Here’s The Advice From One of The World’s Most Successful Investors

Last week, Charlie Munger, the 95 year old Birkshire Hathaway Chairman and Chairman of the Daily Journal, spoke to shareholders of the newspaper’s annual meeting. In his usual no holds barred manner, he spoke for two hours addressing and answering questions from shareholders.

I watched his address from beginning to end. The man is 95 years of age, he’s one of the smartest minds in investing, and when he speaks, investors stop and listen.

His investment concepts, processes, and beliefs are so simple, which I believe is what makes it so difficult to implement and replicate.

It’s amazing how intelligent it is to spend some time just sitting. A lot of people are way too active.

– Charlie Munger

I’ve taken some of his best responses to questions he was asked in the hope that it would give you insight into, and be valuable in your endeavor to build your financial wealth. If you want to be anywhere near as successful as this man, take his advice. Okay, here we go…

Which money managers would you recommend besides you and Warren?

I’ve only hired one in my lifetime, I don’t think that makes me an expert. Everybody would love to have a money manager that would make him rich. Of course we would all want that. I would like to be able to turn lead into gold. But it’s hard. It’s very hard.

Next question.

How do you know when to exit an investment?

You’re not talking to a great exiter. I’ve been a good picker. Other people know more about exiting. I’m trying never to have to exit. I’m no good at exits. I don’t even like looking for exits. I’m looking for holds.

Think of the pleasure I’ve got from watching Costco march ahead. Such an utter meritocracy and it does so well. Why would I trade that experience for a series of transactions? Firstly I’d be less rich, not more after taxes, and secondly it’s a much less satisfactory life than rooting for people I like and admire. So I say find Costco’s not good exits.

I’m a very patient man, and I know a lot, but I don’t know everything.

Why has apple stock declined over the past 12 months?

I don’t know why Apple stock is going up or down . I know enough about it so I admire the place, but I don’t know enough to have any big opinion about why it’s going up or down recently. Part of our secret is we don’t attempt to know a lot of things.

I have a pile on my desk that solves most of my problems – it’s called the too hard pile. And I just keep shifting things to the too hard pile. And every once in a while an easy decision comes along, and I make it. That’s my system.

In October of 2008,  a month later Lehman fell bankrupt, and in the depths of the abyss. Mr. Buffett famously wrote an editorial saying that he was buying stocks and that he was bullish on America. You’re famous for bottom picking Wells Fargo in March of 2009. What made you decide to buy Wells Fargo in March of 2009, instead of October of 2008?

Well, I had the money at a later period. And the stock was cheaper. Those are two very important parts of the purchase.

If you didn’t have access to Li Lu and to the Chinese exchanges through him like many American’s don’t, would you feel comfortable investing in the American Depository of most Chinese companies that are comprised of a VIA structure, and offer shareholders few rights and minimal protections from the Chinese government?

I don’t know much about depository shares. I tend to be suspicious of all investment products created by professionals and I tend to go where nothing is being hawked aggressively or merchandised oppressively or sold aggressively, so you’re talking about a world which I don’t even enter. So I can’t help you. You’re talking about a territory I avoid.

Do you worry about the large use of derivatives on the balance sheet of banks?

All intelligent investors worry about banks. Because banks present temptations to their managers to do dumb things. There are so many things you easily do in a bank that looks like a cinch way of reporting more earnings soon, where it’s a mistake to do it long-term considerations being properly considered.

As Warren puts it, the trouble with banking is there are more banks than there are good bankers. And he’s right about that. So if you’re going to invest in banks, you have to go in at a time when you’ve got a lot going on for you. Because there’ll be a fair amount of stupidity that creeps into banking.

What level of discount would you be applying to potential investments today?

Generally speaking, I think professional investors have to accept less than they were used to getting under different conditions. Just as an old man expects less out of his sex life than he was 20.

Why is Warren so much richer than you?

Well, he got an earlier start. He’s probably a little smarter, he works harder, there are not a lot of reasons. Why was Albert Einstein poorer than I was?

He finishes his address with the following statement. A statement which I believe more investors should take into consideration when it comes to financial wealth creation.

If you actually figure out how many decisions were made in the history of the Daily Journal Corporation and Birkshire Hathaway, it wasn’t very many per year that were meaningful. It’s a game of being there all the time. And recognizing the rare opportunity when it comes. and recognizing the normal human allotment is to not have very many. Now there’s a very confident bunch of people who sell securities who act as though they’ve got an endless supply of wonderful opportunities. Well, those people are the equivalent of the race track tout – they’re not even respectable. It’s not a good way to live your life – to pretend to know a lot of stuff you don’t know. My advice is avoid those people, but not if you’re running a stock brokerage firm – you need then.

It’s not the right way to make money. And this business of controlling your costs and living simply, that was the secret. Warren and I had tiny bits of money. We always under spent our incomes and we invested, and if you live long enough you end up rich. It’s not very complicated.

Investing is simple, but not easy.

The Cost of Complexity

They say simplicity trumps complexity. I’m a big believer in that statement, especially when it comes to the investment world. The financial world is a big bullshit machine. Our industry is simply trying to sell shit to investors and profiteer during the process. Facades, charades, charlatans, smokes and mirrors is the game. Here one day, gone the next.

I get it. The scarcity. The exclusivity. The complexity. The money. It’s all enticing.

The most recent National Association of College and University Business Officers (NACUBO) Study of Endowments was released a week ago. It’s based on 802 U.S. college and university endowments and affiliated foundations, representing nearly $617 billion in endowment assets.

These are some of the largest, most sophisticated and powerful endowments from around the world. The resources at the finger tips of these institutions are incredible. They have specialist teams dedicated to analysing sectors and stocks – their job is to analyse investments every-single-day. They employ economists and strategists who are some of the brightest people in the finance world. Their investment committees and boards include some of the world’s most highly educated and connected people. These people spend their days meeting money managers and undertaking due diligence on investment opportunities, both locally and globally.

They’ve literally got one job. To make great investment decisions. That’s it.

Here’s how they performed:

Here are some relative indices for comparison:

Here are the funds’ asset allocation:

These funds have not only over-complicated their investment strategy, but they’ve also taken on more risk, yet achieved a lower rate of return. For reference, a Vanguard 10/90 (defensive/risky) portfolio returned 9.70% and 7.10% pa over 5 and 10 years respectively.

The more sophisticated a system and strategy, although it may appear attractive on paper, often fails to bear fruit. Why? The people behind them and their (and your) behavioural errors – buy high, sell low, derails the most seasoned investor. Your IT help desk actually has an acronym for this issue – PEBKAC, or “problem exists between keyboard and chair.”

By understanding our own cognitive biases, we can design an investment portfolio to bypass our behavioural errors. One way is to simplify your investment strategy. Here are a few ways of doing so:

  1. Go passive. Here’s a dirty little secret – stock picking is totally over-rated. Just click here.
  2. Diversify your portfolio (properly) across and within major asset classes.
  3. Keep your investment costs low. If you’re paying more than 0.50% pa., you’re paying too much. It’s like taking an Uber-Black when an Uber-X would have got you to the same place, in the same time, but would have cost you (at least) half the price.
  4. Re-balance your portfolio – annually is ideal for a variety of reasons, which I won’t bore you with here.

Investors spend far too much time and money trying to beat the market. When in fact they should be trying to make sure the market doesn’t beat them.

Tidying Up with Robert Baharian

I’m so excited, because I love…mess!

That’s Marie Konda from the latest Netflix series, Tidying Up with Marie Kondo. In a series of inspiring home makeovers, world-renowned tidying expert Marie Kondo helps clients clear out the clutter – and choose joy.

For some reason, we have so much stuff…

Kondo has designed the KonMari Method – a unique Japanese method whereby she organises by category rather than location, and tidies five categories in a specific order:

  1. Clothing
  2. Books
  3. Paper
  4. Komono (kitchen, bathroom, garage, miscellaneous)
  5. Sentimental items

We feel stressed at home, because of the clutter.

Kondo and I have one thing in common. We both love mess! Well, Kondo loves messy homes and I love messy financial lives.

It’s kinda hard to let it go, because I really like this one…(crying)

Inspired by Kondo, I’ve designed the RobBahari Method – a unique Armenian method of organizing your wealth by category rather than investment, which I’ve broken down into five specific categories:

1. Security

This is the no to low risk stuff – from cash, term deposits, to government and corporate bonds. This bucket provides you with certainty in your life, and it’s the bucket you should keep the part of your wealth you cannot afford to lose.

2. Growth

This is the engine room of your financial wealth. And one that you need to take a long-term view on. Anything less than 10 years and you’re speculating – simple. This bucket includes your share portfolio, real estate, land, collectibles, etc.

3. Cashflow

This is the bucket that helps you live your life – clearly a very important bucket. This bucket may include items from the Security and Growth bucket too. Primarily this bucket includes your salary, shareholder drawings/business income, property developments, business ventures, etc.

4. Lifestyle

Life is about more than just money, and this buckets includes just that. Your family home, the beach house, the sports car, that nice piece of jewellery.

But hey, just because it’s lifestyle, it doesn’t mean it can’t be an investment either.

5. Contribution

They say the secret to living is giving. It’s taken me a little while, but I’m a big believer in that. The more you give to others, the happier you’ll be, and the more you have, the more you can give.

My beautiful wife has taught me that having a scarcity mentality of money is what will prevent you from being wealthy. If you don’t give away money when you have $100, then you won’t give it away when you have $1m. And it’s not just about giving away your money – that’s easy. It’s more about your time, your efforts, your ideas, your advice, your attention, your love, and your presence.

Far too many individuals and families go by each day without a strategy, without a game plan. In fact, far too many individuals and families are not clear on their goals and priorities. I ask you to challenge yourself…

  1. What are you working towards and why?
  2. What does money mean to you and why?
  3. What does wealthy mean to you and why?

I’ll leave you with this quote from Marie Kondo:

Keep only things that speak to your heart.

2019: My Year And Yours

When do you officially stop saying happy new year? This debate continues. There are no rules really, rather, personal preference – so do whatever you want. Happy New Year folks! The team at BWM are officially back from a very well deserved break, and we’re looking forward to a massive year ahead.

The new year is probably one of the most common periods when we set new goals for ourselves. I’m not talking about new year’s resolutions, I’m talking about real goals. Whether it’s to run a marathon later in the year, to travel the world, to double your income, or whether it’s to quit your job and set up that business you’ve always wanted, January is a great excuse to get you doing something about it.

A goal is a dream with a deadline

– Napoleon Hill

Like the management of money, goal setting is something we are not taught at school, yet there is some impressive evidence that supports goal setting. A Harvard Business Study found that 3% of Harvard MBAs who had written down their goals ended up making 10 times as much as the other 97% combined.

I’ve always set goals for myself that I was confident I would achieve – it came as no surprise when I was told this. Not only could I have stretched a little further, but I could have done a better job benchmarking my progress as well as setting new goals when I had achieved my goals in advance. So a few weeks ago I did something a little different. I set goals for myself that literally scared me. Goals that were totally out of my comfort zone. Goals that would put a big smile on my face when I imagined achieving them. There are some simple stuff in there, and a couple of goals that start to make me a little nervous – but that’s the point of stretching yourself and your ambitions, otherwise we wouldn’t achieve greater heights.

Here’s what I did (using the Goal Mapping worksheet and the BWM Clever Cashflow Guide):

I used this Goal Mapping worksheet produced by team Tony Robbins. It’s probably the best tool I’ve used because it’s super simple, and straight to the point – 1) what is your goal 2) why is it important/what is the purpose 3) what actions will you take to achieve it.

When setting my goals, I stick to the S.M.A.R.T. acronym:

Specific: Saying you “want to earn more” is too vague. Pick a number for how much money you want to earn. Do you want to start making $150,000 per year, $500,000, $1 million? Set a clear number that will enable you to track your progress. As you work toward this goal, visualize your specific outcome.

Measurable: When it comes to goal setting, you need a way to track your progress. For example, by setting a clear goal (earning $150,000) you can check the numbers as the year goes on. How are you matching up to your goal? Are you on track to succeed?

Achievable: If you pick a goal that you know is outrageous – say you’re currently earning $30,000 and want to earn $5 million next year – you’re most likely not going to achieve it. Pick a goal that requires effort on your end, but is actually achievable as well. When you create a goal that’s too lofty, you might begin to feel that it’s impossible and eventually give up.

Realistic: You’ve always wanted to learn Japanese, but it’s not realistic to learn an entirely new language with foreign characters in three months. Be realistic about how much time you have to commit to your goal and the amount of resources it takes to do so.

(In a) Time frame: The final S.M.A.R.T. principle is setting a clear time frame in which you can achieve your goal. Give yourself a reasonable amount of time to accomplish your goal. Do you think you can start earning your desired salary in six months, one year or two years? Having a clear time frame is essential for checking your progress along the way to reaching your goal.

Finally, in order to help manage the finances to support some of my goals, using inspiration from my good friends at SiDCOR, I built on their budget tool to create the BWM Clever Cashflow Guide.

You can download it here for free. Please use it to help manage your own household’s cashflows, and pass it on to your friends, kids, and family. If you have any questions or would like some help with either the Goal Mapping worksheet, or the BWM Clever Cashflow Guide, please give me a call as I would be delighted to help.

What now? Print off the Goal Mapping worksheet right now! Block 1 hour out of your day start writing. Remember to leave any bullshit excuse as to why you can’t do something at the door – don’t let them into the same room!

And if your goals are finance related, then set some time aside and start filling in the BWM Clever Cash Flow Guide so that you know where you are now and what you need to do to make your dreams a reality. And if you tell me you don’t have time to write down your goals, where are you going to find the time to accomplish them?

Let’s go!

New Arguments Against Low-Cost, Passive Investing Are No Better Than The Old Ones

Since the GFC, index funds have taken a huge slice of investable assets globally. And in my opinion, rightly so. There will be many that disagree with me on this, but let the evidence and data speak for itself I say. For every winning stock picker, there is a loser – it’s just how it works. Unless active funds dramatically reduce their fees, index funds will always be at or near the top quartile of long-term performance.

The premise of active management is essentially that with enough skill, it’s easy to consistently outperform the market, or the benchmark. When this view was challenged decades ago, it sparked a longstanding debate with strong believers on both sides, and some in between.

If you want to see some of the data, you can click here. The SPIVA (S&P Index Versus Active) Scorecard is a robust, widely-referenced research piece conducted and published by S&P that compares actively managed funds against their appropriate benchmarks on a semiannual basis.

Investors have been voting with their feet and ploughing money into index funds over the last 10 years. Vanguard, the primary beneficiary of this evolution, took in as much as its eight competitors in 2017.

In fact, over the last 8 years, Vanguard’s total Assets Under Management (AUM) has grown exponentially from US$1 trillion to over US$5 trillion. Mind blowing.

The more investors passive funds attract, the more they’re criticized. And all the new arguments you hear against low-cost, passive investing are no better than the old ones.

There are three reasons why indexing has become so popular. First, it costs less — often much less. High fees are a drag on returns; compounded over decades, they lead to a 20 to 30 percent penalty on total returns. Next, the alternative is active-stock or mutual-fund selection or some form of market timing. Academic research overwhelming shows that the vast majority of investors lack the skills or discipline to do that. Attempts at out-performance invariably lead to under-performance. Last, even among those who have the requisite skills, the discipline and emotional control necessary to successfully manage money is intermittent at best, absent at worst.

Market Watch recently published an opinion column arguing index funds are terrible for our economy and highlighted 3 key areas indexing is creating a risk to our markets and economy. Barry Ritholtz responds to each of these in order:

Index funds contribute to market melt-ups and meltdowns.

Really? That statement is at odds with the experience of most Registered Investment Advisors (RIAs) and index-fund managers. Indeed, we have experienced several bubbles and crashes, melt-ups and meltdowns, during the past few decades. The evidence is clear that passive-index investors behave better than active-fund investors or market timers, tending to blunt rather than aggravate volatility.

During the financial crisis, passive investors sat tight and for the most part didn’t sell. Indeed, they were net buyers, according to former Vanguard Chief Executive Officer Bill McNabb. As my Bloomberg colleague Eric Balchunas pointed out, during the 2008 credit crunch, the money flows were into index funds and exchange-traded funds, in part because they displayed less volatility; more than $205 billion was put into these funds while active funds experienced $259 billion in withdrawals.

“Index funds reduce the quality of stock analysis.”

If this were offered as a joke, we could ignore it. But this is a serious — and a seriously flawed — allegation.

Let’s be blunt: Stock analysis has been famously terrible for most of forever. Analysts are too bullish when things are going well, and perhaps too bearish when they are not. They are highly conflicted. Since research itself doesn’t generate income, analysts are paid out the funds generated by other parts of a securities firm’s business, such as investment banking. Their goal is to encourage more active trading, which generates commissions but also higher tax bills and lower returns. For a reminder of how problematic Wall Street research is, recall the analyst scandals of the late 1990s and early 2000s.

I believe this author has it exactly backward: Expensive and ethically compromised analysts were shown to be of so little help to investors that they actively contributed to the rise of indexing.

“Index funds contribute to poor corporate governance.”

Again, I think this is exactly backward — it’s the long-term owners of public stock, that is, index funds — that management must deal with year after year.

Consider what Dave Nadig, managing director of ETF.com (part of CBOE Global Markets) wrote earlier this year:

State Street voted against the slates of directors proposed by companies over 400 times, because those companies failed to add women to their boards. And BlackRock recently published an open letter to markets, putting every company on notice that they would be taking a hard, hard look at everything from executive compensation to community development to environmental impact.

Active managers and activist investors can threaten to sell their stock, and sometimes they do. But then what? The indexers are long-term owners — and they vote their proxies. Management has to acknowledge their permanence.

The complaints about indexing have become tiresome: Indexing is Marxist, it’s a bubble waiting to burst, it’s dangerous to the economy or the efficiency of the market, and so on. The need to relitigate every lost battle is telling. The people who want to sell you newsletters, expensive mutual funds, or costly trading advice have suffered greatly from the move toward low-cost, passive investing. No wonder so many of them refuse to accept the obvious benefits of indexing to average investors.

END

Next time you’re looking at your investment statement, take a moment to think about how much you’re leaving on the table – 10, 20, 30%? The fact that investors choose to, year after year, make voluntary donations via the sacrifice of returns from their portfolio to those that purport to be able to ‘beat the market’ astounds me.

There’s a great book by Fred Schwed Jr. titled, Where Are The Customers Yachts?, which exposes the folly and hypocrisy of Wall Street. The title refers to a story about a visitor to New York who admired the yachts of the bankers and brokers. Naively, he asked where all the customers’ yachts were? Of course, none of the customers could afford yachts, even though they dutifully followed the advice of their bankers and brokers. Full of wise contrarian advice and offering a true look at the world of investing, in which brokers get rich while their customers go broke, this book continues to open the eyes of investors to the reality of Wall Street.

Source:

  • Bloomberg – https://www.bloomberg.com/opinion/articles/2018-12-12/index-investing-critic-takes-aim-fires-misses
  • Market Watch – https://www.marketwatch.com/story/your-love-of-index-funds-is-terrible-for-our-economy-2018-12-10
  • Morningstar
  • SPIVA

25 Things You Probably Know & Don’t Know About Investing

If you are ready to give up everything else and study the whole history and background of the market and all principal companies whose stocks are on the board as carefully as a medical student studies anatomy – if you can do all that and in addition you have the cool nerves of a gambler, the sixth sense of a clairvoyant and the courage of a lion, you have a ghost of a chance.

– Bernard Baruch

Making money in the modern market is tough. As investors, there are so many things we think we know, yet very few spend time thinking about the things they don’t know. Jim O’Shaughnessy, founder, Chairman, and CIO of O’Shaughnessy Asset Management recently shared what he thinks he knows and doesn’t know about the financial markets. I think investors should take note. Here they are:

  1. I don’t know how the market will perform this year. I don’t know how the market will perform next year. I don’t know if stocks will be higher or lower in five years. Indeed, even though the probabilities favor a positive outcome, I don’t know if stocks will be higher in 10 yrs.
  2. I DO know that, according to Forbes, “since 1945…there have been 77 market drops between 5% and 10%…and 27 corrections between 10% and 20%” I know that market corrections are a feature, not a bug, required to get good long-term performance.
  3. I do know that during these corrections, there will be a host of “experts” on business TV, blogs, magazines, podcasts and radio warning investors that THIS is the big one. That stocks are heading dramatically lower, and that they should get out now, while they still can.
  4. I know that given the way we are constructed, many investors will react emotionally and heed these warnings and sell their holdings, saying they will “wait until the smoke clears” before they return to the market.
  5. I know that over time, most of these investors will not return to the market until well after the bottom, usually when stocks have already dramatically increased in value.
  6. I think I know that, at least for U.S. investors, no matter how much stocks drop, they will always come back and make new highs. That’s been the story in America since the late 1700s.
  7. I think I know that this cycle will repeat itself, with variations, for the rest of my life, and probably for my children’s and grandchildren’s lives as well.
  8. Massive amounts of data have documented that while the world is very chaotic, the way humans respond to things is fairly predictable.
  9. I don’t know if some incredible jump in evolution or intervention based upon new discoveries will change human nature but would gladly make a long-term bet that such a thing will not happen.
  10. I don’t know what exciting new industries and companies will capture investor’s attention over the next 20 years, but I think I know that investors will get very excited by them and price them to perfection.
  11. I do know that perfection is a very high hurdle that most of these innovative companies will be unable to achieve.
  12. I think I know that they will suffer the same fate as the most exciting and innovative companies of the past and that most will crash and burn.
  13. I infer this because “about 3,000 automobile companies have existed in the United States”, and that of the remaining 3, one was bailed out, one was bought out and only one is still chugging along on its own.
  14. I know that, as a professional investor, if my goal is to do better than the market, my investment portfolio must look very different than the market. I know that, in the short-term, the odds are against me but I think I know that in the long-term, they are in my favor.
  15. I do know that by staking my claim on portfolios that are very different than the market, I have, and will continue to have, far higher career risk than other professionals, especially those with a low tracking error target.
  16. I know that I can not tell you which individual stocks I’m buying today will be responsible for my portfolio’s overall performance. I also know that trying to guess which ones will be the best performers almost always results in guessing the wrong way.
  17. I know that as a systematic, rules-based quantitative investor, I can negate my entire track record by just once emotionally overriding my investment models, as many sadly did during the financial crisis.
  18. I think I know that no matter how many times you “prove” that we are saddled with a host of behavioral biases that make successful long-term investing an odds-against bet, many people will say they understand but continue to exhibit the biases.
  19. I think I know the reason for the persistence of these “cognitive mirages” is that up to 45% of our investment choices are determined by genetics and can not be educated against.
  20. I think I know that if I didn’t adhere to an entirely quantitative investment mythology, I would be as likely—maybe MORE likely—to giving into all these behavioral biases.
  21. I know I don’t know exactly how much of my success is due to luck and how much is due to skill. I do know that luck definitely played, and will continue to play, a fairly substantial role.
  22. I don’t know how the majority of investors who are indexing their portfolios will react to a bear market. I think I know that they will react badly and sell out of their indexed portfolio near a market bottom.
  23. I think I know that the majority of active stock market investors—both professional and aficionado—will secretly believe that while these human foibles that make investing hard apply to others, they don’t apply to them.
  24. I know they apply to me and to everyone who works for me.
  25. Finally, while I think I know that everything I’ve just said is correct, the fact is I can’t know that with certainty and that if history has taught us anything, it’s that the majority of things we currently believe are wrong.

What is it about investing and financial markets that you don’t know?

The Hayne Royal Commission Could be Taking Things too Far. Here’s Why.

When you want to help people, you tell them the truth. When you want to help yourself, you tell them what they want to hear.

– Thomas Sowell

As the royal commission on financial advice continues to crucify the banks and their executive teams, I’ve been watching with great interest and can’t argue with the revelations to date. Late last week I came across this article, which irritated me a little to say the least.

Source: AFR

As grandfathered commissions are all but dead – and I would argue they should never have been grandfathered to begin with, the Hayne royal commission seems to now be moving its shiny bazooka toward ongoing fees charged by financial advisers.

The financial industry has evolved from not charging clients anything at all and being remunerated via product commissions, to percentage of assets under management (AUM), to no commissions whatsoever and simply charging their clients a flat dollar monthly/annual retainer (with some charging a combination of percentage of AUM and flat dollar).

At my firm we charge a flat dollar monthly retainer as we think it removes most if not all conflicts of interest. It means we remain outcome focused rather than product focused. It also removes the vested interest to gather as much ‘AUM as we can. We’re free to advise clients across all asset classes instead of guiding them toward assets we would otherwise control/manage (and charge a fee on).

The commission is exploring the idea of overhauling ongoing advice fees, so financial advisers, like accountants and lawyers, must provide the service before they can invoice their customers.

When NAB chief executive Andrew Thorburn tried to defend ongoing fees as a “transparent upfront fee” of $12,000 a year that is paid $1,000 monthly, Mr Hodge challenged the need for such expensive financial advice.

“How many Australians do you think really need to be paying a thousand dollars a month for financial advice?”

Here’s the transcript:

Source: AFR

Mr Hodge, my neighbour thinks paying $13.99 per month to Netflix for unlimited streaming of movies, documentaries, and shows from all around the world is expensive and unnecessary. He also thinks paying Spotify $9.99 per month for unlimited streaming of music from all around the world is expensive and unnecessary. In fact, he even thinks paying $100 per month for a gym membership that will help him get back into shape is expensive and unnecessary. You see Mr Hodge, regardless of the cost of a service, the customer or client must see value in the service. There’s an old saying, “price is an issue in the absence of value”. This also applies to financial advice.

Charging a fee for service via a retainer promotes engagement, it encourages dialogue, and it incentivises clients to pick up the phone and ask questions without the fear of being invoiced and charged for a phone call (or meeting). It’s the basis of a true partnership.

What’s interesting to me is the number of accounting firms we speak with who are moving to the financial advisers’ fee model – a monthly retainer. The concept of charging clients after the work is done is great for one off transactions, and if that’s the business you’re in – good for you. This, however, is not the business we’re in. We’re in the business of ongoing advice, ongoing oversight, ongoing discussions, ongoing dialogue, ongoing debate. Our clients’ financial lives are not a one-off transaction Mr Hodge. Global financial markets, economics conditions, and the ever changing legal landscape are not a one-off transaction.

Mr Hodge, more Australian’s need to and should be paying $1,000 per month (if not more) to a good quality financial adviser. To help them make good decisions with their money. To help them avoid speculation and grow their wealth the slow way. To help them avoid buying and selling at the wrong time and chasing investment returns.  To act as their sounding board when they are faced with options and confusion. To help guide them toward their financial goals. And to save them time, energy, and anxiety with managing their money and financial affairs.

Show me the incentive and I’ll show you the behaviour.

– Charlie Munger

Finally, some of the responsibility needs to fall on the consumer. If you are engaging a professional to help you with your financial matters, and you are paying them a fee to do so, yet you are not receiving a service, it’s up to you to call it out. Here are 16 questions you need to ask your financial adviser.

Despite all the negative press aimed at financial advisers, it’s not that hard to find a good quality, ethical adviser. Here are just a few of them:

Chronos Private

Marasea Partners

Your Family CFO

Rasiah Private Wealth

ICG Financial Planning

There are many of us that pride ourselves on our ethics, transparency, drive, and our purpose. And we won’t allow uneducated and misinformed points of view dictate the great work we do for our clients.

Next time I turn on Netflix or Spotify, and I’m not receiving the service I am paying for, I will not be waiting for a royal commission on the cloud streaming industry, as a consumer I will be on the phone to find out what’s going on. You need to do this same. You deserve better.

Visualising The Damage on The Stock Market

Bed goes up, bed goes down, bed goes up, bed goes down.

– Homer Simpson

Since the GFC stocks have been the perfect place to hide. In fact, there has been no safer bet with stock markets around the world trading at multiples of their GFC lows. Here’s how major stock markets around the world performed (total return) since the bottom of the GFC:

(orange line – Australia, purple line – Asia, green line – Europe, blue line – US, red – Emerging Markets)

Only when the tide goes out do you discover who’s been swimming naked.

– Warren Buffett

Financial markets however, have no regard for what you want or what you need, and will turn on you like the Melbourne weather leaving you perplexed as to which season it is.

The recent spasm of news coverage on the stock market correction prompted me to assess the damage done on stocks. For the last two months, these were the headlines investors have been reading – how exciting!

I’m not sure who defined a market correction being a decline of 10% or more, but it’s the widely accepted definition. What good is it for investors to know that the correction has begun based on some meaningless threshold someone fabricated? Why is the threshold not 12%, or 15%? Why should a manufactured definition trigger investors to revisit their investment strategy? To me, this threshold seems illogical, and to base investment decisions on these definitions seems foolish.

Let’s take a look at what all the fuss is about. Here’s a chart showing the total return of the above indices since 8 October (when the decline began) to Friday, 23 November 2018:

Within two months, the US stock market is down 10.69%, Europe is down 9.05%, Asia down 7.97%, Australia down 5.92%, and Emerging Markets down 5.25%. Having said this, if we were to look at peak to trough using 52 week highs, the chart above would look different again. In fact, Emerging Markets would look a lot worse if we pulled the start date back to earlier on in the year. It doesn’t matter where you were invested your money, there really was nowhere to hide.

If you think that’s bad, just spare a moment for the tech investors. Here are the FAANGs (Facebook, Apple, Amazon, Netflix, Google) against the S&P500 (orange line) and Nasdaq (grey line):

(purple line – Facebook, green line – Amazon, blue line – Apple, yellow line – Google)

Hey, what do you expect after a run up like this:

Netflix’s market cap is currently sitting at US$112 billion. To put that into perspective, Citigroup is currently valued at US$150 billion. Number of employees at each company: Citigroup – 209,000, Netflix – 5,400. Revenue (2018 est): Citigroup – US$216,000,000, Netflix – US$16 billion. Net income (2018 est): Citigroup – US$18 billion, Netflix US$671 million.

Markets can remain irrational for a lot longer than you and I can remain solvent.

– John Maynard Keynes

Most money managers will highlight and emphasize performance for a select period of time (I’ll let you decide why), so it’s very useful to me (and investors) to look at things through a wider lens. So here it goes – the recent market declines since the GFC for stock markets around the world:

It comes as no surprise that the asset class that has performed the best over the last 10 years is the one that has fallen the most when things are seem a little uncertain.

Even following a market “correction”, the US stock market is still up 265%, the Australian market up 144%, and Asia, Europe, and Emerging Markets up 123%, 80%, and 59% respectively.

There are several narratives that are making headlines justifying the recent market decline. The general theme goes something like this: This bull market has been running hot for almost 10 years. Interest rates are rising, and cost pressures are rising, which will cause inflation. Whatever narrative you decide makes most sense to you, the reality is that the news that is floating around is not new and is probably priced into current market valuations anyway.

At the end of the day, the more you pay for an asset, the less the future expected return. The less you pay for an asset, the greater the future expected return. In life, and in financial markets, things sometimes just don’t make any sense – although they eventually do. Don’t try and keep up with the Jones’ or get caught up in the market and media hype – it takes guts, discipline, patience and time to make money.

When you decide to embark on the journey of investing, remember the wise words of Homer Simpson – bed goes up, bed goes down.

Source:

  • Charts and headlines – Thomson Reuters
  • Returns are denominated in AUD for all charts except the FAANGs

Here’s What Happens When You Invest at Market Peaks

PT Barnum is often credited with coining the phrase, “there’s a sucker born every minute.” History buffs argue the famed circus founder instead stated, “there’s a customer born every minute.” When it comes to investing, the words “sucker” and “customer” could be interchangeable.

As human beings we are drawn to the idea of the future being predictable. And anyone that, for one second, purports to be able to have some insight into what the future hold, we’re hooked – yet as clear as day, we all know these folk hold no insight whatsoever.

It’s tough to make predictions, especially about the future.

– Yogi Berra

Financial markets are no exception. We want to avoid the tops and pick the bottom, we want to avoid paying top dollar, and pursue bargain basement prices. Yet when we find ourselves in the midst of euphoria or a crisis, we tend to follow the crown.

Try to be fearful when others are greedy, and greedy when others are fearful.

– Warren Buffett

What if you just had shear bad luck when investing? What if you weren’t able to avoid the tops? Even worse, you retired precisely when the market peaked?

Ben Carlson of A Wealth of Common Sense ran these numbers for a US based investor, so I decided to run the numbers for an Australian based investor. We’ve got three investors, James, Frank, and Steve. They each retire just before the stock market peaks with AU$1,000,000 invested 70% in the Australian share market (S&P/ASX All Ordinaries Index – Total Return), and 30% in Australian bonds (Bloomberg AusBond Bank Bill Index). They also draw 4% of their portfolio at the beginning of each year to help fund their retirement. I’ve also assumed the portfolio is rebalanced once a year, and I haven’t taken into account fees or taxes to keep things simple.

Here’s what I found:

  • James retired on October 1987,
  • Frank retired on June 1998, and
  • Steve retired on September 2007.

Here are the returns adjusting for inflation:

Trying to time the market for it to add any benefit to your investment returns is super difficult. Investing at market tops prior to retirement hasn’t been as destructive as one would have assumed – although it could be. The analysis shows a somewhat diversified portfolio that is structured, disciplined by rebalancing, and an investor’s who remains patient without getting in and out of the market, their portfolio can remain quite robust through their retirement. Of course, the longer one invests for, the better the financial outcome – who would have thought.

The best time to invest is when you have the money.

– John Templeton

The Disease of Kings And King of Diseases

The disease of the kings and the king of diseases dates back to Egypt, 2,600 BC. In 1963, Thomas Sydenham, an English Physician described its occurrences so very accurately.

Those who fall ill to the disease are either old men, or men who have worn themselves out in youth as to have brought on premature old age—of such dissolute habits none being more common than the premature and excessive indulgence in venery and the like exhausting passions. The victim goes to bed and sleeps in good health. About two o’clock in the morning he is awakened by a severe pain in the great toe; more rarely in the heel, ankle, or instep. The pain is like that of a dislocation and yet parts feel as if cold water were poured over them. Then follows chills and shivers and a little fever… The night is passed in torture, sleeplessness, turning the part affected and perpetual change of posture; the tossing about of body being as incessant as the pain of the tortured joint and being worse as the fit comes on.

Today, the disease is more commonly known as gout – the term dating back to around 1200 AD, and is typically a combination of diet and genetic factors. There are certain things that make it worse, and others that make it better.

Last week I fell ill to the disease of kings, and boy, it certainly earns its name – king of diseases. If you’ve never experienced the pain, the torture this illness brings, ask someone who has and they will describe pain of dislocation, and fractured bone. Whatever you do to try and alleviate the pain, it’s merely temporary. The disease needs to be treated before it hits.

Like the disease of kings, investing too cannot be left untreated – one can simply not look for immediate relief when one has not made the right decisions for years prior.

Here are three key principles to apply when investing for the long-term that will ensure you’re not looking for the pain killers when things go south:

Start investing early

Unlike most things in life, you can start investing as early as you like. The chart below shows the impact starting early has on the end balance of your portfolio. It shows four investors each saving/investing $5,000 annually. Just take a look at Consistent Chloe’s portfolio, and compare it to that of Late Lyla – it’s almost half the value only having started 10 years later!

Source: JP Morgan

The power of compounding

Whether Einstein called it the eighth wonder of the world or not, it matters not. What matters is how powerful such a small decision can be. The chart below shows the difference between reinvesting dividends and distributions and without – almost four times the amount!

Source: JP Morgan

Stay invested

By trying to time the ups and downs of the market, history shows time and time again you’re going to lose money.

The chart below shows us the return of an investor who remained fully invested in the Australian stock market from 1996 through to 2017 – they earned 9% pa. If they had missed just the 10 best days during that time, their return fell to 6.50% pa. If they missed the 20 best days during that time, they return was halved – 4.60% pa, and so on.

Source: JP Morgan

Looking for short cuts and get rich quick schemes in the midst of great pain is like taking pills at the peak of illness expecting it to solve all your problems. I just ain’t gonna happen.

Sources: JP Morgan, Wikipedia, Gout – The Affliction of Kings