Elections And Investing

With Australia in the middle of another general election campaign and facing the prospect of a change of government, investors may ask what implications the political cycle has for financial markets and for their own portfolios.

Media commentators often say that elections pose significant uncertainty for markets, as investors weigh the prospect of policy change and how that might impact on overall sentiment, the direction of the economy and company earnings.

It is true that in this federal election, the opposing platforms of the incumbent Liberal–National Coalition and opposition Labor Party feature significant differences in tax policy that may impact on individual investors depending on their circumstances.

But it is also true that in terms of macro–economic policy, there is little separating the two major party groupings, who both express a commitment to fiscal responsibility, independent monetary policy, free trade and open markets.

Certainly, if you look at history, there is little sign of a pattern in market returns in election years. Since 1980, there have been 14 federal elections in Australia. In only three of those years (1984, 1987 and 1990), has the local share market posted negative returns. (See Exhibit 1).

This isn’t to imply that federal elections are ‘good’ for shares either. Firstly, this sample size is too small to make any definitive conclusions. And, in any case, it is extremely hard to extract domestic political from other influences on markets.

For instance, 1983, a year in which the Australian market rose nearly 70% and in which Bob Hawke led the Labor Party to a landslide election victory, also coincided with the end of an international recession and the floating of the Australian dollar.

Likewise, the election year of 2010 was one of the poorer years for the local market. But this was also the year of the Euro crisis as worries about Greece defaulting on its debt triggered concerns for fellow Euro Zone members Portugal, Ireland, Italy and Spain.

Neither is there much evidence of a pattern in returns based on which side is in government. Over the near four decades from 1980, there have been four changes of government in Australia—from the Coalition to Labor in 1983, from Labor to the Coalition in 1996, back to Labor in 2007 and to the Coalition in 2013.

During the Hawke/Keating Labor governments of 1983–1996, the Australian market delivered annualised returns of 16.4%, the best of this period. But this wasn’t markedly different than what was delivered by the global equity markets in the same period.

During the 11–year era of the Howard Coalition government from 1996–2007, the annualised return of the local market was 14%. While this was twice the return of the world market in the same period, the latter half of this period included the China–led resource boom. (See Exhibit 2).

Put simply, while Australian general elections are understandably a major media focus, there is little evidence that whoever is in power in Canberra has a significant impact on the overall direction of the local share market. Of course, specific policy measures proposed by an incoming government can impact on individual investors within that jurisdiction, depending on their asset allocation, investment horizon, age, tax bracket and other circumstances.

But these are the sorts of issues that are best explored with a financial advisor who understands your situation and how any tax or other change might influence your position. The bigger point is that markets are influenced by many signals and events—economic indicators, earnings news, technological change, trends in consumption and investment, regulatory and policy developments and geopolitical news, to name a few.

So even if you knew the election outcome ahead of time, how would you know that events elsewhere would not take greater prominence? In any case, if the major policy changes are flagged ahead of the election, markets have already had the opportunity to price them in.

In the meantime, for those concerned about individual tax measures, it is worth reflecting on the benefits of global diversification and moderating your home bias, as this reduces the potential impact of policy changes within your own country.

Contributor: Jim Parker

Winter is Coming. Avoid These Mistakes.

It was over 150 years ago Admiral Robert FitzRoy took his own life. Today FitzRoy is primarily remembered as the captail of HMS Beagle during Charles Darwin’s famous voyage in the 1830. However, during his lifetime FitzRoy found celebrity not from his time at sea but from his pioneering daily weather predictions, which he called by a new name of his own invention – “forecasts”.

Discovering how seasons worked, and understanding that winter came around once a year, has helped humans thrive for centuries.

Financial markets, not dissimilar to the weather, goes through patterns. And winter, is a harsh season for both. The current bull market has been running for over 10 years now, making it one of the longest in history. As summer doesn’t last forever, neither do bull markets. By understanding how the seasons of financial markets work will give you an enormous edge over the average investor.

The only value of stock forecasters is to make fortune-tellers look good.

– Warren Buffett

Here are 7 facts you need to understand and remember about the stock market.

Fact #1: On average, corrections happen once per year

For more than a century, the market has seen close to one correction (a decline of 10% or more) per year. In other words, corrections are a regular part of financial seasons – and you can expect to see as many corrections as birthdays throughout your life.

The average correction looks something like this:

  • 54 days long
  • 13.5% market decline
  • Occurs once per year

The uncertainty of a correction can prompt people to make big mistakes – but in reality, most corrections are over before you know it. If you hold on tight, it’s likely the storm will pass.

Fact #2: Fewer than 20% of all corrections turn into a bear market

When the stock market starts tumbling, it can be tempting to abandon ship by selling assets and moving into cash. However, doing so could be a big mistake.

You would likely be selling all of your assets at a low, right before the market rebounds!

Why? Fewer than 20% of corrections turn into bear markets. Put another way, 80% of corrections are just short breaks in otherwise intact bull markets – meaning that selling early would make you miss the rest of the upward trend.

Fact #3: Nobody can predict consistently whether the market will rise or fall

The media perpetuates a myth that, if you’re smart enough, you can predict the market’s moves and avoid its downdrafts.

But the reality is: no one can time the market.

During the current nine year bull market, there have been dozens of calls for stock market crashes from even very seasoned investors. None of these calls have come true, and if you’d have listened to these experts, you would have missed the upside.

The best opportunities come in times of maximum pessimism.

– John Templeton

Fact #4: The market has always risen, despite short-term setbacks

Market drops are a very regular occurrence. For example, the S&P 500 – the main index that tracks the U.S. stock market – has fallen on average 14.2% at least one point each year between 1980-2015.

Like winter, these drops are a part of the market’s seasons. Over this same period of time, despite these temporary drops, the market ended up achieving a positive return 27 of 36 years. That’s 75% of the time!

Fact #5: Historically, bear markets have happened every three to five years

In the 115 year span between 1900-2015, there have been 34 bear markets.

But bear markets don’t last. Over that timeframe, they’ve varied in length from 45 days to 694 days, but on average they lasted about a year.

Fact #6: Bear markets become bull markets

Do you remember how fragile the world seemed in 2008 when banks were collapsing and the stock market was in free fall?

When you pictured the future, did it seem dark and dangerous? Or did it seem like the good times were just around the corner and the party was about to begin?

The fact is, once a bear market ends, the following 12 months can see crucial market gains.

Fact #7: The greatest danger is being out of the market

From 1996 through 2015, the S&P 500 returned an average of 8.2% a year.

But if you missed out on the top 10 trading days during that period, your returns dwindled to just 4.5% a year.

It gets worse! If you missed out on the top 20 trading days, your returns were just 2.1%.

And if you missed out on the top 30 trading days? Your returns vanished into thin air, falling all the way to zero!

You can’t win by sitting on the bench. You have to be in the game. To put it another way, fear isn’t rewarded. Courage is.

– Tony Robbins

Source: Visual Capitalist, Tony Robbins, Peter Mallouk, S&P

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?

A Bear Market is Just Around The Corner (or is it?)

You’d be totally forgiven for thinking no more of what a bad economy and market looks and feels like. I mean, how could you not?

Consumer confidence is the highest it’s been for a number of years, and well ahead of GFC lows:

Australia Consumer Confidence

We’re spending more:

Australia Consumer Spending

We’re saving less:

Australia Household Saving Ratio

We’re earning more money since the GFC:

Australia Average Weekly Wages

And of course, the stock market…say no more:

World stock markets continue to make all time highs. The current bull market (as defined as a 20%+ increase in the market) has lasted 3,255 days, which in fact is the second longest on record behind the 4,494 day bull market that ran from late 1987 through to the early 2000. The market climbed 13 years without a single decline of 20% or more.

If this bull market was going to topple the record of the 1987 bull market, we’d see our stock market continue to climb until the 19th of June 2021. Hard to imagine right? It’s not as if it hasn’t happened before!

Here’s a chart of both bull and bear markets since 1926. It shows the number of days both bull and bear markets have lasted. A couple of things to note: 1) Bull markets last longer than bear markets (I mean, a lot longer!) – the average bull market has lasted 981 days, and the average bear market has lasted 296 days, and 2) Bull/bear market cycles have been lasting longer since WW2.

Source: BIG

Let’s dig a little deeper into the post WW2 period. The chart below shows all the bull (in green) and bear (in red) markets, when they started, ended, the percentage change, and number of days they lasted. The average bull market was up 152.4% and lasted 1,651 days, with the average bear market falling 31.8% and lasting 362 days.

Source: BIG

Meanwhile, pundits have been calling for the mark top since 2012. I want you to read these comments, seriously, read them. And next time you hear or see another attention grabbing headline about the market, I want you to recall this post. Here’s a summary of the commentary since (click for larger image):

Market All Time Highs (ATH) doesn’t necessarily mean the market will crash. Here are the number of ATHs each year since 1929. The year 1995 set the record with 77 ATHs, 1964 recording 65, and 2017 notching up 62. The year 2017 is sitting in third place with the number of ATHs in any given year. Presently, the year 2018 is in 27th place, with four months to go in the year – anything could happen.

No one knows how long this market will continue to run hot. No one knows when the market will collapse either.

What you can and should do however, is design your portfolio as if the market will collapse tomorrow. Because someday, maybe sooner rather than later, the market will collapse tomorrow. And you will exhibit precisely the same behaviour as you did in 2008. You will have forgotten how you behaved, however you will remember exactly how it felt. Your human mind will switch to ‘fight-or-flight’ mode, and you will either destroy a lifetime of savings, or you could create a lifetime of savings – the choice is yours.

As long as the music keeps playing, we’ll all continue to dance, until it stops.

The Most Expensive Game of Golf You’ve Ever Played

Last week I wrote an article on investing following a speeding infringement. I received quite a number of positive responses to this note – thank you. I also received a number of questions on the concept I talked about in my blog, that is, compound interest and market timing. I touched on this topic a little while back, but let me give it another go.

Have you ever played golf and placed a bet on each hole? You know, everyone places a small amount of money on each hole, and the winner on each hole takes the lot? Pretty simple, and a bit of fun. Have you ever played this game whilst doubling the amount of money you bet on each hole? Not a big deal…start with 10 cents a hole, and double this amount for 18 holes. Any idea what the number is on the 18th hole? Before reading any further, just take a guess, quickly, don’t take too long!

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$13,107.20! Ridiculous, right!?

How on earth does this happen I hear you ask? Here’s the above table in a chart.

Notice how nothing happens for a long time, the all of a sudden, BOOM, the amount explodes. This my friends is compound investing – the eighth wonder of the world.

If you think that all you need to know is which way the stock market is going in order to make money, think again. Talk to any successful business owner or investor, it’s more about being disciplined, having a game plan, and taking the long view.

Meet John – he’s the world’s greatest stock picker. He only buys when the stock market index is trading at 52-week lows, and assuming they are 17% below his last purchase. Meet Jane – she’s the world’s worst stock picker. She invests $2,000 only at market peaks beginning in 1970, when she’s 22 years of age. She increases her investment by $2,000 per decade – $4,000 per year during the 80’s, $6,000 a year during the 90’s etc. She retires at age 65.

The results? Hands down winner is John, right? The results of this experiment (thanks to Ben Carlson) may surprise you. John does quite well, as you would expect. But the results are very similar. You’d think John’s portfolio would be multiples of Jane’s as he was buying at market lows, and Jane at market highs, however this is not the case. Why? Compound interest.

Jump on any online calculator and calculate the capitalised interest on a 30 year loan. It’s okay, I’ve done for you. A $500,000 loan, with an interest rate of 5%, accumulates interest of $966,279.60. Think about that for a second – that’s only the interest. Imagine compounding capital and interest on your stock investment! The reason John misses out on the benefit of compounding, is because he’s out of the market for long periods of time. Carlson clearly states in his analysis, “Short-term moves in and out of the market don’t matter nearly as much if you have a long-time horizon. Thinking long-term increases your probability for success in the stock market while the day-to-day noise gets drowned out by discipline and compound interest.”

The strategy is so simple, requires no insight into the future, yet it is so powerful, and actually exists – unlike the perfect market timer. The catch? It takes a long time, and it’s b-o-r-i-n-g! The irony is however, that the group of people who have the greatest capacity to absorb the market’s volatility, are the same group of people who seem to be the least interested in it.

We’re Headed For Another Recession & You Have No Idea What Will Happen

Daniel Kahneman once said,

“The idea that the future is unpredictable is undermined every day by the ease with which the past is explained.”

As investors, in fact as human beings, we’re constantly fighting the last war. In other words, we overweight recent events when we make judgment on the probability of an uncertain future event. We simply extrapolate the most recent event indefinitely into the future.

Think about the most recent economic decline, investors we’re running for the exits with the view that the ‘things we’re going to get worse’. The financial crisis of 2007/2008 was one of the most painful experiences in almost a century, yet it only lasted 18 months. I know plenty of investors who retreated at possibly the worst time, and were left hanging out to dry after the market bounced off the bottom, waiting for ‘the right time to get back in’.

Contrast this to how the market has been performing since the bottom of the GFC (March 2009), we have witnessed one of the longest recoveries in history, as illustrated in the chart below. This is probably one of my favourite charts – Bull markets since 1950 in measure in both duration and magnitude.

I know plenty of investors who have either bought back in after they had sold out at the worst time, or have been redeploying cash because they believe the market will continue it’s stellar performance.

Source: Yahoo Finance

Investor’s not only extrapolate the most recent events, but also try to plan ahead for the next GFC and how they’re going to deal with it, and it causes investors to shift their tolerance for risk at precisely the wrong time. If  you’re worried about a 10% correction in the stock market, stocks are not a place for you. Unfortunately for investors, no two market cycles are ever quite the same, so studying the last crisis is unlikely to prepare you for the next. Studying how you behaved during the last crisis on the other hand, may be quite beneficial.

Financial markets never follow the exact same route more than once, yet human behaviour follows precisely the same route, each and every time. Here’s a great, simple 30 minute animated video by Ray Dalio, on how the economy works. It’s probably one of the best videos on the economy I’ve seen.

The timing, the impact, and the duration of recessions are all different. Here is every US recession going back to the Great Depression along with the corresponding stock market performance.

 

Source: National Bureau of Economic Research, Ben Carlson

Even if you knew when the next recession was going to hit, the duration, and the impact it would have on the economy, it’s unlikely you would be able to profit from it. The stock market’s performance during each of these recessions would surprise most investors. This is one of the reasons why you can’t ‘wait for things to get better’ before investing – the stock market is a forward looking machine, not backward.

On average the stock market:

  • Has been up during a recession
  • Has been up 6 months prior to a recession
  • Has returned over 20%, 12 months after a recession has ended
  • Has returned over 52%, 3 years after a recession has ended
  • Has returned over 85%, 5 years after a recession has ended

By the way, we don’t need a crisis or a recession to see the stock market go down. Here’s 13 instances where the stock market has fallen 10% or more without a recession:

Source: Stocks for the Long Run, Ben Carlson

Paul Samuelson once said,

“The stock market has predicted nine out of the last five recessions.”

Next time you find yourself captivated by the alarming predictions made by the guy or gal on the television, in the paper or on Twitter, please remember this: More money is lost in trying to anticipate a collapse in the stock market than the collapse itself.

Probabilities Versus Predictions

Last week, South Korea stunned the football world by knocking out World Cup favourites Germany. In an astonishing finish, South Korea kicked two goals within minutes of the final whistle during extra time, in one of the biggest upsets in the sport’s history. Why? Because Germany were expected to take out the 2018 Fifa World Cup.

Here’s the 2 minute wrap up of the match courtesy of SBS:

It wasn’t only the football world who expected the German’s to take the cup home, it was also the expectation of UBS’ analytical team who ran complicated statistical models to place probabilities on all nations competing in the World Cup. Here’s the report if you’re curious.

Following Germany’s loss to South Korea, UBS have been copping criticism from journalists and social media trolls, about their inability to predict or forecast the future. Individuals’ and companies’ inability to forecast the future is well documented and certainly not news to anyone that studies the market, no matter how sophisticated they are or their technology is.

Let’s get one thing clear, UBS nor any of the other investment banks “predicted” Germany would win the World Cup. They simply applied a 24% probability of winning, in other words, a 76% probability of not winning – there is a huge difference.

“We are humble enough not to outright claim that Germany will win the tournament again, but our simulations indicate there is no other team with higher odds to lift the trophy than the defending champion.” – UBS (emphasis mine)

As nerdy and as absurd as this analysis may seem, what else do you have to rely on? Your gut feel? The tip your taxi driver gave you? Your “expert” football mate? I’ll take the odds thank you very much.

This is exactly how casino’s work. Their gaming systems are all designed to ensure the odds are firmly in their favour. Sure, you may win, and you may even win big, which is why you keep playing – but the odds are slim. And if you keep playing for long enough, you will eventually lose.

And when it comes to investing, investors seem to throw the odds out the window and prefer to play a very different game. One that is akin to the gambler at the roulette table. One where investment professionals try to outguess prices established by the collective wisdom of millions of different buyers and sellers each and every day.

Investors may be surprised by:

1) The number of investment funds that become obsolete over time, and

2) The low percentage of funds that are able to outperform their benchmark.

The chart below shows the sample number of funds that existed as at 31 December 2017, the number of funds that survived, and the number of funds that outperformed their benchmark. For example, 5 years ending 31 December 2017 (from 31 December 2012), there were 2,867 sample funds, of which 82% survived the 5 years, and only 26% were able to outperform their benchmark.

Source: Dimensional Fund Advisers (DFA)

Both survival and out-performance rates fall as the time horizon expands. For 15 years ending 31 December 2017, only 14% of funds survived and outperformed their benchmark. The odds of this game don’t seem very compelling if you ask me.

Let’s say you’ve found a manager who’s been able to outperform their benchmark for the last 3 years, and you’ve decided to hire them. Most investors and advisers use this method of manager selection, reasoning that a fund manager’s past success is likely to continue into the future – sack the poor performers, and hire the strong performers is how the narrative goes. The evidence suggests the contrary.

The chart below shows that among funds ranked in the top quartile (25%) based on previous three-year returns, most of them did not repeat their top-quartile ranking over the following. Over the periods studied, top-quartile persistence of three-year performers averaged 26%.

Source: DFA

The assumption that strong past performance will continue often proves faulty, leaving many investors disappointed. And despite all the evidence, investors continue to search for the winning investment – taking far greater risks than they ever expected.

Imagine for one second you could invest like the casinos. Putting the odds of success firmly in your favour the longer you play the game. As investors, we need to consider more than just a compelling story, and more than just good past performance. You may choose to ignore the evidence. You may choose to take on the odds. You may choose to ignore probabilities and make decisions based on predictions. Now that Paul the octopus is no longer with us, you may as well ask Achilles the cat for stock tips.

30 Facts About The Stock Market

My son turned 4 years of age the other week and it was a weekend full of parties and eating. One of my son’s favourite toy is Lego. His imagination and creativity runs wild. I’m one of those dad’s that keeps the instruction manuals in a folder – I mean c’mon, how else will you know how to build the original toy Lego had designed with all those parts? Although I did recently find out that Lego’s website stores all the instructions. Maybe I’m just a little old fashioned…at 35 haha!

Anyway, this got me thinking about how often we, as investors, deviate from what the stock was always designed to do. We seem to lose the instruction manual too often and our imagination and creativity seems to run wild like my 4 year old son with his Lego.

So I decided to take the liberty and list 30 facts about the stock market. What it was designed to do, how it operates, it’s performance and behaviour, and some of the facts that many folk in our industry seem to ignore:

  1. Stock markets exist and were conceived in order to allow companies to raise equity from the public in exchange for shares in that company.
  2. For every seller of a company, there is a buyer.
  3. For every buyer of a company, there is a seller.
  4. Over the long-term, the Australian share market has returned 8.5% pa.
  5. On average, the number of times the stock market moves up or down 1% within a day is 57 times over one year. In 2017 we witnessed 20 +/-1% days, and in 2018 so far we’ve witnessed 6.
  6. Australia makes up 2.1% of the world’s stock market. The US makes up 52.2%.
  7. The Australian stock market is made up of 40% in banks, and 18% in mining.
  8. Since 1926, we’ve witnessed 10 bear markets (declines of 20% or more). On average, the decline has been 45% and lasted for just over 2 years. The shortest was 3 months, and the longest was 5 years.
  9. Since 1926, we’ve witnessed 11 bull markets (including the current). On average, the climb has been 159% and lasted for 3.5 years. The shortest was 13 months, and the longest 9.5 years.
  10. Since 1926, we’ve experienced 15 recessions. That’s 1 in every 6 years.
  11. The average recession lasts 15 months, and the average expansion lasts 47 months.
  12. Over long periods of time, small company stocks beat large company stocks.
  13. Over long periods of time, the average investor under performs the stock market by a about 5% pa.
  14. Over long periods of time, professional investors under perform the stock market 77% of the time.
  15. Over a rolling 10 year period, the stock market has not lost money.
  16. The biggest gains in stocks are made while the company is on the way to the top, not after the gains are made.
  17. The stock market returns double digit gains or losses in 70% of all calendar years.
  18. The stock market lost almost 90% of it’s value during the great depression.
  19. The Japanese stock market has done nothing since 1989.
  20. Dividends make up about 42% of an investor’s return.
  21. If you missed the best 10 days in the stock market over the last 20 years, your portfolio would have returned 67% less than the market. If you missed the best 40 days, your portfolio would have returned 114% less than the market.
  22. If you missed the worst 10 days in the stock market over the last 20 years, your portfolio would have returned 150% more than the market. If you missed the worst 40 days, your portfolio would have returned 952% more than the market.
  23. 90 days of the year generates around 95% of all the year’s gains.
  24. The US stock market rose 22% last year. 25% of that return came from 5 companies. 10 companies made up 35% of the return. 23 companies accounted for half the return. Apple’s return alone was responsible for of the index’s total return then the bottom 321 (of the S&P 500) companies combined.
  25. From 1980-2014, 40% of all the Russell 3000 stocks lost at least 70% of their value and never recovered.
  26. The stock market has experienced an average intra-year decline of 13.8% every year since 1980.
  27. The average return of stock markets are between 8-12%, yet stock markets see gains within this range only 5% of the time.
  28. The stock market produces a positive return 3 in every 4 years.
  29. The stock market produces a negative return 1 in every 4 years.
  30. Stocks go up most of the time.

The stock market needs to be looked at as owning a piece of a company, a business. The ownership or worth of a business represents it’s futures earnings power. I strongly believe that as technology progresses, as we become more innovative and efficient, profitability should increase, and therefore businesses become more profitable, and businesses become more valuable – on the whole. During this process, we’ll witness and many of us will experience default. But I believe this is part of the evolution and progress.

Returns on the stock market are not promised to anyone, nor are they guaranteed. Having said this, the track record of the stock market is compelling. If you’re patient and disciplined enough, you too may be able to participate in what it has to offer.

Source:

Index Fund Advisers

JP Morgan – The Agony & The Ecstacy

JP Morgan – Guide to Markets (Australia)

Vanguard/Andex

Morgan Housel

Ben Carlson

SPIVA

The Changing Face of Melbourne

Once upon a time in 1667, the Dutch East India Company, the most valuable company in the world at the time, wanted a monopoly on nutmeg – a spice that was worth considerably more than gold. During this time, Run island, a tropical island closer to Darwin than Jakarta, was prized as the home of nutmeg.

In July of 1667, the Dutch acquired Run island via a swap with the British. They agreed to trade New Amsterdam for Run island. The Dutch now had a global monopoly on nutmeg. It has been described as “the real estate deal of the millennium”.

Unfortunately for the Dutch, the price of nutmeg eventually collapsed. The British stole seedlings and dramatically increased supply by growing them in other parts of the world. Furthermore, the arrival of other stimulants such as coffee, tea, and tobacco didn’t aid the Dutch’s situation.

Today, Run island has a population of around 2,050, and still grows nutmeg. New Amsterdam was renamed New York, and the rest is history. All of this within a very short period of time – 351 years to be exact.

They say investors have a three year time horizon, last year, this year, and next year. As human beings we’re wired in such a way that makes it difficult for us to be able to see so far into the future. Take the city of Melbourne for example.

Here’s the evolution of Melbourne city over 130 years, in images, taken from the top end of town – Spring Street:

And here’s Melbourne today – a very different picture to that of the first.

 

Between 1% and 3% of a city is demolished and rebuilt each year, such that over almost a lifetime, a city is completely transformed and almost recognizable.. Incremental change is so difficult for us to recognize, however over long-periods of time, it’s clear as day.

Here’s a different perspective, one that most of us can recall. Southbank, in the blink of an eye is completely transformed.

Today is no different. With not only the unprecedented level of construction within the city of Melbourne, but also the density of construction, the public are outraged that we are killing our cities. Our cities have never stopped growing, have never stopped evolving, and have never stopped progressing.

This is what progress looks like. Just because it’s new, just because this wasn’t how it used to be, just because this isn’t how we grew up, doesn’t mean we should fear what the future holds.

Melbourne was founded on the 30th of August 1835. A lot has changed since then. A city which is 183 years young, houses a population of around 4.725 million. Contrast this to the city the Dutch swapped for their nutmeg monopoly in 1667. New York City, founded in 1624 is now around 394 years young, housing a population of around 8.625 million.

By the year 2046, Melbourne’s population is expected to increase by 2.8 million people. Here’s what Melbourne’s skyline looks like looking up from the south:

Here’s what the same skyline starts to look like when Melbourne houses 10 million people:

And if you were to take all the buildings on Manhattan Island and placed them into the city of Melbourne, this is what it would look like:

Although quite staggering, it can be done.

As investors we need to fight the minute by minute news headlines that try and grab our attention each and every day. Although we are not wired to, we know deep down that true, significant, and sustainable wealth is created over long periods of time – yet we want it all now. We need to change the way we think about, and invest not only our money but in ourselves. We seem to be attracted to complexity and complication when in fact simplicity yields a more favourable outcome. We seem to prefer to make significant and material changes less frequently, when in fact small, incremental changes made more frequently, which may seem insignificant to us today, compound to and have a far greater impact than we could have ever imagined. It’s like a freight train that gains momentum – it becomes unstoppable.

Try and add 5+5+5+5+5+5+5+5+5+5 in your head. It’s pretty easy, you can do it right? The answer is 50. What if I asked you to multiply instead of add in your head, 5x5x5x5x5x5x5x5x5x5? There’s no way you’ll be able to do it, in fact, I don’t even think you’ll be able to wrap your head around it (by the way, the answer is 9,765,625).

As investors we underestimate the long-term. We underappreciate the power of compounding. Because it isn’t intuitive, we ignore it, and try to solve problems through other means. Next time you’re planning ahead, stop and think about the long-term. Stop and think about the potential of compounding.

Thanks to Tony Crabb of Cushman & Wakefield for the inspiration.

The Art of Wu Wei

For 30 years ending 2016, the US stock market returned 10.16% pa. Yet the average investor for this same time frame generated 3.98% pa. This is the behaviour gap folks. A 6.18% pa behaviour gap!

Staying disciplined through the gyrations, and heart-stopping rises and falls of modern markets isn’t always easy, yet it’s crucial for your long-term investment success.

When it comes to investing, we look beyond short-term fads, the panicked reaction, the rumoured sure thing and the ‘my gut feeling is to (whatever)’, and we build investment portfolios based not on intuition, forecast or rumour, rather, on research and evidence.

At Baharian Wealth Management, we don’t purport to our clients or prospective clients that we hold the secret sauce to investment management. That we hold market information that no one else does. That we have the ability to beat the market. At BWM we spend our time and energy ensuring the market doesn’t beat us.

Far too many people and firms focus their energy and efforts into pursuing something that is statistically improbable. Their job is to keep you as their investor/client, amused and entertained. It’s nothing more than dinner theater. President Lincoln once said, “You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.”

There are three key over-arching factors that help us bridge the (6.18% pa) behaviour gap:

  1. We think about factors rather than forecasts,
  2. We think about probabilities rather than possibilities, and
  3. We focus on process rather than the outcome.

We focus our energy on aspects of investment management that we can control; human behaviour, diversification, costs, and rebalancing.

If you want to succeed as a long-term investor, take the time to understand the Taoist concept of Wu Wei, which literally translates to “act without effort”. The practice of Wu Wei are fundamental beliefs in Chinese thought and have been mostly emphasized by Taoism. It means natural action, or action that does not involve struggle or excessive effort – it manifests as a result of cultivation.

Be clear on your investment goals, put in place a disciplined process and plan that is going to help you achieve them, and stick to it – avoid over thinking and avoid the panicked over-reactions (fear-sell/greed-buy). Let the process unfold – it takes time.

Several years ago, Charlie Munger was asked by a probing journalist, “If what Berkshire has done is so simple, why haven’t more people copied it?” To which Munger replied, “More investors don’t copy our model because our model is too simple. Most people believe you can’t be an expert if it’s too simple.”

Long-term successful investing is simple, but not easy.

If you want to know more about how we think about investing, click here. We’ve uploaded two documents at the bottom that the page that you may find of interest. Or feel free to get in touch.