October, 2016 | Slack Investor

Not Index Funds Again … This is Boring!

This site spends a bit of time talking about index funds, here and here. As well as the blog, the Slack Investor site hosts pages following the ASX Index, US Index and UK Index. This is because Slack Investor likes, and is invested in, these type of funds. Each page is dedicated to a rules-based method of following these type of funds in a (mostly!) profitable manner … and, in the Slack Investor tradition, a minimal amount of energy needs to be spent on these investments.

The astute reader will peruse my portfolio page and ask the question

Why does Slack Investor keep going on about these funds when only ~4% of his portfolio is invested in them?

The explanation is that Slack Investor started out 100% in Index funds … and, with some experience started trading in individual shares. I currently have a mixture of both. Index funds are a great place to start your journey into share investment.

There are some eloquent arguments against using the broad index funds as an investment tool. Montgomery maintains the theme “why fill the saddlebags with bad companies!” in this article.

However, despite these funds labelled as “dumb investing” by some, Index funds become more popular each year and have some solid support in the investing community. Slack Investor has developed a simple rules-based method for (usually!) profitable trading in index funds that only requires monthly monitoring. At the end of each month, I will look at the monthly chart of each followed index on Incredible Charts and make one of three decisions – buy, sell, or move my stop loss.

The simplicity of this approach is appealing for its slackness!

Details of this method will be eventually posted on the index pages – Not because I’m secretive, … just because I’m a little slack … and I think it will make an interesting future post … but for now, monthly decision points will be posted as soon as they are made.

This “index trading” method is different to how individual companies are traded by Slack Investor. There are greater risks involved in trading just a few individual companies … but the potential rewards are also much greater! One of the few advantages of being in the investment game a long time is having enough capital to have positions in at least 20 companies … this limits “individual company” risk as each company is just a small fraction of my total portfolio.

Slack Investor is currently enjoying the decisions associated with trading individual companies … even though a bit of effort goes into researching the companies – and they require more monitoring (work!). I am rational enough to know that there will be a time where this extra work will lose its appeal … and then I will revert back to index investing … “dumb” perhaps … but hopefully still profitable.

What’s that smell? Is this Spring? … It’s Dividend Season!

There is that smell in the air … Is it love? Winter is breaking … New growth erupting on the stems… and Ah Yes, It is Dividend Season – the Prince of Seasons! That time of the year when the companies that you have invested in reward you for your efforts and present you with a fraction of the results of their toil.

There is no finer season – it occurs twice a year! Each company has worked hard during the financial year trying to increase sales and profits … they have crunched the numbers and made reports and hopefully held their numbers close to their chests ready for a festive occasion where the managers and shareholders gather. There is a triumphant report to the shareholders and final dividends are calculated from a share of the profits and a date is set where the patient shareholders receive a cash gift into their accounts as a reward for supporting the company through this last financial year. Hopefully there is growth in sales and dividend, and prospects for the coming few years are good …

Well, this is how its supposed to happen … and if you have done a bit of homework and assessed the company and industry … and management … and competitors … and economic environment … and heaps of other stuff … OR, you may have just been lucky! … Its how it often happens.

Because Slack Investor is not the most fastidious of researchers (He would much prefer others did the hard work for him!). Sometimes his luck doesn’t run and reporting season brings some bad news and there is a drastic price slide as other investors bale out.

Investors seem very sensitive in dividend season and tend to react strongly when there is a perception of bad things in the air. Particularly stocks that have a lot of good news forward-priced into them (high PE). Triggers such as as when analyst expectations are not met … or profit guidance is revised down … or a product disaster … can reduce share prices by 20 -30% in a matter of hours.

Slack Investor is not watching his stocks hour by hour and has suffered from a few of these corrections. But the beauty of his slack approach is that no decisions need be done on the day … absorb the bad news overnight and ask yourself the question

Given this bad news … Would I still buy the stock at its new price?

If the answer is no, sell at the next opportunity. If the answer is yes, keep an eye on the stock for the next few days … One of two things will happen

The drastic stock price retreat was an over-reaction and value buyers start pouring in and the price returns to its former glory… your slackness has been rewarded.
The bad news filters through to the general community and analyst and brokers change their recommendations to their clients, people continue to sell and the price slides further.

Unfortunately, the second scenario is more common and even though you may think the stock is more of a bargain now … through experience, Slack Investor has known other bad news to follow bad news and it is prudent to sell the stock (perhaps at a loss) – you can’t hold back the tide! If it is a stock that you like … you can always buy it back when sentiment improves.

You can’t trust a SPIV … but you can trust a SPIVA!

A SPIV, in the beautifully old fashioned slang favoured by my mother, is a sharp dresser that makes his living in usually disreputable ways – Arthur Daley take a bow!

… A SPIVA … well that’s a completely different story!

In a follow up to why index funds are a good start to investing in shares, Slack Investor was combing the press (rather than his hair!) this week and came across this cracking group of financial wonks known as SPIVA that love nothing more than analysing reams of financial data. Slack investor loves a well constructed piece of research that he doesn’t have to do himself – and for 14 years they have been looking at world markets and publishing reports every half year.

There are two main types of funds: Active Funds where the stocks are actively managed according to financial experts – they control the stock selection and timing of the buys and sells – their expertise does not come cheaply and to piggy back onto their knowledge you have to pay a management fee of usually 1.5 to 4% every year. You can invest in these funds directly by filling out an application form – or you could buy shares on the ASX in a Listed Investment Company (LIC) such as Argo or AFIC.

Passive Funds are constructed in such a way that they passively follow an index. These funds can be mostly automated and are much cheaper to run. They have annual management expenses of usually less than 0.5% per year.

What do the wonks at SPIVA think about the Australian Active vs Passive scene? Their mid-year 2016 report is full of interesting stuff but the killer finding is that nearly 60% of large cap actively managed funds failed to beat the ASX 200 index (passive) in the most recent financial year, with this number rising to nearly 70% over a five-year period.

Things are even worse for international stocks, SPIVA reports that over 80% of Active international equity fund managers underperformed their benchmark index. This rises to over 90% over a five-year period.

Slack Investor is not against individual active fund managers … some are very good, … consistently … Roger Montgomery comes to mind … but because of the much smaller annual fees that they charge, passive funds seem to have a great edge in most cases … and the data from SPIVA bears this out. There is much more to say on the pros and cons of managed funds … and exchange traded funds vs individual stocks … but this will have to be another post(s).

2016 September Monthly Update

At the end of September 2016, Slack Investor is embracing the slackness of it all and stays IN for all his ASX, US and UK index positions.

The reason for this lack of action is that none of his preset stop losses have been breached and, as the Slack Investor has a natural pre-disposition to be in the market earning dividends from investments, he cools his heels for another month … ahhhh the bliss of it all … decisions can be so fatiguing!

More detail and chart and table updates can be found on the ASX, UK and US index pages.