FY2022 Nuggets and Stinkers and … July 2022 – End of Month Update

“So the last shall be first, and the first last: for many be called, but few chosen“
Matthew 20:16 – King James Version of the Christian Bible

Slack Investor is not a very religious person – but he is a numbers man and 84% of the global population identifies with a religious group – so I have to go with the flow here. This sort of majority demands respect. The Christian disciple Matthew was reporting on one of Jesus’s teachings. Biblical scholars think that Jesus was trying to point out that Heaven’s value system is far different from earth’s value system.

The “Last first and First last” might also be applied to how some of the Slack Portfolio stocks have been going over consecutive years. There seems to by a cycle of last years Nuggets … might end on the Stinker pile the year after – and vice-versa. Growth stocks have many virtues … but they are not immune to the cycles of price – bouts of overvaluation followed by a period of undervaluation.

The percentage yearly returns quoted in this post include costs (brokerage) but, the returns are before tax. This raw figure can then be compared with other investment returns. I use Market Screener to analyze the financial data from each company and extract the predicted 2024/2o25 Return on Equity (ROE), Dividend Yield and Price/Earnings (PE) Ratio on the companies below. This excellent site allows free access (up to a daily limit) to their analysts data once you register with an email address.

Slack Investor Stinkers – FY 2022

Financial year 2022 was the Pepé Le Pew of all of Stinktown for Slack Investor.I hold mostly growth shares in the technology and healthcare sectors. These sectors have been heavily punished across the world so far in 2022.

This is the first time I have had a negative result for my investments over a financial year since 2009. Slack Investor is a great believer in long term investing returns – usually evaluated over a 5-year period – so this year’s result, while painful, does not change my overall strategy.

Three of my “stinkers” this year were actually “nuggets” from last year. For FY 2020, Codan +161%, REA +59% and IDX +37%. Such is the cyclic nature of some growth stocks.

Codan (CDA) -58% (Still held)

(CDA – 2025: PE 14, Yield 3.8%, ROE 25%) Codan is a technology company that specializes in communications and metal detecting. This company was one of my big nuggets last year (+161%) – so I should not have been really surprised that there could have a bit of a pullback. The decline hurt, but the fundamentals of the company remain sound. Holding on.

Xero (XRO) -41% (Sold)

(XRO– 2025: PE 81, Yield 0.3%, ROE 15%) Xero is an innovative cloud -based accounting provider for small business. Every business owner that Slack Investor talks to say that Xero is a boon to their business. This sort of “word of mouth” got me over-excited this year and I just held my nose and jumped in – against all my rules of avoiding the excessively high forward PE ratios of over 50! It is these high PE companies that are usually punished first in a downturn – and that’s exactly what happened. I still look at it and think its a decent growing business – but I can feel the recent bite!

Integral Diagnostics (IDX) – 39% (Still held)

(IDX – 2024: PE 16, Yield 4.5%, ROE 12%) This medical image company provides diagnostic image services to GP’s and specialists. IDX was another of my nuggets from last year (+37%) that has just shed all of last years gains. The Return on Equity of this company is starting to get a bit low (<15%) – But the PE and yield seem OK. Will keep this company on watch for the moment.

BetaShares Asia Technology Tigers ETF -33% (Still held)

(ASIA – 2022: PE 14, Yield 0.7%,) Growth in Asia … What could go wrong! Plenty it seems.

These “technology tigers” that make up this ETF have been part of a global selloff of tech-related shares this year.

A lot of the Chinese companies (such as Alibaba) have been marked down because the Chinese government imposed its will on a few industries. Also the US government has hinted at action on Chinese companies that have listed on American market. However, the ASIA ETF has large holdings in such monsters as Taiwan Semiconductors, Samsung and Tencent Holdings – so I will accept the current pain and stick with this as a long-term holding

REA Group (REA) -33% (Still held)

(REA – 2024: PE 29, Yield 1.8%, ROE 32%) The owners of RealEstate.com.au. which is the go to portal for house selling and buying. 65% of Australia’s adult population are checking the site every month looking at property listings and home prices. Another long-term holding.

I have only listed the stinkers that lost over 30% this year … sadly, there were many more rogues that lost over 15% for the Slack Fund. They include PPK Group (PPK) -28%; Altium (ALU) -25%; Nick Scali (NCK)-20%; Pushpay Holdings (PPH)-16%; and A2 Milk (A2M)-15%.

Slack Investor Nuggets – FY 2021

Nuggets were few and far between this year. A great benefit of investing in companies that have a high Return on Equity (ROE), and with a track record of increasing earnings, is that they sometimes behave as “golden nuggets”.

Technology One(TNE) +17%

(TNE – 2025: PE 34, Yield 1.7%, ROE 36%) This Software as a Service (SaaS) and consulting company continues to be profitable. This year is the 13th year in a row of record half-yearly profits. A high 2025 PE of 34 (Expensive) is a little scary but, if the high Returns on Equity (36%) remain, on balance, this is OK.

Macquarie Group (MQG) +10%

(MQG – 2025: PE 25, Yield 4.0%, ROE 13%) Macquarie is a complex business with a range of banking and financial services, and plays in global markets and asset management. Once again, the management seem to know what they are doing – Slack Investor remains a fan.

Honourable mention to the only other company that ended in the black – Coles (COL) a decent +8% in these troubled times.

Slack Investor Total SMSF performance – FY 2022 and July 2022 end of Month Update

In a year that Chant West describes as “a rough year for markets”. Following FY2021, which was one of the strongest years for Super funds (+18% for FY21), things have now lurched south with the median growth fund (61 to 80% in growth assets) returning -3.3% for FY22.

The FY 2022 Slack Investor preliminary total SMSF performance looks like coming in at around -14%. However, the 5-yr performance is a more useful benchmark to me – as it takes out the bouncing around of yearly returns. At the end of FY 2022, the Slack Portfolio has a compounding 5-yr annual return of over 13%.

Despite a breach of the stop loss for the ASX 200 last month, Slack Investor remains tentatively IN for Australian index shares on a dramatic rise of 5.7% this month. The FTSE 100 also had a good month (+3.5%)and I remain IN. The US Index S&P 500 eclipsed them all with a remarkable 9.1% gain – and I am now a BUY back IN.

Last month the ASX 200 price went below its stop loss. Slack Investor tries not to exit a stock against the momentum of the market, so I have been off the couch and closely watching the ASX 200. It has remained above the rising trend line and emerged above the monthly stop loss. I am tentatively still IN.

ASX 200 Weekly chart – From Incredible Charts

After a sell, it is important to have a notion when to get back IN to an Index or a stock. When trend trading, my main tool for finding a buy signal is a trend following (or momentum) system called the Directional Movement Index. There are many ways of setting up this system. Slack Investor likes the “smoothing” that is enabled by a system that looks back over the previous 11 periods – but the complexities are best left for the Resources page.

S&P 500 Weekly chart showing a BUY signal on the Directional movement Index weekly chart. The weekly price ranges are at the top and Average Directional Movement Index (ADX) patterns below – From Incredible Charts

In addition to the BUY signal from the Directional Movement Index for the S&P 500, the charts show a triggering of the “Wedgie” pattern where the stock price breaks through a long term down-trend. This reinforces the BUY.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

Lifting the gaze … to a beautiful place

Earth Australia planet earth satellite view SKU 0099 image 1 — An “enhanced” satellite view of eastern Australia incorporating an “exaggerated relief” technique to emphasize the topography. The mountains of PNG and Indonesia are on the horizon.

It serves an investor well to occasionally lift themselves away from the day to day stresses of the world – and the trials of owning a share portfolio!

ASX 200 – The Australian Index

My previous post outlined a few of the difficulties of market timing and my decision to be tentatively out of the Australian Index according to my “market timing rules”. I also try not to trade against the market trend … and I would not sell while the weekly chart was looking positive.

ASX200 Weekly Chart FY 2022 – Incredible Charts

So far this has been the case, with the weekly chart just above the rising trend line. I will sell if the ASX200 is below the trend line and still below the stop loss at the end of the week. This gets to one of the problems of market timing – you can set up the most definitive strategy that will give you an objective selling point – but my heart is not in it as Slack Investor believes that the ASX 200 represents reasonable value at the moment. I am actually looking forward to the end of my 20-year market timing experiment – even though it does have the useful purpose of giving Slack Investor something to do in a market downturn.

Lifting the gaze

My absolute favourite way of lifting the gaze is to look at the Vanguard Asset Index chart over a long period. However, a later version than 2021 isn’t due out till mid August 2022 – so I have just shown last years version. The Long term asset class returns chart shown below – in a logarithmic scale, show that the asset classes of Residential Property and Australian shares – are the only really worthwhile games in town. When things just get too much in the day to day trading world – just sit on the couch and gaze in wonder at these two charts … and then perhaps doze off.

The importance of Australian shares in your portfolio | Stockspot — Long term Asset returns 1926-2020 – From Stockspot

Extract from the 2021 Vanguard Index chart (Just the 2008-2021 portion) – the dollar values on the right are the results of investing $10000 in index funds in each asset class for 30 years (since July 1991). – Check out the full glory of the Vanguard 2021 PDF chart – Click for better resolution.

Market Timing and Share Market Valuation … and June 2022 – End of Month Update

Trying to time the market is a losing game

In addition to the trading … and mostly holding onto individual companies, Slack Investor has been running an experiment on market timing for Index funds in the Australian, UK and US markets. The Index funds have been doing OK .. but Slack Investor is generally just finding that timing markets is just too hard and is hinting at an end to the timing experiment in 2024.

As a recap on the experiment so far, I am still outperforming the “Buy and Hold” investor in all followed markets – but the advantage is slim. Per annum outperformance is 1.4%, 1.9% and 0.6% for the ASX, UK and US markets respectively. Not really fantastic results when you consider that I am missing out on the dividends that “buy and holder’s” receive when I am “timed” out of the markets.

The Slack Index “timing the market” method was devised with a lot of back-testing on 30-years of market performances and does really well when sustained bear markets occur as it gets out of the market at a hopefully early stage in the price downturn. Ideally, the Slack method should stay in the market for the smaller fluctuations (corrections <~10%) and get out of stocks before it becomes a full bear market. The problem with my current strategy is that I am getting “whipsawed” out of the market in these smaller downturns – and the big swings seem to happen so quickly that the damage is done before I can get off the couch.

Things were much easier in the accumulation stage – I had set amounts of money coming out of my pay each month that would be automatically invested into my trading account. With dollar cost averaging, if the market went down, it would just mean that I would be able to buy a greater number of shares – all good.

It is different in retirement mode … as, I am not a net buyer of shares now and, as I am usually am fully invested, it is difficult to take advantage of a lower-priced market. These days, the stock market downturns are just something to be endured.

A chart that caught my eye from Current Market Valuation is shown below. They have a developed a method to try to see if a market is over, or under, valued using the cyclically adjusted price-to-earnings ratio (CAPE). This is very similar to the way that Slack Investor has previously tried to work out the valuation of the Australian, UK and US markets.

S&P CAPE data showing the **1950-2022 average** (mean) **P/E value of 19.8** (baselined as 0%), as well as horizontal bands showing standard deviation bands. As of **June 24, 2022**, the S&P500 P/E ratio is 47% higher than the **1950-2022 average** – From Current Market Evaluation.

Current Market Valuation define the market as “Fairly Valued” if the CAPE Ratio is between between -1 and 1 standard deviation from the “average”. If the CAPE distribution is “Normal”, then the CAPE should be ranked as “Fairly Valued” about 70% of the time.

Slack Investor has developed similar charts – but only since 1982. I have used only a short time frame for this analysis as there are good arguments as to why the CAPE should actually rise over time – and a small time range will tend to stop this distortion. The Green shaded areas correspond to the limits of one standard deviation of the CAPE from the 40-yr average values.

Slack Investor S&P 500 CAPE data showing the **1982-2022 average** (arithmetic mean) **P/E value of 24.3** at the end of May 2022 -“Fair Value” is represented by the green shaded area. Despite recent price drops, the S&P 500 CAPE is still well above average (28%) but at least in the broad “Fairly Valued” range now- Data from Barclays

Slack Investor FTSE 100 CAPE data showing the **1982-2022 average** (arithmetic mean) **P/E value of 17.5** at the end of May 2022 -“Fair Value” is represented by the green shaded area. The FTSE 100 CAPE is close to its 40-yr mean and well into the “Fairly Valued “range – Data from Barclays

Slack Investor ASX 200 CAPE data showing the **1982-2022 average** (arithmetic mean) **P/E value of 20.4** at the end of May 2022 -“Fair Value “is represented by the green shaded area – Data from Barclays

Slack Investor gets very nervous when the CAPE charts are well above the green “Fair Value” range. and would love to be a buyer when any of these markets show CAPE values below their 40-year averages.

However, as my “time the market” skills are limited, and my Stable Income pile is still producing, I am prepared to strap in and “enjoy”(not really!) the ride.

June 2022 – End of Month Update

The financial year closes and looking at the 12-month charts for FY 2022 – An official “Bear Market” for the US (>20% fall from a recent high) and big drops in the UK and Australian markets. The “blood in the streets” trend in world index prices have moved the ASX 200 below my stop loss of 6917 – This triggers a sell response.

However, I will not sell against the overall trend. Given that the ASX 200 is bouncing up a little today (01 Jul 2022), this means that I will go to a weekly watch on the ASX 200 – I will now wait till the end of next week to see if the ASX 200 continues to drop – or recovers. I have developed this “soft sell” approach when I gauge that the market is not too overvalued (see above ASX 200 CAPE chart).

Slack Investor remains IN the FTSE 100, TENTATIVELY OUT for the ASX 200, but OUT for the US Index S&P 500 due to a sell in January 2022.

All markets down for the month. The FTSE 100 (-5.8%), the S&P 500 (-8.4%) and the ASX 200 (-8.9%).

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index). The quarterly updates to the Slack Portfolio have also been completed.