Slack Investor remains IN for US, UK (Just!), and Australian index shares.
… a very volatile month and a test for the fainthearted. The monthly overall declines do not tell the whole story – rapid declines then recovering. The Australian Index (-0.4%) had the best recovery and the US index (-3.9%) and UK index (-4.0%) had similar overall monthly falls.
Slack Investor is already off the couch and is still on alert for the US Market considering its high valuation and its recent 10.2% correction. The UK market is also under watch as it is very close to its monthly stop loss (See UK Index page).
The Upside of being Slack
Some of the time there is a price to pay for being Slack – and only making sell decisions on a monthly basis. But it is not this day!
… A day may come when the courage of men fails, when we forsake our friends and break all bonds of fellowship. But it is not this day.–Excerpt from Aragon’s Sons of Gondor speech – Lord of the Rings – Wikiquote
Well, … quoting from Tolkien’s The Return of the King is perhaps is a little dramatic but this post is a bit technical and needed a picture of Viggo Mortensen just to brighten it up.
There are many share traders who set automatic stop losses with their brokers that trigger a sell order when the price moves below a designated value. This technique can be good when you want to set a stop loss and forget about it – But there are pitfalls. Slack Investor has tried this method before and has found that the automatic sells are sometimes triggered by a particularly volatile day and your automatic sell order may trigger at $3.00 but at the close of the day the stock may have recovered to $4.00.
More common (and disappointing!) is when a rapidly falling price jumps below your automatic stop loss without triggering the sell. You then would sell the stock manually – usually at a lower price.
There are many traders who, like Slack Investor, set there stop losses manually … butact on them on a daily basis. The chart below is a daily chart of the US Index S&P 500. As a refresher, each vertical line represents the daily price range for the S&P 500. A red line indicates that the price has dropped during the day, and a blue line shows a daily price rise. Clicking on the chart will increase the resolution and you can then make out little tabs either side of the vertical daily line. The tab on the left represents the opening daily price and the tab on the right the closing price for the day. A daily trader might act on his stop loss immediately the S&P 500 falls below the stop loss (e.g. big red arrow). This technique can be a very good thing if there are further falls! However, in this case, the recovery from the 10.2% correction has rewarded the Slack Investor’s slackness.
Slack Investor does not like the daily grind of decisions. He likes to do most of his trading based on monthly charts (See left) … where each vertical line represents a month of price movement for the US Index S&P 500. At the end of February 2018, the right hand tab of the last vertical red line indicates a closing price of 2713 – well above the stop loss of 2557 (for now!) so my trading method says to hang in there.
Sometimes there is a price to pay for this slackness – For instance, when there is not a recovery in the stock price! But the delight of only making monthly decisions outweighs this concern for me. My monthly trading method together with diversification (~20 stocks) and a bit of effort in selecting growth stocks has proved to be sound so far.
All Index pages and charts have been updated to reflect the monthly changes – (ASX, UK, US).
Easy does it Ladies and Gentlemen … slide back in your seats … there has been a correction in the S&P 500 … the world is not ending … Yet!
The market volatility has been driven by the US market which was overvalued due to stellar gains of 22% in 2017 and big gains in 2016. According to AMP Capital, as of early February, European shares have fallen 8% and Australian shares have lost 6% – there have been substantial recoveries in all markets since.
On Feb. 6, 2018, the (US) stock market officially entered “correction” territory. A stock market correction is defined as a drop of at least 10% or more for an index or stock from its recent high. –from fool.com referring to the Jan/Feb 2018 correction in the US S&P 500 index.
The stock market is a wonderful way to accumulate wealth … but it does not always behave rationally. The driving force behind increased stock prices is company earnings … if they are rising then “generally” the price of the stock increases. But rationality is not a common trait where the share market is concerned – as the market is combination of buyers and sellers with differing motivations.
I often find it useful to take a step back from the daily price fluctuations, the chart below shows the last 5 corrections of the S&P 500 US market (in dark grey) since the market crash (>20%) of 2008/9. It has been a couple of years since the last correction and the US market has made some substantial gains since then.
Source financialsamurai.com showing the last 5 corrections(>10%) of the S&P 500 since 2009.
Corrections are a normal part of stock market growth and the chart below (In logarithmic scale – representing percentage increases on the same vertical scale) shows how Australian share market values have continued to increase over all – despite the many world crises that have presented in the last century.
The chart below sums up why Slack Investor is happy to be predominantly invested in shares at the moment. The “Grossed up dividend yield” is the effective yield “after tax” that Australian shares are returning to the investor – around 6%, compared with the safe term deposit rate which languishes at around 2%. While the gap in annual earnings between Australian shares and bank deposits remains high I am happy to stay with the “risk on” options of shares – The price of shares, or capital value, may fluctuate temporarily but the annual dividends should continue to be paid. In any case, my downside risk is protected by monthly stop losses. The economic news from around the world remains mostly positive pointing to a growing global economy. So, … stay optimistic – but be ready to bail if the charts start turning south in a significant way!
Slack Investor remains IN for US, UK, and Australian index shares.
… some monthly setbacks for the Australian Index (-0.5%) and the UK index (-2.0%). However, confidence remains high in the USA with another huge (I mean … It’s like … Really Huge!) rise of 5.6% – This is “irrational exuberance” territory!
Slack Investor gets off the couch and is on alert for the US Market. The two strong rises over the last two months have pushed the S&P 500 up to breach the the 20-25% upper limit from his previous stop loss. This involves some necessary action – finding a new stop loss that is a little closer to the current price.
From Incredible Charts
The old S&P 500 upper limit of 2786 was surpassed by the end of month price (2823). I then go back to the charts and find a new, higher stop loss that makes sense to me. This is usually a new “higher low” – and I had to look at the weekly charts to find a sensible stop loss minimum at 2557. If this chart stuff interests you, go back to an earlier post. Otherwise, be happy that Slack Investor has moved his stop loss upward and is ready for the inevitable fall (Correction) in the US markets.
A2 Milk Company (A2M)
Slack Investor was blissfully unaware that there are two types of proteins in Milk – Conveniently labelled A1 and A2 – Who knew?? I am blissfully unaware about most things.
A2M is a New Zealand company listed on the Australian Stock Exchange and they own the patent for identifying cows that only produce the A2 protein in their milk. The selling point, backed up with a slick marketing campaign “Enjoy Milk Again “, is that there is evidence to suggest milk containing just the A2 protein is easier for some people to digest.
Slack Investor has been an owner of this fantastic company since last year and has taken the opportunity to top up his holding when A2M reached a new high in the middle of the month at around $8.00 – This is not advice.
There are many claims for A2 Milk, including that the lactose intolerant folk find it easier to digest than normal milk. Slack Investor has had a glance at A2M’s supporting 100 independent studies and he is refreshingly skeptical of these claims till a large sample, “double blind”, piece of research emerges. There are also other skeptics.
However, he cannot argue with success of A2M’s new campaign and the converts to A2M’s products that are reflected in recent sales growth. The action on the price charts and projected sales get me off the couch. Particularly with a recent announcement that A2M is expanding into the large US market. Suprisingly (for me!), 70 percent of African Americans and 90 percent of Asian Americans are lactose intolerant.
Always, before I invest, I want a deep look at a company – I use the excellent 4-Traders site and, in particular, the Financials tab – for A2M has revealed the type of growth trend that Slack Investor likes – the black columns are projected sales through to 2020. Projected increasing sales and income are the type of thing that I am looking for.
From 4-traders.com – click image for better resolution
A2M’s Current Price to Earnings ratio is an “eye watering” very high 48. This does not compare favourably with the ASX average PE of around 15. A high PE ratio can be a sign of an overpriced stock- but there are exceptions!
The exceptions are made for exceptional companies. A2M is growing its earnings so fast that the forecast PE is much more reasonable in a few years (i.e. A2M estimated PE is a more reasonable 28 in 2019) and A2M is the type of company that is excellent at using its resources to make money – an extremely high Return on Equity (ROE ~50%). These high PE, high growth companies make up a large portion of Slack Investor’s portfolio. They can be a wild ride … as they are often punished (price drops) if they do not meet forecast earnings during reporting season – but I am happy to hang onto this company for now – there might even be some further A2M good news ahead – If not, my monthly stop loss at $6.97, and diversification, will protect me from catastrophe.
All Index pages and charts have been updated to reflect the monthly changes – (ASX, UK, US).
There is a bit of an animal theme in this post as Slack Investor pays tribute to George Orwell and his book Animal Farm. The “pigs and the dogs” have all the power in Orwell’s allegorical tale – and, with Australian’s paying $31 billion annually in super fees, there are plenty in the superannuation fund industry that are getting richer like the “pigs and the dogs”.
In common with most of the school essays that I wrote … after an interesting start, things start to fall apart … and I can’t stretch this narrative too much further. In Animal Farm, two of the leading pigs inspired the other animals to revolt against the humans … and, I cant see any of the retail super fund executives (who are benefiting from the status quo) getting us to demand lower fees – So it is up to us … Come on other animals … Let’s break out of our “profound disengagement” with our retirement savings and … Let’s revolt against these fees!
So stand tall on your hindquarters all you downtrodden animals and firstly check where your current employer-paid super payments are going.
With few exceptions, you have a legal right to choose where your employer pays your superannuation contributions. If you formally notify your employer of your preferred fund, they must direct their employer contributions into the superannuation account of your choosing.
A recent survey by Stockspot “Fat Cats Fund Report 2017” looked at 4,102 Australian funds, sorted them into categories from Conservative to Aggressive then filtered them for relatively poor performance after fees over 1, 3 and 5-years. Stockspot calls these poor performers “Fat Cat” Funds.
At the other end of the scale, there are the “Fit Cats” with relative outperformance – these are the ones that you want! Stockspot found that fees were really important when measuring performance – if you are in a fund charging more than 1.5% per year, it is at high risk of becoming a Fat Cat Fund – to check how your fund rates according to Stockspot, go to this link.
A comparison of Retail Super funds and Industry Super funds – and how they fit into the Stockspot FatCats and Fair Cats rating system – From Stockspot.
So, as banged on about in a previous post, Industry funds generally have lower fees but Stockspot recommends looking further into the relative performance of each industry fund (after fees) over a period of at least 5 years as there is considerable variation in performance.
To flog a dead horse ( You will have to read Animal Farm to really get this pun … Sorry Boxer, Vale!) … and with apologies to George Orwell again …
Not all industry super funds are equal … some are more equal than others
Slack Investor remains IN for US, UK, and Australian index shares.
… and further gains for the Australian Index (+1.6%) and the US index (up 1.0%) on the month. The UK Index is in record high territory, up 4.9% in December.
Slack Investor is on the couch again and congratulates himself for being involved with the world stock markets in an environment where a no risk cash 12-mth term deposit will reward him with a paltry 2-4% p.a.
In order to reach financial independence it is necessary to embrace some risk – but as discussed below, Bitcoin may be a “Bridge too Far”.
Bitcoin Revisited
Bitcoin USD chart from Dec 30 2017. Latest chart can be found at etoro.com
Bitcoin is a regular feature in the papers and even around the Christmas Table. Since my last note on Bitcoin, the price has been on a bit of a wild ride.
Going deeper than Slack Investor really wants to go is a whole world of Bitcoin – and its own language – such as “forking”. This is “sort of” explained by Business Insider. Oh yes … there are “Hard forks” and “Hybrid forks” and “Coin Splits”, and “Bitcoin Cash” and “Bitcoin Gold” and … and … see Wikipedia. The complexity is amazing and “makes my head hurt”
Yet, despite this wild chart, in only a six weeks, Bitcoin has almost doubled in value.
Slack Investor has thought of another way of doubling your money that is much simpler … and faster! Go down to your nearest Casino, stroll to the Roulette table and put your investment money on “red” … No No No … Black! (This is not Investment Advice! – Slack Investor is just experimenting with a Dream Sequence). If you are lucky, you can double your stake in minutes, and walk out with a smile – or, if not, you can walk out feeling like an idiot.
The reason that Slack Investor doesn’t go to the Casino – OR invest in Bitcoin – with his hard-earned investment money is RISK. The bitcoin price might get to $100000 USD, or it might crash to nothing. The trip to the Casino and investing in Bitcoin represents too much risk to my capital.
40% of all bitcoin value is held by 1000 people. There is an obvious price risk if one of the bitcoin “whales” decides to suddenly sell. There also could be a difficulty in getting your bitcoin money out if there is a sudden crash.
What does the great investor and Slack Investor hero Warren Buffet think …
“It doesn’t make sense. This thing is not regulated. It’s not under control. It’s not under the supervision [of] any…United States Federal Reserve or any other central bank. I don’t believe in this whole thing at all. I think it’s going to implode.” – from Forbes
My case rests your honour.
All Index pages and charts have been updated to reflect the monthly changes – (ASX, UK, US). I have also done the quarterly update on the portfolio page. A newcomer to the portfolio is the Vanguard FTSE Asia ex Japan Shares Index ETF – (VAE.AX) on Yahoo. This should give me some exposure to a wide range of companies in the growth region of Asia with not too much expense (MER 0.4%). Bought October 9, $62.34; Monthly Stop Loss $58.79)
Further reading of the excellent article referred to in my last post by Kerr Neilson – The Rise of Asia – has got the Slack Investor onto one of his hobby horses. In a previous life, before my main working stint as a meteorologist, I was a maths and science high school teacher in Australia, UK, Jamaica, US and PNG. With the zealotry of an ex-teacher, I have been keeping a loose eye on the education system in Australia and … I don’t like what I see …
There is an international (OECD countries) test that measures student skills (in mathematics, science, and reading comprehension) called the Program for International Student Assessment (PISA). Shown below, 7 of the top 10 positions were filled by Asian countries. In 9 years, Australia has fallen from no. 9 in 2006 to no. 21 in 2015. The UK ranked 23 and has not changed much in the rankings. The US ranked 31 and also has had a declining performance this past 6 years. There are arguments that these absolute rankings can be misleading, but they are presented below.
2015 Rank
Country
2015 Average Score
2006 Average Score
Change In Rank (2006-2015)
1
Singapore
552
543
+1
2
Hong Kong (China)
533
542
+1
3
Japan
529
517
+7
4
Macao (China)
527
509
+10
5
Estonia
524
516
+6
6
Chinese Taipei
524
526
0
7
Canada
523
529
-2
8
Finland
523
553
-7
9
Korea
519
542
-5
10
B-S-J-G (China)
514
–
–
11
Slovenia
509
506
+5
12
Ireland
509
509
+3
13
Germany
508
505
+4
14
Netherlands
508
521
-6
15
Switzerland
506
513
-3
16
New Zealand
506
524
-9
17
Norway
504
487
+11
18
Denmark
504
501
+4
19
Poland
504
500
+4
20
Belgium
503
511
-7
21
Australia
502
520
-12
Source: OECD (PISA)
What is wrong and how can we fix it …
Smarter people than myself have been contemplating this problem. Most of the information below comes from a Conversation article “Six ways Australia’s Education system is failing our kids”. .. and the answer is not just spending more money. Education spending in Asia is around 2-4% of GDP and lags that of Western countries (about 5%). Perhaps a clue can be found in the importance that other countries place in education – In addition to normal schooling, around 80-90% of Asian families are willing to give their kids private tuition, compared to just 20-30% of households in western countries.
The solution to this alarming relative fall in standards is complex but a good start would be to bring Education more to the forefront of Australian minds. Germany had a similar fall in its PISA scores in the year 2000. However, in contrast to Australia, it started a national conversation that saw education on the front page of newspapers for the next two years! Germany has since greatly improved its ranking.
There seems to be a morale problem with teachers. Gabrielle Stroud reports that new teachers complain of a lack of support and have difficulty getting secure full-time jobs. Experienced teachers complain of the many non-teaching duties that they have to do and they don’t have time for mentoring younger staff. Also it seems that teachers are not hanging around …
Australian Bureau of Statistics suggest 53 per cent of people who hold a teaching degree do not currently work in education. – from abc.net.au
Australia ranks 22 out of 37 on the OECD league table that measures the total investment across education as a percentage of GDP.
In maths and science, an average Australian 15-year-old student has the problem-solving abilities equivalent to an average 12-year-old Korean pupil.
Australia is just about the only developed nation that does not make it compulsory to study maths in order to graduate from high school.
Teacher education degrees had the highest percentage of students entering with low University entrance scores.
You cannot expect top performances if we recruit our teachers from below average students. Perhaps we should take a lead from Singapore, where the government has focused on a centralized system of education and a key factor in their ranking rise has been the standard of teaching, recruiting their teachers from the top 5% of graduates.
Whatever we do, we must do it soon and hold our politicians to account for this depressing trend. The march to be successful in the future depends on ideas and technology – and the growth trends are definitely in China’s favour.
I haven’t even started on the sparsity of financial education in Australian schools … I think I had better go for a lie down!
Slack Investor remains IN for US, UK, and Australian index shares.
… and further gains for the Australian Index (+1.0%) and the US index (up 2.8%). The UK Index dropped 2.2% in November due to what the Financial Times attributes as the “Firmer Pound contribution”.
marvels at the sage judgement of the Financial Times – and most other financial publications that always assign a reason for the random walk of market fluctuations after the fact.
Asian middle class on the rise
While on the couch, Slack investor has an ear out for world affairs and came across an article from the accomplished fund manager (and Asia Buff) Kerr Neilson – The Rise of Asia – worth a full read if you have the time. The article points to the need to consider Asia, and its effect on the world economy, over the next 10-20 years. It is a powerful collection of facts e.g,
China and India have grown their economies consistently at 6-7% for the past 20 years – they are now 4 times bigger than they were in 1998.
When measuring purchasing power, their combined GDP of US $33 trillion is 50% larger than either the US or the EU!
China and India originate nearly 120 million high-spending overseas travellers each year.
The last point is backed up by CNN Money who report that the number of Chinese tourists travelling internationally has more than doubled to 120 million people over the last five years – 1 in every 10 international travellers now comes from China.
Chinese people tend to begin traveling abroad once their household earns about $35,000 – from CNN Money
The rapidly rising middle class of these countries is behind this increased tourism and the graph below indicates the influence of these two economies will be on the rise.
Based upon fear of what he might discover, Slack Investor keeps most personal introspection to a minimum. However, for a number of reasons, I am particularly fond of reviewing investment performance. … and always looking to tie in a quote from a great scientist and Time Magazine’s 1999 Person of the century – Albert Einstein.
Anyone who has never made a mistake has never tried anything new– Albert Einstein (1879-1955)
Slack Investor has made plenty of mistakes and regularly racks up the failures. The 2017 Financial Year, (1 July 2016 – 30 June 2017) annual review of his portfolio has revealed a few “shockers” in the Slack Investor Self Managed Super Fund (SMSF ) portfolio – which I not so proudly list (with their percentage losses) as my financial year investment “fails”
Sirtex (SRX) -34%
TPG Telecom (TPM) -23%
McMillan Shakespeare (MMS) -16%
G8 Education (GEM) -15%
APN Outdoor (APO) -14%
Amaysim (AYS) -11%
These companies have usually dropped in price during reporting season where a bit of bad news, or a failure to reach projected profit forecasts, triggered dramatic price falls. In all cases, these stocks were eventually sold because they breached the end of month stop losses that I had set.
Slack Investor just accepts these setbacks as part of the investment process. The type of companies that I invest in are usually
Growth companies
Have an above average “return on equity” ROE
Have an above average “price to earnings” P/E ratio – Where P/E =Current price/Historical earnings.
The reason that Slack Investor is interested in these stocks is that they usually have higher projected earnings in the years ahead and should perform better than the general market. When I am looking at a stock, the forecast P/E ratios are given much more importance than the actual P/E ratios. However, it is the nature of these stocksto be particularly sensitive to any change in the forecast earnings. If profit forecasts are not met during a reporting season (sometimes referred to as the “confession season”), then there is a mad rush for the exits and the price plummets. Slack Investor is not a day trader and prefers not to watch his stocks continuously. As a result, he is never able to pick the precise right time to bail out.
I am sure there is a cost to this monthly decision making technique – but it is a price a pay gladly. The “peace of mind” in knowing that I only have to make stock decisions once a month – and that I can ignore the daily fluctuations of share prices is priceless to me.
The upside of dealing with these type of companies is that they have excellent growth potential. Thankfully, there was some good news in the portfolio this last financial year due to some heavy lifting from the following stocks.
So far, the Slack Investor approach has been very fruitful. I usually own about 20 different stocks and this diversity allows my portfolio to have some individual failures and still do well.
The point of this post is that you can fail in the stock market … but also succeed. I certainly do not dwell on these failures – they are just part of investing.
For the 2017 financial year my SMSF portfolio achieved an overall return (IRR) of 19.5%.
Bitcoin is everywhere in the media. Tales of fortunes made from just investing in this cryptocurrency and waiting till it rapidly accelerates in price – it sounds like the ideal investment vehicle for the Slack Investor!
Superman encounters Kryptonite and starts to lose his powers … Image found here … but original material from DC Comics
Well … not really!
Slack Investor is a student of history and feels like this has all happened before … Some people may be able to make their fortunes through this type of vehicle … but I reckon you would be taking a big risk … Cryptocurrencies might become Kryptonite for the casual investor.
There have been many famous “bubbles” in history, see The Bubble Bubble, The trading commodity may vary but they they all have some things in common, a period of “rampant speculation” … where the price rises sharply … and an eventual crash. Bitcoin has been through several of these cycles already in its brief history – and each time so far has gone on to make higher prices. Those around in the late 1990’s may remember the dot.com bubble the bubble burst in a big dip of the NASDAQ index shown below left.
In the days of the British Empire, in the early 1700’s, the South Sea Company purchased the rights to trade in the South Seas from the British Government and then went to the public to raise money. This was a time of prosperity for some and the money flooded in … and the price rose spectacularly (above right). Despite having this great trade monopoly, the company was mismanaged and eventually failed when the news came out that the management had sold their shares.
“Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he ‘could calculate the motions of the heavenly bodies, but not the madness of the people.’ Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price — and lost £20,000 (or more than $3 million in [2002-2003’s] money. For the rest of his life, he forbade anyone to speak the words ‘South Sea’ in his presence.”
I have included a $USD price chart for Bitcoin – worth over $7000 USD on 7th November, 2017. The chart is below and it maps a spectacular rise since 2010 – when you could pick up a bitcoin for under a dollar! It might be possible to make money using the “greater fool” theory of investing – but your timing had better be impeccable – it looks like a “bubble” to me!
Rather than “Bubble” investing, Slack Investor likes to invest in a diverse range of growth companies – these are real businesses that hopefully have unique products. They are businesses that are run well and are forecast to grow. Financial independence might take longer this way … but the results are surer, and I sleep well at night. I will leave Bitcoin to the speculators.
After all, if a very clever bloke like Issac Newton couldn’t make money on a bubble … what hope does Slack Investor have?
Slack Investor remains IN for US, UK, and Australian index shares.
… and what a bumper month it has been with all markets that I follow on the rise – The Australian Index rockets 4.0%, the UK index up 1.6% and the booming US market up a further 2.1%.
Slack Investor gets off the couch and has a look at the UK Index … as it is recovering from a small fall in September where the monthly price range (the red third bar from right) breached the 10-month moving average (black line). This breaching is a trigger for the Slack Investor trading method as it establishes a new “higher low” for a moving of the stop loss upward – as a new support price has been established. The stop loss for the UK Index was moved upward from 6677 to 7196.
I have undertaken a major change to the Index pages (ASX, UK, US). Previously I have been basing my decisions on Exchange Traded Funds (ETF’s) that I own that are proxies the actual Indexes for each market. As there are a multitude of these ETF’s, it makes more sense to make my decisions on the actual indexes – as this will have more relevance to the readers that are exposed to the general market indicies through whatever means e.g. another index-based ETF, Superannuation funds or Retirement Plans (US).
From the current investment cycle, Slack Investor will base his decision on the following charts
All Index pages are updated together with the charts to reflect these changes. Also, the the previous charts based upon the Index ETF’s are also kept at the bottom of the page for reference (for the super keen!) on the index pages – (ASX, UK, US).
Slack Investor remains IN for US, UK (Just!), and Australian index shares.
