SlackInvestor | Slack Investor

Diversification … It’s a good thing … up to a point

This collection of herbs and spices makes me hungry – From Systematic Risk Systematic Value

Slack Investor tries to diversify his investment risk by keep a 70% growth oriented investments portfolio with a 30% stable income portion. So far this financial year, my Investments portfolio performance has been a bit lacklustre – so I have gone to the “hall of mirrors” and had a long, hard look at myself. I decided to do a sector analysis of my investments portfolio. The biggest revelation is the large proportion of Investments in the Information Technology (INFT) and Healthcare (HLTH) sectors.

A breakup of the Slack investments portfolio by sector. Dominated by Information Technology (INFT) and Healthcare (HLTH) – but a scattering of Financials (FINL), Broad Index-type funds (INDX), Consumer Discretionary (COND), Communication Services (COMS/TELS), and Consumer Staples (CONS)

Both of my main sectors have had a rough time these last few months – as can be seen by the monthly sector performance chart below. Materials (Resources) and Energy have done well – But these are sectors that I do not own.

Monthly Sectors heatmap for S&P 500 Sectors – Click on Image for better resolution – From Livewire

Slack Investor is not too old to learn new tricks … or, at least, evolve a little. so I was interested to see how my sector analysis compared with the US S&P 500 (below). I chose the S&P 500 f0r comparison as it not dominated by Financials and Resources like the ASX 200. My weightings are very different to the S&P 500.

Dow Jones 30,000: Here's Why It's Still Underperforming the S&P 500 and the Nasdaq | The Motley Fool — S&P 500 Sector analysis – From The Motley Fool

Annual performance for each sector in the S&P 500

I came across a great graphic showing how each sector of the S&P 500 performs annually

10 yr excerpt from the annual S&P 500 Sector Performance ranking – Click on the Chart to get the full interactive experience – From Novel Investor

Some explanation of this beautifully coloured quilt is in order. The vertical columns represent each of the last 10 years performance of each sector of the S&P 500 in ranked order. The right hand column is for 2021. The 2021 sector leader was Energy (ENRS) after a long period in the doldrums. Next is Real Estate (REAL), Financials (FINL), Information Technology (INFT), S&P 500 (S&P), Materials (MATR), Health (HLTH), Consumer Discretionary (COND), Communication Services (TELS), Industrials (INDU), Consumer Staples (CONS) and Utilities (UTIL). The full glory of this graphic is found on the Novel Investor website with a bit of interactivity.

Some things that I have gleaned from this graphic

Every dog has its day – Depending on the year, each sector can have it’s day in the sunshine.
If you want neither the best of returns or the worst sector returns – buy the S&P 500 Index.
Often … if a sector tops the rankings in one year, it usually performs much worse in the next year.
The Information Technology (INFT) sector, to which Slack Investor is heavily exposed, is in the top four rankings for performance for 7 of the last 10 years. This year is not one of them.

Should I change my sector allocation?

There are good arguments for passive investing and, if I did not enjoy investing in individual companies, and my 5-yr results were not OK), then that is what I would do. To completely diversify my investment portfolio to match the S&P 500 would mean that I would be investing solely in an S&P 500 Index fund. This has been an excellent idea for the past 50 years.

Berkshire Hathaway has tracked S&P 500 data back to 1965. According to the company’s data, the compounded annual gain in the S&P 500 between 1965 and 2020 was 10.2%
From businessinsider.com

However, Slack Investor still thinks that the S&P 500 is over valued. Regardless of the current cycle, to invest in the whole index would be lumbering my portfolio with some cyclical and low growth companies.

I will continue to skew my investments portfolio with growing businesses – regardless of which sector they are in. I will not always get the company selection right – and will suffer the occasional whack. That’s fine, as long as I get it “mostly right”.

At the moment, many of the high P/E, growing businesses that Slack Investor owns are being sold down as analysts adjust down future earnings because of anticipated inflation. But the companies I own were usually selected for their ability to set their own prices and increase their earnings … these are the qualities of businesses that will prevail – regardless of short-term fluctuations.

Asset Decisions … and March 2022 – End of Month Update

*Between Wealth and Love* – by William-Adolphe Bouguereau– From Arthive.com (Private Collection)

Slack Investor doesn’t face such vexed issues as this poor young woman. In this sad, but beautifully painted, scene from the 16th Century there are two suitors – the old bearded one offering wealth in a jewellery box, while the young musician offers only love. Her gaze is turned away from both men and she has a despondent expression that suggests that the decision may not be hers alone.

My decisions seem feeble in comparison to the young girl depicted by Bouguereau. Looking at this painting just reinforces to me that men must do a better job of recognizing some of the often horrible decisions that women have to make. Sure, things have improved for women since the 16th Century – but there is still plenty of inequalities. It is the duty of all men to “lean in” and try to make things better.

Asset Allocation Decisions before the end of the financial year

Slack Investor likes to have a look at my income producing piles at this time of year – The Stable Income pile and the Investments pile. I have to decide how to allocate money for living expenses and how to allocate the amounts in my investment asset mix before financial year end to get it ready for next year.

Lets just back track a bit here and remember that Slack Investor finances were thrown into three piles before retirement– a House, Stable Income, and Investments. Now that I am retired and fortunately have my house paid off, there are only two piles that really concern me – The Stable Income pile (30 %) consists of Annuities, Bonds, Term Deposits and Fixed Interest. I have recently added some shares to this pile that I think won’t be too affected by a share market downturn. This share tranche consisting of a small amount of property trusts, consumer staples and infrastructure shares.

The other pile is Investments (70%)- consists of mostly growth shares (high Return on Equity, historical and forward earnings growth).

Despite the tough recent times for growth shares, after extracting living expenses, the total of the piles has grown slightly so far this financial year (0.2%). With 70% growth shares, positive pile growth will not always be the case. But my asset allocation strategy should help be ride out the bad times.

Dividend season is almost over and throughout the financial year I have taken out most of my living expenses from both piles using income from annuities, interest payments, distributions and dividends. At this stage, my current allocation is 29% Stable Income and 71% Investments. In order to maintain my 30%:70% asset allocation, if I need anymore living expenses I will take it out of my over-allocated Investments pile. I will make final adjustments at the end of the financial year – so that the initial allocations are roughly intact (30%:70%) – ready for the next year.

The decisions I make on asset allocation are to keep my nest egg in good shape – so that it continues to provide income. In a good year for investments most of my living expenses can be withdrawn from the Investments pile. In a bad year for investments, then I dip more into the Stable Income pile. Also, in a bad investments year, I might cut back on my discretionary expenses eg. Travel.

March 2022 – End of Month Update

Slack Investor remains IN for Australian index shares and the FTSE 100 but OUT for the US Index S&P 500 due to a sell in January 2022.

The FTSE 100 was flat this month (+0.4%). There were substantial rises for the ASX 200 (+6.4%) and the S&P 500 (+3.6%).

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.

Here comes the Sun … It’s alright

The Beatles at Tittenhurst Park, 1969 – From Rolling Stone

It has been 53 years since the Beatles) recorded “Here Comes the Sun” from their landmark Abbey Road Album. It has been 18 months since Slack Investor installed Solar Panels on his roof and is in complete agreement with George Harrison … This Sun, “It’s alright”.

Here comes the sun
Here comes the sun,
And I say, It’s all right
From “Here Comes the Sun” – Songwriter: George Harrison

Always looking for distractions during the declining months of the stock market … and I can always rely on my solar panels for good news. Solar Choice evaluate solar panels in Melbourne (where I live) to have a 22% – 36% internal rate of return on your investment (that’s good!) – and then there is the mantra of “doing the least harm” by minimising fossil fuel use.

The road to Solar Panels

Firstly, great apologies to planet Earth that it has taken me 6 decades to harness some of the sun’s energy for my personal power use. But what is done is done .. and I am moving forward with the zeal of a reformer.

Like all big financial decisions, Slack Investor was not immune to procrastination. There is always an excuse not to act … ” I’ll wait till I pay off my mortgage”, ” I’ll wait till I get to my dream home”, etc. What I wished that I knew during these periods of hesitation was that solar panels on your roof does not only make environmental sense … but it makes great financial sense.

What is sadly missing in energy debates is an analysis of the “total environmental cost” of each way of producing energy. A 2021 report on production and environmental costs of various means of electricity generation in Europe revealed a compelling case to move to wind farms and solar panels to make electricity. This report does not seem to include the vital battery storage costs in its analysis, but another study found the use of solar panels with utility-scale battery storage will have at least 10 times less emissions and air quality impact compared with natural gas or coal for power generation.

A graphic comparing the cost of various energy sources, along with environmental and health costs

Slack Investor tries to do his homework before dipping into his wallet and, during his solar research, I came across a very informative website solarquotes.com.au. Not only can you find great information on solar energy, but they can arrange quotes from 3 local installers. The system is free to the homeowner – I have no affiliation except for the great satisfaction of using their service. Where I live in Victoria, Australia, the governments are encouraging of Solar Panels and offer incentives to install a solar panel system.

Solar Panels now on Roof

The hard part is always deciding on the detail and, after 3 quotes, only one installer actually climbed on our roof and assessed the shading of surrounding obstructions. I decided to reward this initiative and ended up with a

7.7 kW system
6 kW Inverter
22 x 350W panels
Solar Analytics Smart Monitor and lifetime subscription (Well worth it!)

The total cost was $10 906, but with the Australian government $3750 solar credits and the Victorian state government rebate of $1850, out of pocket costs were reduced to $5306

After 18 months, the first revelation to me was the daily variability of solar output of my system due to cloud and rain. The next revelation was the seasonal variability of the output. During winter, the sun is low and relatively weak – Summer is the time of peak production. The third revelation is the economies of using your own power rather than exporting to the grid due to a lower feed in tariff – but that analysis is worthy of a future blog.

The raw daily production of my solar panels in kWh during 2021, showing large daily and seasonal variation – The red line is the daily expected average of solar energy generated by my system – 27 kWh

The projections from my installer suggested a return on my investment after 4 years. The first hurdle is to recover the environmental cost of producing the raw metal, silicon and glass of these panels. With the increasing efficiency of solar panels, the environmental pay back period is between 1-2 years. The next hurdle is the financial costs including installer’s fees. My installer projected a break even point after 4 years.

Pleased to report that, after 18 months, everything is going according to expectations. Go Solar … good for planet … good for pocket … Slack Investor happy!

I am 18 months in to this grand solar experiment, and 39% paid off. The savings come from power sent back to the grid and the use of my own electricity during the day. On current projections the financial cost of the system will be fully recovered in 47 months – Just 4 years!

Get a job, mate … and February 2022 – End of Month Update

LETTERS TO THE EDITOR: Climate action, jobs go hand in hand | The Courier Mail — For admirers of Australian art – this clever cartoon by Harry Bruce, The Courier Mail

The February 2022 Australian Labour Market report indicates that now might be a pretty good time to look for a job. Due to closed borders and huge government stimulus, Australia’s unemployment rate is at a rock bottom 4.2% – a 13-year low!

Skills and labour shortages increasing
Employers report increasing hiring difficulty

It might seem a little strange that Slack investor, a retired bloke, would be thinking about jobs … but I’m in need of distractions – as the stock market is tanking due to all sorts of uncertainties. I have set my portfolio mostly into stocks that I would like to keep. Although I missed the boat on a couple of my more speculative recent purchases. I have “trimmed the boat” a little, and will now will just wait for better times.

I found an intriguing graphic, amongst many other excellent visualisations, at Four Pillar Freedom. By combining data on occupational stress levels (100 = maximum stress) with median US salaries for 623 occupations, this interactive data plot was produced. The searchable raw data with much more detailed information can be found for occupational occupational stress levels and US job salary estimates.

By hovering your mouse around the data points below, occupations, salaries and stress levels are revealed. Ideally, you would not want a high stress, low-paid job (top left) e.g. Police, Fire, and Ambulance Dispatchers. Even a high stress, highly-paid job would not be that marvellous (top right) e.g. Nurse Anesthetist. The sweet spot for Slack Investor is the relatively low stress and a relatively high salary occupations lower right. As it happened, my working life moved from Secondary Teacher ($54K, Stress: 73) to Atmospheric Scientist ($94K, Stress: 85). I could play with this interactive plot for hours.

Jobs and automation

When thinking about what job you would like to do – it is good to think about the prospects of this job for many years to come. One of the threats to certain occupations is that technology and artificial intelligence will replace your finely honed skills. About 35% of current jobs in the UK are at high risk of automation over the next 20 years.

The top 8 occupations at risk from automation in the UK – Will a Robot take your job? – BBC

A more dense read on the same subject, How susceptible are jobs to computerisation? Over the next two decades, the authors estimate that 47 percent of total US employment is in the high risk category. The sectors featured on the right hand side of the chart below have the biggest probability of computerisation. Jobs in Sales, and Office and Administrative support will be affected the most. A lot of the service jobs will be impacted – but some areas (left of chart) will remain needed.

A US study of occupations that breaks each occupational sector into risk categories, the “Low”, “Medium” and “High” risk of automation – From How susceptible are jobs to computerisation?

In these times of turmoil … tune out a bit on the stock market … and keep working if you can. Slack Investor is heartened to find out (from research for this blog) that, for the next few decades, the likelihood of job automation for a manager of licenced premises … is only 0.4%.

February 2022 – End of Month Update

Slack Investor remains IN for Australian index shares and the FTSE 100 but OUT for the US Index S&P 500 due to a sell in January 2022.

A volatile month, but the FTSE 100 ended up flat +0.3%. The Australian market drifted upwards +1.1% and the S&P 500 down -3.1%.

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

Einstein’s thought experiments

Everyone has heard about Albert Einstein – The theoretical physicist that came up with the famous relationship between Mass and Energy ( E = Mc² – where c is the speed of light in metres per second). He also came up with ground breaking work in relativity and quantum mechanics. As a student of physics in my younger days, Slack Investor was in awe of this wild-haired genius but, even understanding the very basic concepts of general and special relativity at university … just made my head hurt.

“There are only two ways to live your life. One is as though nothing is a miracle. The other is as though everything is a miracle.”
Albert Einstein

Einstein had a brilliant mind, the 1921 Nobel prize winner was instrumental in developing new ways of looking at energy, time, space and gravity. He often would construct a “thought experiment” to help him visualise the difficult concepts that he was tackling. I will try to explain one of his many thought experiments

Einstein’s elevator thought experiment

The first part of Einstein’s elevator thought experiment is the “equivalence principle” – where Einstein concludes that there is no difference between gravity and acceleration.

To an observer in an elevator drifting along in space experiencing weightlessness. If some “being” attached a rope to the elevator and then started pulling it along with the same acceleration force that gravity provides (9.8 m/s per second), the experience of someone inside the elevator would be exactly the same as if he was in Earth’s gravitational field — they are the same thing to the elevator man.

Because of this acceleration, if a light beam entered one side while the elevator is moving, the beam would appear to drop or curve down as it crossed the elevator. Einstein postulated that light would behave in the same way if the elevator was in a gravitational field. He concluded that gravity could ‘bend’ light.

This prediction was tested by Arthur Eddington in 1919 who devised a very clever experiment during an eclipse that demonstrated a shift in locations of distant stars when recorded during the day (when light would have to move past the sun’s gravitational field) compared with night time measurements.

Celebrating gravity’s light-bending landmark — A drawing showing Eddington’s marvellous experiment. The sun’s gravity really did bend starlight just as Einstein’s theory predicted.

Einstein proposed an extension of this concept with the introduction of the idea of “black holes” in 1916. These strange dense objects have a gravity that is so strong, even light cannot escape their clutches. Black holes remained as theoretical objects for decades – the first physical black hole was not discovered until 1971.

Slack Investor volatility thought experiment

In these tough times where Slack Investor is currently getting a bit of a whack in his share portfolio, he has adapted a thought experiment on coping with volatility.

I go to the end of my driveway and construct a big sign for all the passersby. It says “Shout out how much you would pay for my house”

In this thought experiment, I imagine I am also sitting out the front in a chair and listen to the informed offers as people go past. There would be a great variance in the offers and whenever an offer is heard below what I thought it was worth, I would wince a little. After a while I would just get sick of it and tear down the sign and go back inside my house – completely satisfied that most of these people had got it wrong … and I am happy with my house – it represents a value to me that is higher than nearly all of those shouted offers.

This is exactly how I try to think my share portfolio in troubled times. I own mostly good companies with good management that are projected to increase earnings. Earnings are critical. People can shout out whatever they want about what they will pay for my small percentage of these companies. While their earnings story is basically intact, I will hang on to them.

“It is not that I’m so smart. But I stay with the questions much longer.”
Albert Einstein

Trading in troubled times … and January 2022 – End of Month Update

nature, waves, lighthouse, landscape, Portugal, heavy, wind, HD wallpaper

It is worth revisiting corrections, these annoying dips in the market are testing – even for experienced investors.

A correction is a 10% or greater decline in the stock market in a short period of time. The average rally period without a correction is 357 trading days, according to a Deutsche Bank analysis of stock market moves since the 1950’s.
CNN Business

As there are about 250 trading days in a year and Slack Investor is hoping for a 50-year investing career (50 x 250 / 357 )= 35 . That’s a lot of corrections … so I had better have a plan on how to handle them.

Despite recent rallies in the last few trading days – In January 2022, there was a technical “correction” in both the US and Australian markets.

The S&P 500 index dipped into “correction” territory on Monday for the first time since March 2020. The benchmark fell 10% or more from its recent high in early January, before a late-day rally.
Greg Iacurci – CNBC – Jan 25, 2022

Most corrections solve themselves. A 2018 Goldman Sachs report found that the average correction for the S&P 500 lasted only four months. In the 40 years prior to 2020, the S&P 500 experienced 17 corrections – only a third of them resulted in the larger falls associated with bear markets.

This is not an exact science – but when a correction occurs, I try to think about the scenario where a correction will turn into something worse.

As most bear markets are associated with a recession – Are the economic conditions are such that a recession is likely? – Is this current correction likely to lead to a “bear market”?

The Omicron COVID-19 variant has showed that it is difficult to project into the future. However, even though some industries are suffering, while interest rates remain low and there seems to be some signs of economic recovery. I will try to shut out the “noise” this time.

Index stocks – S&P 500, ASX 200, FTSE 100

I am running a personal 20-yr experiment using “stop losses” to try to time the market for index funds, rather than “buy and hold”. The results so far can be found on the index pages of this blog (ASX Index, UK Index, US Index). The annual gains using this timing method have been modest so far with outperformance of +1.5%, +1.9% and -0.3% , respectively. The jury is still out on this experiment and a full report will be given in 2024.

For the bulk of my holdings – do nothing

For most of my stocks, I take no action during these corrections. Most of my portfolio contains individual companies that I have built up a history with, and I am mostly convinced of their viability and growth outlook for the next 5-10 years. For these companies, I am comfortable to ride the stock price up … and down – this is something I accept about owning stocks. For example, although getting out of the US Index last week, I am happy to keep my holding of US Alphabet stock (GOOGL) – for many reasons.

Tinker with the stocks that you are not so sure about

There is a second-tier in my stock portfolio that includes my theme ETF’s and other companies that I am not so totally convinced about – or, I have changed my mind about their growth prospects. A correction is a good time to review these stocks.

With shares, the market decides what “it thinks” that your stock is worth on a minute by minute basis. This stock price can vary a lot on a daily basis – but over a longer period, the stock price should be decided by more fundamental levers such as earnings, amount of debt, quality of management, and growth potential.

January 2022 – End of Month Update

Slack Investor is off the couch and sold his US Index shares. He remains IN for Australian index shares (only just!) and the FTSE 100.

A bit of turbulence in the markets this month. The ASX 200 and S&P 500 dipped into correction territory briefly. At the end of the month, the Australian Index had a monthly fall of 6.4% and the US Index, down 5.3%. The FTSE 100 was a relative star +1.1%. Slack Investor remains watchful.

On Monday 24 January, (New York time) I sold my US Index shares at the S&P equivalent of 4332. This was below the previous days closing price (4397) … but I have to accept the possibility of a bit of “sell shrinkage” on the next day – in this case 1.5%. However, for consistency. I have used the closing price on the previous week for my calculations.

Despite the end of month rally in S&P 500 price (Jan 31 4515) – I am glad to out of the US Index as I have been troubled by the high valuations for some time. Slack Investor would not have the foresight to get out right at the top of the market. In the spirit of “trying to get things mostly right” I am happy with the US Index trade – a gain of 55.4% over 19 months.

As a way of “zooming out” to get an idea of how current prices are in relation to long term trends – I have updated my Cyclically Adjusted Price to Earnings ratios (CAPE) to include December 2021 data for the S&P 500. Despite it’s limitations, CAPE is still Slack Investor’s best way of assessing quickly whether a market index is under or over-valued compared to its long term average.

At the end of 2021, the S&P 500 was still 61% above its 40-yr average! This is in contrast to the ASX 200 (14% above average) and the FTSE 100 (about average). When valuations get this far out of kilter, for the US Index, my assessment is that there is much more downside risk than upside. The recent breach of the stop loss on a weekly basis gave me an excuse to get out of this broad index.

CAPE ratios for the S&P 500 from January 1982 till December 2021

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

Well … That was Fun – S&P 500 Index SELL Alert Update

Jimmy Fallon and Kevin Hart Ride a Roller Coaster

January 2022 – S&P 500 SELL Alert Update

This image has an empty alt attribute; its file name is trend-1445464__180.jpg

Normally, Slack Investor likes to work on a monthly scale i.e Slack! He usually limits himself to just two posts per month – so this is an unusual post.

I have to report that I am tentatively OUT on the S&P 500 – but remain IN for Australian index shares (ASX 200) and the UK Index (FTSE 100).

Slack Investor has been a little bit on edge lately due to the high valuations of stock prices – particularly with the S&P 500. As a result, I have been working with tightened stop losses on my Index funds and tried to keep them within 10% of the latest end of week price.

Sadly, on a weekly basis, the S&P 500 has just sunk below the current stop loss of 4495 and is on a SELL watch.

S&P 500 Weekly chart since May 2020 – Incrediblecharts.com

This means that, on the US open of trade, Monday 10am (New York Time) – I will try to sell my S&P 500 Index holding. The only situation that will stop me is – if there is a dramatic reversal in the first hour of trading. In other words, if the S&P 500 starts increasing in price – I will not try to trade against the trend and I will put a hold on the selling.

A quick look at the S&P 500 futures shows a continuation of negative sentiment likely for the Monday – and it is probable that I will sell. It has been a good association with the S&P 500 since May 2020. I will give full details of the trade in the end of January update.

This is not advice – just an outline of Slack Investor’s trading intention.

CSL Goes to the Well – Share Purchase Plan 2022

I did a north to south crossing of Africa 36 years ago, mostly in a 4-wheel drive truck and, if we stopped in a village, my routine would be to grab the water containers and find a well. This was always a pleasant task as it involved a line-up, sign language and usually a few giggles at the strange visitor’s expense. Overwhelmingly, the well would be attended by women and there was usually an air of joy and strong comradery in the queue.

CSL have just gone to the “well” – with a Share Purchase Plan (SPP). They have purchased a Swiss company, Vifor Pharma (VIFN:SWX), which specialises in iron deficiency and renal disease. The acquisition cost US$11.7 billion and they have already covered most of this with an institutional placement and some new debt. CSL is trying to raise another $750 million from the “well” of shareholders pockets – and they seem likely to get it – let’s hope they will be welcomed back when they need water next time.

It seems to be the way of things that institutions (Brokers and Super Funds) get the first slice … and when this is done, there is a limited offer to retail investors – just to stop them whinging. Most of the time I participate in any share purchase plans as a convenient way to accumulate shares without the cost of brokerage. The CSL offer is set at $273 (or a 2% discount to the share price if CSL shares fall below this mark). Bids for the stock must be lodged by the 7th February, 2022.

“The combination with Vifor Pharma is expected to be financially compelling for our shareholders while expanding and diversifying our revenue base. It is expected to be immediately earnings accretive in the first full year of CSL ownership …”
Paul Perreault, Chief Executive Officer and Managing Director of CSL

Nice words Mr Perreault … but I have never ever read a share purchase plan that didn’t offer these comforting sentiments – CEO’s usually love to inform us of their astute decisions. “earnings accretive” just means that after all costs and synergies, the earnings per CSL share (EPS) should go up … and, when earnings go up, the share price should go up.

The projections for acquisitions and mergers are always complicated – the only real proof … will be down the track.

(There is) 30 years of evidence demonstrating that most acquisitions don’t create value for the acquiring company’s shareholders
Harvard Business Review

CSL do have a good track record of acquiring new assets and turning them into future growth engines. However, The CSL offer to acquire Vifor Pharma was generous at 40% above the Vifor list price. But this is where it gets even more complicated, the size of the premium is historically not a good predictor of how the deal will turn out. The most pertinent question is “Has CSL paid more than the acquisition was worth to to CSL.” Slack Investor has no answers yet … We will see how this deal settles.

On 14/01/2022, the CSL share price was $276.00 – A premium of $3.00 to the $273 offer price – or about 1% – so the SPP offer price is no real bargain. Despite Slack Investor’s endless devotion for the company, it seems that the market is currently out of love with CSL.

In the background, despite ongoing problems with plasma collection due to COVID-19, CSL has increased its profit for the past two financial years by 20% – but its share price does not really reflect that. After a rapid increase in 2019, the share price has gone nowhere in the last two years. Macquarie analysts have a 12-month price target on CSL of $338.

CSL Share price over the last 3 years – From marketscreener.com

Unlike Big Kev, I’m not super excited … The investor presentation, as always, looks compelling – full of talk about global reach, synergies and “developing a significant renal franchise”. But what really impressed me was the confirmation of CSL FY22 NPAT guidance of US$2,150 million – US$2,250 million. This is not advice, even though Slack Investor already has a big holding in this company, he will be participating in a slice of the CSL 2022 SPP.

Scaling Back

One of the annoying things about share purchase plans is the “scaling back”. If the SPP represents a good deal … they are usually oversubscribed. The 2021 Commonwealth Bank (CBA) SPP was such a good deal for retirees that they stumped up $18 billion more than the amount of shares on offer. Their share bids were scaled back by 79.4%. If you applied for $20 000 of CBA, you would have to send off this amount – and you would have been rewarded with $4120 of shares – and then have to wait for your refund.

The CSL 2022 SPP is not as immediately financially rewarding as the CBA offer and will probably not be scaled back as much. CSL has assured share owners that after the SPP, they will at least retaining their percentage shareholding in the company,

Slack Investor has done some rough calculations. As this new placement and SPP represents approximately 5.1% of current CSL ordinary shares on issue -This means that I should be able to buy at least 5.1% of my current holdings in the SPP without the inconvenience of scaling back.

If I owned $120 000 of CSL shares, I would be guaranteed to get at least $6120 (120K x 0.051) in the new SPP without scaling back. I round this up to the nearest allowable dollar value parcel, which is $10000 – and that’s how much I will apply for. Most people would apply for more (up to $30K) – but my portfolio is heavy with CSL, and this scaling back process just annoys me! CSL will of course refund any scaled back monies as soon as practicable after 14/02/2022 – without interest.

Betting from the couch … and December 2021 – End of Month Update

The satirical website, the Betoota Advocate, have beautifully summed up the barrage of gambling ads on TV that saturate any sporting viewing on commercial TV – in a recent article “Game Of Cricket Interrupts Endless Stream Of Predatory Gambling Ads”

Australia: World leaders in Gambling losses

Slack Investor has long been appalled at the prevalence of gaming machines “pokies” in pubs in Australia. These “pokie rooms” are full of sad faces. With a machine “return-to-player percentage” of 85 -90% each gambler is methodically destroying any chance of achieving financial independence.

Australia is actually home to 20 per cent of the world’s pokie machines, because it is one of the few countries that allows machines outside of casinos.
From Eliza Bavin, Yahoo Finance

In 2019, NSW and Victorian poker machine gamblers lose an average of about $3500 a year in pubs and clubs – three times the average $1245 spent annually on electricity and gas. There are countless stories of the tragic consequences of poker machine addiction. Poker machines are concentrated in Australia’s poorest suburbs. The state governments are, in turn, addicted to the revenue from these gaming machines. However, this situation can’t be good for the community and it can be turned around. Western Australia has banned poker machines in Pubs and Clubs. If you want to ban these machines or reduce their harm in your state – Let your state representative know.

Gambling Losses in $USD – Australia are the biggest gambling losers, per capita, in the world! Not anything to be proud of- From savings.com.au

Online Gambling and Sports Betting

Pokies aren’t the only gambling demon. Online betting, which includes sports betting, is expected to be the fastest-growing gambling segment over the next 5 years, compounding at 11.5% per year. In 2017, sports betting accounted for 25% of all money bet by Australians. The target of these betting companies is young men (aged 18-34 years) who are most most likely to sign up for new online accounts and to be at risk of long term gambling-related harm.

Since March 2020, the stock markets have been quietly accumulating and Slack Investor has spent some quality time on the couch – Sometimes watching sport. Hitting me in the face have been an avalanche of betting advertisements enticing me to get an app, to lay down some hard-earned cash on a match outcome, identify a “first try scorer” or a “multi” (???). Always, I am advised to “gamble responsibly” but this guidance is always accompanied with a wry grin as they collect my credit card details.

Commercial TV networks all seem to have an overlay of gambling ads as they cling to this growing industry – as their other advertisers are looking elsewhere. One of Australia’s largest advertisers is Sportsbet, they spent $AUD 139 million on ads in 2020. It is all about “Brand awareness”. In 2021, US Sports betting companies have spent a staggering $USD 1.2 billion on acquiring new customers. This will only increase as more US states legalize sports betting. With brand awareness comes a desire to download an app, promotional codes are given for gambling credits, you give your own bank details, place a bet … and suddenly you are a customer, and subject to further online conversion.

Slack Investor can see that gambling can introduce a bit of excitement to a life, but I would always take the long view. What are the chances that I would succeed in any form of gambling with repeated trials – where the odds are set by hardened professional compilers. Rather than gambling, I would much rather invest in a growing companies that produces useful things. That’s enough excitement for me.

Gambling is a “tax on stupidity”
Attributed to Samuel Johnson – Or Voltaire (When talking about Lottery)

What can you do?

Three-quarters of 8 to 16-year-olds interviewed could name at least one gambling brand, and one-quarter could name four or more.
Based on a 2016 survey of Australian children in NSW and Victoria

If you would like tougher rules to stop the saturation of prime-time television with gambling ads in Australia, you can put the commercial TV Networks on Notice and register a complaint with the Free TV umbrella organization. It seems to be that the language they understand is the threat to move your viewing to the streaming services that don’t show harmful and repetitive gambling ads (Netflix, ABC iview etc.). Slack Investor is not sure how effective this is – but it made me feel better.

December 2021 – End of Month Update

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100. All Slack Investor followed markets this month had substantial rises (ASX 200 +2.6%; FTSE 100 +4.6%; S&P 500 +4.4%).

Well, Santa did come to most index holders. The theory is that, in the US market, there is a lot of spending at this time of year (good for retail) and pay bonuses are also awarded at this time. The “Santa Claus Rally” has occurred 76% of the time between 1950 to 2019. Although this seems to be a regular calendar event, Slack Investor would not bet on it – as there also have been some sharp declines in December – particularly in the last ten years. Long-term accumulation for me – but it is a delight to see Santa when he comes.

Slack Investor has been busy with adjusting stop losses upwards again for the US Index. In these over-valued times for the US Index, and to a much lesser extent the Australian Index, I am keeping my stop loss within 10% of the end of month price. See the US Index page for details.

Monthly chart for the US Index (S&P 500) showing upward movement of the Slack stop loss from 4278 to 4495 – from Incredible charts

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.

Innovation

pizza scissors — Pizza scissors – The new “Must Have” – These highly rated Kitchen Maestro Pizza Scissors were available at **Amazon for $12 USD**, but sadly, for pre-Christmas shoppers – currently out of stock.

Fish swim, birds fly, humans think, create and innovate. Thinking is not something that people do because we like it, we do it because it is our way of surviving.
José Luis Álvarez – From KnowledgeWorks

An amazing trait that we humans have is the ability to innovate. Slack Investor admires the innovators and the intellectual capital that they bring to businesses. Ideas and research are a vital part of a growth company. Research and Development (R&D) may lead to more efficient production processes or better products that give a company future growth. I have long been a big fan of companies with a high spend on R&D and I am happy to invest in these stocks.

According to the data from EFPIA, in the percentages below, the big spenders are in just a few sectors. The survey looked at 2,500 companies around the world. Technology companies usually have a big R&D budget, but the pharmaceutical and biotechnology industry lead by spending 15% of revenue on R&D. NASDAQ figures for specific companies, show R&D expenditure for Google (Alphabet) was 15% of its revenue in 2020, CSL about 11%, and Microsoft 13%. Apple was a relatively low 7% – but they have a very small range of products.

Proportion of Revenue spent on R&D by each Industry sector – EFPIA

Just because a company has a high R&D spend does not always guarantee success. As well of the discovery of ideas that might be useful in the business, a company must be really good at the Incubation, and Acceleration of these ideas. It is important to look for an established record in the way a business brings new products to fruition.

However, there is a broad link between innovation and value. The Boston Consulting Group(BCG) compile a yearly list and map the performance of the 50 most innovative companies. In 2021, they found that the more innovative businesses had an average Total Shareholder Return (TSR) premium of 3.3% over the MSCI World Index.

Most Innovative Companies 2021 — Outperformance of the most Innovative companies – From the VisualCapitalist

“If I have 1,000 ideas and only one turns out to be good, I am satisfied.”
Alfred Nobel

Top 10 Most Innovative companies – published in the Visual Capitalist from BCG data.

The full list of top 50 innovators is worth a look and is a reminder that these are the companies that a lot of people interact with every day.

I have been a continual investor in the Betashares NASDAQ ETF (ASX: NDQ) that gives me access many of these great innovative companies. Every time that Slack Investor looks at the businesses that make up the NASDAQ 100, I think that this technology area must be where growth is still happening – and I want to be invested here.

According to GuruFocus the 12-mth forward PE of the NASDAQ 100 is 27 (A bit expensive) but the Return on Equity is at 18% – and growing (This is good).

Slack Investor also owns a slice of the Asian Technology giants with BetaShares Asia Technology Tigers ETF (ASX: ASIA). The heavy hand of Chinese government interference in some tech stocks has led to a pullback in price this year. But I have maintained my holding because Chinese companies like the search engine Baidu, the e-commerce giant Alibaba, and the technology beast Tencent will not be held back for long.

A good compromise, if you want a more whole world approach, is the ETFS Morningstar Global Technology ETF (ASX: TECH). This ETF has holdings distributed across the United States (89.6%), Australia (5.8%), Japan (2.4%), and Germany (2.2%) and has a “moat” filter that will only select companies that have built a competitive advantage around their businesses. All of this for a Management fee of less than 0.5%.

Innovative company shares do not always go up. An example of this is is the new Cathie Wood disruptive innovation stocks ETF – (ARKK). Early investors are very happy, recent investors not. However, with a 3-5 year time frame, exposure to the whole NASDAQ index – the top 100 of the (mostly) great NASDAQ companies must be a good thing.

This is not advice, but if I cant buy pizza scissors for Christmas – I might as well top up with some more NDQ or ASIA, or expand into TECH.