Basic Finance Skills | Slack Investor

Cash is not King

My nephew is a carpenter and he would often gleefully say “Cash is King” when offered a cash job – no paperwork and no tax. This was fine for him as he was on a travel holiday and didn’t want the hassle of being on the books and claiming his tax back at the end of his holiday.

But, to the investor, Cash is not King.

If you hold too much of your wealth in cash, you won’t be able to keep pace with inflation, meaning your purchasing power will go down and it will be more difficult for you to achieve your goals.
Black Swan Capital

Slack Investor cannot argue that money in the bank is not safe, The government guarantees balances up to $250,000.

Cash is important for day to day expenses and your emergency cash buffer, “the cushion” to keep you going for about 2-3 months in an emergency. However, to get on the path to financial independence you must invest in appreciating assets.

Term Deposits, Bonds and Fixed Interest

For a relative, Slack Investor was trying to find a place where cash would earn a decent rate – without too much risk. There is not much around. Most transaction accounts pay no interest or 0.1% interest per year. If you are prepared to lock your money away for a year in a term deposit in a major bank, you might get 0.85%. One of the newer banks, Judo Bank, is offering 1.01%.

There are a few offerings in the bonds and fixed interest area. I ended up in the Vanguard Australian Fixed Interest Index Fund with a management fee of 0.24% and 1 and 3 year returns of 3.2% and 4.7%, respectively. The fund lends money to mostly government authorities – but, unlike term deposits, the returns are not guaranteed. A similar product is offered as an Exchange Traded Fund Vanguard Australian Fixed Interest Index ETF (VAF).

Growth Assets – Shares and Property

Higher up the risk curve are funds based upon share (equity) investments. In these funds or ETF’s the rewards can be higher – but the risks are also much greater. Only invest in shares or share funds with money that you can lock away for 3 to 5 years.

To grow wealth we must have exposure to growth assets such as shares and property.
Shane Oliver, AMP

Asset classes shown on a logarithmic scale for the past 120 years – From “5 charts to help you through COVID-19 investment fear” – Shane Oliver

Australian shares have returned on average 11.5% per year from 1900 to 2020. The incredible value of sustained compounding over long periods is shown by the dollar amounts achieved over 120 years – A $ 1 investment yielded $481, 910 for Australian Shares, $1017 for Bonds and a paltry $242 for cash. But these high returns on investment in Australian shares did not come without risk. Since 1900, Australian shares have had negative returns for two years out of ten.

A similar chart with data to 2016 shows that Australian residential property has a similar trajectory to Australian Shares (11.1% p.a.). There are many hidden costs to owning property – but that is another story. Lower on the risk curve, are Bonds and Cash.

Slack Investor acknowledges that people have different appetites to risk, but if you are in the fortunate position to be sitting on some cash in excess of your emergency fund … the current rates for term deposits encourage a first journey up the risk curve and consider fixed interest funds or ETF’s. For money that you wont need for the next 3-5 years, then shares have the best long term returns. If your time frame is longer, then a well positioned property has been a good investment.

“Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”
H. Jackson Brown Jr. from Goodreads

Know when to Fold’em … and October 2020 – End of Month Update

“He said, “If you’re gonna play the game, boy
You gotta learn to play it right …
You’ve got to know when to hold ’em
Know when to fold ’em
Know when to walk away
And know when to run
Excerpt from “The Gambler” written by Don Schlitz and recorded by Kenny Rogers.

Kenny makes this sound easy, but selling shares is tricky and Slack Investor does not always get this decision right – and I’m OK with that. The Slack Investor art is just to attempt to get things “mostly right”. There are some stocks that I will hold for the long run, and their weekly and monthly charts are not of a big concern to me. However, about half of my portfolio is on a weekly or monthly watch – I review the Incredible Charts output for each of these stocks on the weekend or at the end of the month.

I pay particular attention when the stock price falls below my stop loss on the monthly chart. In hindsight, I should have been more alert back in August. A2M is a good company with a unique product and has shown excellent growth in the last 5 years. However, earnings season is always a bit volatile for the growth sector.

The FY20 results showed a record profit but there were some question marks about FY21. The real catalyst for a downward price move was the later release of an acquisition and that members of the board and senior executive team had sold over 1.8 million shares. Selling by insiders is not always bad, as the executives might just be diversifying their portfolios – However, in this case, the market took a dim view. Overall, the A2 Milk Company Ltd (ASX: A2M) share price has slumped more than 15% since the release of its FY21 outlook.

Monthly Price chart of The A2 Milk Company (A2M) showing a buy in at $11.66 in January 2019 and a sell at $15.40 at the end of September 2020. I took the opportunities to gradually creep up my stop loss from the original value of $11.11 to $17.08 – From incrediblecharts.com

I am not known for my fast work and have tended to take the couch rather than make a decision in the past. However, in the spirit of incremental improvement, I didn’t wait till the end of the month and pounced on the sell button on the day that the A2M fell more than 10%, 28th September 2020.

*Daily Price chart of The A2 Milk Company (A2M)*. Slack investor sold on the day news leaked out about insider selling on September 28 *– From* incrediblecharts.com

I am not put off A2M forever. The end of month share price was $13.67. There is now a reasonable case for re-investing given the growth pathway beyond 2021 and the Market Screener , relatively low, 2023 predicted PE of 19. There has now been a downward trend of 3 months and Slack Investor’s favourite pattern has started to emerge … “The Wedgie”. If there is a break above “the Wedgie”, I will reinvest and hope the share price resumes an uptrend.

” … the secret to survivin’
is knowing what to throw away,
and knowing what to keep …”
Further … from The Gambler

Ooooh Kenny … the secret to investing is simple to describe, but harder to do … but you knew how to tell a good story!

October 2020 – End of Month Update

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100. However, the US and UK charts are hovering close to their monthly stop losses.

The state of recent COVID-19 surges in Europe and the US seems to be worrying punters and monthly falls were recorded in these markets (S&P 500 -2.8%; FTSE 100 -4.9%). In Australia, the governments are handling the response to the virus in a constructive fashion and the ASX 200 rose 1.9%.

On the ASX 200 Index monthly chart, a new “Higher Low” was established and this gave me the opportunity to move up my monthly stop loss to 5763.

The US economy entered a recession in February 2020 and Slack Investor has his stop losses live for all Index funds.

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

Human Frailty: 1. Anchoring Bias

Ahhh the Humanity … Election night crowd, Wellington, 1931 Photographer: William Hall Raine – From the National Library of New Zealand

“We all are men, in our own natures frail, and capable of our flesh; few are angels.”
William Shakespeare, Henry VIII

Yes William, we humans are weak … even Slack Investor has a few human biases that get in the way of his investing. We humans are constantly battling against traits formed deep in human past where we were hanging out in caves and each day was a battle for existence. A lot of human foibles can be explained by Evolutionary Psychology. This fascinating field of study tries to identify which human psychological characteristics have evolved. In primitive times, if we found a trait that was successful and helped our survival, then we would try to repeat it.

Anchoring Bias

Anchoring bias occurs when we put to much weight on the first bit of information that we hear. A good example of anchoring is provided by Weingarten Associates.

Do you think a porcupine has more or less than 5000 quills ?

Do you see what happened here? An “anchor” was sneakily thrown in, and potential guesses from the “porcupine uninformed” would cluster around the 5000 mark. According to Science, any well dressed porcupine will have 30 000 quills.

Another great example from the world of commerce that Slack Investor would fall for is provided by Stockspot. It is common for a restaurant to have an outlier as an “anchor” in the wine list to make the other wines seem like a bargain. Confronted with this list, after the heart attack, Slack Investor would probably go for the tried and true method of going for the 2nd least expensive bottle – Although tempted, I wouldn’t order the “low price” Chateau Gloria and risk being labelled cheap for the sake of 5 bucks!

Stock prices are good examples of anchors. If a share price falls from $4.00 to $2.00, it doesn’t necessarily mean that the stock is now a bargain. Neither price should act as an anchor – the stock may never return to $4.00. The important thing is the value of the share now … At the price of $2.00, is there potential for growth? – you would have to look deeper than just the stock price to answer this question.

Slack Investor has observed how share prices move like a river, sometimes in flood and ahead of their true value and sometimes in a drought – and lagging their real worth. This is a difficult lesson, but there is no logical reason to be anchored to either your buy price or a recent high or low price. If you buy a stock at a price, and it starts heading south, the price you paid should not anchor you into waiting till it returns to the buy price – this has been one of Slack Investor’s frailties in the past. Unfortunately, much of the finance press reinforces anchors with language like “down 20% from a recent high”. It is up to the investor to take a hard look sometimes and make a decision on the future prospects of all our investments.

Chasing Last years Returns

Anchoring also influences we poor humans when we are thinking about investing and confronted with fund manager, ETF, or stock performance figures from last year. It is natural to be drawn to the high performers for the previous 12 months. A look at the Vanguard chart below showing % returns for 9 different asset classes reveals how rare it is that an asset class will repeat a top performance for the next year. Most asset classes will have their “moment in the sunshine” and this adds to the argument for diversification.

*Chart showing % annual market returns for 9 different asset classes. The chart from Vanguard* *dates back to 2007 (can be clicked on to get better resolution) … or the ultimate is the big … beautiful (Thanks Donald)… chart pdf download* here which goes back to 1991

This anchoring also is prevalent when choosing managed and superannuation funds. Last year’s top performers are always heavily promoted and usually attract the most new money. Retire Happy has done some fund research and concluded that chasing last years performance works about 15% of the time. Or, Slack Investor would say, a “not working rate of 85%!

The only way to combat anchoring is to be aware of it. Slack Investor always tries to be conscious of this anchoring bias prior to an investment decision. Are you giving enough thought to how the investment fits into the general economy? How is the stock looking on the charts? Have you done the fundamental analysis on the investment – looked at the projected sales, PE ratio, ROE? Or, are you basing your investment decision on an anchor point?

Call My Broker

It is my sincere hope that, when you call your broker, Jordan Belfort (played by Leonardo DiCaprio) from the highly entertaining Wolf of Wall Street, is not at the end of the line – Image may be subject to copyright.

Most people own shares indirectly through their superannuation or, perhaps through investment platforms such as Raiz – this is a good place to start. Slack Investor would like to make the case for moving onto the next investment step and getting a broker for yourself. These days, a broker is usually an online platform that organizes buy and sell orders for shares and other financial bits.

It brings me shame … but Slack Investor doesn’t just have just one broker … I have three! This might seem a tad excessive – most people only need one and I thought I might share my experience with all of them to help you choose the right one for yourself. If you are serious about investing, you need a broker- Even Dilbert has a broker!

*With acknowledgment to Scott Adams – whose everyman Dilbert brings joy to the tedium of the office.*

Getting a broker involves as much effort as getting a bank account – an associated trading account is usually required to store your cash when setting up. Most of this can be done online but there are a few identity checks to go through. I have set out below my experiences with my brokers – this is not a complete comparison and a good overview of recent offerings can be found at Best Online Brokers Australia for 2020. This field is rapidly changing with a move towards “zero brokerage” by some new players e.g. etoro. It is always a good idea to research the total costs for each of the new offers as there are often hidden fees such as “withdrawal fee”, “holding fee”, “inactivity fee “, etc. My experiences below might give you an idea on what to look for in your broker.

Commsec

Commsec was my first broker and it is the “gorilla” – It is Australia’s largest retail share trading platform and backed by the Commonwealth Bank. I use Commsec for my super fund trades.

Good things: A great trading platform with easy access to recent sales, buy/sell spread and research. One of the best thing about Commsec is that you can make a trade with zero money in your trading account and have 2 days before trade settlement to transfer your funds to your trading account. I have often sold a share and on the same day bought another share with the funds required covered by the previous sale – this gives great flexibility. Other than brokerage, there are no other fees for ASX shares.

Things that annoy me: The brokerage, this is on a sliding scale and range from $10 for a $1000 trade (1.0%) through to $19.95 for a $10000 trade (0.20%). Because most of Slack Investor’s trades are over $10000, I was pleasantly surprised to find that for the last financial year, my total Commsec costs were only 0.13% of trade value.

SelfWealth

SelfWealth is a much smaller trading house and has won Money Magazine’s “Cheapest Online Broker” award for the last three years. I use this for my own name accounts and was drawn in by their headline fixed price trades of $9.50 – no other fees.

Good things: A very cheap trading rate – my costs for 6 trades in the last 12 months amounted to 0.08% of trade value.

Things that annoy me: The SelfWealth trading platform is not as good as Commsec’s and transfers to and from the trading account are terribly slow. This is annoying as they don’t allow trades till there is money in the trading account. So, before I act on a trade I must first move money into the SelfWealth trading account – this may be days after I first see a trading opportunity!

Saxo Markets

Saxo Markets is a broker that I have only recently signed up with as my SMSF manager (esuperfund) required me to go through Saxo if I wanted to own overseas shares. Total costs will depend on how much you trade … but after the smooth Australian experience, the cheap trading fee is complicated by Currency Exchange fees, Inactivity fees and Holding fees. For the past year, my costs add up to 0.42% of trades.

Good things: The ability to buy other international stocks. Many other brokers also offer this.

Things that annoy me: The fees of course … and the confusing trading platform. I wouldn’t use these jokers if I had a choice. Particularly when there are cheaper ways to access the US market.- Stake has a similar currency conversion fee to Saxo without the multitude of other costs.

Stock broking expenses compared to Real Estate

Slack Investor stock broker transaction fees range between 0.08% and 0.42% of trade value – and I’m leaning towards Commsec as my favourite broker on a costs vs features basis. If I was just starting out, maybe SelfWealth, or one of the zero brokerage platforms – but watch out for other fees!

I might have had a little whinge about broker fees … but let’s just have a reality check with another common investment commodity where there are costs involved – Real Estate.

I have recently bought and sold a house and the transfer costs are relatively staggering.

When selling a house (Agent Fees, Conveyancing Fees, Advertising, Govt fees,etc), my transaction costs were 2.7%. When buying a house in Victoria, excluding loan costs, (Stamp duty, Land Titles, Conveyancing) the costs worked out to 5.8% of the purchase price.

Transaction costs are just part of investing, but it is no wonder that Slack Investor is attracted to the lower fees, simplicity and transparency of share trading over property trading. However, the volatility of shares I find testing at times.

Financial Winners

There are many ways to measure a happy and successful life – and financial security is just a part of this. Benjamin Franklin best sums it up

“Content makes Poor Men Rich; Discontent makes Rich Men Poor.”

To be grateful and happy with our many blessings is a good place to start – But, to be financially secure is one of the three tenements of a happy life. My Dad did give me the great advice …

“The only time that you use borrowed money is for the purchase of appreciating assets.”

This meant I would avoid the crippling credit card interest by paying off my credit card balance every month (Admittedly, there were a few slip-ups!) and, most importantly, if I wanted a car or holiday, I would have to save up for it first – and pay cash before the glorious enjoyment of my purchase.

However, (hopefully) appreciating assets like property or shares were given the big tick by my Dad – and it was OK to borrow money for them. I suppose my Dad would have made an exception to the rule if you were investing in yourself. Spending borrowed money on things like education or, if you are just starting out, tools, a work ute, or office equipment – can be justified.

This makes Slack Investor a bit of an outlier in the community considering the amount that the average Australian owes on credit cards. ASIC has a Debt Clock and they point out that there is around $32 billion owing on Australian credit cards, that’s an average of around $4,300 per card holder!

There are some basic rules for getting ahead financially and Noel Whittaker points out the differences between winners and losers in the financial game.

“The winners borrow at low rates of interest, subsidised by the Tax Office, to buy growth assets such as property and shares that increase in value over time. The losers borrow at high rates of interest, non tax-deductible, for consumer items such as cars that depreciate in value.”

You can argue about the fairness of negative gearing and capital gains concessions (I think rightly!) and superannuation concessions (Which have been recently reigned in) – but these are the existing rules.

If you start at a young age with just my Dad’s advice … and only borrow to invest in, hopefully, appreciating assets – it will be a good start. My Dad was an understanding bloke and would appreciate that there were some cases where the rules need to be broken – i.e. suppose that you needed a car for your job – but he would insist that If I did borrow for a car that I would shop around an get the best loan deal … and hopefully, I would be able to pay it off early.

Slack Investor can’t guarantee financial security – but If you follow my Dad’s simple advice you will be on the right path to be a financial winner.