Cathie Wood is the CEO of Ark Innovation and is best known for her NASDAQ based flagship fund ETF (ARKK). She has been concentrating her bets on the “disruptive technologies,” such as artificial intelligence, genomics, blockchain and cryptocurrency, and clean energy. She is a big fan of Tesla and has made the prediction
Slack Investor is no seer … but at the October 14, 2022 price of 16240 USD, Bitcoin has quite a way to go to reach that mark. In the words of the great BBC TV character Sir Humphrey, this looks like a “very courageous” prediction Cathie!
The ARK Innovation ETF (Nasdaq: ARKK)
Wood, is a devout Christian, and has named her company after the sacred Ark of the Covenent. Cathie Wood is a household name in the US and has a huge number of loyal fans. Her funds had 60 billion USD under management at their peak. She was named by Bloomberg as Stock Picker of the Year in 2020 . The flagship ARKK fund gained a remarkable 152% in 2020, but since then, the performance has not been so stellar – ARKK is down 65% so far this year. In interviews, she often refers to her past success, and insists, over and over again, her performance should be judged over a five-year time horizon.
The Price chart of the ARKK ETF since 2017 –
Wood is nothing but confident. She hosts a monthly finance video – delightfully called “In the Know” and is a great defender of her fund. She sees “spectacular returns” for Ark Invest over the next five years. According to a recent article by New York magazine, her initial predictions for ARK Invest were annualized returns of 15 percent, “Now we think 50 percent.”
Slack Investor would agree that a 5-yr holding period is a good minimum to judge how a fund is performing – to allow for volatility and to allow growth stocks to grow. She might be right that tech stocks are undervalued at the moment. But let’s have a look at her results as a fund manager over the last 5 years. The total return of ARKK expressed as a compound annual growth rate (CAGR) since November 2017 was a not so impressive 3.5% when compared with other “no stock picking” index funds.
Instrument
Value Nov 2017
Value Nov 2022
5-yrCAGR
ARKK
36.44
43.31
3.5%
NASDAQ 100 TR
7159
13881
14.2%
S&P 500 TR
5212
8407
10.0%
FTSE 100 TR
6510
7564
3.1%
ASX 200 TR
56486
81102
7.5%
Based upon the 5 years preceding November 2022, the compound annual growth rate (CAGR) of various Total Return (TR) index values compared with the ARKK ETF (including dividends since Nov 2017 of $2.91 USD). These TR calculations include dividends. Data from Yahoo Finance and CAGR calculations from CAGRCalulator
Cathie Wood conducted a recent session at a Morgan Stanley event in Sydney. where she maintained her bullish outlook. According to the Financial Review, the fund manager essentially argued it’s the market that’s got it wrong, not her!
Slack Investor is far more humble … he “takes his licks” when times are bad – doesn’t “crow” when times are good – and is mostly wary when a new “stock guru” emerges.
In the stock market, volatility is the price he has to pay for being involved with long-term asset growth.
November 2022 – Mid-Month Update
My small-scale, and often very frustrating, market timing experiment continues until its projected end in 2024. On a weekly signal for the FTSE 100 from the momentum following Directional Movement system. I have bought back into the UK index. I am back now to fully invested in the ASX Index, UK Index, US Index.
The buy signal can show itself as a downward dip in the trend strength indicator ADX (grey line) of the lower panel below. There are many ways of setting up this Directional Movement system. Slack Investor likes the “smoothing” that is enabled by a system that looks back over the previous 11 periods – but the complexities are best left for the Resources page.
A 1999 extract from The Sydney Morning Herald showing a 13-yr old Chris Brycki – smartcompany.com.au
Slack Investor will admit to being less than young … but I am still capable of being a “Fan boy” when I see something impressive happening in the financial world.
After a series of schoolboy stock picking successes – winning the ASX’s Share Game a remarkable 3 times and, at university, he entered the JP Morgan Trading Competition, which he also won several times. The talented Chris “the Brick” Brycki, launched into a career with stockbrokers and financial houses. After a while, he started to question the long term performance of fund managers.
“… The problem is that over time, even by being right, the value added is not big enough to counteract the 1% fee that a lot of these fund managers charge.”
Chris founded Stockspot in 2013 as an alternative way to invest. Their Robo Advice model offers a low-cost automated alternative to traditional fund managers and advisors. After a simple online survey to determine your investing stage and risk tolerance, an investment portfolio type is recommended to you.
Chris (and Stockspot) have come up with the breathtakingly simple, yet genius (Both Slack Investor and Donald Trump have a loose definition of genius), strategy. After researching thousands of ETF’s and, based on exposure, performance and low fee costs – Stockspot has selected just 5 of them as the building blocks for a range of different portfolios. The portfolios are based on risk tolerance, financial situation and the investor’s appetite for volatility. The five component ETF’s are in Australian Shares (VAS), Global Shares (IOO), Emerging Global Markets(IEM), Australian Fixed Income (IAF), and Physical Gold (GOLD).
The five ETF’s that Stockspot use to build their portfolios (1-yr Performance is to 13Oct 2022) – most of these ETF’s have a $500 minimum if you are investing directly.
It is best to disregard the above 1-yr performance – It has just been a bad year for most assets. The ETF management fees are low (depending on ETF complexity), there is good long term performance (Growth since Inception) and they have selected Physical Gold for inclusion.
Slack Investor does not naturally lean into Gold as it is a speculative, non-income producing asset. However, I might have to change my mind here. The reason Stockspot include Gold in all their portfolios is based upon historical data and the way gold tends to outperform in times of crisis. The results in this last year performance of +7.34% for Gold, speak for itself – as other asset classes flounder.
A chart showing relative risk and return (grey line) of a portfolio varying between 100% Australian Bonds and 100% Australian Shares. The Stockspot portfolios have historically yielded lower returns than 100% Australian Shares) – but only slightly in their most aggressive Topaz portfolio. Overall, through their diversification, the portfolios represent much lower risk.
5-yr annual performance (After Fees) – to 30 September 2022 – From Stockspot
There are fees involved for Stockspot to manage your money. For a balance of $200000, they amount to 0.66%. At first blush, these fees (on top of the ETF fees) sound a bit steep to Slack Investor. However, for all types of investors, with a time horizon of at least 3-5 years, for a stress-free place to put your money, this might be exactly what they are looking for. Stockspot do a tailor-made portfolio construction, all the re-balancing of assets and, they take care of all brokerage costs – Not Bad! They even have zero management fees for children accounts up to $10,000 (for under 18s) and the ability to dollar cost average with regular top-ups.
Stockspot does not earn fees from or have a commercial relationship with the ETFs we recommend. We don’t pay professionals for recommending our service to their clients.
Slack Investor can think of lots of situations where people would like a decision-free, low-fee, diverse investment that is designed to grow in the long term. Well done Chris Brycki (and Stockspot), for advancing the investing cause with particular attention to keeping the fees down … you are a Slack Investor Hero.
October 2022 – Mid-Month Update
Despite the above discussion, my small-scale market timing experiment continues until its projected end in 2024. My frustration with this experiment continues – as it often goes against one of Slack Investors firm beliefs. If you can avoid it – Do not sell an asset when it is undervalued. Using historical CAPE values, at the end of September 2022, the UK Index (FTSE 100) was 13% below its long term mean, the US Index (S&P 500) was 9% above its long term mean, and the Australian Index (S&P 500) was 7% below its long term mean.
At the end of September 2022, Slack Investor was on SELL ALERT for Australian index shares (ASX 200), the US Index (S&P 500) and the UK Index (FTSE 100). Each of them had broken through their monthly stop loss.
I have a “soft sell” approach when I gauge that the market is not too overvalued. I generally will not sell against the overall trend but monitor my index funds on a weekly basis once the monthly stop loss has been triggered.
Well … I can see no obvious up-trend at the end of the week for the US and UK marketsand will exit at the end of week price of 3583 for the S&P 500 and 6858 for the FTSE 100. I am still justhanging in with the ASX 200 as they had a strong finish to the week.
The Index pages and charts have been updated for the UK Index and US Index.
I am hoping that your retirement does not upset as many people as in this James Gillray (1756-1815) painting of “Integrity Retiring From Office”. You can hopefully avoid this by leading a good life and providing yourself with income for this wonderful stage of your life.
There are lots of ways to do this – Slack Investor likes to separate his non-house assets into a Stable Pile and an Investment Pile in his Self Managed Super Fund (SMSF). Most of the commentary on this website has been about the Investment pile as this is the most exciting – and produces the most gains – and lately, the most losses. My Investment pile is volatile as there is greater risk (and opportunity for growth) in this part of the portfolio.
The Stable Pile is mostly to supply me with guaranteed income during the market downturns. Slack Investor’s Stable pile consists of Cash, Term Deposits, An Annuity, Fixed Interest, Real Estate and Bond ETF’s, and some dividend-producing consumer-staple shares.
If the previous financial year has been a good year for investments, my next years annual income requirements can be withdrawn from the investments pile. If you get a bad year for investments, then, I dip into the stable income pile. I try to keep my ratio of Investment Pile to Stable Pile at about 70%:30% and I roughly rebalance at about this time of year (July/August/September).
Using this method, you are always selling from your investments pile when the market is high and buying when the market is low
This method suits Slack Investor, but there are other ways to provide yourself with income in retirement.
Dividends
The well known Australian investor Peter Thornhill, is a great proponent of using dividends to provide retirement income. His MySay articles are well worth a read. Peter maintains that dividends supply an inflation-protected, income that doesn’t vary as much as stock prices do. He supports this strategy by keeping sufficient cash in his superannuation account to fund the next 3 years minimum pension withdrawals (For the Australian superannuation system) – this helps avoid forced selling. The rest of his fund is in Industrials and Listed Investment Companies (e.g. Argo (ARG), Whitefield (WHF)). He has tested his strategy through market cycles and his strategy has been vindicated through the Covid-19 downturn with even some LIC’s using maintained profits to keep dividends going.
Whitefield Ltd is a Listed Investment Company (LIC) that has generally maintained its dividend Per Share (DPS – blue columns) for the past 50 years – even during periods of downturns where the Earnings Per Share (EPS – Red line) of its contributing companies were declining. From Peter Thornhill
Lifetime Annuity Payments
There are many different types of annuity. Annuities have not been very popular in Australia due to their pricing, relative complexity and inflexibility. Challenger has a few of these products available in Australia with rates at September 2022 for a lifetime inflation-protected annuity of $5104 for a 65-yr-old male for every $100000 invested. There are other options for payments that can be either deferred or market linked. Although you can access these annuities directly through their website, the current model that Challenger prefers is access through a financial advisor.
Retirement Income Stream products
Way back in the Australian 2016/17 government budget, Treasury proposed a series of reforms that included removing barriers to innovation in retirement income stream products. This tinkering was brought about by the realisation that the Australian Super model was mostly fit for purpose in the “accumulation” stage – but was lacking in retirement income stream products that address Longevity Risk – the risk of outliving your savings.
Hopefully, with the benefit of compulsory superannuation, most people would have a pile of superannuation money when they retire – and a desire to turn that pile into income (after paying off any debts). Everybody wants to maintain their standard of living in retirement and would prefer something to invest in that would give them the peace of mind of having a guaranteed income stream for life.
At last some new products are staring to emerge from the super funds. Slack Investor was excited to come across the MyPension income stream from Equipsuper. It is a “set-and-forget” investment strategy that nicely mixes a bit of risk assets (to keep your pension fund growing) with more conservative elements (to maintain a more steady income). This fund uses a similar method to the Slack Investor strategy of using “piles” or “buckets”.
To use the Equip MyPension, you would have to roll your existing super into their fund on retirement. Your super is separated into three distinct investment ‘buckets’. The automatic rebalancing of this product would suit those who want to be a bit more “hands off”.
Equip MyPension option for maintaining a retirement income stream.
Cash – For regular income payments, usually comprised of three years income – about 20% of investment.
Conservative – Investments in low risk categories including cash and bonds – about 40% of investment.
Growth – Investments to grow your savings, subject to short term fluctuations – about 40% of investment.
The clever thing is how these buckets work together over time. When investment markets are good, any earnings in the conservative and growth buckets go into the cash bucket, locking in your gains (Automatically). If markets experience a downturn, we’ll leave any buckets that lose value untouched at the end of year, to allow them to recoup losses in future years.
Slack investor has just two piles for his retirement – the Stable Income pile (Cash and Conservative) option and an Investments pile- and I do my own annual rebalancing. My investment pile is a bit more aggressive than the EquipSuper offering – more volatile, but Slack Investor likes to meddle and, is developing a “strong stomach”.
“So the last shall be first, and the first last: for many be called, but few chosen“
Matthew 20:16 – King James Version of the Christian Bible
Slack Investor is not a very religious person – but he is a numbers man and 84% of the global population identifies with a religious group – so I have to go with the flow here. This sort of majority demands respect. The Christian disciple Matthew was reporting on one of Jesus’s teachings. Biblical scholars think that Jesus was trying to point out that Heaven’s value system is far different from earth’s value system.
The “Last first and First last” might also be applied to how some of the Slack Portfolio stocks have been going over consecutive years. There seems to by a cycle of last years Nuggets … might end on the Stinker pile the year after – and vice-versa. Growth stocks have many virtues … but they are not immune to the cycles of price – bouts of overvaluation followed by a period of undervaluation.
The percentage yearly returns quoted in this post include costs (brokerage) but, the returns are before tax. This raw figure can then be compared with other investment returns. I use Market Screener to analyze the financial data from each company and extract the predicted 2024/2o25 Return on Equity (ROE), Dividend Yield and Price/Earnings (PE) Ratio on the companies below. This excellent site allows free access (up to a daily limit) to their analysts data once you register with an email address.
Slack Investor Stinkers – FY 2022
Financial year 2022 was the Pepé Le Pew of all of Stinktown for Slack Investor.I hold mostly growth shares in the technology and healthcare sectors. These sectors have been heavily punished across the world so far in 2022.
This is the first time I have had a negative result for my investments over a financial year since 2009. Slack Investor is a great believer in long term investing returns – usually evaluated over a 5-year period – so this year’s result, while painful, does not change my overall strategy.
Three of my “stinkers” this year were actually “nuggets” from last year. For FY 2020, Codan +161%, REA +59% and IDX +37%. Such is the cyclic nature of some growth stocks.
Codan (CDA) -58% (Still held)
(CDA – 2025: PE 14, Yield 3.8%, ROE 25%) Codan is a technology company that specializes in communications and metal detecting. This company was one of my big nuggets last year (+161%) – so I should not have been really surprised that there could have a bit of a pullback. The decline hurt, but the fundamentals of the company remain sound. Holding on.
Xero (XRO) -41% (Sold)
(XRO– 2025: PE 81, Yield 0.3%, ROE 15%) Xero is an innovative cloud -based accounting provider for small business. Every business owner that Slack Investor talks to say that Xero is a boon to their business. This sort of “word of mouth” got me over-excited this year and I just held my nose and jumped in – against all my rules of avoiding the excessively high forward PE ratios of over 50! It is these high PE companies that are usually punished first in a downturn – and that’s exactly what happened. I still look at it and think its a decent growing business – but I can feel the recent bite!
Integral Diagnostics (IDX) – 39% (Still held)
(IDX – 2024: PE 16, Yield 4.5%, ROE 12%) This medical image company provides diagnostic image services to GP’s and specialists. IDX was another of my nuggets from last year (+37%) that has just shed all of last years gains. The Return on Equity of this company is starting to get a bit low (<15%) – But the PE and yield seem OK. Will keep this company on watch for the moment.
BetaShares Asia Technology Tigers ETF -33% (Still held)
(ASIA – 2022: PE 14, Yield 0.7%,) Growth in Asia … What could go wrong! Plenty it seems.
These “technology tigers” that make up this ETF have been part of a global selloff of tech-related shares this year.
A lot of the Chinese companies (such as Alibaba) have been marked down because the Chinese government imposed its will on a few industries. Also the US government has hinted at action on Chinese companies that have listed on American market. However, the ASIA ETF has large holdings in such monsters as Taiwan Semiconductors, Samsung and Tencent Holdings – so I will accept the current pain and stick with this as a long-term holding
REA Group (REA) -33% (Still held)
(REA – 2024: PE 29, Yield 1.8%, ROE 32%) The owners of RealEstate.com.au. which is the go to portal for house selling and buying. 65% of Australia’s adult population are checking the site every month looking at property listings and home prices. Another long-term holding.
I have only listed the stinkers that lost over 30% this year … sadly, there were many more rogues that lost over 15% for the Slack Fund. They include PPK Group (PPK) -28%; Altium (ALU) -25%; Nick Scali (NCK)-20%; Pushpay Holdings (PPH)-16%; and A2 Milk (A2M)-15%.
Slack Investor Nuggets – FY 2021
Nuggets were few and far between this year. A great benefit of investing in companies that have a high Return on Equity (ROE), and with a track record of increasing earnings, is that they sometimes behave as “golden nuggets”.
Technology One(TNE) +17%
(TNE – 2025: PE 34, Yield 1.7%, ROE 36%) This Software as a Service (SaaS) and consulting company continues to be profitable. This year is the 13th year in a row of record half-yearly profits. A high 2025 PE of 34 (Expensive) is a little scary but, if the high Returns on Equity (36%) remain, on balance, this is OK.
Macquarie Group (MQG) +10%
(MQG – 2025: PE 25, Yield 4.0%, ROE 13%) Macquarie is a complex business with a range of banking and financial services, and plays in global markets and asset management. Once again, the management seem to know what they are doing – Slack Investor remains a fan.
Honourable mention to the only other company that ended in the black – Coles (COL) a decent +8% in these troubled times.
Slack Investor Total SMSF performance – FY 2022 and July 2022 end of Month Update
In a year that Chant West describes as “a rough year for markets”. Following FY2021, which was one of the strongest years for Super funds (+18% for FY21), things have now lurched south with the median growth fund (61 to 80% in growth assets) returning -3.3% for FY22.
The FY 2022 Slack Investor preliminary total SMSF performance looks like coming in at around -14%. However, the 5-yr performance is a more useful benchmark to me – as it takes out the bouncing around of yearly returns. At the end of FY 2022, the Slack Portfolio has a compounding 5-yr annual return of over 13%.
Despite a breach of the stop loss for the ASX 200 last month, Slack Investor remains tentatively IN for Australian index shares on a dramatic rise of 5.7% this month. The FTSE 100 also had a good month (+3.5%)and I remain IN. The US Index S&P 500 eclipsed them all with a remarkable 9.1% gain – and I am now a BUY back IN.
Last month the ASX 200 price went below its stop loss. Slack Investor tries not to exit a stock against the momentum of the market, so I have been off the couch and closely watching the ASX 200. It has remained above the rising trend line and emerged above the monthly stop loss. I am tentatively still IN.
After a sell, it is important to have a notion when to get back IN to an Index or a stock. When trend trading, my main tool for finding a buy signal is a trend following (or momentum) system called the Directional Movement Index. There are many ways of setting up this system. Slack Investor likes the “smoothing” that is enabled by a system that looks back over the previous 11 periods – but the complexities are best left for the Resources page.
In addition to the BUY signal from the Directional Movement Index for the S&P 500, the charts show a triggering of the “Wedgie” pattern where the stock price breaks through a long term down-trend. This reinforces the BUY.
All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).
An “enhanced” satellite view of eastern Australia incorporating an “exaggerated relief” technique to emphasize the topography. The mountains of PNG and Indonesia are on the horizon.
It serves an investor well to occasionally lift themselves away from the day to day stresses of the world – and the trials of owning a share portfolio!
ASX 200 – The Australian Index
My previous post outlined a few of the difficulties of market timing and my decision to be tentatively out of the Australian Index according to my “market timing rules”. I also try not to trade against the market trend … and I would not sell while the weekly chart was looking positive.
So far this has been the case, with the weekly chart just above the rising trend line. I will sell if the ASX200 is below the trend line and still below the stop loss at the end of the week. This gets to one of the problems of market timing – you can set up the most definitive strategy that will give you an objective selling point – but my heart is not in it as Slack Investor believes that the ASX 200 represents reasonable value at the moment. I am actually looking forward to the end of my 20-year market timing experiment – even though it does have the useful purpose of giving Slack Investor something to do in a market downturn.
Lifting the gaze
My absolute favourite way of lifting the gaze is to look at the Vanguard Asset Index chart over a long period. However, a later version than 2021 isn’t due out till mid August 2022 – so I have just shown last years version. The Long term asset class returns chart shown below – in a logarithmic scale, show that the asset classes of Residential Property and Australian shares – are the only really worthwhile games in town. When things just get too much in the day to day trading world – just sit on the couch and gaze in wonder at these two charts … and then perhaps doze off.
Long term Asset returns 1926-2020 – From Stockspot
Extract from the 2021 Vanguard Index chart (Just the 2008-2021 portion) – the dollar values on the right are the results of investing $10000 in index funds in each asset class for 30 years (since July 1991). – Check out the full glory of the Vanguard 2021 PDF chart – Click for better resolution.
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.
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.
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 theBetashares 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.
“Sick young Bacchus” a self portrait by Caravaggio (circa 1593) showing himself as the Greek God Bacchus, the god of wine. It is thought that Caravaggio painted this portrait when he was not well – probably suffering from malaria. From the Borghese Gallery, Rome.
Fear and greed are part of the human condition, these traits have evolved over time.
Without the right dose of fear, we would expose ourselves to unreasonable threats and, without the right dose of greed, we would forego opportunities to secure the resources that we need to live.
The fluctuations of the stock markets are just a symptom of these traits. There is a lot of general panic and selling when the stock market starts consistently falling. Stock owners become fearful of further losses and press the sell button. This sets up a chain reaction and the markets fall even further.
A “Herd Effect” exists in the financial markets when a group of investors ignore their own information and, instead, only follow the decisions of other investors.
It is easy to see how herd behaviour evolved as copying what other individuals are doing can be useful in many situations. For example, if there is an immediate threat, that you haven’t noticed and the herd has – it might save your skin to follow the herd.
Then, of course, there are the good times when the stock market is pumping – the buyers start piling in regardless of the fundamental foundations of the stocks. Asset bubbles often result and a good example of this greed was the “dotcom” bubble in the late 1990’s when big prices were paid for any company that mentioned the internet in its prospectus. Nobody wanted to miss out on, what looked like, easy money.
But these herd behaviours are the opposite of what the astute investor should be doing. We must fight these evolved traits and develop our own behaviours that keep us on the right path.
Savings Automation and Dollar Cost Averaging
Slack Investor has written before about automating your savings. There are also huge advantages to automating your investing – particularly when you are just starting out in the investing world. The first stumbling block that new investors face is to start investing. Then they must develop the habit to keep on investing. There is always a reason to use the money somewhere else or, you might think that right now is not a good time to invest. This “paralysis” must be over come and the best way to do it is through automation.
With auto investing, you don’t have to make the decision when to invest, it just happens automatically when your savings reach a pre-determined point. This opens up the delights of “Dollar Cost Averaging” where, if the market is relatively expensive, you will buy few shares – and if the market is undervalued at the time, your set amount of dollars will buy more shares.
You are buying in the good times and bad . This doesn’t matter – the important thing is that you are buying into companies and accumulating your wealth. Your purchasing is relentless, no decisions, no procrastination – Warren Buffet would be proud!
By investing regularly, in this case, $417 per month, you accumulate shares regardless of the share price. Dollar Cost Averaging buys you more shares when the share price is cheap and less when they are more expensive. – From SeekingAlpha.com
Pearler and Auto Investing
A new kid on the block in the broking business for Australian and US shares is Pearler with distinguishing points of a flat $9.50 brokerage charge and the use of the Chess system for attributing shares to individuals. This means that you are issued with a Holder Identification Number (HIN) and you have direct ownership of your shares. Slack Investor likes this model rather than the custodial model of many other new broking players. Pearler also offers free brokerage on the purchase of selected ETF’s (provided that you hold them for a year).
However, Slack Investor thinks the absolute best feature of the Pearler platform is that it encourages Auto Investing and makes the process simple. If you are serious about your investing journey, you need a broker and why not make it Pearler.
There are some well researched and comprehensive reviews of Pearler and its many features by Captain FI and AussieDocFreedom.
Auto Invest through Pearler is an excellent way to combat the cycles of fear and greed and take the emotion out of your investing decisions.
Other than just opening an account with them, Slack Investor has no affiliation with Pearler.
That old troubadour Bob Dylan released this back in 1964 …on vinyl … I might add! Bob’s lyrics were written almost 60 years ago about the cultural and political divide that existed way back in the early 1960’s. His message to “start swimmin’ or you’ll sink like a stone” continues to have relevance – even to investors.
Music has been an important part of Slack Investor’s life and starting with my first “record” vinyl purchase in high school, I then went through the cassette phase. Cassettes were always a bit dodgy, but they did have their moments – who can forget the sublime “mix tape” given to you by a friend. The gradual degradation of cassette musical quality as they lost their magnetism and, the ultimate tragedy when your precious “mix tape” starts unravelling in the car. All this made me glad when CD’s were introduced in 1982. Aaahh … the beautiful world of the CD – Digital quality and a format that I thought would live forever. Only in hindsight do we see that “Peak CD” was in 1999 and this was also the peak of recorded music revenue for artists. I could look at the below chart for hours.
The changing shape of revenues from recorded music delivery 1980 – 2020. – This incredible graphic is from Statista
Despite the recent uptick in vinyl sales, it seems obvious that the days of owning music are numbered. It is also sad to note that revenues from recorded music in 2014 sank to a third of those in 1999. Revenues are on the increase but royalties from streaming remain pitifully low and artists can be paid as little as 13% of the streaming income generated. The recording artists must resort to touring and merchandising to provide the bulk of their income. The highest grossing act of 2017 was U2. According to Billboard – their streaming income was only just over 1% of their total revenue of 54.4 million USD.
Spotify generally pays between $US.003 and $US.005 per stream, meaning you’ll need about 250 streams to make a dollar.
In an unbelievable turn of events for all “Boomers”, streaming is now the way to access recorded music and now accounts for 83 percent of music industry revenues in the U.S. Physical CD’s and even music downloads are in major decline.
All of that music stuff was just to provide an example about how unexpected change can happen in just a few decades. Slack Investor had built up an impressive CD collection over the past 30 years and, he thought he was set up for life. This collection is now in a box as I now tend to now use digital versions for my musical pleasures. To the great dismay of my children, I am still hanging on to ownership of my music – they tell me this is typical “boomer” behaviour and are urging me to get on board the streaming train.
We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.
Bill Gates
Bill has pointed to a bit of a weakness in the vision of investors … and Slack Investor obviously cherishes his moments of inaction – but will act if he has to. He has already made a few tweaks in his portfolio
I have been thinking of relatively safe investments lately … and this is tricky in these weird times as, besides precious metals, it is difficult to name a sector that would be unaffected by an inevitable downturn in the markets. Will bricks and mortar retail be the same? Will CBD office real estate be the same? Will banks be the same with the new competition from Neobanks?
With the exception of consumer staples, safety may not be found in traditional industries. Technology is such a large part of our lives now – and this is where growth will happen. I keep returning to the utility of an Index like the NASDAQ 100. It has the beautiful self correcting mechanism where dud technologies get shuffled out of the bottom of the index and the companies that are still making money tend to stay in.
I have been a buyer of this ETF along the way and a recent dip in price (perhaps due to the recent Facebook revelations) point to an increasing mood for more regulation in some of the tech stocks. Barrons have the current PE at 34.5 which does not make it cheap but the PE based upon the forward 12-mth earnings forecast is a bit more reasonable for the growth sector at 28.0. In this changing world, the one thing that you can bank on is that the technology industry will be an important part of it. Not advice … but I think I will buy some more.
Slack Investor is not known for his fast work … and have often taken the couch when action was probably needed. There are some stocks that I will hold for the long run, and their weekly charts are not of big concern to me. However, about half of my portfolio is on a weekly watch – I review the charts on a weekend and cast the Slack Investor jaundiced gaze over each stock that I own (Thanks Incredible Charts!)
This is the least satisfying timescale and, if I could successfully train myself to ignore this daily oscillation of my investments – I would. The reason to avoid daily swings of the share price is that I have absolutely no idea about whether the price of a stock or index will go up or down on the next day – the share price is determined by others! In the chart below, in the first 7 days shown, the daily index went down, down, up, down, down, up, up, etc – monitoring daily prices can be frustrating!
ASX 200 Daily “Candlestick Chart” showing 6 months of index values since January 1 ,2021. The Red candles show a day when the value went down, and the Blue candles indicate a day when the index price went up.
I am happy to say that, when on holiday, or busy, I have no need to monitor on the daily timescale. Regardless, no decisions are made on this daily basis.
Weekly
Weekly is where the “rubber hits the road” for Slack Investor – and I look forward to my weekly sessions with my portfolio. I set aside an hour on the weekend to make sure my portfolio prices are updated and the charts are reviewed. The weekly time scale smooths out a bit of the volatility and I then open up Incredible Charts to scroll through my portfolio.
Incredible charts offer a free month sign up and then $9.95 per month for access to worldwide updated delayed charts daily from 6pm Australian time. This package is not in “real time” and does not suit a day trader. But for an investor on my slower time scale, it is very good value. These charts open up the whole world of technical analysis as it allows you to monitor trends in your stocks and mark in trend lines and stop losses.
I have always used the weekly charts to make decisions on buying a company – looking for a momentum shift in the trading using the Directional Movement System. I also like to trade a “breakout”, or a “wedgie”
Monthly
This is the timescale when I am most happiest and would like to make decisions just every month. After a life of work where decisions were a constant grind – It is a gift not to make decisions!
It is still my aim to make selling decisions monthly – but things seem a little precarious lately and, for now, I am on a weekly decisions cycle for selling. The sell happens when a stock price finishes below my stop loss at the end of the week/month (see Technical Sell below).
Yearly
This is the “Look at yourself in the mirror” period where Slack Investor does the evaluation of his portfolio performance against benchmarks at the end of each financial year. Although the financial year ends at June 30, it usually takes until the middle of August for me to get my final results and benchmarks together. I present my results at the annual Financial Year Results post.
Special Occasions Selling
Slack Investor is in one of those right now and he has to free up some cash to by selling some shares. I like to do things a bit methodically and here is my process for a sell.
Technical Sell
This is my first port of call. Technical Analysis uses charts and trends and I have been watching the charts for the past 4 weeks for a technical sell signal in my portfolio. For me, this happens when the stock price falls below the pre-determined stop loss that I have set. I will then try to sell at the start of the next week/month. My rules are not rigid here, if the stock starts to rebound after I have made my sell decision, I might stick with it for a little while longer.
Another technical signal is when a stock loses its momentum – but this is a more subjective signal than when a stock simply moves below a line.
Slack Investor bought into ESPO in October 2020 at $10.39 and sold this week at a small loss $10.19. The stock didn’t grow like I thought it would – but that’s fine. I like the concept of this ETF but I am happy to be out for now and look forward to be getting back in when a strong upward trend establishes itself.
I was also able to exit on a technical sell for the Betashares ASIA ETF and I am not sure what is going on here as I thought the tailwinds for this sector were good. Small profit this time and will get back in if the trend changes.
Weekly chart for the VanEck ESPO ETF showing a breach of the stop loss – Incredible Charts.
Fundamental Sell
Fundamental Analysis revolves around trying to determine the real value of a stock by looking at its financial data (e.g, Price/Earnings ratio, Return on Equity, Debt, etc) over time and, in reference to its competitors. This is a much more complicated process.
If Slack Investor can’t find a technical sell, I look for a fundamental sign. I will list all of my sellable stocks (Shares that I don’t hold for “the long run“). The first step is to get some financial data on each company from the very good Market Screener then put them in a table and hope that something stands out as a sell. A sell signal might be a trend of falling earnings, increasing debt, or decreasing Return on Equity (ROE). I also get nervous about a stock if its predicted (+ 2 years) Price Earnings (PE) ratio goes over 50. Fortunately, I didn’t have to resort to any fundamental analysis this this time … and this approach probably needs a post in itself.
In the meantime, like my pumpkin friend … always watching …
“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
Sir John Templeton
John Templeton (1912 – 2008) was a great investor, fund manager and philanthropist. He is best known for setting up the Templeton Growth Fund which averaged returns of over 15% per year for 38 years. Slack Investor salutes this kind of behaviour and listens when great investors say something. If Mr Templeton is right, this game should be pretty easy and we wait till the “Euphoria” sets in and the we sell … Right?
Well, according to the CitiGroup Panic and Euphoria Index , which looks at sentiment in the market back to 1950. The section from 1987 through to the start of 2021 is shown below – Euphoria is already well and truly established by December 2020. However, most markets have gone up considerably further since then!
Source: Haver Analytics, Pinnacle Data, and Citi Research – diamondportfolio.com.au– Click image for better resolution
This is a bit of a complex chart, and the grey solid columns represent the return from the US Stock market for the next 12 months (forward return) and the Magenta line is the Citibank Euphoria Index which tracks market sentiment.
Visually, it looks like whenever the Euphoria Index (LHS – Magenta) goes to a high value, there is a downturn in the next 12-month return (RHS – Grey). Citibank have defined a range (Blue Lines) where the market is operating “normally” and outline areas of Euphoria and Panic when the market is beyond that range. According to Citibank, we are in a period of Euphoria and the prospect of good returns in the next 12 months looks bleak. The Chief Economist from Citigroup, Tobias Lekovich, suggests that there is a “100% historical probability of down markets in the next 12 months at current levels.” – that proclamation was made 5 months ago.
Another Slack Investor hero, Warren Buffet, talks about the ratio of total United States stock market valuation to US Gross Domestic Product (GDP). This is now known as the “Buffet Indicator” – and, although he admits to its limitations, it still is “the best single measure of where valuations stand at any given moment“. At April 22, 2021 the Buffett Indicator is calculated to be 234% – the highest value since 1950. In contrast, the Australian market using this indicator is either “fair valued” or “modestly overvalued”
From Current Market Valuation – The Buffett Indicator is the ratio of total US stock market valuation to GDP – Click image for better resolution
By our calculation (the US Stock Market) that is currently 88% (or about 2.9 standard deviations) above the historical average, suggesting that the market is Strongly Overvalued
There are a lot of current examples of “investor exuberance” in the stock markets – particularly in the US. There is no doubt that the pricing of some companies has got well out of hand. The earnings of a company are critical when I look at my investments.
Another risk is that pockets of the market at the moment appear to be speculative bubbles. You can easily tally about US$5 trillion of assets, from cryptocurrencies to Tesla, that are not underpinned by any fundamental earnings. They’re speculation. And if these bubbles were to pop, that could drag down a wider range of investments.
There are a group of companies that I like that I have no intention of selling – because they have a good track record of increasing earnings and there future prospects look good – no matter what the market does in the short term. There is also about 40% my portfolio in stocks where I am not so sure of their long term prospects. It is these stocks that I will be watching closely at the end ofevery week and have set stop losses that will indicate to me that I should sell if the price falls below the stop loss.
Slack Investor is happy to go along for the ride and has no real faith in his prediction ability. Sure, stocks are at extreme valuations but these are very unusual times. Interest rates are very low and there has been an unprecedented amount of government spending to keep economies going along.
Still on the couch, I don’t feel euphoria … but I feel OK … I have a plan.
April 2021 – End of Month Update
Despite the “exuberance”, Slack Investor is still on the wave and remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100. All Slack Investor followed markets this month had strong rises (ASX 200 +3.5%; FTSE 100 +3.8%; S&P 500 +5.3%).
In these uncertain times, especially with the high prices on the US market, I am monitoring my index funds weekly and if, at the end of the week my Index funds are below the stop loss, then I will put a post on the blog and sell at the next opportunity. All Stop Losses are Live.
All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).
