Slack Investor is often “banging on” about Price to Earnings (PE) ratios. The economist Robert Shiller designed the even sexier Cyclically Adjusted Price to Earnings ratios (CAPE) which use ten-year average inflation-adjusted earnings to take out some of some of the volatility of annual earnings. The details on how to calculate the Shiller CAPE Ratio can be extracted from Seeking Alpha.
Relationship of annual market returns (over 10-yr period) to current CAPE. From Research Affiliates – based upon Shiller Data
Professors Shiller and Campbell found that, the higher the CAPE, the lower the likely annual return from equities over the following 5-20 years. The current US CAPE is at one of its highest levels since the 1880’s. GuruFocus provide current information on the S&P 500 CAPE and market return predictions based on Shiller’s work.
What originally started me thinking of CAPE is this excellent visualization prepared by John Kingham of Seeking Alpha for the UK FTSE 100. This chart shows how the current FTSE rates with fair value at a glance. John uses a “Fair Value” UK CAPE of 16 -just a bit below its recent average of 17.5. The UK CAPE black line seems still in “fair value” territory – according to Shiller, this is generally OK for a buyer in terms of long-term returns.
This chart of the UK FTSE 100 CAPE from Seeking Alpha. The FTSE CAPE is the black line and John Kingham has prepared the CAPE zones to indicate GREEN = cheap, YELLOW = fair value, RED = expensive (75% above the mean) – Click for higher resolution
We are also in times of high government stimulus and, with interest rates so low, there is more than the usual amount of money in the share market. It is a case of no other alternative – perhaps, with the exception of residential property.
Slack Investor has no idea whether the extremely high US S&P 500 CAPE values may continue for a while … It is a complicated market at the moment. With the US Market at 38 times the 10-year average earnings … the US Market Is Not Cheap and, I am glad that my stop losses for index funds are set tightly within 10% of recent highs in the share price.
The rich data on CAPE ratios for a range of countries is prepared lovingly by Barclays each month. The CAPE values of the US S&P 500 CAPE, ASX 200 CAPE and the FTSE CAPE are respectively, 61%, 19% and 0% above their 39-yr averages. Interestingly, the US market CAPE (24.5) has a far higher mean than Australia (20.4) or the UK (17.5). This may be due to higher earnings growth prospects in the US.
Historic CAPE Ratios for the S&P 500, ASX 200 and FTSE 100 together with their 39-year averages – Developed with data from Barclays
Is CAPE a good predictor of a market correction/crash
In the below chart I mapped the US S&P 500 against the S&P 500 CAPE to see if the CAPE is useful for determining market turning points.
The CAPE indicator does not seem to be a good predictor of short-term share market prices – as high CAPE values have been at sustained high levels for many years. CAPE trends seem to immediately mirror the trends in the share price. However, Professor Shiller’s established relationship with high CAPEs and lower forward returns in the longer term is hard to ignore. Interest rates will not stay low forever. Regardless of the unusual circumstances of todays stock market, the US market at 61% above its 39-yr average, looks expensive.
September 2021 – End of Month Update
Slack Investor remains IN for Australian index shares (ASX 200), the US Index (S&P 500) and the UK Index (FTSE 100).
After 11 months in a row of monthly stock rises for the ASX 200, things are starting to get a little jittery in the stock markets. This is just normal behaviour. Decent monthly falls for the ASX 200 (-2.7%) and S&P 500 (-4.8%), the FTSE 100 flat at -0.2%.
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 recalculated.
As much as Slack Investor hates retail shopping – he loves to have the opportunity to buy into companies. Like any new relationship, when you buy a stock, you are not really sure about how its going to work out – but its exciting!
I have never been good at predicting when the stock market will have a correction … and the current high valuations (PE Ratios well above the long term average) do make me nervous. However, Slack Investor would much rather be in the game than out of it and I have been looking for a few companies that would hopefully not suffer too greatly if a correction occurred in the stock market.
This is not advice … just an insight to the Slack Investor bumbling buying process. My rate of converting bought shares into winners of 55% is not that impressive – but my overall performance results are good.
I get heaps of buying ideas from investment sites such as Motley Fool, Livewire, ShareCafe. But I will always, always, check things out for myself before parting with any Slack Dollars. This involves a rigorous screening of the fundamental financial metrics PLUS a look at how the stock chart is going on Incredible Charts. This technical analysis consists of a quick scan to see if the chart is in a continual growth trend … or has just had a “breakout”, or broken out of a downtrend.
Let’s put on the buying boots. As well as the companies below, Slack Investor has also recently added to some small positions in PPK.ASX and TNE.ASX.
Slack Investor Buys Alphabet (GOOGL.NASDAQ)
Half of my buying cash went into an existing holding – Alphabet (GOOGL), This money making juggernaut is part of the new economy and I could buy this company all day. The first step is to go to the phenomenal MarketScreener.com. Registration is free on this site and they allow you to look at analyst data for up to 5 stocks a day.
Search for your stock and then finding the Financials Tab for that company. Firstly, I look at the chart Income/Sales and Earnings per Share. An increasing trend is good and, if the estimated earnings (2021 – 2023) are also increasing, I’m acutely interested. I do a quick check on debt levels. Alphabet is a cash king – has more cash than debt – solid tick.
Income statement for Alphabet (GOOGL on the US NASDAQ exchange) – from MarketScreener
I continue with MarketScreener to extract the Return on Equity (ROE), both past and forecast. I hope that it is above 15% – Big Tick. The final bit of vital information is the Price Earnings (PE) Ratio and it is here that I gauge whether the stock price is too high for Slack Investor. For a good growth stock, I try not to buy into companies that have a projected PE of more than 40-(50 at a pinch). The analyst estimates for GOOGL is a forecast PE of 23.0 in 2023 – Tick
YEAR
2018
2019
2020
2021(e)
2022(e)
2023(e)
ROE
18.6
19.3
19.0
27.2
25.8
25.2
PE Ratio
23.9
27.2
29.9
28.0
26.6
23.0
Table of fundamental financial metrics for Alphabet. The documented Return on Equity (ROE) and Price Earnings (PE) Ratio are shown for 2018-2020. Analyst estimates are shown for later years – MarketScreener.com
Slack Investor Buys NASDAQ 100 ETF (NDQ.ASX)
Not everyone has access to direct access to US shares – if you only have an ASX broker, then to get exposure to Alphabet, a good substitute is to buy the BetaShares NASDAQ ETF (NDQ) – Alphabet represents 8.1% of this ETF – and you get profit machines like Apple, Amazon, Microsoft and Facebook thrown in. I topped up my holding here as well.
The ROE for the NASDAQ Index is 17.7 and increasing (30 June 21) – Above 15, Tick. The projected 2023 estimate for the Price/Earnings Ratio for the NASDAQ Index is 22.47 – Below 40, Tick – Very reasonable for growth sector companies.
NASDAQ 100 Index 2020 PE Ratios and Forward Estimates of PE for 2021, 2022. 2023 – From nasdaq.com
Slack Investor Buys Coles Group (COL.ASX)
YEAR
2019
2020
2021(e)
2022(e)
2023(e)
2024(e)
ROE
29.8
32.8
37.0
34.9
33.3
34.3
PE Ratio
12.4
22.9
22.4
23.4
22.8
21.4
Table of Fundamental metrics for Coles Group . The documented Return on Equity (ROE) and Price Earnings (PE) Ratio are shown for 2019-2020. Analyst estimates are shown for later years– MarketScreener.com
The Return on Equity (ROE) for this retail business is pretty impressive and, the PE Ratio would be pretty good for a growth company – but the Income Chart below reveals that Coles is not really a “growth” company – so the expectation is that the PE Ratios should be much lower, in the early 20’s or below would be the Slack Limits for slow growth companies.
Income statement for Coles Group (COL.ASX) showing a very gradual increase in projected income – Compare this with the Alphabet chart above – from MarketScreener
The income chart shows some pretty shallow growth and the slow earnings per share (EPS) growth makes the Coles Group something that Slack Investor would not usually be interested in. But, I go to Coles Supermarket at least twice a week and I actually like going there as a company part owner. Coles is in the “stable income” section of the Slack Portfolio rather than “Growth”. Even if the worst of times was thrust upon us and there was a recession in the next few years, a business like Coles will keep on performing. I would much rather put up with the price fluctuation of shares and have my money in a business like this at a projected yield of 3.5 – 4% p.a. than have Slack Dollars tied up in cash for 2 years in a Big 4 bank term deposit at 0.3%.
August 2021 – End of Month Update
Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100.
There were significant rises in all followed markets (S&P 500 +2.9%, and the FTSE 100 +1.2%). The Australian stock market is also in record territory (ASX 200 +1. 9%). This is all happening during extensive COVID-19 related lockdowns in the populous South Eastern part of Australia.
Slack Investor is normally relaxed about most things, but I am moving to the edge of my couch and starting to get ready for action. Looking at the monthly charts for all the indexes, in these boom times, the index prices have been getting too far ahead of my stop losses for comfort. I have tightened up my rules for adjusting stop losses upwards.
All Stop Losses are live and are being moved upwards every month if the index price exceeds the stop loss by 10% or more. All Indexes have got this treatment this month – It is sometimes difficult to work out where to put the stop losses on the monthly chart. I usually go to the weekly charts and find a minimum on the weekly price range that is within 10% of the current price (see below). If the stock price is below the stop loss at the end of the week – I will usually sell at the next opportunity.
The weekly US S&P 500 Index chart showing an upward adjustment of the stop loss from 4056 to 4233 – Thanks Incredible Charts
All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).
“In the business world, the rear view mirror is always clearer than the windshield.”
Warren Buffett
Slack Investor has a proven track record in notbeing able to predict where speculative assets (such as Bitcoin or precious metals) are going. I would also add to the “speculative list” some companies whose share price have become divorced from the link to their actual earnings. As a rough guide, I try not to invest in companies that have a forward P/E ratio of greater than 50. I get these forward P/E ratios from the excellent Market Screener site.
This means that I have missed out on the great gains of being by in companies like Afterpay (APT – 2023 P/E ratio 190) or TESLA (TSLA – 2023 P/E ratio 193). Some folk have made a lot of money with these companies …. but they are just too speculative for me. Slack Investor tries to “stick to his knitting” with growing companies that have an established earnings record and forward P/E ratios <50.
After an eventful FY 2020 and the COVID-19 dip in the markets around the world. FY 2021, has seen very good gains for most global markets. In the UK, the FTSE 100 Total Return Index is up 18.1% (last FY 20 down 13.8%). Dividends helped the Australian Accumulation Index to be up 27.8% for the financial year (last FY down 7.7%). These Americans remain stupendously optimistic … the S&P 500 Total Return Index was UP 36.4% (last FY up 12.0%) for the same period. All of these Total Return Indexes include any accumulated dividends, wheras the chart below of the ASX 200 for FY 2021, just shows stock prices.
ASX 2oo Weekly chart for FY 2021 – started at 5897 and finished at 7313 (30 June 2020 – 30 June 2021) – Incredible Charts – Click for better resolution.
Slack Portfolio Results FY 2021
All Performance results are before tax. The Slack Portfolio had a cracking year with annual FY 2020 performance of +21.7%. Full yearly results with benchmarks are shown in the table below. It was also a top year for all benchmarks (Median Balance Fund +13.0%, Vanguard Growth Fund +20.3%, ASX 200 Accumulation +27.8%).
Against all Slack Investor predictions … Real Estate turned out to be a great investment in the Brisbane and Melbourne markets for FY 2021 (+17.9% and +10.7%) – Perhaps I should also give up on the “looking ahead” in the residential property market – I just don’t get it!
The five-year compound annual performance gives me a much better idea about how things are going and will smooth out any dud (or remarkable!) results.
Slack Investor 5-year compound annual rate of return – compared to benchmarks – Click for better resolution.
The beauty of compounding with a succession of good performance results can be seen in the chart below showing the growth of an initial investment in June 2009 of $10000.
The rate of growth of $10000 invested by Slack Investor in FY 2009 – compared to benchmarks – Click for better resolution.
The lessons of long term investing
Every year Vanguard publish their performance data on each asset class. Slack Investor looks forward to this – as it reminds him of the power of the appreciating asset classes of Shares and Property. Vanguard highlights the volatility of asset values in the short term – but also emphasizes the joys of holding and accumulating shares or property for long periods of time. These asset classes have steadily increased in value over the last 30 years. $10000 invested in Australian Shares in 1990 would have compounded to $160 498. Staying in Cash would have yielded $38 938.
2021 Vanguard Index Chart
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.
Financial year total returns (%) for the major asset classes
In the chart below, for each asset class the total annual returns are given and the best performing class for each year is marked in green … and the worst in gold. What stands out to Slack Investor is that is rare for and asset class to lead in annual returns (green) for two years in a row – and there are years where the leading asset class (green) becomes the worst performer (gold) in the next year. This drives home the often repeated sentence in the finance world.
Past performance is not a guarantee of future results.
Total returns for each asset class for the 30 years since 1991 – Check out the full glory of the Vanguard 2021 PDF – Click for better resolution.
This table highlights the benefits of diversification across asset classes for the long term investor.
Sitting on the couch, Slack Investor is quietly pleased with his 2021 results – Roll on Financial year 2022. However, when comparing this year’s bumper returns with the long term average returns for Australian and International shares of around 10% – Slack Investor can’t help but be a little nervous.
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.“
George Soros
Now George knows how to make a dollar and, to his great credit, is a generous philanthropist. I am sure, like any successful investor, that George looks back at times on his investment decisions. Slack Investor looks forward to this time of year when I can reflectively analyse my greatest investing failures. Fortunately, my stinker to nugget ratio was good this year.
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 analyse the financial data from each company and extract the predicted 2023 Return on Equity and 2023 Price/Earnings 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 2021
Growth stocks (High Return on Equity >15% and increasing sales) are fantastic companies to associate with as they are growing and hopefully, their earnings per share, are growing also. The downside to this is that these companies are usually sought after in the stock market and command high prices in relation to their current earnings because the “future earnings” of the company are priced into the current price. This gives them a high PE Ratio. Whenever there is a future earnings revision, or a stutter in growth, there is usually a dramatic drop in price.
Slack Investor has a look at his stocks every weekend on a free chart program (Thanks Incredible Charts!). I actually pay a small amount to get the chart data early in the morning. Both of my “stinkers” this year were actually “nuggets” from last year. For FY 2020, Appen +58% and A2M +26%. Such is the cyclic nature of some growth stocks.
Appen (APX) -24%
APX (2023 ROE 14%, 2023 PE 19) remains a company that puzzles me “the development of human-annotated datasets for machine learning and artificial intelligence”. The company has had a few problems due to COVID-19 and a hit to its underlying profit and increased competition. Slack Investor got out late last year at $25.87 as the weekly chart moved below the stop loss at $28.11. However, this represented a loss of 24% for the financial year.
The downward trend marked by the thick blue line is setting up niciely for one of Slack Investors favourite chart trading patterns – “The Wedgie”. When the share price punches through a downward trend line of at least 6 months … and the fundamentals are right, Slack Investor is interested. Given the forward PE for 2023 is a relatively low 19 – I might have another crack at this once the price has poked above the blue wedge line.
A2 Milk (A2M) -21%
A2M (2023 ROE 17%, 2023 PE 23) sells A2 protein milk products to the world. The actual benefits of the A2 only protein seem to be limited to easier digestion. Long term independent studies with large data sets are still in the works … but the marketing skill of this company is undisputed. COVID-19 brought big changes to sales with the collapse of the “daigou” market and worries about China trade sanctions. Slack Investor sold about half way through the downtrend – but not before taking a hit for the team.
Slack Investor Nuggets – FY 2021
A great benefit of investing in companies that have a high Return on Equity, and with a track record of increasing earnings, is that they sometimes behave as “golden nuggets”.
Codan (CDA) +161%
What a company! Codan is a technology company that specializes in communications and metal detecting. It has made a major US acquisition this year and paid with cash. Sales are up and predicted to keep increasing. The high 2023 ROE 32%, and relatively low 2023 PE 24 (for a growth company) makes me think there will be more price growth over the next few years – I will try and top up my position this year on any price weakness.
Alphabet (GOOGL) +61%
(GOOGL – 2023 ROE 23%, 2023 PE 23) The Alphabet list of products continues to grow. I use a ton of Alphabet products every day and the company is growing fast into the cloud with cloud computing revenue jumping 46% in the March quarter. There are a few regulatory problems coming up with the US Justice department claiming that Google’s actions harmed consumers and competition. There is also the ongoing work of G7 nations trying to make international tech companies pay their rightful share of tax on revenues in each country.
Despite this, if there is one company that Slack Investor could invest in and then pay no attention to for 10 years, and still sleep well, … it would be Alphabet.
REA Group (REA) +59%
The owners of RealEstate.com.au. which is the go to portal for house selling and buying (REA – 2023 ROE 38%, 2023 PE 44). The group has just completed an acquisition of Mortgage Choice and picked up a big chunk of a Mortgage software company. This expanding of the business must be good. 65% of Australia’s adult population are checking the site every month looking at property listings and home prices. However, the 2023 projected PE is very high (44). Using the Slack Investor bench marks, suggests the stock is expensive at the moment.
Integral Diagnostics (IDX) +37%
This medical image company (2023 ROE 16%, 2023 PE 24) provides diagnostic image services to GP’s and specialists. IDX seems to be getting a few tail winds with an ageing population and more demand for their MRI, CT and PET scans.
Macquarie Group (MQG) +36%
Macquarie is a complex business(2023 ROE 14%, 2023 PE 17) with a range of banking and financial services, and plays in global markets and asset management. The latter division looks for undervalued companies. Despite COVID-19, profits are increasing. The management seem to know what they are doing – Slack Investor remains a fan.
Betashares Global Robotics And Artificial Intelligence ETF (RBTZ) +36%
This ETF tracks the megatrend of robotics and artificial intelligence. Although the PE ratio is a bit high (2021 PE Ratio 37), this is a disruptive sector that should make gains against existing industries with the advantage of technology against rising labour costs.
Most honourable mentions to those other companies that returned over 20% for the tax year. Cochlear (COH) +34%, BetaShares Nasdaq ETF (NDQ) +33%, VanEyk MOAT ETF (MOAT) +32%, Vanguard International ETF (VGE) +29%, BetaShares HACK ETF (HACK) +31%, Vanguard Asia ETF (VAE) +28%, BetaShares QLTY ETF (QLTY) +25%. To these companies, I am grateful for your service.
Slack Investor Total SMSF performance – FY 2021 and July 2021 end of Month Update
A great year for shares, Chant West reports Super funds have delivered their strongest financial year result in 24 years, with the median growth fund (61 to 80% in growth assets) returning 18% for FY21. The FY 2021 Slack Investor preliminary total SMSF performance looks like coming in at around 22%. 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 2021, the Slack Portfolio has a compounding annual 5-yr return of over 21%.
Slack Investor remains IN for Australian index shares The FTSE 100 had a flat month (-0.1%) but rises in the US Index S&P 500 (+2.3%) and the ASX 200 (+1.1%).
The party with the US S&P 500 just keeps on going. As the S&P 500 has moved more than 20% higher than its stop loss on the monthly chart, I have adjusted the stop loss upward to 4056 from 3622. It is difficult to decide where to put the stop loss on the monthly US Index chart. In these cases, I go to the weekly chart and look for a “sensible place” to put the stop loss coinciding with a minimum value (dip) on the chart. The current stop loss is 8% below the end of month price.
US Index (S&P 500) weekly chart showing a moving up of the stop loss this month.
“Rembrandt … says things for which there are no words in any language.”
Vincent Van Gogh
Slack Investor doesn’t put himself in the class of Rembrandt but he admires the honesty of this self portrait at age 53. It is time well spent to look a little further into his amazing catalogue.
Rembrandt, despite incredible talent and artistic output, was known to have lived beyond his means and, he sadly died in 1669 at age 63 as a poor man. He was known to have done over 40 self portraits in his life. Perhaps after 5 years of Slack Investor, it is also a time for self reflection.
Slack Investor doesn’t possess any great financial skills. My financial talents pale in significance with the great investors. I didn’t go to a private school but my government school was one of the better ones and I scraped into a science degree at university. My Physics and Maths marks didn’t put me on the honour board – but I passed. One thing I am grateful for is that my parents instilled a desire to make the most of any opportunities that life presents. Skills that I do have are a willingness to learn and the “stubborness” to complete a task.
Although Slack Investor has been very fortunate in his life with opportunities to travel and work in many interesting countries in his twenties. My own financial story is not really one to emulate. I had a delayed journey to financial independence by returning to Australia at 29 broke, no superannuation, and owing money. My limited skill set was lucky to include the ability to learn from others and to be single minded in pursuit of a goal – that was, to be financially secure.
My journey was greatly helped by going to an investing class by Robbie Fuller, He had selflessly contributed his investing knowledge to a U3A class in Townsville for over 20 years and also ran an evening class for investors. I learned a lot from Robbie. He showed me how to look at a companies sales, debt levels, future earnings and potential growth and to try and assess its real value (fundamental investing). He also opened up the world of charting to me. Looking at a price chart of a company – trends, breakouts and stop losses (technical investing) – and I am grateful. A basic knowledge of the fundamental and technical aspects of investing is so important – and not many people have this knowledge.
However, not everyone can have a convenient investment class in their town. I originally started this blog as a means to show those interested in investing that, by gaining a few skills, you can become a better investor and manage your own financial affairs at a minimum cost – knowledge is power.
Never depend on a single income. Make Investments to create a second source.
Warren Buffet
Slack Investor hopes to keep going. I am sure that Rembrandt had a good life -an enormous creative talent, a love for his wife Saskia, other relationships after his wife’s sad death, a son and a daughter. However, Rembrandt earned much, and he lost much. He was forced to sell his house and most of his art collection for a pittance to avoid bankruptcy in the late 1650’s. A bit of financial self reflection is often required if you want to achieve financial independence – Take control.
Slack Investor’s Favourite Charts
There are lots of great charts on the web. I look forward the release of the Vanguard Index chart every year – and this will be the subject of another post when they release the 2021 chart. However, the chart below drives home the benefits of consistent investing over time – and I like that.
Returns on an Australian Index fund 1990 – 2020 – Vanguard Australia – click for better resolution.
This chart shows the beautiful connection of constant investing and time. Over 30 years since 1990, the chart shows the 2008 GFC crash and last year’s Covid-19 crash. Despite these major downturns. given time, their is always a recovery. An investor who starts with nothing but invests in a US index fund by contributing $250 per month would have compounded $443 205 by the end of 2020. If the investor had increased the monthly contribution to $1000, then the rewards would be $1 772 819.
Another way of showing the benefits of time and compounding investing is to look at the average returns on a single investment of $10 000 in various asset classes over 30 years.
Returns on $10 000 after 30 years of Investing in various asset classes 1990-2020 – Vanguard Chart found at Canstar.com.au
Jackie Lambie “Lambo” and Pauline Hanson “Hanso (?)”, together with Stirling Griff, helped get this new super legislation pass – From ABC News
Slack Investor takes the easy way out and generally stays clear of politics … but the machinations of government often fascinate me. I have followed the development of compulsory superannuation in Australia since its inception in 1992 … so, some recent changes to Australia’s superannuation system has got me off the couch.
Your Future Your Super
Pictured above are a couple of Australian Senators with unusual pasts who have just linked up with a lesser known Senator, Stirling Griff, to help pass a significant super reform. The Your Future, Your Super Bill has just become law in June 2021 by the narrow margin of 34 votes to 30.
… the most significant change to super since its introduction in the 1990s … consumers could expect savings of more than $17 billion once it came into law.
In particular, I like the stapling of funds to each employee when they get there first real job. For too long, it was the default practice to start a new super fund when you changed jobs. This led to many people having numerous super funds … and multiple sets of fees and insurance. These new laws should eliminate the problem of multiple funds. Slack Investor followers would have already engaged with their super to roll all of their super into one good performing fund. However, this measure will help those who are not as committed to their long term wealth accumulation pile.
Underperformance measures
The default MySuper products will have an annual performance test. The funds that are underperforming will need to write to each member if the Australian Prudential Regulation Authority (APRA) reckons that their returns are less than the APRA benchmarks. Poorly performing funds will be assessed as unable to accept new members. An example of how APRA will pick funds for sanction is shown in their assessment of underperforming funds over 6 years in 2019 below.
APRA applying their benchmarks on performance over 6 years – Super Funds do not want to be in the red zone as they may face APRA scrutiny – From APRA MySuper Product Heatmap
Problems with Your Future Your Super
Not everyone is impressed with this new bill, the Labor party and Greens senators opposed it – the Labor opposition perhaps as it is too beholden to the whim of the Industry funds. There is also some criticism about disability insurance being in some cases industry specific and wise to staple to each industry. But, there is a parliamentary enquiry looking into this.
The underperformance measures also seem a little harsh. Average underperformance by only 0.5% will result in some APRA sanctions. Graham Hand from Firstlinks points to some better ways of managing underperformers which include a more consultative approach by APRA.
There will be some strange unintended consequences. Due to the general disengagement of the Australian public with their super – If your first super fund avoids sanctions, people will generally stay with it. As most people get their first job in retail or hospitality, this will boost industry funds such as REST and HostPlus. The AFR suggests that the Construction and Building Unions Superannuation are expected to be losers under these reforms.
Slack Investor view of the reforms … Mostly Good.
“(I do not want to) let the perfect be the enemy of the good”
Senator Jacqui Lambie unexpectedly channelling a bit of Voltaire – From AFR
June 2021 – End of Month Update
The financial year closes and looking at the 12-month charts for FY 2021 – I am surprised with the vigour of all invested markets. I am all IN for my Index funds!
Solid monthly rises for the ASX200 (+2.1%) and S&P500 (+2.2%) – The FTSE100 flat at +0.2%.
COVID-19 is still a big concern and has caused havoc across the globe – but the wheels of industry and speculation have kept on turning. Despite Slack Investor’s nervousness I remain invested for all followed markets. This is one of the strengths of a trend-following system – it helps overcome any misgivings of the frail human being. More analysis of the financial year in the next few posts.
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 recalculated.
Slack Investor presented his version of a bucket strategy – The “Three Pile Theory”. It is the three pillars of a House, Stable Income, and Investments that have supported me through most of my working life and now the three piles are still supporting me in early retirement.
These piles have been continually interacting with each other as I was trying to build them all up. At the start, the Prince of all piles was a good income and, as I have very poor entrepreneurial skills, the key for me to get a good income was to have a good education. I was lucky enough to have parents that encouraged me to go as far as my wit would take me.
Without education you’re not going anywhere in this world
Malcolm X
When originally talking about three pile theory, I glossed over the retirement phase and how the investment and stable income piles can keep you going … hopefully, for a long time. By retirement, if possible your house will be paid off – and this will be left as a dormant house pile which keeps giving back in lots of ways … but only as a last resort will you use it to fund your lifestyle in retirement!
Lets do the sums on just two piles – Your Retirement Fund
Consider a retirement fund with just two piles – Stable Income and Investments. In order to generate 4% of income per year, you need have most of your retirement fund in investments rather than stable income. According to his two pile theory, Rob Berger from Forbes Magazine recommends that you should have between 50% and 75% of the retirement fund in the investments pile 0f equities (stocks). Decide on a ratio of stable income to investments that you can sleep well with – a higher amount investments will mean potentially more growth … but definitely more volatility.
A bit of mathematics here … my original ratio of house:stable income:investments was 30%:20%:50%f Net Worth. When taking my house out of the calculations, my ratio of Stable Income: Investments is about 30%:70% – this is just the numbers that I am comfortable with.
My original plan was to use dividends and interest from the two piles of my retirement fund to give me income. That means taking out money from both piles every year – even when stock markets have fallen. Rob Bergen points out that this is exactly the wrong approach. Taking dividends out reduces the investments pile – it has the same effect on your investments pile as if you sold some of your stocks. In a down-trending stock market, for your long-term investments pile, you want to use those dividends to reinvest in a stock market that is undervalued.
(Using the traditional bucket strategy), assets are taken from (Investments) when market prices have fallen, which is exactly when dividends should be reinvested.
Rob Berger – outlining the folly of taking money out of your Investments account when the market is falling.
How to make your piles last in retirement phase – Rebalancing the Retirement Fund
This heading has Slack Investor lapsing into what my mother called “Plumber’s Humour”. Using the Rob Berger simple strategy, you maintain your piles. Even though you have the competing interests of wanting to withdraw annual amounts for a great lifestyle, and yet, keeping enough in your retirement fund to generate future income for many many years. There are lots of articles on buckets to fund your retirement but, it can get complicated – I really like the clarity of Rob Berger’s approach. He explains in detail how the traditional bucket strategy is flawed.
By the time you retire, you will have a good idea of your expenses, While you are healthy and fit, add a good chunk of income to fund some travel. At the start of the financial year, this amount gets withdrawn to your cash account to fund yearly living expenses. The remainder is your retirement fund comprising of Stable Income pile (Annuities/Bonds/Term Deposits/Fixed Interest) and Investments pile. Slack Investor is happy with 70% of his Retirement Fund in Investments (Equities/Stocks).
Set up a ratio of Stable income: Investments in Your Retirement Fund that you are happy with and take your annual expenses out of the pile that is over allocated at the end of the year. In the above case, Investments.
In a good year for investments (outlined above) your next years annual income requirements can be withdrawn from the investments pile. If you get a bad year for investments, then dip into the stable income pile. Take out enough from each pile so that after your yearly expenses withdrawal, the initial allocations are roughly intact – I should do some algebra here to make this easier … but you can do it for your homework!
Using this method, you are always selling from your investments pile when the market is high and buying when the market is low – masterful investing, Warren Buffet would approve!
May 2021 – End of Month Update
Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100.
There were modest rises in all followed overseas markets (S&P 500 +0.6%, and the FTSE 100 +0.8%). The Australian stock market is powering on (ASX 200 +1. 9%) despite Slack Investor and the state of Victoria being in a (hopefully only one week!) COVID inspired lock down. All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).
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).
There are many numbers to note in finance world – Fees, Investment returns, etc. However, there are two extremely important numbers when it comes to financial independence. Both are percentages and the first one is the 4% “rule of thumb” and the second is your savings rate.
The 4% Rule
All followers of finance blogs would have heard of this often quoted “rule” Slack Investor acknowledges that this magic number is arguable and depends on individual circumstances but, it is an excellent way to estimate how much you will need to retire. The 4% rule is a way to “roughly” link assets with income. For example, as an estimate, if you would like to generate a $40 000 yearly income, you would need to have investments assets of $1 000 000 to earn this income using the 4% rule (4% of $1 000 000 = $40 000).
Another way of looking at this 4% rule is that you need to save 25 x your annual spending for your retirement fund so it can generate an income to cover your spending. So, if you spend $30 000 a year, you need a portfolio of $750 000 (25 x $30 000). To get an idea about what your expenses are it is important that you track them over a year using a spreadsheet or finance software. If necessary, this investment income can always be supplemented by a government pension or a part-time job.
Bill Bengen originally came up with this “4% safe withdrawal rate” in 1994. He developed it by backtesting a conservative US portfolio with data dating back to 1920 and tried to get a safe withdrawal rate that would generate an income for at least 30 years. He is the first to admit that the 4% number was always treated too simplistically and has since updated the rate to be closer to 4.5%.
Slack Investor is a bit old fashioned in liking to hold on to most of the capital that is earning the money and has a flexible approach to how much to extract from investments each year. In a good year for the stock markets, I am happy to dig deep into the investments pile – using dividends, distributions and even some capital gains as income. When the market performs poorly, it is more complicated and I have to dip into my stable income pile. Most of the Slack fund is in Australian Investments and in 2021, the Australian Index has a 12-month forward dividend yield of 3.5% . Hopefully, the shares will also increase in value over time. Over the past 10 years, Australian shares had a total return of almost 7% – with growth shares you can aim higher, but prepare for volatility. In the good years, I will also take out a bit of capital gain for extra spending. All of this is in addition to the stable income component of my investments.
Using the 4% rule we estimate how much will give us a sustainable retirement. But there is another number to add to our arsenal.
Just as in Lord of the Rings there is ” one ring to rule them all…”, there is also one “percentage” to rule them all in the Financial Independence world – and that is the Savings Rate percentage.
The annual expenses is critical here as this is the figure you are trying to generate out of investment income. Lets have a look at the effect that savings rate has on the number of years that you have to work until you can sustainably generate your expenses from your investments. The table below is from the great financial blogger Mr Money Mustache. There are a few assumptions used to generate this table
At a saving rate of 10% you will have to work for over 50 years – we have to do better than that! There are some pretty heroic savings rates amongst financial bloggers e.g Aussie Firebug 61%; Dividends Down Under 61%; I have admiration for these savings rates and note that these bloggers are in a hurry to get to financial independence – and retire early. At 60% savings you can retire after 12.5 years of working and saving – but that sounds pretty hard.
Slack Investor was on a much slower train and lucky that he quite enjoyed his job – and didn’t mind spending 30 years saving for his retirement. I have always been a good saver but, when looking at my past savings rates, it was usually around the 30-40% level and, some years had dropped down to 20%. Raising a family and holidays are a delightful interference with savings and you just have to find a balance. In Australia, we have compulsory superannuation which currently adds a welcome 9.5 % to your savings rate.
A beautifully presented calculator at Networthify shows how the savings rate works and gives a yearly breakdown. It also shows some interesting OECD statistics for average National savings rates (e.g. The US 6%, and India 32%). The aim is to eventually save enough money to invest in a way that you average (at least) 5% return on your investments after infation. If you withdraw from this retirement pool at the rate of 4% and have enough to cover 100% of your expenses – you become financially independent – the retirement pool keeps on giving!
Automate your savings
One of the best financial habits that I formed was to take the thinking out of saving and set up automatic recurring transfers from my work money to my savings or investment accounts – Pay Yourself First. I also took full advantage of “concessional contributions” to my super account which were taxed at 15% rather than my then marginal rate of 37%.
So, automate your savings. Investment returns are important and we hope that we can exceed the 5% after inflation returns that the above table and 4% rule are based on. However, the number you have most control over is your savings rate – and that is most important.
