Philosophy | Slack Investor

Keep On Course … and September 2022 – End of Month Update

Randall Reeves encounters a storm in the Indian Ocean in 2017 – Is this what the current stock market turmoil feels like?

Slack Investor loves finding out about remarkable achievements. He came across the inspiring story of Randall Reeves who set himself the task of doing a solo “figure of 8” circumnavigation around the Americas and the Antarctic. This 64 400 km trip encompassed both polar regions and was achieved solo, in the 14m boat “Moli”, in 384 days.

… he (Randall) hit a severe storm in the Indian Ocean. Waves were breaking 200’ (61m) to 300’ (91m) in each direction, and his boat got knocked down so intensely his mast was fully submerged, breaking a window in the pilot house and flooding his electronics.
Extract from The Figure 8 Voyage – Randall Reeves

Randall Reeves during his adventure, after his circuit of the Antarctic and back to Cape Horn for the second time!.

I mention Randall Reeves achievements as he set himself a difficult challenge, that no one had achieved before, and succeeded on his second attempt. All we investors have to do, is pick a course to financial independence – and just keep going. Our boat might suffer a few perils along the way …. but we trust that it is a sound vessel – and it will get us home.

Bear Markets

Downturns aren’t rare events: Typical investors, in all markets, will endure many of them during their lifetime.
Vanguard, 2022

Slack Investor can speak with some experience here, as I have been an investor through all of the above bear markets … and they are never any fun! But, I have learned that … they all pass – and the stock market recovers, and always reaches new highs. The sometimes frustration of just “holding on” to your shares in a falling market must be weighed against the stresses of trying to time the market.

Keep on Course

Slack Investor has had mixed success in his timing the market experiment. The experiment is limited to index funds (Less than 3% of my Portfolio) and will run for another 2 years to make it a 20-year trial.

At the end of September 2022, my Index Timing strategy has outperformed the Australian Index (+1.4% p.a.) and the UK Index(+1.9% p.a.), but underperformed the US Index (-0.3% p.a.). My current feeling is that when considering that “time out of the market” means a loss of dividends, it is not worth the stress and effort and I will probably abandon the experiment in 2024 – after a 20-yr trial. The bulk (97%) of my Investments portfolio is run with the strategy of trying to buy good companies that are growing, tinkering a little, but generally just holding on!

The world MCSI AC Index is dominated by US companies (61.3%). The current 2022 World MCSI ACWI bear market is not shown in the above chart. Also, there is some argument whether the 2020 “Covid Crash” qualifies under the generally accepted definition of a Bear Market – a decline of 20%, or over, that lasts at least 2 months.

We humans naturally feel the need to do something when we see our investments fall in value. Slack Investor does not know if the worst is over, probably not! Slack Investor does know that, if you can avoid it, it is generally not a good idea to get rid of your risk-exposed assets during times of downturns – you are selling your assets cheaply in these times.

Vanguard have (below) kindly extracted the Bull markets (shaded in green) from the Bear markets (shaded in brown) for the MSCI All Country World Index since 1980 prior to January 2022. The Bull’s prevail and these pesky Bear markets will eventually pass – This chart is reassuring.

The Bull (shaded in green) and the Bear markets (shaded in brown) for the MSCI AC World Index since 1980. The gains/losses are expressed in percentage terms. – Vanguard

The World Index (MSCI AC), the S&P 500, the Dow Jones Industrial Average, and the Nasdaq are now in a bear market, and the S&P 500 has closed at a new 2022 low.

We might not be on a solo circumnavigation through dangerous waters … but the lesson here is to prevail. Tighten the belt if you have to, you have a plan! Endure the situation and try to distract yourself from the stock market with life’s enjoyable things.

The stock markets will do what they always have done, oscillate between over-priced to under-priced. The long-term gains provided by holding shares are well established. If you are still working, your regular saving and investing will be buying lots of shares through dollar-cost-averaging.

If you are retired, in these tough times, you have your stable income pile to help with your living expenses. There will be better times.

September 2022 – End of Month Update

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Despite the above discussion, my small scale market timing experiment continues. Slack Investor is on SELL ALERT for Australian index shares (ASX 200), the US Index (S&P 500) and the UK Index (FTSE 100).

I have a “soft sell” approach when I gauge that the market is not too overvalued. I will not sell against the overall trend but monitor my index funds on a weekly basis once the monthly stop loss has been triggered.

All my followed Index funds have fallen below their stop loss values. Big monthly falls for the ASX 200 (-7.3%), S&P 500 (-9.4%), and the FTSE 100 (-4.1)%. Time for some distraction from the market carnage. There will be better times.

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.

Einstein’s thought experiments

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

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

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

Einstein’s elevator thought experiment

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

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

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

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

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

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

Slack Investor volatility thought experiment

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

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

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

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

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

July 2021 – 5 Years of Slack Investor

Extract from Rembrandt van Rijn “Self-Portrait, 1659” – From the Museo Collection. Enjoy the full image at the National Gallery of Art, Washington

“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

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Golden Triangle of Happiness … and December 2020 – End of Month Update

After just going through a Christmas period where, in these COVID-19 times, I was lucky enough to spend time with some family – I was struck with an unusual contentment. It is easy to get bogged down with the day to day challenges of life, but Slack Investor occasionally gets self reflective and has long realised that he is a happy bloke. This state is much sought after and it often doesn’t naturally happen. A recent publication that has lodged in my tiny brain is the Australian Wellbeing Index. This research has been conducted twice a year over the last 15 years and involves more than 60,000 participants.

Personal wellbeing appears to increase with age, with some of the happiest Australians aged 65 and over.
Australian Wellbeing Index – 2019 Joint Research between Deakin University and Australian Unity.

The latest instalment of one of Australia’s largest wellbeing surveys has found that, besides genetics, there are three simple indicators of a happy life. Financial security, a sense of purpose in life, and good personal relationships make up the “golden triangle” of happiness. The full report can be found here.

well-being2 — Source: thenewdaily.com.au

Financial Security

This is really what this blog posts mostly about – so I wont expand too much here. But if you feel that you are in control of your money then you can avoid many of the financial stresses. While having money does not make you happy, if you don’t have any, it can make you miserable. Not surprisingly, the survey found that the feeling of wellbeing gradually rises for household earnings up to about $100,000 a year. Surprisingly, earnings over this point found the relationship between happiness and wealth drops off dramatically.

Relationships

… the people who fared the best were the people who leaned into relationships, with family, with friends, with community,”
Dr. Robert Waldinger , Harvard University

We are humans and (mostly) social creatures – a sharing of your life and having someone who cares about you makes you feel better about yourself. A Harvard study that has been going for 80 years found that people who are more socially connected to family, friends, or community are “happier, they’re physically healthier and they live longer than people who are less well connected,”

“It doesn’t need to be a sexual relationship, but it needs to be an emotionally intimate relationship where you can share troubles and sorrows and joys,”
Prof Bob Cummins, Deakin University

Sense of Purpose

Something to do … your get up in the morning and you have a project, part time job, volunteering, exercise, a hobby – but it is something! People are happier when they are active.

But, beyond the “golden triangle” of happiness, there are other approaches – Rather than take on each corner of the triangle, just try to just make little micro changes to your life – Perhaps a little more exercise, or contact an old friend …

An older friend once pointed out to me that we were lucky enough to have choices with our lives. He stressed our limited life span and suggested I make a list of the things that I really liked doing – and then try to engineer my life to maximise these good things and then minimise the other, less enjoyable. but necessary stuff. When you collect all the moments that make you happy … you might just … be happy!

Spend more time with people you like, get outdoors a bit more, listen to some music, have some new experiences, help other people …
“Happiness thinker” Professor Paul Dolan

December 2020 – End of Month Update

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100. All Slack Investor followed overseas markets this month had rises (ASX 200 +1.1%; FTSE 100 +3.1%; S&P 500 +3.7%).

I still remain nervous about the US market with its high valuations. The closing value of the S&P 500 (3756) is now 18% above the current stop loss at 3200. If the margin gets to 20% (UPR LIMIT 3840)), then I will find a place to move my stop loss upward. In these uncertain times, I will monitor 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.

S&P 500 Monthly chart December31 2020- From incrediblecharts.com

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index). The quarterly updates to the Slack Portfolio have also been completed.

Exercise and Wine … What could go wrong?

Dr Spock with the Vulcan Salute which usually comes with the salutation “Live long and Prosper” – Image may be subject to copyright – Star Trek

Most of Slack Investor’s blog is about becoming financially sound, but there is also a need to be happy and healthy and to flourish in other areas. Spock and his fellow Vulcans are all over this idea – Live Long and Prosper – What is the use of becoming financially prosperous if you can’t be around to enjoy the choices that this state can offer.

One of my favourite UK blogs The Escape Artist also flogs the theme of trying to be fit and healthy of body … as well as looking after your financial state. There can be a parallel in approaches to athletic and financial matters.

Set Goals

36 years ago, my brother and I were sitting in a Greek Restaurant with a bottle or two of Retsina and we were full of youthful optimism and set ourselves a list of things we would like to get done in life. They were exciting things like “have a girlfriend”, jump out of a plane, learn how to scuba dive, go on a TV talent show, etc. I am pleased to say that most goals were achieved within 5-years of that goal setting night – but the elusive one was to “Run a marathon”. We found this task even harder than finding a girlfriend! 42 kilometres is a long way and the training required to do this thing properly had this feat rolling around in the “too hard basket” for decades.

That was … until 2018.

Work Hard through efficient research

Slack Investor believes that there can be many solutions to a problem, and as my body aged and I became even slacker, it was apparent that the conventional route of working up to this great distance over time and training 6-days a week was not going to cut it. One look at the Runners World suggested marathon training program over at least 6 months and starting at 24 km per week building up to 64 km – gave me the “vapours”. The “Fair Dinkum” marathon runners train hard and aim for below 4-hr times and these folks have my greatest respect. Most marathons have qualifying times for participants and they usually sweep the slower runners off the course if they can’t complete in 6 hours. My challenge was to find a marathon in the world that had a generous cut off time – that would accommodate slack athletes.

While not a complete fitness numpty, Slack Investor has trouble running 5km comfortably at a shuffling pace – and the thought of running further than that is mildly appalling! You can see the dilemma here.

Festivals of “Convivialité ” to the rescue

Luckily we have the French to remind us of the joy of life and each year they have 20 Conviviality challenges that are run by regional communites that involve some sort of running combined with tastings of wines and other regional delicacies. To add to the festival theme, the runs are usually done in fancy dress.

The most famous of these Convivialite’s is the Marathon du Medoc where, one day in September, 8500 participants run around the beautiful Medoc area, near Bordeaux. Registrations must be done by the previous March and I found the combined accommodation/run packages the easiest way in. There are refreshment stops along the way where 20 of the wineries around the Pauillac area will offer water, wine, music and food. It is tempting to linger at each Chateau but there is the ever present sweeping crew that will put you out of the marathon if you are slower than the required 6.5 – 7 hr pace.

In the same way as investing, Slack Investor likes to break things down into achievable chunks. I was working on a theoretical finishing time of 6 hrs and 45 min (405 minutes).

First 30 km Plan – I thought that using my ungainly shuffling jog I could do 5 sets of 5km runs at a 7 min per km pace (175 min). I could walk a kilometer between each 5km runs (to gather breath!), 4 lots of walking at a 10 min per km pace (40 min) . This plan will use up a total of 215 minutes to do 30 km.

Last 12km Plan – I knew that I would be knackered here … but still hoping I could comfortable walk a kilometre in 10 min. If I walked the last 12 km, that would use up 120 min.

The planned running/walking would use up 335 min (215 +120), leaving 70 min (405 – 335) for wine tastings, toilet stops, recoveries! Even allowing for time shrinkage – this was a good plan!

Image may contain: David Nahrung, smiling, standing and outdoor — Slack Investor in a fetching outfit prior to the the run with fellow Aussie “Steve Irwin”

Image may contain: 1 person, smiling, outdoor — Slack Investor about to cross the finish line – Goal achieved!

Well, I signed up for the Medoc 2018 Marathon … and happily, the plan was executed (in a fashion). There was more time shrinkage than anticipated – and it was hot! I did not have a wine at every stop (Although my colleague “Steve Irwin” did! I was scared the wheels would fall off my plan if I imbibed too early …. so I had a wine-free first 20 km … but after that, I found each of the Chateau offerings delightful.

Would I do this again? It was a lot of fun and a worthy bucket list destination – but it was hard! The day after there was a 10km walk through four Chateaus over 3 hours. Much more my style, I will seek out these more leisurely, but still challenging, events in future. I have now retired from marathon running and look forward to new adventures.

Choose your battles … then Go Hard. Live Long and Prosper … in wine is truth!

Optimism

Slack Investor has always been on the “glass half full” side of life – but acknowledges the decided benefits of pessimism.

The nice part about being a pessimist is that you are constantly being either proven right or pleasantly surprised.
George F. Will – from source

Slack Investor would much rather hold shares than not … and be involved with companies that are growing and part of the economy than using more passive investments such as cash. However, he must keep his eyes open occasionally – and keep a watch on major market trends.

ASX200 Weekly chart – From incrediblecharts.com

Let’s firstly have a look at the markets that Slack Investor is involved in. The ASX200, FTSE100 and S&P500 are all in a distinctive downtrend. Typical is the ASX200 weekly chart shown above. This downtrend may go further but Slack Investor is seeing some signs for optimism – At least in the Australian market.

There is a high level of uncertainty in global markets at present. Europe has Brexit and Italy. The US has investigations into Donald Trump’s election campaign. China has the threat of a trade war with the US. But my sense is that the market has become risk averse rather than fearful. There is no sign of panic selling as yet. But investors are clearly on the defensive and prepared to sell off vulnerable stocks.
Colin Twiggs – Trading Diary

But, all is not lost … Despite large amounts of emotion in the market. The fundamentals of emerging economies are still good. Vanguard estimates that a recession in 2019 is not likely – that the more likely scenario is a slowdown in growth, led by the U.S. and China.

Shane Oliver, head of investment strategy at AMP Capital, said “history tells us” a major bear market requires a recession in the U.S., but that is not happening. He advises that U.S. monetary conditions are “far from tight,” with fiscal stimulus still in play and no signs of excessive market conditions that normally precede a recession.

Marcus Padley is also on on the side of the optimists and concludes that the current situation in the ASX is more of an opportunity than a disaster. He notes that average correction for Australian markets is 13.72% and takes 109 days. The current correction has been 13.2% and it has taken 59 days -Brutal! On that basis, we have already completed an average correction in half the usual time. These corrections are never fun and test even the most strident of investor. But Slack Investor IS an investor much more than he is a trader.

Slack Investor has already had a hard look at his portfolio … and said goodbye to some … and is hanging on to most – as he thinks that most of his individual shares represent reasonable value at current prices. I’m sitting tight for now with a bit of cash in the bank should things turn around, Sadly, more decisions will have to be made at the end of the month – but for now, I am grateful for the good things in life … Happy Christmas to you all.

Cryptocurrency … Kryptonite!

Bitcoin is everywhere in the media. Tales of fortunes made from just investing in this cryptocurrency and waiting till it rapidly accelerates in price – it sounds like the ideal investment vehicle for the Slack Investor!

Superman encounters Kryptonite and starts to lose his powers … Image found here … but original material from DC Comics

Well … not really!

Slack Investor is a student of history and feels like this has all happened before … Some people may be able to make their fortunes through this type of vehicle … but I reckon you would be taking a big risk … Cryptocurrencies might become Kryptonite for the casual investor.

There have been many famous “bubbles” in history, see The Bubble Bubble, The trading commodity may vary but they they all have some things in common, a period of “rampant speculation” … where the price rises sharply … and an eventual crash. Bitcoin has been through several of these cycles already in its brief history – and each time so far has gone on to make higher prices. Those around in the late 1990’s may remember the dot.com bubble the bubble burst in a big dip of the NASDAQ index shown below left.

Dot-com Bubble Chart (Nasdaq Bubble) — The dot.com bubble shown on a late 1990’s NASDAQ chart from thebubblebubble.com

The South Sea Company bubble 1716-1720, from thebubblebubble.com

In the days of the British Empire, in the early 1700’s, the South Sea Company purchased the rights to trade in the South Seas from the British Government and then went to the public to raise money. This was a time of prosperity for some and the money flooded in … and the price rose spectacularly (above right). Despite having this great trade monopoly, the company was mismanaged and eventually failed when the news came out that the management had sold their shares.

A hero of Slack Investor’s, and not a bad scientist and mathematician, Isaac Newton became involved in this saga as an investor. The quote below comes from the updated version of Benjamin Graham’s “The Intelligent Investor,” by Jason Zweig.

Sir Isaac Newton

“Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he ‘could calculate the motions of the heavenly bodies, but not the madness of the people.’ Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price — and lost £20,000 (or more than $3 million in [2002-2003’s] money. For the rest of his life, he forbade anyone to speak the words ‘South Sea’ in his presence.”

I have included a $USD price chart for Bitcoin – worth over $7000 USD on 7th November, 2017. The chart is below and it maps a spectacular rise since 2010 – when you could pick up a bitcoin for under a dollar! It might be possible to make money using the “greater fool” theory of investing – but your timing had better be impeccable – it looks like a “bubble” to me!

The bitcoin price in US Dollars – From coindesk

Rather than “Bubble” investing, Slack Investor likes to invest in a diverse range of growth companies – these are real businesses that hopefully have unique products. They are businesses that are run well and are forecast to grow. Financial independence might take longer this way … but the results are surer, and I sleep well at night. I will leave Bitcoin to the speculators.

After all, if a very clever bloke like Issac Newton couldn’t make money on a bubble … what hope does Slack Investor have?

Measurement … The Sweet Science Part 3

Paul Keating, the father of dividend imputation (franking credits) in 1987 – when he was the Treasurer for the Australian Government. He was Prime Minister 1991-96 and is shown here ready to nail to the wall any “24 carat pissants” and “mangy maggots” that cross his path. Source

Previous posts One and Two in this series show a few simple ways to calculate your portfolio performance. Slack Investor has a complicated set of portfolios with inflows and outflows during the year and, for an accurate performance figure, it is necessary to account for the time that your money is available for investment. For example, an additional $10000 invested at the start of the year should add more value to your portfolio compared to an addition in the last week of the year.

I usually calculate returns before taxes, this is sometimes referred to as “gross of tax”. An important reason to do these calculations is to compare your investments with other investments, such as a managed fund, super fund, ETF or another benchmark. With very few exceptions, performance figures are always reported pre-tax. In Australia, we are lucky enough to have our dividends mostly “franked” or tax paid at the rate of 30%. Thanks Paul Keating … you are a legend!

So I include these franking credits in my return calculations as they represent tax already paid on my Australian Dividends.

The Internal Rate of Return (IRR) and Time-Weighted Return (TWR) are two different ways of calculating portfolio performance. The IRR measures the actual return achieved by an investor’s money in a portfolio. There are also good arguments for using the TWR, Both IRR and TWR take into account the time value of money … The arguments for each are presented here –

Slack Investor likes to do things accurately … but easily! The TWR requires a portfolio valuation after every inflow/outflow and this adds an extra step to the calculation. With a spreadsheet, the IRR calculation is a simpler process. So Internal rate of Return (IRR) is what I use.

3. Portfolio with inflows and outflows – Internal Rate of Return (IRR)

The IRR is also known as the “money weighted rate of return” and the calculation is complex as it involves trial and error mathematics – for the enthusiasts further details can be found here.

The good news is that with an Excel spreadsheet, all this is taken care of by the XIRR function and you only have to enter the start value of your portfolio, dates of inflow/outflows and finish value. I have included the rather complex set of inflows and outflows based upon my SMSF portfolio and hope that your portfolio is simpler. Just use the lines that you need, but it is important that you have an initial date and balance, and a finish date and balance – (scroll down to the bottom of the spreadsheet). Inflows are entered as positive numbers and outflows as negative.

To download the Excel spreadsheet that that performs these calculations go to the Resources Page.

Of course, if this is too difficult, you can always get a bit of software to do your portfolio management and return calculations. Slack Investor likes to keep the costs of investing on the down low and Sharesight in Australia is an excellent choice for the starting investor. They offer free monitoring of investments, capital gains and performance reports if you have 10 or less investments to track. Slack Investor monitors his shares with the retired but excellent (and free) “Sunset” international version of Microsoft Money Australian Version, UK Version, US Version linked into share prices with MSMoneyQuotes. The latter is not freeware but it is $10 US well spent.

In the USA, Personal Capital is recommended.

Measurement … The Sweet Science Part 2

Lord Kelvin (1824-1907) – based on image from Wikimedia

Measuring your portfolio performance can do your head in … but Slack Investor thinks that it is important that you set aside a time to evaluate your investment performance at least once a year. I choose the end of the financial year in Australia (June 30) as a good time for these calculations … but you can chose your own date … and, if whatever you do, you do it consistently … you are going to be OK.

First of all … why measure? Lord Kelvin was a smart bloke – as discussed previously, measurement adds to our knowledge – By measuring your own portfolio performance you get an idea of how you are doing compared to other portfolios, share indicies, or managed funds. If you consistently underperform against other bench marks … then it might be time to become the ultimate Slack Investor and outsource your portfolio to Index funds.

Outsourcing into passive investment is not so bad … if the fees are kept low … “The Buff” , (aka Warren Buffet, the worlds greatest investor!) has promised to give away 99% of his $65 billion fortune when he dies – the remainder of his fortune will be invested in bonds and index funds to support his wife and family.

My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers. from source

Portfolio with no inflows or outflows

Lets start simply … supposing your have the most basic portfolio that reinvests its earnings with no external inflows (“cash in”, contributions, or transfer) and no external outflows (“cash out”, pension payment, or transfer) from your investment portfolio during the year and you want to do a performance calculation to benchmark yourself with other funds and investments. Most people can come up with a starting value and an ending value of their portfolios at the year (financial year) end – this includes the value of your stocks and any portfolio cash. Slack Investor prefers to calculate his returns before tax. So, tax credits such as franked dividends are included in his portfolio return.

Whatever happens inside this portfolio – buys and sells, dividends, interest, expenses, brokerage and fees – are just part of the portfolio business and will be reflected in its finishing value.

An Excel spreadsheet that will make this job easier is available on the Resources Page.

2. Portfolio with inflows and outflows – Approximation

However, for most real portfolios, there is money transferred into, or out of, your portfolio account during the year. Unlike the Beardstown Ladies, if you want to accurately portray how you are doing, it is imperative that you account for cash flows either in or out of your portfolio. If you want the least amount of work and you are willing to calculate your portfolio return approximately – the way below will work a treat. A net contributions figure is obtained (inflows – outflows) to give an ‘average’ amount of capital invested during the year and by subtracting 50% of net additions from the ending value and adding 50% to the beginning value – we get an approximate percentage return.

An Excel spreadsheet that that performs these calculations is available on the Resources Page.

Of course, in real life, rather than using averages, portfolio returns depend greatly in the timing of when you had capital available. The above is an approximation. Slack Investor chooses to go into more detail to reflect the time value of money for his portfolio. These intricate ways will be revealed in the last of this measurement series next month.

Measurement … the Sweet Science

“….when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind…”

Lord Kelvin, a Science “Hall of Fame” member was right … Particularly so when it comes to your investments. As well as some notable scientific discoveries, including the invention of the absolute temperature scale which defines the lowest possible temperature – at which atoms stop moving (-273.15C) – The wise Lord Kelvin showed a respect for measurement … and the nerd in me remembers the graffiti homage from Physics Lab toilet doors …

Absolute Zero is Cool!

Slack Investor takes the measurement of investment performance very seriously and puts some effort into doing it right. Slack Investor is old enough to recall the famous case of the Beardstown Ladies Investment Club – a club that published a book in 1994 that claimed a market-beating investment performance from a group of talented, but amateur, investors from a small town in Illinois, USA.

The Beardstown Ladies are a group that are still going, a 14-woman investment club that hit the financial headlines with their “The Beardstown Ladies’ Common-Sense Investment Guide” which included a seemingly astounding financial performance that beat the best of Wall Street with their investment returns of 23.4% pa between 1984 and 1993.

This gave other amateur investors a real kick and did wonders for their book sales. It was far better than the 14.9% gained by the index S & P 500 and almost twice the 12.6% return of the average US stock mutual fund.

However, after an independent audit, according to the LA Times, in 1998, their was a recalculation of their the performance figures amid questions about accuracy. The ladies, sadly, have an audited revised portfolio return of a 9.1% a year – a great effort … but lagging the index!

The problem was, the lovely ladies from Beardstown had innocently forgotten to account for their cash flows into the fund (Contributions) and these had been added into their portfolio performance to give an inflated figure. Their book is still for sale … and they have published four others … The US loves winners(?)!

The Slack Investor message is to not always believe what you read … wait for the independent audits … and, like Lord Kelvin, to avoid “meagre and unsatisfactory knowledge”, take some time in your measurement of portfolio performance. More of this next month …