Lessons for all
Alan Kohler’s weekend briefing, The System Is Rigged, was the best newsletter that I have read since I became a subscriber to Eureka Report. The lessons outlined in the briefing should be heeded by all. The rorts that Alan listed that go on across the investment spectrum were spot on. Unfortunately, it seems the people involved do not see anything amiss in what they do. Hubris leads to treating ordinary investors with contempt. We need more people like you to expose the arrogance of directors and senior executives as well as the funds management and financial advice industry.
Keep it up please.
Could John Abernethy advise on the sharp share price falls of both Monadelphous and Fleetwood Corp? Are they still viewed as good value or are there fundamental issues in both companies?
John’s response: The problems with the mining services sector are well documented across the financial press. It is common to hear stories of a tightening in payment terms by leading miners. This is not so much on the capital investment side but rather on the operational side. Costs had blown out through poor management controls and they are quickly being reigned in. Mining servicing contractors are wearing the pain in this area.
It is therefore a very difficult and fluid environment for FWD. The company had intended to build accommodation facilities in Gladstone to service the burgeoning LNG employment base, but has now decided to delay this development. The rental streams from Port Headland have suffered from enforcement of lower cost requirements from major resource tenants. Thus, a lower level of profits is intentionally not being reinvested into growth at this point. This seems a logical capital decision but it does cloud the short term outlook. FWD has also lifted debt in recent years and this has introduced a layer of risk that had not been present in previous years.
As for MND, it has not updated the market yet as to the expected results for 2013. Therefore, the guidance numbers remain on the public record. However, there are doubts as to whether MND will withstand the downturn in 2014 and there is much speculation as to how the downturn will be managed. The company retains a strong balance sheet and will no doubt be quick to cut its costs in response to the market. MND will clearly come through this cycle but it may well have a different operational structure in say two years then what it has today. I suspect that MND will see profit decline in 2014 from this year but at this point it is most difficult to forecast the level of profits with any certainty. Indeed, I suspect that management itself may struggle with this as well.
In my growth portfolio I am considering other opportunities with clearer outlooks and particularly now that the whole market has declined by over 7% from recent highs.
Apathy over the growing super pot
Thank you to Alan Kohler for last Saturday’s weekend briefing, The System Is Rigged. The problems outlined regarding investment advice, superannuation and funds management are well known, particularly by those in the respective areas of endeavour.
Why are we, as a collective on the receiving end, doing nothing to bring some sense to this arena?
There seems to be an overarching degree of apathy to addressing these issues. I have counterparts visiting from the US who are amazed that we are paying the fund managers 1% at least of FUM. Your remark about employing the odd analyst to bring some semblance of professionalism to index huggers is confirmed. What a joke!
Surely some sort of sovereign wealth fund, not run by the government but by some respectable body run by competent managers who could keep their heads out of the trough, would be high on the agenda. Not only would this bring to investors some degree of surety of return, but it would benefit the country and maintain or possibly increase standards of living. The pot of superannuation monies are increasing by the day. Why not invest to benefit the majority rather than those who are happy lining their own pockets at our expense.
Bank shares versus deposits
I enjoyed Scott Francis' article, Picking a winner: bank shares or cash, but would be interested in some break-even analysis. What would it take for deposits to be equal to or better than shares?
1. Target P/E ratio (either price, or earnings, or a combination of both), and underlying triggers, such as rise in debt provisions, rise in funding costs; and
2. Drop in dividends.
I expect that these are going to throw up extreme scenarios (although in the GFC banks hit those scenarios, at least for a while) and the analysis is getting beyond the intent of the article, but they can be instructive.
Scott’s response: Thanks for the letter. I always find it challenging to know how to deal with all the uncertainty inherent in all forecasting – although as you say, the recent GFC did provide some of those ‘extreme’ scenarios – albeit that our banks seemed protected from some of the worse elements of the GFC, and have returned to the business of ‘record profits’ fairly quickly.
Your comment on PE ratios is interesting, because we can compute a kind of PE ratio from the interest earnings on a deposit, and compare it to the current PE ratio for banks. Currently the interest rate on a deposit is around 4% - perhaps a little better if you shop around and use term deposits carefully. That means a $1,000 deposit earns $40 of interest – effectively the price is $1,000 and the earnings $40. The PE ratio is $1000/$40 = 20; a PE ratio of 20. This can be compared to banks on a current PE ratio of around 13 – which seems more attractive. Of course, the difficulty in a direct comparison is that both the P (Price) and E (Earnings) investing in shares is significantly more variable.
Thank you to Alan Kohler for the insightful comments in Saturday’s weekend briefing, The System Is Rigged, and for the advice that will now be available to Eureka Report clients.
Hold on to Onthehouse?
Some time ago I bought Onthehouse Holdings (OTH) after reading an article Brendon Lau wrote about the company but the stock has since halved. Should I hold on or get out or dollar cost average?
Brendon’s response: It has been more than a year since I wrote about the stock, and back then I thought it looked interesting as it was using a more timely and detailed set of property data to gain an edge over Realestate.com.au. This business model using a far better data set (such as the latest sales of surrounding homes) has allowed latecomers like Zillow in the US to compete effectively against market leaders. The key question is whether OTH can replicate Zillow’s success here. So far, there are more encouraging than discouraging signs.
OTH’s earnings and internet traffic are trending in the right direction. More importantly, its cash flow has jumped significantly, which should give shareholders some confidence that the business model is gaining traction. However, it’s still early days and displacing a market leader on the internet is very hard. The industry is also filled with giants. REA Group (owner of Realestate.com.au) has a market cap of $3.8 billion and Fairfax (Domain.com owner) is a $1.3 billion company. What’s more, Fairfax may be getting desperate to gain market share and a desperate competitor is a dangerous competitor as it may be more willing to undertake aggressive measures to gain an upper hand.
I can’t give personal advise on whether you should cut your losses or accumulate more of the stock as it really depends on your circumstances (such as your risk appetite, tax situation given we are nearly at the end of the tax year, etc). But I wouldn’t be too keen to sell now (the stock is not in my portfolio) as I think what OTH has achieved so far is quite encouraging. What’s more important, management seems to be delivering to overall expectations. Also, OTH is not priced like an internet stock but more like an industrial. The current share price puts the stock on a one-year forecast price-earnings multiple of around 11 times, when online stocks tend to trade over 20 times, if not more.
Fairness of discretionary trusts?
Can Eureka Report please publish an article that explains why discretionary trusts are allowed to distribute income that allows them to minimise the amount of tax paid.
I fully understand and do not have a problem with the trust structure being used for asset protection but it seems unfair that a trust can split/ allocate income while salary and wage earners are not allowed the same benefit.
Tarring everyone with the same brush
As a long time subscriber I take exception to Alan Kohler’s latest weekend briefing, The System Is Rigged.
My son-in-law is in the financial advice industry and he does not work under the commission system. Not does anyone in his company. Our investments have been well-managed and we continue to enjoy growth in the money invested.
I think it is unfair to tar everyone with the same brush, as there are advisors out there who do a good job for their clients and offer upfront advice.
Editor’s response: Thanks for your letter. Alan Kohler and James Kirby recorded a video this week on financial advice and addressed concerns such as that mentioned in your letter (see: How to get financial advice).
Diversification is key
After reading Alan Kohler’s weekend briefing, The System Is Rigged, it’s a wonder the small punter has any chance at all to make a buck in the stockmarket. Alan’s comments reinforce the critical importance of diversification and educating yourself to the point where you don’t have to rely on advisers, who in my view have never had the interest of their clients’ wealth creation in mind. After numerous attempts over the years to form a relationship with financial advisers, I gave up due to fees, churn, poor advice and a distinct impression I was simply a revenue stream. They are in business to make a profit, often at the expense of their clients.
I found Alan’s comment’s on Bernie Madoff and index funds very interesting. I only put about 25 to 30% of my SMSF into equities and most of that in AFIC and ARG. The rest is in smaller companies that sit outside analyst musings, like TME, and small companies that are growing and in a growth sector at a discount to intrinsic value. However, they are few and far between. I was also pleased to see Eureka Report has joined forces with Clime. John Abernethy is one of those rare jewels in the financial advisory space who seems to genuinely want to improve the lot of the small investor. Bob Gottliebsen is another. Also like the contributions from Liz Moran.
Reverse mortgage options
I read with interest Cliona O’Dowd’s article in The Mercury regarding reverse mortgages. I turned 60 last November and have been trying every avenue to be able to obtain a reverse mortgage on my property that is valued at $1.1 million. I have had no success from all banks, loan companies and the seniors financial fund. All of the information I can find indicates that reverse mortgage are not available unless you are 65. If you know of any organization, bank or lender that does give a reverse mortgage to a 60 year old, I would welcome that information. Could you also advise of the new regulations that came into effect as of June 1 2013?
Cliona’s response: Thank you for your letter. I recently wrote an article on reverse mortgages for Eureka Report that gave some more detailed information on the new regulations that came into effect on June 1 (see: Tapping into the family home). To my knowledge, Australian Seniors Finance is the only provider that offers reverse mortgages for those aged 60, but I believe is currently not accepting any new business.
Focus on company fundamentals
Alan Kohler’s latest weekend briefing, The System Is Rigged, points out the lack of information equality in the system. Personally, I tend to ignore the broker reports that follow company events and prefer to look at company fundamentals, Roger Montgomery style. This would tell investors that Newcrest has been an underperformer for a long time with a history of disappointing shareholders. But if you conclude, for example, that BHP invests in low-cost mines, you can feel confident that over time returns will be attractive, irrespective of commodity prices or high frequency trading. High frequency trading has been bad mouthed a lot, but if a small investor buys shares for the long term, I fail to see how the impact it would have. I agree with Alan’s conclusion on diversification. It would be good to get some more analysis on the benefits, not just of asset classes, but currencies as well.
Newsletter for retirees
How about Eureka Report setting up a newsletter exclusively for retired people? For the next 10 years or more the search for income is going to accelerate. What I have in mind is an income portfolio for retirees structured to give an annuity-type income stream. While you do have an income portfolio it ignores infrastructure and REITs (John Abernethy’s methodology is not applicable to these entities). Buying price advice and sell warnings would also need to be included. Just about everyone I know is screaming out for this advice and are willing to pay for it!
A delicate balancing act
I imagine that most subscribers like/need to read positive articles on the world's and Australia's economic future. I don't religiously read every article published in Eureka Report, but it appears to me that subscribers deserve to read some articles swayed toward the bearish view of the world.
For example, presuming all the time that the US is in recovery mode without mentioning QE1, QE2 and QE3, and the zero interest rate policy as at least a reason for the sub-par recovery in the USA, seems a little unbalanced to me.
Go it alone to avoid greed and corruption
Thank you, Alan Kohler, for your interesting and very frank weekend briefing, The System Is Rigged.
I'm just an ordinary investor trying very hard to have enough behind me to enjoy retirement. I don't have to make a fortune, just enough, and I want my kids to learn to stand on their own two feet.
The system you have described bears out the concerns of many like me. I guess it will always be difficult, if not impossible, to avoid the repercussions of the system with all its greed and corruption. But since 1987 I have chosen to do it myself with an SMSF. While I am definitely not overly intelligent and have made many mistakes along the way, I am now comfortable investing in shares and some commercial property and enjoying the taxation benefits.
One can only do one’s best to be informed by reading and listening to the Alan Kohler’s of the world, but the experts don't always get it right either. From my experience, I have had most success with blue chip stocks. Blue chip companies go through the mill at times, as all other companies do, but continue to pay dividends and always come out the other side. I keep a one hundred year graph of Australian share price movements near my desk. It gives me the courage and enthusiasm to keep going.