Paul's Insights: Common sense during volatile times

If you share my view that in all likelihood the sky is not falling and despite our ups and downs, the global and Australian economy will bump along in a reasonable growth mode.
By · 12 Mar 2018
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12 Mar 2018
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Chairman's Update - March 2018

Over the last four decades of talking to people about their money, and pondering my own investment decisions, one of the key issues that keeps coming up is timing. Sure, we all get the theory. Buy when things are cheap and sell when they are expensive.

But every piece of evidence shows that not only do we not do this, in fact we are hopeless at it! There have been major studies done by academics on this really interesting area. Not only are these research pieces compelling reading, they are also really easy to understand. The researchers take the return from an asset class, say shares and look at the return over a longer period, typically 20 years. They then use fund manager and market data to look at the real investor experience.

Basically, we are complete duds at timing the market. On average, as individual investors we underperform the market, value managers, and indexed managers. In fact we underperform on just about every measure. The reason of course, is simple. It is because we are humans. We far prefer to buy when markets are booming and to sell when they are falling. Good old fear and greed! I know I have done this many a time and I am sure you have as well.

So what do we do? We all know that holding cash will be our worst investment over the long term. At times though, cash feels great. Its capital value is certain, providing we pretend inflation does not exist, and when markets go down, it feels like we are winning. The proviso of course is that we actually make a decision to move from cash into better performing assets while they are cheap.

Frankly, this market timing stuff is all too hard for me, though I do love all the stuff “experts” put out about when to buy and when to sell markets. We all watch with interest expert’s view on a “property bubble”. If that is true we should sell. We also see experts saying equity markets are currently overvalued, while some say they are undervalued. Others tell us to prepare for the next GFC, sell everything and have cash to buy up big in the next downturn.

It seems to me though, that anyone who possesses such genius must be a billionaire, so why they publish this stuff rather than living on their yachts in the Mediterranean is a bit beyond me. In fact, I suspect they are people like you and I looking to make a living day to day.

We can quickly agree we can get any number of “experts” telling us to buy and sell the same asset class at the same point in time. That is not of any use to us. We will either attach ourselves to a view we personally like (some people are just determined to be negative, while some are determined to be positive) or look at the lack of consistency in experts options and become frozen, unable to make a decision. 

Let’s try to unlock a solution. Based on about 8000 years of reasonably well documented human history, we can say that we will have booms and busts, wars and all sorts of nasty stuff.  We may well get hit by an asteroid, but while statistically inevitable, you may be waiting for a few hundred million years.

My view on investing has and remains, very simple. The world population is growing, global wealth is also increasing. Global poverty, despite some awful situations we see in the media daily, has dropped by over half in the last decade. We are living longer. We humans are amazing little economic engines as we go about our daily lives. As there are more of us, with more money so it is not outlandish to predict a good future for companies that supply goods and services. Property bubble or no bubble, as Australia grows to some 35 million people in the next 30 years, the demand population growth also puts on land and property values is not hard to see.

I have no idea if property and share markets will be higher or lower in the short term. But in the medium to long term, it makes sense to me that they will be. So my approach, and I think it should be yours, is to be an investor not a punter. I invest on a regular basis, mainly through my super fund. This gives me automatic dollar cost averaging. I buy more when markets are down and less in months when markets are up.

Property is pretty easy. I look at where there will be population growth, jobs, public transport, education, entertainment, a nice atmosphere and a decent cup of coffee. I don’t care if it goes down in the short term, because I don’t over gear. With such strong population growth, I figure a well located, attractive property will always find a tenant.

Local and international shares are also pretty easy. I hold a well-diversified local share portfolio. I am happy to use low cost indexed funds or Exchange Traded Funds (ETFs). I also hold positions in sectors where I see better than average growth, for me these are areas such as healthcare, pharmaceuticals and biotechs. ETFs are very handy here. 

When it gets more complicated, I turn to a manager. The InvestSMART Australian Small Companies Fund is a good example. Researching smaller companies is a huge task, they are much better at it than I am. It is the same for international investments, be these shares, infrastructure or fixed interest. Again, there are plenty of low cost ETFs or indexed managers who can help me. Equally, an even simpler way of investing works just fine and you can use funds such as InvestSMART’s to provide you with broad diversification.

As I look back over 40 years of investing, I have done best by buying decent property and shares and keeping them. I am not clever enough to time markets and times I paid too much, meaning markets fell after I bought. But a few years later and I tend to look like a genius. After a decade or so, I just about always look like a genius!

I have only bought twice based on market timing. First was in the early 1990’s when experts were predicting the collapse of our major banks due to the property crisis of that time. I thought that, based on history, this was a bit over the top and banks like Westpac at under $4 looked cheap.

My second crack at market timing was also based on the same logic. After the collapse of Lehman’s, the lemmings were in full flight. CBA shares for example, dropped to around $26 in January 2009. At that price, the franked dividends were around 13% and the government guaranteed deposits up to a pretty big limit. History reminded me that we recover from busts, so shares at these prices seemed a bargain. They were. 

Let’s cut to the chase. You will see pretenders selling investment snake oil with tales of rapid and vast wealth. You will see predictions for boom and bust and how you can profit, but in my experience it is the peddlers of such investment schemes that get rich. The followers get poor. 

We should use common sense. It is remarkably powerful and in surprisingly short supply. If you share my view that in all likelihood the sky is not falling and despite our ups and downs, the global and Australian economy will bump along in a reasonable growth mode, then I suggest we should invest when we have the cash and the earning capacity (if you are using debt) to do so. We should invest in a way that matches our age and personality. For example, in my mid 20’s I had pretty much everything in my company ipac and a big mortgage. Taking more risk when you are young and have time to recover when things go wrong makes sense to me.

As time went by, I paid down non-deductible debt and built wealth through super contributions and buying property and shares as I could. At age 62, I see no place for gearing with my investments, though some gearing is fine if you can sleep with that. I have used risk concentration, plus savings to build wealth, now I am in capital preservation mode to protect my position. This does not mean turning to cash. Cash is a safe but a poor performing asset, so I continue to hold a growth based portfolio with diversification across asset classes both locally and internationally.

It just makes sense.


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Paul Clitheroe
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