Some perspective on investing | The Finn Review

Recent Events

Europe has come back with vengeance, but we all knew that it never went away.

What we have seen this year is a classic example of news fatigue.

We started this year with some great returns and people thought the bull market was back on. For those of you who I chat with regularly you will have heard me say that this had less to do with actual positive information but more to do with people being sick of focusing on the negative news and wanting to be optimistic. In their defence there was some good news coming out of the U.S (we spoke about that last year) but I struggle to see how you could forget about the mess that was still occurring in Europe.

The European way is to take things casually and to ponder about them for a while, or in other terms “why deal with something now when you can do it later?

Outlook ahead

The Greeks are acting a bit like a naughty private school kid who has an important assignment due.

The parents and teachers (Europe and rest of the world) warn the student that they need to change their ways and start preparing to make changes. The student plays along for a while and the parents and students foolishly relax but everyone else knew that they were always going to leave it to the last minute and probably not going to do it at all.

There will be a whole lot of commotion and there will be threats about the student’s future but after the dust settles things will keep on moving on and the parents will continue to support the student.

You may be thinking “what dribble is he talking about?” but this is how I see things playing out.

On Sunday, Greece (our naughty student) is forced to sort out their political situation and force austerity measures (the assignment). If they don’t, the market will react terribly as no one will understand what the European Union do and the flow on effects. The EU will have to make a tough call to force Greece to exit the EU.

A lot of people will have to take some losses but at least people will have some certainty. After all the dust settles the EU will still most likely be supporting the Greeks.

In America there are a number of issues as well.

The amount of positive data is reducing and some negative data is reappearing. We still have the uncertainty of who is going to win the election and historically the summer months of northern hemisphere have sustained poor performances due to people taking holidays and having less money to invest (I know history doesn’t mean it will happen again but it is something to think about).

Domestically, I think Australians are realising that we are not in such a great situation and, although the RBA are finally cutting rates the damage may have already been done.

I also believe that people have not realised the risks involved with our property market and the potential flow on effects as a result of what a poor property market will do to Australia.

It’s not all doom and gloom. I’m actually quite positive as we are well positioned for this and markets factor-in negative news before it actually happens. I think with all the events over the next couple of weeks combined with tax loss selling in June there are going to be some extremely good opportunities arising in June and we look forward to making the tough call and acting.

Humans are amazing in the way we always innovate and improve, this alone means continued growth.

Where to invest

Many of you have been getting impatient recently and have wanted to invest, this is why I have wanted liquidity and soon will be the time we have been waiting for! A number of companies on our watch lists have dropped more than 20% already and are starting to look very enticing.

Notable investments

BHP – Lowest it has been in 3 and half years. We are at a point where the grossed up dividend yield is higher than the cash rate – starts to feel pretty safe.

WPL – Market is pricing in too many problems with their big projects and they are going to benefit from production growth in their Pluto projects starting.

Small caps – Have dropped considerably more than large caps and will most likely keep on going. They will bounce back a lot harder as well though so we will be keeping an eye on them particularly, Boart Longyear (BLY), Horizon Oil (HZN), Pan Aust (PNA), Credit Corp (CCP) and Beach Petroleum (BPT).

Alternative Investments – Everyone is seeing the benefit of holding these in your portfolio and we will keep on supporting them.

Word on the street

To give you some perspective on investing:

Last week a friend of mine attended the Berkshire Hathaway Annual General Meeting (AGM) in Omaha, Nebraska. The CEO and Chairman is the legendary Warren Buffett, the third wealthiest person in the world (net worth US$44 billion) and widely regarded as the most successful investor of all time. He is noted for his personal frugality despite his immense wealth, living in Omaha today in the same house he purchased in 1957.

Omaha is a sleepy hollow, coming alive once a year when around 30,000 people from around the world congregate to attend the Berkshire AGM.

Whilst conceding Europe still has some issues to play out they believe global economies are set for solid growth for years to come and they will use periods of market volatility to add to the Berkshire portfolio.

Unfortunately some shareholders see the opportunity to ask a question as a chance to grandstand and gloat about their own successes in front of 30,000 people.

One shareholder asked why Berkshire had never invested in gold and that he had made a tidy profit on it recently. Buffett politely responded “when we took over Berkshire, gold was at $20, and Berkshire was at $15. Gold is now at $1,600 and Berkshire is $120,000.” He then took a sip of coke while Munger casually added, “We are not interested in short term profits, if you are, then you shouldn’t really be in this room”.

Berkshire like to buy undervalued businesses, quoting: “the basic idea of investing is to look at stocks as businesses, use the market fluctuations to your advantage, and seek a margin of safety”.

They stress the point of investing only in businesses they understand.

If you are looking for an answer on how Buffett became so wealthy, this quote may sum it up: “The beauty of stocks is they do sell at silly prices sometimes, that’s how Charlie and I got rich.”

Out and about with TheFinnReview

Money management / Lonsec Fund Manger of the Year awards

I attended the awards at the Four Season in Sydney last Thursday. It was great to be recognised with an award. But what I really enjoyed was having a chance to chat to the best fund managers in Australia. It was clear from their subdued outlook and lack of partying that times have been very tough for them and do not look to be improving anytime soon. This is a clear example of the lack of confidence problem that I spoke about earlier. Until we see some money flowing back into these funds it is going to be hard to get a sustained rally.

Some great news to come out of the night was that Winton Global Alpha Fund won the best manager award. Winton is an alternative assets fund that many of you are invested in. It has done exactly what we want it to do, providing approx. 10% return with very little volatility and a negative correlation (doesn’t go the same way) to equity markets.

Ishares bond ETF Launch

A great way to pick when a market is overheated is when product manufacturers are scrambling to make new products. Ishares has recently launched a domestic and international government bond exchange traded fund (ETF). I believe it is a great product providing an easy and relatively cheap way to access the bond markets. I don’t believe it’s the right time to be investing in Government bonds when yields are at record lows. It would have been nice if they were around a couple of years ago – don’t jump on the bandwagon!

Did you know?

We can access direct bonds

Traditionally it has been very hard to access the direct bond market in Australia as the minimum investment has been $500,000 per bond. Through a relationship with a fixed income broker we can now break down these bonds into $50,000 parcels. This makes it much easier to have a diversified portfolio. We now have in place an actively managed direct bond model portfolio in which you can invest. With bank lending now getting more expensive and harder to come by, companies are more inclined to go to the market to raise funding. We have seen this with the recent flood of hybrids. It’s a great way to invest in high grade corporate debt and get good returns (6-8%) without equity risk.

Access international equities through ETF’s

Most people have access to international equities through managed funds. Over the last couple of years this has caused some frustration as they may have performed quite poorly. Most people have little understanding of what they are actually invested in.

Another way to access international equities is to buy Ishares ETF’s. These are tradable on the market and are a direct representation of an underlying index. A big one which we use is Ishares S&P 500 which represents the top 500 stocks in the U.S index. This has performed extremely well over the last year and at a cost of 0.09% it is great value. We run an active model which will invest in areas of the world that offer good value and prospects.


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Disclaimer: Information contained within this article is of a general nature. Do not be rely upon it when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.