In celebrating Cuffelinks’ first five years in publishing, I confess to a little self-congratulation for agreeing to contribute at the very beginning. Aside from the obvious success that would emerge from a unique combination of product and people running the newsletter, we have to recognise the many tremendous articles and contributors that have been instrumental in the ongoing growth and success of Cuffelinks.
Fundamentally sensible and technically useful articles again dominated 2017 but for me there were a number of standouts.
Ashley Owen is a professional friend for whom I maintain an admiration. Any article dismantling a relationship that has been held as an axiom is valuable, and Ashley has done investors a great service by demonstrating that there’s no link between economic growth rates and stock market returns. In 2017, he wrote:
“There has been no statistical relationship between economic growth and share prices when measured across countries.”
It's disheartening to think how much paper and ink is wasted suggesting investors need to know what might happen in the economy. It’s even sadder to think how much time investors waste reading it.
Still with Ashley, he produced another useful article early in 2017, after the Dow Jones surmounted 20,000, showing that index performance needs to be considered not only in log scale but also after adjusting for inflation. That stocks markets "always go up", as is claimed by many promoters, may be true but:
“Long periods of poor performance are normal ... We see that the ‘real’ index after inflation has only gone from 2,000 to 20,000 in 120 years – that’s less than 2% real growth per year on average, which is hardly inspiring. True that doesn’t include dividends, but most investors live off the dividends and rely on the capital value increasing in real terms so that dividends can also keep ahead of inflation.”
Ashley reveals indices can trade for long periods without generating positive returns:
“ ... the long bear market from 1906 to 1920 (15 Years) when share prices fell 67% in real terms, and 1966 to 1982 (15 years) when the prices fell 75% in real terms.”
The almost unthinking and faddish adoption of index funds as a solution to the higher fees charged by active managers should be reconsidered in light of this disclosure, especially with share prices today at stretched levels implying low future returns.
I wrote a controversial article suggesting index investing is merely 'dumb investing', and it would be incongruous not to call out fellow fundie Greg Cooper’s article on the subject entitled; “The Paradox of Passive Investing”. Like many value investors, Greg might be early but he is fundamentally ‘on point’ when he suggests:
“As more capital is invested with no thought behind what is being purchased, there has to be a tipping point where this irrational behaviour is no longer sustainable. When is that tipping point? We would suggest we are close to or even past the tipping point in some markets.”
And I would add, it’s better to be 12 months early than 12 minutes late.
With children of my own, I understand how important creating good financial habits is.Robin Bowerman might have been a little disappointed, but he should know investors were universally better off for having the advice of our mothers and fathers reiterated by Vanguard’s global CEO, Bill McNabb. McNabb suggested that amid expected volatility one solution is to:
“Save more … Saving more is an asymmetrical proposition: If you don't save enough and the markets don't assist you, there's nothing you can do. If you over-save and do well, great – you can retire a few years earlier."
As you are reading Cuffelinks, it’s reasonably safe to assume you are doing better, financially, than the vast majority of the population of Australia, a country that is itself much richer than most others. It’s worth remembering two things: First, you can’t take it with you, and second, you’ll be forgotten in two generations. As the pop artist Macklemore wrote in a 2017 song:
“Things are just things, They don’t make you who you are, Can’t pack up all your haul and take it with you when you’re gone.”
Giving should be something we are all engaged in and Antonia Ruffell’s column on the best way to give is an essential roadmap to formalising a framework for good deeds.
Roger Montgomery, Guest Editor
Edition 237 | 28 Jan 2018 | Editorial | Newsletter