The Weekend Edition includes a market update plus Morningstar adds links to two additional articles.
Recently, I appeared on Morningstar’s Investing Compass podcast and I was asked by host, Mark Lamonica, about how I invest now compared to when I was a fund manager. I was on the podcast to talk about ASX stocks to buy and hold forever, so this question towards the end of the interview threw me somewhat, and I’m not sure I answered it well. Here’s my attempt to rectify that and give more detail on the topic.
The key differences
The key differences between how I invest today versus when I was a fund manager include:
1. I invest with a longer-term horizon than I did as a fund manager. As an individual investor, I feel like I can afford to take a long-term perspective on investments, and my time horizon these days is 10+ years. As a fund manager, I never had the same luxury. I had clients who often demanded short or medium-term results, and that created pressure to find investments that would pay off over that time horizon.
2. Because I think longer term as an individual investor, I focus more on the quality and moats of businesses. The longer the time horizon, the greater the need to concentrate on business quality. That a company has an edge to keep competitors at bay. That it has a long runway to grow their businesses. That it has a management capable of executing. And that it has a track record of delivering on promises.
3. Being long term oriented, I focus more on companies I own than those that I don’t own. I was once a Portfolio Manager for an Asia-ex Japan fund, and autos were one of the sectors that I covered. I didn’t invest in Hyundai Motors at the time, which had the largest weighting of any company in the auto sector. It outperformed the autos part of the index for 18 months and I remember having to justify why my fund should stay underweight Hyundai. As an individual investor, I don’t need to concern myself with things like this so much.
4. As an individual investor, I am not as spreadsheet focused as I was as a fund manager. Fund managers and analysts are obsessed with spreadsheets and models. As an individual investor, I rarely use a spreadsheet. It’s important to know the key earnings drivers for a company and what assumptions will drive earnings going forward. Though I prefer simplicity to complexity when it comes to earnings forecasts nowadays.
5. As an individual investor, I don’t have access to the same information as I did as a fund manager, and therefore rely more on primary sources. As a fund manager, I was bombarded with information from brokers, consultants, internal research, government research, and a million other sources. As an individual investor, I don’t get access to that same information. I rely much more on primary sources for information on companies, such as earnings releases, management presentations, and annual reports. This can be good as it filters out a lot of noise. The bad is that I don’t get to same opportunity to test my views against those of others.
6. As an individual investor, I don’t get access to company management like I did as a fund manager and therefore use other avenues to assess senior executives. As a fund manager, I often had access to senior executives at companies. As an individual investor, I barely get access to the receptionists! That can be good and bad. Meetings with management can be a mixed bag – sometimes there’s useful information but there can also be a whole lot of smoke. As an individual investor, I rely more on primary sources to assess management. What their track record is like. What they were like at previous companies. Whether they delivered on previous promises. Their vision and whether it’s achievable. Evidence of whether they have created a good culture ie. employee feedback.
7. As an individual investor, I embrace simplicity over complexity. Fund managers and analysts love complexity, and I was no different. As an individual investor, I prefer simplicity. For instance, I now prefer investing in a good business with decent prospects than a potential turnaround story. It’s simpler, consumes less time, and is usually more profitable over the long term.
A different example: China is dirt cheap at the moment, has just announced much-needed economic stimulus, and its market could bounce hard off depressed levels. But I also know that the government controls the country, that it isn’t interested in investors making money, and that China has a track record of poor shareholder returns despite spectacular economic growth. For me, China is in the too-hard basket and there are other, easier ways to make money.
The differences above point to some of the pros and cons of being an individual investor.
The pros include:
- Freedom to invest how you want. Obviously, being an individual investor is solo sport. Being a fund manager isn’t, and that has limitations.
- No teams/bosses to worry about. A corollary of the first point.
- No clients to worry about.
- Fewer short-term performance pressures.
The cons include:
- Reliance on yourself rather than a team. The good and bad is on you, not a team.
- Don’t inherit processes to guide investment decisions. Most investment teams have detailed processes to guide decisions. The mantra is, ‘good processes lead to good outcomes.’ Individual investors don’t inherit these processes and need to create their own process to help them achieve their goals.
- Don’t get the same access to information.
- Don’t get access to company management.
- Don’t get to influence company decision making.
- Don’t get the same access to company competitors, suppliers, and customers.
In sum, I love having fewer constraints as an individual investor. Yet, I also miss bouncing investment ideas off fund manager/analyst colleagues.
Investing, like life, always involves trade-offs…
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In my article this week, I compare the valuations of the four major asset classes - cash, bonds, stocks, and property - and point to what seems overvalued as well as where investors may be able to find a bargain.
James Gruber
Also in this week's edition...
Mark Lamonica looks at why dividend ETFs may disappoint income investors. He suggests the structure of many dividend ETFs leads to lacklustre or non-existent dividend growth. He runs through the different options for investors.
Martin Currie's Reece Birtles is downbeat on the outlook for the ASX. He says the recent reporting season delivered disappointing earnings guidance from companies, and that this may be a sign of a slowing economic environment. He also notes a concerning trend of companies hoarding retaining earnings and reducing their dividend payout ratios. He says this doesn't augur well for dividends in FY25.
The Coalition's persistent calls for first home buyers to be able to tap superannuation for housing purchases continues to get widespread publicity. Saul Eslake explains the reasons why it's a bad idea, including that it'll likely result in more expensive house prices.
Immigration remains a hot button issue in Australia given the skyrocketing house prices and cost of living. Peter Zeihan looks at how overseas countries such as Canada and Germany have handled the problem. He says while there are undoubted economic benefits to immigration, they need to be balanced against the social costs.
Mining companies are famous for destructive mergers and acquisitions and Schroders' Justin Halliwell says that BHP was lucky that its bid for Anglo American fell over. He runs through the numbers on why BHP's proposed deal would have been a bad one. He also goes through his latest views on lithium after the commodity's unprecedented recent collapse.
Kion Sapountzis has an intriguing theory on why the discounts on some listed investment companies (LICs) and listed investment trusts (LITs) are deepening and persistent. His data reveals LICs and LITs that exhibit lower volatility tend to trade closer to their net asset values. Conversely, those with more concentrated portfolios and higher volatility generally trade at steeper discounts.
Two extra articles from Morningstar. Joseph Taylor highlights two cheap US stocks that have bought back a lot of shares, while Ahmed Khan explains why he upgraded his Fair Value estimate for a company with products that most of us use every day.
Lastly, in this week's whitepaper, Man GLG, an affiliate of GSFM, outlines three reasons to be optimistic on Asian stocks.
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Weekend market update
On Friday in the US, stocks edged lower by 0.13% on the S&P 500 and 0.6% on the Nasdaq 100 to wrap up a mostly forgettable trading week, while two- and 30-year Treasury yields dipped by five and two basis points, respectively, to 3.55% and 4.1%, likewise finishing little changed relative to last Friday. WTI crude bounced to US$68.5 a barrel, gold pulled back to US$2,652 an ounce, bitcoin rose again to US$65,700 and the VIX bucked the sleepy action by advancing to near 17, up a point and a half on the day.
From AAP Netdesk:
The Australian share market has closed at an all-time high, boosted by strong gains from the mining sector, which enjoyed its best week in nearly nine years. But there were losses elsewhere, including for the big banks, while embattled casino operator Star Entertainment plunged by more than 40% after it resumed trading following a month-long suspension.
The benchmark S&P/ASX200 index ended Friday up 8.5 points, or 0.1%, at an all-time closing high of 8,212.2, while the broader All Ordinaries gained 14 points, or 0.17%, to 8,476.8. The ASX200 finished the month up 1.5% and the September quarter up 5.7%, its best quarter result since the fourth of 2023.
The ASX's mining sector rose 2.8% on Friday and 9.4% for the week, its best weekly performance since a 10.3% gain in October 2015. The mining/materials sub-index is still down 7.6% for the year, compared to a 21.9% rise for the financial sector, but there's evidence that traders are swapping out of the latter for the former. BHP on Friday rose 3.2% to $44.74, Fortescue gained 3.6% to $20.10, Rio Tinto added 3.4% to $20.10 and Mineral Resources surged 13.9% to $49.14.
The heavyweight financial sector meanwhile finished 0.6% lower, with all of the big four banks losing ground. NAB fell 1.8% to $36.94, Westpac retreated 1.7% to $31.80, ANZ dropped 1% to $30.44 and CBA slid 0.1% to $134.16.
Elsewhere, Star Entertainment plunged 44.4% to an all-time low of 25c as shares in the troubled casino company resumed trading a month after Star delayed filing its annual financial statement. Star filed that report on Thursday, revealing that it had operated at a loss in July and August and had plans to borrow up to $200 million at a 13.5% interest rate to meet a looming cash crunch.
Endeavour Group dropped 2.5% to $4.99 as the Dan Murphy's and BWS owner announced that chief executive Steve Donohue would step down, once his successor had been found.
Coles fell 0.5% to $18.12 while Woolworths added 0.2% to $33.43 as the competition watchdog released a 266-page report that classified them as an "oligopoly".
A2 Milk shares rose 8.7% to $6.24 before being put in a trading halt so the Kiwi milk company could announce an acquisition.
Woodside dropped 1.4% and Santos fell 1.2% as Brent crude retreated amid rumours that Saudi Arabia was set to increase output.
Back in the mining sector, goldminer Evolution climbed 1.1% but Newmont dropped 0.6% even as the yellow metal hit an all-time high.
From Shane Oliver, AMP:
Global share markets rose again over the last week on expectations for a continuation of a “goldilocks” macro outlook on the back of central bank rate cuts reinforced by news of aggressive Chinese policy stimulus. This saw US and global shares make new record highs and Chinese shares surge around 15.7%. For the week US shares rose 0.6%, Eurozone shares rose 3.6% and Japanese shares rose 5.6%. Australian shares made it to a new record high above 8200 but rose less than 0.1% for the week with a 9% surge in mining shares on the back of Chinese stimulus measures offset by a correction in bank shares after their strong run. Bond yields were mixed with slight increases in the US, UK, Japan and Australia but falls in Europe. Despite an escalation in the Israel/Hezbollah conflict oil prices fell with Saudi Arabia set to increase production and Libyan production returning. Consistent with the “risk on” sentiment, metal prices surged higher, the iron ore price rose, the $A rose to $0.69 and the $US fell.
Oil prices sliding = lower petrol prices. While the expanding war around Israel is a big worry, the key from an investment perspective is whether global oil supplies are impacted (say if Iran which accounts for around 3% of liquid global fuel production is directly drawn in) and so far this has not happened. In the meantime, Saudi Arabia is moving to increase production in December, Libyan oil production (1% of global supply) is set to resume, non OPEC production is rising and demand growth has been cooling. So oil prices have been trending below $US70 a barrel. If sustained this is positive for growth and inflation. And it means that petrol prices in Australia may continue to trend down (abstracting from the weekly/monthly cycles in each city – which eg has just turned up again in Sydney). There is a close relationship between the Asian Tapis oil price in Australian dollars and average petrol prices – and both are trending down.
RBA on hold and still hawkish but pivoting to be a bit less so – at least it didn’t consider another rate hike! As widely expected, the RBA left rates on hold at 4.35% and its post meeting statement continued to lean hawkish with warnings about too high inflation, excess demand, low productivity and a still tight labour market. However, while Governor Bullock repeated that “in the near term [the RBA] does not see interest rate cuts” there was a step in a dovish direction with the Board not explicitly considering a rate hike after months of considering one, against the background of still “not ruling anything in or or out” which means that despite the guidance against cutting in the near term it may still do so if circumstances warrant!
In this regard, Australian inflation data for August provided good news. Not so much because electricity rebates pushed headline inflation down to 2.7%yoy, to be back in the target range for the first time in three years, which the RBA regards as temporary. But because underlying inflation measures – which the RBA focusses on - all fell. Excluding the electricity rebates inflation fell to around 3.1%yoy from 3.5%, inflation excluding volatile items fell to 3%yoy from 3.7% and trimmed mean inflation fell to 3.4%yoy from 3.8%. And the annualised rate of trimmed mean inflation over the last three months fell to 2.8%, way down from 6.4% in the three months to May. Sure, the Monthly CPI needs to be treated with caution, but further falls in underlying inflation provide confidence that disinflation has resumed after stalling earlier this year. In fact, the trimmed mean is now tracking slightly below RBA forecasts.
Curated by James Gruber and Leisa Bell
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