Over the last 18 months I have been contributing articles to the AFR Online magazine, covering direct investing (why and how), structured products and innovative investments. In that time we have blown the whistle on some of the dodgier new products as well as (occasionally) highlighting the best new investments that we have seen. For your interest these articles have now been loaded to the LPAC website, you can view them now under the Research Article tab:
http://www.lpaconline.com.au/research-articles.aspx.
Why investors shouldn’t worry about where the "market bottom" is...Part One
Last month’s LPAC Student E Mail prompted a lot of responses, more than most, and these were often along the lines of "Yes Tony we hear you saying that the sharemarket is good value right now - but we hear from other "experts" that it’s still really bad, that it may remain bad for years - or that, in fact, the whole concept of the market has blown up forever." I even had one adviser say to me, half in jest: "Tony you are the biggest bull we know!"
Well that places me in good company as these views simply echo those of others, far smarter than me, such as Warren Buffett and Jack Bogle (founder of Vanguard Investments) who are on the record, right now, as advocating smart investors should be buying stocks, now. You should watch out for Buffett’s infrequent interviews on CNBC (he has another show coming up soon - check the CNBC website for the time) as they are startlingly clear examples of precisely the message that we advocate in the LPAC course:
"Buying shares is like buying rental properties - what you are buying is the steadily growing stream of income from the investment - and capital value is a second order ingredient in the process of wealth creation"
LPAC Students will be aware that I use the example of how the yield on a rental property can and does grow to 50% or even 100% of its initial cost over time - and that the smart investor should be accumulating as many assets like this as possible. Shares fall into the same category - I teach using the example of NAB which paid a dividend of $0.175 in 1990 against a share price of $3.50...a 5% yield then but a yield of over 50% against that price at its high point last year.
Since we want to generate income streams for retirement it’s actually completely immaterial what the asset price does over time - the only time this is relevant is when we have to sell the asset. Unless we are selling an investment because its fundamentals are seriously damaged, the only time we may have to do so is when we are in drawdown phase. So the essence of this investing approach is to focus on the ongoing income stream from the asset - not whether its price is going to be higher or lower tomorrow or next week.
The media and fund manager obsession with index levels and share prices is a complete red herring, and Buffett himself hammered this home in his last CNBC outing, "The Billionaire Inside - Restoring Trust" and you will get the same message on his next show which you can see details for at: http://www.cnbc.com/id/29552354 . It’s on April 9 and 10th - check it out.
Buffett used the example of Coca Cola to dispel an angry question from a viewer, who e mailed to ask "When will the market hit bottom?" Buffett replied that he didn’t know and in fact he didn’t really concern himself about that, instead he picked up a can of Coke and said that he is buying its stocks now for the following reasons:
- Coke is quality company that has been around for over 100 years;
- It’s a company with a solid business that produces a strong and maintainable stream of earnings and should do so for the foreseeable future; AND
- Importantly, it is now available at such a discount that investors will receive a supernormal return from the stock, ie its irrelevant to ask if the stock price will get any lower or whether it will rise again in the short term!
Your job as an adviser is to find the stocks in our market that are like Coke...and I reckon that the likes of CBA, WBC, BHP, TLS, WPL, ORG, etc fit this bill exactly...
Why investors shouldn’t worry about where the "market bottom" is...Part Two
Obviously this sentiment assumes that the economy and the market aren’t broken. Thinking carefully about this tells me that neither is permanently broken, but how do we explain this to clients who may be excused for thinking "None of you so called experts picked the Global Financial Crisis so how can we trust you now?" Certainly, to the pessimistic planner who told me last week that the US was little different to Zimbabwe and that we would end up living in caves again, no amount of rational discourse is capable of turning back the tide of discontent for those that don’t really understand how economies and markets work. What the "Voodoo Economists" don’t get is that the GFC is nothing more than the bursting of an old fashioned bubble - the problem is that the bubble is the biggest that we have ever seen. We obviously need to re think our regulatory paradigm and that will be harder than most people think - but what we are seeing now is an aggressive wave of policy responses designed to shore up confidence and the workings of the system. As Buffett noted, it’s no different to waging war - there will be new battles and challenges but this time, the global system is united in its attack on the problem.
What do the economists say about the likelihood of hyper inflation arising from governments printing money (like the US)? Will this mean that the US ends up like Zimbabwe (as my Voodoo Economist planner predicts)?
Saul Eslake was kind enough to share a few pointers with me when I posed this question recently to him and I paraphrase his thoughts below. After you read and digest his message you will see why investors are getting stuck into the market at these low levels - if growth going forward is slower than we have seen in the last decade, you want to buy stocks at these low levels to capture the supernormal return that discounted prices offer. Remember, this isn’t trying to lock in capital gains - it’s trying to buy cash flows and yields at the highest possible discount to their "fair" or long term value.
“Tony
Not sure I have all the answers - in particular insofar as they relate to the equities market, since I have the 'luxury' of working for a bank which doesn't own a broker (well, not one with a research service) or a fund manager. That said I offer the following -
- central banks (particularly the Fed) are creating enormous amounts of 'base money' (ie, expanding their own balance sheets) but this is not leading to commensurate increases in the broader 'M's because the 'money multiplier' (the ratio of M-whatever to the money base) has collapsed (see chart 12 in the pack I sent around on Tuesday afternoon); this is an indication of the extent to which the private sector credit-creation mechanism has been impaired by the financial crisis. The expansion in the Fed's balance sheet has been sufficient, almost, to offset the contraction in the balance sheets of the commercial banking system (plus the so-called 'shadow banking system' which was an accessory to the 'originate-and-distribute' model of banking that became fashionable); it is not generating (and probably isn't intended to generate) sufficient 'excess liquidity' to kick off a new bull market (on its own, anyway)
- not sure I agree that "what we will miss in GDP growth from Japan and Europe [and, you might add, the US] will be made up for by China and Asia". Globally, growth is falling short of its 'potential' level (the best indicator of which is that unemployment is rising everywhere, including in China and other Asian economies) - and while it is possible that this shortfall of global GDP might eventually be made up by a period of 'above-trend' growth, I don't see any compelling reason to believe that's likely to happen any time soon (ie in the next couple of years).
- yes it's true that Japan is a net saver; Europe (the euro zone) isn't, because Germany's (and to a lesser extent Holland's and Austria's) large surpluses are more than offset by the deficits of Spain, Italy, Greece, Portugal and France, to say nothing of the newer members to the east. Also note that Japan and Germany became large savers off the back of substantial exports to deficit countries; and that the violent contraction in demand from the deficit countries is therefore hitting them hard, harder in fact than the US itself. What they (and China) should ideally be doing is stimulating domestic spending - although in Japan the rapidly ageing population makes that difficult to achieve.
- I guess it's possible that people could stop buying US Treasuries, although so far there's no tangible sign of that (otherwise the yields on USTs wouldn't be so low). The Chinese have to buy big quantities of USTs for as long as they continue to run mega-surpluses on their current account and refuse to countenance an appreciation of the yuan (and if they did allow the yuan to rise significantly , then America wouldn't need to borrow as much because its bilateral deficit with China would eventually become much smaller). Fund managers will buy bonds for as long as they remain pessimistic about the outlook for growth and earnings. As I keep stressing, the levels of public debt which the US is now proposing to take on (see Obama's budget released overnight) are still reasonably low as a percentage of GDP by comparison with the 1940s and 1950s, and those weren't years of persistently high inflation or a declining US dollar.
- I do think (and have for over a decade) that the US is in relative decline, as countries like China and India which, for centuries, represented a much bigger share of global GDP than they have in the last couple of centuries start to regain the economic rankings which their large populations were always going to achieve for them once they started adopting economic policies conducive to economic growth (which neither of them, for different reasons, did in any kind of sustained way for 200 years or more). The financial crisis will certainly accelerate that relative decline.
- finally, I think it's inevitable (indeed, who doesn't) that the financial systems of most countries will be subject to much more stringent regulation henceforth; in effect, public opinion will conclude, rightly or wrongly, that the reason we have experienced the greatest financial crisis since the 1930s is because the regulation that was imposed on the financial sector after that previous crisis was gradually removed over the past 25 years or so, and once it was almost completely removed the financial sector almost immediately started behaving as it did in the 1920s (albeit in a more 'sophisticated' fashion). Among other things that means that credit will be less readily available, including for the acquisition of real and financial assets, and it's therefore inevitable that trends in asset prices will be much more subdued than they have been in recent decades”
Dr Tony Rumble |
