Yesterday was, apparently, not a good day to be an investor.  More than $30 billion was wiped off the value of the sharemarket - a fact trumpeted by many media outlets.  In fact, ninemsn was describing it as 'Crash Wednesday'. 

You are kidding, right?

Don't worry about the $30 billion 'wiped' off the value of the sharemarket yesterday, what about the $70 billion of value the sharemarket has created for investors since the start of this year alone?  The market actually fell by less than 3% - which is hardly a crash at all.  And it has started to recover those gains in trading this morning.

The key point - a point that should be repeated again and again - is that investing in growth assets like Australian shares, listed property and international shares means that your portfolio will be volatile.  It will go up and down - there will even be years when returns are negatives.  Over time, though, the returns from growth assets will be higher than non volatile investments.

The key is to accept the reality of volatility before you invest.  The last thing you want to do is have markets fall, and they will fall much more than 3% at times, and then decide what to do.  Set a course, accept that volatility happens, and get stronger long term investment returns that come with investing in growth assets.

Cheers

Scott Francis

I was interested to come across an ABC article today that quoted the Reserve Bank of Australia's governor, Glenn Stevens as saying during a Federal parliamentary committee hearing that, 'As a statement of probabilities, a rise (in interest rates) is more likely than a fall'.

I find this very interesting.  At the last rise in November, and in the time since, the commentary from 'financial analysts' has been that interest rates have peaked, and that the next move will be down.

It is interesting to see who the experts used to commentate on these things are - most commonly they are employed by the big banks, such as Chris Caton who is employed by BT/Westpac.

These experts have been pretty consistent in the story over the past 18 months - underestimating the liklihood of interest rate rises and tending to talk them down.  12 months ago no-one was predicting 3 interest rate rises and, according to the Reserve Bank of Australian, more chance of a rise than a fall to come.

What I had not thought of is that these people - who are generally employed by banks - have employers who benefit from interest rates being low.  Therefore public comment by bank economists about lower rates helps their employers as banks customers are more likely to spend more money on credit, borrow more money to buy houses and so on when interest rates are low.

It is an interesting conflict of interest.

Cheers

Scott

A great article in today's Australian newspaper (front page) where the Westpoint boss (former boss) Norm Carey claimed that part of the reason for the Westpoint collapse was the fact that his wife was having an affair with his marriage therapist.

This stands at odds with the conventional wisdom that says the collapse was due to the fact that Westpoint 'investments' were highly risky mezzanine finance investments distributed by a corrupt financial services industry that was dazzled by double digit commission payments.

So now you know!

Cheers

Scott

Scott Pape, under the title the barefoot investor, writes a great column in the Courier Mail each monday morning.

Todays article was brilliant - looking with appropriate contempt at money making opportunities.  One of his questions - and it lies at the heart of all 'too good to be true' opportunities - is why would any great high return, low risk opportunity be passed onto punters?  In this case the product was orange juice with unique medical powers.  And Scott points out that rather than sell this through the supermarket or pharmacy distributors, selling it thought individuals made no sense.  This applies equally for get rich quick schemes in property development or the sharemarket - if it was a foolproof way to get rich then the people with the secret would not be selling it.  They would be building a business developing property or building managed funds.

Anyway the orange juice, as many of these things are, was a multi level marketing scheme - in the shadow of Amway, the leader of all multi level marketing schemes.  Multi level marketing - or network marketing - means that as you sell product all the people in your business line take a cut of your success.  Of course, if you can get a team of people working below you then you can take a cut of their good work.

He quoted some interesting research about Amway and Quixtar (also a large mulit level marketing company) in the US, saying that 99% of all salespeople earned less than $14 a week.  I had never seen these figures before.  I am not suprised either.  $14 lousy bucks a week.

Cheers

Scott

In writing my latest Eureka Report article, I stumbled across some sharemarket data from the Reserve Bank of Australian website, here. 

The great thing about the data that provided is that it is in excel format, and so you can do calculations on it.

There were three data series that I found particularly interesting.  The first is the accumulation index.  It started from 1 January 1980 valued at 1,000 and is now valued at 34,000.  To put it another way, $1,000 invested in the index in 1980 would now be worth $34,000, assuming dividends were re-invested.

The second interesting data series is the monthly PE ratios of the market.  The PE ratio (Price Earnings) is a good measure of market value - the lower the PE the lower the market value.  The current PE is 14.8, while the average PE from 1980 until now was actually 18.7.  This suggest at the very least that, even after three years of great returns, the market is not widely overpriced.

There is also data on the average monthly dividend yield of the market, currently at 3.73%.  This is a little below the average of 4%.

All in all some interesting data, and reassurance that on the basis of earnings and yield the market valuations look reasonable.

Cheers

Scott

In the Australian Financial Review on Wednesday, there was an article about managed fuds that had delivered strong results.

Two of the five Australian fund managers mentioned were Vanguard and Dimensional, fund managers we use widely.  This was a nice endorsement of our investment process.

The other three funds were active fund managers.  Two of these three funds had exactly the same top five shareholdings as the index.  That is, even though they charge big fees to actively find the best investment opportunities their biggest five holding were EXACTLY the same as the index! (All were BHP and the big four Australian banks - the 5 biggest companies in the market at the moment).

Surely that is not what an investor is looking for when they invest in an active managed fund - they want a portfolio that looks different from the index! 

We'll stick to the sound and transparent performance offered by Dimensional and Vanguard funds!

Cheers

Scott Francis

We use the Dimensional investment funds, as a sophisticated and powerful investment approach.

I often have a hard time explaining exactly the Dimensional advantage - what it is, how it works, the research behind it, the great minds (nobel award winners) who have fashioned this approach.

We have just pot together a document for clients that shows the power of the strategy, and I thought it worth mentioning the results of the 5 year returns, after costs.

If you had invested $100,000 into an Australian share index fund, that simply got the average return from the Australian sharemarket over 5 years (to the end of December 2006), your $100,000 would have growth a very healthy $200,000 (assuming dividends are re-invested).

The Dimensional funds focus on small companies and value companies as sources of additional investment returns.  If you had invested $100,000 in the Dimensional Small Companies fund it would now be worth $255,000.  If you had invested $100,000 in the Dimensional Value Companies this would have growth to $254,000.

That is the power of an effective investment approach, patience, and slightly above average market returns at work.

Cheers

Scott

A theme of this blog is not to get too carried away with initial public offerings or share floats.

An article in todays Courier Mail provided a reminder of this.  Last year one of the bigger brisbane based floats was for RiverCity Motorways, which floated at 50 cents a share.  They are currently trading at 39.5 cents a share.

The pattern of the shares - which performed well after the float and are now underperforming is not at all unusual with floats - indeed it is a pattern identified in the academic literature that tracks floats (initial public offerings).  There are plenty of examples of recent floats that have underperformed after listing - think of Pacific Brands, Virgin Blue, Promina for a while, many of the recent listed investment companies and so on.  The secret is this - don't be blinded by the lure of a float as a sure thing. 

I am always impressed at the little details that the financial services industry uses in its bid to systematically defraud people of its money, and the word 'float' is a nice touch.  It sort of suggests an optimistic outlook - what could go wrong?  What could to wrong - ask initial investors in the RiverCity Motorways.

Cheers

Scott

The start of a new year brings will it all sorts of resolutions and forward planning, and nothing more exciting to an MBA graduate like myself that the opportunity for a little bit of 'corporate rebranding' (there you go - two weazel words in the one phrase - my MBA teachers would be so proud!).

So the decision was made by Scott Keefer (business partner) and myself to get a logo for the business.

And here is where it gets interesting.  The website sitepoint is a graphic design service that offers the chance for people to put forward a 'contest', with a prize, for the best design.  We duly submitted the description of what we wanted, details of the prize (US$125), and waited to see what we got.

We ended up with in excess of 60 designs, all interesting and some very good.  We were able to choose the best design to use in the business.

The advantage of this process is that we had a great diversity of designs, we got to provide feedback on designs during the process and we were able to select the one that best suited us.

A very interesting internet experience!  The winning design will be part of our website soon!

Cheers

Scott

Scott Keefer, my business parter at A Clear Direction Financial Planning, pointed out an interesting article from The Economist magazine. 

It showed a comparison of iPod prices in different countries in the world.  iPods are all manufactured in China by Apple. 

Comparing the cost of the same product in different countries is a way of comparing the purchasing power of different economies, and therefore future currency movements.  At the moment iPod prices in different parts of the world include:

• Brazil - US$328
• India - US $222
• UK - $US195
• Germany - $US192
• China - US$180 (which is where they are manufactured)
• Australia - US$172
• US - US$149
• Canada - US$144

CommSec, who are involved in putting out the index, are using it to suggest a 15% drop in the Australian dollar against the greenback.