October 29, 2020 by John Duncan

Election Result Irrelevant, but Vital

It is a week out from the US Presidential election.

We’ve deliberately avoided the election until the very last moment. Why? Its lack of importance. We hear ‘this is the most important election of our lifetime’ almost every election. On some issues, maybe it is. When it comes to investing, it rarely is. Nor should an election ever be regarded as something to focus on.

If an investor is perpetually scanning the horizon for the next event, then they are perpetually distracted by things they can’t control. It isn’t conducive to disciplined investing. Agonising and handwringing over this election, or any other election, is pointless. Like a kidney stone, there is the possibility of short-term pain, but it will pass. There will be another one in four years’ time. The election, that is.

Capitalism will continue to function. Companies still want to make money. They will adapt to whoever is in power and whatever the policies are. Investors will continue to be rewarded over the long term for supplying their capital. This is why any time you see a chart or table showing investment returns during various periods of government, there is no discernible better party or leader. Economies and markets generally get on with it.

A suggestion to the contrary is full of bunk.

Market talk around outcomes revolves around the various sides wanting some validation for their guy or team. We know what history says: no clear better party. And we don’t know what the future is, so forecasting a market response is foolish. Both sides have negatives and positives. Their election or re-election will send money scuttling around to favoured industries. Some sectors will prosper more than others.

Biden rolling back Trump tax cuts on corporations won’t be great. Neither will treating capital gains and dividends as regular income. Increase the marginal rate on people earning over $400,000. There are policies and there is expediency. An economic recovery will need to be well underway before any big changes. Most importantly, a Democratic win will likely bring another massive stimulus package.

Trump equals tax cuts ongoing, China-bashing and deregulation. Likely winners (or those getting a hand) will be oil & gas, financials and defence. Infrastructure and clean energy will do better under Biden. Biden might look at a lock to eradicate the virus. Financially painful. Trump’s plan won’t change. Letting it rip while bragging he beat it. More casualties.

Last time, prominent media personalities and even economic laureates were prognosticating about the end of days because of Donald Trump. Market ruin and economic armageddon. Neither occurred. Now Trump and his supporters use the same lines on Joe Biden. See how this works?

Either result should be considered business as usual.

The key word is ‘result’. The pandemic has done considerable damage meaning more stimulus will come. Financial markets will appreciate this. The current argy bargy over a current stimulus bill passing highlights what markets don’t like: nonsense and delay.

This prompts the key concern about this election. The concern is not a victory or loss for Biden or Trump, but a flap about the outcome. There is only one outcome an investor should want to see: the loser quickly conceding before making a swift exit into the sunset with the wind at their back.

President Trump has been making noise about voting fraud and ‘will he’ or ‘won’t he’ accept the result? What financial markets do not want to see is Trump putting on a tantrum about the outcome. If there is a very clear winner on the night, there will likely be a relief rally.

The alternative?

Going off the only real evidence we have, 2000’s Bush vs. Gore fiasco. The market does not like a contested election.

2000 was not the greatest year on the S&P 500. Calendar year, until election day on November 7, it was down 1.65%. It may even have been poised to finish the year on a positive note. With the state of Florida undecided on election night, that thought went out the window.

What followed was 36 days of turmoil as the election result hung on Florida. As the result was so close, it prompted a recount. The recount was a stop/start affair as courts at every level were involved in an attempt to determine voter intent on ballots. Eventually it ended in the Supreme Court. The recount was halted.

There was a minor rally in December after the chaos was sorted, but not enough to erase the losses. While this was all painful for US investors, back in Australia investors with diversified portfolios sailed through and our market actually held up through the chaos. The ASX returned 1.12% for November and 3.68% for the year.

No matter who you want to win, the best result is an unambiguous outcome.

_{This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.}

October 31, 2014 by John Duncan

How a Market Correction Plays Out In the Media

There is a good reason we continue to highlight the benefits of discipline, keeping your emotions in check, not reacting to market movements and ignoring emotive news headlines.

It’s because history has shown the investors who can’t be disciplined, put aside market movements and media headlines, will inevitably suffer lower than market returns.

The recent correction has provided a great opportunity to illustrate exactly how the media responds throughout two months of volatile market movements. Importantly, we can demonstrate these media reactions while the correction is still fresh in all of our minds.

Below is a chart of the ASX All Ordinaries from the beginning of September until close of trade on October 30. Click on chart for full size.

Overlayed are actual headlines from the Australian Financial Review with arrows indicating when they were published during the correction. We’ve observed these headlines as being an accurate barometer of how the media reported the correction throughout September and October 2014.

At the beginning of September the ASX was near its high point for the year and the equity headlines were positive, with a “Flood of Money Tipped to Keep Shares Going”. From there, the market had a swift decline and halfway through September the AFR noted a “Storm Alert for Investors”.

As the declines continued readers are told of “Fears of More Losses After ASX Wipeout” along with a story detailing past market horrors in October. This one is written every year because the 1929 and 1987 crashes happened during October. Strange that the other 80 odd Octobers that were relatively uneventful haven’t rendered this story useless by now, but journalists need to write stories so they can eat.

Early October and AFR asks “Is This the Last Gasp of the Bull”, while local investment experts begin musing on further bad times ahead – at this stage the market was down over 7%. The market declined another 2% before hitting bottom for the correction. Notably, this was the exact point the AFR capitulated and started talking about bailing out, writing “Knowing When to Use Your Parachute”.

The market moved off the bottom and posted consecutive positive days for over a week. During this time AFR reminded us “It’s Volatile, but Don’t Panic”. A headline that would have been more useful a month earlier after the market had dived and they talked of a “Storm Alert for Investors”.

As the market continued to pull back losses, the reminders about buying opportunities appeared. Yet there were significantly better buying opportunities when they told us to use our parachutes! With the market going up again AFR clearly felt safer about suggesting it was time to buy.

When the market shot back into positive territory for the year, AFR decided to roll out their hindsight machine and smugly suggest “Volatility Is Not a New Thing, Nor Necessarily a Bad Thing”. Again, something that would have been more useful before or during the correction, not when it appeared safely behind us.

We understand market declines can be emotionally trying because as the market falls, so does the equity portion of your portfolio, but here we can see how the media can exacerbate those feelings of nervousness by acting as some form of authority on what’s ahead.

As the headlines on the chart show, they have absolutely no idea what is happening. They’re in reaction mode and their predictions and advice are late, wrong and ignorant.

When the market was at peak they predicted it would continue. After the market fell for half a month they started the panic headlines. When the falls continued, the panic headlines turned to doom with a reminder of past crashes.

As the market bottomed out, they gave advice on jumping. When the market moved upwards for over a week, they then reminded us not to panic. As the market continued to move upward they told us about the bargains we should buy and reminded us to be brave!

Finally, with the market back in positive territory, and after all their emotion charged headlines, they brazenly tell us what just happened isn’t new, nor a bad thing!

Little wonder why today’s newspapers are lining bird cages tomorrow.

September 12, 2014 by John Duncan

Iron Ore Decline Shows the Danger of Being Undiversified

If you haven’t heard, Australia’s mining boom appears to be on the wane. While some commodities appear to be holding up, Australia’s largest mining export, iron ore, has spent the year on a downward slide with the spot price declining over 30%. Such declines bring sharply into focus the budgets of governments, the bottom lines of mining companies and the fortunes of undiversified investors.

Take Western Australia’s Key Budget Assumptions. The 2014-15 WA budget estimate was for an average iron ore spot price of US $122.70. The forward estimate for 2015-16 was for $120.10. For 2016-17 it was $117.60 and for 2017-18 it was an average spot price of $115.

As of writing the iron ore spot price had fallen below US $85. And the decline from over US $120 at the beginning of the year has already mothballed mining projects across the country.

In Tasmania, Shree Minerals started up their Nelson Bay mine in late 2013 and despite talk of 30 years of production and 150 jobs; mining activity had halted by mid-2014. There seemed to be ongoing conjecture regarding their costs; a Shree presentation suggested AUD $81 per tonne, but they stopped mining when the spot price slipped below US $100 per tonne.

Northern Territory iron ore miner, Western Desert Resources suffered an even more disastrous outcome with the administrators called in this month. Macquarie Bank clearly saw the writing on the wall for iron ore prices and wouldn’t extend Western Desert Resources’ $80 million dollar debt facility. WDR had been experiencing problems with its loading facilities.

There were some high profile shareholders and directors scalped in this debacle. Pokies billionaire Bruce Mathieson, former Coles Myer chairman Rick Allert, Billabong co-founder Scott Perrin and former Woolworths CEO Roger Corbett, among the notables. Another reminder that big names involved in a company aren’t actually a reliable indicator of success.

The most interesting story came from Macquarie’s research arm. Back in January, Macquarie Private Wealth analysts put an “outperform” recommendation on Western Desert Resources with a price target of $1.05. At the time it was trading at 71 cents and Macquarie analysts offered the following:

Our estimates suggest the company should generate sufficient free cash flow to repay the $80m debt facility with Macquarie Bank within 12 months.

And less than nine months later Macquarie pulled the pin on that debt facility. Though Macquarie Private Research wasn’t alone with their bad call. Foster Stockbroking and Commonwealth Bank Equities saw similar big things for Western Desert Resources.

Chalk up another big loss for share pickers and analysts!

The strange thing was the analysts’ blindness to what was potentially coming in the iron ore market – the thing they’re paid to know about! Not only had the higher iron ore prices been prompting junior miners like Western Desert Resources and Shree to jump in the game, the majors like BHP, Rio Tinto and Brazil’s Vale had forecast they would massively increase their production.

Take BHP’s production report for the year ended 30 June 2012. BHP’s iron ore production stood at just over 159 million tonnes per annum (mtpa). By the year ended 30 June 2014 it had swelled to 203 mtpa with the expectation of 245 mtpa in 2015 and potential growth to 270 mtpa in the future.

Similarly, Rio was producing 230 mtpa in 2012, but had expanded to 290 mtpa in 2014. Their end goal is 360 mtpa for 2015. There were similar production ramp-ups coming from Andrew Forest’s Fortescue – up to 150 mtpa and the start of Gina Rinehart’s privately held Roy Hill project at 55 mtpa. Looking at a cost comparison of ASX listed iron ore companies might give an indication as to why BHP and Rio were enthusiastically increasing production.

iobe

$70 iron ore isn’t a great concern for Rio or BHP with their economies of scale, but a massive supply deluge could wipe out the majority of their listed competition. Not that any of this was given coverage in the establishment media over the past few years – nor from investment analysts who continued to have optimistic buy ratings on smaller iron ore miners.

This isn’t meant to be research on mining companies or the sector as a whole, but it is meant to be an indicator of how hard it is for an investor to successfully invest in individual companies or sectors. There are an immeasurable number of moving parts and variables that go into tracking the fortunes of one share.

Try being appropriately informed and abreast of the risks on 5-10 shares!

Especially when the information peddled by the media and investment analysts (the information you rely on) appears woefully ignorant until it’s too late. You might notice the media has now discovered the iron ore price has gone down and the reasons why. Subsequently, there are now wall to wall stories with experts and pundits telling us what we should expect next.

The same experts and pundits who’d previously told us to expect something completely different. Take Sydney Morning Herald economics editor, Ross Gittins, and his quotes from 2009 and 2012 that encapsulate the “she’ll be right” message he’s delivered his readers on mining over the past few years:

2009: That’s the point that’s slowly dawning: the resources boom is coming back and has decades to run. It will involve further huge expansion of our mining industry and huge growth in the volume of our mineral and energy exports, either at prices roughly the same as they are now or, quite possibly, higher.

2012: For a start, it’s a bit soon to be kissing the boom goodbye. Spending on the building of new mines and liquefied gas plants is expected to grow strongly for another year before it starts to fall back. Even then, it will stay way above what we normally see for several more years.

Yet last month Gittins levelled with his audience, questioning the value of the boom and timing his backflip perfectly as iron ore looked to fall below $90.

So the chances of your mine being completed in time to enjoy the super-high prices aren’t great – the more so because it’s essentially a self-defeating process: the more firms join the race and the harder they try to be among the first to complete, the sooner supply catches up with demand and prices start falling.

Just another reminder to ignore the forecasts of journalists and media pundits. And if iron ore makes a recovery what commentary should we expect from Gittins then?

As for the iron ore companies listed above (excluding BHP and Rio Tinto) their share prices have all declined a minimum of 30% this calendar year. Rio Tinto is down 10% and BHP a more modest 5.5%.

Meanwhile, the ASX All Ordinaries is up nearly 5%. Listed property is pushing over 15%. Fixed interest is up just under 5% and international shares have returned under 0.5%.

Iron ore is an interesting sector, but if even “the experts” can’t get it right why should anyone else invest their time when a diversified portfolio combining the above asset classes has provided reliable returns over long time frames?

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

January 9, 2014 by John Duncan

Quick Guide to Personal Finance

In my experience, financial success is gained through two key actions that we all have the ability to leverage. The two keys to financial success is hard work and sound decision making. Over time if we consistently make unwise decisions, we will find ourselves in a situation that is difficult to recover from.

Just like other things in life, achieving financial success is more about hard work and making the right choices rather than circumstances outside of our control. Making savvy Personal Finance decisions starts with understanding why we make bad financial decisions in the first place and making a conscious effort to change the way we handle our money.

None of us are perfect as we are all human and are guided through life by a mix of ideals, morals, instincts and emotions. These factors can have a large influence on the financial decisions we make everyday. Some help us make good decisions and others not so much.

Savvy financial decision making begins with understanding that emotions and other elements of the human experience can impair your ability to make good financial decisions. The following list of savvy financial decision examples can help you improve your financial situation and avoid making poor financial decisions in the first place.

Making Better Financial Decisions

Create a Financial Plan – You know my first piece of advice will always be to create a financial plan. A plan will automatically help you increase your financial decision making savvy by showing you the impacts of the decisions you make on a daily basis.

Difference Between Needs and Wants – Far too often we buy the things we do not need. When we spend money to buy frivolous items or overpay for things we do need, we are throwing away the opportunity to let our savings and investments grow at a faster rate. Take the time to explore the concept of needs and wants, let your conclusions guide your future financial decisions.

Don’t Max Out Your Mortgage – In the past, many of us have bought as much house as the bank would let us. We let the lenders and mortgage companies tell us what we could afford. This decision put many of us in a rough financial situation that we are still working through. So if you are exploring the opportunity to buy a house, don’t max out your mortgage.

Automate Your Budget – Taking the emotion out of budgeting and spending less is as easy as opening a bank account. When separating your discretionary and non-discretionary expenses into two bank accounts you will make it easier to save money by removing the temptation to buy the things you don’t really need.

Invest a Little Each Pay Cheque – Consistent investing is the best long-term strategy for making your money work for you. Investing 5-10% of every pay cheque is a great way to build a solid nest egg and easily increase your net-worth.

Don’t Ignore Insurance – One large bill, from a car accident for example, can wreak havoc on your financial plan and severely limit your chances of ever being financially independent. Ensure that your insurance covers you from any large unavoidable bills in the future. I know paying for insurance is not on the top of your to do list, however you will thank me if anything ever goes wrong.

January 29, 2013 by John Duncan

Year In Review – 2012

2012 Year in Review

Economy & Markets: Overview

Throughout 2012, investors did not have to look hard for reasons to avoid the financial markets. Economic news provided abundant cause for anxiety, prompting some investors to consider fleeing to cash. Some investors responded to the headlines and acted on their fears. Unfortunately, on the sidelines they missed the opportunity to capture the strong returns across the markets in 2012.

The year opened with lingering concern about the weak US recovery and debt crisis. Many pundits predicted another lacklustre year for stocks and more volatility. Some predicted a euro zone breakup. The global economy was showing signs of a slowdown, while the US elections and spectre of the “fiscal cliff” prompted caution.

Despite the steady stream of bad news, major market indices around the world delivered double-digit total returns, with Australia outperforming most other developed markets. And while the media constantly talked about volatility driving investors away, market wide volatility actually fell to its lowest level in six years.

[Read more…]

October 3, 2012 by John Duncan

Hands off our super

Many media reports are suggesting Bill Shorten the minister for Financial Services and Superannuation is about to raid the superannuation piggy bank to keep their promise of a budget surplus. (Labor is reportedly considering increasing superannuation tax) While it is prudent to ensure governments are run on budget over the business cycle it is very poor governments that try to achieve surplus at all cost. Superannuation is a great structure for building wealth for retirement see What is Super but many Australians are distrustful of the super system and constantly changing superannuation rules. I can certainly understand their distrust and confusion. Over the last number of federal labor budgets we have seen continuous tweeks to the system to help improve the budget bottom line.

Salary sacrifice contribution limit was $50,000 in 2007 for those under age 50 and $100,000 for those above age 50. The current [Read more…]

December 19, 2011 by John Duncan

The Silver Lining

Uncertainty in Europe, a volatile share market and falling property prices; there has to be some good news! Today I feel a little like Santa Clause for those with large debts as there is a silver lining. With inflation on the way down and predictions of a slowing economy we have now seen interest rates fall two months in a row. Interest rates have now fallen half of a percent, equating to $1500 saving a year or $125 a month, for those with a $300,000 mortgage. With a couple more interest rate falls predicted by a number of economists, do we just ride the gravy train all the way down and hope they stay down long enough to get some real benefit? Or do we take advantage of some very competitive fixed rates and lock them in for a period of time? [Read more…]

December 16, 2011 by John Duncan

Things Change

It’s that time of again, when harried finance editors ask reporters to call investment professionals and cobble together top predictions for the coming year. These are fun to write. But for readers, they’re more entertaining a year later.

Take the late 2010 Barclays Capital Global Macro Survey of more than two thousand institutional investors. The pick for the best performing asset class in 2011 was equities (with 40% support), followed by commodities (34%) and bonds (less than 10%).¹ The consensus prediction was a 15% gain in the US S&P-500 for the year to around 1,420.

As we now know, the truth turned out to be rather different. To the beginning of December and using broad indices, diversified fixed income was the best performing asset class of the year, followed by government bonds. Returns from commodities and equities were negative. The year-to-date return for the S&P-500 was close to zero. (And remember, these are the forecasts of big institutional investors.) [Read more…]

August 10, 2011 by John Duncan

Living with Volatility

The current renewed volatility in financial markets is reviving unwelcome feelings among many investors—feelings of anxiety, fear and a sense of powerlessness. These are completely natural responses. Acting on those emotions, though, can end up doing us more harm than good.

At base, the increase in market volatility is an expression of uncertainty. The sovereign debt strains in the US and Europe, together with renewed worries over financial institutions and fears of another recession, are leading market participants to apply a higher discount to risky assets.

So developed world equities, oil and industrial commodities, emerging markets and commodity-related currencies like the Australian dollar are weakening as risk aversion drives investors to the perceived safe havens of government bonds, gold and Swiss francs.

It is all reminiscent of the events of 2008 when the collapse of Lehman Brothers and the sub-prime mortgage crisis triggered a global market correction. This time, however, the focus of concern has turned from private sector to public sector balance sheets.

As to what happens next, no-one knows for sure. That is the nature of risk. But there are seven simple lessons that individual investors can keep in mind to make living with this volatility more bearable. [Read more…]

May 31, 2011 by John Duncan

Tax planning is essential to minimize your tax bill

It is no use getting to the accountant in September and asking them to save you tax. While they can claim all you’re entitled to, they can’t take advantage of things you could have done to reduce your tax.

There are a number of aspects to tax planning, including:

• Deferral of income
• Splitting of income to take advantage of lower tax rates and tax offsets
• Bringing forward expenses to the current tax year

We have broken tax planning down into 3 categories. [Read more…]