Rob Coyte's Blog
Recent Blogs
- How Will Income Streams Increase From Shares? 27-Jul-2010
- The Importance of Income from Shares 26-Jul-2010
- Why Has The Income For My Investments Fallen? 20-Jul-2010
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Where Is Your Super Invested?
RICE Warner Actuaries have released a report saying that superannuation will grow to $1,583 Billion by 2014. This will mean an average member balance of $78,000 at that point in time.
As can be seen these amounts of money are quite large and it always surprises me when people have no idea how their superannuation money is invested. Even when people know that it is in a fund of some sort they have no idea how the underlying fund invests their money.
Whilst raising concern it is important to also realise this does not have to be the case and that you can take hold of your superannuation and “control” where it is allocated. This means that you are only getting exposure to investment assets that are suitable for you and your circumstances. For this reason a large portion of our clients utilise Self Managed Superannuation a sector which is forecast to grow to over $400 Billion in next 5 years. We can show you how to get the advantages of such a super structure and take control of your money and your future.
The Psychology of Investing
"Ben Graham's conviction rested on certain assumptions. First, he believed that the market frequently mispriced stocks. This mispricing was most often caused by human emotions of fear and greed. At the height of optimism, greed moved stocks beyond their intrinsic value, creating an overpriced market. At other times, fear moved prices below intrinsic value, creating an undervalued market".
Robert G Hagstrom
Investing is often referred to as an art not a science. One of the main reasons for this is the behavioural patterns of investors and how the decisions they make are influenced by certain events and the human traits that lead to those decisions. A field known as “Behavioural Finance” has evolved in an attempt to understand how emotions and cognitive errors influence investors and the decision making process. To be a successful investor we need to firstly understand our own “emotional” make up and then ensure that our decision making process is allowing for the fact that these factors will be involved in the process, after all we are human.
Fear and greed are the two most commonly referred to by people that follow markets however, there are others.
People tend to give too much weight to recent experience and extrapolate short term trends which is against what will happen over the long term. Professor Schiller studied this phenomenon and found that at the height of the Japenese share market 14% of investors expected the market to crash. After it did crash the amount of investors expecting it to crash rose to 32%.
As investors people need to discern between skill and what was luck. Human nature is to say that good results are that of skill whist bad results are that of bad luck. It is important to remember that the future is uncertain and unknown and when you make a decision it is based on the information you have at the time. If investors expect to know what events will transpire in the future, like a global financial crisis the extent that we have seen, then they are bound to fail.
Ego, confidence, ability to blame others, regret are all factors that influence our cognitive decision making process to be an investor we must understand our decision making process if we are any chance of making good decisions.
Are Our Investments Still Profitable?
A couple of weeks ago I did a blog entitled “Time to Focus on What is Important” referring to the profit reporting season, where companies update shareholders on how they are going.
Well how are these businesses going?
Last year companies profitability suffered greatly because of an accounting term called “write downs”. This is when a company has an investment/asset on its books for certain value and then they reassess that value downwards as the asset is no longer worth that much money. One of the examples of this is with Crown Casino (CWN) who invested $1.377 billion in overseas casino operators, which include stakes in Cannery Casino Resorts LLC and Fontainebleau Resorts LLC. These investment are now on the books as they were “wrote down” in previous accounting periods to $50 million in the company’s accounts, or 3.6 percent of their original value. In this reporting season for the 6 months ending 31 December 2009 they are back to making money from the underlying casino operations, people gambling, with Melbourne casino making $243 million and Burswood Casino in Perth making $112 million. This is what we want to see as long term investors. Interestingly if the overseas assets recover they will then increase the value of those assets which will have the opposite impact to profitability from an accounting perspective.
Property companies are classic examples of this phenomenon of “write downs” as real estate values fall they reduce the assets value on the accounts (based on valuers valuations) even though the underlying asset will still be receiving rent (probably more than last year) and continuing to meet its expenses.
As investors we like to look at the “operating profit” of the business which excludes factors such as write downs and looks purely what the company does day in and day out be that gambling, collecting rent, selling groceries or whatever. As over the long term it’s the profitability of these operations that will constitute a company’s value proposition. The good news is that the operating profitability of these companies is expanding from where it was last year which is great news for us as owners of those businesses.
Good Investors Don’t “Look Busy”
With the plethora of news, rumours and whims that get thrown around in the media it is tempting for investors to “look busy” by constantly tinkering with their portfolio. This is counter productive and will not result in the best long term outcomes for investors.
Remember a share is ownership in a real business. In assessing the status of a business one needs to look at the performance of the underlying business, not the share price performance. Once you have determined the “quality” of the underlying business the share price simply tells you whether the business is cheap or expensive. To state the obvious, however it is often forgotten by investors, you buy a business when it is cheap and should it get to the point they are absurdly expensive then you look to sell. A scenario that frequently happens during booms such as the tech boom when Microsoft was valued at well over US$100 per share and today trades at about US$25. When the shares were at their height the underlying business was performing exceptionally well with annual profits growing over 30% per annum for a decade during the 90’s, a feat achieved by no other US company. However, the value people were willing to pay for this company was exorbitant and miles away from a “fair” price. In recent years we have seen a resources boom therefore should we be loading up on these trendy stocks?
Smarter men than myself have used this as the cornerstone for their investing “play book” so I will let them say it.
“Although it's easy to forget sometimes, a share is not a lottery ticket... it's part-ownership of a business”.
Peter Lynch
“When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom”.
Peter Lynch
“Most of the time common stocks (share market) are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed. For indeed, the investors chief problem, and even his worst enemy, is likely to be himself".
Benjamin Graham
“The financial markets generally are unpredictable. The idea that you can actually predict what's going to happen contradicts my way of looking at the market".
George Soros
“I buy when other people are selling.”
J Paul Getty
“The trouble, in my opinion, with corporate America today, is that everything is thought of in quarters” (reference to the short term thinking of investors).
Henry Kravis
“Most of our efforts are focused on understanding the dynamics of how a business works, what makes it unique, and the valuation that one should be willing to pay for it”.
Paul Moore
A Time For Focus on What Is Important
For share investors or business owners “Reporting Season” is the grand final of the football season or the Ashes series for cricket fans. It is where the companies report to shareholders about the underlying performance and ultimately profitability of their businesses. Investors trade shares pretty much all year round and a whole raft of factors influence markets from economic issues, natural disasters, acts of terrorism of implied threats of combat the list is pretty much endless. However, these few weeks provide a window to really focus on what we are trying to do in the long term....own a profitable business.
In the words of the famous money manager Peter Lynch, “I spend about fifteen minutes a year on economic analysis. I also spend fifteen minutes a year on where the stock market is going”.
As the US gets towards the end of their “Reporting Season” it is just starting in Australia. In the US at this stage more than 350 companies that are in the S&P 500 have reported earnings with about 75% of these beating expectations. How are the underlying businesses you own performing in terms of profitability, operationally and the future strategy they are implementing. This is the gauge of whether we want to be investing in a business not the share price, the share price just tells us whether a business is cheap or expensive.
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