Slack Investor remains IN for US, and Australian index shares.
However, it is time to temporarily leave our cousins in England – I am OUT for the FTSE 100.
… a tricky month for investors with all markets declining. The Australian Index (-4.3%) and the US index (-2.7%) had solid falls but managed to stay above monthly stop losses. The UK index (-2.4%) has just had its third monthly fall in a row and finishes the month below its stop loss – Slack Investor must sell his FTSE100 ETF.
UK INDEX FTSE100 Monthly Chart Trade Cycle 29 Jul 16 – 29 Mar 18 – Click for better resolution – From Incredible Charts
As always, there is a time of reflection when I sell – I like owning a share of these UK companies – it is much more satisfying than owning cash. Slack Investor bought the UK index at the end of July 2016 and, after 20 months, is looking at a profit of 4.9%. Not a fantastic profit – but this is the fourth Slack Investor profitable trade in a row for the UK market (31.7%, 27.1%, 17.6%, 4.9%). For simplicity, dividends are not included in these calculations.
The Downside of being Slack
FTSE100 Daily Chart -Click for better resolution – From Incredible Charts
As I wrote about the upside of being slack last month, it is only right that I illuminate the downside. At times, there is a cost to being a monthly trader. If I was a daily trader that used stop losses, I would have unloaded the FTSE 100 on Feb 8, 2018 at 7170 when the closing price first fell below the stop loss. Slack Investor sold at 7056 a discount of 1.6% to the daily exit – but as mentioned many times, the piece of mind found in monthly decisions makes this a small price for me to pay.
All Index pages and charts have been updated to reflect the monthly changes – (ASX, UK, US).
Still from the Peep Show – Image may be subject to copyright – found at this link
One of the great things about England is the turn of phrase that the locals enjoy. “Chance would be a fine thing” is a good example of language that is perplexing to the new arrivals. It is the sort of saying that sometimes crops up in the UK that has a meaning that is not entirely obvious.
In context, someone in England would utter this phrase in response to a comment from another that sets up a desirable scenario – but the retort “Chance would be a fine thing” is said to indicate that it is not likely to happen! Further context can be found in the great tribute by David Mitchell to insecure managers in the short but very fine Peep Show “Chance” sketch at this link. Youtube Autoplay will reward the brave with another great character from the show -“Alan Johnson”, the crude and aggressive management guru in the following Youtube clip – But Language Warning with Alan – I Digress! (… but still giggling!)
I like the “chance” phrase, it reminds me of the enormous part that luck plays in the building of a share portfolio – but it is the very opposite of how I think when I buy a stock! I do not buy stocks often and a buy is usually at the end of some good research where I have convinced myself that the stock is growing and is just about to take off when the rest of the market catches up to my brilliant thinking. Bitter experience and keeping good records over 25 years has shown my abilities in picking winners at around the 55 -60 % mark.
At first glance this looks a pretty poor record of stock judgement – However, by keeping my losses relatively small (through monthly stop losses), owning a diverse range of companies (see Portfolio Page), and letting my rising shares rise, and luck, the Slack Investor has done alright – Five year compounded average growth rate (CAGR) for my audited SMSF portfolio of 16.9% p.a..
The luck of stock selection has always been acknowledged by Slack Investor, but it was brought home to me when my son asked, in December 2017, for advice on where to put $5000 in the share market. You would think that this would be an easy thing for Slack Investor who has spent almost 30 years studying the vagaries of the market. 15 months ago I went into a lather and researched very hard and came up with two growth stocks that I thought were not overpriced and had reasonable growth prospects – but I still had a bit of trepidation as, he is my son, and this was his hard earned savings from a part time job -and, I wanted him to continue with the allusion that his Dad knew what he was talking about!
With the usual combination of research and luck, the two stocks that I presented him with were stocks that I already owned – Fisher and Paykel Healthcare (FPH) and Altium (ALU). I gave him the choice after a brief overview of each company (… spread the risk … give him ownership!). The former are world leaders in surgical instrumentation and pumps. and Altium has something to do with printed circuit board design and the “internet of things”. With the wisdom of youth, he picked Altium to put his savings into. I am relieved to say that both stocks have done extremely well in the past 15 months but the weekly charts tell a story – with my son’s choice, ALU, the clear winner (+177%).
Fisher and Paykel Healthcare (FPH) Weekly Chart – From Incredible Charts
Slack Investor remains IN for US, UK (Just!), and Australian index shares.
… a very volatile month and a test for the fainthearted. The monthly overall declines do not tell the whole story – rapid declines then recovering. The Australian Index (-0.4%) had the best recovery and the US index (-3.9%) and UK index (-4.0%) had similar overall monthly falls.
Slack Investor is already off the couch and is still on alert for the US Market considering its high valuation and its recent 10.2% correction. The UK market is also under watch as it is very close to its monthly stop loss (See UK Index page).
The Upside of being Slack
Some of the time there is a price to pay for being Slack – and only making sell decisions on a monthly basis. But it is not this day!
… A day may come when the courage of men fails, when we forsake our friends and break all bonds of fellowship. But it is not this day.–Excerpt from Aragon’s Sons of Gondor speech – Lord of the Rings – Wikiquote
Well, … quoting from Tolkien’s The Return of the King is perhaps is a little dramatic but this post is a bit technical and needed a picture of Viggo Mortensen just to brighten it up.
There are many share traders who set automatic stop losses with their brokers that trigger a sell order when the price moves below a designated value. This technique can be good when you want to set a stop loss and forget about it – But there are pitfalls. Slack Investor has tried this method before and has found that the automatic sells are sometimes triggered by a particularly volatile day and your automatic sell order may trigger at $3.00 but at the close of the day the stock may have recovered to $4.00.
More common (and disappointing!) is when a rapidly falling price jumps below your automatic stop loss without triggering the sell. You then would sell the stock manually – usually at a lower price.
There are many traders who, like Slack Investor, set there stop losses manually … butact on them on a daily basis. The chart below is a daily chart of the US Index S&P 500. As a refresher, each vertical line represents the daily price range for the S&P 500. A red line indicates that the price has dropped during the day, and a blue line shows a daily price rise. Clicking on the chart will increase the resolution and you can then make out little tabs either side of the vertical daily line. The tab on the left represents the opening daily price and the tab on the right the closing price for the day. A daily trader might act on his stop loss immediately the S&P 500 falls below the stop loss (e.g. big red arrow). This technique can be a very good thing if there are further falls! However, in this case, the recovery from the 10.2% correction has rewarded the Slack Investor’s slackness.
Slack Investor does not like the daily grind of decisions. He likes to do most of his trading based on monthly charts (See left) … where each vertical line represents a month of price movement for the US Index S&P 500. At the end of February 2018, the right hand tab of the last vertical red line indicates a closing price of 2713 – well above the stop loss of 2557 (for now!) so my trading method says to hang in there.
Sometimes there is a price to pay for this slackness – For instance, when there is not a recovery in the stock price! But the delight of only making monthly decisions outweighs this concern for me. My monthly trading method together with diversification (~20 stocks) and a bit of effort in selecting growth stocks has proved to be sound so far.
All Index pages and charts have been updated to reflect the monthly changes – (ASX, UK, US).
Slack Investor remains IN for US, UK, and Australian index shares.
… some monthly setbacks for the Australian Index (-0.5%) and the UK index (-2.0%). However, confidence remains high in the USA with another huge (I mean … It’s like … Really Huge!) rise of 5.6% – This is “irrational exuberance” territory!
Slack Investor gets off the couch and is on alert for the US Market. The two strong rises over the last two months have pushed the S&P 500 up to breach the the 20-25% upper limit from his previous stop loss. This involves some necessary action – finding a new stop loss that is a little closer to the current price.
From Incredible Charts
The old S&P 500 upper limit of 2786 was surpassed by the end of month price (2823). I then go back to the charts and find a new, higher stop loss that makes sense to me. This is usually a new “higher low” – and I had to look at the weekly charts to find a sensible stop loss minimum at 2557. If this chart stuff interests you, go back to an earlier post. Otherwise, be happy that Slack Investor has moved his stop loss upward and is ready for the inevitable fall (Correction) in the US markets.
A2 Milk Company (A2M)
Slack Investor was blissfully unaware that there are two types of proteins in Milk – Conveniently labelled A1 and A2 – Who knew?? I am blissfully unaware about most things.
A2M is a New Zealand company listed on the Australian Stock Exchange and they own the patent for identifying cows that only produce the A2 protein in their milk. The selling point, backed up with a slick marketing campaign “Enjoy Milk Again “, is that there is evidence to suggest milk containing just the A2 protein is easier for some people to digest.
Slack Investor has been an owner of this fantastic company since last year and has taken the opportunity to top up his holding when A2M reached a new high in the middle of the month at around $8.00 – This is not advice.
There are many claims for A2 Milk, including that the lactose intolerant folk find it easier to digest than normal milk. Slack Investor has had a glance at A2M’s supporting 100 independent studies and he is refreshingly skeptical of these claims till a large sample, “double blind”, piece of research emerges. There are also other skeptics.
However, he cannot argue with success of A2M’s new campaign and the converts to A2M’s products that are reflected in recent sales growth. The action on the price charts and projected sales get me off the couch. Particularly with a recent announcement that A2M is expanding into the large US market. Suprisingly (for me!), 70 percent of African Americans and 90 percent of Asian Americans are lactose intolerant.
Always, before I invest, I want a deep look at a company – I use the excellent 4-Traders site and, in particular, the Financials tab – for A2M has revealed the type of growth trend that Slack Investor likes – the black columns are projected sales through to 2020. Projected increasing sales and income are the type of thing that I am looking for.
From 4-traders.com – click image for better resolution
A2M’s Current Price to Earnings ratio is an “eye watering” very high 48. This does not compare favourably with the ASX average PE of around 15. A high PE ratio can be a sign of an overpriced stock- but there are exceptions!
The exceptions are made for exceptional companies. A2M is growing its earnings so fast that the forecast PE is much more reasonable in a few years (i.e. A2M estimated PE is a more reasonable 28 in 2019) and A2M is the type of company that is excellent at using its resources to make money – an extremely high Return on Equity (ROE ~50%). These high PE, high growth companies make up a large portion of Slack Investor’s portfolio. They can be a wild ride … as they are often punished (price drops) if they do not meet forecast earnings during reporting season – but I am happy to hang onto this company for now – there might even be some further A2M good news ahead – If not, my monthly stop loss at $6.97, and diversification, will protect me from catastrophe.
All Index pages and charts have been updated to reflect the monthly changes – (ASX, UK, US).
Slack Investor remains IN for US, UK, and Australian index shares.
… and further gains for the Australian Index (+1.6%) and the US index (up 1.0%) on the month. The UK Index is in record high territory, up 4.9% in December.
Slack Investor is on the couch again and congratulates himself for being involved with the world stock markets in an environment where a no risk cash 12-mth term deposit will reward him with a paltry 2-4% p.a.
In order to reach financial independence it is necessary to embrace some risk – but as discussed below, Bitcoin may be a “Bridge too Far”.
Bitcoin Revisited
Bitcoin USD chart from Dec 30 2017. Latest chart can be found at etoro.com
Bitcoin is a regular feature in the papers and even around the Christmas Table. Since my last note on Bitcoin, the price has been on a bit of a wild ride.
Going deeper than Slack Investor really wants to go is a whole world of Bitcoin – and its own language – such as “forking”. This is “sort of” explained by Business Insider. Oh yes … there are “Hard forks” and “Hybrid forks” and “Coin Splits”, and “Bitcoin Cash” and “Bitcoin Gold” and … and … see Wikipedia. The complexity is amazing and “makes my head hurt”
Yet, despite this wild chart, in only a six weeks, Bitcoin has almost doubled in value.
Slack Investor has thought of another way of doubling your money that is much simpler … and faster! Go down to your nearest Casino, stroll to the Roulette table and put your investment money on “red” … No No No … Black! (This is not Investment Advice! – Slack Investor is just experimenting with a Dream Sequence). If you are lucky, you can double your stake in minutes, and walk out with a smile – or, if not, you can walk out feeling like an idiot.
The reason that Slack Investor doesn’t go to the Casino – OR invest in Bitcoin – with his hard-earned investment money is RISK. The bitcoin price might get to $100000 USD, or it might crash to nothing. The trip to the Casino and investing in Bitcoin represents too much risk to my capital.
40% of all bitcoin value is held by 1000 people. There is an obvious price risk if one of the bitcoin “whales” decides to suddenly sell. There also could be a difficulty in getting your bitcoin money out if there is a sudden crash.
What does the great investor and Slack Investor hero Warren Buffet think …
“It doesn’t make sense. This thing is not regulated. It’s not under control. It’s not under the supervision [of] any…United States Federal Reserve or any other central bank. I don’t believe in this whole thing at all. I think it’s going to implode.” – from Forbes
My case rests your honour.
All Index pages and charts have been updated to reflect the monthly changes – (ASX, UK, US). I have also done the quarterly update on the portfolio page. A newcomer to the portfolio is the Vanguard FTSE Asia ex Japan Shares Index ETF – (VAE.AX) on Yahoo. This should give me some exposure to a wide range of companies in the growth region of Asia with not too much expense (MER 0.4%). Bought October 9, $62.34; Monthly Stop Loss $58.79)
Slack Investor remains IN for US, UK, and Australian index shares.
… and further gains for the Australian Index (+1.0%) and the US index (up 2.8%). The UK Index dropped 2.2% in November due to what the Financial Times attributes as the “Firmer Pound contribution”.
marvels at the sage judgement of the Financial Times – and most other financial publications that always assign a reason for the random walk of market fluctuations after the fact.
Asian middle class on the rise
While on the couch, Slack investor has an ear out for world affairs and came across an article from the accomplished fund manager (and Asia Buff) Kerr Neilson – The Rise of Asia – worth a full read if you have the time. The article points to the need to consider Asia, and its effect on the world economy, over the next 10-20 years. It is a powerful collection of facts e.g,
China and India have grown their economies consistently at 6-7% for the past 20 years – they are now 4 times bigger than they were in 1998.
When measuring purchasing power, their combined GDP of US $33 trillion is 50% larger than either the US or the EU!
China and India originate nearly 120 million high-spending overseas travellers each year.
The last point is backed up by CNN Money who report that the number of Chinese tourists travelling internationally has more than doubled to 120 million people over the last five years – 1 in every 10 international travellers now comes from China.
Chinese people tend to begin traveling abroad once their household earns about $35,000 – from CNN Money
The rapidly rising middle class of these countries is behind this increased tourism and the graph below indicates the influence of these two economies will be on the rise.
Bitcoin is everywhere in the media. Tales of fortunes made from just investing in this cryptocurrency and waiting till it rapidly accelerates in price – it sounds like the ideal investment vehicle for the Slack Investor!
Superman encounters Kryptonite and starts to lose his powers … Image found here … but original material from DC Comics
Well … not really!
Slack Investor is a student of history and feels like this has all happened before … Some people may be able to make their fortunes through this type of vehicle … but I reckon you would be taking a big risk … Cryptocurrencies might become Kryptonite for the casual investor.
There have been many famous “bubbles” in history, see The Bubble Bubble, The trading commodity may vary but they they all have some things in common, a period of “rampant speculation” … where the price rises sharply … and an eventual crash. Bitcoin has been through several of these cycles already in its brief history – and each time so far has gone on to make higher prices. Those around in the late 1990’s may remember the dot.com bubble the bubble burst in a big dip of the NASDAQ index shown below left.
In the days of the British Empire, in the early 1700’s, the South Sea Company purchased the rights to trade in the South Seas from the British Government and then went to the public to raise money. This was a time of prosperity for some and the money flooded in … and the price rose spectacularly (above right). Despite having this great trade monopoly, the company was mismanaged and eventually failed when the news came out that the management had sold their shares.
“Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he ‘could calculate the motions of the heavenly bodies, but not the madness of the people.’ Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price — and lost £20,000 (or more than $3 million in [2002-2003’s] money. For the rest of his life, he forbade anyone to speak the words ‘South Sea’ in his presence.”
I have included a $USD price chart for Bitcoin – worth over $7000 USD on 7th November, 2017. The chart is below and it maps a spectacular rise since 2010 – when you could pick up a bitcoin for under a dollar! It might be possible to make money using the “greater fool” theory of investing – but your timing had better be impeccable – it looks like a “bubble” to me!
Rather than “Bubble” investing, Slack Investor likes to invest in a diverse range of growth companies – these are real businesses that hopefully have unique products. They are businesses that are run well and are forecast to grow. Financial independence might take longer this way … but the results are surer, and I sleep well at night. I will leave Bitcoin to the speculators.
After all, if a very clever bloke like Issac Newton couldn’t make money on a bubble … what hope does Slack Investor have?
Slack Investor remains IN for US, UK, and Australian index shares.
… and what a bumper month it has been with all markets that I follow on the rise – The Australian Index rockets 4.0%, the UK index up 1.6% and the booming US market up a further 2.1%.
Slack Investor gets off the couch and has a look at the UK Index … as it is recovering from a small fall in September where the monthly price range (the red third bar from right) breached the 10-month moving average (black line). This breaching is a trigger for the Slack Investor trading method as it establishes a new “higher low” for a moving of the stop loss upward – as a new support price has been established. The stop loss for the UK Index was moved upward from 6677 to 7196.
I have undertaken a major change to the Index pages (ASX, UK, US). Previously I have been basing my decisions on Exchange Traded Funds (ETF’s) that I own that are proxies the actual Indexes for each market. As there are a multitude of these ETF’s, it makes more sense to make my decisions on the actual indexes – as this will have more relevance to the readers that are exposed to the general market indicies through whatever means e.g. another index-based ETF, Superannuation funds or Retirement Plans (US).
From the current investment cycle, Slack Investor will base his decision on the following charts
All Index pages are updated together with the charts to reflect these changes. Also, the the previous charts based upon the Index ETF’s are also kept at the bottom of the page for reference (for the super keen!) on the index pages – (ASX, UK, US).
There are plenty of naysayers in the market today but, from the couch, Slack Investor has been noting a few things.
Since 2008, the Reserve Bank of Australia (RBA) has been cutting interest rates from 7.25% to 1.5%. This is the right thing to do for this independent body when the country is recovering from a bit of trouble and they have helped Australia avoid a recession for over 25 years.
Portrait of Isaac Newton at 46 in 1689 by Godfrey Kneller – Wikipedia
However, the great mathemetician and scientist, Issac Newton (1642 -1727), the inventor of Calculus and the Laws of Motion – and heaps more – had a few insights.
To any action there is always an opposite and equal reaction
It is not quite opposite (or equal!) but there are a few consequences of these lower interest rates. This cheap money, together with overseas investment (and a few other factors) have helped home prices in Sydney increase 76% from December 2011 to March 2017. The state government “clips the ticket” on all of these home transfers and the state budgets of New South Wales (and Victoria) are moving rapidly into big surpluses as home prices rise. Where will this money go?
Australian politicians (of all persuasions) have been getting a lot of (mostly deserved) bad press – but behind the scenes, some good things are going on. When money is cheap, this is exactly the right time to borrow for nation building assets. According to a recent Milford analysis for the next budget cycle, the NSW Government will be spending an additional $4.4 billion on school upgrades, $7.7 billion on health infrastructure and a staggering $72.7 billion on infrastructure.
An AFR article quotes the Commsec economist Craig James. He laments that the focus has been on “negatives such as high household debt, weak consumer sentiment and low wages growth, research published this week shows almost $100 billion in local, state and federal government spending will hit the economy this financial year alone.” The cool graph of proposed infrastructure spending is presented below – please click for image for greater resolution.
Slack Investor generally does not think in terms of investment themes, but the chart of an Australian infrastructure firm WorleyParsons Ltd (WOR) has been speaking to him. After a long term down trend in price, WorleyParsons management have cut costs and are riding the wave of this infrastructure development since the start of 2016. This is not advice, and Slack Investor is a bit late to this party, but he has cut himself a slice of the WOR cake. Click on chart for greater resolution.
Slack Investor remains IN for US, UK, and Australian index shares.
Despite a bad month for the UK index where the previous month gains were wiped out, there are no alarm bells yet. All markets have had a reasonable financial year (to Jun 30, 2017) with 12-month returns for the US, UK and Australian Index of 15.2%, 13.0% and 9.6%, respectively. These returns, for simplicity of calculation, do not include dividends. For the Australian market, the dividends would add another 4-5%!
And now for a confession …. Slack Investor has been slack … and not moving his market index stop losses properly! I put this down to an oversight and have included an extra few columns on the Index pages to help me not do this again.
Stop Losses are very important to the Slack Investor’s method and offer a detached way in which to make decisions at the end of every month. The stop losses are set at the time of share purchase and moved upward according to a modified version of Dow theory. This trend method was discussed in an earlier post The Trend is Your Friend …
Slack Investors’s Index trading method involves moving the stop loss level upwards to a new higher low when it is established on the monthly chart. There are a couple of rules that I have to keep me in the index trade as long as possible.
Stop Loss Rule No. 1: A Higher Low can only be established below the 10-month moving average (the wavy black line on the index chart pages).
Stop Loss Rule No. 2: Stop Loss Rule No. 1. does not apply if the monthly closing price is more than 20% above the set stop loss.
For the UK Index, back at the end of February, the end of month price rose 21% above the stop loss level. I should have moved the Stop Loss level then … but I have now caught up and include the adjustment on the UK Index page. I include the technical chart information for some readers who are interested … but don’t worry, Slack Investor will tell you at the start of each month what each of his decisions are in the monthly updates for the US, UK and Australian Index.
Warren Buffet has some much more famous investment rules …
Rule No. 1: Never Lose Money.
Rule No. 2: Never Forget Rule No. 1.
Mr Buffet is being a little flippant here, and even the great investment master has lost money at times on individual investments. However, overall he has not lost money … and this is the same approach that Slack Investor is trying to emulate. It is impossible to completely avoid losses, it is just part of investing, and there is no use beating yourself up about a loss when it happens … However, you can limit losses by using stop loss levels … and, with Slack Investor Stop Loss rules … they should be limited to around 20% (there may be some slippage!.
I have updated all Index pages and the Portfolio page.
Slack Investor remains IN for US, and Australian index shares.
