Normally, Slack Investor likes to work on a monthly scale i.e Slack! He usually limits himself to just two posts per month – so this is an unusual post.
I have to report that I am tentativelyOUT on the S&P 500 – but remain IN for Australian index shares (ASX 200) and the UK Index (FTSE 100).
Slack Investor has been a little bit on edge lately due to the high valuations of stock prices – particularly with the S&P 500. As a result, I have been working with tightened stop losses on my Index funds and tried to keep them within 10% of the latest end of week price.
Sadly, on a weekly basis, the S&P 500 has just sunk below the current stop loss of 4495 and is on a SELL watch.
This means that, on the US open of trade, Monday 10am (New York Time) – I will try to sell my S&P 500 Index holding. The only situation that will stop me is – if there is a dramatic reversal in the first hour of trading. In other words, if the S&P 500 starts increasing in price – I will not try to trade against the trend and I will put a hold on the selling.
A quick look at the S&P 500 futures shows a continuation of negative sentiment likely for the Monday – and it is probable that I will sell. It has been a good association with the S&P 500 since May 2020. I will give full details of the trade in the end of January update.
This is not advice – just an outline of Slack Investor’s trading intention.
Slack Investor has long been appalled at the prevalence of gaming machines “pokies” in pubs in Australia. These “pokie rooms” are full of sad faces. With a machine “return-to-player percentage” of 85 -90%each gambler is methodically destroying any chance of achieving financial independence.
Australia is actually home to 20 per cent of the world’s pokie machines, because it is one of the few countries that allows machines outside of casinos.
In 2019, NSW and Victorian poker machine gamblers lose an average of about $3500 a year in pubs and clubs – three times the average $1245 spent annually on electricity and gas. There are countless stories of the tragic consequences of poker machine addiction. Poker machines are concentrated in Australia’s poorest suburbs. The state governments are, in turn, addicted to the revenue from these gaming machines. However, this situation can’t be good for the community and it can be turned around. Western Australia has banned poker machines in Pubs and Clubs. If you want to ban these machines or reduce their harm in your state – Let your state representative know.
Gambling Losses in $USD – Australia are the biggest gambling losers, per capita, in the world! Not anything to be proud of- From savings.com.au
Since March 2020, the stock markets have been quietly accumulating and Slack Investor has spent some quality time on the couch – Sometimes watching sport. Hitting me in the face have been an avalanche of betting advertisements enticing me to get an app, to lay down some hard-earned cash on a match outcome, identify a “first try scorer” or a “multi” (???). Always, I am advised to “gamble responsibly” but this guidance is always accompanied with a wry grin as they collect my credit card details.
Commercial TV networks all seem to have an overlay of gambling ads as they cling to this growing industry – as their other advertisers are looking elsewhere. One of Australia’s largest advertisers is Sportsbet, they spent $AUD 139 million on ads in 2020. It is all about “Brand awareness”. In 2021, US Sports betting companies have spent a staggering $USD 1.2 billion on acquiring new customers. This will only increase as more US states legalize sports betting. With brand awareness comes a desire to download an app, promotional codes are given for gambling credits, you give your own bank details, place a bet … and suddenly you are a customer, and subject to further online conversion.
Slack Investor can see that gambling can introduce a bit of excitement to a life, but I would always take the long view. What are the chances that I would succeed in any form of gambling with repeated trials – where the odds are set by hardened professional compilers. Rather than gambling, I would much rather invest in a growing companies that produces useful things. That’s enough excitement for me.
Three-quarters of 8 to 16-year-olds interviewed could name at least one gambling brand, and one-quarter could name four or more.
Based on a 2016 survey of Australian children in NSW and Victoria
If you would like tougher rules to stop the saturation of prime-time television with gambling ads in Australia, you can put the commercial TV Networks on Notice and register a complaint with the Free TV umbrella organization. It seems to be that the language they understand is the threat to move your viewing to the streaming services that don’t show harmful and repetitive gambling ads (Netflix, ABC iview etc.). Slack Investor is not sure how effective this is – but it made me feel better.
December 2021 – End of Month Update
Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100. All Slack Investor followed markets this month had substantial rises (ASX 200 +2.6%; FTSE 100 +4.6%; S&P 500 +4.4%).
Well, Santa did come to most index holders. The theory is that, in the US market, there is a lot of spending at this time of year (good for retail) and pay bonuses are also awarded at this time. The “Santa Claus Rally” has occurred 76% of the time between 1950 to 2019. Although this seems to be a regular calendar event, Slack Investor would not bet on it – as there also have been some sharp declines in December – particularly in the last ten years. Long-term accumulation for me – but it is a delight to see Santa when he comes.
Slack Investor has been busy with adjusting stop losses upwards again for the US Index. In these over-valued times for the US Index, and to a much lesser extent the Australian Index, I am keeping my stop loss within 10% of the end of month price. See the US Index page for details.
Monthly chart for the US Index (S&P 500) showing upward movement of the Slack stop loss from 4278 to 4495 – from Incredible charts
All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index). The quarterly updates to the Slack Portfolio have also been completed.
Paul Keating, at the National Press Club in November 2021, likening Australia’s recent announcement of buying 8 submarines as part of our defence strategy against Chinese expansion as “… like throwing a handful of toothpicks at the mountain.” – The Guardian
Paul Keating is an established Slack Investor hero for helping to modernise Australia’s economy and also introduce compulsory superannuation back in the early 1990’s. He has certainly not lost his ability to cut through with memorable quotes. In amongst the barbs at his latest Press Club interview was a compelling message for the need to feel comfortable with Australia’s place bordering Asia. Keating stressed the positive aspects of Australia’s potential for engagement with the region, particularly with Indonesia and China.
Now, back to finance … and the need to engage with our own mountain. At the end June 2021, Australia’s total superannuation assets were $AUD 3300 billion ($USD 2360). This staggering sum is almost 150% of the whole of Australia’s annual Gross domestic product(GDP) for 2021 of $USD 1610.
Australian superannuation fees are still too high
Although it is far from perfect, we should be proud of our superannuation system – it is the fourth largest pension pool in the world – not bad for a small country. But we can do better.
Data collected by the Productivity Commission showed that superannuation fees and costs were at the upper end of global comparators, and significantly higher than pension top dogs, Denmark and the Netherlands
It is difficult to make direct comparisons to other countries as each country has its own quirks. For instance, the average Netherlands worker contributes 22.5% of salary to their defined benefits super scheme – compared to the current rate in Australia of 10% and (hopefully) moving towards 12% in 2025.
There are some structural changes that must happen to make our superannuation system more efficient. A good start is the Australian Prudential Regulation Authority (APRA) introduction of a performance test to identify poor performing super funds. But readers of Slack Investor do not need prompting from APRA – they have already engaged with their super and switched to be in one of the top performing funds.
In a recent speech, Margaret Cole, a board member for APRA, pointed out that Australia has too many small super funds – Of the 156 APRA-regulated superannuation funds, there are 116 funds that each have less than $10 billion under management.
To get costs down there must be much greater consolidation of these toothpicks to achieve economies of scale so that they can be at least a “tree on the mountain”. Unfortunately, each of these funds have their own board, investment officers, and other “hangers on”. Self interest keep them going … not the needs of their clients. Their members must overcome their super inertia and change funds if they are performing badly. Or, the funds need to be told … and regulated out of the picture.
November 2021 – End of Month Update
Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100.
Most markets drifted down this month. The Australian market down -0.9%. The FTSE 100 down -2.5% and the S&P 500 down -0.8%. Slack Investor remains watchful with stop losses in place.
All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).
This is a beautiful detail from an impressive sculpture sitting under a fully-robed Athena (Goddess of War and Wisdom) from thePallas Athena Fountain in the front of the Austrian Parliament in Vienna. In Slack Investor’s favourite story of the month – which brought great delight for it’s ludicrous starting point, this wonderful sculpture is in the news as it is part of a new “genius” Vienna Board of tourism promotion to supposedly defeat censorship by social media providers.
Vienna and its art institutions are among the casualties of this new wave of prudishness – with nude statues and famous artworks blacklisted under social media guidelines, and repeat offenders even finding their accounts temporarily suspended. That’s why we decided to put the capital’s world-famous “explicit” artworks on OnlyFans
But I digress, the figure (above) representing the Inn River is depicted asking the Danube River for some leniency on her home loan rate – This conversation is something I highly recommend to all with a mortgage.
Not for the first time, I did a bit of a review of Slack outgoings this month. Starting with the large fruit first, loans and insurances. We have a small loan remaining on our house because I have used the home equity to buy some shares in the past. We could pay the loan off by selling the investments but, while home loan interest rates are low ( 2-3%), I am happy to keep this money in shares and hopefully gain a return more than my interest costs.
I noticed that the rate my bank charges me on my loan (2.7%) is higher than that offered to new customers (2.35%). A quick internet search revealed a few loan operators offering loans close to the 2% mark. An informed phone call to Bank Australia provided a quick revision of my rates downwards. Confirming that loyalty is only rewarded – when you nag the institution.
Regardless, I am happy with the saving of $8000 for the life of the loan that this phone call achieved. Those with higher loan balances should be rewarded more significantly for a painless phone call to your lender.
New Fintech loans
Beyond the traditional banks there is an emerging FinTech solution to loans. There are too many to mention but they all seem to be willing to lend you money for all sorts of reasons. In a further erosion of “old banks” business, Slack Investor was shocked to count over a hundred of these new enterprises. Each with their own “catchy – but cool” names. I would be very wary about investing any Slack funds in these new businesses as there seems to be a lot of competition in this space.
However, taking money from them … where they are assuming all the risk – and offering very competitive rates – sign me up! Providing, of course, that I know all of the conditions of the loan contract up front.
There are a number of new home loan providers Yard, Athena, Nano , Bluestone, Well, etc. Each are offering products at about the 1.99% rate for home loans with a high amount of equity. In the event of of a loan provider collapse, they offer the assurance that another loan provider will takeover the loan under the same conditions that you originally signed.
Athena Home Loans
There a range of home loan providers that are offering no-fee loans at around the 1.99% comparison rate. I have no affiliation with Athena. The only reason that I am focusing on Athena rather than the other excellent home loan providers is that I like their sustainable philosophy of trying to obtain their funds from super funds who need the stability of a fixed income for a portion of their portfolios. It is also a good marketing link to a lot of people. They also have a reputation of quickly passing on any reserve bank interest rate cuts.
We’re working on providing industry super funds a way to access the Australian mortgage market directly and aim to be the first in Australia to do it!
I am happy to go through the loan application process with Athena. They have streamlined applications so that it is mostly online. Their 1.99% rate will give me a further saving of around $8000 in total interest payments on my current loan. However, I note that I will incur discharge fees on my current loan of about $370. This does not trouble me as I would have eventually incurred these discharge fees when I fully pay off my home loan – and the further joy of the Athena loan is – No application fees. No ongoing fees. No discharge fees.
October 2021 – End of Month Update
Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100.
The Australian market remained flat -0.1%. Overseas markets seem on the move with the FTSE 100 up 2.1% and the S&P 500 rising an incredible 6.9%. The optimistic Americans seem impressed with a swathe of good earnings reports and have had the best monthly return this year. Slack Investor remains watchful with stop losses in place.
All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).
That old troubadour Bob Dylan released this back in 1964 …on vinyl … I might add! Bob’s lyrics were written almost 60 years ago about the cultural and political divide that existed way back in the early 1960’s. His message to “start swimmin’ or you’ll sink like a stone” continues to have relevance – even to investors.
Music has been an important part of Slack Investor’s life and starting with my first “record” vinyl purchase in high school, I then went through the cassette phase. Cassettes were always a bit dodgy, but they did have their moments – who can forget the sublime “mix tape” given to you by a friend. The gradual degradation of cassette musical quality as they lost their magnetism and, the ultimate tragedy when your precious “mix tape” starts unravelling in the car. All this made me glad when CD’s were introduced in 1982. Aaahh … the beautiful world of the CD – Digital quality and a format that I thought would live forever. Only in hindsight do we see that “Peak CD” was in 1999 and this was also the peak of recorded music revenue for artists. I could look at the below chart for hours.
The changing shape of revenues from recorded music delivery 1980 – 2020. – This incredible graphic is from Statista
Despite the recent uptick in vinyl sales, it seems obvious that the days of owning music are numbered. It is also sad to note that revenues from recorded music in 2014 sank to a third of those in 1999. Revenues are on the increase but royalties from streaming remain pitifully low and artists can be paid as little as 13% of the streaming income generated. The recording artists must resort to touring and merchandising to provide the bulk of their income. The highest grossing act of 2017 was U2. According to Billboard – their streaming income was only just over 1% of their total revenue of 54.4 million USD.
Spotify generally pays between $US.003 and $US.005 per stream, meaning you’ll need about 250 streams to make a dollar.
In an unbelievable turn of events for all “Boomers”, streaming is now the way to access recorded music and now accounts for 83 percent of music industry revenues in the U.S. Physical CD’s and even music downloads are in major decline.
All of that music stuff was just to provide an example about how unexpected change can happen in just a few decades. Slack Investor had built up an impressive CD collection over the past 30 years and, he thought he was set up for life. This collection is now in a box as I now tend to now use digital versions for my musical pleasures. To the great dismay of my children, I am still hanging on to ownership of my music – they tell me this is typical “boomer” behaviour and are urging me to get on board the streaming train.
We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.
Bill Gates
Bill has pointed to a bit of a weakness in the vision of investors … and Slack Investor obviously cherishes his moments of inaction – but will act if he has to. He has already made a few tweaks in his portfolio
I have been thinking of relatively safe investments lately … and this is tricky in these weird times as, besides precious metals, it is difficult to name a sector that would be unaffected by an inevitable downturn in the markets. Will bricks and mortar retail be the same? Will CBD office real estate be the same? Will banks be the same with the new competition from Neobanks?
With the exception of consumer staples, safety may not be found in traditional industries. Technology is such a large part of our lives now – and this is where growth will happen. I keep returning to the utility of an Index like the NASDAQ 100. It has the beautiful self correcting mechanism where dud technologies get shuffled out of the bottom of the index and the companies that are still making money tend to stay in.
I have been a buyer of this ETF along the way and a recent dip in price (perhaps due to the recent Facebook revelations) point to an increasing mood for more regulation in some of the tech stocks. Barrons have the current PE at 34.5 which does not make it cheap but the PE based upon the forward 12-mth earnings forecast is a bit more reasonable for the growth sector at 28.0. In this changing world, the one thing that you can bank on is that the technology industry will be an important part of it. Not advice … but I think I will buy some more.
Slack Investor is often “banging on” about Price to Earnings (PE) ratios. The economist Robert Shiller designed the even sexier Cyclically Adjusted Price to Earnings ratios (CAPE) which use ten-year average inflation-adjusted earnings to take out some of some of the volatility of annual earnings. The details on how to calculate the Shiller CAPE Ratio can be extracted from Seeking Alpha.
Relationship of annual market returns (over 10-yr period) to current CAPE. From Research Affiliates – based upon Shiller Data
Professors Shiller and Campbell found that, the higher the CAPE, the lower the likely annual return from equities over the following 5-20 years. The current US CAPE is at one of its highest levels since the 1880’s. GuruFocus provide current information on the S&P 500 CAPE and market return predictions based on Shiller’s work.
What originally started me thinking of CAPE is this excellent visualization prepared by John Kingham of Seeking Alpha for the UK FTSE 100. This chart shows how the current FTSE rates with fair value at a glance. John uses a “Fair Value” UK CAPE of 16 -just a bit below its recent average of 17.5. The UK CAPE black line seems still in “fair value” territory – according to Shiller, this is generally OK for a buyer in terms of long-term returns.
This chart of the UK FTSE 100 CAPE from Seeking Alpha. The FTSE CAPE is the black line and John Kingham has prepared the CAPE zones to indicate GREEN = cheap, YELLOW = fair value, RED = expensive (75% above the mean) – Click for higher resolution
We are also in times of high government stimulus and, with interest rates so low, there is more than the usual amount of money in the share market. It is a case of no other alternative – perhaps, with the exception of residential property.
Slack Investor has no idea whether the extremely high US S&P 500 CAPE values may continue for a while … It is a complicated market at the moment. With the US Market at 38 times the 10-year average earnings … the US Market Is Not Cheap and, I am glad that my stop losses for index funds are set tightly within 10% of recent highs in the share price.
The rich data on CAPE ratios for a range of countries is prepared lovingly by Barclays each month. The CAPE values of the US S&P 500 CAPE, ASX 200 CAPE and the FTSE CAPE are respectively, 61%, 19% and 0% above their 39-yr averages. Interestingly, the US market CAPE (24.5) has a far higher mean than Australia (20.4) or the UK (17.5). This may be due to higher earnings growth prospects in the US.
Historic CAPE Ratios for the S&P 500, ASX 200 and FTSE 100 together with their 39-year averages – Developed with data from Barclays
Is CAPE a good predictor of a market correction/crash
In the below chart I mapped the US S&P 500 against the S&P 500 CAPE to see if the CAPE is useful for determining market turning points.
The CAPE indicator does not seem to be a good predictor of short-term share market prices – as high CAPE values have been at sustained high levels for many years. CAPE trends seem to immediately mirror the trends in the share price. However, Professor Shiller’s established relationship with high CAPEs and lower forward returns in the longer term is hard to ignore. Interest rates will not stay low forever. Regardless of the unusual circumstances of todays stock market, the US market at 61% above its 39-yr average, looks expensive.
September 2021 – End of Month Update
Slack Investor remains IN for Australian index shares (ASX 200), the US Index (S&P 500) and the UK Index (FTSE 100).
After 11 months in a row of monthly stock rises for the ASX 200, things are starting to get a little jittery in the stock markets. This is just normal behaviour. Decent monthly falls for the ASX 200 (-2.7%) and S&P 500 (-4.8%), the FTSE 100 flat at -0.2%.
All Index pages and charts have been updated to reflect the monthly changes – ASX Index, UK Index, US Index. The quarterly updates to the Slack Portfolio have also been recalculated.
As much as Slack Investor hates retail shopping – he loves to have the opportunity to buy into companies. Like any new relationship, when you buy a stock, you are not really sure about how its going to work out – but its exciting!
I have never been good at predicting when the stock market will have a correction … and the current high valuations (PE Ratios well above the long term average) do make me nervous. However, Slack Investor would much rather be in the game than out of it and I have been looking for a few companies that would hopefully not suffer too greatly if a correction occurred in the stock market.
This is not advice … just an insight to the Slack Investor bumbling buying process. My rate of converting bought shares into winners of 55% is not that impressive – but my overall performance results are good.
I get heaps of buying ideas from investment sites such as Motley Fool, Livewire, ShareCafe. But I will always, always, check things out for myself before parting with any Slack Dollars. This involves a rigorous screening of the fundamental financial metrics PLUS a look at how the stock chart is going on Incredible Charts. This technical analysis consists of a quick scan to see if the chart is in a continual growth trend … or has just had a “breakout”, or broken out of a downtrend.
Let’s put on the buying boots. As well as the companies below, Slack Investor has also recently added to some small positions in PPK.ASX and TNE.ASX.
Slack Investor Buys Alphabet (GOOGL.NASDAQ)
Half of my buying cash went into an existing holding – Alphabet (GOOGL), This money making juggernaut is part of the new economy and I could buy this company all day. The first step is to go to the phenomenal MarketScreener.com. Registration is free on this site and they allow you to look at analyst data for up to 5 stocks a day.
Search for your stock and then finding the Financials Tab for that company. Firstly, I look at the chart Income/Sales and Earnings per Share. An increasing trend is good and, if the estimated earnings (2021 – 2023) are also increasing, I’m acutely interested. I do a quick check on debt levels. Alphabet is a cash king – has more cash than debt – solid tick.
Income statement for Alphabet (GOOGL on the US NASDAQ exchange) – from MarketScreener
I continue with MarketScreener to extract the Return on Equity (ROE), both past and forecast. I hope that it is above 15% – Big Tick. The final bit of vital information is the Price Earnings (PE) Ratio and it is here that I gauge whether the stock price is too high for Slack Investor. For a good growth stock, I try not to buy into companies that have a projected PE of more than 40-(50 at a pinch). The analyst estimates for GOOGL is a forecast PE of 23.0 in 2023 – Tick
YEAR
2018
2019
2020
2021(e)
2022(e)
2023(e)
ROE
18.6
19.3
19.0
27.2
25.8
25.2
PE Ratio
23.9
27.2
29.9
28.0
26.6
23.0
Table of fundamental financial metrics for Alphabet. The documented Return on Equity (ROE) and Price Earnings (PE) Ratio are shown for 2018-2020. Analyst estimates are shown for later years – MarketScreener.com
Slack Investor Buys NASDAQ 100 ETF (NDQ.ASX)
Not everyone has access to direct access to US shares – if you only have an ASX broker, then to get exposure to Alphabet, a good substitute is to buy the BetaShares NASDAQ ETF (NDQ) – Alphabet represents 8.1% of this ETF – and you get profit machines like Apple, Amazon, Microsoft and Facebook thrown in. I topped up my holding here as well.
The ROE for the NASDAQ Index is 17.7 and increasing (30 June 21) – Above 15, Tick. The projected 2023 estimate for the Price/Earnings Ratio for the NASDAQ Index is 22.47 – Below 40, Tick – Very reasonable for growth sector companies.
NASDAQ 100 Index 2020 PE Ratios and Forward Estimates of PE for 2021, 2022. 2023 – From nasdaq.com
Slack Investor Buys Coles Group (COL.ASX)
YEAR
2019
2020
2021(e)
2022(e)
2023(e)
2024(e)
ROE
29.8
32.8
37.0
34.9
33.3
34.3
PE Ratio
12.4
22.9
22.4
23.4
22.8
21.4
Table of Fundamental metrics for Coles Group . The documented Return on Equity (ROE) and Price Earnings (PE) Ratio are shown for 2019-2020. Analyst estimates are shown for later years– MarketScreener.com
The Return on Equity (ROE) for this retail business is pretty impressive and, the PE Ratio would be pretty good for a growth company – but the Income Chart below reveals that Coles is not really a “growth” company – so the expectation is that the PE Ratios should be much lower, in the early 20’s or below would be the Slack Limits for slow growth companies.
Income statement for Coles Group (COL.ASX) showing a very gradual increase in projected income – Compare this with the Alphabet chart above – from MarketScreener
The income chart shows some pretty shallow growth and the slow earnings per share (EPS) growth makes the Coles Group something that Slack Investor would not usually be interested in. But, I go to Coles Supermarket at least twice a week and I actually like going there as a company part owner. Coles is in the “stable income” section of the Slack Portfolio rather than “Growth”. Even if the worst of times was thrust upon us and there was a recession in the next few years, a business like Coles will keep on performing. I would much rather put up with the price fluctuation of shares and have my money in a business like this at a projected yield of 3.5 – 4% p.a. than have Slack Dollars tied up in cash for 2 years in a Big 4 bank term deposit at 0.3%.
August 2021 – End of Month Update
Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100.
There were significant rises in all followed markets (S&P 500 +2.9%, and the FTSE 100 +1.2%). The Australian stock market is also in record territory (ASX 200 +1. 9%). This is all happening during extensive COVID-19 related lockdowns in the populous South Eastern part of Australia.
Slack Investor is normally relaxed about most things, but I am moving to the edge of my couch and starting to get ready for action. Looking at the monthly charts for all the indexes, in these boom times, the index prices have been getting too far ahead of my stop losses for comfort. I have tightened up my rules for adjusting stop losses upwards.
All Stop Losses are live and are being moved upwards every month if the index price exceeds the stop loss by 10% or more. All Indexes have got this treatment this month – It is sometimes difficult to work out where to put the stop losses on the monthly chart. I usually go to the weekly charts and find a minimum on the weekly price range that is within 10% of the current price (see below). If the stock price is below the stop loss at the end of the week – I will usually sell at the next opportunity.
The weekly US S&P 500 Index chart showing an upward adjustment of the stop loss from 4056 to 4233 – Thanks Incredible Charts
All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).
“In the business world, the rear view mirror is always clearer than the windshield.”
Warren Buffett
Slack Investor has a proven track record in notbeing able to predict where speculative assets (such as Bitcoin or precious metals) are going. I would also add to the “speculative list” some companies whose share price have become divorced from the link to their actual earnings. As a rough guide, I try not to invest in companies that have a forward P/E ratio of greater than 50. I get these forward P/E ratios from the excellent Market Screener site.
This means that I have missed out on the great gains of being by in companies like Afterpay (APT – 2023 P/E ratio 190) or TESLA (TSLA – 2023 P/E ratio 193). Some folk have made a lot of money with these companies …. but they are just too speculative for me. Slack Investor tries to “stick to his knitting” with growing companies that have an established earnings record and forward P/E ratios <50.
After an eventful FY 2020 and the COVID-19 dip in the markets around the world. FY 2021, has seen very good gains for most global markets. In the UK, the FTSE 100 Total Return Index is up 18.1% (last FY 20 down 13.8%). Dividends helped the Australian Accumulation Index to be up 27.8% for the financial year (last FY down 7.7%). These Americans remain stupendously optimistic … the S&P 500 Total Return Index was UP 36.4% (last FY up 12.0%) for the same period. All of these Total Return Indexes include any accumulated dividends, wheras the chart below of the ASX 200 for FY 2021, just shows stock prices.
ASX 2oo Weekly chart for FY 2021 – started at 5897 and finished at 7313 (30 June 2020 – 30 June 2021) – Incredible Charts – Click for better resolution.
Slack Portfolio Results FY 2021
All Performance results are before tax. The Slack Portfolio had a cracking year with annual FY 2020 performance of +21.7%. Full yearly results with benchmarks are shown in the table below. It was also a top year for all benchmarks (Median Balance Fund +13.0%, Vanguard Growth Fund +20.3%, ASX 200 Accumulation +27.8%).
Against all Slack Investor predictions … Real Estate turned out to be a great investment in the Brisbane and Melbourne markets for FY 2021 (+17.9% and +10.7%) – Perhaps I should also give up on the “looking ahead” in the residential property market – I just don’t get it!
The five-year compound annual performance gives me a much better idea about how things are going and will smooth out any dud (or remarkable!) results.
Slack Investor 5-year compound annual rate of return – compared to benchmarks – Click for better resolution.
The beauty of compounding with a succession of good performance results can be seen in the chart below showing the growth of an initial investment in June 2009 of $10000.
The rate of growth of $10000 invested by Slack Investor in FY 2009 – compared to benchmarks – Click for better resolution.
The lessons of long term investing
Every year Vanguard publish their performance data on each asset class. Slack Investor looks forward to this – as it reminds him of the power of the appreciating asset classes of Shares and Property. Vanguard highlights the volatility of asset values in the short term – but also emphasizes the joys of holding and accumulating shares or property for long periods of time. These asset classes have steadily increased in value over the last 30 years. $10000 invested in Australian Shares in 1990 would have compounded to $160 498. Staying in Cash would have yielded $38 938.
2021 Vanguard Index Chart
Extract from the 2021 Vanguard Index chart (Just the 2008-2021 portion) – the dollar values on the right are the results of investing $10000 in index funds in each asset class for 30 years (since July 1991). – Check out the full glory of the Vanguard 2021 PDF chart – Click for better resolution.
Financial year total returns (%) for the major asset classes
In the chart below, for each asset class the total annual returns are given and the best performing class for each year is marked in green … and the worst in gold. What stands out to Slack Investor is that is rare for and asset class to lead in annual returns (green) for two years in a row – and there are years where the leading asset class (green) becomes the worst performer (gold) in the next year. This drives home the often repeated sentence in the finance world.
Past performance is not a guarantee of future results.
Total returns for each asset class for the 30 years since 1991 – Check out the full glory of the Vanguard 2021 PDF – Click for better resolution.
This table highlights the benefits of diversification across asset classes for the long term investor.
Sitting on the couch, Slack Investor is quietly pleased with his 2021 results – Roll on Financial year 2022. However, when comparing this year’s bumper returns with the long term average returns for Australian and International shares of around 10% – Slack Investor can’t help but be a little nervous.
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.“
George Soros
Now George knows how to make a dollar and, to his great credit, is a generous philanthropist. I am sure, like any successful investor, that George looks back at times on his investment decisions. Slack Investor looks forward to this time of year when I can reflectively analyse my greatest investing failures. Fortunately, my stinker to nugget ratio was good this year.
The percentage yearly returns quoted in this post include costs (brokerage) but, the returns are before tax. This raw figure can then be compared with other investment returns. I use Market Screener to analyse the financial data from each company and extract the predicted 2023 Return on Equity and 2023 Price/Earnings Ratio on the companies below. This excellent site allows free access (up to a daily limit) to their analysts data once you register with an email address.
Slack Investor Stinkers – FY 2021
Growth stocks (High Return on Equity >15% and increasing sales) are fantastic companies to associate with as they are growing and hopefully, their earnings per share, are growing also. The downside to this is that these companies are usually sought after in the stock market and command high prices in relation to their current earnings because the “future earnings” of the company are priced into the current price. This gives them a high PE Ratio. Whenever there is a future earnings revision, or a stutter in growth, there is usually a dramatic drop in price.
Slack Investor has a look at his stocks every weekend on a free chart program (Thanks Incredible Charts!). I actually pay a small amount to get the chart data early in the morning. Both of my “stinkers” this year were actually “nuggets” from last year. For FY 2020, Appen +58% and A2M +26%. Such is the cyclic nature of some growth stocks.
Appen (APX) -24%
APX (2023 ROE 14%, 2023 PE 19) remains a company that puzzles me “the development of human-annotated datasets for machine learning and artificial intelligence”. The company has had a few problems due to COVID-19 and a hit to its underlying profit and increased competition. Slack Investor got out late last year at $25.87 as the weekly chart moved below the stop loss at $28.11. However, this represented a loss of 24% for the financial year.
The downward trend marked by the thick blue line is setting up niciely for one of Slack Investors favourite chart trading patterns – “The Wedgie”. When the share price punches through a downward trend line of at least 6 months … and the fundamentals are right, Slack Investor is interested. Given the forward PE for 2023 is a relatively low 19 – I might have another crack at this once the price has poked above the blue wedge line.
A2 Milk (A2M) -21%
A2M (2023 ROE 17%, 2023 PE 23) sells A2 protein milk products to the world. The actual benefits of the A2 only protein seem to be limited to easier digestion. Long term independent studies with large data sets are still in the works … but the marketing skill of this company is undisputed. COVID-19 brought big changes to sales with the collapse of the “daigou” market and worries about China trade sanctions. Slack Investor sold about half way through the downtrend – but not before taking a hit for the team.
Slack Investor Nuggets – FY 2021
A great benefit of investing in companies that have a high Return on Equity, and with a track record of increasing earnings, is that they sometimes behave as “golden nuggets”.
Codan (CDA) +161%
What a company! Codan is a technology company that specializes in communications and metal detecting. It has made a major US acquisition this year and paid with cash. Sales are up and predicted to keep increasing. The high 2023 ROE 32%, and relatively low 2023 PE 24 (for a growth company) makes me think there will be more price growth over the next few years – I will try and top up my position this year on any price weakness.
Alphabet (GOOGL) +61%
(GOOGL – 2023 ROE 23%, 2023 PE 23) The Alphabet list of products continues to grow. I use a ton of Alphabet products every day and the company is growing fast into the cloud with cloud computing revenue jumping 46% in the March quarter. There are a few regulatory problems coming up with the US Justice department claiming that Google’s actions harmed consumers and competition. There is also the ongoing work of G7 nations trying to make international tech companies pay their rightful share of tax on revenues in each country.
Despite this, if there is one company that Slack Investor could invest in and then pay no attention to for 10 years, and still sleep well, … it would be Alphabet.
REA Group (REA) +59%
The owners of RealEstate.com.au. which is the go to portal for house selling and buying (REA – 2023 ROE 38%, 2023 PE 44). The group has just completed an acquisition of Mortgage Choice and picked up a big chunk of a Mortgage software company. This expanding of the business must be good. 65% of Australia’s adult population are checking the site every month looking at property listings and home prices. However, the 2023 projected PE is very high (44). Using the Slack Investor bench marks, suggests the stock is expensive at the moment.
Integral Diagnostics (IDX) +37%
This medical image company (2023 ROE 16%, 2023 PE 24) provides diagnostic image services to GP’s and specialists. IDX seems to be getting a few tail winds with an ageing population and more demand for their MRI, CT and PET scans.
Macquarie Group (MQG) +36%
Macquarie is a complex business(2023 ROE 14%, 2023 PE 17) with a range of banking and financial services, and plays in global markets and asset management. The latter division looks for undervalued companies. Despite COVID-19, profits are increasing. The management seem to know what they are doing – Slack Investor remains a fan.
Betashares Global Robotics And Artificial Intelligence ETF (RBTZ) +36%
This ETF tracks the megatrend of robotics and artificial intelligence. Although the PE ratio is a bit high (2021 PE Ratio 37), this is a disruptive sector that should make gains against existing industries with the advantage of technology against rising labour costs.
Most honourable mentions to those other companies that returned over 20% for the tax year. Cochlear (COH) +34%, BetaShares Nasdaq ETF (NDQ) +33%, VanEyk MOAT ETF (MOAT) +32%, Vanguard International ETF (VGE) +29%, BetaShares HACK ETF (HACK) +31%, Vanguard Asia ETF (VAE) +28%, BetaShares QLTY ETF (QLTY) +25%. To these companies, I am grateful for your service.
Slack Investor Total SMSF performance – FY 2021 and July 2021 end of Month Update
A great year for shares, Chant West reports Super funds have delivered their strongest financial year result in 24 years, with the median growth fund (61 to 80% in growth assets) returning 18% for FY21. The FY 2021 Slack Investor preliminary total SMSF performance looks like coming in at around 22%. The 5-yr performance is a more useful benchmark to me – as it takes out the bouncing around of yearly returns. At the end of FY 2021, the Slack Portfolio has a compounding annual 5-yr return of over 21%.
Slack Investor remains IN for Australian index shares The FTSE 100 had a flat month (-0.1%) but rises in the US Index S&P 500 (+2.3%) and the ASX 200 (+1.1%).
The party with the US S&P 500 just keeps on going. As the S&P 500 has moved more than 20% higher than its stop loss on the monthly chart, I have adjusted the stop loss upward to 4056 from 3622. It is difficult to decide where to put the stop loss on the monthly US Index chart. In these cases, I go to the weekly chart and look for a “sensible place” to put the stop loss coinciding with a minimum value (dip) on the chart. The current stop loss is 8% below the end of month price.
US Index (S&P 500) weekly chart showing a moving up of the stop loss this month.
Slack Investor presented his version of a bucket strategy – The “Three Pile Theory”. It is the three pillars of a House, Stable Income, and Investments that have supported me through most of my working life and now the three piles are still supporting me in early retirement.
These piles have been continually interacting with each other as I was trying to build them all up. At the start, the Prince of all piles was a good income and, as I have very poor entrepreneurial skills, the key for me to get a good income was to have a good education. I was lucky enough to have parents that encouraged me to go as far as my wit would take me.
Without education you’re not going anywhere in this world
Malcolm X
When originally talking about three pile theory, I glossed over the retirement phase and how the investment and stable income piles can keep you going … hopefully, for a long time. By retirement, if possible your house will be paid off – and this will be left as a dormant house pile which keeps giving back in lots of ways … but only as a last resort will you use it to fund your lifestyle in retirement!
Lets do the sums on just two piles – Your Retirement Fund
Consider a retirement fund with just two piles – Stable Income and Investments. In order to generate 4% of income per year, you need have most of your retirement fund in investments rather than stable income. According to his two pile theory, Rob Berger from Forbes Magazine recommends that you should have between 50% and 75% of the retirement fund in the investments pile 0f equities (stocks). Decide on a ratio of stable income to investments that you can sleep well with – a higher amount investments will mean potentially more growth … but definitely more volatility.
A bit of mathematics here … my original ratio of house:stable income:investments was 30%:20%:50%f Net Worth. When taking my house out of the calculations, my ratio of Stable Income: Investments is about 30%:70% – this is just the numbers that I am comfortable with.
My original plan was to use dividends and interest from the two piles of my retirement fund to give me income. That means taking out money from both piles every year – even when stock markets have fallen. Rob Bergen points out that this is exactly the wrong approach. Taking dividends out reduces the investments pile – it has the same effect on your investments pile as if you sold some of your stocks. In a down-trending stock market, for your long-term investments pile, you want to use those dividends to reinvest in a stock market that is undervalued.
(Using the traditional bucket strategy), assets are taken from (Investments) when market prices have fallen, which is exactly when dividends should be reinvested.
Rob Berger – outlining the folly of taking money out of your Investments account when the market is falling.
How to make your piles last in retirement phase – Rebalancing the Retirement Fund
This heading has Slack Investor lapsing into what my mother called “Plumber’s Humour”. Using the Rob Berger simple strategy, you maintain your piles. Even though you have the competing interests of wanting to withdraw annual amounts for a great lifestyle, and yet, keeping enough in your retirement fund to generate future income for many many years. There are lots of articles on buckets to fund your retirement but, it can get complicated – I really like the clarity of Rob Berger’s approach. He explains in detail how the traditional bucket strategy is flawed.
By the time you retire, you will have a good idea of your expenses, While you are healthy and fit, add a good chunk of income to fund some travel. At the start of the financial year, this amount gets withdrawn to your cash account to fund yearly living expenses. The remainder is your retirement fund comprising of Stable Income pile (Annuities/Bonds/Term Deposits/Fixed Interest) and Investments pile. Slack Investor is happy with 70% of his Retirement Fund in Investments (Equities/Stocks).
Set up a ratio of Stable income: Investments in Your Retirement Fund that you are happy with and take your annual expenses out of the pile that is over allocated at the end of the year. In the above case, Investments.
In a good year for investments (outlined above) your next years annual income requirements can be withdrawn from the investments pile. If you get a bad year for investments, then dip into the stable income pile. Take out enough from each pile so that after your yearly expenses withdrawal, the initial allocations are roughly intact – I should do some algebra here to make this easier … but you can do it for your homework!
Using this method, you are always selling from your investments pile when the market is high and buying when the market is low – masterful investing, Warren Buffet would approve!
May 2021 – End of Month Update
Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100.
There were modest rises in all followed overseas markets (S&P 500 +0.6%, and the FTSE 100 +0.8%). The Australian stock market is powering on (ASX 200 +1. 9%) despite Slack Investor and the state of Victoria being in a (hopefully only one week!) COVID inspired lock down. All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).
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