Global Shares | Slack Investor

Alphabet … Google It

Sundar Pichai, the CEO of Google and its parent company Alphabet looks ready to play the “evil genius”.

At around 15% of my investments, Alphabet (US:GOOGL) is a major holding in my portfolio. It is my biggest international holding. I first dipped into the stock back in 2019 and have been trying to top up (in small amounts) each year since.

Since Larry Page and Sergey Brin launched Google in 2004 with a killer search engine, the many tentacles of Google/Alphabet have spread into the everyday life of billions. Youtube alone had 2.6 bn annual users in 2022.

(Google’s search and advertising) is Alphabet’s best business, accounting for 80% of Google’s total revenue in 2022 including Google Search and other properties like Google Network ads and YouTube. The remaining 20% comes from Google Cloud (9.4%) and its apps, hardware and content businesses (10.4%).
From Intelligent Investor

Why keep investing in Alphabet?

Before any investment decision, Slack Investor will do a bit of research. Market Screener has a Financial page on each stock.

When the income chart looks like the above showing a track record of growth (prior to 2023) – and projected further growth up to 2025 – I’m interested. A look now at Slack Investors favourite finance indicators. A projected Return on Assets (ROE) of 24.5 in 2025 (well above 15%), a 2025 predicted PE ratio of 17.5 (very low for a growth stock), and plenty of cash on hand for further aquisitions – it all looks good.

Nitpicking

Despite admiring the skill of Alphabet management in aquisition and company growth, Slack Investor is not enamoured with everything this company does. There are some things that I find annoying. Back in 2017, they sudddenly dropped their popular Google Finance Portfolio feature. Slack Investor then migrated to Yahoo Finance to keep track of his portfolio. I note that Google Finance has recently reinstated its porfolio feature – but I have already moved.

To keep growing revenue, many of their channels are being further monetized. I love using Youtube for music, entertainment, and the millions of helpful “how to” guides. However, the ads at the start of the clips are tedious. This is an attempt to get people into Youtube (no ad) Premium at $13.99 per month.

I also had a recent battle to reduce the amount of data in my google account (Photos, Google Drive, gmail) to below the 15 Gb free limit. This is deliberatly not a simple process and seems to be designed to push people into more storage through a subscription starting at $2.49 per month.

These are relatively small quibbles though – and Slack Investor really doesn’t expect “something for nothing”. I continue to hold and a happy buyer of this company using an international e-broking account with CMC Markets – Alphabet, I hope, will be a very long-term holding.

The cost of retirement is increasing

A bloke with a barrow of mutilated currency circa 1910

Every quarter, the economic boffins at ASFA (Association of Superannuation Funds of Australia go to the trouble of crunching the numbers on what yearly income they think is required for a “comfortable retirement”. They assume that the retirees own their own home outright and are relatively healthy. In one year, due to inflation, the comfortable retirement amount has increased by 7.6% , or $4920, to $69,691 for a couple (Dec 2022 ).

Comfortable lifestyle (p. a.)	Modest lifestyle (p. a.)
Couple $69,691	Couple $45,106
Single $49,462	Single $31,323

ASFA calculated annual retirement requirements for those aged 65-84 (December quarter 2022) for both “comfortable” and “modest” lifestyles

ASFA’s calculations are very detailed, but notably these annual incomes do not include any overseas travel – depending on your accommodation standards and length of journey, this could easily require another $20K.

Their latest December 2022 report notes that price rises have occurred for most spending categories. In the last four quarters,

Food rose by 9.2%
Bread 13.4%
Meat and seafoods 8.2%
Milk 17.9%
Oils and fats 20.8%
Gas 17.4%
Electricity 11.7%
Household appliances 10.2%
Automotive fuel 13.2%
Domestic travel and accommodation 19.8%
International travel and accommodation 15.9%

ASFA also helpfully calculate a lump sum that you will need to supply this income – with the assumptions that the lump sum is invested (earning more than the cpi) and will be fully spent by age 92. Let’s aim high and just concentrate on the comfortable retirement – the “modest” retirement lump sum amounts are much lower (around $100K) as they assume supplementation from the aged pension.

Savings required for a comfortable retirement at age 67
Couple $690,000
Single $595,000

ASFA calculated lump sum t requirements for those aged 65-84 (December quarter 2022) for a “comfortable” lifestyle

How to Cope with Inflation

There is just one simple way – you must be invested in appreciating assets that keep pace (or exceed inflation). Appreciating assets tend to go up in value over time. This is pretty vague, but if you are unsure about an asset, try and find a price chart over a 10-yr to 20-yr period. If it is going up, it is probably an appreciating asset.

You will always need some amount in cash for day to day requirements and to ride out any investment cycles without the need to cash in your investments at a low point in the cycle.

Knowing the difference between an appreciating and a depreciating asset (e,g cars, furniture, technology equipment, boats, etc) was an important step in Slack Investor’s investing life. I can still remember the day my father gave me “the talk”, that it was OK to borrow money for appreciating assets – I think he was pushing me in the direction of real estate at the time. However, I was not to borrow for a depreciation one i.e. a car, or consumer goods – assets that lose value when you walk out of the shop!

Appreciating Assets

Below is a (not exhaustive) list of appreciating assets. I have left out cryptocurrency deliberately as it has only been traded since 2010, and it is not established yet that it is a long-term appreciating asset.

List of appreciating assets:

Real estate
Real estate investment trust (REIT)
Stocks (Shares) and ETF’s
Bonds
Commodities and Precious Metals
Private Equity
Term Deposits and Savings Accounts
Collectibles e.g. Art

Term deposits and savings accounts might keep pace with inflation (if your lucky!) – but generally do not grow faster than inflation. Slack investor will write about why owning your own home and investing in Stocks (Shares) and ETF’s are his favourite appreciating assets in a later post.

Persistence is hard … and March 2023 – End of Month Update

Salvador Dalí, The Persistence of Memory (1931) – MoMA

Dali’s painting “The Persistence of Memory” has been described as a “surrealist meditation on the collapse of our notions of a fixed cosmic order“. Slack Investor is not gifted in the interpretation of artworks but would “have a crack” and say the work was indicating a lack of permanence, or persistency, that we often associate with everyday things. What Dali called “the camembert of time”.

“The sole difference between myself and a madman … is the fact that I am not mad!”
Salvador Dali

Persistence : (Noun) the act of persisting or persevering; continuing or repeating behaviour – vocabulary.com

Persistency is a great investing quality that impresses Slack Investor – but I acknowledge the difficulty. Standard & Poor’s collect data from the US market on how consistently recent top performing share funds are able to keep producing winning records in subsequent years. The following graphic tracks the funds that were in the top 25% of performers in 2018 – and who stayed in the top quartile in successive years.

The percentage of US funds that remain in the top 25% of funds after a 1, 2, 3 and 4 year period – S&P Research – Not many! – Ifa.com

Over a five-year horizon “it was statistically near impossible to find consistent outperformance.”
S&P Research – Ifa.com

Just because a fund, or portfolio, did well in one year does not mean it will continue to perform well the next year. Slack Investor has found this himself with his best performing stocks often becoming the worst performing in the next year – such is the nature of stocks. The stock market often moves between being overvalued and undervalued – and it is the same for individual companies.

Most active (stock picking) funds do not exceed their long-term benchmarks

Not only do active managed funds struggle to maintain consistency, most of them underperform index funds. We are lucky that there are a group of economic boffins that keep an eye on things in the funds department. They are the known as SPIVA (S&P Indices Versus Active). Since 2002, they have been collecting world financial data and comparing actively managed funds to passive (Index) Funds. The 2022 data is now in and the disappointing theme continues. For Australian Equity (Share) funds, for the 5 and 10-yr horizons, respectively, 81.2% and 78.2% of funds underperformed the S&P/ASX 200.

For International equities, the performance of active funds was worse – Over the 5 and 10-year periods, more than 86% and 95% of funds underperformed, respectively.

The percentage of **underperforming** Australian funds in various categories over a 1-yr, 3-yr, 5-yr, 10-yr and 15-yr period – SPIVA 2022 Report

How to cope with inflation

To keep pace with inflation you must be invested somewhere – so that your investments can grow faster than inflation (cpi) over time (at least 5 years). I will explain in a future article why I prefer shares and ETF’s as the vehicle to do this over other appreciating assets. So, on this path, to be exposed to equities (or stocks) you can either buy

Active managed funds – Roll the dice here as most of these underperform Index funds after fees, but the minority showed some skill over benchmarks over a 5-yr period – but there is no guarantee that they will keep ahead of their benchmarks.
Individual stocks – this is what Slack Investor does – but some experience is helpful here!
Low-Cost Index Exchange Traded Funds (ETF’s) – this is the easiest path, and Stockspot have made the process even simpler by researching the best Index ETF’s in each class.

Exchange Traded Index Funds (ETF’s) for a Portfolio

Stockspot diligently analysed 640 of the largest managed funds available in Australia.

Australian Shares Index ETF

For Australian share exposure, Stockspot recommends the ETF ASX:VAS – as it has outperformed 74.3% of large cap Australian shares managed funds over 5 years with an Indirect Cost Ratio (Management Fee) of 0.1% and an annual return (over 5 years) 0f 9.0%.

Australian Small Companies Index ETF

Here, Stockspot recommends the ETF ASX: VSO – as it has outperformed 63.5% of small cap Australian shares managed funds over 5 years with an Indirect Cost Ratio (Management Fee) of 0.3% and an annual return (over 5 years) 0f 11.7%

International Shares Index ETF

For a swing at the world markets, Stockspot recommends the ETF ASX: IOO – as it has outperformed 97.5% of the large cap global managed funds, available in Australia, over 5 years with an Indirect Cost Ratio (Management Fee) of 0.4% and an annual return (over 5 years) 0f 14.2%.

March 2023 – End of Month Update

After a sparkling January, the calendar year has crawled along in share market gains. But, it’s “dividend season” now – and this cheers Slack Investor up greatly.

Declines this month for the Australian and UK markets (ASX 200 – 1.1%, FTSE 100 -3.1%). Those irrepressible optimists in the US keep powering on, with the S&P 500 up 3.5% – even though this is the most overvalued of Slack-followed markets.

Slack Investor remains IN for the FTSE 100, the ASX 200, and the US Index S&P 500.

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