Philosophy | Slack Investor

Lucky!

Luck … there is a lot of luck in the investment process … and a lot of luck involved in life.

To be born in the western world … and to be born in Australia … and to be born a bloke … Slack Investor acknowledges his debt to the luck Gods … and he is grateful! (… further research has revealed that not all feel the same … Ms Slack Investor, for instance, is quite glad she is not a bloke OR an Australian!)

The great Warren Buffet talks about the “Ovarian Lottery”

“It’s 24 hours before your birth, and a genie appears to you. He tells you that you can set the rules for the world you’re about to enter — economic, social, political — the whole enchilada. Sounds great, right? What’s the catch?

Before you enter the world, you will pick one ball from a barrel of 6.8 billion. That ball will determine your gender, race, nationality, natural abilities, and health — whether you are born rich or poor, sick or able-bodied, brilliant or below average, American or Zimbabwean.”

“You’re going to get one ball out of there, and that is the most important thing that’s ever going to happen to you in your life.”

Slack Investor is well aware that defining life in terms of income is a narrow view. However, as a point of comparison, the Global Rich List offers some sobering perspectives.

For example, an Australian on an annual income of $50 000 is in the top 1% of world citizens by income.

And the western world in general offers opportunities for education and reward for effort … but most of all there is an environment where luck can at least enhance outcomes.

There are things that you can do to increase your luck. The golfer Gary Player adopted the aphorism

“The harder I practice, the luckier I get”

This is not against the Slack Investor ethos … there is some practice or research that you must do to become a good investor … however, we like to keep it too a minimum … and, as a rule, always remember to be grateful!

People are happier when they are active

Slack Investor is not averse to parting with the odd dollar for things he values … but increasingly these are becoming experiences rather than things. However, looking at his adventure packed schedule for the week, amongst the usual pastimes like (work, cinema, social gatherings, personal development and grooming (joke!)) I notice that two of the things I am doing are, remarkably, free events.

The first was a concert a Yarrabah indigenous community featuring the incomparable Archie Roach and the second is local university sponsored lecture on ecology by the Stanford Professor Paul Ehrlich.

The first event, at Yarrabah, I have already been to … and it was fantastic! This was my first visit to this local indigenous community. It is a settlement of over 3000 people in an idyllic tropical location – and a place with a few social problems – unemployment, lack of local businesses and a high crime rate, to name a few. However, the concert headlined by Archie Roach and Montaigne plus various local acts was a ripper – and there was a real sense of hope from some of the community leaders (and Archie). It will take some time, but a few of the locals were quite inspiring.

One of the great things about living in Australia is that various levels of government and educational institutions subsidise occasional events – and as an abiding tax-paying citizen I make it my business to attend them if I find them interesting.

Ms Slack Investor reminds me often about the human need for occupation – and filling in your calendar with events is a great thing. As well as (hopefully) being kind and charitable, being busy is a fundamental part of a full life.

Although this blog is mostly about financial stuff, “The golden triangle of happiness” points out that this is just one corner of the triangle of well-being. I will revisit this important triangle in another post.

The Deakin University study points out that Relationships, Financial Control and Sense of Purpose are the three corners to a happy life. As my full time working life is coming to an end, it is this sense of purpose that I will be working on … people are happier when they are active – and filling my calendar with enjoyable events, volunteering, travel – will be all part of it – I hope.

You can’t trust a SPIV … but you can trust a SPIVA!

A SPIV, in the beautifully old fashioned slang favoured by my mother, is a sharp dresser that makes his living in usually disreputable ways – Arthur Daley take a bow!

… A SPIVA … well that’s a completely different story!

In a follow up to why index funds are a good start to investing in shares, Slack Investor was combing the press (rather than his hair!) this week and came across this cracking group of financial wonks known as SPIVA that love nothing more than analysing reams of financial data. Slack investor loves a well constructed piece of research that he doesn’t have to do himself – and for 14 years they have been looking at world markets and publishing reports every half year.

There are two main types of funds: Active Funds where the stocks are actively managed according to financial experts – they control the stock selection and timing of the buys and sells – their expertise does not come cheaply and to piggy back onto their knowledge you have to pay a management fee of usually 1.5 to 4% every year. You can invest in these funds directly by filling out an application form – or you could buy shares on the ASX in a Listed Investment Company (LIC) such as Argo or AFIC.

Passive Funds are constructed in such a way that they passively follow an index. These funds can be mostly automated and are much cheaper to run. They have annual management expenses of usually less than 0.5% per year.

What do the wonks at SPIVA think about the Australian Active vs Passive scene? Their mid-year 2016 report is full of interesting stuff but the killer finding is that nearly 60% of large cap actively managed funds failed to beat the ASX 200 index (passive) in the most recent financial year, with this number rising to nearly 70% over a five-year period.

Things are even worse for international stocks, SPIVA reports that over 80% of Active international equity fund managers underperformed their benchmark index. This rises to over 90% over a five-year period.

Slack Investor is not against individual active fund managers … some are very good, … consistently … Roger Montgomery comes to mind … but because of the much smaller annual fees that they charge, passive funds seem to have a great edge in most cases … and the data from SPIVA bears this out. There is much more to say on the pros and cons of managed funds … and exchange traded funds vs individual stocks … but this will have to be another post(s).

First Investment … Index Funds … Sounds Fun!

OK … the cushion is sorted and we are ready to start on the path to financial independence with our first investment.

However, we are just starting and our first plunge into the share market shouldn’t be with an individual company … this is too risky … exposure to the whole market through an index fund is a good first step.

The main reason for this strategy is that Slack Investor has found that – despite his great prowess as an investor (?) there are many unknowns when it comes to an individual share or stock.

Slack Investor does a great deal of research on a company before he parts with his dollars and, despite being convinced at purchase time that this company will be a great winner, this does not always turn out to be the case.

Slack Investor has been in this investing game for a considerable time and despite this 30-year experience and diligent research his documented win probability for an individual company (Selling the share for more than I bought it) is surprisingly (to an optimist like me!) low.

Slack Investor win probability ... is just over 50%.

This sounds like I don’t know what I am doing … However, bear with me …If you follow Slack Investor and use the enduring wisdom of many successful investors

“Cut your losses short and let your winners run.”

… You will be well on the road to financial freedom.

This is because individual stocks that you keep in your portfolio (Winners) may increase in price by 5-500% (or more!) but if you limit your losses on losing stocks to around 15% you will end up with a solid investment portfolio. For the record, the Slack Investor portfolio has between 20-30 individual shares/managed funds and, including dividends, has achieved a 5-year average annual Internal Rate of Return (IRR) of 14.6% (as at 30/06/16)

If you don’t want to get involved with a stock broker, and you have $5000, then the most excellent Vanguard Funds offer exposure to the whole Australian, US or World markets through their managed funds. For example the Vanguard Index Australian Shares Fund offers exposure to the whole Australian share market for a management fee of 0.75% p.a. with a published 5-year annual average return of 8.7% (after fees)

Or, you could take the plunge and sign up with an Online Broker. Slack Investor uses CommSec. After a bit of paperwork you should then be able to trade on the ASX online and get exposure to the world of Exchange Traded Funds (ETF’s). You will have to pay brokerage for each trade but otherwise, costs are low.

Two such Australian ETF’s are SPDR S&P/ASX 200 (STW) and Vanguard Australian Shares Index Fund (VAS) . They have management costs of 0.19% and 0.15%, respectively, with 5-year average net total returns of 9.98% and 9.32% respectively (31/08/16).

The stock market is a capricious beast and susceptible to whims and world events. Of course, past returns on the stock market are no guarantee of future returns – but, if you put your faith and money into the whole market through an index fund for 3-5 years you will usually be rewarded.

One More Marshmallow Please …

Once the financial cushion is established the hard graft of saving must commence … Fortunately, Slack Investor has always been a good saver and a lot has to do with the mystical trait of delayed gratification. A famous experiment was conducted at Stanford by Professor Walter Mischel. It is worth expanding on this research as Slack Investor finds this trait to be fundamental to the pursuit of financial independence.

The Stanford study was published in 1972 under the dry academic title of Cognitive and attention mechanisms in delay of gratification. And started with a preschool child sitting in a chair, and placing a marshmallow on the table in front of them. The researcher then told the child that he was going to leave the room and that, if the child did not eat the marshmallow while he was away, then they would be rewarded with a second marshmallow. However, if the child decided to eat the first one before the researcher came back, then they would not get a second marshmallow.

The researcher left the room for 15 minutes and the child would either gobble the treat … or wait patiently for what must have been a very long 15 minutes. In the original experiment, one third of the preschoolers managed to get the second marshmallow.

The really interesting part of the Marshmallow Experiment happened years later where follow up studies tracked each child’s progress in a number of areas.

The children who were willing to delay gratification and waited to receive the second marshmallow ended up having higher university entrance scores, lower levels of substance abuse, lower likelihood of obesity, better responses to stress, better social skills and generally better scores in a range of other life measures.

The children were followed for more than 40 years and the researchers concluded

… that the ability to delay gratification was critical for success in many of life’s challenges.

You might think that this ability might be part of your natural make up, but Slack investor and a bunch of Behavioural Analysts think that this delayed gratification can be learned (i.e., Older children were better at the task)… And the best way get this delayed gratification going … is to start saving. Some tricks you can use are to get a portion of your pay paid automatically deducted into a separate account … or set aside a review day at the end of the month so that you can slide any money that you don’t need right away to a separate online savings account.

These accounts are easy to set up and are offered by many banks. Slack Investor has a few accounts with ME Bank, but there are many offerings in the Australian Market. In addition to your transaction account, start a “Cushion” online a/c and a separate “Savings” online account. With your regular contributions they will grow and the delayed gratification vibe can warm your heart! … and you will eventually have all the marshmallows that you could possibly eat!

First Post … mmmm

I suppose that it is important to start of this blog with a profound post … just joking! … In reality, I am not sure how this blog will evo 1374027484173661141the-thinker lve – and what it will eventually contain.

This blog has started as a means to plot down the things that, through a great deal of trial and error, I know about investing. I don’t pretend to be a master investor – but through the years, I think that I have learned a lot and have developed methods that will work for most investors.

I have been lucky enough to learn from many kind investors over the years, together with reading many fine books on economics and investing. The knowledge that I have is continually being updated. Together with books, there are some great finance blogs that I continue to find interesting.
.

In essence, I want this blog to contain information that I wish I had 30 years ago – when I first started to think about saving for my retirement. I like to think that with the type of information that Slack Investor presents, my journey to financial independence might have been a little shorter.