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.
I did a north to south crossing of Africa 36 years ago, mostly in a 4-wheel drive truck and, if we stopped in a village, my routine would be to grab the water containers and find a well. This was always a pleasant task as it involved a line-up, sign language and usually a few giggles at the strange visitor’s expense. Overwhelmingly, the well would be attended by women and there was usually an air of joy and strong comradery in the queue.
CSL have just gone to the “well” – with a Share Purchase Plan (SPP). They have purchased a Swiss company, Vifor Pharma (VIFN:SWX), which specialises in iron deficiency and renal disease. The acquisition cost US$11.7 billion and they have already covered most of this with an institutional placement and some new debt. CSL is trying to raise another $750 million from the “well” of shareholders pockets – and they seem likely to get it – let’s hope they will be welcomed back when they need water next time.
It seems to be the way of things that institutions (Brokers and Super Funds) get the first slice … and when this is done, there is a limited offer to retail investors – just to stop them whinging. Most of the time I participate in any share purchase plans as a convenient way to accumulate shares without the cost of brokerage. The CSL offer is set at $273 (or a 2% discount to the share price if CSL shares fall below this mark). Bids for the stock must be lodged by the 7th February, 2022.
“The combination with Vifor Pharma is expected to be financially compelling for our shareholders while expanding and diversifying our revenue base. It is expected to be immediately earnings accretive in the first full year of CSL ownership …”
Nice words Mr Perreault … but I have never ever read a share purchase plan that didn’t offer these comforting sentiments – CEO’s usually love to inform us of their astute decisions. “earnings accretive” just means that after all costs and synergies, the earnings per CSL share (EPS) should go up … and, when earnings go up, the share price should go up.
The projections for acquisitions and mergers are always complicated – the only real proof … will be down the track.
(There is) 30 years of evidence demonstrating that most acquisitions don’t create value for the acquiring company’s shareholders
CSL do have a good track record of acquiring new assets and turning them into future growth engines. However, The CSL offer to acquire Vifor Pharma was generous at 40% above the Vifor list price. But this is where it gets even more complicated, the size of the premium is historically not a good predictor of how the deal will turn out. The most pertinent question is “Has CSL paid more than the acquisition was worth to to CSL.” Slack Investor has no answers yet … We will see how this deal settles.
On 14/01/2022, the CSL share price was $276.00 – A premium of $3.00 to the $273 offer price – or about 1% – so the SPP offer price is no real bargain. Despite Slack Investor’s endless devotion for the company, it seems that the market is currently out of love with CSL.
In the background, despite ongoing problems with plasma collection due to COVID-19, CSL has increased its profit for the past two financial years by 20% – but its share price does not really reflect that. After a rapid increase in 2019, the share price has gone nowhere in the last two years. Macquarie analysts have a 12-month price target on CSL of $338.
Unlike Big Kev, I’m not super excited … The investor presentation, as always, looks compelling – full of talk about global reach, synergies and “developing a significant renal franchise”. But what really impressed me was the confirmation of CSL FY22 NPAT guidance of US$2,150 million – US$2,250 million. This is not advice, even though Slack Investor already has a big holding in this company, he will be participating in a slice of the CSL 2022 SPP.
Scaling Back
One of the annoying things about share purchase plans is the “scaling back”. If the SPP represents a good deal … they are usually oversubscribed. The 2021 Commonwealth Bank (CBA) SPP was such a good deal for retirees that they stumped up $18 billion more than the amount of shares on offer. Their share bids were scaled back by 79.4%. If you applied for $20 000 of CBA, you would have to send off this amount – and you would have been rewarded with $4120 of shares – and then have to wait for your refund.
The CSL 2022 SPP is not as immediately financially rewarding as the CBA offer and will probably not be scaled back as much. CSL has assured share owners that after the SPP, they will at least retaining their percentage shareholding in the company,
Slack Investor has done some rough calculations. As this new placement and SPP represents approximately 5.1% of current CSL ordinary shares on issue -This means that I should be able to buy at least 5.1% of my current holdings in the SPP without the inconvenience of scaling back.
If I owned $120 000 of CSL shares, I would be guaranteed to get at least $6120 (120K x 0.051) in the new SPP without scaling back. I round this up to the nearest allowable dollar value parcel, which is $10000 – and that’s how much I will apply for. Most people would apply for more (up to $30K) – but my portfolio is heavy with CSL, and this scaling back process just annoys me! CSL will of course refund any scaled back monies as soon as practicable after 14/02/2022 – without interest.
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.
Pizza scissors – The new “Must Have” – These highly rated Kitchen Maestro Pizza Scissors were available at Amazon for $12 USD, but sadly, for pre-Christmas shoppers – currently out of stock.
Fish swim, birds fly, humans think, create and innovate. Thinking is not something that people do because we like it, we do it because it is our way of surviving.
An amazing trait that we humans have is the ability to innovate. Slack Investor admires the innovators and the intellectual capital that they bring to businesses. Ideas and research are a vital part of a growth company. Research and Development (R&D) may lead to more efficient production processes or better products that give a company future growth. I have long been a big fan of companies with a high spend on R&D and I am happy to invest in these stocks.
According to the data from EFPIA, in the percentages below, the big spenders are in just a few sectors. The survey looked at 2,500 companies around the world. Technology companies usually have a big R&D budget, but the pharmaceutical and biotechnology industry lead by spending 15% of revenue on R&D. NASDAQ figures for specific companies, show R&D expenditure for Google (Alphabet) was 15% of its revenue in 2020, CSL about 11%, and Microsoft 13%. Apple was a relatively low 7% – but they have a very small range of products.
Proportion of Revenue spent on R&D by each Industry sector – EFPIA
Just because a company has a high R&D spend does not always guarantee success. As well of the discovery of ideas that might be useful in the business, a company must be really good at the Incubation, and Acceleration of these ideas. It is important to look for an established record in the way a business brings new products to fruition.
However, there is a broad link between innovation and value. The Boston Consulting Group(BCG) compile a yearly list and map the performance of the 50 most innovative companies. In 2021, they found that the more innovative businesses had an average Total Shareholder Return (TSR) premium of 3.3% over the MSCI World Index.
Outperformance of the most Innovative companies – From the VisualCapitalist
“If I have 1,000 ideas and only one turns out to be good, I am satisfied.”
Alfred Nobel
Top 10 Most Innovative companies – published in the Visual Capitalist from BCG data.
The full list of top 50 innovators is worth a look and is a reminder that these are the companies that a lot of people interact with every day.
I have been a continual investor in theBetashares NASDAQ ETF(ASX: NDQ) that gives me access many of these great innovative companies. Every time that Slack Investor looks at the businesses that make up the NASDAQ 100, I think that this technology area must be where growth is still happening – and I want to be invested here.
According to GuruFocus the 12-mth forward PE of the NASDAQ 100 is 27 (A bit expensive) but the Return on Equity is at 18% – and growing (This is good).
Slack Investor also owns a slice of the Asian Technology giants with BetaShares Asia Technology Tigers ETF (ASX: ASIA). The heavy hand of Chinese government interference in some tech stocks has led to a pullback in price this year. But I have maintained my holding because Chinese companies like the search engine Baidu, the e-commerce giant Alibaba, and the technology beast Tencent will not be held back for long.
A good compromise, if you want a more whole world approach, is the ETFS Morningstar Global Technology ETF(ASX: TECH). This ETF has holdings distributed across the United States (89.6%), Australia (5.8%), Japan (2.4%), and Germany (2.2%) and has a “moat” filter that will only select companies that have built a competitive advantage around their businesses. All of this for a Management fee of less than 0.5%.
Innovative company shares do not always go up. An example of this is is the new Cathie Wood disruptive innovation stocks ETF – (ARKK). Early investors are very happy, recent investors not. However, with a 3-5 year time frame, exposure to the whole NASDAQ index – the top 100 of the (mostly) great NASDAQ companies must be a good thing.
This is not advice, but if I cant buy pizza scissors for Christmas – I might as well top up with some more NDQ or ASIA, or expand into TECH.
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).
“Sick young Bacchus” a self portrait by Caravaggio (circa 1593) showing himself as the Greek God Bacchus, the god of wine. It is thought that Caravaggio painted this portrait when he was not well – probably suffering from malaria. From the Borghese Gallery, Rome.
Fear and greed are part of the human condition, these traits have evolved over time.
Without the right dose of fear, we would expose ourselves to unreasonable threats and, without the right dose of greed, we would forego opportunities to secure the resources that we need to live.
The fluctuations of the stock markets are just a symptom of these traits. There is a lot of general panic and selling when the stock market starts consistently falling. Stock owners become fearful of further losses and press the sell button. This sets up a chain reaction and the markets fall even further.
A “Herd Effect” exists in the financial markets when a group of investors ignore their own information and, instead, only follow the decisions of other investors.
It is easy to see how herd behaviour evolved as copying what other individuals are doing can be useful in many situations. For example, if there is an immediate threat, that you haven’t noticed and the herd has – it might save your skin to follow the herd.
Then, of course, there are the good times when the stock market is pumping – the buyers start piling in regardless of the fundamental foundations of the stocks. Asset bubbles often result and a good example of this greed was the “dotcom” bubble in the late 1990’s when big prices were paid for any company that mentioned the internet in its prospectus. Nobody wanted to miss out on, what looked like, easy money.
But these herd behaviours are the opposite of what the astute investor should be doing. We must fight these evolved traits and develop our own behaviours that keep us on the right path.
Savings Automation and Dollar Cost Averaging
Slack Investor has written before about automating your savings. There are also huge advantages to automating your investing – particularly when you are just starting out in the investing world. The first stumbling block that new investors face is to start investing. Then they must develop the habit to keep on investing. There is always a reason to use the money somewhere else or, you might think that right now is not a good time to invest. This “paralysis” must be over come and the best way to do it is through automation.
With auto investing, you don’t have to make the decision when to invest, it just happens automatically when your savings reach a pre-determined point. This opens up the delights of “Dollar Cost Averaging” where, if the market is relatively expensive, you will buy few shares – and if the market is undervalued at the time, your set amount of dollars will buy more shares.
You are buying in the good times and bad . This doesn’t matter – the important thing is that you are buying into companies and accumulating your wealth. Your purchasing is relentless, no decisions, no procrastination – Warren Buffet would be proud!
By investing regularly, in this case, $417 per month, you accumulate shares regardless of the share price. Dollar Cost Averaging buys you more shares when the share price is cheap and less when they are more expensive. – From SeekingAlpha.com
Pearler and Auto Investing
A new kid on the block in the broking business for Australian and US shares is Pearler with distinguishing points of a flat $9.50 brokerage charge and the use of the Chess system for attributing shares to individuals. This means that you are issued with a Holder Identification Number (HIN) and you have direct ownership of your shares. Slack Investor likes this model rather than the custodial model of many other new broking players. Pearler also offers free brokerage on the purchase of selected ETF’s (provided that you hold them for a year).
However, Slack Investor thinks the absolute best feature of the Pearler platform is that it encourages Auto Investing and makes the process simple. If you are serious about your investing journey, you need a broker and why not make it Pearler.
There are some well researched and comprehensive reviews of Pearler and its many features by Captain FI and AussieDocFreedom.
Auto Invest through Pearler is an excellent way to combat the cycles of fear and greed and take the emotion out of your investing decisions.
Other than just opening an account with them, Slack Investor has no affiliation with Pearler.
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.
Slack Investor is drowning in paper. Owning shares is a lot of fun but the unnecessary postage and paper is a waste and a frustration. In particular, the posted CHESS Holding Statements from the Australian Securities Exchange (ASX) and useless bits of paper from the share registries are annoying.
(The) ASX sent out 19.2 million paper statements over the year to June (2020), a rise of 34 per cent, as trading surged during COVID-19. The statements used 103 tonnes of paper in the past year.
Australian Investors will be familiar with CHESS, the computerised Clearing House Electronic Sub-register System of the ASX. It was introduced in 1994 and has been around for most of my investing life. All my share holdings are settled through CHESS, through a Holders Identification Number (HIN) and managed by a broker.
There is no doubt that the introduction of this system 27 years ago was a bit of a revolution as it simplified share trading from the cumbersome system of share ownership certificates. It was a world leading technology at the time. However, things have moved on and Slack Investor issues a plea to the ASX, enough is enoughwith the useless paperwork.
ASX charges companies $1.25 for every “CHESS holding statement” sent out to investors, who receive them even if they quickly sell shares bought. Many investors put them straight in the bin.
I am by no means a frequent trader … but the constant statements that I get mailed to me for every small change in my share balances are a continuing source of frustration.
A Sample of the 10 Chess Holding Statements that washed up into my post box last week. These statements are issued by the ASX and are currently unavailable online – they are only issued in hardcopy via post
Although these are mailed out to me at the end of every month – I have never used these statements. The definitive holding record of what shares I own at any given time is held by my CHESS sponsor, my broker (Commsec or SelfWealth).
In the same way I trust my superannuation fund or Bank (i.e not much!), I trust my broker with the record of share ownership – and, I also trust them to work out any dispute if I disagree with their tally. If there ever was a dispute … I would go back to the PDF contract notes and certainly not the paper CHESS Holding Statements to try to resolve it.
How to cope with share record keeping now
At the moment the only way that you can get your Chess Holding Statement is through the post. For 27 years, I have dutifully filed these statements but now, like many of my fellow traders, I have decided to shred them and put them straight in the recycling bin. Shredding is important as these notices contain your name, address and personal HIN.
However, there ARE other very important bits of record keeping that you should try to handle in digital form.
Share Registry Stuff
Share Registries are another intriguing layer in the ownership of shares – and another source of paper and postage. When a company lists on ASX, most companies appoint a share registry to manage the book of shareholders. For we share buyers, the registries manage our share holdings, dividend payments, and the voting at the annual general meeting.
Confusingly, there are three main share registry companies in Australia, Computershare, BoardRoom and Link Market Services and, it is a bit of a raffle which registry manages each company. On purchase, I always label each share with its associated registry. You can look them up at ASX Share Info. For instance CSL is always CSL (C) in my records (Computershare) and Macquarie Group is signified as MQG (L) as it uses the Link registry. I find this cross-linking very handy when chasing down any company payments (dividends) or tax statements and I can’t remember which registry manages the company shareholders.
Whenever you make a share purchase in a new company, through your broker, even though it is using your personal identifier (HIN), at the moment it is necessary to contact the registry and do three things. You will probably be prompted by a paper mail delivery asking you to contact the registry.
Register your bank account details for dividend payments with each company (even though they may already have them)
Register your Tax File or ABN number (even though they may already have them).
Tell the registry how you want to handle all communications – (electronically/email) suits Slack Investor
Every registry change that you make usually generates a letter in the post. They charge the company (we shareholders) for this, though some registries seem to be letting me know by email if they already have my communication preferences.
Keeping track of your finances
These days most share transaction and income finance details are now pre-filled on your tax return. However, it is your responsibility to check on these things and, at a bare minimum, you should download a summary report from your share broker at the end of the tax year. This report contains your buys, sells and income and is usually sufficient evidence for your annual tax return.
A more complete share portfolio solution is using third party financial software such as Sharesight. This is amazing software and is free to use if you have 10 holdings or less. They supply end of tax year reports that even include a capital gains analysis.
Slack Investor is a bit “old school” here and uses the free Microsoft Money Sunset International Edition for portfolio management- But this is dated software now and not recommended for new users.
Because I like to keep track of everything without paper – Slack Investor also sets up folders on his computer for each tax year. There are subfolders for 1. Dividends and Distributions and Tax Statements (From the registries) 2. Broker Transactions.
Dividends and Distributions and Tax Statements: There is no excitement like dividend season as the dividends and distributions roll in via each company registry. I download PDF copies of all payments. I file them on my computer in the format: Tax Year_Investor_Company_Type_Date e.g., 2021_SMSF_CSL_DIV_2021-04-01. Or 2021_SMSF_RBTZ_TaxStatement_20210630.
Broker Transactions/Contract notes: When you buy or sell a share through a broker, a contract note is issued. These should be emailed to you and your broker will keep a copy of them. I also download each contract note for a buy or sell from my broker in the format: Tax Year_Investor_Company_Type_Date e.g., 2022_SMSF_COL_BUY_20210809
Capital Gains: When you sell shares for a profit or loss , you need to declare it on your tax return. Capital gains calculations can sometimes be tricky. A simple example is described in this ABC Overview here and Slack Investor will plan a later article on how to handle more complex cases.
Of course some paper documents still sneak through the Slack Investor fortress and I keep them in a tray in my office and bag them in envelopes labelled with the tax year and keep them for five years, as required by the ATO.
The Future
I am hoping that the share registries can ask the ASX for an email only option for share owners. All registries should have an automatic default instruction to use the same Bank account, tax file # and communication preference – whenever a share purchase is made with your Holder Identification Number (HIN). No announcements from the registries yet – I lie on the couch and dream.
In late 2017, the ASX sent a ripple of excitement through the market, announcing that CHESS would be replaced with distributed ledger technology
… but not until 2023. In the meantime, if these holding statements are necessary – can we at least have an e-statement option.
The ASX has had many delays to the starting date of this new technology. Distributed Ledger Technology (DLT) is similar to Blockchain. The full difference between Blockchain and DLT made my head hurt … so I hope they know what they are doing.
Unlike the CHESS system, Mr Squiggle never gets old – even after a 40-yr career starting in 1959 – With thanks to Norman Hetherington, Mr Squiggle, and ABC TV
But, please hurry up with these reforms ASX … after decades of complaints. Streamline the share registry process, ask us for our email details and give us the option for email delivery of statements. In its current form, the CHESS clearing system and paper mail trails just seems a little bit … of another time.
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