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Welcome to Firstlinks Edition 565 with weekend update

  •   20 June 2024

The Weekend Edition includes a market update plus Morningstar adds links to two additional articles.

Open a business newspaper or magazine on any given day and you’re bound to find an article or snippet on a rock star investment manager – Warren Buffett, Ray Dalio, Howard Marks, or locally, Phil King, Geoff Wilson and others. It’s natural and understandable for investors to look to replicate the strategies and successes of these managers.

What the same newspapers and magazines rarely include are the fund managers who aren’t doing well or have failed. The failures far outweigh the successes, yet you’ll almost never hear about them. For instance, the managers who’ve trailed indices for some time or those who are forced to close funds.

Triumph being made more visible than failure isn’t just an investing phenomenon. It’s everywhere.

Think about musicians. We’re overloaded with news about Taylor Swift. How she’s a billionaire, how she’s sold out her music tours, and how she’s broken up with another boyfriend. We don’t hear about the tens of thousands of wannabe musicians who don’t make it professionally, even though many are extremely talented.

The same goes for sport. Roger Federer still makes headlines even when he is retired, but we don’t read about the hard luck stories from the thousands of tennis players who couldn’t quite get to Federer’s level.

The same goes for books. The chances of getting on a New York Times bestseller list are tiny. Around 3 million books are published each year, and just over 6,000 of them end up on these lists, or 0.00208%. Becoming a famous author is a rarity.

There’s a behavioural psychology term for all this: survivorship bias. We focus on the successes rather than failures, and consequently overestimate our ability to be a success in a certain field.

You’re not Warren Buffett

Consider Warren Buffett. You might have heard of him. Buffett is a financial genius and was a genius from a young age. Recently, I read a speech from a hedge fund manager which gave a fantastic insight into the extent of Buffett’s genius. Mark Sellers gave the talk – So You Want to Be The Next Warren Buffett? How’s Your Writing - to a group of Harvard MBAs in 2007.

Sellers was blunt:

“I know that everyone in this room is exceedingly intelligent and you’ve all worked hard to get where you are. You are the brightest of the bright. And yet, there is one thing you should remember if you remember nothing else from my talk: You have almost no chance of being a great investor. You have a really, really low probability, like 2% or less.”

Sellers went on to say that the Harvard students before him were undoubtedly a cut above the rest, and that meant the chances of the average person becoming a great investor – which he defined as one being able to compound returns at 20% per annum – were much smaller still.

Sellers thought that by the time that your brain had developed in your teenage years, you either had the ability to be a great investor or you didn’t:

“… you can’t compound money at 20% forever unless you have that hard-wired into your brain from the age of 10 or 11 or 12. I’m not sure if it’s nature or nurture, but by the time you’re a teenager, if you don’t already have it, you can’t get it. By the time your brain is developed, you either have the ability to run circles around other investors or you don’t.

Going to Harvard won’t change that and reading every book ever written on investing won’t either. Neither will years of experience. All of these things are necessary if you want to become a great investor, but in and of themselves aren’t enough because all of them can be duplicated by competitors.”

Sellers then listed seven key traits of extremely successful investors:

  1. The ability to buy stocks while others are panicking and sell stocks while others are euphoric.
  2. They are obsessive about playing the game and wanting to win.
  3. A willingness to learn from past mistakes.
  4. An inherent sense of risk based on common sense.
  5. Great investors have confidence in their own convictions and stick with them, even when facing criticism.
  6. It’s important to have both sides of your brain working, not just the left side (the side that’s good at math and organization).
  7. The ability to live through volatility without changing your investment thought process.

Sellers thought none of these traits could be learned by the time that you reach adulthood.

Number 2. on Sellers’ list is worth elaborating on. If there’s one thing that stands out from Alice Schroeders’ biography of Buffett, The Snowball, it’s not only his precocious ability from a young age, but his willingness to sacrifice everything to get wealthy. And I mean: everything. He was addicted to investing and neglected his wife, children, and friends, to achieve his goals.

Not only is Buffett’s genius rare, but his investing obsession is rarer still.

Better to shoot for average, or better than average

Sellers in his speech wasn’t all doom and gloom. He said that though the Harvard students were highly unlikely to become great investors, they could become above average ones through hard work and study. And that beating indices by a few points each year would hold them in good stead.

Shooting for above average results, or even average, is sage advice. It reminds me of US fund manager, John Neff, who ran the Windsor Fund from 1964 to 1995. In his biography, he comes across as a low key and humble man, and his portfolio often reflected that. He liked to buy stocks at a 40-50% discount to the market price-to-earnings ratio, with steady, growing earnings, and sound balance sheets. In other words, there were no momentum stocks, or loss-making ones on price-to-sales ratios of 10x or more. He stuck to low priced, steady compounders.

He ground away at that simple strategy for 31 years, beating the S&P 500 by 3.1% per year. It doesn’t sound like much, but it resulted in $10,000 (with dividends reinvested) turning into $564,000 over the life of the fund.

Neff was more concerned with avoiding large losses than making big gains. In that, he echoes the sentiments of the great investment consultant, Charles Ellis, whose book, Winning the Loser’s Game, I’ve written of previously.

Ellis writes of how the stock market has become a loser’s game. That is, so many professional investors have entered investing that it’s made the market extremely efficient. It makes beating the market difficult and even more so if you include costs such as fees and brokerage.

Ellis says there are two ways to play a loser’s game. You can choose not to play. Even back in 1975, Ellis was already advocating index investing.

The second way of playing the loser’s game is by losing less than your opponents, aka making fewer mistakes:

“In a Winner’s Game, 90 per cent of all research effort should be spent on making purchase decisions; in a Loser’s Game, most researchers should spend most of their time making sell decisions. Almost all of the really big trouble that you’re going to experience in the next year is in your portfolio right now; if you could reduce some of these really big problems, you might come out the winner in the Loser’s Game.”


In my article this week - everyone knows Australian housing is expensive, but how expensive is it versus the rest of the world? A new Demographia International Housing Affordability report suggests our residential property is around 2x that of the US and UK on a price-to-income basis. And that it’s cheaper to buy a house in New York than in Adelaide or Brisbane. The report lauds New Zealand for its recent moves to address housing affordability, though it’s less complementary of the efforts of other countries.

James Gruber

Also in this week's edition...

Listed investment companies are trading at historically wide discounts to net assets. What’s the catalyst for a turnaround? Lots of fingers have pointed to supply, size, liquidity, and performance, and other things. However, Ophir’s Andrew Mitchell thinks the trigger for a turnaround lies with interest rates. He provides compelling data to back up his theory and why better times for LICs and LITs may be ahead.

A report released by Vanguard reveals new retirement challenges facing Australians, especially around housing. Nearly one in five retirees are renting, and almost one in three working Australians expect to still be paying a mortgage in retirement. The report says it’s a critical issue because retiring with a house, minus a mortgage, has a large positive impact on retirement confidence.

Meanwhile, retirement can last more than 30 years, necessitating thoughtful planning. Many miss workplace friendships, identity, status, expertise, and routine, but these can be replaced with renewed activities and purpose, according to Jon Glass.

Warren Buffett is widely regarded as the most successful investor ever, and rather than keep his secret sauce hidden, he's shared his knowledge for decades. The question is: why haven't more investors been able to replicate his methods and success? Buffet author and fund manager, Robert Hagstrom, shares his thoughts, as Joseph Taylor reports.

It’s that time of year where email inboxes fill with predictions for the ASX for the 2025 financial year. Airlie’s Vinay Ranjan advice is: ignore all of them. Instead, he outlines three reasons to bullish, as well as three reasons to be bearish. Ultimately, Vinay thinks investors should ignore market noise and focus on buying quality companies.

For much of the past 40 years, a negative correlation between stocks and bonds has meant when stocks move up, bonds move down, and vice versa. That’s been a godsend for investor portfolios as bonds have provided protection when equities pull back sharply. Recently, a positive correlation between the two assets has undermined bonds role as a portfolio diversifier. Ray Gia says investors should consider gold to help diversify their investments.

Two articles from Morningstar this weekend. Joseph Taylor compares Guzman y Gomez to other fast food winners and Mark LaMonica earmarks seven potential dividend growers.

Lastly, in this week's whitepaper, TD Epoch, a GSFM affiliate, says while things are looking up for equities, it expects volatility and fundamentals to play a larger role in equity returns moving forward.


Weekend market update

On Friday in the US, stocks edged slightly lower on the major indices as sleepy price action continues to predominate with second-quarter earnings season still several weeks away. Treasurys likewise came under modest pressure with the long bond rising three basis points to 4.39% and the two-year note settling at 4.7% from 4.69% Thursday, while WTI crude ticked below US$81 a barrel, gold pulled back to US$2,322 an ounce and bitcoin slipped to US$64,200. The VIX wrapped up the week slightly north of 13.

From AAP Netdesk:

The Australian share market on Friday finished slightly higher as investors' attention turns to the end of the financial year. The benchmark S&P/ASX200 index finished up 26.6 points, or 0.34%, at 7,796, on Friday, while the broader All Ordinaries rose 28.4 points, or 0.35%, to 8,040.5. For the week, the ASX200 rose 0.82% after losing 1.7% the previous week.

Eight of the ASX's 11 sectors finished higher on Friday, with mining flat and industrials and consumer discretionaries slightly lower.

Utilities were the biggest gainer, climbing 1.9% as Origin Energy added 3.3% to $10.76.

In the heavyweight mining sector, goldminers shined. Newmont added 2.1%, Evolution rose 4.2% and Northern Star climbed 1.9%. Elsewhere in the sector, BHP edged 0.1% higher at $42.78, Rio Tinto climbed 0.5% to $120.25 and Fortescue dropped 0.9% to $21.71. Lithium miner Pilbara fell 2.8% and peer Liontown fell 5.1%. Mineral Resources dropped 7% to a nearly two-year low of $55.76, two days after announcing it would close its Yilgarn iron ore mine in the Pilbara, throwing 1,000 employees out of work.

The big four banks had a mostly quiet day, with Westpac flat at $27.24, CBA edging down 0.1% to $127.68 and NAB edging 0.1% up at $36.21. ANZ was the outlier, falling 0.9% to $28.94.

Booktopia remained frozen on the ASX as the struggling online bookseller asked to extend its voluntary suspension while it tries to raise funds from various parties to stay in business.  "Indicative interest has been provided from some of these parties and they are currently undertaking due diligence ... to determine if support will be forthcom5ing (which) ... is necessary for the company's continued financial viability," secretary Alistair Clarkson said.

Looking forward, next week domestic consumer price index data for May will be released on Wednesday. Next week is also the end of the financial year, with the ASX200 up 8.2% year-to-date.

From Shane Oliver, AMP:

  • Share markets were mixed over the last week. US shares pushed higher helped by tech and AI optimism and despite a bit of profit taking at the end of the week rose 0.6%. Eurozone shares rose 1.1% recovering some of their losses from the week before as fears around the French election settled down a bit. However, Japanese shares fell 0.6% and Chinese shares fell 1.3%. Australian shares rose by 0.9% helped by the positive US lead despite more hawkish comments from the RBA with utility, financial, health and telco shares leading the gains. Bond yields mostly rose. Oil prices rose but metal prices and the iron ore price fell. The $A rose with slightly hawkish RBA comments, but the $US also rose.
  • Nvidia briefly made it to be the world’s biggest company in terms of market capitalisation in the past week, but narrowing breadth in US share market gains is signalling caution on shares. When share market gains are broad based it provides confidence in their durability. This has been evident through much of the bull market since October 2022 in good gains in the equal weighted US S&P 500 index (where each share has an equal weight). Since May though gains have been ever more narrowly driven by a handful of mega cap tech stocks driven in particular by enthusiasm for AI with Nvidia leading the charge whereas the equal weighted index has not regained its May or even March highs. This can go on for a while and July is often a seasonally strong month for shares, but the narrowing gains at a time of poor valuations (evident in the narrowing earnings yield less bond yield gap), elevated (but fortunately not extreme) levels of investor sentiment and technically overbought conditions warn that we could see another correction ahead, possibly in the softer seasonal months of August and September.
  • The drip feed of rate cuts globally continued over the last week with the Swiss central bank cutting rates for a second time taking its policy rate to 1.25%. The Bank of Norway left rates on hold with a more hawkish bias than previously. But the Bank of England held at 5.25% but with 7 votes for a hold and 2 for a cut as in the last meeting and it indicated that the decision to hold was “finely balanced” for some officials suggesting more may be close to supporting a cut with Governor Bailey welcoming the fall in inflation. The UK money market now sees an 86% chance of cut in August and has priced in two cuts this year.
  • A hawkish hold from the RBA at 4.35%, but we still see a rate cut late this year. The RBA provided no big surprises and is still “not ruling anything in or out”, but its language around inflation still being too high continues to lean hawkish with only a hike or a hold on the table and its arguably a bit more hawkish than in May with the RBA reinstating a comment that it “will do what is necessary” to return inflation to target. Our view remains that inflation will resume its downswing, as has occurred in various other countries after pauses including the US, and that as a result rates have peaked ahead of a start to rate cuts late this year, or if not then early next year. 

Curated by James Gruber and Leisa Bell

Latest updates

PDF version of Firstlinks Newsletter

ASX Listed Bond and Hybrid rate sheet from NAB/nabtrade

Listed Investment Company (LIC) Indicative NTA Report from Bell Potter

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