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Welcome to Firstlinks Edition 485 with weekend update

  •   24 November 2022
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The Weekend Edition includes a market update (after the editorial) plus Morningstar adds links to two additional articles.

I once received this question at a job interview: what have you changed your mind about in the last decade? I thought it was a good question then and it remains a good question now.

At the interview, some 15 years ago at a funds management firm, I answered I was convinced that a concentrated investment portfolio was a key ingredient to being a successful investor. Previously, I hadn't been convinced of that.

I was being a bit disingenuous because I knew that this answer would be music to this fund manager's ears. But I also happened to believe it, which certainly helped the cause.

Today, I would take issue with my former self; I would take issue with the answer I gave back then.

But let's back up a bit and explain why I gave that initial answer. It probably had deep roots. All the way back to my childhood, in fact. As a kid, I remember seeing a lot of issues in black and white. Right and wrong, good and bad, win and lose, and so on. There wasn't much room for shades of gray. And being somewhat of a stubborn child didn't help either.

When I got my first job in finance as an analyst at a sell-side broker, I was encouraged by my employer to take strong views on stocks and sectors of which I had coverage. The company didn't take kindly to 'hold' recommendations on stocks; 'buy' and 'sell' recommendations were more appreciated as they generated more trading and brokerage fees for this firm!

I carried this type of thinking over when I became an equities portfolio manager, and indeed with my personal investing. It was about having strong views on a small bunch of stocks.

My investment heroes back then all had concentrated portfolios, who's virtues they proselytised. The likes of Erik Metanomski in Australia and Warren Buffett and Mohnish Pabrai overseas.

What's changed over the past decade then? Losing some money during the GFC had an impact, no doubt. But it's much more than that.

I've changed my approach to investing because I've changed my approach to life. I've realised most issues aren't black or white. I've realised how much I don't know about many issues. I've realised that I'm more risk-adverse than the average person about lots of things. I've realised that I don't like the stress involved in taking a big bet. All of this has made me an advocate of having a diverse investment portfolio.

I'm not saying that concentrated investing can't work. It can. If you are a good investor, with the stomach to take volatility and potentially big drawdowns, then a concentrated portfolio can do wonders. It just doesn't work for me.

What have you changed your mind about in the last decade? I'd love to hear your thoughts.

In this week's edition ...

The FTX saga has a bit of everything. Knowing America, books and movies on the subject will already be in the offing. For Australian investors, it might seem the drama is too movie-like to have any relevance to them. Yet there are many lessons to take away from FTX - some obvious; others not-so-obvious.

Jody Jonsson of Capital Group believes investors need to reset their expectations about how a typical investing environment looks. She identifies five seismic shifts happening in economies and markets and the investment implications for each.

Superannuation has become a political football and there's noise around further changes to the system. Former Chair of Retirement Income at Challenger, Jeremy Cooper, says we need to take a deep breath: while super isn't perfect, more changes could add further complexity to a system that's served us well.

Meanwhile, the rules for eligibility to contribute to super are relatively simple but there are additional conditions regarding access to the bring forward rule that may result in unintended tax consequences. Julie Steed looks at the rules and reviews what happens when they are not fully met.

Retirement has become a central part of the conversation about the future of super. As more post-retirement members have more superannuation savings than ever before, Andrew Boal and Steve Freeborn of Deloitte believe the time has come to better engage with people about managing their retirement needs.

A sharp spike in bond yields has resulted in Australian Real Estate Investment Trusts being among the poorest performers on the ASX this year. With the RBA prioritising growth over inflation though, A-REITs may be set for a turnaround, according to Cameron McCormack.

Private credit - loaning money to private businesses including SMEs - is booming and investors can now get direct access to funds in the space. Roger Montgomery is our guide to the benefits and pitfalls of investing in private credit.

In the weekend update by Morningstar, Shaun Ler suggests Perpetual's acquisition of Pendal more than likely to happen, and James Gard looks at the stunning return of Bob Iger as CEO of Disney and what it means for the future of the company.

This week's White Paper comes from Vanguard Investments, whose latest quarterly ETF report highlights that despite the market pullback, Australian ETFs are still attracting substantial inflows. 

***

Weekend market update

On Friday in the US, stocks closed mixed, in a short session, paced by a drop in Apple amid heightening concerns that China’s COVID outbreaks have already significantly cut supply of iPhones. The Dow finished +0.5% while the S&P 500 was down 0.03% and the Nasdaq was 0.5% lower.

From AAP Netdesk: The local share market rose for a fourth day in a row on Friday, climbing modestly in light trading to again set a five-month high. The benchmark S&P/ASX200 index on Friday gained 17.8 points, or 0.25%, to 7259.5, while the broader All Ordinaries was up 15.4 points, or 0.21%, to 7447.6. For the week the ASX200 gained 1.5%, its fourth winning week in the past five.

The heavyweight financial sector gained 0.8% on Friday, with Commonwealth Bank rising 1.1% to a one-year closing high of $109.20. ANZ gained 0.7% to $24.82, Westpac added 0.5% to $23.99 and NAB 0.8% to $31.49.

The consumer discretionary and property sectors were the strongest performers, with both climbing 1.2%. Kmart and Bunnings owner Wesfarmers added 0.6% to a six-month high of $49.16, JB Hi-Fi grew 1.9% to a three-mongh high of $44.81 and Harvey Norman 3.1% to a two-month high of $4.30.
But City Chic plunged 28.4% to a three-year low of 99.5c after the plus-sized retailer warned of profit margin compression amid tough competition for reduced demand.

The heavyweight mining sector was down 1.1%, with both BHP and Rio Tinto falling 0.8%, to $44.20 and $105.65, respectively. Fortescue Metals dropped 1.2% to $18.94.

From Shane Oliver, AMP: Share markets resumed their rally over the last week helped by further signs of a slowing in rate hikes from the Fed and a decline in bond yields. While the latter may partly reflect recession fears, lower bond yields also make shares more attractive from a valuation perspective. Reflecting this, US shares rose 1.5% for the week, Eurozone rose 1.2% and Japanese shares rose 1.4%, but Chinese shares fell 0.7% on Covid lockdown worries. The positive global lead saw Australian shares rise to their highest since May & they are now down by only 2.5% for the year to date. The gains in Australian shares were led by utilities, industrials, health and consumer discretionary stocks. Bond yields fell further. Oil and iron ore prices fell but copper prices were little changed. The $A rose to its highest since September as the $US fell. 

Slower growth and easing inflation pressures are enabling some slowing in rate hikes from central banks. The past week saw more positive news:

  • The minutes from the Fed’s last meeting leaned dovish with most Fed officials supporting a slowing in rate hikes and only a small number supporting an increase in the expected terminal (or peak) rate. This suggests recent somewhat hawkish Fed speeches have been aimed at stopping financial markets from rallying too quickly and easing financial conditions prematurely post the lower-than-expected October CPI. But the minutes support the view the Fed will slow to a 0.5% hike next month.
  • Business conditions PMIs for major advanced countries for November showed a further easing in price pressures.
  • German producer prices saw their first fall since 2020.

This is all consistent with our Pipeline Inflation Indicator which is still trending down and points to further falls in US inflation.

James Gruber

Latest updates

PDF version of Firstlinks Newsletter

LIC Monthly Report from Morningstar

ASX Listed Bond and Hybrid rate sheet from NAB/nabtrade

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

Monthly Funds Report from Cboe Australia

Plus updates and announcements on the Sponsor Noticeboard on our website

 

4 Comments
Lyn
November 25, 2022

Crumbs, Kevin, been following your posts for a few weeks and you suddenly don't feel as confident. What happened? No-one to share your thoughts with? Take care online or you may be scammed. Take some time to learn how not to be scammed with what you share online, L

John E
November 24, 2022

i can't think of anything I have changed my mind about in the last 10 years ... that's why I am so boring ... same sort of investments ... same wife, same house etc etc ...

Trevor
November 26, 2022

John........Thanks !
".........same sort of investments ... same wife, same house etc etc ..."
I call it "having successfully achieved a mellow maturity" ....and it is a very significant stage in "the tail end" of life.
You know who you are , who your friends are and what you are doing [ or have retired from doing !? ] and life is bliss !
It is the stage in life where "all the hard work is now paying off" and you can lead a care-free life [ not a care-less life ] !
Congratulations on a job well done....and keep up the good work.....you have now set an example for others to emulate !
Regards , Trevor.

Kevin
November 22, 2022

Your points are valid, perhaps the emotional side of investing? The GFC taught me I needed more cash, I got closer to a margin call than I ever thought possible. Money was spent buying shares in companies where the price had fallen.That took away the safety net.


Nothing else changed,still a concentrated portfolio, most years ( 9 of 10? ) the capital value rises and the income derived from that capital rises. The GFC lesson turned out great.


During the present turmoil I've had cash to buy shares. I would never have gone into the market in Feb of this year.Coincidence? Graham and his podcast .A share is mentioned that I forget I own ( APA). I buy because I hadn't realised the price had gone down that much.That sudden rush of white line fever sets me up for February. Then as suddenly as that rush of blood and white line fever appears I make it disappear.


Longer than 10 years but the only change is I thought cash was useless and it had to be working for me at all times. Now I realise sleep at night money is important.

 

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