Don’t wait too long to leave the party!

Investment Perspective – April 2018

“Neither the investing method nor the fundamentals of the business are right or wrong because the mood of the market is favourable or unfavourable toward the “stock”. That is because when you really think about it, “stocks” (shares) are all about the financials and the trading price, the share price…the cash up value. What matters more is the economics of the business” 

Peter Flannery

This “Don’t wait too long to leave the party!” is one of the many, many “clickbait” headlines that proliferate the internet.

It is suggesting that if you don’t sell all your investments and reposition into safe harbour type assets now that you will be sorry.  Because they reason, the “black swan” … the day of reckoning is nigh!

In this particular article I was reading recently, they get more specific suggesting that everyone should bail out of the share market / real estate investments and protect investment capital by repositioning into commodities, gold and US Treasuries (fixed interest investments).

Having been around for a day or two, like you, I have heard this type of banter before … several times in fact over the last 30 years!

Indeed, this particular organisation has never been seen to suggest that anyone should ever get involved in the sharemarket or even in real estate. 

That’s because there is self-interest at play.

They promote investments based in commodities and gold. 

But wait?!

Doesn’t WISEplanning promote the share market though !? 

No. 

If you have been with WISEplanning for any length of time you will know that we advise against playing the sharemarket.   Better to invest in a mix of investments or specific investments that match your investment risk preferences and that will help you to achieve your long term investment goals.

Whether that mix of investments is a diversified investment portfolio or a narrow selection of large businesses listed on sharemarkets around the world will depend on our clients’ investment risk preferences, experience with investing and their long term investment goals, among other things.

The bottom-line

When it comes to investing, the bottom-line I believe comes down to the quality of your investments and the methodology that you employ when investing.

There is a vast difference between a defensive approach that consists of investing in a variety of fixed interest type investments including bank deposits or corporate bonds and investing for growth using the Value Investing Methodology.  They are indeed worlds apart. 

When our investment success is based on a specific / unique set of economic and market circumstances coming together to drive positive results, then at some point we will be disappointed.

“Price is what you pay and value is what you get.”

Warren Buffett and Charlie Munger have worked it out already.

For several decades, Berkshire Hathaway, driven by Warren Buffett and Charlie Munger continued to surprise the market through their successful investment efforts.  Their approach back then and still today is a so-called Value Investing method that looks beyond the numbers (the financials).

The way to think about this is that the financials of your investment (e.g. turnover, profit, profit margin percentage, price earnings ratio, net debt to equity, price earnings growth ratio, price to sales, etc etc) are if you like, the score card. 

Thousands upon thousands of analysts around the world analyse these types of numbers (the financials as we call them at WISEplanning) in an attempt to work out where to invest.

What’s missing and what Value Investors rely on more so than the financials is the underlying economics of the business. 

For large businesses that are listed on the sharemarket, this revolves around such things as the sustainable competitive advantage, the eco-system and brand strength. 

Are you playing the stock market or investing in businesses?

Warren Buffett is a business man – he’s not a share market investor or speculator like most people think.

How interested do you think Warren Buffett and Charlie Munger are in the cash up value of their holdings from one year to the next? 

Sure, long term this begins to provide a real measure or score card of how we are progressing and how investments are performing.  Short term though, it is less useful. 

I mention this because we are heading into a period of increased volatility which may see investment portfolios track sideways (not grow much) or even from time to time make short term losses (from a cash up perspective). 

Many of my clients when they check their investments go straight to the valuation screen and check the total cash up value.   Usually they compare it with the last time they looked to see whether it’s up or down.

Of course it’s prudent to check and keep an eye on things.  The question though is just what message you receive when you carry out that exercise?

Maximising returns on your investments

It turns out that excessive activity, lots of buying and selling, is unlikely to add additional returns to your investment portfolio.  The opposite in fact is what much of the evidence confirms.

Better to locate good businesses, buy them at a reasonable price, hold long term and increase your holdings along the way. 

I don’t mean set and forget.  It’s not quite that simple.  We need to keep an eye on the business (I don’t mean the trading price from one year to the next).  The underlying economics of the business is what will drive the long term returns for you, not the financials that tell us what has happened already.

The “P” word…

Just because prices decline making your portfolio track sideways does not instantly mean that there are bargains everywhere.  At this stage price declines only mean that those trading prices are generally less expensive – not necessarily cheap.

Stay patient, I will keep you posted …

 “I am a better investor because I am a businessman and a better businessman because I am an investor.”

Warren Buffett