ARE WE INCREASING YOUR RETURN ON INVESTMENT (ROI) OR SLOWING IT DOWN?

Investment Perspective – April 2019

“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

How to invest is at least as important as where to invest.

 Last month, I demonstrated how you can increase your ROI by modifying how you invest

How to build in an improved ROI

Life in general is not without its complexities, however investing does not need to be one of them necessarily.  As you know, WISEplanning can do the work for you, whether you like to be a full hands on investor, scrutinising every recommendation from my office or totally hands off, trusting WISEplanning to have your back every step of the way. 

“I do look at my portfolio every month or two but have stopped looking at it every day or every week because I realised, I was just watching prices bob up and down.” 

This was a comment I heard in my office the other day from a young client, who has only recently joined WISEplanning over the last few years.  He is highly educated and in my view (as I have said to him from time to time), a bit academic in his outlook on life (okay, he’s more intelligent than me!).  Anyway, he realised that what drives portfolio returns is how he invests.  A quick study, he has taken the time to understand the methodology adopted at WISEplanning and has a strong grasp of it. 

Ewan knows this:

• Ewan knows that it is not the stock price moving up and down or what the reports off the wrap account (Aegis or FNZ Consilium) say. Those numbers are merely the results. They do not drive returns but merely report on them.  They do not make money, they just count. 
• Ewan knows that price and value are not the same thing;
• Ewan knows that he invests in the underlying business and not the shares;
• Ewan knows that the economics of the underlying business are likely more important than all of those mountains of analysis that are available across the internet;
• Ewan knows the difference between momentum investing, available through share brokers, modern portfolio theory available via managed funds (e.g. kiwisaver) and exchanged traded funds and value investing;
• Ewan knows that WISEplanning’s approach to value investing is also separate and different to the way this discipline is carried out by other analysts and fund managers across the market. Our emphasis is on the economics of the business, rather than the financials of the stock;
• Ewan knows that the global economy is not in an ideal situation but also he realises that the methodology that we apply to his investments will keep his money secure, regardless of economic conditions; and
• Ewan knows the importance of maintaining healthy levels of cash and remaining patient.

 Activity versus non-activity

Many people believe that value investing is basically buying and holding long term. 

Sure, we hopefully can buy and hold long term.  This definition of value investing, however, is well short of the mark, particularly when looking at what we are doing at WISEplanning.  That is because we invest in the underlying business, which extends beyond buying a large company that has been around for a long time and just sitting on it.  We do not do that. 

We do like to locate good businesses that we can hold for the long term.  The reason is because those businesses grow and compound returns for investors. 

The feedback we receive from our clients at WISEplanning sometimes is that, I am not active enough with recommendations.  Occasionally, I have also been told that I could have been more proactive when markets decline and prices drop, rather than sitting and waiting.  I have also been told that whilst markets were rising, I should have been making recommendations to capture the rising prices.

Over many years of investing and advising, I can confirm that unnecessary activity detracts from returns.  It is simply because:

1. Whilst making adjustments is appropriate and necessary, too much of it increases the chance of a mistake.  On a slightly different tack, some investors struggle to resist the temptation of chasing a rising market.  This is commonly known as FOMO (fear of missing out); and
2. Every time we transact, it costs.  Admittedly, if we buy into a business and hold it for, say, 20 years, the cost of brokerage is close to nil.  On the other hand, when we buy and sell or rebalance as per the dictum of Modern Portfolio Theory, we are constantly buying and selling and significantly increasing those transaction costs.  They become a real drag on performance and your ROI.  A few years ago, one study showed that the amount of brokerage paid across the American share market was approximately the same was the amount of dividends received over a 12 month period. That is significant.  Effectively, the cost of transactions cancelled out all dividends!

So, at WISEplanning, we have a low transaction mandate built into our portfolios because it helps to build in better performance.  Errors are minimised (although The Rule of 5 still applies) and transaction costs are kept to a minimum. 

Just quietly, we do not need to rebalance your portfolio or to make recommendations around adjustments, so that we can clip the ticket and earn money.  As you know, we charge a very salient fee, so that you know what the cost is and that is that. 

I realise a low trading mandate does not sound clever and sexy. 

I am not sure about you but I just do not care.  I do care about maximising ROI. 

I know too that maintaining strong discipline around our method allows us to avoid distraction and also helps support your ROI.

“Only buy something that you would be perfectly happy to hold if markets shut down for 10 years.”

                                                              Warren Buffett