2023 Returns

[SailorRob]

Actually there is a very good reason to hold some debt, particularly at the moment when the bank is offering you a decent interest rate (term deposits) AND when the potential of falling interest rates can see capital growth in a fixed interest portfolio (bonds). The counterfactual to that 'bond option' being that if interest rates do not fall, then you will be 'forced' to endure high interest returns with no capital growth while you wait until interest rates fall (not too bad as a second choice scenario option).

You are thinking in nominal rates which to me are meaningless. When thinking of real rates you can forget CPI as well, inflation for the average consumer when measured properly will eat your term deposit and then some.

Yes if you can predict future rates then bonds are fine. Nobody can however and perhaps you missed the biggest point of all when you said 'if interest rtes do not fall' well what if they rise dramatically? When everyone KNOWS that rates are coming down this year... Look out.

I would not take a term deposit offering 15% right now, no chance, probably not even 20% as this would mean selling equities to fund it and I have no idea what price I could buy them back at.

https://www.podbean.com/ea/pb-pmi9u-14f0abc Listen to this from the 23 minute mark, really good debate on why NOT to hold debt of any type, from a very clever dude.

Yet in the longer term equity markets do outperform bond markets. So in this sense I agree with SR on the wasted investment potential of fixed interest / bonds. But the advantage of holding fixed interest in the short to medium term is that such investments provide a 'holding pen' for your cash that is waiting to be deployed, while paying you to 'hold the pig' to boot.

Implying the ability to time the markets or switch between at opportune times. I cannot do this. Everyone else can with ease but not me!

Equity investments require careful evaluation of operational downside risk. There is no point in investing in a company that you are not happy with just becasue it is an 'equity investment'.

Massively correct.


The mantra that 'equity always performs better' does not apply to all stocks, all of the time.

Correct of course


Even the likes of Buffett only turns up with one or two serious investment opportunities per year from all Berkshire's researched potential opportunities out there.

You highlight someone who is one of the worst positions of any investors in the world due to the size of funds to deploy. Buffett with less capital was leveraged and would not hold cash/debt.

SR considers Berkshire relatively undervalued. But another way of looking at it is to say that Berkshire is fairly valued and the DOW is overvalued. Of course your expected returns going forwards from Berkshire do not look so good if you view things this way.

I strongly disagree with this, my expected forward returns don't change if I view things like that. It is relatively undervalued according to my own discount rate as well as Buffetts who will only repurchase shares when they are well below intrinsic value conservatively estimated and I can promise you that this is not based on the relative value of the Dow. My expected return is around 12% over the next decade and I don't think this is a fair value for the safest financial asset in the world (US Treasury much more risk as you will lose money in real terms guaranteed)


As for judging NZ based investments against an American sharemarket index, that is just inappropriate in my view. Generally you are looking at entirely different kinds of businesses both in scale, industry classification and yield 'over there' compared to 'here'.

This is the entire point. If you are a 50 year old prostitute in Hamilton, you may well see fit to judge yourself against other similar ladies however perhaps you should be comparing yourself to 20 year old Auckland ones.

SNOOPY

Good post Snoopy, cheers. When I read your first post on the thread a while back my thoughts were that you would have been far better off indexing, but that may not be true in the future.

[SailorRob]

Holding debt especially TD at peak of rates is a very big temptation which should be avoided ....when the TD rates are highest around that time stocks are most UNLOVED ...thus in the long run making a 5 years TD at peak will almost certainly give less returns then getting into a managed fund or even ETF like FNZ ...I experienced it myself in 2010 thus will totally recommend not to fall for the lure of assured returns with capital safe ...

Now the question of holding bonds ....rates go down then u get capital growth ...but u wud have got more in stocks for similar rate falls ...rates dont go down then u get yield but one can still get both yield and capital appreciation in TRA type stocks ....then how to find Bonds attractive in any scenario ...holding OCA bonds or OCA stock ...IFT bonds or IFT stock ...imo choice is simple ...but all can have their own views and circumstances .

All seasoned or not so seasoned players here know by now that rates are surely cyclical ...its timing can be only tricky part ...law of averages support looking for lower rates ahead ...sometime ...when is that sometime ...6 months or 1 year is the only question ...if one is looking at next 5 years or more then its almost certain that one will see OCR of 2.5% or lower sometime in next 5 years ...then one should hold stocks or debt of OCA / IFT etc ??

Well said. Of course you can't sit in debt and then wait for rates to decline and hop onto the equity horse.

[SailorRob]

Wheels coming off was 22 and most of 23 was grinding along the tarmac on the hubs. Was not all bad, I got a full allocation in the HGH raise

On a side note I am 57 this year and I am going to start thinking seriously about passive funds over the next 3 years.

Go into passive funds and then let us know what you went into. If those investments then beat Berkshire over the following 3 years a $200 bottle of rum will be sent to you from me.

[SailorRob]

Totally agree Snoopy, re the holding pattern in cash etc whilst interest rates are high & until equities look attractive enough again to re-enter.
This is based on an index investment rather than any particular stock.
I'm currently in that holding pattern now, on the sidelines effectively.

It's served me well in the last year or so.

Yes this makes total sense, it's an easy way to get far better returns than what the index would give of you just stayed invested in the index.

I am surprised it hasn't served you well over 20 or 30 years - not just the last year 'or so'.

[mike2020]

Great offer. If it still applies 3 years from now all good. Know pretty much nothing about passive funds but later on I would prefer less volatility somehow.
My nzx portfolio is 100% in the green long term but I have seen capital losses over the last 18 months. I expect that will correct but time literally is money and if that could be avoided next cycle I would be happier. I have honestly never thought of passive funds until an earlier post in this conversation. Its food for thought. Poster did sound like he was happy with the results.

[SailorRob]

Great offer. If it still applies 3 years from now all good. Know pretty much nothing about passive funds but later on I would prefer less volatility somehow.
My nzx portfolio is 100% in the green long term but I have seen capital losses over the last 18 months. I expect that will correct but time literally is money and if that could be avoided next cycle I would be happier. I have honestly never thought of passive funds until an earlier post in this conversation. It's food for thought. Poster did sound like he was happy with the results.

My point was Mike, Buy Berkshire instead of passive funds (but offer also genuine)

I thought you meant you would now for the next 3 years, offer stands from now due to massive differences in valuations between passive products and Berkshire.

Who knows what price Berkshire will be in 3 years, could be an awful offer by then!

Well, I will extend the offer. No matter what you decide to do over the next 3 years - Berkshire beats you silly or you get the Rum.

[Daytr]

Yes this makes total sense, it's an easy way to get far better returns than what the index would give of you just stayed invested in the index.

I am surprised it hasn't served you well over 20 or 30 years - not just the last year 'or so'.

Well it served me well in previous times as well but I wasn't so interested when interest rates on the whole were lower.

[SailorRob]

Well it served me well in previous times as well but I wasn't so interested when interest rates on the whole were lower.

Well done mate.

[Snoopy]

You are thinking in nominal rates which to me are meaningless. When thinking of real rates you can forget CPI as well, inflation for the average consumer when measured properly will eat your term deposit and then some.

Yes if you can predict future rates then bonds are fine. Nobody can however and perhaps you missed the biggest point of all when you said 'if interest rates do not fall' well what if they rise dramatically? When everyone KNOWS that rates are coming down this year... Look out.

I would not take a term deposit offering 15% right now, no chance, probably not even 20% as this would mean selling equities to fund it and I have no idea what price I could buy them back at.

https://www.podbean.com/ea/pb-pmi9u-14f0abc Listen to this from the 23 minute mark, really good debate on why NOT to hold debt of any type, from a very clever dude.

That podcast is on the US debt market. I don't think it is directly applicable to draw from that what might happen in NZ. The NZ Reserve Bank, at least prior to the last labour government, has tended to be much more idealistic on their fight against inflation. And now that the Luxon lead government has refocussed all the attention back on inflation only, I think we will see a very concerted attempt to get inflation down, no matter what the economic and social cost is to the rest of the economy.

I don't look at CPI when I am considering interest rates, because I have no control over the CPI. It doesn't pay to worry about things you can't control. The high interest rates exist because the CPI is out of control. If you are looking for high interest rates in a low CPI environment (the holy grail of fixed interest investment) you are not going to find it. Or rather you are not going to find it without serious risk to the return of your capital, (which should more than temper any sugar rush you might feel from being offered a high return on your capital).

I don't claim to be able to predict exactly when interest rates will fall in NZ. And yes we all might get a shock if our reserve bank decides to put interest rates up and not down. However, I do think that over the medium term (say 3-5 years) interest rates in NZ will fall. Not to those super low post pandemic rates. But down a couple of percentage points from where we are now. And if they do rise from today's rates that rise will be a short term blip.

So in summary, I don't invest in fixed interest because I know exactly when interest rates will change. I invest when interest rates are near the top of their cycle, with inflation being disregarded. I have great -although not supreme- confidence, given the overzealous directive given to our reserve bank that we are near that interest rate peak now. The only consequence of being wrong in my timing of any interest rate falls is that I will have to wait for any bond capital gains a bit longer, while still 'enduring' high interest rate payments while I wait. The future angst of watching current fixed interest investments once again pay more than the rate of inflation I think I can take.

If this sounds to you like investment hell, I nevertheless believe that I can live there (for a while).

SNOOPY

[Snoopy]

Snoopy wrote:
"Yet in the longer term equity markets do outperform bond markets. So in this sense I agree with SR on the wasted investment potential of fixed interest / bonds. But the advantage of holding fixed interest in the short to medium term is that such investments provide a 'holding pen' for your cash that is waiting to be deployed, while paying you to 'hold the pig' to boot."

Implying the ability to time the markets or switch between at opportune times. I cannot do this. Everyone else can with ease but not me!

You have got why I established my significant fixed interest position wrong. I didn't time the market. The market timed me, by delivering me my largest ever cash payout from the partial takeover of Restaurant Brands a few years ago. Since then I have been through a pandemic and have been evaluating various investment opportunities that have arisen. I have endured agonisingly low term deposit rates and now much more favourable ones. I have topped up in a small way other share market investment positions. But I have not yet found that great opportunity that 'floats my boat' in your language: the right opportunity at, very importantly, the right price. So although the return on my 'returned capital' has been disappointing for a few years (given it is in fixed interest) it has provided and continues to provide that potential investment opportunity, without a need for me to sell any of my existing share investments. And at last I can report that, although I haven't finished my number crunching, I am now looking at a couple of NZX opportunities that show promise.

Snoopy wrote:
"Even the likes of Buffett only turns up with one or two serious investment opportunities per year from all Berkshire's researched potential opportunities out there."

You highlight someone who is one of the worst positions of any investors in the world due to the size of funds to deploy. Buffett with less capital was leveraged and would not hold cash/debt.

Well maybe, but Buffett has a whole string of underlings (175 by the Berkshire Partners 2021 count) who can crunch the numbers on his behalf too. If I had a workforce like that investigating my own investment ideas, my cash probably would not stick around in my accounts as long as it has.

SNOOPY