What are your Investment Rules?

[kiora]

Time to get busy on high quality companies

""You can depend upon the share market to do the right thing. But only after it has exhausted every other possibility."

And so it is with great delight that I have been witnessing the return of buyers to share prices in some of the highest quality and resilient business models listed on the ASX. Think CSL (ASX:CSL), Cochlear (ASX:COH) and ResMed (ASX:RMD), but also Amcor (ASX:AMC), TechnologyOne (ASX:TNE) and Woolworths (ASX:WOW)."
Note, for example, how both Objective Corp (ASX:OCL) and WiseTech Global (ASX:WTC) issued a positive market update in July. Yes, of course, one can potentially make a higher return out of a share price that has fallen a lot further, but what is the real trade-off when adjusted for the risks involved, as well as when taking a longer-term view?

Lower quality fly-by-nighters tend not to perform well over a longer period of time. This is the confusing message the share market throws at bargain hunters: it does not account for the risks involved."
https://www.livewiremarkets.com/wire...ality-recovery
https://www.livewiremarkets.com/wire...rns-on-capital

[kiora]

""My usual answer is that whenever we’re not in a recession, we’re heading toward one. The question is when,” writes Marks,
But he insists that shouldn’t change the way you invest. Why not?

"Because the possibility - or even the fact - that a negative event lies ahead isn't itself a reason to reduce risk; investors should only do so if the event lies ahead and it isn't appropriately reflected in asset prices," he writes."
https://www.livewiremarkets.com/wire...ays-outperform

[kiora]

"EDITED TRANSCRIPT

LW: How do you evaluate companies for their competitive advantage?

Matthew Landy: We see five sources of an economic franchise. And sometimes companies can have multiple, and sometimes it's only one.

So one is a natural monopoly. Infrastructure companies tend to fit that category. So once you build an electricity transmission grid, for example, there's no point replicating that. The costs involved are so enormous that it makes sense for only there to be one provider of the electricity transmission grid.

Brands clearly can be very powerful. In particular, the consumer sector obviously. It creates loyalty, and it often enables you to earn very high-profit margins on your product.

Intellectual property gives you a period of exclusivity over a product or service. We see that a lot in the healthcare space, particularly in medical devices.

Network effects - I mentioned Visa, MasterCard, and Google arguably have that as well, where effectively, the more people that use the product, the more valuable it becomes to consumers over time. It's a very rare competitive advantage, but when it happens, it's incredibly powerful.

Switching costs is another, and you see this a lot in the software industry. It's where a product, the nature of a product or service means that it's hard for customers to switch to a competitor. "
https://www.livewiremarkets.com/wire...-one-trap-card

[kiora]

"THE DO-NOTHING TECHNIQUE"
https://www.tradingview.com/chart/SP...y+174+%28EN%29

[kiora]

"No, the Buffett Indicator doesn’t mean markets will definitely crash. However, there is a more than reasonable expectation of disappointment in future market returns."
https://seekingalpha.com/article/454...erm=must_reads

[kiora]

"How to survive the worst bear market of all time"
https://finance.yahoo.com/news/how-t...120034754.html

[Aaron]

"How to survive the worst bear market of all time"
https://finance.yahoo.com/news/how-t...120034754.html

A decade going nowhere in stocks. Actually 16 years 1966 to 1982, reading closer it only broke out in 1982 so you were down on 1966 in 1982 but onwards and upwards since then.

If it is shaping up as long term and less transitory inflation, I wonder how many people nearing 65 are in equities. Bummer to hit retirement just as your portfolio craps out for the next 10 years.

It could increase the size of an overreaction if people nearing retirement in passive index funds get spooked as it will feed on itself as selling pushes prices lower encouraging further selling. A bit like a bank run or the end of a ponzi scheme.

Also I was going to add margin debt as a potential issue, but that is already coming down although if Fig 1 in the article below is to be believed still pretty high historically. it has come down to the peaks reached in 2000 and 2008. Leverage does wonders when asset prices go up, and no one believes asset prices can ever go down, so why not.

https://www.currentmarketvaluation.c...argin-debt.php

Janet Yellen reckons we will never see another financial crisis in our lifetimes so I guess we should not worry too much. Ex fed chair and current secretary of the treasury, she knows a lot.

She is also 76yrs old so maybe she has some health problems we don't know about. "Lifetime" is relative.

https://www.usnews.com/news/articles...-our-lifetimes

And in keeping with the thread.

It is time in the market not timing the market.

Asset prices always go up in the long term.

[SBQ]

A decade going nowhere in stocks. Actually 16 years 1966 to 1982, reading closer it only broke out in 1982 so you were down on 1966 in 1982 but onwards and upwards since then.

If it is shaping up as long term and less transitory inflation, I wonder how many people nearing 65 are in equities. Bummer to hit retirement just as your portfolio craps out for the next 10 years.

It could increase the size of an overreaction if people nearing retirement in passive index funds get spooked as it will feed on itself as selling pushes prices lower encouraging further selling. A bit like a bank run or the end of a ponzi scheme.

Also I was going to add margin debt as a potential issue, but that is already coming down although if Fig 1 in the article below is to be believed still pretty high historically. it has come down to the peaks reached in 2000 and 2008. Leverage does wonders when asset prices go up, and no one believes asset prices can ever go down, so why not.

https://www.currentmarketvaluation.c...argin-debt.php

Janet Yellen reckons we will never see another financial crisis in our lifetimes so I guess we should not worry too much. Ex fed chair and current secretary of the treasury, she knows a lot.

She is also 76yrs old so maybe she has some health problems we don't know about. "Lifetime" is relative.

https://www.usnews.com/news/articles...-our-lifetimes

And in keeping with the thread.

It is time in the market not timing the market.

Asset prices always go up in the long term.

I'll like to bring this chart for reference:



Timing the market does indeed matter. Warren Buffet himself insists this is important when PEs are sky high, he's simply not interested in buying anything. It was not until recently he started buying stocks, but prior 10+ years, he pretty much did nothing with few acquisitions. Of course he would advise that no one with certainty can 'time the market' year after year, he does also say there needs to be a relevance to if share prices are overvalued or not.

There's a misconception that at age 65, one would hope there's enough of a nest egg in their retirement portfolio. However this is not always the case (and in NZ's case, I would say those in such Kiwi Saver schemes would be at most risk or disadvantaged). On NewsTalkZB every Sunday there's Finance hour but i've never had the free time to get around to calling in. My concern? Well it's the fundamental problem of Kiwi Saver not delivering to those that look for retirement at age 65.

The problem with NZ's Kiwi Saver scheme is it's geared for making $ the most to IRD, and to a lessor part, the managed funds that charge mgt fees. We are talking about taxing of paper gains year after year which has a devastating effect on the total compound returns on the portfolio over the long term. Let me post a reference to the father of index ETF and founder of the Vanguard Funds 'John Bogle':

https://www.rebalance360.com/john-bo...rement-return/

“Let’s assume the stock market gives a 7% return over 50 years. If you get to 7%, each $1 goes up to $30. If you get to 5% (that would be 7% less the industry’s typical 2% all-in costs), you get $10,”

“So $10 versus $30. You put up 100% of the capital, you took 100% of the risk, and you got 33% of the return! As I say to people, if that strikes you as a good deal, by all means do it!”

There is no disputing this outcome. You can't dispute the math in compound interest. Likewise what John Bogle says, the math in compound costs equally applies. So what you have in NZ is a situation where Kiwi Saver taxes the individuals that make contributions during years where they are most productive. The more the individual earns in a year, the more they can contribute to KS, and the HIGHER the income tax bracket they end up paying (which the managed fund would tax the paper gains in the same high tax bracket rate as the individual's income tax rate). But when the individual ages on in their 60s and 70s, well their earning potential is a lot less, or for most, is entirely gone as they end their day job income and end up in a low income tax bracket situation. What has happened to their KS portfolio? Well 2/3rds of it was robbed by IRD and the managed funds mgt fees.

Hop over to N. America and the emphasis for retirement savings is purely based on maximising compound returns. Throughout many decades, no capital gains tax is paid but instead, the model relies on "deferred taxation". Individuals there contribute into their 401K or RRSP (Canada), by REDUCING their taxable income. What does this do? Well these are pre-taxed, taxable incomes so if a person makes $100K/year, he could contribute $10,000 to his pension plan which lowers his taxable income to $90K/year and thus place the individual at a LOWER income tax bracket. Those contributions again, grow tax free until retirement. At age 65, the individual would have exited the job market and is on LOW income, so they will elect to withdraw what ever portion they desire and pay the tax accordingly. There is full control of how much they want to pay ; if there's a desire to buy a boat or a motorhome, they withdraw more. If the stock market is down and they just only want enough to pay the house bills, they withdraw little and pay less taxable income. This is a scheme that is far more elegant than the NZ Kiwi Saver because it allows investors to withhold their contribution room (which accumulates each year that they don't fully contribute each year), and wait until there's market crash for when they make that larger contribution.

In the NZ sense with Kiwi Saver, well you're basically locked in on set contributions of 3% + 3% by the employer. There's no deferment of these funds to factor if there's a market crash in the future. And the fund managers in KS funds certainly don't hold on the contribution holdings thinking they could buy lower.

Don't forget, if the KS Funds invest in overseas shares, FIF kicks in for which so far this year the S&P500 has lost over 20%. If the FDR has been paid in previous years to the peak of 2021, why should FDR still apply on the rebound going back up in future years? If 2023 proves that the S&P500 goes up 10%, then IRD gets to double dip despite the portfolio balance is lower than pre 2022.

[Aaron]

SBQ I may not have understood all of it but that chart highlights my point.

Sometimes you don't have 25 years to recover your investment, especially if you have just retired and did not have a lot invested so cannot live on the income.

Comparisons above were against the 1970s so that is 16 years compared with 25yrs for the 1930s. I wonder what period we will rhyme with?

With more active central banks the down times are shorter each time. March 2020 was a blink and you missed it moment.

The PIE regime was setup to cap tax rates on savings at 28% to encourage people on the top tax rate to save for retirement.

Not sure how large funds calculate taxable profit. Years ago passive funds did not have to pay tax on capital gains but active funds did. Not sure about now. In down years individual investors can switch to the CV method for FIF income calculations, not sure about fund managers.

Agreed fund managers fees seem like a rip off as they are based on the amount you invest rather than the time it takes them to shuffle about funds. I guess that way they capture a percentage of your gains over time as well. Not sure why this is but you would hope that fees come down as Kiwisaver balances grow, but I would not hold my breath.

Personally I put in $1,042 a year to get the tax credit. Not a big fan of managed funds.

[SBQ]

SBQ I may not have understood all of it but that chart highlights my point.

Sometimes you don't have 25 years to recover your investment, especially if you have just retired and did not have a lot invested so cannot live on the income.

Comparisons above were against the 1970s so that is 16 years compared with 25yrs for the 1930s. I wonder what period we will rhyme with?

With more active central banks the down times are shorter each time. March 2020 was a blink and you missed it moment.

The PIE regime was setup to cap tax rates on savings at 28% to encourage people on the top tax rate to save for retirement.

Not sure how large funds calculate taxable profit. Years ago passive funds did not have to pay tax on capital gains but active funds did. Not sure about now. In down years individual investors can switch to the CV method for FIF income calculations, not sure about fund managers.

Agreed fund managers fees seem like a rip off as they are based on the amount you invest rather than the time it takes them to shuffle about funds. I guess that way they capture a percentage of your gains over time as well. Not sure why this is but you would hope that fees come down as Kiwisaver balances grow, but I would not hold my breath.

Personally I put in $1,042 a year to get the tax credit. Not a big fan of managed funds.

With inflation higher than 1979-1980s we could be in for the biggest bull run in the past century. In that chart, from 1985 to 1995 you has a massive bull run. Yes major crashes from 1 time events are very short lived. But what we have with inflation will span for years and when that settles down, then things start to get exciting.

The model with Kiwi Saver is all funds pay tax based on the individual's taxable income. However in that mix of stock holdings, you can have NZX shares that attract no capital gains tax, end up paying a lot of taxes on the dividends. Take The Warehouse Group which has paid consistent dividends for the past 20 years but it's share price has gone nowhere (worse if you factor the cost of inflation) and the individual is worse off when they are taxed on dividend income instead of NZ capital gains.

The Comparative Value Method does not apply to fund managers!! If I recall correctly in my readings, IRD states that all fund operators (passive or active) who receive contributions for investment, must use the FDR method. Either way each method, on a negative year, ends up having no tax to pay.

The PIE regime just rubs more insult to the small investor who are on lower income levels. Why should individuals on the high income tax bracket, get the benefit of only paying 28% on their Kiwi Saver fund when their annual income tax bracket could be 30%, 33%, or 39%??? It's the same kind of insult why the wealthy are able to buy multiple houses and hold in excess of 10+ years so all the capital gain is tax free.

I honestly believe Bill English did a disservice to NZ by introducing Kiwi Saver. The #1 beneficiary to this scheme is IRD. There's no disputing this math as John Bogle said, if the Market Return is 7% a year for 50 years, and the individual that has to pay tax on those market return gains year after year and also see's managed funds taking a cut, he/she may be lucky to see 5% per year net for the Market Return. However the latter only gets 1/3rd of the total gain while the 2/3rd is pocketed mostly by IRD and expensive managed funds and the cut that financial advisers take.

I'm also very critical on Kiwi Saver funds that do nothing more than buy the Vanguard VOO (S&P500 index ETF) as a passive fund way of investing, but charge 10 times more in admin/mgt fees. I know myself it does not take much for a broker to enter the buy / sell details to buy the VOO for their clients. Certainly being able to charge 0.1% or 0.15% on something that the Vanguard VOO only charges 0.04% per year. What reason do these NZ fund managers have to charge so much more on top of the Vanguard fund fee?

This is why I advice people to open up a Hatch or Sharesie account directly and manage their own retirement fund. A married couple can contribute up to $50,000 each before FIF applies. So they essentially they can buy the same VOO index ETF as so called KS saver funds do, but only pay the same rate that Vanguard charges. This I believe is the best bet for the small individual as even with Kiwi Saver, that 3% employer matching contribution is grossly negated by the higher mgt fees of funds, and the tax they have to pay in those funds, year after year.