What are your Investment Rules?

[SBQ]

But why would an investor pay for an advisor to manage a cash holding?

Because in NZ, the gov't has imposed the Kiwi Saver scheme where these investment managers dictate the 'risk level' of a fund, based on the % proportion of cash (bonds / interest bearing deposits) : to equity ratio. The higher the portion set aside for cash or fixed return investments, the lower the risk, and therefore the lower the return. Quite simply cash holding by all conventional managed funds in NZ is a proxy to the amount of risk the investors chooses ; ie conservative -> aggressive risk levels set out in all those Kiwi Saver funds.

Is this a good thing? Hell no but that's how FMA has regulated the markets in NZ. I don't understand why the NZ gov't has not understood these problems that also exhibit on Wall Street where investors lose $ for non-performance. If there's a chance to dissuade investment into owning multiple houses for tax free capital gain, there's no chance in hell that Kiwi Saver or any investment into stocks : cash/bonds will provide a better after tax return than owning leveraged mortgage housing.

[DarkHorse]

I recently listened to a podcast of Bryan Lawrence from Oakcliffe Capital, which has significantly outperformed the S & P 500 since 2006.
https://www.theinvestorspodcast.com/...ryan-lawrence/

I highly recommend it to both novice and experienced active sharemarket investors.

His 5 rules/questions happen to match my checklist, but he explains their rationale far better than I could, with detailed reasons and examples. The rules are:

1. “Do we understand this business? Is it within our circle of competence? Is it a business that management makes understandable?”

2. “Is it a great business?” ie one with durable cashflows
eg Does the business provide more value to customers than what the business is charging those customers?
Is the business operating in an industry structure that is favorable? ie does it have a clear moat/competitive advantage, monopoly or duopoly

3. “Is the management team aligned with us?" This is most common with founder-led businesses

4. "Is the valuation cheap relative to the cashflows the business is likely to produce for shareholders?"

5. "Is the low valuation based on a temporary misconception?"

I find examples of 4 and 5 are far more likely among neglected small/microcaps - and it's also likely that due to flying under the radar, great businesses may not be recognised as such. Often for smallcaps to be great businesses means being market leader in an unsexy niche area.

[SBQ]

I recently listened to a podcast of Bryan Lawrence from Oakcliffe Capital, which has significantly outperformed the S & P 500 since 2006.
https://www.theinvestorspodcast.com/...ryan-lawrence/

I highly recommend it to both novice and experienced active sharemarket investors.

His 5 rules/questions happen to match my checklist, but he explains their rationale far better than I could, with detailed reasons and examples. The rules are:

1. “Do we understand this business? Is it within our circle of competence? Is it a business that management makes understandable?”

2. “Is it a great business?” ie one with durable cashflows
eg Does the business provide more value to customers than what the business is charging those customers?
Is the business operating in an industry structure that is favorable? ie does it have a clear moat/competitive advantage, monopoly or duopoly

3. “Is the management team aligned with us?" This is most common with founder-led businesses

4. "Is the valuation cheap relative to the cashflows the business is likely to produce for shareholders?"

5. "Is the low valuation based on a temporary misconception?"

I find examples of 4 and 5 are far more likely among neglected small/microcaps - and it's also likely that due to flying under the radar, great businesses may not be recognised as such. Often for smallcaps to be great businesses means being market leader in an unsexy niche area.

You will find his rules have been taken from Warren Buffet. No need to follow some 'new unicorn' when the original is all you need.

[kiora]

"“The goal is not to have the longest train, but to arrive at the station first using the least fuel.”"
"Tom Murphy thought that a business with a moat is very hard to find and for this reason alone he preferred to put capital to work in the business where he had the greatest advantage"
"”A leader is best when people barely know he exists, not so good when people obey and acclaim him — worse when they despise him. But of a good leader who talks little when his work is done and his aim is fulfilled, they will say: We did it ourselves.” "
"It is tremendously cost efficient to have a
culture that is based on trust, since you don’t have the cost or the inefficiency associated
with layers of management that try to act as a substitute"
https://mcusercontent.com/ea8e8120d9...Management.pdf

[kiora]

Charlie Munger The Psychology of Economics
https://www.youtube.com/watch?v=zNxsAhc6sk8

The social proof of this site?
The power of reinforcement & social proof

[DTC]

The Federal reserve and other central banks/ governments print money (sic.). And inflation generally keeps up. But it hasn’t since the mid-90’s:
https://www.longtermtrends.net/m2-mo...-vs-inflation/

And if money supply keeps exceeding inflation, you’d expect inflation to eventually appear and knock back the sharemarket, but it took 20+ years, during which the sharemarket’s come through pretty well. So if your strategy was to time the market on the excess money supply signal, you’d have lost out on a lot of gains.

But if absolute money supply is shrinking (not just a reduction in the rate of printing, but an absolute reduction in the amount of money in the economy):
https://tradingeconomics.com/united-...oney-supply-m2

does this mean the Federal reserve shreds money also?

[SBQ]

The Federal reserve and other central banks/ governments print money (sic.). And inflation generally keeps up. But it hasn’t since the mid-90’s:
https://www.longtermtrends.net/m2-mo...-vs-inflation/

And if money supply keeps exceeding inflation, you’d expect inflation to eventually appear and knock back the sharemarket, but it took 20+ years, during which the sharemarket’s come through pretty well. So if your strategy was to time the market on the excess money supply signal, you’d have lost out on a lot of gains.

But if absolute money supply is shrinking (not just a reduction in the rate of printing, but an absolute reduction in the amount of money in the economy):
https://tradingeconomics.com/united-...oney-supply-m2

does this mean the Federal reserve shreds money also?

The charts are just that and it's based on how you interpret the inflation over which time period. M2 has not decreased over the past 1+ year. Only a fool considers inflation as the result of a 2 or 3 months period. Look again in 2021 vs how much the M2 supply has grown to now. The end result without a doubt has been inflation. The second chart shows the M2 growth rates. Too late, the cat is out of the bag once the $ has been printed, the cat is out of the bag and inflated is the end result. As my macro-econ prof at uni explained, there's always a delay on the aggregate spending and the time inflation is realized. The central banks adjust interest rates by means to control M2 but it's kinda like a moving target and control is is much like a using a wobbly steering wheel. Look at that peak of M2 during the 2020 Covid year. That's the result of gov't spending world wide trying to control deflation. When they overspend or print, then inflation is the end result which always occur later on. This scenario has been explained by Warren Buffet during the GFC where he said massive spending much occur in order to control deflation. He also said the prescription also comes at a cost... called 'inflation'.

[DTC]

Okay. That all makes sense. There was still a large lag from the GFC until inflation took off a year ago, and maybe only then because of the Covid stimulus, then exacerbated by the Ukraine war.

Checking again to answer my last question, it seems the absolute money supply doesn’t shrink, it’s just a reduction in the rate of printing/ spending. The Federal reserve doesn’t shred money, only inflation does(?).

A trader would have been pretty canny to have rode those market gains up to the end of last year, before exiting. Inflation may have ordinarily been expected to increase earlier- prior to Covid.

Thanx for the response…

[kiora]

"The Federal reserve doesn’t shred money, only inflation does(?)."
Seems likely that the drop in asset values of crypto's & shares has shredded a lot more money than inflation lately?

[SBQ]

"The Federal reserve doesn’t shred money, only inflation does(?)."
Seems likely that the drop in asset values of crypto's & shares has shredded a lot more money than inflation lately?

Drops in asset values don't spur on to inflation. I would say the vast majority of the inflationary pressures came from gov't expenditures (either directly, or gov't hand outs like Covid Subsidy Payments). If gov'ts did not step in to curb deflation, we would be in some serious troubles that could lead on to more wars.

Just as easy as housing values were inflated by cheap $, the other way can happen easily too. We are in a period of rising interest rates and when you take houses (which has a limited supply), generally more $ is taken out of the economy that go to service higher cost mortgages.