Stanford Brown TW3 – Back To The Future

Market Wrap

Global markets headed into correction territory this week, as a confluence of factors combined to spur sell-offs across the sphere. The selling was sparked by fears that US companies, particularly tech companies, would report weaker earnings than investors had expected. This caused a snowball effect as investors who were already spooked by issues such as the trade war, Italy’s budget and the rising bond yields pulled the trigger and sold out.

The graph below shows the returns of the S&P 500 (American stocks, black line), ASX 300 (Australian stocks, orange line) and Nikkei 225 (Japanese stocks, blue line). As we can see below, the recent sell-off wiped out a year’s worth of gains in less than a fortnight.

US markets rebounded overnight, with the S&P 500 up 1.86% after losing more than 3% the day before. This provides an insight into the degree in which human psychology feeds into markets. On Wednesday, investors were selling companies left, right and centre as they wanted to get out of the market. The next day, despite no major announcements being made, investors piled back into the same shares, illustrating how day-to-day price changes have more to do with investor sentiment than economic reality.

What Was Behind The Sell-Off?

The natural question on the mind of investors is what caused the sell-off this week. Although there are a multitude of factors at play, here are the key themes dampening investor sentiment:

  • Human Psychology – Fear and greed play a large role in the decision making of most investors, meaning they are likely to overreact to market sell-offs
  • Overoptimistic Expectations – Many investors have paid a price for US companies (particularly in tech) that assumes uninterrupted earnings growth and blue skies forever. The upcoming reporting season will test those assumptions
  • Political Uncertainty – The US mid-term elections are fast approaching, whilst the Italian budget and complications stemming from Brexit paint a murky economic picture in Europe
  • Trade Wars – The US and China have shown no signs that their differences will be reconciled in the near future, with no assurance that the next Trump tweet won’t be announcing another tariff
  • Rising US Interest Rates – Fears that the Federal Reserve may be raising rates too quickly, which slows down the US economy and puts pressure on asset valuations. Rising interest rates are also strengthening the USD, putting pressure on emerging market economies
  • China Slowdown – China is entering a cyclical slowdown, which will weigh down on global economic growth expectations

Finance 101 – Negative Gearing

With Kerryn Phelp’s shock victory in Wentworth over the weekend, the odds of a Labor election victory next year Shortened. Unlike other elections in recent memory, the policies of Labor and the Liberals are materially different, with Labor’s populist promise to reform negative gearing likely to ruffle some boomer feathers. But what is negative gearing?

At its core, negative gearing entails deliberately losing money on an investment property to reduce your taxable income. A property investor can claim a number of related expenses against their taxable income, ranging from interest on mortgage repayments to cleaning expenses to pest control. If these expenses are higher than the rent received from the property, the investor can claim a loss against their taxable income and reduce their tax bill.

The appeal of negative gearing is that money that would have been spent on tax is spent on the maintenance and development of an investment property. An investor negatively gearing a property is making a bet that they will be able to sell their property for a profit that exceeds the losses they’ve incurred on the property (after taking into consideration their reduced tax bill). This strategy worked wonders for investors who bought in Sydney and Melbourne in 2011, however as property prices weaken, it’s unclear whether investors who bought later in the cycle will come out in the black.

Negative gearing is particularly attractive for wealthier investors with a higher tax rate, as they avoid paying more tax than an equivalent investor with a lower tax rate would.

The current Labor policy is that future property investors would only be allowed to negatively gear newly constructed houses, with investors who are currently negatively gearing allowed to continue doing so. The intention is that future property investors will be forced to develop new homes rather than buying existing homes and pricing out buyers who want to reside in the property.

Sydney Property Goes Back To The Future 

Labor’s proposed changes to negative gearing would be salt in the wounds of many property investors, as the Sydney property market continues its recent slide. Median house prices in Sydney are now at their lowest level since 2016, with the city and eastern suburbs the only region where prices have risen in the last year.

There are no signs of the slump subduing either, with auction clearance rates at their lowest levels since the GFC and homeowners accepting increasingly larger discounts on their original asking prices. Much to the delight of one young editor/prospective homeowner!

Health, Wealth & Sex

At what shapes up to be our best event yet, please join us as we hear from personal finance guru Noel Whittaker and bestselling sex therapist Bettina Arndt on the 29th of November! The evening will cover investing to intimacy and everything in between!

Friends and family are more than welcome to join our guests, who can register for the event here.

Mind Over Matter

From neologism to nanoparticles to the stunning image below, this month’s instalment of our regular retiree publication, Mind Over Matter, has it all!

If you’re not subscribed already, please ask your adviser to add you to the distribution list!

Who Am I?

Congratulations to Ben and Emma for correctly spotting the Iron Lady herself, Margaret Thatcher!

But Who Am I?

Observation of the Week

You will always this read incorrectly

Video of the Week – A Monty Python Funeral

Viewer discrection- contains profanity

Have a great weekend!

Jonathan Hoyle, CEO & Nicholas Stotz, Investment Analyst

Stanford Brown

 

 

Stanford Brown TW3 – RBA Redlining, Tech Tanking, Banks Banking

See you soon!

The TW3 team will be taking a much deserved break next week, but we’ll be back snarkier than ever on the 21st!

Market Wrap

Global markets were down this week thanks to more emerging market woes, trade tensions, and a heavy sell-off in tech stocks. Markets had a relatively subdued start to the week, as the fog of the trade war weighed on investor sentiment with the US and Canada failing to agree on a new trade agreement, a further $200b USD of tariffs on Chinese goods due to take effect, and Trump claiming that he would pull the US out of the World Trade Organisation if they didn’t “shape up”.

Emerging markets continued to struggle this week, with South Africa and Argentina sliding into recession and southeast Asian currencies (including the Australian Dollar) weakening against the strengthening USD. Aside from a brief rally in response to the Argentinian government securing a further $50b USD from the International Monetary Fund, the Argentinian peso continues to plummet, dropping 26% against the USD in August alone.

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Source: CNBC

The selling accelerated after Twitter and Facebook executives testified before the US Congress regarding the influence of social media platforms on public opinion, particularly as it pertains to fake news and the censorship of conservative accounts. Facebook and Twitter fell 2% and 6% respectively in response to testimonies, with the resulting sell-off wiping out the last two months of gains for the Australian sharemarket.

Finance 101 – The Behaviour Gap

A growing subject of debate in finance is whether investors are better off investing in an index fund rather than paying fund managers who struggle to beat the market consistently. After all, if we invest in an index fund, we’ll get the return of the market, right?

Not necessarily! In order to achieve the market’s return, investors would have to sit on their hands, which goes against every impulse and behavioural bias they have. The average American investor underperformed the S&P 500 by 2.89% p.a. from 1996-2016, with a significant part of that underperformance due to ill-advised trades arising from fear, greed and trying to guess the short term direction of the market.

The difference between the return an investor would have received if they sat on their hands and the return they actually receive is known as the behaviour gap. Compounded over time, this gap drastically alters investor outcomes (2.89% compounded over 20 years is more than 75%).

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Source: Dalbar

So how do we bridge the behaviour gap? Education and experience are a good start, but even seasoned industry veterans have behaviour gaps. One of the key functions an adviser plays is to take the burden of investing off their clients’ hands, meaning that when major events like the Trump election occur, investors don’t get spooked by the media’s hysteria and sell at the wrong time (global shares are up 40% since the Trump election).

In the words of one money manager “If you own growth stocks, you should only look at the price every 12 months. That way, you’ll only suffer one sleepless night a year.”

Banks Jump the Gun on RBA

Despite news this week that the economy had grown 3.4% in the last year, the RBA continued to sit on its hands, leaving interest rates at record lows for the 25th month in a row. Despite the RBA’s best efforts, the economy is still sputtering with no signs of a sustainable pickup in wages or inflation.

Although there are a number of contributing factors to Australia’s mediocre economic growth, the majority of the blame has to go to Canberra. The economy is in desperate need of structural reform to remain competitive, however help from Canberra is nowhere to be seen. Imagine that the economy is a car, with the RBA in charge of the brakes and accelerator and the Commonwealth Government in charge of the gearbox. The RBA has floored the accelerator, however Canberra is too busy squabbling and stabbing to shift gears.

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Despite the RBA leaving rates unchanged, every big bank except NAB raised mortgage rates in the last week or so, citing increased funding costs. The move is likely to draw the ire of the public, with some financial analysts reporting that the additional revenue from the rate hikes will be more than double the funding costs in question.

Down, Down, Prices are Down!

Property continued to ease in August, as tighter lending standards, rising interest rates and increased supply continue to put downward pressure on prices. The Sydney property market is down 5.6% in last 12 months, whilst Melbourne fell by 2% in the last quarter alone.

A look at the property listing numbers shows that investors are starting to head for the exits. There are 30% more properties up for sale in Sydney than this time a year ago, and listings increased by 11% in the last month alone.

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Source: SQM Research

The suburbs that rose the most during the boom are now falling the hardest, with properties in Baulkham Hills and Ryde both down more than 9% in the last year.

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Source: CoreLogic

Slap on the Wrist for Westpac

Property investor sentiment wasn’t helped by the announcement that Westpac would be receiving a $35m fine for breaching responsible lending laws. From 2011-2015 Westpac used an automatic approval model that systemically underestimated the living expenses of mortgage applicants, meaning that more than 10,000 homeowners received loans they may not be able to repay.

Although this isn’t Florida in 2006, it shows that many property owners have debt that they will likely struggle to pay off. Rising interest rates, lower rents and stagnant wages are putting pressure on the average homeowner’s ability to make their repayments, meaning any economic downturn will likely put thousands into financial distress.

Who am I?

Congratulations to Mark and Judy for spotting Malcolm Turnbull before he even knew what an opinion poll was!

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But who is this young man?

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Pic of The Week – The TW3 Manual!

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Video of The Week – Who’s Cutting Onions?

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Have a great weekend!

Jonathan Hoyle, CEO & Nicholas Stotz, Investment Analyst

Stanford Brown

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Stanford Brown TW3 – Twain and the Tail of the Tariffs

Great Places to Work

On Tuesday evening, Stanford Brown was invited to the Great Places to Work awards evening. This is a celebration of some of the best employers in Australia. US tech companies Salesforce, Atlassian and Cisco took the top honours, but we are delighted to announce that Stanford Brown was designated as the 13th best employer to work for (in the 35-100 employees category). All well and good for your staff, you might be thinking, but why does this matter to me? It matters because the market for quality financial services professionals in Sydney is white hot. If we build a culture of excellence, we can attract and retain the very best advisers that can provide you with heroic service. Thanks to all the team for making this such a vibrant place to work!

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Market Wrap

Global shares were up this week thanks to dovish comments by the US Federal Reserve on interest rates and mixed news in the trade war. The week started at the Jackson Hole Economic Symposium in Wyoming, where the who’s who of central banks, academia and big business gather to deliberate the future of monetary policy. Markets were buoyed by the prospects of slower rate hikes after US Federal Reserve Chairman Jerome Powell remarked that “when you are uncertain about the effects of your actions, you should move conservatively”.

The S&P 500 and Nasdaq both hit all time highs thanks to Powell’s remarks and the announcement that the United States and Mexico had reached a trade deal. However, this morning global shares are down after reports that Trump will be slapping a further $200b USD of tariffs on China as early as next week. The trade wars, rising interest rates and emerging market woes have many investors on edge, with some warning the September is historically a dangerous month for stocks. We couldn’t help but think of Mark Twain after reading that!

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Finance 101 – Value and the Greater Fool Theory

One of the most important distinctions in Finance is the difference between the price paid for an investment and the value of the underlying investment. Warren Buffet once quoted that “price is what you pay; value is what you get”. When an investor is buying a share, they are buying ownership of a business. When an investor buys government bonds, they are buying debt from the government. Although it is an imperfect science, investors can try to calculate the intrinsic value of an investment (e.g. estimating what the fair price of the share of a business is given its underlying assets) then try to buy it at a price lower than its value. This is known as value investing.

Although this is a sound long-term strategy, it is not without its pitfalls. For starters, value is subjective. Even if it was selling at a heavy discount, a vegetarian is unlikely to buy a steak since they don’t value it personally. Likewise, a retired investor is unlikely to buy a highly speculative stock even if it is selling cheaply because they don’t want that risk in their portfolio. Furthermore, two otherwise identical investors could be given the same information about an investment and come to wildly different conclusions about its fair value, and it is not guaranteed that an undervalued investment will ever return to its fair value.

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Although value investing isn’t perfect, risk-astute investors need to be aware of the relationship between the price they are paying for their investment and its underlying value. Bubbles begin to form when investors buy investments with no regards for their value. Many investors bought into cryptocurrencies not because they knew anything about blockchain and its potential, but because they saw the price rising and thought they could make an easy dollar. Likewise, many Sydneysiders bought property at eye-watering prices with no consideration for rental vacancies or interest rates because they saw the market roaring and wanted a piece of the action. This thinking is known as the greater fool theorywhere investors don’t care about the price they are paying for an investment because they think someone else will come along and buy it at a higher price.

Although considering value is no guarantee of an early retirement, having no consideration of value will almost certainly result in a postponed retirement.

Tariffs are Risky Business

There is no shortage of risks in the global economy, and every day a new doomsayer writes that the end is nigh and investors should drop everything and buy gold, Bitcoin, Argentinian farmland, or whatever obscure asset is the flavour of the month. As we can see below, the cause of the impending doom shifts every few months, with most investors now viewing the trade war as the largest risk facing global markets.

Although many of the previous tail risks caused short-term volatility in markets, they were by no means the end of the world, nor should they have been expected to be. The trade war will damage the global economy, but it will not be the end of it. As we’ve written before, often more money is lost trying to anticipate and protect from a correction than is lost from the correction itself!

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Should you have an enduring attorney?

The decision whether and on what terms to appoint an enduring attorney to make financial decisions on your behalf bears careful consideration. Whom do you trust to be capable and trustworthy to make these decisions? Do you appoint more than one? If so, must all attorneys agree? Do you appoint a substitute if your attorney is not able or willing to act? At what point can the attorney begin to make decisions for you? Do you authorise the attorney to make decisions from which the attorney benefits?

Take a recent case which came before the Queensland Supreme Court. There was a dispute over the estate of a deceased man, and there was question over whether the enduring attorneys could make a binding death benefit nomination in similar terms to the existing nomination which was due to lapse. In the circumstances of that case, the court decided that it was within the scope of the enduring attorneys’ power to do so. The case demonstrates the importance of having a holistic approach beyond a simple will and death benefit nomination, as a failure to do so can result in your estate not going to its intended recipients.

If you would like to discuss the pros and cons of an enduring attorney, please speak to your financial adviser.

Who am I?

Congratulations to Richard and Anne for spotting a young Winona Ryder and Alec Baldwin on the set of the cult classic BeetleJuice!

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But who is this young man rocking a striped shirt?

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Pic of The Week

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Video of The Week

Have a great weekend!

Jonathan Hoyle, CEO & Nicholas Stotz, Investment Analyst

Stanford Brown

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Stanford Brown TW3 – Malcolm in The Muddle

Market Wrap

Politics weighed heavily on markets this week, as leadership spills, trade wars and legal scuffles all dampened investor sentiment. The week started off with the US Dollar selling off, after Donald Trump expressed his disapproval of the Federal Reserve’s recent rate increases. Rate increases slow down the economy by making borrowing more expensive, and Trump wants to have the economy humming in the lead-up to the mid-term elections in early November.

Investor sentiment took a further hit when $32b USD of tariffs took effect yesterday, with the market hoping that ongoing trade talks between America and China would result in a delay of those tariffs. For now it seems as though the trade war will go ahead as planned, the question now is how much each side is willing to cut their nose to spite their face.

The Australian market is down this week thanks to the shenanigans taking place in Canberra, as investors take to the sidelines to digest what a new government will mean for Australian companies. Shares also took a hit after Malcolm Turnbull dumped his proposed company tax cuts in the hopes of salvaging his political career. The disunity of the Liberal party has also firmed Labor’s chances of taking government at the next election, a troubling prospect for investors given Bill Shorten’s rhetoric towards big business and franking credits.

Finance 101 – The Maths of Gains and Losses

If your portfolio was up 55% one year then down 40% the next year, would you be happy with the outcome? Although on face value it seems like your portfolio would be up 15%, in reality you’d be down 7%!

Imagine that you have a $1m portfolio. If you gained 50% on that portfolio you would have $1.5m, but if you subsequently lost 50% you would be down to $750,000! A 50% loss on a portfolio requires a 100% return to breakeven.

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The lesson to glean from this simple arithmetic is that losses do more harm to a portfolio than gains of an equivalent percentage, therefore it is more important to avoid major losses than it is to chase small gains. The soon to be longest bull market in history is beginning to lose steam, however many investors are happy to keep their chips on the table, hoping that the party will keep on going for one last dance. Perhaps they should keep a Shakespeare quote in mind “When clouds appear, wise men put on their cloaks”.

The Bulls Keep Charging On

If global shares avoid a major downturn until October, they would have experienced their longest bull run in modern history. This accomplishment comes with a major asterisk however – more than $12t USD of quantitative easing was required. This bull market has been unique in the sense that investor sentiment has been quite cautious, with central banks needing to throw trillions at financial markets just to keep the party going.

The Kool-Aid is now beginning to be taken away from the guests at the party, only time will tell whether they will stick around or head for the exits.

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Getting Crowded Out

Consistently beating the share market is an incredibly rare feat to achieve. In previous editions of TW3 we have shown that 95% of fund managers underperformed the market in the last 15 years. The reasons for this have been debated from classrooms to boardrooms, however, there’s one simple reason which many investors seem to have missed.

In 1997 there were around 7500 listed companies in the United States, today there are less than 4000. In 1997 there were 6700 fund managers in the United States, now there are 9400. Fund managers now have 40% more competitors, with half the amount of companies to differentiate themselves from the crowd!

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Canberra Calamity

Regrettably, when most of you read this article we will have a new prime minister, the fifth time since 2010 that a sitting prime minister has been ousted by their party. It is another sad day for Australians, as now more than ever we need competence from Canberra.

10 years on from the GFC, the economy is still sputtering along with a budget surplus nowhere in sight. Millions of Australians will retire in the coming years, meaning a smaller group of taxpayers will have to foot a rapidly increasing health and welfare bill. Domestically, workers outside the resources and property industries are suffering whether it’s due to Amazon, automation or drought. Internationally, we are caught in the middle of an economic and geo-political dispute between the two most powerful countries in the world. In addition to these economic challenges, there is a laundry list of societal, environmental and structural issues affecting the lives of millions of Australians.

So how have our political leaders performed in the face of these challenges? Exactly how you’d expect from a group of individuals who think getting re-elected is a better measure of success than governing the country effectively. The economist Thomas Sowell once wrote “No one will really understand politics until they understand that politicians are not trying to solve our problems. They are trying to solve their own problems — of which getting elected and re-elected are No. 1 and No. 2. Whatever is No. 3 is far behind

In times like these, there’s often nothing you can do but throw your hands in the air and laugh. A couple of our favourite satirical headlines below.

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The Wealth Effect In Action!

One of the first concepts taught to economics students is the wealth effect, where individuals tend to consume more when they see their net worth rising.

The majority of Australians have most of their wealth tied to the values of their homes, which is one of the reasons why the RBA is reluctant to pop the residential property bubble by raising interest rates. If house prices dropped, hundreds of thousands of Australians would see a reduction in their net worth, and the subsequent slowdown in consumer spending would be a wet blanket on an already fragile economy.

The wealth effect can be clearly observed in the chart below, which shows that sales of luxury cars have been slowing down ever since the housing market hit its peak.

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Who am I?

Congratulations to Jane and Scott for spotting Heath Ledger in last week’s Who Am I! An extraordinary talent gone far too soon.

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But who is this young duo?

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Pic of The Week

Even by Sydney Airport’s standards, this is a bit rich!

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Video of The Week – Physics is Phun!

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Have a great weekend!

Jonathan Hoyle, CEO & Nicholas Stotz, Investment Analyst

Stanford Brown

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Stanford Brown TW3 – Don’s Dough Domino’s

Global Market Wrap

Global shares bounced back from last week’s sluggishness thanks to stronger than expected earnings out of America and Europe. The S&P 500 reached its highest level in five months, whilst the NASDAQ reached an all-time high in part thanks to a surge in Amazon’s price, briefly reaching a valuation of $900bn. Stronger than expected US retail sales led to a small sell-off in American bonds, with two-year US treasuries at their cheapest level since August 2008.

However, the elephant in the room (although some may call him a RINO) remains Donald Trump and the trade war. It could be argued that the most harmful impact of the trade war is not the potential for more expensive consumer and industrial goods, but rather the uncertainty that arises from not knowing what the most powerful man in the world will do next. One of the foundations for sustained economic growth is business investment, and businesses will be reluctant to risk their capital if there’s a chance that the next Trump tweet is a tariff on a key production input.

Likewise, investors looking to invest their life savings will be reluctant to tie their fate to companies that could have their profits slashed thanks to a trade war. Since investing inherently involves a degree of risk, additional uncertainty in the markets is often enough for investors to sell stocks and rotate into conservative assets.

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Finance 101 – There’s Nothing Riskier Than Cash

Most investors think of risk in terms of potential short-term losses (for example, the risk that the stock market may drop 10% in the next quarter). However few think of risk in terms of not achieving our long term investment goals (e.g. not having enough money to fund your retirement). The latter risk is far more harmful than the formers.

You may have some friends who keep their savings in cash accounts, preferring them to stocks since “there’s no risk”. If we use the short-term measure of risk, they are correct, since the Australian government guarantees bank deposits. However, using the long-term measure of risk, they are actually investing in the riskiest asset of all, since cash is the only asset guaranteed to lose purchasing power after inflation (the cost of living) in the long run..

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*Source: Global Financial Data, AMP

The graph above shows that $1 invested in 1900 in a portfolio of Australian shares has now grown to an eye-popping $280k, whereas that same dollar placed in a cash account is now worth just $204. Truly astonishing.

Unless you already have all the money you need for your retirement, you will need to accept the risk of temporary short term losses in order to maximise the chances of reaching your investment objectives. At Stanford Brown, we construct portfolios with the overarching goal of meeting our clients’ long term investment objectives with fewer, shorter, and shallower setbacks.

Asset Class Returns

Index fund manager, Vanguard, offers a fantastic chart that allows investors to compare the returns of different asset classes over time. It is worth revisiting this chart once a year to remember that often the safest assets to invest in over the long-term are the ones we think are the riskiest in the short-term. The best performing asset class over the past 10 years might surprise you!

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Westpac Cuts Supply to SMSF Speculators

The beleaguered property market took another blow this week, after Westpac announced that it would cease lending to self-managed super funds looking to invest in property. Property investors now account for just over 40% of new mortgage lending, the lowest level since 2011.

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Investor sentiment wasn’t helped by reports this week that rental vacancies across Australia are at their highest levels in 13 years, with some analysts going as far to say that Sydney has now become a renter’s and a buyer’s market simultaneously.

The Wit & Wisdom of Howard Marks

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One of the smartest investors in the world is Howard Marks, chairman of giant US distressed debt managers, Oaktree Capital. Every quarter, he shares his thoughts on the world. It’s essential reading for money managers such as Stanford Brown. You can read his latest missive here. This quarter he contemplates the meteoric rise of passive funds (they now account for 42% of all US equity assets, up from just 24% in 2010) and wonders at what point active investing will once again play a role. He then examines the current fad of ‘quantitative investing’ (buying stocks based on certain pre-determined rules or ‘algorithms’) and makes the prescient observation that “there is nothing reliable to be learned about making money. If there were, the study would be intense and everyone with a positive IQ would be rich!” Finally, he reflects on how Articial Intelligence and Machine Learning will impact the world of investing and concludes that “computers are likely to affect the market in ways that make it harder for them to achieve success.” A window into a brilliant mind.

Greenback In The Green

In recent weeks we have written about how the rising US dollar has put pressure on companies in emerging markets. However, even US firms have begun to warn that their earnings are also suffering. The dollar has risen due to strong jobs and wages growth giving the US Federal Reserve scope to continue raising interest rates. US exporters suffer when the US dollar rises as it makes their products more expensive.

Stanford Brown added the BetaShares USD ETF to client portfolios on the 13th of April and switched to using unhedged International Shares only days before the WSJ Dollar Index bottomed out and began its rise. The ability to make swift changes to asset allocations to hundreds of client portfolios in a matter of days is one of the many reasons why we advocate the use of discretionary Managed Accounts. If we had to follow the usual procedure of issuing investment advice, preparing compliance documentation, receiving authority, administering trades, etc, most of our clients would have missed out on the recent surge in USD.

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Don Gets the Dough at Domino’s

Domino’s Australia CEO, Don Meij, was in the headlines this week after pocketing a cool $38m in take home pay during the 2017/18 financial year, making him Australia’s highest paid CEO. Although some have questioned whether Meij’s pay is excessive, it is important to keep in mind the extraordinary growth that Domino’s has experienced under his guidance.

A common method companies use to align the interests of CEOs and shareholders is to grant long dated stock options, which in essence incentivises the CEO to make decisions with long-term growth in mind rather than quick short term gains. In 2013 he was given options which were only valuable if the Domino’s share price was above $14.90. Three years later, he cashed in those options once the price had almost quintupled to $74.70.

Meij has been at the helm of Domino’s since 2002, and since going public in 2005 the Domino’s price has risen at more than 26% per year, whilst the All Ordinaries is up 55% since 2005. An investor buying at IPO and selling at peak would have netted a price return of more than 3700%. Whilst we can debate whether CEO pay is too high, at the very least we can acknowledge that Meij has more than delivered for his shareholders.

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*Dividends not considered

Who am I?

Congratulations to Michael and Diana for spotting a young Nelson Mandela last week! Wednesday would have marked Mandela’s 100th birthday. God bless you, sir!

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But who am I?

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Pic of the Week

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Video of The Week

Although the Germans may have missed out on the group stages of the soccer World Cup, they can take pride in making the final of the philosophy World Cup.

Have a great weekend!

Jonathan Hoyle, CEO & Nicholas Stotz, Investment Analyst

Stanford Brown

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Stanford Brown TW3 – China, Clairvoyants, and Calculus

Market Wrap

Global shares were mixed this week, as volatility in China weighed heavily on Asian stocks. Chinese shares are down almost 25% after peaking in January, as a cooling economy and imminent trade war depress investor sentiment. Corporate profits in China have taken a big hit this year, with credit ratings agencies beginning to issue more ratings downgrades than upgrades. The downturn is a healthy development for China, and is a sign that it is taking the required steps to boost the sustainability of its economy and sharemarket.

John F Kennedy once remarked “The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger – but recognize the opportunity”.

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In local news, the RBA maintained its cash rate at 1.5%, marking the 21st consecutive meeting where the cash rate was unchanged. It is likely that we will only see a rate hike from the RBA when the economy heats up significantly, since Australian households have record levels of private debt and may not be able to bear the brunt of increased interest payments.

Finance 101 – Hindsight Bias

When reviewing our portfolios, it is natural to think to ourselves that it would have been great if we had put more money in our best performing investments and sold the underperforming investments, or if we had invested more in Sydney property in 2012, or bought Bitcoin in 2009. Whilst it’s true that making those investments would’ve made us rich in the past, there’s no guarantee that they will make us rich in the future.

High returns are almost always accompanied by high risks, however when we read about a stock that’s up 50% there is rarely a footnote disclaiming that it was an incredibly risky investment. This feeds into a behavioural bias known as the hindsight bias, where investors believe that past events (such as a stock going up 50%) were obvious and predictable.

Long-term investing is not gambling, however it is akin to gambling in the sense that we are putting money at risk based on our predictions of the future. We doubt any readers watched the Melbourne Cup last year and thought it would’ve been a good idea to risk their life savings on the winning trifecta.

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Since we can’t predict the future, the best we can do is to have a sound investment process that mitigates the risks in our portfolio. This will not always lead to spectacular gains, but it is our best shot of avoiding catastrophic losses. When comparing the returns of our portfolio to other investments, we must keep in mind how risky the other portfolio is.

If 24 people each risk their life savings on a horse in the Melbourne cup, one person will walk out a multi-millionaire whilst the remaining 23 will be destitute. To whom should we compare our returns? Every investor who took a large risk or only the ones whose risk paid off?

Even Clairvoyants Underperform The Market

But what if you knew which stocks were going to outperform in the future? In an eye-opening research piece, two American fund managers tested how a portfolio constructed with perfect foresight would theoretically perform against the market, with the portfolio rebalancing every five years with stocks in the top decile of returns for the following five years (e.g. in 2002 the portfolio rebalanced to invest in the highest performing stocks from 2002-2007).

Despite having an annual growth rate of 29%, the portfolio often underperforms the benchmark and loses money, suffering losses of more than 20% every decade or so.

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The first lesson to take from this research is to invest for the long term, since every investment with a meaningful return will go through periods of underperformance. Many investors suffering a 20% return will sell into cash, even though that is often the worst time to sell.

The second lesson to take is that asset allocation matters. All investments, even when picked by sages, will go through periods of underperformance that will test the mettle of investors. Appropriate asset allocation reduces the frequency and severity of downturns, which increases the probability than an investor will stay in the market and reach their financial goals.

2017/18 Review

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The much respected industry economist Shane Oliver has written a useful review of the last 12 months of investment returns, drawing some key lessons for investors.

The first lesson Shane gleans is to be cautious of the crowd, with the rise and fall of Bitcoin a timely reminder of the dangers of fear and greed in markets. He then calls for investors to tune out the noise, with well diversified investors earning solid returns despite the return of volatility and predictions of ruin, especially when compared to the measly returns of cash accounts.

Hobart High, Sydney Sputtering

CoreLogic has released its latest report on Australian property prices, with Sydney continuing to soften as tighter debt markets and reduced foreign investment take their toll. Hobart continues to fly high, with this oft ignored market up almost 13% in the last year.

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As mentioned in the Market Wrap, the RBA may be reluctant to raise rates given how indebted the Australian population is. According to a report by 9 News, if interest rates were to rise by 1%, entire suburbs in Western Sydney would effectively be in mortgage stress.

Self-Managed Super Advise Not So Super

ASIC and the ATO will be cracking down on self-managed super fund (SMSF) advice after reporting that 90% of the advice given to a randomly selected group of SMSFs was noncompliant, with almost 30% of the advice putting the client at risk of financial detriment. Of particular concern for ASIC was the finding that many investors were establishing SMSFs for the sole purpose of investing in property, with little or no regards for a diversified investment strategy.

Further complicating the issue is the emergence of “one-stop shops” for property investments via SMSFs, with these firms promoting “the purchase of geared residential property through an SMSF, arranged by groups of related real estate agents, developers, mortgage brokers, accountants and financial advisers”. Investors must be wary of these businesses, who are incentivised to advise geared property investments even when they are not in the best interests of the client.

In five years to 2017, SMSF numbers grew from 473,000 to 597,000 and this latest report from ASIC surveyed a small sample of 450 members who had SMSFs set up within this period. At Stanford Brown, we believe that SMSFs have many advantages but they are not appropriate for all investors. If you want to know whether a SMSF is appropriate for you, please speak to your adviser.

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Japan Show Us How It’s Done

The FIFA World Cup has more than delivered its fair share of spectacular goals, impossible upsets and controversy, but the tournament’s best moment took place off the pitch.

Japan suffered a heartbreaking loss in the Round of 16, conceding a last gasp goal to lose against their much fancied opponents Belgium. Despite having their dreams dashed, the Japanese team bowed to their opponents, bowed to their fans, and left their locker room spotless with a note saying “thank you” in Russian.

The actions of the Japanese team follows other acts of class where fans of Senegal, Japan and Uruguay cleaned their supporter bays after watching their games.

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The TW3 team is well represented at the World Cup, with Nicholas’ and Jonathan’s respective motherlands of Uruguay and England both making it through to the quarter finals. Uruguay has their work cut out for them this weekend as they face competition heavyweights France, whilst England continues their arduous quest to bring the World Cup home as they lock horns with the much vaunted football juggernaut…Sweden.

What’s On In Sydney

Skating, Santa and stars are on the agenda in this month’s instalment of What’s On In Sydney

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Who Am I?

Congratulations to Christine and Chris for spotting a dread-less Bob Marley!

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But who is this the owner of this dashing haircut?

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Pic Of The Week

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Video Of The Week

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Have a great weekend!

Jonathan Hoyle, CEO & Nicholas Stotz, Investment Analyst

Stanford Brown

Stanford Brown TW3 – Inner City Blues

Market Wrap

 

Global shares rallied this week after stronger than expected job data out of the US lifted markets to multi-month highs. The US economy added 223,000 jobs in May, blitzing the 188,000 figure that markets were expecting. The strong jobs growth report will give the Federal Reserve scope to continue raising interest rates, which until recently was considered a bad thing for shares. Readers may recall that it was stronger than expected wage growth and job creation that prompted a heavy sell-off in February. After losing money in a speculative bubble, Isaac Newton, arguably the greatest scientist of all time, remarked “I can calculate the movement of the stars, but not the madness of men”. Food for thought.

Source: CNBC

In local news, the RBA kept interest rates on hold as expected, as wage growth and inflation remain sluggish. The economy seems to be showing signs of life however, with GDP expanding by 3.1% in the past 12 months, the fastest growth rate in seven quarters. Hobart’s burgeoning housing market is showing up in the economic figures, with Tasmania recording the strongest growth of all states in the March quarter.

 

Finance 101 – Loss Aversion

 

One of the most important skills required for successful investing is knowing when to cut your losses and sell an underperforming investment. Many investors shoot themselves in the foot by refusing to cut their losses, insisting on holding on to losers in the hope that they’ll ‘come good’. This mistake is a form of the behavioural bias known as loss aversion, where individuals are more sensitive to losses than gains.

American financial planner, Carl Richards, once posed the following question to test whether investors were allowing biases to creep into their decision making: if an administrative error mistakenly sold your portfolio down into cash, would you buy the same portfolio you hold today? If the answer to that question is no, you need to consider whether you’re holding some investments for the wrong reasons.

In no way are we advocating selling just because an investment undergoes a period of underperformance. Rather, understand the difference between having conviction and hoping for a reversal of fortunes. No investment goes up in a straight line and a great deal of patience is required for successful investing. As Warren Buffett once said “the stock market is a device for transferring money from the impatient to the patient”.

 

Fat Cats Get Fat Slap

 

CBA made headlines again this week after receiving a $700m fine for violating anti-money-laundering and counter-terrorism financing laws. Despite receiving the largest fine in Australian corporate history, CBA shares were at one point up 2.4% in the hours after the fine was laid down. This is largely because investors were expecting a larger fine to be handed down, and were buoyed by the news that the fine was only $700m.

 

 

Charting the Housing Slowdown

 

The Sydney property market continued to soften in May, with prices 4.2% lower than a year ago. Although the combination of rising interest rates, sluggish wage growth and curtailed foreign investment will likely continue to weaken the broader market, the slowdown in property prices will not affect different suburbs equally.

As the chart below shows, houses have been hit harder than apartments, with homes in the inner city and Ryde as much as 10% off their previous peaks.

Source: Corelogic

Investor sentiment took another hit during the week after the NSW government announced restrictions on online home-sharing platforms such as Airbnb. Many property investors prefer Airbnb over traditional lease agreements as their occupants are usually tourists willing to pay a premium for accommodation. Under the new regulations, Airbnb landlords will only be allowed to rent out their homes for 180 days per year, which should put downward pressure on rents.

 

#Shorting A Tall Order

 

Famed economist John Kenneth Galbraith once attributed the excesses of financial markets to “extreme brevity of the financial memory”, and it appears that some market participants are eager to prove Galbraith right. Financial markets are on pace to have their most volatile year since 2008, yet hedge funds are increasingly making bets that volatility will be subdued.

In February we wrote about investors who shorted volatility suffering heavy losses as markets sold off, we’ll have to wait and see whether these hedge funds can avoid a similar fate.

Mind Over Matter

 

For those who may have missed it, check out our monthly newsletter for retirees “Mind Over Matter”, where in this month’s instalment we cover the Beatles, travelling in Europe, and a “spot the difference” picture at the centre of impassioned debate in the Stanford Brown Sydney Retiree Community.

Please let your adviser know if you would like to be added to the distribution list for Mind Over Matter.

Who am I?

 

Congratulations to Chris and Natasha who spotted Sean Connery in last week’s TW3!

 

But who is this broody young man?

Pic of the Week

 

Video of the week 

 

 

Have a great weekend everyone!

Jonathan Hoyle, CEO & Nicholas Stotz, Investment Analyst

Stanford Brown

 

 

 

Stanford Brown – Monthly Mind Over Matter

Welcome!

Welcome to the second instalment of the Stanford Brown Monthly Mind Over Matter, inspired in name by the wise words of Mark Twain;

Here we summarise the monthly highlights of the articles being uploaded to the Stanford Brown Sydney Retiree Community, our Facebook Group which has grown rapidly since commencing in March 2018. We welcome you and your friends & family to join in the community – otherwise, if you don’t have Facebook, this monthly email is for you to ensure you don’t miss out!

Top 10 highlights and popular articles from the last month within the Facebook Community:

1. What’s On in June

As staying indoors becomes more and more of an attractive weekend prospect, Sydney turns up the heat with great food and entertainment. Our monthly wrap-up makes finding the best of the bunch easier than ever, featuring films festivals, food shows, inspiring talks and our comprehensive guide to Vivid – you’re just a click away from the perfect winter weekend.

Feel free to click on the text within to be taken to the respective website for more information on each feature, and be sure to share with your friends!

2. Meetup Groups

Have you wanted to engage in a passion/hobby/interest or give something new a try but haven’t taken action yet?

In my experience and during my discussions with hundreds of pre and post retirees – as well as through our Life Themes Profiler process – this is a very common occurrence.

If the reason why you have not taken action is the uncertainty of how to go about pursuing your passion then I’ll go out on a limb and say this may well be the best tip you will receive all year!

Meet Up Groups are a wonderful way of finding and connecting casually with groups of people with common interests who meet regularly to pursue their common interest(s).

Visit www.meetup.com/en-AU (or download the free app) to explore the many different categories or search by anything specific you are interested in – you will be surprised how many people share your common interest/passion, who are currently engaging regularly and casually as a group and (you never know) may become good friends or casual acquaintances.

3. Sydney’s Best Tours

Perhaps a overlooked activity in Sydney, tours are a great way to get out and about, and learn more about some different parts of the city we love. They’re perfect for showing visiting friends or relatives around town, or introducing grandkids to your favourite spots!

4. Help! I’m a baby boomer lost in the millennial world of a co-working space

A hilarious article written from a baby boomer’s experience in a shared office environment. The comments section beneath the article is also must-read for those considering a third-act venture into freelancing or entreprenuership; with more interesting stories and perspectives from those in the business.

5. Out and About with Grandkids

Time to lock in a date to take the grandkids for a day out: Sydney’s famous City Recital Hall is being turned over to the kids on July 7th, as Kinderling Kids Radio takes their award-winning kid’s music from the airwaves to the stage. There’s also plenty of interactive workshops and arts and crafts projects, like face painting, storytelling, creative play and more.

6. The Beatles – The White Album Concert

Some great tips here for those considering writing down your memoirs. There’s not a more powerful way to record your memories, and leave a legacy for future generations to follow.

7. Top 10 Most Colourful Cities in Europe

There’s nothing like a travel article to spark the wanderlust in all of us, but for those who see retirement as the perfect time to see the world this one is particularly timely.. European summer awaits!

8. How to Remember What You Read

A must read for bookworms, this article gives great insights on how to elevate your reading style from passive to active. The latter type of reader activates their brain by keeping ‘mental models’ in mind whilst reading, to truly understand and then retain key concepts and lessons – ensuring you’ll never read in the same way again.

9. Which chicken is different?

This seemingly simple ‘spot the difference’ picture divided the opinions of our Facebook group – what do you think?

10. On Mother’s Day we shared this thought-provoking video…

 

If you like what you’ve seen so far, please feel free to join and interact with us on our Facebook group, at www.facebook.com/groups/sbretireecommunity
And if you’d like us to add any of your family and friends to receive this email, reach out to info@stanfordbrown.com.au
Andrew Griffin | Private Wealth Adviser & Retiree Advice Leader
Stanford Brown

Stanford Brown TW3 – Investors Get Queasy Over Quitaly

Market Wrap

 

Global shares dipped this week thanks to volatility in the Eurozone and fresh shots fired in the trade war. Markets dropped sharply on Wednesday as news came out that Italy had failed to form a new government after President Sergio Mattarella vetoed the nomination of Paolo Savona, a vocal Eurosceptic, as minister for the economy. The veto increased the prospects of another election being held in Italy, which many believed would effectively be a referendum on whether Europe’s fourth largest economy should remain in the Eurozone. The prospects of Italy leaving the Eurozone spooked global investors, and most major market indices dropped 1%-2% in response to the news. The volatility was a wet blanket on the prospects of seeing four rate hikes from the Federal Reserve in 2018, which is good and bad news depending on who you ask.

Finance 101 – Ceteris Paribus

 

When we first heard of Scott Morrison’s plan to raise $200m through his digital tax , we thought ceteris paribus! Translated from Latin, ceteris paribus simply means ‘all else being equal’, a critically important concept to bear in mind when considering the predictions of politicians.

Unlike the natural sciences, where experimenters can isolate variables to test hypothesises, it is near impossible to make definitive claims in the social sciences such as finance, economics and political theory since human behaviour is too complex. To deal with this, we can use qualifiers such as “all things being equal”. This is of little use, however, as all things are never equal, and often what ends up happening is the opposite of what we’d expect. For example, when a new road is built, traffic usually gets worse (as more people drive instead of using public transport) and when petrol prices go down, travellers often spend more money on petrol (as they can afford to drive more).

In the case of Amazon, Scott Morrison’s tax would have raised $200m if the policy had no effect on the sales and business strategies of the companies being taxed, or all things being equal. Unfortunately for the treasury (and Amazon customers), Amazon announced that it would be blocking Australian users from using its US store as a result of the tax.

House Prices Fall…RBA Shrugs

 

The Australian dollar was boosted this week after remarks by RBA board member Ian Harper that falling house prices won’t prevent the RBA from raising interest rates. In an interview with the Wall Street Journal, Harper was quoted saying “The bank will raise interest rates when it has a basis for doing that — because inflation is starting to pick up. When all that starts to line up, who cares what’s happening to house prices”. Although Harper doesn’t speak on behalf of the RBA, the comments are a further drag on investor confidence in property, as they now face the prospect of not being bailed out by the RBA if things go pear shaped.

Investor sentiment took another hit the next day when the Foreign Investment Review Board reported that foreign investment in residential property had shrunk from $40bn in 2015/2016 to just $13bn last year. Chinese investment has been particularly impacted, largely thanks to restrictions on bank lending to foreigners and capital controls in China.

Why Quitaly Matters

 

The prospect of Italy exiting the Euro (Quitaly, Italexit or Itexit depending on your taste) has evoked comparisons to the Greek crisis in the aftermath of the GFC. However, an Italian exit would likely be much more calamitous. Italy is the fourth largest economy in Europe, nearly 10 times the size of Greece and heavily indebted. An Italian exit would likely bring an end to the EU experiment, a terrifying outcome for risk assets.

A key difference between Quitaly and the Grexit is the motivation for wanting to leave the EU. Greece was threatening to leave because it was nearing insolvency and wanted to monetise its debt. Conversely, Italy’s primary motivation for leaving the EU is akin to Brexit – disenchantment with the EU. This morning it has been reported that Giuseppe Conte’s new ministry, with Giovanni Tria as minister for the economy, has been successful in forming government, which will end months of uncertainty but leaves the question of Italy’s future in the EU unanswered.

Emerging Markets hit by hikes

 

The recent spike in volatility combined with rate hikes from the Federal Reserve are hitting emerging markets hard. The strength of the USD and rising interest rates have been particularly painful for Turkey and Argentina, with the Turkish Lira and Argentinian Peso each depreciating more than 15% against the USD in May. These developments are particularly troublesome for companies that have borrowed in US Dollars, as their US debt costs have risen by more than 15% whilst the domestic economy is showing signs of weakness. If the Federal Reserve continues to raise rates and investors continue to reduce their apetite for risk, expect further pain for emerging markets.

What’s On In Sydney

 

Don’t let the cold weather be an excuse for staying in the house. See what’s on the agenda in this month’s instalment of What’s On In Sydney.

Who am I?

 

No, it’s not fake news, last week’s entrant was in fact Donald Trump. Congratulations to Jeff and June for spotting him!

But who is this young man?

Tweet of the Week

 

 

Video Of The Week

Who’s cutting onions?

Have a great weekend!

Jonathan Hoyle, CEO & Nicholas Stotz, Investment Analyst

Stanford Brown

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