TW3 – Trading Tim Tams for Tapas

Market Wrap

Markets were mostly flat this week, as stalled negotiations in the US-China trade war offset stronger than expected economic data out of the USA. Optimism over a trade deal had lifted investor sentiment in February, however markets have drifted lower since US trade representative Robert Lighthizer told US policymakers that “much still needs to be done” if a deal is to be reached. Investors shrugged off robust growth from the US economy overnight, which was 0.4% higher than the consensus estimate.

Source: Bloomberg
In local news, last week the International Monetary Fund concluded that the Australian financial system was well positioned for ongoing stability, making significant improvements since the Global Financial Crisis. Let’s hope their prognosis is accurate, as both major parties are cracking down on the big banks to cash in on the Royal Commission and earn some pre-election brownie points. This week Labor announced it would establish a fairness fund to double the number of financial counsellors in Australia, with the big banks footing the $160m p.a. bill.

Finance 101 – Animals in Finance

As the Royal Commission illuminated, there are plenty of animals in finance. Even if the Hayne Report is implemented, there will still be some animals walking about. Here is the TW3 guide to animals in finance:

Animal Spirits – The natural instincts and biases that cause investors to act in an irrational manner (e.g. fear and greed)

Bulls – An optimistic investor that believes prices will rise in the near-future. Investors who always believe prices are going to go up, despite risks of a sell-off, are known as permabulls

Bears – A pessimistic investor that believes prices will fall in the near-future. Investors who consistently predict a major crash around the corner are known as permabears

Gold Bugs – Investors who are consistently bullish on gold as an investment. Gold bugs are usually permabears, often citing hyperinflation and the impending collapse of the global monetary system as reasons to own the precious metal

Chickens – Investors who are unreasonably risk averse, earning sub-par returns due to their overly conservative investing

Pigs – Investors who take on too much risk, often out of greed. No return is good enough for a pig, who will often borrow money to supercharge their returns (and more often than not, their losses)

Hawks – A monetary policy hawk supports tighter monetary policy (i.e. higher interest rates), often wanting to keep a lid on inflation and debt levels
Doves – A monetary policy dove supports looser monetary policy (i.e. lower interest rates), claiming that cheaper debt will stimulate spending & investment and boost employment

Ostriches – Investors that ignore negative information about an investment rather than reassessing their position (e.g. a cryptocurrency investor assuring themselves a regulatory crackdown will have no effect on the value of their coins)

Sheep – Investors that look to others to guide their decision making. These investors often act on investing tips from friends & family, or buy whatever fad investment is trending. They are doomed to underperform, buying when prices are high and selling when prices are low

Warren’s Wise Words

The world’s most famous investor, Warren Buffett, penned his annual letter to shareholders over the weekend. A few highlights below:

On semantics – Abraham Lincoln once posed the question: “If you call a dog’s tail a leg, how many legs does it have?” and then answered his own query: “Four, because calling a tail a leg doesn’t make it one.” Abe would have felt lonely on Wall Street

On debt and investing – Rational people don’t risk what they have and need for what they don’t have and don’t need

On market trends – Charlie (Munger) and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities. Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price

Fear Mongering and Property

Articles such as the one below are increasingly common nowadays, as major media outlets hope to maximise their readership through provocative headlines.
But is this development relevant to the housing market? Although monthly credit growth may seem like an intuitive measure of housing activity, a dive into the numbers reveals that it is has historically been an unreliable method of forecasting price movements in the Sydney property market.
Source: ABS, RBA

Even after adjusting for inflation, there’s no reason to believe that January’s change in housing credit growth is evidence for further weakening in the Sydney housing market.

Source: ABS, RBA

The lesson to glean from this example is that actionable investing insights are very rarely found in financial papers. As always, a healthy dose of scepticism never hurts!

How Much Is Enough?

With medical advances extending the life expectancy of Australians, a common concern amongst retirees is whether they will outlive their savings. Debate over the amount required to fund a comfortable standard of living in retirement reached fever pitch late last year, with the Grattan Institute releasing a report claiming that Australians save more than enough to retire comfortably. The findings of the report seem to be corroborated by findings that more than half of Australian retirees spend less than the age pension.

So should we sell our shares and dig into some caviar? Perhaps not. The aforementioned reports claim that expenses in old age are often overstated since the government foots the majority of healthcare related expenses. As the population ages and the health budget becomes strained, it may be precarious to assume that a dwindling taxpayer base will continue to be so generous. Furthermore, different retirees have different lifestyle (e.g. not being dependent on government assistance) and estate planning objectives, which affects the amount of money required to require comfortably.

Perhaps the biggest risk to retirees is sequence risk, whereby regular withdrawals from an investment balance amplify the effects of market sell-offs. In a presentation to clients last year, Stanford Brown’s Chief Investment Officer Ashley Owen showed how outcomes can vary drastically depending on what stage of the market cycle you retire in. The purpose of Stanford Brown’s “CPI +” performance benchmark is to ensure that investor capital is preserved throughout market cycles after taking withdrawals into account.

Time to Trade the Tim Tams for Tapas?

With the Rugby World Cup fast approaching, many Wallabies fans are looking for activities in which Australia is ranked higher than New Zealand. As it turns out, we’re healthier!
Source: Bloomberg

Spain took out the top gong in the Bloomberg Healthiest Country Index, which takes into consideration factors such as pollution, life expectancy and healthcare quality. The researchers linked the Mediterranean diet to Spain and Italy’s strong showing, which is associated with reduced rates of cardiovascular disease.

Earn Your Stripes!

Scientists may have solved the age old question of why Zebras have stripes! Long assumed to be for confusing predators by blending in a herd, American researchers now believe that the stripes are to confuse flies and other potentially disease carrying insects. The experiment involved placing horses in black, white and black & white coats and monitoring how frequently flies would land on the horse. As we can see below, the horses were significantly less bothered by flies when they had their Zebra style coat on!

Source: Plos One

Name That Line!

Congratulations to Sue and Peter, who were the first to tell us to fasten our seatbelts!

But what was the classic line in this scene?

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