TW3 – A Bridge Too Far?

Market Wrap

Markets shrugged aside coronavirus fears this week, despite global behemoths like Apple warning investors their earnings are likely to take a hit thanks to the shutdown in China. The consensus appears to be that China will contain the outbreak, as the number of new cases of infection continues to fall each day. There may be further stimulus on the way for markets, as Japan, Korea and Singapore all teeter on the brink of recession. The timing of the virus outbreak is particularly poor for Japan, as attendance for the Tokyo Olympic Games in July is likely to be disrupted.

The outlook for the Australian economy is slightly rosier, with RBA Governor Phillip Lowe confident that the economy will weather any disturbances from the coronavirus and the recent bushfires. This sentiment was echoed by companies such as JB-Hifi, Kathmandu and Nick Scali reporting better than expected earnings. The performance of retailers are often used as a proxy of consumer sentiment, and the hope is that a rebounding retail sector is a sign of a strengthening economy.

Although the outlook for economic growth seems like a logical concern for investors, more often than not it is of little interest for portfolios. For years Stanford Brown’s Chief Investment Officer Ashley Owen has been shouting from the rooftops that economic growth expectations don’t affect sharemarket returns – you can read his report here.

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Finance 101 – Margin of Safety

One of the most famous investing books is Margin of Safety by Seth Klarman. Aside from being loaded with pearls of investment wisdom, the book is notorious for being wildly expensive as a result of going out of print in 1991.

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The concept of a margin of safety is borrowed from engineeringIf you’re building a bridge, you make it twice as strong as you think it needs to be. This is because your estimate of how strong the bridge needs to be could be wrong, so you make the bridge stronger to give yourself room for error. This makes building the bridge costlier, however you also mitigate the risk of a disastrous (and expensive) collapse. In investing a margin of safety is sensible since the future is uncertain – you want to give yourself plenty of room for error as you will encounter bad luck as well as good luck with your investments.

In many cases the cost of avoiding disaster is redundancy. You could argue that somebody who never has to make a claim on their insurance has wasted their money. Likewise, you could argue that investing conservatively during a market boom is misguided as you’re missing out on easy returns. This argument misses the point – the point of prudent investing is to avoid disaster, not to maximise short-term returns. Sooner or later the market boom will end, and paper gains turn into real losses for those who left themselves no margin of safety.

Warren Buffett once quoted that it’s only when the tide goes out that you find out who’s been swimming naked – don’t forget your cozzies when investing!

Kochie Loves Bitcoin?

We come across our fair share of scams, but one this week takes the cake! Who wouldn’t trust Kochie? N.B. Kochie has condemned these scammers for using his name to lure in victims.

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The reason why we’ve been harping on about keeping an eye out for scams is that people fall for them every day, including some very intelligent people. More than 100 doctors in America were recently swindled by a vulture claiming to be able to generate monthly returns of 15%.

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Investing legend Charlie Munger once remarked that in investing it’s better to have an IQ of 130 and think that it is 120 than it is to have an IQ of 150 and think it is 160. People who have experienced success in one walk of life often suspend disbelief when coming across strategies promising abnormal returns – it can be easy to expect above-average results with your investments if you’ve achieved above-average results elsewhere. When it comes to investing your temperament is far more important than your intelliegence – keep those grains of salt handy.

Wit and Wisdom from Munger

It was bittersweet reading Charlie Munger’s remarks at a shareholder meeting this week. While Munger is still as sharp as a tack at a healthy 96 years of age, his body hasn’t aged quite as well. All the more reason to soak in his wisdom while he’s still with us!

Some selected highlights from the 2hr meeting:

On economists:

Economists have a lot to be modest about. LBJ said giving a talk on economics is like urinating on your leg. It feels hot to you, but never to anyone else.”

Some life maxims:

Take the high road, because it’s less crowded.

Know what you don’t know, as so many don’t seem to know that they don’t know much of anything.

Demand for immediate gratification is the way to ruin – it may also give you syphilis.

On problem solving:

When I was a meteorologist in World War II, I was told how to draw maps and predict the weather. But I was actually clearing pilots to take flights. Suppose I wanted to kill pilots. What would be the easiest way to do it? Planes flying into icing they couldn’t handle or not having enough fuel and being in a place where they couldn’t land. I made up my mind I was gonna stay miles away from killing pilots. So it was my job to help to avoid those situations. I just reversed the problem. You don’t think of what you want, you think about what you want to avoid and invert. If a meteorologist can really know how to avoid something that’s the only thing that’s gonna kill a pilot, the results are better.

On the rat race:

Riches in a modern civilization are a relative thing – it’s status that we want. The trouble with reaching for status is the bottom 90% are always going to contain exactly 90% of the people no matter how hard we work or how much we succeed.

Advice for raising children:

The best thing is to be a good example. Preaching doesn’t work worth a damn.

ATO Changes The Meaning Of Love

Arguably the hardest part of journalism is coming up with a catchy headline. For years we’ve speculated that the highest paid employee at The Daily Telegraph is the person responsible for coming up with the headline for the front page – take this stroke of genius after a punch up between two members of the Italian national rugby league team a few years ago.

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On Valentine’s Day, the AFR ran this corker of a headline, how could we not read it?

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We doubt anyone is more qualified to provide an opinion on what love is than the Australian Tax Office. Previously, if a private company or family trust was owed money, they could forgive the debt on the basis of their natural love and affection for the creditor – or more specifically, on the basis of the love and affection of those controlling the company/trust for the creditor. This is no longer the case as the ATO has now decided that a private company or trust can’t feel love.

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