TW3 – A Toddler Could Beat Buffett

Market Wrap

Uncertainty over progress in the US-China trade war truce wasn’t enough to keep global markets down this week, as investor sentiment was buoyed by surprisingly dovish comments from US Federal Reserve Chair Jay Powell. During questioning by journalists, Donald Trump noted that tariffs on China may remain in place for a “substantial period of time”, only to shortly after claim that “the deal is coming along nicely”. Negotiations will recommence this weekend.

The US Federal Reserve Board met midweek to assess US monetary policy. Whilst few investors expected a change in interest rates, Fed Chair Jay Powell unexpectedly announced that there are no planned rate hikes in 2019. This in stark contrast to the Fed’s meeting in December when it trimmed its forecast from three rate hikes in 2019 to two. Each dot below represents a board member’s view of where interest rates will be at the end of the calendar year, with the median projection (green line) showing that the Fed only expects to raise rates once before 2022.

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Source: Bloomberg

In local news, the Australian unemployment rate dropped to 4.9% in February, falling below 5% for the first time since 2011. Although this may seem like a sign that the Australian economy is improving, there was a loss of 7300 full-time jobs in February, with the improvement in unemployment thanks to an uptick in part-time jobs. The ABS considers someone working one hour per week employed, meaning that the unemployment rate is a flawed barometer for the strength of the economy.

Finance 101 – The Outcome Bias

Imagine two financial thrill seekers that take their life savings to the casino. They end up at the roulette table, with one betting the house (literally) on black and the other favouring red. One will walk out having doubled their money whilst the other won’t have enough to pay for their bus fare to Centrelink.

Although the subjects of our example made equally foolish decisions, we tend to view the unlucky gambler more harshly than the lucky gambler. This is a result of the outcome bias, where we judge the quality of a decision by its end result rather than by the process used to arrive at the decision. The bias is particularly dangerous for investors, as luck and randomness play an uncomfortably large role in investment performance (e.g. was your average Sydney home buyer in 2010 smart or just lucky?).

When selecting money managers, many investors use recent performance as a proxy for the quality of the product. The issue with this is that a portfolio of stocks chosen by a toddler can outperform a portfolio chosen by Warren Buffett for weeks, months, or even years. In the long run, however, good luck tends to run out, so investors should place higher significance on the strategy and decision making process of a manager than their short-term relative performance.

As our Chief Investment Officer Ashley Owen said in a recent seminar, our goal at Stanford Brown is to help you avoid this guy!

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Dr. Don Reflects On A Decade Since The GFC

Lauded economist and Stanford Brown Investment Committee member Dr Don Stammer has reflected on the 10 years that have passed since the GFC ended, penning four lessons for investors in an article for The Australian:

  1. The GFC Didn’t End The World As We Know It – Many experts forecasted years of secular stagnation, frequent recessions and sub-par investment returns in the wake of the GFC. Instead, no major global economy has seen a recession, and all asset classes have enjoyed a golden decade
  2. Market Commentary Has Been Overly Pessimistic – Bad news sells better than good news, since good news is no news!
  3. False Crises Outnumber Real Crises – In the words of legendary investor Peter Lynch “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
  4. Keep An Eye On Inflation – Inflation in Australia has been quite low since our last recession, meaning that many seasoned investment professionals have no experience operating in an inflationary environment. Although there is no guarantee inflation will return, investors should remain wary.

What A 0% Corporate Tax Rate Looks Like

Perhaps treasurer Josh Frydenberg should book a visit to Bermuda to learn about their wonderfully industrious workers. After all, according to IRS figuresUS companies earned $45m USD of pre-tax profit per Bermudan employee in 2016!

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Source: IRS

Although the Bermudans may claim that ditching suits for shorts boosts productivity, the real reason behind these astronomical figures is tax evasion. Cunning accountants for US companies structure their operations so that profits are reported in low tax jurisdictions. Companies often don’t need to have any physical operations in the tax-haven country, with one 5 storey building in the Cayman Islands being the registered office address for20,00 corporate entities!

Australia’s uncompetitive tax rate is one of many reasons for its sputtering economic growth. Foreign companies are unlikely to do business here if there’s little profit incentive. Despite having no natural resources and having to import half of its water, Singapore is one of the richest countries in the world thanks to its accommodative business conditions. It’s quite possible that lowering the corporate tax rate would actually increase revenues, but more on that next week!

Cheese Chooses MC’s Over Mozart

What is the best music genre out there? According to cheese, it’s Hip Hop! Swiss researchers exposed emmental cheese to A Tribe Called QuestLed Zeppelin or Mozartover 6 months and then invited a culinary jury to give their verdict.

Hip Hop came out on top, with a stronger, fruitier taste!

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Source: Bern University of the Arts

Name That Line!

Congratulations to Jeff and June, who seized the day last week and got themselves a bottle of red!

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But what was this famous line?

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Pic of the Week

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Video of the Week – When A Lyrebird Watches Star Wars

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