TW3 – Harley Davidsons and Useless Economists

Market Wrap

Technology stocks have rebounded strongly in June after posting losses in May. The market has taken comfort from recent comments from the Fed about the possibility of lower interest rates ahead and from the resolution of the proposed Mexican trade tariffs. The tech sector’s rally has come just days after regulatory investigations into Google parent Alphabet, and Facebook sent the Nasdaq 10% down from its May record. In just five trading sessions since, the Nasdaq has advanced 6.7%. Microsoft, the world’s largest public company, has seen its market value once again exceed $1 trillion.

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Finance 101 – Risk vs Uncertainty

A simple yet important distinction for investors to make is the difference between risk and uncertainty. Risk is where there are a known number of outcomes that may occur in the future, and we can try to assign probabilities to make an estimated guess. Uncertainty is where we don’t know what may happen in the future, making it difficult to make predictions about the future. If you bet $100,000 on the roulette table, you are dealing with risk but not uncertainty. You are risking that the number the ball lands on is different to the one you wagered on, but you know exactly how many numbers are in the roulette wheel.

If you invested $100,000 in shares, you are now dealing with uncertainty. Trump’s antics this year are a perfect example of that. Will he raise tariffs? On who? By how much? When? For how long? Will he compromise? Is he bluffing? Will the other country retaliate? How will he retaliate to the retaliation? These are all questions that affect investor sentiment and therefore share prices, yet nobody can be reasonably certain what the answers to these questions are. This is just one of thousands of pertinent variables that affect share prices which display uncertainty.

So how do we deal with uncertainty? It helps to have the humility to admit there is uncertainty! Every now and again a new team of brilliant investors armed with PhD’s in astrophysics and quantitative finance will claim that they’ve mastered the markets, only for them to inevitably go down in flames (e.g. Long Term Capital Management).

At Stanford Brown we deal with uncertainty by focussing our efforts on managing our clients’ exposure to risk. We do not promise astronomical returns, nor do we guarantee that every year will be a smooth ride. What we do promise is that we will diligently manage your portfolios with the underlying aim of achieving your financial goals with fewer, shorter and shallower setbacks.

Writing a Will – Risk vs Uncertainty

Stanford Brown works with a panel of excellent professional law firms to help our clients write their intergenerational wealth plans. Inevitably, people always focus on the question of “where should the money go if we both go?” In particular (and understandably), Wills are often re-written in advance of a long plane flight. There is risk with flying. But there is certainty with buying that Harley and taking your partner for a spin. In fact, you are 3,028 times more likely to die on a motorbike mile than a plane mile.

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Some Stanford Brown End of Financial Year Tips

With the end of the financial year looming, here are a few considerations to keep in mind:

  • If you’re in super phase, review whether you have maximised your tax-deductible contributions
  • If you are drawing a pension, make sure you have taken you minimum payment
  • The 30th of June falls on a Sunday this year, meaning any additional Super contributions must be processed prior to June 28
  • If your partner earns less than $40,000, you can make super contributions on your partner’s behalf and receive a tax offset
  • Under the First Home Super Saver Scheme, first home buyers can voluntarily contribute a maximum of $15,000 per financial year to their super.

‘This Time It’s Different’

Are the four most scary words in the English language, argues legendary investor Howard Marks, in his latest quarterly missive. The founder of Oaktree Capital (one of the largest distressed debt investors in the world) equates this phrase to “the cheque’s in the mail” (which somewhat dates him!) and discusses eight impossible things the market currently believes:

  • There doesn’t have to be a recession
  • Continuous quantitative easing can lead to permanent prosperity
  • Federal deficits can grow substantially larger without becoming problematic
  • National debt isn’t worrisome
  • We can have economic strength without inflation
  • Interest rates can remain lower for longer
  • The inverted yield curve needn’t have negative implications
  • Companies and stocks can thrive even in the absence of profits

Mr Marks is compulsory reading for anyone wanting to better understand markets. And he writes with the clarity of the truly informed.

Useless Economists

In January of this year, the Wall Street Journal asked a bunch of leading economists where they expected the yield on the 10-year Treasury note to be at the end of June. It was then 2.6%. Today it is just 2.09%, confirming the adage that “an economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today”.

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Useless Markets

But are markets any better at predicting future moves in interest rates than economists? Well, it would appear that markets (in this case the short term interest rate futures market) is equally inept at predicting the future path of Fed rate hikes. Ever since 2009, the market has been expecting the Federal Reserve to lift interest rates, all to no avail.

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KIPPERS (Kids In Parents’ Pockets Eroding Retirement Savings)

One-half of US college students plan to move back home after completing their studies, and a majority of parents are ready and willing to accept them (ed- really?), according to a new survey conducted by the Harris Poll on behalf of TD Ameritrade. And when moving back in with their parents, these young adults are not just thinking about a quick stop. In fact 31% of them move back for two years or more. And this time around, the stay will likely be rent-free. However, 38% expect to pay an average of $486 a month while living at home, the survey indicated.

Get Rich Slowly

J.D.Roth, author of Get Rich Slowly, shares his thoughts on the Seven Enemies of Success. Remarkably simple, practical advice for all of us.

  • Lack of discipline – it’s impossible to get rich if you spend more than you earn. The math just doesn’t work.
  • Materialism – stuff will not enrich your life. It’s so very easy to find yourself “keeping up with the Joneses”, succumbing to lifestyle inflation. But materialism breeds discontent. Instead, focus on intellectual and spiritual pursuits to obtain fulfillment.
  • Debt – not all debt is bad, of course. A reasonable mortgage on a sensible home is fine. But consumer debt — or a bad mortgage on a big house — is an enemy to financial success.
  • Taxes – “it is not unpatriotic to reduce paying your taxes.” We should instead actively work to keep our tax burden as low as possible.
  • Inflation. Inflation is wealth’s silent enemy. It will not destroy you all at once. But it’s always there, nibbling at the corners of your life, consuming a little cash every year.
  • Investment mistakes. Poorly structured investment portfolios can be a killer. This enemy is fought through education, through an understanding odiversificationand asset allocationby taking the emotion out of investing.
  • Emergencies. The final enemy to financial success is the unexpected: unemployment, death, illness, and legal complications. Without a plan for emergencies, you leave yourself at the mercy of the fickle fates.

TW3 Funny

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Video of the Week

Watch what happens as French tennis player Nicolas Mahut goes out of the 3rd Round of the French Open at Roland Garros. This will melt the heart of even the most cynical!

Jonathan Hoyle, CEO & Nicholas Stotz, Investment Analyst

Stanford Brown

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