TW3 – Vale Bob Hawke

Vale Bob Hawke

With the passing of Bob Hawke, there was no other choice for our video of the week than his infamous advice for Australia’s bosses after our America’s Cup win in 1983. Hawke’s passing serves as a painful reminder of how poor the current generation of Australian leaders is. Here’s to Bob, and let’s hope our new prime-minister can live up to his legacy (we’re not holding our breaths).

Market Wrap

It was another wild week for global shares, with markets falling sharply on Monday and Tuesday only to recoup those losses overnight. American shares posted their largest loss since January to begin the week, as investors responded to reports that China would be increasing tariffs on selected American goods. Markets then rebounded after Trump showed signs of being reconciliatory, with shares now flat for the week. You may wonder what an adviser means when they suggest tuning out the noise, this week is a prime example – lots of talk, lots of trading, yet prices are the same today as they were to start the week!

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In other news, the ridesharing platform Uber laid an egg in its debut on the New York Stock Exchange. Only two months ago, pundits were forecasting a $120b USD valuation of Uber, today, the market is valuing the company at roughly $70b USD, with some analysts forecasting further falls in the shareprice.

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Finance 101 – Recency Bias

When engaging a financial adviser, most investors will be asked a number of risk-profiling questionnaires that go along the lines of “On a scale of 1-5, how comfortable would you be with a 20% loss in your portfolio”. Investors tend to overestimate their comfort with risk when answering these questions, in large part thanks to the recency bias.

The recency bias occurs in investing when we look at the recent past to predict the future. If the market has been trending up recently, we usually expect the market to continue doing so. When the market has sold-off recently, we usually expect the market to continue trending downward. Of course, this line of thinking is flawed, but that doesn’t stop it from creeping into our psyche.

We tend to overstate their comfort with investment risk because the future is uncertain. Nobody knows for sure how deep a sell-off will be nor how long it will go for. If you knew for certain your portfolio was going to drop by 20% then rebound in 3 months, you probably wouldn’t bat an eyelid. But when you’re in the midst of the sell-off and your portfolio is bleeding, the recency bias creeps in and we’re likely to wonder whether we should sell-out and avoid the rest of the downturn.

The true value of an adviser isn’t to deliver a flawless strategy, but rather to help you stick to the plan when you feel the urge to make drastic changes to your portfolio. There are few emotions quite as rich as losing important money, and our advisers are here to help you resist the urge to make common mistakes that guarantee underperformance.

There is Always Cause For Concern

Since the GFC ended, the S&P 500 has fallen more than 5% 24 times. Each downturn was driven by legitimate fears about the global economy, and during each downturn a convincing case was made that a major crisis was imminent, and that investors should get out before shares get clobbered.

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Source: Charlie Bilello

Alas, on each occasion the fears were overdone, and investors who resisted the urge to sell have been rewarded with handsome returns.

Who Pays Tariffs?

We promise this is the last Trump tweet we’ll cover! (for this week at least…). In the tweet below, Trump claims that Chinese companies have paid tens of billions of dollars in tariffs. Whilst this might seem like a win for America, the unfortunate truth is that most of these costs will be borne by the American consumer.

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Chinese corporations aren’t charities. When their cost of business increases (e.g. by having to pay tariffs), they will do whatever it takes to maintain their profit margins. More often than not, that involves raising the prices of their goods.

This is why large fines for corporate misconduct are hollow victories. If you fine CBA, they’ll just pass on the fine to their customers. Fines punish shareholders (who own the company) and customers (who have to pay higher fees). The managers and senior executives who are responsible for the misconduct usually just release a generic apology to the public, issue a new statement of corporate principles, and then continue business as usual. Just look at former CBA CEO Ian Narev’s track record!

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Self-Managed Misallocation

In last week’s Finance 101 we argued that the hardest aspect of investing is predicting the actions of others. Many academics and institutional investors deal with this issue by assuming that all economic actors are rational. They make investment decisions based the assumption that all investors are emotionless, perfectly rational utility maximisers. The issue with this way of viewing the world is that it is categorically false.

Take this week’s ATO report on SMSFs, which showed that pension SMSFs held significantly more growth assets (e.g. shares, listed trusts) than accumulator SMSFs, whilst accumulator SMSFs held more cash. There is no logical reason why this would be the case, and yet here we are.

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Aside from an interesting insight as to how thousands of Australians are mismanaging their life savings, the ATO’s report is yet another example of how any investment philosophy that makes decisions based on rational investors is almost always doomed to underperform.

The Easiest Way To Get Ahead In Life

One of our favourite quotes comes from the investing legend Charlie Munger “It is remarkable how much long-term advantage people like us have gotten by trying to be not stupid instead of trying to be very intelligent.”.

Just ask the Indian navy, who have had a $3b USD submarine out of commission for a year because someone forgot to close a hatch.

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As investors, it is natural for us to think that the way to get ahead is to outsmart the competition with a sophisticated strategy. More often than not, avoiding elementary mistakes (like forgetting to close the hatch) is all you need to do.

Name That Line

Wait a minute Aaron and Carla, are you telling us you built a time machine out of a DeLorean?

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But what’s this classic Australiana line!

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The Best of Nature

Ever wondered what the last thing a fish sees before they see a bear? Well wait no more with the winners of Big Picture’s Nature Photography Competition!

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Pic of the Week

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