TW3 – Where Are The Customers’ Yachts?

Market Wrap

At this stage it would appear that our market wraps are simply highlights from Donald Trump’s twitter feed! Trump triggered the worst week for global shares in 2019 on Monday, with most major markets falling 1% – 2% in response to the tweets below.


As we have been writing for more than a year now, readers would be wise to refrain from basing any investment decisions on Trump tweets. This is nothing more than a ploy to strong-arm China in trade negotiations, and is unlikely to have any long-term significance.

In local news, the RBA left interest rates unchanged for the 30th meeting in a row. This was the first meeting in several years where there was actually a chance of interest rates being adjusted, with the combination of low inflation and the housing downturn making a rate cut increasingly likely.

Finance 101 – Irrationality

In last week’s TW3, we offered our readers a bottle of wine if they correctly predicted the winning portrait in the Archibald Prize. There is a subtle, but important, difference between asking which portrait you thought was best and asking which portrait you thought would win. Choosing your favourite portrait is simple, predicting the behaviour of others can be quite difficult.

In essence, when we invest we are betting that in some point in the future other investors will like our investment more than they do today, and will be happy to pay a higher price for it. In other words, we are making a prediction about the future behaviour of others. The economist John Maynard Keynes called this second degree decision making – successful investing isn’t finding the best asset, but rather finding what the market will think is the best asset.

This is arguably the most difficult aspect of investing – how can we predict the behaviour of others when there is ample evidence that they act irrationally? Why would a doctor still smoke cigarettes despite knowing the risks of smoking? Why would someone feel uneasy boarding a plane but feel fine getting into a car, despite the risks of being in a car crash being significantly higher? Why would someone buy a lottery ticket despite being five times more likely to be struck by lightning?

The correct answer is that there is no way to reliably predict the behaviour of others, any investment manager who tells you they can is full of it!


Germans Killing Inflation

So who is to blame for Australia’s persistently low inflation? Although Amazon is a usual suspect, a new report from PwC suggests a new scapegoat – ze Germans! According to the report, Aldi’s attack on the Coles-Woolworths supermarket duopoly has saved ALDI customers $2.2b per year, whilst shoppers at other supermarkets save $450m per year thanks to price competition.

One of the issues with the RBA’s view of the Australian economy is that it is constrained by the textbook belief that low inflation = weak economy and high inflation = strong economy. Accordingly, if we were spending more on groceries each week, the RBA would conclude that we’re in a better position to absorb increases in mortgage and credit card rates than if we were saving money on groceries. This is so out of touch that only an esteemed academic could believe it!

Cowboys Get Caught Short

With the TV show Billions currently in vogue, the glamorous perception of hedge funds as cowboys who can master the financial markets has made an unfortunate resurgence. We do not include hedge funds in client portfolios for several reasons, the most pertinent being that they charge eye popping fees for mediocre performance. In the words of Warren Buffett “performance comes and goes, fees never falter

A couple of weeks ago we read the below headline on Bloomberg and thought that this could only spell trouble. What hedge funds en masse were doing was making a bet that volatility in share markets would stay low, what could possibly go wrong?


Alas, Trump’s tweets about the trade wars triggered volatility in the markets this week, and the index that hedge funds were betting would go down actually increased by more than 50% in less than a week!


Whenever you hear of hedge-fund cowboys and Wall St bigwigs living the good life in their yachts, you should ask yourself one question – where are the customers’ yachts?

Not All Downturns Are Created Equal

An underappreciated aspect of the property downturn in Sydney is that not all suburbs have been affected equally. As we can see in the table below, the last 12 months have been markedly different for homeowners in Gladesville and Neutral Bay.


The effect of the downturn also varies depending on whether the investor bought a house or an apartment. Houses in Paddington have risen 2.2% over the last year, whilst apartments in Paddington have fallen by 15.9% over the same period!


As always, keep a few grains of salt handy when interpreting numbers such as these. The methodology use by Domain has not been made clear, meaning that the figures may not be reliable. Data providers often do not make basic adjustments to ensure apples aren’t being compared to oranges (e.g. comparing a three-bedroom unit sold in 2018 to a two-bedroom unit sold in 2019 is invalid if we don’t adjust for the differences in # of rooms).

Berkshire Meeting/Munger Interview

Berkshire Hathaway, the conglomerate ran by Warren Buffett and Charlie Munger, held their annual shareholder meeting over the weekend. Although there were plenty of highlights from the 5 hour lecture, we found Charlie’s interview with the Wall St Journal much more insightful. A few of our favourite highlights:

On selfishness

A lot of people think that real selfishness, very extreme, is what works. But it doesn’t. If you have a reputation for being decent to work with and unselfish, you make more money, not less… good morals and a reputation for good morals are enormously valuable, and it’s just so simple…. The right way to go through life is win-win. Just anything else is crazy. To be all take and no give is just an absolute disaster.

On taking your chances

You only get a few opportunities, and you have to grab them aggressively when they come because even in the most favoured life, they’re really rare… that lesson is taught in no business school I know of. But everybody who has any sense ought to know that at the start of life, and practically nobody does.

On financial education

Of course they tend to teach things as if investment were radiology: Anybody can learn it. And anybody can learn radiology. They know what cancer looks like, what and what, and you can learn it. But there is no such thing in investment where you can just learn it and it will always work. There are times when it works well and times when it doesn’t

On getting ahead

I just set out to avoid the standard stupidities…And it’s a way for mediocre people to get ahead and it’s, it’s not much of a secret either. Just avoid all the standard stupidities. There are so many of them, and so many brilliant people do it.

Being a prodigy is hard. I’m not trying to be a prodigy, I’m just trying to avoid the inanities, including the inanities of the prodigies! That enables a man of moderate abilities and moderate work habits to get so much more than his logical deserts.

On the investment industry

We have a lot of stupid people in the investment world. Everything gets overdone and overpushed when you’re feeding it gazillions of young men who want to get rich, and all of them are bringing in more young men want to get rich, and of course that’s created a ghastly culture.

Archibald Prize 2019

Thank you to all our readers who sent through their picks for the Archibald prize last week!

Unfortunately, none of our readers picked the winning entry, with Sydney artist Tony Costa taking the top gong this year for his portrait of fellow artist Lindy Lee.


Hubble Releases Most Detailed Photo of Galaxy Ever

Ever wondered what 265,000 galaxies look like? Now you do!

The team at NASA has compiled 7500 images taken over 16 years to create the largest image of space ever! You can have a scroll through the galaxies here, otherwise, this video gives a glimpse to just how big our universe is!


Reminds us of the Serbian proverb “Be humble, for you are made of earth. Be noble, for you are made of stars


Name That Line!

Andrew and Irene had us at hello last week!


But what was this classic line?


Tweet of Week


Video of the Week – How Far We’ve Come!

Jonathan Hoyle, CEO & Nicholas Stotz, Investment Analyst

Stanford Brown

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