Interesting article

I found this article about investing in the Australian sharemarket interesting, and thought I'd share it.

Why long-term success is being held hostage to short-term thinking in our companies | AFR | Loftus Peak

It covers many issues, which experienced investors would be familiar with, but other newer investors not - investing in the index, effects of the franking system, international exposure and disruption, issues with small caps, etc.

Of course the author is probably talking his book a bit, since he seems to be an investor in overseas "disruptive" businesses. However i think the points are valid. I don't follow or invest in the author's fund, just found the article covered a few interesting bases about investing in the ASX

 

Franked dividend payments and short-termism go together like peas and carrots. In the US, where there is no dividend franking, companies do not provide significant dividends to shareholders, preferring to re-invest the cash that would otherwise be paid out, so generating a return on the return. However, in Australia, the pressure on the top 20 companies to pay a dividend makes re-investment in the kind of innovation that will disrupt their businesses in the near term and grow them down the track that much more difficult.

Thanks for posting Bingomaster.

In defense of dividends ;

Plenty of nonsense in this statement. Tech stocks don't pay dividends for the most part due to requirement to reinvest. However, very many wide moat stocks in oil, health, consumer staples have very strong dividend cultures. Here is Johnson and Johnsons for example for the last 20 years ;

What I would also say is the a dividend policy enforces a level of capital discipline on management - making sure money reinvested in the business creates value, rather than just having carte blanche to waste capital....one doesn't need a long memory to present a catalogue of capital wasted on growth initiatives in our market. On the "short termism" thing, short term "at risk" pay levels and quarterly reporting is as big a problem in the states as in Oz....and allow management to spend capital to get short term share price appreciation, you can rest assured they will.

Long term (50 years +) dividend payers have out performed in both Oz and the US market from a total shareholder return standpoint. There is something in that....

He is right about the index hugging managed funds though......career risk is the main cause of that!

 

Thanks for the link,but i like this quote..
quote..
A comparison of the 2014 and the 1995 Fortune lists of the top 100 companies in the US reveals a startling fact: 44 of the names have vanished. The average lifespan of a US company has dropped from about 60 years in 1960 to less than 20 years. At the current churn rate, 75 per cent of the S&P 500 will be replaced by 2027. People now live longer than companies.*

..wacko..

 

The "Vanished company" thing is misleading.....outside of tech related stocks (which are often shooting stars) the majority of the "vanished" are acquired and delisted, with shareholders paid out.

Happened to me with one of my favourite stocks Veda....it was a good business but was unfortunately sold from under me. I had to content myself with 25% capital gain in the 8 months I held it Mind you, I imagine the Toll shareholders were extremely happy to be let off the hook by Japan Post last year at a 50% premium to the share price! Dig through and most of the large cap vanished end this way.......not with share price going to zero as many imagine..............

 

From my reading on Mr Buffett & Berkshire recently this is certainly a very strong argument.

Basically in Berkshire owned companies management had to explain how they could deploy the capital within the company better than Berkshire could elsewhere. If they couldn't it was paid as a "dividend" and placed where it could be best used ensuring a practice of best return on capital and management thinking carefully about spending. Following this example, taking dividends and putting them where they are of best use makes sense to me.

 

Dividend policy partially mitigates the issue of "agency risk", which is the divergent priorities of management and owners. Only businesses with a very high bar for capital allocation and rusted on management not interested (not paid!) short term incentive are those that I will happily allow to deploy my share of earnings as they see fit. Berkshire and Markel being the only two in my portfolio.

 

Thanks for the discussion guys and taking the time to pick some points apart.

The Falcon - thanks for the posts re: dividends and challenging that part of the article - thats the part I actually had problems with as well. You expressed it much better than I could though

The risk of underperforming the index and associated index hugging part is what really got me. I remember seeing a presentation by a high performing LIC a while back where they said most fund managers see risk as underperforming the index, deviating from the index. Whereas they saw risk, "crazily enough," as the actual loss of capital. I know which one more closely matches my own idea of risking my money!

It really struck me then - these funds managers aren't scared about you losing your money, as long as everyone else also loses by the same amount. They don't lose their jobs in that situation

 

Bingo, that is a fairly true summation. A lot of that comes down to mandate. A large broad based "Australian Equities" fund comes with an expectation that the fund will provide exposure to the broader Australian market and outperform at the same time. Positive variance from the index and you are a genius, negative and you are in trouble....and risk loss of FUM, and your job. Problem is, effective strategies will result in both of the above at different times. So safer to hug the index and take a few punts that might move the dial a bit.

Managers with specialist mandates generally have more leeway, as its sold to investors that periods of underperformance are to be expected, but in the long term the strategy will work. Problem is though, easy to accept this when things are going well, but after years of underperformance ( relative to broad market index) then the faith will start to waiver and outflows result.

 

Yeah, here's an example of a high conviction, non-index aware fund lead by a so called "master of the universe" investor:

Superstar investors have forgotten investing 101

No problem with a good active, non-index aware fund manager. However beware of some fund managers talking one's book whilst criticising other proven strategies. Hedge funds in particular are notorious for this. Research carefully and choose wisely. And remember with high reward comes high risk!

There is room for both active and passive in one's portfolio as in the core and satellite approach for example. And passive doesn't have to always mean just index funds.

"What is 'Passive Investing
Passive investing is an investment strategy involving limited ongoing buying and selling actions. Passive investors will purchase investments with the intention of long-term appreciation and limited maintenance."

It could even be a well diversified Industrial share, income producing portfolio with limited maintenance!

The Falcon what do you reckon?

 

@austing i think you might be on to something!

 

Some go that way,a few startup miners i bought in at the start went from 45 cents back too 4 cents then the company was taken over buy a larger Indian base company,and that's what they paid all the unit holders,"4cents",and i think if you went back 25 years there are several listed
have had a high mortality rate within Australia,just that no one ever talks about those companies,and if one was to study the USA airline industry over a 30 year span,apart from the companies that were bought out,a lot ended in zero balance sheets..

 

Ah yes for sure. Airlines and miners, terrible businesses suitable for trading only. Pretty much the poster children along with tech of "not suitable for buy and hold".