Long Term Investing Valuation and Timing Strategies

Re: Accumulating Cash (at end of 2014 start of 2015 article)

Earn three times more than cash rate

You might be surprised to learn that an investment in government bonds could have generated 7.8 per cent over the past 12 months; that's what the BT Government Bond Fund returned after fees. That is a pretty healthy return from a fixed-interest fund, particularly given shares only returned 4.61 per cent over the same period (measured by the S&P/ASX 200 Accumulation Index, which assumes dividend reinvestment).

Analysis by YieldReport showed other bond funds that performed well were PIMCO and Legg Mason, returning 6.7 per cent and 7.5 per cent respectively. The international bond funds of PIMCO and Legg Mason gave even better returns of 11 to 13 per cent after fees. Many of these funds can now be bought directly on ASX through its new mFund platform.

On 3rd July , 2014 the Dow eclipsed 17,000 points for the first time and on the 25th January 2017 breached 20,000 points

New highs are normal, if they weren’t, we wouldn’t beat inflation

Nobody rings a bell at the top (or the bottom) of a market (proverb)

 

These percentages mean nothing to me. Tell me what the income distribution is? Is it greater than 6% and likely to grow faster than the rate of inflation "perpetually"? And is the distribution mostly trading profit which could dissappear tomorrow if these magnificent traders get the bets wrong?

The reality is that bonds pay crap income. For asset allocators reliant on living off their capital they help smooth capital returns (you hope). Dividend investors see bonds as a woeful source of income and hence avoid them like the plague.

 

Do prices of dividend funds like VHY drop a bit ex dividend?

 

How to Produce High Quality Investment Research

Excellent research in the following report:

PREDICTING STOCK MARKET RETURNS USING SHILLER CAPE
Jan 2017

http://www.starcapital.de/files/pub...tock_Market_Returns_Shiller_CAPE_Keimling.pdf

 

Hi Everyone
I have been following Meb Faber, who puts out a huge amount of free research, and is one of my favorite financial writers. He is also a big fan of the CAPE ratio (and often references STAR Capital research). He has written a white paper on using the CAPE to build a basic trading system, link here
White Papers | Meb Faber Research - Stock Market and Investing Blog
it is the third paper down.
He has also written excellent white papers on timing the market using a 10M SMA (Quantitative approach to tactical asset allocation), and others. He has also written extensively on cloning the best value hedge funds using 13F filings.

I use his stuff a lot, nothing fancy but a lot of common sense.
enjoy
gavin

 

Totally agree and I'm currently backing of and accumulating cash, also have switched one of my funds from Geared to Bonds.

There seems a general reticence about bonds. Bond funds seem to do ok averaging around 4-6% p.a

 

Don't get me wrong with bonds. There's nothing wrong with them. It just depends on the approach of the investor. They are great for smoothing portfolio total returns for those who may need to draw down Capital in retirement and / or believe in asset allocation. In our case we follow the dividend investing approach. Even if dividends were cut deeply they would more than meet our generous lifestyle expenses. So given capital volatility is irrelevant to us (ie we're not drawing on capital) so is the need for bonds.

However in both cases sensible investors would maintain a cash buffer for around a minimum of 2 - 3 years living expenses in retirement.

 

Thanks Gavin. Welcome.

Yes, I've read a number of his reports. They're always a good read. The 10 SMA system has been around a long time from memory. Like all MAvg systems they tend to come unstuck in sideways markets with whip saws causing havoc.

Also would be interested to know your experience using it with ASX? It was a long time ago I tested it finding it not as useful on ASX as with the S&P 500.

As a dividend investor nowadays I tend to adjust my thinking to take into account the fact that dividends are very low in the US vs Australia with its high dividends.

In the paper about CAPE Trading Model the summary stands out:

When I used to trade using T/A and charting, if going long it was a case of buy low, sell high.

Now as a long term dividend investor it's a case of buy low, DON'T SELL! Just like Buffet we generally like to buy assets cheap but also like him we generally like to keep them.

But please share more on how you personally use Faber's strategies. Would love to hear.

Cheers

 

Hi
At the moment I use 2 of his basic ideas which I have tweaked somewhat to suit my own personality, as follows:-
1 - First system is based on his Global Tactical allocation work, the basic system uses 5 asset classes (Bonds/Commodities/US equities/Int Equities/Emerging Equities). It essentially splits your portfolio into 5 equal positions, and you are long the asset class when it is above the 10 month SMA, and go to cash when it is below the 10 Month SMA. I have been trading it with real money since 2010 and it has performed in line with expectations. I have tweaked by adding in his relative strength stuff, which adds to the upside, but does not really affect drawdowns - he did another white paper on this.
It is by no means a holy grail, and an important thing to understand is that using timing such as this does not really do much for your upside, but significantly reduces your drawdowns, which is what I like. The other drawback for us is that in this format it has to be traded in USD.
2 - The other I use with real money ( although only last 2 years) is creating by - Choosing a basket of value orientated hedge funds (Buffet/Third Point etc), Choose the 10 stocks that are the most common amongst those 10 hedge funds, and thats your portfolio. There are a couple sites you can use to backtest this (I use whalewisdom) . I struggled with this for a long time, as there was huge downside, but I have since added a rule that the stock must be above its 10Month SMA, again doesent do much for the upside, but controls drawdowns.

I only moved to Australia in 2008 so have no experience in using any of this with the ASX or its stocks so cant comment on that, but I';m sure it can easily be backtested. Since finding these threads I am tempted to chuck all these systems in and put it all into some good LIC's and just drink homebrew with you!!!

Happy to discuss, I love talking about this sort of stuff.
cheers
gav

 

Thanks Gav,

Great post.

I skimmed the articles again this morning as a refresher. You nailed it perfectly with what stood out to me:

As a dividend investor the capital volatility, the drawdowns are of little consequence. Hence why I gave up trading years ago and focused on long term investing for dividends.

Again my favourite chart visually illustrates the reason behind our approach:


Then throw in a cash buffer for around 2 - 3 years living expenses for retirees to "smooth" any dividend shortfall if needed during rough patches.

But of course not everyone may have started saving early enough or earned enough to be able to eventually live off dividends alone. So drawdowns can't be ignored completely. Hence why some will have a set allocation to bonds (or cash if bond risk high) to help smooth capital drawdowns.

Systems like Fabers take asset allocation a step further. But unfortunately when it comes to trading, psychology is often the reason for failure or giving up. Take MAvg systems, when whipsaws occur and one is stopped out of trade after trade with losses it's very difficult for many to stick with the strategy. Hence psychology, stress (and poor money management) issues are at the heart of why so many traders fail.

Plus in my case I just got tired of following the market and monitoring trades. And what happens if I kick the bucket and portfolio management is left to my wife who has no interest or knowledge in such things. Dividend investing mostly in LICs has not only been dramatically more profitable for us but it's so god damn simple and looks after itself mostly, leaving us plenty of time to do what we choose. And should it be left to my wife to manage it's so easy, bugger all knowledge required.

Cherrs

 

I agree 100%.
I have daytraded now for the last 7 or so years, and psychologically it destroys you. With Meb's systems that I have running where I only update once a month it is much easier as you are not subject to the same decision fatigue, but even so self doubt creeps in when you are in a drawdown, has the system stopped working etc etc.
And running the numbers seems to make more sense just investing in the LIC's. Based on historical backtesting say I can get 14% if I juice up the GTAA system with relative strength etc, returns generally get the CGT exemption, so lets say 7% is taxed at 30%, so net return is 11.9%, which is probably comparable to total return on the LIC's with franking (given that I would never have to sell, and would leave the CGT problem to my heirs...)
Add in the other benefits you mentioned, simplicity, no fx concerns, what happens if I keel over it hardly seems worth the stress.
The only benefit I can see is the diversification it adds, as in a major crash it performs well (or will lose very little).
That and I enjoy this sort of stuff.
Sorry about the ramble but I've been thinking about this stuff a lot lately and how to structure the portfolio going forward and it helps to put my thoughts down and get some good feedback.....am also going to Peter's seminar at Sydney uni in Feb so looking forward to that.
cheers

 

I would be interested if there is an easy source or filter to find companies that LICs (or other funds if you choose) as currently adding to and looking for a consensus.

 

Not sure if anyone does this for LIC's, not that I have come across.
cheers

 

There's sites like this:
Consensus Recommendations (23 January 2017)

You could subscribe to Morningstar (free trial here):
Join Morningstar Trial Membership
One of the better analysis / data sites.

Check announcements pages eg:
Announcements Search Results
Look for changes / becoming substantial shareholder.

@Hodor look out, that bug's trying to bite you again.

Cheers

 

In a perfect market the share price falls by the exact amount of the dividend on the ex-dividend date. The market is not perfect and arbitrage exists, so the amount by which it falls may not be exactly the dividend value. This also excludes scenarios where the market as a whole moves up or down, or there is news about the share.

 

You pay a high price for happy consensus

 

When you say cash do you mean short duration term deposits or a high interest at call account? Does the entire cash buffer of 2-3 years need to be available for immediate withdrawal at any point in time? The reason I ask is if you only ever needed to withdraw say a maximum of 30% of the cash buffer (would there ever be a time when you might say "I need $300k worth of hops because it's at bargain basement prices"?) then the 70% could go into short term bonds that would be planned to mature periodically, say every 3 or 6 months. If in a 3 month period you did withdraw 30% then the next set of maturing bonds could be placed into an at call account. Otherwise more bonds purchased. The idea being that bonds at over 4% are a lot more palatable than savings accounts at 2%. In that case bonds could be working harder for you than the cash rate.

 

In SMSF I keep enough cash in Macquarie CMA to generously cover say 6 month pension payments. The rest of cash is in Ubank Online High Interest account.

Cash is not about maximising returns for us but for liquidity, emergency and opportunity. I want it at call in case of market opportunities etc. I don't want to be waiting for laddered bonds to mature.

If I get conservative with age and decided to deliberately allocate a larger set percentage to cash then I would consider "laddered" TDs (short term bonds?).

Here's a common strategy for those who hold more cash using the "bucket approach";

BUCKET 1 (year 1):
Cash (at call)

BUCKET 2 (years 2 - 10 depending on risk profile):
Laddered TDs / bonds maturing periodically
- eg 1 yr term, 2 yr, 3 yr ...

BUCKET 3:
Growth investments

Useful articles:
The three-bucket approach to retirement investing

See page 15 of attached (Managing risk for retirees):
http://www.stockbrokers.org.au/Portals/2/stockbrokers monthly - MARCH - DRAFT3 - 250314.pdf?ver=2015-03-08-045419-663

 

Based on something @The Falcon said about setting up his own portfolio, I placed the top 20 companies with weightings of all LICs in a spreadsheet and worked out what an ideal portfolio would look like based on an equal weighting of the LICs (I like ie ARG, BKI, MLT, WHF, AUI, AFI, CTN). Theoretically, with enough capital this could be the basis of a LIC with a no-fee (0.01%?) that copies the rest of the LICs - "stealing the IP" if you will, without any effort required in research. But I realised, the buy-in timing was the most important thing and this is where I have little to no idea and probably where the LIC research teams earn their money.

An identical strategy could be used on small /mid caps such as QVE and MIR to get an idea of their portfolios with a significantly cheaper MER. Once again, buy-in (and sell-off although this should be avoided) timing is the difficulty.

 

I see that you need your powder dry for important buying opportunities:
"200 Kg of malt and hops @ $15/kg kind sir and throw in 5000 ARG @ $5.88 while you're at it."

But if the market crashes, what percentage of your cash buffer are you willing to invest @austing?

Thanks again.