LIC & LIT QV Equities - LIC - Small/Mid Cap (ex-ASX 20) - Australia

Yes in the updates, Geoff keeps mentioning that we are x years in to the bull run and are closer to the end, so gently preparing shareholders for that. Perhaps this warning will cause nervous/cautious shareholders to sell out...maybe it will correct back down to NTA

 

yes, it has been a long bull run. Many Wilson fans are very loyal I would not expect many to sell out unless there is a market correction. Then some people will just sell everything. WAM goes ex div soon I think???

 

Wilson has been predicting an immement Crash for well over a couple of years now. The danger he’s likely concerned about is as mentioned shareholders who have been silly enough to do what he never does or recommend, ie pay a premium and in recent times a very large one for WAM / WAX. When NTA normalises or worse there may well be a lot of pain for those who have overpaid.

 

ETFs could trigger the next 1987 crash: Geoff Wilson

Fund manager Geoff Wilson witnessed the 1987 share crash firsthand as a 30-year-old stockbroker, and he warns that exchange traded funds (ETFs) are eerily similar to the portfolio insurance that triggered the 25 per cent fall that remains Australia’s biggest one-day share slump.

 

WAM got hammered in the GFC/severe dividend cut (potentially unlikely to be cut so severely again due to changes). There will always be some nervous types and without any support the price will crash. Many will happily hold, they won't dictate the near term price.

I overpaid NTA is still chasing my price

It will be very interesting to play along when a bear walks into the room. QVE has been interesting and only a short term thing, only a few people seem to have come along to the QVE NTA discount party. WAM is a similar, yet grander, situation with has been developing over a much longer time frame.

 

Yes the change you mentioned that should reduce the impact of a future market crash on dividends / NTA with the likes of WAM in case others aren’t aware was this:

The biggest threat to not just WAM but LICs in general is Labor’s proposed removal of franking credit refunds. Hence why we’re seeing headlines like this:

Geoff Wilson is ready to march in the streets over dividend imputation changes

Interesting times ahead.

 

His vested interests aside, it seems the crux of his argument is that the problem will stem from people want to sell their ETF’s en masse during a correction.
Is that what ETF investors would do though? I may be miopic from spending time on PC with long term intelligent ETF’ers, but isn’t the idea of an ETF to hang in and obtain passive market results over longer terms?
What is the opinion of people here about how ETF’s would be panic sold in great numbers or not?

 

My memory of share market corrections and I am old enough to remember a few is that some people stampede to the door with "sell" above it. There are a lot of casualties and blood on the floor. It is very hard to sit on your hands and recite your personal mantra of "here for the ride - bank the dividends" when there is carnage all around you. Many did and when it comes again many will sell. My 2c

 

Everyone will hurt when people head for the exit, I don't believe it to be a any more of a problem for ETFs. There is two sides for every trade be it ETF, LIC or individual equity. Sellers lowering their price to find liquidity is pretty much the definition of a crash, I don't understand how defining something using different terms adds anything. Maybe I am missing the point?

ETFs are a varied bunch these days, indexes of various flavours, leverage, options/short, value, yield and actively managed - The psychology behind some of these isn't sit back and hang on.

 

Active Mgr with vested interest more likely. ETFs are as liquid as the shares they invest in. If one invests in broad based cap weighted index ETFs run by reputable Mgrs then there’s unlikely to be much to be concerned about. As for niche ETFs then it’s a case of buyer beware.

Beside long term investors particularly accumulators should be thrilled at the buying opportunities any potential liquidity problems provide. Just make sure your not a forced seller. Do you honestly think Vanguard will go bust and / or their ETF market makers join the weak hands running for the hills?

PS: Just saw @Hodor ’s post so repeat of some points.

 

That makes a lot of sense. Thanks @Hodor for the wise words.

 

I have no experience in a crash and thank everyone here for their insights into one.

ETF investment is massive these days compared to pre-gfc. I don't know exactly the demographic but you have your bogleheads, FIREs, SMSFs, etc. Are they going to sell on mass during a correction? All the literature and forums say don't sell but talk is cheap. My "guess" is that a fair proportion of inflows into ETFs are new to the market investors like me. This makes them more likely to panic sell.

Regardless, I can see how a panic sell of ETFs will send the markets down even faster than previous crashes as the funds are forced to sell off. It will NOT be easy to find buyers with that volume of sells, which then push the market down further. Remember this is all algorithmic, once it starts there is no switch to turn it off. It will crash very fast IMO.

The sunny side is that it will take us faster to the point where we can buy in. It may overshoot but that's a good thing.

The aftermath will be forums of people saying they thought ETFs were safe because they are diversified and they won't buy into the market again. Cycle goes on.

In summary: I am guessing that algorithmic ETFs (all of them) will be forced to bring the market down faster and harder than ever before. All that means for us is the opportunity to buy should come sooner as we know it can't go to zero. There may be a lot of people who have predicted this and are waiting to cleanup. Once again Mum and Dad investors may be the losers. We can't time this thing so we have to be prepared to buy. The fast drop may mean a faster early pullback so be ready for that absolute bottom.

Not advice and just a logical guess.

 

Not saying this is or is not a factor but my understanding is an ETF can issue or redeem units to meet excess demand or supply. So I guess - and that's all it is - if everybody wants out.........

Then it is probably only to enable the ETF to provide additional liquidity in some manner.

However, if you're into synthetic ETFs, it's likely to be a whole different story.

 

Interesting views. I haven't really experiences a crash either, I've held a couple of shares for 20+ years, but nothing serious until post GFC so it doesn't really count.

IMO it appears to be a beat up. The market crashes because there is no one willing to buy at previous prices (on gloom, possibly valid) so the buyers have to come down to meet the sellers who as always want to pay a lowest price. Two sides to every trade.
I don't see how changes in investing strategies/methods will result in more or less people loosing their nerve, this would come from a general mindset change. There is a % of people who will head for the doors and a % who will hold. As always a natural balance will be established between those running to exit and the money available and willing to support the market where they see value. And again I think those willing to support the market/holding cash probably represent a similar %, the bigger the crash the more sellers a buyer can support.

Happy to be corrected if the above is rubbish.

 

I spread my investments across “close end” assets like LICs and “open ended” assets such as ETFs but not because I worry about how they will go in a crash / bear market which I’ve now experience a few times. Shares are shares no matter the structure they are held in. If ETFs weren’t available most investors including new ones would still likely be investing in active managed funds.

An even worse structure in my mind because the same weak hands will be scrambling to redeem their investment and there’s a possibility you might not even get your money at all if the Mgr freezes redemptions. Might be a good thing in some ways (protecting you from yourself) but if you genuinely needed your money it could be a nasty situation.

But it’s all of little concern provided you never put yourself in a position of being a “FORCED SELLER”. In bad times accumulators can lose their jobs and many retirees reliant on drawing down their equity capital may get into difficulty when Capital gets decimated. Hence plan for such events using common sense things like avoiding getting greedy, keeping debt manageable, maintaining a cash buffer incase one losses their job or equity capital is insufficient to meet retirement expenses.

And most importantly get your head in the right space so you don’t do something stupid. Spend your time learning about and mastering your behavioural weaknesses. What to invest in is so rediculously easy for most so don’t waste too much time there. Focus the majority of your energy on having a simple written investment plan, maintaining discipline and on anything that increases your chance of “staying the course” no matter what is happening in the market. Investing success in really a mind game more than anything.

 

Quote..

Once again Mum and Dad investors may be the losers. We can't time this thing so we have to be prepared to buy. The fast drop may mean a faster early pullback so be ready for that absolute bottom.

There is some very good post's prior to the ÇFC in the old site ,in the lead up and what happened and as success can be a state of mind and that success is usually attributed to discipline -and the maximum loss one is prepared to sustain..

Mum and Dad investors won't be monitoring their daily profit and loss and analysing the raw results on a monthly basic ,and writing down notes to remind oneself and the dos and don't to reinforce discipline ,because most have never settled on a trading style in the trump-sober free world,everything is in other peoples hands..

 

Very good points and could very well be right. My prediction is mostly based on increased algorithmic trading that will pull the trigger without human intervention that then kick off a chain reaction of selling that can't be stopped. The fact that ETFs are algos and have such a big portion of the market implies they will act like a gravitational force pulling the entire market down. May be completely wrong too.

 

However, the ETF may algorithmically sell sell sell, but wouldn’t it also be buying other stocks to maintain index weighting? Slowing the overall decline?
I’m imagining say a crash starts with the banks for some reason, the ETF will be rebalancing into other sectors. And only reducing (net selling) as mums,dads,fund managers and other humans are pressing the sell buttons (or set pre defined sell triggers). So it’s all about what the humans sell or have set triggered to sell. Eventually hit a bottom and then up again.
I do agree that logically it could be faster than the days of the past.

 

If all shares in the market drop in unison then you are right that the ETF has nothing to do in terms of rebalancing and the only change is the ETF NTA. Buying and selling will be triggered by discrepancies in the falls of shares.

What happens when humans liquidate ETFs? Will that also trigger selling? What about funds invested in ETFs that are rebalancing?

 

Market cap indexes don't require rebalancing (outside entrances and exits from said index).

Rules based might have other considerations outside of just price. I guess this could be an issue if stress causes rebalancing leading to cap gains/losses when not wanted etc even if the ETF holder is just holding.