Thoughts on my investment Strategy

Discussion in 'Share Investing Strategies, Theories & Education' started by Big A, 23rd Jan, 2019.

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  1. ChrisP73

    ChrisP73 Well-Known Member

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    Good to hear @Islay.
     
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  2. Big A

    Big A Well-Known Member

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    Would probably be best to keep it all in one thread. It’s a continuous journey regardless of the year we are in.
    Would make a good read for me in 10 years time to look back and reflect on. And hopefully along the way those starting there journey stumble across this thread and can skip some of the speed humps and confusion that we all encounter as the start.
     
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  3. geoffw

    geoffw Moderator Staff Member

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    Thank you!
     
  4. Barny

    Barny Well-Known Member

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    Big A are you ready to buy up a little more? Corona virus/media is spooking the markets and looks like a good opportunity to buy up for longer term holdings. These dips will be a blip in history.
     
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  5. Big A

    Big A Well-Known Member

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    Hey mate, pretty much deployed all the cash holdings in December and early this month. Could scrape together 100k-200k by pulling forward future expected income but just waiting to see if it keeps going a little lower before doing that. I have access to PPOR rates debt but would want to see at least a 10% drop to start tapping debt.

    I am not expecting this blip to turn into any significant downturn. The amount of times last year I saw these sort of short term dips to only regain it all within days.

    Now that I have gone all back in I don’t find myself watching every dip so closely waiting for it to turn into something bigger.

    even though I said this year all capital will be directed to equities I will confess that I am about to pick up another unlisted property trust. I put my hand up for 300k in a office asset in Adelaide CBD. Might not get the full allocation as they were oversubscribed in 24 hours.
    I can’t resist a good property trust. It’s a weakness of mine. :D
     
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  6. Big A

    Big A Well-Known Member

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    Since it wont stop raining and we are all stuck indoors, thought I would come here and bore everyone even more with an update.

    Since I finally stopped trying to play the timing game, put together a plan and have stuck with it since end of last year things seem a little boring. Now from what I have learnt from the wise people here its once your investing becomes boring then you know you are doing it right.

    So I threw back all the spare cash ( After I used a little of it on more property trusts ) back into equities and have stuck with a monthly purchase plan every month starting back on Dec 1st 2019. Three successful months so far of staying the course.

    I am not going to lie though. I am not sure if I have fully overcome the fear / desire to try and time to some extent. So even though I am doing the monthly fixed purchase which is derived from income that comes from the property trusts and the Contributory Mortgage investments I am still having some reluctance in lump sum buying at the current lofty market prices. Part of the problem is my working income does not arrive weekly. It normally comes quarterly as distribution from business. So every few months a have a decision to make above the monthly buy in that comes from investment income. This quarters business distribution went to a worthy cause. The tax man. Had a handsome bill for the 18-19 financial that I paid. But soon enough there will be another lump sum of income arriving. I know good problem to have.

    Even though I said no more property trusts this year as I am 50% property trusts already. I cant seem to help but feel more comfortable investing in a good property trust offering than equities at the current prices / outlook. Some one tell me this is silly and I should stick with the rebalancing towards equities regardless of the current market prices.

    I have a property trust offering coming up for an office asset in Adelaide that has some decent growth potential which I am looking at putting the next lump sum that arrives into. There are also the contributory mortgage syndicates with Australian unity that I like. Still feel like they are a decent offering at the moment and could direct some of the future lump sum income there. Again the contributory mortgages are currently sitting at about 20% of the portfolio and I probably should not be going much higher a percentage of the total portfolio into that asset class. But again for some crazy reason I like the simple straight forward income play it offers.

    The rest of the portfolio pretty much comes to 26% equities and 4% is a resi investment which I am meeting with the agent this week to look at move it along. No longer have any desire to hold resi.

    Another reason to get rid of the only resi I hold ( Not that I need any more reasons ) is I am in the process of interviewing for a new accountant. Just like I did over 12 months ago with the advisor I am now starting to question if the current accountant is delivering value for money.
    The more I learn the more gaps I am seeing in his offering. On top of that the charges for the services seems to be growing significantly each year. Maybe its the loyalty tax after having been with the same accountant for so many years. I have questioned the charges and increases to be told that there is a lot of work involved and that he is looking after me. But after making a few quick enquires in the last week with some other firms it obvious already that I can receive more service for less dollars elsewhere. Disappointing after 15 years of loyalty.

    So back to the resi thing I figured getting rid of the resi would only simplify my accounting making it one less thing for the accountant to account on.

    I also have 3 individual share holdings. 2 are property trusts that have done well to date. The third is Telstra. something like 3 years ago ( actually just went and checked and it was on the 21st of feb exactly 3 years ago now ) before I found PC I thought " hey I can dabble in this shares thing ". So I thought I would be smart and buy a $20k parcel of Telstra shares after the price had moved lower significantly. Bit of an experiment you can say. 3 years later and my $20k worth of Telstra are now around $16k plus some dividends along the way. EXPERIMENT FAIL.

    Might P*@S of those Telstra shares and give the accountant 1 less lot of shares to account for.
    Then there is the 2 lots of listed property trusts. CMA and CLW. Personally have no issue with either of those as both have done well. Paying a nice yield and had plenty of growth. But maybe at the current price and for the sake of simplifying I should move them along and re direct the funds into general equities. I already hold enough property trusts outside of equities with the unlisted stuff. That one is something to think about a little more. Feel like there might be a little more room for growth in these 2 especially with CMA.

    Wow that is a lengthy rant. Blame it on boredom. :D
     
    Last edited: 9th Feb, 2020
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You probably need a new accountant, but keep in mind you should also be getting second opinions on things as well - perhaps yearly or ever few years at least, especially where there is a complex situation with many moving parts.

    It is like seeing a Doctor I suppose. If one told me I had something wrong, I would get a second opinion.
     
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  8. Big A

    Big A Well-Known Member

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    Totally agree. And I do get second opinions and consult with others, like I did that time with yourself to make sure I and my accountant are on the right track. Unfortunately with the current I am finding to many instances in which we are not on track and I am having to point that out to him. When I do point them out its not that he is not knowledgeable or unaware but just fails to point certain things out to me until I raise them.

    Yes I think its time for a change.
     
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  9. The Falcon

    The Falcon Well-Known Member

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    @Big A , what do the contributory mortgage distributions look like? Straight income or tax deferred?
     
  10. Big A

    Big A Well-Known Member

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    Straight income mate. No tax benefits. But a pretty yield. 8% and a little over when you factor in a few syndicates go over maturity and you get a 5% bonus till maturity.

    I really like this asset class. Not sure I would do it with any other player other than AU though. Comfortable with there experience and scale. Currently in around 20 or 21 different syndicates. So I have built up my own little pooled fund.

    Been doing these for 3 years now with AU and so far so good. I don’t believe they have had a single loan result in a loss of capital since they started this particular fund. I think 5 or 6 years. They had a similar fund previously but was a pooled fund. They wrapped it up after the gfc as investors panicked and they were flooded with withdrawal claims. Even though it took a fe years to return investors capital I believe it was all returned.

    From what I understood the issue was being pooled they had to wait till they in wound all the loans to get the capital back to investors. That’s why this time they did not go down the path of pooled. Each loan you go into is individual with normally a 12-18 month term.

    I have had close to 20 syndicates mature and return capital over the last 3 years.
     
  11. The Falcon

    The Falcon Well-Known Member

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    Ok quick thoughts ;

    - single manager risk
    - very short history

    But the main thing ; this is a yield trap. Capital is taxed at half the rate of income in Australia. You receive no growth from this fund but it throws off a lot of income which you don’t need. You are paying shedloads of tax and you are receiving basically total return of 4% after tax. This type of private debt fund (non bank) may be desirable for a low tax retiree but I think you should reconsider particularly given your very high unlisted real estate exposure.

    To deal with the desire to time, do this. Set up a cash account and automatic investment linked to it so that a monthly DCA occurs. Just need VAS and VGS. Keeping it simple, 50/50 will do.Keep the DCA going for the long term. Play with other investments around the edges, but ensure the DCA happens. Long run you will significantly reduce your risk, and improve your tax situation.

    My 2 cents only
     
  12. pippen

    pippen Well-Known Member

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    Partner follows this DCA approach, not in ETF's but the unlisted VAS and VGS funds. Great from a behavioural finance perspective.
     
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  13. Big A

    Big A Well-Known Member

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    Thank you @The Falcon .

    single manager risk I feel in this asset class is not really an issue. Especially when that manager is as reputable as AU.

    Short term history risk I see. But they have a long history in the property game that gives me some comfort.

    Tax angle, I hold these in a company and not personally. So 30% tax rate. That improves the after tax return but I still see your point.

    I receive my income from business into this bucket company. An straight interest earning investment is better suited in a company due to no capital gain discount. That was also one of the reasons I went into this asset in a company ownership structure. Not sure if that is a good enough reason to hold this investment on its own. But again I am attracted to steady straight forward income paying investments.

    I have been doing the equities monthly set buy in via the BT platform for the last 3 months now. So I am listening. But for some reason I can’t give up what I feel is my safety net which is these type of steady regular income paying investments.

    Without turning this into a therapy session, I believe this stems from the fact that I am in a business that does very well but could change very quickly. So I don’t know when that business income will come to a sudden end. My investments are set up with the fact in the back of my mind that tomorrow I could need that income to live.

    I do appreciate your feedback and I am slowly working on overcoming my investment fears and being so attached to high income paying investments.
     
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  14. Big A

    Big A Well-Known Member

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    Yeah hold the same two funds on the BT platform and have been adding to them each month. Though I am spreading the monthly buy across these two index funds plus some active managed funds.
    Working on a 50/50 split across aus / international and index / active.
    Pretty much there except for the international index part. That’s still a little behind. And with the US market being so frothy I have been reluctant to rebalance from international active to index right now.
     
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  15. Isla_Nublar

    Isla_Nublar Well-Known Member

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    @Big A - related to yield trap, if you enjoy reading, you should have a look at some of John Bogle's books (Founder of Vanguard) - he has a way of explaining topics very succinctly.

    Extracts below taken from: John Bogle: The 3 Sources of Future Investment Returns - GuruFocus.com

    Using Occam’s Razor as his rationale, he pared the sources of investment return down to three elements: the dividend yield when the stock was first purchased, the rate of earnings growth after that purchase and the difference between price-earnings ratios while the stock was held.

    Bogle said, “The total of these three components explains nearly all of the stock market’s returns over extended holding periods.” He added that by analyzing the contributions of each factor to the total return, investors could arrive at a reasoned estimate of future values."

    He emphasized that speculation plays only a small part in investors’ returns, arguing that over the seven decades before 1996, the nominal dividend yield averaged 4.5% while earnings growth had averaged 4.2%, for a total of 8.7%. That total is 1.8% less than the nominal average return of 10.5% over the same term and so 1.8% is the average long-term return on speculation.

    To Bogle, that means investors with long-term horizons, such as retirement, have favorable odds if they focus on dividends and earnings, rather than speculating about the psychology of the market. Further, short-term strategies have “almost nothing to do with investment.”

    **

    To put this back into the context of commercial property and REITs, if you assume that rents will rise 5% per year, and the valuation of commercial property is derived from desired rental yield, shouldn't the value of commercial property and REITs (everything else being equal), rise in a similar fashion? So how does a REIT investor explain the increase of the sector by 20% in a year, if the revenue isn't increasing in a similar fashion? Surely that would have to be price speculation by investors?

    ** I'm not an REIT investor (other than through my ETFs), so a genuine question, I just don't see how the value of the REIT sector can increase so disportionately to the underlying rent of the asset? Generally speaking, Microsoft can sell exponentially more subscriptions to its software, and therefore double its value and its revenue and its profit in a matter of months, but REITs generally can't exponentially increase its number of tenants, price tenants pay etc (sure it can increase occupancy, but I'm imagining that the good managers have their occupancy pretty well as good as they can get).
     
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  16. The Y-man

    The Y-man Moderator Staff Member

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    IMHO This would be the case for for listed A-REITS - there is a lot of speculation that goes on because:
    1. they can - units are on the open market and it's open slather who pays what, completely detached from the underlying investment.
    2. listed A-REIT units are often "stapled" to the manager/owner company shares which makes valuation a bit convoluted
    For this reason, I always say one needs to consider the NTA of the listed A-REIT before putting your money down. In fact, there are a scant few listed A-REITs that are anywhere near their NTAs at the moment - and most are at crazy multiples.

    Your observations on the other hand will not likely be the case for unlisted REITs due to the restricted liquidity (there is not "market making") and units are basically sold/bought on the basis of the NTA.

    The Y-man
     
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  17. Big A

    Big A Well-Known Member

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    Thank you for the info and extract from bogle. What you are saying makes total sense and I agree. Pretty much what @The Y-man said and you pointed to in your post. The 20% jumps in listed reits is mostly the speculation part. That's why I don't buy listed unless I like the assets and its trading at NTA or below. I have only ever bought 2 listed reits. CLW which I did at IPO and picked up a little more after but always at below or NTA. CMA which I picked up below NTA.

    But lets work on bogles calculations. Most of the unlisted funds I went into yielded 7% at start. Not easy to find that today with most likely 6-6.5%. Then lets say earnings growth are at the lower end of 2% which would be your rental increases. That's an average 9% return with no speculation built in. Am I calculating that right? If I can get 9% average return for the next 10 years I will be happy with that. And if and when they sell the asset I get an extra few percent of return due to the speculation factor then even better.

    I am actually about to make a decision this morning on the new unlisted property trust that has come across my table. Was humming and hurring over it and not because its a bad asset but because I should really stop accumulating so much property trusts. But I think I might still put some into this one. Last one I promise. :D I feel like I am an addict and always need just 1 more property trust hit.

    As much as I said I'm not going to play the market timing game anymore I cant help but feel nervous about sticking another few hundred thousand in the market at the prices right now. I am much more comfortable with sticking to a monthly smaller buy at todays prices.
     
  18. dunno

    dunno Well-Known Member

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    Who sets NTA? and what is their basis for it and future revaluations of it? Is it management or management engaged 'independent' consultants?

    Is there an inference that who ever sets the NTA (value) in an unlisted fund is better at valuation than the market is for a listed Reit? Are assets revalued on the books the same in listed and unlisted funds? Does the same accounting standards apply?

    I dunno nothin about property funds so have never attempted to answer this question of how you value such lumpy assets if not via an informed market taking its best guess? I want to meet the (wo)man who knows, without fail, better than the market - boy do I have some questions for them.
     
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  19. The Y-man

    The Y-man Moderator Staff Member

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    The (hopefuly) most reliable is based on bank val of the building. Unlike resi, comm prop loans are bank valued annually. As most reits have loans of some form or another, vals are often done by the banks or external valuer. Where it is done in house, it should be declared as such.

    This is a feature that makes it IMHO much easier to "value" a "share" in reits than say a biz valuation for shares, as it is based on lease expiry, contract terms, quality of tenants etc, as well as the underlying land value.

    Incidentally this is no different for when you have a loan on a small comm prop. My relos had a loan called in when their biz tenants went bust, and the bank came along to do their annual val.

    See p. 15 of this report as an example
    https://www.cromwell.com.au/__data/assets/pdf_file/0023/25835/DPF-Annual-Financial-Report-2019.pdf


    The Y-man
     
    Last edited: 12th Feb, 2020
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  20. Big A

    Big A Well-Known Member

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    Let me have a crack at this. So on the unlisted side they would normally get a professional valuation done every 6 or 12 months. Valuations between that period are normally done by the fund manager. When I say professional I see names normally such as JLL / CBRE e.t.c. So I would say the big reputable players who should have some idea of what an asset is worth. No idea regarding your question on how the are revalued on the books and if its the same with listed vs unlisted.

    The interesting question you put forward is, do these so called experts who value and set the price know better than the market? Don't know, but I will share with you what I think.

    I would think that in the market price there is a lot of speculation on what its future value will be built in to todays price. The NTA that these experts ( Lets call them that for arguments sake ) set is what they believe its worth today based on comps. Either way the fact that I invest in unlisted and work of NTA which does not include the markets speculation premium then I should be ahead I think. And when the unlisted property comes up for sale and the market price gives me the future speculation premium, I will gladly take it.