New Sunday Times Feature - Diary of a Private Investor

Discussion in 'Investments' started by Brendan Burgess, Sep 4, 2015.

  1. cremeegg

    cremeegg Frequent Poster

    Posts:
    2,318
    First may I say I am loving your contributions, and am only picking at them because you have me engaged.

    This is another example of letting an investing nostrum dictate your thinking without really analysing it. There is a lot of that about AAM at the moment.

    A value share is one that is worth buying because of the intrinsic strengths of the company. Yes it may well be a high yielder, but that is not the essence of a value share.

    A growth share is worth buying because of the superior growth prospects of the business.

    In each case if you are going to pick the stock you must believe that the market has mispriced either the quality or the prospects of the company.

    I can see why you dont care how the return is obtained, but if you expect the company to deliver a large rate of return you must have some expectation as to how the company will do that. That comes down mostly to either growth or quality.
     
  2. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    34,834
    It's nothing to do with "belief".

    Colm may well believe that he can outperform the interest rate expense, but he may well be wrong. He has no way of knowing whether he can or not. So the belief is irrelevant. The risk is not worth taking.

    Brendan
     
  3. moneymakeover

    moneymakeover Frequent Poster

    Posts:
    264
    And repay the loan?

    Colm, what kind of interest rates can be hot for buying stocks? Or do you top up mortgage loan?
     
  4. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    34,834
    I had just been thinking of this.

    I have a small mortgage - less than 10% of my portfolio of stocks. So, in effect, I too am borrowing to invest in shares.

    But it's secured on my home and the rate is ECB + 0.6%.

    If the rate were 5%, I would definitely sell shares to pay it off.
    If the loan was 50% of my portfolio, I would sell shares and reduce it.

    Brendan
     
  5. Gordon Gekko

    Gordon Gekko Frequent Poster

    Posts:
    2,867
    The rates are typically between 1% and 3%.

    Unless you’re spreadbetting or have a tax shelter, it’s hard to see leverage making sense at the higher end of that range.
     
  6. Colm Fagan

    Colm Fagan Frequent Poster

    Posts:
    113
    I'll try - gradually - to get round to answering as many of the questions as possible (the sensible ones), but I don't have the time to deal with them all just now. I've more important things to do - like complete the Milliman football competition forms, complete my 10,000 steps, plant some flowers, etc.

    I've lived with the issues that have been raised by various people for a long time now, and I've thought of them all (and many more that haven't been raised: I'll touch on them at some stage if I've the time), so I do have good answers to all the questions.

    Starting with the boss:
    Brendan, it's not a matter of belief, it's one of expectation, in the mathematical sense, i.e. the weighted probability value of different possible outcomes. The expected return from shares is (say) 4% per annum higher than from bonds (I actually think it's higher). I can borrow at less than 3% (Gordon Gekko is right; it's done through spread betting, which answers other questions on the interest rate charged - there are no repayment terms, you just go bust if the value of the shares falls below the amount borrowed plus a safety margin). I expect to get (say) 7% on the shares, so why not borrow? OK, by borrowing, you increase the volatility of the return significantly, but that's OK if you're adequately prepared for it and have the defences in place to deal with a sharp downturn. I'll come back to what those defences might be and how effective they are at a later point.
     
  7. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    34,834
    But Colm, I don't think that you have lived long enough.

    Most of the time, your strategy will be fine. In most years, you will get a return which exceeds the borrowing costs.

    But at some stage, you might hit a perfect storm. A once in 50 years event that wipes you.

    If I visit you on your death bed, I expect you to say "I told you so...". But there is a risk that you might be wrong. It's small but, if the consequences would change your lifestyle, then you shouldn't take them.

    Brendan
     
  8. cremeegg

    cremeegg Frequent Poster

    Posts:
    2,318
    That seems exactly right to me.

    However you must believe that the weighting you have attributed to each possible outcome is correct.

    I am not familiar with this type of borrowing, and now I agree with Brendan, I would absolutely avoid any type of borrowing which under any remotely likely scenario, could result in going bust. I knew a Lloyds investor.

    Personally I have large borrowings, but they cannot be recalled so long as I can meet the modest cashflow requirements. So the value of my assets can fluctuate without risk to my solvency.
     
  9. Colm Fagan

    Colm Fagan Frequent Poster

    Posts:
    113
    Brendan, I presume you're joking!
    I hate to admit it, but I was Assistant Actuary in Irish Life in 1974 (at the tender age of 24, 25 by year end), with responsibility for preparing the actuarial valuations of liabilities for the Irish Department of Industry and Commerce (that was well before any CBI involvement) and the Department of Trade and Industry in the UK (once again, well before the FSA or the PRA; we had to prove our solvency separately in the UK, as it was well before the Single European Market). At the time, Irish Life offered a leveraged regular premium unitised investment product that carried an extremely generous maturity guarantee. In the light of that experience, I presented a paper three years later (with wonderful mathematical input from a certain Mr. Woods, who is well known to some people on this site under a nom de plume, and from Tom Collins, who subsequently got a doctorate for his work on the paper) on approaches to mitigating the risks associated with such products. The paper was well received in international actuarial circles (but only after a number of years!). As you know, the crash of 1974 was in some ways more severe than that of 1929. Then, in 2008, I was with-profits actuary for a UK life assurance company which faced the challenge of remaining solvent whilst doing the right thing by policyholders in terms of risk exposure of their with-profits products.
    In short, I do think I've lived long enough!
    There is just so much more I'd like to write about this topic, but I don't have the time just now. When and if I do get round to writing about it, AAM readers will be first to know!
     
    Itchy likes this.
  10. Colm Fagan

    Colm Fagan Frequent Poster

    Posts:
    113
    My apologies, but I don't understand what you mean by this. I thought we were on the same wavelength: I don't believe in a false dichotomy between "growth" and "value". Are you not saying the same thing?

    Once again, I'm at a loss as to what this means. Maybe I'm being slow. Surely good quality businesses have better growth prospects, so it's definitely NOT a case of "growth OR quality", as you state; it's more a case of growth AND quality.
     
  11. cremeegg

    cremeegg Frequent Poster

    Posts:
    2,318
    If you are a stock picker, you must have a view why a company will deliver a return which (more than) justifies the price you pay for its shares.

    A business with tangible proven strengths, strong management, a proven product or service, an established market presence, a strong balance sheet and most important to my mind repeat customers, if the shares are well priced is a value opportunity.

    I am a value investor, this is not because I prefer to get my return from dividends or because I believe value companies out perform. It is because I feel that I have some ability to identify, these things

    A business with huge unproven potential is a growth opportunity. I am not a growth investor because I have no idea how to value a good idea, and I know something about how difficult it is to translate good ideas into strong businesses.

    In fact two of the companies you have referenced in this thread highlight the point. Renishaw is a value investment, you understand as much as anyone can about the business, you are well positioned to make an informed opinion about the value or otherwise of its share price at any given time.

    Tesla is the opposite. Obviously it is a brilliant idea with huge potential. That gives me at least no clue how to value the business. No one has any idea if it can overcome the obstacles to delivering on its potential. It may well succeed after more financing leaving the current shareholders to be wiped out along the way.

    I am a value investor because I think I could make a sensible decision about Renishaw, I certainly could not make a sensible decision about a price for Tesla, (I don't think anyone else can either).
     
  12. Colm Fagan

    Colm Fagan Frequent Poster

    Posts:
    113
    Of course. More specifically, I think that "the market" (i.e. the consensus among analysts) has undervalued some aspect(s) of the company's business. In Renishaw's case, as I wrote in my "diary", I considered that the analyst who gave the "sell" recommendation prior to the company's Investor Day misjudged the success of its 3D printing business. Other analysts apparently misjudged it also, given the reaction after the Investor Day.

    For what it's worth, analysts who buy into the "value/growth" approach to investment would classify Renishaw as a "growth" company. It has a very low dividend yield (less than 1%) and a very high Price/Earnings multiple (42 calculated by reference to last year's earnings). The reason for the very low dividend and low earnings yield (which is the same as a high P/E multiple, as one is the inverse of the other) is because analysts expect both earnings and dividends to grow strongly in future.

    Phoenix Group Holdings, another of my "core" holdings, is at the opposite end of the spectrum in terms of the "value/growth" matrix. The dividend yield on these shares is 6.4%. Analysts would classify Phoenix as a "value" investment. They think the prospects for future dividend growth aren't great, and that they could actually reduce in future, which explains the high dividend yield. I think they're wrong, which is why I'm hanging on to the shares.
     
  13. David Quinn

    David Quinn Frequent Poster

    Posts:
    27
    I really like the idea of just living off the income produced in an ARF portfolio, and avoiding selling the physical asset wherever possible. I attended a Science of Retirement Conference in London in February where this was the international consensus for best practice retirement drawdown. The great Nick Murray effectively said any other strategy is flawed, in his usual entertaining manner.

    However, this is unrealistic for the vast majority of Irish ARF investors who are invested in accumulating unit linked funds. It would be an interesting exercise to compare your approach Colm, to the more common approach of a fixed 4% annual withdrawal through a sale of units in a Unit Linked Life Company Equity Fund.

    If I get some time I might try to model the two alongside each other, assuming a 3.5% dividend from a direct stock portfolio, compared with a reasonably high yielding unit linked equity fund. Allowing for costs, they should perform in a similar manner at first glance, although I suspect the reality will be different?
     
  14. Colm Fagan

    Colm Fagan Frequent Poster

    Posts:
    113
    Hi David

    With all due respects to the great Nick Murray, his suggestion makes absolutely no sense. Taking the examples I cited earlier, if someone had a €1 million ARF and invested it in Renishaw, they could only take less than €10,000 in the first year, but hopefully it would increase strongly thereafter, whilst if they put the money in the Phoenix Group instead, they could enjoy an income of €64,000 (in the first year at least).

    It reminds me of something that happened to me many years ago, when inflation was running around 10% per annum and bond yields were in the region of 12% per annum. A barrister told me that a client of his was entitled to the income from a farm while he was alive, but the farm would revert to someone else on his death. He wondered if it would be reasonable for the farm to be sold, the money invested in government bonds and for his client to take the 12% per annum income, leaving the reversionary with the bonds on his death, by which time their value would have been ravaged by inflation. You can guess my answer.
     
  15. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    34,834
    I don't even understand how anyone could even quote nonsense like this. I hadn't heard of Nick Murray, but it sounds as if he has learnt his financial management from old wives' tales. I wonder did you misquote him David?

    Brendan
     
  16. Sarenco

    Sarenco Frequent Poster

    Posts:
    4,842
    Pardon my ignorance but who is “the great” Nick Murray? I’ve never heard of him.
     
  17. Sunny

    Sunny Frequent Poster

    Posts:
    3,297
    Is it this guy?? I am sure he is a nice guy but 'great'???:)

    https://www.youtube.com/user/nickmurray22
     
  18. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    34,834
    I think we should all club together to get him over to Ireland. He is very reasonable. Sarenco, would you be able to stay off the drink for a couple of hours?

    http://www.nickmurray.com/

    Fee:
    $10,000 for one keynote presentation of up to 75 minutes. Where logistically feasible, and only with prior consultation, Nick may accept a second engagement on the same day in consideration of an additional fee of $4500.


    Deposit:
    $3,000. Due upon signing of an agreement letter. Nick will return the deposit if he has to cancel the engagement at any time for any reason. He will be entitled to retain the deposit if, within 90 days of the meeting, the client:
    1. Cancels the meeting.
    2. Cancels Nick's appearance at the meeting.
    3. Moves the meeting to a date on which Nick is unavailable.
    Expenses:
    1. First class airfare on a U.S. carrier. Business class on a Canadian carrier.
    2. Standard hotel accommodation.
    3. Private car ground transportation to and from airports.
    4. Nick provides photocopies of receipts. He retains originals.
    Agreement:
    In effect when client signs and returns agreement letter with deposit.
    NO-NOs:
    1. Nick never speaks after dinner.
    2. Nick never speaks to people who are drinking, or were just drinking, alcohol.
    3. Nick will speak at breakfast or lunch, but only after people finish eating and the waitstaff has stopped moving.
    4. Audio and video taping are not permitted.
    5. He does not fly on commuter aircraft.
     
  19. Sarenco

    Sarenco Frequent Poster

    Posts:
    4,842
    Possibly.

    But I suspect Nick Murray would drive me to drink.
     
  20. David Quinn

    David Quinn Frequent Poster

    Posts:
    27
    Great in my book anyway, the rest of you are not so easily impressed!

    He is a 74 year old US advisor with 50 years experience advising investors. I’m not going to spend much time defending him or justifying his fees. He makes over $1m a year on his newsletter subscription fees alone so doesn’t need my help!!! He is in huge demand so I suspect he puts those rates out there and if anyone is foolish enough to accept his demands, fair enough. I respect him as an influencer within the global financial advice community and force for change within the industry. Very strong views on holding high equity weightings throughout retirement and managing behaviour.

    Anyway, back on topic....
     
    Sarenco likes this.