Presentation on theme: "Investors’ Seminar October 2008 Overview of Current Markets Projections and Predictions What to do now; in the short- term and the long-term Logical,"— Presentation transcript:
Investors’ Seminar October 2008 Overview of Current Markets Projections and Predictions What to do now; in the short- term and the long-term Logical, rational, rock-solid plans and actions
Disclaimer This is not Advice. Please see Mark before considering any changes. Mark will put any recommendations in writing The information contained in this presentation has been prepared for general use only and does not take into account your personal investment objectives, financial situation or particular needs. Before you make any decision about whether to invest in a financial product, you should obtain and consider the Product Disclosure Statement of the financial product. The information provided by HFS has been done so in good faith and has been derived from sources believed to be accurate at the time of compilation. Changes in circumstances, including unlawful interference and unauthorised tampering, after the date of publication may impact on the accuracy of the information. Neither HFS nor any member of HFS accepts responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis of the information included. Past performance is not a reliable indicator of future performance. Neither HFS nor any member of HFS guarantees the performance of the Funds, the repayment of capital or any particular rate of return. The performance of any unit trust depends on the performance of its underlying investment which can fall as well as rise and can result in both capital losses and gains. Consequently, due to market influences, no assurance can be given that all stated objectives will be achieved.
Current Markets – the current crisis explained Debt – Western Consumers Sub-Prime in US CDOs – and inter-bank transfers Lower Consumer and Business Confidence Deflation; Inflation; Stagflation
Its even worse in the UK!
‘on Wall Street, the most unnerving stock market reports since the 1930’s depression became daily more dismal’ – ‘The next recession won’t look like any that has preceded it in recent decades. We are so heavily indebted that a slump would quickly turn into a Latin American style depression’ – ‘this economic convulsion is unprecedented in the post world war 2 era’ – ‘This time it is different. This time the market won’t be so quick to bounce back. Who can look at the world now and not conclude that things have changed dramatically?’ – It’s different this time? Time June 1, 1970 Newsweek, September 7 1998 Forbes September 4, 1989 Fortune, September 28 1998
Why are we investors – ie what are our goals Short-term goals; Long-term goals Goals need to be re-considered. Write them down. Probably only change slightly. Success is measured over set time period. Why? The power of compounding. If you double your money every year : Start with $100k then after 10 years your $100k becomes $102.4m
“The stockmarket is a giant distraction from the business of investing” – John Bogle Sharemarket quotes: “...voting machine......long-term it is weighing machine” “transfers wealth from the impatient to the patient” “good TV” Investor or Trader
Are either of these important for achieving our goals: Picking the bottom? The time-frame to recover? Warren Buffett – average returns1965-2007 – 21.1%pa (doubles every 3.4 years!) vs market return of 10.3%pa. The goal is to never overpay for assets. Buy them cheaply.
When markets recover it can happen quickly
Investors’ Seminar October 2008 Structure Asset Mix Specialist Stock-Pickers All investment decisions need to address these 3 areas:
Asset Mix Australian Shares International Shares Property Term Deposits Cash
The Bucket: RHS – security; return of the $ invested; it is to be “consumed” LHS – Achieve long-term goals - a sub-goal : Replenish cash (RHS) - major goal– total returns– growth or income
Asset Class Historical Long-term Real Return Risk of a Negative Return % p.a 1 Year 3 Year 5 Year10 Year20 Year Cash - Domestic 0 - 1 n/a Fixed Interest - Australian 0 - 3 2% 1% Fixed Interest - International 1 - 2 9% 3% Property Securities 3 - 5 14% Shares - Australian 5 - 8 27% 9% Shares - International 5 - 9 22% 14% n/a 0% 1 8% 4% 0% 3% 1% 0% The Facts of Investment TESTING PERIOD HFS
“The market can stay irrational for longer than an Investor can stay solvent” – JK Gailbraith The HFS model is fine. Clearly defined goals for each section of the bucket.
I P IS AS
Skill set and processes to analyse; filter and compare the businesses Specialist Stock-pickers Concentrated Portfolios – Quality Businesses All Ords; MSCI; etc – basically define the sea in which to fish. We do not want to own a bit of every business. Can hold Cash – ie Fund Managers can whilst they are awaiting value. The LHS Side
Invest in 3 ways – profit, rent or interest What do we own – shares or businesses. Our goals are long-term returns We aim to part-own businesses. The means to do that is via shares. How to value a business for immediate sale of part of it – sharemarket. More due diligence is needed if buying or selling the whole business.
Investing is not rocket-science. Too many people complicate it. HFS Model – stay to the core asset classes. Contract specialist Managers that invest in businesses or properties and ensure transparency. Only invest in what you understand. What do we really own? Who monitors these investments?
We do not “own” Ausbil or EleyG. We contract them to buy businesses (shares) on our behalf. What do we own? $100 to Ausbil = $14 of BHP, $9 Westpac $100 to Eley G = $3 Seek; $3 Primary Health Care $100 to Hunter Hall = $5 Vallourec; $4 Woongjin ThinkBig Now to the stock-picker skills needed
A closer look at Step 3 – ICVR stock filters I Industr y Rating INDUSTRY Products Supply & Demand Key Macro-economic variables Growth Rate Structure Barriers to entry Return on Capital Government intervention Sustainability C Company Quality COMPANY QUALITY Industry positioning Barriers to entry Recurring- revenue Growth rates Margins Return on Equity Free Cash Flow Dividend history Management- experience and track record Management- incentives and stake in equity Corporate Strategy Corporate- Governance Balance sheet- strength V Company Valuation VALUATION Enterprise Value / EBITDA Market Cap. / Free Cash Flow Stock Price / Cash EPS Stock Price / Dividend PS Market Cap. / Book Value R Company Risk Rating RISK RATING Key macro-economic & weather- sensitivities Key customers and suppliers Government influence Level of recurring- revenue Barriers to entry Balance sheet- strength Free Cash Flow Corporate Strategy Corporate -Governance Market –Capitalisation Share liquidity Major shareholders
Case Study - BHP Industry: Score 7/10 Strong global demand for resources still forecast for next 12 months at least. Signs of a “super cycle”. Company: Score 9/10 Leading producer of iron ore, copper, coal, oil, nickel and other base metals. Debt free. Strong management. Active capital management initiatives. Valuation: Score 8/10 Trading on around 9.7 times earnings compared to current market multiple of 16 Risk: Score 7/10 Main risks are commodity prices and curbed global demand particularly from China.
Where do Shares and Property returns come from? Income or dividends + Growth in profits Fundamentals P/Es; ie how much to pay for $1 of profit /rent + Changes in sentiment
If a share rises 5% in one day… 1 day Dividends0% Earnings growth0% Sentiment+5% Total Return+5% Impact of sentiment100%
In the long run fundamentals dominate 1 day I Year 10 years 25 years Dividends0%4% Earnings growth0%+10%+5% Sentiment+5%+14%+3%+0.5% Total Return5%28%12%9.5% Impact of sentiment100%50%25%5%
Summary 1. Don’t chase past returns 2. The long term is easier to forecast than the short term 3. In the short term expect the unexpected 4. When prices fall, future returns go up 5. Forecasting can identify good and bad periods to invest 6. Be wary of residential property 7. Equities offer good long-term returns 8. Diversification within portfolio is essential
26 The wealth surge has been significant 200% 300% 400% 500% 600% 700% 800% 1960196519701975198019851990199520002005 Private wealth to GDP
farrelly’s If inflation stays low PEs will be in the 14 to 18 range? Australian Equities-PEs vs Inflation 1961-2005
Profits and the sharemarket … rise and fall together Index based at 10,000 in 1985 Source: ABS 5676.0 Gross operating earnings, All Ordinaries index, Bloomberg. Earnings to 31 March 2008. All Ordinaries index to 20 August 2008. Past performance is no indication of future performance. Corporate profits All ordinaries share price index
Average annual total returns after inflation Australian long term returns 1900- 2007 % 1950- 2007 % 1950s % 1960s % 1970s % 1980s % 1990s % 2000- 2007 % Real bond returns1.30.6-6.30.9-188.8.131.52.1 Real equity total returns7.96.99.010.6-184.108.40.206 10.2 Real equity capital gains2.01.52.44.6-10.64.04.66.1 Income compounding effect 220.127.116.11.06.42.64.44.1 Source: ABN AMRO / London Business School : ‘Global Investment Returns Yearbook 2008’ Past performance is not a reliable indicator of future performance.
Average annual total returns after inflation US long term returns 1900- 2007 % 1950- 2007 % 1950s % 1960s % 1970s % 1980s % 1990s % 2000- 2007 % Real bond returns1.92.1-2.2-18.104.22.168.8 Real equity total returns 6.57.615.75.6-0.711.014.2-0.4 Real equity capital gains 22.214.171.124.4-4.56.611.7-1.9 Income compounding effect 126.96.36.199.188.8.131.52.5 Source: ABN AMRO / London Business School : ‘Global Investment Returns Yearbook 2008’ Past performance is not a reliable indicator of future performance.
Source: ABN AMRO / London Business School : ‘Global Investment Returns Yearbook 2008’ Past performance is not a reliable indicator of future performance. Average annual returns after inflation World long term returns 1900- 2007 % 1950- 2007 % 1950s % 1960s % 1970s % 1980s % 1990s % 2000- 2007 % Real bond returns1.73.3-0.40.71.56.56.75.6 Real equity total returns 5.87.818.05.40.61184.108.40.206 Real equity capital gains 1.54.412.81.9-220.127.116.11-0.6 Income compounding effect 18.104.22.168.22.214.171.124.9
Investors’ Seminar October 2008 Structure Asset Mix Specialist Stock-Pickers Summary to consider:
Banks Freeze Downward Cycle starts Consumer and Business Confidence Drops; Profits Drop; Unemployment Increases….. Inflation What are Bad Scenarios – No - Governments to win
Economics was not meant to be easy: Too many variables. Interest rates – boost or inflationary? Save or Spend – good or bad? Human behaviour!! ************** “More information is rarely what is needed. A greater understanding of the information available is required.” See past the noise. What affects our plans.
Transparency. Logical. Foundation for achieving our goals. Sound plan – historically and theoretically. Liquidity; sentiment (**) vs Globalisation; productivity/ingenuity A Sound Solid Plan Only worry about those things you can control Contact me by phone Remember the Goals!
AS IS P TD Cash Investors’ Decisions HFS’ Decisions