Investors’ Seminar October 2008 Overview of Current Markets Projections and Predictions What to...
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Transcript of Investors’ Seminar October 2008 Overview of Current Markets Projections and Predictions What to...
Investors’ SeminarOctober 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? It’s different this time?
Time June 1, Time June 1, 19701970
Newsweek, September 7 1998Newsweek, September 7 1998
Forbes September 4, Forbes September 4, 19891989
Fortune, September 28 1998Fortune, 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 When markets recover it can happen quickly happen quickly
Investors’ SeminarOctober 2008
Structure
Asset Mix
Specialist Stock-Pickers
All investment decisions need to address these 3 areas:
AssetMix
Australian SharesInternational 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 ClassHistorical
Long-term Real Return
Risk of a Negative Return
% p.a 1 Year 3 Year 5 Year 10 Year 20 Year
Cash - Domestic 0 - 1 n/a n/a n/a n/a
Fixed Interest - Australian 0 - 3 2% 1%
Fixed Interest - International 1 - 2 9% 3%
Property Securities 3 - 5 14% 14%
Shares - Australian 5 - 8 27% 9%
Shares - International 5 - 9 22% 14%
n/a
0%
0%
1
8%
4%
0%
0%
0%
3%
1%
0%
0%
0%
0%
0%
The Facts of InvestmentThe 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.
X
A
B
C
Y
Z
D
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
IIndustryRating
INDUSTRY
ProductsSupply & DemandKey Macro-economic variablesGrowth RateStructure
Barriers to entryReturn on CapitalGovernment interventionSustainability
CCompanyQuality
COMPANY QUALITY
Industry positioningBarriers to entryRecurring- revenueGrowth ratesMarginsReturn on Equity
Free Cash FlowDividend historyManagement- experience and track recordManagement- incentives and stake in equityCorporate StrategyCorporate- GovernanceBalance sheet- strength
VCompanyValuation
VALUATION
Enterprise Value / EBITDA
Market Cap. / Free Cash Flow
Stock Price / Cash EPS
Stock Price / Dividend PS
Market Cap. / Book Value
RCompany
Risk Rating
RISK RATING
Key macro-economic & weather- sensitivitiesKey customers and suppliersGovernment influenceLevel of recurring- revenue Barriers to entry
Balance sheet- strengthFree Cash FlowCorporate StrategyCorporate -GovernanceMarket –CapitalisationShare liquidityMajor 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
Dividends 0%
Earnings growth 0%
Sentiment +5%
Total Return +5%
Impact of sentiment 100%
In the long run fundamentals dominate
1
day
I
Year
10
years
25
years
Dividends 0% 4% 4% 4%
Earnings growth 0% +10% +5% +5%
Sentiment +5% +14% +3% +0.5%
Total Return 5% 28% 12% 9.5%
Impact of sentiment 100% 50% 25% 5%
Summary1. Don’t chase past returns2. The long term is easier to forecast than the short term3. In the short term expect the unexpected4. When prices fall, future returns go up5. Forecasting can identify good and bad periods to invest6. Be wary of residential property7. Equities offer good long-term returns8. Diversification within portfolio is essential
26
The wealth surge has been significant
200%
300%
400%
500%
600%
700%
800%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Private wealth to GDP
farrelly’s
If inflation stays low PEs will be in the 14 to 18 range?
0
5
10
15
20
25
-5% 0% 5% 10% 15% 20%
Australian inflation
All
Ord
s PE
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 index0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Dec-85 Dec-93 Dec-01 Dec-09
Average annual total returns after inflation
Australian long term returns1900-2007
%
1950-2007
%
1950s
%
1960s
%
1970s
%
1980s
%
1990s
%
2000-2007
%
Real bond returns 1.3 0.6 -6.3 0.9 -5.1 2.1 10.1 3.1
Real equity total returns 7.9 6.9 9.0 10.6 -4.2 8.6 9.0 10.2
Real equity capital gains 2.0 1.5 2.4 4.6 -10.6 4.0 4.6 6.1
Income compounding
effect5.9 5.4 6.6 6.0 6.4 2.6 4.4 4.1
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 returns1900-2007
%
1950-2007
%
1950s
%
1960s
%
1970s
%
1980s
%
1990s
%
2000-2007
%
Real bond returns 1.9 2.1 -2.2 -1.0 -1.7 7.2 5.7 5.8
Real equity total
returns6.5 7.6 15.7 5.6 -0.7 11.0 14.2 -0.4
Real equity capital
gains2.1 4.1 10.3 2.4 -4.5 6.6 11.7 -1.9
Income compounding
effect4.4 3.5 5.4 3.2 3.8 4.4 2.5 1.5
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 returns 1.7 3.3 -0.4 0.7 1.5 6.5 6.7 5.6
Real equity total
returns5.8 7.8 18.0 5.4 0.6 13.4 7.9 1.3
Real equity capital
gains1.5 4.4 12.8 1.9 -3.3 9.6 5.6 -0.6
Income compounding
effect4.3 3.4 5.2 3.5 3.9 3.8 2.3 1.9
Now Specialise Trade
20 1010
2 -- 10
2 -- 10
10 20 10
Advantages of Trade & Globalisation
Investors’ SeminarOctober 2008
Structure
Asset Mix
Specialist Stock-Pickers
Summary to consider:
…….May 2007………
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
X
A
B
C
Y
Z
D
Investors’ Decisions
HFS’ Decisions