Monthly Archives: April 2016
How to retire comfortably
I had dinner over the weekend with friends of friends and after a while – as usual – we started talking about investing and how to best use your super to retire comfortably. I thought I use this friend as an example on how I would go about increasing super to achieve your goal. The friend works in IT, is 48 years old and has managed to have $ 100,000 in her super fund. Performance in her super fund over the last few years was close to zero percent. She is in a balanced fund with a fair amount of cash, a few bonds and blue chip shares. As you don’t want to write code any more in old age, she thought we would want to retire at around 63 years of age which gives her another 15 years to increase the super. In order to retire comfortably as a couple experts think you need about $ 60,000 net per year.
Blog: Reasons to invest in overseas equities
Most Australian investors have a home country bias and are therefore underweight in overseas equities. The main reason for this lack in overseas exposure is lack of familiarity with other markets. Domestic investors know the leading companies in Australia relatively well but following companies in other countries just seems too hard and daunting even if many investors realise that they should invest more overseas. However, overseas investments have many advantages:
So how do you go about investing in overseas markets? Most Australian bank owned brokers (CommSec, Nabtrade etc) offer overseas broking services within a domestic broking account. You will just have to fill in a few more forms which should not be too onerous. However, before you do this make sure that you are aware of all the fees the broker charges. Brokerage rates tend to be higher than domestic rates but mostly not excessive. Most bank owned brokers, however, charge significant mark ups / spread for currency conversions which are mostly hidden and the average investor is not aware of those additional costs. It is therefore important to shop around and compare all fees and charges. We use a US based, Australian regulated broker with extremely low brokerage and FX conversion fees and a sophisticated order platform allowing investment in just about all developed markets around the world. Feel free to contact us if you would like to know more.
Blog: The Buffet Indicator
In order to determine if the overall stock market is overvalued, fairly priced or undervalued Warren Buffet likes to compare the total market capitalisation to the total GDP.
If the total market cap in the US is somewhere between 75 % to 90 % of GDP the market is fairly valued. Below this range the market becomes undervalued; above this range the market becomes overvalued. Currently, the ratio is 116.8 % which makes the U.S. market significantly overvalued.
The more overvalued a market is the lower the forward 10 year annual return. At the height of the 2000 dot.com boom when the ratio was close to 150 % the forward annual return was around – 5 %. At current valuation we should expect a slightly negative p.a. return for the next 10 years.
Australia looks much better.
The historical high was 229 %, the historical low 94 %. We are pretty much at the historical low so we must assume that in the next few years the Australian market will outperform the US market.
As an investment strategy I would like to wait for the US market to finally roll over (maybe “Sell in May and stay away.”). This will probably drag down the Australian market so that we should have even better buying opportunities.
Blog: Percentage of winning trades does not matter
I have written the last few weeks about trading and investing strategies using sometimes somewhat provocative language to make my readers think and reconsider investment rules. The point I wish to make today is that the percentage of winning trades does not matter if you wish to make money in stocks. This is obviously counterintuitive and thus probably correct. If I want to sell an advisory service to unsophisticated investors the easiest way to do it is announcing that my advisory has a high percentage of winning trades, the higher the better. 98 % of winners would be really good and most unsophisticated investors would jump on such an opportunity. To generate 98 % winning trades, however, is very easy: Let me continue with my slight provocation and suggest that my (just for fun to make a point) trading strategy consists of me slipping a fair coin. Heads I am long, tails I am short, i.e. I sell something now that I do not own at a higher price with the intention to buy it back later on at a low price. This takes care of entry. The exit rule is quite simple, too. If the market goes one cent / one tick in my favour I take profits. If the market goes against me I do nothing and wait until, hopefully, the market goes one cent into the profit zone. This will happen very, very often. So I can expect about 98 % winning trades. Great! But what will happen with the losing 2 %? Well, at some stage the market will immediately move against me and won’t show a one cent profit. If I am long a stock the stock can only go down 100 % so I can lose the entire capital invested in the position. If I am short the stock, the price can go up, through the roof, to theoretically infinite levels. At this stage I am going to lose lots of money. Even if the stock goes not go to zero (when long) and not to infinite values (when short) I will over time accumulate losing positions. The losses will eventually outweigh the tiny wins and I will lose money even if I have 98 % winning trades. So the percentage of winning trades does therefore not really matter. What matters is how much I win when I have a winning trade and how much I lose when I have a losing trade. So I need to calculate statistical expectancy. I have to multiply the average win per trade by the probability of a winning trade and also multiply the average loss by the probability of a losing trade. In trading leveraged markets like CFDs, Futures or FX, most trend following systems will have a percentage of winning trades at around 40 % to 45 %. That means the trader loses in 55 % to 60 % of the time but the average win will be double average loss in good trend following systems. So if I am losing $ 1.00 60 % of the time my average loss times probability of loss will be $ 1.00 * 0.60 = – $ 0.60. My average win will be double my average loss, i.e. $ 2.00, and I am going to win in 40 % of my trades. That means an average of $ 2.00 times 0.40 = $ 0.80. So the average trade would make $ 0.80 – $ 0.60 = $ 0.20. I would make 20 cents for every dollar risked.
We trade predominantly shares long only and share trading is not a zero sum game like futures, CFDs or FX but has a built in growth pattern. Share markets increase on average in the long term by the nominal increase of the GDP of an economy plus the dividend yield. So share markets have a positive bias and it makes sense to have a longer term time horizon. The longer my time frame in a positive bias market the higher the percentage of winning trades (all other things being equal). Given that stocks can fall quite dramatically and we want to outperform the market we need a stop loss. Once we incorporate a stop loss the percentage of winning trades will go down slightly. I guess that we should have 60 % + winning trades in a longer term share trading system. That implies that we will still have losing trades which in the overall big picture doe not really matter. The percentage of losing trades however only matters for our ego. Making money in the markets depends on the relationship between average win / average loss and % winning and % losing trade. The percentage of losing trades by itself and on its own is meaningless.