Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Wednesday, 30 November 2011

Reasons people don't invest

A topic I have glanced at before.  A few reasons people don’t invest for the future:
·         Can’t afford it (you can begin investing with $50 a month or less)
·         Fear of losing
·         Not sure what they’re doing
·         “She’ll be right mate” attitude
The problem with the she’ll be right mate attitude is that for a lot of people, she won’t.  The average pension balance is very poor because it’s a poor system run by greedy fund managers.
I was looking at my super balance having recently shifted to a Self-Managed Super Fund.
I’ve worked in Australia for the past 6 years, starting on a salary of $80,000 and earning around $150,000 plus bonus in the last year.  Don’t really want to talk about my salary but it’s kinda required for explanation purposes...
So, on a decent salary what would you think my pension balance would be after 6 years?
Answer: about $50,000. 
So after 6 years work I have around 6 months’ worth of living costs saved up (if $50,000 sounds like a lot of money to you, let me assure you in Sydney, that does noooo go very far!).
Thatalso  does not make for a good retirement.  Bear in mind that we might live for several decades after we retire.  The numbers are downright terrifying if you think about it.
That's why investing outside of your super is important.
As I have alluded to before, the super system is not set up in a way that is going to provide for a good retirement and that is one reason why the contributions will be heading northwards to 12% soon.
I also had some ‘amusement’ working out how what return my fund manager had achieved for me over the 6 year period.
After the deductions for admin fees, fund managers fees, insurance and taxes - the return, as near as makes no difference, was zero.  Great!
Hate is a strong word – but I hate the whole industry.

Wednesday, 23 November 2011

Changing States

Most books I read are either from the library or off Amazon. 
Those that I buy I generally read once or twice and then pass on to St. Vinny’s.  Occasionally I come across a ‘keeper’ that I know I’ll come back to.
As I mentioned I’m currently reading Awaken the Giant Within by Tony Robbins.  I think it may be the third or fourth time I’ve read it and it, and it’s been brilliant each time.
I’ve never read a better book for simply improving the quality of your life.
Today’s tip: changing states
As Tony rightly notes, we all at times feel frustrated, sad, angry, morose, upset, lonely, anxious, depressed, miserable.
Just as surely we all develop triggers for changing the way we feel (or our ‘state’) too.
Trouble is, for most of us we use bad triggers: reaching for a (packet of) Marlboro Gold, eating too much Dairy Milk or McDonalds, retail therapy, a line of Charlie or drinking a VB long-neck.  In others words, addictive and destructive behaviours.
Robbins' top tip, is to write down a huge list of other ways to change you state, that do not involve food, drink or drugs, perhaps 50 other triggers. 
Here are 10 I thought of that can work for me:
-listening to AC/DC Back in Black on my iPod
-calling my Mum on Skype
-buying presents for my nieces
-going for a relaxing hot tub/spa
-driving somewhere and listening to Run DMC
-heading to the beach for some body-boarding
-20 minutes on a cross-trainer and some weights
-watching Test Cricket or State of Origin Rugby League on Fox
-going to the pool for a swim
-phoning my mates
So next time I get a craving for a smoke….it’s an excellent book, anyway, I’d definitely recommend it.
***
Markets down 0.6% today so far.  French and Spanish bond yields are the latest to spiral upwards.  Been a miserable last 8 days of trading.
Westpac and JP Morgan are now tipping FOUR consecutive interest rate cuts.  Not so sure about that but it shows how significantly the sentiment has inverted.
***
Managed to fix up the flat tyre with a bit of elbow grease. 
Driving down towards Geraldton today, though will probably end up bush camping tonight.

Monday, 21 November 2011

A system for winning at Blackjack...and at life.

If you’ve ever been to a casino you’ll know that the odds tend to be loaded against you.  In Roulette, for example, the house has a green zero number giving it a 3% edge (or in the US a ‘0’ and a ‘00’ giving it a 6% edge).
There is one game where you can theoretically steer the odds in your favour: Blackjack.
By counting the high cards (10 through colours) and low cards (2 through 6) dealt you may ascertain the odds of favourable cards being dealt to you and adjust your bet accordingly. Not easy, but possible.
Poker and Bridge players know the tactic intuitively.  The way to win the game is not to split your chips into 10 equal piles and bet the same amount on 10 hands.  Instead, you wait until you have a strong hand and increase your bet.
The Kelly Model
A bright spark managed to put this idea in to a formula:
2p-1=x  
P represents the probability of the outcome and x represent the percentage of you capital you should bet.
Don’t worry if algebra brings you out in a cold sweat (it does me too) as I’ve done the maths for you here:

% likelihood of outcome
% of capital to allocate
100
100
90
80
80
60
70
40
60
20
50
-


It’s logical enough: if you’re 100% certain of an outcome (e.g. the sun coming up tomorrow) bet 100% of your money.
If you are only 50% sure of an outcome then your odds are no better than winning a game of Two Up on Anzac Day, and you shouldn’t bet.
Applying this to investment
You super fund manager doesn’t play to win, he plays not to lose.  That’s why he will hold up to 100 or 200 stocks on your behalf (and fail to beat the stock market index).
The richest investors don’t do this; instead they place big bets on high probability events. 
In 1991, George Soros foresaw the ‘Black Wednesday’ meltdown coming and took a monumental $10 billion short position against the British sterling, netting himself a $2 billion profit.
Buffett thinks similarly.  Through 1988 and 1989 Buffett took a position of $1 billion in Coca Cola shares (back when a billion dollars was a serious amount of cash) and by 1998 the holding had grown in value to $13 billion.  He was well on his way to being the richest man alive.
Buffett wasn’t fazed with more than 40% of his entire net worth being tied up in the stock of one company.
He still works on similar principles today; recently he took a $10.7 billion position in IBM – a big bet on what he sees as a high probability event.

Thursday, 17 November 2011

Buy and hold; not cool but very effective

What do fund managers tell us to do?  Buy and hold, ride out the bumps, stay invested for the long term.
But behind the fa├žade, do they practice what they preach?  Negative.  They buy-sell-buy-sell-buy-sell in a frantic and desperate bid to top the performance tables for the next quarter. 
That’s why they under-perform the average stock market growth.
Three problems with high-frequency trading
1)      Transaction costs - these tend to be lower in shares (brokerage costs, stamp duty – though no stamp in Oz thankfully) than they do in property (stamp duty, legal fees, agent’s fees), but they are still there and they do have an impact

2)      Poor timing – most people are rubbish at timing the top and bottom of the market

3)      Capital gains tax
Effect of tax
Here’s a hypothetical investment that doubles in value each year and then tax is paid at a notional 30% on the profits before reinvestment:

Starting capital
Capital doubled to:
Tax at 30%
Finishing capital
$10,000
$20,000
$(3,000)
$17,000
$17,000
$34,000
$(5,100)
$28,900
$28,900
$57,800
$(8,670)
$49,130
$49,130
$98,260
$(14,739)
$83,521
$83,521
$167,042
$(25,056)
$141,986


Here’s another hypothetical investment where the investor holds for the full 5 years then sells, incurring capital gains tax at the reduced rate of 15% (see note below):

Starting capital
Capital doubled to:
Tax at 15%
Finishing capital
$10,000
$20,000
$-
$20,000
$20,000
$40,000
$-
$40,000
$40,000
$80,000
$-
$80,000
$80,000
$160,000
$-
$160,000
$160,000
$320,000
$(43,500)
$276,500


Note: capital gains tax rules are different in the UK (CGT allowances and indexation) and in the US.
In Australia there is a 50% exemption where an asset is held for more than 12 months. Complicated, but the principal here is the important thing!
Table 2 shows that while the tax is Year 5 is rather eye-popping the net result is far better.
Do the rich pay much tax?
Well, we know that companies sure don’t - but what about individuals?
We know that Kerry Packer wasn’t a fan of tax telling the Senate that people who didn’t minimise their tax “need their heads read” because governments tend to waste a lot of taxpayer money.
George Soros took a different approach, incorporating his famous Quantum Fund in a tax haven (Netherlands Antilles).
Warren Buffett minimises his tax in two ways.  Firstly his company Berkshire Hathaway has only ever paid one dividend (dividends from company profits are effectively taxed twice, once in the company and once in the hands of the recipient).  He mused: “I must have been in the bathroom at the time.”
The second way he reduces the impact of tax is by not selling.  Buffett’s preferred timescale for holding a quality investment is forever.
What does it mean for us?
The buy and hold strategy offers the average investor the best chance they have of not being average. 
The strategy that is most often effective is:
1)      Identify a quality asset (shares in a great company or property in a great location)

2)      Buy it at the right price (also known as investing counter-cyclically or “don’t follow the crowd”

3)      Hold it for the long term
It’s a long way removed from the Gordon Gekko image of the mad-crazy-impulsive Wall Street trader. But guess what?  It also works.
***
Arrived in Coral Bay in time for lunch.  First impressions, it’s beautiful!

Sunday, 13 November 2011

Loss aversion

Here’s a simple 30 second exercise:
JJJL   K
Box 1                                       Box 2
Suppose I said you could select one ball, blind-folded, from Box 1.  If you picked a smiley face then I give you $100,000, but if you picked a sad face you receive $nil.  Or, alternatively you can just take the ball from Box 2 and receive a safe $75,000.  Which would you instinctively go for?  Box 2?  Yep, so would I!
OK, now what if you could select one ball from Box 1 and if you picked any of the three smiley faces you would lose $100,000, though if you pick the sad face then you lose $nil.  Alternatively, you can just pick the ball from Box 2 and lose a guaranteed $75,000.  What now?  Box 1?  Yeah, same for me.
Finally, what if the win is a guaranteed $75,000 or a three in four chance of winning $125,000 and a one-in-four chance of receiving $nil.  Still going for the guaranteed $75,000?  A more difficult choice now, but most would take the $75,000.
This is normal human psychology and known as loss aversion. 
Behavioural finance research shows that people are generally twice as thrifty in a recession as they are frivolous in boom times. 
These are very similar to the instincts and emotions that arise when we make winning and losing trades in shares and explains in part why most share traders make little or no progress. 
We are unwilling to take losses for it is admitting that we got a trade wrong or made a mistake.  This is completely illogical, because all shares traders pick wrong trades as it is impossible not to.
Winning share traders cut losing trades quickly and let the winners run.  Most people do the exact opposite by snatching at winning trades too quickly to ‘lock them in’ and allowing losing trades to slide in the hope that they ‘come back’ (“it’s a long term investment!”).
***
Moving on from the Pilbara tomorrow.  It’s just too hot, a relentless 39 in Dampier again today.  Was in two minds about staying longer, but the clincher was going to see the iron Red Dog statue this morning.
Thought I’d give Red a cuddle for a cutesy photo, unaware that a metallic statue could defy the laws of physics to actually become hotter than the sun.  Got a searing red welt across my radius for my foolhardiness.
Off down to the more temperate Coral Bay and Ningaloo Reef for a week of swimming and sunbaking instead!

Wednesday, 2 November 2011

Is Gold a good investment?

Well, if you’d have bought gold ten years ago, it’s a no-brainer innit?
I’d phrase the question differently though, and ask: is buying gold an investment or speculation?
Many decades ago, the Godfather of value investors, Benjamin Graham, spent muchos time pondering what constitutes an investment.  He concluded that an investment must involve thorough research and a reasonably certain return of your capital.  Can we say that about this gold stuff?
Investors buy shares in companies because they believe the company will generate profits and return their capital to them via dividend payments.  Hopefully, the company will increase its profits over time and increase its intrinsic value too – and therefore its share price.
Gold doesn’t make profits and it doesn’t pay dividends.  It just, kind of….well, sits there.
Buying a commodity in the hope that someone will pay more for it down the track – the ‘Greater Fool’ theory – isn’t really investment.  It certainly isn’t the same as buying assets that pay you income, such as shares in a gold mining company, for example.
People buy gold when they are fearful because they worry that low interest rates and inflation will eat away at the value of their dollars, and therefore they want to own a ‘real’ commodity and flee to gold. 
So if we slide in to a double dip recession, the gold price will probably go up.  But if we don’t, then….so gold is a vehicle for betting on fear.
I’d be extremely wary of buying a commodity that not so long ago smashed through its all-time high value.
To wrap up, I’ll defer to the king of the pithy quote, Mr. W. Buffett esq.:
“ If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion dollars…For that you could have all the farmland in the USA, you could have about 7 Exxon Mobils, and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67ft cube of gold and looking at it all day, and me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland the Exxon Mobils.”
Wise words, Wazza.
***
In Katherine, NT, today.  A lot of places fall in to the “worth a visit” category, but going for a cruise on Katherine Gorge, well, that’s one of the best things I’ve ever done.  Absolutely outstanding.  It’s an obvious and lame observation about the bush in NT…but crikey it’s hot here!
Heading 500km west to the WA border tomorrow.