Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

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.

Invest in Sydney/Brisbane property markets, or for media/public speaking requests, email pete@allenwargent.com

Tuesday, 29 April 2014

Banks

Spend less than you earn

It was mentioned on this blog the other day that I had a cuppa or two with Peter Thornhill, author of Motivated Money. I always learn so much from him, it's worth the price of a coffee a thousand times over.

Although I've been a shameless convert to the Apple revolution, now being an owner of an i-Pad, an i-Pod and so on, I was mildly amused to note that we'd arranged to meet in Woollahra via texting from near-identically crappy Nokia mobile phones.

Two people getting together to discuss investment strategy both on $49 Nokias: a coincidence? I think not.

In fact, the first words on Thornhill's slides when he presents are:


When we catch up a number of the same themes repeat: charitable giving, world travel, the short-termist nature of reporting in the financial media, and so on.

Another theme is the sheer wonder of how people are perfectly happy to inspect their superannuation balances blithely just once per year while barely questioning the results, while at the same time being totally unable to apply that same level of long term discipline to investments outside their funds.

Thornhill was himself a former funds manager but has become something of a rebel against the funds management industry, promoting a passive approach to investing with a heavy focus on the tax-favoured and growing dividend income streams rather than the myopic obsession with daily share prices.

Bank bubble

With all four of the major banks getting rolled on the stock market today by around 1.0% to 1.75% at the time of writing, it occurred to me that it might a good time to review the past year's performance.

My goodness, is it really a full 12 months since commentators called a bank stock bubble in Australia and began advising all manner of short positions? 

Crumbs, it actually is. Where does that time go, eh? If I didn't know better I'd say someone was winding the clock on fast.

I took a detailed look at bank valuations at that time here, which told me that while price-to-book values were clearly too high to represent any traditional notion of value in the Ben Graham/Warren Buffett sense, PE ratios of 12-14 could barely be construed as a bubble (unless you believed that ongoing earnings growth was totally unsustainable).

The "Big 4" banks raked in cash earnings of around $27 billion in 2013 and, to boot, they receive an implicit government guarantee i.e. they are seen as too big to fail.

PE ratios of 12-14 and high price-to-books...an expensive entry price given the uncertain economic outlook? Indeed. Lacking in value? Perhaps. 

But...bubble? Mmm.

This is partly reflective of the problem with so much commentary these days: practically everything seemingly must be be described as either a bubble or a crash, whereas by definition the overwhelming majority of what goes on in investment markets takes place at neither extreme.

Share price

In that context, let's take a look at how the "bank bubble" has progressed over the past 12 months.

Note that after five years of very strong gains, the banks are now indeed likely to be due a correction...possibly even starting today looking at the markets!

CBA

Let's start with the biggest of all of our big banks: CommBank (click chart):


The share price performance has been very strong, doubtless spurred on by low interest rates and thoroughly underwhelming returns on savings accounts and fixed-interest products such as term deposits.

Price-to-book valuations remain high as expected, the PE ratio is now around 15 with the market capitalisation climbing to around $128,000 million or so.

Remember, investors (as opposed to speculators) aim to own a share of these companies in order to command their own share of the billions which the bank generates in earnings.

And Commonwealth Bank has delivered two very tidy 100% fully franked dividends of $2.00 in August 2013 and $1.83 in February 2014.

Regardless of what now happens to the share price in the coming months, long term owners are winning with those tremendously healthy yields. The share price appreciation has merely been the icing on the cake.

ANZ

OK, that was CBA.

How about ANZ? (click chart):


More strong share price performance, with the PE ticking up to nearly 15 and the market cap around $95,000 million.

Lovely to see, but the really interesting result was the $0.73 and $0.91 dividends delivered in May and November respectviely, both 100% fully franked too, of course.

Another outstanding result for long-term investors.

WBC

Next up, Westpac (click chart):


Another excellent share price performance, market cap now moving above $100,000m and PE ratio of around 15.

But the really exciting thing here has been the massive ramp-up in Westpac's fully franked dividends to $0.96 and $0.98 in May and November respectively.

To put that in some kind of context, in 1997 Westpac was churning out dividends of around 20 cents.

What a result for long term holders that is!

NAB

And finally, National Australia Bank (NAB) - (click chart):


Also strong from the NAB.

PE has increased to around 14 and the market cap about $85,000m.

More interestingly, 100% fully franked dividends of $0.93 and $0.97 were once again delivered in May and November, so the share price appreciation has once again merely been the icing on the cake.

Conclusion

Well, the conclusion here writes itself doesn't it?

There will always be people telling you it's a bad time to invest based on some forthcoming calamity.

And of course, given that the share prices of all our banks have now appreciated dramatically over the past five years, a correction at some point is all but assured.

The future, as always, remains unknown, and therefore all that really matters is that you have a suitably diversified investment plan which suits your own needs.

I'd suggest that if your plan is heavily reliant on market timing, the odds of success are immediately diminished.

And the "bank stock bubble" is a fine case in point.

A year ago all the commentary was advising people to short the bank bubble, which didn't turn out too well. So now what? Prices are higher than they were and the dividends keep on rolling out to owners. Go short again? 

Drowning

At the beach the lifeguards always tell you to swim between the flags, don't get out of your depth and never try to swim against a rip current.

That's pretty much how I'd look at investing: stick to the knitting with the tried and tested investments, always keep within your depth by keeping a sizeable cash buffer and diversifying, and swim with the tide rather trying to fight it (i.e. go long shares and property by owning them, rather than trying to be smart and timing the market with shorts).

Most of us are better off with a long-term strategy to own great companies than speculate or trade them.

Even the pros are frequently hopeless at timing the market, so what makes us think we'll do any better?