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In For The Long Haul

FYI | Feb 07 2018

By Peter Switzer, Switzer Super Report

A ‘newbie’ share player called Michael has asked me to reveal how people like me play stocks generally and have played stocks during periods such as the post-GFC period. It’s hard for me to generalise about how ‘old hands’ invest, as there are very different views on the market, varied strategies for individuals, dependent on their timeline horizons and appetite for risk, as well as their goals.

So, I’m going to tell Michael how I invest and I will compare and contrast with recommended advice from the best benchmarks of financial planning.

In for the long haul

In general, younger people like Michael, who’s in his early 30s, could easily be 100% invested in stocks. He has at least three bull markets during which it is pretty well certain his portfolio of assets will grow brilliantly, provided they are at least as good in their returns as the S&P/ASX 200 Index. My favourite chart proves my point:

This shows $10,000 invested in 1970 into the S&P/ASX 200 Index, where the dividends were re-invested religiously, rolled over to $453,165 by 2009 — the year after the GFC-crash.

This shows the value of:

  • Compounding of dividends.
  • The persistent upward direction of stocks, where over a 10-year period you can expect around a 10% return, of which half comes from dividends.
  • Investing in quality assets, such as the top 200 companies in Australia.
  • Time in the market rather than timing when to get in and get out!

This drives the core of my strategy and it’s always nice to start your investing career after a crash of the market, such as the GFC one, but you can’t always be so ‘lucky’. If you’d started investing in March 2009, you wouldn’t care that the Index has not beaten it’s old high of 6873.2 but those who saw a 50% slide in their portfolio in that crash wouldn’t be as happy.

As a younger man, I didn’t care if I got caught by a crash, but nowadays I’m keen to take profit before the next crash, only because I have less bull markets ahead of me.

The core/satellite approach

I still play close to 100% of my portfolio in my self-managed super fund in shares. My cash balance is small as term deposit rates are low. I plan to increase my exposure to bonds over time, after rates rise. For now, it’s adding to the core when it’s appropriate and/or building up my satellite holdings. These are more speculative and make up no more than 20% of my holdings but they’re not dodgy companies that I have no certainty about.

My most recent addition to these holdings was Fortescue (FMG) and it followed a story I wrote for this Report. Everything I use to select a stock was in place for FMG at the time.

Before I fork out on a stock, I want to have a positive view on the sector. The company must be, or is starting to look like, a quality company. It has to be doing a good job with debt, its management must be exemplary, the technical story has to promising, the uptick in price needs to have started and there needs to be a reasonable chance of a decent dividend.

Fortescue ticked all those boxes and it had one other thing going for it — it had dissenters that had taken its price down too low. It looked like a quality company contrarian play.

This is the standout characteristic of how I invest. I can jump on the bandwagon of a quality company that has already taken off but I love it when the market is being too short-term and has overreacted to, say, geo-political news or one bad report or outlook statement.

All of that Amazon rubbish talk unfairly hit JB Hi-Fi’s share price last year and it was a classic quality company contrarian play.

My best play in recent times, FMG aside, was BHP when it was heading towards $14. I know I’ve told this story many times but it does sum up my attitude to investing.

It was a quality company that had been over-smashed by the market. I didn’t get in until about $16 but by then I could see there were smarties who, like me, saw value in BHP around $14. I reasoned if it went to $20 in three years, I’d make $6 on $14, which would have been 42%, and over three years that would have been 14% per annum plus dividends. It wasn’t a risky bet on a quality company and even though I waited until it broke $16 before I acted, on the current share price it has vindicated my approach.

I didn’t do it for Woolies, when it was $20.56 in mid 2016, but I was a little spooked about Amazon, Aldi and Costco. At its $27 price today, it was a mistake not to stick to my strategy.

The ETF strategy

Since the GFC, one my best plays on quality assets has been the ETFs (exchanged traded funds) — IOZ and STW — which, of course, capture the S&P/ASX 200 Index.

On many occasions when persistent market negativity drove the Index down and I argued here, as well as in Switzer Daily, and on TV and radio, that we were looking at a buying opportunity, I used these ETFs to position myself for the uptick I was always expecting.

In February 2016, the Index dropped to 4765. I had called the unreasonable drop “a buying opportunity” around 4900 and if my advice was taken, right now you’d be up 23%, plus about 8% in dividends, so that would be about 15% per annum buying the best 200 assets on the Aussie stock market!

I hold 15-20 stocks so I’m not too exposed to any one dumb government policy or a silly CEO.

I have to admit I’m not a great seller but capital gains tax unreasonably spooks. That’s because most of my holdings have made very good capital gains, as I was optimistic on stocks from early 2009 and my strategy is based on buying low.

I did dump Telstra, BHP and Rio when their prices were falling but I was able to get back into the latter two when I couldn’t believe how harsh the market had been towards them in January 2016.

Macquarie (MQG) is one I just can’t sell because it has been so good for my portfolio but when I see the fat lady come out of the dressing room to belt her last song for this ‘bull market opera’, it will be one that I will have to kiss goodbye. However I’m not expecting that for a year or so.

I know my financial planners would be telling my clients to, say, have 60-70% in quality stocks/ETFs, say 15% in a quality bond fund or two and 15% in cash/term deposits, because this a nice, safe way to end up with a 7-8% per annum return over the cycle.

However, I can’t see myself quitting work for a decade and we have a business with over 50 staff, so my profile is a little different to many of my clients. Maybe I’m forever young, but note that even if it looks risky to have a near 100% exposure to stocks, as they are good dividend payers, they will keep paying good income while we wait for the stock market to bounce back. And, of course, I will be a buyer after the next crash because that’s what I do.

I hope that has helped Michael and I intend to get a lot more of my expert mates to share their views on how they invest.

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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