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A mixed market outlook and long term investing

April 30th, 2013 · Greg Atkinson · 20 Comments

The Australian stock market has posted some good gains recently with the ASX All Ordinaries Index and S&P/ASX 200 Index both closing above 5100 yesterday. Instead of the markets showing some weakness as I expected, they appear to be rallying even despite falls in commodities prices and warning signs that the Chinese economy may start to slow again. This makes it difficult to get a feel for where the markets might be heading and economic stimulus measures in the United States, China and Japan complicate the outlook even further.

As a long term investor I don’t place too much emphasis on short term trends. Rather than trying to predict where the markets will be in days or weeks I am more concerned about where they will be in months or years. I also don’t expect to be able to time with any great accuracy the purchase of stocks or other assets at the bottom of a cycle nor sell them right at the top of a cycle.

My investment strategy is based on getting the market trends almost right in two or three year blocks. That means with some luck, I will generally be moving into positions when the market is weak and hopefully taking some profits when there are profits to be had.

I usually miss buying stocks at rock bottom prices and quite often sell them before they have peaked, but as long as I sell them for a profit I figure I am doing okay. For example I sold all BHP Billition shares during 2010 at just over $44 and then watched them head near $50.

I sold them because I turned bearish regarding the outlook for commodities and although I did not time the sale as well as I could have, I did get the long term trend right and BHP shares peaked months after I sold and are now trading around $32.

But sometimes I get things horribly wrong as I did when I ventured into Babcock & Brown shares during the depths of the GFC. At the time I expected financial related stocks to recover and in fact generally most of the blue-chip ones did. However Babcock & Brown was a wipe-out and that trade almost cancelled the gains I made from BHP. Thankfully I held onto other banking stocks and they have also eased my pain.

So now when the markets appear to be moving upwards against my expectations I find it useful to sit back and review the big picture. What long term trends may I have picked correctly, which ones have I made a mess out of and what am I expecting over the next two or three years.

After the Australian stock market hit the GFC low in early 2009 I wrote on many occasions about how the All Ords/ASX 200 has been basically been moving sideways and that I expected them to trade within the 4800-5200 range. My attempts to nail down a figure for All Ords/ASX 200 however at the end of each year hasn’t been too successful but at least generally speaking I did make the rights call over the longer term.

So far this year the Australian stock market has moved higher than I expected so once again my short term outlook is off the mark. But they are still within the 4800-5200 range and I don’t expect they will break much upwards out of that range although I do expect them to dip down below that range this year.

What is making me cautious about the outlook for the Australian share market is that although commodities prices are falling and mining stocks have slipped back, the overall market has been pushing up against this trend.

Lower interest rates and overseas money looking for investment opportunities has helped push up the market. But the long term support for much of these gains i.e. increasing company profits, doesn’t seem to be a major factor.

As a long term investor I am sitting on my hands. If the market keeps rising then I make money, but I am not inclined to buy into this rally as I believe it is not sustainable.

There are some stocks/sectors I am watching closely however. The big miners like BHP Billition & Rio Tinto for example are getting down to prices that are tempting and I am also interested in stocks with exposure to Europe & Japan. I am also looking into listed companies related to agriculture and healthcare.

If I do buy into mining stocks again it would be as a long term play where I would hopefully see some decent gains in two or three years time. Meanwhile I would sit back and watch the dividends roll in.

At this point I wish to remind readers that I am not offering financial or investment advice. My articles are based on my personal observations and analysis of the markets plus some crystal ball gazing.

All of us need to bear in mind that forecasts and predictions regarding the stock market or economy involve a lot of guess work. So although I believe it is important to have an investment strategy and to try and form a view of how the markets may move, I also accept that things seldom turn out exactly as planned.

In short, it’s good to have a plan, but it also pays to be ready to adjust to the new reality when that comes along and shakes things up!

Finally let’s have a look at the long term trend for the ASX All Ordinaries Index between 1988 and 2013.

ASX All Ordinaries Index 1988 – 2013

allords_1988_2013_chart

On the chart above I have marked a trend-line in green which shows that the All Ords is basically moving as it did before the mining boom took hold. Since I expect iron ore, copper & gold prices etc to remain under pressure for the next few years, I reason that the market should move upwards pretty much along this trend line for a while.

Along the way there will be some dips, maybe some big ones, but I will be looking at these as chances to buy rather than a reason to sell and join the panic.

It’s not a strategy without risk, but for now that is my long term stock market investment plan.

Greg Atkinson is the editor of Shareswatch Australia and Managing Director of Ohori Capital. He currently works & resides in Japan.
He can be followed on twitter via


20 responses so far ↓

  • 1 Jimbo Jones // Apr 30, 2013 at 2:08 pm

    Greg, a well balanced article.
    My thoughts;
    – Agreed the market has continued to rally on the back of banks and other yield plays. More so than i expected, but consistent with US SPX strength.
    – Credit markets are very quiet. Volatility continues to remain subdued, allowing further strength in industrial equities. And the RBA could (maybe should) cut rates in May, so the rally could continue.
    – Mining and Materials sectors are very much unloved and investors fleeing in droves. Sentiment definitely is not in its favour!
    – What about April being one of the best performing months on th ASX. Seasonsals at work again???

    Where to from here (My thoughts and potentially guesstimates!)
    – Will a sharp deteriation of the AUD occur sooner rather than later. Historically USD appreciations have been very violent and fast when leaving their current bearish conditions. Could that be the catalyst for the Mining/materials sector rotating. BHP and RIO dividends in USD do look a great deal more appealing subsuquent to a sharp USD appreciation.
    – Credit markets seem to sailing comfortably into blue skys currently. Another catlayst for a changing sector rotation from financial services into unloved precious metals.
    – What about US SPX still making all time nominal highs? Again a fast strong rally with the bull market in its 5th year. What historically stops these bull markets??? Tightening yields (no sign yet) based on the rotation into commodities signifiying future inflation (again no sign yet).
    – Do we see divergences in the US SPX and ASX??? There does in fact start to be seeing nominal new high driven of a less broader base……

    So lets wait and see. Will the seasonals continue with their Mid year corrections or will this rally continue into its 6th year uninterrupted.

    Interesting times indeed. Lets revist in the weeks ahead.

  • 2 Greg Atkinson // Apr 30, 2013 at 2:48 pm

    Thanks for sharing your thoughts Jimbo. I didn’t touch on the AUD but that is certainly something to watch.

    Anyway after posting the article I started thinking again about mining stocks and figured if investors are leaving them in droves, then I might try heading in the opposite direction.

    So today I picked up a small parcel of Rio Tinto shares at $55.48 each as a long term recovery play somewhere around 2015.

    As you say, it certainly is interesting times!

  • 3 Matthew // Apr 30, 2013 at 9:31 pm

    Greg,

    You have hit the nail on the head with one theme being Long term Investment.

    That is the key to a wise investor. A short term position in any market is high risk / reward.

    As for the miners, such as your Rio investment, is to look for value in diversified miners. I fear one trick ponies with high costs of productions in volitile markets (such as Newmont, FMG etc) will suffer while diversified businesses such as BHP and Rio will prosper as markets change.

    As for Babcock and Brown, I was also burned, my worst share was the prior BBW now IFN. An absolute bloodbath I can not bring myself to exit because to be honest I dont need the tax losses that bad!

  • 4 Greg Atkinson // May 2, 2013 at 11:29 am

    Matthew is BHP falls much below $30 then I may be tempted to buy some shares in them as well. I may need to wait some years before there is a capital gain but in the meantime hopefully they will maintain a health? dividend policy.

  • 5 Jimbo Jones // May 2, 2013 at 2:09 pm

    I have started to review some of the carcases in the mid tier resource space. Prices are now below book value for a variety of company’s and are giving nil to minimal values for the operating assets on balance sheet. Its time to sift through the good potential companies from the bad. I expect the biggest risk to 2h is actually upside, as it seems the whole community is expecting the market to worsen.

    A tailwind from signs of a US SPX topping process with hitorical rotation into the CRB/CCI will give a catalyst to the upside. (as does typically occur at the end of 5-6 yr bull markets)

    Anyway, lets sit back and watch over the next few weeks (and months) what unfolds.

  • 6 Biker // May 16, 2013 at 4:15 pm

    Harker: “It is going to be a very challenging five years”

    And, for every thesis, the antithesis:

    http://www.businessday.com.au/breaking-news-business/resources-investment-to-peak-at-85bn-20130516-2jobu.html

  • 7 Biker // Jun 2, 2013 at 12:15 pm

    Wealthy investors still like shares | The Australian: http://t.co/qnbX4ueoaF about 2 hours ago

    Interesting article, as it defines ‘wealthy’ as those with $500K to invest. Rarely do those comparing asset classes actually define ‘wealth’ in dollar figures.

    Here’s a slightly different slant:

    http://www.perthnow.com.au/realestate/investing/property-powerhouses-dominate-rich-list/story-fnhlgqbd-1226648445386

  • 8 Lachlan // Jun 2, 2013 at 7:48 pm

    The DRA fellas just sent me a warning that a 14 year property boom is about to start. Don’t tell me they stole your horse BP. And they’re flogging it….I must be wrong. I did not “click here to read on”. Maybe they are talking about a property boom… but priced in bitcoins 😉

  • 9 Biker // Jun 2, 2013 at 11:28 pm

    Hell’s bells, Lachlan… . For the last seven, they’ve declined all my well-meant advice about Australian property… even tho’ I told ’em we were _different_ !!

  • 10 Biker // Jun 2, 2013 at 11:51 pm

    Seriously, I see no real ‘boom’ ahead Australia-wide for property in the next decade, Lachlan. It’s possible that some areas will jump by 10% pa or more, but the days of doubling or trebling in three years are probably over.

    As for DRA* and MMA, Sayce and Denning had the opportunity to warn goldbugs of the impending bubble-burst back in 2012. Instead we read such gems as:

    http://www.moneymorning.com.au/20121122/dont-be-fooled-by-australian-housings-death-fart.html

    * Every time I elbow my way back into their company, some hapless cursed soul whines, alerting them to my presence… and I’m again shown the door. 😀

  • 11 Biker // Jun 9, 2013 at 7:06 pm

    Having been accused of offering little… and sniping from the sidelines… I hesitate to offer yet a(nother) tip on what works for others…

    However, back in late January 2013, I mentioned that our sons had found a successful investment strategy, which was working well for them. No-one queried the comment, so I assumed there was either a lack of interest, or other investors had found the secret(s) of success and weren’t all that interested… and let it drop.

    Our eldest, advising his brother, has been highly successful for the past thirty or so months.

    His mix? 10% Australian & US Bonds for low risk; 75% Shares, inc Super (shares are ETFs, operating as indexed funds); 15% property; 0.5% Cash. His Australian shareholdings are just 10% of his indexed share portfolio. It’s mostly international shares.

    During that 30-month period, his profit has more than doubled the amount(s) lost posted here by a contributor who has claimed expertise as a share investor. Mind you, he does have a lot more invested than that investor.

    Why index(ed) funds? Initially we were doubtful, having seen the market fall 55.4% during the GFC… but his figures are impressive. Those in the know, including Buffett, contend that indexed funds are the way to go for inexperienced investors.

  • 12 Greg Atkinson // Jun 10, 2013 at 8:08 am

    Biker did you perhaps post this comment with the same breakdown 30 or even 12 months ago? By January 2013 the markets had already rallied so posting an investment strategy after the markets have rallied is well…not that hard to do.

    As I have written about a few times, if investors get the timing just right and buy into the market at the right time then they can do well. The trick is getting the timing right and buying the right stocks..that is easier said than done.

    Perhaps if this strategy is still a work in progress you could update us regarding what the mix is now and even mention a few of the ETF’s?

  • 13 Biker // Jun 10, 2013 at 9:05 am

    As stated, indexed funds are a strategy advised by Buffett and a lot of other experts, including Kohler. Even the doyen of footwear aficionados, The Bearfoot Investor, agrees.

    The chief objection to the mix I described might be that it’s a long-term strategy… no get-rich-quick, fast-buck tips for those who want to turn a $100K portfolio into $750K quickly, as one punter here forecast.

    Our original plan was to pull nearly all of my wife’s Super, add to our cash reserves, or buy a couple more houses. Our sons’ success has made us rethink that plan. Cash returns are falling out-of-the-sky, we really have enough rentals (and the lure of additional tax-free income from what appears to be a successful mix) is fairly tempting.

    As for not advising Shareswatch thirty months ago, or even twelve months ago, it was only during my January 2013 trip to Singapore that I was able to press our eldest for more information. As for tips-in-advance, the only hopefuls I’ve seen do so, have lost hugely (on paper 😀 )

    We are now attempting to locate a low-fees Super fund which will let us design a portfolio for my wife’s Super. Her current industry fund has a close fit plan and a target of around 6.2% pa, with minimal fees. They claim around 10% pa for the last decade, which includes that major GFC hit. (Personally, we find that claimed figure doubtful… .)

    We’re not interested in a SMSF, as fees and commissions seem excessive.

  • 14 Greg Atkinson // Jun 10, 2013 at 9:22 am

    I mentioned ETF’s and LIC’s on this site some years ago. But not all ETF’s happily trend upwards and it becomes even more complicated if investors moved into ETF’s that are essentially focused on non-AUD assets. Exchange rate movements can be tricky to deal with.

    I wasn’t aware Kohler was an investment expert..is that why he is in finance journalism? Buffet, Chanos, Faber, Soros…I would put them into the expert category but not the likes of Kohler, Pascoe, Gittins etc.

  • 15 Biker // Jun 10, 2013 at 9:40 am

    I guess if engineers can run investment sites, journos can also be considered investment experts, Greg. 😀

    No-one expects you to ‘deliver tips’ on shares. You yourself warn that you don’t have a crystal ball. It may be enticing if you comment “I’m looking closely at XYZ…” and others then follow what appears (to them) a lead, but that’s their problem.

  • 16 Greg Atkinson // Jun 10, 2013 at 10:38 am

    You should check my bio a little more carefully Biker, I established an investment business back in 2005. Engineers can have multiple skills.

  • 17 Biker // Jun 10, 2013 at 10:40 am

    And journos can’t? Hey, don’t get me wrong, Greg. You’re right to vociferously challenge _any_ proposed doubtful strategy put up by _any_ reader. That’s important, because to fail to do so might be considered negligent by readers who reasoned that (say due to my comments) a really major win was just around the corner.

    Now, regarding Kohler’s ‘expertise’. A year’s Eureka subscription, at 20% discount, costs $348.00. Advice is informed and pretty specific. Enough Australians subscribe to grant him some degree of expertise.

    Personally, I wouldn’t mind owning an investment site generating that kind of income, an evening spot on the national news… and a Sunday TV show.

    Someone somewhere must think Kohler is The Real Thing!~ 😀

  • 18 Greg Atkinson // Jun 10, 2013 at 11:00 am

    Did you see me inset my name into the list of experts I posted above? Never once on this site have I claimed to be an expert.

    Investment “experts” in my view are those who have a track record over many years actually managing successful portfolios…not just talking about successful portfolios or churning out so much content that eventually some of it has to hit the mark.

    But the mainstream finance media does a great job of selling itself I agree.

    Investments experts in my opinion are those who not only talk the talk but also walk the walk..i.e. the likes of Buffet, Chanos, Faber & Soros.

  • 19 Biker // Jun 10, 2013 at 11:18 am

    I read a wonderful piece recently, in which an analyst pointed out that most of those who flaunted crystal balls were one-shot-wonders who called it right after decades of getting it wrong. The meta-analysis even showed that, in one case, the claimant’s _father_ had actually called the same shot wrongly for decades.* Eventually, they got it right _once._ We remember these ‘experts’ for that one right call. The ‘mainstream finance media’ ensures we do.

    And as with expert (Australian) economists who clearly get-it-wrong, the response is that it will just take a l-i-t-t-l-e longer.

    Did you misunderstand my example “(say due to my comments)” 😉

    * Must locate it

  • 20 Biker // Jul 3, 2013 at 12:33 pm

    Thoughts on Zweig:

    Zweig: “Everyone wants the secret, the key, the roadmap to the primrose path that leads to El Dorado: the magical low-risk, high-return investment that can double your money in no time. Everyone wants to chase the returns of whatever has been hottest and to shun whatever has gone cold.”

    A brilliant article, hardly spoilt by the flawed notion that we _all_ want investments which ‘double your money in no time’.

    We’ve probably all experienced that phenomenon… and there’s no doubt that it’s an opiate… but that rare proposition may now be generational. Zweig may be right applying that formula to sub-cultures or some demographic groups; but what I’m seeing more, daily, in my (older) generation, is the desire to a.) earn regular income from assets; b.) protect income sources from unacceptable risk; c.) preserve flexibility and liquidity. Some of the ‘products’ which existed in the past no longer exist, possibly because they worked too hard for investors… and because the funds actually _shared_ some of the risk.

    A friend recently showed me the figures for an annuity (not an allocated pension) he’d bought before the GFC hit. It’s supplying this couple with a living wage, through ‘untaxed’ Super, on top of their pension. Yes, there is still risk. We agreed that the fund could go broke and disappear, along with his money! He pointed out that his capital had not only survived the GFC, but payments to him have remained constant (albeit subject to some minor loss through inflation.)

    Discussing the annuity option with my wife’s fund, yesterday, I wasn’t all that surprised to learn they don’t offer true annuities… just allocated pensions. The fund member takes all the risk (ie., market-based) and the fund still takes their fees.

    Going it alone, investing with very moderate growth in mind, still looks like the preferred option.

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