Q&A – Page 2 – TurnerStreet

December 27, 2023 PPD1962 Asset Allocation|Cash|Debt|Equities|Realty

Debt: why equities folks follow it.

QUESTION: TSA do asset allocation only between cash and equities portfolios, so why are you interested in government debt?

ANSWER: Like it, or not, most investments are based off US Treasuries, so we need to abreast of what is happening. Recently, there was a good article that we would direct you to for an update: see this link. The US Treasuries are often used for the risk-free rate, which helps us determine the value of equities and their alternatives.

However, given the political instability in the US, maybe it will not be the risk-free rate in the future that investment managers use. Ironically, there is a significant proportion of the 74m of Americans who voted for Trump in 2020 who would prefer Trump over democracy. That is a huge number and the risk is that those Trump supporters have filtered into all elements of society: the Supreme Court; lower court; Congress; local election officials; et al. If that sounds familiar, think of Hungary, Turkey and Poland.

Finally, although TSA limits itself to cash and equities, we also like realty, specifically freehold land where the investor has local knowledge. However, most TSA clients already do land investing themselves, so we cannot add value, except to recommend freehold over leasehold or strata property (we will expand on that later).

Contact TurnerStreet if you wish to buy our current asset allocation recommendation (we do cash and equity only allocations for our wholesale clients), and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

December 10, 2023December 10, 2023 PPD1962 Uncategorized

Equities: are short-sellers evil?

QUESTION: The Economist recently had an article on short-sellers. Do you think they are evil?

ANSWER: No. With more and more funds under management moving from active to passive equities managers, there is an increasingly important role for short-sellers: informing the market that maybe something is not right with the stock. Passive equities managers don’t take a view whether something is going to be the next Enron or Wildcard, even though they tend to be wrecks that happen in slow motion, and the portfolio managers read newspapers. Active managers who should be have done their homework on the fundamentals, sometimes will be alerted to do it again when short-selling happens, so are more likely to avoid the Enron-like corporate disasters.

Licensed investment managers who are active managers take note of short-selling, and so should you.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

November 27, 2023 PPD1962 Derivatives|Equities

Equities: large cap stocks are not boring!

QUESTION: People say most of the gains are made in small cap stocks and the large cap indices are boring. Is this correct?

ANSWER: No. “People” who say that are small cap equities managers with a vested interest, or idiots who have never looked at the data.

Below is a table that comprises the 1 year price movements of the five best, and worst, performing stocks in the S&P Global 100 index and its tracker exchange traded fund (“ETF). The range was +189% to -41%, with the benchmark at 17%

Name	Change % (1Y)
NVIDIA Corporation	189%
Broadcom Inc.	83%
Mitsubishi UFJ Financial Group Inc.	67%
Eli Lilly and Company	66%
Banco Bilbao Vizcaya Argentaria S.A.	60%
iShares Trust – iShares Global 100 ETF	17%
Anglo American plc	-31%
Roche Holding AG	-32%
Bristol-Myers Squibb Company	-37%
Pfizer Inc.	-38%
Bayer Aktiengesellschaft	-41%

Source: Koyfin data.

What the table shows is there plenty of excitement for stock picking in the large cap. However, unlike the small cap benchmarks you can short the 100 largest companies in the world if you think they are losers easily, and cheaply, with derivatives. Try that with small cap stock (anything less than a $1bn), or microchip stock.

ACTION PLAN:

If you still don’t understand how diverse the possible outcomes in any investment benchmark are, you are just punting securities, derivatives, etc, rather than investing. You should get a licensed investment manager.
The most significant means to increasing your wealth is getting the asset allocation correct. For most people, that means knowing when to put money into equities, bonds, et al and when to take it out. The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what is the expected 10-year US Treasury yield and the percentage of a portfolio that should be equities, bonds, realty or cash (the other asset classes are so speculative, they should be only for the very brave).
Once you establish how much to allocate to each class, then it is a question of which security or property in each class to buy, or sell (short). For the DIY folks, that will most likely be an index. For professional investment managers, it will be buying/selling individual stocks, bonds, realty or leaving money in cash in a well constructed portfolio. Also, it may mean not holding any equities (as even cheap stocks go down when the tide floods out).
Contact TurnerStreet if you wish to buy our current asset allocation recommendation (we do cash and equity only allocations for our wholesale clients), and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

November 22, 2023November 22, 2023 PPD1962 Equities

Equities: ERP in the US is almost zero.

QUESTION: I saw this in The Economist. Should I be worried about the Equity Risk Premium being now almost zero?

ANSWER: Yes.

The explanation of why the ERP is a worry is well explained in a couple of sentences.

ACTION PLAN:

If you still don’t understand the concept of ERP, you are just punting securities, derivatives, etc, rather than investing. You should get a licensed investment manager.
The most significant means to increasing your wealth is getting the asset allocation correct. For most people, that means knowing when to put money into equities, bonds, et al and when to take it out. The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what is the expected 10-year US Treasury yield and the percentage of a portfolio that should be equities, bonds, realty or cash (the other asset classes are so speculative, they should be only for the very brave).
Once you establish how much to allocate to each class, then it is a question of which security or property in each class to buy. For the DIY folks, that will most likely be an index. For professional investment managers, it will be buying individual stocks, bonds, realty or leaving money in cash in a well constructed portfolio. Also, it may mean not holding any equities (as even cheap stocks go down when the tide floods out).
Contact TurnerStreet if you wish to buy our current asset allocation recommendation (we do cash and equity only allocations for our wholesale clients), and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

November 16, 2023November 20, 2023 PPD1962 Equities

Equities: why is the P/E ratio for the S&P 7 twice that of the S&P 493?

QUESTION: The Economist wrote an interesting article of the “magnificent 7” stocks in the US. It said that their P/E was twice that of rest of the S&P 500. Is that correct?

ANSWER: Yes, give or take.

A high Price/Earnings ratio suggests that most of the value of the stock is justified by earnings well into the future, rather than the here and now. Hence, when interest rates were falling, those future earnings were discounted less and we had higher valuations for the hot stocks. When interest rates started to rise, then the magnificent 7 whose earnings were proportionally more in the future had a greater price drop. Now that many think interest rates have peaked, the situation is reversing.

TSA preferred large cap benchmark is the S&P Global 100. The S&P500 is still of interest because its derivatives allow the best (imperfect) hedging. Originally, the DAX, which has 40 stocks, was our preferred benchmark but exposure to Russia (energy, political risk) and China (IP, political risk) makes it less attractive.

ACTION PLAN:

If you don’t understand the concept of discounted cash flows (DCF) to the extent you could do a simple DCF calculation, you are just punting securities, derivatives, etc, rather than investing. You should get a licensed investment manager.
The most significant means to increasing your wealth is getting the asset allocation correct. For most people, that means knowing when to put money into equities, bonds, et al and when to take it out. The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what is the expected 10-year US Treasury yield and the percentage of a portfolio that should be equities, bonds, realty or cash (the other asset classes are so speculative, they should be only for the very brave).
Once you establish how much to allocate to each class, then it is a question of which security or property in each class to buy. For the DIY folks, that will most likely be an index. For professional investment managers, it will be buying individual stocks, bonds, realty or leaving money in cash in a well constructed portfolio.
Contact TurnerStreet if you wish to buy our current asset allocation recommendation (we do cash and equity only allocations for our wholesale clients), and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

November 10, 2023 PPD1962 Debt|Derivatives|Equities

Equities: what is wrong with people?

QUESTION: Active equities managers generally don’t seem to be able to consistently beat their benchmark, what is wrong with these people?

ANSWER: Hubris, and occasionally stupidity.

TSA believes that smart folks, by fundamental analysis, can rank stocks in an investment universe from outperform to underperform/bankruptcy, and generally get it mostly right over many years. However, the reason it doesn’t often happen is hubris and/or the marketing imperative to get investor-clients.

So this is how it works (in a simplified form):

Active manager has had some early success picking stocks (about three years will do it), so investor-clients are now interested (flipping three heads, or three tails, in a row is not an impossible challenge and neither is an active manger with poor fundamental skills fluking stock picking for three years);
Active manager does some great fundamental analysis and determines that stocks A, B, C, D, E and F are going to be best highest total expected return (“TER”). The active manager knows nothing is certain in markets so it (my preferred pronoun) also calculates the risk for each TER.
Client say to active manager, stock F is expected to have a TER only slightly above the index, so why are have you got that in the portfolio? Also, D and E’s return is a lot less. Why aren’t you backing yourself as an active manager?
Active manager says “you are right, you have come to me because I’m a great stock picker, so I will give you a three stock portfolio of A, B and C, and I will be fully invested, i.e. hold no cash, proving to you the first three years was not a fluke”.
Overtime, the stock picking active manager with the three stock portfolio generally underperforms.

The potential mistakes are:

the manager is just bad at stock picking based on fundamentals (a few high profile managers have been in the media recently);
concentrated portfolios inevitably have the wrong “bet size”; and,
active mangers ignore bet size because it sends the wrong marketing message to potential investor-clients,

In a nutshell, active equities is about ranking stocks on fundamentals, but constructing portfolios using quantitative tools.

ACTION PLAN:

If you haven’t heard of “bet size” and understand the maths behind the Kelly criterion, you are just punting securities, derivatives, etc, rather than investing. You should get a licensed investment manager.
The most significant means to increasing your wealth is getting the asset allocation correct. For most people, that means knowing when to put money into equities, bonds, et al and when to take it out. The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what is the expected 10-year US Treasury yield and the percentage of a portfolio that should be equities, bonds, realty or cash (the other asset classes are so speculative, they should be only for the very brave).
Once you establish how much to allocate to each class, then it is a question of which security or property in each class to buy. For the DIY folks, that will most likely be an index. For professional investment managers, it will be buying individual stocks, bonds, realty or leaving money in cash in a well constructed portfolio.
Contact TurnerStreet if you wish to buy our current asset allocation recommendation (we do cash and equity only allocations for our wholesale clients), and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

November 6, 2023 PPD1962 Asset Allocation|Cash|Debt|Equities|Uncategorized

Debt: bond v. term deposits

QUESTION: Vanguard wrote an article on why bonds are better than term deposits for investors, do you think they are correct?

ANSWER: yes, but...

Simplistically, and generically, the answer is obviously yes. However, investors do not come all in the same size (of portfolio assets). Investors who have a large enough investment portfolio, which means they are non-retail investors might be able to take a much more efficient, riskier and more profitable route of having only two asset classes in their portfolio: cash and equities. This might seem strange to exclude bonds, but in a higher inflation environment bonds and equities are positively correlated. Also, moving from cash to equities (and back) is far cheaper than the transaction costs of a bond portfolio. Additionally, in many jurisdictions bank deposits are government guaranteed.

In the words of the prophet, Brian, “you are all individuals” so think carefully before acting on publications aimed at a mass audience.

ACTION PLAN:

Put together a list of your assets and income, and determine what return you are looking for and how much you are willing to lose in the first year of your new portfolio strategy.
If you don’t have a view on the expected returns/risks of the different asset classes, you are just punting securities, derivatives, etc, rather than investing. You should get a licensed investment manager.
The most significant means to increasing your wealth is getting the asset allocation correct. For most people, that means knowing when to put money into equities, bonds, et al and when to take it out. The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what is the expected 10-year US Treasury yield and the percentage of a portfolio that should be equities, bonds, realty or cash (the other asset classes are so speculative, they should be only for the very brave).
Once you establish how much to allocate to each class, then it is a question of which security or property in each class to buy. For the DIY folks, that will most likely be an index. For professional investment managers, it will be buying individual stocks, bonds, realty or leaving money in cash.
Contact TurnerStreet if you wish to buy our current asset allocation recommendation (we do cash and equity only allocations for our wholesale clients), and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

AA: debt markets can drive equities and other markets

QUESTION: the New York Times is concerned enough by the bond market to write an article on the matter, so are you concerned too?

ANSWER: yes.

Again, Finance 101 says that an asset is worth its cashflows in perpetuity, discounted by an appropriate rate. The appropriate rate is almost always related to the 10-year US Treasuries, who when their yields go up, valuations go down! Why, and how far, yields rise or fall is subject to lots of analysis by pseudo-scientists (also known as economists and chartists). It is fair to say that with lots of government debt to refinance, political pressure, a great economic resurgence, low unemployment, on the balance of probabilities, US yields are likely to rise. How much is debatable, but for anyone older than 60, another 1% would be at the lower end of expectations.

ACTION PLAN:

Firstly, if you can’t value an asset, including equities, by discounted cash flow, you are just punting securities, derivatives, etc, rather than investing. You should get a licensed investment manager.
The most significant means to increasing your wealth is getting the asset allocation correct. For most people, that means knowing when to put money into equities, bonds, et al and when to take it out. The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what is the expected 10-year US Treasury yield and the percentage of a portfolio that should be equities, bonds, realty or cash (the other asset classes are so speculative, they should be only for the very brave).
Once you establish how much to allocate to each class, then it is a question of which security or property in each class to buy. For the DIY folks, that will most likely be an index. For professional investment managers, it will buying individual stocks, bonds and realty.
Contact TurnerStreet if you wish to buy our current asset allocation recommendation, and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

Equities: fear in markets?

QUESTION: why fear is spreading in financial markets?

ANSWER: The Economist, and TurnerStreet, agree it is because of the long-haul reality of high interest rates.

At a recent investment conference TurnerStreet attended, all the speakers, except one, thought it may be late 2024 or 2025 before interest rates start to fall again. However, thinking about want truly is normal for interest rates, shouldn’t interest rates continue to increase by 2-3%? If correct, then the tide is going out for all the financial markets for some time. The best game in equities would then be to seek “alpha” and to hedge the “beta”.

ACTION PLAN:

Firstly, if you have never heard of alpha and beta before reading this article or understand what it signifies, you are just punting securities, derivatives, etc, rather than investing. You should get a licensed investment manager.
The most significant means to increasing your wealth is getting the asset allocation correct. For most people, that means knowing when to put money into equities, bonds, et al and when to take it out. The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what percentage of my portfolio should be equities, bonds, realty or cash (the other asset classes are so speculative, they should be only for the very brave).
Once you establish how much to allocate to each class, then it is a question of which security or property in each class to buy. For the DIY folks, that will most likely be an index. For professional investment managers, it will buying individual stocks, bonds and realty.
Contact TurnerStreet if you wish to buy our current asset allocation recommendation, and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.

October 3, 2023October 3, 2023 PPD1962 Client Services|Uncategorized

Clients: investment manager services agreement now available

QUESTION: are you ready to invest our money?

ANSWER: Yes. We have an investment manager services (“IMS”) agreement that can be sent to clients who want us to manage their funds in an individually managed account (“IMA”). The minimum investment is A$100k.

ACTION PLAN:

Use the “contact us” tab to let us know you would us to send you the IMS agreement.
Ask your accountant to send us a certificate that you are not a retail investors. (Most accountants would be too embarrassed to charge for the certificate as there is almost no work involved.)
We will call to set up a meeting to discuss the parameters of your porfolio and the administrative set up.

IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors. Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors. Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.