Many ways to invest
It’s important to reiterate that there’s no ‘right’ way to invest, only the right way for you, your present situation, goals, and personality type.
In our book we outline what we believe to be the optimal approach in the current environment, but there are always other ways to invest.
The most important thing is having a systematic plan, staying the course with it, and making adjustments as appropriate upon considered review.
Shedding the home bias
One of the key strands to our approach is the shedding of the inherent home bias.
Investing predominantly at home may well have made sense once, but today it introduces an unnecessary – and easily avoidable – risk of under-performance.
Australia makes up approximately 2–3% of global stock markets.
But we have a very high rate of home bias, with many investors choosing to keep their funds in the home market.
In this respect, we’re not unusual.
Over the past 120 years, Australia has actually been the most successful stock markets, with amongst the highest returns.
But remember that sort of timeframe is not applicable to you as an individual investor.
Bull and bear markets count!
Aussie companies do derive some of their revenue from overseas, but still there have been many periods when the Australian market has under-performed overseas markets.
This is why diversification makes sense when you can so easily take advantage of overseas markets that offer potentially higher returns.
When local stock market expected returns (especially in the low interest rate environment) look to be low, overseas markets may still provide opportunities to generate solid investment returns.
This is why we adopt a global approach to investing, in order to generate returns consistently through the cycles.
Testing our hypothesis
A strange thing with the internet is that if someone has a different viewpoint to you they can often take any point of difference quite personally.
And this leads on to ad hominem attacks or personal slights.
No big deal there, we’re old enough and ugly enough not to be bothered by any of that nonsense.
Remember, there are many personality types and many ways to invest!
But genuine critiques we’re always interested to hear.
We’ve intended our strategy to be as robust and watertight as possible, and have developed it accordingly, so naturally we openly welcome constructive criticism.
Here are some of the most common criticisms we have had (and our thoughts):
Criticism of Low Rates, High Returns
Here are some of the common questions or criticisms:
-‘You can’t time the market‘
We do agree that it’s impossible to consistently time markets very accurately, and personally we’re not big on using technical analysis (it’s possible to wait for confirmation of an uptrend before investing, for example).
That said, you don’t actually need to have great market timing skills; you just need to be able to see when a market is very cheap, and if you average sensibly into an investment the returns will come, thanks to mean reversion.
Have a look back through history and you’ll see that big opportunities to buy low come around regularly.
Take the recent example of Pakistan after its index crashed 70% – this is what we looked at 6 months ago:
Which do you think will perform better:
-a country where stock prices are down 70%, with PE ratio of 8, and a dividend yield of 9.4%; or
-the US where valuations are at their highest levels since the tech bubble, and levitating at a CAPE ratio that’s never previously been sustained?
It’s not a trick question!
Of course Pakistan had its issues with high interest rates and other economic challenges (aren’t there always?), although there’s a great swathe of Chinese investment underway too.
But with a yield and value like that on offer you don’t need to overthink things (ever more detailed analysis isn’t a requirement, or often even helpful) or catch the exact bottom of the market.
More than 50% of gains later, it’s still cheap, and we’re still holding.
Over a 10-year or 20-year time horizon returns are largely determined by the price you pay, and much of the rest is noise.
There’s always some reason or other why economies are going to boom (or crash), but that tells you little about stock market returns, and in fact an economic boom is often negative for future returns over the coming decade.
-‘Taxes and transaction costs are too high if you buy and sell‘
Broker fees can thankfully be fairly negligible these days.
It’s true, however, that if you buy and sell assets within 12 months then there can be significant capital gains tax to pay.
Our approach does involve selling assets when they’re fully valued, but it’s still an approach still founded upon investing not trading, and ideally we look to own investments for much longer than a year (thus qualifying for the capital gains tax discount).
We like to hold assets for as long as they represent good value.
For example, we’ve been invested very profitably in Russia since 2014, and continue to hold very happily, with returns to date of over 200%.
We note that whenever the Aussie market becomes cheaper again then we’re all for adopting a passive approach at home too.
We don’t, however, want to commit the cardinal sin of giving all of our hard-earned gains back again in the next bear market.
So, we rebalance, and take a profit, and a bit of tax is a small price to pay for that.
-‘International/emerging markets are too volatile/sound dodgy‘
Emerging markets in particular can be volatile, but volatility is not the same thing as risk, and indeed it can be your friend when it throws up wonderful opportunities to buy a dollar of value for fifty cents.
Corporate transparency is weaker in some countries, so owning an index may be safer for you than individual stocks, in many cases.
These days you can buy emerging markets ETFs with vast diversification if you do want to minimise volatility, but that shouldn’t be necessary if you buy low, and average into a position.
You can also invest in developed markets, sectors, and styles to diversify.
-‘What about foreign currency movements?‘
This is an excellent question, with a few possible solutions.
A simple approach is to take a judgemental view each time you invest, which is one viable option, albeit sometimes tricky to execute effectively.
Another way is to recognise and accept that, over the course of multiple investments, the ups and downs of currency fluctuations will likely wash through and balance themselves out over the years.
Alternatively you can hedge, or buy and sell in US dollars, or use other mitigation strategies.
It doesn’t necessarily matter which your favoured approach is, but pick one and stick to it.
-‘Holding cash is a drag on returns‘
In a bull market, this is true.
Holding cash does give you a buffer, however, and it also means you can generate higher returns on your capital when the market is offering higher returns.
You don’t have to be 100% invested at all times if the returns aren’t there.
Holding some cash or liquid funds is actually desirable if it means you can compound your wealth faster later.
-‘It all sounds too much like hard work‘
There’s definitely something to be said for simplicity, so, for example, you might like to keep to about a dozen positions.
And it’s also the case that if you’re moving into your later years with a spouse who has no interest in investing, you may wish to have a simple set-and-forget strategy in case you depart first.
The goal of our book is simply to outline a proven method for generating strong returns in a low risk fashion, given the current low interest rate environment.
In our view that means taking a global approach, and being cautious about the extremely high valuations in the US and some other developed markets.
Not everyone needs to generate anything more than the income on offer from the market, of course, especially in their later years, though we believe our approach can also help to limit downside risk.
Thus we adopt our 8 timeless investment principles, combined with a Kelly capital growth strategy, including the Kelly Criterion for position sizing.
This does involve more thinking than a purely passive approach, although it’s entirely possible to adopt an approach that simply involves rebalancing your portfolio quarterly, or even annually.
-It sounds too complicated
It’s not that’s hard, honestly!
In many ways the beauty of our approach is in its simplicity.
Analysts often think that more and more detailed analysis is helpful.
But really you want to paint with a broad brush, and look for opportunities with limited downside and huge upside.
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Low Rates, High Returns. 