The Rising Tide

[keithj]

I certainly agree with you that asset class selection is most important. With stocks in particular this is where I feel LICs and Index funds come into their own. One can remove stock specific risk and focus purely on timing if you are confident you can do this. Or if the focus is on building an ever increasing income stream with less concern for short to medium term capital gains then one could also dispense with trying to time the markets and just dollar cost average into the market at regular intervals. This would certainly work very nicely with LICs and index funds.

When I get bored by all this investment stuff & want a 100% hands-off, growing income stream I'll do exactly that - 30% in ARG, 40% in AFI, 40% in STW & 50% in SLF - (the last 50% is OPM).

 

[austini]

When I get bored by all this investment stuff & want a 100% hands-off, growing income stream I'll do exactly that - 30% in ARG, 40% in AFI, 40% in STW & 50% in SLF - (the last 50% is OPM).

Hi Gang,

Hey Keith, just curious why you didn't throw MLT in there given it's stand out performance over the years and it's relatively large size?

This portfolio example given by Keith would also be excellent for a SMSF. There is very minimal accounting and compliance work to be done and hence costs are kept very low.

I know a couple of retirees who have the bulk of their wealth invested in ARG &/or AFI. In both cases they have similar holdings in their SMSF and personal names. By having the likes of ARG in the SMSF and both names they were able to take advantage of mutiple share purchase plans etc over the years. But I must admit I still get a wee bit concerned about the thought of eventually having so much of our wealth invested in only a few LICs. In theory because of their diversification the risk of them going belly up is extremely low. However I suppose one could still argue that there is some stock specific risk. Managed funds both listed and unlisted have come to grief over the years. However given the investment approach of the LICs mentioned I can't ever see this happening.

The other risk with LICs of course is if their CGT special status is removed which would put them at a disadvantage to their unlisted competitors. However given that there is very little turnover in these LIC's portfolio and if your focus is on the dividend income then this is not really a concern. In fact my view is that this situation would create a fantastic buying opportunity with the less well informed shareholders looking to exit quickly.

Another thought in regard to stock/fund specific risk is that the average Joe Blow's main wealth (other than the family home) is typically invested in a single Super fund via their employer!

Any thoughts anyone has about possible risks of having the bulk of one's investment in only a few LICs would be welcomed.

Cheers - Gordon

 

[see_change]

Implementing leverage is a 10 minute exercise, selecting a promising bunch of stocks may take some weeks of effort. I know where I'd prefer to spend my effort.

Setting up a system to select the shares may take a matter of weeks ( or longer if your a computer illiterate like me .... ). Getting the knowledge to be in a position to create one might take a lot longer . Running it on a regular basis is a matter of minimal time .

See Change

 

[alexlee]

Several conclusions could be drawn from this -

• It doesn’t matter what you buy, provided it’s the right asset class
• Much of the effort put into buying specific assets gives little additional gain. Provided it’s the correct asset class at the correct time, it’ll give good returns. If IP is similar to shares, then 20% of the gain is buying in the right suburb/city & 10% picking the right house, but 70% is simply being IN the market.
• The big picture (that moves markets) is more important than local/specific issues.

Thoughts ?

Agree with the tidal theory. The way I interpret it is the Somersoft principle: buy median priced properties regularly and don't sell. You don't have to be a market whiz to be rich: just invest consistently. IPs naturally amplifies returns because of the gearing, and the earlier you start the better it gets at the back end.

I've always wondered how people can 'spot' the next hot suburb. Sure, I can see that an area has good schools and shops and a park, but what makes that better than the next suburb on, which has similar amenities? My conclusion is that I can't. So I'm just going to buy IPs in areas that I would want to live in, in more than one area at or below the median price, with some yield analysis as a sanity check (which is why I'm holding off on Sydney), and hitch a ride with the tide. The Lazy Investor's plan.
Alex

 

[keithj]

Hey Keith, just curious why you didn't throw MLT in there given it's stand out performance over the years and it's relatively large size?

Hi Gordon,

ARGs 2nd biggest holding is in MLT. Go to ARG & click Top 20 shareholdings.
AFIs 22nd biggest holding is MLT - see here. They're the 1st & 4th largest on MLTs register.

Also MLT is relatively illiquid. AFI & ARG daily turnover is $2M+, MLT turns over about $20K per day. I do hold a small qtys of MLT, so I can get $5K of discounted shares each year.

As an aside, you may read that in the past LICs were really bad & suffered from a serious lack of confidence. The reason was that LICs bought each other, so it created a circle of ever increasing valuations. Then someone realised the lack of underlying value & LIC valuations came crashing down (to reality). So when you invest in a LIC, check if it has major holdings in other LICs....... them check that LICs holdings..... etc If anything ever leads back to a LIC you've already checked, be alert AND alarmed.

Any thoughts anyone has about possible risks of having the bulk of one's investment in only a few LICs would be welcomed.

It's all market risk, v. little stock risk. If you think capitalism is going to fail, buy bonds/gold/AK47 instead. Otherwise IMHO quality LICs such as ARG & AFI are great.

Cheers Keith

 

[Glebe]

Also MLT is relatively illiquid. AFI & ARG daily turnover is $2M+, MLT turns over about $20K per day. I do hold a small qtys of MLT, so I can get $5K of discounted shares each year.

I thought you owned for the free Dreamworld tickets

 

[austini]

Hi Keith,

Yep can't argue with your reasoning on MLT - good points.

Actually the incestual type relationships that can happen with LICs is what caused all sorts of problems with these in the UK quite some time ago. So these issues you raised are certainly worth taking note of.

I like your following quote which was in line with my thinking when I typed my last post:

"If you think capitalism is going to fail, buy bonds/gold/AK47 instead. Otherwise IMHO quality LICs such as ARG & AFI are great."

I have often thought that it would take a catastrophic event to cause ARG & AFI to go bust in which case an AK47 sounds very appropriate. Although many think of IP's being a safer asset class than stocks in general things like termite damage, tidal surge and litigation etc are probably more likely to happen than ARG or AFI going bust. So in my mind Index funds and quality LIC's like ARG & AFI which remove stock specific risk are less risky than many IP investments. Yet many of us think nothing of spending 1/2 mil plus on a single property asset.

Thanks for your comments.

Cheers - Gordon

 

[stretchy]

I've spent a long time trying to find a reference....and failed. I read it a long time ago, so I guess it must been on a paper medium. It sounded as though it might come from 'A random walk down wall st', so I scanned the first 200 pages..... not there.

I have seen that info both in "A random walk.." and another book called "Asset Allocation". I would agree with you on that one.

Even techincal analysis books tend to harp on about it - [SIZE=-1]William O'Neil's system makes a point about following the general trend of the market when buying stocks.[/SIZE]

 

[Glebe]

Also MLT is relatively illiquid. AFI & ARG daily turnover is $2M+, MLT turns over about $20K per day. I do hold a small qtys of MLT, so I can get $5K of discounted shares each year.

I thought you owned for the free Dreamworld tickets

Oops got Milton (MLT) mixed up with Macquarie Leisure Trust (MLE).

Argo Investments also has a share purchase plan ($5000 per year) and dividend reinvestment plan at 2.5% off market price.

 

[keithj]

Oops got Milton (MLT) mixed up with Macquarie Leisure Trust (MLE).

Did you find that out before or after you bought them!

Argo Investments also has a share purchase plan ($5000 per year) and dividend reinvestment plan at 2.5% off market price.

AFI, ARG & MLT all offer $5K of shares (via SPP) @ 2.5% discount every year AFAIK. I hold $500 of each in my personal name & more in trust, so I get offered around $30K of shares @ 2.5% discount every year. It's an extra $750pa of v. low risk equity gain.

 

[Andrew_A]

I've spent a long time trying to find a reference....and failed. I read it a long time ago, so I guess it must been on a paper medium. It sounded as though it might come from 'A random walk down wall st', so I scanned the first 200 pages..... not there.

‘They taught me that 40% of a stock’s price movement was due to the market, 30% to the sector, and only 30% to the stock itself, which is something that I believe is true. I don’t know if the percentages are exactly correct, but conceptually the idea makes sense.’ - Steve Cohen in Stock Market Wizards.

It makes sense to me. Knowing when to play and what game is the favourite at the moment is valuable.