Obiter Dicta: CAPE Ratio

Having recently written a bit on the Sharpe Ratio reminded me that I hadn't actually covered the CAPE ratio on my blog. This was particularly surprising as it was one of the first things that ボーイフレンド taught me, even before I had started my own portfolio.

Invented by the Nobel Prize winner Robert Shiller, it stands for Cyclically Adjusted Price to Earnings Ratio, also known as the P/E 10 Ratio. Starting again on fundamentals, PE ratio is one of the first tools that you learn in finance. It is simply calculated as follows:

It is a very blunt instrument that provides rough guidance on whether or not a share is overpriced. The higher the PE ratio, the more likely it is that a share is overvalued or a high growth is expected, vice versa, the lower it is the more likely it is undervalued or slow growth is expected. In comparing PE ratios, it is best to compare with competitors in the same industry or with the company's previous years' performance to ensure consistency of benchmark. Being a very simplistic indicator, it doesn't take into account projected earnings, especially for startups which may yet have started turning over a profit. It is also often limited by fluctuations experienced annually throughout the course of a business cycle.

This is essentially what lead to the creation of the CAPE ratio, to smooth out fluctuations in corporate profit over a decade. The formula for CAPE ratio is:

The use of the CAPE ratio for individual companies is largely to assess the long term financial performance to determine whether or not a share is over or undervalued. Limitations of the ratio include the fact that it is always only backward looking rather than forward looking and it doesn't take into account changes in accounting standards which may also affect the figures used in the calculations.

Other than for individual companies, I find that a far more useful application of the CAPE is in considering the historic CAPE ratio for an individual country. The CAPE Ratio by country is calculated by averaging a country's average equity price by their ten year average inflation adjusted earnings weighted by market capitalization. The resulting figure provides an indicator on whether or not the country's stocks are considered over or undervalued.

When considering a country's current CAPE ratio to it's historical average, we can determine the propensity for a substantial corrections in it's equity prices. From the chart below, it is clearly apparent that the crashes in US and Australian stocks corresponded to a much higher than average CAPE ratio, notably the dot com crash and the GFC. Therefore in the short to medium term, investing in a country with considerably above average CAPE ratio is likely to result in lower than expected returns in the foreseeable future.

It is also of interest to note that different countries' CAPE ratio cannot be compared against each other because different countries specialize in different industries with different average PE ratios, so a country's CAPE ratio ought only to be compared with it's own historical average.

Given the above, there is little doubt as to why CAPE ratio poses such a useful tool in measuring not only a company's stock but for a whole country's projected future performance. Definitely a worthwhile indicator to consider when assessing future investments.

by 小福

Book Review: Affluenza - Clive Hamilton

Has been a while since I've had time for a book review. Not so much because I haven't had time to read but due to the time I've spent dwelling on the recent current affairs and state of the world. Finally finding a brief respite amidst the turmoil, comes another book review, Affluenza, When Too Much is Never Enough by Clive Hamilton and Richard Denniss. Surprisingly it was recommended to me by Mr A quite a few years ago rather than my ボーイフレンド .

Reading it after The Millionaire Next Door, I found that it built upon a lot of those foundations and provided a more in depth analysis on the spending habits of the the majority who live in first world western society. As you can probably guess by the title, Affluenza is a portmanteau affluence and influenza, it covers the topic of over consumption in our current culture. The premise of the book considers how we are often conditioned by media and more recently, social media to aspire to the lifestyles of the rich and famous and at the cost of our mental wellness and financial future. It covers the vast amount of possessions that we buy each year, upgrading to the newest, fanciest model of accessory whilst throwing out an unprecedented amount of waste. In the end it presents a message of downsizing, weighing up what is an essential rather than shallow desire to ensure that we can live a more fulfilling and fruitful life. It also means that for those who are stuck in jobs that they do not enjoy as much, they can become financially independent and retire earlier.

In a nutshell, affluenza can be encapsulated in the following:

 “We buy things we don't need with money we don't have to impress people we don't like.”
― Dave Ramsey

by 小福

Obiter Dicta: Sharpe Ratio

The relative calm of the recovering market means I have had more time to ponder theory surrounding financial mathematics rather than the pragmatic application of theory to real life when a crisis is unfolding. 

Having gone through the recent downturn and observed the gains by some investors, it made me wonder whether or not return on investment was the single best measure of performance. Considering that some have taken higher risk than others to achieve comparable returns, I recalled  ボーイフレンド had mentioned that the Sharpe Ratio was a good measure of this, so it was time for a bit more technical research.

The Sharpe Ratio is calculated as follows:

rx is the rate of return for the investment
Rf is the risk free rate of return, which we can take to be the RBA cash rate (currently 0.25%)
StdDev(rx) is the standard deviation of the portfolio. A guide on calculation can be found here.

The higher the Sharpe Ratio of your portfolio is, the better the returns are at the undertaken risk. As good a tool as it is, the Sharpe Ratio does come with drawbacks, substantively the premise that the lower the volatility, the better the portfolio, it negates the positives of upside volatility. Those who are familiar with the formula are also able to cherry pick performance to demonstrate stable earnings to boost risk adjusted returns as well, so as with most blunt instruments, due consideration needs to be given in application.

In the end, both return and risk need to be considered when evaluating whether or not a portfolio is superior. Just because you took a very high risk and it paid off handsomely doesn't make you a skilled investor so much as it means that you are a lucky gambler (for now).

By 小福

Case Study - BBUS and BBOZ: The First One's Always Free

Those who have been dabbling in stocks during the most recent period of volatility will undoubtedly have gained invaluable experience in the market during the Feb to April downturn and subsequent uptick. In summary, from 19 Feb to 23 Mar, the S&P 500 lost 33.9%, making it the fastest crash in history. This was followed by growth of 17.5% from 24 to 26 Mar, being one of the biggest three day gains for almost a century. It would not be an exaggeration to say that what we lived through was truly extraordinary. What was even more amazing was to watch the market response to these violent movements. 

As my readers will now have discerned, my investment strategy has been a fairly conservative one where I dollar cost average twice a month, largely into index funds and by exception individual shares where they appear to be of exceptional value and worthy of the additional risk involved. Whilst I stuck to my plan throughout, I have found it to be infinitely fascinating to watch the response of average retail investors who succumbed to the dark side and were burned hard by the market. 

In observing the people around me and a plethora of online forums, there were two main poisons which decimated portfolios, one was Put Options, the other was Inverse Indices. Today's topic of discussion will revolve around two highly popular inverse indices, BBUS and BBOZ. 

 

The simple way to explain inverse indices is that it is exactly what the name purports, an inverse of an index fund. While BBUS is a leveraged inverse of the S&P 500, BBOZ is a leveraged inverse of the ASX 200. By utilising futures contracts, every 1% lost in the relevant index results in a 2% to 2.75% gain for the holder. As you can envisage, this became a highly attractive investment vehicle to make some gains during the intense drop. Although it may sound like a good idea to buy when the market is falling, there are a number of reasons why a beginner or even novice investor shouldn't touch these products.

Market Timing

When you buy into index or a fairly stable blue chip share, it is almost an inevitable outcome that the shares will go up in the long run. Since BBUS and BBOZ are inverse indices, they obviously go down in the long run as demonstrated in the chart below.



When you look at the prices for BBUS in the last several months the returns look extremely attractive after the fact. If you bought on 20 Feb for $2.67 per unit, this would have become $6.63 by 23 Mar. However, given the state of the economy on 20 Feb, who would have been able to foresee the impending crash and buy into BBUS? Very few. Given the uncertainties surrounding the impacts of coronavirus on the economy and subsequent fall out, most people held onto their portfolios for at least several days until a downward trend was established when it was somewhat higher in price. I know of at least one friend who put their whole portfolio into BBUS at peak for $6.63.

Given investor psychology surrounding the Dunning Kruger effect, even the investor who bought in at the peak was determined that the falls were not yet over and any minor dips constitute bear market rallies and the big crash has yet to come. Of course the media also fanned flames during this period, hyping up death stats and forecasting the end of civilization as we know it, but the unsavvy investor failed to realise that this was already priced in when the market tanked. As a result of this, they consistently held on whilst their portfolio was was violently wiped out.

As of today, BBUS currently stands at $3.39, almost down to what it started on. Are we in the middle of a massive dead cat bounce and the big crash is still coming, or whether we are in for a V shaped recovery? I don't know, which is why I will continue with my dollar cost averaging. Short of being able to accurately time future market movements, it would be imprudent to purchase such a risky vehicle. Having said that, if you are able to accurately foresee the future, why wouldn't you just maximize your gains on minimal cost by buying next week's lotto ticket and min maxing your profits.

Compounding Risk aka. Volatility Decay

Another reason why leveraged inverse indices shouldn't be held for an extended period of time, but isn't apparent to most until demonstrated by a worked example.

For simplicity, let's do two worked examples on the following parameters:

• Starting portfolio is $10,000
• Every day the market moves up or down 1% (10% in the other simulation) returning to parity every second day
• For simplicity we will take the leverage of inverse index at a multiple of 3.

As you can see, whilst market returned to parity every second day, the value of the portfolio was gradually reduced, whilst the results were subdued when volatility was small, when movements were violent, decay was also extremely brutal. Given the fluctuations of the last several months, I have no doubt that quite a few people suffered considerable losses from volatility decay.

For further clarity, consider the fund strategy that BetaShares proposed for both BBUS and BBOZ whereby returns of 2% to 2.75% for every 1% drop are only for any given day, thereby indicating that those returns cannot be expected to continue for periods over one day.

Expenses

Due to the nature of inverse indices attaining their benchmark leveraged returns through use of complex mechanisms like derivative contracts, the associated expenses of high fees, high transaction costs and re-balancing costs also eat into returns considerably. Although simple, for someone who puts money into ETFs for their low management costs, this is clearly reason why inverse ETFs should be considered with a grain of salt.

Conclusion

The last months have provided me with precious insight into the workings of the human mind and how the fear of loss coupled with greed to make gains have pushed innumerable investors to the dark side. From moderate gains during the remainder of the bear market to the eventual wipe-out with the recent rally, millions have been lost on the market because The First One's Always Free and the lure of quick gains is intoxicating. For this, I am grateful to have held firm to my resolve and weathered the storm.

It has also provided a practical example to ボーイフレンド as to why retail investors often under perform when compared to index returns.

As a final point, for those who are wondering. Mr A, who got bored of checking on his brokerage account and continued to DCA through the dip on a preset diversified spread has now returned to -13% on his portfolio whilst the market is still at -20% from peak, outperforming everyone that I know personally.

By 小福

Book Review: The Millionaire Next Door - Thomas J Stanley and William D Danko

As the turmoil starts to subside, and the VIX falls back to 40 after some all time highs I'd 80, I finally have some time to go back to some general reading without having to follow current affairs like a hawk every day, so of course it is time for another book review(´｡• ω •｡`).

The Millionaire Next Door by Thomas Stanley and William Danko was actually recommended to me by ボーイフレンド during our first date(=`ω´=). Of course I went home and read it all within a matter of days and it proved to be more insightful than I expected.

Essentially the book covers some studies that were done on households with a net worth over one million dollars and compares the behaviour and habits of Under Accumulators of Wealth and Prodigious Accumulators of Wealth. In terms of spending, PAWs are far more likely to spend significantly less than they earn and they also tend to make considerably less purchases of luxury goods and status items (・_・)ノ. The book shows surprising evidence that the supposedly wealthy people you see living in lavish mansions driving luxury vehicles are often only able to do so via debt, leaving them with a considerably reduced net worth. As someone who doesn't really indulge in luxury goods, it served as a firm reminder that the sacrifices that I was making towards my goals were worthwhile. In summary, the book demonstrates that with hard work, discipline and prudence, almost anyone living in a first world country can attain millionaire status.

It was quite eye opening to me when thinking about friends and family around me and considering what their underlying financial situation was. For instance, I have a beloved relative who inadvertently ticks all the boxes of a UAW whilst I had never noticed it in the past (〃＞＿＜;〃)  and I have a work colleague who appears to be very low key pragmatic but is almost a textbook exemplar of a PAW. Guess I know who to go to for advice in the future╰(*´︶`*)╯ .

One surprising fact that I did also note, which turns out to make sense when you think about it, is the concept that offering financial aid to children often results in financially underperforming children who become entitled to the regular handouts. For people considering raising a child, this is also quite sobering and offers ideas as to how to raise your child to ensure they become PAWs.

For those who are interested, Thomas Stanley and his daughter Sally Stanley Fallaw have recently published a follow up of the study, The Next Millionaire Next Door. Apparently the book demonstrates that in modern times it has become even easier to grow wealth than before. No doubt I will read it in due course („• ֊ •„).

By 小福

Case Study: On UNV, TER and margin of safety

One highly technical post calls for another. I hadn't intended to go into another so soon but due to the recent chain of events, it was too good an opportunity to pass, so today's post will be on the complete debacle that was TerraCom's (ASX: TER) purchase of Universal Coal (ASX UNV). In the words of ボーイフレンド it was basically a murder suicide with retail shareholders forming unwitting collateral damage. 

All good stories though, start from the beginning. So that's where we will commence. Late last year ボーイフレンド was considering industries that would be likely to outperform in the medium term. With a fairly contrarian perspective compared to the average retail investor, he decided that with the uprising popularity of renewable energy and the social pressures surrounding ethical funds, traditional fuel sources like coal and oil would be fairly discredited and undervalued in the short term. As a result of this, he and Mr D started looking into individual companies in the industry for potential individual picks for investment. 

In their research, they came across UNV, a London based Thermal Coal company with operations in South Africa. One look at their financials shows why it was such an attractive company to buy into. With steady growth in revenues, reasonable and proportionate expenses, healthy cash flow, a history of generous dividends as well as excellent asset to liability ratios whilst management also appeared to be sound. In applying discounted cash flow models to value the shares, ボーイフレンド determined that each share was worth within the vicinity of 0.6 to 0.9 which obviously meant that his purchase price of 0.24 when the PE was about 5 (and my subsequent purchase at 0.23) was definitely a steal, so we purchased a small amount of holdings each.

For reference, I have extracted some financials of UNV current as of 6 Apr 2019. Although there has been a bit of time lag, you can definitely see the solid fundamentals in the reports.

Testament to the unpredictability of stocks and also a lesson in the importance of diversification, the unexpected did in fact happen and TER, an Australian based coal producer with projects in Queensland and Mongolia launched a takeover bid for UNV. Judging by the condition of the health of the company from its financial reports, it was easy to see why they wanted the takeover. TER had sustained a couple of years of losses with an increased net loss projected in the current year with an indeterminate time for return to profitability despite an increase in revenues. Cash flows were abysmal and assets to liability ratios were not ideal. This was definitely not a company that I would want to hold.

Again, for reference, I extract a copy of the financials currently posted on 6 Apr 2020.

Under the offer, UNV shareholders will get 10 cents in cash and about 0.6026 new TER shares for each UNV share held. As at the point where we were made this offer, TER was selling at around 0.24 per share. This meant that accepting the offer, I would break even at 10 cents plus roughly 14.4 cents of TER per UNV.

At this point, the board of UNV issued advice to shareholders not to take any action with respect to the unsolicited bid whilst they instigated litigation to suspend voting rights of TER but strangely three members of the board itself Tony Weber, Shammy Luvhengo and Hendrik Bonsma proceeded to accept the offer on 22 March 2020, raising serious concerns to me about acting in good faith when they undertook a course of direction to which they advised shareholders not to. In the end, ボーイフレンド and I held out to the end and didn't accept until we saw that 75% of shareholders had accepted. The final figure stood at over 90%.

Within a couple days my cheque for $4,347.80 arrived in the post and 26,200 shares of TER appeared in my SelfWealth Account. The cheque was easy enough to bank and transfer back into my SelfWealth but the 26200 shares of TER were a lot harder. There was no doubt in my mind that TER was not a company to hold for the long therm, but with the continued falling price and no fundamentals to even justify a potential rebound at a later date, there was nothing to do other than to sell.

Initially when I was first issued my shares, TER was trading for around 14 cents per share, wanting to break even at around 17 cents, I held on as I watched it drop to 12 cents, by which point ボーイフレンドcashed out. Holding for another two days, I finally gave up and sold for 10.5 cents per share, the lesson to be learnt is apparently not to be greedy, because even though you may hope that a share may go up, without sufficient justification as to why it ought to go up, it has just as much or maybe even more reason to go down.

In the end, my $10k investment in UNV resulted in a payout of $7,098.80. Although by absolute figures this was a pretty big loss of almost 30%, given the most recent drops in the market, the outcome was largely the same as what I would have gotten if I had bought into index instead. If nothing, this highlighted to  me the importance of making individual purchases with a generous margin of safety, because if individual equities are not bought at a price that is significantly below their intrinsic value, when unexpected situations like this do happen, the losses that are sustained could be critical indeed.

As to what I put my $7,098.80 into? VGE and WGB.

 By 小福

Obiter Dicta: On Sentiment

My last post provided a fairly light hearted introduction on informal measures of market sentiment, but during these uncertain times I tend to reflect upon the copious amounts of reading I have done on sentiment to try and get an understanding of where we are in the current climate.

Two books that I have recently finished, Mark's The Most Important Thing Illuminated and Neill's The Art of Contrary Thinking highlighted that market sentiment often swings in a pendulum like motion between extreme fear and extreme greed. One way for an investor to make significant gains is to recognise where we are in the market thereby exploiting opportunities as they arise. By and large the most gains can be made when you can keep a cool head and calmly make purchases when the majority of the population are panic selling and selling (or at least reducing purchases) when prices start to overheat. As such, I have spent a considerable amount of time pondering sentiment and relevant indicators and have made the following observations of different gauges.

Quantitative Indicators 

Stock Market Price

It would be hard to argue that there is a stronger indicator of market sentiment than the market pricing itself. In stating the obvious, the current price of a stock clearly represents what the market considers to be fair value as at that one point in time. The PE ratio gives a ratio of earnings per share to each share price which in turn provides rough guidance on whether a share is over or under valued. A further step would be to consider the Forward PE ratio to gauge the expected growth and earnings. The higher the Forward PE ratio the higher the predicted growth of the stock which gives a crude starting point for the market's disposition.

Relative Strength Index

The RSI is a momentum indicator that provides a measurement on whether stocks are currently overbought or oversold. The calculation for RSI is fairly complex:

N is often taken to be 14.

The result is a number between 0 and 100 whereby 50 indicates that stocks are neither oversold or overbought, a number closer to 100 indicates it is overbought and a number closer to 0 signals under bought. A range between 30 and 70 is considered fairly normal.

Using the current example of what has just happened locally, you can see that the market crash at the end of February corresponded to a sharp decline in RSI correlating with in a massive oversell of equities in March. A savvy investor would then recognise the market panic from these charts (amongst all the other factors) and may draw the conclusion that it would be a good time to make some purchases of some good quality value equities for a good price.

Bond Yield Curve

The Bond Yield Curve has recently been cited often as an indicator of impending recession, however there is far more information to be gleaned from it than just the one omen of impending doom. Going back to basics, a bond's yield tells you what the annualised return is from purchase to maturity. As is with the laws of uncertainty, it is riskier to purchase a bond for a longer duration than a shorter one (because you can never really know for certain what will happen in the longer term future) and accordingly in normal situations long term bonds will tend to attract a higher yield than short term.

For reference, our current bond yields in Australia are as follows:

Our current yield curve looks like this:


Different orientations of the curve give different hints to what can be expected in the future.

Normal Curve - has a lower short term yield with a mild increase to mid term and long term. This indicates a normal level of confidence about the future.

Steep Curve - has a lower short term yield with a much greater mid and again much greater long term yield. It is a very bullish signal and has historically correlated with rallies in the stockmarket.

Flat Curve - indicates a lack of investor confidence in the future and is a moderately bearish indicator, although not as bearish as the inverted curve.

Inverted Curve - occurs when short term bonds produce a higher yield than long term bonds. This demonstrates that investors are expecting a drop in yields over the long term as well as a high risk in the short term. This is a very bearish indicator and is often portrayed by the media as a sign that a recession is imminent, whether or not that is true is another matter for a separate debate.

Qualitative Indicators

Pendulum of Hysteria and Euphoria - Changing times?

Moving away from the highly technical quantitative indicators, I find that having an understanding of investor mood through qualitative signs is also important in pinpointing where we currently are on the pendulum swinging between hysteria and euphoria.

There are a number of sources that I have referred to, each with their own limitations. The news is an obvious starting point but the media always sells more by playing up the fear factor, so this often ought to be taken with (at least) a grain of salt. Friendly conversation with friends and coworkers can also provide insight into what your peers are thinking, but of course you are narrowing down your sources to your acquaintances which may only represent a small segment of broader society.

A resource that I have found somewhat insightful over the years is Reddit, specifically the subs investing, fiaustralia, ausfinance and wallstreetbets. Although you are also limited to a demographic of people who are clearly computer savvy enough to post and engage with the online community, it provides a less biased account of reality.

A snapshot of some posts on Ausfinance today results in the following:

For those who are reading this post after the fact (which will probably be most of you), the ASX dropped 36% from a peak of 7162 on 20 Feb 2020 to a recent trough of 4546 on 23rd of Mar 2020 and has since rebounded quite violently 13% to 5181 today 31st Mar 2020. Since the initial panic that was caused by the crash which lead to a considerable amount of selling off (see RSI) there have been a notable amount of investors who have joined the bear gang and attempted to recoup losses by way of buying inverse indices such as BBUS and BBOZ or for the more sophisticated traders buying put options. This had been going on for a couple of weeks now and resulted in a number of oversimplified principles  such as "buy puts = free money" "all in BBUS". The mood on the relevant boards quickly changed from despair to euphoria when the masses of retail investors learned that they could grow their wealth at an accelerated rate by using these highly risky, leveraged products.

As mentioned above, we have since experienced a considerable uptick in the last week and the posts in the screenshot provide a good indicator of how the typical retail investor is reacting to this market movement. From hope of a bearish future with the prospect of incoming defaults and further falls anticipated in equities to the user who invested his whole life savings into BBUS and BBOZ it is clear that they are all anticipating further falls in the market. Whether or not we have reached the extreme end of the pendulum is anyone's guess but these posts seem to indicate that even if we haven't, we ought to be fairly close.

Another interesting note on the matter though, traditionally retail investors were not sophisticated enough to buy inverse indices or puts as these products have only been made available to the masses relatively recently. I would suggest that with these products being made available, an adjustment to our pendulum ought to be made to reflect this, since once the market has clearly taken on a downward trend, euphoria can be found in retail investors who have bought inverse indices or puts where traditionally there would only be hysteria. It would seem that now hysteria only really arises when the market turns and those who missed the signals are caught like a deer in the headlights.

Keynesian Beauty Contest

One final qualitative measure that I will touch upon today is the Keynesian Beauty Contest. For those who are unaware, rather than the traditional beauty contest where participants are asked to choose who they consider to be the most beautiful, they are asked to choose who they think will be voted most beautiful, i.e. crowd consensus. In other words, it constitutes a game of sentiment whereby the winner is the person who can guess better than the crowd as to how the crowd will behave.

In applying this back to our current situation with Covid and the lockdown that I find myself in, we have seen not infrequent headlines whereby the crowd has bought into the hype that the shutdown that we face will be ongoing for months on end, tens of millions of people around the world will die from this virus and the markets will never recover ever again. The most important question though is that although this is what the crowd believes will happen, is this likely to be a realistic outcome given our fundamental understanding of human nature? I would argue that it is not.

In closing, I would like to round off this post with some words from, Warren Buffett, “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.

by 小福

Random Musings: Hot Waitresses, Mens' Underwear and Lipstick

Since my last post just under two weeks ago, Australia has plunged into the second stage of a lock down, my work has finally handed down a work from home directive and I haven't left the house in four whole days. Whilst I have been home bound, it has given me ample opportunity to further my studies and readings on finance and the broader economy whilst this volatile situation unfolds.

One of the things that appeared as a recurring theme across books that I had read was sentiment. Essentially that it is important to have a firm understanding and ability to grasp what the market sentiment was so that we could comprehend where we currently are on the fear-greed pendulum. Among all all my technical technical readings I came across three informal measures of sentiment which I came across on Investopedia. All three are quite interesting albeit crude measures. Having taken a look back at my last several posts which have been quite sombre, I thought it would be apt to share these with you to lighten the mood a bit.

Hot Waitresses

So the idea with this measure is that next time you have a meal out, you take a look at your waitress to see if they are relatively good looking or not, because according to the index, the higher the number of good looking waitresses there are, the weaker the state of the economy. The idea behind this is that during times of plenty, attractive people will be able to find and abundance of employment in other jobs. As these jobs become less available during times of crisis, by the laws of supply and demand, they will find themselves in hospitality jobs like waitressing (or waitering).

Mens' Underwear

Prior to Alan Greenspan's research in the 1970s, mens' underewear was largely viewed as a necessity rather than a luxury, which would mean that sales would largely be static despite a change in the economic climate. However what the research in fact proved was that during times of economic decline, men tended to wear their underwear until it was threadbare rather than get new ones, an interesting contrast to womens' underwear purchase habits. Complimentary to this study, similar results were shown for things like clothing alterations and haircuts. Having said that, I am only privy to the condition of two mens' underwear, being my father and my ボーイフレンド. If you looked at their underwear as a basis to assess the economic climate we are in, you would think we are in a perpetual never ending depression, so my personal anecdotes seem to refute this research.

Lipstick

Our last informal indicator is lipstick. So rather than having an abundance of fresh crisp new underwear when the economy is booming, women tend to indulge in other luxuries such as designer handbags or outfits. The idea is that when the economy is faltering, women still want to indulge themselves and instead purchase smaller luxury goods as a sign of comfort such as lipstick, which would mean that the higher the lipstick purchases, the worse the economy. Again, if I applied this indicator to my own purchases of lipstick, you would think we never got out of the depression. Either way, it is an interesting way to consider indicators of market sentiment.

By 小福

Trials and Tribulations: Three weeks and 30%

Tuesday 17 March 2020. As I write this, it has been approximately three weeks since the market started to drop and since then my portfolio which is largely index based, has dropped roughly 30%(T＿T). Yesterday marked the biggest fall in ASX history at 9.7% and overnight the SP500 lost 12%. Trading halts and massive swings used to be rarities and are now commonplace. The volatility index has risen to 80 and panic has thoroughly set in amongst the broader population∑(￣□￣;). Self doubt has started to creep in on me but my resolve still holds firm. I decided on this course of action four months ago and I intend to see it through to the end._(:3」∠ )_

Indubitably mass hysteria has set in to the general populace, far beyond the financial markets. It is one thing to hear about panic buying of essential goods on the news and another to witness the apocalyptic sight of empty shelves in the supermarket first hand(。•ˇˍˇ•。). Thankfully my household has a heathy reserve of basic necessities. My workplace has not given a directive to work from home or self-isolate, but our organisation appears to be the last stand in a derelict skyscraper. Most of my colleagues are on edge but management refuses to consider the welfare of staff and would rather focus on the bottom line（╯‵□′）╯︵┴─┴.

In the news, I am constantly bombarded with news that large institutional companies like Qantas or UQ are on the verge of going bust as well as predictions of long standing recessions which will take up to ten years to recover from (Deloitte). People whom I respect greatly are predicting a permanent shift in society with far reaching consequences for the long term future and my learnings on holding steadfast to contrarian beliefs are being well and truly tested.( •̥́ ˍ •̀ू )

Only time will tell if I have made the right choice in sticking to my plan, otherwise it will be a very costly mistake indeed.

By 小福

Trials and Tribulations: End of the Bull Run

With my last post and the slowing down of instances of Coronavirus in China, I had thought that maybe my run of bad luck would finally take a turn and I would be able to recoup some of my (not yet crystallized) losses (－_－) zzZ. Unfortunately for me (and the rest of the world), we took a turn for the worse in the last two weeks and the eleven year bull run was finally brought to an end this with the market in free fall across America and Australia ʕ •ᴥ• ʔ.

As I write this, the S&P500 had lost $5.3tn whilst the ASX200 has lost $430bn in the last three weeks and there has been considerable hysteria online and in real life. Everyone regardless of whether or not they bought into the market has a fairly strong opinion on whether or not the virus will cause long lasting economic impacts as well as the associated impacts and flow on effects╮(︶︿︶)╭. 

For the time being, I have learned to stabilise my own emotional responses to the regular losses with a focus on long term gains as I continue to dollar cost average on a regular basis(-_-;)・・・. I thought I had gotten used to drowning out irrelevant opinions as noise, but today I was fairly shaken by the words of my long time mentor Mr L, who I consider to be the most brilliant men I have ever met. Throughout the years, he has given me priceless insights on the machinations of the world, needless to say, I hold him in extremely high regard. As someone who invests heavily in precious metals, Mr L doesn't touch property or stocks, however as I was speaking with him about other matters today, I did mention that I was buying into the dip as the downturn unfolds, to which he very sternly told me that trying to catch a falling knife is a dangerous endeavour ＼(º □ º l|l)/. Frankly, I can discount a large majority of people's opinions and continue my course of action because I consider them to be wrong, but when my most respected mentor also raised these concerns, I definitely faltered in my conviction and spent the whole afternoon pondering my choices. In the end, I've committed myself to going through with this and until I see definitive proof that the strategy doesn't work, I will see it through, but it is definitely taking a lot more determination than I had previously estimated. Hopefully in a few months, this will not matter anymore(×_×)⌒☆.

In the meantime, this is what I think of bears＼＼٩(๑`^´๑)۶／／:

By 小福

Trials and Tribulations: Coronavirus Market Correction

With the drama that I had experienced most recently with my only two hot picks in individual stocks, CLH being on its continued trading halt which has now extended until mid March and UNV being subject to a hostile takeover bid from TER, I really thought that I had seen enough drama to last a year. (ᗒᗩᗕ)

That is, until the markets this week undertook one of the biggest corrections in recent times with the index going down 9.8%, taking $210bn from the markets   ᕕʕ •ₒ• ʔ୨. As someone who doesn't buy shorts or puts, obviously I took on a fair amount of collateral damage.

As someone who tried to go into this journey with a certain amount of mental preparation, I too was caught off guard as to my personal responses to this black swan event. Early on in the week, my ボーイフレンド and I spent most of it indulging ourselves in schadenfreude when we watched everyone around us and in online forums lose their minds over the daily 3% drops Σ(･ω･ﾉ)ﾉ！ . It had gotten so bad that even my colleague Mr D was finally pushed over the edge and cashed out his holdings on Thursday and dived in on inverted indexes (BBUS and BBOZ), cashing out at the lowest point, thereby crystallizing his losses before buying into the already relatively higher inverted index. I can only hope that he doesn't crash and burn too hard that he can no longer be redeemed.

As for myself, I had high hopes that with my mental preparation, I would be able to separate myself from the numbers as the fell. During the start of the week, I could definitely say that I managed to do so with relative capability. Having said that, by the end when it neared a 10% drop, I too succumbed to a slight bout of sadness when I realised that half a years' worth of my savings was gone on the papers. When you consider than in real terms of how many bleary eyed mornings I had to force myself out of bed to get onto the bus and deal with stupid people at work, it did make me fairly sad. Despite my disappointment in myself for having feelings when I expected none (◞ ‸ ◟ㆀ), I can still gladly say that I did not once have my finger on the "sell" button, which is testament at least to a level of discipline and rationality.

So to drown our sorrows for losing that much on the markets this week, at least we could still enjoy two minute noodles and tendies to commemorate our week of losses. As for what I will be doing next week? I will be increasing my DCA and putting my March funds into WGB. For those who are wondering, I couldn't convince Mr A to go buy in the dip, but at least he also stayed the course and is continuing his regular investment ʕ´•ᴥ•`ʔσ”.

An interesting note though, as an ironic silver lining to this week, the trading halt from CLH happened to cushion my fall a bit, cos 0% is still better than being negative. 

By 小福

Trials and Tribulations: CLH Trading Halt

Having only started my portfolio a mere three months ago, I had expected a fairly uneventful first few months with most of the excitement in my life attained from second hand thrills in watching what goes on in Mr D’s portfolio as well as the shenanigans on r/wallstreetbets⊙﹏⊙∥. The vast majority of what I personally hold are of course a collection of conservative and uninspiring ETFs, which of course leads to the conclusion that a minority of my holdings are comprised of individual stock picks (≧ω≦)/.

I had initially wanted to write a brief analysis post on my first ever hot pick, Collection House (ASX.CLH), but whilst I was still formulating what aspects to cover, an interesting development occurred in the meantime in the form of a Trading Halt to CLH. Σ(っ °Д °;)っ

As someone who has long been fairly risk adverse, I thought that I would be moderately stressed out by the uncertainties pertaining to the trading halt. With Mr D having mentioned to me a number of times that he believed CLH to be a textbook example of a value trap that he believes will slowly drop in price to eventual oblivion, this was largely founded upon a lack of understanding of the industry that CLH operates in as well as assumptions and speculations on management which appear to be largely unfounded based on my preliminary research (。・`ω´・).  Contrary to my apprehension though, since being notified of this last Friday, my mood has been relatively uneventful despite the unpredictability in what may happen when the Trading Halt either lifts on Tuesday or gets extended. For now, we have no information as to whether or not to expect good or bad news from the halt.

Reflecting on this, I would have to attribute my serenity to the copious amounts of time my ボーイフレンド  and I spent  delving through years of annual reports and financial reports of not only CLH but also its competitors, assessing the potential risks and threats to the business before deciding to put our hard earned money into the company(•̀へ •́ ╮ ). Having been satisfied that it was a reasonable purchase for good value with a solid history of dividend yield and potential for future growth meant that even when a Trading Halt was placed on the shares, I found little to shake my conviction in my decision making.

In short, if I am right in my reasoning of the outcome, there is little to be concerned about come the announcement tomorrow and if I happen to be wrong, it would be a most interesting albeit costly lesson to have learned. Will provide an update as the situation resolves. ٩(๑`^´๑)۶

By 小福

Random Musings: On the GFC, Trading Cards and Maplestory

Whilst I was reading A Crisis of Beliefs, one of the things that really stuck with me was the fundamentals of what causes a financial meltdown. Reflecting on my relative inexperience in life, it occurred to me that similar situations had happened to me before but in a different context (｡T ω T｡). Speaking to my ボーイフレンド , he too provided a story pertaining to his similar experiences which basically summarizes the GFC perfectly (｡•́︿•̀｡) . I will try to encapsulate them below.

In my childhood, I used to be a huge fan of Sailor Moon trading cards, subsequently amassing a large collection of cards which were my pride and joy. At some point, I met up with a distant cousin over a meal, and as all young children are prone to do, I showed her my stash of cards. At this point, she told me that she had a hot tip that a certain card that she held was worth $50 (a fortune to a seven year old), which was more than enough to drastically multiply my collection, all for a discounted family rate of my best card凸( ` ﾛ ´ )凸. As all dumb seven year olds would do when presented with this offer, I jumped on it. Only several days after the fact when I asked around to find a way to sell off the card to expand my collection was I informed by my parents that what I was given was a plain piece of cardboardヽ(`⌒´メ)ノ . 

My ボーイフレンド 's experience was similar but different. Back in the early days of the highly popular MMORPG Maplestory, he was sold an enhancement scroll for $1.5m gold on the premise that he was getting a discount from the regular $2m market value. Again, as children are oft to do, he made the purchase. Luckily for him, he onsold it to another unsuspecting buyer for a profit, only to realise later that these scrolls could be purchased at an unlimited quantity from the game itself for the small sum of $34k. ¯\_(ツ)_/¯

In essence, the economy as we know it is a giant marketplace of people conducting individual trades every single day. For every transaction there is a seller, a buyer and an agreed price. For market crashes to happen, the players often get so hyped up in the perceived value of an asset completely deviates from the true value. Those who are lucky can pass it on to another buyer, those who aren't lucky when the ball drops are left with a piece of cardboard (`皿´＃).

By 小福