Categories
The Benchmark

The playing field vs. the scoreboard

May 13, 2024


59 years worth of investing wisdom

Dear Reader,

Warren Buffett has been in the markets longer than many investors have been alive.

In 1965, his Buffett Partnership Ltd. company acquired textile manufacturing firm, Berkshire Hathaway, and assumed its name as it transformed into a diversified holding company.

This diversified holding company is now among the S&P 500’s top 10 listings, and among the largest private employers in the United States. It’s class A shares have the highest public company per-share value on the planet.

Buffett’s investing and business success is objectively impressive.

Rather than throwing lavish parties in luxury mansions, or parading between red carpet events in bespoke supercars or megayachts, Warren keeps his lifestyle modest, preferring to let his investments — and their near six-decades of outperforming the S&P 500 by nearly 10% a year — do the talking.

But, the impressive performance charts and corporate filings aren’t the only way to observe Buffett’s brilliance.

Six decades of shareholder letters

When Buffett took control of Berkshire Hathaway in ’65, he started writing letters to the company’s shareholders.

Initially ‘signed off’ by other figures in the business, Buffett eventually started publishing in his own name, building a (so far) near six-decade body of writing covering a huge range of markets, events and ideas in his now-signature friendly, casual tone.

You can read the 1965 letter (pictured below) here.


Wall Street Journal writer, Karen Langley, recently started with the letter above and went all the way — reading every single shareholder letter Warren has ever written.

Here’s six of the best excerpts:

Six of Buffett’s best investing ideas

1: Fear & greed as ‘super-contagious diseases‘ — 1987

Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable.

‘And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease.

‘Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.


2: Watch the playing field, not the scoreboard — 1992

It’s true, of course, that, in the long run, the scoreboard for investment decisions is market price. But prices will be determined by future earnings.

‘In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard.


3: A ‘
really long-term example‘ — 2006

It’s been an easy matter for Berkshire and other owners of American equities to prosper over the years.

‘Between December 31, 1899, and December 31, 1999, to give a really long-term example, the Dow rose from 66 to 11,497…. This huge rise came about for a simple reason: Over the century American businesses did extraordinarily well and investors rode the wave of their prosperity,

4: The power of price on perspective — 2012

The first law of capital allocation — whether the money is slated for acquisitions or share repurchases — is that what is smart at one price is dumb at another.


5: Bubbles, wisdom & folly — 2012

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices.

‘In these bubbles, an army of originally skeptical investors succumbed to the ‘proof’ delivered by the market, and the pool of buyers — for a time — expanded sufficiently to keep the bandwagon rolling.

‘But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: ‘
What the wise man does in the beginning, the fool does in the end‘.


6: What to do when the skies rain gold — 2017

Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves.

Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold.

When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.’


‘The Architect of Berkshire Hathaway’

That last excerpt refers, of course, to the late Charlie Munger, vice chairman of Berkshire Hathaway, who passed away in 2023.

Buffett referred to Munger as ‘The Architect of Berkshire Hathaway’, and credited him with shaping not just the company, but Buffett’s whole way of viewing business and the markets.

Berkshire Hathaway reported a profit of $96.2 billion for 2023. The company ended the year with a record $167.6 billion in cash, prompting plenty of speculation from commentators on what, if anything, Buffett’s now-colossal firm might do with it.

For context, $167.6 billion is more than enough to buy Nike, Morgan Stanley, Boeing, BlackRock, Airbnb, or Sony, among other huge firms.

Quote of the week

In my whole life, I have known no wise people… who didn’t read all the time.

You’d be amazed at how much Warren reads, at how much I read.

My children laugh at me. They think I’m a book with a couple of legs sticking out.

— Charlie Munger

That’s it for this week’s The Benchmark email.

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Invest in knowledge,

Thom
Editor, The Benchmark

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Categories
The Benchmark

re: predicting the stock market

May 6, 2024


Ray Dalio, debt cycles,
and the economic machine

Dear Reader,

What if you never had to worry about unforeseen financial events again?

What if you had a calendar that showed you what economies and markets were doing years in advance?

How valuable would that knowledge be?

This is what this week’s The Benchmark is about.

About 10 years ago, I stumbled upon Ray Dalio’s How The Economic Machine Works video.

It did for me in 30 minutes what no economics teacher or other ostensibly financially savvy person I’d met had managed:

Explain, in simple terms, what the economy is, how it behaves, and why.

Dalio’s thesis in brief:

Economies go through cycles of expansion and contraction.

The accumulation and deleveraging of debt drives this cycle.

This cycle consists of three main stages:

  1. Credit expansion
  2. Debt bubble
  3. Deleveraging

I’ll explain more after I explain what gives Ray Dalio the authority to explain such a seemingly complex thing as the economy in such simple terms.


Benchmark beater: Ray Dalio

From mowing lawns to raking in billions

Ray Dalio first started making money as a kid mowing lawns in New York.

A 2022 estimate valued his personal wealth at US$15.7 billion.

What happened in between?

Ray got good at understanding money and markets.

In 1974, unhappy with his employer (a trading firm), he got drunk at the Christmas party and punched his boss in the face.

After the firm let him go, some of its top clients chose to continue letting Ray manage their money.

The following year, he started Bridgewater Associates from his two-bedroom apartment.

The firm launched multiple funds in the course of becoming the largest hedge fund firm on the planet.

Some of the biggest entities in the world parked their money with Bridgewater.

This chart gives you an idea why:


Source: Wikipedia

We all like to marvel at lines that go up and to the right.

But what’s most interesting about this one — the Bridgewater Pure Alpha 1 fund’s performance between 1991 and 2015 — is how it ends up pretty much where the S&P500 does…

Without the massive falls in 2000 and 2008.

While stocks were tumbling amid the two bloodbaths…

Ray Dalio’s investors were making money.

That’s what qualifies this man to lecture the rest of us on what the economy is, how it behaves, and why.


Long-term productivity growth, with the short and long-term debt cycles overlaid.

As you’ll see in the video, there’s three key factors you need to understand:

Productivity Growth: Over time, we become more productive and raise our living standards.

Short-Term Debt Cycle: At the consumer level, our borrowing and deleveraging generally moves in ~6-year cycles.

Long-Term Debt Cycle: At the broader economic level, society’s borrowing and deleveraging generally happens in ~75-year cycles.

According to Ray, both the 1929 ‘Great Depression’ and the 2008 ‘Great Recession’ both marked the beginning of ‘deleveraging’ phases on the long-term debt cycle.

Understanding this fundamental economic truth was what allowed Bridgewater’s Pure Alpha 1 to effectively dodge the 2008 crash.

If the market is really this easy
to predict, where are we now?

Ray Dalio is not only one of the wealthiest people on the planet, financially speaking.

He’s also — I would argue — one of the wealthiest in terms of his knowledge and understanding of the financial world.

(And, as we like to remind you in The Benchmark, knowledge pays the best interest.)

Ray is about as on the money as one can get about the fundamental nature of the economic world we live in.

Here are some comments he made in 2023:

In my opinion the tightening that began in March 2022 ended the last paradigm in which central banks gave away money and credit essentially for free, which was great for the borrower-debtors.

We are now in a new paradigm in which central banks will strive to achieve balance, in which real interest rates will be high enough and money and credit will be tight enough to satisfy lender-creditors without interest rates being too high and money and credit being too tight for borrower-debtors.’

Dalio: 2024 a ‘pivotal year’

Ray’s January Principled Perspectives newsletter is a deep dive (an actual deep dive, not just another blog or email claiming to be) into how he sees these economic cycles playing out in the world.

It’s well worth a read, if you have the time and intellectual energy to absorb some very big ideas.

Here’s why:

2024 will almost certainly be a pivotal year in a number of ways— for example, we will find out whether the existing democratic order in the US will or won’t hold up well, and whether or not the world’s international conflicts will be contained.

‘Of course, like all years, 2024 and the events in it will be just small parts of the long string of years and events that make the Big Cycle arc of history, which is what is most important to pay attention to
.’

If you’ve still not checked it out, watch How The Economic Machine Works now.

That’s it for this week’s The Benchmark email.

Forward this to anyone you know who needs to read it.

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Invest in knowledge,

Thom
Editor, The Benchmark

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Categories
The Benchmark

Morgan Stanley’s ‘dangerous short-termism’ revealed

April 29, 2024


Risk 🔗 Reward

Dear Reader,

Investors are beginning 2024 at a precarious point.’

So begins Morgan Stanley’s 2024 U.S. Stock Market Outlook.

The carefully-worded report lays out three main reasons why investors need to approach the market cautiously this year:

  1. U.S. stocks ended 2023 ‘overvalued’.
  2. Overly-optimistic earnings forecasts & tapering economic growth.
  3. Markets overestimating Fed rate cut agenda.

How, exactly, does Morgan Stanley recommend readers of its sage wisdom act on these bleak observations?

Balance expectations and portfolios by buying the equal-weighted S&P 500 Index or actively favoring value-style stocks, with a focus on financials, industrials, utilities, consumer staples and healthcare.’

Basically, buy the market, or buy a bunch of stocks from those five sectors.

In this email, we’re going to do two things:

First, let’s check in to see how markets are tracking since setting off from Morgan Stanley’s ‘precarious point’ on January 1.

Second, we’ll show you a few pieces of information that help long-term investors avoid getting caught up, bogged down, or bothered by reports such as that outlined above.

Stocks in 2024: The story so far

So far, four months into 2024, Morgan Stanley’s predictions of ‘an average year for markets’ appear to be wide of the mark.

The S&P 500: Up 7.5%


Source: Google Finance

NASDAQ 100: Up 7.8%


Source: Google Finance

Of course, these performance charts in no way tell us what might come next for the S&P 500 and the NASDAQ.

But, consider this:

Going down while going up (and vice versa)

Ben Carlson is the Director of Institutional Asset Management at Ritholtz Wealth Management (who manage about $2.5 billion of client capital).

Ben wrote a fantastic post last year titled Even When the Stock Market Goes Up it Still Goes Down.

In his post, he makes the case that investing is pretty much always confusing in the short term.

Even when stocks are trending higher, they can and do crash lower, or ‘draw down’.

Equally, when stocks are trending down, they can produce short-term price increases.

Ben also notes that since 1928, the S&P 500 has gained 20% or more in a year 34 times.

That’s 35% of the years up to and including 2023.

Of those 34 years, the index has corrected by 10% or or more in 16 of them.

In other words, nearly half the S&P 500’s strongest annual performances include a double-digit correction/drawdown.

Here’s the proof:


In Ben’s words:

‘Risk and reward are attached at the hip when it comes to investing. One of the reasons the stock market provides such lovely returns in the long-run is because it can be so darn confusing in the short-run.

‘You don’t get the gains without living through the losses
.’

We’ve written before in The Benchmark about so-called ‘dangerous short-termism‘ — the phenomenon that makes people, and investors, struggle to see beyond events and concerns that are immediately in front of them.

What Ben Carlson writes about living through the losses to get the gains, this next chart illustrates (over the much longer term).

Here’s the Dow Jones Industrial Average from 1915 to March, 2024:


https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

As you can see, the index’s 2,217% return over the more than 100 years has not come without multiple massive crashes and downtrends.

The Great Depression crash and the protracted bear market in the 1970s stand out as the most dramatic drawdowns.

If you’re a newer investor, and you’re yet to develop the long-term view common to history’s most successful and wealthy investors, annual market forecasts like Morgan Stanley’s might scare you.

But as Ben Carlson shows, billionaire Kenneth Fisher’s statement that ‘time in the market beats timing the market‘ is a good general approach to the stock market.

Before we hammer on the point too much (although I’d argue it’s always worth considering such proof and observations, especially when dealing with difficult ‘drawdown’ episodes along the way), here’s one last visual for your consideration:

This one’s from Long Term Mindset writer Brian Feroldi:


Decades > Years > Months > Days

Morgan Stanley and other Wall Street firms can predict, forecast and prognosticate all they want about what the market might or might not do.

But the reality is — for those looking to build wealth in the markets over the long term, at least — that what happens this month, or even this year, is of little relative consequence when you have your sights set on a bigger picture far beyond the short or medium-term horizon.

With ups come downs, and as Ben Carlson says, risk and reward are joined at the hip.

That’s it for this week’s The Benchmark email.

Forward this to anyone you know who needs to read it.

And, if one of our awesome subscribers has forwarded it to you…

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Invest in knowledge,

Thom
Editor, The Benchmark

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Categories
The Benchmark

The easy money has been made (or has it…)

April 22, 2024


The S&P 500 in 2034?

Dear Reader,

Senior journalist and MIT Technology Review contributor Richard Fisher has been studying how humans perceive time.

Just as a child grows from only being able to imagine tomorrow, or next week, to eventually grasping the idea of not only their own life, but the distant past and distant future either side of it…

The whole human species’ sense of time has evolved with our civilization.

And yet, Fisher writes:

While we may have this ability, it is rarely deployed in daily life. If our descendants were to diagnose the ills of 21st-century civilization, they would observe a dangerous short-termism: a collective failure to escape the present moment and look further ahead.

So often it’s a struggle to see beyond the next news cycle, political term, or business quarter.’

The ‘short-termism’ Fisher notes is, of course, very much present in the investment world.

With their capital at risk, investors easily fall prey to a market’s daily, or weekly, or monthly volatility.

You don’t have to look far to find someone who sold early — or didn’t buy in the first place — because they fell into ‘dangerous short-termism’ instead of stepping back and trying to see the big picture.

Meanwhile, the big picture, long-term thinkers position themselves on the other side of such decision making.

As the king of long-term benchmark outperformance, Warren Buffett, says:

The stock market is a device for transferring money from the impatient to the patient.’

The market’s next year decade

In the spirit of highly-evolved, long-term thinking, let’s consider the idea of the ‘secular bull market’.

According to Investopedia:

A secular bull market is a market that is driven by forces that could be in place for many years, causing the price of a particular investment or ​asset class​ to rise or fall over a long period. In a secular bull market, positive conditions such as low interest rates and strong corporate earnings push stock prices higher.

In a secular bear market, where flagging corporate earnings or ​stagnation​ in the economy leads to weak investor sentiment, stocks experience selling pressure over an extended period of time.

The idea here, is that there are short and long-term cycles in markets.

And if, as Buffett says, the stock market transfers money from the impatient to the patient, surely it pays to know about these long term ‘secular’ markets, right?

Take a look at this:


On the chart above, you can see the S&P all the way back to the 1920s.

Zoomed out that far, you can see the argument for ‘long-term secular trends’ in the stock market.

The argument basically goes that over the long term, the US stock market moves through periods of expansion and contraction that last about 16 to 18 years.

Viewed through this lens, you can make two observations:

First, there have only been two secular bull markets since the 1920s — one in the 1950s and 1960s, and another in the 1980s and 1990s.

Second, those ‘expansionary’ periods preceded periods of contraction, which you can see marked by red text.

These are inflationary or deflationary periods where stocks basically grind sideways over the long term.

The last two contraction periods for the market occurred from the mid 1960s until the early 1980s and from the late 1990s to about 2014.

So going by the chart, we’re in a secular bull market right now.

Could stocks rise for the next 10 years?

Some of the most experienced investors and fund managers on the planet right now certainly think so.

Robert Sluymer has been analyzing and forecasting financial markets for some of the largest institutions in the world for more than 30 years.

Late last year, he went on record with his prediction for where the S&P500 — the biggest in the world — is headed in the next decade.

The long-term secular trend for US equity markets remains positive with an underlying 16 to 18 year cycle supportive of further upside into the mid 2030s, potentially to S&P 14,000.

The S&P could move toward 14,000 by 2034 which is when we expect the current 16 to 18 year secular bull cycle to peak.’

Bank of America technical strategist, Stephen Suttmeier, has a similar take:

The secular bull market breakouts from 1950, 1980 and 2013 suggests that the S&P 500 can spend much of 2024 north of 5,000. This corroborates bullish pattern counts for the S&P 500 near 5,200 and 5,600, respectively.’

This chart shows the 1950 and 1980 secular bull markets with the 2013 (current) one overlaid:


Patience is bitter…’

Patience is bitter, but its fruit is sweet.’ So said Swiss political philosopher Jean-Jacques Rousseau.

This email is not arguing for or against the view that the stock market is going to rise for roughly the next 10 years.

The point is that, either way, taking a step — or a few steps — back from the day-to-day behaviour of the stock market can give you a fresh perspective and appreciation for time.

Take a look at this chart, showing the number of times the media called the top of the market between 2009 and 2017:


Nine times, these publications claimed ‘the easy money has already been made‘. And all nine times, stocks kept climbing.

As Richard Fisher observes, it’s the more highly developed and evolved among us who can grasp the bigger picture and appreciate timescales beyond ‘dangerous short-termism‘.

And if, as Buffet says, the market merely moves wealth from the impatient to the patient…

Then perhaps it’s useful to make sure we’re among the latter, rather than the former.

Now…

You’re still reading, so I’m going to presume you found this email useful, or interesting, or maybe even both.

If that is the case, it would make our day if you’d help us make someone else’s — forward this email on so we can share The Benchmark with more great readers.

Subscribe.

Invest in knowledge,

Thom
Editor, The Benchmark

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Categories
The Benchmark

Welcome to The Benchmark

April 15, 2024


Investing, Fast & Slow

Dear Reader,

Welcome to The Benchmark!

You’re reading this because you joined the Navexa mailing list.

Which means you have, at the very least, a passing interest in investing, the markets, and building wealth.

Which means that — we hope — you’ll find this email informative and entertaining.

Here’s why:

Mission statement

An investment in knowledge pays the best interest,‘ as Benjamin Franklin said.

That statement sums up why we’ve launched this email.

Each week, we’ll write to you with stories, ideas and content that offers some insight and/or perspective to what’s happening in the markets and the wider investing world.

These will include (but not be limited to):

  • Stories about the history of money, wealth and economics.
  • Notes on current events moving markets.
  • Interviews with our global network of HNW investors, traders, analysts and digital asset pioneers.
  • Analysis & comparisons of investment strategies
  • Answers to your questions

The Benchmark will not be making investment recommendations, nor providing financial advice.

Our aim is to provide investing knowledge that ‘pays interest’.

While this isn’t an investing email for beginners, necessarily, we should start with some basics.

And it doesn’t get much more basic than why we invest in the first place.

Check out this post:


The case for investing, in starkly simple terms.

If the idea that investing is essential to building real wealth, as Willy Woo so clearly shows, resonates, then this email is for you.

But, hang on a second.

Why The Benchmark?

This is why:

From 1965 to 2023, Warren Buffett has achieved an annualized return of 19.8%.

Compare that to the S&P 500 index, which has returned 10.2% a year.

Buffett has ‘beaten the benchmark’ by 9.6% for nearly six decades.

That might not sound like much to the average, short-term thinking, investor.

But let’s take a look at what that delta means in dollar terms.

The S&P 500’s 10.2% annualized return turns a $100,000 investment into just shy of $28 million.

Not bad right?

Most of us wouldn’t turn our noses up at that prospect.

But what about the Oracle of Omaha?

Well, the result of his 9.6% outperformance over those 58 years probably have something to do with the look on his face in this photo:


Warren ‘The Benchmark Beater’ Buffett

Because 19.8% a year, for 58 years, turns $100,000 into more than $3.5 billion.

Even with six decades of inflation accounted for, that’s still an exponentially larger sum than $28 million.

That 9.6% outperformance, over that timeframe, amounts to the $3.2 billion difference.

In other words, consistent long-term outperformance has exponential, real-money, consequences.

That’s why we invest in the first place.

It’s why we built the Navexa portfolio tracker.

And it’s why we’ve launched The Benchmark — to deliver ideas, stories and perspectives that will help you become a more effective and complete investor.

Quote of the week

Money does not buy you happiness, but lack of money certainly buys you misery.’ — Daniel Kahneman

The headline for this email comes from the late Daniel Kahneman, who died earlier this year. Daniel’s book, Thinking, Fast and Slow, released in 2011, was the culmination of a life spent exploring human decision making.

He won the Nobel memorial prize in economics in 2002 ‘for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty‘.

What now?

Next week, we’ll dive into the stock markets, exploring where they’ve been, where they’re at, and where they’re (possibly) going.

If you enjoyed this email and you’re looking forward to the next one, then be sure to whitelist us in your inbox, and, if you have a spare five seconds, send us a quick reply with any questions or comments you have for The Benchmark.

Invest in knowledge,

Thom
Editor, The Benchmark

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Financial Literacy Financial Technology Investing

Navexa 3.0: A New Breed Of Portfolio Tracker

In October 2023, we unveiled a major new update to the Navexa Portfolio Tracker. Here’s an explainer on the key changes.

Navexa started life as a basic portfolio tracking tool. Today, it’s developed into a multi-asset, multi-market platform that gives investors professional-level portfolio tracking and analysis on a level no other tool can match.

In October 2023, we launched the most advanced iteration of Navexa to date. In this post, we explain the changes and walk you through a few of the powerful new tools we’ve created to make understanding and optimizing your investments easier than ever before.

Watch our Navexa 3.0 Webinar

We revealed and explained the latest iteration live on a webinar for our customers. Watch the replay free — just click the player:

Navexa 3.0: The Philosophy Behind The Redesign

Navexa started life in 2018 as a basic portfolio tracking tool. It quickly evolved, supporting more markets and offering more solutions to the all-too-common problems investors encounter trying to accurately track and analyze their long-term investment performance.

Today, we’re shedding our reputation as ‘another portfolio tracker’ and revealing four big new changes and additions to our platform.

Here, we introduce and explain the key new tools and updates, and show you why Navexa now offers performance tracking and portfolio analysis tools distinctly different from other platforms.

New: Portfolio Overview Screen

The most visible update we’ve made to Navexa is the new Overview screen:

The idea behind this screen is that investors can see all their key portfolio performance metrics at a glance in one place.

While previously (and on other platforms) you needed to visit different parts of your account to find everything you might need to know, the new overview is effectively a one-stop shop for checking your portfolio’s vitals.

The five key metrics at the top of the chart (value, gain, income return, currency gain and total return) are now clickable — clicking each will display a chart for that specific metric.

Below the chart, you’ll find four bar chart panels.

Clockwise from top left:

Holding Performance: A list of the top performing holdings in the portfolio.

Category Performance: A list of the top performing sectors in the portfolio.

Diversification: Select from holding, exchange, sector, industry and currency to view the portfolio’s diversification.

Income Return: A list of the highest income-earning holdings in the portfolio.

The first three panels all have clickable dropdown menus. You can customize what they show, like return, value, dollar or percentage.

This screen lets you both understand your portfolio performance at a glance, and allows you to drill down into greater detail. Just click the bottom of each panel to access the corresponding report based on your settings.

New: Filtering System

A key tool in Navexa 3.0 is the filter system.

This small, but powerful, tool allows you to ‘filter’ what you view throughout your account.

Click it and select from the dropdown (holding, exchange, sector, industry, currency). This will prompt you to make a selection.

Once you choose your filter, your account will reload, and all the charts, metrics and reports will apply only to your selection.

Note: Your filter selection remains as you move throughout your account — you’ll see it above the chart, and can click the ‘X’ to remove it and revert to an unfiltered view.

New: Benchmark Analysis

You’ve long since been able to choose your portfolio performance benchmark in Navexa.

But whereas previously, this was a simple addition to the main portfolio performance chart, we’ve now created a new Benchmark Analysis page:

Like the Overview screen, the Benchmark Analysis chart features clickable metrics along the top. Click each to view the corresponding performance chart and benchmark chart together.

You can edit the benchmark both on this page and on both the Overview and Portfolio screens.

Below the chart, you’ll find two panels with bar charts:

These display which holdings (or sectors, exchanges, currencies, or industries) are overperforming and underperforming relative to your selected benchmark.

New: Income Calendar

We have another cool new tool for you — the Income Calendar.

Where previously Navexa could only forecast confirmed upcoming dividends, the new Income Calendar lets you estimate portfolio income 12 months in advance.

The solid coloured bars represent confirmed income, and the shaded bars represent predicted, or forecast, income.

Navexa calculated the predicted income based on the previous year’s earnings.

Below the chart, you’ll see a list of holdings and income ordered by date.

More New Stuff: Charts, cash account options & more!

We have left no stone unturned in this latest big upgrade.

You’ll also now find a Sankey chart for analyzing your portfolio income, the option to rename cash accounts, a slew of UX improvements (like labelling, and switching between showing open or closed positions).

Navexa 3.0 is live now — start tracking today!

Ready to start tracking and analyzing your portfolio?

Start tracking with Navexa today.

Go here to get started!

Categories
The Data-Driven Investor

TDDI #008: I was overexposed and didn’t even know it

As a 24-year-old, who’d just started investing, I was excited.

I wanted to put my hard-earned money to work.

I wanted to make money while I slept.

I wanted to invest as much as I could.

But…

I didn’t really know what I was doing.

I was jumping between individual stocks.

Buying ETFs.

And trying to build a ‘diversified’ portfolio.

But without knowing it, I was concentrating my risk.

I was not as nearly as diversified as I thought.

How could this be?

I owned several different stocks.

A few different ETFs.

But, my naive 24-year-old brain was missing something about my investments .

I had a big overlap problem

I bought some blue chip stocks.

Then I bought a financial sector ETF.

Then an index tracking ETF.

But what I didn’t realize is that some of the same stocks were in all three of these.

The index tracker was top heavy with banks.

The financial sector ETF had those same banks in it.

And I had also bought those banks again individually.

Did I really want to be so exposed to the banking sector?

Absolutely not!

But this is a common situation I have found when talking with passive investors.

Often, they don’t actually know what is inside the ETF they have bought.

By the time you buy a bunch of them thinking you are diversifying…

You end up like I did.

So how does an investor avoid this?

Know your ETF

When buying an ETF, do your research and find the list of stocks that are inside it.

From here it becomes pretty obvious if you are going to have an overlap problem or not.

For example, if you own a lot of Apple shares and the ETF you want to buy has a position in Apple as well, you need to decide if that is what you want.

And depending on your strategy, you may be perfectly happy with that.

But the point is, you need to know that this overlap exists.

Build your knowledge, build your portfolio

Back when I started investing I clearly didn’t have enough knowledge.

And look what happened.

I ended up concentrating my risk into a few stocks by mistake.

Losing money because that particular sector didn’t move much.

All the while, thinking I was diversified across the market.

Even though I harp on about strategies a lot…

This issue can still crop up even with the best of strategies.

The key here is building your investment knowledge.

Be aware of what you are buying.

Things on the surface can look great.

But diversifying is not always as easy as just buying ETFs.

Knowledge pays the best dividends,

Navarre

The Data-Driven Investor

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The Data-Driven Investor

TDDI #007: Love It Or Hate It (Just Don’t Overpay It)

There is an element to investing that people try to ignore.

It’s not fun.

It’s not sexy.

And it involves you losing a chunk of your hard earned investment gains.

Of course, I’m talking about tax.

I’m yet to meet a person who loves this aspect of investing.

Except maybe my accountant.

Yet, this is an area that you can not ignore.

I personally have ended up paying the government much more than was legally required.

Why? Because I didn’t like thinking about tax.

I didn’t want to know.

I didn’t optimize my investments for tax outcomes.

And, I paid for my wilful ignorance. 

If you’re investing, here’s what you must understand about taxation. 

Play a game of pass the parcel

In many countries, you have to pay capital gains tax when selling a stock.

This is a portion of the profit you make from the sale.

This is calculated by using the cost base of the holding and subtracting the gain by the cost base.

E.g. You buy some shares for $1000 (cost base) and sell them for $1500, you have made a $500 gain.

But what happens when you have bought the same stock multiple times (parcels), then sell some of it?

You get to choose a CGT strategy for calculating the gain/loss.

This can have a significant effect on what the end gain works out to be.

Let’s look at an example:

  • I buy 100 shares of Stock ABC for $3 = $300
  • I buy 100 shares of Stock ABC for $5 = $500
  • I buy 100 shares of Stock ABC for $6 = $600

So all up I own 300 shares of stock ABC.

What happens if I sell 100 shares for $5 a share for a total of $500?

I could use the FIFO (first in, first out) strategy — I  sell the first shares I bought.

So that makes the cost base $300 and the sale $500 — a $200 gain.

I could use the LIFO (last in, first out) strategy — I sell the last shares I bought. 

This makes a cost base of $600 and the sale of $500— a $-100 loss.

There are other strategies, too. 

But you can see from this simple example how you can go from owing tax, to owning nothing.

And if all the CGT strategy options still result in a gain, there’s still moves you can make to mitigate. 

Turn a loss into a tax gain

When you pay capital gains tax, you pay it as a total of your entire portfolio.

Which means if you make a gain on one stock, you can cancel it out with a loss from another.

This is  tax loss harvesting.

Tax loss harvesting is a strategy that involves selling stocks at a loss to offset a capital gains tax liability, thereby optimizing your after-tax returns.

This concept is powerful enough to potentially kill an investment tax obligation. 

Tax Knowledge Pays Dividends

Even with just this basic investment tax knowledge, you can potentially save a lot of money.

There’s no excuse for not knowing how investment taxes work.

If I had known these tax basics when I started, I might have kept a lot more of my gains.

So before you do your next tax return, have a think about which CGT strategy you are using.

If you are an Australian tax resident and it starts getting hectic calculating cost bases and keeping track of parcels, remember we help with that.

Check out Navexa now.

As always, knowledge pays the best dividends.

Navarre

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The Data-Driven Investor

TDDI #6: My Controversial Opinion On Diversity (In Index Funds)TDDI #6:

A lot of people talk about buying index tracking ETFs.

Finfluencers.

Gurus.

Friends.

Even Warren Buffett has promoted index tracking ETFs.

The idea behind this is that you get decent diversification relatively easily.

As we learn early in our investing careers, diversification is a good thing, right?

Right?

Well, it depends on how you define diversification.

Is it owning multiple stocks?

Is it owning multiple stocks across different industries?

Do these stocks need to be of equal value in your portfolio?

Do these stocks need to be from different countries?

There are many different ways to diversify.

Note: Absolutely none of what follows should be considered financial advice — merely a personal investigation into the numbers behind diversification. 

Don’t Underestimate Big Companies’ Dominance 

The ASX200 index covers the top 200 companies listed on the ASX.

And there are many ETFs out there that track this index.

Buying into one of these would give you broad diversification in terms of number of companies.

But how diverse is the ASX200 really?

With a little bit of digging, you will find that the top 10 stocks in the ASX200 makeup more than 50% of the index’s total market capitalization.

In other words, the ASX200 is very top heavy.

BHP is the number one stock in the index, with a market cap of ~$200 billion.

Compare that to the 200th stock in the index, with a market cap of $1 billion.

This means if BHP has a bad year, it can significantly impact the whole index.

So what does this look like in a real portfolio?

Meet The ASX10 Big Heavyweights

Let’s take a look at a theoretical portfolio made up of the top 10 ASX stocks in 2018.

Let’s call it the ASX10.

In the past five years, the ASX10 has outperformed the ASX200 index.

With capital gains and dividends included, the ASX10 achieved a return of 12.45% p.a. — outperforming the ASX200’s return of 9.81% p.a.

You can see from the chart that the movements were almost identical the whole way through.

But the ASX200 had 190 other companies influencing its overall performance.

So while you get diversification from an ASX200 index fund, is it the kind of diversification you want?

It Pays To Know What Comprises Index ETFs

To be clear, I’m not saying investors shouldn’t buy index funds. 

If it’s between doing nothing with their money or investing at all, then index funds might be a great idea.

They do, after all, track the performance of an index — most of which, over the long term, tend to go up. 

But for those of us who pay closer attention to what we’re investing our money in…

And those — like me — who unashamedly ‘nerd out’ on every detail of our investments…

It’s worth noting that there can sometimes be hidden costs — or rather opportunity costs — to simply buying an index fund versus investing in a particular cohort of companies. 

Diversity has become one of those pieces of financial jargon people perhaps automatically presume to be admirable. 

But, as I like to say, the numbers never lie. 

Always do your own research — this is not advice and always remember that past returns are never a guide for future performance.

Knowledge pays the best interest,

Navarre

The Data-Driven Investor

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The Data-Driven Investor

TDDI #005: Dead Investors are doing better than you!

What makes you a good investor?

Is it because you make great decisions?

You have the most knowledge?

A killer strategy?

What if I told you that, even if you had all three of these, you may not be doing as well as investors who are…

Dead.

Dead investors can’t make any decisions.

They know nothing.

Strategy? Unlikely, six feet under. 

Let me explain. 

According to a mythical study by Fidelity widely referenced in the investing world, but never confirmed, the broker’s best performing client accounts belonged to people who had either died, or had forgotten they had an account.

So, what can we learn from the dead?

Trading is hazardous to your wealth

For those of us with a heartbeat, we tend to be less than perfect in our investing.

We:

  • Are impatient
  • Make emotional decisions
  • Let ego dictate our moves

This means we trade more. 

100% more than the dead. 

With each trade, we lose money to trading fees.

We pay taxes on gains.

We realize losses.

Increased trading activity often contributes to poor investment performance.

Become an expert at feigning lifelessness

If the dead are good at one thing, it’s being patient.

You could say they are the ultimate passive investors.

When Warren Buffett says his ideal holding period is forever, then the dead are *cough* living that ideal. 

When you buy into an entire market, or sector of the market through ETFs — and then do nothing — you’re emulating a dead investor.

You sit back and get rich slowly.

This mythical Fidelity study proves — on a long enough timeline, at least — this strategy is highly effective.

Inaction can be a super power

Society has always praised people for taking action.

It’s also one of the things I pride myself on.

But when it comes to investing, inaction is often more powerful.

Not making emotional decisions.

Not FOMOing in and out of positions because of the news.

These things sound simple to avoid.

But they’re easy to fall for.

Don’t get me wrong, complete inaction, is not good.

Afterall, you have to take action at some point to invest in anything.

But, making calm and calculated decisions is usually best.

We can learn a lot from Fidelity’s mythical dead (or just inactive) investors.

Reducing trading activity saves on fees, taxes and realized losses.

Time in the market, as the saying goes, generates more value than timing the market.

Knowledge pays the best interest,

Navarre

The Data-Driven Investor