XAO Bull

[fraa]

Given the top heavy nature of the ASX200, and poor performance from the top 10 or 20. I wonder what this means for passive/index style investors?

Perhaps a better way to invest passively is via something like this:

MVW.ASX

Thoughts?

I was thinking that too - but effectively you are just tilting towards smaller companies, so this is not much different to buying something like VSO ?

 

[craft]

What is the ultimate underlying drivers of the share market chart going in the North-East direction over the long term? To me they are (in no particular order):

1. Inflation
2. Population growth
3. Productivity gain
4. Increased fund flows into market
5. Index rebalancing
(Probably missed something...)

First 3 drive Nominal GDP – if anything is missing it would be split between capital & Labour because that pretty much translates GDP growth to earnings growth. Then there are equity distributions and dilutions components to determine EPS growth. 4 is amongst the technical’s that feed into the earnings multiple along with other psychological points no doubt. My view is that the earnings multiples are cyclical. 5. I’m not sure if the index rebalancing aspect adds (or subtracts) anything.

Over the next 25 years... *taking out my crystal ball and giving it a good rub.
1). will be present to some extent.
2). will it continue? We have aging population so population growth must be replenished via immigration which may or may no be embraced by all.
3). should continue (a separate debate as to whether Australia will lead/lag the rest of the world).
4). Unsure about this one... again, with population demographic changes, we might see net outflow in the foreseeable future.
5. should continue

My crystal ball is stuffed so I’ll defer to your crystal here.

All in all, I don't have enough faith in the direction of the line to just boldly buy and hold through my investment timeframe. I need to rely on generating my own alpha.

I don't have faith in the direction of the line either – nor do I have I have faith that it will end. So I’m stuck with reacting to what I see, and from my long term perspective things aint broke yet.

Not for a second suggesting people should not chase alpha – I certainly try to as a stock picker. Not forgetting only 50% (less costs) of money chasing alpha can ever achieve it and contrary to popular forum opinion it takes works.

I’m really not trying to make a prediction here or convince anyone – just a thread to put some perhaps contrary to popular opinion at this time, bullish perspectives.

 

[craft]

Starting to look inevitable ...

But is the inevitable view ever the profitable view? Generally inevitable is priced in already. Its when inevitable doesn't happen that ........

The naming of this thread is the very definition of ' Optimist '

True That.

 

[Quant]

But is the inevitable view ever the profitable view? Generally inevitable is priced in already. Its when inevitable doesn't happen that ........


True That.

Well its one of those thing that looks inevitable to me , I would suggest its not the case out there in the herd , me being an independent thinker and all . Nothings impossible but only the probable is my concern , opinions are really of concern to those that hold them for they are the ones that profit or loss from them , externally its just noise . I like to support my opinions with some real facts and I have done so , as inputs change so will my thoughts for i'm not in love with an idea if the inputs change .... markets are dynamic and as participants in its shifting of wealth so must we be so ....

Markets are rarely linear

 

[skc]

First 3 drive Nominal GDP – if anything is missing it would be split between capital & Labour because that pretty much translates GDP growth to earnings growth. Then there are equity distributions and dilutions components to determine EPS growth. 4 is amongst the technical’s that feed into the earnings multiple along with other psychological points no doubt. My view is that the earnings multiples are cyclical.

So simple when it is broken into the main components. Earnings, and the multiple on those earnings.

5. I’m not sure if the index rebalancing aspect adds (or subtracts) anything.

Take the constituents from 1910 of whatever your first chart is actually charting (what it is in 1910?) and I bet you the returns won't be nearly as good. At a guess I'd say 90% of the ASX top 20 didn't exist back in 1910. And they'd never be included if there is no rebalancing.

I don't have faith in the direction of the line either – nor do I have I have faith that it will end. So I’m stuck with reacting to what I see, and from my long term perspective things aint broke yet.

I’m really not trying to make a prediction here or convince anyone – just a thread to put some perhaps contrary to popular opinion at this time, bullish perspectives.

Long term I think I'd rather ride then fight that trend.

Still something I am struggling with... i.e. taking the long term perspective. It's very hard. I can only have a portion on my money on this. I am reasonably comfortable with not getting very rich from investing for the long term, but I am very uncomfortable with having lots of exposure to the market when it appears to breakdown in the short - medium term.

 

[craft]

Take the constituents from 1910 of whatever your first chart is actually charting (what it is in 1910?) and I bet you the returns won't be nearly as good. At a guess I'd say 90% of the ASX top 20 didn't exist back in 1910. And they'd never be included if there is no rebalancing.

Hi SKC

Just to take this a little further. Accept everything you say about the rebalancing producing a higher return then a buy and hold of whatever made up the index in 1910 - you would probably be left tracking nothing today.

But I'm not sure that is the point for me. Its more along the lines is the N/E depicted by the index aided by the selection process of the constituents. ie is it giving me a picture of the underlying environment or is capitalisation as a stock selection process adding (detracting) from the picture.

Across the entire market companies come and go - I think the XAO covers a fair proportion of the market movement ~95% of capitalisation at the moment, not sure if it has always been that high. I,m not sure that what it doesn't capture - the 5% where companies are born and die or just plain small would alter the picture significantly and if they alter it at all what's the net effect.

 

[craft]

If we pull back to 3 decades of data on a log scale you don't see support under AUG lows till sub 4500

Ok so here’s the 3 decades of data on a log scale.



If 4500 has significance as support then too perhaps does a regression channel of the data. Not forgetting we are in the long term investing part of the forum, the issues around breadth,and index make up and how CAPE type valuations are fairly supportive – I think there is some justification for a long term investor to be paying attention for buying opportunities. IF we end up at the bottom of that channel in 30years we get a compound annual capital growth return of 5% at the regression extension its 6.3% and at the top its 8%. Add to that the current grossed up market dividend yield of ~6%. What’s your cash rusting at?

Of course the channel may not be valid in the future but that can be dealt with if it happens.

Now if you’re not an investor and instead your available money is actually tied up as working capital in a trading business then forget the long term. Or if your financial circumstances dictate you shouldn’t be taking volatility risk, forget the long term but otherwise you have to be careful that you don’t lose perspective of the big picture and let near term noise turn you into a dick for a tick (note for self).

My super is cash and will be staying that way for the foreseeable future , we live in ' interesting ' times ....

Given that Super should be a 40-60+ year investment if you are blessed with good health and possibly generational if your any good at this game then perhaps given cash's long term track record (worse than bills) maybe you could do with a little more optimism.

The naming of this thread is the very definition of ' Optimist '

 

[Quant]

Given that Super should be a 40-60+ year investment if you are blessed with good health and possibly generational if your any good at this game then perhaps given cash's long term track record (worse than bills) maybe you could do with a little more optimism.

View attachment 65320

LOL I am not a pessimist either , I've been proactively managing my super and in 2015 I am 15% outperformance on the average fund , I cashed at 6000 , was in a bear etf for a while (not long enough) currently 100% cash . I like clichés and here's another one , very apt once again ...





found some data on global earnings/ earnings multiples ... XJO is not alone

 

[Junior]

LOL I am not a pessimist either , I've been proactively managing my super and in 2015 I am 15% outperformance on the average fund , I cashed at 6000 , was in a bear etf for a while (not long enough) currently 100% cash . I like clichés and here's another one , very apt once again ...


View attachment 65329


found some data on global earnings/ earnings multiples ... XJO is not alone


View attachment 65330

So you cashed out at the very top and shorted the market. Congrats if true!

 

[Quant]

So you cashed out at the very top and shorted the market. Congrats if true!

Cashed out the last of my stock holdings , I wasn't fully invested at 6000 , if I had been my outperformance of av fund would be closer to 30% , nevertheless I'm pretty satisfied , you will never get every % on the table ...

FWIW selling in April/May on high forward earnings will never backfire on you ....

 

[craft]

I like clichés

Yep, I suspected as much.

 

[craft]

View attachment 65329

So what are you trying to say on this thread? A long term optimistic stance is not realistic because YOU have a short term bearish opinion based on analysts forward earning estimates? Or am I missing your point?

 

[Quant]

So what are you trying to say on this thread? A long term optimistic stance is not realistic because YOU have a short term bearish opinion based on analysts forward earning estimates? Or am I missing your point?

Sorry i'm rocking your Bullish boat , in 30 years you will be fine which is great if you like sitting on your hands , I will cease and desist , I actually thought I was adding relevant information that might help explain recent market movements and possibly give some insight where it actually might head and where a value spot to invest may be .

I apologize ..... I will not interfere again

 

[craft]

Sorry i'm rocking your Bullish boat , in 30 years you will be fine which is great if you like sitting on your hands , I will cease and desist , I actually thought I was adding relevant information that might help explain recent market movements and possibly give some insight where it actually might head and where a value spot to invest may be .

I apologize ..... I will not interfere again

Hmm I do like sitting on my hands......

Not rocking my boat. Your 'opinion' is as welcome as the next persons, just trying to understand what you meant by the realist cliché.

 

[Quant]

Hmm I do like sitting on my hands......

Not rocking my boat. Your 'opinion' is as welcome as the next persons, just trying to understand what you meant by the realist cliché.

My last entry in ' here ' Hope it helps

http://philosiblog.com/2012/11/23/t...ts-it-to-change-the-leader-adjusts-the-sails/

" I am responsible for what I spoke, but not for what you understood. "

 

[craft]

My last entry in ' here ' Hope it helps

http://philosiblog.com/2012/11/23/t...ts-it-to-change-the-leader-adjusts-the-sails/

" I am responsible for what I spoke, but not for what you understood. "

You do answer in riddles. But Hey I think I've worked it out. If I just share your opinions I too can be a realist. I sooooo want to be a realist - maybe one day I could even become a critical thinker too.


twit!


Yep - time for a holiday

Merry Christmas everybody.

 

[fraa]

Hi Craft,

If you do not mind, lets flip the question around - say in the next year some new information (fundamental or technical) becomes available.

Hypothetically, what would the information/news have to be for you to have no view or become bearish long term on the XAO ?

i.e. if the XAO wanders outside of the channel you drew for example ? (i know the channel was not in your first post, just an example), or deviates from the long term trend you drew ?

or if we have a severe property downturn that hits the banks hard ?

Not asking for specifics etc - just wondering how severe the news will have to be to convince you that "things really are different this time".

Thanks

 

[craft]

Hi Craft,

If you do not mind, lets flip the question around - say in the next year some new information (fundamental or technical) becomes available.

Hypothetically, what would the information/news have to be for you to have no view or become bearish long term on the XAO ?

i.e. if the XAO wanders outside of the channel you drew for example ? (i know the channel was not in your first post, just an example), or deviates from the long term trend you drew ?

or if we have a severe property downturn that hits the banks hard ?

Not asking for specifics etc - just wondering how severe the news will have to be to convince you that "things really are different this time".

Thanks

Hi Fraa

Flipping the question – That's worth answering.

Market Pricing.
The index price channel doesn’t hold much significance to me – the channel moves depending on where you start the chart. Though a sustained excursion outside a channel starting when the A$ was floated would have me taking notice so would a sustained level below 2011 Lows.

Earnings.
I take much more notice of earnings – particularly the trend of earnings rather than just current or forecast earnings. I’m not too much concerned with the inflation component no matter what it does – because my measure of investment success is purchasing power (or what my real return is)

If the long term productivity component fell through the floor I would be bearish. I don’t see that happening – in fact I see some innovation starting to slowly come back into our economy after the mining boom and some dud leadership.

If the population component fell through the floor because of war, disease etc I would be bearish.

If the division of profits swung massively away from capital because we got a very socialist/communist style government I would be bearish.

If there was a major fiat monetary crisis AND we reverted to a physical monetary standard I would be bearish.

A property downturn wouldn’t really turn me bearish long term – we’ve had them, they are expected.
Between 1931 & 1951 property value to GDP more than halved. Peak to peak or trough to trough capital growth on the XAO over the same period was around 5%pa. plus whatever dividends were at the time. Peak (1929) to trough (1952) i.e. worst timing you could have managed was still 2.5%pa capital plus dividends.
I’ve avoided banks for some time, probably to my detriment because I think a property valuation downturn will hurt their profitability but I don’t really see a high probability of an economy destroying bust from the banks exploding under a property downturn. In fact the banks more vigorously looking for growth outside of low productivity existing residential property may be good for the economy as it would help facilitate some more productive risk taking.

The biggest thing that would turn me bearish is earnings above long term averages and high earnings multiples based on those elevated earning levels.

Observation not prediction of the long run economy is what would send me bearish.

Sorry no graphs to back up anything here – don’t have the data with me.

Cheers and Merry Christmas

 

[Junior]

Good post Craft. Some food for thought.

Reading the business section...tends to make you obsessed with mining/energy, or property. But they are only components of our economy. On the whole things aren't so bad.

Turnbull has injected some positivity too, which is refreshing.

 

[McLovin]

Good opinion piece in the AFR today by Martin Wolf. Be frightened of wars, inflation and financial crisis. Everything else is just noise in the long run. Personally I'm more worried about ISIS than financial crisis, and I'm not that worried about ISIS. And the beat goes on...

There is a great deal of ruin in a nation. Thus did the wise Adam Smith rebuke a correspondent's worry that ruin was bound to follow reversals in the war against the North American colonists. If there is a great deal of ruin in an individual country, there is even more ruin in the world economy. Somehow, it keeps on going.

Measured at purchasing power parity, the world economy has grown in every year since 1946, even (albeit barely) in 2009, in the wake of the global financial crisis. The period between 1900 and 1946 was more unstable than the era of managed capitalism that succeeded it. Even so, the world economy grew in all but nine of those years.

The innovation-driven economy that emerged in the late 18th and 19th centuries and spread across the globe in the 20th and 21st just grows. That is the most important fact about it. It does not grow across the world at all evenly - far from it. It does not share its benefits among people at all equally - again, far from it. But it grows. It grew last year. Much the most plausible assumption is that it will grow again this year.

The world economy will not grow forever. But it will only stop when the economics of Thomas Malthus overwhelm those of Joseph Schumpeter - that is, when resource constraints offset innovation. We are certainly not there yet.

Since 1900, the world's output has grown at a rate of just over 3 per cent a year. Such is the power of compound interest that world output has expanded more than 30-fold over this period. Output grew relatively slowly in the early part of the 20th century and relatively fast between 1947 and the early 1970s. Intriguingly, it grew a bit faster under postwar Keynesian economics than under the conservative revival launched by Margaret Thatcher and Ronald Reagan in the 1980s.

Now consider the pattern of volatility. The marked volatility between 1914 and 1919 was due to the first world war; that of the 1930s to the Great Depression; and that of the 1940s to the second world war. The instability of the 1970s and early 1980s was due to the oil shocks, triggered (or augmented) by war (the Yom Kippur war of 1973 and Iraq's 1980 invasion of Iran). Inflationary financing of the Vietnam war generated the inflationary backdrop to the instability. Ultimately, that led to disinflation by the Federal Reserve, under Paul Volcker.

The slowdown in 1990 and 1991 was again due to disinflation and the first Gulf war, which followed Saddam Hussein's invasion of Kuwait. The slowdown in 1998 was triggered by the Asian financial crisis, that in 2001 by the bursting of a huge stock market bubble and that in 2009 by the western financial crisis.

This picture of the past indicates the kind of events one should worry about. In brief, there seem to be three: wars; inflation shocks (perhaps linked to wars or jumps in commodity prices); and financial crises. These phenomena can be linked: wars will trigger inflation if their finance is by inflationary means.

In this light, let us consider current risks. Some analysts have been convinced for years that high inflation must result from the expansion of central-bank balance sheets. They are wrong. It is quite possible for central banks to control the effects of their policies upon the expansion in credit and money.

A second set of risks, again ceaselessly promoted, is that of financial crisis. The biggest risks seem to be in emerging economies. But these risks are likely to be contained or prove manageable at the global level. If the worst came to the worst, the results are likely to be more like those of 1998 than of 2009.

The third set of risks is that of geopolitical upheaval and conflict. We can identify a daunting list of worries: the massive overloading of the EU's capacity to act; the possible exit of the UK from the EU; the hollowing out of the western alliance; the rise of populist pressures in high-income countries, shown in the success of Marine Le Pen and the rise of "Trumpism"; uncertainty about China's economic and even political future; the rise of global jihadism, and particularly of Isis, the "world's most powerful terrorist organisation"; Russian revanchism; disputes among great powers, notably between Russia and the US and China and the US; friction in the Middle East, notably between Iran and Saudi Arabia; state failure; floods of refugees; and US retreat from its hegemonic role.

Beyond this is a decline in the legitimacy and effectiveness of many high-income democracies, the fragile self-importance of many other powers and the chaos in large parts of the world. Yet all this comes at the same time as a need for effective global governance in an integrated and interdependent world.

If one wants to worry, there is plenty to worry about. Yet, from the economic viewpoint, what matters is not so much whether the world will be well managed: it will not be. What matters more is whether a disaster will be avoided.

What would such an event look like? A war among great powers could be one. Election of a bellicose ignoramus to the US presidency could be another. A war between Iran and Saudi Arabia would be a disaster. The replacement of the Saudi regime by ISIS would be another. A nuclear war between India and Pakistan would be another. Collapse of the EU could prove yet another.

The cumulative chance that at least one of all such disasters will occur is greater than the chance that any one of them will do so. Nevertheless, the likelihood that none of them will occur is surely bigger. Remember: there is a great deal of ruin in the world economy.

Read more: http://www.afr.com/opinion/why-economic-disaster-is-an-unlikely-event-20160105-gm03iq#ixzz3wQTLqjVo