When investing for your retirement think global, long-term, markets rather than stocks, contrarian, and risk management. This thinking will give keep you ahead of the crowd
Some of the short-term measures don’t look good for self managed super investors. While the current markets have spooked investors and created a ‘bear’ market, for self managed super trustees and those investing for retirement, 2011 has been an especially sobering experience. Many of you will be in a managed solution, and you’ll have the professionals managing your retirement investments. But for self managed super trustees, there is likely to be confusion and fear, especially for those who have much wealth in equities and those who are on the verge of implementing a strategy for living in retirement.
I can’t offer advice on this post, but I can offer the perspective of a professional trader and suggest new ways of thinking about market investment. I call it my Global Macro Philosophy. Here are the Eight Perspectives that add-up to Global Macro, and perhaps some food for thought for those with self managed super:
Think Global:
The ASX only accounts for about 2% of the capitalization of the global stock market so why limit your self managed super strategy to just Australian equities? Looking for investment opportunities outside of Australia will help to reduce the correlation of returns of your portfolio. Many broking platforms now make investing in Japanese, European and North American markets as easy as investing in stocks on the Australian Stock Exchange. Even if you decide not to invest outside of Australia you need to know that the majority of movement of stocks on the ASX is attributable to global influences and have little to do with what happens within Australia itself. If mining stocks do well in global markets they will do well on the ASX. Weakness in banking stocks in Europe and the US will show up in Australian banking stocks. The current strength of Telstra has more to do with the relative strength of Verizon and AT&T in the US and NTT in Japan (to name a few) than it has to do with anything unique to Telstra’s operations in Australia.
Think Long Term:
When investing in a self managed super fund, you are building a nest egg for the future. Yet most of what you hear on the daily business news channels is merely justification for what has just happened in markets the previous day or week. Given that what happens on a daily or weekly basis is largely noise, taking too much notice of the “press of popular opinion” is not an investment strategy: it will only lead you to become confused and is akin to a cat trying to catch its tail. It seems that investors’ desire for consistent returns has driven fund managers to chase short term returns. Fund managers simply cannot afford to under perform the market or their peers for any more than a quarter, otherwise they risk having fund redemptions. The result is that fund managers cannot afford to look for deep value situations which will generate significant gains, and accordingly their returns will at very best be in line with the market. As a private investor with a self managed super fund, you only have to answer to yourself and those in your fund. There is no need to outperform the market on a quarterly or even yearly basis. You can afford to look for deep value situations globally, invest in them and wait until they come back into favour with the investing community. In essence your competitive advantage will come from having a longer time frame than most others.
Think Markets, Not Individual Stocks:
Most of a stock’s movement is a result of the performance of the sector it is in and the market in general. This means that if you get the direction of a stock right, especially of the large-cap variety, then you probably got it right but for the wrong reasons, or at least reasons you were unaware of. So, instead of trying to stock-pick in your self managed super fund, look at buying into an out-of-favour sector or market in general. It’s a safer investment strategy and just as rewarding.
Most fund managers under perform the major market indices such as the Dow and S&P 500. Why is this? In essence we are hard-wired for failure or under-performance in investing/trading. We have a tendency to cap our upside and not limit our downside. Too many traders let losers get away on them but they do not let their winners run. Indices, by default, increase their weighting to outperforming stocks and decrease their weighting to losing or under performing stocks. Given that we are hard-wired to under perform major market indices the most important decision we need to make is not what stocks to buy or sell, but rather, whether to be invested in the market in the first place.
Think Macro, Not Micro:
A self managed super investment strategy means seeing long term global trends and buying them; such trends may be wind powered electricity, Chinese automotive etc. A good Macro trend will deliver you growth for ten years, not for ten days. Macro vs. Micro can best be illustrated by an example. Lets talk about Apple computer and all the rage over smart phones and now tablets. While all these new devices look very elegant and it looks cool to have one, what is this really about? Well apart from looking hip the essence of smart phones, tablets, and to a large extent personal computers is the desire for data. This is only made possible by telecommunications companies. Companies producing computing “devices” come and go but the companies providing “transport” for the data don’t. The Macro view would see us more excited about the prospects of AT&T and Verizon, than the Micro trend of Apple!
Think Contrarian:
“When everyone thinks alike, the opposite is most likely to happen”. This is a saying that guides me with my investment strategy and should guide self managed super trustees. To contextualize this from a market perspective – if everyone is fully invested in the stock market, where is the marginal buyer going to come from to push prices higher? Two examples will illustrate this. Apple is the darling of the investment community and perhaps for very good reason. There is absolutely no doubt that Apple is a world-class company but this does not necessarily make it a great investment. Why? Well Apple is essentially priced to perfection; all the optimism and hype surrounding Apple’s products and its growth prospects are now more or less fully priced into its stock price. The result is that it will be exceedingly difficult for Apple to outperform expectations. The exact opposite probably applies to banking giant JPMorgan and most other large-cap financial stocks. Given the incredibly bleak expectations priced into the stock price of JPMorgan it won’t take much for the banking giant to beat expectations. One should always be looking to invest in markets or themes that are out of favour with the investing public.
Think Risk-Management:
If I look at where most self managed super investors go wrong, it is the application of their view rather than the view itself. Leverage is perhaps the biggest culprit in causing investors to fail or under perform. Also one should never be anymore confident on the outcome of one investment over another. Yes, there are a few investors who have taken large positions in certain markets or themes, but the graveyard of failed investors is littered with those who also took large position in an investment, perhaps using leverage, and it consequently went against them.
Think:
Stock and bond markets always reflect an external value; they also have historical equilibrium points. Self managed super investors have to make themselves think in terms of value rather than simply plotting a course from where the stock was last week.
Some of the short-term measures don’t look good for self managed super investors. While the current markets have spooked investors and created a ‘bear’ market, for self managed super trustees and those investing for retirement, 2011 has been an especially sobering experience. Many of you will be in a managed solution, and you’ll have the professionals managing your retirement investments. But for self managed super trustees, there is likely to be confusion and fear, especially for those who have much wealth in equities and those who are on the verge of implementing a strategy for living in retirement.
I can’t offer advice on this post, but I can offer the perspective of a professional trader and suggest new ways of thinking about market investment. I call it my Global Macro Philosophy. Here are the Eight Perspectives that add-up to Global Macro, and perhaps some food for thought for those with self managed super:
Think Global:
The ASX only accounts for about 2% of the capitalization of the global stock market so why limit your self managed super strategy to just Australian equities? Looking for investment opportunities outside of Australia will help to reduce the correlation of returns of your portfolio. Many broking platforms now make investing in Japanese, European and North American markets as easy as investing in stocks on the Australian Stock Exchange. Even if you decide not to invest outside of Australia you need to know that the majority of movement of stocks on the ASX is attributable to global influences and have little to do with what happens within Australia itself. If mining stocks do well in global markets they will do well on the ASX. Weakness in banking stocks in Europe and the US will show up in Australian banking stocks. The current strength of Telstra has more to do with the relative strength of Verizon and AT&T in the US and NTT in Japan (to name a few) than it has to do with anything unique to Telstra’s operations in Australia.
Think Long Term:
When investing in a self managed super fund, you are building a nest egg for the future. Yet most of what you hear on the daily business news channels is merely justification for what has just happened in markets the previous day or week. Given that what happens on a daily or weekly basis is largely noise, taking too much notice of the “press of popular opinion” is not an investment strategy: it will only lead you to become confused and is akin to a cat trying to catch its tail. It seems that investors’ desire for consistent returns has driven fund managers to chase short term returns. Fund managers simply cannot afford to under perform the market or their peers for any more than a quarter, otherwise they risk having fund redemptions. The result is that fund managers cannot afford to look for deep value situations which will generate significant gains, and accordingly their returns will at very best be in line with the market. As a private investor with a self managed super fund, you only have to answer to yourself and those in your fund. There is no need to outperform the market on a quarterly or even yearly basis. You can afford to look for deep value situations globally, invest in them and wait until they come back into favour with the investing community. In essence your competitive advantage will come from having a longer time frame than most others.
Think Markets, Not Individual Stocks:
Most of a stock’s movement is a result of the performance of the sector it is in and the market in general. This means that if you get the direction of a stock right, especially of the large-cap variety, then you probably got it right but for the wrong reasons, or at least reasons you were unaware of. So, instead of trying to stock-pick in your self managed super fund, look at buying into an out-of-favour sector or market in general. It’s a safer investment strategy and just as rewarding.
Most fund managers under perform the major market indices such as the Dow and S&P 500. Why is this? In essence we are hard-wired for failure or under-performance in investing/trading. We have a tendency to cap our upside and not limit our downside. Too many traders let losers get away on them but they do not let their winners run. Indices, by default, increase their weighting to outperforming stocks and decrease their weighting to losing or under performing stocks. Given that we are hard-wired to under perform major market indices the most important decision we need to make is not what stocks to buy or sell, but rather, whether to be invested in the market in the first place.
Think Macro, Not Micro:
A self managed super investment strategy means seeing long term global trends and buying them; such trends may be wind powered electricity, Chinese automotive etc. A good Macro trend will deliver you growth for ten years, not for ten days. Macro vs. Micro can best be illustrated by an example. Lets talk about Apple computer and all the rage over smart phones and now tablets. While all these new devices look very elegant and it looks cool to have one, what is this really about? Well apart from looking hip the essence of smart phones, tablets, and to a large extent personal computers is the desire for data. This is only made possible by telecommunications companies. Companies producing computing “devices” come and go but the companies providing “transport” for the data don’t. The Macro view would see us more excited about the prospects of AT&T and Verizon, than the Micro trend of Apple!
Think Contrarian:
“When everyone thinks alike, the opposite is most likely to happen”. This is a saying that guides me with my investment strategy and should guide self managed super trustees. To contextualize this from a market perspective – if everyone is fully invested in the stock market, where is the marginal buyer going to come from to push prices higher? Two examples will illustrate this. Apple is the darling of the investment community and perhaps for very good reason. There is absolutely no doubt that Apple is a world-class company but this does not necessarily make it a great investment. Why? Well Apple is essentially priced to perfection; all the optimism and hype surrounding Apple’s products and its growth prospects are now more or less fully priced into its stock price. The result is that it will be exceedingly difficult for Apple to outperform expectations. The exact opposite probably applies to banking giant JPMorgan and most other large-cap financial stocks. Given the incredibly bleak expectations priced into the stock price of JPMorgan it won’t take much for the banking giant to beat expectations. One should always be looking to invest in markets or themes that are out of favour with the investing public.
Think Risk-Management:
If I look at where most self managed super investors go wrong, it is the application of their view rather than the view itself. Leverage is perhaps the biggest culprit in causing investors to fail or under perform. Also one should never be anymore confident on the outcome of one investment over another. Yes, there are a few investors who have taken large positions in certain markets or themes, but the graveyard of failed investors is littered with those who also took large position in an investment, perhaps using leverage, and it consequently went against them.
Think:
Stock and bond markets always reflect an external value; they also have historical equilibrium points. Self managed super investors have to make themselves think in terms of value rather than simply plotting a course from where the stock was last week.