My experience investing

I’ve had an interesting life with many twists and turns, but I have always been curious about the world and asked questions.  I am passionate about building a better world for all Australians and for a long time seen that this would be best achieved through investment.  I studied three years of civil engineering, had a baby, then went back and  studied science while working and being a parent.  Now I’m completing a Master of Economics, and have never felt it more possible, that in the not so distant future I might help shape and implement ideas make positive change in the world.

 

I have long believed that to grow a strong economy for future generations, to continue to be one of the richest nations per capita in the world, vision of the future and direction for investment is needed.  Future wealth needs to come from the industries and infrastructure that we invest in to make Australia strong, so we have a future — and this is what I am passionate about.

 

I am excited about some of the amazing new industries like renewable energy and solar tech, carbon capture tech, and quantum computing, that could bring huge returns for Australia in the future.  I am passionate about getting the right infrastructure and housing mix, to support our industry, people and cities.  To foster creativity and build future wealth.

 

I love to read about companies, follow markets, and macroeconomic news (read: world, national, business and political current events).  I invest my own money and although I know I have made mistakes, overall, I have made money on my investments and I have learned so much by actually investing some of my own savings.  I am learning about building a resilient and diverse portfolio.  At this point in history, there have been so many challenges. Just in the last few years we have had the US-Sino Trade War, Escalations of tensions around the world, between Russia and Europe, The Middle East, and South America.  There have been wild fires that ravaged the globe, the omnipresent threat of climate change, the coronavirus pandemic, and now internal tensions over police and state treatment of African American people in the United States, that have led to solidarity protests echoed around the world just this last week.

I had thought about investing for several years, probably I first thought about doing it when I was in year 11 or 12 studying economics at high school, but back then I had no idea really how to even make an investment.  There was a stock market game my high school economics teacher, Mr Young, tried to get me involved with but I felt quite overwhelmed by the task with out any additional guidance, even though it wasn’t real money, the whole idea stressed me out!  Finally after many years debating with myself, I took the plunge, the market had been strong for several years, I had watched stocks have returns wildly above what I was earning in bank savings account interest.  I felt I should at least try the stock market, now I had educated my self a little.  The week after I made my first ever investment in the Australian Stock Exchange (ASX), was the last week of September 2018…you might not even remember now, but it was just before the stock market suddenly dived due to trade tensions and tariffs put up between the US and China.  I lost 6 – 10 % in a couple of weeks and was pulling my hair out trying to salvage the situation.  I was thrown into the deep end and I had to pull out everything I had learned to pull my investments out of dire straits.

 

It was both exhilarating and terrifying.  I used everything I knew, listened to the best advice and managed to make back everything I had lost and more.  At one point I was up about 30% but I had to learn the hard lesson of not locking in my gains when the market began to falter.  Although I was ahead, I had losses that diminished my possible gains. During the crisis this year I had learned something from experience and pulled most of my investments as things got ugly, in hindsight I would have pulled them much sooner and done a few things differently.  Presently, my return since I started investing sits approximately 8.12% above XAO, and 8.37% above XJO. If I had invested in an ASX-200 ETF tracker, I would today be 8.37% worse off.  I am proud I have achieved that with the little experience I had going in.

Looking back, we would laugh to think I thought 6– 10 % was a big loss!  The ASX with most markets around the world, fell almost 40 % this year between 24 February and 23 March this year, after it became apparent that coronavirus Covid-19 was unstoppable and would turn into a worldwide pandemic.  The Australian stock market All Ordinaries fell from a peak of around 7230.445 on Monday 24 February, to a low of around 4564.129 by Monday 23 March (Figure 1). This was a loss of 36.89%.  Those numbers ‘7230.445’ and ‘4564.129’ are the index numbers, indicating the relative ‘height’ of the stock market as a total weighted average of al listed companies.

AXO Australian Stock Market Pandemic 2020 Feb March

Figure: AXO Australian Stock Market Pandemic Dec 2019 – June 2020, source:  ASX charts (1)

To calculate this stock market loss mathematically, first we divide the ‘new low’ by the ‘old high’ or (4564.129/7230.445) = 0.6312, meaning the market was at 63.12% of its previous height.  This is basically like buying a glorious gelato in a cone, your favourite flavour too,  walking outside the shop, and being immediately bumped by someone passing you in the street.  The gelato scoop falling on the pavement, leaving you holding just the cone.  Well, over those few weeks, the world was left just holding their respective cones, gobsmacked.  Gelato splattered all over the footpath.  The loss is found by taking the size of the ‘gelato cone’ away from the original size of the gelato scoop and the cone, which has been normalised in this case to ‘one’ , so the amount of gelato lost is equal to ‘One gelato minus the Gelato Cone’ = 1 – 0.6312 = 0.3687 =  36.89%.

As you can see in the chart the market has partially recovered from it’s lows, but it is a very uncertain time, and anything can happen, it’s not necessarily a real recovery.  We could be in for a prolonged downturn that could stretch for years, and we just don’t quite see it at this stage.  It took a few years to reach market bottoms in the past after stock crashes, after 2008 and 1929.  It’s likely I think this will again happen this time.  We have seen so many events together that some people wouldn’t see in their entire lifetime.  Or at least once in a lifetime events.  It’s a time to come together (virtually or over the phone of course) with friends and love ones.  Take care of yourself, your family, friends, and show care about your community.  Humans are communal creatures, and we can get through this if we pull together and work in unison, rather than letting our differences divide us.

 

1. ASX Charts, URL: https://www.asx.com.au/prices/charting/index.html?code=XAO&compareCode=&chartType=line&priceMovingAverage1=0&priceMovingAverage2=0&volumeIndicator=Bar&volumeMovingAverage=0&timeframe=, date viewed 7 June, 2020.

Portfolio diversification: Starcraft analogy

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My 11 year old is a big fan of Starcraft II, a strategy computer game. If you know the game, you will be aware there are two resources in the game, Vespene Gas and Minerals.  Units in the game can collect these resources and use them as commodities to build new items, or as currency to finance acquisitions, for example fighting or healing units in one of the three armies, Zerg (Alien insects), Protoss (A highly advanced alien race) or Terrans (Humans).  The resources Vespene Gas and Minerals are valuable and necessary for any successful Starcraft II army.  Especially if you want to have success in the game or annihilate your enemy’s bases.  Successful armies require Vespene Gas and Minerals so there is always a market for these resources.

If I was an investor in the Starcraft universe, I would have two possible resources to invest in, Vespene Gas or Minerals.  If I bought only Vespene Gas, my investment portfolio would contain one thing: Vespene Gas.  Say I invested only in a Zerg Vespene Gas field I would have only the risk attached to owning a Zerg Vespene Gas field.

If one day the Protoss came along and blew it up, and blew up all my harvesting units, I would loose all of my investment.  I would have nothing and be all of a sudden very poor.  If I  had instead put only half my assets into the Zerg Vespene Gas field and the other half into a Terran Minerals deposit I would have reduced my risk.  My portfolio would be half Minerals and half Vespene Gas. I would still have my investment in the Minerals even if the gas field was destroyed. I would only loose half of my investment.

By investing in both resources I am spreading my risk and hopefully by doing so reducing my total investment risk. This is why it is so important to build a diverse portfolio and why people say “not to put all your eggs in one basket”.  That is why it is unwise to only invest in Vespene Gas.

 

*Note: This is a very simple example of portfolio diversification for demonstration purposes only. It should not be taken as investment advice. At the time of writing I do not and have not previously held stocks in Blizzard Activision (or Vespene Gas for that matter!)

The Looming Sydney Housing Crisis

What is it that people say? It’s a recession until you loose your job, then it’s a depression. I feel it’s a bit like that with the Sydney housing market. It’s not a crisis, it’s a bubble, until your bubble pops and you are pushed out of the property and rental market because you’ve been out priced.

One of the problems with the Sydney housing market is that it’s been treated by many as an easy no brainer investment class. I’m talking about people who buy houses as an investment to sell at a profit rather than to live in them. It doesn’t really matter whether they are local baby boomer investors or overseas investors, the end result is that because there has been so much speculation in the market for so long, we in Sydney (and Melbourne) have seen an artificial elevation in house prices that is not linked to wage growth. This has ultimately out priced many younger people from the market, and basically anyone who wasn’t on the property ladder to begin with.

Now there is a phrase I have a real problem with “the property ladder”, which implies a buying and selling of properties to upgrade ones housing, presumably for comfort, but more recently (say the last decade at least) for sheer profit.

The thing about houses is they don’t generate any income until they are rented out or sold, and if you have a very big loan you won’t really see the revenue until you sell. People have seen housing as an easy get rich quick scheme, they don’t tend to loose value because people always need somewhere to live, and the more people started investing, the more new investors were drawn in. Until recently property investors (that sounds a bit ominous “investors”, but here I mean anyone who was not buying a property for themselves to live in long term) could buy in parts of Sydney and sell a year later making a 20% profit. It’s a bit reminiscent of other bubbles in the past, most recently the Bitcoin bubble which worked on the same easy money principle.

The problem with the housing bubble, is that it’s not just currency like in the case of Bitcoin, it’s houses, that is homes that people live in. If prices get too high many people are spending too much of their income on loan repayments or rising rent prices. This becomes a delicate balance and if something happens, like you loose your job or prices go up again or let’s say interest rates rise, some people are ultimately going to be pushed off the edge, when their bubble pops (e.g. they can’t make their mortgage repayments and default on their loan). This  can even be the first step towards homelessness. If you are a young person paying high rent with low wage growth and probably low wages due to the casualisation of the workforce that is happening in Australia, you can’t even save enough money to become an investor or home buyer to get yourself out of paying high rents.

The problem is, houses only really generate income when they are sold, and because people have seen the housing market as an easy way to make money there has been a massive wave of speculation. The housing market isn’t as complicated as the stock market, prices have tended to go up without the investor having to do much research or anything much once they have invested. Sure this has made some people rich, but the purpose of housing, something I think people in Australia and some other parts of the world have forgotten, is that houses should be viewed primarily as places for people to live in, not an income generating stream or investment class.

Investing in housing only pushes house prices up and doesn’t have any real benefit. Because really, if you own a place that is overvalued, there will eventually be a price adjustment (read price fall). You don’t really have a million dollars if you own a house valued at million dollars. You own a house and if you sell you will only receive what the market says it’s worth. You only have a million dollars if you sell that house for a million dollars and put that money in the bank.

People should be investing in local businesses and companies as those forms of investment do generate income and they can cause growth in the economy in areas that actually have some benefit to Australia like growth in jobs and wages. Australia has had so many great new technology companies leave because they couldn’t find investors here. The ones that spring first to my mind are the new energy solar power companies that went to China or the US when they couldn’t find investors here. There are your jobs of the future and they’ve all gone overseas and will never benefit Australia.

Australia having a trillion dollars in private home loan debt is not benefiting anyone except the banks that are selling the majority of the loans (1), who will see even more profits roll in when interest rates eventually rise, and they will eventually rise . It wasn’t that long ago real interest rates were around 6% and in the 1980’s they came close to 8% (2). I’m talking about real interest rates too here, not what the banks charged as the interest rate on their home loans which reached staggering levels close to 17% in the 1980’s. Anyone with a large home loan should be very concerned about what interest rate they are paying. If interest rates were raised a few percent higher without wage growth in Australia, many borrowers would default on their loans.

Being tied to high home loan repayments and rents also limits what households can spend as consumers, because all their income is going into housing. This also does nothing to stimulate wage growth and other parts of the economy.

To exacerbate the problem there has been very poor housing affordability policy by all levels government which has played a part in rising house prices and household debt.

The Housing Bubble and Homelessness

We are already seeing the effect of this bubble in the increase in homelessness in Sydney. Don’t think there is a connection between homelessness and rising house and rental prices? Think again. When the Government doesn’t provide enough crisis housing or long term housing for people on low incomes, and the unemployment policy is that if you leave an area with more jobs (like Sydney) for an area with less jobs (like a country town with a cheaper cost of living) you could be cut off unemployment benefits.

So picture the scenario,  you loose your job or you get sick and can’t work for a long period, then because of the drop in income you can’t pay your rent or mortgage and you loose that place. You can’t afford rent on a new place in your area because you haven’t found work again and there is not enough crisis accommodation for all who require it, so you have to find somewhere to go. You probably can’t leave Sydney and move somewhere cheaper because you will be cut off any unemployment benefits by the Government. If you can’t find a place you can afford in the city and unless you have someone who can support you you might eventually end up homeless. you might couch surf for a while, but one day you might run out of people to stay with or you might have some kids, and your friends don’t have room for all of you, so you are living in your car, until you can’t afford your car anymore.

This is a reality, and it is partially caused by housing speculation. There are however many other contributing factors to homelessness. Low wage growth, poor housing policy by Government, poor (or should I say stagnant and un-evolving) unemployment benefit policy and poor mental health and domestic violence policies by Government have all contributed to homelessness in Australia.