Long Term Investing Trends

The Australian Dollar tends to be high relative to the American Dollar during economic booms and low during economic crises. The recent low point in 2015-16 is related to a fall in commodity prices and slowdown in the World economy, especially in China. I think China probably slowed down by much more than the government admitted. During 2015 US stock markets went sideways or declined. The Australian market started 2015 optimistically but then had a steep fall:

There is now a lot of talk of renewed growth in the World Economy. On the other hand, US interest rates are rising as the Federal Reserve tries to reduce its balance sheet and with the Fed not buying US government bonds, but the US Treasury trying to issue even more after Trump's tax cut, the Treasury will need to offer higher interest rates, which makes government bonds an unattractive investment as rising yields implying falling prices for existing bonds. That is likely to both have negative effects on growth in the short run and make Australian Dollars less attractive in terms of interest yields. So, I'm a bit skeptical about the Australian Dollar rising strongly from here.

The US stock market is also very highly valued based on corporate earnings over the previous 10 years (Shiller's measure of stock market valuation, CAPE):

Historically, that has meant negative returns in the US market going forward. On the other hand, it is possible that something has changed and the risk premium for stocks has declined so that the stock market won't return to PE's as low as in past bear markets. It's unlikely that inflation would get as high as it did in the 1970s, which both raised the required rate of return and compressed growth profit. CAPE in Australia was 18.4 at the end of January, which is much more reasonable.

The best indicator of an oncoming recession is the yield curve. If short-run interest rates are higher than long-run interest rates, usually a recession follows. There is no sign of that at the moment in the US:

January 2018 Report

We gained for the eighth straight month in a row as US stock markets went parabolic, the Australian Dollar rose, and one of our private equity investments made a big gain.

Here are our monthly accounts (in AUD):

"Current other income" consisted entirely of salaries (after tax) this month and was $17.8k. It's higher than usual because I finally got my tax refund from last year of $2.6k. Spending (not counting our mortgage) was a little on the high side at $7.8k. After deducting the mortgage payment of $4.1k (which includes implicit interest saving due to our offset account - the actual mortgage payment was about $874 less than this), we saved $6.1k on the current account and added $2.2k in housing equity. Retirement contributions were $2.9k. Net saving was, therefore, $11.1k across the board.

The Australian Dollar rose from USD 0.7813 to USD 0.8077. The ASX 200 lost 0.45%, the MSCI World Index gained 5.66%, and the S&P 500 5.73%. All these are total returns including dividends. We gained 1.11% in Australian Dollar terms and 4.53% in US Dollar terms. So, we outperformed the Australian market and underperformed international markets.

The best performer in dollar terms was IPE.AX, which is a listed private equity fund of funds, gaining $8.7k. One of their funds made a deal to sell Threatmetrix to the former Reed Elsevier group, now known as RELX. The stock, which had been languishing at around 9.9 AU cents rose to 12 cents. Management estimates that if all goes well the net value of the stock has risen to 14 cents. I have bought some more shares at 11.5 cents since the deal was announced. Is this what Ron Brierley knew when he bought into IPE? I am at around 470,000 shares and hoping to buy more as the position is only 3% of net worth :) Early in the month I sold out of Platinum Capital (PMC.AX) at prices of $2.09-$2.15 and then recently when the price fell I bought back in at $1.96-2.00. I also reopened a position in Oceania Capital Partners (OCP.AX), another private equity investment. So far, my latest trade is down. Yes, it was the worst performing investment this month, down $2.7k.

The second best performer this month was Winton Global Alpha Fund, a managed futures fund, which gained $2.8k. I'm planning to increase my holdings in it too as a hedge against equity downside. Currently, the position is $110k after investing an extra $10k. Yeah, that's only 5% of net worth. Despite the craziness of the stock market rise in the US, there isn't a strong case for a big correction. The yield curve isn't yet near inverting, the world economy seems to be doing well, and Oscar Carboni is bullish for the year :)

Private equity was the best performing asset class, up 9.6%. All asset classes gained. Australian large cap stocks gained the least at 0.1%.

House prices rose here 8.4% for the year. Given this strong rise, I have raised the value of our house adjusting the September and December 2017 accounts. The carrying value is now $840k.

As a result of all this, net worth rose AUD 30k to $2.158 million or rose USD 81k to USD 1.743 million.

Projection for 2018

My fair weather forecast for 2018 is a net worth gain of about AUD 250k to reach about AUD 2.3 million. It is based on expected salaries and retirement contributions, an increase in spending of 6% and an 8% rate of return on investments.

ASX200 Alpha and Beta

Another new chart:

This is based on regressing my returns in excess of the RBA cash rate on the ASX200 returns in excess of the cash rate using 36 months of data. Clearly there is a negative correlation between alpha and beta. In recent years beta is less than one and alpha greater than one. Alpha was very negative during the financial crisis and there are some wild swings before that. The tech crash also had hugely negative alpha. Looks like I outperform in bull markets and underperform in bear markets but that it isn't all just due to too much leverage.