Tuesday, 29 September 2015
Is this Groundhog Day?
If like many investors you have been following the mainstream media in recent weeks you could be forgiven for thinking that the financial world is again standing on the edge of the cliff!For seasoned investors and regular readers of our blog, this latest “crisis” is just yet another chapter in the same old story. For the movie buffs, it does feel like the scene starring Bill Murray from the 1993 comedy Groundhog Day where Bill is trapped in a time loop and must live the same day over and over again!.
So as I write this blog, the All Ordinaries Index here in Australia is only just staying above the 5,000 point mark after almost touching 6,000 points back in May – a drop of over 15% from the intra-year high. It was with keen interest on Friday that I absorbed some research from the excellent team at Shaw Stockbroking, which shows that since 1980 the average intra-year market drop in the All Ordinaries Index has in fact been 15.9%. That’s right the “average” fall, taking into account every year since 1980, at some point during the calendar year, was 15.9%. That makes our recent fall from 6,000 points in May to 5,000 points today “equal” to the average for every year since 1980 – hardly end of the world type stuff!
Shaw’s then went on to remind us that of the 36 calendar years since 1980 – 24 saw positive returns for the calendar year – with an annual average return of 13.2% including dividends plus franking credits.
Speaking of dividends and franking credits many of you will know that I regularly watch Sunrise in the morning while enjoying an early morning coffee and Weetbix. I am usually disappointed by their “reporting” of all things financial, so you can imagine my surprise when last Wednesday David Koch engaged the very knowledgeable Craig James from CBA on the topic of dividends. You see over the next 2-3 weeks rather a lot of Australian businesses are sending their shareholders a good slice of the profits they earned for the financial year ended on June 30. These are in most cases the final dividend for 2015 and supplements the interim dividend most of them paid back in April. So shareholders like you and I (and every single Australian who has a super fund) are about to collect a share in over $60billion of dividends in the next 2-3 weeks alone. This stuff just never gets reported by the mainstream media despite dividends historically speaking making up about 40% of the total return from Australian Shares. So for me, this was a very refreshing change from the usual hype and pointless speculation they carelessly bandy about.
As our clients and regular readers well know – we very happily invest in businesses that make profits, a portion of which they return to the shareholder as dividends, and the remainder they retain and reinvest back into the business to grow its profits and increase the business’ value. This is one of our fundamental beliefs and why we will always recommend (and invest ourselves) into high-quality companies when these can be bought at attractive prices.
Please take the time to note the two highlighted words in the preceding sentences – value and price. In our world, these are two very different words with very different meanings – and yet the press use the two as if they are one and the same.
The “value” of a business is something very hard to determine and is based on a whole range of factors including;
- Assets & liabilities
- Quality of goods and services
- Brand and reputation
- People, technology, and processes
- Quality of management
- Level of competition
The “price” of a business is what the share market tells us every single moment of every single day and can be found instantly on the web or by simply picking up a newspaper. The “value” of a business is something far more complex but is something we must understand before we invest – the “price” is only used to tell us when to buy or in some rare cases when to sell. Prices change almost every moment and have become the obsession of the financial press. Value changes slowly through incremental improvement or decline in the trading conditions of business. So step back now and ask yourself – since May is it likely the “value” of Australia’s largest and most successful businesses have fallen by 15%, or have the “prices” for those same companies dropped by 15%?.
Armed with this knowledge what do you do next?
A financial planner at CommonCents Financial Planning can provide or facilitate advice regarding all these and other issues you may encounter. They can also work with other professionals to ensure all areas were covered in an integrated and seamless manner.
To find out more about the information in this article speak with your financial planner or contact us if you don’t already have one.
About The Author
Senior Financial Planner & Director
Nick Girle is a leading expert in personal finance who has been providing families with financial advice for 20 years.
He works with the types of families that aspire to use their financial and intellectual resources and are willing to put in the effort to rid themselves of all of their money worries.
Since embarking upon his Financial Planning journey Nick Girle has brought comfort, security and peace of mind to thousands of client’s financial lives through a process that ensures complete understanding of a family’s financial hopes and dreams.
He became involved in the Financial Services industry initially with the Suncorp group before taking on a Senior Planning role with NAB Financial Planning and then established Common Cents Wealth in 2011 to better help him spend more time focussing on what’s important – a client’s ultimate financial success.
Together with business partner Richard Brannelly he runs CommonCents Financial Planning.
Email or call 1300 376781 today for an appointment and CommonCents Financial Planning will give you the answers you need to worry less about money and achieve the lifestyle you’ve always dreamed of.