1901 Portfolio Report Doubled The Market PDF

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1901 Portfolio Report Doubled The Market 1901 Portfolio Report Doubled The Market1901 Portfolio Report Doubled The Market...

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Contents Welcome to the Blueprint Annual Review for 2019 ———-------—---------———--------——--------------------------———----——------------—----— Page 3 2018: The Bad, the Ugly, and the Very, Very Good ——————--————--————---—--—————————---—Page 4 The Year Ahead —————--—------------------—--—---————————--————---————--—-----——--——----------------——-—--—————-----—Page 10 The Blueprint Scorecard —————--—------------------—--—--—————————----—----—---——-——-------——----——-—--—————-----—Page 11 Quarterly Investment Decision: January 2019 ————--—-----------—----—-----——--------—-----——----———--------—-----——----—--—--- Page 13 The $100K Live Portfolio ———----—--——-----—-------—--------—------------—-—-————--------------------———------———----————------———----—— Page 15 The Break Free Portfolio Annual Review: A Great Return in Just 15 Minutes a Year —------—-------------—---------- Page 16 Legal Information —————---——————-----——————————————--———--————————————--———----—Page 19

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Welcome to the Blueprint Annual Review for 2019

Did we earn our money? Was the Blueprint worth the price of your subscription? That’s the question I’d be asking if I were in your shoes … so that’s the question we’re tackling today. Of course, the Blueprint is far from being a ‘stock tip sheet’. My overarching aim is to earn you back at least 10 times the cost of your membership every year, by investigating great health insurance, mortgage deals and other products – and connecting you with true professionals who can educate and empower you to make truly independent financial decisions. However we also have share recommendations, and it’s important we hold our bare feet to the fire and see how we’ve done. And that’s why, at the start of each year, Mike and I sit down to write you a report like the one you’re reading now. In case you’re new to the Blueprint, let me explain how our annual review works: Every year, we take an objective look at your subscription and review our performance so far.

people do. (After all, most ‘investment newsletters’ love to sell you on the ‘next big thing’ … yet at the Blueprint, this is my family’s money on the line, so you’d better believe I care what’s happened to it!) What’s more, at the Blueprint, we don’t just trumpet our winners and bury our dead: we air it all for you to see … winners and losers alike. Now I’ll admit, it’s not always easy. Today, we’re continuing that tradition … and telling the truth, even if it’s uncomfortable. And before we get into it, one more thing: If a lot can change in a single year … it’s amazing when you look at what can happen over five years. This year, the $100k Live Portfolio turns five … so it’s a perfect time to step back and take a longer-term view of how we’ve tracked over that time. And so to give you the most accurate, no-holds-barred view possible, I’m handing the mic over to a man who I trust to give it to you straight, without pulling any punches: Our very own Chief Investment Analyst at the Blueprint … Mike Kemp. Over to you, Mike.

We spend hours looking up figures, crunching the numbers, and putting together a picture of our year … particularly, our investing performance. Now this alone is something you will rarely find other

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2018: The Bad, the Ugly, and the Very, Very Good

I hate it when I’m wrong.

The Bad ...

However, there’s one thing that I dislike even more than being wrong:

First up, our holding in NAB.

Watching other people fudge it – burying their mistakes and only talking about their winners.

The year didn’t start (or end) well for any of the big Aussie banks.

Lots of gamblers (and investors!) are guilty of doing this.

The problems started in late 2017 when the Federal Government established a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

So while it may hurt my ego, today I’m going to explain to you where I went wrong in 2018. The things I stuffed up! The simple fact is that there have been some pretty poor performers in the $100k Live Portfolio over the past year. Anyway, let’s get straight into it ... The share prices of four of our $100k Live Portfolio stocks plunged by around 20% each over the course of 2018!

“The share prices of four of our $100k Live Portfolio stocks plunged by around 20% each over the course of 2018!” So, let’s shine a light on each of those four stocks oneby-one.

The heads of all the big banks got grilled, yet NAB was probably the biggest loser of the lot. NAB CEO Andrew Thorburn could do little more than apologise for the bank’s repeated failings: like charging customers fees for no service, the self-serving actions of its wealth management business, and the fact that the NAB’s pay structure incentivised staff to act in their own best interests rather than those of their customers. Scott wrote about a Barefooter, a single mother, who took on NAB’s wealth arm MLC and was instrumental in the bank being forced to repay a whopping $67 million to 305,000 members for dodgy ‘plan service fees’. Come July I thought the worst was over. So we topped up our NAB holding in the $100k Live Portfolio. The problem was … it wasn’t over.

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The bank’s reputation took another hit in November when its chairman (Ken Henry) faced the Commission and came across as being combative and arrogant. So what was the final damage to NAB’s share price over the course of 2018? It was down by a very painful 18.6%.

But that was just the start of the $100k Live Portfolio’s problems … Adding to our NAB woes was our holding in telecommunications heavyweight Telstra. As the 2018 new year rolled in, Telstra’s problems kicked off pretty well straight away. In February they were forced to make the embarrassing announcement that their 98% investment in video company Ooyala was worthless and that they were taking a $273 million hit to their balance sheet. In May a very sombre Andy Penn (Telstra’s CEO) delivered a further profit downgrade. He described business conditions as “challenging” and likely to extend into 2019. The share price fell heavily. Then, in June, Penn announced what the market described as “Telstra’s long overdue recovery strategy”. Dubbed ‘Telstra 2022’ its aim was to stop the rot by selling off a number of non-performing assets, slashing employee numbers by a net 8,000, and cutting Telstra’s ridiculously large number of phone plan offerings. Penn’s strategy didn’t reassure the market. Telstra shares fell 5% on the day it was announced. A week later they were close to a 20-year low.

“A week later they were close to a 20-year low.” Then it looked like the tide was about to turn. Telstra received a snippet of good news in August. It was announced that TPG and Vodafone were planning to merge their operations into a single company, which would put a leash on TPG’s aggressive pricing policies and perhaps allow all the telco operators to charge higher prices and earn fatter profits.

Unfortunately the telecommunications party was shortlived. More bad news hit. Just before Christmas the Australian Competition and Consumer Commission (ACCC) expressed concern that a merger between TPG and Vodafone could lead to reduced competition in the telco sector. They said that they’d consider things further and deliver their final decision in March 2019 on whether they’d allow the merger to proceed. Clearly the ACCC’s announcement didn’t just impact our Telstra holding. It also affected the $100k Live Portfolio’s holding in TPG. It got slammed, down almost 17% on the day. So what was the final damage to Telstra’s share price over the course of 2018? It was down by a nose bleeding 21.5%.

The bad news kept coming…. In our July $100k Live Portfolio Report we recommended an investment in mining and civil construction company MACA Limited. We were attracted to the company because it had plenty of work in the pipeline, it had a very strong balance sheet, and its share price was trading at close to a two-year low. We slapped a buy below price of $1.20 on it and sat on our hands, hoping the share price would fall. We were finally able to pick up 13,000 MLD shares in October at $1.16 a pop. Then just four weeks later its shares went into a trading halt! The company used the time-out to deliver some bad news. It was an update on its softer-than-expected upcoming half-year earnings result. When the halt was lifted, and trading resumed, the share price plunged by a massive 26%. We drilled down on the figures, focusing more on the company’s long-term prospects than its next profit result. Our conclusion? Rather than running scared like many investors were doing, we decided to add more MACA shares to our portfolio.

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To date that’s worked out well for us. But it doesn’t deny the hit to our original MLD share holding. How much were our MACA shares down by year-end? A terrible 19.4%. And, just when we thought it couldn’t any worse – it did. We’ve saved our biggest loser for last….

At the time we picked up 4,000 shares at $4.49 apiece for the $100k Live Portfolio. The softer profit result didn’t faze us because we felt that the reasons behind it (high power prices, high resin prices and unfavourable foreign exchange rates) would correct themselves given time. The problem is that the market has yet to agree. After we added our shares to the $100k, the share price fell by almost a quarter (22.7%) by year-end.

So, how are you feeling right now?

The Ugly ... You think that what I’ve told you so far sounds bad?

Not good, I’d suggest! I mean, you’d have to think that all these losses would inflict some serious damage on any share portfolio.

Enter, Pact Group. In March we delivered a report on Pact Group, Australia’s largest manufacturer of rigid plastic packaging. There was plenty that we liked about Pact. As we explained at the time:

[Note from Scott the Editor: “Yes, Kempy, this is very depressing”.] Then again, maybe you shouldn’t be feeling so bad. I’m certainly not.

“... if you cast your eye down any supermarket aisle in Australia and New Zealand, many of the plastic containers you’ll see are made by Pact Group… they make the containers your tomato sauce, table salt and thickened cream come in. And there’s a good chance they make the wheelie bins you put your rubbish out in every week.” We liked Pact’s dominant position in the sectors it operated in.

So lean in and listen up, because I’m about to tell you something that you need to burn deeply into your investing consciousness. Here it is: no matter how hard you prepare, no matter what decisions you make … it’s impossible to run a portfolio and not experience losses. Say it to yourself ... say it again … and again. Think it, understand it. Believe it. Because it’s true.

We liked the fact that its chairman and founder, Raphael ‘Ruffy’ Geminder, had plenty of skin in the game, owning almost 40% of the company. And we liked the ‘grassroots’ nature of its business, meaning we couldn’t see any imminent threat of digital disruption to its operations. We said it was worth buying below $5.00, but it was trading well above that at the time. So we simply waited. We were finally delivered our chance to buy PGH in August when the share price plunged following a disappointing profit result.

What I’ve done above is to focus solely on our worst performers and ignore the other stocks that we own in the portfolio. It’s a trap that many investors new to the game fall into. You see, focusing just on your losers does nothing more than cause unnecessary pain. I know that it’s difficult to avoid doing it, but research has shown why we feel compelled to. It’s because, for nearly everyone, the discomfort felt when a stock goes down carries double the emotional impact of the pleasure felt when a stock goes up by a similar degree. So losses enter our consciousness far more readily.

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The Very, Very Good! So let’s now work towards getting our investment focus into balance, because there are another 12 stocks in our portfolio to consider. First up, there’s only one thing that matters when sizing up the performance of any portfolio, $100k Live Portfolio or otherwise. And that is to consider the performance of the entire portfolio, not simply the stocks that have gone down. And when we measure our performance on that basis, the simple fact is the $100k Live Portfolio delivered an absolutely stellar result over the course of 2018.

Let’s state that again so it’s absolutely clear. Most active fund managers (the supposed pros!) fail to even achieve average stock market returns. Remember that ‘outperformance’ is defined by any amount no matter how small – even if it’s as little as a fraction of one percentage point. So you can now start to see that our outperformance in 2018, of almost 8%, is a significant achievement. And, if you think that our return for 2018 (of 4.33%) doesn’t sound like much then consider this: This week Mercer released the results of its annual performance survey of fund managers invested in Australian shares.

“the simple fact is the $100k Live Portfolio delivered an absolutely stellar result over the course of 2018”

The top performer of the 155 funds surveyed achieved a 2018 return of +5.6%. Our result of +4.33% would have placed us in 4th position.

Let’s compare our performance to the appropriate benchmark, the All Ordinaries Accumulation Index (now known as the ‘Total Return Index’), which includes the share price movements of the biggest 500 companies listed on Australia’s stock exchange plus dividends: While the Total Return Index lost money, delivering a negative return of 3.53% over the course of 2018, the $100k Live Portfolio made money, delivering a positive return of 4.33%.

five years. In Canada it was even worse; only 10% of Canadian active funds outperformed their market over the same timeframe. In Australia, less than a third of active managers have outperformed ours.

But let’s not dwell too much on a single year’s result. Let’s also take a look at our longer-term performance. That is, since the inception of the $100k Live Portfolio back in July 2014.

$100K Live Portfolio 50.8%

60% 50% 40%

That’s an outperformance of 7.86% over the general stock market!

30%

Let’s now explore how significant this is:

10%

Independent research by the highly respected organisation, S&P Dow Jones Indices, shows that the great majority of active fund managers – all over the world – fail to outperform their respective general market.

20%

Total Return Index 25.7%

0% Jul 2014 Dec 2014

In the United States, less than a quarter of active funds have outperformed the general US market over the past

Dec 2015

Dec 2016

Dec 2017

Dec 2018

The $100k Live Portfolio has now been in existence for four-and-a-half years. Over that time the Total Return Index has delivered a return of 25.7%. That works out to be an average annual compound rate of 5.21%. The total

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return for the $100k Live Portfolio over the same period has been double that – at 50.8%, or an average annual compound rate of 9.56%.

Yet make no mistake, for most investors last year is the first time the share market has lost money in several years.

Let me say that again: the $100k Live Portfolio has doubled the market returns since we started.

Losses can be very stressful for most people, and perhaps it’s left you wondering what sort of investor you should be.

“the $100k Live Portfolio has doubled the market returns since we started”

Stop for a moment and answer these three questions: Did you feel a little stressed as you read this report? Have you been genuinely worried about a stock in your portfolio going down? Do you click on doom-and-gloom articles about the share market, or look to anonymous gurus for what might happen next? If you answered ‘yes’ to any of these questions, you might be better off not actively investing your money. (And when I say ‘actively investing your money’, I mean one of two things: either picking your own stocks, or picking an active fund manager (and paying them a lot of money to choose stocks on your behalf). Why? Three reasons: First, because investing takes skill, energy and a lot of time. And even then there are no

Well, here’s a quick test:

guarantees. The simple fact is that the odds of beating the market are very low. Second, the research suggests that you should spend 10% of your time selecting your portfolio, and 90% of your time controlling your emotions. And if you’re prone to making knee jerk decisions – whether that be punting on a “hot stock” or a “hot fund manager” – research also suggests you’ll end up underperforming a basic index fund (sometimes dramatically). Finally, and most importantly,because if you’re constantly stressed about your investments, you’re not truly wealthy – no matter how much money you have. Again, if you’re a stressed out, anxious investor, then invest passively in low-cost index funds or low-cost listed investment companies (or the Blueprint’s Break Free Portfolio) in order to win the investing game. And for those of you who can handle the ‘the bad and the ugly’, keep learning, investing and hopefully enjoying the ‘very, very good’!

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Scott’s Response to my Letter After I wrote this report, I sent it to Scott. His emailed reply was so good, I decided to reproduce it in its entirety:

“Bloody hell, Kempy! “You are the only person I know who could take an amazing result (we smashed the market again) … and turn sweet lemonade into sour lemons. “Here’s what I think you should add. “The $100k Live Portfolio is a real money portfolio … it’s MY family’s money. “And the way I think about my investments is the same way I look at my farm: “The value of my farm goes up and down, depending on what someone is willing to pay for it. So for me that’s kind of like the share prices of the portfolio, I don’t really look at them too closely because I don’t ever plan on ‘selling the farm’. “Instead, what I focus on is the annual harvest. Sometimes there’s bad weather, but over the long term, when you plant and allow it to grow, you enjoy the harvest. That to me is like dividends, and they grow larger each year. “Not only are they dependable, but if I never sell the farm – or my portfolio! – my grandkids can enjoy growing dividends for the rest of their lives. It never ends. “I know it sounds hokey, but that’s genuinely how I think about it … and how I have explained it to Liz. We are no more likely to liquidate this portfolio than we are to sell our farm. Instead, we focus on the inevitable: the dividends that the businesses deliver like clockwork twice a year. “From my worldview I focus principally on ‘shares for income’ (the harvest!) more than rising share prices, because that’s what really puts money in my pocket! Anyway, just my two bobs’ worth. “Scott “P.S. Liz is very happy with the returns and says you’re too honest for your own good.”

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The Year Ahead

So, what’s ahead for the $100k Live Portfolio? Well, we think we’re in a very good position, with just enough cash to take advantage of any downturns that 2019 may throw at us. Specifically, the $100k is becoming a mature portfolio. We have 16 stocks already. We could look at adding another four or five holdings over the next 12 months if fresh opportunities present themselves. However, it could well be that we simply top up our existing holdings with our $25,000 quarterly decisions. So why the modest activity and limited additions to the portfolio? We are not in the business of short-term trading, which lowers returns by taxes and fees. And be...