Dr Tony Stewart is a scientist and analyst by training. He has run a strategic market research business and has an extensive background in statistical analysis. At the beginning of his investment career, he read widely and undertook courses on investing run by the Securities Institute of Australia. He has invested in the Australian stock market for thirty years.
Breadtag Sagas ©: Author Tony, 1 November 2021
I realised that I’ve been investing in shares on the Australian market for thirty years and that perhaps my understanding of investing on the stock market and my experience might be valuable to others. There are four articles in the series. They are Investing in shares 101: 1 Basics, 2 Value Investing, 3 My Experience 1, and 4 My Experience 2.
Investing in Shares 101: My Experience Part 1 — Beginnings, Floats and My Major Error
I have broken this into two parts because it became too long. Part 1 is about successes, luck and one major mistake. I give a minor take home, but leave the major conclusions to Part 2.
Part 2 is an overview, a suggestion of the best ways to build a portfolio slowly, a shareholder’s view of investing in Australian banks (which is also relevant to investing in banks anywhere), some conclusions and final take homes.
Neither parts of my experience give a prescription of how you ought to invest that information was contained in 1 Basics and 2 Value Investing. I did not fully understand the answers to value investing and to being a contrarian at the beginning. Although I quickly grasped the principles, it took me years to really understand them and to understand where I’d gone wrong. Hopefully the nuts-and-bolts approach: outlining what I experienced and where I went wrong, will help you to avoid some of the things I went through and to concentrate on others.
When I began to do some statistical analysis of my share experiences, I began to get depressed at the shenanigans I went through in the first phase of my share investing. Some of my minor losses early on were through stupidity and hubris.
Four companies went bust. But, my one relatively major loss was later on, at the time of the GFC, through listed property trusts (called REITs — Real Estate Investment Trusts — in the USA). This was partly a black swan event, but there were also signs that I ignored and I was to blame too. I only had three REITs investments left by 2007 but they were still substantial enough for me.
I can’t remember why I became so heavily involved in REITs. It began I think with my adventure into managed investments with my mother (which I repudiated in 1 Basics) and perhaps because it was a way to diversify into commercial property (which I reject below).
Fortunately, on re-reading Hagstrom (see 2 Value Investing), I was heartened to find that Warren Buffett made mistakes too, covered by Hagstrom in detail. Mistakes are inevitable in investing in shares. But, it is the systemic mistake, my major error outlined below, rather than the losses above, that should have been avoided.
My share experiences
I covered my total loss of a small amount of money $140 (significant to me) at the height of the mining boom when I was 19 years old in 2 Value Investing.
My next foray into the share market was to help my mother when my father was no longer competent. It was a huge learning curve for my mother to learn to manage their finances. She took to it as the saying goes: Like ‘a duck to water.’
This was in 1987. We had decided to sell all my father’s shares, probably something to do with tax. We went to the stockbroker and it was a pure coincidence that we did this in the months prior to the October 1987 stock market crash. The Australian ASX lost 25% of its value on Black Monday and 42% by the end of October.
Subsequently my mother, who fortunately had an excellent economic adviser, developed a new and immensely solid portfolio on the basis of cashing in my father’s shares.
But, it was luck that she started when she did and it helped.
When I turned forty, I was self-employed with a comfortable lifestyle but a limited earning capacity. I thought that I should start to worry about superannuation and my retirement.
I owned an apartment in Canberra with my parents as partners courtesy of giving up my first-home-owner’s entitlement. It had grown in value over fifteen years, but not spectacularly.
At the time I was helping my mother to develop her investments, we decided to sell the apartment in Canberra and with advice from an architect friend to buy an investment apartment in Sydney. After a few of years of high profit executive leasing, we leveraged the first property to buy another. I was quite emotionally invested in these properties, as it seemed that they were my only prospect for superannuation.
However, I also began investing in the stock market at the same time, and, as the years rolled by, the properties became less important.
3 The Golden Age of Floats or IPOs
I said in 1 Basics:
With shares, one enters the market when it is the time in our lives to do so! We have no idea whether it is a good time or not.
It is luck!
I entered the share market at a good time, as good as my mother’s starting at the bottom of the 1987 crash. It was a brief golden age of floats or IPOs in Australia.
A float or IPO (Initial Public Offering) mostly occurs when a new company (maybe a tech company) becomes large enough to give the early investors tangible rewards and to allow the company to grow through capital raising on the market. Occasionally, an old private firm may wish to turn public, or a government may wish to sell-off an enterprise.
Not all IPOs will grow or are worth investing in (there are hundreds), but with the good ones purchasing in an IPO can be very profitable. Think Google, for example.
In Australia in the 1990s (after the floating of the Australian dollar; and a late effort, in comparison with other developed economies, to exit from tariff protection) the government wanted to privatise some government businesses. The reasons of this were both good and bad. Similarly, the State governments also decided to privatise some enterprises.
3.1 Woolworths (WOW)
Woolworths (37% market share in 2021) is one of Australia’s two major supermarket chains with Coles (28%). They have a virtual monopoly (Warren Buffett’s ideal). Woolworths was until recently, and perhaps still is, better managed than Coles.
A question of ethics
Woolworths was a private company when in May 1993 it floated its shares at $2.45. Retail investors received 1000 shares each.
I am about to confess to some slightly unethical behaviour, which I don’t feel at all bad about. As when our politicians say I did nothing wrong, which sometimes mean they didn’t break the letter of the law, I did nothing illegal. In my defence (but a weak argument), institutions and the markets are always screwing retail investors and I wanted some odds in my favour.
I found that with minor modifications of my name and address, I could increase the number of shares I bought in floats. I wasn’t greedy. I only increased my odds by a maximum of 4x. Once the shares were allocated you could amalgamate them for free by simply filling in a form (for 3 of the purchases).
Hence with Woolworths, I received 4000 shares instead of 1000. I did this also with betting agency TQL/Unitab in Queensland (1590 shares, only x3) and a couple of others. Sadly, I didn’t do it with CSL.
The share price of Woolworths at 30 June 2021 was $38.14, but for simplicity in the figures below, this does not include the splitting off of their hotel and alcohol business (including Dan Murphy’s) now called Endeavour Group (EDV) on 25 June 2021.
EDV began at $6.10 per share and is now over $7.00. This type of thing is not uncommon, BHP demerged South32 (a diversified metals group) in May 2015 to simplify its business, I sold South32 a couple of years later close to peak value.
The increase in the share price of Woolworths over 29 years (not including EDV) from 30 June 1993 to 30 June 2021 was an excellent 10% compounded annual gain, or an increase of 1456% per share or 50% per share per year. The Australian All Ordinaries Index (AOI) over the same period increased by 5% compounded annual gain.
3.2 The Commonwealth Bank (CBA)
Australia’s largest bank (owned by the government) was floated in two tranches T1 in 1991 ($5.40 per share) and T2 in October 1993 ($9.35). I was not ready for the first and only began investing in time for T2 and received 210 shares.
The increase in the share price of the CBA second tranche over 29 years from 30 June 1993 to 30 June 2021 was also a good 9% compounded annual gain, or an increase of 968% per share or 33% per share per year.
3.3 Telstra (TLS)
I purchased a large number (for me) of Telstra shares (the government-owned telephone/telecommunications company) in the first tranche called T1 in November 1997 for 3.30 per share. There were three Tranches: T2 in 1998 and T3 in 2006. I sold 40% of my shares one year later for $7.58 (a 130% increase).
Telstra was a very difficult company to own, its share price declined after 2000 and didn’t change much after. Telstra’s compounded annual gain in share price over 25 years was a pathetic 0.52%. But, Telstra was a ‘cash cow’, its dividends over the years were excellent (roughly 4-8%, more in the higher range).
Because I recovered my investment in one year, I considered my Telstra shares to be free after 1997. I haven’t concerned myself with the share price and have enjoyed the dividends.
From my point of view, Telstra was a good investment.
CSL short for the original government business the Commonwealth Serum Laboratories was started in 1916 to create and manufacture vaccines. In the 1940s and 50s it became associated with the Red Cross and began producing blood products.
A new chief executive, Dr Brian McNamee, was recruited from a private Adelaide-based pharmaceuticals firm a couple of years before the float.
In June 1994 CSL was floated by the government at $2.30 per share and 62% was allocated to retail investors. I received my 2000 shares. I traded in CSL shares at various times but always retained a decent amount.
The government had to indemnify CSL for potential claims against blood products and vaccinations for some years after the float, which may have deterred some investors because of future indemnity issues. The government also gave CSL an exceedingly good deal on new facilities built before the float. Some commentators have said the government made a mistake in its generosity to CSL. The government certainly had no idea what a potentially enormous profit generator it had relinquished.
Brian McNamee remained CEO of CSL from 1990 to 2013 and was almost entirely responsible for CSLs corporate success. McNamee knew how to expand CSL. He also made sure that CSL spent a large fixed amount of its net profit on R&D to ensure future success.
Warren Buffett talks of the importance of competent and honest management. CSL is the only company that I have followed in Australia where management has been much more than mediocre.
In 1987 Kerry Packer (a difficult and perhaps dodgy mogul) sold his TV station Channel Nine to Alan Bond (a corporate crook) for 1.05 billion. Three years later he acquired part-ownership (37%) and control back. Packer was quoted as saying ‘You only get one Alan Bond in a lifetime.’
You only get one CSL in a lifetime!
In 2007 CSL had a 3 for one share split. Hence, the original price for the shares was either 0.77¢ equivalent (one third of $2.30) or the shares today are worth about $900 each.
The increase in the share price over 28 years is extraordinary from 30 June 1994 to 30 June 2021 a 24% compounded annual gain, or 12,943% per share or 462% per share per year. The 24% compounded is in the realm of or even above that of the superinvestors, such as Warren Buffett.
CSL has remained an excellent company after Brian McNamee left as CEO (though he is still Chair). They still spend a large amount on R&D every year. My only qualms about CSL are executive salary. The current CEO earned $40 million in 2021, the highest executive pay in Australia. Apart from being completely outrageous, it makes one worry about him going off the rails.
3.5 UNITAB, the Queensland TAB (horse racing)
This is a complicated story, but worth detailing because it is not atypical for the stock market.
Unitab (UTB), initially called TQL, was floated by the state government whilst we were living in Queensland in 1999, and they gave preference in the float to residents of Queensland. I spent $3180 to acquire 1590 shares at $2 each (3x more than I was due). 7 years later these shares were worth $14.76 each, an annual compounded gain of 33%.
The Company was then taken over by Tattersalls in November 2006. I received $6344 in cash and 4.33 TTS shares per UTB share. At 30 June 2017 these shares were worth $4.18 an annual compounded gain of 2.6%. In October 2017, TTS and TAH (Tabcorp, ex-TAB NSW) merged. I received $2429 in cash and 0.8 TAH shares for each TTS share. From 2017 to 30 June 2021 the compounded annual gain for TAH was 0.9%.
My TQL/Unitab experience was terrific an annual compounded gain of 33% over 7 years and a cash bonus on top.
The cash I received over two mergers of $8773 for an outlay of $3180 was good (though the smaller amount took 17 years).
However, while the experience with UTB was terrific. It has been downhill ever since and I’ll be getting rid of TAH one day soon and should have long ago.
My experience in the golden age of floats was fantastic. Not matched by anything that has happened since.
4 My Education in Shares
My early reading consisted of some really basic guides and the two Benjamin Graham books (see 2 Value Investing). I didn’t get onto reading Fitzherbert (see 1 Basics) or the Buffett books (also covered in 2 Value Investing) until around seven years after I started investing, which I now see as unfortunate.
I also undertook three one-semester courses with the Securities Institute of Australia in 1992/93. These were 1 Understanding the Stock Market, 2 Understanding Company Reports and 3 Money Market Issues. (If I’d done a fourth course, I would have received a diploma and could have sought a job as a financial advisor, but I wasn’t tempted.)
I really enjoyed the first two courses, but thought the third on derivatives and the like was somewhat esoteric. It convinced me derivatives and other synthetic instruments, such as CDFs and CDOs (responsible for the GFC) were dangerous, even for large entities.
I thought the three courses gave me a sound basis for value and contrarian investing.
Dogma rules! I was amused in one of the courses — the third I think — that after a detailed section disproving the existence of a free market, the course writer must have panicked at what he’d written and a paragraph or so below said that of course a free market or efficient market always operates.
In retrospect, and unfortunately, I think I must have been inculcated with some of the professional values of the mainstream investment community and I regret it immensely. I believed then that an investment strategy should minimise risk by seeking diversity, and it caused me immense problems in my first phase of investing, which took me years to remedy.
5 Too Many Eggs, a Terrible Mistake
Don’t put all your eggs in one basket is an idiom whose origin is unclear but is most commonly attributed to Miguel Cervantes in Don Quixote in the early 1600s. As with much bad advice, it sounds obvious, but is actually a disastrous idea for investing in shares.
My major mistake in my early investing, beyond the golden era of floats, was that I spread my investment risk by diversifying my investments across a range of sectors.
I ended up buying shares in more than 70 companies at various times.
Sure I did well in some companies. For example I bought shares in Comalco in December 1998 and sold them, when Comalco was taken over by Rio Tinto in May/June 2000. (I was suspicious of Rio at the time; well-managed, but ruthless.) Comalco over a year and a half gained me an annual compounded rate of 37%. AGL gave me an almost as good return over a year and a quarter. But, other buying and selling of shares was mixed.
And, because I tried (and mostly succeeded) in patiently buying cheap and selling dear, I certainly made much more than I lost (despite the four companies going out of business and the REITs) and made reasonable profits year after year. But, what a waste of time! And, to get rid of the dogs and the companies that I really didn’t want in the first place, took me years.
In my portfolio today, I have sixteen shares and several of those are on the way out and more may be.
Warren Buffett is against diversification. According to Hagstrom he says: investors are better served if they concentrate on locating a few spectacular investments rather than jumping from one mediocre idea to another. (p. 67)
Hagstrom elaborates: much of Buffett’s success can be attributed to inactivity (p. 66).
In 1 Basics I said: Warren Buffett says: The stock market is a device for transferring money from the impatient to the patient. This wisdom is something you will only begin to understand from experience. The above is my experience.
According to Buffett, investors feel the need to purchase far too many stocks, rather than wait for that one exceptional company. Tinkering with a portfolio each day is unwise. In his mind, it is easier to buy and hold exceptional businesses than to constantly switch from ‘far-from-great businesses’.
I am labouring this, because though I had the concept of value-investing and the contrarian approach down pat in principle, I made all the mistakes in trying to diversify stupidly: purchasing too many mediocre stocks. And, I was impatient!
You really need to believe me here. Only invest in excellent companies at a discount to their intrinsic value. Resist the temptation to buy mediocre companies at a bargain.
Although I think that Buffett’s comments above are compelling. There is another reason why it is almost impossible to be a value investor, if you diversify.
Warren Buffett and Charlie Munger (his partner) love what they are doing. They work hard at it every day. It doesn’t seem like work to them. Most retail investors are hobbyists like I am. You have other careers. I love tinkering in the share market, but I have other commitments.
I diversified like every good shareholder was meant to. If you read the Australian Shareholders Association magazine Equity, or purchase a good newsletter like Alan Kohler’s Eureka Report, there seems to be so much to do and to know.
Even if you are smart enough to ignore the noise and concentrate on finding the exceptional business to invest in. You can’t do it, even if your portfolio comprises only sixteen shares like mine does today. With seventy plus shares, it is even more impossible. You just don’t have the time to properly investigate a small range of firms that you have winnowed down from a larger group.
Buffett learned this not from Benjamin Graham but from Philip Fisher (see 2 Value Investing). You have to learn to concentrate and put a small number of eggs into your basket. You absolutely do not have to be represented across a wide range of industry sectors.
I loved buying and selling shares, but after thirty years I really regret not concentrating on a few shares properly and ignoring the rest.
6 Preliminary Take Home
- Keep to the value approach, don’t be sucked in by the current fashion or the exuberance of crowds, be contrarian, buy into excellent companies when others are selling and sell high occasionally, when the market is over-heated.
- Don’t diversify! Buy shares in a few outstanding companies at a large discount to their intrinsic value. Don’t buy shares in mediocre companies, even when they are exceedingly cheap (the Benjamin Graham approach which Warren Buffet weaned himself off slowly).
- Work to find excellent companies, but also be prepared to ‘sit on your hands’ and do nothing most of the time.
- When opportunities happen take advantage of them, but don’t manufacture opportunities out of thin air. Take advantage of good luck. Take bad luck calmly. Be patient!
Key Words: REIT, Woolworths, WOW, Commonwealth bank, CBA, Telstra, TLS, UNITAB, UTB, TTS, TAH, Hagstrom, Warren Buffet, mining boom, 1987 crash, 2007 GFC, Securities Institute of Australia, eggs in one basket, diversify, concentrate, workload, take home, value investing, exuberance of crowds, contrarian, intrinsic value, mediocre companies, patience
posted in Canberra