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 December 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 2 — Overview, Building a Portfolio, Banks
In my experiences Part 1, I covered the golden age of floats, successes, luck, my education in shares and my one major systemic mistake. Because of the last, I argued passionately against diversifying and recommended you concentrate on a few shares only. My take homes were to stick to the value investing approach and to concentrate rather than diversify and the reasons for this. The nuts-and-bolts advice and investing methodology are covered in 1 Basics and in 2 Value Investing.
In Part 2 I begin with an overview of my thirty years of investing in shares not covered in part 1. I talk about why understanding a woman’s approach to investing is useful. I extoll the virtues of DRPs (Dividend Reinvestment Plans) and the general advantage of growing one’s portfolio in small parcels. I explain why I thought early on that the banking sector in Australia was a good bet and why I have been constantly disappointed. This is a useful case study that can be generalised and is worth pondering upon.
I conclude with a take home summary that encapsulates everything I have been advising in these four articles.
I hope you’ll remember this advice fondly in thirty years time, but also that you’ll review it annually and compare your investing experiences with the advice. You can always correct when you divert from sensible action!
2 Overview of My Thirty Years
I was very lucky starting out when I did. I was very lucky investing in CSL (see My Experience 1).
I had a good time buying and selling shares. I did seriously try to be contrarian (buying when the market was down, selling when it was up). I learned a great deal buying and selling many shares, hopefully not too regularly. However, I regret that I spent so much time trading in mediocre companies. From the early 2000s, I spent much time trying to get rid of shares that I shouldn’t have bought in the first place.
My share investing falls into two periods from 1993 to 2007 and from 2007 to 2021. In April 2007, I transferred all my shares from private ownership into a self-managed super fund (discussed in 1 Basics) forming a natural break for my records.
From 30 June 1993 to 2007 (14 years) the increase in the All Ordinaries Index (ASX) was an 8.76% compounded annual gain, or an absolute increase of 194% or 14% annually.
From 30 June 2007 to 2021 (15 years) the increase in the All Ordinaries Index was a 1.54% compounded annual gain, or an absolute increase of 26% or 1.72% annually.
The first period was an almost continuous time of economic growth in Australia. The second began with the GFC and continued in the doldrums until fairly recently. Where the market will go from here in the middle of a pandemic and with the emergency of climate change is most uncertain.
However, don’t despair. Even if you began your investing career in 2007 because it was the right time in your life, as long as you invested wisely your portfolio would have grown relatively well even in this period.
Sure, having transferred my shares into an SMS (self-managed super fund) the few years of little growth after the GFC seemed a bit uninspiring, but my portfolio grew almost unnoticed over time.
3 A Woman’s Touch
Early on in my investment career, I read and studied advice that women tend to be better investors than men. This is because they are more patient and accept small gains over time, rather than wanting to make large profits immediately. Sound familiar?
I also read that women in the USA formed local investment clubs where they shared ideas. They also tended to invest in small amounts regularly.
3.1 DRPs & DSPs
In the USA investors have two means to invest small amounts regularly in shares. They are:
- DRIPs (called DRPs in Australia) stand for Dividend Reinvestment Plans. Instead of receiving direct dividends from companies in cash, you sign up to their DRP and receive shares instead. When I began investing in the 1990s companies tended to give you shares at a good discount in DRPs. This doesn’t happen anymore, but the DRP acts as a mechanism to force you to purchase shares twice a year in small amounts; and
- DSPs (Direct Stock Plans) are a similar mechanism, found only in the USA, not Australia. Some US companies allow you to buy small amounts of shares directly from them, under defined conditions usually at established times. There is no brokerage fee, but you may have to sign up and perhaps pay other fees for the service.
When I read about this in the 1990s, DSPs seemed a good deal. I don’t know if they still are.
Women investors in the USA tended to use these two mechanisms for buying shares in small bundles and other small direct purchases of shares (often after discussions in their investment club). These women built up substantial share portfolios slowly over years.
I thought in the 1990s that this was smart and I still do. I adopted both strategies (DRPs & small purchases), which I adhered to.
First, I usually (not always) sign up for every DRP on offer. CSL has never offered a DRP. And, nowadays ‘I kick myself’ because I could easily have invested the dividend twice a year into more CSL shares, but I didn’t. Had I done so my portfolio would have been far more substantial.
Second, I tend to buy shares in small bundles over time. For example, if I want to buy $10,000 in company A shares. I tend to buy the shares in 5 lots of $2000 each over several months or even longer. Sure I pay $100 brokerage instead of $20, but most of the time I get a better average price on the shares.
In my experience, I also still tend to be impatient (a male characteristic) even though I know that I’m doing it. I tend to buy shares too quickly on a falling market, rather than waiting patiently. And, I tend to sell shares too quickly on a rising market. But, I still do all right.
Sadly, or perhaps I should say happily, over my thirty years, DRPs have performed roughly as well for me as my buying shares strategically in the long term part-ownership of companies that I’ve wanted to buy and hold forever. I’ve built my share portfolio almost equally by each method in those companies that offered DRPs. (And, I’ve crunched the numbers on this! This is not a vague statement.)
The statistics don’t lie, this is true even of the companies that I really have wanted to accumulate and have snapped up every opportunity that I think their share price is too low.
Don’t ever underestimate the power of dividend reinvestment plans. They build you a portfolio. Over time, they are more powerful than you can imagine.
3.3 Other Things
I have also used other mechanisms, such as, perpetual income securities and converting preference shares at various times. They worked well for me at the time. But, lately in Australia neither seem especially attractive and they may be a thing of the past. They are also perhaps over-complicated for the beginning investor.
4 Why I Invested in Banks and What the Results Were
4.1 The Why
In the late 1980s I began Q Research a strategic market research company. Some of the first jobs we undertook were with Credit Unions and Building Societies. These are called Savings & Loans in the USA and are a specialty of Charlie Munger (Warren Buffett’s partner). The USA is large enough to support these institutions (though Savings & Loans have also had their rough times). In Australia Credit Unions and Building Societies had proliferated by 1990 but some went bad, as did the Bank of South Australia. Some also had to be bailed out by the government. The ones that have survived have become banks themselves and with foreign banks account for a tiny segment of the Australian market. (Macquarie bank is an exception, but it is not really a retail bank and not relevant to this discussion.)
In 1990 with the anticipated privatisation of the Commonwealth Bank (CBA) and the Australian currency having been floated, the government formed the four pillars policy. This meant that the four major banks CBA, ANZ, Westpac (WBC) and NAB would not be allowed to merge with one another.
They were also heavily regulated (and supported) but an unanticipated consequence was that it was very difficult for anyone else to compete against them. Although the last three were privatised, they were protected entities. Westpac, for example had evolved from the merger of the Bank of NSW with the Commercial Bank of Australia. The big four banks in Australia are all in the top 53 banks in the world by total assets and higher in terms of profitability.
These banks have dominated Australia since the 1980s and their position was solidified in the GFC in 2007/2008 when the government guaranteed deposits in the big four banks of up to $250,000. This was extended to all banks in Australia, but because it was only the big four initially, the impact was immense on their status in the marketplace. And, the other banks, particularly the regional ones, never caught up.
Because of my paid research into financial institutions at the time that ATMs became widely used by everyone in Australia in the 1980s, I realised early that the convergence of new technology was making banking much cheaper. Together with globalisation and the potential for significant growth and profits in Australia and beyond, this gave the big four Australian banks a long-term business advantage that could be expected to last a generation or more.
(The first ATM in Australia was introduced in 1969, but most people had not heard of them or used one until the mid-1980s. I remember my quaint habit as a consultant when travelling was to carry a Commonwealth bank passbook because you could get money out at any post office, which had much longer hours of service than the banks did.)
4.2 The Good, the Bad
So how have the banks done? CBA as mentioned above (and in My Experience 1) has done pretty well for me a 9% compounded annual gain. Those who invested in the first tranche at $5.40 two years earlier have received a 10% compounded annual return.
How have the other banks done? I began investing in 400 Westpac (WBC) converting preference shares in 1993 (price $7.50, interest rate 6.5%, conversion 30/06/1998 for x 1.05 shares). I thought that this was terrific. (The ANZ converting preference issue in 1991 was even better). The compounded annual return for WBC from 1993 to 30 June 2021 was 6.24%. I didn’t buy ANZ shares until 1998 and NAB shares until 1999. Their compounded annual return from those dates was 5% and 0.7%, respectively. But, a fairer comparison from 1993 would be a compounded annual return of 6.5% for ANZ and 3% for NAB.
Hence my return on investment in NAB was pathetic. The return on WBC and ANZ was mediocre. Remember, for the same period from 1993 the All Ordinaries Index (AOI) has had an annual compounded gain of 5%.
The return on CBA for the same period at 9% was good. However, the Commonwealth Bank had a massive advantage in size early on and still has.
4.3 The Ugly
Am I happy with Australia’s big four banks? Absolutely not! NAB I think lost less than the others in the 1987 crash, but has performed poorly ever since, squandering its privileged position.
I have watched all four banks waste money, year after year, time after time, on incautious investments, expansion plans and other poorly thought out misadventures. The executives have earned outrageous salaries, but the management has been mediocre at best.
Hagstrom quotes Warren Buffett on banks and Buffett should know (p 217):
‘Banking doesn’t have to be a bad business, but it often is,’ Buffett said, adding that ‘bankers don’t have to do stupid things, but they often do.’ Buffett describes a high risk loan as any loan made by a stupid banker. When Buffett purchased Wells Fargo, he bet that Reichardt was not a stupid banker. ‘It’s all a bet on management,’ said Charlie Munger…
This quotation pretty much nails my dissatisfaction with Australian banks, particularly with their senior executives and boards.
The banks have been propped up by the Australian government time and again. They are too big to fail. The ANZ and Westpac (WBC) nearly collapsed the entire system because of bad loans following 1987 and had to be bailed out by government.
The banks should have performed really well to my expectation over the past thirty years, but they have not.
Even worse in more recent years they have become dishonest, engaged in fraud and malfeasance and ruined customers’ lives.
As a shareholder, while all four banks engaged in these egregious activities, the cash flow generated did not improve the banks’ bottom-lines much. The cash that was supposedly improving competition was siphoned off into the hands of individuals within or associated with the banks, and it seems the senior executives, if not involved, were complicit by default and the boards were too stupid to notice. (Am I exaggerating here? Barely! As an outsider there seems no other plausible explanation.)
Unfortunately, the government shows no sign of implementing the superb integrated recommendations of the Banking Royal Commission. There appears to be no political will to reform the financial sector, and the banks themselves will probably revert to customary bad behaviour.
How can institutions that have such perfect operating conditions, lowered costs because of technology and ever expanding horizons over a generation perform so badly?
By any account I have been lucky in my share market experience. 1993 was a good year to start. Australia was in a resources and terms of trade boom for much of the time to 2007. Sure I had bad luck, and I also made stupid mistakes but none of them irreversible. The only mistake I regret is believing in diversity as a strategy.
From 2007 to the present the growth of the overall market has been much less impressive. However, had I started in 2007 and not diversified, I would have done well-enough. My portfolio (reasonably solid in 2007) has grown comparably ahead of the All Ordinaries Index.
If you follow the value investment pathway outlined in 2 Value Investing, then you should do well too, especially if you concentrate, put all your eggs in one basket and don’t diversify.
You probably won’t do as well as Warren Buffett, but you will do well. Actually, I take that back! If you are not a hobbyist like me, if you love investing in shares enough to do it as a full-time occupation and you follow Buffettology (as outlined in the two books recommended), then you will do as well as Warren Buffett. The proof is in the evidence given in 2 Value Investing and of the others influenced by Graham in Buffett’s 1984 talk — The SuperInvestors of Graham and Doddsville.
6 Final Take Home
- If you don’t enjoy it, don’t do it.
- Buy stocks to hold forever.
- Be patient! (If you are a male, this is very hard.)
- Value-invest (follow the Warren Buffett books). Do your homework.
- Invest in exceptional companies with excellent long-term prospects and a high return on invested capital.
- Buy shares in these companies at a large discount to their intrinsic value (margin of safety consideration).
- At least, worry about the honesty and competence of management.
- Concentrate on a few companies, don’t diversify on many (my main mistake).
- Build a solid portfolio over time. Remember, black swans happen. Don’t focus on share prices on a daily basis. You are only trying for large discounts on intrinsic value.
- Be contrarian, buy when others are selling and sell when others buy (sometimes), but only shares in the excellent companies that you’ve researched thoroughly.
- Don’t get caught up in the exuberance or the panic of crowds.
- You can’t control luck, just as you can’t control black swan events, but you can be prepared. You can take advantage of good luck, when it occurs. And, because you are running a long-term strategy, you can compensate for bad luck.
- Black swan events aren’t necessarily bad luck — there could be opportunities. They are rare but they occur. And, unlike the bulk of investors you should be able to compensate and also take advantage occasionally. (Graham’s margin of safety is relevant here.)
- Follow the female investment club approach. Take up the DRPs (dividend reinvestment plans), take up shares in small parcels, be content with small gains. And, if you are male, try to be more patient than you can believe possible.
None of these recommendations are prescriptive. Although, it is possible to conduct your investment strategy rigorously. Value-investing is partly a state of mind. Once it becomes ingrained, you know how to behave.
There is some hard work and analysis involved, but it is much simpler than the rules and advice you’ll find at the sensible end of financial advice. In Australia, for example, as you’ll find in the Australian Shareholders Equity Magazine or The Eureka Report. The advice at this end of the market is complex.
As Warren Buffett said (see 2 Value Investing):
I have seen no trend toward value investing in the 35 years that I’ve practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult.
With regard to money, unless you are rich, you will need some semi-formal mechanism to put money aside to invest. You can build your portfolio slowly, as the women from the investment clubs in the USA do.
With regard to DRPs, even if the company doesn’t offer them, you could always reinvest your dividends into shares. For example, looking back at CSL dividends I’m extraordinarily sorry that I didn’t routinely buy CSL shares with them, as in a DRP.
Warren Buffett, of course, prefers companies that don’t offer dividends instead ploughing profits back into the business (CSL is slightly niggardly with its dividends).
I hope this coverage of my own investment activities in the last two articles, reinforces the investment advice in the previous two articles: 1 Basics and 2 Value Investing.
If I had my thirty years over, I would no longer buggerise around buying and selling shares, but just follow a Buffett value-investing strategy rigorously. I haven’t done bad, but I could’ve done much better without any more effort.
Key Words: Overview, thirty years investing, a woman’s touch, DRP, Dividend Reinvestment Plan, small parcels, All Ordinaries Index, compounded annual gain, DSP, Direct Stock Plan, womens’ investment club, perpetual income securities, converting preference shares, patience, Savings & Loans, banks, four pillars policy, Commonwealth Bank of Australia, CBA, ANZ, Westpac, WBC, NAB, Hagstrom, Warren Buffet, portfolio, value-invest, exceptional companies, discount, intrinsic value, margin of safety, management honesty and competency, concentrate don’t diversify, black swan, luck, be contrarian, don’t follow the crowd, analysis
posted in Bundanoon
Thanks Tony. Another useful one to share with my nephew.
Very insightful, thanks for sharing