Why the Bull Market will end soon

Popular media can be a very good source of market trends. Some recent things I’ve observed makes me think this long bull-market is coming close to an end.

I recently happened on a very interesting article that suggested that margin lending by hedge funds had reached an all-time high. It also suggested that hedge funds were generally exiting their short positions in favor of going long. While such indications may propel one last and final wave of exuberance in what is been a very lengthy bull-market, the increasing usage of leverage is also a precursor to the fact that the next leg down whenever that is will be a particularly nasty one.

According to the Goldman research, hedge fund leverage is at the highest it’s been in the market since 2009. Also interesting is that the short ratio as a percentage of total equity market value is also the lowest it’s been since the bull market began. While these two indicators can typically be viewed as near-term bullish for markets, taking a more contrary in perspective suggests that exuberance in the market is rapidly reaching a peak.

Successive waves of doubt and disbelief about the length and duration of the rally has now given way to FOMO or fear of missing out, with hedge funds giving up the fight and deciding that if you can’t beat them you have to join them. If you view hedge funds collectively as ‘the market’, high leverage and low levels of short activity suggests peak bullishness.

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Options writing has been very profitable for 2017!

Greetings all, as we enter into the final few weeks 2017 I thought it would be opportune to summarize progress across the board. I will deal with my option writing this week.

Those that have come by here may recall that I decided to embark on a program of writing out of the money put options over year ago. This is principally designed to complement activity in my Project $1M portfolio, which was a concentrated, focused growth portfolio aimed it tripling my investment capital over a ten-year period.

Well, that portfolio is now fully invested, I have been opportunistically looking at ways to buy more of these businesses at substantially lower prices. Of course I realize that these opportunities only come around periodically. As a result it seemed like an interesting idea to write out of the money put options at prices that were more consistent with levels that I would like to buy at.

What I have essentially been doing is writing insurance. In other words I’ve been providing insurance to others that hold the same high-quality stocks that I wish to buy, with the assurance that I will be a buyer of last resort if the prices of the stocks fall substantially.

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Why it is so hard to hit investment ‘home runs’

Readers may recall I had launched an experiment just over 18 months ago, focussed on building wealth as a start up employee. There has been an interesting update to this experiment now.

I previously wrote about what a lottery it is to build start up wealth. Employees need to suck it up for some period of time, slave away with an employer, build up some equity and hope their company makes it big so that they can convert their time and hard work into cold hard cash!

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An update on my start up journey

I indicated recently that I was contemplating a career shift and moving into a start up. I’m going to provide an update around how things are going.

Earlier this year I decided to make a move from a career standpoint. I left my long-standing employer of almost 8 years to take a punt on a start up opportunity within an established business. I’m pleased to say that a couple of months in I feel strongly that the decision that I made to make the switch appears to be the right opportunity.

My current role involves more operational responsibilities than I’ve previously had. I’m charged with executing on a new business opportunity within this new organization that I’ve joined. It’s essentially a start up opportunity within a large business so I have the luxury and the freedom of a startup employee with the security and backing that comes with being an employee of a large established business.

That in my view provides the best of both worlds. The challenge is an interesting one because growing a business is not a career challenge that I’ve had to undertake at this point in time in my career.

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Large cap Tech Stocks are on fire!

 An interesting trend has been taking place over the last few months which has seen technology stocks reverse their poor performance of 2016.

Technology stocks were the whipping boys towards the latter portion of 2016. With Trumps ascendancy into the White House, there were concerns that Republican policies would favor old-school telecom and incumbents at the expense of the internet giants and technology start ups..While the jury still out on the extent of the impact of Trump policies on tech it’s fair to say that tech stocks have significantly outperformed since the beginning of 2017.

Markets go through ups and downs sometimes without any rhyme or reason but ultimately they always return back to earnings performance and that’s ultimately what drives the long-term performance of a stock. In Google and Amazon’s case, exceptionally strong revenue growth and correspondingly good earnings performance have seen both stocks significantly outperform the broader index in the first part of 2017. Google stock is up almost 17% year-to-date while Amazon stock is up more than 23%.

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Is it that hard to beat the market?

I’ve been thinking about the idea of beating the market on a long-term basis and whether that’s really possible. I laid out some thoughts on that topic below.

There’s a school of thought that suggests the market efficiently prices in all information that’s available to it at any point in time such that it’s theoretically impossible to be able to outperform the market on a long-term basis. Of course the investment results of people like Warren Buffett, Philip Fisher and Peter Lynch obviously suggest otherwise but even a more empirical study of stock price movements suggest that the market is prone to over or under react to information at any point in time. I’ll go into this further, but before that, consider the overall “quality” of the market.

If you think about a broad-based index like the S&P 500 for instance there is obviously varying levels of quality amongst all of the stocks that make up that index. Some of those businesses are clearly on the ascendancy such as Google ,Facebook, Amazon etc. all of which are riding market tailwinds while other businesses such as Ford, U.S. Steel and even Verizon are now on the decline as a result of market changes. Further many of these businesses also have varying levels of profitability, returns on equity and competitive dynamics within their various industries that influence long term returns. Arguably the index itself takes care of better and worst performers through changes in the weighting of these relative components however that doesn’t change the fact that there are still 500 businesses of varying quality within the overall index.

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My rules for investment growth

Fine-tuning investment strategy is an iterative process. I find that I’m always learning throughout my journey.

I feel like I’ve come to a good place with my investments. I’m generally pretty happy with the strategy I’ve chosen and how I’ve looked to execute on that strategy. However I find that I’m always learning and taking steps to becoming a better investor.

Here are my latest thoughts on investment strategies for growth.

Pick businesses that will last the test of time

This is a tried and tested rule for me in terms of looking for investments that have some strong barriers to entry that can stand the test of time. This will result in compounding machines with barriers to entry that protect long time compounding of capital and will produce exceptional wealth creation and value over the long run.

It’s all about returns on capital

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What’s in a career?

As I’m about to embark on the next phase of my career, I recently stopped to reflect on whether the expectations for structured career path way actually do us more harm than good.
For the longest time I had visions of a linear career track. I expected that I would work my way up through a structured pathway moving through various levels of seniority within a given functional specialty on my way to an eventual retirement.

Fast forward 15 years and my career track has taken anything but a linear pathway. Not only have I moved across industries but I’ve also moved across different functional areas, different specialties and different roles across a variety of different levels on my journey through life.

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An update on my options strategy

I launched into an options strategy with full vigor last year. I want to provide an update on how things are going, and how I’m looking to evolve this.

Rising markets provided motivation to consider an options strategy last year. I felt market prices were elevated (who knew that they would continue to inexorably since then!). I figured that writing some out of the money put options, which would obligate me to purchase high quality at prices that made sense, wasn’t a bad strategy in the interim while prices were excessive. If prices didn’t fall to the levels that I wanted, I would just pick up the option income.

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2017 Goals

As a follow up to my last post on my Goals for 2017, I invested some time into thinking about the specific things that I’d like to achieve this year.

Setting goals is something that I believe is highly beneficial for long term progress and achievement. I’ve rarely set explicit goals to be accomplished, however for this year I thought that I would add some. I have kindly been provided a template from earnest.com to help in my efforts to document these goals.

Investment Property

As I’ve mentioned previously, its our aim to diversify our investment holdings beyond equities and accumulate additional property ownership. To that end, we have spent some time searching for the right kind of investment property that would make sense for us. However a big part of making the investment property dream a reality is to be able to fund the required deposit. That is an explicit goal that we have set our sights on trying to achieve in 2017.

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New Year, New Opportunity?

Well it’s often said that the new year brings about opportunities for change. I have one such change that’s likely on the horizon.

Folks who have come by my site periodically will have noted that there been times when I discussed  a potential career change. I have been in a position and in a company that I quite enjoy for the longest time.

The role provides very good work life balance with the opportunity to meet incredible individuals who are passionate about various things that they’re building. There’s never really a dull moment and there’s always an opportunity to learn and do more.

Having said that I’ve been feeling a little static for the last couple of years. I’ve also seen more junior peers of mine pass me by for promotional opportunities. While it would be fairly easy to just be content with my lot in life and say that as a family we are on track to achieving some rather big and meaningful opportunities from a wealth perspective (and there’s no doubt here that we are), I’ve often wondered whether I should be aspiring to try and do more.

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My 5 Priorities for 2017

The new year is a good time to set goals. Here are my overall priorities for 2017.

Add another rental

Our experience with our existing rental has generally been a good one. Given where stock market valuations are currently at, I’ve been actively thinking about diversifying our portfolios away from equity exposure and directing some monies to property.

My wife and I have been actively looking at adding another rental to help us further diversify our investment portfolio in 2017. In 2017 I’d like to make significant progress on our search for another rental either through making a substantial commitment towards saving up the deposit and perhaps even isolating the specific area in which we would like to purchase.

Who knows if things progress sufficiently well we may even be able to complete a rental transaction in 2017 itself!.

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2017: What does the year hold?

Happy New Year to all!. 2016 was a surprising year in many respects. Here, I consider what 2017 may bring.

I think 2016 took many people by surprise. Of course, on the political front, Donald Trump surprised many of the political pundits with his victory. However beyond politics, what was also surprising to me was the unrelenting rise of the S&P 500 and the DJIA.

From a February slump, the index accelerated in the latter few months of the year, with the DOW in particular coming within earshot of 20,000.

Personally, I feel that the major indexes no longer represent reasonable value in the market. While things may still continue to steadily rise, I struggle to find any real value in large cap stocks, or for that matter, the market in general.

Pockets of value still do selectively exist, primarily in large cap healthcare and biotech stocks. However I haven’t been a buyer for quite some time, and don’t intend to enter the markets at current levels. Most of my most recent buying was done with the DJIA was just shy of 16,000.

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Reflections on 2016

The end of another year is upon us. Here my thoughts and takeaways.

2016 was a very solid year of progress over here. I experimented with a few things, discovered some new things and learnt lots of things.

I pursued an options strategy

Most notable of my various endeavors for 2016 was embarking on an option strategy to lock in attractive prices on strong growth stocks. I’m a long-term buyer of high-quality stocks. However elevated pricing levels across the market in general have led to most stocks trading at valuations which are currently less than attractive To ensure that I am a buyer of last resort, I’ve employed a strategy of writing out of the money put options that are long dated on high-quality growth stocks that I would look to own. I put that into effect in 2016.
I have netted approximately $6,500 in options premiums from deploying the strategy, however more than the premium income what was notable to me about deploying the strategy was that I’m effectively looking to lock in attractive prices to purchase high-quality stocks over time and not get carried away with current market pricing on the same companies.

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Consider backing owner operator founders

I’ve been giving a lot of thought to the ingredients that make up a successful investment. I’m convinced that backing successful owner operators is one of those ingredients.

With so many businesses to choose from in the equity markets to drive total returns I’ve often wondered how you identify those businesses that are most likely to be successful.

Obviously strong moats, good competitive advantages and tailwinds are all elements of what help to drive good growth and sustained profitability over a long time. Additionally the ability to earn strong returns on invested capital is also a necessary ingredient to a successful long-term investment in my book.

However one of the other factors that I think is overlooked by many people is the existence of an owner operator/ founder. Now owner operator founders tend to be very rare at the helm of the business, certainly as a business gains size and scale.

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Measure progress by the evolution of your thinking

As investors we are often fixated on financially focused metrics to measure our investment journey. I suggest there are other ways beyond this to do so.

The clearest way to measure how you’re doing financially is to always look at the numbers. There’s no disputing that. However they may be times where markets are going through a trough or it’s early on your investment journey and your investments just haven’t had the chance to demonstrate their progress. In that case just how can you measure your progress as an investor?

I was recently thinking through this issue. One of the things that came to mind was that when I started my investment journey I recall initially going to a financial planner for some advice.

I was armed with details of an investment fund that had the best financial returns over the last 12 months and was keen for this planner to invest my funds in that specific mutual fund.

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Automating my investment strategy

I have automated my 2017 investing. I already know what I will be buying in 2017 and at what prices. Let me explain further.

For me, investing is principally about removing emotion from the investment process and buying high quality businesses at prices that are bargain basement. Ideally, I’d love to be the buyer of last resort, and buy when nobody else wants to buy.

Of course, this is easier said than done. While it may be easier to identify the high quality business, the discipline to know when to sell, when to wait and do nothing, and then went to move in aggressively is more nuanced and can easily be influenced by emotion.

I’ve already made my bets for what I’d like to hold over the next decade and potentially buy at lower prices should the opportunity present itself. I’ve accumulated initial stakes in most of these businesses over the last 12 months however  present prices aren’t conducive enough for me to look to accumulate more aggressively.

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Rethinking my property allocation

I’ve been historically heavy on equities as the overall focus in my portfolio. More recently I’ve been thinking about giving property greater prominence.

Equity investment has been a major part of my journey towards financial independence. I like the asset class for number of different reasons. I find businesses easier to analyze and understand. It’s more self-evident to me to work out the reasons why a business performs in the way it does based on its competitive strengths, its revenue growth and the returns it derives for its shareholders equity. Frankly it’s also a lot easier to move into and out of equities given transaction costs are relatively low.

It’s never been as easy for me to understand the dynamics behind property investment. I struggle to work out what really drives the price appreciation of property in a given area versus another area. Sure some basics such as proximity to services, transportation and school districts no doubt account for a larger amount of why a given property is valued in the way it is. However what explains property growth and appreciation beyond that has been harder for me to understand.

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At the corner of Buffett and Fisher

I’ve drawn a lot of inspiration for my investment strategy primarily from the Buffett and Fishers approaches. I’ll discuss here how I am applying them in my own unique way.

I’ve been reading and drawing inspiration from a lot of different legends in the investment area over the last several years however I think the approaches that have most resonated with me are those that have been utilized by Warren Buffett and Philip Fisher, and to a slightly lesser extent Charlie Munger.

Well I don’t claim to have anywhere near the investment acumen of the three legends of investing. There’s something very unique about how each of these investment giants approaches investing that’s relatable and that gives me confidence to persist with such an approach.

From Buffet and Munger I’ve tapped into a discipline of starting out with businesses that are drowning themselves in the weight of cash that they throw off. That means that they have unique control over their destiny and are not dependent on external conditions.

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The attraction of compounders Pt 2

I previously discussed my interest in compounding machines. Today, I will expand on this theme a little further.

Last time, I discussed my interest in compounding machines that were able to compound earnings with minimal capital. The other type of compounder or business that is highly valuable is one where capital can be aggressively redeployed at high rates of return to steadily expand and widen the business franchise.

Now while I prefer those businesses that don’t require much capital to produce fairly high long-term rates of business growth, I do also very much like these businesses that have opportunities for reinvestment at high rates of equity also.

The challenge that arises with reinvestment businesses is the certainty of reinvestment at high rates of return. However there are a few examples that I can think of where one can be relatively confident that an investment will produce high rates of return.

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