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Posts By : Baiocchi Griffin Private Wealth

Points of Interest – Summer 2021

In this edition of Points of Interest, we look back over the year that was 2020, which was naturally dominated by the pandemic and its impact on world health, the global economy and stock markets. We also explain the impact that ultra-low interest rates is having on investor behaviour, where investors are forced to accept higher risk in order to earn returns that in years past would have been considered as relatively modest. We also consider whether or not global stock markets are near the top of a bubble, evidenced by significant increases in share prices of companies such as Tesla and others.

Points of Interest – Spring 2020

In this edition of our quarterly newsletter, Points of Interest, we discuss the very unusual nature of the pandemic, which has led to significant increases in sales and profits for certain sectors and firms, while others have struggled to survive the impact of the pandemic and efforts to contain its spread. We also review the Australian government’s budget and discuss the performance of the market over the quarter.

Points of Interest – Winter 2020

In this edition of our quarterly newsletter, Points of Interest we discuss the gradual recovery from the pandemic-induced market crash and economic slowdown experienced over the preceding four months. We also discuss the impact of falling interest rates on portfolio construction and how this influences our decisions regarding asset allocation and investment selection.

Goodbye car

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 5 May 2017.

I had a car accident over the weekend. Nothing too serious fortunately and most importantly nobody was injured. It wasn’t your typical car crash really – no high-speed manoeuvres or screeching brakes. I was in a car park looking for a park. Ahead of me a very large 4×4 started backing out of its park, so I stopped to let it finish and move off. To my alarm, it turned toward me and began to accelerate. I mumbled something under my breath along the lines of ‘surely they can see me’, but it continued to pick up speed and back towards me. At the last moment, I tried to both put the car into reverse and lean on the hooter, failing to do either very effectively. With that the 4×4 crashed into the front of my car, almost landing on the front bonnet. To say I was a little surprised that the driver hadn’t seen me was an understatement. You can imagine my surprise however, when it turned out that there was no driver! The details are a little unclear, but it seems that the car may have been left in neutral without the handbrake on, allowing it roll out of its park and pick up speed as it hurtled down the hill.

In some way, it was fortuitous that my car was there to stop the runaway 4×4. There were quite a few pedestrians about, including small children, who would not have even heard the 2 tonnes of metal rolling down the hill, so placing my car in the way could be seen as an act of self-sacrifice. That’s what I told my car anyway, as it was towed away to an uncertain fate. Being involved in a car crash (albeit a minor one), got me to thinking about stock market crashes. There are some similarities: both result in damage, either financial or physical; both are usually accompanied by lots of confusion and noise; and both can be emotionally unsettling (that said, on an individual level, a bad car crash is much worse – money is just money, but life can’t be replaced). The other commonality between the two is that both stock market and car crashes are unpredictable. If they weren’t, they wouldn’t happen. After a stock market crash, a raft of pundits will come out and say they saw it coming, but that’s often either simply untrue or wishful thinking. Nobody rings a bell (or sounds a hooter) at the top of the market. Preparing your finances to survive a crash is one thing, avoiding it altogether is another.

The Black Swan

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 22 April 2017.

In 16th century London, inhabitants used the expression ‘black swan’ to describe something that was impossible. The reasoning behind this was the fact that, up until that time, nobody had ever seen anything but white swans. Black swans were presumed not to exist, so anything that was thought to be impossible was described as a black swan. Then, in 1697, Dutch explorers reached Western Australia and found, to their great surprise, vast numbers of black swans! The impossible really did exist! The expression ‘black swan’ then changed over time to mean an impossibility that was later disproven. For example, the collapse of the Soviet Union seemed an impossibility, until it happened. So, the end of the USSR was a black swan event. The impossible becoming possible.

Black Swan theory was popularised by writer Nassim Nicholas Taleb, who said that black swan events had three defining characteristics: they’re unexpected; they have an extreme impact and finally, we try and rationalise the event after it’s occurrence, as though it was in fact predictable or explainable. In Taleb’s view, events such as the advent of the internet, September 11 and World War 1 were all black swan events. Taleb’s book, ‘Black Swan’, was very popular in finance circles (Taleb himself used to work for investment banks and hedge funds) and forecasting future black swans became a popular pastime for investors and analysts (which sort of defeated the whole point of a black swan event, in that it is entirely unpredictable). Some went so far as advocating investment strategies based on black swans – the aim was to position your investments ahead of a black swan event to either profit from it, or be protected from it. Again, the point was often lost on such advocates, that if you can predict the event in advance, it’s not a black swan event (at least, not in the way it was described by Taleb).

The problem with an investment approach based on predicting the next black swan (such as, putting all your assets into gold, or into cash), is that the black swan you’re waiting for may never arrive. Or a different, but equally unpredictable and severe black swan event may occur, which renders your strategy worthless. For most people, taking all-or-nothing punts on the possibility of a potentially catastrophic outcome, is a bad idea. The idea of a sound and diversified investment approach is not new, but for some people it’s also not exciting enough. When it comes to making (and managing) money however, I’ll take boring over exciting any day.


Make me happy

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 8 April 2017.

For some time now, I have found that I’m less and less inclined to watch the news on television. Most of it can hardly be called news anymore anyway – a murder here; a violent assault there; politicians nit-picking and back-stabbing each other for fun; corruption hearings; prison sentencing…the average television news broadcast these days is less uplifting than the obituary section in the newspaper. It turns out however, that there’s a very valid reason for my growing disinterest in the news – I’m getting old! Researchers have found that as we age, we prefer to avoid experiences and situations that increase our negative stress levels. So, the fact that I’d rather watch Iron Man (a movie largely about explosions) rather than Spotlight (a harrowing account of the exposure of child abuse practices by priests in the Boston area) says more about my age than my lack of taste in movies.

Apparently, as we get older we start to instinctively avoid places, events or situations which make us feel bad. The theory is that subconsciously, we know we are running out of time (literally), so we want to maximise the time we spend feeling good and happy. We ignore or avoid negative things and seek out those things which make us happier. In researcher-language: “This attentional bias is consistent with older adults’ generally better emotional well-being and their tendency to remember negative less well than positive information.” So rather than watch the news, with all its upsetting stories of murder and mayhem, as you get older you prefer to watch Gardening Australia or Better Homes and Gardens. Sounds like a perfectly good night in if you ask me.

A problem arises however, when we start to also avoid information that contradicts our existing opinions, on the basis that you don’t want it to upset you. This is important when it comes to investing, where a failure to keep an open mind can lead to a failure to make appropriate investment decisions. Refusing to consider views different from your own, leaves you at risk of being blindsided by change. In turns out that researchers have even identified exactly when this preference for positive experiences becomes a hindrance to effective decision-making – age 70! From then on, apparently, “…older investors exhibit worse stock selection ability and poor diversification skill. The age-skill relationship has an inverted U-shape and, furthermore, the skill deteriorates sharply around the age of 70”. At that age, your years of experience are seemingly outweighed by your poor decision-making abilities. One of those rare cases where you really are both happier and poorer. Now that’s something to look forward to.

Bad driver

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 25 March 2017.

Late last year we moved house and now live about 40 kilometres away from the office. As far as commutes go, it’s not as bad as it sounds. It’s about half an hour door to door – in Sydney that would be almost like living in the same suburb as your work. It’s also highway driving almost the entire way, which gives me plenty of time each day to observe the other drivers. It has reached the point where I have started categorising drivers into general behavioural types. There’s the Go-slow-Go-fast driver – that’s the one that drives at 80km/h in a 100 zone, but when it drops to 50km/h in a town, just keep their foot glued to the accelerator and blow through at 80km/h. It’s as though they’re only comfortable driving at one speed, regardless of the actual signed limit. Either that or they’re simply not noticing that they’ve entered an urban area, which is even worse.

Another familiar face on the highway is one we all know too well – the Tailgater. Don’t you just love it when you’re stuck behind a 30-tonne truck doing 50km/h in a 100 zone, and the Tailgater roars up your behind and thinks that sitting two feet from your back bumper is somehow going to make the truck in front of you go faster? They’re either just overly helpful or incredibly short-sighted – maybe they just can’t see the truck in front of you, and if you gave them the appropriate hand-signal (the universal one for ‘hello’), they might realise their error and retreat to a safe distance? That’s what I think anyway, but it never seems to work. The other common highway driver is of course the P-plater. I don’t mean to generalise, but I’ve begun to think that the ‘P’ doesn’t stand for ‘Provisional’, but rather it means you’re sharing the road with a ‘Philosophical’ driver. I say this because most P-platers seem to adopt a philosophical approach to speed limits – they are there to be considered, not obeyed. Philosophical drivers interpret speed limits as they see fit, as being up for debate and most oftentimes outright ignored.

So what does this have to do with finance? The commonality is that irrational drivers (like the ones helping you push the B-Double up the hill) are as prevalent as irrational investors. People want to buy when they should be selling; sell when they should be buying; want gold when they should be in oil; and want shares when they should be in cash. Irrational investment choices can be just as damaging for your financial health as a run in with the Tailgater is bad for your rear bumper. Avoid both as much as you can.

Go gadget go!

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 11 March 2017.

I recently set up a Wi-Fi enabled indoor/outdoor weather station at home. From anywhere in the world it allows me to log in and check the temperature both indoors and outside; investigate CO2 and sounds levels in the kitchen and a host of other functions. If I could be tempted to pay for the optional extras it would also automatically measure rainfall and wind speed, all nicely plotted with charts and diagrams. At the same time I also set up a bunch of Chromecast Audio devices. These nifty little devices allow you to connect all your old stereos and sound systems to your home network. You can stream music to every room in the house at the same time, or just to a particular room if you felt like it. No need for an expensive new sound system, as one of these turns your old boom-box into a smart radio. And all this technological whiz-bangery is on top of the solar-powered internet relay station I had to build in the top paddock to beam the internet down to the house. The fact is, the average house these days probably has more technological devices and gadgets than the first few shuttles that NASA sent into space. We take it for granted that we can hold a video conversation with someone on the other side of the world while sitting in the kitchen holding a mobile phone. I’ll bet that NASA wished Skype existed 50 years ago – no question of the moon landings being faked, we could have all watched it live on our phones.

Technological change has not missed the financial sector either. Some people have a financial adviser they’ve never met; having only ever had conversations via video. If a video relationship isn’t your thing, you can let a computer make investment decisions for you – just upload your portfolio (and credit card details), click ‘Go’ and sixty seconds later get back a computer generated report telling you what to buy and sell. Automatic spare change investments, peer-to-peer lending; crowdfunded capital raisings, fractional residential property investment…the list of investment-related technological initiatives is a long one. However, it’s probably worth asking whether or not all of the clever technological advances actually result in better outcomes? Just because a computer can select a portfolio for you and deliver it in a snazzy way straight to your mobile phone, should you let it? While it might be fun (for a while) to check the temperature in my house from anywhere in the world, would I want my weather station to look after my life savings? Not before hell freezes over – an event my weather station tells me is most unlikely.