Advantage retail investors

Tuesday, 3 October 2017
Melbourne, Australia
By Bernd Struben

  • Yes, smaller can be better
  • What is a shockproof stock?
  • Why miners should stick to mining

Once markets hit new record highs, every time they go up represents another new record.

This is exactly what we’ve seen playing out with all three major US stock markets.

The Dow Jones Industrial Average, the NASDAQ and the S&P 500 all gained yesterday. And all set new record highs once again.

US markets remain buoyed by hopes Trump’s massive proposed cuts to corporate taxes will gain some traction in Congress. Trump, as you likely heard, wants to cut the corporate tax rate from 35% to 20%. That’s a lot more money going into company coffers and potentially back to shareholders.

Investor sentiment got another boost from the Institute for Supply Management (ISM). The ISM’s index of US national factory activity hit 60.8 in September. That’s its highest level in 13 years. And well above the critical 50 level, as any reading above 50 indicates growth in manufacturing.

The Dow is now up 5.66% in three months. The NASDAQ is up 6.31% in that same time, while the S&P 500 has gained a slightly more subdued 4.36%. And three months ago, they were all already at, or near, their top levels ever.

I imagine you’d be happy with these types of gains in only three months. Especially if, like most Aussies, you’ve invested a lot of your funds into the ASX 200.

The ASX 200, as you know, is made up of the 200 or so largest companies — by market capitalisation — on the Australian Securities Exchange. (I say ‘or so’ because the index does not always contain exactly 200 companies.)

And you have to reach back a long way for the last time anyone mentioned the ASX 200 at record highs. In fact, you’d have to go all the way back to November 2007, when the index peaked at 6,828 points.

At today’s 5,700 points, it’s got a fair bit of ground to make up yet. And it doesn’t look to be in much of a hurry to get there.

The ASX 200 has returned a grand total of 0.47% over the past three months. That’s less than you’ll get with a term deposit…with a fair bit more risk.

So as an Aussie investor, should you be putting your money into the US markets?

Yes…and no.

Diversifying your stock portfolio beyond Australian listed companies is certainly something to consider, if you have not done so already. And these days it’s easier and cheaper to invest in international stocks than ever.

But there are some fast growing companies right here in Aus as well. It’s just that you won’t find many of them on the ASX 200.

More, after the markets.

Markets

Overnight, the Dow Jones Industrial Average rose 152.51 points, or 0.68%.

The S&P 500 gained 9.76 points, or 0.39%.

In Europe, the Euro Stoxx 50 index finished up 7.84 points, or 0.22%. Meanwhile, the FTSE 100 climbed 0.90%, and Germany’s DAX index gained 0.58%.

In Asian markets, Japan’s Nikkei 225 index is up 181.32 points, or 0.89%. China’s CSI 300 is up 0.37%.

In Australia, the S&P/ASX 200 is down 32.83 points, or 0.57%.

On the commodities markets, West Texas Intermediate crude oil is US$50.54 per barrel. Brent crude is US$56.12 per barrel.

Gold is trading for US$1,271.12 (AU$1,624.23) per troy ounce. Silver is US$16.59 (AU$21.20) per troy ounce.

One bitcoin is worth US$4,404.10.

The Aussie dollar is worth 78.26 US cents.

Yes, smaller can be better

If you have a managed super fund, odds are you’re heavily invested in Australian blue chip companies. That is the companies making up the ASX 200.

The below graph shows the performance of the ASX 200 since 3 July:



chart image

Source: Google Finance
Click to enlarge

As mentioned above, the index has only returned 0.47% over the past three months.

Yet investors keep pouring money into the 200 largest companies.

Part of that is because these are familiar names. And we tend to be more comfortable investing in companies we’ve heard of. These larger stocks are also perceived to be less risky than smaller companies. And that’s true…to an extent.

Yet regardless of risk or returns, larger fund managers have little choice but to invest in these big stocks. When you’re dealing with millions of dollars aimed at a particular stock, you can’t really target a smaller company. Not without distorting its valuation, anyway.

This is where you, the little player, have a great advantage. You’re free to invest in blue chips as you wish. But you can also target the smaller end of the market. One the fund managers generally are unable to access.

And the smaller end of the Aussie market has done quite well of late.

Have a look at the below chart. It shows the ASX Small Ordinaries over the past three months.



chart image

Source: Google Finance
Click to enlarge

The ASX Small Ordinaries contains companies included in the S&P/ASX 300 index, but excludes the top 100 stocks. It’s a useful benchmark for small-cap investments. And it’s up 4.18% since 4 July.

That’s almost nine times the return of the ASX 200.

Tiny stocks — some too small to even make the Small Ordinaries index — can see explosive gains, regardless of wider market conditions.

For example, NRW Holdings Ltd [ASX:NWH], with a market cap of $441.69 million, returned 120.56% in 2017. And small-cap stock Champion Iron Ltd [ASX:CIA] made some investors gains of 312.24% this year.

You’re unlikely — really unlikely — to see those types of rapid returns from blue chip companies like BHP Billiton Ltd [ASX:BHP] or National Australia Bank Ltd [ASX:NAB].

That’s one of the things that makes small-caps so exciting.  Yes, they can be risky. But the right small-cap companies also have the potential to return hefty gains even when most big stocks are floundering.

That’s why Sam Volkering, editor of Australian Small-Cap Investigator, likes to call the best of these small companies ‘shockproof’.

What is a shockproof stock?

In Sam’s own words:

A shockproof stock is a company that can soar no matter how bad things look for the economy, or the share market.

Usually they are small, nimble companies with more “horsepower” than any other shares on the market.

And they’re loaded with the potential to turn small stakes like $500 or $1,000 into enough money for a brand new car or a six-star holiday.

They tend to exhibit three key attributes…’

I can’t reveal all the details today, but you can find the three key attributes Sam looks for in ‘shockproof’ stocks here.

You’ll also discover the three tiny Aussie stocks he believes could make you big money in 2018. How big is big money? Sam reckons if you invest this week, that these three stocks could return gains of 506% by December 2018.

Get all the details right here.

And now for something completely different…

Why miners should stick to mining

Tobacco smoking causes an estimated 15,000 premature deaths in Australia each year.

That’s a staggering figure. And a tragedy for those affected, as well as their families. Especially as there is a ready solution.

If you don’t smoke already, don’t start. If you do…quit. (Sorry smokers, I did say a ‘ready’ solution, not necessarily an easy one.)

Yet, tobacco is only one of many legal substances chipping away at our life expectancies. You can add sugar, salt, fatty foods and alcohol to the list, for starters.

And then there are all of life’s dangerous activities. Like driving to work. Or climbing a ladder. Or surfing, skiing, and riding a bike.

Of course, one of the most dangerous activities of all is inactivity. Too much sitting, you know, can shave years off your life.

So do we ban people from excessive sitting?

Well, that’s unlikely to get voter approval. Unless, we target that ban to those under 21. That way only a very small minority of voters are impacted and we’re more likely to get the ban passed. And we might add, excessive sitting habits are generally formed in your youth. By banning excessive sitting until the age of 21, we’re likely to impart healthy habits for life.

Now, removing my tongue from my cheek, Andrew Forrest, founder of Fortescue Metals Group Ltd [ASX:FMG], has just proposed something right along those lines in a misguided effort to reduce smoking.

As The Sydney Morning Herald reports:

Australians would be prohibited from buying cigarettes until age 21 under a new cancer-fighting plan developed by billionaire mining magnate Andrew Forrest.

Mr Forrest and his wife Nicola are spearheading a major lobbying campaign to convince federal and state governments to raise the legal tobacco purchase age from 18 to 21 — a move they say would stop young people getting hooked, save lives and save government coffers up to $3.1 billion a year.

Thanks to Andrew ‘Twiggy’ Forrest for putting his full weight behind the nanny state. But increasing prohibition-like tactics on tobacco is not the answer. It may, in fact, lead some younger people to view smoking as ‘cool’ again. Because after all, it’s illegal!

Making something illegal — or taxing it out of people’s ability to afford — only drives it underground.

We’ve already seen this with cigarettes. The government’s massive excise taxes have seen criminals moving in to supply much cheaper (illegal) tobacco, often sourced from overseas. This trend will only grow as the price of a pack of smokes is driven up to $40.

And if the government follows through with Twiggy’s masterplan, the criminal justice system will be pulled in to police its enforcement as well.

That will see store owners dragged into court for selling tobacco to someone deemed capable of fighting in our military…but not capable of deciding whether or not to light up. And it could see a 22-year-old arrested for buying a pack of cigarettes for their 20-year-old partner.

Prohibition is never the answer. Not with alcohol in the 1920s US. Not with the colossal failure of the war on drugs still raging today. And not with cigarettes.

Transparency and proper education are the best bet at getting Australians — young and old — to make the right personal choices. But as a nation, we must recognise that not everyone will make the right personal choices.

That is the price of freedom.

And freedom of choice — for both businesses and individuals — is something we’ll be covering in detail in Port Phillip Publishing’s brand new e-letter, The Australian Tribune.

The Australian Tribune is 100% free, delivered to your inbox every morning, five days a week. And if you decide it’s not for you, you can unsubscribe at any time, with no hard feelings.

If you’d like to see what it’s all about simply click the link below and you’ll automatically be signed up.

Yes, I’d like to start receiving The Australian Tribune right away. 

That’s all for today.

Cheers,
Bernd