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Avoiding avoidable mistakes

Avoiding avoidable mistakes. Tim Farrelly August 2010. Avoiding avoidable mistakes. Bubbles are big and compelling The damage is significant and long term But can they be identified in advance? Can we avoid them?. Bubbles – big and compelling. …but cause significant damage.

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Avoiding avoidable mistakes

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  1. Avoiding avoidable mistakes Tim Farrelly August 2010

  2. Avoiding avoidable mistakes • Bubbles are big and compelling • The damage is significant and long term • But can they be identified in advance? • Can we avoid them?

  3. Bubbles – big and compelling

  4. …but cause significant damage

  5. Significant….. and permanent 1. 19 years after peak

  6. Can your clients afford one or more of these experiences?

  7. Avoiding avoidable mistakes • Bubbles are big and compelling • The damage is significant and long term • Can bubbles be identified in advance? • How can we avoid them?

  8. The Occam’s Razor approach tp long term forecasting Income + Growth in income + or - Effect of change of PE Ratio

  9. EPS PE Price Contribution $1.00 10 $10.00 Income + Income Growth + PE effect 5%pa Total Long run returns-an example 5%pa

  10. EPS PE Price Contribution $1.00 10 $10.00 Income +7%pa + Income Growth $2.00 10 $20.00 + PE effect 12%pa Total Long run returns-an example 5%pa

  11. EPS PE Price Contribution $1.00 10 $10.00 Income +7%pa + Income Growth $2.00 10 $20.00 +7%pa + $2.00 20 $40.00 PE effect 19%pa Total Long run returns-an example 5%pa

  12. EPS PE Price Contribution $1.00 10 $10.00 Income +7%pa + Income Growth $2.00 10 $20.00 -7%pa + $2.00 5 $10.00 PE effect 5%pa Total Long run returns-an example 5%pa

  13. Forecasting Australian equities returns

  14. Forecasting Australian equities returns

  15. How fast can companies grow their earnings?

  16. Capitalism at work…

  17. Forecasting Australian equities returns

  18. Forecasting Australian equities returns

  19. Where will PE’s be in 2020?

  20. Where will PE’s be in 2020?

  21. Forecasting Australian equities returns

  22. Forecasting Australian equities returns

  23. Forecasting Australian equities returns & bonds

  24. What did this framework indicate about bubbles? • US REITs • The internet revolution • Japanese equities • Gold

  25. As at March 2007 REITs yields are historically low Source Nareit

  26. As at March 2007 Price/Distribution makes US REITs look extremely overstretched

  27. What lemmings believe…

  28. As at March 2007 US Equity REITs forecast

  29. 10 Year Forecastsas at October 2000

  30. Realistic 10 Year Forecastsas at October 2000 Based on 2010 PE of 21

  31. As at December 1988 Japanese equity forecast

  32. Gold really is an inflation hedge.

  33. Avoiding avoidable mistakes • Bubbles are big and compelling • The damage is significant and long term • But can they be identified in advance? • How can we avoid them?

  34. Avoiding bubbles : even smart investors are at risk Newton invests a bit From GMO: Isaac Newton’s Nightmare

  35. Avoiding bubbles : even smart investors are at risk Newton exits happy Newton invests a bit From GMO: Isaac Newton’s Nightmare

  36. Avoiding bubbles : even smart investors are at risk Newton’s friends get rich Newton exits happy Newton invests a bit From GMO: Isaac Newton’s Nightmare

  37. Avoiding bubbles : even smart investors are at risk Newton re-enters with a lot Newton’s friends get rich Newton exits happy Newton invests a bit From GMO: Isaac Newton’s Nightmare

  38. Avoiding bubbles : even smart investors are at risk Newton re-enters with a lot Newton’s friends get rich Newton exits happy Newton exits broke Newton invests a bit From GMO: Isaac Newton’s Nightmare

  39. Markets can stay irrational longer than you can stay solvent Market first became overvalued in early 1985

  40. Japan was much worse… Market first became overvalued in mid 1983

  41. Again in the late 90’s

  42. US REITS first became expensive in 2004

  43. Gold a very long time in the expensive range…

  44. Don’t want to sell too early…

  45. Because we don’t know how long or how high… • Just don’t buy expensive assets • Sellers can take their time

  46. The new imperative in asset allocation • Bubbles are a recurring theme • The damage caused is significant and permanent • No one is immune from their charms • They can be clearly identified in advance • They are an avoidable mistake

  47. Disclaimer. This presentation has been prepared on the basis that it is only for the exclusive use of the person for whom it was provided. Although information is derived from sources considered and believed to be reliable and accurate, farrelly’s, it’s employees, consultants, advisers and officers are not liable for any opinion expressed or for any error or omission that may have occurred in this presentation. Any forecasts included are reasonably believed to be reliable based on current information but due to our inability to predict future events with certainty, they cannot be guaranteed. This presentation is of a general nature only and has been prepared without taking into account any persons particular investment objectives, financial situation or particular needs.

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