Love this @DVV1974. I'm a huge fan of Howard Marks.

Uncertainty is an essential ingredient if you ever hope for outsized returns. The less uncertainty, the lower the return. The more uncertainty, the higher the (potential) return.

Or, perhaps more precisely, you want a situation where the wider market is less certain than you are (due to an informational or analytical advantage) and where there is a good degree of asymmetry in the range of possible outcomes.

I was just searching for a topic for tomorrows email, so I think I'll run with this!

@DVV1974 One of the advantages of being a retail investor is that you can choose what point on the risk curve you want to play in and, of course, size bets along the curve accordingly as you move along the curve

Understanding the existence of a r/r curve and accurately assessing the risk/return is, of course, critical.

it is not good enough to understand risk ex-post (oh that was a disaster, must have been risky.....:)

good luck with it....my favourite Hm graph below

Risk is ensuring your strategy is resilient to events you can’t predict.  Uncertainty is not knowing what is going to happen.

Manage risk, embrace uncertainty.  

What a great chart @Solvetheriddle

And well said @ArrowTrades

I'm stealing that :)

@Solvetheriddle ditto - nice graph.

If I understand this correctly, I'd add that what I look for in my holdings, is assymetry in the distribution of returns around the expected value - at any point along the risk curve. I'll work higher up the risk curve if I assess the assymetry to be strongly in my favour. For this to be valid, I have to believe that the market is mis-pricing the uncertainty, relative to my view.

This is also why I seek to value holdings using a p10-p50-p90 range of values. Of course, I'm not kidding myself that I can really judge those probabilities with any accuracy - that would be absolutely delusional. But I find the discipline of trying to get to those kinds of numbers helps me make decisions that are rational rather than emotional.

Furthermore, to the extent that SP volatility bears no relationship to the fundamental value and risk of the business, then this adds option value around buying and selling decisions. Literally, I can decide which pitches to swing at. And unlike baseball, I can pass as many times as I like, until I get a pitch I think I can knock out of the park.

... just testing my understanding of what you've been writing.

Personally, I've found your posts very helpful, and a reminder that it can be very valuable to go out onto the pitch for innings after innings, and not hit anything. Psychologically, it is easy to fall into the trap of feeling like you've done some work because you've transacted. That's a false KPI.

All i have to say is No Risk No Fun..... ;-) (Dietrich Mateschitz (Red Bull founder) often used this in his business dealings)



Yes this was great wisdom as always from HM. And his new memo out today "Shall we repeal the laws of economics?" is gold. He takes aim at both sides of politics, for the folly of their many "first order thinking" attempts to alter the course of the economy. Not sure there was too much you could do with the insights as an investor this time but nevertheless it was so well laid out and hopefully a few pollies read it...

@mikebrisy i agree with what you said, the only thing i would add, this is my opinion, it is difficult to assess risk unless you have experienced a wide enough universe, so you can calibrate, secondly, i do see excess volatility as potentially a danger sign (leaving aside illiquidity) it needs to be followed up with what is making the market jumpy. That doesn't mean i won't buy but I need to explain that vol (I still can get it wrong after that lol)

@Solvetheriddle excellent points. Well said.

I do try to assign a cause to SP volatility, and unless I have a well-founded hypothesis, I won't act.

Referring back to the graphic you posted, the ability to assess risk/uncertainty is fundamental to knowing where you are along the curve. And I totally agree with you, that capability grows with experience. In fact, I think it is one of the main components of a circle of competence.

And, of course, being able to assess risk and uncertainty doesn't make it go away. So even with the best assessments, we'll lose sometimes ... but hopefully we'll win more often, and when we lose we'll not be too surprised!

Great discussion on risk here. Here's what Marcus Padley had to say in his MarcusToday Saturday email today about the US' attitude to risk during the past week on the back of their rate cut:

The main event last week of course was the FOMC Meeting and the decision to cut rates by 50bp instead of 25bp. Initially, the US market didn’t react, but the next day the markets got the bit between the teeth as the big fund managers decided it was “game on” in equities, and some of the brokers started to raise their S&P 500 targets and speculate about another 50bp in November followed by another 25bp in December. I think you call that a “Fast Start” if it happens.

The consensus is that rates will be cut by 25bp in each of the next three months, then by 100bp next year and another 50bp in 2026. Stronger than expected Australian jobs numbers this week killed any chance of the RBA even thinking about cutting rates. They have a meeting on Tuesday.

Perhaps the most positive part of the Fed meeting last week was the "calm". The idea that the Fed are in control, “on the curve” and anticipating a soft landing. There was no mention of a recession risk, on the contrary, the jobs market was described as strong and inflation is clearly on its way back to target. Very Goldilocks. Equity market prices are a combination of value and risk. Value rose this week (lower interest rates means higher profits) and risk fell.

--- end of excerpt ---

While he mentions our Australian Resources sector being up during the past week, the movements of our biggest two miners overnight was down:

Wall Street didn’t do anything - our futures are interestingly down 68 points this morning. I think you can blame that on Resources, with BHP and RIO down 2.54% and 2.47%, reversing some of their 3-4% gains the day before.

The ASX 200 was up 1.35% last week (+109) hitting a series of record highs. Dow Jones up a mild 38 points overnight, with the NASDAQ down 0.36% and the S&P 500 down 0.19%. Quiet night, no major releases.

Last week the NASDAQ was up 1.49%, the S&P 500 was up 1.36% and the Dow Jones was up 670 points. Interestingly the European STOXX 600 was down 0.33% last week. The Bank of England and the Bank of Japan left interest rates unchanged last week. As expected.

--- end of excerpt ---

Despite at least one day last week when financial were down and resources were strongly up, financials (banks) still outperformed resources over the week:

However, in terms of us (the ASX) being back to "risk on", that idea is certainly backed up by the traditionally defensive sectors of healthcare, consumer staples and REITs all underperforming last week, as shown above.

Here's what MP had to say about our Aussie banks this morning:

An incredible performance from the banks last week with the bank sector up 2.37%. The CBA was up another 2.0%, the NAB up 3.6%, Westpac up 4.6% and ANZ up 2.4%. It’s relentless. The odd thing at the moment of course, is that the banks have relentlessly performed since November last year (when it became clear that interest rates had peaked), and they continue to perform. It’s very hard to buy them at these prices, and then they go up again. The buying has to be a combination of passive money coming into ETFs (hence banks) and international money coming into our market focusing on the big stocks. Most of the domestic institutions set and forget and rarely bother adding or subtracting from the biggest banks. The mobile money is international. Retail isn’t pushing them, the buying is too big.

One day, probably when the market has a significant washout, the banks will underperform from these levels, there are a lot of profits to be taken, but for now, you just hold on until the top or simply accept that you are never going to sell them and forget about trying to cutely sell them so you can buy them back 10 to 15% lower. It may never happen. Some of you have capital gains tax issues. Some of you have bought them at prices which means the yield is not what it appears to a new buyer today, on your purchase price, they are yielding 10% or more! 

--- end of excerpt ---

I actually think that some of the commentary from Marcus today is a tad more insightful and informative than usual, but then I am usually fairly cynical...

What he said there backs up Matt and John's views at WLE (WAM Leaders) in terms of the banks and particularly CBA. Matt said on their recent webinar that when you look at CBA vs CSL, it's an absolute no brainer to rotate money from CBA into CSL if you're betting on growth over the next 5 or 10 years (I'm paraphrasing but something along those lines - I have got the two companies correct) but that while passive and overseas money continues to prop up these Aussie banks at these rediculously high levels, WLE has to hold them purely for risk management purposes (so as not to fall too far behind their benchmark index which is dominated by those banks), but that they remain ready to pivot out of them very quickly when the tide turns, which they believe it has to, because a company like CBA, as good as it is, is NOT worth an infinite amount of money, and it's more expensive than some American banks now that have significantly larger book values.

Anyway, my Aussie financials exposure is just via WLE (my largest real-money position), and beyond that I am giving the banks a wide berth.

Back to our market last week, there was clearly some sort of rotation out of healthcare, due to the risk-on move, as shown by the top 50 losers shown in the top right corner of the table below:

For FPH, RMD, COH, SHL and CSL to ALL be among the top 50 companies whose share prices fell the most last week while the ASX200 hit new record highs does tell us something, however a few of those names are coming off phenomenal years where they have provided their shareholders with superb capital gains, so I don't think they are sells here, just a bit of profit taking with some (FPH, RMD) and sector rotation happening I think.

I note that the "up" move on the left side of that table were generally of greater magnitute than the "down" moves on the right side, hence the ASX making new all-time highs during the week.

There was clearly some profit-taking across the gold sector (WGX, RMS, EMR, GMD, down between -4.1% and -5.6%), lithium stocks began falling again after the spike the previous week that may have signalled a bottom (MIN, PLS, IGO, LTR all down by between -3.7% and -7.2%), and there were some Telco and Energy Infrastructure and Utilities companies sold down as well (CNU, TPG, SPK, MCY, MEZ).

Auckland International Airport (AIA) and a couple of the larger toll road operators (ALX, TCL) were also sold down, further suggesting that people are moving out of safer / reliable options (slow & steady growers) into higher risk/return options like Zimplats (ZIM, +10.5%), De Grey Mining (DEG, +8.9%, Australia's largest gold project developer, no production yet, but plenty of promise), QAN (possibly a play on lower aviation fuel prices translating into higher profits), biotechs and pharma companies like Clarity Pharma (CU6, +14%) and Telix Pharma (TLX, +6.6%), and also into some of our mid-tier or secondary-level miners like Alcoa (AAI, +10.2%), Capstone Copper (CSC, +10.5%, a CDI for a US copper miner), and Zimplats (ZIM, +10.5%, who produce Platinum Group Metals - or PGMs - in Zimbabwe).

For those who are trying to minimise risk via the use of ETFs, even those had winners and losers during the past week:

Although, to be fair, the biggest losers in the ETF space appear to be concentrated or specialised ETFs rather than broader index tracking ETFs.

Here's a list of the larger ones and then a selection of the sector or thematic ETFs below:

And they were all mostly up.

Below are a selection of events that the Aussie "market" might be taking some direction from during the coming week:

Our main event this week is the RBA’s rate decision on Tuesday at 2:30pm. Marcus says:  "Hold inevitable. Central banks around the world have begun cutting rates with the Fed kicking off their easing cycle with a 50bps cut this week. It's extremely unlikely given Australia’s current inflation level at 3.5%, Michele Bullock's regular reiteration that there will be no rate cuts this year, and after a stronger-than-expected jobs number last week, that the RBA would entertain for a moment the idea of a cut. The RBA inflation target is 2%. Consensus among economists is a Febraury cut next year."

So, as long as we don't get any big surprises during the week, the stage is set for onwards and upwards I reckon (more "risk on"), but anything could happen.

24-Sep-2024: Well, Marcus has called it today:

"The 'great rotation' kicked in with resources doing very well following the PBoC firing its 'bazooka' and the banks fell after the RBA held rates unchanged for the same reason as last time. The Big Bank Basket fell to $240.49 (-2.8%) as CBA dropped 3.0% and NAB fell 3.0%. Other financials held, with MQG up 0.9% and CGF up 1.3%."

He could be right.

I would have thought that Banks would continue to do well if interest rates were not moving down until early 2025, but perhaps the market is pricing 6 months into the future now?

Definitely happy with Resources coming back up!

I think @pubenvelope that the banks are very expensive even if they do have a good outlook. It's really not about how well they will do so much as how massively overpriced they have become, particularly CBA, which is more than 3x book value now - MUCH more expensive than US banks. CBA's June 30 (2024) book value was $43.71/share (according to https://stockanalysis.com/quote/asx/CBA/financials/balance-sheet/; Commsec has them @ $43.67/share Book Value at June 30) and they closed yesterday (Monday 23-Sep-2024) @ $142.39/share. That's almost $100/share MORE than their book value.

Further Reading: https://simplywall.st/stocks/au/banks/asx-cba/commonwealth-bank-of-australia-shares/valuation Their system is automated, however they give CBA a score of zero out of six for valuation, so CBA are expensive based on 6 different metrics.

By contrast - in the USA, where some of the largest banks in the world reside, listed on the world's largest and most liquid sharemarket, and one of the safest places to invest globally, banks are trading at close to their book value, not three times their book value!

See here: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/pbvdata.html

Yes, sure, this is now 8 months on from when that table above was compiled, but even if the US banks had doubled in price, which they haven't, and even if their book value hadn't risen at all, they would only be at just over 2x book, and CBA is 3x book value.

Our other banks are expensive, but CBA is by far the MOST expensive of them.

The argument has been that passive flows (ETF buying) as well as overseas money flows - so money that can't be invested in China and other markets that are considered to be uninvestable now due to extreme risk and lack of the rule of law and/or lack of a suitable regulatory framework that provides confidence that investors have all the info we need to invest in those companies on/in those markets in a fully informed manner - are building the demand for our larger and liquid shares (like our big banks) up to levels that can not be sustained - because their current share price levels are not based on valuation; they're based entirely on increased demand to own shares in them with no or very little regard for intrinsic valuation or even relative valuation.

Short version is that as the market rises, more people want exposure, and part of that is through more buying of index-tracking ETFs, and the largest components of those ETFs are - in Australia's case - our ASX20 companies (largest 20 companies in Australia) and in the case of discretionary funds (i.e. not ETFs) particularly the banks which do not have the commodity risk associated with BHP, RIO & FMG (who are all also in the ASX20). And banks are generally considered to be a "safe" investment, as they are considered too big to fail, and will be bailed out by the Australian government in a crash or meltdown (if needed).

So those Aussie banks get bought up more than smaller ASX-listed companies when there are inflows into ETFs that track the ASX. Which drives their share prices ever higher.

And money from overseas investors is now making its way into the ASX like never before, partly due to Australia being seen as a relatively safe place to invest, and that overseas money has mostly gone into the stocks seen as the largest (most liquid), safest and least risky, with the big 5 banks at the top of that list, despite their already very lofty valuations.

So far in 2024, the majority of that money coming in from overseas has been going into our largest stocks EXCEPT for our largest miners, because of commodity exposure risk, particularly iron ore exposure risk through our largest 3 miners (BHP, RIO, FMG). What changed today?

This did: China has finally delivered some stimulus: https://www.washingtonpost.com/world/2024/09/24/china-economy-stimulus-measures/

So now the outlook for our big miners looks a little bit brighter. Is it enough for significant money to rotate out of our overpriced banks and into our miners? It was enough today, but let's see if it's the start of the "great rotation" or just a blip on the radar.

And just when I was understanding fintech.

Good to see measures to prop up the stock markets over there through asset pledges.

It's not enough in my opinion.

Need to see real measures to bail out the property sector as well.

Pay out the money that is still owing from unfinished projects.

And also the massive infrastructure spend that happened during the GFC.

BTW: Develop did not respond to any of the news.

I think it was more about iron ore sentiment improving today @edgescape .

DVP will have their day. Just not yet.

I hope to be back in when they do start producing and Bill gets into some serious M&A again in a more positive commodities environment.

On the sidelines again ATM.

@pubenvelope - I should also mention that if there is a serious rotation from the ASX's largest sector (financials) into our second largest sector (materials) which includes mining, then it will start with overseas money and instos and fund managers including those that manage Australia's massive pool of superannuation money, and then as mining company share prices rise and banks fall, the index-tracking ETFs then rebalance to track those index weighting movements.

So ETFs don't cause the rotation when it does happen, but they add some momentum to it.

One day isn't enough to call it, in my opinion, but it was obviously enough for Marcus Padley to call it in his market-close newsletter this evening.

Hope he got this call right.

Couldn't agree more re the banks @Bear77

@Bear77 Love the insight to this thank you very much. It sounds like this will cause the ASX200 to maintain levels if the money is simply cycling into resources and other companies. Perhaps I should look at grabbing a few ETFs that track the 200 as a hedge.

Parking money in an ASX200 tracking ETF would have worked out pretty well over the last few years @pubenvelope - and is a lot easier than stockpicking. However, we never know what's going to happen; we can only work with what we think is likely to happen, but also have a back-up plan if things don't pan out that way.

Looks like someone heard my DVP rant and sent the share price up today.

Going to sell DVP into that rally here (SRL) now and rebalance. Because it is so easy to do that here.

Still holding most of what I have IRL as I'm already in profit.

Woodlawn to me is a fairly ordinary project that lacks scale.

You probably need knowledge of keyhole surgery to mine Woodlawn but there is no equipment to do that in the mining world.

It's also strange that RHI hasn't done anything while the Iron Ore price has rallied.

Further to Marcus Padley's "The 'great rotation' kicked in" comment on Tuesday (2 days ago), here is a tiny snippet from his mid-day email today:

• Resources rally slows on “China stimulus scepticism” as short squeezes ease.
• Should we sell some banks in the Income Portfolio? You might. We’re not.

So... no rotation then?

@Bear77 Ha! Things can move pretty fast these days. Hard to keep up!!! Rotation one day, gone the next.

Yeah @Arizona - things DO move pretty fast, like between his mid-day email and his after-market email this evening in which he said:

"ASX 200 closed up 77 points to 8204 (+1.0%) as resources took off again and banks stabilised. More Chinese stimulus announced. Modest losses in the big four with CBA down 0.4% and WBC off 0.7% with the Big Bank Basket at $235.04 (-0.3%)"

Okaly Dokaly...

Hey, one of these things (below) is not like the others:

Energy down -1.1%? Could it have anything to do with the elephant in that room being down -2.7%?

Good chance!

Copper sentiment is rising. Sandfire (SFR), Australia's largest pure-play copper company hit a new 12-month high today:

If one graph could sum up why China is propping up their banks, it's this one:

The line is NIM (bank's net interest margin) - which is down to zero, and the columns are non-performing loans (bad debts). You couldn't describe that as a healthy banking system. Just another reason why more and more money has been finding its way across the ocean into our big banks over the past couple of years.

I think economic and financial system stimulus by their central government is certainly called for, but whether that means a turning point in global commodity prices is yet to be determined - in my view.

China getting out the firehose now.

They know something is wrong.

Going to be interesting if it works.

Market happy to give this a pass.

Too bad I'm underweight on gold and resource stocks now apart from DVP.

I guess I should not have seen that slide on fintech. Note mining and gold is not even there!

While the banks were being sold off and the miners being bought, it is interesting that the top overvalued firms like Netwealth and Hub24 held firm today

I'm afraid the party is not over yet for these puppies even though everyone thinks they are too expensive

WTC and PME also rose

Again the sad fact is, demand is still exceeds supply and those lower price targets mean nothing when that happens.

And what is so sad is that there are investors holding here and saying too expensive but won't sell because

1. Huge CGT bill

2. There is no alternative that is better than these companies and therefore no reason to sell.

and this exacerbates the demand / supply curves further.

Almost like a miniature version of the housing market, lots of willing buyers and no willing sellers. So buyers will take what is on offer even if it is expensive

Like what I said about "doom loop"?