Investing Chris C Style

This is one for Chris, can you suggest the kind of investment strategy you've got in place to address your debt concerns?

My own is based on the obvious tax advantages associated with investing using debt, but I'd be keen to see how you manage what you obviously see as a large debt risk.

Doesn't have to be your own figures but I'm interested in your concepts i.e. still using debts but protecting with puts? Using a lower LVR? Contrarian investment in major events?

Cheers,
Vagon

 

Sorry about my slow reply I wanted to make a considered response plus I have been quite busy "investing" in my relationship with my girlfriend over the last week or so because she thinks I am investing too much time on InvestEd and not enough with her...



Well firstly I think it's important to note that when someone asks me at a party what I do for a living, I don't respond with "professional investor" so I don't try and derive a living from my investments alone nor specialises in refining investment strategies to maximise yield.

When it comes to investing, my strategy at this stage in my life is a low risk, low personal investment (time), with the primary focus of being a store of wealth for later consumption (in a "real" sense) plus accruing a reasonable return which closely correlates with the technical efficiency gains of production in local and global businesses as well as reasonable compensation for risk of capital. It's that simple.

Given this, I opt for simple investing, the sort of investing that the average Australian should partake in given that if they like me and not professional investors, and as such should not act like it.

So I'm not a trader, in that I prefer not to bother with trying to "time" markets (with the exception of trying to avoid buying overpriced assets), nor will I ever be a trader or professional investor unless I have a capital base that is large enough to justify trying to create a living by beating the market and that is above and beyond that from which I can obtain from selling my time into the workforce or in a business when all things are considered. This I believe will maximise my return over life.

So as a simple investor what do I like - low cost, no leverage, diversified, listed funds.

Low cost means, if you don't have a capital base to effectively diversify yourself (the majority of Australian probably never will), opt for a listed fund that offers the diversification at a low cost and no hassles to the investor. By this I also subscribed to index based funds rather than actively managed funds given that traditionally the cost of management isn't recouped by improve performance.

No leverage means exactly that, nothing to amplify my loss or gains given that I'm not a professional investor/trader nor do I have the expertise to effectively "time" the markets precisely. So until I have such expertise to realistically trust my judgement to effective know "what" and "when" it makes little sense in my mind to justify rolling the dice just to obtain a tax savings.

Diversification means exposure to shares, property, cash, commodities including international exposure. You don't have to physically own a property to have exposure to property, same goes with commodities, and the weighting doesn't need to be an equal split, but as a rough guide probably no more than 50% in any class would be advisable. Diversified international exposure whilst highly recommended also probably shouldn't be much higher than 50% if one is expecting to live their life out within Australia.

In many senses most Super funds offer a good range and reasonable weighting of diversification with their balanced options, though I don't like that they often don't also add some small exposure to investment classes like commodities and agricultural land, but some of this exposure is gained through equities, I just feel it probably isn't enough, and I also feel probably a bit too much weight is given to cash and fixed interest investments. Though in aggregate I think they offer a reasonable balance.

What I don't like - debt and government intervention.

Using debt makes sense when you can use those funds to produce an income source that is above that of the cost of funding and risk (in a real sense). The vast majority of household and consumer debt in our society is used to buy consumer items (including housing) we can't afford and that don't increase our earning capacity. Therefore it is bad debt.

Debt when it is used to purchase assets that have negative earnings after all expenses are considered is also a bad use of debt (like negatively geared property and shares purchased with margin loans). This sort of credit expansion just create speculative bubbles that create beliefs of artificial wealth and undermine social productivity.

I also believe governments are always going to try and stick their fingers in pies, steal slices of the same pie and they will sometimes help but they will just as often hinder. So investing based on temporary government incentive and gimmicks is asking for trouble over the long term.

Super seems to be a good government scheme, but I'm just so young and have so little faith in governments to do the right thing over the long term that I just don't see the tax saving as enough to mitigating regulatory risk especially when I run a small business and am able to yield much better returns on my equity than would be yield from super. Though I appreciate that for most investing into Super will often be a good option with low risk if you are close to retirement.

Ultimately government are beholden to the same financial laws that the rest of us are, in that they can't spend more than they earn forever, and given that they don't produce anything, every dollar they give needs to first be taken from someone else. And government like in all natural systems (capitalism) will see its frivolous excesses eventually eliminated in order to survive in the long run. So investing based on the government inefficiencies being able to continue in the long run is a high risk game of regulatory timing.

So for the government to be able to fund hand outs like FHOGs, super co-contributions or offer tax savings to investors that lose money on a regular basis it needs to be made up by other individuals within the economy (eg - discriminatory taxes on mining companies). And every new government bureaucratic job created within this economy makes it slightly less competitive and productive and more complicated despite the governments best intentions.

At the end of the day the idea that government can keep expanding its subsidisation of health and welfare is as nonsensical as the notion that credit can expand exponentially. At the end of the day someone has to do the work and pay the taxes, and last time I checked government weren't in the business of production they were only in the business of getting re-elected, lining their pockets and greasing the economic cogs (and in that order). So be careful of government promises, financial realities can bite back hard (ask the Greeks).

So if you really want a tax effective investment strategy while living in a Western lifestyle move to country with an efficient and effective government, like Singapore. That's what I plan to do eventually. After all in our globalised world governance itself may even become a competitive industry and when it comes to supporting good business the only way to do it is by voting with your feet.

Some reading this might be thinking - well this doesn't really help me, and all I have to say is that, this thread was started to find out what's "Chris C's Investing Style" so I'm laying out for you. It's not popular (I know), it is not practical for everyone, but it's the way the world is, and I'm not looking to be popular nor am I looking to be average Joe either. This is just a very simple strategy that takes into account some very simple principles that I believe will be effective in the long term because they are based on fundamental laws of finance and thus avoid the common pitfalls that come from a short term rent seeking attitude.

Moving off a topic, an important factor for anyone reading this needs to appreciate is, what I'm investing for.

Firstly I don't plan to live in Australia all my life, I plan to live in whatever country best suits my situation, thus I need to be adaptable and as liquid as possible.

Secondly, I don't dream of making a million dollar so I never have to work again. I dream of having the capital to give me the time to work on whatever I want to work on (my passions). I actually enjoy working, growing and optimising businesses, it may sound weird to some, but it's a bit of a passion of mine.

So for me having time and the ability to spend that time how I please is the goal. Not to have all my equity tied up in paper profits and illiquid assets that are not easily divisible and require me still to work a job I hate.

This also extends to other important future life goals like raising a family. I want the ability to best invest in my children - whom I know will both be the most important investments I ever make and potentially the greatest achievement of my life. So investing with this in mind makes me value safe, secure, adaptable, and low time involvement style investments.

Thirdly I am looking to apply an accumulation strategy, rather than a short term investment strategy to save for a deposit on a home or anything. So more than anything I'm looking to buy asset classes that are priced at good to reasonable value and hold until the equity can be better utilised elsewhere.

Also so often all we talk about on these forums is money, but from my perspective, money has always been just one focus of my time, the other four areas of my life that I'm always looking to invest in are my health, relationships, experiences and education. These four plus an investment in my financial matters make up the elements of my life that I never outsource and am always trying to invest more into.

Why do I tell you about these other investment areas, because I think they can be some of the most fruitful areas to invest in, and with exception to health, investing in each of those other areas will help improve earning capacity over ones life and that's what it's really about - maximising earning capacity through maximising our ability to add value.

At this point I'll just copy what I have already mentioned in another post on these forums:

The above point was copied from the thread - http://www.invested.com.au/85/leverage-strategy-37587/ - which I have elaborated extensively on my opinions on leveraged investing.

With all this said I'm actually in the process of selling my investment property, it's under contract at the moment, which if it sells should leave me with around $70,000 in equity to invest, and some might be interested in knowing what I plan to use that money for.

At this stage I'm mainly focussed on getting at least another $10,000 to $20,000 into business projects. This will be my primary focus because it will net the highest return for me.

From there I'm likely to increase my exposure to precious metals - probably another $5,000 - $10,000 in physical gold and/or silver. All around the world there is just too many debt issues which to date are being papered over by, so I want protection from that.

I will probably put another $10,000 - $15,000 into an index fund like STW. Though I may consider a staggered entry into the market if it gets much higher than it is now, I'm still quite worried about prospects for short term deflation, though have a longer term concern about inflation (thus the large precious metal exposure).

I will also probably put at least $10,000 into a low cost international diversified fund, with a slightly larger focus on developing markets, though like above at this stage I do have quite a few reservations about the prospects for developing markets in the short term if this sovereign debt crisis continues to grow as already there seems to be signs of a renewed trend towards "flight to safety" investing that really hurt the developing markets last time around, not to mention there are people raising questions about bubbles within emerging markets due to increased debt levels and hot money. So once again I will enter with caution and may look to dollar cost average in.

As for property, I will probably avoid investing any money in it at this point because I don't think it provides good value at this stage. That said I might look at investing in a large diversified property management group that has exposure to multiple economies around the world (particular developing nations with low debt levels), though I expect it would probably hard to find a firm or fund that gets good exposure to both developed and developing property markets, though I haven't done a lot of looking at this stage.

The rest of the money will remain in cash, and like I said, I do think there is a reasonable chance of more short term deflationary pressures on world equity markets so I do want to be holding a bit of cash in reserve in case some buying opportunities present themselves, particularly in emerging markets. If this wasn't to eventuate I would probably consider putting more into STW, my business or potentially some long term, higher yielding developing country bonds.

With all these investments I am really thinking long term, like life long investments, which is what I think more Australians should be doing (even though many are via Super).

The reason I think this is because of the following...

Anyway I think the above gives you a general idea on my investing strategy. Please bare in mind that I do believe in traditional things like taking advantage of tax minimisation where possible, but I don't believe in making investments based on short term regulatory inefficiencies and government gimmicks or tax advantages.

Once again sorry about the slow reply, I have had the draft of this post written for a couple of days now, just never got a chance to complete it and post it.

 

Thanks Chris,

I am always confronted by the length of your posts. So I boil a pot of tea before reading and sipping.

I am a one finger typist, so I imagine you can type. I am impressed by your grammer and content and imagery.

I wouldn't have taken you to be interested in indexing. How long have you been investing in this form and what research have you done in this area?





Johny.

 

LOL - if you think they take awhile to read, imagine how long they take to type and revise... but yeah there is just so few things in the world that are black and white and I don't know why but I always feel compelled to make caveats for everything.

Also I feel like I should try and explain as much as I can, because there are a hell of a lot of people reading these posts on InvestEd, so I feel compelled to give them something worth reading.

LOL yes I can type... I was the sort of kid that grew up with chat programs like MSN - so you learn to type fast otherwise you are relegated to never being able to have your two cents.



I even tell my father to this day he needs to start chatting with people on chat programs to improve his typing speed. It is so frustrating watching him two finger type his way through his back log of emails everyday.

To be completely honest I don't own any index funds at the moment. All my capital is still tied up in my IP and my business and some gold stocks and GOLD ETF. Though with my IP set to be sold late June that will change soon.

I imagine one day in the distant future I might become an active manager of my investment portfolio, but at present it just doesn't make a lot of sense with such a small capital base - I really got more important things to focus in my business. In all honesty I'm trying to reduce the amount of time I invest into economic related reading and posting on forums like InvestEd.

That said low cost index funds are what I recommend to anyone who asks my opinion. They are just the simplest way to go about investing in shares without needing to know too much. I have just too many family and friends jump in aggressively picking specy stocks with margin loans thinking they are pros in general up trends but then lose their shirts when the specy stocks turns out to be nothing more than a bad gamble. So many people just want to get rich overnight, and I'm always just trying to explain to them that most rich people get rich slowly applying relative simple principles.

As for why I'm personally a fan of indexing, a fair bit of it has to do with the fact that I spend much more time studying the macroeconomic elements of economies, and I just feel that it's easier to pick a country that is likely to grow over the next 5 - 10 years than it is to pick a company that is likely to grow over the next 5 - 10 years.

Of course that's just my personal preference, and I appreciate that loads of people prefer the complete opposite to me and would much prefer to study the accounting books and microeconomics of a firm rather than the countries overall economic situation which the firm is within, but each to their own.

 

Good post, Chris. FWIW, I think you'll do extremely well with this approach.

 

That's the plan...



At the end of the day I think the underlying principle of my whole strategy centres around that I expect "nothing for nothing", in that I'm not expecting "something for nothing" which I sometimes get the feeling that others in society have become accustomed to, be it in form of cheap credit and continued credit growth to prop up asset prices or be it excessive government welfare payments, vote winning handouts and tax advantages.

I honesty just aim to put in a fair days work for a fair days pay, then tuck away the money I don't need into a diversified portfolio for a time when I do it. That simple. No gimmicks. No tricks. Just a lot of common sense.

 

Johny,
I am also challenged having to read the length of what Chris puts down at times.
I have said before that in my view creating wealth is about using other peoples money wisely, it is a finance strategy using leverage to invest in capital growth assets. You need to factor in safety nets and have adequate risk insurance in place to mitigate most risks, but not all.

I advocate and invest in property simply because the lenders are still lending up to 90% of the asset value and you do not have the margin call risk.

I am not a big follower of shares as I do not understand the movements of the share market. However as part of a course I did, it involved looking at finance strategies and investments and the overwhelming research evidence and was that low cost indexed funds outperform market traders something like 84% of cases if my memory serves me correctly. These traders are the major fund managers, the experts. what that says to me is how on earth is an individual going to do better than these experts who do not even produce results that the general market does itself.
Good luck in investing
Greg

 

Back at you, I've been travelling in Vietnam and Cambodia and so I haven't had a chance to read this until now.

Thanks for your time, it's interesting to see that we're not that far different in strategy excluding that you favour physical commodities and I probably use more leverage.

 

There is nothing wrong with using debt/leverage when it's used appropriately. It's just that most people that use leverage don't understand they are speculating, not investing.