Sunday, 30 April 2017

Over Trading

I recently ran some tests on the portfolio to show the impact of turnover. This involved picking random start and end dates and then running two tests: how the portfolio itself (the 'active' portfolio) performed between those dates and how the portfolio would have performed if no changes were made to the initial portfolio at the start of the test period (i.e. just go to the beach - the 'do nothing' portfolio). 

You would hope the more actively traded portfolio would beat the do-nothing portfolio (otherwise what's the point in turning the portfolio over). I ran the test across four time periods across the last 17 months. Results were pre-tax, but post brokerage. Dividends are included, however franking credits are excluded (to make the calculation easier). I've assumed dividends aren't reinvested for the do-nothing portfolio (again, to make the calculations easier). 

The average value add of the more active portfolio was -0.7%. Yes, that' means trading has actually been a cost, not value-add. The active portfolio did perform better in three of the four periods, but one period (covering the last six months) was materially worse. Looking through the results, it is clear that some winners were sold too early and moving on to the next latest and greatest really is not always the best thing to do.

The results are even more pronounced if tax is factored in. Any capital gains from the very initial portfolio are unrealised.

These results are consistent with academic studies showing low turnover portfolios tend to beat higher turnover portfolios.

While it is not a long-time period and there could be some good/bad luck across the different portfolio, it's at least very difficult to argue that more frequent turnover is the way to go. Brokerage starts adding up. Companies need time to execute business plans. Yet, as a fairly active person myself, it is difficult at times to not take action. That's something to work on.

I should also note the individual stocks in the do-nothing portfolios at times have had a large degree of volatility. You do need a tough stomach to watch share prices bounce all over the place in the short term. 


Friday, 31 March 2017

AI and Stock Picking

There have been a few articles recently written about AI and the attack on hedge funds / funds management. Computers have been making in-roads for sometime, particularly in quantitative and algorithmic trading. My interest is in whether AI will start infiltrating classic, bottom-up fundamental analysis. 

One argument against the invasion of AI is the breadth of experience and information sources required: meeting company management, suppliers, competitors, ASX announcements, store visits - the list goes on. This argument seems reasonable. However, the opposite side of the coin is just how much any of this actually matters. It is an increasingly well-known fact that most fund managers fail to beat the index over time (particularly post fees). If you think about it, the index itself is a fairly basic algorithm (selects stocks based on metrics such as size and free float) that fends off most fund managers - most humans have already lost to machines. 

There are chunks of fundamental analysis that are manual and repetitive and therefore susceptible to AI performing the task. For example, a common hunting ground for the fundamental investor is to go through the ASX announcements, looking at company updates, insider buying/selling etc. I imagine a robot could trawl through these announcements and compile a shortlist and dossier of stocks meeting a checklist of investment criteria. A robot could identify a company buying back stock in decent volume, go back through years of announcements to compile annual and half-year data to identify the trend in financials. The robot could then probably search the web for products sales, compare with competitors and even check out the CEO's personal background. Google is the big obvious beneficiary of this. Just imagine the power of how much Google can understand about a company. Google can identify key word flow and website traffic and probably deduce the impact on companies. And all this can be delivered with zero emotion or bias. 

So not only do fund managers struggle at the best of times, it is hard to imagine how AI won't deliver a decent kick in the ribs in the coming years to mainstream managers. If there is an edge in fundamental analysis, AI could probably deliver it cheaper than humans. 

That being said, I think human managers will have roles in speciality areas. Start-up or young  turn-around companies are hard to quantitatively analyse (there isn't much data) and the quality of the management team are of higher importance - whether fund managers or a machine are best place to determine whether managers or winners or losers or not is another issue. Very illiquid, small companies may just be too small for AI to bother with. And there will be cases of joining the dots where AI may never catch up. 

If AI skims the cream from a lot of traditional finance professionals, they may be forced into the remaining niche areas such as venture capital and small-caps thereby overcrowding those trades and invalidating them anyway. 

Some individuals are particularly adept at buying in panic and selling in boom, however if AI increasingly displaces humans from markets, then irrational behaviour may also decrease reducing the ability to arbitrage fear and greed. 

It's really hard not to see how the landscape won't continue to change and get harder for humans. 


Disclosure: own Alphabet / Google (via 401k)

Friday, 24 March 2017

EGP Capital Launch Party

As part of the launch of 'EGP Capital', Tony Hansen is putting on some drinks and nibbles Friday 31 March at the Radisson Blu Hotel, Sydney. EGP is exceptionally managed and this provides you with an opportunity to meet the manager in person. And the best part is it's free - a probably once only event knowing the frugality at EGP. 

If you are interested in attending, please contact EGP Capital directly at


Saturday, 18 March 2017

PIE Conference

The PIE conference is being held Tuesday 21 March in Auckland. The company line-up looks to be high quality and will be worth seeing the CEO's present. 

I'm going to attend, and will be in Auckland Monday 20 - Wednesday 22 March. Please let me know (via the profile page) if you would like to catch up and talk stock ideas.  


Friday, 10 March 2017

Calling Out For Queensland Body Corporate Managers

I'm doing some research on a company that primarily distributes through QLD Body Corporate Managers. Given I, and some colleagues, are in the process of buying shares in this company, I can't disclose the name of this company at this stage. 

This company is very rapidly growing, offering customers big savings. I'd like to speak to some QLD Body Corporate Managers to get some industry feedback. Industry feedback is a great way of verifying management and stockbroker claims.

If you are or know a BCM then I'd be appreciative if you could get in contact or pass on someone's contact details. 

Thank you, 

Kristian Dibble

Friday, 3 March 2017

Kangaroo Island Property

After touring Kangaroo Island (KI) early December last year looking at Kangaroo Island Plantations (KPT) timber plantations and proposed wharf at Smith Bay, it also appeared there may be an opportunity in property investment on the island - there are several catalysts to improve the economy and therefore house prices. 

Firstly, KPT is planning on exporting timber off the island. If this goes ahead it will create jobs. Not everyone agrees on where the timber should get off the island, but everyone agrees it needs to happen. Secondly, the airport is getting upgraded and lengthened so commercial jets can land/takeoff. This means that jets could fly direct from Sydney and Melbourne. This doesn't just mean more tourism, but people could work in Sydney for example during the week and fly to KI on the weekends. The house price differential is enormous. And recently a new resort application has been approved.

There is minimal permanent rental property on the island. We visited the Century21 office at Kingscote and there were only four properties for rent! 

So the upside case here is a jab-in-the-arm for the economy from the infrastructure projects and a 10%+ escalation in population along with minimal rental property could lead to higher rents and higher prices. 

There are some potential downsides, of course. Projects may not go ahead. Commercial jets may not fly into KI. There appears to be quite a number of unused houses on the island - there are a lot of weekenders and short term holiday letting property on the island. How much of this would convert to full time rental property if the population increases is a question I don't know the answer to. And KI will always be more expensive and isolated than the mainland: it won't appeal to everyone. 

I didn't draw any specific conclusion as to how or if property prices will move, so if you're thinking of that strategy you would want to look into this in detail yourself. The agent I spoke to was extremely helpful - contact me if you would like his details. 


Disclosure: own KPT

Friday, 24 February 2017

The mavericks disrupting funds management titans

The AFR has run a good article on the disruption of the funds management industry which included two close colleagues and friends - Tony Hansen (EGP Capital) and Peter Phan (Castlereagh Equity). After having known them for some years now, I can say they are both exceptionally smart and ethical individuals.

Both gentleman typically invest in smaller Australian companies and given they have a lot of their own personal wealth invested in their respective funds they have a sharpened eye for risk that many other investors simply do not.

Investors could certainly do worse than investing with them - but this of course is not to be construed as financial advice(!) 

Click the link below to read the full article: