Moneyball: a story of faith in an objective strategy

Moneyball: a story of faith in an objective strategy

Evidence triumphs over anecdote

If you’ve seen the movie “Moneyball”, (or read the book by Michael Lewis), you may have picked up on some similarities between the issues faced in managing a major league baseball team and those faced in managing investment wealth.

If you’re not familiar with the movie/book, it tells the story of Billy Beane, a professional baseball manager of the Oakland A’s, a low tier baseball team in the US major league. To overcome the financial power of the top tier teams, he adopts an approach that focuses on buying the attributes that win games (rather than buying the specific players he thinks will win games).

Rather than replace a high profile, big hitter with another equally expensive big hitter, Beane looked for other ways to replace him. The team didn’t necessarily need another big hitter, they needed to replace the (statistical) attributes that they had lost (e.g. the average number of times he got on base per game). By looking at player selection in this way he gave himself the freedom to build a winning baseball team without the restrictions imposed by traditional methods.

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You can be better off paying capital gains tax!

You can be better off paying capital gains tax!

Surely, it’s better to defer paying tax

It is not unusual for clients to have sizeable exposures to individual shares that they have held for long periods of time. We generally would encourage them to sell these holdings and invest the proceeds into highly diversified investments to reduce the risk of their portfolios, without a loss of expected return.

However, we often experience considerable resistance to this advice if sale of the shares would result in the crystallisation of significant capital gains and the obligation to pay capital gains tax. Clients reasonably ask “What’s the point of taking an unnecessary action that brings forward the payment of tax?”

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Borrowing to buy property within Super: Buyer Beware!

Borrowing to buy property within Super: Buyer Beware!

Just because you can doesn’t mean your should

Borrowing to buy property within a Self Managed Super Fund (SMSF) has been promoted by many within the advice industry as an exclusive opportunity you should seriously consider. And, while there can be occasions where this strategy makes sense, as a general rule the fundamentals just don’t stack up.

Back in 2007, the Government opened the door for SMSFs to borrow. The change was driven by the popularity of investing in instalment warrants (such as Telstra’s T3 offer). These investments had an element of gearing which created some confusion under the no borrowing restrictions of the Superannuation Industry (Supervision) Act. To over come this, the Government decided to remove the borrowing restriction.

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DIY Financial Planning – The real costs may not be evident

DIY Financial Planning – The real costs may not be evidentDIY Financial Planning appears to be a low cost alternative

There are a lot of smart people who make some rather dumb choices with respect to their finances. More often than not this is driven by short term thinking and the desire to save an immediate out of pocket expense. There is often a failure to lift the eyes and see the bigger picture.

An example that highlights this is the use of superannuation. We’ve talked previously about the significant benefits of making pre-tax contributions to super. However, in this article we look at the benefits of making post-tax contributions to super.
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Taxes, investment costs and investment returns

Taxes, investment costs and investment returns High before tax returns may not be best …

If you accept the often repeated warning that past investment returns do not provide a guide to future performance, you would be smart enough to not select a fund manager based simply on their recent results.

But what if you knew for certain (which you couldn’t) that a particular investment manager would return 1% p.a. above their relevant market indicator, before investment costs and taxes, for the next 10 years. Would you select that manager in preference to one that guaranteed you the market return? As we demonstrate, not necessarily.

Your objective as an investor should be to maximise your investment returns after-tax, costs and inflation for the amount of risk you accept i.e. your net risk adjusted return. In this article, we will focus on the importance of taxes and investment costs (e.g. fund manager fees, transaction costs). We have discussed the risk issue extensively in our “Foundations of Financial Economics” articles and, excluding inflation indexed bonds, there is little an individual investor can do, directly, to take account of inflation.
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Ownership of family wealth

Which structure is best?
Family wealthFor our clients, there are predominantly four ways they hold their personal wealth. They are:

  1. Directly, either as an individual or jointly;
  2. In a private investment company;
  3. Through their family trust; and / or
  4. Via a self managed or public superannuation fund.

Which structure is best? It depends. But given our emphasis on focusing on the things you can control, the structure choice is one that needs serious consideration. There are a number of often competing factors to take into account, with taxation, asset protection and succession / estate planning usually most prominent. This article considers some of the issues.
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Franked dividends and your investment strategy

Is franking a free lunch …Franked Dividends - Free lunch?

Many D-I-Y investors skew their investment portfolios towards shares that pay franked dividends. This is particularly prevalent amongst trustees of self managed superannuation funds who appear to over value the benefit of franking credits.

There appears to be a view that franking offers “a free lunch”, resulting in its overemphasis as a driver of investment strategy.

We believe investors should not favour particular shares simply because they pay franked dividends. The usual thinking behind such behaviour is, in our view, flawed.
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Mortgage or Super?

Mortgage or Super
Are you better off reducing your mortgage or contributing to super?

A lot of people ask this question. Unfortunately, as with many wealth management decisions there is no straight forward answer. The appropriate choice depends on a number of issues, some of which we address in this article.

The obvious starting point is to look at the numbers. Assume you have 15 years until you can access your superannuation benefits free of tax. You have a mortgage that is costing you 7.0% a year (after tax) and a small amount of super. Over the next 15 years, you expect to have at least $13,375[1] a year of surplus cash flow.
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Protected Equity Products: Can you have your cake and eat it?

Protected Equity Products: Can you have your cake and eat it?Loss protection and tax advantages …

Protected Equity Products (PEPs) are heavily marketed at this time of year.

They are promoted as an opportunity to benefit from share market growth, without the risk of losing capital. They involve borrowing up to 100% of the purchase price of a basket of shares for a minimum period (generally 3 – 5 years). You keep the dividends and any gains and are protected against investment loss.

The loan interest is also usually prepaid to bring forward a tax deduction and reduce a current year “tax problem”. What a deal – no downside and tax benefits!

However, even with this basic explanation, the alarm bells should ring for smart investors. PEPs play to at least one psychological bias (i.e. “loss aversion”) that investors should be wary of and contradict at least one of our wealth management decision making principles (i.e. “It’s about ends, not means”).
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“Timber”: Agribusiness Managers Felled

Diseased from the beginning …

“Timber”: Agribusiness Managers FelledWithin a couple of weeks of each other in April and May, the two largest stock exchange listed managers of managed investment schemes (“MIS”), Timbercorp and Great Southern, went under. Most likely, shareholders will end up with nothing while creditors are almost certain to take a substantial haircut.

Timbercorp and Great Southern sold interests in agriculture based (or “agribusiness”) investment projects, particularly forestry plantations, to investors or “growers”.

While the “green” credentials of the projects were highlighted, the primary purchase motivation for investors was the large up-front tax benefits offered. The long term economic viability of the projects was always suspect, even more so now that their ongoing management is under a cloud.

Based on our wealth management principles, we think these projects and the decisions to invest in them were flawed from the start. It is a tragedy that there is now an estimated $6 billion of funds and 61,000 investors (see Footnote) caught up in a disaster that could have been avoided by applying a few tried and tested decision making fundamentals.
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