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Investing and life success: luck or skill? - Firstlinks newsletter

Graham Hand  |  05 Aug 2021Text size  Decrease  Increase  |  
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It's tempting to assume our good investments are due to skill and poor investments are due to bad luck. Of course, it's not like that. Every investment decision is made with imperfect knowledge. It's often luck whether the favourable elements outweigh the problems, known or unknown. As professional poker player Annie Duke writes in Thinking in Bets:

"Why are we so bad at separating luck and skill? Why are we so uncomfortable knowing that results can be beyond our control? Why do we create such a strong connection between results and the quality of the decisions preceding them?"

Nobel Laureate Daniel Kahneman goes further in his famous Thinking, Fast and Slow, saying we are delusional to think we can forecast accurately:

“It seems fair to blame professionals for believing they can succeed in an impossible task. Claims for correct intuitions in an unpredictable situation are self-delusional at best, sometimes worse. In the absence of valid cues, intuitive ‘hits’ are due either to luck or to lies ... Remember this rule: intuition cannot be trusted in the absence of stable regularities in the environment.”

Hamish Douglass supports this view in the current market. In his article on current market conditions (and why Bitcoin will become worthless), he says:

"A common question from investors is: “What’s your outlook for the next 12 months?” My honest answer these days is: “I don’t know.” That’s because the world confronts its most complex set of economic circumstances for at least 30 years. Charlie Munger, Vice Chairman of Berkshire Hathaway, said at the company’s recent annual general meeting: “If you are not a little confused by what's going on, you don't understand it."

This week, we focus on luck at a more fundamental level. Charlie's mate, Warren Buffett, puts most of his success down to the lucky circumstances of his birth, and he issues a challenge. What type of political and social system would we create if we did not know our privileged place in the world? He pushes the discussion into the types of equitable taxes we should adopt, with relevance this week to the Labor Party abandoning a range of policies it clearly believes in. Pragmatic politicians realise the only way to power is to drop your principles if they might be unpopular. No use being right and on the opposition benches.

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On luck, see below at how the winners and losers change every year and try predicting it. Morningstar has updated its annual gameboard and there's no pattern, but notable that the bottom place from FY20 is the top place for FY21. It shows the risk of selling your losers. It also emphasises the poor returns from cash and bonds and it's no surprise equities continue to see record inflows in the TINA trade.

A survey on retirement incomes

Our recent focus on retirement incomes has attracted strong readership with some articles receiving over 10,000 views. We add to the background with noted author Satyajit Das who looks to a future where many retirees live on tight pensions and drawing on the value of their homes.

So it's time to learn your views. It will take only a couple of minutes to complete our short survey, and we will share the results with policymakers in Treasury as well as reporting back here with the full results. Where are retirement income policies taking us?

Back in November 2020, senior portfolio managers from Neuberger Berman looked ahead to 2021 at what might happen (a summary is in the article, the full version is in our White Paper section). Recently, they undertook a mid-year review, again showing how difficult it is to make predictions, but it's good input to see how things have worked out so far.

The impact of COVID on real estate has been fascinating to watch, proving what a heterogeneous sector it is. Of course, residential property around the world has gone crazy on the back of cheap finance. I have been 'on-the-ground' recently on behalf of a family member and it really needs to be seen to be believed, what people are paying in Sydney for dumps. I believe the even real estate agents are shocked as buyers casually add half a million to top guidance. Steve Bennett takes a look at business conditions in industrial, retail and office segments of commercial property.

In the latest episode of our podcast 'Wealth of Experience' with Morningstar's Head of Equities Research, Peter Warnes, we discuss which companies have done especially well and badly over recent years with a focus on a favourite stock pick, Brambles (ASX:BXB). We look at the Retirement Income Covenant and I have a rant about how performance fees are measured. We also share some ideas from Nick Griffin of Munro Partners as he looks around the world at major growth themes.

One subject both Hamish and Nick discuss is the crackdown on leading Chinese companies. Many investors may think this has little impact on them, but names like Tencent (00700) and Alibaba (BABA) are both down 40–50% from their highs. These two companies alone comprise 10% of the MSCI Emerging Market index. Some leading fund managers say China is currently uninvestible due to the unpredictable actions of Chinese authorities. The Government is reminding outspoken tech billionaires who is in charge. The chart below shows how two BetaShares ETFs, NDQ based on the US NASDAQ 100 and ASIA based on Asian tech, have performed in the last year. As NDQ hits new highs, ASIA retreats.

Gold, gold ... and last

With the background of Australia's golden success at the Olympics, we have gone from world beaters at managing to spread of the virus to laggards in the vaccination process. There is enough written every day in other places without covering the issues here but a vaccination passport of some type is a no-brainer. Travelling with a vaccination certificate has always been common. Here is mine, updated when I went to Brazil for the 2014 FIFA World Cup, with jabs for polio, cholera, typhoid and yellow fever. We were told we could not come back into the country without it.

So now I can add COVID because I jumped at the chance to take two doses of AZ. Come on folks, get those jabs, get the certificates and get on with it!

Finally, our Comment of the Week selected from 42 strong contributions made on 'Retirement income promise relies on spending capital' comes from David K:

"Graham, I think this topic of the best or right terminology is actually a really important one for the average Aussie. Thanks for raising it. Most people think of income as what is taxed; i.e. they pay income tax on it. In retirement, there is no tax so we need to frame it differently. It's now spending money for them, including the pension, investment earnings and some of their capital. That's a very different perspective."

And don't forget our Reader Survey, we will share the results in a submission to the Retirement Income Covenant paper.

is the editorial director of Morningstar Australia.

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