The Biggest Problem with Stock Recommendations

I might have given brokers a hard time in my earlier post.

Despite the potential conflicts of interest, and absurdities of putting short term price targets on shares based on ‘valuations’, the fact is even the most independent, diligent, stock analysts have a huge issue when it comes to stock recommendations:

The recommendation they make is universal.

It’s either a BUY, a HOLD, or a SELL (despite the various other descriptions used by brokers such as ‘accumulate’ or ‘strong buy’).

But does a BUY recommendation mean that everyone should by this stock?

Not a chance.

Making a tough job look easy

It’s actually one of the easiest things to do – to recommend a bunch of different stocks a BUY or a HOLD. Eventually, you’ll be able to cherry pick those few that did really well, and show off how great your investing skills are.

You need to be wary when you see the results of any stock picking newsletters in particular – “Here’s three stocks we recommended during the year, all up over 50%!” (just don’t ask about the other 47 stocks…)

Once you buy a stock – the easy part – the hard part is only just beginning.

When it comes down to actually investing money, and managing a portfolio, there are far more difficult questions to answer:

  • How will I prioritise which stocks get my funds?
  • How much money should I put into this one versus that one?
  • Should I buy in stages, or fully commit to this investment now?
  • How will I know when to sell?
  • How do I monitor my risk? How do I even know if and when my portfolio is getting more ‘risky’? What does ‘risky’ even mean for me?

To be clear, the challenge brokers have with making a recommendation, and then updating that as things change, is a challenge for any value-based investor.

The only difference is that brokers don’t have to worry about any of the questions above – it’s simply a matter of value versus price to them at any point in time.

They can write a new report every week on the same stock, whereas an investor has a finite amount of funds to invest, and realistically only has a couple of opportunities to make an investment decision.…

Beware the Broker BullS#!T!

Most of us are good at something. Perhaps even great at something.

For all the things we’re not so good at, there are plenty of experts out there that specialise in whatever obscure task we might need help with. This is particularly useful when there’s clearly a right way to do something, and a wrong way – I don’t think I’d be game to ‘have a go’ at rewiring my house or experimenting with the setup of the engine in my car.

But for many other things in life, including finance, things are a little more grey. Everyone has opinions, some even have techniques that seem to work really well for them.

Unfortunately most people want clear answers – like what stocks to buy – when there really isn’t a right or wrong answer. Yet we still search for experts to tell us what we want to hear.

And who are the industry experts when it comes to identifying the best stock investments?

If you’re answer is “Stock-brokers!”….then boy will this be an interesting post for you!

Broker Reports

If you haven’t seen a broker report before, they look something like this:

Some reports are brief, others have pages and pages of analysis, but they all usually have the same basics – stock recommendation, commentary and fancy analysis.

You can access certain broker reports through the ASX website – they issue a summary of new broker reports weekly if you sign up via email (see link here). Some companies also choose to put them on their websites as part of their resources for investors.

But the broker report above is one I found completely randomly on the internet by doing a quick Google search – one of the first reports that wasn’t for a mining or exploration company.

The company is Cash Converters (CCV), mostly known as a retailer of second-hand goods, but also a supplier of ‘financial products’ (mostly expensive short-term loans).

And much to my excitement, I discovered that Cash Converters has a whole heap of broker reports on their website dating all the way back to February 2010! (see link here)

What a wonderful opportunity this presents to do some analysis over the 8 year period, and use this as a real life example to discuss the usefulness of broker reports….…

Time to Top-Up on Telstra, or a Thinking Trap?

I said when I initially bought Telstra at $3.61 in mid-January that it wasn’t necessarily a screaming bargain, but deserved a place in the Fund as a solid Fully Franked dividend payer. I also started with a smaller investment, and said at the time I’d love to add to the holdings if the price fell below $3.40 or so (or low $3.20’s ex-dividend).

Well, that time has well and truly arrived.

Telstra closed at $3.10 on Friday 6th April, down around 14% from my initial buy (or 11.6% including the recent dividend). At this price it’s offering a dividend yield of 7.1%, or 10.1% Fully Franked.

Whenever you see a dividend yield that high, it’s usually a big sign that the market doesn’t believe it will sustain its dividend. It wasn’t long ago that Telstra made a whopping cut to its previously rock solid dividend, expected to be $0.22 per share for FY18, compared to $0.31 for the prior two years. The market seems to think that there’s more to come.

Whilst the market may have some further thoughts on this since mid-January, nothing has really changed in my mind since my original investment case. It would take another pretty big cut to the dividend to change my mind, and I don’t see that happening.

But of course, my premonitions means nothing in the world of investing! Absolutely anything can happen. I’m simply betting that the long-term value on offer is better than what the market is saying right now.

I have no special insights into the industry or inner workings of Telstra. However, what I find much more interesting is the psychology of buying another tranche of a stock you already own – especially when the price has fallen……

No, No, Know! Do you know you don’t know?

When you’ve spend the majority of your life in a certain field, it’s not unreasonable to assume you know plenty about that topic. Even if you’ve dedicated only a year or two of intense study and interest, you might still classify yourself as an ‘expert’.

I feel like I know plenty about finance and investing, having worked in it my entire career so far and having had a keen interest in the field since my teenage days.

Often I’ll see new books released on the topics of investing and finance, articles in the news, or titles of other blog posts, and automatically think, “Yeah, I already know that stuff! Why waste my time reading more about it?”

Despite this, having launched Fully Franked Finance just over two months ago, I’ve already discovered so many new things I didn’t know that I didn’t know – all thanks to my fellow bloggers and readers.…

The Tipping Point On Transaction Costs

Most stock investors – including me – spend the vast majority of our energies on identifying good businesses trading at great value prices. Not only does it provide the potential for market-beating returns, but it’s Franking good Fun!

The analysis itself is endlessly fascinating, as every business is different, and watching your investment thesis play out is very rewarding – when it goes the right way. And when it doesn’t, there are always lessons to be learnt.

As we get caught up with our Fancy analysis and measuring our returns, we need to be careful to stay aware of any costs which chip away at those returns.

Transaction costs can be an absolute killer. There is a very strong correlation between high transaction costs and low returns for individual investors, not least of which is the compounding impact those aggregate costs have on your long-term returns.

Indexing Ian inadvertently highlighted this when comparing long-term returns in Australia with the rest of the world. The impact of an extra 1.5% return per annum is F’henomenal!!

Ignoring International Investments – Is Ian an Idiot?

Hi everyone, Ian here again!

That title might be a little harsh, but some of you are no doubt asking the question if you read my original post!

I’ve previously explained my strategy for index investing, which involves sticking to my home country of Australia.

You may be wondering, why on earth would I restrict myself to a region that only makes up around 3% of the world equity markets? Am I lazy? Patriotic? Or just plain ignorant?

Fair questions, but I actually have two reasons – and I’ll let you judge whether they’re compelling enough…

1) I’m Not Convinced Global Will Perform Better

History is always a useful starting point to set the scene. How has Australia fared over the years compared with the rest of the world?

I absolutely love this interactive chart from Vanguard. It allows you to compare the growth of $10,000 invested in different asset classes over any historic period since 1970. I’ve focused on shares in three different regions – Australia, US, and International – over a few different periods.

Let’s start with the performance since 2010:

(PS – that little straight line at the bottom is cash)

Facing your Fear of a Financial Market Free-Fall

As investors, there are two things we absolutely love – appreciating asset prices, and / or greater income from those assets. And boy have the past few years been good to us – especially for our friends in the US!

But all this Fortune brings with it a potentially Frightening downside – the Fear of a Financial Market Fall – or CRASH! Yes, these do happen occasionally, and can really put a dent in your Fund balance.

Yes – this does happen unfortunately…

Given this Fantastic run over the past Few years, the media is Full of speculation around if and when a potential downturn might be coming. Seems like a timely issue to address as we get Frankie’s Fund up and running.…

Introducing… Indexing Ian!

Hi everyone! I’m Ian, or ‘Indexing Ian’ as Frankie likes to call me.

You’ve heard Frankie’s Investment ‘F’hilosophy, so let me tell you a bit about mine. I haven’t always been an ‘Indexer’, in fact, for many, many years, I spent HUGE amounts of time analysing stocks, buying and selling, trying to time my investments perfectly. I’m a pretty smart guy, always thought of myself as ‘above average’ in many ways, and like Frankie, have plenty of experience in the finance industry, so I didn’t want to settle for an ‘average’ index fund – how BORING!…

Frankie’s Investment ‘F’hilosophy

So far I’ve introduced you to the First Few Fully-Franked Dividend Shares in the Fund, and hopefully through those posts on Virtus Health, Telstra and Prime Financial Group, you’re getting a Flavour for the way I invest. But it’s probably worth taking a quick time out to highlight my ‘F’hilosophy of investing a little Further.

Let’s start with a Few key points:…