SHOULD I BUY ASX SHARES NOW?

Best undervalued stocks ASX for 2020

Well you might have to scroll until the end to see my two cents worth in regard to the above questions.

Also scroll to the end of this long post if you just want to see my Pearler Invest Review.

Actually no, I don’t want to give out stock tips but perhaps I can give an answer on what areas to look at. The main reason I went for these headings is I am reading reports that beginner investors throughout the world are rushing into shares. The various search terms in google that are surging are ones such as the title above. Here are some others.

Top trending questions for Shares, past two months in Australia:

  1. Should I buy shares now?
  2. Which shares to buy now.
  3. How to buy Qantas shares.
  4. Will Webjet shares recover?
  5. What are NIB shares worth?
  6. How to buy oil shares.
  7. Where to buy shares Australia.
  8. Are Qantas shares a good buy?
  9. How to pay for CommSec shares.
  10. What are index shares?

This was from some research conducted by ASIC from the end of February until early May. An article discussed this in more detail here.

https://www.news.com.au/finance/markets/australian-markets/asic-releases-extraordinary-warning-for-mum-and-dad-investors/news-story/8a8b02d8530ae221fae6abf6d1925333

They were trying to protect the “mum and dad” investors. The implication was that turnover was higher, they were speculating and likely to rack up big losses due to inexperience.

I also suspect that will be the case eventually, if it isn’t already. Although I am not sure they have all done badly yet, perhaps they are even making a killing in the market?

“Dumb” money versus “smart” money?

This report made news in the first week of May. As I write markets continue to move higher. I wonder if perhaps ironically many of these “mum and dad” investors are dramatically outperforming most professional fund managers. It seems like the trend is for them to find a stock they are familiar with (Qantas, or simply the index, or Afterpay perhaps?) that has crashed in price in March, then buy.

Meanwhile many of the articles that are written by the professionals on Livewire markets in late March were boasting about the elevated cash levels they were carrying.

Maybe ASIC will soon issue a warning to fund managers to invest their own money in low cost index ETFs, and not to gamble trying to time the market as much.

My own dumb money investing

By the way this is the first blog post I have made for almost 6 months. I was going to keep quiet for the whole year. Lockdown in Melbourne right now has changed my plans a lot to how I thought this year would be, so I have some more free time now. It also seemed strange if I regularly blogged for four years and stopped the minute the markets got interesting! So here I am again.

One reason I gave the blog a rest in January was I got a bit grumpy how most of these mum and dad speculators seemed to be doing better than me! I was feeling FOMO and something didn’t feel right that the stock market could be so easy for some. I wanted to disengage a bit from twitter and stock market forums for that reason, otherwise I might go performance chasing.

Fortunately that meant my cash levels were a little higher than normal. It was largely luck that this was the case leading into COVID-19. There was a period though from mid Feb that lasted until the first week of March where markets were still quite complacent. This was after the virus was at a minimum having a major impact on China. I did some more selling then.

That was the relatively good news. On the negative side small cap stocks got hit harder than I ever imagined, and faster than I thought was possible. Was pretty amazing seeing some of my stocks in this area crash so quickly! My portfolio initially didn’t beat the overall market to the extent that I would have hoped given I luckily held more cash.

I was able to run down my elevated cash levels to closer to normal levels in late March, but in hindsight nowhere near what I should have done. When markets fall 30% I have a bit of a rule of thumb to buy some more exposure no matter what. For no other reason than historically buying such falls eventually tends to turn out ok. Just buy something, shut your eyes and hope!

I wasn’t however smart enough to focus my buying on the small cap stocks that got hit. Returns since in that area have been spectacular. It has also shocked me the speed and magnitude to which they rebounded and all this happened.

L1 Long Short Fund (ASX:LSF) Review

Since it all happened so fast my buying was more focused on LICs which also saw their discounts widening substantially. For me mainly L1 Long Short Fund Ltd (ASX:LSF), which spent plenty of time at a 33% or more discount to pre-tax NTA, and much larger to the post tax measure. This may be a surprise to some as I have been quite critical of this hedge fund in the past about the fee structure (despite acknowledging the unlisted L1 Capital Long Short Fund performance is amazing since September 2014 inception). However in March the fee drag was less of an issue as I shall explain.

I still own, it is looking like the buyback will be quite accretive to NTA. They are going a bit slower than what I like but may end up acquiring more than 5% of all units back at a 25% discount to NTA over a 12 month period. That effect reduces a lot of the drag from their management fee. Even now after the huge bounce it will still take a while for them to get back to their high watermark and for any performance fees to kick in.

From boom to gloom to boom in 2 months?

If had a $1 for every time I have seen the below market cycle sentiment picture the last 2 months I would have a lot of dollars.

What strikes me as weird is the confidence to which investors stated in various times in March where we were at in this cycle.

The most amusing of course was in February when the ASX200 falls from 7,150 to 6,850 and they quote Buffett about time to be buying in gloom. You usually know when to disregard it as those early calls often quote “Buffet” instead.

Just 2 or 3 weeks later things got more interesting when the ASX200 was 5,500. You could find many confidently expressing that this was clearly the denial phase, therefore clearly you should be selling a lot of your portfolio. At the same time though many were saying clearly capitulation has occurred so it makes sense to be buying a lot. Confused yet?

As I write now I seem to be coming across more comments that markets will keep going up because too many investors are bearish. Yet if I am seeing more and more investors saying this doesn’t that mean more and more investors have already turned bullish?

I am sure I have confused my readers now on this market sentiment analysis stuff, I have certainly confused myself anyway by writing this.

A good example of how fickle sentiment is might be how I have felt using twitter this year for following stock market news and opinions. As I said at the beginning of the year it gave me the sh*ts because everyone was bragging about how their portfolio rose 88% in 2019! That swung around so quickly though, FOMO was replaced by FEAR. Mid to late March I had to switch it off a lot of the time because it would have psyched me out of doing any buying whatsoever. A few more days of reading the news and various opinions might have seen me convert to a doomsday preppers lifestyle.

Certainly the markets have changed a lot again since March 23rd.

Is it time to buy Afterpay shares?

Now once again I think if I get too plugged into stock market forums etc I will be convinced to take on more risk. Seems like the Aussie thing to do is get your line of credit on your house (or your stimulus payments / $20k of early retirement fund releases), leverage that into a margin lending structure, then open up a CFD account using Afterpay, to punt on Afterpay going to $100 a share.

YouTube is going gangbusters with “market experts” opining on stocks, their follower counts are surging. You can search there for “ASX shares to buy”. You can find your favourite video with 80k views and join 500 odd people commenting to get comfort of what to do next. Get your “non-advice” answers from a youtuber that has seen it all in markets. Veteran 22 year old’s that were old enough to have survived the great market panic of late 2018 so therefore know what to do now.

New stock market gamblers in the US also, and Davey Day Trader

This theme of inexperienced investors taking risks in the share market since March is not only a theme confined to Australia as you can see from this article.

https://www.cnbc.com/2020/05/22/gamblers-pivot-to-stock-trading-during-lockdowns—barstools-portnoy-revives-old-e-trade-account.html

What if all the bulls and all the bears both get it dramatically wrong?

Earlier I confused probably the readers and definitely myself about where the consensus thinks markets are going. If you are a contrarian now you probably don’t even know what the consensus is to go against it!

Perhaps the contrarian view on the market’s direction from here is to have no view. Or that we stay in a range on the ASX of 5000 to 5,800 for a long time. Then spend a year or more of listening to bulls and bears criticising each other. That might be painful to listen to.

Rather then offer another two cents on that issue I thought I just might throw in some charts to show some of the dispersion in market performance.

Maybe some areas are dominated by FOMO, but some still show signs of fear?

I shall refer to the following link to reference many charts. Bear in mind the article was a little over a month old on April 9th. I think it still tells some interesting stories.

https://www.topdowncharts.com/single-post/2020/04/09/10-Charts-on-the-PE10-Valuation

Because the charts more reflect when markets were bottoming out in March they are less meaningful now from an absolute standpoint. They might provide some context over why markets were able to rebound sharply from the March lows though.

I think it still offers some insights into how much dispersion of performance in markets we have seen.

Investors who have focused a lot on investing outside of the big cap names in the US (or some glamour ASX thematic stories), are probably hardly feeling exuberant about their investment returns from the last couple of years. (well maybe I am just speaking for myself!). Think of themes such as value vs growth (yes I realise they are joined at the hip but refer to how many define these), emerging markets, small cap value in particular. Not a lot of FOMO in those areas.

But perhaps it is all different this time, the new normal?

Now for some usual rants

Disclaimer – These views on excessive premiums to NTA have been made before on this blog. Not much has changed so I have been wrong on this before and may well be so in the future!

Should I buy WAM shares?

I want to stress here that I have a healthy respect for the long term performance numbers of WAM. Geoff Wilson had done a good job over a long time and is generous with his time at the investor meetings. I have to call it as I see it though and I don’t like their latest format of the NTA reports.

A few things that have come to light since I last commented on them are as follows. Recent performance versus their benchmarks have been disappointing.

ASX LIC performance reporting

 What I find more frustrating on that is not quickly being able to look up the figures for recent years. Investing is about the very long term of course. I would argue though that WAM over the last 3-5 years is a different beast to their first decade. Huge AUMs now, different staff making the calls. Knowing performance of the last 3-5 years might still have some relevance I would have thought. I hope they haven’t fallen in the trap of playing games with performance reporting.

I bring this up because another issue with some lacklustre performance is the depleting profit reserves at a time of an increasing premium to NTA. According to the last NTA report,  their premium to NTA was 20%, with 6 cents in profits reserve, and they were holding 25% of the fund in cash. If they ever have to cut their dividend in the future it will be interesting seeing how the share price reacts.

ASX LIC comparison

Should I buy AFIC vs Argo shares?

Less extreme premiums to NTA have been seen recently in these two, but still baffling to me. I have said that before of course. Despite some discounts occurring after that, we have swung around now to the point that nothing much has changed. So I have been proved wrong again, the premiums have more or less been sustainable so far.

Be careful of buying in this range of 10% though, pretty sure many were buying in March at a premium of more than 12%. Seems excessive for a fund with the inflexibility of built in unrealised capital gains and one with no clear evidence of any active performance edge. I know they are popular with fans of the Peter Thornhill and the barefoot investor approach. Yet paying more than 12% over NTA seems to be taking this a bit too far. Argo as a general rule I have observed does not tend to command as high as a premium.

Below is a chart of the movements in the discount / premium of AFIC over the years.

AFIC premium / discount to NTA

Is the AFIC share price a buy at these levels?

Risks are once again the rich premium to NTA may act as a headwind to future returns from these levels in early 2020.

FULL REVIEWS ON AFIC, ARGO LICs

For more information on LICs such as AFIC, Argo etc. read below:

Other side to the older, low fee LICs, AFIC, ARGO, etc

Beware future tax policy

If you were buying a lot of WAM, AFIC vs Argo during the share market falls I would want to think that the debate around policies on franking don’t resurface again. When this occurred in early 2019 pre the election premiums quickly shrunk or disappeared on these LIC dividend favourites. WAM from around a 25% premium to only 10%. AFIC / Argo from 5% premiums to 5% discounts.

I suggest all investors should ponder how future taxation policies can be unreliable. With the economic headwinds from COVID-19 I think this is the case more than ever. I discussed this topic in a blog post here from 2018, on the very day Labor proposed some changes in regard to franking.

As crazy as it seems right now, the S&P 500 would only have to climb around 12% to get to all-time highs again!

Does it feel kind of wrong that us investors could soon potentially seeing new high levels of personal wealth, at the same time of unemployment rates of circa 20%? In that environment will there be much sympathy for those worrying about their franking credits?

Perhaps the saviour will be if the government locates another $60 billion of loose change behind the couch when reflecting on their next budget forecasts.

NAB SPP 2020

I get a bit tired of reading on Hotcopper that the system is all rigged in favour of the big institutions. I was a holder of close enough to zero NAB shares but get an opportunity to try my luck in buying $30k shares in a SPP that is 10% “in the money”.

Now my suspicions is I will be disappointed and get a measly $4k or something per a $30k application. Still you never know. I remember ANZ in 2009 treating me well not scaling back anyone after their SPP then being well oversubscribed.

Wish me luck. It’s a bit embarrassing the number of small shareholdings I have now for this type of thing, yet so far in 2020 this is my only hopeful one of making a buck. Which as I said may be disappointingly scaled back.

Still I don’t think there is much risk at all playing this game. Just thought I would mention it as investors who perform poorly often like to complain about the disadvantages of being a small investor.

UPDATE – JUNE 3

NAB SPP 2020 SCALE BACK /  ALLOCATION

Now I shall clarify my comments above before anyone trolls me because they are unhappy with their allocation! I noticed a lot of unhappy punters on Hotcopper.

Are share purchase plans (SPPs) good?

I have noticed that SPPs this year are not getting the allocations some might hope for. Maybe recently because some SPPs are closing 20% plus in the money the smaller investors are not getting fantastic treatment on allocations. I stand by my comments though that they are usually good for very small shareholders. Recent weeks have been unusual though with markets surging and companies complacent that they don’t need to upsize the raisings by too much.

My comments in the post I made a couple of weeks back were more from the perspective of a shareholder that may only own a parcel of under $1k shares to begin with. I was just suggesting they get a good deal in terms of the “optionality” and just to be in the running for a potential profit. Going forward, smaller holders will stand greater chances of better allocations generally when the SPPs don’t close so far in the money.

If you have $30k in liquidity not earning much, it can be worth a shot tying it up for a few weeks if a SPP is comfortably “in the money”. In this case it was still about a $700 return for the hard work of taking a few minutes making a payment via BPAY if you sold on the open today like I did. Not so bad is it?

If things had of worked slightly different it could have been more. For example if the SPP closing date was around a week earlier, shares might have been only 6% or so in the money, perhaps then demand closer to $2 billion and maybe they would have gave everyone full allocations? NAB then hypothetically would have been making this decision when the shares were trading much lower on May 20th rather than on the 27th. In this scenario the shares might have been ready to sell by May 27 or so for a $8k profit per $30k application! We shall never know.. What’s that saying again, if your aunty had balls she’d be your uncle..

As to whether holders of parcel sizes of tens of thousands or more are getting a good deal with these SPPs in 2020 compared with institutions, I haven’t been following this closely enough. Feel free to comment, interested to hear what others think. But I think expecting that you will hold say $30k or less worth of shares, then effectively more than double your holding with a full $30k SPP allocation that might be over 20% in the money is not that realistic.

DON’T BE A MUG PUNTER IN THE STOCK MARKET!

As I touched on earlier above, I fear a lot of new investors in 2020 will be drawn to the speculative end of the market and eventually lose out.

Pearler Invest Review

Pearler – investing for financial independence in Australia

A new low cost brokerage platform called Pearler, for investors, not traders.

I have been testing this new platform and I like what I have seen. I got involved with it to try out their Auto-Invest feature – where you setup direct debit to automatically invest in ETFs, LICs and more. No other broker has this feature, and I like the way it works.

I use it personally to have some hassle free set and forget funds on the side that I don’t have to think about. The money I auto invest won’t feel like much of a sacrifice and in 15-years or so from now I can hopefully be amazed what it has turned into. I can show my son then how investing can be quite simple if you want it to be.

Selfwealth vs pearler

I like the behavioral side of investing that Pearler stands for. They emphasise slowly accumulating passive ETFs is best for most. That is in contrast to what I have seen at the likes of Selfwealth for example, which appears to encourage extreme active trading and FOMO with their weekly performance comparative emails.

So I already hold shares (yes they are CHESS sponsored) that have been acquired via the Pearler platform.

Trades are only $9.50 brokerage and they’re working on other exciting things which can’t be revealed yet. (update in 2021 – free brokerage on a large range of ETFs was one exciting thing).

If you’d like to avoid a short waiting list at the current time and join Pearler you can use my sign up link. It also gets you a free brokerage credit worth $9.50 if you make your first trade within 30 days. You can click on the following link that will take you to the Pearler webpage that allows you to sign up. You will see my code “valueinvesting” filled in to get the free brokerage credit, go here to sign up.

Note:  I like Pearler and what they’re doing so I decided to sign up as an affiliate partner.  As such, this blog earns a small referral fee if you choose to sign up using the link above.

18 thoughts on “SHOULD I BUY ASX SHARES NOW?”

    1. Thanks Trent. My post probably offers no insight on what happens next in markets. But so much has happened in the last 6 months I found it interesting writing about some surprising things. I never imagined the new small retail punters would flock to shares at a time like this.

    1. Hi Dani,

      Normally I do tend to look at stocks that size with market caps low versus cash on hand.

      However a few years ago I made a rule of thumb not to get involved where Bentley / Keybridge had an influence on things. So I haven’t really followed it.

      Looks like it might have worked out for those who bought the last couple of months. Doesn’t look like many though looking at volumes. Most buying over the last few years might have been a stressful ride, judging by when I glance at it occasionally?

      Any thoughts yourself or any luck with it?

      Steve.

  1. Steve,
    Thanks a lot for that quick feedback.
    I are not really sure if YOW is legit, see you also are cautious around YOW.
    If you know it and trusted it then today was a reward for that.
    A headscratcher.

  2. Good article Steve, great to see you back.
    Good call on Wilson, i sometimes wonder if he’s lost his way, even if in general, he seems to be reasonably professional.
    In separate news I was pretty unimpressed with the lady from Coopers on a recent podcast this weekend.

    1. ps: don’t be surprised if you (we) get our full allocation in NAB … only bank paying out dividends, at a time they are encouraged to build capital

      1. NAB will be interesting, I wouldn’t have a clue how they will handle this. I mentioned a good experience with ANZ in 2009. But NAB that year massively scaled back a SPP that was about 20% in the money.

        Take a look at the RHC announcement today. I hope NAB don’t look at that for guidance as I hardly own any NAB shares! Yet RHC was almost a 20% in the money situation at SPP closing date I think. NAB just 10% or so, so fingers crossed.

    2. Thanks Simon, I think WAM should be happy to present all the periods of their performance figures and do so on an after fee basis. It is one of the rare LICs that can do so in an honest way and the long term figures will look fine. They should see it is a strength not a weakness. I know many others think the same way. I used to think he was good in all these issues but a bit puzzled now. On the board at ALF and that fund is still going and not wound up. Big buyback at ALF yet is on the board of future gen that are against buybacks. No buyback at WGB also.

      Also they might one day want to go activist on the likes of TGG / CIE. I don’t think it is a great look that their recent performance figures coincidentally get hidden after a lean trot. It might get harder for them in the future to criticise other LICs than it has in the past.

  3. Wednesday for NAB , and good calls on Wilson, hard to argue he’s consistent = red flag.
    interesting list of search questions in your article… QAN was definitely one i heard people asking about …

    1. Hi Steve,
      How did you go with the share buyback I put in 7500 and got 5000 back not happy same deal last time.
      Only the big boys get looked after again so much for being a shareholder

      Paul.

      1. Hi Paul,
        My comments here were more about my strategy to hold onto tiny share parcels as there is not much to lose. These days I don’t find it any admin burden in doing so. I held a tiny $600 or so NAB shares from memory. My hope was that when applications close the price would only be about 5% above the SPP price and same when NAB made their final decision. I think in such a scenario there may have been way less applications and then they fulfill all of them. Then if the price holds my $30k application can bank a profit perhaps around $1,500. Price could fall below that in a couple of weeks but could also go higher. Odds are in my favour. Cost of money is cheap these days.
        As it turned out markets are surging and demand is huge. I can’t complain with these things as my holding was so tiny anyway. So even though I applied for $30k, I got the minimum 2,500 parcel and sold first thing. (share price is much higher now!).
        Reading a bit more now since on these SPPs this year I think holders of bigger parcels than me might be getting screwed, so I can understand other’s frustrations.
        One thing to keep in mind though is retail investors get to decide when the odds are way more stacked in favour. For example making the bpay payment is easier when the stock subsequently goes to 25% indicative profit as we have witnessed on many SPPs this year. Institutions have to decide in a day or so and their new shares are only likely to be 7% or so in the money when they make the decision.
        Despite making that point though I think retail are getting a rough deal this year.
        But my strategy is purely keeping many different $500 or so parcels and seeing how I go. From that perspective I am not personally complaining about the process.
        Hope that long answer makes sense!
        Cheers
        Steve.

      2. This is Stephen Mayne’s opinion on some of these SPPs. Have a read of this and you are probably right to be annoyed.

        https://www.firstlinks.com.au/small-investors-miss-out-as-institutions-and-banks-cash-in

        I think he makes some good points.

        Although I think an article debating this needs to be balanced. I don’t think he touched on the benefits that a company has in securing that institutional component. That is, within a couple of days, they know they have the capital. Hypothetically, if a huge portion is left to the retail component, they have to wait weeks to know whether retail investors will have the appetite. Hindsight is a wonderful thing and now we know that many weeks later of course retail investors are hungry for SPPs that are 10-30% ”in the money”.

        Overall though I still agree with the Mayne article conclusion in that I think they should be giving much more of the institutional / retail split toward retail, compared with what they have been doing.

  4. “Veteran 22 year old’s that were old enough to have survived the great market panic of late 2018 so therefore know what to do now.”

    Great line!

    I’m reminded of a line from John Kenneth Galbraith: We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know.

    We stick to reading the numbers and investing based on those.

    1. Yes I like that line about forecasting and also your plan there. Having said that the 22 year old day traders that I probably offended I suspect made a killing again today and are laughing at me!

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