Final edition in Summer Series, Guest Editor, Roger Montgomery


In celebrating Cuffelinks’ first five years in publishing, I confess to a little self-congratulation for agreeing to contribute at the very beginning. Aside from the obvious success that would emerge from a unique combination of product and people running the newsletter, we have to recognise the many tremendous articles and contributors that have been instrumental in the ongoing growth and success of Cuffelinks.

Fundamentally sensible and technically useful articles again dominated 2017 but for me there were a number of standouts (the links to the articles are below).

Ashley Owen is a professional friend for whom I maintain a dose of admiration. Any article dismantling a relationship that has been held as an axiom is valuable, and Ashley has done investors a great service by demonstrating that there’s no link between economic growth rates and stock market returns. In 2017, he wrote:

“There has been no statistical relationship between economic growth and share prices when measured across countries.”

It’s disheartening to think how much paper and ink is wasted suggesting investors need to know what might happen in the economy. It’s even sadder to think how much time investors waste reading it.

Still with Ashley, he produced another useful article early in 2017, after the Dow Jones surmounted 20,000, showing that index performance needs to be considered not only in log scale but also after adjusting for inflation. That stocks markets “always go up”, as is claimed by many promoters, may be true but:

“Long periods of poor performance are normal … We see that the ‘real’ index after inflation has only gone from 2,000 to 20,000 in 120 years – that’s less than 2% real growth per year on average, which is hardly inspiring. True that doesn’t include dividends, but most investors live off the dividends and rely on the capital value increasing in real terms so that dividends can also keep ahead of inflation.”

Ashley shows indices can trade for long periods without generating positive returns:

“ … the long bear market from 1906 to 1920 [15 Years] when share prices fell 67% in real terms, and 1966 to 1982 [15 years] when the prices fell 75% in real terms.”

The almost unthinking and faddish adoption of index funds as a solution to the higher fees charged by active managers should be reconsidered in light of this disclosure, especially with share prices today at stretched levels implying low future returns.

I wrote a controversial article suggesting index investing is merely ‘dumb investing’, and it would be incongruous not to call out fellow fundie Greg Cooper’s article on the subject entitled; “The Paradox of Passive Investing”. Like many value investors, Greg might be early but he is fundamentally ‘on point’ when he suggests:

“As more capital is invested with no thought behind what is being purchased, there has to be a tipping point where this irrational behaviour is no longer sustainable. When is that tipping point? We would suggest we are close to or even past the tipping point in some markets.”

And I would add, it’s better to be 12 months early than 12 minutes late.

With children of my own, I understand how important creating good financial habits is. Robin Bowerman might have been a little disappointed, but he should know investors were universally better off for having the advice of our mothers and fathers reiterated by Vanguard’s global CEO, Bill McNabb. McNabb suggested that amid expected volatility one solution is to:

“Save more … Saving more is an asymmetrical proposition: If you don’t save enough and the markets don’t assist you, there’s nothing you can do. If you over-save and do well, great – you can retire a few years earlier.”

As you are reading Cuffelinks, it’s reasonably safe to assume you are doing better, financially, than the vast majority of the population of Australia, a country that is itself much richer than most others. It’s worth remembering two things: First, you can’t take it with you, and second, you’ll be forgotten in two generations. As the pop artist Macklemore wrote in a 2017 pop song:

“Things are just things, They don’t make you who you are, Can’t pack up all your haul and take it with you when you’re gone.”

Giving should be something we are all engaged in and Antonia Ruffell’s column on the best way to give is an essential roadmap to formalising a framework for good deeds.

Roger Montgomery, Guest Editor

Roger Montgomery is Chairman and Chief Investment Officer at Montgomery Investment Management


Stock market winners 10 years on
by Ashley Owen on November 30, 2017
The intuition is that stock markets should perform in line with an economy’s GDP, but a look at the last decade shows little relationship, and perhaps the opposite is more accurate. Read more…

The Dow hitting 20,000 and what it hides
by Ashley Owen on February 9, 2017
Investors celebrated when the Dow broke through the 20,000 mark last month, but in real terms, it’s a more sobering picture. Australian stocks in particular are struggling to reach their previous heights. Read more…

The paradox of passive investing
by Greg Cooper on September 21, 2017
The rapid rise in investments into passive vehicles is having a distortive effect on markets as the flows are prone to sudden reversals. The cheap cost may come with a paradoxical result. Read more…

Preparing for the ups-and-downs of 2017
by Robin Bowerman on February 16, 2017
When markets deliver lower returns, investors need to save more, learn about investments and stay the course to achieve their retirement goals. Diversification is an effective way to weather uncertain times. Read more…

Philanthropy is growing, but what’s the best way to give?
by Antonia Ruffell on May 25, 2017
Investors looking to give to charitable causes before 30 June often leave little time to make the best choices to suit their philanthropic intentions, which is where an ancillary fund can assist. Read more…

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