Is Your Portfolio up in Smoke?

Is Your Portfolio up in Smoke?

This week The Australian Financial Review came up with a surprising finding.

The Australian government’s household survey recently discovered that ‘Australia’s lowest-paid workers are more likely to be found living in the richest 20 per cent of households than they are in the poorest 20 per cent’.


Because income and wealth are two completely different things. Scandinavian countries are held up as being examples of equal societies. And on income they are. But their wealth inequality is shockingly high.

Understanding economics is rarely useful. But there is one particular joy it gives you.

You can make sense of the counterintuitive results that baffle most people…

Smoking has wealth benefits

Why do high minimum wages hurt the poor and help restauranteurs?

Why do subsidies destroy industries instead of help them?

Why doesn’t banning something make it unavailable?

Why does raising taxes reduce tax revenue?

Why do rising wages not lead to inflation?

All of these results are counterintuitive. But they’re also obvious and predictable to someone who spends time thinking about them. You can find well developed explanations in economic theory for all of them. They should be what you expect.

Once someone explains what’s going on, it seems obvious in hindsight. Unless you’re politically active and therefore unable to change your mind until your leader gives permission.

Very few people are capable of seeing a counterintuitive outcome beforehand. They don’t expect the result they should.

The good news is, you can use all this to your investment advantage. Today, I want to show you how. And this example should persuade you to pay attention…

The tobacco industry has been through a hellish couple of decades. Doctors used to prescribe tobacco to calm people’s nerves. These days the government bans tobacco in most of the places it used to be smoked. And the marketing department spends most of their time trying to convince people not to smoke.

So how do you think tobacco stocks fared in the midst of all this turmoil?

Bloomberg has the figures: ‘The MSCI World Tobacco Index returned an impressive 1,437 percent from the end of 1999 through 2015, compared with just a 72 percent return for the broader MSCI World Index.’

So the government’s most despised industry trounced the world’s other stocks.

Surprised? I’m not.

It’s exactly what I’d expect.

And it’s exactly what you’d expect if you understood economics properly.

Unintended consequences are investment opportunities

Here’s another example for you.

When QE first began, there was panic over the inflationary effect. People predicted consumer prices would surge, triggering a collapse in bonds. Precisely the opposite happened. Bond prices surged so far yields went negative.

Which is odd. But it’s precisely what you should’ve expected. Economists call the attempt to engineer inflation ‘pushing on thread’. It doesn’t work.

Another example.

You’ve probably heard about the cannabis boom. They’re calling it the Green Rush. One country after another is legalising cannabis. Leading to enormous investment gains for investors who were ahead of the curve.

Who’d think government bans would lead to investor gains? I would. That’s because I understand the counterintuitive nature of economics and how to profit from it. And I think you can too.

Here’s my point.

By seeing what others can’t… by expecting the opposite outcome to your neighbours from every major financial, political and economic trend taking place around you… by realising what’s coming before it surprises everyone else… and by investing accordingly, you can become wealthier.

Do fight these Feds

There’s a saying in the trading pits: ‘don’t fight the Fed’.

The meaning is, don’t bet against central banks. Because their firepower is unlimited. They can print an unlimited amount of money.

But fighting the Federals — the government — is a viable strategy. Or taking advantage of them. That’s what I’ve tried to show you today. With some examples.

If they hate tobacco, invest in tobacco stocks.

If they tell you house prices won’t fall, bet they will.

If they tell you Lehman Brothers is too big to fail, bet it’ll go bust.

Just do the opposite of what the government recommends. Now that’s an investment philosophy.

It certainly beats the investment performance of what the government does recommend. ‘Buy and hold’ hasn’t worked well for the stock market.

A few weeks ago, Bloomberg reported UK stocks had gone nowhere in the 21st Century. American stocks have done well.

But European stocks have gone nowhere since 1999. And then there’s Japan, in black…

Source: Bloomberg

Aussie stocks are still 10% below their 2007 highs.

So much for ‘stocks go up in the long run’ then. They didn’t. In my opinion, they don’t. And won’t.

The results from the Thinking Ahead Institute’s report on pensions speak for themselves.

In 2018, a global model pension portfolio of 60% stocks and 40% equities landed you a -5.7% return. Congratulations on your diversification…

Over five years, the return was a pitiful 2.9% per annum. Remember, that’s during what politicians call the ‘recovery’ from the financial crisis.

Over 20 years? An annualised return of 4.7%.

Which sounds good until you compare it to the Reserve Bank of Australia’s interest rate back then. Term deposit rates back then were better than the performance of a typical investment portfolio.

Australians own far more shares than most people around the world. So the underperforming stock market has been especially bad.

But that’s what you get for trusting the government for your financial advice…

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia