Good afternoon,

Before I get all excited and start my “Zip Co/Zipmoney just broke $1.10” rant, the ASX200 was up 1.17% for the week. 

I can see why some people are balking at markets right now, full-ish valuation and interest rates on the rise.  I think that’s a bit of first order thinking though.  First order thinking, for those that don’t know is something like:

  • Stock XYZ is undervalued because it’s got a PE of 5x or,
  • Stock ABC is a great investment because it has a 9% dividend yield

Whilst both statements may be true, they are poorly conceived arguments because they ignore 2nd order thinking such as: 

  • Stock XYZ is overvalued at 5x PE because its earnings (the ‘E’) are forecast to be negative in the future and the company may not survive, investors are pricing in this likelihood. 
  • Stock ABC dividend is likely to be cut and the market is pricing in this likelihood. 

As you can see, second order thinking considers not just the obvious but also things like probability, likelihood, rates of change, co-variance, causality and correlation.  It’s nuanced.  To quote the great Charlie Monger: 

“It’s not supposed to be easy stupid!  Anyone who finds it easy is stupid.”  
– Charlie Munger (the brains behind Berkshire Hathaway)  


Everyone knows interest rates go up when certain economic markers are observed by the central banks.  The nuance to consider is: 

  • The rate of change of interest rates, relative to their current levels
  • The rate of change of one nations interest rates relative to another
  • The rate of change in interest rates relative to the rate of inflation/GDP Growth/wealth creation/wage growth
  • The effect on company profits of all of the above
  • The probability of forecasting any of these things incorrectly

See… not so easy after all.  
If you want to read about 2nd order thinking I suggest reading any of my usual behaviour finance/economics book recommendations (Thinking Fast and Slow, Misbehaving/Nudge etc.) but in particular Howard Marks book “The Most Important Thing”, 
you can buy it here


A simplified model for investing
I’d like to show you that ‘simple’ and ‘easy’ are two very different things.  Simple in my mind is elegant, the path to the correct answer with the least total resistance/friction.  Easy is the complicated solution that has low initial resistance/friction. 

There is a bit of a saying in the market for the ASX that goes “buy the market on a 5% yield, sell on a 4% yield.”  This is easy.  


To make this simple, let’s take out resources to help reduce volatility.  And lets not use 4% & 5% but top and bottom quartiles. 


For completeness, this is on a monthly basis since 2001.  199 observations. Returns exclude dividends. 


What you’ll find is if you buy the ASX200 ex-resources when the dividend yield is 5.75% or higher, your average 12 month return is 13.3%. 


The worst result is -30% in the GFC or -9% in Oct 2010, Th best result is +51% in recovery of 2009 or +36% in 2012.) 


33 positive observations (ave 25%), 18 negative (ave. -10%).


If you buy the same stocks on a dividend yield of 4.6% or lower, your average 12 month return is -4.8%. 


Worst result is -17% in 2002

Best result is +3% in 2001.) 

7 positive returns (ave. 1.5%), 13 negative (ave. -8.2%).


Using this rule there is a total of 20 sell signals and 51 buy signals. 


Current dividend yield 4.53%

Interview with Luc Wiesman from D’Marge

I was fortunate enough to interview Luc Wiesman from Men’s lifestyle magazine and media company D’Marge.  I started writing for these guys a few years back (you can read my stuff here) and since have got to know Luc as a savvy businessman with a real knack for getting ahead of the curve.  Proof of this is the fact that in 2018, as print media and magazines disappear from existence, D’Marge successfully started printing a physical magazine called “Shut Up and Take My Money”.  There’s some good insights from the interview around the media sector, businesses built on social media and how a clearly defined brand personality can help you scale.  You can watch it here 


Zip Co (Z1P)
Last trade $1.19, new All Time High today!

Aside from the recent name and code change, which for the record I’m not a fan of, the business continues to progress extremely well and continue to deliver on the things they promise.  

I first saw Zip management before the IPO in 2015 and since then, I’ve been a big fan of the business.  I very rarely get clients involved in IPO’s or startups, but if it’s good enough for you, its good enough for me and Zip was no different and my clients and I took c.15% of the initial raise at 20c.  At the time Zip had lent $4m on the platform and had 100 merchants and 4500 customers. 


Fast forward to January 2018 and Zip has a loan book of $231m, has 530,000 customers and generating $9.3m per month in revenue.  The share price has 
near enough 5x since we first bought it and the company is about to start making a profit.   The share price went sideways for 12 months, under performing the market throughout 2017 and in the last 4 weeks as added 60% to the share price. 

This is the perfect example of why patience in great businesses can pay off and why you can’t judge a company’s performance by the share price performance.  Zip was a victim of 1st order thinking all of last year (I heard “Oh, Afterpay is killing them” soooo many times) and only now are people realising what I’ve been saying all along, that Zip has a better business model, is better at managing bad debts and is way faster to cash flow break even/profits.  Zip’s market capitalisation is $310m.  Afterpay is $1.3b.

Other movers this week were Pinnacle Investment Management (PNI) which certainly has my attention, Resmed (RMD) on a strong quarterly, Treasury Wines (TWE) and NextDC (NXT).  

Nothing much to talk about in red. 
Have a good week,
LL

* The information contained in this email is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.