Growing Wealth Through the Share-Market

The one thing that is severely under-communicated in respect of building wealth is the importance of starting young.

In fact, the three keys in my view are:

1. start young;
2. be consistent (I recommend 10% of after-tax income as a minimum); and
3. never touch the nest egg.

In order to demonstrate the power of starting young, investing consistently & leaving the investment untouched, I have created a ‘theoretical’ individual; let’s call him ‘Average Joe’. Average Joe is average in every way, most importantly for our examination, in earnings.

Average Joe Turned 20 on 1 January 1980. He immediately entered the workforce & immediately commenced earning the average wage (you may point out the unlikeliness of this – i.e. he would start earning less than the average wage and end his career earning a good measure more than the average wage). In any case, he immediately began setting aside 10% of his after tax income and has never touched his investment.

At present (for Calendar 2010), based on the Average Full-Time Adult Total Earnings from the Australian Bureau of Statistics, Average Joe earns $1,305.10 per week. He will earn $68,098.29 for the year and pay $13,979.49 in income tax (20.53%). I have used the mid-point from each year, you can check the ABS website for current and historic average wages - http://www.abs.gov.au/ausstats/abs@.nsf/mf/6302.0; it is pretty good for such information.

In his first full year of work (Calendar 1980), Joe earned $258.30 weekly, - $13,477.73 for the year. For simplicities sake, I have assumed he has always paid 20.53% of his gross wage in income tax (tax rates of course have changed frequently). So in calendar 1980, Joe saved $1071.08, with which he purchased an ASX200 index investment on the first trading day of 1981. Some said Joe was crazy, the ASX200 had advanced 48.86% in calendar 1980, and surely he was paying too much…

In calendar 2010, Joe will save $5,411.77, which he will invest on the first trading day of 2011.

Over the preceding 30 years, Joe has saved (and invested) $87,169.28. His current shareholding (bear in mind all he has ever done was buy the market with what he saved in the previous year on the first trading day – not at all strategic) is valued at $425,022.19.

In order to see how Joe might look come retirement age (which I will assume to be 67 by the time Joe retires in 16 years) we need to make some assumptions. I will assume Joe’s wages and the market move smoothly over the next 16 years at the same rate as they have done over the last 31, which I don’t think is unreasonable.

This being the case, when Joe retires on his 68^th birthday, on January 1, 2028, he will have earned $3,078,277.07 in his 47 year working life, or after tax have earned $2,446,306.78. He will have saved $244,630.68 (10% of his after tax income). The terminal value on retirement of his investment would be $3,789,336.58. That is fully 23.1% more than his gross earnings in his lifetime. Furthermore, it is 54.9% higher than his after-tax income.

These extrapolations are obviously just that, the average wage may not grow as quickly over the next 16 years as it has since 1980. The share-market may not achieve the same rate of return as the last 31 years. But Joe’s current results are impressive enough, and all he ever did was buy the market. It must be remembered that Joe’s investments are outside of whatever he has in superannuation as well. Average Joe will live well in retirement.

For those of you sceptical about projecting future returns, Average Joe’s Uncle, Average Joe Sr. commenced work at age 20 on January 1 1964 (earning the average 1964 wage of $51.70 per week), has earned the average wage all his life and will retire at age 67 on January 1 2011. He will have earned a total lifetime income before tax of - $1,261,141.11, after-tax income of $1,002,228.84. He will have saved $100,222.88, which he invested annually in arrears into the Australian Indices, without selecting specific stocks. As at today, 20 December 2010, Average Joe Sr. is worth $1,089,949.95, more than his total lifetime earnings. So you see my point (we don’t need ‘projections’ to make this look viable).

I appreciate there are many simplicities in this situation, for example, Average Joe Sr., would be earning something in the order of $40,000 in dividends annually, which would bring upon him additional tax obligations. This means, for example, instead of earning $68k in 2010, he would earn $108k. Instead of paying $14k tax, he would pay $27,910. When you factor in that his dividends historically in the ASX200 are franked at nearly 70% (about $12k in franking credits on $40k dividends), he is only out of pocket an extra $1,910. That’s a pretty small price to pay to retire a millionaire. The importance of starting young (point no.1) is demonstrated thusly – Average Joe Sr.’s first investment on January 1 1965 was $214.38, which as at right now is worth $40,540.23.

I will not post the next couple of weeks as I will be travelling (I anticipate January 17 being my next post), but I look forward to bringing you more of my ideas about wealth building in 2011, may it be a bright and prosperous one for us all - Tony Hansen 22/12/10

Investment Reading

Well, it’s nearly Christmas, buy someone you care about something useful, a book on investment, to help get them started on the road to financial security.
People, who are interested in investing, invariably will at some stage buy, or be given book/s about investing. I am no different than most, probably having consumed more financial literature than anyone I know. There are lots of really ordinary books out there, don’t let that stop you read everything you can lay your hands on.
I highly recommend this (scatter-gun) approach. It is my opinion, barring a couple of really ordinary books that, virtually every book on finance or shares or stocks or investing or property or trading or options or derivatives I have read added to or improved my understanding of finance and investing in some way.
What is entirely undeniable is that some books will do substantially more to enhance your knowledge than others.
Depending on your level of interest and/or experience in investing will depend on where you should look first. If you are fairly new to investing in shares, or simply aren’t inclined to read hundreds of books to have a completely rounded knowledge of the subject, the first book you should read is Motivated Money by Peter Thornhill. Thornhill presents an outstanding analysis of the importance of using shares as a principal theme in building the wealth and income stream needed to retire self-funded. I have never met Peter, but I guarantee that even if you have an extensive understanding of markets, you will benefit from this book. I was lucky to stumble across this book; in fact it was my business partner, Dave who found a copy in a second-hand bookstore. Irrespective, you can order the book from the website: https://www.motivatedmoney.com.au/ and it is well worth paying full retail. As an aside, Peter Thornhill uses his website to periodically make comment on the state of the markets, or whatever is on his mind and the information is well worth reading also.
For the investor with more experience and who is inclined to spend more time developing a fuller knowledge of how to properly value individual companies. The best book for such a person would be ‘The Intelligent Investor’ by Benjamin Graham. Graham is considered the ‘Father of value investing’ and deservedly so, this book is in my view central to building a complete framework within which to analyse shares.
Finally, for the really passionate investor, in my view, you can’t be considered to have completed your education in the markets (you never really 'complete' your education) until you have waded through ‘Security Analysis’ by Benjamin Graham & David L. Dodd. It is a pretty epic read and not as user-friendly as the other two books mentioned here, but it is really a solid capstone for an investor who wants to knowledgably analyse potential investments in a truly businesslike manner. If you are going to take the time to read investment books, then start with the best. These are the best place to start - Tony Hansen 15/12/10.

Borrowing to Invest

Borrowing to invest is often demonised in the financial press. It is referred to as ‘leverage’ and for good reason, it ‘levers’ up your gains and losses. The only time the leverage has no apparent effect is when the return is the same as the cost of the leveraged capital. Recent examples to demonstrate the potential effects of leverage (I will use the rate from a Line-of-Credit I have operated over the periods in question, you may have been able to borrow at higher or lower rates yourself):

1. On 30 November 2007, you decided to borrow $100,000, in order to purchase an investment in the S&P ASX200 (TR) indices. In the ensuing 3 years to 30 November 2010, the annualised return has been -7.01% pa, which means your original capital is now worth $80,409.76. During this period, at your average of 6.8648% borrowing costs, you also paid $20,594.40 in interest costs. When you subtract your borrowing costs from your remaining capital, you are left with $59,815.36, which implies an annualised return of -15.74%. Your negative result has been amplified considerably more than the -13.8748% loss indicated by the difference sum of the borrowing costs and the negative growth.
2. Fortunately, 10 years ago, on November 30 2000, you decided to do the same thing. Your annualised return has been 7.8% pa, which means your original capital is now worth $212,012.31. During this period, at your average of 6.6302% borrowing costs, you also paid $66,302 in interest costs. When you subtract your borrowing costs from your remaining capital, you are left with $145,710.31, which implies an annualised return of 3.84%. Your positive result has been amplified substantially, instead of capturing the 1.1698% (difference between interest costs and earnings rate).

Both of these periods, we must bear in mind cover the worst market period in living memory (unless you’re really, really old…). The other thing that is left out of the calculation is the ‘negative gearing’. In simple terms, in relation to the examples above, assuming you were in the 38% tax bracket, this effectively means that the government effectively covers 38% of your borrowing costs by virtue of tax you will not pay due to your annual income being reduced by the interest charges produced by the borrowed sum.

In the case of the second example above, when we strip out the $25,194.76 of borrowing costs the government effectively pays; you are left with $170,905.07 after paying ‘your share’ of the interest. Your new annualised return is 5.51% pa, which is about 4.7x the 1.1698% difference between the borrowing costs and the investment return.

There are two key mistakes people make when borrowing to invest. The first is the wrong type of borrowing. Margin lending, for example, is fraught with risk, if your holding declines below a certain point, your shares can start to be sold out from under you. Shares are volatile, as Warren Buffett says ‘Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.’ If you use margin lending, the choice may not be yours. Unless you can borrow against an asset, and are confident that even in the event of a downturn, you will be able to service the debt, then ‘leverage’ is not for you.

The second mistake people make is timing. If I met someone with $500,000 of available equity to borrow against, say in their home, I would strongly advise against borrowing the whole sum right now and investing it all. This is despite my opinion that the market over the next 5 years is likely to perform equal to or better that historic averages. More prudent in my opinion would be to set up a strategy, whereby each month over a 4-year period, about $10,000 was invested monthly, this will enable the investee to ‘dollar-cost average’ their purchase and ensure they build their holding at a price that will evenly reflect the market average price over the period.

Borrowing to invest is a reasonable strategy, provided you are cautious and bear in mind these types of issues, and remember, the higher your tax rate, the more viable the strategy is. A taxpayer in the 45% tax bracket, who can borrow at 10% pa over a period, needs only be confident that their investment will grow by more than 5.5% per annum to justify the investment. Compare this to an individual in the 15% tax bracket, who would need to be assured of at least an 8.5% return to end in positive territory. Tony Hansen 08/12/10

Taxation Value of Equity Investments, Part 2

To clearly demonstrate the advantage of buy and hold equities, I will posit the following situation. Ten years ago on November 23, in the year 2000 you had $10,000, which you wanted to invest in a quality Australian company. I was originally going to say you chose BHP (whose performance I might add was much better than the stock I chose), however, they have done several things like stock splits & de-mergers in the last 10 years, that make a retrospective calculation tricky.

I should comment that hindsight stock picking is easy, the selected stock is not relevant, it is the decision point we come to 10 years later that I seek to demonstrate.

So I settled on Woolworth’s (WOW), a nice stable company with a solid history & good prospects. You took your $10k and purchased 1298 shares ‘at market’ and got them for $7.70 ($9,994.60), I have left off brokerage, as I don’t think it relevant to the discussion. In any case, you signed up to the WOW DRP (dividend reinvestment plan), put the stock in the drawer and forgot about it.

Today, November 22, in the year 2010, you examine your WOW holdings and find that you own 1810 shares, worth $48,779.50 at today’s closing price of $26.95. This comprises:

1. Starting capital = $9,994.60
2. Re-invested dividends = $10,663.54 (512 shares @ average of $20.83) &
3. Capital gains = $28,151.36

Genius investment you say, well you could have sold the whole parcel for about $10k more in late 2007. By the way, the part of the investment you don’t see is the over $4k in franking credits you also received (an important factor I think is under-recognised by most investors).

In any case, the decision point is this. You believe that WOW are likely to perform at best marginally better than the market, however, you have discovered another share, XYZ – that you believe can outperform the market over the next 5 years by 3% per annum.

Should you sell now and invest? We’ll make these assumptions 3:

1. The market performs at its historic average over the last 30 years, by performing at 12.47% pa for the next 5 years
2. You are also correct about WOW performing only marginally better than the market, they maintain their historic 3.22% dividend return, with a 10% annual capital gain for a 13.22% total return (only 0.75% better than the market)
3. You are also correct about XYZ, over the next 5 years, they return a total of 15.47% pa including reinvested dividends (3% over market returns)

So what do we see on November 23, in the year 2015?

1. If you stayed in WOW, and returned 13.22% pa, our investment would be worth $90,751.35
2. If you sold your WOW & crystallised your $28,151.36, using the 50% capital gains tax discount, you paid tax of $5,348.76 (assuming a 38% tax rate) on your taxable gains of $14,075.68. You invested the after tax amount of $43,430.74 in XYZ and it was worth $89,154.46 after 5 years.

Well, despite our investment in XYZ annually returning 2.25% more (not an unimpressive effort) than WOW over the 5 years, our investment was still worth $1,596.89 less than if we did nothing. In fact, over a 5-year period, under the figures used, XYZ would have had to generate 15.88% (2.66% pa better than WOW) just to equal the performance of WOW over 5 years.
The lesson? Don’t change investments on a whim, because it seems clever. Unless you are virtually certain that an alternative investment is substantially better than your current one, there is a high likelihood that you are better to leave the ‘free leverage’ provided by your ‘unpaid tax’ on current investments. Tony Hansen 01/12/10.

Taxation Value of Equity Investments, Part 1

One thing that does not get nearly enough coverage when talking in terms of wealth creation is the important taxation differences between the various asset classes. People talk about the ‘safety’ of having your funds in cash. When it comes to people like self-funded retirees, with just enough asset coverage to see them out, cash is a valid investment position. For someone with a long-term investment horizon, say younger than 55, or older, but with substantial assets, say more than $2m, cash will likely be a significant anchor on your performance.

The reasons are many. The historically superior performance of shares versus cash is simply the one that gets the most attention. Capital gains legislation in Australia provides most of the other advantages. The immediate taxation of income versus the deferred taxation of gains (as with most other countries), but most especially, the 50% discount for capital gains held over 12 months. I can’t stress that advantage enough, particularly for long-term holding as the ‘untaxed’ gains in your portfolio compound, effectively using your future taxation obligations as ‘free-leverage’.

Example - assume you are in the 38c tax bracket (between $80k & $180k in earnings). If I told you that over the next 10 years, the average interest rates on term deposits available would be 10% and the average growth in equities over the same period would be 10% (6% growth & 4% in dividends). What would you do with the $10,000 you wish to invest? For most people, the steady increase of the term deposit would be attractive, because despite both seeming to get to the same end result, the equities would probably be more lumpy, perhaps (4% / 16% / -10% / 23% / 17%) and so on. Assuming they were smooth, the end result would look like this:

The difference you will agree is quite substantial, the cash/term deposit option (with the assumed 38c tax rate) naturally returns net – 6.2% per annum. The equities netted an annualised return of 7.865% despite what is ostensibly the same return. Obviously property can have similar capital growth benefits. Held for long enough (over 40 years or so), the dividend would eventually be a larger per annum payment than the 10% cash return, at that point your capital base (the funds column) would be over 2 & 1/3 times larger in the equities column than the cash.

There are of course other factors to consider, like capital gains & franking credits and so on. But the basic fact remains that an equity investment assumed over the long term to grow at the same rate as the equivalent cash investment will actually be considerably more valuable.

So, given that if the returns were expected to be exactly the same, equities would prove to be a substantially more lucrative investment, it is probably a more worthwhile comparison if we us their historic returns. For the 30 years from January 1 1980 to December 31 2009, the average cash rate was 7.24% (we’ll call it 7.25%) and the average return for the S&P/ASX200 (TR) was 12.47% (we’ll call it 12.5%) with approximately 4% of the growth in dividends, would look more like this:

I know I am not alone in making this prediction. There is a better than average prospect, given the spikes in commodity prices and the economic policies being undertaken by the two largest economies in the world that we could be in for substantial inflation over the next 10 or 15 years. There is no better protection for your net worth during such a time than having a substantial proportion of your net worth invested in a group of stocks with good pricing power. Tony Hansen – 24/11/10

Managed Funds

You will often hear me talk about the poor performance as a whole of the managed fund industry, after taking into account fees. Mathematically of course, over any given period, 50% of funds are going to out-perform and 50% will under-perform. Unfortunately, studies have shown that when fees and charges are added into that, over 80% of all managed funds fail to beat a basic benchmark.

I decided, rather than trust someone else’s ‘studies’; I would look into the matter myself. Here was what I discovered:

Comsec (EGP’s discount broker of choice) has a universe of managed funds for its clients to use. There are 560 in total; I downloaded all of these, including their MER (Management Expense Ratio) and their performance over 1, 3 & 5 years into a spreadsheet so that I could get the data into a workable form.

As an Australian investor, there is really only 2 sets of indices I think serve as a valid performance comparison of market performance, the S&P/ASX200 (TR) and the All Ordinaries Accumulation Index. These measure the majority of the Australian market by market capitalisation on a dividend reinvested basis. As at 12/11/2010, the 1, 3 & 5 year returns of the S&P/ASX200 (TR) were 4.58%, -7.57% & 5.35%. Bearing in mind that the bear market of 2007/2008 commenced 3 years 16 days ago (makes the 3 year figures look dreadful). These are the benchmarks I will use to evaluate the funds.

Of the 560 funds, only 354 have a 5 year or greater track record. Of this 354, there are only 37, or 10.45% that beat the benchmark. This of course means 89.55% of all funds managed in Australia over the last 5 years would have returned a better result by investing their funds directly in the ASX200.

There are 536 funds that have been running for over 1 year. 148 of these or 27.61% have equalled or beaten the benchmark, proving only that it’s easier to beat the market in a single year than to do so on a sustained basis.

This brings me to my next point which is what might be termed ‘elimination bias’, whereby the worst performing funds are either closed, or wrapped into other products, so the manager can present a more successful ‘history’ in their PDS. This makes the 10.45% who beat the market over 5 years an even smaller figure because many of the other funds that make up the universe disappear through poor performance leading to unmarketability. Assume the universe should consist of 450 funds rather than the 354 remaining due to elimination bias (this is an assumed number as the true number removed is unknowable). Under this assumed circumstance, there are more like 8.22% out-performers.

The average MER for the 354 products with a 5 year history is 1.95%. The average MER of the 37 products which beat the benchmark was 1.80%. The 37 worst performing products had an MER of 2.02% (on average, if you’d have invested $100,000 in these funds 5 years ago, you’d now have the princely sum of $63,717 of capital remaining). This disproves, at least when it comes to fund management, the idea that you get what you pay for.

Similar results are found in the 1 year charts, the best performers charge below average fees and the worst performers charge the highest fees. When you look through the PDS of the higher performing products, invariably you discover a very low ‘annual charge’ and a higher ‘performance fee’ compared to the lower performers, which inevitably have higher annual fees and smaller performance fees.

The issue here is ‘alignment’. The more strongly the fund-managers interests are aligned with the unit-holders interests, generally the better the performance.

Some who look at this universe will state - but many of these are ‘world’ or ‘global’ products, the S&P/ASX200 (TR) is not a valid benchmark. To those people, I took the trouble of stripping out ‘global’, ‘world’, ‘commodities’, ‘gold’, ‘bond’ & ‘property’ products and was left with a universe of 232 Australian ‘equities’ facing products with a 5 year performance history. Care to predict the results?

26 out of the 232 products, 11.21% beat the indices. The out-performers charged below average fees. 4 out of 232 (1.72%) beat the index by more than 3% per annum over 5 years, and a single solitary 1 (0.43%) beat the benchmark by more than 5% per annum over the last 5 years.

There were 334 Australian ‘equities’ products with a 1 year performance history 86 of these, or 25.75%, out-performed the benchmark.

The conclusion – on an annualised basis, about ¼ of all fund managers will beat the index after fees are deducted, and generally less than 12% of fund managers will maintain index out-performance over a 5 year period, probably more like 7 or 8% when ‘elimination bias’ is factored in.

The solution - invest the proportion of your wealth you want exposed to equities one of two ways (or a combination of both) in either:

a) buy a low cost and liquid index fund such as SPDR 200 FUND ETF UNITS (trading on the ASX with ticker code STW), which after fees & costs has a tracking error over 5 years of less than 3% (about 0.5% per annum); or

b) find yourself a fund manager, who will charge you no fees, excepting in the event that a predetermined benchmark is beaten and who will have substantially all of their net worth exposed to the same investments as yours. Off the top of my head, I can think of EGP Fund No. 1 – Tony Hansen 17/11/10. (p.s. If you wish to see the list, e-mail us – eternalgrowthpartners@gmail.com and I will send it to you)

Beating the Indices

Our most satisfying result was calendar year 2008, a horrible year for investors globally, the S&P/ASX200 (TR) index declined by about 40%. I do not think it appropriate to quote an un-audited result here, but suffice to say that while our portfolio declined in value; it was nowhere near the quantum of the broader market. Any loss of capital is undesirable; however, if the cause of it enables you to accumulate significant positions in some seriously mis-priced issues then, in the longer term, it is not such a bad thing.

We were fortunate in that this attitude was handsomely (and rapidly) rewarded when the market bottomed in March 2009 and took off. Although the margin of victory over the benchmark in 2009 was not as wide, it came against an opponent (the S&P/ASX200 (TR) index) that had added about 35%. In years when the market advances so quickly, just keeping up is quite satisfactory.

When I think about benchmarks, I prefer to think in longer terms. On current values, the S&P/ASX200 (TR) dating back to 1980 has achieved returns in the order of 12.5% annualised. When you factor into that period, the 2 biggest market declines (1987 & 2008) since the great depression, that is pretty amazing, $1,000 invested in the indices (dividends reinvested) would be worth over $33,000 today, without doing anything more than being average. If, however, you managed to beat the market by a further 2.5% annually, your investment's current value would approximately double (about $66,000), add another 2.5% over the indices and your $1,000 would be over $125,000.

The sound performance of the indices, without the stress of individual stock selection is the reason that I recommend index investments to the vast majority of investors seeking exposure to the share market. Provided you take a long view and accumulate steadily a significant holding, you will build a handsome asset.

If you think for a moment the next 30 years will not be as good as the last, I think you will be proven wrong by a good margin. Provided we (as a country) make no substantial economic missteps, we are poised on the brink of a period of massive economic growth. I would happily bet that if you reset the benchmark – the S&P/ASX200 (TR) to 1000 on December 31 2009 (as it was at December 31 1979), that it would be at least at the 33,000 it is currently by 2040.

However, being as good as ‘average’ has always struck me as not being quite good enough. It would be much more satisfying to beat the market by a handsome margin. A 10 year record of beating the market by 5% per annum would place you firmly in the top 1% of investors over such a period, and as pointed out above, in a period of ‘normal’ market performance, would lead to the creation of substantial wealth.

The purpose of the informal/un-marketed commencement of EPG fund No. 1 is in order to establish, under an auditable reporting format, the formalisation of our investing track record, to - we hope - create the type of performance record that will serve as its own advertisement for the reasons you would want to invest. I am very excited about the market at the moment, in my view the whole market is quite cheap, meaning (I expect) over the medium term, gains will be better than their historic average. Better still, if we can beat that by a few points, we will stand our long-term wealth position in excellent stead. Tony Hansen 10/11/2010.

Efficient Market Hypothesis

Over the next few months, while we get all the regulatory loose ends tied off prior to our July 1^st 2011 ‘informal’ launch of EGP Fund No. 1, I will periodically post some information to direct our investors to the philosophical foundation of my investment choices and beliefs.

I am an unashamed fan of Warren Buffett as an investor, as I am of a great many other ‘super-investors’. I have reviewed extensively Buffett’s career and writings and would encourage anyone with a genuine interest in wealth creation to do the same.

Academics frequently posit that it is impossible for an individual to beat the benchmark consistently over a period, due to all known information being rapidly reflected in stock prices. The link below (authored by Buffett) is easily the best counter to that argument, and has never been successfully explained by efficient market theorists.

http://www.tilsonfunds.com/superinvestors.pdf

The most fascinating aspect of investment to me is the idea of competing against the ‘collective intelligence’ of the market. I am by nature an enormously competitive individual; the S&P/ASX200 (TR) index is the yardstick by which I measure the collective result of the market. Consistent out-performance of this benchmark can mean only one thing in my view; the accumulation of substantial wealth.

Whilst, like most people who have had a considerable measure of success in outperforming the stock-market, I am reluctant to attribute any of my success to ‘luck’, I would freely acknowledge that the idea of the market being relatively efficient is not completely baseless. The information instantaneously available to individual and professional investors alike means that the quantum of the discrepancy is significantly smaller than it has ever been in the past. The incredible reach of globalisation - the internet and telecommunications means information is disseminated swiftly and seamlessly to an audience with a great and growing capacity to interpret that information and quantify its impact on the current and future prospects of businesses.

That is to say markets are much more efficient than they were in the 1950’s or 1960’s, but they are not, and never will be, perfectly efficient. The likelihood of any investor ever creating anything like the returns of the Buffett partnership, which between 1957 and 1969 outperformed the Dow by 22.1% p.a. annualised, is close to zero in my opinion.

It is my belief, through in-depth analysis, I could outperform the S&P/ASX200 (TR), even investing only in ASX50 companies (the 50 largest in Australia). At the moment, I think BHP and RIO both represent very good value and will perform better than the indices and most other stocks in the ASX50; I find it difficult to separate the two at current prices. I would rank the big 4 banks in 2 classes CBA & WBC representing better value than ANZ & NAB. That said, I would be unlikely to invest in any of these given the substantially more favourable valuations to be found in the smaller companies.

The smaller the business, the greater the likelihood of the market mis-pricing the enterprise value. Companies worth less than $1b are most frequently mis-priced, and until the day I am managing truly substantial sums of money, I will spend most of my analytic time and effort outside of the ASX100 stocks – Tony Hansen 03/11/10