What's the definition of a long-term investment?
A short-term investment gone wrong.
Such is the lot of Medibank Private (ASX: MPL) investors.
So much hype. So much hope. And so much for the rivers of "free money."
It's all fallen as flat as a pancake.
And now? Anger, frustration, blame, and dare I say, I little bit of boredom. As I write, Medibank Private shares are down a cent on the day, trading at $2.13.
Party over.
In hindsight, for a few hundred dollars profit by stagging the issue — selling on day one — it all hardly seems worth the trouble, huh?
Although I realise I may be upsetting a good portion of the Motley Fool readership, I have ZERO sympathy.
As I wrote in the lead-up to the Medibank Private IPO feeding frenzy, I wasn't touching it with a barge pole.
Sure, I may have left some "free money" on the table, especially as I could have tried to stag some profits for myself and my wife and three children too.
But heck. If a few hundred dollars is going to make a difference to your wealth, health or happiness, good for you. I've got far bigger fish to fry.
In the aftermath of the Medibank IPO, I trust it's a little easier for readers to understand why I've sworn off IPOs for life.
Scaled back allocations. Stag profits on offer of a few hundred dollars, at best. A fully priced stock, with no margin of safety.
Yesterday I suggested the Medibank Private IPO hype would last maybe a week.
I was wrong.
It lasted three hours, coinciding with the last hour of trading yesterday, during which time the Medibank Private shares fell from $2.20 to $2.14.
I'd hazard a guess it was around that same time that a sense of anger and disappointment descended on investors. It felt like something that was rightfully yours — namely "free money" — had been suddenly and unexpectedly ripped from your grasp.
Again, my sympathy factor is zero.
Remember my old saying, that if it looks too good to be true, it usually is?
Come in Medibank Private. A solid company, with modest growth prospects, with a respectable fully franked dividend yield, yet priced at a massive premium to the market.
Compare that to one of the Motley Fool Share Advisor recommended stocks, M2 Group Ltd (ASX: MTU), the telecoms company behind the iPrimus and Dodo brand names.
The stock is up over 43% since Scott Phillips tipped it to Motley Fool Share Advisor subscribers — easily out-performing the All Ordinaries, the latter being up only 5% over the same time.
In a recent company presentation, M2 Group forecast earnings growth of 15 – 20%. Trading on a forecast P/E of under 15, coupled with a forecast fully franked dividend yield of 3.6%, on those metrics, it leaves Medibank Private for dead.
In fact, the list of current Motley Fool Share Advisor buy recommendations is chock full of stocks similar to M2 Group — companies that have strong growth prospects, pay a decent and usually rising dividend, and trade on reasonable valuations.
In comparison to Medibank Private shares, why would you look anywhere else?
Overnight, no doubt in sympathy with Medibank Private, U.S. markets were as flat as a pancake. This was despite data showing the U.S. economy grew at an annualised rate of 3.9%, nicely ahead of expectations.
No wonder really, given U.S. interest rates have been stuck at zero percent for as long as I can remember… and are set to stay there for longer yet.
Compare that to Australia. Our economy is stuck going nowhere, lucky to grow at 2.5% per annum.
Our unemployment is on the rise, with some pundits predicting the jobless rate could close in on 7% in the months ahead.
The price of iron ore, by far our biggest export, is plumbing five year lows, now trading firmly below $US70 a tonne.
The Aussie dollar remains stubbornly high at US85 cents, especially in comparison to some forecasts of fair value being as low as US75 cents.
Yet, here we are, in Australia, the continent formerly known as the lucky country, sporting a cash rate of 2.5%.
I'm no rocket scientist, but something doesn't add up.
The Reserve Bank of Australia (RBA) are clearly of the belief that words speak louder than actions… for now.
But, as you'll read below, come early next year, all that could be about to change… and I'm talking about even lower interest rates.
I for one am not hanging around, getting in ahead of the game, buying stocks now.
I'm not fussy. Growth stocks, value stocks, dividend paying stocks — they're all the same to me, although I must point out, almost all stocks I buy have first been fully vetted and recommended to our paying subscribers by our crack team of Motley Fool analysts. I'm happy to leave my stock picking to the experts.
Philip Lowe was the latest official to flex the jawbone, the AFR reporting the RBA deputy governor as cautioning that much of the present malaise both here and abroad was because people were fearful of taking new risks, despite record low official interest rates. He said…
"It is important that we guard against the possibility that this uncertainty mutates into chronic pessimism."
Clearly Mr Lowe has been hanging out with our politicians a little too much. Their stock in trade is turning boom to gloom.
I digress…
Some years ago, maybe as many as many as 20 years ago, I decided that if I was going to create wealth for myself and my family, I needed to take some risks in life.
So, I turned to what I knew and loved best — investing in the stock market.
Perhaps somewhat belatedly, I decided I wasn't going to get rich leaving my money in the bank, especially in term deposits.
Back then, it should be noted, interest rates were FAR higher than they are today. In 1994, the cash rate was 7.5%, and term deposits were likely paying around 6.5% — a positive windfall compared to today's pitiful interest rates.
Still, it was the stock market for me. Yes, as a relative youngster, time was on my side. But I didn't own a house, wasn't married, didn't have children, and as always, the future was uncertain.
I'm pleased to report I haven't looked back, and that's despite living through the dot com bust, September 11, more stock market corrections than I care to remember, and the doozy of them all, the GFC.
I was summarily sacked from one job. At various stages in my career, I was a contractor, a temporary worker, a freelancer — paid no sick leave, no holiday leave, no superannuation, and was highly dispensable, at a moment's notice.
I took a pay cut, twice. I left a stable, well paid job as an accountant at the BBC in London to join an upstart company with a strange name — The Motley Fool.
But all the while, I continued to live well within my financial means, saved hard, and continued to put money to work in the stock market.
My decision has served me well to date. And, I fully expect it will continue to do so for many, many years to come.
Looking ahead today, uncertainty abounds.
What happens when inevitably interest rates rise?
Will there be a house price crash in Australia, and what will it mean for our big four banks, and to our economy?
We're well overdue a stock market correction.
What if iron ore really does hit $US50 a tonne?
What EVER happens now or in the future, I'll still be a stock market investor. I'm committed to being a lifelong investor.
- Not one day, like some Medibank Private stags.
- Not one month, like those who will bail out at the merest whiff of loss.
- Not one year, like those who compare the year to date return so far in 2014 on the S&P/ASX 200 Index to term deposits and determine the latter is their safest bet next year, and beyond.
- Not three years, for anything can happen between now and 2017.
- Not five years, for that is far too short a time period to let the power of compounding returns weave its magic.
I'm talking decades… up to, and hopefully well past my own personal due-by date. I'm putting the building blocks in place now — mostly through teaching — for my children to keep investing the family's wealth way past when my time on this planet is up.
When Philip Lowe talked about people taking risks, he likely wasn't suggesting we all pile into the stock market.
He was encouraging entrepreneurs to start new businesses.
He was encouraging banks to lend to entrepreneurs.
He was encouraging small and big businesses alike to go for growth — create jobs, invest in something new and innovative.
He may have been even encouraging government to invest in infrastructure. To use this period of low interest rates today to build the big, bold projects of tomorrow — things that will pay the taxpayer back, largely through increased productivity, in spades in the years and decades ahead.
I'm talking about things like high speed rail. More, better, public transport. Out of town business parks. Additional airports. Take the politics out of high speed broadband — make the NBN the best, fastest, scalable and longest lasting it can possibly be.
All that said, I'm a realist. In the current political environment, where point-scoring trumps policy, getting any of the above done is more likely than Clive Palmer being re-elected to Parliament.
Source: 2GB
What is likely however, is still lower interest rates.
Try as they might, Glenn Stevens and Philip Lowe's jawboning is simply not working. Crunch time is coming, when actions must trump words.
In the case of the RBA, that means lower interest rates. Not this year, but potentially as early as the first quarter of next year.
Writing in the AFR, David Bassanese is on the same page, saying it's possible the RBA is moving to cut interest rates further, given the still sombre outlook for the economy. He concludes by saying…
"With the federal government set to announce a budget blowout and a new round of spending cuts, local confidence may well need support early next year. A stubbornly high dollar and a flattening out in house prices would make the case for lower interest rates even stronger."
In the face of what looks increasingly like interest rates next year of closer to 2% than 3%, for a lifelong stock market investor like me, it means three things…
1) Dividend paying stocks, especially of the fully franked variety, will continue their popularity.
2) Related to the above, as dividend yields are driven lower, so stock prices rise. Where once a 7% fully franked dividend was the norm, a 3% fully franked dividend yield might be the new normal. Imagine what that could do to the share prices of popular dividend paying stocks like Telstra Corporation Ltd(ASX: TLS) or Insurance Australia Group Ltd (ASX: IAG)?
3) In order to build wealth, and indeed to generate income in this ultra-low interest rate environment, you're going to need to take some risks. And seeing as I'm not going to be building a high speed rail link, for me, as was the case 20 years ago, that means continuing to invest in the stock market.
Tomorrow, I'll name one Hidden Gem stock that's already in my portfolio, and which one of our stock pickers, thinks has been unfairly and unjustly beaten down to bargain basement levels.
And no, for the record, I'm not talking about Medibank Private.
