So much for that RBA interest rate cut, huh?
Still, it's likely we won't have to wait too much longer, with most economists pegging an interest rate cut in May.
What's a month between friends?
Regardless of when the RBA next cuts, according to Equity Trustees head of asset management Paul Kasian, the "yield play" is still on.
He's stating the obvious, of course. Whether the cash rate is 2.25% or 2% or even 2.5%, it doesn't matter — by comparison, dividend yields smash government bond and term deposit yields out of the park.
Yet Australian investors remain cautious… when it comes to the share market at least.
The property market, especially in Sydney, is on a whole other level. To emphasise the point, the AFR today said the median price of a Sydney home could smash through the $1 million mark before the end of the year.
So much for my warnings that house prices are unaffordable, that bank stocks are over-valued, and that it will all end in tears.
It's what cheap money can do.
It can make the unaffordable look affordable. The monthly repayments on a $700,000 30-year mortgage are 'only' $3,500, or less than $800 per week, about the same cost as renting.
Add in capital appreciation — because in Australia the prevailing wisdom is you can't lose buying bricks and mortar — and for investors, negative gearing, and it's a no-brainer.
What could possibly go wrong?
Try rising unemployment. Try a slowing economy both here, and more importantly, in China. Try a federal budget in need of repair, ultimately leading to a lower standard of living for many Australians (hint: taxes must go up, benefits must go down, including superannuation benefits for the wealthy).
In short, the lucky country's winning streak is soon to come to a grinding halt. We're already in an income recession, about which ANZ chief economist Felicity Emmett said late last year…
"Soft income growth will weigh on profits, wages and public revenues, and flow through to softer consumer spending, business investment and public demand."
Despite all this, the property market is running hot.
Red hot in Sydney, where the AFR says Australian Property Monitors' chief economist Andrew Wilson has mounted a clock on his desk counting down the days before Sydney's median house price hits $1 million.
What could possibly go wrong?
Try higher mortgage repayments. Forget negative gearing, try negative equity. Try selling your bricks and mortar in an illiquid, and falling property market.
Now I'm not saying all that will happen. What I am saying property is NOT a one-way bet, especially at these highly elevated prices.
Yet property investors and property buyers — not to mention the spruikers, of course — are acting as if nothing could EVER go wrong.
Buyer beware. Interest rates can go up as well as down, and house prices can go down as well as up. And property forecasters can be wrong.
Not so share market investors. They've seen and felt the pain of a falling market. As such, they remain cautious… even as the S&P/ASX 200 Index closes back in on the 6,000 level.
Apply the same logic to the share market that property investors are applying to the housing market, and shares would literally be through the roof.
Thankfully, for someone like me, who is a net buyer of shares and therefore prefers cheaper shares, not all ASX equity valuations are through the roof… despite the AFR quoting Invesco's UK-based product director as saying Australian equities are "very expensive versus broader global equities."
Yes, some large-cap ASX shares are expensive… try Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS) both trading on P/Es of 17. Or AMP Limited (ASX: AMP) trading on a P/E of 20. Or CSL Limited (ASX: CSL) trading on a P/E of over 25.
Let me assure you, on a pure price to earnings basis, they are all expensive.
Let me also assure you, in this ultra-low interest rate environment, the 6.8% grossed up dividend yield on Telstra shares is attractive. And that's before the next interest rate cut, coming as soon as next month.
So what's an investor to do?
Sit on the sidelines and wait for a correction?
Waiting for a crash or correction isn't going to get you far. You'll be waiting a while, and if and when a correction does come, I guarantee you'll freeze up and stay sitting on the sidelines.
Not me. There's no fun, or wealth, in that.
Whatever the market, I regularly invest new money into the share market, while ALSO maintaining a healthy cash balance.
Cash is a natural hedge, giving me protection against markets when they inevitably do fall, and providing me opportunity to buy shares on the cheap. And I regularly dip into my cash balance, adding to my share portfolio on an almost monthly basis.
Cash may not earn me too much in the way of interest, but as hedges come, it's a cheap form of insurance.
Heck, even Warren Buffett, widely regarded as the world's greatest investor, holds billions in cash. Not that it deters him from buying shares — just two weeks ago, with US share markets riding high, his Berkshire Hathaway announced it will combine with Brazilian private equity firm 3G Capital to invest $US10 billion into a mega-deal that will merge food giants Heinz and Kraft.
Who's afraid of the big stock market crash? Not the world's greatest investor.
You can do those sorts of opportunistic deals when you run a healthy cash balance, and when you measure your return on investment over decades, not days.
Clearly I'm no Warren Buffett. But I do take a leaf or two out of his book of investing…
- Don't use leverage, or debt.
Buffett says "If you're smart, you're going to make a lot of money without borrowing." Property investors, leveraging up to take advantage of today's low interest rates, should take note.
- Invest for the long-term
Buffett says "If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes." Day traders, those trying to make a few hundred dollars trading in and out of volatile stocks like Fortescue Metals Group (ASX: FMG), should take note.
- Buy quality shares
Buffett says "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Those who missed buying quality companies like SEEK Limited (ASX: SEK) or Cochlear Limited (ASX: COH) because they were trading on lofty valuations, should take note.
Speaking of SEEK and Cochlear, I'm going to let you in on a little secret…
Back in the day, Scott Phillips recommended subscribers of his Motley Fool Share Advisor stock-picking service buy both those companies, and with stunning success, with SEEK up 160% and Cochlear up 47% for subscribers to that service, both returns soundly out-performing the returns of the All Ordinaries Index.
You may have seen Scott on Sky News Business or the ABC's The Business.
With returns like those of SEEK and Cochlear, no wonder that the Motley Fool Share Advisor scorecard is soundly out-performing the market, the average ASX pick being up a whopping 62% versus the All Ordinaries up 25%.
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Share market investing need not be difficult. As Buffett says…
"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ."
With that, I give you my parting investing tips, which for regular readers of this free Motley Fool Take Stock email, will have a familiar ring, for which I make no apologies…
1) Invest regularly.
2) Don't panic when markets inevitably do fall.
3) Hold for the long-term.
4) Reinvest dividends.
5) Live a healthy and wealthy life.
