Wealth Intelligence

There is a glistening nugget from September quarter’s share-market debacle (-7.2%)

Independent thinking is an integral element of wealth management success.

First Samuel’s experience is a salutary lesson

The Australian share-market returned -7.2% (-5.8% including dividends) in the September quarter.

Not a happy result.

But First Samuel’s clients’ share portfolios returned between -1% and + 1% (depending on each client’s individual Investment Programme), a very large outperformance.

Well, so what, First Samuel?

The so what is that such a large relative out- performance was the outcome of an intentional investment strategy that meant First Samuel clients had earlier relative underperformance for many months.

That intentional investment strategy was to have a ‘defensive’ portfolio when we considered that the market was over-valued.

And that strategy turned out to be most successful.

The set-up

First Samuel assessed that the 'search for yield' (i.e. investing in large companies that paid high dividends. especially the banks) was a short-term 'sugar-hit', as in many cases the longer-term profit growth outlook for those companies wasn't so good.

That is, the short-term excitement of a high dividend overwhelmed the probability of poor long-term share price gains.

The result was that the share-market, driven by the so-called 20 Leaders, had a mini-boom. And in fact, in the space of three months (December, January and February) leapt by 12%!

First Samuel eschewed following the herd. And stuck with its investment approach that had hitherto provided strong outperformance. But this led to relative underperformance for this period.

First Hand Spring Summer15 graph 1 1280pxW

As the share-market rose, First Samuel took profits. But as stocks in which we were interested were too expensive, the surplus cash was retained.
Along with other stock selection decisions, the outcome was a ‘defensive’ portfolio.

The successful outcome

It took until the September quarter for the strategy to become successful. Not only did the cash position help immunise the portfolio against
the sharp fall in share prices, the balance of the stocks also had strong relative performances.

First Hand Spring Summer15 graph 2 1280pxW

Two-fold success

First Samuel’s success had two components.

Firstly, the need for independent thinking in wealth management. Following the crowd is not always a recipe for success. But it does give those that have followed the crowd the lame excuse, “Well, everybody else did it, so it was okay.”


Secondly, it was critical that First Samuel’s clients understood that independent thinking was an integral part of the investment process. Clients were patient and understood the reason why the ‘sugar hit’ was ignored.
They knew of the process. And knew that it was just a matter of time before the market corrected.

Not unique

I have used the example of First Samuel as a successful implementer of ‘independent thinking’, as the success is somewhat proximate.

Of course, there were other wealth managers that thought similarly to us i.e. were also independent thinkers over this period. And also with a strong long-term performance history.

The skill, of course, is being an independent thinker all of the time.

Success comes from independent thinking

The obvious point is that following the crowd is not always a wise course of action. Especially when there are clear signs that the crowd is going down the wrong path.

IMPORTANT NOTICE:  Any advice contained in this document is of a general nature only and has been prepared without taking into account your personal objectives, financial situation or needs.
Because of that, before acting on any advice in this document, you should consider whether the advice is appropriate for you having regard to your personal objectives, financial situation and needs.