A horse is a horse of course of course…

25-Oct-2019
Investment
by Michael Davie

With the Melbourne Cup weekend upon us, it had me reflecting about the sport of kings, the origins of Kuda Wealth’s naming conventions, and the difficulty in stock selection when it comes to picking winners. 

Kuda comes from the first two initials of my surname and that of my wife’s maiden name. The word Kuda in Malay means horse. My father in law “Joe” comes from Malaysia and together he and Jenny immigrated to this wonderful country aptly on Australia Day 26th January 1978, (a year after I was born) and now I’m married to his wonderful daughter Millicent.

The knight in our logo represents Kuda (Horse). It’s indicative of both a game that I love and the importance of strategy in financial planning and portfolio management. The knight in chess is the only piece that has the power to jump other pieces. It is my favourite tool for both defence and attack in equal proportions. I see this as being a great metaphor for portfolio management. We need to be looking forward and continually pursuing opportunities to grow our wealth, whilst having an eye firmly on defence and protecting what we have already achieved.

The equine connections behind our business name, extend beyond the cultural origins of my wife’s family, a board game and a mashup of our surnames. My brother “Chris” breeds horses; coloured warmbloods to be precise. For those horse lovers out there, you can find a link to his website here http://kenlockpark.com/

We believe the Kuda name, supported by our knight logo is a positive representation of what we stand for in business. The horse has long been a symbol of freedom and strength. The origins of our equine friends do not necessarily receive the attention and credit that they deserve in shaping our modern world. The use of the horse revolutionised agriculture, helped develop cities, improved transportation and communication, facilitated imperialism and nation-building and revolutionised warfare.

The horse and carriage have long been replaced by cars. However, we still use the term horsepower today to refer to the strength and power of our motor vehicles. The cities that the horse helped to create are now populated with children and young adults, some of which have never seen a live horse, let alone understand the effect it has had upon their lives.

The horses that will take to Flemington this coming Tuesday in the race that stops a nation, will be vying for the chance to be immortalised in history with the greats of Phar Lap, Archer, Might and Power and the great mare in Makybe Diva.

I’m not into gambling but we have always put $10 on the Melbourne Cup for each of the family members since the birth of my eldest daughter Ruby 12 years ago. The results have proved a mixed bag in terms of winnings and if anything, have served for providing a higher level of interest in the day’s events. Now it might be the planner in me, but I’ve always tried to apply some strategy to my horse selection. I will read the form guide, look at the win, place, loss history and track conditions. (With Winx being a recent horse racing exception), the reason why investment and portfolio disclaimers always remind investors, that past performance is no indication of future performance is summed up in horse racing.

My children have had more consistency in Melbourne Cup success then any form guide analysis, expert opinions and odds indicators. Ruby picks her horses based on the colours that the jockeys are wearing, James picks them based on their odds, Tom picks them based upon the coolest names and Millicent picks number 8.

The difficulty in picking a winner and a consistent winning formula, places horse racing firmly in the corner of gambling. So how does this vary to Investing? I have prospective clients sometimes tell me that buying shares is like gambling. This is where I hold a different view. Gambling variabilities are many and wide and even the experts fail to do this on a consistent basis.

Over the years we have seen a rise in Vanguard or Index Exchange Traded Funds. This would be akin to placing $1 bets on every single horse in the race. The market decides the investors fate. The winner in that year may have been a short-priced favourite and the subsequent return may not be enough to pay back the total outlay in $1 bets placed on the other horses. However, it is guaranteed to pay and produce a winning result. Whereas, if a big paying odds surprise winner gets up, the return may be enough to cover the cost of the outlay and make additional profit for the gambler. Therefore, the punter is merely a participant and has no say in which horse gets over the line.

As Vanguard buys the index or market, it keeps the price of the management low and the turnover in the holdings is also reduced. The investor gets the market dictated returns and spreads their risk.

Whereas, with strategic portfolio construction, I say to clients that it is still “just as difficult as picking a winner in the Melbourne Cup, to select an individual stock that is going to have a breakout winning year.’’ The broader market may even call off the race in any particular year, with global and negative market falls. However, through the review of the market, analysis of the current and future economic conditions, quantitative data available and research house analysis, it is somewhat an easier task to avoid the groupings of stocks which will be facing headwinds, market turndown, performance problems or earnings pressure. The Vanguard index investor does not receive this luxury. They collect “the ones that are still running” as they do not have any say on what to avoid.

Portfolio management rewards runners, not just those that finish with a placing. We may not get the winning stock of any particular year. However, with careful analysis we can build a diversified mix of shares that in concert can work towards achieving our client’s goals. Not all runners are going to have speed, some may be slow out of the gates, or have trouble in the saddle over the journey. However, our portfolio theory is about buying quality assets, that can weather headwinds over the short to medium term, as they pursue long-term success. The average race in the Melbourne Cup is a little over three minutes. The average timeframe for a winning stock is five to seven years.

The Melbourne Cup punter has a little over 3,200 metres to see if they are in the money, whereas the average investor has a much greater distance to cover. They call the Melbourne Cup runners and winners the true stayers. Whereas, that mantle really belongs to the intelligent investor who understands that investing is a marathon and not a sprint.

On behalf of the team at Kuda Wealth, we would like to wish all our clients and punters the very best of luck on Tuesday; and if you would ever like us to do our own analysis of your odds of retiring comfortably, do not hesitate to contact us.

Michael.

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