18% Annual Dividends… for 200 Years

Before you get too excited about today’s headline, you should know it’s not related to one of our investment services. In fact, this ship literally sailed more than four centuries ago.

It refers to the Vereenigde Oost-Indische Compagnie (VOC), a Dutch outfit known in English as the United East India Company. The VOC was the first business in the world to ever issue stock…way back in the early 1600s.

I learned a bit about the VOC in my uni days. But it wasn’t until reading Rob Mundle’s Great South Land over the holiday break that I appreciated just how successful this business was. Not to mention how little I knew about the earliest Western explorer to reach Australia’s shores.

Care to take a guess?

When I polled some Aussie friends a few mentioned James Cook. But he didn’t spot Australia’s east coast until 1770. Most guessed Abel Tasman’s epic voyage in 1642…which admittedly is what I thought before reading Great South Land.

Surprisingly, no one had heard of Willem Janszoon, captain of the VOC ship Duyfken. He stumbled onto Australia’s west coast in 1605. That was early days for the VOC. But it was already astoundingly profitable, selling Asian purchased spices and fabrics in Europe at 3000% mark-ups.

That’s why, according to Mundle:

‘…the company was able to return an annual dividend of 18 per cent for almost 200 years, due to the policy followed by its directors in Amsterdam of reinvesting much of their substantial profits back into the business.’

Reinvesting back into your business? What a novel concept. And one that seems to be lost on many of our biggest companies today. Like BHP, for example.

This headline ran in the Sydney Morning Herald on October 23, 2015, ‘BHP open to using debt to pay dividends’. I don’t know about you, but that sounds a tad dodgy to me. And with BHP shares down 33.5% since this date, I imagine more debt is on their horizon.

Anyhow, I could go on about the VOC and Mundle’s enlightening book. But it’s time to cast our eyes to the markets. You might want to squint…it’s not pretty.

Global markets in limbo dance

As we near the end of the first trading week of 2016, you have to wonder…how low can markets go?

On Thursday, the Dow Jones finished down 2.3%, bringing the weekly loss to 3.2% as of Thursday’s close. Tech stocks fared even worse. The Nasdaq shed 3.1% Thursday and was down 4% for the week.

It’s a similar picture in Europe, with the German DAX losing 4% for the week.

And there’s no safe haven in Asia either. Though Japan’s Nikkei 225 was up 0.4% in trading Friday, it was still 6.3% in the red for the week.

And then there’s China. If you’ve been following the daily carnage on the Chinese markets, it won’t surprise you to hear that the SSE Composite Index was down 11.7% last week. That’s despite — or perhaps because of — several trading halts and more central bank and government meddling to prop the share market up.

So how about the ASX? Have a look at the chart of the ASX 200 below. Welcome to the first trading week of the new year! If a picture is worth a 1000 words, my job is done.


Source: Yahoo FinanceClick to enlarge

See what I mean?

As of writing, the ASX was down 0.44% Friday, and 5.84% for the week. According to Friday’s Business Day,

‘[Yesterday] The ASX suffered its worst one day performance in more than three months, its worst week since August 2011, and its worst start of the year on record, chalking up a loss of 5.4 per cent, or $78 billion in market capitalisation, in 2016.’

Wow. Less than one week in and already down $78 billion. That’s probably making you wish you had listened to Vern Gowdie’s advice, if you haven’t already.

Commodity investors have even more reason to moan. WTI crude is currently at US$33.48 per barrel, down from US$36.76 on Monday. Brent crude inched back up Friday, at US$34.10 per barrel, after dipping to US$33.09 cents Thursday — its lowest level in 11 years.

Gold is one of the few commodities to buck the trend. The yellow metal — traditionally viewed as a safe haven — gained 2.7% last week, currently trading at US$1103.40 per ounce.

With the old limbo bar dropping every day, what’s an investor to do?

Pick your stocks carefully

If you’ve read this far, the following from The Australian Financial Review won’t come as a big shock.

It’s going to be a disappointing year for sharemarket returns in 2016, according to Australian investors who predict a meagre 3 per cent growth for equities gains this new year.

A survey of nearly 10,000 Australians by Investment Trends found investors expect the share market to grow by less than 5 per cent this year, reflecting nervousness after a dismal year of returns in 2015.’

To be honest, 3–5% returns in 2016 sounds optimistic to me. My crystal ball’s not flashing on a massive crash either. But I wouldn’t be surprised if we see a repeat of last year’s 1.3% loss on the ASX 200 by the time the year comes to an end.

That sentiment is reflected in this article from The Age last week,

“Whatever you’ve been doing isn’t going to work; it hasn’t been working for some time,” Australian Unity chief investment officer David Bryant said…

That meant 2016 would be a market for stock pickers, rather than trying to mimic market indices, he said.

‘“Your strategy for the market should be to move into and out of the market as it moves around.”

David Bryant’s advice struck a chord with me. And not just because most of Port Phillip Publishing’s financial advisories are all about picking the right stocks in any market condition.

It’s mostly because with today’s highly volatile markets — and recent sharp sell-offs — index tracking ETFs or a diversified basket of blue chip stocks just aren’t going to cut it.

Of course moving in to and out of the market is easier said than done. If you move at the wrong time, you could lose far more than any index tracking fund. That’s where a little expert advice can save you from making costly mistakes.

And when it comes to moving in and out of markets, I don’t know anyone who’s got it down better than Quant Trader’s Jason McIntosh. Jason offers you the opportunity to trade both long and short, sending subscribers daily signals on the latest actions to take.

An important aspect of Jason’s strategy is that he doesn’t limit you to just the largest companies. Here’s what he wrote to subscribers Friday afternoon when discussing the top 20 performing stocks,

Scroll your eye down the list. You’ll see only a handful of the stocks are in the ASX 200. This is the subindex most fund managers’ focus on.

Here’s a summary of the data.

Subindex

Number of stocks

ASX 200

4

ASX 300

5

All Ordinaries (top 500)

7

Outside the subindexes

4

This is really interesting. Quant Trader scans practically every ASX stock. It doesn’t favour any particular segment. The algorithms’ first priority is to identify movement…

‘Most of these stocks [the top 20 performers] are not household names. Yet they have outperformed many of the larger and more familiar companies.

The ASX has around 2000 stock listings. That’s a lot of companies. And most of these are virtually unknown.

But here’s the thing. Few traders can analyse anywhere near 2000 stocks. So they instead focus on a subset of the market — like the ASX 200.

The downside of this is that it filters out a lot of potential top performers. You see, many of fastest growing companies are outside of the top 200.

‘Quant Trader identified plenty of small to mid-tier stocks in back-testing. Many went on to rally by hundreds of percent.’

Quant Trader was only one of a handful of publications to receive a straight A in our 2015 Port Phillip Publishing Alliance Report Card, sent to our Alliance partners on 1 January.

With $3.28 won for every dollar lost in the long trades, and $2.07 won for every dollar lost in the short trades, that grade was clearly deserved.

Although the win rate on the short trades isn’t explosive, it’s right in line with Jason’s expectations that most of the gains will come from the long strategy, with the shorts acting as more of an insurance policy during downturns.

And with the market outlook on the…er… gloomy side, you can do a lot worse than an insurance policy that delivers a 2:1 win ratio.

You can find out more about Jason McIntosh’s trading style and Quant Trader here.

Regards,

Bernd Struben,

Managing Editor, Money Morning

Ed Note: The above article is an edited extract from Port Phillip Insider.

From the Port Phillip Publishing Library

Special Report: You probably already sense that stocks might be in for another bumpy ride in 2016. But that doesn’t have to mean that you have to miss out on making great money. Because, according to small-cap analyst Sam Volkering, certain stocks could rise hundreds of percent no matter what happens in the next 12 months. In this special report, Sam reveals the simple principle behind that success. And you’ll also discover his top three small-cap picks for 2016, which could bring you gains as high as 338% over the next 12 months. (more)

Join Money Morning on Google+

Money Morning Australia