AGM season in full swing...and I couldn't care less

Just before the Annual General Meeting season started for Australian companies I did a series of posts on how voting at AGMs was the one time that shareholders had to influence the way in which a company was run.  I also pointed out that retail shareholders do not vote and the companies therefore made decisions which typically favoured institutions.

I decided that one mini-crusade that I would go on would be to inform retail shareholders how important their vote was and how they should vote to protect their shareholding.  For this first AGM season, therefore I committed to doing my small part and actually voting in every AGM in which I was entitled to and I discovered something - I just did not have a good enough understanding of what I was voting on to care.

Voting on remuneration reports

This is the one area that people typically get worked up about - executives get paid too much money and this is a chance to vote that remuneration report down.  However there are several problems

1. The remuneration reports take a fair bit of effort to go through properly
• What you should be interested in is not only the absolute levels of incentives but also how these incentives are structured and how the vesting works for each of these
• Most retail investors do not have the knowledge or know how to go through these reports
• Even if you do have the knowledge and know how they take a fair bit of effort and if you try and do it for any more than about 5 stocks you typically get bored out of your brain
2. Typically remuneration report voting is linked to how well the shares have performed NOT how the remuneration is structured
• You see this all the time - a company that is performing well can pay their senior management almost anything and incentivize them terribly and shareholders will still vote for the report
• Conversely  shareholders will vote against a report which compensates managers in an appropriate way if the shares are performing badly
• This doesn't make sense but it is the only real option that shareholders often have to vent their frustration at the company

Voting for directors

This is the bit I got most stuck on (and I cared the least about).  I simply did not know WHO these directors were, whether they were good or bad, what sort of decisions they voted on and how informed they were. 

The strange thing about investing in companies is that you are constantly exposed to the management team - the CEO, CFO and other senior personnel through conference calls, news reports etc but as a shareholder you get no say over the management team.  You get to pick the guys who pick the management team however you know nothing about these people and how active they are on the board and how much the actually contribute.

I found myself voting for board members if I liked the senior executives and against them if I didn't.  There has to be a better way.  Companies should start providing information on what these board members are actually adding.

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When to buck the trend and ignore the share market

Often times as an investor, especially in listed securities, you will find an investment 'going bad'.  The market will has significantly against you and the temptation is to cut your losses and get out.  This post will be about when to hold your nerve and what you should be telling yourself when your are doing that.

I have posted before about how one of the hardest thing to do as an investor is to sell shares when they have increased in price significantly or very suddenly because greed takes over.  This is the converse case - it is about how it is hard to hold onto you shares when fear takes over.

However I should stress from the start that you should not always hold onto your shares.  There ARE times when you should cut your losses and get out.  There are, however, a very specific set of circumstances in which you should ignore the market and buck the trend

What are the specific circumstances where you should ignore the market?

For you to ignore what is going on in the market, in your own mind you should be very clear about certain things:

1. Is your valuation of the company up to date and do you believe in it?
• This means you should have included ALL relevant information that has been released and you need to be comfortable that your valuation is as accurate as it can be
• If you think that you are right and the market is wrong - this is where you can make real profits
  
2. What is causing the share price drop and is this relevant?
• Share prices fluctuate quite a bit and sometimes they do so for valid reasons (e.g. the company is decreasing in profitability, there is a new, better competitor, they have too much debt) however sometimes it has nothing to do with the company itself (e.g. a company that doesn't have any exposure to Europe falls on concerns about Greek debt)
• If it is relevant news (or even rumours) then you should be putting these into your valuations as discussed in point 1.  Your valuation is not a static document - it should constantly be updated
  
3. What DON'T you know?
• The hardest thing about being an outsider investing in a company is that you will never know everything
• You always need to consider therefore what may or may not be happening that you do not know

Assuming your valuation is up to date, the factors causing the share price to drop are irrelevant or temporary and you have accounted for those things you don't THEN DON'T SELL

If you have done everything that you can and you trust your valuation and you understand what is moving the share price then you should have the confidence in your own investment analysis to hold out against the market.

The thing about investing is that you have to be able to ignore what is happening day to day with your stock investments.  They will go up and down and as long as you are tracking the fundamentals and they still look good to you then you should hold out until your valuation not the market tells you to sell  

In these circumstances I have often seen investors double up their bets and take advantage of the lower prices.  I am typically not one of those investors.  If I still trust my original investment then I stick with that amount.

Note that there is always the risk that you are wrong.  There is the risk that there is something that you didn't know that comes and bites you and unfortunately there is nothing you can do about this other than to keep a very close eye on the investments that you do have - especially those that seem under pressure - and constantly be trying to work out what is driving the share price.

A (current) personal example

I thought I would include a quick example that was currently affecting me.  Recently I mentioned that I bought into (in quite a large way) the FKP rights offer.  In fact I was very happy when I got allocated much more than I was expecting. 

Because I have hold periods associated with any stock that I buy, I have been unable to sell these and the stock has dipped well below my average buying price (and the offer price).  I have more than I am usually comfortable with invested in this particular stock.  

The reason I am holding onto it is as follows (please do not go out and buy this stock because I am saying I think it's good - I'm not giving investment advice - just describing the principle):

1. I am comfortable with my valuation of the stock and this has not changed as the stock price has been falling
2. I think I know why the price has fallen so aggressively - I think the underwriters are selling the stock they got issued when FKP screwed their retail shareholders (I hope they are making a loss)
3. I think there are things I don't know - but I have allowed for those specific items in my valuation

I'll provide an update on how this goes but hopefully the price recovers around the time I want to sell it so I can reduce my exposure a little bit.

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Employee shares - Avoiding high transaction costs on the way out

In a recent post I mentioned that I had been stung pretty badly when selling my employee share plan shares.  The operator of the share registry that my company uses knows that most people will sell their shares directly through them and will often charge outrageous fees which employees think that they have to pay.  This post will show you how to save a lot of that money.

Who typically gets stung the worst by the share registry fees?

Typically the people that get stung the worst are employees that live in one country but get issued shares in another one (i.e. on a foreign stock exchange).  This is pretty common for those working for large US corporations but who do not live in the US.

The shares that are issued to them are typically listed on a US stock exchange and held with a share registry company that specialises in employee share plans.  A very common registry for US stocks is BNY Mellon (which is now owned by Computershare).

The fees that a foreign shareholder normally gets stung with include

• A transaction (trade) fee:  This is normally quite reasonable and everyone gets charged this
  
• A foreign wire transfer fee:  This costs $25 and is a little annoying but not over the top
  
• A spread on the foreign currency:  This is where they really sting you badly.  The rate that BNY gives you is much worse than the actual wholesale rate.  In the case of the AUD there was a 2% difference between that rate and the rate they gave me - this meant that I automatically lost 2% of my profits through this cost.

In most cases you will not be able to avoid the first fee and it is a reasonable one to pay however you should  NOT be paying the second and third fees (or if you do pay them they should be much lower).  Below I have outlined some strategies to save on the fees.

Saving on the foreign currency fee

If you sit back and think about how much that foreign currency fee is actually costing you - you will be outraged.  If you assume that you are allocated $20,000 of stock in a year (not out of the ball park if you have variable compensation and an employee share plan) and you sell this stock you are getting hit with $400 in foreign currency fees which is outrageous!

Here are some ways to save on the fee charged by these share registries

• Do a position transfer to a broker like Interactive Brokers which and sell through them instead - they do not charge an FX spread
• What you are doing here is actually transferring the stock itself to Interactive Brokers - you are not selling it through the share registry.  This should not cost anything.
• Sell the shares through interactive brokers - their trading costs for US stocks are very cheap (generally you want to be trading US stocks through a US broker not through your home country broker)
• Interactive Brokers does not charge an FX spread - they charge you a flat percentage of the currency conversion cost which is 1bp - i.e. 0.01%
• Instead of paying $400 in currency costs you will therefore only pay $2.50 (the minimum trade value)
  
• Sell the shares through the share registry but set up a multi-currency account
• There are some banks (like Citi and HSBC) that offer multi-currency accounts
• They also offer exchange rates that are better than those offered by the share registries
• You sell the stock through the share registry and then transfer the funds to these accounts to be converted into your home currency
• These accounts typically have minimum balances and have reasonably high fees however they are worth considering if you get a lot of stock in foreign currencies or travel a lot

Saving on the wire transfer fee

The wire transfer fee is not a large amount ($25) however it is an annoying amount that I really believe that you should not have to pay.  Here are some ways that you can get around it.

• Transfer the funds to a US based (multi-currency) account
• If you can do an in country bank transfer instead of a wire transfer then you do not have to pay this fee
• Multi-currency accounts typically have branches in several countries and so you do not get charged the wire transfer fee for bringing it back to your home country
  
• Use a broker to sell you shares that does not charge a wire transfer fee
• Interactive Brokers (mentioned above) does not charge a wire transfer fee for Australian accounts.  This is because they have an account based in Australia so what they actually do is an in country bank transfer to your account
  
• Request the proceeds in a check
• The share registries normally give you the option to receive your proceeds as a check.  If you do this it will take a little longer to get to you but you are not paying a pointless fee to receive it
• You can then deposit this into your local bank or your multi-currency account

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A few updates on the personal finance front - November 2012

A few updates on the personal finance front - November 2012

There were several small updates that I've been meaning to write for a while but they have not been sufficiently important for me to dedicate whole posts to so I have decided to do one posts which will cover several of these smaller issues.

Employee share investment plan - shares finally sold

In several of my previous posts I outlined that many companies offer employee share plans to their staff and how it can be a way to make free money.  I also had a post in which I said that there were several strategies one could take when it came to selling the shares when they were allocated to you.  At the time I had said that I would sell these as soon as they were allocated to me.

In fact I let them run for ~4 months and got a very good return out of doing this (~35%). Where I did get shafted though was on the exchange rate which cost me hundreds of dollars more than it should have. I will do a post on avoiding these exchange rate fees soon.

Annual bonus hit the account - I had already mentally pre-spent the amount so benefit is only passing

In my 2012 financial goals at the start of the year I said that one of my goals was to buy a sports car when I was young and carefree enough to throw away a bit of money.  I realised that this would not help me financially however not all things in life can be driven by finance.

Although my bonus was in line with what I expected, I had mentally catered for too much tax so on an after tax basis I actually got more than I expected. In addition I have picked the model / year of car that I want and this was cheaper than I had originally budgeted for too.

I am therefore using the excess as my spending money for my overseas holiday. In my October 2012 net worth post I mentioned that I would need to start putting away money for this but it turns out that I wont have to.

Until I actually spend the money it will appear in my net worth but this is only transitory and will not count in the long run.

Tax return is finally done and MUCH better than expected

I will cover this more thoroughly in my next net worth post however I could not believe the amount I got back on tax (~$20,000) - it turns out that I really did pay too much tax over the year   This amount I will save and it is going to increase my net worth over the long run.

I have STILL not started my business

I confess between my last post and this one that I have still not got around to starting my business.  Several things (and life) have gotten in the way.  It is still one of my goals however I do not have a time frame on it because at the moment I cannot find a decent amount of time to dedicate to it.  If this actually gets off the ground in the next few months I will be pleasantly surprised.

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What is NAV (Net Asset Value)?

NAV, or Net Asset Value is typically a term used in investment funds (both listed and unlisted).  It is the assessed value of the funds assets, normally by the management of the company and approved by independent valuers (though not always).

NAV is also sometimes referred to as NTA, or net tangible assets however I think this term is incorrectly used as NTA is used for all types of companies and does not necessarily refer to this independent valuation of assets process

What types of entities disclose NAV?

NAV is typically disclosed where it is hard for investors to see or discern the value of the assets.  This is often used for investments where the exact composition of the portfolio is unknown or where the assets are inherently illiquid and so assessing an actual value from regular valuation methods becomes difficult for investors.

There are many types of entities that disclose NAV however some of the most common ones are:

• Property trusts (both listed and unlisted)
• Property of all types is inherently illiquid.  As investors we know that the value of properties are changing however without the full information about all the properties held in the trust it is pretty hard to know how the valuation of these trusts are moving year to year
• Property trusts normally revalue their assets on an annual (or sometimes semi annual basis) so that investors know what the theoretical value of the assets within the trust are worth
  
• Equity funds
• Equity funds normally disclose their NAV on a daily basis.  It is very easy for them to calculate however very hard for outside investors to work out because they do not know the exact composition of the portfolio
• For equity funds the NAV represents the valuation of all the shares within the fund (and you divide this by the number of units to get the per unit NAV
  
• Infrastructure funds
• Infrastructure funds also typically disclose a NAV for the same reasons as property trusts
• They typically hold more than one asset and investors find it hard to value these assets from an external perspective.
  
• Companies with minority stakes in several unlisted assets
• Where a company does not have a controlling shareholding in several assets they often disclose NAV because it is almost impossible from regulatory filings and presentations to work out what these assets are worth
  
• Externally managed vehicles
• I have written before on the corporate governance related to externally managed vehicles
• External managers are often compensated based on the value of the assets under management. In order for investors to understand the fees being paid to external managers they often provide a valuation of the company and it's assets to justify the fees.

Why do companies trade at a discount or premium to NAV?

For listed funds and companies you will notice that they very rarely trade at NAV (the exception to this is listed equity funds which never really deviate far from NAV).  This seems counter intuitive - if you know the value of the assets then why would you see for less than they are worth and conversely why would you buy for more than they are worth?

The answer is quite simple - the NAV is always

Click Frenzy - A chance to do your Christmas shopping in one hit

Click Frenzy is this coming Tuesday starting at 7pm and running for 24 hours.  It gives shoppers the opportunity to buy goods at 15 - 90% off (only) for that 24 hour period.

I think this is a great opportunity for everyone to do their Christmas shopping early and in one massive hit and possible get some good deals but you do need to prepare!

What is Click Frenzy?

Click Frenzy is the Australian version of Cyber Monday which was is a US day of crazy online sales where everything online is heavily discounted.  It is like the online version of the boxing day sales.

This is the first time it is being done in Australia as Australia has been very far behind in terms of major retailers having an effective web presence and Australians have been much slower than their US counterparts in taking up the online buying phenomenon.

When is it?  It starts at 7pm on  Tuesday 20 November and runs for 24 hours.

What stores are participating in Click Frenzy?

Not all the major retailers are participating but so far there are a really good list of retailers that are participating including Myer, Dick Smith, Target, Dan Murphys, Masters, Microsoft, Saba and many others.

You can find a more extensive list here.

What should you do before Click Frenzy?

There are several things you should do before the start of the sales.  These include

1. Make sure you have access to a good Internet connection.  
• My home Internet tends to be extremely slow during times of high use (you wouldn't think that about broadband but unfortunately it is the case) so I am using my corporate connection and will be staying at work.
2. Work out what you want to buy before the sales
• The chances are the stock you want to buy will be relatively limited and if you are going for something popular you want to head there straight away
3. Make sure you know your prices before Click Frenzy
• The worst thing you can do is to buy an over-priced product which has then been nominally marked down so if you have your list of products you want to buy - make sure you know the cheapest price you can get it elsewhere
4. Know what stores sell the product you want
• There are real worries that the Australian retailers' online stores are not up to the volume of traffic that will be received on Tuesday and you want to be able to get into the store you want and purchase your product before it goes down

Are the deals really going to be that good?

This is the big question and the fact is that no one really knows.  I think the retailers will offer really really good deals in this first year to hype up the day and get it off the ground so this may be the year where you get the best deals.  In any event I have freed up a couple of hours that night and have made my list of things that I want.  

Hopefully my Christmas shopping works out a lot cheaper than I had originally budgeted for!

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Should you vote for the GetUp! proposal at Woolworth's AGM?

In a previous post I had touched briefly on shareholder activism, how you defined shareholders interests and used the Woolworths battle with activist group GetUp! as an example of when activists work to promote their agenda which may not necessarily be in the broader shareholder interest.  At the time the issue was put off until the Woolworths AGM.

As this AGM gets closer - it is now only a week away (on Thursday 22 November 2012) Woolworths shareholders need to seriously consider how they are going to vote on this issue.  There are several things to consider which I have addressed below.

What are the proposals?

There are three proposals being put forward by shareholders that form the vote that will take place at the Extraordinary General Meeting (which is being held at the same time as the Woolworths Annual General Meeting).  The proposals are summarised below.  It essentially changes the constitution of Woolworths such that from 2016

• The company limits it's Electronic Gaming Machines (Poker Machines) to a maximum bet of $1 per push;
• Limit the profit each machine can make to $120 per hour; and
• The machines are only allowed to operate for 18 hours in any 24 hour period

Is this motion in the best interests of the company and shareholders?

The first thing you need to remember as a shareholder in Woolworths is that this is a real investment for you and this is real money that you stand to gain or lose as a result of this investment. Therefore, while it should not be the only consideration, you need to think about whether voting for this resolution will be good or bad for the company in the long run.

From this framework I would consider the following

• Woolworths is naturally going to lose profitability if you limit the money they can make from these poker machines
• The argument is that they will get some sort of social benefit, or rather avoid a social cost by being seen as a responsible operator
• I do not find it convincing that the benefit (or lack of cost) that they will receive from implementing these measures will outweigh the actual money they will be losing through implementing these measures

I actually find this case analogous to the selling of cigarettes.  Everyone knows that smoking is bad for you and creates real social harm however it is a legal thing to do and therefore stores (including Woolworths through their shopping centres) are allowed to sell them as long as they obey the law.  The idea that people will not want to invest or shop at a store that operates gaming venues seems strange to me because they are more than happy to invest and shop at one which sells cigarettes.

Will the measures work to stop problem gambling?

In this area I think both sides have been a bit disingenuous.  Woolworths has downplayed the Productivity Commission's reports on gambling and in their letter to shareholders was quite misleading on several aspects of this.

However GetUp! is also being a bit sly about it's motives.  It keeps talking about how Woolworths is the largest operator of poker machines in Australia, which may be true however they still only have 6% of the market and GetUp! is obviously targeting Woolworths because they are a soft target (unlike a casino or the actual manufacturer of the gaming machines themselves, Aristocrat, which is also a listed company).

I think the reason that GetUp! is targeting Woolworths is because if they can force Woolworths to operate in a certain way then Woolworths will lobby the government to ensure that everyone operates in the same way.  There is currently very limited political will to implement such measures and GetUp! wants an influential player pushing for rules they want.

Do I think problem gambling is a problem and do I think this is the solution?

I absolutely do think problem gambling is a problem and although it does not affect a large proportion of the population, it is devastating to those who it does affect.

Having said that - I do not believe this is the solution.  I believe that this problem needs to be dealt with by policy makers in this country.  I believe that to really tackle the problem that everyone should be playing by the same rules with the aim of reducing problem gambling.

I think that the Woolworths vote will not do anything to curb problem gambling, will cause Woolworths shareholders to be worse off and therefore do not believe shareholders should vote for this measure.

If you have an opinion on this matter or if you think I am wrong please comment below

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