Investors’ Seminar September 2011

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Investors’ Seminar September 2011 Will I achieve my goals? Will we achieve our goals?

Realistic Goals Structure/Strategy (Tax etc) Super Fund Admin Asset Mix 1 -Cash/TermDs needed Asset Mix 2–Growth Section (LHS) Stock-Picker Selection The Boxes to Tick

Non – investment Matters 1.Goals – realistic cashflow needs 2.Structure & Strategy Super & Pensions Tax & Centrelink Matters 3.Super Fund Admin SMSFs vs Wholesale/Retail/Industry etc

Investors’ Seminar September 2011

Investors’ Seminar September 2011 Historical Data Forecasts Hayden Asset Allocation Model Specific Investment Selection Bad case scenarios

Investors’ Seminar September 2011 Historical Data  How far back to go?  Is old “data” relevant in today’s world? Predictive Data  Theory; Reasoned Rational Approach

Historical Data

Forecasts

Investors’ Seminar September 2011 Historical Data Forecasts Hayden Asset Allocation Model Specific Investment Selection Bad case scenarios

Hayden Asset Allocation Model Australian Shares International Shares Property?? Term Deposits Cash

 Segmentation Bar  RHS – Cash and Term Deposits  LHS – 10+ Year Focus Never need to address the best investment for say 2 to 8 years. Never need to predict the return of Growth assets over the short-term. We do need dividends etc to replenish the RHS – but regularity is not relevant. It can be zero for 1 or 2 years (most unlikely because the businesses will not exist if they do not make profits). The Hayden Asset Allocation Model

The Segmentation Bar – ie vertical bar that segregates the short-term RHS and the LHS RHS - Return of the $ invested at the designated time; has a 0-2 year focus. CashFlow Needs are the main determinator. Cash and Term Deposits - this section is structured to be “Consumed” Asset Mix - Decision 1

The LHS Side of the Bucket. The Goals are:  Main Goal - Long-Term Total Returns – 10 Year Targets  Sub Goal – replenish the Cash Volatile Returns are not a concern Income is not a focus – maximising returns is the goal. A business that reinvests is not any less attractive than one that pays out all profit as a dividend. Asset Mix - Decision 2

Projections What are the key timeframes:  0-2 years – no projections needed. Cash and Term Deposits cover all goals in this time frame  2-8 years – not necessary to invest in this timeframe if we can have a 10 year focus which incorporates better returns  10+ years – the key goals. Again we use the Tim Farrelly Projections

AS IS P TD Cash Hayden Asset Allocation Model – Growth (LHS)

Specific Investments for the LHS Australian/International Shares We have a 10 year plus time frame so we are sharing in the profits generated by the business – ie either dividends and/or capital growth generated by higher profits We want a good portfolio and we want it monitored and changed when needed Best way - contract Specialist Stock-pickers

AS IS P TD Cash Drilling down further XYZ Manager

The three choices: 1.Index Funds …* 2.Choose Your Own Stocks …# 3.Contract a High-Quality Stock-Picker * 3 is preferred because some businesses better than others- ie either in a better Industry and/or better Management. # 3 is preferred because some people have specialised skills and resources in finding and then analysing businesses? It is worthwhile contracting these skills. Is a Stock-Picker Needed?

A quality stock-picker is contracted for  Their selected portfolio of shares and  Their skills in monitoring and changing that portfolio For each underlying investments we can ask them why they part-own that business and what are the key factors that would lead them to sell that business The investee businesses must either have High Profit Margins or High Turnover and Reasonable Profit Margins. And this advantage must be sustainable. Choosing a Stock-Picker

Specific Investments We, via the Specialist Stock-pickers, want : ** the best performing businesses over a 10+ year time frame We want to buy these on the stock-market Most stock-market participants are looking for the best 1 year performers. Their time frame may be shorter, eg 3 months,or……even intra-day! This can be to our advantage. Avoid the noise.

How Many Managers -ie stock-pickers? Obtain diversification – ie different processes and different people/perspectives Not too many that we dilute the best performers Around 3-5 in both Australian and International Shares

The businesses that we part-own (via our specialist Fund Managers) should, or must, meet these criteria:  We want to select Good Businesses – ie those with a Durable Competitive Advantage  We want to avoid Poor Businesses - ie those where price is the major motivating factor in the consumer’s decision to buy their product or service. The Buffett Overlay

Investors’ Seminar September 2011 Historical Data Forecasts Hayden Asset Allocation Model Specific Investment Selection Bad case scenarios

Investors’ Seminar September 2011 What is our greatest fear? “running out of money” “not achieving lifestyle goals” “losing money” …..readily addressed; we need patient capital; there is no value-add by counting it daily …..need the faith to leave it; let it grow; leave it in a Bank, a Property, a Business etc

Investors’ Seminar September 2011 The Fear: Not achieving our goals (including running out of money) What’s needed: The “tap” turned on at a reasonable rate Reasonable long-term returns Bad case scenarios: Share Prices “crash”; Dividends reduce; Cash and Term Deposit Rates are very low

Investors’ Seminar Bad Scenarios Cash and Term Deposit Rates are very low – not a concern – liquidity and security the RHS’ focus Dividends reduce – zero for one year is no concern; Some businesses will survive (ie some employment) hence some Earnings Share Prices “crash”- What part is “noise” – relatively minor and what part is “fundamental” – changing the economy. Good Businesses will still generate Earnings. This will show partly as Dividends; partly in increased future Dividends; and partly an increased intrinsic value of the Business.

Illustrating the Bad Case Scenarios Cash and Term Deposit Rates - zero Dividends reduce – NB Still will be some dividends (ie any surviving business will pay dividends most years) Share Prices “crash”- The LHS will never be zero – there will always be some businesses

Asset Mix Australian Shares International Shares Property?? Term Deposits Cash

AS IS P TD Cash Specialist Stock-picker XYZ Manager

Changes to Lifestyle or Financial Goals Asset Sector Changes – eg if the 10 year return differential is significant; Switching of Fund Managers – may be needed at any time if a change to skill level or portfolio integrity. In switching Managers we retain the same asset sector exposure –eg to shares. Switching

Realistic Goals Structure/Strategy (Tax etc) Super Fund Admin Asset Mix 1 -Cash/TermDs needed Asset Mix 2–Growth Section (LHS) Stock-Picker Selection The Boxes to Tick

Peace-of-mind for Investors 1.Part-own a lot of great businesses. We have a portfolio of businesses that is well diversified across locations, industries and size. 2.Employing (contracting) some very wise people to monitor and change our portfolio of investee businesses when necessary.