Showing posts with label shares. Show all posts
Showing posts with label shares. Show all posts

Thursday, 9 October 2025

Investor Psychology

Market Psychology
Investment markets are driven by more than just fundamentals. 
Investor psychology plays a huge role and helps explain why asset prices go through periodic booms and busts and why share prices can react in extreme ways to events. The key for investors is to be aware of the role of this investor psychology and its influence on them. 

We don't have perfect information. We're making buy, sell, hold decisions around imperfect information about the future. And because there is uncertainty in that, we sometimes get those decisions wrong. 
We as a species are predictably irrational. 

The study of that, of course, is called behavioral finance. 
Investor psychology plays a huge role, but it's often triggered by something positive or negative. 
If you go back to the tech boom of the late 1990s, there was lots of reasons to be optimistic back then. That optimism propelled markets to excessive valuations particularly for tech stocks.

The market got ahead of itself as a result of investors piling in & pushing share markets higher.
Then we went through a severe correction in the early part of the 2000s as investors got in a rush to get out. 

There's a combination of investor psychology traits that drive this. 
One of the big ones is this tendency for investors to project recent strong gains or recent
sell offs into the future. If the current environment has been very positive, with lots of good news, people will assume that will continue. Then they pile into the share market pushing it to extremes. It it starts to feed on itself  and then that eventually sets up a bust. 

So how do we counter this behaviour?
This requires operating in a manner which is contrary to the crowd around you. 
"buy when others are cautious, and sell when others are greedy" to paraphrase Warren b

Warren Buffett is perfectly happy to be contrarian. 
He's got a long-term time horizon. I guess his mental makeup was such that he can resist the crowd, so to speak. 
But for most of us we listen to and act on what those around us are talking about at dinner parties. 
If everyone else is getting in, you want to get in, too.  And likewise, at the bottom, it works in reverse.

You could aim to be a contrarian, but you may not get the timing right.
It's kind of hard to time the top and the bottom.

So what are the theories of investor psychology ? 

These are my favourite papers all of which won Nobels for behavioral finance.

1. Herbert A Simon's 1978 Nobel win for his pioneering research 
    into "the decision-making process within economic organizations”. 

Classical and neoclassical economic theories assume that people are perfectly rational and strive to optimize economic outcomes. Simon argued that human rationality is constrained, not perfect, and that people seek satisfactory rather than ideal outcomes. 

Eg:  you can argue with your kids to clean their the room. 
In theory, the room should be perfectly clean,  but they stop as soon as it looks
less messy and mom won't shout anymore? That's a concept of satisficing.

In theory we should be scouring the stock market for the very best places. But most of us being human don't. We look around until we find the very first thing that looks good enough and then that's what we buy or sell. 

2. Allais Paradox
    French economist Maurice Allais was awarded the Nobel Memorial Prize in 
    Economic Sciences in 1988 for his pioneering contributions to the theory of markets 
    and efficient resource allocation. 
    While he received the prize for his general equilibrium work, he is most famous 
    for the "Allais Paradox," a decision-making puzzle that challenges expected utility theory.

In the case on one of the shares I own (ASX JIN)  which is a software gambling stock
the number of people buying lotto tickets is determined not by the outcome of likely win, but by simply the prize money on offer. Those that offer bigger prize money with worse odds have more participants than those with a greater expected value but have smaller winnings. 
This is completely irrational.

3. Daniel Kahneman 2002 Nobel prize
   Daniel Kahneman was awarded the 2002 Nobel Memorial Prize in Economic Sciences
   for pioneering the field of behavioral economics, specifically for his groundbreaking 
   work on decision-making under uncertainty. 
   He developed this research in deep, decades-long collaboration with 
   cognitive psychologist Amos Tversky.

They talked about an S-shaped preference curve. 
The idea here is that we treat wins and losses asymmetrically.
It explains phenomena like "loss aversion," where the psychological pain of a loss feels roughly twice as strong as the joy of an equivalent gain.

This partly explains bubble behavior.
As the market goes up, we become less and less risk averse about the fact that it
could crash, which is exactly the wrong thing to do.

Kahneman & Tverky showed, what matters is not did we win $10. It's how much did we think we had before we made that gamble. 
The more wins we have, the less we value future wins. 


4. Fallacies & Bias
    Keep at the back of your mind the concept of 
    a) narrative fallacy, 
    b) confirmation bias 
    c) endowment bias.

  a) Narrative Fallacy
      This is the idea that we as humans really want to assign a story and 
      a reason to things that happen even if they're random. 
      Want to assign stories to random events which then can have the risk of 
      becoming self-fulfilling. So a great example is a company may have no 
      news on it. Its share price rises two or three days in a row. Now that's just 
      standard probability. You know, flip a coin three times, 
      you can get three heads in a row. And yet very quickly within the market, there
     will be article after article writing about why the share price has risen and 
     why that is an indicator that this company is actually really good, 
      which feeds further share price rises because more buyers come 
      in the market. And the story takes on a life of its own. 
     We get caught up in that that sort of behavior of crowds, but it's one you can 
     really easily solve. All you ever need to do to avoid falling into the narrative 
     fallacy go and look at the underlying data and ask, is it true? 
    Is there any evidence from the company itself that that's occurred?
     A simple sense check will often save you. 

b) Confirmation Bias 
     That's that idea that if we hear a piece of information that confirms what 
     we already believe, we treat it as true. And if it disagrees with us, we think 
    it's wrong. 
    You see this in politics all the time. 
    Trump can say something and people who are on Donald Trump's 
    side hear it as confirmation and those of us with perhaps a slightly more 
     cynical view of Trump here it is negative .
    Again you can stop yourself falling into that trap by just being aware of it 
    & looking up the facts.

c) Endowment Bias (existing ownership).
    We as humans immediately value something more just because we own it.
    So once you've made a decision to own something, whether it's a stock, 
    a house, a car, a managed fund, be conscious of the fact that you will 
    prescribe more value to that asset than you ever did before you owned it. 


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So how do we acknowledge this irrationally and rationally evaluate the market?

Puts vs Calls are one method.
What's the ratio of puts versus call options looking at? 
Because if you've got a a low level of puts but lots of calls then maybe um that 
could be a sign of uh excessive optimism and so on.

Use the principles of value investors... ROE, PE ratios, earnings growth, chart analysis, .....the methods available are endless.

I think important to go beyond just understanding market psychology. 
& to understand your own psychology.
At the end of the day you are managing your own money

Tuesday, 7 October 2025

ROIC vs WACC - Return on capital vs Cost of capital

 A good Return on Invested Capital (ROIC) generally exceeds a company's Weighted Average Cost of Capital (WACC), meaning it generates more wealth than it costs to fund the business. As a rule of thumb, an ROIC above 10% is considered solid, while anything 15% or higher usually signals a strong competitive advantage. 
Understanding what makes a "good" ROIC comes down to a few key factors:
1. The Golden Rule: ROIC > WACC
The absolute number matters less than the spread between your ROIC and your cost of capital (WACC). 
  • Value Creation: If your ROIC is 15% and your WACC is 8%, the business is highly efficient and creating value.
  • Value Destruction: If your ROIC is 5% and your funding costs are 7%, the business is destroying wealth.
2. Industry Norms
Capital requirements vary heavily by industry, altering the baseline for a good ROIC: [1, 2]
  • Asset-Light Industries (e.g., Software, Consulting): These require little physical capital. Investors typically expect an ROIC of 20% to 30%+. [1, 2]
  • Capital-Intensive Industries (e.g., Manufacturing, Utilities): These require heavy upfront investments in equipment and plants. A solid ROIC here is typically 7% to 12%. [1, 2]
3. Consistency Over Time
A single year of high ROIC doesn't reveal much. Look for companies that have sustained a strong ROIC over a 5 to 10-year period. A consistent or growing ROIC over time highlights strong management and durable business moats.

Friday, 1 March 2024

MXT - Metrics Master Income Trust

 MXT Metrics Master Income Trust
12-07-26

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The ASX:MXT (Metrics Master Income Trust) is an actively managed fund that gives everyday investors exposure to the Australian corporate loan and private debt market, a space historically dominated by major banks. [1]
Here is exactly what it does:
  • Invests in Private Credit: Instead of buying shares in companies, your money is pooled to lend directly to corporations, real estate developers, and infrastructure projects. [1, 2]
  • Pays Monthly Income: It pools interest from these loans and distributes the cash to investors on a monthly basis, with a target return usually tied to the RBA cash rate plus a premium. [1, 2]
  • Manages Risk: The fund primarily focuses on "senior secured" debt, meaning if a borrower defaults, MXT is first in line to get its money back, helping to preserve your initial investment. [1, 2, 3]
It is primarily used by investors looking for a steady, reliable stream of passive income alongside portfolio diversification away from traditional stocks and bonds. 
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ASX:MXT (Metrics Master Income Trust) has delivered a steady total return of around 7.52% p.a. over the past 5 years. As a managed investment trust focused on corporate loans, it has minimal corporate debt, pays out nearly 100% of its profits to investors, and maintains a consistent 5-year distribution yield of roughly 7.5% to 8.5%. [1, 2, 3, 4]
Financial Snapshot
  • 5-Year Total Return: ~37.30% (including distributions). [1]
  • Profit (Net Income): The trust remains highly profitable, generating consistent net operating incomes that historically exceed $160M AUD. [1]
  • Debt: Negligible, as it is a pass-through listed investment trust (LIT). It invests in corporate loans rather than raising debt on its own balance sheet. [1, 2, 3]
  • Return on Equity (ROE): Consistently tracks between 6.9% and 8.2%. [1]
  • Dividend Yield: Trailing 1-year yield is roughly 8.13%. [1]
Key Performance Drivers
  • Income-Focused Structure: Because MXT primarily gives investors exposure to the Australian corporate loan market (acting like a bank), its primary goal is providing monthly cash income rather than massive share price growth. [1, 2]
  • Capital Stability: The trust's Net Asset Value (NAV) has historically remained highly stable, hovering close to or slightly above its $2 issue price even during economic downturns. [1]
  • Current Share Price: MXT typically trades between $1.87 and $2.07 AUD. [1, 2]
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Recent problems ??? Oct 2026

the Metrics Master Income Trust (ASX:MXT) is directly and heavily exposed to private credit. [1]
📌 Overview of Private Credit Exposure
  • Core Strategy: Operates as a listed private debt fund investing in the Australian corporate loan market. [1]
  • Asset Class: Direct non-bank corporate loans and unlisted debt instruments. [1, 2]
  • Recent Valuation Adjustments: Net asset values were recently cut from $2.47 billion to $2.42 billion following audit scrutiny. [1]
  • Liquidity Actions: Associated wholesale private credit funds managed by Metrics have frozen redemptions amidst valuation reviews

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Whether the Metrics Master Income Trust (ASX: MXT) is a good investment depends on your appetite for private credit risk, your need for regular cash flow, and how you weigh recent valuation and audit scrutiny.
Key Positives (Pros)
  • Regular Monthly Income: MXT is designed to deliver consistent monthly cash distributions from a diversified portfolio of Australian corporate loans and private credit assets.
  • Attractive Yield: The trust offers a high dividend/distribution yield—typically tracking around 8% or higher depending on the unit price and market conditions (e.g., roughly 8.16%–9.14% range).
  • Floating Rate Exposure: Most of the underlying loans are floating-rate, which helps protect income generation when interest rates are elevated
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  • Scale and Experience: Managed by Metrics Credit Partners, MXT is one of the largest listed investment trusts (LITs) in the Australian fixed-income space, backed by an experienced team.
Risks and Recent Concerns (Cons)
  • Audit and Valuation Stoushes: In mid-2026, Metrics faced public scrutiny and delays regarding its financial year accounts and asset valuations with its auditor KPMG, resulting in a temporary suspension from trading and a material write-down in portfolio/NTA values (with audited NTA landing around A$1.96 per unit).
  • "On Watch" Ratings: Following these valuation and governance disputes, some independent research houses like Lonsec placed the funds "on watch" or reassessed ratings, even though other research providers (like Zenith or IIR) maintained more supportive stances.
  • No Capital Growth Guarantee: As a credit fund, MXT is built for income rather than major share price appreciation. Its unit price can fluctuate below its net tangible asset (NTA) value, meaning you face capital risk if you need to sell on the ASX during a market downturn.
  • Unfranked Distributions: The distributions carry 0% franking credits, meaning they are fully taxable as regular income without tax offsets

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Is it right for you?
  • It may suit income-focused investors looking for alternative yield sources outside of traditional bank stocks or equities, provided you treat private credit as only one portion of a broader, diversified portfolio.
  • It may not suit conservative investors who cannot tolerate temporary trading suspensions, valuation write-downs, or the opaque nature of private market debt pricing

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