Uncommon Sense
INVESTMENT WISDOM since THE STOCK MARKET’S DAWN
MICHAEL KEMP
First published in 2016 by John Wiley & Sons Australia, Ltd
42 McDougall St, Milton Qld 4064
Office also in Melbourne
© Kemp's Nominees Pty Ltd 2016
The moral rights of the author have been asserted
National Library of Australia Cataloguing-in-Publication data:
All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above.
Cover design: Lizzie Deller and Wiley
Cover image: Paper Tear © Lizzie Deller
Cover and internal images: The Old Exchange of Amsterdam
© Job Adriaensz Berckheijde; Wall Street New York Stock Exchange
© iStock.com/LUNAMARINA
Disclaimer
The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication.
FOREWORD
‘Where do I find a good investment analyst to hire?' I asked a close friend.
‘Well, there's one guy I know. He's brilliant, but he's kind of … intense.'
That man was Mike Kemp.
The first time we met, I felt like Mike's eyes were burning into the back of my brain.
To prepare for our casual chat he'd read my book cover to cover, and watched two seasons of my show, The Barefoot Investor, on CNBC, back to back.
I'm also pretty sure he didn't blink for the entire 30 minutes we spoke.
I count that meeting as one of the luckiest moments of my professional life.
Mike and I have worked together daily for over three years now, and in that time I've learned that there's another trait that Mike has in equal measure to his intensity: integrity.
In an industry full of wonks and shonks, Mike's the real deal.
I've never met anyone who's more committed to rigorously uncovering the truth. And, as this book attests, if that means he has to go back to the dawn of capitalism to prove his point, so be it.
When you begin dipping your toe into the wonderful world of investing, you're instantly bombarded with all sorts of opinions that are rolled up and presented as investment ‘laws'.
It's almost impossible for the new investor to separate fact from fiction. Who could blame them? After all, as this book shows, the same investment delusions that were whispered by shoe-shine boys on Wall Street are polished up and presented as facts today on the internet and cable TV.
So let's cut to the chase. If you're standing in the bookstore reading this, let me give you three reasons why you should pony up to the counter.
First, Mike will show you just how hard it is to convincingly beat the market over a long period of time. However, he'll also give you the intellectual building blocks to start you off on your quest to do so.
Second, this book is like a guided history through high finance – and it's surprisingly saucy: from the invention of the stock exchange, to Evangeline Adams (a spiritual mystic who was giving the holiest stock tips in the lead-up to the 1929 Crash), to the cheesy-but-true story of rat trading (seriously, a number of hedge funds got interested in the idea of rats delivering market-beating returns from trading stocks and currencies).
And finally, it'll dramatically slim down your future reading list. That's because Uncommon Sense takes a knife to the most common investing illusions held dear.
The end result is that you'll never look at charting, market timing or valuation in the same way again. In fact, I'm convinced that after you read this book you'll begin to see just how close CNBC is to the Comedy Channel.
ABOUT THE AUTHOR
Dr Michael Kemp completed an MBA before embarking on a career in corporate finance during the mid-1980s bull market. As a young financier he was awarded the Ian Roach Prize for achieving first place nationally among employees of the Australian Securities Exchange studying for the Graduate Diploma in Applied Finance and Investment.
Michael Kemp graduated from Melbourne University and has subsequently gained two master's degrees, including an MBA from Monash University.
His financial career has included working in the Treasury Department of the Australian Wheat Board, as a trader for Bankers Trust and in the Corporate Finance department of stockbroking firm Potter Warburg (both in Australia and London).
Today Michael spends his time investing on his personal account, writing articles for the Australian Securities Exchange and analysing and writing about stocks for the Barefoot Blueprint newsletter.
To Michael, finance has always been a passion, never a job. Uncommon Sense is his second investment book.
ACKNOWLEDGEMENTS
Writing this book has been a fascinating journey, one I'm sad is now over. And like any journey its completion allows me to reflect on those who I shared it with. Thanks to friends and family who showed an ongoing interest in the process. And a special thanks to those who read the first manuscript: Colin Nicholson, Robert Miles, Scott Pape, Michael Wall and my two children, Andrew and Jessica. Their respective critiques helped sculpt the final product.
Part I
THE LIMITSOF REASON
0.9
START THINKING FOR YOURSELF
First up, that's not a typo. I wanted this to be chapter ‘0.9'. If I'd called it ‘Introduction', ‘Prologue' or ‘Preface' you'd probably have skipped it. But it contains stuff I want you to read. So here it is: chapter 0.9.
My passion for the stock market became obvious when I was in my early to mid twenties. Problem was, by then I was already a dentist. What's more, I'd studied dentistry for all the wrong reasons. Those who thought they knew me best used to say, ‘Hey Mike, you're getting great grades. You're really good at science. And since you can get into any university course you want, you should study medicine.' But I didn't want to be a doctor, so I chose dentistry on the rebound. Seemed like a good idea at the time. After all, doesn't everyone choose dentistry when they decide not to study medicine? Wrong. As I later found out, dentistry is what you study when you don't get the grades for medicine.
I should have noticed the warning signs earlier. Like when I was six years old and told my mother I wanted to be a bank manager. I mean, what six-year-old wants to be a bank manager? Most six-year-olds want to be a pilot or a fire