In short
Podcast Episode Summary: Motley Fool Money - Mailbag: incl. ‘Be like water’. August 11, 2024
Overview In this episode, hosts Scott Phillips and Andrew Page tackle various listener questions focusing on investment strategies, market conditions, and company valuations. The discussion also touches on broader themes of economic foresight and the importance of long-term planning in investing.
Key Topics Discussed
- Thriving Companies in a Bad Economy
- Long-term Investments: The hosts emphasize that sustainable success often stems from strategic investments made years in advance.
- Case Study: The success of Australian athletes in the Olympics is linked to prior investments in training and infrastructure, illustrating the concept that good planning pays off over time.
- Buying Opportunities
- Magellan Investment: A listener expresses interest in whether it's time to buy shares in Magellan. The hosts discuss valuation issues and potential risks surrounding fund management companies.
- Key Concerns: The company's profitability is heavily dependent on the funds under management, which has seen a decline. The departure of key personnel raises questions about future performance.
- Portfolio Management
- When to Stop Adding to a Portfolio: One listener asks about the right time to cease adding to their investment portfolio. The hosts stress the importance of evaluating market conditions and personal financial goals.
- Investment Timing: The debate about lump-sum investing versus dollar-cost averaging is introduced, highlighting the psychological aspects of market timing.
- Risk and Reward
- Contradictory Investment Factors: A listener presents concerns about government debt and market policies impacting long-term investments. The hosts discuss the balance between long-term gains and current economic challenges.
- Investment Decisions: They argue that successful investing requires understanding both quantitative data (like earnings) and qualitative factors (market sentiment).
- Valuation Challenge
- Listener's Challenge: A listener proposes a valuation exercise using a random stock from the ASX 200, prompting a discussion on how to evaluate stocks using both raw data and market sentiment.
- Valuation Techniques: Scott and Andrew share their thoughts on discounted cash flow (DCF) analysis and the importance of understanding business fundamentals alongside market narratives.
Key Takeaways
- Importance of Foresight: Investments made today can yield significant returns in the future, akin to how good sports training can lead to Olympic success.
- Valuation Sensitivities: Valuation models can be highly sensitive to assumptions, and understanding the underlying business dynamics is crucial.
- Market Resilience: Despite economic challenges, companies that provide tangible value tend to thrive in the long run.
- Dollar-Cost Averaging: For new investors, this strategy can mitigate risk and help manage psychological pressures associated with market fluctuations.
- Flexibility in Investing: The hosts emphasize being adaptable, akin to the philosophical idea of “being like water,” to navigate the uncertainties of investing.
Conclusion The episode encapsulates the complexities of investing in a fluctuating market, urging listeners to maintain a long-term perspective and be proactive in their financial education. The discussion reinforces the idea that successful investing is as much about understanding the market's emotional landscape as it is about crunching numbers.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Transcript
Automatic transcript. May contain errors.0:00A listener production.
0:07This is the Motley for Money Mailbag. Welcome to Motley for Money, our very special Sunday morning mailbag edition. You know it's the Olympics. So Andrew Page must have been doing something very Olympic this morning, probably at 110%, probably for hours. Goodness knows, maybe it's skateboarding, maybe it's BMX riding, maybe it's sailing. We've won some medals in that, so maybe Andrew's taking the lead. Mr Page, good morning. What have you been doing before we started recording? Good morning. No, I don't want to suck any of the limelight from our Olympic superstars. You're in a respectful furlough, are you?
0:42Oh, look, dude, you only can have so many gold medals, right? Before you've got to share it around a little bit. Can I do a little bit of Aussie, Aussie, Aussie? We are most successful games ever. That's kind of cool. Man, we punch above our weight. Don't we? So China and US are ahead of us, but they are like very much larger than us. Well, the US is 15 times our population and China is 84 squillion times. That's 400 times something. So I was in the car this morning. I rarely get out of the house. I have to drive the kids to school and back. Can I stop you there? Think about what your story, Rory.
1:14Don't forget, because I want you to forget this story. I just want to give some background to our listeners because normally when you and I start stories with us, I was in the car this morning. You normally be listening to talkback radio and you normally have something to rant about. So can I just set that up by saying I'm looking forward to what comes next? So I built it up for our listeners. What happened when you were in the car this morning, Rory? oh and you know what my kids are getting older now so they're just and they're teen like one of them's a teen and you're just like the eye roll like here goes dad i don't care it's like let me tell you son this is oh just just let me off here it's okay i'll walk i'll walk anyway so there's probably some signal in in all of that um so anyway the question they were they were asking is like why why does a country of what 25 28 million people how do we do that and i got out of the car so i didn't hear the the experts answer but that didn't that didn't stop me lucky you're here to help us with the answer and i'll put it to you and i think there's a wider sort of uh hopefully relevant sort of investing points to be made here probably not but let's try anyway probably not but we'll try and fit the circle the circle through the square hole I suspect that what we are seeing today is the result of decisions made a decade plus ago where we invested very heavily into sports and coaching and all this kind of stuff and I might be wrong on that that's just my gut instinct as to what it is maybe it's just maybe I think Australians prefer the oh we're just genetically superior okay fine you know what I mean like well we're Australian we're just we're just objectively better at throwing a javelin or whatever.
2:55But I suspect that's the reason. And things don't come out of nowhere. So the lesson here is that when you make very smart, prudent investments, the payoff isn't immediate. The payoff can be a long way down the track. But we are reaping what we sowed a long time ago. Now, you could debate whether we maybe could have invested that money elsewhere And is it good to have gold medals or, you know, schools that have heating? I don't know. I don't want to say even – it's a false dichotomy, right? I don't want to paint it as an either or picture. But my point is, is that when you look around the world today in our country, you kind of think, gosh, this could be better, this could be better, this could be better.
3:33It's just like, well, it could be better, but it's going to take foresight. It's going to take planning. It's going to take time to do it. But if we're serious about these things, we can put money in certain areas. And guess what? You know, a hypothetical example, let's say that for whatever reason we feel as though AI is a thing that we want to be behind and the government just spends a huge amount of money. I always rant about how the government is just our money. But anyway, go with me. We publicly decide that that's what we want to sort of back. Now, we could throw a lot of scholarships and incentives and everything at that.
4:09And a year later, two years later, three years, five years later, really there's just zero return. but there could be a very significant return 10 15 you know as as the 16 year old matures grows up goes into the workforce armed with all the capabilities that we've given them the support that we've given them there's incredible incredible payback china's rise was made by the but um i forget his name the the uh who was who was the um who was the premier before xi jinping um now no miles are long with it no um incredibly smart man right and made a lot of long-term structural decisions that catapulted the in fact precipitated the fastest economic growth that the world has ever seen now there's different people in power it's going in a pretty dark direction and that will have implications 10 years hence from now but but you know things don't just emerge out of nowhere.
5:10And when you see something like a very tiny country punching above its weight, there's a reason. And it's usually because someone made some very smart decisions a long time ago. Thank you. That's the one. I looked it up. Yes, yes. Oh man, it's really interesting. I mean, you know, it wasn't perfect. But some smart nation building long-term thinking there that I think a lot of modern governments could learn from. I think that's right, mate. I think, and by the way, Like, I'll answer some members, ask them to read your questions in a sec, listen to questions, let me get that right. But before that, you're absolutely right.
5:46One of the things I want our listeners to know, and again, I feel like a real so-and-so when I'm, you know, rubs with a banker, when I'm saying, what you should know is, like, who makes you special, Phillips? But what's good to remember is that governments rarely deserve the credit they seek or the blame they're given. Oh, so true. Because of everything you've just said, right? Now, I will say there are some really specific things that policies you can absolutely say. You screwed that up. You did that wrong. And that's objectively or at least subjectively possible. But the circumstances in which we find ourselves, that the economy is this big in 2024, is not a function of what was done in the last two and a half years of the current government's term any more than the result.
6:28I mean, think about COVID, right? The last government, same thing, right? Did they do some things they shouldn't have done or I would have done differently? Yes. Has the current government done the same? Yes, absolutely. So, you know, I don't want to excuse bad policy, but outcomes? When you think about the leading you've just talked about, plus the impact from others. I mean, you know, how good are our swimmers? They're great. But if we had, you know, pick your favourite swimmer. If our boys were swimming against Michael Phelps today, would we have won quite as many medals? Probably not. You know, and so it's kind of, it's about the competition.
7:00It's about the investment. It's about just dumb luck and circumstance. Apparently, we're swimming at a slow pool this year. I can't believe that's a thing, but apparently that's true. But, you know, so yes, you're right to highlight it. I think it's a really, really important point, but it does apply to politics. Don't give governments as much credit as they want. Don't give them as much blame as whatever opposition happens to be in power wants them to be tarred with. If and when we have a recession this year, it will probably almost entirely not be part of the government's decision. They are partly responsible for the inflation outcome, as we talked about that.
7:29They're very responsible for the house prices, given what they could do. Not entirely, by the way, because you and I... That goes all the way back to Howard and before, that current situation. But further than that, right? There's one house and two people who want it. Like, it's just, at some level, it's just straight supply and demand. So, you know, you can kind of... There are additions and subtractions, but the Australian people aren't made to outbid each other for a million-dollar house when we could have outbid each other for a half-million-dollar house. You know, we line up at the auctions with our paddles and do our best.
7:57So, you know, don't give governments as much credit. Don't accept or don't give them as much blame because neither should be true. Go on. I make a very quick relevant point to investing here as well in the sense that I often, when we're interviewing CEOs and stuff with Strawman and it's a new company to you, never heard of it, it's pretty small, under the radar kind of thing. Oh, you guys doing that? Oh, well done. What you don't realize, it's the classic overnight success that was 10 years in the making. Yes, exactly. And what you don't see is the blood, sweat and tears of these teams slogging it out against all, you know, the odds are against them and they just did.
8:34And then they turn up and it's come on your radar. It's like, oh, wow, look at these guys. They've got, you know, isn't it brilliant? It's like, yes, but not because of the CEO who's been there for six months. You know, maybe the owner founder who was there for 10 years before that and built that up is what it is, you know? And the inertia in these systems are incredible. So it's why you can get something like an AMP that still surprisingly exists, right? because even though it's been run terribly for a long, long time, Telstra, another example. I mean, pick your favorite corporate whipping boy and the dominance that they sort of have and enjoy means that you can really do dumb things for a while before the chickens come home to roost.
9:17And likewise, you can make some really smart, savvy investment decisions and it's not going to be recognized for a long time. I think that's where I try to do the Wayne Gretzky thing of skate to where the puck is going to be. And it's been a very interesting lesson for me is to, when you see a company that's embarked on a reasonable degree of capex, capital expenditure, investment for the future, and it kind of just like makes everything look worse in the here and now, it's like, what'd you spend all that money for? Oh, your margins have gone down. Now, just because you spent money and invested money doesn't mean it's going to pay off, but it's kind of a necessary precursor for that growth.
9:52You know, you see the company that's like, oh, wow, look how well they're doing. Yeah, because they just spent 15 years getting this thing out of the lab and into commercials, you know, and out into the field. And now it's getting traction and good on them. And maybe they're making decisions now that are also good for the longer term. But it didn't come out of nowhere. Success just doesn't just arrive randomly on your doorstep. Great, great, great, great point. Mate, let's... I'm going to... It's not a Bitcoin question, but given we finish on Friday, I'm nervous to make this our first question.
10:21But I will. But I will because it's the first in the list. It's from Jono. I'm going to just ask you to... I may have a word. Hi, guys. This is Jono. I want to say a genuine thank you for your help in getting our family portfolio off the ground. We paid off our mortgage as a priority and have now been progressively entering the market over the last 18 months. However, I'll confess that I'm struggling on a contradiction in your advice, us, on a, quote, full growth, end quote, market entry. Can you please help me square your own circle? That's a nice way to change it up. With the following juxtaposition.
10:58One, investing in equities for the long term is a smart way to invest. It's got a proven track record over decades for meeting other forms of wealth creation. The default supersetting, for example, of a mix of shares, bonds and cash is suboptimal. The exception to this is needing to access the invested funds Within an approximate five year duration I think we'd agree with that wouldn't we Ram? Yeah no argument there So here's the second part of it Two The can keeps getting kicked down the road for government debt Where the Keynesian economics just cannot function As designed inside a democratic framework Where the incentive is for politicians to spend now To effectively buy votes And make the result someone else's subsequent problem Also pretty true Also true Hence the juxtaposition So Jono says, to be clear, I'm not a doomsday prepper nor a bear market moaner.
11:46Part of my previous job was planning rig operations, which taught me to plan and hope for the best outcome, but also have a firm eye on low probability but high consequence scenarios. We should have more rig planners, I think, running government. On squaring the circle, he says, how can I have confidence going all in for growth shares with an eye on holding for the long term, whilst also hearing that at some future stage there will be a reckoning on the policy making of all democracies with their structural deficits. So here's the example. I won't read all that, John. He talked about the US spending money on Ukrainian aid, China ramping up pressure on Taiwan with obviously time of making chips, US can't do a cut and run like Afghanistan, US spending out of control, AUKUS climate change, a whole lot of stuff.
12:30Surely this will have significant impact on the share market sometime down the line and within my investing timeframe. Could this be a case like Android housing? We're on a spreadsheet to the returns from shares being owning a house. When considering X factors like having to move every year, the equation changes. Please tell me I'm an idiot worrywart. To crack open a good bottle, watch reruns of The Simpsons and reminisce of a time when I was thinner and my wallet and hairline were thicker. Regards, Jono. Can I tell you, Jono, that is a very, very good... I'm not a massive Simpsons fan. I like Ram who makes up for both of us combined.
13:07but otherwise, I'm out of record between the two of us. You probably nailed it. I used to have hair. So I'd happily have a thin hairline. That'd be lovely these days. I don't have that anymore. So look, Ram, this is kind of what we talked about at the end of the pod on Friday, the whole everything's tough but invest anyway. Can you give John a bit more of the how that works? I mean, if everything does, on one hand, we're saying, don't worry about the whole, Max, just look at individual companies. On the other hand, companies don't operate in the vacuum, right? But again, I'll invoke the famous, the front fell off skit from Clark and Door, where the senator being interviewed says, no, no, no, it's not in the environment.
13:44It's been taken outside the environment. We can't get companies outside the environment. We can't get outside the economy, outside the country. So even the best companies might be at some risk, surely. Yeah, there's so many contradictions in investing. think you know it's sort of like we make these sort of statements that you know generally the market is right but yet it's wrong often enough that you can uh sort of find arbitration of opportunities you know um you you need to be convicted have the strength and courage of your convictions but you also need to sort of let the market tell you what to do this is these are off the top of my head there's a thousand of them right and yeah there's a lot of nuance so the first point to make is that the market always climbs a wall of worry so let's not even talk about what might be or let's just talk about fact and if you go back to 1924 to today that's 100 years well we've had a great depression we've had some we've had a world war uh you know we've had an asian financial i mean i don't know you always mention regional regional wars uh recession oil shock opec uh cold war biopigs cuba cold war we nearly we nearly faced nuclear armor getting like dot-com crash terrorism attacks yep y2k right yeah yeah like the gfc itself covid itself i mean these things actually happen yeah yep so so it's kind of the thing is is that despite a lot of ineptitude from the powers that be despite the the um the the the the just the challenge i mean it's just easy to sort of you know throw criticism from the peanut gallery you know there's a great poem about the man in the arena which i just love by the way it's just sort of like until you're there in the dirt fighting for your life you don't realize what's the babe ruth quote you know i never realized how easy this game was until i stepped into the commentary yeah that's right do you know Which is a great saying.
15:42It's a lovely question, yeah. And yeah, you're going to have all of that kind of stuff. But commerce tends to thrive in spite of that. And it's always a case of two steps forward, one step backward. So when I look to the future, I mean, if you heard me rant on Friday, gosh, there are a lot of things I'm pessimistic about, right? But I'm fully invested. Yeah. And the way I square the circle is I think that people with a good idea will create value and will be rewarded. And they might be the exception to the rule. They almost invariably will be the exception to the rule. But they will succeed in spite of all of that kind of stuff because they're providing value to the world.
16:24And if someone is going to give me a piece of magic glass that gives me all of human knowledge at my fingertips and I can communicate with anyone on the planet, probably going to prioritize the ownership of that. Like it's a good thing to have. It's kind of a point. It's like, do I adopt this or do I not? It's like, well, ask Japan how it went when they decided not to adopt gunpowder, right? Like there will be some things that come along that are just so groundbreaking, whether it's steam power or radio or electricity or the internet, like AI, where we are now, synthetic biology. The list of potential game changers is as long as your arm.
17:04And my bet is on human ingenuity. And my bet is that despite all of the hurdles, I mean, think about – you can go further back than 100 years. Think of what we have done as a – like we talk about COVID. Like go back to the Black Death where one in three people – or was it two in three? I don't know, some insane number of people died, right? We survived that. And I'm not saying it was like a picnic. But we somehow seem to muddle through. Here's the other brutal reality of it. What else are you going to do? Here's your choice. Become a doomsday prepper. Literally, find some land, buy a bunch of baked beans, learn how to use a crossbow, and live that life.
17:55That's the choice that you're confronted with. Isn't a halfway house with hard assets, though, mate? And I'm not advocating this at all. I'm just playing out the scenario. somewhere between shares and doomsday prepping might be for example productive land where it's going to be needed and used for a thing uh if we're trading shekels or shells or whatever we're gonna need to grow wheat or graze cattle or whatever else assuming lab grown meat isn't available because we've just blown the world up right you know but i think i'm not saying that is the solution but i think there might be a halfway house which is gold and land and stuff maybe yep yep digital gold um yeah no 100 like like that that that's the thing i think the big picture view here is when you zoom out is that the money is just an accounting system you know it's just a it's a tracking system it's a communication system what you just mentioned are the things that actually matter like we we need to sort of account for what we will transact in and what we'll store our value in and that's gosh that's a conversation as deep as i don't know I don't know how deep it is because I haven't found the bottom yet, but it's deep, right?
19:01But I can tell you, if you're an alien and you landed on this planet, you would say, why is the US the richest country in the world? Well, they have incredible resources. And they had a system of property rights and government that really fostered that human ingenuity kind of element. What really matters, when stuff gets real, is it the digital zeros and ones in your bank account that matter? Or is it the fact that I own this thing that we need? You know, the thing that grows food that you need to support. That's kind of valuable. It's kind of important. Exactly. Right? It's kind of important.
19:41The fuel that makes your cargo and creates electricity, kind of important. The steel that you know. These are the things that matter. Now, you can still go very wrong in these things if you overpay for them. And again, that's extending our conversation from Friday, is that farmland, productive farmland, is that always going to be in demand? Very likely so. Am I going to pay$20 trillion for a plot of land at Barrow? No. Well, I can't because I can't afford it. But even if I could, I'm going to do terribly well. If I can buy it for a dollar, hell yeah. Now, somewhere between those points. And so that's really what you're trying to do as an investor is like, what is valuable and what is the market?
20:24Yeah. And what's it worth? Here's the irony. You can't know. You can guess, but you can't know. But you need to think about it deeply. So we can all agree that certain things have value. Then the next question is, well, how much value? And then the third question is, is it available to me at a price of value or better? and if all of those things check out, go for it. You'll probably do pretty well. It'll be bumpy ride. You'll have corrections and crashes along the way, but you'll probably do pretty well. It's the whole Buffett thing of investing is simple but not easy. It's simple. Dude, I've been saying it for 50 years.
21:00He just bangs his head against the wall every unit. He's like, I'm just buying good businesses at a sensible price. But what about now? No, the same as always. I'm just doing that. Oh, but the this and the that and the rah, rah, rah. And I'm like, oh, my God. The principles don't change. I've said a million times, Ben Graham effectively codified them, Buffett's mentor back in the 30s, maybe 20s. Buffett's kind of, you know, made them available to the masses and digestible. I don't know of a single investment principle that's been invented since, including all the... I was going to say, let me clean it up.
21:34All of the options, formulas, and other arcana that can be done with computers these days, the fundamental principles of investing have not changed since Ben Graham wrote securities analysis and the Intelligent Investor. They just haven't. What you are doing is you – money gives me this optionality. I can exchange it for anything, right, that I want. And everyone's got a price. So if I've got a surplus of money because I've worked more than I've consumed at the very basic level, and what am I going to do with it? Well, I'm only going to give it to something where I can be confident that I will get more back over time.
22:12Otherwise, I'm just giving it away. Now, maybe there's a charitable angle in that, and that's totally fine. But from an economic actor's standpoint, it's just like, I want to get back more than I put in. Okay, let me go back to the question from Jono, though, because he's kind of painting a picture of a, if not zero-sum outcome, or zero outcome, sorry, some sort of meaningful value destruction angle. So your theory is 100 % right. I agree with it. jonah is saying okay but what if the e that i'm using to do to work out my p uh my earnings versus price to those who i didn't i wasn't particularly aware uh if if if the doomsday thing happens if it all does go to custard yeah isn't owning any shares a silly idea where you and i are are playing silly buggers maximizing our returns until i go to zero and anything times zero is still worth zero so my berkshire shares go from 400 bucks to a thousand bucks and then back to a dollar uh that's what's happening in the meantime right i've stolen left with a dollar in the circumstance you've most particularly i share your concerns i think you hold them more stridently and i'm more more i think the probability is higher but in either case um in some of those circumstances i is there not cognitive distance in your own mind i'm not picking on you i'm just using this example no no it's just to say i think the economy's screwed and there's financial repression there's other things whatever else it is for friday but i mean own shares, you have to implicitly believe, I'm answering Jono's question on your behalf with my words, you can fill in, you're kind of implicitly saying, even if things go badly, maybe even particularly badly or a little bit badly for a long time, I still think this is the best cause.
23:51I don't think it is a zero outcome. I think it's a negative from here. It's an unsatisfactory outcome. It's less than it should be, less good than it could be. but still earning shares is the least worst way to prepare yourself for that circumstance is that is that close to your view yeah no no no i mean so that's the other thing if i'm wrong or any of us are wrong in what we think the future holds then yeah it's like doesn't doesn't matter what your theory was like i'm still buying this because despite all these difficulties the company will still exist in five ten years time and on average it'll be earning more than than it is than it is today.
24:25And if that's true, then great. If it's not, then yeah, okay. It didn't work out. In fact, I am guaranteed to have been wrong. Probably at least 45 % of what I'm holding is allocated to things that will not go well. I know that. I know that because that's what the stats tend to tell me. It's what happens to the greats. And like, here I am, little old me, and I'm going to get, no, I'm going to have a hundred. Everything I touch is going to turn to gold or at least not go to zero like no of course no i mean i can't tell you the stuff that i've held in my portfolio that just is absolute rubbish but looking at some of those things now my gosh um but that's normal it's it's 100 normal so what all i'm trying to do is be right more often than i am wrong is is to recognize that when i am wrong to to recognize it and and change your mind you know when the facts change you change your mind what other logical reasonable outcome uh is there um you know but you changed your mind you said this like yeah yeah what would you have me do should i just continue to like plow ahead you know um and and that's really the story of it i don't know the timing of things i don't know that i don't know exactly how the future is going to unfold but i know if i spread it around and i know that if i stick to some pretty sensible time-honored rules that i'm gonna go okay Will I look back and go, I could have done it better?
25:50Yes. Will I look back and say, gosh, I wish I'd bought that instead of that? 100 % yes. But if I look back and it's like I am like 0.1 % above what the benchmark is, I'm happy. I'm a happy person, right? Because I've put in effort that's yielded me more than the average, and that's probably worthwhile. And I just go back to my other point. What's my choice? What's my choice here? So I stay away from highly leveraged stocks. I stay away from unproven businesses as best I can. Like there are some early stage businesses in there, so maybe I'm bending the rule a little bit there. But, you know, I feel as though there's traction and there's momentum in the business.
26:27And there's a rich reward trade-off too. Yeah, and there is. Like the earlier you are, the bigger the ups. So you've got to pick the point at which you're sort of comfortable. Here, I'm a guy with a napkin that's got a business plan. Do you want to invest? No. I'm a guy that's got a product in the market and I'm selling more than I did last year, even though I'm still losing money. Well, okay, now I'm interested. You know, like there's a sliding. And then there's a business I've been around for 30 years, and I just make this amount of money more or less each year plus inflation. Like there's a scale there.
26:51And you've got to try and pick the ponies that you want to back as best as you can. Stick to those golden rules. Be flexible. Be like water, you know. Be like water. Very Buddhist. As the Buddhists would say. And it's such an unsatisfying answer because what – not Jono, but a lot of people will want to hear, oh, let me give you the formula. And there is no formula. It's just like, I'm just one of many, one of 8 billion hairless apes on this planet who's sucking his thumb and trying to make the best judgment that I can and invariably making all kinds of mistakes. But if I can just avoid a few major blowups, if I can survive, if I can be anti-fragile to my point on Friday, if I've got a little bit of optionality, if I've got a little bit of diversity, Am I going to be remembered in a thousand years' time as the world's greatest investor?
27:45Definitely not. Am I going to improve myself and my family's fortunes over the long term? I think so. I think any of us have that capacity to do that if we're sensible and humble and farsighted enough to do so. Nicely put. Let's move to a question from Arnold. From the very, very, very broad Zen Buddhist approach to investing to a very specific company question, which I really enjoy. Discot and Ram, love the podcast. Keep up the sterling work. Thank you, Arnold. You've helped guide me through the stages of not knowing what mistakes I'm making, being aware of what mistakes I'm probably making me doing it anyway, and now laughing as I catch myself before falling for the same trap.
28:26That's good. I love that. He says, catching the falling knife and averaging down are two I've particularly enjoyed in the past, in brackets, Kogan. Thank you, Arnold. I appreciate you mentioning the fact I'm losing money on Kogan. That's very nice of you. However, your recent podcast, discussing the themes of dividend traps and the company's AMP and Perpetual made me revisit my previous investments in Magellan. Current numbers seem to suggest the company has a dividend yield and a PE in the high single figures, about nine apparently. I'm aware the company had key person risk with well-known management leaving, but it still makes decent profits.
29:01And there seems to be an overemphasis on funds under management declining. Obviously not a good sign, but how much does FAM directly impact the level of profitability for these kinds of businesses? I feel the company will come back, perhaps not to the level of its former glory, but enough where it currently seems cheap. Or am I regressing towards making my previous mistakes? Would love to hear your thoughts. Obviously not as personal advice. Regards, Arnold. I'll go this one first, man. I mentioned this last time, Arnold. You know, I see you. I see what you're doing. just because you say I know it's not advice don't we we know I uh I've been saved from making this mistake by by some a couple of colleagues at the monthly fill over the last couple of years for exactly this sort of reason Arnold because I I'm a sucker for a falling and cheap share price like well not much has to go right for this to go well um me too but I haven't bought it mate and I've I've not recommended it to our members and the reason largely is you ask how important this farm it is so important it is hugely important because right it's everything for two reasons one their fees are a percentage of the funds under management so whatever they've got they get a percentage they get a percentage of its fees every year so if it's lower you get lower fees the other thing is their costs are almost completely um unhinged disconnected from their fund and that's a good thing when your funds are increasing because it means your costs are the same but your fees go up in other words imagine a business with sales growing but not costs not many businesses can do that by the way software companies can uh but if you're selling a money you know funds management companies can most companies if woolly sales go up they have to sell more units of product and more stores and more people and more cost of goods sold uh magellan gets to say well hang on you're going to be put a zero on your on your direct deposit to me doesn't cost me an extra cent to manage that money so which is great when it's growing when it's declining a modest decline in funds under management can lead to a massive decline in profit.
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30:58And that's kind of what's happened. Now, as an advisor, I hate the funds management industry because they are just taking money out of the pockets of average investors. As an investor, I love the funds management industry because those economics are beautiful, right? Not only do you make more money when funds increase, but the market goes up over time. So the value of capital markets increases over time. So if you're a fund manager, you've got this lovely, Andrew loves the word lovely, I like it too. There's a lovely wave of cash. The tide's always coming in. And it's always coming in further and further and further.
31:30It just keeps coming in. It's like it's brilliant. The two risks are that your fees compress, i.e. the percentage goes down because there's more competition. And that has been wonderful for fund investors because low fee ETFs have basically driven them down. The other is you lose that funds under management. And you think about competitive advantages. Think about brands, right? There's Woolies. What does Woolies stand for? What does Telstra stand for? What does Apple stand for? the brand of a fund is really really really really thinly set the foundations are very shallow because what is Magellan really I mean it was kind of you know the Hamish Douglas company as he leaves and what's left well there's a brand but what does the brand really mean and I've got to say about funds in general any investor in general funds in general the fund manager, the portfolio manager, sorry, matters so much more than the brand.
32:25Take an example, right? Let's say we've got the Motley Fool, and I currently happen to be the chief investment officer for mistakes that are made by my bosses, but I appreciate. And you say, well, the Motley Fool's doing a great job, because of course it is. And then all of a sudden you put Donald Duck in charge. Now, either you say, oh, thank God we got rid of Phillips. Donald Duck's actually really good at this stuff. So I thought Motley Fool sucked, but now Donald Duck's there. It was great. Or conversely, Donald doesn't know one end of a PE from the other. the motley full as a business from the outside looks the same right the brand is the same but how good is the person running it and it or boeing was a wonderful yeah right exactly exactly so yeah so so the person managing it really really matters and the brand perceptions change really fast in funds um so i look i i want to love it mate uh i don't know i really want to love it i i I wanted to invest and I wanted to buy this just for all those reasons.
33:19But you kind of think, okay, who's putting most of the money? The other thing is the brand Magellan actually means even less than you think because while retail investors kind of like the brands, institutional investors don't care at all. Financial advisors care a little bit because they want to put you into something you know. So you say, oh, it's Magellan. Oh, I've heard of it. I think they're good, aren't they? Yeah, they're good. Okay, good. So that matters a little bit. And for retail investors, it matters a lot. I don't know anything about investing, but I've heard Magellan's good. I'll invest in that.
33:43That's kind of the thinking, right? Now, most of Magellan's money is institutional. a decent percentage of the remainder is financial advisors. Now, funds are declining. The returns haven't been great. Which financial advisor is going to say to their client, you should put money in a gel. It's not going very well, but it'll probably improve. Now, think about, even if it's true, think about that behavior. You're going to go to your client and say, invest in this losing business. Institutional investors are looking around going, I don't really care what the brand is. Why would I care? I saw the best returns I can get.
34:12Do I trust the new guy or don't I? Now, maybe they do. I'm not criticizing the new team. uh i just think the brand that we we like but i love i love the hell out of brands they're my favorite thing um but as an investor by the way like like some personally but um i love businesses with brands magellan seems to have one i think it's much flimsier than most people believe and that's why i thus far haven't invested because if their brand isn't worth anything then the funds under management aren't as secure as we might think and if they're not then there could be more downside ahead now there could also be upside as we say all the time maybe the new team does a great job maybe market falls in love with them maybe they throw money out the hand of a fish because they find the next ai darling or whatever this could turn around but the point that it can go either way and in really big large swathes of you know extreme directions in either in either extreme amounts in other direction uh is what's kept me on the sidelines i'm not saying you should buy or not buy arnold but that's what's kept me from buying ram yeah yeah i mean it's it's not to suggest in any way shape or form that the company can't turn around and do well and that it's cheap i could correct but but your job as an investor is to try and handicap the odds of that and i'm with you mate i wouldn't bet it i wouldn't short it yes god knows i wouldn't short it um but i just i just i don't and this is more this is more about me than anyone else i and i again just to throw in our next obligatory buffet quote is you know it's not really the size of your circle of competence that matters it's knowing where the boundaries are i love that and when i look at a company like that and and you and by considering investing in it i have to have a degree of conviction that that they are going to turn it around i just don't not they might don't exactly yeah and i i could they yep could they not yep what do you think i shrug shrug i know it's like it's like sacrilege for anyone in our industry to say i don't know and that's that's kind of the that's kind of the problem with our industry to be honest because everyone's everyone's got an opinion even though they don't often have the right to have an opinion and and i don't know so i i go to areas and i and i can't ever know the future on any company but there are some that are just easier here's another buffett quote for you you know i don't i'm not looking for six foot yeah given that's the olympics i'm looking for six foot hurdles here i'm looking for a one foot bar i can jump over yeah it's like you know the easy example here would be something like a woolies his woolies around in 10 years 100 well he's around in 10 years time you know you know or what do I think they can do?
36:39It's not a fait accompli. It's not a slam dunk. It's just easier, right? And I stay away from these fundies because they go from, you know, the – I keep wanting to say rude words.
36:59Fill in the blank here. they go from like you know the best thing since sliced bread to like everyone hates them and then and then back again and what causes that well the other thing that's really hard with with fundies is that that no one likes to acknowledge we're for all of us in fact is the degree of luck that's right you know someone comes in and they go i like these companies and it just happens that that's the next latest and greatest sector you know they bought drone shield at 20 cents because of this and whether they were right or wrong, the thing went to$2 at one point. It's like, whoa, funds under management go up.
37:34People get excited. They pick that, more money flows in. And it's just sort of like, that is brilliant that you guys pulled the rabbit out of the hat. Okay, do it again. Well, you did it a second. Okay, now do it again. And it's just sort of like, it's just very hard to kind of bet on. It's funny that as this question came through, I just scrolling through straw man and special shout out to newbie HK, one of our members. he's gone cheekily AMP shares rocket he's pasted a headline in here AMP shares rocket 12 % on half year results right and he's doing that because I've just constantly put the boot into AMP right it's like so what do you have to say about that sir is kind of a thing yeah right right right you know and it's kind of like here I am like telling anyone who'll listen that it's just like the most rubbish company on the ASX or certainly one of the most in the top 50 and I will die on that hill by the way so if anyone wants to debate it let's go but if I just bring up the chart there and go out 10 years I've gone I've got a stock that's gone from 6 bucks to$1.13 it's like yeah it's kind of cool that it gained 11 cents today it's$1.24 it was a$20 stock not all that long ago well years ago now in late 2019 it was$1.25 and a few months later it was$1.75 again I'll make the point even after a big rally today it's$1.24 like no No, no.
38:57Like it's just one swallow does not a sum of make. Interestingly enough, statistically, some of the biggest gains are seen in stocks that are collapsing. Yeah. Just the nature of buy-sell dynamics and the rest of it, you know, and it's sort of - I hope spring eternal. A lot of the time too, it's something completely non-related to, it'll be like short covering. A whole bunch of people saw it as the dumpster fire that it was, shorted the hell out of it. Now they're closing their positions. Closing a short position is buying, right? So you sell to lock in a long, you buy to lock in a cell. Maybe that's that.
39:28And I'm not trying to suggest that's what these things might be, but there is a lot of danger in looking at an institution with a multi-year history of incompetence and ineptitude. Sorry, AMP. Again, I'll die on this hill. I think the facts clearly speak for themselves. Could it turn around? Maybe. The fact that they have one good half, am I about to sort of like abandon that? So here's another stat I heard recently. When you're trying to work out, this was done at the sovereign level in terms of debt defaults and the rest of it, but it holds true when it comes to corporates as well. What is the best indicator of whether a company or a country will default?
40:09Go on. If they've done it before.
40:15So we've all got mates who never pay you back, right? now after a point whose fault is it to lend the money like honestly who's it's your fault or you just got to make peace with they're not going to pay you back and and maybe you're happy to sort of do that kind of stuff and this is the same kind of thing i think you have to take with a lot of these sort of companies is just sort of like well the last 10 years has been an absolute dog's breakfast and a disaster but oh now it's going to be good and maybe again maybe it will maybe i'll be eating my hat and in five years time amp's at twenty dollars a share and some gun came in and just turned it all around but it's not a statistically sound bet i know this is amp and not magellan but magellan magellan is is um as you said there was there was an individual there was a key man there was at play not there anymore is that is the is the next person just as good maybe I don't know.
41:10It's too hard. Move on. For me. For me. Nice. I like it. Not advice. Not advice. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.
41:26One from Dave, mate. He says, I've been a regular listener of the Pod Machine for about 12 months, coming into this rather embarrassingly, with virtually zero exposure to or understanding of shares. Apart from a terrible experience on a mining stock tip given to me by a friend about 10 years ago that promptly tanked to zero. Oh, by the way, that story is very... I'm not even... People in glass out. Forgive yourself because every single one, almost without exception, has been there and done that. Exactly. You have reopened my eyes, he says, to the world of share investing. and my knowledge has grown substantially thanks to the way in which you make the subject so digestible to the everyday person on the street thank you you're welcome i'm now in my early 40s he says and while i do kick myself it will do me no good to look back at the missed opportunities and compounding that have been lost all i can do is focus on getting the journey started now and also use this to form part of my children's education to enable them to get ahead early themselves i think it's a really good point well done thankfully my wife and i have fairly well paid jobs and both owned separate properties in the uk prior to moving to and meeting in australia 10 years ago the sale of these properties allowed us to purchase our forever home for us and our two young children oh there's your right let me right away there's your first mistake you know you've got to use the equity roll that into it leave her up you know selling a property to buy a house to live in that's pure madness but please continue i just want to make sure that everyone understands as Bram was being sarcastic there.
42:58As things currently stand, says Dave. The highest form of wit, as we all know. Exactly. As things currently stand, we have a manageable mortgage that will allow us to start putting aside somewhere in the region of 60 to 100K per year, into investments for the future, and remaining of about$300 ,000 left over from the house sales that is currently losing us money by sitting in the bank. Yes. Finally, my question. I'm not seeking personal advice, of course. Q, there we go. Here we go. But what would your thoughts be on the best way for someone to start their investing journey in a similar situation where a sizable lump sum exists and smaller regular sums will be available ongoing, all being well.
43:35Dollar cost averaging the regular payments seems sensible, but approaching an initial investment seems to require more thought. Would it be better, in theory, to simply get it all in the market as soon as possible and potentially risk mistiming the market with such a large sum, or to split it up and dollar cost average it into the market over a period of, say, 12 months? Given my limited experience, I'm not quite ready for individual stock picking, so I thought I would make my initial investment into two or three broad-based index ETFs to get initial exposure to the market and start the journey.
44:06I would then look to split some of the regular investments over time into individual stocks once I've done a bit more work and feel more comfortable doing so. I'm sure a lot of this has already been covered, kind of has, but couldn't find an episode that really gave me the answer I was looking for. And I don't want to start off by making another big mining stock-esque mistake. your general advice and thoughts on the matter would be very well received thank you in advance and full on dave what do you reckon mate oh it's so it's so hard it's i get the conundrum right with the with the regular stuff uh the money that's coming in you're right it's a no-brainer just dollar cost average it's the easiest thing in the world there's there's two free kicks in investing one's diversification one's dollar cost averaging like you just just do it right like Like if that penny hasn't dropped for you yet, then I don't know.
44:53Just stick with cash under the mattress, I guess. But here's the other – again, statistically, it's probably not a terrible thing just to put it all in, right? Because even if you don't have the best luck in terms of timing, it's unlikely to be the very peak of a market top. and even if it is a little bit above what might be considered reasonable, two or three years later and even faster with the regular contributions you're making, you're back in the black very quickly and off you go. But there is a chance. There is the chance that you just get unlucky and that you do put your lump sum into the market right at the top.
45:33I mean, spare a thought for those in late 2007 that did that, right? If they just chucked their money in, in what was it, November of 2007, the market, this is without dividends, so it would have been a bit shorter with dividends, but it took you basically to the end of 2019 to break even, right? In a passive index fund. And that's a pretty bitter pill to swallow. Yeah, that's the, yeah. And the other thing that I guess, the thing that is true in life, but certainly true in investing, is that there's always an opportunity cost with these things, there's always a compromise to be made. And for me, and only you will know this, but for me, I would be tempted to leg it in over a year or two.
46:21And I know that full well knowing statistically, I'll probably regret that. I will probably regret that because I'll go, why don't I just chuck it all in? Yes, correct, correct. But it also guarantees that I don't have that other problem. Yeah. and that's why I say for me I would the opportunity cost lost the compromise of the gains that could have arguably should have been made I will forgo that knowing that I've extraordinarily to a very large degree mitigated that risk of that timing risk and I know that I'll look back and go gosh I should have chucked it all in or I should have waited for the whole thing or I should well yeah yeah would have could have should have right The best time to invest is at the bottom of a market crash.
47:08But no one rings a bell at the bottom is the old saying. That's a tough one. But I would lean that way. And don't forget, there's false dichotomies and binary choices here. So I've sort of given to chuck it all in on day one or leg it in over a year or two. Or it could be like I put half in now and then the others I dribble across. There's shades of gray in all of this. As long as you're aware of the potential pros and cons of each approach, you can make an informed decision and you will know in five years' time what you should have done. I think that's right. I'm going to double down on your thoughts very quickly because I want to get through some other questions.
47:49I invested my mother-in-law's super all on one day. She had a different strategy. We went, you know what, let's buy a portfolio of income producing shares. Did all on one day. And it was, you know, not inconsequential. It wasn't sheep stations, cattle stations, but it was, you know, it was a decent chunk. In new farms? In new farms. And could it have gone badly? Yes. Was it likely to go, well, yes, I was investing for income anyway. So did it matter? Probably not. Could I kick myself? Yes, blah, blah, blah. You're right also, Rem, that statistically, the earlier you invest, the better. But I'm going to double down on your thought for most people, particularly new investors.
48:24You know, if I got, you know, so here's, if I got a lump sum today, if I, you know, my rich, great uncle somewhere I didn't know came and said, here's$10 million, I'd invest it today. I just would. And knowing it could be$8 million tomorrow. And that's kind of okay. Not okay, they'll lose the money, but okay, I know I'm doing that. But for people who aren't in that, that's what, again, I would define mother-in-law. People aren't in that headspace are particularly new investors or you're just simply not sure about your own temperament. Here's the thing. If you invest it slowly, you get the benefit.
48:54It's also, it's purely psychological, right? But you get the benefit of two things. If you invest a little bit at a time and the shares go up, at least you've made money on what you've already bought. So you're feeling pretty good. If they go down, you get to buy the next dollar shares pretty cheaply. So you're feeling pretty good. And that's the way you outflank your own biology is, you know, you take the benefit of both. Now, the reverse is also true. If shares go down, you've wasted money. If shares go up, you should have invested more. So that's also true. But if you're looking for a way to assuage the deepest regret, in particular the deepest emotional distress um dollar cost averaging makes sense yeah i again we can't see what you should do uh but i think it would probably depend to me on the size of lump sum versus the size of the annual components if you're going to put a million in then a dollar a day i do i do the million over a much longer period of time it was 50 grand up front then 50 grand a year you probably do it over three or six months so kind of think about the proportions I would probably do it over 12 months, I reckon, if it was me.
49:53Yeah. So what was the listener's name again? Dave. Dave, can I just give you a pat on the back here? Because, I mean, one thing I was ranting about on Friday was making yourself bulletproof. And you may have regrets. I mean, by the way, you will have regrets because whatever you do, you will, in hindsight, know that it could have been slightly better. That's right. But you're kind of bulletproof because what did you do? You've paid off most of your house, right? So no one's going to kick you out. No one's going to evict you. Things could go really bad. It could be that you choose to put it all in on day one and the market crash and it's going to suck.
50:29It's really going to suck. But you're not on the street. No one's calling you up saying there's a margin call. We need to liquidate all of your assets. There's not like knocking on the door of friends and family saying, can we sleep on your couch tonight? I applaud that. And it is something that isn't celebrated enough. and the people that make the headline of the, especially the tabloids are the 23 year old with 26 investment properties, you know, and just, it's not to say that they, it's not legitimate and true, but yeah, those returns need to be looked at through a risk adjusted context. No one celebrates the person who put a, you know, their life savings on black at Star Casino and came out with twice the amount of money they went in with and think, wow, what a smart person.
51:08Look what they did. But, you know, you over here just trying to passively index, you know, with a bit of spare cash while making sure that you don't have a big debt burden. He's like, you're not going to go down in history as, you know, the person who just made a squillion dollars. But you're going to, you just kind of, you're bulletproof. And I just, I feel as though that needs to be acknowledged and celebrated. And I know it's not an easy path to make, particularly when others are doing seemingly much better, at least in the short term. So well done. Well done, Dave. Like it. Good one, Dave.
51:39Here's one from Matt, mate. Can I say, Matt, I love this question. I love the long-term thinking. I got to say, for all the issues, Matt's 22. For all the issues that a 22-year-old's got, I love that Matt's asking this question because it's going to be years and years and years into his future, but he's already thinking about it. He starts, Hi, Scott and Andrew. I've been loving the podcast, so please keep up the great work. Thanks, Matt. My question relates to compound interest. I'm 22. I've been investing into two ETFs each month using a dollar cost average method over the last few years. Mate, just quietly.
52:09That puts you in the top 1 % of all 22-year-olds. Well done. my understanding is that there is a point where my monthly contributions start to make trivial differences to my overall returns i was wondering how i determined the point at which making monthly contributions becomes trivial kind regards matt i just i love that he's thinking about he's 22 he's like when should i stop that's just brilliant right go around you so it's easy when when should you stop never don't why would you stop i would i would you yeah gotcha so you're you're putting less than you earn, you're taking the excess and you're investing it every month when you have the opportunity to.
52:43So let's say I put a hundred bucks aside and I get$10 million in my account. Sorry. I could add the hundred bucks or I could be like you know what, I'm just going to buy an extra bottle of whatever I want to buy. A bottle of wine or whatever. There's a point at which adding the extra is so small. That's what I'm saying to Matt. Matt, it's not going to be anytime soon, mate. Unfortunately for you, but you're young so it's earlier for you than it will be for other people. Yeah. So how do you think about the point in time at which, okay, the You're compounding. The snowball's rolling so fast, there's no point putting more snow in front of it.
53:10It'll do its own job. Oh, that's such a... Okay, yes, you're right. There is a point where it becomes ridiculous. Or at least redundant, yeah. Well, we talked about this a bit before too. I mean, it depends on your lifestyle. If you're the kind of bloke that likes power yachts and racehorses and stuff, well, you probably need to keep doing it for a while because it's an expensive lifestyle to fund. If you're more... There's someone living in a tent eating two-minute noodles and there's someone with the power. there's a whole range of spectrum within that but basically when you get to the point that if i can just get like a five six seven percent return on my capital and that funds my life yeah that's probably the point right because you don't need to be warren buffett to get five percent you can get five if you can fog a mirror you can get five percent on average over the long term right you should be able to um just term deposits or something like that you know or maybe that'll changes interest rate anyway my my point is is that it's not it's not a heroic assumption to think i'm going to get 20 every year and that's going to fund my lifestyle that's that's entirely reckless the person who says i think i should not every year but at least get five percent a year that's actually a very low bar to to to cross over and and that that return is going to fund the lifestyle that i desire that's probably the point i would say i think that's true i think I'll add another wrinkle, mate, only because Matt is so young.
54:37There may be a point at which his compounding will do enough in future that he can stop even though he's not retired yet. So, for example, because Matt's so incredibly young, I haven't done the numbers that I should, Matt, and I'm sorry to do this to you. Think about doubling every seven or eight years just for the fun of it, right? If Matt could get to – let's be hypothetical, right? If Matt had 200 grand now, I'd probably say you could stop investing, Stop adding. Not because he can pay for his lifestyle with what he's got now, but assuming he plans to keep working for a few years, the company will kind of take care of itself over his 20s and 30s and 40s so that when he's 50, he can retire if he wants to with enough money.
55:15So there's a line you can draw, I think, where you can - That's about a million dollars after 20 years, if my math is right. If you're getting 8%, like it's shorter if you're getting 10, right? And maybe it's 48, in which case it's$2 million. So, yeah, all I'm – Matt, you're right to do it in a spreadsheet, mate. I would keep – like Ram says, I actually keep investing almost if he had exactly as much money as he wanted to have in that portfolio because it means you don't rely on future returns, which are uncertain. Ram's already talked about the fact he thinks next decade is going to be less than the past, so maybe you should use, you know, 6 % rather than 9 % as an average for the next decade or so.
55:51But there is a point at which you could simply say the snowball is big enough and I've got enough runway left, enough more room on the mountain I can stop adding, even though it's not big enough to retire on, but it's big enough that it'll look after itself. So by the time I get to the bottom of the mountain, the ball will be big enough. Does that mean I'm torturing the analogy? But you know what I mean, Rem? There's a few and I, we're old, right? So we're going to probably have to keep contributing until we get to that point where like, okay, now I've got enough. Now I can pull the pin. Matt at 22 can probably say, if I got to a certain amount of money by a certain age, the company will take care of it from here and I can stop adding even if I'm not yet ready to retire work to live don't live to work right unless there's intrinsic value in your work and hopefully you're fortunate enough to be in that situation but yeah absolutely I mean it doesn't I it's why I've sort of you know scratched my head with you in on the pod before you look at certain billionaires in miserable sods and just after more it's like god you just you don't get it do you like you know it's interesting you know psychologists have been busy in this area too there's no greater degree of happiness amongst the uber wealthy in fact there's a lot of depression and all kinds of other problems that are there you know it's just like they've they survey people on their deathbeds all the time what matters family friends and experiences every time you know no one goes to goes to their grave thinking gosh if only i had that second ferrari i could just and even with you here's the i'll take i'll take the researcher's word here because i'm not in a position where i've experienced it but and i'm not a car guy but let's use the example let's say you give me a ferrari right like i can guarantee even if someone is not a car guy i'm gonna have a hell of a lot of fun the next month or two i'm gonna be that guy right and and it's gonna be super fun uh then it's not then it's just normal right and then you go okay well he's uh i don't know aston martin boom here's another one way and just it's very rapid diminishing returns on all of that kind of stuff the hedonic treadmill, as it's called, is going to run, is going to move as fast as you can possibly run.
57:53And I've mentioned before, it goes the other direction. People who have very, like tragedies in their lives, obviously not happy individuals for a time, but the happiness normalizes very, very quickly. And so what you want to do is you want to, here I'm telling you how to live your life, live your life however you want. But what I want to do is I want to maximize for the things that matter. I want, you and I have sort of said before, probably pretty arrogantly, but we could earn a lot more money if we went in the industry proper, right? Yeah, totally. We might suck at our jobs, but assume we don't suck.
58:28Oh, yeah. The equivalent pay to be earned elsewhere for the same job, assuming we were able to pass the interview, is more than what we're getting. Look, if we can trick the HR person to think that we know what we're talking about and hide our incompetence, yeah i think i i think we we could we could get a much better paying job but i'd be miserable i'd be miserable now there is a point at which you just got to put food on the table so you can't say i'm just going to be an artist and wander the fields like well you know i've got to pay put petrol in the car and and the rest of that kind of stuff but beyond that kind of point me personally i'm going to maximize my time with my friends and my family and and the experiences that i have That's what I want to do.
59:13And it took me a long time to realize that, by the way. I was pretty hedonic there for a while. Oh, totally. Yeah, no, you're right. I think we all get to that point of like, hang on, what am I doing? Well, maybe we don't all get there actually. You and I have got there at a point, but certainly not as early as we should have. And Matt's probably already thinking about that, which is great. The other thing that matters, of course, you can combine the two. So having a large enough portfolio gives you the opportunity to, if you want to, work a little bit less or four days a week or for a lower paying job or for a whatever.
59:38you know that that's the beauty of cash as we've said many many times it gives you the choice and that's all it really is you know financial freedom is just about choice uh and that's kind of you know that's the beginning end of it really some people i used to i used to work with years ago sort of went into like finance sort of finance proper and it's like oh my gosh they look so old they're so aged you know because they work these 80 out they're on big bucks right they're on big they have nice houses but they have not look as a general rule not great relationships with their other with their other halves and that because they're just never home right they're never home yeah yeah um the stress is ridiculous and no kid ever thank dad for working 80 hours a week that's what the kid they know their kids they don't know their kids you know it's like no not for me now i don't want to cast judgment some people go no the career is the only thing that So I've got to be careful not to judge.
1:00:30I'm not judging. I'm just saying for me, no way. And you have to figure that out for yourself. Yeah, yeah. All right, let's... I love this beginning. Louis says, Dear Pod Machine, thank you for your time, learnings, occasional rants. Louis hasn't been listening very long, obviously. And all around good banter. I've recently become obsessed with valuation and the different approaches people take. I also enjoy pondering the macroeconomic factors and how Mr. Market regularly changes his mind about the price of stocks, bonds, interest rates, and inflation, all based on short-term narratives. Endlessly fascinating.
1:01:09I'm with you. It's crazy. Here we go. I recently watched a lecture on YouTube by Aswath de Moderen about valuation. He is the godfather of valuation. He was a guest lecturer at an MBA course in the US. He discussed his approach to valuing stocks, which inspired me to set a challenge for both of you. I would like each of you to value a random stock to see how your valuations compare. To assist with this, I used a random number generator on Google. Based on the market cap on the day you read this, please choose the 66th highest stock in the ASX 200. He says, please feel free to adjust the randomness if needed.
1:01:45I have no skin in the game. I would like you to discuss how you use raw data and business fundamentals versus the softer aspects such as current market and macro narratives. If possible, could you share the DCF analysis, PE ratios and any other metrics you use to arrive at your valuation? Additionally, could you name a price, Ceteris Paribus, at which you would sell? Scott, I know you hate selling, he says. To make this more interesting, could you read this beforehand, maybe a week out, which is why I'm reading it now, to allow the listeners to create their own valuations and post them on platforms like ShareAdvisor, he's a new member, and Strawman.
1:02:17I can't afford, I'm an inspiring member. This exercise would make for great listening and provide an opportunity to conduct a statistical analysis on the valuations to determine the median and mean values independently on both platforms based on the listenership, as they say. It sounds like a lot of work, man. As they say, the smartest person in the room is the room. Thanks again, Legends, Louis. Louis, I haven't given a ram heads up on this one, obviously. We'll have a chat about it.
1:02:46The hardest part, Louis, really, honestly, mate, is audio is a terrible medium for discussing valuations because by the time you've listed three numbers, everyone's forgotten the first one or switched off. So I'm not saying we won't do it. Ram and I will have a chat offline and work out if there's a way we can maybe make that happen. I am not doing a DCF detailed analysis on the 66 largest company. There you go. Louis, the answer is no, apparently. Sorry, not for me, Louis. But I've got words. I've got thoughts. So we will come back to that one, Louis, but I just thought we'd ask the question.
1:03:19We'll see how we go. Andrew and I have talked about looking at a particular company, kind of doing a pros and cons or something. I think we might, I don't know, mate, I'm speaking off the cuff here. We might find a company where we both are happy to discuss and compare. If we can find something we kind of both like, we might do it that way, Louis. Will it be random? No. The thing about randomness, by the way, mate, is it takes a heap of work to get up to speed to have enough confidence in evaluation. And so it's... And it's the last step, right? It's the absolute last step. It was about days and hours of research just to kind of feel like you know enough about the company to have a reasonable assessment of its future.
1:03:53But really good question, Matt. Really good question. So Demandoran's great, right? He is well known for valuation because he really dives into the weeds. And I don't have a lot of criticism against him except where I think he goes. Actually, no, I think in more recent years, he pays more lip service to this. He's mellowed. And what you will find with his approach is that it's highly technical, highly detailed, highly smart, right? But there is a false specificity in that approach. I said the other day, ignore any forecast with a decimal point, right? And when you do the DCFs and the others, I need to forecast sales, costs, margins, share count, cost of capital, a thousand things.
1:04:53And then I have to do it for next year and the year after and the year after and the year. It's diabolically hard. And valuation is like the Hubble telescope. So if I nudge the Hubble telescope one millimeter to the left, I'm in a different galaxy, right? Like it's like the sensitivity, like, you know, and it's the same with this. We did a bit of a discussion actually just the other day with Ordinate. So Ordinate, AV software, hardware sort of manufacturer, a great company, love it, dropped 30 % the other day. And people on the forum were just sort of discussing it. We all lowered our forecast.
1:05:33And some people are like, well, that's a big adjustment. What's going on there? It's like, actually, we didn't really change that much of the assumptions. Yeah, that's right. Yes. You start for a lower number. Yeah, yeah, yeah. You know, just like a really – and this is where sometimes I think the smarter the investor, the more trouble that they can get themselves into. A million percent true. I think it's a hundred percent true. Yep, yep, yep. Peter Lynch says that the most important organ is the stomach and not the brain. He is right. Right. And so what I'm saying here is that the value in these approaches is in thinking through what do you think sales growth can be?
1:06:12What do you think a reasonable margin can be? And why. Exactly. Yeah. What are the mechanics? Hey, if staff costs go up, if I start expensing my R &D, there's a thousand and two questions that you could ask. But it gives you a feel for sort of the economic mechanics of the business. So that's very worth doing. but then but then you're going to suck it all into your model and it's going to spit out a number and it's going to be eight decimal places and it's going to give you a false confidence that's not deserved because i can go into your model i can change one variable by 10 and again i'm in a different galaxy yeah so so is this to say you don't do valuation no absolutely do valuation it's how can you possibly buy something without any notion independently of of what it's worth like It's madness.
1:06:57So I am rounding up to a conclusion here, mate. Sorry. As I have matured, and I'm not yet mature, but I'm hopefully on the process. As you've been maturing, yes. I've been slowly maturing. I've really just – and I've been this way for a few years. Quite a number of years. I've just dumbed it down. So I've explained it before as I thumb suck what the earnings per share will be in five years' time. I thumb suck what I think a reasonable market multiple is on that. and then I discount it back by 10%. Now, that sounds so ridiculously basic. Almost negligent. Right, exactly. And then I do it like eight different ways and just got to get a feel for where the spread is.
1:07:37And then I kind of go, so I did it for Ordinate the other day and I went, well, if I assume this, about$12 a share and if I assume that about$4 a share. So$8 a share. That's what I posted on Strawman. Is it right or is it wrong? Well, it's definitely wrong. Every valuation is kind of wrong. But the point is I've got to draw a line in the sand somewhere. And the more important point is I know what needs to happen for this price to make sense. I have now related the price to expectation because my model was based on a certain level of growth and margin. And if I were a few years ago, well, they're nowhere near that growth.
1:08:14They're not getting any margins. They're not improving. And I know that the valuation is busted and the thesis is busted as well. And I have to go back to the drawing board. that's the value in doing these kinds of things. So yeah, endlessly fascinating. You're right to think about it. Absolutely learn. I'm trying to think of the saying, you learn DCF so you can not use it. That's exactly right. That's a million percent right. That's exactly what it's about. And again, that makes why, because it's not worth, no, no, no, it teaches you how to think, but don't make the mistake of what most of the sell-side analysts do who started believing their own BS, right?
1:08:51It's just like, it is a guess and it is almost certainly flawed. That is a wonderful way to finish. It's a slightly negative way to finish, but it's an important way to finish roughly right rather than precisely wrong. Okay, wait, wait, wait, wait, wait. Very quickly, very quickly. Ask a builder, right? When they say, what's the quote on my new bathroom going to be? They could add up all the materials, add up the cost of all their subbies and all of this kind of stuff. Or they could say, usually it's about this per square meter, thumb suck, add 10 % and that's it. And they're always more accurate than the people who do it very detailed.
1:09:23Speaking of negativity. Until next week, enjoy your week and fool on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under financial services license 400691.
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