Mailbag: incl. Dollar cost averaging... in reverse? March 24, 2024

29:29So year on year, I'm comparing the original business, plus I get six months worth of the new business. Look how much I've grown the company. Now that seems like it's obvious, right? In year two, you don't have to make any more acquisitions because the new company you bought now adds 12 months of earnings, not just the six in the first year. So all of a sudden, I've doubled my earnings I get from the acquired business year on year, plus my other business I have. So any acquisition that's made during any financial year, unless it's on the first day of the financial year, adds to that year and then adds to the second year because you get a full year of earnings all of a sudden where the previous year, you only got half a year or three months or nine months of earnings.

30:04And again, I'm not saying people do that deliberately to try and muddy their waters, but I will say if you're looking at growth, you can get two years of growth out of that. the second year in particular is one very few people notice because you think well okay last year they made an acquisition they didn't but you really really really need to be careful it's why companies when they do retail companies when they do same store sales compare like for like only those stores have been for 12 months already which is exactly what you should do and any company should do this sometimes they do it sometimes they don't but worth just being very very careful of because it can be one of those things that uh occasionally um either either as it deliberately the companies might do it to try and mess with you or they don't but you can as an investor be messed with yourself if you don't recognize you need to allow for that first the acquisition secondly the full year of earnings when the previous year was only a part year of earnings yep yep very well said mate patrick has a philosophical question for you well for us but i'm gonna make you answer it first because it's what i do hi scott and andrew up question for the podcast, please.

31:05What are the investment questions you have? What are the things you want to know? I don't mean things like how do we time the market or can we time the market, which you know the answer to, but things that still haven't resolved properly, but you think can be resolved. Thanks for the pod, Patrick. I love this question. It's a really, really good way of kind of, you know, really scrubbing the gray matter and trying to work out what would you like to know mate that you don't yet know the answer to but you think probably could be known in time you mean what i would want to find out about a company specifically as part of the research process or just me as a as a person wanting to know i think he mentioned i think he means investing in general just saying uh questions you have or things you want to know not things you already know the answer things you haven't resolved properly you think can be resolved so i assume you're talking about just investing kind of approaches or or investing philosophy i suppose i feel better or worse i've i've comfortably settled into my framework um it's working you know you know the answers already it don't it ain't broke don't fix it so i don't know all the answers but i know the questions is probably the better way of putting it um and i i really start out like embarrassingly dumb like like before i've even looked at a share price chart or anything i just want to know like what do you do i mean how do you make money what product or service do you sell how is that what what problem does that solve for the customer what what other ways could the customer solve that problem you know um is the customer likely to continue to want your solution or maybe more of your solution will more people want more of that kind of stuff you know that that's if i can't get and and again there's a lot of companies i I can't get past that stage on, right?

32:55Really. And I mean, really get that. That's the kind of things that I don't know that I think could be known that I would want to know. But if I can't know, I'm happy to sort of like, right, swipe it aside and go there. So I think that's where I go in terms of investment approach. It's just, and then layering it up. And I will keep picking at it and keep digging while ever it remains interesting. But usually the more common approach is as you dig, you find something that's often a deal breaker. Like I find that one thing out, it's like, no, not interested. Usually it's something like, well, you're in a very commodified industry and you're very hard to – your only edge or hope of an edge is one of operational excellence.

33:40It's very rarely a pillar I like to lean on. But, yeah, I feel as though I'm not really getting to the essence of it. You might have a better luck at it. But in terms of that's what I want to know and I want to try and know, I'm starting out at that point. And then before I've even looked at a financial statement or anything like that, I think it's something that too easily is glossed over. And I think those that do just start looking at numbers and go, look, I don't really know. They do some kind of corporate back-end software kind of deal and rah, rah, rah. But look, earnings per share growth has been really great and the dividends.

34:16You know, it's not that they're unimportant things, but I feel as though you actually know, stop. They're all good things to look at, but come back. And I'm big on the keep it simple, stupid principle, the KISS principle. And I think that'll serve you very well as an investor. I'm probably way off the mark. Yeah. No, you're not. It's a difficult question. We sound like two arrogant old blokes.

34:44Patrick, I'm not. I mean, there are always the unanswerable, unknowable things that in a perfect word you'd love to know, right? No, it's the old Charlie Munger, unfortunately, who did pass away, but who used to say, tell me where I'm going to die so I'll never go there. There is some element of what would I like to know? Well, anything that I don't know that would have a bearing on the future. And then if I knew it, would help me invest better, which is both absolutely accurate and real, but also not very useful in the context of your question. By the way, just very, very quick tangent. what you said there was one of the um there's a lot of research going on into prompting with ais and in particular the problem of agi and the the the difficulty is is like if you can't know as much as this thing how do you know what questions to ask you have to you have to frame it that way it's like if i had your kind of insight and knowledge and i had this sort of north star in mind what were the things that i should want if i was interested in myself you You know, those kinds of, it's a very sort of second layer.

35:43Anyway, you just reminded me. I read that recently. Go on. Nice, nice. Distraction. Distraction. I think I'd, speaking of AI, as computing, well, see, here's the problem. Anything that's knowable as a fact, once it's known, gets arbitraged away, as Andrew said regularly before. So, would I like to know the things that actually make the statistically most significant difference for investors? that if done would improve my results? Yes, I would, absolutely. As soon as that's knowable, it'll be known. As soon as it's known, it'll be shared. As soon as everyone shares it, then there's no upside potential left.

36:19So it's kind of one of those, it's a bit of a, I mean, it's a great philosophical question over a couple of beers or a whiskey. But if I could only know it myself, of course, all the things I'd like to know are all the factors that make, statistically making me more likely to be a more successful investor. That would be the very boring, but very honest answer. Yeah, but then you get to that point of just like, just tell me which share price is going to go up the most in the next six months. You know, you get to a point of progression as like if we're hoping for things that we could know that we can't know, well, I might as well go for that one, right?

36:52Yes, yes. That's true, that's true. But things that are knowable, which is kind of Patrick's question. I mean, you know, like for example, I think it's pretty statistically successful that founder, we're talking about founder owners, founder CEOs tend to outperform. So, you know, knowing some of those, what they call factor nesting, If I could have a list of things that statistically are more likely to make it successful, and I could use data or AI to do that and harness some of those things, I'd like to know those things. Not so much predictions around what the future is going to be, but the things that have statistically been more likely to add to investment outperformance, I'd probably like to know.

37:27But you can know that now, though, right? I guess I answered it the same way. I'll do the things that you can't know, though. Sorry, the things that we don't know the answer, things that if we knew more about or had the tools to find out, we could do. So the founder CEO one, you're right, we can know now. But if there was a, if you say to AI at some point - I get you, yes. If you say to AI, based on 150 years of public market investments, what have been the factors that have led to the most significant outperformance? It might say buying on a Tuesday, a company started with W, or it might say founder owners, or it might say sales growth over X percent for the previous two and a half years.

38:02or, you know, again, I don't know how likely that would be, but those things, if you could know those sort of, you know, factors that maybe people haven't looked at yet because we haven't had the data or the time or the interest or the energy or the effort or the whatever, or the computing power or time to do, I guess I'd like to know those things that would make investing easier. You know, the thing that I would most like to be able to do, if I had a magic, again, a total magic wand will be showing me the future prices so I can live in the Bahamas. If I could, though, do something, it would be to better understand my own psychological biases and failures so I could overcome them.

38:44To Munger's thing about tell me where I'm going to go so I won't go, where I'm going to die so I won't go there. It would be, I think I've got a pretty good, I'll just quote Munger again. Munger said all his life he reckons been in the top 5 % of his cohort when it comes to understanding the power of incentives, but he never really still understood it well enough or gave it enough weight. I guess I would probably, in the realm of knowable things, if I could reasonably accurately understand where I am tripping myself up at a high enough level of accuracy and materiality that I could change my investing approach to avoid some of those own goals, that's probably what I'd do.

39:24That's probably my answer, Patrick. Well, yeah, I think I've understood the question a bit better. Sorry, Patrick. I, following up from an earlier conversation, I think I would want to know what the culture was like inside the business. Oh, that's cool. If I knew that. And I would very strongly guess, because it is a guess, I don't have any hard data, but that a company where the majority of people really, as we said the other day, love to turn up and are mission driven. I think that would be an incredible edge that you would have as an investor. And the inverse is true. If you were able to look into a company and realize that, ah, it's poison in here.

40:08Everyone is miserable. They are here because there are no better options for them at this point in time. And the second that a better option comes, they are gone. No matter what else, what else you could give me in terms of, I would probably stay a mile away from that. now I'll preempt someone here because people going ah I look at that and I look at Glassdoor reviews so Glassdoor is a a website where where people sort of review their their workplaces and I don't dismiss that I think there's some useful insights to be gained there however not that useful in the sense that it tends to be the squeaky wheel that gets the Greece in the sense that, you know, it's only the really disgruntled employee that bothers to do that.

40:52And there is so much noise on there from HR departments who are anonymously posting, oh, this is such a vibrant workplace. It really enables me to, you know, grow to my full potential. It is, you will find what you are looking for, even if it's not there. So yeah, I would want to I would want to know the true read on culture and morale, and that would be massive. I love that answer. I'm actually really glad you brought up Glassdoor, mate. I'm going to do something that doesn't make me popular at the Motley Fool. Plenty of people in the Fool, particularly in the US, have talked about Glassdoor, including our CEO, by the way.

41:28So speaking of career risk, love you, Tom, if you're listening. I completely agree with you on Glassdoor. I think Glassdoor is a massive false tell because of the reasons you've just highlighted. You've got a whole lot of HR people saying, hey, say nice things, or a whole lot of, you know, a small number of disgruntled people who got retrenched in the last round of layoffs, who just went absolutely to town on the company and makes it seem worse than it is. And you don't know. It's their side, right? The truth might be they were a terrible person who never showed up and, you know. Correct. Oh, wonderful, and they're right.

41:58But here's the thing, and this is Statistics 101. This is what people should really understand, is if you are not getting a representative sample or if you don't know if you're getting a representative sample, Be very, very careful with any data you're presented with. I asked three people in the street and they said this. Yeah, but you happen to ask three 95-year-old women or three 18-year-old boys or, you know, is it representative of the population? This is why when you see political polling, they make sure that when they get their 1 ,500 responses, it's the right proportion of men and women, older and younger people, regional and rural and CBD, working, non-working, part-time, full-time.

42:35They try and represent the overall circumstance of the population because they know that matters, right? If you ask three coal miners in Newcastle what they think of climate change, or you ask three basket weavers in Balmain, you're going to get very, very different. You ask three people. 100 % of people say coal mining is wonderful. 100 % of people say coal mining is terrible. We know neither of those is representative, and it makes sense, right? And yet, if you look at Glassdoor and say 15 people who responded don't like their employer or love their employer. my last point on this one mate is um i worked for a company who again i won't name i do a lot of not naming companies i'm just trying to keep myself out of trouble here and i had the you know you um do you ever come in the great place to work i haven't i haven't seen a reporter for ages but for a while they must be on due soon these companies do great place to work right so they survey and try and find the best places to work to your point about culture and again really really you know you want a great place to work as an employee you figure out if it's a great place to work they're probably going to be happier and probably more productive not guaranteed but again likely this particular workplace i worked at turned made very clever they basically kind of made a point of pride that the company should win this thing and so they encourage all their staff to win the great place to work they weren't saying if you think it's a great place to work for us like no no we're a great company if you think so yeah we want everyone to think they're a great company and so it's it's the old you know do you want everyone to love your sports team yeah do you want everyone to you know i think you're great yeah people state of origin i love my state You love your state.

44:01Yeah, let's go and do that. So what they did is they created effectively a sports team mentality. Let's all go and vote for our company so we can win this thing. And we went, yeah, let's go and do that. And it was just beautiful to watch. I'm sitting there thinking these people are being absolutely just completely, you know, not so much misled, just kind of, you know, misdirected into, hey, answer honestly and see how we rank. It was like, no, let's try and win this thing. Let's try and be the number one company because that'd be great. Which, again, it's just, you know. Plus, people aren't idiots, right?

44:28Like, I mean. No, but it worked. that was the thing it actually worked well i've that rings a bell i've had a experience with something along those lines as well and it's just like i was miserable but you know on my employee survey it was like the best place to work i'm not an idiot right i'm not gonna say where is the up hey you're not gonna do anything about it right like i know that well enough all i does is paint a big black x on my back because it's like this guy's trouble so i was like shut up and he said yes sir no sir yes this is wonderful ticked i can tick some boxes and be in the good books or i can i can tick the wrong boxes and be in the bad books and and have nothing change anyway so they're all there it's all a nonsense that's why that's why you can't know it i guess that's why that's why it's a good uh thing to want to know if you could but but exactly not to know motley fool money for more subscribe to the free newsletter at fool.com.au forward slash listener.

45:26Arzan, I hope that's pronounced correctly. Arzan, Arzan. Hi, Scott and Andrew. Long-time listener, first-time questioner. Thank you for listening. Thanks for asking. Thanks for your nuanced discussions around investment, says Arzan. Would love your non-personal hypothetical thoughts about something. We've just sold out of the crazy Sydney property market and we are going to rent for the next 10 years at least. Arzan says, I won't go into the myriad of reasons, but we see better opportunity renting and being flexible in our place of residence rather than being tied down with a large mortgage. So hypothetically, says Arzan, we have just pulled out half a million dollars of equity from the house sale.

46:02We'd like to put all of this money into an index fund for the S &P 500, which has averaged a total return of 10 % per annum over 30 years. We would also like to pull out 50 grand a year from this investment to pay for our rent after paying tax on the returns, he says. My question is, does dollar cost averaging work in reverse? Considering the index makes on average 10 % a year, would pulling out that 50 grand a year, including dividends, mean that over time, the initial capital will stay at$500 ,000? I understand that inflation will eat away at the 50 grand, so we intend to top up the initial capital to compensate for that.

46:41But apart from inflation, is my above reasoning correct? What else am I not considering? Feel free to tear my thoughts apart appreciate your thoughts Arzan oh Arzan this is this resonates I mean this is this is exactly what I did 10 years ago um and I had the same rationale and I think I think the math stands up right like it does if if a then b like you're right if if you put that all in there you get a certain rate of return yeah you've got rent to cover but you know you you've you've still got other capital that's working there and it can you know depending on what assumptions you use you can make that very worthwhile i've mentioned before a couple times on the podcast how it was one of the bigger regrets i had not because the maths was wrong but what happened was what i didn't factor in was just how crap pardon my language the rental market is it is what throws my what threw my calculations out was i didn't know that i was going to get kicked out every 18 months yeah and then i would have to like pay double rent for three or four weeks at a time over the year and would have to front up the costs of moving and not just to mention the non-financial emotional stress and you know having some idiot come in and like you know question that you've put some blue tack on the wall you know just the most asinine things it is i think in a world where if we had the european system of very long-term rentals i just like it's just no brainer i would I would a hundred percent do it.

48:15Right. Like why wouldn't you get all the, all the benefits of, of security and long-term, the ability to think long-term and plan long-term, but put your money in far more productive places. So I got that wrong. And I also got the fact, here's what, here's what else I missed was I remember at the time thinking, look, I don't really know where the property market's going, but it's not like it's going to double in the next few years. Like, you know, like that's not going to happen. And it did like it exactly happened. And it's worse than that is that I was, the money that I invested was unleveraged.

48:48I just put the money into the market and I'm very proud. I'll tell anyone who'll listen. I outperformed the market incredibly well on that. The capital that I freed up from selling my house did really well. But the property market did well also, not as well as the share market. But if I was leveraged as I would have been in the housing market, like you pay a 20 % deposit and you've got another 80 % to play around with, the return on your equity became much higher. So it's not a foolproof plan is what I'm saying.

49:23But nevertheless, I have huge sympathy for it and would side and encourage that almost that approach. if it was, if we lived in a different world where you could secure high quality rental tenancy and be treated with respect like a human being. And, you know, where are the consequences if you damage the place or you don't pay your rent? Absolutely. But, you know, barring those two scenarios, if that was a different world that we lived in, I think, yeah, why wouldn't you? You know, but we don't live in that world. And what will throw you potentially is you'll go through the hell of moving every couple of years.

50:01And don't ask the real estate agent if they're after a long-term tenant because the answer is always yes. Exactly. It is always yes. Mate, despite all that, can I draw you on the financial question though? Assuming that Arzane's going to proceed to it anyway, seems like that's already been done. Seems like Arzane's already sold and wants to rent. The question now is, can Arzane rely on a reverse dollar cost averaging approach and use a portion of the returns or the whole return from the amount being invested to cover the rent for the foreseeable future? Well, no, either, unfortunately. I mean, it depends on the capital base.

50:38So we're talking with$500 ,000. Let's go off that. The trouble is that so we can say with perfect clarity and fact that the share market has over the long-term average 9%, 10%, with dividends reinvested, et cetera, et cetera. But we know that the reality is it's up 60%, then it's down 30%, then it's down another 20%, then it's up 2%, then it's up 40%. And it may be that the – this is no prediction, but just hypothetical. It could be that next year is the year that the market drops 50%. And now you've got$250 ,000 worth of capital and you're withdrawing$50 ,000 out. So now you've got$200 ,000. So you've just gotten rid of a fifth of your capital where you're only planning on getting rid of 10 % of your capital.

51:21And the return you need from that lower base needs to be even higher to get back to where you started from now because you've taken out a low price now it could be that next year or the coming year is the year that the market triples and i was like hey this works really well so it's why it makes more sense at very large or larger values because you you drawing that amount down is isn't going to be too fundamentally altering the the overall capital base but when but with even with five i mean five hundred thousand is not an insignificant amount of money, not by any stretch of the imagination, but you really could be a forced seller under that scenario.

51:56So I tend to prefer that approach. If you're going to go that approach, I would try and be more reliant on the dividend side of the returns. They will fluctuate as well, but nowhere near the extent of share prices. So if we have a recession, yeah, Woolies might cut its dividend or hold it steady for a few years, but it's not going to be your 30, 40 % drawdown in your overall wealth very rapidly. So does that make sense? It does entirely. And I think that's the right approach. Honestly, Arzane, no one knows. It may well be that from here, you could do that perfectly fine. If the market goes up first, stays higher, you get a couple of 15 % returns, and then it's volatile after that, you're probably okay.

52:38If it falls first or falls meaningfully in the first few years, to Ram's point, the impact of that, if you have to take money out and make that kind of work for you permanently or essentially permanently, that can be pretty problematic. So it's an open question, I think, as to how whether or not it can work. Hypothetically, could it work? Yes. Would I want to rely on it? No. It's the same reason we say to people, any money you've got in the market or any money you put in the market should be money you don't need for three to five years or more. I would suspect you might be able to do something like that if you had a cash buffer to allow for that fact that if the market did halve, you didn't have to then find 50 grand by selling those shares at the bottom.

53:19Because it is harder if you're not adding more money to the portfolio to then get that growth to work. You'll work out the math to yourself. But basically, to add that 50 grand, if your portfolio falls to 200 grand, if it's 50 the first time, then it's 25 % the next time if it doesn't go up. And then it gets lower. So you could actually wipe yourself out if your timing end up being unfortunate. If I was going to do something like that, again, around this point, I probably wouldn't. I wouldn't want my bills to be reliant on that. They have to be a forced seller. But if I was going to do something like that, I'd want to make sure I had cash first and then went from there.

53:50Having the cash matters because it allows you to choose when you're going to sell. We have an income service at the Motley Fool I've talked about before. I'm not going to sell it. But we do it by basically making sure you've got an amount of money. So we have a cash buffer. So we tell our members, draw your monthly income out of this cash pocket and refill that cash pocket with dividends over time. We also, by the way, don't make that particularly aggressive. We're not taking 10 % out. So a strategy like this, more often than not, should or could work. I would take at a lower percentage and I make sure I had a cash buffer of a couple of years, maybe three to five years, ideally, of cash in the first place.

54:30Now, that's a very different thing. If you're saying 50 grand a year and you want three to five years worth, that's 150 to 250 grand. that takes a big chunk out of your 250 or your 500 that you started with. But that's how I'd do it. I wouldn't want to rely on that. Again, you might do it and it might be fine. But you might do it and it might go badly. Here's the thing. Once that platform starts burning, once you are having money coming off lower and lower balances, it's a one-way. You can't make enough money back or you'll be very, very unlikely to make enough money back to cover those sales made at low prices.

55:00Yeah. Is that fair, Ian? Yeah, I mean - That's a good question. It's a great question. I mean, I really get it. And periodically you see people write about this, sort of rent versus buy, what's the most effective use. And there's some really good arguments, I think, on both sides. There's no right or wrong answer. I just emphasize the non-financial dimension to it. Yeah, that's absolutely true. I say it from lived experience, right? Yeah. I think that's right. The only thing I'd say, again, is theoretically, if it works nine times out of 10 or nine times out of 100, that means 1 % of the time, for every 100 people to try it, one person goes broke doing it.

55:33And it's like, do you really want to be that person? Do you really want that to be the – but from an experiential perspective and a financial perspective, not going back to square one is the most important thing. So just don't run it so close to the wire that you do run that risk, even if it's a sensible idea, either for a lifestyle reason, for financial as I say, in both cases. Don't run so close to the line that you don't have enough room for a large enough error. Yep. It's really the drawdown element of that question that makes it trickier than it otherwise would be. If it was just like, I'm going to put that in the market and then continue to work and that will provide my living costs, it's like, oh, yeah, that is much more.

56:10It just adds a little, especially it's 10 % every year can swing things. Well, could I take it out if I wanted to? It's different from I have to take it out. In which case, you are locked in. Different story. Absolutely. Like, why wouldn't you? You know, particularly it's just sort of like, again, money is there to be enjoyed. It has a use. If there is, I can really do something of quality and lasting for me and my family and market happens to be roaring, like, well, yeah, why not? But, oh, it's a superpower to be able to say, well, things are really bad right now, but I'm not a false seller. I'll be here for the recovery.

56:41It'll get better. Jason says, hi, Scott. I have always enjoyed your upfront views and opinions. This is directed at me, Matt, but I'm going to throw it at you as well. You mentioned in your podcast that you like to invest in companies whose management has skin in the game. Using the same principle, I'd be interested to find out whether your regular personal investments align with your monthly best buys for ShareAdvisor? Regards, Jason. And we've had a similar question in the past, so I will address it very quickly. It's worth asking, very good question. Mate, probably 90, I don't know the number, so I'm going to make it up.

57:11Conservatively, more than 90 % or probability more than 95 % of my portfolio is made up of companies that we've recommended at ShareAdvisor, either in the US or here in Australia. I am precluded from selling anything that we have as an active recommendation. So anything I buy is locked in. there are a couple of reasons where there are companies that either haven't made the scorecard for one reason or another i own some fortescue shares i never felt comfortable enough to make it a recommendation for share advisor because of the style of service that it is but i bought some for myself i've done that a couple of times at a couple of different companies there's very very very little i still own now uh that is not a share advisor recommendation in one form or another i'm not obliged to i think it's the right thing to do um i'd have to have a very good reason to buy something that I didn't recommend to my members first.

57:58In fact, that's always been my approach. If I buy something, I'm going to buy something new. My first question to myself is, if I'm going to do it, shouldn't I tell members first? If the answer is no because of whatever, and again, Fortescue was that example. I bought it. I didn't recommend the share advisor because I didn't think the company fit the bill. Otherwise, yes, absolutely. I think it's 100 % the right way to go. There are some circumstances where maybe for different reasons, I might not. I'll give you a single one. Because I can't sell anything, if I want to sell some of portfolio for whatever reason, pay off a mortgage or buy a car or whatever I wanted to do with the money.

58:31I actually couldn't do it under the Motley Fool's trading rules. So there is a slightly weird disincentive there. If I invested in something else, so if I want to sell my Ford excuse, I can do it tomorrow. If I want to sell shares in, I've mentioned Kogan, it's a recommendation of ours, it's one I own. I couldn't sell them even if I wanted to. So it makes sense for me, at least on a personal financial flexibility perspective, to have investments outside my scorecard for exactly that reason. I could possibly ask for a dispensation to sell. I'd probably get it if I advise members first, hey, I'm going to sell my Kogan shares because I'm going to, I don't know, what am I going to do with the money?

59:03I probably could and I'd probably get it and I'd probably explain it to members. It's just painful and difficult. And so there is a slight disincentive there for our team to actually do that, but we figure it's the least worst outcome. Your thoughts, Ram, in general and for you personally? yeah i mean i i always put a big weight on people who eat their own cooking um i think i've mentioned it before it's more more obvious in the context of funds and there are some really good you know fund managers out there that's just the rule if you work for us your all your money's got to be in the fund like you you live or die by the results here not just for our business and the customers but you you personally they are the exception to the rule but you know it doesn't guarantee success but you know everyone's trying yeah that's and that's kind of what you all you need um as i said there are reasons why not i think i've said before i've had questions on from people say well hang on you're biased you're talking your own book now because you own them uh that's why you're recommending them and yeah you can't please everybody and i did i asked on twitter not the twitter's the arbiter of these things but i just i got to the point one day i was like you know i'm gonna ask people what they think and i said look would you rather me own what i recommend so you know i'm can i have conviction or would you rather me own nothing you know i would i would i do it i i professionally and and reputationally if i felt like a member to be better than me having only index funds for example and recommending stocks and that way there could be no conflict i would probably do it um i'd have to give a bit of return to do that probably if i'm half good at picking stocks because if i if i beat the market then buying the market means i would i would sacrifice my own returns but if it felt like it was the right thing to different members i'd do it um so i did ask people i said what would you prefer people complain about me either not owning the stocks that I recommend and therefore not having skin in the game or having skin in the game, therefore being conflicted and talking about book.

1:00:52Yeah, some people you can't please. I was like, which would you prefer? And about, I think about two thirds of people said, you know, it might be more than that. Skin in the game, we'd rather you own the stocks. And that is the approach I would take anyway. So I was pretty relieved, frankly, to have that as the answer. As I said, not that it's scientific, but yeah, you can't please everybody. Yeah, I mean, it's hard. I mean, there's plenty of stuff I own that I would definitely not recommend for close family and friends, which isn't, nothing to do with, you know, to be condescending towards them, but I know their temperaments and I know that they wouldn't.

1:01:25It's important. I know that they would go from loving me to hating me and vice versa a hundred times. And it's just sort of like, it's not that worth it. So there are investments that you, Scott Phillips, might love. Hand on heart, love this to death, but I don't think it's right for you. And again, not in a condescending way, but just recognizing that it's not going to be for everyone. So I've always thought that, and I know this is what The Fool does, and I did when I was there as well, which was all you can do is put out your rationale. And too often, and this was the frustration that you have, right, is that people just hear buy or sell.

1:02:01That's what people hear. And we would write, and I know you guys still do, you write up a whole report, right? It's sort of like, well, we like it. Obviously, it's a buy. But here's what can go wrong. Be aware of this.

1:02:16This might be riskier or less riskier than normal. There is context around all of that kind of stuff. And that context matters a hell of a lot. So it's all about trying to arm people, I think, to enable them to make the most informed decision that they can. And I think you sleep very easy at night, whether you own the shares or not, if that's the kind of situation that it needs to be. And I know I say this every time these kinds of questions come up and it comes across very harsh, but you don't get to blame anyone if an investment goes bad, even if someone gave you the idea. And it sounds like that's what a finance guy would say.

1:02:54It's like, well, wait a sec. No, that's not right. But it is. It is. This is a very nasty industry full of self-interested people with lots of snouts in the trough. You know, their business model isn't, yeah, I'll try and make you good returns if you can. but you know that when the ducks quack feed them right you you are far better off out there peddling sexy narratives and you know trying to attract huge amounts of flows rather than focusing too much on investors so it's it's the and and you don't know anyone even if you've listened to us every week for the last 10 years like you don't know us and and i just feel as though you you it's such an important thing to really internalize but not to be nasty but to to when When you accept that truth that you are accountable for your capital allocation investment decisions, you will think harder about it and you will get better results.

1:03:48So, you know, okay, I subscribe to the full. Scott says he likes this. He says it's a buy. Okay, great. That's a really good signal. It's just, as I've said before, it's kind of like a filter, right? It's 2 ,000 stocks and this guy's gone through, it seems another thing or two. He's gone through a bunch and he's put this one forward. He's just passed the baton to you. now you've got to build up your own conviction because you're not going to be able to pick up the phone to Scott on a Tuesday when the stocks just dropped 15%. Is this good or bad? What do I do now? And it's sort of lean into that because too often you say, again, you and I have been in the industry for a long time and people take away the wrong lessons and people can end up sort of acting in counterproductive ways.

1:04:30And usually it'll go like this, like I've got to invest in the share market because my money's doing nothing locked out of property or something i gotta you know i'm gonna do it i'm gonna do it they do it they have one or two bad early experiences and the whole thing's a con and this company's full of crooks and i'm out and you just you you slump off in a cynical cloud and all i mean who's suffering there and you know it's sort of like you've just talked yourself out of a lifetime of wealth creation potential which is full of all kinds of missteps and and backward steps and that's just the nature of the game and you know So it's on you at the end of the day.

1:05:05And when you get that, you will be far, far more diligent. And as I say, you'll get better results. Yeah. I got a couple of things to that, mate, because it's really good. I think I said before, we occasionally have a member, I think I've written this about this, we occasionally have a member who badmouths us on social media or one of those comparison websites or whatever. It says, oh, I bought this stock and it went badly and those bastards lost me money. Now, I feel bad about that and I feel sorry for that. And I don't ever want, in a perfect world, to give our members anything that loses the money because why would I want to do that?

1:05:38It's bad, right? I don't want that to happen. The reality, though, is that it's going to happen because we're not perfect. No one's perfect. Buffett's lost money. Some of his companies have gone broke as well. So the reality is when we have people join our service, we say, this is how you should use the service. Be long-term. Be diversified. Buy 15 to 25 stocks. Play the long game. Expect losses. We go to a huge amount of effort to do that. and yet people will join us, buy one stock, lose money on that stock, call us scammers and then, you know, go and buy it. And when you say lose money on the stock too, it's often the case of one of like your best stocks underperform for the first three months before they're, well, you know, six months or two years, you know, it's sort of like, so when you say it was a bad recommendation, it's like, well, it didn't immediately fire to the moon, but actually if you'd held on for five years, you would have done really well.

1:06:23Yes. By the way, some of us really have flamed out entirely. Oh, of course, of course. And so we saw people mention, we recommended a retail food group like eight years ago, whatever it was. And I still occasionally, if someone posts on social media, it's like, dude, move on. Like, you know, did it suck? Yes. Was it a mistake? Yes. Did we make, have we made them since? Yes. Are we going to make more? Yes. My point isn't to absolve us of responsibility, Ram. It's to say that the reality is you have to take the full advice, not just the bit of advice you want to take and then wonder why it didn't work out.

1:06:50You know, you can't make a cake using one ingredient saying, I used the flour and the flour sucked. I didn't make good cake. Like, well, what do you expect, you know? So there's that. And that's important. I think the other thing I'd probably say, in terms of thinking about the returns you're getting, what you're doing, I'm going to go a bit further than you did, mate, and say there are too many people buying individual shares and there are too many people with self-managed super funds. And that is not what I would say if I was anyone else in our industry trying to sell more stuff to more people.

1:07:17If I get some sucker to use my service and send me some money to do that, then most of our industry would say, yeah, I'll take all your money. I will say right here and right now and very clearly, to your point before, Matt, if you can't, you're right to say, Scott will give you a recommendation, you choose what to do with that. If your view is or your result is, I still don't know what to do with this information, then do nothing with it. And if you want to go and buy an index ETF and invest in that, listen to the podcast for fun, go fishing and just ETF index through for the rest of your life, go for it, please do.

1:07:47Please do that if you're not someone who wants to, can, is comfortable with, knows enough about investing to buy individual stocks. You shouldn't be doing it. It is not necessary. To your point, Ram, you don't want to leave money in cash. I completely agree with that. But there's a million options that don't require you to pick stocks, to deal with the volatility, to deal with whatever. By the way, if you don't like the volatility of the index either because the market crashed 38 % in early 2020, then don't do that either. But know that this is the endeavor that you're in. Know that this is what sort of thing that happens.

1:08:17If you don't want to or can't deal with it, please don't do it because you are going to be the person who sells out in a fit of peak. When the market falls, you sell out, see, I knew I shouldn't have done this. That was stupid. I'm going back to cash. You've locked in a loss. You've missed out the subsequent opportunities. It is literally the worst of all worlds. So I want more people to invest. I want more people to buy stocks. I want more people to take control of their financial futures. But if picking stocks is not for your temperament or your interest or your effort, don't do it, please. But do something entirely different.

1:08:46Don't do it half-heartedly. That's the worst of all worlds. Yeah. And look, I'll just add too, This is why I'm very fond of saying that investment returns are earned. It's very easy to look at someone and go, oh, he bought Afterpay when it was 50 cents and look, wow, lucky. How lucky is that? And look, there's always an element of luck in life and investing in everything. But what you miss for the person who, let's go with Fortescue, who bought that when it was like 10 cents a share and rode that to the moon. Did they earn that? Well, they bought when no one else liked it. They had a thousand opportunities to take money off the table and lock in a ridiculously good profit.

1:09:24And along the way, every stock that goes to the moon has these gut-wrenching drawdowns, 10, 20, 30%. You pick a stock, Altium, let's let go with that. It's gone to the moon. You know, it's like plenty of gut-wrenching moments. That person didn't just get lucky. Do you realize that they went through hell and back to get that return? you know they they was strapped to the mast and the siren songs were just there and they didn't they didn't budge they held on that this all of the things that attract all of us to the share market are the stories of the multi-bagger returns that just those life-changing ones and and and again they are earned but you you have to earn those returns yes because you've done the work and you've thought about it sensibly and stuff but also because you've had the the strength of conviction and the fortitude of characters sort of hang through all of that kind of stuff and you're not not going to get that from a newsletter you're not going to get that from reading a book you're gonna you know really some internal contemplation and you know um just practice i think with with all of that kind of stuff so you know this is this is why we're we're not going any further in this industry you and i because the reality is that these are not comfortable truths and is really and very counterproductive to the businesses that we operate.

1:10:45But that is why when you see marketing in this space, it is always guaranteed, you know, virtually. It's like, look at this. No one's, it's only the upside that is being spoken about. It is none of the cautionary tale. Why? Because you don't want to, you're trying to sell a product or a service here. Like it doesn't, don't, don't. Steve Jobs doesn't go out there and say, look at the iPhone. It's fantastic. By the way, the screen will crack in an instant when you, as soon as you drop it all. don't don't at me apple people i don't know what the story is but you know what i mean like you don't you don't emphasize those kinds of things and and just remember that when you're in the market like the market for financial services there'll be a bloke because it's always a bloke on every street corner with a sandwich board saying come to me i'm going to solve all your problems and the people with the biggest line in front of them are those that are going to be making the bigger bigger promises the person in the corner saying oh i'm not responsible for what you do with my information oh i'm gonna i'm gonna make lots of mistakes and even when i do well it's not going to go immediately well but i think you'll do pretty well over time on on average there's no one standing in front of that person but but we're dumb enough to sort of put that out there and say it and just where the consequences but it is it is it's the truth it's the truth yeah that's absolutely true it's absolutely true uh i think yeah like i think i think that's the yes um investing is hard and it doesn't index investing is easy maybe that maybe that's the maybe that maybe that's you know the the returns are on offer uh if you want to grab them it's why by the way well not why but 80 percent of managed funds generally underperform the index um it's not just individual investors right four out of five fund managers should go and find another job if those numbers are right and they are um some investors aren't meant to be investors that's okay too at least not in terms of picking stocks um have a go it's worth it if you're interested if you're keen if you want to spend the time and effort energy if you want to learn if you want to grow and develop as an investor, if you want to try and replicate the returns of some other people who've done really, really well, go for it.

1:12:40Just know your limitations, know your realities. I don't fix my own car. Part of me would love to learn, but I also know that I probably not have the dexterity or aptitude for it and take a long time. So I don't do it. I get someone else to do it for me and that's completely okay. Don't get a scumbag, to Andrew's point, from our industry to do it for you because I'll just rob you blind. But you don't have to... I guess the benefit is there's no index investing equivalent to getting your car fixed, right? But there is in investing. And that's great. It's such a fantastic thing to be able to go out there and do that.

1:13:09So yeah, do the work. Earn the returns, to Ram's point. If you want to go and do it, go and do it. But if you're not that person, please don't. You know what? The worst outcome from this podcast would be someone who listened for five years, went, you know what? I'm finally going to take the plunge. They sold their house or they had an inheritance or something. They put all the money into some stupidly small number of stocks. One went badly for a little bit of time, as you said, Ram. They sell the whole lot, give it up, lose 100 grand. and walk away so I'm never doing that again. You know, that's a real loss.

1:13:37That's a real loss. I would hate that to be the case. I think we can help people do well if you listen to the whole thing and put the whole thing to work. But please don't take part of, not that any of this is advice, but don't take part of what we say. Don't just say one thing and say, well, once upon a time they said you should do this. Investing is a discipline. It's a pursuit. It requires effort and energy and education and learning and all that kind of stuff. So please, if you're going to do it, go for it. But please do it properly. Yeah, shouldn't talk you out of it too much. I mean, it is very rewarding.

1:14:05And I'm not talking financially. Well, hopefully it's rewarding financially, of course. But it is. I've always thought that investing is, you know, at the periphery, it looks like it's just making money. But I just, I think it's one of the few vocations that gives you such a, forces you to have such a broad world view because you need to understand how, yeah, I'm ultimately trying to figure out which share price goes up. But to do that, I need to know, understand which business is going to perform well which means I need to understand business which I mean need to understand how society works which needs to me it means I need to understand you know what people value I mean you get very foundational on this kind of stuff very quickly but it forces again you mentioned Munger before he was sort of saying you know if you can be someone who who understands the top seven eight concepts of every discipline of all the big ones You have so many mental models at your disposal to make money, frankly.

1:15:05But it's also endlessly stimulating because the people who win in investing aren't the ones with the most powerful spreadsheets. They're the ones who see the world for what it is and effectively see the future, at least more often than not. And if you want to have any ability to see the future, which is what investing is, you could bucklies if you don't understand how the world works. And it goes far beyond what a discounted cash flow is or a price earnings ratio is or what the net profit margin is. Like it's sort of, so let me put in a case for the direct investment. It is masochistic. Yes, it is.

1:15:41But it is incredibly rewarding. And especially when you do get it right, like it can change your life. And of course, the final thing we should say is it's not an either or kind of thing. We've often said that if you're not sure, 80 % of your capital in an ETF and then maybe 20 % as you learn and as your confidence and conviction and aptitude grows, then you can tilt the scales in more of the opposite direction. But it does start with knowing thyself and what you're in for and the pros and the cons and the goods and the bads. That's a really good story, Matt. You're right. I don't want to discourage anybody either.

1:16:15I know people in my life who shouldn't be investing their own money because they're just not suitable for it. And I would never say to that person, you know what, you should really try. You should really do this. You should really, you know, eventually maybe possibly you'll get it and eventually you'll be the right temperament and, you know, approach and interest and whatever. I'll use my mother as an example. She won't mind me doing this. She shouldn't be investing. It's not her thing. And that's okay. That's completely okay. I mean, she got me to help her, obviously. But, you know, but you're right.

1:16:40But if you are someone who, frankly, if you're listening to this at this point, particularly in the podcast, you're probably interested and engaged enough to actually go on and do it. And I think those people should absolutely consider whether it's right for them. If they do think it's right for them, give it a go. I 100 % agree with you, mate. I just don't want people to feel like they have no choice but to do it despite their misgivings. Because those are the people who really should take the easier option or the less risky option. And again, at some point, if you do keep listening, and then to Andrew's point, you do want to go and put some money to work, then do it by the individual company after that.

1:17:07Just if you're not sure, you don't want to do it, you feel like you're being kind of not pushed into it by us, but not by us at all. But don't invest reluctantly. Do it objectively. Do it actively. Do it thoughtfully, choicefully, which is a horrible word, but you get my point. Do that for sure. So yeah, you're right, mate. Thanks for calling me out. I'm not trying to discourage anybody. I just want anyone who does it to really understand what they're getting into and how to think about the way they're going to proceed with that. Starting, you know, the old half an idea is dangerous. don't start unprepared that that's that's the really dangerous angle to stretch your analogy further there'll be plenty of mechanics who out there would be going it is incredibly rewarding to understand how an engine yeah yeah put it together and you can save a lot of money and you can get a better performance out of you and they're 100 right and there'll be people out there going yeah i could really get into that that's really cool i love that kind of stuff and there's others like yourself and me too frankly just like it's not my thing and i know where i know what i'm good at and what i'm not i'm not good at that stuff you know if you're if you've got a busted you know pipe don't call me right because i'm just going to make the situation worse but again as i said before know thyself and that's that is the that is the the absolute starting point that's a great point and on that point that is also our finishing point until next wednesday if you're still listening and you are on the gold coast remember go to fool.com.au forward slash money so you can come and join us for a podcast recording on wednesday the 27th of march As I said, if you're listening to this after the 27th, don't set up next Wednesday.

1:18:35We won't be there. Also to hit us up on all of the socials and via email if you have a question, comment, any feedback. Go to info at fool.com.au. Probably the best way to throw a longer question at us. If you want to follow us on social media, if you want to engage, please feel free to do that. Andrew is exclusively on Twitter at sage underscore simian or at strawman invest. I am far more, what's the polite word of saying? I'm everywhere, everywhere. Not sure. We'll think about that. I am on Twitter at TMF. Omnipresent. Omnipresent. I'd like to omnipotent better, but thank you. Let's go to Twitter and Instagram at TMF Scott P.

1:19:12I am on Facebook at Scott Phillips Money. Until Wednesday when we see you in person, until Friday when that episode goes up on the podcast machine. 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.