Mailbag: incl. 'Here's to the Boomers!' December 3, 2023

27:07I get that. And I'm not suggesting the problem isn't real. What I really have an issue with is people say, if you don't like my solution, you disagree with the problem. So, no, no, no, I get your problem. I understand. I empathise with the problem. I think there's a dozen ways to solve it. One of those is not making it so unbearable for someone to live there that they're forced to sell because they're old and not have an income anymore. It just grinds my gears. I tell you one thing that does grind from the other direction though is I know a few people in my family circle that are like this, no names mentioned, not that any of them listen to this pod, thank goodness.

27:36Oh, dear. But I have people in my life who are asset rich, cash poor. So rattling around four bedroom houses that are collapsing because they don't have any cash flow. Their house is probably worth$4 million. And you're complaining about not having money. That grinds my gears a little. It's sort of like - That's fair. That's fair. Well, that's a choice. I mean, look, I would swap with you in a second. If it meant that I could downsize to a two-bedroom unit and then literally own my new house outright, albeit a smaller one, but I don't have kids. I'm an empty nester at this point. And I would have$2 million in liquid cash to spend.

28:21Now, you don't want to because of, I don't know, memories or whatever. That's cool, but that is a deliberate compromise that you are choosing to have. And if you want to, if you're happy with that choice, I'm not going to question. It's like, fine, that's cool. Just shut up and stop complaining about not having any money because you are literally a multi, multi, multi-millionaire. It's just that you choose to have it locked up into this thing when you don't have to. Your stroke of a pen, you're, you know, flying around the world first class and living your best life. I shouldn't say it. I shouldn't advocate for it too much because at some point in the future, it'll come to me and other siblings and cousins and all the rest of it.

29:01So it's sort of like maybe I should shut the hell up. But I do think that, and I've mentioned to you before too, just around my area, I often go for a walk at lunch and people, you know, of an advanced age sitting out the front of these houses that are like literally falling to pieces, you know, and it's just like, what are you doing? How much longer do you think you're going to live for? Like get out there, get out there. I would be partying hardy. I would be travelling around the world. I would be doing all kinds of things. And if that just meant that when I came back home, I'm living in a very nice townhouse or something in the same kind of area, I don't need a four-bedroom house with a double garage when it's just me and the missus or me and my myself.

29:45Like, what are you thinking? And you're eating cat food, for goodness sakes, and you're shivering under a blanket because you don't want to turn the heater on. It is pure madness. But again, you know, each to their own. Yes, each to their own for sure. And I agree with that. one as well, mate. I just find the... I don't know. When you're accusing an older generation of selfishness and them being selfish by solving the problem for them, I think it's a bit crazy. But you're absolutely right as well. The idea of choosing not to take a different decision where you actually could have a much more comfortable life for the sake of it.

30:16Can't take it with you. You can't take it with you, right? But anyway. Yeah, exactly. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

30:30Mate, let's go to a question from Nicole, I think it is, who says, Hello, I'm a recent listener to your podcast. I'm loving the diversity of topics covered. Thank you for all your great work. Thank you, Nicole. You recently discussed the issue of home ownership in Australia. Everything except finance and investing, apparently. That being the preferred path for wealth creation, how it traps in a work and mortgage cycle that the rising house prices creates theoretical wealth but doesn't necessarily translate to a better lifestyle. I find this path and conversation is often skewed towards those with families.

31:04What are your views on single households trying to build wealth and a better lifestyle? Do you think buying a house is still best so you can use the increased value and tax savings when downsizing later in life? What about buying an apartment and investing in shares with the saved capital instead? Would love your thoughts. Thanks, Nicole. She says, I'll share this actually because it's just interesting. I think it's a good question and a good context. There's a bit about me for context. When I was buying property alone, I opted for a small but nice apartment near the city. It was low maintenance, walking distance to work, close to things important to me, and it felt safe.

31:38The alternative was buying a larger place in the suburbs, but this would have meant doing repairs, community to work, and being somewhat isolated. Since then, my coupled friends have seen their houses rise dramatically in value, and are set to have quite a bit of wealth when they downsize after the kids leave home, whereas my apartment value has barely shifted. and I have the additional cost of body corporate fees. However, I paid off the mortgage and I've been investing in shares for a passive income now that allows me to work part-time. I'm 46 and single, she says. I think that's a really good point to make, mate.

32:08It's something we don't talk about often enough. Yeah. Yeah.

32:14Look, I love, love, love, love the awareness that there is no wealth without the downsize. Yeah, nice. There isn't. It's funny. It's a completely illusory wealth. So let's say I buy a house. Let's say I buy a house for a million dollars and next year it's$3 million because the property markets has gone bananas. Now I'm going to feel really great. And as a proportion, like as a loan to value ratio, any mortgage I have is going to be much smaller. I'm going to have a much bigger buffer. I'm going to be able to draw down against that. But think about it. The only way to say, well, okay, spend that money.

32:58How do you spend that money? You either, well, you borrow money against it. So that's, well, that is, do you know what I mean? Like that's, is that wealth if you're borrowing against that? I don't know. You've still got to pay that back, right? Otherwise, if you say, well, I'm going to sell my house. Well, if you're buying any kind of equivalent house, whether the market is up, down, left, right, side, it doesn't matter. Like you're buying in the same kind of market. So you sell your$3 million house and you buy another$3 million house and have all the transaction costs. So there's no money there.

33:33The only way to get the money is to move to an area which has lower property values. And so there's a compromise. I wrote about this exact same thing on Strawman just earlier this week. There are absolute – that wealth is only accessed through some kind of compromise. I want to compromise on my debt situation. I want to compromise on the house I live or I want to compromise in the location that I live in. And that's fine. Literally five minutes ago I was just advocating that certain elderly people should do that, right, because that's how you spend your money. That's how you realise the gains.

34:11Without that, they're completely made up. in a very real way in the sense that I – and even if you want to go to an investment property, which is different, right, because I'm not living in that, so I can sell that at any stage. The issue that I think here is – Alan Kohler wrote a really great piece in the AFR this week. We're recording this on late November. And what people tend to do, you buy your house, You get a bit of equity. You use that equity. Now, that's just like a notional paper asset value that you will then use as collateral to borrow more money again. So I'll use that. So I'll borrow more money and I'll buy an investment property.

34:56Okay, everything's going well. Property values go up. Fantastic. Now, what do I do? Do I go, hey, look, I made all this money and sell it or just enjoy a yield off a purchase price that's quite attractive? No, no, no. What I do is I use that equity to buy another property. And this is the formula that has been entrenched in there. So in other words, I can get to a stage, particularly if I started early enough, I might have an investment portfolio of 10 investment properties, and they might be worth$10 million, but I've levered up massively the whole way. In other words, I don't really get the value until I sell.

35:32And until that point, it's a game of chicken. And it might be a game of chicken that you win. if you time the point at which you swerve well, you're going to make a fortune on this because of the leverage gains you're getting on rising asset prices. Don't get me wrong, the gains will be eye-watering. They'll be incredible. But I think what we fail to recognize just the mathematical reality of the situation is that the mathematics works in reverse too. So if you continually lever up, you pretty much more or less main an LVR value that's equivalent and fairly highly leveraged. As soon as things, you know, it might, for many people, only take a 10 % fall and you wipe out any equity.

36:14In other words, you might feel good about yourself because, hey, look, I've got all these properties and they're worth$10 million. It's like, well, they are until they're not. And actually what matters is how much equity you actually own in that. And that equity can disappear in an instant if you're leveraged enough. In other words, again, it's an illusory wealth until captured. So I think we have to be very careful with some of the assumptions that we're making here. I think the listener has done a brilliant job. What have they done? They bought a house within their means. They've paid it off.

36:50They're mortgage-free, right? So what's your housing cost? Like a bit of basic maintenance and some strata costs, you know, some rates and like virtually nothing compared to what would be the cost if you were renting an equivalent place or if you were buying that place again fresh from the start. And now you've got surplus investable cash to put into other things. Now that other thing might be an investment property or it could be shares as it is in this case. In fact, just to clarify here, because if everyone gets me wrong on this, I don't care what it is. As long as it's a good asset at a good price, that's a smart thing to do, right?

37:23I would just, my personal view is that there are lots of good assets out there in residential property. They're just very insane prices that I wouldn't be touching with a barge pole at this point in time. So, yeah, I can't fault any of the thinking there. Sorry, mate, that was a long rant, but I just, I love the awareness there of the too many people, and I include a lot of people in my friendship group here, walk around cock of the walk thinking that they're financial geniuses. I don't know how many times I've had to say to them, it's like, okay, great, spend the money. Like their cash, there is a balance sheet value, and we've seen on the markets how that can change rapidly for some of the real estate investment trusts, right?

38:05Like, oh, it's recorded at this. So there's a balance sheet. Okay, great. But there's also a cashflow statement. And the cashflow statement for a lot of my friends who have these very robust balance sheets on paper is awful. They're bleeding cash because they're negatively geared. There's all these expenses that come up, the bloody tenants. How dare they? They want an oven that works and a door that locks and, you know, all of these unbelievable, unrealistic expectations. corporations and it's just sort of like it it could still work out well but you you have to take the chips off the table at some point or you have to hope that the income that it is able to generate is is positive in cash flow otherwise what is it it is a game of chicken it is what it's the keynesian beauty contest or it's better actually described it's the greater fool theory that's exactly what it is.

38:56Am I too hardcore there or what do you think? I think you're slightly too hardcore, given you asked the question. No, I need to check myself at times. So I definitely want a candid answer. No, you're absolutely right. I think you're 100 % right. And I think your passion comes from trying to shake people out of the mistaken assumptions they have around what property can be based on the last 40 years of history and the generally accepted views in society. I think that is a really, really useful counterpoint to make for people. I think it's – I'm a little more sanguine about the negative cash flow stuff because effectively saving is negative cash flow, right?

39:46If you're putting money in shares or you're paying off a mortgage, you're doing kind of the same thing. So I don't necessarily buy that as much as you put it the same way. You're right about it, by the way, and you are also right about, you know, if the property price falls, your equity is wiped out. I'm not talking about an 80 % crash either here. I'm talking about like maybe a 10 % to 20 % correction, which believe it or not happens. You know, that's what I'm talking about. But it's only impactful if the price stays that low, right? It's like saying, you know, if you buy shares in bullies and they fall by 50%, you've lost half your money.

40:18I mean, that's true, but if they go back and end up higher than we started with, then the point of time in between those two is not as relevant, right? So I think - As long as you can service the loan along the way, right? So the scenario, usually things don't happen in isolation. So a big house price fall probably due to some kind of recession. It's probably rising unemployment. You may well be negative cash flow along the way. So things always get scary when people are forced sellers. And I'm sure a lot of people won't be in that situation, but price is again determined on the margin. So it only needs a certain percentage of people to be in that scenario for things to get very hairy.

40:58And then I become a forced seller. And then just as we see all this momentum on the way up, you can see that kind of reverse. So again, it's not, it's not to be too chicken little here. It's just to try and shake people out of this, this religious belief that nothing ever goes wrong. Things always go up at seven to 10 % every year. It's sacrosanct. And it's like the sun rises in the east and sets in the west. It shall ever more be. That is when you start to go, oh, really? I would, I would, we talk about it all the time when buying shares, right? So obviously you buy a share because you feel as though it's got good value, but understand the bear case, understand the downside, right?

41:35Like it might have all the upside in the world. You talk about it a lot with biotech companies. They've got the best upside or mining explorer. they have mathematically there's no better upside than the penny dreadful that goes from one cent to yeah that was fortescue metals back in the day right like it's like brilliant but you know that doesn't always go that way in fact statistically it far often goes the other way and that and that's just it's just prudent to to to be aware of that sorry man i hijacked your your thread there, but it was just, it was important context. And I think where we have lost our way is that back traditionally property was such a wonderful investment because it did two things.

42:21Property is always and forever been a wonderful store of wealth. In other words, whatever purchasing power I'm putting into this thing today, whatever happens with inflation, whatever happens, you know, 10, 20 years down the track, I'm very likely to be able to sustain that purchasing power. And when you look at any historical records and the longest in the world are in Amsterdam, but we've got, you know, centuries worth of data from all kinds of places around the world. And as much data as we've got going back to 1890s in Melbourne here in Australia and the rest of it. And generally, that's what it is.

42:57It more or less matches inflation a little bit on top of that, granted. And again, recent decades, different story. I understand that. But that's fine. That is totally fine. Because you know what? What I used to get was I used to get this incredible thing called yield, real yield, where I would buy a house. Someone would live in it for me. The land value would be preserved. And I have a few expenses that I have to pay. But each and every week, someone's paying me cash flow. That was the investment. That was why it made so much sense. That was why it was so brilliant. We now find ourselves in a situation where there is no yield.

43:37I was talking to you about how my calculations, my landlord's getting 1.6%. Gross, before any costs. What an idiot. Hi there, if you're listening, you're an idiot, right? I can get 4.85 % in a term deposit today, you muppet, right? And I guarantee you this guy is at least 80 % of the value was purchased with him. So you are probably bleeding$2 ,000-something a week when you do the mass, and I've done the mass, right? So now it's not investing. It's not investing. It's speculation. It's price speculation, pure and simple, and it's become a national pastime. And we've so far divorced from the underlying fundamentals of what makes a good property investment a good investment, right?

44:26It's not to say you can't bank. Sorry, I'm really on a tear here, mate. It's not to say you can't have a view on value and expect capital values to rise. Absolutely. But just the fact that everything everywhere will always double every seven years just because shoulder shrug Australia is different just strikes me as the height of hubris and it can't go on. Mathematically, it can't go on forever. So I just think it's, again, another giant game of chicken that could end very badly for people who have unrealistic expectations. Sorry. A little better? Sorry. You know what my favourite part of that whole rant is?

45:05By the way, I do want to actually respond to Nicole's comment and then I will move on. Sorry, sorry. No, it's good. No, no, I just want to do it justice by not ignoring her question. At least for me, you've covered it beautifully. Nicole, I think, so Ram's right in the sense that their properties have gone up, but when they sell, if they're going to downsize, they'll make some money. If they're going to go from their big suburban houses to a unit, they'll take some money off the table. You can't necessarily do that if your asset isn't worth as much, your unit, for example. So the reality of leverage is that if prices do go up, and Ram is less comfortable and certain of that than I am, but either way.

45:44And it's been wrong for a long time on that, just to be fair. Well, but the dollar value of the difference, right? If it probably goes up 10%, you'd rather have a million-dollar property than a$100 ,000 property. Yeah, true. because the money you make. And I'm not saying that everyone should go and do that, but the reality is, Nicole, if everyone goes up 10%, your friends will do more than you will. Now, if they're not going to sell, as Andrew says, then it's irrelevant. If they are going to sell and downsize, well, maybe they've got a bit of extra cash in the kick for the process. That being said, I really like the approach you've taken too for a couple of reasons.

46:17Firstly, you've chosen a property that works for you as a lifestyle asset, not a financial asset. Yes. And that should be what your personal home is, right? That's what our house is. It's shelter. What makes you happy. And so you're in a place you like, in a building you like, near facilities you like. You feel safe. I think that's perfect. I think it's really, really great. So that's the most important thing, frankly, despite everything else, even though, again, we're a finance podcast. So there's that. Second thing I'd say is you've also done a really great thing and paid the mortgage off and you're saving and investing now.

46:46I am really open to buying investment property, maybe a little more than a ram from the sound of it. and I did some numbers. And yes, now for all I said, I share Rem's view that property in the future won't increase the rate it has in the past. So I have put some very conservative assumptions in there for both shares and property, but I think there's a better chance that shares grow at a closer to historical average rate than property. So I put those assumptions into the spreadsheet. Now, we know that models are like that. You get out what you put in. So you can engineer whatever outcome you want.

47:16I couldn't make investment property work better for me than investing in shares, even though in the early years, the leverage would be better for an investment property because of the fact you'd be borrowing 80%, 90%, 95 % of the property value. If it went up a lot more than I expected, it'd be great. Shares don't go up as quickly initially because you're using your own money. The thing is though, if in the out years, you're getting 2%, 3%, 4 % in property and you're getting 7%, 8%, 9 % in shares, when you compound it, the beauty of compounding is that's just not a doubling of the final value.

47:48It's a doubling of the per year return. And that accelerates really fast. So I did the numbers out for, I think it was 20 years, 25 years, I can't remember what numbers I did. And I just couldn't, I couldn't make investment property pay relative to shares. Particularly by the way, when you consider frank, dividend franking, if you've got franked dividends from those companies, we talk about yield and cashflow. And so for me, I just did that. I was like, well, I actually want to buy property. I actually wanted it to work out that I could buy property. Just to be really clear, I like the idea of being able to say, hey, I own that property.

48:15It's going to go up. I've got a tenant in there. it pays me cash. I like that. I really like that. So I wanted to be in a situation where I was like, yep, I can make this work. Let's go and buy that unit down the street or whatever it was we were going to look at. But I just couldn't. I could not make it work unless I made some uncomfortable assumptions about property's growth. So frankly, in a call for what it's worth, I would suspect, and I can't tell you what you would do or will do. I can't make you promises or guarantees. I can't do predictions. But I would suspect someone in your position is more likely to end up with a more comfortable retirement, short of that downsizing thing that your friends may or may not choose to do.

48:48They won't. In the situation that you're in because you will have paid off your property. You will have that investment. You'll have really nice tax-effective income if you choose dividend paying shares. And again, you'll still live in the place you want to live because you've chosen the right place to live. So I don't have any issue at all with the approach you're taking. I will say your life is much harder than couples because the reality of disposable income means that a second income in a household doesn't have the same base additional costs. If you buy your unit, if you were in a couple, you wouldn't own two units.

49:26So there wouldn't be two water bills, two electricity bills, two lots of rates. You might have slightly bigger ones because you use more of those things. But generally speaking, those things you only have to have one of to make life work. It's just cheaper per person in a couple. That's why, frankly, the age pension allows for that same very thing. So you are going to do it tougher than a couple. And I don't say that to be unkind. I say that to be really clear and honest and just upfront about it. You know that because you're living it right now. I'm not telling you anything you don't know. So you know that's the situation that you're in, but you've done a really great job of offsetting that by making some really great financial decisions and taking control of your financial life.

50:02I think you'll, frankly, as long as you continue to invest and save wisely, responsibly, be diversified, all that kind of stuff, I think you will find by the time you decide to retire, you'll be very, very happy with the choices you've made. I think you'll find yourself very comfortable as well. Yep. Guaranteed. If I can use that term, guaranteed. But yeah, as close to guaranteed as you can get. Now, mate, that's good timing. You did a pretty good rant. I'm sorry. I'm so sorry.

50:31So we got a question. Yeah, question. Hey, Scott and Andrew, I'm one of the three last listeners that hung on to the bitter end of your marathon podcast recently and I enjoyed it thoroughly. Keep up the great work. Thanks, Mum. No, I'm kidding. Before we get to my request, and then he or she, Bernard is, sorry, Bernard. Then Bernard says, before we get to my request, Pro Medicus, it's madness. It depends. Warren Buffett. Kogan. Keep the recurring themes recurring. It's burning. As I listen to you fellas on headphones, I sometimes hear Scott draw in a long breath or give out a sigh as Rampage walks up to the fence to come in off a very, very long run.

51:16And it occurred to me that I would like to see the roles reversed for once. I'd like to hear reserved Rampage and Scotty the Smasher just for a change. I know you have a day job, Scott, so I appreciate you may not be able to go fully off the chain. That's all I ask. I wonder if you could each either parody the other or actually let your shadow selves out to play. Full on birded. He says, by the way, this long-term investing thing is way harder than it looks. It still hurts that as I see my portfolio has not yet recovered from its 2021 highs, even though I didn't sell during COVID and other market downturns since I started investing in 2018 and bought up companies with bright futures, so I thought when their prices were on sale.

51:59Yeah, that's an issue, Bernard, where we're all going through similar things. Speaking of Kogan, Kogan got to$20-something. She has an idea of about$5. So trust me when I say I know exactly how you feel. So firstly, I will say the size and the breadth, it's generally theatrical. I actually thoroughly enjoy as do you, Ram's rants. It makes the podcast fun. and it makes it frankly what it is. So it's largely just for pure theatre, like the Bitcoin carry on and everything else. Yeah, it's a bit of investing entertainment or investainment as I like to call it. Invest the taint. So yes, no, it is exactly.

52:37So it is just for a laugh. That being said, I will say, I don't know, I'm impressed you think I haven't actually ranted. I obviously haven't done a very good job. Yeah, I was thinking that too. I've been pretty forward with my thoughts. And again, I will say too, and I've said this before recently just now, working for the Motley Fool is wonderful mate I don't have to worry about being on the chain I you know I speak to so many of our colleagues or peers in different companies who say oh yeah we're not allowed to talk about that company or I can't really say that thing or I wish I could say this but either because I'm stupid or because I've got a forgiving boss or both I've never had such compulsions in fact if you follow my Twitter feed I'm all over the place right I've had people in the investment industry say I only tweet about investing or I only follow of people who tweet about investing and like I reckon that's fine if that's what you want to do for better or worse I think I hopefully have something to add but also I don't know it's just I'm probably my father's son quite honestly in that you know it's there's a certain responsibility I think when you are someone who has a voice albeit relatively small and minor and in one strange small corner of the online universe.

53:50I couldn't not. I just think if I have some degree of expertise in some of these issues and topics, then I kind of feel, I don't know, it's the, you know, it's a who much is given, much is expected thing. Not that I've been given that much, but I've got the opportunity. I just, I would feel horrible about not actually adding my voice to things I think are important for people. And that's mostly economics, occasionally politics or other policies, but just kind of like I've got a view and I've hopefully relatively educated and thoughtful and hopefully done an okay job trying to, you know, massage that and communicate some of those things.

54:22I think I'm an investor first but I'm a communicator second and I'm not even sure of the order of that sometimes. If I can take some decently complex issues that I've spent, you know, in a professional career trying to understand and, you know, give a reasonably thoughtful response or opinion, I try to do that. So honestly, I don't think there's anything that I've not – I don't think I've ever pulled a punch quite honestly. Tell me in the listeners if you think I'm wrong. But I mean, I try and be thoughtful about it. I try and be nuanced about it. I do try and recognize there are two sides to a conversation.

54:54I try to present my views in a thoughtful and kind of, you know, I try and allow for the fact I could be wrong or there's other information that I don't know. There's your problem. Let me diagnose it right there. That's your problem. Go on. Comments from the super coach here. Don't ever assume you're wrong. You know, fly into it with the full confidence that you feel is deserved. Shoot from the hip, right? Don't just spray and pray is how you do a good rant, you know? And there's been more than one or two occasions, many occasions after which we sort of log off and I kind of have that quiet moment of reflection going, did I say that?

55:40I think I did say that. Oh, gosh, I hope I – that's probably not the best way to IT. Ah, whatever, whatever, you know. I'll get up to the plate next week and say it. As long as people know that it's a little bit tongue-in-cheek. But, yeah. And I feel as though it helps to be – it helps to be personally offended at every little thing, even though it has got nothing bearing on you personally, which is a really, really, really terrible advice. But I'm just saying if you want good – if you want advice in terms of how to sort of like have a good rant. You know what I mean? Like you just got to lean into it and go for it and be damned with the consequences.

56:18Maybe that's it. Maybe I haven't been loose enough with my thoughts and comments. No, you're too thoughtful and too considerate. I do not have that problem, I can tell you. Bernard, thank you though, mate, for the thoughts. I appreciate it. In terms of taking the other role or parodying each other, that actually might be quite a fun thing to do at some point, but I'm not that clever or that funny. I'm not that thoughtful. So rant does a better job of parodying. You parody yourself and I parody myself way better than each other could, I think. 100%. It's a good point. Oh, man, what would I rant about?

56:48I don't even know, mate. I mean, yeah, I feel suitably cleansed by this podcast. I think I've said what I've wanted to say. I can't leave anything burning away. It's like, you know what? I really should talk about that thing all of a sudden. I think we've done plenty of that over the last few years, haven't we? Mate, as long as this property market rolls on, you're going to guarantee a few rants here and there. As this very episode is, I think, very clearly demonstrated. What would you rant about if you didn't have property to rant about? If property market was all of a sudden fixed, what would you do?

57:16I think, I mean, we're not afraid to rant on dumb fiscal decisions from government. Like I feel as though that's a very rich vein to tap into. And a pretty bipartisan way too, right? Like I reckon, I mean, we've got our personal, like, you know, life approaches and ideologies, but I think we've been pretty fair and giving it to both sides when they've deserved it. Oh, yeah, yeah. I mean, they're both as bad as each other. Some of the decisions that are just so counterproductive and terrible. So that's definitely a rich vein to tap into. I think - Always got that. Yeah, I mean, I love - Look, as much shade as I love to throw it at the property market and real estate agents.

57:58Shout out to real estate agents. I hope you're having a great day. Don't. Shut up. Stop there. Shut up. Okay. Keep doing God's work But I will say People in glass houses Shouldn't throw rocks And you and I have said many The scumbags that work within the finance industry I mean we Overrepresented And that's also a good thing To rail at because there is so much Nonsense in our industry And People are paid too well For the value that they create if they create any value at all, and many of them don't. In fact, we talked not long ago about recent bit of – I mean, this bit of research comes out every year almost, but the latest bit being that, oh, it turns out that most professional money managers underperform the benchmark when you include fees.

58:49It's like that's something to rail at, you know. Yeah. It's also got new information, by the way. It's an updated report. It's been happening as long as you and I have been in the industry. Oh, yeah. I guess my point is there's going to be a lot of things to rail at. I guess even if the affordability issue on housing goes away anytime soon, which I suspect it won't, the response and commentary around the causes and remedies, quote unquote, to that will be so infuriating that there will be a lot to talk about. The government needs to make the bank forgive my debt and it was not my fault that I took on 18 investment properties on a salary of$30 ,000.

59:32You know, there'll be a lot to talk about. Don't you worry. Mate, let's finish off with a question, which I think is a good question, but hopefully a relatively quick one we can do in a bit of detail. No rants required, no ideological. No, no, no. Hi, gents, says Jared. A question for the mailbag, please. It feels like one of those questions that has an obvious answer, but I've been thinking about what the right answer should be. What is the best way to calculate the dividend yield? Not so much the calculation itself, But what's the right share price to use in that calculation? Excellent. I've been calculating the yield simply by dividing the dividend paid against the share price I purchased at the time.

1:00:13This made sense initially, but as time goes on, should one still be calculating the dividend yield by the original purchase price or against the current share price? An example of a company I own, I own these shares too for the record, is Fortescue Metals Group. A few years back, I purchased a bunch of shares at$15. Using the last 12 months of dividends paid of$2.21 against the$15 price I paid, I get a yield of 14.7%. Pretty cool. But using the current or then current share price of$24, rounded to make it easier, the same dividend yield translates to a yield of 9.2%. Still very good, but quite a difference.

1:00:50So then I started thinking I should use the current share price so I get the current return on investment based on the current valuation. But then I also thought with share price volatility in the short term being pretty normal, the current share price could move by 20 % either way pretty quickly and have considerable swings in the yield, creating a lot more noise in the calculations. So I'm thinking keep it simple by sticking with my original outlay, the original purchase price. But what is your view on the most appropriate way to measure it? I guess as time goes on and you've owned shares for many years, many decades, the delta will continue to grow most probably.

1:01:23So how does an unsophisticated retail investor square this circle? LOL, said Jerry. Cheers, gents, and enjoy listening and learning from the podcast. Much appreciated. Cheers, Jared. All right, mate, what is the right way to calculate a dividend yield? Both. Both ways are perfectly valid. And it's such a great – it's an easy – like it feels like, oh, that's not a hard question. But it is. I totally get it. I've wrestled with this myself. I say both are correct because it depends on what you're measuring. If you're measuring the success or otherwise of an investment you've made, Use your starting price, right?

1:02:00Like really, and actually I would go a step further and say, just look at the total return. You bought it at this. It's currently worth that. You've gotten this much income along the way. What is it? And that is only useful in determining the success of that investment. It's actually useless. And actually, I think because of the way our brains work, I think it's actually massively counterproductive when in all other situations. because as we often talk about, one of the biggest things as an investor you need to focus on is the concept of opportunity cost. So if you want to base your yield on what you paid for it, it ignores the fact that, well, it's irrelevant.

1:02:43The market doesn't know what you paid for it. It certainly doesn't care what you paid for it. All it's saying to you is it thinks it's worth X dollars today. And if the yield on the current price is 2 % and there's a business that's of equivalent quality with equivalent prospects that's got a yield of 4%, accounting for tax, that is objective. You should move out of one and into the other because that's what you can get today. So if you're trying to work out where is the best home for my limited capital today, do not use your starting price. That is going to blur. The amount of, speaking of boomers, the amount of boomers I've spoken to in the past to go, it doesn't really matter what the bank share price does because I bought my Commonwealth bank at$5 a share in, you know, 1731 or whatever.

1:03:30You'd think, Jesus, I mean, I'm sorry, I shouldn't blaspheme, but it is really bad thinking because it is irrelevant to what your decision needs to be today. All that matters today is where to from here. Speaking of housing, I've seen, I've actually recently had a conversation with someone who said, oh, I don't really care if prices fall this much because I, I only bought it at this lower value. And it's like, well, yeah, but you could sell it today and you could put it into this, that, or anything in between. And that opportunity cost really needs to be your focus because newsflash, you can't travel backwards in time.

1:04:11The arrow of, ask a physicist, right? Arrow, it comes from the laws of thermodynamics, right? Entropy, time goes in one direction. So all you can do is make decisions today to influence the future. And the decision you've got today is I've got X dollars of capital tied up in asset A. What I paid for it is totally irrelevant. And I could press some buttons and it could be an asset B. Again, accounting for tax, which you need to. What's the best alternative? And that is why I think you want to use the current share price when you're making those determinations. Yep. I think that's a lovely way to do it, mate.

1:04:48I think your point is perfect. So a couple of things. You've done a great job. I'm going to add a couple of thoughts. Firstly, why are you bothering to do it? And that sounds like a weird question to ask. Well, of course I would. I want to know how much I'm making, right? Well, yeah, but for what real purpose? And I think that goes back to your point about the future stuff or at least the present stuff, right? Because let's say you bought Fortescue shares at$80 or$2. Either way, you're getting$2.21 in dividends and you own 10 shares to make my life easier. Right? So you get$22,$10 in dividends no matter how much you paid for them.

1:05:25And so kind of like you might give yourself a pat on the back if you did well or give yourself a whack on the back of the head if you did badly. But either way, it's not changing the current circumstance in which you find yourself. So it's nice to know. And the reason I say that is I'm a big fan of keeping a score when it comes to investing because you need to be able to know how you're doing. But it's also kind of one of those things where you end up sort of solving thought you can't get stuff for the sake of calculating it and then you've got an answer i could have got an answer now and that can almost be not misleading but misdirecting and misdirect yourself uh and all of a sudden you're in the wrong the wrong space so i think i think that's a really good point ram um i never use the starting price personally and the reason is exactly as you've pointed out mate if i've got a thousand dollars worth of shares now no matter how much i paid for them no matter what's what the yield was based on the what i could have started with 500 or 2 ,000, I've got$1 ,000 now.

1:06:15And I can get a return in the bank. I can get a return of a dividend plus whatever future capital growth I might get in shares or, frankly, property. So what it was kind of doesn't matter. Again, we've said in other contexts, if I went to cash today, would I buy the same shares back again? And here's the other thing, by the way. Let's take the example. Let's say I bought Fortis Couchers at – I'll make it – I'm just going to change numbers. bought them at 10, now they're worth 20, right? And I'm getting a yield. If I went to cash today, if I bought the shares back now, my yield would actually be lower because I'm buying at a higher price.

1:06:53But it wouldn't actually change the amount of cash I'm getting. And so you kind of think, well, hang on then, you know, or if they halved, you know, since you bought them. You sell them, you buy them back today, now my yield's different. My yield's now higher than it was. Really? And so you kind of think, well, where's the value? I would use the starting price to calculate my total return, to evaluate how good I was at making decisions about investments. In other words, measuring my own performance to date, super useful. The yield on the shares is only about how much cash am I getting for either living expense or to reinvest.

1:07:23I don't even know I'd do the percentage. I think I'd just say how much money – I've got a portfolio worth$1 ,000. I'm getting X dollars,$50 worth of income. Right, that's my income. If I want more than that, I can go and look for it. But it almost really doesn't matter. The only question is what else could you do, the opportunity cost of holding those shares when it comes to future gains and future dividends. So last one for me, mate, is just reinforcing a point you made. Don't let dividend yield be the only story. I love dividends. I got some dividends from Brickworks the other day and it was just nice.

1:07:55So when someone literally puts money in your account, it's like, they just gave me money for nothing. And it's not for nothing. I've given them money first and I haven't got back yet what I've invested with them. So cashflow-wise, I'm behind. So I love dividends. but also if you're getting too wrapped up in the dividend yield, now if that's all you're looking for, that's fine. If you're investing specifically for income, that's great. But just have a think about the full return you're likely to get over time. I've got some companies paying nice dividends. I've got some companies paying no dividends.

1:08:23I've got some paying very good dividends and lots in between. So just have a think about that. But remember, it's the future, as Andrew says, that counts, not the past and certainly not the yield for the sake of calculating in and of itself. Let me make a statement here. I would say that any investment, emu farms, investment properties, shares, only has value because of its capacity to at least one day pay a dividend potentially. So there's lots of companies, some of the best companies in the world. Well, let's take Berkshire, right? I think we can all agree it's a pretty good company. Never paid a dividend.

1:09:04So anyone who put money into that thing has got not a cent out of it. Now, what a terrible investment. Well, the price has gone up a lot, but again, you could equally, could you say, well, that's just the greater fool through. You found some other sucker who was happy to pay a higher price for it. Yeah, maybe, maybe not. The price driven up on pure speculation and FOMO and all kinds of silly things, yes, I think that's fair. But the price has gone up because, not because it pays a dividend, but because if it decided it wanted to pay a dividend, it could and it could be a very attractive dividend.

1:09:40I've got virtually none of my companies pay dividends at the moment. So why do they have value? Well, they only have value because one day I think they could. Not even that they should. In fact, they should do a buffer. As long as you've got good reinvestment potential, don't give it to me, right? I've often said that. But the value exists purely because of that future potential, at least as you perceive it to be. If you said to me, here's an investment, but I am going to enshrine in stone that you will never, this investment will never pay a dividend. No matter what happens, no matter how much cash flow we generate, no matter how much the value of our assets rise, we are never, ever, ever returning cash to you.

1:10:29I would say that that investment is probably a zero. Yeah. Yeah. Okay. Maybe I can flick it to someone else, but then that person has to, it changes the entire calculus of what's going on here because the person who you, you sell it to then has to, then has to have that expectation that they can sell it to someone else. The beautiful thing, and this is what Buffett talks about a lot. It's just like, I want to hold something that if the market closed tomorrow, I'd still be happy to hold. In other words, I don't have a choice to sell it. And frankly, why would I want to sell something that is generating all this cash that it can put into my pocket?

1:11:07Now, again, they might not choose to do that because there are good opportunities for growth, but that growth is there only because it will then at least at some stage have that capacity. So dividends or income, the income, or more specifically the cash flow potential, those three words, cash flow potential, underpin any investment. And without that, it's just speculation. Whether you get the cash now or not. Yeah, and I say that with I think maybe two shares I own will pay dividends. And the others are miles away from ever paying a dividend. But I believe that they one day will have the opportunity to and will be to a degree that is sufficient enough to rationalise the current price.

1:11:48I hope I probably explained that all very badly, but does it, do you get it? No, beautiful, mate. Absolutely not. It's exactly what it's about. And that's what share price value is about. You're paying a proportion. I use the phrase underlying earnings power, mate. Yes. Which doesn't talk about the cash flows necessarily because you say the business can be, you can reinvest in the business. Here's the example I would give. And this is a really, really simple one, right? You put somebody in a term deposit, whether you should or not, different question. Let's just go with it. Yep. You put$1 ,000 in a term deposit.

1:12:15you're getting 4 % again because I like my math to be easy. So you're getting$40 a year for your$1 ,000 of interest. Now, you can at the end of that term say to the bank, keep it, reinvest it for me. Your portfolio in this case or your company, your structure, whatever you want to call it, your thing has generated you no cash flow because you haven't taken the money out of it. Does it mean the$40 wasn't generated? No. Does it mean you couldn't generate more than that? Sorry, you couldn't take it out if you wanted to? Does it mean reinvesting that money is not going to give you more in future because the$1 ,040 is then going to give you, and I'm not going to do the math live because I can't get that,$41.

1:12:50And then the next year,$1 ,081 will give you whatever. And it grows like that. You don't have to see the money or receive the money to know it's there. To your point, mate, about future cash flows, it's kind of about that, right? I want to get a cash flow from my cash eventually. Don't need it yet. I'll keep reinvesting it. It doesn't mean the money is not there. It's not possible. You can't value it. Just worth keeping in mind. Yep. And look, my final point before we put a bow on this entire thing finish fair is the natural place to finish, which is why investment properties in certain parts of this country are so insane at the moment because there is no potential.

1:13:25Even if you have got the capacity to buy it outright without any leverage and you've got very, very, very minimal costs, the yield is so woeful in comparison to what I get with Rishri. That is why I think it's objectively a nonsense. It would be different if you could, like if I'm a fast growing tech company, I invent the next greatest thing and cash just starts gushing in. So if you were to say, well, I'm buying this thing at a 1.2 % gross yield, but in three years' time rent will be 400 % higher, it's like, okay, fine. That actually makes a huge amount of sense if you can have conviction in that view.

1:13:58But if you can't, this is pure speculation, pure and simple. Mate, I reckon we've done a pretty good job of summarising that, and that does bring us to the end of this particular Sunday morning podcast. I think we've got Genevieve done by 10 o 'clock, so she can get on with the rest of her day. Thank you, everyone, who sent us a question or a comment. If you do want to ask us a question or let us know what you're thinking or maybe just share some boomer-related kangaroo analogies, if that's your thing, email us, info at fool.com.au. Hit us up on Twitter. Andrew is at sage underscore simian. If you want to take him to task on his housing comments or at stillmaninvest, I'm at tmfscottp on Twitter and Insta.

1:14:37And, of course, facebook.com forward slash scottphillipsmoney. Until next week, until next Friday. Fool on. Cheers.