Mailbag: incl. How can the efficient markets theory be false? April 13, 2025

29:39What's their net profit margin? You work that out from what it is at the moment. Is that reasonable? Is that sustainable? I don't know what a similar kind of companies do. There you go. You've got a net profit figure. You go, well, how many shares are there? Divide one by the other, right? You go, well, what's a stock like this usually trade at? You know, I don't know. P of 20 sounds pretty generous given the long-term average is 15, but it's high quality and it's growing. Ba-ba-ba-ba-ba-ba-ba-boom. You just worked out a target price for five years. And you say, well, I want a 10 % return, so I'll divide it by 10, you know, 1.1 five times, bring it back to the present value.

30:09I apologize for doing this verbally because it's a lot of nuance there, but play it back and listen to it. I'm just trying to guess three things, you know, the revenue, the margin, and the multiple. and if you can guess those by the way if you can guess those things you will 100 % work out exactly to the 18th decimal place what your return will be so don't take it too seriously but help yourself draw that line in the sand because let's say that you do that exercise and it goes well it still makes sense it's just that profit has to grow 24 times between now and that and you might think that's possible and that's great but it will also give you pause for thought to go, well, that's the proposition here.

30:52Because if they don't do that, even if they triple their earnings, and the multiple doesn't hold or expand to offset that, you're still going to lose your shirt. So do it that way. I actually do that more often than not these days for all of my stocks because it's just easy and there's less things to guess. And it's generally true as opposed to most of my DCFs, which are very much specifically wrong. I think that's exactly right. let's get a let's get a question from Deacon and I love this question I've talked about this before we might have touched on it a little bit I've certainly done it on Twitter Deacon says hey Scott and Ram as per the contract I have a question read the podcast has been amazing and continues to be a great part of my week I'll allow it it doesn't feel particularly sincere well I'll let this one through alright I'm wondering how you reconcile your thoughts that the efficient markets hypothesis is false yet a majority of fund managers underperform and the ones who do churn.

31:48Is it something to do with the quarterly incentives of fund managers versus something like the Motley Fool or Berkshire, et cetera? I'm curious for your thoughts and where you sit on the spectrum. Cheers, Deacon. Yeah. It's actually interesting because there are different versions of the efficient market hypothesis. In academia, there's the, what are they called? The soft version and the hard version. You got to be careful with what you mean. Some people I think mean when we say the efficient market hypothesis, and you and I do it, because I think we're right to do it. You know, it's like, we're going to be very derogatory about it.

32:20It's like, oh, really? Everything's perfectly priced. We've taken all available information, rationally calculated out what it is, reached a consensus. It's obviously nonsense, right? But to be fair about it, others would say, yeah, but what is really getting at is that it's very efficient at telling you what the average person thinks, right or wrong. And over time, the average person tends to be pretty close to being right. So you can be too strict with your definitions. And if you want to be more relaxed and practical with your definitions, I've got plenty of time for the efficient market hypothesis.

33:00I actually would say, I think you would too, mate, that markets are usually pretty close to fair value. You know, sometimes they distort massively. Often they distort a little bit. And then within the broader whole of the market, there'll be all, like, at any point in time, bull market, bear market, sideways market. There are stocks out there right now that are just, like, patently ridiculously priced. Yes. On the upside and downside. Yes. Yep. So, you know, like, you know, how precise do you want to sort of be with your definition? Is that why fund managers underperform? Maybe to an extent. but I would say it's more to just do with very bad incentives.

33:37And the incentives is, yeah, well, which is part of it, right? Yeah. So it's sort of like, I'm just going to hug the index. So I'm not going to swing for the fences too much. And then when you add on a small fee on top of that, it's very hard to outperform. And really what you're trying to sell, I've always said this, what people in our game are trying to sell you aren't good returns. They're trying to tell you a good story, right? And the story they're trying to sell you is, we will look after your money and you won't have to take too much risk or lose too much. So you've got a professional in charge.

34:08We're going to do it for you. And to be fair, there's actually value in that. That is serving a market need. Plenty of people. Yep. I am time poor because I'm actually doing stuff in the real economy, unlike you idiots.

34:25And if you're not familiar with this stuff, it is. It's scary. It's confusing. Pick a random topic, chemistry. Yes. History. Mechanics. Pediatrics. Scott, fix your own car. I could probably watch some of the futures and maybe I could possibly change my oil, but I'm not sure I'd do it properly. I'd take the mechanics. I'll do it pretty quickly with a lot of expertise for a relatively good price. That's okay with me. As my wife pointed out to me recently, because I was so pining, it's like, it can't be that hard to wire a new light bulb into that. She's like, do not do that. I am not there. They're just wires.

35:00And every Sparky listening to me right now is like, You idiot, right? And she's right and they're right. It's never a problem until you electrocute yourself or set the house on fire. Right. But at the same time, and maybe this is ego talk, I don't feel as though it is beyond. If, for example, I went down the path of doing the industry training, getting the certificate, I feel that maybe I don't have the capacity. I'm not trying to say anyone can do it, but I'm just trying to say I feel as though, like I reckon I could be an okay violin player if I dedicated 20 ,000 hours of work to it. Now, I'm not filling symphony halls, but I could play Mary Had a Little Lamb.

35:38I could do something else. Most people don't have the time to dedicate to becoming great stock pickers. Here's a guy, I say guy deliberately because it always is, in a shiny suit telling you that it's all okay. I've got a lot of smart sounding work. I'm going to offer you the certainty of not too much risk and decent returns. And you don't do that by taking deeply concentrated bets on things that are well outside of what the current market synopsis kind of is. You stick to it. Basically, I'm going to take the index, twiddle around a little bit more on BHP, a little bit less on CBA to reflect my bias, whack on a 2 and 20 fee, go and play golf.

36:17That's what those guys do. And that's why they underperform. I'm going to unpick Deacon's question a little bit. So we're saying the MH is false. I think the way it's expressed that everything is priced in and therefore it's not possible to beat the market is nonsense. Buffett has done that for 60 years. If you really care, there's a great article called The Super Investors of Graham and Doddsville. Such a great article. Worth reading. And Buffett just makes the point, hey, there's a whole lot of people who learned at the feet of Ben Graham and we've all outperformed and maybe there's something to this.

36:48Statistically, that's very unlikely. On chance alone. Exactly. So he makes that point, which I think is worth making in and of itself, to combat EMH. I will say, Deacon, I think in the question, I could probably twist the question a little bit because EMH is false, yes, but that's not why the majority of fund managers underperform or they don't. They underperform largely because the market as a whole gives you the market return. And if you're giving the market return less fees, then on average, you're going to underperform by definition. And so that's kind of the difference here. So Ram's point is valid.

37:22I'll take a separate point, not a disagreement, which is simply that in any group, If you say you all get an average of 10, if you're all going to pay me a dollar each to play the game, then you'll end up with nine on average, right? And so the average is still 10, but everyone's getting nine. That's why fund managers are underperform because you've got to outperform by more than the fee to beat the index, which by the way is why indexing is so bloody brilliant. It's wonderful. Like we're stock pickers, right? But if you don't want to, and Ram just made the point, I wouldn't go to a fund manager.

37:48I'd grab an ETF or a range of ETFs. It's not hard, right? This is not an ad at all. We have a service called Motley Fool ETF Investor. It costs$29 to join. We make you a recommendation of some ETFs to put in a portfolio. We'll just keep adding to those over time. Don't join if you don't want to. It's only$29. I don't care either way. I'm not here for the sale. I'm making the point that you can simply do that, right? For whatever you're paying a fund manager or get some other people give ETF portfolio advice. Just do that, right? For a much, much cheaper price. But yeah, so they underperform not because of EM.

38:14I do think EMH and fund manager underperform is actually related to Deacon, I suppose. To do the politicians thing, rejecting the premise of your question. They underperform not because the market's efficient, but because they charge fees. And we know that, right? It's just been the case over time. Speaking of Googling, Google Warren Buffett helpers, H-E-L-P-E-S, and got rocks. One word, G-O-T-R-O-C-K-S. Buffett was a family called the got rocks. That's the surname of the family, right? So he talked about the helpers. It's one of his annual letters of about, I'm going to say six years ago. I'm getting old.

38:44It could have been longer. He talked about the helpers. In other words, the fund managers, and frankly, people like Ram and I, as a group, as a whole, take money out and reduce your overall, the return you'd otherwise get. so that that's the that's the answer the other thing i will say and you mentioned the motley fool it's very kind of mesh it with berkshire in the same in the same sentence but i'm going to leave the motley fool out of it i've said many times the the paradox of investing i've called it i grandiosally call the paradox of investing is that as a group everyone should index why because on average you can't beat the index and telling you it'll cost you money to try and do it so on average if everyone indexes we're all better off except those who can pick stock successfully like buffett should do it because why would you not if you can and so you took that you kind of had that's the paradox how do you combine those two buffett should index we'd all should index because we all will be better off if we all do except those who can beat the market should because why would you not and that's it that's that's the naughty thing to get your head around and that's where the emh thing comes out is you know the market clearly i mean if the market here's the other thing if the market was efficient it wouldn't have fallen 38 percent during covid it just wouldn't have right and it wouldn't have recovered so quickly after after the falls when covid was still getting worse we didn't know any better in fact things got worse for months while the market kept recovering um is that is everything pricing that we know well i mean you can by the way some people use the academic thing and argue it to its own point you know the kind of disappears its own its own whatever um by saying well everyone knows everything and so the market price is the market price no one knows everything something the market doesn't know therefore 38 for was a market be efficient like it's somehow somehow self self-justifying right which anyone who studies logic no it can't be the case you can't be you know it's like defining a word using the same word the word but means well but it's like yes but but what like what no it means but it's like you know you can't you can't do it that way so long long rambling answer but short version is i don't think the fund manager under performance is practically justification for or evidence against emh i think it's two different questions um i think emh is false because people beat the market i think fund managers lose because they charge fees um i think those are the two answers to your questions rather than being, unless I'm misunderstanding your question, that for me would be the two answers rather than one answer that the two have to coexist in the same universe for.

40:58Yep, agree with all that. Go on, give me a button. Although one, again, I'm going to be a bit of a patent again. If everyone indexed, then we're in trouble. Yeah, I know. You need someone to set the price. In other words, let's run that thought. I know you know this, but just to tease it out because it's fun to think, you know, if literally every single one of us were just ETFing, whatever the current structure of the market was would just be preserved. In other words, the relative valuations and weightings would never change. Now, that might make sense today and tomorrow, but 10 years' time, there'll be a business in there that's actually not making any money that's still 13 % of the overall index.

41:38AMP would still be$20 rather than$1.50. Right, and it's just like it actually doesn't exist as a viable entity, but it's still 13 % of the index That's what it was when we started. And the shares still sell at the same price, yeah. There will always be room for stock pickers, always. Even to our earlier question, even if it's an AI stock picker, right? Like there has to be all of that. The other thing too, which is get really deep, and I don't want to go too far down this path, is that the word efficient is doing a lot of heavy lifting in that phrase. What do we mean by efficient? And this is my latest hobby horse, but the Austrians would sort of say it's a revealed, it's really hyper-efficient at showing us the revealed preference of individual actors.

42:21We should be careful not to put a value judgment on that revealed preference. If you go out, we finish the podcast, and you go out to a cafe and order a hamburger, who am I to sort of say you should have ordered the salad? Or stayed at home and made a sandwich? Like, are you wrong? No, that's what you chose to do. You're right in that context. There might be other reasons why it wasn't the best decision, but that was your decision. The decision was the decision was the decision. You know, it's praxeology is the term for it. It is human action is its own thing, right? And you would almost say that like, when you start looking at it through that way, is it even possible to be efficient when you mean a efficiency of valuation and pricing?

43:05Probably not even possible. Yeah. Is it efficient in terms of revealing to us in aggregate what all these individual players think? 100 % at all times, even in COVID, even in any dislocation. Right now, the price is doing this. Is that efficient? Well, if by efficient you mean, is it telling us what all the actors are doing right now or thinking right now? And revealing through the actions of buying or selling. Yeah, it's always perfectly efficient. It feels like I'm playing semantics. I think you're right a little bit because I don't think that's what the theory is supposed to. It may be misnamed.

43:40No, the popular sometimes interpretation of it. You're right. The theory doesn't say that. That's fair. There are words that academics use that wouldn't be our interpretation of them in the normal vernacular of things. Yeah, I think that's right. What do you mean by efficient? Exactly. Is what I'm getting at. No, that's fair. I think it's possibly misnamed. their key point is no one can beat the market because everything is known. That's what they mean by the hypothesis. Rather than actually the word efficient, having that. And you're right to call it out because we often use both. Dependents like to redefine the words, but equally the words that are used don't always describe it.

44:18So it shouldn't have been called the efficient market hypothesis. It should have been called something else. But yes, I absolutely take your point. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

44:33Hey, David sent us an email and actually sent us a picture as well, which I'm going to horribly describe and then maybe possibly if I'm forced to, I might put it on the Twitter feed. I steadfastly refuse to kneel and kiss the proverbial ring, says David. Next question. We're moving on. He says, but instead, I offer you a glimpse into the future, courtesy of ChatGPT. Now, I'm going to ask you to imagine Stadler and Waldorf type characters, but centre stage rather than off to the side. Much older we both are, mate. We both have grey hair. I have grey eyebrows but still a bald pate. You have a bushy beard and moustache and long hair.

45:12Grey though it may be. We both have kind of concerned slash angry slash grumpy looks in our faces. So again, harking back to Stetler and Waldorf. I got my mouth open. I'm yelling at something. You're just looking particularly unpleased. And on stage is a Muppet style stage. is simply the icon of a bee with two lines running vertically through it. The Bitcoin logo. So make of that, or make of all that what you will. David, let us know what search term you put into ChatGPT to get that. I'd love to know what you threw in to get it. He's at the prompt. Thank you. That's the word he used. Let us know what you asked AI to deliver for you.

45:48Anyway, let's move on. He says, With my humble tribute laid before the AI incarnations of Statler and Waldorf, I now pose my questions. Shares versus mortgage offset. Given the delightful unpredictability of the markets, I assume he means that in a sarcastic tone, would it not be wiser to park one's funds in an offset account for those fortunate enough to own property? After all, a guaranteed 6 % plus return by reducing mortgage interest, plus the ever faithful appreciation of property, because as we all know, property prices only go up, right, surely beats gambling one's hard-earned capital in the stock market.

46:21Mr. Page, what say you? It definitely beats gambling in the stock market. I'm not going to push back it there. Talk about words having meaning, right? Yeah. Which is - I think it's tongue-in-cheek to be fair, given the way he's written the question, but you're right to pull it up. No, the majority of my friends and family, I'm pretty sure they think I just gamble. Like, it doesn't matter what I say. It's like, you're a degenerate speculator and nothing more. Maybe they're right. Yeah, that thing is still true. And you can be - No, it's like - What you do can be different things, Ram, is all I'm saying.

46:54Oh,

46:58it's going to be an unsatisfying answer. It's a personal choice. I mean, you're absolutely right to say it's a guaranteed form of return. Yeah. That's brilliant. But it is, well, soon to be 5%, depending on what you think citrus rates are going to happen. But it's not - You always change your investment, by the way. If you're whacking the offset at six and goes into five, you may choose to then change how you invest that money. Yeah, yeah, totally, totally could do that. But if you think rightly or wrongly that you can do materially better than that, then you wouldn't do it. So you've got to answer that.

47:37I can't answer it. No one can answer it for you, but you're absolutely right to contrast the two because that is a very real choice. And I think for a lot of people who like the security and the virtually guaranteed return proposition of just putting money in the offset account versus quote-unquote gambling on the share market. If you've got no inclination to get better at this stuff and you certainly don't have the fortitude and all in, you know, you don't have the temperament to go through periods like we're going through now, then definitely put all your money on the offset. If you're taking a long-term view, you want to be pretty sensible about it.

48:20And, you know, I would say it's not entirely reckless to put some money in the market. History would very strongly support that as a sensible move. And then it's not binary either, because it might be, well, I've got half on the mortgage and half on the market. So that's a very unsatisfying answer. You've got to do what's right for you. I do think, though, that you've got, you do have a a very I'm going to be very careful how I work this but over a long enough time and being sensible enough I think you are leaving a lot of money on the table in a way that doesn't necessitate excessive risk taking but that's just me I think it's really fair mate I have said previously I think we made a similar question last week or the week before we hear this question a lot yeah I have said at at 6 point something percent I'm probably leaning towards particularly given the tax that's tax free money right you get your 9 % in the market you pay your 3 % you know three of that that's a 33 % tax rate so that's not miles away from the average tax rate most people pay or investing now you're kind of back at the same number and so for me the higher and as you said it's a sliding scale it depends The higher the mortgage rate is, the more sensible it is to invest, to pay off the mortgage.

49:39The lower the mortgage rate is, the more sensible it is to invest in shares. It's not either or, as you say, necessarily, mate. I completely agree with you. I think at six point something, it's very hard to make a very strong case that you're obviously going to do better by investing in shares. What I will say, and you kind of alluded to a little bit, about the long-term impact. If you want to see the long-term impact of a slight change in percentage rates, do some compound interest calculations is at 10 % versus 12 % or 6 % versus 8 % or something else, there is a very real, it feels like a couple of 6 % or 8 % is kind of the same thing I'll pay the mortgage off.

50:12If you extrapolate or if you calculate out an 8 % return versus 6 % return on shares over, or any money, over 10, 15, 20, 30, 40 years, that number gets further and further apart over time. And so the small differences now that don't feel like a big deal can actually be really big differences. The last one I'm going to add, mate, is actually behavioral. And this is really, really different and it's important. and I want to remind Ryan and everyone that 90 % of us think we're better than average drivers. Plenty of people say, I'll pay the mortgage down now and then I'll start investing. And that's a completely fine strategy to take.

50:43A couple of things. Firstly, there's already the difference in the compound rates I just mentioned. The other one is that you have to be very, very, very, very self-disciplined to actually follow through on that. Because once your mortgage payment goes away, the last day you pay the mortgage, I think I've done that. It's like, well, I should start investing now, but before I do, I need to remodel the house and I'll use some of that money for that. and then I'll upgrade the car and use the money for that. I've got to go overseas and use the money for that. Once it's burning a hole in your hot little hand and not allocated to the mortgage anymore, it's really, really easy for that not, you don't ever quite get around to putting that mortgage money into the stock market.

51:14But can I just very quickly interject? That's why they're called offset accounts these days and not repayments. I don't mean that necessarily, mate. I mean, let's say you even pay it off entirely and you use the offset to pay off the rest of the mortgage and then you've got no mortgage and then the week after that you start, so I've got, okay, I've got two grand in my back pocket because I didn't pay the mortgage this month. I didn't have to. What do I do with that money? And you might say to yourself, I knew when I get to this point, I would pay the mortgage off first and I'd invest the mortgage repayment every month thereafter.

51:39You're right about the offset, by the way. But even if you don't get sucked into using it, you just simply say, right, mortgage is done. I've got more money in my pay packet, or not more, the same amount of money, but I've got nothing to spend it on because the mortgage is done. I should invest this money today and every day from now on till I retire. The number of people who say they will and the number of people who actually do are very, very different. And that's where even the people say, I'm better off to rent and invest than to pay the mortgage off. There's a lot of behavioral stuff in that, right?

52:02There's a forced saving of a mortgage. There is the money that gets compounded in the background. There is the, will I actually do it when it comes to it kind of stuff. And that's where you've got to be really, really, really self-disciplined to see that through properly. I'm trying to think of the phrase. It's like, Lord, give me the strength to not do this, just not today. Yes, yes. Is that a celibacy by St. Francis of Assisi? That's the one. Or St. Augustine? One of them. I'll jump in. I'm missing out my saints. Yes, yes. God, Grammy, Selby, Sim, Not Just Yet, or one of those kind of phrases.

52:33Hey, David's second question, mate, is about Europe. It is, is Europe the new Tina? For those who don't know the acronym, it's there is no alternative. If one must risk their capital, should they not cast their gaze towards Europe? Not just the preferred escape for sun-seeking Australians, but perhaps also the promised land of outsized returns. Certainly more appealing than the waning empire of the Americas or the great Australian tradition of digging holes and building structurally questionable beach shams. Warm regards, David. I'm loving the sarcasm that's dripped right through this email, David.

53:02Thank you. Europe, given where the US is and Trump is, and given the focus, not only the Australian economy on holes and houses, but the Australian market on holes and banks, is Europe a better third way? Not in aggregate. Why not? No. It's a socialist clown show. Right. What do you really think? Let me unpack that a little bit. Okay, let's do that. Let me unpack that a little bit. the the the again it's a spectrum here right and i think the pendulum has swung too far to the left and i say it as a lefty at core right i very much am and i'm not against again you gosh it feels like everything we have to say these days we have to like sandbag it so much because you're so terrified of being misunderstood but i mean you don't even like let's forget trying to predict the future let's just look at the last 10 years let's like it's been terrible it's been terrible before Trump came along, the returns in the European markets have been woeful.

54:02I mean, look what Greece, Greece is the poster child of what happens when you have a shared currency and a shared sort of central authority, but different fiscal considerations. And you have a situation where a bus driver can work for 10 years and then get their full salary until 78. You know, they're just, it is not an environment that is nurturing towards capital formation and the entrepreneurial spirit. And this isn't all about, hey, business is good. Let's rape and pillage the planet. Capitalism for the win. It's not that. But all the things that we have, all the value we have is because someone has risked, has foregone consumption today to create more for tomorrow.

54:42And America is an absolute basket case in a thousand different ways. But the one thing that they get very, very, very right, and the founding fathers got very, very, very right, was just the big pillars kind of stuff. You know, individual property rights, the rule of law, the – isn't it ironic that the Republicans are doing the biggest market distortions in living memory? But true. But their foundations are very much on free market capitalism and capitalism in the pure, proper sense of the word. And the Europeans have strayed, in my humble opinion, and I'm not the first person to have this hot take.

55:18I think they have strayed too far from that. So, again, you say that, and I say that to some of my mates, and all of a sudden, you're some heartless capitalist. So you're against universal health care? No, I'm not. I love that kind of stuff. But there is room for the middle. And they have gone way too far in that direction. And you can see it in the numbers. It would have to change. The political zeitgeist would have to change rather radically for that to be undone and for people to start making material investments. Not that it doesn't happen. These aren't binary things. Yeah. But in a way that would allow for, at least at a broad-based kind of level, really, really good capital allocation options and investment kind of potential.

56:07There are great businesses started every day in Europe. I don't want to be too harsh here. But nowhere near the level of business formation in the United States. And that has consequences, right? I feel I'm going to start tying myself further in knots if I keep talking, but does that help fill it out a little bit more? I think it's good.

56:32I suspect extrapolation is always dangerous, right? So we always want to be careful about extrapolating or assuming the future. whatever happened in the past is going to always happen in the future. But it's also reasonable to say that if people around the rest of the world, there's a lot of home market bias. So hard, right? Yeah, right. A lot of home market bias and there's a lot of what we think we know. And so I'm very aware that we invest in Australia in a way that Europeans would say, someone on the Motley Fool Money Europe podcast, which doesn't exist, should we invest in Australia? Is this the new Tino?

57:03They're around the rest of the world. They're not fighting with Trump. Maybe that's a good place to invest. and someone's like, no, don't invest in Australia. They're all holes in houses and it's a terrible economy and they're down the bottom of the world anyway and blah, blah, blah, blah. And they would have a reason not to invest in Australia. And I don't, again, I wouldn't necessarily make them right or wrong nor it makes Ram you right or wrong on Europe. I just, there is a bit of that kind of, you know, top level, here's what I think about everything kind of approach. And we need to be a little bit careful of that.

57:28The Germans have done really well on pharmaceuticals. They've done very well on defence. that's done reasonably well on energy companies individually. But I think that, I mentioned extrapolation at the beginning, that the reality is the US stock markets have grown more quickly, more successfully. And the US economy over the last century has grown more quickly, more successfully than the rest of the world. And I think it's probably gutsy to try to guess when that stops being the case. And so I'm not anti-investing in Europe at all. I don't own European stocks, it turns out. By the way, sometimes just how hard is it?

58:02I mean, you pick your fishing pond. I could try and, let me torture an analogy. I could, you know, fish my local fishing hole and I could fish in the local bay down the road. So that's Australia and the US for those who are following the analogy. And then someone would say, what about, there's another bay and it's all the way over there and you got to go get there. And look, the people don't actually, most of them speak English particularly well. You got to get the fishing instructions translated, but you might get some fish over there. Now, on one hand, it's like, well, there's a fishing spot.

58:27Maybe it's good. Maybe you should try it. On the other hand, I know my two current fishing spots. how far do i push to try to get a benefit and is there do i have an edge do i have a reason to believe i can do that better than anybody else and that for me is the heart that's why i haven't done europe i just i don't have the time or the mental space to try and consider another market more different different rules different currencies different languages uh different consumers all that stuff um so yeah i mean the home market bias is largely uh instinctive and it's not particularly rational to the extent there is some rationality it's just i know more of it it's an easier start i can start from the third square in the in the hopscotch game rather than the first one and so i better chance of getting to the end um so for for reasons of past performance and difficulty i'm not investing in europe should i could i i could do i have enough reason to believe i would outperform my australian or u.s investing by doing so not really um no i'm not saying i can't i'm saying do i have enough confidence to do it other words you know if i if i weigh up the probabilities where do i want to put my chips do i want to put some chips in europe not particularly last one for me david for what it's worth is remember i've said this before it's old data i really really have to update it someone make me do it sometime soon about seven or eight years ago the s &p 500 got something like half of their revenue from outside the u.s in other words even if you want european companies or companies who business in europe investing in the u.s US listed companies, sorry.

59:54Doesn't mean you're even necessarily investing in US domiciled companies. Sorry, domiciled, yes, in terms of that's where their listing is. But they might be doing business everywhere around the world. I mentioned Coca-Cola Amateur, by the way. Coca-Cola company, I'm sure these days, makes more money outside the US than inside the US, including in Europe. So, yeah. Would I say to someone you shouldn't invest in Europe? No. If you've got an edge, if you want to do the work, if you know how you're investing, there's as many individual opportunities in Australia and the US as Europe, I'm sure. Because by definition, there are companies out there doing stuff.

1:00:23right? So is there a company in Europe that's going to beat a company in Australia or the average in Australia? Almost certainly. Well, no, certainly. Guaranteed. Certainly. Yeah. Guaranteed. Can I find it? Is it worth the time, effort, energy, new accounting rules, currency, extrapolations, valuations, brokerage accounts? For me, no. For others, possibly. And if you can build a great... There are some fund managers that have a Europe fund and they have people whose job it is to literally focus there and try and find opportunities that are big enough and good enough to justify their investment.

1:00:49And they're out there. I'm just not going to spend the time and effort because it's hard enough already with the the us and australian markets i operate in um and predominantly australia but also the us and i i'd rather try to maximize my returns here's the other thing quickly and i'll let you get in rem knowledge is cumulative so i've spent decades looking at the australian market and the us markets if i had to start from zero in europe yes i could take the benchmarks and the models and the theories and the you know all that so i could so i'm not saying from zero but how does the i keep wanting to go to Swatch Watch, right?

1:01:20Because it's a Swedish watch company. It's the one that always pops in my head when I think of European companies. I could try and understand that business and I can understand European customer trends and whatever. It's just a longer putt, so I'm not going to make it. You go, mate. Oh, I was just going to point to some data. I mean, again, don't take my word for it. Like, so, and I think, I'm really glad you made the distinction between sort of broad-based ETFs and stocks there. Yes, yes. Because again, there will be, undoubtedly will be some cracker companies that come out of that geography.

1:01:45There'll be some, out of any geography, right? Yep. But if you look at the S, let's go Vanguard. They're the biggest guys. Let's go with Vanguard FTSE Europe ETF. So this covers all of the major European markets. And this fund was established in 2005. And if you invested in that over the last, since inception, you have made 5.33 % per annum. Right. There you go. So in real terms, probably a couple of percent per year. Just to contrast that, the NASDAQ over the same period is probably up 15 % per annum. Yeah. Like three times better. Yeah. And it's not like, oh, there's always a point in time kind of bias or whatever it's called.

1:02:28What's the name for it? Anyway, as I often say, you can prove any point you want by choosing an appropriate starting point with stock market data. 100%. But over the last 10 years, it's given you 6%. The last three years, 7%. It's just, it's not, it's not great. It's really not great. And it's, it's easy to point to, you know, US exceptionalism as if there's something intrinsically better about the people or something like that. It's not. Human beings are human beings and have been for the last 10 ,000 plus years, right? Like I don't care where you're from or your cultural background, whatever, in aggregate, pick random person from country X and random person from country Y and they will be very equivalent.

1:03:15And so the only distinction is the system under which they operate. And there's something in that. Now, there are other considerations around what their stock markets have done. So I would much rather live in the south of France than I would in downtown LA. Like, let's be clear about that. But we are talking about investment returns. And when it comes to investment returns, it's just like the track record has been awful. The GDP has been awful. um all of these i mean just not from what you what should be you know modern western democracies with insane amounts of of wealth at their disposal and human capacity and power it's like something has gone wrong there and and i just don't see it reversing anytime soon so no for royal reasons you said plus what i've said hard pass i'll take us even australia with all these problems i'll take that over europe and when in europe you've got to be careful too this is Australians talking here, right?

1:04:09There'll be Europeans going, I really take exception. I've got a good mate who's French and if he heard me talking, he would be really upset that I lumped him and his people with the Germans or the Portuguese or whatever. And for the Germans to be offended to be lumped with the French, right? It's always the way. And they are in a lot of different ways. So it's sort of like, you know, but you use the term David, Europe, and that's, and so I've gone with that as the construct. I think that's right. I forgot anything to add. One more thing while you're thinking. And I love pointing this out because it's so counterintuitive.

1:04:48The Chinese economy, as we all know, and I know I've pointed this out a million times, has just gone gangbusters over the last 20 years. Newsflash. I don't know if anyone missed that. It's gone gangbusters over the last 20 years, but the share market has gone nowhere in 10 years. Yeah. In fact, over 20 years, it's like, I think in real terms, it's negative. which by the way can actually be about the stock market maybe it was too expensive 20 years ago so that's where when you say Europe and David I'm agreeing with you it kind of depends as an economy as a market at the current prices for what period of time I mean also mindful Ram I have to say for as much as we sort of talk about our view of the systems we are outsiders and we have our own ideological views up until World War II maybe a bit earlier the UK was the dominant empire and world power.

1:05:38And there's the Spanish before that and the Portuguese before that. I'm getting the order wrong, but yeah. And saying, look, I'm going to, in 1935, I'm going to invest in the UK because they've had the best return. Look at the US stock market has been terrible. The UK has been great for the last 30 years. I'm going to keep investing in there because I reckon it's the best system right now. For all I know, the UK might have actually still been in the US over that Brazil the following 90 years. But my point is that we can extrapolate so far, but also be ready to change. The biggest challenge we've got as investors, I'll say we, I'll say me actually, is being aware of and trying to work out if and when those things change.

1:06:10I mean, the US market has been a wonderful place to invest for 120 years. So has the ASX. Now, if that remained the case, then I'm sweet. At some point, I hope I'm smart enough and aware enough and, you know, behaviorally open enough to go, hey, this feels like it's changed. Maybe I should look at the Europe. the europe maybe do you mention the u.s and the you know what's going on there at some point does the u.s end up you know maybe trump is a revolution and maybe they go back to go-go days or maybe he is the not the beginning of but the the extension of uh some sort of change to the u.s mindset regulation companies uh you know economic growth whatever happens so that it's it starts to slack behind so it's full behind okay well then i have to be wise enough and aware enough and able enough to say i'm going to now change i'm going to look at europe because the u.s no longer seems attractive enough and so that's that's hard right everything to your point everything we know to this point is that the u.s seems to have the special source and we've tried to put a finger on maybe the sort of reasons why it might have those things and it tends to be i think roughly right by the way i'm not entirely sure that a great market always makes a great society um the inequality in the u.s is far bigger than the inequality in europe for example now and they've got better stock market returns.

1:07:26Part of that is, well, which would I prefer? You mentioned downtown LA versus France. Where would I prefer to live? The answer might be different. Where do I prefer to invest? And that's, again, you've got to separate so many parts of your brain here is not the which economy would I like to be part of, which is fairest, which is nicest, which is best, versus which market is going to be the best returns. It may still be Europe. By the way, David, feel free to write in on five years and tell us we were wrong and you were right and the European market took off. but for now at least there's insufficient evidence for me i think it sounds like ramburghese insufficient evidence for me to suggest that europe is a better investment potential as a market again not individual companies as a market than than the us or australia now one last thing for me then i'll shut up the i mentioned individual companies before will there be individual companies in europe that beat the asx absolutely yes by the same token there'll be individual companies in the asx that beat the asx and so again you know is casting a wider net more useful if you if you had one dollar to spend it once and you only make one bet would you try look every single place you could find to find the best idea probably yeah um if i have relatively more money than a dollar but limited time and i have to concentrate on my opportunity cost right what probabilistically what's my best bet trying to find a market beating company in australia trying to find a market company in the us or trying to understand the entire i want to say the entire european market you made the point ram it's not one market it's a dozen a dozen 16 countries, at least in the Euro, and I don't know how many more, I should know how many countries in Europe, I have no idea, to try and work out if I can possibly find a company that will do better than an ASX company.

1:08:58It will. Statistically, there's a 50 % chance that a single European company beats a single Australian company, just by definition, right? Because in any given year, who knows? But could I find that one? Is it worth my time? Are I probabilistically going to do better at doing that? So even though individual companies are different, I still reckon that individual individual company is more likely for me to be found on the ASX in the US because I know those markets and for all the reasons I said before. Yep, I agree. The analogy here is we're talking geographically, but you could also talk industry.

1:09:31That's fair too. We often do. We give this example all the time. The classic was always batteries and EVs and therefore lithium or the sun setting of the fossil fuel industry. So therefore anything associated with renewables in terms of generation or pick your, insert your favorite macro theme here. Yeah. And it's like, it's understandable. You get it. It's like, oh, you know, it was cloud back in the day. And, you know, now it's AI. And it's like, see, people get attracted by themes and it's just fine, which is actually, you know, skate to where the puck is going to be, right? Like if they, I want to be sailing a ship, I want to be going with the wind in my sails.

1:10:11I don't want to be driving into the wind. So it's not a terrible starting point if you think that that is where the best place to be is. But it's why I'm always, and I think why you are always a bottom-up investor. It's like, yes, I like that. But the best industries and the best geographies can do really bad. And the worst, and the opposite is true as well. And listen, we got so much grief. I got so much grief for being... No, we did. It was so obvious too, by the way. Well, I would say obvious. I'll say probabilistically likely that there's a lot of money chasing demand and no one paying attention to supply.

1:10:46And the theme was absolutely, the theme was right. I think more people will buy more EVs and more EVs will require more batteries, therefore we'll need more lithium. Perfectly 100 % accurate. Absolutely happened. Nailed it. Nailed it. The share price fell through the floor. Why? Because the commodity price fell because the supply response was good enough. And that's why top down is, top down is interesting, right? Because top down, you can say, I think technology is going to be a thing. I think, I'll put me personally, right? Everyone knows. I think e-commerce is going to be a bigger and bigger part of our retail spending.

1:11:15So, I might say, are there any e-commerce companies worth buying on that basis? Yep. But then I go bottom up from there. So it's not like, e-commerce is a thing. You don't think me, therefore, oh, that's e-commerce, therefore I'm buying it. Or even I'm going to buy the best one. I'm not going to be able to buy the best e-commerce. I can look at a wall and go, huh, cool trend. I think that's still right. Can't find anything worth buying. Or by the way, the other, very rarely, but a rubbish industry can have good companies. It's harder because if you're in a declining industry, it's very, very hard to be a long-term success story.

1:11:41So finding great businesses in good or great industries is the best way to go. But you've got to define the industry not only in terms of popularity or sales or frankly scuttlebutt, news reports, noise, headlines. Ignore all that stuff and ask yourself, is this going to be bigger and where's the value going to be captured? For lithium so far, could turn around. For lithium so far, it's been rubbish, absolute rubbish. and that's precisely because you had people say, I get the demand side, I forgot the supply side. It's how supply responds. It's an absolute case. By the way, it was graphene before that, it was nickel before that.

1:12:15People will forget this one. AI right now. Right? Yes. Right now it's AI. Great example. People are just tripping over themselves. AI, AI. It's going to end badly. Statistically, it's going to end badly even though you will not find a bigger AI ball than me. I'm all in on the tech. I love it. It's 100 % the future. I don't think I've got any direct investments in a pure AI company. It's just way too early to tell, right? Nice. I think we've done that one, mate. Anything left to leave our listeners with as I pull up with them on this Sunday morning? No, they were all excellent questions as they always are.

1:12:48And I do appreciate a good bend of the knee, so keep it up. And we shall deem you worthy. Or not. Your question worthy to be answered. Yeah, just a... If you kiss the butt. Well, yeah, I reminded David, you only just got that question in based on your refusal to kiss the ring. The AI graphic may have got you over the line speaking of AI, but just take this as a warning. Let's call it a last warning, David, and a warning for everybody else listening. Just, you know, we're nothing if not eager. No, we're not really. I don't think I've ever knocked back a question other than one we've covered previously or one that was super, super specific.

1:13:23I couldn't do so. We will always try, if we've got too many questions, by the way, it'll be hard, but we'll always try and answer your questions. Thank you for submitting them. Thank you for listening if you made it this far through the pod. Enjoy the rest of your Sunday. Have a wonderful weekend. We'll see you next Friday. Until then, full 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.

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