Mailbag: incl. How's this for a portfolio strategy? April 16, 2023

28:42There are no adults. No one knows what's going on. You like to think that there is like some, you know. There's no smart money, that's for sure. Yeah, there really isn't. I mean, look, there are degrees. There is obviously some money that's much smarter than others, but there is also, I think you and I have chatted about this previously where it's just like you're surprised at the insanity that goes on from actors that should ostensibly be, should know better. You know, we talked about Milk Run on Friday, right? Oh, yeah. The VC company was putting$100 million into that and their pitch deck was telling you that they're losing$30 on every order or something, you know, and it's just like, it's not that you've got to be too critical as you say eventing and look after the fact and was it as obvious at the time, but it's just the insanity that regularly pervades markets needs to remind you that actually there's not that much.

29:35And it's not, Munger talks about, it's not about being the person with 200 IQ points and the best resources. It's the person who can do the very basic, simple things when everyone around you is losing your head. That's the edge. And I think I, for the longest time, felt as though there was some, there's got to be more to it. What else am I missing? Like, no, it's as basic as it sounds, you know. They're just businesses that are broken up into little bits and you can go and meet other people who might give you some for cash and vice versa. And then at the end of the day, if the business goes well and you paid a sensible price, your shares will go well.

30:08That's it, right? Like that is it. And then everything is sort of like the shades of gray that lie in, which are vast, by the way, of course. And there's a lot of digging in as to what's a good business and what's a good price. But don't overcomplicate it. Keep it simple. I don't care whether we're in the top of the macro cycle or the bottom or there's technological disruptions underway. Those fundamental truths will always be true. and don't expect there to be a layer that you will peel back and there is all this hyper logic and reason and sensibility and stuff around. It's just not there. Sorry, mini rant over.

30:44No, so I'm going to add to it very quickly. But speaking of smart money, this is the AFR. So these are the, in theory, smart people, right? The people who get paid a lot of money to do their investing marketing. Well, they do get paid a lot of money, not just in theory. But yeah, say what you're saying. Yes, yeah. here's a quote from the AFR talk of$100 oil has been buzzing since the end of last year but it seems like the can keeps getting kicked down the road first some analysts have predicted prices would reach that threshold in the second quarter of 2023 the view got pushed into the second half of the year and now some of the bigger balls aren't expecting the magic number to come into play until 2024 now these are people whose forecast would have at the time both of those times and now get quoted as analysts say x will happen and we go oh i guess they should know then yeah uh look i'm i'm absolutely picking on oil and actually pick on these analysts they're not named which is fine pick an asset class pick an analyst the forecaster right it was just a great example great single example of the fact that we think these people know what's going on uh and you know we're in the same industry we are we are in the same roles if we put our smart suits on and made some of these outlandish forecasts people would listen to us in the same way uh we're hopefully just humble and hopefully right enough to say actually nobody knows and the whole thing was made up and they're all guessing no very few people are trying to screw you right there's very few people who are out there trying to say i'm going to make up a number on oil that i don't believe in just let me try and get some attention or whatever else most are saying i think this is probably right hubris is a much much bigger issue yeah than cynicism or fraud it really really is especially in an industry that's like 80 male right which is one of our biggest weaknesses It's just, gosh.

32:19Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

32:29Everything you say just makes sense, says Matt. I find myself nodding in agreement with just about everything you both rant about. And I really enjoy the trip down the rabbit hole. You have to, I think, to still be listening after this much time. So thank you. Motley Fool Money is in my top three on the podcast machine. And I've been listening to you legends for around three years now. but not hearing you. Stay with me here. I am 40 years old. I've been dabbling in stocks, brackets not investing, for almost two years. Starting with a sort of scattergun approach with 40-ish tiny positions in stocks and ETFs to see what works for me.

33:01And I've made all the rookie mistakes, including FOMO, over-trading, collecting specky mining stocks, catching falling knives again and again, using funds that I later had to pull out, but worst of all, not having a structure or plan. Finally, says Matt, I hear you after only three years of listening. After taking a step back and looking at my not yet a portfolio, I only really like about 5 % of what I hold. So I'm basically resetting and cutting all the weeds to restart. Excellent. Isn't it? I figure I can carry forward a tax loss on these to balance out my future profits. Let's stop there, mate, because we talked about this on Friday, about changing your mind, about recognising what's going on.

33:40I'm going to say to Matt very quickly, I don't think I necessarily encourage people to do what you've done, but you've started hopefully relatively small you've made some mistakes you've tried some things to find out what works for you and I think there's a real value in that so don't give yourself too much of a hard time I've said many many times my first investing was a mate slash boss at the time who told me to buy MIM when the share price was low and then sell it when it went up and then buy it again Was that Mount Isa Mines? It was Mount Isa Mines back in the day I remember and it was a stupid strategy but I did it because I thought it was interesting I bought a whole lot of stuff pre.com crash I had sausage software and computer share and some other bits and pieces.

34:17I don't remember what I bought. We've all made those mistakes and there's nothing wrong with that. Anyone who hasn't made those mistakes is a liar, frankly. Or you're about to. Yeah. Anyway, let's go to Matt's. Now, the new plan, he said, includes a few core ETFs. Probably Vanguard's Australian 300. Give me the codes. I hate stock codes. The AS is. Vanguard Global and FEMX. Do you know what that is? Not sure. No. I don't know what that is. Let me tell you this for the fun of it. This is real-time research, by the way. It is the Fidelity Global Emerging Markets Fund. There you go. Can't criticise that.

34:54All right. Then maybe holding five or six stocks of what I would call the big dum-dums, such as CSL, BHP, Westfarmers, Solpats, and possibly one real estate investment trust for about 30 % of my portfolio. This should give me some stability, and to get my speccy fix, I will probably trade ETFs such as gear, gold, etc. with 10 %-ish of my portfolio. The last 10 % or so for just two or three uber risky stocks so that I don't feel the need to check in daily and can try out this patience thing I hear so much about. I know there's no question yet. I just wanted to put something down and get someone to hold me accountable.

35:33So I thought of you guys as I really value your perspective. In the words of the wise Mr. Page, please poke holes in my ideas. I will get this restart done well before the end of June so I can sell my bad stock choices before they get spanked down any lower due to tax loss selling and get back to you in a year's time with an update. Good stuff. There's a side note to come up. Just stop there, mate. What do you reckon? So it sounds like about 60%, 50 % ETFs, 30 % big dum-dum stocks, which I like that phrase, and the 10 % trade and 10 % speccy. What do you reckon? First off, I just got to make the observation that the day you sell, the next day they're going to rally.

36:14That's just the universe going to mess with you. And it's probably still the right thing to do. Like they'll end up going down again. You buy, shares fall, you sell, they rise. It's just how it goes. So just don't feel as though, oh, I made a mistake. It's like often, yeah, I think in the fullness of time, these moves you'll be very grateful for. But just steal yourself for that really annoying nature of the universe. we touched on this on Friday and I sort of expoused a view where I don't like I don't like this idea of core and satellite and speccy just to me every dollar is precious and I want to invest sensibly with all of it it's all core now some people might look at my portfolio and go really that's core well it is for me right it's core to my strategy my approach how I like to do things there's nothing in there that I would say is speculative i would say that there's businesses in there that are smaller and riskier than a lot of other businesses but it's i'd like to think it's a a reasonably we we have to be honest with ourselves too we we cannot hide from the fact that we are also in the forecasting game you know uh we're just forecasting what a business is likely to do and you know ultimately how a market might sort of value that kind of you can't get away from it right so we're going to make um a bunch of mistakes and and all of that kind of stuff but but as soon as you label something my speccy basket you're just giving yourself permission to do dumb things on it and it's like it's okay no that's that's fine but i mean 10 of your investable capital like i really get i really i mean i get that some people just like to bet on the football and the poker machines or on stocks i get it i get it whatever fun you're going to have doing that you will have with a thousand bucks as much as you will as with you know 50 grand or something like that 50 grand i mean look everyone's in a different situation for me 50 grand is a huge amount of money and there is no even if that was represented just five percent of my portfolio do i am i going to go to the casino with 50 grand no but that's what i'm doing with with shares right and and well if i am just like oh it's a complete hail mary punt two cent stock that might invent them world's best computer chip or something like, you know, it's just, it's just, don't do it.

38:29Don't do it. Treat it all as core, all as core. And the other element I would say is don't think that just because things are big and in the top 200, you actually list a bunch of really excellent companies. So I'm not having a go at specifically, but too often I've seen people say, oh, it pays a dividend. It's a very big company. You know, like I'll use my favorite whipping boy, AMP, right? Or Telstra. or there's plenty of big quote unquote blue chip companies that are just, pardon the French, crap. Just awful businesses. They are just bloated. They are - I think you'll find the French is le crap.

39:03Le crap, you know. No, do they make money? Yes. Will they be around in the future? Yes. Are the economics great? No. Is there any real growth there? Not really. Is the price sort of reflective of that? No. It's kind of, you know, it's just - Yeah. So again, off air, when we were chatting before, I said that I would put my stocks against a good chunk of the ASX 100 and say they're higher quality businesses. If I could just own a business outright, I would far prefer that than a lot of stuff that's in the ASX 100, even though it's like 10, 20 times bigger than the stocks I'm holding and they are well past the point of profitability and all of that kind of stuff.

39:42They're just objectively, I think, when you sort of look at them, they're not good. So be careful with – too often in our industry, these labels get applied and I just don't think they make sense. The lowest risk investment is the one that you understand the most. Nothing to do with volatility, nothing to do with market cap, nothing to do with liquidity. Risk is – here's the obligatory Buffett quote. Risk comes from not knowing what you're doing. Knowing what you're doing. Right? That's what risk is. And to some extent we're all making it up, right? Again, I'll go back to my previous points. but you can, there is a very long spectrum as to how intelligently you can approach that.

40:20You can approach it from a mate at the pub, a taxi driver told me this was great, all the way through that I've read every annual report over the last 10 years, every presentation, dialed into the calls, modelled out the business. You know, you can go way into the weeds if you want. I'm not saying you need to be right at the extreme end of that spectrum, but the further you are towards that, heard it from a mate at the pub, you know, I don't care what the market size or liquidity or whether there's a dividend. I mean, you are gambling pure and simple. And with gambling, the house tends to win in the end.

40:51Yep. I think that's a great answer, mate. I, yeah, completely agree with that. The only thing I would say is know yourself, as you've said many times. If Matt needs to do that, then 10 % is better than 20%, 27 % than 30%. Yeah, sure, sure. So, you know, Matt, if you can't not do it, then I guess that's fine. um the real i wouldn't trade etfs mate uh i don't trade etfs i've never traded etfs uh if you here's the thing about trading is you're trying to guess the short-term direction of something betting as other people are trying to do the same thing and unless you know you're better than them there's a chance they're better than you google google keynesian beauty contest there you go so i the great thing with share what i love about shares and and for it's worth property and other things is share since since the dawn of the share market listed companies have made more money over time there is a positive we talk about expected value there's a positive expected value on the market that's why etfs are great right they'll probably go up over time so the longer you hold them and leave them alone as long as you bought reasonable companies diversified decent prices all that stuff they'll probably go profits will almost certainly go up over time uh with some pullbacks from time to time but you know go up over time share prices will probably go up over time on average trading is the opposite of that trading is giving that up and saying over the next one, two, three, four, five months, I'm going to bet that I can guess the direction of something more than the other person who I'm buying or selling this from or to.

42:15And mate, knock yourself out if you genuinely have it. And this is what we said about the expected value stuff on Friday. If you have a really genuine proven reason to believe you're better at this than somebody else and then everyone else, the guy on the other side of the trade, then go for it. If you don't have a genuine reason to believe you're better at this than they are, you've got no business doing it. In my humble opinion, I don't mean to sound critical about it. I have no business doing it, right? I don't know what's going to happen with the gear ETF or the gold ETF for the next 1, 3, 6, 12 months.

42:42I have no idea. Absolutely no idea. So I have no business trying to guess, bet, on where that direction would be. I'm blindfolded, right? There's no point doing it, no reason to do it, and no reason to waste 10 % of my portfolio trying. Personally, same with the risky stocks. Same thing. Maybe they go up, maybe they don't. If you wouldn't go and bet 10 % of your portfolio at the track, then I wouldn't do it on shares. so the good thing is oh sorry mate I'm sorry go on no go I was just gonna say the good thing about it is this just to really hammer home your point if you know yourself and you know that you need to do this and that's not a criticism like I like playing poker with my mates I gamble you know I buy lottery tickets believe it or not you know have fun have fun um and the great thing about that is is it it will it will prevent you from doing it where you definitely shouldn't be doing it which is the most of your capital so if it saves you from yourself it could i would just make the point that that itch will will you don't need to be a 10 of your investment i mean it depends on the kinds of money that we're talking about here but it doesn't need to be a substantial part of your wealth to scratch that itch you can have the fun like i always say this is the madness of pokey machines right is that whatever joy people get out of those damn things i imagine And, you know, really, like, do I need to bet$100 a spin or can I do a cent a spin?

44:06Like, it's still getting the same flashy line. I know people say, yeah, but it's the thrill of being able to win substantial amounts and more. But I just, I kind of think if you're going to do that, then that's, by the way, how I would fix pokey machines. I would just, like, go nuts. Anyone can have them. They're everywhere. It's just a one cent per spin. If someone wants to sit there, you'll have all of the fun of quote-unquote gaming, but you can't, like, put your entire paycheck and family savings into it, that'll kind of fix itself. Everyone gets to gamble and yet no one gets to lose their shirt.

44:34So anyway. Once they had a spin and you got to wait for five seconds between spins. Yeah, man, go nuts. Sit there. I'll probably sit at a pub and slap away while I drink a beer and hey, hey, I won three bucks. You know, it's fun. I get it. I get it. Anyway, sorry, mate. I cut you off. No, perfect. No, I think we're done. So just a side note. I have a one and three-year-old daughter. This is Matt again. and I started to buy one share in qual, I assume it's a quality ETF, per month as they, probably one share in qual per month they age. And I tell you, their portfolios are smashing mine. Well, there might be something to that.

45:10My question is, if I'm to start dollar cost averaging into the aforementioned ETFs, is it better to set a monthly order at the start, middle or end of the month? I know I'm just feeling around the edges, but is there any benefit? I'm going to say a very quick no. Do you have any different views, mate? In terms of the frequency? No, whether the order is placed at the beginning, middle, or the end of any given month. Oh, no. Oh, and the other two podcasts in my top three are The Good Oil with Scott Phillips. Oh, there you go. The Good Oil with Scott Phillips and one other. Keep up the great work, you straw fools, or motley men, you can decide.

45:40Kind regards and keep up the great work. You guys could charge anything you want for your podcast and they would still be a screaming bargain. But being the tight ass I am, I'm really glad they're free. Thank you, Matt. That's great. All right, I want to one from Colin, who's Dear Scott. and what's his name again? The straw man boss? Question for the pod. I've been a fool for almost a decade and I've been listening to the pod machine. Another one for the pod machine, Andrew. Since Andrew was just a twig on a scarecrow, you can give me my first spiffy pop monster, Altium. That was a recommendation of yours, was it?

46:11Yeah, that was... God, I wish I'd kept mine. There are so many lessons in investing. This is my favorite. Sorry for the very quick detour here. but I have done this on a number of occasions where I bought a company for the right reasons the right thesis and for whatever luck and it was entirely luck very quickly the market caught onto it and shares went up significantly in that short amount of time and I thought I'm a genius and I sold and they are the biggest regrets that haunt me to this day it's not the money that I've lost I've lost 50 on umpteen positions you know before and that kind of sucks yeah it's the ones that get away that get you.

46:50And why did I do that? Because I started with an investment and then I started speculating on price. Oh, it's gone up too much. The market will come. You know, it just creeps into you. What a mistake. And Altium is another classic example. If I had just never sold that, I'd be worth a lot more than I am today. Wouldn't be all my life. And then you sell out and then you continue to watch it go up. And again, not just because the share price is going to the business. It's just doing wonderful things, the business. and it continues to execute. This is great. And then you go, well, I can't buy now because I feel as though it's too late.

47:27The amount of behavioral biases that plague me is one thing, but plaguing me while I'm fully conscious and aware of them is what really rubs salt into them. Because I know what's happening. I'm doing this. Am I doing this? I am. Am I making this? Here we go. We sit on our little pedestal here on the pod. and say, oh, you shouldn't do this and you shouldn't do that and make sure. And then we log off, we go back to our own little worlds and then I think, I wonder if that's going to get a little bit cheap. I'm just being honest, right? Because it just, it creeps. It is so, again, pernicious is the best term for it, right?

48:02Like it just, anyway, I make that point. We're all human. We are, we are indeed. So what about the Spiffy Pop? A Spiffy Pop, by the way, is a stock that goes up in a day by more than the price you paid for it. Not very common, but when they do happen, that's pretty cool. yeah hey once that by the way once they start happening they happen all the time can i can i boast for a second yeah go on i've had a triple spiffy pop before oh in other words the one day increase in share price was three times more than my purchase price and it happened because the spiffy pop like the first time it happens um this is with pro medicus no surprises um and you know i bought it at 85 cents the first lot so we've got when it gets to us you know 60 odd bucks a day It's not hard for that to go up 80 cents in a day.

48:47So you sort of add that first one and then it's like, and then it's like, I'm just spiffy pops down, you know, up and down and all. And then it just, the way the maths works is it becomes extremely common, but rare, but really nice. And to come back to my earlier point, you just don't get that by locking in the short-term profits that might think you're smart at 50 % in six months. So I was like, you know, no, I want the thing that in five or 10 years is spiffy popping every single day. Like that's what I'm here for. I love it, mate. I love it. It's definitely worth growing. So, yes, back to Colin.

49:25Colin says, needless to say, I am, insert gratuitous compliments here. Colin, come on, make an effort, mate. I mean, you know, I appreciate you letting me fill in the blank. You have trained the listeners. You have trained the listeners to, Because I'm sure you gravitate towards the nice questions. And so they know that if they want their question answered, they've got to like drip it with praise. That is 100 % incorrect, by the way. I've never ever filtered it out. Sorry, not filtered out. But just so people know. Yes, no, that's fair. But yeah, you could have at least made an effort. Can I say, speaking of conditioning, Ram, this is one of my favorite.

50:01One of the prime example of Pavlovian conditioning is thinking about the word dogs. Is that great? Wait a sec. Pavlov's dogs. Pavlov's dog. Get the whole, so Pavlovian Pavlov dogs. So you think about Pavlov's dogs, that's the whole Pavlovian conditioning thing. Yes. Moving on. No, you broke my brain a little bit there. That's all. I just like failed to compute for a second. Your rants and tangents, says Colin, are a masterclass in investment. Sometimes I even learn from the actual topic of the podcast. Needless to say, I'm a long-term investor and as such, I am trading with the myopic fund managers who are unable, unwilling, or not incentivized to hold for long.

50:40However, as you often state, these people have a wealth of knowledge and technology which I cannot ever compete against. Their buy and then sell, or perhaps the opposite, makes them, their bosses, and their customers reasonably happy. But these people are on the other side of my buyers. So here are my questions. Who are these well-sourced traders? How long does the average fund manager hold shares? Do any of them buy and hold even the best companies? What prompts them to buy and sell? Is it just short-term company forecasts, macro fears, excitement, or the sales expectations for the next six months?

51:14I need to understand more, says Colin, because if I'm taking the contra opinion, I need to know that I'm not the patsy in the trade, and that I have just longer-term goals than they are able to have. Thanks for your thoughts. Full on, and keep examining the man of straw, Colin. That's very, very, very good. By the way, Colin has a fool in his email address. I won't obviously read it out, but I like it, Colin. That's awesome. Very cool. Mate, lots of questions there. I am going to start with an answer, and then I'm going to throw you for the questions. I think the first thing you identified, Colin, is time frame.

51:47And so while we will talk about the questions that you've asked for, most of the answer between the two is just you and I work on different time frames to most fund managers who have quarterly and half yearly numbers. And so what's different? if you're taking the contra opinion, yes, the answer is absolutely, as you suggest, you have longer term goals than they're able to have. We can live through. Now, frankly, I work for the Motley 4, right? We make stock recommendations and our members are very unhappy when they go down, even in the short term. And if they go up quickly enough, they say, oh, your last, I've had, I would say three times I can distinctly recall in the last decade where I've had a member who said, look at your last 12 stockpits, 10 of them are down.

52:24You guys, you've lost your touch or you're not very good at this or it must have been luck the last time. and then when they go better no one says hey you guys are geniuses have all gone up again it's not to not to brag right it's not to brag at all um my key point of all out of all of that was just to say that there are times when just things suck and go against you and if i had to if i had to produce a three three monthly quarterly or half yearly report of what the portfolio that period of time some of those times would be terrible right i'm not hiding from that that's that's a feature not a bug because we invest and we recommend our members invest as long-term investors we don't try to play the three-month six-month game but honestly colin the biggest part of the answer is exactly what you just have assumed so let's go through let's go through the question and you can jump on some other ones who are these well-sourced traders

53:13faceless masses and all of them in different and unique ways who knows like cool you know i i here's the thing like even with fund managers right like we we like to sort of give them a hard time there's some brilliant fund managers out there like phenomenal investors um and and you know there i personally know fund managers who are just like diametrically different in their approach and they're both good they're just different right so it's sort of there's not one consensus on the other side there there's even within this so-called professional class there's huge diversity in approach and strategy and time frame and and the rest of it i would i would say I wouldn't think the mass and the evidence will tell you the average isn't covering the industry in glory.

53:56But there are some interesting edge cases, definitely. So I don't know and I don't care. Cool. Yeah, I can't have much to that other than to say they are smart people. Don't assume they know more than you. You don't have to compete against their technology because technology only helps you if you try and trade short term. There's no technology that helps you over multiple years, right? It's not a technology game. Can I clarify a point? I need to clarify a point. And I just want to say I don't care. I very much care about what the bear case is. I definitely want to know what Charlie Munger again, I'm quoting him a lot today, but you know, he says you've got to understand the bear case better than the bears.

54:31For anything that you hold, you need to be aware of it. So I'm not saying I don't care. No, I definitely care where I could be wrong, but whatever. All I need to know is once I've decided to buy something, is it available at a price that I want? Yes or no? Yes, it is. Great. I'll buy. If not, no, I'll wait. And that's as simple. because it's not that it wouldn't be nice to know, but you can't know. So it's kind of, it's sort of like a mute point. So when I say I don't care, that's why I don't care. Nice. I like it. I like it. The next question was, how long does the average fund manager hold shares?

55:08It's different again, because they're all different. But I would say on average, and this is more anecdotal than I've got no hard data to back this up, but I would say you'd struggle to see too many investors that, fund managers that have like positions they've held for like five years in their fund. Again, there'll be exceptions. There'll be exceptions but I imagine for the very big sort of, you know, the ones that people will know, I'm sure they don't. Here's the, and this is your point really I guess, is that you're playing a different game but you've got the edge. so what it's called it's called the institutional imperative and it's a really diabolically um big challenge because they are whether they're i mean you could you could be a really smart fund manager who's buying a bunch of stuff and let's say in 10 years time that's all going to be up 10x like it's just going to do really well but but you you're managing your business on fund flows people putting money into the fund and taking it out you have a bad court and everyone exits doesn't matter how right you were or what your thesis was.

56:12You were competing against that. So you unintentionally, but you shift towards shorter and shorter and shorter timeframes. And this is really, to my humble opinion, the last remaining true edge for the quote unquote retail investor is one of timeframe preference. Lower your time priority, right? And if you are competing quote-unquote against this quote-unquote smart money but you're playing a different you're you're you're both playing different games one of them they're they're running sprints you're running a marathon and and whatever whatever whoever's in front after the first you know 200 meters kind of doesn't matter it's worth saying too by the way mate the uh the person who wins the marathon isn't the one who does 420 100 meter sprints yes so there's i think your analysis your metaphor is a very very good one for both those reasons different games but also remember the investing is a marathon, not a sprint.

57:07So if you're competing against sprinters and you're a marathon runner, you're probably in a pretty good position, I think. I saw some numbers. The average turnover in the US in 2019 was 63%. So effectively, an entire portfolio gets turnover every 18 months. Wow. Entire portfolio. That's not some stocks that are 18-month holds. The entire portfolio on average gets turnover every 18 months. Yep. Do any of them buy and hold even the best companies? Yes, some do. The edge case, as Andrew says, we both know people, work with people who are very good at doing this. They're just unusual. and frankly the risk for them is that i just mentioned share advisor before the service i run if fund managers ran their funds away around share advice they'd have serious issues with keeping people and inviscid because their customers also are conditioned to want short-term performance yeah so it's a it's a difficult thing to be a fund manager with a long-term perspective because your customers look at magellan's fund flows yeah magellan has had a classic couple of years and people are banning them out a million miles an hour now maybe they're never worth investing with.

58:02Maybe they have suddenly got worse than normal, or maybe their fund investors are just even less patient than they are. So we bag fund managers. They've created their own, by the way, what do they say? You make your idea, you lie on it. They've created an expectation among fund investors that they can get good short-term returns. So what happens? They chase the short-term returns. We know the average fund does worse than the market, and the average fund investor does worse than the average fund because they chop and change chasing performance. So I won't say I'm going to defend those fund managers, but there's a reality of the business they've chosen and they've created and the incentives and the expectations they've created have exactly caused this sort of problem.

58:42Which is why, can I just say, which is why you may not have heard the term, but it's called index hugging. And it's very common amongst big funds because what it does is when it's, it basically it's, well, let's just have an ETF, but we'll have a slightly different weighting. So you've pretty much whatever's in the A6200, we've got it. You know, BHP might be 4 % in the actual one. We maybe are a little bit more bullish on materials, so we'll be 5%, something like that. Now, you're never, by definition, going to like massively outperform, but you're never going to massively underperform either.

59:14And when you're having a bad year, it's probably because the market in general is having a bad year. So is that a very – I mean, think about the pitch to investors. Like we're just going to slightly do a little bit different than the index, but we're going to charge you a lot more for it. and by the way the index tends to be to be pretty good but there's there's old generals there's bold generals there's no old bold generals right and that's that is that is absolutely the case when it comes to fund managers and they in their own again it's not necessarily nefarious thing but in their own best interests what do you want to be do you want to like really go for it shoot the lights out and be the next hero uh or more likely just get blown up along the way or or just just just hug the index and collect the paycheck and just do that for 20 years.

59:59You know, like the incentives are everything and that's the incentive, not designed, but the way that they've evolved, that's the incentive in the industry. Yeah. Let's just answer Colin's last question before we finish up. What prompts them to sell or buy? Is it just company short-term forecast, macro fears or excitement or the sales expectations for the next six months? Again, all of the above. You know, they read a bad report. They had a nightmare. You know, anything. They found a better opportunity. Who knows? Start with the aim, Colin, and work backwards. So if your job is to deliver a good six-month performance, then what do you attempt to do?

1:00:38You attempt to try and guess what shares might do best over the next six months. And if you do that, then you attempt to try and make guesses and then around and around you go. And you find different ways to try and convince yourself you can answer that question. So Andrew's point is all the above, but their main aim is, okay, I've got six months to demonstrate to my boss and my fund investors that I should be kept on. So I need to try and beat the market over six months and I have to go and try and find ways to beat the market over six months. And so I'm going to say, well, what can I do with that?

1:01:04And the answer is almost going to be, I'm going to try, you mentioned the Casey Beauty Contest, Ram. It's part of that. Everyone seems to like after pay right now. I'm going to buy some because I think the shares will probably keep going up. Or I think the economy is, maybe things would go a bit worse in the next six months. So I might get out of so-called cyclical stocks or you try and find, and it's not, again, unreasonable given the incentives and given the, if someone said to me, I had to pick stocks that might go on the next six months only. So by this time in six months time, which one's what I choose, I would start thinking the same way they are, which is first, I mean, firstly, I would say I don't know and I wouldn't do it.

1:01:38But gun to the head, you say, well, I guess I, maybe I should try and work out what people like now, what they're going to like more of in six months time. I'm going to work out what the economy might do between now and then. I'm going to find ways to try and convince myself that I know the answer or can work out the answers so that I can do what I'm tasked to do, which is get good performance over really short timeframes. Yep. I mean, this is an unrelated point, but I'll make it because it reminded me of it. This is why I hate the ASX share market game. Because if you want to win that thing, I mean, the person who wins it is just the one who takes the biggest, the boldest bet.

1:02:12And statistically, someone's going to, that's the person who's going to win. Now, they won't be able to do it again and again and again, but they are the better investor by definition of winning the game. And it's just like it incentivizes the exact wrong behavior. There'll be someone within that stock market game who's built a very robust, sensible, long-term portfolio that just maybe didn't do quite as well. Well, by definition, it's not going to do as well as the ones that happen to be on the extreme end of the bell curve for that particular six-month period. So you are guaranteed to lose or best do mediocre with that strategy.

1:02:45So what strategy are you going to do? I'm going to go for the flyer because it's the only chance, I might not win. It's a gamble, but it's the only way to win. That's if there's no downside. If there is downside of losing your job, you're going to index. I can go back to that same thing. Yeah, exactly. How do you try and make this work? We'll finish off. My nephew asked me literally over Easter, Uncle Scott, we've got to do the share market game at school. What should I do? How should I do it? And I didn't know how to answer him because you and I know the answer when there's no downside and there's only upside, death or glory.

1:03:17Death means nothing. Glory means you win. Yeah. but I also, as the guy who they kind of listen to and want to help them invest, I'm like, I don't know if I want to tell you that's how you win this game because that's a really, really crappy lesson to lesson, air quotes to learn about what good investing is, right? Because winning the share market game has nothing to do with winning and investing over the long term. They are entirely, entirely different things. We've got performance tracking on Strawman for our members. So you can look up what your performance has been three, six months. No one takes it seriously.

1:03:47Why would you? I mean we measure it because it's there to be measured we've got the data but I don't I think people naturally go no I want to see this since inception and it's more the people who have gotten good returns over multi-year periods and that is just sort of sensible so it's just such a shame someone at some point in time had this idea of we really should encourage and teach investing I am fully on board with that and this perversity of, I don't know, has just come out or is it like, actually, we are teaching all the wrong lessons. Kids come away from that thinking that it's all a gamble and they're right by what they've been taught.

1:04:28Gosh, it's a tragedy. Let me quickly to just give a quick shout out to Pearl. I know I do it semi-regularly. Again, I have no dog in the fight at all, but I like what they're doing. Their performance is just all-time tracking. Yeah. The graph you see when you log in is just what's happened since you opened your account. Yeah. No, you know, you can choose other time frames if you want. I would discourage it, but you can. But that idea of just starting from here and here's where we're going and that's what we're doing. Here's the long-term story. It's a nice reminder as a default. Rather, what am I share price done in the last five minutes, today, last week, last month, last whatever?

1:04:59It's like, well, how am I going over long periods of time? Because that's more likely. The longer the time period, the more likely the result is going to be representative of the ability of the fund manager, stock picker, yourself, market, investing generally, all those things. Yeah. Yep. Well said. I reckon that'll do us, mate. Yeah. Yep. I think we're done thank you for joining me for another podcast if you want your question answered hit us up info at fool.com.au follow us on all the socials Andrew is exclusively still on this new business called X apparently because Elon Musk has merged Twitter with X Holdings so make of that what you will probably nothing but you can follow Andrew on Twitter slash X slash Doge as the logo was changed to because Elon is a 12 year old boy don't get me started you can go to at Sage underscore Simeon or at Strawman Invest if you want to follow me on Twitter or Insta.

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