Mailbag: incl. In whose name should I invest? June 11, 2023

27:42Even better when you compound it. Well, here's my point, right? So I think it's roughly$300 a week sort of saved. Now, not everyone's going to be in a position to do that, But it's just amazing how fast that can grow. So that's just saving and getting 0 % interest, right? So if I can do$320, whatever it is a week, I'm going to have$50 ,000 after five years. 156 times 300, I think it's something like that, right?

28:11And then at that point, now you've got something, you just assume sort of average market growth rates or something. You've actually got something that itself is contributing five grand a year further to that to that compounding machine as well so anyways chatting to a mate the other day he's always sort of struggling to you know i've never got any money to invest and i was like dude if think about it as a case of beer a week you know you pay 80 bucks for like a carton of beer right you know so if you can do i'm not saying don't enjoy life right but i'm just sort of saying there are i think all of us can there are i'm not saying i'm not trying to preachy and say, don't drink beer, whatever it is in life that you can easily rationally afford and enjoy doing.

28:50There's a few cup bites you can make. And all of a sudden that's like, it's more than four grand a year, right? And you do that over like a 15 year period, you know, and you were throwing some compounding, you got a hundred grand to your name that itself is probably generating close to 10 grand a year on average for a very, very small sacrifice. It's just the real point of all this stuff and the nuance and the weeds that we get into here. It's just like, I know I keep coming back to it. Spend less than what you earn. Enjoy life by all means, but put it away. And you'll just wake up one day and go, wow.

29:24And you're going to find that each year that goes by, the wow factor increases because it's really nice to earn a 10 % return on 50 grand. I'll tell you what's nicer, earning 10 % return on 500 grand. That's really cool too. So yeah, I want to call it out. Yeah, well done, Brian. Can I add to that too? speaking of being preachy and speaking about i think reflecting back to friday's podcast um i i'm i'm gonna just preach for half a minute um which is just you mentioned the case of beer and the millennials are tagged with their smashed abos and that kind of stuff and that you know the abos aren't going to save you much the beer will save you more um by the way if you drink a case of beer a week maybe maybe ever think about how much you drink that's not health advice or financial advice um i guess i wanted to you know you can save some money by cutting back on smashed or coffee you can save money by cutting back on beer you can save money by cutting out a streaming service that's costing you 15 bucks 20 bucks a month right that they're real savings and for plenty of people that is the difference between credit card debt and and you know not having that debt so they're not i don't want i don't want to for a second um suggest you shouldn't do any of those things again if you drink more of the case of you maybe cut back for your health as well as your wealth uh but uh the no judgment by the way but um i guess what i wanted to make a point about the bigger things you know if you if you think about the car you drive particularly if you have a lease if you think about the house you own uh particularly if it's bigger or fancier than you need it to be again as rams said you make your own life choices you make your own decision do whatever the hell you want but the savings that come from a smashed avo or a coffee or a again maybe a six-pack a beer um are very very different and much tiny relative to the ability to constrain your own lifestyle expectations and lifestyle inflation, right?

31:10You can drive your$80 ,000 Audi or you can drive a$35 ,000 used Audi or a Commodore or whatever else the cool kids drive these days. I drive a Hilux. So please yourself, I'm not saying I should drive a Hilux. They're very good cars. I guess I'm just making the point that the money you can save, I mean, look, if you buy, I bought a used, again, I'm not telling you about to do this, used$35 ,000 Hilux right I could have bought a brand new$80 ,000 Audi you know and if and if that's you buying the Audi or whatever the 50 grand you save there so about saving$50 ,000 by adding saving money every week you literally have that in your back pocket just by not buying the car in the first place if you finance it it's even more than that because you've got to pay the interest over the time of the length of time during the the lease or the finance period and again I'm not saying don't drive nice cars I'm not saying drive nice houses I'm just saying that those are the things that can really meaningfully change your financial future and you can work like buggery to try and find a hundred dollars saving on your insurance or fifty dollars on you know streaming over a year or whatever else you want to do and again do those things for sure but i just encourage people also look at the big things not just the little things because that's where there's that that that is that is honestly the difference between potentially a very very large amount of money in retirement and a nice car for your working life and then significantly less in retirement.

32:26And if you want to choose the car, choose the car, knock yourself out. But I just want to make the point, mate, that we don't often talk enough about making better big decisions. We talk a lot about saving a cup of coffee or doing something else. I think both together are worth thinking about. Actually, I'm glad you raised that. Nothing drives me more crazy than people saying, oh, if you just cut back on the avo and toast. I know that's become a meme, but the general sentiment has not gone away. You see it crop up all the time. then you'd be able to have a house. I actually saw this wonderful tweet from Tarek Brooker the other day, avid commentator on Twitter.

32:59And he was just playing around with some average numbers and said, how long would it take for a medium household to save 20 % deposit on a medium home? It's a reasonable question. Base 3 % wage growth, 5 % house price inflation. So there's always assumptions in here. But saving 15 % of their household income. And it's an interesting analysis in the sense that it took 13 years to get ahead, right? Guess what it was for a house? You might've saw the tweet. I didn't actually know. So tell me. Infinity. In other words, you never get to 20%. Now you would have, the mathematically minded among you would have said, well, because you just assume 5 % house price growth and only 3 % wage growth.

33:39But however, that is the circumstances a lot of people find themselves in where the houses are growing much faster than wages. So even if you're the average person looking for the average home, even if you're saving 15, 15 % saving on household rates, very high, right? Like it's much higher than the average. So you're doing everything that you kind of can. You still can't get away. You still can't get ahead in that set of hypothetical circumstances. The longer you're on the marathon, the further in front your competitor is getting. Yeah. So, I mean, you know, all I'm saying is, is where appropriate, cut back.

34:10Don't live in a tent eating two minute noodles and stale bread. You know, enjoy life. But I just want to make the point that it can really sort of add up over time. but yeah don't don't don't don't be a don't be a dumb boomer and just blame the kids on not you know being being being it's their fault for not having a house like really sticks in my crawler correct correct i like that hey mate one from andy hi gentlemen that's very kind of you any two more gentlemen second time writing in i have a few tangent inducing questions for you both to indulge in well that's it clear my schedule this is going to be a long podcast uh it's your fault sandy all right well i was gonna say we'll do our best not to but i can't even promise that let's go question one do you both believe the inflation story can have a long-term effect on share prices like it does on tangible assets or are most investors more focused on cash flows and earnings say my buying power is cut by inflation does the market reflect this to say buyers actually require more dollars to buy a given share yeah yep yep i don't think so implicitly i don't think it's something we think about as much as probably we should but it should i mean whether it's pesos or aussie dollars or whatever it's just like whatever what are these companies doing that's what they're delivering that's what they're aiming to deliver more of this thing that we sort of measure the value in.

35:31And, um, you know, so it is, it is, it is, you can't divorce the two. There's no point if my company makes 20%, it does 20 % profit growth each and every year, but inflation's at 30%. Like I'm going to factor, I'm going to factor it in. Right. Um, yeah, I have that being said, I don't think, I don't think enough of us do, um, as long-term investors. And it's why, when you look at real rates of long-term return, they tend to be much lower than what we tend to quote because you've got to take off. I mean, what matters here, it's just a number, like double the amount of dollars or half the amount.

36:06We're using a ruler to measure something here. And if the rule is going to keep changing in length, it's going to fold back into the calculation at some point, even though it might be easier to miss over short periods. And frankly, look, in most developed markets, most of the time, it probably, hopefully, won't be much of an issue that it's going to swing the dial. And the other thing to remember with inflation is it's across the board. So, you know, it's not going to, whether it's emu farms or shares or property, it's a consistent consideration across everything. Yes. I think that's largely true.

36:47I will share a couple of different thoughts, maybe even contradictory thoughts in some senses, Ram. So tell me your thoughts when I'm finished. No, hit me. um so breaking it back a little bit i think the first thing well i'll do i'll do a scott morrison i think i said with julia gillard once got in trouble for it whoever one of them one of them said it uh i disagree with the premise of your question andrew uh andy sorry uh not because i disagree with ram's commentary but i think i will say if you're asking that question you're implicitly maybe attempted to think about what do i do as a result and if that's the case then And the other thing I would just say to you is when you say, does inflation have a long-term effect on share prices?

37:29I mean, it could, but then inflation has to be high for long periods of time to even have that question being a valid question to ask, or at least the answer to be materially useful to you. So I'm kind of dancing all over this. I guess what I'm saying is, like everything, if you're only thinking about high inflation, you're missing the chance. If you'd ask in 1991 or 1980 or 1977, when the oil price shock was going through the economy um you know what happens if what you know what's going to happen with the sheer price with long-term high inflation and we could have had the conversation that the next 40 years were remarkably low consistent inflation and so the answer to the question may have been technically or theoretically right or useful um but it may not have necessarily been very worthwhile because we didn't have that scenario unfold so that'd be the first thing i'd say second thing is i i have an interesting thought that's different to yours ram so i love your thoughts you probably thought more about this than I have.

38:24But to some degree, share prices are more likely to be impacted by interest rates, which I guess themselves are a function of inflation, an indirect function of inflation. So to some degree, the so-called discount rate, when I can get 5 % in cash in the bank in a term deposit, do I want to earn 6.5 % in shares? Probably not. Now, if I get 10 % in shares, I'd probably do it. But there is some element of that. And we find that higher interest rates tend to push down prices. And higher interest rates tend to be correlated with inflation. So indirectly that's that's probably true last thought is just one of share prices tend to be a function of earnings the multiple matters the multiple is probably what gets meaningfully impacted by rates that i just mentioned but inflation will play its way out right through a company's profit and loss statement and arguably eventually its balance sheet and i say that because we have to think not just about if you so if you had an annuity if you're gonna get a dollar a year forever um would inflation impact the price of that annuity yeah absolutely because if i got a one percent return when inflation's at zero that's worth something to me when inflation's at three percent i couldn't sell that thing quick enough and somewhere in between is the reality so i guess but but in in the case of shares where this is unlike say a term deposit or a bond is you would hope companies just generally make more money over time if they have pricing power they might even be able to entirely offset inflation over time and so when we say impact on stocks i say yes but different companies in different ways because inflation will only impact just the price we pay for the asset or for the earning stream, but inflation will impact that earning stream itself.

40:00And so you've kind of got to think through both of those things at the same time. Yeah.

40:09Actually, no, I mean, that's what I love about this. I love about the mailbag because I mean, I think you pick a lot of these questions and you just find that you go deeper and there's a lot to be. because we demonstrate there's a lot to be said about so many. And generally it sort of asks more, it opens up more questions. Here's the other thing, you know, if you want to protect yourself from inflation, what do you want? You want scarce, hard quality assets. They always go up in value. And so shares is a very broad term. There's a mining speculator out there. And there's also companies that are extremely deeply motored cash-generative machines.

40:53And you'll find that they tend to be pretty good stores. Woolies shares are scarce. There's only so many of them, right? And what you will, I think, could say, whatever your view on inflation, is that they will probably be pretty inflation-resistant in the sense that they're non-discretionary. I mean, inflation means they're putting their prices up, right? So they're kind of sort of hedged to a natural degree around that. And just the expectation from the market that inflation is going to be a thing. We touched on this the other day when using Woolies as an example, but I think that sort of folds into it.

41:35So what am I trying to say here? What I'm trying to say is if you, I think, consider inflation, absolutely, but it's consistent error across the whole thing. But you want the kind of companies that can weather an inflationary environment and those that can, by definition, will themselves find their asset prices pretty inflationary protected. I mean, again, come back to this idea that money is a ruler. So whatever sort of, and you measure that ruler against something that is harder and more finite, one is going to move around much more relative to the other. So I would always bet on not the exact number of what earnings per share might be or dividends per share in real or gross or nominal terms or whatever it happens to be.

42:20But if you've genuine – this is why investing at its heart is really just a meditation on value, that little word that just means, so what does value mean? How do I think about that? How do I put numbers on it? How do I even measure value? It's really, really, really hard to kind of do. but just to keep it basic, if you've got something that is genuinely valuable, because you've got to, I could stick with Woolies, an economic machine here that can pretty reliably adapt to these environments. And they'll have better years than others, don't get me wrong, they'll make bad investment decisions. But has that quality of at least likely to be very durable, likely to be very long lasting, and likely to be fairly inflationary, that will in itself attract a premium.

43:07And when there are inflationary environments, you'll find that the share price will adjust. Maybe not in real terms, maybe the share price, maybe over the next five years, Woolies goes up 50%. And in aggregate terms, inflation is not each year, but over that five years, if we have 10 years, like five years in a row or nine or 8.8 % or whatever it is, that's exactly what you get. You've actually stayed absolutely still in your purchasing power, but that's still a pretty good outcome because wealth preservation is... Relatively, that's right. You know, that's great. So I don't know, just throw some more thoughts in there to complicate things.

43:41Love it. No, really good thoughts, man. Here's the second question from Andy. He says, does the fact that super funds and fund managers that attempt to track indices such as the ASX 200 or 300, that continue to buy large parcels of large cap shares regularly, does it actually account for some of the large caps having fairly hefty multiples? Names that come to mind are CBA and Woolworths. you said w w andy because you didn't hear my rant before but just i'm going to assume you would have changed your question had you heard i know these are both quality companies but it seems mostly all investors have had the same thesis that they are both overvalued i'll take first swing on this one mate um uh i i'm gonna i'm gonna i'm gonna just for fun of it speaking of tangents i grab your last point andy about it seems mostly all investors have the same thesis these are both overvalued uh the market is the market will tell you exactly at any point in time what the market is thinking and so when you say most people think this is over those are overvalued what you're saying is the people i'm listening to uh believe they're overvalued uh the people who still hold them don't think they're overvalued the people who are buying them because someone's buying them every day don't think they're overvalued now someone's going to be wrong uh i think there's a there's a thing called a valuability bias right and it's just a case of you know who do i listen to if i listen to enter all day i'm going to think bitcoin's not crypto and the best thing in the world right and maybe he's even right if i listen to some other people on twitter one particular i'm thinking of andrew brown g'day andrew you're probably listening to this one but just for fun he actually puts anti-crypto on his profile uh description uh if i listen to him i'm going to think something very different now i would say it seems most people think bitcoin's a hoax or it seems most people think bitcoin's gonna be fantastic uh i shouldn't mention bitcoin what are you doing to me here i know i know uh but but broadly broadly my point is you know we say mostly all investors have the same thesis, I would actually just respectfully disagree with that almost by definition based on what we see in the market.

45:32So there's that. In terms of the indices, I'm going to just take you back at half a step. You say just the fact that super funds and fund managers that attempt to track indices buy these companies. It's a bit of a chicken and egg problem because if you're tracking an index, you buy it because the price goes up, but you're not causing the price to go up to someone else. You're just buying it because those things are happening, right so if you're tracking an index you are buying each company in proportion to its ownership and there is no i guess maybe the asx 200 versus the bottom 20 stocks maybe there's more buying pressure on that than the other uh but that's not necessarily the super funds or fund managers per se i would i would encourage you to think about that as everybody adding money to the market in their own preferred option there are emerging markets i'm sorry emerging markets there are small cap investors who just, Andrew is a small cap investor.

46:22It's like, well, if people like Andrew keep adding money, won't they push up the PEs of small stocks? And somewhere in between. Over the last 18 months, the PEs of growth or tech stocks have absolutely been destroyed. I think it's tempting to think about it that way, Andy, and I understand your approach. The market will value these things at what the market thinks they're worth. As soon as a super fund buys it and pushes the multiple up, anyone owning CBA who says, finally, I'm out. This is too expensive. I'm selling it. This is ridiculous. we'll push the price back down. There are always two sides to every single trade.

46:53Yes, money being added to a market in general will have an upward pressure on prices in that market by definition, because there are more and more people who are trying to invest over time. Demand and supply as always. You know it, right? Like any market, when you add demand and you don't add more supply. Now, by the way, new companies are being listed all the time. So there's always those things moving around. It's an imperfect thing. I would suggest to you that it's probable that Australian shares are higher than they would be if there wasn't a superannuation system, because I think that compulsory savings probably wouldn't have happened to the same size without it.

47:24So there's probably some element over a very long term to suggest that might be pushing prices up more than they otherwise might be. That being said, we know there is growing wealth inequality, right? Let's not get political about it, it just happens to be true. There is more of national income going to capital rather than labour. Where's that capital going? Well, some of it's in cash, some of it's in something else, some of it's in shares so again is that happening globally probably yeah um but also there are still businesses out there that are trading on single digit pe's and if the market chose to it could allocate money to those single digit pe companies i thought they were better value or small caps the small cap funds should be going bananas right now if people went cba is too expensive i'm going to go and invest in small caps i'm going to find a great small cap manager invest in them or i'm going to jump on straw man or follow the motley fool um and do it myself so i think there are some there are some impacts and likely trends that do have a macro impact on these things over time.

48:19I think they're really, really small. I don't think they're meaningful. I'm not even sure if they're measurable. Maybe they are. The super thing seems to be large enough that it might be having an impact. But I don't know that I would suggest that CBA and Woolies, for example, are more expensive than they should be because of that thing going on. If anything, it might be the whole market. And if it was, you look at CBA and Woolworths, for example, ANZ is half the price of CBA. If you're tracking an NX, you'd buy both. So I don't think you can necessarily pin individual company valuations on that kind of market-wide thesis of more money being thrown at these large companies.

48:55Ram, am I wrong? No, I don't think so. During the ascendancy of ETFs, I remember lots of active fund managers coming forward, crying foul, and it's unfair, it distorts markets. It's like BS. Like it does. You next time you go in the whole market, then we won't get any pricing. It's all rubbish. I mean, again, they should be cheering for it, right? If it's really distorting market prices, I mean, you're an active stock picker. You want a distorted market, right? Like perfectly efficient markets are not the friend of the stock picker, right? So it was a stupid argument. I mean, where it's true, you highlighted it well, so I'll say the same thing slightly differently, but it's more about the new money that's coming in.

49:36If I've built my billion-dollar ETF and I've got a position in everything and the market goes up, well, the market's gone up anyway. I've re-weighted just by being there, right? If the market falls in 50%, I mean, or one company within the index changes, like the very act of that movement automatically re-weighted me. So it's the new money that's coming in. And you could argue that, and I don't think this is a fair argument, that without ETFs, a lot less people would be investing. New money would be coming into shares. Now, as you say, it's about the question of how it's allocated. So it turns out that an ETF provider is doing it on your behalf and investing against a certain agenda and methodology.

50:14That's fine. Maybe not as much would have been there. But again, if there was these big distortions in there, someone would be selling. It would sort of average it out. So I think it's – I love these questions because they really do get you thinking. but the the thankfully the answer practical one is an easy one which is don't sweat it nothing to worry about i think that's i think that's pretty right um i'll let you go first on question three from andy what are your thoughts on employee share purchase plans i'm currently employed by one of the larger companies on the asx and they offer spps to employees being of the younger generation bastard i am working a few jobs to try to get ahead in my early years well done so tax on this income from this secondary employment is increased and because the purchase plans salary sacrifice i.e pre-tax and don't require brokerage am i wrong in believing i'm able to get shares in this company for a discount on the current share price around 20 as this is my tax rate p.s i have no issues paying my taxes i'm not trying to avoid paying them we shall do our fair share to help in a thriving nation we call sorry help this thriving nation we call home prosper i'm just a sucker for a bargain share price when i can get one we all are we all are yeah hopefully i haven't led you both down a slippery path towards going tremendously over time for the podcast keep up the awesome podcasts kindest regards andy yeah great question right spps um so i love them conceptually i love them um it's usual it depends it's like um executive shares and short-term incentive.

51:49So it gives you alignment. I think you're going to be a more engaged employee when you've got an ownership stake. I just kind of care more, right? So I love that. I love it too, even from a business perspective, because it's a form of remuneration that isn't cash. So as long as it's not hyper dilutive to other shareholders, it's a great way to sort of attract and retain and align people. So it's just, it's hard not to like it from that angle. You just want to make sure it's equitable. You don't want to make sure that it's too onerous in terms of what you're able to do. And fundamentally at the base layer of it all, you've got even if shares seem, and you're right, on an after-tax basis, they are cheaper.

52:32You are getting a discount because you're paying with pre-tax dollars, right? With your salary tax. So it's unquestionably a discount than what you're getting on market. But if the thing's going to zero, who cares, right? Like whether you get a 20%. So you need to have a view that it is a company that I would want to invest in anyway. And if all of that is true, I love it. I think it's a great option. Yep. I mostly agree. Two thoughts from me are one is the concentration of your employment remuneration and the shares you own. um plenty of plenty of Lehman Brothers employees had had you know most of their super or their versions 401ks in Lehman shares um that was doubly painful for those people so just just just be mindful of that I don't think it's a reason not to do it but just just be mindful of what the rest of your portfolio looks like and where you're doubling down the other is both a positive and a negative when you're working for a company it's really really really easy to see what you love and it's really really really easy to see what you don't like about the business you're working for and that can absolutely change your view uh i have yeah you have a bad manager that you can't stand right but it happens to be a really great company your your day-to-day is like oh this guy's an idiot and just it's frustrating and rah rah but yeah maybe the business is still good good point what's it like working for a bad boss at straw man mate yeah he's great he's brilliant so there's that but but it's also it's not just manager mate i've worked for businesses where i looked at the decision being made and thought these people are idiots and the business succeeded anyway so there's also just that element of kind of like just being humble about how much you think you know and and not letting your experiences of the manager or the company itself or whatever overwhelm the results of the organization there's just that there's two two different parts at the same time and like anything um invest in the business based on its customers not your own perspective if you love a particular product everyone else hates it it's probably going to do very well if you don't love a product i'm never going to buy levisa costume jewelry ram it's not my thing funnily enough um if a lot of people love it well that tells you something about the business right so the same is true of the businesses themselves make sure when you have a view either good or bad gee i love my boss he's such a great guy i can't see how we'll possibly fail but you're working for Kodak.

54:54There are just some realities around thinking about what that looks like and just make sure you keep that in perspective. Again, not saying you sure shouldn't do it, just some additional thoughts on back of RAMs. Much more excellent answer as different ways of thinking about what's going on. Also think about the T's and C's a little bit, just to be aware of them. It might be that you can't sell your shares for five years. By the way, that's exactly how the company should structure it, right? Because it's not here for you to get a bit of a discount flick on market and make an easy buck right it's more about creating that long-term incentive but it's a consideration for some if it's like well i get to do this i get to use pre-tax dollars i really like the company all of that oh i can't sell for five years well your life i mean it's just it's a it's a consideration that means that the the the money is not going to be available to you uh for a time and again i said i think it's appropriate for companies to put some uh escrow periods in there because it becomes too much market casino but yeah be aware of it i should Just to say for the record, I own some Motley Fool shares.

55:52They're not publicly listed. I don't normally disclose them in any other context. But in this context, I have bought them. The Fool is very generous with equity grants to employees as well. Now, that's taxable as well. It's only issues. Just be mindful of those tax implications, by the way. Often when the grants are provided, that's taxable. Then even if you don't sell the shares, there's certainly been some cash. Yeah, so here's$10 ,000 worth of shares. We're going to tax you on that. But I didn't get any money and I can't sell my shares. It feels like an impost. And for justifiable reasons, it's quasi-income.

56:26Startups in particular do it instead of cash, and you think, well, hang on, if I'm getting a benefit, I should be taxing that benefit, but it can be brutal. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

56:41Hey, mate, let's finish off with a question from Stephen, or an email from Stephen anyway. there are at least two lines where he's uh he's responded in capital letters so uh just just just buckle in for us okay scott and ram he says firstly congratulations on your podcast and the breadth of issues covered it's a nice way of saying we tangent a lot i think also thank you both for your commitment contributing to providing a tremendously important source of education to your listeners about me says steven i'm an old bloke who started first started investing in the share market in 2007, just before the GFC, he says.

57:17In the early days before podcasts, the only thing that kept me from panicking or jumping from a balcony was the marketing material emailed to me every few days from The Motley Fool, assuring me things would eventually get better and the dark days would pass. I know you've been critical of some of the marketing, but believe me, it kept me sane, for which I am extremely grateful. In case your listeners are unaware, the fallout from the GFC was quite extreme. Even though I could pick up shares at great companies at huge discounts, the overall decline in prices for the blue chip shares I own was so steep that my portfolio only returned to the black in 2010.

57:53I'm going to stop there actually, mate, because I want some of our listeners to just think that through. Bought shares in 2007. I don't know whether he was still buying in eight, nine, and 10, but it took three years before he was made whole again. And you made the point earlier, Rambo, about recessions, not if, but when. There will be another share market slump like that one. And three years is a bloody long time to stay in a market when you're looking at red on the screen every single day and it hurts and you feel like you've been stupid and made horrible mistakes, done all those sort of things.

58:26And it's really, really easy to give up at any one of those points in time. Had Stephen done that, he would have crystallized a loss and not been made whole. Again, I'm promising the next one will be like the last one. I just wanted to use Stephen's example to give a face or someone other than us to just remind people that things can be like that from time to time. Oh, it's brutal, by the way. Like that is... Three years, 750 trading days where the market's telling you you're an idiot and this share investing is terrible and you lost money and you worked hard for that money and you sacrificed to save it and the market just took it away.

59:01It's a really, really, really massive head something. It just feels like such a long time too. In retrospect, you can go three years over an investing career. I can deal with it. Gosh, six months is brutal. Ask me. The last year has been brutal. So actually, a very quick interjection here. I saw something the other day. I wrote it up for Strawman. So between 2019 and 2020, Berkshire Hathaway, Uncle Warren's company, underperformed the S &P 500 by 37%, right? So that's a big fall. A third. Yeah. Yeah. And so it wasn't a fall. He went forward. It's just that the S &P 500 went. So investing in Warren in 2019 meant that you massively underperformed for two years.

59:49It was actually one of the worst relative performances he's ever had. Mark, you're up and up and up. You've got Berkshire thinking, bloody hell, I knew I shouldn't have bought this boring old-blood company. I should have been buying this off that's going up instead. Interestingly enough, and this will sound familiar, he was criticized at the time for hoarding too much cash and not investing enough in technology stocks. I was kind of like, you know where I'm going with this story, right? So, well, look, the other thing that was interesting, I found a chart that showed Berkshire versus the S &P 500 going back 20 years.

1:00:22And what was interesting was that, so let me emphasize this. we're talking about Warren Buffett, right? Like probably one of the greatest investors that ever lived or definitely one of the greatest investors, probably the greatest investor that ever lived. And not only does he underperform the market, but he regularly underperforms the market. Between 2003 and 2005, same thing. It was a brutal, brutal period for him. Same in the late 90s. I mean, he's been doing it for 50 plus years. So it's happened a lot. The other thing is what was interesting is there were periods where Berkshire, a very conservatively run company, Actually, so forgetting about relative performance, in actual terms went backwards.

1:01:02The share price of Berkshire went down in years where the market went up. And I can see at least three or four instances over that period of time where that's happened. So the punchline is, of course, actually, since mid-2020, Berkshire has done twice as well as the market. It's up 63 % versus 30 % for the S &P 500. So he tends to sort of compound over time very, very favorably. But the point that I just want to emphasize here is that if someone like this guy is going to regularly underperform, sometimes significantly, and not just underperform but go backwards in markets that are going up, who the hell do you think you are that it's not going to happen to you?

1:01:43So this is one of the things I think you've got to own this really deeply, deeply, deeply within your most inner psyche. This is not a question of this could happen to me. This will happen to you and it will last for years at a time. Now, that doesn't mean there's not points of reflection and maybe you do need to change some core consider. Maybe the fundamental strategy is just broken. And this isn't just one of those unappealing periods where you underperform. It's actually, no, you're just doing it wrong. And the longer you do it, the more you're going to fall behind. But it does mean that, A, it's something that you've got to expect.

1:02:24And the lesson that Uncle Warren tells us is that his superpower has always been just being consistent in application, when times are good, when times are bad, and making sure that the process is key, right? So I've got a good process and I'm just consistent in it and I just keep doing it. And so I just, I wanted to stress that point because, yeah, I think the listener here is sort of, is probably going to end up at the same point in the story that, oh, it actually turned out to be really well overall, but only if you happen to stick at it and only if you were consistent in doing the right thing even when it wasn't easy to do so.

1:03:07that's a very good point always beautifully made um steven then continues anyway i'm writing in response to your comments early on regarding the growing level of social and financial inequality in australia it seems this is a cancer that is affecting many developed countries in the world google u.s inequality for example which is getting worse as the oils once wrote full marks for mentioning the midnight oil uh band in this steven as the oils once wrote quote the rich get richer and the poor get the picture. End quote. Great line. I'm reminded of two of your podcasts with Cameron Murray in which he mentioned his book, Rigged, How Networks of Powerful Mates Rip Off Everyday Australians.

1:03:47Just a quick aside, that was The Good Oil, if you want to have a listen about it. Cameron and I talked on the Aussie Firebug podcast, actually, about the superannuation system. And Matt from Aussie Firebug was kind enough to let me post those on our Good Oil podcast feed as well. So check that out. I can tell you it was a hard read and it made me very angry. because taxpayers, he says I'm referring to nurses, factory workers, cleaners, etc., are subsidising the wealth generation activities of the very rich, including some corporates who really should be stepping up to the mark and honouring their obligations to society.

1:04:18In his book, Murray refers to mining companies engaging in activities to limit the amount of royalties they pay, even when they are earning supernormal profits. He also includes property developers, especially in Queensland, who use their political influence to rezone land. In the ACT, there is a betterment tax, that is levied on developers to ensure society receives a fair share of the windfall. Both of these examples include the use of lobbyists who obtain exclusive access to politicians. Then there is a practice of staff rotating from government to industry bodies and back to government, including former ministers, immediately being employed by industry bodies on retiring from politics.

1:04:56He then says, referred to, apparently there's an index, he says, yes, eight pages of names and industry bodies. There are many more outrageous examples in the book, which I commend to you. In the final analysis, the first steps even out the spread of wealth in Australia is to end these and the other practices that unfairly advantage a small number of Australians at the expense of taxpayers. Stephen then says, rant on, which I think is his invitation to ask you to comment, Ram. Oh, wow. I mean, makes my blood boil, too. There is a lot of stuff like that that is – I think it's unequivocal, right?

1:05:36Like there is – I don't think anyone really would pretend seriously that there doesn't – you don't get a lot of power and influence with more money. You do. Let's just be real for a second, right? And let's also accept the realities of human nature that, again, it's not an evil plan, but we're always looking after ourselves as best we can. And, yeah, I think there is very, very big unfair advantage in a lot of the way that things are set up. I mean, I just – it's so – where do you go with that, though? I think we all can acknowledge all of this kind of stuff. The solutions are nuanced. They're complex.

1:06:16They're not easy. They're not even obvious. And so it really does – we could spend the next six weeks talking about it. But this is why I feel like things like the fourth estate are so important. You need to shine a light on things before we can even know that it's there to discuss. Just quickly, mate, the fourth estate being the media, for those who don't understand the reference. Oh, sorry. Yes, yes. Just pointing to those who haven't heard the phrase, the fourth estate normally refers to the media. A free and open and fearless media is just so important. We need someone who can speak truth to power.

1:06:50and it's just without that, it's sort of like, what else do you do, right? At the end of the day too, it's sort of like, it's kind of all on us. Like we need to sort of have our say through the democratic process. It's a very indirect kind of influence, but it's the only one we've kind of got. I think, I know it frustrates me to no end to people to say I'm an ex-voter. Whether it's one side or the other, I don't care. I just think it's the most, apologies if this is you but i just think it's the most unthinking dumb thing that you can do right it's not a football team that you'll love them through thick and thin they're people who actually have the power to to influence these very real concerns that that you have and just because they happen to be wearing the color shirt that you like is just you know so we we need to be more accountable to ourselves but the other side of that is is that you know when you're under the thumb and just trying to scratch a living you probably don't have that much time to to have the level of engagement that you need until, until there's riots on the street, right?

1:07:52Which is where, I mean, historically, when you look at a big arc of history, I mean, that's, that's where inequality leads in that direction one way or the other. And we're miles away from that, obviously at that point, but that's, that's where it's headed. And I think the U S is a really interesting use case, a test case there because it's, it's, it's very much going in that, in that has been for a long time, but I feel as though things are coming more to a head over there. And it's a glimpse of the future for ourselves. If we don't do it. I think the, I'm sorry, man, I'm going all over the place here, but I think that's what, that's what we're invited to do, mate, knock yourself out.

1:08:25Too often it comes back to ideological premises and stuff. And it'll be like, well, you don't want people to take risks and be entrepreneurial and create value and everything should be a socialist, a utopia. It's like, no, it's just dumb straw man arguments that get thrown out there like that. But I think I'm one who hates buckets. So I try to sort of not put myself too firmly in one. But I think you can recognize the importance of free markets and all the rest of it, but still have, still have, still recognize that while a profit is a powerful incentive mechanism, once I'm Kerry Stokes, you know, the extra$10 million in profit I can make this year is very little incentive needed or driven there.

1:09:07We can structure things more appropriately where we get the best out of capitalism, but also make sure that we foster an environment where people can get ahead regardless of their circumstance. I'd like to think some poor kid being raised by a single mom under difficult circumstances in a housing estate somewhere could eventually become i know it's cliched but eventually become the prime minister or the ceo of commonwealth bank or something like that not because mommy and daddy sent them to a private school and they've got this old boys network that they can rely on and you know all of these other and and you know i happen to go to school with this bloke here who's now on this and he used to work for this and now he's in there and it just and i use the term him and his very deliberately because let's face it that's where most of this dodginess sort of happens so i don't know man i'm all over the shop there it frustrates me i i wish i had an easy answer yeah i am um i'll try and not to go off such a long run not because andrew is bad just because we'll try and not go on for six weeks as you said no it was great man i'm just i'm just saying i don't want to i don't want to cover the ground you've covered necessarily and we're deep into the podcast but But I, so again, where do you start, right?

1:10:12I want to say firstly, I'm very, very, very lucky and very thankful. And this is not to give my own company a plug for the sake of it, but I get to spend a lot of time on this podcast and on Twitter and other places talking about public policy issues that aren't ostensibly directly related to my day-to-day job, right? If I'm employed to pick stocks and I'm talking about population policy or negative gearing or, to your point, the fourth estate, mate, you know that the the the role of of a free and fair and open press i mean yeah are they tangentially related yeah if i try desperately to link them most people in my position don't get the flexibility or the opportunity to do that and if they do they're going to be mindful of who they're annoying and who they might want to raise capital for or which government's in power and regulating their industry or you know all that kind of stuff so i just want to say you know um thank you for the question thank you for the opportunity to to answer it but also you know The Motley Fool is very, very good to me to let me have these conversations completely free of any influence or restriction whatsoever.

1:11:11And sometimes, by the way, things I say are not things some of our members want to hear. Because I will say, for example, I think taxes should be higher on resources companies. I own shares in Fortescue. I don't care. I want taxes to be higher. I think policy beats profit, right? It just does. We want a country that is a great place to live and work um and all the things that i think we actually think in our in our you know more gentle reflective moments that are important for any society things that are morally and ethically appropriate and right and better um and fairer and all those things i think we you know i hope i want to believe most of us still believe those things are important um to ram's point we have developed into a society where things feel so precarious for everybody that you've got to look after yourself because if you don't, you're worried no one else is going to.

1:11:57And that I think, without worrying to be too rose-colored glasses or too simplistic about it, is actually the root cause of most of our problems today. The idea that if you win, I have to lose and I don't want to lose, so I'm not going to let you win. And so therefore, it's all about me. The individualization of society, I think, is one of the great disasters of the last 40 years. And I say disasters not to be hyperbolic. We all like to think Australia was the land of the fair go. Maybe it never actually was in absolute terms. We have improved a hell of a lot since on a whole lot of fronts, including for minorities and other people who didn't get a fair go.

1:12:28So, you know, it was always the land of the fair go for the white bloke, but maybe not everybody else. But those things we think were and are important, I think we've lost because we've got to the point of saying, you know, Andrew's talking about scratching out a living. That's absolutely true. But there are others who aren't necessarily or shouldn't be scratching out a living who are earning well and truly more than enough to have a comfortable life who still feel very precarious because of circumstances whether that's employment certainty or the chance to get another job or being able to pay a stratospheric mortgage or whatever else is happening in those sort of situations now they put themselves in that place maybe even they're responsible for it but when we get to that point as a society we end up encouraging even i don't necessarily think it's deliberate but we end up encouraging that idea of like i've got to make look after me because if i don't know what else is going to and actually that's the biggest disappointment of the last 40 years if we had more of a sense of i'm going to do what i can for myself and for my neighbors because we're all pitching together if things get tough i think we've lost whatever that we used to have i think that that's the saddest part and that is i think the root cause of a lot of the problems we're having now because you've got to get ahead no matter what uh i'll look after number one and stuff everybody else becomes the starting point and i think when you think about politics policy um the role of the media failure, the role of corporations, the role of regulators and legislators.

1:13:51I think there's, it's not a single point of failure. It's not a single cause, but it feels like all variations of the same thing. I am, by the way, self-interestedly, anyone investing should want for a more prosperous country in 5, 10, 15, and 20 years time if you want your portfolio to be higher. And the best way to do that, believe it or not, is to make sure that everyone in our society has what they need and can go and be an active part of our society because if you give Gina an extra dollar or Twiggy an extra dollar they're not going to spend it because they've got nothing to spend on they've already bought their private jets and limousines and whatever and that's not a criticism of them but you know when Gina earns an extra billion dollars she's gonna say cool I'll get an extra billion dollars that's nice now imagine spreading that money across I'm not saying we should take it from the rich by the way I'm making the point that someone who's not earning what Gina's on or is not as wealthy as Gina who gets an extra dollar is likely to spend that in the economy.

1:14:42Now, if you are a capitalist, if you want to make money from growing profits from the companies you own, you want people spending money at those businesses. So even purely self-interestedly, more money in the hands of those who would spend it is actually better for you, believe it or not. If you get past the envy and the greed and the otherness of some of these conversations, that is just the reality, right? Just purely self-interestedly. Think about it this way, mate. Think about it this way. if it's all about just being at the top of the pecking order, right? And be damned with the rest of society.

1:15:16If you're even in the, you know, even if you're in the second quartile of wealth in the country, from the bottom, right? There are plenty of countries you can move to where all of a sudden you're now in the 1%. Yeah, that's right. So that's what matters. Like it's just being the richest in society. Well, I ask you, why would you, I'm not going to do that because I don't want to name countries, but you know, there'd be like a dystopian nightmare full of corruption and crime and real safety issues and the rest of it. So there's a couple of things I think the very rich and powerful need to think about.

1:15:52Pakistan got a bit of a taste of this not too long. Or was it Sri Lanka? Pakistan. Is that it's not even being altruistic. It's about saying, yeah, I get that. We all want to be at the top of the pile, but I want to be at the top of a really good pile, right? Because wealth is all relative anyway. So it's just like where I can walk down the street at night where there's low crime rates, there's low drug rates, all the kids that go to school together are all, you know, no one's sort of being left out here. You know, this is a great thing to have. This is a great, wonderful thing to have, not just because you've got more customers for your factories, but you get to live in that society.

1:16:32And the other thing you've got to remember too is that the, Gene is a classic, right? It's all about her hard work. And I don't deny it, right? Like, okay, whatever. You worked hard, but your success was enabled by the society that you lived in. You could be just as hardworking and try your luck in the Congo, right? Where everything just would have been confiscated by the government and no one would have ever heard your name before. So the society that brought you those, I mean, you didn't do it in a vacuum, right? And I think we all need to sort of recognize that. But I've always liked the appeal of, I think you can debate where the line gets drawn, but I really like the idea of progressive tax rates that get quite extreme at high levels.

1:17:15Now, I mean, very high levels, right? The kind of levels that once you get there, you're not going to care that you're paying 80 % tax, right? Because you've got that much sort of extra money. I think that's really the easiest thing to do. But these are all pipe dreams. The practicality or the reality of them getting through are not likely. So I'm going to finish, mate. just with some broad thoughts and only because we're invited to and not to take up too much time. I don't blame rich people for being rich and I don't blame them for wanting to be richer necessarily. I think you could be, there are plenty of rich people.

1:17:48Buffett's going to give away 99 % of his wealth on his death. Bill Gates is going to do the same. He's been got rich doing things now. Buffett's giving away more than he was going to. He's going to give it all away on his death. Now he's giving away some more progressively because he wants to use it now rather than wait. There's lots of ethical conversation about who do you help and when do you spend the money. So my point is that rich people are bad. And I think my starting point very clearly is that the rest of us have all of the power in the world to shape the society that we want to live in.

1:18:19And you mentioned the free press, Andrew. I will mention things like the people that we vote for, the standards of probity and behavior in parliament that we expect. The fact that these things sound almost like pipe dreams these days is part of the problem, by the way. isn't it um there were there were things there's a set of conventions which are a bit old and stuff called the westminster traditional westminster conventions there are there are centuries old parliamentary um conventions that are accepted and used to be adopted by both sides of politics to deliver a respectful reasonable thoughtful polity things like for example this is this is a silly example but it's also really important pairing in parliament where if if a member of you know the Calathumpian party is sick or going to visit a relative or has a reason not to be in parliament the opposition party will say well I'm not going to take advantage of that I'm not going to use my vote on the floor of parliament just because you happen to need to be somewhere else to rush through something that's not in the in line with the will of the people so we're going to give you what they call a pair they would say well if you're not there I won't vote I will I will cancel out the fact you're not there because that's the right and respectful thing to do rather than making you be there just because if you're not we're going to screw you those things that's a really simple and really almost silly example but it actually is a really important one because it talks to the norms and the way we think a reasonable society operates and i guess that's my my starting point i think we as a society need to be more aware of and thoughtful of and frankly care more about the way our country is run from those people who are doing it you know the people set the rules about how much a billionaire should pay in tax is the billionaires fault for not pay more tax not really no can the government change it tomorrow of course they could and and should they yes they should and so i think what it whatever it is whether it's you know the tax cuts that mean we're not spending money on infrastructure or fixing the environment whether it's uh the the way a a particular politician treats donations or as as steven said their ability to jump from politics to to lobbying and back again because it's you know there's some money in it there's some no brain it's such low-hanging fruit in terms of things you could change right right i mean i'm just glad the the current government at least put the national anti-corruption commission in place we haven't seen it sit yet but that is a massive massive step forward to make sure these things don't get out of control i just think you know for all of to the extent you have the opportunity to and again ram said a lot of people scratching out a living just have to do what they feel like they have to do the rest of us owe it to ourselves and frankly the society we inherited right like we were given a society not because we were clever or smart or what worked how we just got born here or happened to arrive here right so that's if you're if you're in that situation use your vote thoughtfully and carefully vote against your own self-interest sometimes that that isn't that didn't used to be a surprising thing to say you know if i'm going to pay more tax but the government is going to do better things for the country then i'm going to vote for that government whether i like it or not i own shares in fortescue i'm going to i have called regularly on twitter for meaningfully increased resource rates will that hurt fortescue's profit absolutely will that hurt the share price of fortescue absolutely do i care well i kind of don't want to be poorer than I could be but is it the right thing to do of course it is so I'm going to keep doing it right and I'm not I'm no martyr I'm no you know I'm no mother Teresa or bloody Gandhi but there's just sometimes there's the right things to do and the right things aren't necessarily always things that make me richer and that shouldn't be a controversial thing or an unusual thing to say and I I feel like to Stephen's point the more the longer the further we go the more unusual that is and the weirder that seems the fact that the fact that self-interest putting aside self-interest for the national good is unusual or weird or somehow it makes me strange i think that's part of the problem yeah so it's all about the oh and i keep repeating myself it's always incentives get change the incentives low-hanging fruit right get rid of corporate donations to political parties bam gone right i just just just do that um uh truth in advertising it just seems like i can't believe that's even a debate that we have to have it's like well i know should we have what do you mean i have to tell the truth well what what do you mean that you you were you arguing that you should be able to lie in politically and there's a thousand other things that are like that which is which is you know that i mean pocock's talking a lot lately about the access that lobbyists have with the passes right i'm you know what i mean yeah and then it's just like he makes such a stupidly obvious point you kind of think oh we're even debating this like who who is on the other side of that debate going no i should be able to give lobbyists closed access to all the parliamentarians what's wrong with that it's like if you can't see what's wrong with that like that's that's a problem in itself so yeah it's it's diabolically difficult mate i i'm keen to read murray's book actually i did i did see it advertised and it seems like it i like i like a good book that'll make me shake my fist at the sky so It sounds like it's right up that alley.

1:23:08Just loading the gun. Just loading the gun. Yeah. A really quick example, and I will shut up. Stage three tax cuts. Oh, come on. I will benefit from stage three tax cuts by thousands of dollars a year, right? By the way, that's adding, I read the other day, that's going to add 1.5 % to inflation. And here we are trying to fight inflation, and yet we're pushing through this grossly unfair thing. It's going to affect only a very minority. Most people are happy with it, even though only benefits a relatively small number of people. Anyway, sorry, continue. It impacts more people than you would think, but the vast bulk of the benefit goes to people earning over$180 ,000.

1:23:45That's why the thing cuts. Other than that, it's reasonably marginal, yeah. I think most people, I think most income earners benefit very slightly, which is why they do it that way. They've kind of set it up that way, so it seems like everyone loses that if it doesn't get passed, so the high-income earners can get more. But yes, so I would benefit from that. if I had the money I would invest it I would be richer in retirement as a result I could give even more for my kids I could give more to charities lots of things I could do with that money it's actually just still the wrong thing for the country and you know I am yet to find almost anybody who will disagree with me other than those who benefit from it if I talk about it again I'm reasonably proficient prolific both prolific on Twitter and I have I say it regularly most people agree and a few people disagree and those people largely come from ideological perspective and whatever whatever uh and we can have that argument there's plenty of people listening here who will won't like what stage three tax cuts and you're welcome to them um i just want to make the point not that i'm right necessarily i'm just saying i think there's something about being able to say i wish it wasn't true but it is or it's not going to help me but it's still right you know it's easy to find someone who already believes a thing to say that thing over and over again you know either direction when someone says i will lose if this happens but it still should happen or i wish this piece of economic evidence trickled down right i wish trickle down was right it seems like something it should be a nice idea that if it worked that'd be lovely for everybody and i used to think it was the right thing and then i saw the evidence went actually it's not right i wish it was true but it's not so i have to change my mind that that that can be okay right that's that's when you start to make progress in society so anyway long and ranty stuff because steven invited us to rant um just to do what you can to do the right thing even if it hurts sometimes just because it just is the right thing.

1:25:28I don't know. Do you know what you want to think about? I think it's always careful what you wish for, right? I would encourage anyone to go to San Francisco right now. So one of the richest countries in the world, one of the richest cities in the world, beautiful city. We went there yonks ago. Actually, I wasn't with you at the time. That was a different company. Sorry, memories are mixing up, but it was brilliant. Like just clean, prosperous, lovely. you can't walk down a lot of places there there's like tent cities everywhere there's huge uh drug problems and they're in it and and and then you go another couple blocks and like the wealth is extreme and you kind of think really the people in the wealthy gated communities might say well it's all fine for me it's like is it though like look at the life that you you're only safe behind closed doors like uh there's misery all around you it's just like in a different reality where there was a more equitable society you're still at the top you've still got the champagne and the ferraris like what you you can have you can have what you've got because it's just it's arbitrary after a point it's just like extra digits in a bank account you know so you've still got that and you don't have to worry about sort of being you know murdered when you go out to to the chemist late at night anyway it's a very good point let's um let's conclude by agreeing that if we all try a little bit harder to improve society rather than just improving our lot it's probably a better country yeah nicely said i love that hey um i did talk about twitter so let me do that quickly if you are still listening and you want more to the four people still listening correct uh you and i and our producer and somebody else which is nice so three people uh yeah one person who's not one of us is listening uh if you do want to follow us on twitter please do andrew is at sage underscore simeon or at straw man invest i am at tmf scott p uh fair warning as I said, follow me sometimes for investing ideas, sometimes just for public policy stuff, because I feel like if I have any sort of voice at all, I should use it for good, which is probably an old fashioned thing.

1:27:28But I figure I could look my mum and dad in the face and not do the right thing. So that's kind of what motivates me. So yes, follow us on Twitter, on Instagram, the same at TMFScottP or on Facebook at facebook.com forward slash Scott Phillips money. As always, please be careful of imitators. Andrew and I's accounts have both been spoofed in the past so please be careful of those uh hit us up on email info info at fool.com.au and with that with one final rant fool on cheers the motley fool and people appearing in this program may have positions in the companies mentioned general advice only please speak to your financial professional to understand how it may pertain to your situation subscribe to the free newsletter at fool.com.au forward slash listener.

1:28:16The Motley Fool operates under Financial Services Licence 400691.