Mailbag: incl. Should I invest in private equity? June 30, 2024

30:48That's 100 % right. Hey, next question for someone who starts with saying, please keep me anonymous. And you know who you are. Despite your final comment, I won't dox you, and you're welcome. Just think about that for a second. Hi, Scott and Ram. Thank you for your dedication each week to providing us with two fantastic episodes. You're very kind. Being an avid finance, economics, and business podcast consumer, I can honestly say Motley Fool Money is my favorite. You know, it's anonymous. It comes from my mom. You guys provide honest feedback, advice, and best of all, you admit you're just doing your best like the rest of us and that nobody knows everything.

31:23I was asked on radio earlier, we're recording this when ANZ had just reduced their interest rate forecast. And I was like, what's your prediction, Scott? And I just went, I don't know. And you almost visibly, you know, audibly hear the host gasp. I don't know. Anyway, so no, we don't know everything. We don't know most things, actually, as it turns out. I had the very good fortune, says our questioner, of having a father teach me the importance of saving and investing from a young age. While I'd like to think my current situation is all me, I know it's only fractionally me because of the luck I had being born to my parents, now living in a developed country and having a supportive partner who tolerates my finance talks and monthly meetings.

32:00And I love the humility of that, by the way. So important. My question revolves around asset type diversification, specifically private equity funds. I always see a big allocation in super funds and endowments to private equity. but they've historically been out of reach for the average Joe, even above the average Joe, actually. For context, I'm 28, in brackets, sorry, Scott, with a partner who's 26, and we currently have a diversified share portfolio with four ETFs, Bitcoin, no other crapto, he says, one investment property, and the current house we live in, both homes mortgaged below 65 % LVR, and a stake in an SME doing reasonably well.

32:40Man, I'm a fan. Right? I know. We're coming to you for advice. In my head, I feel like we're very well diversified. But after discovering a private equity fund with a reasonable minimum fee of$50 ,000 and a monthly entry exit option, I'm wondering if we're diversified enough across asset types. The private equity fund claims to have average gross returns of over 40 % over the last 25 years, resulting in a net 20 % to investors. He says, yeah, quite the fee. I know. with returns like that am I just being enticed to hand over our hard-earned or is this actually a gateway for the smaller investor to have access to the private equity market?

33:19Do you think it's necessary for us to diversify further or am I just being greedy and seeing those apparent juicy returns? I know you guys can't provide personal advice but any thoughts and opinions we should consider during our research would be greatly appreciated. All the best and thanks again for the gold you guys give away for free. P.S. Ram, I'll always have your back on Bitcoin so please feel free to bring it up more often. I will not dox you, dear questioner, but just know you're on thin ice here is all I'm saying. Mate, what do you reckon? Private equity, yes, no? I mean, the first part, well, the first thing to say is you're very well diversified, like extremely diversified.

33:57Just if you had just stopped after four ETFs, you're very well diversified, I would say, particularly at sub 30 in age, like, yeah. So that doesn't mean don't do it, But don't do it for that reason, which was actually last week's mailbag episode. We made the same comment. You can – I mean, speaking of Buffett, right, he calls it diversification because you really do get to a point where you're so diversified as to just only thing you are doing is guaranteeing mediocrity. Like you actually want a bit of – there's nothing wrong with sort of putting all your eggs in one basket and then watching that basket very closely, right?

34:33There's plenty of smart and famous investors that sort of advocate that approach. And people take liberties with some of these sort of, you know, sayings, but there is truth to it. I just, I think sometimes we go to, we take a good idea and we run with it too far. So I would say, yeah, don't, you're very well diversified. I would also say in general, no, PE is a waste of time. Even those 20 % returns. Well, I mean, it's like I generally say fund managers are a waste of time. And I've got some friends who are fund managers, and I think they do excellent job, and I trust my money with them, right?

35:11So it's the exception. Things can be generally true. I mean, it's the 80-20 rule, which, you know, you see it everywhere once. What do they call it? The Pareto principle? Pareto principle, yeah. You see it everywhere once you first come across it. And I think it's fair to say, you know. What is the Pareto principle? There we go. So, well, just 80 – in any context you sort of want to use it, but it's the 80-20 rule. So, you know, are fund managers good? 80 % of them are not worth the cent. 20 % of them are total rainmakers, you know, and it's true. 80 % of the returns in the endeavour come from 20 % of the effort, depending on what you want to look at.

35:52So 80 % of the returns, 20 % of the fund managers, 80 % of the rain on 20 % of the days. And by the way, it's not a law. It needn't be true. It just tends to be more often than you'd like to believe. It doesn't, it convinces me more and more we are in a simulation. It's like, how is that true? Or there is a guy who's some sort of weird mathematician who just likes to mess with us. Like the Fibonacci sequence. Everywhere. Everywhere, right? Like power laws. Like when you see power law rules, like, oh, that explains this, this, this, this, this. Like, how? I mean, I get the mathematics of it. Yes, yes, yes.

36:26But how does that relate to internet adoption rates? Yeah, that's right. You know, like what's that got to do? Like it's a mind blow. Where was I going? Okay. So private equity, 80-20 rule. Yeah, probably 90-10 rule in this case. I think there is a lot of people who have got IQs that would put anyone to shame, right? Like they would triple whatever I can bring to the table. So they're not dumb people. They're incredibly smart, but I actually think that's their weakness is the arrogance and intelligence and the feeling that they can, and the appeal of complexity and sophistication So a lot of these private equity groups, they do things that are just unnecessarily complicated.

37:09And when all is said and done, particularly when the fees are taken into account, it's just you would have done better just buying an ETF. And that's not just me saying. People have researched it. People have analyzed it. And just Google it, right? You'll find umpteen different studies that tend to suggest that on average it's not great. Yet within that, there are people that are just great. and they're worth every cent. So it's like, I've winched to you before about some of the accountants I've had to use in the past. And, you know, it's not, I'm happy to pay a high fee for excellent quality service.

37:42Right. You know, it's only when you pay a high fee for something that, you know, you could shave a chimp down and they would have done a better job. That's what sort of, again, sticks in your craw, right?

37:54And the hard part of it is, is that unless you know them personally, so you've got to read on their principles and what makes them drive and their sort of general philosophy of investing and you've just got a track record. And that's actually – I'm not saying don't look at it. It's actually really important. But at what point do you sort of say that's conclusive? I mean, look at Magellan, right, on the ASX. Yes, that's a really good point. Brilliant track record for ages and then not. Yep. You know, and then there are others where it's just like, oh, gosh, they had a bad run for six years and then they've been the best performing fun for the last three.

38:29Yes, correct. And then if you say, well, I'm going to wait 20 years of track record, it's like, well, at that point they're retiring and you missed out. So what do you do? Like Peter Lynch only ran his fund for, God, how long was that? Yeah, 15 years maybe. 15 years, right? I don't know for sure, but it's something like that, yeah. So it's diabolically difficult. I think some of the good ones, they actually write a lot, whether that's on a blog or an investment newsletter, and you really get John Huber at Sabre Capital. It was a really good one I found randomly. I subscribed to his newsletter, read it all the time.

39:03It's really great. Really buffer test kind of thinker. Nice. Really great long-term returns. And, you know, no guarantee, but at least I know the thinking that he is employing. I'm not smarter than everyone and I see the future. You know, it's just like these tend to be really good companies. These are what I look for. This is how we run it. Here's our – so you've got to build up this sort of holistic view on it all. And even then, even then there's no guarantee. So what am I saying? So probably not necessary, but if this particular one, beyond the returns, which are certainly worth considering historically, if you feel as though the people are well aligned, oh, by the way, here's an instant deal breaker for me on any fund or private equity, and I don't have any private equity, by the way, would be if they don't have a very significant amount of their own money in it, it's a deal breaker.

39:55I just can't see, not all of it. Some funds we've both known in the past have requirements for that, and that's great. But if you're not even prepared to – I mean, if you've got 10 % of your own money in the fund and you're out there selling it to other people, it's like I've got zero conviction there that you believe it, right? I think for you it's a way to earn fees, and that's how you're getting your return for it. Now, you show me a fundee who's got like 80 % of their money invested in it. Now, it doesn't guarantee anything, but I know you're trying. Correct, that's right. Skin in the game.

40:30Skin in the game. It's so important. So I'd look for skin in the game. I'd look for some of their writing. What's their philosophy? Does it align with you? Are they doing stuff that is just completely outside of your wheelhouse and you don't have access to? That's also good. And a good track record. Yeah, then you might want to consider it for a little bit. But I don't know. What do you think? No, I think that's right, mate. No, I think that's absolutely right. the other thing i think you mentioned funds i think the thing that so look i'm not against it if you want to do it um if the returns are genuine and they're as good as they could be and there's no reason to believe they're going to be any different that's kind of your starting point right because that's not any investment is the same thing why invest in shares we think the future is going to be something like the past or at least good enough that it's worth investing in uh is something true of private equity investing i don't know um so i can't say don't i can't say do and i guess because my biggest my biggest bump on private is it's the word private it's not because it's not accessible because it's opaque it's really really hard to say and that's the advantage if you are a private equity manager you want to be opaque because you want your opportunities to be well guarded and and i get that um so i'm not against it i i think a couple things so firstly within any fund you tend to see survival bias at play survivorship bias should say in other words the ones that didn't do that failed the ones that are left are doing okay so far for how long do they keep doing okay is there something genuine about the secret sauce i don't know my biggest my biggest knock on it though is is the managers or the management um actually well two things i talked to the team this morning my monthly full team this morning about some things that normally are good things to look for but you have to be careful of those things we all take for granted good management we all want good management uh consistency of earnings growth of course we want that um you know pick whatever good customer list yeah okay cool pricing power the price right well the challenge with some of these things is they they don't they're correlated but not necessarily uh causal so i use the example and i apologize what the full recommendation of appen went back to us 2022 annual report and had our customer list and it was enormous all the all the usual suspects right like the the googles and microsoft's and and all the fortune 500 companies all that stuff like really really great fantastic like the blue blue chip as a blue chip of blue chip lists right doesn't get better than that uh the by then the share price by that was about nine dollars fifty had it fallen from thirty five dollars it's now fifty cents now no one knew at the time what was going to happen next my point was just because you see it doesn't mean you should necessarily go with it um but with with the fund who is the fund manager who is the you know it's not just the owner of the fund but it's like who's making the calls because you know speaking about peter lynch mate when he left fidelity fidelity kept going and fidelity would have marketed its track record legitimately as x but that was x under peter lynch if the next guy running the thing is yogi bear you're in trouble you know and so so who's running the fund how likely are they keep going and the bit i was mentioning before about the stuff i mentioned the team this morning was the circumstance in which the returns were gained if you happen to find some great social media companies or great buy now pay later companies for example right you made a fortune on them you listed them they went public great great great do those skills transfer to the next innovation maybe they do there's some great p funds that absolutely can say yes there are others who are like oh we got we got uh lithium right but we got buy now pay later wrong we got buy now pay later right we got graphene wrong we got graphene right we got ai wrong then if the if the returns are a function of the expertise of the manager in an industry or an area and that area stopped providing great opportunities you know industrial conglomerates how many how many pe managed industrial conglomerates kept doing well when conglomerates went out of the window how many internet went well when they you know when it wasn't so just be careful about the source of the returns i guess the beauty of a diversified index asx index or international index is it's every type of company yes it's country specific but it's not sector specific or company specific so the s &p is a great example it was general electric then it was uh whatever would have come next i don't know and then it was tesla and then it was nvidia you don't need to have chosen that the index does it by itself um so i i so and just to bring it full circle i am not investing in private equity i have no interest in or need to invest in private equity i don't feel like i need it for diversification or performance reasons i'm just not doing it it doesn't matter it's not making a mistake but sometimes the we're not giving advice but the the best thing is you know are you doing it no i'm not because i don't really see the need or the or the i don't have the ability to select i don't have the access to select would i choose the one that was available just because it was available definitely not you know would you like to invest in are banks good to invest in yes okay there's one you can invest in you want to invest in it i mean maybe but maybe not even and i made some banks to be provocative deliberately because ram loves banks but um but you know like you know it's just yeah no not for me yeah i actually i gotta correct myself i don't i do i do have exposure um well it's listed it's Balador.

45:29And they invest in private technology companies. They themselves are listed on the ASX under the ticker BTI. I mean, the appeal of it is that there is a, it took me longer than I really should have to realize this, but there is a premium for liquidity. Investors pay a higher multiple of earnings, even if you want to use projected earnings or whatever, but we pay a hire multiple for liquidity for the ability to press a button on my smartphone and get cash or take cash and buy you know like now think about buying a private business if anyone has ever done that you know it's got it takes forever to do and you've got to have all these negotiations and the you and the seller have to agree on a price it's really complex and what you can't sell it either i've been like now try and sell it i need to find someone who wants it and then you got to go through the due diligence and it's super super super super hard cash exactly yeah So if you have two identical businesses, one is listed on the stock exchange and one isn't, the one listed on the stock exchange will trade at a higher price.

46:33And it used to just make me think, why? I don't get it. What's the difference? What's the difference? Well, it's obvious. It's the liquidity. And it's not even a dumb thing. It's like, no, that's a smart thing. Like, I want, I will pay extra for that ability. And, but, so, so why do the private equity people do it? because there is almost, I don't want to use the term arbitrage, but I guess it is of sorts where it's kind of like if you can find a company early enough and you feel as though this has got the potential to sort of grow significantly and eventually list, you get an exit at some point in time, but you're buying something that might be four times operating profit and then you're listed at 30 times.

47:14So even if the profit doesn't grow, I mean, there's a huge upside there, but presumably the profit will grow along the way or the operating profit or the revenue depending on what stage the business is at. So when private equity goes well, I mean, you look at some of the big players in Silicon Valley, they were the early backers of Uber. They were the early backers of Airbnb. And they just did insanely well. The companies did very well, but they did insanely well because they got the growth and the multiple expansion. But what you miss in that analysis is that it's the – it's the silent evidence that you can't see, which is that was the one in a hundred that did do it.

47:53And there were 99 that didn't. Now, private equity people will turn around rightly saying, that's cool, we only need to find one Airbnb. Which is true. Which is true. Which is true, absolutely true. But it's still hard. It's still hard to do. And so even when you have someone who is honest and aligned and capable, it's just like well it's going to take a long time to to find the the middle in the haystack and then once you find it it's going to take many years for it to to mature to the point where there is some kind of exit and even then you might not want to exit right like some of those mistakes to exit on listing and stuff as well so it's just it's just a diabolically tough game and that's why you that's why you've really got to back the right people here not not just people with high IQs, but people with wisdom, I guess, but more than just intelligence.

48:42Nice, mate. Nice. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener. This one comes from Julie, who says, Hi, Scott and Andrew. Many thanks for your podcast. You give me much food for thought and guidance in my investing journey. My husband became redundant about 10 years ago, which gave us a nice payout and a big chunk of shares he'd acquired as a manager. As CFO of the household, she says, with gusto, I launched into investing the cash and selling most of the shares. As hubby also decided a good move while they were starting to head south to then diversify.

49:21I set up an online broking account and was like a kid in a lolly shop. I did some reading and bought shares, listed investment companies, ETFs. I made some mistakes and had some dumb luck where fortunately I bought a few winners e.g. REA Group although I cashed in too early with some because I liked crystallizing the certainty of profits and just wanted some ongoing action i.e. to buy something new the process has also been fascinating for me in observing my own behavior and tolerance for volatility and risk I liked your recent pod on insurance as we've generally taken the risk of being underinsured for things like our lives she says I cashed out most of the shares in April 2021 to buy us a bush shack lovely again dumb luck with timing but I'm left with a couple of slugs including Wham Capital she says granted the dividends are high now and yep a lithium stock my question or maybe a reflection I listened to a Wham webinar and boy can they rationalize the reasons for any outperformance with ridiculous premiums to NTA she says and now it seems more about future growth potential in investment I was also reflecting on how I get the choice of comparison between benchmark and indices is like for like.

50:34But how Andrew's bottom line of what's your best idea is always fundamental. And therefore, should we be comparing our best idea against the best performing index or indices? Should LICs, for example, be comparing their funds against the best performing market index, whatever that might be? Thanks so much, Julie. Julie, I love this summary, mate. Such a great story. Bushshack, I'm super jealous, mate. I'm trying to convince my lovely wife to let me go and buy a block of land somewhere. To no avail. So I may prevail on you, Julie, to have a chat with her at some point. No, I'm kidding. But I am jealous.

51:10What a great investment, though, by the way. I think as you get older, you realize. I mean, I use that very deliberately. It is an investment. It's not a non-financial return. But I guarantee you, when you're on your deathbed, you'll be looking at the quote-unquote returns from that investment much more than you will of any other asset. 100 % true. So, yes, love it, Julie. Thank you. I love the story, too, and just the journey. It sounds like a pretty cool story. Best idea, mate, comparing indices, what should you compare against? I'll just quickly tell a story, and then you can reflect. At The Motley Fool, we got a call from ASIC one day.

51:47and it wasn't a bad one but in the past we'd said look you know what here's the thing Australian investors invest in Australia and we and so you know most of us would say well how's the all odds doing and our job was to recommend stocks that beat the all odds and we had share advisors our longest running service and since investment inception we chose the all odds index because it was the broadest one again we believe in broad indexes from as passive investors so the easiest total market, you know, what is the share market doing is that number. And then compare that with our recommendations. And we actually did the same with the US.

52:22And for a while, we ran a US recommendation against the ASX completely on the basis of, well, if the average Australian investing in the All Lords, the alternative is investing in this company in the US. Here's how it's going. Asik knocked on the door and said, we don't like you doing that, guys. And I kind of went, well, hang on, here's what I did. And they go, oh, that makes sense. Don't do that anymore. So, okay. And their view is that, and just to answer your question, Julia, or at least to roundabout address it, they said they believe that the company should be compared against its own market or sector.

52:53So if I'm going to recommend Berkshire Hathaway, for example, comparing the company against the ASX was chalk and cheese, or apples and oranges, if you prefer. They prefer to say, well, hang on, Berkshire's operating in the US on the US market, therefore you must compare it against the US market index. Commonwealth Bank is in Australia. We don't recommend it, by the way. You must compare that against the ASX. And I don't really have an issue with it. I didn't argue the point because they're ASIC. We're not. Pick your battles, right? But also, I get why they would perceive that. Because if the US market did really, really, really well and the ASX sucked, we would get outperformance on Berkshire just because the US market did well.

53:30And conversely, it would be true that if the US market did terribly and the ASX did really, really well, then, again, the underperformance wouldn't be representative of the relative opportunity in the short to medium term. that's why i'm getting to the long-term answer for you julie in the short term you need i would argue as so asic aside because they may have different rules by the way but i will tell you how i would think about this as an investor i would be comparing the company you buy or the etf you invest in the lc you invest in against over the long term against the most appropriate market for that that item not against whatever's doing best the reason i say that is because in the short term tech was had a terrible year in 2022 i want to say ram and they're cracking year in 2023 down 30 percent one year up 30 percent the next year yeah and if so the best index if i owned zero shares for example uh one year where i'm carrying some market down though tech down 30 next year up 30 it doesn't really help me over that period of time particularly well here's the other thing if it's a best performing index then i would have been comparing my uh what sold patch shares against the tech sector was up 30 % saying, well, obviously you underperformed.

54:40I mean, it's true, but I would have known which sector that should be in advance. And then I'd have to have an investing strategy that aimed to do exactly that. And so I think honestly, the best index is the index that most represents your investing strategy. And so I wouldn't do it the way you're suggesting, Julie. Honestly, I would do it against the index that represents the market that I'm trying to outperform because the alternative, here's why, the alternative is buy the index. Now, if you compare it to the best performing index over any point in time, as an investor, if you were going to do that instead, you'd have to know that so you could buy that index at that point in time.

55:16For me, I'm saying to myself, I've got a dollar. I can invest that dollar in the market or in a stock. They're my choices. And I'm only going to invest in the stock if I think the stock can beat the market. That's literally, so that's how I think about benchmarks it's what are the alternative choices in advance based on my understanding of investing and investing strategy and the likely investing outcomes now to ram's point i'll get you to jump in a minute mate but what's your best idea i that's the other thing is i a lot of people use discounted cash flows they put arbitrary numbers in and say i want 10 a year uh i put 10 in or i want 20 say you want 20 i don't put 20 a year no no company ever gives me those returns i buy nothing meanwhile the market goes up and then you wait longer and the market goes up further and you wait longer the mic goes up further and eventually in 16 years time something finally triggers and you put 5 % of your portfolio in that thing and then you keep holding cash and on and on it goes and it ends up being really super counterproductive so I like your highlighting of that I like Ram's idea of what's your best idea and that's kind of the way I invest I'm always fully invested not because I think today's opportunities are better or worse than the ones six months ago in six months time but specifically because I don't know and so I'm always looking at my portfolio simply saying what is the opportunity cost If I'm invested in this, I can't be invested in that.

56:29Have I got a better idea right now? If the answer is no, then I stay with what I've got. If I've got a better idea, then I'm going to invest in the better idea. Right? No, I mean, that's right. I mean, a little bit annoyed by Asik's response there. Careful. Don't, don't, don't, don't, don't. I love the people Asik. You know what? I will say really quickly, they are actually genuinely lovely people. And they were, you know, you kind of get the head of the corporate cop. They were like, hey, we know you've done this. We don't think it's right. let's have a chat so we had a chat like oh look we'd really pretty didn't it was like cool got it it was it was a very very very good call i still wouldn't do it that way by choice i don't feel super against it but they were very reasonable about it they just had a view and that was their view go on i i can only imagine the political um minefield that they tread and i'm sure if you sort of had had had a beer with some of the after work you know and lips are a bit like oh they're There are some very big entities doing some very bad things, but we do not have the resources to go after them.

57:31So we're going to go after this little newsletter over here that's not going after the proper – like, you know, they can only do what they can do. So I won't be too mean. But there's no right answer here. My personal view is – I agree with what you said. What you said makes perfect sense. Here's an alternative. It's very easy. I could do that. Do I think I can do better than that? But someone might want to compare against a completely different benchmark. That's fine too. Yeah, true. As long as it's clear and set at the beginning, if a funder wants to come out and say, we're going to compare ourselves against, I won't name names.

58:10Good plan. Thank you. There is a well-known fund out there that compares itself to the bank bill swap rate. So basically the cash rate plus 3 % or something. Yeah. And I kind of think, well, that's the hurdle that you've got to jump over. That doesn't seem like for super, you know, mega brained, you know, hedgies, that doesn't seem like a hard hurdle to cross. But at the same time, I respect the decision. You know, you've not hidden away from it. That's the hurdle. That's the one you've chosen. People know that that's what you're going to beat. You're going to try and beat. And if you beat it, you're going to get, what is it, 2 and 20, you know, the 20 % of all profits above that threshold.

58:53and you might not like it. Well, don't invest in it. Yeah. I really do. My philosophy is I think we live in a world where there's a lot of bad people trying to do bad things and we need protections. I get it. But I do think sometimes we overreach in that and we try and wrap everything in cotton wool and it's just like there's got to be a degree of personal responsibility. You're going to give your money to someone. it's a little bit on you to do some due diligence like i'm sorry right like it's not you can't go out there doing all kinds of dumb things and then say well mommy my knee is scraped you know come and help kiss it better like well no one it's my money we we talk about the government's money it's my money and your money and everyone's listening money it's like so again it annoys me a little bit so i just i feel as though as long as you're clear and honest and like the motley folk ones come out and say we're comparing our u.s investments against the all odds no problem with that?

59:49Do I personally agree? It doesn't actually matter. It doesn't matter because that's what you said you're going to do and that's what you're doing. And people can make a rational choice on that. Should a hedge fund be able to beat like a very low hurdle? Well, you know, I'd like to think so. Okay, that's cool. People are signing up apparently anyway. So that's fine as well. That is the key to it as far as I am concerned. And so Julie, yeah, I mean, just choose something that you feel is appropriate. But to Scott's point, just do it something that I would very easily could invest in directly um to make it a worthwhile benchmark and then and then compare against that because that's really your alternative you know it's like us investing tragics it's like we could just buy the etf and go and do anything else worthwhile in life not invest anyone who's investing if you can't beat the market stop yeah buy the market like just seriously there's no there's no excuse there's so much more available to you i mean yeah there's some hobby and enjoyment whatever but at some point particularly in a larger amount of money it's like if you're losing x dollar yeah not even losing if you're making x dollars less than you could otherwise make take that money go and do unicorns go on take a day off a week and go gardening like you know again if you love it and you want to be do it and you want to take unsub par returns i guess do it but otherwise that's the only rationale it was costing you money that in fact that's that's always been one of my major criticisms of trading as opposed to investing so that the people with the eight screens in front of them you know were in and out in and out and trying to be super clever one statistically the odds are massively stacked against you like there's a 98 chance that you're going to lose terribly and the two percent who don't got very lucky and i'll just lose next year it's like and then i always get a few emails from people well actually i've been doing it for 18 years good for you good for you dude but my retort would be in that situation is yeah but if you spend 40 hours a week and sleepless nights and getting up to watch wall street open and doing that and you've beaten the person who just bought an etf and then went fishing or by the way went to work and actually got paid at the same time and did just stack some shelves at woolies right i was like who's the smarter person here right it's like all of that work for that tiny bit of alpha that tiny bit of alpha performance yep as you said if this is just what i love this and then okay fine right some people love chess and they do that all day long and some people like this, and that's cool.

1:02:10So if there is an inherent pleasure in the process, no harm, no foul, fill your boots. I've got no criticism. But if you're only doing it for the excess returns and the excess returns are marginal on what you would get for nothing, I mean, I think all of us as investors need to standardize our returns on a per unit of effort basis. You know, the Scott Phillips, who gets 10 % on average compound over the last 10 years, who spend three hours a week with these investments versus me who got the exact same, who did 20. One is objectively a better result. We talk about risk-adjusted returns, but I think time-adjusted returns or effort-adjusted returns are just as valuable.

1:02:51So I don't even know how I got on. Yeah, well, yeah, opportunity cost. I don't know how I got that sidelined off from the original question, but there it is. No one is surprised, mate. I appreciate you being sidelined. It's always good. Mate, Julie, great, great question. Let's finish off with a question from Chris. to me he says uh hi scott and andrew i've enjoyed your podcast for a number of years for the honesty knowledge and even it depends in recent episodes there's been a number of go on sorry it does it does depend in recent episodes there have been i'm gonna i'm gonna stop on this one you know why it depends it depends because life is difficult and complex and messy and if you're if your financial advisor planner stockbroker whatever it doesn't say it depends really ask yourself seriously whether you you know and look that said we we make recommendations the month before i say you should buy company x not it depends if you should i'm saying i think it's going to beat the market but the reality is the the level of certainty one of your favorite lines made is strong opinions loosely held that's that's literally literally so making forecasts i don't know best guesses maybe and and of the things i think are likely here's the other thing someone says what do you think about interest rates so um i say i don't know as i mentioned earlier but people who say well i i just ask i give an answer it's like that's that's cool but i don't have an answer i don't have a rough answer on most of the asx companies neither do you so so i have a i have a view on a small number of companies that view will be wrong some of the time hopefully not most of the time but a decent minority of the time i'll be wrong about that versus the index in particular um most of them i don't have a view on so so even with that it depends do i do i don't recommend aristocrat leisure the poker machine maker do i think it sucks no do i think it's going to beat the market i don't know so it depends i just don't know anyway on to chris's question in recent episodes there have been a number of topics i would like your thoughts on regarding australian u.s and international broad-based etfs you recently this is a this is a slight bit of showbiz right at us you've recently seemed to have come around to the possibility of borrowing for shares once the house is paid off once to make the numbers easy.

1:04:58Let's say you've paid off a family home and 80 % of the equity is a million bucks. Makes sense. The starting point is half a million dollars in an ASX 300 ETF and half a million dollars in an S &P 500 ETF. You are limited to one lever like the RBA and can move the dial up or down to change the percentage of each ETF. So first Chris has thrown shade at us. Secondly, you said, don't say it depends. Don't recommend anything else. All you can do is choose between the two. Whether it's more US or more Australia, how may this change factors like serviceability of the loan, long-term growth and risk?

1:05:31And if you could add one additional ETF to sleep at night, what might that be? Okay. So firstly, move the lever. So more US and less ASX and vice versa. So that's what the lever does? Yes. As far as 50-50, how would you change it? I mean, well, I almost said it. I almost said it.

1:05:58You have to have a view on which market is going to perform better. Right. And it's a tough one. Or you might have different views on diversification or currency, not necessarily better. There might be other reasons why you might choose less than a 50-50 split for different reasons. Yeah. I'd probably go – I'd push the lever in the direction of a bit more US exposure. Why do I say that? Because I've just come out of a six-week deep dive into all the macro facts. No, I don't. I just, I gut feel. I was going to say, what? No. I gut feel that the, you know, the ASX is hyper-concentrated in commodities and banks, and I think the banks are egregiously overvalued, and as everyone knows, and the US has got more growth potential despite the absolute stinking mess of their political system and fiscal situation that they find themselves in.

1:06:56But yeah, it's really just a vibe more than anything else. I don't think you could tell. If that was your only option, there's not – what you observe when you look at the Aussie market and the US market over long periods of time, they're pretty much lockstep, pretty much. So I don't think there's any – all you can do is offer an opinion there and time will tell. And, but I don't know if there's any setting, which is going to be like, there's obviously plenty of settings. We're going to be better than others, but I don't know if there's any setting that's that over a say 10 year plus period is going to be massively different.

1:07:37If, if the U S got itself into all kinds of trouble, the old saying is the U S when the U S sneezes, or was it when wall street sneezes, the rest of the world catches a cold. And that's, that's, that was the GFC. right? So, and next financial crisis, it is the biggest, deepest capital market in the world. Very decent, not a guarantee, but there's a decent chance that that's the epicenter. And if it is, there's going to be trouble. Likewise, in Australia, it's sort of like, what are the things that are going to undo us? There are certain factors here, but I mean, And a lot depends on our major trading partner, i.e.

1:08:17China. So if the relationship sells, I can't see a situation where we just like really don't get along, but the US and China are best buddies. Like it says there's so many relationships across those three parties that I feel as though our fortunes are somewhat all tied together. I don't know. I'm just, I'm not offering anything of any value here. So I'm going to pass the baton to you to save me. Not at all, mate. I think you're perfectly right. I think that, let me, so starting point, why have more Australia? For reasons of currency and market familiarity. And that's probably it. And currency, I don't mean, I think the currency is going a certain way just because you don't have to consider currency when it comes to buying and selling.

1:09:09so just easier you know you're in australian dollars anyway um and so you know you kind of know you're gonna get a one-for-one transfer between australian dollars where the shares australian dollars in cash and that's just easy and home market you know the market you know what's going on um trading hours are easy just easier and simpler why have more us uh and and i'll have i have more pros for this one which will tell you why how i'm probably gonna move the lever in a minute uh it is the world's largest capital market by orders of magnitude it has some of the most impressive growth companies of our era.

1:09:42Investing in the US is actually investing in the world. I haven't done the numbers for ages. I say this every time, and I really should look up the new numbers. It was not long ago that something like just under half of the S &P 500 revenue, so take all the S &P 500 companies, add them all together, just under half their revenue came from outside the US. So when you're investing in the US, you're not, you're actually investing in the world. The companies happen to be domiciled in the US, which is a good thing, by the way, because US laws and customs and currencies and everything else. But almost half of their revenues came from overseas, outside the US.

1:10:09So you're buying international while buying US. You get the diversification of different industries. We've talked about banks that Ram mentioned. You get the diversification of currency. We think the Australian currency is fine, but maybe it's not. Maybe it is, by the way, in which case you diversify both ways. That's the point of diversification. So industry currency in geography. You're investing in markets, again, not just the US, but the rest of the world, which is uncorrelated, which is not the same as having your house, car, job, and investments all in Australia. so there's a heap of diversification benefits so oh by the way starting point um i wouldn't go anywhere near 80 percent of my house in terms of taking the taking the rate of investing shares uh so so you said 80 percent every hour said a million is 80 therefore it's half million at each uh i wouldn't go anywhere near you could maybe only 80 percent lvr uh in in investing uh why because i don't need to i don't want to and ram and i are a little bit different here uh if you're about regret minimization rather than value maximization, you take a different path.

1:11:09I'm a regret minimization guy. Could I earn more money if I did it? Yes. If it went wrong, would I be just forever broken by it? Yes. I'm not going to do that. I don't want to do that. But you can and that's cool. But just for the premise of the, as the police, I reject the premise of the question. I wouldn't use 80%. I don't know if I'd go to 80 either. I'd get up there. Would you? Okay. You couldn't get me over half, mate. You couldn't make me go over half. I could probably do 60, 65. yeah cool anyway so to finish it off though I would probably this is so again what would I do what would I recommend other people do I'd happily have two thirds of my money in the US possibly as high as 80 % I wouldn't be super uncomfortable with but probably not stoked by so the other Australia Pro I should have said as you get closer to retirement you care more about the dividends and the franking benefits are far better that's a good point so just be mindful of the tax benefit of Australian dividends rather than international or Australian capital growth.

1:12:06It's just systemically better. So there's a slight benefit there. So I might, maybe I'll call it two thirds, one third for the fun of it. My portfolio is probably roughly that. In dollar terms, in terms of ASX invested versus US invested, I've got about half in the US roughly. I also though own a couple of international ETFs and the NASDAQ ETF on the Australian exchange. So in terms of dollars invested, it'd be over half. But yeah, something like that would be my starting point. let's go to so whether he asks whether it be more US or Australia how may this change factors like serviceability of the loan long term growth and risk so let's kind of talk to that specifically I'll kick this one off because it's just easy the serviceability of the loan needn't matter because you're not tying the two together unless you're requiring dividends to pay the loan back or capital growth to pay the loan back in which case i said i've said last time in terms of borrowing i wouldn't borrow i would only borrow as much as could be as i would borrow to the point where the dividends covered the interest um that's the rate i'd pay if you're going to borrow it my housing rates of what six and a half percent you're going to get four-ish on average in the asx if you buy the etf you're going to get probably one and a half out of the us make that 50 50 you're down to what's that average out three percent um and you're paying six and a half, you're going to make that up somewhere else.

1:13:32You're going to pay it from your income, which is fine, or you're going to sell some shares because you have to, to make up the difference. And that does change the so-called sequencing risk really, really, really matters at that point. If you were to do this, the market drops 25 % and you've got to sell 5 % of what you now have because it's dropped to make the loan payment, then you're kind of eating into your capital in a way that the growth end won't necessarily pay for coming back. So sequencing risk matters the the order in which the years roll out if you have five good years then a bad year you're sweet if you have three terrific years and two bad years you're sweet if you have two terrible years you probably don't make it back for 10 years and you're certainly not going to it's not going to be a profitable investment idea it's probably going to cost you money over time that's a great point so sequencing risk does matter um so that that's the so service we live alone more us means more cash coming from somewhere else and that just makes it a riskier investment than australian um in terms of the downside not bad just riskier just by definition um long-term growth, Andrew's already said, I think it's likely the US outperforms Australia from this point for a while yet, maybe not forever because again, things have been flow, particularly market.

1:14:41Frankly, the more expensive US tech gets, the less likely that is. That's true. If and when the banks are a smaller percentage of our market, I mean, the performance has been terrible over the last, you know, five or so years for banks. So, it's probably they've declined as a percentage. So, it's less risky in concentration terms than it was five years ago. Yeah. That will probably change. So, long-term growth, I would expect the US does better risk we've just talked about basically it's a summary of those two plus currency um there is a tiny in terms of tiny risks chance that being a non-domestic owner of u.s shares could at some point get problematic for policy or regulatory or legislative reasons they may change tax treaties again i'm not slightly worried about any of these things but they're possible so you asked about it so i'll cover them off that's about it ram any other thoughts about serviceability long-term growth and risk?

1:15:27I think you got it all there. Yeah. I did this. Yeah. No, I'd just be adding words for the sake of it. So I won't. Cool. Last one. The last question that comes from Chris on this one, the same question, but it's the same topic, was just, if you could add one additional ETF, and this is important, he says to sleep at night. So this is not a maximum, there's not a maximize. This is a, this is a, I want to sleep better. What might that be? Monochrome Bitcoin ETF. just last week. They can't be asleep at night, ETF, surely. Yeah, I mean, it feels that way. But the deeper you go, I think the less risky it seems, which is I'm just going to let that hang there and people can be exasperated or not.

1:16:14I really, I was listening to a pod the other day and it's just sort of like, do you ever get that sense of people like just like groan, like when you start on a topic? And I was like, yeah, I know that feeling. And that's this topic. So I'm not going to play it on any thicker than that. But honestly, the reason I say it is not for shock value or anything else. I say it because it's my genuine thing. Yeah, for sure. That's not saying I'm going to be up 90 % and then the others are going to be 5 % each. But, I mean, it's non-correlated, right? Given the – would you not – okay. Sleep at night would suggest minimum downside risk there, right?

1:16:53As much as your conviction of Bitcoin is high, would you choose as a sleep at night ETF? Yeah, again, I think people are too unfair with that. So if I said I go the Magnificent 7 ETF or something like that, I mean, you might question it, but you wouldn't be asking me these questions. I would. I would absolutely say, is that really a sleep at night ETF? So I'll give you my three concepts. Most people wouldn't though. So remember that it's sort of this idea of, oh, it's not sensible because it's volatile. Well, hello, NVIDIA. Hello, Tesla. Hello, like, you know, CSL, you know. That's stocks. And in fact, on getting rid of the very, very early years, the volatility is not out of whack with any of those other things.

1:17:43So I reject that straight away. Anyway, I won't go on. But that's my honest answer. Okay. So for me, sleep at night is minimal volatility or minimal risk or more uncorrelated diversification. And frankly, Bitcoin would meet that last test. And look, it depends, Chris. I mean, if it's genuine, if you can't sleep at night with this stuff and you want to add one for more sleep at night, what you're saying is give me something with either less volatility or less risk, and those are different things, by the way, and we've said that many times. That's such a good point. You've got to hammer that. So it kind of depends on what helps you sleep at night, which again is an it depends answer.

1:18:22If someone said, look, I've got a lease. I really just want to reduce my volatility. I'd say, well, maybe it's cash or bonds. I don't like either of those things. I wouldn't buy them to maximize my returns. But if you're saying, well, I don't want to maximize my returns. I don't want this money to be used to grow my wealth. I want it to be used to minimize the volatility so that in the really, really bad times when the ASX is down 20 % and the US is down 30%, I've got something that's not down at all. or only done a bit or only your bonds or cash and again I don't reckon you should do it I reckon you should learn to live with the volatility as we've said before but if that's not you then don't make yourself do it if you're saying I can't sleep a night with this or I need more then choose something that's not going to give you now if you're going to take money out of the bank or out of your house to do it I'd say to leave the money in the property because that's the best volatility protection is borrow$750 rather than a million if you're going to borrow a million and put$250 in bonds just leave it in the house be done with it right I wouldn't be borrowing money to buy a bond ETF.

1:19:18But so from a leveraged perspective, the best slip of an eye would be less leveraged, I would presume, at least for me anyway. No, I agree with that. The money's not the value. You know, the money's the accounting system. Yes, correct. The value is the house. Correct. Because it's got utility. It's shelter. You can grow. I was going to say grow a family. Raise a family in there. Put a pop-up out the front. You've got protection. That's the value. You can sell it for the cash, but then the cash is only useful because I want something else that is of value. It's just a storage mechanism. It's really got to hit that point.

1:19:56And for our context of this conversation, I'd say the same thing about shares. I mean, yeah, they're real entities, but they're just abstractions that live digitally on some registry somewhere. You can't spend your Apple shares. You know what I mean? By the way, speaking of Bitcoin, people go, oh, you can't spend it anyway. It's like, well, spend your BHP shares. You can't. You've got to convert it. It's a representative token, yeah. It's a representative token is all it is. And so you've got these – there is a – I just really want to double down on the point that you made there because it is so true.

1:20:30is just like the money or the assets are there to kind of take what you don't need now in the expectation that you can have more later. Not more money, more things. More things, yep. More things, you know, whether they be experiences, whether they be goods, whether they be services, whether they be things that genuinely as you as a person provide you with this very fuzzy term, what we call value. And that's true. The money is the money is the money. It's sort of irrelevant. And I feel as though too many people in our game forget that very basic fact, right? It becomes a scorecard for its own sake rather than actually something that adds to life value at some, or self-life enjoyment, life experience, whatever, at some future point.

1:21:17Yep, absolutely. So anyway, I hammered that. No, I love it, mate. No, it's a really, really good point because it is the fundamental standard. Here's the other thing just quickly on the property thing, right? You want to sleep at night. So you're going to say, hang on, I'll borrow a million dollars and I'll put a quarter million dollars into a cash ETF and that'll help me sleep at night, right? And well, here's the thing. So I'm going to say, I'm not actually making fun of it. The point I wanted to make in this case was, I get that. If you borrowed 750 and the whole thing was volatile, you'd be more freaked out by that.

1:21:45And by the way, that's completely okay. So I guess I'm saying, on one hand, I am saying, take out 750 instead of a million. Because mathematically, that is less volatility than investing the whole million. But if your head still says, but my portfolio in total, which is, again, this is all behavioral psychology. Behavioral psychology 101. A million dollars invested, three quarters in cash, sorry, three quarters in shares, one quarter in cash, will be less volatile than a portfolio invested 100 % in shares. Which will be, right? Even if, because you don't mentally count or account for the money that's left in the property and not borrowed in the first place.

1:22:22So you should be able to say they are the same thing, living in the property. but I will say to Chris and others listening, if you still can't mentally, and it's not a criticism because it's baked into a DNA. If you can't look at 750 and say, at least I know I've got 250 still in the house, therefore it's not as volatile as it looks. If you need something, if you need to take a million out and put it in bonds to make sure your portfolio, in quotes, is less volatile, do it. If that's what you need to do to make the 750 work, go for it. It should be the same thing or it should be better left to the property because there's zero risk at that point.

1:22:53You're keeping a thing and you're reducing the amount of interest. you're paying by the way which is also a bit massive benefit that that should be completely okay but if you need to do something different to tell yourself that it's okay because i've got some cash over here and some or some bonds over here and some shares over here if that's how it works in your head then do it do what works for you and we don't mean that in a hippie kind of you know peace love among beans everyone's everyone's beautiful kind of way it's just literally that's if that's if that's how your brain works go with it because that's going to make you most successful and minimize the chance you do something silly at the least possible or the least opportune time.

1:23:26The other thing that we've missed from this conversation is that we've, because we're Australian, we've had this whole conversation without even entertaining the idea that the house could go down in value, right? Like, so, I mean, again, I got to be careful. I'm not saying it will. I'm not saying it will. That's a good point. I mean, it goes to your point. It's shorter either way, right? The value doesn't change if the price goes down, but the perceived value will. You are bulletproof. You are bulletproof. As someone who owns their house, I mean, if the property market tripled or it halved, so what?

1:23:56You've still got three homes and two dunnies and a garage. You know, zero has changed other than what they call the wealth effect, which is just talk about mung beans and, you know, feelings. Proprietary psychology. It's pure psychology. I feel richer because similar houses in my area are now worth more. Nothing has changed for me. And if I saw mine and bought the one next door, I couldn't get any extra money out of it. I'd still have the same amount of money and the same asset and the same shelter. Yeah, exactly. Oh, a friend the other day, oh, my house is worth more. I'm like, cool, go spend it.

1:24:26What do you mean? Well, it's all this extra money. I don't understand. It's like, well, I could. All right, where are you going to live? I'd buy another house. And the market's the same market here. Like this, you know what I mean? It's like, God, we're all so obsessed in this damn country about, you know, we forget. I don't know. I would say I wouldn't, what is it? The Buffettism. don't risk what you don't have and don't need for something that you do need and do want and do value. Don't risk what you have and need for what you don't have and don't need. That's much better said. Yep. And right?

1:25:01And so you won the game of life. You won, okay? Game over. You're not, you know, twiggy and with billions of dollars, but there is nothing that can happen to the property market or the ladder or whatever stupid, you know, analogy you want to use. Correct. You know, game over, man. Take the win, right? At this point, don't take. And then, I mean, there's different degrees here, but I just think in trying, there's going to be a lot of people who are on paper extraordinarily wealthy that are going to find that that evaporates extraordinarily quickly on the slightest wobble because they just pushed it to, they took a reasonable idea, to be fair, not silly, like taking some equity and sensibly investing it, perfectly rational and sensible.

1:25:47But they just took that idea way too far. And you watch everyone's fault and someone needs to bow me out and boohoo, it's unfair. What timestamp this podcast? And so Andrew said this, and at some point you just watch, right? Because it's something like I get to have, it's what do they call it? It's like capitalism on the way up and communism on the way down, right? It's like I'll take all the gains and I took all this stupid risk and I somehow won because the ball landed on red on the rule that we got. But the second it doesn't, yeah, that's different. So I would be, now that you've sort of said that and pushed me down that path, I would be like, just don't borrow to that level of extent.

1:26:28That's craziness. On that happy note. Sorry. No, it's all right. Will you come back next Friday? Do I get to do these rants? Because if the answer is yes, then I am coming back. Have I ever stopped you? Nope. So I've come back. Until next Friday, we'll all have a cold drink and maybe a cold shower. Maybe a cold shower. And full on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener.

1:27:07The Motley Fool operates under Financial Services License 400691.