Mailbag: incl. The bear case for Bitcoin. Sort of. October 20, 2024

29:28It's hard to know, right? There is all range of incentives. Ram is right about incentives. That's the key one. They're not – ironically and almost weirdly, they're not even necessarily personal incentives. if you're if you there's a lot of institutional group think and expectation among businesses generally are they doing it to increase their kpis probably in part but then why would a board director set a kpi accordingly unless they wanted that outcome and then why would the directors want the outcome if the shareholders didn't want the outcome at some level it's really hard to kind of untangle the not entirely i would suspect there's probably a part of personal incentive i would suspect there's part of a story of we want earnings per share to grow rather than shareholder wealth to grow, which sounds stupid, right?

30:14Because if you buy back shares at too high a price and destroy shareholder wealth, then you're wrecking things. But how do you increase earnings per share? Well, you increase earnings or decrease the share count. So if you're a Commonwealth Bank and you've got excess capital and you want the reported earnings per share to grow, and this is one of those... Because Buffett and Munger were different. Buffett is, Munger was very different people. Who was the guy who did the conglomerates, mate, who I can't remember his name now in the 70s in the US? Teledyne, who was his name? Can't remember now. Anyway, there are some people who realize that capital allocation is actually about the money you end up with and understand, and it sounds silly to say, but the real drivers of cash flow generation and value generation, right?

30:58Others are happy to play the game that everyone else is playing and increase the metrics that people want to see increase. So if I increase earnings per share, I look like I'm doing a good job. If I decrease earnings per share, but give my shareholders money in other ways, i.e. a special dividend, right? I've actually grown your wealth. But on paper, on the recorded numbers, when someone looks at a share price chart and says, or an earnings chart and says, hang on, earnings per share decreased this year. So yeah, they did, but I didn't buy more shares back. I gave them the money instead. Think about what that looks like.

31:29And I sound like I'm talking gibberish. If you're a right thinking person, you're thinking, well, who in God's growth would actually choose that? And the answer is a lot of people a lot of the time because they don't know any better or, and this is the other problem for executives, frankly, what's that problem? I'm not feeling sorry for them, but they do what the shareholders want. Shareholders will say, increase my earnings per share, please. So, okay, that's how I'm judging you. Okay, that's what I'll do then. How can I do that? I'll grow earnings. Well, I'm in a very small market and banking is very concentrated in the market.

31:58and how can I as CBA or Westpac or ANZ or NAB or how do I grow earning? I can't really. Well, how do I grow EPS then? Well, I guess you've got to buy back some shares. Okay, I'll do that. If that's what shareholders want, that's what they get. Does it grow their wealth? Arguably not. To Ram's point, maybe even destroy some wealth. If they didn't increase EPS and dropped, but they also paid a special dividend, shareholders would be better off, fundamentally better off. So why don't they? And again, we're back to the same question, which is it depends. It's hard to really untangle properly. But I would suggest that those people who genuinely ignore the accounting and the financial jargon and the that's the way we do things around here, and actually simply ask themselves the right question, which is, if I'm a steward of capital, how do I improve, increase, grow, maximize that?

32:48Well, I do it by, and as you rightly ask yourself, Brett, by paying a special dividend. It's exactly what they should be doing. They shouldn't be buying back shares. Special Luveden, by the way, also carries the franking credits to Ram's point. So it's even better than it looks. Even pure numbers, even without franking credits, special Luveden is better if the shares are overvalued. Add in the franking credits and it's extraordinarily better. Now, maybe they don't have the franking credit balance for all I know. They might not have sufficient franking balance to buy more back and that might be one of those things.

33:14That's the other thing, by the way. So think about the optics of this. We talk about optics on Friday. CBA, let's say they pay$1 fully franked. They haven't got franking credits left. So they pay$1 fully franked and 50 cents unfranked. and also the headlines say Commonwealth Bank share dividend only 67 % franked. Which sounds bad, right? Except it's no different to a dollar fully franked and 50 cent unfranked dividend. But the drinking percentage falls. Does it matter? Of course not. Is the cash flow different? No, of course not. Do people think, oh, CBA has broken its unbroken string of paying fully franked dividends?

33:47Again, I'm not saying it's CBA doing this. I'm not saying this is the reason they're doing it. I'm just saying there are a lot of perverse incentives. I mean, it's emotional, psychological incentives. It's not even necessarily on the executives, you know, kind of, they're not making more money by doing this or screwing anyone by doing it. They're doing what we expect. And the problem is most of us don't think properly about the actual value. We think about the reported metrics that we're asked to think about. And this is where, by the way, back to investing for a second, the thoughtful investor can look at some of this stuff and go, actually, where's the value?

34:19I've said many times, use the example, it's an old one now, I should get a new one. M2 telecommunications, its earnings were artificially low because it had to amortize some acquired customer lists. It was purely an accounting transaction, but it made the earnings lower. Now, if you look at a PE, you say, oh, gee, that PE is pretty high. If you looked at the actual numbers and thought about it, it went, well, it is, but the earnings are artificially depressed. And when earnings come back up again in two years' time, earnings will be higher, the PE will be lower. This is actually hiding some value here.

34:48You could actually make some money. And we did. We managed to recommend it to our members. And And again, it was years and years ago. I'm not bragging, by the way, I'm just giving you an example, where you can look through the numbers and say, I see some value that the market's not looking at because they're only looking at the reported numbers. I think that's kind of the lesson here. Ram? Just a bit of Googling and chat GPT. Oh, yeah. CBA, because it just can read documents faster than I can. CBA has$1.8 billion in available franking credits. That works out to about$1.10 per share. By the way, they can't just give that to you.

35:21It must be attached to a cash payment. So that's why they won't. And there are some capital rules. They've got to keep a certain amount of capital so they can't pay all the cash they've got. But they could absolutely pay it out rather than doing a share buyback. Yep. What is the capital ratio at the moment? Is it 10 % or used to be 12.5 % I think? I think it's higher again now. I'm pretty sure. After the Basel-Bal, however you pronounce it. I'm pretty sure it's higher again. Yep. Interesting. It depends who is tier one, tier two, tier three capital ratio. So it's all very - We should do an episode on banking one day.

35:52I'd love to. It's just such a fascinating - Do we want to put our listeners through tier one capital ratios? Oh, I think if you were to describe it in plain English, like what does it mean? Why? I think it's like it's one of the most fascinating stories around it. Given the central role in the economy and civilization, frankly, it feels like something that's worth knowing. As long as you promise I'm talking about Bitcoin. If this is some sort of Bitcoin Trojan horse, then that episode will never set a lie to date. No, I'm kidding. No, absolutely not. But it is – how they operate is just fascinating.

36:28I'm not even trying to suggest that it's nefarious or anything wrong with it, but it's like I reckon – I've said this many times before, but if we just surveyed a sample of 1 ,000 people randomly, I think people think that there's a vault down there full of gold. And it's like, oh, that's not the case? In fact, it turns out there's not even any cash there. It's like, okay, well, where is it? Oh, it doesn't exist. What? That's a story, man. That is a story worth telling. And again, I'm not trying to suggest it's anything untoward. It's just the modern structure of banks and how they work and how that integrates into central bank and how that connects and interacts with consumers and businesses is one of the most – it sounds super dry because it is shrouded in T1 capital ratios and basically everyone goes, I don't know what the hell you're talking about.

37:20I have an eye on market rates and yeah. You know what I mean? But once you've looked into it, it goes, oh, just being to that. I think you could absolutely explain it to a 12-year-old, but they would go, oh yeah, cool. They would probably have some follow-up questions, but they would get it. I have some questions on that. Yeah, anyway, it's fascinating. Nice. Very, very good question. Thank you, Brad. Hey, here's one from an anonymous listener, I assume, because I've been sent it without a name. Dear Scott and Ram, I've been cooking up an idea that has probably been talked about a million times over already.

37:51I like to call it debt recycling light. He says in brackets, or she says, everyone who has had the idea has probably already called it this too. The idea involves paying extra into your mortgage every week. Then once a year, you take the money in your redraw account and invest it into a handful of blue chip dividend paying stocks and have those dividends paid back onto your mortgage along with your extra repayments. If it works the way my feeble mind thinks it would, you'd end up with a double compounding effect of paying down your mortgage quicker while building up a good core portfolio of blue chip stocks.

38:24I don't have a lot of spare money with a young family, so I want to make full use of the money I can spare without taking the risk of debt recycling proper and actually borrowing money to invest. What are your thoughts? Have you already talked about this a million times? I love the pod, guys. What's the inside of it look like? I imagine it to be like that round bit with a bubble window that juts out on a Macca's playground. I love that. It's better than the Statler and Waldorf version, so I'm not sure. Maybe it's some combination of that. Imagine Statler and Waldorf peering out through the bubble in the bubble window on the Macca's playground.

38:59That's very funny. I'm not sure we can tell you what the inside looks like other than you made it be entirely wrong. What do you reckon, mate? Debt recycling light. Put some money into the redraw and take it out once a year and then put those dividends back in the mortgage. Yeah, I think it's a pretty clever way to short the dollar. I mean, don't forget you're paying back your loan in nominal terms, right? And you're in a situation for whatever structural reason that is just treated differently. When housing is the collateral, you get very favorable rates, more than you would if you owned a factory or something else.

39:37I'm effectively doing that, actually. I'm not taking a sort of that dividend approach, but it's just sort of like, I am wearing a much higher debt and an ongoing repayment burden than I need to because I'm keeping money elsewhere. And it makes perfect sense. So long as this is the thing you've got to be honest with yourself about. So long as the return you get outside. So there is an inherent return you get just by paying off your mortgage, which is the saved interest cost. Right. Like that's a, that's a real return. It's not the return in the way that it's typically thought of, but it is a return.

40:17But so as long as the return you're getting in these outside investments, whether it comes through capital, by the way, it doesn't have to be a dividend thing. It could come through the capital gain of your shares through the dividends or through the emu farm that you bought or that, that bit of art. Don't buy an emu farm. You know, you know, or another asset I won't mention. Like there is, if that return is higher than the other return, then do it. After tax. Sorry, thank you. So two things. Yes, after tax, absolutely. And also you will find certain situations where it works out, provided there's no little shocks along the way.

41:00So you don't want a situation where this should work out, but if it doesn't, I'm back to zero. Right. So I'll summarize my, I'm all over the place here. If you think you can get a better return without taking any excessive risk and ever putting yourself in a situation where you're a false seller, 100%, do it. And I've really radically changed my view on that over the years. I used to be pay it off, pay it off, pay it off. And now I think, no, I actually prudently should invest sensibly in far, far more productive, higher return assets. As long as I, as long as I'm never put myself in an existential threat, then that makes perfect sense.

41:40And to tell you what, it makes even more sense. It's made even – it's even been – that makes sense when you've got 2.5 % inflation. When you've got – now, we're well above that now, but when we're at 7%, I tell you what, it makes crazy amounts of sense. So you've got to have a view on inflation as well, but I'm of the view that it'll be tough to get too low for too long. and yeah, I like it. I like the trade. I like the thinking. So I did too. I'm going to, I'm going to mention the risk you mentioned, Ram. I want to just touch on it. You ought to have different views and that's cool because it gives our listeners some different ideas.

42:20The existential risk comes largely from job loss and from cash flow. And so if in 30 years time, you had 30 years of unbroken employment, it was obviously a good idea to have done that, leveraged up and maximized both. If you're out of work for only months during that period, you lose your house in the meantime, even though you were trying to be prudent, you're still going to have lost your house. And even though the problem, we talk about probabilities on Friday, right? Buffett talks about having a, you wouldn't play Russian roulette with a gun with a million chambers. Why? Because you get the other 999 ,000, 999 ,000, and you're fine.

42:51You get the wrong chamber, you're dead. There is no trade-off in which is worth risking death for any other return. It just doesn't make any sense. And so the only thing I would add to just your point, I think mathematically, academically, theoretically, it's right. But I would have a massive margin of safety, which is I could be able to work for under two years, right, before I lost my house trying that strategy of being too levered up. Compared to being, you know, if you pay a mortgage off, you'll lose your job tomorrow and it'll suck for a while, but you're not going to lose your house. Yeah.

43:21And so, there is a trade-off there somewhere. When it comes to your question, dear anonymous listener, I think you're right. I would encourage you to think about the whole thing holistically though which you kind of are the only reason I say that is putting extra money into the redraw then taking it back out again you could just invest in shares directly there's no need to put it in the redraw then take it back out yes for that year you get a little bit less interest but if the assets are going to do more than the interest anyway like we said on Friday you want to be invested in the market more quickly if the market averages 10 % your mortgage is 6 % pick some numbers then you actually want to be in the market more quickly there's no point waiting a year giving up a 10 % gain to save 6 % and then investing the money.

44:02There's no mathematical value in that. If you're going to take it out anyway, you might as well do it straight away. So there's that. In the same vein, putting the interest or dividends back into the mortgage versus letting them compound outside the mortgage, your total return is still the same in the sense that you've got, think about, you've got three assets, right? You've got, or three, not three assets, three buckets. The first is the house. The second is the mortgage. The third is the share portfolio. and whether you increase the portfolio or decrease the mortgage by a dollar, your asset value doesn't change.

44:33If I have$10 in debt and$10 in assets, if I have$11 in... Sorry, if I have nine in each or 11 in each, they still cancel each other out. So putting the dividends back on the mortgage just because it means they're going to be paying off a lower interest mortgage rather than compounding a higher rate in shares if you think that's what it's going to do. Does that make sense? Have I explained that? Yeah, yeah. But the one thing I do want to talk about tax though, and I do choose numbers not deliberately, but they're not far off. If you get a 10 % return in shares, ignoring franking credits and capital gains for a second, and we should put them back, so I will in a minute.

45:07If you're on a 30 % tax bracket, then your$10 return,$7 after tax. Now, would I try and get a 7 % return as opposed to a risk-free 6 % return, which is paying off the mortgage? No, because I might get 7 % or I might not. And so I take the risk-free six every day. So when interest rates are high, this makes less obvious sense because the incremental return you're getting by investing is probably not going to be that much bigger after tax than it would be because, remember, your risk-free returns on your risk-free, it's tax-free as well. The saving on your mortgage is tax-free. So think about that when you do your maths.

45:44I would always, it's kind of a general theme, is be roughly right, not precisely wrong. So kind of proceed. If you can put extra on the mortgage or put extra in investing, you're probably okay. I would be inclined to make sure whatever you do, you are building that cashflow buffer for yourself such that if the world goes to hell and you lose your job, you can cover that mortgage for a while and keep yourself in comfort. The psychological benefits are well worth it for me. They might not be for you or for Ram. But I've said before, we put money on the mortgage rather than buying shares with it.

46:17not because I thought the mortgage was going to give me a better return just because it helped myself and my wife sleep better at night that was that that was an easy decision for us to make right at that point um we also one of the other things you can do depending on your financial position is um you got to be really careful you don't spend the money here like really really really really careful we bought our house we sold one to buy this one and we actually took out the maximum mortgage the bank would give us even though we didn't need the money and I left a six-figure sum in the offset account now something we're going to spend on holidays and cars and stuff and the last thing I want you to do, because that's why the banks offer offsets, right?

46:49Because they figure you'll spend it and they're probably right most of the time. So make sure it's right for you. We could have borrowed a decent amount less and just the equity we had and the price we were paying, we could go, okay, well, I'll borrow this much instead. We didn't. We borrowed the maximum. Why? Because that money meant multiple years of repayments if the worst was to happen. So it just brought me some peace of mind. Again, if I'd spent that money on something stupid, it would have cost me more money over the long run it would have been a terrible decision but if you're someone who can be reasonably disciplined that can be an option i'm not sure if you're in that situation if you already maxed out your earning capacity you probably can't and most people have these days because house prices are stupid but if if you are in that situation that's another way you can think about giving yourself a cash flow buffer while so you can invest in what's likely to be a higher return environment yep any more from that ram yeah no i think we've we've covered it it's just death yeah Yeah.

47:45Uh, yeah. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

47:57This is an interesting question. It's longish, Jamie, so I'll do what I can. Hi, Scott and Ramsey, Jamie. If you two were wrestlers, Scott would be the disclaimer because every sentence starts with, I do or do not mean what I say, depending on if you do or do not get upset and whether it is or isn't personally about you or if it is or isn't in general. His finishing move would be the counterfactual argument because there would be no possible counter. And obviously Scott would be a baby-faced good guy. Of course, Ram would be a heel. How could he not? Coming up ranting about how it's not fair that he isn't put in title matches and management actively against him.

48:34He'd carry on earning the name Ram Chop. He would lead a faction called the Straw Man who worship him as a god, claiming to be property poor with no house because he had to sell it to afford referee bribes. With no property left to sell, he secretly uses Bitcoin, accumulated through his secret billion-dollar business and his army of straw men to bribe the referees. He only wrestles in property matches where the loser loses their house with a conveniently bribed referee. He never seems to lose these. His finishing move would be the three most dangerous letters in sports investing, the RCI, Retail Crypto Investment.

49:13Not the C word, please. I was with you until that point. If you're reading this on the pod machine, it must mean you have at least some sense of humour and have put my question in the bin. So thanks for indulging me. Absolutely our pleasure, Jamie. Here's the question. That was very good. What's going on? The disclaimer, I like that. My wife and I have a portfolio of just over$90 ,000 invested in the following. 20 % in the Australian Foundation Investment Company, 28 % in BetaShares Nasdaq ETF, 23 % in BetaShares Global Quality Leaders, 17 % in a combination of other shares, and 5 % in hard cash that is really scarce for real.

49:51Yes, Ram knows the one. Good man, Jamie. I think he's saying Bitcoin, is he? Yep. Okay. We invest in AFIC, the Nasdaq ETF, and the Quality ETF as our passive dollar cost average investments. with the goal that it gives us Australian, US and global exposure. On a recent pod, you mentioned some criticisms about the quality ETF. I've been thinking I'd like to change to something that's more passive and a more broad based option. I've also been thinking about Australian Foundation Investment Company. We originally invested into this because of the barefoot investor. He said too, and I like the tax benefits of the dividend share substitution plan, which means there are not tax on dividends as there are no dividends, though there is increased tax when selling shares.

50:34which suits a buy and hold forever passive investment method. But while we treat it as a pseudo ETF, it's not really an ETF and is still subject to active management decisions. So I've been debating whether to change to an ASX ETF. Here's what I want to know. Question one. If I want to change my investments, what are your thoughts on selling the current ones and buying new alternatives versus keeping the current ones and just putting new cash into the new ideas? Ram? Yeah. I mean, I'll just start by saying, I don't want to say anything bad about Scott because he's a good guy. Pape or Phillips, the record?

51:14Both. I do that behind your backs. I don't want to, but I do. My hands are tied. Exactly. The Australian Foundation Investment Company, just looking at on the ASX, has underperformed just the Vanguard ETF over one, three, five, and 10 years. pretty materially too. Maybe there's something in that that I'm missing and the past is no guarantee of the future, as they like to say. But it's kind of like, I would love to know the rationale behind it more deeply. I would actually wonder whether this preceded ETFs more broadly actually. Yeah, right. Scott's original advice made. Because ETFs, we said the other day, were surprised by how new they were in the Australian market.

51:59It's possible this was older. I don't want to put words in Scott's mouth there that he may still have exactly the same view. Yeah. So I don't want to speak against it. But look, for my mind, yeah, I think the ETF seems the better choice. I've never really looked into the Australian Foundation Investment Fund. There could be some really, really good reasons. So I put that caveat that's out there. But then, yeah, you potentially have a tax bill, and that potentially is big, and that potentially means that the ETF has to do relatively much better for a long period of time before you're just back to even.

52:33So there is that. So for that reason, unless you're in some tax advantage vehicle, it would be probably better just to start allocating new capital to the ETF if that's the way you go. Yeah, tax is going to hurt you there. Yeah, I completely agree. You've got to have to, if you do the maths, I'm going to use 30 % tax rate, it makes my life easier. It just takes me to have to do the maths any other way. if you were to get a 5 % return on a pre-tax amount, so 10 bucks, for example, you get a 5 % return, it's 50 cents. If you sell your$10 investment and you end up with a$7 left over, to get the same 50 cent gain, you just got to make a lot higher return.

53:15That's kind of the math. I can't do the math in my head. Should use an even easier number, but I didn't. So that's your starting point, right? It's probably closer to what's 7 % or 8%, something like that, 8%. So you just need a higher return after you pay the tax. You're going to pay tax eventually, but compounding is beautiful. That's why Charlie Munger always said, don't interrupt it unnecessarily. If you can compound pre-tax, you're always better too. Now, if you think the gap, by the way, those two numbers side by side, if you kind of go, well, hang on, I think that underperformance has been so terrible, then in 10 years' time, I will have wished I'd compounded, gone with the other investment.

53:46They by all means changed out, but I'm kind of with Ram. If they're going to be there or thereabouts, what's the underperformance, mate? Do you have a, I know you looked it up, you Googled it. Do you have a sense of what the difference is between the two assets over the last 10 years, for example? Over the last 10 years, I tell you exactly. Well, actually, it only goes – oh, no, it doesn't. What have you got? What have you got? Sorry, sorry, sorry. I've just navigated away. So the last 10 years, we've had the Vanguard VAS is the code, which is the broad-based low-cost index ETF is 47 % up. The other one, the foundation company is up 25%.

54:20Right, there you go. So one's done twice as well as the other. Yeah, but even after tax, you're probably still behind if you paid tax 10 years ago, I imagine. And depending on what your game was. So just be careful of that. I wouldn't rush out. We have a service called ETF Investor at The Motley Fool. My intention is if we ever tell our members to change their mix, we will probably do exactly what Rams just said and say, keep what you've already got and add future money to this new mix simply because it's not worth paying the tax for the sake of it. The ETFs aren't likely to own it so badly, they offset the cost of the tax you'd have to pay.

54:50And that's such a key point. I want to just dig into that for a second because I very often come across people who will say, I hold, it's usually in relation to the banks, I hold the banks, I don't like them, they're overvalued, but I'm going to cop a huge tax. Now, tax hit. It still makes a huge amount of sense to cop that tax hit if the relative performance going forward is going to be very different. So if you expect the market at large to do really well and you thought the banks are in for a bit of a rough time, it might be worth taking that tax hit, right? Oh, totally, yes, yes, 100%. And I know just to emphasize that point, I think tax is something you always want to consider, but it's sort of one of the final considerations.

55:33Like too often it's people put the cart before the horse and they make their decision entirely through the lens of this. If I do this, will I have to pay tax? Yes. Well, I'm not doing it. No, no, no. But wait, hear me out. It's vastly better in every, like, again, to your point, what do you want? Do you want to maximize your after-tax returns or do you want to avoid paying tax? I want to maximize my after-tax returns. I don't know about you, but the number of people that shoot themselves in the foot just to stick the middle finger to the tax man is just – it's cutting off your nose to spite your face in many, many situations.

56:04So if you're on something that you're not really comfortable with at all and you have a fairly bearish outlook on it and you also have a potentially big tax bill to pay, I'd seriously think about it. And it's not just a binary thing either. It's like, well, maybe I can just slowly sell down a bit this year, a bit next year, spread that tax burden out a little bit. There are ways to sort of help minimize it. But just to go, gosh, I really don't like this thing I'm invested in, but I don't want to sell because I might have to pay some tax. It's always struck me as a bit odd. It is. So maximize your after-tax return, don't minimize your tax.

56:38Yes. Is the way you want to approach that one. Here's a second question, mate. Are global ETFs worth investing in or is investing in the U.S. enough? I interpreted talk on a recent pod that a global style funds are just investing in the US with worsification added in. And most of the big US companies have global earnings anyway. Yeah, that's my view. I just think the sales teams for a lot of these ETFs or just investment advisors generally do it because it sounds good. I mean, why wouldn't it sound good? Australia is 2 % of the world. The US is 25%. There's a lot of stuff happening in China. There's a lot of stuff happening in Europe and Asia and you've got all these countries that are supposedly developing.

57:21It's like, I'm just going to ignore that. So it makes it, there's a certain appeal to it. It's just not supported by the data. I mean, my favorite whipping boy at the moment in this regard is China, which is undeniably just exploded in terms of the economy. But it's been like 10 years, you've done nothing. You've got no return. You might even be a loss. I'd have to double check it but it's it's a woeful return and again can you imagine the cognitive dissonance like just i travel back in time i say scott over the next 20 years china is going to go from this rural back worth 30 years really you know to to the second largest economy in the world on the verge of becoming the largest economy in the world do with that information what you will i know what i would do is like i'm all in baby i'm like 100 china focused and yet it was like one of the worst investments you could have made so i just i think u.s is special despite all of its problems and it's got serious problems um and australia is very we're very fortunate in terms of our institutions in terms of our natural endowment um in terms of our home field advantage because we live here and we know it we know the culture we know that you know we're just we're familiar with it that that gives us an advantage so for me it's australia and the u.s and and i don't care and and having Having said that, even if my ASX portfolio, there are stocks in there.

58:44In fact, there's more than a few stocks in there where they earn not just some of their income overseas. They earn most of their income overseas. I'll point to Catapult at the moment, which I do so because it's having a good run at the moment. I copped a lot of grief for it for a while. Go Catapult. I told you. But yeah, I mean, they earn vast amounts of their money overseas. So it's listed on the Australian Stock Exchange, but it's given me that broad exposure. So, yeah, I think it is. I think it's diversification to a large degree. And you want diversification, of course. But that doesn't mean just expose yourself to everything because that just guarantees you mediocrity.

59:24so i'm gonna i'm gonna take jamie's uh original comment i'm gonna start saying i do or do not mean what i say depending on if you do or not no i'm kidding um i'm but i'm gonna argue both sides of this mate i own a vanguard global etf which is effectively the global economies excluding australia because that's the way vanguard set it up so you can basically get the rest of the world is kind of there it's an australian based etf so like well i'm not gonna double up with australia buy the australian etf if you want it here's the rest of the world if you want it and it's the rest of the developed world so it excludes the developing economies so think um you know canada uh stock markets of europe uk that kind of stuff um i can't remember if it's japan included or not certainly not china not the developing world and i own that because my view is simply that passive is passive is passive and so if i every time i make a every time i make a bet every time i make a call on what i expect to happen i've got to ask myself whether i really have the crystal ball or probabilistic kind of views to do that.

1:00:26So if I say I want to be diversified passive, that's what I want. With my ETFs, I got some in my super account and some for my young bloke, as I said before. I want to be diversified outside Australia. So if I say, well, I want to be diversified outside Australia, but I'm only going to take the US, I'm choosing, I'm making a decision saying I'm passive, but only passive in the US, not passive around the rest of the world. I'm choosing the US over something else. Now, I don't think you're wrong, around. This is why I'm going to argue both sides of this. I think it's very likely the US is the strongest economy for the longest time for a whole lot of reasons that have a lot to do with history.

1:00:56That being said, it hasn't always been the case. Go back to the 1800s and you wouldn't have picked the US. You would have said, US, I'll invest in the UK. Why would I go global? If I'm a UK investor, I'll say in the UK, thanks. The UK is, look at the empire. The empire is never going to end. The sun never sets on the British empire. And again, I'm not suggesting the US empire is over, although Ram has said things to that effect in the past, or at least that it's coming to an end. If I'm doing a multi-decade investment strategy, I'm thinking, well i don't really know i don't i have a view but i also i've got to be honest with myself you talk about ego on friday i think it was ram gotta be honest with myself i have that view but am i really likely to be right and i think a bit of self-doubt a bit of self-questioning is really good for the investor i think i'm right but why why would i think that if i'm if i'm trying to be passive well why would i be passive and then try actively to choose which market i'm gonna be passive about there's some cognitive dissonance there so um so my i have the the vanguard global it's VGS is the code for those following at home.

1:01:47I own that one. I'm not saying you should buy it. I'm just saying I own it. That's why. Because I kind of said, I'll have passive global, please. That being said, I have, I think it's the VTS, the Vanguard Total Market US for my young bloke. So I'm arguing both sides. I think it's probable that the US market outperforms the rest of the developed world for reasons that we've talked about. But is it certain? No. If I want to be passive, what am I going to do? So I flip-flopped, I own both, which is probably about as sitting on the fences you can get. But I will argue both sides of that. Is investing in the US enough?

1:02:17Yes. Is it necessary to go more global? No. But ask yourself whether you want to pick a market or whether you just want the passive global return. For my global portion of my, sorry, my passive portion of the portfolio, I've said, well, if I'm genuinely passive, why would I then try and work out whether the US is going to beat the rest of the world over the next 30 years? And I don't know the answer to that. The other thing about, by the way, just the selling and buying some more that Jamie's first question. The other side of that is if you're going to invest for 30 years, the compounding, whatever compounding happens kind of matters a lot, right?

1:02:48If you start from now and say, imagine the compounding at 30 years, we know from Warren Buffett's own track record, a couple of percentage points of difference a year can be massive over time. So it's not inconsequential, but we can't know. You just can't know what the future is going to bring. You're literally guessing. So my view is if you want to be passive, passive, passive, that's your point. I want passive outside Australia. Global developed world is kind of where I have lent towards and I probably still would, but I would absolutely not criticize anybody who said, you know, I'm just going to stick in the US because of all the reasons Ram just said.

1:03:23Is that on the fence enough, Ram? Yeah. I mean, again, every investment decision, I mean, it's compromises being made. Exactly. And it's just a question of the compromise you want to make. If I've read you right there, you're basically saying, I don't know. so I go with the broad diversification. No, by the way, that includes 65 % US. So I'm not giving up that much to do it. You're not. You're not. But you will – I mean, while you're guaranteed not to do the worst, you're also guaranteed not to do the best. Correct. By definition with ETFs. By definition. And I'm sure you're very happy with that, right?

1:04:00So again, even when you – A bit like maximizing you said, short-term maximizing versus long-time endurance. Would I like the best trend if I get it? Yes. Do I want to make that bet or just take the overall long-term return? No. Yeah. The thing is, yeah, I guess I really have sympathy with that view. It's interesting though, isn't it? Isn't it interesting that if we went back 50 years and we said, it's a horrible term, but what is the developed world versus the developing world? You go, well, we've got the US, we've got the UK, we've got Europe, and we've got all these developing countries. The global South is one.

1:04:35It's the way it's sort of framed these days. And none of them have developed. It was the third world before it was the developing world, by the way. The third world, that's right. We've been through plenty of those terms. Yeah, yeah. South Korea is an exception. Yes. Singapore is an exception. Even Japan, depending on how far back you go. I mean, post-war Japan was, you know, destroyed. But why not? What happened with Latin America? What's going on there? What happened with much of Southeast Asia? What's going on? What happened with Africa? These are huge places. And Africa has been tipped for decades.

1:05:06Middle East. The Iraqi stock market, I vividly remember. This is kind of, you know, in between Gulf Wars or after, like, Iraq was apparently all these companies were really, really cheap. And, you know, there's plenty of those would be, could be, should be. It's a fascinating question. I mean, why? It's not that you would expect things to be fixed that quickly, but things are just as bad as they were back then. So it's not as if, oh, the progress has been slower than we've liked. It's just like nothing's changed despite all of this aid and the IMF and the World Bank doing it. In fact, I would point the finger for squarely at that in the way that they, they're basically loan sharks, right?

1:05:44It's like, yeah, have some cheap money. Oh, you can't pay us back. All right. I guess we're going to take this and this and this. It's a very, very destructive relationship that's there. And again, not to get down a whole other rabbit hole, but I don't see that changing. And too often people grab for the, you know, the home field exceptionalism. We're just smarter and harder working in Australia. It's like BS we are. Humans are humans are humans. And there are very entrepreneurial, hardworking, honest, intelligent people in every corner of the world. It's a whole bunch of idiots too. Don't get me wrong, right?

1:06:20You know? But the capacity of a society of humans is always about the same. I mean, you probably have the same percentage of geniuses and fraudsters and, you know, it's the same kind of mix. And so you have to sort of say, well, what is it then? It's a structural issue. There's an institutional robustness that just lacks in those areas and incredibly difficult to fix. And I just, it's not to be cynical. It's not to be negative. I just think when I look at Africa, when I look at Latin America, I look at this place, I think it ain't changing. I just don't want to bet on that. It's like, have they got great resources in Africa?

1:07:01Oh my gosh, yes, they do. What about Latin America? Oh my, like Argentina and Brazil, huge amounts of like massive endowment there, you know? The Middle East, oh my gosh, you know, maybe it's even more complex, but gosh, there's a bunch of stuff there as well. So why, why is that? And again, you can pick at that and you'll form your own conclusions, but then you have to say, now, if you want to make a 50-year investment, I mean, I'm a long-term investor. but that's going to push my investment time horizon. The thing about ETFs though, mate, is that people – I mean, they probably are, right? If you're 25, you're probably going to own that ETF for 70 years.

1:07:39I mean, it sounds preposterous, but if you're genuinely passive investing for retirement and then living off the income, I can imagine a scenario where you are literally investing for more than half a century. The world is changing so fast and that pace of acceleration is changing. Well, that's – the pace of velocity is acceleration. Anyway, I'm going down a different – the pace of change is accelerating and so i just think i think you're right who can predict out 20 years 30 years so so i i kind of i stopped trying after 10 really because it's too hard if it ever came to a situation where it's like wow they're really getting their act together in some of these jurisdictions i can change my mind yes but but in the next 10 years i do see it as not impossible but close enough and and for that reason it's like yeah and again i'm not i don't feel like i'm taking a compromise i'm massively diversified by a australian etf or a us etf and they've got all of those intrinsic institutional advantages that they don't have and and look if that changes in the year 2033 you're having a discussion it's like wow this new you know political party in in you know wherever is really turning things around all right now then i can change my mind I hear what you're saying, but I don't think any 20-year-old today is making an investment that is, well, this is it, set in stone.

1:09:02I made a decision when I'm 20. I'm 48 now. The world has radically changed from my initial expectation, but that's it, la, la, la, ends in the years. You know, I'm going to stick with it. Like, no, you can change your mind. So anyway, each to their own, but it's not for me. Fair enough. Last question from Jamie. Is the NASDAQ 100 diversified enough for passive U.S. investing? Yes. How much do total US or S &P 500 style ETFs overlap with the NASDAQ 100? How would you go about splitting passive investments between the NASDAQ and a more broad-based passive style US ETF? It's more than diversified enough.

1:09:39I mean, I made the point before on the pod, I'll make it again, and it sounds critical. I'm not being critical, but we've got very smart listeners. And so they get all the big stuff, and now we're at the really pointy end of certain optimizations. Yeah. yeah if we want to nerd out we can i i just i just i just don't think i i think if you really want to worry about moving the dial on your future wealth do everything you can to maximize the income that you can generate now through whatever skill that you can bring to bear you want to be the world's best hairdresser the world's best plumber the world's best investment banker whatever it happened i'm a great dentist do that and do what you're doing now you're going to be you're going to be just fine and tell you what that is a far far more or or just you know spending time with the family or enjoying great experiences with your friends and family like these are these are far more worthy pursuits than then do i go and as that 100 or am i better off going with a slightly different product that includes 187 shares i don't know i don't know you're there you won you've got it right like again i've am i being unfair here or dismissive i just think i just yeah i i think it it's it's at a point of optimization where you're really not going to move the your your efforts and your focus spent elsewhere will have significantly bigger payoffs than whether that flavor of etf is much different from this one which are broadly this like the venn diagrams overlap to such an insane degree that while there is definitionally and you know in hindsight we will look back and go oh that was the better option.

1:11:17Yeah, that's right. One isn't going to be, wow, I compounded at 15 % per annum for 20 years and the other one I lost all my money. It's just the divergence is going to be really, really, really close. So it's just, it's, yeah, I don't have a strong opinion on, other than that strong opinion, I don't have a strong opinion on, you know, which particular kind of tech-oriented broad-based low-cost ETF you should go for. So I'm going to kind of have a similar view on this one than the one I had about the US versus global, actually, mate. And I'm going to try and outline the differences. I'll come to the last bit.

1:11:52Yeah, so let's go first. So look, NASDAQ is not only tech, by the way. The NASDAQ 100 is the 100 largest non-financial companies on the NASDAQ exchange. And the exchange itself doesn't really matter to the investor. If Microsoft went from the NASDAQ to the New York Stock Exchange or GE went from the New York Stock Exchange to the NASDAQ, it wouldn't change the company, right? And so NASDAQ gets a little bit too much love because the companies that are on there have been the best performers over the last 15-odd years, maybe 20 years now. And so NASDAQ's kind of – if you want to invest in tech, you invest in the NASDAQ.

1:12:27If you want broad tech, the NASDAQ ETF was the easiest one to go broad tech on because that had a greater proponents of tech companies. So overall, and this is where I get to, the difference between those two is probably going to be equal to the difference between the technology and non-technology sectors broadly in terms of the US future. Now, I will say exactly the same thing you just said about the, you know, does it matter that much? There's two things, I guess, in the future if you're making some calls. And again, to your point of the global side, you can always simply just choose to invest differently in future than you have now.

1:13:01If I'm looking at this though, So I own both, I said the global one and a Nasdaq ETF for the record. If I'm thinking about the long-term Nasdaq ETF, there's no reason the Nasdaq remains heavily tech-focused for the sake of it, right? So if you're a company listing on an exchange, why would you list on the Nasdaq versus the New York Stock Exchange? There is nothing that says tech companies have a better run on the Nasdaq or you can't list on the Nasdaq if you're not a tech company or any of that sort of stuff. It's purely just a question of where do we put the, you know, where do I want to list?

1:13:32and the nasdaq was the first computerized purely computerized exchange it had lower listing costs for its new companies so guess what around 1995 through 2005 all these new dot-com companies went well nasdaq's online that's kind of cool and it's cheaper that's kind of cool if we're gonna list i'll list on the cheap exchange and honestly that's kind of why we've got what we've got had it been different and the nasdaq been 40 years older and the new york stock exchange opened some different board of cheap, lower fee access for those companies. We might be talking about the NYSE index rather than the NASDAQ index being the home of Amazon and Google and Apple and whatever else.

1:14:06And I say that because there's no reason why in five or 10 years time, the NASDAQ's composition can't change markedly or the New York Stock Exchange's composition can't change markedly. In fact, some companies actually switch between one exchange and the other. So you could buy the NASDAQ because you're like, I'll say Amazon, I own the shares. And Amazon could decide to list on the New York Stock Exchange next week. So to drop out of that index only because it changed the exchange, not because it wasn't tech anymore or anything else. So if you're a passive ETF investor, just be mindful of what could change composition-wise between the two.

1:14:36Second thing, just quickly, we'll wrap this up. Second thing is just think about you're making an active bet. You're betting on tech over non-tech broadly, not with saying what I just said. The tech preponderance in the NASDAQ is much bigger than the S &P or the New York Stock Exchange. So if you buy or don't buy one or the other, as Ram says, you're making a decision either way, actively or inactively. Not making a decision is still a decision. So if you don't invest in NASDAQ and you invest in a broader US market, you're getting more non-tech. And if you want to make an active call that, hey, I think tech's going to be a driving force, you want the NASDAQ.

1:15:12If it's not going to be or you're not sure, then maybe ask yourself why you want that versus the other. So it's difficult, right? But the last thing I will say, this is actually really big for me. I own the NASDAQ ETF, as I've said. I may at some point choose to change what I'm investing in. And maybe that point might be sooner rather later. I'm not saying I will at all. Please don't take this as any advice and don't take it more seriously than I mean it. The iShares S &P 500 ETF, it has a management fee of 0.04%. The NASDAQ is 0.48%. It's literally 12 times more expensive. Half a percent of your returns compared to 0.04 % of your returns.

1:15:52Now, think about the fact the S &P is large chunks of that now, the NASDAQ anyway. How much am I really getting extra with the NASDAQ that I'm not getting with the S &P 500? And how much of that gap, if I get the same in both, how much am I paying extra for the kind of the pure tech or the less kind of non-NASDAQ stocks? At some point, that starts to overlap. Now, while the tech stocks do really, really, really well as they have for the past couple of years, it looks like reasonably obvious that the Nasdaq's outpouring massively, right? I wouldn't presume that it necessarily will outperform sufficiently, given the fact a lot of these tech companies are on the S &P 500 anyway.

1:16:30I'm not sure it'll outperform the fee difference, I've got to say, over time. So I'm probably closer than I've been in years because the S &P 500 has changed its composition. 15 years ago, none of these companies were in the S &P 500, right? Because they're too small and too new and no one really talked or cared about them. These days, they're all there. And so if you look at the composition between the two, at some point on fees alone, you might want to go for an S &P 500 ETF. Yep. You're going to do pretty well in each case. Well, and that's the other thing, by the way, if you don't think tax is going to do well, don't buy the S &P.

1:17:00If you think it's going to do well, you buy the NASDAQ and maximize your tech exposure. It's a little bit, I've said many, many times, I think if you think about innovation over the next 15, 20 years, it's probably going to come from inside the NASDAQ rather than inside the S &P more broadly because not necessarily the company is currently but if you're a new tech company you're gonna listen to nasdaq probably because that's where all the cool kids list so whether you're with your existing tech company growing fast or a new tech company listing you're probably gonna listen to nasdaq is tech going to be the driving force in the next 20 years economically probably doesn't necessarily mean like your china example that it'll occur to shareholders but it probably will probabilistically i think it's i think i'm sure i've said i probably don't know what time frame i use but i would let me just put a finger in the air and say if you want me to make a random and um irresponsible guess i think that's beats the S &P over the next 10 years.

1:17:44But that's just a pure guess and I wouldn't invest on that basis alone. What story happens over there? I missed you. I reckon the NASDAQ beats the S &P over the next 10 years. Oh yeah, I'd suspect so. Yeah. They'll both do well. They will. Again, it's an entirely a relative game. You know, in a world where your ETF drops 10 % is a wonderful outcome where everything else goes to zero. You know, it's sort of, it is very much a relative game and it is, you've got to ask. It's not just the culture that exists in Silicon Valley, which allows for a lot of innovation and value creation. It's also the incumbent advantage of scale and access to capital.

1:18:25Having cheap access to capital is just such a superpower. That is why Google and the FANG stocks would be hard, not impossible, but hard to disrupt because they can do what they've done. Like you just, as soon as anything slightest bit threatening comes onto the scene, just buy them out. Yeah, exactly. Because the market will give you credit at such a ridiculously low rate as to why wouldn't you? Now, if you and I want to pass the hat around, we're not raising a couple billion dollars, you know, lower than the cash rate. We're just not doing it. So it's sort of, you can't be naive or hubristic enough to think, I know the next big breakthrough and where it's going to come from.

1:19:07I don't know. But there's a good chance wherever it does emerge, if there's any substance to it, some of these big companies will bring it under their umbrella and will get to prosecute it. Google bought YouTube, Facebook bought Instagram. I mean, there's just so many examples of that kind of thing going on. And it doesn't even have to, and then look, sometimes, gosh this is the whole other thing but first mover advantage can be very powerful yeah but also but also there are plenty of examples where the person who made the invention wasn't the one who made all the value from it you know it's it's it's interesting you know maybe some new breakthrough technology we're not even talking about right now happens you know it it it comes into existence the founder starts their own company they go really well for a while oh well look at actually Yeah, AI is a good example.

1:19:56You know, it all sort of – That's a great point. It was OpenAI that was the driving force there now. But guess who's got AI programs? Google's got one. Apple's got one. Microsoft's got one. Amazon's got one. Yeah. Does OpenAI have a bit of a first mover event? Yeah, they do. Are they one of the leading, you know, candidates to really do well? Yeah, I think so. But the others have got pretty good irons in the fire there as well. And when we look back in 10 years' time, it might be someone else entirely. I mean, it's the Facebook, MySpace example. Facebook didn't invent social media. You know, MySpace kind of did.

1:20:32Well, not even them, really, frankly. But it wasn't the first player that did it. I just - Did you hear it on EVs, mate, I think? Yeah. I mean, Tesla's still got a decent market lead. It may still end up with most of the value, I like Apple and the others. But look at the growth of BYD. I think BYD has still got more EVs than Tesla globally. The idea that just Tesla was first mover, it created the industry, it created the market. it's done an amazing job. Does it end up being the largest market share? I think the jury's probably out. Almost certainly won't be a majority overall. There'll be other car companies that do it.

1:21:02Just because it got there first doesn't necessarily mean it will be the winner. Well, and to the earlier point, Musk didn't found Tesla. Yes, exactly. Yes, yes, yes. He bought it, right? So again, look, the future is unknowable in every regard, except for death and taxes. And a strong property. And you ran your Bitcoin.

1:21:26but but i would i i would think as much as you can make a guess on these things i just think there's something special about that part of the world and the structures and institutions that are around it that it's whatever the future does bring a good part of the value is likely to be captured that i want exposure to it i've i've got i've got exposure through it through etfs again have i got the best etf i don't know how much time do i think about it none but I sleep very comfortably at night knowing I've got a really low cost exposure to it. You know, good enough. Pretty good place to be. Yeah.

1:22:00Indeed. Mate, thank you for spending an hour, more than an hour and a bit with me, but it's been an absolute fun conversation. Thank you to those who've sent in your questions. If you want your question answered, info at fool.com.au. Mark it down for the podcast and our member services team will make sure they find their way to me to ask Ram. As a reminder, by the way, Ram, we get no early look at these questions. that are all off the cuff. It does an amazing job. I think that's very apparent on the answers. I should either look at them either. I don't. No, I have them, but I don't always look at them.

1:22:31If you want to follow us on socials, hit Ram up at Sage. Sorry. Oh, my God. Sage underscore. So rarely on it these days. I'm pretty sure. Sage underscore Simeon or Strawman Invest. I'm at TMF Scott P or at The Motley Fool AU on Facebook. Grab me at Scott Phillips Money until next Friday or whenever you're listening to this podcast. Full on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener.

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