Mailbag: incl. The challenge of selling, well. September 17, 2023

35:31And I think the reason being is to steel man, to use the opposite. Maybe I should have called it steel man. There's every chance, rebranding. Now it occurs to me years too late. Anyway, but they steel man, they're trying to steel man an argument. And I think that is the way to do it. And I think the other thing that's really worth remembering here is that any decision not to sell is almost like a decision to buy. Yeah. And in the sense that you're retaining that asset and therefore exposing yourself to the future in any case. Yeah. And you're keeping your capital tied up under that position, which by definition, I mean, it's the - If you're into cash tomorrow.

36:24Yeah. Yeah. It's exclusion principle at play here. You know, a particle can't be in two, two particles can't be in the same position at once and two amounts of money can't be in two different positions at once. It just can't happen. Opportunity cost, baby. Opportunity cost, you know. Yeah. I'm sorry. I'm rambling. You go on. What do you think? No, I think it's perfect. A couple of things, actually, Ben. I am and the Motley Fool tends to be better at buying than selling. um i think i've probably said in the podcast maybe not for a while that in the u.s a few quite a few years ago and actually probably maybe five years ago they did some research the u.s we've been in business here for since 2011 the yanks have been in business since 1997 and had kind of portfolio style approaches about 2001 or two and they went back and looked at all the the cells they decided if they'd never sold anything they would have been better off in other words at the point in time they decided to sell uh the the net result of that was that The sales would have done, they would have made money if they'd held all sales, put it that way, rather than selling them.

37:23So there's something, that's my, that's one of the origin, indirectly it's not the only origin, of my approach to be slow to buy and slower to sell. That is, if you've done all the work, then you've found the companies you think are best. And particularly if you're a long-term investor who prioritizes quality in business, which everyone should, frankly, in my view, although other people have different views. If you find a great business, then some will go badly. i've talked about my you know efforts of commission and omission before selling stuff too quickly um my service i'm sure members would have been richer had i not sold anything so that's that's the first the first thought second thought is there's a whole lot of ways you can manage a portfolio some people like conviction by 12 stocks or eight stocks and just do that and that's fine um others to your point about managing a lot of stocks david gardner again i'll mention him a second time i don't i'm always wary of putting words in people's mouths because i don't want to misrepresent their positions but i'll do my best to be um to do it correctly the his view is look he owns a lot of stocks and the ones that have done well are worth a large part of his portfolio the ones that i'm terribly are so small now so it'd be almost immaterial to the reach of his returns and and that's not to be flippant his point is i could sell them once they have 0.05 of my portfolio but kind of that point why bother and you know at some point they're a bit of a reminder of of mistakes made and and things gone um there is something to that i think around just kind of letting your portfolio build.

38:47So I am also slow to sell. I think I've sold maybe twice in the last three or four years. Unfortunately, I'm adding more money because I'm saving every pay period. I'm adding more money to my portfolio. So I don't have to sell to free up capital. Ram's absolutely right about opportunity costs, 100 % right. But generally, I'm kind of happier to let my portfolio kind of sit where it is. I don't buy all that frequently either, by the way. So I'm not someone who, I don't buy every fortnight and they never sell. Otherwise, you're right, I'd have a million things. A lot of the monthly full service, we actually re-recommend companies.

39:16In other words, recommend them for a second or third or fourth purchase. So they're not just new companies. And in terms of managing it, mate, I guess it's up to you. If you are a member of the full service, and I'm not trying to be noted or sell here, we follow them on behalf of our members. So if you want to just buy them when we recommend them and then sell, when we say sell, then go for it. But generally, because we, in those services, we don't have a fixed amount of capital, we can make a new recommendation each time without selling more. So it is that equivalent of adding money to a portfolio regularly.

39:47So far, we've done reasonably well, I think on almost all of our services. So there's that kind of idea of, I'm not sure you need to sell for the sake of it. If you find you want to do the research yourself, then yeah, there is a reality to how many you can cover. At that point, I would... I've even found it ShareAdvisor, for example. I'm going to pull this up just really quickly around. Sorry not to talk about it, just to give it some context. the last dozen recommendations we've made let me have a look one two three four five of the last dozen were re-recommendations so actually we've only had seven new ideas in the last month last year and that's probably pretty reasonable now we've also sold some in the last year um i don't think it's i don't think it's a massive issue frankly is i guess my thought but can i Can I guess?

40:34I'm sure there was some subscribers that didn't appreciate that. Well, this is the other thing, right? Because people who join our service say, I want new ideas. I'm like, well, if I've already got 40 companies on the scorecard, do you really want my 41st best idea? If I like those 40, do you really want the new thing because it's new? And we do a bit of both. As I said, some are new, some aren't. The longer we're, frankly, the longer we're in business, the more we are likely to replicate something because there's not that many. I will say for Ben's question, he's absolutely right. If we get to 100 live recommendations, then we're doing something wrong too because there can't be that many great companies that we're so confident of beating the market that we really want you to own them all.

41:10So we've got to hold ourselves accountable to that as well. As I said, we do sell some for different reasons. Some are takeovers, some go to rubbish, some get too expensive, a combination of all those things. So, you know, there's reasons. Look, I don't want to talk about, again, not too much about the services. In terms of selling, honestly, mate, my general approach is to be slow to buy, slower to sell. I would be loathe to get rid of that stuff. But that's just my call. Yep. I said this last week. I actually continued to mull it over because I think it's a useful framework. I want to try and formalize it more.

41:43And it's not an original idea in at least general concept. But just break out of Google Sheets. Not because I'm going to make you build a DCF model. But just get out a spreadsheet, Word doc, whatever. And just write down all the companies that you would like to own. probably worthwhile having another document just gives you you know one page thesis on why you would they're good investments i is this business around in 10 years time and is it earning materially more money at that point than it is today that's a really good starting point but then next to the on the on your spreadsheet write down what the uh returns what your future expected returns are but on based on that that future outlook of the business and you will it What's really nice about it, it's just going to put things in context for you.

42:32It's like, gosh, I really love Cochlear. What a great business. Be around forever. I think it'd be more profitable in the future. But I think it's really expensive at this point in time. Next to something that perhaps I don't feel as strongly about in terms of business. But wow, the return potential is much higher. And I've now got a context to comparing one with the other. And I would just draw a line. Frankly, for me, I would draw no more than 20 down the list. that's what that's the football team that you're going to put onto the pitch right and so for something to go on the pitch someone's got to come off yes and i'm you know and that because because frankly beyond that point i mean do i really need how much diversification do i really need um and then i'm just gonna i'm just gonna play it that way and i'm going to make sure that the players that are on the field are those that have the best risk adjusted return yeah you know There'd probably be another column there that I would have conviction next to, confidence, quality, whatever adjective you want to use there, because that does matter.

43:31Or maybe that's folded into your risk-adjusted nature of the return. But again, I'm getting overly unnecessarily complex here. I'm just trying to say that what you want to do is just create a wish list and then try and put a value next to each of those, which sort of identifies its attractiveness to you at this current point in time. You'll need to update that as the share price changes meaningfully. Shares go down half a percent one day. What's the point? But, you know, meaningfully. And as new information sort of comes to light. And I've always said that's the value of a Motley Fool or any newsletter service.

44:08They're an idea generator. Look, there's 2 ,200 companies out there. Go do your work. Or pay these guys a small fee and they'll narrow it down to, what would you say, 40 stocks. And then you can go to work on those 40. I know which one I would prefer to do. It's a lot easier to do one than the other. But then just remember here that, again, opportunity cost. I just want to make sure the best players are fielded at any one particular point in time. And that exercise, you can build that in the manner that you see fit as long as you're sort of getting the general sort of concept right there. I think that's a really useful framework to help you answer that question.

44:46Gosh, there's all these stocks. Which ones do I buy? Well, you buy the ones that you think are the best quality and that are offering the best value. How do I know that? Well, you do a bit of work or you lean heavily on someone else who's going to do the work for you. But that's pretty much your options. Nice to be with you, mate. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

45:13Hey, question from someone who wants to remain anonymous who says, Hi, Scott and Ram. question for the pod please keep anonymous again a reminder if you want to be anonymous put at the top of the question rather than the bottom because i don't always pre-read them uh so well done for this person i would like to know how you guys think about balancing investing and spending money on experiences and life's luxuries this one is particularly difficult for me i'm a passionate investor but i'm also a 25 year old who has plans he says and bookings for overseas travel and probably spends more than needed on weekends out with friends and general life experiences.

45:47Basically, I'm not frugal in nature, but I do invest most of the leftovers. I have close to 30 grand invested in the market, but I know this could be a lot more if I put the brakes on spending. Sometimes it's painful to think about how much this could equate to when I consider the compounded value in 30 to 40 years. Then there's the other half of my brain, which tells me that life is meant to be enjoyed. And there's a little point accumulating wealth, but not living. How do you guys feel about balancing these interests particularly for a younger person now see i liked you until the end of that question and then you had to stick the knife in and say you're a younger person therefore we're old blah blah blah i'm tempted to move on not even answer the question around but i'm not quite that vindictive so i will ask you to turn your attention to the question posed by the anonymous questioner even though they apparently are young and we are apparently old how do you balance it out mate this is why i've got faith in the future i mean gosh that's just such what a brilliant question.

46:43I spent a lot of my youth backpacking around, traveling around, and probably could have spent all that money and put it into realestate.com or whatever. And I'd be very, very rich right now, but I don't regret it. And I'm pretty sure when I'm on my deathbed, it'll be those experiences I look back and treasure the most, you know? So I know this is the wrong answer from a finance guy who would should should say no no put as much as you you can but no it's the same as we were talking about with um the teacher and the coffee right like there are some people there's there's some really good examples i'm going to draw a blank on the people who these miserly old ladies and you know whatever or old uh frugal you know gentlemen that lived a life of misery.

47:36And when, after they died, the family realized they were$14.8 billion or something, you know, like, well, not money is money is a tool. Money is there to, to be enjoyed. Yep. And, and I think you, you can go to either extreme too much. You can be the kind of person who invests every single red cent, or you can be the kind of person who parties hard every single weekend and And both of those answers are wrong to my view. So there's no right answer that I'm going to give you. What I would do though is I would flip it around a little bit. So the listener said, whatever's left over, I invest. And can I tell you, here's something else that I'm going to go jar against every financial planner in the world here, but I hate budgets.

48:24I think budgets are dumb. I don't like them. Don't like them. Because it's like a diet. But it doesn't work because they're too impossible to stick to. And what you might think in the cool light of day, I'm going to do this and I'm going to spend this much on entertainment and this much on food. It's just too hard. So what do you do? I think for my mind, when I say flip it around, I do it this way. I say, depending on how much I earn, I am going to invest this much per week or save slash invest this much per week. anything left over that is up for grabs do what i like with it i think it i think it's it gets rid of the life is comes at you too fast there's too many things on your plate for me to work out oh can i spend this$10.50 on a burrito today when i said that in my budget i only had so much for fast food but i did have so much for entertainment and this and like what you know these apps that the banks give you that you know it does all it all sounds good but it's just not it is not feasible rather i get paid i put 200 bucks aside and the rest just go to town do whatever you like and then when i just run out wait till the next paycheck that comes in you know like it's just easier it's it's and i think it's which is better i'm sure the more technical answer is to have a very well thought out structured articulate well articulated budget but you're not if you're not going to stick to it it's worthless it's like the diet and the exercise plan that is far superior than someone who just goes, you know, I'm going to try and get 10 ,000 steps in a day and, you know, maybe cut back on the sugar.

50:01Right. It's just one is, one is immense. If it's more achievable, it's better. And, and that, that's, that's why I think, yeah, that's why I would, I would go about it that way. And, and, and then you'll find that you limit yourself that way. If you find that I'm miserable, I'm missing out on all these things that my friends are doing. well just cut back on the amount that you're saving each week because you don't want to be miserable right or if you find there's actually you know i don't think i'd actually miss an extra 50 saved each week and i can i can i can bump it up but save first live second so i i agree um with a couple of additional thoughts a lot of exceptions additional thoughts uh one is i think the i think you're right about budgeting with the exception of people not having enough to pay the electricity bill at the end of the month because they spent it on something else So the idea of budgeting, you're right.

50:53So firstly, pay yourself first, I think, is the single best one. Maybe it's not single best. One of the very best pieces of advice in finance. Because if you wait to see what's left over, too often there'll be not enough left over. And if you don't have it, you won't spend it. If you already put it aside, you're not going to say, well, have I still got the$200 I planned to? Oh, I don't because I thought it was worth buying the jeans or doing whatever. So pay yourself first always makes sense. I just think with the budget thing, my only thing from a broader financial advice, financial planning perspective is just, If you know you've got to pay the car rego, the insurance, the babysitter, the whatever else, you've got to make sure that's still there, right?

51:25Because if you blow on the burrito and you're like, oh, now I default on my rent or something. So just, you know, I agree with you at a kind of a general level. For some people, they do need to at least make sure they've got the right money in the right bucket so that when the bills are due, they've got the money to pay it. I guess that's all I mean. No, you're 100 % right. I guess the way I would deal with that, though, is when you're trying to figure out how much can I put aside each week, I think that's where it comes into it. I'll tell you, you agree. My rent is this much. I've got this much in rent.

51:53What's left? So in theory, I could save this much. Yeah, that's right. And then I can decide from there. But yes, it's a very good point that you raise. So Chris, Ram's making me the bad guy. He said the whole, hey, spend your money. Who cares? Enjoy life. And I'm like, yeah, but. So I ended up being the bad guy. Partly you deserve it because you're 25. You know I hate young people, Chris. but also the only thing i would say is i i 100 agree with ram um there are you know whether i'm happy about how much money i've got the bank at the end of my life is probably material as i've got enough to do what i want to do relative things i could have done and chose not to because i was trying to save the money i 100 agree the only thing i would say is there is a role for self discipline somewhere between those two extremes which is i'd love that new 48 million screen inch i said 40 i was gonna say 40 inches like that's a really small tv these days i'd love that new 150 inch tv and i'd it's an experience i feel i feel i'll feel good if i buy it and so you know ramp said it's okay because i don't have to invest i can enjoy my life i can do that or you know i can have the 84th pina colada on a friday night because yeah who cares they're 85 dollars a pop at the local you know special but not a pub a bar special bar in sydney or something um i just think i think there's there's there's some room for there's some room for some combination of self-discipline and just a little bit of future thinking you know will you really be glad in a year's time you bought the extra x t-shirt pair of jeans holiday and if the answer is yes then go for it but just put your put your future selves almost a ramp's point put your future selves head on say in 25 years will i be will i be glad i did this thing yes or in 25 years will i be like i didn't really need to spend that money on that thing did i it wasn't that big a deal then again that might give you the answer so i would just i would just again it's no different what ram said I would just add that extra little bit of, you can always make, in the moment, you can always justify buying the new car because it's more fuel efficient.

53:46Or, you know, I feel better if I buy the new pair of jeans or I really, really enjoy the new TV or whatever those things are, right? So I'm not saying don't do any of those things at all. I'm just saying, have a think about whether in the future you genuinely look back and say, gee, I'm glad I got that or I didn't really need that. And maybe that's how I just probably add some extra context. In my view, not saying it was Ramsey at all, but my view to to that question is just you know am i going to be glad i bought it or do i kind of wish i've got the example for ram i i was a stupid um 20 something year old not as stupid as chris chris and stupid at all which it helps but i was uh i was i was really stupid as a 20 i must be 23 or something i think i got given a car allowance for my employer i got a promotion and it came with a car allowance right it was a cash payment you didn't have to use it for a car it was called a car allowance the job comes with it and these days it's all one number normally most remuneration but that back in the day i'm old it was here's your base salary and here's your car allowance so i went out and said okay i've got this money and it's a car allowance so what really i'm not really spending the money because i wouldn't have had it up if i didn't get the car allowance i'll go and i'll go and spend it i did even worse i i got a higher commercial higher purchase a finance lease on a car uh it was a volkswagen passat which i loved it was a beautiful car leather seats heated seats the whole kidney burrito ridiculous right absolutely ridiculous i want to say it was about 60 odd grand i think worth of car um maybe a bit more than that oh and right i'm 23 seriously what the hell anyway uh the other thing by the way peer pressure is big right so all the other sales i was in i was in account management in a little bit of sales and analysis for a food company everyone else had a cool car too so i'll you know just give one of the one of the team and not miss out all the stupid peer pressure things so i i bought the car I sold it X years later.

55:31I might have got 15 grand for it, right? So I've dusted 45. I got the car allowance. So yeah, again, I didn't spend more than I, I wasn't left with less take home. I didn't spend more than the allowance. So I felt like it was an okay thing to do. If I'd have saved that money and invested it instead, I did the maths subsequently. And literally, because I was so young, the amount of money I dusted on that car probably would have compounded to a very high six figure sum by retirement. Now, am I bitter about that? You bet I'm bitter. I was a stupid so-and-so because was it fun? Yes. If I was not swept up in the moment and caught up with the, it wasn't peer pressure.

56:07It was just I wanted to be like the other cool kids. Just, you know, I don't regret spending money on holidays. I went to the UK, lived there for a year, earned pounds and still came home with nothing. I spent the lot. I don't regret a cent of that spending, right? Because it was, I went all over Europe. I'd had a great time. The car, that was just absolute blatant stupidity. So I'm absolutely sympathizing with Chris. I'm agreeing with you, Ram. And I'm just saying at the same time, sometimes you've got to say, I can be hedonistic about that thing, but I really shouldn't be because it's not that big a deal.

56:36That's such a great story. The science has got a bit to say on this. Oh, go on. God, I'm not going to be able to quote papers. But I do remember reading that experiences rank well above things. Right. So in terms of happiness, the 25-year-old backpacking across Vietnam is going to give you much more value, quote unquote, over your life in terms of fond memories and the rest of it than a sports car. Yeah. Makes sense. What science tells us also is that the thrill of the new purchase, we all know what this is, right? Like I bought a new toy the other day. I was like, oh, I was so happy. I was so excited.

57:22Now it fades very, very, very, very quickly. Now experiences by definition are over once they're over. Like they're gone. But there's something about the memory of that that lingers and lasts. So I guess what I would say is if you're going to, and you should enjoy life, err more towards the experiences than the things. And also be very mindful. like some i've got a friend who loves cars like loves cars i look at him and just go you're an idiot like i don't get it but he's not wrong because that that that for him is is like it is a visceral play he loves the mechanics the engineering the aesthetic so he just just gets into you know you'll just he loves it so whatever your thing is in life i think that you you're okay to sort of chase that but don't chase it for signaling reasons and too many of us buy things not because i'm not buying the bentley because i just love that car for the record i'm never buying a bentley because a i don't have a choice it'd be i wouldn't anyway um but but we also know that a lot of us buy stuff to impress other people not not for the intrinsic pleasure it brings us It's like, in other words, if I lived, if it was, you know, a Mega Man kind of end of the world thing, I wouldn't, I just wouldn't have this because there's no one to impress.

58:47So just be very honest with yourself. It's like, are you buying this because you're trying to signal to other people how successful and rich and happy you are? Are you that person on Instagram that's living this brilliant life but is crying themselves to sleep every night because they're miserable and lonely? So just, yeah, I, and that is a very rare person in their 20s or even 30s, I think that it has the ability to sort of be honest enough. And frankly, people in all stages of life to recognize that amongst themselves. But if you can, again, it's another superpower. I like it, Matt. Really nicely put.

59:22Hey, let's finish off with one more. We can probably squeeze one in.

59:30Oh, no. I will ask the question in the order of which it's posted. And I'm going to ask you just to recognize, Ram, that we don't have another hour of this podcast because the battery's in my machine The chin will run out. Good morning, gents, says Nick. I just wanted to question why Andrew always mentions about not wanting to go on a rant about the flaws with investing in property for a 1 % yield when you get more in the bank. However, at the same time, he'll invest in companies making no profit, so basically a 0 % yield. Or dare I say, Bitcoin, that doesn't make a return with the basis that we're worth more in the future.

1:00:03How could he, quote, square that circle, end quote, when he is doing the same thing in just a different asset class? Are both he and property investors not investing based on believing their capital will be worth more and therefore using the same logic? Thanks, Nick. Yeah, great question, Nick. I mean, it's brilliant. Timer starts now. Okay. Oh, now there's pressure. Sorry, mate. You take as long as you want. It's a very hard question to answer very quickly and I won't even bother going towards Bitcoin. But I will say that you're right. If you want to look at things purely through the yield lens, then yeah, it's hard to sort of make any justification to it.

1:00:48My argument would be, let's look at some of the small cap companies out there that aren't paying dividends at all. In fact, some of them not even making profits. So how do I do that? Well, you square the circle by saying, but I think they will in the future. Right? So I think here's a company, it's not making any money, but wow, sales are growing at 20 % per annum. Cost base is reasonably fixed and scalable. Extrapolate that forward a few years and they should be making a hell of a lot of money. And there's a long growth runway and that's where the value is. So I guess just to address the counterpoint to that is, well, that's why I would invest in property, right?

1:01:29People will be saying, yeah, well, I'm taking a 1 % yield in property because I think that in five years' time, the property will be worth much more and I'll get a capital gain. So my response to that is, well, I hope you're right. But why? Why? I would look at some of my companies and say, well, I think that the expectation for growth in sales is evident just in the trajectory that they've – like clearly more and more people are buying their product. Those that have their product is very low churn, are keeping it and probably upgrading it in a lot of cases as well. There's a very big market opportunity that's available with not a huge amount of competition, and there's incredible sales.

1:02:07So no one knows the future. Certainly I don't. But I think it's not drawing a long bow to suggest when you look in your crystal ball that those sales are going to be bigger and better in the future. Buffett pretty much did the same in 2012, was it, and he bought Apple shares, right? Correct, yeah. I think that this is a pretty good product. I think in the future, people will be buying more of it. We can debate whether you're right or wrong, but that's the expectation. As I've long argued with property, the trouble with it is that we're kind of at the end game of a greater fool theory at this point, where it's like the only way that the property value goes up is that someone else...

1:02:45This is the difference, right? I know someone's going to say, but what about Bitcoin? but the trouble with with um uh properties is a non-productive kind of asset so the only way i think you made the point there's only three ways right so i get access to extra credit i'm or i'm more prepared to take a lower yield yep what was the third one um oh i've gone blank now but but in other words there's there it's not that it couldn't happen right like we've got a situation now where someone who is on$200 ,000 a year is still going to spend the next 25 years trying to like pay off an average, pretty ordinary, you know, fairly run down two bedroom home in an outer Western suburb.

1:03:30It's like, okay, so it's going to get even more expensive. It's possible. It's possible. But you really have to start to stretch credulity, I think. I don't know how tight that rubber band gets before it snaps. It's a different proposition than a business with demonstrable sales traction continuing to grow. Now, if you hold a different view, that's fine. Invest it all in the property. But that's how I square the circle. Yeah, I think that's right, mate. I think what's important is to understand the context of the conversation. And I think you and I don't always take a start from first principles to the end result every time we talk about something and so i think nick what may be happening here is um may have may have not missed but just maybe maybe separated the two arguments and i think you know when rams made these comments i'm not i'm not as bearish on property as rams is but i do share his concerns about how much upside there is um and i think that's kind of important because when we when we use shorthand to kind of summarize in passing you have a 1 % year then we move on And I think what's important is that Ram's saying that in the context, I'm not defending him, by the way, I'm explaining, in the context of every other conversation we've had for years about property, right?

1:04:43If we had to start from first principle, so what do you think about property? Well, let's go all the way back to 1860. You know, you couldn't do it every time people ask the question. Maybe you could just refer back to the original podcast and be done with it. That's one way to do it. So I think, you know, Ram, I'm going to assume if you found a property that was on a 1 % yield, but you thought was going to triple in the next five years, you'd happily buy it, right? Oh, hell yeah. Yeah, yeah, yeah. So that's where it's important, Nick, to kind of add the and then what. And Rami, you've already made the point about the growth thing.

1:05:13But I guess we're not saying 1 % yield is good or bad. I earn some shares with a 1 % yield. I earn some shares that don't pay a dividend. I earn some shares that pay, what's the highest I've got? Maybe 4 % yield, something like that. Maybe I'll look now really quickly because this is boring for everybody else. It doesn't really matter, actually. Yeah, I've probably got, have I got a 4 % yield? Maybe, maybe, maybe. Oh, yeah. With franking. There you go. There you go. So now, you know, if I was just after income, I'd buy all the highest yielding stocks. But of course, we know that that's not the only way to make a dollar.

1:05:42So when Ram says property is 1%, some of these unprofitable companies are zero and Bitcoin is zero, that's fine because the future is the future of all that combination. What's inherent in what Ram says, and frankly, I believe, I agree with him, is if you're starting with 1 % yield, you need your returns to come from capital banks. And if you need your returns to come from capital gains, it's not going to come, then you're going to lose on both counts. And so that's, I think, inheriting the value. And just quickly, the opposite of that is true as well. A company that might be offering you a reliable 8 % yield all in, you don't need much growth, right?

1:06:12It's like, I've got it all. So those numbers have to add up. So if I'm starting with zero, then I must have capital gain. I'm starting with one percent. I must have capital gain, even outpace inflation. And so then the question is, well, where, why and how is that going to come about? And then that's the second part that's more important. So I think that absolutely works. So I just want to make that point. I think it's very reasonable for you to say, hey, he's saying I wouldn't buy it just because I've got a low yield. I'm sure we've said that. I'm sure we've both said that at some point in the past of, you know, saying 1 % yield, so dot, dot, dot.

1:06:45Implied or inferred or intended to be implied in the response was, and I'm not sure about the capital growth. So in that case, it's just not an attractive enough idea for me to go with. I think that's a very, very reasonable question. The answer is probably just in the broader context of our discussions, both recently and frankly, not long past as well. I'll just add as well, I think what makes me worried, not Nick's case because he hasn't said it, but it comes up all the time, where people make statements as if there's some kind of economic principle of the universe. you know like the law of gravity or something Maxwell's equations where they'll say property doubles every seven years and then move on it's like you have to take that for granted and it's like whoa back up cowboy why oh because that's what it did for the last 10 years like that's very spurious reasoning imagine if I told you that hey Scott there's a penny stock here that in the last couple of years has grown at 30 % per annum So I'm putting all my money in that because, look, that's what it's done in recent times.

1:07:51You go, well, you're an idiot. Like that is just because it – what do they say on every financial product ever? Past performance is no guarantee of future performance, right? And then I would actually say – not that history isn't a useful guide. It's probably an incredibly useful guide. But I think what we do is we forget – we lack context. You know, what seems like a long time in our human lives is very short in the grand arc of history. And when you look, and people have, right? When you look over longer periods of time, probably goes up about rate of inflation, tends to match in all developed markets that people have looked at.

1:08:31There's some exceptions, but the longest records we have are in Amsterdam, which go back to the 1600s, I believe, maybe a little bit further. And guess what? About 3 % per annum. in Australia, even with the hyper amazing growth that we have had in the last 25 odd years or so. And you want to go back to 1890s, I think from Melbourne, there's some really old records there. It's only about three and a half, 4%. So if you want to play that game, by all means, play it, but don't extrapolate recent history. Do you know? Necessarily. It could continue, but there are two frames. You're not talking off air about the base effect.

1:09:06Right. Depending on where you want to start, you can make any case you want. Yep. Just make sure if you're going to extrapolate that, you're choosing the right base. Because if you get that bit wrong, I mentioned Berkshire. It's up 33 % over the last 12 months, right? Yeah. Now, if you want to offer me that over the next 15 years, I'll take it. I will sign here. If you're going to give it to me, you can give it the money. I know you know, we all know it's not going to be a 33 % per year gainer, right? It's just not. And so using that saying, well, it's going really well. I guess it'll keep going well.

1:09:32It's like, well, let's just ask you for trouble. It's just not going to happen. It can't happen. Yeah. Now, Buffett actually talks about it a lot. And so he'll talk about the book value, right, of Berkshire. And I think it's 20 % compound over the 55-odd years. Probably 19 now because it's slowing down. But yeah, exactly right. And he has said for at least the last 15 years, like, it's going to get lower. It's going to get lower. And the reason he can say that so confidently, again, let's just do an exercise in logic and reason here. And I made this point before. Bring out a spreadsheet, okay?

1:10:02Take an average property. I just use Sydney for the sake of it, right? You know, the average property in Sydney is 1.2 million. And let's grow it at 7 % per year. Just push it forward, right? Now, we know that wages are growing at best 3%, okay? And let's push that forward. Now, you don't need to be a computer to realize that those lines are going to get further and further and further apart. Now, we can argue as to at what point things break. yeah but it's just like when what is it is it when houses uh they're already at 14 times average incomes now in our parents generation back at the boomers were paying three to four times income so yeah that's right you know okay and a lot of people argue me included sort of well gosh can't go up forever and yet here we are at 14 that's right right okay okay but but but remember that the argument gets stronger the longer it remains in place, in the sense that, okay, 20 times?

1:11:06No, okay, still not convinced? 50 times. No, okay, no. One million times. I mean, again, I don't know where the exact point is. No one can know. But rationally, there is a point in which, in fact, if you push it forward high enough, the value of Sydney real estate becomes eclipses global GDP. Yeah, that's right. So you tell me. It is literally a mathematical game of chicken that you're playing here. And look, Egg could be well on my face because you could look back in 10 years' time and it goes, well, turns out that it actually did get to 20 times income before everything collapsed in a heap. And I just happened to make a fortune along the way.

1:11:47I was like, okay, that's good. But it is a game of chicken. And just be aware of what game you are playing there. You need to have extremely high levels of confidence that people's ability, capacity to buy, lenders' capacity, willingness to lend, interest rates, flexibility around all of that, allowing these trajectories to continue, all need to be in place. And if they're not, there's only one thing that's going to correct, right? And I'm not saying it's the end of the world, but it sure as a hell isn't doubling every seven years. And then you are – here's my other point, right? So it's like let's say that nothing goes wrong.

1:12:30There's no collapse. There's no correction or whatever you want to call it. And that you – we just muddle ahead. And in 10 years' time, prices are pretty much inflation adjusted where they are now. Well, well done. You got a really, really ordinary return for a hell of a amount of risk, a very significant amount of risk. you got your 1 % gross nominal yield. I don't know. It seems like if everything goes okay, and maybe we do get 3%, 4 % from here. Add that to my yield, I get 4%, 5%, 6 % nominal returns over a 10-year period. Yeah. Okay. I mean, I'm not doing cartwheels at that point. And if it's, again, the asymmetry here, If it's not that, then maybe it goes down 10%.

1:13:27On a leveraged investment, your entire equity could be wiped out. It could be down to zero, right, if you're leveraged 10 to 1 or 5 to 1, as most people tend to sort of be. So just contrast that, the upside with the downside here. And I just feel as though there's too much religious faith in property investors that's not grounded in any kind of reason. And I'm going to shut up at this point. I know, mate, I'm not going to disagree with you. I will say I don't expect an eternal or everlasting fall in property prices. So I think the wipeout scenario, in my view, and you may have a different view, which is fine, I don't think the wipeout scenario is very likely.

1:14:07No, it's an edge case. I agree. I'm not calling for collapse, but it's amongst the possibilities. Yeah, totally, totally. But I do think the potential for long-term returns, it just, I've said many times, the ASX is a subset, a really, really, really tiny subset of the biggest and some of the best, the highest X is the best, but biggest, some of the best businesses in the country. If I could invest in the 2 ,000 best properties and we had an index for those, I might have a different conversation with you about the future for property versus shares. If we said the PSX or the APX, the Australian Property Exchange, and there was the 2 ,000 biggest and best properties that had long-term track records and had 100 years of properties of that style doing well, we might have a different conversation.

1:14:51The very, very, very difficult thing about property is by definition, it's the market. The ASX is never just, I mean, it's the stock market, but it's not the business. We know business profits go up much, much more slowly on average than the ASX's profits or profits of companies from the ASX, right? We're literally, we're already having done for us the first, second, third pass of best businesses and saying here's, There's some rubbish on there, by the way, as well. I'm not going to say every - Lots of rubbish. Yeah. But if you think about that and say, hang on, if I could get to the best properties, then maybe I'd have a different view.

1:15:21But when it's the entire market and the entire market, whether it's repayments or rent, is limited by people's wages and willingness to pay and interest rates. That's kind of all that matters. Those things can't expand much more quickly. And there are really good reasons. This is going too long. There are really good reasons why things have accelerated in the last 30, 40 years. very very very good really reasonable reasons and second incomes lower interest rates uh higher loan evaluation ratios lower deposit requirements these things all individually and together have just bumped up the ability for people to borrow more and more money poor policy poor planning right yeah all of that kind of stuff strong population growth etc yeah so those things those things matter but the you know how many of those can be continued into the future frankly poor policy can go for years because you've met our politicians but um you know rates rates i mean they go back down from now but you're already paying you know kind of pre-rate increase prices second incomes you kind of can you add a third income no uh okay deposit percentages can you well no we can't do anything with that loan lengths can maybe length a little bit so maybe there's a bit of juice there um we're already paying 30 35 40 percent of our incomes on on repayments can they go to 50 i guess but at some point you know so the ram's point that's the rubber ban right we've kind of and these aren't even rubber band things necessarily by the way these are just structural changes but you got to ask yourself we're at that level so those changes have bought this level of pricing your pricing's up that rate what structural changes happen to push things up because if there's no structural changes you're left with as rams already said population growth gdp incomes okay couple of percent where's the extra come from i don't know where you find it which is why i would buy property i'm not i'm a i'm a shares guy by default because I've not found better value elsewhere.

1:17:08But I think I've said this podcast a few months ago. My wife and I said if prices fell further this year, they haven't. So if they did, of course we'd go shopping. And maybe we'd find something, maybe we wouldn't. Oh, man, if I could get a 4 % yield on an investment property where I didn't have to spend a huge amount on maintenance, like it was a well-constructed, happy day. And I can leverage on that? I'm not against property. I'm just against excess valuations. And likewise, if all of the investments available on the ASX were giving me very ordinary valuation, I wouldn't invest in shares. I go to where the returns are.

1:17:45And this is what blows me away. So we have, what is it, something like 40 % of investment loans are negatively geared. We had before the discussion around, oh, well, I'm getting a 1 % yield. The rest has to be made up in growth. There are people on negative, a lot of people on negatively geared. So from a cash flow perspective, each year that goes by, I'm just hemorrhaging cash. More money to the agent, more money to maintenance, more money to the bank. It's like, I'm not getting anything out of this. I'm going to make myself feel good because I'm paying less tax because I'm making less money.

1:18:18That's why I'm paying less tax. But it's okay. It all comes good in the end. It's like, well, you're under a scenario here where, again, forget a property crash. Forget a correction. Forget even a slight dip. If things just go up, I forget exactly how, well, it depends on how leveraged you are and the rest of it. But there are a lot of people who are going to find even 2 % or 3 % annual compound capital growth in their portfolios are still going to leave them with a loss, a leveraged loss. And that is pure madness. So what I fully expect, I actually had a conversation with Matt Barry from Freelancer recently.

1:18:52Massive property bear. He's got a - Oh no. Google - He loved it. Massive love in, massive love in. He's an interesting cat. But anyway, YouTube SMH, this 2050 summit, he gave the keynote address. I've mentioned this before. It's a good chat. But I made the point to him. I said, listen, we've got to be careful because we're just going to like be in a massive echo chamber here. The thing that you need to be aware of is even though rationally a lot of these things can be questionable, I fully expect – we are in territory now, which I would – was famous, made famous in the GFC of too big to fail. And I think we're too big to fail when it comes to Aussie property.

1:19:35No government is going to let this thing collapse willingly. So this is what – here's my prediction. You will be able to increasingly draw on your super to get a house. You will see increasing stimulus in things like first homeowner grants. You will see banks start to roll out 40-, 50-year mortgages. You will – everything that can be – you will see – we have already seen the fastest pace of inflation growth in – population growth in history. Recently, just this morning actually, I saw some numbers sort of come out. We're adding one and a half Canberras every year, right? You know my thoughts on that, but yes.

1:20:14You know, madness, madness. but we kind of have to to keep everything sort of going and so this is, I think if you let the market do its thing and we just stopped tinkering, it would sort itself out pretty quickly but I wouldn't be surprised that we will do everything we can to make it go on and on and on and each day where something doesn't break, it just increases the chance that it will break in the future in my view and it's really depressing stuff. I don't want to make this any longer. Other than to say, I'm never quite as binary as you. I think it needs to break. I think there's plenty of room in between there for a managed right sizing of the economy in whatever context we're looking at.

1:21:00Whether the politicians have the guts to actually do that is the bigger question, which is why it makes it more likely it breaks eventually because the further you kick the can down the road, the more the consequences are if you don't deal with the underlying situation. I think we could, with some serious people in Canberra right now, we can absolutely avoid a breaking of housing. But the longer they ignore that, either someone eventually has to deliberately break it or it breaks by itself. So I just want to add that as a - I'm glad you did. But here's the thing there, right? Let's assume we don't have a break, so to speak.

1:21:30But the only way to square that circle is a very, very prolonged period of sideways prices. Now, for people who are getting into - Or a longer period of slower growth or something there, but yes, you're right. Very sideways to extremely slow growth. Now, if you're making an – now, again, I want to be clear, it's very different if you're buying a house to live in. There's utility there, okay? So I'm talking purely from an investment standpoint. But if you are making an investment on a negative or virtually zero or extremely low yield, you have to look into the mirror and reconcile this. like i'm really i'm not i'm not i'm not i just want to be careful here please don't do you do you i don't care it's your money right but just be be very careful in your assumptions and understand that as any investment whether it's in shares or property always consider the bear case so this is what i think is going to happen we can have an argument debate whatever is whether that's right or wrong but consider the other side of the story and just make sure you're comfortable with that.

1:22:37You don't want to be in a situation where if you're right, I get what, one or 2 % real returns after inflation over the next 10 years. But if I'm wrong, I'm left holding, I'm basically a debt slave for the next 40 years or worse. I'm having my entire equity wiped out in the space of six months. That is just the most awful asymmetrical risk proposition that I can imagine. And too many of us, I feel, have been lulled into a false sense of security from decades of unusual growth. On that cheery note. By Bitcoin. Mate, you have, oh God, you have powered through this episode. Thank you for, again, we asked about property at the end, we asked about Tim Gurner at the end yesterday.

1:23:21I think I've stumbled on the perfect formula, listeners. So we'll see what happens next week. I'll see if I can come up with something else. Mate, no, in all seriousness. Just thank you for jumping out of your sick bed and getting the podcast. No, I'm feeling better. I know our listeners will also appreciate it very, very much. Will you come back next Friday? Yes. Good law willing. Absolutely. Yes. Yep. In that case, until next Friday. Fool on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation.

1:23:57Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.