Mailbag: incl. The kids are alright! September 10, 2023

26:44And there might be a company that's only fallen 5%, but it was already super cheap. So the idea of value always needs to be made in the context of what does the current price look like relative to all future cash flows of the business, the very wonkish way of sort of saying it, But that's kind of what it is and you need to look at it through that lens. But if that is the lens you're looking through, then that is also the one that makes the decision for you. So the market has fallen. You've got this cash, which is the cheapest. Well, maybe that's not true, actually. The other thing you have to do is it's sort of, again, to be a little nerdy, there's a difference between sort of return potential and then what you might call a risk-adjusted return potential.

27:37So there's something that's probably like a Solpats or, you know, a CSL or something. It's like very, very reliable. They'll be around for a long time. But they're never going to like 10X in three years, right? There are other companies that have, return potential is fantastic, but there's just a lot more risk in there. In other words, they might. They could go to zero. They could go to zero. Or they could drop in half, which is still really bad. And so, yeah, that's the only other wrinkle. So there's no precise – well, there are formulas, but I wouldn't take them too seriously. But there's no precise way of knowing this because you can't know the future, which I think a lot of the financial economists, mathematicians sort of all tend to miss there.

28:24But look at it in the way that a normal, sensible person would. It's like, what's the return? What's the value of this? Let me contrast that against how risky I think it is. And then I'm just going to buy whatever I think is the best bet through that lens. And don't forget, it's a lot of thumb sucking with all of that. But it doesn't have to be an all or nothing bet. If you just make up a round number here, if there's$10 ,000 that you've got to invest, maybe you put 30 % towards something that has a better return potential but a bit of excess risk and the rest into something that's not as exciting but a lot lower risk.

29:00Or whatever balance that you feel is appropriate, you can shift things around in that kind of way. And as I said before, you're guaranteed to, with the benefit of hindsight, realise, well, I should have just put it all in that. But you can't know, you won't know, and that's still a pretty sensible way of playing things and always with an eye to the downside. That's really good advice, Jeff. I would – it's hard, right? I'm a sucker for quality, which sounds like it's a humble brag. It's not really. I don't, I tend to find businesses that I think have a higher than average degree of longevity and I won't get the same deals for those.

29:39So during GFC, I bought lots of Berkshire Hathaway, for example, back a million years ago. And again, that's not a humble brag either. There was stuff that was down much more than that, but I was like, hey, I get a chance to buy Berkshire cheap. Why wouldn't I? So kind of that's my personal bias. I tend to go that direction. I was probably buying salt pads during the COVID crash. I think I can't actually remember what I bought during the COVID crash. And I was buying, but I can't remember exactly what it was. I can probably look it up. So there's that. I think it's hard, right? Look, I think if there's a chance of going to zero, then you probably don't want to.

30:13There's a reasonable, everything's got a chance of going to zero under the wrong circumstances, right? But I don't think the crash is the time to say, hey, I'm going to abandon good investing practice and just swing at the fences for me to say 95%. Because maybe if it comes back, I'll make a squillion. I do think you should absolutely look, as Ram said, about the future value of these things. First thing I would do is I would eliminate anything that has existential risk. So was, you know, I'd pick a company, I don't know. Was Woolies ever going to zero? No. Were there others that had a truckload of debt and uncertain customer futures and might have gone to zero?

30:43Yeah. Flight center or Webjet. I owned Webjet at the time. I don't know anymore. Those two companies had to double their share count to stay in business. Now, it didn't go to zero, so that's okay. But that's a really significant chunk of change. Corporate Travel, on the other hand, which I do own, didn't issue any more shares. So there's very different... And the reason was Corporate Travel had the cash. Webjet and Flight Center didn't have the cash to make it through a period of shutdown. So there was very, very, very different experiences for those companies. Would I have done better by one or the other when they fell to maximum?

31:13Probably. But was there a chance those companies couldn't have raised capital or had to raise capital even more dilutive levels? Yeah, absolutely. So there's a case of just being a little bit careful. um i'd say ram's advice do a bit of both spread your money around but uh but think about the future value of these businesses over time the other thing by the way is if you're not a like i'm a long-term shelter i'd like to hold for years and years and years if i can so i would i would if you're buying if you're buying something that's down a lot but it's not a very good quality business then know that you're playing a shorter term game not short term but shorter term if you're going to buy i don't know um some you know kind of okay moderate but business at 80 percent when it comes back up immediate a decent way you're going to say well i do i want to hold this forever probably not so then you want to be honest with yourself enough to say okay it's done the thesis played it i bought it simply because the shares were cheap now they're not cheap i'm selling and you have to take that approach for my approach i'm like you know what i want to own i use saltpats i own saltpats for decades so if i get a chance and because i think it's going to be a long-term market beating compound over decades.

32:14And that's where my returns are going to come from. So if I get a chance to buy that a bit cheaper than usual, I'm going to because I want to hold it for that long. And that's going to really pay off over the super long-term if I'm right about the business's potential. So for me, because I'm a long-term investor, I want to hold it for that long. That's what I'm going to do with it. But you forego the opportunity for larger, shorter to medium-term gains in doing so. Nice. Hey, Jared asks, it says, good morning, MF team. I'd like to submit a question to the mailbag. He has. Hi, Scott and Andrew.

32:43There is a small but increasing trend of companies trialling or considering a four-day work week. Generally, this includes no change to your income, but your working week reduces from five to four days. On the assumption there is no reduction in productivity and employees receive a better work-life balance. Sounds pretty good, but I'm unconvinced, says Jared. There may be parts of the workforce this may be workable for, but as one example any industry that has frontline or customer facing staff any reduction hours will need to be made up by someone else which is an overall increase in wages in this example a business or organization would spend an extra 20 percent in wages to cover the full five days and i doubt it would come with a 20 increase in productivity for the record i'm not a grumpy employer resisting change i'm an employee who manages staff and i'm a big supporter of flexible and hybrid working and believe the days of bums on seats five days a week in the office are outdated So I'm putting this discussion topic out there to seek your views, both positive and negative, on the four-day work week.

33:44Cheers, Jared. What do you reckon, Ram, a boondoggle or a boost for the work-life balance? I'm going to go with my usual, it depends. Come on. How's that fence going for you? It just does. Because here's the thing. I think that at the end of the day, you as an employer, as a business owner, as someone who's managing staff, you just want to – and I'm going to use that. It's a horrible term here. But you want to get the best return out of your human capital. Yep. And you do, right? Like as a business, you're trying to optimize costs. And also, I think too often people think businesses like make money by tricking people.

34:26There are some businesses that do that. I hate that. But really you make money by creating value, right? So there's sort of like the top of the income statement. And as you go down the line item there, you know, you may find that you can actually get far better efficient, more productivity, more efficient use of your human capital by just being nice, right? Not because you're altruistic, but because you will find that your workforce loves being there. They're on the mission. There's a great culture. They feel supported. They're going to do what they need to to get the work done. And they're going to be happy, engaged employees.

35:06And now we all love to be compensated for our time. And money is obvious, you know, the way that we do that. But I think you'll find a gazillion studies have sort of shown that it's all the other non-financial things that make a big difference as well. I look back with a lot of fondness on some jobs that I had before. And it was the people I worked with and the cultures there that made it that way. And there are other jobs where I got paid significantly better, but I hate it. And I was just, you know, ready to hit my head against the wall at any chance that I could. So I would say, and here's the other reality, and you'll know this, Jared, if someone's disengaged and they're not happy to be there, whether or not you make them do five days or not, they're going to.

35:47The second your back is turned, they're just going to be opening up solitaire and playing. You know, it's just, it is, you can't, unless you're going to use a literal whip or something, right? And have someone up the front of the office beating a drum that, you know, it's just like in the galley type sort of fashion. It's not going to work. So I would, now that's for a certain kind of workforce, but particularly people in the knowledge economy and that kind of stuff where it's like, frankly, I mean I don't really have any staff but but if I if someone wanted to do some work for me and they said oh but I want to work from Bali and I only want to work after nine o 'clock I don't you do I don't care the only thing I care is that when the deliverables need to be delivered they're delivered and they're delivered well and I feel as though I'm getting a good return on the money that I spend however you do that you do you I could not care less right and I've got that in the kind of business that I have.

36:45But if I'm running a retail store and I need someone there, well, it's obviously not doable, which is why I say it depends. But I guess I know of circumstances where it's worked wonderfully well. I know of other circumstances where people have just sort of taken the mickey and it's not produced anything. So it's got to be too many, particularly big companies, I think they do it because things sound good, you know, and it's like, oh, look how supportive we are of this and that. And, you know, and it's just like at the end of the day, everyone's just miserable and looking on LinkedIn for in seek for jobs, any, any chance that they get.

37:18So you've got to, if you're too, too many managers talk about culture and all of this stuff, you've got to take it serious. And I think there is huge returns on quote unquote investment for those that, that get it right. I don't know. I'm rambling at this point. What, what do you think?

37:38So I'll try and cover a couple of mini thoughts and we'll move on. First thing is that we would have had this question when someone proposed moving from a six-day week to a five-day week. And I think it's also true to say over that period of time, the workforce hasn't been particularly unproductive. Notwithstanding Friday's comments about productivity, we didn't go to hell on a handbasket. We went from six days to five. Now, there is a point at which, you know, five days to one, to half a day, to one hour a week. At some point, you're absolutely right. Productivity falls off a cliff. But we are all, as humans, wired to believe the status quo is right, and therefore any change to the status quo, therefore needs to be justified um we would have the same chances going from six to five uh second one is i think you're right ram there's an old line about a half joke about you know what if we train them and they leave and the other guy says well what if we don't train them and they stay um it's great it's kind of the same with this stuff and you've already mentioned that mate if you know it's like well what if what if my staff work from home they slack off it's like well they're gonna slack off home they're gonna slack off at work and you've got the wrong people yeah again on every job and you're absolutely right jared you know in a frontline job you need to be there you just need to be at you know at the coalface and that's where the productivity comes from hard to justify someone at a working checkout only because it's a very transactional thing nothing wrong with checkout workers um if you're working there you know swiping the stuff you're not going to swipe 25 faster because you get a day off extra day off a week so it's very very hard to make that case quite honestly we could say make it a five to four day a week and pay them more that absolutely would that comes absolutely with extra cost and absolutely in my view um a decrease in productivity per per hour worked and per dollar spent because those you know they just can't scan 25 percent pasta for those four days to make up the difference just just and i've been there i've done it that is that is absolutely true the flip side is um you're in a war for talent and and the question is going to come down just like working from home which i'll get to in a sec um you know do you want to do work from home whether it's right or wrong the best company's going to offer it and the best employees are going to work for the companies offer it.

39:34So there is an element of, you know, choose not to if you don't want to, but just be careful about what you wish for, because you may be stuck with the people who have to work five days because they can't get the job to work for, in which case you're stuck with a second rate workforce because you're making them work five days a week. So there is a trade-off with costs and benefits. Last one to finish off is a slight tangent. I had a whole lot of people today on Twitter, well, Thursday, now this has been broadcast on Sunday, but on Thursday, when I mentioned the productivity declines that we talked about on friday said do you reckon it's work from home must be work from home because people aren't working as hard that's why productivity's down uh and and i think with absolute respect for those people they are they have an answer looking for a looking for a problem they decided work from home is bad and they say ha ha now i've finally got evidence the reality is that if you take the last quarter so the june quarter versus the same period a year ago there are more people now who have been going back to the office in that quarter than there were a year ago.

40:32In other words, there were more people working from home 12 months ago. And while not everyone's going back to the office five days a week, there is less work from home now than there was a year ago. In other words, if work from home was a problem, going back to the office should have fixed productivity. It should be going up now because they've gone back to the office, right? And people go, oh, well, that didn't suit my preconceptions, did it? Now, I'm not saying you have those preconceptions, Jared. I'm just making the point that you need to be a little bit careful when... This is... I shouldn't even...

40:58Well, I'll make it about this because hopefully it's a teachable moment, as the kids say, or maybe the teachers say, just be careful with any of these things that you don't start with a preconception of. This is what I believe. Can I find evidence to support it or can I argue from that perspective? Again, you're not saying that necessarily, Jared. I guess I'm just making the case that if you're already saying, oh, four days can be all right, because this, if you've decided first, rather than gathering the data first, the evidence first, you do run the risk of maybe misleading yourself a little bit.

41:25I have no strong view. um i would suspect that if you gave people some reasonable but specific kpis over the course of their working year and gave them four days to do the work most people would be almost as productive in four days as five because i'm going to get done by the end of the week i'll take the motley full we give a one recommendation a month we in one of our services motley full share advisor we do a weekly update we do our research uh if i had to get all that done in four days so i was going i had a long weekend i was going on holidays on the friday i get it all done early so i could take the day off right over time if that was you know do i think the motley fool would be as productive yeah almost probably not almost almost they're almost inevitably leakage by definition but if we had to jam five days worth of output in a four and there was no change to staffing or expectations absolutely we now it wouldn't it wouldn't change productivity in terms of cost because I'd be paid the same amount of money.

42:23But if the boss said, look, Scott, you work four days a week, but you can do everything you're doing now, including this podcast and everything else, and get it done by Thursday rather than Friday, and I could choose to do that, I would take it, yeah. Would I do less? Maybe I might do a little bit less research in my spare time, but I also might say, I'm not going to, maybe I spend a little bit less time on Facebook because, you know, on Monday afternoon when I'm kind of after lunch because I've got this stuff done, I've only got three days to do it rather than four. As long as the KPI is held for any output-based worker, I think you would find there'd be no meaningful reduction there'd be a reduction I'm not sure there's a leak there's going to be but I would suggest most of the things that need to get done would still get done by the way you would know this if you're managing people how much busy work gets created because there's time to do it how much stuff if we had to prioritise if I had to say right do you know there's a name there's a name for that it's called Simpsons Rule right okay tell me yeah yeah well we just you know I think it's more aimed at bureaucracy but a bureaucracy will fill any budget and time allotted to it Yes, that's exactly.

43:19And it's 100 % true. I've said, our boss, Bruce Jackson, you know, you're talking about scarcity and being forced to focus on stuff. And from that, I've kind of taken this kind of axiom that scarcity is a wonderful resource because it makes you prioritize. And so, yeah, if I had four days to do the work, would I do the thing that was the fifth most important thing? Probably not. And if that fifth most important thing was not any real value and I was happier as an employee and probably more productive, maybe less likely to take sick leave. and frankly, I'd get some stuff done on the Friday that I'd do during the week because I've got all the time to do it during the work week.

43:53So I'll drop the car after the mechanic and I'll go get my hair cut. Well, I don't have hair. But if I did have hair, I'd get my hair cut. I'm actually worth more money than the employer. I don't smoke and I don't have haircuts. I'm already more productive than anybody else. But you know what I mean? You do that stuff on that day, potentially. So I am not convinced it's a terrible thing. I would imagine on average if you are a high performance business and you hired high performance people and that was a hiring and retention perk. I don't know. I would actually bet you're probably more competitively advantaged than if you didn't offer it personally.

44:24I think, you know, if I was the Motley Fool and I was controlling the purse strings, would I do it? Maybe not. Would I consider it? Absolutely. If I could get and keep the best quality people because of an extra work perk and said, guys, here's the deal. Same output, but you only have to kind of work four days a week. What do you reckon? They said yes. And I could manage that work output and make sure it happened. I would do it. Yeah, absolutely. But that's, again, very specific example, very specific circumstance. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

45:15Looking to dollar cost average into low cost diversified ETFs over 20 to 30 years. Do you think the risk adjusted returns? He already intestated your comment, Ram. Do you think the risk adjusted return is better for a US market ETF or a global ETF? And good luck. Good on him. He hasn't even included the tickets. He's listed the individual ETFs. He said, US market ETF in brackets, e.g. Vanguard, US total market shares index, or a global market ETF, e.g. Vanguard, MSCI index, international shares ETF. Tickers be damned, says James. And James, you are speaking my language. What I'm grappling with is this.

45:52On one hand, my assumption is that New York Stock Exchange and NASDAQ will remain the most attractive market for the world's best companies to list on, regardless of where those companies originate. And therefore, investing in a global ETF will reduce my long-term returns by holding a lower quality basket of companies after the inclusion of non-US businesses. No offense, Menti says, to other countries, but Australia's strong market performance compared to the US is a remarkable outlier. But, he says, what if my assumption is wrong? And in the long term, more of the world's best companies list themselves on other exchanges.

46:26I can't see it happening, but I'm a mere simple simian. So what do I know? In that scenario, would it not be safer on a risk-adjusted basis to have been dollar-cost averaging into a global index, which will rebalance over time to include higher quality non-US companies? Or is this all just trimming around the edges and should I just move on instead of trying to optimize for slightly better returns? Looking forward to your thoughts and rants. Thanks again. And full on, James. What say you, Mr. Page? Actually, I think that's right. There's so much, particularly as someone outside the US, I think we look at some of the craziness that goes on there and just think, oh my God, it's the end of empire, right?

47:09It's the final decades of the Roman Empire. And it's probably a lot of truth to that. but there is something magical about the US. And it's no accident, I don't think, that the biggest and arguably best companies in the world there, and certainly the most innovative companies in the world there. Look at Europe, right? Europe developed, Western Europe, very rich. Name me a big technology company. There's a few of them. You know the big European companies? They're all luxury brands. They are. LVMH, among others. Yeah. Right. Like, but they're not, they're not, it's not the center of AI. It's not the center of robotics.

47:50It's not the center of, you know, SaaS or, again, exceptions to the rule. I know there are. But, you know, people in glass houses as well. Same with Australia. What have we done? Afterpay was our big breakthrough and they got taken out. And actually, Atlassian probably is worth mentioning as well, but not really. I mean, all we do is dig rocks out of the ground and then flip houses amongst ourselves. That's what we do. That's right. Don't get me started. So what is it? I think the US has very good rules. They allow people to go bankrupt really easily. It's a good thing, right? They'll let you fail.

48:24So there's less impediment for entrepreneurs and less penalty. Less impediment to start, less penalty to fail. I think that's really smart, actually, what they do. There's a whole bunch of other stuff they get really wrong. But on that front, I think they get it. They do get it right. it's also the world's most developed and in many ways the best capital market as well so they attract all the money and there's certain network effects that i think are at play there as well that if you have got if you're someone with any kind of talent in those fields and you ask them where would you want to work silicon valley thank you like no i don't have to i have to think about that for like 0.3 of a microsecond you know that's where i want to work because that's where all the other smart people want to work that's where all the money is that's where all the um you know the infrastructure for want of a better word is for that kind of stuff and although the u.s is is uh certainly waning i say you know back in back in the 1940s i think it was like 40 percent of global gdp now it's depending on how you measure it i think it's about 20 percent or so so so there's there's you know the u.s is sort of on the other side of the bell curve in terms of its empire but But in terms of that, in terms of its ability to attract talent, to have the really great support for capitalistic endeavors, it's hard to beat.

49:50And just more generally, I think I need to actually have been meaning to this for ages, actually do some research on it. But I think global ETFs tend to underperform what's happened in the US. over time is my anecdotal observation. I think that the evidence will bear that out. And we've talked before on this pod, I think it was the Q &A pod too, of just how disconnected the China exposed ETFs are from the ascent. I mean, there's no denying the ascent of China from a GDP perspective. Yeah, right. From an investment perspective, it's been okay. But not what you'd expect, right? And why is that? Well, the structure, the political system, the business environment, all of these kinds of things.

50:37And I just don't see that changing. So I think there's plenty of investment bankers and financial planners out there will tell you that you need global exposure because I don't know. You just do. It's just sort of this thing. Just trust me, bro, on it. I've yet to see any good evidence for it. Go the US, man. but a bit i say in aussie you got the home field advantage here so the vast bulk of my money is here because i'm it's my pond i know it better than than than other ponds but but if i'm not in australia for anything else and i've got etfs exposure it it's for the us yeah i uh i can't strongly disagree with that mate i will say that by evidence of what i'm actually doing uh i've bought a i own shares in a nasdaq etf and shares in the vanguard global etf which is the one actually that you're asking about james um so i'm kind of gonna dog in both fights i think i also have a u.s total market for my young bloke but it's small and in his own account so i've got a you know i've conflicted all over the place and i've taken various approaches um i it's kind of philosophical at one level you know if you're buying broad-based low-cost diversified index funds, then anytime you choose not to follow that logic by making active decisions, you are kind of stepping a little bit further away.

52:00Not that's a bad thing, just be mindful of what you're doing. So if I think global capitalism will be good and value will be created and therefore owning a broadly based diversified low cost index fund exposure to it, whatever that it is, then the broader and less selective I am, the more I'm going to get the average return. So, you know, if I own only Australia, I'm forgoing the rest of the world. If I own the US, I'm forgoing the rest of the world. Now, if I say, well, actually, I just want the US, I'm saying I am actively selecting the US as an active choice, which goes at least, you know, purely theoretically against the idea of a low cost passive fund.

52:41Anytime you're not being absolutely passive by making a decision to choose a subset, you're moving away from that broad idea so i think that that's the first thing i'd say second thing i'd say though for all of that is the u.s is 60 % of the world's capital markets frankly a lot of the companies that are in europe and the u and the uk are listed secondarily on the u.s markets anyway so you're kind of getting some exposure to that regardless um so there's kind of you know there's and the size of those relatively speaking is not particularly large i will say ram i kind of take your point too by the way we're going to be a little bit careful again to play too thematically you know if you start I'd say, well, it's going to be tech that's going to win.

53:18We had the question from the kids, you know, is tech going to win? Okay, well, I want tech. You're saying, well, okay, I think tech's going to be better over the long term. Now, I tend to think that's going to be true, but am I so sure that I want to bet in it? That's a whole different thing. You already mentioned, Ram, the company. So Novo Nordisk is the largest European company by market cap out of Denmark. Of the next four, two, four, and five others luxury brands, LVMH, which is Louis Vuitton mowat hennessy l 'oreal is fourth and hermes or hermes is fifth in between there's asml which is a hardware software computer chip business uh then you got accenture the consulting mob sap the big enterprise resource planning business total energies which i've never heard of but i imagine it's a rebranded energy business dior number nine again to ram's point and process out of netherlands is 10.

54:06you ask yourself you know are those companies going to be long-term compounders at an extraordinary high rate? I don't know. Because I don't know, I don't know. I've gone global ex-Australia because I figure that's the complement to my Australian holdings. So I've just done that because I think it is the broadest way to go and I don't have to make those decisions. But I also own the NASDAQ ETF. So I'm also making an active bet in that sense. And I think that's different, right? So I don't own the NASDAQ ETF because it's a broad-based low-cost index ETF. In fact, it's not. It's relatively expensive fee-wise.

54:39It's not broad-based at all. It's technology that is an active decision for me rather than a passive one for my passive etfs i do own global because i just think i don't know is hermes going to outperform nvidia i don't know does l 'oreal beat nike i don't know uh and i haven't done the work so generally speak i'm happy to have the us and the rest of the world rest of the developed world should have not emerging markets and i'd make that my basket so that's what i've done but i don't i have no issues if someone decides to do something else. Yeah, there's no wrong answer, really. It's a question of taste and preference.

55:12And we're all trying to look into crystal balls at the end of the day. And it's hard to give an answer, an opinion on this without revealing your own bias. And not hard, it's impossible. So if anyone out there is screaming, no, no, what you don't understand about Bolivia or this, don't at me, just do what you want to do, right? But again, we will see. I'm not even going to – I'm certainly going to bet my left arm on some of these opinions. But at the end of the day, you know, perfect is impossible when it comes to investing. All I really want to do is make sure – Besides us, obviously. But I mean, really all I want to do is get a fairly decent real rate of return after inflation over time that allow compounding to do its thing.

55:59If I'm on my deathbed and realize that if I'd only done this or that, I could have got 2 % or 3 % extra of you. I mean, I'm not saying that wouldn't have made a difference. Yeah, absolutely it would have. But I'm guaranteed that whatever I'm doing now is not perfect. I'm guaranteed, right? And so I just think sometimes we get a little bit too obsessed with trying to optimize that which is not optimizable, at least from the vantage point where we sit right now. It'll be something – I guarantee you this, right? Well, I can't guarantee. If you want to guarantee, buy a toaster. but i suspect if history has any guide when our children's we've both got young kids when they are our age yes they will be talking about companies that we don't even know yeah probably haven't even been founded exactly yeah yep right and they they will be companies that are just trillion dollar businesses that you know making robots or or augmented reality brain chips or whatever the hell that they're doing at that point in time.

57:02And, you know, and it's also, you know, the future will unfold in really wild and unpredictable ways. So it's, it's all, it's all very, very, very difficult. But I think, I think you get the basics, right? And this is what's interesting about so many of the calls and questions that we get. It's like, everyone gets it, right? We're, we're kind of splitting hairs at this, at this end, which is fun. And we're happy to talk about it but um spend less than what you earn yeah totally spread it around you'll be fine i mean we are we have to end up both sides of our mouth a little bit right we pick stocks for giving because we're trying to get a little bit more than the market and we're saying but don't worry about absolutely i mean both are true i think what you're really saying is 99 percent maybe 90 percent 95 something like that of of the result is going to be the things we're talking about you can absolutely optimize if you can uh yeah but but worse than worse than you know worse than choosing incorrectly would be not doing anything because you're trying to work out which one's best and doing nothing while you try and work it out.

57:55Just pick one or both and go with it. You'll be very, very, very happy with the outcome if you do it for long enough with a large enough savings rate. Absolutely. I mean, go back to 2000 and say, hey, you need to invest all in this company. It's going to sell books on the internet. Like what? Get real. Oh, that was Amazon. Okay, fine. Go back to 2010. Oh, this is magic internet money called Bitcoin. That's going to be the best performing asset class that the world has ever done. You're right. The world is mad. You can't make this stuff up and it's just like it'll be the same in another 10 and 20 years it just it just will be so um you know humility is important in what we do correct mate let's finish with some questions from daniel we'll see if we can race through them uh hey scott and ram i'm a massive fan he says i'm a member of share advisor and dividend investor i've been listening to the podcast since around episode 50 with ram coming then going and then the return of the messiah that is the man, the myth, the legend that is Mr.

58:50Andrew Property Page. Love it. Daniel's trying to take my intros away from me. The prodigal son. I actually bought Salt Patsy, he says, as one of my first buyers. I've been sounding most purchases, but I've strayed outside the podcast tips and bought some speckies, in brackets, lost 95 % in a day from a bad draw result. And some other purchases because I believed in a theme, aka rare earth, or a mate gave me a hot tip, in brackets, another loss. Although my portfolio was still up and dividends rock. However, I've now got to the promised land of 15 to 20 companies, not stocks, he says in brackets.

59:25I love that, Daniel. We buy companies, we don't buy stocks. With some ETFs from ETF Investor. And I'm now in a confused state. Oh dear. And hope you can non-specifically give advice, but help your listeners. Here we go. A, I know you've spoken of not treating super and personal share accounts differently, but I'm having issues separating the fact that a lot of my super would be in the asx 200 furthermore i have both solpats and westfarm in my personal holdings and i think they are quite a conglomerate in terms of asx spread so i'm having an issue following some of the etf investor recommendations for an asx etf am i missing something or am i costing myself a balanced portfolio with this call uh i'll drop this one first round because it kind of refers to a couple of stocks are recommended in bits and pieces um i think you are missing something daniel if i can say that nicely uh solpads and west farmers are anything but representative of the asx if you're talking about a listed investment company like afik or argo one of those companies that kind of tries to be kind of roughly very spread across the asx that'd be worthwhile i'm not saying solpads and west farmers won't do well i think they will i think they'll both beat the market for what it's worth but if you think about Soilpats, they've got coal and telcos, some property and a brick business.

1:00:40It is very, very unrepresentative compared to the ASX. Similarly, West Farmers has some lithium. It has an insurance business, some chemicals, Bunnings, Officeworks, and bits and pieces. Again, not particularly representative. Now, they're conglomerates. That's great. They're internally diversified. That's great. And so that's good in itself. But if you're saying, well they're kind of the same as the asx 200 etf i'd say well there's not a lot of financials in there funnily off sop has considered i think a financial for um it was industrial if you look up the the sector classification is ridiculous financial i think might be anyway um but you know so so if you think about you know do you have do you have um mining no uh is there any uh you know csl news corp no uh i mean there's so no like there's lithium i suppose in west farmers you have no iron ore in those uh you have very little in the way of technology in those and so on and so on so if you're saying i have a couple of diversified investments i'm happy with then yeah you could do that instead of an asx etf if you wanted to if you said actually i want to have a representative sample of the asx then these two companies are anything but that um so i would i would probably just again choose what you want no harm in having those instead of the asx etf for sure but they're not well no we do the same thing in my view ram yeah i mean i can't argue with any anything there um it's funny is it because you know there's there's different requirements or different um out there in the market different people will be looking for different things yes and as as a as a company i know the fool tries to sort of cater to a whole bunch of different people whether it be sort of those looking for dividends or those looking for ETFs.

1:02:22So, you know, and there's something for everyone that's kind of there. I guess I'm struggling a little bit because what is appropriate for each person will depend on each person. And I don't want to sort of say what is right or what is wrong because, you know, I've long said as the kind of investor that I am, I mean, I would absolutely not walk at a subscription for an ID gen. Now that might be very different to how other people would use the service. Who's right? Who's wrong? Depends. Just know what you're after. Be very clear. I think too often people approach our industry going, I want to make money.

1:02:59Well, join the club. But you need to know thyself before you know anything else. Let's get a little bit more specific here on things. And then you're in a better position to sort of say, well, what would I look to take off the shelf when I look through the shop and how I combine that all together? This is the most waffly, non-helpful answer I've ever given, but there it is. I love it, mate. I love it. Let's go to the second question. Here we go. Having worked to get to the magical 15 to 20 individual companies level across a good and planned diversified array of sectors. Nice work. Based on some podcast advice, I then started increasing my holdings for my best idea at the time.

1:03:40What is proving difficult is each new recommendation from the fool gets me excited. and I'm having non-buyer's remorse that maybe the new idea is better. I'm trying to be buy and hold for the long term. I didn't sell during the COVID crash, but the shiny new toy of the next buy recommendation is proving hard to psychologically ignore of what I believe is predominantly a great set of companies in my current holdings. I'm scared if I keep buying the new idea, I'll both miss out on gains in my current companies. I'll also have 50 plus holdings, which would be unmanageable. Any thoughts or tips? It's kind of what you were saying, mate, about using the ideas and choosing the ones you have highest conviction over.

1:04:16Daniel, I'll give you the, just apologies for those who don't care or aren't full members. And this is not here to plug the service, do whatever you want. But Daniel, so there's two ways you can do it, mate. We manage the scorecard as a scorecard. And the scorecard is currently market beating, which I'm pretty happy about. No promises for the future. We manage it as if members could buy every single recommendation when we recommend it. And we'll tell you when to buy, hold or sell. And you can just simply follow along if that's what you want to do. So 50 is unmanageable if you want to do your own research on all of them.

1:04:45You can just follow along with what we're recommending, then you can do it and just buy when we say buy, sell when we say sell. If you want to do that, I'm not saying you should or anyone should, but if you want to, you can do that. That's how we run the service, right? It's literally that combination is what gives us our returns. So the simplest way to be a member of our services is just to go, I'll buy when they say buy, I'll sell when they say sell. Second thought is, and this sounds like I'm selling and I'm really not. We have other services that are what we call portfolio services where we give you portfolio weightings and sizes and we tell you when we do to buy and sell in a weighted basis.

1:05:14So effectively a model portfolio you can follow along with. It costs more money. You don't have to buy it. I'm not saying you should. I'm just saying if you're kind of worried about the flow and you kind of feel a bit kind of drowning in the number of recommendations, that's an option for you. The third is what Ram said is just simply make your own calls and buy the recommendations that make most sense to you and build your own version from good ideas. As much as I believe in all the recommendations, that's why you make them. You know, you don't need to do everything with everybody. you can just grab the ones that make most sense to you and build your own portfolio.

1:05:45So that's how I'd address it. Ram, do you have any additional thoughts to what you mentioned before? Yeah, there's an idea I've been toying around with just from a software perspective. So don't hold me to this. It might amount to nothing. I think we all struggle with that. I often look at what I've got versus what I could have and then I think, well, this one hasn't played out. I very much struggle from what they call the endowment effect. What I own right now, I find hard to sell. I just do. I'm the same. Absolutely the same. Something that has not done me well in recent times. But I think what can be handy is get yourself a Google Sheets or Excel spreadsheet, whatever.

1:06:26Not to be complicated, but just write down all the stocks that you're interested in. And then on one column, write a confidence score, like zero to 10, zero to five, whatever scale you want. So 10 being I'm super high conviction on this. I just love this company. About the company or about the price or the value proposition? No, no, no. About the company. How much do I like this? How confident am I of this? There are two things. A, it's around in the future, and B, it's more prosperous at that point in time. Nice. You're really down the rabbit hole if you really want to be technical with it. But I think the KISS principle, keep it simple, stupid, that kind of thing.

1:07:03So just confidence, conviction, whatever you want to call it, scale of 1 to 10. And the other column, do estimated return. Like what kind of return do I think is reasonable to get from this? And then just plot them out. And you'll have this X, Y spread. So the top right of that chart, you'll have something that you think has the best return and you have the highest conviction on. And down the bottom left, right near the origin, you'll have very low return expectations and very low conviction. and I think when you have them plotted out visually, I think it should make your decisions a lot easier because you go, huh, well, I've thought about each of these individually without in reference.

1:07:45I just, yeah, I like CSL. I think it's really high. Return, maybe not so good. Whatever happens to be and then you'll see it just spread out there and I think what it will tell you is like, well, if what I thought was true, I should really be weighting much more heavily the companies that are up towards the top right quadrant as opposed to the bottom left quadrant. Now, is this a perfect system? No. Is this going to be written up in the Journal of Finance? No, it's not. I think we caught a business school anytime soon. Yeah, it's not. But I mean, is it potentially a framework that can help you?

1:08:19Because again, and I know I whip this horse a lot, but it is opportunity cost, opportunity cost, opportunity cost. There's finite capital. There's a gazillion opportunities that are out there. You've got to be selective. You don't need more than, you know, certainly 20, in my humble opinion, to be extremely well diversified. So, you know, you need some – and this is just me shooting from the hip a little bit here, but something like that I think will help you lay it out. So as the fool delivers a new recommendation each week, you can read it, then put it on your spreadsheet, score it. I think the return potential is like this, and this is how much I like it.

1:08:55And then contrast it against everything else. I don't know. Have a play with that as a concept. Work at how you feel is appropriate, but it might help you be a bit more objective in your thinking. And it's something that I've been thinking about a lot lately. Yeah, nice, mate. I like it. Hey, questions, so your part C just to finish off with. Daniel asks, finally, I know this was asked before, but I have a question about the small odds. I cannot see how an ETF based on the small odds would provide returns if a company becomes successful, then would it not leave the index, meaning the index itself is inherently stuck at a similar size and value.

1:09:37Thanks for your work over the years. Full on from Daniel. Thoughts, Ryan? Yeah, I like that. I mean, you could argue that as it goes from, because what is the small, let's define it first. It's the ASX. It's the all-ordinaries. It's the all-ordinaries minus the 200. Okay. So it's the 201st to the 500th largest company. Essentially, yes. So the argument could be that, well, by the time you're up into the top 500, you're already in the top quartile of all companies. And you've got to go a long way to get kicked out. So there's a lot of probably value creation for you to go into the small odds and then out of the small, in the right direction, mind you.

1:10:22Not on the way out, but on the way through. There's probably a huge amount of return there. But I don't, that's just me trying to be intuitive about this. I don't know what the actual answer is. There are a lot of companies that – these are all based on size. Oh, sorry, technically size and liquidity. So you can have very big companies that are very liquid and vice versa. So liquidity is a consideration here. But generally it's about size. And I argue and have argued long that the biggest companies are usually often the most boring and least exciting. and not just from a, you know, strap yourself in, this is all about, you know, getting the adrenaline bumping.

1:11:08I just mean from a return potential. You know, if I can just like delay for a second here and look at the ASX 20, what do we got here? We've got AMP, hard pass. Major banks, hard pass, except for CBA, they've done nothing in the last five to 10 years. What else have we got? QBE, hard pass. Telstra, hard pass. You know, like they're big, but gosh, they've been real. If anything, they've been a drag on the market. So there's something to be said for the smaller companies. The other thing I've often said too is that I think it's all relative. So as everyone knows, I love my small caps. Oh, they're tiny little companies.

1:11:56Well, yes, put BHP next to it. And, you know, one's Jupiter and one's Mercury, right? I get it. But you take some of these quote-unquote small-cap companies, they are$150 million in market cap. It's not the pizza shop on the corner. These are big businesses with tens of millions in revenue.

1:12:19And it's almost definitionally true that by virtue of their size, they have got far more growth potential. With size comes strength. I get that. And there's a risk factor to that. But in terms of potential, the return potential on some of these companies are just dwarf the other ones. So this compromise is always to be made. And there's a spectrum there of like, do I want ultra, ultra, ultra low risk? Well, that's fine if you do, but just be aware that you're going to get Telstra-like returns. Or do I want something that's a bit riskier, but I've got a chance here of getting something that's a bit more exciting?

1:12:52And again, no right or wrong, know thyself and know what you're after and know what you're in for. but but um i don't know what am i trying to say here i don't think i don't think you could do i think you do a lot worse than than having a having a focus on on the small odds yeah i think i'm i'm really torn mate uh we have in the past recommended members by both a small odds and and the asx 300 uh to basically replicate the all odds so you're kind of getting getting everything Now, if you own both, then you get them as they leave one into the other. So you're not really giving much up overall, in theory, as those companies make their journey through.

1:13:36So I will say, by the way, the last five years, the ASX Toronto has massively outperformed these small odds. Now, it's possible that that's because of exactly the factor that we're being asked about, which is that the companies simply don't get big enough before they leave. I would suggest to you that we have, despite your points about banks, you're absolutely right, mate. Over the last five years or so, the fact that the bigger companies have done better than the smaller companies kind of talks to what's been happening right around the world, which is that value has been accreting to those biggest businesses that have been buying other businesses, have been using market power to maximize their profitability.

1:14:17Whether, I mean, in the US, we've talked before about the fact the biggest companies in the US are absolutely streeting the field for the S &P 500, right? If you take those out, the rest of the S &P 500 is kind of flat to down. And I would, frankly, the same is true of the ASX. So on one hand, you say, based on recent history, hey, the big guys, where are the games at? I think that's reasonably fair to say. Is it because, now, the flip side, as you said, if you've got small companies that grow and then don't grow from there, But the medium-sized companies that fill their niche. Think about, I don't know, we're talking about a whole lot, Technology One or Dicker Data or some of those businesses.

1:14:54I don't really matter which ones they are. But they're not going to become BHP anytime soon. So they're never going to be ASX 20 stocks because they just don't have the sheer market size and opportunity. So do I want those businesses when they're small and get bigger? Yeah. The growth in Woolies over the last 15 years has been great, but the growth before that was even better. So I kind of want that sort of small ordinary growth. They're not small companies, by the way. they're the you know 21st you said about the fifth 500th company out of 2000 they're still big businesses there's not as big as the big guys um i kind of want access to that growth now if if they don't get it because the big guys grow faster because they're big and the dynamics of capitalism happen to work out that they're getting prioritized and doing better then yeah you'd be better at the top end of the scale at some point to ram's point when you get four banks two miners other things if they don't have the growth left you don't want just that you want to have others And so my view has generally been, again, think about being passive.

1:15:48If you buy an All Lords ETF, I think there are any All Lords ETFs actually, but there's an ASX 200 or 300 ETF. There's a Small Lords ETF. Kind of whack those together, you get the All Lords, because it moves one and goes to the other. I wouldn't buy, so really clear, I wouldn't buy the Small Lords only. I would buy the larger one only if I had to buy one or the other, but I'd happily buy both. I'd happily own both. I think that's where the opportunity is for me. Do you know the other thing? I just looked it up from S &P. So a quarter of the small odds is materials. That's the other problem. You know, like, yeah.

1:16:25It doesn't give you sector diversification that people might be assuming. Well, you add in the energy sector on top of that as well. If you just really want to take sort of commodity-oriented companies, and you've got basically a third of your money is in companies that dig stuff out of the ground. Correct. And here's the dichotomy here. Whenever you say what was the best performing stock over the last five or 10 years, it's always a materials company. Yeah, yeah. Whenever you say what sector tends to underperform the market every single time, it's the material sector. How do you square that? Well, you have the lottery ticket that goes from 0.1 of a cent to$2.

1:16:59Yeah, that's right, that's right. So, you know, it's like there's a distribution there where you have a couple of lottery winners and a whole bunch of losers. And the lottery winners, they are the Fortescue medals that were penny dreadfuls that became big ASX50 stocks. And the returns are so massive, so massive, that they just drag everything else up. And so maybe that's the argument. You put enough of them in there and on average you'll go sort of okay. But I tend to think once you're getting to this kind of level of nuance, build your own ETF and just call it a portfolio. right like that's it's kind of what we're doing as stock pickers right yeah i it's it's a it's a exchange traded portfolio etp exchange traded portfolio yeah agreed agreed uh look i said i think both works um i'm i the only thing i want to mention i guess i suppose at one level is if you have looked at the s &p 500 10 years ago 15 years ago and said well hang on there's no technology companies there therefore i'm not going to invest in this thing you look at today when the techs are big companies, the big guns.

1:18:11My reason for investing in ETFs is not to play that industry-level sector in or out stuff necessarily. There is an ETF out there we've been asked about actually in a future question. It's an ETF which excludes mining and financials for exactly that reason, which we'll talk about another day. But the fact that the sector currently has a certain... You would have avoided the S &P 500 if you wanted tech, you didn't want to buy GE, General Motors, Exxon Mobil, something, something, whatever they were, right? And yet, had you done that, you would have missed out on extraordinary gains because the little businesses, not tiny, but little businesses in the S &P 500 went on to become the biggest ones and absolutely obliterated the previous big guys in the process.

1:18:53And you still made extraordinary wealth. So I'm not saying that this won't necessarily happen to the ASX, but I would just say be a little bit careful about what you ignore or what you avoid because of the now we're all investing in the future not the not the present now if you could exclude those and if you could have said years ago i will take these big guys out just invest the little guys maybe you would have had some money doing i don't know but equally that had you had to know the future in the hindsight it's obvious at the time was it that obvious no i don't know so again it's that active versus passive in a rams point once you start becoming active past the point you might as well say okay well now i need to do enough work to be able to value it in which case you're back in stock picking territory and that's probably the right approach for a whole lot of people if you're at that point of wanting to be more involved and more active and more more analytical which i think is great and brand thinks is great that's probably the way to do it yeah yep thank you for some great questions we've got heaps more i can't wait to get back stuck back into them but we are done for this week uh mate um i know you'll be back from your run you've been working for three or four hours probably time to have a have a rest and maybe head back to bed you haven't been there for four or five hours by now, Sean?

1:19:57I'm a big fan of the afternoon power nap. Can I just say? Oh, hashtag four-day work week. And I will rationalize that like you would not believe. I'll convince myself that I'm far more productive. The secret is no more than 15 minutes, right? Because then you're just going to be drowsy all afternoon. I can't do afternoon. Yeah. Just when you start to find you're nodding off a little bit, just put the head down and then boom, back into it. There you go. I enjoy your power nap, Mr. Page, and I will see you next Friday. Until then, thanks for listening and Fool on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned.

1:20:40General 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. The Motley Fool operates under Financial Services Licence 400691.