Mailbag: incl. Your list sounds like Uncle Warren’s. November 17, 2024

26:33I'm with Ram. With the exception, mate, that you're a doctor, I'm not sure what your career is going to look like in terms of where you're going to live and where you're going to be. So the thing I'd say is by all means, save for it. You're 26, so you've obviously put a heap of effort and time into your qualifications. If you know you're going to work and live in the city, you're going to work and live in, you want to buy the house straight away and get on with it, then do it. there may be a scenario where you say actually i don't will i might end up in the country or i might end up in a different city or i might end up across the city um and so in that case just be a little careful we saw our stamp duty briefly on friday just just don't rush into putting those roots down you're 26 you're young right so um but but i would i guess honestly my answer is do neither i.e invest in shares until you have an amount that approximates a house deposit and then work out whether that's the right time to buy a house that's probably how i would do it so i i guess you're right to think about it.

27:25I guess the decision point though doesn't need to be until such time as you have a significant amount amassed, try saying that three times quickly, that you can then choose whether to keep it in the portfolio or cash it out and put it on the house deposit. By then, I reckon you'll probably be further in your career. You'll know what you want. You'll know where you want to live. Choosing the house is a difficult one. I got advice when I was a kid, a kid, young, younger than you, you know, to really max out your borrowing capacity. In hindsight, I should have. I didn't. I know. I went through the roof in the decades since.

28:00The wrong lessons have been taught, right? Right. I was going to say, I would say just be careful of expectations, inflation. It's easy to do. We've all done it. I'm not going to be critical of you when it happens because it will happen because unless you're an automaton, that's just life, right? Our needs and wants expand to fill our salaries. It's what happens. But if you can buy something you like and you're comfortable with and you want to live in, you want to have a family and those things are important. Without going overboard and put the difference, as Raym already says, into shares, the compound returns you're likely to get from shares, in my view, should meaningfully dwarf the returns you're going to get from maxing out a property loan.

28:38Yeah. And again, the big caveat here is that you do have that flexibility is when you choose to buy and you've got a – and very likely that it is going to be a multi-year period. Yes. Do not just chuck it into an ING account or something like that. I mean, even at 2.5 % inflation, you're going to see like 12%, 13 % of your purchasing power erode over five years while you save the deposit. Like it's a bit rigged. But if you're covering inflation with interest, which you probably are, the upsides on top of that from owning productive assets like shares are going to give you a better return again.

29:15Absolutely. Absolutely. Mate, we had this question from Kate. Great question, James. By the way, I should say, we say you a lot in some of the answers. You all know this, but we can't give personal advice, James. So I can't say what you should do. There are some thoughts to go with your decision-making. A question from Kate. We've had a few times, mate, but I just, it was a really, firstly, I love hearing from female listeners. Secondly, the question is really concise. It gives us a nice way to kind of just touch on this. Some of the questions we do cover over again. Hopefully our views aren't changing.

29:43or if they are, they're changing because we've got better ones. But Kate says, hi, Scott and Andrew, in brackets, the straw man. I religiously listen to your pod on the pod machine and enjoy your banter. Thanks, Kate. With everything going on in the world, one thing is for sure, markets go up and markets go down. But I wanted to get your thought on debt recycling. This one we've had a few times. I have a relatively small mortgage and was wondering if you were given the choice, would you withdraw$100 ,000 to invest in Australian shares via an ETF? To me, this avoids a margin call on a margin loan, and in theory it would mean I could pay off my mortgage quicker.

30:19What are your thoughts, Kate? Yep, I like it. I like it a lot. Just do it. Just what you need to really watch there is that LVR, like taking a bit of money out against a home as collateral, you're not going to get the margin call. You're going to – the cost of that is going to be the interest that you incur, but on a home loan is going to be, what, six-something percent, not a lot. So if you are reasonably confident that on average and over the long term, or term of the loan at least, that you can get more than six percent, it's money for jam, right? Maybe I'll be careful with the statement there.

30:59Money is not for jam. There's a lot of stress and anxiety and whatever that goes with it. But there is a margin there that can be made, and I think is a very sensible one. The thing that undoes people is they borrow too much, and they're forced sellers at the worst possible time. Or they just take on such a load that they just can't even service it without anything untoward sort of happening. Or they take the money and while they may be notionally investing in shares, which is notionally a good thing to do, what they've really done is gone off and bought a$0.02 penny dreadful mining speculator or biotech company that's got zero chance of ever making a profit.

31:34So it's sort of like that can end up really, really badly for you. But in the example of a broad-based ETF, I've got quite a reasonable buffer on my loan, and I'm pretty confident in my earnings power to sustain things in the interim. I actually think it makes a lot of sense. I mostly agree, mate, but I don't know now's the time necessarily. with interest rates where they are on the mortgage and the fact that your returns yes the interest is tax deductible but you also got to pay tax on the returns you're getting whereas your mortgage is tax-free if you're paying a rate of kind of six and a half percent give or take I don't know the gap is big enough for me if I could fix it two percent I'd do it tomorrow if I do it four percent I'd probably do it tomorrow six and a half you're getting really close by the time you account for tax um to kind of roughly long-term market averages and i don't i just don't know the gaps there um so i don't i mean i haven't done it so maybe that's the maybe that also helps you with a view i haven't i have chosen not to do it um yeah i don't know yeah i don't think i wouldn't do it at six and a half put it that way uh at a cheaper interest rate i would absolutely um theoretically i still might not actually do it for personal reasons or for family reasons i've mentioned before um we get some some psychic value out of out of having you know not having a larger mortgage that's just kind of a personal life preference um but yeah i think the margin call you're right about kate's absolutely um a huge benefit of using it's also you're getting a better rate taking a margin loan on shares directly i know what the margin loans are now might nine percent i suppose are they something like that yeah they're not great yeah but but even six and a half i just i just think when you allow for the tax on that if you had to return nine you pay 30 tax you're down at sort of six i just i don't know for me the margin would be big enough to want to take on that debt if the gap was bigger if you thought you get nine percent and you could pay four percent interest that's starting to get pretty attractive because the gap there is big enough even after tax you're probably still ahead um so yeah that that's what that's what i personally would do i get we can't say you should do kate but that's what right now i wouldn't at lower trade i might and again like a lot of the things we say there's a middle path here right if in doubt it's not an all or nothing thing it's like oh gosh I'm not quite sure maybe I'll do it with 20 grand instead of 100 grand you know you can find that sort of sweet spot absolutely and the other thing I suppose over time is and the one the one benefit of that is actually not the period of the loan but it's the compounding thereafter and this is one of those this is one of those human sort of psychology behavioral things and you know people say well I could back to my response about renting and for all the non non-financial reasons even if you do people say hang on, I can rent and it's cheaper than buying a house of the same value or size or location.

34:25And I can put the savings, the different amount into shares and do really well. Even if renting was still attractive enough to do, with all the stuff that we haven't talked about, how rubbish this would be a renter these days, you've still got to make sure you're disciplined enough to actually do those other things that work, right? And I know that it feels like I'm being a bit condescending and passionate when I say this, but I say it to everybody listening in the hope that some of you will be in this boat, but some of you won't be, which is just to remember that the circumstances, you need to actually have followed through the logic to actually get the result, right?

34:56So I will rent and I'll put the savings into the portfolio. It's a great idea, except one out of every how many people say, I'll do that and then don't. So you've got the cheaper rent and you have a great, more expensive lifestyle. And you realize after 30 years, the thing you were going to do when you started renting, you never quite got around to and you're still renting without a portfolio. And so it's kind of one of those, again, it's a know-yourself kind of situation. Rationally, logically, if you followed it through, the maths checks out. If you don't or don't do it enough or give yourself excuses to go and spend some of that money because I'd really like a new car and I'd really like the holiday, and so you do that instead of investing in a portfolio or some of that, the benefit you think you're going to get if you followed it religiously and in a really disciplined way simply won't eventuate.

35:39So just be careful of that too. And I guess the reason I mentioned that for Kate is if you're going to sell out after a 20 % loss when the market falls because you freak out and go, I shouldn't have done that, then you're locking in a loss. If you don't invest that money as well as you might, you're locking in a loss. I think I'd do an ETF, but then in a couple of years' time, I think, actually, I like this investment. I'm going to go and buy some shares in, insert dodgy company here, and you lose some money. That's like, oh, no. It's very hard to make back those losses if you crystallize them.

36:03So just, again, the theory only works if practice matches the theory, right? And that's probably just the, again, everyone says they will, and I don't mean to sound like I'm being condescending, But as I regularly say, 90 % of us think we're above average drivers. So just keep that in mind. Stay humble is probably, what is it, Memento Mori you mentioned last week, Ram? You are mortal. Right. And I think, and maybe there's just this humility for all of us, even without the victories of the great generals of the past. Just, you know, be humble. Realize that you're not the automaton and perfectly self-disciplined, you know, Vulcan from Star Trek you think you might be.

36:39Give yourself some much of error, I suppose, is what I'm saying. Yeah.

36:45this is a this is an interesting question from Rich question slash comment and I kind of I like it because he went back on some of the stuff we talked about and also then posed something different and wants us to compare them so with that Ram here's your chance to compare and contrast Rich is asking us to well we'll see how he's going to compare us Hi Scott and Ram first and foremost many thanks for the entertainment you continue to provide each and every week on the pod machine. Thank you, Rich. Also, thank you for mentioning Ram's workouts. I'm meticulously keeping track of his athletic feats.

37:21Don't encourage him, Rich. Don't encourage him. Goodness sakes. It gets better. And compiling them into a book I can sell for the aspiring ultra-athlete. And then to disappointing effect, he says, I'm just kidding. Oh. There you go. I think it would have laid him down this morning, actually, mate, anyway. I mean, the exercise on the inside thing, I thought you were better than that. Sorry. Anyway, the other day on the pod machine, you mentioned the five, seven or eight most important points you look for in a company. That's exactly what we did. We started with five and got to about seven or eight.

37:51Here's what I heard, and please feel free to correct the list. One, A and B combined, large inside ownership and having a founder CEO. Two, high reinvestment potential. Three, low capital intensity or capital light business model. Four, business with operating leverage. Five, business with a moat. Six, one that's easy to understand. Seven, a strong balance sheet. And eight, kind of offered at a fair price. As I was listening to the list, I was thinking to myself, this list seems vaguely familiar. Now, at this point, I'm stopping around because I'm not sure whether he's going to accuse us of being inspired or maybe as clever as or just ripping it off directly.

38:30So I'm going to assume, Rich, you just are impressed. But he says, and then I remembered Uncle Warren's acquisition criteria. Here's his list. One, large purchases. Two, demonstrated consistent earnings power. Three, businesses earning good returns on equity while employing little or no debt. Four, management in place. We can't supply it, as Uncle Warren. Five, simple businesses. If there's lots of technology, we won't understand it. And six, an offering price. We don't want to waste our time or that of the seller by talking even preliminarily about a transaction when the price is unknown. which says to me there seems some crossover between the two lists yeah i thought it was amusing that you independently created the list but it seems pretty similar to the berkshire list great minds think alike right fools fools seldom differ is the other way exactly my arm used to love that one um you go first mate i think um oh by the way he says also p.s the teledyne co who was a master capital allocator oh yes singleton yes he was mentioned in the book the outsiders by William Thorndike.

39:36Thank you. Yeah, look, I think, honestly, Rich, you've done us an amazing favor by comparison to Uncle Warren. We don't deserve any of that. Very high praise. I'll take that. By the same token, investors, they follow Uncle Warren, and then they get a little bit arrogant and decide that, oh, Uncle Warren's, I'm better than Uncle Warren. I think this or I think that, or, oh, he's okay, but Charlie Munger's better or something else it's just and look you know knock yourself out um once you've decided to discard uncle for greener pastures you've probably got a little bit far through the looking glass i would suggest um i think they're roughly the same you're absolutely right i mean we probably were and remember i did one each we kind of compiled them together if you think about you know large purchases we don't really care about obviously but demonstrating consistent earnings power is basically kind of what we talked about it's the operating leverage the moat the business needs who understand the strong balance sheet, to some degree, they're all variations of the same kind of theme, right?

40:39And really it comes down to is this an attractive business because it's done well and it's going to keep doing well. It's kind of that, right? And we tried to highlight some criteria that met that. So, again, I'm not going to try and say this is the same as Warren's or we got it right or anything else. But to your point, that's kind of exactly what we talked about. We said business we can understand. so yeah that being said Andrew I've spent a very large amount of time in our investing careers thinking about other people's investing and largely Warren Buffett's investing in particular I'm not even slightly surprised it matches not because we're as smart as him but because we learnt from him I think you know it's kind of one of those things if you can read Warren Buffett and come up with something different as your investing criteria I would suggest you probably you know as I like to say whenever I agree with Warren Buffett I assume I'm wrong that's kind of the story right so if you disagree with Buffett you're probably wrong if our list matches his in any way shape or form it's absolutely because we've just you know frankly stolen it directly and unintentionally uh because we've just spent so much time learning about the the traits of good businesses the traits of good investors and i think we kind of end up at the same spot speaking of buffett i'll quote his um his partner in crime no longer with us sadly uh charlie mungo said i believe in the discipline of mastering the best that other people have already figured out yeah exactly all right and he goes on to say i I don't believe in just sitting down and trying to dream it all up yourself.

42:03And that is, I mean, people have laid the foundations. It's the whole, it's often misquoted, but Newton's, you know, if I've seen far, it's because I've stood on the shoulders of giants. That's my favorite. It's such a great line. And I say that with a little bit of cringe because I'm not suggesting that I have seen far. Yeah, that's right. But if I have had the - But if you want to call me Isaac Newton, you can. But if you want to. But I mean, if I have had the potential to, or any of us have had the potential to, I never would have in a million years had the intelligence to comprehend the concept of discounting future cash flows or competitive.

42:46There is not one single original thought I have ever had, ever, in investing. And if ever there was a time where I thought, ooh, if I'm the first person to think of this, a bit of Googling very quickly says, no. That's right. People were chatting about this in 1832, right? Like there is nothing new under the sun when it comes – well, maybe one exception. There is mostly nothing new under the sun in investing. You see what I did there? You know what I think it is? I think you're still right because the application is – when you say nothing new under the sun, we're talking about the principles of investing.

43:22Even if you allow for the new thing that will remain unnamed because you mentioned once this week and that's your quota. But even then, the principles are still the same. There is nothing different in terms of the application. Same with SaaS software as a service business models, right? Really different. Network effects through Facebook, social media, really different. And yet, the principles of value creation of the way you think about that business, of the way you interpret or analyze it, those – Ben Graham wrote about it in 1920, whatever it was. I mean, you could literally have done nothing since we pick up that book right now and go, well, SAS isn't mentioned here, but I can see how I would do it.

43:57It's just not that hard. Yep. Yep. And the harder part is that when you start going on this journey, here's the irony of the information age, is that we have access to the entirety of human wisdom. Yeah, I know. We also have the access to the entirety of human foolishness as well. Yes, yes. So when you start Googling how to invest, right, you get so much rubbish out and stuff that's not obviously rubbish until you've sort of either learned the hard way or you've done a lot of work on it. So it is very difficult, you know, and a lot of these arguments sound super compelling. And a lot of them have a lot of weight when it comes from some dude in a suit who works for some very high profile investment bank and has like, you know, all these qualifications after their name.

44:48It's just like, well, they're not wrong. It's Jamie Dimon. How could he possibly be wrong?

44:55I guess you want to learn from the stuff that's out there, but it's more than just sort of getting to the stage where you can recite a few Buffett quotes. You need to own those ideas. You need to embrace those ideas to your very core once you've figured them out, right? because you soon realize that actually this is everything. If I get like, you know, we came up with a list of eight, you could get to 20, you could narrow it down to three. But, you know, when you get to that list of the big ideas as you see them and you've got good reason to have conviction in them, that is a huge milestone. But it's also that's just when the hard work begins because then you've actually got to put it into application and that is a whole other kettle of fish as well.

45:49But, yeah, I mean, that's why we say journey. You know, it's such a horrible, cringy word to say, but it is. And I've been doing this now 30 years professionally. Yeah, yeah. And I'm learning stuff all the time. And every time I have that prideful moment, there's a rake in the face, right? And I feel as though it's something that never, ever comes to an end. But it's just curiosity is two things. Curiosity and humility are the two most powerful attributes you can have. Because if you're curious, you'll go and learn. And if you're humble, you'll have that mental flexibility to question yourself and to change your mind.

46:35And in combination, it's a superpower. Nothing can stop you. I love it. That's a really good way to fill it. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

46:52Great question from Lisa. Thanks, Lisa, for sending in a question. I laugh because Lisa starts by saying, hi, amazing pod machine educators. That's not even the bit I'm talking about. Huge, thank you for your work. I look forward to each week's podcasts and even the kids know not to interrupt mummy when she's learning. I think they may even be learning a little during the car rides each week. Excellent. Lisa, that is awesome. G'day, kids. Thank you for bearing with Ram and I while mum learns a few things. Hopefully she's helping. If you guys are learning some stuff too, that's awesome. If not, hopefully we're at least...

47:28She's helping them get to sleep, right? There is that. It just makes the rest of the car ride seem much better when it goes off. Yeah. It's all about low bars. A question for the mailbag, if I may. She says, and you absolutely can. I have been seriously investing since COVID with a core portfolio of ETFs in individual companies, small and large cap in Australia and the US. I spent some time recently reviewing my holdings as I joined ShareSite. And to my dismay, realized my individual holdings across two different trading platforms are way too many companies. She puts a 40 in brackets and a woman face palming, which I'm a fan of the emojis.

48:06over time I now realized FOMO must have come into play and I was adding to new positions on each platform without truly realizing how I may affect our future returns. Maybe even a worsification Lisa says. My question for you both is now what? How many are too many? Do you sell out of a position when you add a new company to your portfolio to get near your sleep number? Do you just leave your losers and not sell them, which would increase the number of companies you own over time. In general, do you look at your portfolio as a whole and consider each company as a percentage of your entire portfolio?

48:44Or do you break it down into, say, small and large cap, etc.? I'm fortunate to be in the green with many of my holdings, says Lisa, so I'm trying to figure out if getting rid of the losers now is the easy way to reduce the overall total. Sounds a bit dramatic, and no doubt, quote, it depends on my conviction, end quote, will be your responses. With some of the markets nearing all-time highs, it has given me thought about spreading the portfolio too thinly. Any insight and rants on the above would be wonderful. Thanks again from an avid she slash her slash female slash lady listener with a big smile and a wink.

49:18That's from Lisa. Thanks, Lisa. That's awesome. We appreciate it. Yeah, great question. So while you're reading that out, I jumped onto my straw man portfolio and I counted up the positions. I got like 27 positions on there, right? Right, okay. Which is way too many for me. I've often sort of said I prefer a concentrated approach. The thing you need to understand is that three companies or three securities, let's say. Three investments. Three investments make up 50%. So I am very concentrated, very, very, I didn't design it that way. Things have just, some of them have gone really well. So it is.

49:58Hashtag humble break. Just saying, you know. And the other ones are really small positions because they didn't go so well, right? That's what she's asking. Yeah, great. Perfect. But it's – I am increasingly a big fan of watching positions. Stanley Druckermiller does a bit of this stuff. It's sort of like something's come across your radar and it's past like the initial sniff test. You haven't done nearly enough work on it, but it looks good. And you might buy a very small position. Like, you know, the bare minimum that ComSec will allow you to buy or whatever. Why do you do that? It's, I think it sharpens the mind because once real money is on it, you pay more attention.

50:39You think a bit harder about it. So there's a bunch of stuff I hold that I'm really, I wouldn't advocate for. I wouldn't advertise. I wouldn't encourage others to, but it's there because I find it interesting. Having said that, when you say, well, where is the bulk of my economic exposure? It's in a small number of other kinds of things. So it's not so much the number, but the waiting, I guess, is the long-winded way of what I'm trying to say there. I think it is a very healthy exercise for investors to periodically review and cull. Not every three months, but once every year is probably about right.

51:19Maybe even every, you don't want to do it too often, but there are things, we all suffer from inertia and things just, you bought for one reason and it didn't turn out the way you expected it to. And it just sits there because, you know, hope never dies basically, you know, these kinds of things. The only thing I would caution you on, and I know you know this, Lisa, but just the language you use there was like sitting on some losers. I don't define the losers as the stocks that haven't performed well so far because COVID was a blink of the eye. The losers are the ones where the underlying business has not performed anywhere near what you thought they would.

51:57Here's another humble brag. Catapult for me is doing extraordinarily well at the moment. It may even tap$3. I copped so much grief from that from so many people for so long. So yes, yes, I'm going to say it, right? It's doing well. Put that in your pipe and smoke it, right? But the reason I sort of say that is that had I based its investment merit was only a blink of the eye it was 70 cents you know it's nearly 4x'd in that period why didn't i well it's because to my view the business was still performing well the share price was doing terribly and and too often in fact when you pick pick your favorite gun you know wealth creating share they all go through these periods and so if you're going to sell out every time the share price underperforms, you're going to miss out on those opportunities.

52:52Likewise, the company that's going really well, maybe it's up 200%. This is obviously a good share. I'm going to keep hanging onto that. It might be extraordinarily overvalued or just the subject of some sentimental pump that has got nothing to do and it's all going to fall in on itself. So I know you know this, Lisa, but it just makes the point there. So I think you're at a good point now. Two portfolios, there's been a bit of bloat there, unintentional, absolutely review it. But the things you want to take out behind the shed and shoot are the ones where the businesses are just not doing what you think that they would otherwise do.

53:28They're the ones to focus on. 100%, mate. Love that answer. What can I add to it? I think, so I think I would think about it as two separate processes, right? I think you haven't necessarily done the wrong thing holding 40 companies, but you may have if you look at it and realize you got the wrong ones not too many and and so i'm gonna i'm gonna kind of try and answer this in three ways firstly an investor should always buy their best idea right because why wouldn't you and i'm going to qualify in a second but why wouldn't you um and if that's a new company then there's no point saying well i can't buy this really great investment idea because i already own some of something else you know it would be madness right here i've got a winning lotto ticket for you lisa would you like it no thank you've already got three other lot of tickets.

54:12That kind of stuff. And I know you're not saying that, but I guess I'm supporting your at least directional decision to add to companies when you went, hey, I like that a lot. I think it's going to be a market better. I'll buy it. That's exactly what you should do. Now, if you find that's growing your portfolio too quickly, then maybe, again, I'm not talking about you personally, Lisa. I don't want you to feel insulting or critical at all. If I to that 40 companies in two years, I might sort of say, I might have got a bit carried away here. I might just bought the shiny new thing rather than one is genuinely better.

54:45Or possibly, because you started investing relatively recently, the first half dozen you bought might have sounded good, but you realize you know better now. And so buying the best idea is always what you should do with two exceptions or two qualifiers. One is make sure the portfolio you end up with is sufficiently diversified. If I like banks a lot and I spend three years buying every bank, and I've got 40 of them, I've probably not built a portfolio particularly well. So think about diversification of industry, geography, currency, risk. What's the right word? Risk cause, if you like. So if I own three different companies that are all exposed to consumer spending or to the finance industry or to the US dollar, again, I might not be as diversified as I think I am.

55:28So have a think about the diversification of your portfolio. The other one is in hindsight or after the fact go back and just simply ask yourself to ram's point do i still think these companies are going to be market beaters because that if in the cold light of day it's hard to do because once you own it you kind of get a bit emotionally attached to it but you kind of think well actually no i thought this thing was going to do really well and either i got the initial decision wrong which is completely possible i just i just screwed it up to ram's point maybe um the business hasn't performed as well as i'd hoped maybe the share price has gone really well and you're talking about selling the losers, it might be as rampant as some of the winners you want to sell.

56:05Because you kind of look at it and go, well, I thought it was good, but I think it was going to be that good. And in fact, the business hasn't gone that well at all, but the share price is up. Gee, that feels a bit overvalued. So when you think about what you already own, you think about pairing it back, that's probably another thing to do. I wouldn't pair back for the sake of it, mate. I don't think you should necessarily need to target a number for the sake of it. If you want to, by all means, go for it. Just remember that if you bought something because you liked it, if you're selling that afterwards, it may still go well or it may not.

56:31The number you should own, you don't want to be too diversified to Ram's point. You don't want to have too many companies. You can't keep track of them every earnings season. Are you really going to sit and go through 40 earnings releases and financial statements and CEO commentary and conference call detail and say, what do I know? You're like, no, I'm not going to do that. Man, I can't do more than 10 of those. Okay. Well, maybe that's, again, your idea. And that's where ETFs come in and the weighting, as Ram talked about and how that sits. So I hope that kind of helps. I've got, I think I worked out 27, I used to 27, what must be, what was I, I can't remember, do I do it quickly?

57:04Let me do it, I should know what Ram was talking about, I'm not that clever so I did it. But well over the notional 15. I've got you. Yeah. Yeah. Well, I'll, there's a roughly in alphabetical order. Look at my portfolio now, just on ComSec and this is just the ASX stuff. There's one, two, three, four, five, six companies that represent each less than 1 % of my portfolio. Right? Now, think about that if they're less than 2%, sorry. That would effectively mean less than 1 50th. In other words, I'd have 50 companies of that size to make up a full amount. So the random spot is really small. I've got one, two, three, four that are more than 10 % each.

57:41And then lots in between. And so, again, you know, at some point I've got to be honest with myself and say, do I really want to own this position that's 1.09 % of my portfolio? Is it really important enough, big enough? Do I have enough conviction? if I do I should want more than that right 1 1 100th of my portfolio either it's really small and risky I'm having an absolute flyer which I don't do but if it was you you kind of could but otherwise like what am I doing with a 1 % position in something like it could 5x and it just barely moves the dial right I mean it'd be lovely I'll take it but yeah if I care enough about it and I like it enough it probably should be more than that now will I do it maybe not because at some point it's so small as to not be meaningful and so it doesn't really matter it doesn't matter either way right So you can kind of argue this one both ways.

58:24I think you can on most brokers, and you certainly can on shares, I think. Can you sort it by weighting? I'm sure you probably can. And sort of take Ram's point and kind of go, okay, well, you probably want 75 % of your portfolio in 20-odd companies, I guess, probably something like that. If you're going to have more than 20, if you're going to have less than that, obviously, different story. But, you know, because you want to have your highest conviction ideas with the most money behind them by definition. If I've got, I don't know, I've probably got 20 there roughly, just eyeballing it. If I've got 20 companies, my 20th best idea, my 1.1 % position, have I not got a better place for that money?

58:58And if I don't, then I should sell something else, put my money into that position because if I like it that much, why would I have 1 % in it? So there is some value on doing it. My last point, we'll move on, is simply just to say it's worth not overthinking it because you don't want to keep buying something buying something trying to rebuild your portfolio. It'll kill you. So be roughly right rather than precisely wrong. have a look every 12 months and kind of look at it and go, do I really still like this thing enough? Should I get rid of it and get something else? Again, to Ram's point, not because the shares are down.

59:29Shares could be up or down. It doesn't matter. We recommended a sell to our members, speaking of humble brags, last Thursday, so a week ago. And a bit over a week ago. And it had gone really, really well. But it got so stupidly expensive. We're just like, we can't justify holding this. You've got to name names. I need to know. It was REA Group. Oh, well done. It's like 90 times. It was some stupid. I want to say 90 times earnings. I'm sure that can't be right. But I'm going to, again, real-time research. It is 70 times earnings. And it's just like now it's gone from 160 to 240 over the last 12 months.

1:00:06It went really, really nicely for us. I'm really happy that we recommended it. But at some point, it's like 70 times. Now, this might go well. I've jinxed it now perfectly. Now we've said it on the podcast. It's going to go to the moon. This is a$31 billion company of the P of 70. and we just kind of went, maybe it's going to do well, but how sure am I at that sort of PE with a growth rate it's got? So we went, no, don't know. Going to sell it? We didn't feel we had enough conviction in it. So that's gone well, not badly, and we're selling it. We also sell stuff that's gone badly because it sucks.

1:00:36But again, just to reiterate Ram's point, not just because the shares are down, look at it and go, do I really feel good about this for the future? Our job is to recommend market-beating investments to our members. We just didn't think REO was going to beat the market from this price. Again, could it? Of course. Yeah. I could have sold it two months ago and it's gone up 20 % since then. So I would have missed that gain. And that's always going to be, that's the other thing, Lisa, that's going to be life, right? You're going to sell something and it's going to go up. Guaranteed. You hold something, it goes down, you kick yourself, but that's just the process.

1:01:03Yep. As I've gone on my journey, I think one thing that I've gotten better at and it's almost become a religious thing for me is the recognition that there are real – a very, very high quality idea is rare. There's lots of decent investments. Yes. Lots of decent investments, absolutely. But I'm talking about the kind of investment where you can honestly say – and this is the trick, to be honest with yourself. But if you can honestly say, I understand this deeply, I have as high a conviction – I can never know the future, but if I have incredible conviction that this is going to do well, I will very happily hold a very substantial weighting in that.

1:01:51Now, they're very rare, so it doesn't happen very often, but don't be afraid to – look, I've got to be careful what I say here because it'll sound very reckless, but overweight might be the more generalized way to say it, a very high-quality, high-conviction idea because they are so rare. They are super, super, super rare. And I can tell you there is nothing. I've often said this. Yeah, seeing a share go down 50 % sucks. Selling a share and then watching it 10x over the next decade is far more painful, particularly for reasons that you articulated when you bought it. And I see it all the time with investors.

1:02:29Oh, Xero is going to completely disrupt the accounting landscape, and it's going to do this, and it's just going to be one of the dominant global platforms for accounting for business everywhere. Oh, really? Do you think that? Yeah, I do. I'm going to buy some shares. Great. Hey, how are your zero shares going? Brilliant. I just locked in a 30 % profit. Look how smart I am. Like, you're an idiot, right? You are an idiot. And you're an idiot that I've been that idiot before in the past. But again, these kinds of situations are rare. And the kind of person who overthinks the, oh, I only wanted a target weight of 8.6 % and it's 12.3 % and it's 3.7 % above my intrinsic value calculation.

1:03:07That's finance bro stuff. And just stay away from it. Your weighting should be determined by your conviction and your conviction should be determined by deep, honest, objective research. Yes, that's a very, very good point. Mate, I'm going to finish with one from Igor who says, Hi, legends. The buttering up starts immediately. First of all, thank you for providing a rich weekly rant. Amusement sprinkled with some factual information. Just a sprinkling. A little bit. I look forward to each episode and consume it as quickly as I can. Unfortunately, on one and a half times speed, it does not last long.

1:03:48So I would appreciate longer episodes and maybe another weekly podcast episode for maybe a Tuesday or a Wednesday. The extra day could just be rants and what ifs. Listeners could send rant topics and you let rip for as long as it takes. The extra episode could be paid subscribers only. You can always use OnlyFans as they seem to be geared for the pay-per-view extras. So I've heard.

1:04:12well you know what you know the economy takes a turn anything is possible anything is possible and frankly everyone's different everyone's got their thing if there's enough people in the world maybe with someone's thing someone god help you all god help you all now for my questions as eager after all that sort of yeah you can't hear that or unthink that as an early semi-retired person with investments in the share market my concern is always with a significant market drop i know that markets can drop often and I'm okay with these drops thanks to past experience and your valuable advice. However, what I am concerned about is with the length of time it might take for a market to recover to its previous levels and move forward.

1:04:52I do keep liquid reserves for a few years to make sure I'm not a forced seller at the worst possible time. But what if the market stays low for 10 years or even five? It has happened in the past. That got me thinking, and this is what I want to run past you. We now have a huge and growing influx of super money that is going into shares. So my thinking is that even if the market drops significantly, super funds will still be investing large sums into stocks as they have no choice but to do so. Initially, the supply will outstrip the demand as there'll be spooked sellers, not your listeners, as well as momentum and algorithmic traders.

1:05:28This will cause the market to continue to drop. But at some point, the supply will stall. At that point, continuous injection of super into the market, as well as the bargain hunters, will ensure that the demand will outstrip supply and the market will start to recover. As soon as this starts to happen, the momentum traders will jump in and the market recovery will accelerate. Am I correct in my thinking? If I am, then I can't see the market staying suppressed for too long, like it did after some of the past crashes. so maybe the v-shaped recovery we saw after covid is the new normal please discuss thank you igor p.s please keep my name anonymous pps only joking it's too late as you already said it well done uh you want me to make a list are the are the days of the long bear market over because of all the super money going into the system i doubt it i mean i don't know but i i do know that markets are surprising that's that's the one thing i do know and and i mean a lot of what you said there igor resonates i i can i totally hear you um i'm just i'm just humble enough and experience i just i've learned the hard way you're probably you're proud to be humble aren't you i'm very proud to be humble um but it just i mean it's a really compelling narrative, you know, but then I also know other very compelling narratives that would say the opposite.

1:06:56And I just, I always land back on, I don't know. I just don't know. And so I, I think you've done it exactly the right way, particularly it sounds like you've got a little bit of extra padding there. So if you're mainly exposed to that, you've got enough to cover living expenses for a few years in the worst case scenario. I think it's about as best that you can hope for. You know, maybe you want to get super clever and start doing covered call strategies and buying some puts and hedging. They usually don't work either. So I'm certainly not going to say, oh, that is a terrible take. There is no way that's going to happen.

1:07:33But at the same time, I wouldn't say, oh, that is definitely going to happen. I mean, we could absolutely see the market fall 20 % and stay there for 10 years. I mean, is that my base case? No. But could it happen? Yeah. And not like a one in a million. I don't know. I'll make up a number. It could be a 15 % chance that that happens, like a non-insignificant chance that that happens. I just don't know. The only other distinguishing thing I would sort of say, which is worth repeating, and we do repeat it a lot, but I don't invest in the market. I invest, I transact via the market. That's what the market is.

1:08:10But my portfolio looks very different from the markets, what we would consider the market. In other words, the index. In other words, the passive ETFs that are tracking these kinds of things. I don't know any of the major banks. I don't know BHP. I don't know Rio. So all of a sudden, all of a sudden, my portfolio is very different. And history will suggest to you very strongly that even if you want to pick some really bad periods in market history, there have always been pockets of opportunity. That's the thing to always remember. But when the bulls are running and there's a, you know, people are just like super excited or people are crushingly depressed and defeated because we're in a brutal bear market, there's always opportunities.

1:08:51And I always just try and look at, I like the idea of now casting, not forecasting, which is just a matter of saying, look, recognizing I can't predict the future, but hopefully looking at a portfolio of assets where I feel as though of a good quality with good prospects and not too far away from what a reasonable person would consider a reasonable price. Lots of vagaries in that. I get it, but that's kind of the point. And is that guaranteed to be the most optimal investment strategy? No, it's not. But it's also one that I know that, oh, is it one that will guarantee you that I'll avoid any big drawdowns?

1:09:30Absolutely not. I'm absolutely going to, in fact, I suspect I do worse in the bear markets than the index because of the types of securities I've got. But it tends to be something that will always work out over time, even if there are some real serious dislocations in that. It's a really unsatisfying answer. But it is what it is for me. I've thought so long and hard on this. I always arrive at that same conclusion. What about the need for money, though? Because Igor is kind of semi-retired. So it's not a case of necessarily being able to put money to work during the down times, but actually having to suck up the fact that the portfolio is worth less at those periods.

1:10:08Yeah, great. I mean, but one, he said he can go three years or whatever it is without doing that. So that'll, you know - As we're saying, maybe it's five or 10 years. And in that case, I would be selling stuff. How should I think about the risk of another five or 10 year bear market where I'm, you know, I'm getting lower prices for an extended period of time? Yeah, but don't forget, it's not a wholesale liquidation event. It's not like, oh, I need some money, I'm going to liquidate the portfolio. Sell what you need. It's going to suck. It's like dollar cost averaging, right? Sometimes I'm buying at really high prices and sometimes I'm buying at low prices.

1:10:40It's kind of the point, right? It's the reverse of DCA. It's the reverse of DCA. So let's say we're five years into a brutal bear market. We're still 20 % away from the top. You've run out of cash and you need to sell something. Is that a great scenario? No. Are you okay? You're fine. And I don't know what your portfolio is, but if you're having to sell two or three percent in that environment you know what i mean like the vast vast bulk of it is still there to to enjoy the eventual recovery now if you're someone who's paycheck to paycheck and you just don't have like well there's a different there's a there's a different discussion there but i'm i'm i'm framing this in the in the context of the way that igor laid it out and i'm reading between the lines here someone who's semi-retired at a younger age probably got a decent portfolio has already admitted there's a pile of cash there to see them through.

1:11:29Igor, I can't give you advice, but I kind of think there are great injustices in this world, but a fairly well-to-do person having to sell a little bit of their portfolio in the market is depressed is far from the worst tragedy. And I get it. I don't want to do it either if ever that comes to it, but you'll be fine. And I think you've positioned yourself very, very sensibly and you don't need to do anything differently. I like that. So, yeah, I can't add much to that. I think the other thing is just dividends, Igor, is the other option, right? So, think about where your income is coming from. If you are in a situation where you're worried about a market downturn and you're worried about having to sell shares.

1:12:09Now, by the way, if there's a market downturn, maybe it's because of an economic downturn. So, dividends are no more guaranteed than rising share prices or even high share prices or not falling share prices. but if you can diversify your income stream by whatever combination of selling shares to fund your living expenses and dividends received from some of those companies and generally speaking dividends for less than share prices so again if it's a bit of both you're probably going to be better off a little more protected it's also true that companies paying large dividends are probably going to grow as quickly so you are going to have to trade some of that off but it kind of goes to your thinking in terms of what you want to do.

1:12:46So your question about have things changed with super funds? I don't think so, mate. And the reason I say that is because the Australian market experience is no different to, or not meaningfully different, to the US or European or rest of the world experience during things like COVID. So the V-shaped recovery during COVID, yes, it was a V-shaped in Australia, but it was also a V-shaped in the US, where yes, they have 401ks, but they're not as big as ours and they're not compulsory. hard to believe that super is or was responsible for that we're in part of it part of it frankly was the steepness of the decline right so you know had it been a slow we lost 10 it might have taken a year to come back that 10 we lost so much so quickly with so much panic that the just simply absence of that panic and people kind of going oh maybe we did overdo it a little bit that was a lot of what the bounce back was kind of about was just that kind of the the um the reflex of you know Maybe we went a bit too far there.

1:13:39So I wouldn't – I have not seen evidence that superannuation has had a meaningful impact on our market. There's no evidence that I've seen – I don't want to say it's not out there – that, for example, our market has got more expensive as the superannuation guarantee percentages have gone up because it was a zero, then it was three, then it was six, then it was nine. And there's no sense the PEs are larger, which would happen if you had more money chasing the same assets. The price-earnings ratios would have gone up. and to what extent they have they've done the same overseas where they don't have that same impact at play so you kind of and again nothing's guaranteed right because you don't get any double blind controlled trial so you can't know for sure but there's just no evidence that suggests the Australian market's circumstances performance has been that much different over the last 30 years compared to the US for example or the last five years last two years yeah you know in fact the US has probably done better than ours probably largely actually because of tech which is a whole different thing.

1:14:32But if you just look at the raw numbers, you'd say, well, the super has actually been worse because the market hasn't gone up as much as the US. The answer is probably just what's going on in the US rather than what's going on here. So I think that's probably true. I do think for what it's worth, Andrew, we're not buying the market. We talked a little bit on Friday about Commonwealth Bank's share price. I suspect part of the CBA success is actually the blue chip money, right? Super in part, soft managed super in part. I suspect individual companies are probably, distorted is probably too strong a word, but I wouldn't be at all surprised if the behavior is a little bit different than it would be without super because people just feel compelled to put it in the so-called blue chip or safe.

1:15:10Neither of those things are true. I'm putting them in air quotes, but there's probably a bit of that on a company by company basis. As a market overall, there's just little evidence that super has changed much. So I will pull that stool out from under you. I'll kick the stool out from under you, Igor. I don't think you should rely on super to suggest you won't have volatility. You should expect volatility. If you don't get it, be happy, but please don't expect low volatility and then be disappointed, heartbroken, or wiped out because you didn't expect that it happened. Expect that it will happen.

1:15:38If it doesn't, then you're ahead. And yeah, I would look at dividend paying shares for that. Ram's right. Dollar cost averaging in reverse at some point, year four, five, six, or seven. It's going to suck, but you'll be fine. And yeah, dividends is a way of doing something different in that space. if you wanted to have a slightly different take and maybe a different opportunity. The other option, last one quickly, is just international diversification. So there's no guarantee that Australia's economy or market will operate differently in the US, but if both operates the same, it doesn't hurt you.

1:16:10If they do operate differently, then you do have an opportunity to sell from one or the other. Again, if they're both down, then you're still no worse off than if you only invested in one and it was down. It just gives you the optionality and a bit of diversification. Yep. Any more thoughts on that, mate? No. I mean, these are grade A problems. They are. These are the best kinds of problems you can kind of hope for. So I'm happy to offer insights onto that. There are much more intractable issues out there that I've got nothing intelligent to say. So, yeah, this is a good one. Good problem to have.

1:16:43And you can put yourself in this scenario, right? I think that's the key. For those that are listening, well, good for Igor. I'm so happy for you, bro. So, you know, well, you know, probably it's fair to say there's a bit of sacrifice and work along the way that kind of got there. But also he's semi-retired, right? So it's not even to say he's got a lot of money. He just might be choosing to live on lower amounts of income so he can not work. And that doesn't mean he's retiring on a yacht. He might be just working 20 hours a week and just supplementing a little bit with a little bit of super and just kind of not scraping along but doing okay.

1:17:12So we shouldn't assume he's necessarily fully flush. He just decided to live his life, as we said earlier. That's kind of the idea as well. Yes, and I'll repeat what I always say. I mean, that's true wealth. You know, control over your time is the only measure of wealth. If you've got full – so for me, the richest person in the world is the person who wakes up every day and can do whatever the hell they want. You know? I think you said once true wealth is not having a certain alarm. Yeah, it is. I love that. That's a great line. I've told my wife that once you like. Now, for some people to be able to do that on 50 grand a year with – Yes, exactly.

1:17:43Other people will need 10 billion a year because they've got ridiculous, desires out of life or different. I shouldn't judge it. But yeah, it's sort of like that for me is the whole box and dice. That is exactly what I am working for and have been for the last however many decades is just to get to that stage, right? Yeah. Absolutely. And that's, yeah, you're right. It's about the money and as much as about the expectations, get those two aligned. Was it Charles Dickens said? It was in pounds and shilling and pence, but it was basically, if you've got$20 and$19 worth of expenses, you're happy.

1:18:19If you've got$20 and$21 worth of expenses, you're miserable. Yes, yes. So true. So it's a bit of that too. Yeah. It's a bit of that too. All right. I reckon we're done. Mate, you'll come back on Friday, won't you? Hell yeah. You know our email address, info at fool.com.au. Follow Ram on Twitter at, I've got some news for you too, on Twitter at sage underscore stimion or at strawman invest. You can get me on Twitter or Instagram at TMF Scott P. You can also get me on Blue Sky at TMF Scott P. Hey, he's on Blue Sky. Oh, yeah. I started up ages ago and I'd literally never posted. And it seems like there's quite a few people wandering over to Blue Sky.

1:18:53So I've just started tweeting, not tweeting, posting, whatever you do at Blue Sky this week. So all brand, spanking, new. I don't know. I don't know that two social networks of this style had ever kind of coexisted at scale. It seems pretty inefficient, but who knows? So I am on Blue Sky, at least for the time being. It's a protest, folks. At TMF Scott P. Pretty much is. It's a process photo. Yeah. Yeah. Well, that's – if it gets enough of a network effect, then things move very quickly, right? Yeah. Yeah. Well, people move from Facebook to Insta to WhatsApp to TikTok. So, anyway, it's possible.

1:19:26So, I am there if you want to go and visit me. We're still on Facebook on the Old People's Network. Scott Phillips Money is the handle on that one. Thanks for listening. And until next Friday, we'll see you there, bright-eyed and bushy-tailed. Full on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services License 400691.