The Rules of Investing

Equities form a core part of most long-term investment strategies; they offer strong long-term returns, but at the cost of higher volatility than many other assets. But how should investors think about their strategy in this important asset class? That’s the topic of this week’s podcast. In part two of this three-part mini-series, I sit down with Hamish Carlisle from Merlon Capital. Hamish is an excellent communicator, and has written some of my favourite pieces of stock analysis on Livewire this year. The goal is to provide the tools and the background needed to get started investing in equities. We discuss what makes a great equity investment, some important skills and concepts for new investors to learn, and he talks us through a current practical example of an investment that he thinks is materially undervalued.

Getting started as an investor is a daunting task. Even for experienced investors, information overload can be a problem, but for the new investor, it’s hard to even know where to look for a starting point. That’s the goal of this special mini-series; to provide a starting point for novice investors to begin their journey. In this first part of the series, we’ll be discussing issues around personal finance, goal setting, risk and reward, and setting yourself up to get started as an investor. In two weeks’ time, we’ll do a special episode on equity analysis, that I hope will provide the tools required to begin analysing stocks. Finally, we’ll do an episode about portfolio construction and asset allocation – one of the most underappreciated aspects of investing. If you’ve got any family members or friends that have been asking you about investing, then this is for them. Please consider whether you know anyone who might benefit from this content, and send it their way. This week’s guest is Phil Richards, Director and Wealth Advisor at Endorphin Wealth, and Founder of Smart Home Deposit, an online tool to help first home buyers save for a deposit.

Guest: Anton Tagliaferro, founder and Investment Director at Investors Mutual. Just like in life, an investor’s early experiences can’t help but shape the way they see the world. For Anton Tagliaferro, founder and Investment Director of Investors Mutual, one of those early formative experiences was the infamous ’87 stock market crash. After witnessing the events in New York the night before, Anton and his team tried to guess how far the ASX would fall that day, but even the most bearish analyst in the group was not prepared for the 25% crash that came when the market opened. “It taught me a very important lesson; on the day of a crash such as that, everything falls. In a crash, everything falls. The good, the bad, and the ugly. But when sanity prevails and the panic subsides, which it does eventually, people do go back to the stock market, but it’s the good stocks that recover. A lot of the crap, all the froth and bubble, which in the boom was in the headlines all the time, a lot of that stuff goes to nothing.” In the latest episode of The Rules of Investing, we discuss his current views on Australian banks and retailers, how he first developed IML's investment philosophy, and why he doesn't like the ‘value versus growth’ argument.

In Australia we’re fortunate to have some very talented women in funds management. Catherine Allfrey is one of them. After a chance encounter at a Wesfarmers event in the late 90s, Catherine was recruited to Colonial First State by Greg Perry – a true ‘Master of the Market’. This time working with Perry helped to shape her investment philosophy, which seeks to identify those companies that can grow their earnings at a rate higher than GDP. Catherine formed Wavestone Capital in 2006 with her business partners Ian Harding and Graeme Burke with Raaz Bhuyan joining 2014. Today Wavestone manages ~$4.8 billion for institutions and retail clients. In this video, Catherine discusses the attributes of companies with superior DNA, shares her view on sectors experiencing tailwinds and explains how she is working to bring more women to investing in Australia.

Guest: Donald Amstad, Aberdeen Standard Investments. Developed economies are at a crisis point, the powers of unconventional monetary policy are exhausted, and markets are just beginning to wake up to this. That’s the sobering assessment on the current state of the global economy delivered by Donald Amstad from Aberdeen Standard Investments His view is that when developed markets finally crack, there will be serious implications for every asset class and economy. However, those economies where monetary policy remains relatively ‘normal’ will be those best placed to respond. In his view, the emerging markets have more levers to pull when compared to developed markets, where the money printing taps have been turned on and interest rate settings are near zero. The irony is that during the Asian crisis it was the IMF and central bankers from developed markets that convinced the emerging market governments not to print money and ‘take their medicine.’ Amstad says that this was a cathartic process for these economies, and they are now looking on in bewilderment as the West has resorts to money printing of an unprecedented scale.

Guest: Joe Magyer, Chief Investment Officer, Lakehouse Capital. Moving to a new country is no easy task, but doing it while managing a portfolio, completing the exams for the Chartered Financial Analyst designation, and dealing with the challenges of parenthood is truly Herculean. That, however, is exactly what Joe Magyer, Chief Investment Officer of Lakehouse Capital, was doing in his first years in Australia. How did he manage all this? As it turns out, saying “no” can be a critical skill. And not just in time management either, Joe says “no” to a lot of new investment ideas too. "I've had analysts start before and I've told them, 'look, there's a really good shot that I'm gonna say no to every idea you pitch for the first year. Don't take it personally, you're probably doing really good work, it's just that I'm really choosy.'" In this week’s episode of The Rules of Investing podcast, he tells us about the similarities and differences between Aussie small caps and global growth stocks, which global tech stocks will continue to grow and whose stars will fade, and why Visa’s new payment splitting function doesn’t pose a significant threat to Afterpay.

Guest: Matt Haupt, Lead Portfolio Manager, Wilson Asset Management. Large cap Australian stocks are often purchased for their income, franking credit, and defensiveness, but can undervalued growth stocks be found at the big end of town? Matt Haupt, Lead Portfolio Manager of the WAM Leaders LIC thinks so, however, it requires a different approach to small caps. At the smaller end of the market, growth is driven by stock specific factors, but among large caps, macro plays a much more important role. “You don’t have the growth in the larger companies, because they’re linked to the fundamental economic backdrop. There’s more of a macro factor built into the larger companies.” In this week’s episode of The Rules of Investing, we discuss his take on the sustainability of the current rally in iron ore, whether or not the recent RBA rate cuts came in time to stop a recession, and his current views on one of the hottest sectors in the market right now.

Nick Griffin, the founding partner and Chief Investment Officer at Munro Partners, is a self-described "growth" investor. In a world where labels are often confusing and unnecessary, he explains how equities differ from other asset classes in the sense that most other asset classes "mean revert" to a certain degree. In the equities game, stocks can rise by thousands of per cent, yet only fall 100 per cent. And while plenty more fall by 100 than rise by 1000, the stocks in the latter camp are invariably "growth" stocks. As Nick sees it, the beauty of growth equities, and stocks in general, is that the information dissymmetry between the market participants is so much bigger than it is in other asset classes, given there are so many different variables at play. These are what enable growth investors to discover great investments. In this engaging discussion, Nick explains why it is "asymmetrically" in investors' interest to own equities, and that if they can identify those stocks that are benefitting from the structural changes that are happening all around us every day, they will "win".

Guest: Roger Montgomery, Chief Investment Officer, Montgomery Investment Management. Australian house prices and the economy stand at an important crossroads. On the one hand, we have the return of the Liberal-National coalition, the softening of APRA regulations, and rate cuts from the RBA, which all stand to stimulate. On the other hand, we have housing starts down by over 25% over the last year and showing no signs of turning, combined with anaemic retail sales, with the potential to push the economy into a dark place. One rarely discussed dynamic, however, is what Roger Montgomery, Chief Investment Officer at Montgomery Investment Management, calls 'the economics of enough'. “People have borrowed enough, they’ve bought enough stuff, and eventually growth slows, and that’s where you get deleveraging occurring in the economy, where credit growth is slower than economic growth. I think there’s a risk that we’re now in that deleveraging phase.” In this week's episode of The Rules of Investing, Roger shares what "quality" really means to him, some lessons on late cycle investing from Buffett himself, and we discuss two outwardly-similar companies with very different long term prospects.

Guest: Michelle Lopez, Head of Australian Equities, Aberdeen Standard Investments. As soon as she was able to open a trading account, Michelle Lopez bought shares in ASX, seeing it as a monopoly business crucial to the function of financial markets. She still owns those shares today. After 15 years with the firm, Michelle was recently made Head of Australian Equities at Aberdeen Standard Investments, a global manager with $914 billion of assets to invest. The small cap fund that she has been managing for the past decade has returned 11.5% per annum after fees, beating the index by 4.9%.

Guest: Warryn Robertson, Lazard Asset Management. An investor's job can be boiled down to two primary tasks, explains Warryn Robertson, Portfolio Manager at Lazard. First, to predict what a company's cash flows or earnings will be in the future, and secondly, to work out how much to pay for those earnings. Estimating two unknowns like this is a big challenge for equity investors, so why not make it easier? By investing in businesses with cash flows that can be easily predicted, this reduces uncertainty, and allows them to focus on the other half of the equation. “If you can find a group of companies that has more predictable earnings, more consistent cash flows, you’re making your job as an investor much easier in terms of arriving at that valuation. That is, in essence, the overriding philosophy that I’ve had throughout my investing career.” In this week’s episode of The Rules of Investing podcast, we discuss some unique benefits that come from investing in infrastructure equities, how he avoids the dreaded "value trap", and one area of investment he thinks could see significant negative returns in the coming years.

Guest: Dr Don Hamson, Plato Investment Management. Host: James Marlay, co-founder, Livewire Markets. In year 427BC, the Greek philosopher Plato founded ‘The Academy’, which is considered the world’s first university. It is somewhat fitting then that half of Sydney-based fund manager, Plato Investment Management’s team have PhD’s. With so much grey matter focused solely on generating equity income for their clients, it’s no surprise the results are impressive. Managing Director, Dr Don Hamson, shared in this interview that their investors will have received 16% gross yield after fees this financial year. That's about 10% above the gross yield of the index, though Don cautions that these were ‘abnormal returns’ supported by some political and corporate one-offs. So what is the outlook for dividends post-election? In our latest fund manager interview Don addresses this question, highlights one part of the market that remains under-appreciated for income and explains what he believes is the single most expensive asset in the market today.

Guest: Paul Skamvougeras, Head of Equities, Perpetual. In the lead up to the tech wreck of the early 2000s Paul Skamvougeras was working on the dealing desk at Perpetual. The ‘value’ focused manager was struggling to keep pace with a market full of exuberance and momentum. Nearly two decades later Skamvougeras, now Head of Equities at Perpetual, says the same patterns and behaviours are becoming prevalent again. Skamvougeras doesn’t shy away from the immediate challenges facing Perpetual and other value investors; however, he remains uncompromising on the quality of the companies he is willing to own and the price he will pay to own them. In this interview, Paul explains why there are certain ‘non-negotiables’ when it comes to buying stocks, shares a forgotten opportunity on the ASX and makes his case for why ‘value’ is not dead.

Back in February, Chris Watling, CEO and Chief Market Strategist at Longview Economics, wrote that a recession in Australia was likely, and that rates would be cut to zero if this happened. While he acknowledges that a lot has changed in Australia since then - not the least of which being the surprise re-election of the coalition government - his base case remains that a recession is on the way. "The basic thesis on recession is that housing was in a bust phase, and the bust phase will probably be bigger than 10-15% peak to trough. Obviously we're having a bounce in house prices now that questions that, I personally think it's probably a head-fake." In the latest episode of The Rules of Investing podcast, Chris discusses his views on Australia in-depth. He also shares why the outlook for the US is more positive, shares his favourite chart in the world today, and discusses eight key asset bubbles globally.

When Walter Schloss founded the funds management firm that bore his name in 1955, markets were a very different place. Schloss harnessed the power of Ben Graham's "net-nets" strategy and managed to outperform the market by more than 5% p.a. over the next 45 years. But could such a simple strategy work in today's deeply researched markets? Steve Johnson, Chief Investment Officer of Forager Funds thinks so. But why isn’t every fund manager pursuing this strategy? “I still know people who are making exceptional returns doing that… Does it still work? Yes, it absolutely still works if you’ve got $500,000 or $1 million dollars.” In this week’s episode of The Rules of Investing podcast, we discuss the biases that fund managers and private investors are most susceptible to, how to separate luck from skill, and his approach to properly valuing a business.