Basics: Investing 101

Bryce: [00:01:30] Ren we're back with episode two of Equity Mates, double our output. Oh, very pomped to have you guys back, pumped to be back. I've got a few different things in this episode that we want to kick off. [00:01:43][12.9]

Bryce: [00:01:45] So we're going to start with that section of the news that's been going on in the world of finance and economics and investing so that we can make it easy for you to understand what's been going on. So Ren take it away. [00:01:57][12.5]

Alec: [00:01:57] All right. Well, we are doing this podcast at a very interesting time because it is reporting season [00:02:03][5.6]

Bryce: [00:02:04] And what's reporting season? [00:02:04][0.4]

Alec: [00:02:05] So companies report twice a year. They do that and they follow the financial year, not the calendar year. So that means at the end of June is the end of the financial year. And so in July, we'll get the end of financial year reports. [00:02:19][14.9]

Bryce: [00:02:20] And yeah, I think the reporting season actually falls in February. [00:02:24][3.7]

Alec: [00:02:26] Yeah. End of financial year you get your full year reports and then around February, as Bryce just said, you get your half yearly report. So basically what we're getting now is updates from businesses on how they're going with any projections, whether they need to update the market on anything. And you always get a couple of nice little titbits here and there. And so we're going to rip through a couple from Australia and then we'll mention a couple from America. But look, we recognise that we're an Australian market focussed podcast at the moment. And so we'll talk about some things in America, but not for very long. So don't kick us off. Give us a company that's interested you in this reporting season. [00:03:13][47.4]

Bryce: [00:03:14] OK, well, Wesfarmers is one that has interested me particularly. I like Wesfarmers. Well, I don't know if I like them, but they're interesting because they've got quite a diverse range of businesses that fall under them that can have a really big impact on what the actual end result is. That could have one business that is doing really well. [00:03:33][18.8]

Alec: [00:03:33] And so what I want to just quickly run through the business is the Wesfarmers own. [00:03:37][3.7]

Bryce: [00:03:38] So they own supermarkets, theyre in retail. [00:03:42][3.1]

Alec: [00:03:43] Why don't we just run through the actual businesses [00:03:44][1.2]

Bryce: [00:03:45] Coles, Target, Kmart, Officeworks, Bunnings, theyre in coal. So quite large. [00:03:53][7.8]

Alec: [00:03:54] So we have an industrial division. So they like sell fertiliser, they mine told, they sell side equipment. It's a lot of like very sort of industrial applications. [00:04:02][8.1]

Bryce: [00:04:02] Yeah. So on the back of that, they had great coal results and unfortunately Coles supermarket didn't perform so well. Good call. [00:04:10][8.1]

Alec: [00:04:11] Bad call. [00:04:11][0.3]

Bryce: [00:04:11] That's correct. So Coles has posted a another quarter of same store sales growth, which is a key metric in retail business. And this is the thirty fifth successive quarter of doing so, which is quite impressive. [00:04:25][13.6]

Alec: [00:04:27] Why was it a bad result? Are you telling me Ren is one side? The market has certain expectations and the despite Coles growing in the same store sales, they didn't make the market's expectations, whereas Woollies did quite well. And so investors are a little bit skittish about Coles, given that Woollies is coming back on the right ground. Sorry, on the rebound pretty strong. You know, we've we've got the competitive constraints of Amazon and Leidel coming in at Aldi growing. So Coles not meeting market expectations despite still growing is a little bit worrying. [00:05:02][35.8]

Bryce: [00:05:03] And it's always one of those annoying things about this reporting season. These companies can do so. Well, I think Wesfarmers you can say, you know, it's 30 per cent up in terms of profit. If it doesn't meet expectation from the market, then it's probably going to suffer in trade in terms of pricing. [00:05:19][16.1]

Alec: [00:05:19] Now, one thing that I feel quite interesting out of Wesfarmers was that they're talking about spinning off of as well into it as a as an IPO. And, you know, Officeworks profitable, no huge business. But the strategic motivation, we think that that is the threat that Amazon poses to Officeworks. A lot of the things that Officeworks sell, it's likely that you just order from Amazon on American consumers at the moment, all of that stuff from Amazon. So it looks like they're going to try and spin it off before Amazon come. So at this stage, that's an IPO that I would avoid. Like the plague. [00:05:55][35.8]

Bryce: [00:05:56] Yeah. If it comes to fruition, another one that I liked and have been keeping an eye on for a number of years now since I started university is Domino's Pizza, and it keeps on going up and up and up and up. Profits are up fifteen and a half percent in the last quarter. [00:06:14][17.8]

Alec: [00:06:14] Yeah, but the market didn't love it. No, no. I didn't get a great share price result, which you would think, you know, your profits up fifteen percent like. That's great. Yeah. But I think the lesson to take from it is that in a lot of cases investors price. Expected, yes, increases, and so then even if your profit is up. [00:06:32][18.3]

Bryce: [00:06:33] Yeah, and I mean, it's been doing so consistently well over the last few years, it gets to a potential point where the expectations become so great that it becomes quite hard for the companies to meet these expectations. It's not a bad problem to have a side note to that in the news at the moment. There is also a bit of a talk going on about the way that Domino's is treating their franchisees and the way their franchisees have been going on and trading their respective employees. So that's also something to keep an eye on because that can eventually potentially have an effect on the way that investors view the company. [00:07:03][30.1]

Alec: [00:07:03] Yeah, and the CEO said all the right things in that report. He said that they have a zero tolerance policy of franchisees underpaying employees. But I mean, as always, you say I can say the right thing on reporting whether that follows. True. [00:07:16][12.9]

Bryce: [00:07:16] Yes. It's so hard to place another one that I really liked. And Ren is you can take this away because I know that you're in love with this company and it's a little baby is A2 milk. [00:07:25][8.8]

Alec: [00:07:26] Yeah, it is my little baby. So I'm going to go to make the statement upfront that I own the company some a little bit. I'll think, oh yeah, I'm an investor. But as we say, if you're an investor in that company, you are part of that company. That's how you think of it. Yeah. So A2 Milk is a dairy company. Sell milk, as the name suggests, they have a particular way of creating milk that so milk has dairy has an of NATO protein. And what they do is they have a method of manufacture that takes up to eight. Sorry, I want protein out of the milk and a lot of people who are lactose intolerant are lactose intolerant because of that. Yeah. Now that's quite a unique selling point, especially in the Asian market with its quite high rates of lactose intolerance. Yeah. Now, I thought it was a great company when I bought it, if I may say so myself. Product. It's currently trading at about 52 times earnings, which is an outrageous multiple because it sounds like, yes, the market is expecting some huge things from A2, but it delivered well. It had a pretty good report. So its profit is up two hundred and ninety percent, which isn't something [00:08:35][69.6]

Bryce: [00:08:36] the two point nine hundred nine hundred and ninety percent. Yeah. [00:08:39][3.7]

Alec: [00:08:40] And that that result was primarily driven by three hundred and forty eight percent revenue growth in China. Huge. Yeah. Now China is obviously the crown in. Crown jewel in the crown jewel in the crown when it comes to basically any business these days. So it's great to say that A who is doing well in trying. Yeah, the thing that we need to watch for is the old buildings, try the buildings was reporting great China sales, but the way that they was selling into China was through a great market where basically a lot of Chinese people in Australia were buying the product from in Australia and sending it to China. What I too is saying and what we like to say is that they actually have more established avenues of sale into China so that actually selling the traditional way into China is [00:09:34][55.0]

Bryce: [00:09:35] not relying so much on the grey market. [00:09:36][1.3]

Alec: [00:09:37] Yeah, yeah. And and that which [00:09:38][1.3]

Bryce: [00:09:39] is what this one is selling these issues. [00:09:40][1.7]

Alec: [00:09:41] But, you know, I will say, if I can continue to live up to investor expectations that 50 times multiple means you should not be buying it at its current prices. As much as I love everyone to buy it, to sort of cool. [00:09:57][15.9]

Bryce: [00:09:58] So there's probably some of the standouts for us in terms of the reporting season. So what else has been going on in the news this week? [00:10:03][5.8]

Alec: [00:10:04] So a little bit from America. We won't we won't talk about companies as much, but we'll just quickly find some things that we found quite interesting. A lot of talk has been made about American companies holding money overseas because the way the American tax system works is they tax it when they bring the money back into the country. I would just reported that two hundred and thirty billion dollars, I would say that is an outrageous amount of money just to be sitting overseas. Yeah, it obviously is a constraint for them to an extent. And sometimes they have to raise debt in America to fund their American operations because they don't bring that money back. But it does look like they're going to win this standoff with the American government and they'll probably get a tax holiday or seriously reduced tax rate when Trump finally gets them to repatriate that money. [00:10:44][40.5]

Bryce: [00:10:46] Facebook has made the news because their last fourth quarter revenue has risen by 51 percent. Now their revenue is primarily, primarily driven through advertising, particularly mobile advertising. That's where they're getting a lot of their growth coming from. And I think this is a good little segue into our next little news item about a potential well, not a potential anymore. An upcoming IPO from Snapchat. Yeah, bro. Aware of Snapchat and what they do. They've now just changed their name to snap ink. And they've told the market that they're no longer a social media company and they are a camera company, which is a bit confusing. The reason that I get that from Facebook is because this has the potential to either be Facebook IPO and go really well or has the potential to be a Twitter IPO and. Absolutely. But the reason I say that is because Snapchat continue to have a growing user base, which is very important. You don't want to see any sort of stagnation in that. But one of the things that they're trying to sell and I think are struggling to do is what is the actual core business? And if they're saying that they're a camera company, then it makes the investor a bit nervous about which direction they're going to head. And do they actually know what their core business is? And if they don't really know and they're just saying that camera company, because they're hoping that down the track, it's going to give them the ability to go down different avenues of generating revenue, then it can be a bit scary or hairy for investors to jump in on this IPO. So it's one that we're very interested in, definitely one that I wouldn't be looking to get involved. [00:12:24][97.7]

Alec: [00:12:25] I think there's some cautionary tales with American hardware companies. So the two that come to mind when I think it's snap as a camera company, as whatever. Yeah. Fitness watch device company and go to another camera company. Yeah. And both were market darlings for a little while, was a lot of hype around them. But really when push comes to shove, if you're a hardware manufacturer, if you're making a camera or you're making, you know, a fitness watch, yet, you know, it's tough to have a real point of difference. And like, obviously you can and obviously companies do it. But the challenges that GoPro and Fitbit are facing at the moment is why would a consumer pay premium for their product rather than an alternative company? Yeah, and that's the thing with SNAP, will they be able to convince people that their camera is better than the hundreds of other companies? [00:13:15][50.1]

Bryce: [00:13:16] Yeah, I mean, I can say that the way they're going to go and they already have begun doing so is creating accessories. So, you know, they've got those glasses that. Yeah, but then you're putting yourself in a pool that has to compete with Google and, you know, the Google Glass, which [00:13:32][16.4]

Alec: [00:13:32] was a pretty big failure. [00:13:33][1.1]

Bryce: [00:13:34] Yeah. Which in itself hasn't proven successful with the might behind Google. [00:13:37][3.2]

Alec: [00:13:38] So to be fair to them, though, the strategic advice that they have over companies like Fitbit and like GoPro is that they have the user base in the app that they can then tie their hardware products to. Yeah, and that could be a. Competitive advantage. It's not it's whether [00:13:54][16.0]

Bryce: [00:13:54] or not it is, it's whether or not that user base want to take up on the hardware that that go. So tell to keep it on. We're pretty interested in it. And you can see how it goes. [00:14:04][10.2]

Alec: [00:14:05] And just one last thing from America that I found quite interesting is that Starbucks is making a serious push into China, so much so that they plan to open a new store in China every 15 hours. Right now, I mean, strategy in place. But again, if they feel like if you if you're organising store openings in China, you've got to be. [00:14:27][22.4]

Bryce: [00:14:29] Yeah, that's unbelievable. I was blown away when you told me that the other day. [00:14:32][3.1]

Alec: [00:14:32] And it is it is something interesting because up front the Starbucks is not in America, is that they had to pull back from a number of their stores because they found they're almost too much, too many stores and they were sort of cannibalising each other a little bit and eating into each other's sales. And so they pulled back some of those stores. Will that be a problem in China? I mean, it's a big place. I like doing [00:14:53][20.7]

Bryce: [00:14:53] that to build it. And they will come. Or did the Chinese like coffee that much? I do know it's something that I know really across very much. [00:15:00][6.7]

Alec: [00:15:00] I mean, the betting on the Chinese consumer wanting American brands has been a pretty safe and reliable bet for a number of American companies over a number of years. Apple? Well, I mean, Apple killed it in China for a while and then went away. Then the smartphone sales in China started to slow. And that was when people were worried about Apple. Apple's share price has rebounded since then. Yeah, but Chinese middle class consumers, it's it's a relatively safe bet that they quite like American products. Yeah, but American coffee, it's not good. That's. Yeah. You know, obviously you buy the brand that Starbucks, but you also just buy you coffee and, you know, you're introducing a new product into a lot of these Chinese markets, you know. [00:15:46][45.8]

Bryce: [00:15:47] Well, who knows? They might tell products that are a bit more suited to that market. But I guess at the end of the day, they're over there because they can say that this growing middle class is wanting products from the Western world. [00:15:57][10.1]

Alec: [00:15:58] And as long as I use to open their coffee. All right. Well, in terms of our news, we we've seen in Australia the Australian dollar having a bit of a rally. Now, a lot of new investors probably don't care or don't know why they should care. So, I mean, why don't we sort of go through some of the basics of why that's important? [00:16:23][25.6]

Bryce: [00:16:24] Yeah, well, historically, the Australian dollar has been quite low, but over the past well, maybe even 24 months or so, if not a little bit longer. It's been sitting at a price that, you know, has been verging on quite worrying for the RBA at times because they would like the Australian dollar to be in a range that makes our exports seem attractive. [00:16:49][24.9]

Alec: [00:16:49] Yeah, so very basic. If your dollar is low, your exports are cheaper. Yeah. Just because when foreigners buy your currency to them by your exports, it's cheaper if the dollar is cheaper. [00:17:01][11.3]

Bryce: [00:17:01] Yeah. However, what we've seen of late is an increase in demand for our iron ore and coal. So we haven't quite come off the mining boom as such. We'd still have a lot of not so much growth but our revenue and exports coming from our mining sector. And so that's true. Driving the price of the dollar up. It's keeping it up. It's keeping it high. Also it also in overseas, we're seeing a lot of volatility in terms of government and markets. And so investors like to put their money into currencies that are sometimes dangerous, safer options than what would otherwise be overseas. So in doing that, investors are pouring money into the Australian dollar and that drives up demand and that's keeping the price relatively high. So it's sitting around the mid 70s at the moment and has been doing for quite a while. So I'm asking the question, is this going to be the new norm or is this something that the RBA is going to try and push down further? I'm not so sure at the moment, but it's just something to keep an eye on. It has been progressively been going up over the last three or four months, if not more. And it has good implications for our Australian businesses in terms of the revenue that they're going to be receiving. But for some businesses like agriculture and that sort of stuff, when it's better to have the price a bit lower, I'm sure they'd like to see it on the table. [00:18:23][81.7]

Alec: [00:18:23] So, yeah, I mean, in terms of the dollar, for me, until we know more about what's going to happen in both with the American and the European political situation and economic situation, I think we're going to see a lot of volatility. And then also when we know in the longer term what India and China's demand for our resources is going to look like, I think it's going to be a bit of uncertainty for a while. [00:18:42][19.3]

Bryce: [00:18:43] Well, I hope it stays like this for Nixon and for many I would. Yeah. So keep going. Aussie dollar. [00:18:50][6.3]

Alec: [00:18:52] And then the last thing that we want to talk about, because every podcast and every news source has to talk about this to stay relevant is we've got to talk about Trump. Trump about the Trump stuff really quickly. Haven't been following the American market before Trump was elected. People were talking about the market being too high and being a little bit of a bubble. And what we've seen since Trump came into power is just a surging market. Just unbelievable, unbelievable highs [00:19:21][29.3]

Bryce: [00:19:22] hitting historical highs. Yeah, what we thought was going to be a market collapse has turned into the complete opposite. And the question begs why? [00:19:31][8.7]

Alec: [00:19:32] Yeah, and there are there are some explanations. So the one explanation is that the market is pricing in a number of Trump's policies. So his infrastructure bill, if it ever goes ahead, is going to stimulate a lot of growth in the market. His tax cuts are going to be extremely good for American companies. Another big one, which we touched on before with Apple is if he gives all these American companies a tax holiday and allows them to repatriate a lot of money now that the tax cuts and actually know what, all three of those have some relevance for Australian investors. There are Australian companies like ResMed who are now based in America and have money for overseas, much like Apple, although not to the same extent. And they want to they want the same thing. They want a tax holiday so they can bring that money back into America. And they're trying to build a plant in the blancher at the moment and they need that money to complete that plant. So even though we're obviously not in America, there are some Australian companies and some Australian investors that have a really close eye on these particular policies and what that will mean for their investments. [00:20:42][70.5]

Bryce: [00:20:43] And so it's important to mention as well that Australia is the Australian market is quite reactionary to what's going on in the other bigger markets around the world, especially the US market. And so if we're seeing growth from the US market, then it's pretty safe to say that we're going to see a reflection of that through the Australian market. So, you know, a lot of what's happening at the moment in the American market is driven by a lot of what Trump is tweeting at midnight. And it's easy for him to talk the talk. But will he walk the walk? We're not sure. And that's a concern that we have. You know, is it overvalued if if it doesn't come to fruition? And what he's been saying, what's that going to have an impact? And is that going to affect the Australian market? [00:21:25][42.1]

Alec: [00:21:26] Well, yeah, absolutely. But look, at this stage full of Trump for his tweets, full of Trump, the chaos that's going on in America. But don't worry so much about Trump in relation to your investments, because it's all sort of speculation at the moment. If the American market corrects, which I think we both think it will have to at some stage. Don't be surprised and don't be worried. That's natural. And it's kind of necessary at this point. [00:21:51][25.0]

Bryce: [00:21:52] All right. That's a wrap with News of the Week. We will bring that to you each week at the start of each episode. We'll also stop introducing all of our segments to give you an idea of what segments you can come to expect from our episodes. We can hope we hope that you can sort of get understanding of how we relate what's going on in the world to our investing ideas. [00:22:11][19.4]

Alec: [00:24:09] So as we said in the first episode, one of the main reasons we started this podcast was to talk about some of the basics of investing and sort of give you guys some of the information that we would have loved to have when we were starting our investing journey. Yeah. And so this is going to be the first of what will be a regular segment in the show, which is investing a lot of money or investing basics one on one. Yeah. And we're a better place to start than. So you've decided to invest. Where can you put your money? [00:24:37][28.2]

Bryce: [00:24:37] Yeah, well, this is something that when we asked ourselves what would we have liked to have known when we first started out, we both came to the conclusion that it wasn't, you know, who to buy through or how much to spend or what or what to buy. It was what are the options available where I can put my [00:24:52][14.5]

Alec: [00:24:52] hard earned cash. Yeah, because before like, well, I don't think it was straight away what shares to buy. Yeah. But it would have been nice if I had known that I could take a step back and ask what can I buy. Yeah. Yeah. [00:25:03][11.2]

Bryce: [00:25:04] Because options are available. Yeah. [00:25:05][1.4]

Alec: [00:25:06] Yeah. Strategies. Yeah. I can make it [00:25:08][2.3]

Bryce: [00:25:08] less [00:25:08][0.0]

Alec: [00:25:08] daunting really. Yeah. So in this segment we want to cover off what we say in the sort of three main investment options for people who are just sort of investing casually, just dipping a toe in the stock market. Paul, I just want to sort of test the waters so the three shares index funds and exchange traded funds. Yeah. Why don't we kick it off with the most known form of investment in stocks? Yeah, yeah. [00:25:35][27.0]

Bryce: [00:25:36] Well, I mean, this is probably when you guys are listening to the news or reading the paper and you hear people talking about investing or the stock market or even what companies are doing, they're usually referring to stocks, individual shares and individual companies. Yeah, and that's probably the most basic form of investing and the most common. [00:25:55][18.4]

Alec: [00:25:55] Yeah, definitely makes up the bulk of investing, especially for sort of everyday investors. It's what you know, the super funds will unlock shares. Yeah. Dad. Yeah. But yeah, it's in essence it's what you think of when you think of investing. Yeah. Buying shares in the company. Yes. [00:26:14][19.3]

Bryce: [00:26:15] Nothing complicated about it. You know, hidden tricks. You're just buying a stake in the company and then you become a partner in that company for as long as you hold that stock. One thing to realise with this form of investing is that the price of the share when you buy it on the stock market is driven by supply and demand. So you've got a group of sellers and a group of buyers. Obviously, the sellers are holding the shares and the buyers want to purchase. So the price is the agreement between the seller and buyer on the open stock market, the ASX. And that's how your final prices determine. [00:26:44][29.9]

Alec: [00:26:45] Yeah. So in theory, the company shouldn't have any influence on selling its Bryce. It's like you said, it's purely buys and sells in practise. There are things companies can do, share buybacks and the like to sort of push the price in the direction they want. But yeah, you could you know, the company could be killing it. But if people investors don't like what they're doing, then the price will be lightened up. So, yeah, it's pure, pure pointed out it's a free market. Yeah. [00:27:11][26.3]

Bryce: [00:27:12] So one thing to consider. When you're thinking about buying shares, is that it's probably one of the most of the three that we're going to talk about today. Shares is one of the most active forms of investment. You have to be quite involved in your investment approach because you not only have to be all over your stocks, but you have to be putting in research into each company that you're going to be investing in. You have to be putting away an amount of cash each time so that you can start to diversify your portfolio, have to start thinking about diversifying, looking at different sex sectors, industries, all that sort of stuff. So if that's something that interests you, then by all means, go ahead and get stuck in. However, if you don't have the time and you don't know where to start, it can prove to be quite a stressful activity. [00:27:53][41.1]

Alec: [00:27:54] Yeah, I guess a good example of where active management is really important is my first investment and I've spoken about it. I spoke about it in the first episode, in the introduction, but my first investment was Slater and Gordon and the other market darling for a while. And I knew that the market supported that. And I think things were rosy to start with. And I didn't pay attention to what was going on, what was being reported and what whispers were coming out in the media. And what happened was there were people who were more like clued in to the information. They were watching the news that were following the company's reports and the reports about the company in Australian Financial Review and the like. And so what happens is when something really important Bryce and people realise that the company has been fudging the numbers a little bit, everyone sells. And because I'm not following it as closely as other people, I'm left holding the bag, as it were. And so they don't get me wrong that I'm not going to try and scare you off shares because it is my preferred form of investing still. But you've just got to you've got to take the time to be clued into. [00:29:00][66.0]

Bryce: [00:29:00] And you've also really got to understand what level of risk you're willing to take on. If you have the ability to lose that, you lose an amount of money and you're not going to beat yourself up about it, then by all means, give shares a shot. But if you think that you're going to be you know, if it takes you that extra bit to earn that 500 dollars, you can put it on a thousand or whatever it is. And and you feel that you are going to lose out and you are going to be so happy about it. And ETFs or indexes are probably more safer. Way to go while you're starting off before you can then start to focus on investing in stocks. So I think that pretty much covers off shares very well. [00:29:33][32.5]

Alec: [00:29:33] And that's a good spot to move on to the second investment option, which is index funds. [00:29:38][5.2]

Bryce: [00:29:39] Well, yeah. So what's an index? [00:29:40][1.2]

Alec: [00:29:41] So an index is a basket of stocks that are traded on a particular exchange and they're generally seen as a good way to follow the movement of the market as a whole, the movement of particular stock exchanges as a whole. So I'm an example. The first index that was created was the Dow Jones and which is in the US, which is in the U.S.. I've heard of it on the news. The Dow Jones Industrial Average. And what it is, is a basket of 30 companies, some of the biggest historically, it was some of the biggest companies in America, some of the bigger companies now. But it was the first index created. And there are a few problems with the index that we might worry about getting into them now. But some of the other indexes that you might have heard of is the ASX 200, which is the biggest 200 companies on the Australian Stock Exchange, or the S&P 500, which is the 500 biggest companies traded in the New York Stock Exchange. [00:30:34][53.5]

Bryce: [00:30:34] I think also one that most people would have had a mom and dad have had ABC News on or any of the news. Is that the All Ordinaries? Yeah, yeah. That's an Australian index that tracks the overall movement of a large group of Australia's largest companies. Yeah, and. [00:30:50][15.3]

Alec: [00:30:52] Well, is it is it all ownership? Oh yeah. [00:30:54][2.4]

Bryce: [00:30:54] I guess it's called the All Ordinaries because it's all ordinary shares and that's one that is most often referred to as well as the ASX 200. So they're Australia's two largest and most prominent index funds indexes. [00:31:08][13.4]

Alec: [00:31:09] So the All Ordinaries Ordinaries contains the 500 largest ASX. Yeah. So like the ASX 200 in the 200 largest. [00:31:15][6.5]

Bryce: [00:31:16] Oh yeah. In terms of market capitalisation. Yeah. So those are two to keep an eye out for when you're doing a bit of research. But the way that you can get involved in these indexes and one of the firstly one of the main advantages of investing in an index fund is that you automatically get access to all of these companies. So immediately your portfolio becomes diversified just through purchase of one stock so you can get access to 500 shares of stock in companies if it's through the all, or you can get access to 200 or if it's through the ASX. And this takes away a lot of the stress and pain involved of having to work out what to buy, when to buy it, when to sell. Because overall, yeah, you're not going to be getting huge returns. You're not going to be getting massive losses. But your volatility is probably the keyword that comes to mind when you're talking about indexes, because it takes away a lot of volatile risk. [00:32:02][46.6]

Alec: [00:32:03] Yeah, and the indexes are considered the safest one of the safest forms of investing just because historically indexes always trend. You know, like there are the. Think that there are aberrations, you know, like the JFC, obviously on the index is tight, but, you know, if you bought a any of the major indexes in 2005 and just held it, copped it through the JSA Ren that way, you wouldn't at this point, you know, 12 years down the line have made money on that investment you would have seen on the JSE and made money just because indexes just always historically turned down. Yeah. So, you know, past performance is never an indicator of future performance, but index is a pretty safe bet. [00:32:42][39.3]

Bryce: [00:32:43] And an index fund. Well, index is you know, investors can't really beat the market in in in a sense because they are the market. So it's actually quite hard to beat the market if you're starting out because there's a lot of people out there trying to beat the market and who are professionals out of it and still can't do it. [00:33:02][19.0]

Alec: [00:33:02] Yeah, absolutely. [00:33:02][0.3]

Bryce: [00:33:03] So Indexes lets you leave the guesswork out of the end of investing. And it's also a very passive way and low cost way of investing compared to individual stocks. You can put your money into an index fund and just let it ride and not have to really worry about it. You know, one of the world's greatest investors, Buffett, is a very strong supporter of investing in index funds. [00:33:25][22.3]

Alec: [00:33:25] Yet there's a famous story about Buffett making a million dollar bet with a hedge fund manager where Buffett bet the index and the hedge fund manager backed himself into. I think it was the truth, a number of different actively managed portfolios that would beat the index. And that was in 2008. We're coming to the end of the bet. And Buffett has absolutely smoked this hedge fund manager. Really? Yeah. So it's [00:33:49][23.9]

Bryce: [00:33:50] just a great [00:33:50][0.5]

Alec: [00:33:50] example. Yeah. Unlike often, I mean, the American, I believe, was the S&P 500 he put his money on and the American economy has had the American share market has had a very good run over the last few years. So that's obviously held off it. But it's just an example of how just because what are you doing essentially putting money into the index. You're betting on all these big established companies continuing to do what you like in America. You're betting on, you know, apples and you go gold and also and continue to do well in Australia. You're betting on, you know, the big four banks and Telstra and joining the miners, just like big established companies whose share prices might fluctuate day to day. But when you got a basket of 200 or 500 of these established companies like General, [00:34:37][47.1]

Bryce: [00:34:38] the general trend is up. Yeah, yeah. Now, that's not to say that they won't go down. Let's make that clear. But they're a very effective way of diversifying and limiting your risk and getting your money working for you from the start so that you can then take the time to start understanding the shares side of things before you leap into it. Yeah, there are a number of ways that you can get involved in index funds. Yeah. You know, Vanguard is one of these demain companies sort of look out for the index funds in Australia. Yeah, in Australia. Well, they also offer the ability to get involved in the United States as well. And that's something else that we sort of haven't mentioned, that if you want to get international exposure, you can do so quite easily by buying index funds. But if you want to be more specific about industries or sectors in the market that you may be interested in, such as commodities or financial industry or health care, then there are index funds that are created to follow those specific industries and sectors as well. And so that's a great way of diversifying your risk, limiting your risk, but getting access to a bit more specific sector and industry. Yeah, so keep it on to that. Vanguard iShares also offer a number Espie. They are small and they say they are invested ETF company index companies that offer a number as well. So something to think about and jump online and have a look. We might put some up on our website to have a look at it. Look at as well. [00:36:02][84.5]

Alec: [00:36:03] Yeah. And yeah. Not want to flog a dead horse with the Warren Buffett story, but I think it's pretty telling that perhaps the greatest investor of all time in his will, he had specific instructions about how he wanted the money he left for his wife invested, and what he said was 10 percent in government bonds and the like, and then 90 percent in the S&P 500 index he [00:36:27][24.0]

Bryce: [00:36:27] discovered from the world's greatest. [00:36:28][0.8]

Alec: [00:36:28] Yeah, for his wife. Know, he didn't he didn't want to worry about actively managed investments or anything like that. Let's put it in the index. It's relatively safe. [00:36:36][7.9]

Bryce: [00:36:37] And not only that, he didn't want to worry about actively investing, but he just at the end of the day, he just thinks that's going to be the best return. [00:36:42][5.4]

Alec: [00:36:43] Yeah. Yeah. So we've we really hope that the benefits would be nice. Yeah, I there's a reason for that. We think for people starting out, it is a pretty good option just to dip your toe in the water and see what it's like. You don't have to worry about making a mistake that I made and try to pick a stock straight off the bat when you perhaps weren't paying enough attention and didn't know enough. [00:37:03][20.5]

Bryce: [00:37:04] Well, sort of. I'm sort of doing a bit of a 180 as well. I started with Shan's and now I'm actually going to look at going into some index funds. Yeah, I'm putting some money towards them. So I can have that assurity of some of that money is safe and I mean, I can have a play around with some of my other stuff, so, yeah, I'm looking forward to that. [00:37:20][16.3]

Alec: [00:37:21] Yeah. So that's indexes that baskets of shares that are grouped by sector or by size and exchange that drive it on. The third category of investment choices that we want to talk about today is a little bit different. They're called exchange traded funds, ETFs. [00:37:36][15.7]

Bryce: [00:37:37] They're a relatively new investing concept to the market as well. And I say relatively I mean, they've been around for a while, but they have they are newer than the idea [00:37:48][11.1]

Alec: [00:37:49] and it's becoming increasingly popular. Yeah, but in a nutshell, what how would you explain it to someone for the first time when an ATF is [00:37:56][6.3]

Bryce: [00:37:56] so an ETF is a managed fund that is traded on the stock exchange. So you've got a fund management company that has their fund that they have capital in and that they actively manage themselves across a number of different stocks. It may be industry specific. It may be. It may be not. And then that fund itself is then traded on the stock exchange and you will buy into that just like you would a share. So by doing so, you are getting access to the diversified nature of that fund. So it is still a way of limiting your risk. But you're then doing the performance of your shares in the hands of the managers of the exchange traded fund or the company that manages that fund. [00:38:40][44.2]

Alec: [00:38:41] I guess I guess a really simple way of explaining it would be so. Wainer Equity Mates have our hypothetical portfolio if that was a real that was a real fund with real money being managed and a way we could then list that on the share market. And if you liked us and our management style or we had a particular type of company we're investing in. And you thought that was a good bet, you could then rather than putting money into the fund for us to invest, you could buy that ETF on the share market and you're essentially making a bet on the on the performance of the fund that we're managing. Yeah, yeah. [00:39:12][31.7]

Bryce: [00:39:13] And it's a good way of targeting industries or investing styles that you're particularly interested in. So as you were saying, if you like the way that we were investing, then, then you can give or put your money into our fund. So if you have an idea that some companies value based on their heavily in stocks, in mining or speculative, then you can put your money towards those funds. [00:39:36][22.9]

Alec: [00:39:36] I guess. I guess the other important thing to note is a lot of these funds have minimal buoyancy. So, you know, for a lot of might be five grand for some of the bigger funds or some of the more exclusive funds will be higher than that if you don't have Lybrand put into the fund, but you want to have access to the funds, performance, ETFs or the like to give you that access, because you can just buy you can buy shares of that fund by buying into the ETF on the channel. [00:40:00][23.8]

Bryce: [00:40:00] So just to clarify, when you say they have a minimum of five grand, that's if you're personally giving your money straight into the fund. [00:40:06][5.1]

Alec: [00:40:06] Isn't a concern to use the Equity Mates fund idea again that the five grand limit would be if you were going to give money to us their best. But if we were floated on the market as an ETF, there's no limit you can by and thought that's it. [00:40:20][14.3]

Bryce: [00:40:20] Yeah. So just like an index, it's a great way, as we've said many times, to limit your risk. You're not you're definitely not going to be seeing massive returns like you would if you were directly involved or invested in to a company, a listed company. But over time you will start to see an upward trend. [00:40:39][18.3]

Alec: [00:40:39] And it's a little it just depends on the wall that surrounds [00:40:43][4.2]

Bryce: [00:40:44] the management style of the company. So there are some examples of ETFs that you can buy that cover everything from currency, commodities, fixed income, also stocks like we've been talking about. And that gives you the ability to get involved in these different asset classes without having to worry about the understanding of how each asset class is affected. [00:41:04][19.5]

Alec: [00:41:06] So, again, you know, things like fixed income, you might you might want to buy a whole bunch of government bonds, but if you buy fixed income and you get exposure to bonds and you get the benefits of them without having to actually own that. Yeah, the same amount to currency trading. But you want benefits. [00:41:20][14.5]

Bryce: [00:41:21] Yeah, exactly. So it's a great way of getting access to that type of stuff because we've taken away the stress of being like, oh God, what, what, what do I do, when do I do it. [00:41:30][9.1]

Alec: [00:41:30] Yeah. So you basically backing at an expert. Yeah. Yeah. And that's [00:41:35][4.6]

Bryce: [00:41:35] what some do really well, Sondakh, [00:41:36][1.2]

Alec: [00:41:37] you know, as with everything in life. [00:41:39][2.0]

Bryce: [00:41:41] So I mean that's that's pretty much that's pretty much it. Yeah. That's the basics 101 in a nutshell. [00:41:48][6.6]

Alec: [00:41:48] So I think it's important that you keep that sort of broad idea in your mind of the different what different things you do for your money. And obviously that this isn't by any means an exhaustive list. There's a huge number of investment products in different asset classes that you can put your money into. But in terms of what we sort of think is a good starting point, these three sort of broad headings is where we're going to sort of flush out and talk about a lot of the different options. Of things it should look at. [00:42:14][25.6]

Bryce: [00:42:15] Well, they're all things that are accessible easily through the stock market, through the [00:42:19][3.8]

Alec: [00:42:19] and for investors like us. Yes, we don't have a lot of capital just starting out money. [00:42:24][4.6]

Bryce: [00:42:25] And so to recap, the three that we went through with the shares, [00:42:27][2.5]

Alec: [00:42:29] which are just the standard part of buying a part of a company. What do you think of people [00:42:33][4.7]

Bryce: [00:42:34] investing, actively managed and brings a higher level of risk on the up and up and down that we spoke about indexes, which is where you follow and invest in a much broader basket of stocks. You know, we might example of the ASX 200 or the All Ordinaries, which was the 500. And then we spoke about the ETFs or exchange traded funds, which are a bit more specific than index funds. And they more rely on the skills and expertise of the managers who manage those funds. Both the index and ETFs carry with them a lot less risk and the need to be less active. So we're not sort of necessarily saying you should do either or. We just think that, you know, a few of them at an early stage are more beneficial than the other. [00:43:22][48.0]

Alec: [00:43:22] Yeah, I guess just if that if there is some confusion out there about the difference between index as an ETF, I guess maybe you could really think about it is indexes are like a predefined thing. So there's like a predefined basket of things that you're investing in. So if you're listening to ASX 200, what you're investing in is the 200 biggest companies in Australia and the full stop. Yeah, I'm like, no, there's no one going into that, like Vanguard on fiddling around with the companies that they are and they just follow the index. Sometimes the ASX gets Ren index. We're not going to worry about that in this episode. But like the index is the index is the index. And that's what you invested in with a lot of ETFs. There's a bit more active management from the fund managers themselves. So if you've invested in like a currency ETF, there will be people who manage that fund trading currencies. So, you know, they're not always going to hold like a fixed percentage of US dollars in euros and they'll actually be a bit more active management, not from you as the personal board, but from the fund managers themselves. So that's probably the distinction if you does a little bit of confusion about the difference between the two. [00:44:23][61.0]

Bryce: [00:44:23] So in terms of risk, you would probably say lowest risk index. Second is ETF highest risk shares. But then if you were to flip that around and say, you know, potential short term or long term gains, it's it's all up in the air that you can't really say something, that over time the index means others do really well with individual stocks. So something to think about. [00:44:43][19.9]

Alec: [00:44:44] And it's not it's not like I think anyone in that position you probably want to have a capital for. I have some index fund by somebody outside yourself, occasionally buy some shares to have some fun. Probably the safest way to do it is to have some fun. I we go. [00:45:03][18.8]

Bryce: [00:45:04] Well, I think that's it, guys. It's going be a wrap. Thanks for sticking with us. We're going to continue the Investing 101 throughout each episode as we go as Ren. As mentioned at the start of the episode, this is probably the one segment that we really want you guys to get a lot out of. And it's probably the reason we started this whole adventure. So we'll check a few nights up on Equity Mates Dotcom. Go and jump and have a look, please. Right. Our podcast, even if it's not on the five stars and then give us some context to tell us where we can improve recruitment. But thanks for sticking with us and looking forward to the next episode. [00:45:38][33.3]

Alec: [00:45:38] Yeah, Equity Mates out. [00:45:39][0.9]

Speaker 6: [00:45:42] Equity Mates and the cable appearing in this programme, they have positions in the company section. This is general advice. Please speak to a financial professional to understand how they pertain to your individual situation. [00:45:42][0.0]

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