EM Talk: Are You Investing Or Are You Speculating?

Bryce: [00:01:29] Equity Mates, welcome, everybody, Episode 11, happy to be with you here with my Equity Mates buddy Ren. How are you mate? [00:01:36][6.8]

Alec: [00:01:36] I'm good. How are you? [00:01:37][1.2]

Bryce: [00:01:38] Good, good. We've had a pretty interesting week with some of our stocks in our hypothetical portfolio, which will quickly run over before we kick off proceedings. But as always, the show today is going to include some news for you guys. It's been a lot happening. And then Ren is going to go into a segment on investing versus speculating and what are the differences and what it means to us. And then, of course, we'll jump into a stock of the week. So big show coming up. And we're pretty pumped to get into it. But to start off, a quick update on our Equity Mates hypothetical portfolio, which you can check out on our website. We're doing pretty well. We're happy with where we're at. But there's been a few developments in some of the stocks that we've picked this week. So Ren you want to take it away? [00:02:18][40.7]

Alec: [00:02:19] Yeah, absolutely. So one of the first stocks we picked was Australian Agricultural Company. Now, as the name suggests, they're a big agricultural company. They produce a lot of beef and they've recently got heavily into the beef export market. So it is the second largest exporter in the world and they account for 20 percent of all beef exported. Now, it's really important for Australia of this man because would you believe that Indian Buffalo made was becoming a serious competitor to Australian beef exports? I would not believe that. It's particularly in Indonesia where there's a lot of value put on just a cheap source of protein. And obviously, Indonesia being so close to Australia, it's a big market for Australian beef exports. But, yeah, Indian buffalo meat was really cutting into Australian Agricultural Company and other beef exporters profits. So, you know, we wait and see whether this ban will be upheld. There's a lot of money at stake for Indian farmers. So it could be overturned. But at this stage, it's good news for AAC, it's bad news for people who like buying beef because the global beef price should rise. [00:03:27][68.3]

Bryce: [00:03:27] And hopefully we can say a bit of a price movement over time to say we bought them at a dollar sixty eight and they're now sitting at a dollar eighty seven for about 11 per cent up. So I'm pretty happy with that one. And then the other update we have is with Afgooye or Afterpay. We bought them last episode I think it was, and the news was that they have just signed an exclusive partnership with Trade Me, which is New Zealand's largest online marketplace. And I have a very strong brand over there. So it's a great way for Afgooye to get a channel into New Zealand and expand on their markets and offerings. So that was great news. And the market responded pretty well to that news. Over the last week, Afterpay has jumped by about 15 percent. So it's now sitting at a healthy three dollars. So pretty happy with both of those. And it's also worth mentioning, guys, that we are going to be changing our broker from what we were previously with. Who was it? Ren, CMC markets. Yeah, that's it. Yeah. Yeah. So they were doing eleven point ninety five at the time when we signed up with them were one of the cheapest brokers in the market. [00:04:34][66.8]

Alec: [00:04:35] They still they still are one of the cheapest, but we're going to the very cheapest, which is IG. Now they they charge eight dollars for brokerage. And if any listeners out there want to call me out and point out a cheaper, cheaper company with cheaper brokerage, let us know because we'll we'll move to the cheaper ones [00:04:50][15.1]

Bryce: [00:04:50] to jump ship. There's absolutely no reason that you should be paying, you know, and I cba commonwealth to nineteen ninety five, which in at the moment just seems a ridiculous price when you can be paying eight dollars per transaction. So we've changed to IJI and that will be reflected in our portfolio online as well. So we just thought we'd update you on that. [00:05:09][19.5]

Alec: [00:05:10] It's worth, it's worth saying as well in in real life. I also have changed from CommSec to IJI. CommSec was really convenient for me because I'm a combined customer. But you know, you save eleven dollars every trade. It's not a lot, but it's something it's [00:05:22][12.7]

Bryce: [00:05:23] certainly considerable when you might be trading in the minimum five hundred dollar allotments as well. And as the same as you Ren. I've also changed to IG. I still have holdings in Commonwealth, but my new trades will be done through and [00:05:35][12.2]

Alec: [00:05:35] we should say we should say IG haven't sponsored this segment. But, you know, if they want to sponsor us going forward, we'll keep giving them a plug. [00:05:42][6.7]

Bryce: [00:05:43] And also the international trades for a flat ten us. So that's also pretty appealing if once you get to that stage, it's worth having a look anyway. So moving on. There's been some big news agendas this week, Ren you want to take it away? [00:06:00][17.4]

Alec: [00:06:01] Yeah, sure. So the big news on everyone's lips this week is that Trump has left. [00:06:07][6.2]

Bryce: [00:06:07] I know that everyone ought to know. [00:06:09][2.1]

Alec: [00:06:10] It's pretty widely discussed for those who haven't heard, I guess, and Trump. President Trump recently pulled out of the Paris climate change agreement, an agreement that every nation on earth, aside from Syria and Nicaragua, signed. And would you believe that Nicaragua didn't sign it because they didn't think the agreement went far enough? So really, it's now only Syria and America that are pulling out of the climate agreement? In my opinion, not not a lot of investment worthy news. You know, people will jump to hot topics like oil, clean energy stocks should fall. And, you know, this is great news for oil companies. And, you know, oil stocks did rise on the news and there is some truth to that. But in the long term, what we're saying is that the market for clean power is really driving action, more so than government policy, even if America pulls out of this agreement. I think the incentive structures globally are still there. We see China investing huge amounts in renewables. We say the Europeans forging ahead. India's announced a huge commitment to continue investing in renewables. So, you know, if you own a clean energy stock, I wouldn't fret too much. I think the incentives are still there on the inverse. You know, the long and slow decline of fossil fuel industries may have been halted, but, you know, it probably will still continue over the longer term. So I don't know. I don't know. [00:07:31][81.4]

Bryce: [00:07:32] Yeah, no major ramifications at the moment, but I guess it's just interesting as well that trumps just going on his own agenda, which no one can really predict where it's going and that in itself can create some volatile activity on the market. So, yeah, [00:07:45][12.6]

Alec: [00:07:45] if you if you think you know what he's thinking, pull out of the market. You don't know what you [00:07:48][3.3]

Bryce: [00:07:49] know or bet a lot of money and. [00:07:51][2.2]

Alec: [00:07:52] I mean, Steve Bannon doesn't know what he's thinking. I don't think he knows what he's thinking. Anyway, let's move on to something that we. Yes. [00:08:01][9.1]

Bryce: [00:08:02] Or at least stocks related. So start of this week, sorry, started last week. I think it was big news across the front of the Australian Financial Review, May 30th for those that are interested. Philip Parker, who was the chief investment officer and I'm pretty sure a founder of Alta Asset Management, sold everything that they had under management and returned all of their all of the cash back to his investors. He put it down to the fact that he was predicting big doom and gloom in the markets to come, you know, asset crash and all sorts of things that he was putting it down to the fact that his reputation was on the line. And by doing so, he was selling out all the profits that he had made over the last few years and returning all of the profits back to his investors who are all happy with what he'd been doing because he foresaw that down the track, you know, the markets are going to turn and he might not be in a position to be able to protect that money is as well as if he hadn't have made this decision. However, I'm not sure where you stand on this Ren, but there's definitely a lot of commentary about is there more to this? You know, it's a very unusual thing for asset manager to come out and just completely liquidate and sell, because at the end of the day, half of their role and the reason that they're paid all of these management fees is to actually protect your money in economic cycles. So selling out seems like a bit of a copout, really. Yeah. [00:09:23][80.9]

Alec: [00:09:23] And if I can be really cynical for a minute, you know, even even when these funds perform really poorly in the event of a crash, you know, these fund managers make performance fees, but they also make fees for just assets under management. So, like these guys either really had to care about his reputation so much that, you know, he was willing to forgo a lot of personal wealth, the furtherance of his career. You know, it is a big move. It's not it's not as simple as just giving everyone their money back and then six months later giving them a call and, you know, putting the band back together, so to speak. [00:09:55][32.0]

Bryce: [00:09:56] Exactly. [00:09:56][0.0]

Alec: [00:09:56] It is a career altering decision from him. [00:09:58][2.2]

Bryce: [00:09:59] Yeah, in a big way. Firstly, I just I think we should start with this Bryce. But, you know, he started with this whole doom and gloom outlook, and that's something that we've been talking about over the last few months as well. You know, there's a bit more chatter coming through and investors are starting to make decisions about putting more in cash and that sort of stuff. So in terms of overall market thinking, he's sort of preaching the same sort of message. So that is one thing to consider. The second side is having a look behind all the fanfare and at what is actually going on. So you have anything to add to that Ren? [00:10:31][31.9]

Alec: [00:10:31] Well, yeah. I mean, he it's come out that he is being sued by his mum in the New South Wales Supreme Court. Apparently, he used his mum's shares as collateral on a loan. She's alleging that it happened without her permission. I mean, you know, we don't know, you know, one might have everything to do with the other. It might also have absolutely nothing to do with the other. You know, he the funds were going, OK. He's to. Guns were ranked 19th and 21st equity funds in Australia by Morningstar. OK, so you know, like on the surface it looks good. But yeah, he had two directors resign, one in October last year and one in April this year. So, I mean, look, there's a lot of fuss going on, going on in this story, to be honest. I don't know if this story itself is too interesting. I think, you know, like sorry. I don't know if it's so important. It's an interesting story. But at the end of the day, you not agree with his prediction. You think the markets fully valued. You think there's a property value. Sorry, you think there's a property bubble and you agree with his decision to move to cash more or you think the market's still got further to go and you might think, you know, you might justify it and say there's more to this story. Yeah, really, the more important thing here is what the market's doing rather than what this bloke's doing. [00:11:45][74.3]

Bryce: [00:11:45] Yeah, good point. So that brings us to today being the first Tuesday of every month. And that's the time at which the RBA have the meeting and discuss what they're going to do with our interest rates. So interestingly, over the last few months, there's been a lot of talk that the interest rates are going to stay as is we're going to float through to the end of the year and 2010 will come and then the RBA will probably decide on what to do going forward. However, recently there's been a lot more talk and and and pricing into the market that the RBA, if not today, then in the near future, will be actually cutting interest rates. [00:12:23][37.9]

Alec: [00:12:24] And if the RBA is cutting interest rates, what does that mean more generally? [00:12:28][3.7]

Bryce: [00:12:28] So a cut in interest rates generally means that they are trying to stimulate the economy. They're saying that they're trying to make access to money cheaper so that businesses will invest more, consumers may borrow more and spend more. And essentially, it's a way that the central banks use to try and encourage economic growth. So that obviously gives an indication that if they're willing to do that, then obviously Australia's economy is probably not going as well as they had been thinking. Now we're going to be getting some gross domestic product or GDP results coming out tomorrow for Australia, which are said to be quite weak and weaker than expected. Now, the RBA said today that over the next three years we're going to be growing, hopefully growing at around three per cent. But a lot of people are saying that's a very ambitious target. So at the end of it all, the RBA didn't do anything with rates today. They decided to sit on. What was more important was the message that they gave across. And unlike the last few months where they have come out and said, you know, it used quite strong words in terms of growth, growth rate, housing prices, et cetera, et cetera. The statement that they released today was a little softer than usual and left them with a bit more wiggle room in case things did start to turn a bit bad or worse than expected. So watch this space, I guess because an interest rate cut for Australia, in my opinion, is probably not the best thing going forward. But unfortunately, in in this economic climate, something that we haven't seen in a long time, the ability for the RBA to actually change the way we're going forward is quite tied. Their hands are tied at the moment. Moving interest rates even lower will only further inflate house prices and and probably not stimulate demand just the way they want it. So, yeah, [00:14:13][105.0]

Alec: [00:14:15] the other really interesting thing to take into account is Australia for a while has had a two speed economy. So for a while there, when the mining boom was really kicking along, why in Queensland were crushing it and the rest of Australia, you know, not so much. And then since the mining boom has really slowed down, we've seen, especially in New South Wales and Victoria, really pick it up and a lot of the other states start to lag behind. So it's it's really difficult for the RBA to make these decisions because, you know, if you're going on a state by state basis, interest rate decisions might be a little bit easier. But you've got to make policy for all of the country. And, you know, it might lowering interest rates might stimulate economic growth in WA and some other states, but then it will it might also further inflate a property bubble in Sydney and Melbourne. So, you know, there's always two sides to it for the RBA. So I guess we'll wait [00:15:05][50.2]

Bryce: [00:15:05] with bated breath. Yeah, definitely. I think the main takeaway from that, though, is that the outlook on the Australian economy is seems to be changing as as is the market so and not and not for the for the for the better. So see what happens. [00:15:17][12.0]

Alec: [00:15:18] Yeah. Well, after all, that doom and gloom might be worse. I mean, this this story isn't to it's not is not quite fun, but it's an interesting one. Yeah. So everyone loves a good technology company. Everyone wants to be the next tech billionaire. If you had invested in Amazon or Google, which turned itself into Alphabeat, you would be well on your on your way to being that tech billionaire. Both of these stocks have just hit over a thousand dollars per [00:15:43][25.9]

Bryce: [00:15:44] share, us or Australian us? [00:15:46][1.9]

Alec: [00:15:46] Well, yeah. So they've been on a pretty incredible ride on know. A lot of people talk about the tech boom of the 90s that crashed in 2001. Well, I mean, Amazon and Google share price now compared to then is nothing, you know, they're crushing what they were in 2001. Yeah, and that is even with a big correction when the market crashed. So, yeah, I like you know, there's there's lessons to be taken away. But also Amazon and Google are quite unique as companies. But I think, you know, a lot of people when the market crashed in 2001 would have thought, you know, screw tech. It's you know, it's a fad. It's different. But there's that, you know, even in the worst of crashes, there's people who buy and hold and, you know, 15 years later, they've come out on top once and for all of us. [00:16:32][45.9]

Bryce: [00:16:33] But now some of the biggest companies in the world. So they've definitely got something going for them. Also, just to point out that in cases like this and it happened to Facebook, once they get to a process like this, there's the option to split the shares so that rather than being a thousand dollars and continuing up, that will split the shares and create more so that the price is reduced to make it more accessible for retail investors like yourself. And also, for example, if you held one share of Amazon for a thousand and they decide to split it four ways, that means you then hold four shares at two hundred and fifty dollars each and that will now be two hundred fifty dollars on the market. So you could then go and buy them for that amount rather than someone having to have a sales and they can buy one for two hundred and fifty. Not everyone will do that. [00:17:20][47.0]

Alec: [00:17:20] The most famous example of not doing that is Berkshire Hathaway, which is now trading for something like two hundred and fifty grand per share. And if you bought if you bought that when it was, you know, a few dollars a year, you're laughing at cheering. [00:17:36][15.5]

Bryce: [00:17:36] Well, look, who knows? Amazon and Alphabet might not decide to do it. And we could be sitting here talking about how a thousand dollars where I once share, but who knows, in 20 or 30 years, 50 years, Amazon might also be three hundred thousand dollars. Sorry, Kate. Kate Bachtiar in mind, we're not really thinking about looking at Amazon. A thousand dollars expense. It's too expensive. It could be worth a lot more. Yeah. All right. Well, that's it for the news and good stuff in there. So to move on, we're going to bring in a bit of a book review segment here. Ren has been reading a book that we discussed in, I think, episode five or six. When we were talking to Andrew Brown. He suggested a book that how much is it now online? [00:18:13][37.3]

Alec: [00:18:14] If you want to buy a new copy of Amazon, it's about one thousand five hundred. Hey, guys, so much the price of one Amazon share. [00:18:20][6.2]

Bryce: [00:18:22] The Ren is lucky enough to come across a version that wasn't as expensive. And I've been reading it over the last couple of weeks. So take it away. Ren. What are you going. [00:18:31][8.9]

Alec: [00:18:31] Yeah. So I guess the best place to start is who wrote this book, who writes a book that is worth fifteen hundred dollars. So the investor's name is Seth Klarman, OK. And he is a very highly respected in the investment world, so much so that he's been nicknamed the Oracle of Boston, which is an homage to Warren Buffett's Oracle of Omaha. [00:18:57][25.1]

Bryce: [00:18:57] OK, yeah. Yeah. [00:18:58][0.8]

Alec: [00:18:58] So he has this he has a very similar philosophy to Buffett value investing, find companies that are undervalued and buy a lot of it and wait for that value to be realised by the broader market. OK, the story goes that Warren Buffett keeps a copy of Margin of Safety on his bookshelf. So, you know, that's not about the name of the book. It's called. Yeah. The book's called Margin of Safety. Probably should have introduced that at the beginning. And just to give you an idea of, you know, what Kleiman's done as an investor, he is the head of a investment company called Bull Post, probably butchered that pronunciation pronunciation. But Burpo group, he's only lost money three out of the thirty four years that he's been in business and is saying twenty percent compounding annual rate of return. So essentially he's making twenty percent a year every year for the last thirty four years. [00:19:46][48.4]

Bryce: [00:19:47] That is actually Buffett stuff. Yeah. [00:19:49][1.5]

Alec: [00:19:49] Yeah. It's unbelievable. I could be wrong but I think it's almost a Buffett. It may even be better than Buffett. Wow. Excluding Buffett's crazy early years. Yeah. Yeah. You know what, I'm, I'm not talking out of any figures yet, but yeah. That's bloody clothes you. It's bloody impressive. Wow. So yeah. Now Claman write this book in nineteen ninety one and I originally sold from the twenty five bucks but you know they stop printing them. I think it didn't do well too well to start with, but then it got a cult following so that's why they're so expensive. Now I was lucky enough to get my hands on a copy and I, I've pulled out three things that I reckon everyone can take away from bought. You know, it's definitely worth calling you like the library and saying if I've got a spare copy [00:20:34][44.5]

Bryce: [00:20:34] because Ren, you can rent yours out. [00:20:36][1.6]

Alec: [00:20:36] I could. Yeah, yeah. [00:20:37][1.3]

Bryce: [00:20:38] Interesting. Interesting. You put up prices on the web [00:20:41][2.5]

Alec: [00:20:42] and email Equity Mates, Gmail dot com. We'll, you know, we'll negotiate. [00:20:47][5.1]

Bryce: [00:20:49] So just to confirm or just to reiterate its margin of safety by Seth Klarman. [00:20:53][4.9]

Alec: [00:20:54] Yes, KLA. Man, cool. [00:20:57][2.8]

Bryce: [00:20:57] All right, so what are the three what are the three takeaways? [00:20:59][1.6]

Alec: [00:20:59] So the first one is something he calls the institutional performance. And it's a it's a common critique of Wall Street these days, but it's something that everyone should just keep in mind when they're thinking about who they're choosing to manage their money. You know, even if you don't have a lot of spare cash that you got, you have being managed. Everyone's got a super fund. This is something that everyone should think about because most people don't think about it. And he talks about fear for Wall Street. The incentive structures is all wrong. All these big institutions, all these big banks and all these big investment banks, they make money on activity and transactions in the market. Yeah, companies make money on brokerage, on underwriting new securities. They make commission on convincing investors to purchase certain investments. And this is all based. This is all done regardless of the outcome on these activities. And then for investment funds or superannuation funds, money is made as a percentage of money under management rather than the performance in a lot of cases. So it seems like a [00:21:59][59.1]

Bryce: [00:21:59] bit of a rip [00:21:59][0.3]

Alec: [00:21:59] off. Yeah, yeah, it is. But it just means the incentive for these, you know, superannuation funds or these big investment funds is to get more people into the fund rather than to manage the money in the fund. Really, really well. Yeah, and a lot a lot of the time it's performed. There's performance fees as well. So if they kill it, they'll also get a percentage of that. But the main consistent money is made from management and then he also talks. So combine all that with the the hyper short term focus of a lot of Wall Street people and Wall Street firms. So, you know, because Wall Street and by extension all investing markets really is just so hyper competitive, it's really hard to have a long term focus, is really hard to tell your investors that, you know, five to ten years down the line, we'll be doing okay. But you've just got to sort of hold out now. A great example, not in this book is Warren Buffett during the 80s, the high flying years of the 80s when everyone was making a buck and everyone was killing the market. Warren Buffett's, you know, slow patient value investment approach was pretty ridiculous at the time. Well, at least he was criticised for leaving money on the table, become the crash of 87. And come the you know, the market correction, people started to say the value in what Buffett was doing. So, look, this is essentially what Kleiman's writing about. And the big thing that I took away from it is that, you know, even if someone professes to be an expert and professes to be acting in your best interest, you're always going to look at the incentives underlying that. Is it just a super fund who's looking to get more money into their fund so they can take more more fees? Or, you know, is this person trying to sell you based on, you know, the last six months performance of their fund rather than the last six years? And he I mean, he's pretty scathing about what he calls the institutional performance. ERBY It's a good rated. It challenges a lot of preconceived notions I had about, you know, the the expertise of of Wall Street or, you know, [00:23:50][111.1]

Bryce: [00:23:51] I could almost like a big sales pitch from some of them. [00:23:53][2.2]

Alec: [00:23:54] Well, it is. It is. Yeah. And ironically enough, this book maybe was a sales pitch to put money in his fund. But I think I think he makes a good point. The good thing that he doesn't it doesn't get too stuck in the detail of, you know, sort of like technical analysis or terminology, like he just lays it out really clearly and really simplistically, like how the incentives are structured and how that is a problem for some people. So definitely something to think about and always something to keep in mind when you're choosing, you know, what super fund or, you know, what financial adviser you're going to you're going to take on [00:24:28][34.3]

Bryce: [00:24:28] Ren, because at the end of the day, Fais year on year add up to quite a substantial amount of your portfolio that has to be paid out to someone else. So, yeah, definitely a good point. Yeah. [00:24:37][9.1]

Alec: [00:24:38] So the next thing that he wrote about that's worth keeping in mind is investment funds. OK, now investment funds for Claman writing in 91 with things like leveraged buyouts and risk arbitrage. Now, you don't really need to know what these funds were, but, you know, they were big in the 80s. They made a lot of people a lot of money. But then, you know, the fad ended and and people lost a lot of money, obviously. Yeah. OK, you can say you can say Fuds today. You know, the big one at the moment is the stock. You know, everyone wants to own the next billion dollar marijuana company. And, you know, it sounds familiar. Yeah. And some people some people will make money on that. You know, it was the same in the 90s. The tech boom, like, you know, there are investment funds and clubman, he really explains sort of how the the fad develops. And it's something that foamer all. Yeah, basically, [00:25:32][54.5]

Bryce: [00:25:34] yes, it is. [00:25:35][0.5]

Alec: [00:25:35] Because, you know, early days, there are days there are a few investors that are in this particular industry and they start making a killing, you know, tech investors in the early 90s. Our corporate rate is in the eighties. You know, people who invest in stocks in the early days recently and then everyone gets foamer. You're right. And a lot of other investors. Jump into that market and what that does is it bids up the price that investors have to pay to get into that market. So because there's so much more demand, it gets harder and harder to get into that market. Yeah, what also happens is that investors appetite for risk changes. So you go you know, the tech boom is a perfect example. You go from the pretty safe, pretty solid tech companies that were making a profit. And we're a solid business as well as being technology companies. But that's the histeria grows the risk profile. You know that that increases. You start investing in companies, you know, with no no profit, no users, no no way to make money. You bought, you know, dotcom in their name. So people are willing to take a punt. But then what happens is at some point, people get closer to the fad and, you know, everyone starts pulling their money out. And then you have a massive correction as panicked investors all try and pull their money out as quickly as they can. [00:26:49][73.6]

Bryce: [00:26:49] Yeah, and it's interesting. So, I mean, does he discuss how to how to manage this feeling? Because it's definitely a feeling that I mean, I've been through and I know a lot of our mates and other investors go through is that you say these stocks soaring and you think that you should get on board and it's all going to be roses and then all of a sudden you throw it in and and you lose out. So does he make mention of what's the best strategy when this sort of stuff happens? [00:27:13][24.3]

Alec: [00:27:14] Yeah, definitely. So the important thing for Klarman is that he's a he's a value investor in the truest sense of the word. And so what that means is every company he looks at, he tries to determine what their value would be if, you know, if you took the business as a whole, what its value would be. And then you look at its share price and you try and determine if you're getting a bargain and you're just trying to find value stocks, regardless of what company, regardless of what industry they're in, regardless of what they do, you're just trying to find bargains out in the share market. And so, you know, it doesn't matter whether, you know, where the crowd's going. Like if if you're looking at a technology company in the middle of the 90s and it's you know, it's got good cash flow and you can get it for a bargain, then, yeah, don't let the fad scare you away. But at the same time, you know, if you're looking at a company that has no cash flow or doesn't have a profit, it doesn't have users is just selling a dream, really. And obviously, you know, avoid it. Yeah. And don't don't try and don't try and make money on the fund. So don't try and pick, you know, where the where the crowd's going and, you know, ride that wave and then time before the market crashes because, you [00:28:23][69.0]

Bryce: [00:28:23] know, you're literally just gambling. [00:28:24][1.5]

Alec: [00:28:25] You are you guessing. Yeah. You're making a bet on your ability to read human psychology more than you are business fundamentals. [00:28:32][6.6]

Bryce: [00:28:32] Yeah, that's where a lot of people come unstuck. Yeah. [00:28:35][2.4]

Alec: [00:28:35] And I mean, you know, you can sort of say fads everywhere these days and bitcoin. Yeah. Yeah, exactly. Bitcoin. And the thing is, with every fad, there's always a kernel of truth underlying that. Of course. Of course. But but the important thing is just recognising when you know, even if even if it's true that, you know, in 20 years from now, marijuana, there will be like established marijuana companies that make a lot of money and, you know, will be very good to investors. You have to be pretty confident in your ability to pick the right company and, you know, be able to, you know, do do the fundamental analysis to find the value stock and buy it. Because, you know, it's it's a young market. There's a lot of hype and you don't know if the company you pick will be the right one. [00:29:19][43.9]

Bryce: [00:29:19] So I guess I like that point so well. [00:29:22][2.7]

Alec: [00:29:22] Yeah. Yeah. I mean, it's a good book, I'm telling you, bro. [00:29:25][2.9]

Bryce: [00:29:25] Fifteen hundred dollars. [00:29:26][0.5]

Alec: [00:29:26] Yeah, yeah. [00:29:27][0.5]

Alec: [00:31:23] So I guess this takes us to the last lesson. And this lesson was my favourite one, because it is it is very simple in its essence, but I reckon it's quite profound. OK, and it's best summed up with a question, are you investing or are you speculating now? You know, you're buying shares, you're investing, right? Yeah. Yeah, well, [00:31:43][19.9]

Bryce: [00:31:44] I know I know people who buy shares and I would say it's speculating, so. [00:31:50][6.1]

Alec: [00:31:51] Yeah, well so I guess it's probably to preface it, it's probably it's probably worth talking about, you know, investing, speculating. It's not a new question from Kleitman. It's something that is kind of constantly debated by investors. What's an investment? Well, it's, you know, speculation. I mean, there are examples where people say it's, you know, if you're buying a company before it's earning any revenue, that's what you define as speculating. Whereas if a company has revenue, it's investing. Yeah. I mean, there are others you if you some people say it's about time, like if you if you if you're only buying it for like a day or a week, then you're speculating on the price movement. If you're buying for the long term, then it's investing. [00:32:31][39.9]

Bryce: [00:32:32] Some people even look at it in terms of the price of the stock. Like if it's only under 50 cents, then you're making a speculative investment. If it's over a dollar, then you you're you're investing. [00:32:42][10.0]

Alec: [00:32:42] Yeah, I like this [00:32:43][0.7]

Bryce: [00:32:43] risk level as well. Yeah. Yeah. Are you taking on a higher risk than you might be more speculative, whereas a stock that you think has a very low risk, then you might be inclined to say that you're investing. So yeah. [00:32:56][12.4]

Alec: [00:32:56] So yeah, look, there are lots of there are lots of definitions. And I, you know, I've heard different ones and I had an idea about what was investing or speculating. But I've got to say that writing this book, I reckon Klarman makes a very strong point for his, I guess, conception of what is speculating and what is at stake. And he makes the key distinction. So when you invest, you are expecting to benefit from the free cash flow generated from the underlying business. So what does that mean? That means that when you buy a share and you're investing, you're expecting either the company to make money and for you to make money from dividends. So if you earn off that investment or for the company to make money and to grow its business operations, you know, the underlying engine, the actual business that you're investing in grows and it gets more customers and more, you know, more stores and more locations or more users or whatever it is. And it actually grows. And then the share price only rises because of that, because of the increased business activity that the actual the companies in the company say. So when you're investing, what you're doing is you're investing in the revenue making ability of the business [00:34:08][71.5]

Bryce: [00:34:08] tik-tok economic engine make [00:34:10][1.2]

Alec: [00:34:10] profit. Yeah, he he compares that to speculating where what you're doing is you're buying a share or an asset or anything else with the expectation to make money because others are willing to pay more for it in the future. Yeah. So what you're doing there is you're saying, you know, I am buying this share because I think the share price will go up in X amount of time [00:34:33][23.6]

Bryce: [00:34:34] because others are buying it. [00:34:36][1.1]

Alec: [00:34:36] Yeah, yeah. And, you know, there's some great examples outside the investing world. You know, like people who are investing in are you know, they don't invest in art because, like, the underlying business is all the time because the [00:34:49][12.9]

Bryce: [00:34:49] was growing on them. Yeah, yeah. [00:34:50][1.4]

Alec: [00:34:50] Yeah. Those anyway, that painting, it [00:34:52][1.6]

Bryce: [00:34:52] changes [00:34:52][0.0]

Alec: [00:34:53] right. You money. But you know, people are investing in it because they have the expectation that someone else will pay more for it at a later date. And you know, it's the same with, you know, there are some there are some property investors who just buy property because they expect it to go up in value at a later date. And you're speculating on the price. But that can be compared to people who are investing in property. And what that means is, you know, they're buying the property and they expect to make an economic return, you know, from rental income every year. And in that way, you know, you're expecting to generate free cash flow, i.e., rental income from the from the investment that you made in the property. So, you know, it's not just like some asset classes are investing in some asset classes of speculation, but I think it does lead to a very powerful conclusion, which is that any time you're thinking about putting your money in something, an investment or, you know, you expecting to make money from something, I always think, why do I expect to make money from do I get to make money from it? Just because I think that somewhere down the line someone else is going to. I'm all for it. Well, am I putting my money into it because I expect the money that is generated from that, you know, from the business earning revenue or from the property earning income or whatever it is, it just earning money. And that is going to make me money. I don't essentially ask yourself, do you have to sell it to make money to [00:36:17][84.0]

Bryce: [00:36:17] do things that come to mind? Firstly for me. So the way I look at that is one you're buying, as you said, into the actual business and the way that it generates money the other way. You're essentially just betting that or gambling with yourself that the price is going to change. And that's how you're making making a profit. But what came to mind when you were explaining that was Buffett, one of the one of the famous things Buffett says is that, you know, he doesn't he wouldn't care if the markets shut down for 10 years because he knows that the businesses that he's bought will all be generating cash flow regardless of if people are buying their stocks or not. And he will still make income from that cash flow regardless of if the price of the stock rises or falls. Whereas if you are a speculative investor and you put your money into a speculative stock expecting that you would be making money because someone else bought and the markets shut down, then you're not going to be making any money at all because there's no one going to be able to actually purchase the stocks off you. So that's a sort of good example. Buffett backing up what he's saying. [00:37:20][62.8]

Alec: [00:37:21] Definitely so. Yeah, like I mean, there's a reason that, you know, Buffett, Klarman and all these guys have sort of had such long careers, I guess, you know. Thirty four years, a lot of success off it, you know, I [00:37:36][14.9]

Bryce: [00:37:36] guess even longer, close [00:37:37][1.2]

Alec: [00:37:37] to 60 years on my life a lot. Yeah. And the important thing is that, you know, when you're when you're investing, when you're putting your money into something, don't put it into it with the expectation that, you know, you'll find someone else, you know, in in finance. I call it the greater fool. You know, if you buy something, you've got to find a greater fool to to purchase it all for you at a higher price. And that's how you make money instead, you know, by business, because it's a good business, because it will make money for you 10 years, 20 years down the line. So, I mean, look, it's obviously easier said than done if if everyone had that ability to just know that a business was going to keep generating profit, keep growing and keep paying you good dividends, a lot more people, [00:38:18][40.5]

Bryce: [00:38:18] it is easier said than done. But I also take I personally take comfort in thinking about it that way. For me, for some reason, it takes away a lot of stress rather than going in a bit blind and thinking, oh, I'm just going to put some money on this and hope that, you know, that it goes up or as you're talking about this Funmi thing, jumping in and hoping that it's going to go up over three or four months. You can take some comfort in sitting down and actually looking at the business, taking away the price and looking at it as a business. And and if you can, you can become confident in your own judgement over time that, yes, despite the market fluctuations, this business will start will continue generating revenue over time. So, yeah, I like it. Did you end up doing a review on that? We can put up stock for the guards. [00:39:03][44.8]

Alec: [00:39:04] Yeah. So I've done a little write up. I, I've included all three of those lessons. So you have right to [00:39:10][6.2]

Bryce: [00:39:10] put that upside live when the episode goes live. And we'll also put up your rental process for the book if anyone wants to get their hands up. [00:39:18][8.0]

Alec: [00:39:19] So, you know, and taking all offers and you know, [00:39:22][2.6]

Bryce: [00:39:22] the minimum price is fifteen hundred dollars. [00:39:24][1.6]

Alec: [00:39:24] So if someone wants to buy it off me as well, you know, I like about it now that's an investment because, you know, you're going to want the book might not make money, but the knowledge inside of it know generate money for you for years to come. [00:39:38][13.6]

Bryce: [00:39:38] Well, you just told us three points. And what. So you're given us seven hundred dollars worth of value. [00:39:41][3.6]

Alec: [00:39:42] Yeah. So the checks can be sent to Equity Mates or you can direct deposit straight to a bank account. [00:39:48][6.3]

Bryce: [00:39:49] Exactly. So now that was good. First little book review. Well, it was a quite a lengthy one, but those I think those lessons were great and encompass exactly what our overall sort of message is, especially the way you and I are trying to invest. OK, so I'm moving on Stock of the Week. We'll keep this one brief because there's not a lot to discuss about it. But it's an interesting concept that we came across during the week and that we thought we'd share with you guys. It's sort of in line with what we were discussing earlier about this whole doom and gloom and people thinking that the market is going to be turning. And and what what does that mean in terms of constructing a portfolio? And what are some ways in which you can set up your portfolio so that it has a defensive element so that if the market does turn, you've got some stocks in there that either won't crash has had or will actually make you some money. And I know that sounds a bit weird. How can stocks make money when the whole market is going down? But it's also true with shorting the market, which is a concept that we'll discuss later on. But this week's Stock of the Week is called BEAR. Yes. It's not the traditional. Three letters that usually follows, but that's because this is an ETF that is negatively correlated to the market. And what that essentially means is that if the S&P ASX 200 goes up, then the value of there is going to go down and vice versa. [00:41:10][81.7]

Alec: [00:41:11] So it's meant it's meant to be correlated pretty closely. So it means if the ASX goes up one percent, bad goes down one percent and vice versa. So you're betting on the market going down. [00:41:22][11.4]

Bryce: [00:41:23] So with that in mind, then it makes sense that you wouldn't be purchasing this stock if you have and if you think that the market over a period of time is going to be going up, you wouldn't solely have a lot of cash in this because it's negatively correlated and it would continue to lose value. However, it's something that is worth having in the market when necessary in your portfolio, when we have been talking about, as I said, that sort of stuff so that when markets do turn, you will make a bit of money from at least this stock. So to give you an example that it does actually do what it's supposed to. Let's just look at me. At the start of May, the S&P 200, ASX 200 was at about five thousand nine hundred points. And at the end of May, it was at about five thousand seven hundred and twenty points or thereabouts. So it fell by just under five percent and Bear went up just over four percent or about 18 cents. So it does show that it does exactly what it's supposed to do. And having that in your portfolio is a great way of offsetting any losses that you may make across the board. Now, that's not to say it'll offset all of your losses because there will be some stocks that fall a lot harder. But I guess [00:42:33][70.3]

Alec: [00:42:33] it just depends how much you buy. [00:42:34][0.9]

Bryce: [00:42:34] Exactly. So in terms of going forward, you know, I think that, you know, depending on your level of experience, this is a good stock to have ready to implement when you can see that the market might be turning. I personally wouldn't have it sitting in my portfolio all the time. It would be something that I would deploy as I think that the market might be on a trend down. I'm not going to be buying this to sit in my portfolio for two or three days. But if if we're trending over two or three months, that it's going to be going down. And that obviously is hard to predict. But that's something that I would look at having in my portfolio. So, yeah, [00:43:12][37.3]

Alec: [00:43:12] I mean, look, a lot of a lot of people used to do do this with gold. Yes. So what they would do is know they'd have the portfolio and then they would buy gold because gold is countercyclical asset. So what that means is when the market's going up, gold prices generally not doing that well. But then when the market falls, a lot of people take their money out of shares and put it into a safe haven. That's gold and gold prices go up. So people, you know, protect and protect their investments by having a big gold in their portfolio these days because of ETFs like this. Yeah, you can more accurately protect your portfolio. I guess you can buy something that, you know is going to be countercyclical because it is, you know, directly negatively correlated to the market. So, yeah, look, some some people would buy it for safety. Some people would be really strategic with it. If they reckon the market's really, really getting to the top of its cycle, they'd be going hard. They might yeah, they would load up though tight. They would start selling their shares where they've made a lot of money as the market rises, putting it into something like bear and then as the market tanks then gives them because bear goes up in price when the market bottoms out, they can sell that and they can buy a whole bunch of shares and then ride the crescendo of the market once again. And obviously, it's obviously really nice in theory. It's really hard to time the market that well. But, you know, it's a strategy that some people try to do. Some people do quite well. It's definitely worth thinking about. And it wasn't knowing about. [00:44:44][91.4]

Bryce: [00:44:44] Yeah, it doesn't have to be 20 percent of your portfolio, 30 percent of your portfolio. You could even be as small as five percent. Or you might even just decide to have a little bit in there just to say hot spot. But we're going to chuck it in to our portfolio online because both of us are feeling a bit bearish at the moment. [00:44:58][14.1]

Alec: [00:44:59] Yeah. And, you know, it's a good learning experience to sort of see how it operates in the portfolio. Yeah, yeah. Everything else in our portfolio is going up so far, so we're kind of made it. So not everything can all be in positives because if the rest of our stocks only go up, chances are they will go down and vice versa. So, yeah, farewell, old grains, hopefully more consistent, longer term returns. [00:45:24][25.3]

Bryce: [00:45:26] And look, if if our attitude changes towards the market over time, then we'll make a decision accordingly to whether or not we keep this in our portfolio or not. But, you know, both of us just found this was an interesting stock and a great way to get access to shorting the market as such without actually having to go ahead and do it all yourself. So that's our Stock of the Week. We're throwing a thousand bucks towards it without [00:45:49][23.8]

Alec: [00:45:51] first first buy with the new broker and. Hopefully, future sponsors, A.J., if you're out there, give us a call. [00:45:59][7.4]

Bryce: [00:46:00] That's it. That brings us to the end of Episode 11. Some great stuff in that I really enjoyed the book review some great lessons. And as we mentioned, Ren will throw up your review of that on the website when the podcast goes live this Sunday. We have got some feedback during the week about our newest episodes. So we're going to also keep you guys updated about actually where we're getting our news from. And we'll check that up online as well. We might even do it through Facebook, but we'll start online on our website, Equity Mates, dot com, so that you guys can do a bit more research about what we're talking about going forward. [00:46:34][33.8]

Alec: [00:46:34] It's probably worth saying. It's probably worth saying as well. On on our Facebook page, we, you know, share news that interests us. So, you know, if people are wondering where we get our news, our Facebook page will be a good starting point for you guys to sort of read some of the same articles that we're writing. [00:46:50][15.7]

Bryce: [00:46:50] Yeah, yes. It's because we read this stuff every day, so we love it. So, yeah. Look, thanks for listening and keep the feedback coming and we really appreciate it. Our best way of improving with you guys, you can contact us via email, Equity Mates at Gmail dot com or through our website or Facebook page. But until next time we've got an investor expert investor lined up for our next episode, keep posted keep listening. Subscribe and write us and we'll talk to you next time. [00:46:50][0.0]

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