Expert Investor: Alan Kohler – Why I’m Disgusted With Warren Buffett

Bryce: [00:01:29] Equity Mates, welcome to Episode 18, a podcast where we break down the world of investing from beginning to dividend to make it easy for you. I'm here on a lovely Saturday morning, as always, joined by my Equity Mates buddy Ren. How are you, bro? [00:01:43][13.8]

Alec: [00:01:44] I'm very good. Bryce. How are you? [00:01:46][2.0]

Bryce: [00:01:46] Good, good. Bombers v Swans today very keen for that. And US wants the bombers then looking forward to it. And yes, looking forward to this episode. We sat down with Alan Cole last weekend down in Melbourne. We had a great chat to him. You want to give a bit of a spiel? [00:02:00][14.1]

Alec: [00:02:01] Ren. Yeah, OK, so for Australians, there's probably no name or face more synonymous with investing or financial journalism than Alan Kohler. So he's had a long history in finance and journalism, including being the editor of the Australian Financial Review for a few years in the 80s. And he now does the financial section of the seven o'clock ABC News and does his weekly weekend overview. That's a much anticipated must read for the financial community. So in my house growing up, we always watch the seven o'clock news and Alan was known as the gruff man as he's become known for his interesting and insightful chats that he shows viewers. So we were lucky enough to sit down with Alan and discuss all things charts and investing. Hope you guys enjoy it. [00:02:45][44.6]

Bryce: [00:02:46] Well, great to be here with you, Alan. I'm very excited. And we've been watching you on TV for a while since I was young. So it's good to be in the same room with you. [00:02:54][8.2]

Alan: [00:02:54] Still young, if I could. So they could better be. [00:02:58][3.8]

Bryce: [00:03:00] So, Alan, you are known for your charts, charts for charts sake. I'm just wondering to kick it off, what's your favourite shot? [00:03:06][6.1]

Alan: [00:03:07] Well, I think my favourite show is one that was produced by Andy Haldane, who is the chief economist at the Bank of England, which was a chart of interest rates back to the year 3000 B.C., which was great. Yeah, I mean, it was I don't know, they he asked somebody it is on his staff to figure it out what interest rates were over the past five millennia. And he came up with it. And apparently interest rates, the the bond rate was 20 per cent in ancient Egypt. [00:03:39][32.4]

Alec: [00:03:40] I wonder how you calculate interest rates back then. No, no central banks or anything? [00:03:44][3.9]

Alan: [00:03:44] Certainly not. And then I presume there was some, you know, hieroglyphics or [00:03:48][3.8]

Alec: [00:03:50] some Covid [00:03:50][0.4]

Alan: [00:03:52] explained that people were charging interest for loans and stuff [00:03:56][4.1]

Alec: [00:03:56] like that. Then you go really as a profession is all this time. [00:03:59][2.6]

Alan: [00:03:59] But but the point of the point of the chart was to show that interest rates now are the lowest they've ever been in 5000 years or so. [00:04:07][7.9]

Alec: [00:04:07] I guess. Let's start with a bit about your background. So had you always wanted to be a financial journalist? And what about interest in investing and finance come from? [00:04:16][8.5]

Alan: [00:04:17] I wanted to be a journalist when I was at high school and I didn't go to university. I got a job as a journalist on The Australian when I was 18. And in those days we're talking early 70s from 1970 when I turned 18. What you did was a cadetship, so it was like an apprenticeship. And that's what I did. And it just happened to be that that job that I got was on the finance section of the Australian. And that's kind of where I stayed. [00:04:47][30.0]

Bryce: [00:04:48] So then you obviously had an interest in it that made you say I [00:04:52][4.1]

Alan: [00:04:52] developed an interest. You know, I didn't mean what I had an interest in at that point was being a journalist and writing. But as I say, I sort of got a job there. I didn't having after I did my cadetship, I then left and travelled and I got all sorts of different jobs as a journalist covering courts, police rounds, covering sport both around Australia and in England. So various things came back to Australia eventually and got a job back as a financial journalist again in 1979 and then basically stayed. And I kind of from there I became editor of the Financial Review in the 1980s, became editor of The Age in 1992, and then I went on from there. So, I mean, obviously, I've done a lot of reading, a lot of studying. You know, you don't have to go to university in order to study. So I taught myself. [00:05:46][54.1]

Bryce: [00:05:47] So at what age did you start personally investing and. [00:05:50][2.9]

Alan: [00:05:50] Well, I didn't have any money for quite a while. I mean, I was no money, so I didn't I mean, and after a while, I kind of decided to run my own super fund. And I've been investing that. I guess, you know, I sort of slowly took on investing because I started to understand how to do it, be a good idea and did it. But I'm not I'm not. I'm fundamentally a journalist, not an investor. Yeah. Yeah. [00:06:13][22.2]

Alec: [00:06:13] So when you started with your super fund and got more interested in investing, what were some of the hottest things you found about getting started? [00:06:20][6.7]

Alan: [00:06:21] Well, I had already I mean, I kind of came out of it from a different direction in the sense that I already understood it all. Yeah, my my my four year. It essentially was covering the stock exchange from the age of 18, 20, 22, for years, I in those days the stock exchange was an actual physical thing, not a computer thing. There was actually people on the floor shouting out. Yeah, yeah. So I spent my four years there. There's a press gallery overlooking the floor at the stock exchange. And that's where I spent those four years doing well and mixing with stockbrokers and talking to them about. So I got a pretty good understanding early on of how to do it and what was going on about how the system worked. [00:07:05][44.5]

Bryce: [00:07:06] From the experience you had at the stock exchange and from the many people that you would have spoken to in your career, are there any characteristics that stick out to you amongst that sort of successful investors? [00:07:17][11.5]

Alan: [00:07:18] One of them is don't be too greedy to actually be satisfied with a reasonable return in return for reasonable risk. So, you know, you can't get a return without taking some risk. But if you you know, if you are expecting to double your money and trying to double your money, then you're probably taking too much risk. And so I remember when I started, it was kind of during the Poseidon boom that time people started to get very greedy and they were kind of doubling their money overnight and making lots of money. And then everyone lost everything because the bastard, you know, and so, you know, sort of I came to a pretty clear understanding that how how brutal the share market can be, you know. Now, also, 1987 was incredibly brutal. And in 2008, I mean, I've seen a number of busts where people thought that everything was fine and then it wasn't, you know, and so it's really a matter of kind of having a clear understanding of the risk taking and to not think that, you know, everything's going to be always fine because it has been for the last little while. In some ways, the longer you go with everything you find, the more likely it is that you kind of come across at some point. [00:08:28][69.9]

Alec: [00:08:30] So building off that for our listeners who are, you know, early into their investing journey, is there any advice that you have for them to sort of set them on the right path or anything that you wish you knew when you were starting out? [00:08:42][12.9]

Alan: [00:08:43] I wish I had a clearer understanding of compound interest. I mean, it really I mean, the fantastic thing about being young is that you're able to harness the power of compound interest. But the thing to understand about that is that it really starts to come into its own after a decade or two. You know, it takes a while and you have to be patient. But the other thing is you don't have to you don't have to settle for subpar returns. It is possible to particularly if you had long term. One of the things about being young is that if you're saving for retirement, that's 30 or 40 years away. And the ups and downs in the meantime don't matter. So I think that's an important thing to bear in mind. A lot of people equate risk with volatility, particularly professional investors. For them, when they talk about risk, they refer to, you know, the volatility, the ups and downs that are along the way. And that doesn't matter to somebody who's young and saving for a long time. Yeah, it matters to a professional investor because they're getting judged every quarter or every month. And so, you know, you're only as good as your last quarter. So for them, that's important. But for young people, risk is not volatility. Risk is losing your money. Yeah, yeah. That's what you need to guard against. And so if I was if I was young again, you know, I would I would find somebody earning who has a track record of earning 15 percent annual returns. Who knows how to do that? Yeah. And I give them my money and I'd use what's called dollar cost averaging to basically save, which is to say you put a certain a fixed amount of money, you put a fixed amount of money in each month into something or other, whether it's whether it's, you know, it's in a trust or a company or a group of companies and then you because it's a fixed amount of money, you buy more when the price is down and you buy less when the price is up, which is the right thing to do. When something is more expensive, you should buy less. When something is cheaper, you should buy more. And that's what dollar cost averaging cheesily. So if you do that over time and you harness the power of compound interest, you you will retire very comfortable. The question is whether anybody who's in their 20s can actually be bothered doing that. [00:11:01][138.3]

Alec: [00:11:02] You know, it's [00:11:03][0.6]

Alan: [00:11:03] like you got a house to buy. You know, you've got travel to do. And, you know, you know, you've got nice breakfast. [00:11:08][5.5]

Bryce: [00:11:09] You know, it's it's good advice. And that's what we're trying to encourage people our age to start thinking about that sort of stuff. [00:11:15][6.6]

Alan: [00:11:16] Yeah. One of my big problems is with the way the system works at the moment is people go into a super fund in their 20s, which on the whole earn about five per cent per annum, which is OK. And if you end up in. If you do five per cent per annum over the course of your life, you'll end up with, you know, maybe a million bucks, but the difference between five percent and even 10 percent over 40 years is phenomenal. You know, and you don't even have to settle for 10. You can achieve 15 per cent if you get the right manager and you know and play it correctly. [00:11:49][33.0]

Bryce: [00:11:50] So what are your thoughts on going with a fund manager versus putting it in an index, which is something that so an investor like Warren Buffett always talks about, like, do you have to say the same or. [00:11:59][9.4]

Alan: [00:12:00] Well, I've just written a brilliant piece for some of those Australians that I don't like index. It's an index fund. I think it's a bad idea. OK, can you explain? Well, because you just with an ETF or index fund, you you're buying you're effectively buying shares according to their size. The bigger a company is, the more money you're putting into it, because the index funds and the ETFs invest according to the to the index, the weightings of the index. Right. And that's on market capitalisation. So you end up investing in large companies mostly, and large companies will not give you a decent return. They just won't know over time. I mean, you'll get the market return, which over the long term is seven or eight per cent per annum. And in my view, that's not good enough. You can like I've just been looking at a fund manager this morning who's good at picking stocks and they have achieved high 20s returns. Now, you wouldn't want to put all your eggs in one fund manager basket, but it is possible to achieve that kind of return by people who who choose good companies, invest in, you know, choose them and not just invest according to size, which is what an ETF is. So I'm kind of I'm disgusted with Warren Buffett, actually. I think that he's suggesting people do exactly what he hasn't done yet. [00:13:20][80.0]

Alec: [00:13:20] That's very true. But I did I did read that article when we were preparing for this interview. And I also read another article that came out today about land tax over income tax. So it seems you are putting some provocative thoughts out there to get people thinking about finance and the structure around the Australian economy. [00:13:40][19.4]

Alan: [00:13:40] Well, my view is that having a column in a national newspaper is a privilege and a well, I mean, I should use it to get people thinking. Yeah, to I mean, there's no point riding the bleeding obvious or just, you know, writing boring stuff, you know. Yeah, definitely. You've got to say something. Yeah. Yeah. I've always had a view in journalism that you, you know, you've got this position if you paid to write, which is kind of a great thing to be able to do, particularly if you're a national newspaper, which has got a lot of readership and, you know, you've got a you have a responsibility to use it. [00:14:15][34.7]

Alec: [00:14:16] Yeah. So with the land tax idea and just for our listeners, it was essentially that if you tax land owners on the value of their land rather than workers on the income that they're generating, that leads to a more equitable economy. Is that a fair assessment of the argument that was put forward? [00:14:36][20.1]

Alan: [00:14:36] Yes, a lot of people are talking at the moment about universal basic income or some way of compensating those who lose their jobs out of automation. And where we're moving from a period of of replacing manufacturing jobs with robotics to replacing blue collar jobs with artificial intelligence, probably. So people like Elon Musk and others are saying we need to do something about that. Because, you know, this is a huge challenge that you gave on Musk called artificial intelligence bit more of a threat than North Korea. Also, it's the case, if you look at the stats, that wages growth is very low, productivity is low. There's lots of issues with the economy which are puzzling to everybody. So and on the other side of things, the governments are failing really to fund themselves properly. They're all under water and massive deficits, including Australia. And if we if we are moving to a stage of lower employment, which is probably the case, then taxing labour is going to prove to be a dead end. So we've already shifted a fair bit of taxation to consumption through VAT and GST is GST in Australia, it in England and so on. So there's been a big shift towards consumption, taxing consumption because of the inadequacy of labour and people like someone. Bill Gates said, well, we need to start thinking about taxing robots. Well, actually, robots are owned by companies. So what you're talking about there is taxing companies. And so there is a view that we need to start shifting towards taxing companies. However, the trend at the moment is towards reducing company tax, not increasing it. And that's with good reason because capital is so mobile with companies, it's very difficult to tax companies and so taxing various types of income. In some ways, a company tax is just another form of GST to. Sort of withholding tax at that point is passed on prices of goods, and so you've got GST, you've got company tax, which are essentially taxes on consumption, taxes on labour, which are failing. Company tax is failing because the big global multinationals like Apple and Facebook and Google and so on are able to get out of it too easily. So we've got to come up with something else. And the one thing that's completely immobile that you cannot move is land. And taxing land means that that means that the more land you earn, the more tax you pay. And rich people own the land. Yeah. Now, I referred in that piece to Henry George, who actually came up with all this 150 years ago when he published a book called Progress and Poverty. And he there was Henry George Ligue. There's George. You know, there's a lot of people who followed this, who he proposed at the time. We should have land taxes. And in some ways, what happened then in the late 19th century is exactly what is happening now. There's a lot of inequality, a lot of technology at the time. You know, steam engines, railroads, what we regard as kind of not old stuff now was then new technology. And he was writing about how new technology was not actually providing good living for people that was not leading to higher productivity. It was was not dealing with inequality. And so he was proposing at the time the land tax. And so, I mean, I sort of was rather reminded of it because it was Henri-Georges birthday on Saturday. [00:18:03][207.0]

Alec: [00:18:04] OK, yeah. Good time to write the article. That was for all the listeners out there. The game Monopoly was actually originally created with two sets of rules, and it was called The Landlord's Game. And it was to show the effect of a land tax. You know, the property owners in Monopoly, they would be paying tax and the game just didn't end. And it was much more equitable with all players still having some level of income. But then Hasbro got rid of that set of rules because people want to win the board games that they play. But it's it's interesting that, you know, that idea is sort of coming back in vogue. As you said, there's all these trends, sort of readhead, again, technological innovation, inequality and all that. That's right. So it's yeah. It was really interesting to read this morning, you know, [00:18:43][39.4]

Bryce: [00:18:44] so back to the charts that I mentioned earlier, start the charts. Obviously a great way of illustrating trends and and what's happened in the past. So we're wondering, have your use of charts always been a strategy or is it been something that's evolved over time? [00:18:58][14.4]

Alan: [00:18:59] Well, the story for that is like a lot of things, things happen by accident. I joined the ABC back in 1995 for seven years, was on the 730 Report as a as a reporter. And then I said, why don't you go on the news 2002. And at the time, though, they were introducing two national segments onto the news, finance and sport. And Peter Wilkins did sport as a national thing. And they made they made both my segment and Peter Morgan segment mandatory. So the way the ABC News works is it's a federation and each state has control of what it puts to anyone except certain things. Not many things are regarded as managed and they have to run them. And so they introduce national finance and national sport, which were mandatory. And they decreed that the two things would include both me and Peter Wilkins doing a presentation, but also showing video footage. And Wilkins had no problem finding video footage or tons of it. Yeah, but I couldn't get any video footage was hopeless. So they said I'm fine for the efforts of oh God. So occasionally this occasion is a press conference, but at some boring middle aged man talking. Yeah. And so I did that for a couple of weeks and thought this was was working. I was too hard to find. So I thought, well, what else can I do? And the answer was I'll try charts. So I started using charts which I've always kind of thought were a terrific way of understanding history really, and correlations to two things the charts do for you as they tell you what happened in history in a very visual way. And they also help you understand correlations where they exist. Sometimes you can you can portray correlations that don't exist. But yeah. So that's that's how that came about. Right. [00:20:48][108.8]

Bryce: [00:20:48] And it just kicked on ever since. [00:20:50][1.1]

Alan: [00:20:50] Well, I just kind of find a couple of charts every night and it helps people understand what's going on. [00:20:56][5.7]

Alec: [00:20:57] Yeah, I think because I grew up watching ABC News and it definitely makes it more relatable for people who have no financial background and like our whole family dynamic finance background. And we definitely found that. Yeah, it's good. So I guess, you know, you're known for your charts, but does your investing does that for your investing? Do you sort of subscribe to technical analysis and do you use charts to make decisions on what assets to buy and things like that? [00:21:24][26.8]

Alan: [00:21:25] Well, as part of the cost of the investor, I've also. Quite another newsletter called Market Timing. Now, I've never really had much faith in or knowledge really about how to use charts to make investment decisions. I've enjoyed charts, tell you lots of stuff, interesting things. But in terms of deciding how to base an investment decision or a trading decision on it, I've never really got it. Market timing was started by a bloke I know in Sydney called Percy Allen. He lost a lot of money during the GFC, decided that he never wanted that to happen again and he wanted to help other people avoid losing money. So he created this newsletter, which was based on charts, on using charts to basically understand momentum, whether the market is tipping over or whether it's bottoming. And I've since learnt since working with Percy and publishing his newsletter on my business to constantly test, I've learnt that charts can tell you what trend, what trend is taking place. It won't tell you the absolute peak, but it'll tell you after it's fallen about 10 per cent, whether it's going to keep falling on the whole. Usually I'm not a hundred per cent, but it can tell you that the market is now trending downwards and it's time to get out or it's trending upwards and it's time to get in. And so what market timing does using charts is to publish, buy and sell signals based on charts. But it doesn't do very often, like it'll do an average of two signals a year. Oh, well, ok. OK, so we're not doing trading signals like every day. [00:23:00][95.4]

Alec: [00:23:00] Yeah. Yeah. [00:23:01][0.5]

Alan: [00:23:01] Okay. Some people use charts every day, you know, they're looking for my new differences. Yeah. I think that's a trying to. No way that one. But some people swear by it and fight on it. Yeah. But you know in terms of market timing, we're looking for the big trends to protect people from the big crashes. Yeah. Okay. And you know you can do that. Yeah. [00:23:22][20.7]

Bryce: [00:23:23] So these charts look at it from a macro approach or [00:23:25][2.1]

Alan: [00:23:26] what it's more to do with it. I don't know. It's it's a bit of a black box situation. Percy's coming out of it all, but I know that it has to do with moving averages. So if you you know, and when the when the daily chart crosses over a 200 day moving average, that kind of tells you that the trend is down. [00:23:46][19.7]

Alec: [00:23:47] So talking about your time as the editor of The Financial Review, you you were the editor in the 80s, which was a pretty crazy time in the world of finance, you know, Reagonomics of high flying corporate mergers and then the crash of 87. What was it like following markets then? And do you notice any similarities or any glaring differences between then and now? [00:24:07][20.5]

Alan: [00:24:09] Well, look, it was a great time to be running in financial news. I can imagine, you know, there was something happening every day. I mean, we had we had Bob Hawke and Paul Keating in power and they were floating the dollar. Deregulating the financial system is fantastic stuff going on all the time. And there was also massive takeovers. Alan Bond, Christopher Skase. So, look, you know, there's something going on. Every day was extraordinary time. So we were running on a million miles an hour and it was exciting. It was great. It's different now. I mean, the GFC kind of changed everything. The 1987 crash was in some ways a blip. It was the market fell 50 per cent, but it was it really quickly got back to where it was. So, you know, if you look at a chart, you know, there's no doubt about it. The crash of 1987 shows goes up and goes down. And then you can draw a line to it's sort of it was a blip within a kind of a rising trend. Yeah, but the but the 2008 crash was something different. And so the world changed then. And I mean, obviously it was exciting in 2008 as well. Lots happening, lots of negative things happening. And that was kind of obviously also an interesting time to be around. But it's become much less interesting now in some ways. Was that well, it's it's been it seems it feels like it's become much more control over in this country, more controlled by the central banks. Everyone else for the last ten years, everyone or everyone wants to know, what's the Fed going to do? What's the central bank going to do? What about interest rates going to go up or down? You know, that's kind of I mean, I remember in the 80s that was we didn't care. That was, you know, like interest rates went up in 1988, 89 to 17 per cent and of course, the recession. And that was obviously terrible. But it felt like it was kind of how can I put it? It was that was the first time that I can remember when, you know, interest rates were really a big deal to other and the central bank. But even that was to do with the government getting involved. It wasn't really it just feels so much more boring now with the central bank controlling everything, you know, and volatility has declined. Politics seems to have taken over. Politics is interesting. Obviously, this Donald Trump. You wake up every day with another tweet and there's plenty of interesting stuff going on in politics, but finance and business is a bit more boring. [00:26:36][146.9]

Bryce: [00:26:37] Do you think that's because people are more wary of what happened in 2008 and they're scared that there's going to be a repeat of it? [00:26:43][5.6]

Alan: [00:26:43] Or I think there's that, you know, the markets have been going up and if made a fair bit of money, the property market's going up with interest rates low. People have been making a fair bit of money out of all that. But it's just like politics. Although it's interesting in Australia every day, nothing much is getting done. There's so real, you know, like in the 80s, stuff was getting done all the time. People were the politicians were actually doing things all the time. But now they're not just this theatrics. Yeah, all the time. And yeah, I think that there's not much kind of there's not a lot of swashbuckling entrepreneurs like Alan Bond and stuff. [00:27:23][40.5]

Bryce: [00:27:24] That was a cultural change. [00:27:27][3.0]

Alan: [00:27:27] So I think so. And I think that's reflected to some extent in all the money going into ETFs. People aren't actually people are just kind of want to be passive. Yeah. I mean, ETF is a passive type of investing. You know, it's becoming the dominant form of investing there. So it's kind of, you know, and people say, oh, look, it's also hard. I'll just I'll just go with the market. [00:27:47][19.9]

Bryce: [00:27:48] You're on the thrill back. [00:27:49][0.7]

Alan: [00:27:51] Oh, well, you know, it is as a journalist, it's it's interesting. Yeah. [00:27:56][4.7]

Alec: [00:27:57] So in that time as well, you've seen the rise of pension funds in Australia. We have super. But globally, you know, trillions of dollars of pension assets have been saved. Do you think that's changed the market in any way? And maybe, you know, all that money going into passive and in the big companies are sort of quieted the vicissitudes of the market? [00:28:17][19.5]

Alan: [00:28:18] Yeah. Well, look, obviously, I mean, I can only talk about Australia, really. I think that there's clearly a trend towards the ageing of the population everywhere. And people are saving for retirement. And there's lots of pension assets everywhere in Australia. It's obviously mandatory. So there's huge amounts of money is now to two point two or three trillion dollars of money going to super, which was fine. There's lots of that lots of money going there. It's been conservatively run then it's not going much into, you know, into what you might call interesting business like venture capital infrastructure. It's pretty conservative. And there's a lot of self managed super fund money and a lot of that's just sitting in cash and ETFs. And so, you know, used to look, I don't quite know what to make of all this, to be honest. The before the superannuation system was set up in 1992 by Paul Keating, most of the superannuation or retirement savings or retirement income was provided by defined benefit funds rather than defined contributions or accumulation. And the the really the shift that occurred was from employers and life officers and so on, guaranteeing people a certain income in retirement, which is what the way the system used to work to being that we all take risk now. We all have to basically do our own thing, whether it's we give the money to a super fund or we run it ourselves. We're all kind of exposed now to risk in the market where we were before. And so, you know, I think one of the things that occurred is that people were kind of comfortable taking that risk between sort of 19, mid 90s until, you know, for 12 or 13 years, until we started to see declines. So year 2000, US stock market crashed Covid not all the way. And then 2008, it lost a lot of money, you know. And so I think that that was really the 2000 that was really the first big time in Australia where everyone who had been shunted into accumulation super funds, out of defined benefit funds had suddenly realised that they were you know, they were actually exposed to risk. And I saw the risk that they were exposed to the risk was to their own life in retirement, you know, so it was no longer kind of academic or theoretical. It was real, you know, which is one little microcosm of that was Percy Allan. And the market timing is that where he lost the money, decided to do something about protecting people from that happening in future. And in a way, that's what I'm trying to do, too. I'm trying to get people to take long term positions, particularly young people saving for the long term. Don't worry about short term volatility, but, you know, focus on what you're doing and understand the risks that you're taking. [00:30:55][157.4]

Bryce: [00:30:56] So I in 2005, you founded Eureka Report, which is now one of Australia's most read investing newsletters, and then 2016, except that [00:31:05][8.6]

Alan: [00:31:05] I [00:31:05][0.0]

Bryce: [00:31:05] didn't know he sold and then in 2016 founded The Constant Investor, which is what you're working on at the moment. And what is it about the online online newsletters that you find appealing? [00:31:16][10.8]

Alan: [00:31:17] Well, I find starting a business appealing. It's it's an act of great optimism and faith. Starting a business. Yeah, it's exciting. Interesting. It's a way of. Being creative, so, yeah, I like I like doing that, but I also like writing columns. I feel very privileged to be able to appear on TV, write columns for the Australian and to start a business and it's great. Wouldn't be dead for quids. [00:31:40][22.4]

Alec: [00:31:42] So we're done with this sort of financial reporting that we get these days, not not so much in newsletters, in the specialised stuff. But, you know, the the more mainstream, you know, like CNBC, that kind of financial reporting, do you think it's having a positive effect on people's financial literacy or do you think a lot of it's very short term orientated and, you know, these are the three hot stocks of the month and that sort of sensationalised click bait almost reporting. [00:32:09][27.1]

Alan: [00:32:10] Absolutely right. Of course, that's what it's like. But it's not different to the rest of life. [00:32:14][3.9]

Alec: [00:32:14] That is true. Yes. [00:32:15][0.5]

Alan: [00:32:16] I like reporting generally is being taken over by Tik-tok because. Because it's not viable anymore as it used to be. Yeah. So you certainly shouldn't look for those kind of things for education, that's for sure. I mean, there's a lot of that going on and I don't think that's going to change. [00:32:34][17.8]

Alec: [00:32:34] Yeah, well, hopefully people pay for good content like. Like the constant investor. Exactly. Yeah. [00:32:39][4.6]

Alan: [00:32:41] We're much we're not like that. I mean, and and part of the reason that's we're one of the few things where you actually pay, you have to pay for it. I mean, there's a few there's lots of things starting up that are like BuzzFeed for finance. Yeah. And and enough I mean, a lot of people who are in that there's a lot of my friends, people I know who have been made redundant by the newspapers are going into those kind of products and, you know, trying to make a living. It's tough, you know, trying to get people to click on something. [00:33:10][29.1]

Alec: [00:33:10] Yeah, I think I think we're seeing a trend in our generation recognising the value in paying for content again, because there was a long time when no one was willing to pay for anything with the Internet. But I think people are starting to recognise that you pay for good content. And you say that in rising newspaper subscription numbers and I'm sure in newsletters like yours and similar, that people are sort of the trends changing and people are reverting back. [00:33:34][24.4]

Alan: [00:33:35] I think that's right. I think that has to that's the way it has to be. The only way you're going to get sort of independence and serious content is by paying for it. Yeah, definitely. So I'm definitely relying on that.[00:33:48][13.2]

Bryce: [00:35:42] wheel concept that we introduced to our listeners is the dividends. And it's something that you've written about and have a strong opinion on. And in a recent article in The Australian, you wrote that Australian corporate leaders have become lazy bonus hounds, churning out dividends without taking risks, and argued that the tax system, specifically dividend imputation, is largely responsible for this country's failure to have any meaningful place in the global technology revolution and in particular, the coming IBM. So can you just give us your thoughts on that and the effect that higher dividend payout ratio is having on our economy? [00:36:19][36.9]

Alan: [00:36:21] Well, the average payout ratio in Australia is about 75 per cent. A lot of big companies paying out 80, 90 per cent of their profits in. Dividend, and then they're trying to get money back when they need to spend it on something to expand or to invest, they have to get the money back off the shareholders, ansaru dividend, the investment plans or or equity raisings. I think it's noticeable that the big companies that are dominating technology globally and artificial intelligence in particular don't pay dividends. And Amazon, Facebook, Google, Microsoft, IBM, even those who do pay a dividend like IBM, it's like 10 or 15 per cent of their profit goes out and dividend no more. Now, the culture in Australia because of dividend imputation is that companies are there for the purpose of a company is to pay you an income. That's the whole purpose of America. The purpose of a company is to grow and to know, to employ people and to, you know, develop exports and so on. So I just think that we've gone down the wrong track in Australia. But by turning these companies into kind of ATM cash machines for people looking for income. Now, I get that there's an argument the other way. A lot of people have got stuck in to me since that column. And fair enough. I think it's interesting and good debate to have on. I and I can as I say, I can acknowledge the counterpoint, which is that companies tend to just waste the money, you know, they keep it. And look at BHP, it keeps wasting money on big projects. And so shareholders. Fair enough. They say it doesn't just give us the money we always do instead. You know, so there's there's there's a there is a solid argument for companies paying the money out now. And the thing is that most companies earn a return on equity in Australia in excess of 12 per cent. Some, you know, mostly roughly the banks own 15 per cent return on equity. A lot of good companies have only 20 per cent return on equity. You're not going to get that. You're not going to get that sort of return anywhere else with your money, taking money, taking money out. Yes, it's it's not entirely tax free, but you've got company tax taken out of it. So there's less tax, but there's still a bit of tax on it. And then you've got to put it somewhere where you're going to get better than 15 percent return on equity. You're not going to do that, really. You know, he put it back into the share market and, you know, you're lucky to get over time seven or eight per cent, so you must leave it in there. And that's what Warren Buffett always says. He never paid a dividend in his life. It doesn't like dividends, doesn't want if we invest in companies, he doesn't want them to pay dividends because he says, if I like a company, I want to I want them to keep the money and keep investing in know what they're doing. Yeah. So, yeah, I mean, I think it's a really sort of a I don't know, it's a strategy of despair in some ways to say what was and you know, we, like your company will invest in it. But for Christ sake, don't keep the money. Give me the money back and everything you make, you've got to give us. Yeah, well, that's terrible. And the reason I call them lazybones hands is that is that executive bonuses are based on total shareholder return, not total shareholder return, and includes dividends. If you look at the stats on most companies over the past ten years, they've not had much capital to hardly any in terms of the average share prices. I can't believe I actually did it. I mean, I think that over a ten year period, the capital return is like zero zero in Australia on average of Australian listed companies. Right. So the only return that they've achieved has been for dividends. Yeah, right. And so they are bonus according to the total return, which is to say their bonus on dividends and they decide on the dividends. Right. So so the executives and as we know, executives are paid an absolute shitload of money. Right. And their bonuses have been great, but the bonuses have been based on dividends. Yeah, well, what's going on with that? [00:40:27][246.4]

Alec: [00:40:28] Is that the same in America? Do you know, or is their incentive structure a little bit different? And that's why the outcomes are a bit different. [00:40:34][5.8]

Alan: [00:40:34] Well, in America, they're paid on total shareholder returns. OK, but but the total shareholder returns is mostly capital gains. [00:40:43][8.3]

Alec: [00:40:43] So it's a bit of a positive growth. Yeah. [00:40:45][1.7]

Alan: [00:40:46] So what I was saying, if the if the if the Australian companies had not paid out over the past ten years, had not paid up 70 or 80 per cent of their profits as dividends, the share market would be, I think was the number a lot of 300 billion larger. OK, yeah. I mean, like the share market is currently one point seven trillion. It would be two point a bit more than two trillion in size. All the companies would be larger and everyone would own more, you know what I mean? Like that. And also companies, Australian companies like Telstra or others would be much more of a position to be global champions because they'd have more. Cash investment. So the fact that they've disgorged so much of their profits over the past 10 years as dividends has meant that they've kind of had to just stay where they are in Australia. At the same time, you know, companies like Amazon and so on, they've just taken over the world by reinvesting all of their money. [00:41:47][61.4]

Bryce: [00:41:48] Do you see it changing? [00:41:48][0.5]

Alan: [00:41:49] No. Yeah, I don't I don't think that's going to change. Sort of regretting that. Yeah. [00:41:54][4.7]

Alec: [00:41:55] It's it's funny that you mention Telstra, though, because since you wrote the article, they did cut their dividend and, you know, it was days and days worth of noise for that CEO. And, you know, if other company CEOs say that there's a pretty strong disincentive to follow their lead just because of the public outcry that will follow. [00:42:12][16.9]

Alan: [00:42:13] Yeah, look, they cut the dividend payout ratio back from 100 per cent to 70 per cent. [00:42:17][4.8]

Alec: [00:42:18] Yeah, it's still pretty high. [00:42:19][0.9]

Alan: [00:42:19] So we find I still [00:42:20][0.9]

Alec: [00:42:22] it's got a long way to go. [00:42:22][0.6]

Alan: [00:42:23] You know, they are they will have to cut the dividend more. [00:42:26][2.4]

Alec: [00:42:26] Yeah. [00:42:26][0.0]

Alan: [00:42:27] Competitive times simply because their profits fall. But, you know, as I pointed out in that article, that Telstra wants to become a technology business. That's what they're calling themselves now. They're trying to say that we're going to achieve growth by being in technology, but they're up against global companies that pay dividends, that reinvest all their profits back in the business. They're kidding themselves. Yeah. [00:42:48][21.2]

Alec: [00:42:49] Yeah. So we touched on the GFC before, but something that we hear more and more these days is where the market's fully valued. You know, there's no there's no value left. Do you see any similarities between the run up to 87 or 01 or 2008 and the market now, or do you think it's a bit of a different situation? [00:43:10][21.2]

Alan: [00:43:11] Well, it's always different set up. They said someone said history doesn't repeat, but it rhymes. So there is there are similarities and that the American market in particular was reasonably expensive. There's been a lot of investment in the Nasdaq stocks, the technology stocks, they're not as expensive as they were in to in late 1999, 2000, but they're obviously quite expensive. The Australian market is a little bit expensive, but not much. So there's no kind of basis for thinking, particularly in Australia, that there's going to be a crash. Yeah. On the other hand, things are different in the sense that there's a lot more debt now in the world. There there's a lot of differences that may lead to reasonably big correction. That's possible. But, you know. [00:43:59][48.1]

Bryce: [00:44:00] Yeah, sticking with the JSE, are there any sort of major lessons from that that the average investor can take going forward if it were to occur again? [00:44:09][8.4]

Alan: [00:44:09] I suppose the main lesson is that it can happen. You know, that you need to be aware that it can happen, that you need to, you know, follow Warren Buffett's dictum of be greedy when others are fearful and fearful when others are greedy. So if you see that the world is becoming greedy or over hyped, that's the time to wind back if you can. It's very difficult to do those things. That's the time to do it. [00:44:35][25.2]

Alec: [00:44:35] You've stated that Bitcoin and other crypto currencies are a scam and they're run by anarchists. You see value in the underlying block chain technology and interestingly enough, greed. Minecraft, I think yesterday said something similar when he was talking about how banks won't be deposit holders in the next ten or 20 years because central banks will use distributed ledgers to be the deposit holders for general, the general population. So with that in mind, like, what do you think about crypto currencies and block chain and where do you what do you see it going in the next sort of two years? [00:45:10][34.9]

Alan: [00:45:10] I wouldn't begin to claim to be an expert on this stuff. I just don't find it hard to get my head around. A lot of people do. But it seems like Block Chain is a powerful piece of technology or software. It seems to be likely to be around for a while and it's likely to be used by various people. I mean, people are using it to create markets for electricity like markets with lots of different things. So clearly, it's going to be an important piece of technology. And I think that it's even possibly going to be used by central banks to as a basis for existing currencies. Exactly how that works. I couldn't begin to explain or understand. But, you know, that's that's a lot of a lot of central banks, I think, including Australia's, are investigating how to base existing currencies on block chain distributive technology, distributed ledger technology. And that seems to be quite interesting. As for Bitcoin and Ethereum and Bitcoin cash and the whole and the hundreds of other or crypto currencies seems to me very unlikely that any of them is going to become what you might call legal tender or an actual currency. I can't imagine how that would. Play our part in the fact that they're volatile and the value is kind of impossible to trust. I mean, yeah, I can't imagine how that would in fact think that at some point governments probably have to ban them as much as money. I mean, to say that they will never be money. You can play with them if you like, but not don't expect it'll turn into money. I think the reason that people are paying 3000 or 4000 dollars for a Bitcoin is because I think it will become money and you're on it's otherwise there's no other reason for doing it. And I think that they're wrong. [00:47:01][110.5]

Alec: [00:47:01] And it's just a lot of it would be blind speculation as well, just running with the crowd, because even even if it became money, you're paying four thousand dollars for one Bitcoin. Like, where does where do you think that, like, the value of that coin actually comes from, even if it became legal tender like that? That's where my confusion over the whole thing is, because [00:47:20][18.9]

Alan: [00:47:20] I presume it's because it's the number is going to be limited. The number is limited that they've created or mined 16 million out of 21 million. So there's going to be a limit of 21 million. And then at that point, particularly if it's money, then it has to be divided up into smaller and smaller pieces. And therefore, if you own one Bitcoin, there's divided into a million pieces so that it can you can buy coffee with it, then, you know, your bitcoin is going to be worth thousand dollars. That that I mean, and I don't think the people who are speculating on that or complete idiots. [00:47:55][34.2]

Alec: [00:47:55] No. No. [00:47:56][0.4]

Alan: [00:47:57] So what's going on? The question is what's going on in their heads? And the answer is, it seems to me that they think that's going to happen. Yeah. That they think that it is going to be able to be used as a currency. It is going to be divided into lots of little pieces so that you buy small things with it. You don't have to buy something that's four thousand dollars. Yeah. You have to be able to be able to buy coffee. So therefore it's going to be divided into lots of little pieces. And, you know, in 10 years time when they've got 21 million and that's it, then, you know, each one is going to be worth a million bucks. [00:48:27][30.8]

Alec: [00:48:28] Well, we'll say four thousand dollars might be cheap, and [00:48:31][2.3]

Alan: [00:48:32] that's what they think. Yeah, I think they're wrong. But yeah, I've been wrong before, too, as I think you're going to point out. [00:48:38][5.7]

Bryce: [00:48:42] Yes. Well, in 2011, you gave some advice to what you said to your Eureka Report subscribers that you were reducing your exposure to equities, possibly to zero, because you thought that there was going to be a major sell off panic sell off first. Can you explain what you thought was going to trigger that sell off? And then the second part of the question is that, you know, since then we've seen a bull market continue and some know records of consecutive quarters without recession. So I'm wondering if you can give economic scenarios for the following. What what would it require for this bull run to continue for at least another two years? And then on the flip side, what are some economic conditions that you may see required for a correction to occur and sort of what's more likely? [00:49:28][46.0]

Alan: [00:49:29] Well, that's a series of questions. So obviously, I got it wrong then. That was a mistake. Obviously, I was the biggest loser out of that because I didn't do what I said I was going to do and I shouldn't have done that. So what I think it was going to happen. I mean, it was perhaps like a lot of people, I was kind of really nervous after the GFC that I thought it was going to happen again. What I hadn't taken into account was the central banks just flooding the world with liquidity and cutting interest rates and leaving interest rates where they are, and in particular, the European Central Bank the following year coming out and saying we're going to do whatever it takes to preserve the euro. And then that really was was when when Mario Draghi said that that was the kind of turning point and that was the end of any prospect of a big correction. Right. So it was really the entry of the Europeans. I mean, at that point, the Fed had been doing QE and had cut interest rates, but really the European Central Bank coming in and doing the same thing and then eventually cutting rates to cutting interest rates to below zero to minus point four percent where they are now. And that's been what turned around. So I kind of didn't think that would happen. Right. And I was wrong. And a lot of people were that's that's no comfort, really. So really, for the past 10 years, particularly since then, the markets of the world, investors everywhere have been relying on central banks to to mispriced credit. That's what they've been doing. They've been reducing the price of credit to unnatural levels, which has bolstered the prices of assets. What it hasn't done is achieved what the central bank is trying to achieve, which is consumer price inflation and higher income wages, hasn't resulted in those things. All of the central banks have managed to do is. Is inflate asset prices, [00:51:28][118.6]

Bryce: [00:51:29] which I mean is dangerous going forward? Wouldn't you [00:51:32][3.3]

Alan: [00:51:32] think? Yeah, so but the belief was that that would lead to higher consumer price inflation and lead to investment in the economy and lead to higher wages and employment and so on. And that really hasn't occurred. [00:51:44][12.5]

Bryce: [00:51:45] Do you think it's a major concern for many people or is it just something that is part and parcel of what's going on and why? [00:51:52][6.8]

Alan: [00:51:53] I think we're entering unchartered territory, really, when central banks start to rebalance, rewind back to the stimulus. Nobody really knows. I mean, the Federal Reserve has started to increase interest rates, its interest rates three times and hasn't yet started to wind back the balance sheet. The expansion of its balance sheet, which is the reverse quantitative easing, has just had to do that. It has increased interest rates and that hasn't caused a big problem yet. When Australia might at some point Australia is going to start increasing interest rates. Will that lead to a big problem? I don't know. Maybe, maybe not. Depends how careful they are, I guess. Interesting. But these are different times. You know, we've got we've had 10 years of extraordinary central bank intervention, which has led to a huge increase in asset prices, you know, not in the last 12 months or so, but certainly over that period, which at some point it's going to turn around. [00:52:47][54.9]

Bryce: [00:52:48] Do you think Sydney and overturned a housing bubble? [00:52:50][1.7]

Alan: [00:52:51] No, I don't think it's I don't think it's a bubble. I think I think the problem with housing is that it's the only asset class that we want to live in. But if you think about it, like housing has two purposes. It's an investment asset and it's something we live in. Most investment assets, whether they're bonds or stocks or whatever. We don't have to worry about living the problem. So if housing wasn't something we lived in, then that go up and down and nobody worried worry about. And it would be only a question of what the yield was. And it's on investment. The trouble is that we can't because of interest rates so low, it's become too hard to save for a deposit for because the banks require 20 per cent and they're expensive. Now, houses are expensive. So the problem of saving for a deposit has become a major social issue. Yeah, and it's become in a sense of generational equity issue, which I'm sure you guys are only, too. Yeah, well, you know, I mean, it actually is if you can actually buy a house, the repayments are okay because interest rates are so low. So it isn't a repayment issue. Getting that it's getting there is the saving for a deposit, which so the only solution. And unless housing prices come down, which I don't believe they will. The only solution is what you might call early inheritance, that helping, which is kind of it. And the problem with, you know, part of the thing is that the problem of unaffordable housing is being exacerbated by the fact that mum and dad are living so long. You so we have we have longevity now so that kids are kids are getting to middle aged before their parents die. It's getting too late. [00:54:35][104.2]

Bryce: [00:54:37] That's 65 and his parents are still alive. [00:54:38][1.4]

Alan: [00:54:39] So far, I'm still. Yeah. [00:54:42][3.6]

Bryce: [00:54:43] I can't wait that long. [00:54:43][0.8]

Alan: [00:54:45] Well, you know, you're done then. Yeah, it's like it's over. So. So that's the problem. And so I don't know what the solution to that is. But one solution, obviously, is a big fall in house prices. But that'd be great. That'd be a big dislocation for the economy. And I don't think it's going to happen anyway because the demand is still quite strong, whether it's from overseas or, you know, whatever. I mean, in interest rates being low, there's quite a lot of investment demand. And so to some extent, everyone has to get their head around renting them long term, which other countries managed to do. So maybe we do that. The problem with that is, apart from the emotional issue of wanting to own your own house, what happens if you get to retirement and you don't own a house? That's an issue which you need to think about now. [00:55:32][47.1]

Alec: [00:55:35] A lot to think about. And not not many easy answers, I think is the. Yeah. The deal with [00:55:40][4.6]

Alan: [00:55:40] housing, that's er [00:55:41][1.0]

Alec: [00:55:42] I'm so now we'll get to our final two questions and these are the questions that we and each interview with. So the first one, is there a must read book that you would write that you would recommend. It can be financial or just just in general. [00:55:56][14.1]

Alan: [00:55:57] So many I have trouble thinking of. [00:55:58][1.7]

Alec: [00:55:59] Yeah. I mean, feel free to give us a few if if you have a few. This is a great time to give a plug to some of your books as well, if you like. [00:56:06][7.6]

Alan: [00:56:08] Oh well I've done it. So my book obviously whatever that was called, I got a [00:56:14][5.9]

Alec: [00:56:16] charts of the world. [00:56:17][0.6]

Alan: [00:56:17] The charts. Yeah there was there was the charts book I did with Paul. Yeah. With David Koukoulas last year. But yeah, there's been some guides to investing in stuff and I've done. They're all together now. Yeah, look, Tipping Point by Malcolm Gladwell is an important book, I think Nassim Taleb is Black Swan, Black Swan and the subsequent book actually is more interesting and important, not just one school. [00:56:46][28.7]

Alec: [00:56:46] Now, we'll look it up. Yeah, we'll put it on our show notes for the listeners. It's interesting that you say until leave, though, because a lot of investors that I've listened to in interviews and stuff have recommended that book. So I'm starting to get the impression that that's a must read for anyone interested in investing. [00:57:03][17.0]

Alan: [00:57:04] Yeah. As I say, are kind of the next one was called Antifragile. Oh, aka so Black Swan. The Black Swan was 2007 Antifragile 2012. So I think a lot happened in those days and I liked that 2012 was in some ways more important. Yeah, kind of both really worth reading. And look, there's lots of different books about Warren Buffett. I mean, he's never written the book himself, but there are a lot of books that talk about his thoughts the way the way he operates and why. And so any one of those really that are good, you should read, because he's just he's quite clear about it, except when he gets under way to forget about it. [00:57:42][37.4]

Alec: [00:57:42] Yeah. [00:57:42][0.0]

Alan: [00:57:44] Just ignore that so [00:57:44][0.7]

Alec: [00:57:45] that when you go to the ATF stuff, just print out your article from The Australian. [00:57:49][4.0]

Alan: [00:57:50] And this book is only said that recently. [00:57:52][2.4]

Alec: [00:57:53] Yeah, yeah, yeah. That that bit that he made with the hedge fund manager where he took the index and a hedge fund manager took a five managed funds, that's sort of been really visible like driver of things paid into ETFs because it's so clear that the ETF outperformed the hedge funds. But I mean, he picked a great year to take the ETF like started it in 2008, and it's just enjoyed a bull run for nine years. [00:58:20][27.3]

Bryce: [00:58:21] It hasn't been here. Yeah, yeah, yeah. So final question, and this is for our listeners. If there's any advice that you could give to those that aren't investing at the moment, I'm just starting to sort of help them get get on their way or get in the right mindset, sort of. What would that be? [00:58:39][17.9]

Alan: [00:58:39] Well, if you want to if you're interested in companies indirectly investing in companies, which I think is not a bad idea, invest in companies, you know, or use the products of we have a sense of. And so that you enjoy it, you don't invest in a company that you don't think is interesting. And if it's a company, especially if it's a company, you know, and using their products, that's a good way to start. Otherwise, if you want to just sort of make sure that you get a decent return, go for a fund manager who has a good track record mean it is true that future performance is not going to surpass performance isn't a guide to future performance. That is true. They'll always tell you that. But it's all you've got. Past performance is all you've got. And you know, somebody who's got 15 or 20 per cent return over 10 years clearly knows how to do it. [00:59:25][46.1]

Alec: [00:59:26] Yeah. And don't invest in ETFs. [00:59:27][1.5]

Alan: [00:59:29] Well, you know, with your eyes open, understand what you're doing. Yeah. Don't expect to get other than anything other than the boring market. Yeah. And, you know, the advantage of an ETF is it's low cost. That's true. But sometimes you get what you pay for. [00:59:43][13.9]

Bryce: [00:59:44] Thanks, Allan. We really appreciated you giving us your time. We've had a request from one of our listeners, though, that if you could just sign off with your signature that you're doing the ABC, that would be fantastic. [00:59:54][10.3]

Alan: [00:59:55] And that's finance [00:59:55][0.0]

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