Expert Investor: Daniel Want – A Self-Taught Investor In A Complex World

Bryce: [00:01:42] Episode 14 pumped to be here with you guys again with my equity buddy Ren, as always. How are you? [00:01:49][7.3]

Alec: [00:01:50] I'm very good, Equity Mates. [00:01:51][1.7]

Bryce: [00:01:52] That's good to hear. I hope you guys loved tech-tacular Last week, we certainly had a all talking about it. We could have gone for a lot longer, but we thought we'd keep it nice and short for you. This episode, we're also excited to bring another one of our expert investors. We have an interview lined up for you with a guy called Daniel. What? [00:02:12][19.6]

Alec: [00:02:13] Now, Daniel, one probably isn't a household name, but anyone who's looking to get started investing teach themselves a thing or two. He's definitely someone worth listening to. Yeah, he'll tell us his story in the interview. But you'd be hard pressed to find someone who more fits the title of a self-taught investor. [00:02:34][20.6]

Bryce: [00:02:35] Yeah, this guy is next level smart, and we had a great time interviewing him. So we hope you enjoy the interview as always. Keep the feedback coming and we look forward to giving you a rap on my tour of Italy and our next episode. [00:02:53][18.2]

Alec: [00:02:54] Yeah, I can't wait. [00:02:55][1.1]

Bryce: [00:02:56] Equity out. [00:02:57][0.5]

Alec: [00:03:03] Daniel, one is the very definition of a self-taught investor after dropping out of university with the belief he could teach himself the skills necessary to succeed in finance. Daniel has had a meteoric rise and is now the co-founder and chief investment officer at Prerequisite Capital. Daniel, thank you for joining us networks. So why don't we start with a little bit about your background. What got you interested in investing and what were some of the first investments that you have made? [00:03:31][28.8]

Daniel: [00:03:32] Yeah, well, probably about 18, 19 years ago, I was at high school and my business studied at high school. At the time, I was either going to go into finance and business kind of general direction or was probably actually going to go into the Air Force. I realised that I probably wasn't that cut out for a military type culture in terms of undertaking and, you know, limited capacities to be able to think for yourself, at least at a lower level, or at least that was my perception at the time. So I chose business and finance. I saw a my business studies teacher actually one day played a basically a video of this guy who worked from home of his computer, pretty much spent half the day at the beach, and he did this thing called futures trading. And I was kind of sort of come again. What what does this guy do? You know, I was kind of fascinated by that. But this is after I'd already sort of developed an interest in business and even the share market to a large degree as well anyway. And so that was kind of the key major sort of domino that fell that then, you know, set into motion a lot of other things at a high school. I grew up south of Coffs Harbour in New South Wales. And out of high school, I, I wanted to actually get into an investment bank that they weren't taking people out of high school. And so I ended up in an accounting firm in Sydney while I started a university degree. But it was actually a fantastic experience in that I started in a firm in an audit division and got a fair bit of exposure as well through that time to corporate fraud investigations. So I learnt a lot about a lot of things really quick and how to read financials and all the the nitty gritty of what happens there. And at the same time, obviously doing a degree or part time at the time and found I got pretty sick of accounting, pretty quickly shifted over more into finance. And then I thought, well, I should probably try a bit more of economics as well. Economics was a real eye opener in that I basically, especially in the early subjects and you would essentially have the professors explain to you why the assumptions underpinning the economics they were teaching you were ridiculous and not necessarily in touch with reality. And that was fair enough. You know, we'd all sort of make jokes about that sort of thing. But then between the first principle or the first assumptions that underpin at least what we were taught back then in economics. And I don't think it's too much different today. But, you know, between the assumptions or the level of teaching and getting more complicated into the higher frameworks, all of a sudden I started to notice the teachers and lecturers and things going from basically ridiculing the assumptions to actually a quasi religious belief in these big, complicated frameworks that they then construct. You know, I struggled a lot with that, not so much in understanding the concepts, but just in some in how is this robust, you know, because if the foundations are still ridiculous, then who cares what you build on top of these things? And pretty quick, I started to learn the hard way that at least in the institution I was in and, you know, I don't necessarily want to think all or even sames construct a better understanding of the world. And, you know, I kind of pretty quickly was left with the impression that, you know, you're actually not supposed to think you're just supposed to go and read other people's stuff and try and quote them and, you know, write these big bibliographies and in any original thought is kind of taboo, at least in those early levels. But we were still learning about stuff that was more applicable, I thought, to Mars. And so pretty quick, I started to realise that, look, if I'm going to have any future in this industry or as an investor or, you know, ideally in time as an investment professional, I can't be learning the stuff that they're trying to teach me because it seems ridiculous. And just out of touch with what I was at the time thinking was reality. In the end, I just quit uni. I thought I could do a better job teaching myself than I could. So I basically moved back from Sydney and everyone thought I was nuts because at that time I was progressing quite a bit in different realms and especially from a career sense and starting to do the. For years with the investment banks and all this sort of thing, and I thought now I've got to get back to basics and just try and get schooled somehow. And so I pretty much walked away from all that and went back to the family home back south of Coffs Harbour and spent a few years, must've been a bit over three years as a hermit. And every second week I'd have another box of books rocking up on the doorstep. Fortunately, you know, I was the Internet and Amazon. You have a pretty pretty much a global reach. And I'd find a lot of the more interesting and useful books were actually out of print. And I'm having to buy these second hand things that were printed decades and even half a century ago, even in some cases, and only to find that, you know, the world just doesn't change. It's still run by people and still all the same dynamics. And funnily enough, you know, I've spent over the last 15 years, especially a hell of a lot of time trying to understand banking systems and capital flows and all sorts of things in a more intense sort of manner, and especially when it comes to banking system. Surprisingly enough, I probably learnt more from guys that were around like 100 years ago, 200 years ago, even about even how the banking system works today, because the principles are all the same. It's sort of same old stuff, same basic principles. It's just a different sort of technological and regulatory sort of era with a slight in a different context from a geopolitical perspective, but same old stuff. And so, you know, nothing that's happening now hasn't really in some way, shape or form have happened before, or at least a lot of really smart switched on. People have understood similar dynamics that are happening now back, you know, many decades or even a century or so ago and warned about such times. And so when I quit uni, I basically had two questions I set out with one. I wanted to figure out how the world works as you do, and young and naive enough to just have a crack at that with a view to being able to express or use that understanding of how the world works to being able to navigate investment markets. Now, the second question was actually a little bit more sort of less big picture, but how could I walk in any business and grow as sort of the second objective and say, running? And I also, you know, in pendulum swinging from the academic university environment, I pretty much resolved, especially in those early days, years, I didn't want to see another textbook. I in fact, I didn't really want to learn from anyone who hadn't had a track record of success in whatever field, whether it's business or investing or even anticipating to some degree, you know, future events. And so that was sort of the criteria. I wanted people who were in touch with the real world, who'd actually had demonstrated success in the real world in terms of understanding and operating within it and even anticipating it to some degree. And so I didn't know where to start. So I just bought books on everything and everyone. I could sort of come across and say, if you'd read a particular guy who was successful in business or investing and he mentions a certain set of concepts or some other guy, then, you know, you write the concept down or that guy down or go through the you know, anyone he mentions is, you know, in a way he holds or she holds in high regard and then track books down on him or her and, you know, and so one book would turn into five, which would turn into another, you know, 20. And it just sort of things would breed like rabbits. And so in those early days, more or less, just trying to learn everything I can about history, psychology, sociology, economics, like what I would more called a real world type economics, finance, banking systems and business, even marketing, sales and and strategy and all of this sort of stuff. Because everything I learnt pretty quick was interrelated. It's very hard to understand one field without having some exposure or loose understanding of a of another field or a seemingly unrelated field. In the early days, it was a bit intimidating because everything the world just seemed to get more and more complicated. The more books you read, you know, you start to realise how much you just don't have a clue. And in some ways, you almost feel like stumbling in the dark and you get a bit overwhelmed. You know, you sort of just keep on chipping away. [00:12:34][542.0]

Bryce: [00:12:35] And at what point did you realise you or did you feel comfortable then that you learnt enough? And and what was the next step? [00:12:42][7.6]

Daniel: [00:12:44] Well, to be honest, I went through a cycle every three to six months of, you know, because I burnt every bridge. Right. And that tends to motivate you pretty strongly, especially when everyone thinks you're nuts. So every three to six months, I go through this cycle where I was just getting blown away and all the different things I was learning. But then, you know, come. Every four months, I'd be like, oh, I've ruined my life, you know, what have I done? Nothing. But then I'd get perspective and go. Now I'm learning some really fascinating stuff. How can this not be profitable to me in the future? And so you keep going. And at the same time, I opened up a futures trading account of all things. And fortunately, I'd learnt enough about risk management and money management to basically not have a clue what I was doing, but still come out OK and more or less and say, you know, quite a big sort of roller coaster ride type season. But fortunately, I grasped a lot of what the old guys were saying, so to speak, or at least in all the different books I was reading about risk management and it's just so essential. And that stopped me from basically blowing up in those early years of, you know, I look back now and I just, you know, I just like, wow, I just didn't have a clue, really. So that was just absolutely fascinating. And I learnt really quickly that just as important as gaining an understanding of the world and markets and risk management, et cetera, just as important, is actually gaining an understanding of yourself and your own psychology and all the mind games that come with it. And when you're on a boom bust sort of roller coaster ride of, you know, because I figured the only way to learn about investing or trading and things is to just throw yourself in there and start doing it. And that's correct. But in hindsight, I probably wouldn't have risk as much of what I'd saved up leading up to that. But unfortunately, the risk management kind of bailed me out. And so I was kind of blown away actually by the risk management side of things in that it was able to preserve any big sort of blows to the money that I'd saved up. And so, you know, I had a lot of wins and and a lot of potentially larger losses, but I was fortunately able to cut them short pretty quick. And and so I learnt a lot about the value of risk management in the early days. I just didn't really. And in hindsight, I had no competitive advantage or no really consistent methodology or an edge in what I was doing and in trying to actually even operate in those markets. And so it was all pretty random. [00:15:17][153.3]

Alec: [00:15:18] So where did the decision come to sort of rejoin the broader financial sector? [00:15:24][6.0]

Daniel: [00:15:27] After few years of that, one of the other aspects of figuring out how the world works, that overarching question that I was driving towards was that I wanted to work out a way to operate in the markets, but in a way where in theory, what I did wasn't liquidity constrained. Now, what I mean by that is in different markets, there's a certain amount of money that and you can actually trade or invest behind certain strategies, you know? So if you are only trading in the smallest, you know, small and micro-cap stocks on the ASX and these are the smallest companies that basically sort of trade on the ASX, for example, they basically have no liquidity. So it's kind of hard to buy and sell and and all of this sort of thing. And and you can usually only buy and sell these stocks using small amounts of money relative to, say, the professional funds management industry or the the larger amount of money. And so I knew I wanted to move more in that macro bigger picture. You know, I was more interested in studying countries rather than companies, so to speak. And so after a few years being a hermit and realising I had to get back in the real world again, I moved up to Brisbane. I didn't really want to go back to Sydney again and more. Long story short, I basically typed in literally into Google Global Macro Hedge fund just to see what would come out. And it turns out turned out at the time that was actually a global macro hedge fund that kicked off in Brisbane about a year earlier to when I did it, when I just ran the Google search, so to speak. And I was pretty surprised. But it was founded by an ex proprietary trader from BT in Macquarie. And, you know, he's at one time, they're the most profitable trader in Australia and all of this sort of stuff. And so it had quite a successful career in proprietary trading previous to that. And anyway, so I went to the Contact US page and just down the generic number and went through to the receptionist. And fortunately I didn't. And she felt sorry for me or something, but I just basically told, like, I want to talk to David, who was the chief investment officer of the and the founding one of the founding directors of that global macro fund. And I said, look, he doesn't know me. I want to do what he's doing in 10 years, I just wanted to try and call him up and offer to buy him lunch one day just to pick his brain, so to speak. And anyway, she sort of said, look, leave it with me. And Dave called me back a little bit later that day and he actually gave me a bit of a grilling, just, you know, who are you? What's the story? And all the rest of it. And I was basically, you know, same old thing. You wouldn't know me from a bar. So can I buy you lunch and blah, blah, blah. And anyway, he basically agreed to catch up for Brekky a few days later. So we caught up and I just basically explained everything I'd done and even the analysis that I was doing on the world at that point in time. And and by that time, I developed a pretty unique way of looking at the world, mostly through I spent a lot of time studying what is essentially known as like complex systems thinking and like complex adaptive systems analysis type methodologies and all of this sort of thing, the bit of a can of worms. And it's not as complicated as it actually sounds. Anyway, I figured I actually was fortunate enough in a similar manner to reach out to another guy who was in the US who actually ended up becoming a mentor as well, that he's basically like a world renowned expert on systems thinking that has applied to businesses and all this sort of stuff for performance improvement, etc.. And I figured, well, all these methodologies are all just they arise out of, ironically, quantum physics, even though that sounds complicated. But these principles of systems analysis and thinking actually aren't that complicated. And I thought, well, the ultimate complex system was the world and economics and the financial markets are trying to apply some of those concepts to that. And so I'd been doing that for Australia, Australia, in the US and broadly speaking, the major markets of the world. And so I started to run that through through all of that sort of analysis with its chief investment officer. And by the end of Brekky, which ended up being quite a long brekky or less, invited me to up to the office in Brisbane and met the other directors, spend more time talking. And he basically offered me a job as an analyst. And I thought, wow, this is awesome. And I was still in the mentality of, hey, I've got a long way to go. I want to learn rather than earn, you know, in terms of earn money, so to speak. I still in learning mode and say I found, you know, I would have paid them or at least done it for free, volunteered to work with them, let alone get paid to do what I loved. And also learn more, funnily enough, from that experience in that. And that was, you know, sort of leading in that was in 2007, sort of leading into the GFC in 2008 and all the rest of it that followed on after that. And a lot of that analysis that I did in 2007, especially from that systems perspective, ended up being spot on. And a lot of people were sort of witness to all of that. And that sort of started to catch up, especially when it all started to unfold more or less to a tee in 2008 in the different macromarkets. And so because a lot of people kind of had front row seats and were witness to that analysis, methodology and the analysis I've done in 2007 and then watching everything unfold in 2008, that sort of started to kick me off quite a bit. And I started to pick up research and consulting clients and all of this sort of stuff outside of that macro fund as well. I mean, your journey sounds amazing. And early on, very you had to absorb a lot of information and do a lot of reading in that sort of stuff for people that are just beginning to invest and are a bit overawed by all the information and sort of jargon that's out there at the moment. [00:21:32][365.8]

Bryce: [00:21:33] What are some things that you would recommend that they do to get the ball rolling? [00:21:37][3.7]

[00:21:38] Basically, the best thing to do is just try to watch, you know, buy books that are just focussed on interviewing investors. So successful investors and traders of all different types, you know, everything from the the Warren Buffett type, you know, stock picking valuation type approach through to currency traders, through to everyone else in between now. And in a practical sense, a man by the name of Jack Swagga wrote a whole series of books. And every chapter is just another interview with a highly successful investor. OK, he wrote this series of books. It's called Market Wizards. I think it might have started in the early 90s. Maybe I can't remember. But anyway, over the last 20 or 30 years, he's he's done basically a whole series of more or less very timeless sort of interviews with some fantastic investors and traders of all different types. And the reason I suggest that you probably want to start there, it'll simply expose you to all of the different things that are out there, because when you start, you don't know what you don't know and you don't. Even know what's out there and and all the rest of it, you know, there will be a lot of terminology in there, but Jack Schweigert doesn't usually from memory, he's done a good job on, like putting a glossary and at the back and explaining the odd term here or there, you know, in so it's a crash course in kind of learning the investment and trading in market type lingo and language that you've kind of got to pick up. Every field has its own language. And step number one usually is actually learning what that language is and all the the jargon and the mumbo jumbo of what people are actually talking about. Yes. And these interviews are a good crash course in that. And also, you're just exposed to everything because the key to actually becoming a successful investor or trader, whatever it is you want to do in the future, is actually finding an approach and a way of operating that is actually more of a natural expression of yourself. So the way you're wired, your personality, what your interests are, what you're interested in, all of this sort of stuff, because if it's not just a natural expression of who you are and your personality, and then you're not really going to be able to sustainably run whatever it is you're doing and be interested and passionate enough and curious enough about whatever it is you're doing to actually be successful. Unfortunately, investing and trading in it, in some respects, it's a bit of an all or nothing type endeavour. You kind of throw yourself into a fair bit. However, you know, there are ways of operating and, you know, more basic first principles that you can stick to that will kind of keep you safe. But at the same time, it all just comes down to what are you interested in? In by reading books like Jack is another set of books that are a little bit more recent, written by someone whose surname is Drobny D-R Obbie, and why he tends to interview, I think, the two main books Inside the House of Money and then The Invisible Hand. [00:24:41][182.4]

Daniel: [00:24:42] He tends to be more [00:24:43][1.1]

Speaker 5: [00:24:44] like hedge fund type managers and different things, but that's a sort of a more recent version of Jack Swagger's Market Wizard Books. [00:24:52][7.8]

Daniel: [00:24:52] Throughout all of them, you kind of [00:24:54][1.6]

Speaker 5: [00:24:54] get exposed to a lot of different investment methodologies, trading approaches, different [00:24:59][4.7]

Daniel: [00:24:59] markets, all [00:25:00][1.0]

Speaker 5: [00:25:00] sorts of things. And then once you've sort of absorbed all of them and plus there's so many timeless principles and lessons and stuff that he's very experienced traders and investors share during these interviews. It's actually a fantastic crash course in everything anyway. And of books, you can you fill out notepads or whatever it is you like to do in terms of scribbling down principles or precepts or great ideas or interesting ways of looking at things or whatever it is. And they they also cover off a lot on the psychology side of things, which is just as important in learning to effectively master yourself and your own or the head games mind games that sort of come into play when you start to get involved with investing in markets and all this sort of thing. Right. [00:25:43][42.9]

Alec: [00:25:44] I think I think that's some great advice for all of our listeners who are, you know, unsure of how to start reading those books that you suggested. Jack Swagga and Drobny sound like really, really good places to sort of learn and familiarise themselves with some of the different investing styles out there. [00:25:59][15.4]

Alec: [00:27:53] From that, what would you say, your investing style or what are some of the core philosophies that are that you stick to when you invest? And did that change over time? [00:28:05][12.1]

Daniel: [00:28:07] Yeah, I mean, they've definitely evolved in time, I mean, but there was a couple of underlying [00:28:13][6.1]

Speaker 5: [00:28:14] observations or thoughts that kind of have stuck with me since those early days. I mean, one of them, for example, was there's a there's an old quote by Jack Welch. Basically, he says, if you don't have a competitive advantage, don't compete [00:28:30][15.9]

Daniel: [00:28:31] right now in business. [00:28:32][0.8]

Speaker 5: [00:28:32] We intuitively kind of get a sense for that because without competitive advantages, you don't really have a basis for [00:28:38][6.0]

Daniel: [00:28:39] expecting [00:28:39][0.0]

Speaker 5: [00:28:41] outsized profits or any profits, quite frankly, because you have no bargaining power. You'll be a price taker instead of a price maker in business, et cetera, et cetera. And so I figured that that was just as applicable to the markets, which it is. You know, you're trying to develop some sort of array of competitive advantages of some form of an edge that puts the odds in your favour, [00:29:00][19.6]

Daniel: [00:29:01] so to speak. Now, in those early [00:29:03][1.6]

Speaker 5: [00:29:03] days, I'd actually done a lot of like especially having the accounting background and a little bit of finance as well. I'd done a lot of cybersecurity security analysis or stock, you know, like fundamental type analysis, like a Warren Buffett style type of thing. [00:29:17][13.9]

Daniel: [00:29:18] But more and more, I was [00:29:19][1.0]

Speaker 6: [00:29:19] gravitating towards [00:29:20][0.8]

Speaker 5: [00:29:21] the bigger picture sort of dynamics and changes and what was happening in the world. And there was two main reasons for that, because when I was doing these, you say valuation models for pick a company and going through all the financials, I started to realise that you can analyse these businesses till the cows come home. But, you know, 60 percent plus of what actually drives a change in the share market, in the share price of most of these businesses are actually related to bigger picture macro level things. [00:29:52][31.1]

Daniel: [00:29:52] And even in the valuation [00:29:53][0.7]

Speaker 5: [00:29:54] type frameworks and spreadsheets and analysis that I do, [00:29:57][2.9]

Daniel: [00:29:58] you have to put in [00:29:59][1.0]

Speaker 5: [00:29:59] assumptions like currencies and interest rates and all [00:30:02][3.4]

Speaker 6: [00:30:02] sorts of things. And in the general level, you'd have to get a sense for the general level of economic activity. And in an economy, depending on what company you're analysing, [00:30:12][9.4]

Speaker 5: [00:30:12] to get a sense for or a forward looking sense for revenues and all sorts of things. And so [00:30:18][5.1]

Daniel: [00:30:18] I started to realise that the [00:30:20][1.4]

Speaker 5: [00:30:20] you know, you can be fantastic at analysing the nuts and bolts of these companies. But at the end of the day, one of the biggest drivers of ultimate performance is still [00:30:28][8.0]

Daniel: [00:30:29] for most stocks, macro level [00:30:31][2.3]

Speaker 5: [00:30:32] dynamics, these assumptions we make about interest rates and [00:30:35][2.9]

Daniel: [00:30:35] all the rest of it. And so I started to realise that I need to [00:30:38][3.4]

Speaker 5: [00:30:38] learn a lot more about the macro side of things. The other thing, too, that I realised from a competitive advantage perspective was that [00:30:45][6.8]

Daniel: [00:30:46] I'm not well connected. I mean, I grew up basically [00:30:48][2.0]

Speaker 5: [00:30:49] in the bush in rural rural Australia, hardly knew anyone that invested in stocks, let alone, you know, knew what a bond was or, you know, how the currency markets, all of that [00:30:59][10.5]

Daniel: [00:30:59] stuff. Right. And so. I wasn't exactly going to be privy to inside information, [00:31:05][5.6]

Speaker 5: [00:31:06] not that that's legal, but I would never have an edge in terms of information flow from a company specific type perspective, or at least this was my thinking in the early days. And that's still largely true, more or less. [00:31:19][13.7]

Daniel: [00:31:20] But I also realised that, look, when it came to the bigger picture [00:31:23][2.7]

Speaker 5: [00:31:23] trends and macro changes and interest rate trends and currency trends and and the broader stock [00:31:29][5.8]

Daniel: [00:31:29] market itself and [00:31:30][1.1]

Speaker 5: [00:31:31] commodities et there actually was no such thing as insider information at that level, that big picture level. [00:31:38][6.8]

Daniel: [00:31:38] And so I'm like you kind of [00:31:41][2.2]

Speaker 5: [00:31:42] everyone has access to pretty much everything, all the different data sets that are out there. And there's no one data set or piece of knowledge that really will, you know, that you could even class as being material or inside information type thing because the world is just too big and too complex and these markets are just too big to to basically have to worry about that. [00:32:03][21.0]

Daniel: [00:32:03] So I figured, well, at that bigger macro level, it's more of an even playing field. I can sort of [00:32:09][5.7]

Speaker 5: [00:32:09] develop some competitive advantages or an edge or a better understanding in certain areas. Then a lot of the people I'm competing against, or at least that was my thinking, [00:32:18][8.3]

Daniel: [00:32:18] which is more or less true. But I didn't realise, you [00:32:22][3.6]

Speaker 5: [00:32:22] know, it's a pretty tough, tough game out [00:32:25][3.3]

Daniel: [00:32:25] there. But anyway, and so that drove me [00:32:28][2.3]

Speaker 5: [00:32:28] more and more towards the macro level stuff as well. And I was interested. I've always been fascinated about how countries, you know, in societies, you know, would rise and fall and all of this sort of thing. And in the bigger picture dynamics around asset markets and in booms and busts and all the rest of it. And and so that tended to take me towards the bigger picture stuff. And so now [00:32:51][23.0]

Daniel: [00:32:51] what I do more is not so [00:32:53][1.8]

Speaker 5: [00:32:53] much analyse companies per say, but still my main focus is countries. [00:32:58][5.2]

Daniel: [00:33:00] And so, [00:33:00][0.3]

Speaker 5: [00:33:01] yeah, I've had it in that bigger picture [00:33:02][1.3]

Daniel: [00:33:02] direction, [00:33:02][0.0]

Speaker 5: [00:33:03] more so than picking stocks. [00:33:04][1.4]

Bryce: [00:33:06] Can you give us an example then of what things you're specifically investing in when you say you're following the bigger picture and the macro trends? [00:33:15][9.5]

Daniel: [00:33:16] What I say, OK, so for example, we run portfolios for our clients most mostly here in Australia. And, you know, when you're analysing even half [00:33:28][12.7]

Speaker 5: [00:33:29] the companies on the on the ASX, [00:33:30][1.4]

Daniel: [00:33:31] we are [00:33:32][0.3]

Speaker 5: [00:33:32] such as Australia is such a small aspect of the broader world. You know, I think [00:33:36][4.9]

Daniel: [00:33:37] both [00:33:37][0.0]

Speaker 5: [00:33:38] from a GDP perspective. So the size of our economy and also if you were to take the size of our banking system, for example, like our commercial banks, like the big four plus all the rest of them and our central bank as well, [00:33:50][11.9]

Daniel: [00:33:51] we only come to about, you know, one to two percent roughly of [00:33:54][3.7]

Speaker 5: [00:33:55] global GDP and global sort of money and banking [00:33:58][3.0]

Daniel: [00:33:58] assets, for example. And so we really are in especially the way the world has [00:34:04][5.6]

Speaker 5: [00:34:04] kind of been configured the last 20 years, especially, you [00:34:07][2.8]

Daniel: [00:34:07] know, we're kind of that [00:34:08][0.7]

Speaker 5: [00:34:08] flea on the monkeys back and that monkey is more or less China. And there's a symbiotic relationship between China and the US that you really need to get your head around [00:34:17][9.3]

Daniel: [00:34:18] and say in order to analyse Australia, you know, [00:34:21][3.2]

Speaker 5: [00:34:21] you really actually need to start with the US and start [00:34:23][2.2]

Daniel: [00:34:24] with China. And then some of the other different things [00:34:26][2.3]

Speaker 5: [00:34:26] that are happening [00:34:26][0.2]

Daniel: [00:34:27] in the world. And then, you know, after [00:34:28][1.6]

Speaker 5: [00:34:29] you've probably spent 60 percent of your time on all of that, then you can start to look at Australia in some form of proper context, and especially because of our linkages with the world. [00:34:39][10.3]

Daniel: [00:34:39] And and so we run portfolios. [00:34:42][2.4]

Speaker 5: [00:34:42] Our main objective is actually to preserve purchasing power. You know, we're trying to actually generate a positive return over any two year rolling period. So, for example, when I was back at that hedge fund back starting in 2007 and going through the GFC, [00:34:57][14.4]

Daniel: [00:34:58] we actually did really well. I mean, by the end of 2009, we were starting to win awards [00:35:02][3.6]

Speaker 5: [00:35:03] because we basically saw it all coming. We're able to make the most of it in the markets and et cetera, et cetera. [00:35:09][5.6]

Daniel: [00:35:10] But at the same time, I'm like and there's a lot of people that got smart, including my own family and [00:35:15][5.2]

Speaker 5: [00:35:15] friends to a large degree as well. [00:35:17][2.1]

Daniel: [00:35:18] And I'm like, you know, we've got to take some of this [00:35:21][3.1]

Speaker 5: [00:35:21] knowledge that's out there and actually package it in a way where an average person can actually have the benefit of, you know, it is it's [00:35:28][6.8]

Daniel: [00:35:28] like these things like the GFC, [00:35:30][2.1]

Speaker 5: [00:35:31] for example, in some regards you can simplistically paint is just history repeating. It's the same sort of cycle, same sort of stuff. But you've got to do your homework to be able to get a little bit of a forward looking probabilistic sort of [00:35:45][14.0]

Daniel: [00:35:45] view of things. And so, anyway, three and a half, four years ago [00:35:48][2.9]

Speaker 5: [00:35:49] with a few other guys, we founded PCM. And so [00:35:52][3.0]

Daniel: [00:35:53] we basically run [00:35:53][0.8]

Speaker 5: [00:35:54] mostly superannuation portfolios [00:35:55][1.5]

Daniel: [00:35:56] for people. But we do it in a way we don't use [00:35:59][2.5]

Speaker 5: [00:35:59] derivatives we don't like. We don't use futures and stuff for options, we don't use [00:36:03][4.2]

Daniel: [00:36:04] leverage, we don't sell short anything. So it's just long. Only the only things we [00:36:08][4.8]

Speaker 5: [00:36:08] use securities that are traded on the ASX or the New York Stock Exchange. OK. And the reason for that [00:36:15][6.5]

Daniel: [00:36:15] and even the securities [00:36:16][0.5]

Speaker 5: [00:36:16] we do use on those two exchanges, big, boring, highly liquid securities. Right. [00:36:22][6.3]

Daniel: [00:36:23] And so what we do is more or less like asset allocation. [00:36:27][3.5]

Speaker 5: [00:36:28] We take a dynamic or slightly active approach to managing the risks that are confronting both the share [00:36:33][5.8]

Daniel: [00:36:34] market, the bond markets, [00:36:35][1.1]

Speaker 5: [00:36:35] currency markets, precious metals, gold, etc., and cash. [00:36:39][4.1]

Daniel: [00:36:41] You know, we take a bit of a global view, but our main [00:36:43][2.3]

Speaker 5: [00:36:43] objective is actually to preserve purchasing power. So capital preservation first, we [00:36:49][5.5]

Daniel: [00:36:49] don't really want [00:36:50][0.7]

Speaker 5: [00:36:50] any of our investors and most half of our clients are actually family and friends anyway. So we kind of eat what we cook. But yeah, [00:36:57][6.5]

Daniel: [00:36:57] we don't want to [00:36:58][0.7]

Speaker 5: [00:36:58] put people on roller coaster rides, basically, which is the typical experience of most people in superannuation over the last 10 years, has just been one heck of a roller coaster [00:37:08][9.7]

Daniel: [00:37:08] ride. You know, I do that we construct these portfolios using a combination of shares. [00:37:13][4.6]

Speaker 5: [00:37:14] Yeah. You know, share market both domestically and internationally, but only through, you know, simple, boring, big liquid asset class type ETFs on the ASX in the New York Stock Exchange, depending on whether it's the more conservative or more proactive strategy. We're talking about [00:37:30][16.7]

Daniel: [00:37:31] bonds and government bonds, [00:37:33][2.2]

Speaker 5: [00:37:34] mostly just Australian or us [00:37:36][1.5]

Daniel: [00:37:36] now at different points in time, [00:37:38][1.9]

Speaker 5: [00:37:39] will either be underweight or overweight, these different asset classes. Right. [00:37:42][3.4]

Daniel: [00:37:43] But when we always [00:37:44][1.3]

Speaker 6: [00:37:44] maintain [00:37:44][0.0]

Speaker 5: [00:37:45] a fairly diversified stance that makes our portfolio is quite resilient. So whatever happens, [00:37:50][5.0]

Daniel: [00:37:50] something will go down, something will [00:37:52][1.1]

Speaker 5: [00:37:52] go up, and we should be able to maintain the resiliency of the capital in these portfolios over time, irrespective of what happens. So we have shares, bonds, precious metals, cash, [00:38:04][12.3]

Daniel: [00:38:05] say a little bit depending on [00:38:07][1.5]

Speaker 5: [00:38:07] the portfolio of foreign currency exposure. Like, for example, we might own some US shares, for [00:38:12][5.8]

Daniel: [00:38:13] example, and [00:38:13][0.6]

Speaker 5: [00:38:14] will choose not [00:38:14][0.6]

Daniel: [00:38:15] to hold [00:38:15][0.8]

Speaker 5: [00:38:16] them on a hedged basis. So we'll get the benefit of, say, the US dollar going up against our Australian dollar, falling against the US dollar. But then other times we might choose to hold those US shares or assets on a hedged basis. So we'll neutralise or knock out the currency aspect of the equation. Yeah, that's basically the bulk of what we do. [00:38:40][23.9]

Daniel: [00:38:40] And in order to do that, we use [00:38:41][1.4]

Speaker 5: [00:38:42] a fairly simple common sense sort of framework that fairly easy to explain and understand. [00:38:46][4.5]

Daniel: [00:38:47] And we just take a conservatively dynamic, that active [00:38:50][3.3]

Speaker 5: [00:38:51] kind of approach to effectively if a particular market's going up, whether it's the share market or the bond [00:38:56][5.2]

Daniel: [00:38:56] market or whatever, [00:38:57][0.4]

Speaker 5: [00:38:58] will tend to be overweight, [00:38:58][0.8]

Daniel: [00:38:59] that asset class. And if a particular market's going down or whatever it is, will tend to be underweight [00:39:04][5.4]

Speaker 5: [00:39:05] that asset class. And we just sort of rebalance the portfolio is a little bit according to the major trends out there in the world and in the asset markets. [00:39:14][8.6]

Daniel: [00:39:15] And so, you know, it's fairly simple and always liquid and transparent. [00:39:19][4.1]

Alec: [00:39:20] So given your focus on big macro features in the economy and complex systems, we would be remiss if we didn't ask you what you thought about the state of the economy at the moment. You know, you turn on the the finance news and you can hear everything from the crash is imminent to buy, buy, buy. So do you have anything that you're sort of really paying attention to at the moment and anything that our listeners should maybe keep a close eye on? [00:39:50][29.7]

Daniel: [00:39:51] Yeah, first, I just need to touch upon one sort of principle, a bit [00:39:58][6.5]

Speaker 5: [00:39:58] more of a qualification type principle, but then, you know, basically give a quick summary of what I'm saying and from an economic and then also just the major markets type [00:40:08][10.0]

Daniel: [00:40:08] perspective. So one of the things that I have learnt that you need to do as an investor is not so much try to predict stuff, but try to identify when [00:40:19][11.2]

Speaker 5: [00:40:20] you need to adapt. Right. So you need to watch the way the system or the economy or the markets are evolving and adapting, more so than trying to predict some end game outcome. Right. [00:40:33][12.9]

Daniel: [00:40:34] Because you need to stay focussed [00:40:35][1.5]

Speaker 6: [00:40:36] on that process of change rather than any end result that you think might ultimately happen, [00:40:41][5.0]

Daniel: [00:40:41] so to speak, because it [00:40:43][1.6]

Speaker 5: [00:40:43] is an adaptive system out there. [00:40:45][1.4]

Daniel: [00:40:45] Now, having said that, you know, we're pretty late in the cycle in a lot of things. The only real economy [00:40:51][5.6]

Speaker 6: [00:40:52] ultimately that has been holding up economic growth in the world has been the US. They're very late in their economic cycle that they're starting to get due for. You know. A recession, [00:41:04][11.9]

Daniel: [00:41:05] even at the most simplistic level of going, well, you know, you normally get [00:41:08][3.4]

Speaker 5: [00:41:08] a recession every year, somewhere between five to 10 years. And the US has been going quite a while now since technically they came out of recession. And so we're kind of just on a time cycle perspective going to do the same thing for Australia. We've got so much complacency and so much latent risk in our system. It's quite surprising. We're well overdue for some form of a, [00:41:34][25.7]

Daniel: [00:41:35] you know, at least some sort of a cyclical [00:41:37][2.4]

Speaker 5: [00:41:38] kind of wash out or, you know, recessionary type conditions in the years to come right out. [00:41:43][5.3]

Daniel: [00:41:44] There's no shortage of risks, [00:41:46][1.4]

Speaker 6: [00:41:47] people are aware of a [00:41:48][1.5]

Speaker 5: [00:41:48] lot of the indebtedness story, especially at a household level, but it might be a little less aware of our banks and how unbalanced they take. They basically are. So, for example, if you look around the equivalent types of banks in the in the world as our own, say, Westpac, CBA and NAB and ANZ and all this sort of thing, a typical commercial bank in the world would typically have maybe 20 to 25 percent of its lending in the direction or related to property, whereas our big four banks, more in the 60 to 65 percent of their lending is related to property. [00:42:26][37.6]

Daniel: [00:42:27] And so they're pretty unbalanced [00:42:27][1.0]

Speaker 5: [00:42:28] that their Achilles heel on top of that is that they've got exposures to you know, they're pretty dependent still, albeit on a smaller scale than what they were, say, 10 years ago on wholesale international funding markets. And those wholesale international funding markets have been under pressure and have been basically there's there's quite a lot of stress and issues building up and starting to come to the surface in that sort of global banking system and funding market world. I don't know [00:43:04][35.9]

Daniel: [00:43:05] when or, you know, [00:43:06][1.0]

Speaker 5: [00:43:06] or if that sort of manifests to more acute problems, you know, say from our Australian banks perspective in the near term. But, you know, the direction those trends are heading in and not necessarily great. [00:43:17][11.1]

Daniel: [00:43:18] And then on top of you know, so our wholesale household [00:43:21][3.0]

Speaker 5: [00:43:22] level has got too much debt and somewhat unbalanced. Our banks are unbalanced and have a few Achilles heels that could really cause them some grief. And then on top of that, [00:43:31][8.9]

Daniel: [00:43:31] the Chinese [00:43:31][0.2]

Speaker 5: [00:43:32] sort of credit cycle has been quite extreme, but nearly any standard in a lot of the analysis we've we do and have done, we just see so much, you know, the stresses are building in that Chinese system, trying to keep a lid on on all the malinvestment in the the credit overexpansion that they've had in the last 10 years, especially, you know, that were quite an extreme point ten years ago. But now they're at a ridiculously extreme point, you know. So in 2007, their entire banking system was seven, roughly about seven trillion US dollars. When the GFC came in 2008, 2009, [00:44:09][37.1]

Daniel: [00:44:10] they kind of panicked and just. Open the floodgates [00:44:14][3.5]

Speaker 5: [00:44:14] on, you know, and instructed their banks and all the different institutions [00:44:18][3.3]

Daniel: [00:44:19] to just extend credit and [00:44:20][1.3]

Speaker 5: [00:44:21] debt like there's no tomorrow. And so in the space of like four years, they went from seven trillion dollar US US dollar type size of the banking system to that [00:44:31][10.4]

Daniel: [00:44:32] 30 trillion dollars in about four years, which is ridiculous on a whole lot of levels. They're currently at something like thirty six, thirty seven trillion dollars us. And so the only reason [00:44:43][11.3]

Speaker 5: [00:44:43] China is kind of powered ahead in the last 10 years is because they've just [00:44:47][3.2]

Daniel: [00:44:47] been on one hell of a debt binge and none of about none of what they have done, you know, has any of the hallmarks [00:44:54][6.4]

Speaker 5: [00:44:54] of sustainability. Mostly what they've been doing the last four or five years is just trying to [00:44:59][4.9]

Daniel: [00:45:00] kick the can down the road and the risks that are [00:45:04][3.5]

Speaker 5: [00:45:04] building in their system and the volatility in their system in order to basically keep [00:45:10][6.1]

Daniel: [00:45:11] stability and some measure of growth. But, you know, there's only so much debt [00:45:14][3.5]

Speaker 5: [00:45:14] an economy can take before you start to hit saturation sort of levels. [00:45:18][3.7]

Daniel: [00:45:19] Anyway, these those are more or less some of the headwinds that are starting to gather or [00:45:25][5.6]

Speaker 5: [00:45:25] the clouds that are starting to gather, that are [00:45:27][2.2]

Speaker 6: [00:45:28] suggesting that you want to think [00:45:30][1.8]

Speaker 5: [00:45:30] about concepts of resiliency in your investing over the next three years. I think you're going to probably need it, [00:45:37][6.9]

Speaker 6: [00:45:38] you know, so is your portfolio resilience is [00:45:40][2.5]

Speaker 5: [00:45:40] your investment selections and activity, you know, a little bit more focussed on diversification and really being a little bit stronger on the risk management side of things and the resiliency side of things more so [00:45:54][14.1]

Daniel: [00:45:55] than, you know, getting on the offence [00:45:56][1.1]

Speaker 5: [00:45:56] and taking on risk and or concentrated risks and all this sort of stuff. So it's sort of we're coming into seasons where you probably want to be a little bit more defensively minded rather than offensively minded across a whole range of markets [00:46:11][15.0]

Bryce: [00:46:13] for beginners with just off that comment about developing sort of concepts of resiliency without going into shorting and all that sort of stuff, what sort of strategies can I begin to do? You know, what fell down into or. [00:46:30][16.9]

Daniel: [00:46:32] Yeah, I mean, basically, you know, you don't necessarily have to in fact, using derivatives [00:46:38][6.5]

Speaker 5: [00:46:39] doesn't necessarily make you more resilient. In fact, that can just make you more inflexible and cause a bigger blow up, especially if you're doing it with leverage. [00:46:47][7.7]

Daniel: [00:46:47] And so moving in the direction of [00:46:49][2.2]

Speaker 5: [00:46:50] the resiliency [00:46:50][0.1]

Speaker 6: [00:46:50] tends to be more, [00:46:51][0.8]

Speaker 5: [00:46:52] you know, focussing more on genuine diversification of the different investments and assets that [00:46:57][5.5]

Daniel: [00:46:58] you hold. So if you've got a portfolio of like 20 stocks, [00:47:02][4.9]

Speaker 5: [00:47:04] who cares in a problem or a crisis, you know, they're all going to basically behave the same, right? Yeah. And so diversify them with different asset classes. So some sort of an allocation to cash or some sort of a small allocation to, say precious metals, a small allocation to bonds, for example, [00:47:22][18.3]

Daniel: [00:47:23] or whatever [00:47:23][0.1]

Speaker 5: [00:47:23] it is, you know, just start to diversify a little bit. So you've got parts of your portfolio that move in different directions to other parts in that portfolio. [00:47:31][8.4]

Daniel: [00:47:33] You know, it's a bit of an [00:47:34][1.2]

Speaker 5: [00:47:34] oversimplified sort of strategy or approach to take things to an extreme. Just to illustrate the point, for example, there's a whole guy who passed away, I think, a decade ago by the name of Harry Browne. He wrote a very simple but effective book called [00:47:49][14.8]

Daniel: [00:47:49] The Permanent Portfolio. Now, there's no perfect [00:47:52][2.8]

Speaker 5: [00:47:53] way of constructing a, [00:47:54][1.4]

Daniel: [00:47:55] you know, Bullet-Proof portfolio. It just isn't one. But, you know, he's his approach to just moving in [00:48:02][7.6]

Speaker 6: [00:48:03] in the direction of [00:48:04][0.9]

Speaker 5: [00:48:04] resiliency was about as least bad as you're going to find type thing. [00:48:08][4.3]

Speaker 6: [00:48:09] And he basically would say, look, if all you did was just allocate 100 percent of your portfolio. [00:48:15][5.6]

Speaker 5: [00:48:16] Twenty five percent to cash, 25 percent equities, 25 percent [00:48:19][3.7]

Daniel: [00:48:20] to you, no longer dated government bonds, 25 percent to 20 precious metals like gold, and then stuck your head in the sand, rebalanced [00:48:28][8.3]

Speaker 5: [00:48:29] once a year [00:48:29][0.3]

Speaker 6: [00:48:30] come hell or high water, you're probably going to preserve your purchasing power. [00:48:33][3.0]

Speaker 5: [00:48:33] Most of the time. [00:48:34][0.6]

Daniel: [00:48:35] So the logic was for growth conditions. [00:48:37][2.4]

Speaker 5: [00:48:38] That's equities. That's the share market. They do good when everything is going [00:48:41][3.5]

Daniel: [00:48:42] well [00:48:42][0.0]

Speaker 6: [00:48:42] for recessions or, you know, crisis situations. That's cash. [00:48:45][3.4]

Speaker 5: [00:48:46] You know, if you have cash when others don't, then you've got an ability to buy higher quality assets that have, you know, basically been smashed down in price. You get a bargain basement type prices anyway. [00:48:58][11.5]

Daniel: [00:48:58] So and then inflation. [00:49:00][1.5]

Speaker 6: [00:49:01] Then simplistically, that's why you hold [00:49:02][1.6]

Daniel: [00:49:03] a bit of gold, for example, and deflation or longer dated government [00:49:08][4.9]

Speaker 5: [00:49:08] bonds tend to do really, really well in disinflation or deflationary type conditions. [00:49:13][4.5]

Daniel: [00:49:14] And so the world is only ever going to [00:49:16][2.2]

Speaker 5: [00:49:16] morph into some combination of those four conditions, a growth, recession, inflation or deflation, some [00:49:22][5.6]

Speaker 6: [00:49:22] combination of them. So his logic was, well, one of those asset classes is going to do okay. Another one's going to get smart and on balance, it'll all even out and preserve your purchasing power. [00:49:32][9.6]

Daniel: [00:49:33] And, you know, if you look back over the history of markets and, you know, say over the last 30 [00:49:38][5.8]

Speaker 6: [00:49:39] years in Australia, the last 50, 100 years in the US and 100 years in the UK, you know, that basic allocation approach, more or less works. You know, it's about as robust or resilient as you're going to get. The only problem with that approach is it's a bit of an extreme one in the sure. [00:49:56][17.7]

Daniel: [00:49:57] You'll be quite resilient and your [00:49:58][1.3]

Speaker 6: [00:49:59] purchasing power, but you're also not going to really generate much return out of the thing. You just keep pace with inflation and more often than not. But that's an extreme example of resiliency, for example. And the other benefit of that sort of a portfolio is that it's it's liquid. [00:50:15][16.2]

Daniel: [00:50:15] You can convert it to cash any time. One of the things you got to be [00:50:19][4.1]

Speaker 6: [00:50:19] careful of, especially in this world, is what happens behind [00:50:23][3.7]

Speaker 5: [00:50:24] a unit price. You know, in managed funds, [00:50:25][1.7]

Daniel: [00:50:26] when things go wrong or surprises happen in the world, then [00:50:29][3.0]

Speaker 6: [00:50:30] you start to realise that all that fine print that you sign up for in these managed funds and all you ever say is a unit price, right. Then you know to what degree you've experienced this. But, you know, there's all sorts of stuff that happens behind that unit price by way of fees, by way of potential for locking up money and not being able to liquidate or get your money out in different conditions [00:50:51][21.4]

Speaker 5: [00:50:52] and all sorts of stuff. You know, it obviously depends on the fund, all of this sort of thing. [00:50:56][4.1]

Daniel: [00:50:56] And so that was one of the other benefits at an extreme example. And I'm not [00:51:01][4.7]

Speaker 5: [00:51:02] actually recommending that you go and do this right. This is all just a general discussion of principle, for example. [00:51:08][6.4]

Daniel: [00:51:08] Yeah, but yeah, Harry Brown's approach, you know, it illustrates the point. And those four asset classes, [00:51:14][6.0]

Speaker 6: [00:51:15] so cash, equities, bonds and precious metals, they're bad, is unrelated to each other as you're going to get, is probably also a small argument for a small [00:51:25][10.1]

Speaker 5: [00:51:25] degree of, say, foreign currency just to protect yourself against your domestic. I don't see [00:51:30][4.9]

Daniel: [00:51:31] getting smashed for whatever reason, but that kind of [00:51:33][2.2]

Speaker 6: [00:51:34] gets into the [00:51:34][0.7]

Speaker 5: [00:51:35] logic around precious metals as well. In fact, [00:51:38][2.5]

Daniel: [00:51:38] all but that would be and in a more practical [00:51:41][3.0]

Speaker 6: [00:51:41] sense, how do you get more resilient will start to pay down and get out of debt if you can build up your savings buffers, develop some more competitive advantages either in your career or your business or whatever, you know, and there's nothing makes you more competitive than, you know, high quality education. And that doesn't necessarily mean going to a university [00:51:59][17.6]

Daniel: [00:52:00] but learning more and developing [00:52:02][1.7]

Speaker 6: [00:52:03] a capacity to adapt. It's sort of that capacity to adapt in the in the midst of adversity. That's really what resilience is all about. You know, how can you make sure you're not inflexible? Because if you're inflexible in any realm, you've got too much debt, too little savings, too little income or income that is vulnerable to disruption, then you're very inflexible. And that's when bad things happen, that if you're flexible, trying to build savings, trying to reduce debt, flexible, kind of resilient income streams or, you know, educating yourself to be more attractive to your employer or different employers, different skill sets, or if you're a business owner, how can you, you know, develop different competitive advantages to sort of make sure that, you know, you're the business that's left standing in any adverse negative surprise type event, et cetera, et cetera. So is thinking about resiliency not having big, ridiculous overheads? You know, [00:53:00][57.2]

Daniel: [00:53:00] if you're a business owner or even a person not living a lifestyle that sort of you know, you have no breathing space and you're overcommitted and blah, blah, blah. So resiliency is I use this word. But one other way of thinking about it is like when you look at a natural system in the environment [00:53:22][21.5]

Speaker 6: [00:53:23] out there in the world, [00:53:23][0.6]

Daniel: [00:53:24] typically the ones that survive and thrive in time typically have the character trait of being two thirds resilient and one third efficient. Right. And so [00:53:37][12.2]

Speaker 6: [00:53:37] simplistically, you could say two thirds defensive and flexible, adaptive, you know, come what may [00:53:43][5.9]

Daniel: [00:53:44] in one third [00:53:45][0.5]

Speaker 6: [00:53:46] productive and really efficient in what they do and competitive [00:53:48][2.9]

Speaker 5: [00:53:49] advantages and all this sort of stuff. [00:53:50][1.3]

Daniel: [00:53:51] And that's probably the right sort of balance [00:53:52][1.5]

Speaker 6: [00:53:53] they typically find in nature. That balance gets skewed in either direction, like, say, to resilient and not efficient enough, or they just simply become obsolete and inefficient and they they just basically die. They cease to exist as a system. [00:54:07][14.5]

Daniel: [00:54:08] And if they're too efficient, too focussed on productivity [00:54:10][2.3]

Speaker 6: [00:54:11] and just whatever it is that that system does and not resilient enough to inflexible, well, it only takes the next storm and they're basically out of action, [00:54:20][9.2]

Daniel: [00:54:21] you know. Well, and so the balance [00:54:23][2.4]

Speaker 6: [00:54:24] in nature even seems to be about two thirds, [00:54:26][2.0]

Daniel: [00:54:27] two thirds resilient. One-Third efficient. [00:54:28][1.6]

Speaker 6: [00:54:29] And so even that translates into our own portfolios. We sort of have that philosophy permeate through most of what we do, both as a business and then running portfolios and even assessing markets. [00:54:39][10.0]

Daniel: [00:54:40] And anyway, you get the point, thinking about resiliency would be highly [00:54:45][5.5]

Speaker 6: [00:54:46] advised, at least for the next three to four years. And if you've got purchasing power and cash and we do have a couple of hiccups and other people who haven't been sort of as prepared [00:54:55][9.8]

Daniel: [00:54:56] and or given thought [00:54:57][1.4]

Speaker 6: [00:54:58] and action to that concept of resiliency, and they're sort of hurting or asset markets have a few hiccups, then you've got the liquidity and the cash and the purchasing power still intact to take advantage of all that. And that's the other trick, [00:55:10][12.4]

Daniel: [00:55:11] is that one of the best sort of strategies you can have is knowing full well that every seven to 10 years on average, you're going to get some [00:55:18][7.2]

Speaker 6: [00:55:18] sort of a hiccup in the world, whether it's a recession or a crisis or whatever or in your country. And so every seven to 10 years, you know that you're going to have an opportunity to buy high quality assets cheaply. [00:55:30][11.5]

Daniel: [00:55:31] And so make sure you're always [00:55:32][1.3]

Speaker 6: [00:55:32] prepared for that, especially when you're starting to recognise that, oh, we've been, say, five to seven, 10 years since we've had the last hiccup, maybe just by sheer passing of time. And there's just a cycle of history. Maybe we're getting closer to the next one [00:55:48][15.7]

Bryce: [00:55:49] in terms of building this sort of resiliency. Very simplistically, you know, cash and equities are quite easy. But for our listeners, what are some ways in which you can one of the easiest ways of buying government bonds or precious metals, is it as easy as buying stocks through CommSec or. [00:56:08][19.2]

Daniel: [00:56:09] Yeah, going if you go into the ASX website, they actually [00:56:13][3.9]

Speaker 5: [00:56:13] in different parts of the website, explain what [00:56:15][1.9]

Speaker 6: [00:56:16] exchange traded funds, exchange traded products [00:56:18][2.3]

Speaker 5: [00:56:19] and bonds actually trade on the ASX. And so Australian government bonds, for example, if you thought [00:56:25][6.3]

Speaker 6: [00:56:26] interest rates were going down or you just wanted to diversify a little bit more and. Once again, this is not obviously specific advice, there's just a general sense of what's out there. This is the great a great starting point is to go to the ASX website and punch in government bonds and it'll take you to a couple of education pages and prices and what's traded and [00:56:48][22.8]

Speaker 5: [00:56:49] all of this sort of stuff. [00:56:49][0.7]

Daniel: [00:56:51] The only [00:56:51][0.2]

Speaker 6: [00:56:52] problem with this, especially because the idea is that we're talking at a beginner [00:56:56][4.0]

Daniel: [00:56:56] level, is that a little bit of knowledge can be dangerous, right. And so, you know, I'd still highly recommend you go and find [00:57:05][8.3]

Speaker 5: [00:57:05] some people who know what they're doing. [00:57:06][1.1]

Daniel: [00:57:07] Talk to them, you know, find a [00:57:09][1.7]

Speaker 6: [00:57:09] qualified advisor, cetera, et cetera, although that can be a can of worms. Basically, you want to find out [00:57:14][5.2]

Daniel: [00:57:15] when you go to any adviser [00:57:16][0.8]

Speaker 6: [00:57:17] in the and I'm talking to, say, financial planners, especially stockbrokers, number one, figure out how they are actually paid [00:57:22][5.5]

Daniel: [00:57:23] because, you know, you follow the money. And conflicted incentives, [00:57:27][4.0]

Speaker 6: [00:57:28] especially financial incentives, will result in most likely conflicted advice, even though it's probably stock standard stuff. But the whole industry is kind of a little bit, I think, a bit warped. Be very careful of people who get paid on a transactional basis, you know, like a stockbroking model. So they make money not by putting you necessarily into the best investments or stocks. They make money by activity, buying and selling stuff, you know. So really, they if they're going to increase their earnings or go in that next holiday, they just they need to buy and sell more stuff in their client accounts to get more transactions and commissions. Right. And even the financial planning industry [00:58:07][38.6]

Speaker 5: [00:58:07] kind [00:58:07][0.0]

Speaker 6: [00:58:08] of has a similar dynamic or they try to have more safeguards against this, of putting, you know, people in and out of different products, you know, whether they be managed fund products or insurance products or whatever, because they get commissions on the back of all of this. So no one figure out how these advisors are getting paid and be very well aware of the fact that there are monetary incentives to the advice that they give you. A lot of these incentives make them look more and more like a used car salesman, [00:58:35][27.1]

Speaker 5: [00:58:35] more so than a trusted financial [00:58:37][1.7]

Speaker 6: [00:58:38] advisor. And so one, follow the money and figure out how they get paid, too, [00:58:42][4.1]

Daniel: [00:58:42] especially if they're on an investment. [00:58:44][1.3]

Speaker 5: [00:58:44] From an investment perspective, [00:58:45][0.9]

Daniel: [00:58:46] do they eat their own cooking or do [00:58:48][1.5]

Speaker 6: [00:58:48] they just peddle out all this advice to people but they actually have their own money in the same sort of things or their own family and friends prepare to be put behind what they do, etc., etc. [00:58:59][10.6]

Daniel: [00:58:59] And so there's no substitute [00:59:00][1.3]

Speaker 6: [00:59:01] for education and knowledge. And but it's it's [00:59:04][3.1]

Daniel: [00:59:05] you know, it's full on [00:59:06][0.9]

Speaker 5: [00:59:06] and it's quite a journey. You've got to be committed and you're going to run down a lot of rabbit holes. [00:59:10][3.9]

Speaker 6: [00:59:11] And all I'd suggest is that in the early days or the early phases of your education in all these things just don't risk much when you're putting funds at risk because you're guaranteed you're going to be learning a whole heap of lessons. [00:59:24][13.0]

Daniel: [00:59:24] And usually when you're learning stuff [00:59:26][1.4]

Speaker 6: [00:59:26] in markets, it means you're losing money when you're having negative surprises. You know, there's an old saying [00:59:31][5.5]

Daniel: [00:59:32] that in any trade or investment, you will either grow richer or wiser, [00:59:37][4.9]

Speaker 6: [00:59:37] really, both together. All right. Interesting. There's another old saying that basically says a bull market. So a rising trend in a in a market, especially a multi-year trend, will make geniuses out of idiots. It's a bit of a harsh way [00:59:51][13.9]

Daniel: [00:59:52] of putting it. But if you just happen to be in the right market at the right time for any reason, and you might have done one hundred [00:59:59][7.6]

Speaker 5: [00:59:59] pages of [01:00:00][0.4]

Speaker 6: [01:00:00] analysis, but who cares if it's the wrong analysis? But the thing went up [01:00:03][3.1]

Daniel: [01:00:03] and you made money. Well, that's a [01:00:06][2.2]

Speaker 5: [01:00:06] false sense of security. [01:00:07][0.7]

Daniel: [01:00:08] And there's nothing worse than the [01:00:09][1.6]

Speaker 6: [01:00:10] thing actually keeps going up. And you keep making money on that same strategy, whether it is [01:00:14][4.1]

Daniel: [01:00:14] some you know, you don't really know whether what you [01:00:17][2.9]

Speaker 6: [01:00:17] are doing is legitimate or anchored to reality or not. You're just in a rising tide, you know, and if it's a rising, multi-year trend, [01:00:25][8.2]

Daniel: [01:00:26] you know, that can lull a lot of [01:00:29][2.2]

Speaker 6: [01:00:29] people into a false sense of security, but [01:00:31][2.0]

Speaker 5: [01:00:31] they're not necessarily learning what really is driving these markets. [01:00:34][3.1]

Speaker 6: [01:00:35] No property is actually a fantastic example in Australia right now. If you think property markets are driven, especially overall at a country base, if you think they're driven largely by, say, demographics and interest rates, [01:00:48][13.0]

Daniel: [01:00:49] then, my gosh, you've got one hell of a learning curve coming in. And so, you know, we've had a multi year, [01:00:58][9.1]

Speaker 6: [01:00:59] even multi decade rise in property prices. [01:01:01][2.2]

Daniel: [01:01:01] And we've got so many [01:01:03][1.2]

Speaker 6: [01:01:03] experts out there, it's ridiculous. [01:01:04][0.9]

Daniel: [01:01:04] But most of them don't [01:01:06][1.6]

Speaker 6: [01:01:06] really understand the mechanic, the dynamics in the broader system that actually goes to underpinning and driving property prices at the bigger picture level. [01:01:16][9.9]

Daniel: [01:01:17] You know what makes [01:01:17][0.6]

Speaker 6: [01:01:18] them go up or down over multi year, multi decade sort of perspectives? And and so we've got a lot of experts out there that are incredibly complacent [01:01:27][9.0]

Daniel: [01:01:28] that we've only ever seen good times. They've never really been through [01:01:31][2.9]

Speaker 5: [01:01:32] a serious cycle [01:01:33][1.2]

Bryce: [01:01:34] before. [01:01:34][0.0]

Speaker 6: [01:01:35] And anyone that's basically been involved in property the last 20 years hasn't really seen a serious cycle before. [01:01:40][5.4]

Daniel: [01:01:42] And so, you know, it it's a full on endeavour, this education and the. [01:01:49][7.3]

Speaker 6: [01:01:50] The best way to do it is to do it yourself, but all I'd suggest is start be a little bit paranoid about risk and only risk smaller amounts in the beginning phases of your education, because you can guarantee there's a whole world of experience that you haven't got yet and you're not aware of. But after you've been through a cycle or so, then you can start to gain a bit more [01:02:11][21.2]

Speaker 5: [01:02:11] confidence, especially if you've kept on educating yourself and seeking out knowledge, etc.. [01:02:16][4.4]

Bryce: [01:02:16] You mentioned the rise in property prices there. I'd be interested in your macro view of the world. You look at cryptocurrency or the Bitcoin or have a view on that. [01:02:27][11.2]

Daniel: [01:02:28] Yeah, that's not going to be a two minute discussion. [01:02:31][2.6]

Bryce: [01:02:33] Right. [01:02:33][0.0]

Daniel: [01:02:36] You know, maybe another time we can open a can of worms, but [01:02:39][3.6]

Bryce: [01:02:40] in short, we need to look at it. [01:02:41][1.2]

Daniel: [01:02:43] Yeah. The two minute version. Right. If you're going to look [01:02:45][2.7]

Speaker 6: [01:02:46] at Bitcoin and this is not advice. Right. This is just general [01:02:50][4.7]

Daniel: [01:02:51] observations, you'd probably make the observation that, look, what's my downside risk probably 100 percent [01:02:57][6.4]

Speaker 6: [01:02:58] over the next 10 years in the in a negative scenario type outcome for [01:03:02][4.1]

Daniel: [01:03:02] this this currency dynamic right now, quasi currency, whatever you want to call it. So your risk on the one hand is probably 100 percent so. OK, cool. What's your upside? Well, depending on which optimistic [01:03:16][13.6]

Speaker 6: [01:03:16] scenario you go with, you know, you can be gone from, you know, hundreds of percent to thousands [01:03:21][5.3]

Speaker 5: [01:03:22] of percent, sort of upside over 10 [01:03:24][2.2]

Speaker 6: [01:03:25] to 20 years. If we get the rosy scenarios kind [01:03:27][2.7]

Speaker 5: [01:03:28] of occur, [01:03:28][0.1]

Daniel: [01:03:29] you know, what's the balance of probabilities between the upside of quite a lot? Maybe if, you know, a [01:03:35][6.3]

Speaker 6: [01:03:36] confluence of really positive things kind of happen and we don't get [01:03:39][3.3]

Speaker 5: [01:03:39] negative surprises? [01:03:40][0.4]

Speaker 6: [01:03:40] Well, what's that balanced with the downside [01:03:43][2.2]

Daniel: [01:03:43] potentially of, say, anywhere from [01:03:45][1.9]

Speaker 6: [01:03:45] 50 to 100 percent? Probably 100 percent, maybe if if we got a negative confluence of surprises or things unfold over the next 10, 20 years, but say that's enough of a starting point for thinking about, say, Bitcoin to [01:04:01][15.9]

Daniel: [01:04:02] then go, OK, well, if I have any exposure at all [01:04:05][3.3]

Speaker 5: [01:04:05] to this Bitcoin story, it's probably going to be really, really low because I know my [01:04:11][5.6]

Speaker 6: [01:04:11] risk over the next 10 years is probably anywhere from my downside risk is anywhere from 20 percent down to 100 percent wiped out. Right now, you're going to tend to scale your exposure to be pretty much to the point where you don't care or it's not going to matter if you if it if you lose it all in the [01:04:30][19.4]

Speaker 5: [01:04:31] next 10 years. Right. But your upside is is [01:04:33][2.6]

Speaker 6: [01:04:34] could be substantial [01:04:34][0.5]

Daniel: [01:04:35] depending on what [01:04:36][1.3]

Speaker 5: [01:04:36] occurs over what unfolds over the next 10 years, for example. [01:04:39][2.8]

Daniel: [01:04:40] And so maybe is a diversifier, but [01:04:44][3.4]

Speaker 6: [01:04:44] ridiculously small, you think, or [01:04:46][2.1]

Speaker 5: [01:04:47] look at it in that sort of those sorts of terms as a starting [01:04:49][2.9]

Speaker 6: [01:04:50] point. And so your exposure is going to be really small as a credible currency. It's kind of not credible just because it's too volatile. [01:04:57][6.8]

Speaker 5: [01:04:57] It's not really a store of value yet. [01:04:59][1.7]

Daniel: [01:04:59] Yeah, you might use it. [01:05:01][1.8]

Speaker 6: [01:05:01] Transactionally in the world, you know, say you want to transmit money from [01:05:05][3.9]

Speaker 5: [01:05:05] here to some other country. It's probably going to be a bit cheaper, more reliable, a bit quicker, whatever, if you use Bitcoin versus half the other ways, [01:05:13][7.3]

Daniel: [01:05:13] but you're only going to use it on a [01:05:15][2.1]

Speaker 6: [01:05:15] transactional basis, but then [01:05:17][1.4]

Daniel: [01:05:17] convert [01:05:17][0.0]

Speaker 5: [01:05:18] Bitcoin into some other currency or money or [01:05:20][2.5]

Speaker 6: [01:05:20] asset, [01:05:20][0.0]

Speaker 5: [01:05:21] it's a bit more stable, right. [01:05:23][1.5]

Speaker 6: [01:05:23] Because of the volatility. It's not really you know, it [01:05:26][3.0]

Speaker 5: [01:05:26] doesn't have that store of value characteristic to it to actually kind of make it [01:05:31][4.5]

Speaker 6: [01:05:31] a bit more of a credible currency type [01:05:33][1.8]

Daniel: [01:05:34] possibility. Maybe it's just [01:05:36][2.8]

Speaker 6: [01:05:37] too early on in its journey, but until you start to see this volatility drop a bit, it's not really going to be a credible contender. [01:05:44][7.5]

Speaker 5: [01:05:45] There's also a can of worms we open, which would be another discussion around the risk from a governmental point of view around the world. And really, when it comes to Bitcoin, for example, you know, half the story is actually on the block chain and the infrastructure under it is quite nominal. That will no doubt revolutionise [01:06:03][17.9]

Daniel: [01:06:04] the internal plumbing of financial [01:06:06][1.9]

Speaker 5: [01:06:06] markets and banks and everything else over the next 10, 20 years. And that's quite phenomenal in its own right. [01:06:13][6.6]

Daniel: [01:06:14] But say you've got you know, I think I heard it was the Bank of England. I think it was Bank of China maybe as well. China's central bank pretty sure is. [01:06:24][10.0]

Speaker 5: [01:06:24] The Bank of England has their own little project to create their own little cryptocurrency and all this sort of stuff. I know [01:06:30][6.0]

Speaker 6: [01:06:30] the ASX is exploring block chain quite proactively, [01:06:34][3.7]

Speaker 5: [01:06:35] and some of our institutions in Australia actually seem to be on the forefront of at least trying to understand it better and its possible uses. [01:06:41][6.5]

Daniel: [01:06:42] But, you know, whether it's Bitcoin or some other [01:06:44][2.5]

Speaker 5: [01:06:45] version of a cryptocurrency, like, I got [01:06:47][2.0]

Daniel: [01:06:47] no idea that goes beyond me, but. When it comes to just [01:06:51][4.6]

Speaker 5: [01:06:52] looking at it from an investment lens, well, the [01:06:54][2.1]

Speaker 6: [01:06:54] first thing I want to get [01:06:54][0.8]

Speaker 5: [01:06:55] a grasp on, what's my downside risk and what's my upside downside clearly is anything from 20 to 100 percent [01:07:02][7.2]

Daniel: [01:07:03] wiped out. And there's plenty of plausible [01:07:04][1.5]

Speaker 5: [01:07:05] scenario [01:07:05][0.0]

Speaker 6: [01:07:05] that you could say where that would happen [01:07:06][1.1]

Daniel: [01:07:07] over the next 10 years. Yeah, upside. Well, you know, you've got the usual rosy sort of ridiculously bullish scenario that a lot of the promoters will give you. And yeah, I'm sure there's a possible pathway where that could maybe theoretically happen. [01:07:23][16.5]

Speaker 5: [01:07:24] And in that case, your upside is massive, massive. [01:07:27][2.7]

Daniel: [01:07:28] But at the same time, I've seen [01:07:29][1.9]

Speaker 5: [01:07:30] so much read, so much listen and so many more informed people than I am on that particular subject that are it's still early days. [01:07:38][8.8]

Bryce: [01:07:39] A big unknown. [01:07:40][0.8]

Speaker 5: [01:07:41] Yeah, that's right. And so, you [01:07:43][1.6]

Speaker 6: [01:07:43] know, I wouldn't exactly attach a huge probability to that big upside [01:07:47][4.2]

Speaker 5: [01:07:47] scenario playing [01:07:48][0.5]

Daniel: [01:07:48] out anyway. But that's the short version. [01:07:50][2.3]

Speaker 6: [01:07:51] That's why maybe even starting to think about it. But, yeah, it's really a can of worms in its own right. [01:07:56][5.5]

Bryce: [01:07:57] Yeah, it's very interesting. Very topical. [01:07:59][1.9]

Daniel: [01:08:00] Well, of course. But the whole market [01:08:03][2.4]

Speaker 6: [01:08:03] realised that the fact that it is topical means we're probably closer to our intermediate term top. Yes. Anything becomes too popular and it's being talked about out in broader society, you name it. Yeah, well, it's probably the end of a at least an intermediate term sort of swing or trend [01:08:19][16.0]

Speaker 5: [01:08:19] and say just be cautious on the short to medium term. But who knows. [01:08:24][4.2]

Alec: [01:08:25] Yeah. All right. Well, Daniel, we really appreciate you taking the time to chat with us today. I think you've given us now listeners a lot to think about and some really good starting points to think about where they want to go with their investing journey. If they want to read more about you or hear more of what you have to say is the best place, the prerequisite website. [01:08:49][24.0]

Speaker 5: [01:08:50] Yeah, definitely. [01:08:50][0.4]

Speaker 6: [01:08:51] So just get a w w w the prerequisite dotcom. [01:08:54][2.9]

Daniel: [01:08:55] You, I will say on a quarterly basis, tend to publish our more general audience type client letters, a quarterly client letters. And that might be a bit of an overview for, you know, loosely what we're saying [01:09:08][13.4]

Speaker 5: [01:09:09] in different markets or in the horizon or what's happening. And so that can be one way to just sort of follow [01:09:14][4.9]

Speaker 6: [01:09:14] along where I try to write it for a bit of a broader audience. A lot of the other stuff we put it out [01:09:19][5.1]

Speaker 5: [01:09:20] is a bit more on the intense side because we we also, besides running portfolios for, say, Australians in superannuation or outside of super, we do a lot of research for international investors. And so, yeah, we we have a weird client base that we just have a full spectrum of everyone. [01:09:39][19.4]

Speaker 6: [01:09:40] It seems that the quarterly letters are the more absorbable, easier [01:09:45][4.1]

Speaker 5: [01:09:45] to understand ones, [01:09:46][0.8]

Alec: [01:09:47] and the publishers are [01:09:48][0.9]

Speaker 6: [01:09:48] a bit more Australian focussed. [01:09:49][1.1]

Alec: [01:09:50] Yeah, great. And they can be found on the prerequisite website as well. [01:09:53][3.2]

Daniel: [01:09:55] Yeah. Just go to the website and [01:09:57][2.1]

Speaker 6: [01:09:57] then on the managed portfolio tab at the top. Click on that and you'll [01:10:01][3.8]

Speaker 5: [01:10:01] find our quarterly reports. And then it also just talks a bit about how we approach running portfolios as well. [01:10:08][7.4]

Alec: [01:10:09] Perfect. Well, yeah. Thanks, Daniel. We really appreciate you taking the time and thanks for all your advice. Yeah. [01:10:15][5.9]

Bryce: [01:10:15] Got a problem. Yeah, thank you. Hopefully we'll do a follow up on the bitcoin and block time at some point. Yeah. [01:10:23][7.3]

Speaker 8: [01:10:24] Equity Mates and the people appearing in this programme may have positions in the companies mentioned. This is general advice for me. Please speak to a financial professional to understand how they pertain to your individual situation. [01:10:24][0.0]

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