Move over Magnificent 7, meet the Magnificent 11, Bryce’s small cap investment & Compounding continued

Bryce: [00:00:25] Welcome to Equity Markets Investing, a podcast where we explore what's possible in the world of investing. If you've just joined us for the first time, a huge welcome. My name is Bryce and today we are discussing our portfolio moves. We have Europe's answer to the Magnificent Seven and a community question on compounding. To chat through it, as always, I'm joined by my equity buddy Ren. How are you? 

Alec: [00:00:53] I'm very good, Bryce. Very excited for this episode as we like to talk about here at Equity Mates. Over the long term, markets grow, and there's no better example of this than the Magnificent Seven growing into the Magnificent 11. 

Bryce: [00:01:12] Nice. 

Alec: [00:01:13] And if people aren't sure what the Magnificent 11 is, stay tuned for the second segment. Because that's Europe's answer to the Magnificent Seven.

Bryce: [00:01:22] The Magnificent Seven. Yeah. They do have an acronym that was coined by Morgan, Goldman Sachs. We'll get to that. We'll get to that now before the show kicks off. Ren, I have a big favour to ask from the community. 

Alec: [00:01:36] Could not hear from me.

Bryce: [00:01:38] Not from you. From the community. We've, we've done a lot of work over the last sort of six months with some new concepts and new segments that have come in. My portfolio book club is back in the street, deep dives are coming, and we really sort of thank you for everything that you have, given us in the community survey. If you're enjoying the show and really getting a lot of value out of it, if you can leave a review and write us on your podcast app, that would be awesome. We would really appreciate it. And it goes a long way to helping us find new, equity mates listeners. So if you love what we're doing and you appreciate it and you're getting a lot of value about it, big favour, please just leave five stars and a review. Done. 

Alec: [00:02:15] So, the first segment here is all about portfolio moves. And you've really been making more moves than I have. So over to you. 

Bryce: [00:02:26] This is something that we've been talking about offline for a bit.

Alec: [00:02:29] Fairlight. 

Bryce: [00:02:30] Fairlight. Yeah. 

Alec: [00:02:31] Okay. So for context, Fairlight Asset Management is a small cap manager here in Australia. They have come on the show a number of times. We've spoken to Nick Craig probably twice. And then Will Dowd, maybe twice as well. Yeah. I think every and this has been over years since maybe like 21. I reckon every time we finish the interview, I ask if I can invest with them. And I never do. And I think you're about to tell me that you've stolen my thunder. 

Bryce: [00:03:09] Yeah, well, I've made an investment, I think, to go back a step. So a couple of episodes ago, EM Chats, we spoke about how I had some. We did the lump sum versus dollar cost average conversation, and I had a bit of lump sum cash sitting on the side that you like. Why is it like that? 

Alec: [00:03:27] Swimming in pools of cash.

Bryce: [00:03:28] No. Do you have got to pull that caught up had some money sitting there. And my wife has also been keen to do some joint investments. She has her portfolio. I have mine, but she's been keen to do some joint. And so I thought that was a good opportunity to make this investment into Fairlight. Okay. We've done this together. 

Alec: [00:03:50] Why Fairlight.

Bryce: [00:03:51] Just because it's a fresh investment and it's not in any of our brokerage accounts. This is direct with them. And it was easy to set up as a joint. So I think from just without having to join brokers or anything like that, this is just a clean way to start our journey of investing together. Nice for everyone listening at home. So Fairlight, they are a global small and mid-cap fund manager. And we get super excited every time they come on. And for me, this is now pseudo outsourcing my satellite portfolio. This is how I'm thinking about it.

Alec: [00:04:23] Yeah, that's what I mean, that is what I have to over. Yeah, yeah, yeah. 

Bryce: [00:04:27] You know, because we've done a lot of, a lot in it Pimp my portfolios now with Luke and I have taken a bit of, you know, not advice, but have listened to what he's been saying in some part around, you know, thoughts around the value that active managers can bring. And so when I think about how my portfolio is set up now, we've got the core component that I'm super happy with. And I've got a great strategy there. And it's just going in. Got a number of smaller satellite positions, but the biggest omission in my portfolio, Ren, is small caps. And so if I think about the skills and resources I have to go out and find good small caps versus giving my money to someone else, I think that's where I've landed. And so whilst they've been around since 2018, they have had pretty impressive performance against their benchmark. And yeah, I'm willing to back them in.

Alec: [00:05:11] How have they gone? 

Bryce: [00:05:13] So they benchmark themselves against the MSCI World Small Mid-Cap index. It's performed 9.6% since inception since 2018 per annum, whereas Fairlight have done just over 14% per annum. After face. Yeah. So, I think that is worth talking about. We do talk about low cost and all that sort of stuff on the show. This is where, you know, it makes a little bit more sense to pay a bit higher fees. I'm comfortable paying it. They do have a management fee of 1.25% and an admin fee of 0.05%. And then they have a 15% for performance fee when they outperform the benchmark.

Alec: [00:05:51] Okay.

Bryce: [00:05:52] Yeah. 

Alec: [00:05:52] So it's expensive. 

Bryce: [00:05:53] It is expensive. 

Alec: [00:05:54] But yeah, you know, if they're doing what, 4 or 5% above the benchmark off the fees, then that's why you pay.

Bryce: [00:06:01] That's why you pay. So how I thinking about this is, this is, something that I will continue to invest in just like I do my core. But this will, you know, it certainly won't be a position the size of my core. It's going to sit in that sort of satellite spot. But, yeah, this is outsourcing a fair chunk of that satellite for me. 

Alec: [00:06:18] Nice. Okay, great. Have you used any of your equity mate's influence to, like, get a better rate or anything? 

Bryce: [00:06:26] No. I should have. Yeah. 

Alec: [00:06:30] So I can say here you've had a look at some of the top holdings. And I think the reason that I always get really excited when we speak to the guys from Fairlight is they always bring interesting companies that I haven't heard of. And for me, that's a real hallmark of, you know, people who are doing different work or more work or are living in different circles and researching in different ways, and that's really what you want. When you've got an active manager, you want a different view of the world or a different opportunity set. 

Bryce: [00:07:04] Yeah, I don't want them buying things that I could otherwise do myself. 

Alec: [00:07:07] Yeah. If their portfolio is Nvidia, Spotify and Facebook, it's like, well, no, I know those companies and I could buy them. And you know that that never was that more clear than when Will Dowd joined us in the summer series. And he spoke about Landstar Trucking, a company that I'd never heard of. But a really interesting one. So tell us about some of the companies in their top five.

Bryce: [00:07:30] That if top position is a company called Auto Trader Group, they're an online marketplace for car buyers and sellers. I'm pretty sure he came on and spoke about that a couple of years ago. The second one we've spoken about on the show before is Constellation Software. 

Alec: [00:07:46] So when we say we're really stretching the definition of small caps here, aren't we? 

Bryce: [00:07:50] Oh, so they invest in anything from 500 million to 30 billion.

Alec: [00:07:55] Market cap? 

Bryce: [00:07:56] Market cap.

Alec: [00:07:57] Yeah. And what's a constellation.

Bryce: [00:07:57] Like we're somewhat skewed here in Australia with our views on small caps. 

Alec: [00:08:01] Hold on, hold on. Constellation is 76 billion. 

Bryce: [00:08:03] Oh that's interesting. Well on their website it says 500. Yeah 500 million to 30 billion. Maybe it's from initial investment. 

Alec: [00:08:11] I mean, it's us. So this would be 76 billion CAD. So let's get a US day. Still 56 billion US. 

Bryce: [00:08:19] Maybe it's from the time of investment. 

Alec: [00:08:22] Maybe that's they. Maybe they're letting their windows run. 

Bryce: [00:08:23] Letting it run. 

Alec: [00:08:25] Well, Will or Nick or anyone from Fairlight, if you're listening 

Bryce: [00:08:30] I'll send you an email and come back to it on that one. I'll have an answer because it's good. Good question. But yeah, thick there. The universe is, they say on their website, 500 million to 30 billion, and they invest in 30 to 40 stocks. But to close out their top five, they have a company called Diploma PLC. When I looked it up it was just a classic. All they do is supply specialised technical products and services. So yeah. And then Gartner and Scout 24. So IT consulting in another online marketplace make up the top five. So of the five I've only heard of two of those. 

Alec: [00:09:05] Yeah. Yeah I think the interesting thing is British stock, a Canadian stock, a British stock and American stock. And then I think a German stock. So one U.S. stock in the top five.

Bryce: [00:09:17] Love to see it. So yeah. looking forward to you're going to make some moves I assume. 

Alec: [00:09:26] Yeah. Look I think this is probably the impetus for me to actually sign up. It's always just the admin heavy load. 

Bryce: [00:09:32] Well, yes, this has been administratively light, which is nice. It was all online. You did have to upload some documents. Well, not even you just type your numbers in. And it did all the verification online. And away we went. 

Alec: [00:09:45] Yeah. Nice. Yeah, I know, but you still have to upload a signature. Yes. Yeah. 

Bryce: [00:09:50] I just put it on the page and took a photo. 

Alec: [00:09:52] Yeah. Okay. Yeah. Because that's the thing. You still have to sign in for the wedding. Nice. And then can you track? How are you going to track it through Sharesight? Are you able to do that? It's got that functionality Sharesight work.

Bryce: [00:10:02] You can. So you just get the unit price from the guys. 

Alec: [00:10:05] I'll see. You gotta do it manually.

Bryce: [00:10:07] But yeah they say I'll come back with that next week. I can share. So it does have the ability to track this stuff. Usually it's like the M funds and those sorts of things. So I didn't know it was able to do everything through Equity Builder. So, I'll find out. All of the products are equity builders. 

Alec: [00:10:22] Well, look, that's, obviously nothing in this show is financial advice, as our disclaimer at the very front says. And, you know, this is a move that Bryce and Harriet have made based on their financial circumstances. The pools of cash, the swimming and their specific life stage and goals. So. 

Bryce: [00:10:42] Not a buy hold or sell 

Alec: [00:10:43] Yeah. But, it's an interesting one for you to bring to the table. And I think if there's any action to take out of this, it's to go back and listen to our previous interviews with the guys from Fairlight because, they're some of, some of our favourite conversations will include the Landstar in the show notes. But yeah, just search equity mates Fairlight. 

Bryce: [00:11:03] So next stop, private equity. 

Alec: [00:11:05] Oh, really? 

Bryce: [00:11:06] I'd love to. Don't know how I can bring some people on the show to find out? 

Alec: [00:11:11] Well. Yeah. Okay. 

Bryce: [00:11:13] I know, I know, there are a couple of fundies now who have achievable minimums in their funds. 

Alec: [00:11:18] So you'd prefer to put your money into a fund rather than put your money with a manager, like in the management company. 

Bryce: [00:11:25] As in, like a KKR or something?

Alec: [00:11:26] Yeah. Cause a lot of the big ones Blackstone, KKR, Apollo, they're all listed over in the US. So you can just buy the equity. 

Bryce: [00:11:37] TBC I think, I wouldn't mind a fund. 

Alec: [00:11:40] Okay. Yeah, yeah. Well, what's the minimum? You minimum is going to be at least like 50 grand.

Bryce: [00:11:45] I'm not sure. I just have one that's 20. 

Alec: [00:11:47] But like, the question that I like this is coming on as an uneducated position but the ones with the lower minimums, did they also have lower asset quality? Of course, as I said, the superstar PE funds don't mess around with us because they go to like the endowments and the institutions and, and they're the ones that buy Sydney Airport. That was a super fund. You know what I mean. 

Bryce: [00:12:14] It's the next stock. So, a lot of DD to do from here, but I think it's something I want in my portfolio. 

Alec: [00:12:21] I would love and this might exist, I would love just an ETF that just owned all the publicly listed private equity players in equal weighting. Just one purchase and you got like 20% each of the big five done. 

Bryce: [00:12:35] But do they actually perform well if you're like from a listed point of view or is it. Yeah they do. Well you know what I mean. Like the return.

Alec: [00:12:46] Put it this way. Blackstone's up 263% in the past five years. So not good enough for you. KKR is up 318% in the past five years. 

Bryce: [00:12:57] Is that there? Like that's the stock price relative to. 

Alec: [00:13:01] Apollo.

Bryce: [00:13:01] Fund performance. 

Alec: [00:13:02] Apollo 293% in the past five years. 

Bryce: [00:13:05] Yeah okay. It's alright. But you know what I lost. You know what I'm saying? It's like, what's the underlying fund performance in that same thing? 

Alec: [00:13:12] Yeah, well, I'm sure there are some funds that have done better, but I'm sure there are other funds that have done worse because, like, unlike equity funds, where if, if there's multiple funds, they're probably all investing in, you know, like classic example, Magellan had a high conviction fund and a global fund. The overlap between those two funds was pretty high. It's just that the High Conviction Fund was their best 12 to 15 ideas. The Global Fund was at best like 30 ideas or whatever. Whereas in a private equity fund each vehicle is buying completely different assets. Yeah. You know, they're buying a whole company in one fund. Then they raise the next 100 buys of completely different assets. So the discrepancy between funds is going to be a lot higher in private equity than it is in public equities. So that's me completely avoiding answering your question but saying I reckon there would be a range. And I reckon the performance of the public like the management companies equity would probably be in the midpoint of that range. 

Bryce: [00:14:13] Yeah. All right. We'll take it on notice because that's that's the next that's the next thing I want to be.

Alec: [00:14:19] I don't take it on notice. Betashares, Global X, Vanguard and iShares one of you make a private equity ETF where you can just invest it. 

Bryce: [00:14:27] Yeah, true. There you go. Let's get it done. Anyway, Ren that's it for portfolio moves. Let's move on. 

Alec: [00:14:36] All right. Bryce. Well, we said at the start of this episode that we're done with the Magnificent Seven and we're all in on the Magnificent 11. Now, we first heard about these companies when we spoke to J.P. Morgan Asset Management's Kerry Craig. God, I was sick for that if people listen to it. But the acronym that was coined by Goldman Sachs is the Granolas. We've also heard them referenced as the Magnificent 11. So introduce us to this world. 

Bryce: [00:15:16] Yeah, well you mentioned that we first heard it in a recent interview with Kerry Craig only a matter of weeks ago, but it was first coined by Goldman Sachs in 2020. 

Alec: [00:15:26] Yeah. So we're behind the times. 

Bryce: [00:15:29] The term is granolas, and this refers to 11 stocks from the European stock market, which is, I guess, the European answer to The Magnificent Seven. Sort of answer. 

Alec: [00:15:44] Sort of. I think financial media have a real desire to pot and match, and it's like something's happening here. Let's find it there. You know, it was the same in Australia that we spoke about the wax stocks that answer to Faang. That is just this massive desire to be like, something's capturing a lot of attention somewhere. How do we make an equivalent? And this is a classic example of that Magnificent seven. Magnificent 11. They are fundamentally different. The Magnificent Seven is like a concentrated tech grouping, whereas the Magnificent 11 is a lot more diversified. And I would say there's a lot more interest in them because of their relative value rather than just the, you know, strap in and hold on to your, say, unbelievable growth story. But the thing that unites the two of them is that they've both had pretty incredible stock price performance. 

Bryce: [00:16:48] They have, Ren. They've absolutely pumped out some incredible returns. So before we get to performance, let's actually go through what the 11 companies are that make up granola.

Alec: [00:16:58] All right I'll give you the letter you give me the company okay. G

Bryce: [00:17:03] GSK healthcare company specialising in pharmaceutical and biotech, with a $68 billion market cap. Up 13% in the past 12 months. 

Alec: [00:17:14] Nice.

Bryce: [00:17:15] R is Roche also in healthcare. They're a Swiss multinational healthcare company operating under pharmaceuticals and diagnostics, up 13% in the last 12 months. $210 billion market cap. 

Alec: [00:17:27] Nice. Next up we've got A. 

Bryce: [00:17:29] A is ASML, a tech company with a $360 billion market cap. They make chip makers. 

Alec: [00:17:35] The maker lithography machine. 

Bryce: [00:17:36] Lithography machines. They're up 46% in the last 12 months. 

Alec: [00:17:41] N.

[00:17:41] N is Nestlé Consumer. They call it consumer defensive 235 $53 billion market cap. Swiss company specialising in food and drink. As everyone would know, they're actually down 15% in the last 12 months.

Alec: [00:17:55] This is a classic example of why I don't think The Magnificent 11 and the seven are similar, because the world's largest food company is not the same as Nvidia. Anyway, we've got to N. Next up, we've got another N. 

Bryce: [00:18:09] N is Novartis, a healthcare company? Swiss Pharmaceutical 198 billion. Market cap up 6% in the last 12 months. 

Alec: [00:18:17] And then would you believe it another N. 

Bryce: [00:18:19] Another N. yes, Novo Nordisk healthcare company Danish Pharmaceutical known for Ozempic $560 billion market cap, up 62% in the last 12 months. 

Alec: [00:18:28] Now next up, you would think that Granolas goes to oh, to this. But Goldman Sachs are good at maths, not good at spelling because next up we've got L. 

Bryce: [00:18:37] Yes. So coming in at number seven is L'Oreal. I think they've dropped the L to get O so that they can make granolas. Consumer defensive a French personal care consumer goods company 229 billion market cap, a pretty flat for the last 12 months. 

Alec: [00:18:54] Next up we have L.

Bryce: [00:18:55] Yeah. Finally LVMH consumer cyclical. They're a French luxury goods company with a market cap of $410 billion down 4%. 

Alec: [00:19:04] And now we've got A. 

Bryce: [00:19:06] Yes, AstraZeneca health. British Swedish pharmaceutical, 165 billion market cap and down 6%.

Alec: [00:19:13] Most known for the Covid vaccines. Yes. Coming in at number ten, we've got s. 

Bryce: [00:19:19] We've Got s, which is SAP, German software company and technology 219 billion and the second best performer of the group, up 53% for the last 12 months. Yeah. 

Alec: [00:19:30] If people work at large corporations, they probably use that technology to try and boost off leave, amongst other things. Yeah. And then finally number 11, we've got s again. 

Bryce: [00:19:41] Yes. Sanofi, another healthcare company. French Pharmaceutical, $111 billion market cap down 10% in the last 12 months. 

Alec: [00:19:48] Nice. So that in Goldman Sachs estimation spells Granolas. In my estimation it spells grand loss. But either way, 11 European companies that span a lot of health care, some consumer companies and luxury goods, six of 11 are health care. 

Bryce: [00:20:08] Us is tech, Europe is health care. And a bit of consumer is the is the vibe that comes out of that. 

Alec: [00:20:14] Now here's my question, Bryce. Have they just picked most of the large non-industrial companies in Europe? 

Bryce: [00:20:21] Well it seems that way doesn't it. You mean that could have gone, you know, the Exxon's?

Alec: [00:20:27] No. Well, Exxon's American, but 

Bryce: [00:20:29] You know what I mean the shell BHP whatever 

Alec: [00:20:33] BHP iIs Australian. Yeah, it's what I'm saying is there's a lot of just like large cap European stocks X industrials. Like X oil and gas X materials ex resources.

Bryce: [00:20:48] I think what they have done here is actually taken companies that have contributed significant gain to the overall index similar to what. 

Alec: [00:20:55] Oh yeah. Nestle down 15% from last year. 

Bryce: [00:20:58] Well they do represent 20% of the combined value of all 600 companies in the StockX Europe index. So not as much as the Magnificent Seven. 

Alec: [00:21:08] I feel like that just reinforces my point.

Bryce: [00:21:10] That there's bigger. [0

Alec: [00:21:12] No. They've basically just gone all large caps ex industrials.

Bryce: [00:21:16] Yeah. Well if you look at actually the biggest companies in Europe these are 11 of the top 15. 

Alec: [00:21:24] Yeah that's kind of exactly what I was saying. I'm going to get it up quickly. 

Bryce: [00:21:28] But The Magnificent Seven is no different. They've just got magnificent sevens. Do you know what I mean like it's just the biggest companies X. 

Alec: [00:21:37] Not x, That's true. It.

Bryce: [00:21:42] So what we should do is come with an ASX 200 top ten acronym. 

Alec: [00:21:47] Yeah, yeah. It's just for me, it's like giving it an acronym gives the illusion of more nuance and more work and more like stock picking. Whereas really what they've done is just said we're bullish on Europe. [00:22:01][13.7]

Bryce: [00:22:01] Yeah we're bullish on that. Yeah. On the biggest companies in Europe. 

Alec: [00:22:04] Which is Europe. Yeah yeah yeah. 

Bryce: [00:22:07] So if you're thinking about how they've gone from a performance point of view versus The Magnificent Seven. 

Alec: [00:22:12] So so I've got the top ten companies in the Stoxx Europe 600, Nestlé in Novo Nordisk in ASML in LVMH in Shell Industrials, Novartis in AstraZeneca in Roche in TotalEnergies industrials. 

Bryce: [00:22:30] SAP in so two out of eight. 

Alec: [00:22:32] And the energy companies. Yeah yeah yeah. So anyway that really just kind of proves where we're at. Yeah. Goldman is long Europe. 

Bryce: [00:22:40] Goldman's long year. And I reckon we should make an ASX 200. I can see what we can see and what you can come up with. So in terms of performance, they've accounted for 60% of all gains in the European stocks over the past year. Makes sense. But if you look at them compared to The Magnificent Seven. So since 2021 total returns are equal weighted portfolio, the Granolas doubled in value with a total return of 103% compared to the total return of the Magnificent Seven of 128%. So not too far off over that period of time. I think the big difference, though, is if you look at what has happened over the last 12 months, some of the Granolas have had negative performance. The top, Magnificent Seven have just shut the lights out, albeit Tesla. 

Alec: [00:23:26] Yeah, they've had a negative performance. 

Bryce: [00:23:28] Tesla has. Yeah. Yeah. But there's one out of seven if you look at. 

Alec: [00:23:33] wasn't that one out of 11.

Bryce: [00:23:34] Now Nestle is down, AstraZeneca is down, LVMH is down. Barrios flat. So then you've got Nvidia up 224% Meta 136 so anyway, I guess the question is if you want to invest in these companies, you're just looking for the top 58th. 

Alec: [00:23:54] Just don't look. So I don't think there are any granola ETFs out there now, but I think this is a classic example of where an index is a better option than a well, granolas index because a granolas index, if you bought it thinking long term, you're really making a pretty, undiversified bet on 11 European companies. Whereas if you buy a European index, you get exposure to the performance of those 11 European companies. But you also get the built in resilience in the investment product that if they start to fall away, they get smaller and smaller weightings in the index. They eventually could get the flick from the index. But more importantly, the new companies that are coming through and driving the growth of the index, you also get exposure to them as they grow. And that you wouldn't get if you just bought a Granolas ETF. And that's like that is the real elegance and beauty of an index product that companies die. But indexes are forever, as we titled a chapter in our second book and Don't stress, Just invest. Indexes are like they're the really, truly only bottom drawer investment in my personal non personal advice opinion. But just because of the structure of that product. And so yeah, like I own a mainland Europe ETF in my core portfolio that I dollar cost averaging into. And so I'm you would have been cheering these grand laws on. 

Bryce: [00:25:22] Yeah absolutely. Well I mean they've contributed just like the Magnificent Seven to I guess outsized returns. For the index. 

Alec: [00:25:30] So do you own a Europe index? 

Bryce: [00:25:32] Yes. I don't own a footsie. Footsies is dead to me 

Alec: [00:25:35] Yes, footsies.

Bryce: [00:25:37] He is dead. I noticed that although of all the 11 as well. 

Alec: [00:25:40] AstraZeneca. 

Bryce: [00:25:41] I think only one is London based. Yeah. Yeah. British. British Swedish. 

Alec: [00:25:47] Hold on. AstraZeneca is listed in London. GSK is it? 

Bryce: [00:25:51] And it's London. Yes. It's two, two out of 11. Come on UK. 

Alec: [00:25:56] Yeah. Well I mean what the rest is Germany and France. Oh Switz. Which does well. ASML is Dutch. 

Bryce: [00:26:03] So anyway, I don't have a footsie, but I do have a European, ETF, so we'll, we'll have benefited. But Ren, let's take a quick break. On the other side we're going to answer a community question about compounding. We'll be right back. All right. Welcome back to Equity Mates. So we have a question this week that has come from Matt Rose from the equity mate's Facebook community that got a lot of likes and interest. So we thought we'd bring it on the show and answer it. So Ren, I'm going to rate the question out. So give me a moment here. Hey guys. You recently laid out why compounding is the eighth wonder of the world. Now we spoke about that in a previous episode, Lincoln Show Notes. Link in shownotes and you've spruiked its magical, mythical qualities. But I was hoping you could talk about when compounding doesn't work. And in those cases, what the trade offs might be. For example, I was fortunate enough to buy meta at a decent price and have held through the more recent growth. However, due to outside circumstances, I haven't been able to keep a consistent DCA into that holding or dollar cost average. Ignoring for a moment that meta recently announced a dividend, I would assume that without dividend and without dollar cost averaging, I am not actually experiencing compounding, but just relying on value increase. Is my assumption correct? And if so, what does need to be in place for compounding to occur? Good question. A lot of people comment on that saying, I've been thinking the same thing. You know, I'm not able to consistently put money in and I don't have dividends or reinvestments on. Am I missing out on the eighth wonder of the world? Let's go. 

Alec: [00:27:52] Well, I mean, the good news is you're not missing out. Conceptually, where we should start is separating compounding and dollar cost averaging because compounding happens whether or not you're adding to your investment. And compounding happens because your investment grows. And then the year after it grows some more and it grows some more. And, consistent rate of return over a long period of time becomes really powerful because you're growing not just your original investment, but all previous year's returns. And that doesn't need to be cash. So let's use meta and use really simple numbers. Let's say you, put $100 in and it grows 10%, and that then gets to $110. Then if meta grows 10% the next year, it's growing from that $110 base for you. You're getting $11 rather than the ten, because that's 10% of 110. And so then you have $121, and then the next year, Meta grows 10% again, you're getting $12.10 rather than what you got in previous years. And so that's not you adding more to the investment. And that's not you getting dividends and reinvesting. That's actually the value of your investment, the capital that the capital value of your investment growing consistently year after year without you doing anything. That's the beauty of compounding. Now you can supercharge compounding by dollar cost averaging and adding more to your investment. If you're getting dividends, reinvesting those dividends, those are all things that supercharge compounding. But don't worry, you're not missing out on compounding. If you've just invested some money and not done anything more. 

Bryce: [00:29:39] Yeah, I think what's also important Ren is that, part of the question was around, when does it work? And like, does this apply to any investment when we're generally talking about it as well? You know, we're talking about it at an index level. We often say, you know, the market return or if you're, you know, the $100 challenge that we do and get started investing, if you get 8% per year for 40 years, you get 350 grand. You know, those sorts of things. We're talking about that at a market level. Obviously, keep in mind that if you're individual stocks that can go to zero and you can absolutely get no compounding.

Alec: [00:30:22] Yeah, sure. But at the same time, individual stocks compound in the same way.

Bryce: [00:30:26] Absolutely. 

Alec: [00:30:27] Like it's not an isolated thing. It's just that that compound it a wide range of growth rates. Whereas when we talk about this sort of 8% to 10% consistent growth, that's like the general average across markets for indexes. But you know, like Berkshire Hathaway, Warren Buffett's company has compounded at about 20% a year for 60 odd years. So everything can compound down as well. Like if you have a consistent decline in growth rate then you get some very small very quickly. Well it actually slows as that the growth curve. But anyway let's not worry about that too much. So how's it different for individual companies. Like the principles are the same. But it's then like the rates of growth and fall can be different. And as we actually said in the earlier segment, you've got to remember that companies dot indexes are forever. So I think the studies since the 1950s in the US, about 70% of companies listed on the stock market have gone bankrupt. Which is wild to think about. But in that time, the index has just powered on and on and on, because new generations of companies come to market and keep growing and do well. And that's the difference between expecting compounding out of an index, which is set up to be ongoing and expecting compounding out of a company which history shows is often finite. 

Bryce: [00:31:57] So great question Matt. I hope we've been able to answer it. If you are sitting at home thinking, man, I'm not able to put more money into accelerate it, don't feel you are not missing out on the eighth wonder of the world. But keep in mind the beauty of compounding and where the magic really happens is over time and over a very long period of time. That's where things kick in. So just to put some numbers to it, you know, I put $1,000 into Meta and we are getting that 8% return, no dividends, no additional investments. At the end of the first year, you would have $1,080 in terms of value of meta if you left it, and it did another 8% at the end of the second year, it's 1166. And if the third year it's 1260, and by the end of the 10th year you're at 2159. So you've doubled your investment over the ten years. If it's just compounding at 8% per year, that could assume some years it's up 10%, one year it might go down a bit, but on average it's gone up 8% per year. So you can stay there without having to put anything into it. You are what you would. I guess what people are saying Ren is this just seems like a capital gains, which it is. But every year the gain is multiplied because of the capital base that you're starting with each year. 

Alec: [00:33:15] Compounding is capital gain. 

Bryce: [00:33:17] That's what I'm saying. Yeah, but it's the compounding nature of it comes by keeping in that time and time over a period of time. And it just, exponentially grows. 

Alec: [00:33:26] Yeah. Now, let me take your worked example and give you another worked example. Meta is up 136% over the past 12 months. If you put $1,000 in and it grows, it grew at 136% a year for the next ten years. How much money do you think you'd have?

Bryce: [00:33:43] Oh, $1,000 over ten grand. Easy. 

Alec: [00:33:48] Yeah, definitely over ten grand. You'd have $393 million. Yeah, well, it's more than doubling up year. So it's like one into more than two into. That's what it says here. Hold on, hold on. Is that right? Yeah. So. Yeah. Yeah. So from year one you've got about a thousand that goes to two and a half grand in year two which goes to nine grand in. Sorry. Two and a half grandin year 1. Nine grand in your 2. 34 in year 3, 125 in year 4.A bit shy of half million in year five, 1.6 in year six, just shy of six in year seven. 21.5 in year 8, 78 in your nine. Anyway, yes, it's right. 

Bryce: [00:34:32] If you'd like to ask a question, head to Equitymates.com/contact. All the information is there. and you can also come and join us in the Facebook community group where there's plenty of conversation going on as well.

Alec: [00:34:45] And if you want to fact check that compound interest calculator, I'll put the link in the show notes. You can't use the Money Smart Compound interest calculator because they cap your total annual interest rate at 20%. Yeah. Yeah, yeah. But I'll put this other one in so you can put ten years at 136% and say what I just saw that couldn't really be explained. 

Bryce: [00:35:08] Goodness me. All right. Love it. Well, that brings us to the end of our episode today. Stay tuned. Tomorrow we've got to buy or sell with Adam, in your feed, so stick around for that. And please, if you can leave us a five star review and. Yeah. And a comment in your podcast app. 

Alec: [00:35:24] Yeah, yeah. Surely Fairlight, they're giving us a positive review. Off to your little sprinkle it. 

Bryce: [00:35:29] We'll Ren, always good to chat later.

Alec: [00:35:31] That sounds good.