What is driving increasing company valuations?

Scott Berg - Portfolio Manager, Global Equity Fund, T.Rowe Price

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In this episode, Scott Berg, Portfolio Manager for the T.Rowe Price Global Equity Fund, joins us to discuss the recent performance and outlook of global equities, the role of value and growth stocks in your portfolio and the current factors driving company valuations. Scott also shares his views on the rising geopolitical risks between China and the US and his investment philosophy for navigating the current financial crisis.


Transcript

Paul O'Connor (POC): Welcome to The Netwealth Investment podcast series. My name is Paul O'Connor and I'm the head of investment management and research. The investment management and research team oversees the investments that we make available to you through our super and non superannuation investment platforms. And we're also responsible for the managed funds and the managed accounts that net wealth issues. So we spend a lot of time interacting with the fund managers. The due diligence we undertake on funds provides a lot of insights into the views of the global economy, financial markets and investment strategies offered by the fund managers. Today we have Scott Berg from T. Rowe Price, who is the portfolio manager for the global growth equity strategy.

The global equity fund is an actively managed long only global equities product that invest in a diversified portfolio of stocks, that have the potential for above average and sustainable rights of earnings growth. Good morning, Scott.

Scott Berg (SB): Good morning. Thanks for having me.

POC: T. Rowe Price group is a US-based global asset manager established in 1937. The firm is headquartered in Baltimore USA with offices in 16 countries and manages assets across a broad range of active equity, fixed income and multi-asset investment strategies. The firms listed on the NASDAQ and has US 1.2 trillion in  of 2019 T. Rowe Price have a number of active managed funds that are available on the net will superannuation and RDP investment platforms, including Scotts global equity hedged and unhedged funds, Australian equities and global fixed interest. The global equity research platform of T. Rowe Price includes 171 research professionals structured along sector and regional lines who provide stock recommendations to the firms, portfolio managers, including Scott. So there's no shortage of analysis and opinion that hopefully we can tap into in today's discussion.

Many observers believe that global equities were expensive prior to the outbreak of COVID-19. So we're not surprised when equity markets fell significantly in March, but the bounce back of the market in April was truly extraordinary. And markets as a whole have managed to hold grand since April and some stocks have even continued to rise in value. So our share prices is increasing because company earnings are increasing or evaluations being supported by the actions of governments and central banks, or a momentum investors, perhaps even driving the valuations. Hopefully Scott can provide some insights for us to these questions. To start with Scott, I assume your travel is now restricted. So how are you in the T. Rowe Price team coping with dealing with companies interacting with each other now remotely not being having the benefit of being able to have a face to face meeting?

SB: Yeah, absolutely. Again thanks for having me on today, Paul. Yeah it's quite surreal as someone who has spent the better part of half of every month for the last 15 years travelling around the world, typically get to about 15 countries a year. I have not even gone into Baltimore City to my office for more than 100 days. So it's definitely [crosstalk 00:03:43] still 100% working from home, but what I would say is the wonders of modern technology really have a loud, [inaudible 00:03:53] T. Rowe and many businesses we speak to, to work surprisingly well, in fact, better than I think any of us would have guessed if you had, have kind of thrown this scenario out there. And so in some senses, I would actually say that the corporate access we get to CEO's and CFO's of companies around the world has been greater than ever during this time. 

Before COVID, if we were going to see Mark Zuckerberg at Facebook, which we do every couple of years, you would be expected to show up in Silicon Valley. And so we'd have to coordinate all the T. Rowe people being there. I have to coordinate Mark's calendar. Whereas in the midst of COVID we had a meeting scheduled just before and it got cancelled. He was hoping we could do it in person, but then all you need to do is get an air of the [day 00:04:44] where everyone in their respective home offices can kind of get on and do it. And so I'd say it's actually, it's surreal in a sense that I couldn't have imagined that happening, but it's actually been even more access than ever and still feel incredibly connected and able to get all the inputs from the broad team or a platform with no issues at all.

POC: 
It's interesting there, Scott, that I think the whole COVID-19 has forced humans to adapt quicker to the technology and to embrace the technology, I think is there's a rise were fairly slow to embrace things and to change our behaviours, but there have been significant behavioural changes, I think, to the way we interact since the outbreak of COVID. The fiscal and monetary responses of governments and central banks in March with significant. So do you believe that enough has been done to avoid a [inaudible 00:05:42] global recession? 

SB: Yeah, I mean, the way I would answer that is firstly to say, I still think the size and speed of the response in a particularly of the US fed in the US government on the monetary and fiscal side was truly breathtaking and still not fully appreciated by many. And it took many people a long time to appreciate quite how much they had done and how quickly, but I think the bigger the lesson from my investing career and having lived through the 2000, 2001 tech wreck living through the global financial crisis, like [inaudible 00:06:22] is that people forget it's not a one and done thing. And this was one of the things that helped me through it. I mean, the fiscal stuff, the US government has done, we were dividing package number four right now. And the fed has done multiple different things. 

We took rates all the way from where they were to zero. We started on limited QE. Then we started supporting bond markets. Then we even started buying corporate bond DTX or whatever. And so the main message I think people can take away is that I think there's a very strong signalling that governments are committed to do whatever they need to and can do to try and help small businesses, unemployed people, the economy to get to the other side. And so it's not so much have they done enough? I think they've shown they've done more than nearly anyone expected at the stop and they committed to do even more if they need to.

POC: Yeah. I find it interesting there, Scott, that I think because of the human crisis, that is COVID-19 the central bank action and the fiscal policy response of governments has largely flown under the broader media radar as opposed to 2009, where even if it was on the front of just all of the newspapers. So yeah I agree that it appears to me that the governments are doing whatever it takes to ensure that liquidity remains in the system and that markets remain functional. 

SB: Yeah and If I can just add one follow on comment to that. I think one of the things post the global financial crisis that maybe feeds into this a bit is you know in the last decade was clearly had a rising populism globally. We've had a rising issue of the kind of haves and the have notes. And so I think there's also now maybe a little more political sensitivity when they're doing stimulus to either even be positioning it and talking about it as helping the unemployed person and the small business. And they genuinely we're helping those. Right. But it's not that the stimulus didn't make a big news, but I think in the GFC, the stimulus came across as being government bailing out big business. And this time around, I think the government's also did a lot better job of saying, this is us doing everything we can to help the people most hook. 

But just to put some numbers around that to, for people who haven't fully appreciated it. And I like your analogy with the GFC where it was all over the newspapers, what the US fed has done in three to four months is twice as much as they did in the entire global financial crisis period from 2008 to 2010. So take three years of QE and do twice as much of that in just over a quarter. Right? And so it's that kind of keep the people know they did something, but the scale of it really was unprecedented by the way, other countries. I think Australia is an interesting one, to, right? You think that the virus in Australia has been incredibly mild versus most of the developed world countries, the government quartered under control and being an Island helped a lot, but you look at the response of the RBA and it was equally pretty extreme and powerful when the actual kind of direct it to the country was maybe not as much as they originally thought.

POC: So when COVID-19 began to spread globally equity markets sold off aggressively in March only to stage a remarkable comeback in April, what would the biggest signs in the depths of the market downturn in March, the prompted you to believe that the seller would be short lived? 

SB: Yeah, it's a great question, the way I'm going to answer it is a little different to the way you phrased it. Because I don't think in this whole crisis, that was so much that I thought it would be short lived, rather that I thought we had seen an appropriate sell-off firstly. And secondly, then that we saw a positive data or inflexion on a bunch of key drivers, right? So, to put it in perspective, we even had a decade long bull market and I'm sure as everyone can remember before even going into this year for the prior two years, there had been multiple points of debate as to whether we were about to have the inevitable recession at the end of a long bull market. We had that debate in 2008, partly around China trade issues and the like.

That was when the yield curve got inverted and people were like, this is a signal for a recession, et cetera. So the first thing is we had, had a long bull market and at some point a recession was going to happen. And so COVID was the thing that catalysed a recession that ended a decade, long bull market, right. That's one first simple way for me to put it in context, forget about it and as a health crisis, but think of it as it was the catalyst for the recession that we're always going to have, to have that ends the bull market. So then if you look back over the last 100 years at the 12 cycle ending recessions and market selloffs all of those 12, eight of them average, a 20 to 35% sell off, and four of them average, a 40 to 60% sell off.

So the first question we kind of asked ourselves was, do we think this is the two thirds of cases where markets at the end of a cycle tend to go down by 20 to 35%, or is this one of the rare cases where we're really going to have a 50% sell off. And on say for us there were four different key things. And then a fifth one came along where we saw data that made us feel confident. It was more likely to be the former. So at 20 to 35% sell off and real briefly without going into them all, the first one was the size and the speed of the fiscal and monetary response that we kind of talked about. So just simplistically that in those four out of 12 massive sell offs in history, people claimed governments were kind of asleep at the wheel and in this case, clearly they were not, they were doing everything they could as quickly as I could to try and offset it.

The second thing was just the fundamental nature of this being more like a natural disaster than a typical business recession. It was a health crisis catalysing the recession. And so while you saw a lot of big headline, massive unemployment numbers, as much as the great depression, et cetera, 80% of the unemployed people in America [inaudible 00:13:19] load. They weren't permanently unemployed. So this is the global financial crisis where people had to find a new trade or move to a new city or start a new life because the thing they did before the crisis would no longer existed, in this one the vast majority of people were just waiting for their business to reopen and go back to work. And so that was a bit different. We had the medical advancements with every passing month. We were big believers that pretty much never in history had you seen as much focus, coordinated effort and focus from corporations and governments to get a solution.

So more testing, better testing, foster testing therapeutics [inaudible 00:13:59] and then an all out effort to kind of have 10 plus shots on goal for vaccine. And so those, it wasn't necessarily that we viewed it. It would be all clear, but that with every passing month we'd feel a bit better. And then I'd say the first one, which was really important is in early April, when most of the world was dealing with the kind of peak of COVID, China and Taiwan, and even South Korea, what already coming out the other side. And so to me there are a lot of people in the developed world that seem to be like, how long could we be in this, could this last a year.

And to us, we definitely got some comfort and patent recognition from China's factories. We're back to 75% utilised by early to mid April, right? It didn't take nine months or a year, not that every country will be exactly the same, but I'd say those four things there, made us feel like it was a 20 to 30% sell off, was due as markets often do. It went down a bit more than that. So we went down to 33%. And so then at that point to me, we had had a very appropriate sell off for an end of cycle, sell off based on 100 years of history. And so it happened to happen in a short period of time, but it was more of the kind of magnitude. And then the final thing, I'd say that people forget to two final points.

People forget the math when you sell off 33%. So you go from 100 down to 66.6, you need to go up 50% to get back to where you started. And so firstly, just to keep things in perspective, we went down 33% with bounce back about 45%, broadly markets in the world are still below where we started, right? And so this has been a hit. This has slowed the world down. This has been a hit to corporate earnings, but on average markets are down a bit and governments have reacted. The second thing is that if you look in history, stock markets typically bought them about four months before economic fundamentals. So the other thing we asked ourselves when markets were bottoming around like March is that didn't mean we needed to see a economic fundamentals instantly rebound in my mind, I was like, if markets end up bottoming here, that means we're still going to see incredibly tough numbers for April, may, June, July, and then maybe by August things start picking up. Right? And so I think all those things were important for remember and helped us through the.

 

(Previous episode) Have Governments done enough to prevent a global recession? - PIMCO

In this episode, Brian Leach, Credit Strategist at PIMCO joins us to discuss the impact of fiscal and monetary measures issued by Governments and central banks and whether enough has been done to avoid a deep global recession. Brian also shares his views on the current performance of the fixed income markets, and what investors can do to positions their portfolios going forward.

Listen to the episode



POC: 
As you're going through your points there. Scott, I'm just thinking to myself that the longer the cross has went on, the more we adapted, the more we got comfortable adapting to a different way of life and in terms of doing business and fundamentally business continued to go on. So to your point, it was unlike 2008 where they were structural problems in the whole financial market system. This is a human issue and it wasn't related to any structural floor that we've got in a banking system, for example. So yeah, it's a bit of, it's a tick to the resilience of humans and the way we adapt in my view, how do you think about valuations now with so many supposedly risks brewing on the horizon?

SB: Yeah, so tying into something, I just said there, actually let me make three points, I mean the first one is my view of valuations before the sell off was that while they were a little above average. They were far from bubble like, they were far from extreme. And so if you look before the crisis markets were trading broadly around the world at a mid to upper teens, multiple of [inaudible 00:17:59] earnings, which is a bit about the longterm average but very different than when you go back to the Tech bubble in 2000 when the whole world, whole developed world was trading at 25, 26, 27 times earnings. And that actually included you tech companies with 200 times earnings, et cetera. So the first thing starting point wasn't as extreme as it had been. And we were also in a very low interest rate. 

The second thing is I said is, even though markets they went down so much that even though they're back up, we're still below where we started. And so one way I think about it is just to use a really simple analogy. Don't quote me on this exactly. But my best guess right now is that the world has lost about 18 months of of GDP. If you like through COVID just as it could be as little as a bit over a year. It could be as much as two years, but let's pick a mid point and say 18 months. So effectively in my mind, it's going to take about the middle of next year until we get back to where GDP was on January 1st going into this decade. And so in that sense, if markets broadly right now are still 5% below where we started the year, and in about another year from now, we're going to be back to where we were at the start of this year.

And then let's say markets go up another five, six, 7% over the next year, we were kind of going to end up at a market level, similar to where we started with a GDP, similar to where we started. It's not that far off that mass. Now, clearly there are some companies that have won a lot more than others and we'll get onto some of that in these later questions, the different [inaudible 00:19:43] trends, et cetera. But at that highest level that doesn't strike me as totally absurd. And then with the final caveat that we are now in a world where pretty clearly interest rates are going to be lower for longer. And I had long said, as I've travelled back to Australia through the last decade, that Australians didn't fully appreciate what low interest rates really were. Because up until about the last six, nine, 12 months, you could still get a decent yield in bonds in Australia. Right. But that's changing. And so the other thing is in a world where all of sovereign bond yields of developed world countries, it's not just Japan, it's not just Western Europe. It's not just America, it's Australia, it's Canada, it's everywhere, right? That in a world where the risk free rate is much slower, you can actually make an argument to me that the equities could be meaningfully higher. Right?

POC: Mm-hmm (affirmative)- Interesting there Scott, maybe moving to emerging now, many emerging market countries risks of flagged weakening fiscal positions of the governments. So do you believe COVID-19 could change the growth profile of the emerging markets? 

SB: I know it's a but it's a bit like saying if I averaged the US and Japan and Italy and Sweden or something, and we take an average of those four countries, right. Does that accurately describe any one of them? Right. Because Japan and Italy are much worse than the US and Sweden and Sweden and the US much better than those. So the first thing, when I think about emerging markets I think about it as full pretty distinct buckets. So the first bucket is China, right? It's just so big and massive in and of itself a bit like the US is in the developed world. And it's really important for people to understand China's basically being the best performing country in the world this year. It was the centre of Corona Virus. That's where it all started. And yet the return on China ratio has been as good as the return on the NASDAQ 100, it's up double digits this year. 

And that's part of margin. It's actually the biggest part of a margin right? So firstly, we've got China, then you've got a whole lot of countries that are exporters and basically the tech supply chain, some of which shouldn't even really be called emerging. So when you take countries like Korea and Taiwan, for all intents and purposes, they're developed world countries, but for various issues of corporate governance and China not allowing someone to cold Taiwan, a country, et cetera, those ones get bucketed when they not really, but they're really developed world tech supply chain. Then you have a whole bunch of countries that are commodity levered. So think of the [inaudible 00:23:03] Bush of Australia and Canada. And so this is the, Brazil's the, Russia's the South Africa's, whether it's metals mining, whether it's oil, the middle East, et cetera, and they are driven by commodity things

And then you have the small group of countries, which I think are actually the really interesting part of the game where they're really demographically driven. They have very low levels of debt to GDP. They have relatively normal interest rates and they just have meaningfully highest structural growth. Right. And the big five I talk about, and my favourite five, would be India, Indonesia, Philippines, Vietnam, and Peru. But simplistically, I think about it as kind India and Southeast Asia as the key ones. And so I would say is when I think of COVID, if I think covert partly is leading to a low interest rate world and a lower growth world for longer, then being able to invest in those fastest growing countries where they just have demographic dividends coming where they still have low debt levels, where they can still benefit from interest rates going down.

I would say that's to looks like a very enticing and high probability bet. Now on the flip side, if you're talking about countries that are oil level, like Russia in the middle East, and I think we've got real issues in the energy sector, right, then they're going to struggle. Or if you talk about some of the other commodity ones, like a Brazil and South Africa, right, they're going to have their own links to commodities, much like Australia does which can override some of the other stuff. But overall, the kind of bits of emerging we're interested in, I think still look very interesting to me. I haven't lost any, any conviction in those.

POC: Yeah. I think a very valid comments you make there Scott around and particularly, I guess it's the role of an active manager to look through a asset class and to perhaps look at the different markets, the different countries, and then realise the different economic growth trajectories of those countries and then also the stock markets and the investment opportunities there. So I think you made some very good comments [inaudible 00:25:45]. I think investors need to think about emerging markets.

SB: And if I can share actually one more anecdote people might like to hear on this one, one of my favourite questions to ask CEOs or CFOs, if we're having a more relaxed kind of dinner or lunch meeting over the years has been to say, if you could click your fingers and magically have a meaningfully bigger business in two or three countries of the world, what would those countries be? Where do you really wish you had more than you have today? And what I would share with you kind of the summary of all that is never have I had anyone say they wished they had a lot more in Russia. I don't think I've ever had anyone say they wish they had more anywhere in Africa. I've had probably 80% of people say they wish they had more in India or in ASEAN. 

It's the number one place in the world that even successful companies, even companies like Amazon and Alibaba, which notionally to me have the best positioning of near any company on earth. Both of those see India and Southeast Asia as the two most important dynamic, interesting markets on us that can move the needle for them. Right. And so there are parts of the [inaudible 00:27:02] but interestingly, the incredibly small pots of the [inaudible 00:27:06] benchmark. And so we're not talking about South Korea or Taiwan, we're not talking about South Africa or Brazil, we're talking about focus, parts of it, but I'd say most of the corporates I meet with are looking to have more of their business in these fast-growing [inaudible 00:27:21]. And they would much prefer to have that than have more business in Western Europe or Japan or in a number of places, even in the US.

POC: So Scott, how do you think about the larger crowded COVID winning companies, and the valuations that they're currently trading on? Because they do appear quite extreme. You really comments there around the market as a whole, not being too overvalued, but some of these individual, I guess FANG stocks, and what have you seem to be trading on extreme multiples?

SB: Yeah. So on this one to I'll share two or three different perspectives to add a bit of colour. I mean, the first one is even while there is a small group of midcap software as a service companies and cloud companies and a few of the smaller eCommerce companies that are trading at very hefty multiples. If you actually look at a lot of the FANG stocks, I think it would surprise a lot of people to know that if you look at Google and Facebook, right, those two stocks. So two of the fans both trade at somewhere 20 to 25 times an hour, a year earnings number or free cash flow number. They have no debt. They have hundred billion dollars, a cash or more reach. The growing double digits if not nearly 20%.

And so if I flipped it back and I look into kind of Australia, New Zealand context, and you think about a company like CSL, right? Which has been an absolute horse for more than a decade, right? It trades at a 35 to 40% multiple premium to Facebook and Google. And Facebook and Google a trade are growing nearly twice 50% faster, if not twice as fast with no balance sheet risk at all. And at the cutting edge of what's happening globally in artificial intelligence and data, et cetera. Right? So I'd say it's still very different to back in the 2000 bubble where you had a company like Cisco trading at 200 times earnings. Equally, even if you look at Amazon, if you take Amazon out three to four years, Amazon now is trading on an earnings multiple, not that different to Walmart based on our own analysts numbers when we go a couple of years out.

And we would argue even a couple of years out and Amazon looks a lot more, a better place. So first thing is I'm not going to argue all of gross isn't trading more than all the value, and some of these stocks are up a lot. But the first thing is I think the magnitude of how expensive they are is over hot particularly when you're talking about the big caps. Same with Apple, with Microsoft, none of these things have 40, 50, 60 multiples. We're still broadly. Apple for a long time was a mid teens multiple burnings. And now we're up at 20 times a bit more, but they don't cry as each. But, I would say we have seen those stocks really outperform, they are relatively more expensive, but here is another fun stat that I think is why they deserve to be in some sense.

So if you look at e-commerce penetration in America back a bit more than a decade ago at the last crisis we had, it was about 6% of all retail sales in America were made online. And over the last decade, that 6% went to 16%. So it was increasing at about a percent a year of penetration. In the last 12 weeks through covert, that penetration has gone from 16 to 26. So we've had 10 years of eCommerce penetration happen in 10 weeks. And I would say broadly, when we speak to so many different companies, they feel like COVID has truly kind of accelerated or fast-forwarded adoption of a lot of digital related business models, whether it's digitization of business, whether it's cloud with our SAS software, whether it's eCommerce, it's accelerated it by at least five years. So if it's kind of a 10 year benefit here and now they recognise some of that gets given back when business returns to normal, but it really was kind of a step function five-year increase in a couple of months.

And so that's really incredibly valuable, right? And then on the flip side, when you look at the stocks that have massively underperformed and you look at what's in the value index there, and you see you've got a whole lot of developed world banks now in a world with near zero interest rates, which are just really tough for bank. We've seen that in Japan, we've seen that in Europe. You've got a whole lot of energy and commodities companies dealing with low energy and commodity prices, which is just a big kid. You've got a whole lot of losers on the side of traditional bricks and mortar commerce or industrials getting disrupted by the less spending on aerospace, all those things. And so I would say there is a big gap there, but a decent part of that gap is deserved. And so I have been trimming a number of those winners. I do think it doesn't make sense to have bigger bets on the middle or higher prices, but many of them, I still think are going to be bigger companies in another two or three years.

Global economic outlook: what risks and implications investors need to consider

In this webinar, Sebastian Mullins, Multi-Asset Portfolio Manager at Schroders, joins us to provide a macro analysis of the global markets, including the risks and implications investors need to consider. Sebastian will also share how the Schroders Multi-Asset team are currently positioning their portfolios to respond to current market conditions.

Watch the presentation


POC: 
On a bench in that the companies were under immense pressure as the world locked down in March. So do you have any interesting stories from your engagement with the companies over this time? 

SB: Yeah, I would say, I mean, to me it was incredibly helpful. The access we had real time through the whole crisis and maybe one of the ones that just really jumps to mind was how surprised. So during the kind of peak four to five weeks of COVID, I would say I was probably doing between six to 10 calls a day with leaders of different businesses around the world. And one of the things that was very striking in early April was how surprised they were at how quickly the bond markets totally opened up. Right. And so if you look at a company like Airbus, they make planes and all the airlines had stopped flying and they had this big backlog and there was all the talk of cancel planes. Your company at the kind of the store, right. 

SB: And in the first 10 days of April, they raised I think it was eight year bones at something like two and a half percent interest rate, right? So you've got a company in the teeth of crisis. That's at the centre of the crisis raising the late 10 year money at two and a half percent. Then even more surprising. I remember we had a call with Wind the casino company, and as the fed had started acting, doing its QE and intervening in board markets, they put feelers out to see if they could raise some unsecured debt. Right? So here you've got a casino company with all its global casinos closed looking to do unsecured borrowing, and they had more interest than they expected and could raise more money than they thought at better rates than they thought.

I'd say those data points, as examples were incredibly helpful in signalling to us that this, recession was very unlikely to become a financial crisis. If you have companies that were in the eye of the storm and actually could quite easily raise more money, even unsecured debt, right. For a company in the eye of the storm, that was really incredible. And some of that kind of stuff helped us kind of have a bit more conviction to also stay the course as stocks were rallying, right. Not to just start selling them too soon because the world was more washed with money than I think people appreciated.

POC: I think, as you're making those comments, there's got, I was thinking in my mind that again, the extraordinary actions of central banks with monetary policy with fiscal policy of governments really did STEM the liquidity gap in the market that appeal quickly and then disappear. And as you say, companies could still raise it to continue on so that's very positive in my mind. Again that we don't have any structural issues in the financials.

SB: Yeah. And it was just so different. It's just so different. Again to 2008, I share a memory from that one where there was a point in early 2009, I think it was February of 2009 when Microsoft, which a company that had more than a hundred billion dollars of net cash and effectively no net debt, but they still operated with some corporate borrowings, but just cashflow and tax efficiency. They couldn't even borrow money for 30 days as basically a debt free, incredibly profitable company. Right. And that's the contrast. When you've lived through that and you see a totally safe company that is probably safer than a government bond, couldn't borrow money for 30 days back then, and now a company that was a casino with all its casino shot could borrow unsecured debt or a plane might go. It was just so different. And I think in investing, it just really helps when you've lived through prior crises to have those reference data points. So it's not just what we saw this time. It was just how starkly different it was back then before.

POC: Scott. We usually finish our podcast with asking our guests for personal investing tips that you've applied through life. And that perhaps are central to your own personal investment philosophy. So do you have one or two tips that you might be able to share with our listeners? 

SB: Sure. So, funny story on that one, I've taught a little mini investing class at both my children's. I have a son and a daughter and both of them when they went through fourth grade, their teacher asks me to come in and teach a little investment [crosstalk 00:37:46] to them. And I would say at the most basic fundamental level, I mean, one of the things that's just always stuck with me is the notion of one just has to get in the habit of saving and investing regularly and in a disciplined way [inaudible 00:38:02]. And the payoff to doing that is just huge, right? Not always tell the kids the story of, if you have two people, one who invests, a 1000 a year from age 20 to 30 and then never invest another dime. And then someone else who does nothing until they're 30 and then puts a $1000 in every year from 30 to 65. 

In most cases, the first one is going to come out ahead at age 65 because just the power of compounding once you have that money, right. And my favourite personal story, and maybe this is sharing a little too much, I won't put all the exact numbers on it, but if it's been just incredibly powerfully in my own loss, that before I went to business school, the second job I had in my career, I was working for a corporation in Dayton, Ohio, and I was only worked there for about two and a half years and was married with no kids. And so we were trying to save some money for a retirement. We were there for two and a half years I think we managed to save something on the order of 20, $25,000. And then we went to business school and there was that temptation to kind of pull that money out and use it to pay for vacation or pay for some of the school fees.

And I remember saying to my wife, we put this in our retirement so we would have it and let it build. And that money today that $25,000 that I saved in my second job is worth more than half a million dollars tax free forever. I could basically pull a dividend of $25,000 a year forever off something I only ever put $25,000 in. Right. And it is just for me being the most powerful thing, I just could have never imagined in my wildest dreams that, that little bit back then, but just the power of it sitting in there and being invested. And you never know when the market, so the first one is just doing that. The second one I would just say, and it sounds motherhood and Apple pie, but I think it's really important to remember that on average in investing, you really do want to find yourself buying low and selling high.

And yet on average, what nearly everyone's behavioural bias is, is they wait until things positive news is out there and they buy after stocks have gone up a lot and you see this happening all around the world right now, people buying now, and when markets are down, they actually have the bias to sell, not to buy. Right. And so just recognise human nature is to, be fearful at the bottom and want to sell and to feel better after it's gone up. But actually you have to try and fight that.

And the easiest way to fight it to me is just the dollar cost averaging notion. Just putting money in regularly, consistently so that whether or not the markets are going up or down. If they are going down you're buying more, if they're going up you've had some of the rod and, at a minimum do that. But then if you can actually get yourself to go risk on when others are risk-off and equally, then be a bit more prudent when others are starting to get a bit crazy, then that actually is a really powerful thing. And it's different than the question you asked, but one thing we didn't touch on yet, which I kind of neglected to one of your earlier questions and I want to make. We'll touch on is my personal view of risks right now.

And the market right now, sitting here in mid July is that we are in a very different place to where we were back in March, April, May. Right. We now have a market that has rebounded 40%. I mean, we're still below where we started, but we've come back. We've got a market where the China US tensions a probably flashing AMBA, right? I think the new normal state of affairs with China's going to be ongoing tension, but it's definitely more than it's been for a while.

We've got a second wave of the virus happening or an extended first wave in many places. And I'd say, if you went back in April, most people would've thought we probably would have had less cases in the US and in many places that we have brought down. We've got an upcoming election in the US which is getting a bit more press than a notion that you could have Democrats potentially sweep all the houses here, which would and this isn't a political comment, but it would probably mean a different kind of regulatory regime and tax regime.

So when you think of those yellow flags, I do think we're now at a point where it makes sense to be a bit more prudent. I'm trying to be more prudent than I was two or three months ago. Because I think there are yellow flags, but then if I take the longterm view, and this is always the hard thing in investing really simplistically to me, we are now very early in a new equity cycle. So we had a 10 year equity cycle from the GFC until Corona. And we are now months into the next equity cycle. And so all the internet equity cycle, things like banks and materials companies always look bad, right? They always look bad in a recession and then they tend to do better over the cycle.

And so I would say near term, I'm acting a bit more prudently than I was when others were fearful and we've dialled it back, but I'm not outright defensive because I do think over the medium term here. This is the time you want to be leaning into some stuff like banks and materials companies when you're at the bottom of a cycle. And so quite aside from just the Corona winners, interestingly, our second biggest overweight in the portfolio right now is financial stocks and we're overweight material stocks. And part of that's just saying when you're in a crisis, that's when you want to lean into these things, right. It's a bit that same pattern recognition I was talking about.

POC: Yeah. Some very wise words there Scott, and I think, as you were talking, there are a couple of comments that all thoughts that came to mind and particularly around, we're not wired as humans to be good investors. We're too emotive and it's very difficult to be fearful when others are greedy and greedy when others are fearful. Because we are wired to move with the masses. And hence in my mind, that's what's very important to employ a active manager who's true to their label that can make these petitions by removing the emotion there. And then the other obvious thought that I had in my mind is when I was a younger guy, I think second year at university, I did a subject basically titled compound interest is the eighth wonder of the world. And if you invest and you reinvest your dividends and you just have a long term view, the risk will typically look after itself.

That's so incredible. I still agree with those two lessons. Right. And my final closing comment I just make is that I made with a couple of clients over the last two weeks is if you actually look over the last three years, right, and we think about people feel like we've just had this big crisis, it's been bad. The annualised equity return for investors in Australia to be in global equities for the last three years is nearly 11%. Over the last five years it's nearly 10%. And this is even with a period of struggle at the end, right? And so still just taking that medium term horizon. I still think in all of human history, equities and real estate have been the two best ways to generate the most kind of long term wealth, and real estate tends to be a lot rockier road with a lot more leverage and people also go and bust. And so I still think in the very medium term, owning a portfolio of great companies that are growing their businesses, if you can have that long term view, it tends to be a pretty good thing.

POC: Well, I tend to think with property, I agree on your comments there. And I also tend to think it's very difficult to get a very broadly diversified, direct property portfolio as opposed to the ease of being able to invest in a diversified managed fund that will expose you to potentially 100 or 200 of the best companies in the world. On that note Scott, thank you very much for joining us this morning. It's been a very enjoyable discussion and I think you've made some great comments that are valuable for both myself and our listeners.

To the listener. Thank you again for joining us for the podcast this morning. And I look forward to joining you for the next Net Wealth Investment podcast series. Thank you.

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