Navigating the January rally and avoiding investor traps

In this episode of Stocks Neat, Co-Portfolio Manager Harvey Migotti joins me to discuss the recent January rally and what it could mean for future returns. We discuss how investors can protect themselves from being too conservative and missing out on potential gains.

Special guest Liam Shorte, @SMSFCoach on Twitter, then joins the podcast to further explore this topic. He discusses portfolio construction principles and tools investors can use to navigate tumultuous stock markets.

We discuss the typical behaviour of investors during market highs and lows and share some client success stories and anecdotes to illustrate the benefits of regular rebalancing, dollar cost averaging, and dynamic bands in portfolio construction.

“The natural aversion of people, when they see a stock that’s beaten down, is they’re very reluctant to go into it, because they think it dropped 20%. Why would I go into something like that? Again, you have got to go back to the fundamentals and see, was it a short-term, or a long-term thing that’s affecting that company? If it’s only a short-term thing like COVID, and it’s a company that’s got really good cash flow, that’s actually the opportunity to get into that stock.”

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Edited Transcript


Just a quick reminder, this podcast may contain general advice, but it doesn’t take into account your personal circumstances, needs, or objectives. The scenarios and stocks mentioned in this podcast are for illustrative purposes only, and do not constitute a recommendation to buy, hold, or sell any financial products. Read the relevant PDS, assess whether that information is appropriate for you, and consider speaking to a financial advisor before making investment decisions. Past performance is no indicator of future performance.

[0:00:39] SJ: Hello, and welcome to episode 15 of Stocks Neat. I’m Steve Johnson, Chief Investment Officer at Forager Funds. Sitting in the hot seat with me today, Harvey Migotti. He’s already into the whiskey before we’ve even started the podcast. Filling in for Gareth today and Harvs about to head off overseas. We thought we’d get him in before he disappears from our shores for bit of an extended trip. Where are you off to, Harvey?

[0:01:04] HM: Yeah, so a couple days in London. Meeting a few companies and investors. After that, off to the US, where we’re getting in a couple of conferences. One is a smid cap and one small cap conference. Usually, they’re a very productive source of idea generation. Then on the backend of that I have my holiday. Going to Japan, actually, drinking a Japanese whiskey.

[0:01:23] SJ: Very topical. We’ve got a Japanese whiskey today, the Nikka, rare, old, super whiskey. They told me on the Internet, it’s an old man’s whiskey in Japan. A very kind gift for us here at Forager from Greg Hoffman to celebrate the 10-year anniversary of our International Shares Fund. Bit hard to believe it’s been 10 years, to be honest with you. I wrote a blog reflecting on that period this week, if you want to check it out and see what we’ve had to say.

Today’s podcast, we’re going to talk about this pretty significant rally that we’ve had in global stock markets over the past few weeks and what that might mean for future returns. I’ve got a special guest, Liam Shorte, joining us midway through the podcast to talk about all of those people trying to pick the bottom and some tricks and tools you can use to try and stop you losing money while you’re trying to do that.

Then you’ll be back joining us, Harvey, to talk about some sectors where you’d really love to see a price pullback at some point in time.

Look, let’s jump into it. It’s been a big start to the year. The S&P 500 was up 7% already. The NASDAQ up 14%. That NASDAQ tech heavy index was one of the worst performers in 2022. Gareth actually tweeted a really nice chart from one of the brokers the other day that had the 2022 return plotted against the 2023 year-to-date return, and it was almost a straight line showing that every single company, or stock, or sector that has performed really well this year are the ones that performed poorly last year. What’s been happening out there?

[0:02:48] HM: Yeah. Well, I think what’s clear is that sentiments obviously improved. We were at very extreme levels back in Q4 of last year, especially October, November, December, which is Q4. Many of those have now tilted a bit more neutral. If you look at the Bank of America Fear and Greed Index, we were at rock bottom levels back then. Now, we’re more a neutral-ish tilt on that front. The bull and bear index that a lot of people like to talk about, which is investor sentiment, ended a record streak of 44 consecutive weeks of bearish sentiment. We haven’t really seen more bulls than bears in that survey since March 2022. Big stocks, such as Meta have doubled from the lows. Tesla’s up 90% almost year to date, or since December. Yeah, it’s been a wild ride.

[0:03:35] SJ: Yeah it has. We talked a bit about this last year, but I don’t think overall index levels got to levels that you would say reflected the amount of investor pessimism that was out there in terms of valuations. Certainly, in some sectors that were economically exposed, or cyclical exposed, sentiment was very low. We were talking about some businesses and buying some businesses out there in sectors, like building materials, that were trading at very attractive levels, looking through that cycle, It all unwound in terms of that sentiment very, very quickly. I mean, what would you say is driving the investor enthusiasm?

[0:04:11] HM: Well, I mean, generally, we’ve seen interest rates stop going up rapidly. They’ve somewhat stabilised so far. At the same time, the world economy is doing okay. I mean, earnings season so far has been relatively decent, particularly relative to expectations coming into the year. We’re not seeing tons of humongous profit warnings. Guidance generally seems to be okay. Expectations were there for a really bad earnings season and that didn’t happen.

Europe is chugging along fine. Energy prices are down, which is helping many countries over there and helping the consumer at the margin. Of course, China reopening post many years of lockdowns, obviously helping sentiment and starting to boost certain sectors and whatnot.

[0:04:54] SJ: Yeah, so whether they’re right or wrong, I guess it’s this path towards a soft landing where the economy can muddle through okay. Interest rates stopped going up and replying still fairly low discount rates by historical standards to earnings that hold up okay. It’s given people some optimism. I mean, what does that mean for future returns? I touched on that building sector before, a stock like IBP, we’ve touched on it on the podcast. We think it’s a really, really good secular story here. In terms of multiples traded at such a wide range, without that much changing dramatically on the fundamentals front. Is that true of indexes as well?

[0:05:31] HM: What I will say is that some sectors started really cheap. As you mentioned, we made the case for small caps many times, particularly back in December. I think you even wrote about it in one of the letters. We think there’s some really good, attractive long-term returns in some of those small cap companies. Many haven’t bounced. People kind of, when they want to go back into the market, they tend to gravitate towards the larger names that they know, and the more liquid stuff and some of the smaller stuff can take longer to bounce.

There’s no doubt that it’s harder today than it was a month and a half ago. Market multiples, as you said, never got screamingly cheap, but some of these sectors have certainly improved from the lows. You mentioned IBP, that went to a very, very low multiple by any standard, even if there was some profit downgrades to come. We saw that across the board and many sectors that are exposed to other consumer discretionary spending, US housing and whatnot. They bounced heavily this year, 25%, 30% in some cases. So, the “easy money” has, to some extent, been made. You got to keep fishing and digging up rocks.

[0:06:32] SJ: Yeah. It’s almost a bit of the opposite risk and reward at the moment, because I think in a lot of these sectors, the downgrades and the hit to sales, it’s still coming. It may not be as bad as was being implied by the price, but we’ve seen here in Australia through this reporting season a couple of companies. Nick Scali may be a really good example, right? Sell loungers and furniture. In June last year, the share price had almost halved back to $7 a share. Then by December, it had recovered. By the end of January is probably a better marker, recovered to $12 a share. It was up 70 something percent over that period and we still hadn’t had the slowdown. Then they come out in February and say, slowdown is coming. Which you would think that everyone is fully aware of with what’s happening with interest rates and the share price fell back another 10%.

I think you’ve gone from prices that do genuinely look through some earnings downgrades, to ones that there’s potential, I think, for people to still get quite nervous and scared when the actual hits start coming here. I don’t think there’s any evidence that in those sectors that benefited massively from COVID. I mean, it is just coming and it may be pretty bad here in Australia, where the interest rate exposure of a leveraged sector is so much higher.

Even with that IBP, I’ve seen you taking some money off the table there in terms of that portfolio waiting, I guess that’s generally been the approach, right? It’s a business that we want to own for a long period of time, but we’re no longer getting that same degree of upside for living through what’s going to be a difficult year.

[0:08:03] HM: Yeah. We were adding to it as, I think back in Q4 and near the lows and we’re taking some of that off. I think just being prudent here in terms of weightings. Even though we’re going to pull that stock for many years, most likely being prudent in terms of weightings. When it runs ahead of earnings and so forth, and as you said, expectations get a bit higher. I think that’s probably the prudent thing to do here. Redeploying to things that haven’t moved, or are being still ignored, or where we see something different happening.

[0:08:30] SJ: Yeah, I’d generally agree on that. I think we’ve skewed more conservative over the past few months as share prices have run up. You’re seeing, I think, through this reporting season that the optimism is fragile when it comes to some of these companies that are quite exposed to a cyclical downturn. It does lead me on to something I really wanted to talk about today. That is the investor obsession with waiting it out when things are uncertain and where people are nervous. I spoke to so many investors late last year that were waiting for the environment to be better before they invested with us, or in other funds, or just in the market in general.

The conversation is always, I want to see how this interest rate cycle goes. I want to see what the economy looks like before I invest my money. It’s just another lesson in that you don’t get that free option, right? You don’t get to sit there and wait until the coast is clear and then still be buying cheap stocks on the other side of it. Long-term returns from equity markets are 8% to 9% per annum. I think it’s really easy for people to forget that and go to cash at the worst times.

[0:09:33] HM: Credit time and whatnot. Yeah. I broadly agree with that.

[0:09:35] SJ: That may still be right. There’s no guarantee that we’re not sitting here in a year’s time and prices aren’t lower. To the extent that that happens, they’re not going to be able to pick that environment either. I’m going to bring a guest in today. Because if that is you and you have been doing that, don’t stress too much. It’s almost every investor that does exactly the same thing, professional and retail. I’m going to bring my guest in today, who’s a financial planner, to talk about some tools you may be able to use to stop it happening next time around. Harvey, we’ll get you back after I have this chat with Liam and wrap up the podcast there.

[0:10:07] HM: Sounds good.


[0:10:09] SJ: Welcome to the Stocks and Neat Podcast, Liam Shorte. Hello.

[0:10:13] LS: Hi. How you doing?

[0:10:14] SJ: Very well. Thanks. Liam runs Verante Financial Planning. He’s on Twitter as @SMSFcoach. Passionate follower of the Irish rugby team and anyone who’s playing against England. And it’s an SMSF coach that is exactly what we need today. We’ve known each other professionally for many, many years. I’ve always appreciated your transparency and insight into the world, so it’s fantastic to have you on today. Thanks for coming in.

[0:10:37] LS: Yeah. Really excited to be here.

[0:10:39] SJ: Look, I’ve got you on this podcast, because you probably deal with this issue more than me. I’ve just talked about it with Harvey, but I do get frustrated with people trying to pick the bottom of markets and telling me they don’t want to invest, because times are going to be better down the track and they want to wait until the coast is clear before they come and invest. Then of course, by the time that actually happens, it’s too late. Why do we all behave like that is my first question?

[0:11:05] LS: The main reason someone goes into a stock is usually from a recommendation, or an article they’ve read that really outlined the reasons why a company is going to do well, or is going to be positive going forward. Then, to come out of it, especially if you’ve done well, you need an even bigger trigger to try and push you to actually press the sell button. People are not too bad at pushing the buy button on a good stock. But taking profits, it just seems to be really hard for some people to do. Because they’re not seeing a new article, updating them on what that – the outlook for that company for the future, that the fundamentals may have changed and it’s time to take some profits, they just hang in there. They can often ride the rail down.

Then the natural aversion people, when they see a stock that’s beaten down, they’re very reluctant to go into it, because they think it dropped 20%. Why would I go into something like that? Again, you got to go back to the fundamentals and see, was it a short-term, or a long-term thing that’s affecting that company? If it’s only a short-term thing like COVID, and it’s a company that’s got really good cash flow, that’s actually the opportunity to get into that stock.

I love it. I remember years ago, Resmed had a recall. I knew some of the researchers in there, they knew they had the next level and the next version coming out in that, so the flow of income is going to be great for the future. But that short-term, they dropped about 24% and we just jumped in and pulled as much as we could, especially for our younger clients who didn’t need income.

[0:12:33] SJ: Yeah. I find even in terms of overall portfolio exposures, people will sit there and say, “I want less exposure to equities, because the market has fallen.” They tend to be least invested when the markets are at its lows in terms of the percentage of their portfolio and vice versa, things are going really well, the allocation to overall equities has grown really nicely. And at the top of the market, you end up actually having your maximum exposure to a particular asset class.

I wanted to talk a little bit today, I guess about how you talk to your clients about general portfolio construction. What are some of the principles, or tools that people can use to think about those overarching principles about how much money should I have invested in different types of asset classes?

[0:13:21] LS: Look, one of the things, the first thing, you have to understand the person’s age, their situation, whether they’re still working, semi-retired, or retired, what’s their need for income going forward and their need for big, large capital amounts of their record as well. What we try and do is make sure that one, we’re suiting the portfolio to the actual income needs of the client, without them worrying. That case of having too much or too little in shares, we try to get around that by saying to a client, we want three to five years pension money in cash, bonds and fixed interest, okay?

Therefore, we’re taking that question out of it as to whether a short-term fall in the markets, or a short-term sprint in the market is going to make a huge difference to their day-to-day circumstances. If you can take that out of it, people are a lot more rational. I’ll say to people, “Look, no matter what happens in the market with COVID, we have your money sitting in cash to pay the pensions and in some term deposits.” That meant that they were not worrying about the stocks that had dropped. We looked at them and said, what’s the outlook for each of those stocks? Is this a short-term thing? That was it. In a lot of cases, we bought more.

I do struggle trying to get people to come out of something that’s performed really well consistently, and you just go, everything is in a cycle at some stage. You’ve just got to be aware of it. With some things, you just have to force the clients and just say, “Look, full stop. I’m telling you that we’re going to take some profits on this.”

[0:14:45] SJ: Okay, so step number one, have enough liquidity that you’re sleeping well at night. That may be a different amount of liquidity for different people, depending on other sources of income, whether you’re still working, whether you’re retired, how much those expenses are that are going out. But if you’ve got three to five years there of cash and other things that are easily accessible, lets you think about the rest of the portfolio a bit more rationally and a bit less emotionally, thinking I’m going to need this money.

How then do you split? I mean, it obviously differs by client, but what are some of the key principles in terms of how you split that invested part of the portfolio, so we’ve got the liquid piece sitting there for a rainy day. How do you set up an optimal portfolio for someone that is equities and property and whatever else to consider?

[0:15:28] LS: We’ll often start with a multi-index, or multi active manager core to a portfolio and just say to someone, look, here’s the market return, we’re building in that as a base. From there, we’re looking at satellite managers, or satellite ETFs that will add value for that client’s specific situation, or at the current cycle in the market. For example, three to four years ago, we started building a lot of exposure to hybrids, just because we knew that some stage inflation was going to come back. It was just not too much in any one, but just making sure that it was something that clients can understand. They don’t really understand bonds too well and last year proved a really scary time for people who expected bonds to do well when shares were going down.

[0:16:13] SJ: Yeah. I think it was the first year in 60 years or something like that, where the two have been so correlated. Because it was all interest rate-driven, equities and bonds went down.

[0:16:23] LS: The research now shows that correlation, having a diversified portfolio works over the long-term, but you’ve got to be careful in times where there’s extremes. Look, we’ve had for the last 10 years where governments held interest rates down at some stage, those rates were going to have to come back up. The bond market does not react well to a sudden rise in inflation and interest rates. That’s a lesson I’ve learned over this last 10 years and we’ll be ready for the next time.

[0:16:49] SJ: We’ve heard a lot about the hypothetical 60/40 portfolio in the news, which is 60%, equities, 40% bonds, or is that the way around that it is?

[0:16:58] LS: It depends on the person’s 60/40.

[0:16:59] SJ: I mean, the bond, like you said, I think as an asset class, bonds are not as popular here in Australia. What are some other really, I guess, basic rules of thumb? I’ve heard about a third, a third, a third and there’s a bunch of things out there that I think are not too bad in terms of general basic rules.

[0:17:18] LS: The 60/40 works for people in their mind. We tend to work on a 50/50 for retirees, saying you have 50% in shares and property, 50% in cash, fixed interest and bonds, okay? The idea is just setting that level with them first. Then digging down and showing the individual sectors then that will make up each of those parts of the portfolio. For example, on the share side, we will look for somebody who’s pre-retiree. We’re looking for growth, to really build up, take the risk while they’re still working, so that we can step the risk back a little bit when they retire.

Once they retire, or a couple of years before retirement, we’re starting to look for where the money’s going to come from. In the last 10 years, I’ve allocated money to a lot of industrial property funds, for example, because they were paying steady income, long-term leases. You treated them like a risky long-term term deposit, five to seven years, you were locked into a lot of them. Really paid off. The thing I found was clients would actually, when they were driving around the country, on holidays or whatever, they would stop at some of them and take a picture and send it back. It gave them a bit of confidence.

With the equities, for the last few years, all I’ve heard is growth, growth. I’ve had to really talk clients out of just following what they ate reading in the media, and just saying, “Look, we need dividends. We need steady income. We love companies that are a mixture of both. I don’t want to rely totally on dividends. I don’t want to rely totally on growth in retirement. But if we can get that nice mixture, and Australia has a lot of that.” This is where that 60/40 falls down, because in America, they have that higher allocation often to bonds, because equities don’t pay much in income.

[0:18:54] SJ: There are a lot more corporate bonds over there. You can get Wesfarmers exposure, you might get an extra 3% over government bonds. That market is really liquid and active over there. Whereas here, when you talk bonds, it’s usually government bonds is the main one.

[0:19:12] LS: Because it’s such a small market here, there’s not enough education about it. It is like a black hole, where people go, “I don’t really want to step in there.” Often, we’ll use a very good quality manager in that area, especially for stepping away from government bonds and all that. We’re looking for managers who’s got a really proven track record of stability in that area. It’s really an education piece, especially in the SMSF space. It’s an uphill battle for me often with people on bonds. From 2005 to 2015, I got them to do international shares. That was hard enough. They built confidence in that sector, because a lot of them just did the top 10 shares and term deposits.

[0:19:51] SJ: That was four banks out of the top 10 companies here in Australia.

[0:19:55] LS: You look back a lot on those big four banks. In reality, most of them have not had much growth in the last 20 years. They have delivered good dividends, but delivered a lot of volatility in that period.

[0:20:06] SJ: A couple of really important principles there, I think one is you need a mix of growth and income in your portfolio and that mix, as you get older, you should be getting more risk averse. That’s because you’re going to need the income at some point in time. Probably more importantly, you’ve also just got a lot less income generating capacity ahead of you. There was a concept in the CFA course where they talk about your human capital and you start your life with a lot of that ahead of you that you’re going to earn a lot of money. Frankly, you could lose 100% of your portfolio when you’re 21-years-old and the amount that you’re going to save in the future dwarfs it.

As you get closer to the end and needing the money, that balance should be shifting to more and more conservative over time. I think the other really important piece there is that you need to sit down, what are my objectives and set up a portfolio that is going to deliver on those objectives. I find most people are actually starting with the end in mind. Then they try to, “I need a certain amount of income to live off. Therefore, I need a return of 12.” I’ll go and then create an overly risky portfolio, because of what they think they need. You really need to sit down and say, “Okay, what’s my risk tolerance? What is that portfolio going to give me,” and then work out how you can live within whatever those returns are.

[0:21:23] LS: Their risk tolerance, the last five years have told us that a lot of people didn’t understand their own risk tolerance. They thought they could go through bad times without worrying. But when some of the companies stopped paying dividends in 2020 with COVID, that really panicked a lot of them, because they had no safe haven in term deposits. They were relying on the big banks and big dividend players. When they saw those taken away, that’s when they started looking at debentures and stuff that were offering 8%, 9%.

[0:21:54] SJ: Whiskey barrels.

[0:21:55] LS: Yeah. Yes, exactly. Things that it just sounded too good to be true. But because they were desperate for that yield, they were willing to look anywhere. Yeah, they would look at single-property trusts and stuff like that. There’s so much risk in that single exposure. It’s really a case of going back to basics, working out what the actual risk tolerance is. Also, understanding that it will change over even to retirement. Because I have a lot of clients who will receive inheritances. We don’t want them spending too little in those original years of 55 to 75, or 85. Because there’s often going to be a large amount coming through.

They’re the years where you’ve got to enjoy life and have got to do your travel and spend time making the most of it. If you’re always worried about your money running out, but knowing that there’s going to be an inheritance coming at the end, you’re just cheating yourself. It’s really looking at the full picture and not just what you’ve got at the moment.

[0:22:50] SJ: I’ll add one more piece to that picture and this is true, I think, for a lot of my clients, where they’ve actually got significantly more assets than they’re ever going to spend in their life. There’s a portion of that portfolio that is intergenerational, and they need to be thinking about it as a family, not as one person and where am I at in my life, but where is our family at in terms of the requirement for growth assets and return over time.

[0:23:10] LS: I’d take the lead from that from what I call my granny crew. They’re ladies who have gone through the 60s, 70s and 80s. Now, they’re in their late 80s and they’re more aggressive investors than people that are 65, because they’ve been through everything. They know how the markets work, but also, they don’t need the money anymore. They’re investing for their grandkids, and they’re saying, look, a Vanguard ETF, just put some money into it for my grandchildren. Find a manager that you can trust. They’re willing to take risk on that part of it, because they don’t need it. Exactly what you said.

Another thing is, clients shouldn’t be just taking risk just because they got money. People with a fair amount of assets, I would sit down with them saying, “Look, do you really need to take more risk?” A lot of them will still have businesses going. They’ll have investment properties. I’ll just go, now we’re getting turn deposit rates over 4%. I’m saying, maybe we should just lock some of that in for three or four-year term deposit. You just go off and do your travel and not worry about it.

[0:24:07] SJ: Yeah. I think the risk of your income is the other thing for people that are of a working age to think about. If you’re working for a funds management business and your bonuses and income are all tied to stock markets already, you already have a lot of exposure to that asset class and you need to think about how that fits in with the rest of your life, and the amount of leverage you carry and all those sorts of things as well.

[0:24:27] LS: Things can change so quickly. We’re seeing now what we call the sandwich generation, especially females, they’ve got kids who are having grandkids, but they have a mom and dad who are now living into their 80s or 90s and they’re demanding care from their daughter. A lot of people leaving jobs a lot earlier than they expected. Some earning very good money, because the culture of their family or just their want to take care of their parents. That means stepping back. That can take a huge hit on your retirement. That’s why I keep on saying to people, take the risk when you’re young and really build up your portfolio. Get the benefit of compounding, because as you get closer to retirement, most people don’t get to choose their retirement date.

Something happens. They get sick, a partner gets sick, a parent gets sick. They get retrenched, or the whole industry changes and they’re out of step at it. You’ve got to be planning long-term, not just saying, “I’m going to start saving for retirement two years, or three years before.”

[0:26:05] SJ: Do you have any, I guess, tools or tricks? How do you get people to stick to that? You’ve sat down, you’ve got a plan, that plan says, you should be invested mostly in equities. Then we’re in the middle of a big bear market and interest rates are going up and everyone can see the economy is going to slow down. That client of yours is saying, “Can’t we just wait here in terms of our equities allocation? I want to see the economy going better and I want to see how high interest rates get before I put my money into equities.” They will say that most people preface it when they say it to me, I know I can’t pick the bottom of markets, but, and the but is the problem. What can you do, I guess, to try and overcome that human emotion? Because the thing for everyone to think about is the reason things get really cheap is because everyone’s feeling the same, right? It doesn’t happen in isolation, where you realise that everything’s fine and everybody else doesn’t. Have you got anything that you do with people to say, how are we going to overcome this human bias that is very, very, very common?

[0:27:01] LS: You just got to work with each person. We will do a lot of work on showing the history of previous crashes, or previous booms and what happened, how using a fairly steady asset location that suits their risk tolerance will get them through those periods. Also then, just switching to doing some drip feeding. If the person is really worried, look, I believe long-term drip feeding probably doesn’t pay off financially. But mentally, it’s a really good way of doing things.

For the last two years, probably nearly every new client that’s come on, we’ve done some form of drip feeding for them into some of the more volatile sectors. Look, they appreciate it. When we look back over the period, it probably would have been better off to put the large sum in most cases. For the mental health of that client and for the actual building of the trust with them, it was the best thing that we did.

[0:27:49] SJ: I actually find that a lot with my new clients as well. I actually prefer someone to start with a relatively small amount of money, because that relationship between us, the client-fund manager is really important as well. One of two things can happen, is they have a bad experience at the start and they run off, or they have a good experience at the start and then that trust is built up and they can then add to their investment over time.

If someone’s made a really significant investment and then the first three months are bad performance, it really makes them understandably question that decision. It’s emotional, rather than necessarily economically rational. I find something, dollar cost averaging is maybe the lingo for it. Just to average over time into things makes a lot of sense. The other one that I think works really well is just a set regular date for rebalancing your portfolio. I’m going to do it maybe every quarter.

[0:28:37] LS: We see our clients every six months and we just basically go through it. If the asset allocations got out of whack, I’ll look and say, well, for the last couple years, we did keep it a little bit extra on the growth side, because the income side was paying so little. Now, with a lot of clients going, now’s the time to get back to your actual asset allocation, whether it’s 50/50, or 65/35, whatever. There are some times we have to be a bit dynamic about it, where you know you’re not going to get anything from a sector for a number of years, because of the effects of the cycle. You have to make that dynamic asset allocation to another sector that will pay off, but not thinking about what you’re jumping into now.

You’re thinking about, what am I going into now that’s going to pay off in three or four years’ time? That’s what you need to look at and that’s the way you need to talk to them, because they’re reading the internet, the magazines, papers, it’s all the bad news about today. You really need to be getting them to focus on what’s good the outcome for those companies. When I saw that CSL, they weren’t collecting any plasma in the US during COVID. But you know, they’ve got the largest network of plasma collection places and blood collection and everything. At some stage, that’s going to turn around. When they dropped to $260, or $254, I think it went down to, we didn’t go buy a fortune in there, but clients who had some spare money were going, “Here’s a solid company long-term that will do okay. Let’s put some money in there.”

And looking at companies like, I mentioned Resmed, or Cochlear earlier. Looking for companies that are not affected too much by a downturn, because they either get paid for by the government, or paid for by insurance companies. They’ve got a solid income coming through. They’re big names that people know. When it comes to smaller stocks, that’s where I want a manager to step in and manage that sector.

Yesterday, I had a client send me a list of 10 stocks. Fortescue Metals was at the top. Honestly, I didn’t know six of the other stocks. I’d never even heard of them. I just went back to the client going, “You’re two years from retirement. Why are you going into these?” He said, “Well, this group contacted me and these were their best performers.” I said, “But, what were their worst performers? Get the full story before you go into it. Does it actually suit what you’re actually trying to achieve?” He’s the sort of client that wants to be invested, but hates losing money. Eight out of the 10 stocks you’ve sent me, they’re really risky hit or miss stocks. He came back at the end of the evening, and just sent me an email going, “Okay, I understand now. Let’s just stick with what we’re doing at the moment.”

[0:31:05] SJ: Yeah. I find just a regular rebalance with that every six months for your clients, or every quarter, making it part of the process, rather than a call on markets is a really useful thing to say, well, this is just what I do every quarter. I’ve got my portfolio allocation. Naturally, you will be then adding to equities when prices are down, because your allocation is down and you’re taking money off the table when prices are up. That’s true of all your different asset classes.

I find that really works well. I’ve heard of some people, you’ve touched on the word dynamic there, but actually doing it on a valuation, or even a recent historical returns basis where it is a bit more dynamic. My aim might be to be say, 60% in equities when the PE ratio is below a certain level. Or you can do it on value-based. Alex Shevelev’s actually, we’re talking about returns from small cap stocks here in Australia. It’s been a really horrible five-year period, where the index has done 2% per annum, including dividends.

Every single time that the trailing five-year return has been that low, your prospective returns are very high for fairly obvious reasons, right? The profits that those companies made is still there and they’ve created bigger businesses. That’s been a pretty useful guide. We’ve talked about using it as a fund manager as how much cash do we want to hold. Every day, it’s easy to sit down and say, this is a great business, that’s a great business. If we were a bit more mechanical about saying, when the trailing return is this, we’re going to hold more cash. When it’s that, we’re going to hold less cash.

Would even as professional fund managers, I think be a useful way for us just to adjust our risk tolerance depending on what the prospective returns look like, but using partial returns is a useful guide for that.

[0:32:40] LS: The main thing you have to do is, if you’ve got a philosophy like that, or you’ve got a strategy like that, you’ve got to stick by it for your clients. You can’t be chopping and chasing. I don’t tell my clients that we’re stock pickers. We’re not fund managers. I’m an asset allocator. If I know an area, I’m happy to do some direct stuff in it. The majority of what I do is I do a core index and then some really good satellite managers around it. I stick to that. If clients come in with the flavour of the day stock or something, I just go, “Look, I’m more than happy for you to add it to the portfolio if you want. It’s not something I’m interested in. Don’t expect me to call you out on it.”

[0:33:15] SJ: We’ve just been talking about AI with – Or sorry, we’re about to talk about AI with Harvey, this last section of the podcast. There’s the flavour of the month at the moment, every single company. You know all of the spivvy companies are the ones that are coming out and talking about how they’ve got AI in their products now to try and get the share price up.

[0:33:32] LS: You know that’s going to take them years to deliver any income on that. If you’re a younger person, yes, you can have an allocation to something like that, or a small allocation in retirement. I find it’s the engineers, it’s the IT people, they’re the ones – they know more about it, so they’re interested in it. They’ll want a little allocation for that. For me, until something’s proven itself, or unless I can see that it’s going to have a major effect on one of the bigger stocks that are in the portfolio, and I think there’s going to be a bit of a washout between Google and Amazon and Microsoft, so it’s going to be interesting to see who is the winner in the ChatGPT type AI stocks. Again, for me, if I don’t understand it enough, or am able to explain it to a client in one minute, I’m not going to be putting their money in there.

[0:34:11] SJ: Yeah. As a general rule, if you’re reading about it in 10 articles in the paper every day, then the prices that you’re paying for the stocks are not going to be cheap. Before you leave, Liam, you need to have a taste of the whiskey and let us know what you think. And you’re not allowed to use the word smooth. The new rule of the Stock Neat Podcast.

[0:34:27] LS: That hits the back of the throat fairly well. Wow.

[0:34:30] SJ: Very good.

[0:34:31] LS: Nice Japanese whiskey. Good. I’ll reserve my judgement as to whether they’re better than Irish whiskies, but I’ve started drinking a lot of Australian whiskies lately, so that one really leaves that burning taste in the back of your mouth, which is lovely.

[0:34:44] SJ: Very good. Well, thanks for joining us today. We really appreciate you coming on. I’m sure we’ll have you back on at some point in time. Good luck in the Six Nations and thanks for joining us.

[0:34:53] LS: No problem. Thank you very much, Steve.


[0:34:57] SJ: Some fantastic advice there from Liam. Before we get into this last section, Harvey, you’ve already had a taste of the whiskey, but give me a go, or you give a quick summary of it. We’ve got a new rule on the podcast. We’ve had a few complaints from listeners. You’re not allowed to use the word smooth when describing the whiskey. You know what’s interesting, I’ve actually found that I’ve done a few whiskey tastings in my time. It’s really hard just reviewing a whiskey on its own. When you have three or four of them and you can really notice the difference between them, it’s easy to describe those differences. But when you just taste the whiskey, there are a limited number of ways of describing it, I think. But anyway, go ahead. This is a Japanese blend. Most of the Japanese whiskies are blends and this is one that goes back a long time.

[0:35:39] HM: I’m going to keep it simple. I’m annoyed that I’m drinking this, because I’m pretty sure this is a very expensive bottle that I won’t be buying regularly, but I thought it was fabulous. I’m not going to use the word smooth. It just goes down nicely. That’s the way.

[0:35:52] SJ: Generally true of those Japanese whiskies, right?

[0:35:55] HM: Oh, yeah. They’re priced for that, too.

[0:35:57] SJ: I don’t think this is silly. I had a quick look. For people that know Greg, they’d be surprised if it was crazily expensive. I think about 80 to 90 bucks a bottle, you can get it online. This one came in a nice little box with a couple of beautiful Japanese glasses as well. A nice gift package. Yeah, a good addition, I think to that Japanese list we’ve tasted a couple on here. I find it pretty hard to go wrong with the Japanese whiskies if you want something just regular drinking around the house.

Look, I think the truth is, no one has any idea where the bottom or tops are. We’ve been around markets long enough to know that things do get screamingly cheap from time to time. But you often have bear markets that are just bear markets and recover quickly and there’s all sorts of different market environments. I would say, the last thing we want is equities getting absurdly expensive. Again, we’ve seen a bit of meme stock, stupid behaviour over the past couple of months. Cryptocurrencies coming back, Bed Bath and Beyond share price a $1 to $5 and back to $1.50 or something like that.

[0:36:59] HM: Yeah. That’s been crazy.

[0:37:01] SJ: Some worrying behaviour there, I’d say. I think for us, we like buying businesses at attractive prices and having the business through its results show people that it’s worth more than we bought it for. If everything gets expensive, again, it only makes our life more difficult. Let’s run a hypothetical scenario on the other side and say, markets did tumble again. What sectors are you most interested in adding to our portfolio that we don’t have exposure to at the moment?

[0:37:25] HM: Yeah. We’ve done work on a couple of stocks that I would love to see come back and get a better entry point to, but I can’t mention them at the moment. We’re keeping a close eye on them. One key sector that we’ve done a ton of work on is semiconductors and semiconductor manufacturing equipment. We really like its structure over the long-term. I mean, we could probably just buy the shares today and we’re going to do amazingly well over the next five years.

Maybe we’re getting greedy by trying to wait for a better price, but that is what we’re trying to do. I have no doubt that the environment will continue to be volatile over the next few months. High rates and shaky economies, plus a tighter consumer. There will be ebbs and flows, I would say, especially after such a strong start to January and one of the best starts we’ve had in 80 years for the 60/40 portfolio, I actually read the other day. Maybe that was true as of a week ago. I think we’ve had a bit of a pullback since. Yeah, we’re going to continue to do the work on a number of names and hopefully, take advantage of any of these pull backs.

[0:38:19] SJ: I mentioned that book I read over Christmas. Chip Wars. Strongly recommend that as a book for people to read, that are not familiar with the sector, even people who are. I think the history of the sector is amazing. I always thought it was a business that was very difficult to understand and very technical, and therefore, one that I wouldn’t want to invest in. I think there’s some simple truths about it that actually make it a very, very investable sector in terms of understanding the competitive advantage of the businesses that are very well established there. It’s changed a lot over the past 20 years. I mean, when you started covering this sector, it was probably dozens and dozens of companies all competing with each other fairly fiercely.

[0:39:00] HM: Yeah. Huge amount of consolidation. Consolidation leads to industry repair. It’s led to – a lot of these names are still cyclical, but higher highs and higher lows each cycle is what you generally see. Many of the names are again, essentially oligopolies. In particular, in the semi-cap equipment manufacturing side. You’ve got ASML, which is actually a monopoly in EV. Then many of the other names are 50/50 market share with another player. It’s all consolidated nicely. You know what I mean. I don’t even have to spell it out for people. Oligopolies and monopolies are nice terms.

[0:39:32] SJ: The barrier to entry has become so technical, right? It was a bit of a commodity business at some point in time, but it has become, one of those ASML machines, it’s got, I think they said, has got 150,000 different components in it, and the amount of R&D that needs to go into creating the next version of those things. They are operating now at an atomic scale and now trying to stack these things on top of each other. It’s truly an extraordinary industry, that it’s impossible to imagine someone coming along now and starting from scratch and competing with this.

[0:40:05] HM: Well, certainly no cost of capital where it is today, versus a few years ago. But no, it just won’t happen. It’s one of the industries you can definitely say that there’s not going to be any startups that all of a sudden, come in here and start taking share from these guys.

[0:40:16] SJ: Yeah, there’s been a huge amount of hype about this ChatGPT, whether it ends up delivering on the promise that everyone’s got in mind for it at the moment. I think that the concept of computers interacting a lot more with humans and having more back and forth, is going to continue to proliferate in our lives. That just requires more and more computing power. It’s one of the few sectors, I think, where it’s almost impossible to imagine a world that it’s not twice as big in 10 years’ time.

[0:40:46] HM: No, exactly.

[0:40:46] SJ: It’s pretty hard to find, I think other sectors where you’re that confident and where there are players that are so well established that you’re also confident they’re going to be around. Yeah, like you said, we probably feel we missed it a bit at the bottom sort of last year, and a lot of the prices have recovered a lot by the sector that we really like to own at some point in time. Good luck on your trip.

[0:41:06] HM: Thank you.

[0:41:06] SJ: I hope you find a few other stocks to add to the list. We’ve been working really hard to build out the, ‘We’ve finished the research. We like the business and we’re just waiting for the price’. Yeah, the team has done a particularly good job, I think, of growing that list over time. Maybe you’ll come back from America with a few insights and a few more of those stocks.

Thanks for joining me, Harvey. Thank you for tuning in. We’ll be back in a month’s time with the next podcast.

Any questions you’ve got, or topics you’d like to cover, email us at Or you can find me, @ForagerSteve on Twitter.

[0:41:41] HM: Thanks, everyone.

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Steve Johnson
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Steve began Forager Funds in 2009, and now manages approximately $350m across two funds. Offering a listed Australian Shares Fund (FOR) and an unlisted International Shares Fund, Steve focuses on long-term investing in undervalued companies.

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