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Sharemarket sell off : What to do? · The Money Puzzle

0:07
Speaker 1: Hello, and welcome to the Australians Money Puzzle podcast. I'm
0:10
Speaker 1: James Kirby. Welcome aboard, everybody, Welcome aboard. On a what
0:14
Speaker 1: can I say, a fairly rocky week, didn't we pick
0:18
Speaker 1: the right time to talk to my guests today? The
0:21
Speaker 1: ASEX has officially midweek entered a correction, territory down ten
0:27
Speaker 1: percent from its peak and still very weak as we speak.
0:33
Speaker 1: Tech shares of course being soughked off quite hard, and
0:36
Speaker 1: anything to do with AI interestingly, not just AI stocks,
0:39
Speaker 1: but AI related stocks of which there are many and
0:42
Speaker 1: all sorts right across two property trusts. So we've lost
0:47
Speaker 1: all the gains that we had since the day Trump
0:49
Speaker 1: was elected and just now it's it's also, of course
0:53
Speaker 1: the same week that we had the tariffs imposed upon us,
0:56
Speaker 1: which what does that do bring us back? Where does
0:58
Speaker 1: that bring us back to? Huh nineteen? So it's time
1:02
Speaker 1: to talk to someone in the market about the market.
1:04
Speaker 1: My guest is Roger Montgomery of Montgomery Fund's Management. Oh
1:08
Speaker 1: are you Roger?
1:09
Speaker 2: Great to be with you again, James. It is an
1:11
Speaker 2: auspicious day to be chatting with you.
1:14
Speaker 1: Today, so it would seem but anyone who's been around
1:18
Speaker 1: knows the market can do this and it can surprise us.
1:24
Speaker 1: There's no the other thing I would say about this
1:26
Speaker 1: particular downturn, and I know that you can put your
1:29
Speaker 1: case about it. You actually are skeptical about the definition
1:33
Speaker 1: of correction. More than ten percent is many people's definition.
1:36
Speaker 1: There's no nothing legal. There's no legal definition out there,
1:39
Speaker 1: but certainly no lack of explanations for why this particular
1:46
Speaker 1: route has occurred on the share market is there.
1:50
Speaker 2: I agree there's no shortage. There's always going to be
1:52
Speaker 2: opinions after the fact. You know, I'm pretty content with
1:58
Speaker 2: the columns that I wrote in Wealth earlier this year
2:03
Speaker 2: saying that I expect this year to be a positive year,
2:06
Speaker 2: but that it would be more volatile, and I doubted
2:09
Speaker 2: that we would get another twenty percent year like we
2:11
Speaker 2: had last year in the year before in the s
2:14
Speaker 2: and P. Five hundred. I think, James, to your point
2:17
Speaker 2: about corrections. I think the word correction is a euphemism
2:22
Speaker 2: for a crash, or it's been. It's been somewhere along
2:26
Speaker 2: the line, journalists and commentators like you and I stopped
2:30
Speaker 2: calling it a crash started calling it a correction, and
2:34
Speaker 2: so now correction is not twenty percent anymore. It's ten percent.
2:37
Speaker 1: That's right. The crash is twenty.
2:39
Speaker 2: A crash is twenty. But I thought a correction was
2:42
Speaker 2: a euphemism for a crash, so I didn't realize there
2:47
Speaker 2: was it was nuanced.
2:48
Speaker 1: Oh, it's nuanced. Yes, it is, whatever it is, Roger,
2:52
Speaker 1: it's sure as how going the wrong way, isn't it.
2:55
Speaker 1: We had a fabulous year in twenty twenty four, and
2:58
Speaker 1: we knew that, and as investors, we all knew that,
3:00
Speaker 1: and we knew that you don't get double digits every year.
3:03
Speaker 1: We knew that. Come, well, bank, the biggest bank in
3:05
Speaker 1: the market, cannot go up forty percent. Well, history would suggest,
3:09
Speaker 1: reality with suggest it can't go up forty percent. Another falling,
3:15
Speaker 1: and they're falling right across the board. First of all,
3:18
Speaker 1: you're still comfortable with basic premise you're working on that
3:21
Speaker 1: we will finish calendar twenty twenty five with a positive
3:25
Speaker 1: return on share markets.
3:27
Speaker 2: There's there's the backdrop that supports that idea is threefold.
3:34
Speaker 2: Number One, you need disinflation, and in January and February
3:42
Speaker 2: we saw an uptick in US month to month inflation.
3:46
Speaker 2: So we're still arguably still in deflation, because we're nowhere
3:51
Speaker 2: near the eight to nine percent inflation rates that we
3:53
Speaker 2: had before. But if your starting point was November October
3:59
Speaker 2: November last year, then we've seen inflation accelerating marginally, So
4:05
Speaker 2: that's not going the right way. But we need disinflation.
4:08
Speaker 2: The other thing that we need is positive economic growth.
4:12
Speaker 2: There is now some doubt about that, particularly in the
4:16
Speaker 2: United States. And the reason I say disinflation and positive
4:19
Speaker 2: economic growth, James, is because there was some research conducted
4:23
Speaker 2: by a macroeconomic research house back and presented back in
4:27
Speaker 2: nineteen seventy eight, and it demonstrated that whenever you have
4:31
Speaker 2: disinflation and positive economic growth coalescing, then you end up
4:37
Speaker 2: with a ripe environment for innovative companies with pricing power. Now,
4:44
Speaker 2: in twenty twenty three and twenty twenty four, that's precisely
4:48
Speaker 2: what we had, positive economic growth, disinflation, and the innovative
4:52
Speaker 2: companies with pricing power, the Magnificent seven, with the exception
4:55
Speaker 2: of Tesla, let's call it the Magnificent six. They all
4:58
Speaker 2: did really well. And by the way, and the reason
5:01
Speaker 2: why a lot of the money flowed into those megacap
5:05
Speaker 2: companies is because there's a perceived safety in those larger companies,
5:10
Speaker 2: and there was still a lot of talk about recession
5:13
Speaker 2: or the risk of recession and so forth. And so
5:16
Speaker 2: the inner so Gavical Research, who published that research in
5:20
Speaker 2: nineteen seventy eight, they've been absolutely correct every time since
5:24
Speaker 2: nineteen seventy eight. So that's two requirements for a positive
5:28
Speaker 2: outlook for this year. And the third is central bank liquidity.
5:33
Speaker 2: And now in twenty twenty three and twenty twenty four,
5:36
Speaker 2: we had something in the order of five to six
5:39
Speaker 2: trillion US dollars being surreptitiously injected into financial markets. Despite
5:45
Speaker 2: all the tough talk from Jerome Powell and all of
5:49
Speaker 2: that realet Janet Yellen as well, all of that tough
5:53
Speaker 2: talk about QT or quantitative tightening and so forth, in
5:57
Speaker 2: the background, they were drawing on things like the Reverse
6:01
Speaker 2: Repurchase Agreement account that the FED holds, and they injected
6:06
Speaker 2: about two trillion dollars from that account into markets. So
6:09
Speaker 2: that was supportive. Again, liquidity is a fundamental necessity for
6:16
Speaker 2: markets to go up, you need to have liquidity. And
6:19
Speaker 2: so this year we have three challenges, and that is
6:22
Speaker 2: disinflation still in train, and at the beginning of the year,
6:25
Speaker 2: I believed that it would be, but at the moment
6:28
Speaker 2: there's a question positive economic growth that at the beginning
6:32
Speaker 2: of the year I thought that would be a consistent issue,
6:36
Speaker 2: a consistent positive influence, but there's question marks in the
6:40
Speaker 2: market about that. We're still positive, growth is still positive,
6:43
Speaker 2: but there's a question mark that's re emerged. And liquidity, well,
6:48
Speaker 2: that reverse repurchase agreement account I mentioned a moment ago,
6:51
Speaker 2: that's down to one hundred and twenty billion now from
6:54
Speaker 2: about two point four trillion a year and a half ago,
6:57
Speaker 2: So that's been exhausted. The Federal Reserve and global central
7:02
Speaker 2: banks are going to have to be very creative if
7:05
Speaker 2: they don't want markets to tank in thinking about they'll
7:08
Speaker 2: have to be very creative about how they pump more
7:12
Speaker 2: money into financial markets and into the financial system.
7:15
Speaker 1: To give that The critic to keep that cree variable,
7:18
Speaker 1: obviously here is Trump.
7:20
Speaker 2: I've only talked about one one aspect. Yes, so Trump
7:24
Speaker 2: and the tariffs and the sort of mercurial way that
7:28
Speaker 2: he imposes them withdraws that creates uncertainty not only for
7:33
Speaker 2: financial markets, but it creates uncertainty for business. James. Companies
7:37
Speaker 2: don't know whether they should spend their capital on investing
7:41
Speaker 2: in new manufacturing. They don't know whether or not they
7:44
Speaker 2: should be in advertising or marketing, should they be employing
7:47
Speaker 2: more people. That all gets pulled back in this very
7:51
Speaker 2: uncertain political regime.
7:54
Speaker 1: Yes, so what we're seeing so far actually, as you said,
7:58
Speaker 1: like a capital striker, and that's being reported quite lightly,
8:01
Speaker 1: that listed companies of all at all levels are they
8:05
Speaker 1: don't know where to turn. There's always uncertainty in the market.
8:10
Speaker 1: Of course listeners and there would have been a shore
8:12
Speaker 1: ever where I would have talked to Roger and we
8:14
Speaker 1: would have said, hey, the markets are certain, but there
8:17
Speaker 1: are degrees one of the things talking about in uncertainty.
8:20
Speaker 1: So the market's down quite sharply. But the VIX, which
8:24
Speaker 1: is the uncertainty index, that's not flying high or anything
8:28
Speaker 1: like that.
8:28
Speaker 2: It did spark, We did have a spark a couple
8:30
Speaker 2: of days ago, but it hasn't spiked too you know,
8:34
Speaker 2: extraordinary levels of previous crashes. The other thing that's interesting, James,
8:38
Speaker 2: I just finished that. So we talked about the economic backdrop.
8:42
Speaker 2: We then talked about the fundamental ecodrop nomic backdrop. Then
8:46
Speaker 2: we talked about or mentioned Trump and tariffs and the
8:48
Speaker 2: uncertainty there. The third one is again something that I
8:52
Speaker 2: wrote about in the column for you, and that was
8:56
Speaker 2: that was the end of the AI thematic, at the
9:00
Speaker 2: end of that boom in AI stocks fueled by the
9:03
Speaker 2: liquidity that I mentioned a moment ago.
9:05
Speaker 1: When you said the end, you mean the end. It's
9:08
Speaker 1: not over right, It's the end of what the promise
9:11
Speaker 1: of the period of where there was no limits to
9:13
Speaker 1: the promise. Is that what you're straining it.
9:15
Speaker 2: I think the initial unbridled optimism where a complete disengagement
9:22
Speaker 2: between price and revenue occurs, that that's over And the
9:28
Speaker 2: hint and what I wrote about in the column a
9:30
Speaker 2: while back. The hint was that the SOPs Semiconductor Index
9:36
Speaker 2: in the United States had actually been ranged trading for
9:40
Speaker 2: nine months. In fact, it was unchanged about a month
9:43
Speaker 2: and a half ago. It was unchanged from nine months earlier.
9:46
Speaker 2: So that told me that the thematic was becoming tired.
9:50
Speaker 2: And despite all the positive news about Mannas, about Grock,
9:55
Speaker 2: about the next version of chat GPT, despite all all
10:00
Speaker 2: of the positive announcements and developments in the AI landscape,
10:04
Speaker 2: what we were seeing was no real positive price response
10:09
Speaker 2: in semiconductor stocks. And that told me that you know what,
10:13
Speaker 2: there's a lot of there's a lot of great words
10:15
Speaker 2: being said, but not a whole lot of buying happening
10:19
Speaker 2: as a result of those words. And so once once
10:22
Speaker 2: investors see a thematic becoming tired and they're not getting again,
10:26
Speaker 2: it's a little bit like when you're investing in a fund, James,
10:29
Speaker 2: and you know you've been there for five years, and you're.
10:31
Speaker 1: Going, well, yeah, you know.
10:33
Speaker 2: When's it going to turn? You sort of start to
10:35
Speaker 2: become a little bit a little bit impatient. And I
10:38
Speaker 2: think that's what investors have done now, They've become impatient
10:41
Speaker 2: and they're reversed. And if I can just say one
10:44
Speaker 2: more thing about the AI thematic, and that is that
10:48
Speaker 2: again wrote a column about this last year in the
10:51
Speaker 2: Australian Wealth. The thing that needed to happen was that
10:55
Speaker 2: revenue models needed to be developed to justify father capital
11:00
Speaker 2: expenditure on AI. And you know, the most popular or
11:06
Speaker 2: the biggest use case for large language models that was
11:10
Speaker 2: commercial up until this point right now was companion bots.
11:17
Speaker 2: So you know, so chatbots that if you were lonely
11:20
Speaker 2: or feeling romantic or whatever it was, you could subscribe
11:25
Speaker 2: to a chatbot that was powered by a large language model,
11:30
Speaker 2: and it would talk to you about your needs and wants.
11:32
Speaker 1: And it's not exactly as commercially look at as it
11:37
Speaker 1: was in the payment system, or if it was in
11:39
Speaker 1: the This is the sort of thing that we were
11:40
Speaker 1: waiting for. I've got a very good question on this,
11:43
Speaker 1: which we'll do in a few minutes when we get
11:45
Speaker 1: to questions, because it captures what all listeners I imagine
11:48
Speaker 1: they're asking this week. Just before I do, I think
11:50
Speaker 1: we should take a break because I want to come
11:51
Speaker 1: back to you and look at this market now and
11:53
Speaker 1: the extent to which capital gains. If capital gains are
11:57
Speaker 1: not going to come through this year they were last year,
12:00
Speaker 1: and that's a logical thing to say, before we even
12:02
Speaker 1: had this correction. Where do people turn for income? We'll
12:06
Speaker 1: be back in a moment. Hello, Welcome back to The
12:18
Speaker 1: Australian's Money Puzzle podcast. James Kirby talking to Montgomery of
12:22
Speaker 1: Montgomery Investment Management. Regular contributor of course to the Australians
12:26
Speaker 1: Wealth Section, longtime contributor Roger. I wanted to just bring
12:30
Speaker 1: that up with you. For most investors, shares are just
12:33
Speaker 1: a part of their portfolio and they are faced with
12:37
Speaker 1: a real conundrum now. Saving rates are falling because official
12:43
Speaker 1: rates are falling at the same time the share market returns. Well,
12:49
Speaker 1: they've had a setback, quite a setback in this first
12:52
Speaker 1: quarter of twenty twenty five. And on top of that,
12:55
Speaker 1: we've also come to realize that the dividend payouts in
12:59
Speaker 1: any event I'm talking about the ASX now are slowing.
13:03
Speaker 1: The big miners aren't paying dividends anything like they used to.
13:06
Speaker 1: The dividend yield which people would depend on, has dropped
13:09
Speaker 1: and it's under four percent now, where it was traditionally
13:12
Speaker 1: between four and six percent. To the listeners who were
13:14
Speaker 1: looking at this scenario where the shares are falling, their
13:18
Speaker 1: wrists on risk free deposits are falling, and they know
13:22
Speaker 1: that a dividend do you listen as good as it
13:24
Speaker 1: used to be? What are the options here?
13:28
Speaker 2: Okay? So there's a couple of frameworks to consider, James,
13:31
Speaker 2: that help inform this discussion. Number One, if you're an
13:34
Speaker 2: investor who bought the Commonwealth Bank shares fifteen or twenty
13:38
Speaker 2: years ago, the price doesn't matter. The yield on your
13:43
Speaker 2: investment is extraordinary, and I would be very reluctant and
13:48
Speaker 2: it would be disingenuous of me to suggest that you
13:52
Speaker 2: should sell your shares because they're going down.
13:55
Speaker 1: Yeah, you're sent to listeners. They yield on your Combak
13:58
Speaker 1: shares if you bought them from fifty bucks exactly our
14:01
Speaker 1: twenty bucks. Yeah, of course. Yeah. When I talk about
14:04
Speaker 1: the dividend, I'm talking about the place they are.
14:06
Speaker 2: So if you're investing today, if you had capital to
14:09
Speaker 2: invest today and you're thinking about where to put it
14:12
Speaker 2: because income is something that you're going to need or
14:15
Speaker 2: you need now, well, you know what, there's a growing
14:18
Speaker 2: cohort James of people who are growing very tired as
14:23
Speaker 2: they age and head towards their seventies. They're growing very
14:26
Speaker 2: tired of the volatility of the stock market, and so
14:30
Speaker 2: they're looking at other asset classes. And perhaps the asset
14:33
Speaker 2: class that is now growing the fastest is private credit.
14:37
Speaker 2: And that is a space that I've written about. It's
14:40
Speaker 2: an area that we're now distributing a couple of very
14:43
Speaker 2: successful funds. We're distributing those funds in Australia. They're Australian
14:48
Speaker 2: based and have a long track record seving and a
14:50
Speaker 2: half year track record in one case.
14:53
Speaker 1: But could I ask you if you've got confidence seeping
14:55
Speaker 1: out of the share market and if you have a
14:57
Speaker 1: share market correction, there's no way that private credit is
15:01
Speaker 1: quarantines in any fashion from the broader action on the market.
15:06
Speaker 1: I put that to you.
15:07
Speaker 2: Oh yes, no, because private credit is private markets. It's unlisted.
15:11
Speaker 2: And so your return is coming from lending to medium
15:16
Speaker 2: sized corporates in Australia, which the banks pulled back from
15:19
Speaker 2: after the GFC because of regulation. And so look, the
15:23
Speaker 2: fact is, fifteen years ago, James, if you'd said, Roger,
15:26
Speaker 2: I want to lend money to small and medium sized corporates,
15:29
Speaker 2: I would have said, James, don't do it. You've got
15:31
Speaker 2: rocks in your head because the banks had that market
15:33
Speaker 2: stitched up. They had it, they were dominating that space,
15:37
Speaker 2: and the only businesses you could have lent to directly
15:40
Speaker 2: or indirectly through a fund would have been the businesses
15:43
Speaker 2: the bank's rejected. But now since the GFC, so much
15:49
Speaker 2: capital is required for certain types of lending by the banks.
15:52
Speaker 2: It's no longer profitable for them, it's not efficient for them,
15:56
Speaker 2: and so the gap there is now a three hundred
15:59
Speaker 2: and fifty billion dollar gap in Australia between what small
16:03
Speaker 2: and medium sized corporates would like to borrow for growth.
16:06
Speaker 2: And I'm not talking about businesses that are on their
16:08
Speaker 2: knees and need turnaround capital. We're talking about high quality borrowers,
16:12
Speaker 2: double A, double B type borrowers.
16:16
Speaker 1: We see some of these top funds having to take
16:18
Speaker 1: over things they never wanted to take all in restaurants
16:20
Speaker 1: or whatever.
16:21
Speaker 2: Yeah, they're lending, and most of the headlines relate to
16:25
Speaker 2: loans that have been made to property development. So I
16:29
Speaker 2: would say, you know, there's a like stocks on the
16:31
Speaker 2: stock market, James, there are higher risk stocks and there
16:35
Speaker 2: are lower risk companies to invest in. And it's the
16:38
Speaker 2: same with private credit funds. There are funds that lend
16:41
Speaker 2: to property developers and construction companies and restaurants, and then
16:46
Speaker 2: there are those that don't. There are those that lend
16:48
Speaker 2: for two and three years, which I think is riskier
16:51
Speaker 2: than lending for three months or four months. And so
16:55
Speaker 2: there are different vehicles out there in that private credit spaces.
17:00
Speaker 1: Side of five credits, what about in more conventional areas,
17:03
Speaker 1: there's obviously some sort of a swing to fixed income.
17:05
Speaker 1: We can see that in the market, those people, as
17:08
Speaker 1: you said, tire of volatility.
17:10
Speaker 2: The only thing I say, James on that is there's
17:12
Speaker 2: a very high correlation between bonds such as the US
17:16
Speaker 2: treasuries and Australian government bonds and the equity market when
17:21
Speaker 2: inflation is rising, and particularly when inflation is above four percent.
17:26
Speaker 2: So you know that traditional sixty to forty portfolio that
17:30
Speaker 2: many people have heard about. The idea is that when
17:34
Speaker 2: the stock market is going down, your bond portfolio, the
17:37
Speaker 2: sixty percent portion of your portfolio is going well. And
17:41
Speaker 2: historically that has been the case except for when inflation
17:45
Speaker 2: is accelerating. And we saw that when inflation jumped after
17:48
Speaker 2: the after COVID, the protection that the bonds were meant
17:53
Speaker 2: to provide failed to provide that protection and bonds went
17:57
Speaker 2: down simultaneously. Or can currently with equity markets, especially in
18:03
Speaker 2: twenty twenty two.
18:04
Speaker 1: What about twenty twenty five, what's the val.
18:07
Speaker 2: Well, as long as inflation remains benign and doesn't accelerate,
18:15
Speaker 2: then bonds can provide that protection that you're looking for.
18:20
Speaker 2: So it's important to understand the yield that you're going
18:22
Speaker 2: to be generating from those bonds and understand that if
18:25
Speaker 2: you hold them to maturity, that's your maximum return. However,
18:31
Speaker 2: if interest rates fall considerably. Long bond rates fall considerably,
18:35
Speaker 2: then you could also make a capital gain from the bonds,
18:39
Speaker 2: but that should be treated as cream on top. What
18:41
Speaker 2: you should be looking at is that beginning yield and
18:45
Speaker 2: decide whether or not you're happy with that return, because
18:48
Speaker 2: by holding the bonds to maturity, that's what you're going
18:50
Speaker 2: to get.
18:51
Speaker 1: In your team, what's the inflation view.
18:54
Speaker 2: Well, my view, and each of our managers will probably
18:58
Speaker 2: harbor a different view to each other, but my view
19:01
Speaker 2: is that we probably won't see inflation outside of the
19:06
Speaker 2: tariffs that are ultimately that ultimately are imposed. We shouldn't
19:10
Speaker 2: see dramatic inflation that is that businesses are unable to
19:15
Speaker 2: pass on to consumers.
19:17
Speaker 1: Right, Okay, so you see it as restricted really.
19:21
Speaker 2: But the risk, of course, the risk, of course is
19:23
Speaker 2: the unpredictability of what tariffs are going to be imposed
19:29
Speaker 2: and how belligerent certain people are in the United States
19:32
Speaker 2: about imposing them. And the reason I say that is
19:35
Speaker 2: because the downside of tariffs is number one, prices go
19:40
Speaker 2: up for businesses that are manufacturing in the United States
19:44
Speaker 2: but are importing the raw materials that they need for
19:47
Speaker 2: that manufacturing pro and if they can't pass those things on.
19:50
Speaker 2: Then their margin is compressed and they make less money.
19:53
Speaker 2: Then they employ fewer people, they don't grow, and the
19:56
Speaker 2: economy slows down.
19:57
Speaker 1: Anyway, this is the risk, isn't it the risk that's
20:00
Speaker 1: on the table. I'm bouncing around. But I want to
20:02
Speaker 1: try one other thing with you. I don't tell you
20:04
Speaker 1: talking about moving to quality stocks, getting rid of the thrash.
20:08
Speaker 1: That's sort of saying zoning in on blue chip stocks.
20:10
Speaker 1: That's strong.
20:11
Speaker 2: Well, you know I've only ever talked about quality stocks.
20:14
Speaker 1: Well, you should remind everybody where you come from.
20:16
Speaker 2: Yeah, okay, So the background is and I wrote a
20:19
Speaker 2: book on this, as you might remember James back in
20:21
Speaker 2: twenty ten, called Valuable, and it was all about identifying
20:26
Speaker 2: quality and equality. Business is a business, and we'll go
20:30
Speaker 2: right back to first principles, and I'll keep it brief.
20:34
Speaker 2: A quality business is a business that can generate a
20:36
Speaker 2: high rate of return on equity. And when it generates
20:39
Speaker 2: a high rate of return on equity, it's able to
20:41
Speaker 2: retain a very large proportion of its profits and reinvest
20:46
Speaker 2: again at that high rate of return. And the most
20:50
Speaker 2: so that a business that can do that su sustainably
20:54
Speaker 2: is a business that has or harbors within it a
20:58
Speaker 2: competitive advantage. Now, the most valuable competitive advantage of all
21:03
Speaker 2: is the ability to raise price without a detrimental impact
21:07
Speaker 2: on your unit sales volume. And a business that can
21:10
Speaker 2: do that think about that, James, you and I were
21:12
Speaker 2: on the board of a company. We sell chocolate. You know,
21:15
Speaker 2: it doesn't matter what we're selling. If the only decision
21:18
Speaker 2: we had to make every year was James, how much
21:21
Speaker 2: should we raise prices by this year? And each year
21:24
Speaker 2: we say, oh, ten percent and we see no reduction
21:28
Speaker 2: in volume. Well, that is a wonderful business to own.
21:32
Speaker 2: And because there's no capital expenditure involved, there's no investment involved,
21:36
Speaker 2: nothing changes. We just put an extra ten percent into
21:40
Speaker 2: our revenue and maybe that flows through completely to the
21:43
Speaker 2: bottom line.
21:44
Speaker 1: It's in just that we see Warren Buffett this year
21:47
Speaker 1: selling when everybody was buying last year. Now cash stup
21:50
Speaker 1: and we see this correct selling going on exactly. Yes again,
21:54
Speaker 1: So I just want to ask you, yeah, because people
21:56
Speaker 1: listening are going to see give me some names. Child
22:00
Speaker 1: expect you to do that, but I can do that.
22:02
Speaker 1: Does combank fit that criterion?
22:04
Speaker 2: Comback does because of the inertia in banking in Australia.
22:08
Speaker 2: Nobody thinks that the benefit of switching banks is greater
22:13
Speaker 2: than the inconvenience of doing it. The inconvenience of changing
22:16
Speaker 2: banks is enormous. Passwords, pin codes, logins, cards. You know,
22:21
Speaker 2: it's a disaster and all of those payments that are
22:24
Speaker 2: taken out automatically that you have to go and you know,
22:27
Speaker 2: reorganize it. The benefit of switching banks isn't seen to
22:30
Speaker 2: be greater than the inconvenience, and so people stay. And
22:34
Speaker 2: that allows banks to try on certain things like charging
22:37
Speaker 2: people for taking their own money out of account if
22:40
Speaker 2: they go to a branch, which by the way, was
22:42
Speaker 2: pulled back from but the CBA tried that, but.
22:45
Speaker 1: They they have to try. If you're relaxed in doing so,
22:48
Speaker 1: would you tell the list of some stocks that you
22:51
Speaker 1: think fit that criterion.
22:53
Speaker 2: The poster child in Australia, and I've written about it
22:56
Speaker 2: for years with you, James, is real estate, the Aria Group,
23:01
Speaker 2: which I.
23:02
Speaker 1: Must see, which we've said, and disclosure is obviously a
23:05
Speaker 1: news cooperation.
23:06
Speaker 2: Yes, you've got a stake, big stake in the business company,
23:10
Speaker 2: so it's listed. And think about the fact that there
23:13
Speaker 2: are something like eighty websites eight zero eighty websites in
23:19
Speaker 2: Australia where you can list your house for sale. The
23:22
Speaker 2: vast majority of them you can do for free, and
23:26
Speaker 2: yet Aria charges more than anyone else. And every year
23:31
Speaker 2: it's been raising its price either through premiumization, which is
23:35
Speaker 2: that idea that hey, I'm going to move your ad
23:37
Speaker 2: for your house from a from the silver plan to
23:40
Speaker 2: the Gold plan to the Diamond plan to the Platinum plan.
23:43
Speaker 2: And the price goes up every year. And despite that
23:47
Speaker 2: it has more houses listed than probably all the other
23:50
Speaker 2: websites combined.
23:52
Speaker 1: Yes, it's ahead, isn't it. Y has that molt again,
23:55
Speaker 1: it's the spuffet idea. Yeah, so combined we just said
23:59
Speaker 1: comt you, maybe you one or two more.
24:02
Speaker 2: There was another one called Altium, which was it designed
24:06
Speaker 2: software that helped people create the circuit boards if you like,
24:13
Speaker 2: that are pretty much behind every single well they are
24:17
Speaker 2: taken over that. Fortunately, that's another example of a business
24:21
Speaker 2: that could have charged pretty much whatever it wanted. Another
24:24
Speaker 2: business with a different kind of economic moat is Nick Scary.
24:30
Speaker 2: Nick Anthony Scarly invented the just in time model for
24:35
Speaker 2: furniture in Australia. So remember when you and I were young.
24:39
Speaker 2: Our parents would go to a furniture shop, point to
24:42
Speaker 2: a couch or a sofa as they're now called, and
24:45
Speaker 2: so I want that one.
24:46
Speaker 1: And they would see in stock.
24:50
Speaker 2: Back then when we were kids, two burly men would
24:54
Speaker 2: to the roof, put it on the put on the
24:56
Speaker 2: roof racks and now it's you know, yep, we'll have
24:59
Speaker 2: it delivered to you in twelve weeks after. It's manufactured furniture.
25:03
Speaker 1: When you buy it, depressed the button to actually constructed.
25:07
Speaker 2: Talk about it. No warehousing, no warehousing. The only stock
25:12
Speaker 2: that they've got is the stock that's on their floor
25:13
Speaker 2: that you decide, yeah, I want that one.
25:16
Speaker 1: You've played for a long time, haven't you. I certainly yes,
25:18
Speaker 1: So you've been on them for a long time. Okay.
25:20
Speaker 2: They've just bought a business called fab Furniture in the
25:22
Speaker 2: United Kingdom and if you google a shop front, fab
25:27
Speaker 2: furniture storefront, google that and have a look at a
25:31
Speaker 2: really dated concept in the UK, which by the way,
25:34
Speaker 2: is a population three times bigger than Australia. But Nick
25:37
Speaker 2: Scarley has bought that business and they're rebadging and they're
25:41
Speaker 2: redesigning the stores and they're going to be pumping their
25:44
Speaker 2: furniture through and where they've already started doing that. The
25:47
Speaker 2: Nick Scarley furniture is the fastest growing or fastest moving
25:52
Speaker 2: furniture in the United Kingdom stores, so we've already got
25:56
Speaker 2: a taste of how successful that's going to be.
25:58
Speaker 1: That's very interesting, and there are three stocks we've watched
26:00
Speaker 1: for a long time. I know that. Okay, folks, we
26:02
Speaker 1: have a really good batch of questions. Often at least
26:06
Speaker 1: some of them are on what's going on this week
26:08
Speaker 1: with the listeners genuinely worried as they would be, especially
26:11
Speaker 1: if you haven't been around for a correction before. So
26:14
Speaker 1: let's get back to them in a moment we take
26:16
Speaker 1: a break. Hello, Welcome back to The Australian's Money Puzzle
26:32
Speaker 1: podcast James Kirby with Roger Montgomery. We are talking, of course,
26:37
Speaker 1: in about stocks and the outlook for the market, which
26:41
Speaker 1: I know Roger a long time and I know that
26:44
Speaker 1: his view on the market would have barely budged before
26:48
Speaker 1: this ten percent correction because he tends to have a
26:50
Speaker 1: he's a value investor, so they stick. They have a
26:53
Speaker 1: principled approach which doesn't really change other than obviously as
26:58
Speaker 1: the facts changed in front of him, and you could
27:00
Speaker 1: hear him sort of outlining that when he talked about
27:02
Speaker 1: at the start of the show the conditions he saw
27:05
Speaker 1: which were necessary for a strong year this year, and
27:08
Speaker 1: how some of them are not actually in place as
27:10
Speaker 1: we might have thought they were at the start of
27:12
Speaker 1: the year. I've got some ridio question this, Roger. I've
27:14
Speaker 1: got one here from George which actually just came in
27:17
Speaker 1: since this market set off. Here I'll read it out
27:19
Speaker 1: in full because it's really good. He says. Tech stocks
27:22
Speaker 1: in the US and Australia began to be sold off
27:25
Speaker 1: even before the tariffs were announced. This was on the
27:28
Speaker 1: basis that the Chinese app deep Seek posed a threat
27:31
Speaker 1: to Nvidia and the larger AI group, which is very
27:35
Speaker 1: true and in a way, if you think back about
27:37
Speaker 1: deep Seek, was the beginning of the tumble really in
27:40
Speaker 1: tech stocks. Now, George says, this week data center stocks
27:44
Speaker 1: such as next d C, which I know, Roger, again
27:47
Speaker 1: you have been an admirer of and Digiko hit twelve
27:52
Speaker 1: month share part slow. So is the AI trade dead
27:55
Speaker 1: or will data center stocks recover? Now? I know you've
27:59
Speaker 1: parted actually answered that where you said that investors were
28:02
Speaker 1: tired of the AI team, or at least they were
28:04
Speaker 1: tired of hearing about how it would be lucrative but
28:08
Speaker 1: little evidence of it being lucrative. The part of the
28:10
Speaker 1: market that people were conservative investors found attractive for data
28:15
Speaker 1: centers for the simple reason that there was I suppose
28:17
Speaker 1: bricks and water there next to see great favorite Digico
28:21
Speaker 1: obviously less so it went underwater from the day it
28:24
Speaker 1: floated and has never recovered. But also off market Roger
28:27
Speaker 1: we saw amazing stuff going on air trunk and that
28:30
Speaker 1: sort of thing. So a lot of people perceive real
28:33
Speaker 1: value in the data centers anyway, the AI was something
28:38
Speaker 1: of cream on the cake. How do you view them now?
28:41
Speaker 2: So we've been long term investors. In fact, in the
28:46
Speaker 2: Montgomery Small Companies Fund, I think one of the day
28:49
Speaker 2: one stocks was mcquarie what was called McQuary Telecom mcquarie
28:54
Speaker 2: Technology correct. And the thesis there for that particular business
28:59
Speaker 2: is that it has very high quality clients, including the Hyperscalas,
29:04
Speaker 2: which are the Googles and the Amazons of the world.
29:07
Speaker 2: But it also has the Australian Taxation Office, I think,
29:10
Speaker 2: the Australian Defense Force, you know, the ASX, even you
29:14
Speaker 2: know the very very high quality government and semi government
29:18
Speaker 2: organizations are tenants in their centers because they are the
29:24
Speaker 2: ones that can provide the necessary security. And that's not
29:28
Speaker 2: going to change what we think. The thesis long term
29:32
Speaker 2: is that eventually, when all the centers have been built
29:36
Speaker 2: and then fully tenanted, then the exit strategy for the
29:42
Speaker 2: founders of that business, the chewed Hope brothers, David Cheered
29:45
Speaker 2: Hope being at the helm of the business, the exit
29:49
Speaker 2: strategy for them is potentially to sell to a global
29:53
Speaker 2: pension fund that is looking for a stable yield. And
29:58
Speaker 2: on that basis, look on a current on an operating basis,
30:01
Speaker 2: we think that the business could be worth about one
30:03
Speaker 2: hundred and ten dollars a share, and in this takeover scenario,
30:09
Speaker 2: which is purely hypothetical, by the way, it's a theory.
30:13
Speaker 2: In that scenario, then you know, one hundred and fifty
30:16
Speaker 2: or one hundred and sixty dollars or even one hundred
30:18
Speaker 2: and eighty dollars is possible.
30:20
Speaker 1: So, and these guys are down about thirteen percent, I think,
30:23
Speaker 1: so far worse than the bolder market.
30:25
Speaker 2: Indeed selling indeed, and so we think that the as
30:29
Speaker 2: I said to you earlier, I think the AI theme
30:32
Speaker 2: was done even before Deepseek. I think the AI theme
30:35
Speaker 2: was growing tired before Christmas. And what we have to
30:40
Speaker 2: remember is that excitement about new technology eventually needs to
30:46
Speaker 2: be met with revenue models. And only Nvidia had a
30:51
Speaker 2: revenue model, you know, for selling its chips. But the
30:54
Speaker 2: downstream applicators, if you like, those who were going to
30:57
Speaker 2: apply those chips, you know, they had idea for what
31:00
Speaker 2: they were going to do. You know, we're going to
31:02
Speaker 2: enhance We're going to enhance Microsoft Office with co pilot.
31:06
Speaker 2: You know, we're going to enhance your experience on Facebook
31:09
Speaker 2: and so on. People aren't paying a lot more for that,
31:12
Speaker 2: you know that. You know, are you and I other
31:14
Speaker 2: than maybe subscribing to pet for twenty nine dollars a month?
31:18
Speaker 2: Are you and I saying, oh, I'm going to pay
31:21
Speaker 2: five thousand dollars a month for you know, having an
31:23
Speaker 2: AI version of Excel? You know, no, I'm not. It's
31:27
Speaker 2: a margin. It's an incremental improvement to revenue. It's not
31:31
Speaker 2: as transformative as the price change implied. It should be.
31:36
Speaker 1: Okay, just quickly, next you see still a supporter.
31:40
Speaker 2: It's next to you see you again. Is a business
31:42
Speaker 2: that is going for a decade or more is going
31:45
Speaker 2: to have a tailwind because in terms of enterprise, so
31:50
Speaker 2: very large businesses migrating to the cloud. We're only halfway
31:54
Speaker 2: through that journey. Where where where it's where mobile phone
31:59
Speaker 2: smartphones work ten years ago or twelve years.
32:02
Speaker 1: Agay, one of these time, I know again listeners are
32:05
Speaker 1: asking Goodman highly regarded property trust. Forty percent of working
32:13
Speaker 1: progress is linked with data centers. Four hundred million retail
32:16
Speaker 1: raising out there right now to find more data centers.
32:19
Speaker 1: There's retail raisings that are thirty three, the stocks are
32:22
Speaker 1: thirty wants closing tomorrow. What's your view on Goodman's AI
32:28
Speaker 1: link how much as you want? Yeah? Explos Yeah.
32:31
Speaker 2: So look, Goodman is one of those businesses that I
32:34
Speaker 2: would class as you know, one of the top fifteen
32:36
Speaker 2: or twenty listed companies in Australia. I think it's an
32:39
Speaker 2: extraordinary business. But there's two things to think about. There's
32:43
Speaker 2: the business and we want a good quality business. Part
32:46
Speaker 2: that for a minute, and then there's the price. And
32:49
Speaker 2: if you pay too high a price, even for a
32:52
Speaker 2: good business, you're going to end up with a low return.
32:55
Speaker 2: Remember this rule. The higher the price you pay, the
32:58
Speaker 2: lower your return. And so, you know, the time to
33:01
Speaker 2: be buying these businesses that we've been talking about, and
33:04
Speaker 2: to buy them aggressively is when everyone's running for the hills,
33:07
Speaker 2: you know, when everyone's saying get out. You know, there's
33:10
Speaker 2: it's going to be a blood bath, that's the time.
33:12
Speaker 2: And I don't think the correction that we've seen to date,
33:16
Speaker 2: you know, ten percent down on the index, you know,
33:18
Speaker 2: for many stocks, they haven't fallen that much, you know,
33:22
Speaker 2: and they're not far from their all time highs and so,
33:25
Speaker 2: and they're nowhere near a big discount to their intrinsic values.
33:29
Speaker 2: So it still isn't the time where I'd be saying
33:32
Speaker 2: load up, and if you've got new capital, dive into
33:36
Speaker 2: the stock market with both ears pin back. I want
33:39
Speaker 2: some exposure when the market corrects as it's done, because
33:42
Speaker 2: it's better to buy now than to have bought a
33:45
Speaker 2: couple of months ago. But I'd still want to have
33:47
Speaker 2: some powder dry to be buying if better value presents itself.
33:52
Speaker 1: Kay. But it's interesting your disposition towards those stocks. Next
33:56
Speaker 1: you see macro Technology, even Goodman with its AI hat
34:00
Speaker 1: on is unchanged.
34:02
Speaker 2: Really, the businesses haven't changed, the price has changed. And
34:05
Speaker 2: maybe a bit of a steam has come down or
34:07
Speaker 2: a bit of a froth has come out of the
34:11
Speaker 2: price because people aren't as energized, and as you know,
34:15
Speaker 2: the optimism isn't as unbridled as it was before. And
34:18
Speaker 2: that's appropriate. That's when you start sharpening the pencil to
34:21
Speaker 2: have a look.
34:23
Speaker 1: Okay, we'll running out of time. I'll just jump one
34:26
Speaker 1: or two other questions. We had a question from Paul
34:29
Speaker 1: and also from Joshua that was more in the way
34:32
Speaker 1: of a complaints really, which says James, if I may
34:34
Speaker 1: say so, I think you misspoke in your discussion of
34:37
Speaker 1: the tax of Frank dividends, where you said the less
34:40
Speaker 1: tax you pay, the higher your dividend. Now this is
34:43
Speaker 1: true on an after tax basis, just like any other
34:46
Speaker 1: dollar of taxable income, the lower your tax rate, the
34:48
Speaker 1: more of your income that you get to keep. After text, Yes,
34:52
Speaker 1: Paul and Joshua and everyone else. Yes, in future, what
34:55
Speaker 1: I would say is the less tax you pay, the
34:58
Speaker 1: higher your divis end payment in your pocket, which is
35:04
Speaker 1: really what matters to most people. And that stands. But
35:07
Speaker 1: the dividend itself, it's not that you get a higher
35:10
Speaker 1: dividend than someone else if you are retired, for instance,
35:13
Speaker 1: you just get a higher payment after James ranking James.
35:18
Speaker 2: I'll also say, you know, the lower the tax we pay,
35:20
Speaker 2: the higher everyone's income.
35:23
Speaker 1: Ha ha, Yeah, okay, you could say that if you want,
35:27
Speaker 1: as long as everyone understands the first point, all right,
35:30
Speaker 1: And finally, Susie says, markets have been falling. If you
35:34
Speaker 1: are in agreement, we can't expect the sort of higher
35:36
Speaker 1: returns again this year. If you were in a big
35:38
Speaker 1: super fund, do you need to actually change your investment
35:41
Speaker 1: choice to something more conservative? Reasonable question, It's a it's
35:45
Speaker 1: an earnest question, so people would be out.
35:47
Speaker 2: So we used I used precisely those words in the
35:51
Speaker 2: most I think the most recent article I wrote for you,
35:54
Speaker 2: or the most recent column, and that was, don't expect
35:56
Speaker 2: the returns of whatever happens, You're not going to get
35:59
Speaker 2: those double digit returns. In fact, only once in the
36:02
Speaker 2: last one hundred years have we seen three high double
36:06
Speaker 2: digit returns in a row from the S and P
36:08
Speaker 2: five hundred, plenty of doubles, but only one triple, and
36:12
Speaker 2: that was in the nineteen eighties.
36:14
Speaker 1: And just remind people of where are we now.
36:16
Speaker 2: We've had two doubles We've had two plus twenty percent
36:19
Speaker 2: years in the S and P five hundred. So I said,
36:22
Speaker 2: with whatever the outcome, it's going to be a lower
36:24
Speaker 2: returning year this year anyway for me. If I wasn't
36:30
Speaker 2: broadly diversified, and you know, I was younger, for example,
36:35
Speaker 2: and I was happy to switch from one asset class
36:38
Speaker 2: to another asset class, I'd be saying, well, if I
36:40
Speaker 2: thought that the stock market was going to give me
36:43
Speaker 2: nine percent this year, while I'd rather be in private credit,
36:47
Speaker 2: which gives me nine percent with zero volatility, no exposure
36:51
Speaker 2: to public markets at all, and I'm going to get
36:54
Speaker 2: nine percent. That makes perfect sense to me, and that's
36:57
Speaker 2: what's attracting so many retirees who were in the later
37:00
Speaker 2: stages of their retirement.
37:01
Speaker 1: But you put it just to as as a part
37:04
Speaker 1: of a diverse fopeus indeed, but you.
37:06
Speaker 2: Still need because we could be wrong, James, and the
37:10
Speaker 2: market could have a twenty percent year, and if it did,
37:13
Speaker 2: it would be a mistake to be exiting. And so
37:17
Speaker 2: the answer to Susie's question relates to or it comes
37:20
Speaker 2: back to why she selected that particular risk profile at
37:26
Speaker 2: the very beginning of her journey. And I'm going to
37:29
Speaker 2: presume that she assumed that there would be some bumps
37:34
Speaker 2: along the way, that there would be some volatile years. Now,
37:37
Speaker 2: ideally she's got some other sources of income or some
37:41
Speaker 2: other assets outside that she can add to as prices fall,
37:47
Speaker 2: and that's the ideal scenario. You don't sell when prices
37:50
Speaker 2: are down, you buy more. You're invested in quality. I
37:53
Speaker 2: will say that's an important exception because you've heard that phrase.
37:58
Speaker 2: It's not timing the mark. It's time in the market
38:02
Speaker 2: that matters. But in the market, time is only your
38:05
Speaker 2: friend if you're invested in good quality businesses. If you're
38:08
Speaker 2: invested in Telstra for the last twenty years, time has
38:11
Speaker 2: not been your friend. You know, the longer you're invested
38:13
Speaker 2: in a poor quality business or a lower quality business,
38:16
Speaker 2: the worse the outcome for you, because you're missing opportunities
38:19
Speaker 2: to be invested in better quality businesses and be invested elsewhere.
38:24
Speaker 1: By the way, this is never advice, it's always information only.
38:26
Speaker 1: But Susie and all the Susi's out there, I think
38:28
Speaker 1: the point I'm just making is the investment option that
38:33
Speaker 1: you choose in big super whether it was last year
38:35
Speaker 1: or five years ago, shouldn't be knocked around by a
38:41
Speaker 1: couple of bad weeks interview.
38:43
Speaker 2: You make my article sound better, James, and also make
38:47
Speaker 2: my sentences more succeptile.
38:48
Speaker 1: Actually, folks. For what it's worth, the Roger Montgomery raw
38:51
Speaker 1: copy is very good and it's the lightest of touch.
38:54
Speaker 1: The lightest of touch, Okay, terrific. Now, one thing before
38:57
Speaker 1: we go here at the Money Puzzle. We love receiving
39:01
Speaker 1: your correspondence. You know that, and you know the address
39:05
Speaker 1: the Money Puzzle at the Australian dot com dot au.
39:08
Speaker 1: Now we have a new facility. This is worth hearing.
39:11
Speaker 1: You can send us your questions using the voice notes
39:14
Speaker 1: on your phone. We'd love to hear you you asking
39:18
Speaker 1: the questions on air. We'll publish them when we get them.
39:22
Speaker 1: All you have to do if you're on your phone,
39:23
Speaker 1: you've got a voice memo app. You just record your
39:26
Speaker 1: question and when you've finished it, you share it. You
39:28
Speaker 1: send it in like an email to our address, the
39:31
Speaker 1: Money Puzzle at the Australian dot com dot au. So
39:35
Speaker 1: let's have some questions. That is your voice on the question.
39:39
Speaker 1: And when we hear you and we get these voice memos,
39:43
Speaker 1: we will bake them into the show where you will
39:45
Speaker 1: hear yourself asking the question. I think this is a
39:47
Speaker 1: great idea. It's the producer Liah Sama Glue has come
39:51
Speaker 1: up with this. It's innovation here at the money Puzzle.
39:55
Speaker 1: Thank you very much, Roger, great show as always, love
39:57
Speaker 1: you to talk to you. We'll talk to you again
39:59
Speaker 1: soon a pleasure, and we'll talk to you in a
40:02
Speaker 1: few days. Thank you.