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Could you handle a share market crash? · The Money Puzzle

• 0:13
  Speaker 1: Hello and welcome to the Australian's Money Puzzle podcast. I'm
• 0:15
  Speaker 1: James Kirby, the wealth editor at The Australian. Welcome aboard, everybody.
• 0:20
  Speaker 1: Now imagine, imagine as an investor, a share investor, how
• 0:23
  Speaker 1: would you feel if this happened? You wake up tomorrow morning,
• 0:28
  Speaker 1: you look at your phone or you look at the
• 0:29
  Speaker 1: television and you find out that Wall Street is down 23%
• 0:35
  Speaker 1: in a day overnight. You say, oh my God, you
• 0:39
  Speaker 1: hope Australia... when it opens, would be better. Maybe there'll
• 0:42
  Speaker 1: be a recovery. Maybe there'll be some bargain hunting. The ASX,
• 0:47
  Speaker 1: in a fashion which was established way back when and
• 0:50
  Speaker 1: continues to this day, overdoes it and actually falls harder
• 0:55
  Speaker 1: than the American market. And it falls 25% in a
• 0:59
  Speaker 1: single session. Now, I want you to keep this in mind.
• 1:03
  Speaker 1: At the moment, these days, we get terribly worried if
• 1:05
  Speaker 1: we have a bad day on the ASX. We have
• 1:07
  Speaker 1: a 3% drop. It's a big deal. If we have
• 1:11
  Speaker 1: a 5% drop, it's front page news. It's billions have
• 1:16
  Speaker 1: been wiped off the stock exchanges. The thing is that
• 1:20
  Speaker 1: in 1987, we had a 25% drop. It was the
• 1:23
  Speaker 1: greatest stock market crash of our time. It was the
• 1:26
  Speaker 1: biggest since 1929.
• 1:29
  Speaker 2: The crash of 87 around the world share market pandemonium.
• 1:33
  Speaker 3: Good evening.
• 1:34
  Speaker 2: The stock market sale of the century continued around the
• 1:37
  Speaker 2: world today with more than $ 60 billion wiped off the
• 1:41
  Speaker 2: value of Australian shares in the past 30 hours.
• 1:45
  Speaker 1: And it's worth knowing this, the previous worst day, Essex,
• 1:49
  Speaker 1: before the 25% drop, has a 4% drop. So it
• 1:53
  Speaker 1: was like five times, six times anything that people had
• 1:58
  Speaker 1: seen before.
• 2:00
  Speaker 2: At the end of the day's trading on the Sydney
• 2:02
  Speaker 2: Stock Exchange, the market's leading indicator, the All Ordinaries Index,
• 2:06
  Speaker 2: had fallen 515 points. As the selling stampede continued around
• 2:11
  Speaker 2: the world, some economists are now forecasting the start of
• 2:15
  Speaker 2: a worldwide recession.
• 2:18
  Speaker 1: Now what's that line, the historic line? If you forget
• 2:21
  Speaker 1: the past, you're condemned to repeat it. So I wanted
• 2:24
  Speaker 1: to remind people That crash happened this week in 1987.
• 2:29
  Speaker 3: The Sydney Stock Exchange, 15 minutes before opening. The calm
• 2:34
  Speaker 3: before the collapse.
• 2:43
  Speaker 1: I was actually in the market, very junior, but I
• 2:47
  Speaker 1: was in the market and I can remember there was
• 2:49
  Speaker 1: a lead-up to the Spring Racing Carnival in Melbourne. There
• 2:53
  Speaker 1: was a Melbourne Cove looming. I had just arrived in Australia.
• 2:57
  Speaker 1: By that I mean I was here a couple of
• 3:00
  Speaker 1: weeks and I was a reporter on the Financial Review.
• 3:04
  Speaker 1: And I can still remember how difficult it was for
• 3:08
  Speaker 1: us to grasp this because we didn't have the communications
• 3:11
  Speaker 1: we have now. We were basically standing around what they
• 3:13
  Speaker 1: call a wire machine. And I wanted to talk to
• 3:17
  Speaker 1: someone in the market who would be good on this,
• 3:19
  Speaker 1: who recalls it clearly. And my guest today was in
• 3:24
  Speaker 1: the thick of it all at the time. He's an
• 3:26
  Speaker 1: Australian who was in London at the time, but he
• 3:28
  Speaker 1: was right across it. His name is Alex Moffat. He's
• 3:33
  Speaker 1: at the Joseph Palmer Group. Hi, Alex. How are you?
• 3:37
  Speaker 1: Good morning, James. Thank you for the invitation. It's good
• 3:40
  Speaker 1: to speak to you. It's delightful to have you on.
• 3:43
  Speaker 1: So it turns out, funnily enough, you're the Australian, but
• 3:46
  Speaker 1: you were in London. And I was here on that day,
• 3:50
  Speaker 1: which was a Monday in New York. And a Tuesday
• 3:54
  Speaker 1: in Australia, the last great crash we had. And I
• 3:58
  Speaker 1: want to talk to our listeners today about this because, folks,
• 4:03
  Speaker 1: there's going to be another crash. I don't know the
• 4:06
  Speaker 1: scale of it and I don't know when, but crashes
• 4:09
  Speaker 1: are part of the market. And we possibly as investors
• 4:13
  Speaker 1: just now are having it so good that we've probably
• 4:15
  Speaker 1: forgotten just how scary it is. Where were you, Alex?
• 4:19
  Speaker 1: And tell me about the day. Okay. I was in London.
• 4:21
  Speaker 4: I was working in Irving Trust Company's dealing room in
• 4:25
  Speaker 4: Abchurch Lane in London. And for those who know London well,
• 4:28
  Speaker 4: Abchurch Lane is just up the road from the Cannon
• 4:32
  Speaker 4: Street railway station.
• 4:33
  Speaker 1: The Irving Trust Company was not a stockbroker.
• 4:35
  Speaker 4: They were an American bank that was running their global
• 4:38
  Speaker 4: bond dealing operation from London. New York at the time
• 4:42
  Speaker 4: was the secondary operation because London, of course, at the.
• 4:44
  Speaker 1: Time was the center of the universe.
• 4:47
  Speaker 4: The Australian firm that sent me there was one of
• 4:49
  Speaker 4: the discount houses at the time in Australia, TransCity Discount.
• 4:54
  Speaker 4: And I was running the Australian bond operation for TransCity
• 4:58
  Speaker 4: Discount through Irving Trust's offices in London.
• 5:02
  Speaker 1: What was the atmosphere like? How did people react when
• 5:05
  Speaker 1: they saw the overnight news? So, James, you were right
• 5:08
  Speaker 1: in your earlier comments. The week before, if I can
• 5:11
  Speaker 1: just paint a little bit of a picture, the week
• 5:14
  Speaker 1: before the... Obviously, as a bond dealer, you look at
• 5:18
  Speaker 1: all the markets around you, and we keep a half
• 5:20
  Speaker 1: an eye on the stock market. The bond market globally
• 5:23
  Speaker 1: is about double the size of the total of the
• 5:26
  Speaker 1: world's stock markets. But you do keep an eye on
• 5:30
  Speaker 1: it because it's important. A lot of investment dollars go there.
• 5:33
  Speaker 4: In the week prior to the Friday night, the 16th
• 5:38
  Speaker 4: of October in London, the S & P 500 dropped
• 5:41
  Speaker 4: about 10%. not in one day, but over the course
• 5:45
  Speaker 4: of that week. And you alluded to that in your comments.
• 5:48
  Speaker 4: You could tell that there was something wrong. We went
• 5:50
  Speaker 4: home on the Friday night and it just didn't feel right. Now,
• 5:55
  Speaker 4: when the stock market has issues, credit spreads also start
• 6:00
  Speaker 4: to widen against the risk-free rate against government bond yields.
• 6:04
  Speaker 4: And so the pressure was being felt in credit spreads,
• 6:06
  Speaker 4: which is the market that I dealt in, as well
• 6:09
  Speaker 4: as in the stock market. Now, in adding a little
• 6:12
  Speaker 4: bit of further colour, and some of your listeners may
• 6:15
  Speaker 4: be very young, on Sunday night, the 18th of October,
• 6:19
  Speaker 4: a wild hurricane hit London and decimated a very large
• 6:24
  Speaker 4: part of certainly Hyde Park, which was near where I
• 6:27
  Speaker 4: was living, to the end that when I got a
• 6:30
  Speaker 4: phone call very early on Monday morning, the 19th of October,
• 6:34
  Speaker 4: and someone said, Mock, look out your window and tell
• 6:38
  Speaker 4: me what you see. We were living in Devere Cottages
• 6:42
  Speaker 4: in Kensington at the time, and out on Kensington High Street,
• 6:46
  Speaker 4: I could see a double-decker bus on its side. I
• 6:50
  Speaker 4: walked to work that day. There was a sense of
• 6:52
  Speaker 4: doom in the air. There was, separate to the markets.
• 6:58
  Speaker 1: There were a lot of trees down in Hyde Park.
• 7:00
  Speaker 4: I walked to work. and in the city of London,
• 7:03
  Speaker 4: in Abchurch Lane. And the morning was, it just, you
• 7:07
  Speaker 4: could feel the black clouds around the dealing room. The
• 7:10
  Speaker 4: American Central Bank had been holding monetary policy fairly tight.
• 7:14
  Speaker 4: Alan Greenspan was the new president of the Federal Reserve.
• 7:18
  Speaker 4: It just, it was a surreal day. And then when
• 7:22
  Speaker 4: the Dow Jones components, and for your listeners' information, the
• 7:27
  Speaker 4: Dow comprises the 30 largest stocks in the U.S., And
• 7:31
  Speaker 4: when they open those 30 stocks, they open one stock
• 7:34
  Speaker 4: every minute for half an hour.
• 7:37
  Speaker 1: They start at about one o'clock.
• 7:38
  Speaker 4: And by quarter past one, the Dow was down very
• 7:43
  Speaker 4: hard indeed, down probably 10%.
• 7:45
  Speaker 1: Were they trying to stage manage as such a crash
• 7:50
  Speaker 1: that they knew was happening? That's a really good question, James.
• 7:53
  Speaker 4: And at the time, it was basically the start of
• 7:57
  Speaker 4: program trading and Program trading probably was the lead into the,
• 8:03
  Speaker 4: I guess, the artificial intelligence-inspired program trading that we have now.
• 8:08
  Speaker 4: But there were an awful lot of sell orders going
• 8:11
  Speaker 4: into the stock market, which was why the market was
• 8:13
  Speaker 4: going down at a rapid rate. And this was impacting
• 8:16
  Speaker 4: credit spreads, as I said. People started selling just to
• 8:19
  Speaker 4: cover risk positions. So people were selling good assets like
• 8:23
  Speaker 4: bonds to cover their bad assets.
• 8:25
  Speaker 1: Like stocks at the time.
• 8:27
  Speaker 4: The Dow dropped 20% on that day as the S &
• 8:29
  Speaker 4: P was down 20%. It's probably the worst day since
• 8:33
  Speaker 4: the 1929 crash, the anniversary of which is coming up
• 8:37
  Speaker 4: very shortly.
• 8:38
  Speaker 1: Yes, it's interesting. Isn't it the big crashes are this
• 8:41
  Speaker 1: time of year? They are. October, October. What's that about,
• 8:45
  Speaker 1: do you think? I have my own theory on that.
• 8:49
  Speaker 4: We in the Southern Hemisphere have our holidays around Christmas time.
• 8:53
  Speaker 1: But in the Northern Hemisphere, school breaks up. for summer
• 8:57
  Speaker 1: in late June.
• 8:58
  Speaker 4: And a lot of the big fund managers and captains
• 9:01
  Speaker 4: of industry go away to their summer houses in Spain
• 9:03
  Speaker 4: or wherever for a long summer break.
• 9:06
  Speaker 1: Take the children with them.
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  Speaker 4: And they leave the juniors on the desk over the
• 9:09
  Speaker 4: summer period.
• 9:10
  Speaker 1: Oh, yeah.
• 9:11
  Speaker 4: When they come back in September, late August, September, and
• 9:15
  Speaker 4: school resumes, university goes back, they have investment committee meetings
• 9:20
  Speaker 4: and they readjust their risk settings, their investment parameters, et cetera. And-
• 9:26
  Speaker 4: Program trading at the time was in its infancy. There
• 9:30
  Speaker 4: were no buffers built into the programs. Controls came after that.
• 9:34
  Speaker 1: So the selling perpetuated selling. Exactly. It was like a
• 9:39
  Speaker 1: rolling snowball, and it just kept rolling. It's interesting because
• 9:42
  Speaker 1: people often ask about what were the causes of the
• 9:44
  Speaker 1: 87 crash. And one of the things about FIT, it's
• 9:48
  Speaker 1: almost like a sort of a mirror image of what
• 9:50
  Speaker 1: were the causes of the First World War. There's a
• 9:51
  Speaker 1: pile of causes. What were the causes of the 87 crash?
• 9:54
  Speaker 1: Nothing in particular jumps out, but the crash... one of
• 10:01
  Speaker 1: the things was that not only did it... So that
• 10:03
  Speaker 1: was the day, everybody, listeners, and I'm sure the vast
• 10:06
  Speaker 1: majority of listeners don't remember. I may not even know
• 10:09
  Speaker 1: about this. It fell 25% on the day. And for
• 10:14
  Speaker 1: what it's worth, it kept going. And the next few
• 10:16
  Speaker 1: months were worse. And in the end, it fell 40%.
• 10:19
  Speaker 1: And the bottom at that time was about five or
• 10:23
  Speaker 1: six months later in February 88. And then it started
• 10:27
  Speaker 1: to turn. Now, the most recent crash that we're familiar
• 10:30
  Speaker 1: with wasn't so much a crash as a slow, what
• 10:33
  Speaker 1: do they call it? The slow motion train wreck, which
• 10:35
  Speaker 1: is the GFC, where because the authorities were trying again
• 10:40
  Speaker 1: to stage manage how bad things were, shares fell 50%,
• 10:45
  Speaker 1: but they took two years to fall 50%. from 207
• 10:49
  Speaker 1: to 209. Now, what I want to ask you, Alex,
• 10:55
  Speaker 1: is tell me about having been in the thick of things,
• 10:59
  Speaker 1: and you were a credentialed professor in 1987. I was
• 11:05
  Speaker 1: a junior reporter, and I was just standing there with
• 11:07
  Speaker 1: my mouth open, just watching. I'm watching everybody. I remember
• 11:12
  Speaker 1: someone saying to me, you should go around to the
• 11:14
  Speaker 1: stock exchange because there was a physical stock exchange on
• 11:17
  Speaker 1: Connell Street in Melbourne. And you could go and there
• 11:19
  Speaker 1: was 12 boards and all that. And I remember trying
• 11:21
  Speaker 1: to go in, but the crowds, of course, were around
• 11:24
  Speaker 1: the doorways. You couldn't really get in. Normally there was
• 11:27
  Speaker 1: no one in there apart from the traders and chokies
• 11:29
  Speaker 1: and all that, but you couldn't get in because it
• 11:31
  Speaker 1: was like 60. But I'll never forget it. But what
• 11:34
  Speaker 1: I want to ask you is, having witnessed and professionally
• 11:38
  Speaker 1: witnessed as an investor, the worst crash of our time,
• 11:43
  Speaker 1: being the great crash of 1987. Did it change you?
• 11:47
  Speaker 1: In the way that people say, oh, I grew up
• 11:49
  Speaker 1: in the Great Depression. My parents grew up in the
• 11:50
  Speaker 1: Great Depression and it characterized me, it formed me. What
• 11:56
  Speaker 1: did it do to you as an investor from then on?
• 12:00
  Speaker 1: There was a real water change, a sea change for me, James.
• 12:03
  Speaker 4: And the word valuation took on a real new meaning
• 12:07
  Speaker 4: and When I transitioned from the bond market to the
• 12:10
  Speaker 4: stock market 20 years ago, valuation became all important. And
• 12:15
  Speaker 4: there's a number of companies now which people probably are
• 12:18
  Speaker 4: watching the technology stocks going up and up, exceeding their
• 12:22
  Speaker 4: realistic valuations.
• 12:24
  Speaker 1: And there's a.
• 12:25
  Speaker 4: Means of calculating a company's valuation and measuring it against
• 12:29
  Speaker 4: its peers. And I think that's what drove it into me.
• 12:32
  Speaker 4: And so I became a value investor after that. And
• 12:35
  Speaker 4: that goes for bonds as well as stocks. Buy when
• 12:38
  Speaker 4: it's cheap and sell when it's expensive.
• 12:40
  Speaker 3: Yes.
• 12:41
  Speaker 1: It's hard to sell when it's expensive. It's hard to
• 12:44
  Speaker 1: sell when you've made a lot of money out of something,
• 12:45
  Speaker 1: isn't it?
• 12:46
  Speaker 4: You can always take some off the top, though.
• 12:48
  Speaker 1: You can always take your capital out and let the
• 12:51
  Speaker 1: profit run. Are you listening, WiseTech investors? Are you listening,
• 12:55
  Speaker 1: NextDC investors? Mind you, WiseTech is selling off for you,
• 12:58
  Speaker 1: so you don't have to worry. But are you listening,
• 13:01
  Speaker 1: shall we say, NVIDIA investors, one of the most popular
• 13:04
  Speaker 1: overseas stocks on the Australian market at the moment, and
• 13:07
  Speaker 1: all the big tech stocks that our listeners love, the
• 13:11
  Speaker 1: Meta and Alphabet, et cetera, et cetera, Facebook and Google? Okay,
• 13:15
  Speaker 1: what we might do is take a short break. And
• 13:17
  Speaker 1: what I'm going to do in the second part is
• 13:19
  Speaker 1: I'm going to put the key question to Alex, which
• 13:23
  Speaker 1: is all very interesting, but those were different days or
• 13:28
  Speaker 1: were they different days and could it all happen again?
• 13:30
  Speaker 1: We'll be back in a moment. Hello and welcome back
• 13:40
  Speaker 1: to the Australian's Money Puzzle podcast. I'm James Kirby talking
• 13:43
  Speaker 1: to Alex Moffat of Joseph Palmer and Sons. Alex is
• 13:48
  Speaker 1: a He also writes a newsletter for his clients, which
• 13:52
  Speaker 1: he very nicely, a few years ago, put me on
• 13:55
  Speaker 1: the circle. And I have a look at it every
• 13:58
  Speaker 1: morning and it's very interesting. And he has a historic
• 14:01
  Speaker 1: perspective of the wider market, which is invariably missing, can
• 14:07
  Speaker 1: I say, from a lot of commentators that we read.
• 14:10
  Speaker 1: And it's really important to know what has happened in
• 14:14
  Speaker 1: the past. Alex, you were going to, I know you
• 14:17
  Speaker 1: were just, I could see you were heading towards something
• 14:19
  Speaker 1: there a minute ago, before we talk about the prospects
• 14:22
  Speaker 1: of it all happening again, about the big companies. At
• 14:26
  Speaker 1: that time, some of the biggest companies in Australia in 1987,
• 14:31
  Speaker 1: there was companies like Pacific Dunlop, which was a giant company.
• 14:36
  Speaker 1: BTR Nidex was a giant company. There was the great,
• 14:40
  Speaker 1: the Buccaneers, the John Elliott with Elders. the Adelaide Steamship
• 14:44
  Speaker 1: Group with John Spalvins, Holmes Accord and his various enterprises,
• 14:50
  Speaker 1: and of course the iconic figure, the one that stands
• 14:53
  Speaker 1: out to this day, Alan Bond and his empire, they're
• 14:58
  Speaker 1: all gone. And many of them were, that was the
• 15:02
  Speaker 1: beginning of the end for them, wasn't it, for many
• 15:04
  Speaker 1: of them, the 87 crash. Are things so different today?
• 15:11
  Speaker 4: The difference, James, and you've highlighted a lot of them.
• 15:14
  Speaker 4: Quintex is another one that comes to mind. Christopher Skays,
• 15:18
  Speaker 4: who I stood in front of his desk in Collins
• 15:21
  Speaker 4: Street in Hardy House while he signed a mountain of
• 15:24
  Speaker 4: bills of exchange for me. He wouldn't let me sit
• 15:26
  Speaker 4: down while he did them, but nonetheless, I think the
• 15:28
  Speaker 4: difference between those days and these is there's one word
• 15:32
  Speaker 4: missing in those days, profit. And a lot of those
• 15:35
  Speaker 4: companies were going up on promises, expectation, sheer flow of
• 15:41
  Speaker 4: investor money, but they weren't delivering profit or dividends. And certainly,
• 15:45
  Speaker 4: I remember that was the case in Adsteam, Quintex, Bond Corporation.
• 15:50
  Speaker 4: There was a lot of sharp practices. And you may
• 15:54
  Speaker 4: remember a practice which was called Bottom of the Harbour.
• 15:59
  Speaker 1: The tax schemes, they were around at that time, but
• 16:03
  Speaker 1: I was only vaguely aware, really, of what it was
• 16:05
  Speaker 1: all about.
• 16:05
  Speaker 4: They started in about the mid-70s and went through to
• 16:08
  Speaker 4: the late 80s. And that's where entrepreneurs would come in,
• 16:11
  Speaker 4: buy a company, strip it of its assets, and put
• 16:16
  Speaker 4: some bogus directors in, and then avoid any tax payments.
• 16:20
  Speaker 4: And if you go back through your history books, and
• 16:22
  Speaker 4: as James, I'm a real fan of history, you learn
• 16:24
  Speaker 4: a lot from it. The painters and dockers in Victoria
• 16:29
  Speaker 4: were technically very helpful to some of these companies in
• 16:33
  Speaker 4: providing stand-in directors for some of these shell companies that
• 16:36
  Speaker 4: were stripped through the bottom of the harbour schemes.
• 16:40
  Speaker 1: So profit is the answer. When things are really good,
• 16:45
  Speaker 1: then the nature of scandals change. And I think people
• 16:48
  Speaker 1: are not as worried. It's a tough look on Chris
• 16:52
  Speaker 1: Ellison and Minres. Minres was the big lithium player. I'm
• 16:55
  Speaker 1: holding it out as an example this morning, but why not?
• 16:58
  Speaker 1: Because there's an investigation going on now, and ASIC has
• 17:01
  Speaker 1: confirmed they're investigating how he's dealing with what would seem
• 17:06
  Speaker 1: to be an alleged tax arrangement that should not have
• 17:10
  Speaker 1: happened at MinRed. But the point I want to make
• 17:14
  Speaker 1: is not so much about him, but it seems to
• 17:15
  Speaker 1: me that the scandals we get at the top of
• 17:18
  Speaker 1: the market, in a huff market, are scandals of greed.
• 17:23
  Speaker 1: And that was a common theme in terms of how
• 17:28
  Speaker 1: people were dealing around that time. In the late 80s,
• 17:32
  Speaker 1: we had a terrible crash. And we had the Harlan scheme,
• 17:35
  Speaker 1: if you remember, at Elders. And we had various issues
• 17:39
  Speaker 1: at Quintex, not to mention the sort of mind-bending stuff
• 17:42
  Speaker 1: that was going on at Bond. And we have something
• 17:44
  Speaker 1: this week now at Minres, where there is again a
• 17:48
  Speaker 1: sea of under-suspicion people for trying to make even more
• 17:53
  Speaker 1: money than they're already making. And I just wondered, do
• 17:56
  Speaker 1: you detect in the bull market that we have now,
• 18:00
  Speaker 1: do you detect some sort of tremors or signals that
• 18:06
  Speaker 1: would lead us to a reprise of 87?
• 18:12
  Speaker 4: The only things I can detect, James, and stewardship, and
• 18:15
  Speaker 4: you very rightly raised that, is very important. Certainly stewardship
• 18:18
  Speaker 4: in our company analysis through our own business is a
• 18:22
  Speaker 4: key factor of our due diligence process before we invest
• 18:25
  Speaker 4: a penny of our clients' funds into any company. You're
• 18:28
  Speaker 4: quite right in raising that. It's just simply appalling. And
• 18:32
  Speaker 4: he has put his hand up. ASIC, of course, will
• 18:35
  Speaker 4: go in and do what they do, but have my
• 18:37
  Speaker 4: own opinions of Chris Ellison, and I certainly won't share
• 18:41
  Speaker 4: them here, but it's not a stock that I would
• 18:44
  Speaker 4: happily buy into. To me, I think corporate Australia has
• 18:49
  Speaker 4: come a long way since 1987. And you look at
• 18:52
  Speaker 4: company CEOs and boards, and there is a very high
• 18:57
  Speaker 4: degree of probity amongst those boards and CEOs. To the
• 19:02
  Speaker 4: second part of the question, I'm looking also at the
• 19:05
  Speaker 4: overall market valuations and your observation is quite right. Our
• 19:10
  Speaker 4: market at the moment is the ASX 200 is valued
• 19:14
  Speaker 4: at about 21 times historic earnings. The long-term average and
• 19:18
  Speaker 4: long-term is 20 years, it's a fair measure, is about
• 19:22
  Speaker 4: just under 15 times. So our market's expensive at the
• 19:25
  Speaker 4: moment and it is being driven by weight of money
• 19:28
  Speaker 4: and You would be very well aware that superannuation contributions
• 19:32
  Speaker 4: assist that weight of money going in.
• 19:35
  Speaker 1: Yes, it's a mandatory weight of money. Correct. Exactly right.
• 19:39
  Speaker 4: And a lot of that weight of money is going
• 19:42
  Speaker 4: into two very large Australian super funds, Australian Super being
• 19:46
  Speaker 4: one of them. And so that money has to be
• 19:48
  Speaker 4: invested and it's invested at the time. So our market
• 19:51
  Speaker 4: is trading expensively. I think it goes back to what
• 19:54
  Speaker 4: I mentioned before. It's very hard finding value in the
• 19:57
  Speaker 4: current market. And I think investors have every right to
• 20:01
  Speaker 4: be cautious. And in being cautious, you spend more time
• 20:06
  Speaker 4: doing your due diligence before buying.
• 20:08
  Speaker 1: Okay. Now, one of the things about all our crashes,
• 20:12
  Speaker 1: I don't know much about what happened in 1929 here,
• 20:16
  Speaker 1: except that obviously there was a perfect reflection of that
• 20:19
  Speaker 1: crash and a perfect reflection of the later depression, the
• 20:22
  Speaker 1: Great Depression. In 87, there was a mirror image of
• 20:26
  Speaker 1: the crash. In the 2000 dot-com crash, there was a
• 20:29
  Speaker 1: mirror image of the crash. So we tend to mirror
• 20:32
  Speaker 1: Wall Street. And when they have a crash... For all
• 20:35
  Speaker 1: our conservatism, this is recent conservatism, and for all our
• 20:40
  Speaker 1: emphasis on dividends, for instance, so it's a less... Our
• 20:46
  Speaker 1: share market gives better dividends, but it doesn't give as
• 20:49
  Speaker 1: good price appreciation as the US market. But for all that,
• 20:53
  Speaker 1: when things go bad, we fall with them just as much,
• 20:58
  Speaker 1: if not more. If the US has a sharp downturn
• 21:03
  Speaker 1: and no one knows why it would happen but a
• 21:05
  Speaker 1: black swan event. Okay. So we just can't say what
• 21:07
  Speaker 1: it is, but something happens that no one thought was
• 21:10
  Speaker 1: going to happen and everyone loses their nerve and there's
• 21:13
  Speaker 1: a big fall on Wall Street. Will we fall with
• 21:15
  Speaker 1: them like we always do?
• 21:18
  Speaker 4: We definitely will, James. And the analogy is the end
• 21:21
  Speaker 4: of the tail on the dog. The dog wags its
• 21:23
  Speaker 4: tail and Australia can be right at the end of
• 21:26
  Speaker 4: the tail. Yes, we always overreact and then the recovery
• 21:30
  Speaker 4: is slow, as you pointed out.
• 21:32
  Speaker 1: If we're at 21 times and the average is 15,
• 21:36
  Speaker 1: is there a number of people who get seriously scared
• 21:38
  Speaker 1: and say, this has to tumble over?
• 21:41
  Speaker 4: Look, I thought when the market fell over in 2020
• 21:45
  Speaker 4: with COVID, our market, sorry, the S & P 500
• 21:49
  Speaker 4: dropped about 35%. That was a very fast drop, but
• 21:53
  Speaker 4: it recovered very quickly. You mentioned before the downturn in 2007-8,
• 21:57
  Speaker 4: and you mentioned how long it took to fall that
• 22:02
  Speaker 4: I think it went down eventually, about 60 odd percent.
• 22:04
  Speaker 4: It took until 2012 to recover. I've noticed too that
• 22:10
  Speaker 4: through the clients who we act for, we haven't had
• 22:13
  Speaker 4: a single instance of anyone panicking. So it's been people
• 22:18
  Speaker 4: have held their nerve generally and recognized the downturns for
• 22:22
  Speaker 4: what they are, typically an overreaction. to an event whether
• 22:28
  Speaker 4: it be COVID or a housing crisis in.
• 22:31
  Speaker 1: The US or lack of corporate profitability and bottom of
• 22:35
  Speaker 1: the harbour in 1987.
• 22:37
  Speaker 4: The markets will eventually right themselves and if you look
• 22:40
  Speaker 4: at a chart of say the S & P 500
• 22:42
  Speaker 4: or the Dow or the Australian All Ordinaries Index over
• 22:46
  Speaker 4: the last 50 years it's a very gentle upwardly sloping line.
• 22:51
  Speaker 4: Yes there are bumps and ticks but if you go
• 22:54
  Speaker 4: back And look at that 50-year chart of the S &
• 22:57
  Speaker 4: P 500. The crash in 1987 is a minuscule move.
• 23:02
  Speaker 1: And time in the market is very important.
• 23:06
  Speaker 2: Yeah.
• 23:06
  Speaker 1: Time heals all wounds. Exactly. Including 25% sell-offs. Just before,
• 23:12
  Speaker 1: one last thing before we go to the break. Talked
• 23:15
  Speaker 1: about how it was five years for the market to
• 23:18
  Speaker 1: come back. And it was only six months, actually. Six
• 23:22
  Speaker 1: months to get to the bottom in 87. two years
• 23:24
  Speaker 1: to get to the bottom in 2007. And the COVID crash,
• 23:28
  Speaker 1: very quick, that is, but that a short, sharp crash
• 23:30
  Speaker 1: with a short, sharp rebound, which is what everyone would prefer.
• 23:33
  Speaker 1: Nothing is worse than this sort of death of a
• 23:36
  Speaker 1: thousand cuts where you have this long, slow decline, which
• 23:38
  Speaker 1: you had in the GFC. But what I want to
• 23:41
  Speaker 1: ask you is this. There's a theory that there's an
• 23:43
  Speaker 1: acceleration of everything, an acceleration of speed, acceleration of trading,
• 23:46
  Speaker 1: acceleration of all business cycles. Would that mean that if
• 23:49
  Speaker 1: we had a crash that it probably would rebound faster
• 23:52
  Speaker 1: than historically? It probably would.
• 23:56
  Speaker 4: And I mentioned before the program trading was a large
• 24:00
  Speaker 4: part of the cause of the 87 crash. The authorities,
• 24:03
  Speaker 4: after that, put measures in place so that when the
• 24:06
  Speaker 4: market drops a certain percentage, they stop trading for 10
• 24:09
  Speaker 4: minutes so people can never think about it. So those
• 24:12
  Speaker 4: buffers are brought in to try to slow a disaster. Now,
• 24:17
  Speaker 4: it doesn't happen on the upside. It happens on the downside.
• 24:20
  Speaker 4: And it's a protection mechanism. It's to stop a total meltdown.
• 24:24
  Speaker 4: So yes, it will happen again. I've no doubt it'll
• 24:27
  Speaker 4: happen again. I don't know what's going to cause it.
• 24:29
  Speaker 4: You use the term black swan. I think that's exactly right, James.
• 24:33
  Speaker 4: But we know there are cushions put in place to
• 24:36
  Speaker 4: ease the falls when they happen and allow people time
• 24:40
  Speaker 4: to think and take stock.
• 24:41
  Speaker 1: We'll see about those cushions when it comes, and it
• 24:45
  Speaker 1: inevitably will, folks. And I just say that, and I
• 24:48
  Speaker 1: mean it from the bottom of my heart to anyone
• 24:49
  Speaker 1: who's relatively new to the market. particularly, for instance, if
• 24:53
  Speaker 1: you came in just after the COVID period and you've
• 24:56
  Speaker 1: had nothing but uphill, and not uphill, but if you've
• 24:59
  Speaker 1: had nothing but an upswing, basically, since the day you started,
• 25:02
  Speaker 1: just be careful that it's not as easy as it seems.
• 25:07
  Speaker 1: And in the end, value investing, dry though it is,
• 25:11
  Speaker 1: is a very strong approach to the market. Okay, we'll
• 25:14
  Speaker 1: take a break. We've got some really good questions. Hello,
• 25:23
  Speaker 1: welcome back to the Australian's Money Puzzle. James Kerby with
• 25:26
  Speaker 1: Alex Moffat today. We're talking on the week that is
• 25:30
  Speaker 1: the anniversary of the great crash of 1987. Now, interesting,
• 25:36
  Speaker 1: really appropriate question from Paul. Are the Australian US and
• 25:41
  Speaker 1: other markets approaching long-term PE value peaks? Don't they tend
• 25:46
  Speaker 1: to correct at this point? What does history tell us?
• 25:50
  Speaker 1: You would think, Paul, that you'd trigger the whole show,
• 25:53
  Speaker 1: which is just a useful coincidence. Is there a point
• 25:56
  Speaker 1: of which... I was saying that to you. You said
• 25:58
  Speaker 1: the long-term average is 15. Then you said that we're
• 26:01
  Speaker 1: currently trading at 21, right? Folks, that's 21 times price-earnings-value ratio,
• 26:07
  Speaker 1: which is still the metric that people use in terms
• 26:10
  Speaker 1: of the value of a stock. How much is it worth?
• 26:13
  Speaker 1: In other words, the amount of money you put in,
• 26:15
  Speaker 1: the amount you're getting back, how is its value? But U.S.
• 26:19
  Speaker 1: stocks often... go into the 30s, don't they? We've had
• 26:23
  Speaker 1: stocks that go into the stratosphere and it can be
• 26:26
  Speaker 1: justified because they've got extraordinary earnings growth or whatever it is.
• 26:31
  Speaker 1: But can it ever be justified with the market getting
• 26:33
  Speaker 1: up to that? Does it have to go back to that?
• 26:36
  Speaker 1: Does it have to return to the mean as such
• 26:37
  Speaker 1: the 15 times? I don't think so, James.
• 26:43
  Speaker 4: In fact, I was looking at some data only last
• 26:45
  Speaker 4: night in preparation for this discussion. And I note that China,
• 26:49
  Speaker 4: the current average market P there is trading below its
• 26:52
  Speaker 4: long-term average. It's trading currently at 10.6 times. Long-term average
• 26:57
  Speaker 4: is about 12 times. Australia, I mentioned where we're above,
• 27:00
  Speaker 4: but we're nowhere near the top of the 20-year range.
• 27:06
  Speaker 4: India is the most expensive market at the moment at
• 27:08
  Speaker 4: about 25.5 times its earnings with a long-term average.
• 27:13
  Speaker 1: The US is expensive.
• 27:15
  Speaker 4: Japan is probably the cheapest at the moment, trading at
• 27:17
  Speaker 4: about 14.5 times against a long-term average of about 16 times.
• 27:22
  Speaker 4: So I think it's horses for courses, and this is
• 27:24
  Speaker 4: part and parcel of choosing, not blindly just to invest
• 27:29
  Speaker 4: in the US, but selecting the market that you want
• 27:31
  Speaker 4: to invest in and going.
• 27:32
  Speaker 1: For the value in that market. So what currency do
• 27:34
  Speaker 1: you want to be in? Which geopolitical area? Which sector
• 27:38
  Speaker 1: of market do you want to be in?
• 27:39
  Speaker 4: Because I know a rising tide floats all boats, but
• 27:44
  Speaker 4: sometimes Boats float higher than others.
• 27:46
  Speaker 2: Yes.
• 27:47
  Speaker 1: What's our height then? We're saying the long-term average is 15.
• 27:51
  Speaker 1: We're at 21. Okay.
• 27:53
  Speaker 4: Our high point now in Australia, the 20-year, this is average,
• 27:57
  Speaker 4: mind you, for the whole market, not just single stock,
• 28:00
  Speaker 4: is about 21 times.
• 28:02
  Speaker 1: So we're close to it. So we're pretty close to
• 28:04
  Speaker 1: the high point at the moment. So if you had
• 28:05
  Speaker 1: an ETF, know that, folks, because that's what ETFs reflect, okay?
• 28:10
  Speaker 1: The entire average market. All right, great question. Hope that
• 28:14
  Speaker 1: was useful to you, Paul. Lewis, I would like to
• 28:17
  Speaker 1: get some observations, not advice, but sage wisdom. Thank you
• 28:21
  Speaker 1: for reminding me, Lewis. This is never advice. This is information, folks.
• 28:26
  Speaker 1: On NextDC, as a current shareholder with the company, NextDC
• 28:31
  Speaker 1: have recently announced another share purchase plan, which has been completed, etc. Yes, indeed,
• 28:39
  Speaker 1: they are always raising money. My question is, are these
• 28:42
  Speaker 1: guys burning cash too quickly? There is no target capital
• 28:47
  Speaker 1: raising with shareholders capped at 30,000 per investor this time round.
• 28:50
  Speaker 1: Is there something fishy here? Okay, I don't... We would
• 28:55
  Speaker 1: hope there's nothing fishy at all at NextTC. It's a
• 28:59
  Speaker 1: certain type of company, folks. I have mentioned it before.
• 29:01
  Speaker 1: I've actually mentioned the fact that it's in my own SMSF. Thankfully,
• 29:05
  Speaker 1: very happy to say it is. And it's one of
• 29:08
  Speaker 1: the biggest holdings I have. I didn't choose that. It
• 29:10
  Speaker 1: just swelled on me, where it's gone up to about
• 29:15
  Speaker 1: $ 18 at the moment. It's got a couple of issues.
• 29:21
  Speaker 1: It's a data center company. Two outstanding issues. One is
• 29:25
  Speaker 1: it's become the share market proxy, along with Macquarie Technology,
• 29:29
  Speaker 1: for AI in our market, though it isn't AI. It's
• 29:32
  Speaker 1: actually a fairly conservative, semi-property type of company that builds
• 29:38
  Speaker 1: data centers. It is very well regarded. And I don't
• 29:43
  Speaker 1: want to say what I think about it, but I'll
• 29:45
  Speaker 1: just quote, and this is just on public record from
• 29:47
  Speaker 1: a fund manager, Andrew Mitchell of Ophir Asset Management, who
• 29:50
  Speaker 1: is another person who has had them for a while,
• 29:53
  Speaker 1: even longer than I have, and of course loves them.
• 29:55
  Speaker 1: as you would when you've done very well out of them.
• 29:56
  Speaker 1: But just quoting from a report he recently said, MixedDC
• 30:00
  Speaker 1: has been the most successful operator in the space, reporting
• 30:03
  Speaker 1: a solid full year result with revenues growing 30% on
• 30:06
  Speaker 1: the prior year and EBITDA at plus 28. And he
• 30:11
  Speaker 1: basically spells out what he likes about them, that they
• 30:14
  Speaker 1: have lots of tenants, that they're very well positioned. And
• 30:18
  Speaker 1: there remains over 1,500 multi-tenant data center providers globally. The
• 30:22
  Speaker 1: top 10 now account for more than half of the
• 30:24
  Speaker 1: industry's revenue. And we would expect that portion to grow
• 30:28
  Speaker 1: as further consolidation plays out. So fund managers like them.
• 30:33
  Speaker 1: I don't like the fact that they continually raise money.
• 30:35
  Speaker 1: And I didn't go into the last raising. But I'm
• 30:37
  Speaker 1: an individual investor. I'm not an institution. There was no
• 30:41
  Speaker 1: discount whatsoever, I thought, on that. So I didn't. Why
• 30:44
  Speaker 1: would you go in? You could buy any day for
• 30:46
  Speaker 1: more or less the same price. That's why I held
• 30:49
  Speaker 1: off on that one. There was one other point I
• 30:51
  Speaker 1: wanted to make. Yes, AirTrunk, of course, sold for an
• 30:54
  Speaker 1: extraordinary multiple recently, and they're in the same business. Everything's
• 30:58
  Speaker 1: going their way at the moment. And that might be
• 31:01
  Speaker 1: a problem for someone like Alex, who's a value investor.
• 31:04
  Speaker 1: Have you looked at the AI scene? Have you looked
• 31:07
  Speaker 1: at NextDC, Alex? I have.
• 31:10
  Speaker 4: And I like the business. I like the data center business.
• 31:12
  Speaker 4: Another one that is starting to move into that area
• 31:15
  Speaker 4: is the Goodman Group. And I think certainly they're worthy
• 31:18
  Speaker 4: of investor intention. But I've looked closely at NextDC. It's
• 31:22
  Speaker 4: just too expensive for me to buy, James. I think
• 31:25
  Speaker 4: he's trading at about nearly 15%, 20% above.
• 31:29
  Speaker 1: What a fair value. But certainly keep an eye on it.
• 31:31
  Speaker 1: I think I have to reiterate, I like the business.
• 31:34
  Speaker 1: It's What do you do if these companies never come
• 31:36
  Speaker 1: into value? I often see value investors saying, it's fallen 6%.
• 31:41
  Speaker 1: It's nearly there. Another three, it'll be in our range.
• 31:44
  Speaker 1: But it never comes down that low. Really good companies.
• 31:46
  Speaker 1: When did good money ever come into value? That's a
• 31:48
  Speaker 1: really good point, James.
• 31:49
  Speaker 4: For my own self-managed super fund, if I really like
• 31:52
  Speaker 4: a company and I own Next DC, I'll buy a
• 31:55
  Speaker 4: small amount and put a toe in the water and
• 31:57
  Speaker 4: then use when there's a major drop, like WiseTech's happened.
• 32:01
  Speaker 4: Assess the situation. What is the reason for the drop?
• 32:04
  Speaker 4: What's the nature of the change of the business?
• 32:06
  Speaker 1: Is Richard White.
• 32:08
  Speaker 4: Going to be the MD forever? And then add to
• 32:11
  Speaker 4: that position or leave it alone.
• 32:14
  Speaker 1: Yeah, okay. But certainly a toe in the water doesn't hurt. Yeah, okay.
• 32:19
  Speaker 1: Just on that, key person risk. It's an issue, isn't it?
• 32:23
  Speaker 1: Richard White at WiseTech, Chris Ellison at Menres.com. As a
• 32:27
  Speaker 1: value investor, it must be really hard to assess that.
• 32:30
  Speaker 1: If you've got someone like Jerry Harvey at Harvey Norman,
• 32:33
  Speaker 1: I'm not talking now, I'm talking 20 years ago, if
• 32:35
  Speaker 1: you were looking at it, you'd say, this company is
• 32:36
  Speaker 1: completely dominated by this guy. It's called Harvey Norman, it's
• 32:40
  Speaker 1: Jerry Harvey. As a value investor, can you put that
• 32:44
  Speaker 1: to one side? Kerry Packer, publishing and broadcasting. Elon Musk.
• 32:49
  Speaker 1: The companies I simply won't invest in. Okay. Just simply
• 32:53
  Speaker 1: will not invest in. Okay.
• 32:55
  Speaker 2: No.
• 32:56
  Speaker 1: To me, the principle risk is too great. Is that right? Yeah.
• 33:00
  Speaker 1: Because it's personality. Exactly. Dominant personality. Okay. Very interesting. Very interesting. Okay. Terrific. Folks,
• 33:09
  Speaker 1: just one last thing. We had someone had come in
• 33:11
  Speaker 1: talking about Revolut and disappointed. I had recently done a
• 33:14
  Speaker 1: lot of, said something unwritten quite enthusiastically about Revolut, which is,
• 33:20
  Speaker 1: of course, the big card services provider that... I think
• 33:24
  Speaker 1: is really impressive in how they operate and will give
• 33:27
  Speaker 1: our banks a real run for their money when they
• 33:29
  Speaker 1: really take off. Here, they've got some remarkable features to
• 33:36
  Speaker 1: their cards, which I think will challenge the banks in
• 33:39
  Speaker 1: a big way. In Europe, you can keep your money
• 33:42
  Speaker 1: on deposit with them, of course, which would really frighten
• 33:45
  Speaker 1: our banks if you could do that here. And they
• 33:48
  Speaker 1: have this extraordinary credit card, not credit card, but card
• 33:50
  Speaker 1: arrangement where Everyone's worried about the security of their card
• 33:53
  Speaker 1: when they use it, particularly overseas. But they've come up
• 33:57
  Speaker 1: with this thing where you have a once-off disposable card number.
• 34:00
  Speaker 1: So if you don't trust who you're dealing with, you
• 34:02
  Speaker 1: can just use your card and you can have a
• 34:05
  Speaker 1: once-off number, which evaporates basically after you've finished. I thought
• 34:08
  Speaker 1: it was brilliant, actually, as a financial innovation. Now, the
• 34:13
  Speaker 1: Lister made the point that Revolut has had the UK
• 34:17
  Speaker 1: National Reporting Centre for Fraud received 10,000 reports in relation
• 34:22
  Speaker 1: to Revolut, and was disappointed that I didn't make more
• 34:26
  Speaker 1: of this. Fair enough. The only thing I would say
• 34:28
  Speaker 1: is that, yes, that all did happen. And after that happened,
• 34:32
  Speaker 1: the Bank of England signed them off and gave them
• 34:35
  Speaker 1: a license. And I did make the point in the
• 34:37
  Speaker 1: piece I wrote that it took them three years to
• 34:39
  Speaker 1: sign it off. Normally, they take a year to sign
• 34:41
  Speaker 1: these things off. So they did very thoroughly go through that.
• 34:44
  Speaker 1: Just thought we'd clear off on that. Okay. Alex Moffat,
• 34:47
  Speaker 1: Joseph Palmer and Sons. Thank you very much. That was
• 34:49
  Speaker 1: really good. I knew it would be. It was really interesting.
• 34:52
  Speaker 1: I hope our listeners learned something from that pretty scary story,
• 34:58
  Speaker 1: which is not that long ago and in the same
• 35:01
  Speaker 1: market that we operate in now. And we are in
• 35:04
  Speaker 1: a pretty hot market right now. And it's the hot
• 35:07
  Speaker 1: markets that boil over as opposed to the cool ones.
• 35:10
  Speaker 1: Just keep that in everybody. Can I leave you with
• 35:12
  Speaker 1: one thought? You can.
• 35:14
  Speaker 4: On my wall in my study here, I have a certificate,
• 35:17
  Speaker 4: a bond certificate, a bond statement, which I got framed.
• 35:22
  Speaker 4: The bond was brought by Bond Corporation on the 16th
• 35:25
  Speaker 4: of October, 1987. That was a Friday. The lead manager
• 35:29
  Speaker 4: was Merrill Lynch. It was an 80 million pound issue
• 35:33
  Speaker 4: paying 6.5% interest. It was very successfully dealt into the
• 35:38
  Speaker 4: market by Merrill Lynch. And by one o'clock On Monday,
• 35:43
  Speaker 4: the 19th of October, it was worth zero. It went
• 35:47
  Speaker 4: from 100 pounds per unit, per bond, 80 million pounds
• 35:52
  Speaker 4: turned to zero by one o'clock Monday.
• 35:55
  Speaker 1: I had one on my study wall. I tell you,
• 35:58
  Speaker 1: it tells us two things, not just about bond, but
• 36:00
  Speaker 1: it tells you that the biggest institutions in the world
• 36:04
  Speaker 1: get involved in these things. And just because Merrill Lynch
• 36:06
  Speaker 1: or anybody else is involved, don't think that's actually some
• 36:10
  Speaker 1: sort of guarantee, folks. Exactly right. Okay. Hey, thank you, Alex.
• 36:14
  Speaker 1: Great to talk to you. Take care. And thanks for listening, everybody.
• 36:18
  Speaker 1: Do mention us to your friends and mention the show.
• 36:22
  Speaker 1: We'd really appreciate that. We have an email. We'd like
• 36:25
  Speaker 1: to get some more questions in. They were very good today.
• 36:28
  Speaker 1: I really enjoyed them. Thank you. TheMoneyPuzzle at theaustralian.com.au is
• 36:33
  Speaker 1: the email. Thank you very much. We'll talk to you soon.
• 36:38
  Speaker 1: Thank you.