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BONUS: Roger Montgomery's investment journey: from fish and chips to fund management · The Money Puzzle

0:15
Speaker 1: Hello, and welcome to The Australian's Money Puzzle podcast. I'm
0:18
Speaker 1: James Kirby. Welcome to the second in our series of
0:22
Speaker 1: three special bonus episodes. My colleague at The Australian, Julianne Spragg,
0:28
Speaker 1: sat down this time for a chat with fund manager
0:31
Speaker 1: Roger Montgomery. Roger, of course, is chief investment officer and
0:35
Speaker 1: founder of Montgomery Investment Management, and in this episode he
0:40
Speaker 1: talks about his upbringing and life lessons formed as a
0:43
Speaker 1: young investor and how that shaped what he does today.
0:48
Speaker 2: Roger, thanks very much for joining us.
0:50
Speaker 3: It's a pleasure, great to be with you.
0:51
Speaker 2: You've been investing for quite some time.
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Speaker 3: Here's three decades, a little more than three decades.
0:56
Speaker 2: Okay, any home? Montgomery Investment Management.
0:59
Speaker 3: That's right. We distribute in Australia a variety of funds
1:03
Speaker 3: across private credit, small caps, large caps, both globally and domestically,
1:09
Speaker 3: a long short fund, all managed by different teams.
1:12
Speaker 2: What do you find. We'll get into your journey in
1:14
Speaker 2: a second. But I am interested because I think that
1:16
Speaker 2: there are people in markets who understand how this all works.
1:19
Speaker 2: But from the outside in, when you sort of meet
1:20
Speaker 2: friends or family, is there a misconception about what you
1:22
Speaker 2: might do.
1:24
Speaker 3: My kids asked me when they were very young what
1:26
Speaker 3: I did for a job, and my response was, I read.
1:30
Speaker 3: That's what I do more of than anything else, reading
1:34
Speaker 3: and listening.
1:35
Speaker 2: Let's talk about how you got into investing. Did you
1:38
Speaker 2: always know that you wanted to be an.
1:40
Speaker 3: Actually I wanted to be a fighter Parlot when I
1:44
Speaker 3: was a teenager. The Top Gun, the first movie, had
1:48
Speaker 3: just come out. It was transformative for most young boys,
1:51
Speaker 3: you know, and that was what I wanted to do.
1:54
Speaker 3: And then I don't know how, but in high school
1:58
Speaker 3: I just did a lot of economics and subjects and
2:01
Speaker 3: decided I preferred that I think as I was wearing glasses,
2:04
Speaker 3: there was a problem, still a problem today. So if
2:07
Speaker 3: you join the Air Force, you can't be reliant on glasses,
2:12
Speaker 3: but if you require them later on in your career,
2:15
Speaker 3: that's fine. Yeah. So, in fact, I've been in an
2:19
Speaker 3: FA eighteen Hornet with a pilot who wears glasses. So
2:24
Speaker 3: I was kind of annoyed that I missed out discriminated.
2:28
Speaker 3: That's right. So apparently if you need glasses after you've
2:32
Speaker 3: been trained, then it's too expensive for them to let
2:35
Speaker 3: you go.
2:35
Speaker 2: How are you in an F eighteen. How does this
2:38
Speaker 2: just one day just walking along?
2:40
Speaker 3: No, it's just just an invitation.
2:43
Speaker 2: So you study economics finance. What's your first job?
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Speaker 3: So first job out of university during the recession that
2:49
Speaker 3: we had to have, so not many graduates from Melbourne
2:52
Speaker 3: University were in paid employment initially. I was one of
2:56
Speaker 3: the fortunate ones that I had a job with a
2:58
Speaker 3: stockbroking firm and mel called F. W. Holst and I
3:02
Speaker 3: was an equities analyst there. That was the first job
3:05
Speaker 3: I remember. My first company that I analyzed was a
3:10
Speaker 3: company called Central Equity. They were property development firm and
3:14
Speaker 3: what because of accounting rules at the time, they weren't
3:17
Speaker 3: recording or they weren't disclosing sales that they'd actually made
3:23
Speaker 3: because the accounting rules wouldn't allow them to record those sales.
3:27
Speaker 3: I think maybe only deposits had been paid. But you
3:30
Speaker 3: could see a very clear line of sight of revenue
3:33
Speaker 3: for this business and that wasn't being recognized in the
3:36
Speaker 3: share price, and so happily that one doubled. But I
3:40
Speaker 3: was young, I was new straight out of university, so
3:43
Speaker 3: of course none of the stockbrokers really took my research
3:46
Speaker 3: very seriously. But I was inspired by the fact that hey,
3:49
Speaker 3: I'd analyzed this, I'd worked it out, and the share
3:52
Speaker 3: price doubled.
3:52
Speaker 2: Had you invested at this point.
3:55
Speaker 3: I trust myself at that point. Either. One of the
3:58
Speaker 3: things that we that happened at the time, though, is
4:01
Speaker 3: that banks were on their knees, remember the recession that
4:03
Speaker 3: we had to have. Banks were very cheap. In fact,
4:06
Speaker 3: you could buy a share of Westpac for two dollars
4:08
Speaker 3: or two dollars fifty at the time. It was extraordinary.
4:12
Speaker 3: And I think Kerry Packer was on the board at
4:16
Speaker 3: the time, and I think there were rumors going around
4:19
Speaker 3: that maybe he was going to make a takeover bid
4:21
Speaker 3: for one of the banks. And I remember calling my
4:24
Speaker 3: mum and said, Mummy, never going to be able to
4:26
Speaker 3: buy a bank for two dollars fifty again, you know,
4:29
Speaker 3: you've got to get some shares. But that gave me.
4:31
Speaker 3: That was confirmation for me that I was in the
4:33
Speaker 3: right the right industry.
4:34
Speaker 2: Can you recall then money discussions in your household or
4:38
Speaker 2: can you remember sort of the feeling about money growing up?
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Speaker 3: I should say at the outset, I wouldn't swap my
4:43
Speaker 3: childhood with anyone. I had so much fun and We
4:47
Speaker 3: were always outdoors, and my love for the outdoors stems
4:50
Speaker 3: from I think mum kicking us out after breakfast and
4:53
Speaker 3: you know, saying don't come back till dinner. So I
4:55
Speaker 3: had great childhood. But the discussions about money, there was
4:59
Speaker 3: a phrase my mum would say repeatedly, and that was
5:02
Speaker 3: next fortnight. By the way, I'm mentioning mum a lot,
5:04
Speaker 3: because Dad had died when I was two, so Mum
5:08
Speaker 3: raised my brother and I. So if we wanted something
5:11
Speaker 3: next fortnight, yeah, that's when she'd next be paid. And
5:14
Speaker 3: so we just had to wait, I could, you know.
5:16
Speaker 3: I very quickly learned that we didn't have what a
5:18
Speaker 3: lot of other people had, and that probably was a motivator.
5:22
Speaker 3: But money discussions were really about saving. It was all
5:25
Speaker 3: about saving and delaying satisfaction.
5:29
Speaker 2: Do you think though, I mean at the time, is
5:30
Speaker 2: a necessity like your mom's on her own trying to
5:33
Speaker 2: raise the family, so there is just no spare cash,
5:35
Speaker 2: that's right, But do you feel like that's set you
5:37
Speaker 2: up today? Do you have those habits from stitched in? So?
5:40
Speaker 3: I was a very good saver. I was always very
5:42
Speaker 3: good savor. My wife would say, not such a great savior.
5:45
Speaker 2: Now you lose a discipline.
5:47
Speaker 3: Yeah, perhaps. I remember when I met my wife, she
5:51
Speaker 3: had already purchased an apartment with a friend, and I'd
5:54
Speaker 3: saved a lot of money, so, you know, by the
5:57
Speaker 3: time I was in my mid twenties, it was a
5:59
Speaker 3: very large amount of money. I could buy a house
6:02
Speaker 3: with the amount of money I'd saved.
6:03
Speaker 2: Were you saving for a particular purpose or was just I.
6:06
Speaker 3: Was saving for security. I was saving for self preservation.
6:10
Speaker 3: And I remember my boss at the time, who's also
6:12
Speaker 3: passed away now, Bruce Bradshaw. He asked me how much
6:16
Speaker 3: i'd saved. He said, what are you doing with the
6:17
Speaker 3: bonuses we're giving?
6:18
Speaker 2: You know?
6:18
Speaker 3: I told him how much I'd saved, and he couldn't
6:21
Speaker 3: believe it. He said, that's more money than I've got
6:23
Speaker 3: in the bank, you know. And I'm sure he was joking,
6:25
Speaker 3: but the point being that I hadn't bought anything. I
6:29
Speaker 3: just saved. I just accumulated cash. And in fact, when
6:32
Speaker 3: I received my first bonus, and I'll never forget it,
6:35
Speaker 3: my first bonus was twenty thousand dollars and I was
6:38
Speaker 3: in my early twenties, and I was so nervous about
6:40
Speaker 3: losing it that I split it up and put it
6:43
Speaker 3: in different banks in case any of the banks went bust.
6:45
Speaker 3: That's how insecure I was, having grown up with very little,
6:50
Speaker 3: you know, suddenly getting money or receiving it. I was
6:53
Speaker 3: really concerned about losing it again.
6:56
Speaker 2: I bet you were. Now after the break, Roger, I
6:58
Speaker 2: want to have a chat to you about those early
7:00
Speaker 2: lessons and how they shaped how you invest today. Welcome
7:12
Speaker 2: back to this bonus episode of the Money Puzzle. I'm
7:14
Speaker 2: Julianne Sprague, a wealth editor at The Australian, and I'm
7:18
Speaker 2: chatting to Sydney fund manager Roger Montgomery. Roger, knowing what
7:24
Speaker 2: you know now, do you look back and do you
7:26
Speaker 2: wish you had done something different with all that money?
7:29
Speaker 2: You stashed it? You saved it, but do you think
7:32
Speaker 2: now you should have done something else with it?
7:34
Speaker 3: I'm still ultra conservative. I'm still extremely conservative. You know,
7:38
Speaker 3: if there's a safer version of a product, a financial
7:43
Speaker 3: product that pays slightly less, I'll urge towards that. But
7:48
Speaker 3: I'll also I'll also speculate in some things, but with
7:53
Speaker 3: an appropriate amount of money. You know, it tends to
7:56
Speaker 3: be a smaller amount of money.
7:58
Speaker 2: You fly paragliders. But you're the outdoors type, could I say, Roger,
8:02
Speaker 2: and you take risks.
8:03
Speaker 3: They're measured risks. Yeah. So with paragliding, for example, you know,
8:07
Speaker 3: you can choose to fly in the middle of the
8:08
Speaker 3: day in summer when it's going to be really violent
8:11
Speaker 3: and you're going to sometimes have a bag of washing
8:13
Speaker 3: over your head, or you can choose to fly earlier
8:16
Speaker 3: in the day when it's smoother, or late in the
8:17
Speaker 3: afternoon when it's smoother, so you can adjust the risk.
8:21
Speaker 3: It's the same with stocks. You know, not all stocks
8:23
Speaker 3: are the same. And you know, I talk often about
8:25
Speaker 3: private credit and people say, oh, that's risky. You know,
8:28
Speaker 3: remember what happened in the eighties or the nineties, and
8:30
Speaker 3: you know it's the same thing again, Well, well, no,
8:32
Speaker 3: that's unfair because actually, if you look at the PDS's
8:36
Speaker 3: or the ims, the information memorandums for all of these funds,
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Speaker 3: they're all different. Just as stocks have different risk profiles,
8:43
Speaker 3: so do funds, and it's important to understand what they are.
8:46
Speaker 3: But by just dismissing everything out of hand, it's you know,
8:49
Speaker 3: you're missing out on opportunities. So, yes, I'm conservative, but
8:53
Speaker 3: I'm informed can.
8:54
Speaker 2: We chat about your very first investment? Can you remember
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Speaker 2: what it was?
8:57
Speaker 3: I do remember what it was. A friend of mine
9:00
Speaker 3: and I we had decided to invest in futures or
9:05
Speaker 3: trade futures on the I think it was futures on
9:08
Speaker 3: the Dow Jones back then it may been the S
9:11
Speaker 3: and P five hundred. I was working at that stockbroking
9:14
Speaker 3: firm in my first job, and we decided to put
9:17
Speaker 3: in ten thousand dollars each. Now my friend had ten
9:20
Speaker 3: thousand dollars. He came from a well to do family,
9:23
Speaker 3: and I didn't have ten thousand dollars. I had to
9:28
Speaker 3: borrow the money and Mum went Garran Taur on the
9:32
Speaker 3: loan and we started trading futures, and we knew nothing
9:35
Speaker 3: about what we were.
9:36
Speaker 2: Doing and why futures.
9:38
Speaker 3: Because of the leverage, you could invest a relatively small
9:41
Speaker 3: amount of money and potentially make a lot because of
9:44
Speaker 3: the leverage that's inherent in futures contracts. So if you
9:47
Speaker 3: put ten thousand dollars in, you can buy potentially one
9:51
Speaker 3: hundred thousand dollars worth of the commodity just with the
9:54
Speaker 3: ten thousand dollars. But of course the leverage works against
9:57
Speaker 3: you as well when prices fall.
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Speaker 2: And just initiated those who might be listening, who, what
10:02
Speaker 2: the hell's when are you wearing this?
10:04
Speaker 3: So, a futures contract is an agreement to purchase or
10:08
Speaker 3: sell something that is underneath that future contract at a
10:12
Speaker 3: future date in time, and those future contracts trade at
10:15
Speaker 3: their own price based on what that underlying commodity or
10:19
Speaker 3: financial instrument is doing between now and when it expires
10:23
Speaker 3: that future contract expires. And so we were trading using
10:27
Speaker 3: nothing else other than technical analysis or charting. Where we'd
10:31
Speaker 3: seen a Bloomberg screen. We had access to a Bloomberg screen,
10:34
Speaker 3: and they were the early Bloomberg screens. And I'd noticed
10:37
Speaker 3: that when the blue line crossed the red line, the
10:40
Speaker 3: market went up, and when the red line crossed the
10:41
Speaker 3: blue line, the market went down. And we had about
10:44
Speaker 3: three months of data. That's all we needed to go,
10:47
Speaker 3: and off we went, and we started trading, and we
10:49
Speaker 3: turned out twenty thousand dollars I think into almost forty
10:52
Speaker 3: thousand dollars initially, and I thought, gosh, this is greater.
10:56
Speaker 3: Probably don't need to continue going to university. This is
11:00
Speaker 3: so easy, we can quit. But then it turned pair
11:03
Speaker 3: shaped and we lost all our money. I ended up
11:06
Speaker 3: working in a fish and chip shop to earn some
11:09
Speaker 3: money to pay my mum back for the loan.
11:13
Speaker 2: What was the conversation like with mum?
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Speaker 3: I remember getting into the car and we were listening
11:18
Speaker 3: to three ks it at the time, which is during
11:20
Speaker 3: the news break before the sport and the weather. There
11:23
Speaker 3: would be a very short Gold's doing this, Oils doing this,
11:27
Speaker 3: and the Dow Jones did that. And I remember getting
11:29
Speaker 3: in the car and I was very quiet, and Mum
11:32
Speaker 3: said what does that mean? And I said, I don't
11:34
Speaker 3: think it's going to be a good day anyway. I
11:37
Speaker 3: spoke to my friend I won't say his name, and
11:40
Speaker 3: he said, what do you reckon we should do? Roger?
11:41
Speaker 3: And I said, well, in the three months of data
11:43
Speaker 3: that we've got, it's not fallen. The Dow Jones hasn't
11:46
Speaker 3: fallen this much before, So what do you think we
11:49
Speaker 3: should do it? Well? I think we should hold on
11:52
Speaker 3: and because three months of data is not enough data, right,
11:54
Speaker 3: that's not a statistically significant sample. Anyway, it fell again,
11:59
Speaker 3: got in the car three news report, how's that going?
12:02
Speaker 3: Roger my masks and my response was it's going to
12:05
Speaker 3: be an even worse day. Anyway, we ended up losing
12:08
Speaker 3: all the money that we'd made plus the money that
12:11
Speaker 3: we'd put in, and we closed out our positions, or
12:13
Speaker 3: they may have been closed for us. And then I
12:16
Speaker 3: had to pay back the loan fish and chip shop,
12:18
Speaker 3: and I've probably had a few other jobs as well,
12:20
Speaker 3: but made that worked in a nightclub as well. It
12:23
Speaker 3: was called the Cadillac Bar and made the money back.
12:26
Speaker 3: But I used lived eighteen kilometers away from the nightclub,
12:29
Speaker 3: and I distinctly remember I would walk home at six
12:33
Speaker 3: o'clock in the morning when my shift finished at the nightclub,
12:36
Speaker 3: and I would walk eighteen k's. It took three hours.
12:39
Speaker 3: I would walk home to say it, because I didn't
12:41
Speaker 3: want to buy There were no buses running at that
12:44
Speaker 3: time of the morning or trains, so I would walk
12:46
Speaker 3: home and I wasn't certainly wasn't going to wake mom up,
12:49
Speaker 3: and I wasn't going to pay for taxi. So it
12:52
Speaker 3: made some sacrifices to save money.
12:54
Speaker 2: So what was the lesson you learned from that and
12:57
Speaker 2: how did it shape your investing?
12:58
Speaker 3: It fed into that conservative of disposition. Know nothing teaches
13:02
Speaker 3: you risk like losing money. That is a really painful
13:07
Speaker 3: way of understanding risk. It gave me some fantastic insights
13:12
Speaker 3: into leverage, into markets, and into the sort of securities industry,
13:18
Speaker 3: and it really helped me to evaluate relative risk amongst
13:22
Speaker 3: capital stacks and different types of securities.
13:25
Speaker 2: And the things though that you can pin back to
13:27
Speaker 2: that moment that you've made rules for investing, that.
13:31
Speaker 3: Those early experiences have taught me to actually quarantine that risk,
13:37
Speaker 3: to make sure I understand that, you know, I'm using
13:39
Speaker 3: funds that if I lose those funds, it's not such
13:42
Speaker 3: a big deal. You know. Even today, for example, I
13:45
Speaker 3: know what my exposure is to the equity market in total.
13:48
Speaker 3: I know what my exposure is to private equity, which
13:51
Speaker 3: are businesses that will one day IPO, and so knowing
13:55
Speaker 3: what the exposure is to the market, I know what
13:57
Speaker 3: my downside is, you know, And I'm all thinking in
14:00
Speaker 3: terms of risk rather than in terms of, oh how
14:03
Speaker 3: much could I make? It's not about that, it's what's
14:06
Speaker 3: the downside?
14:07
Speaker 2: Is there a ratio that you recommend to people? If
14:09
Speaker 2: people come to you today advice, they say, I've got
14:11
Speaker 2: one hundred thousand dollars to invest, what portion do you
14:14
Speaker 2: think needs to be just you lock that one in
14:16
Speaker 2: the like that has to stay in the bank or
14:18
Speaker 2: savings account, like don't risk at all? Is the sense
14:20
Speaker 2: I'm getting from you.
14:21
Speaker 3: Well, the answer to that question is the reason why
14:24
Speaker 3: financial planner is. I'm not a financial planner, but it's
14:26
Speaker 3: the reason financial planners risk profile their clients. You know,
14:32
Speaker 3: That's why you go through you answer multiple questions to
14:36
Speaker 3: understand what your risk profile is. There's no one right
14:40
Speaker 3: ratio because everybody has a different risk tolerance. There will
14:44
Speaker 3: be people who will happily gamble the whole hundred thousand
14:47
Speaker 3: dollars on something and if they lose it, oh well,
14:50
Speaker 3: even if they don't have a lot of money elsewhere,
14:52
Speaker 3: you know, they want to have a crack at making
14:55
Speaker 3: a multiple of that initial one hundred thousand dollars.
14:58
Speaker 2: You've done a lot of investing now in your early
15:00
Speaker 2: twenties anymore. You're looking very good, very young, your old Roger,
15:05
Speaker 2: but you've learned a lot, and I want to have
15:06
Speaker 2: a chat to you about some of the key lessons
15:09
Speaker 2: you've learned from investing. And some of those lessons often
15:12
Speaker 2: come from making really big mistakes. But I wouldn't mind
15:15
Speaker 2: exploring maybe something for more recent times where an investment
15:18
Speaker 2: has gone wrong, And we do have a little bit
15:20
Speaker 2: of a section. We'd like to call it the fast
15:22
Speaker 2: five where I'll ask you a series of questions and
15:25
Speaker 2: just see where that takes us. But we'll do that
15:27
Speaker 2: when we come back from a breaking We ch added
15:47
Speaker 2: about the early years investing and learning your way, investing
15:51
Speaker 2: in futures and working out that your future. But you've
15:54
Speaker 2: done a lot of investing over the years. When you
15:58
Speaker 2: look back on that, if you could go back, perhaps
16:00
Speaker 2: to your mid twenties, if you can go back in
16:01
Speaker 2: time and maybe do something differently, or perhaps it's adopt
16:07
Speaker 2: a financial habit, do something that you think would put
16:10
Speaker 2: you in a better place or your investments would be
16:11
Speaker 2: in a better place today. Do you know what that
16:13
Speaker 2: would be?
16:14
Speaker 3: So the best way to answer that is this way.
16:18
Speaker 3: The biggest losses in my investing career have been the
16:23
Speaker 3: investments I didn't make okay, and they've mostly been in property.
16:30
Speaker 3: So my advice to my mid twenties.
16:33
Speaker 2: Self, you're going back making a phone call by it.
16:38
Speaker 2: So there was opportunities that came to you when you're
16:40
Speaker 2: in your mid twenties and for whatever reasons, And.
16:43
Speaker 3: See it's even just before COVID. There are opportunities.
16:47
Speaker 2: Let's talk about those. Is I feel like that's a
16:48
Speaker 2: nice little segue into mistakes if you made, And sometimes
16:53
Speaker 2: the biggest mistake you can make is the choice you didn't.
16:56
Speaker 3: Yeah.
16:56
Speaker 2: Indeed, so if you had to sort of name one though,
17:00
Speaker 2: stands out.
17:00
Speaker 3: So there was a there was a property going to auction.
17:03
Speaker 3: It was one hundred acres, might have been one hundred
17:06
Speaker 3: and fifty acres. It was down on the south just
17:12
Speaker 3: south of Cayama, on the East coast of Australia, just
17:17
Speaker 3: south of Sydney and Wollongong, and it was for sale.
17:24
Speaker 3: It was right on the cliff and it had beach access.
17:28
Speaker 3: And I went down, drove down there, visited it, loved it,
17:32
Speaker 3: thought it was absolutely spectacular. And the real estate agent
17:36
Speaker 3: at the time down there, who was really very well
17:38
Speaker 3: connected and new prices down there really well, he said, look, Roger,
17:42
Speaker 3: it's going to go for between two and three million dollars.
17:46
Speaker 3: And I remember saying that's great.
17:47
Speaker 2: How long ago are we talking.
17:49
Speaker 3: This would have been twenty maybe twenty fifteen, Yeah, okay,
17:52
Speaker 3: twenty fifteen, And he said it's going to go for
17:56
Speaker 3: between two and three million dollars and I said, that's great.
17:59
Speaker 3: I'll come to the auction, although I'll probably attend by phone.
18:04
Speaker 3: And there's a reason for attending by auctions by phone.
18:06
Speaker 3: By the way, that's another piece of advice I can
18:08
Speaker 3: share anyway, So that bit remind me. But yeah, yeah,
18:11
Speaker 3: we'll talk about that later for we get time. So
18:15
Speaker 3: the day before the auction, the agent said, look, it
18:19
Speaker 3: now looks like it's going to go for between three
18:22
Speaker 3: and four. There's a lot of interest in the property.
18:25
Speaker 3: I said, okay, no problem. I'll be there, no worries
18:28
Speaker 3: at all. The auction started. The next day. I was
18:31
Speaker 3: there on the phone. They started the auction. There were
18:35
Speaker 3: no bids so much for a lot of interest in
18:38
Speaker 3: the property. So the agent has said between three and four.
18:41
Speaker 3: That's fine, no problem. They have me on the phone.
18:44
Speaker 3: They're asked me if I want a bid. No, I
18:46
Speaker 3: don't want a bid. Why would I do that? So
18:49
Speaker 3: then they put in a vendor bid of three point five. Great.
18:53
Speaker 3: A second later I bid three point six and I thought, okay,
18:57
Speaker 3: Well he said between three and four indoor a bit
19:00
Speaker 3: of three and a half. I've been three point six.
19:02
Speaker 3: It's mine, done, done and dusted. No problem anyway, he's
19:07
Speaker 3: I'm on the phone. He says, we'll give you a
19:09
Speaker 3: call back. I was expecting a congratulations anyway, give you
19:13
Speaker 3: a call back. So I wait, no call. The next day,
19:18
Speaker 3: still no call. So I've called the agent and the
19:22
Speaker 3: agent says, oh, you're not going to believe this, Roger,
19:24
Speaker 3: the vendor wants five what really, nobody how I'm annoyed
19:31
Speaker 3: right now, I'm annoyed. But you know, time passed. They
19:34
Speaker 3: continued to approach me, continue to try and get me
19:38
Speaker 3: to five, and I was so annoyed I just said no.
19:41
Speaker 3: In fact, my recollection is that the vendor came to well,
19:46
Speaker 3: he didn't come to my office. He came to my
19:49
Speaker 3: office at work and offered vendor finance for the extra
19:53
Speaker 3: amount of money. You know, he said, look, I'll give
19:55
Speaker 3: you more money. Yeah, I'll give you more money if
19:58
Speaker 3: that's the issue. And I was just so annoyed. And
20:01
Speaker 3: that property sat on the market for another twelve months. Now,
20:05
Speaker 3: one of my peers in the industry, he ended up
20:09
Speaker 3: buying it for one of his kids, or one of
20:12
Speaker 3: his kids bought it. And so it's another fund manager
20:16
Speaker 3: whose family ended up buying it. They built a great
20:19
Speaker 3: home on the property. It would now be worth twenty
20:23
Speaker 3: five or thirty million dollars. Same thing happened again just
20:26
Speaker 3: before COVID in twenty eighteen at NUSA there was a
20:31
Speaker 3: house that came up for five million dollars. This time
20:35
Speaker 3: it was Thomas Muster's house, the tennis player, and I
20:38
Speaker 3: was invited to purchase that property, and we just decided
20:41
Speaker 3: that it was too much money to pay for a
20:45
Speaker 3: holiday house.
20:46
Speaker 2: You know, that was an extravagant It was extravagant, too extravagant.
20:49
Speaker 3: It's not like us, so we didn't do it. And yeah,
20:53
Speaker 3: that then COVID hit prices and NUSA went nuts. And
20:56
Speaker 3: that's easily twenty four million dollars between twenty eighteen and now.
21:01
Speaker 3: So you know, from five to twenty four it's arguably this,
21:04
Speaker 3: you know, the best property price increase that's happened anywhere
21:09
Speaker 3: in Australia at any time. You know, it's just been incredible,
21:12
Speaker 3: the looser property prices.
21:13
Speaker 2: Some mean, you're better at stocks than property, are you
21:15
Speaker 2: telling me?
21:16
Speaker 3: Like I said to you, the worst investments have been
21:18
Speaker 3: the things I didn't buy. I'm quite content with the
21:21
Speaker 3: investments I have made, but I'm upset about the ones
21:24
Speaker 3: I missed out on.
21:25
Speaker 2: This will be interesting because I think we might get
21:26
Speaker 2: into the fast five, but the first one we can
21:28
Speaker 2: take a little bit longer with. Because I was going
21:30
Speaker 2: to ask you if you can only invest in one
21:32
Speaker 2: thing for the next ten years so it shares all property.
21:34
Speaker 3: Yeah, I think that's an unfair question to ask, because
21:37
Speaker 3: I think both will do extremely well. If you buy
21:39
Speaker 3: a bad property, you're going to do badly. If you
21:41
Speaker 3: buy bad stock, you're going to do badly. You know
21:43
Speaker 3: you've heard that aphorism. It's time in the market, not
21:47
Speaker 3: timing the market that's important. Actually, that's not quite right.
21:51
Speaker 3: Time is only the friend of an extraordinary business. If
21:54
Speaker 3: you own a bad business, the longer you are invested
21:57
Speaker 3: in it, the worse it's going to be. You know
21:59
Speaker 3: those people who bought Telstra on the first day it listed,
22:02
Speaker 3: You know they're still waiting to make their money back.
22:04
Speaker 3: So being invested in a mediocre business is going to
22:06
Speaker 3: give you a mediocre return. Being invested in a mediocre
22:09
Speaker 3: property for a long period of time is going to
22:11
Speaker 3: give you a bad return.
22:12
Speaker 2: So how do you work this out? If I'm thinking
22:14
Speaker 2: about right, Roger, I want to go and invest.
22:16
Speaker 3: But how do I know when it comes to any asset,
22:21
Speaker 3: or any fund or any property put quality first? Is
22:26
Speaker 3: it high quality? And quality means different things to different people.
22:31
Speaker 3: But ultimately when it comes to property, you know there's
22:34
Speaker 3: a scarcity factor. You know, when you look at NUSA
22:37
Speaker 3: and there are other places in Australia that are wonderful.
22:39
Speaker 3: I'm not to you know, don't want to denigrate other places,
22:42
Speaker 3: but at the moment, at least, you know, NUSA has
22:45
Speaker 3: a couple of things going for it. You know, it
22:46
Speaker 3: has great climate. There's a demographic avalanche that wants to move,
22:51
Speaker 3: particularly from Southern States to Queensland because of that climate.
22:54
Speaker 3: And as they get older, as the baby boomers get older,
22:56
Speaker 3: you know, they like the cold less and so they
22:59
Speaker 3: tend to want to move to warmer climates. Great restaurants.
23:02
Speaker 3: You know, there's a whole bunch of things going for it.
23:04
Speaker 3: There'll be other places in Australia as well, and so
23:08
Speaker 3: you know, Moosa ticks a lot of boxes for people
23:11
Speaker 3: and there's not many houses. So you've got if you
23:13
Speaker 3: think about, you know, the great population of Australia, which
23:17
Speaker 3: is you know, people debate this whether it's growing too
23:19
Speaker 3: fast or not. But the population of Australia is growing quickly,
23:23
Speaker 3: Musa is not getting bigger. When it comes to stocks,
23:27
Speaker 3: quality is different. Quality is about businesses that have sustainable
23:31
Speaker 3: competitive advantages. They do something that other companies find hard
23:36
Speaker 3: to replicate or too expensive to replicate, or they're just
23:41
Speaker 3: locked out because it's a geographical advantage. For example, you
23:44
Speaker 3: know a Westfield shopping center has a geographical competitive advantage.
23:49
Speaker 3: And those competitive advantages are important because they drive what's
23:54
Speaker 3: called return on equity. And you want to own a
23:56
Speaker 3: business that generates a high rate of return on equity
24:00
Speaker 3: and is able to do two things. High rate of
24:02
Speaker 3: return on equity, but is able to retain a large
24:06
Speaker 3: portion of its profits every year and reinvest it at
24:09
Speaker 3: a high rate of return.
24:10
Speaker 2: Again, I want your advice for investing at different stages
24:15
Speaker 2: of your life. Everyone's on a different financial journey and
24:17
Speaker 2: there are different things that come at you at different stages.
24:19
Speaker 2: But what would your advice be for someone in their thirties,
24:24
Speaker 2: their forties, well, their fifties.
24:27
Speaker 3: Okay, So in your thirties you're ascending. You're on the
24:32
Speaker 3: ascendant in terms of your career, and if you're good
24:36
Speaker 3: at what you do and people like you, then you're
24:39
Speaker 3: going to be earning more. As time, your earning power
24:43
Speaker 3: is going to be increasing, and so you can afford
24:46
Speaker 3: still to take some risks. But if your preference, because
24:49
Speaker 3: your conservative is to buy property, then my advice would
24:53
Speaker 3: be to pay off the mortgage as quickly as possible
24:57
Speaker 3: with that additional income that's coming in. Because let's assume
25:03
Speaker 3: you're on a higher tax bracket. Then if you adjust
25:07
Speaker 3: the interest rate on your mortgage for your tax rate,
25:11
Speaker 3: then the return the interest rate is much higher. So
25:15
Speaker 3: let's say it's let's say the interest rate is six percent,
25:18
Speaker 3: you're on the highest tax bracket, let's round it to
25:20
Speaker 3: fifty percent. Your pre tax return by paying off the
25:24
Speaker 3: mortgage is nine percent. Now, there aren't many investments that
25:29
Speaker 3: can guarantee you a nine percent return, so paying that
25:33
Speaker 3: mortgage down is like investing in a nine percent guaranteed investment.
25:39
Speaker 3: So my advice would be pay that down as quickly
25:42
Speaker 3: as you can and accept that really great return.
25:46
Speaker 2: Nine percent sounds like a great return, But the other
25:48
Speaker 2: thing that comes at you all the time is time
25:50
Speaker 2: in the market, and so sure, how do you get
25:53
Speaker 2: around the idea that should all of the money be
25:55
Speaker 2: following to get that mortgage down, or should you be
25:58
Speaker 2: making investments at the same time, I work out some
26:00
Speaker 2: sort of balance parallel strategy.
26:02
Speaker 3: I actually would advise, and this is just me, but
26:06
Speaker 3: I would be advising people to get that mortgage down
26:09
Speaker 3: because nine percent, you know, a bird in the hand
26:12
Speaker 3: is worth two in the bush, right, and a guaranteed
26:16
Speaker 3: nine percent return versus a return that might be higher
26:20
Speaker 3: than nine, but it also could be down twenty you know,
26:23
Speaker 3: in the stock market. You know, again this is my
26:26
Speaker 3: conservative side talking. But once you get that mortgage down to.
26:31
Speaker 2: A level where with hit the next decade, we're into
26:33
Speaker 2: the forties. Yeah, yeah, Okay. Let's make an assumption here
26:36
Speaker 2: that your mortgage is you've got built up equity.
26:38
Speaker 3: In the home.
26:38
Speaker 2: You've built up to me, probably haven't paid off the mortgage,
26:40
Speaker 2: but good luck to you if you have.
26:41
Speaker 3: But if you have great or you can start thinking
26:43
Speaker 3: about some other investments. You'll certainly be thinking about for
26:47
Speaker 3: the first time ever, you'll probably be thinking about your
26:49
Speaker 3: superannuation and retirement. Believe it or not. You might think,
26:53
Speaker 3: no way, I'm not going to do that, but it
26:54
Speaker 3: just happens. You get to forty, and you start to think.
26:57
Speaker 2: Is that money there, what's it been doing?
27:00
Speaker 3: Also entering what's called the sandwich generation right where you're
27:03
Speaker 3: looking after kids, You've got school fees to pay potentially,
27:07
Speaker 3: but you also you know you're starting to think about
27:10
Speaker 3: your parents getting older, and you know, what are you
27:12
Speaker 3: going to do to help them out?
27:13
Speaker 2: I think the demands on your time increase as well
27:15
Speaker 2: they do you're managing children, like you've mentioned your parents.
27:19
Speaker 2: Your career is career is a peak at a pace?
27:22
Speaker 3: Probably? Yeah, you're really going well in your career in
27:24
Speaker 3: your forties, and so now is the time that you
27:27
Speaker 3: can start thinking about making some investments. The simplest way
27:31
Speaker 3: I can think about creating a portfolio or the metaphor
27:34
Speaker 3: that we can use as a boat. Right, So you
27:37
Speaker 3: need a hull. The boat needs a whole because it
27:40
Speaker 3: needs to keep you afloat. So what you want to
27:42
Speaker 3: do is you want to put the bulk of your assets,
27:44
Speaker 3: or the bulk of your investment portfolio into investments that
27:48
Speaker 3: are high quality. They may grow, you want them to grow,
27:52
Speaker 3: but mostly they're high quality companies. So and a mix
27:56
Speaker 3: of overseas and local domestic investments is fine. But just remember,
28:00
Speaker 3: the vast majority of Australian businesses pay most of their
28:04
Speaker 3: earnings out as a dividend. They don't retain the bulk
28:07
Speaker 3: of their profits for growth. And that's because of our
28:10
Speaker 3: tax system, right, we don't double tax dividends in Australia
28:13
Speaker 3: our profits. Rather, so the franking credits that are produced
28:17
Speaker 3: when a company generates profits in Australia, they're worth nothing
28:20
Speaker 3: to the company and worth a lot to recipients, particularly
28:23
Speaker 3: recipients who are on lower tax rates than the company
28:26
Speaker 3: tax rate. And so companies tend to pay out the
28:29
Speaker 3: bulk of their earnings in Australia as a dividend. In
28:31
Speaker 3: the US they don't. They retain most of their profits
28:35
Speaker 3: for growth. And so you find a lot of companies
28:38
Speaker 3: outside of the small cap space that are still growing.
28:41
Speaker 3: You get big companies that are growing, so they're high quality,
28:44
Speaker 3: they're very liquid, and they're growing fast. And so some
28:47
Speaker 3: investments in those businesses I think make sense. And then
28:52
Speaker 3: you want an outboard engine on the boat. Otherwise you're
28:54
Speaker 3: going to be listless, you know, and you're going to
28:57
Speaker 3: be You're just going to go. You're not going to
28:59
Speaker 3: go in the right direction. That outboard engine that should
29:02
Speaker 3: be in your thirties and forties, should be a small
29:04
Speaker 3: cap fund by a manager who's doing a really great job.
29:08
Speaker 3: And I think small companies in Australia and overseas, that's
29:12
Speaker 3: where you're going to find a lot of innovators. You're
29:14
Speaker 3: going to find a lot of companies that might be
29:15
Speaker 3: worth a billion dollars today but one hundred billion dollars
29:19
Speaker 3: in ten years time or twenty years time, and they're
29:22
Speaker 3: in that small cap space. So that's your outboard engine.
29:24
Speaker 3: And if there's anything left, well, you could pop a
29:26
Speaker 3: turbo engine on the outboard and that's a smaller amount
29:29
Speaker 3: of money. Again, and that might be things like private equity,
29:33
Speaker 3: you know, or you know, I don't want to say
29:35
Speaker 3: futures trading, but you know, it could be something that's alternative.
29:39
Speaker 2: Okay. So if you were sailing into the fifties sixties,
29:42
Speaker 2: so in your fifties and sixties, you are in the
29:44
Speaker 2: Sandwich generation.
29:45
Speaker 3: And if you're a woman, particularly, you know, you're really
29:47
Speaker 3: going to feel the pressure because you know, unfortunately husbands
29:52
Speaker 3: die tend to die first, you know, so you might
29:54
Speaker 3: be left alone, you might be left with you know,
29:57
Speaker 3: the responsibility of managing money, looking after the kids, and
30:01
Speaker 3: looking after your aging adult parents. And was rightly or
30:06
Speaker 3: wrongly it was the husband who looked after the money matters.
30:10
Speaker 3: And so you know, I would say, make sure you're
30:12
Speaker 3: getting educated about financial matters, put together a group of
30:17
Speaker 3: people who can advise you. You know, get your support
30:20
Speaker 3: network in place. That mortgage has to be gone. Focus
30:23
Speaker 3: on your highest interest debt and get that paid off.
30:26
Speaker 3: If you've got credit cards, get rid of that, and
30:29
Speaker 3: now you can start you know, now you can really
30:31
Speaker 3: start thinking about investments that or you might want to
30:34
Speaker 3: start thinking about investments that give you an attractive return
30:38
Speaker 3: but don't have as much volatility in them. As I
30:41
Speaker 3: noticed with our clients, as they age, their appetite volatility,
30:45
Speaker 3: appetite for volatility becomes less. And so this is where
30:49
Speaker 3: I really think, this is where private credit is really
30:53
Speaker 3: going to play a bigger role in people's portfolios going forward.
30:57
Speaker 3: And again, like stocks, different credit funds have different risk profiles,
31:03
Speaker 3: so it's important you understand what those risk profiles are.
31:05
Speaker 3: A lot of them lend money to and the reason
31:08
Speaker 3: why there's no stock market volatility is they're not buying equities.
31:12
Speaker 3: They're lending money to businesses. They're doing what the banks
31:15
Speaker 3: used to do, but because of the global financial crisis
31:18
Speaker 3: and regulation on capital adequacy requirements of banks, they're not
31:21
Speaker 3: lending to these small and medium sized enterprises anymore. Some
31:25
Speaker 3: of these private credit funds are lending to property developers.
31:29
Speaker 3: That's riskier than in lending elsewhere, and so it's important
31:32
Speaker 3: to understand some of the risks. But Yeah, as you
31:34
Speaker 3: get older, I think people are going to be more
31:37
Speaker 3: and more attracted to a seven, eight or nine percent
31:40
Speaker 3: return without stock market volatility. So you're going to start
31:44
Speaker 3: to think more and more about rebalancing your portfolio towards
31:48
Speaker 3: those more conservative investments rather, I should say, investments that
31:53
Speaker 3: may have less public market risk.
31:56
Speaker 2: I'm going to condense down a fast five to a
31:58
Speaker 2: fast three you go. Best finance book that you could recommend.
32:04
Speaker 3: The Making of an American Capitalist by Roger Lowenstein. It's
32:07
Speaker 3: the story one of the early biographies of Warren Buffett.
32:11
Speaker 3: If you're interested in the stock market and you're interested
32:14
Speaker 3: in investing, and I suspect you are if you're listening
32:16
Speaker 3: to this podcast, then that would be the book that
32:18
Speaker 3: I would go out and get first. I should say
32:21
Speaker 3: the one I wrote as well value Able. It was
32:24
Speaker 3: a bestseller in twenty ten in the finance space, and
32:27
Speaker 3: I wrote that for my kids, if something happened to me,
32:30
Speaker 3: I wanted them to have a guidebook for investing in
32:33
Speaker 3: the stock market.
32:33
Speaker 2: Well, my next question was going to be, what's the
32:35
Speaker 2: one thing you want your kids to learn about money
32:37
Speaker 2: or take away from What if you could impart one
32:39
Speaker 2: thing into your children about money, what do you want
32:42
Speaker 2: them to hold on to?
32:43
Speaker 3: Good with it? Do good with it, if you make it,
32:47
Speaker 3: do good with it. It's much more fun giving it
32:50
Speaker 3: away and sharing than it is accumulating stuff. Give it away.
32:54
Speaker 2: Okay, so less on the material possessions and more on.
32:57
Speaker 3: There's ecstasy in getting something new, but it aids very quickly.
33:01
Speaker 3: You know where contentment comes from actually making other people happy.
33:05
Speaker 3: We're built for relationships.
33:07
Speaker 2: Well, and this is another beautiful seguey, I think, because
33:10
Speaker 2: my final question was going to be what can't money buy.
33:14
Speaker 3: It can't buy old friends, and it can't buy contentment.
33:17
Speaker 3: It gives you choice, which is fantastic. As May west
33:20
Speaker 3: One said, you know, too much of a good thing
33:22
Speaker 3: is wonderful, but once you've got a certain level of comfort,
33:26
Speaker 3: more money and more stuff doesn't make you happier than
33:29
Speaker 3: you already were. Look on Sydney Harbor, you know, all
33:32
Speaker 3: of those wonderful homes with beautiful views. The blinds are
33:35
Speaker 3: often closed. Money buys you brief ecstasy. It bars you
33:41
Speaker 3: that brief jolt of happiness. Wow, look at this view.
33:44
Speaker 3: But then you get used to it, you know, and
33:46
Speaker 3: then the blinds are closed and you Wealthy people still
33:49
Speaker 3: have all the problems that everyone else has, except maybe
33:53
Speaker 3: money problems. But you know, they still have divorce. They
33:56
Speaker 3: still suffer from sadness and loneliness and insecurities and all
33:59
Speaker 3: of those things. It doesn't buy any of those things.
34:02
Speaker 2: You meet and deal a lot with the What makes
34:05
Speaker 2: them the happiest if you can think about it. You
34:07
Speaker 2: don't have to name them. But if you think about
34:09
Speaker 2: sort of the happiest wealthiest people, you know, what is
34:11
Speaker 2: it that is driving them? It's not sort of the
34:13
Speaker 2: bank balance.
34:14
Speaker 3: Yeah, they're content, they're content. They try to be content
34:18
Speaker 3: in all circumstances. Imagine imagine being extremely wealthy, but holding
34:23
Speaker 3: that money with an open hand and saying, if it goes,
34:27
Speaker 3: I'm okay. If you can't say that, then you're putting
34:30
Speaker 3: too much of your self worth and too much value
34:34
Speaker 3: in the money and not in relationships and other things.
34:37
Speaker 3: You know, I met. I remember going to a wedding
34:39
Speaker 3: once at Blackwattle Bay where the souper yachts are all moored.
34:43
Speaker 3: And the minister of that particular wedding at a church
34:47
Speaker 3: where a lot of wealthy people attend, and he's been
34:51
Speaker 3: at the bedside of dying wealthy people, and he said, Roger,
34:55
Speaker 3: I can assure you that a lot of these people
34:58
Speaker 3: would give up everything that they have, including all of
35:01
Speaker 3: these boats, for one extra day, and that goes to
35:05
Speaker 3: show you what it's really worth.
35:07
Speaker 2: Oh, that's a lovely way to end. Focus on the day,
35:10
Speaker 2: live in the now. That's not all about the money.
35:12
Speaker 2: But it's good to make some money. Let's be honest.
35:14
Speaker 3: As I said, it gives you choice, you know, it
35:16
Speaker 3: does give you choice.
35:18
Speaker 2: Thanks for joining me Julianne Sprague, Wealth editor at The
35:21
Speaker 2: Australian for this bonus episode of the Money Puzzle. For
35:25
Speaker 2: more insights into building wealth and knowing what the smart
35:28
Speaker 2: money is doing, head to The Australian dot com dot
35:31
Speaker 2: au slash Wealth