What I found is that the companies that perform the best in over a ten year period never with the top than any one year.
The immediate volatility after the Liberation Day announcements, when is it its first day?
It ended up the day up.
If I look at websites of FU managers often of about a one year, three year, maybe a five year record. If I'm investing for a longer term than that, then actually that's not really relevant for me.
Kyoto Koto, Welcome to shared Lunch. I'm Garth Bray. Congratulations if you've made it through the past few weeks with your nerves holding investors haven't seen this volatility for more than a decade. How are you coping and how are you looking for the positives and opportunities. Well, we're in Wellington today and helping me look for those things. We have some sparkling talent in the form of Paul of Beth, editor of the bottom Line, and Susan and Batley company
director and also head of Cheesey's business arm. Before we get started, here's some important information you should always consider an investing.
Investing involves the risk you might lose the money you start with. We recommend talking to a licensed financial advisor. We also recommend reading product disclosure documents before deciding to invest. Everything you're about to see and here is current at the time of recording.
Welcome to both of you. Paul, you took the boldest bet I can think of in the first quarter of twenty twenty five and launched a business, so congratulations on the bottom line. Susanna, you're a director at deliver Easy as well as helping out with the business side of business here at Cheers EA's so, I mean a lot on your plate obviously. Congratulations and welcome to twenty twenty five. What are you doing for stress at the moment? How's your stress levels? I find it pretty calm.
I mean we're at the bottom of the world with one hundred thousand mile mote surrounding us. It's quite easy to be in New Zealand and watch on while Rome burns. I mean, it's the last couple of weeks in this year in general have certainly thrown up a lot of things to think about. But it's the same thing. You know, New Zealand has that relativity thing right. Things are bad here at times, but when you look overseas, Yeah, you're definitely shaken.
Your head about you are you waking up every morning checking the numbers and checking again.
I mean, I am still checking the numbers. But what I've actually found really helpful for me is actually looking back in history and continue to look at other times where there have been a lot of volatility. The reasons have been different. But I do think that if you don't engage with history, then everything feels unprecedented. So I've found that to be quite a calming thing to think about and look at each time that's happened. That life does go on and markets do continue, So.
You're looking at the cycle and trying to work out where we are there and work out what happens next, or at least take some stock from the fact that this is not unprecedented.
That's right. I mean, I don't try and analyze the future. In fact, even that is a really odd phrase, because the future hasn't happened, so there really is nothing to analyze, and I have really no idea what's going to happen. And if I look back in history, history is really a series of surprises, and so it's very hard to then think about what that next surprise has got to be.
But I do think it is good to focus on some of the things that we do know are likely and sort of thinking about what a good response to that might be. It is hard to continue to invest when you're seeing your portfolio go down and value and knowing that that might persist for some time and things
might look worse even the next week. In fact, Howard Marx, who is someone that I really enjoy his books, and he's got a very famous memo that I think he's written since about nineteen ninety and I came across oak Tree Capital during the GFC. We're at about the last
four months of the GFC. Oak Tree Capital. We're deploying about six hundred million dollars US into the market every week, and that was as a market was continuing to deteriorate, and so every week what they had purchased the week before was worth less, and then they kept doing it again and again and again. And that having that high conviction and be willing to put up with quite an extended pair of volatility is really hard psychologically, and that's why often in the past few have been able to
do that. But for the people that can do that well, it's been incredibly fruitful over the long term, I guess.
I mean, you know, if you compet it to house prices, Obviously there's been pandemonium if they dropped like fifteen percent since February, like was sort of seen with e SMP. But admittedly there would be people out there licking their lips and going great, finally, this is my chance to get into that market will double down or so on. And it's the same effectively with equities, right.
That's right. I mean house prices, I think is an interesting one, and I think gets overlooked a bit around the impact of leverage that that has as well. So you know, when people might buy a house if they have funding it with eighty percent of a mortgage, then that leverage really amplifies the outcome. And that's great when things are going up, but that can get pretty catastrophic when things are going down. And so when we've seen house prices move down, that return on equity gets a
lot more negative. It's amplified because of the effect of leverage, whereas in the equity markets, you know a lot of people investing and not using leverage to that degree. So it's interesting that house price.
Analogy not since the eighties anyway, Yeah, Yeah, I want to get to did a little bit later on because obviously it's a big part of what's behind what's been going on coming out of the state, so I spots. But the reasons about sort of stress was this is probably a little bit like kind of a health check time for a lot of people with their portfolio. As would you say, Paul, Like, it's like, am I comfortable with this amount of risk?
Definitely? And they should have been doing that already. Anyway, if you're looking at equities, you know you're going in with something that's volatile. There are a lot of other products out there to mitigate that. In the handy little risk profiles that we get in various disclosure statements to one to seven seven bang, you're going to have to tolerate some downs with the ups and think about it
over a long period of time. I mean, I still struggle when I see these statements looking at a long term investment being five years, that's not a long term investment. You're day trading if you're thinking that's your sort of profile. If we think about Kiwi Saber forty years, this is a generational product, So you can go through these sorts of things and looking at you know, the immediate volatility after the Liberation Day announcements and ends it x first day,
it ended up the day up. We were the first market to open. We eaked out in the final fifteen minutes of the match where all of the big money sort of trying to set their final prices for the day, ends up in the green, having been sort of you know, in the red for a lot of it. Then you get to a Wall Street reaction the following day slaps everyone. We finally get it on the Monday, where it comes down a bit domestically. But you'd look at those numbers and I remember I was looking back at say sort
of heighter GFC, hider COVID, he to COVID. Was I mean some of that that some of those movements were nonsensical. You couldn't quite wrap your head around it, even thinking about the likes of West Texas and the media oil prices going negative for a stage mad GFC going back to you know it was it was a smaller, sort slightly bigger than the dot com bubble in the early
two thousands. But over the course of it, you're sort of going, Okay, we're feeling this now because it's happening right now, but we felt like this in the past. And that's how you try and sort of think back into your mind. Okay, if you're thinking about equities, it's a long term thing. It's it's so easy to get
caught up in the ups and downs. You do want to have an idea of going into things, you know, what am I What am I comfortable with and revisit that every now and then, like, you know, let's have a look at it, maybe quarterly, maybe yearly. What do I think about my portfolio now? What do I need sort of over the next six, twelve, twenty, fourth, thirty months type thing? And it just accordingly or not.
It's like a health check, as you kind of check and maybe once a year with your doctor if you can get in to see them and go, you know, how things looking. It's a chance to say, is my strategy for the long term working right now? And do I need to adjust it? Would they be right?
Yeah? And I do think sometimes living through these moments are the reality check to actually go back and look and go, am I dipssified enough? Do I have enough cash on hand? Are those settings right for me? At the stage of life and for my risk appetite, I think when it comes to investing, it's really important to understand whether we are trying to maximize for the short term or optimize for the long term. And those are two very different things, and they're actually adulds with each other.
So if you're optimizing for the long term most of the time, I would say by definition, that means not maximizing for the short term, and it means actually not maximizing for returns when times are good. And again psychologically that's quite hard. You know. For the last couple of years, I'm very well in Nvidio, and every time that I go and look at that stock, I go, oh, I think it's overpriced, and I will invest, and then sure enough I was wrong and the price will keep going up.
And I do think there are times when things are going up where people could maximize short term returns by taking on more debt, having lower cash levels, going more into individual equities, and maybe having less di versification. But what that also does is it does make your portfolio more or less resilient to large volatility and large periers of uncertainty, and less resilient over the long term and for people that really are looking to optimize for the
long term. And if we look at the formula of long term wealth, is your sort of return to the power of time. That keyword is time, like it's to
the power of time. And so if you're thinking about endurance and thinking about maximizing for the long term, then sometimes that does mean holding back a bit in terms of trying to maximize over short periods of time, because actually you really want to make sure that you can survive the one and twenty year event or the one in forty year event, and that's quite different the what.
If moment that we're all kind of going through.
Now, that's right, and I think when we you know, what we do know so far is that over long periods of time, there's been lots of periods of volatility, but that markets overall have done well. And so that does go back to going, am I diverse wide enough? What does diversifacation look like? And is my time horizon to fuce point long enough? And I agree with five years is just not long enough in my view to be really thinking about the equity markets.
You're looking more like ten or longer, yeah.
Or longer? I mean, I think Warren Buffett made something like, I think something like ninety nine percent of returns are to returned sixty I think, and that's just because of that exponential, that power of time that it's all been in the the latter years.
But he made some pretty smart decisions before that, I'm sure did. Coming back to the INSIDEX and you were talking about how we actually managed to perform a little bit out of step with those market moves. You know, there's obviously a lack there. I mean, has there been has it been a good guide for the volatility that's out there, the performance of that market, and are we sort of seeing it reflected or are there some local things that we need to think about there would.
Definitely follow those trends. You're looking at it, and you don't tend to see the same peaks and troughs that you get on that daily basis over sort of the short period of time. I mean, that's where you saw five percent going on the NASDAK, you might get a three on the fifty.
Might that make it a bit more of a defensive A definitely.
I mean, when you're looking at the top ten, top twenty, you're looking at utilities you've got the three government controlled power companies, an airline which is government controlled, broadband provided that got out of got into businesses that it probably shouldn't have. Fisher and Pyble Healthcare is probably the most interesting one out of there and has been an astonishing success. There are always a lot of what if moments, and it does often make you wonder whether or not we've
got the risk settings right. It's one thing for the market to be defensive, but the trading volumes on the nz X fifty were pretty low throughout this entire period, even though activity sort of perked up throughout it all.
When you're looking back at sort of just the actual volume of shares trading, and you're looking at maybe one twenty one to thirty mili in turnover value of trading going through it on a daily basis, The rewatings of major indices a couple of weeks prior had massive volumes over that you're looking at sort of equivalent volumes going through the Breck search back in twenty sixteen around mid year like that, that seems out of step when you've got some of the biggest trading volumes going on in
Wall Street over in Australia, and yes, people are sort of sitting and waiting to see what goes on. But you're just wondering, why is New Zealand not actually engaging in this? Is this just a function of the fact that a lot of our ownership is being done through passive ETFs now and these are the vehicles that people
are flocking to. Has really been quite curious is to wonder have we got our risk settings right for what should be something that is there to support not only deeper capital markets for new businesses to be coming out there,
but for investors to get involved in. You struggle to see the imagination getting captured by the New Zealand public at a time when more of the New Zealand public is finally getting over the finance company debacle, the eighty seven crash, You're left sort of scratching your head, going what gives.
The data would suggest though, that we are getting over those things that if you look at even at the Cheeses index that Cheesy's produces quarterly, people are diving into those marks, not necessarily the nsiet x point, but they're getting amongst it, don't they.
Yeah, I've been really hardened to see the response to this period of volatility, where the latest figures from the Cheesy's Index over the quarter January to March showed again continuing strong netbuying through this period, and then also a shift away from sort of more individual companies into more ETFs and diversified funds as well as into defensive individual
companies as well. And I do think that reflects the fact that we are probably in for a period of continued volatility and divesification is a really important thing to make your portfolio more resilient to sort of withstand withstand that period. I also think actually even before this tariff war and these geopolitical events that we're seeing play out.
You know, if I look at twenty twenty four, in the year, the S and P five hundred was up, I think about twenty five percent, but about half of those companies had losses so had a negative return for that period. And actually it's a very few number of
companies that accounted for the majority of that return. And I think that is a trend that we're seeing more and more, particularly as you have large tech players with high operating leverage and you're seeing some more global companies, you are seeing that the drive to the tails and the tails that are driving for the big outcomes, and unless you can you know, really pick who those winners will be. And I mean I certainly can't. Definitely, we're not near my day job if I could do that.
But you know, unless you can do that, well, then you know you're it's going to be hard to even beat the market return if you haven't got decent exposure to those very few sort of fewer and fewer stocks that are driving the big outcomes. And so I do think that moving more to that diversified approach is really helpful as we're seeing that trend even beyond you know, the volatility with off the back of the Trump saga.
That's just also one of those issues that you get around the shifting around the ETFs and the such. It's hard to look at say like a QQQ, the Nasdaq ETF or the S and P five hundred and really consider either of those to be diversified given the concentration of Magnificent seven and you know, just thinking about, like you know, people on Shares's platform, this is we investors being drawn more to US stocks and they're going down this you get told to diversify your portfolio. This American
market should be one that you should go into. But if you're only going into seven companies that are making up the dominance of it, you know, it's hard to wrap your head around how you're actually diversifying your investment there, or if you're just trying to ride the wave that we've all been don for what last seven eight nine years now?
I mean to fourth point though. Yeah, when you look at for example one E S and P five hundred ETF, it is dominated by a very few number of stocks. And I mean I remember a time on the ins oft X fifty where I think it was fishing, Packal, Healthcare, and A two milk collectively where something like thirty percent of the index. And so unless you had for fund managers that didn't have a massive exposure to those two,
they almost always underperformed index at that time. What we are also seeing because we call a lot of our keep we saving members, and we are talking to investors all the time. And another thing we're seeing is we're actually fine larging investors not disengage. They're not going I just put my head in the set end and try and just forget about this period we are seeing investors actually continue to check in with their balances, but also they're saying, actually, this is just part and parcel of
being an investor. And I think that really is a shift in mentality of what we've seen in previous periods, particularly amongst retail where I'm talking to investors, I've seen a really big shift in psychology where it is much more volatility is the price of investing, and it's not a penalty, it's not for doing something wrong. It's literally
the price of being in the market. And actually, when I do talk to investors, the things that they're about is not volatility in the short term, and they shouldn't be like for investors taking a long enough time horizon and advertate, volatility in itself shouldn't be the issue. The issue is, you know, can I lose some all of my money? Or am I going to get inadequate returns for the risk I'm taking on? Those are the issues that investors need to be concerned with, not that short term volatility.
Yeah, I guess key. We saver is probably a huge part of that equation. Right, people are now directly invested that can sort of see a little bit about their peace of the world. And that's probably leading a lot of financial literacy as well. I guess the fact that it's locked in right that people are in there until sixty five or whatever, or until they buy their first house, if that's where they're trying to push it to. So that's got to be a big part of this.
Yeah, totally. And dolo cost averaging in that is the key saver strategy. Like every month money gets deployed, whether or not people are feeling good about it and looking at the balance and obviously only investing at the top of the market is not a good strategy. So dolo cost averaging does rely on investing when markets go down and continue to deploy money during those moments, which, as we've talked about psychologically, is challenging.
I mean, we do have some slightly unusual KEI we server settings here where we sort of tax it going in, whereas a lot of other countries will just say you make the money, you grow, your pie, will have it when you cash it out when you're retired. Things like is it time for us to look at that and say we need a health check on We.
Should be looking at that all the time, you know. The esteemed commentator Brian Fellow, who is very smart columnist at The Herald for many, many many years, would regularly point out a bit the horrendous change that was made when Roger Douglass was Finance Minister to change that setting around the tax you're clipping the ticket on the way through and what government wants to give up that money, which the ultimate taxpayer doesn't see. You're not aware of
how much you're actually paying. Until we had the sort of it might have been the COVID crash. When you're looking at the annual key we save balances, it was almost about that time where the tax take was going to be bigger than the fees generated. Now, you know, it's kind of a moral for the government to be a bigger beneficiary of the privatizing of future savings than the people that it constantly complains about. It's a horrendous setting.
I kind of imagined it's a little bit like trying to steal food out of the mouth of the animal that you're trying to feed. Rather than just saying, hey, one day we're going to you know, it's going to meet at the end and we're all going to eat. You know, it feels like they're trying to take too much too soon. But like you say, it's locked in and probably hard to reverse. But are there other changes where you trying to make well.
I mean everyone's pushing for pushing for increasing contribution rates, which makes sense. I mean even if you go back to doctor Cullen when he was setting it up, the staggered rate of one, two, three, four going up one percentage point a year to minimum and then wanting, you know, wanting to be able to get for it to go up to eight.
I mean, the great thing with key we save is it really does maximize for that time horizon. And I think as humans, for most people, and I said, it's for myself, compounding is not insuredive. Like if someone said to me, what's seven plus seven plus seven plus seven, I'd give them the answer. They said, what's seven times seven times seven times seven? I just say that's a
really big number. I personally think compounding, the compounding formula, we're the most useful formula that my kids ever learn. And I just think that we don't. It's very hard to visualize and really understand how powerful that is. Over decades.
Look, we've managed to get through this mostly without a lot of talk about Trump or tariffs or any of those things, or it's been in the background there, right, because every other day it's a new thing, right. But coming back to what we're talking about with some of those New Zealand companies, those local companies, is there any way we can work out what those likely impacts are to be on some of the market players that we've got.
Here, not yet, Yeah, well ofause, I mean, your first round had so Fisher and Pugle health Care, which has significant manufacturing operations in Mexico, which were immediately slapped with tariffs before the big Donald Trump versus the World, which was then peered back to Donald Trump versus China Super Slam.
We should start coming at some wrestling metaphors or something at SummerSlam.
I mean, he is a WWE fan, but it's the were their immediate thing was it's not going to hit our twenty twenty five financial year because their financial year ends in March, so that gives them a bit of an out to then think about, well, gee, we need to work out what the impact is going to be, whether or not we're going to be able to pass this on to our customers, whether or not we're going
to shift more manufacturing back to New Zealand. They went through this in twenty sixteen after the original when NAFTA got torn up and Trump renegotiated the free trade agreement with Canada or Mexico. Fisher and Pigal Healthcare. We're looking at their manufacturing footprint and thought this is too much of a risk. We need to find another country to build things. They ended up settling on a Chinese factory
which came on stream. It might have been last year or the year before, quite remember, but this is this is how every company is going to respond. They will look at what the rules are going to be, and they will work out what will we get hit by and how can we get around it, and how else should we respond. I mean, in video promising to build half a trillion dollars worth of AI servers and there are supercomputers in America. That's exactly the sort of behavioral
shift that this White House administration wants to see. Whether or not you know that the tariff regime would have forced their hand or not. Counter factual, We've got no.
Idea whether they've got the consistency coming out of the White House that these businesses can actually use to make those decisions as well, right, you know, can't we just get a deal instead?
Yeah, I'm intrigued to see actually how much manufacturing will move to the US, because there is there is quite a lag in terms of that response to them going, oh we actually going to build a factory or going to set up a factory, and that that takes time, and I'm seeing various countdowns as to when Trump, you know, when his term will finish, and look, who knows what
will happen at that point. But you know, if that takes time, and do you think that they will get reversed, then you do sort of whip back and go, well, actually, is that worth it or not?
There are always going to be winners and losers throughout this entire sort of situation. Some people will find the opportunities and others will get burnt, which is kind of capitalism, right. I mean, you know, it's not a win win, win win win, no matter how much these sort of well manufactured press release tries to pict it is. So.
Yeah, and then another interesting thing is thinking about what the long term consequences might be of all of this as well. You know, even if things are completely reversed, that doesn't necessarily take away the fact that this has happened. And then what, you know, how will global fund managers look at the US or you know, what will be certain views around the US dollar moving forward, And that's really hard to predict, you know what that might be.
I was just thinking Milford, our local fund manager in New Zealand, they had already been looking at the valuations in the US and gone, it's a bit toppy. And they had been pairing back their US exposure and shifting it to Europe where things were looking like a better value.
And you saw in the first sort of the first quarter up until Liberation Day which liberated US at our gains, that some of those European defense stocks have been going through the absolute roof in Europe, primarily because they couldn't trust on being able to source American product anymore. But you know, these things, these things have massive budgets coming their way as well as a result of what could possibly be the dissolving of the NATO alliance, which is crazy when you say that out loud.
Yeah, I did say we were going to try and be unashamedly local. I feel like we've ranged pretty far from home now. So I'm just going to bring it back. If we're talking about the NZIX. There's something I need to ask you, Susan strategic mediocrity explain.
Yeah, Strategic metirocrity was actually a term that the global asset manager used to use. I don't know if they still do, and it was really from a bond trader back in the day called Ben Trotsky. In two thousand and three, he retired with the best ten year record
at the time globally. And what ben Trotsky had done is he analyzed a lot of a lot of history, a lot of data, and actually found that if he could stay within the top third of performers each year, but not higher than that, so not on the top twenty percent or the top twenty five percent, then naturally, if he did that consistently over a ten year period, he would be at the top in any competitive universe. And really what it is about is going things change
all the time. Just as we're talking about things are so uncertain all the time, and so an environment that might produce sellar returns one year, if the environment changes, then that same strategy might not produce the same outcome. In fact, it's unlikely to so if the strategy is more about thinking about a really resilient and robust approach
that will work in a variety of different environments. If you apply that consistently each year, then actually over a longer period of time, say a ten year period, then that should produce really good outcomes. And I actually looked at this on with instx data, and it was really fascinating to see over I looked at a range of different decades, and what I found is that the companies that perform the best over a ten year period never
with the top than any one year. And I think, again, it's that optimizing over the longer term versus maximizing over the shorter term. And I don't think we talk about this enough. If I look at websites or fund managers, they often talk about a one year or three year, maybe a five year record. If I'm investing for a longer term than that, then actually that's not really relevant for me. I need to be looking at what that track record looks like over a much longer time frame.
And it was interesting seeing some of the top formers on the insiet X. I mean, Chorus was one that has produced some stellar returns over a ten year period, and in fact, if you account for the sort of risk control as well, it's probably even better. So, you know, I think it's interesting too. Over the last few years we've seen quite a bag shift away from the injetex
into the US markets. But I did look at a range of Intertex companies and actually, if we take a much longer time horizon, there's been some really really strong consistent returns on some of these companies over a decade plus.
All are there hidden treasures in there in the insiet.
X They're always hidden treasures, but I mean it's part of the problem around crystallizing value out of them as the lack of liquidity throughout the entire market. People won't
touch anything outside of those top twenty companies. And when you're looking at sort of those mid and small cap companies, and these are why they're so often how to takeover targets because they're trading possibly even below the net tangible assets that you know, if you were to liquidate the matter point in time, you would get more money than what you could do buying them all on market at that price. There are a lot of companies in that sort of space, and part of it is just because
they've fallen out of favor. Part of it is that their owners, the shareholders, don't want to sell at the prices that someone else is out there trying to do so. But it's just really difficult to drive that activity to get a real, a transparent price, which is what a stock market, a forum for people to buy and sell, is all about. Why didn't Rocket Lab get a secondary
listing when it went to the Nasdaq? What are we doing in New Zealand that's not encouraging those companies that are imagining to get from small to medium to big, or those hugely ambitious companies to think domestic, even if that's only just a component of it. Why are they completely assuring us? And it's very easy to take a crack at the stock exchange operator and say, well, you're not sticking to your knitting, you're too busy off and
funds management, wealth administration. Well that's unfair. They're just one component to the entire thing. Is it the fifteen years of the conduct legislation that we've been operating under, did that get it right? Maybe it's time to have we think about that. I mean, Cheersy's has been a magnificent introduction into the market to at least inject, if not necessarily, the value of trading that you see from the big houses,
the volume of it. Retail investors are getting engaged through it and doing so, but more it just seems to be like we've left something on the table, and if I knew what it was, I'd probably be sitting in the top floor of PWC's our own commercial bank. The what if moment out of all of this and the peaks and troughs of the SMP five hundred is we need to look a little bit local and fix our own house as well and fix some of these things. Thank you so much for your insights, for your experience.
Do you come stay calm people, honestly and as you say, just just check in when you need to and you know, back the long game.
Thank you very much, Paul, Thank you very much. Susanna, Thank you very much as well for listening and for watching YouTube Spotify, Apple iHeart straight off the shares exap. If that's where you're getting it from, Thanks very much. Let us know what you thought, let us know what you'd like to hear about, Kumitu. That's us for now.