The Rules of Investing

Why this ex-central banker fears a second (and even bigger) mistake

If there's one group of people who cop a lot of flak in financial markets, it's central bankers. Whether you believe they get too much or too little of it, they're the ones who print the money and make decisions that influence the wallets of billions of people. That was particularly true in 2022, as many on the economic spectrum were caught unawares by the surge in inflation (and its persistence thereafter).
And depending on which central bank you most closely watch, they may also provide intentionally vague answers - or at least, avoid giving the direct and certain feedback you desire. 
A beautiful example of this stems from Federal Reserve Chairman Jerome Powell. In his post-decision press conference last week, Powell argued "certainty is not appropriate". In layman terms, he's simply saying that singular data prints are not Gospel, even if financial markets may see otherwise.
Now, at this most crucial time in financial markets, EFG Bank Chief Economist Stefan Gerlach has granted us an exclusive interview about the state of the global economy and what central banks are doing as a result. 
Gerlach was the Deputy Governor of the Central Bank of Ireland between 2011 and 2015. As part of this role, he also sat in on the meetings of the European Central Bank under its former President Mario Draghi. 
You can read an edited summary below: 
https://www.livewiremarkets.com/wires/why-this-ex-central-banker-fears-a-second-and-even-bigger-mistake 
 
Timecodes: 
1:00 - Why were central bankers caught so off guard by the inflation surge?3:38 - Could central bankers have better forecast this mess?4:51 - Did central banks react quickly and forcefully enough to avert a recession?7:29 - Would you have handled things differently if you were still in your old role?8:08 - What is the risk central banks will make a second big mistake?11:17 - What advice would you give investors who want to understand central bank messaging better?16:46 - Will the Eurozone avoid a deep recession?18:42 - Will China’s reopening save Australia from the global recession?20:12 - How has your asset allocation strategy changed?23:47 - What’s one macro theme investors are not talking about enough?

Lazard’s Philipp Hofflin reveals how the stock market really works

We’ve got a slightly different episode for you today on The Rules of Investing. A departure from the norm!
A lot has been said about the change from growth investing to value investing.
This shift has been easy to see in aggregate. In 2022, the MSCI world growth index was down 29.05%, compared to just -6.5% for the MSCI Value index.
But indices are just that - aggregates. They do little to explain the why behind the what. 
Why has this shift occurred? What signals should investors watch? How should we interpret these signals? And what traps lie in weight to catch out investors?
In short - how does the stock market actually work?
To answer these questions and more, we're joined by Dr Philipp Hofflin, Portfolio Manager on the Australian Equity Team at Lazard Asset Management. Phil's an expert in market bubbles - how they grow and, importantly, how they burst. So he's the perfect guest to break it all down. 
(He also happened to be the most popular ROI guest in 2022).  
Note: This episode was recorded on Monday January 30, 2023. 
Timestamps
3:20 – “The central bank always wins”
5:15 – The most striking US market change since last September
8:00 – Why 2023 will be a tough year, but less so for Australia
10:30 – Recessions are almost always unexpected – and what this means for investors
11:00 ­– Will the Fed’s slowing of rate hikes flow onto RBA
14:00 – The normalisation of equity valuations is only halfway through
17:00 – 80% of market volatility is driven by noise – only 20% by fundamentals
28:30 – The surprising reason Value always beats Growth
36:00 – Why migrations are so important for Value portfolios
39:00 – How Lazard ascribes value to companies
42:00 – A case study of James Hardie (ASX: JHX)
 

Trailer: Lazard’s Philipp Hofflin reveals how the stock market really works

We’ve got a bit of a different episode for you today, which I think you’ll enjoy. A lot has been said about the change from growth investing to value investing.  
This shift has been easy to see in aggregate. In 2022, the MSCI world growth index was down 29.05%, compared to just -6.5% for the MSCI Value index.  
But why has this shift occurred?  What signals are investors watching. How should we interpret these signals, and what traps lie in weight to catch out investors?
To answer these questions and more, I’m joined by Dr Philipp Hofflin, Portfolio Manager on the Australian Equity Team at Lazard Asset Management.

Steve Johnson’s hunt for tomorrow’s market movers

Professional investors have been banging the quality drum with intensity since since the June sell-off. 
It makes a lot of sense. In today's market turbulence, the companies that will survive (and thrive) need strong balance sheets, consistent earnings and high return on capital. All the good stuff. 
But that alone doesn't make them good investments. Quality companies only make sense if you buy them at a good price.  
Today's episode of The Rules of Investing features a Livewire favourite: Steve Johnson, Chief Investment Officer and co-founder at Forager Funds. 
Forager started life in 2009 and now manages approximately $350 million across an Australian share fund and an unlisted international shares fund. 
Forager are on the hunt for undervalued and unloved companies, mainly in the small cap space, but they also invest in mids and large caps to add some liquidity to the portfolio when volatility spikes. 
Today we discuss lessons learned from 2022, the small cap cycle and earnings downgrades, and the one Aussie company with a market monopoly in the US. 
Note: This episode was recorded on Monday 16 January 2023. 
Timestamps
1:10 - Lessons learned from 2022
2:30 - The right time to sell 
3:40 - Preserving capital
5:00 - Managing risk through weightings
6:30 - Managing investor expectations 
8:40 - Inflation, rates and the Aussie consumer
13:00 - Earnings downgrades and small caps
16:00 - Are quality companies crowded?
21:20 - Forager's shopping list
33:00 - Forget about picking the bottom
35:00 - Biggest wins, deepest losses
39:00 - The Big Tech stock for the bottom drawer

Trailer: Steve Johnson’s hunt for tomorrow’s market movers

In the upcoming episode of The Rules of Investing, we're joined by Steve Johnson, CIO at Forager Funds. Forager began life in 2009 as a compliment fund to the highly successful market newsletter The Intelligent Investor, and has grown to manage about $350 million across a listed Australian shares fund and an unlisted international shares fund. 
Forager look for undervalued and unloved companies, and Steve has come to the table with plenty of companies that fit the bill. Here's a preview of what you can expect. 

Success and More Interesting Stuff is back

The Rules of Investing is done for another year. But fear not! For those looking for some summer listening we’ve got a fresh Series of Success and More Interesting Stuff going live right now. Search for Success and More Interesting Stuff on Apple Podcasts, Spotify or Podbean. 

This Hall of Famer has uncovered a stock worthy of Warren Buffett’s portfolio

When volatility strikes, investors invariably become more reflexive and less disciplined.  But investing with reckless abandon is almost certainly going to lead to bad outcomes.   
Experienced investors stick to the game plan - a game plan borne of experience and a process that's been tried and tested through the full business cycle.  
On today’s episode of The Rules of Investing, David Thornton sits down with Matt Williams from Airlie Funds Management. 
Matt cut his teeth in 1993 when he joined Perpetual Investments as an equities dealer. That was followed by 17 years at Perpetual, working alongside heavy hitters including Anton Tagliaferro, Peter Morgan, and John Sevior. There he held the role of head of equities from 2011 to 2015. He joined Airlie in 2016, with a remit that includes Australian share strategies for institutional clients and the Airlie Australian Share Fund for retail clients.
This year, Matt was recognised as one of the best in the business and inducted into the Hall of Fame, joining a small and distinguished list of Australia’s best fundies (including the three Perpetual alumni mentioned above).   Matt explains why the Aussie market has fared better than its global peers, where valuations are and where they're going, and the one Aussie company Matt reckons is made for Berkshire Hathaway's portfolio. Note: this episode was recorded on Thursday December 13, 2022.Timestamps1:40 - Leaning from mentors, past and present3:15 - It's not only what you own, it's what you avoid5:00 - Why the Aussie market has outperformed global peers8:00 - Cash is king14:00 - Stress testing companies18:30 - Defensive anchors20:00 - Getting in early with Mineral Resources (ASX: MIN) 22:00 - Upgrade the quality when the market falls23:00 - Buying blips28:04 - A business made for Buffett

Trailer: This Hall of Famer has uncovered a stock worthy of Warren Buffett’s portfolio

In tomorrow's episode of The Rules of Investing, I sit down with Hall of Famer Matt Williams - a portfolio manager at Airlie Funds Management. Matt runs Airlie's Aussie share fund. We cover a lot of ground, including the way he views today's market, where Airlie's deploying capital, and the one company born to be in Warren Buffett's portfolio.