The Rules of Investing

Alan Kohler: We’re in for a recession we didn’t need to have

On this week's episode of The Rules of Investing, Livewire's David Thornton sits down with Alan Kohler AM, one of the country's preeminent business journalists. 
Alan first cut his teeth in 1969 as a cadet at The Australian. From 1985 and 1988 he served as editor of the Australian Financial Review, and was editor of The Age from 1992-1995.
In 2007, together with Robert Gottliebsen and Stephen Bartholomeusz, Alan founded Australian Independent Business Media, publisher of Business Spectator and Eureka Report.
In 2016, after selling the business to News Corp, Alan founded The Constant Investor, which was sold on to Investsmart. 
In a case of full circle, Alan now once again writes for the Eureka report. He also pens a regular column for The New Daily, hosts The Money Café (with Alan Kohler), and you’ll still find him in your living room reading the finance on the ABC. 
In today’s episode, Alan why the RBA has become too hawkish (and the consequences of it being so), the overhaul needed at the Reserve Bank of Australia (RBA), and his views on funds management.
Note: This episode was recorded on March 7, 2023.   
Timestamps
2:34 - It's all in the hands of the RBA
5:00 - Elevated inflation isn't ideal, but it's ok
5:30 - All roads lead to the inflation target
8:30 - Renovating the central bank
12:20 - What is guidance, anyway?
15:30 - Should Parliament carry its weight?
19:30 - What is priced into equity markets?
21:35 - What to look for in an actively managed fund
23:35 - What is a reasonable net return from a balanced fund?
24:50 - The role of ETFs in the portfolio

From a kosher butcher shop to one of the country’s largest family offices

The Smorgon family is one of Australia’s great wealth building stories.
The family emigrated from Ukraine in 1927, opening a Kosher Butcher shop in Carlton soon after. Through the 1930s, the family expanded into wholesale meat and canning industries and, by the time the decade was up, were exporting meat and canned fruit goods to the United Kingdom.
Victor Smorgon AC and the family established Smorgon Consolidated Industries in 1942, and this is when things really started to take off. In the 50s, the family added paper and packaging businesses to their repertoire, while the 80s saw the addition of a glass and plastic packaging company.But it was the Steel industry where the Smorgon family displayed its appetite and aptitude for disruption, with Smorgon Steel going on to become the country’s largest vertically integrated producer of steel and steel products.
In 1995, with a heavy heart, Victor and the family divested Smorgon Consolidated Industries. In its place came Victor Smorgon Group, which is today one of Australia's premier family offices. 
In today's episode of The Rules of Investing, Livewire's David Thornton sits down with Peter Edwards – the late Victor’s grandson and CEO of Victor Smorgon Group.  
We discuss:
The Smorgon family’s flair for disruption
The way a family office invests, and
The multi strat fund that has recently opened its doors to outside money.   

Christopher Joye: the RBA got it wrong, now it will crush housing, growth and the consumer

Today’s guest on The Rules of Investing will be very familiar to subscribers of Livewire. 
Christopher Joye co-founded Coolabah Capital in 2011, and it's since grown to house about $7 billion in funds under management. Coolabah is a leading active credit alpha manager, with 28 portfolios across institutional and retail mandates. 
Chris has storied history analysing Australia’s property market. In 2008, when the world was in the throes of the GFC, the Australian Government ploughed $15 billion into a policy proposal developed by Chris to provide liquidity to the Australian residential mortgage backed securities market.
He also founded research and investment group Rismark International. While there, he designed Australia’s first “quality-controlled” house price indices, the IP for which is used to this day by Corelogic.
In today’s episode, we dive into the RBA’s latest rate decision, the dire outlook for Australia’s housing market, and how Coolabah generate returns by exploiting mispricing in the bond and cash markets.
Along the way, you'll get a front row seat into the inner workings of an active bond fund. 
Chris also spins a yarn about the time he challenged GMO's Jeremy Grantham to put his money where his mouth is. 
Timestamps
2:30 - The RBA hikes rates to a 10 year high
6:00 - Pain on the way for the Aussie household
10:00 - A problem in the RBA's models
12:50 - Housing to fall by 30%
18:55 - Maintaining central bank credibility
22:00 - Zombie haunt the ASX
26:00 - Wait for the risk-free rate to do its work
27:26 - Challenging GMOs Jeremy Grantham
38:30 - How to short the housing market
31:30 - Hunting for mispriced bonds
38:00 - The inefficiency of the over-the-counter bond market
41:20 - How Coolabah builds its portfolios
46:00 - Navigating 2022
48:00 - Choose your hedges wisely
57:00 - How the NSW Government becomes a hedge fund
59:30 - The best value in bond and cash markets
Note: this episode was recorded on February 8, 2023.   

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)
 

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

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