The Rules of Investing

Blackwattle’s Ray David is raising red flags about market darling CSL

There are a select few stocks on the ASX that boast true market darling status. Whereas other stocks sell off at the hint of bad news, market darlings seem to emit an aura effect on markets that itself attracts investment.
Biotech company CSL is arguably the Aussie market’s preeminent market darling, having returned 5,741% since inception.
For a while, it seemed like CSL could do no wrong. But even royalty can be dethroned...
Today’s guest is Ray David, Portfolio Manager and Partner at Blackwattle Investment Partners. Alongside Joseph Koh, Ray runs Blackwattle’s brand new Long-Short Quality Fund.
Ray has a red flag system for identifying his short and underweight positions. He put CSL through the ringer, and as you’ll learn today, it spat out a sea of red flags.
He also discusses the Ponzi scheme that sparked his interest in investment finance, why he’s bullish BHP irrespective of the commodity cycle, his overweight positions in industrials, and the media company with the best suite of assets on the ASX.     
Thanks again to Bell Direct for their support of this podcast. And remember, for a limited time, you can get 3 current Bell Potter stock reports each week. It’s the kind of exclusive research that can give investors an edge. So go to Bell Direct and look for the Livewire logo to get your Bell Potter stock reports now.
Note: this interview was recorded on August 15, 2023
Timstamps
0:00 - START
1:56 - A ponzi introduction to finance
5:30 - Lessons from the the Buy and Sell sides of the industry
10:00 - Have risk assets beaten central banks?
11:46 - The bear case for banks
14:00 - Defining 'quality'
18:00 - A new era for short selling
22:54 - Red flags for CSL
27:00 - Overweight industrials
29:10 - The best asset book on the ASX
30:26 - Reporting season buys
34:40 - Mining needs explosives
37:37 - Franchising done right
 
 

Livewire Live is back in 2023!

Livewire Live is an investor event like no other where Australia’s most experienced investors will debate the critical topics in markets right now.
It is set to be an unmissable event with an exceptional lineup of speakers and innovative formats. Tickets will sell out, secure your spot here. 
Speakers
We will be announcing additional speakers in the coming weeks.
Robert Millner, Chairman, Washington H Soul Pattinson
Bobby Yazdani, Founder & Partner, Cota Capital
Andrew Clifford, Co-founder, Co-Chief Investment Officer & CEO, Platinum Asset Management
Martin Conlon, Head of Australian Equities, Schroders
Nick Griffin, Chief Investment Officer, Munro Partners
Mark Landau, Joint Managing Director & Chief Investment Officer, L1 Capital
Christopher Joye, Portfolio Manager & Chief Investment Officer, Coolabah Capital
Matt Williams, Head of Australian Equities, Airlie Funds Management
Mary Manning, Portfolio Manager, Alphinity Investment Management
Phil King, Chief Investment Officer, Regal Funds Management
Tim Carleton, Principal & Portfolio Manager, Auscap Asset Management
Jacob Mitchell, Chief Investment Officer, Antipodes Partners
David Allen, Head of Long Short Strategies, Plato Investment Management
Casey McLean, Portfolio Manager, Fidelity International
Andrew McKie, Portfolio Manager Elston Investment Management
Alexandre Ventelon, Head of Research and Investment Strategy, Morgan Stanley Wealth Management
Dania Zinurova - Portfolio Manager, Wilson Asset Management
Marcus Burns - Portfolio Manager, Spheria Asset Management
Diana Mousina - Senior Economist, AMP
 

What do counting cars and delivering an 18% pa return for investors have in common?

There is a good reason why Australia’s sovereign wealth fund, the Future Fund, maintains a 16% allocation to private equity. Returns, returns, returns.
Private equity, and the lucrative returns it offers, has traditionally been the restricted domain of institutional investors and off limits to retail investors.
Ellerston Capital's JAADE Private Assets Fund bucks that trend by offering retail investors exposure to unlisted Australian growth companies. Like private equity, JAADE’s managers act as a partner with the companies it invests in by holding a space on their respective boards.
It’s a model that clearly works.
As of June this year, the retail fund has returned 14.48% pa over three years and almost 18% per annum since inception.
In today’s episode, Livewire's David Thornton sits down with Jayne Shaw, Investment Director at Ellerston Capital and analyst for the JAADE fund. Jayne didn’t take the typical road into funds management. Initially trained as a nurse, she went on to take a number of roles in leadership positions in healthcare organisations. This appropriately explains why Jayne looks after the healthcare allocation within the JAADE fund.
She also explains why the “carpark indicator” is a great way to know when the deals are on in private equity. 
Topics include:
the evolution of private equity over the last few years,
today’s deal flow,
the first order principles that guide Jayne’s process; and
the investment case for Mable and Prospection – two companies that are shaking things up in the healthcare space. 
Timestamps
0:00 - START2:30 - An uncommon journey5:03 - Private equity has changed10:17 - Dry powder12:16 - Counting cars14:00 - JAADE 16:00 - It all comes down to the people19:58 - Hard conversations21:30 - Earnings runway22:25 - Mable25:40 - Prospection32:39 - Why healthcare companies are good investments37:07 - Don't put too much weight in the past42:00 - A company for the bottom drawer

Regal’s ultimate guide to microcap investing in 2023

If there is one request that we repeatedly receive from our audience, it’s that you want more content on the wonderful, often under-covered world of microcaps. 
It makes cents (literally). These stocks usually fly under the radar of the masses, providing diligent investors with the opportunity to invest in mispriced stocks and generate capital growth over the long term. 
However, investing in this area of the market comes with its risks. In 2022, the S&P/ASX Emerging Companies Index suffered a brutal blow (it fell 24%), with one Livewire contributor describing it as a "killing field". This year, however, the Index has lifted around 3%, but it hasn't been a tide that has lifted all boats. 
So in today's episode, we're joined by microcap expert Jessica Farr-Jones, the portfolio manager of the Regal Emerging Companies Strategy*. She shares why she is feeling bullish about the opportunity in small and micro caps, some of the stocks that have her excited, as well as a deep dive into what small and microcap investors can expect this reporting season. 
And yes, if the last name sounds familiar, she’s the daughter of Wallabies great Nick Farr-Jones, who now also works in funds management as a mining specialist.
*Note: This strategy is only available to wholesale investors. However, around 25% of the Regal listed investment trust (ASX: RF1) is exposed to the Emerging Companies Strategy, which investors can access on the ASX. 

The only ASX stock with a return on equity of over 50%

Value investing is all about buying stocks that are trading below their intrinsic value. 
In practical terms, that often involves investing in companies and sectors that have been shunned by the market due to particular macro headwinds. 
"It should be no surprise as to where the pockets of opportunity are," says Tim Carleton, Auscap Asset Management CIO and today's guest on the Rules of Investing. 
"They're in the more cyclical sectors that people are most concerned about from an earnings perspective."
In today's interview with Livewire's David Thornton, Tim runs through two retail stocks in the Auscap Long Short Australian Equities Fund that fit this profile. I won't give them away, but one is the only stock on the ASX with a return on equity above 50%, while the other is a long-term compounder poised to take market share. 
He also discusses why he's avoided the tech and energy sectors, what he expects from earnings season, why he doesn't put much weight in earnings beats and misses, and why lithium is a crowded trade (yet remains invested in it). 
Note: This episode was recorded on July 26, 2023. 
Timestamps
0:00 - START1:30 - Have we avoided a hard landing?3:30 - Australian base case4:30 - Reporting season10:00 - Stock prices follow earnings12:30 - A checklist for finding value14:20 - Consumer discretionary in 202317:55 - Two COVID beneficiaries primed for growth20:50 - Avoiding tech and energy23:00 - Lithium is crowded, but does that matter?29:20 - Look past the market's time horizon44:00 - Bottom drawer retail stock
 

Oscar Oberg: Small caps are primed to rally, and it doesn’t happen without these stocks

A year ago I sat down with Oscar Oberg, lead portfolio manager at Wilson Asset Management. His thesis then was that small caps were beaten down and due some mean reversion.
Alas, small caps haven’t done much since then, with the Small Ords returning 3.91%. Yet Oscar’s thesis also remains unchanged. 
In fact, it’s gotten stronger!
Not only is he positioning for a rebound in smalls and microcaps, he’s doing it with overweight exposure to consumer discretionary, a sector that has been tarred and feathered by today’s macroeconomic landscape of high inflation and high rates. As Oscar puts it, “there’s no mean reversion without consumer discretionary.”
In today’s episode, Oscar lays out this thesis and the companies that make it up. 
He also discusses:
the relationship between the tech rally and small caps;
generating return with short-term tactical trades; and
how he deals with low liquidity, 
and the primed aged care stock under takeover.     
Note: This episode was recorded on Tuesday July 20, 2023.
Timestamps0:00 - START1:50 - When will small caps bottom?4:30 - No small cap rally without consumer discretionary6:30 - Profit taking7:30 - Why large cap tech matters to small caps10:14 - 30-40% rally is not out of the question14:30 - Harvey Norman's (ASX: HVN) property backstop16:00 - Wearing the volatility17:00 - Industrials20:20 - Going tactical24:15 - Mermaid Marine26:30 - Body language matters27:30 - City Chic (ASX: CCX) was a mistake29:20 - Managing liquidity in small caps32:45 - Takeover target34:50 - Balance sheets look good36:55 - Going public too early40:25 - The classifieds company for the bottom drawer

Paul Taylor’s guide to long term compounding on the ASX (plus a 3-stock portfolio for the bottom drawer)

Last month, Fidelity marked the 20 year anniversary of its Australian Equities Fund. The fund has consistently outperformed its benchmark, the ASX 200 Accumulation Index, netting over 11% per annum.
Paul Taylor, Head of Investments at Fidelity International, has captained that ship from inception to now.
The fund's generated 11% per annum over the two decades, through some of the worst crises markets have dealt with. The Global Financial Crisis, the European sovereign debt crisis, COVID-19, and the Russo-Ukrainian war. The list goes on.
How's he done it? Well, he turns down the noise. When I speak to fund managers, I often get a general response about how to do that. Usually something about focusing on fundamentals. 
In today’s episode of The Rules of Investing, Paul gives an actionable step by step process that all investors can follow to turn down that noise.
He also goes deep explaining his process for finding what he terms the “holy grail” of investing – long-term compounders, identifies the market’s next buying window, the need to view stocks and their upside potential within the context of portfolio construction, and the next thing to break if rates keep rising. 
And as a little kicker at the end, he provides a [hypothetical] 3-stock portfolio for the bottom drawer. 
Note: This interview was recorded on July 11, 2023. 
Timestamps
0:00 - START2:00 - 20 years of volatile markets4:00 - 4-step process for blocking out noise8:00 - Making moves during the GFC16:00 - Second order affects18:50 - The next buying window20:30 - Banks in the firing line22:50 - Preserving capital25:40 - Don't pick stocks in isolation28:50 - Finding long-term compounders32:50 - The secular tech rally36:30 - Glass half full39:40 - Buying WiseTech Global (ASX: WTC) early 42:50 - A 3-stock portfolio for the bottom drawer

This energy company hasn’t seen conditions this good in 25 years

In sports, players deemed to be "all rounders" don't usually dominate headlines and highlight reels. Yet, over the course of their careers, their flexibility and consistent performance can prove invaluable. 
The same can be said of investing. You have growth managers, value managers and everything in between. When market conditions are favourable, they're on. But when markets favour another style, they take a back seat. Sometimes for a decade or longer. 
Today’s guest is Blake Henricks, portfolio manager at Firetrail Investments, a high conviction manager of Aussie and global equities.
Firetrail live by the motto “every company has a price”. But don’t let that fool you into thinking they're are a value-only only manager. Theirs is a style agnostic approach, which gives them the flexibility to play at every point in the cycle.
In today’s episode, Blake discusses Firetrail's approach to investing, the health of Aussie balance sheets, what we can expect from earnings season, what leads the market to misprice a stock (and some examples), and the implications for the resources sector of being in a buy versus build phase.  
Note: This interview was recorded on June 27, 2023.
Timestamps
0:00 - START1:20 - Today's market2:12 - Conflicting data points3:20 - Earnings season will be tough, but not for every company5:10 - Beachside mansions vs outback shacks10:30 - Finding market misreads12:15 - The benefits of being style-agnostic16:30 - Jack of all trades, master of none?18:30 - Firetrail's portfolio22:30 - Is energy still the play?23:40 - Buy vs build30:00 - Don't board the AI hype train33:00 - Clipped wings and big gains36:00 - A franchise built for success