The Rules of Investing

The unspoken rules of Wall Street’s best hedge funds

Working as an analyst on Wall Street, Qiao Ma, Portfolio Manager at Cooper Investors, had the privilege of meeting legendary hedge fund manager, Julian Robertson. Qiao worked at Coatue Management, one of the famous “Tiger Cubs” that spun off from Tiger Funds Management. It was an incredible experience to be grilled by Julian about a stock, but she warns that it was important you’d done your homework.
“Julian had an unspoken rule, if you cover a stock, or you pitch a stock, you better know more about that stock than anyone else in the world.”
Today, she applies that same principle with her own analysts.
In this episode of The Rules of Investing podcast, we discuss her experience in China at the start of the COVID-19 outbreak, how one of her first investments saw 15% of its value evaporate overnight, and some of the exciting opportunities she's seeing throughout Asia today.

Buy growth, but don't ignore the price

Michael Frazis, Founder and Portfolio Manager at Frazis Capital Partners, is positive about the outlook for equities. Despite the obvious challenges the world faces, a combination of monetary and fiscal stimulus, and economies that are beginning open back up, should present a perfect setup for growth equities. But that doesn’t mean investors can be blasé about what they buy. He warns that in some popular sectors, the prices have gotten too high in some names.
“Even in the hottest parts of the market, where there’s companies trading on 25-35 times sales or more, there are companies trading on a tenth of that. I think it’s extraordinarily important now to dodge some of those companies.”
In this episode, we discuss why he's so bullish right now, some new additions to his portfolio over the last two months, and why he was buying Afterpay as the stock fell in March.

The biggest experiment in markets: How does it end?

Guest: Sean Fenton, Sage Capital
In response to the COVID-19 shutdowns, governments and central banks around the world have embarked on an enormous monetary and fiscal experiment, the scale of which has not been seen before. In the space of a few weeks, the US Federal Reserve added more to its balance sheet than the entire period between 2009 and 2014. Meanwhile, additional spending measures combined with falling tax receipts are expected to see the US deficit soar to US$3.8T in 2020, almost 20% of GDP.
But in the face of this massive stimulus, demand has fallen off a cliff, the economy has stopped, and unemployment has spiked to 1930's levels.
Sean Fenton from Sage Capital says we're seeing a massive tug of war between liquidity and economic fundamentals, and it's not clear yet which side will win.
"This is an experiment that has no defined end point for how it turns out, just a range of possibilities. Those possibilities are very wide, and can have some divergent outcomes."
But what are the implications of all this for markets? And how are investors supposed to position for such an environment? We discuss this in the latest episode of The Rules of Investing podcast. He also tells us about his highest conviction investment right now, and shares his view on whether we'll see a new high, or a new low first.

Navigating the COVID crisis

Guest: Chris Rands, Portfolio Manager, Nikko Asset Management
One of the biggest questions on many investors’ minds in recent weeks has been, just how bad will the economic contraction be? But Chris Rands, Portfolio Manager for the Nikko Australian Bond Fund, says this isn’t the question to focus on. Instead, the focus should be on how long the downturn will last.
“It’s going to be weak. We all know it’s going to be weak. You take a quick walk around outside and you’ll see that absolutely nothing is open. If it’s down 5, 10, 15 percent, nothing would really shock me. It’s more important to say, “how long is it going to last?””
In this episode of The Rules of Investing podcast, Chris speaks to us about the stability of Australia’s financial institutions, when he first realised that COVID-19 presented a material risk to markets, and how the crisis has affected his view on Australian housing.

COVID-Crash special with Sam Sicilia and Martin Thompson

Guests: Sam Sicilia, Hostplus; Martin Thompson, Frontier Advisors.
The ASX200 has collapsed by more than 20% in just three weeks since COVID-19 went global. When markets fall so far and fast, it induces a state of panic for many investors. In this episode of The Rules of Investing, I sit down with two very special guests to get their take on the current situation, and to hear what we could lay ahead.
The first is Sam Sicilia, Chief Investment Officer of Hostplus. With more than $50 billion of funds under management and one million members, Hostplus is one of Australia's largest superannuation funds. Under Sam's guidance, Hostplus has become the top performing super fund in Australia over 10 years, according to Superguide.
Also joining us is Marty Thompson, Senior Consultant at Frontier Advisors. After studying science in his undergraduate degree, Marty undertook PhDs in Molecular Cell Biology and cancer research. He's also worked as a research scientist and teacher in virology at Murdoch University. Since starting his Masters of Applied Finance, Marty has worked as a Commercialisation Analyst at Melbourne University, and an Investment Analyst at Starfish Ventures, a leading venture capital firm focused on biotech startups.
In the first part of the episode, we discuss the disease itself, including what we know and don't know, and how the spread of the disease could play out from here. We then turn to discussing the effects that the disease and associated disruptions could have on the real economy. Finally, we discuss the effects on financial markets and individual investors.

How to buy growth companies before they get expensive

Guest: Mike Hill, Managing Director & Portfolio Manager, Bombora Group.
Investors who bought into Afterpay’s 2016 IPO have had great returns, seeing their investment appreciate by more than 33 times in under four years, even after the recent sell-off. But for investors invested in Afterpay’s pre-IPO round less than a year earlier, they’ve seen far great returns – well over 100 times.
Traditionally, pre-IPO investing has been restricted to institutions or venture capital funds with long lock-up periods due to the illiquidity of the underlying investments. But Mike Hill, Managing Director and Portfolio Manager at Bombora Group, takes a different approach. By investing in both private and publicly listed companies, they’re no longer subject to the same level of illiquidity.
In this week’s episode of The Rules of Investing podcast, we discuss some of the similarities and differences between working in private markets and public markets, one unknown company that he believes could one day be a large cap, and we take a dive into a case study of an ASX-listed company he's taken from private to public.

Aboud: What I'd buy in a market crash

Guest: Anthony Aboud, Perpetual Investments.
At some point in their lives, most people have lusted after a dream item, but been unwilling or unable to justify the price tag. Whether it’s a car, jewellery, or luxury holiday there's a point at which the price is too high to justify. But then, the retailer suddenly announces a big sale that brings it within reach.
Buying stocks is no different. Quality comes at a price, but occasionally the entire equity market goes on sale - allowing you to snap up your dream stocks at a discount.
In this week’s episode of The Rules of Investing, Anthony Aboud from Perpetual shares two companies that he’d love to buy the next time stocks go on sale. We also discuss his large overweight position in Commonwealth Bank, what he looks for in a compelling short candidate, and the company results he’s most interested to read this February.

Finding income in a low-rate world

For the best part of a decade now, income hungry investors have battled to find a decent yield. Thankfully, the capital gains from falling rates have offset the lack of income. But with rates around the world close to zero, it seems there’s limited room left for more capital gains.
Let me share an example. According to the ATO, the average super balance for a 65-74-year-old man is $446,800. Meanwhile, the average super balance for a 65-74-year-old woman is $378,600. So, let’s say our couple has a combined super balance of $825,200. Quite a healthy nest-egg. But with term deposit rates at around 1.75%, that will produce just $14,441 of income over the course of a year.
It should come as no surprise then that private credit, with its chunky yields, has seen a boom in popularity in recent times. Once purely the domain of institutional investors, these products are increasingly available to retail investors through listed structures on the ASX. Offering returns in the mid-to-high single digits, they attract a premium for the higher risk nature, while generating additional fees from deal origination.
Andrew Lockhart, Managing Partner of Metrics Credit Partners, has been a pioneer in this sub-sector in Australia. He worked for decades at a Big Bank on these deals, and then nine years ago decided to start Metrics with his business partners. In this week’s episode of The Rules of Investing, we discuss how the GFC shaped his investment philosophy, how Australia's big banks have changed the way they’re funded, and the sectors he'd be avoiding if the market closed for 5 years.