The Rules of Investing

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

Giselle Roux’s fluff-free take on the market (and where you can find opportunity today)

If you are feeling confused right now, you can rest easy knowing you are not alone. 
Since the beginning of the year, investors have been bombarded with a cacophony of conflicting market commentary on where best to invest. The indicators themselves, such as the VIX Index, the Coppock Indicator, and various sentiment surveys, also seem to be pointing in opposing directions.
For equities-focused fund managers, there’s plenty of opportunity hidden within the world’s major indices. For fixed income investors, there’s more opportunity than ever before in bonds. In the end, everyone is talking their own book. And who can blame them? How else are they meant to attract investors’ hard-earned cash?
This week's guest is different. She’s completely independent and unrestricted by any investment management firm's mandate, compliance team, or asset class. She's nothing if not completely honest. 
And let's face it. That's really what we all need right now. 
Giselle Roux has 35 years of market experience. She’s worked for the likes of Merrill Lynch, Citigroup, JBWere and Escala Partners. However, since 2019, she’s been providing independent advice to a handful of advisory groups.
In this podcast, Roux will be providing her unfettered opinion on markets, where there actually is true opportunity, as well as why she believes global growth looks challenged from here.
Note: This podcast was recorded on Thursday 22 June 2023.Timestamps:3:10 - Choose your information wisely4:30 - Credit and liquidity is key6:21 - Corporate finance is changing9:30 - Explaining the charge in US tech11:00 - The heavy burden of sovereign debt13:30 - Stock market vs economy15:30 - Future drivers of growth19:30 - Finding 10% return21:16 - Opportunities in smallcaps and midcaps25:00 - Hold cash, but not for too long27:50 - Is gold overrated?30:00 - Don't put too much weight in history32:50 - Cyber is here to stay

The dividend doctor gives his prescription for investing in 2023

Dividend-paying equities have long formed the backbone of retirees’ portfolios. And the historic stalwarts of these portfolios are well known. BHP, Telstra, and Commonwealth Bank, to name a few.
You might be mistaken for thinking that equity income portfolios are therefore set and forget propositions, made up of a limited number of dividend darlings that will pay out into perpetuity.
But you’d be wrong on both accounts, according to today’s guest.
Dr Don Hamson  is the founder and managing director of Plato Investment Management. Plato manages $11 billion in assets across three funds – an Aussie equities income fund, a global equities income fund, and a global alpha fund. Managing $11 billion in total.
Before that, he was responsible for over $10B in active and enhanced equity investments at State Street Global Advisors.
In today’s interview [in the upcoming interview], Don explains why dividend-paying equities are still the best place to generate income, what makes a dividend sustainable, how to identify dividend traps, and which sectors and stocks have the brightest dividend outlook.
He also names the dividend darlings that no longer deserve the title!
Timestamps
0:00 - START
1:45 - Dividends hold up amid inflation and rate hikes
4:15 - Dividends remain the income backbone
6:00 - The importance of franking credits
9:17 - Dividends vs the bond market
10:47 - Capital vs income
11:45 - Drawdown and sequencing risks
14:13 - Finding dividend growers
16:30 - Dividend traps
24:03 - Buying cheap stocks in hope of a dividend
26:00 - Red flags
31:40 - What makes a dividend "sustainable"?
38:00 - The best (and worst) looking sectors
41:23 - Invest with a short time horizon
43:00 - No free lunch for less than 20 stocks
50:30 - It's not all doom and gloom
58:00 - Don's bottom drawer investment

8 mega cap stocks have carried markets in 2023. Here’s what comes next

Few of us would’ve predicted that by June the S&P would not only be positive, but up over 11%. On face value, a healthy market.
But dig a little deeper, and it quickly becomes apparent that this performance has been carried by the big mega-cap tech stocks. Such is their performance, and the lack of performance by the rest of the index, that Apple, Microsoft, Alphabet and Nvidia now account for a third of the S&P500.
This all begs the question: what next?
Do these mega cap stocks sell off, does the rest of the market trade up, or will it be a bit of both?
If it’s the former, which companies will take the reigns?
These questions, and more, are answered by today’s guest – Jacob Mitchell, founder, CIO and lead Portfolio Manager at Antipodes Partners. Antipodes houses two global funds, an emerging markets fund, and an actively traded global shares ETF (ASX: AGX1). 
Before starting Antipodes, Jacob spent 14 years at Platinum Asset Management, where, as the co-CIO and lead portfolio manager of the Platinum International Fund, he oversaw $3.5 billion in assets under management.
Jacob goes to town on a lot of subjects, including:
his bear case for consumer-facing mega cap tech;
whether the AI boom is in fact a bubble;
where he’s seeing low multiples despite strong earnings growth; and
the stocks that will lead the the next cycle.
Note: This episode was recorded on Wednesday, June 5 2023
Timestamps
2:30 - Megacaps have dominated. What's next?
5:30 - Is AI a bubble?
9:10 - Slowing in the West, reopening in the East
12:00 - Market valuations and fundamentals don't line up
15:30 - Eyes on smaller companies bridging the gap
20:10 - Primed sectors
22:50 - Holding the line
27:20 - Liquidity is draining
30:20 - The secular winners of tomorrow
34:45 - Retail investors are sceptical of the energy transition
41:00 - Investment case for fossil fuels
44:00 - Hedging risk in today's market
48:00 - High conviction stocks