JAMES GRUBER | from Firstlinks

My guest this week is James Gruber, editor of Firstlinks and a veteran of Asian markets with a background in journalism and funds management. We dive into his contrarian views on dividend stocks and gold's role in portfolios.

James started in journalism at the ABC, producing the 7pm news in Canberra. He switched to stockbroking in Asia, working in Indonesia, Malaysia, Singapore, and Hong Kong before joining AMP Capital as a portfolio manager for Asian and Chinese equities. His China fund ranked number one globally over one and two years. Later, he founded Asia Confidential in 2012 and moved to Morningstar as a financial writer.

Our discussion stems from James's article "Why I Dislike Dividend Stocks." He drew from David Gardner of Motley Fool, who achieved seven 100-baggers—stocks returning 100 times or more. Gardner held Amazon from 1997 and Nvidia from 2005, both up over 1,000 times.

Gardner breaks rules: he buys high-valuation stocks (100x PE) signaling fast growth and favours stocks already up sharply. He targets market leaders in emerging industries, like Intuitive Surgical in robotic surgery.

This mirrors venture capital: buy 10 leaders, expect some failures, but let winners like Amazon compensate. Holding through 90% drops, as with Amazon post-dot-com bust, demands conviction in the business.

James prefers slower-growth industries with less competition. He invests in consolidators of fragmented sectors, gaining revenue, pricing power, and cost synergies. In Australia, Propel consolidates funerals, AUB Group insurance broking. In the US, Brown & Brown and Arthur J. Gallagher excel in insurance broking; AutoZone in auto retailing. These deliver 20%+ annual returns over decades.

Watch for acquisition pitfalls. ABC Learning consolidated childcare but collapsed as returns on capital deteriorated despite earnings growth. Monitor return on equity (ROE) and return on invested capital (ROIC).

James dislikes dividends if you don't need income. High-yield stocks like banks offer 5% franked yields but stagnant growth. Dividend growers, like those in funds such as DivGro, require earnings growth. He prefers companies with high ROE reinvest earnings over paying dividends, avoiding taxes and fees.

On gold, central banks now hold more than US Treasuries—a shift. They sold at 2000s lows; now buyers like China back the renminbi as a dollar alternative amid US deficits. Gold hedges government and central bank errors, holds value against inflation over centuries, and diversifies portfolios. Stocks and bonds correlate more now; gold doesn't.

James sold some gold recently amid bubbly signs: queues at bullion shops, friends buying for price momentum. He views it as insurance, not a speculation play.

What grinds his gears? Self-interested financial info promoting products. Think independently; most follow crowds.

Firstlinks offers free weekly newsletters with in-depth articles on investing, super, and retirement. Subscribers engage via comments for vibrant discussions. Subscribe at firstlinks.com.au.

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

Level up your investing with Sharesight, Investopedia’s #1 portfolio tracker for DIY investors. Track 240,000+ global stocks, crypto, ETFs and funds. Add cash accounts and property to get the full picture of your portfolio – all in one place. Ditch the chaos, track like a pro! Sharesight makes investing easy. Save 4 months on an annual paid plan at THIS LINK

Portfolio tracker Sharesight tracks your trades, shows your true performance, and saves you time and money at tax time. Save 4 months on an annual paid plan at this link

Disclosure: The links provided are affiliate links. I will be paid a commission if you use this link to make a purchase. You will receive a discount by using these links/coupon codes. I only recommend products and services that I use and trust myself or where I have interviewed and/or met the founders and have assured myself that they’re offering something of value.

EPISODE TRANSCRIPT

James: If you want income, dividend stocks make sense. I think they make less sense if you don't need income. Now, why would I say that? Well, if I get a growth company that has a high return on their equity, I want them to be able to reinvest in their own company rather than paying it out to me. Because what paying out dividend dividends does to me is that I can get taxed on my dividends and then I can get brokerage and transaction fees as a consequence. That gives me less to reinvest. If I want to reinvest back into that company, I would rather the company retain that, invest in themselves, and grow those earnings over time.

Phil: G', day, and welcome back to Shares for Beginners. I'm Phil Muscatello. What's not to like about dividend stocks? Apparently quite a bit, although I like them myself. And does gold deserve a spot in a beginner's diversified portfolio? Joining me right now to discuss all this and more is James Gruber. G', day, James.

James: Hi, Phil. Nice to be here.

Phil: James Gruber is the editor of First Links. Prior to that, he covered Asia as a leading fund manager, stockbroking analyst and journalist. More recently, he was a portfolio manager for Asian equities at AMP Capital, Managing Asia and China. During his time there, the China Fund was ranked number one globally over one and two years. He was also a television and radio news journalist at ABC and founded Asia Confidential in 2012. So, James, what came first, journalism or funds management?

James: Journalism first. I was at the ABC for five years. I ended up producing the 7pm news in Canberra. And then I made a little bit of a radical switch to stockbroking as an analyst in Asia in various parts of Asia. I worked in Indonesia, Malaysia, Singapore, Hong Kong, and came to Sydney via that job and then eventually ended up at Amp on the funds management side. Took some time out and came back to Morningstar as kind of a hybrid, a, uh, writer on all things financial, television, financial news.

Phil: I reckon that's the dream job. I reckon Alan Kohler has got the dream job. I mean, he just has to stand up there in front of the camera once a day, talk about, about a couple of stocks. One little news item. How do you get a job like that?

James: He's very good at what he does and he's got a lot of knowledge as well. So I think he's a fantastic asset for the ABC and for finance in general. And he makes it easier than it looks, let's put it that way.

Phil: Okay, yeah, that is the skill.

So what was it like changing from journalism to funds management? Did you have an interest beforehand in investing?

James: I did and it wasn't easy. I remember I went into a quasi management program at this broker and it was the number one brokerage in Asia. They're actually an independent broker, smaller broker, clsa, but they were beating the likes of Goldman Sachs in Asia during that time. This was in 2005. And I went into this management program and I remember I had to do the Hong Kong securities exam, which is similar to here. I had to do that about three weeks in, basically off little financial knowledge, had to do that exam and somehow I don't know how managed to pass. But it was a rapid fire switch. And the big switch is obviously I'm creative as a writer and journalist, thinking numerically I can do that, but it probably doesn't quite come as natural. And combining those things was difficult at first, but the interest was there in shares, markets and being in that world.

Phil: So being someone who's used to crafting stories, do you find that that's something that you'd have to suppress when you were looking at the fundamentals of individual companies?

James: Yes, narratives are, uh, or can be dangerous when it comes to stocks. And I think people underestimate the power of story and narrative when it comes to stocks. You just have to look around the world today. The power of the AI story, the power of interest rate cutting stories, stories abound. And trying to make sense of all that noise and come to an independent point of view is tough but necessary. And if you're to succeed in markets.

Phil: Yeah, I think that's just something. It's such a lesson for people and such a lesson for beginners is that because you always get excited about this story that you hear, the story always sounds fantastic, but without the numbers backing it up

00:05:00

Phil: and rigorous research, you're on a hiding to nothing, aren't you?

James: What I used to do when I was a funds manager, I used to think about different scenarios. And I think that this is one of my biggest lessons from being a fund manager is that instead of thinking about price targets and fair value and valuation multiples is to think about different scenarios for both earnings and valuation multiples. So what is the probability that say CSL today? Is it a value or a value trap? Well, I think that you've got to have a good handle on what earnings may do over the next, say, three to five years, do different scenarios around that and put different valuation multiples on those earnings and see what comes of it, and then potentially weight the different scenarios. So maybe a 10% scenario where earnings go up by more than 10% a year over the next five years and the valuation multiple increases over that time, you can put a weighting on that and then different scenarios. Now, I know that's a little more complicated than looking at a pure PE or something like that, but. But to me, that probabilistic type of thinking is really necessary to be a successful investor.

Phil: And in your time in funds management, were there constraints due to size of positions and the mandate that you were operating under? Uh, and those kind of things that basically don't apply to just a regular retail investor?

James: Yeah, I think I've written about this before, but I think the individual investor has a big advantage over fund managers in many ways because fund managers are restricted by their processes. As fund managers, you may not realize it. You go through documented processes that you have to present to clients that you have to adhere by. That can be slow going, particularly in larger firms. You also have restrictions on how much you can invest in particular stocks or sectors. You have all kinds of restrictions because you're trying to cater to your clients. In essence, as an individual, you don't have that. You have more freedom to invest. So, for instance, if Amazon grows and it's more than 10% in my portfolio as an individual, that won't matter as much as if you're a fund manager. There may be automatic limits where you've got to exit or bring it down by a certain amount. And that may cost you long term performance. It could very well cost you long term performance. So I think the individual in many ways has some advantages.

Phil: Okay, well, let's get back to the point of this podcast that we originally chatted about an article that you wrote. So we're basing this interview on a recent article about dividend stocks. Why I, uh, dislike dividend stocks. I'll put a link in the episode description in the blog post. And the article starts with the story of David Gardner, the co founder of the Motley fool investment newsletter. And it's about his suite of hundred baggers. Tell us about Dave.

James: Well, if your listeners aren't familiar with the term hundred baggers, what it means is that a investor invests in a stock and it goes up by a hundred times or more in terms of total returns. So I invest, uh, $1 in Amazon. Let's say, and it goes up by, let's say 100 times, it'll be $100. If it goes up by a thousand times, it'll be $1,000 and will be termed a thousand bagger. David Gardner I was listening to a podcast of his. He's also just written a new book and it outlined how he'd had seven 100 baggers during his investment career of I think it's around 25 years now. I'm not sure about you Phil, but I'd be happy with one. There are very few investors that have one stock that goes up 100 times in their lifetime or more. He's had seven and he's had two that have gone up by more than a thousand times. They are, uh, Amazon and Nvidia, which have gone up by, I think it's around 1100 times and 1300 times since he bought them at the equivalent of 16 cents a share for both Amazon and Nvidia. Now if your listeners want to go look at the share prices now, you'll see that they're up by a lot more than 16 from 16 cents. He bought Nvidia in 2005 and Amazon in 1997, has held on that entire time. Pretty remarkable. And I wanted to find out more. And I found out that he breaks a lot of so called investing rules that I myself have considered sacrosanct. So one of his rules, for instance, is buying stocks that are highly valued.

00:10:00

James: He doesn't mind buying stocks at 100 times price to earnings ratios. Now for me, I can't do that. I'm just not comfortable doing that. But he likes that because basically it emphasizes that this stock is growing fast. It's a fast grower. Second of all, he likes stocks that have gone up in price a lot. So if a stock has gone up by 300% in a year, that doesn't put him off. It actually encourages him to potentially buy a stock again. A lot of what I've been taught has been the exact opposite. So that was something that was contrary to that I traditionally believed in too. What he's basically done is he buys stocks that are market leaders in emerging industries. So you can imagine, say AI today. He would be all over that in terms of who he thinks the leaders would be. I know he owns another stock who called Intuitive Surgical, which is a US listed stock, which is into robotic surgeries in hospitals. He's bought that very early on. It was a market leader and it still has a remarkably high market share in the field of robotic surgery. It's getting a little more competition in now, but it's still by far the market leader in that field. And he's bought that early on and it's gone up a long way since. So that's the kind of stock and industry that he likes to invest in.

Phil: Take control of your investments. Sharesight has you covered. It's Investopedia's number one tracking tool for DIY investors. Get four months free on an annual premium plan@sharesite.com sharesforbeginners.

It's interesting that you're talking about what's kind of the opposite of value investing. We're always told, and there's so many people that we've had on the podcast about they're looking for value, they're looking for quality companies, but they're looking at value prices. It's really turning things on its head. And sorry about my puppy in the background making a bit of noise.

James: No problem.

Phil: And this is really the opposite. I mean, has it changed the way you're thinking about it at all, the way you're thinking about your own investments?

James: It certainly got me thinking. What David Gardner, uh, acknowledged and very much represents is that he invests in stocks like a venture capitalist does with businesses. So what he looks to do is buy, say, 10 stocks that he thinks are, uh, market leaders in emerging industries. And he expects some of those stocks to be dogs, to lose money. But what he's counting on is for one or two to more than make up for that. So if you can have one or two, Amazon and Nvidia's in your portfolio, it can make up for a lot of losses elsewhere in a portfolio. And he acknowledges that in this type of investing, you are going to have some losers. He mentioned, say he invested in Peloton, which, if you've seen the share price of that, it has been, uh, pretty awful over the last two to three years coming out of COVID But he's saying, I'm willing to bear that as long as I have those big winners that are going to more than make up for those ones that don't do well. And in terms of that, it has got me thinking about that style of investing. But I do think that you've got to find a style that best suits you. And that style wouldn't suit a lot of people because a lot of people wouldn't like one of their stocks losing 90% in price. They couldn't handle that. They couldn't handle the volatility of some stocks, say Amazon. He's held it, uh, from 1997, in 1999, 2000, when the Internet bubble burst, Amazon went down. It was over 90% in share price. And he held on. There are very, very few people that would have held onto that stock. They just don't have the aptitude for that. So you've got to have the aptitude for that if you want to invest like that. And not everybody can do it. I, uh, know.

Phil: It's incredible, isn't it? Because that's so much a part of investing is holding on and having a belief in why you're holding on. Did he ever talk about what kind of belief that led him to hold on for such a long term?

James: Well, it was that he believed in the companies. In essence, if he's a believer in that you are going to buy a market leader and, and it's an emerging industry that's going to grow a lot larger, you can have confidence with that. I think the other analogy might be that I like to think about companies in terms of their earnings, often in downturns. The best way to look at companies is to see what their earnings are like. Are they going up at the moment? If they are going up and the share price is down 20

00:15:00

James: 20 or 30%, you can have some belief that things will turn eventually. If they continue to grow earnings, eventually the price is going to come back. And I think that's a good way to look at things.

Phil: Another part of the article he mentioned is about the approach of investing in industries that are consolidating. Tell us a bit more about that.

James: Um, so what I do is that David Gardner invests like a venture capitalist. I'm not as comfortable with that. And I like to invest in growth industries, but that are slower growers, that attract less attention, that attract less competition in terms of businesses. And some industries are, uh, highly fragmented. And what I mean by that is that you can have a thousand mom and pop kind of stores, and there might be a few within that that consolidate those stores and become much bigger. And what that does is that it brings, obviously revenue growth, but it also brings pricing power with customers, and it can bring cost synergies. It can bring costs down. If you share costs with a competitor, if you take them over, you can reduce overall costs as well. So there are big advantages to that. And I've seen in many industries, both in Australia and overseas, the consolidation of industries is very powerful for shareholder returns over the long term. So in Australia, a good example would be funerals. The funeral industry has become more and more consolidated. It's still relatively fragmented and the big two, one of them still listed Propel is one of them that is slowly consolidating that industry and they're becoming more and more powerful where they have pricing power as well as cost synergies. Another one is insurance broking. So just in the news recently, AUB has received a takeover offer. They're one of the biggest insurance brokers, but that industry was highly fragmented and still reasonably fragmented. But AUB has been a big consolidator of that industry and its returns have been stellar over the long term. In the US there's all kinds of industries which insurance broking is another one of them. The big insurance brokers have consolidated that industry in the US and the returns have been staggering over the past two to three decades. Arthur uh, J. Gallagher is one, Brown and Brown is another insurance broker. These kind of stocks have done very, very well. Auto retailing, you've got the likes of autozone that have done huge things in terms of consolidating the industry. And the returns have been 20 plus percent over the past two to three decades per annum that is. So if you can find the leaders in these fragmented industries that are consolidating, it can be a very powerful tonic to shareholder returns.

Phil: Just to turn to the dark side of that sort of strategy though, there's often companies that try to acquire other firms and it doesn't work out at all. And um, that's something to be wary of and watchful for, isn't it?

James: It is. There is a fine line between a consolidator and a consolidator that doesn't consolidate their own operations properly. You find that particularly with really fast growers that do lots of mergers and acquisitions and you've got to be pretty careful of that. And I think there are a few metrics to look out for. So for instance, I look out for return on equities and return on invested capital. So I'll give you a prime example. ABC Learning, which is well known, went down the gurgler in the early 2000s. It was a, uh, consolidator of a fragmented industry. This is exactly what we're talking about. It made huge gains on the share market but then eventually went bust. But there are a few telltale signs along the way. The sort of quality of its earnings deteriorated and particularly its return on capital. Invested capital and return on equity slowly decreased. And what that showed was basically that the more they expanded and took over childcare centers, they were getting less and less returns from that. And that's a tell sale sign. So Even though overall earnings might be growing, the quality of those earning, the returns that they're getting were deteriorating at the same time. But investors were blind to that because they were just looking at the revenue growth, the earnings growth. They weren't looking underneath the hood at exactly what was happening. So you can see a few pointers there that may be clues as to whether a consolidator is doing too much with regards to acquisitions.

Phil: So where does that leave dividend stocks? I noticed that you had the title and then you talked about all of that. And then right at the end of the article there was about your little spray about dividend stocks. And just before we get there, I just wanted to mention a recent guest that I had on from a fund called Diversity Grow. And the rationale behind that fund is to look for companies with growing

00:20:00

Phil: dividends. Basically US companies, not in Australia. But you think from the name of that fund that they'd be looking at the big dividend earners here in Australia like our banks and so forth. But there is something about the growth of dividends without paying out everything in dividends that does show that there might be a good company there to invest in. Anyway, that's my spray.

James: I know the guys at AH Divgro, so I know what they do. And what I'd say is that there are two ways, primary ways to invest in dividend stocks. Number one is that you can go for stocks with high yields, say your banks, classic example, although their yields aren't as high as they used to be, but they are still relatively high, except for cba. The others are still reasonably high. You can invest in those, but normally they are low growth stocks. So what that means is that dividends get paid out of earnings if earnings don't grow. And for the banks, on average, they've hardly grown over the past 10 years. The dividends aren't going to grow with that, you're going to get your yield of say 5% fully franked. Right. Right now on some of those banks, you're going to get that yield, but you're not going to get an increasing dividend over time. What Divgro does and what others do is that they go for companies that grow dividends over time, which is a big difference. But what that relies on is earnings growing. If earnings don't grow, dividends really can't grow much. Okay, so say if company doesn't grow their earnings over the next five years and it's 100% paying out those earnings as dividends already, and it's got a 5% yield, then you're not going to get a high dividend over the next five years. So you're going to trail inflation and you're probably going to go backwards in after inflation terms. So that's one example. But with dividend growers, your earnings might grow 5% per year and your dividends could grow 5% per year over that period. What I'd say is that I think that dividends, if you want income, dividend stocks make sense. I think they make less sense if you don't need income. And what I realized when I was writing about this article and the ways I invest is that I'm not really after dividends. I don't need income right now, and therefore I don't really want dividends attached to my stock. Now, why would I say that? Well, if I get a growth company that has a high return on their equity, I want them to be able to reinvest in their own company rather than paying it out to me. Because what paying out dividends does to me is that I can get taxed on my dividends and then I can get brokerage and transaction fees as a consequence. That gives me less to reinvest. If I want to reinvest back into that company, I would rather the company retain that, invest in themselves, and grow those earnings over time. So my style of growth investing is actually very similar to what DivGrow does. They just want some dividends out of that, whereas I don't want dividends. But we're both after companies that grow earnings over time as expressed by growing.

Phil: Dividends over time, presumably. M. Yeah, yeah, yeah. Yes.

James: You can't grow dividends without growing earnings, as a general rule. And that's a key point to make.

Phil: And that's the other key point is this is all about capital allocation we've been talking about here, is that capital can be either invested in, uh, growing the existing business, acquiring other businesses, or doing share buybacks or paying out to investors. And this is something that, you know, these are the kind of things that you really have to watch out for, aren't they?

James: They are. And what management does with their, uh, cash with their profits is often a telltale sign of what they're like. So if you have a company that has low returns on their profits, as in, say they get a 6% return on their business and they, uh, don't pay any dividends and they reinvest in that, that means they're basically getting 6% returns in perpetuity. That's not a Very good return. And they shouldn't be doing that really. They should be paying out more to shareholders via dividends. But if you're growing at say a uh, 20% return on those profits, I would much rather that they hang onto that cash than pay me a dividend and me getting the tax on the dividend, transaction costs and all that kind of stuff. I want them reinvesting so they can earn another 20% on their profits and hopefully that, that can continue for a long period of time. They're the kind of companies that I want to invest in.

Phil: And is that the metric return on capital that you're looking at to identify this?

James: Yeah, I think you're going to ask me this question potentially later. Is that uh, important metrics? I look a lot at return on equity and in return on invested

00:25:00

James: capital. Now return on invested capital is quite complicated so I might uh, put that to one side. Return on equity is simply the profits that you get on shareholders equity. And shareholders equity is the amount of money that shareholders put into a company. So say shareholders put $2 of equity into company ABC and ABC earns 20 cents of in profits for a particular year. The return on equity is 10%. So it's $0.20 out of $2 is 10% of that. So that's the return on equity. And that's very important to see what kind of returns a company gets and what a good company looks like. So there are many good companies that can earn 20% return on equities. There are others that earn five good quality companies have high return on equities. The only caveat I would put on that is that the return on equities can be influenced by the debt of the company. So watch out for the debt which can influence that equity equation. If it's a highly indebted company, that return on equity can be higher than it should be. So you just need to be careful of the debt equation too.

James: Are you confused about how to invest? LifeSherpa can ease the burden of having to decide for yourself. Head to lifesherpa.com au to find out more. Lifesherpa, uh, Australia's most affordable online financial advice.

Phil: Do you personally look at the debt and try and avoid companies that have too much debt on their balance sheet?

James: Yeah, it's a good question. I wouldn't rule it out, but I'm cautious on high endeavor companies. Things that.

Phil: It's a judgment call for you, is it?

James: I think it is a little bit. So let's take, I mentioned funeral home, um, companies. Some of them can be Highly indebted, but you've got very stable cash flows with regards to that. So if you have very stable cash flows, you can safely take on a bit more debt. If your cash flows and profits are volatile, being highly indebted is a good way to become bankrupt. So as a general rule I would say be skeptical of high indebtedness, but I wouldn't rule it out totally.

Phil: Did you mention the name was Propel for the Australian funeral company that's doing the takeovers? Yes.

James: Yeah, they're a smaller listed uh, company, Propel.

Phil: It's a great name. It sounds like they shoot you out of a cannon.

James: Well, I'm not sure if they're doing that given the business they're in.

Phil: Okay, let's switch to another article. Recent article about gold. You've highlighted central banks holding more gold than US Treasuries. Why is that a game changer?

James: Well it is because I view central banks as a bit of a contrarian indicator when it comes to gold. A lot of the major central banks, and Australia's included, were selling gold back in the early 2000s when it nearly bottomed after a 20 year bear market. So they sold a ah, heap of gold. The UK central bank was famous for it. They sold tens of billions at basically the lows of the gold price. So central banks are contrarian indicators in some ways. The recent central bank activity has been interesting and I think China's is a little different in that they are trying to make their currency, the renminbi, a uh, alternative currency to the US dollar. And they're doing that via partnering with a lot of different countries. And I think that they're trying to make gold as kind of collateral like physical backing for their currency. They weren't sure.

Phil: That's an old fashioned idea, isn't it?

James: It is a bit. But uh, they're trying to assure partners that they aren't going to depreciate their currency. And uh, the reason why central banks are turning to gold partly is because they're looking at the US budget deficits which continue to spiral out of control. And what that does is they basically have to print money to meet those deficits, to spend what they want to spend on and that is depreciating the currency. The US dollar has been down over the past six to nine months and central banks are wary about what's going to happen in future with those budget deficits and the US dollar.

Phil: So how should investors, or I know you can't recommend, but what are your thoughts on investing in gold? And what sort of part that might play in people's portfolios.

James: So first of all, let me disclose that I've been selling a fair bit of my gold recently. I think there are a lot of signs that it has been getting bubbly.

Phil: Um, like those queues in Martin Place outside abc.

James: I went past those and that certainly got me thinking as well as of price performance. I have friends that have invested in gold that have never had any interest previously. And I think a lot of that investment isn't for potentially

00:30:00

James: the right reasons, is just because gold has been going up. So I have been selling some in terms of what I, how I think about gold. This is my personal viewpoint. I think a lot of stuff that's written on gold is just not right. My personal view is that it's a hedge against government. And central bank stupidity is one of my big things. If you look at times through history, governments and central banks can do really, really silly things. And gold has held its value through that time against inflation. So it's done well over hundreds of years in holding its value versus inflation. Every other currency, even major ones, have disappeared through those hundreds of years. I'm not saying that's going to happen to the US dollar, but the probability is that it will at some point. So gold has held its value through that time. And I just think that if you're suspicious about what governments are doing, and personally I think that current government deficits and debt is pretty scary. And I think that that is something to be wary of. And that's part of the reason why you hold gold. And it's also proven as a diversifier within portfolios. People talk a lot about diversification when most things are very correlated to each other. So even stocks and bonds, which the 6040 portfolios become famous. But throughout a lot of history, barring the last 20 or 25 years, stocks and bonds move together. They either moved up together or down together. In those past 25 years when bonds just, you know, interest rates fell to the floor from high rates, bonds and stocks moved opposite to each other. So that was very good for a portfolio. So if stocks went up, bonds went down, but overall you kind of gained and vice versa. Bonds held up when stocks tanked. That hasn't been the case over the past three years or so. And so you need to look for other diversifiers. And gold is a genuine diversifier within portfolios. And that's where it has a role.

Phil: Yes, diversification and hedges and the old 6040 portfolio, this is something we've been really banging on about in the podcast recently because that 40 aspect that we're talking about, that used to be bonds and you can see this in your superannuation reports, depending on your balanced portfolio of whatever nature it is, that that 40 now is not just bonds. It's going to be private credit, it's going to be precious metals, it's going to be infrastructure, fixed income products, all sorts of things. And this kind of diversification across asset classes can be a good thing. But then, you know, things like private credit now are starting to come under a bit of pressure and a bit of more, uh, scrutiny.

James: Yeah, it's a tricky one. I've given some thought to it. And people are getting out of bonds. And this is particularly, you know, your super funds, your large institutions, they are, some of them hold very little in bonds these days. They invest much more in private equity and private assets and infrastructure and the like. What I would say is that they are more correlated with equities than you might think. So I'm not sure if they're genuine diversifiers. I also think the transparency around them is low and I think that that is, uh, a bit of a warning sign. And private equity is actually not performed that well of late. And private credit has been performing, though there are obviously some question marks about that these days. Infrastructure I like, but it is a bit correlated to equities. But infrastructure are long term assets and I do like them. I do think that you shouldn't abandon bond as a diversifier and I think that that trend is overdone at the moment, that people are dumping bonds too readily and I'm not sure if that's going to be a positive thing for your overall portfolio in the long term.

Phil: So you spend quite a bit of time working in Asia. And what sort of lessons would you like to pass on to listeners about investing overseas and particularly in Asia?

James: Uh, well, everybody's going overseas these days, but they're mostly going to one country, the U.S. and why do you think that is? They're chasing performance a bit like gold. And that's a very dangerous thing to do. So if I look at the US now on every valuation metric, it's expensive. And what, uh, decades and decades of data will tell you that high valuation multiples invariably lead to lower returns in future. So if I was a betting man, I would suggest non US stocks will outperform US stocks over the next 5 to 10 years and I'll pretty confidently make that declaration. I think that valuations are much less demanding in the rest of the world, particularly Asia. Asia's got

00:35:00

James: many growth industries and stocks and they are pretty cheap for what they are. What I'd, uh, say is that with the US People are investing there not only because of price but also because they're familiar with some of the brands and so on. But you'd be surprised to how many brands in Asia and Europe, much cheaper, but you'd also know them. And Asia's got a lot of dynamic opportunities. And what I would say is that if you are, uh, intent on becoming a successful investor, successful investors, they go into areas where others aren't. They want to be so called fishing in ponds where there's no one else to be seen. And Asia, you can find some of that and other places and you certainly won't find that in the U.S. right now. So that's what I would say on that.

Phil: Okay, so James, what's grinding your gears in the financial world at the moment?

James: I mean, it's probably like a lot of people, it's that when you're investing, a lot of information is thrown your way and a lot of that information is self interested, I. E. They're talking their own book, they're promoting their own products. And you've got to be, as I mentioned earlier, you've got to be skeptical of a number of things that you read in the press that come out. And a lot of it is pretty self interested. You've got to make up your own mind and try to not be afraid to make up your own mind because 99% of people are really following the crowd, even though they may not think they are. They often are if they dig deep enough. So try to think for yourself and try to not be afraid to have an independent point of view.

Phil: So do you think that First Links provides a defensive shield for that kind of pointing out where self interest might be taking over? Uh, from providing useful information?

James: It tries to, in a full disclosure, uh, sponsors pay to have their content on First Links, but we also have.

Phil: To pay for it. Yep.

James: We have lots of third party rights writers as well, myself included. I write articles and I value independence a lot. And we try to make it as independent as possible, uh, and try to keep that self interest out of it. And I think that that's one of the reasons why it's successful because there's not a lot out there like that. What you're seeing more in the media world these days is branded content. So basically that's teaming up with fund managers to present something, a video, you know, a story. A lot of it's branded these days. And that's becoming more and more the case as the media landscape gets tougher, I suppose.

Phil: And, uh, we should also provide a hat tip to Graham Hand, who founded First Links, who was, yeah, kind of wrote without fear or favor, didn't he? Sadly missed.

James: Yeah, he did. He died about a year ago and he left a really great legacy in First Links and I'm trying to continue that.

Phil: So where can viewers and listeners find out more about Firstlinks?

James: Firstlinks.com au is the primary tool and you can subscribe for free. It's a free weekly newsletter. We have sort of longer form articles that go into depth on investing and super and retirement and these kind of issues that affect everyday investors. And we've got a lot of subscribers and they comment a lot on articles and a lot of people love the sort of comments and interaction because they can learn a lot from those comments as well. So we have a lot of educated readers that point out flaws in articles, that point out gaps or things that they've seen. And that makes it, uh, a very interactive experience for, uh, readers and M subscribers as well.

Phil: A vibrant experience.

James: Yes.

Phil: James Gruber, thank you very much for joining me today.

James: Thank you.

James: Thanks for listening. Listening to Shares for Beginners. You can find more@sharesforbeginners.com if you enjoy listening, please take a moment to rate or review in your podcast player or tell a friend who might want to learn more about investing for their future.

00:39:04

Any advice in this blog post is general financial advice only and does not take into account your objectives, financial situation or needs. Because of that, you should consider if the advice is appropriate to you and your needs before acting on the information. If you do choose to buy a financial product read the PDS and TMD and obtain appropriate financial advice tailored to your needs. Finpods Pty Ltd & Philip Muscatello are authorised representatives of MoneySherpa Pty Ltd which holds financial services licence 451289. Here's a link to our Financial Services Guide.