Rob Gilmour is a wealth manager helping private clients to understand their money choices. He’s a self-confessed financial nerd and he offers a range of skills from accounting and law to financial planning.
We discuss:
- How the actual mechanics of share trading haven’t really changed for many decades even though paper share certificates and graph paper aren't used any more.
- Own a share and you own a part of a company.
- How easy it can be to get caught up in hype around a share.
- The classic text about share trading - Reminisces of a Stock Operator by Edwin Lefèvre a thinly disguised biography of Jesse Livermore who was one of the greatest share traders ever.
- Managed Funds, ETFs and LICs what do they mean?
Rob's website is https://wealthsimplicity.com/ if you'd like to have a chat. Don't forget to mention this podcast if you get in touch.
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TRANSCRIPT
Rob Gilmour is a wealth manager helping private clients to understand their
money choices. He's a self confessed financial nerd and he offers a range of
skills that we began by discussing.
Phil Muscatello: You've got Bachelor's of Commerce and Law, a Master of Applied
Finance, and graduate diplomas in legal practise and financial planning. Did
you have any time for fun?
Rob Gilmour: There's been plenty of time for fun over the years, Phil, I can
assure you. Uh, yeah, I mean I studied economics because I really enjoyed that
field of study and law seemed to be a practical choice for business. I didn't
start university knowing exactly what I wanted to do, but just knew that those
particular fields would be useful, uh, from a business perspective and
professional perspective. Um, and then things have just kind of added to the
list as I've gone through various iterations of my, my career. So.
Phil Muscatello: Your dad introduced you to investing, didn't he?
Rob Gilmour: Yes, he did. Back in the days when you know you own shares and
your evidence of owning a share was a piece of paper, there was no such thing
as an online broker. Uh, it was just a collection of pieces of paper in the
drawer that if you wanted to sell something, you posted it to the broker and
they executed the trade and a new piece of paper would come back to you. So
he's an investor himself and a businessman and so I think he liked to impart
knowledge and I suppose you look back on that these days and you think, oh, uh,
well, that was really, really special to be able to share those things with
dad, but he's always done it himself.
Phil Muscatello: So what was the first, uh, shares that you bought?
Rob Gilmour: Oh, uh, look, I can remember Western Mining, which was eventually
taken over by BHP. I can remember BTR, Nilex 2 Holdings and a number of other
holdings that just simply don't exist anymore.
Phil Muscatello: So did he buy them on your behalf?
Rob Gilmour: Yeah, that's right.
Phil Muscatello: And then explain the whole process?
Rob Gilmour: Yeah.
Phil Muscatello: How did he, how did he explain that to you?
Rob Gilmour: Uh, look, it was just. I understood it as ownership of part of a
company and, and I thought, well, you know, that's, that's great. You can own
part of a company and it's represented by this piece of paper. And uh, I never
had experience dealing with, with brokers or, or trading shares or putting a
portfolio. It was really a case of just imparting that knowledge as well. This
is what you, you can do.
Phil Muscatello: And the mechanics of it.
Rob Gilmour: Yeah, and the mechanics of it obviously today are very different,
but really the.
Phil Muscatello: The mechanics of share investing, even though it's all
computerised and done on electronic exchanges, the whole philosophy and the uh,
the mechanics behind share trading hasn't changed really, has it?
Rob Gilmour: You know, it actually hasn't and it's, and it's interesting. Uh,
I'd say it probably hasn't changed in 100 years. There's a lot of things to, to
trading. Uh, there's a big psychological aspect to it and there's also a market
aspect to it. So from a psychological perspective, you're battling yourself and
trying to overcome certain cognitive biases. Uh, from a market perspective.
Well, the market's always changing. And it's interesting, I read a book some
time ago. It was actually written in the 1930s, thereabouts. And, um, a lot of
the things that come out of that book, uh, are still very applicable today. And
it's the storey of someone who used to trade shares in New York.
Phil Muscatello: Which book's that?
Rob Gilmour: Um, it's called Reminiscences of a Stock Operator.
Phil Muscatello: Is that Jesse Livermore?
Rob Gilmour: Uh, that does ring a bell.
Phil Muscatello: Yeah. I think that's a Jesse Livermore book. Yeah. Yeah. Uh,
I've seen there's a lot of sayings online where if you go and Google Jesse
Livermore, you can find out a lot of his, um, uh, aphorisms about share
trading.
Rob Gilmour: Yeah. And you know, it's interesting, it's a storey of someone who
tried and failed many times failed for a lot of the reasons that people fail
today, um, but also appreciated that the market that they were in, you know,
and how they were doing things, the odds were actually stacked up against,
against him. And fast forward today, psychologically, the same issues still
apply for anyone going down that path. And the market, well, it's, it's highly
computerised and it's all driven by algorithms now. So in a lot of senses, the
market challenges are still very much there.
Phil Muscatello: Okay, let's just step back a bit. Um, you're talking about the
psychology. What's the cognitive biases and the psychology that you would
recommend people understand if they are going to start buying shares.
Rob Gilmour: It's very easy to get caught up in hype and momentum, to follow
the headlines in the newspaper. And I think the same rules apply to whether
you're trading or investing. You've, you really need to step back from the
noise that's going on around you and try and approach things with a, uh, with
it, with a clear head. And you know, when we, when you see the light, the, the
latest fad or the stock that's, that's going up, the temptation, you know, you
watch and watch and watch. You continue to see it go. And the same would apply
with the market. The temptation is, oh, uh, well, it's just keeps going up. I'm
going to get in. Well, normally, you know, that type at that time where things
are the most euphoric is the worst time to go in because ultimately that rolls
over and it goes the other way and people watch it go down and then it becomes
the most pessimistic and you think, oh, gosh, I've just got to get out. And
it's the worst time to get out. And you know, we saw a lot of people get caught
up with that during the gfc. Whereas if you'd hung on through the bad times,
then you come out the other side and you're in positive territory. But a lot of
people sold at the worst time and crystallised their losses and permanently
damaged their retirement savings. So it takes a long time to recover from
things like that. And, um, it's an emotional response. Um, and when there's
money involved, it's always hard to separate the emotion from.
Phil Muscatello: It is the money really makes a difference to how you feel, you
know, isn't it? There's anger and there's. What was I reading this morning?
Someone was saying that they lose money and then they think that the market
owes them the money back.
Rob Gilmour: That's right.
Phil Muscatello: Which is not the market.
Rob Gilmour: Market doesn't, uh, work like that at all.
Phil Muscatello: That's so impersonal, isn't it? I just wanted to go back a
little bit in your um, work history because you worked in London?
Rob Gilmour: Mhm. For a while, yeah. Uh, when I got to London things weren't
great economically. My first job over there was actually working in a pub
because I arrived and started looking for work the day before 9 11. And um, the
City of London's very responsive to what goes on in the rest of the world and
the financial markets. And things were pretty tough at that stage. But I ended
up taking up work in an institutional fund manager there, mainly in their
finance, uh, area. But it was great sort of in the coalface, um, working in the
City of London. And in my later time in London it was through the gfc. So we
certainly saw a lot of things going on. Meetings taking place following the
collapse of Lehman Brothers. What does this mean for the organisation from a
risk management perspective and really fascinating times where people hadn't
seen what was unfolding in front of their eyes and um, yeah, I mean it's always
um, great to live through those and um, having experienced it.
Phil Muscatello: What's an institutional fund manager?
Rob Gilmour: Yeah, basically it's um, a fund manager that manages money on
behalf of other institutions. So take your super fund, uh, here in Australia.
Could be Australian super. They employ other organisations to manage certain
parts of the money. And the business that I worked for was probably one of the
largest. It managed a lot of pension money for Norwich Union Insurance as it
was known at the time.
Phil Muscatello: That's in the uk.
Rob Gilmour: In the uk, yeah. So I used to tell people it was the biggest fund
manager you've never heard of because it actually owned about 3% of the FTSE
index, um, which is quite large.
Phil Muscatello: What's the FTSE Index?
Rob Gilmour: That's the basic UK uh, index. The um, top stocks in the UK. So
it's a bit like the ASX 200 here, but obviously a lot bigger.
Phil Muscatello: What's an index?
Rob Gilmour: So look, taking, uh, probably the thing that most people will
Understand is the ASX 200 and uh, that's an index of the top 200 companies on
the Australian stock market. And so the index is basically a ranking of those
companies from the highest value company through the first company through to
the 200th. And so that index is then aggregated and a number is created. So you
might see the ASX 200 is at 5,500 points. Um, really that's just an aggregate
of the performance of those 200 companies. That's what most people see on the
news night to night. The ASX was up 1% or down 1%. Um, it's really the
performance of those 200 companies and index exist all around the world in
terms of investing. They have an index or many indexes in the US market, the
S&P 500 is a well known one, um, the top 500 companies in the US. The
NASDAQ is another one which is the tech companies in the US and you also have
indexes say in the UK which is the first FTSE 100. So really it's just a way of
aggregating uh, the biggest companies, uh, uh, in the market and giving you
information around the performance. And there can be indexes in other asset
classes as well, like bonds and all that, but it's really just a way of
creating some sort of benchmark around um, explaining the performance of a
market.
Phil Muscatello: I reckon the sexiest sounding um, index is the Russell.
Rob Gilmour: Russell 2000.
Phil Muscatello: Russell 2000.
Rob Gilmour: It's a tight 2000 companies in the US and you can imagine um, the
huge breadth of something like uh, the Russell 2000 index.
Phil Muscatello: Um, and they're like small companies, aren't they?
Rob Gilmour: Smaller companies in the U.S. um, uh, but it's a much bigger
market in the US and the entire ASX 200 is probably about 2000 companies. So
the entire Australian market is about 2000.
Phil Muscatello: 2000 companies. Yeah. I'm a prospective client and I've come
to you and I said, okay, I want to manage my wealth, but I just want to uh,
invest directly in the share market.
Rob Gilmour: Yeah, well there's, there's obviously shares, um, which is
important, but there's also property. There's also uh, types of investments
that are a little bit more defensive. Like, like bonds, um, and you also have
other alternatives. Hang, um, on.
Phil Muscatello: We'll just stop there. Okay. Defensive. And bonds. What's
defensive mean?
Rob Gilmour: So defensive an asset which is more geared towards capital
stability and not losing money. Yeah. So one would say that, you know, bonds
tend to be more stable and produce income. Cash is defensive because, well,
there's no risk to holding cash in the bank provided the bank doesn't go under.
I guess you could always keep it under your mattress. So cash and bonds tend to
be the, you know, the defensive type of assets that go into a portfolio.
Phil Muscatello: Okay. So, um, they're defensive assets and they should be part
of any portfolio that you're recommending. But um, there needs to be other
aspects to that. Management of the finances look.
Rob Gilmour: Absolutely. And people's circumstances are different. You know,
often, you know, if someone's young and 20 years to retirement, then
absolutely. Having a bias towards growth assets like shares and property make
sense because they're the type of investments that will give you the best
return over that long period of time. The defensive assets like cash. Well, we
know that cash will ultimately lose value over time because of inflation, but
it's the safest. But so it really depends on your time horizon and it depends
on your appetite for risk. Now if you invest in the share market, you know, if
you take a 20 year period, you should be expecting something in the order of,
you know, 8 to 10% per annum. Now there will be years where it's higher than
that and years that are lower than that, but that's the long term. You'll get
the best returns in shares and property and you'll get the worst returns in
cash. But there will be periods of time, uh, where the share market could
easily go down 40%, you know, like it did in the GFC. You've just got to
weather that, um, and know that, you know, play the, play the long game.
Phil Muscatello: So do you do any investing directly in shares for your
clients?
Rob Gilmour: Look, I do and I guess there's a number of different ways to
invest in shares. You can access shares through a managed fund and that's where
you're uh, effectively outsourcing the stock picking and employing the
expertise of a manager. And that can be really useful to say, access shares overseas.
So people talk to me about investing in Asia. Well, I really wouldn't know
where to start in the Chinese stock market, but I know managers that are pretty
good at it. So there's managed funds and using those is a great way to get
access to a specific type of strategy or segment of the global share market.
Phil Muscatello: Can you explain to me in a managed fund, just in a bit
more.
Phil: Detail about how it works?
Rob Gilmour: Well, managed fund, you give your money to a fund manager. Uh, the
fund manager, uh, ultimately, uh, invests that money in a portfolio of shares
and there is a fee that that fund manager charges as a result of that. So
hopefully you choose a manager that is going to perform well for you over the
long term. And that's known as active management. So they're actively managing
a portfolio to ultimately deliver, uh, excess returns or beat their benchmark.
But not all of them do.
Phil Muscatello: And how do you, how do you buy a managed fund?
Rob Gilmour: Uh, you can go to a fund manager directly. Um, you can buy managed
funds these days on the ASX through um, what's called, uh, mfunds M, which is a
very easy way to access managed funds. A lot of managed funds these days are
also traded on the ASX. In the form of um, exchange traded managed funds.
Phil Muscatello: ETFs. Yeah, they're like an ETF is similar to um, a managed
fund, uh, well.
Rob Gilmour: Typically an ETF and how they're commonly known as is really like
an index type strategy, a very passive form of investing. And really ETFs grew
from the perspective that, well a lot of fund managers actually don't beat the
benchmark. And when I say benchmark, I'm talking about say the ASX 200 for
example. And mathematically you can't have all fund managers beating the
benchmark, particularly when they're charging a fee. So they've not only got to
beat the benchmark, they've got to beat the benchmark plus their fee. And
mathematically it's impossible for all of them to beat that benchmark. And
that's really where a chap by the name of Jack Bogle pioneered index investing,
saying well there's all these fund managers out there charging a fee, uh, most
of them don't beat the benchmark. Well why don't we just invest in the
benchmark? That's really where index investing came from and how a lot of
exchange traded funds were created to just buy the index. And that's known as
passive investing. So there's no one actually um, choosing the stocks, they're
just buying the stocks in the benchmark. And uh, a mathematical algorithm is
adjusting that every day. And interestingly most uh, activity in share markets
these days is all done by algorithms. And it's algorithms off the back of
exchange traded funds just mathematically investing money. Algorithms that are
being put together by fund managers to try and come up with a mathematical way
of beating the market.
Phil Muscatello: The ASX 200 is not set in stone. It's changing all the time.
Some companies are coming in, some companies are going out. And the, I don't
want to use the word weighting, but the proportion that each company occupies
of that ASX, uh, 200 changes. So is that what an ETF is doing is managing
that?
Rob Gilmour: Well that's exactly right. It's structured based on the size of
each company. So you know, if your biggest company in the index is cba,
Commonwealth bank, then your exchange traded fund is that is going to be the
biggest holding in it. And it's interesting, you know, the bigger that these
companies get, bigger the proportion of the index that they occupy and the
exchange traded funds have to buy more of it. We've seen this extreme example
in the United States where it's the tech companies these days, um, Facebook,
Amazon, Netflix, Google Microsoft, known as the Fang stocks have become so big
and take a big proportion of the index, it creates a concentration, um, so the
bigger they get more capital goes in, which is kind of fundamentally flawed.
You shouldn't be putting more capital into something just because it's bigger.
So there are other ways of structuring an index and there are other exchange
traded funds that look for a little bit more of a creative way of allocating
that. But broadly speaking an index will be structured based on the biggest
company to the smallest company in that and then it's rebalanced over certain periods
of time to reflect the changes in the uh, in the size of the underlying
companies.
Phil Muscatello: So anyway, I'm the client that's come to see you and I say no,
no, I'm not interested in all that. All sounds too complicated. I want to buy
BHP and cba. What do you say to me?
Rob Gilmour: Well I'd say um, that's fine, you can do that. And there's many
different ways you can do that through um, discount brokers where you can own
the shares directly and you don't need to pay a lot of money in terms of
brokerage and you can access that direct directly. Um, I'd say do you really
want to pin all of your savings on the performance of two companies? BHP is a
mining company, but they're.
Phil Muscatello: Great companies and they're huge. They're huge parts of the
ASX, uh, 200. What's wrong with investing on those?
Rob Gilmour: Nothing's wrong with investing on those. And hold those companies
through the long term, particularly the Commonwealth bank, you'll do fine. But
you are going to investing in just two stocks. You are going to see lots of
swings in fortunes, uh, around the performance of those two stocks and you're
going to open up your portfolio to really just the risks around two companies.
So my first challenge on that would be um, you need to broaden your horizons
and look at investing in other companies so you spread your risk. And that term
is known as diversification. And there's a number of ways you can do that. You
can say okay, well rather than buying just BHP and CBA, I'm going to select at least
10 other stocks to be able to invest in. Um, so it's not just beholden to the
performance of two companies. I've sped my risk around 10 companies. That will
depend on the size of your portfolio. You know, if you don't have a lot of
money to um, put towards it, I would say start out with something that
naturally gives you a broad exposure like an exchange traded fund to give you
that 200 company exposure or something like a listed investment company that
might do the same thing in a very low cost way and give you a broad exposure.
Or maybe a managed fund.
Phil Muscatello: Uh, sorry, can I just stop there? Because I still can't work
out what the difference is between a listed investment company known as LICs
and an ETF which is an exchange traded fund. What are the difference between
the two?
Rob Gilmour: Well, look, I really like listed investment companies and a listed
investment company. It's like any company listed on the asx, uh, except it's
not an operating business like Commonwealth bank, it's a company that invests.
And there are many, many different listed investment companies on the asx. Some
of those listed investment companies just invest in a portfolio of stocks that
might typically be around the ASX top 100 or 200. And they are a different way
of accessing a broad exposure to shares. Uh, the difference between a listed
investment company and an exchange traded fund is a listed investment company
has its portfolio, uh, it's managed by someone and they can be managed in a
very low cost way and sometimes cheaper than an exchange traded fund. Um, but
it's a set portfolio of stocks, it's not trying to mirror an index. There's
someone ultimately behind it. Stock picking but there's a number of them out
there, like I say, that have been around for many decades that just buy and
hold shares over the long term and have proven to be a very effective way of
getting a broad exposure to the market and getting a nice dividend off the back
of that. And a strategy that invests in a listed investment company or even an
exchange traded fund and reinvests those dividends over the long term is a
great way to get broad exposure to the market without having to worry about the
stock picking and just let things grow and compound over time. Can be a great
core to starting out and then around the edges of it, uh, potentially you know,
picking some additional stocks that you might like to add to the mix.
Phil Muscatello: Just coming back to BHP and cba, they've got different risks,
haven't they? What are the risks with a bhp?
Rob Gilmour: You've got to look at what a company does. Bhp, it's a mining
company, so it digs things out of the ground and sells them overseas to other
companies and countries that want to buy it. Um, BHP mines iron ore. Um, it has
a lot of assets in oil and gas, copper. So BHP's performance is really dictated
by the price of commodities and those things.
Phil Muscatello: Like copper and iron ore Are commodities, are they?
Rob Gilmour: Yeah, they're all commodities. And commodities trade on markets
like shares and commodities. The price of them is dictated by demand and
supply. So when the world's doing okay, there's more demand for uh,
commodities, uh, so the price goes up. But similarly the world goes through
periods where it's not so okay and the price of commodities go down. And
commodity prices are very cyclical so it's up and down. And historically mining
companies like BHP have not made the best decisions at particular points in the
commodity cycle and shareholder value has ah, often evaporated. Um, so you've
got to understand what kind of business are you investing in. And for bhp
you're investing in, in commodities. And so you're going to see a, ah, lot more
up and downs with that type of investment. Commonwealth bank, well it's a bank
now banking, we know Commonwealth bank, it's the biggest bank in Australia. Um,
it has very strong market powers along with the other big four banks. It's like
an oligopoly. And we know that, you know, if the cost of money for banks goes
up through interest rates, we know what they do. They pass it on to their
customers, don't they? So banks have very strong um, pricing power. But banks
also go through periods uh, where it can be more challenging. But typically
investing in a bank like Commonwealth bank, you're going to see probably more
stability in terms of your cash flow and predictability of the business. But
typically banks are very good at controlling their costs and they've got a lot
of power in the markets. So you're going to tend to see a little bit more
stability, um, of income, um, from a bank, um, than you would say a mining
business like um, bhp.
Phil Muscatello: Why should people come to you to manage their money? Well
often people getting to the big questions here.
Rob Gilmour: Well, often, um, there's a number of um, references.
Phil Muscatello: You're a financial planner, wealth manager. Is that the best
way to describe what you do?
Rob Gilmour: Yeah, I mean my background's accounting and really sort of largely
what what I do, it's around tax and investments. We firstly look at the best
way to manage money. Um, we look at the structures and often the decisions
around tax and saving. Tax can be just as important as the decisions around
investing the money. So we look at the big picture first and understand what
people want to achieve. And often people will come to see me because they're at
a stage where they're worried about their retirement or they're at a stage
where they've got so much on that they're not paying attention to, you know,
their own investments and that longer term plan or there might be a life
changing event with an inheritance or you know, um, where you know, getting
some assistance around money is important because they want to make the long
term decisions. So putting those pieces together from the big picture, um, is
important. And understanding objectives rather than sort of jumping to the
conclusion, this is what we invest in. But once we get that understood long
term objectives, the type of, uh, structures that are appropriate, then we can
look at, you know, well, how do we invest the money and how do we do that over
a long, long period of time. So, and often those investment decisions are areas
where, you know, most people don't understand. Most people have their own
excellence in terms of what they do day to day. They don't have the time to
become experts in the share market or property market and they want help with
those decisions. And part of what I do is educate it and taking people through
the process so they understand where their money's invested, what we're doing,
reasons why we're doing it, um, and they're making the decisions, but they're
getting assistance with those decisions along the way.
Phil Muscatello: You just mentioned before about um, political influences on markets,
if that's an area that you're really interested in, um, can you tell me a bit
more about that?
Rob Gilmour: Look, I wouldn't say that you should be basing investment
decisions on political events. They certainly have an impact on markets. There
is always going to be something to worry about in terms of the political
landscape and the economic landscape. There's never a time where there's
nothing to worry about. And what you do find is markets will muddle through.
But having an understanding and awareness of what's going on I think is really
important.
Phil Muscatello: It can be comforting as well, I guess, knowing that these
things will always be there but always changing.
Rob Gilmour: Well, you never know. Um, and I think that's really the
uncertainty that markets play on. Markets try and guess, markets try and look
one year, two years in advance. And markets tend to move quickly. But you need
to have an understanding in terms of, okay, well, what are the big four forces
that are, that are sort of behind some of these shifts and uh, the shift in
terms of, okay, a change in economic growth, maybe things start to move more
defensively and a shift towards higher interest rates and how that's going to
affect asset prices. There's a lot of things going on, um, in the big picture
that it's important to have an understanding of. Um, but there's also a lot
going on at the very small micro level in terms of an individual company
understanding all companies, the environment they operate in. But sometimes they
can be uh, completely separate with what's going on in the world. A company can
have a niche, it can be making money in a growing market and it can do very
well. So there's really the big picture, but there's also understanding sort of
where you're investing in the specifics of a type of investment, be it an
individual company or a type of asset.
Phil Muscatello: Now it's interesting you say that because there are some
companies that do make money no matter what the economic times are. Um, you
mentioned defensive stocks. That's usually consumer staples, is that
correct?
Rob Gilmour: Yeah, yeah. Consumer staples being Woolworths and um, recently uh,
demerged coal. So you can now invest in coals.
Phil Muscatello: Directly because people still have to eat.
Rob Gilmour: People still have to eat, yeah. People um, need food on their
table. So that tends to be very defensive. And healthcare is another one, um,
which tends to be very defensive because of the need for ongoing healthcare and
ageing population. So they're two sectors that are very good examples of
defensive within the stock market. Doesn't mean that they're immune from the
big mechanisms of market movements. But typically when you start to see
forecasts or fears of growth slowing down, markets tend to shift from those
stocks that perform well, um, when the economy is doing well, to stocks which
tend to sort of weather things out. So it's kind of a rotation that goes on
within markets as well as markets going up and down generally. So there's a lot
of dynamics going on. But um, defensive stocks, Coles and Woollies, uh, are ah,
certainly considered up there as well.
Phil Muscatello: Talking about the valuation of the stock. And that's based on
the earnings. That's the price earnings ratio really, isn't it? It's one of the
most fundamental ways of valuing a share price. Uh, can you explain that a
little bit to me please?
Rob Gilmour: Price earnings ratio is a company will earn a certain amount each
year and its value can be extrapolated in terms of a multiple of its earnings.
So um, if you look at a bank possibly on about 10 or 11 times earnings, um, so
essentially you're paying 10 years of, of uh, earnings in the price. Um, so
it'll pay itself off in, in 10 years. That's a price earnings multiple.
Phil Muscatello: So if you buy a stock for.
Rob Gilmour: $50 now yeah, that examples, um, let's say it's a 50 million
dollar company, uh, you're paying a multiple of 10, then it's earning $5
million a year. And so it's going to take 10 years to pay back the amount that
you pay you bought that stock for now, hopefully that stock's going to grow its
earnings over time. And you also need to take into account the time value of
money. Um, and so discounting that back. But earnings multiples is a way of
comparing stocks. And you can compare similar stocks in an industry one might
be trading on a higher multiple could be more expensive than.
Phil Muscatello: So they might be on an 18.
Rob Gilmour: Rather than be on an 18 as opposed to a competitor which is on a
15 times multiple. Then you're going to think well, why is that on a higher
multiple more expensive than the competitor? Is it on a higher multiple because
it's in a stronger position? Is it just expensive? You can also compare
multiples of markets and often you see those comparisons the ASX long term
average price earnings multiples about 14 times. So you go through periods
where the market might be trading on 16 times. So it's a little bit more
expensive than the long run average.
Phil Muscatello: So the higher the number, the more expensive.
Rob Gilmour: Yeah, that's right. Um, so you're looking for a lower.
Phil Muscatello: P E ratio than a higher one.
Rob Gilmour: It's comparing averages. So you can kind of look at long term
averages and say, well, this market's trading at a higher multiple than its
historical average. And typically what happens over history is things revert to
the mean. So you kind of know, well, if it's on 16 times and the market trades
at 14 times, one of two things have got to happen. The earnings of the market
are got to increase to justify the price or the price has got to come down to
match the earnings.
Phil Muscatello: What's the time value of money? What do you mean by time
value?
Rob Gilmour: So time value of money is really put simply, um, a dollar today is
going to be worth more than getting a dollar in 20 years time.
Phil Muscatello: Why is that?
Rob Gilmour: And that's just through the natural erosion of value that occurs
from inflation. So um, a dollar will buy you more today in terms of goods and
services than a dollar will buy you in 20 years time simply because, uh,
inflation will mean prices are higher. So that's where you discount the value
of cash flows in the future to come up with a value of what that is today. And
that's a big way of trying to value companies and putting a value on a share
price.
Phil Muscatello: Okay, what's earnings per share then?
Rob Gilmour: So earnings per share takes the, and.
Phil Muscatello: This is normally called eps, isn't it?
Rob Gilmour: Eps? So um, generally earnings per share will break down the
Earnings of a company on a per share basis. So you will get an overall profit
divided by the number of shares that are, that are issued on the market. So
that'll give you an earnings per share and then you can have a dividend per
share. So you really want to be looking for companies that are not paying out
more than their earnings per share, um, because that's not sustainable.
Phil Muscatello: So the dividends per share, uh, should always be lower than
the earnings per share.
Rob Gilmour: It should always be lower. And also I'd say it should be lower
from the perspective that you want to be in a company that also has
opportunities to further reinvest those profits in the future, um, rather than
just pay it all out to, to investors. Now there are certainly instances where
you do want a high payout ratio, but also you might find companies where, uh,
they're not paying a high dividend because they're reinvesting the profits to
grow for the future. So you've got earnings per share, dividend per share, and
you can get anything in between. In terms of what a company might be doing with
their profits, whether they're paying it to investors in terms of income or
reinvesting it. I would say income is pretty important from an investing
perspective. Companies that do pay a good, um, stable, uh, income tend to
perform well over a long period of time. Companies that have a strong balance
sheet that are generating positive cash flow. So you can glean certain
information from an earnings per share, but it's not until you actually get
into the balance sheet of a company to understand, well, how much debt does
this company have? And if debt markets tighten up, is that going to cause a
problem? Uh, is this kind of company which.
Phil Muscatello: Means they're going to be paying higher.
Rob Gilmour: Interest rates, paying higher interest rates, or may not be able
to refinance? And is this company generating enough cash to pay for its debt,
or is this company actually in negative cash flow? So really sort of scratching
beneath the detail of an earnings per share or dividend per share is what's
needed to sort of break things down to understand the investability of
something.
Phil Muscatello: Okay, here's the challenge for you. Now I've always wanted to
ask an accountant, this is what's ebitda?
Rob Gilmour: Uh, earnings before interest tax, uh, depreciation and
amortisation.
Phil Muscatello: Okay, break it down for us.
Rob Gilmour: Look, EBITDA is probably a better way of looking at an earnings of
a company. When you get, um, tax, um, accounting involved like depreciation and
amortisation, you can you get a little bit more financial engineering going on
and obviously structuring things, ah, or profit line from a tax perspective is
very different from just looking at the raw earnings. So EBITDA is a good
number to be looking at just at the earnings of a company.
Phil Muscatello: So it's the raw numbers. We're just making this amount of
money by digging something out of the ground or selling something to someone
else.
Rob Gilmour: That's right. So you know, a mining company for example, you know,
it might, its earnings number might be X, but it's purchased all this mining
equipment and it's able to claim all this depreciation off the cost of that
mining equipment which then gets offset against the profit number. And
obviously that tax accounting can vary significantly between businesses. So
just comparing the earnings, um, the EBITDA between companies is a much better
number to use.
Phil Muscatello: And also in Australia because we've got a lot of mining
companies here so we, we need to be aware of what they, they do and how they're
valued. Aisc all in sustaining costs.
Rob Gilmour: Ah, have you heard of that one? That's, that's a, that's a mining.
Again a mining.
Phil Muscatello: And that's specifically for mining companies.
Rob Gilmour: Yeah, that's right. Yeah. I mean it's, it's, it's taking into
account all the costs of production for say digging an ounce of gold out of
the, out of the ground. So uh, again that's probably looking at all the costs
and comparing that gives you closer uh, apples versus apples.
Phil Muscatello: This is quite an interesting thing about valuing companies is
that there's a lot of rubbery figures in these valuations and.
Rob Gilmour: Often you don't find out until later on. There's plenty of
examples where even guidance uh, that's been issued by a company turns out to
be very different in a short period of time afterwards. And people look at,
well how did you not know that you. Yeah, the market's not perfect and the
reporting of companies uh, is certainly not perfect either in that regard.
Phil Muscatello: Do you have any interest in technical analysis?
Rob Gilmour: Look, um, it's an important um, part of the picture of investing.
It's probably more important for traders.
Phil Muscatello: First of all can you explain to us what technical analysis is
really?
Rob Gilmour: You can break it down to two types of investing. Um, you have the
fundamental analysis which is looking at the um, business fundamentals of what
you're investing in. So um, what industry is it invested in? What's its
competitive position against competitors? What's its balance sheet looks like,
what does its cash flow look like? What dividend is it paying? All these
factors specific to a, ah, company and really picking apart the aspects of the
company and coming up with a valuation is fundamental analysis. Technical
analysis is really looking at the charts and it's taking the fundamentals
aside, you basically understanding or researching the price action of that
particular share.
Phil Muscatello: So you're looking at a, you're looking at a chart which shows
the price action over a period of time and what's happened with the price.
Rob Gilmour: Yeah look, that's right. You go back a period of time, it's always
historical and you understand how that share price has moved. There's many m
schools of thought around technical analysis that can extrapolate movements in
the share price and try and predict where the share price is going and that can
get really complex. There's lots of uh, indicators out there, moving averages,
oscillators, um, it's all mathematical patterns um, that you can overlay on a
chart to try and give you signals when to buy and sell. And that's really
getting down, it can get down to a very small um, time period where you have
ah, active share traders that are trading in and out of positions purely on
the, on the price action. They might even not know anything about the company
that they're investing in. So that's share trading. It's based on technical
analysis and it's really trying to predict future prices based on the
historical prices and mathematics of the shares and it's an understanding of
markets and how markets move and some strategies perform m well in certain
markets, others don't. So um, it's a really interesting field.
Phil Muscatello: What's the one piece of advice you would give? Um a first time
share investor I.
Rob Gilmour: Think understand what you're trying to do and what you're trying
to achieve. Um, you really need to know yourself um, before you just jump in to
the share market.
Phil Muscatello: Know yourself.
Rob Gilmour: Know yourself. Absolutely. So know yourself. Are you trying to
trade and do things short term and, and really be in and out of the market and
make a quick profit or are you an investor? Um, now I would say it's very, very
hard to be a trader. Um and you know the statistics are that you know 90% of
people fail. So if you're going to go down that path make sure you start
practising without using real money. Really understand what you're trying to
do, perfect your craft but it's very, very difficult on the investing side of
the ledger. Uh, you tend to have a little bit more of a long term perspective.
Again it's important to understand what you're doing, um, research the
different ways to access the share market Think, uh, about using exchange
traded funds or listed investment companies or managed funds to get a base.
Particularly if you're investing your retirement money. You don't want to be
trying to move in and out of the market and try and pick stocks from the get go
because ultimately it can be very random and the market can be very cruel. So
my advice is understand who you are, what you're trying to achieve, um, and
then go about sort of building, uh, your own strategy step by step, um, rather
than going boots and all or trying to follow someone else or the latest
newsletter because there's a lot of distractions out there. Um, and also if
you're unsure, get some advice.
Phil Muscatello: Okay. And if they want advice from you, how can they get in
touch with you?
Rob Gilmour: So my business is Wealthsimplicity. Um, you can get in touch with
me, Rob Gilmour@wealthsimplicity.com. uh, my website is wealthsimplicity,
uh.com. so you can read a little bit more about me there. And um, if anyone
wants to get in touch, I'd be more than happy to have a chat.
Phil Muscatello: Thanks very much for your time.
Rob Gilmour: My pleasure, Phil.
Phil: Rob's website again is wealthsimplicity.com and don't forget to mention
beginners when you say hi. Shares for Beginners is for information and
educational purposes only. It isn't financial advice and you shouldn't buy or
sell any shares based on what you've heard here. Any opinion or commentary is
the view of the speaker only, not Shares for Beginners doesn't replace
professional advice regarding your personal financial needs, circumstances or
current situation.
Phil Muscatello: And I'd also like to say a big thank you to Christopher Sulos
of Garlic Breath Studios for all the fantastic help with the music production.
Shares for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any shares based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Shares for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation.