ANDREW COLEMAN | from Team Invest Private

Why do 80% of fund managers fail to beat the average? And how can you outperform a benchmark by simply filtering out the "dogs" of the market. Note to viewers, we actually love furry dogs. Discover how to improve investment returns with Andrew Coleman from Team Invest Private. We dive into Andrew's six core principles of investing, from the power of compounding and how to identify "dogs" and "unicorns." Great insights for investors looking to beat passive ETFs and grow wealth strategically.

Team Invest Private operates in three key areas: education and advice for high-net-worth individuals and organizations, funds management, and their own balance sheet investments. They manage about $1.6 billion under advice, $270 million in funds, and $130 million on their own balance sheet, with a track record of outperformance over 24 years in education and 13 years in direct investing.

What are the six key principles of investing? First up is the power of compounding—small return differences over time lead to massive dollar gains. Second, he introduced the concept of “dogs versus unicorns,” a framework for avoiding bad investments rather than chasing mythical winners. Third, stability wins: consistent, replicable gains trump erratic bets. Fourth is the margin of safety—buying assets at a price that ensures a buffer against losses. Fifth, removing noise means focusing on the fundamentals of an asset, not the hype. And sixth, the wisdom of the crowd, a nod to Sir Francis Galton’s idea that collective, independent insights from informed people often yield accurate predictions.

We also discussed why so many active managers underperform. Andrew highlighted two culprits: human nature and flawed reporting standards. Humans struggle to go against the crowd, and fund managers, needing to attract new clients, often play it safe to avoid looking foolish. This herd mentality leads them to “crowd around the middle,” chasing the same stocks at the same prices, where fees eat away any edge. Add to that the industry’s obsession with equating volatility with risk—a misunderstanding that punishes managers for outperforming as much as for underperforming—and you get a system that discourages bold, thoughtful bets.

Instead of trying to pick winners (which even the efficient markets hypothesis says is nearly impossible), he focuses on avoiding losers. Using 27 quantitative metrics, Team Invest identifies companies at risk of going bankrupt—the ultimate “dogs” that wipe out capital. By excluding these from a portfolio, they’ve found that the remaining investments can double the market’s return.

At Team Invest, members—over 600 strong—meet monthly to share expertise, from Sydney to Perth, and online for U.S. and U.K. markets. I saw parallels with the Australian Shareholders’ Association (ASA), where engaged investors share insights at conferences and local meetings. Andrew noted that ASA members, like Team Invest’s community, are deeply thoughtful, asking nuanced questions about long-term strategies rather than chasing daily market noise.

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

Andrew Coleman: One of the challenges that we often have as investors, and I know not only as a fund manager, but my personal capacity this happens, is you think something's wrong, you know the market's got X wrong, so it's a buying opportunity or a selling opportunity and then you have that moment of doubt, usually at around 9 o'clock at night that sits in your mind that says, what am I missing that everyone else is seeing? You know, why am I on the other side of this trade? And of course from that point of view, getting together with other intelligent people who doing deep thought about their investing is the best antidote to getting caught up in that sort of analysis paralysis.

Phil: G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. What are the most compelling high conviction ideas in today's market? What are the themes and strategies driving long term portfolio growth? Today I'm joined by Andrew Coleman from Team Invest Private. G'day, Andrew.

Andrew Coleman: Hi Phil, thanks for having me.

Phil: Andrew's a co founder of Team Invest Private and responsible for sourcing, structuring and overseeing investments in general management. Prior to tip, Andrew was an investment banker for a global bulge bracket firm and he holds a Bachelor of Economics from the University of Sydney. What's a global bulge bracket firm?

Andrew Coleman: That's a good question. It's the old school way we used in investment banking to define or describe ourselves as the largest one. So global bulge bracket confirm would be someone like a Goldman Sachs, a JP Morgan or where I used to work, which was Credit Suisse, which of course is now part of ubs.

Phil: Fantastic. So there you go listeners. There's something you can drop into conversations to command respect. Oh yeah, I work for a global bulge bracket firm. So let's have a chat about Team Invest Private. And just to set the table for this conversation, I first came across Team Invest earlier this year. We had some house sitters come and one of the house sitters, when we met and then understood what I was doing, he explained that he was a member of Team Invest Private. And I was actually quite shocked because I said, well, how much does it cost? Because I'm used to newsletters being, you know, thousand bucks a year, something like that. And he mentioned $11,000 a year. And anyway I was taken aback but then he assured me that uh, there was plenty of value Involved. So, Andrew, tell us the team invest private story.

Andrew Coleman: Excellent. Now look, we're an ASX listed investment house focused on compounding knowledge and wealth. And we operate in three verticals. The first vertical, which it sounds like your house sitter, uh, was a part of, is our education and advice business, which is where we advise high net worth individuals, NFPs, charities and large organization on how to better invest their endowments or their capital. The second group of our three verticals is our funds management business, which is where we put that exactly into practice on behalf of other people's capital. And our third vertical is our own balance sheet where we do exactly that across both active and passive investments. I think of that as listed and unlisted investments and we're managing across those SOR of about 1.6 billion under advice in the education and advice business, about 270 million under management in funds management and about 130 million do on our own balance sheet. And we've achieved significant outperformance over the last 24 years in education and advice and 13 years in direct investing on our own behalf and on behalf of our funds for our investors. And so that's built us, uh, a very large and growing group of what I like to think a delighted customers.

Phil: we met face to face. I think we shared a lunch together at the previous Australian Shareholders association conference and appearing there as a speaker covering active versus passive investing and the six core principles of investing. So let's dive into it. What are your six core principles of investing?

Andrew Coleman: Absolutely. Well, I think that the six core principles of investing, as far as I define them, and of course others may have different ones, but are the same for public and private markets. So when I'm talking about investing and we're going to talk about investing today, I think it applies equally no matter the asset class and it applies no matter whether the assets you're looking at are, you know, listed assets, so things like stocks and bonds or unlisted assets. So that could be anything from private equity to your home. And the six are really, firstly, the power of compounding understanding that small changes in interest rates or returns over the long run result in big dollar differences. The second thing is this concept of dogs versus unicorns. And I think we'll talk about That a little bit later, so I'll save the thunder. Um, third is stability winds, the idea that small gains but replicable gamesains for a long

00:05:00

Andrew Coleman: time always beat the idea of unpredictable ideas. Fourth is the idea of a margin of safety, only buying assets when you can be certain that a margin of safety is built into the price. The fifth is removing noise, which is often one of the hardest to do. And that's this idea of how do you actually identify what's going on in the underlying asset that you're buying compared to the noise surrounding that asset. And then lastly is the wisdom of the crowd. This idea coined by Sir Francis galton in the 19th century and forming of course the foundation of modern statistics, which is that, ah, a relatively independent sample taken from a large enough number of hopefully in this case intelligent people because we're talking investing, but it could be anything in statistics will give you as an average a pretty good view of the underlying results, even if individually those people are way off. And you know, famously that's done with things like jelly beans in a guessing game. But it applies equally as well to making predictions around growth of investments, a required rate of returns or what's just going to happen in a market, up, down or sideways. And understanding that concept in enables you to add an extra layer to what is otherwise often quite a technical investment process for a lot of people.

Phil: So you truly believe that active investing can outperform passive? And this is despite all of the evidence that we hear all the time that people should be in low cost ETFs, you know, reflecting broad market indices. But tell us your background in terms of how and why you discovered that active actually can work for individual investors.

Andrew Coleman: There's a lovely line from the former English Prime Minister Benjamin Disraeli of there's lies, damned lies and statistics. And I think from a marketing point of view, the passive investment group and particularly industry super funds in that. But it's not just them have done an incredible job of using statistics to argue their case in a way that I really don't begrudge them because I'd be doing the same thing. But I think what's interesting is you should always, whenever you're dealing with any form of statistics or marketing, you should always be a bit cynical and ask the inverse. So I'm going to give you a line that I'm sure you've heard many times, all of us have probably heard many times in finance. And then let's unpick it a bit more rationally because I think it shows the flaw in the argument, and that's simply that 80% of active fund managers fail to beat the index after fees. I presume that's a line you would have heard lots and it comes from.

Phil: Some plen studies plenty of times.

Andrew Coleman: Absolutely. And there's been a lot of studies that prove that's the case. The challenge is then using that piece of factual information, 80% of active managers fail to beat the index after feast to draw any conclusion about passive investing. Because of course in order to do that, if you really want to compare apples and apples, you should have to ask the next half of that equation, which is what percentage of passive fund managers fail to beat the index after fees? And compare the two. You know, obviously if passive investments doing better than active investment, you would expect more passive investors to beat the index after fees than active investors. And of course a little bit of logic tells you that that's false and it's really false. Really simply right. If a passive index or investor holds an index and is charged any fee, even if that's incredibly low cost, one basis point, by definition, they have now got worse than the index because they uh, got the index gross return and then a fee. So the actual comparison point in that study, as opposed to stopping at the marketing line, should be what percent of passive fund managers beat the index after fees, which is zero. Not a single one. It's impossible for them to do so. And I don't blame them. That's their product. Right. So in fact what you're doing is you're saying if you take the other side of the equation, 20% of active fund managers after fees beat the index and ah, that may still be an indictment of active fund managers. I'm not defending only 20. You'd think it'd be coin toss, but 20% of them beat the index versus 0 passive managers beat the index. So if what you want is a return that's less than the index but gives you safety, well then obviously passive investing sounds like a great idea because you've got guaranteed market less fee. Right? That's a good thing. It's relatively low volatility and it's cheap. But if you're actually trying to beat the index, you cannot do so ever by owning a passive fund. And so if you believe in that first of the core principles of that idea, that the power of compounding matters, then there is value in trying to understand can I beat the index even by a little bit? And who is likely to do so? And of course we do know as well from research that it's quite easy to identify which fund managers, active fund managers, beat the index regularly. And of course, the answer there is, look at their previous performance. You know, if this is an active fund manager who's one of the 80% that has never beaten the index after fees or fails to, well, in that case you're probably better off investing in the passive fund, right? On the other hand, if that active fund manager is one of the 20% that does beat the index with regularity, well, you know, seems to me like a very obvious investment case. And I think this is one of these classic problems that we have in society so often of, you know, and perhaps it's driven by social media, but this idea of we take a sound bite of research, take it out of context and apply it broadly, and then claim

00:10:00

Andrew Coleman: that that is, uh, a general market rule. And the other one, of course, that I love in that space. And, you know, if you've got a second on it, Phil, but is this lovely. Compare the pair from index super funds, which I think the nerd in me really loves, right? Because what they do, of course, is they take two index funds, their industry fund and another index fund. They compare their industry fund with very low fees with another index fund holding exactly the same assets, so it's comparable with higher fees, and then make a very good argument, which of course is that if you paid lower fees, you have more money. The question I always want to ask is why is your choice the index fund with high fees and a super fund holding the same thing with low fees? Surely you have more choices than just that. But of course that doesn't make for quite such a nice, uh, marketing gimmick. Super is one of the most important investments you'll ever make. But how do you know if you're in the best fund for your situation? Head to lifeshherera.com.au to find out more. Life Sherpa, uh, Australia's most affordable online financial advice.

Phil: And presumably a lot of the fund managers that are surveyed in the surveys that we're referring to have very different dynamics applied to them. As opposed to a small retail investor who can take time to do things, they're not looking for a performance on a quarterly, monthly, yearly basis and so forth. There any other factors like that that can explain away the, um, underperformance of some of these fund managers?

Andrew Coleman: I think there's lots if you've got time. But I think the challenge there is two different questions, right? So the first one was just simply active versus passive investing. The second one, which Is I think the question that perhaps you're raising there, which is why do 80% of active managers fail to beat the index? And I think the answer to that is actually driven by two fundamental issues with both human nature in the one case, and the second one is reporting and accounting standards. I don't blame them, I just think they play out interestingly and amusingly. This was my honest thesis back at university. But if we take the human nature one for a second, as humans we find it very difficult to be against the crowd for any length of time. And it's particularly difficult not just to hold that line. And I'm sure you found that in your own portfolio. You know, you've got a conviction that something will go up or down, the market disagrees with you, how long can you stomach it? Which naturally tends everyone to crowd to the middle. But secondly, it's really hard to advertise it. And remembering that fund managers are in the business of fund management, you know, unlike you in your personal portfolio where the goal is simply maximize my long term wealth. The goal of a fund manager is to both maximize wealth for my clients, but also bring new clients in the door. And so if I've got a position as a fund manager that's far away from the market and the market is in my opinion irrational and wrong, but it's moved against me, which can happen. It's very difficult to go and raise new capital because you're out there advertising that you've got better ideas than Joe Blogs fund manager on the side or an industry super fund. And the first question that uh, a savvy investor is going to ask you is how have you performed relative to the market? And so if your answer is, well, I got my bet wrong, then you don't get new fund flow. So there becomes this tendency emotionally driven by advertising in people, to crowd around the middle. And of course the more you crowd around the middle, the less likely you are as an active manager to do well because you're trying to take a.

Phil: Uh, don't to be seen to be taking any risks that no one else is doing. You know, there is a herd mentality often in these cases, isn't there?

Andrew Coleman: Exactly. And then the second thing, which I think is perhaps even more fundamental to why the industry is in many ways broken, is this misunderstanding of the concept of risk and volatility. I did a podcast on this the other day, but I'll try and summarisee it much faster here because that was a sort of whole hour on it, right. But the Idea at the moment that seems to be very prevalent in market circles is that volatility is a proxy for risk. I'm sure you've heard that this idea that if your portfolio or the value of an asset moves up and down a lot, then that's indicative that the asset is risky. And where that comes from, of course, is some really great financial modeling out of originally the 70s and since, which shows that you can remove that kind of volatility through diversification. And so you can get, uh, a better result. Now, the challenge there is the word better result. And I think this is another one of these where we've taken statistics out of context. So in that research, the goal was to say, and this, if you think of it, makes sense. How much does my actual return differ from my expected return? So if I'm aiming for 6% and I get 5, then I've missed my expected return by 1% or 1 6, which is bad. The corollary, though, is for the maths to work, you're asking not only to the downside, how much did I miss it by? But also to the upside. So in the same example, the maths will work that if you achieved a 7% actual return versus an expected sixth, you have the same volatility, you missed it by a sixth. Now, of course, from our point of view as an investor, one of those scenarios is very bad. I got 5% when I wanted 6, and one of those is really good. I got 7 when I wanted 6. You know, how much better have I done? Yay to me. And

00:15:00

Andrew Coleman: it doesn't end up getting captured that way by fund managers. Because when fund managers report volatility, and volatility is, uh, direction independent, it ends up saying that the person who beats the market every year is risky and as risky as if they had missed the market every, uh, year. So as over time, fund managers have to report more and more on these things, and people make investment decisions on them, there creates this desire to remove volatility, that is deviation of actual return from expected return. And if your benchmark that you're comparing to is the index, then that again requires you to start taking off the winners as much as it does avoiding the losers. And then we're back to that same problem we just described with emotions, which is we're all crowding around the middle where there's very little to be gained. And of course, the fees, if they are, uh, material, will eat away any small profit you can make by chasing those same companies that everyone else is chasing at the same Prices. And then I think the third factor on top of that, of course, if you've got a very short term investment horizon, you're investing, you know, as a fund manager against every quarter or every month. That just exacerbates it even further. I mean at least if you compare a fund managers 10 year returns they can say, well, I had a position because I think something was going to happen. It took three years but I was right. But if you're asking them to report weekly or daily or monthly, well, how much in the world can happen in a day? You know, how right can you be? Even if you've got a position that's correct, the odds are it's not going to change. So it sort of avoids you to do any form of deep thinking.

Phil: So we're coming up to the Gold coast conference which we're going to talk about with the Australian Shareholders Association. Have you noticed any particular traits of members of the association in how they approach their investments? Because obviously they're much more engaged in their investments than your average punter on the street.

Andrew Coleman: Yeah, look, I love coming to these conferences and I have a lot of fun at the ASA because I think outside of our own community and there is a lot of overlap as I know, but outside of our own team invest community, it's probably the community of the most engaged investors in the country. And why I love that of course, is that with that engagement comes thought. I'm constantly frustrated when I'm required to present at investment conferences or on TV as I'm on regularly and everyone wants a cursory answer, uh, with no time to think about it and no real depth. And it reminds me of that lovely old joke of a question without notice gets you an answer without thought at least. The advantage with the ASA is people are thinking about it because it matters to them. And so what I enjoy about those conferences is the ability of ASA members to look at a theme like the ones we just talked about, for example, and ask some of those deeper questions and say, well, from my point of view, do I care about daily volatility? Well, probably not, you know, I'm investing for uh, a longer horizon. So in that case, how can I take advantage of the vagaries of the market and find myself on the right side of that long term investing approach rather than crap, you know, at 5 o'clock today I've got a report. So how, you know, yes, I think Tesla's overvalued, but what can I do about it in a day? So I'm just going to hold it, you know, as an example. And I have a bit of fun, as you know, because I know you've been there, Phil, obviously regularly at the times where I'll get up on stage at those conferences and give my predictions for a year or two ahead, because I can. Whereas when I'm on tv, no one wants my prediction for a year or two ahead. They want my prediction for tomorrow. My prediction about tomorrow is almost certainly wrong. There's no way I could know a year or two ahead. It starts to be a bit more.

Phil: Fun and there's will be a promo code available in the episode description where there's a discount. So if anyone wants to come and join us in September on, um, the Gold coast, we're going to have great fun at this conference.

Andrew Coleman: Absolutely. And I think you. The interesting thing just talking about those six principles of investing, what the ASA does and what we do at Team Invest is really focused on that fifth and sixth principle of removing the noise and the wisdom of the crowd. So if you're thinking about where does that fit into your investing approach, think of it as those kind of conferences, whether it's with the ASA or it's where the inside Team Invest, where it's obviously an even more curated group, the goal of those events is to help you as the investor, remove the noise around the asset so that you can understand is there something you really want to invest in or not? And ways of removing the noise of things like meeting management of the companies you might invest in, or meeting the fund managers who are managing your money, or looking at the underlying deep data rather than just the cursory one line in the, you know, the AFR headline that's designed to sell newspapers. And then the wisdom of the crowd is really as simple as getting together with those people, talking it through and seeing if your view is the majority or not. Because I think one of the challenges that we often have as investors, and I know it, not only is a fund manager, but in my personal capacity this happens, is you think something's wrong, the market's got X wrong, so it's a buying opportunity or a selling opportunity, and then you have that moment of doubt, usually at around 9 o'clock at night, that sits in your mind that says, what am I missing that everyone else is seeing? Why am I on the other side of this trade? And of course, from that point of view, getting together with other intelligent people who are doing deep thought about their investing is the best antidote to getting caught up in that sort of analysis paralysis. Because you can ask them, look, you, I'm seeing X. What are you seeing? If

00:20:00

Andrew Coleman: they agree with you, hopefully not just because they're trying to be polite, but because they've actually thought about it, then that's another data point that you can use to help confirm your decision. If they say, you know what Andrew will feel, you're completely wrong for these reasons. Well, at least you've avoided the mistake by asking the question first.

Phil: And I think that's uh, so important to be part of a community. I mean for me, joining the shareholders association and going along to the meetings, the local community meetings was fantastic. Just in terms of the knowledge, the wisdom, um, the feedback that you can get. And I think it benefits everyone and it also helps your investing because you're not going to make panicked decisions because you buy yourself and you suddenly go again, that idea of what am I missing? You can find out by talking to other people.

Andrew Coleman: Absolutely. And look, I don't know if the ASA has data on how much that adds in value, but we've done some research with you insw about our own membership and how much that adds and we know that that wisdom of the crowd, in our case what we call the smart process, but that's not necessarily relevant for today, but that that is associated with a material statistically significant increase in your expected return. And to our point it's a roughly doubling. So roughly what you would have got on your own, you get roughly double when you associate with high quality independent thinkers who can give you answers to those questions. And again, when you think of how we work as humans, that makes perfect sense, right? We all know from our own life that our decisions are better when we are able to ask experts as opposed to when we're doing them on the fly. So, you know, it shouldn't shock us that research, but it sort of still does because you think it's worth maybe 1% or 2% when actually it's worth a materially much larger amount. And just from our own data we have been able to generate a net. So that's after fee outperformance of well over 300 basis points per annum, which is sort of unheard of to the right for most fund managers and about 800 basis points before fees for our investors who do it themselves. And a very large amount of that outperformance is a combination of, number one, this concept of avoiding dogs that we've spoken about before. So I won't go into much detail now and we've talked about a lot at the asa, which is this idea that the market is made up of both really good businesses, really bad businesses, and people in the middle. So if you can just avoid the really bad ones, then the average of what's left is by definition pretty good. So doing that process rather than trying to pick winners, which is hard. But then secondly is this concept of the wisdom of the crowd that adds a significant increase on top. Because the challenge when trying to identify those dogs, of course is exactly that question of, uh, well, I know there are statistical indicators that indicate this is a dog, but where's the false positive? What happens if it doesn't have that indicator and it's still a dog? How would I know? And that's where you can bring people around you to help you make that decision, because the average of their views is likely to be right.

Phil: And just to make the point here, we're not an anti dog podcast any means.

Andrew Coleman: They're wonderful creatures. Absolutely.

Phil: May I take a moment to interrupt normal programming? This episode was recorded before I had the promo code for the Australian Shareholders Association Queensland Investor Summit to be held at the Langham Hotel, Gold Coast, 9-21-24 youl ll receive a 150$50 discount by simply using the promo code QLD SUMMIT when booking links are in the episode description. Come along and say hi. Im the em keeping this rough and rowdy crowd in order. That's a two day summit pass for $595. Normally 745. Thank you for your attention. Back to the show. So Team Invest was founded by John Price. Tell us about John Price and how he understood risk and um, volatility and the maths involved.

Andrew Coleman: Yeah, absolutely. So John's one of our uh, I think five co founders. John was formerly the head of mathematical finance at the University of New South Wales and a very long tenured professor across many institutions. And John arrived at finance in that era of the beginning of Black Schol options theory. And he came to finance as so many did, through originally a mathematics and physics background. So he was originally a professor of mathematics, then a professor of physics and then later on in finance. And as a result John has a very dry sense of humor about the way in which mathematics tends to be used in financial industries. Right. Um, I am an economist originally I have a similar view. My maths was nowhere near as good as John's, but it was sort of a core part of the degree. And John jokes that so much of mathematical finance in the way it's delivered by industry participants as opposed to the. The theory is an attempt to use mathematical intimidation to obscure really simple concepts. And the joke I like to use about that is that sort of the apocryphal line, uh, ascribed to Don Bradman about cricket where he said that cricket is a very simple game made difficult by those of us who play it. And I think the same applies to finance. We were talking about risk before, but this idea that common sense risk is the idea that I get less than I hoped and yet because that would make the maths really difficult, we redefine maths in finance to be a differential outcome from the expected one, which of course is mathematical intimidation. Right. Because now we've completely changed the concept and applied it in ways in which the average layp

00:25:00

Andrew Coleman: person wouldn't necessarily have understood. Another one that I love that comes up about that and John and I have had hysterics about over the years is this line that we're all required to say by law, which is that past performance is no guarantee of future performance and it's not the past is not a perfect predictor of the future. But we also know from research that it's the best predictor. So it's no guarantee of a future outcome, but it's the most likely indicator of a future outcome. You know, if a company has never made money, the odds are is next period it won't make money again in the same way is because I'm m not 6 foot 6 or more. I've never been a good basketballer. Uh, the odds are next month. I'm not going to suddenly be a good basketballer right now. It's no guarantee. I could somehow have a growth spurt in my late 30s. I could somehow learn, you know, a skill set I've never had. But the statistical odds of that are very, very low. And it's the same around finance. And yet because we get to say the past is no guarantee of the future, what we end up doing, I think is a little bit of ma mathematical intimidation. In that case. What I think ends up happening is great managers or great results are marked off as luck. Know that's the past. It may not happen again. And we excuse bad outcomes because oh well, you know, we got it wrong but'next time we'll get it right. Of course that's not how the worldd really works. So you know, there's this sort of amusing concept. You can do it with anything in mathematics but it's and finance. But there's this, I think challenge often in the financial services industry is to take common sense concepts and make them so obscure as possible so that you can charge a higher fee for then managing them for your client. And of course I find that morally wrong as well as particularly amusing when someone sits down in front of me and tries to do it.

Phil: I uh, love that concept. Mathematical intimidation.

Andrew Coleman: Absolutely.

Phil: You should be intimidated by maths nerds only.

Andrew Coleman: And it's why I think it's so funny where Warren Buffett has resonated with so many people, right over the years. Not only his incredible results, but he has s spent you know, 60 plus years of standing in front of people and saying what I do is easy, it's replicable. Just use common sense, you know, find assets that uh, are good assets that have a good long term track record, buy them at a reasonable price. You don't need to try and be some expert and then wait for compounding to do the rest for you. And I think it's the reason why for so many people Buffett is a hero. And also for so many people in the finance industry, Buffett as it has been villain. Right. Because in a way, if it's as simple as that, what are you paying me for?

Phil: Okay, uh, let's have a look at some more animals. Dogs versus unicorns. How do you identify them and how do you avoid the dogs?

Andrew Coleman: Although we love doinges dogs the animal as opposed to dog the investment. I think it's probably worth taking a step back and saying that the, let's start with where most people start in investing because I think it exposes the mistake that we make. So I think most people start investing and certainly I did. So I'm now speaking from personal experience and I hope that resonates with those listening. We set out to pick winners. You know, our idea is we want to go out and find really good investments that are going to make us know 10 times our money. The problem of course with doing that is that there is to date no replicable way of being able to do that. Finance theory has been trying for decades and in fact the efficient markets hypothesis posits that it's impossible to do. And every replicable study that been done and uh, reputable study that's been done as proof, there is no way of in advance picking who the winners are going to be. And so the challenge then becomes you're out there with your capital trying to pick winners in a sea of potential options and it's really, really hard to do. So Carl Jacoby, the famous mathematician re quoted better I think by Charlie Munger. So I'll use Charlie Munger's Version said, when, always, whenever you are confronted with a difficult problem, invert, always invert. So stop asking what the hard problem is and start asking, is there an easier problem you can solve that gets you, you know, 90% of the way there? And in the case of investing, that simply flipped the message. So if it's really hard to pick winners, ask the question, is it easy to pick losers? Because theoretically, if you could hold the market without the worst performers, then the average of what's left would be materially higher. So the two questions you should then do is a little bit of research to say, well, number one, can you pick losers? And number two, how much is that worth? So the good news is I've done that already. Our team'done that over many, many years, both us and other academics. So I don't need to get any podcasts listener to do it. But the first answer is yes, there are 27 quantitative metrics, backward looking quantitative metrics that are indicative that a company is the most extreme form of loser. And what I mean by that is that they're likely to potentially go bankrupt. Because of course, if you're an investor in a company or an asset and that ceases to exist, then that wipes out all your capital. That's the worst possible outcome. So if you could just exclude the ones that have a risk of going bankrupt, then by definition, you know, that would be a good thing and what's left should be safer. So we're not going to try and focus our time on finding the asset that gives you 4% instead of 15. Let's just look at the ones that're going to lose all our money.

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Andrew Coleman: And then the second question we should ask is, if there are 27 quantitative factors that do that, what would be the value of holding the index without them? And it turns out again, when you do that study, uh, that over the last 24 years in the ASX and similar in the US market, the average of doing that has given you about double the market return. So if you could hold the market without the worst companies in the market, your average return would be double that of the index. So that means it's meaningful to do it. So then I think the question, of course, is why the terms dogs versus unicorns? Well, in finance circles, and I know you know this, Phil, we have coined the term unic as being a company that, you know, materially increases the value of your investment in a relatively short period of time. And of course that term originally came out because they were mythical creatures. They didn't exist but wouldn't it be, uh, were amazing if you could find a unicorn? So from our point of view, I made the joke on TV a while ago and we've started to use it since, that the challenge in finding unicorns is there's a lot of dogs walking around with ice cream cones on their head and until you shine the light on them, their shadow looks the same. And so that was sort of our joke about dogs versus unicorns is can you shine a light on these companies and say, rather than trying to pick unicorns, I just want to find out which ones are dogs masquerading as a unicorn, take them out of my sample and then own the index and that'll earn me more money. And effectively that's the first step, I think, of any good investment process. And it's what we do in team invest, right Is, and inside tip is we spend most of our time not trying to pick winners, but trying to avoid losers because we know that what's left, yes, there'll be a distribution. Some will do poorly, some will do well, but the average of what's left has got to be higher than the initial starting amount that we included. And if it's worth as much as double your returns, well, that's an exercise worth doing.

Phil: Just getting back to the communities for a moment and, um, I know this is the same in the shareholders association community, and presumably your community as well, is that there's a lot of people who have retired or have worked in industries that they've got expertise in that they can also share with the community as well. And this is valuable information because you're not just looking at numbers here, you're looking at living, breathing companies. And to get some sort of insider knowledge is just a valuable edge to have, isn't it?

Andrew Coleman: Oh, hugely. I mean, I think the, if you take that dogs versus unicorn argument, there's 27 quantitative factors that help you exclude them, but what's left still includes a lot of maybe they'not dogs, but they'horses or zebras pretending to be unicorns. The only way you are ever going to know that is by having deep knowledge of the area. As an outsider in a field, you don'understand. Something outside your circle of competence. How would you know? My daughters, uh, are very young at the moment, still toddlers and they have a very cute book that I rec if you'got grandkids or kids who in that age I recommend called Thelma the Unicorn. But Thelma the Unicorn is this story of a little pony who wants to be a star. So she slaps a carrot on her head, paints herself pink and goes out and acts like a unicorn and the whole world love her as a unicorn. How do you know that if you don't know the difference between a pony and a horse and a unicorn? Right? And it's the same thing if you are re looking at a medical company that says it's got some great technology and it's got a great motat and it's making good money. How do you know if something has come up that will eat its lunch unless you are plugged into the medical field? If. Same thing with engineering, same thing with technology, same thing with finance. Right? So that's really where I think the value of the wisdom of the crowd comes to the fore. It's in two areas. It's firstly, helping you remove the noise as we spoke about before, and then secondly it's giving you an expanded circle of competence. So you know, in my case, I'm uh, obviously a finance and economist person from background, so I can, I can look at finance companies and understand pretty quickly is what they are saying about their future likely to come true or not. You know, is it marketing speak or is their value? But I can't look at a biotech and answer that question. But if I can partner up with a doctor or a research scientist in that area, well, now I've expanded my circle of competence, I'm less likely to be fooled by a dog masquerading as a unicorn in two industries, not just one. And so take that to an extreme. In theory, if you could have a big enough group of people about every market in the world, you would be able to avoid all the dogs everywhere. Now that would probably be quite difficult to do, but you could certainly do it about the Australian market and say the US market in the European market. And that's what we've been doing again at Team this. So we've now got 600 of those experts, just over 600. And we meet, uh, once a month in every major city, twice a month online about the US and the UK. So overall, sort of 1112 meetings a month where we're doing exactly that, trying to get that wizard amount of that wider expert community about companies that are worth looking at, you know, they're not an obvious dog. And asking the question again, hang on, is this Thelma or is this really a unicorn? Because I can't know that. But you know, Phil might, with Phil's background and Steve might or Sarah might. So ah, getting them to share that knowledge is so valuable and Whether are you're doing that at the ASA or a team investor at a coffee shop with friends, that ability to expand your circle of competence and your access to expert knowledge can only be a positive.

Phil: Take control of your investments. Shareight 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. And does this information filter through the community? For example, there might be some form of expertise in Sydney that throws up an issue with a particular company. Does that get spread out to everyone? I mean the people in Brisbane and Perth are going to hear about it as well.

Andrew Coleman: Yeah, inside Team Investor does. So we obviously have an online platform where we uh, collate all of that information and share it so that the outcome of those discussions is broadly available to all of our members. And I think that's one of the reasons members join us. It's not only their local chapter, but it's their ability to access the wider group. I think the ASA does something similar about certain things, but maybe not in quite as formal a way, but that is a function of price point if not nothing else. Right. Uh, you. We have the luxury because our members tend to be quite wealthy and are prepared to pay a reasonable fee for doing it, that we can build infrastructure around it. But you know, you can do that yourselves with friends. The challenge is always knowing people in the other areas to share that information. And uh, I'm reminded of a story from our early days, but it's just sort of funny, which is that there was a company called Forge Resources. I don't know if you remember back on the ASX'a big capital killer, it blew up lots of money and on the numbers it looked quite good, sort of similar to not quite an Enron. It wasn't quite as fraudulent. But this idea of, you know, the accounting numbers misrepresented the trut in for just case, not through fraud, but through accounting standards. And we were saved a lot of money because a number of our Perth members who worked in the industry were able to say, hang on a minute guys, I know the people involved, I know the assets, they aren't as good as you think. And it's going to come down crashing. Where of course had we been? Eastern coast only. That may have been a mistake that many more people made. There are plenty more examples. It's just one that's always stuck with me because it was so easily resolved so quick. That's the advantage of communities, right?

Phil: It is the advantage of communities and it's also the advantage of having to take your ideas and thinking seriously. You know, so many people blunder into the share market and they think, o, I've heard about this stock, I've got this tip down at the pub and.

Andrew Coleman: There was a study done, a few.

Phil: Yeah, the acronym is Tips for Team Invest Private. But what's the difference between small cap tips and large cap tips?

Andrew Coleman: That's a good question. I'll just say the quick piece I was about to because I think it segues nicely. So there was a study done a number of years ago and I cannot for the life of me remember the author. So I feel bad, but feel free to look it up. But it was a study on what is the average amount of time that an investor spends in making an investment decision. And for listed equities it was less than five minutes, of which more than half was spent. Looking at the share price graph and when you think about the amount of money that probably the average person is placing in any investment that they make, to spend less than five minutes looking at it seems to me so counterproductive. You know, you've spent many years accumulating the capital, working hard, saving up. Surely you would want to spend a similar amount of thought and effort into where you deploy that capital. And yet, because we're humans, we tend not to, right? We rush decisions, we do this thing called post hoc rationalizing, which is that we get an emotional feel, gut feel about something and then we find reasons to justify why our emotion was right. You know, I like Company I, so I'm going to go read the report and find the four things that convince me I should invest in it or I dislike Company B. I'm going to read it quickly. Look at the share price goaph. Ah, it's dropping. See good reason I'm not in it. Rather than actually spending time looking in more detail and the challenge perhaps that I'll leave the viewers with, which is one that I always ask myself is how long did it take me to accumulate this capital or my investors to accumulate the capital? Doesn't it behove me to spend the same amount of time or a similar amount of time deciding where to place it? Otherwise I've spent 40 years finding it and 4 minutes deploying it and that seems a very skewed equation. So to your point about small and large cap tips, I think the challenge with all tips is that lovely old quote about, you know, the challenge with advice is it's freely given but expensive when it's wrong. You know, it's the same kind of concept. How much thought did that person put into their advice? Whether it was a newster that you read or a broker's report or whatever it was, what was their motivations and how much time should you spend checking it before you put your hard earned capital at risk off the basis of their comment? Because I've been on TV and done this. I mean we all do. We're human. You know, I'm m regularly on AZ business. The call, as I'm sure you've seen and you'll get asked a question about a company you didn't expect. You know, it wasn't on the list. So normally how the call works is you get a few days in advance the list usually 48 hours in advance. That gives you a little bit of time to do some digging and understand who the assets are and then the stock of the day will come up and the stock of the day we find out at best five minutes before we're asked, usually about a minute before and we're expected to opine on the stock of the day. Now sometimes I'm lucky. The company that comes up is one that I've already researched and I know very well in others. It's a company I've

00:40:00

Andrew Coleman: never really heard of or it's never come across my desk. So how much thought was it possible to put into my answer? I mean I'm trying to do this with the best care possible for the viewers, right? But like If I've got 30 seconds to think about it, the odds are it's not going to be a particularly well considered outcome. And yet that recording will then get played again and again and again. And if I've been controversial particularly, it'll get played even more. Right. And so the challenge then becomes as a viewer watching that show, and I hope viewers don't do this, but a viewer watching that show is to understand which of the ones Andrew has thought about versus Andrew hasn't. And I don't know if you can do that easily the only substitute for your own thought is your own thought, right? Like you can't use someone else's brain to do the thinking for you or you're at risk of these off the cuff comments becoming perceived as having greater wisdom than they do. And um, and that's not even taking into account if someone's trying to be a bad actor and market manipulate, which I assume most people aren't. Right. But there are some. But even if they're trying to do the best thing possible if you courted me on the street and said, you know, Andrew, what do you think about xyz? And well, if all the time I've had to think about it is the time you asking that question, the odds are my answer'not going to be very well thought out. That's the challenge when we take tips from people and you know, stock tip newsletters, particularly as AI becomes used more and more to generate them. My joke about artificial intelligence, and I do find it very valuable by the way, and I encourage people to look into it. But my joke about artificial intelligence is it is artificially intelligent. It mimics thought, but it doesn't actually do. So what it's doing is it's finding the most common predictive outcome based on what everyone has said. So if you know, 99 people in 100 in the market are saying forge resources was a great investment because they know nothing about it and one who does is saying it's bad. The AI will tell you what the 99 are telling you, but that 99 comments with no thought were worth less than the 1 comment with deep knowledge. And that's the challenge to separate a tip from something of real value. And so you know, our ticker is tip. I know that's the joke about this, but I joke. We don't do tips. Tips bad. What we try and do is thought. And that thought may result in something that's valuable to you. But. But tips are dangerous.

Phil: And I think it's also a very good word of warning, especially with financial media, that they're just looking for clickbait. They just want people to click and they want people who want an easy answer and they're just feeding that. So just be very careful really. You know, investing, like you said, is a long term process. It requires a lot of care and thought and attention. But you do have to put the time to try and outperform the market, as you say.

Andrew Coleman: Absolutely. And this will be a plug for you, Phil. But podcasts like yours that try and understand the underlying concept rather than just pick a winner or tell you where to invest, uh, are where if you are learning, I would focus your time because knowledge. You know, I joke regularly that there are only three things we all have access to that compound. And so if you believe that compounding is valuable, those are the three things you should focus your time on. The first is wealth. Wealth compounds up and down. We know that. That's why we're on this podcast. The second thing is our culture. Those we associate ourselves with, their good habits Rub off on us, their bad habits do too. So, you know, culture can compound up, it can compound down. You see this in sporting environments all the time. It doesn't take long for a bad club to become awful if they get a bad egg. But similarly, it doesn't take that long to take an underperforming sports team and turn them into a great team with the right leadership and the right culture. But then thirdly, the one that we, uh, we perhaps spend less time thinking about but is actually probably the most valuable is our knowledge. Because knowledge, by definition compounds. Once we gain knowledge, it only grows on the knowledge we already have. And when we share knowledge, that's a form of compounding. Right. You know, your knowledge becomes something that now I have, and my knowledge becomes something you have in that compounds. And the big advantage knowledge has of those three is it's the only one that only compounds in one direct. You know, wealth can compound down if you make some bad decisions. Culture can compound down if you end up in the wrong group. But knowledge, by definition only compounds up, even when you make a mistake. That's a form of gaining knowledge about avoiding that mistake in future. So if you are going to focus more time on one of the things you could do as an investor, you know, whether you're 18 or 80 in the market, I would say invest your time in compounding your knowledge because the more you know, it's the only one that can grow always, it never shrinks. And it's the one that's the leading indicator on the rest. Because the more knowledge you have, the more your circle of competence is expanded, the more deep your thinking is, the more opportunities you will see that others don't. And in the end, that's what will drive positive results and vice versa. The more times you will see a mistake brewing and get out of it, where, if you didn't know it, you know, uh, Terry Pratchett's got a lovely quote. He says wisdom is the result of experience, and experience is usually a result of a lack of which wisdom. So, you know, if we can use our wisdom to avoid the experience, we're off to the races.

Phil: Yeah. And also benefit from the wisdom of others as well, to compound and multiply that. So, Andrew, tell us about Team Invest Private and how listeners and viewers can find out more.

Andrew Coleman: Yeah, absolutely. Well, as I mentioned, we have those three verticals. Obviously, from our perspective, our flagship

00:45:00

Andrew Coleman: product is our, uh, education and advice business, which is called Team Invest. And if you'd like to know about that, you could go to www.teaminfest.com.au that's T E A M M I N v e s t.com.u and if you'd like to find out about our funds management business, that's also on the same website. And if you want to find out about the listed company tip as a whole and what we do with our own balance sheet, not just our funds and our education, go to www.tipgroup tipgroup.com.au and that will take you to the page about our listed company as in the holding company rather than just the operating business.

Phil: Thank you very much Andrew, and looking forward to catching up again on the Gold coast in, um, our white shoes.

Andrew Coleman: I'm looking forward to it and I hope that we'll have some really interesting things to talk about. I've seen the speaker list. It looks exciting and I'm worried a little bit in the cricket analogy of falling prey to the comment of Sid Barnes of batting after Bradman felt like warmb beer following champagne. So hopefully I'll either go first or. Or I'll be felt of a champagne and not just warm beer.

Phil: That's great. And yeah, a lot of CEOs for this one as well. Many more CEOs than normal. Yeah, I think a lot of the members do enjoy hearing from direct from the horse's mouth with the companies that they're investing in. So, uh, yeah, looking forward to it.

Andrew Coleman: Absolutely. Thanks for listening to Shares for Beginners. You can find more at 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.

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