MICHAEL KEMP | The Ulysses Contract
MICHAEL KEMP | The Ulysses Contract
What does an epic poem written around 700BC have to tell us about investing? How are investors
tempted to steer their money onto the rocks of investing underperformance? I'm joined in this episode by Michael Kemp, the author of The Ulysses Contract.
There's plenty of great lessons from history in this interview and much more in the book. There's a lot to avoid but as Michael says:
Don't be discouraged by all the negative arguments I'm putting forth. I like to end on a positive and I end it on a positive in my book. I don't believe you need to become a champion to become a really good investor. I believe that market returns are fantastic returns as long as you achieve them. They're not difficult to achieve. Don't try and shoot for the stars cuz you're probably full flat on your face. But if you accept that you're gonna be delivered market returns and you are patient, then market returns can be spectacular returns given the power of compounding.
Michael’s working life has been an intermingling of two professions. He has worked as a periodontist and also had an extended career in finance. From 2011 to 2020, he worked as the chief investment analyst for Scott Pape’s Barefoot Blueprint newsletter. As well as managing his own portfolio, he has spent a lifetime reading, researching, writing and speaking about share investing. The Ulysses Contract is his third book.
He warns about listening to much to economic forecasting
The problem with narratives is that the narratives regarding the past and the narratives about the future sort of sound the same people blur them into one, but they aren't the same. The past is fact and the future is crystal ball gazing. All it has to happen for a narrative about the future to be accepted and believed is for it to sound credible. And some of those economists, when they start talking, they sound very convincing. But I always like to say to people, when an economist comes on tv, use the time constructively, get out of the chair and go and make yourself a cup of tea.
According to Michael, there's far less volatility in dividends than share prices. By focusing on dividends you are far less affected by the volatility in the price of the underlying shares:
My portfolio of shares is like a farm that's generating returns like a farm generates a harvest. I live off that harvest, namely the dividends. I don't fret about the share prices. And I think if you take that attitude, it helps enormously to alleviate any anxiety about price fluctuation. In fact, if you look at periods when the market drops significantly or rises significantly, typically the dividends are far more stable as you'd expect. The dividends being the harvest from company's activities. The actual production machine that's producing the dividends is not nearly as volatile as the prices themselves because the prices are driven by hopes and fears and emotion. Whereas the company's activities aren't, or to a much lesser degree.
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To appreciate that market volatility. If you have the right frame of mind, should present you with opportunity, not danger. And most people get very, very scared when the, when the market starts moving around, it, it, it's a dangerous thing to actually engage with the stock market without first having sought some form of financial education. However, basic I compare a lack of knowledge about the market to a child who's afraid of the dark. You can elite usually alleviate that child's fear by switching on a light. And to me, a solid financial education is like switching on a light.
G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. What does an epic poem written around 700 bc Have to tell us about investing. How are investors tempted to steer their money onto the rocks of underperformance? Joining me today to discuss Greek mythology, periodontics and investing is Michael Kemp G'day. Michael.
Michael (1m 9s):
Hey, Phil. Good to
Phil (1m 10s):
Be with you. You can obviously tell that I've been waiting to have a, an introduction like that to talk to, but thank you very much for that.
Michael (1m 17s):
It's a bit cryptic, isn't it? It
Phil (1m 19s):
Is, it is. Michael's working life has been an intermingling of two professions. He's worked as a peronist and also has had an extended career in finance. From 2011 to 2020 he worked as the Chief Investment analyst for Scott Pape's Barefoot Blueprint newsletter, as well as managing his own portfolio. He spent a lifetime reading, researching, writing, and speaking about share investing. The Ulysses Contract is his third book, and as Michael, you so proudly texted me on the weekend, it's, it's on the charts in front of Spare by Harry.
Michael (1m 51s):
Yes, it has. It's it's doing much better than I thought. But yeah, it's been, it's taken off. Looks like we're, it's been out about three weeks. It looks like we're about to enter our third print run. First print runs sold out first day before lunchtime.
Phil (2m 5s):
Oh, congratulations. Mm. So remind us of the story of Ulysses and the sirens.
Michael (2m 10s):
Yeah, great question because that's basically what the theme of the book is. Ulysses was a character in Homer's epic poem. The Odyssey is the king of a Greek island called Ithaca. Now, the part of the story that most people remember is when Ulysses is returning home to Ithaca after the Trojan War, he's about to sail his boat past an island that's inhabited by sirens, sirens who sing so beautifully that they lose sailors to sail their boats onto the rocks surrounding the island and to their death. So Ulysses told his men to put wax in their ears so they couldn't hear the sirens, but Ulysses wanted to hear their singing as they sail past.
Michael (2m 51s):
So he instead told his men to tie him firmly to the mask, minus the wax. He knew that that had to happen to resist the seduction that he was about to be exposed to, that he needed to put something in place now that would stop him from behaving stupidly later on.
Phil (3m 11s):
So what's the lesson for investors then, Michael?
Michael (3m 14s):
Well, that's the link. There's a powerful message for investors. Investors might start their multi-decade investment journey with the best of intentions to do the right thing along the way. But the fact is they're gonna be exposed to many different influences on that journey that will seduce them away from doing the the right thing and instead doing the wrong thing. Hmm. So they need to do two things. Firstly, they need to identify what those financial sirens look like, and secondly, they need to establish a method of investing where they are less likely to be seduced by them.
Phil (3m 50s):
Those siren songs can be very seductive. I mean, we're talking about the glossiest of brochures, the slickest of promotions, and the financial industry does tend to specialize in this, don't it? Doesn't it?
Michael (4m 2s):
Yeah, it does. A lot of 'em are difficult for even people to see themselves. Some of them are not so obvious. So let's start with the ones that really aren't obvious at all, and I think the worst ones are often generated in our own mind. And that's exactly what investment great Ben Graham wrote about in his 1949 book, the Intelligent Investor, he said, the investor's chief problem and even his worst enemy is likely to be himself. So the fact is, humans don't think straight and even gets worse when money is involved. We're irrational. We are biased. We come to conclusions far too quickly without bothering to collect all the facts.
Michael (4m 42s):
And it often means that we come to the wrong conclusions quickly and then we compound the problem through a process called confirmation bias. That is, we accept new information that confirms our held belief and reject information that doesn't. Even if that information might be correct, Phil, it's also why have you noticed when we read a book, we tend to highlight those things we already agree with. It also means that we can passionately hang onto views that are just downright wrong. And it's well described by that old quote. It ain't what you don't know that gets you into trouble. It's what you know for sure that just don't say in, in much of the book's, content is driven by that quote from German Carl Ludwig born, who wrote a couple of centuries ago, losing an illusion makes you wiser than fighting a truth.
Michael (5m 34s):
And each of us tends to accumulate a rag bag of investing beliefs that many of them wouldn't even pass the pub test. We need to constantly challenge our beliefs no matter how strongly we hold them. And jettisoning faulty investment beliefs that don't work is the first step to becoming a better investor. But I talk about a lot of emotions. I won't, I won't labor them all, but there's a few others that I think are very, very important. Another big internal one is, is emotion. When you're greedy, you don't think straight when you're fearful, you don't think straight when you're angry or when you're upset over a financial loss. But the problem of course, is that humans are emotional things and they're particularly common emotion when it comes to the stock market.
Michael (6m 18s):
We get emotional when money is involved, but it's a siren that's gonna cause you to make some very bad investment choices. You, you, you know, the irony about it, Phil, is you, you can actually use emotion to assist your investing rather than making it worse. If, if you are able to identify mass emotion, crowd emotion that's driving market prices, yet you are able to keep your head when others are losing theirs, then actually there's opportunity. Which leads me to another siren I described in my book, which is the crowd, the stock market is like every other market. It's made up of people. And that's an easy thing to forget when you are interacting with Commsec via a computer screen. But there are people on the other side of your trades, and when there's a lot of people involved, sentiment can become unified.
Michael (7m 4s):
And that unified sentiment can really be quite strange in the way it sends the market in the wrong direction. I don't know if you've have seen a book, it was written by a Frenchman called Gustav Le Bon. He wrote a book called The Crowd in 1895, and in it, he said, in crowds, it is stupidity not mother wit that is accumulated. You know, apparently there's safety in numbers and it does protect us in the wild. And you know, but when it comes to the stock market, it's not necessarily the case. I I saw it firsthand in October 87. I I, I wasn't long into my financial career at that stage.
Michael (7m 46s):
And you may remember some people may remember others have read about it, that on the 20th of October 87, the stock market in Australia plummeted by 25% in one day. Now, 25 percent's not a number. That's a gut-wrenching emotion, and there was total capitulation that day. But he, here's the crazy thing, what caused it? The Aussie market collapsed for no other reason than the US market had collapsed by 23% just hours earlier. We just blindly followed their leads. So it obviously begs the question, why did the US market collapse? Now you'd think it'd be a case of Captain obvious why any stock market sheds a quarter of its value in a matter of hours.
Michael (8m 32s):
But in the four months following the Wall Street collapse, there were six independent US investigations in an effort to determine its cause. And they didn't produce a single defining explanation. It was simply a case of mass hysteria. Someone got scared and like I herd of frightened antelopes investors around the world just started stampeding. What I found interesting is that a guy called Bob Shiller, he's a Yale professor, and he wrote that bestselling book, Irrational Exuberance. You may have read it. He did a survey in the wake of the 87 crash and he asked people why they sold. Now thi this was a survey to market professionals.
Michael (9m 14s):
We're not talking about mums and dads here. And the most common answer was that people sold because the market was falling. They didn't have a reason, they were just joining the stampede. But here's the thing, if you'd remained fully invested in a simple no-brainer, broad-based portfolio of Australian shares prior to the crash, if you ever remained invested to now and it invested all the dividends you'd received over that time, then your portfolio would be worth 14 times what it was worth pre-crash. There was never any reason to be fearful at all. I I, as I said, I don't wanna go through them all, but one I need to mention is I describe it the so sayer siren, people who make predictions, some of the most seductive sirens you are gonna hear are economists, particularly the ones that predict the future.
Michael (10m 6s):
But I I love that quote from the financial historian John Kenneth Galbraith who said it well, he said, there are two types of forecasters, those who don't know, and those that don't know, that they don't know. The reality is they get it wrong far more often than they get it right. And few people bother to check how the predictions turned out, but some people do. I mean, the evidence that they get it wrong is copious. Just read the works of people like Philip Tetlock or Dan Gardner, Alfred Coles, Taverski and Kahneman. The problem here, Phil, is that PR and why people believe them, believe economists is because the predictions are usually delivered as a narrative.
Michael (10m 50s):
But the problem with narratives is that the narratives regarding the past and the narratives about the future sort of sound the same people blur them into one, but they aren't the same. The past is fact and the future is crystal ball gazing. All it has to happen for a narrative about the future to be accepted and believed is for it to sound credible. And some of those economists, when they start talking, you know, con on tv, they, they sound very convincing. But I always like to say to people, when an economist comes on tv, use the time constructively, get out of the chair and go and make yourself a cup of tea.
Phil (11m 29s):
I think John Kenneth Galbrath was also famous for that other quote, which is the role of economic forecasting is to make astrologists look good.
Michael (11m 38s):
Yeah, I think Buffett's repeated that one too. I think charting people love, love looking at charts and interpreting things that should not be interpreted. I tell in the story the book about the V1 and V2 rockets in the second World War, this is pattern seeking behavior that, that humans seek. The V1 and V2 rockets, the Germans were firing over London into London from the French Coast. They, they were extremely inaccurate. They couldn't be targeted the way missiles are today. And inordinate number hit the east end of London. So the Londoners thought that they in fact were accurate and the Germans were targeting the East end.
Michael (12m 20s):
The Germans note knew they weren't. But in the wake of the war, a statistician proved that what Londoners were seeing, the high hit rate in these in East London was in fact random. But this gets back to finance a lot of chartists, you know, they put their faith in charts, you know, heads and shoulders and you know, support and resistance and all this flags,
Phil (12m 44s):
Michael (12m 45s):
And flags. I, it's, they've got every shape and you, it's like looking into the night sky and seeing things up there amongst the stars. I don't believe I be in charting. I believe that what charters are doing is trying to find order in randomness. In fact, I talk about a study in the book where a statistician called Holbrook working generated charts from random sequences that he just generated. You know, they were well fake sequences, they were meant nothing. And he showed them to professional traders who used charts in their daily work and the traders couldn't tell the difference between working's fake charts and, and the real ones.
Michael (13m 26s):
You know, and high returns is another siren. Unrealistic expectations of returns.
Phil (13m 31s):
Well, this is actually, this is, I was just gonna bring that up because I think that's one of the problems is that when people first start looking at the stock market, yeah, that's what they're expecting. Yeah. And they see something like a 5% jump in a share price and they think, oh, that's not really very good, is it? I'm thinking, aren't we gonna make 50%, a hundred percent, are we gonna make life changing gains here? But it's, that's not the way to, to approach the market,
Michael (13m 56s):
Is it? No. The biggest return you're gonna get from stocks, I hate to break the bad news, but I totally accept it, is from dividends. If you look at the long-term returns on stocks in terms of capital gain and then adjust them from inflation, and they're fairly mundane, you know, between one and 2%, whereas dividend, what, 6% before tax, it's the compounding of dividends and reinvesting those dividends that will generate the returns that you should expect. The stock market delivers a long-term average return of around about nine 10% before inflation, about 7% after. And if a person expects higher than that, then they might achieve it through luck for a short period of time.
Michael (14m 40s):
But in order to develop skill to generate higher returns, it takes an enormous amount of skill and an enormous amount of effort that's beyond the pay grade of most investors.
Phil (14m 52s):
And the time that they might even that I might have to, and
Michael (14m 54s):
The time it's a full-time job and there's no guarantee you're gonna achieve what you're expecting to. I mean, truly, truly skilled investors are, are hard to find. In fact, in the book I say that you're unlikely to become one yourself, nor are you likely to meet anyone in your lifetime who has, I mean, it it just stands to reason Phil. I mean, the market is the market. Not everyone can, can outperform it because we are the market, the investors are the market. And if everyone could outperform the market simply, well, it's just a nonsense. So
Phil (15m 27s):
What's the contract that's mentioned in the title of the
Michael (15m 30s):
Book? Yeah, the less contract. Yeah. It's a myth of an investing that is more mechanical than seat of the pants investing. And when I say seat ofthe pants investing, most people are seat ofthe pants investors. They chop and change and they change their technique depending on the weather and market sentiment. But the Ellis contract is a contract that should help you shield out all the noise. So you're less likely to be influenced by all the financial sirens and feds and
Phil (15m 57s):
Michael (15m 58s):
That yeah, an economist. So what you need to do is you establish first what works and reject that which doesn't. And then as I said, you gotta reject that, which doesn't get that out of the system. So you establish what works, then you set up an investment plan based on your findings. I guide people through this in the book, and then you stick to that plan over an extended period of time. You don't get sidetracked from the main game. And my last chapter is about a Ulysses contract that I feel nearly every investor independent of their skill can put in place. I mean, a perfect example of a a Ulysses contract fill is a mandated superannuation.
Michael (16m 39s):
I mean, the government has placed every employee in Australia into a mandated Ulysses contract with super. Outside of Super. You could dollar cost average. That's another one where you placed, you know, you work out how much you can save each month, put the money into a bank account, turn that into your preferred investment place your trust in a regular saving plan, feeding that money into the stock market, usually via something like a, a broad based ETF or a low fee LIC list investment company. But compounding your portfolio at general stock market rates over an extended period of time can deliver enormous returns as long as they stick to the contract
Phil (17m 21s):
And hold, hold your nerve as well through all the noise. And I think it's worthwhile sometimes just to, just to do, have a play around with a calculator and just to see how returns will compound over 10, 20, 30 years. You know,
Michael (17m 33s):
You know, Phil, you, when I sat down, I talk about this in my book when I, I'm 65 now, but I sat down and did exactly what you just said at, at at age 30. I sat down one night and I worked out what I could possibly be worth within a decade, two decades, three decades based on market returns. And it absolutely shocked me. Compounding is something that really starts to gain momentum if, if you just let it go. Interfering with that compounding machine is really a very silly thing to do. Yeah,
Phil (18m 10s):
I think it's great though that many young investors these days actually understand that whereas, you know, in the past, I mean, how did you actually find out about that back in the eighties? Or
Michael (18m 21s):
It was learned about compounding in sixth grade at school from my teacher called Mr. Curtis. But what I didn't do at that time is link it to investing. It was just a mathematical formula that an 11 year old learnt. But how did I learn it reading, you know, as a young adult, it became entrenched in me. I was fascinated with the stock market. I was fascinated with investing. I've always enjoyed mathematics and it just seemed a, just a sensible notion to me, you know, common sense.
Phil (18m 53s):
And it, it's really, there's so many people who look at the stock market and they think, you know, it's about, it's like picking a horse and they, they're looking at it and going, oh, I like the sound of that one or so and so has given me a great tip on this specy goldmine.
Michael (19m 7s):
You know, I often say that novice investors should not look upon shares as a stock code with a price attached. They're actually companies
Phil (19m 16s):
Living, breathing companies.
Michael (19m 17s):
Chloe (19m 21s):
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Phil (19m 35s):
So the subtitle of the book is How to Never Worry About the Share Market again. Is it possible to never worry about the share market again, having been through several crises yourself? I'm sure.
Michael (19m 44s):
Yeah. You know, having said that, I'll worry about the stock market far less than, than I used to. Mm. I mean, I didn't come up with that subtitle, the title, the Ulysses Contract is mine, but the subtitle isn't. But I still think it's a good subtitle. It was recommended to me by a, a friend who's also an investor. Worry is a personal thing when it comes to the share market. Most people are never going to it totally eradicated, but you can modify how much you worry. And, and the book provides a number of tools that you can employ to, to help reduce the worry that you might experience. And I'd throw a few of them at you now, like acknowledging that there are many things regarding investing that you just can never control.
Michael (20m 30s):
So control the things you can, but it's futile worrying about the things that you can't. And I, and I run through those in my book, you, you also need to acknowledge that when you invest, you are to a large degree placing your trust in the system. And the way you can place your trust in the system is to study history, get a really good feel for long-term stock market returns. How the stock market has returned and performed over the centuries. And I mean, the first stock market was, first tradable stock was 1602 Dutch East India Company. First stock market was 1611, again in Amsterdam when actually built a formal market. So there's over four centuries of history and it's all well documented.
Michael (21m 14s):
Trust the fact that over the long term, there's no compounding machine that can match the stock market. Not even property. But that's, that's another issue. I could get onto that in another day. So yeah, you need to trust place. You trust in that compounding machine. What I touched on before, to appreciate that market volatility, if you have the right frame of mind, should present you with opportunity, not danger. And most people get very, very scared when the market starts moving around. It helps alleviate anxiety enormously by gaining a financial education. It's a dangerous thing to actually engage with the stock market without first having sought some form of financial education.
Michael (21m 57s):
However, basic I compare a lack of knowledge about the market to a child who's afraid of the dark. You can ale usually alleviate that child's fear by switching on a light. And to me, a solid financial education is like switching on a light. The fear tends to dissipate. The other thing is people focus on loss, but recovery is also a feature of the stock market. And finally, there's another tool that's helped me stop worrying about price volatility. I view my shares differently. I take a different perspective than most people do. And it's what you said before, people focus far too much on capital gain as the source of return.
Michael (22m 40s):
Hence they, they look at prices and get very anxious about what the price is doing. To me, investing is not about casinos. To me, my portfolio of shares is like a farm that's generating returns like a farm generates a harvest. I live off that harvest, namely the dividends. I don't fret about the share prices. And I think if you take that attitude, it helps enormously to alleviate any anxiety about price fluctuation.
Phil (23m 10s):
So is that the case when you might be going through a period of volatility but the dividends still keep rolling in? Is that the case?
Michael (23m 17s):
Correct. Yeah. In fact, if you look at periods when the market drops significantly or rises significantly, typically the dividends are far more stable as you'd expect. The dividends being the harvest from company's activities. Mm. The company's activities, the actual production machine that's producing the dividends is not nearly as volatile as the prices themselves because the prices are driven by hopes and fears and emotion. Whereas the company's activities aren't, or to a much lesser degree.
Phil (23m 49s):
And other guests on the podcast have pointed out that it's worthwhile researching the dividends to a certain extent because you don't wanna get caught in a dividend trap just getting something cuz a, a really good dividend is coming up without actually thinking of the overall
Michael (24m 3s):
Don't pay. I don't choose my stocks on the basis of dividend yields. Yep. In, in fact, it's far more about the activities of the company because dividend are also subject to dividend policy of the company. I mean, for example, I own Berkshire Hathaway shares for quite a while. That's the
Phil (24m 21s):
Expensive ones. The the second
Michael (24m 23s):
Class size, class size, size, size. Wow. I had the Class A, I bought them at an excellent time. I bought them, I think it was September, 2011 when the Aussie dollar was at parity with the UB. So I got in dollar for dollar and I think they're about 113,000 a share in the covid induced selloff. In March, 2020, our dollar hit 55 cents against the us which meant that the currency had changed. It was very, very good for people selling assets outta the us. So I sold them then. But yeah, I had the class a's, but the point I was gonna make, Phil, is that it didn't have a div in it.
Michael (25m 3s):
Buffett retained all the profits. I think it was 72 was the last dividend. I'd have to check that cause I'm relying on the long-term memory here. I think it was 72 and it declared a dividend of about 10 cents at the time. And Buffett, he complained, he said he must have made the washroom when the, when the board decided to pay the dividend. But yeah, it hasn't paid a dividend, you know, 50 odd years when you like to say, well, what's the use of owning it? Well, the, the point is, buffet says if you want a dividend, sell a share because I'm retaining the profits, I'm gonna reinvest them in the business. It's been a massive compounding machine. Massive. So
Phil (25m 39s):
You've spent a lifetime researching financial literature dating back hundreds of years. Is this because there's nothing new under the sun?
Michael (25m 45s):
No, it's not because of, I, I guess I, I love history, but is there anything new under the sun from, you know, going back to 1602 when it all got going? So we've got 400 years. Look, we can view that question from two perspectives. I guess either a technical perspective or a human behavior perspective. So let me address both. Firstly, from a technical perspective, 420 years, what's changed over then? We've got the internet, they didn't have, we've got fiber optic cable satellites. So the, the speed and volume and ease of trade has increased massively. Also the dissemination of information. And that's certainly had an impact on professional trading.
Michael (26m 28s):
The other thing that combining computer power with algorithms has facilitated is the search for and the profiting from pricing inefficiencies in the market that a lot of the big hedge funds do today. Again, nothing that mums and dads can do on their, on their Apple laptop, but Jim Simon's mathematician turned investor at age 40, that's Renaissance technologies at hedge fund. He's just absolutely hit the ball outta the park in his search for pricing inefficiencies using algorithms. Those technologies that have been developed haven't yet had a significant impact on how we actually invest in the traditional sense. That is how we choose shares.
Michael (27m 9s):
And I, I was invited in 2015 to deliver a presentation in the US in the lead up to the Berkshire Hathaway AGM and I talked about this to the US investors and hedge fund managers and so forth that were at the conference, the way investors valued stocks. See they all think, you know, valuation of stocks started with Ben Graham, you know, and securities analysis in 1934. But it didn't, in fact, the way investors valued stocks way back when things started in the 17th century is pretty much the same as now. And you might say, well how's that? Well, the concept of discounted cash flow, which analysts use to today to value stocks is clearly described in Leonardo Pisano's book, Libra Barchi, the book of Calculation.
Michael (27m 59s):
And that was written in 1202. So there is nothing new about discounted cash flow. A book written in 1688 about the Dutch exchange. He describes how he values shares. I mean he calculates them. So it's the same as today. So, alright, well that's, that's plain vanilla shares. But what about financial derivatives, like options and futures? People think they're sort of new whizbang ideas and if you ask anyone, they'll say, oh yeah, brand new thing. You know, a few decades old. No, they're not a new thing. There are documented reports of options being used in ancient Greece. Mm. I mean, before Jesus Christ was a child.
Michael (28m 39s):
Not options on shares at that stage, obviously, but the concept of a not option contract can be applied to anything of value. But when wa options applied to financial instruments like shares since the very beginning, they were traded on Dutch East India Company shares back in the 17th century. De LaVega talked about the many's book, confusion de de Confusions, which he wrote in 1688. I've read the book. In fact, the Dutch referred to options as opsis. That was the word they had for it. Now he's another one Phil contract for difference. Mm. You know what a CFD is? Yeah. Everyone thinks they're a new thing. In fact, if you look up Wikipedia, Wikipedia will tell you that they were developed in Britain in 1974.
Michael (29m 25s):
Well, that's not all together correct either. I, I have a copy of an act of the British Parliament on a bookshelf that was passed in 1734. It's called the Sir John Barnard's Act of 1734. It's a government act of financial regulation. And in the act they ban the evil practice of making up differences for stocks. That's basically what CFDs are. The act also declares all contracts for the future deliveries of securities to be null and void. Well, that's what futures contracts are. So what's new is old. Secondly, a share market's different today than they were centuries ago in terms of how people behave.
Michael (30m 9s):
Absolutely not. And that's no surprise, given that 400 years has been a tiny speck in terms of human evolution and development. People today experiencing exactly the same emotions as those who came before us. Fear agreed hope. Same, same. I mean, I love that observation delivered during England's stock market bubble of 1720, which that bubble was referred to as the South Sea bubble. It was made by a London attorney at the time who was watching people trade stocks in London's exchange alley. It was an outdoor area where they exchange shares. And, and this London attorney of the day said, I had a fancy to go and look at the throngs. And this is how it struck me.
Michael (30m 49s):
It is nothing so much as if all the lunatics had been escaped out of the mad madhouse at once. I mean, it's the same today. Emotion hasn't changed where no more, less emotionally sophisticated or not than investors were 300 years. So we make the same mistakes as people always have in the share market.
Phil (31m 10s):
Well, that kind of answers the question though, I was gonna come to, which is why do people keep on making the same mistakes over and over again? And it's because we're just, you know, I think we've just evolved. You know, it was 10,000 years ago, 12,000 years ago, everyone was hunter gathering basically. You know, it's only been a very short time since we've been smart chimpanzees with a couple of tools.
Michael (31m 27s):
Yeah, well there's another reason for that one too. And I, I don't think I make the same mistakes over and over again, but people don't read history. Mm. That's, that's the basic problem, which means each generation makes the same mistakes as those that preceded them. If, if you don't develop an appreciation of financial history, then the only way you're gonna learn is through the school of hard knocks. And I always tell new investors that they need to read about past financial booms and busts. You know, 16 88, 17 29, 8, 7 29, 9 74, 87, 2008. It's all there. And they're real events. They're not just stories in books that I always say to people when you read history, imagine that you're with yourself.
Michael (32m 10s):
I mean, I love financial history. Each crash is unique, but they tend to follow a similar script. So when I experience the stock market myself, and I've experienced a few, I I describe it as like watching a movie for the first time. But you know, it's, you know how it's gonna end. It's a, it's a weird feeling. You feel, you almost feel reassured in a boom, in a bus of what's gonna happen. And, and thinking that way. I tend not to feel scared or threatened when markets fall collapse.
Phil (32m 41s):
The title of this podcaster Shares for Beginners. What advice would you give for someone approaching the market for the very first time? You know, just one or two little hints.
Michael (32m 51s):
Okay, three things, here we go. Just don't believe everything that you hear, you know, from anyone when it comes to financial markets. The problem is that fantasy can often sound like fact, particularly in the way it's delivered by someone who's confident or, you know, wearing a suit or, you know, it's very easy to assume that people know more than you and often they don't. But particularly be skeptical regarding advice from people who have an agenda, for example, that they're profiting from you, believing what they're telling you. Test everything yourself, develop an education
Phil (33m 24s):
And you write in the book about complex investment concepts and you reject a lot of these why and what are some of these complex investment concepts? Yeah,
Michael (33m 33s):
That's something that the publisher wrote in the promotional blue on the, So they aren't specifically my words. Yeah, I, I'd be a bit more nuanced with that one. I, I do reject some specific things that don't work at all. Like, as I've talked about the ability to predict the future no matter who's delivering it. But I'm more nuanced regarding most other things that I write about in the sense that there are many things that don't work in the hands of the average investor that might work in the hands of the extremely skilled investor. I question an ability to market time the market. I think for most people who get swept up in the emotion of the time, it's a very difficult thing to do.
Michael (34m 13s):
In fact, in the book, the biggest chapter is about timing the market. It's over 30 pages long. And I, I think when people read that, they'll start to relate themselves to what's said in the market. Do they really have the skill or the sense to know when things are outta whack? Most people don't. Another thing that's more nuanced is the capacity to consistently achieve higher returns than the general market delivers. There are people in the world who can, people like Warren Buffett, people like Jim Simons. There are true skill can be applied, but it's extremely rare. It's ex takes an extreme amount of work to develop it. And you need to have an edge, something unique that other people don't have.
Michael (34m 57s):
And I like to say that if you don't know what your edge is, then you don't have one. It's that simple. You need to know what it is before you even embark on the process simply to assume you have an edge because it's you. It just doesn't cut it. The other nuanced one is an ability to work out the true price of a stock or it's intrinsic value. Now value investors operate by working out what they believe a stock to be worth. And then they, they compare it to the market price. And if, if they believe that the market is offering them a stock cheaply, they might buy it. And if they believe that the market price is overcooked, they might sell it.
Michael (35m 38s):
Here's the problem. There are plenty of books on the subject of stock valuation that make it sound easy. It's not, it's not an exercise in simple mathematics. And a lot of these books just deliver a formula. You know, someone new to the game, they'll look at the formula, they understand the formula, they're not difficult algebraic equations and they think they've discovered a capacity to value stocks. They haven't. What you really need to do is develop a deep appreciation of the company that you're considering an investment in because it's the inputs to any formula that deliver the edge, not the understanding of how the formula, it works mathematically. And it takes an enormous amount of effort.
Michael (36m 19s):
And the things that I've mentioned above tend to be above the pay grade of most investors. Now I say in the book, Phil, don't be discouraged by all the negative arguments I'm putting forth. I like to end on a positive and I end it on a positive in my book. I don't believe you need to become a champion to become a really good investor. I believe that market returns are fantastic returns as long as you achieve them. They're not difficult to achieve. Don't try and shoot for the stars cuz you're probably full flat on your face. But if you accept that you're gonna be delivered market returns and you are patient, then market returns can be spectacular returns given the power of compounding.
Phil (37m 4s):
So where can listeners find out more about the book and some more information about you? Well,
Michael (37m 8s):
The, the book, it was released three weeks ago and it sold
Phil (37m 12s):
Out. If they can find a copy. I
Michael (37m 14s):
Know sold out the first few, first day, I think it was when the first hour or two the first print run ran out onto the second print run. Looks like we're going to a third, but it's really easy to obtain. Even Big W have picked it up. So all the bookshops, but most people shop on the internet these days, don't they? Booktopia Amazon, big W, all
Phil (37m 36s):
The usual places. Yeah,
Michael (37m 37s):
All the usual places. Yeah.
Phil (37m 38s):
Yeah. So finally, what does a peronist do?
Michael (37m 43s):
Yeah, we're back to the Greek again.
Phil (37m 45s):
Well, I dunno, I've, I've got such good teeth. I've never had to go to a peronist.
Michael (37m 50s):
Look, if we, if we look at the word derivatives of the word peronist, it's a specialist arm of dentistry to start off with. Perio means around in ancient Greek as in perimeter and donis is derived from the Greek word for tooth. So combining those two words together, periodontists treat the supporting tissues around the tooth. And, and that covers a number of things. But 90% of my day when I worked as a periodontist and I don't anymore, was treating a relatively common condition of the supporting tissues of the teeth called Peron Titus. And I also, during the course of my career, placed over 3000 titanium screws into jaws to support prosthetic teeth when teeth were were absent.
Michael (38m 33s):
So it was a, it was a surgical, surgical sort of job in many ways.
Phil (38m 36s):
Well, I'm glad to have never met you or any of you real,
Michael (38m 41s):
But that wasn't my total career. I worked in finance for many years as
Phil (38m 45s):
Well. Yeah. Yeah. Okay. Michael Kemp, thank you very much for joining me today. It's been a great
Michael (38m 49s):
Interview. Yeah, pleasure to meet
Chloe (38m 50s):
You. 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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