Episode 84 | How trade wars & global uncertainty affects us all | Douglas Isles, Platinum Asset Management

Global risks that could take Australia into recession

Douglas Isles is an Investment Specialist at Platinum Asset Management. He joins us to discuss a broad range of topics including:

• Why fear & greed are the biggest problem in investing.

• How to think like a private owner, even if you’re purchasing shares.

• Social pressure & loss aversion: the behavioral biases costing you big time in the equities market.

• What are the long term benefits of holding equities against holding properties?

• How to recognise when you are holding onto a lemon.

• How do active managers counter the argument that ETFs win over the long term?

• Critical investment thinking: would you still buy an investment you currently own today?

• The importance of listening to your gut when investing.

WEBSITE LINKS:
Ep 1: Simon Russell, Behavioural Scientist
Ep 69: Scott Phillips, Motley Fool
Ep 73: Roger Montgomery, Roger Montgomery Inv Mgt
Ep 83: Balaji Gopal, Vanguard

GUEST WEBSITE:
Douglas Isles - Platinum Asset Management

Work with Veronica? info@gooddeeds.com.au
Work with Chris? hello@wealthful.com.au

EPISODE TRANSCRIPT: 

Please note that this has been transcribed by half-human-half-robot, so brace yourself for typos and the odd bit of weirdness…

This episode was recorded on: 8th August, 2018.

Veronica: You're listening to the Elephant in the Room Property Podcast where the big things and never get talked about actually get talked about. I'm Veronica Morgan real estate agent buyer's agent, cohost of Foxtel's Location, Location, Location Australia and author of a new book "Auction Ready How to Buy a Property Even Though You're Scared Shitless.”

Chris: And, I'm Chris Bates, financial planner, mortgage broker, and together we're going to uncover who's really making the decisions when you buy a property.

Veronica: Don't forget that you can access the transcript for this episode on the website as well as download our free Fool or Forecaster report. Which experts can you trust to get it right? www.theelephantintheroom.com.au.

Chris: Please stick around for this week's elephant rider bootcamp and we have a cracking dumbo the week coming up.

Chris: Before we get started. Everything we talk about on this podcast is generally nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent. They will tailor and document their advice to your personal circumstances. Now let's get cracking.

Douglas: This year we've had the pleasure of interviewing a number of investment experts in asset classes other than property. We have been learning quite a lot about the sharemarket, particularly in our interviews with Scott Phillips and Roger Montgomery and we've discussed philosophical parallels and distinctions between investment in real property and equities. The topic of active versus passive investing has come up quite a lot and recently we discuss index funds in greater depth with Balagi Gopal from Vanguard. So it seems we need to balance the scales a little and have a chat with an expert in active funds management. We've also learned from our conversations with a number of economists that there are macro environmental forces at play out on both a national and an international level, the trickle down and affect our local property markets. So in this episode we pick the brains of Douglas Isles, a man who can help us understand more of these complex issues. In fact, Douglas has a degree in something I was always told you could only get if he was seriously brainy. He's an actuary. Is it true you have to study for seven years to be an actuary.

Douglas: Look it's sort it's an undetermined amount of time time you've got to pass a certain number of exams. So I think I actually did it in three years. I was, I was pretty motivated at the time. Um, back when I was 21 living in Scotland, and I think the big thing was that you've got a pay rise if you passed an exam and at the very end you are entitled to a company car. So that the motivation was pretty clear, very high. And I got through it as quickly as I could.

Speaker 2: So now, however Douglas is an Investment Specialist at Platinum Asset Management, a company that describes itself as a true active manager that focuses on one asset class, international shares, and there's a contrarion longterm philosophy. Well that last point is certainly piqued my interest. I'm looking forward to this chat. Thank you for joining us Douglas.

Douglas: Thanks very much for having me.

Chris: Good to see you, Douglas. Nice to see you, Chris. Just for the listeners. I used to work with Douglas back 12 years ago when I didn't have a hair on my face and my job was to order the beers on a Friday. That was pretty much what I had to do. So I'm good to see you out for our listeners. Um, I'm sure they've heard about Platinum Asset Management. I mean, they, you know, they are in the papers pretty much every day and you know, you know, got my, you know, buildings with their names on it and they're pretty well known. Um, what's Platinum's approach to investing just more broadly?

Douglas: Yeah, I think, you know, Veronica mentioned the word contrarian and that to some extent, uh, captures what, what we're trying to do, but it's a bit more than that. Um, when Kerr and Andy set the business up back in 1994, our founders ah Kerr Nielsen and Andrew Clifford. Uh, they really had a belief that they had a way of making money. And that way of making money really revolved around two things. One is that that sort of contributed an idea if you like the idea of avoiding the crowd. And the other thing was really this sense that a lot of the best opportunities for investing, uh, happen when there's change taking place and when change is taking place, the market often gets it wrong. So the market finds it hard to interpret big changes that are taking place. And, and over time what that's meant is we've had a lot of attention paid to things like technology, healthcare and looking very closely at countries like China and India where things are changing rapidly because the market tends to misunderstand them.

Douglas: The third component of it was really this idea that we would try not to lose money for clients as well. And it's very, it's probably quite good idea and I think that's where it, you know, we talked about in the entry you talked about passive investing. The problem with passive investing is it rides the market up and it rides the market down. Uh, the way we approach things, we take a very conservative approach to the markets. In fact, if we even keep up with the market when it's rising, we, we think we're doing a pretty good job because we spend a lot of energy and a lot of attention on, on what can go wrong. And we use various tools and techniques to try and protect our clients from loss. And, and that can include holding more cash than you would expect. It can include, um, managing the currency positions within the fund. It can also include what's known as short selling, where we actually try to profit from the falls in share prices of companies that we think are overvalued.

Chris: Okay, cool. So in terms of platinum, you've got lots of different funds, but where are the majority of your money? Where are you focusing a lot of your attention in the past and in the future?

Douglas: Yeah, it looks for the business. We manage about $25 billion and most of that is Australian, um, people's savings, a combination of superannuation and money that people have outside of super. But, um, when, when you look at our assets across the board, about two thirds of them are invested in what is effectively our flagship global portfolios, uh, best known as that is the Platinum International Fund. And then about 20% of our assets are invested in our Asian Strategy. So that's investing only within the Asian region, which we define as you like continental Asia. It doesn't include, it doesn't include Japan, doesn't include Australia. Uh, then we have another arrange of other smaller funds, uh, regional and sector funds that make up the balance, this sort of other 10% of the assets. But we've really made our name and we're best known for our, our global investing and to a lesser extent what we do within the Asian region.

Chris: And the, you know, the index versus passive debate. I mean, a lot of, um, there's a lot of evidence out there that index investing is potentially a better option than kind of going and trying to pick fund managers. And you know, there's been a lot of funds that have underperformed the index over many years. And a lot of, you know, younger investors have kind of seen that research has kind of, you know, seeing how funds have underperformed and they're like, well, these index things seem quite simple and they should invest in them. What's your argument to kind of people who are thinking that index is the kind of the Gods strategy and should not do anything else besides the index?

Douglas: Well, I think, I think the best evidence really comes in a downturn. So, you know, what we've, what we've had is we've had this sort of unprecedented, long, unbroken period for markets. So, you know, we're in watts. Bull market's been gone for more than 10 years, beating back the GFC, the market's bottomed, uh, in March, 2009 and so March 23rd, so are there you go. Remember it. Well,

Chris: On that day, and I remember the conversation at the time, I was like, you thought it was really nervous? Yeah. That much cash. And I was like, my, if things get lower from here. Yeah. And I just gotta be, you know, it's all time lows and uh, he's done extremely well since that day.

Douglas: Well, no, the people, people who did, but most people tend to do the opposite. They tend to, they tend to panic when things are, are not going so well. You know, and if you look at the, the tax years, which are probably the easiest thing to think of from an Australian perspective, 2008, 2009 combined global markets fell by a third. Uh, our flagship portfolio was down 1% over these two years. So basically you started the bull market with the a hundred dollars when the market or the index investors only had 67 left. And that, that really makes a very big difference. But over the last 10 years, I think what index investing has done in that period, it's given you an adequate outcome. Regardless, ignore what active does that we've, you've made an adequate return from being exposed to the market. And you know, the first, the first premise that we have as well is that equities are the best store of wealth of any asset class.

Douglas: And I know most of the listeners that's property that they focus on. But if you go back over the very long term, equities are the best store of wealth. And so if we think of that, then we would rather that people expose themselves to the markets in some way. And An indexing would be the adequate solution. And you can think of it like with, uh, with car brands for example, and I don't want to rubbish any particular brands, but there are, there are cars which are very, very basic and they will get you from a to B. But then there are cars and you know, the Germans being a good example. If you, if you want a German car, getting from a to B will be a lot more comfortable. You'll have a, you'll have a smoother ride. So what we can do with active investing is we can really try and make the journey easier for investors and your, when you have these big sell offs, um, people tend to panic.

Douglas: And so one of the things we're doing at Platinum is we're trying not to lose money. The problem with the passive strategies at that point, people see their funds down 30 40 50% and then they sell and then they lock it in and they, they probably go to cash and they'd probably come back and you know, several years later when the market's gone, already gone up by 50 or a percent. So they miss out twice. So what we're doing is really using our skill to get what would be called better risk adjusted returns.

Veronica: I often find particularly property that people take far too much risk for the return they get.

Chris: Yeah. And I think, you know, with property they, they've too unforgiving. So you know, they, they'll get bad returns in property and they're like, oh yeah, all property goes up. Oh, it'll come back. And things like that. And they're a little bit more patient with property. Even it's a poor assets, but my worry with index investing, which is going to come up in the next few years, whether it's next year or 21 or 22 or 23, there will have to be an end to the bull run, which been going for, you know, ridiculous length of time and all the index investors will sell at the wrong time, crystallize all their losses and then the whole indexing will just kind of go out of fashion again and people who've lost a lot of money. So I guess that's the big fear that's coming for index investors that don't know how to apply that market.

Douglas: Exactly right. And like Vanguard is the, is the big champion of investing index investing. They've done a fantastic job building their business, but they built the business on the fact that it works for the time being. Vanguard are getting more money in every day, I think. I think they got $1 billion of new money every day. In the US more than the entire rest of the industry, uh, is seeing, you know, go out the door. It's, it's a phenomenon and these things always, you know, we try and avoid the crowd. We try and move in the other direction, uh, before the, before the problems arise.

Chris: Okay, cool. So tagging these in a bit of a different direction, there'll always be a role for active and passive and the real active manager is, I believe you should consider are ones that are contrary and they are betting against the market. Cause if you just got a bet with the market, go with an index fund. But you know, look at contratian investors.

Veronica: That's what Balaji said, you know, he, he did say you've got to find a really good active manager. Yes. And that's your challenge.

Chris: Yeah. And you don't know if you're betting on luck or skill or whatever. So I mean I guess the, the real kind of conversation I guess we want to get into here though is, you know, the global story and Australia is such a little bubble, you know, what percentage of the world market is Australia? I guess as a stock market?

Douglas: yeah, probably makes up about 2% of the, of the global market and that's actually punching above its weight. I mean, we have an expensive stock market relative to other markets and uh, if you think about population-wise where we're less than 1% and half of 1% GDP wise we're probably about 1% and then stock market wise where we're about two, so at two where we're punching above our weight and uh, it makes up, most people in Australia managing portfolios tend to have about 50 or more percent of their equity portfolio in Australia, which is actually the biggest home bias in the world. So no country in the world puts as much money into their domestic market as Australians do. So that's an interesting little statistic for you.

Veronica: We do love talking about biases on this podcast and so home bias?

Chris: Home bias is huge. I think. Um, I mean I was really flabbergasted when I came back to Australia in 2011. I'd living in London for four years. And, um, you know, London was the depressed, it was the recession from 2008 businesses was shutting down. Bars, sort of cafes, nothing was opening up. Um, unemployment was rising really fast. There was no real end in sight. Interest rates had dropped to zero. Um, lots of people were laying off staff. I came back to Australia and there was, oh, everything's amazing. You know, they're doing this mining boom and, you know, and nothing had changed and things like that. And I feel like, you know, they kind of got away through the GFC because obviously China, um, you know, what some of the global risks that are happening that Australians aren't really thinking about that could really severely take us into a recession, that we kind of have haven't had for a long long time.

Douglas: Well, I think, you know, mining is actually doing alright right now, but I think the big thing was that, you know, when China chooses to invest in infrastructure and build out, you know, it's, um, it's backbone if you like. That's been a big, big benefit to Australia. So I know you're absolutely right. Australia avoided the GFC because of essentially, because the Chinese decided to spend on infrastructure. I was in Singapore at the time, sort of 2009 to 12. And I remember Kevin Rudd coming to do a presentation to an audience of Australian business, people living in Singapore and trying to claim that he had done whatever he'd done to save Australia, giving people $900, I think it was to spend on televisions or put it in the pokies.

Veronica: But no they did do a lot of school buildings.

Douglas: But it was, it was funny because we're sitting in a room in Singapore where everyone was there because they were trying to capture the Asian growth opportunity. And then here was a guy telling us that he had saved, um, Australia from the GFC when everyone in the room knew it was, it was China.

Veronica: God, that's hilarious.

Douglas: And everyone was asked at the end were actually asked, we had to clap when he, uh, when he left the room because the people were just so amazed at this. This guy thought he'd, he'd, he'd saved the country. You can look at all these charts. I was actually doing a presentation yesterday. Down in regional Victoria and showing charts of the debt situation in China and what if you look at the, uh, the growth and debt against the growth of the economy. The spike that they had in 2009 was, was off the charts and that was the big pulse that was about effectively as the rest of the world slowed down and China at that time was very export focused.

Douglas: They needed to find a way to keep people in work because of, you know, 20 30 million people are going to lose their jobs. That was not going to be stable in China. So they went hard foot to the floor on, on infrastructure. That actually ended up being overbuilding too much capacity and, and led to some problems probably around 2014, 15 as the had too much capacity in a number of industries. We've seen a bit of a repositioning of the, of the demand from the, from the mining sector. But the biggest, the biggest question for Australia really comes down, it's not necessarily a one or two year question as much, more of a, a longer term question of what is our, our position, if you like, within the world. And what are we offering to, whether it's developing Asia or whether it's to the developed world, what are we actually trying to sell to the rest of the world?

Douglas: So we hear these great things about what it's all about education or it's tourism, healthcare services, what have you. And it's things that, you know, when everyone's trying to sell these things. So, you know, if you think of, um, one of the exercises I often ask people to do is if you get a globe and you put Beijing, the sort of center at the goal, but then you, and then you look down, Australia doesn't look any closer than Europe or all the American, the west coast of America. So, so we sit here and we talk about Australia and the Asian century and we talk about how do we fit in to this, um, this growth story. And Asia is the nearest place to us. I mean Indonesia is not that far from our north coast. So we see that as our obvious market. It's a long way to London. It's a long way to New York. However flip it round and look at it from the perspective of the customer. They can choose equally. I mean simply in a geographic sense they will choose the best.

Chris: So you then have to think India's the same story, right, exactly. Another country. I mean they could go anywhere fun.

Douglas: India is a lot closer to Europe than it is to Australia. So you've got to think for that non mining exports or nonagricultural exports, not the things that we're digging up and growing where we have a competitive advantage, what are we offering from a skills perspective and are we educating people to address this? And there's some quite damning statistics when you look at the state of education and uh, the, the rank holder, uh, countries by the quality of, uh, I think it's maths tend to look at age. I can't remember the numbers exactly, but Australia has gone from I think its ninth to 21st in the world between 2006 and 15. So we're falling behind. So we want to compete, um, you know China producers, 4 million stem graduates a year and this is what we hear about. We must be skilled up in science, technology, engineering and maths, China is producing 4 million a year. That's probably going to be 40 50 million in a decade. That is a, you know, so UK or France or, or a or a Spain worth of people graduating in these subjects. So we've really got to think about what are we trying to, what are we trying to produce and sell? And that's, that's a big question.

Chris: So I mean obviously we've got yeah, massive problems from a longterm point of view as a big question for the government and society to become more competitive as a country. We can't just keep growing. We've got to produce something. But I mean in the short term, yeah. Yeah. What are some of the things that, you know, obviously there's the trade wars and things like that, but what are some of the things that we just aren't aware of that can easily kick off and how things can get pretty bad pretty quick?

Douglas: Yeah, I mean the trade war and, and it's, and it's sort of second order effects if you like, are probably the big thing that people would be concerned about. And I think, I think rightly so. Um, what you have is, uh, two super powers. We haven't had two super powers going back over 30 years, but when I was growing up, it was, there was a cold war. It was US against Russia. And then that sort of ended, uh, 1989 approximately. So we're re 30 years on from that. And China has really emerged in the last, in the last decade. And depending on how you measure it, the economies of the US and China are approximately equivalent. Uh, in a physical sense, China is much larger, but uh, lawyers get paid more in the US and that's still a measurable part of that economy. So, but when you, when you look at these two superpowers and as they interact with each other, and the imposition of tariffs. I think what we saw in 2018 we saw that the, the world is more sensitive to what's going on in China than what people had perceived. And there was a big sort of filtering out if you were, if you are selling to China last year as they were slowing down, you were struggling and what was happening with the trade tariffs and the uncertainty, a lot of decisions get deferred so people aren't sure where they should build their next factory. They aren't sure whether they should be building inventory or, or, or what. These kinds of decisions become become very difficult to make if you don't know what the rules are going to be. And we've seen it at various points in history. Any time there's uncertainty overregulation that then decisions get deferred. And so I think as, as we look at the trade war, rather than thinking so much about, but what Trump's pronouncing and, and what have you, which a lot of, which is probably an election game with 2020 coming up.

Douglas: Yep. So you've got on one hand you've got America taking or the leader of America looking at the next, well, no, no, two years, but it's a four year cycle. You're looking at China reasserting itself after two centuries of not being the world's number one. And China's gone through most of its history being the technologic technology leader, military leader, wealthiest country in the world. And it's had these two years where it's been, sorry, two centuries where it's been taken over at first by the UK and then by America. So he's trying to reassert itself on the, on the world stage and it's very patient. So don't, don't look at the headlines, but when there are headlines, except that there will be deferal of decisions and there'll be confusion. Yeah. And so short term there's, there's all sorts of things can hit us.

Douglas: It could be, you know, monetary policy in China or the US or Europe can effect effectively our relative position, are our interest rates attractive or not, do we attract capital, not attract capital? What does it mean for our currency? Um, but I think it's that big picture question of what is our role in the next maybe a decade from now and how do we get there? Which will, which will really have a really have a bigger impact.

New Speaker: It makes a lot of sense, right? If, if there is a bit of uncertainty on where things that are going to be, you know, happens with elections every, you know, three off, you know, where everyone's like, oh well we've gotta wait for the election. So they stopped hiring staff, they stopped building, they stop investing.

Veronica: Well look at our energy policy or lack thereof.

Douglas: Yeah. But, but here, the franking credits was a big thing. So there was a big debate about in the stock market in Australia was franking credits. Would we lose franking credits? Would we not lose franking credits in the property market? It was negative gearing or otherwise. And so you had this so-called relief rally on a, on a maintenance of, of government, which was effectively people making decisions ahead of the election, uh, for something that actually never ended up happening. So it's very, very, um, confusing.

Chris: So you know, I guess, um, interest rate story's gone and completely flipped in the last, you know, few months and you know, we'll potentially US were increasing rates, we were potentially going to increase rates, a lot of talk then it's all like, no, we're cutting rights and we're going lower and we might even go under 1%.

Chris: Yes. And a lot of people think we're becoming a bit Japanese, right. In terms of we're going to have very low interest rates. Can you please tell a story around how Japanese have got themselves into that position. Yeah. And are we going to go to that ourselves?

Douglas: Yeah. And it's very, it's very interesting because those are, if there's a phrase the Japanese Japanification, which probably applies mostly to Europe. Uh, Europe's got negative rates across a lot of the major countries and even corporates. So Nestle, we're borrowing money, a negative interest rate. And I find,

Veronica: can you explain how that works?

Douglas: It's a very high to explain it. It's the, it, you always get this wrong way round. But the idea is that when you borrow money, normally you would, you would, you would pay the bank to borrow money. Uh, this, this situation is that you are paid, uh, to borrow my borrow money.

Veronica: Yes. Yes. So I thought that see what it means. But that just seems ridiculous. I don't mind being given free chocolate or something. It must be something.

Douglas: Yeah, it doesn't, it doesn't, it's not easy to comprehend. So the idea at the moment is that everyone thought rates were effectively bounded at zero because if you were not going to get rewarded for, or sorry, if you're going to have to, um, think about the other side of it, that the lender, um, the lender would effectively do something else with the capital, they wouldn't, they wouldn't lend it to you. And, and, and receive a negative rate and pay you for the privilege of leanding the money. So it's all, it's all very confusing, but probably no, we're probably know almost a decade on from the GFC. And that, that's really shortly after that we went to this position of negative rates cause zero itself wasn't helping to stimulate the economy.

Douglas: So yeah, we could go there in Australia. Um, we could go there, but what's happening in the rest of the world is the longer we're in a position where zero or slightly negative is not working, the more the discussion moves to what else can we do? So we're kind of catching up now to where everybody else got to several years ago. Yes. Japan got there first. They had a huge bubble back in the late eighties and you know, property in Japan that the anecdotes were crazy. I think the story was that the emperor's palace was worth as much as California. So I'm sure it's exaggerated, but the, that the bubble, the bubble was probably the most obscene we've seen in any asset. Uh, and at least modern history more so than even the tech bubble or the our resources. Um, so Japan got there first and it's just this sort of malaise if you like. And yeah, property in Japan is interesting. People get a reasonably high yield but the expect the value of the property to go down every year. So, uh, you know, they look at the equation in a, in a very different way. Whether we get to negative in Australia, whether we get close to zero. Um, I think the bigger question is, you know, we are that small country, what is happening in the US what is happening in Europe? Do they move to what is probably been described as modern monetary theory? A modern monetary theory is not modern. It's what they did and I think in the 1930s. But the idea is that the government starts spending more money and what we've had is a couple of decades I'm even more aware of fiscal discipline has been very important all about trying to balance the budget. And a lot of the debate in this country has been about which side of politics would be more conservative when it comes to managing the budget.

Douglas: But the sort of monetary, modern monetary theories are more the idea that we'll have zero interest rates don't work, then governments have to start spending money and that becomes, then it's no longer about balancing budgets. It's more about effectively just creating economic activity, weather and hopefully through products that are projects that are productive. But you also get the sense in in Japan at various points that were building roads to nowhere to either win votes or, or just to keep people employed and ultimately got people digging a hole, filling it back in and digging it again just to, just to stay in work. So it's a, it's an interesting where we get to on that and you know already you've got Trump cutting taxes and increasing spending. The US budget is not balanced. They're in deficit 10 years into a boom, which is a concern. And they also have underfunded liabilities and pensions, social security, medical. So you're for all the US is in this sort of apparently robust position in Wall Street's been doing very well and the stock market's been going up. You know, that's not a, a long term sustainable position either. And if they go harder on the, on the investments or the other fiscal spending side, it'd be interesting to see where it ends up. And we'll probably go back into this experimental territory again, but no one really understands.

Chris: Yeah. Speaking about negative interest rates. Noel if you're listening. Noel Whittaker, uh, he did love his, um, his newsletter and um, there's a case in Denmark, I think it is in a mortgage holder. He's actually getting paid to have paid to have a mortgage. So it's gone all the way, not only for governments and corporates, it's actually gone all the way down to consumers now that are getting paid to have mortgages.

Veronica: Ok now you have to explain it to me. Who is giving them the money and why.

Chris: So you go to CBA to get your home loan. I hate CBA. But anyway, you go to CBA and you get a home loan instead of you paying your mortgage to CBA and paying interest, they pay you every month.

Veronica: I get that. But why would a bank do that?

Chris: Well, the reality is it's just the capital is just so cheap as a, as a, and then just got to basically protect capital and there's got to lend. And so, you know, they're borrowing it at negative interest rates and yeah, it's just, it's, it's messed up.

Douglas: It's effectively the clearing price if you think about it for, if you think about money has a price and where that interest rate is set is the price at which there's a balance between those who have that savings, who want to invest them and those who have, you know, the desire to borrow to for whatever projects. And that that's not just for buying homes. It's for, uh, for, for investing in, you know, think of corporates and the projects that they're doing so that that clearing price has become negative. It also means that savers are willing to accept a negative return. And that means that you know, you $100 in the bank for five years. At negative industry, you don't get your $100 back. And you would argue that, why not put it under the mattress? But um, yeah, the uh, the reality is people give it to the, uh, they're happy to accept that there's sometimes there's an interesting angle there. So Nestle, Nestle one example I mentioned, that's a Swiss company and people are perhaps willing to receive a negative return from providing money to Nestle because they believed that the Swiss frank is going to go up. So there are nuances that can be a little bit more complex for a gamble or, or perhaps an informed decision.

Chris: So the elephant in the room is 100% for you.

Veronica: The reason that Chris and I do this podcast is because we passionately believe that property buyers can do it better. We really want to help all of you understand all the risks, but also the ways in which you can avoid your elephant making a decisions.

Chris: But what we would love for you to do is just to share this episode and share other episodes with people around you that are going through the property process. Just by you sharing our episodes, you're really helping us.

Douglas: give us a review on iTunes. A five star please will be very appreciated because this is about making sure that we all benefit from the wonderful information that our guests have been sharing with us.

Chris: So behavioral bias, I mean, we've talked to obviously, you know, our podcast, we love it and we like talking about it, how it affects property decisions, but now how does it affect investing into shares? Because I think a lot of people don't know what they don't know and they don't know how they're going to act irrationally when they're trying to trade shares.

Douglas: Yes.

Chris: And so where, what are some of the common mistakes share traders make, uh, and the problems you have with investing in equities?

Douglas: Yeah, I think one of the biggest problems people make is this, this, um, and it is the simple one. It's the fear and the greed. That's the, that's the biggest, the biggest single problem I think people face when it comes to investing. So you advice how to break it down. The first thing, the first bias that we're trying to counteract when it comes to investing, I like to describe as social pressure, uh, and it really comes back, you know, it's this evolutionary thing and you know, the cast your mind back 5,000 years and you were living on the savannas of Africa.

Douglas: Um, it certainly made sense to be part of a group. Yes. And uh, there were a lot of dangerous animals out there. So if you weren't, if you didn't fit in within the group, you probably didn't have a very good life expectancy. There's my actuarial bit for today, but no you wouldn't, you would, you would probably wouldn't last very long. So we have become, and we've evolved to have a view like this disposition to wanting to fit in and, and I always think the flip side of that is that if we are excluded from a group, we feel it pretty badly. It's like physical pain. And that is a mechanism that means, well, if you've excluded me, I've, I've not been invited to your party. It's important that I to remain connected to you. How can I find another way to, to bond with you.

Douglas: So, so we learn a young age to try and, um, almost be chameleons and fit in different people in order that we can, we can survive that. That manifests itself really much in crowd behavior and you see it in the property market you see in the equity market, but everyone wants to buy and participate in. Then they have this fear of missing out when things are going up, uh, because they'll hear at the barbecue at the weekend that their mate made some money. So yeah, I think I shoot as well. But to me that social pressure is really one of the biggest things I would say. As an aside, I'm pretty concerned about, I've got two young girls, 13 and 11 and I look at, um, social media. And I think, you know, we're more connected more often to more people than, than ever before. And so that social pressure is, is not going away.

Douglas: In fact, I think it's getting more and more intense. And you know, we know through history people have this ability to maintain networks of about 150 people. And you're looking at the, even looking at kids with 500, a thousand, 2000 connections, um, on whether it's Instagram or Facebook or whatever they're using these days. But that to me is a, it's crazy. Like how, how can you, how can you cope with all these signals coming and you're, you're always missing out. So, so it's really quite, um, I think there'll be a lot of problems. There already are a lot of problems, but that, that to me is a serious, threat the, the mental wellbeing of, of our children as they grow up.

Chris: So as an investor, how do you counteract that kind of herd mentality? Because it's, yeah, it's, there's obviously it happens, you know, bitcoin was a prime example last year of it. Yep. Um, yeah. How do you kind of switch off the noise and get away from the herd and just stick to your, your game plan?

Douglas: So really, I mean, first and foremost, it's about having that sort of mentality because this is, this is a really uncomfortable thing to do. So, you know, we have a, a team of 36 guys focused on finding investment ideas and each one of them as a human being. So they're not, they're not immune to the same a sentiment and feeling that they want to fit in as well. Um, they want, um, they want some kind of sense of, uh, gratification from, from the markets. They want their, they want their colleagues to respect them and all these other things that, that make it very, very hard to pick ideas that are challenged within the market. So, so first of all, just just remember this is not an easy thing to do. And we often actually say that the, the best ideas we have will often be the most uncomfortable at the time that we're, that we're investing in them.

Douglas: But there are a couple of things that we can do to help. And the first of these is we can use what we call screens. So our quantitative techniques, we can look, we can run the numbers on lots of companies around the world and try and find out which companies exhibit the characteristics that suggest their our flavour. No simplistically think of that as a low price, but there are lots of other things we could look at like how the prices are moving. Uh, we can look at lots of other ratios but, but effectively think of what is cheap.

Chris: So you've got some fundamental rules that you run over that data and take, let's take out the human emotional element here. Is this company really ticking all the boxes from what we've known from history, these companies generally they tick these boxes as they do better than others.

Douglas: It's a starting point. Yeah. And then there are there affirms like quantative firms. So that's all they do. They, they'll run a screen and they will buy all the stocks that meet a specific criteria. And that to me is quite a passive way of approaching things. So we, we take that as the best. Your starting point. So is this company cheap over companies cheap? The question really is, is is the market, yeah, exactly. Why is the market punishing over punishing? It is exaggerating the problems that the company faces. So that, that's one way we do it. The other way we do it is by organizing our, our analysts into teams, generally global sector teams. So you'll have a team that looks at technology companies all around the world and they have developed over a number of years, a vast amount of knowledge of what's going on within their area and what they're trying to do. It's almost the inverse. They're trying to spot changes that take place that the market hasn't picked up on. So think of that almost as like the prices haven't moved, but we've observed something good that's taking place. And so you might think of that as there's, there's a growth opportunity that that hasn't been been appreciated. So that is domain knowledge. That is expertise, that's human. And the other side, the screening side, there's a lot more mechanical but, but by doing the two of these, you try and find where the, where the crowd is not.

Chris: Yeah. And I guess around investing in property, I mean, what's, what's kind of, how do you think that besting inequities investing in property as similar? I guess what's your kind of belief on what, what, you know, skills are transferable.

Douglas: I mean the big thing is trying to work out what are you paying and what are you getting? So some kind of sense of a, a collar valuation methodology or of some sense. So that understanding and you know, both, both of them are our real assets. And if you think of, uh, I mean if you think of property, uh, at the end of the day it's effectively a business. Even if you buy, you buy one apartment and you rent it out. If you think of that as a business, then you think of an equity as it is a share in a business. So whether it's an intangible business like a Google or a Facebook or whether it's actually, there are listed property companies as well where you are investing in aggregations of, of property investments. So you are running a business. So then you've got to think, well what is a sales line? Which in the property cases that there's the rental income and then what are the costs? And I think, I think actually one of the biggest problems people have in appraising property investments is they look at the yield and they forget about the cost.

Douglas: So we've done a lot of work on, uh, the longterm benefits of holding equities against holding properties. And I think, I think that the hidden things with property you probably knocked 2% off the yield to start with for the cost. It's going to cost you to maintain that property.

Veronica: 25%.

Douglas: 25% of the income, sorry, I'm thinking 2% but it is, it's, you know, I've, I've been a accidental landlord at one point in my life because I moved overseas to Singapore and I had to rent out the police that I owned in Sydney and I have to see, it wasn't particularly, uh, overwhelming that I was achieving because that was where the market had got to.

Veronica: It was also potentially your family home, I'll guess. And they typically don't get great yield. Yeah. Um, but yeah. Off air you mentioned that, um, you see property as passive investment. You want to elaborate on that?

Douglas: Yeah, so look, I think about this, um, when people buy it by unit and they're thinking about, I'm going to meet, I'm going to make money in the property market. What they're tending to do is by buying a unit in a suburb holding onto it for over long, let's say five, 10 years, the return they get from it predominantly comes from the appreciation of the area in which they're in. And so we see a lot, I mean the media covers a lot about which suburb should you be in? Hot suburbs, cool suburbs. What's been the growth rate in the different suburbs? Most people buy something pretty close to where they are based. It tends to be a decision based on something they already know. So we talked about the home bias and the equity market in the property market.

Douglas: Most Sydney based investors, I suspect buy Sydney-based properties if not properties within the next year. They may have a family home in the nearest accumulation of, of apartments is where they buy their apartment.

Chris: Sometimes next door.

Douglas: Yeah. Very almost. Oh, this, I'll buy that. So, so the really that decision is not some strategic, um, the way we trawl over, you know, 15,000 companies in the world looking for um, a hundred investments. Yeah. It's there's an apartment next door I want to get into the property market and I'll just ride that regardless of it. So I think it's actually a lot more passive than people think. Uh, they don't tend to do much to these units. They tend to be pretty homogenous. Uh, and so you're buying effectively a shell and then selling that shell down the track, the real money in property and that the rich lister type, you're aiming for the stars. These guys at the top of the property ladder in the top of the, the rich list that we see in these fortunes that be made in property. It comes from development because that is like a business do you find a customer need and you fulfill the customer need. And by fulfilling that need, you earn a profit. And that's really what good businesses do.

Chris: Yeah, I mean, I, I agree the, you know, if you want to get rich fast, property's not going to happen. Right. We can't get, um, you know, liked, for example, quite surprised by Allasian right? Like, their share prices has gone from $30 a share to $140 something last week. So five times in the last couple of years. Property, come on, don't you can't find a property, it's gone up five times so you're not gonna get rich fast with property. And I think a lot of people think you can approach property that way and it's just, you're just going to get burned. The only way to do it that way is through development. So you never going to get on that rich list. Just building a portfolio of properties. It's just, that's not what you're trying to achieve here.

Douglas: I think that that rich list concept, our, our, our culture that we're sort of developing in this country and the media loves the, you know, this guy's made $1 billion, this guy's made it. Last thing guys probably made 10. Um, but, but they love that it's a headline and the a hundred million dollar property and so on. And so I think, I think for young people that say, I often find when I meet people wanting to get into my industry that the fund management industry, it's been a, it has produced some stars over the years and a lot of people have a sense that that's where they want to get and in a hurry to get there as well. Um, you touched on Atlassian, it's done, done a fantastic job, build it, building a business. But you know, it's a kind of companies like Atlassian at the moment, which are very, very hot in the stock market. So people are, uh, the, they want businesses. We're in a world where the economy is not growing a particularly fast. So people want to own companies that they think will grow regardless of the economy. They're trying to protect themselves from a slow economy and they're paying an increasingly large premium to own a company like Atlassian. I'd only think buying Atlassian shares today is going to be a way to get rich quick. Yes, their businesses worth over $30 billion. Fantastic what it's achieved. But these group of companies, we're seeing people paying very, very high prices and it's reminiscent of the tech bubble back in 1999 2000 when anything technology related started to attract premium. So Atlassian and may go on to be one of the ones that, that that persists and is incredibly successful in the long term. But there are a lot of businesses price like that, that that will not be. And that's where people really risk losing a permanent loss of capital.

Veronica: Yeah. Roger Montgomery talked about that when we interviewed him a few episodes back. Um, and when it comes to property, it's interesting what you say there about it being quite passive because yeah, I think you're right to a certain degree. When you buy in a suburb compared to the rest of the country and all the other places you could have bought in, that suburb is going to perform in its way. You know, so location is, is sort of 80% of the job. But within that you can actually be an active property investor in the sense that if you are very, very careful and your asset selection you can outperform that area. But yeah, if you're buying a homogenous product, you know, in fact I suspect homogenous product unit underperform that market in anyway.

Chris: What Douglas is trying to say is that with the passive side I'm, most property investors are completely just buying and that yes, yeah.

Veronica: So it's that sort of the unconscious sort of way of going into it and not actually quizzing it, interrogating it. Um, yeah, it's an interesting observation.

Douglas: Every person who's become a property investor, they've just based their decisions on what they've done or what their parents have done. Friends have done it because my friends, like at the barbecue you mentioned earlier, like, you know, I'm doing really well and you should, you should do it too. Yeah. You know, I've spoken to so many people that, you know, they've gone along to a barbecue and someone said, I've just bought, you know, an apartment off the plan on this fabulous building and I'm going to be, I'm going to be rich, true property. You should do it too. And they attract all their friends into it.

Veronica: You know, it's like, but nobody tells the yard the bad stories.

Chris: I do worry about that. And if you are one of those people who are recommending stuff to your friends and your family and things like that, and you really don't know what you're doing, just be really careful what you say. Because if friends and family are acting on what you say, you've gotta be really sure that you know, you know what you're talking about. Because the reality is sometimes people do take decisions on this. And I've seen it time and time again, especially when they've made that mistake. They've this confirmation bias kicks in. Yep. And then I want to believe it. And I stopped trying to get people on their side and then they get other people to believe it and then you're part of the crowd and things like that.

Douglas: But I think the social pressure, I mean I often talk with the barbecue is the most dangerous place or investors in in this country.

Veronica: Don't go to bbq's.

Douglas: And so that's one piece of it was not financial advice, general advice then don't, don't go to BBQ's. But you know, it's people have got, you're surrounded by people you like and you've had a few drinks and people tend to um, you know, share their stories and as you said, they tell the good stories, but it'd be stepped back a little bit. And you look at Australia, you know, about 60 years ago, people were being paid to move here and today it's ranks consistently as one of the most desirable places in the world to live.

Douglas: So we have had that, that big uplift in, if you like, what the capital growth as a result of not just income growth, wage growth. We've had this kind of undesirable place to live to desirable place to live in, in the context of the world, and that's something that I think will never be repeated.

Chris: So youy don't think it will continue?

Douglas: It, the market, may continue to do ok, but we've had this, let's say the multiple of income. It was three times income 60 years ago. It's 12 times income today or whatever. We're not going to go from 12 to 48 times income or something. So the growth rates that people are using are probably higher than you would expect to get in the future. So you then step back and say, at best I'm going to get wage growth a as the appreciation on my property. It's a different, it's a different mindset but don't go, this guy got wealthy from it or my friend did well owning a property 10 years ago.

Veronica: A lot of them also think they did well, but they don't really know that they did well or didn't do well. They've got no concept of opportunity costs. They haven't actually benchmarked it against anything and they haven't, you know, it's just a feeling like we went up in value and so therefore I'm really good smart property investor. But what about leverage though? Cause I mean we've had this conversation with a couple of um, you know, equities specialists and you simply can't borrow as much money to buy shares, right? Oh you can. But you know, it's a bit riskier.

Douglas: So if you borrow money directly to buy a share portfolio, what would be called a margin loan, they actually charge you quite high rate. And a big risk with the margin loan that is, is that if the value of the shares falls temporarily below the value or not even the value of the Lord, but the loan with a cushion, you will be asked to the, to be either top it up or liquidate the positions. And that can be fatal. Cause that's exactly the right, everyone's selling at the wrong time. And you'd never want to be a forced seller.

Veronica: That is what happened with the GFC.

Douglas: That's exactly right. Yeah. So, so, so, you know, borrowing to buy things and then being forced to sell them as a is a disaster. You can borrow against your property. Yes. At the rate, at the residential lending rate to buy a portfolio of shares and then you're never marked to market because you're using effectively like the, the, the redraw type type facility. So that's a more, a cautious way, a more sensible way if, if someone has that opportunity. But again, that's a, we don't want to go into the realms of advice.

Chris: No that's really good point. And I'll probably step in there then, but I mean the, you know, I mean, you're right, when someone has got very limited equity in their home, um, you know, they can leverage much further into property because they've got say $200k.

Chris: So if you've got very limited equity, the say $200 grand and it's quite a lot, but if you've got 200 you could then go borrow, let's call another 800 and buy a property for $1 million. Right? But if for example, you've got a $2 million house and it's paid off, well you've got now one point $6 million of equity. And really the discussion that comes up is, well actually do I put, you know, $500,000 into shares and $1 million into property. And you've got both on the table. And I think very few people get to that point to till they are generally, you know, late forties to 50 and then this is when equities are actually potentially a better option as well because time's much shorter. You might want to be selling down in a shorter timeframe. And so yeah, it's not so much properties better than shares or you can leverage more. It's each individual situation. It's a lot of people think you can just always leverage more into equities. So or into into interpretive. Yeah, I mean I think they, the valuation thing, which you, you spoke around there and it's 12 times. I think that's a really good point because a lot of people miss that and I don't really understand that it is highly priced and a lot of the things that drove the market in the last 20 to 30 years, you know, can't happen again.

Chris: We can't go from one high income worker and one working at one. You're not at home with the kids, let's say to two high income earners, um, pricing property.

Veronica: Although in certain demographic there's still a lot of that and quite expensive markets you where you still do have one primary owner. So I think that, you know, that's um, you know, getting into demographics with that or um, is sort of interesting. You know what I mean? So yeah.

Chris: And the cost of capital though is much cheaper now. So, you know, if interest rates are six or 7% yep. And you got 12 times salary. Well, and of course it can't grow anymore, but if interest rates are 1% and then 1% for say 10 years, um, but wage growth isnt an equal as well. And so, you know, if you're investing in an index, you would expect that index to perform based on the wage growth across the whole economy.

Chris: But certain sections of the Australian economy for example, the tech sector will do get much greater wage growth I imagine. Yeah. And so that will, you know, means that some property potentially could get returns a lot higher than, you know, the, the general wage growth.

Douglas: Maybe you want to buy a property where the Atlassian employees are going to be based. I mean that's, that's the kind of ideas is these suburbs will probably do better than some of the others.

Chris: It cause a lot of their employees aren't Australian. Yup. You know, from Belgium, their Spanish, the English, their French, um, and their tech, you know, and they come here. And so they've come here on a four, five, seven and now they're earning $200 grand a year, $150 grand a year, and then new entrance into the property market. Yeah. So I guess the, you know, the real question for the Australian property markets is whether we still stay high on that desirable list on, you know, a place to move to. And I guess it's, what's your thoughts around the Australian population policy and whether you think that'll continue?

Douglas: Yeah. Look, I mean, growing population is healthy for economy. So actually look at the way an economy grows. There's only two ways it grows. One is individuals become more productive and the other, as you get more people into the workforce. And you know, I lived in Singapore for a while and they tended to grow when they added, when their allowed people would come in and when the, and when they slowed foreign workers coming in, the economy tends to slow. So it's, um, it's actually a massive advantage that we have here in Australia is we have this huge empty space, uh, and we can, we can grow in the same way America has a much better demographics than Europe and, and the American productivity is not particularly impressive, but the economy grows because the add people. And so, ah, look, I, I'm a, I'm an immigrant myself. Uh, so I, I'm big advocate for welcoming people who can make a, make a contribution. We're not here to be too political, but I, you know, I, I definitely think that if people have something to offer, um, then it's, it's good to have them, uh, coming in and, and helping to grow the economy. A friend of mine lives in Norway and I was chatting to him the other day and he was seeing know, they've gone through most, most women in Norway work, or very, very high tax rate. So what ends up happening is people in employment tend to have very equal net or take home pay. And so he said it's interesting. His um, know his wife has moved to Norway and basically everything is priced off two people having an income, it's a very expensive, obviously said if one of them was to drop out of the workforce, then they would have real problems with the cost of living.

Douglas: However, the flip side of that is that Norwegian companies are very conscious of that and he goes home at four o'clock everyday and, and the, the, they expect most people, their kids, they dropped the kids off at school and then the both parents go home. Uh, and so they've got very different working policies and much more flexible to, to what we have here in general. So it'll be interesting at a social level just to see how Ho things evolve and, and maybe there are trends, you know, things like your longer term autonomous driving and various other things Ho host cities evolve and how her work practices evolve and that, that that will be an interesting week that you can make money actively in property by anticipating the areas that, that benefit and the areas that suffer time.

Chris: So there's a lot of people in property are either on two camps, they're either very pro property. Um, and I always think it's gonna keep going up and I, it'd be, you know, I biased and don't really understand that, you know, not all properties equal. Yes. Then you have the other ones at dooms dayers and you know, there are growing cohort, um, a lot of them are frustrated first time buyers that kind of getting the market, which is just fair enough. Um, or you know, or you know, have made a bad mistake and then they've lost money or something like that and they're like, well, I'm not going there again. Yep. With investing, do you think it's very dangerous to being both or either camp? Yeah. And how do you kind of stay balanced in the middle?

Douglas: Yeah, and I think it's something, there's sort of mental flexibility. So, you know, one of the, one of the things that's very important is the world is always changing. So, you know, we spend most of our energy, it's really understanding what is right, what was going to happen. But, but, but by virtue of that, you're thinking what is going to change, how it's going to change. Um, and if you absolutely back yourself into a corner, then you just can't have that mental flexibility. So there could be, it can be perfectly reasonable at point in time to be a doomsday, uh, have the doomsday view things are very, very expensive. I don't want to get near that. W we have that view on certain segments and that's why I was, you know, when we, when you touched on Atlassian it wasn't a go at them as a company. It was more than that. The space they're in, there is a lot of hype at the moment. And so there are a lot of technology companies that will never succeed. The ar are priced as if they're very successful. So we will always find areas that you'd say, absolutely, we don't want to go there. But you make money by, by changing that and becoming a big advocate of that area, uh, at a later point when, when the, perhaps the prices of, of readjusted or the dynamics have changed of the industry. So it's, I think it's about being with all this stuff, it's about being flexible. It's about being curious. Um, you know, if we're going to hire an analyst to our team, what are we looking for? We're looking for someone who loves business. So I guess in a property sense you'd want people who love the idea of real estate but broadly similar. And then it's having this curiosity because you've got it just, you can't just take things at face value. Most people presented with information will come to broadly similar conclusions. And that's why you get the opportunity because everyone becomes negative on something because it doesn't feel right, but they don't triangulate that back to the, to the price and the future opportunity.

Veronica: And then, and then you've got to be brave and you have, cause you know, you're actually sticking your head out goat. You're all individuals. I'm not. Um, yeah,

Douglas: Well you have to be willing to act without, without full information. You'll never have full information. And a lot of people struggle with the transition from, from being an analyst, which is idea you're coming up with the ideas to being a portfolio manager, which requires you to actually execute on the decisions and that execution. There are certain people are are good at acting, a lot of people are good at just sort of suggesting and then not being able to go to that, that next level.

Douglas: What's your reputation on the line? Isn't it really? I mean you got clients say that that may not be that happy with certain outcomes and you know, you've got to back that and you've got to have justification for that and yes, explanations I would think. Yeah.

Douglas: And know as a contrarian the biggest problem is your reputation on the line. You're buying something that is ugly, it's unloved, it's out of favor and it will probably go down before it goes up. So, so you, we, we bring a young analyst in and I know they go through this thing that I saw called zero to one when they have to get their first stock idea put forward and in the portfolio up to that point, they feel that they're, they're not making a contribution, then they get their first idea. You know, someone's, someone's bought into the idea, they have one idea. Their entire reputation in the firm is based on this one company. And all we talk about is this one company. And inevitably if it goes down, then it's tough for them. But that builds up the fortitude that you need in the future. The worst ones that we've had guys in the past where they've, their first idea goes up a lot and they're terrible cause they thought to believe that they believe that I believe that they know what they're doing and if they get to write in a role, then you've really got to worry about.

Chris: Yeah. So when I worked for platinum for, I remember the young chap at the time, Dean, uh, at, uh, in our, I remember that he was, you know, trying to become an analyst. Did you know early days in yeah. And I remember just talking to him, you know, at the Friday sort of drinks about an experience where he had to pitch an idea and co was there and you know, and it's very confronting because he had a lot riding on this because a lot of research and it was paper companies in Canada or something at the time. And it was, um, yeah. And it's just so it's very hard, you know, just the problem is you got to know when you're wrong. And so how do you know when you should change your view on something as an investor and really, you know, take a different tack because a lot of property investors, you know, and they'll be, a lot of people listening right now have got properties that have underperformed for many years. And the easy thing to do is just to forget about it and continue with life. But you're wasting time, your biggest assets. So how do you, how do you come to that realization and, and take action?

Douglas: Yeah, and that's the difficult thing in property because generally, you know, given people's level of wealth and buying an investment property is a very, very large portion of their wealth. The good thing with a portfolio of shares is you're probably not taking such a big position so you can get rid of a company but you know, what do we do? So, so, so when we're looking at a company, what's the role of the analyst is effectively to, to determine what you might call the roadmap for what we think that company will achieve in the next, let's call it three, four, five years. So then what you do is you track the company against that roadmap. You don't track the company against its share price. So where the share price is interesting is, you know, the share price goes up very quickly after you bought something.

Douglas: You might want to say, look, this has become too expensive. We've, we've achieved all the returns we want to make. If the share price is going against you and the company is following the roadmap, you can buy more of that share because as long as you have the confidence in the, in the roadmap and what the company is gonna achieve. Do we actually talk a little bit about that as um, thinking like a private owner? So if you bought the company and you own the company and it wasn't listed on the stock market, you'd never have to look at the share price. All you'd have to assess is, am I getting an adequate return from owning this company? That is one of the biggest advantages in property over equities. We get the price quoted to us everyday. People ask you about the price. They, they, you know, there's always pressure from externally, from clients internally from colleagues.

Douglas: So you have to try and detach yourself from that and just see, is this business doing what I, what I expected of it? There is a, there is a, a bias or a behavior of you like no one has loss aversion and loss aversion is this idea that we feel losses more than we enjoy equivalent gains. The way I think about that is that the market stop mark on a daily basis is a coin toss. It goes up about 50.3% of the time. Paul's 49.7 so to all intents and purposes, it's a coin toss. But the problem here is every night you go home and you turn on the TV and you get told what the stock market's done. You get up in the morning, you put on the radio, you get told what the stock market's done. You see it on websites and an here in Sydney, you see it on a tickers, on buildings as well.

Douglas: So you cannot get away from this coin toss. But I used to ask groups of financial advisors in, in presentations, does anyone want to toss a coin for $1,000? No one ever did or the one guy did once. But, um, but, but you know, that was a hundred, uh, well actually one was awkward. You, you're not allowed to pay commission as an investment manager to a financial advisor. So if he'd won the coin toss, that was going to be a very awkward legal situation. So anyway, I won the cost toss. I made it, made it easier. I used to use it as an example. Uh, he didn't, I couldn't, I couldn't accept them. I couldn't accept the money. The point, the point I was, I was happy to take that bet a hundred times because I knew I'd probably end up breaking even. But to an individual to take that bet once the idea of losing $1,000 was far more confronting than making a thousand and so, and we used a thousand because use the dollar it was probably wasn't, it wasn't going to express it properly. So, so property you have that advantage. You don't see your value everyday. Although there are websites now that estimate it for you on an hourly basis.

Veronica: Although with loss of vision, we've, we've discussed this actually in, the podcast a number of times. People who know that they really should get rid of a poor performing asset. Yeah. They won't sell it because of loss aversion. They don't want to actually realize that loss. They don't want to accept it and they'd rather just pretend or believe that things are going to get good.

Douglas: Yeah. And that's, that's a problem because you really need to just constantly, it comes back to that mental agility you want to, you want to constantly be reassessing is it's really a question where the, if you're on a property or if you're in any shares, would I buy this today? And if the answer is I wouldn't buy it today, then the answer might be you should be selling it today and it will be, things are changing. You know, it could be something like built a railway station next door to your property that it's a good thing or a bad thing or someone, your crime rate's gone up or whatever it is. And you and you, you need to be constantly recalibrating what, uh, property is doing against the roadmap if you like, for that, for the suburb or for the building itself.

Chris: Yeah. So I guess it's really, I mean it's kind of what you to counter that confirmation bias, you kind of research things that kind of disprove or go against what you believe and you kind of constantly checking and thinking, am I right? Am I wrong? Am I, you know, am I getting too, you know, wound up in my beliefs? And you know, that, that to do that as an investor is it takes a lot of time and you've got to do a little reading and constantly be questioning things. And, um, but if you've got that gut feeling that's, you know, that something's not right, you've got to, you've got to reset shape because you know, comes at a point in time when you've, you kind of do know and then at some point you're gonna, you know, represent yourself or, you know, get regret it and then feel guilty and I should've done this years ago. And then that's just gonna build to something. It doesn't need to happen. So if you've already got that feeling, you know, try to figure it out and get a solution in place.

Chris: Every week we hear incredible stories of the dumb things, property buyers do, dumb things that end up costing a whole lot of money and, or a whole lot of stress mistakes that can be avoided. Please Douglas, can you give us an example of a property dumbo? We can all learn what not to do from these stories.

Douglas: Look it's interesting I talk to people more about, about the stock market then than about property. So a, a rather rather than having a property done. But I think, I think the, the equity dumbo the other stock market done well. It is applicable. I'm always being asked when is the next crash going to happen. And I think it's this idea that people believe that as professional investors, we have this crystal ball if you like on the future. And they're also, which, which we don't. Uh, as I see, we're just constantly trying to reappraise the returns that we can get and being flexible to that. But the second thing is this idea that even that a crash itself is predictable and there's some, uh, interesting work on this, uh, there's a work by, by academics on it, but, but the idea that the analogy I like to use a simple analogy is just think about an avalanche.

Douglas: And, and thinking about, um, if you're a skier and you go to uh, a resort, certain times a year, there'll be areas that have warning signs. Your do not go here. Avalanche risk. Yeah, there's always going to be someone at the end of the night that comes into bar who's done some dangerous off piste run. They've had a great time full of adrenaline, probably doing Tequila shots and telling you what a great time they had. It comes back to that fear of missing out, you think is, I wish, I wish that was me. That sounds really, really exciting. The most sensible thing to do is just to avoid the area because no one can predict whether or not an avalanche will actually take place. What you can do is you can identify that there's a risk of an avalanche. And I think when it comes back to this idea that we have this perfect vision or this crystal ball, we can just say, that area looks dangerous. We're avoiding it, and therefore we were looking somewhere else. And that's the question I probably get asked most often. When's this all going to, when's this all going to blow up and end in tears?

Veronica: It's very, very similar to, you know that where's the next hot sport? You know, where's it gonna go up? You know, where's it gonna go down, et Cetera, et cetera. And I say, you know what? It'll go up a little bit in the whole scheme of things across the whole period of time that you're going to own a property and then it'll just settle down or go down because it was just, it was, should never have gone up in the first place. So there's a lot of parallels with that. Look, thank you so much for your time Douglas. Um, you know this, this has really been, I guess theme of this one has been about change and uncertainty and you know, where opportunities lie and that versus where, you know, the dangers lie in that. And that's been very, very informative and, and some insights into China as well. And um, and Kevin Rudd story, just think that's gold.

Chris: Thank you.

Douglas: Thanks for having me.

Chris: We want to make your bet at elephant rider and this week's elephant rider training is:

Veronica: So we had some very interesting conversations with Douglas, a lot around human behavior. You know, behavioral science or behavioral finance as he referred to it. I liked when he was talking about shares. And, and the question you should ask yourself if you're owning something that you might be a bit of a dud, which is would I buy this today? And through that Lens and asking yourself that question, you can actually determine whether you should hold onto that share or not. And that's what he's talking about in the context of equities. Now he also talked a lot about social pressure or social proof and fear and greed and Fomo and those sorts of things and they are often what drives the property market just as it does the share market.

Veronica: And so a good question to ask when you're buying in a hot market, when you're looking at an asset, a property, and you might be tempted to buy just anything that'll do because everything's going up and you've got fomo going on, fear of missing out and you're succumbing to social pressure that everyone else is doing this and you're not doing this. And I know that right? The minute when we recording this, we are not in a boom market, but you know, we'll have another one at some point. A good question to ask yourself is, would I buy this? If it was a buyer's market, would I buy this? If I had to absolute pick if everything in this marketplace so it's a slight change on a Douglass's question, would I buy this today and so then you can reflect on whether you want to keep owning it because if you do ask that question, would I buy this? If it was a buyer's market down the track when you go to reflect on your portfolio or your all your investment, if you only have one and you ask yourself, would I buy this today? Well the answer will be yes because you would have made that decision with the right sort of information, the right thinking in the first place.

Veronica: Please join us for our next episode when we interview Nikki Hudley from Deloitte Access Economics. Nicky runs the urban advisory practice there and she's responsible for many very enlightening reports. Now two of which we are going to discussing in a fair amount of detail. One is on population growth and density and how that impacts on our cities, the way we live property prices, et Cetera, et cetera. And the other is about the future of work. And we talk about how that's going to impact on the way we leave as well.

Chris: Don't forget, we're on all the social channels. We're on Facebook, we're on Linkedin, broad Twitter.

Veronica: Or you can connect with us on www.theelephantintheroom.com.au The links are all there for you.

Chris: Please connect and send us a message we'd love to hear from you.

Veronica: The Elephant in the Room Property Podcast is recorded at the Sydney Sound Brewery. This week's podcast was recorded by John Hresk, editorial by Gordie Fletcher.

Chris: Until next week. Don't be a dumbo.

Veronica: Now remember, everything we talked about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent who will tailor and document their advice to your personal circumstances with a statement of advice.

Veronica: The people at Platinum have also asked us to add this disclaimer to this episode: "Any commentary relating to Platinum reflects views and beliefs at the time, which are subject to change without notice. No representation or warranty, express or implied, is made to the accuracy, adequacy or reliability of any statements, opinions, or other information given."