The Butterfly Effect

In Chaos Theory, the Butterfly Effect predicts that extremely small changes in conditions can lead to massive differences in outcomes later. An example often given is that a butterfly flapping its wings in Brazil sets off a tornado in Texas. In economics, minor decisions or unexpected disruptions in one corner of the world can flow into massive consequences across the globe. From the Global Financial Crisis (GFC) in 2008 to today’s volatile financial environment, small adjustments have created ripples that continue to influence economies worldwide. Seemingly minor decisions, from interest rate changes to supply chain adjustments, have reshaped markets, fueled investment trends, and reshuffled the balance of global power. 

The GFC is one of the best examples of the Butterfly Effect in recent history. The crisis began with risky lending practices in the US housing market, where financial institutions issued subprime mortgages to buyers with poor credit histories. At the time, it seemed like an isolated issue in one sector of the US economy. However, these loans were bundled up, repackaged, and sold worldwide, spreading the risk across financial systems. When homeowners began to default, the underlying value of these securities plummeted, triggering a range of problems.  

The aftermath was devastating as major banks in the US collapsed, stock markets crashed, and liquidity dried up. Countries across Europe were affected as US financial products had permeated their banking sectors. Iceland, Ireland, and Greece all faced crises, and central banks around the world had to intervene with unprecedented bailouts and stimulus measures. Poor lending practices in a single country spiraled into a global economic disaster, leading to a recession that took nearly a decade for some countries to fully overcome.  

Fast forward to today, and China’s economy plays a similar role as a key driver of global economic outcomes. China’s recent economic slowdown, especially in its real estate sector, has had significant consequences worldwide. Real estate giants like Evergrande defaulted on their debt, and China’s government implemented measures intended to stabilise the property market. But it also reduced demand for construction materials such as steel and cement which are crucial exports for many countries. 

In Europe, which exports machinery, cars and raw materials to China, industrial output has felt the brunt of this downturn. Germany, a leader in industrial manufacturing, has seen slower growth as demand for its exports decline. Countries from Brazil to Australia, which supply raw materials to China, have also felt the economic impact. When I read that Volkswagen is shutting down three manufacturing plants in Germany it's a great reminder of just how interconnected the global economy is that a local policy decision by China to rein in its real estate sector can result in jobs losses in Germany and impact economies on the other side of the world. 

In 2022 and 2023, the US Federal Reserve started aggressively increasing interest rates to control inflation. While this move was primarily aimed at stabilising prices in the U.S. economy, the ripple effects were global. Higher interest rates made the dollar more attractive, leading to a stronger currency. This, in turn, increased the cost of dollar-denominated debt for emerging markets, putting pressure on countries from South America to Southeast Asia.  

Meanwhile, the conflict in Ukraine, disrupted natural gas supplies to Europe, pushing prices to historic highs. Europe, which relied heavily on Russian gas, scrambled to find alternative sources, which sent global energy prices soaring. This ripple effect was felt in everything from manufacturing costs to household energy bills, not only in Europe but globally. 

For investors, the Butterfly Effect highlights the importance of understanding global interdependencies. Diversifying portfolios across geographies can mitigate risk, as challenges in one market often create opportunities in others. So, being aware of the changes in major economies is crucial. For instance, understanding China’s economic shifts can provide insight into commodity prices, while understanding U.S. monetary policy can signal potential changes in global capital flows. 

As technology continues to increasingly connect the world, the Butterfly Effect will likely become more pronounced in economic and investment contexts. Small policy adjustments or market shifts influence everything from inflation to investment sentiment. The key for investors is to recognise that seemingly small decisions have the power to set global financial markets on a new path. Whether it’s a policy in China, an interest rate hike in the US, or a geopolitical shift in Europe, these decisions create ripples that cross borders, affecting people, companies, and entire economies.  

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Making Decisions: Finding Opportunities and Avoiding Mistakes

Every day, we make countless decisions, from small, routine choices to life-altering ones. Yet, despite the frequency with which we face decisions, few of us are taught how to make them well. Whether in business or personal life, the ability to make thoughtful, well-considered decisions can significantly impact our success and happiness. Most importantly, it’s often not about making perfect decisions, but about avoiding costly mistakes. By approaching decision-making with consideration and structure, we can improve our chances of success and better outcomes in life and business.

I think there would be a lot of benefit in teaching people from as young an age as possible how to approach the decision-making process. Some decisions matter more than others. Most people struggle with making long-term decisions. Often in life, people make big decisions on a whim or without considering the consequences properly. This might include starting a business without understanding the market or buying shares in a company just because a friend did. The opposite is also true, people who don’t make a decision even when it makes sense to do it and it's something they want to do. If you don’t pull the trigger and do it, then the opportunity is lost.

I watched a speech by Warren Buffet where he explained that we don't get 500 great opportunities in our lifetime, he says we get perhaps 20. Buffett suggests we give kids finishing high school a punch card with 20 punches for the major financial decisions in their lives. When you make any investment that's a punch on the card and you only get one card for your whole life. This paradigm will dramatically change your thinking. He argues that you will become successful much more quickly because you’ll spend more time identifying the truly great opportunities and eliminating the ill-considered investments. It is a fantastic mindset to adopt when it comes to making decisions in all areas of life.

Interestingly, success doesn’t always hinge on making the best decisions. Sometimes avoiding major mistakes is enough to move you forward. Decisions that reduce the likelihood of negative outcomes are extremely underrated. We talk about good and bad decisions but in many cases what we are really talking about is the outcome they lead to. Making the right decision can still lead to a bad outcome but that doesn’t change the fact it was the best decision. Similarly, an ill-considered decision doesn’t always result in a bad outcome. If someone drives their car home after too many drinks and they get home safely it doesn’t make the decision a good one. But if you make enough unwise decisions the probability of a poor outcome will eventually catch up with you.

Following are a range of decision-making tools and methods that are simple to use in life and business.

A pros and cons list is a straightforward way to list out the reasons for and against to allow you to see what the list of factors looks like when considering all the positives and negatives that apply.

The Covey matrix categorises tasks into 4 quadrants according to whether they are urgent and important or not. It is an extremely effective tool to decide where you need to spend your time.

Pareto's analysis or the 80/20 rule as it is better known, applies across so many areas. It suggests that 20% of your decisions result in 80% of your happiness. In business, 20% of your effort produces 80% of your outcomes. In investment, 20% of your portfolio may well produce 80% of your returns. This is particularly useful in helping you to decide where to focus your time and effort in almost any endeavour.

Cost-benefit analysis is useful in assessing the trade-offs between your investment and the gain.

A SWOT analysis will help you decide whether to enter a market or even start a business in the first place as you assess the strengths, weaknesses, opportunities and threats.

Scenario planning is extremely useful in making decisions where variables can change the outcome significantly. It helps you prepare for the future and reduces the uncertainty where there are a range of possible outcomes that may eventuate.

Having a process for making decisions makes a world of difference in our ability to make well-considered decisions. While no single method guarantees success, using a structured approach can help you avoid common pitfalls and make better, more informed choices. By incorporating tools like pros and cons lists, SWOT analyses, and scenario planning into your decision-making process, you will have a clearer perspective on the options in front of you. As Warren Buffett suggests, it’s not about making lots of decisions or chasing every opportunity – it's about making a relatively small number of carefully considered decisions count. Whether in life or business, by focusing on reducing mistakes and improving our decision-making frameworks, we set ourselves up for long-term success in the face of uncertainty.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Private Credit - A Wolf in Sheep's Clothing

In recent years, there has been a massive surge in demand from investors looking to place money into private credit. These investors have typically been investing in funds managed by people with experience in bonds, corporate debt or banking. The fund managers have spotted gaps in the market where the big banks once operated. As the banks have become increasingly conservative, it's been difficult for some borrowers to finance deals, from property groups and developers through to businesses. By helping match higher-risk borrowers with investors seeking higher fixed-income yields, the Australian private credit has emerged as a reported $200 billion dollar market. While Australia leads the way, it is also a worldwide phenomenon as the market globally passes $US1 trillion.

Despite their popularity, I would be very wary of investing in these funds. In many cases, these funds have been positioned as being less volatile because they are unlisted. However, that's only true in relation to the day-to-day unit pricing. The underlying assets are still only worth whatever they can be sold for. This will become a problem if higher interest rates result in defaults, or the economy deteriorates. We are already seeing dramatically increasing signs of insolvency here in Australia with the September quarter up 45.5% from the same period in 2023. If a borrower could borrow from a bank at a lower rate they would, so, many of these loans are being made to higher-risk borrowers and projects that the banks avoid. While the banks are simplifying their business the higher-risk end of the market is moving to private credit. The big banks are as focused on profit as any entity in the country, so they have good reasons for avoiding this part of the market.

Like all markets, there will be good and bad operators, and it’s the poorer performers where the risks will emerge. When fund managers have millions or billions of dollars to manage there is a fight to place the funds and provide finance. It’s a different system to how banks manage risk. Often the private credit funds are paid high management fees to manage the loan book. There isn’t the same financial risk for them in the event of a default as there is by a bank. Those who lose money on a bad loan from the bank are the bank as the loss sits on their balance sheet. Those who lose money on a bad deal from the private credit fund manager are their direct investors. The billions of dollars in private credit now looking for a home means there are deals getting funded now that wouldn’t be in a normal market. It's not their money, and it potentially leads to outsized risks being taken. It’s creating a bubble. Not only is it a bubble, but this is also an unregulated and opaque sector.

The higher-risk end of the market that the banks are moving away from is still there, it’s simply being transferred elsewhere in the system to private credit. With interest rates still relatively high, it's possible that these higher-risk loans see increases in defaults. That raises serious questions for investors to consider when things go wrong. Unlisted assets can’t be easily sold. When things go wrong you simply can’t exit, there is almost no way to get your money out. However, you can generally sell a listed asset, perhaps for a lower price but you can sell. When it’s an unlisted vehicle, the mechanisms for redeeming the investment when things go wrong evaporate. The funds are tied up and redeeming your funds can be a multiyear process.

We have stayed clear of many of these unlisted funds, from hedge funds to private equity and especially in the private credit sector. It is a great business model for the operators but there are potentially significant downside risks for investors in the event of broader issues in the economy. In many respects, part of the issue is the simplistic nature of investors' mindset with these investments. They see an interest rate and assume it is a better version of a term deposit or bond. It could not be further from the truth when you look at the underlying investments and structure. In some cases, these are junk bonds, in others they are chopped up and mixed like they did in the GFC. As popular as these unlisted funds have become, there is a real risk it will not end well. My priority for the fixed interest portion of our portfolios is for it to be defensive and do the job we want it to do. If we want growth-style returns, that is for the equity part of the portfolio. I would strongly urge investors to be aware of exactly the risk they are exposed to.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

What Successful Business Owners Have in Common

I have interviewed almost 100 business owners on my podcast over the last three years. The other night around the dinner table I was asked: “What do the most successful business founders have in common?” I have found there are five key traits that separate great business owners from all the others. 

1. Self-aware – they understand their strengths and weaknesses and are reflective. 

2. Ambitious – goal oriented, big goals, relentless, resilient and won't settle 

3. Growth mindset – constantly wanting to improve, be challenged and grow 

4. Deliberate – they are intentional and considered in everything they do 

5. Passionate – this drives their enthusiastic approach to life and business 

The most interesting insight is that there is never a sole distinguishing trait that sets a successful business owner apart as someone who will build a hugely successful business. Certainly, some founders are exceptional in many ways, but in many cases, they are not particularly different from other people in business.   

For example, they don't work harder than the small to medium business owner. That isn’t to say they don’t work hard, they do. But I know many small to medium business owners who work just as hard, and they haven’t been able to turn their business into a $100m or $1billion organization. So, while hard work might be a prerequisite, it's not the differentiator that many people assume. 

Nor do many of the traditional stereotypes like the egomaniac or control freak billionaire ring true. Most of the people I've interviewed are just the opposite, they are incredibly self-aware and quite humble. They almost all explain the importance to their success in finding great people to come in and do the jobs they weren’t good at. They learn to let go and provide their people with the autonomy they need to do their jobs. They understand that they can’t be control freaks because it stymies growth for everyone. 

They have a growth mindset. That mindset starts with their personal growth but permeates through the entire organization.  So, while they have ambitious goals and are relentless in their pursuit of success, they are aware of their strengths and weaknesses and the need to continuously improve. It is at the intersection of ambition with self-awareness and a growth mindset where the most successful founders separate themselves from the pack. 

One is that they are very deliberate in their thinking and actions. They are intentional in their approach to growth and scale. They are considered in their communications and the way they approach both their people. They are also enthusiastic and passionate. I think this is the real driver of their underlying success. It dictates their positive can-do approach to life and business and is their superpower when they go through the tough times that they will inevitably face. 

What is clear to me is that while their motivation can be anything from achieving family financial security to changing the world, one thing they have in common is that they are ambitious and driven. They are prepared to go all in, and they are not afraid to face their fears or potentially failing. Most importantly, they want to reach their potential. 

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Energy Boost

Energy is one of the most important macroeconomic themes shaping the global investment landscape in the decade ahead. From the demand for oil and gas to the geopolitical factors affecting energy supply chains, the importance of energy in determining economic growth, market dynamics, and investment returns cannot be overstated. It is critical for investors to have exposure to this sector in your portfolio for the long term.

While much of the world has focused on the transition to renewable energy, from a pure investment perspective, it has distorted parts of the energy market. Fossil fuels still account for over 80% of the global energy mix, and despite the growth of renewables, that figure is expected to remain high for at least the next decade. This is due in part to the sheer scale of global energy demand, particularly in emerging markets, where industrialization and population growth are driving a need for more energy.

The world needs an ever-increasing amount of energy to power the activities of the future. AI is a massive extra and unexpected demand on energy. The additional energy required to power the AI energy demand will see AI energy demand double by 2026, from 2% of global demand to 4% of global demand. Of course that is just the start. But even that equates to all the energy required to power Japan for a year being added to global energy requirements.

Part of the problem with the transition to renewables was that it was too expensive to produce enough to meet demand. Simultaneously, it became politically difficult for the oil and gas industry to gain the investment needed to fill the shortfall. Consequently, the world has drastically underinvested in energy and energy infrastructure over the past decade and that will need to be rectified. Global spending on data centers alone is estimated to be $US2 trillion by 2029 (Blackstone) so high energy-demanding technologies from data centers to AI require a long runway of energy demand for the rest of the decade and beyond.

Energy has always been a geopolitical issue, and the coming decade is unlikely to be any different. As countries vie for control over energy resources and supply chains, geopolitical tensions will continue to affect energy markets. The Russia-Ukraine war has caused widespread disruption in global energy markets, leading to supply shortages and spiking prices, particularly in Europe. More recently, tensions in the Middle East have seen increased volatility and prices spike.

As countries worldwide move toward energy independence in the interest of national security, geopolitical risks can be a double-edged sword for investors. The price of oil fell as low as the US$70 a barrel mark about two weeks ago on the prospects of a weaker global outlook before jumping quickly to around US$80 a barrel today. It is important to remember that the USA dramatically depleted their emergency oil reserves in their bid to curb inflation and pledged to replenish this reserve at US$70 a barrel. This potentially provides a floor under the price.

The investment opportunities in energy are broad. I think the simplest way to gain exposure is through blue chip companies in the oil and gas sector as well as uranium. We hold stocks such as Woodside, Santos, Chevron, and Cameco. I am less bullish on the renewables space because in many cases it is more dependent on technology bringing prices down over time. Many of the investments therefore are more complicated than I like and while they may appear to be energy stocks, they are effectively higher-risk technology companies. There are also massive opportunities in energy utilities and energy storage.

Energy will be one of the most important macroeconomic themes of the decade ahead. The demand for energy from emerging countries and industries, the importance of energy storage, and the geopolitical complexities of energy supply chains all underscore the central role energy will play in shaping markets and investment strategies. We are still at the start of a massive global energy expansion that will be a core component of our investment portfolio for the long term.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Keep it Simple

Some of the best advice I have ever heard was also the simplest. In a competitive world, it is easy to get wrapped up looking for ever more sophisticated ways to gain an edge. Yet keeping things simple is one of the most underrated aspects of doing something well. It applies to any endeavor whether it is investment, business, sport, or life.

From an investment perspective, I see it all the time. Investors who are easily distracted by every shiny new opportunity often don’t know their true objective or achieve the results they want. When you really know what you are doing, you do not lose focus. It comes back to having a robust understanding of your investment criteria and being disciplined on the fundamentals.

Warren Buffett is the world's greatest investor, yet his investment portfolio remains remarkably simple. His portfolio is invested in shares, cash, and bonds. He does the fundamentals exceptionally well and has done since 1956 when he started his first investment partnership. Today his investment vehicle, Berkshire Hathaway, is valued at almost $US1 trillion. His methodology is simple. He buys great businesses at fair prices and holds them for the long term.

I am always perplexed and slightly amused when I see the range of exotic investments that many large investment firms have wealthy families pour money into in the chase for better returns. I think that might be more about marketing and fees than returns. As a long-term investor, the best thing you can do is simply master the basics. When you have done that, you can be patient and trust the process you have in place.

To succeed in whatever you are doing, you do not need exotic or risky strategies. Understanding the fundamentals and then mastering them will provide the foundations for success. As Bruce Lee once famously said “I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times”. In other words, it is far more powerful to have focused on mastering one thing than it is to have tried everything. As a long-term investor, the best thing you can do is keep it simple. 

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

The Epicentre: China

The major stimulus package announced by China on Tuesday should be a warning sign to markets of how bad their economic woes are and not a reason to celebrate as they did. The growth of China from an economic backwater to a global powerhouse over the past 45 years has been phenomenal. In many respects, we are seeing the first real stumble for the emerging economic and geopolitical power since they embraced elements of the capitalist system and moved to integrate into the world economy in 1978. But China increasingly appears to be the epicentre of an emerging global slowdown.

An influx of capital investment from all around the world turned China into a manufacturing behemoth. It became the centrepiece of the global supply chain and the primary beneficiary of globalisation. The subsequent urbanisation of China led to their next phase of growth based around construction and infrastructure. The rapid rise of China’s middle-class consumer opened an entirely new market for companies across the world and appeared to be the driver for the next phase of economic growth as the nation looked to overtake the US as the world's major economy.

However, that hasn’t quite played out as the Chinese economy falters under the weight of economic, geopolitical and demographic crises converging at the same time. The major problem facing China now is that the themes that provided their economy uninterrupted growth for decades no longer exist and are even reversing in some cases. There are three key challenges that fundamentally threaten the drivers of China’s economic growth going forward.

Firstly, they have been dealing with a collapsing property market for years now and there isn’t an obvious or simple solution. As a government-controlled economy, China can implement strategies to contain losses that western capitalist economies cannot. While that has helped prevent a full-scale collapse and the immediate contagion, the fallout is still reverberating through the economy.

The second key problem China is facing is the decoupling from their economy by the west. This is a slow-moving but very real problem for them. What gave China such as boost for the last 20 years simply doesn't exist anymore. Following the Russian invasion of Ukraine most western countries have moved to decouple from China in the interests of national security. There is a whole suite of changes that ultimately boil down to removing their dependence on China to protect their supply chains in the increasingly probable event of a conflict. This will be a decade-long economic drag on the Chinese economy as investment is redeployed by western nations back home or to allied nations.

Thirdly, they have a population problem. China has low fertility rates and its population is rapidly aging. Around 30% of the population is forecast to be aged over 60 by 2035 and that figure is forecast to hit almost 40% by 2050. The implications are serious for China because it means more people need government support with a shrinking workforce paying taxes to fund it. You need only look at Japan most recently to see how problematic this can be.

What does this all mean for Australia and the rest of the world? Well, it’s bad news. From European auto manufacturers to Australian miners, it going to hit core industries at the hearts of many national economies. It's important to remember that outside of Australia almost every major economy is now cutting rates to get ahead of the slowdown. This month alone the US cut interest rates 50 basis points (bps), Europe 65 bps, and China 20 bps. Ironically, for all its own problems, the US may well be the best-positioned major economy. It remains our preferred investment market against the backdrop of a potential slowdown.

This all raises the question of how China can stabilise its economy and avoid a more serious economic downturn. China doesn’t have many options up its sleeve. In some ways, they are simply at the mercy of the wave they rode up now that it is on the way down. Many of the changing themes are structural and out of their control. The flow-on effects of the downturn in China are yet to fully impact Australia and the rest of the world. Keep watching though because the downturn is coming.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Get Comfortable Being Uncomfortable

The most successful people are those who are the hungriest to learn and improve. They understand early on in life that they need to get comfortable being uncomfortable. They are confident operating in the grey zone of uncertainty. That’s how you learn and grow. They know they need to be outside their comfort zone on a regular basis because if you are not growing as an individual or as an organisation, you are going backward.

But being comfortable being uncomfortable is easier for some than it is for others. For some, learning can be intimidating. But you cannot let fear hold you back. I am reminded of the karate teacher who once told a class of new white belts attending their first lesson that every black belt walked through the dojo door once as a white belt on their first day too. That lesson applies to everything. Whatever we are great at in any field, we were all white belts once. Conversely, whatever you want to be great at you can learn if you just start.

It is not only fear that we need to combat, complacency is equally damaging. There are many people who go through life and grow to a point and then stop. They get comfortable and then lazy. Being comfortable is like an inflation that erodes a person's ambition and ability to grow. We all know people who wish they changed careers, or took the job offer or lived overseas and never did it. When they don't, it’s often a combination of being too comfortable in their current situation and a fear of failure, so they do nothing. They stay where it is comfortable and then it gets easy not to change and grow.

The people who have achieved success do not think about or talk about failure in the same way as unsuccessful people. They are too busy trying to improve to let anything stop them. Successful people are focused on improving, what worked and did not work, then they move forward fast. Velocity matters with learning. It is not about your feelings. If you want to be successful, it is best to leave your insecurities at the door.

When someone is thinking about embarking on a life changing journey, I will often ask them what their mix of fear and excitement is. I find personally when the mix is 50% excitement and 50% nervousness that has always been a good indicator that this challenge is the right step up to the next level. Too much fear might mean you are not ready for the challenge or it’s beyond uncomfortable, while too much excitement might mean you are blind to the risks, or you are being irrationally exuberant. While it is important to push outside your comfort zone it must still be a very rational and deliberate approach.

At a time when there is so much uncertainty in the world, I hear from a lot of people, especially younger people, that they are increasingly overwhelmed. They often don't know where to start or how. There seems to be an increased level of anxiety people feel when they are out of their comfort zone. There is no need to overthink this because there is never a perfect time or place to start. The best way is simply to walk through the door like everyone else before you and create your own day one. A lot of things will go wrong, but that doesn’t matter. You will work hard and solve the problems as they are faced with them and keep moving forward. That’s how you start to learn and ultimately succeed.

Not happy in your life or career? Change something, do something different. The worst thing you can do is keep doing the same thing that makes you miserable because you’re too worried about what might go wrong. But it happens every day because people are complacent or scared. So, they do nothing. Getting comfortable being uncomfortable is not about learning. It is a mindset that becomes the difference between getting to the end of your life and having achieved your hopes and dreams or becoming complacent and living a life filled with the regret of potential that was never reached.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Keep Watching Jobs and Unemployment

As I have said for a while, keep watching the unemployment data. When the unemployment rate starts to move up then you know the economy has a problem. I wrote about exactly that in my weekly note titled “Unemployment the canary in the recessionary coal mine.” back in February. Unemployment in the US has indeed gone up. From 3.4% in April 2023 unemployment has since jumped to 4.3% in July 2024. The trend is clear; the US economy is genuinely slowing.

A rising unemployment rate is very significant because it is a real and tangible indicator that the economy is slowing. It is why interest rate cuts in the US are on the table for September and beyond. Then the question becomes how fast is the economy slowing and how far will it fall? The ongoing debate for investors is whether it will be a soft or a hard landing. In other words, will it be a mild downturn or a major problem? I think a recession is probable with the potential for a crisis, or crises to emerge. We are positioned accordingly within our client portfolios, though we are cautiously optimistic.

I am concerned that governments and investors all seem to think that an economic slowdown can be fixed every time simply by dropping rates. It is not always the case. When the GFC and Covid hit, the playbook was to drop interest rates to 0%, pump money into the economy and away we go. It was about giving consumers confidence to keep spending by letting them know that the government would do everything needed to keep the economy moving. Somewhere along the way, the world became addicted to low interest rates as governments moved from lower rates to save a faltering economy to using them to turbo charge it. That is where the asset bubbles and inflation we have seen across the world come from.

But as inflation took hold and interest rates went higher, cost of living pressures reemerged for the first time in decades. The world changed and a psychological line in the sand was drawn as real-life consequences began to emerge. Higher costs eventually slow the economy, whether it is via inflation, or the higher rates needed to curb it. Then as business adjusts the casualty is jobs. That is the real game changer. As the unemployment rate moves higher, the issue is not the lost spending from the few people who lose their jobs, that's just the tip of the iceberg. It's a complete change of mindset in the consumer.

A consumer is not just someone who spends in isolation. They are usually an employee who earns an income so they can meet their living costs. If they have some income left over, they also have discretionary income they may spend. In the past, when the economy slowed, rate cuts put money into people's pockets and the spending flowed. In the environment we face now, the unemployment rate is going the wrong way, so the rate cuts are not going to be met with the same psychological response as they were in the past. They are not going to think about spending extra, as unemployment creeps higher the fear becomes “will I have a job next month or next year?”

So, a rate cut in this situation is not met with the previous celebratory spending. Employees, as they become worried about their job security, are instead battening down the hatches and preparing for a rainy day that may soon befall them. We are at the very start of this process. Unfortunately, that very fear of their job security is the catalyst for why rate cuts are unlikely to have the same positive economic impact as they have in the past. The biggest challenge facing governments across the world next is rising unemployment as economies stall and businesses cut jobs. While consumers might react to rate cuts, employees care more about jobs.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Debt and Deficits

Investors are trying to work out just what a win for either Trump or Harris means for their investments, the economy and the ramifications for the entire world. Certainly, there are significant changes ahead in many areas depending on who leads for the next four years. However, what many overlook is that there are many areas that will not change much regardless of who wins. In many respects, these areas are more important to understand long-term.

Firstly, the US will keep spending and run up huge budget deficits. With a forecast deficit of $1.9 trillion (yes with a T) for 2024 this is not sustainable, but the US will keep on this path until they cannot. In other words, while we would all like to think the US government will at some point rein in their spending and get their house in order proactively, history tells us it will take some form of crisis to force change.

Secondly, on the back of those massive budget deficits, national debt will continue to balloon. At last count, it is about $35 trillion and increasing rapidly. By 2034, the US Federal budget deficit is forecast to be $2.9 trillion and debt to reach $54 trillion US dollars. Go back ten years to 2014 US govt debt was $17 trillion and ten years before that in 2004 it was just $7 trillion. Ever higher debt will have massive implications for the pricing of debt in the future, not just for the US but for every other country and business in the world. US debt is seen as the benchmark for pricing risk.

Thirdly, the US will continue to be the most important and powerful country in the world, from both an economic and a military perspective. The biggest, best and most innovative businesses will continue to prosper there. The US dollar will continue to be the world's currency for international trade despite what people may say about the emergence of crypto currency or any other currency taking hold. The US will continue to be the undisputed military power in the world. Regardless of their challenges, sentiment and enemies; US military might remains critical to global stability and economic trade.

Eventually, there will be a time when too much debt is needed by too many countries from too few investors. No one really knows how long it will be before that happens. Everything will be fine until it's not. Once too many debt issuers are competing for too few investors it will force bond yields up. While some countries simply won't get finance and will need to dramatically reduce their spending while others will not be able to refinance their existing debts. Either way, it poses significant economic problems for individual nations and the global economy.

However, the major reason financial markets are less concerned when it comes to the US debt level is that where a country controls its own currency, it effectively has an endless source of money. The US specifically has the added advantage that it is the global reserve currency too. If the debt problem one day morphs into a debt crisis, the US can pull the money printing lever as its get out of jail free card. But the closer we get to that lever being pulled, the more we need to consider what that world looks like.

If the debt and deficits from countries across the world are not reined in, a global debt crisis will eventually emerge. The US will do whatever needs to be done to protect their national interests. They will have no problem going back to the GFC playbook and printing even more money to inflate asset prices and their economy once again. The likely outcome then is a massive spike in inflation. It's not inevitable but fast forward 10 years to a world of many nations with higher deficits and more massive debt, then that will be the necessary outcome.

So, when it comes to the USA, regardless of who wins the election, some things will not change. The federal deficit and debt will continue to grow. There is no plan to address it. Everyone is in denial on this from politicians to financial institutions. No one knows how to implement the change needed before it gets to be out of control so they just kick the can down the road and will deal with the crisis when it eventually arrives. When it finally does, the US will be able to use its dominant position in the world to manage the situation and make it everyone else's problem.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Are You The Leader You Wish You Had?

One of my favourite parts of interviewing exceptional leaders and businesspeople on my podcast is hearing the stories that are unique to their journeys. While high performers have many similar traits, there are always insights to uncover based on each person's path and hard-earned lessons along the way.

With that in mind, I was especially looking forward to speaking with Sydney Swans Premiership coach and AFL Legend Paul Roos on my most recent episode. There were so many awesome insights across a range of topics. We covered everything from success and failure to culture and leading through to mentoring, succession, family, and parenting.

When he retired as a player in 1998, he compiled a list of 25 'Coaching notes’. These were the key attributes or actions he wanted from his coaches. The list was quite different from what you might think and was part of the revolutionary approach he brought to the AFL when he started coaching. He is adamant that he would never have won the 2005 AFL premiership without the list.

The list comes from a simple question that Paul suggests that every leader ask themselves:

“Are you the leader you wish you had?”

It is a question worth asking.

Paul Roos Coaching Notes (1998):

1. Always remember to enjoy what you’re doing.

2. Coach’s attitude will rub off on the players.

3. If coach doesn’t appear happy/relaxed, players will adopt same mentality.

4. Never lose sight of the fact it is a game of football.

5. Coach’s job is to set strategies: team plans, team rules, team disciplines, specific instructions to players.

6. Good communication skills.

7. Treat people as you want to be treated yourself.

8. Positive reinforcement to players.

9. Players don’t mean to make mistakes – don’t go out to lose.

10. 42 senior players – all different personalities, deal with each one individually to get the best out of him.

11. Never drag a player for making a mistake.

12. Don’t overuse interchange.

13. Players go into a game with different mental approach.

14. Enjoy training.

15. Make players accountable for training, discipline, team plans – it is their team too.

16. Weekly meetings with team leaders.

17. Be specific at quarter, half, three-quarter time by re-addressing strategies – don’t just verbally abuse.

18. Motivate players by being positive.

19. After game don’t fly off the handle. If too emotional say nothing, wait until Monday.

20. Surround yourself with coaches and personnel you know and respect.

21. Be prepared to listen to advice from advisers.

22. Keep training interesting and vary when necessary.

23. Team bonding and camaraderie is important for a winning team.

24. Make injured players feel as much a part of the team as possible (players don’t usually make up injuries).

25. Training should be game-related.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions

The Economic Power of Sentiment

When it comes to the stock market, sentiment is usually something I’d associate with the noise of the market. In this context, sentiment is often the momentum of the share price movement driven by the investor emotions of fear and greed. When sentiment is against a company, it is often out of favour. Ignoring the noise of the crowd means it may potentially be a buying opportunity. Conversely, when sentiment is in favour of a stock or trend, this noise may well mean that it’s time to sell down or take profit. In this regard, sentiment reflects the weight of the herd's view in the short term. For long-term investors in shares, paying attention to sentiment can be counterproductive.

From an economic perspective though, sentiment really does matter. After all, the global economy is not a machine or some abstract concept, it’s just the output of what all the people in the world do. The global economy is simply the result of what we collectively produce and consume as individuals every day. This is an important and often forgotten aspect of how we look at the world from an investment perspective.  If consumers and business owners are positive about where the economy is going, they are more likely to spend and invest. While if they are negative about the economic situation then they’ll spend and invest less. So, it becomes a self-fulfilling cycle. Consumer and business sentiment matter a great deal to economic activity.

Central banks and governments understand that sentiment matters from an economic perspective. It’s why they are so focused on managing consumer and business expectations. In tough times, they will never say “this situation looks like it could be an economic disaster”. Even in a recession they will say something like “it’s been a tough few months, but we think the worst is behind us, the green shoots of growth are coming through”. Then they will repeat that every month until it ends up being right. That approach is also the right way to manage sentiment in the down times from a government managing the macro-economic perspective. If you talk down the economy, you’ll shift sentiment down fast, then the economy will fall off a cliff too quickly.

It's rare and in fact counterproductive for governments and central banks to speak openly about any real concerns for the economy as it will only make them worse. It's far better to speak positively to blunt the impact in tough times and eventually, the good times will return. That’s the playbook for governments around the world. The mistake investors make after listening to it is to believe it. It's up to an investor to decide for themselves what their view of the macroeconomic picture is. Your mandate is to generate a return from your investments and that is completely different from the aim of the government and the central banks. The worst time to listen to the government for economic guidance is when the economy slows because that is exactly when your goals clash with theirs.

So, as the global economy begins to slow over the coming months remember all of this. It’s up to you as an investor to form your own view of the economy and what that means for consumers and businesses. Understanding the impact that sentiment has on a slowdown in the global economy is critical for investors because ultimately the activity of consumers and businesses flows through directly to the profits of companies you invest in. But don't be fooled into thinking that the government or central banks will tell you how an economic slowdown will play out. Their task is different to yours.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions

How the Mighty Have Fallen

Share markets have been hitting all-time highs for much of this year on the back of standout performances of the big tech. But it is certainly not across the board. Many equally recognisable global names have significantly underperformed and are feeling the brunt of investor wrath. For some, it is due to a downturn in sales while for others it might be an event or series of events that bring chaos and a reputational hit.

Sometimes the events causing the problems are worth looking at more closely. While the issues at play often justify the share price decline, if the company, brand, and management are strong enough such events can be overcome. This potentially presents a one-off opportunity for patient long-term investors to buy an unloved and out of favour company.

Often, short-term investor sentiment is volatile. Too exuberant when there is positive news and too fearful when news is negative. For investors, Warren Buffett's classic quote sums up the counter-intuitive approach needed when he said, “Be fearful when others are greedy, and greedy when others are fearful.” Buffett has on many occasions looked at what other investors have seen as a crisis and invested having realised it was in fact an opportunity.

In 2008, at the height of the Global Financial Crisis (GFC), Buffett famously invested billions in Goldman Sachs. He bought shares in the investment bank at a time when fear in investment markets was at extreme levels. He profited greatly from investing at that point. Many years earlier he bought shares in American Express after the company had been embroiled in a fraud scandal. The shares plummeted with its future and reputation brought into doubt. Again, Buffett understood that while the situation was obviously serious, the company could address these problems and recover.

Currently, companies that have taken significant hits include Nike, Boeing and most recently CrowdStrike. Often the reasons for share prices falling are valid such as a declining industry or a competitive environment. But often there are a range of circumstances that while bad are not as bad as investors fear in the moment. Of course, it is not always the case.

The key to this is the strength of the brand and the importance of the company within its industry. You need to consider if the issues can be resolved too. Are the issues a one-off and temporary or are the issues embedded in the company? If they are systemic, can they be remedied? It's worth having a look to consider if the issues facing the company are the existential threat that markets sometimes would have you believe. If the company can overcome the issues in the long term, then the share market might well be marking it down too harshly in the short-term.

In the case of Nike, the share price is down heavily this year on slower sales globally and increased competition from new entrants. Nike’s share price is down just over 40% since December last year and almost 60% lower than its all-time high back in November 2021. What is clear to me is that Nike is an extraordinarily strong global brand. It is dominant in areas such as basketball and running. While consumer demand is sluggish around the world, it will not last forever. There are exciting growth opportunities in key markets such as Asia and Africa that are passionate about sports, especially basketball.

In the case of Boeing, there are some really concerning issues around safety. Their 737 planes which accounted for almost of third of their revenue were grounded after a series of fatal crashes. But these appear to be potentially systemic issues. Government investigations paint a concerning picture about the culture at the company. However, there are not many companies that can do the things Boeing can do. Not only that but they do a significant amount of work in the defence space at a time of massive increases in military spending. They obviously need to overhaul not only their processes and procedures but their entire culture. But if they can, perhaps this is an opportunity. After a long period of remediation, it may be possible for Boeing to emerge stronger than ever.

CrowdStrike is an interesting case study. I am particularly interested as cybersecurity and defence is a massive growth industry and these stocks tend to trade at levels that I find too expensive to justify. The CrowdStrike outage that affected the entire world obviously carries with it reputational risk, but it also highlights how important and embedded in the global communications infrastructure framework these companies are. There are not many companies with the capability of CrowdStrike. At this point, the share price is 40% lower than a month ago on the concerns investors have right now. But if it is a one-off this incident may be a distant memory in 5 years' time. Obviously, the risk is that this is a reoccurring issue, and they lose credibility and customers.

It's somewhat more difficult to be greedy when others are fearful. In the case of Nike, I think this is a potential opportunity to accumulate shares for long term in a leading global brand at fair prices. In Boeing, I think the likelihood is that the cultural turnaround will take many years, and the risks associated with this are probably too high for me. With CrowdStrike, if recent events are not symptomatic of a deeper systemic problem, it may well be soon forgotten, and business returns to normal. It's critical for investors to think about the long-term prospects of the companies they are investing in when a company faces serious issues. One of the best questions you can ask is will these issues matter in 5, 10 or 15 years’ time?

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

An Excellent Disappointing Result

Yesterday, Microsoft results were released. After the news, the shares immediately dropped over 6% in after-hours trading as headlines called it a ‘disappointing result’. Analysts referred to the result as ‘below expectations’ and questioned when investors would start to see a return on investment for the $US14 billion spent last quarter on AI (Artificial Intelligence) infrastructure.  

Seems grim. Just how bad were their results?  

Well, revenue was up 15% year–on-year. In their important Azure Cloud division, revenue was up 29% for the quarter with guidance for 2025 for growth ‘slowing’ to 28%. Profit was up 10% to $US22 billion. For the full year, revenue was $US245 billion and net income was $US88 billion.

This is an excellent result from an outstanding company. So why the drama and consternation?  

Share markets and investors are incredibly short-sighted. The primary reason for the fall in the share price was that however well a company performs investors want more. The share price went up too much this year on expectations that were too high. Investors expected 31% revenue growth and were concerned about the level of capital expenditure for the quarter.  

Microsoft is only just getting started in building out its capabilities to win the AI arms race. This is a multi-decade investment. It is madness to expect to see a return on investment on a quarter-by-quarter basis. This is where long-term investors need to look beyond the noise in the financial media and quarterly results. Understanding the big picture is critical.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

JP Morgan Juggernaut

There are a handful of stocks we hold in our client portfolios that I consider to be cornerstone stocks. These are the bluest of blue-chip companies such as Microsoft, Amazon and Coca-Cola. Another name, less well-known here in Australia is JP Morgan Chase (JPM). We added it to our portfolio before the regional banking crisis in early 2023 and have continued accumulating shares in the stock for most clients in their international portfolios in that time. The performance has been outstanding, and we expect their market leadership to continue.

There are several important reasons I like this company.

Firstly, they have outstanding management. It starts with their CEO of the past 18 years, Jamie Dimon. He has guided the bank from strength to strength including navigating not just JP Morgan through the GFC but the entire banking industry. He is the definition of a great leader.

Under his guidance, he has balanced the need to perform in the short term while optimising for the long term. His leadership and foresight have set JP Morgan up to achieve long-term growth while creating a culture of prudence and discipline that has delivered consistent results and made JP Morgan a beacon of stability in an era of disruption and change.

This discipline and stability enable the bank to not only weather the most difficult of financial storms but also to take advantage of them and add value to shareholders in the toughest of times. As the GFC took hold and big-name banks collapsed, JP Morgan’s position of strength enabled it to be a buyer at a time when no one else could. They were able to buy Bear Stearns and Washington Mutual in the process for pennies in the dollar.

More recently, the regional banking crisis in 2023 highlighted how susceptible the smaller US banks are to failure when depositors withdraw their funds and create a run on a bank. This caused the downfall of Silicon Valley Bank (SVB) because they were forced to sell assets at a loss. Once again, JP Morgan was able to capitalise on the situation by taking over SVB as well as First Republic.

More importantly though, it was their relative strength and stability that was able to help in heading off the crisis. Once JP Morgan stepped in, depositor concerns about their deposit dissipated. During that time, it became clear to me that going forward the banking world was going to change, consolidation was going to be inevitable, and the big will get bigger. Additionally, their global presence is growing and their investments in technology are paying off too. They will be a beneficiary in the advancement and integration of artificial intelligence technology.

But from a pure investment value perspective is what appeals to me most. Within our portfolios, we tend to buy Australian companies where the Australian market leader has similar attributes to their global peers. We prefer to buy exposure in international companies where you simply cannot invest in a theme domestically. For example, all things being equal on valuation, you might prefer Woolworths over Walmart, but you simply cannot find a domestic equivalent to Microsoft.

When you start comparing JPM to Australian banks, the difference in valuations is stark. Australia’s biggest and safest bank Commonwealth Bank of Australia (CBA) trades at a 22 times price earning (PE) ratio while JPM trades at just 11 times. Comparing their valuations to their profit, CBA is twice as expensive as JPM. While JPM has a market capitalisation of AUD $895b approx. four times CBA’s AUD $220b, one is dominant globally while the other is dominant in a nation of only 25 million.

Obviously, Australian investors love CBA and will point out it has a higher dividend at 3.7% fully franked compared to 2.2% for JPM. But this is where its critical to look under the hood and really understand how the numbers work. CBA pay out almost 80% of their profit to maintain that dividend. JPM only pay out about 25% of their profit as dividend. JPM could pay a higher dividend yield than CBA if they chose to. But they retain their earning to reinvest massively in the future as they position for global opportunities.

It's important to remember that the issues that created the regional banking issue back in 2023 haven't really disappeared. With all the geopolitical and economic uncertainty around the world, its critical to invest in companies with a proven track record. But history has shown that whatever the problems or crises that arise in the decade ahead, JPM will be positioned, ready and waiting patiently to capitalise on any opportunity. Few companies have a better track record, market strength and leadership to confidently enter a more difficult phase. Few are better positioned on the global stage than JP Morgan. This is why investors need to consider the best companies across the world, not just at home.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Is Now a Good Time to Consider Selling Your Business?

I’m having an increasing number of conversations with business owners recently where they have asked whether it’s a good time to sell their business. If you run a successful private business, you have probably been approached by private equity firms gauging your interest in selling or taking on a big investor. Anecdotally though, it seems that these approaches are becoming more frequent and the valuations on offer higher than ever. 

The current situation reminds me of 2006 when I saw a surge in people exiting businesses at fantastic prices. Shortly after that, the GFC hit, and it all came to a grinding halt. Obviously, it depends on lots of factors including your age, your industry, your motivation, and stage of life. But subject to those personal considerations, my answer is increasingly, yes, now is a great time to sell a business. 

It starts with the largest investment institutions, big superannuation, pension funds and wealth management firms. With share markets hitting record highs, they are trying to diversify and find better value opportunities. Many of these organizations are mandated to invest these funds regardless of valuations. Increasingly they’ve poured billions into private equity. 

With a flood of money into private equity funds, managers are looking across the country at private companies they can buy or invest in to deploy these funds. What happens in situations like this is there’s more money and more managers competing for the same number of deals. In such a competitive environment they have a choice, pay more than they’d like to or stay disciplined and miss out on the deal altogether. 

Here’s where it gets tricky. Often the funds are deployed even though it puts future returns of the fund at risk. Why? Well, firstly it’s not their money. Secondly, if they don’t deploy the cash their investors will want their cash back. Either way, if they don't find businesses to buy then they don’t get their management fee.  

While many PE firms will be disciplined, many aren’t, and this is when bad investments are made. As the late great investor, Charlie Munger once said, “show me the incentive and I’ll show you the outcome”. So, the deals will get done and this flood of money will find a home. That’s why as the landscape becomes increasingly competitive the price earning multiple on private deals starts to ratchet up. 

In many cases, the profits of these businesses are not increasing dramatically to justify the higher prices private equity will pay, they are simply prepared to pay a higher multiple of the profit. It’s also the reason I’ve completely avoided private equity funds for my clients. They sound great but in this current market, it’s possible you’re paying $1 to buy 80 cents.  

Conversely, it's a great opportunity for a business owner who might have been thinking of selling in the years ahead to bring forward their timeline. Why? It’s because this situation isn’t sustainable. This is the frothiest part of the market cycle. Once the music stops business owners will see these offers dry up and they be leaving tens if not hundreds of millions of dollars on the table. So, is it a good time to sell?  

Yes absolutely. 

The next question I get is what’s the timeline? 

If these elevated prices on offer are not sustainable then when does it end? How long do you have before things change? I continue to be surprised by how high and how long both the share market and property market have continued their rise. The level of growth needed to justify current valuations is very high. This is especially so in an environment where higher rates are taking so long to cause the slowdown they are intended to create. I think we are already overdue for a pullback in share markets and economic growth, so I'd get on with it sooner rather than later.  

Then it's about how to structure a deal when you sell your business. Usually, deals are structured as a mix of cash, shares and an earnout based on hitting agreed metrics in the years ahead. If you think there’s a risk business conditions might deteriorate significantly, then logically you’d want to take as much of the sales proceeds in cash as possible. Signaling is important in these transactions. A founder who wants all cash is a red flag for investors, so you need to temper your enthusiasm in this regard and ensure your selling narrative is for the right reasons. 

Often business owners take more in shares and much less in cash if they feel there is still high growth ahead. But unless you are convinced of the upside growth opportunity a higher cash component is worth considering given you won’t have the same level of control or autonomy over the company post-exit. And no matter how well it starts it’s always difficult for founders to manage with the new regime and increased bureaucracy during the earn-out phase. While a three-year earn-out phase is the norm, if you can negotiate a shorter period, it might be better for you. 

This is, in my opinion, a once–in-a-generation opportunity for business owners to potentially obtain a price that they may look back on in a couple of years and regret not taking. Like 2006 and even 2021 for tech, once the music stops and the downturn is in full swing, these deals dry up and the valuations fall to much more normal or even depressed levels. So, if you have been thinking about selling your business in the next few years, I would strongly suggest considering whether current higher prices coupled with the potential for an economic downturn ahead, make it worth acting much sooner.  

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Setbacks and Success

When I was younger the ultimate definition of greatness for me was Michael Jordan or Steve Jobs. I aspired to be like that. I learnt a lot growing up reading everything I could about them.

I have always been fascinated by those who reach the highest level of achievement in their chosen field. I am interested not just in their achievements but their mindset and what really makes them tick; what lies deeper down that drives them to succeed.

When I wrote my weekly note a few weeks ago about consistency, I reflected on why I place such a high value on routine. It occurred to me that there are two types of people who achieve their goals. There are those that are disciplined and so they have a strong routine, then there are those who need a strong routine to be disciplined.

Those in the first group have always seemed focused and methodical, almost robotic in their execution. I was never like that. I was in the second group and my biggest strength was that I was determined. A lot of successful people across all types of fields fall into the second category.

Often, it is the setbacks, disappointments, and trauma in life that underpin their drive to succeed. Michael Jordan was cut from his high school basketball team; Steve Jobs was fired as CEO of his own company. Yet in both cases they were determined to come back stronger than ever. Their determination to succeed was fueled by their failures.

They did not accept failure or shy away from it and did not let it define them. Instead, it was the catalyst for who they became. When you are determined to succeed, the overriding focus is not winning. It is often about refusing to be beaten. That does not mean you never lose. In fact, losing is one of the best ways to learn and get better.

That said, neither Jordan nor Jobs had a reputation for being tolerant of anything less than perfection. In society, those we put on a pedestal are not necessarily the people you really want to be like. Often the best of the best are driven to achieve not only despite their flaws but because of them.

The point here is that the level of success that anyone achieves is often a far uglier and traumatic process than we realise. Even the toughest of times are romanticized in the storytelling. The truth is that working out how to succeed is usually a series of iterations or small wins that accumulate into a larger achievement.

My routine was born out of many years of trial-and-error and finding what worked best for me. It certainly was not how I have always worked. Success in any field is a lot like life itself whereby no matter how ‘together’ or successful someone is they are still trying to navigate life and all its challenges the same as the next person.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Land Mines

From the rapid increases in interest rates to the aftereffects of the pandemic, there are multiple generational events that the global economy is continuing to digest. However, there is increasing evidence of financial problems hidden beneath the surface that are raising some concerns. Investors need to watch their step.

I have been warning for a while now that central banks cannot increase interest rates from 0% to 5% with no consequences. Higher rates impact the entire economic system, not just people’s mortgages and businesses. Large corporations through to entire countries with high debts are feeling the pinch. So far, their impact is taking longer than I expected to flow through and cause a financial or economic mishap, but they will eventually.

There have been a couple of recent near misses. There was the run on the regional banks in the US that brought down Silicon Valley Bank and a close call for the UK pension funds. In both cases, disaster was averted but it is worth remembering that the underlying issues that created those problems are still lurking.

A recent property transaction in New York City highlighted just how much the world has changed in the past 5 years. Earlier this month there was an office building sold in NYC for US$50m. What stood out was that it was sold at a 67% discount to its 2018 purchase price of US$150m.

In 2018 interest rates were low, we hadn’t heard of covid and working from home was unusual. Compared to 2024 with much higher rates and office vacancy rates at much higher levels, the numbers and cash flows look radically different.

The real problems begin when owners in financial difficulty are forced to sell, or worse, the banks seize the property, and are selling. You end up with a glut of properties, no buyers, and increasingly desperate sellers. Prices fall and continue to fall. This leads to even more sales as desperation to get out before you cannot sell at all.

There are other signs too. Many organisations including BlackRock and Charter Hall have suspended or limited withdrawals from some of their office property funds. They are doing this preemptively to prevent investor withdrawals requiring them to sell assets at lower prices, potentially realising losses. This has not raised alarms so far, but it should have attracted much more attention than it has.

There are many of these funds holding billions of dollars of office property assets managed by large and small fund managers for investors. The proliferation of unlisted funds for everything from property to private credit raises real questions for investors as to how they get their money out if markets go the wrong way.

I have not seen a set of circumstances like this since the GFC and here in Australia not since the early 1990’s recession when record-high interest rates created a property and loan default crisis that almost sent Westpac Bank broke. This time around the big banks seem more conservative. The risk may well be with the organisations who filled the gaps.

I am not predicting this for the entire property market, but the office property market specifically has all the hallmarks for a situation like this to unfold. How that implosion, should it happen, flows through to financial markets and the general economy is a real risk. My concern is that the office building in NYC is not a one-off, but that it might be the first domino of many more to fall.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Consistency is The Key

What I’ve come to understand over the years is that if I am to achieve my goals in business and in life, I need to think more like an elite athlete. Performing at the highest level doesn’t require you to do anything spectacular though. The key is simply being consistent and working on building winning habits every day. I’ve found there are a few tasks that are not negotiable for me if I am to perform at my best. Embedding these tasks into my routine so that they become habits removes the decision-making process and ensures they get done without even having to think about it. 

The most important part of my day is getting up at 5am. I get up and make myself an espresso on the stove using my mocha pot like my Nonno back in the old days. Then it’s off to the gym. I have found that the habit of getting up early and hitting the gym first makes my whole day fall into place. I’ve tried every other option, morning, noon, and evening but for me, there is nothing better than getting my workout done early and forgetting about it. As the saying goes “win the morning, win the day”. 

I work out at the gym 7 days a week. I used to have Sunday off for rest, but I have found it much easier to get up and go every single day without any rest days. I have worked out now for 266 days in a row with no day missed. My goal is 366 days in a row. For me, streaks work because they change your mind set significantly, you’re more invested psychologically. When you have been to the gym for 266 days in a row and you wake up feeling tired or it’s cold, you still go otherwise tomorrow you are back to day 1.  

I’m at my desk at 7.30am. I read the Financial Review, Bloomberg and Wall Street Journal to catch up on what happened in financial markets overnight. Then I will write a few words for my weekly insights note. It can be any topic that is broadly relevant, and I find interesting. This process is critical because it helps to both broaden and deepen my thinking on topics and form a more articulate and considered view.   

At 8.30am, I tackle the most important task of the day. Like a lot of people, I find it all too easy to procrastinate and put important tasks off and instead reply to emails or complete other work. But when I attack the most important task first it means my attention is in the right place and I am making the most productive decision for me and my business.  

Perhaps most importantly with regards to my phone, I don’t have any notifications on other than for text messages and phone calls. With so much noise these days you need to be deliberate in removing distractions to ensure you have an environment where you spend time doing the tasks that you intend to do. I’ve deleted apps such as Twitter and LinkedIn off my phone because even when you use them for work it’s too easy to waste time on interesting but unproductive content.  

During the day, I make sure I get out of the office a couple of times and go for a walk around Circular Quay and get my 10,000 steps. That’s also not negotiable, I do that every day. I have dinner with my wife at 6.30pm and by 8pm I am watching Bloomberg TV. The show brings together some of the best minds in the world across finance, investment, politics and economics and provides insights that are current and very useful.  

I have an alarm set for 9.30pm so I make sure I go to bed on time. Rest and recovery are critical and the biggest part of that is sleep. I go to bed and read for 20-30 minutes before I go to sleep. I try to get a good 7 hours a night and as I get older it’s too difficult getting up at 5am if I haven’t had enough sleep.  

In today’s busy world, I find that without a strong routine, it’s too easy to be distracted by any number of things. The key to performing at a high level is the discipline to do the simple things consistently. For me, the biggest part of that was working out the routine that worked for me. No one wants life to happen to them by accident. We all have goals we want to achieve in life, so it’s critical to be clear and deliberate in the way we spend our time. 

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Warren Buffett’s 10 Rules for Investing

Warren Buffett, or the “Oracle of Omaha,” as he is known, is one of the most successful investors in history. His investment philosophy is built on principles that are timeless. These are tried and tested principles that are the most fundamentally sound approach to investing. So many investors tend to forget that when you are investing in shares, you are simply buying a part of a business. The best thing you can do sometimes is forget the daily share price noise and market movement and focus on the fundamentals of the company you are a part owner of.

1. Value Investing

At the core of Buffett’s strategy is value investing. This means buying stocks that appear undervalued based on their intrinsic worth. In other words, Buffett looks for companies that are worth more than their current stock price suggests. This involves careful analysis of a company’s financials, such as earnings, dividends, and future growth potential.

2. Understanding the Business

Buffett avoids investing in businesses he doesn’t understand. He focuses on companies with clear business models. This allows him to forecast the company’s future performance more accurately. For instance, he has significant investments in consumer goods, financial services, and insurance companies — industries he understands well.

3. Long-Term Perspective

Buffett is known for his long-term approach to investing. He once said, “Our favorite holding period is forever.” He looks for companies that will perform well over many years, not just the next quarter. By focusing on the long term, he avoids the pitfalls of short-term market volatility.

4. Economic Moats

Buffett seeks companies with strong economic moats. An economic moat is a competitive advantage that protects a company from its rivals. This could be a strong brand, patented technology, or unique business processes. Companies with moats can maintain higher profit margins and fend off competitors, ensuring sustained profitability.

5. Management Quality

The quality of a company’s management team is crucial to Buffett. He looks for honest, capable, and shareholder-oriented leaders. He believes that good managers can navigate challenges and capitalize on opportunities, driving the company to long-term success.

6. Financial Stability

Buffett pays close attention to a company’s financial health. He looks for strong balance sheets, consistent earnings, and low levels of debt. A financially healthy company is more likely to withstand economic downturns and continue to grow. Buffett avoids companies that rely heavily on debt, as they are more vulnerable to financial instability or economic shocks.

7. Margin of Safety

The concept of a margin of safety is central to Buffett’s investment decisions. This means buying a stock at a price significantly below its intrinsic value. The margin of safety acts as a buffer against errors in analysis or unforeseen market fluctuations. It reduces risk and increases the potential for returns.

8. Patience and Discipline

Patience and discipline are hallmarks of Buffett’s investment style. He waits for the right opportunities and doesn’t rush into investments. He often sits on cash until he finds a stock that meets his criteria. This disciplined approach helps him avoid impulsive decisions driven by market hype or fear. At Fortress I call this ‘busy being patient’.

9. Focusing on High-Quality Companies

Buffett prefers investing in high-quality companies with strong brands, loyal customers, and reliable earnings. He believes that owning a great company at a fair price is better than owning a fair company at a great price. This focus on quality reduces risk and enhances the potential for long-term gains.

10. Ignoring Market Noise

Buffett is known for his ability to ignore market noise and focus on fundamentals. He doesn’t get swayed by daily stock price movements or sensational news headlines. Instead, he bases his decisions on thorough analysis and a clear understanding of a company’s value. This helps him stay calm and rational in turbulent markets.

Warren Buffett’s investment philosophy is grounded in simplicity, patience, and a deep understanding of the businesses he invests in. He is focused on high-quality companies, maintaining a long-term perspective, and exercising discipline. While the principles might seem straightforward, applying them consistently with the constant media noise and fear of missing out on the latest trend makes it more difficult than you’d think. Buffett’s principles and approach have been fundamental to my own investment philosophy for years. In a world of instant gratification, ultimately as an investor, as in life you are rewarded for patience and discipline.

General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.