March 2, 2025 • 16 mins
There is a way to make fairly certain that all the best performing companies are in your pension portfolio. It's a trick my dad taught me when he bet on the Grand National.
Video version
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
An engineering company reported that 10 years ago, it replaced 250 workers with nine robots.
(00:08):
Now, the company still thrives and is still a major employer in the area, but performs
well against its national and international competitors.
Now, if we write history and the company decides not to invest in those robots and continues
to produce goods using the human staff, well, gradually, competitors do introduce robots
(00:28):
and the cost of producing their goods goes down.
Our company now starts to lose orders as it can't remain competitive in the marketplace.
So it downsizes a few times and then eventually closes with the residual damage that generally
occurs in the local community when that happens.
(00:48):
So labour-saving systems have already eliminated millions of man-hours in the UK, making remaining
workers more productive.
But artificial is simply another tool that any company can leverage to achieve more with
a smaller workforce or completely replace some teams.
For instance, a company I work for, we recently replaced our counter-clogs, Humanised Invoices,
(01:16):
with an AI tool that read the invoices automatically and updated the finance system.
Now, this was pretty new technology at the time, but most modern finance systems now
have a similar capability.
And many businesses have chosen not to hire for these straightforward jobs anymore.
Now, a survey of 697 companies by Metro G, who are a research advisory firm, revealed
(01:41):
that companies that didn't implement AI in 2023 hired about 89% more agents than other
companies in their contact centres.
When I was introduced to contact centres, this did lead to 36% of companies laying off
an average of 26% of the workforce.
(02:02):
And that was just within one year.
Now these statistics are concerning and they reflect the impact on call centres, which
to be honest, have already faced challenges from outsourcing, understaffing, automation,
much more than other professional services.
While other businesses have successfully reduced headcount and expenses, there's an underlying
(02:26):
issue.
In 1914, Henry Ford boosted his factory workers' wages to $5 a day.
And it's supposedly to help them afford to buy a model tape.
However, the real reason was really to lower employee turnover and prevent these workers
from leaving and joining dodge.
(02:46):
Now, this illustrates a harsh truth.
If employment rates drop like these, as we've seen in contact centres, companies globally
will face decreased revenues because jobless individuals can't buy things, they don't
have the purchasing power.
Even employed people do tend to cut back when there is a fear of job losses.
(03:08):
However, if companies can use AI to increase efficiency and redeploy the workforce to grow
the business, then this has got to be a win-win.
Win for the growth in the economy and that's certainly a win for the employees of the company.
But what if the company can't introduce a robot or AI or make itself more efficient?
(03:28):
Well, one growing trend is for companies to focus on creating products for the rich.
The wealth gap is widening all over the world with the rich getting richer and the poor getting
poorer.
So, some companies are betting their future and generating income only from their wealthy
customers.
Now, this might seem extreme, but it's already unfolding.
(03:51):
If we think about video game sector, the industry is capitalising on what's called the freemium
model where most players get the game completely free or a small number, which they refer
to as whale, spend substantial amounts of money, sometimes thousands of pounds on in-game features.
These players are essential because they provide social opportunities for those who play and
(04:19):
enjoy the status in the perks.
In an era where budget-friendly entertainment is in demand, the gaming industry has realised
that their profits actually do come from catering to those with disposable income rather than
from their general population.
As automation likely replaces more jobs, the value of labour may also diminish while the
(04:43):
worth of income-producing assets may increase.
The rapid evolution of AI and automation makes the future unpredictable.
But those investing in these technologies will need to recognise what the gaming industry
has already learned.
There's greater profit in targeting affluent customers while everyone else serves generally
as entertainment.
(05:04):
Now, this trend isn't new as AI advances it will further amplify these issues that have
been developing for years.
Therefore, understanding the mechanics of money and how businesses adapt to a world
where affordability becomes a challenge is crucial for our investments.
Now, Lamborghini has sold more cars in the past decade than in its entire history.
(05:30):
This really highlights the growing market for luxury vehicles.
There's simply a bigger marketplace for 300,000-pound plus cars.
From Ferrari to luxury groceries, exorbitant gym memberships, hotels and the rise of popularity
of private jets and yachts.
(05:54):
The much more commonplace nowadays, it's true that billionaires are becoming wealthier.
Those who maintained even a modest investment portfolio over the past four years have amassed
significant wealth.
Some have benefited from really clever and astute investments while others just leveraged
credit to take full advantage of these unprecedented asset bull market that you've been in.
(06:17):
And few modern fortunes have been solely through hard work.
Investing has shifted from being a means to secure your retirement to pretty much a necessity
for maintaining quality of life for the rich.
If automation continues to advance, it could reduce the value of human labor since machines
can perform tasks instead, while asset values would rise as business owners capitalize on
(06:44):
this automated labor.
Now, this scenario has led to people discussing things like UBI, universal basic income.
And this is where a government payout provides basic needs for the individuals.
It's been proposed to sustain the economy of people who can't earn income due to job
(07:06):
outsourcing or automation.
But it creates a divide where individuals either rely on government assistance or belong
to the wealthy class.
And then recently, reports have been published where significant UBI experiments gave 1,000
(07:27):
residents in Texas and Illinois a thousand pound a month with no conditions, while a
control group of 2,000 received only $50.
Now, this initiative aimed to measure spending decisions.
And it was funded back to you by Sam Altman from Open Research.
And he'd expressed a concern over job displacement from technology.
(07:47):
And Wallace did he may have said there's a good market and tool for him as organization.
It's findings still holds some value.
Notably, those that received the thousand pound payment to end up earning less on their
own compared to the control group when accounted for the subsidy being removed.
While all households earn more overall, researchers noted that many recipients actually reduced
(08:12):
their working hours to focus on leisure and family.
And they really did embody this kind of idealized vision of a future where machines do the work.
Although mental health did improve for all participants, the benefits diminished over
time.
Food security initially increased and there was a general rise in living.
(08:35):
But this was eroded over time as prices increased.
This reflected the slow and destructive impact of outsourcing, which turned many UK cities
into almost ghost towns without any particular solutions for it really.
The ultimate goal for those investing in automation is kind of a utopian, automated future, while
(08:58):
a priority for everyone else is ensuring that we're not marginalized when that vision occurs.
So how does this play out in helping us to make better investments for our pensions?
Well you may decide that your hard-earned pension money should go to Nvidia and AMD who produced
the chips that run the data centers that run the AI.
(09:20):
Or maybe you invest in Microsoft, Google and Amazon actually run the data centers themselves.
Or maybe the real value will be generated by those companies using the AI technology
to streamline their operations.
I mean when I was young there was a blockbuster video shop on every corner.
(09:40):
When a couple of guys invented Netflix, which was a CD share and service back then, they
offered to sell the business to Blockbuster.
Blockbuster lacked the vision to change their business model and now there is no Blockbuster.
Netflix pretty much beams out to all our living rooms.
So how do we pick those smart companies with the talent in the boardroom to become a Netflix
(10:04):
and not become a blockbuster?
Well if I was there 20-something with a general investing account, I'd certainly try my best.
However as a 50-year-old something with a pension account, I don't see that kind of
a shoot as suitable for me.
I'll explain this with an example.
When I was a kid and the Grand National was on, my dad used to split his bet over about
(10:27):
30 horses.
He'd win every year and by win I mean of the 30 horses, one of them would always win and
overall the winners from that race would about clear what he paid out on his bets.
I mean sometimes he won a little, sometimes he lost a little but never lost everything
and never won big.
Now rather than betting the ranch on the big winners in the AI race, why not bet on all
(10:53):
the riders?
The winners will be in that bunch.
Now this is easy in pension investment and it's called index investing and in most cases
investors should really focus on low-cost index funds as their main investment strategy
and I'll outline why a low-cost index funds is a good investment choice for me and for
(11:15):
most individuals, especially for those currently using high-fee actively managed funds which
is common amongst Britons.
The rationale for index funds can be distilled into a few key points.
Cost efficiency, diversification, investment returns, tax efficiency and simplicity.
(11:36):
Now I'll begin with a background on index funds.
So an index fund is essentially a collection of stocks that intend to mirror a particular
market or a segment, for example the S&P 500 and this represents US large companies and
it uses a capitalization weighted model where larger companies like Apple and Amazon have
(11:56):
more influence than smaller ones.
This method is widely adopted for evaluating investment strategies and creating index funds
that follow the indices.
And throughout this discussion I'm going to specifically refer to capitalization weighted
market index funds rather than any other kind of strange composite.
(12:17):
In contrast, actively managed funds attempt to outperform market indices by selecting
certain stocks and timing market exposure.
Over the past 60 years index funds evolved from an obscure concept to a popular investment
vehicle and this was supported by a wealth of academic research since 1968 demonstrating
(12:39):
that actively managed funds often failed to provide enough value to justify their higher
fees with most actually underperforming over time.
The first point to support the low cost index fund is their low fee structure.
In the UK the average fee for an index fund is 0.19% whereas actively managed funds generally
hover around there 0.85%.
(13:02):
Now these higher funds correlate with diminished investment returns without any identifiable
advantages.
John Bogel who founded Vanguard highlighted that an investor in lower costs generally leads
to better outcomes and Bill Sharp revealed that when accounting for costs the average
return of actively managed funds are lower than those of passively managed funds.
(13:27):
Although some active managers might appear to add value pre-feeds, once you take the
fees into consideration the truth generally reverses.
Now another reason funds are preferable is their superior diversification.
Index funds hold a wide array of stocks across the market, a bit like my dad Beton on 30
(13:49):
horses in the Grand National.
Now actively managed funds tend to concentrate on fewer stocks and their pursuit of outperforming
the market.
I know this selective strategy might yield higher returns if you're lucky and successful.
But picking can lead to significant losses.
As most stocks do underperform, I mean data from 1926 to 2016 reveals that only a small
(14:14):
fraction of US stocks exceeded returns of the safer investments like treasury bills.
I mean Beton on all horses and your Beton on all the winners.
The second significant point is that index funds typically outperform the vast majority
of actively managed funds.
The 2023 study of US equity mutual funds from 1991 to 2020 found that over half of these
(14:39):
funds underperformed compared to index funds and after counting for fees only a small percentage
managed to achieve better results.
This includes more extensive studies that actually corroborate these findings over longer term
horizons.
Ministers frequently seek out actively managed funds expecting past winning managers to keep
(15:02):
performing well.
But evidence suggests that this isn't just an illusion really.
While some active funds may have outperformed historically, there's little support for the
idea that past success will translate into better future results.
Index funds not only provide high returns but are also tax efficient.
This is due to their lower turnover rate which results in fewer taxable distributions for
(15:27):
investors.
Another advantage is simplicity.
Assessing the performance is really straightforward compared to actively managed funds where performance
can be quite challenging to interpret really.
Now I focused generally on total market index funds.
(15:48):
It's crucial to be cautious that not all index funds are equal.
Some thematic index funds that track popular trends may perform poorly in the long run
like a green energy fund or a crypto fund.
Hence I choose capitalization weighted total market index funds.
So in summary, low cost index funds are diversified, cost effective and historically outperform
(16:14):
most actively managed funds when you take fees and taxes into consideration.
But thanks for watching and if you found this video helpful, please share it with others
who may still be using high fee actively managed funds.
See you on the next one.
An engineering company reported that 10 years ago, it replaced 250 workers with nine robots.
(00:08):
Now, the company still thrives and is still a major employer in the area, but performs
well against its national and international competitors.
Now, if we write history and the company decides not to invest in those robots and continues
to produce goods using the human staff, well, gradually, competitors do introduce robots
(00:28):
and the cost of producing their goods goes down.
Our company now starts to lose orders as it can't remain competitive in the marketplace.
So it downsizes a few times and then eventually closes with the residual damage that generally
occurs in the local community when that happens.
(00:48):
So labour-saving systems have already eliminated millions of man-hours in the UK, making remaining
workers more productive.
But artificial is simply another tool that any company can leverage to achieve more with
a smaller workforce or completely replace some teams.
For instance, a company I work for, we recently replaced our counter-clogs, Humanised Invoices,
(01:16):
with an AI tool that read the invoices automatically and updated the finance system.
Now, this was pretty new technology at the time, but most modern finance systems now
have a similar capability.
And many businesses have chosen not to hire for these straightforward jobs anymore.
Now, a survey of 697 companies by Metro G, who are a research advisory firm, revealed
(01:41):
that companies that didn't implement AI in 2023 hired about 89% more agents than other
companies in their contact centres.
When I was introduced to contact centres, this did lead to 36% of companies laying off
an average of 26% of the workforce.
(02:02):
And that was just within one year.
Now these statistics are concerning and they reflect the impact on call centres, which
to be honest, have already faced challenges from outsourcing, understaffing, automation,
much more than other professional services.
While other businesses have successfully reduced headcount and expenses, there's an underlying
(02:26):
issue.
In 1914, Henry Ford boosted his factory workers' wages to $5 a day.
And it's supposedly to help them afford to buy a model tape.
However, the real reason was really to lower employee turnover and prevent these workers
from leaving and joining dodge.
(02:46):
Now, this illustrates a harsh truth.
If employment rates drop like these, as we've seen in contact centres, companies globally
will face decreased revenues because jobless individuals can't buy things, they don't
have the purchasing power.
Even employed people do tend to cut back when there is a fear of job losses.
(03:08):
However, if companies can use AI to increase efficiency and redeploy the workforce to grow
the business, then this has got to be a win-win.
Win for the growth in the economy and that's certainly a win for the employees of the company.
But what if the company can't introduce a robot or AI or make itself more efficient?
(03:28):
Well, one growing trend is for companies to focus on creating products for the rich.
The wealth gap is widening all over the world with the rich getting richer and the poor getting
poorer.
So, some companies are betting their future and generating income only from their wealthy
customers.
Now, this might seem extreme, but it's already unfolding.
(03:51):
If we think about video game sector, the industry is capitalising on what's called the freemium
model where most players get the game completely free or a small number, which they refer
to as whale, spend substantial amounts of money, sometimes thousands of pounds on in-game features.
These players are essential because they provide social opportunities for those who play and
(04:19):
enjoy the status in the perks.
In an era where budget-friendly entertainment is in demand, the gaming industry has realised
that their profits actually do come from catering to those with disposable income rather than
from their general population.
As automation likely replaces more jobs, the value of labour may also diminish while the
(04:43):
worth of income-producing assets may increase.
The rapid evolution of AI and automation makes the future unpredictable.
But those investing in these technologies will need to recognise what the gaming industry
has already learned.
There's greater profit in targeting affluent customers while everyone else serves generally
as entertainment.
(05:04):
Now, this trend isn't new as AI advances it will further amplify these issues that have
been developing for years.
Therefore, understanding the mechanics of money and how businesses adapt to a world
where affordability becomes a challenge is crucial for our investments.
Now, Lamborghini has sold more cars in the past decade than in its entire history.
(05:30):
This really highlights the growing market for luxury vehicles.
There's simply a bigger marketplace for 300,000-pound plus cars.
From Ferrari to luxury groceries, exorbitant gym memberships, hotels and the rise of popularity
of private jets and yachts.
(05:54):
The much more commonplace nowadays, it's true that billionaires are becoming wealthier.
Those who maintained even a modest investment portfolio over the past four years have amassed
significant wealth.
Some have benefited from really clever and astute investments while others just leveraged
credit to take full advantage of these unprecedented asset bull market that you've been in.
(06:17):
And few modern fortunes have been solely through hard work.
Investing has shifted from being a means to secure your retirement to pretty much a necessity
for maintaining quality of life for the rich.
If automation continues to advance, it could reduce the value of human labor since machines
can perform tasks instead, while asset values would rise as business owners capitalize on
(06:44):
this automated labor.
Now, this scenario has led to people discussing things like UBI, universal basic income.
And this is where a government payout provides basic needs for the individuals.
It's been proposed to sustain the economy of people who can't earn income due to job
(07:06):
outsourcing or automation.
But it creates a divide where individuals either rely on government assistance or belong
to the wealthy class.
And then recently, reports have been published where significant UBI experiments gave 1,000
(07:27):
residents in Texas and Illinois a thousand pound a month with no conditions, while a
control group of 2,000 received only $50.
Now, this initiative aimed to measure spending decisions.
And it was funded back to you by Sam Altman from Open Research.
And he'd expressed a concern over job displacement from technology.
(07:47):
And Wallace did he may have said there's a good market and tool for him as organization.
It's findings still holds some value.
Notably, those that received the thousand pound payment to end up earning less on their
own compared to the control group when accounted for the subsidy being removed.
While all households earn more overall, researchers noted that many recipients actually reduced
(08:12):
their working hours to focus on leisure and family.
And they really did embody this kind of idealized vision of a future where machines do the work.
Although mental health did improve for all participants, the benefits diminished over
time.
Food security initially increased and there was a general rise in living.
(08:35):
But this was eroded over time as prices increased.
This reflected the slow and destructive impact of outsourcing, which turned many UK cities
into almost ghost towns without any particular solutions for it really.
The ultimate goal for those investing in automation is kind of a utopian, automated future, while
(08:58):
a priority for everyone else is ensuring that we're not marginalized when that vision occurs.
So how does this play out in helping us to make better investments for our pensions?
Well you may decide that your hard-earned pension money should go to Nvidia and AMD who produced
the chips that run the data centers that run the AI.
(09:20):
Or maybe you invest in Microsoft, Google and Amazon actually run the data centers themselves.
Or maybe the real value will be generated by those companies using the AI technology
to streamline their operations.
I mean when I was young there was a blockbuster video shop on every corner.
(09:40):
When a couple of guys invented Netflix, which was a CD share and service back then, they
offered to sell the business to Blockbuster.
Blockbuster lacked the vision to change their business model and now there is no Blockbuster.
Netflix pretty much beams out to all our living rooms.
So how do we pick those smart companies with the talent in the boardroom to become a Netflix
(10:04):
and not become a blockbuster?
Well if I was there 20-something with a general investing account, I'd certainly try my best.
However as a 50-year-old something with a pension account, I don't see that kind of
a shoot as suitable for me.
I'll explain this with an example.
When I was a kid and the Grand National was on, my dad used to split his bet over about
(10:27):
30 horses.
He'd win every year and by win I mean of the 30 horses, one of them would always win and
overall the winners from that race would about clear what he paid out on his bets.
I mean sometimes he won a little, sometimes he lost a little but never lost everything
and never won big.
Now rather than betting the ranch on the big winners in the AI race, why not bet on all
(10:53):
the riders?
The winners will be in that bunch.
Now this is easy in pension investment and it's called index investing and in most cases
investors should really focus on low-cost index funds as their main investment strategy
and I'll outline why a low-cost index funds is a good investment choice for me and for
(11:15):
most individuals, especially for those currently using high-fee actively managed funds which
is common amongst Britons.
The rationale for index funds can be distilled into a few key points.
Cost efficiency, diversification, investment returns, tax efficiency and simplicity.
(11:36):
Now I'll begin with a background on index funds.
So an index fund is essentially a collection of stocks that intend to mirror a particular
market or a segment, for example the S&P 500 and this represents US large companies and
it uses a capitalization weighted model where larger companies like Apple and Amazon have
(11:56):
more influence than smaller ones.
This method is widely adopted for evaluating investment strategies and creating index funds
that follow the indices.
And throughout this discussion I'm going to specifically refer to capitalization weighted
market index funds rather than any other kind of strange composite.
(12:17):
In contrast, actively managed funds attempt to outperform market indices by selecting
certain stocks and timing market exposure.
Over the past 60 years index funds evolved from an obscure concept to a popular investment
vehicle and this was supported by a wealth of academic research since 1968 demonstrating
(12:39):
that actively managed funds often failed to provide enough value to justify their higher
fees with most actually underperforming over time.
The first point to support the low cost index fund is their low fee structure.
In the UK the average fee for an index fund is 0.19% whereas actively managed funds generally
hover around there 0.85%.
(13:02):
Now these higher funds correlate with diminished investment returns without any identifiable
advantages.
John Bogel who founded Vanguard highlighted that an investor in lower costs generally leads
to better outcomes and Bill Sharp revealed that when accounting for costs the average
return of actively managed funds are lower than those of passively managed funds.
(13:27):
Although some active managers might appear to add value pre-feeds, once you take the
fees into consideration the truth generally reverses.
Now another reason funds are preferable is their superior diversification.
Index funds hold a wide array of stocks across the market, a bit like my dad Beton on 30
(13:49):
horses in the Grand National.
Now actively managed funds tend to concentrate on fewer stocks and their pursuit of outperforming
the market.
I know this selective strategy might yield higher returns if you're lucky and successful.
But picking can lead to significant losses.
As most stocks do underperform, I mean data from 1926 to 2016 reveals that only a small
(14:14):
fraction of US stocks exceeded returns of the safer investments like treasury bills.
I mean Beton on all horses and your Beton on all the winners.
The second significant point is that index funds typically outperform the vast majority
of actively managed funds.
The 2023 study of US equity mutual funds from 1991 to 2020 found that over half of these
(14:39):
funds underperformed compared to index funds and after counting for fees only a small percentage
managed to achieve better results.
This includes more extensive studies that actually corroborate these findings over longer term
horizons.
Ministers frequently seek out actively managed funds expecting past winning managers to keep
(15:02):
performing well.
But evidence suggests that this isn't just an illusion really.
While some active funds may have outperformed historically, there's little support for the
idea that past success will translate into better future results.
Index funds not only provide high returns but are also tax efficient.
This is due to their lower turnover rate which results in fewer taxable distributions for
(15:27):
investors.
Another advantage is simplicity.
Assessing the performance is really straightforward compared to actively managed funds where performance
can be quite challenging to interpret really.
Now I focused generally on total market index funds.
(15:48):
It's crucial to be cautious that not all index funds are equal.
Some thematic index funds that track popular trends may perform poorly in the long run
like a green energy fund or a crypto fund.
Hence I choose capitalization weighted total market index funds.
So in summary, low cost index funds are diversified, cost effective and historically outperform
(16:14):
most actively managed funds when you take fees and taxes into consideration.
But thanks for watching and if you found this video helpful, please share it with others
who may still be using high fee actively managed funds.
See you on the next one.
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!