March 13, 2025 • 40 mins
It had to happen: Tariffs, recession indicators and an overpriced Wall Street: The sharemarket has taken a tumble. As luck would have it, the Money Puzzle has a top value investor on the show this week and he names three top stocks that can survive just about anything!
Roger Montgomery of Montgomery Investment Management joins James Kirby in this episode.
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In today's show, we cover...
- The sharemarket sell off - why did it happen?
- Ai and Tech face a new reality
- Three stocks with a value 'moat'
- The conditions we need for a positive year on the ASX
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:07):
Hello, and welcome to the Australians Money Puzzle podcast. I'm
James Kirby. Welcome aboard, everybody, Welcome aboard. On a what
can I say, a fairly rocky week, didn't we pick
the right time to talk to my guests today? The
ASEX has officially midweek entered a correction, territory down ten
(00:27):
percent from its peak and still very weak as we speak.
Tech shares of course being soughked off quite hard, and
anything to do with AI interestingly, not just AI stocks,
but AI related stocks of which there are many and
all sorts right across two property trusts. So we've lost
all the gains that we had since the day Trump
(00:49):
was elected and just now it's it's also, of course
the same week that we had the tariffs imposed upon us,
which what does that do bring us back? Where does
that bring us back to? Huh nineteen? So it's time
to talk to someone in the market about the market.
My guest is Roger Montgomery of Montgomery Fund's Management. Oh
are you Roger?
Speaker 2 (01:09):
Great to be with you again, James. It is an
auspicious day to be chatting with you.
Speaker 1 (01:14):
Today, so it would seem but anyone who's been around
knows the market can do this and it can surprise us.
There's no the other thing I would say about this
particular downturn, and I know that you can put your
case about it. You actually are skeptical about the definition
of correction. More than ten percent is many people's definition.
(01:36):
There's no nothing legal. There's no legal definition out there,
but certainly no lack of explanations for why this particular
route has occurred on the share market is there.
Speaker 2 (01:50):
I agree there's no shortage. There's always going to be
opinions after the fact. You know, I'm pretty content with
the columns that I wrote in Wealth earlier this year
saying that I expect this year to be a positive year,
but that it would be more volatile, and I doubted
that we would get another twenty percent year like we
(02:11):
had last year in the year before in the s
and P. Five hundred. I think, James, to your point
about corrections. I think the word correction is a euphemism
for a crash, or it's been. It's been somewhere along
the line, journalists and commentators like you and I stopped
calling it a crash started calling it a correction, and
(02:34):
so now correction is not twenty percent anymore. It's ten percent.
Speaker 1 (02:37):
That's right. The crash is twenty.
Speaker 2 (02:39):
A crash is twenty. But I thought a correction was
a euphemism for a crash, so I didn't realize there
was it was nuanced.
Speaker 1 (02:48):
Oh, it's nuanced. Yes, it is, whatever it is, Roger,
it's sure as how going the wrong way, isn't it.
We had a fabulous year in twenty twenty four, and
we knew that, and as investors, we all knew that,
and we knew that you don't get double digits every year.
We knew that. Come, well, bank, the biggest bank in
the market, cannot go up forty percent. Well, history would suggest,
(03:09):
reality with suggest it can't go up forty percent. Another falling,
and they're falling right across the board. First of all,
you're still comfortable with basic premise you're working on that
we will finish calendar twenty twenty five with a positive
return on share markets.
Speaker 2 (03:27):
There's there's the backdrop that supports that idea is threefold.
Number One, you need disinflation, and in January and February
we saw an uptick in US month to month inflation.
So we're still arguably still in deflation, because we're nowhere
(03:51):
near the eight to nine percent inflation rates that we
had before. But if your starting point was November October
November last year, then we've seen inflation accelerating marginally, So
that's not going the right way. But we need disinflation.
The other thing that we need is positive economic growth.
(04:12):
There is now some doubt about that, particularly in the
United States. And the reason I say disinflation and positive
economic growth, James, is because there was some research conducted
by a macroeconomic research house back and presented back in
nineteen seventy eight, and it demonstrated that whenever you have
disinflation and positive economic growth coalescing, then you end up
(04:37):
with a ripe environment for innovative companies with pricing power. Now,
in twenty twenty three and twenty twenty four, that's precisely
what we had, positive economic growth, disinflation, and the innovative
companies with pricing power, the Magnificent seven, with the exception
of Tesla, let's call it the Magnificent six. They all
(04:58):
did really well. And by the way, and the reason
why a lot of the money flowed into those megacap
companies is because there's a perceived safety in those larger companies,
and there was still a lot of talk about recession
or the risk of recession and so forth. And so
the inner so Gavical Research, who published that research in
(05:20):
nineteen seventy eight, they've been absolutely correct every time since
nineteen seventy eight. So that's two requirements for a positive
outlook for this year. And the third is central bank liquidity.
And now in twenty twenty three and twenty twenty four,
we had something in the order of five to six
trillion US dollars being surreptitiously injected into financial markets. Despite
(05:45):
all the tough talk from Jerome Powell and all of
that realet Janet Yellen as well, all of that tough
talk about QT or quantitative tightening and so forth, in
the background, they were drawing on things like the Reverse
Repurchase Agreement account that the FED holds, and they injected
(06:06):
about two trillion dollars from that account into markets. So
that was supportive. Again, liquidity is a fundamental necessity for
markets to go up, you need to have liquidity. And
so this year we have three challenges, and that is
disinflation still in train, and at the beginning of the year,
I believed that it would be, but at the moment
(06:28):
there's a question positive economic growth that at the beginning
of the year I thought that would be a consistent issue,
a consistent positive influence, but there's question marks in the
market about that. We're still positive, growth is still positive,
but there's a question mark that's re emerged. And liquidity, well,
(06:48):
that reverse repurchase agreement account I mentioned a moment ago,
that's down to one hundred and twenty billion now from
about two point four trillion a year and a half ago,
So that's been exhausted. The Federal Reserve and global central
banks are going to have to be very creative if
they don't want markets to tank in thinking about they'll
(07:08):
have to be very creative about how they pump more
money into financial markets and into the financial system.
Speaker 1 (07:15):
To give that The critic to keep that cree variable,
obviously here is Trump.
Speaker 2 (07:20):
I've only talked about one one aspect. Yes, so Trump
and the tariffs and the sort of mercurial way that
he imposes them withdraws that creates uncertainty not only for
financial markets, but it creates uncertainty for business. James. Companies
don't know whether they should spend their capital on investing
(07:41):
in new manufacturing. They don't know whether or not they
should be in advertising or marketing, should they be employing
more people. That all gets pulled back in this very
uncertain political regime.
Speaker 1 (07:54):
Yes, so what we're seeing so far actually, as you said,
like a capital striker, and that's being reported quite lightly,
that listed companies of all at all levels are they
don't know where to turn. There's always uncertainty in the market.
Of course listeners and there would have been a shore
ever where I would have talked to Roger and we
(08:14):
would have said, hey, the markets are certain, but there
are degrees one of the things talking about in uncertainty.
So the market's down quite sharply. But the VIX, which
is the uncertainty index, that's not flying high or anything
like that.
Speaker 2 (08:28):
It did spark, We did have a spark a couple
of days ago, but it hasn't spiked too you know,
extraordinary levels of previous crashes. The other thing that's interesting, James,
I just finished that. So we talked about the economic backdrop.
We then talked about the fundamental ecodrop nomic backdrop. Then
we talked about or mentioned Trump and tariffs and the
(08:48):
uncertainty there. The third one is again something that I
wrote about in the column for you, and that was
that was the end of the AI thematic, at the
end of that boom in AI stocks fueled by the
liquidity that I mentioned a moment ago.
Speaker 1 (09:05):
When you said the end, you mean the end. It's
not over right, It's the end of what the promise
of the period of where there was no limits to
the promise. Is that what you're straining it.
Speaker 2 (09:15):
I think the initial unbridled optimism where a complete disengagement
between price and revenue occurs, that that's over And the
hint and what I wrote about in the column a
while back. The hint was that the SOPs Semiconductor Index
(09:36):
in the United States had actually been ranged trading for
nine months. In fact, it was unchanged about a month
and a half ago. It was unchanged from nine months earlier.
So that told me that the thematic was becoming tired.
And despite all the positive news about Mannas, about Grock,
about the next version of chat GPT, despite all all
(10:00):
of the positive announcements and developments in the AI landscape,
what we were seeing was no real positive price response
in semiconductor stocks. And that told me that you know what,
there's a lot of there's a lot of great words
being said, but not a whole lot of buying happening
as a result of those words. And so once once
(10:22):
investors see a thematic becoming tired and they're not getting again,
it's a little bit like when you're investing in a fund, James,
and you know you've been there for five years, and you're.
Speaker 1 (10:31):
Going, well, yeah, you know.
Speaker 2 (10:33):
When's it going to turn? You sort of start to
become a little bit a little bit impatient. And I
think that's what investors have done now, They've become impatient
and they're reversed. And if I can just say one
more thing about the AI thematic, and that is that
again wrote a column about this last year in the
Australian Wealth. The thing that needed to happen was that
(10:55):
revenue models needed to be developed to justify father capital
expenditure on AI. And you know, the most popular or
the biggest use case for large language models that was
commercial up until this point right now was companion bots.
(11:17):
So you know, so chatbots that if you were lonely
or feeling romantic or whatever it was, you could subscribe
to a chatbot that was powered by a large language model,
and it would talk to you about your needs and wants.
Speaker 1 (11:32):
And it's not exactly as commercially look at as it
was in the payment system, or if it was in
the This is the sort of thing that we were
waiting for. I've got a very good question on this,
which we'll do in a few minutes when we get
to questions, because it captures what all listeners I imagine
they're asking this week. Just before I do, I think
we should take a break because I want to come
back to you and look at this market now and
(11:53):
the extent to which capital gains. If capital gains are
not going to come through this year they were last year,
and that's a logical thing to say, before we even
had this correction. Where do people turn for income? We'll
be back in a moment. Hello, Welcome back to The
(12:18):
Australian's Money Puzzle podcast. James Kirby talking to Montgomery of
Montgomery Investment Management. Regular contributor of course to the Australians
Wealth Section, longtime contributor Roger. I wanted to just bring
that up with you. For most investors, shares are just
a part of their portfolio and they are faced with
a real conundrum now. Saving rates are falling because official
(12:43):
rates are falling at the same time the share market returns. Well,
they've had a setback, quite a setback in this first
quarter of twenty twenty five. And on top of that,
we've also come to realize that the dividend payouts in
any event I'm talking about the ASX now are slowing.
(13:03):
The big miners aren't paying dividends anything like they used to.
The dividend yield which people would depend on, has dropped
and it's under four percent now, where it was traditionally
between four and six percent. To the listeners who were
looking at this scenario where the shares are falling, their
wrists on risk free deposits are falling, and they know
that a dividend do you listen as good as it
(13:24):
used to be? What are the options here?
Speaker 2 (13:28):
Okay? So there's a couple of frameworks to consider, James,
that help inform this discussion. Number One, if you're an
investor who bought the Commonwealth Bank shares fifteen or twenty
years ago, the price doesn't matter. The yield on your
investment is extraordinary, and I would be very reluctant and
(13:48):
it would be disingenuous of me to suggest that you
should sell your shares because they're going down.
Speaker 1 (13:55):
Yeah, you're sent to listeners. They yield on your Combak
shares if you bought them from fifty bucks exactly our
twenty bucks. Yeah, of course. Yeah. When I talk about
the dividend, I'm talking about the place they are.
Speaker 2 (14:06):
So if you're investing today, if you had capital to
invest today and you're thinking about where to put it
because income is something that you're going to need or
you need now, well, you know what, there's a growing
cohort James of people who are growing very tired as
they age and head towards their seventies. They're growing very
(14:26):
tired of the volatility of the stock market, and so
they're looking at other asset classes. And perhaps the asset
class that is now growing the fastest is private credit.
And that is a space that I've written about. It's
an area that we're now distributing a couple of very
successful funds. We're distributing those funds in Australia. They're Australian
(14:48):
based and have a long track record seving and a
half year track record in one case.
Speaker 1 (14:53):
But could I ask you if you've got confidence seeping
out of the share market and if you have a
share market correction, there's no way that private credit is
quarantines in any fashion from the broader action on the market.
I put that to you.
Speaker 2 (15:07):
Oh yes, no, because private credit is private markets. It's unlisted.
And so your return is coming from lending to medium
sized corporates in Australia, which the banks pulled back from
after the GFC because of regulation. And so look, the
fact is, fifteen years ago, James, if you'd said, Roger,
I want to lend money to small and medium sized corporates,
(15:29):
I would have said, James, don't do it. You've got
rocks in your head because the banks had that market
stitched up. They had it, they were dominating that space,
and the only businesses you could have lent to directly
or indirectly through a fund would have been the businesses
the bank's rejected. But now since the GFC, so much
capital is required for certain types of lending by the banks.
(15:52):
It's no longer profitable for them, it's not efficient for them,
and so the gap there is now a three hundred
and fifty billion dollar gap in Australia between what small
and medium sized corporates would like to borrow for growth.
And I'm not talking about businesses that are on their
knees and need turnaround capital. We're talking about high quality borrowers,
(16:12):
double A, double B type borrowers.
Speaker 1 (16:16):
We see some of these top funds having to take
over things they never wanted to take all in restaurants
or whatever.
Speaker 2 (16:21):
Yeah, they're lending, and most of the headlines relate to
loans that have been made to property development. So I
would say, you know, there's a like stocks on the
stock market, James, there are higher risk stocks and there
are lower risk companies to invest in. And it's the
same with private credit funds. There are funds that lend
(16:41):
to property developers and construction companies and restaurants, and then
there are those that don't. There are those that lend
for two and three years, which I think is riskier
than lending for three months or four months. And so
there are different vehicles out there in that private credit spaces.
Speaker 1 (17:00):
Side of five credits, what about in more conventional areas,
there's obviously some sort of a swing to fixed income.
We can see that in the market, those people, as
you said, tire of volatility.
Speaker 2 (17:10):
The only thing I say, James on that is there's
a very high correlation between bonds such as the US
treasuries and Australian government bonds and the equity market when
inflation is rising, and particularly when inflation is above four percent.
So you know that traditional sixty to forty portfolio that
(17:30):
many people have heard about. The idea is that when
the stock market is going down, your bond portfolio, the
sixty percent portion of your portfolio is going well. And
historically that has been the case except for when inflation
is accelerating. And we saw that when inflation jumped after
the after COVID, the protection that the bonds were meant
(17:53):
to provide failed to provide that protection and bonds went
down simultaneously. Or can currently with equity markets, especially in
twenty twenty two.
Speaker 1 (18:04):
What about twenty twenty five, what's the val.
Speaker 2 (18:07):
Well, as long as inflation remains benign and doesn't accelerate,
then bonds can provide that protection that you're looking for.
So it's important to understand the yield that you're going
to be generating from those bonds and understand that if
you hold them to maturity, that's your maximum return. However,
(18:31):
if interest rates fall considerably. Long bond rates fall considerably,
then you could also make a capital gain from the bonds,
but that should be treated as cream on top. What
you should be looking at is that beginning yield and
decide whether or not you're happy with that return, because
by holding the bonds to maturity, that's what you're going
to get.
Speaker 1 (18:51):
In your team, what's the inflation view.
Speaker 2 (18:54):
Well, my view, and each of our managers will probably
harbor a different view to each other, but my view
is that we probably won't see inflation outside of the
tariffs that are ultimately that ultimately are imposed. We shouldn't
see dramatic inflation that is that businesses are unable to
(19:15):
pass on to consumers.
Speaker 1 (19:17):
Right, Okay, so you see it as restricted really.
Speaker 2 (19:21):
But the risk, of course, the risk, of course is
the unpredictability of what tariffs are going to be imposed
and how belligerent certain people are in the United States
about imposing them. And the reason I say that is
because the downside of tariffs is number one, prices go
up for businesses that are manufacturing in the United States
(19:44):
but are importing the raw materials that they need for
that manufacturing pro and if they can't pass those things on.
Then their margin is compressed and they make less money.
Then they employ fewer people, they don't grow, and the
economy slows down.
Speaker 1 (19:57):
Anyway, this is the risk, isn't it the risk that's
on the table. I'm bouncing around. But I want to
try one other thing with you. I don't tell you
talking about moving to quality stocks, getting rid of the thrash.
That's sort of saying zoning in on blue chip stocks.
That's strong.
Speaker 2 (20:11):
Well, you know I've only ever talked about quality stocks.
Speaker 1 (20:14):
Well, you should remind everybody where you come from.
Speaker 2 (20:16):
Yeah, okay, So the background is and I wrote a
book on this, as you might remember James back in
twenty ten, called Valuable, and it was all about identifying
quality and equality. Business is a business, and we'll go
right back to first principles, and I'll keep it brief.
A quality business is a business that can generate a
(20:36):
high rate of return on equity. And when it generates
a high rate of return on equity, it's able to
retain a very large proportion of its profits and reinvest
again at that high rate of return. And the most
so that a business that can do that su sustainably
is a business that has or harbors within it a
(20:58):
competitive advantage. Now, the most valuable competitive advantage of all
is the ability to raise price without a detrimental impact
on your unit sales volume. And a business that can
do that think about that, James, you and I were
on the board of a company. We sell chocolate. You know,
it doesn't matter what we're selling. If the only decision
(21:18):
we had to make every year was James, how much
should we raise prices by this year? And each year
we say, oh, ten percent and we see no reduction
in volume. Well, that is a wonderful business to own.
And because there's no capital expenditure involved, there's no investment involved,
nothing changes. We just put an extra ten percent into
(21:40):
our revenue and maybe that flows through completely to the
bottom line.
Speaker 1 (21:44):
It's in just that we see Warren Buffett this year
selling when everybody was buying last year. Now cash stup
and we see this correct selling going on exactly. Yes again,
So I just want to ask you, yeah, because people
listening are going to see give me some names. Child
expect you to do that, but I can do that.
Does combank fit that criterion?
Speaker 2 (22:04):
Comback does because of the inertia in banking in Australia.
Nobody thinks that the benefit of switching banks is greater
than the inconvenience of doing it. The inconvenience of changing
banks is enormous. Passwords, pin codes, logins, cards. You know,
it's a disaster and all of those payments that are
(22:24):
taken out automatically that you have to go and you know,
reorganize it. The benefit of switching banks isn't seen to
be greater than the inconvenience, and so people stay. And
that allows banks to try on certain things like charging
people for taking their own money out of account if
they go to a branch, which by the way, was
pulled back from but the CBA tried that, but.
Speaker 1 (22:45):
They they have to try. If you're relaxed in doing so,
would you tell the list of some stocks that you
think fit that criterion.
Speaker 2 (22:53):
The poster child in Australia, and I've written about it
for years with you, James, is real estate, the Aria Group,
which I.
Speaker 1 (23:02):
Must see, which we've said, and disclosure is obviously a
news cooperation.
Speaker 2 (23:06):
Yes, you've got a stake, big stake in the business company,
so it's listed. And think about the fact that there
are something like eighty websites eight zero eighty websites in
Australia where you can list your house for sale. The
vast majority of them you can do for free, and
(23:26):
yet Aria charges more than anyone else. And every year
it's been raising its price either through premiumization, which is
that idea that hey, I'm going to move your ad
for your house from a from the silver plan to
the Gold plan to the Diamond plan to the Platinum plan.
And the price goes up every year. And despite that
(23:47):
it has more houses listed than probably all the other
websites combined.
Speaker 1 (23:52):
Yes, it's ahead, isn't it. Y has that molt again,
it's the spuffet idea. Yeah, so combined we just said
comt you, maybe you one or two more.
Speaker 2 (24:02):
There was another one called Altium, which was it designed
software that helped people create the circuit boards if you like,
that are pretty much behind every single well they are
taken over that. Fortunately, that's another example of a business
that could have charged pretty much whatever it wanted. Another
(24:24):
business with a different kind of economic moat is Nick Scary.
Nick Anthony Scarly invented the just in time model for
furniture in Australia. So remember when you and I were young.
Our parents would go to a furniture shop, point to
a couch or a sofa as they're now called, and
(24:45):
so I want that one.
Speaker 1 (24:46):
And they would see in stock.
Speaker 2 (24:50):
Back then when we were kids, two burly men would
to the roof, put it on the put on the
roof racks and now it's you know, yep, we'll have
it delivered to you in twelve weeks after. It's manufactured furniture.
Speaker 1 (25:03):
When you buy it, depressed the button to actually constructed.
Speaker 2 (25:07):
Talk about it. No warehousing, no warehousing. The only stock
that they've got is the stock that's on their floor
that you decide, yeah, I want that one.
Speaker 1 (25:16):
You've played for a long time, haven't you. I certainly yes,
So you've been on them for a long time. Okay.
Speaker 2 (25:20):
They've just bought a business called fab Furniture in the
United Kingdom and if you google a shop front, fab
furniture storefront, google that and have a look at a
really dated concept in the UK, which by the way,
is a population three times bigger than Australia. But Nick
Scarley has bought that business and they're rebadging and they're
(25:41):
redesigning the stores and they're going to be pumping their
furniture through and where they've already started doing that. The
Nick Scarley furniture is the fastest growing or fastest moving
furniture in the United Kingdom stores, so we've already got
a taste of how successful that's going to be.
Speaker 1 (25:58):
That's very interesting, and there are three stocks we've watched
for a long time. I know that. Okay, folks, we
have a really good batch of questions. Often at least
some of them are on what's going on this week
with the listeners genuinely worried as they would be, especially
if you haven't been around for a correction before. So
let's get back to them in a moment we take
a break. Hello, Welcome back to The Australian's Money Puzzle
(26:32):
podcast James Kirby with Roger Montgomery. We are talking, of course,
in about stocks and the outlook for the market, which
I know Roger a long time and I know that
his view on the market would have barely budged before
this ten percent correction because he tends to have a
he's a value investor, so they stick. They have a
(26:53):
principled approach which doesn't really change other than obviously as
the facts changed in front of him, and you could
hear him sort of outlining that when he talked about
at the start of the show the conditions he saw
which were necessary for a strong year this year, and
how some of them are not actually in place as
we might have thought they were at the start of
the year. I've got some ridio question this, Roger. I've
(27:14):
got one here from George which actually just came in
since this market set off. Here I'll read it out
in full because it's really good. He says. Tech stocks
in the US and Australia began to be sold off
even before the tariffs were announced. This was on the
basis that the Chinese app deep Seek posed a threat
to Nvidia and the larger AI group, which is very
(27:35):
true and in a way, if you think back about
deep Seek, was the beginning of the tumble really in
tech stocks. Now, George says, this week data center stocks
such as next d C, which I know, Roger, again
you have been an admirer of and Digiko hit twelve
month share part slow. So is the AI trade dead
(27:55):
or will data center stocks recover? Now? I know you've
parted actually answered that where you said that investors were
tired of the AI team, or at least they were
tired of hearing about how it would be lucrative but
little evidence of it being lucrative. The part of the
market that people were conservative investors found attractive for data
centers for the simple reason that there was I suppose
(28:17):
bricks and water there next to see great favorite Digico
obviously less so it went underwater from the day it
floated and has never recovered. But also off market Roger
we saw amazing stuff going on air trunk and that
sort of thing. So a lot of people perceive real
value in the data centers anyway, the AI was something
(28:38):
of cream on the cake. How do you view them now?
Speaker 2 (28:41):
So we've been long term investors. In fact, in the
Montgomery Small Companies Fund, I think one of the day
one stocks was mcquarie what was called McQuary Telecom mcquarie
Technology correct. And the thesis there for that particular business
is that it has very high quality clients, including the Hyperscalas,
(29:04):
which are the Googles and the Amazons of the world.
But it also has the Australian Taxation Office, I think,
the Australian Defense Force, you know, the ASX, even you
know the very very high quality government and semi government
organizations are tenants in their centers because they are the
ones that can provide the necessary security. And that's not
(29:28):
going to change what we think. The thesis long term
is that eventually, when all the centers have been built
and then fully tenanted, then the exit strategy for the
founders of that business, the chewed Hope brothers, David Cheered
Hope being at the helm of the business, the exit
(29:49):
strategy for them is potentially to sell to a global
pension fund that is looking for a stable yield. And
on that basis, look on a current on an operating basis,
we think that the business could be worth about one
hundred and ten dollars a share, and in this takeover scenario,
which is purely hypothetical, by the way, it's a theory.
(30:13):
In that scenario, then you know, one hundred and fifty
or one hundred and sixty dollars or even one hundred
and eighty dollars is possible.
Speaker 1 (30:20):
So, and these guys are down about thirteen percent, I think,
so far worse than the bolder market.
Speaker 2 (30:25):
Indeed selling indeed, and so we think that the as
I said to you earlier, I think the AI theme
was done even before Deepseek. I think the AI theme
was growing tired before Christmas. And what we have to
remember is that excitement about new technology eventually needs to
(30:46):
be met with revenue models. And only Nvidia had a
revenue model, you know, for selling its chips. But the
downstream applicators, if you like, those who were going to
apply those chips, you know, they had idea for what
they were going to do. You know, we're going to
enhance We're going to enhance Microsoft Office with co pilot.
You know, we're going to enhance your experience on Facebook
(31:09):
and so on. People aren't paying a lot more for that,
you know that. You know, are you and I other
than maybe subscribing to pet for twenty nine dollars a month?
Are you and I saying, oh, I'm going to pay
five thousand dollars a month for you know, having an
AI version of Excel? You know, no, I'm not. It's
a margin. It's an incremental improvement to revenue. It's not
(31:31):
as transformative as the price change implied. It should be.
Speaker 1 (31:36):
Okay, just quickly, next you see still a supporter.
Speaker 2 (31:40):
It's next to you see you again. Is a business
that is going for a decade or more is going
to have a tailwind because in terms of enterprise, so
very large businesses migrating to the cloud. We're only halfway
through that journey. Where where where it's where mobile phone
smartphones work ten years ago or twelve years.
Speaker 1 (32:02):
Agay, one of these time, I know again listeners are
asking Goodman highly regarded property trust. Forty percent of working
progress is linked with data centers. Four hundred million retail
raising out there right now to find more data centers.
There's retail raisings that are thirty three, the stocks are
thirty wants closing tomorrow. What's your view on Goodman's AI
(32:28):
link how much as you want? Yeah? Explos Yeah.
Speaker 2 (32:31):
So look, Goodman is one of those businesses that I
would class as you know, one of the top fifteen
or twenty listed companies in Australia. I think it's an
extraordinary business. But there's two things to think about. There's
the business and we want a good quality business. Part
that for a minute, and then there's the price. And
if you pay too high a price, even for a
(32:52):
good business, you're going to end up with a low return.
Remember this rule. The higher the price you pay, the
lower your return. And so, you know, the time to
be buying these businesses that we've been talking about, and
to buy them aggressively is when everyone's running for the hills,
you know, when everyone's saying get out. You know, there's
it's going to be a blood bath, that's the time.
(33:12):
And I don't think the correction that we've seen to date,
you know, ten percent down on the index, you know,
for many stocks, they haven't fallen that much, you know,
and they're not far from their all time highs and so,
and they're nowhere near a big discount to their intrinsic values.
So it still isn't the time where I'd be saying
load up, and if you've got new capital, dive into
(33:36):
the stock market with both ears pin back. I want
some exposure when the market corrects as it's done, because
it's better to buy now than to have bought a
couple of months ago. But I'd still want to have
some powder dry to be buying if better value presents itself.
Speaker 1 (33:52):
Kay. But it's interesting your disposition towards those stocks. Next
you see macro Technology, even Goodman with its AI hat
on is unchanged.
Speaker 2 (34:02):
Really, the businesses haven't changed, the price has changed. And
maybe a bit of a steam has come down or
a bit of a froth has come out of the
price because people aren't as energized, and as you know,
the optimism isn't as unbridled as it was before. And
that's appropriate. That's when you start sharpening the pencil to
have a look.
Speaker 1 (34:23):
Okay, we'll running out of time. I'll just jump one
or two other questions. We had a question from Paul
and also from Joshua that was more in the way
of a complaints really, which says James, if I may
say so, I think you misspoke in your discussion of
the tax of Frank dividends, where you said the less
tax you pay, the higher your dividend. Now this is
(34:43):
true on an after tax basis, just like any other
dollar of taxable income, the lower your tax rate, the
more of your income that you get to keep. After text, Yes,
Paul and Joshua and everyone else. Yes, in future, what
I would say is the less tax you pay, the
higher your divis end payment in your pocket, which is
(35:04):
really what matters to most people. And that stands. But
the dividend itself, it's not that you get a higher
dividend than someone else if you are retired, for instance,
you just get a higher payment after James ranking James.
Speaker 2 (35:18):
I'll also say, you know, the lower the tax we pay,
the higher everyone's income.
Speaker 1 (35:23):
Ha ha, Yeah, okay, you could say that if you want,
as long as everyone understands the first point, all right,
And finally, Susie says, markets have been falling. If you
are in agreement, we can't expect the sort of higher
returns again this year. If you were in a big
super fund, do you need to actually change your investment
choice to something more conservative? Reasonable question, It's a it's
(35:45):
an earnest question, so people would be out.
Speaker 2 (35:47):
So we used I used precisely those words in the
most I think the most recent article I wrote for you,
or the most recent column, and that was, don't expect
the returns of whatever happens, You're not going to get
those double digit returns. In fact, only once in the
last one hundred years have we seen three high double
digit returns in a row from the S and P
(36:08):
five hundred, plenty of doubles, but only one triple, and
that was in the nineteen eighties.
Speaker 1 (36:14):
And just remind people of where are we now.
Speaker 2 (36:16):
We've had two doubles We've had two plus twenty percent
years in the S and P five hundred. So I said,
with whatever the outcome, it's going to be a lower
returning year this year anyway for me. If I wasn't
broadly diversified, and you know, I was younger, for example,
and I was happy to switch from one asset class
(36:38):
to another asset class, I'd be saying, well, if I
thought that the stock market was going to give me
nine percent this year, while I'd rather be in private credit,
which gives me nine percent with zero volatility, no exposure
to public markets at all, and I'm going to get
nine percent. That makes perfect sense to me, and that's
what's attracting so many retirees who were in the later
(37:00):
stages of their retirement.
Speaker 1 (37:01):
But you put it just to as as a part
of a diverse fopeus indeed, but you.
Speaker 2 (37:06):
Still need because we could be wrong, James, and the
market could have a twenty percent year, and if it did,
it would be a mistake to be exiting. And so
the answer to Susie's question relates to or it comes
back to why she selected that particular risk profile at
the very beginning of her journey. And I'm going to
(37:29):
presume that she assumed that there would be some bumps
along the way, that there would be some volatile years. Now,
ideally she's got some other sources of income or some
other assets outside that she can add to as prices fall,
and that's the ideal scenario. You don't sell when prices
(37:50):
are down, you buy more. You're invested in quality. I
will say that's an important exception because you've heard that phrase.
It's not timing the mark. It's time in the market
that matters. But in the market, time is only your
friend if you're invested in good quality businesses. If you're
invested in Telstra for the last twenty years, time has
(38:11):
not been your friend. You know, the longer you're invested
in a poor quality business or a lower quality business,
the worse the outcome for you, because you're missing opportunities
to be invested in better quality businesses and be invested elsewhere.
Speaker 1 (38:24):
By the way, this is never advice, it's always information only.
But Susie and all the Susi's out there, I think
the point I'm just making is the investment option that
you choose in big super whether it was last year
or five years ago, shouldn't be knocked around by a
couple of bad weeks interview.
Speaker 2 (38:43):
You make my article sound better, James, and also make
my sentences more succeptile.
Speaker 1 (38:48):
Actually, folks. For what it's worth, the Roger Montgomery raw
copy is very good and it's the lightest of touch.
The lightest of touch, Okay, terrific. Now, one thing before
we go here at the Money Puzzle. We love receiving
your correspondence. You know that, and you know the address
the Money Puzzle at the Australian dot com dot au.
Now we have a new facility. This is worth hearing.
(39:11):
You can send us your questions using the voice notes
on your phone. We'd love to hear you you asking
the questions on air. We'll publish them when we get them.
All you have to do if you're on your phone,
you've got a voice memo app. You just record your
question and when you've finished it, you share it. You
send it in like an email to our address, the
(39:31):
Money Puzzle at the Australian dot com dot au. So
let's have some questions. That is your voice on the question.
And when we hear you and we get these voice memos,
we will bake them into the show where you will
hear yourself asking the question. I think this is a
great idea. It's the producer Liah Sama Glue has come
up with this. It's innovation here at the money Puzzle.
(39:55):
Thank you very much, Roger, great show as always, love
you to talk to you. We'll talk to you again
soon a pleasure, and we'll talk to you in a
few days. Thank you.
Hello, and welcome to the Australians Money Puzzle podcast. I'm
James Kirby. Welcome aboard, everybody, Welcome aboard. On a what
can I say, a fairly rocky week, didn't we pick
the right time to talk to my guests today? The
ASEX has officially midweek entered a correction, territory down ten
(00:27):
percent from its peak and still very weak as we speak.
Tech shares of course being soughked off quite hard, and
anything to do with AI interestingly, not just AI stocks,
but AI related stocks of which there are many and
all sorts right across two property trusts. So we've lost
all the gains that we had since the day Trump
(00:49):
was elected and just now it's it's also, of course
the same week that we had the tariffs imposed upon us,
which what does that do bring us back? Where does
that bring us back to? Huh nineteen? So it's time
to talk to someone in the market about the market.
My guest is Roger Montgomery of Montgomery Fund's Management. Oh
are you Roger?
Speaker 2 (01:09):
Great to be with you again, James. It is an
auspicious day to be chatting with you.
Speaker 1 (01:14):
Today, so it would seem but anyone who's been around
knows the market can do this and it can surprise us.
There's no the other thing I would say about this
particular downturn, and I know that you can put your
case about it. You actually are skeptical about the definition
of correction. More than ten percent is many people's definition.
(01:36):
There's no nothing legal. There's no legal definition out there,
but certainly no lack of explanations for why this particular
route has occurred on the share market is there.
Speaker 2 (01:50):
I agree there's no shortage. There's always going to be
opinions after the fact. You know, I'm pretty content with
the columns that I wrote in Wealth earlier this year
saying that I expect this year to be a positive year,
but that it would be more volatile, and I doubted
that we would get another twenty percent year like we
(02:11):
had last year in the year before in the s
and P. Five hundred. I think, James, to your point
about corrections. I think the word correction is a euphemism
for a crash, or it's been. It's been somewhere along
the line, journalists and commentators like you and I stopped
calling it a crash started calling it a correction, and
(02:34):
so now correction is not twenty percent anymore. It's ten percent.
Speaker 1 (02:37):
That's right. The crash is twenty.
Speaker 2 (02:39):
A crash is twenty. But I thought a correction was
a euphemism for a crash, so I didn't realize there
was it was nuanced.
Speaker 1 (02:48):
Oh, it's nuanced. Yes, it is, whatever it is, Roger,
it's sure as how going the wrong way, isn't it.
We had a fabulous year in twenty twenty four, and
we knew that, and as investors, we all knew that,
and we knew that you don't get double digits every year.
We knew that. Come, well, bank, the biggest bank in
the market, cannot go up forty percent. Well, history would suggest,
(03:09):
reality with suggest it can't go up forty percent. Another falling,
and they're falling right across the board. First of all,
you're still comfortable with basic premise you're working on that
we will finish calendar twenty twenty five with a positive
return on share markets.
Speaker 2 (03:27):
There's there's the backdrop that supports that idea is threefold.
Number One, you need disinflation, and in January and February
we saw an uptick in US month to month inflation.
So we're still arguably still in deflation, because we're nowhere
(03:51):
near the eight to nine percent inflation rates that we
had before. But if your starting point was November October
November last year, then we've seen inflation accelerating marginally, So
that's not going the right way. But we need disinflation.
The other thing that we need is positive economic growth.
(04:12):
There is now some doubt about that, particularly in the
United States. And the reason I say disinflation and positive
economic growth, James, is because there was some research conducted
by a macroeconomic research house back and presented back in
nineteen seventy eight, and it demonstrated that whenever you have
disinflation and positive economic growth coalescing, then you end up
(04:37):
with a ripe environment for innovative companies with pricing power. Now,
in twenty twenty three and twenty twenty four, that's precisely
what we had, positive economic growth, disinflation, and the innovative
companies with pricing power, the Magnificent seven, with the exception
of Tesla, let's call it the Magnificent six. They all
(04:58):
did really well. And by the way, and the reason
why a lot of the money flowed into those megacap
companies is because there's a perceived safety in those larger companies,
and there was still a lot of talk about recession
or the risk of recession and so forth. And so
the inner so Gavical Research, who published that research in
(05:20):
nineteen seventy eight, they've been absolutely correct every time since
nineteen seventy eight. So that's two requirements for a positive
outlook for this year. And the third is central bank liquidity.
And now in twenty twenty three and twenty twenty four,
we had something in the order of five to six
trillion US dollars being surreptitiously injected into financial markets. Despite
(05:45):
all the tough talk from Jerome Powell and all of
that realet Janet Yellen as well, all of that tough
talk about QT or quantitative tightening and so forth, in
the background, they were drawing on things like the Reverse
Repurchase Agreement account that the FED holds, and they injected
(06:06):
about two trillion dollars from that account into markets. So
that was supportive. Again, liquidity is a fundamental necessity for
markets to go up, you need to have liquidity. And
so this year we have three challenges, and that is
disinflation still in train, and at the beginning of the year,
I believed that it would be, but at the moment
(06:28):
there's a question positive economic growth that at the beginning
of the year I thought that would be a consistent issue,
a consistent positive influence, but there's question marks in the
market about that. We're still positive, growth is still positive,
but there's a question mark that's re emerged. And liquidity, well,
(06:48):
that reverse repurchase agreement account I mentioned a moment ago,
that's down to one hundred and twenty billion now from
about two point four trillion a year and a half ago,
So that's been exhausted. The Federal Reserve and global central
banks are going to have to be very creative if
they don't want markets to tank in thinking about they'll
(07:08):
have to be very creative about how they pump more
money into financial markets and into the financial system.
Speaker 1 (07:15):
To give that The critic to keep that cree variable,
obviously here is Trump.
Speaker 2 (07:20):
I've only talked about one one aspect. Yes, so Trump
and the tariffs and the sort of mercurial way that
he imposes them withdraws that creates uncertainty not only for
financial markets, but it creates uncertainty for business. James. Companies
don't know whether they should spend their capital on investing
(07:41):
in new manufacturing. They don't know whether or not they
should be in advertising or marketing, should they be employing
more people. That all gets pulled back in this very
uncertain political regime.
Speaker 1 (07:54):
Yes, so what we're seeing so far actually, as you said,
like a capital striker, and that's being reported quite lightly,
that listed companies of all at all levels are they
don't know where to turn. There's always uncertainty in the market.
Of course listeners and there would have been a shore
ever where I would have talked to Roger and we
(08:14):
would have said, hey, the markets are certain, but there
are degrees one of the things talking about in uncertainty.
So the market's down quite sharply. But the VIX, which
is the uncertainty index, that's not flying high or anything
like that.
Speaker 2 (08:28):
It did spark, We did have a spark a couple
of days ago, but it hasn't spiked too you know,
extraordinary levels of previous crashes. The other thing that's interesting, James,
I just finished that. So we talked about the economic backdrop.
We then talked about the fundamental ecodrop nomic backdrop. Then
we talked about or mentioned Trump and tariffs and the
(08:48):
uncertainty there. The third one is again something that I
wrote about in the column for you, and that was
that was the end of the AI thematic, at the
end of that boom in AI stocks fueled by the
liquidity that I mentioned a moment ago.
Speaker 1 (09:05):
When you said the end, you mean the end. It's
not over right, It's the end of what the promise
of the period of where there was no limits to
the promise. Is that what you're straining it.
Speaker 2 (09:15):
I think the initial unbridled optimism where a complete disengagement
between price and revenue occurs, that that's over And the
hint and what I wrote about in the column a
while back. The hint was that the SOPs Semiconductor Index
(09:36):
in the United States had actually been ranged trading for
nine months. In fact, it was unchanged about a month
and a half ago. It was unchanged from nine months earlier.
So that told me that the thematic was becoming tired.
And despite all the positive news about Mannas, about Grock,
about the next version of chat GPT, despite all all
(10:00):
of the positive announcements and developments in the AI landscape,
what we were seeing was no real positive price response
in semiconductor stocks. And that told me that you know what,
there's a lot of there's a lot of great words
being said, but not a whole lot of buying happening
as a result of those words. And so once once
(10:22):
investors see a thematic becoming tired and they're not getting again,
it's a little bit like when you're investing in a fund, James,
and you know you've been there for five years, and you're.
Speaker 1 (10:31):
Going, well, yeah, you know.
Speaker 2 (10:33):
When's it going to turn? You sort of start to
become a little bit a little bit impatient. And I
think that's what investors have done now, They've become impatient
and they're reversed. And if I can just say one
more thing about the AI thematic, and that is that
again wrote a column about this last year in the
Australian Wealth. The thing that needed to happen was that
(10:55):
revenue models needed to be developed to justify father capital
expenditure on AI. And you know, the most popular or
the biggest use case for large language models that was
commercial up until this point right now was companion bots.
(11:17):
So you know, so chatbots that if you were lonely
or feeling romantic or whatever it was, you could subscribe
to a chatbot that was powered by a large language model,
and it would talk to you about your needs and wants.
Speaker 1 (11:32):
And it's not exactly as commercially look at as it
was in the payment system, or if it was in
the This is the sort of thing that we were
waiting for. I've got a very good question on this,
which we'll do in a few minutes when we get
to questions, because it captures what all listeners I imagine
they're asking this week. Just before I do, I think
we should take a break because I want to come
back to you and look at this market now and
(11:53):
the extent to which capital gains. If capital gains are
not going to come through this year they were last year,
and that's a logical thing to say, before we even
had this correction. Where do people turn for income? We'll
be back in a moment. Hello, Welcome back to The
(12:18):
Australian's Money Puzzle podcast. James Kirby talking to Montgomery of
Montgomery Investment Management. Regular contributor of course to the Australians
Wealth Section, longtime contributor Roger. I wanted to just bring
that up with you. For most investors, shares are just
a part of their portfolio and they are faced with
a real conundrum now. Saving rates are falling because official
(12:43):
rates are falling at the same time the share market returns. Well,
they've had a setback, quite a setback in this first
quarter of twenty twenty five. And on top of that,
we've also come to realize that the dividend payouts in
any event I'm talking about the ASX now are slowing.
(13:03):
The big miners aren't paying dividends anything like they used to.
The dividend yield which people would depend on, has dropped
and it's under four percent now, where it was traditionally
between four and six percent. To the listeners who were
looking at this scenario where the shares are falling, their
wrists on risk free deposits are falling, and they know
that a dividend do you listen as good as it
(13:24):
used to be? What are the options here?
Speaker 2 (13:28):
Okay? So there's a couple of frameworks to consider, James,
that help inform this discussion. Number One, if you're an
investor who bought the Commonwealth Bank shares fifteen or twenty
years ago, the price doesn't matter. The yield on your
investment is extraordinary, and I would be very reluctant and
(13:48):
it would be disingenuous of me to suggest that you
should sell your shares because they're going down.
Speaker 1 (13:55):
Yeah, you're sent to listeners. They yield on your Combak
shares if you bought them from fifty bucks exactly our
twenty bucks. Yeah, of course. Yeah. When I talk about
the dividend, I'm talking about the place they are.
Speaker 2 (14:06):
So if you're investing today, if you had capital to
invest today and you're thinking about where to put it
because income is something that you're going to need or
you need now, well, you know what, there's a growing
cohort James of people who are growing very tired as
they age and head towards their seventies. They're growing very
(14:26):
tired of the volatility of the stock market, and so
they're looking at other asset classes. And perhaps the asset
class that is now growing the fastest is private credit.
And that is a space that I've written about. It's
an area that we're now distributing a couple of very
successful funds. We're distributing those funds in Australia. They're Australian
(14:48):
based and have a long track record seving and a
half year track record in one case.
Speaker 1 (14:53):
But could I ask you if you've got confidence seeping
out of the share market and if you have a
share market correction, there's no way that private credit is
quarantines in any fashion from the broader action on the market.
I put that to you.
Speaker 2 (15:07):
Oh yes, no, because private credit is private markets. It's unlisted.
And so your return is coming from lending to medium
sized corporates in Australia, which the banks pulled back from
after the GFC because of regulation. And so look, the
fact is, fifteen years ago, James, if you'd said, Roger,
I want to lend money to small and medium sized corporates,
(15:29):
I would have said, James, don't do it. You've got
rocks in your head because the banks had that market
stitched up. They had it, they were dominating that space,
and the only businesses you could have lent to directly
or indirectly through a fund would have been the businesses
the bank's rejected. But now since the GFC, so much
capital is required for certain types of lending by the banks.
(15:52):
It's no longer profitable for them, it's not efficient for them,
and so the gap there is now a three hundred
and fifty billion dollar gap in Australia between what small
and medium sized corporates would like to borrow for growth.
And I'm not talking about businesses that are on their
knees and need turnaround capital. We're talking about high quality borrowers,
(16:12):
double A, double B type borrowers.
Speaker 1 (16:16):
We see some of these top funds having to take
over things they never wanted to take all in restaurants
or whatever.
Speaker 2 (16:21):
Yeah, they're lending, and most of the headlines relate to
loans that have been made to property development. So I
would say, you know, there's a like stocks on the
stock market, James, there are higher risk stocks and there
are lower risk companies to invest in. And it's the
same with private credit funds. There are funds that lend
(16:41):
to property developers and construction companies and restaurants, and then
there are those that don't. There are those that lend
for two and three years, which I think is riskier
than lending for three months or four months. And so
there are different vehicles out there in that private credit spaces.
Speaker 1 (17:00):
Side of five credits, what about in more conventional areas,
there's obviously some sort of a swing to fixed income.
We can see that in the market, those people, as
you said, tire of volatility.
Speaker 2 (17:10):
The only thing I say, James on that is there's
a very high correlation between bonds such as the US
treasuries and Australian government bonds and the equity market when
inflation is rising, and particularly when inflation is above four percent.
So you know that traditional sixty to forty portfolio that
(17:30):
many people have heard about. The idea is that when
the stock market is going down, your bond portfolio, the
sixty percent portion of your portfolio is going well. And
historically that has been the case except for when inflation
is accelerating. And we saw that when inflation jumped after
the after COVID, the protection that the bonds were meant
(17:53):
to provide failed to provide that protection and bonds went
down simultaneously. Or can currently with equity markets, especially in
twenty twenty two.
Speaker 1 (18:04):
What about twenty twenty five, what's the val.
Speaker 2 (18:07):
Well, as long as inflation remains benign and doesn't accelerate,
then bonds can provide that protection that you're looking for.
So it's important to understand the yield that you're going
to be generating from those bonds and understand that if
you hold them to maturity, that's your maximum return. However,
(18:31):
if interest rates fall considerably. Long bond rates fall considerably,
then you could also make a capital gain from the bonds,
but that should be treated as cream on top. What
you should be looking at is that beginning yield and
decide whether or not you're happy with that return, because
by holding the bonds to maturity, that's what you're going
to get.
Speaker 1 (18:51):
In your team, what's the inflation view.
Speaker 2 (18:54):
Well, my view, and each of our managers will probably
harbor a different view to each other, but my view
is that we probably won't see inflation outside of the
tariffs that are ultimately that ultimately are imposed. We shouldn't
see dramatic inflation that is that businesses are unable to
(19:15):
pass on to consumers.
Speaker 1 (19:17):
Right, Okay, so you see it as restricted really.
Speaker 2 (19:21):
But the risk, of course, the risk, of course is
the unpredictability of what tariffs are going to be imposed
and how belligerent certain people are in the United States
about imposing them. And the reason I say that is
because the downside of tariffs is number one, prices go
up for businesses that are manufacturing in the United States
(19:44):
but are importing the raw materials that they need for
that manufacturing pro and if they can't pass those things on.
Then their margin is compressed and they make less money.
Then they employ fewer people, they don't grow, and the
economy slows down.
Speaker 1 (19:57):
Anyway, this is the risk, isn't it the risk that's
on the table. I'm bouncing around. But I want to
try one other thing with you. I don't tell you
talking about moving to quality stocks, getting rid of the thrash.
That's sort of saying zoning in on blue chip stocks.
That's strong.
Speaker 2 (20:11):
Well, you know I've only ever talked about quality stocks.
Speaker 1 (20:14):
Well, you should remind everybody where you come from.
Speaker 2 (20:16):
Yeah, okay, So the background is and I wrote a
book on this, as you might remember James back in
twenty ten, called Valuable, and it was all about identifying
quality and equality. Business is a business, and we'll go
right back to first principles, and I'll keep it brief.
A quality business is a business that can generate a
(20:36):
high rate of return on equity. And when it generates
a high rate of return on equity, it's able to
retain a very large proportion of its profits and reinvest
again at that high rate of return. And the most
so that a business that can do that su sustainably
is a business that has or harbors within it a
(20:58):
competitive advantage. Now, the most valuable competitive advantage of all
is the ability to raise price without a detrimental impact
on your unit sales volume. And a business that can
do that think about that, James, you and I were
on the board of a company. We sell chocolate. You know,
it doesn't matter what we're selling. If the only decision
(21:18):
we had to make every year was James, how much
should we raise prices by this year? And each year
we say, oh, ten percent and we see no reduction
in volume. Well, that is a wonderful business to own.
And because there's no capital expenditure involved, there's no investment involved,
nothing changes. We just put an extra ten percent into
(21:40):
our revenue and maybe that flows through completely to the
bottom line.
Speaker 1 (21:44):
It's in just that we see Warren Buffett this year
selling when everybody was buying last year. Now cash stup
and we see this correct selling going on exactly. Yes again,
So I just want to ask you, yeah, because people
listening are going to see give me some names. Child
expect you to do that, but I can do that.
Does combank fit that criterion?
Speaker 2 (22:04):
Comback does because of the inertia in banking in Australia.
Nobody thinks that the benefit of switching banks is greater
than the inconvenience of doing it. The inconvenience of changing
banks is enormous. Passwords, pin codes, logins, cards. You know,
it's a disaster and all of those payments that are
(22:24):
taken out automatically that you have to go and you know,
reorganize it. The benefit of switching banks isn't seen to
be greater than the inconvenience, and so people stay. And
that allows banks to try on certain things like charging
people for taking their own money out of account if
they go to a branch, which by the way, was
pulled back from but the CBA tried that, but.
Speaker 1 (22:45):
They they have to try. If you're relaxed in doing so,
would you tell the list of some stocks that you
think fit that criterion.
Speaker 2 (22:53):
The poster child in Australia, and I've written about it
for years with you, James, is real estate, the Aria Group,
which I.
Speaker 1 (23:02):
Must see, which we've said, and disclosure is obviously a
news cooperation.
Speaker 2 (23:06):
Yes, you've got a stake, big stake in the business company,
so it's listed. And think about the fact that there
are something like eighty websites eight zero eighty websites in
Australia where you can list your house for sale. The
vast majority of them you can do for free, and
(23:26):
yet Aria charges more than anyone else. And every year
it's been raising its price either through premiumization, which is
that idea that hey, I'm going to move your ad
for your house from a from the silver plan to
the Gold plan to the Diamond plan to the Platinum plan.
And the price goes up every year. And despite that
(23:47):
it has more houses listed than probably all the other
websites combined.
Speaker 1 (23:52):
Yes, it's ahead, isn't it. Y has that molt again,
it's the spuffet idea. Yeah, so combined we just said
comt you, maybe you one or two more.
Speaker 2 (24:02):
There was another one called Altium, which was it designed
software that helped people create the circuit boards if you like,
that are pretty much behind every single well they are
taken over that. Fortunately, that's another example of a business
that could have charged pretty much whatever it wanted. Another
(24:24):
business with a different kind of economic moat is Nick Scary.
Nick Anthony Scarly invented the just in time model for
furniture in Australia. So remember when you and I were young.
Our parents would go to a furniture shop, point to
a couch or a sofa as they're now called, and
(24:45):
so I want that one.
Speaker 1 (24:46):
And they would see in stock.
Speaker 2 (24:50):
Back then when we were kids, two burly men would
to the roof, put it on the put on the
roof racks and now it's you know, yep, we'll have
it delivered to you in twelve weeks after. It's manufactured furniture.
Speaker 1 (25:03):
When you buy it, depressed the button to actually constructed.
Speaker 2 (25:07):
Talk about it. No warehousing, no warehousing. The only stock
that they've got is the stock that's on their floor
that you decide, yeah, I want that one.
Speaker 1 (25:16):
You've played for a long time, haven't you. I certainly yes,
So you've been on them for a long time. Okay.
Speaker 2 (25:20):
They've just bought a business called fab Furniture in the
United Kingdom and if you google a shop front, fab
furniture storefront, google that and have a look at a
really dated concept in the UK, which by the way,
is a population three times bigger than Australia. But Nick
Scarley has bought that business and they're rebadging and they're
(25:41):
redesigning the stores and they're going to be pumping their
furniture through and where they've already started doing that. The
Nick Scarley furniture is the fastest growing or fastest moving
furniture in the United Kingdom stores, so we've already got
a taste of how successful that's going to be.
Speaker 1 (25:58):
That's very interesting, and there are three stocks we've watched
for a long time. I know that. Okay, folks, we
have a really good batch of questions. Often at least
some of them are on what's going on this week
with the listeners genuinely worried as they would be, especially
if you haven't been around for a correction before. So
let's get back to them in a moment we take
a break. Hello, Welcome back to The Australian's Money Puzzle
(26:32):
podcast James Kirby with Roger Montgomery. We are talking, of course,
in about stocks and the outlook for the market, which
I know Roger a long time and I know that
his view on the market would have barely budged before
this ten percent correction because he tends to have a
he's a value investor, so they stick. They have a
(26:53):
principled approach which doesn't really change other than obviously as
the facts changed in front of him, and you could
hear him sort of outlining that when he talked about
at the start of the show the conditions he saw
which were necessary for a strong year this year, and
how some of them are not actually in place as
we might have thought they were at the start of
the year. I've got some ridio question this, Roger. I've
(27:14):
got one here from George which actually just came in
since this market set off. Here I'll read it out
in full because it's really good. He says. Tech stocks
in the US and Australia began to be sold off
even before the tariffs were announced. This was on the
basis that the Chinese app deep Seek posed a threat
to Nvidia and the larger AI group, which is very
(27:35):
true and in a way, if you think back about
deep Seek, was the beginning of the tumble really in
tech stocks. Now, George says, this week data center stocks
such as next d C, which I know, Roger, again
you have been an admirer of and Digiko hit twelve
month share part slow. So is the AI trade dead
(27:55):
or will data center stocks recover? Now? I know you've
parted actually answered that where you said that investors were
tired of the AI team, or at least they were
tired of hearing about how it would be lucrative but
little evidence of it being lucrative. The part of the
market that people were conservative investors found attractive for data
centers for the simple reason that there was I suppose
(28:17):
bricks and water there next to see great favorite Digico
obviously less so it went underwater from the day it
floated and has never recovered. But also off market Roger
we saw amazing stuff going on air trunk and that
sort of thing. So a lot of people perceive real
value in the data centers anyway, the AI was something
(28:38):
of cream on the cake. How do you view them now?
Speaker 2 (28:41):
So we've been long term investors. In fact, in the
Montgomery Small Companies Fund, I think one of the day
one stocks was mcquarie what was called McQuary Telecom mcquarie
Technology correct. And the thesis there for that particular business
is that it has very high quality clients, including the Hyperscalas,
(29:04):
which are the Googles and the Amazons of the world.
But it also has the Australian Taxation Office, I think,
the Australian Defense Force, you know, the ASX, even you
know the very very high quality government and semi government
organizations are tenants in their centers because they are the
ones that can provide the necessary security. And that's not
(29:28):
going to change what we think. The thesis long term
is that eventually, when all the centers have been built
and then fully tenanted, then the exit strategy for the
founders of that business, the chewed Hope brothers, David Cheered
Hope being at the helm of the business, the exit
(29:49):
strategy for them is potentially to sell to a global
pension fund that is looking for a stable yield. And
on that basis, look on a current on an operating basis,
we think that the business could be worth about one
hundred and ten dollars a share, and in this takeover scenario,
which is purely hypothetical, by the way, it's a theory.
(30:13):
In that scenario, then you know, one hundred and fifty
or one hundred and sixty dollars or even one hundred
and eighty dollars is possible.
Speaker 1 (30:20):
So, and these guys are down about thirteen percent, I think,
so far worse than the bolder market.
Speaker 2 (30:25):
Indeed selling indeed, and so we think that the as
I said to you earlier, I think the AI theme
was done even before Deepseek. I think the AI theme
was growing tired before Christmas. And what we have to
remember is that excitement about new technology eventually needs to
(30:46):
be met with revenue models. And only Nvidia had a
revenue model, you know, for selling its chips. But the
downstream applicators, if you like, those who were going to
apply those chips, you know, they had idea for what
they were going to do. You know, we're going to
enhance We're going to enhance Microsoft Office with co pilot.
You know, we're going to enhance your experience on Facebook
(31:09):
and so on. People aren't paying a lot more for that,
you know that. You know, are you and I other
than maybe subscribing to pet for twenty nine dollars a month?
Are you and I saying, oh, I'm going to pay
five thousand dollars a month for you know, having an
AI version of Excel? You know, no, I'm not. It's
a margin. It's an incremental improvement to revenue. It's not
(31:31):
as transformative as the price change implied. It should be.
Speaker 1 (31:36):
Okay, just quickly, next you see still a supporter.
Speaker 2 (31:40):
It's next to you see you again. Is a business
that is going for a decade or more is going
to have a tailwind because in terms of enterprise, so
very large businesses migrating to the cloud. We're only halfway
through that journey. Where where where it's where mobile phone
smartphones work ten years ago or twelve years.
Speaker 1 (32:02):
Agay, one of these time, I know again listeners are
asking Goodman highly regarded property trust. Forty percent of working
progress is linked with data centers. Four hundred million retail
raising out there right now to find more data centers.
There's retail raisings that are thirty three, the stocks are
thirty wants closing tomorrow. What's your view on Goodman's AI
(32:28):
link how much as you want? Yeah? Explos Yeah.
Speaker 2 (32:31):
So look, Goodman is one of those businesses that I
would class as you know, one of the top fifteen
or twenty listed companies in Australia. I think it's an
extraordinary business. But there's two things to think about. There's
the business and we want a good quality business. Part
that for a minute, and then there's the price. And
if you pay too high a price, even for a
(32:52):
good business, you're going to end up with a low return.
Remember this rule. The higher the price you pay, the
lower your return. And so, you know, the time to
be buying these businesses that we've been talking about, and
to buy them aggressively is when everyone's running for the hills,
you know, when everyone's saying get out. You know, there's
it's going to be a blood bath, that's the time.
(33:12):
And I don't think the correction that we've seen to date,
you know, ten percent down on the index, you know,
for many stocks, they haven't fallen that much, you know,
and they're not far from their all time highs and so,
and they're nowhere near a big discount to their intrinsic values.
So it still isn't the time where I'd be saying
load up, and if you've got new capital, dive into
(33:36):
the stock market with both ears pin back. I want
some exposure when the market corrects as it's done, because
it's better to buy now than to have bought a
couple of months ago. But I'd still want to have
some powder dry to be buying if better value presents itself.
Speaker 1 (33:52):
Kay. But it's interesting your disposition towards those stocks. Next
you see macro Technology, even Goodman with its AI hat
on is unchanged.
Speaker 2 (34:02):
Really, the businesses haven't changed, the price has changed. And
maybe a bit of a steam has come down or
a bit of a froth has come out of the
price because people aren't as energized, and as you know,
the optimism isn't as unbridled as it was before. And
that's appropriate. That's when you start sharpening the pencil to
have a look.
Speaker 1 (34:23):
Okay, we'll running out of time. I'll just jump one
or two other questions. We had a question from Paul
and also from Joshua that was more in the way
of a complaints really, which says James, if I may
say so, I think you misspoke in your discussion of
the tax of Frank dividends, where you said the less
tax you pay, the higher your dividend. Now this is
(34:43):
true on an after tax basis, just like any other
dollar of taxable income, the lower your tax rate, the
more of your income that you get to keep. After text, Yes,
Paul and Joshua and everyone else. Yes, in future, what
I would say is the less tax you pay, the
higher your divis end payment in your pocket, which is
(35:04):
really what matters to most people. And that stands. But
the dividend itself, it's not that you get a higher
dividend than someone else if you are retired, for instance,
you just get a higher payment after James ranking James.
Speaker 2 (35:18):
I'll also say, you know, the lower the tax we pay,
the higher everyone's income.
Speaker 1 (35:23):
Ha ha, Yeah, okay, you could say that if you want,
as long as everyone understands the first point, all right,
And finally, Susie says, markets have been falling. If you
are in agreement, we can't expect the sort of higher
returns again this year. If you were in a big
super fund, do you need to actually change your investment
choice to something more conservative? Reasonable question, It's a it's
(35:45):
an earnest question, so people would be out.
Speaker 2 (35:47):
So we used I used precisely those words in the
most I think the most recent article I wrote for you,
or the most recent column, and that was, don't expect
the returns of whatever happens, You're not going to get
those double digit returns. In fact, only once in the
last one hundred years have we seen three high double
digit returns in a row from the S and P
(36:08):
five hundred, plenty of doubles, but only one triple, and
that was in the nineteen eighties.
Speaker 1 (36:14):
And just remind people of where are we now.
Speaker 2 (36:16):
We've had two doubles We've had two plus twenty percent
years in the S and P five hundred. So I said,
with whatever the outcome, it's going to be a lower
returning year this year anyway for me. If I wasn't
broadly diversified, and you know, I was younger, for example,
and I was happy to switch from one asset class
(36:38):
to another asset class, I'd be saying, well, if I
thought that the stock market was going to give me
nine percent this year, while I'd rather be in private credit,
which gives me nine percent with zero volatility, no exposure
to public markets at all, and I'm going to get
nine percent. That makes perfect sense to me, and that's
what's attracting so many retirees who were in the later
(37:00):
stages of their retirement.
Speaker 1 (37:01):
But you put it just to as as a part
of a diverse fopeus indeed, but you.
Speaker 2 (37:06):
Still need because we could be wrong, James, and the
market could have a twenty percent year, and if it did,
it would be a mistake to be exiting. And so
the answer to Susie's question relates to or it comes
back to why she selected that particular risk profile at
the very beginning of her journey. And I'm going to
(37:29):
presume that she assumed that there would be some bumps
along the way, that there would be some volatile years. Now,
ideally she's got some other sources of income or some
other assets outside that she can add to as prices fall,
and that's the ideal scenario. You don't sell when prices
(37:50):
are down, you buy more. You're invested in quality. I
will say that's an important exception because you've heard that phrase.
It's not timing the mark. It's time in the market
that matters. But in the market, time is only your
friend if you're invested in good quality businesses. If you're
invested in Telstra for the last twenty years, time has
(38:11):
not been your friend. You know, the longer you're invested
in a poor quality business or a lower quality business,
the worse the outcome for you, because you're missing opportunities
to be invested in better quality businesses and be invested elsewhere.
Speaker 1 (38:24):
By the way, this is never advice, it's always information only.
But Susie and all the Susi's out there, I think
the point I'm just making is the investment option that
you choose in big super whether it was last year
or five years ago, shouldn't be knocked around by a
couple of bad weeks interview.
Speaker 2 (38:43):
You make my article sound better, James, and also make
my sentences more succeptile.
Speaker 1 (38:48):
Actually, folks. For what it's worth, the Roger Montgomery raw
copy is very good and it's the lightest of touch.
The lightest of touch, Okay, terrific. Now, one thing before
we go here at the Money Puzzle. We love receiving
your correspondence. You know that, and you know the address
the Money Puzzle at the Australian dot com dot au.
Now we have a new facility. This is worth hearing.
(39:11):
You can send us your questions using the voice notes
on your phone. We'd love to hear you you asking
the questions on air. We'll publish them when we get them.
All you have to do if you're on your phone,
you've got a voice memo app. You just record your
question and when you've finished it, you share it. You
send it in like an email to our address, the
(39:31):
Money Puzzle at the Australian dot com dot au. So
let's have some questions. That is your voice on the question.
And when we hear you and we get these voice memos,
we will bake them into the show where you will
hear yourself asking the question. I think this is a
great idea. It's the producer Liah Sama Glue has come
up with this. It's innovation here at the money Puzzle.
(39:55):
Thank you very much, Roger, great show as always, love
you to talk to you. We'll talk to you again
soon a pleasure, and we'll talk to you in a
few days. Thank you.
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