Why I’m Selling this Rally

In a world beset by geopolitical tensions, high inflation and interest rates, banking collapses and uncertainty, the stock market has been surprisingly resilient this year. So far in the calendar year 2023, the Australian stock market is up 3.8% while in the USA the S&P500 is up 6.9%. The NASDAQ is up an astonishing 19.4%! That’s more than resilient, that’s almost a bull market. Now obviously stock markets are still well off their highs of 2021, but it does highlight the difference between what is evolving in the global economy and how stock markets are reacting.

I’ve said before that the share market looks out 6 to 18 months ahead of current economic issues. So, does this recent rally indicate that the market is comfortable with where the global economy is heading? I think the answer to that is a simple no. I also think that there is so much uncertainty in the world right now that the usual playbooks have been ripped up and it’s almost become every investor for themselves. Investors are confused and there is little advantage in knowing what others are doing because, well, they are probably wrong.

The big question is are we through the worst? I think that’s unlikely. I think we are only getting to the end of the beginning. As tricky as the last 12-18 months have been, the real economic woes are yet to play out and until we have that phase underway, share markets will continue to be confused. Right now, that confusion has resulted in stocks being higher than they probably should be. I believe this is an excellent opportunity to sell further and add to the cash in our client portfolio’s.

While share markets have been relatively resilient, we are seeing real volatility in markets that are traditionally very stable. For example, the yields on 2- and 10-year US bonds have been moving up and down like a yo-yo in response to the re-rating of risks from bank collapses to inflation expectations. The yield on the 2-year US bond has moved from 4.06% to 5.05% and back to 3.79% over the last 10 weeks. These are incredible moves that are anything but normal. It highlights the conflicting nature of much of the data coming through and just how difficult it is to get a read on critical data. How the data ultimately plays out will determine the direction of both the economy and the share market.

I am still convinced that the share market will pull back as it becomes clearer that we are heading into a global slowdown. I expect the market to retest those lows of 2022 and possibly head lower. To me, there is so much evidence that points to a slowdown that I think it’s prudent to sell further into the current strength we are seeing in the share market. It’s impossible to know where markets go in the short term so you can only ever make decisions that are prudent for the long term. Cash remains king. If the market continues to go up after we sell a little, I am more than happy to sell some more.

As resilient as the share market has been I don’t believe that this is an accurate reflection of where the market should or will be. One of the simplest tests for whether you have enough cash when you enter a downturn is how you feel as the market falls or when the next crisis arrives. Are you excited because of the opportunities you see becoming available or are you worried as markets fall? If you’re feeling nervous, then that’s a pretty good sign that you don’t have enough cash.

Our current focus for our client portfolios is weighted to protecting capital and minimising losses in the event of a market downturn. This is a unique time in the history of the world. There is really no precedent for the current situation and so it is difficult to predict how badly the global economy will be impacted. A lot of this is mitigating those risks and being ready. It is not about making money right now; it’s about protecting it. If in the next year or so the world has muddled through and it turns out there is no major downturn, then that’s great. There will always be opportunities to make more money when times are good or at least more predictable. But in the next year or so we will know for sure just how all the current events and variables have collided and their impact on the global economy. Sometimes treading water is what you need to do to ensure you survive.

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

Balaji’s Bet

Amidst the emergence of the banking issues, US entrepreneur and former partner at prominent Silicon Valley venture capital firm Andreessen Horowitz, Balaji Srinivasan made a very public bet on Twitter. He bet $2m that the price of bitcoin will go to US$1m in 90 days. Given the price of bitcoin at the time was about US$26,000, it’s an aggressive bet and it certainly gained a lot of attention. The good news is that we will know very quickly just how clever he is. The bad news is that if he is right then the world is in far more trouble than anyone is prepared for. I’ve had a few people ask me about this, so I thought I'd provide my thoughts more publicly. 

Over the past decade, Balaji has amassed a huge following in tech and cryptocurrency circles. He also gained prominence over the past few years for his predictions on a range of topics including how Covid would play out. He is a smart guy and is very influential within the tech and VC space. His views on the banking system and the pace of change are extreme. His rationale for his position is his prediction of imminent hyperinflation, his concerns around the bond losses the banks hold and ultimately the collapse of the USD. He views bitcoin as the likely replacement.

For the record, I think he’s completely wrong for several reasons but it's worth exploring his rationale and the counter points. Financial markets are always a melting pot of diverse views and sometimes the most unusual perspectives prove to be right. Considering different viewpoints in a critical manner is always worthwhile even if it is especially unusual or extreme. It’s always worth understanding the rationale behind someone's position.

Firstly, in the short term, a US banking crisis is likely to be deflationary rather than inflationary. The real risk for the economy right now is if banks tighten their lending criteria and start to hoard cash for their own liquidity. That potentially starves businesses, consumers and the economy of the capital that generates economic activity. This would more likely lead to an old-fashioned credit crunch which would hammer economic growth. So, an escalation of the banking crisis he predicts is not inflationary at all and may well ‘cure’ the inflation problem. 

Secondly, in anticipation of a credit crunch or recession, the impact on interest rates is more likely to change from rate rises to cuts very quickly. The bond market is already telling us rate cuts are coming with 2-year bond yields dropping from about 5.05% to 3.94% in a matter of 3 weeks. Bond markets are now pricing in several rate cuts in 2023 even though the Fed’s position is that this is unlikely. The implications are that the tightening in the banking sector is effectively acting like added interest rate hikes which will further dampen inflation. The hyperinflation argument seems extreme and unlikely. 

Thirdly, any interest rate cuts would quickly erase a sizeable part of the unrealised bond losses that many institutions are carrying on their balance sheet. These unrealised bond losses are a big part of the problem at the banks, and a central part of the Balaji thesis. Whether interest rates come down due to market forces or because the Fed deliberately changes course is largely irrelevant. If interest rates do come down, it will reduce the bond losses that banks carry, which will alleviate the pressure on the bad bond investments in the banking system.

The unrealised bond losses are a significant issue for banks, but it's not necessarily the existential issue Balaji seems to fear. The US govt can simply choose a different interest rate policy. If push comes to shove and the Fed must choose between addressing a bigger issue in the banking system or inflation its likely they choose the biggest immediate threat. That would mean dropping rates due to banking issues and dealing with inflation later.

While there are not many tools at the disposal of the Fed to fight inflation, they have lots of tools to deal with bank issues. In the face of Bitcoin appearing as a threat to US hegemony, I would say that laws in the US would change rapidly. I'm not saying that’s a good thing but I'm a realist. As great as all the tech and VC gurus think bitcoin is for the future of a utopian world, if it’s a threat to the US and its dominance, they will restrict it and suffocate it, or even make it illegal if needed. I would not underestimate the US govt ability or willingness to protect itself by any means necessary if its position is threatened.

While I do think cryptocurrencies may be the future of money, I am not convinced that it will be bitcoin. Even if it should be, the control of the monetary system is far too important for governments to relinquish control. Additionally, there is a major risk in holding bitcoin that it has no intrinsic value and that its price is simply determined by the flow of money in and out. If a more technologically advanced and energy-efficient cryptocurrency ends up being adopted, then bitcoin will end up worthless as everyone moves across to the new coin. 

I think that Balaji’s prediction is a combination of self-promotion combined with limited downside risk. He knows that as money moves out of banks, some will certainly find its way into bitcoin, limiting the downside risk, while all the publicity and uncertainty puts upward pressure on the price. Overall, I suspect as part of the Silicon Valley clique that is very bullish on cryptocurrencies and exposed directly to the collapse of Silicon Valley Bank that he’s just a little too close to the situation to see the forest for the trees. A little like a conspiracy theorist who goes down a rabbit hole and continually reaffirms their theories in an endless stream of combined confirmation bias and group think. 

What’s certain is that you’ll increasingly hear and read these types of Armageddon predictions as the global economy head into recession. But there is an enormous difference between a recession, even a bad one, and the type of predictions the most extreme people will start to espouse. In times of uncertainty fear mongering escalates and is an easy way to grab attention and headlines.

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

An Economic Downturn is Inevitable but Normal

An economic downturn across the world, including Australia, is inevitable. It’s simply a part of the natural business cycle. I remember my mum talking about this when I was a kid. Dad had a small earth moving business in Geraldton in country WA. WA is probably more accustomed to the boom-and-bust nature of the business cycle than most economies given the mining industry. In Geraldton, you’ve also got farmers and crayfishermen. So, the ups and downs of a good or bad season are very much part of the fabric of the local economy. 

In the early days, Dad was a sole operator and business came in by word-of-mouth. No phones back then so you’d get calls on the house landline and take messages. Most people would call in the evening when dad was home to book in jobs in the days and weeks ahead. A plumber needs to hire dad and the backhoe to dig a leach drain for a new house, or a farmer needed him to dig the footings for a new shed. I was always proud that Dad had the reputation as the best operator in Geraldton. 

Usually, dad was really busy and worked 12 or 14-hour days, 6 days a week. He’d have Sunday off for family time. He charged an hourly hire rate so there were no wages, there was no safety net. So, you work when the work was there knowing that at some point it might not be. In the 70’s and 80’s various economic challenges arose. There were certainly times when work was quiet. If the phone didn’t ring there was no work, there was no money. 

When work was quiet one particular time, I was old enough to wonder if things would be ok. Mum’s answer was simple. Yes, it comes goes in cycles, quiet times don’t last, and it will get busy again, don’t know when, but it will. Booms and busts have been happening for years, it’s just how it works. And she was right. Many people understand the cyclical nature of the industries the economies of regional towns are built on. Farmers have good and bad seasons, and they know neither lasts forever. But these days we’ve become conditioned to only good times. Even when Covid hit, governments across the world made life easier for people to the point that many still have surplus savings from that period. 

But these extended good times haven’t made us more prosperous and helped us collectively put away more for a rainy day. It’s had the opposite effect because people have not had to worry about when things go bad for so long. So, they just stopped worrying and lived it up. That’s where we are at today, after 15 years or more of good times, complacency has set in and suddenly everyone is surprised at the prospect of a downturn and looking for someone to blame. 

No doubt there are various organisations, including the RBA and the federal government that have made the situation worse. What these organisations do really does impact the economy. They do significant damage to the economy and business when they get it wrong. Just ask anyone who paid interest rates as high as 18% back in 1990. To this day they have not forgotten the pain and difficulties of that time. Conversely though, today we’ve experienced too much of a good thing and now it is coming home to roost. 

While Paul Keating was much derided for his “Recession we had to have” comment in 1990, he wasn’t wrong conceptually. The Government and RBA nearly broke a generation of mortgage holders by forcing rates up too high. But the idea of a recession being needed once again rings true to me. In some respects, I think it's inevitable and just part of the natural business cycle. Something is lost when people don’t experience the full cycle of the good and the bad. The problem this time around is that people are woefully unprepared to deal with a downturn not just financially, but mentally in my view.

What’s created this is 3 things. A super cycle boom on the back of a once-in-a-generation urbanisation of China, low-interest rates by the government for the past 15 years in response to the aftermath of the GFC and a boom mentality that has been normalised. The third change is the biggest problem now, as this has conditioned people to expect good economic conditions or a safety net. This is understandable if that’s all you’ve ever known. But it will make the adjustment more difficult as conditions return to normal and the eventual bust is much bigger than it would otherwise have been. Ask anyone in small business in a country town, that's just how it works, but it's up to each of us to prepare for the tough times ahead.

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

Don't bank on it being a crisis

Within the last week we’ve seen three US banks collapse and now perhaps more significantly Swiss banking giant Credit Suisse appears to be in trouble and needs to raise more capital. Fear of contagion is extremely high because many remember the flow-on effects of the GFC all too well. Although necessary, interest rates going up so high so quickly to slow inflation will ultimately break something in the economy at some point. I have been sitting on cash patiently waiting for the catalyst to appear that would send share markets falling back to their lows of 2022. That’s the buying opportunity we are waiting for. The current issues in the banking system sound bad and have damaged confidence significantly, however I am not convinced that this is the systemic threat that markets seem to fear it is. That said, these sorts of situations can escalate quickly, and can be unpredictable so I am certainly mindful of that too.  

Firstly, to really understand the current situation we need to separate the US bank failures from the Credit Suisse issues. They are not related. Credit Suisse has been poorly managed for years and the current need for more capital is not really a surprise. The issue came to a head yesterday when the chairperson of the Saudi National Bank, the largest shareholder in Credit Suisse, said they wouldn’t supply further funding if the bank needed it. Investment markets started to fear the worst. I would expect swift intervention from the Swiss Government or Central Bank to provide the funding needed to stabilise the bank. That will prevent systemic risks from coming into play. It will cost the Swiss taxpayers and Credit Suisse shareholders significantly but for the rest of the world it’s business as usual.  

In the US, the Silicon Valley Bank (SVB) collapse was effectively the result of the bank having so many deposits that they had to invest surplus funds and did so in only longer dated bond style investments. When interest rates increased and SVB had to cash in some of these investments earlier than they expected, they had to realise losses on those bonds. That spooked depositors, many of whom were in the tech industry in Silicon Valley and were advised by their venture capital backers to withdraw their money ASAP. That created a good old fashion bank run and led to the demise of the bank. SVB mismanaged several issues along the way but the run on their deposits is what ended them. The US government has moved quickly to ensure depositors are protected and in theory that should be sufficient to provide depositors confidence going forward.  

The US banking sector is much bigger than here in Australia but also much more fragmented. There are hundreds of medium-sized and thousands of smaller banks in the US. However, although the government has moved quickly to make depositors secure, we are talking about the same people who only months ago ransacked supermarket shelves of toilet paper during the Covid pandemic. So, let’s not pretend that people are going to be sensible and not panic when it comes to money in the bank. I believe the next move will be depositors moving their money out of small banks into the very largest to ensure the safety of their funds. Even if depositors are conceptually comfortable with the measures in place, the prospect that others might not be, or that the government may change the rules will push them to move to a big bank. No one wants to wake up to the news that their bank is at risk or that their funds are frozen. There really isn’t any incentive to keep their money in the 28th or the 37th biggest bank compared to having it in the 1st or 2nd largest bank. 

So, the largest banks will get even bigger as they win market share from smaller regional banks. I expect a wave of smaller banks to close and be taken over as they simply lose their client base to the biggest banks. Great for the big banks and their shareholders, terrible for the small banks and theirs. But it’s important to keep this dynamic in mind as the media will have no hesitation in printing headlines about the number of banks that ‘collapse’ along the way. It might be unnerving to see in the weeks and months ahead, but it doesn’t necessarily translate into another financial crisis. The depositors will move to a new bigger bank either by choice or when taken over and life will go on. The banks are not collapsing because of bad debts at this stage, it’s only because of a quirk that’s created a liquidity and confidence issue. In other words, at this early stage it doesn’t seem to me that these banks failing will create the negative economic consequences feared, and that is an extremely important distinction.  

So, while I do expect that there are other issues brewing that will negatively impact the economy, to me this banking issue isn’t likely one of them. That said, the spectre of unrealised bond losses such as those incurred by SVB will hang over many institutions from insurance companies to banks and pension funds and is yet to be fully understood by markets. I think the fear in this situation is more likely to create opportunities to buy the very biggest US banks such as JP Morgan at lower prices. Well-capitalised and well-managed businesses will benefit from the wave of new customer deposits and gain market share as the fragmented US banking sector consolidates rapidly.  

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

Lowe needs to go.

When you’re in the top job in any organisation if you don’t get it right, you’re out. Whether it’s the coach, CEO, or Prime Minister, they are the first to go when things go wrong. So, it’s beyond comprehension that after getting it so wrong so often that Phillip Lowe is still the chairman of the RBA (Reserve Bank of Australia). He got it wrong on inflation. He got it wrong on rates. He got it wrong when he told the Australian public as recently as 2021 that rates won’t go up until 2024. He’s getting it wrong again now. He is still hoping that inflation is transitory. Even in his speech today he’s indicated a pause in rate rises as soon as May. Yet with interest rates at only 3.6% following yesterday’s interest rate increase, there is a long way to go before the RBA tames inflation at over 7.8%. 

Here's the thing. If you’re too tough on inflation you can drop rates quickly but if you are too soft on inflation and it becomes entrenched it’s a recipe for economic disaster. I appreciate that many of the initial drivers for inflation have been on the supply side and there isn’t much the RBA can do about that. However, inflation is an insidious cancer. If you don’t do everything to remove it, it will find its way into other parts of the economy. This is a genuine concern. This is already happening in the USA where as recently as January it was thought inflation was starting to be tamed. Yet just a month later, data has shown it is likely to re-emerge. Many say Lowe’s doing too much, but everyone continues to underestimate inflation. I don’t think he’s done enough. 

After some horrendous missteps, Lowe now seems more worried about managing expectations rather than inflation right now. Why else would you increase rates by only 1.25% over the last 6 months and say there is still more to come? The RBA are compounding their initial mistake of being far too slow to act by now being far too slow to raise rates. Their argument that it takes time to see the economic impact of rate increases would have been better served by front-loading the rate hikes and doing 0.5% in Oct, Nov and December 2022. It’s a slightly higher overall increase but now they would have had 3 months to observe the effects instead of still talking about what theoretically may happen. 

If Lowe thinks there are more rate increases to come, then get on with the job and increase rates by the amount needed to make an impact. We should have rates at well over 4% right now. There’s far too much mollycoddling all around in my view. If people with mortgages are going to suffer financial pain because they listened to him the first time and borrowed too much, then so be it. That’s how markets work. There’s too much trying to signal intentions and too many cleverly crafted speeches for people to interpret the language. He’d be better off playing it with a straight bat. There are winners and losers. It’s not his job to worry about consumers’ feelings or mental health, it’s his job to manage inflation and that means making the hard decisions that are needed. The overall consequences will be worse if he delays. 

There are really two ways to kill off inflation, the first is by raising interest rates. By doing so Central Banks seek to increase borrowing costs sufficiently that it reduces spending, dampening demand for goods and ultimately slowing the economy and the pace at which prices go up. There is a second, less common solution and that is simply inflation itself. If left to run rampant inflation eventually leads to demand destruction for goods and services resulting in a similar effect to that of rising interest rates, except it's uncontrolled. 

I’d liken raising interest rates to the back-burning of forests. Back-burning results in deliberately burning forests in a controlled, planned manner that is designed to mitigate a disastrous bushfire that engulfs everything. Letting inflation run wild is the equivalent of an out-of-control bushfire with no back-burning. Central banks slowing or pausing rate hikes in anticipation of a slowing economy is the equivalent of not fighting a fire because you hope there is rain coming. Maybe it does, maybe it doesn’t but you can’t afford to take the chance. You fight the fire with everything you’ve got while it’s burning. 

What we’ve got currently are the most difficult set of inflationary economic pressures in 40 years. There is no easy solution. The reality is either way there is going to have to be pain here. Either it’s the pain of inflation or the pain of rate rises. One results in controlled inflation, and one doesn’t. The fact that raising rates will cause many financial pain and hardship does not mean it’s the wrong path. That soft approach to dealing with economic problems only leads to a bigger problem later. At the first sign of pain, the outcry leads to short-term fixes, not long-term solutions. 

Lowe has repeatedly shown he is not capable of getting the basic decisions right. Nor has he been able to navigate the political tensions that arise with making conditions tougher for the economy in the short term for its benefit in the long term. He didn’t take the pain early and now whichever way he turns there is a bigger problem. Conveniently for the Government, when public outrage hits fever pitch later this year because either inflation is too high, or interest rates are, it will be Lowe’s fault. So, the government will not remove him until it is politically necessary. Regardless of that, Chairman Lowe has got it wrong too many times and needs to go. 

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

Are Industry Funds a Trojan Horse?

With one announcement Prime Minster Anthony Albanese and Treasurer Jim Chalmers have not only reignited the ‘super wars’ they have also signalled their willingness to compromise the integrity of the superannuation system for political gain. Their proposal to tax funds over a $3m cap at a 30% tax rate is a blatant tax grab and moves the goal posts on those who have invested in good faith. The government is now specifically targeting people with legacy funds that have been operating within the rules for decades. It highlights a very real and much bigger problem brewing within the superannuation system and the underlying control of these funds.

Most will understand the Labor Government’s links to the trade unions at a grass roots level and their influence behind the scenes within the political regime. Over the years it’s fair to say that both political parties have seen their traditional power base change somewhat. But while the Liberal Party’s struggles to redefine itself are well known; most Australians are probably not aware of the power shift within the political landscape as it pertains to the Australian Labor Party today. Regardless of your political leaning, most would agree that a balance in power is healthy for a strong democracy. So, it’s important that people understand how the new powerbrokers are influencing the change in the political system.

Industry superannuation funds have grown to become the dominant force in the superannuation industry. Their marketing has been excellent, and workers have been drawn to them. Low-fee funds run on behalf of members of particular industries. They sound great in theory but as with anything, when power is too concentrated, it’s potentially a problem. Today, in my opinion, the industry super funds have quietly become more powerful and influential than the trade union movement ever was. The big difference between the unions and industry funds is that the amount of capital controlled by these funds is now approaching $1 trillion dollars.

The industry funds history stems from being the default superannuation fund for various industry sectors such as Hostplus for hospitality workers, REST for retail workers and UniSuper for higher education workers. To this day, there remains requirements for “Equal Representation” governance which broadly means that the superannuation fund trustees must include an equal number of directors nominated by employers or representatives of employers, and members of the fund or representatives of members including trade unions.

The more I hear the current government talk about superannuation, the more it appears to me that a level of political ideology is increasingly becoming entrenched in the superannuation system. Superannuation was always for the purpose of investing for retirement. In fact, this aspect was considered so important that there was a piece of legislation that became a cornerstone of governing superannuation funds. The Superannuation Industry (Supervision) Act subsection 62 includes a test called the sole purpose test. It literally defined that superannuation was required to meet this definition, being that superannuation funds are for the sole purpose of providing for retirement and death benefits.

Fast forward a couple of decades and I see Industry Super Fund ads in the media not talking about superannuation investment but rather about the infrastructure projects and jobs being created for everyday Australians. Well, that is very noble, but it has nothing to do with the purpose of superannuation. The obligation on the trustees of all superannuation funds is on managing the money and generating returns for superannuants for their retirement. If there are better returns elsewhere jobs have no place in the discussion and should not even be a consideration.

Now the Labor Government is pushing for changes to redefine ‘the objective of super’. Why? There may be a few reasons. Various proposals push for superannuation to access impact investing in lower-cost social housing, infrastructure, clean energy, and aged care. Many of these are government and political objectives not based on the best investment decision. There should be no crossover, it’s a dangerous and slippery slope. While there are robust governance and rigour in place around these massive pools of money being used to fund projects and create jobs, it’s critical to ensure that there is never any room for the lines to be blurred and for problems to evolve in the future. Superannuation should never be a political weapon. It’s not the government’s money, it’s the retirement savings of hard-working Australians.

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

Playing Politics with Tax and Super

You may have noticed in the last few days increased rhetoric from Federal Treasurer Jim Chalmers around reforming the superannuation system and its “unsustainable” tax breaks. As we approach the Federal budget, expect to again see a wide range of stories in the media calling for tax reform. They generate a lot of debate in the media and in the community and can be quite concerning for anyone who might be impacted. So, you’ll increasingly see articles about:

• Taxing the trillions of dollars in superannuation.

• Ending negative gearing. 

• Increasing the GST.  

• Taxing the rich and inheritances. 

It happens ahead of every budget and election cycle in one form or another. These stories are basically planted by the political parties or vested interest groups to gauge what is and isn’t acceptable policy to run with ahead of the budget or an election. Meanwhile, the spreadsheet nerds back in Canberra come up with forecasts that potentially raise billions in additional taxes that they can’t believe it’s not been done before. Problem solved, no more budget deficits. 

Generating billions in new taxes looks so simple on the spreadsheet. The only problem is that those four issues above are probably the most emotive financial topics at a grass roots level. Every government and opposition seemingly try new ways to tax these funds and increase their tax revenue streams but after a few weeks or months of trying every angle to open the door, they end up retreating with their tails (and calculators) between their legs. 

Both side of politics have at various times positioned their proposed changes as ‘closing loops holes’ that are being ‘exploited by the rich’ but it never resonates with the average Australian in the real world. The reasons most voters reject these notions are more psychological and personal than financial or political. Below I’ve outlined why I don’t think these issues are something people need to be overly concerned about right now even as they gain attention in the press. 

Everyone has super. While many don’t really pay enough attention to it, they all know it’s there and it’s their nest egg. Many workers fear that one day there will be no age pension. When the government starts talking about changing super rules or taxing super, they are messing with people’s retirement plans and their future. Their future freedom from that job they probably don’t like and work hard in every day. Not a good idea. Every single time a government tries to ‘change super’ they create mistrust. More concerningly, because they underestimate the complexity of super their changes inadvertently make the system even more complicated. It ends up compromising the integrity of the system.

When there’s talk about ending negative gearing, you’re potentially eliminating one of the few ways the aspiring working class has in their financial arsenal to grow their wealth. I say aspiring because it is mainly utilised by higher income earning workers, wealthy enough borrow large amounts of debt for an investment property but not wealthy enough to buy the property without debt. However, the pool of people who aspire to one day own an investment property is even higher than those who do. If you remove negative gearing, you conceptually kill the dreams of millions. The people intuitively understand this even if government doesn’t. The banks and property industry are also very powerful and unlikely to support this. 

Increasing the GST is an obvious tax government would like to increase but presumably will be rejected by the public out of hand. Partially because any proposed increase is a direct cost to the consumer but just as importantly, the fastest way to end up with a GST rate of 15% down the track is to agree to ‘a onetime only’ increase to 10.5%. The average punter is far smarter than politicians think they are. 

Wealth and inheritance taxes are potentially the easier sell if the government takes their usual Robin Hood approach to selling it. But in the end people care less about the theoretical billions the wealth may pay in new taxes and more about the thousands their family may one day pay. Keep in mind that the current capital gains tax regime already acts as a quasi-inheritance tax when a family sells an asset anyway. 

So, in the weeks and months ahead keep an eye out for some of these issues gaining more attention but it with a grain of salt. I wouldn’t be overly concerned, and you can probably ignore most of these issues as you see them arise. The political parties all do it as they try to find the policies that will resonate best and those to avoid as they map out their battle plan for the nations finances. The four topics I have flagged seem to be raised on a recurring basis, yet over the years for all the concern it has caused, rarely has any material change eventuated. That said, as budget constraints become increasingly problematic in the coming years expect the pressure to ‘reform’ these areas to intensify.

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

Write a blog post in the style of Dion Guagliardo

Today I'd like to talk about how artificial intelligence (AI) and specifically OpenAI's GPT-3 model, ChatGPT, will change the way we live, work, and interact with each other.

The development of AI has been one of the most significant technological advancements in recent years. It has the potential to revolutionize various industries and change our lives in ways we can't even imagine yet. But what sets ChatGPT apart from other AI models is its advanced language generation capabilities.

ChatGPT is a conversational AI model that has been trained on a massive amount of data, allowing it to generate human-like text and respond to questions and prompts with incredible accuracy. This opens up a whole new world of possibilities for businesses and individuals alike.

For businesses, ChatGPT can be used to automate customer service and support tasks, freeing up human employees to focus on more complex and critical tasks. ChatGPT can also be used to generate content, such as articles and social media posts, saving time and increasing efficiency.

On a personal level, ChatGPT has the potential to revolutionize the way we communicate with each other. With its natural language generation capabilities, it can assist us in our daily lives, whether it's helping us schedule appointments, answering our questions, or just being a friend to chat with.

Another exciting aspect of ChatGPT is its ability to learn and adapt to new information. As it continues to be used and fed new data, its abilities will only continue to improve, making it an incredibly valuable tool for businesses and individuals alike.

In conclusion, the potential of AI and specifically ChatGPT is massive. It has the power to change the way we live, work, and interact with each other for the better. The future is truly an exciting place, and I can't wait to see what else AI and ChatGPT will bring us.

A note from the author

To demonstrate how powerful ChatGPT is I asked it to write the above post for me. I typed in the following instructions: “write a blog post in the style of Dion Guagliardo explaining how AI and ChatGPT specifically will change the world”. Within 10 seconds the above post was generated and I’ve share it exactly as it was produced without changing a word.

It’s ability to compose documents alone will revolutionise areas such as law, finance and administration reducing costs and saving time. But it goes so much further than that. Almost any industry will benefit from its capabilities. Perhaps the most challenging aspect initially is coming up with the right questions for ChatGPT to maximise it potential to solve problems and create efficiencies.

When I started using ChatGPT I realised my questions weren’t complex enough because I was treating it like a Google search. So, I asked it how it was different to Google. It gave me a great detailed answer. Then I asked if to give me some examples of the most complex questions it can deal with and it answered that too. Then I started to adapt my questions.

ChatGPT's ability to understand context and remember previous questions makes it incredibly intuitive. Without a doubt this type of technology will transform the entire user experience and functionality of the internet. It’s clear why Microsoft and Google are now locked in an AI arms race following Microsoft’s recent multi-billion-dollar investment and partnership with Open AI. This is the future.

It something everyone should be starting to look at more closely. Once you use it a few times you’ll start to think of more and more applications that will apply to both your work and home life now and as the technology becomes even more sophisticated in the future. Here is the link to ChatGPT if you want to try it for yourself: https://chat.openai.com/auth/login

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

Hope is not a strategy

Markets continue to misinterpret what the US Federal Reserve will do with regard to interest rates. I alluded to this last week but there remains a stunning divide in both communication and understanding between the two groups. It’s a recipe for disaster for investors who are unwilling to be patient.

The rally in markets over the last month or two hinged on the assumption that inflation was coming down rapidly, the economy was slowing, and all was returning to ‘normal’. After increasing rates by 0.25% last week, Fed Chairman Powell again handled his post-meeting press conference poorly and effectively poured fuel on the fire by using new language that investors instantly latched on to and sent markets instantly higher.

There are a few issues here. Firstly, he should know better by now. He’s seen his loose language create bear market rallies on multiple occasions. That said is that really his problem? How markets choose to interpret nuanced language? Secondly, investors have become so accustomed to reading so deeply into the underlying meaning of the words of officials that they make my year 12 English literature teacher look like a straight shooter.

And that’s part of the problem everyone is looking at all of this far too deeply as they try to make the situation fit the economic world they want. A world where making money was easy, a world where interest rates and inflation were constantly low. Everyone wants that and many have become accustomed to those conditions. If you take a step back everything is probably much simpler than we make it. While investors around the world look for every insight and clue to explain why everything could be bullish as it fits their narrative or strategy, they tend to lack objectivity and overlook what is right in front of them.

While Powell should know better in terms of choosing his words, his core message has really been the same for some time. If inflation remains high, rates will need to go up. Everyone looks to the Fed officials and those of other central banks to determine how ‘hawkish’ or ‘dovish’ they are in order to glean an insight into where rates may go. But the truth is that they don’t really know any more than anyone else. They have a view, which does matter as it pertains to their immediate decision, but ultimately it will be the economic data that will make these decisions for them over time.

This was never more evident than last week when Chairman Powell’s post-Fed meeting comments were interpreted as meaning rate increases may stop soon. Everyone was happy and markets jumped. But Powell’s view is really just the best guess of one man. The reality is different because what needs to happen will be determined by the economic data. And the reality was different. A couple of days later new data was released, a US jobs report. The Wall Street consensus forecast was for 190,000 new jobs created in the month of January. There was talk in the financial media that a lower than expected number of say 100,000 would really indicate that the rate hikes were nearly done.

However, that report showed that 517,000 jobs were created. A massive upside surprise. Suddenly nothing Powell said or didn’t say mattered. No one had forecast such a jump (of 20 or so Wall Street firms surveyed the estimates ranged between 130,000 and 305,000). Suddenly this single report changed everything. That job report means that unemployment in the US is now 3.4% the strongest since 1969. It also means that the labour market is still really tight and that means even more interest rate rises are likely required to cool off the jobs market.

In other words, if the jobs market is too strong it means wages will be driven up, potentially creating a wage-price spiral that will push inflation back up. So, the Fed will need to put up rates until it effectively creates higher unemployment.

Now there is new data coming out all the time, so you can’t become so obsessed with every data point announcement that you tie yourself up in knots just as some do with the words of Jerome Powell. But the data is what really matters, and ultimately the data will determine what Powell needs to do in the end regardless of the words he uses along the way or what he thinks or where he is leaning in his views.

Too many investors pin their hopes on an economic scenario evolving that aligns with their own greed or optimism. I would love to be more bullish in the short term but it’s not how the data adds up to me. The economic data will be the final decider of where interest rates go. Investors would be better equipped to look objectively at the numbers to navigate the reality of the situation. Hope is not a strategy.

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

10 Themes for 2023

The advancement in technology continues every year regardless of stock market movements. This year, I’ve selected two specific areas of technology as the leading themes for the year ahead. There is no better example of this than the progress in artificial intelligence with ChatGPT hitting the mainstream in recent months. This is world-changing technology, and every business and consumer will be exploring its capabilities in 2023. It’s not only what the technology can do, but also all the businesses and applications that can be built to utilise the platform.

Improvements in these technologies will accelerate exponentially, ushering in entirely new ways of doing business. Not only will it be creating and eliminating jobs but creating and eliminating entire industries too. The emergence of AI and machine learning will bring about unprecedented efficiency and productivity for countless businesses. I also think the opportunity in robotics and automation is massive too and that it’s only a matter of time before this area has its ChatGPT moment as well. Watch the latest Boston Dynamics robot video and consider what that type of technology means for the future. So many industries benefit here.

The most difficult part of 2023 for investment markets may simply be trying to answer the inflation question. Financial markets currently anticipate a goldilocks situation where no recessions eventuate, inflation returns to 2% and economic growth and corporate earnings will improve. This is essentially the rationale for the recent rally in stock markets globally. I would not be surprised to see inflation stick around the 5-6% mark for some time. That would force the Federal Reserve in the US to hold rates higher for longer and deliver significant pain across the board. A recession being the likely result. Markets are not pricing in such a situation. Inflation is not easily defeated and doing so usually requires significant financial and economic pain.

As much as the Goldilocks scenario has emerged as the consensus in financial markets over the last month or two, I am still very concerned about recession and expect this to be the reality for the global economy. I would urge caution. I believe there is far more downside risk in 2023 than there is upside. Recession risk is still high in Europe, the US and even here in Australia. It just takes time for all these dynamics to flow through. There are landmines everywhere for markets to navigate. None of these are being factored in by the market currently, and while not all of them will eventuate, some will and that poses a big problem.

Geopolitical tensions are near the top of the list for 2023 and the longer the war in Ukraine festers the more likely something escalates or spreads. It is on the side burner at the moment but I expect this to remerge as a bigger problem in 2023. There is no easy way to resolve a conflict when the aggressor is both a nuclear power and under authoritarian control. Russia’s aggression has the potential to spark other conflicts and test the resolve of all nations going forward. Tensions between China and the US have seemingly cooled off, but I suspect more for strategic reasons than due to any real change in the long-term relationship which is one of rivalry and distrust.

It also leads to entirely new trends that impact the investment landscape. The continuous movement towards reshoring of manufacturing and supply chains across the world is critical to national security whilst also having an inflationary effect. Additionally, the energy shortage in Europe highlights the systemic lack of supply globally. While a moderate winter combined with the China covid lockdown helped Europe navigate their energy shortage for now, energy remains both an issue of concern and a significant investment opportunity in 2023.

As lower consumer spending and weaker corporate earnings in the next 6 months lead to cost-cutting and a potential recession, I expect the second half of the 2023 calendar year to see unemployment well on the rise too. Job security will become an issue as job layoffs start to spread. It’s a pending disaster for home builders and construction that will have a massive flow-on effect over the next 1-2 years as all the related trades and businesses feel it. This could end up being hundreds of thousands or even millions of jobs in the US. There are several separate areas like this across the world where economic spot fires are waiting to emerge.

There is an increasing risk of debt crises emerging too. Higher interest rates are now a reality, and the flow-on effects will start being felt in a range of areas. Businesses of all sizes with borrowings due to be refinanced will face a real wake-up call. But the same also applies to Government at all levels. Suddenly the debt they have will begin costing substantially more. I think there are several areas where disaster could strike from Japan trying to control their yield curve through to the US and their debt ceiling issues remerging. Normally these issues resolve themselves and carry on, however, the game has changed for good, and I would not be surprised to see these situations deteriorate. 

My final point after outlining a variety of macro themes is this: There will always be great businesses to invest in regardless of the macroeconomic situation. If anything, the last few years have forced investors to consider the macroeconomic circumstances more than ever, but more than is ordinarily necessary. Great businesses will continue to thrive and prosper regardless of the geopolitical environment, inflation, interest rates or the global economic outlook. As long-term investors, it’s critical not to overthink this. It’s easy to get caught up in the timing of short-term fluctuations, and while it definitely matters, the individual investments that you own matter more. Invest in great businesses at reasonable prices for the long term.

Themes:

1. Continued Rise of Artificial Intelligence and Machine Learning

2. Robotics and Automation

3. Inflation and Interest rates

4. Energy

5. Geopolitical Tensions - Escalation of the War

6. National Security

7. Corporate Earnings

8. Recession Risk

9. Risk of a Debt Crisis Emerging

10. Post Covid - A Return to Normal

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

Review of my 10 Themes for 2022

As I work through my 10 Themes for 2023, I always find it interesting to re-read the prior year’s note. While it’s critical to look ahead, it’s also important to review your forecasts and to hold yourself accountable. You’ll never get everything right but it’s a great exercise to revisit earlier thinking and compare it to how things actually played out.

A lot has happened since I sent the note below out on the 24th of January 2022. This was a month before Russia invaded Ukraine (24th Feb), before the USA started raising interest rates (March) and well before Australia did (May). Energy certainly became one of the biggest stories of the year, while inflation and interest rates would go on to become significant issues for markets and the economy.

Many thanks to everyone for their support and feedback over the course of the year. I really enjoy hearing from you when a particular article resonates or strikes a chord.

I will be on leave from Thursday 22nd December and returning on the 18th January 2023. As always, I am available on mobile and will be in touch if there is anything time critical that requires action from an investment perspective.

I wish you and your family a very merry Christmas and a safe and happy New Year!!

10 Themes of 2022

For all the uncertainty over the last 2 years with the pandemic, investment markets across the world had performed very well. However, 2022 is already shaping up as a more difficult year for investors with the All-Ordinaries index down over 6%, the S&P500 down over 8% and the NASDAQ down 13% all in the last few weeks. Markets are going to continue to be challenging as we move from an environment of low interest rates, low inflation, and significant government stimulus to one of rising inflation, higher interest rates and a wind back of government stimulus.

From an investor’s perspective, I think the pandemic will largely be over by June as the omicron variant continues to spread throughout the world like wildfire over the next couple of months and we move to the endemic phase. Obviously, a more serious variant could emerge, but for investors, I expect we are through the worst. If that’s the case, then all of these issues slowly start to rectify themselves. The disruption to supply chains will work themselves out over the next 12 months and with that inflation will ease too. Interest rates will then stabilise.

To me the most important theme is the continued rise in all facets of technology, not only for 2022, but for the next decade and beyond. It underpins everything. It determines the areas we invest in and those we bypass; it determines the companies we buy and those we avoid. It is central to our investment thesis and generating returns over the long term. Outside of the big tech giants there has already been very significant falls in the prices of pure tech stocks. This is not unreasonable given their high prices and adjusting for rising interest rates. However, as markets retreat exceptional long-term buying opportunities are emerging in this area. Patience is key.

Perhaps the biggest threat to the Australian economy is the slowdown in China on the back of their property and debt issues. China appears to be dealing with this situation so as to protect the country from any major financial catastrophe however, as always, their methods are opaque and do not provide the outside world with great confidence in the overall system. Importantly China’s president, Xi Jinping, needs to ensure the nation’s stability as he locks in his next term later in the year. What is most clear though is that the Chinese economy is slowing, and that Australia’s economy will be directly impacted by this.

While there are always geopolitical concerns and the risk of conflict it appears to me that the USA and the west will have a more challenging time than usual in 2022. Russian troops at the Ukraine border are the latest to add to ongoing threat of China invading Taiwan. I expect China and Russia to coordinate the timing of their provocations as to apply pressure on the USA and its allies, forcing them to either prioritise one potential conflict over the other or spread themselves thin. Either way, rising geopolitical instability is an emerging concern to note.

Energy as a theme is similar to technology in that it encompasses several important sub-themes. Captured here is everything from oil and gas to uranium and renewables. Importantly ESG may be the most influential sub-theme here as energy use, production and sustainable business practices are increasingly prioritised by investors, consumers, and leaders across the world. On the flip side under-investment in traditional energy will create distortions in markets and potentially create opportunities. Demand for energy globally will continue to rise and will likely require a pragmatic approach to avoid dislocation in energy markets in the short term. Big opportunity in multiple areas.

Overall, the inflationary pressures driving interest rate rises are a short-term game changer, even if it’s just for the next 12 months. Higher interest rates not only mark the end of easy money but the end of easy investing across all asset classes. Add to this a slowdown in China, rising geopolitical risks across the world and the now familiar backdrop of pandemic and there is more uncertainty than ever. Looking ahead the investing environment for 2022 appears more challenging than it has in recent years. The key variables that were previously so conducive to growth have turned and a tougher outlook will be the result. Returns on most asset classes will be lower than we have come to expect. As always though there will opportunities that present themselves despite the challenges.

10 themes for 2022

1. Continued rise of technology

2. Rising interest rates

3. Inflation risk

4. Covid variants and vaccine

5. Supply chain disruption and economic impact

6. China economic issues

7. Geopolitical risks

8. Energy

9. Govt debt and spending

10. Bond market concerns

Bucket List

As I start to think about the new year ahead and reflect on the year that was, I’ve started looking at my bucket list. I’m not one for New Year’s resolutions, I think they are short sighted. They tend to reflect our inability to change our habits. We think we can just set a date and fix it, but this inevitably fails.

But a bucket list is something I’ve increasingly found to be beneficial as a long-term tool. I’ve had a list for several years and I pick a few items each year that I want to tick off. Now it’s inherently a very personal list but it’s a great exercise to think deeply about what you want to do in the years you have left on this earth.

I think that’s the key, a bucket list makes you explore your own mortality. It’s the items you would love to do before you kick the bucket. It makes you plan your life a little more than you otherwise might. Not planning in a rigid way but rather in a purposeful way.

I start by thinking about what I would regret not having done by the end of my life. They are the real priorities. That process helps cut through a lot of the ego driven items. The things you don’t really care about as much as you think and are more about how they look or make you feel.

The other way I approach it is to think about what would be awesome to do or challenging to try. I’m a big basketball fan, but I’ve never been to a live NBA game in the US. I really want to do that. I started karate with my kids many years ago, my oldest achieved their black belt, but I stopped going. It’s on my list to return to at some point and get my black belt too. 

But they don’t have to be big ticket items or impressive achievements. They might be deeply personal. One of mine was to write a song and another was to sing at karaoke, I ticked both off in 2022. I’d like to try standup comedy too, no idea why because the thought of it is somewhat terrifying. But I want to see if I can do it. The most important item on my list is to visit Sicily and the 2 small villages of Sant’ Angelo di Brolo and Sinagra where my Nonna and Nonno grew up.

There’s something very powerful in actively writing down what you want to achieve in your life. Very often in the busyness of life, it’s easy to find 10 years go by and if you are not proactive, you’ll get caught in the everyday grind and lose yourself. This simple activity is the antidote.

So, what’s left? Well, one of my first items added as a kid was to build a billion-dollar business, turns out that is quite a bit harder to do than I thought back then. But I love investment markets, and I’ll do what I do until I’m 90 plus so maybe that does one day turn into a billion-dollar business. I want to travel the world and experience other cultures so living in Italy for a year down the track.

But more important than what’s on your bucket list is which ones you do. The ones you will tick off next year and the ones you already did tick off this year. I keep a separate list of the bucket list items I have done, and it reminds me of not only how lucky I’ve been in life but how much fun it has been having some of these adventures along the way. 

The biggest consideration is that we don’t know how long we will live. This year might be your last. And if it was what will you regret not having done? Life is for living. Most of what we worry about is a waste of time. I love coming up with new ideas that pique my interest to add to the list. World sporting events and travel are items I think more about as time goes by. I ask myself this… When you are old and look back on your life, what do you want to have done? What are the top items on your bucket list?

Bucket List – To Do

1. Visit Sicily (Nonno and Nonna villages)

2. Wedding anniversary in Paris 

3. Bench press 100kg 

4. Black belt

5. See NBA game live 

6. Attend event at Madison Square Garden, New York 

7. Try standup comedy

8. Write a book 

9. Publish a book of poetry 

10. Build a billion-dollar company 

11. Live in Italy for a year

12. Live in NY for a year

13. Study at Oxford and/or Harvard 

14. Complete a PhD 

15. Visit Positano, Florence

16. Visit Egypt & Pyramids 

17. Karate tournament (open event)

18. Play organised basketball again

19. Play in a chess tournament 

20. Whiskey in Scotland 

Bucket List - Done

1. Get Married 

2. Have Kids

3. Get my MBA

4. Attend AFL grand final 

5. See Cat Stevens live 

6. Attended Formula 1

7. See Ludovico live 

8. Met John Howard 

9. Drink a bottle of Penfolds Grange

10. Karate tournament (won novice event) 

11. Coached basketball grand final win 

12. Kids all finish school

13. NYE fireworks from the top of Sydney

14. Built a house

15. Start and run a business 

16. Learn chess 

17. Live in Perth

18. Live in Sydney 

19. Sing at karaoke 

20. Kids all adults 

21. Write a song 

22. Took kids to Disneyland and Europe 

23. Attended Lauren Jackson’s last game for Australia

24. Espresso with Dad in Rome 

25. Champagne with Paula in Paris

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

Changing the World

I’ve always been fascinated by business and entrepreneurs. From a young age I would read the stories of any successful entrepreneur I could find, from Richard Branson to Steve Jobs overseas to Kerry Packer and Gerry Harvey in Australia. I was always interested in where they came from and how they built their empires. But there is a layer of mythology to these epic success stories that becomes problematic as well which we should also be mindful of. The way the stories of success are told and learned amplifies both the traits that are desirable but also those that are not. We can easily fall for the narratives that would make you believe you must be a relentless megalomaniac to achieve success.

Elon Musk is easily today’s poster child for aspiring entrepreneurs. Without a doubt he is as brilliant an entrepreneur as the world has ever seen along with people such as Steve Jobs and Howard Hughes. His ability to take on seemingly insurmountable problems, prove the naysayers wrong and create multi-billion-dollar businesses along the way is extraordinary. The fact that he can execute his plans across multiple businesses in different industries simultaneously is simply mind blowing. His combination of intellect, vision, and ability to relentlessly execute have made him the wealthiest man on the planet. Yet the biggest mistake aspiring entrepreneurs can make is to try to be like Elon Musk.

One of the reasons I started my podcast was that I still love learning about the journeys of people who have created successful businesses. There have been guests who have made me reflect more deeply on a topic and my recent interview with Kristy Chong had that impact on me. She is almost an accidental entrepreneur. I often hear people say they want to “change the world” or “solve big problems” and I get the sense that in many cases this is ego driven as people find their place in the world and make their mark. Nothing wrong with ego or ambition but it makes me think about what it really means to change the world and what defines a big problem to tackle.

Kristy created a business called Modibodi that has profoundly changed people’s lives. It’s not what you would describe as a traditionally cool or sexy business, in fact it might be the opposite. But what Kristy did was to solve a very real, very difficult problem. As a mum of four, Kristy came up with the concept in 2011 while training for a marathon and experiencing light incontinence. Upon finding there was no product available she spent the next 2 years creating one, patenting leak-proof underwear. From there it became obvious that this was a big problem for a lot of people who were desperate for her solution. Fast forward to 2022 and Kristy sold the business for $140 million. 

It struck me as we spoke about the use cases for her product that this was indeed a life changing product. Kristy soon discovered that post-natal women were not the only ones who struggled with embarrassing leakage issues. Before long there was demand from young girls to people with disabilities through to old men. Suddenly people had a solution that opened the possibilities of life and activities that they had avoided. Her product literally changed people lives overnight. It wasn’t something people felt they were able to talk about, there was no solution, until Kristy created it.

In a world where every entrepreneur seems to aspire to be the next Elon Musk, I would love to see a far greater emphasis on helping more and more people become the next Kristy Chong. 

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

The Market Ahead in 2023

In recent months, share markets have been relatively resilient and some of the bear market fear has dissipated. So, is the worst of the share market turmoil over and is it time to buy?

The short answer is no.

My view remains that this market has another big move down ahead. How I think the market and economic events unfold over the next 12 months is this. Europe continues to fall into a deep recession for all of 2023. The US goes into a recession too. Ultimately dragging the rest of the world’s economies into a recession. My priority remains protecting investors’ capital. I am prepared to miss out on short-term gains by being under-invested if I am wrong. In my opinion, this remains one of those periods in time where protecting the downside risks is significantly more important than any potential opportunity. It is prudent to be cautious in this environment. We will still have our capital intact and can invest in great opportunities in due course. What I don’t want to do is invest too early when sentiment is overly positive because everyone wanders back outdoors in the eye of the storm. The real economic storm is still ahead.

In 2022 all the talk was about inflation and interest rates. That will continue in the early part of 2023 as central banks around the world are forced to over-tighten and create deeper problems. My view is that in 2023 the key topics will become company earnings, global recession, and unemployment. Unlike any previous downturns in the last 20 years, where constant bail outs and money printing supported markets, government’s hands are tied this time around. Countries around the world will simply need to endure an economic downturn the old-fashioned way, take some pain and come out the other side with a better foundation for future growth. It’s not the worst thing that can happen and frankly, if we’d all faced up to a couple of downturns in an organic way, we’d be far better off right now.

But in any case, if Europe and the US are in recession, and China continues to battle covid then it’s difficult to see how Australia avoids an economic downturn in 2023. I know everything seems pretty good now and it doesn’t seem like we are anywhere near a recession, but a downturn is heading our way. When you look at how the world is positioned, a deteriorating global economy is pretty obvious. The problem for most investors in accepting the impending economic reality is that there is a major difference in what we all see and experience right now in our daily lives versus what we can’t yet see and experience in the near future. Overlay what most investors optimistically want to see and it’s often only when things are undeniably bad that it’s finally accepted.

Over the next 6 months, I think we see corporate earnings deteriorate and consequently real cost-cutting across the board. Then the job losses really start to kick in. First with European companies, then the multinationals with significant exposure to Europe, before flowing through to the rest of the global economy. They have started in tech already but will become mainstream in due course. The tricky part for investors will be when we start to see inflation fall, share markets will start to celebrate the return of low interest rates. That’s going to be a monumental head fake for markets as the dream of a return to lower inflation and lower interest rates becomes an economic nightmare in the form of a global recession. In 2023 the downturn will get real. The real economy will start to suffer. That’s when stock markets will enter the final phase of this bear market and crash back below the lows of 2022. If inflation stays persistently high, it will only make the downturn worse.

That said, there is an important distinction to make here between the share market and the economy. I expect the economic situation across the world to deteriorate for most, if not all of 2023. But while I expect the share market to fall significantly as the economy weakens, by mid-year, investors will be looking ahead to how the global economy will be starting to recover in 2024. Share markets don’t wait for the actual economic recovery, they are looking 6-12 months or more into the future. So, while I expect more share market pain ahead, the real buying opportunities will present themselves around the middle of 2023, as the deteriorating economic situation is still unfolding. Take note of that because the time to be bold and buy stocks is when it feels like the economy is starting to look quite bleak, but before the economy is at its worst.

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

Crypto Crash

We all understand that trust is the foundation of any lasting relationship, whether in our personal life or business. But trust is the bedrock for so much more than that. The entire world depends on trust to function. Without it, there is only anarchy. Trust is required for financial markets to function, for governments to govern and for nations to conduct trade. Conversely, when trust breaks down, everything falls apart. During the GFC when institutions were no longer able to trust each other, credit markets froze, and banks collapsed. It brings me to the current crisis in crypto markets.

Billions of dollars have been lost in the latest crypto debacle. The exchange company FTX has been found to have an $8b hole of missing funds after a run-on the platform by investors withdrawing funds exposed the lack of reserves backing the business. The flow-on effects have been swift with more to come in a sector that was already under siege. We hold no crypto in our portfolios as it is impossible to value and justify purchasing. We are unlikely to invest directly in crypto currencies anytime soon. Yet many of the world’s wealthiest and most well-respected investors did and many invested directly into FTX itself, including Sequoia Venture Capital, Tiger Global and SoftBank, all of them losing more than $100m each. It raises questions about the due diligence processes that these funds have in place.

But trust in financial markets matters a lot and the current situation and subsequent contagion with other companies linked to FTX and Alameda Research is a massive setback for the industry. It will be a critical turning point for the industry and the adoption of the technology as new regulations and compliance will now be forced upon it to protect investors and participants in the future. Those that embrace this side of the equation will be best positioned to prosper long term. Where you’ve got companies acting as custodians for an asset on behalf of investors, even crypto currencies, there needs to be trust that those assets are in fact being held. If everyone was doing the right thing, most of these issues would never eventuate. But they don’t, which is exactly why robust governance and regulatory processes matter so much.

That said, it doesn’t mean that this technology is not set for incredible growth that changes the world. I believe that it will. It’s just too difficult to invest in at this early stage. I remember the early phase of the internet and tech stocks back in the 2001 tech bubble. We didn’t go anywhere near it back then simply because not only was there no profit but also no revenue for many of those companies. Fast forward a decade or two and many of the tech companies from that era have grown to become some of the best companies in the world. But many didn’t. This will likely be the case with crypto style companies and assets. In my opinion, it is generally far too difficult to invest in today and most will fail but that doesn’t mean that in 10 years some won’t be great companies, making a profit and operating in the mainstream. In these situations, regulation does not equal bureaucracy but instead is the bedrock of trust on which the industry will grow.

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

An Astronaut Riding a Horse as a Pencil Drawing

Regardless of however bad share markets are, how gloomy the global economic outlook is or how high geopolitical tensions rise, the world will continue to innovate. With all that’s going on in the world it is important to remember just how exciting the future is. New technology of all kinds is being developed by the best minds in the world faster than ever before. Machine learning is one such technology. 

In a recent podcast, I interviewed Jalal Shaik the co-founder of artificial intelligence and machine learning company GAMEFACE.AI. His business, which recently sold for $33 million, is a real time sports analytics company that leverages artificial intelligence and machine learning to provide key insights and analytics from a sporting match. From match video their software is able to provide deep analytical information that will improve performance at a team or individual level. For example, analysis that will help coaches adjust game plans in near real time based on video of player movements and passing patterns.

As our discussion progressed and I asked Jalal where he sees this going in the future, it became even more interesting. Imagine software that can analyse a tennis match and from the way a player’s left leg moves on a particular shot is able to prescribe specific preventative physiotherapy treatment and recommend modifications to the strength program. It will even be able to go further to make modifications to diet and footwear. It opens up better ways to treat injuries in sport (which is where the big money is) but it also filters down over time to every aspect of life including military, work and accident and injury victims, impacting the insurance industry as much as the health industry. We are still at the earliest stages of this type of technology but there are endless use cases that will be found across all aspects of life and work.

One of the most interesting advancements I have seen recently is an artificial intelligence program called DALL-E. The program was developed by OpenAI and revealed in 2021. It creates digital images from text descriptions. Seems simple – you type a description, and it instantly creates a picture. For example, an Astronaut riding a horse as a pencil drawing. But that is just the start. In the future, this will develop further into short videos which will have implications for content creation of all types especially in the advertising industry. Imagine having an advertising brief, but rather than give it to an agency and spend millions of dollars on a campaign, you’ll type it into a system that will produce the ad instantly. Go a few more years out and as the technology advances we are talking about customisable programming through Netflix, Disney, Apple, and Amazon, from movies to tv series. Create your own viewing, tv shows and movies, on demand.

Another great example is Tesla. Each car is a connected computer gathering all types of data from its surroundings. Millions of variables being collected and analysed. Imagine a time where the car detects the patterns that predict when a driver is beginning to grow tired. Or adjust steering or cornering speed of an inexperienced driver on the basis of weather and road conditions. Eventually, it leads to driverless cars and automation. It’s far more than that though. There will be reductions in insurance claims and accidents, lives saved, lower insurance premiums, less stress on trauma wards in hospitals. These are significant advancements.

There are implications for a whole range of industries across the board from health to cybersecurity. Predictive and preventative medicine has implications for hospitals, health providers and insurers. I personally look forward to the day where machine learning algorithms eventually make better real time decisions than central banks. Imagine interest rates being adjusted in real time based on machines understanding exactly what needs to be done in a timely manner to ensure the optimal outcome for the economy.

But we must also be mindful not to assume these technologies will only be used for good or noble purposes. It’s the type of technology that in the wrong hands, could have devastating consequences. As exciting as this area is, there is a desperate need for government regulation at a global level, not unlike that relating to nuclear technology. Even if regulation slows down the advancement and innovation that could be made this is one of those times where we cannot afford to get it wrong.

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

Property Puzzle

For all the volatility across investment classes globally, the Australian property market has held up ok so far. In an environment where every asset class is being impacted negatively by rising interest rates, Australian property seems to be an obvious next victim. Especially residential property, which is expensive on almost any measure. Residential property has fallen around 5-10% from its highs in most capital cities but with interest rates rising fast, many believe a sharp fall is on the cards. I think this is highly likely as I wrote in May this year, I expect 20% plus fall. But I also think there are some unusual nuances to consider this time around as a legacy of trends stemming from both the GFC and Covid.

The impact of rising interest rates goes far beyond simply property prices. It effects a wide range of subsectors with problems often evolving as new home construction slows and bad debts rise. Concerns around the number of people, especially those under 40, who have borrowed millions and are maxed out already naturally leads to concerns around what happens if they can no longer afford the repayments. What does this mean for the banks and the economy more broadly? There are several aspects to this market that I think we need to be mindful of as this process takes hold and flows through the economy through 2023 and 2024.

Bank strength

Ordinarily rising defaults and bad debts could become a dire financial situation, especially for the banking system. However, since the GFC, the crisis in property markets globally lead to rules that ensured the banks have much higher capital requirements in place. As a result, banks have a significantly stronger capital base and although its likely bad debts will increase with rising interest rates, they will see increasing net interest margins too. For all the problems in the world, the banking system in Australia is well capitalised and in quite good shape.

Housing & construction data

There are lessons for Australia from US data. In the US, new mortgages have fallen dramatically. Mortgage interest rates going up so quickly (from 3% to around 7% in less than 12 months) means not only has this depressed the number of people who want to buy or build, but it has also reduced their borrowing capacity. People can’t afford to buy or build even if they want to. New housing starts in the US have dropped substantially too. We are still in the early stages of this flowing through the industry but from home builders, contractors, mortgage brokers, equipment sales, building supplies – there are a vast array of jobs that are underpinned by the construction industry. We are starting to see this here in Australia too with the recent profit downgrades from James Hardie and others on the front line.

Interest rate impact

When it comes to mortgage interest rates, a key difference between the US and Australia to be mindful of is that in Australia most mortgages are variable rate, so the increases deliver immediate pain to homeowners and consumers. In the US it’s a different story as a significantly higher portion of mortgage holders have fixed rate loans for 15 or 30 years so there is far less immediate overall impact and in turn less concern around repayments. This may mean that lower interest rates are required in Australia compared to the US to have a similar result.

Bank of mum and dad

The rise of the ‘bank of mum and dad’ is a unique phenomenon that I think adds a layer of protection for the banks and the banking system across some of their most ‘at risk’ borrowers. Post GFC, the banks have been willing to lend very high amounts but have protected themselves by ensuring parents either go guarantor or provide additional property as security. We won’t find out until things get bad just how much of a factor this is. However, many families have provided security to banks to fund property purchases that will be in the firing line should their adult children start to struggle under the weight of higher mortgage repayments. The risk of default may well result in that risk being effectively transferred from the banks to the parents. It means less forced selling in such a situation and a more orderly property market than we might have otherwise seen in the event of a substantial correction.

Landlords will start closing down businesses

There are many companies who during covid were unable to meet their rent. In many cases, landlords enabled these businesses to pay what they could but at the same time, the landlords accrued the amount owed. Many businesses are getting closer to that day of reckoning where they have to face the reality that they are not able to repay the back rent owed. Subject to their relationship with the landlords and their landlord’s assessment of their efforts to pay and future prospects, expect this to result in many businesses having their doors locked in 2023.

Working from home

Perhaps the biggest legacy of covid is nothing to do with our health, it is about the way we live. Working from home is another trend that dramatically accelerated during covid. Certainly, it is here to stay and it’s also the future of work in many respects. I see it as the precursor to work in the metaverse in the decades ahead. But I do see this changing in the short to medium term as the power dynamic shifts between employees and employers in the next 12-24 months. Many employees love it, many employers prefer staff back in the office. Some have found a balance. But once unemployment rises during 2023 and jobs become scarcer and promotions more competitive, many employees will find themselves reverting to being back in the office. This will support the ailing CBD office sector.

Summary

Overall, I believe property prices will continue to fall significantly here in Australia in the new year. While at this stage it may not result in the catastrophe of forced selling and loan defaults, the impact of rapidly rising interest rates on property and construction and the associated industries will begin to fully impact the entire economy in 2023 and beyond. There will be numerous opportunities to buy stock in companies in these sectors as markets find a bottom during the year. But before we get to that point, we need to see some of the economic pain flow through to earnings and more companies reflect the downgrades in their 2023 earnings forecasts that are yet to be made.

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

Geopolitical Disruption

Disruption in business is well understood. The incumbent, a large profitable giant corporation which has built a monopoly over decades becomes complacent, forgets how they got to the top and focuses on maximising profits and protecting its turf at the expense of innovation and real growth. The disruptors change everything. They move fast and break things. They have no respect for the status quo and no regard for ‘how things have always been done’ and certainly no respect or fear of the incumbent. They are hungrier and prepared to do whatever is necessary to prevail. That’s why they win. Relentless pursuit of their objective against a comfortable and disorganised incumbent.

This is also the way disruption of the world order works in geopolitics. It doesn’t happen as often on the geopolitical level, but it is certainly happening now. It’s the way empires rise and fall, and it’s been like this for centuries. The USA, European nations, and much of the West are the country equivalents of giant corporations. Fat, lazy and content. Rightly or wrongly China and Russia are disruptors prepared to use methods, force, and tactics that the comfortable nations are not accustomed to anymore.

There is perhaps no better example of this than the juxtaposition of UK and US politics (in disarray and leaders losing power) vs China and Russia (leaders consolidating power). This is significant as we approach conflict situations of the disorganised vs organised. Unfocused vs focused. Those that can’t act decisively and those that can.

Unless the West adopts a more competitive and strategic mentality and realises it’s in a fight for not only relevance but survival, they risk the same fate as the corporate giants who did not prepare for disruption. It’s critical that Western nations adapt to the changing geopolitical landscape to mitigate their vulnerabilities to the emerging threats from these disruptive nations.

There are some unique parameters with respect to the battle ground for any conflicts that loom ahead. Supply chains and energy supply in a globalised world economy have become weaponised. Other key areas of concern include state sponsored cyber-attacks and even social media. We are all familiar with the power of platforms like Facebook and Twitter to influence people. However more importantly will be Tik Tok. Ownership of the world’s most popular social media app among young people is with China.

People tend to focus on privacy and data issues in relation to Tik Tok and while that is a genuine concern, I would be more concerned with young people getting entertainment and information via what amounts to a modern day trojan horse. At some point Western governments will move to warn people against using the app but if we move into a deeper conflict, it will be banned and cut off. 

Russia’s threats to escalate and use nuclear weapons should not be taken lightly. They have on their side a dangerous precedent of such weapons being used pre-emptively against an adversary when the US bombed Japan in 1945. While a win for Ukraine would be great and just for freedom, the reality is that it would raise the spectre of a massive escalation and retaliation from Russia if they have nothing to lose. A drawn-out war that weakens Russia over years may be a better result for world peace. Regime change is often touted but that is fraught with danger. The last thing the world needs is a younger more aggressive and ambitious version of Putin.

Strides are being made when it comes to restructuring trade and supply chains. These will need to be modernised for the new circumstances emerging in the world. Reshoring manufacturing and services and securing energy supplies need to happen as quickly as possible. This is a huge investment opportunity but also an essential strategic requirement for the West to become as independent as possible in the years ahead of any potential conflict. The sooner the better for nations and businesses.

The reality is that this is an opportunity for the West to reinvent itself. As in business, competition often awakens the slumbering giant to action. The rise of these disruptive nations may well prove to be the catalyst that is needed to refocus the West on what made their nations so great and bring forth a new age of innovation and productivity that is both sustainable and prosperous.

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

Living on Borrowed Dime

With the price of almost everything rising across the globe over the last 12 months you’d expect consumer spending to slow abruptly at some point. Surprisingly, this hasn’t really happened yet. It’s strange because clearly, the price of key expenses has increased dramatically, from rents and mortgages through to fuel, power, and food. While at the same time, incomes haven’t increased at the same pace. So how is it that spending is being maintained? How is it sustainable?

The answer is simple. It’s not. What we are seeing is a lag effect and consumers failing to adjust their spending to their new reality. You can see it at both the macro and micro level. Consumers are not as resilient as they appear. While they are spending as they have become accustomed to; they are now living beyond their means. To maintain their lifestyle, they are drawing down on their savings and drawing up on their credit cards and mortgages.

They all know they are going backwards and can’t keep it up, so at what point do their spending habits change? After two years of covid restrictions, this year has been about rewards and spending money on holidays and dining out because everyone feels like they deserve some fun. But as financial reality bites and the new year looms I’d expect Christmas to be the last hurrah for the consumer to spend up big. My guess is these changes come in two phases.

Phase one is after the Christmas and New Year break. It may seem simplistic, but consumers and their spending patterns are not a sophisticated collective, they are everyday people trying their best to navigate the pressures of work and raising their family. Sometimes you don’t need to be an expert in finance to see the signs ahead for the economy. Often the drivers come down to basic human emotions, fear, greed, pleasure, and pain. I think this will be how it plays out at the consumer level.

Families are aware of higher costs, they are starting to feel the pinch but not adjusting yet, but the pressure is building. Over Christmas, they will be catching up with family and friends. Topics for discussion will be increased cost of living, fuel prices, food prices, power bills and mortgage interest rates. People previously trying to maintain their lifestyle to ‘keep up with the Joneses’ while slowly sinking will take comfort as they discover that everyone they know is in the same boat. 

Psychologically, being the first to be frugal when things are getting tight makes it look like you aren’t able to keep up with everyone else. But over Christmas, people in their social groups will become comfortable that they are not the only ones, that in fact it’s everyone. People will become more comfortable about cutting back collectively. It’s easier to tighten your belt when everyone else is too.

Just after these family gatherings and social catchup over Christmas comes the one day of the year when people really think about their lives and goals, that’s January 1. New year’s resolutions and a commitment to balance the family budget or at least live within their means will become a key focus. Those that don’t adjust will sink, but either way consumer spending slows.

What does that all mean in practical terms? Consumers spending less directly hits businesses. Sales will fall across the board, though at different rates for different industries of course. Some businesses are better insulated against a slowdown in consumer spending than others. Some businesses are not reliant on households, while other businesses have pricing power.

But you’ve got to keep in mind that the profit equation for businesses has two sides, revenue from consumers buying their goods and services is one part. The other reality is that businesses are getting hit hard with inflation and rising costs too. Power, fuel, and higher interest rates are all hitting the bottom line hard. So, in 2023 businesses will be hit with falling sales as consumers start to dial back spending and higher costs, a double whammy for profit. This leads to phase two of the fall in consumer spending.

Businesses will have no option but to cut costs, ultimately leading to job losses and it will flow on through to a higher unemployment rate which will be a game changer for the economy and the consumer. Rising unemployment will have a dramatic impact on consumer spending not only as people lose jobs and have less money to spend but because it will shake the confidence of consumers even further. They will fear that they may be next to lose their job. That fear around job security will have a very damaging impact on the economy and further consequences for businesses, government and property that will play out over the course of 2023.

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

10,000 Steps and 50 Words

Successful investing is not rocket science or about being some mathematical savant as it is often portrayed. It’s far simpler than that. It is really about habits and discipline. But I would go a step further and say that not only is successful investing predicated on good habits and discipline, but success in any field or pursuit in life.

It probably took me until I turned 40 to really understand and appreciate the power of cultivating good habits. When I was younger, I could achieve a level of success through hard work, sheer willpower, and determination. But as I got older, I started to realise that if you aren’t disciplined on the small-ticket items then it flows through to the big-ticket items. Natural ability will only take you so far too and this is as true for sport and business as it is for any aspect of life.

Habits and routines are a really important part of developing a disciplined mindset. Two of the best habits I’ve introduced are walking and writing. I’ve been genuinely surprised by the impact and flow-on effects that introducing these simple tasks into my daily routine have had on my overall performance.

I’ve had a Fitbit for years, but in November 2019 I set myself the target of getting 10,000 steps a day, every day, no excuses, no missed days, no exceptions. I ended up getting to 800 days in a row before I got covid at the start of this year and ended up in bed for a week. I had built a new streak to 250 days in a row before I tore my calf playing basketball 3 weeks ago.

But it does interesting things to your motivation. When you have a streak like this and wake up especially tired or run down you have a decision. Is it worth breaking the streak for that one day of laziness? So far, unless I am physically unable to walk, on every occasion the time invested in accumulating my streak has pushed me on those days to get the steps. It’s helped me lose weight and improve my overall fitness.

When I started writing my weekly insights note to clients in early 2021, I wanted to be sure that I didn’t just start writing it and stop after 4 weeks. My main focus was to make sure I was consistent, so I transferred the lessons from my minimum steps to writing. I set myself 1 article a week and to do that I had to write at least 50 words every day. Most days I write more than that and the finished articles are between 400-800 words. But on those days, I really don’t feel like writing, or I am pushed for time I can dial it down to 50 words and I have maintained the consistency required to build the habit.

What I didn’t expect was how beneficial writing was for me as a tool to help me with my investment process. Writing a note to send out for other people to read makes you challenge the concepts and preconceived ideas you have on a topic. This is particularly useful from an investment perspective. It makes you question your assumptions and your biases. Often when I write I imagine the counterpoint to a view. It’s a great process in identifying if there are any flaws in your rationale. In fact, on more than one occasion I have changed my mind on a topic or view that I held as I held imaginary debates with the people who may query it.

These disciplines are foundational and lend themselves to building additional layers of habits and activities over time. For example, after a while of completing 10,000 steps, I added weight and strength training and then consulted with a dietician to introduce improved eating habits. These days I weigh most of my food. Having consistently produced an article each week I turned my attention to a podcast. Initially monthly, then 2 a month. It’s been just over a year now and we’ve published 22 podcasts so far with a range of great guests. So not only does it matter that you are disciplined on the small things but getting those foundational habits right leads to success in bigger things.