A Storm is Brewing

I genuinely think the stock market recovery of 2023 will go down in history as a false dawn. There are not many real reasons for the level of optimism we’ve seen in stock markets in 2023. We’ve taken this opportunity to take profit on growth assets along the way. It is difficult to see what the drivers are to support the narratives of a ‘soft landing’ or ‘no landing’ that has become the consensus for markets as they oscillate between possible mild recession and no recession.

However, there are a number of issues that could finally come to a head in the short to medium term and act as the catalyst for a crisis. This would lead to a material leg down in share markets and potentially tip the global economy into a recession. Many of these are interlinked but anyone of them could evolve into a serious issue in its own right. Inevitably, one or more of these issues will eventuate, the bigger concern would be if there was a level of contagion that subsequently evolved into a more systemic economic or geopolitical issue. 

 The most obvious issues are:

1. Higher interest rates for longer.

2. Inflation being stubbornly higher than everyone anticipates.

3. The flow-on effects of the economic slowdown in China. 

4. The ongoing war in Ukraine and Russia’s next steps.

Any of these issues could be the epicentre of a major problem, at any time ahead. We are already seeing the price of oil pushing up headline inflation. While China’s debt and property market is a ticking timebomb that could explode at any point, as is the Russia situation. However, the one issue that stands out to me as having the most amplified impact and highest probability of creating a systemic problem is interest rates being higher for longer. If this does eventuate everything that has been building over the past 12-24 months will eventually come to a head relatively quickly. 

Rates staying higher will negatively impact corporate earnings, slow lending, reduce consumer spending and dampen economic growth. Then there are the risks to all borrowers paying higher interest rates and the risk of rising defaults from all kinds of borrowers. We are already seeing this in the US commercial property sector and that would appear to be just the start. Corporate and government bond issuances are becoming increasingly expensive and there is the looming prospect of too much debt being needed from too few investors. Then there’s the flow on effect to banks from lower margins due to paying higher rates on deposits, to higher defaults through to liquidity requirements and losses on bond portfolios. The tentacles of higher interest rates touch every part of the economy.

That said, the biggest immediate impact on stock markets may simply be over the next 3-6 months if markets finally accept that interest rates will be going higher. In the initial share market sell-off in 2022, the share market (especially tech) adjusted to lower valuations that accompany higher interest rates. It’s pretty simple financial math. Except in 2023 we’ve seen ‘multiple expansion’ which is a fancy finance way of saying prices have gone up, but profits haven’t. In other words, while markets have improved in 2023 it’s on the back of financial smoke and mirrors because in many cases profits are actually lower. 

In reality, the market was right to adjust lower in 2022 as interest rates went up. Then in 2023, AI and general hype led to multiple expansion, and everyone seemed to hope that as inflation started to fall the implication was that interest rates would too. That was wishful thinking in my mind but 9 months into 2023 and it’s still the implied view of share markets. Not bond markets though. Bond yields are moving higher. As I pointed out a few weeks ago there is a shift in long-term bond markets with yields going materially higher for 10- and 30-year US bonds. Bond markets are telling us rates will be higher for longer. 

So, in the simplest terms what should happen (this does not mean it will happen!!) is that if bond markets are right, and I expect they are, then equity markets and especially the big tech that have rallied so hard, are in trouble. On a fundamental basis, if there are sustained higher interest rates on long-term risk-free assets (for example 10-year US Govt bonds) then, mathematically speaking the share market and those stocks are going to revisit those 2022 levels. Now there is nothing that says that does have to happen, even if fundamentally it makes sense. Multiple expansions can last a long time and the simple weight of money flowing into asset classes or specific stocks can hold prices at significantly higher prices than they should be. But I would err on the side of caution and look at the fundamentals. 

If the hope of lower interest rates disappears and the penny finally drops for the share market that interest rates are going to be higher for longer then so does the support for the multiple expansion we’ve seen. Keeping in mind that there are also other serious issues from inflation and cost of living pressures to the China slow down through to geopolitical risks. Not to mention any black swan events we don’t even anticipate. We will continue to take a conservative view, taking profit on growth assets and holding an overweight position in cash in anticipation of increased volatility and rates holding higher for longer to provide us with opportunities in due course.

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.

Why Unemployment Will Rise

So far, 2023 has been a surprisingly good year for equity markets and investors. While there are some positive signs in the global economy, there are many more reasons to remain cautious. China’s economic slowdown, corporate debt defaults, retail slow down and office property valuations are just a few examples. The good news this year has been that inflation rates across much of the world have fallen reasonably quickly from their peak in mid-late 2022. The big question for the rest of 2023 and beyond is whether inflation continues to fall and ultimately gets to a sustainable 2%-3%. There is still some way to go until victory can be declared. Central banks are hoping they have done enough and are banking on the lag effect on rate hikes coming through to finishing the job. The danger being that after the pause in rate hikes, inflation is lower but still elevated.

Unemployment is the key.

The unemployment rate realistically needs to be in the range of 4%-5%. Then you get a balance in the power dynamic between employees and business. When the economy is operating at 3.7% unemployment, it creates distortions and difficulties for businesses in a multitude of ways. No one wants to see people out of work, but the reality of the world is that labour is driven by supply and demand like any other force in the market. If there is no supply, prices go up, but then company profit falls, businesses start to struggle, and they stop expanding and investing and growth falls.

It’s a fallacy that unemployment is always better being lower. The opposite is true when unemployment is too high of course. Everyone understands that when too many people are unemployed, in other words an oversupply of labour, that shifts the power balance to the employers. They increase profits but also find there are no longer enough consumers with jobs to spend so business and the economy falter. There comes a point where balance is lost if unemployment is either too high or too low. Finding the balance between inflation and unemployment is the current conundrum for central banks across the world.

Of course, it’s always a very delicate and misunderstood topic when you are effectively saying it’s better for the overall economy if unemployment is higher. High profile property investor, Tim Gurner, found this out the hard way last week when he outlined exactly this in more blunt terms. His message was broadly right in my view, but the backlash was significant. New RBA chairperson, Michelle Bullock has previously stated on the record that unemployment will have to rise to 4.5% in order to tame inflation. She also articulated it far more diplomatically when she said that the RBA needs to rein in inflation while keeping as many jobs as possible. That is a far more politically correct way of saying that to beat inflation it will cost jobs. It doesn’t matter how you say it, the reality is there will be a cost to the economy and the people to beat inflation and job losses will occur. But higher inflation is worse.

At times like this, it’s the prospect of higher interest rates being required later that unnerves the stock market when stronger than expected jobs data comes through. Ordinarily, good jobs data means a strong economy. A strong economy generally means good conditions for business, and typically that is good for the value of the shares in those businesses. However, when central banks are increasing interest rates to slow the economy enough to reduce inflation, the by-product is going to be job losses. So, when the jobs data is strong, and unemployment stays low, it’s a sign that the rate increases are not having the desired impact on slowing the economy. It’s hard to know if that is just a lag effect or if it means interest rates ultimately need to go higher. For investors, it’s worth keeping this in mind as it’s the primary reason the share market tends to fall if unemployment data is stronger than expected in this environment.

Overall, two of the key areas to watch are obviously inflation and unemployment but there are many other variables at play that all impact these as well. Recently the price of oil has jump and there are going to be adverse implications from this on the headline rate of inflation. While at the same time the retail slowdown is real, and I expect it to be the catalyst in the months ahead to push the unemployment rate higher and subsequently then see inflation fall further in in 2024.

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.

Hedgehog or Fox?

In his bestselling business book, Good to Great, Jim Collins talks about the attributes of the very best companies and what separates the great companies from the good companies. In fact, several of the great companies were in industries that were considered ‘bad industries’ but they prospered anyway. His research showed that “…a company does not need to be in a great industry to become a great company. Each good-to-great company built a famous economic engine, regardless of the industry.” More importantly, it was the set of leadership traits they identified in the leaders of the great businesses that saw them elevate their businesses beyond just being good. He defined these leaders as either hedgehogs or foxes.

The concept of the hedgehog and the fox represents two contrasting leadership and strategy approaches. The hedgehog is characterized by a narrow focus on one's core strengths and objectives, while the fox is more scattered, constantly pursuing various opportunities. Collins argues that the leaders of great companies tend to be hedgehogs, concentrating their efforts and focus on what they do best, rather than being foxes, who often become distracted and spread their resources too thin.

When I first read about the hedgehog and the fox a few years ago it was simultaneously both profound and obvious. What I hadn’t realised up until then was that when it came to building my business, I was a fox. It was tough to have that realisation, but I simply didn’t know any better. I had ambition, drive and worked hard. But in hindsight, I didn’t really understand exactly what I was trying to build at the time. I was always on the lookout for new ideas and opportunities. Once I read the descriptions it completely changed my mindset. The most important change was genuine deep focus and that led to patience. It was a game changer for me and the way I went about business from that point on.

Where you’ll find the hedgehog operating is at the intersection of the answers to 3 critical questions:

·         What you are deeply passionate about?

·         What drives your economic engine?

·         What you can be the best in the world at?

Refining what I am deeply passionate about was incredibly important to understand and it took me time to learn that. I love working with families and people who have built successful businesses. They are relationship-focused people who understand how to build a business for the long term. More often than not, they are hedgehogs too. I wasn’t passionate about the financial planning side. This was important to understand because it is equally important to define what you are not passionate about as it is what you are.

Moving from the fox to hedgehog mindset helped me tremendously. Firstly, it made me define what the one big thing I wanted to work on for the rest of my life was. I am deeply passionate about how the world works, understanding the inner workings of the global economy, geo-politics, and business. I enjoy the process of advising families and I believe I can grow to become the best in the world at it. The part of the process that drives the economic engine of my business is managing money for families. So, I refined the business to focus on that.

When you start trying to be the best in the world at something, your mindset shifts. You don’t have time to spend on things that don’t directly help you achieve your mission. From there I found it easy to simplify everything and focus. Unless a task, venture or opportunity directly relates to achieving your objective, then the answer is no. Once you realise you want to be hedgehog you understand exactly what almost all of these ‘opportunities’ really are – a distraction. I became very deliberate about where my time and efforts were being spent. It meant bringing in people who are equally passionate about different aspects of the business, such as Marcel for our marketing and more recently Poppy and Victoria to assist with research and administration. That process continues to evolve.

Perhaps the most surprising part was the impact all of this had on my work. Once I knew I was going to do this for the rest of my life I no longer felt in a rush to achieve results fast. It immediately made me more patient and genuinely build the business the right way for the long term. Doing that made all of my work better. Defining the answer to those 3 key questions was crucial in designing the type of business I want to be a part of for a very long time. When looking for stocks to invest in I often ask myself if the founders and management of the businesses are hedgehogs or foxes. In fact, it’s a great question for anyone in business to reflect on. So, are you a hedgehog or a fox?

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.

They grow up fast.

Father’s Day is a unique day that means something different to everyone. If there is one lesson I would pass on to young dads it’s simply this — choose how you spend your time carefully. People will often say things that sound like cliches like ‘they grow up fast’ or ‘seems like yesterday I was holding them in my arms’. When you are a new dad looking 18 years ahead and worried about how you are going to pay for sport, braces, and school fees, it’s easy to focus on paying the bills and work. But those cliches everyone mentioned are also true. Time with your kids at each phase of their life is precious and fleeting. Once they grow out of one phase that time is gone forever.

In 2003 my wife, Paula, and I had four kids aged 5 and under. It was it was around then that I started thinking about the years ahead and how that timeframe exists over four distinct phases of their life. Paula hated this analogy because as they moved to the next age bracket, she could see her children were no longer babies or kids as they grew up. But it was an incredibly important perspective for me because as the kids would transition into a new phase I was especially mindful to enjoy the time along the way. The way I looked at it was in 4 phases of 5 years.

1. Ages 0–5 Baby & toddler phase

2. Ages 5–10 Kid phase

3. Ages 10–15 Teen phase

4. Ages 15–20 Young adult phase

But even being mindful of time passing, there will still be times when you still don’t appreciate just how quickly it does go by. I remember coming home from work every day was a highlight. As my keys jingled as I unlocked the front door, I would hear the sound of four little kids yelling ‘DADS’ HOME!’ as they all raced to the front door to greet me. I didn’t realise how much I loved that until a few years later, on a random day, I realized I was no longer being greeted at the door by anyone. I’d unlock the door, walk into the house, and see my wife and say, ‘where are the kids?’ before going off to find them. Sometimes as a parent, you don’t even realise how fleeting the greatest moments in your life are.

Friday nights were family movie nights in our house from the time the kids were little. We enjoyed pizza while we watched Monsters Inc or Shrek. However, even the perfect Friday night tradition my wife and I naïvely assumed would be forever didn’t last. It was eventually abandoned because it is impossible to get four teenagers to agree to watch the same movie. If they do you can be sure it ends with an argument and at least one kid storming out. Of course, what you are trying to do is raise independently minded, strong-willed individuals who won’t be pushed around. So, although it doesn’t feel like it at the time, these moments are in fact the signs that both your parenting and your kids are on track.

With the baby of our four kids turning 20 in June we are now completely out of the four phases. It’s a weird feeling. Three of our four children have moved out and work and study or do both. They are all excited about their future and have adjusted to their lives as adults relatively easily. I think this phase is harder for the parents to adjust. You go from being in the middle of raising your kids to feeling like the last 20–25 years are a blur. The hours of sport and driving them around is no longer a thing. But that’s our job as parents, from the moment we help them to crawl and then walk and send them to school, every day we are teaching them to become independent adults one day, so that they no longer need you. That’s your job. But as a parent, it takes time to adjust to when they leave the nest.

One of the most profound insights for me as a parent came when I turned 44. That was the year my oldest turned 22. I sat back and realized that I was now the same age as my Dad was when I got married at 22. When I was getting married, I’d talk to dad about life and get advice because he clearly understood everything. Once I hit that same age, I suddenly realized how wrong I was, I called Dad and we laughed about the fact that none of us really know what we are doing as parents. We all just make it up as we go along, doing the best we can and hoping we get it right more often than we get it wrong. There are no secrets to parenting. Do the best you can and ensure you enjoy your time with your kids along the way.

Full Contact Juggling

I wish that “full contact juggling” was some sort of clever metaphor I’d come up with to explain investment or living in these complex times. Unfortunately, it is not. I was on Instagram the other day and what should come across my screen but a video of a professional game of a sport called full contact juggling. Where the participants are literally juggling while trying to hit the other contestants and knock their clubs out of the air.

There might be no better example of people today having too much time on their hands and not enough real problems. Now I’m a big advocate of doing what you love regardless of what people think, but to me, this kind of thing is symptomatic of the level of hubris and complacency we have in Western society today. That’s not a social statement but an important observation because what happens in society translates into the economy. That’s the part that matters for investors.

While it may be just a silly example there are others that I think reveal more about the state of the psyche of society and more importantly the consumer today. I look at how many people, of all levels of wealth, go out for dinner at fancy restaurants and they are all sipping on $25 cocktails. These items have moved from being the luxuries that mark a special occasion to how we live our lives in the day-to-day. As an observer of consumer habits these are the little markers of hubris within society that tell you we are collectively living beyond our means and that an adjustment is coming.

Over the years I’ve often observed the seemingly innocuous anecdotal signs of excess that provide insights into the pulse of the people and the consumer. You can learn a lot just from observing the changes in daily habits over time. Even the way media headlines change over time signals shifts in sentiment as they tap into the most emotive topics of their respective readers. But paying attention to the anecdotal evidence is often a good place to see breaks in patterns that are worth investigating further into the real data. Inevitably the economy at any point in time is in the throes of being between ever more excess or austerity. These turning points between the two matter a lot.

I’ll never forget the first sign of excess ahead of the GFC. It was 2006 and I was in Perth and saw a tradesman in a brand-new top of the range fancy BMW X5 drive past me with a trailer behind and a ladder on the roof. It screamed to me that something was dramatically out of whack. Now of course it may have been a wealthy builder who was living well within his means. But that’s not the point, it was the stark break from the pattern of what ‘should be’. Being anecdotal it didn’t directly influence investment decisions, but it certainly raised the alarm to make me more cautious and dig deeper in my research on the state of the economy at the time.

At every turn, the government has smoothed the way and removed any hint of hardship. Yet what is considered hardship today would have been considered luxury by our parents or grandparents. I can assure you no one has saved for a rainy day because there are no rainy days. That fundamentally changes the mindset of a generation. For anyone under 35 this probably all seems normal. But I am really interested to see how consumer habits change once the economy starts to tighten up, especially as unemployment starts to edge higher.

This will impact companies in many industries as many of the everyday products and services we have become accustomed to and assume are minimum required living standards are actually luxuries when the economic push comes to shove. 

There is a Shift Happening

In recent weeks there has been a significant shift in the prospects for long-term interest rates. Both the 10-year and 30-year US bond yields have spiked to highs not seen since the GFC in 2007 as the notion of interest rates being higher for longer finally seems to be kicking in. The 10-year US bond rate hit 4.3% and the 30-year US bond yield hit 4.45% up from their lows of under 1% in 2020.

So why is it happening and what does this all mean?

In a normal market, you’d expect the yield on bonds to be higher the longer the term of the investment. However, for the past year or two that hasn’t been the case. The US has had an inverted yield curve with short-term bond yields being higher than longer-term bond yields. That curve is generally associated with a pending recession because when inflation spikes, the bond market expects interest rates to go up in the short term and those higher costs to put the economy into recession. Conversely the expectation is normally that to recover from the recession interest rates will later need to fall to assist a recovery.

These increases in bond yields may seem counter intuitive as they’ve occurred at a time when many investors believe interest rates will come down on the back of falling inflation rates in recent months. However, many other aspects of the global economy remain surprisingly resilient, including unemployment. While that remains the case it’s difficult to realistically expect interest rates to come down just yet. Equity markets especially may be getting ahead of themselves by expecting a continuing decline in inflation back to the target rates of central banks and a subsequent reversal in interest rates.

Now though, it appears the bond market is starting to realise that interest rates are going to be higher for a lot longer. Not a little bit longer. A lot longer. These rates may even be the new normal. When the 10- and 30-year bond yields move like this it is a material shift in the way risk is being assessed. Bond markets are generally very good at assessing and adjusting for risk while equity markets tend to be more optimistic, have more variables to consider and are slower to react. Bonds investors are demanding a higher premium to lend money for the greater risks associated with investment including default.

There is a lot of debt across the world and many nations have huge budget deficits. Those deficits are met by countries issuing even more debt by way of new bond issuances every year. On the back of many years of budget deficits and increasing debt, the rising interest rates across the world means governments that are refinancing maturing bonds will also need to pay a lot more than they were previously. That puts many nations under even more pressure and makes them even less creditworthy.

But in an increasingly competitive debt market for nations and companies, problems arise if there is too much borrowing and not enough investment demand to fund it. It creates a couple of potentially problematic situations. The first problem is that borrowers who are weaker or less credit worthy will have to pay significantly more on borrowings. The second problem arises if nations or companies are not able to secure the funds at all. While government borrowers might be less likely to default when they can issue more bonds in their own currency, this compounds other problems such as inflationary pressures.

The reality is that this recent spike in long-term US bond yields will mean a recalibration of the pricing of all debt across the board. These bonds are the benchmark for what investors consider to be ‘risk-free’ so all other debt is progressively riskier and as such will need to have their pricing adjusted. This means all debt is going to be more expensive. From the bonds of other countries, states, and municipalities to the debt of large, medium, and small corporations, the flow-on effect is significant. Everyone will be paying even higher interest rates as a consequence.

All of this becomes a problem as the weakest of the borrowers in all these different categories start to really struggle. Some may not get finance in the future and that has serious implications for countries and companies where this occurs, and it will occur. This is all part of the slow-motion aftereffects of such rapid rate increases, there are unintended consequences, and the fallout isn’t always manageable. So be wary as to the quality of the bonds or credit investments that you hold in your portfolio and understand that the reason you’re able to get higher returns is due to the higher risk that is embedded in the investments you hold. That risk is real and if you get it wrong it can lead to disastrous outcomes.

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.

No, you are not a tech company

The CEO of Rio Tinto, Jakob Stausholm, made headlines recently by saying "We're a tech company". It's a sentiment that sums up the thinking of many business leaders in 2023. Rio Tinto is at the forefront of advanced technology with its driverless trucks and ever-increasing use of automation in its mining operations. 

But to me, that's like calling a florist a logistics company because they deliver flowers using cars and trucks. It's important that businesses don't lose sight of their customers' needs. The customer of the florist wants flowers at a certain time and place. They don't care how they get there.

Similarly, China and other countries want the iron ore Rio Tinto mines. They don't care how good the technology is or how it's extracted from the ground. Depending on the business's product, how good the technology is has nothing to do with the end product the customer wants.

These days, every company wants to be a tech company when it sounds cool. Whether it's for recruiting or stock market valuation purposes, being seen as a tech company is popular. Often though, it signals to me that a business has lost its way and has become distracted from their core business when they start making such grandiose declarations.

So, is Rio Tinto really a tech company?

To be fair, you can make the case that every company these days has technology at its core. Indeed, to avoid being the next Blockbuster or Kodak, it's critical for companies to continue to innovate and reinvent themselves before they are disrupted.

However, if I am a carpenter who uses a hammer and nail, and the other carpenters start using nail guns and get more work done, did they surpass me because they were a tech company? No, they are still in the carpentry business, they just used the latest tools to become more productive.

It doesn't matter if you are a tech company or not. What matters is that businesses embrace innovation in such a way that they either grow productivity or create efficiencies that enable them to continue to serve their customers ahead of their competitors. If Blockbuster thought like this, they'd have understood they weren't just in the video rental business, and they'd be where Netflix is right now.

Where do you draw the line?

The flip side of this argument is a company such as Amazon. Is Amazon a tech company or a retailer? Most consider them one of the big tech companies. But at their core, they are really a retailer. They have utilised technology to create an incredible business model that serves their customers extremely well. From using ecommerce during the early the internet to warehouse robots and Ai more recently.

True innovation is not only about technology, it's about the way you use technology to better serve your customers. It's about knowing what your customers really want and being prepared to adopt technology to change your business model ahead of your competitors. The very best and most enduring businesses are not technology businesses, they are simply the ones that embrace technology to continuously innovate. That's the most important aspect of business. 

It's worth thinking about as we make decisions about where to invest. It's easy for investors to be captivated by the story around a company that wants to appear more cutting-edge than it may really be. Successful pure technology companies are relatively rare and very high-risk investments.

But there are many great businesses that are utilising technology and innovation to deliver great outcomes for shareholders. They may not be technology companies, but they are certainly at the cutting edge of innovation. From computers and the internet in the 80's and 90's to automation and ai more recently, the very best companies are obsessed with how technology lets them deliver better outcomes for their customers. Technology is the tool that allows them to evolve and even revolutionise their business model. That's more important and at the core of every great business. These are the type of companies we want to have in our portfolios.

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.

China Slowdown

The much-heralded China economic reopening doesn’t seem to have materialised in the way markets anticipated. At various points during Covid, the prospect of China reopening for business post covid sent markets rallying higher on the expectation of higher demand driving the global economy. But so far, the reality has been underwhelming and it appears there are more economic challenges ahead for China than many anticipated.

Yesterday’s inflation figures for China show the once-powerful engine of global economic growth to now be heading for deflation. The CPI rate of -0.3% for the period was lower than expected and the flow-on effects are massive. Lower inflation and the prospects of lower economic growth are genuinely problematic for a nation that has been all about growth for the past 30 years.

In the past, China has had many long-term trends playing into their favour driving their growth. But suddenly there are a number of these trends are being reversed and we are now starting to see these factors impacting the country negatively. China has been the biggest beneficiary of globalisation over the past 20–30 years. Combining that with a huge population and rapid urbanisation sparked decades of investment that turned China into the world’s second-biggest economy.

Yet what China faces now is a totally different situation, and I am not sure the world has really considered what all of these variables combined really mean. All these issues are well known but China has been such an economic juggernaut it’s difficult for people to look at the situation with fresh eyes and consider what all these issues converging really mean for China and the world.

The catalyst for changing these trends was Russia’s invasion of Ukraine effectively waking the world up to the economic consequences of a conflict on the global supply chain. National security became the number one issue for every nation in the world and overnight it commenced the slow reversal of globalisation. As countries extricate themselves and their supply chain dependency from China this new trend will weigh on the Chinese economy as decades of investment is slowly unwound.

Meanwhile, emerging economies such as Mexico, India and Vietnam are booming as the USA and other Western nations are reshoring their supply chains and manufacturing. Make no mistake the process of untangling the global supply chain is still underway. The global supply chain dependence on China is a bigger vulnerability for the Western world than Germany’s dependence on Russian energy. There is no quick fix so all sides are working as quickly as they can to mitigate their risk. That’s a problem for China’s long-term economic growth.

Another overarching theme is their changing demographics. China’s population is aging and by 2035 an estimated 400m people will be over 60. Population won’t be the driver of growth it once was. But the trend that really accelerated the Nation’s growth over the last 20–30 years was the urbanisation of China. As people moved from the country to the city there was massive investment in infrastructure and property. Entire cities were seemingly built overnight. But simply developing infrastructure and buildings isn’t sustainable, in fact, it might be part of the current problem.

China is now at a crossroads.

The spectre of large amounts of debt has hobbled the economy. Economic growth has been lower than expected and in the past that was the signal for stimulus from the government. More often than not in the form of infrastructure and property development. It’s unlikely to be the case this time around and those past actions are part of the problem. Large debts at all levels of government, especially local government, were used to build projects that didn’t necessarily stack up financially. There are large amounts of infrastructure and property development that provided economic stimulus and jobs at the time but sit vacant or barely used now they are completed.

This is a serious problem.

It means that many of these projects haven’t delivered the returns needed to pay for themselves. But more importantly, faced with slowing growth, it may stop the government from being able to roll out the old playbook because they have effectively over saturated the market. The property and debt issue in China has been lurking since the collapse of Evergrande back in late 2021 and there remain serious problems and questions with regards to the entire sector. I am sure grand announcements of government stimulus and investment packages are coming but China need a new strategy to reignite growth.

By way of investing in Chinese equities, I still believe the country remains uninvestable. As I’ve previously said in these notes before, regardless of how big the opportunity may seem I am not interested in investing funds where a country’s government can torpedo entire companies or even industries overnight on a whim. Business is difficult enough at the best of times and I have no interest in the space and wish those brave, naïve, greedy or silly enough to invest there good luck.

With all of these long-term trends reversing, it will be extremely difficult for China to grow in the same way they have for the past few decades as they go forward. It’s time for investors to think carefully about what these changes mean and reevaluate what the flow-on effects are not just for China but more importantly for the companies in your investment portfolio that are heavily exposed to China. Australia has benefited enormously from the growth of China but if the Chinese economy faces a genuine slowdown and they are unable to resort to their usual ‘just build more playbook’ in the same way they have in the past there are huge implications for Australian companies of all sizes.

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.

Investing Tactically

The benefits of having a diversified portfolio across asset classes are well understood. Strategic asset allocation offers several key benefits for an investment portfolio. Firstly, it provides a disciplined and long-term approach to investing. By setting a fixed allocation based on an investor's risk tolerance, financial goals, and time horizon, strategic asset allocation helps prevent knee-jerk reactions to short-term market fluctuations. This reduces the likelihood of emotional decision-making, which can often lead to poorer results. Instead, it encourages investors to stay the course and maintain a well-diversified portfolio that can weather various market conditions over the long run.

Secondly, strategic asset allocation seeks to achieve a balance between risk and return. By spreading investments across different asset classes, such as stocks, bonds, and cash, it diversifies the portfolio's risk. During periods of market volatility or economic downturns, certain assets may underperform, but others may act as a buffer, mitigating potential losses. Over time, this balanced approach has the potential to deliver consistent, more stable returns compared to more aggressive or concentrated strategies. Additionally, strategic asset allocation allows for periodic rebalancing, which entails selling assets that have outperformed and buying those that have underperformed, effectively "buying low and selling high." This disciplined rebalancing process helps maintain the desired allocation and can enhance returns over the long term. It’s the general principles of diversification and strategic asset allocation.

But sometimes it’s important to be more dynamic in your decision-making process. The diversified nature of the portfolio assets allocation was meant to help weather any storm. While equities can be more volatile in tough times the bond portion of the portfolio provides the less volatile and more defensive fixed income assets. But in 2022 both equities and bonds experienced significant declines. At one point the Bloomberg Aggregate Bond Index down -20%, which is almost unheard of for safe, secure, boring old bonds. The reasons were very straight forward. It was due to the rapid rise of interest rates, as fast an increase as there has been at any point in the last 40 years. This is why it is important to avoid being too complacent or passive in your investment approach.

When once in generation events occur, sometimes your decision making needs to adjust. In 2022, with interest rates rapidly rising from almost 0% to 4%-5%, it was apparent that this would impact both stocks and bonds negatively. It is important to be able to think tactically here and make dynamic decisions with regards to your investment portfolio. We took the view that in this situation we wanted to be underweight both equities and fixed interest. It meant increasing our exposure to cash, term deposits and floating rate bonds. By doing this, we avoided losses on the bond component of the portfolio while minimising losses on the stock component that year. At the time, many portfolio managers stuck with their strategic asset allocation and lost a lot of money. Thinking and acting tactically was critical in generating a far better outcome for our clients.

Now in 2023, as interest rates approach their peak that situation is rapidly changing again. It means that where we avoided fixed rate bonds previously these are now becoming much more attractive. Interest rates on fixed rate bonds are much higher, offering a very reasonable yield, and the prospect of rates going much higher from here is lower. So, the risk of capital loss is minimized. If inflation continues to cool and rates do come down, there is the prospect of these bonds increasing in value. With the recent improvement in equities, it provides the opportunity to take advantage of higher share prices, lock in some profit and reallocate that capital to the more defensive part of the portfolio at attractive prices.

While strategic asset allocation provides an essential foundation for a well-diversified and disciplined investment approach, there are times when a more dynamic and tactical decision-making process is necessary. The events of 2022, with the unprecedented rise in interest rates impacting both equities and bonds, serve as a stark reminder that complacency in investment strategy can have adverse consequences. Recognising unique situations and being willing to adjust allocations accordingly can be the key to navigating through challenging market conditions successfully. As we move forward through 2023, with interest rates approaching their peak and changing market dynamics, the importance of flexibility and adaptability in portfolio management becomes even more important.

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.

Succession

One of the best TV shows I’ve seen in a while is Succession. What the show does really well is explore the issues and power dynamic of a very wealthy family and their business. It highlights how difficult navigating succession within a family business can be. There’s an old adage that family business and wealth is made and lost over 3 generations. The basic concept is that once the wealth is made, the next generation maintains it while the third generation squanders it. Often referred to as ‘shirtsleeves to shirtsleeves in 3 generations’ it’s a cautionary tale that conveys the difficulties families face in managing their wealth and financial success over the very long term. The reality is that planning for succession is a serious topic that is too often neglected until it’s too late. The purpose of succession planning is to make sure that the family wealth passes through the generations and continues to grow. 

There are often tensions as the family patriarch or matriarch gets older, and their adult children rise within the business. It’s important to manage that situation because these issues only become more difficult and more complicated to deal with later if there’s no succession plan in place. By the time the founder passes away it’s all too late. It happens all too often, and the subsequent problems can become an emotional, financial, and legal minefield for the whole family. None of these topics are going to be easy to deal with but it is necessary to work through the issues regardless. 

Addressing these challenges requires careful planning, open and honest communication, and a commitment to the long-term success of the business. Sometimes hard conversations are needed. Seeking external expertise, implementing governance structures, and establishing clear processes can help navigate the difficulties associated with succession planning within a large family business. Obviously, it’s important to avoid any unnecessary bureaucracy but at a certain point, a family grows to a size where it benefits from introducing a more formal process for decision-making than they had in the past. Overwhelmingly, I hear from every family that goes through the process, that they wish they’d done it years earlier.

I had a really great conversation on exactly this topic during my podcast recently with Stu Laundy from Laundy Hotels. These days the family have over 90 venues and a business valued at over $1.5 billion. What was fascinating was Stu’s candour with regard to the real-life struggles that exist within his family as they mapped out the succession plan for the next generation. It’s not easy for the older generation to let go of control and change the way they run the business. What Stu and the family realised and ultimately embraced was that it is critical to have those hard discussions as early as possible because once you do you reap the rewards. So many family businesses can learn from these insights.

You’re not going to avoid conflict in a family business, but you can harness the difficult issues and turn them into a constructive process. These cover a range of topics from the family relationship dynamics, balancing various competencies and skill sets, family Interests, through to the emotional attachment of the founder and how to let go. You also need to ensure fairness and equity for all the family members and the need for the business to evolve and adapt to changing markets and technology. The benefits are significant though and help to safeguard the future prosperity of the business. The planning process helps identify the right people for the right roles and not only educates the successors but develops their talent to ensure a smooth transition and a continuation of the founder’s legacy for generations to come.

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.

Why I Started The Dion Guagliardo Podcast

Growing up, I always loved reading stories about successful business leaders. I would devour anything I could about people like Kerry Packer, Richard Branson and Gerry Harvey who were amongst the earliest people I was fascinated with. I would buy books that featured profiles of say 20 entrepreneurs or 100 businesses. I made a habit out of purchasing the BRW Rich List (now the AFR Rich list these days) to learn how successful people made their money. I was particularly intrigued by stories of self-made people and tended to skip over those based on inherited wealth or property. My fascination lay in understanding how great businesses were built and the personality traits and leadership qualities of the people who built them.

One of my favourite lessons was from when Steve Jobs was young. At 12 years olds, Jobs randomly rang Bill Hewlett, the co-founder of Hewlett Packard to ask him for spare computer parts. An amused Hewlett not only gave him the parts but a summer internship in the factory. Years later when Jobs was quizzed as to how he did it, he said, ‘I looked him up in the phone book and made the call’. His big lesson here was that ‘I’ve never found anybody that didn’t want to help me if I asked them for help.’ He also added that most people ‘don’t get those experiences because they never ask.’ It's so easy to make the call, yet almost no one does. The very best do though.

But it’s not only the very wealthiest people that have wisdom to share. There are so many people who have built successful businesses that have a less well-known story but just as much wisdom. I thought, who is telling their stories? How are they sharing their knowledge? These are the types of people I work with and talk to every day and there are many insights to be gained from them. I’ve always found them to be generous with their time and advice. So, I thought interviewing these people on a podcast would be a wonderful way to share these stories. That’s where the Dion Guagliardo Podcast started and why it exists.

My favourite part of talking with my podcast guests is when the conversation is so interesting that you almost forget you’re recording an interview. The conversation flows and you gain insights that were simply different to what you’ve heard before. A couple of months back I interviewed Vu Tran, cofounder of Go1. The business was started by four high school friends from Brisbane in 2015 and since then has grown to a $2 Billion+ tech unicorn. But as Vu explains, that’s just the start. They have very ambitious goals for the company and where they want to take it.

What struck me most during our conversation was Vu’s take on company culture. In the business and corporate world, culture has almost become a cliché. Companies will say how important it is but often fail to articulate what their culture is, and they rarely live up to the talk. Most often, companies will espouse their wonderful culture and why they look for people who will fit their culture. This is what made Vu’s answer so interesting. “We don’t want people to fit our culture” he said almost defiantly “We want people who will enrich and grow our culture.” Interesting. “We don’t want the same culture we have now in 10 years, or we haven’t grown”.

I was always fascinated by the intelligent and considered interviewers, like Andrew Denton and Michael Parkinson who seemed genuinely interested in their guests. They were so good at building rapport. I always remember watching Andrew Denton interview people when I was young and being blown away by the way he used silence or a gentle follow-up question to break down barriers and open up a guest to a whole new level of vulnerability and openness. He not only knew how but he knew when to do it. He understood nuance and subtlety. Not many people can do that, and it really stood out to me.

As I’ve got to know my clients over the years, I have found one of the great privileges to be the lessons and stories you hear about how they made the money that I now manage for them and their family. There is nothing quite like hearing about the early days from a founder starting with nothing who went on to build an empire. But what watching great interviewers taught me was that if you ask the right questions, you’ll find that everyone has an interesting story and unique insights and wisdom to share. There is nothing more interesting than meeting a guest for the first time, hearing their story, and going on the journey of unpacking how they got to where they are today. That’s my rationale. I want to learn from the best people across all fields and I want to help them share their lifetime of hard-won insights for the benefit of everyone. Now 2 years in and approaching our 50th interview, I’d like to think we are achieving that.

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.

Signs of Distress

There are some troubling figures starting to emerge in relation to a jump in bankruptcy, insolvency, and mortgage stress. These areas have all spiked recently as the covid era business protections are removed and markets are left to function more normally. Keep in mind that these figures are coming off a low base, but it signals a new phase for the economy. Here in Australia according to the latest insolvency statistics from ASIC (Jul 2023), insolvency rates are climbing sharply now too. During covid, insolvencies were in the 4,000-5,000 range annually. In the last 12 months, this figure has increased substantially and is now in the 8,000 to 9,000 range with 866 businesses being wound up in May alone. This is emerging across the world with places such as the UK particularly severe. The key concern is the flow-on effect through the economy. Increased bankruptcy means less jobs and less money being spent by both consumers and businesses in the economy. It snowballs from there.

At the same time, here in Australia, we are starting to see a spike in borrowers in mortgage stress. According to Roy Morgan research, over 1.4 million Australian borrowers are facing mortgage stress, up 78% from a year ago. The figure means almost 30% of all mortgage holders are in mortgage stress, which is the highest rate since the GFC. The most troubling aspect of these figures is that they’re at these alarming levels despite the economy not being in a recession and at a time of record low unemployment. If we see the unemployment rate materially rise in the months ahead, which I believe we will, these figures spike even higher. With so many people already struggling now while most people have a job, imagine the economic carnage when the unemployment rate rises. Mortgage stress means consumers have less money to spend on everything else. It slows economic growth, and it becomes a vicious cycle leading to more insolvency, less jobs, less spending and so on.

The added issue with mortgage stress for the property market becomes forced selling. It’s been a long time since we have had a situation like that with property, but I think it’s now a possibility. Distressed property owners selling drives prices down fast. Even during the GFC here in Australia, we didn’t really experience property issues in the same way the USA did. You really need to go back to the early 1990s since we’ve seen a scenario like that. It’s simple supply and demand. When you get distressed sellers, a glut of properties form and supply becomes greater than demand. The prices start to fall to meet demand. As people become more desperate prices fall even faster. Compounding this issue is the fact that buyers realise if they wait, prices will go even lower. So then demand starts to dry up and the situation becomes even worse. I’m not saying that will definitely happen, just that it could occur in this cycle. It’s on my radar and it hasn’t been before.

When we start comparing statistics to the GFC era, you need to keep in mind that in many cases we are talking about the maximum pain points that peaked at the end of the GFC in 2009. What came with that was a whole range of government stimulus and borrowing that was designed to make the upfront pain easier in order to spread out the pain over time. But we never stopped making things easier. Now, we’ve created inflation and as the economy gets worse, there isn’t a lot the government can do to help. Businesses, consumers, and families are going to have to wear the pain. Governments will lower interest rates, but we have the spectre of inflation hanging over us now so governments will be hamstrung with the policy moves they can make. So, while the GFC was bad, it wasn’t as bad as it was meant to be. Governments kicked the can down the road. We are getting closer to the end of that road.

The convergence of these variables doesn’t happen very often, but we have all the requirements for these once-in-a-generation scenarios forming in the background in this economy. It’s one of those things that when you say it, people think you’re crazy, but then when it happens, those same people will say it was obvious. Now interest rates may well still be low historically, especially compared to the 1990’s but it’s all relative. Someone borrowing as much as they can at 3% is going to be in trouble when their rates double to 6% or worse. As slow as the downturn has been to arrive once it is here it will be a problem for the whole economy and all asset classes. We’ve already had a false start in 2022 and since then everyone wants to pretend the worst is behind us. Diversify, be patient and be prepared. You don’t have time to position for it later. The time to position for the bad is when it’s still good. It’s too late to batten down the hatches once the storm hits.

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.

Setting Up a New Portfolio

As I speak to our clients and podcast guests, I continue to see extraordinary business owners who are fantastic at running their business but who’ve never managed investments before. It’s a completely different ball game and it can be daunting. You need to learn, but who do you learn from? When you don’t know how to do something the most difficult part is working out who does. I strongly recommend reading books by the very best in the world. But even then, investment philosophies vary so greatly that what works for one investor doesn’t necessarily work for another.

The first rule is to keep it simple. If you’ve been successful in business, you know how to bring information together and make decisions based on what makes the most sense. So, keeping it simple means only doing what makes sense to you. Importantly, it means don’t make investments you don’t fully understand because you think the person telling you to do it knows better. No one cares about your money more than you do. So, it’s critical to understand the investment and the rationale behind the advice. Sayings like ‘If it sounds too good to be true it probably is’ might be a cliche but are also true.

Those that sell their business suddenly have a large amount of capital to invest. Ironically, while that kind of generational wealth brings with it security, it also brings a high level of anxiety. Founders are suddenly confronted with the prospect of not only making investment decisions they often haven’t had to make before, but they are also acutely aware that in many cases this money, regardless of how much it is, is all they have. It’s a very different mindset when you transition from a business owner making millions of dollars a year in profits to an investor where the amount you’re investing is the amount you have for the rest of your life.

Whether you have $10m, $100m or $1b to invest, the process is very similar, especially in such volatile times. In these situations, invest slowly over time. Regardless of how great the investment opportunities are or how great they seem, take your time, and invest progressively. This is simple but an important part of mitigating the risk of markets falling substantially after you invest. Of course, it can work the other way too and markets can jump up but in the current situation, there is more risk to the downside than the upside. But when you are setting up your family for generations, taking months or even years to fully invest protects the downside while ensuring you have funds available for opportunities that may arise in unique situations.

From there it’s a matter of structuring your investment portfolio for the long term. Rule number 2 is to diversify your risk. Diversification across asset classes such as property, shares, bonds, and cash are critical. But so too are the underlying investments within each of these sectors. Spread your risk because when one asset class performs poorly, you expect the others to have performed well and offset your losses. While diversification within an asset class is similar, if you hold 20 stocks and you have a couple of poor performers, you’d expect the good performers to mitigate this. At its most basic level, it ensures that if an investment fails you don’t have too much of your portfolio in any one asset.

So, keep it simple and ensure that you understand the investments you make. Don’t make an investment because everyone else seems to be doing great investing in it. This is the dumbest reason to invest, and I’ve seen more people lose money from investing in these ways than anything else. Diversify, across asset classes and then further in specific investments within those asset classes. Average in over time to hedge your timing risk, especially when investment markets are uncertain and overvalued. 

Lastly, you need to be able to sleep at night. That is the final test, can you sleep at night with the investments you have? If you can’t then it’s either because you don’t understand your investment properly or you’ve taken too much risk. Always make sure your investments pass the sleep test.

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.

How We Are Investing in the AI Boom

From both a business and a lifestyle perspective, AI is the single most exciting technological development I’ve ever seen. It will be the biggest game changer in the history of the world. Not only will fortunes be made here but it’s going to change our lives in so many ways. There are going to be massive gains in productivity and huge reductions in friction in every type of daily task. If I was a young person looking to start a business, it would be in the AI field. If you are in business, you need to be looking at incorporating AI or you’ll be left behind. It is genuinely revolutionary.

But what is the best way to invest in AI from a long-term portfolio investor’s perspective?

How you access this theme depends on the level of risk you are willing to take. For most investors, there are 4 common ways. I utilise 2 of these in our portfolios and 2 I steer clear of.

• Big tech companies

• Listed AI companies

• SPACs or Themed ETFs

• The broader market

The big tech companies are seeing the most immediate impact in share price movements as the market grasps the enormity of the opportunity and those who are poised to benefit the most. The big tech companies such as Microsoft, Alphabet, Amazon, Apple, and Meta have broadly seen a resurgence on the back of this theme. Most of these companies are great businesses and we hold them in our client portfolios. Right now, for a few reasons they are probably close to fully valued though. While the AI angle has driven share prices up the bigger factor is the flight to safety. In times of uncertainty, the big tech stocks have replaced consumer staples as the ‘recession proof’ businesses for investors who believe consumers will continue to use their products no matter what. Similar sentiment drove their prices up in covid too.

Listed AI companies are all the rage right now and most of them are speculative, expensive and will likely fail. I see this every time a new technology arises from the internet dotcom boom and bust in the late 1990’s and early 2000’s through to the crypto and NFT boom and bust more recently. The key point to recognise is that just because a technological theme is real or going to change the world it doesn’t mean all the companies in the space will. This will play out just like those booms and busts before them. There will be some companies that will flourish and will be what Amazon was to the dotcom boom and bust. But it is really difficult to find individual winners in an emerging technological theme. It takes a massive amount of capital investment to get a technology into the mainstream, very few win, most will lose. Go back as far as you want from air travel to the automobile, it’s the same story. For these reasons, we avoid direct investment in listed AI companies in the early phases.

Similarly, Special Purpose Acquisition Companies (also known as SPACs) and Exchange Traded Funds (ETFs) are often created by fund managers in one way shape or form to provide investors access to a theme that is popular. They raise funds and invest in many different companies or shares within a theme on behalf of investors who don’t have the necessary expertise themselves. However, I’ve seen these types of structures surface in different forms over the last 25 years and I have rarely seen them work in practice. Managers charge huge fees and hold millions of dollars in cash to invest in the popular theme, it collectively drives up prices and the funds end up having to invest the funds at overinflated prices in lots of companies that ultimately fail. The theory of diversification to access the theme doesn’t seem to work as well as promised when it’s a new technology. I would avoid these structures and investment vehicles.  

Lastly, AI’s impacts across all industries will see many untapped areas for long-term investors to access the benefits of AI in the same way that worked for many in the internet boom. The introduction of the internet didn’t just provide great results for technology companies, it was ultimately adopted by almost every industry and delivered incredible benefits for revenue, productivity, and cost reduction. There are many examples of this. Just think about the way the banking industry has changed in the past 30 years. There are many blue-chip companies that integrated the new technology and remain blue-chip companies today. But there are also many examples across so many industries from entertainment, retail to newspapers and travel that didn’t and ended up going bust. This is where the real theme of AI will benefit investors over the next decade. Understanding the existing industries that will benefit and those that will be disrupted is key, and then the impact on all the individual companies in your portfolio. It will be just as important to avoid the losers as it is to pick the winners.

The most important thing to remember as an investor is to be patient even though everything seems to be moving fast. AI technology is still in its infancy and as exciting as the opportunities are right now it’s very uncertain and going to be very volatile along the way. Some businesses will be too early, some won’t execute, and many will fail. But make no mistake, this will be a massive opportunity for more than a decade. It is still super early, and AI’s capabilities are going to grow exponentially over the next several years. This is going to be a truly once in a generation opportunity that will manifest over many years in many ways, many we can’t even envisage yet. So become familiar with AI and learn about it because it will impact every company in your portfolio in one way or the other in the years 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.

Work, Money and Life

Just back from an overseas trip to Europe with my wife in May hence the mini-break in articles recently. I wrote this list about 2 years ago when we hit a few family milestones, the youngest of our 4 kids turned 18, my wife and I celebrated our 25th wedding anniversary and I was approaching my 45th birthday. Two years later the 22 lessons are just as true as ever. I’ve added many more followers since then, so I thought it was worth resharing.

This is what I want my kids to know about work, money, and life:

1. Make every single day count. There is one thing I know for sure, it’s that time stops for no one. That doesn’t mean be constantly busy or rush. It means be mindful, not wasteful.

2. Do what you love. Everyone says that these days, but people still struggle with it. Do what you really love, and you’ll end up being successful and more importantly, happy.

3. Give it a go. Whatever it is you really want to do, just go and do it. There will never be a perfect time, so don’t overthink it, just do it. If it doesn’t work out, then just start again.

4. Don’t be scared to try new things. If you don’t know what you want to do, try a bunch of things. You’re not going to find your passion thinking about it. Get out there and do.

5. Learn good habits. This goes for work ethic, health and fitness as much as financial discipline. Start off by making it easy and build on it every day until it's unbreakable.

6. Develop a good daily routine. This follows on from good habits. Almost everyone who I’ve seen succeed has a reliable routine. It’s what helps you get through the tough times in life.

7. Choose your partner wisely. It will probably be one of the single biggest factors in the happiness of your life. This applies to love and business.

8. Pick your battles. Don’t get distracted from your goals by everything that goes wrong or every problem that appears. Save your energy for the fights that really matter. 

9. Enjoy the journey of life. It goes quickly and very few times is anything as serious or grave as it may seem. So, stress less and enjoy each day as it comes.

10. Buy books. The best investment you can ever make is to buy a book for $30 to get the insights a world-class expert gained over a lifetime. It remains the best deal I’ve ever seen.

11. Spend less than you make. Always. Save and then invest. Once you build your savings add to your investments regularly. It doesn’t matter if it's shares or property as long as you invest.

12. Credit cards are dumb. Pay cash. If you can’t pay cash, then guess what? You can’t afford it. Only use debt to buy appreciating assets like property and even then, with caution.

13. Start a business when you are young. Whatever it is you want to try once you’ve learned the basics try it. Start small scale and assume you’ll fail. But learn by doing.

14. Turn off notifications. And most social media for that matter. If you don’t consciously turn off from it, you’ll be distracted from your own goals by the barrage of addictive marketing. 

15. Learn about money. Understand the magic of compound interest, the importance of cash flow and how to read a balance sheet. Invest don’t speculate.

16. Learn the power of words. They impact all your relationships, your ability to communicate at every level and negotiate the outcomes you want in life. They matter.

17. Be a lifelong learner. Be curious about the world. Travel and open your mind to other cultures and views. Most importantly never stop learning no matter how old you are.

18. Embrace change. In your everyday life and in the way technology is changing the world. Understanding how the world is changing is one of the most interesting parts of what I do.

19. Take regular holidays and breaks. Spend time with family and rest. I try to take a short mini-break every 3-4 months if I can. Rest, rejuvenate and smell the roses along the way.

20. I assume I’ll die in 10 years. For perspective, it reminds me that life is short and to get on with it, but at the same time, it's far enough away that I’m not too worried about it.

21. The meaning of life. In my younger years, I gave a lot of thought to this and concluded it was a waste of time. There is none. It’s up to us to create whatever we want from our lives.

22. Have fun. Remember to laugh and enjoy every day if you can.

Feel free to share with your kids or grandkids if you think it may provide them with useful insights.

Take the trip, see the show

This might be the best advice I have ever given. To be clear, it’s not the best financial advice but it’s not meant to be. This one is about living life. I see this more than you’d think from very wealthy people concerned about spending money in retirement.

Early on in my career I saw many people who worked so hard to build their future. I saw a few couples who sold their business for millions of dollars to retire only for one of them to die within 12 months. Their dreams and plans for the next phase of their lives turned upside down and all the things they were going to do together were never going to be done

What was all that work for? The future they worked so hard for over decades didn’t exist. So, what was the point? It made me more determined than ever to both succeed and enjoy life along the way. It also heavily influenced my views on how to spend money during both your working years and in retirement.

In my younger years, I was more focused on achieving outcomes. I’d reach a goal and instantly move on to the next one. But as I get older, I realise that it’s the process every day as you work towards your goals is what life is all about. The journey is more important than the destination. That journey includes all the simple things in life such as a family meal together or a walk on the beach, but it also includes the bigger ticket items we tend to put off for too long.

But the same applies once we are older too. If you’re 70 you might have 10–15 years of good health left if you are lucky. That’s often the time when you can still travel and do all the things you want to do in life, but it gets more difficult as you get older. Who knows when our time is up too, so there’s no point in waiting to do things, get on with it and do them.

Part of the issue here is that once people have sold their business and retired, regardless of their level of wealth, they become more conscious that the amount of money they have is what they have for the rest of their life. That can make it especially daunting to dip into your capital in the name of fun or living life. But outside of leaving an inheritance, what else is it for? What were all the years of blood, sweat and tears for?

I’m not suggesting people become frivolous spendthrifts, but I am suggesting that it’s worth crunching the numbers, whatever your financial position, to understand the balance between frugality and living a fulfilled life. Of course, success and happiness are different for everyone and only you know what that means for you and your family. But what I do know for sure is that our time on this earth is limited, and our time with our loved ones is even more limited.

When I hear people in retirement questioning whether they should dip into their capital for a regular overseas holiday, I take the view that there is no better time than now. We don’t get healthier as we get older. I see it as money well spent. So, buy the tickets and see the show, take the overseas trip because it might just create some of the greatest times and best memories of your life.

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 Earn-Out Phase

Over the years as I speak with clients and more recently, the business owners I have interviewed on my podcast, it is clear one aspect of selling a business is tougher than most would expect. Specifically, the transition phase whereby the founders complete their ‘earn-out’. When a business is sold, there are usually 3 components made as payment, cash, stock and an earn-out. The cash is the amount of the business you sell for dollars in the bank. The stock is the shares in the new entity you receive, often a much bigger listed company. The earn-out phase is a period after the business is sold, after which the seller receives additional payments in exchange for assisting with the transition of the business to the new ownership. Typically lasting up to three years, the earn-out phase incentivises the seller to work towards agreed-upon objectives and performance targets being met to earn a bonus payment.  

The earn-out is an extremely important part of the deal but is sometimes overlooked or at the very least not given the level of consideration by founders as it warrants. After the initial excitement of being acquired for millions, reality soon hits because how the earnout phase is set up and who you have sold the business to is going to impact your life in a big way for the next three years. While many people are willing to endure discomfort for three years when a large cheque is on the table, it is worth taking the time to plan and negotiate the earn-out terms. It is especially important to consider how the next few years may play out if things don’t go well. It could be because of targets being missed, personality clashes or simply tough economic times but you’ve got to consider the downsides. 

The comment I hear the most is that you lose two things that are more important to entrepreneurs than anyone else, autonomy, and time. So be aware that you have handed over ‘your baby’ and you are not in control of the decisions anymore. Other people are in charge and they will not run the business the same way you did. Your business will be part of a larger organisation with a hierarchy that slows everything down. No longer can you decide on a marketing campaign in an afternoon based on your gut instincts based on 20 years of business. Now those are group decisions that must go by the head of marketing for approval. But they will need to run it by legal for approval and so on. Be aware that is just how it will work going forward.  

The reality is that you’re going to experience significant change in the transition phase. More so than anyone else in the business. The greater the percentage of the business you retain, the more important it will be for you to have a level of control. Most importantly you need to prepare yourself psychologically that the business is no longer yours. The new owners will probably drive you insane at times and make decisions that make no sense to you at all. So, you need to be mentally prepared for this because they may very well take your years of blood, sweat, and tears and mess it all up. It might turn out great too and everyone will live happily ever after, but do not underestimate the earn-out phase and the impact it will have on your life for those few years.

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 Trust

One of the defining parts of the GFC was seeing the impact of a credit crunch on large property fund investments. These funds held billions of dollars in all types of property including offices, retail and commercial. Like any investment, these include both good and bad managers. Often when these investments perform badly it’s for relatively obvious reasons such as too much leverage. However, the GFC highlighted a different twist on the problem with debt.

In the lead-up to the GFC, credit was easy to source, it almost didn’t matter how much debt you had as you would just refinance it on new terms when it came due. But once the GFC hit, the music stopped, and it was far more difficult. It led to both good and bad property assets becoming distressed, and not because there was too much leverage or difficulty making repayments. It was because if you couldn’t refinance the loan it had to be repaid in full. This became a major problem that wasn’t expected.

Many big property players had become so complacent during the times of easy money that they forgot the fundamental rule of managing the maturity of their debt. With no refinancing available, the only options became asset sale or default. It was a catastrophe with many funds caught out. The only thing worse than being caught out with a default or having to sell assets in a fire sale is having it happen when everyone else is too. It led to many property trust structures collapsing and investors losing millions.

Fast forward to 2023 and there is an element of this beginning to emerge again. In the USA alone, there is almost $1.5 trillion of commercial real estate debt due in the next 12-18 months. There are two parts to this problem emerging. Firstly, that debt is going to be refinanced at much higher rates and that’s obviously a big problem for organisations making repayments. It may mean that many organisations are not even able to gain approval to refinance under the new terms given the new rates change all the financial models they previously applied. That’s one aspect where failure will occur.

The second part of the problem is going to be those that can theoretically afford to refinance may still miss out. With financial conditions tightening and banks being far more selective, there will be a significant number of organisations that will miss out. Lenders will move from friendly facilitators of business to ruthless corporate vultures pre-emptively picking and choosing the assets they support and those they don’t. Understanding the bank’s place in the pecking order of default will play an important role in their decision-making and which assets and organisations succeed and those that fail.

This time there is a lot of debt not just linked to property assets but also a range of business and other financial assets. The key to property trusts and corporations surviving all of this is making sure they get ahead of any potential credit crunch. They need to refinance sooner rather than later and ensure they have sufficient access to capital, so they are not forced sellers at the wrong time. Make no mistake when push comes to shove in these situations, the deck is very heavily stacked in the bank’s favour. In a time of crisis, the banks will make the decisions that are in their best interest, not the borrower.

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.

My favourite business books

One of the best ways I learnt about business and investing in my life has been by reading books. It still blows my mind that you can spend $30 and get a lifetime of lessons and insights from the very best people in any field in the world. It’s genuinely the greatest investment you will ever make. I remember when I got married almost 27 years ago and we only had $100 in the bank, if I found a great book, I’d buy it without hesitating because we knew it was the fastest way to gain the knowledge to become successful. So here is a list of my favourite business books over the years.

1. Grit by Angela Duckworth

If there was only one book, I could tell my kids to read to help them through life, it would be this one. I can’t think of an attribute that is more important in life than grit. For all the natural talents a person can have, this book highlights that more than anything having grit is the true determinant of success in life.

2. The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone

This is one of the best business books I’ve ever read and is a fantastic insight into the fundamental tenants that make Bezos and Amazon tick. The book goes into great detail about his mindset and philosophy with regard to Amazon. Once you read it, you will have a newfound appreciation for why they will likely continue to dominate for decades. So many lessons for entrepreneurs and investors. 

3. Warren Buffett Speaks by Janet Lowe

One of the easiest books you’ll ever read. The author compiles quote after quote from Warren Buffet over the years to tell the story of how he invests. Buffett’s simple stories and wit build on each other and provide you with a great understanding of his investment philosophy. I love this book and genuinely believe that if you read just this book alone it will provide you with the fundamental tenants for investment from which to understand long-term investment philosophy.

4. Good to Great by Jim Collins

One of the questions I ask guests on my podcast is what their favourite business book is. Good to Great would be the most common answer, and for good reason. The book compares and identifies the critical differences and attributes of companies that are good, to those that are truly great, over the long term. There’s a strong focus on leadership including the hedgehog and the fox concept which is fantastic.

5. Atomic Habits by James Clear

When I read Atomic Habits the first time it was a game-changer. It helped me better understand how to use routine to create sustainable habits. It helped me across all aspects of life from business perspective through to better habits and improving my exercise regime.

6. Seven Habits of Highly Effective People by Stephen R. Covey

A timeless business classic. It’s probably the most challenging on this list to read because it demands your full engagement but nonetheless it’s a foundational book to read for anyone who wants to be successful. So many deep insights about management and perspective that I still use every day. These lessons can be applied by anyone to become better at what they do, from business leaders to investors or even parents. In today’s busy world of distractions, time management and prioritisation of tasks are massively underrated and rarely done very well. This book is a game-changer.

7. Steve Jobs by Walter Isaacson

There is nothing better than getting into the mind of a genius, and no one does it better than Walter Isaacson. In this biography Isaacson captures so many brilliant insights into Steve Jobs and how he built Apple. The first time I read it, I had pages of notes only a quarter of the way through. I had to stop writing because I wanted to enjoy the book. The book is the product of interviews over 2 years including over forty with Jobs and more than 100 family members. Any biography by Isaacson is a must-read.

8. Zero to One by Blake Masters and Peter Thiel

Zero to One is based on learnings from Peter Thiel, the co-founder of PayPal and the legendary venture capitalist who is known for being the first money into Facebook. This book gives you perspectives into the mindset and thinking required to change the world. It looks at how people create something totally new. Most successful businesses take something we already know and expand on it, but Zero to One is about those few exceptional businesses that create an entirely new industry and change the future.

9. You Can Negotiate Anything by Herb Cohen

These last couple of books I first bought and read when I was 18 and working as a labourer for my Dad. You Can Negotiate Anything is to read with lots of great stories teaching people how critical it is to understand the power they have in any situation and that negotiation strategies are useful in all aspects of life. Almost everything in life is some form of negotiation.

10. How to Win Friends & Influence People by Dale Carnegie 

Another age-old business classic first written in 1960. The title is terrible, but the content is profound. For a blue-collar 18-year-old kid from Geraldton, it was life-changing. It helped me see how wealthy people operate and at the same time, it helped me understand that they are all simply people. The reason that is so profound is because then you realise that everyone has hopes and dreams as well as fears and concerns. If you can help people achieve their goals or alleviate their fears, you’ll become successful.

Summary

I highly recommend all of these books. Each of them has taught me many important lessons over the course of the years. There are many other great ones that aren’t on this list too, but these are the ones that have been most influential on me at different points in time. If you have any books that have had a similar impact on you, I would love to hear about them.

Let Them Learn

There is an old story about a Zen Master who refused to help someone who was struggling with the burden of a hard and difficult life. People asked the Zen Master if he would help the person. He said, “no let them struggle”. The people didn’t understand why he wouldn’t help. Eventually, he explained… “when you rob a person of their pain and suffering, you rob him of his life, his freedom, his independence; you keep him dependent on you and rob them of the experience and of their journey”. As a mentor, whether it be a parent, teacher, boss, or coach, it’s not necessary to give the answer. There is something profound to be gained by letting people learn by doing. We don’t have to correct them when we see them doing something we think is wrong or that we don’t think will work. Maybe it will, maybe it won’t but there is beauty in the struggle.

My youngest daughter is 21 years old and has slowly started a business over the last few months. A side hustle as the kids say these days. I gave her the best advice I could – Go for it. Give it everything you’ve got. That’s about all I need to say for now. But I’ve also heard people say, “Oh another candle business there are so many”. So what? Maybe it will work, and it won’t, but these people are missing the point. The lessons are in the struggle not in whether this business is a roaring success. I have learned the hard way over the years that in life, as with business, the best you can do for your kids and your people is to let them find their own way. That means getting out of the way and letting them learn. It also means letting them find their passion for themselves and see where it takes them. At the end of the day if someone has a passion for something they will become all consumed by it and it will lead to a happy and successful life. 

It’s the same with the young people I know who thought Crypto and NFTs were the easy path to riches. All their friends were into it, and everyone was making money early on. Sounded great. My comments to my son’s mates who asked my view on it was this: “I think you will probably lose your money at some point, but I think it is a great process for you to go through.” For most of these kids aged 18-25 who were investing in it, it wasn’t big dollars, but it was a lesson to be learned. Plus, while it was the latest craze none of them were going to listen to me anyway. To experience the emotions and be a part of it is the lesson and if it works out then great. If it fails, then you will have been through your first crash and will be all the better for the experience.

But this applies to everyone that we come across who has dreams and aspirations, not just our kids. One of our best people here at Fortress is a young guy who has worked for me part-time for the last 2 years, Marcel. He’s a 20-year-old student studying software engineering at Uni and in only a few hours a week produces my podcast, organises the guests and takes care of all our social media. He’s quite brilliant. In the past, I would have tried to work out how to keep him working for me but early on I realised he would be here for a few years and then he’ll outgrow me. I realised my job is to help him do that. So, there will come a day down the track when he moves on to do something far more impactful on the world than what I do here, simply managing investments. I think it’s pretty cool I get to be a part of his development and how he approaches the world with his future endeavours.

It's often the same with investment advice from well-intentioned family members giving their views on how someone should invest. If you ask 20 different people, you’ll get 20 different views and most of them are either wrong or biased towards the weaknesses of the person who is answering. I see it all the time. As parents, we want the best for our kids. In many respects, we try to avoid the mistakes we think our parents made, but the flip side is I think we often just find new and interesting ways to mess our kids up anyway. One of the best things my dad ever did for me was when I was 15 and asking him about how to make money. He said, “I don’t know, you already know more about money than me, you’ll work it out.” But that was exactly what I needed, not my dad’s views on money, but his humility and honesty to tell me he didn’t know and to encourage me to go and learn for myself. When someone is curious and passionate, they will find the answers they need regardless of the hurdles in front of them.