EVAN LUCAS | Author of Mind Over Money

What are the secret mind powers of successful investors? How does training your mind help you to protect and grow your wealth? Joining me today to share his thoughts and beliefs of the power of the meat between our ears is Evan Lucas.

Evan has been investing and researching global markets for over a decade. After getting his Masters in Finance Evan headed to Amsterdam with ABN Amro before moving to the Royal Bank of Scotland. He returned to Australia with RBSMorgans where he developed his top down approach. He’s also the author of the recently published Mind Over Money.

We talk about the power of compounding, ignoring short-term market noise, and how Arnold Schwarzenegger's approach to training has lessons for investors.

Understand how your thinking drives your money behaviour to master your finances and make better financial decisions.

There is limitless financial information in our modern-day, connected world. We can find stats, facts, investing approaches, wealth creation hacks and new ways to wealth (think Crypto currencies). But leading economist and market analyst Evan Lucas believes we should cut out the external noise and look at ourselves first. What drives our behaviour and attitude to money?

This fascinating book explores the things people do to overcome their money habits and looks to instill tips on how we can make better money decisions just by acknowledging our own learned behaviours.

All too often we ignore logic and make decisions around money that we know aren't entirely rational. That s because money doesn't just involve finances it s deeply tied up with our emotions, our learned behaviours, our biases and how we think.

We are all different in the way we use money: some of us are savers, some spenders, risk-takers, or investors. Mind over Money helps us understand our money personalities, our money cognition and why we do what we do. It then takes us through ways we can work with our strengths so that we meet our financial goals and live the lifestyle we desire.

Mind over Money is a life-changing read that will help clarify what you want from life and your money, so you can master your finances and improve your financial freedom.

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

Chloe (1s):

Shares for Beginners, Phil Muscatello and Fin Pods are authorized reps of MoneySherpa. The information in this podcast is general in nature and doesn't take into account your personal situation.

Evan (11s):

Arnold Schwartzenegger said it wasn't about his training that got him to be the champion as Mr. Universe. It was the routine before it. So every night he would make sure that his gym bag was packed, that his shoes were ready, that everything, cause it wasn't getting, it wasn't the gym itself, it was getting to the gym. Cause he knew once he was there, away he went and off he went. It's the same principle. Have your routine with your investing. I am contributing X amount per month, per fortnight, per year calendar, whatever else. And my goal is to be wealthy in 5, 10, 15 years by using compound interest in my advantage.

Phil (48s):

G'day. and welcome back to Shares for Beginners. I'm Phil Muscatello. What are the secret mind powers of successful investors? How does training your mind help you to protect and grow your wealth? Joining me today to share his thoughts and beliefs of the power of the meat between our ears is Evan Lucas, G'day Evan.

Evan (1m 6s):

Hello Phil. That's a great lead. And the meat between our ears the most powerful thing in your entire body, cuz That's right. and it is just a piece of meat. A lot of, lot of lead in. Love it. Yeah. I try and use the term muscle cause I think that's that's what it is. It's, you know, like anything in your body, it can be trained, it can be worked, it can be improved. And it's inverted commas fitness is, is using your mind as, as often as he can and, and stimulating your mind as much as possible. Well

2 (1m 30s):

I was just talking to another guest, Claude Walker from A Rich Life, and we were talking about challenging listeners and you know, I was sort of saying about this podcast is, well it's called Shares for Beginners. It's not Shares for simpletons. So I do like to go a little bit heavier than some people may want. But I think if we raise our expectations, we raise our results and outcomes.

Evan (1m 52s):

Yeah, and I'd also look at it from a different point of view is that even if you're a beginner, you, you are going to have an understanding and what I mean by an understanding. You, you, you know how the world works, you know how the things that you do work and you will have a very interesting and understanding about the racies of your own personal experiences and your life and et cetera. So although we, I agree with you using the term beginner, all it is that you are just learning a new skill, but you've already got skills and you'll be able to apply those previous skills you've got whatever it is into this world as well. And I think that's, I agree with you. I would much rather sit here because what I think you and I are basically saying from the answers that we're both giving, which is when you look at these kinds of things, you've already got an education and that's the term.

Evan (2m 36s):

You've already got an education. So you will, if we go too too low brow, it'll not just bore you, but it won't actually stimulate your mind, it won't actually stimulate you to stay in this space, do what you need to do. Which is, as Phil pointed out, and he, and he does it through this entire podcast series, is, you know, it's about building wealth. It's about also getting that skill. Cuz that's what it is. It's just a skill to a level that you're confident enough to actually not go from just being a beginner. But understanding that investing is, is something that all can do, all can do relatively well. And once it's going, the confidence it gives you to do, let's do what you want, when you want, how you want, just, you know, amplifies. And you're gonna hear me say that term over and over in these podcasts.

2 (3m 19s):

Good to hear. But it's also the, the idea that we're trying to get past the obfuscation of this industry. Yeah. So much of this industry seems to be about keeping the, those special mind powers in the, in the hands of a particular cult. And we're just trying to open that up and realize it's, it's not that hard. The maths is not difficult. You don't need even calculus. you know, that's, there's a lot that you can do yourself.

Evan (3m 45s):

Correct. And the other thing that I would say to those sort of magic people that you're explaining to, I I've come from that world and what I mean by that is that the way I've always been explained it in a way, people always talk to me the same thing. It's sort of like a, a line of continuum. There's, you know, people on the beginner slash sort of simple side. There are people on the very other side, which are these highly complex, really, really, you know, strange modeling, all this kind of sort of adverted dark arts material. And I've, I've been on both sides and, and I like to think that I can now sit in the middle and, and everyone can sit in the middle of those two because Filz, right? The other thing that research shows that history shows is that all those models, all those, you know, secret herbs and spices or whatever sort of acronym or, or sort of pun you want to use to describe it, they don't necessarily give you above and beyond returns.

Evan (4m 39s):

And that needs to be pointed out. So in the end, I mean, what we're trying to do here is long term. Those guys are looking short term and trading and doing all sorts of other random little things that, that isn't, you know, that isn't gonna build your wealth, that isn't gonna get you in a situation of, of being really, really happy with, with where your money and, and your your overall asset position is going. It, it does take time. One of the things I talk about a lot now is, is patience. And, and I remember when I first started in this industry, and I know Phil you are the same, is, you know, when you first get in there, the, the, the, the rush to move, the rush to return is really high and human beings are geared to that. So don't, don't beat yourself up about it. We are geared to wanting the now, now investing is a long-term thing and and you don't need to make it complex.

Evan (5m 27s):

In fact, you know, the, the biggest, best examples over and over Warren Buffett, straight out, keep it simple, he says it all the time, you know, Ray Dalio, even he who runs a massive edge fund, he's like, look, the more simple it is, the better it's gonna be. So that is the other part of this is that you don't need to sit on that extreme other end that I just alluded to. Sitting in the middle will do you more than any good. It'll do you incredibly well over time.

2 (5m 52s):

So we've rushed into the answers and the questions and I haven't even done your introduc properly yet. Well, let's, okay, so Evan, you've been investing in researching global markets for over a decade after getting your masters in finance, you headed to Amsterdam with AB and amro before moving to the Royal Bank of Scotland. You returned to Australia with R b s Morgans. I just wanna make sure that people understand that you do have some credentials in this area where you developed your top down approach and you're also the author of the recently published Mind Over Money. So why is your mind so important in relationship with money?

Evan (6m 25s):

So first part of that answer is in the end, all of my experience shows and also my background as economics, not just markets and all that kind of stuff, is that economics, all economics is, it's a study of you and me as a group doing things in certain directions, you know, how we're spending, how we're not spending, what we're doing with regards to our overall confidence, not confidence, et cetera, et cetera. Then investing's the same thing. And all market is, is just you and I having an opinion in one way or another. And, and I think that needs to be put out there from the point of view that it shows that, again, if we all think that BHPs a buy, we'll all work that way and you'll push the price up if we all think BHPs a sell and we all work together and we'll push it down. So why I say your mind is all part of it and where it comes into your experience is that that is, you know, these are your biggest influences.

Evan (7m 11s):

These are the things that have shaped your development. It has shaped your understanding. Now what I mean by that is that you are going to have a particularly bad view of money. If you have seen friends, family, parents, et cetera, struggle with money, you know, always find themselves in debt or find themselves in in in hardship, your view of money's gonna be different to somebody that's grown up with it who you know, has, has done incredibly well with it from family experiences, et cetera, et cetera. So that's the unfortunate part. It's like anything, it is exactly the same as if your social scenario is high or low on that spectrum. It, it's all the same thing. And, and so you can, you can change it.

Evan (7m 52s):

And what I mean by that is you can work it. So why your mind is so important is that you need to understand who you are. You need to understand, you know, what is your view of money. And and again, when I say this before, my view on money is this or money gives me autonomy, it just gives me the ability to do what I want, when I want, how I want. That is me. You will be different. Now, the reason I also use that quite highly is that most studies, and the best study I can show you is that there was a study that came out of Harvard around human beings and what the most number one priority human beings have, it is autonomy. Think about your work environment, think about your overall control or your direction.

Evan (8m 34s):

You want the autonomy to do what you want. So that's the same with your investing. Your investing helps you get that autonomy, your investing helps you move that. So I know it's a very broad brush there, Phil, but the way I answer that question is know who you are with money. Know that simple is best and understand that there is no right or wrong answer. It's the right answer for you and what you want to do.

2 (8m 59s):

But there's many people though that don't even understand what needs to be done I mean. I'm just preface this by talking about a conversation I was having with a young friend who was about 30 years old a few weeks ago and he's very, he's incredibly disheartened, you know, he's a tradie, he makes good money, but he feels like he's never going to be able to buy a property. And so I mentioned to him about micro investing and that you can be putting money away each fortnight or whenever you get paid and then that money can compound over many years. And he said to me, that's the first time anyone has ever said that to me. And sometimes people just don't even know what they don't know or dunno what they don't dunno.

Evan (9m 39s):

Yeah. And and that's what we're talking about here. So that he's now had an experience, a relationship with you to start actually shifting his dial with his view around money. And that's, that's what this all is I mean. If you are listening to this podcast, you are already doing that I mean if you are here listening to Phil week after week, you are already trying to do what your colleague was trying to do, which is starting to understand that, look, the eight adverted commas, it's been attributed to Einstein. We still don dunno if it's true, but he's attributed with the sign of saying that the eighth wonder of the world is compound interest. If you can remember your year 10 maths, it's probably the only thing that you really need to know in terms of, of what's doing here, which is whenever you are micro investing was as Phil said, or even if it's a little bit more than that dollar cost averaging whatever you want to use the term for doing, constantly adding to your compound interest con concept and your compound interest strategy will over time be the best outcome that you can get.

Evan (10m 36s):

And that, that's, that's, that's not me just saying that for being, you know, flippant. That's actually fact. The difference between your year 10 maths and the theory that I just announced and the real world is that understand markets are irrational, they're jagged, they're scary sometimes and that's fine. And I think you need to understand that, that's fine. So the way I, I wrote about this in my book too, I actually want I overlaid the charts is that the ASX, when I wrote the book, it's a little bit different now, but it's close enough. The ASX was on average on a total returns that includes your dividends was returning about 9.5%, give or take. If you look at that over a 10 year period with compound interest reinvesting your dividends at that nine point a 5%, it gives you 155%.

Evan (11m 19s):

Now people, when you say that number that that's not possible, so well actually that's a fact. That's, that's, that's true. And you could do that with any sort of term deposit. Okay? If you look at a term deposit, your compound interest, your time deposit, it's four and a half percent. You compound everything back in, roll it immediately, blah, blah, blah. Away you go, you'll get similar numbers. It's obviously not as high as that because four and a half percent versus 9.5%, it's different. But when you actually look at it in real life, you look at that 9.5% per annum and that 155% return over those 10 years that I did it to, which would've been at that time, 2021, June, July, 2021 when I finished writing the book. Cause it what came out the end of last year.

Evan (11m 59s):

Sorry. Yeah. Anyway, it doesn't matter if you look at the chart together on a real basis, you can see that there's a lot of jaggedness, there's a lot of ups and downs and everything in between. You've gotta have the mental fortitude slash also the behavior to understand that what happens in the short term, what happens now actually doesn't affect me. I am looking for that 10 year return. I'm looking for that 155% because you know, 2023 is not gonna be 2033 Phil. And I know that. And, and if you ask yourself, you know, that too I mean look back 10 years ago and what was happening and you were doing 10 years ago to think now 10 years into into the future, it's going to be that different again.

Evan (12m 39s):

We know that I mean we've had a pandemic in that period of time and all sorts of other things as well. All that can still happen. But over that same period of time, the market was still up 155%.

2 (12m 48s):

And that's just something that people need to deal with as well and be prepared for and to be educated about is that the market does go up and down and when you see your portfolio on the screen, you know, and it's valued every minute of every day, it can get scary when you start seeing all that red. Yeah. How would you suggest people arm themselves for this kind of experience?

Evan (13m 12s):

Yeah, so I'm gonna go back to your example with you had with your, with your friend before the 30 year old guy who thought he'd never buy his house. I know it's not perfect, but the analogy I always use when somebody asks me that question is that if you walked home every day and had a big neon sign above your house that had to the scent, right to the scent, how much it was worth, and that neon signed, then between 10 and four every day moved in front of your eyes and one day you rocked home and you saw it moved 10% lower, would you sell your house? I doubt it because you know that your house is a long-term investment, you're not gonna move out of it. It's the same principle.

Evan (13m 52s):

The the catch is is that yeah, markets are much more what we call liquid. They're much, much more open, there's much more money flowing through them. Selling your house takes, you know, a good three months in terms of what's going on. There's a lot of things to happen before you can sell your house. And that actually works in your favor to some extent. Cause if you were to get scared by that neon sign and you were to flick your house, you'll make a mistake. The time factor of selling, it slows you down. So unfortunately you don't have that necessarily, whether you're investing in markets, whether it be Equities, whether it be fixed, fixed income. By fixed income, I mean things like hybrids, bonds, corporate bonds, et cetera. Those things are open to you to trade. And that's the right term every day.

Evan (14m 32s):

So again, the strategy is Filz already slightly I'd put out the strategy is this, you need to find a way to look long term. You need to find a way to not worry about the short term. Now again, this is me, not necessarily perfect for you. I have with my personal portfolio, not with what, what I do for my dayto day life. Cause obviously I live in breathe markets, but for my personal portfolio, I make it very clear that I don't look at it for probably a month at a time. Now, back in the day, I would probably look at it every day and I break that month. I mean I I I'm, I'm now strong enough that if I do see a decent move and I don't, I don't care. But when I first started to get over that, that, that fear, that that, that of mistake, that also that ability to then go, oh my god, my portfolio is down 10%, I need to get out, I need to blah, blah blah.

Evan (15m 22s):

And then clicking out and I bet you the next day it'll take off on you. All of that thing. It's about taking the mindset away. It is then also about automating. It's as you know, Phil said before, micro investing, adding a hundred bucks a month or every fortnight, whenever you get your thing, that then automatically gets reinvested into what you have. That is your compound interest. That's what you've gotta remember. Think of it on that perspective, the capital movement up or down in today, this week, this month, this half year, this calendar year should mean nothing to you. It's about I need to keep compounding on the idea that this is a compound interest return that I'm not gonna touch for a minimum of five years.

Evan (16m 2s):

And if you can do that, you'll all of a sudden find that you're in a much, much better position.

2 (16m 6s):

You've kind of referenced about how you are you and obviously I am me. Yeah. Yep. What does that concept mean? You, you've, you've referred to that in the book, haven't

Evan (16m 14s):

You? I have, yeah. And I've sort of, I've sort of skirted around using it with you just then. And, and it's been a way that I've sort of communicated whenever I've gone and done speaking events or when I was working in my previous life, working as an analyst or, or whether I was working at an advisor and all those materials is the more and more I went on it. I sort of said this at the start with the answer is that I know what I am, I know how I work with money, so I am me. And that's, that's what I mean. What I do with money, how I think about money, how I invest my and my family's money is it works for, for me, you or you. And and that gets back to this idea, is that what Phil does, how Phil invests how he thinks. Although you can probably hear, you know, in our conversation we're clearly very similar because we do this for a living, Phil will be different.

Evan (16m 57s):

And those of you listening, you are gonna be different for the two of us as well. And that's what I mean. You are you, I am me. This is, and why I say this, this is also the simplest term I can say is it's trying to get away from a envy. It's trying to get away from, you know, getting caught up in things like confirmation bias or attention bias or availability bias, or that person's doing this, they look like they know what they're doing. They look like a smart person. I should do what they are doing. The catch is is that they're not you. They, they're certainly gonna have a good option. you know, if you, if you're following somebody reparable, they're gonna have good ideas. They're gonna have, but they may have, you know, they, their, their goal might be actually to, you know, they might be almost there.

Evan (17m 41s):

you know, they, they may actually be finishing up in their investment cycle in a year. Whereas you might be finishing up in five years or they might actually be, you know, highly aggressive in what they do and they're completely fine with that. But you are not. So that's, this is what I mean by knowing yourself, knowing you are you knowing who you are. Having an understanding that what you are doing, it may take 10 years, your friends may take five, that is fine. Don't get caught up in them. Get caught up in, you know, you know your money, you

2 (18m 14s):

In that answer. You referred to a couple of cognitive biases, let's just run through a couple of them. What, what are your favorite ones? Where have people made the most mistakes? Oh,

Evan (18m 22s):

Okay. So the three I mentioned are probably the, the most known. There's one other which is called loss aversion. So I'll start with loss aversion because the reason I say that in the world of money finance, economics, it's the most attributable to that world. The man who actually, sorry, the two men that coined it, Daniel Kahneman, who is an American psychologist who is a bit of a, I have a bit of an idol on him. He won, actually won the Nobel Prize in economics as a psychologist, coining the term loss aversion. And his study with his colleague at the time, Amos Tversk ski was showed very clearly that human beings are geared to loss and what I mean by that. We are much more acute to a loss than we are to a game.

Evan (19m 5s):

So the examples that he used, I won't go into it, but I, the best way to do it in a really sort of lay slick term is if you put your hand into your pocket right now and you pulled out 50 bucks that you didn't know was there, you'd get an elation, it'd probably last you at most four hours. If, however, you knew that 50 bucks was there, you put your hand in there and it's gone. And no matter what you do, you can't find it and you've lost it. You will dwell on that. And the, the study found to upwards of a couple of weeks and that, that's, that's the difference. Now the other way to look at it is that it's doesn't, it's even, it doesn't matter how big or lo or small, so let's say you found that $50 and the elation four I is, you know, a couple of hours, even if it's $10 that you lose, you are much more likely to dwell on that.

Evan (19m 48s):

Now, why I use that example is that if you imagine that you hold an investment, a, an investment B, and an investment A is your good one, it goes up, you know, 70, 80 bucks or whatever it is, but your investment B drops by 10, your bias will jump to the B example because you are losing and you will much more fret on the fact that despite the fact, let's say it's $10 loss and you're $70 up, that your net 60 in your portfolio up, which is what it should be doing, you will dwell on the $10 loss, which you just, and you know, add zeros to it, right? $10, a hundred dollars, a thousand dollars, $10,000, you are much likely to concentrate on it rather than the 7,707, you know, blah blah, blah and so on and so forth.

Evan (20m 33s):

And that is what loss aversion is and it's it's protection mechanism. Why it's a problem is that not only does it cause bad decision making, cuz you try and make rash decisions, the studies also show that once you're in a loss making position, you are more likely to take rash options to try and co recoup it. you know, chase fast returns, start using leverage, blah, blah, blah. But the other thing it can lead to, so that's the, that's the bad decision making. The other thing it can lead to is non-decision making, whereas the fear of loss is so high that you won't actually invest. And that is just as bad because as we came back to this whole discussion at the start of this, this, this podcast, do not forget compound interest is happening in your investment.

Evan (21m 16s):

And that's, that's what loss aversion is. It's the, it's the most famous one and it's the one that is most linked to to that I'll then quickly gloss over the other three for you. Phil confirmation bias, attention bias and availability bias, confirmation bias, it's pretty clear. I mean everybody sort of knows what that is. If you've got a view, you basically will go and search out something that will confirm that view. And social media these days makes that very, very easy. If you've got a view that this is the thing to do, you can find that even though it, you know, it might not be, again, the best way around confirmation bias is to make sure that A, you've automated B, that you sleep on it is the other one.

Evan (21m 58s):

And C these days is, okay, go to social media and find your confirmation, but also find those that have the complete opposite view and ask yourself why do they think that gen like in the end, if your view is the right one, then happy days, but at least challenge yourself. So that's confirmation bias, availability bias. This is actually a challenge on the whole premise of of economics, economics and markets and market, you know, theory is we have perfect information at all points in the cycle, which is clearly not true, but that's the theory. Availability bias is actually even worse. And the fact that you have such an infant, sally, small amount of information that you can act on it. So the example would be, you know, GameStop 2021 where there wasn't a huge amount of information, but the available information that was there was that it was the right decision, all these people were doing it.

Evan (22m 47s):

Therefore a bank, this is the right thing. That's your availability bias and away you go. So availability bias and attention bias, they sort of blend into each other as well because again, attention bias is something that catches your attention clearly. And again, if it's everybody's doing it away, you go with it. So if you've got the available information that this is the right thing to do, the market is going up and x y present, the attention is being put on it, they almost work together. And again, the same principle is breaking it is a sleeping on it. Also challenging that view. Don't rush into acting. It's so hard. I know, and they sound really, really simplistic. But if they, if you can give yourself one second minute, hour to pause and just to challenge yourself that again in the terms of what we're talking about here, long-term investing, they are infinitesimally small amounts of time that can, you know, help you from making a bad decision or, or a decision that you shouldn't make.

Chloe (23m 41s):

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2 (23m 58s):

Evan, let's create a fictional listener. They've just stumbled onto the podcast, they've listened through right to this point now and their only experiences of the market is that they've got friends at the pub or friends that they see all the time and they're always talking, ah, you should buy this lithium stock or, you know, gold's going to run or what, whatever the, so the story is what would you say to them to stop them making a stupid mistake?

Evan (24m 24s):

So, well, the, the, what you're doing right now, if you've got to this point, you you're, you're clearly here to educate yourself. So that first and foremost is also part of the answer. The more broader knowledge and education you can get yourself, the more likely you are to be able to actually challenge, you know, the, what is initially probably called the taxi driver effect, right? If the taxi driver's giving you ex a a a stock tip, ask yourself why or, and again, the GameStop one is the great example. It's a real world example to show you that so many people did not stop and educate themselves to what was a very run of the mill company, right? It wasn't anything special doing something completely irrational and extraordinary in, in the market.

Evan (25m 7s):

So first and foremost, it's education. Whether it's going to read, whether it's going to listen, whether it's going to watch, it doesn't matter. It just gives you that little bit more confidence to challenge that view. The next one to also ask yourself is what we just talked about. They are them, you are you. The taxi driver effect is that's the taxi driver's want. It's not my want. Yeah, it sounds exciting. Yeah, it sounds like an interesting thing, but it's not in my overall long-term goal of what I want to do. Even if you are an assertive investor, that game stock advantage or the lithium stock advantage or whatever, cryptocurrency doesn't matter.

Evan (25m 48s):

It's not in my world. And this is again that sort of training your mind, you know, the fitness that comes with training your mind strength, adverted commas, when we talk about your mind is strength of power of will to actually make sure you go, no, that is not for me. Yes, that is for me. And that is the fitness training of, of getting routines, getting it into, and again, when we say routine, I'm just sort of going a little bit further here on you Phil, but it's like anything Arnold Schwarzenegger is the one I use here and why I use him is that Arnold Schwarzenegger said it wasn't about his training that got him to be the champion as Mr. Universe, it was the routine before it. So every night he would make sure that he gym bag was packed, that his shoes were ready, that everything, because it wasn't getting, it wasn't the gym itself, it was getting to the gym cuz he knew once he was there away he went and off he went.

Evan (26m 41s):

It's the same principle. Have your routine with your investing. I am contributing X amount per month, per fortnight, per year count, whatever else. And my goal is to be wealthy in 5, 10, 15 years by using compound interest to my advantage.

2 (26m 56s):

Have you checked out the Arnold Schwarzenegger documentary on Netflix?

Evan (26m 59s):

Not yet. I haven't a chance. Don't worry. I am, I am, I'm gunning for it. I can't wait. That's so good

2 (27m 3s):

Because

Evan (27m 3s):

Again, it's the same person, right? This and it, it, he talks about this I mean whether you like him or not or what he does it, it, these are the kinds of people and it's outside of finance, right? But his lessons apply perfectly into what we're talking about here. I mean, the way I always talk about it when I do these podcasts is that I like to run, but you can't expect to all of a sudden just go outside and run 42 ks for a marathon or 16 Ks for, you know, a bit of fun. You've gotta, you've gotta lead into it and it will take your time, it will take you several months to get you to do a fitness level that can do it. It's the same principle. So don't beat yourself up. Don't expect to go off to this podcast and go click a button and I'm gone.

Evan (27m 43s):

I've got into this mode and I'm away. It'll take time. And again, that is the hardest bit is, and that's where Arnold comes into it, his routine got him around the ability to a, make a non-decision or a bad decision and got him into a routine that once it was there, it was automatic. Even though he's a human, he was automatically just training, training, training.

2 (28m 6s):

And also I believe just to have a sense of humor as you go about it as well. Because that's so important for you, your mental attitude as you approach anything, whether it's markets or training for a marathon, correct.

Evan (28m 17s):

That's all part and parcel of this. And I think that term, just to use that straight out for Phil's term, there, there's a level of enjoyment that you can get out of this. It might feel like a chore at the start, but once you can start getting it into your routine, your psyche, it'll go from being a chore to being something that you find pleasant to something that you enjoy. It does take time again. But it is that, and it's knowing, there's again in the back of your head, knowing that your wealth is growing, the confidence it gives you in other things is incredible. Now that, again, I know that's a me, that's a me thing, but at the same time, it's something that I hope you can see and feel over time that you are, you know, that confidence, it gives you that, that understanding that through the good times and the bad there is something there allowing me to do what I want, what I want, how I want.

2 (29m 9s):

Because of the name of the podcast, obviously I wanna talk about Shares and which

Evan (29m 13s):

Is my bread and butter

2 (29m 14s):

Investing in Shares. Yeah, yeah. Sorry,

Evan (29m 16s):

What's that? Which is my bread and butter. It's what I grew up on. It iss what I cut my teeth on. I think that's right. You sort of, you sort of said it before we, we were talking about other things, but yes. Stocks in my

2 (29m 22s):

Thing. No, no, that's okay. But that's, this is where there's a bit of a nuance comes into it because, and again, talking about knowing yourself and that you've gotta train for a marathon. My my analogy is always, it's like learning a language. you know, you're not gonna learn another language in a couple of weeks. You've gotta spend time doing it, which is what you need to invest directly in the share market, however you counsel about ETFs as well. So tell us about why, what, what the place is of ETFs and why you think they're suitable for some people.

Evan (29m 52s):

I I do. So what I wanna caveat that answer with is that I believe you need both. So I do wanna put that out there. Direct investing and, and, and ETFs I think are absolutely, you know, fundamental to to why and why I say that is that again, it gets back to combat interest. But then the next thing I'm gonna answer ETFs, the advantage of ETFs is they give you a level of diversification immediately. So if you're a beginner in this and you are, you know, again, we talk about availability bias and, and and how and all that kind of stuff and how much information you need to make a decision. An e ETF takes that decision away from you because it gives you everything immediately. It gives you CommBank, westback, cba, sorry, already said cba, it, you know, bhp it gives you the ASX 200 straight away weighted.

Evan (30m 40s):

And what I mean by weighted is the size of the company to the same weighting it has on the ASX. So CBA is the biggest company by market share. It's about nine and 5%. BHP is not far behind, it's about eight and a half percent. Sometimes it jumps above them, blah, blah, blah. The advantage of your ETF is that you just buy one thing and it gives you that same weighting, your same exposure that everybody else can get as well. and it, it's, it's there, it therefore breaks that concept of, you know, getting caught with loss aversion. It breaks the idea of trying to chase a sector or, or a lithium stock concept or whatever it is. Cause it's all inside one thing. So that's great and it gives you a distribution, which as I would say, again, not advice, but the way I look at it is that I would always be trying to put the distributions, which are their dividends equivalent to be reinvesting so that it's constantly growing for you.

Evan (31m 31s):

The other way I look at it is this, it provides a bedrock or a core or whatever label you wanna put onto it. You can then allow yourself with an ETF to grow your portfolio without having to ma and it's simple without having to make huge amount of decisions. They're so incredibly cheap now, which is fantastic. you know, you, you're talking less, most of them are less than 0.1 of 1% per annum. So it's fantastic, but they're not perfect. And I think at the moment, I wanna point that out why I say that ETFs are brilliant and as you just heard, but they're not perfect. They're not going to beat the market, which is fine cuz you're not there to try and chase and beat the market. But they're also a, they, they also limit your choice.

Evan (32m 14s):

They limit your, your longer term goals to some extent because you then have to go and chase other things. And what I mean by that diversification. This is what I wanna get to, to limit your mistakes, to limit your issues. Diversification is always there. So you should have exposure to Australian Shares, you should have exposure to international Shares, to Australian co bonds, international bonds, cash property, et cetera. And that's, that's a given strategy. That's, that's a, an absolute no known. A guy named Harry Markowitz came up with this in the modern portfolio theory and it's been proven to work because it shows that on the upside it will give you better than you expect. And on the downside it will buffer you from the worst. But again, it's not gonna give you, you know, fixed income obviously is gonna underperform Equities as it should, but Equities is gonna be much, much more volatile than fixed income.

Evan (32m 57s):

Not always the case, but that's the theory. So the other part of the answer is that that's why direct ownership is still there, there is still absolute opportunity to, to look at, at Equities on an individual basis or to look at bonds on an individual basis. So ETFs are certainly part of it. But why I say that is, you know, for me, I am a more assertive person. I'm still, well at least I believe I am, I'm still young, I'm still in my thirties, although I'm getting very much towards the four handle. I know that I've got, you know, 10, 15 years, so I need to actually beat the market. I need to be getting a little bit bigger. So I've got a core bedrock, whatever you wanna call it, group of ETFs. And then I've got 20% of my portfolio that I can then look to do other things in, whether that is alternatives, crypto, gold, you know, X, Y, Z or whether that's an assertive sector, lithium, whether that's much, much higher bond chasing, you know, developing world, it doesn't matter.

Evan (33m 55s):

And again, you can hear, I'm going a bit technical here, but why I'm saying that is that this is me. And that's why I think both direct ownership and ETFs are so important. The ETF world has given people that ability immediately to create an absolute core scenario that 80% of their capital is going to be on the market return.

2 (34m 15s):

Sorry, I've got two questions in my head at once.

Evan (34m 18s):

Yeah, yeah, that's all right.

2 (34m 18s):

It's, it's terrible. I was gonna talk about gemara because I know we weren't gonna talk about Gemara and your appearance on your wealth, but you gave such a good explanation of the inverted yield curve, right? Which mind revisiting that for listeners here. Yeah, because, and I just wanna preface this by saying that the bond markets are much, much bigger than equity markets. They're, they're absolutely huge. They're, they have, they have a major, incredibly major impact on the prices of stocks. Yeah. So anyway, having said that over to you,

Evan (34m 51s):

Okay, so in the world of bonds, and particularly in the us the reason we talk about an inverted bond yield, so normally the curve, the longer time that an investor has to take before they get their principal back, the more,

2 (35m 4s):

And this is, and this is because we hear about bonds, they're being one year, two year, three year, 10 year, 20, 30 year bonds. Correct? And that, that's the duration, isn't it?

Evan (35m 12s):

Yeah, yeah. And so across that timeframe that Phil just gave you is what we call the curve, right? So the 1, 2, 3, 5, 7, 10, 15, 20, 25 and 30 is what we call the curve. So the yield that you get on each of those year term bonds makes a curve. And normally the closer to time duration, so the one year yield should be lower than the 30 year So. it should be a, you know, sort of a, almost like a a, a slight concave state all the way out when it inverts, as it clearly says, it means that the front end of the curve, your one, your two, your three or your five year has a yield that's higher than the longer dated.

Evan (35m 52s):

So you're 10, 15, 20, 30. Why that matters is that what the market is forecasting is that sometime inside the next 10 years, there will be a financial problem. So right now we know higher interest rates, we've got high inflation across the world, not just here in Australia. Central banks are telling that rates are going up, things are getting tight, but what the market knows is that sometime in that future there is going to be some form of crash, there is going to be pressure. Now, at the moment they're forecasting that in the next two years, the probability of a recession in the US is almost a certainty. So in the US the, the market that Phil'stalking about, this inverted yield curve, we compare the two year and tenure and it's always the one that's seen there.

Evan (36m 36s):

The 10 year yield, the reason we use the 10 year yield under economic theory and under market theory, the US 10 year bond is basically seen as the most secure. In fact, it's basically unbreakable. It is the most secure product out there. There is no loss to it at all because the us, the probability of the US government defaulting and not paying on a 10 year bond is next to zero. In fact, it would be zero. And therefore it's, it's the risk-free rate. That's the term that we use on term of it at the moment, the two year bond in the US is higher on the yield than the 10 year bond. And if you go back all the way through to 1900 every time, sorry, in the post, post second World War era, every time the two year bond has gone above the 10 year bond in the US it has forecasted a recession inside the next 24 months.

Evan (37m 22s):

So that is why it matters. That is why we're all looking at it very closely. And the gap in it at the moment is the highest it's been since the eighties and the early eighties. And for those of you in the history buffs, that was back when Vola was in power and he was moving interest rates at not just, you know, 25 basis points. So 0.25 or 1% at a time, he was moving them at 450 basis points. So four and a half percent in one meeting at a time. Pretty astounding stuff on side of that. So getting back to your question in terms of what's going on there, Phil, why you look at it, why it matters so much is that the markets know, or at least are forecasting that there is going to be an economic slowdown, but also it means that to fix the economic slowdown, the US Federal Reserve or here in Australia, the RBA are going to cut rates.

Evan (38m 10s):

So they know that the bond yield difference the two year, so in the next two years they think rates are gonna be higher, but in the next 10 years, they know rates are gonna have to fall because the central banks of whichever country we're looking at, here's the US are going to cut. And that's why the 10 year is lower because in the next 10 years, the probability that rates are going down is pretty high. In fact, I would almost guarantee that they're gonna have to lease it because they've, they openly admit it, they said it I mean we're doing this at the moment on the, the 15th of, of June that this morning in the US they said that, you know, these rates could go higher, but they're already at a tightening very restrictive basis. And so that can't stay forever because the economy needs to move. What I'd also point out, I'm going a little bit further here, equity markets that's so interesting about them is that equity markets tend to actually already be moving to the positive before the recession is actually called.

Evan (38m 59s):

Again, going back to post World War II era, you know, history books, the market actually already knows the recessions there because don't forget, and this is pretty true, the market theory of markets are trying to price 12 months from now, 12 months from now will be very different to what 12 months is today. And, and that's why, although the recession might happen in 2023 or early 2024, markets are thinking what, you know, basically June, 2024 looks like probably even Christmas next year and touching 2025. That will be a different scenario to what we're going through right now.

2 (39m 35s):

Okay, well I just wanted to finish off, and this is the other question I had going in my mind was that I've got my own cognitive bias that I want to add to the list and that's the, if you want to guarantee go and buy a fridge at Harvey Norman and you see too many people that they open up a position, they look at it and it just keeps on going down and down and down. and it's almost like they feel like they can, will the market to move in your own favor, but the market doesn't care about you, does it?

Evan (40m 2s):

No, it does not. So what you are talking about there is, it's probably alluding to into what we call self attribution bias and self attribution is that,

2 (40m 11s):

Oh, I knew there'd be a name for it, someone

Evan (40m 13s):

Probably come up Yeah, So it. Yeah. So why I say that, like, just listening to that scenario is you are never wrong. The environment is, but when it goes right, you are right. So never right, sorry, never wrong, always right. The market will always prove you wrong. And that's why, again, talking about your answer before about ETFs and why ETFs can remove that problem for you because it's the whole thing moving in a in one direction or not, and you're okay with it, but if you've made a decision to invest in something and it goes against you and you are argue that it's not your fault, it's the market's fault that you are willing it to go higher, that it should go higher because of, you know, the demand for lithium in the future is, you know, be four to five times it is now.

Evan (40m 53s):

And, and we know that China is coming with all those justifications that I can give to you right now still means you're wrong though, right? and it still means the market is telling you that it's wrong because you've invested in something that may actually have a structural problem, right? It might actually be, yeah, lithium as the under underlying commodity has an interesting story, but the investment in that company is actually a problem. And why is it a problem? And you haven't done enough delving into it, but your self attribution bias is going no, it's the environment, it's the company or the market not realizing that you know, this is the company, this is the one that's gonna win the lithium stock craze, or this is the one that is going to basically become the, the new AI future of the world, blah, blah, blah, when it's not, and, and your self attribution's getting in the way.

Evan (41m 35s):

So that, that's, that's what that is. Again, there is a huge, huge self-learning curve from this. And what I mean by that is that human beings hate being wrong. We absolutely hate it as a, as a, as a group of things. And you need to learn. And again, it's a lot of learning to accept your mistakes because being wrong in the market is absolutely fundamental 1 0 1, first thing you should learn, you are going to make a mistake. Not only that, I'd argue that you know, your f your investment even in an ETF or whatever it happens to be, you're initially gonna be down because obviously you paid brokerage to get in.

Evan (42m 15s):

It's those things to think about going, okay, I am wrong immediately and I might be wrong for six months. That's okay, as long as it sticks to my strategy of compound interest. But in the term of what you've done there is that I can't keep willing myself to hope the stock is wrong. It's also about accepting that no, I am wrong, not the environment and I need to change, I need to, to move away from that position because it's not fulfilling my my over 20 because then it blends into other things like opportunity cost and a few other bits and pieces like that. That's when you start hitting those kinds of problems. And that's the way to answer that question is that know that you've got attribution bias and, and how to fix it.

2 (42m 53s):

Evan remind us of the name of the book,

Evan (42m 55s):

The name of the Book is Mind Over Money. It was an absolute interesting, brilliant, tough, strange experience, but I'm so glad that I've done it. I'm really, really proud of it. And you can find it online on any good bookstore, Amazon Booktopia dims have 'em, they're, they're around. And I really do hope if you go and get one, you really like it because it was a labor of love. I try and put a lot of my own self stories in there and, and examples and, and also I want to finish on this is that Phil just asked about mistake. I openly tell you in that book, I've made multiple mistakes and I've will continue to make multiple mistakes, but I can overcome my mistakes with my long-term strategy, which is my long-term wealth.

Evan (43m 37s):

And I am well ahead in terms of where I should be. So don't get disheartened, I hope. There's a few things in there you take out of it if you do buy it, it's also around your personal life as well. And what I mean by that is that that experience that link into your real world and into your money world will seep into each other and how to deal with that in, in a way that can benefit both your personal life and also your money life as well. So thank you Phil for, for letting me talk about my book.

2 (44m 2s):

Evan, thank you very much for joining me today. It's been a real pleasure to finally talk to you.

Evan (44m 7s):

Yes, Anna, thank you so much for having me. It's been brilliant. Cheers, Phil.

2 (44m 10s):

Cheers. Thanks mate. Thanks

Chloe (44m 12s):

For listening to Shares for Beginners. You can find more at Shares for Beginners dot com. If you enjoy listening, please take a moment to rate or review in your podcast player or tell a friend who might want to learn more about investing for their future.Any advice in this blog post is general financial advice only and does not take into account your objectives, financial situation or needs. Because of that, you should consider if the advice is appropriate to you and your needs before acting on the information. If you do choose to buy a financial product read the PDS and TMD and obtain appropriate financial advice tailored to your needs. Finpods Pty Ltd & Philip Muscatello are authorised representatives of MoneySherpa Pty Ltd which holds financial services licence 451289. Here's a link to our Financial Services Guide.