VINCE SCULLY | Beware the memes when buying the themes

In this episode we go Beyond the Core with Vince Scully chief Sherpa at Life Sherpa. We explore the core satellite approach to investment, a strategy designed to balance stability and growth in your portfolio. This method involves maintaining a core of low-cost, largely indexed funds while allowing for smaller, more dynamic investments—the satellites—that can capture emerging trends and opportunities.

We discuss the essence of core investing and the importance of having a solid foundation of diversified, low-cost index funds. These core investments are designed to provide steady returns over the long term, much like watching paint dry—slow and steady but ultimately rewarding. The core satellite approach allows investors to satisfy their urge for more dynamic and potentially high-reward investments without jeopardising their entire portfolio.

One of the key themes we explore is the rise of thematic ETFs. These funds focus on specific sectors or trends, such as artificial intelligence (AI), climate change, and clean energy. For instance, investing in companies like Nvidia, which produces processing engines essential for AI, or OpenAI, the developer of ChatGPT, can offer exposure to the booming AI sector. Similarly, thematic ETFs focused on clean energy can provide a way to invest in the growing demand for sustainable solutions.

However, Vince warns of the potential pitfalls of thematic investing. The allure of high returns can sometimes overshadow the risks involved. He cites the example of the tech boom in the late 90s, where many investors bet on e-commerce sites that eventually failed. The key takeaway is to approach thematic investing with caution and to be aware of the risks.

We also touch upon the concept of mega trends—large, transformative shifts that can impact markets significantly. Climate change, for example, presents both risks and opportunities. While traditional markets may have mispriced future carbon risks, there is potential for significant returns in sectors like renewable energy and carbon credits.

Another interesting discussion point is the role of blockchain and cryptocurrency in modern investing. Vince explains the potential of blockchain technology in various applications but remains cautious about the speculative nature of cryptocurrencies. He suggests that if one is inclined to invest in this space, it should be done with a clear understanding of the risks involved.

Here's the webinar that served as inspiration for this episode:

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EPISODE TRANSCRIPT

Shares for beginners Phil Muscatello and Finpods are authorized reps of Money Sherpa. The information in this podcast is general in nature and doesn't take into account your personal situation. Do I invest in Nvidia? Who makes the processing, uh, engines? Do I invest in data centres? Because I know they're going to need lots of more data centres to drive all this stuff. Do I invest in the companies that are developing the technology like OpenAI? Do I look at some startup that's providing the data Appen will be familiar to most Australian investors, or do I rely on someone else to do this research and buy a, uh, thematic ETF?

Phil: G'day and welcome back to shares for beginners. I'm Phil Muscatello. There comes a moment in every investor's life where they're looking for a little more, where you want to diversify beyond your core long term holdings. Believe me, it happens to the best of us. But what are the traps? And how can you satisfy these urges with a margin of safety? Joining me in a return to the podcast is whispering Vince Scully, chief Sherpa at life Sherp g’day Vince.

Vince: G'day, Phil, back again.

Phil: So let's recap the concept of the core investment approach. What is core investing? And we're talking about core satellite and looking at different ways of investing because many investors, like I've done this as well, where you have your core of ETF's and you want to go and have a dabble, have a little bit of a punt. So tell us about the core of investing.

Vince: Well, the concept of core and seller comes from the general principle that for the most part, your good, solid, steady returns are going to come from a core of low cost, largely indexed funds across a range of asset classes. And yeah, so that might be some equities, some global equities, some emerging markets, some big companies, some small companies, some bonds, some golden, some cash. Most of those can be delivered algorithmically for very low cost. And the cost of a large cap ETF today is as good as zero. It really doesn't matter whether it's 0.04% or 0.07%. And so that should be the main core of your portfolio. The challenge with that is that it can often be perceived as dull or boring, and that watching compound interest work for you is a little like watching paint dry. So people have this natural human interest or desire to be doing something. And that desire has been captured by the funds management industry to deliver a wide range of niche products. Whether that's taking a uh, more active or concentrated or high conviction position in equities or themes or more, um, exotic asset classes. And that gives people the scratches, the itch of wanting to do something. And the concept of core and satellite is that you have these things floating around your core just as the planets rotate around the sun. And the expression core and satellite was actually coined about 25 years ago, so not as long as you might think, given, I guess we've had satellites since the late fifties. But a, um, guy called Harold Evansky, who is the guy who gave you the three bucket retirement strategy, is largely credited with this one. And he was working off the research at the time, which was starting to show that algorithmically driven index funds were generally the way to deliver efficient returns within a specific class. And he said, well, maybe there are other things that you should be doing where you might seek to outperform, whatever that might mean. And so he suggested that the core, and bear in mind, 25 years ago, ETF's were very new technology.

Phil: He's an american.

Vince: He's an american, yeah. Interestingly, he's an ex civil engineer who became a funds management salesman in his later years and created a financial planning business in his late forties. He was dean of financial planning at, I think, University of Texas, but certainly a US non East coast university. And uh, he sort of came to this odd conclusion that says if you conclude that active management doesn't work, and there's a lot of evidence that suggests on the whole it doesn't in most asset classes, at least not enough to

00:05:00

Vince: outweigh, uh, the extra cost and taxes that it incurs and mental anguish or mental pleasure, then you shouldn't be doing it in your core, but maybe you should be giving it a punt in a small proportion. So they have been proven that it doesn't work, maybe you should allocate a small portion of your portfolio to attempting to prove that it might be right. And so he coined the expression, and it's since been co opted by just about every scoundrel and unlicensed influencer, uh, in the personal finance space to flog all sorts of crazy stuff. Now that's not to say that it doesn't have merit, but it has been abused by, I think Robin Powell calls the industrial funds management complex to create all sorts of products, many of which have greater marketing substance than they do have investing evidence substance, and that's where.

Phil: They come from, because a lot of these, we call them thematic, ETF's now the product of research on social media. When they see what people are actually talking about in investing forums, aren't they?

Vince: Yeah. And sometimes that makes a lot of sense, that if there are genuine trends, or mega trends, as they get called these days, that could conceivably change the way markets will perform in the future. And climate change is a really good example here, that there is a chance, a, uh, probability, I don't know how big that probability is, that the markets just got this wrong, and that it is actually mispriced future carbon risk. That's a, uh, non zero probability. I don't know how big it is, but it's not zero. And so should you be preparing for what happens if the market is wrong? The markets are generally efficient, and they generally take into account most information as it comes to mind. But there is a very real possibility that we've all got this wrong, and the value that the market has placed on oil deposits or gas deposits might not fully reflect these future risks. So that might be a reason why you would, as an investor, go. Well, actually, I've, uh, got my core over here invested in the ASX, uh, 200. Maybe I should be going overweight hydrogen or overweight solar or overweight carbon credits, I don't know. But some asset that might be able to take advantage of that market mispricing. Now, that is a punt that you got to believe that you know something that the market doesn't and invest accordingly. So that obviously means you don't punt 100% of the Muscatella fortune on this. But there's a reasonable argument that putting something in a contrarian bet makes sense. The big challenge is, what horse do you back and how do you get exposure to it?

Phil: I just wanted to butt in there because there is a non zero probability of just about any megatrend emerging, really. And you could spread yourself. Really, you could, because it could be, okay, it could be climate change, or it could be, I don't know, the number of probable outcomes in the future are infinite. We don't know what they're going to be. And it really comes down to the personal choices of the investor and what they personally feel and believe in.

Vince: That's right. In that level. That's right. You go, what is your conviction that you believe that the market is wrong somewhere, and it will be wrong somewhere, but working out where it is in advance is not an exact science.

Phil: And there's a lot of very smart people, very smart brains working on these. There are all of the time.

Vince: And so identifying a, um, mega trend is possibly the easy part of that exercise. So if you go back to the late nineties when the Internet was the, uh, next big mega trend, you would have been encouraged. And there were a gazillion tech funds launched in 98 99 or 97 98 99, which were based on the thesis that the Internet was going to change the way that we live our lives. And here we are now, 25, 30 years later, when it has changed our lives. But what would you have, uh, bet on in 1996, 97, 98 on how to take advantage of that trend? And, um, people were betting on a whole bunch of e commerce sites that.

Phil: Pets.Com is the fact that, yeah, all.

00:10:00

Vince: Of those ones and very few of those still exist. The more rational investor, to the extent that such a thing exists, was generally betting on the tools, the picks and shovels of the gold rush. So they were betting on things like Cisco. So Cisco was probably the thinking man's punt on the Internet.

Phil: But that didn't work out well, did it?

Vince: Well, no, I mean, it worked really well until 2000. And I'm not sure it's recovered where it was. And certainly Cisco is not the heart of the Internet like it was.

Phil: I mean, you could make the mount the same argument that Nvidia. Yeah, occupies that same picks and shovels kind of idea in space.

Vince: Yeah. And you can go back beyond the nineties. You go back to the eighties and the far east was the, the megatrend. This was the era of the Japanese, the growth of Southeast Asia.

Phil: That's right. When they were buying up most of Australia, if people don't remember.

Vince: And you know, if you just look at the number of funds launched in the eighties with some sort of far east label on them, and we all know how that story ended. You know, Japan was 40 something percent of the MSCI global index in 89, I think 89 today it's more like seven or eight. And I drank that Kool Aid big time in the eighties and dumb decision, but actually it saved my bacon in 1987 because Japan fell less than the rest of the world. So it actually delivered the diversification benefit in my portfolio and saved me going broke in 1987. That doesn't mean it was a good decision. It had a good outcome and it was a, um, mega trend that is possibly coming true now. You know, China, India are, uh, now global superpowers in terms of economics that they hadn't been for 400 years. And so, you know, there will be very few portfolios that don't have chinese listed businesses in them, you know, ten cent. There's a whole bunch of them. So not only do you have to get the trend right, you've got to get the timing right, and you've got to get the horse in the race right. And getting all of those right at the same time is almost impossible to pick ahead of time. Now, none of that is a reason to not do any of this. It's just a flag that says, be careful about drinking your own Kool Aid. Do you really have a scientific basis for this, or is it a punt? And having a punt is an intrinsic part of australian culture, so I wouldn't be encouraging or discouraging anyone from having a punt, but I think you got to understand why you're doing it, and the role applies. Uh, for me, my desire to scratch that edge and have a punta, I go to the tab, and I know that as a mathematician, that my expected return is less than zero because the tabs New South Wales tab's payout, I think, is 96% or 92%. So I know that on every individual bet, my expected return is negative. I'd like to think that my proportion of the payouts will be higher than my proportion of the wager pool, and therefore I'll come out better than average. But I'm not naive enough to know that that's a dead set. But what it does is it scratches that urge, and I can lose a few hundred dollars on race six at Randwick rather than tens of thousands of dollars out of my retirement pool. But for other people, you know, there is a strong narrative that I know something. So I buy an iPhone, I'm an iPhone user, and therefore, Apple is something that's very tangible to me. I use iTunes. I, uh, have an Apple tv. I use an iPhone. I've got a MacBook. Maybe I should put some of my investment there as well. So that's a powerful narrative, and it's very useful in. In terms of the advice process that as a stockbroker, I've got a new story to tell every day because the market goes up when the market goes down. It's very rare that the market stays flat for more than one day at a time. So it means that I've got new news. And so investing porn sells well. It generates eyeballs, it creates new content. It's easy to create, and so it's always new news. So it gives me something new to talk about every day. And as humans, we love stories that numbers mean much less to us as humans than do.

00:15:00

Phil: And this is where. This is where megatrends emerge, isn't it?

Vince: Exactly, yeah. And so, I mean, you raised the AI point quite clearly.

Phil: Oh, I wanted to get into the AI because you could say, okay, this is a mega trend. AI is a mega trend. But how do you invest in that?

Vince: Yeah, so do I invest in Nvidia? Who makes the processing engines? Do I invest in data centers? Because I know they're going to need lots of more data centers to drive all this stuff. Do I invest in the companies that are developing the technology, like OpenAI, the manufacturer chat, GPT? Do I look at some startup that's providing the data? Appen will be familiar to most australian investors, or do I rely on someone else to do this research and, um, buy a thematic ETF?

Phil: Can I just add there that there are other companies? I mean, are you investing in AI if you invest in John Deere? Because their tractor technology is using a lot of artificial intelligence, because they've got a lot of data to deal with. Yeah. And they can use that data to make the process of agriculture much more efficient. It's another way of doing it is.

Vince: I never thought about that one. But you're right. I just about everything we touch has drone companies.

Phil: You know, they're gathering all this data about mine sites and agriculture as well.

Vince: I'm sure my new washing machine has some AI in it to work out how clean my clothes are. But, yeah, so I've got to take a punt. And the track record of punt taking, particularly in the technology space, is patchy to poor. So, you know, probably the biggest name in this space is Ark. So Cathie woods at Arkansas, between her funds, she's toasted about $4 billion of largely, um, retail investors Money. And yesterday, that is more than the total amount paid for financial advice in the US. So is that Kathy's fault? Probably not. Is it the media's fault? Possibly, you know, so she certainly makes for a great talk show. Guess so. If you are running a business news in the morning, getting Cathy, delivering some serious clicks, saying Tesla's going to the moon, that's gold. If you're a media producer, is it a particularly GoOD investment story? I don't know. I've never been a Tesla fan. I'm probably going to get lynched for this. But whilst it's great technology, it's a very unsatisfying driving experience. Maybe fast, but it's like a Trappist monk sell on four wheels and doesn't feel like what $120,000 a car should feel like. Does that mean Tesla's not a good investment? I've got no idea. I don't think the market particularly cares what Vince thinks of the latest Tesla model.

Phil: There's a lot of love out there for TeSla.

Vince: There is. And you might conclude that electric vehicles a mega trend. I think you would certainly conclude that was a mega trend. It's gone well beyond a fad or a fashion. It's here to stay. So how do I invest in it? Ah, Tesla's delivered most of its return or excess return before it joined the S and P 500. So if you waited in your core, so your core S and P 500 fund would not have had Tesla in it until it joined the S and P 500. And it was a very big company. It was bigger than much of the 500 companies by the time.

Phil: Bigger than all the other car companies?

Vince: Well, certainly bigger than all the other car companies in terms of market cap. And so, uh, your core portfolio would not have had a Tesla investment until it joined the s and P. So if you wanted to capture that excess return, you had to do something. And of course, the funds, uh, management industry is more than willing to deliver product to a language for you. And ETF's have made it easier and simpler because liquidity is much less of a problem. If I have a closed ended fund, every time someone wants to come in or out, I've got to liquidate the underlying assets. Whereas ETF's don't suffer from that problem, that most of the trading is in the secondary market. And to the extent that that secondary market differs from the price of the underlying assets, the market maker will step in and close that gap. So you can have a very small ETF, and as long as it's got a big enough of a management expense ratio, it can be profitable. And so we've seen a massive growth in the opportunities, uh, to take these positions, and many of those have got a lot of high level research in them. M so back in 2006, I launched a green, uh, energy fund,

00:20:00

Vince: which simply tracked an index, which was then called the Wilder Hill New Energy Index, which today is the Bloomberg New Energy Index, and it was an active index. So the boffins at Wilderhill were creating an index of 20 something stocks that tracked new energy. So that meant solar, wind, batteries, smart grids. Now, this is almost 20 years ago, and every quarter it looked at the best. So Byd was a member of that index back in 2007.

Phil: What was Byd, Ramon?

Vince: One of the biggest EV car companies today.

Phil: Okay.

Vince: Uh, yeah. Back then it was largely a battery company.

Phil: And so that's all an EV is basically, isn't it? Yeah, it's a battery and a couple of electric motors.

Vince: It's a go kart with a big battery. So that allowed a fund manager to very quickly and cheaply deliver a clean energy fund, which simply had to track this index. And you license the index from Wilderhill or Bloomberg today, and we're seeing that across all these ranges, that Wilderhill was probably one of the leading researchers on clean energy in those, and that's why Bloomberg would have bought them. And so they made the money by licensing this index and their research. So you were getting the benefits of very deep research to allow you to make that decision. As to how do I back the clean energy revolution, how's it worked out?

Phil: Well, what's the returns?

Vince: It's been a bit patchy. I don't know what the returns are off the top of my head. We did it as a structured product, which had some capital protection in it, which worked really well until it didn't work in the GFC. When we had the cost of options went up because volatility went up and the interest rates fell. So the cost of your production, your protection, fell, so they ended up cashing out. So everyone got their money back, but nobody made a particularly good return. But that index still exists today. I'm pretty sure you can still buy an ETF that tracks it. And so there are ways you can play the satellite story today that you couldn't realistically 25 years ago when Harold Evansky invented the coin, the term. So, you know, as with a lot of things, though, just because you can doesn't mean you should.

Phil: Yeah. And I think it's worthwhile reflecting for a moment the financial industrial complex and how many fingers are in the pie, because you just mentioned an index. You have to license an index. There's a companies, it's been. I know, uh, the Singapore Stock Exchange, for example, does a lot of indexes, indices which they then license out so that they can be benchmarked or used by a fund management company to create a fund on.

Vince: Yeah. So when you pay BlackRock four basis points, 0.04% for your IVV s and P 500 ETF S and P is probably getting one or two of that.

Phil: For the licensing fee for the using.

Vince: Of that index, which is why Betashare is using things like selective indexes, which are cheaper. Super is one of the most important investments you'll ever make. But how do you know if you're in the best fund for your situation? Head to lifesherpa.com dot au to find out more. Life SHerpa, uh, Australia's most affordable online financial advice.

Phil: But it still begs the question why is that index the one that is going to provide a return for you?

Vince: Well, I mean, I think you probably got to look at, well, what is an index?

Phil: I know, I mean, we're getting deep into the words here, but I love to actually understand this because, okay, you've got a fund, you've got an ETF or a managed fund, and it's based on an index, but you've got to really dig deep and say, well, what is that index? Why is it being created? What does it actually mean?

Vince: Yeah. So if you just look at the s and P 500 or a major.

Phil: Market, well, that's a pretty basic one.

Vince: It makes sense that, um, answer is a tool that sets out to answer the question, what happened in the market today? So that's a question that as long as we as humans have been trading, people want to know the answer to. Even the merchant of Venice. What's that line from the merchant of Venice? How goes it upon the Raalto? And up to the twenties, I think, 1920s, we looked at things like the ratio of declines to advances. So it did. More things go up than went down. And that tells me it's a good day. That's the hundred year old equivalent of looking at the screen and squinting and going, does it look mostly red or mostly green?

Phil: The heat map. Market.

Vince: Heat map. So, in the twenties, the Dow Jones industrial average was invented, which I think was 23 stocks at the time, and they were equally weighted.

00:25:00

Vince: So it just said, what are the 23 stocks that represent the major sectors across the index? And then we can track how big that, how well that basket of shares performed. And so when the basket as a whole has gone up, then we think the market as a whole has gone up. That's a fairly complicated mathematical calculation. So, uh, over time, we evolve tooth, and it's difficult to replicate in practice. So we evolved what's called a, uh, market weighted index, which is most standard index, and in that case, the basket contains more of the share that's worth more. So when you start on day one and you say, well, here's the top hundred, or the top 200, the top 500. As the market moves up and down, the value of that basket will reflect the overall movement, in that those price movements will move the relative value of each of those within your portfolio. So you don't actually have to trade every day to get the return that that basket is delivering you from time to time. You do have to go, well, actually, those three are now numbers 600, because they've done badly. Therefore, we need to replace them with new ones. And usually that's done quarterly. And, um, part of the skill in designing an index is how do you bring things in and out of the index, because you don't really want to be going, well, it's 101 today, therefore it's not in. It's 99 tomorrow, therefore we'll put it in. Oops, it's gone back to 101, we'll take it out again. So managing those ins and outs is the trick. And the other twist you get on indexes is what do I do with the bits that I trade very often. So you've got a business like News Corp, where the Murdoch family control big chunks of it. So whilst that's part of the value of the company, it's not actually available to trade. So the index might include or exclude or downweight that bit. It might look at companies that are domiciled offshore differently. So shell, I think it still is listed on both the New York Stock Exchange and the London Stock Exchange. So how those two index indexes include Shell, BHP in Australia when it was listed in the UK and in here. So all of those things go to deliver different, slightly different returns. And so it really answers the question, what did the market do today? And it also gives you a benchmark to track your own performance, because performance on its own is meaningless unless you can go compared to what? So if I'm investing in large cap australian companies, so if I've got a portfolio of 20 big companies in Australia, I should be able to answer the question, how did my portfolio compare relative to my basket of 20? How did that compare to the overall 100 or 200 or 300? And the difference in performance is that, um, measure of a whole bunch of things. It could be a measure of my skill, it could be a measure of luck. It's more likely to be a measure of factors that by choosing the bigger companies, I'm exposing, um, myself to the size factor. And large companies, as a general guide, underperform small companies, which is really a reward for risk. And so if my 20 is mostly consisting of stuff between 203 hundred, I should damn well expect a higher return than if I'd bought the top 20. If I'm not, I'm doing something wrong. Or maybe I've just got the timing wrong. So he answers the how did the market do? And how is my portfolio performing? And what the research now is that it is very difficult to consistently pick a subset of the market and actively trade it and over time deliver a higher return than the market as a whole. All other things being equal. Now, if you want to take a punt around that, that's where your satellite comes in. And how much of a punt are you prepared to take? If we're saying that active management in general doesn't work, it's not going to work any better for 10% of your portfolio than it does for 100% of your portfolio. So understand what you're getting for this ten or this 20 and that you're not just a uh, patsy for the latest fad or fashion.

Phil: So how do you identify that?

Vince: With great difficulty, Phil. I don't think there's any particular signs to it.

Phil: Is it just about like, is thematic investing just for you to be able to talk about it with your friends? In a way, I mean that seems to be the main purpose of it. I mean if it's going to be only 5% or 10% of your portfolio, it's not going to make a big

00:30:00

Phil: difference to the overall return.

Vince: That's uh. Right. But one of the things it does create, and I think this is important, is it helps with engagement. So to the extent that the ability to talk about this down at Ryan's Bar on a Friday night to your mates gets you thinking about investing in your twenties or thirties, that has to be a good thing. Just when the market goes up.

Phil: As long as it's not the same as punting as well. You're not doing it in the punting.

Vince: Yeah, I mean there's nothing wrong with a punt. I mean Australians are probably some of the biggest punters in the world and it's just ingrained in us culturally. So I'm not against having a punt, I choose the tab. But many of my colleagues choose penny mining stocks and it's certainly not my place to form a value judgment that punting on some mickey mouse mining stock owned by a few rich punters on St George's Terrace in Perth is any better or worse than horse three in race six at Randwick?

Phil: And of course this is because we've been looking at the satellite approach as being thematic ETF's, but it can be anything.

Vince: It can be, and this is potentially a um, more useful aspect of it. So you might for example say, well my core is the big developed markets. I'm going to have some australian large cap equities, some us large cap equities, some global large cap equities, maybe some emerging markets. I'm going to have some australian government bonds, I'm going to have some maybe some slightly higher risk bonds in my core and I might look at some real estate, some individual shares. So I might look at some, what I called alternatives, which used to be code for not bonds or equity. And now it means, I mean, people would often.

Phil: It can be vintage cars, it could be hard work, it could be wine.

Vince: So all of those potentially have a place in our, uh, investing life. Just understand why you're doing it. I mean, I've got a mate who collects cars and has done remarkably well.

Phil: So that's been a great asset class.

Vince: And I'm sure the amount of money he spends racing them wipes out any gain he's got on the investment side of it.

Phil: But that's not really what's money for exactly.

Vince: You've got to be looking at what you're doing. And not all of us all of the time, are, uh, alpha maximizers or excess return maximizers. And the advantage of the core satellite approach is that you capture the beta, which is the market return. You don't waste it on your behavior, you don't waste it on taxes, you don't waste it on excess fees. You can rest well knowing that you're going to capture the market beta, and then you can safely have a punt with whatever's left to scratch these issues. So, my car collecting mate, I mean, he lives a great life, but I don't think he would say. Well, other than to his wife, I don't think he would say that if you really pushed him on it, that overall he's ahead on his car collection. The collection itself probably is ahead, probably delivered a better return. But, uh, the amount of money he spends racing them, or more than point fixing them up after he races them, would wipe out most of those. I used to have a lot of clients who had taxi plates in their self managed super funds, and that was a highly profitable investment until Uber came along and just killed it. And that government monopoly destroyed the prices of those, uh, almost overnight. So just understand why you're doing it and value the outcome that that's giving you. But don't kid yourself that it's. It's a better risk adjusted return. It might be, but have fun.

Phil: Does life Sherpa offer any of these kind of thematic opportunities in the portfolios?

Vince: We generally don't. So we would say to our members, look, let us look after the core, your fortress. So we are evidence based investors. So we construct portfolios based on modern portfolio theory, mean variance analysis, and come look at the evidence and construct a, uh, portfolio that will give you a. Well, it's a market return within the sector you choose, but the value is actually, which of the sectors we're choosing. So, when I recommend that your australian equity large cap equities portion of your portfolio should be fulfilled using Vas, the Vanguard australian share fund. Vas doesn't know I've recommended it. It doesn't know that you haven't thrown a dart at the dartboard and picked it. It will do what it does. My job as a portfolio constructor and as your advisor

00:35:00

Vince: is to make sure those market returns end up in your pocket. And the reasons they won't end up in your pocket is largely your behavior. And your behavior is largely influenced by the asset allocation. So by aligning an asset allocation to your psychology into your goals and objectives, you will end up with more in your pocket. If you look at the Dalbar, uh, research. Dalbar's a us research house, and they track fund performance versus investor performance. And consistently, individual investors, in their case, they measure the S and P 500. But you could do this in any market that the average investor in the S and P 500 underperforms the S and P 500 by between three and 5%, depending on what period you look at it. And that's because humans naturally put more money in when the market's booming and feel reluctant to invest when the market's not. And therefore, they're buying high, selling low, and that's a recipe to lose Money. So where a lifeshipper, ah, member is keen on, um, having a punt on lithium, Orlando, climate change or whatever, we would encourage them to do that themselves. And we provide them with a share site subscription to track both the tax implications and the, uh, relative performance of all of that. And for most people, that's a hobby. It's not necessarily a pure investment strategy. And I think understanding the difference is critical.

Phil: Well, it's something to talk to your mates about, really, isn't it? Absolutely, that's right. So crypto, this could be considered to be a mega trend or an emerging theme or something. I don't know what even to categorize that. What are your thoughts on crypto, uh, as an alternative asset class?

Vince: I mean, it's certainly an alternative.

Phil: People love to talk about crypto.

Vince: They do. And it's a bit of a male thing that almost all of the new male members that come to our digital door will have some holding. And this is a real classic 1990s dilemma that you can generally, I think most people would accept that the blockchain has a role to play in recording and moving assets around the world. Now, blockchain is just a distributed database. And, um, we've had them since the eighties. So what's special about the blockchain? It allows us to do it in a permissionless way that you don't need a central authority that you have to trust and people can update it. And that's got application where you have a broad range of people updating stuff and tracking agricultural commodities through the chain from the field through to your stew that you buy at the local cafe is one of those sort of applications. Whether it's got an application in moving cash around the world or tracking the uh, registration of shares is a much harder conclusion to come to because in many cases having a central authority adds value in that chain and the cost of going permissionless is very high.

Phil: Is that a trust issue?

Vince: No, it's more about bitcoin, for example, achieves this permissionless by having what's called a proof of work. So in order to get the right to update the blockchain, you have to solve this mathematical puzzle. And that consumes a whole bunch of energy, which has to be paid for somehow, and people have to be rewarded for doing that work. Creates cost just as swift, for example, clips the ticket on every dollar moved around the world. So it's not unique to blockchain, but it does come at an inherently higher cost. The other option is used in, uh, ethereum, I think, which is more a proof of stake where you actually have got to put some money up. So this is all really about proving that you are who you are and that you have some stake in correctly updating the database. So there are absolutely places for that. Some of the suggested uses, particularly around currency exchange around the world, is largely driven because the existing incumbents are extracting higher prices than they need to. So if you're running swift or visa, you actually have a dominant market position that you can protect by dropping the price over time. So where the application is in finance is, I think, still open to question. But let's assume that you accept that the

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Vince: blockchain is the way of the future. And I think most people will accept that it's got some role somewhere in tracking something. Your next question is, well, how do.

Phil: I invest in it?

Vince: How do I invest in it? So what am I going to buy? I could buy, uh, graphics cards, I could buy clean energy because, you know, these guys use a lot of, uh, and in fact, some of the best miners, the list of miners actually make more money out of trading their energy than they do out of the bitcoin mining itself. I could invest in an exchange that trades these things, or I could invest in the coin itself, and I invest the coin or token itself. I still now have to pick one. And many people, particularly the early adopters, have made a lot of money in this space. There's no doubt about that, that it has created a significant number of extremely wealthy people. Does that mean that you tomorrow can make Money out of this? That's a tougher, uh, question to answer. And is that a reason not to invest in it? Well, again, I would put this in my tab category. If it floats your boat, go and do it. But don't necessarily kid yourself that you're investing because you have no idea. And it's very hard to get real transparency in what's happening. We have this illusion of transparency because we can see every movement on the blockchain. So you can see every coin that moves from address a to address b. What you don't know is who owns address a, uh, and address b, and why that transfer happened. And there are big chunks of the stock held by some very big players. So supplies are really hard one to get a handle on. I probably stay away from some of the smaller coins, but if you want to have a pun, I'm not here to cast judgment on how people should enjoy themselves.

Phil: And again, getting back to thematic ETF's, there's different, different kinds of thematic ETF's which do invest in crypto, either crypto directly or crypto exchanges or various other.

Vince: That gives you a bit of a broader thing. So rather than have to pick one coin or one technology or one application, you go, well, let's pick the 20 stocks that are most likely to benefit from this trade. That's a better way to have a, uh, more structured approach, I guess you call it. Obviously, by diluting your stakes, you're diluting your potential upside, and your downside is fixed at your investment. So is that what you really want to do? That's the challenge in a lot of this, is why am I doing it? And am I more concerned in the moonshot, the, uh, 0.00 or 1% moonshot, where this could turn me into a squillionaire given that my downside is capped. That's not a bad way of looking at it, but it certainly makes for great dinner party conversations.

Phil: Vince Kelly, thanks very much for joining me today.

Vince: Phil Muscatello, thanks for having me. Thanks for listening to shares for beginners. You can find more@sharesforbeginners.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.

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