InvestSMART Radio May 27th Transcript

Gaurav Sodhi, deputy head of research with InvestSMART joins Steve Price to help break down the share market.
By · 27 May 2018
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27 May 2018
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Steve Price: Yes indeed we’re very lucky to have the people from InvestSMART with us, because if you’re thinking about investing and you need some advice on where to put those valuable investment dollars, InvestSMART are the people to give you the right advice. We had the group’s chairman Paul Clitheroe in the studio with us last week taking calls. If you’d like to tap into the expertise of InvestSMART give us a call on 131 873 no matter where you are around the country. You might be thinking of starting up a share portfolio yourself, you might have a question about property, you might have a question about superannuation. We’ll attempt to answer those for you. This week I’m pleased to say we have one of the very smart men from InvestSMART, Gaurav Sodhi, is their deputy head of research. He’s in the studio with us. Nice to meet you, thanks for coming in.

Gaurav Sodhi: Thanks Steve, pleasure to be here. Thank you. 

SP: So, what makes a deputy head of research? What is your talent Gaurav? What do you bring to InvestSMART, and what are you very good at doing? 

GS: Well the job actually involves a really gentle balance of incredible arrogance and incredible humility, because every day we come into work and we tell millions and millions of market participants that we are right and they are wrong. So that’s the arrogant part. We have to take a strong view of companies trading on the ASX, and often, well we always take a view that is contrary to what everyone else on the market is doing. So that’s the arrogant part. Humility also comes into it, because we are very aware that you can often be wrong. 

SP: Yeah, I was going to say, do you get it wrong?

GS: Yeah of course.

SP: And anyone who tells you they never get investment advice wrong would be making that up, right?

GS: Yes. And anyone who is investing properly needs to adjust their expectations to allow for mistakes and allow for being wrong. It’s not like a job where, if you’re an airplane pilot and you don’t land the plane one time out of a thousand, you’re still a pretty poor pilot. But if you’re an investor, and seven out of ten stocks you recommend or buy go up, and three go down, I reckon you’re doing really, really well. That would put you probably among the best investors in the world. It’s a profession that demands you being ok with being wrong quite often. And I think that’s probably the hardest part of it. It’s actually not the analysis. The analysis is probably the easy part. The hard part is dealing with the fact that the world is so uncertain, and that often we make mistakes and are wrong because of all that uncertainty. The psychology is the hard part.

SP: Give us an example of your contrary thinking with a real incident, a real company. 

GS: Yeah, so. Just recently, we actually bought Flight Centre about a year ago. Everyone would know what Flight Centre is -

SP: They’re a sponsor on this program, actually. We have a travel segment later tonight.

GS: Well then everyone would definitely know it. It’s a big retail travel business and it has outlets, thousands of them, all over Australia and all over the world. Everyone typically thinks, well we go through these five or ten year cycles where the market has a big freak out when it realises that a lot of Flight Centre’s competition is actually online, and it remembers that a lot of people now buy their airline tickets and hotel bookings online. And so they get worried about this large retail network, and how expensive it is to maintain, and that Flight Centre will get disrupted. Well, that concern reared about a year ago when Flight Centre’s share price just about halved. So everyone thought that this was a business that was going the same way as newspapers and television. That it was going to be disrupted by the internet.


SP: And the taxi industry.


GS: Yeah, that’s another one.


SP: That’s a big one, isn’t it?


GS: And there’s a good reason for thinking that. In business, disruption is a constant threat. Industries are always coming in and going away. So it’s not wrong to worry about that, but in this instance when we looked at it, we just thought that the economics of retail travel are just so much better than the economics of the online web services. And we thought, well look. This is a business that is going to survive. The owner has a big stake in it, they’re still super profitable, there is lots of cash coming out of this, and the price just got really, really cheap. So, we actually bought some for our fund, we recommended it to our members, and we are now sitting on about 100% gains and collecting very generous dividends.

SP: That must make you feel really good, when you pick one like that.

GS: You know, there is nothing better than picking something right that everyone thought you picked wrong. It’s very satisfying. And it’s also balanced by, very often we pick things and we buy things that everyone tells you you’re silly for buying, and when it turns out that you’re wrong, you look like a bit of a mug.

SP: How did you get into this stock picking business? What was your background?

GS: Well I actually worked as an economist. I went to university and trained as an economist, and worked as an economist for many years. But I actually started trading and investing as soon as I got out of school.

SP: As a teenager?

GS: Yeah, as a teenager. After school I won a scholarship to go to university, and I used that scholarship money to invest. Well, I say invest, but I actually lost pretty much all of it very quickly. But it was the best lesson that I could ever hope for. And the worst thing that can happen to you as a new investor is that you go out and you start making money straight away, because that robs you of the very important lessons you need to learn in your early years. 

SP: Yeah, so you wouldn’t be as cautionary. Phil in Melbourne has a query for us both– Phil g’day.

Phil: Yeah, hi. How’re you going guys?

SP: Yeah we’re good. Gaurav’s here with me too.

Phil: Hello Gaurav.

GS: Hey Phil.

Phil: Yeah, well I am a shareholder… Your last comment is very interesting because I was a shareholder of Bellamy and I got a real smacking there about a year ago or two years ago. But I’m now a fairly substantial shareholder in A2. And I’ve been watching the market over the last week/week and a half, and we’ve lost 25%. And it just seems to be based on institutions manipulating the market. What’s your opinion on that, and what can an investor do to protect themselves around that?

GS: Yeah, look. Well we try, when we are looking at potential investments and companies, we really want to understand the economics of the company and understand the business dynamics. I think those are the things to focus on, rather on the mechanics of who’s buying shares and who’s selling shares and what are the institutions up to. I think it’s always best to think about your own internal reasons for buying a company, and then measure results against those internal reasons.

SP: So, are you bullish on A2 milk?

GS: No, we’ve been quote bearish on A2 milk for quite some time actually.

SP: That’s not good news Phil!

GS: Look, its done very well. And we’ve sat back and seen the share price go up a long way. And I’m perfectly happy to miss out on those really big gains, because I’m not sure how sustainable it is. When you look at what the business it, it generates very, very high returns, and one of the great dangers of business is very, very high returns in an environment where there’s low barriers to entry. What high returns signal to competitors and everyone else, is that look, there is a lot of money to be made here if you can do what we are doing. And I just think it’s quite easy to replicate what they’re doing.

SP: Go on Phil.

Phil: I was just going to say, you lied. I respect what you’re saying, and I’m not going to ramp up the product. But you’re wrong. And maybe you should invest. It’s a unique product, and you’re absolutely right and it’s going to attract competition. But competition is good for a product where most of the competition up until recently, was saying it’s a snake oil. And actually, now they’re joining the snake oil party.

GS: Exactly. They’re joining the snake oil party. So they’re replicating the exact same product.

Phil: But, it’s going to take a while for them to breed up A2 herds. And also, we have the IP. So to your point, I’m sorry.

SP: Thank you for our call. I’m happy for you to talk it up. And I hope at the end of the day, when you ultimately do sell out, you walk away with a profit. How do you know when to get out of a share that has increased substantially Gaurav?

GS: It’s actually one of the hardest things in investing. Buying is probably the easy part. Selling is almost always the harder part. And when we buy a business, we always have an idea about what we think it is worth, and at what price we will sell it. So, you have a sell target in mind at the moment you buy it. And that sell target can change depending on the performance of the company while you are holding it, but you’re always thinking about the sell price as you’re holding it. And as it approaches fair value, I think it’s time to sell. A lot of investors make the mistake of continuing to hold a business simply because the price is rising. And that’s where you get in trouble, because you are exposed to the big whack when everyone in the market realises that the price here is overdone. And it can be a painful experience.

SP: We’re very lucky to have Gaurav Sodhi in the studio with us from InvestSMART. We’ll come back and talk some specifics in different fields in a moment.


SP: We are very lucky to have InvestSMART with us on board, giving advice for us on where we should be investing. Gaurav, explain how the InvestSMART model works. 

GS: So, it is a ‘do it yourself’ model largely. We have a website – – and you can jump on that website and we have a few different options. So, you can invest in funds that we run, you can purchase research, you can run your own investments by yourself, or you can purchase funds run by thousands of others. So pretty much any fund in Australia, you can purchase on the InvestSMART website. Probably the best thing about it, is that there’s a free portfolio manager on there. If you don’t want to buy anything, that’s perfectly fine. But the portfolio manager tool is free and just lets you monitor your investments to see how you’re going. And it will suggest research when research pops up for companies you own.

SP:   Jump online folks and have a look. The InvestSMART forum, by the way, continues. The InvestSMART team will be in Sydney CBD next Thursday May 31. Their topic next week is ‘Building a Portfolio to Weather Any Storm.” If you want to register, go to and click on ‘Events.’ InvestSMART, next Thursday in the CBD. You’re a boxer, I’m told?

GS: It’s been a long time. You know, my bio hasn’t been updated in a long time. When I was younger, yes Steve. But it’s been a long time.

SP: Haven’t boxed for a while?

GS: Not for many, many years.

SP: I would have thought that boxing and tactical movement in the stock market sort of went hand in hand. You know, when to throw a punch and when to retreat.

GS: Yes, well there’s a common misconception about boxing that it’s just about two guys duking it out and throwing punches. In fact, boxing is a very tactical and strategic art, and it’s always the smarter guy who will beat the stronger guy in my view.

SP: We’re sitting at the moment watching live on television the horror of the banks unfold, and some of the stories we’re hearing are just horrendous. All of us who have superannuation funds, whether they be self-managed or industry funds would have a financial interest in the big banks. I mean, I don’t think there would be too many super funds, Gaurav, that wouldn’t have banks shares. What’s going to happen with them? I mean, the ANZ is sitting at a 52 week high, and so is the NAB. 

GS: Yeah, well the share market hasn’t shown too much concern about the Royal Commission. And it’s probably too early to know what the impact of that commission will be. Two things are very clear. Internationally, we’ve had these sort of hearings before. In the UK for example, the banks have gone through a very similar process and they came out of it really scarred and damaged. There’s been billions and billions charged and paid in terms of penalties and compensation and fees, and those penalties have run for a number of years. Almost a full decade in fact. So, if we follow anything like the UK model, then the share market is taking a very sanguine view of potential penalties. We’ll put that to one side, though. The other impact of the royal commission is that it is forcing the banks to alter their business models. And you’re seeing that happen already. A lot of the banks have now announced the sale of subsidiaries, the slimming down of their business lines, they’re selling things like wealth management and insurance, and they’re focusing back on that core banking function. ANZ and NAB, who for years went off overseas to try and establish banking brands overseas, have retreated. They’ve sold their international businesses, and have come back to Australia as well. So you’ve now got four banks who are much more concentrated in the Australian market, and they’ve focused on this domestic market, and mostly on simple, basic banking. And I think that’s a good thing. It makes the banking sector stronger, and more simple.

SP: Most super funds hold bank shares, if I’m not mistaken, because you do get decent dividends. Does that slimmed down business mean that you’ll get less of a dividend, and does that make it less attractive?

GS: Yeah look, dividends are a problem. Not just for the banks, but for a lot of blue-chip businesses. Australia has been notorious in international markets for probably paying too-high dividends for a very long period of time, and our taxation system encourages the overpayment of dividends. If you look at our payout ratios, which explains the proportions of profits that get paid out as dividends, Australian companies typically pay two or three times as much as international companies do. And franking explains a large part of that. There is an appetite from Australian investors for lots and lots of yield. The banks are certainly at risk; their dividends are at risk. And they’re at risk because the regulators are changing how much capital they have to put aside when they make loans. And they’re actually increasing the amount of capital that they have to put aside, which actually reduces their returns. So without volume growth, without lots of new loans being written, it is difficult for the banks to grow, and hence, it’s difficult for those dividends to grow. Also, the last twenty years has probably been the most benign and easy banking conditions in corporate history.

SP: Even through the financial crunch?

GS: Even through the financial crunch. Australian banks weathered that really, really, well. And they did that with some assistance from the government. And also, it helped that Australia didn’t fall into recession. We haven’t really seen a recession in this country for a very long time. And we’ve forgotten that banking is a deeply cyclical business, and it’s a Fragile business model at the best of times. Remember, you’re taking in short-term deposits and you’re making long-term loans.

SP: You’re making me feel nervous about my super now.

GS:  So, a bank on any day of the week is technically in default. And risk management is absolutely crucial. It’s also crucial to understand that these are cyclical, and it’s been a long time since anything bad has happened in the Aussie economy.

SP: Adam from Padstow, you’ve got a question for us. G’day Adam. 

Adam: Hey, how’re you going? Thanks for that.

SP: Yeah good.

Adam: Just a quick one. I’m thirty-five years old, I’ve got the house paid off, I’m doing my full contributions to super, and at the moment I’m sitting on about $200,000 in cash. And everyone’s telling me, don’t put it in shares, don’t put it property, everything is slowing down. So I’m sort of looking for some opinions on what we should be doing with the money, me and my partner. 

SP: Gaurav, Adam’s in a good position if he’s got his house paid off and is sitting on a lazy $200,000 to invest. 

GS: Yeah, I’m actually thinking maybe Adam should be sitting in this chair and we should be listening to him! Well congratulations on the terrific position you’re in, that’s really, really, good. You must have done some really clever things.

Adam: Is there any ideas on what to do with it, you think? Should I keep it in cash? 

GS: Look, sitting in cash always seems like a risk-free idea, but sitting in cash is actually – at your age in particular Adam – is actually quite a risky position as well. Because inflation is eating away at your money every year, and if you’re not generating a decent return on that money, it will be eroded over time. So, it is a good idea to put that money to work. There are two ways, really. You can do it yourself, or you can go to a financial product to do it for you. A managed fund gives you instant diversification and the idea is that someone is actually managing the money for you. And that’s a sensible and smart thing if you can find a fund manager that you admire and trust.

SP: So, I guess Gaurav, the question there is trust. Everyone’s got to, I guess you’d agree with this Adam, that the hurdle of trust is the big thing to get over, isn’t it?

Adam: That’s what I have a real hard time with. I was more leaning towards something like ETFs but that’s more passive I guess than a managed fund I take it, because if you’ve got a managed fund someone is looking over it for you, yeah?

GS: Yeah, ETFs are actually a really good idea as well. There is nothing wrong with ETFs. I actually  think for most people, ETFs should be a part of your portfolio. You’ve just got to be a bit careful about the structure of those ETFs and what market you’re trying to mimic. ETFs have exploded in recent years so they’re actually ubiquitous. Just be careful about the market you’re trying to get exposure to when you choose an ETF.

Adam: Are there any managed funds you would recommend at all?

Gaurav: Well, funny you should mention that Adam. Because we are actually listing a managed fund in the next couple of weeks, an income fund, and we’ve been running that fund for fifteen years.

SP: This is your Australian Equity Income fund?

GS:  The Australian Equity Income Fund.  

SP: So how does that work?

GS: We manage that ourselves internally. We’ve been running that fund for about fifteen years as a model, and about five years as an investable fund. And we’ve achieved about 12.5% per annum for fifteen years.

Adam: Oh wow.

GS: I’m involved in the running of that fund, and we’ve got a team who knows what they’re doing. They’ve been doing it for a long time. 

SP: So that’s invested in Australian equities? 

GS: Yep. And the idea there is to try and generate income, and to generate growth. Well look, there are lots of options there. You want to look for a fund manager with a track record, and also look at the process they use. The worst thing to do is just pick the fund manager who made a lot of money last year, and not look at a longer track record. I think what you want is a deep track record that runs through recessions, runs through the business cycle and can tell you about the longevity of that fund manager. 

SP: We can’t give you the direct advice Adam, but I reckon you might have found at least a fund that you should have a serious look at.

Adam: Yeah, no I have, thank you very much for that guys.

SP: Good on you mate, hang on there for a minute and we can give you the contact details for InvestSMART. We’re not saying put your $200,000 in there, but that fund looks like it has a really good track record, doesn’t it? 

GS: Yeah, well we’re very proud of it. It’s been established by; I think we first set it up in 2001 as a model. And we made it investable in 2015 I think. I’ve got some money in there, and everyone who is working there has some money in there. That’s the other important thing. The people who are working in the fund need to be invested in the fund. And they need to have some sort of shared experience with the other investors. That’s another important part.

SP: So that’s returned 11.5% since inception, compared to the benchmark of 7.9%.

GS: And it’s done so by investing mostly in larger, safer, blue-chip names.

SP: Sounds very good.


SP: Resources, Gaurav. Where are we at with resource investing in this country?

GS: Well you almost think the boom is back.

SP: Really!

GS: It was a dire situation a few years ago, and look, a few years ago was the time to be buying resources, as we were doing in our funds. We were buying resource stocks a few years ago because they were cheap. They are the ultimate cyclical businesses. So, they do very well when prices are high, and they do really badly when prices are low.

SP: So, you’ve got to hang in there? You’ve got to be there long-term.

GS: And you’ve got to sell and buy. These aren’t the sort of businesses you just stick in the bottom drawer and stay with. This is one part of the market, you won’t hear us say this very often because we’re long-term investors and don’t like to trade very much, but this is one part of the market that you’ve got to buy and sell.

SP: And the market at the moment, in resources, it’s in the uptick. I mean we went through the downturn. How far back into the cycle upwards are we?

GS: Look, commodity prices are higher. But it’s not really commodity prices that are driving profits and share prices at the moment. And that’s the most unusual thing about resources at the moment. Usually, it’s just higher commodity prices and profits go up because of that. But the management teams of the big resources companies have been so shocked, I think, by the crash in resource prices, that they’ve actually changed the way they do business now. Resources are famous for being capital sinks – they make money and they lose money. They’re now actually focusing a lot more on productivity, on shareholder returns, on cost-cuts. And there is much more cash-flow coming out of the likes of BHP and Rio today than there was at the peak of the Chinese boom. And I think that is really exciting. We own some BHP in our portfolio, and we’ve done that for some time. I think the management quality at BHP has improved out of sight. We’ve been really critical of their company for a long time, but the entire sector has just improved.

SP: It’s been fascinating to have you in and pick your brain. Thank you Gaurav Sodhi. We’ll talk to you soon.

GS: Pleasure. Thank you Steve.  

SP: That’s Gaurav Sodhi from InvestSMART, their deputy head of research. We’ll be back with InvestSMART next week.



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