In this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp are joined by Scott Phillips of the Motley Fool Australia to discuss some global investing trends that American investors may be overlooking -- and to provide a little advice for people who might be thinking of visiting his marvelous nation.
But first, they talk about one of the most anticipated annual missives in the investing world, Warren Buffett's yearly letter to Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) shareholders.
A full transcript follows the video.
This video was recorded on March 6, 2018.
Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick and I'm joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool and we're also joined in the studio, today, by Motley Fool Australia Scott Phillips.
Scott Phillips: G'day, Alison! G'day, Bro!
Robert Brokamp: Hello, Scott!
Phillips: It's good to be with you guys!
Brokamp: It's great to be with you!
Phillips: It's kind of good to be on the inside. I listen to this show every week, and on the other side of the glass is kind of cool.
Southwick: And you are legit from Australia, so I don't know what you get out of our show. You're like, "Oh, great. Someone asked about a Roth IRA, again."
Phillips: I know more about Roth IRAs than I need to know. I'm probably Australia's resident expert now on Roth IRAs, but I enjoy the rest of the show.
Southwick: Well, we're not here to have you talk about Roth IRAs. You're here to share some global investing trends that American investors may have overlooked. We'll also cover the big takeaways from Warren Buffett's annual letter to shareholders and get some advice for traveling to Australia. All that and more on this week's episode of Motley Fool Answers.
__
Southwick: Before I ask you what's up, Bro, we should probably address the Australian in the room a little bit more.
Brokamp: Sure, let's do it.
Southwick: So, Scott...
Phillips: This is going to hurt, right?
Southwick: No. Scott "The Boomerang" Phillips, is the director of research from Motley Fool Australia. I should tell you that my husband came up with me calling you "The Boomerang" because we hope you'll come back.
Brokamp: Hey! Nice!
Phillips: That's not why, is it?
Southwick: What?
Phillips: That's not why, is it?
Southwick: No, that's literally what my husband [said]. Like you should call him Scott, but you should give him the nickname Scott "The Boomerang" Phillips, because you hope he'll come back on the show.
Phillips: Or because you hope he goes back home.
Southwick: No!
Brokamp: No! Not at all!
Rick Engdahl: If you don't come back, we'll just call you the stick.
Southwick: For now, you're the boomerang and we hope it's true.
Phillips: That'll do. I'll take it. I'll take it.
Southwick: ... otherwise Scott the stick Phillips. You're the director of research for Motley Fool Australia. Scott, what has your Foolish journey been? You've been here longer than I have.
Phillips: Yes, I've got a really cool, long and very exciting thorough story and I'll save you three-quarters of that, too. The short version, instead. I was a Motley Fool member way back in 1998. Back in the big, bad, old days. Bro, you would have been here. Plenty of people are still here. They were here at the time. That's kind of cool. I was a Motley Fool reader. There was only a U.S. site way back then. Fast forward to 2010 and completely on spec I see an article on Facebook with Tom Gardner quoted saying, "Hey, our next journey is international. We're going to do something with that." And I thought, "That's interesting," and completely out of character for me I say, "I'll email Tom Gardner on spec."
"You don't know me. I don't know you. You don't live in Australia, but if you ever turn up, I'd love to be involved somehow. Let me know." Three days later I get an email from Bruce Jackson who says, "Hey, I'm the new general of Motley Fool Australia. Let's chat." Fast-forward seven years and here we are.
Southwick: Oh! Actually, you don't predate me by that much, then.
Phillips: There you go. I just look old.
Southwick: Because I started in 2011.
Phillips: There you go.
Southwick: I thought you'd been here forever before me.
Phillips: No, no. This is just the face I carry.
Southwick: We're contemporaries. This is wonderful. What were you doing before you came to The Fool?
Phillips: So, I had a big background of largely what we call commercial management in Australia. Kind of management, accounting, decision-making, finance, and marketing, and all that kind of good stuff. So, the great thing about it is [and we'll talk about Warren Buffett a little bit later], but here's a line about being a better business and because he's an investor and vice versa, that's exactly my journey. I worked inside businesses trying to get the best out of them. Seeing what works, what doesn't, and I get to go to the other side of the screen and say, "Hey, now I get to look at businesses and say, "Are they doing it well? Are they doing it badly?'" That's kind of the story.
Southwick: That's wonderful. I guess I should say, "What's up, Bro," and then you're going to say the Warren Buffett shareholder letter and then I'm going to be like, "Hey, that's interesting. What would an Australian man care about Warren Buffett?" Then you would say, "Well, I've actually been to the shareholder's meeting, and I care a lot." Should we just go ahead and do that? Yeah?
Brokamp: Sure.
Phillips: What's up, Bro?
Brokamp: Well, there's this guy in Omaha who writes a letter. Yes, so Warren Buffett's annual letter, highly anticipated every year, came out toward the end of February. It's many pages long, but I came away with four takeaways that are sort of financial planning, investing related. I'm sure, Scott, you have some thoughts. But I'll start with No. 1 and that is the wind is at investors' backs and for two reasons.
The opening paragraph of the letter has been basically following the same format for 30 years. Just the numbers change. It begins this year with Berkshire's gain in net worth during 2017 was $65.3 billion. However, in the next paragraph he points out that only $36 billion of that came from operations. The other $29 billion just came because of the new tax law. A lot of investors have been thinking [about the new changes in tax law] -- which among other things lowered the tax rates for corporations -- and how that is going to affect my investments.
Buffett addresses it right out of the gate in the letter and says that basically it almost doubles the amount that they can contribute to their growth in net worth. And that's just the beginning. Many companies are going to see the same sort of boost to their bottom lines because of the new tax law, so that's one way that investors have the wind at their backs. He didn't use that phrase talking about taxes, but he did use that phrase in another context. That is a recurring theme with Buffett.
He pointed out that he and his partner, Charlie Munger, don't look at their stocks as tickers that you buy and sell based on what a pundit says, or whether it's up or down, or what the market is doing over the first few months of the year, like in this year where the market has been suffering significant volatility. They see it as basically being partners in long-term businesses. He said that is basically the wind at the back as a typical equity investor in America.
Now, I assume in Australia, you sort of feel the same way in that over the long term, clearly when you look at it you've got the wind at your back.
Phillips: Yes, you've got it, Bro. The Australian market -- Australia is kind of like America's little brother. Joe Magyer, our colleague, who some of your listeners may know was here as well, this week, and he was talking about the fact that America and Australia, we're kind of cousins. We had the same parent in the U.K. way back in the day. You guys separately a little more violently than we did, but in any case, kind of same idea. So, we are very similar as an economy, as people, as markets. Absolutely. I like to call it democratic capitalism and the power of that is just amazing. We have very much the same sort of systems and laws in entrepreneurship that you guys have, here.
Brokamp: Right. That brings us to No. 2 and that is bonds are actually riskier than stocks when you look over the long term. And there are different ways to define risk. Buffett in the letter defined it as "investing is an activity in which consumption today is foregone in an attempt to allow for greater consumption at a later date. 'Risk' is the possibility that this objective won't be attained.'"
And he said if that is your definition of risk, investing in so-called risk-free bonds is actually not going to get you to where you want to be, mostly due to pretty low returns, as well as the loss of purchasing power during inflation. Certainly, in any given year, as he points out, the stock market is riskier than bonds, but if you're looking at it over a longer time frame, it's actually riskier to be in bonds, because you're not going to be able to meet your goal.
He pointed out in his letter that over all of the 43 10-year holding periods since he's been in charge of Berkshire since 1965, in all of those 10-year periods, the market has been up more than it has been down. That does not mean, by the way, that over all those 10-year periods the S&P 500 has made money, and there have been a couple where it's lost money and those are actually relatively recent periods that ended in 2008 and 2009. There have been several where when you look over a 10-year period, the annualized returns were in the low single digits, so it's not been great, but over the long span of history, when you look at 10 years or longer, you're more likely to make money than not.
Southwick: No. 3.
Brokamp: No. 3. You might take that to conclude that you should put all your money in the stock market. All in. But actually, that's not Warren Buffett's advice. At the end of 2017, Berkshire held $116 billion in cash and U.S. Treasury bills which is up from $86 billion at the end of last year. Actually, they're building up their cash hoard. Why is that? On the one hand he's saying it's silly to be investing in these low-returning, fixed-income investments. On the other hand, they keep building up this big pile of cash.
There are two reasons for that. One of them is in the letter Buffett says it makes sense to buy stocks at the right prices. In the letter he basically said we cannot find bargains at this point. All the deals they looked at last year -- the prices were just too high. They're willing to sit on cash and wait for better prices.
And then the other part is basically an emergency fund, and he cited the fact that in 2008 and 2009, when many people were panicking, even some of the biggest banks were finding someone to lend them money because they had such a cash crunch. Berkshire was able to say, "OK, we'll lend you money" because they had the money, and they want to be in that position, so some sort of macroeconomic event isn't going to cause them to go begging to a bank.
But it's also important to remember that Berkshire is largely an insurance company. Buffett estimated in the letter that in any given year, there's a 2% chance that there could be a mega catastrophe that costs $400 billion dollars. To put that in context, he estimated that the hurricanes from last year that affected Texas, Puerto Rico, and Florida cost $100 billion. So, he's saying there's a 2% chance in any given year that we could face a catastrophe four times as expensive, but because Berkshire's an insurance company, they have to have that money on hand to cover those claims.
He said elsewhere that he thinks most people should have about 10% of their assets in Treasuries. That's what he actually lays out for his wife in his will if he dies before her -- that 10% of her money should be in short-term Treasuries.
Southwick: And Bro's final takeaway.
Brokamp: And the final takeaway is to avoid debt. He talks about it first of all again so that you don't have to go crawling to the banks. But also, you should not be borrowing money to invest, which is basically buying stocks on margin. I bring this up because that's one of the possible reasons why we've seen volatility this year. It's what happens when you borrow money to buy stocks.
When the stock goes down, the broker [either A, asks you for more money or B, sells your holdings]. It's a bit of a snowball. He highly recommends that you don't do that, and he cites four examples of where Berkshire's stock dropped approximately 50% throughout his history. You never know when that's going to happen.
The irony of this is that according to FINRA, margin debt is at the highest level it's ever been. Almost two-thirds of $1 trillion has been borrowed to buy stocks. It's a potential risk for many of those people, but it's a potential risk for all of us. To the degree that margin debt is causing some of this volatility, we could see more of it in the future.
Southwick: You're saying margin debt for people, but I imagine it's mostly institutions. Or is it mostly individuals?
Brokamp: That's a good question. I don't know how it breaks down, but there's no question that there are a lot of people out there borrowing money to invest.
Southwick: Scary.
Brokamp: Very scary.
Phillips: Oh, and those market positions, too, where you see that happen. The higher the market goes, the more people pile into leverage, which is exactly the wrong thing to be doing. We talk about being contrarian investors or, to Bro's point, making sure you find good value before you buy. As the market goes up, the optimism takes off. The exuberance takes off, so they'll borrow more because the shares are higher. They'll borrow more because shares are higher, and they borrow more, and then shares are lower.
And to Bro's point, when it falls 50%, the bank comes knocking. You could lose effectively all your equity or a very large chunk of what you started with just because you chased the market. Optimistic exuberance does tend to correlate with higher share prices, which ironically, to throw out a Buffetism, you want to be greedy when others are fearful and fearful when others are greedy. Margin borrowers tend to get greedy when people are greedy, and that's exactly the wrong way to go about it.
Brokamp: Right.
Southwick: Buffett said in his letter that the wind is at investors' backs, which means it's a good time to be an investor. Is that essentially what he's saying? If we're taking the greedy when fearful, fearful when greedy, at some point he needs to say that the wind is not at our backs, but he never does.
Brokamp: I think there's a bit of a contradiction in the letter. He's saying we cannot find deals, so we are not going to invest.
Southwick: But the wind's at our back.
Brokamp: Right. On the other hand, he wants the average investor to just keep holding on through the ups and downs, and I think that, in the end, is the difference when you are a Buffett who has demonstrated the ability to deploy cash in a smart way. Be happy sitting on cash when you can't find a bargain and then be gutsy enough to deploy it when bargains abound. Like in 2008 and 2009 for the people who were gutsy to be buying stocks back then, as opposed to pulling money out of the market makes total sense. But I think what he's saying is for the average investor, don't try to do that. Buy stocks gradually with your 401(k) or whatever and just hold on for the long term.
Phillips: That's it, Bro. If you can be Buffett, be Buffett. If you can't, dollar-cost average, because it's kind of the next best thing.
Brokamp: Right.
Southwick: And guess what? You can't be Buffett. Maybe you can be David Gardner. If you're David Gardner.
Brokamp: By the way, I'm a Berkshire shareholder...
Phillips: As am I for this question.
Brokamp: And over the last five or 10 years it's been about the same as the market which, when you think of that, that's not an awesome investment. Not a horrible investment. When you look at the fact that he's still sitting on so much cash and still matching the market or slightly beating it, that's pretty impressive.
Phillips: About a quarter of the company's market cap is now in cash, so he's basically running 1.5 times as fast to keep up at a company level because of all that cash.
Southwick: But we talked about this in last week's episode -- about the risk of staying in cash so heavily.
Brokamp: Right. Well, I thought about that. I'm sure someone looked at it and said, "What if Buffett, every time he couldn't find individual bargains, just used some of his cash for an S&P 500 index fund and then sold the index fund if he found a bargain." Because of the insurance company aspect, he does have to have a lot of cash on hand. I'd be curious what those returns would look like, but he's happy to sit there and have so much in cash waiting for a solid bargain.
Southwick: I'm also curious about what percentage of his returns come from what sources. Because if you look at the actual companies that Berkshire Hathaway owns, it's like Dairy Queen? Brooks Running?
Brokamp: Fruit of the Loom.
Southwick: See's Candies. Are you out of your mind?
Phillips: Yeah. The Oriental Trading Company.
Southwick: Like Oriental Trading Company? I'm sorry. I wouldn't invest in these companies, but they show them off at the shareholders' meeting, and it's kind of fun, I guess, to have actual products there.
Phillips: I may possibly have a pair of Brooks with Warren Buffett's face on them.
Southwick: Which I would kill... I think Mike Olsen has like a little running jacket from the Warren Buffett 5K that they do.
Phillips: There you go.
Southwick: I'm like, "I would murder you for that jacket." It's so adorable. It's got this little cartoon of Warren Buffett on it. Ach! So cute. The letter gets so much attention when it comes out. And usually I feel in the past we've had more definitive takeaways, whereas this letter, at least from hearing your take on it, [has me] scratching my noggin. I guess it isn't a barnstormer of a letter this year for me.
Brokamp: I would say that it is particularly good reading given what we've seen in the market this year. As we speak today, it's the second day of March and the Dow is already down like 800 points so far this month. In situations like that, if you're getting nervous it's a great letter to read, both in terms of feeling comfortable about the long term, but also feeling comfortable with maybe having a little bit of cash on the side.
Phillips: I've got to say that for any investor who's slightly new to being better at investing, start with Buffett's consolidated letters, whether you buy the book and read the letters, themselves. Give yourself an education. That's how you learn this stuff. After that it's kind of like going to church.
Brokamp: That is so true.
Phillips: Read the letter or go to the annual meeting. I've done both a couple of times. It's the preacher up front saying, "Now don't forget." Like this is the thing. Like, "Yeah, yeah, we know, we know." In a positive way. In the sense that sometimes it just helps. You walk away from those meetings, walk away from his letters going, "That's why I remember that thing."
Buffett's line -- he talks about leveraging in one particular part and Bro's already touched on that and he uses a version of this quote every time, but he says [and Charlie Munger] that both of us believe it is insane to risk what you have and need in order to obtain what you don't need. It's pretty common-sense logic, right? And then out there somewhere else -- was it two-thirds of $1 trillion, Bro, in margin loans. And so, we know that's right. And to hear that again and again, it's like, "OK, OK. Good point, good point." When I feel like I'm starting to think maybe that one makes sense. Maybe I should go and take a flyer or risk over here. But no, just remember that at the front pew of the church, the preacher is pointing at you saying, "You know? Lift your game. That's kind of the story."
Brokamp: Amen.
Southwick: You two are going to start going door to door saying, "Excuse me, ma'am. Do you have time to hear about the good story of Warren Buffett?"
Phillips: This is Brother Boomerang and Brother Bro.
Southwick: You'll get far with that accent, though.
Phillips: We are here to show you...
Southwick: Don't underestimate his accent.
Brokamp: Totally. I'll just be the pretty face. You do all the talking.
Phillips: The Gospel of Warren.
Brokamp: If you find a pretty face, we're in trouble.
[...]
Southwick: As we promised at the top of the show, we have Scott Phillips, here. He's the director of research for Motley Shul... Motley Fool Australia.
Brokamp: Motley Shul.
Southwick: I can't talk anymore. Motley Shul Australia. The good thing is that I'm not going to do a lot of the talking. Scott is here to provide a not-American perspective and share some global investing trends that maybe we've missed because we were too busy being American.
Phillips: Which is cool.
Southwick: It's fine. I mean, it's fun.
Phillips: Someone's got to do it. It might as well be you.
Southwick: I like being American, and I like focusing on me. But yes, you're visiting The Fool for a week. You and Uncle Joe Magyer came to town.
Phillips: Indeed. Had a great time meeting all our fellow Fools up here. It's kind of fun to come and do it every now and again. Come up from a 15-and-a-half hour flight to Dulles and then I like you, Alison. It's great. It's great. Trust me. No, it's worth it. It's well worth it, otherwise I wouldn't do it. That commitment right there. If I'm flying halfway around the world, you guys must be worth it.
Southwick: We love... Oh, go ahead.
Phillips: The truth is I came to do the podcast.
Southwick: Did I turn around during a meeting and I was like, "Scott, do you want to do the podcast?"
Phillips: You might well have.
Southwick: And you were like, "OK." And I was like, "OK." Now we've got to figure out what we're going to do about it. This is where we landed, so if it's not good, well... It'll be good.
Phillips: It's my fault..
Southwick: Yeah... No, it isn't. So, you are here to give us a perspective that is outside of America, but first I have a quick question. So, you're from Australia...
Phillips: Yes, ma'am.
Southwick: The land down under where everything is opposite. So, here it's winter heading into spring. In Australia it's summer heading into fall?
Phillips: We call it autumn, but yes, that's right.
Southwick: So, when the markets are down, here, in the U.S., does that mean they're up in Australia?
Brokamp: Yes, how are Australian stocks doing this year?
Phillips: The U.S. is the capital market of the world, right? Half the world market cap [I think 60%, Bro?] is U.S. markets. And so, the story down under is when the U.S. sneezes Australia catches a cold, and that still remains true, whether that's the physical economy or the stock market. When you guys have a couple of bad days, we have a couple of bad days. So, the falls in February when we saw some concerns about where the bond yields might go or what the U.S. Fed might do -- Australia went, "Oh. The American are kind of a bit freaked out here. We better freak out, as well."
Unfortunately, in that case, we go exactly the same way. Though, I walked through a revolving door to my hotel when I was here. The door revolves the other way around.
Brokamp: Really.
Phillips: Yeah, literally really. That was just weird. I almost walked into the door coming toward me.
Southwick: I guess you guys do drive on the other side of the street, so there are some other opposites.
Phillips: And apparently the water goes down the toilet all differently.
Southwick: You know what? I googled it before we came, and that's not true, supposedly.
Brokamp: Really? We will have to do a test.
Southwick: We'll have to take a video.
Brokamp: Send us a video of it.
Phillips: I'll report back the next time I'm here about that.
Southwick: This is the hard-hitting stuff you're going to get on Motley Fool Answers.
Engdahl: Does your overleveraged portfolio go down the wrong drain?
Southwick: It doesn't matter which way.
Brokamp: It's still down.
Southwick: It's still down. What is the first global investing trend that you think our American investors, here, have maybe overlooked or you think we should take a look at?
Phillips: I won't come and tell you guys what you do look at, don't look at, or what you overlook and don't. I'm going to tell you about some of the global things I see. You can tell me whether it's something that you guys very clearly know about, in which case I'm wasting your time, or I'm actually adding some value, so here's the chance. No. 1.
Southwick: You're coming in so humble.
Brokamp: Yes, with that accent you've already got the value.
Phillips: Setting low expectations. Only upside from here. China continues to grow really strongly. If we go back 18 months -- maybe even two years ago, now -- the story was all about what if China has a hard landing. What's going to happen when China is dead? Is there enough foreign currency around? When the market's got nothing to worry about, it finds something to worry about, and it was worried about China for a good four or six months. China's stock market was all over the place. The currency was under pressure.
The downward course of other things took our attention. The good news [and it won't get reported if it is good news] is that China continues to boom. The economy, itself, still growing about 7%. You can choose to trust or not trust the Chinese numbers, but the economy is growing, and the imports into China and the outputs from China are keeping the world turning. That's a really positive story.
Whether that's demand for iron ore, which we kind of like in Australia, because we've got lots of that stuff, China's manufacturing, China's exports, the Chinese consumer is growing. So, what's going to power the world economy for the next 20 or 30 years as well as American economic growth is Chinese economic growth, and that's a really really good story.
Southwick: What are you telling Australian investors as far as your advice for investing in China, and does that advice translate to Americans?
Phillips: I wouldn't invest directly in China, right now. I think there's a decent amount of sovereign risk. We've talked a lot already about risk and return, so far. Leverage is one of those. The other is taking on more risk than you need to unless you have a portion in your portfolio and you want to take some risk on. There may be some value there. I know there are some recommendations in Motley Fool services here in America which have Chinese-based companies or companies that do business in China.
For us in Australia, we've got some really good opportunities that are Australian companies doing business with China, and so that's the opportunity, there. We've got everything from vitamins companies to infant formula and milk companies. We've got fruit and veg growers. China is demanding more and more products from Australia. It used to be just iron ore, so we'd dig it out of the ground and send it over there. They'd make steel and cars and send it back to us. But now it's very much the Chinese consumer is on the rise, and that's a really good news story for Australia, as there are a whole lot of ways to play that growth.
The other thing is Chinese tourism. We are getting 15-20% a year growth in the number of Chinese tourists coming to Australia. That's really cool. So, local tourism operators. Local transport operators. There's some really nice ways to play that without having to invest in China, itself.
Southwick: Let's talk about your second trend.
Phillips: No. 2 is synchronized global growth is a thing. Did you synchronize growth? Get a run here a few months back?
Southwick: I don't even know. I know what those three words mean, and together I can guess what we're talking about.
Phillips: There you go. I may know more about it. I'm sorry.
Southwick: But I would love to hear yours. You know, I have my understanding of it, but I would like to hear yours.
Phillips: No, you first. Really! I'm kidding. I'm kidding.
Southwick: Well, it's synchronized. Global growth is synchronized.
Phillips: It's growing globally. Synchronizedly. Yeah. The story is that all of the major economies of the world -- the first time since what you guys call the Great Recession [we call it Global Financial Crisis, which is another thing that's different] -- are growing at the same time, and it's really the first time. Europe is on the improve. China is growing strongly. You guys are growing really strongly. Australia is kind of OK and catching up.
But when you get global growth synchronized across the world, you are going to get really magnified returns. That's the good news, so tick one in the box. I guess if you want to see some other side of it and be a big contrarian or see what that means, it probably means that when all the tide is all the way in, it's only got one way to go next, and that's out. So, I'm not predicting a crash. Even if I thought it might be possible, I wouldn't do anything differently. But just thinking about that, the great news is everyone's growing. That's awesome. And we're still recovering, frankly, from the Great Recession. But as we get to the top of that curve, you figure that at some point in the future, growth will be weaker than it is today. So, just be a little bit mindful of that. Don't overegg the pudding when it comes to margin loan. Don't expect that growth can be extrapolated forever. Those kinds of things you've got to keep a bit humble, a bit mindful, a bit thoughtful about what's coming next.
Brokamp: Overegg the pudding.
Phillips: Do you like that?
Brokamp: Is that a phrase you're familiar with, Alison?
Southwick: No, but I also know how to make a traditional pudding, so I can understand what you're trying to say.
Phillips: With eggs, right? Put too many eggs in the pudding, you spoil it. I'll stick to investing, not cooking.
Southwick: No, that's fine. Here in America I feel like we've had people saying a bear market is around the corner for the last eight years. Well, 10 years. Or nine years. I can't do math. Basically...
Phillips: A long time.
Southwick: ... it's been a really long time. Is it the same way in Australia and elsewhere in the world?
Phillips: Oh, yeah.
Southwick: Where as soon as there's even slightly improved economic conditions, people are like, "Eh, ain't going to last."
Phillips: And again, we keep coming back to Warren Buffett, because he knows this stuff. He is Brother Warren. And he's got his thing. That's the story. The market climbs a wall of worry, which is a horrible horrible place, but it's kind of true. "Oh, maybe it's going to fall. Maybe it's going to fall. Maybe it's going to fall." You look back 10 years. Everyone who was dooming and glooming throughout that entire period -- from those who were saying a double-dip recession in 2009 and 2010 -- then it was everything else was going to go wrong.
You know what? Eventually, they'll be right, and by the time they're right the market might have doubled or tripled, and the cost of being right is actually missing out on truly significant compound gains over time.
As investors we ride those waves. That's how you get the returns. You don't get it by trying to predict, and guess, and whatever. Yes, the bears are right once every seven, 10, 12 years. The cost of being right, though, is really really expensive. And so, yes, absolutely. There are people always saying...
I'll get into Australian housing in a minute, but the housing market is really hot in Australia. And so, since 2010 or 2011, they say, "The market's going to crash. The market's going to crash." Maybe it will, eventually, but it's probably tripled since then. So, if the cost of housing falls 30%, you're still doing better to have bought 10 years ago than have worried about when the next crash was going to come.
Now, that doesn't mean you should be flippantly buying anytime, but again, we go back to the dollar-cost averaging that we talked about before, which is keep buying where you see value. Ride the wave. Keep adding. Keep adding. The benefit of that is you end up adding more money when share prices are lower, and a little bit less or buy a few less shares when the share prices are higher. You're doing yourself a favor on the way through.
Southwick: Actually, that is a good segue, because I believe your next point is about Australia's impressive economic growth.
Phillips: I'm catching on with this thing, aren't I? I'm doing all right.
Southwick: You're doing so good.
Brokamp: You are doing fantastic.
Phillips: Segues are everything. So, let me do a bit of flag-waving, all right? You guys are fair.
Southwick: Oh, we're Americans. Puh-lease.
Phillips: So, I'm going to put the little Australian flag up..
Southwick: You think you know how to wave a flag.
Phillips: I'll do my best. We have had a record unbroken run of economic growth without a recession. We're now 25-plus years without a recession...
Brokamp: That's amazing.
Phillips: ... which is awesome. Now, the downside of that is we kind of forget what a recession is, so we start to get a bit silly and take risks. That's the downside. But the good news honestly -- I'm supposed to sit here and say Australia's so great. That's the way we've done it. We've been incredibly, incredibly, incredibly lucky.
When you guys suffered through the Great Recession, China's demand for iron ore was going through the roof at exactly that time, and so just as the consumer was falling apart [just as banks were falling apart], China had this thing. "Hey, guys. Send us out a couple of ships of iron ore, will you?" And as much as digging red dirt out of the ground is not very value-adding, it was enough to keep the Australian economy on an even keel. We had one quarter of negative growth and then back at a positive growth again, and that was all on the back of the mining boom at exactly the right time.
If it had come a year-and-a-half earlier or a year-and-a-half later, we would have been in a massive, massive hole. It just so happened that it came at exactly the right time. We had a mining bust a couple of years later, and the housing boom was taking off. So, you can kind of string enough of these together you're looking pretty good. If they had come at different times if they're overlapped, it would cause an enormous spike and an enormous crash.
So, let's put it down to four-fifths luck and maybe a little bit of greatness for ourselves. But other than that, the good news is if the boom keeps going. And with the synchronized global growth that I talked about, it's kind of not a really good reason for it to end anytime soon. Of course, we never know when it's going to end up or else we'd do something about it, so it's always possible, but the good news is it still looks pretty good. Not as good as you guys, but doing pretty well and the economy is in pretty good shape.
Brokamp: One of the reasons that I am happy to have you on the show is that one of the things I've talked about, off and on over the past year or two, is it might be a good idea to be investing more overseas, and the typical U.S. investor is pretty U.S.-focused. Even among Fools, we're pretty U.S.-focused. What's the typical Australian investor like?
Phillips: We're kind of the same, unfortunately. As much as you guys are saying, "Invest inside the U.S.," we're saying, "Invest outside Australia," and I've got to say we've got more reason to do that than you do, because you've got A, half of the world's stock markets and values and B, a very broad range of really high-quality companies in a whole lot of industries.
Australia is largely miners and banks. We have four really big banks. We have two really big miners and a couple of supermarkets and that's about 60% of the Australian market by market cap. There's 1,500 companies, but all the values are in those big, big, big companies and not much else. And so, we spend a lot of our time saying to our members, "Please go and look outside Australia. We're 2% of the world's market. There are many more opportunities out there."
If I said to you, "You can have anything you want, but only look in this 2% of the shop." You'd say, "I want to look in the rest of the shop. Thanks very much." And you walk in a supermarket or a clothes store and say, "I want to pick 2% of the clothes." You can choose from those. You've got to leave the rest alone. No one inside thinks that's great. But as investors, as you know, Bro, there's that home market bias, so we say, "Well, it's in Australian dollars and it's our time zone. I know the companies." And I kind of get that.
On the other hand, we all use Facebook. We use Google. Most of us use Amazon. Netflix. They're obviously the big ones, but Apple. Everyone's got an iPhone in Australia. We know all these companies, and Australian investors just haven't quite got over the hump, yet, a little bit like U.S. investors going overseas. We haven't got over the hump of saying, "You know what? There's some really great companies outside of Australia. We really should be making the effort."
Brokamp: Interesting.
Southwick: And your final trend that you want to share is actually one that we all share.
Phillips: Yes, I've chosen these in a different or maybe the Americans might'nt know so well. This is kind of one that you guys have experienced and we're experiencing, as well, and these, at least for now, another bit of wind at investors' backs. That's that wage growth is really hard to come by in Australia, just as it is here. I've been really following the news, here, and wages growth is not happening in the U.S. It's also not happening in Australia.
That's kind of tough for a whole lot of reasons, and if we want to spin some off of (unclear: 31:42) policies -- and all sorts of the fun stuff -- Alison, you'll hang around for that.
And I want for our listeners -- what I will say is if you are an investor, you've been way, way, way oversharing in the spoils of that. And so, there is and probably for a reasonable amount of time remains to be all of the economic growth in the country is going to the owners of capital. That means shares.
Again, we could argue the reasons why and what we should do about them. In the meantime, that's where the money is going and that's where the growth is accruing to. Again, another really strong reason to be owning shares.
Brokamp: It's really interesting. Obviously, politics, here, in the U.S. has gotten very contentious. Something like that. Then we think of so much of what's going on in America as a U.S. issue, but a lot of it is a global issue. The whole idea of productivity. Technology putting people out of jobs and keeping wage growth low. It's not just a U.S. issue.
Phillips: No, that's right. And there's also, I think, to some degree, China for a very long time exported deflation. Things got cheaper because China made more of them and made them more cheaply, so you could buy a Chinese television cheaper than an American-made television or an Australian-made television. It keeps prices low, and as consumers we benefited from that for probably three decades.
And so, we never really give that credit because there's a really what I say is diffuse benefit. We all benefit a little bit from it, and that's great. There's some really concentrated costs, because people have lost jobs, particularly manufacturing and that sort of stuff. So, we feel that. We don't really feel the benefit.
I think to some degree we're seeing the move toward more wage parity around the world and without getting really wonky about this stuff, as that move happens, that's why it's harder for Australian and American workers to get wage rises, because a lot of the jobs, a lot of the goods are being sourced somewhere else where wages are lower and there's that wage arbitrage. We kind of fight it for a while, but as you say, technology its policy; I think it's just the reality of the globalized world simply saying, "Well, you can't justify..."
And again, I'm not saying it's right, but unless governments step in or do something about these things, the reality is that low-wage countries are going to get a higher share of the economic pie when it comes to some of that low value-add stuff, like manufacturing that can be done much cheaper overseas.
Southwick: Well, that was really great!
Phillips: That's very fine of you to say.
Brokamp: You did an outstanding job.
Southwick: Throwing this episode together and whispering in between a meeting back and forth. This really came together.
Phillips: You guys even sound like you mean it, and that's really nice.
Southwick: I do mean it. You can tell by how high my register was. But you're not done yet, because you're going to stick around and you're going to give our listeners some advice on traveling in Australia. You got it?
Phillips: I'll do my best.
[...]
Southwick: Alright, Scott. While you're here, we want to get some insider advice on visiting Australia. Our listeners are well traveled, judging by the amazing postcards that we get. I've just got a few questions for you. This will be easy.
Phillips: I'm scared because I've heard your program before.
Southwick: No, this is fine. So, Australia is a big country. It's easy for us to forget that things are kind of far apart and...
Phillips: The land mass isn't that different to the middle of the U.S. What do you guys call it?
Brokamp: The Midwest.
Phillips: The Midwest. No, no...
Brokamp: Oh, continental U.S.
Phillips: There, you go. Thank you. The continental U.S.
Southwick: What are the three places that you think people have to go see? We always think of Ayers Rock. Iyers Rock? Airs Rock?
Phillips: Yes, right.
Southwick: But that's like out in the middle of nowhere.
Phillips: But it's still awesomely nice.
Southwick: So, where should we go?
Phillips: It's now called Uluru. We've adopted the Aboriginal name for it. It was the name given to our English settlers when they arrived. Uluru is just this spectacularly beautiful part of the world. Lots of red dirt...the most amazing array of stars you've ever seen in your entire life. This is just the most magical place. If you can find three days on your trip and you can afford the extra bit of airfare to get from the coast to the middle, that is absolutely the single best place I would say. If you have the time, go there. I promise you won't regret it. It's awesome. Culture, scenery, kangaroos, also. It's good stuff.
Two other places. I've can say see the [??] of Melbourne because you guys probably heard of those. Climb the Harbour Bridge is spectacular. The view is awesome on a good day. So, do that. Go and see that. Have a good time!
Melbourne doesn't get quite the same credit, though. Melbourne is really cool. If you like your bars, and restaurants, and shopping, and cafés, then Alison I'm looking at you. It is a really cool part of Australia. It's just really nice. Little, funky alleyways and places to be. Kind of the best of parts of New York and maybe... I'm not going to do it justice. A really cool part of the part of the world...
Southwick: Lots of character.
Phillips: Exactly. And then go to see the third one -- an Australian winery region somewhere. If you like your wines [even if you don't], just for the sheer tourism value of it. There's some really cool wineries an hour and a half, two hours north of Sydney. An hour out of Adelaide. A couple of hours out of Melbourne, so different parts of Australia. They are different capital cities, depending on where you are. There is a really cool winery somewhere near where you are. Go for a drive. Have a glass of wine. Enjoy the scenery. Enjoy the people. Really just an out-of-the-way way to enjoy part of Australia.
Southwick: Aside from a bloomin' onion, which I believe is your national food, what should everyone eat when they visit Australia?
Phillips: A dog's eye with a dead horse.
Southwick: What?
Brokamp: What?
Phillips: A dog's eye with a dead horse.
Southwick: We need you to translate that for me.
Phillips: We're not quite cockney, but we like our rhyming slang, so dog's eye is a pie, a meat pie, so not a pumpkin pie. Not a sweet dessert pie, but a meat pie. With dead horse, which is sauce, which is what we call ketchup.
Southwick: Ketchup?
Phillips: So, have yourself a pie and ketchup. Don't forget your meat pie, put the ketchup on top of it. Tuck in. A great way to enjoy.
Brokamp: So, the ketchup is called the dead horse.
Phillips: Well, we call tartare ketchup tartare sauce. Rhyming slang for sauce is the horse.
Southwick: In Australia you rhyme "hoss" with sauce. We'll get to translating saucy Australian later. So, everyone knows that the word for beer in Australian translates to Foster's. So, if you want to order a beer, you say, "I'll have a Foster's, please," right?
Phillips: Yes, and that's how we get to laugh at the tourists who come, because...
Brokamp: It's not true.
Phillips: Nobody in Australia drinks Foster's. If you ask for a Foster's, we're like, aha ha! That's a tourist over there. When you come to Australia do not -- please do not -- order a Foster's.
Southwick: Do you guys have the same explosion. I know you've got great sauvignon blancs, like you talked about. Do you have the same explosion of microbreweries that we do in America?
Phillips: Yes.
Southwick: You can't throw a cat... That's a bad way to...
Brokamp: Which we do every day.
Southwick: ... without hitting a brewery.
Phillips: That's what they say about Americans. You guys all throw cats.
Southwick: We do.
Phillips: I think it's weird but, apparently, it's true.
Southwick: I don't know.
Phillips: Yes, we're kind of about 10 years behind you guys, so the whole expansion...
Brokamp: The cats are coming is what he's saying.
Phillips: They're only kittens, Bro. We've got to wait.
Southwick: But that sounds like a great opportunity. Like for anyone who wants to open a microbrewery, go to Australia and do it because we are supersaturated.
Phillips: We call it craft brewers. So, craft brewers started...
Southwick: We call it craft breweries here.
Phillips: That's kind of working, but we're nowhere near the size and scale of you guys. We don't have the same degree of spread in different cities doing their thing. We're getting there, and some people listening will be like, "Yeah, I've got a microbrewery near me." Yes, probably. But the sheer scale you guys do it here, we're not there yet. There's some really cool Australian ones, though.
Southwick: Let's go start one.
Phillips: Fool Ale.
Brokamp: That's nice. Fool Lager. That's nice.
Southwick: We did an episode about the Olympics and had Patrick on because he's from Brazil and he translated some phrases for us. I was hoping that you could maybe translate some phrases for us into Australian, and from Australian.
Phillips: Here we go. I will do my level best.
Southwick: Let's say maybe you're in Australia and you're want to have a small chat with an Australian investor. I believe in the words of Australia's president, Paul Hogan, you say... I knew I wouldn't be able to get that out without laughing. "That's not how you catch a falling knife. That's how you catch a falling knife."
Phillips: Aye, there you go. You're prepared for this.
Southwick: I want to hear you say that.
Phillips: That's not how you catch a falling knife. That's how you catch a falling knife.
Southwick: Finally, could you translate a line from Australia's national anthem into English for us? "Traveling in a fried-out Kombi with a hippie trail head full of zombie."
Phillips: A fried-out Kombi is a Volkswagen Kombi van. You guys call it something. I can't actually recall. What's the Volkswagen Microbus?
Brokamp: Microbus.
Phillips: There you go. So, Kombi is Australian for Microbus. Head full of zombie is something that we wouldn't encourage any of our listens to do, which is partake other than where it's legal of course in a little bit of alternative herb consumption.
Southwick: California and Colorado.
Phillips: There you go.
Southwick: Washington, D.C.
Phillips: That's where you'll get a head full of zombie.
Southwick: All right. So, here at The Fool we also have another Australian named Peter Varley, and he was saying that if you ask any Australian, they won't actually be able to quote the real Australian national anthem.
Phillips: Rubbish.
Southwick: Really? OK.
Phillips: I'm not going to sing.
Southwick: No, you don't have to sing it.
Phillips: No, you don't need me to do this, do you really?
Southwick: You just have to say one line. Peter Varley was like, "No, Australians just don't wave the flag," like you said. What's the first line?
Phillips: Australians all let us rejoice for we are young and free.
Brokamp: Nice.
Phillips: Yes, it's nice.
Southwick: All right, last question.
Engdahl: Don't you have a line about bombs?
Southwick: Bombs?
Brokamp: Every good anthem has a line about bombs.
Phillips: Not in the version I know.
Engdahl: That's just us.
Phillips: That might be just you guys.
Brokamp: Just America.
Southwick: We love our war. So, you've given us some great didgeridoos. How about one didgeridon't when traveling from Australia?
Brokamp: Besides ordering Foster's.
Phillips: That one is ordering Foster's. The other is making really bad didgeridoo jokes. That's the second one. And I think the best thing you can do. We're pretty friendly people alright. Try and say G'day.
Brokamp: Really?
Southwick: OK, you go first.
Phillips: Don't turn the tables already.
Brokamp: G'day.
Phillips: There you go.
Southwick: G'day. Do I have to do it with an Australian accent or can I just say g'day?
Phillips: Yeah, do it with your accent.
Southwick: G'doy.
Brokamp: Let me ask you this. Do you really say that?
Phillips: Yeah, all the time. I do in particular, anyway.
Brokamp: Good.
Phillips: You know what has been cool about being here? The way I talk, I had no idea how much slang language until I talked to you guys. But the minute I'm in a conversation one looks at me with wide eyes and is like, "What was that? What did you just say? What is that thing?" And it's either natural or not, and it's very funny. So, thank you for having me! I really enjoyed it.
Brokamp: It's been a pleasure.
Southwick: Thank you for joining us and again, Scott "The Boomerang" Phillips. Why?
Phillips: Throw the boomerang.
Southwick: Because we want you to come back.
Phillips: Aw, there you go.
Southwick: All right. That's the show. I want to thank Alex, who sent us a card from Neuschwanstein Castle. It adorably has his four-year-old's teeth marks on the corner as you can see right there. And 50BillionCent is back in Boston and sent us a card, so thank you for keeping us on top of where you are, 50BillionCent. You're awesome!
We are still soliciting categories for the upcoming Loofie Awards. Some great ones that have come in include the best Non-Fool Investing Podcast, Best Brokerage, Best State to Retire With your Loofah. So, send in your ideas. They can be serious or not. Our email is [email protected]. You can send those to us.
The show is edited kookaburringly by Rick Engdahl. For Robert Brokamp and Scott "The Boomerang" Phillips, I'm Alison Southwick. Stay Foolish, everybody!
