Ep. 67 | The ABC of Systematic Investing

Headlines tell you to act. A plan tells you when to be still. 

We sat down with Capital Partners founder David Andrew and Dimensional Fund Advisors Australia CEO Bhanu Singh to unpack how a clear investment philosophy helps you ignore market noise, sidestep FOMO, and make choices that actually serve your life.

We trace the shift from active stock picking and star managers to systematic portfolios built on evidence: markets price information, prices are forward-looking, and broad drivers like size, value, and profitability can tilt expected returns without guesswork. 

We also dig into the behavioural traps that cost investors most: loss aversion in selloffs, overconfidence in familiar sectors, and herd chasing during hype cycles like crypto and gold frenzies. 

Bhanu explains how rules-based trading, rebalancing, and tax-aware flexibility turn volatility into a feature, not a flaw. 

Finally, we explore where systematic investing is evolving: incremental advances in measuring short-term reversals, momentum, and profitability growth, and the high research bar for anything new to make it into live portfolios. The takeaway is simple and powerful: define your philosophy, set the plan, and let the process work. When prices shout, let principles speak.

Enjoyed the conversation? Follow the show, share it with a friend, and leave a quick review so more investors can find calm in a noisy market.

The Purposeful Investor Podcast is a public service provided for Australian investors wanting to make smart decisions with their money, avoid costly mistakes, look after the people they care about, and, have a great life!

We draw on over 30 years of experience from David Andrew and the Capital Partners team.

For more information on Capital Partners' award winning team, visit capital-partners.com.au.

Have a question? Email us ask@capital-partners.com.au.

This episode provides general advice only. We do not consider your personal circumstances when we share this information. Always refer to your financial adviser for advice about your personal circumstances. 

Capital Partners Consulting Pty Ltd AFSL 227148 trading as Capital Partners Private Wealth Advisers ABN 27 086 670 788.

Transcript

Wins Of The Week

SPEAKER_01 0:00

Hello and welcome to the Purposeful Investor Podcast. I'm your host, Aiden Wilkins. Join us as we delve into what it takes to make smart financial decisions, provide for the people you care about, and uncover what it means to be living your best life. Follow and subscribe so you never miss an episode. Welcome back to another episode of the Purposeful Investor Podcast. Today we are going to be talking about tuning up the noise, and it's a very, very important concept in the world of investment markets. I'm sure a lot of our listeners would have been reading newspapers, watching the news, and saying what's going on in the world because it's always in their faces. Joining me in the studio is Capital Partners founder, David Andrew. And we have a special guest. We've got Barnoo Singh, who is the CEO of Dimensional Fund Advisors Australia, sitting with us. So, Barnu, welcome to the podcast. Thanks for having me.

SPEAKER_00 0:52

Welcome back to the podcast. Thank you.

SPEAKER_01 0:54

So, as I touched on, we're going to be talking about tuning out the noise, but we're going to start with our little wins of the week. So our listeners know we start off with something that we can reflect back on in the last week that was a little win. So, David, what was your little win? Yeah, this is um this is a real gratitude one, Aiden.

SPEAKER_00 1:10

Um we uh regular listeners will know that Robin and I have been building a house. And uh on the last episode, I said we're getting close, we have now moved in. Nice. And um thank you, and we're so pleased. And uh yeah, it was tough. You know, the last few weeks were pretty tough, but we're now in, and it's beautiful, and all of the angst and anxiety has melted away, and we're just grateful to be there. Us. What about you, Bana?

Why Tuning Out Market Noise Matters

SPEAKER_02 1:39

I'm I'm on the other end of that. I've just started a renovation. I was uh on site earlier this week and they had taken the whole top floor off, and it's going to be a good thing. Yeah, we've we moved out or already. Uh we had a bit of an issue at our house earlier in the year, so we had to renovate it. But yeah, it's been a pretty hectic few months. So to get started on it, it's been a pretty good little win. Let's see how I am at the end of the other end of it. Uh so nice.

SPEAKER_01 2:08

I'm gonna change tact and go with a professional win. So uh it's probably just over a week ago. In Perth, we had the FAA, which stands for the Financial Um Advisor Association of Australia, come over for the annual congress in Perth. So I think it's been about 10 years since Perth hosted it. Um everyone on the East Coast always says it's a long way to come. But it was just really nice to catch up with a lot of people that you only meet with over Teams or you chat to, um, just to share different ideas, best practice, um, yeah, and host it in my home state. So that was a good one.

SPEAKER_00 2:38

And I'm gonna add to that because he's very humble out Aiden. Aiden was a finalist in the um, was it the young admerging talent or young advisor rising? And I don't know how he didn't win that award. I'm I was so, so annoyed, but well done being a finalist. You just you deserved it.

From Active Picking To Systematic Portfolios

SPEAKER_01 3:01

So to the topic at hand, and as I alluded to before, there's the way that the financial markets and the the media works is there's there's always so much noise. There's always headlines, typically with negative news. And so what we want to talk about today is sort of one, why is it so difficult for investors to tune out that noise? But also, how can investing in a systematic way help to sort of alleviate a little bit of that pressure that investors find to make decisions and take action? So, why don't we start off with Dave? If you sort of talk about our experience here at Capital Partners in terms of how we've landed on this systematic approach and why that actually links back to tuning out the noise.

SPEAKER_00 3:41

Yeah, yeah, yeah, yeah, absolutely. So, so we started this business, I started this business in 1999, and um I hadn't been an advisor before. Um, I'd worked really closely with advisors, but all my work had been in investments with large institutions. And um, I just didn't want to be on the corporate treadmill, so jumped off that and thought, well, you know, I I have to be self-employed. I actually have to be self-employed. And so I just thought there's such a market for independent advice, advice that is wholly in the client's best interest, where it's not conflicted, where there's no commissions changing hands. And so in setting up the business, it was it was very much about creating a business that clients could rely on where decisions we were making were in their best interests, not our best interest. So the only way we could get paid was if the client chose to pay us and the client chose to keep paying us. And that remains true to today. We can be fired by a client anytime by turning off the fee. And they have complete power to do that. In the early days, you know, we we really modeled what other firms were doing. We tried running direct stock portfolios, we we ran um active manager portfolios using managed funds. And you know, and the thing that probably bugged me the most was that it was really hard to implement consistent portfolios. So a client who became a client in 2000 would actually have quite a different portfolio to the client who became a client in 2003 because you were buying different stocks, you were buying different funds. And I was very agitated by that because I would do portfolio reviews, and I'd see one client family had done really well, and another client family hadn't done so well over the same time period. I felt actually ethically conflicted by that. I had no idea what to do about it because the conventional wisdom was the conventional wisdom. So, fast forward to 2003, by then Michael Matthews had joined the business, Chris King had joined the business, and we were using really great research, we thought, and you know, managing these portfolios in a very disciplined way. We got this research note that said you should be firing Fidelity Australian Share Fund and you should be buying the UBS Australian Share Fund because UBS has this gun stock picker by the name of Paul Fiani. So we deliberated this, we did some more research, we got second opinions, and we started the process. So we started moving the money from Fidelity to UBS. Now that back in those days was so laborious. You had to write advice, you had to fill out the forms, you had to do so much stuff, not like your experience today, Aiden. Awful. Anyway, of course, no sooner had the last money moved from Fidelity to UBS, and what happened? Uh the the Fiani left and set up his own shop. So then immediately the research house said, Oh, we've put this fund on watch, hold butt watch. And Michael came in and came to work that morning and he said, David, this is never happening again. Never are we doing this to our clients again. And so we embarked on a worldwide search. Um, dimensional had come to Australia three years earlier. I'd actually seen the name come up, uh and I'd I'd read a bit about the value investing because I have a natural leaning towards that style. And so we just went right into it. We went into research around index funds, we went into research around you know systematic, what we then used to call asset class investing.

SPEAKER_03 7:27

Yeah.

SPEAKER_00 7:28

And um every which way we looked at it, Aiden, we just couldn't refute the logic. And that comes back to our last episode where we talked about the the cross-section of stock expense returns from Pharma and French in 1992. Every time we went back to, we read that paper. We read that paper more than once, and it's not easy reading.

SPEAKER_01 7:50

No, it's not.

Client Outcomes And What They Truly Want

SPEAKER_00 7:51

And every time Michael would look at me, he said, I think this is it, I think this is going to work. And so we started implementing dimensional-led portfolios. We we sort of used other managers and we we tested it and trialed it. But that was where we started, 2003. And so now we have a well over 20-year track record of running these portfolios, and it's as I said in the last episode, I've never had to say sorry. And that's a very empowering thing for an advisor. I think that story goes right to the core, or the systematic story goes right to the core of the um why clients like this. And, you know, remember, Barno, that this this podcast is primarily for our clients. Yeah. Lots of other people listen to it, and that's great, they're welcome. But this is really to communicate and tell stories for our clients. But you know, we know there are three things our clients want. Critical outcomes that they are seeking from us. One, they want to make smart decisions with their money and know that they're not making dumb mistakes. The second is they want to know that the people they care about are going to be okay no matter what. And the third is that they want to have a good life. Now, none of that says I want to be tinkering with my investments. I don't want to, I want to be messing with my investments on a Saturday morning, sitting at my kitchen bench. Depending on your age, on a Saturday morning you want to be at your kids' sport or your grandkids' sport, or you want to be in the garden, or you want to be playing, in your case, playing golf. And yet all this noise we get is you should be doing things, you should be doing things, you should be looking at this stock, you should be selling that stock, CSL's done this. You know, AI, the Commonwealth Bank's too expensive. There's a perception that there could be a bubble in AR. All this noise. My friend, one of my friends, um advisor in Canada calls it, too many voices, too many choices. And um, and so I think systematic investing really helps our clients just settle. You know, if they trust capital partners, chances are they're gonna be able to trust the investment process. And and just like it was for Michael and I, if a client chooses to lift the hood on this and really dissect the logic and the systematic approach that lies in the engine of systematic investment, they're gonna find it extraordinarily hard to upend the logic.

SPEAKER_01 10:27

I like that framework, and Bana, you talked um previously about in terms of having a framework to base mind or rules that you can essentially make decisions rather than as humans, we make a lot of decisions on emotions. Yeah. Yeah. So how does how does having that essentially rule book, how does that help people stay the course?

Investment Philosophy And Pricing Of Information

SPEAKER_02 10:46

I I'll even take it a step further up, which is having an investment philosophy about how do you think the world works? Yeah. And testing it and having some conviction in it. And to your point, you looked at it every which way before you arrived at this, which is the homework you kind of need to do before you look after somebody else's money that way. Um and so I think it's really important to have an investment philosophy. And and ours is that markets are very good at pricing and information. And so what you see in the market price, a market price, a stocks price, a bonds price on any given day reflects all the information out there in the world. So you might go, okay, I don't know what to do with that. But a very big implication out of that philosophy is that when you read something in the paper, it's likely reflected in the price. So you don't have to do anything, right? And even if you're thinking about what's gonna happen in the world, um that opinion is probably already reflected in the market price. Because prices by nature are forward-looking. When investors go and trade, they're essentially reflecting a view about the future through their trading. If they think the stock's gonna go up in price, they buy it. If they think it's gonna go down in price, they sell it. There's somebody on the other side thinking opposite, and they're interacting, they're sort of, you know, putting their opinions against each other, but by doing so, they're reflecting that opinion in the price. So when you're thinking about something, the question you really have to ask is what is it that you know, or how is it that your opinion about the future is somehow so unique that nobody else knows about it and it hasn't been reflected in the price? And once you put that little speed bump in the way of making a decision, then all of a sudden you realize, yeah, I don't need to do anything. I think it's fine. Um, so I think that having that framework, that philosophy around what do we think about investing, how do how do we think markets work, that really helps you guide some of those decisions. And it helps you tune out that just the constant clatter and the noise. And um you know, the market bell, ding, ding, ding, ding, ding. It's always something. And and and negative, you mentioned you know, negative news. And of course, you know, we know the psychological behaviors where negative news sort of stick a bit more. You know, losses hurt more than gains feel good, so that's part of that. Um, fear sells more newspapers than than positive news. So that's one. But I'll add another dimension to that, which I think has become a bit more, at least I see it that way, and others would maybe can disagree, is this fear of missing out. So it is negative in that sense, but it's also like, hey, look at what this particular investment XYZ has done. Or I met a mate who bought a board ap NFT and tripled in price next week.

SPEAKER_00 13:31

Crypto is a great example.

SPEAKER_02 13:32

Crypto is a good example of that. And there's always some stock that sort of shot the lights out. And and you see the star fund manager that you know has barely any assets and they get sort of it's very hard to differentiate luck versus scale. They have a few good years and a bunch of money piles in, and then they have that's where they go downhill. So gold's a great example at the moment.

SPEAKER_00 13:51

People lining up in Martin Place to buy gold.

SPEAKER_02 13:53

What is that about? When you think about any investment, you it's helpful to use a bit of a framework to say, well, what's its role in your portfolio? So is gold going to improve your expected returns? Well, gold technically shouldn't have an expected return. It's a commodity. It's not, you know, it's not gonna, there's no sort of science behind like why gold should have an expected return. Um now it's done well recently. So what you're really saying is price has been going up, and I think it's gonna keep going up, and I don't have a good reason for it, but I'm gonna take a bit of a punt at it. So that's one. So when you think, really think through it, shouldn't really improve your expected returns. Then the next thing that's often cited for gold is that it's an inflation hedge. Or when the world goes to hell in a handbasket, gold does really well. You know, on the first one, inflation hedge, when you look historically, stocks have done a tremendously good job at beating inflation, and then some, right? So would you rather put everything in a commodity that has no expected return, or should you put it in a well-diversified portfolio of stocks that has proven to do better than inflation? And that's a much better scenario. Okay. And by the way, forward-looking inflation expectations are in the market, in stock prices, right? So that's one. And then you say, okay, well, when the world goes pear-shaped, it's gonna do well. Buy some bonds. Buy some high quality, globally diversified, sovereign grade, backed by taxes and armies, bonds, then a commodity, which is has all kinds of idiosyncratic issues because it's just one holding, right? So the question is if you go through all that bit of a framework and you arrive at a solution. You were talking to me, I think, about uh yesterday, about needs versus wants.

SPEAKER_03 15:36

Yeah.

SPEAKER_02 15:36

You know, I like to think of it this way: there's no need for gold in your portfolio. No. No, it doesn't make any sense. But there's a want. And if you get to the point and go, I want this, then you're like, I'm not making this decision for any rational reasons. Yeah. I'm just making it because I think it's going to keep going up for whatever reason.

SPEAKER_00 15:52

And then hopefully that stops you. Yeah, exactly. So we we we think about our clients' money in portfolio layers. Yeah. And so the first portfolio layer is what we call critical capital. Now, critical capital is the money that you need to have invested in a diversified portfolio or property or something secure so that you will never be poor. It's gonna fund your lifestyle, it's gonna fund your children's education, it's gonna do all the things you need it to do to live a good life, because it's the third of the three critical outcomes. The second portfolio layer is what we call aspirational capital or emotional capital, perhaps, but it's aspirational capital. That's the stuff that you probably don't need, but you do want.

SPEAKER_02 16:35

Yeah.

SPEAKER_00 16:36

A holiday house.

SPEAKER_02 16:37

Yeah.

SPEAKER_00 16:38

A second sports, a sports car, probably a red Ferrari. You don't need it, but it's nice to have. You know, sending children to some schools, you know, that that is an aspirational capital decision. Um, what else, Aiden? Do we put in that bucket? Um we say horses. Yeah, yeah. Someone was saying yesterday, race horse. But it's a great example. That's not a logical decision. Things that bring you joy in life, but you don't necessarily need to. And the third layer is entrepreneurial capital. Now, for me, I've got a lot of money tied up in entrepreneurial capital, as do you now, Aidan, as a as a as an owner of capital partners, where where, you know, we we've got to make sure that works. We've got to really look after that. Other people think about their entrepreneurial capital in terms of something more speculative. Yeah. You know, buying gold, gold, buying gold stocks and so forth. The definition of entrepreneurial capital is you could make a lot, but you could lose a lot. Um, you know, the definition for aspirational capital brings you joy.

SPEAKER_03 17:40

Yeah.

SPEAKER_00 17:41

And for the definition for for um critical capital is makes your life work well.

SPEAKER_01 17:48

You know? I think on that as well, and I I know I always quote him, but Morgan Houser, who's probably like one of my favorite writers, he always says, like, make sure like investors are playing different games. So make sure you know what game you're playing.

SPEAKER_00 18:00

And those three types of capitals talks that even don't use entrepreneurial investment principles for your critical capital example. It's crazy.

SPEAKER_02 18:08

If you just don't think gold's gonna make you rich as your and you put your core capital in there, that's quite a bit of risk you take, right? Um and there are better ways of achieving that critical capital than than something like gold. And so, you know, nothing against it, but just need a framework, get a philosophy to think through it.

SPEAKER_01 18:26

I don't understand. I always it does come up from time to time, and we talked about people like to have it, because if the world goes to hell in a handbasket, you've got um you've got some gold. But I would say if it gets that bad, we've probably got a lot more problems in the world. Yeah, yeah, yeah.

SPEAKER_00 18:39

But that's a good segue, Aiden, in that you know, from time to time, capital markets can deliver us really quite extreme emotional challenges.

SPEAKER_03 18:52

Yeah.

SPEAKER_00 18:53

Um, and on the theme of systematic investing, one of the things that I like to talk about is that you know, when you have a systematic portfolio, yes, it will go down in value if the market goes down.

SPEAKER_03 19:04

Yeah.

Three Layers Of Capital

SPEAKER_00 19:05

But but you are always acting on a plan. You know, our clients are all acting on a plan, and and we have built into our modeling and our thinking the knowledge, not the possibility, the knowledge, yeah that these market events are going to happen.

SPEAKER_03 19:23

Yeah.

SPEAKER_00 19:23

So your asset allocation is gonna be right, your your your cash holdings need to be right so that when these things come along, but the problem I think for us as humans, and you've now seen this, is that when there's a wobble in the markets, we have this little peace-sized little part of our brain called the amygdala, which is where the flight fight response is. And it's the ancient brain where where we used to run away from saber toothed tigers. And we're still in 2025 thinking we're running away from saber toothed tigers. But but a market downturn is not a saber toothed tiger. It's it's a temp, it's not going to kill you. Um, you know, that's one of the great things about a diversified portfolio. You know, you might not make a killing, but you're never gonna get killed. And so that's really the challenge, I think, for most investors is how do you keep your head on when everyone else is losing theirs?

SPEAKER_01 20:20

And I like how so there's there's that side of it also, Arna, you mentioned before FOMO. So there's actually two sides. So there's one when you're really scared and it's like, what do we do? Let's make it get out. There's the other one, which is just like humans, like we compare ourselves to others. We hear those stories from someone at the golf club who's made money doing this. We see the headline saying, oh, you've got to be investing in that.

SPEAKER_00 20:41

So it's a dual-edged sword, right? I I know a guy who recently sold down everything in his self-managed super fund, and he proudly told me that he's put it all into AI stocks. And I hope that goes well for you, Bruce.

SPEAKER_01 20:55

Yeah.

SPEAKER_03 20:56

Yeah.

SPEAKER_01 20:56

So I wouldn't mind talking about some of the psychological and behavioural challenges that investors face, because that's like that is where some of the biggest mistakes can happen as investors. So in terms of things like confirmation bias, lost aversion bias, even overconfidence. And what we tend to see from time to time as advisors is if you have a specific exposure to say an industry, to even say a medical professional or doctor, and there's this really interesting company in that space, you might have an overconfidence because you've got enough knowledge to be dangerous in that space. Yeah. Um, so so how does actually coming back to the systematic approach, how does having that help protect people from biases that we're prone to as humans?

Behavioural Biases And Rules-Based Discipline

SPEAKER_02 21:41

I think um at the core of it, once again, I I'll keep hammering this, the investment philosophy is to say, A, you're not questioning market prices. So that that means when a stock has dropped in price, other than things like momentum, perhaps where you you have some inkling about it might continue to go down a bit more before it sort of levels out, you're not sort of all of a sudden going it's too cheap or underpriced or overpriced and things like that. So you stay away from those biases. Or if something is running, having the discipline to say, it's met, it's delivered what I bought it for, and now it's no longer appropriate for my portfolio, therefore I should sell it, and then have the discipline to then reinvest in stocks that are gonna repeat that rather than saying, oh, I think it's gonna keep on going, which is a form of sort of overconfidence or maybe herd mentality. Um, so it's going back to it's that systematic set of rules rather than I like to joke that my gut feeling has zero value at dimension, because nobody follows the gut feel. It's more about rules that have been set based on evidence and based on analysis and based on sort of philosophy frameworks to say when this happens, this is generally where we want to go. Now there's a human judgment element involved in that, but within pretty tight bounds. So when do we trade? How do we trade? How much do we trade? How do we maintain flexibility? How do we maximize tax? Am I willing to trade off a bit of a weight change in a particular stock if it leads to a better after-tax outcome? Yeah, sure, that makes sense. Now it's not sort of mechanical, there's a bit of judgment involved, but essentially we're trying to sort of manage and trade off multiple things that are happening in the portfolio. Real life is messy. You know, paper portfolio just says when it hits that line, buy, when it hits that line, sell. Real life doesn't work that way. There's taxes, there's news, there's liquidity, you know, people taking a sick day, holidays, you know, whatever. There's a lot of stuff that happens. So you need a human being sitting there going, what am I trying to do today? I'm gonna move the portfolio from hair to hair, but there's all this real life stuff happening. People are giving money, people are taking money. I've got to accommodate all of that to arrive at a good outcome for the portfolio. So you want that judgment, but in limited with constraints.

SPEAKER_00 23:48

Yeah. But you think you talk about loss aversion, for example. You know, if I get out of the I get out of the bed in the morning and I've been, I've had in the back of my mind this idea that there could be an AI bubble. And I get out of bed one day and say, oh, this has all got too scary.

SPEAKER_03 24:04

Yeah.

SPEAKER_00 24:05

It's just got too scary. I'm gonna call my broker or I'm gonna call Aiden and I'm gonna sell down my portfolio. Um a colleague told me um, you know, a story about when the first news report about a potential AI bubble was reported. And it was in, I think, nine it was in 2021. Yeah. And if you sold down your portfolio that day in 2021, you know, you would essentially, like if your portfolio was worth a dollar in 2021, it would be worth a dollar 80 now.

SPEAKER_03 24:44

Yeah.

SPEAKER_00 24:44

So you've left almost 50%, and that's market return. That's not from AI only. That's not from all the markets at the end. The broad market has done very, very well. Yeah. So so that decision, okay, I've got to a point, I'm now scared, and I'm gonna act on it, is the it is that P-sized little organ in our brain, the amygdala. But that's such a that's an emotional speculative decision. Contrast that with, contrast that with, okay, systematic investing. It makes sense. I want to I want to get a return commensurate that's high enough to fund my goals. Therefore, I probably need a return of, let's say, 7% per annum. If I'm gonna get 7% per annum from a diversified path portfolio, I really need to be invested in stocks, equities. Therefore, let's own the market. That's a logical decision, very different to that emotional. The second decision would be okay, value stocks have a higher expected return than the broader market. It makes sense, it's very logical to include that in my portfolio. Smaller companies, smaller stocks have a higher expected return than the broader market. It makes sense to include that in my portfolio. Profitable, more profitable companies tend to be more profitable. Less profitable companies tend to continue to be less profitable. It makes sense to incorporate that into my portfolio. And then once I've done that, all of that logic lines up and makes sense. You say, now I'm gonna stick with that.

SPEAKER_03 26:19

Yeah.

SPEAKER_00 26:20

No matter what.

SPEAKER_03 26:22

Yeah.

SPEAKER_00 26:22

And you see just how compelling that logic is compared to the emotional side, where we're just compelled to do something. And that's what biases do to us.

SPEAKER_02 26:33

Yeah.

SPEAKER_00 26:33

So it's really tough being human. It's really tough being an investor.

Volatility, Planning, And Staying The Course

SPEAKER_02 26:37

Well, I think you but you said earlier about, you know, it amygdala helps you deal with saber-toothed tigers. Right. So I think the way I think about it with respect to stock markets or investing is that there are those saber-toothed tigers in there, right? And and when GFC happens, your first reaction is, I need to get out. Right. But if you've studied the markets and you have a philosophy, you know these events happen. To your point, you know, markets challenge you with these emotional triggers from time to time. COVID's a good example as well. But if you know that these things come along about once every five years on average, five or ten years, depending on depending on, and you know, whatever the definition may be for you on what that trigger is, it could be 10%, could be 50%, whatever. Yeah. But the point is you've sat down, you worked, you worked with somebody like yourselves to work through it to say, I've designed this portfolio. Here's how this portfolio has behaved in the past. And this is setting some expectations around what you can see in the future. Not exactly, but it gives you a rough idea that during GFC it went down by 30, 40%. Could happen again. Are you gonna freak out when that happens, or are you gonna be able to hold the line? But I think if you know it could happen, then it doesn't look like a saber-toothed tiger. That's that's the whole point of educating and understanding. Exactly. And I think having a philosophy, having a framework, making an informed decision, having a plan that you can stick to is the ballgame.

SPEAKER_00 28:00

And that's the game.

SPEAKER_02 28:01

Because no matter which investment strategy, including ours, you choose, it will have a bad day. It will have a bad week, it'll have a bad year from time to a bad decade sometimes. The point is that's part of the that's part of the exchange to earn that return. You gotta get through those periods to pick up the return. And um, you know, every time I ask, I often get the question, so what do you think of the markets? What are the markets doing? Because they ask you when they're in funds management, what are the markets doing? And often my response is if you're worried about what the market's doing today, you probably shouldn't be in the market. Right. So there's no point to look at it every day.

SPEAKER_00 28:36

This is a classic because we've just come through the black Black Friday sales. Some of those, some of them are still on. Yeah. And I love the idea that we, as humans, we all love buying things that are on sale.

SPEAKER_03 28:48

Yeah.

SPEAKER_00 28:49

When the market is sold off. Yeah, we don't like buying it. We hate buying it. But the but the expected return, the future return of those stocks is much higher than it was a week earlier.

SPEAKER_02 29:01

Yeah, it should be higher. All that's equal should be higher.

SPEAKER_01 29:03

Yeah. On that as well, like given that we've got Barney in the studio, I actually wouldn't mind like giving our investors the opportunity to look under the hood. So yesterday, you have a really good story about Facebook or Meta in 2022. And so just to give our listeners a bit of context, 2022, so I think that's right around when Russia, Ukraine exploded, there were supply chain issues and share markets had come off a bit.

SPEAKER_03 29:23

Yeah.

SPEAKER_01 29:24

And so you you actually took us through like how does that actually play out in a portfolio when a company starts to have a massive fall? And so to investors, that might be really scary. Let's get out. But like, how did that actually play out when you look under the bonnet portfolio?

Under The Hood: Meta And Credit Spreads

SPEAKER_02 29:37

You look at a few things. Um the Russia-Ukraine example is interesting. I'll come back to that in a minute. Um, but you look at a stock's price drops for whatever reason. Yeah. Um, it's very difficult ever to kind of figure out exactly what happened. But the point is the price dropped, which is the market telling you that now you have to pay less for the same unit of a stock than you had before. If nothing else changed, then that should mean a higher return. Like you said, overall market drops to that. But then there's another component, which is the cash flows. You also have to look at well, what happened to the cash flows of this company? If something, for example, you know, if they're they had two factories and one of the factories burned down, then that's probably gonna impact their cash flows going forward. I probably have to worry about insurance payouts and all that, but it's gonna probably impact their ability to generate cash flows. In that case, the price drop was probably, you know, there's a good reason for it. And you're probably not changing much because it's attractive on the valuation side, on the price side, but it's less attractive on the profitability side now. Gotcha. Yeah. But if you can see that the profitability rankings overall haven't really materially changed, uh, or or you know, on average, it looks like it's still a fairly profitable company. So the net effect of the price dropped, and maybe there's some change in profitability is still that overall it's a higher expectation stock now. So then you can actually change the portfolio, you can move. Um, the interesting thing is probably more on the bond side as well. People don't like talking about bonds much, but uh I love bonds. So um there's this idea of credit spreads. So when uh often when economic, bad economic news comes along, that probably has an impact on a company's ability to generate cash flows and therefore use those cash flows to pay off their debts, right? That makes sense. Yeah. You know, if I'm gonna, people are gonna be buying less of my things, I'm not gonna get as much revenue, therefore I probably won't pay my debts as easily. So what that means is there's this idea of default probability that goes up probably, right? But what really happens at the same time is the price drops significantly. So anytime the bond yields go up and the price drops, there's probably two components in there. One is the investors are just really scared, and they're saying, well, if I'm gonna lend you any money, I need a much higher interest rate to lend you that money. Perfectly rational. You know, middle of GFC, nobody's gonna lend anything to banks, right? That's one example. But then there's also this genuinely has the default probability gone up? Is this more likely that this company is gonna default now? Very difficult to disentangle the two. But historically, when you see credit spreads widening, expected returns go up. So what that's telling you is it's worth more to take that credit risk at that time than when everything's fine, right? So it's sort of like almost systematically training yourself to say, that's a buy. That's not a time to sell and run away, that's a buy. You have to do your due diligence, you have to be prudent. You don't want to buy a bond where actually the default probability has gone up, right? Because then you're not getting, you're actually making a worse trade. Yeah. But it's just systematically training yourself to say, at minimum, don't do anything, right? Unless the plans change, that's a separate issue. But at minimum, don't do anything. But in some ways, it might be an opportunity to buy, depending on your circumstance. Uh definitely not don't run out the door and say, yeah. So it's just training yourself. But the to your our earlier discussion, the whole industry seems to be just geared at making you run out the door and transact. So and that's the dangerous part.

SPEAKER_00 33:02

Yeah, I've got some advice for our listeners, and that is when you are feeling anxious like this, do not ask, at least don't ask a capital partner's advisor, should I be selling down my portfolio? But I do think it's absolutely right for an investor or a client to ask their advisor, do you think my asset allocation is right for me? Absolutely. Does my asset allocation really still suit my plan?

SPEAKER_03 33:34

Yeah.

SPEAKER_00 33:35

Are my cash reserves going to be okay if something untoward happens? Like if the markets really do, if this is all this noise, like at the moment we're hearing about Trump to who would have thought, as you said yesterday, Trump 2.0. But you know, the the Ukraine crisis grinds on. China and America keep, you know, muscling up, and you know, China's muscling up to Japan during the week. There's all these things that are going to be. There's always things going on. There's always lots of news. But at the moment, people are feeling a little bit jittery. The question is, is my asset allocation right?

SPEAKER_03 34:09

Yeah.

SPEAKER_00 34:10

Is my are my cash reserves going to be okay to do all the things that I want to do over the next two to three years if the markets aren't what we'd hoped they would be? And that's all about adjusting the plan. Yeah. So you're always acting on a plan. And and acting on an investment philosophy, as you've you've reiterated several times today. And I think it's such good, sound, wise counsel.

SPEAKER_02 34:37

The interesting bit on the flip side of that is the FOMO partners. So what happened pre-GFC, we saw, is if you had a 6040 portfolio in about 2004 or 5 and you left it alone, equities had such a run that you were sitting on an 8020 by the time you have. And a lot of people didn't go to the advisor and say, hey, I was at 6040 five years ago. Should I be at 8020 today?

SPEAKER_00 35:02

We will not let that happen. Exactly, right? Portfolio drift, we will not let that happen.

SPEAKER_02 35:06

So it happens on the other side too. Not just I'm scared, so I want to do something different. It's like times are great. I should probably take some profits, absolutely. So it it's not so a lot of the FOMO comes from when times are going really well. Perhaps the risk profile needs to be still reflected in the portfolio. And I think a lot of more recently, in my opinion, post-COVID with the crypto and the NFTs and the you know SPACs and all kinds of stuff, there's a lot of FOMO in terms of retail investors. I feel like they're getting into pretty, you know, complex, opaque type investments and the hope for a quick buck. And it's unfortunately worked out poorly for a lot of them.

SPEAKER_00 35:49

Yeah. And that seems to be generational. Um, younger generation seems to be in a tearing hurry. Um, so hopefully we can do some work aiding to educate people.

Asset Allocation Check Versus Panic Selling

SPEAKER_01 36:00

Yeah. I I do just want to put you on the spot and get your crystal ball out for the last second, Barney, not to ask where markets are going, but actually to say, sort of, we've talked on a previous episode in a little bit today about how systematic investing's evolved, but sort of what's next for the evolution of systematic investing.

SPEAKER_02 36:17

Yeah, look, I think um what people are looking for is that big, you know, big breakthrough. And and those I I feel like they come every 10, 15 years or so. So size was in uh sort of like uh early 80s, value came along 91, 92 from a quote unquote source of return perspective. Credit was in sort of 2009-ish, eight, nine ish, uh profitability in sort of 2012, 14 or so. But the thing is we these these models are getting pretty comprehensive, they're getting pretty good at explaining returns and building a map. So a lot of the more recent innovation has been incremental, right? So we've done some work on short-term reversals and the momentum. So basically, stocks have this weird behavior where if they've been going up for the last six months, they tend to keep going up. That signal says they'll keep going up for a bit. But then they do this funny thing. If they've been going up in the sort of short term, they tend to reverse. And it's just a weird focus. And it what it's referring to is there's some sort of temporary pressure, liquidity pressure, that when it is gone, it turns. So how you measure that and how you sort of peak that out out of the noisy data is really interesting. So we've done a bunch of work on that recently, and we've implemented that about um a year or so ago uh in our portfolios to say how you measure that short-term performance lets you have a much better handle on how the things might reverse. So that's an example. We're looking at, we've spoken we've been speaking about profitability a lot to say, companies that have been highly profitable tend to stay profitable. But there's a related phenomenon, which is that companies that have been growing their profitability very quickly tend to have additional sort of profitability going forward. So there's some new information in the growth of profitability than just the level of profitability. So that's being sort of eked out to say, can we? The research is done, we're sort of working out how to implement it. Um, that might improve the profitability metric even further. So there's a lot of this kind of like tweaking that goes on. And then I don't know what the next big thing is gonna be. It will be what it will be, but we're looking. We keep keep an eye on it.

SPEAKER_00 38:23

How many people are there in the research group?

SPEAKER_02 38:25

Putting aside Chicago booth, how many people are there directly in the I think we have about 20 PhDs and about probably somewhere between 150 to 200 people in the research group. And they're working on all kinds of cool stuff. Um, and we're all constantly looking. I think one of the um the things that dimensional is we're just generally very curious people, and we look at a whole bunch of stuff, and where it makes sense, we implement it. But there's a lot of stuff we look at that doesn't make any sense, and we just kind of put it away, we don't talk about it. Uh, so there's a lot of time being spent on things um where we've done a fair bit of work, like on intangibles and things like adjustments, like goodwill to to price to book ratios. And we looked at it every which way, and it's just like, yeah, it's theoretically I can see what we're trying to do here, but it doesn't really make a difference to the portfolio, it's a bit of noise that we're adding. So then leave it alone. So um the key is, in my opinion, the key to the future as an investment house like dimensional is that maintaining that standard of research. And I'm absolutely comfortable saying that at our firm, what I see today is we will maintain that standard. Because that's at the core of what we do. Um and if you maintain that standard, I think innovations will come as they come.

SPEAKER_01 39:34

And I think to close out the closing message for our clients, as we've as we've sort of talked about all throughout the episode, is when you're really clear on your investment philosophy, you're acting on a plan and you're really disciplined, you surround yourself with the right people, and you're not you're not bomb bartered by that noise. Um, you get really, really good outcomes. So I think our our counsel would be to really stay disciplined and make sure that you continue acting on a plan. Barno, David, thanks for joining today.

SPEAKER_02 39:59

Thank you very much.

SPEAKER_01 40:00

Great. Thank you. Appreciate it. Thanks for joining us on the Purposeful Investor Podcast. We love being able to share our insight and guidance. If you've enjoyed today's episode, make sure that you subscribe, leave a review, and share it with someone in your community. We encourage all of our listeners to share their questions and ideas that they would like to know more on. You can contact us at ask at capital partners.com.au. All information in this podcast is general in nature and does not take into account your personal situation or circumstances. Capital Partners Private Wealth operates under the Australian Financial Services Licence 227 148. Thanks and see you next time.