Ep. 73 | Why Small Stocks Beat the Magnificent Seven in 2026 with Apollo Lupescu

The market was down 4.3% in Q1 2026 and the headlines were bleak. But look under the hood and the story is completely different. In this episode of The Purposeful Investor, David Andrew and Aden Wilkins speak with Apollo Lupescu from Dimensional Fund Advisors to break down exactly what happened in financial markets in the first quarter of 2026, why the headlines don't tell the full story, and what smart investors should actually be doing about it.

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Chapters:
(0:00) Introduction & Episode Preview
(1:00) Apollo Lupescu Joins from California
(1:50) Win of the Week
(4:35) Q1 2026 Market Recap and What Actually Happened
(8:30) The Magnificent Seven Dragged the Market Down
(16:45) Factor Investing Explained: Value, Small Cap & Profitability
(19:00) The Small Cap Value Case
(24:00) The Odds Game. Value vs Growth Over Time
(26:30) Australian Market Returns 
(30:45) The Media's Role in Catastrophising Markets
(38:45) Why Fear Is Hardwired Into Us and Kills Returns
(41:00) IPO FOMO: SpaceX, Anthropic, Open AI and Why You Should Wait

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Recorded and produced by Podwave Studios https://podwavestudios.au/

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

The Market Snapshot Teaser

SPEAKER_00 0:00

It's called Sandis, and they make these memory cards. And in US dollars, that company was up for the first quarter alone, over a hundred and fifty percent.

SPEAKER_01 0:08

If you did not have an exposure to the magnificent seven, then you would underperform in your portfolio.

SPEAKER_00 0:15

And not only that small underperforms large, but also value beats growth. And when you look at the US stock market in January, the SP 500 was up about 1.5%.

Aden 0:25

So what was some of your comfort or wisdom you said to that family who might still be feeling very uncertain?

SPEAKER_00 0:31

These seven companies were down about 11.3%.

SPEAKER_01 0:35

But if you actually want to make money, if you really want to be a successful investor, you have to follow the rules, right?

Welcome And Guest Introductions

Aden 0:42

Which is Welcome to another episode of the Purposeful Investor Podcast. We're a podcast for successful families who want to make smart decisions with their money and avoid costly mistakes. We're here so that you and the people you care about are going to be okay no matter what. And we're also here to set you up to live a great life. Thanks for joining us on another episode of the Purposeful Investor Podcast. Joining me in the studio today, we've got David Andrew, the founder of Capital Partners. David, welcome to the podcast. Thanks, Aidan. And dialing in from the other side of the world, all the way in California, we've got Apollo the Pescu from Dimensional Fund Advisors. Apollo, welcome to the podcast.

SPEAKER_00 1:21

Gentlemen, thank you so much for the uh the invitation. It's great fun to uh to talk to you again.

Wins Of The Week

Aden 1:26

So today we thought we'd take the opportunity to almost come up for air a little bit. It's we're looking at the first quarter of the 2026 calendar year, and there's been a lot that's been going on in financial markets, the share market, and the world as a whole. So we want to just sort of recap what's happened and almost step back and look at all the events and what that's actually meant for share markets and the broader world. But as our listeners know, before we get into the content of the podcast, we like to start off with our little win of the week. So that's anything you can reflect back on in the past week. That's been a little win either in your personal or your professional life. So, Apollo, why don't you start us off with your little win today?

SPEAKER_00 2:05

My little uh win uh of the week is uh is really about uh being able to connect with a family who worked with an advisor. Uh, and over the past uh a few months they have been really anxious about what is going on. And uh uh I was fortunate enough to be invited to meet with that family, and we spent maybe about two and a half hours. Uh uh and at the end, I could see that that between you know our comments, my advice, and mine, uh, there's just almost like a weight being lifted off the shoulder of that family once they understood a little bit better what's going on and how they're invested. Uh, and to me it was an amazing uh feeling to be able to educate somebody and and and and very, very promptly being able to see uh the impact that uh uh that that uh it can have on a family. So to me it was a big win, just just uh you know feeling that that that sense of uh relief that the family had once they understood a little bit better uh what their investments are all about.

Aden 3:05

Definitely. I imagine there's there's lots of people probably feeling similar wise at the moment. So nice that you can have that impact with someone who's feeling that way. What about you, Dave? What was your little win?

SPEAKER_01 3:13

Yeah, we just had the um a long weekend here in Perth and um it was to celebrate Anzac Day. So Apollo Anzac Day is our effectively our remembrance day when we remember the Australian and New Zealand troops that landed on Gallipoli in 1915. And then all the sacrifice that's happened since, and uh Australians take it very seriously. And uh yeah, I just always love the day and I love reflecting on I guess the solemnity, the way the way we just pause and acknowledge and remember those people. So yeah, super cool. Also happened to be my second son's 30th birthday, so we had a little bit of solemnity and a little bit of celebration all at once. So that was kind of nice.

A Wild Quarter In World Events

Aden 4:08

Nice, a nice balance. Yeah, and you? Uh so mine was a personal win as well, so just a really little one, but um just sorting a few things out around my place. So got a few prints that I'd bought, put them up on, they're all up on the wall, set up the wine rack, a few little pots, so just all those little sort of house or life admin things that you sort of get the opportunity to do on a long weekend. So do you need some donations for the wine rack? Oh, you know, I'm I'm I'll never say no to that. I can help you with that. Um so let's dive into the content. So, as I alluded to, there's been a lot that's been going on in the world, and we're sort of recapping what's happened in the first quarter. But I thought it might be useful to actually look back and say, since January, the start of the year, what are the really big events that have happened? Because there's been so many that it's almost hard to keep track of. So why don't we start with that?

SPEAKER_01 4:55

Yeah, well, I don't know about you, Apollo, but I know I know the world's a crazy place, and I know that there's always a lot of stuff going on, but I was just looking up a slide um in January the US military captures um President Maduro of Venezuela. Um then President Trump on the 9th decides he really does want to acquire Greenland. And then we fast forward there's a government shutdown at the end of January, and then the government shutdown ends, and then the Supreme Court rules that the uh president's tariffs are illegal, and then the president on the 20th immediately bounces back and says, no, no, no, we've found a new way to do this, there's gonna be a blanket 15% tariff, and then the mother of all uh events uh on the 28th of February, the US and Israel launch coordinated military strikes. And that's been the narrative for the all the way through to the end of the quarter in March and and and ongoing. And it kind of strikes me that the story you told about your little win, that family that you got to meet with, were understandably rattled. You're talking to advisors and investors all over the world all of the time. I imagine this is one of the most unsettling periods you've seen in quite a while, Apollo.

Q1 Returns And What Changed

How The Magnificent Seven Skewed

SPEAKER_00 6:27

For sure. I mean, it is not only unsettling because of all these economic events, uh, but something that I think we touched on uh a while ago, which is this idea that uh before we go to numbers and data and economics and money, uh, we have to acknowledge the human element. There's a lot of suffering that is going on at the moment uh in the world, and uh there are troops. And I know families, um, that particular family was also anxious because they had a family member deployed. Um, and you also have all these folks that you see images of rubles and buildings and children hurting and all that, and that's really impactful. Um, and and and those images, at least for me and and for people, uh they they trigger some emotions. And I think uh what's been so interesting is that the emotional impact uh that these events have had on our psyche. Uh and uh quite often I think that that what a lot of people uh tend to do is associate these emotions to something that they see as obvious outcomes in the market. Uh and what we found over and over and over again, and uh as part of you know the conversation that we had with that family, is it is really important to acknowledge these emotions because they're real. That's what makes us human. And at the same time, uh you know, professional investors and managers and advisors like you uh are able to acknowledge these events and at the same time disentangle them from investment decisions and make sure that whatever decisions we make about our money, they're based on much more pragmatic reasons. Uh so when you look at data, I think that that that's one of the ways that we found it's really powerful. Uh, we can go back, uh, as you said, to January. And and you know, last year, both in the Australian market, the US market, global markets is actually did really, really well. The Australian market did tremendously well. Um, the US market did well. And when you look at the the US stock market in January, the SP 500 uh was up about one and a half percent, uh, which is a nice result. It it did move up. Uh, and uh February was followed by a negative month. Uh so by the end of February, there was not much. I mean, the market was pretty flat, uh, not much going on if you just look at the data. And then at the very end, that's when we had the bombing of uh of Tehran and the military uh action uh with Israel and the United States. Uh and what's interesting is that that that's when you saw the SP 500 dip. And for the month of March, it was a negative 5%. Uh and and what I think what's really fascinating is that when you look at the entire quarter for the first three months of 2026 in the US market, uh, we saw a downtrend of about 4.3%. Uh and and there's some things that I want to just kind of touch on for just one second, David, uh, is that when you look at that 4.3%, the first thing to know, which is so interesting, is that if you rewind the tape exactly one year to the first quarter of 2025 in the US stock market uh in US dollars, what you see is that the performance of the market was identical, negative 4.3%. And then second quarter was positive, despite the tariffs and all the nuttiness, third quarter was positive, fourth quarter and positive, and uh uh and really uh the SP ended up very, very nicely for uh 2025. So just because we had this negative quarter, folks, don't read too much into it because it doesn't mean as much as you think. It's really just um uh something that we've seen before. And the fact that the market dropped the first quarter says nothing about what's gonna happen the rest of the year. Second thing to point out uh is that when you look at the performance of any market, including the US stock market, including the Australian market, uh not every company goes up or down. Uh, and for the first quarter, what's fascinating is that you had about 53% uh of all companies, the stocks in the SP 500 dropping in value. And that is called a negative return. You lost money on those companies, on those stocks. Uh and what's also interesting is that roughly half, 47%, went up in value and you made money on them. So not every stock went down, not every stock went up. Uh, and it's it's interesting to see which ones might have gone up or down. Uh, because, for example, if you look at a uh a company who did the best in the US stock market for the first quarter, it turns out that if you are a fan of photography, you might recognize this company. It's called Sandisk, and they make these memory cards. Uh, and in US dollars, that company was up for the first quarter alone, over 150%, over 150%, Dow Chemicals up about 80%, Moderna, the vaccine maker, 70%. You have the uh, you know, the energy companies up over 30%. So, as a swath of sectors, it wasn't limited to just energy. And in fact, a lot of other companies did quite well. Uh, and it's also fascinating because on the lower end, you had companies like Estee Lauder, the uh the cosmetics company, down about 30%. Uh, you had other companies like Paramount, which is the uh entertainment company down about 30%, uh, Workday, which is a software company, uh, and uh DoorDash and so forth. So it it wasn't necessarily clean that, oh, these companies made money, these did not make money. Uh, but the third point that I want to make is also very important, is that when we measure the market performance, in this case, negative 4.3 for the first um uh six months, when we think about the market, it's not just the individual result of every company, uh, but the way we arrived from 500 different individual numbers to a single number is also by taking account of the size of the company of the stock. And in that respect, the largest stocks in the market, based on their ownership value, they receive a greater emphasis on their performance. And this is where it gets so interesting because these magnificent seven that you've heard so much about, uh, and that's NVIDIA, that's Microsoft, that's Facebook, Amazon, Google, uh, Tesla uh and uh um and Apple, these seven companies are important, not only because they have technology and AI, but they're some of the largest in the US stock market and in the global markets for that matter. And what's fascinating is that if you take these seven companies aside, again, keeping in mind uh that that the SP was down about 4.3%. What's interesting is that these seven companies were down about 11.3%, significantly more than the market as a whole. And what's so remarkable uh uh is that that the remaining stocks, because they left a hole in the SP. So if you look at the SP 500 minus the seven, let's call the SP 493, it was pretty much flat. It was pretty much flat. So, you know, if you're trying to attribute and try to explain one that why the market went down, it's tempting to say, well, the war was bad for the market. Well, it turns out that the market for the quarter was pretty flat. It is that these seven stocks dragged it down significantly from almost even uh to a negative 4.3%. Uh, and and I'm not sure that I would associate all these stocks with the Strait of Hormuz and oil. I don't know about Facebook or Google or NVIDIA, uh, but they did have that impact, that significant impact, because among the seven of them, these stocks amount to roughly about 32% of the value of the entire SP, meaning that about a third of the performance of the SMP is driven by these seven stocks. Uh, so they have a tremendous impact on the market results as a whole. And the same exact seven stocks are also part of Nasdaq at 51%, so significantly more. Uh, and if you have a global allocation that includes US, Australia, New Zealand, uh, Japan, and so forth, at that point, you're still going to own these, but in a smaller percentage, you take away that concentration risk, uh, and it's only about 18%. And that's why we saw that among these metrics, NASDAQ did the worst, being the most heavily concentrated. Uh, you know, SP was in the middle, and the best performer among the three was the global allocation. Uh, so I really wanted to uh emphasize these these three points when you look at performance, uh, that uh, you know, it is something that we've seen in the past, just because the first quota is negative doesn't mean much. Look at last year. Secondly, uh, we had a variety of returns, positive and negative. Uh, and then thirdly, is that uh these magnificent seven are really impactful to the market because of the high percentage they are uh in the US and even globally, uh 18%, it's it's it's uh it's it's still a significant portion.

Small Value Profitability Explained

SPEAKER_01 14:55

The magnificent seven for the quarter to the end of March 31st, you know, the falls in those seven companies represented$2.4 trillion. So the people who have been scrambling to get exposure to the Magnificent Seven, thinking, okay, this is my silver bullet, they're kind of hurting right now, which is a fabulous uh advertisement, I guess, for the diversified portfolio. But I do want to just dig into one little piece of this, Apollo. These seven stocks are considered kind of growth stocks, they're they're very profitable stocks, but they're but they're they're very growth-oriented, the the market is backing them to be very successful into the future. But the the only way that this result could have happened where the the rest of the S ⁇ P 500 was flat, was where other types of companies have actually done pretty well. And one of the things that we talk about a lot with clients, you know, and everyone thinks most people think index index fund investing is fantastic, and we think it is for a lot of people. But the way we invest, which is to, you know, look at the portfolio a little bit differently. You want to own a broad portfolio of stocks at a very low cost, tick. But there are other dimensions of return that are really important. So the idea that you're buying lower priced stocks, value stocks, the idea that you're buying some smaller stocks, smaller stocks grow to become big stocks, uh, but also the exposure to profitability. Can you just talk us through how those different factors have contributed to the performance of people's portfolios over the last sort of 90 days, the last quarter?

The Catch Time And No Guarantees

SPEAKER_00 16:48

Yeah, and this is really important because as you said, and and uh I think we we we kind of touched on this, if you look at investing today, and let's just take one market, you can look at Australia, you can look at the US, and I'll use the US just because I'm you know the more familiar with those numbers. Uh, you can think of the market as being this uh a square where all the stocks fit in in this particular square. And then how do you delineate among them? How do you organize and separate them? Because certainly not all the stocks are the same, is crucial. And this is where academic science came along in the late 70s, uh, early 80s that pointed out to you exactly to your point, David, is that if you look at these large companies uh that are part of the SP 500, they're the some of the largest, most uh mature uh companies that he can find. They have a great track record and a good operating history. Those are part of the market. Uh, and and if I were to kind of think of a postage child for them, it would be McDonald's. Uh it's been around for a long time, all over the world. It's it's a fantastic company. Uh great. That is the postage child, in my opinion, for SP 500. Now, in the US market, in the Australian market, there are companies that still trade, but they're not large enough to be included in that club of the SP 500. And in the US, the example that I typically think of is another burger chain that is called Shake Shack. And Shake Shack, as opposed to McDonald's, uh, it's still publicly traded, it's still a public company, uh, but it is not as large as McDonald's. Uh, I'm not sure how many Shake Shacks are in New Zealand, Australia, but uh it is it is a um uh a pretty well-established burger chain, not nearly as big as McDonald's. And that is part of the market in the US. So if you think about these two companies almost intuitively, their risk return potential is different because these larger companies are they are more mature, they have a longer track record, uh, so they they they seem less uncertain. Uh, on the other hand, if you think about which one of these companies can grow and let's say double in size, well, most people say, well, it's probably easier for Shake Shack, the smaller company. And you can see that in the data. If you had looked at the uh SP 500 uh over the long run, and uh there's a book that that we have that that certainly is available to uh uh Australian investors as well, that's called the Matrix Book. Uh and the Matrix book has a lot of data, a lot of incredibly powerful data. Uh, and uh, and it's it's there's a US version, the Australian version, and I'm gonna use the US version again because I'm familiar with the numbers. Uh, one dollar over about a hundred years of of data since the 20s would have grown in the SP 500 roughly at about 14,000 uh fold increase. Uh so one dollar increase 14,000 fold pretty much in my dad's lifetime. Um, and what's remarkable is that if you had invested the same dollar, not in these large, well-established, but the smaller companies, um, and these would be uh the Shake Shacks of the world, again, the smaller companies, uh, if you look at the dimensional small cap index in that book in US dollars, it would be roughly about$54,000 in growth. So a significant, uh, significant what's called premium, uh, which is uh a growth uh difference between large and small. And in the 1980s, the question was what about all the large and what about all the small? And that's when the distinction came along that you also have to pay attention to how much are you paying to own something? What's the price relative to some accounting fundamental? The easiest one to think of is earnings. Given the company's earnings today, what is the price that I pay? But the way, you know, you can also be more sophisticated and think of another term called book value, which is how much does it cost you to buy a dollar of assets from that company after liabilities are paid. Uh, and the lower cost companies are called value stocks, and over the long run, they outperform the more expensive counterparts called growth. So as an investor now, you know that not only that small outperforms large, but also value beats growth. So knowing that value beats growth and small beats large, the one part of the market that ought to give investors the biggest bang for the buck is small and value. And again, if you look in the matrix book at this dimensional small cap value index, the same dollar would have grown uh through the end of 2024 at about 166,000 US dollars. Uh, so what this has given investors is a primer, not just for the US, but around the world. If you look at the market, pay attention to the entire stock market, not just the large ones that might be on the news. And then if you are purposeful in emphasizing more small companies and value stocks, as an investor, you give your chance to earn a higher expected return, a higher payout on your money. Uh, and to me, I think this is absolutely uh crucial because you can increase your expected returns without having to pick stocks, without speculating, but being very strategic and systematic. Uh, and that has been a really amazing primers that that particularly institutional investors have been using for quite a while now, and uh and now it's Permeating more and more into the retail uh market. Later on, there was another distinction that was made, which is not just large, small value growth, uh, but another distinction that has to do with the profitability of the company. And what uh research found is that companies that by and large are profitable, uh they continue to stay profitable. And companies that are unprofitable, they continue to stay unprofitable. And you certainly have to define where profitability is. Uh, and in that respect, you can have a higher expect return by emphasizing more, not just small in value, but also companies with a higher profitability. So now if you think of an elevator, you used to have one cable which is small versus large, then you add another cable, which is value versus growth. Now you're adding a third one. Uh and um, and and and basically the main benefit of adding these more is that if one of them happens not to be present any one year, the other ones will uh uh will hopefully hold you up. Uh so that's sort of the idea that that that led to this um uh uh uh improvement. Uh and what we think of as index beaters, uh these these funds that are designed to be the index without picking stocks, without speculating, uh, but by being very systematic in the way that we reshuffled the market deck and emphasize uh different parts of the of the market. Now, with that, David, I I couldn't just do this without really kind of you know, kind of uh touching on what's the catch, because somebody just said, great, I mean, it seems like it's too good to be true. What's the catch here? And the catch, the primary catch here, it doesn't have to do with the numbers. The numbers are perfectly fine, but the same with everything in life. This is not about certainties and guarantees. There's no certainty or guarantee. You know, we're talking about going swimming. That doesn't guarantee me a longer lasting, healthier life. In fact, probably by swimming off shark would get me. But the point is that that you look at the odds. You also always always try to play the odds and put the odds in your favor. So, in that respect, if you look, for example, at value beating growth, what you see is that over one year, roughly about 59% of the time, you see that result. Uh, and it's so it doesn't happen every single year, about four and ten years, you're gonna see growth beating value. Uh, if you look at five years, that it's about 70%. So if you had a five-year horizon, 70% of the time you'll see that that value beating growth. But again, it's not trivial. 30%, it's not there. And even if you have five years and you ask, well, which one would you like to emphasize? The one that gives you 70% odds or 30% odds, value still is is the one to go. But remember, they're going to be stretches of time, even 10 years. You look at 10 years, it's about 77%, uh, and 20 years, uh, and 15 years is 86. So the more time you give these premiums to work for you, these differences, um, that the, you know, the more likely it is that that you will find uh uh those uh in your favor, but it's not a guarantee. And you have to give the system time to work. And that's why working on an advisor is such an important uh part of success using this uh this particular strategy.

Aden 25:08

I'm really glad that you mentioned the whole time horizons part there, Apollo, because it's so important. But I think it's also important that when um to give value a bit of a pat on the back when it has shown um that it's outperformed. And I'm not sure if you've got the figures on hand, but it has been a really, really strong quarter for the value premium. And I think it probably relates a lot to that point you mentioned before. Everyone looks at the big headline figure, which is negative 4% for the market. But when you actually take the time to look a bit further under the hood, what do the figures look like if you actually look at value stocks?

Value Shows Up In The Numbers

SPEAKER_00 25:39

Well, for example, in the US, when you look at large value, when the market as a whole was down about 4.3%, large value uh was up about 2%, uh 2 to 4%, depending on how you measure it. Uh, you look at small value, small value is up about 5%. So in a market, when you see all this uh uh you know bloodbath, like, oh, things are going down, they're not going on true, but it's still like a 4% loss of our quota is not pleasant in the SP. There are parts of the market, for example, in the US, uh like small, like value, that actually had positive uh outcomes, positive returns, which is really, really impressive that uh they're paying off at a time when it seems like uh uh there's nothing really working. Well, there are absolutely parts of the market working in this particular quarter, as well as last year, you saw that value and small really uh did quite well.

SPEAKER_01 26:28

Yeah, and I think if we look at the Australian market, this is a really important thing. It's easy to focus on that negative four percent for the quarter. But if I look at this um, you know, for the for the Australian market, um at at the end of March, the Australian market was sitting at around 11. you know 59% for the full year to the end of March. So even though people have had a negative quarter, they've had a really, really strong year. And this is such an important anchor that we need to keep bringing people back to. If they want to be successful investors, okay, so let's just call this. If you want to be a speculator, that's fine. You can jump in and out of the market, you can do all sorts of stuff, you do what you need to do to get your jollies, I guess. But if you actually want to make money, if you really want to be a successful investor, you have to follow the rules, right? Which is really be disciplined, have an investment philosophy, understand that you're playing the long game. But if you look at the whole of the Australian market, at least at the top 300 stocks in the Australian market, that's 11.59 for the year-end of March. Do you know what the value component of that is? 27%. So that's a massive outperformance. And all you had to do was show up. The small company outperformance was it was 13%. So several percentage points better than the largest companies in the market. So this is just a reminder for our viewers and our listeners, particularly those who are new to the podcast that aren't our clients, is that so much of the financial industry creates mystique around what you have to do to be successful. Actually, what you have to do is have a really sound investment philosophy, and you have to show up, and you have to show up and stay there. And that's what brings you the real success over a long period of time, right?

SPEAKER_00 28:34

And David, to that point, it's so um misleading in a way to cite statistics. Uh, and I looked at uh, you know, there are all kinds of international small value that have done incredibly well over the past year. You have Australian value, all these numbers. The trick is that you have to have them in your portfolio before these great results, not after. Uh, so you know, a well-diversified, well-put-together allocation would not necessarily miss out on these. Uh, and I think that's really important that these numbers are not just like in the in the rearview mirror, but that you had that uh piece, that allocation in your portfolio in a thoughtful way, without placing big bets to your point. Uh, so it's it's crucial that not just you know, looking at this, this is an abstract, a well-constructed allocation would have had the discipline to hold these investments uh at a time that perhaps they didn't look great because out of nowhere, boom, here comes the great result, and you had to be there for that.

Rules Of Engagement For Investors

SPEAKER_01 29:32

Yeah, and I think that's true, particularly over the last five years, where the Magnificent Seven, certainly in the US, have been the main game. If you did not have an exposure to the Magnificent Seven, then you would underperform in your portfolio. But what we always find endlessly fascinating, Apollo, is that our portfolios are naturally underweight in the Magnificent Seven. They have to be, right? Because we tilt our portfolios towards value, towards small. And yet our portfolios rarely suffer for that fact. You know, during the tough times, they report they perform broadly in line with the index. But when value and small perform well, they kick along and perform better than the index. So it's I'm not calling this a free lunch ever. There's no such thing as a free lunch in investing. But it's a really interesting dynamic that by diversifying your portfolio in a super smart way, you can achieve really quite amazing results. What's it saying? You're you're not going to make a killing, but you're not going to be killed. Totally.

Aden 30:38

Yeah, that's so true. What I would also like to touch on, Apollo, I'm not sure if this maybe relates to some of the conversations you're having with the family, but particularly when you're looking at markets, and it it always seems like we're we're forward-looking, we're looking at the next thing to be concerned about. But if you actually look back about a year ago or just over a year ago, it was right when President Trump came out with the tariff board holding it up. And the market fell significantly in the middle of April last year, the broader market. So what what I've been doing a little bit with clients is almost just um showing the one-year return a year from that date and saying it's very easy to cherry pick data because the difference between looking at the very bottom, which was only a year ago from when the tariffs came out to the recovery, is sometimes been about seven to eight percent, just looking at a three-week difference. So so I guess my question to you, Apollo, is it still feels like there's lots of uncertainty in the world. There's not necessarily been any resolutions from what's been going on. So it so what was some of your I guess comfort or wisdom you said to that family who who might still be feeling very uncertain?

Markets Adapt During Real Crises

SPEAKER_00 31:50

Yeah, and I think that that um what what I what I what I wanted to re reiterate to them is that that the emotions that they feel uh they're absolutely legitimate. Um and they're anxious about the family member, they're anxious about seeing the world. Uh, there was an element of politics involved in it. Uh, and uh and and I do have to say it that those um are legitimate. That's what makes us human. Uh and the perspective that I wanted to kind of give them is that when they are uh putting the money to work in the stock market, they're not really gambling it. They're not really uh putting it into a casino, but rather what they're doing is that they are buying ownership in companies, into businesses that allow them to uh to get uh ownership in that business. Uh and these are companies like Facebook, like Coca-Cola, like uh Newmont Mining, like you know, you have all the banks in Australia, you have uh Toyota, you have all these companies around the world that have opened up the ownership. So, what I try to frame to them is that when a situation like this happens, what the question that the market is asking is not about the morality of the event, uh, but rather more pragmatically, how is this impacting the potential for different companies to operate and make money? And that is the legitimate question because if you are a business owner and you want to sell your share, you want to make sure that you get paid complex, you get compensated for that share of ownership and you don't get underpaid. If you want to buy, you'll make sure that you don't overpay. Uh, so that's what the function of the market is. And in that respect, when this event happened uh and we had the war, uh, what you saw is US Airlines, for example, that had flights in the Middle East, well, they dropped in value because their operations were disrupted. At the same time, contractors, um, uh contracted companies for defense, uh, they went up in value because there was likely they're going to be more orders. So the impact for each company is what the market assesses. But what I also told them that I think uh it was quite interesting, is that from my experience, and when we look at the data and when you look at what happened in the past, uh what is absolutely fascinating is that when there's a challenge uh to which people are confronted, or companies or the markets, or an entire economy, uh what we see over and over is a resilience uh and genuine innovation, that that's human creativity kicks in uh and looks at that challenge and said, How do we move beyond that? How do we get past it rather than just say, well, we're shutting everything down, we're done, because now we have a challenge. Uh so for example, oil. When you look at oil right now, a lot of folks are saying, well, this is bad. The price of gasoline is high and petrol in in Australia, I know we got higher. Um, I think that's the bad news. And it's certainly bad because some people would likely be impacted more than others. But I also find interesting is that that um there are times when petrol price didn't go up. And if you look at the crisis of 1973-74 in the US when um when uh the OPEC countries decided not to ship oil to the US, uh, you had a situation where the government decided that they want to protect people and they did not let the market prices adjust. And this is one of the biggest things that we believe in is markets, markets and and and prices. Um, and if you look in those days, the price of gasoline in the US is about 40 cents a gallon, which is about 3.6 liters. Uh, and uh and and the government said, well, after this crisis, the most that a gas uh uh gas station can charge is 50 cents. So they only moved it up by by 10 cents. But by not letting markets supply and demand work uh and making prices a rationing mechanism, because that's a huge function. Uh, what you had are low prices, but you also had shortages. You had lines and lines of cars waiting at gas stations that had no petrol. Uh, and that was because, again, there was no uh mechanism uh as in the price to ration. Um, and what came out of that, which I think is a really interesting element, is that that there was a realization that maybe these cars that we drive, they're not the most fuel efficient. So let's make others, let's make more fuel efficient cars. There was a uh a highway speed to make sure that that uh we we have some fuel economy. But I think the most important element is that back in those days, the US produced no oil, pretty much no oil, and those two words, energy independence, were spoken for the first time. And over the next 50 years, the US, based on that challenge, uh now became energy independent. And in fact, it is a net exporter of oil. Uh, so to me, whenever something like this happened, rather than go and be negative about, oh, this is so bad, at the moment it doesn't look pretty. But the fact that the markets are allowed to work and the fact that we see over and over that human ingenuity, creativity builds resilience. And that resilience is going to permeate from the individual to the company, uh, to the market, to the society and the and the country at large, that's something that we see over and over and over again. The pandemic was another example. Uh, so to me, when I look at this particular situation, both for Australia and the US, it might not feel great at the moment, the same way that those people at the pump didn't feel great. Uh, it's just that down the road, I do believe that it's going to make uh companies, the markets, and the economy stronger.

SPEAKER_01 37:07

And that is such a wise reflection. And in amongst that, it's very useful, I think, to remind our viewers, listeners about the role of the media in this, because there is a lot of catastrophizing going on at the moment. There just is. And I think that flows through into market prices, you know. But I I'm just looking at my screen here earlier, and I I was looking at some of the Australian stocks that our listeners will be very familiar with. Woodside Energy is up 52.6% this year, Santos is up 31.7% this year, they're very good value companies and they're highly profitable. You know, I just wonder has the intrinsic value of those companies changed that much in the last 12 months? Maybe it has, maybe it hasn't. But the but the reality is there's so much catastrophizing going on in the media that it's very hard for us to keep our heads cool. Yep. And you know, I'm just interested in your thoughts on that.

SPEAKER_00 38:08

Oh, I mean, absolutely. And I think you're absolutely right. It is uh, and again, I'm not here, everybody's spying on the media. Uh, to some degree, I think it is upon us, the consumers of the media, uh, not to confuse entertainment with advice. Uh, media has never kind of said that I'm here to give you financial advice. They're never there to tell you that. They're also all big this business, big disclaimers, entertainment purposes only. That's where their job is. And it's sometimes very bad entertainment, but it's nevertheless entertainment. And it's upon us to upon us to realize that that, hey, there's a distinction between entertainment and advice. And if you are trying to sell entertainment, and particularly the financial media, uh, they're catastrophizing, in my opinion, because there are two fundamental emotions that drive humans. Uh, one is fear and the other one is greed. And it turns out that fear is something that fundamentally saved our species. Because if you go back in the early days and uh you get chased by an animal, you're afraid, you run, and that saves your life. And I think that that uh that's what really the media is trying to do is try to trigger these emotions so you keep watching. Uh, and they've gotten really good at that. They've gotten really, really good, not just social media, but media in general. And if you go now on social media, they know you, they know that, hey, I'm gonna feed you exactly what you want to hear, and that reinforces your views. Uh, so if you have a negative view, it's gonna get reinforced over and over and over again because the algorithm is built that way. So you got to be so careful with your media consumption and and make sure that that you know, to some degree you you understand the distinction between entertainment and advice. Also understand that their business is to sell ads, and the way they sell ads is by keeping you locked into their program. And uh uh and the way they do that is by tapping into your emotions. And uh uh it's been going on for a long time, but I think it's what makes it harder today is that we are glued to our phones uh much more so than we were uh glued in the past to our TVs.

SPEAKER_01 40:08

Yeah, exactly. And what it strikes me with your little example there of talking about the the caveman running away from the saber-toothed tiger to save his own life, you know, the fear of the fight-flight response. At the core of the human condition is to survive and then thrive. And and and those the that that that anatomy, if I can call it that, that evolution, actually undermines us being successful investors because the survival instinct is I have to run away from this perceived danger. I must run away from this perceived danger. But the truth is that to be a successful investor, to thrive as an investor, you actually have to suppress that urge.

Media Fear And Investor Psychology

Aden 40:57

Paula, I wouldn't mind um just delving to a little bit of a different topic at the moment. So there's some big listings that are coming onto the share market, particularly in the AI space. And anyone who's got a phone or has picked up a newspaper has been reading about artificial intelligence, the move towards that. And I think a lot of people are thinking, well, how do I get a bit of that pie? How can I pick the next Apple, the next Microsoft?

SPEAKER_01 41:20

Also SpaceX, you know, that that's gonna be the biggest. I think that's gonna be the biggest listing in history, right? Like trillion dollars. It's just huge. Like, how do you uh FOMO? Yeah. Tell us about FOMO when it comes to those big listings AI, um, Claude, uh, you know, SpaceX, what what's going on in people's heads?

AI Listings And FOMO Pressure

SPEAKER_00 41:40

So there are some very big listings. So let's just demystify a little bit. First of all, what does it mean to be listed? What's this whole thing all about? Uh you know, if you are thinking about deploying your money uh in the market, I think we talked about it when I was in Perth. There are three basic options that you have uh as an investor with your money. I mean, if ideally you would have a financial plan that distinguishes and kind of allocates to these different branches. Uh, but one of the branches is buying ownership in companies. Uh and uh uh the second one is about lending money. Uh, and the third one is investing in uh uh non-economic activity investments, and that could be collectibles, that could be other things that don't have an economic activity, uh, but they can still make you money. Uh so let's focus now on this idea of ownership, uh, which is associated with equity and the markets and so forth. So, what does uh ownership basically mean? Ownership has two different branches here. One branch is called private equity. And what private equity fundamentally means is that the company uh is controlled by the founders or group of people that they control it. And they don't have to tell the world much because it's a private company and you can be private. Uh, and they let in whoever other owners they decide they want to let in, whether it's the employees who buy into the company, whether it's other friends or family, or whoever else they want to bring in. But they have a latitude to choose uh uh who they bring in. And um there's a second type of ownership that you can buy as an investor, uh, which is public stocks. And what it means is that some companies transition from being private at some point that they just a few uh folks control them, a group of people self-selected control them, to now opening up the ownership to the public at large. And that's exactly what's happening right now with companies like SpaceX, uh Anthropic, uh, or uh uh Chad or OpenAI. Uh these companies are right now private, meaning that they are uh controlled by the owners, the founders, uh, and they are the ones who basically decide who they let in. And now they're in the process of saying, well, we want to open up the public, uh, the ownership to the public at large. And because these are so well known companies and the founders are well known, I think a lot of people are looking and saying, I want to jump. Over this opportunity because this is amazing, these companies. And to me, there are some cautionary tales. The first cautionary tale is that this company might have been a phenomenal deal, whether it's SpaceX or Anthropic or OpenAI, at a time when it was really small and unknown. But the better known the company got, the more access they had to capital, the more it increased its value. So by the time you buy into it right now, it might not be a good deal because they know what their worth is. So you might be paying through the nose, and it might be a good deal or not a good deal. So you got to be super careful now if you want to participate in this stage to say, I want to buy it now. In other words, this wouldn't have been an amazing thing if you had known Elon Musk and you talked to him way back when he started SpaceX, that would have been a great time. But over time, as there are multiple rounds of financing, uh the true value of the company to some degree was established. So that's the first thing that you have to really consider. The second thing to consider when you want to participate in the ownership of these companies is to realize that uh in the beginning, uh only a handful of these shares that the private uh holders have will become available. And, you know, I don't know exactly at the moment what it will be for SpaceX, uh, but I think that that that just from my understanding, if you look at this pie of ownership, uh what's gonna happen initially when SpaceX actually releases some of these shares for public ownership, it's gonna be a fraction, let's say about 10% or so of the shares in the company uh that are available uh to uh uh uh to investors in the public market. Uh so what this is saying is that if you are now wanting to participate, you're gonna basically have to fight with a lot of other people because only 10% will be initially available. So what they're trying to do in some ways is create this frenzy that, hey, you need to go get those shares uh and everybody's gonna fight and climb over each other's shoulders to get the shares, but only about 10% will be available. What about the rest of the 90%? Well, it turns out that, for example, in the case of Facebook, there was a period of about six months when these insiders were not allowed to trade. But at the end of the six months, it's quite possible that these 90% can just feel free to go sell whatever they want to sell. So if you rush and you try to get this particular company right now in this stage when only a limited number of their shares is available, perhaps just to kind of really create that frenzy, the feeding frenzy, uh, you got to be careful because listen, this company is still gonna be around. And it's quite possible that six months from now, some of the other 90% are gonna start uh selling. And at that point, you're gonna have another huge supply of shares being available. And that's exactly what happened with other IPOs in the past, uh, which is the process that we're going through. It's called initial public offering. Um, and when that happens, you might find yourself basically, this is not worth as much because now there's so many more insiders who want to sell. And because of that, one of the things that we've suggested and we have executed in our funds is that we want to flush out some of these insiders. We don't be the ones jumping there at the first minute we want to own uh uh SpaceX, because it's possible that if in a few months you have these insiders uh putting more and more shares on the market, uh, and this was an artificially low number just to create that frenzy, you are better off waiting. Uh so what we've done in our funds is basically uh have a process where we kind of wait about a year to flush out all of this, uh, and then you can come and participate because that company is not going anywhere. And you know, hopefully you shouldn't own a company just for the next few months. Uh so I don't know there's a great benefit to um uh to owning it right away as opposed to waiting after they go public, wait a period of time, let this flush out and then come back. Uh, but you know, it's always interesting how people get carried away. I want a piece of that. And and it might be fear of missing out, as you said, FOMO, uh, but that comes at a high price because I do see that um Elon Musk, for example, just from what's being published out there, uh, he's pushing uh for some major changes to indices uh in terms of what they allow. And and it's remarkable how uh everybody's trying to bend over, but ultimately, you know, the smartest money is going to be the wing, kind of taking a step back and say, let me see how this plays out. And not jump in that freeding fenzy because it might not be in your best interest.

IPO Supply Lockups And Waiting

SPEAKER_01 48:44

Yeah, in another episode, we'll talk a bit more about price discovery because that's what you're talking about. What's what's the real price of this? Not the not the inflated emotional, you know, FOMO price. What's the what's the real price? And price discovery takes time and it takes a lot of information, it takes a lot of transactions for it to find its equilibrium.

SPEAKER_00 49:05

And and their market um uh they're just just the just the way that the market operates, you have to be aware of that because uh, you know, markets are not perfect. I mean, there are different uh trading scenarios in which uh you might want to have the experience to know when to trade and how to trade. Uh and uh uh and even as the market's doing these price discoveries, there uh there's certain elements of the market that that that you need to pay attention to when it comes to trading.

Aden 49:33

And I think um just to round that out as well, Apollo, I know I've heard I think it was you or a few members of your team say flexibility is such an important part of being able to turn up to the market. You don't want to rock up with a gun to your head saying, we have to buy this allotment, and you're almost sort of getting the price you get. So I think it's, as you alluded to, Dave, we'll talk a little bit about more of the granule of that in another episode, but it's such an important part of being able to participate in the market. So I think that'll close us out for today's episode. We've covered a lot of content. There's been a lot going on in the world in financial markets, and what I really appreciated today, Apollo, is we're able to look a little bit deeper than the surface headline, the surface numbers, and actually get a bit of an understanding of the why behind what's going on, and also to give our listeners a bit of an understanding of where the returns have shown up in different parts of the market and why it's so important to have a really good portfolio hygiene and a really clear investment philosophy.

Wrap Up Key Takeaways And CTA

SPEAKER_01 50:25

Yeah, and I think if you're an investor out there that's not working with us, um if you're if you're looking at making big decisions, ask yourself the question do I have a clear investment philosophy with rules in terms of how I'm gonna engage the market? If if you can't say yes to that, chances are you're gonna make some pretty expensive learning mistakes along the way. So having an investment philosophy, having rules of engagement, the way you're gonna go about you know, entering the market, sticking in the market, the way you're gonna think about in advance the way you're gonna behave when things get rocky. Um there's a saying, you know, markets are a tough way to a tough place to learn life's lessons. Absolutely.

Aden 51:08

Apollo, thank you so much for joining us from the other side of the world in California. It's probably getting late on your time, but really appreciate you joining in and sharing all your wisdom and expertise with our listeners.

SPEAKER_00 51:18

It's been great fun and a privilege. Thank you so much for the invitation. Thanks, Apollo.

Aden 51:22

And as our listeners know, we love it when you share the podcast with a friend, someone in your network, someone in your community. Make sure that you subscribe to our YouTube channel, follow the podcast, and we love it when you send through any different topics, content, or insights that you'd like us to explore in the podcast. Thanks for joining us. Thank you for listening to another episode of the Purposeful Investor Podcast. Make sure that you share it with a friend or someone in your network who you think would benefit from having a listen. Both David Andrew and myself, Aidan Wilkins, are authorised representatives of Capital Partners Consulting Proprietary Limited, and we operate under the Australian Financial Services Licence 227148.