Highlights of the Q&A session at The Motley Fool's Worldwide Invest Day in London.
On Tuesday 25 September, Fools gathered at Yumchaa in London's West End to celebrate The Motley Fool's Worldwide Invest Day. The session included a talk on the benefits of long-term investing, an interview with Richard Hunter from Hargreaves Lansdown (LSE: HL) and a question-and-answer session that also included Nate Weisshaar, senior analyst at The Motley Fool's Share Advisor and Champion Shares PRO newsletter services. Today's Money Talk podcast are highlights of the Q&A session.
You can listen to or download the full podcast here.
David:
This is Money Talk, the weekly investing podcast from The Motley Fool. I am David Kuo, and on Tuesday 25 September, a gathering of Fools met up at Yumchaa in London's West End, to celebrate Worldwide Invest Better Day. Jill Ralph, our managing director, opened proceedings, and this was followed on with a talk on long-term investing by yours truly. Our special guest for the evening was Richard Hunter, head of Equities at Hargreaves Lansdown. Nate Weisshaar joined us afterwards for a question-and-answer session, and in today's podcast we highlight the questions that were asked by members of the audience. The first question was about gold.
Audience member:
If people are looking at dividend cover as a defensive measure, how much more defensive is a move to gold? And isn't it hard to take a decision to go into something which doesn't yield anything?
Richard:
Yes it is, and it tends to be very much related to your opinion of the world, but it has the added benefit, as I say, of being a contra-dollar or oil play. In terms of income, of course, quite apart from ETFs, there's now the opportunity to invest in things like gold-mining shares, which should produce, on average they tend to produce lower dividend yields, but at least there's some sort of income. But yeah, in terms of gold, you tend to be looking at it, for I guess if you had to equate it to a share, some sort of capital growth, but it's not really something you would invest in for income, and there's also a currency risk to boot. Having said that, just as that kind of backstop to your portfolio, that's why, generally speaking, I think we find a lot of portfolios don't have anything more than a 5% exposure.
David:
What about you, Nate? What are your views about gold?
Nate:
I'm personally quite negative on gold as an investment, and it provides no income. There's no capital appreciation. It's really a fear investment, the fear that whatever currency you're receiving your income in is going to deteriorate, so we're under the working theory that gold will maintain its value at that time. So far, it looks like a good play, but gold has also collapsed, just like everything else. So it's really a bet on how bad things are going to get, and when they're going to get better. As Richard said, if you really believe that the end is nigh, then gold's probably not where you should be putting your money. You should be buying canned guns and a shotgun.
Richard:
Or a spaceship!
Nate:
Or a spaceship, too.
David:
We had a great question about structured products next. For those who don't know, structured products are a type of investment that is linked to the performance of a stock market index. They are supposed to be simple, but in fact they can be quite complex and expensive.
Audience member:
What about some of those structured products that, I mean five or six years ago I had some invested back by Lehman Brothers, and although I got some of the money back, I didn't get it all back, but of course they were still pushing some of those ideas of structured products.
Richard:
Yeah, and even ETFs, exchange-traded funds, you need to be, there are various types of ETFs. You need to find out about something called counterparty risk. These are people kind of behind the providers, because at the end of the day there's movement of stock behind any ... if you buy an ETF FTSE 100 tracker, in theory, the ETF should have a hundred stocks in its portfolio, which it has to buy and borrow from other places, etc. So number one, look at counterparty risk – that's probably the most important thing.
I think number two, I'm sure you know, I'm sure everyone knows – it's an eggs in basket thing. You can by all means take a view on China, or Japan, or the States or the UK, but you don't go all in on any one of those. You look at countries, you look at sectors, you look at industries, and you look at specific stocks. Personally, or I should say, at Hargreaves Lansdown, probably for the last two years, we've been advocating a bottom-up approach, which is very much looking at the Unilevers (LSE: ULVR) and BATs (LSE: BATS), saying, this is a quality company. We think they're going places; they're defensive, regardless of what is going on in the rest of the world, whereas a lot of professional investors at the moment are taking a top-down approach. ‘Woe is me – the eurozone's going to implode; China's going to slow down to nothing; the US is going to go back into recession; the UK – who knows?' ... etc, etc – ‘I just want somewhere else, I want my money to be somewhere else', which is all well and good, of course, except you find it earning next to nothing in cash, at this current moment in time. So from a broader perspective, I think the thing is to very much, as much as you can, and this is where again funds can come in, in the good old days you would tend to say, if it's less than £5,000, don't think about shares – think about a fund. At least within that fund, you might have access to 10 companies, which is slightly uneconomical to do, to buy 10 shares. It's a lot cheaper these days, but you get the picture.
David:
Can I just ask people in the audience, I mean, there was a question about structured products, and I want you to be really honest about this. How many people here understand what a structured product is? Three. My rule about investing is, if I don't understand something, I don't invest in it. If somebody at the bank is trying to sell me a structured product, I'll say, explain it to me, and if at the end I still don't understand it, I'll say, I'm not investing in this, because, why would I? I might as well just give you a blank cheque otherwise, yeah? I think that is one of the lessons – you have to understand what you're investing in. As Richard talked about those exchange-traded funds, in principle, a good idea, but once you start looking at complex exchange-traded funds, well, I'm going to run a mile, because I don't understand them. I don't know what I'm investing in, so why would I?
Audience member:
On that particular subject, there are a number of dividend exchange-traded funds in the UK, I think four, at least, from ISAs. They seem to be physically backed. They seem to be fine, and they give you good broad exposure to different sectors, different geographical areas, like the eurozone, if you want to be there.
Richard:
They're great – I've got one myself; in fact, I've got two – I've got a FTSE 100 and an S & P. I absolutely agree, but it's the level of complexity in particular, the synthetics, where at this moment in time, I'm quite happy being where I am.
David:
But isn't it also true that some of these are mechanical exchange-traded funds? In other words, they will just simply pick the top 20 or the top 30 in the FTSE 250, for instance? They'll just simply pick the shares that are yielding the highest, regardless of anything else that may impact that.
Audience member:
The difference with it, for instance, with ISAs, I'm not trying to plug ISAs, but they also have different ... they also have Dividend Plus for the UK, they have Dividend Select for the eurozone and for the national markets, and then they take, give an income as well. So they're not just the highest-paying dividend stocks, but it has to have, at least, I think, something like 60% cover, and then it has to have the dividend appreciation as well. But they seem to be a good aggregate behind the stock picks, basically, so I'm using the Share Advisor service, but I'm also using this as basically a diversification method.
David:
Good for you, yeah, and the most important thing is, if you are going to invest in these products, look at them, understand them, and if you then say, I'm happy to put my money in them, then by all means do so. But if you look at them, and you just think, I don't understand it, I don't know why I'm investing in this, such as, for instance, some of these synthetic products, then I would say, just leave them alone.
The next question was about P/E ratios, when a member of the audience picked me up on my talk earlier on in the evening about buying shares, even though the P/E was high.
Audience member:
I'm very new to investing. I found interesting what David was saying earlier, about the PE ratios. In my research, I've been reading on The Motley Fool, but I've been trying to read Jim Slater or Benjamin Graham, and they all concentrate on PG or P/E ratio, is supposed to provide you with, a low P/E ratio is supposed to provide some margin of safety, whereas from what you said earlier, is that, you were saying that the P/E ratio might not really be that important? So I was just slightly confused ... to some extent this goes against all I know, all I've been hearing so far.
David:
Do you want to take that one, Nate?
Nate:
The question was, David threw out P/E as a good rule of thumb earlier, or he dismissed it, saying it wasn't relevant, which caused some confusion. I guess the number one rule is, there's no rule that applies all the time. The P/E, obviously everyone wants to buy their shares as cheaply as possible, but a P/E ratio can be skewed temporarily for many reasons, but a P/E of 20 could represent a singular bad year that was a one-off, or could also be representative of the fact that there's a lot of growth prices into these shares. But the question then you have to ask yourself is, can this company achieve that growth? As David pointed out, high-quality companies, over a long period of time, can often exceed growth expectations. So I believe, when I recommended Hargreaves Lansdown for Share Advisor, the P/E was close to 20, maybe above it, and several people balked at that. But the question you have to ask yourself really is, a P/E is just, it's a thumbnail. It's a reference point for what the market is pricing for last year's or next year's estimated earnings.
Audience member:
But the idea behind it is that it provides you with some, what Graham called, margin of safety, isn't it? So it's more like, from what I see, you believe in more like qualitative, rather than quantitative, techniques to shares?
Nate:
There is an aspect of that. Graham was an out-and-out value investor. He wanted to dirt cheap, he wanted everything at its bare minimum, and he didn't believe in growth shares most of the time. That technique works for some investors; other investors, like David Gardner, one of the founders of The Motley Fool, has no regard for P/E, and he's one of the most successful investors that I know. So it's all a matter of what you're comfortable with. As David said, if you can't understand something, stay away. If you don't understand where the forecasted growth is going to come from, that's fine – that's not for you. So it's really a question of, how comfortable are you with the situation being presented to you? Are you comfortable with paying 20 times last year's earnings for a company that you are looking at? Do you see the potential there for that to be fulfilled? On the other hand, a P/E of six, if that company's in systematic decline, then last year's earnings may not be representative of next year's earnings. So P/E, in and of itself, is meaningless. It's a piece of a whole puzzle, and so, as I said, no rule applies.
Audience member:
So while we're on the same subject, you mentioned BAT and Unilever were at high P/Es when you decided to invest in them. Apple (NASDAQ: AAPL.US) are at a high P/E. What characteristics did you look at, or see in Unilever and BAT, way back then, that made you interested in them?
David:
There are different techniques that you can use for valuing shares. The ones that I like primarily is, discounted dividend over a long period of time, and I discount them back, because I'm primarily an income investor. So I want companies that are able to generate dividends which I can project forward, and then I discount all those dividends over a period into infinity, back again, and I'll say, how much is it worth to me today to buy this company? – and on that basis, I then concluded that companies like Unilever and BAT, at the time, were not expensive. Now, if you just looked, as Nate said, purely at a P/E ratio, you would say, this is hugely expensive – I'm not buying this, but I had confidence that these two companies were able to pay me a dividend, not just next year, but the year after that, the year after that, forward for another seven or 10 years, and then you start discounting all those dividends back, you would say, do you know, I could actually get all my investment back over a period of time, which isn't that long, if I buy the shares today. So then the P/E becomes totally irrelevant, because I'm looking at discounted cashflows then. I'm not looking at the P/E in isolation. So sometimes you have to apply different techniques, if you want to value a share. Some people might just simply say, look – I look at this, and I think it's cheap. Somebody else will look at it ... I mean, Nate and I sit next to each other in the office, and there are times when I'll just say, “Nate – what do you think about this?”, and he'll just go, “Nah – not for me”, and I'll go, “Yeah, 'tis for me.” That is really what The Motley Fool's all about – it is this Motley nature, that Nate will look at something in a totally different way to the way I look at it. Neither of us are wrong, because we are looking at it from slightly different perspectives.
The next question was about hedge fund manager, Man Group.
Audience member:
Does that include Man?
David:
What – Man Group (LSE: EMG)?
Audience member:
Yeah.
David:
You'll have to ask Nate!
Nate:
Ask David!
David:
It depends if you believe that it is able to carry on paying that dividend. If you think it is, then go ahead and buy it, then you would say yeah – I believe that it is not going to be cutting its dividend. But if, for whatever reason, you think that that isn't going to be right, that it's going to cut its dividend, then I wouldn't touch it.
Man Group has, of course, just fallen out the FTSE 100, very much market-related. It's very much down to its flagship AHL hedge fund taking a hard time of it at the moment. So it's almost a proxy call in the market, and that's why ... you may not have noticed, but even within the Close Brothers' statement, I think it was today, winter floods, the market-making arm have had a fairly tough time this year. Luckily it's been compensated by the rest of the wealth management group doing okay, but Man has proved to be something of an, almost a tracker, and ETF.
We then had a question that went straight for the jugular. The question was, “Is now a good time to invest?”
Audience member:
So with the moves in both the FTSE and the Dow since probably about May, would you say now's still a good time to buy shares?
Nate:
I think, of the market as a whole, I wouldn't be too confident on, but there's great companies throughout the stock market that are going to outperform the market. So broad brush, I would be hesitant, but there's definitely opportunities.
Richard:
This is a perfect example of the bottom up approach, or the top down approach. The top down approach, you'd probably say, no. It's been fairly toppy; it's been frothy, and given what we've been up against in the last 18 months, let alone the nine months that constitute this year, sentiment can turn on a sixpence. So on that basis, top down, you'd probably be fairly brave to be going in at this stage. Bottom up, of the Unilevers and the BATs and the Glaxos (LSE: GSK) and the Astras (LSE: AZN) – are they still out there? You bet they are, but again, particularly we haven't understood for some time now why the pharmaceutical sector has been driven down quite so far. The long term story's intact. You've got ageing populations who are going to require more specialist tablets. You've got the likes of China and India, who have got access to drugs they've never even had before, and just think about the sheer number of people in populations in China. I was hearing a fascinating fact that I didn't know the other day – perhaps some of you do, that some of these blockbuster drugs, and that's been one of the downers on the share prices recently, because they've had a lot of patent expiries, where the patents go generic, and obviously that whacks out its income ... the next big thing, in terms of the pharmaceutical companies, is going to be biophysical stuff. In other words, they're not trying to cure diseases any more; they're trying to elongate the individual's life. So they're not looking for a cure for cancer, but they're looking for a way of treating that cancer that will probably add 20 years to your life. That's one of the reasons why some of the large pharmaceutical companies are either on the prowl for specialist biocompanies, rather than using it on their own R & D budget, but it seems that the way the pharmaceutical companies are priced at the moment, is that they'll never come up with another big discovery – maybe, maybe not. In the meantime, they generate shedloads of cash, a lot of which they use on things like share buybacks, and a lot of which they use on things like dividends, and again, reinvested dividend income, if you really think, pharmaceuticals – yes, the latest news – look elsewhere.
David:
Well, Jill, my wish has come true – I'm going to live forever! You're stuck with me forever, Jill!
The next question was about insider buying and selling.
Audience member:
Do you not get insiders buying and selling, as indicated, when you keep looking at certain companies. We can look at Man, for instance, with a large chunk of shares bought by one of the directors.
Richard:
The reason I looked at Nate was not to put the question his way. It was more to say, this is another part of the puzzle. At its simplest form, directors should be buying shares in their own companies, shouldn't they? They're running the company, they're driving the company forward. It's a monetary statement of their confidence in the company going forwards. So at its basic level, it's something they should be doing. Without being too basic on the selling side, a lot of these CEOs are earning a fair amount of money, and have got a fair few tax implications to think about, so they might have sold a slug of shares to pay for school fees, to settle a previous tax bill, or simply for personal reasons, to take some money off the table. So you wouldn't necessarily take a selling, the fact that a director's sold, as a negative signal. What you really need, I think as being probably being more representative, is if the whole board of directors have just bought some shares, particularly on a dip, which could have been overdone. That's a statement of confidence, but in isolation, I wouldn't look at it without looking at the other metrics.
Nate:
Yeah, and just to echo what Richard said. I personally don't put much stock in director or insider selling, unless it's wholesale. There are a lot of reasons in life why you need cash – buying a house, buying a boat, maybe ... but divorce is a big one. If you look at director sales, and then dig a little bit more, you'll see a lot of director sales are followed by divorce proceedings.
Audience member:
Then you say, one of your recommendations, Burberry (LSE: BRBY), I think the management bought quite a lot recently – so was that on a dip?
Nate:
I put a lot more weight behind a buy than I do a sell, because there's too many reasons. There's too many reasons for selling; there's one reason for buying.
David:
And the final question of the evening was about stop losses. The member of the audience wanted to know what we thought about stop losses.
Audience member:
What's your opinion on stop losses? And setting stop losses on your shares? I started putting in stop losses about four years ago, and so when the shares, or stock market, went down, they all dropped out, of course, and I had to pay a fortune in capital gains tax.
David:
Is that a good thing, or a bad thing?
Nate:
That's more of an issue than a problem, I guess!
Audience member:
Well, I still had held all of those shares for 10 years or more.
Nate:
Well, as a long term buy and hold investor, I don't particularly like stop losses, because if, for whatever reason, the market loses its mind, and shares drop off, you get yanked out of a position that you didn't necessarily want to be yanked out of. So it takes a little bit out of the control out of your hands. Some investors like to put the floor, and lock in the profits, if they're in that position, but I personally am not one of those. I need to see a fundamental reason why I shouldn't be in a company any more, and market movements aren't that reason.
Richard:
Absolutely. I think, if you're holding a share, there are many reasons why you should consider taking some profits, all profits, or just hanging fire, and one of those questions you need to ask yourself, what's changed about this company, and the reason I bought it? Forgetting the price. It's much more difficult to do in practice than it sounds, but I bought the company because of these five reasons, and those five reasons are, are they still intact, or are they stronger than they were? On that basis alone, there's no reason for me to sell them. I think stop losses were probably invented for the downside rather than the upside, and it's interesting that it gave you a CGT implication, because I bet a lot of investors haven't even thought about that on the outside. You pick a share that you absolutely get it right with, and it goes up 20% in a couple of weeks. All of a sudden, you're out, and you're left with CGT – that's very interesting. But I think they were initially designed for the 1987s of this world, or at least you could get in 5% down, rather than 25% down, although ultimately, again depending on your nerve, you would be asking yourself, even in '87, did BP just become a bad company overnight?
Jill:
David, any closing words on stop losses?
David:
Yep, my personal view is, I am a net buyer of shares over the long term. So I see share price falls in companies that I'm invested in as being an opportunity to go and buy more. So therefore, I don't believe in stop losses. I'll give you an insight into my portfolio. I have a spreadsheet that tells me what my shares are worth today. There is one column that is missing on my spreadsheet, which is the buy price of the shares. I do not want to know what my buy price was. I only want to know what the price is today, what it is likely to be tomorrow, the year after that, and what I bought at is completely irrelevant, apart from when I have to declare taxes on it.
Jill:
OK, well again, this was our first stab at a Worldwide Invest Better Day. You guys have been part of something truly global, which I think is really exciting.
David:
So there you have it – Worldwide Invest Better Day. I'd like to thank Richard Hunter of Hargreaves Lansdown, and Nate Weisshaar, our senior analyst from Share Advisor and CS Pro, for making the evening a huge success, and of course, my thanks goes to Yumchaa for providing the absolutely scrumptious food that evening.
Just one more thing, before we end today's podcast, namely the quote. The quote comes from Georges-Louis De Buffon, and Georges-Louis De Buffon said: “Genius is nothing but a great aptitude for patience.” That really is the essence behind long-term investing: patience. If you have a comment about today's show, please post it on the Money Talk website, which you can find at fool.co.uk/podcast. Until next week, have a great week!
David Kuo challenged his Motley Fool analysts to pinpoint the attractive sectors of 2012 -- and they delivered! Discover the industries they selected in this new Motley Fool guide -- "Top Sectors Of 2012" -- while it's still free!
Further investment opportunities with David Kuo:
> David own shares in Unilever, British American Tobacco, GlaxoSmithKline and Burberry. The Motley Fool owns shares in Hargreaves Lansdown.
