Property Hub - Investment Insights & Inspiration - Get Invested: Part 2: Steve Moriarty on timeless investment principles

Episode Date: November 12, 2021

Steve Moriarty believes that anyone can be a successful investor. In the continuation of our previous episode, Steve breaks down his eight timeless principles that anyone can apply to build their wealth safely. Steve walks the talk. For over 20 years, he has been a highly successful full-time private investor. He’s the founder and Wealth Coach at Next Level Wealth, a podcast host, author and former political adviser.  But as Steve repeatedly reiterates, your investment success all revolves around knowing yourself and your personality type so that you can then construct an investment style and systematic plan that plays to your strengths and protects yourself from your weaknesses and emotional limitations. As already mentioned, To clearly identify your personality type, jump on www.truity.com or www.crystalknows.com to take their quick and easy free questionnaire to find out who you really are. And as a special bonus for Get Invested listeners, once you’ve confirmed which of the personality types you fall into, you can email Steve directly at [e-mail] to get your free personality type investment roadmap that’s tailored to your specific personality type. Now Steve also talks about all of this in much more detail in his excellent book, Low Rates High Returns, so I highly recommend you grab yourself a copy as it’s a really good and easy read and one of the best books I’ve read in years. And if you like what you’ve heard and read, Next Level Wealth’s uniquely tailored investment coaching program may be just what you’ve been looking for, so reach out to Steve at www.gonextlevelwealth.com.au to investigate it further.  And if you’re ready to take the bull by the horns and get started on your property investment journey, grab yourself a free copy of my award winning intro book Get Invested by jumping on https://bushymartin.com.au/books - you can get the ebook version at no cost. And if you like what you read then you can upgrade to the full Freedom Formula book that gives you the detailed keys on why, what and how you need to invest to achieve your ultimate lifestyle goals and get your precious time back. Steve's book recommendation: Irrational Exuberance by Robert Shiller Get ‘Self, Health and Wealth’ wisdom in your inbox: Join me and many other like minded investors in our Get Invested community right now.  I send a free and exclusive monthly email full of practical ‘Self, Health and Wealth’ wisdom that our current Freedom Fighter subscribers can’t wait to get each month. It’s full of investment and lifestyle tips, my personal book recommendations, apps I use to enhance life and so much more. Just visit bushymartin.com.au and sign up at the bottom of the page … because this is just the beginning! Get Invested is the leading weekly podcast for Australians who want to learn how to unlock their full ‘self, health and wealth’ potential. Hosted by Bushy Martin, an award winning property investor, founder, author and media commentator who is recognised as one of Australia’s most trusted experts in property, investment and lifestyle, Get Invested reveals the secrets of the high performers who invest for success in every aspect of their lives and the world around them. Remember to subscribe on your favourite podcast player, and if you're enjoying the show please leave us a review. Find out more about Get Invested here https://bushymartin.com.au/get-invested-podcast/  Want to connect with Bushy? Get in touch here https://bushymartin.com.au/contact/  This show is produced by Apiro Media - http://apiropodcasts.comSee omnystudio.com/listener for privacy information.

That's the really important part of investing, because the eight timeless principles we use are not subjective. It is simply saying, and the first one being systematic investing, which is saying, look, it's not about you. It's about the way the stock market works. And if you know the cycles, I don't care if you think the market's going to go higher. at this point there's going to be a decline over the next 10 years because this is the way history has shown us is it different this time well it could be but you're exposing yourself to a lot of risk and so that's where the eight principles and that's why we call them timeless because they work over the full cycle welcome to the get invested podcast where we share great conversations

with experts from all walks of life to uncover their secret know-how and where they invest their time, their skills and their money and the benefits that this has created. You see, the truth is that everyone invests. Every minute of every day, we're investing our time, our skills, our energy and our money in something. Some of us are investing consciously, some unconsciously, sometimes for good, sometimes for bad, sometimes for no impact.

get invested will help you to start living by design not by default i'm going to help you to make it happen not let it happen you'll hear the top tips on how you can live with conscious intent so that you can live more work less and leave a living legacy by investing now listen to the show to discover the top tips on how to get started make the most of your investment journey and ultimately to be living your dream not someone else's more episodes can be found on iTunes or at bussymartin.com.au forward slash getinvested. Thanks for listening and now let's get invested. Hi Freight and Fighters. When do you buy and when do you sell your investments? And when do you get in and when do you stay out of an investment market or an asset class?

traditionally many investors are taught that if you're in it for the long term then you just need to buy and hold your investments regardless of market conditions but does this really hold up when looking at investing in equities as our special guest steve moriarty warns in part two of our great discussion today this is a common propagated myth that will limit your investment returns long term. So to get you in the right frame of mind for the conclusion to our somewhat controversial contrarian discussion that flies in the face of much of traditional investment wisdom,

I'm going to whet your appetite with further extracts from Steve's great book, Low Rates and High Returns, that he's co-authored with investment legend and Get Invested favourite, Pete Wargen. Now, it's stating the bleeding obvious to say that we're currently living through some extraordinary times. For those of us old enough to remember interest rates above 15% and runaway inflation back in the late 1980s, an era of interest rates at close to zero once seemed impossible. And yet, here we are.

And if financial markets are anywhere near correct, the low interest rate era may be with us for quite some time to come, perhaps even for a very long time. Much else has changed in recent decades. Whereas once we were expected to retire and live for only a short time in retirement, today it's entirely possible that you might live in retirement for many years or even decades. With interest rates globally often stuck at close to zero and apparently little prospect of that changing much soon,

many retirees have been forced to eat into their capital. We used to think of fixed interest investments such as cash and term deposits as delivering risk-free returns. But in this respect, the world has been turned on its head over the past decade or so. These days, we get the risk of inflation eating away the value of our capital without the worthwhile returns. Fortunately, though, there's a better way.

And that's what the book Low Rates and High Returns is here to help you with. The book presents a timeless strategy for managing your own money in all markets. We believe that your goal should be to continue growing your wealth throughout your entire lifetime, into retirement and beyond. We believe the goal should be to be much wealthier when you pass away than when you retire, so that you can live and leave a legacy. Compound growth is known to be the most powerful force in the financial universe,

so it makes sense to continue using it to your own benefit for as long as possible. And one of the asset classes that's proven to have a great track record for delivering both income and growth for Steve is equities, which is to say the stock market. Traditionally, older investors have shied away from the volatility of the stock market in favour of the predictability and perceived safety of cash, fixed investments or annuities.

But the low interest rate era has forced many to have a big rethink on this. Is it possible to consistently generate except the returns from stock markets without the risk? It is, but it may require thinking a little differently from what the finance industry typically recommends that you do. Fortunately, Steve's short but powerful book is here to step you through exactly how you can look to do that. And there's no fluff here. It's a short, sharp book that gets straight to the key points. Steve and Pete wrote the book to explode some of the myths about investing, many of which are espoused by members of the financial services industry itself to benefit themselves rather than you.

So Low Rates, High Returns is also a book about you and why you can manage your own money. As they often say, it's not that hard, honestly. as for why you should read the book well steve and pete have found through their enneagram personality type assessments that i detailed in last week's intro that there are a few reasons why people seek financial independence for high achievers or type threes like myself financial success is usually about achieving significance for more analytical types learning how to invest tends to be about security. And for others still, with a freedom of spirit or a more

adventurous bent, like type 7s, becoming a successful investor is more about the freedom to do their own thing. Now it's a challenge to write a book with the aim of helping different people who have different individual personalities, but with some careful thought, they've managed to do it. Their goal is to help you to understand markets sufficiently to implement their systematic approach and manage your own finances, or at least to seek further information so that you can. Understanding your personality traits and motivations is still important because it helps you to recognize your behavioral traits and their potential flaws because we've all got them together with the related risks. Now a few books account for these differences.

The good news is that it takes all sorts and the strategies they present in the book are timeless and can be used by anyone As I detailed in part one last week they've included a questionnaire to determine what sort of personality you have and how that influences the way you invest They've also endeavoured to keep the strategy simple As Einstein once said

Make it simple, but no simpler They've made additional suggestions for experienced investors to aid in understanding the emotions attached to investing. Ed Thorpe said that he only invested once he became emotionally comfortable with his current position. Similarly, Steve and Pete want to show you how to do the same and to generate stronger-than-average returns on your capital with lower-than-average risk.

So here's a bit more about Stephen. Stephen's been an investor for over 20 years and a committed full-time investor for over a dozen of those years. Early on, Steve thought that buying stock tips was a thrilling way to make money. It was like going to the races. Gossip, speculation, excitement, all combined in one place. And after a resounding failure, he did what most do, and he went back to work for a living.

He worked in the private sector and later he started his own company. Later again he went to university, worked in the public sector as a political advisor and in 2005 accompanied his then wife to Japan as she pursued her career. Now while he'd always been an investor, in early 2006 he rekindled his interest in stock markets and economics in earnest. And with plenty of time to devote to watching and studying stock markets, he read all the manner of books, articles and academic papers on the various attributes of stock markets, human behaviour and natural and social sciences.

And he also gained a Master of Applied Finance along the way. Like many people, Steve had managed funds where you use a regular payment schedule, sometimes known as dollar cost averaging, to invest in the stock market. But the real action came in 2007 and 2008 when the global financial crisis hit. and crash markets around the world. It was at this time that Steve came to understand the true power of one or two of the most important principles of making successful investments. These were mean reversion and buy low, sell high.

Steve has made most of his successful investments when markets have crashed or are generally shunned. This includes the global financial crisis and the 2009 recovery, late 2011 with the US banking system, and more recently in 2016 with Brexit. Steve understood that when it comes to stock markets, history does repeat. Like many things in life,

stock markets have cycles. – short ones, long ones where they go up, then down, then up again – like a tide that comes in and goes out on a longer timescale. These cycles appear in all stock markets around the world, whether they are in developed countries like Australia or emerging markets such as Turkey. After seeing these patterns and reading a vast amount of literature on the topic, Steve understood that you could use those patterns and cycles to make money in your stock market. And as he says, it isn't rocket science. It just requires the bringing together of a few

timeless principles, and these are discussed in detail in the Low Rates, High Returns book. However, he also noticed that the patterns also led to emotional patterns, and these emotions can send you on a roller coaster resulting in moments of pain mixed with moments of joy. Emotions tend to be especially strong when markets are in turmoil, so it requires that you can coolly and in a measured fashion understand where the stock market cycle is at any given point in time. You also discover that there's a large body of myths about investing that are just plain wrong, and like many myths, they feel and sound right. They're mentioned often by mainstream finance commentators and are blindly accepted without

much scrutiny. However, if you can think for yourself with an open mind, you soon discover these myths mislead investors and result in investors making wrong decisions, often at precisely the time they should be doing the opposite. Now over time, Steve developed the strategy contained in his book, which is to deliver above average returns in many stock markets around the world. It's not a complex strategy. It's simple and it can be implemented by anyone. As Peter Lynch, a famous investor said, and I've quoted before, everyone has the brain power to make money in stocks, but not everyone has a stomach. By stomach, Lynch means emotions. Allowing your emotions to dictate your investment decisions will send you broke in a very short

space of time, or at least you're going to lose lots of money. Now, Steven Peat's book shows you how to understand what type of investor you are. The first rule of life espoused by many sages is know thyself and avoid succumbing to emotionally based decision making when it comes to your investments now the japanese have a saying karata ga abatru now i'm sure i absolutely stuffed that translation up but it means the body remembers now this simply means that after repeated episodes of learning whether it be karate tennis or playing a musical instrument you can see and respond automatically to the events that surround you. In Western culture this is sometimes known as muscle memory.

Over time you can gain enough insight and wisdom to be able to respond calmly to the situations that arrive in your daily life. It's Steve's hope that if the book successfully explains the principles and strategy you can gain insight and wisdom for approaching the stock market and you'll see the benefits of managing your own money and becoming a sustainably successful investor. Steve's book grew out of the idea that investing is simple but not easy. The simple part, unfortunately, comes after the difficult part.

And the aim of the Low Rates, High Returns book is to make the difficult part as easy as possible. Now, when beginning to take an interest in investing, it's difficult to know where to start. You read a few articles and books and you think you're getting a handle on it all, but the reality is the more you search for knowledge, the more questions arise. It's an endless loop that can be exciting as you gain more of an understanding, but also frustrating as you realise that the loop is indeed endless.

Some questions you might start out with often include things like the following. Firstly, am I a long-term investor? Most of the finance industry recommend taking a long-term view. Warren Buffett, the doyen of value investing and one of the world's richest people, always goes on about taking a long-term perspective and has been quoted as saying, my favourite holding period is forever. A second common question is, am I a trader? Famous traders recommend their own strategies.

The trend is your friend, they say. Other common questions include, am I a fundamentals guy or a technical guy? Am I a value investor or a growth investor? Should I pick individual stocks? Should I use fund managers or do it all myself? Should I use exchange traded funds or ETFs or managed funds? When Steve studied for his Masters, the dominant theory was the efficient market hypothesis or EMH. Now, EMH holds that markets are always rational and efficient.

But then Warren Buffett retorted that the EMF just doesn't hold true. One thing that Steve has noticed over the years is that, like most things in life, everyone talks their own book. Most financial industry folks tell you to start early, like now. It's time in the market, not time in the market, they say. Well, they say you should ignore the stock market declines because you can't predict them, and so you should just keep putting all your hard-earned cash into the market and sit back and watch it grow. Of course, they seldom declare that time in the market is better for them, but not necessarily for you.

The reason why is because they generate fees, and the less you've invested in the market, the lower their fees are. In the Low Rates, High Returns book, they give you plenty of reasons why you should manage your own money. They also show you that it's not that hard to identify when markets are cheap or expensive, which can significantly improve your returns. The finance and fund management industry takes a somewhat cookie-cutter approach, nibbling away at balances with their fee structures. And as with many industries, there are rules and regulations and a good deal of institutional investing is formulaic in the sense that there's little scope for originality. And as we focused on last week, personality really matters. A fundamental flaw of the finance industry is the belief that all of us are sensible

rational types when it comes to money. and this rationality supposedly extends to each of us when we decide to invest our money. In our experience, this is far from the case. When it comes to money, each of us holds different beliefs and knowledge. Generally, money is a serious business and no one we know of takes money with a grain of salt, so to speak. However, where we do vary is what we believe about money, particularly what it's for. Some of us think it's for saving as much as possible to provide some sort of security.

Others have little interest in money. Some see it as a means to enjoy life's experiences, and yet others think it's a tool with which to make people do what you want. Now these various reasons are mostly ignored in the finance industry. A more recent theme has been the rise of behavioural economics in investing. This theory discusses the various foibles and biases we bring to our decision making. It's a useful start, but it's not the whole story. Again, the premise is that once you've been given the facts

or made aware of your biases, you're going to automatically correct them and away you go. Having knowledge is one thing, but putting that knowledge into practice is quite another. So Steve and Pete have found that their approach to investing reflects our personality. In the book, they use the personality identifier called the nine types or the Enneagram assessment that we detailed last week to assist you in undertaking individual personalities and the

influence this plays in your approach to investing. Having our investment map that recognises your motivations, strengths and potential weaknesses can be very helpful and even enlightening. Along with our personalities, there appear to be certain principles that lie at the heart of many successful investment strategies. Many investors have their favourite set of investment principles and there's no shortage of them to choose from. Among the many, we've now defined the eight key principles that we believe are applicable to all asset classes and will stand the test of time through the cycles. We note here that there are many principles that are applicable

to certain time periods, e.g. the trend is your friend, but these aren't timeless. What we want to show you is a strategy for all markets that can work at any time, to be truly timeless. A timeless strategy for all markets. Out of all this investigation and refinement, Steve and Pete have developed a strategy that you may wish to pursue. Their hope is that you can apply it yourself to become a successful investor. Investing is not that difficult, but they can say that after 20 years, as guys who've been intently interested in all matters investing, they can actually say that. Their aim is to give you a strategy as a place to start and to open your mind to what's

possible. And they go from the macro to the micro. Remembering the broader principles, e.g. that the stock market ebbs and flows over time This is of greater assistance than hair-splitting details when thinking about investment decisions The book Low Rates, High Returns helps you to grasp the importance of having an overall investment philosophy that embraces, encompasses and integrates risk, personality and stock market patterns The eight timeless principles that Steve details in our discussion today are there to assist you in developing a systematic approach.

So it's important to review both the thought and action principles Steve outlines to see if your portfolio is actually holding up. And it's important to remember that no investment strategy will always outperform everybody else. Though you'll inevitably experience both better times and periods when you underperform, having a solid investment philosophy with principles will stand you in good stead throughout your investing journey.

In this regard, developing a checklist can seem like a chore, but a checklist and a system are necessary to help jog your memory to see if you've forgotten anything. Atul Gawande, in his book The Checklist Manifesto, showed how doctors reduced the number of people dying from surgery via simple procedures such as checking that hands had been washed. The problem usually arises when we think we don't need a checklist because, in quotations, we've got it all covered.

Often, in their next level wealth coaching programs, Steve helps clients to build their own checklist. They give you a small investment map to get you started, which will act as a guide or checklist in your approach to investing. as an example after completing the Enneagram personality types questionnaire on truity.com that I outlined in last week's part one episode introduction that indicated that I'm a dominant type 3 achiever personality I reached out to Steve who sent me a copy of my type 3 investment map that gives me a general description of my investment approach as a refresher for type 3s

money is about validation and proof of my success. My ambitions around money are unfettered. I invest in myself and my personal development so I can be more successful and I'm prepared to put in the effort to make money. For type threes money strategy is striving. I'm good at working and achieving my full potential. The more I succeed the more I feel valued and I'm hopeful that success springs validation. I don't worry about compromise and I try hard to shine. But underlying the striving is a deep subconscious anxiety that I lack value. Consequently, I can easily become a workaholic without activities or hobbies. For type threes, growth occurs when I relax, move past striving and integrate what is all that is good in my life. Unfortunately,

as a type 3 achiever, I don't allow myself to relax enough and this can create exhaustion. So as a type 3 achiever, my strengths are that I'm prepared to work hard in order to achieve my goals. I usually have a high degree of competence and as an effective doer, I can get a lot done. As a type 3, I also have a high degree of motivation, resourcefulness and productivity. I'm able to maintain focus on what is required to reach my target. On the flip side though, my type 3 weaknesses are that I'm prone to working too hard and losing sight of the end goal. I also believe there must be some action that can be done to move closer to a goal, so I

feel like I always need to be making it happen, rather than letting it happen, which can be dangerous in certain investment market situations. with these two top three achiever strengths and weaknesses in mind applying my personality type to the eight timeless investment principles of being systematic applying a risk hierarchy recognizing market cycles and mean revision periodic reviews asset allocation diversification buying low and selling high and rebalancing the key things i need to watch out for in the way my personality influences my investment approach are captured in Next Level Wealth's investment map as follows.

Starting with our thought principles in relation to being systematic, as a type 3 being systematic is one of my strong points. Because I'm able to develop and maintain focus on my investment goals, adopting a systematic approach is relatively easy for me. When it comes to adopting a risk hierarchy, I need to be careful not to move my investment funds up the risk hierarchy in attempt to reach my investment goal sooner. When it comes to the principle of market cycles and mean reversion I need to remind myself that markets move in cycles and there's very little that I can do

about it. It's important for me to remember this and to appreciate that there are periods where my hard work and action won't increase my chances of a successful outcome as often markets have a habit of punishing me if I try too hard. In relation to Steve's action principles when it comes to asset allocation as a type three I need to be careful not to over allocate funds in an attempt to generate outsized returns. This will expose me to greater losses and reduce my chances of achieving my investment goals. It can also lead me to chasing an investment in the hope of changing the position. As Warren Buffett said shares don't care that you own them. And turning to the principle of diversification, this can sometimes frustrate me as a type 3 because markets are often correlated, so there are periods where nothing happens.

So I need to avoid seeking to diversify too much as it may increase my risk as markets have a habit of moving up and down quite quickly. And when it comes to the principle of buying low and selling high, I need to remind myself that as a type 3, that there is no such thing as a perfect investment. Markets fluctuate around the same level for some time. So I need to be patient and let the market come to me. It will inevitably provide me with opportunities to invest my money at attractive odds

if I just wait for the right time, the right conditions and the right opportunity. Patience is a virtue that I need to constantly cultivate to avoid impatience and overacting that will potentially hamstring my results. It's okay to do nothing at times. And in relation to the principle of rebalancing, as a type three, I need to remind myself that rebalancing gives me the opportunity to compound my funds. And it's necessary to avoid thinking that a share that has delivered a strong return will 100% continue to do so. So if you want to get your free investment map based on your personality type, complete a free Enneagram test on truity.com and then email Steve directly

on steve at gonextlevelwealth.com.au. That's steve at gonextlevelwealth.com.au. so with a better awareness of who you are and how the strengths and weaknesses of your personality type need to be accommodated into your investment approach where do you start by adopting a timeless investment philosophy based on timeless investment principles that recognizes and responds to real market dynamics and one of the first dynamics is that shares don't always go up they cycle Now let me repeat that. Stock markets move in cycles. So the returns can either be amazing if you buy when markets are cheap

or terrible if you buy when they're expensive. On this basis, our philosophy holds that we want you to invest in bull markets when the odds are in your favour. And we want you to not invest in bear markets when you'll lose money. To achieve this, then you do need to buy and sell investments. You can't simply buy investments and blindly hold them come what may. Let me now explain why this is the case and how important it is to adopt a strategy for all markets. A timeless investment strategy is one that works in all markets.

Now, fads will always come and go. sometimes buy-and-hold investing will become very popular, for example. In other decades, it will drift back out of favour as secular bear markets take hold and as investors lose faith in markets delivering positive returns over an acceptable time frame. For example, the buy-and-hold approach would have delivered dramatically negative real returns in bear markets such as between 1966 and 1982. too. Now it's fine in hindsight to say that you'd have stayed the course and loaded up for the next cycle but in real time that wasn't what most average investors were doing. Through 17 years

that might have torched nearly three quarters of their purchasing power before dividends and at this time we're now almost inevitably heading into another period of below average returns or worse particularly in the US stock market. Now, history shows that there have been long periods of significantly negative real returns in stock markets throughout modern history. In the US, these have included from 1906 to 1921 where the market dropped 69%

or from 1929 to 1949 where the stock market went down by 59%. in addition to significant losses between 1966 to 1982. Of course, in the real world, nobody buys all their portfolio at the market peak and then never invests again. And this doesn't mean there's no place for passive investing, but long-term buy-and-hold investors should remain under no illusions

about how long markets can run against them if they get their timing wrong. what we're interested in is finding a better way that allows you to capitalize on the bull markets and you can do this if you're prepared to look more broadly at global markets so why is an investment philosophy important well in investing it's critical to have a philosophy as well as a system based on a set of principles successful investors such as warren buffett and george soros take a systematic approach to investing. In the book Low Rates and High Returns,

Steve also emphasises the importance of personality and the reason why it's absolutely critical success as we've already discussed. If you invest your own money, but you haven't developed a system or an underlying philosophy, then you can only be investing based on emotion, gut feel or instinct. Now while these attributes may be beneficial

for some areas of life, we certainly don't recommend them for investing. investing should be done with a strong emphasis on numbers history and probabilities in our experience investing based on emotions doesn't lead to superior returns many investors invest this way and they fail to understand the importance of having a systematic approach equally we've met people who believe the stock market is a complex beast requiring an in-depth knowledge of mathematics and finance. However, we don't believe this is the case either. Now, common sense and a cool head are really what's required. There's very little to stop

anyone from undertaking a successful investment career. The knowledge part of the market is easy to understand, and Steve mentors those interested in taking control of their own financial future. So what is Steve's philosophy? There are three dominant aspects to an investment philosophy. Steve and Pete have developed theirs from their combined decades of reserving and investing in stock markets all over the world. But this philosophy can equally be applied to all investments, regardless of whether they're stocks, real estate, bonds or even vintage cars. The first investment part of the investment philosophy is based on the adage, don't lose money. Now, this sounds extremely sensible. However, most experienced investors would tell you it's the reward side of investing that gets most of the attention.

Even in a low interest rate era, everyone wants to talk about where you can seemingly get high reward investments. Put simply, you will fail more often investing as a result of focusing too much on the rewards, that are potential rewards by the way, if the risks are routinely ignored. For the past 20 years, Steve and Pete have sought an investment strategy that is low risk but provides an opportunity for high returns. It's probably fair to say that this is considered the holy grail of investing. Of course, everyone wants low risk investments that deliver high returns. However, that doesn't mean that a low risk, high reward portfolio is impossible to achieve. So what's the traditional view of risk?

Before we tackle other issues, we should discuss the traditional view of risk and why we believe it's not entirely appropriate for investors. By traditional, we mean the widely held view of risk and that which is taught in business schools and finance degrees around the world. Academic literature tends to define risk as volatility, but the truth is, volatility is not the same thing as risk. We've never heard anyone complain about volatility when the market's going up, after all. And, in fact, volatility can be your friend if it presents you with opportunities to buy low and sell high.

The finance industry promotes the traditional view of risk, along with the idea of buy and hold, because of two reasons. One reason is that the industry generally believes that buy and hold is the best approach for investors. Now, let us state for the record that we don't entirely disagree, but where we vary relates to cycles and market valuation. In discussions with many people, we find that most believe in a buy-and-hold approach through default. We think this is because of what the mainstream finance and media industry promote. In short, most folks are told and taught to believe

that you can't beat the market and therefore you shouldn't try. Considering the long term, they say you should just buy and hold, with a bit of tinkering, an index fund. Alternatively, let a financial advisor and a team with a fund manager attempt to beat the market on your behalf. This view is based on the flawed assumption that no single investor knows anything more than anybody else, and so the company share price reflects all of the available information at that point in time. Thus, there isn't any opportunity to benefit from having information that could give you an advantage, they suggest. The much-advertised argument also states that in the long term, your portfolio will achieve a long-run return of approximately 8-10% average annual returns.

Now this is misleading on several levels, and Steve shows you exactly why this is the case in his book. So let's compare this with Warren Buffett's view on risk. Opposing this traditional view are successful investors like Warren Buffett, who state that risk is really about a permanent loss of capital. We like this view. A stock price will fluctuate for many reasons, which will often have nothing at all to do with risk. If you look at the companies in the ASX in Australia,

most companies' stock prices change daily, but if you look closely, many simply follow what the US markets are doing. Yes, there'll be variations and differences, but in general, the ASX follows the US market, especially when there's trouble in global markets. Notice how Australia was humming along nicely until the US decided to crash in 2008, and we, as loyal followers, along with other countries, crashed along with it. After the crash, the buy and hold advocates then drag out the old chestnut that you don't lose money over the long term.

Now, while this might be technically correct, there's a key distinction to be drawn between not losing money and not actually making any money in real terms either. If you look back over history, it's important to notice the large differences in the return over, say, 10 or 20 years. Depending on when you invest your money, over a 20-year period, your annual returns can need to be fantastic by up to 17% or absolutely miserable at just 2%. Then you need to take away inflation at about 2.5% and add back dividends of about the same. Any way you look at it, you would not be boasting to your friends about returns at the low end of this range.

Looking at historic charts, you soon see that investing when the risk of low market returns was elevated, you indeed received very little. Share market history over the long term demonstrates that investing using a buy and hold strategy just doesn't always work. So what is our view on investing? Well here's the main question you should ask every time you want to invest your money. If I put my money in the bank and they offer me say 2% with a 100% guarantee that I'll get it back when I want, and by the way, 2% would be pretty hard to achieve right now,

but I'm being offered and want more than 2%, then what is the extra risk of losing money? That's the key question. Therefore, Steve and Pete have developed the low rates, high returns risk hierarchy, which is a different way to think about risk and investing. now we'll outline the risk hierarchy only briefly now because there's a full chapter on in the book but in short you should think along the following lines cash is very safe but doesn't pay much in returns or reward e.g a small amount of interest what cash gives you is a safety buffer and optionality being the ability to capitalize on great investment opportunities when they come around. Bonds are also typically very safe and may pay a little more than cash. Stocks will

generally do well over time but there may be a greater risk of losing your money. Within stocks there are relatively safer investments like diversified exchange traded funds or ETFs and relatively riskier investments such as some individual company shares. In this regard Steve's book shows you how you can apply their eight timeless investment principles to minimise the risk of losses and enhance your returns in a low interest rate environment. To whet your appetite,

let's start by explaining a bit further what we believe risk really relates to. We believe there are a few major elements to risk and Steve's book shows you a solution to managing risk with an entire chapter on their risk hierarchy. But in simple terms, Risk arises in three key areas. Firstly, risk from your financial position and your personality.

No one likes losing money, but risk varies according to our own personal financial position. Now losing $100,000 might completely change your life, as it did for many when the global financial crisis crushed their hopes when they were on the verge of retirement. But to a multi-millionaire, losing $100,000 will most likely not change their daily routine all their lives out look too much. As we emphasised last week, our personalities play a major role in how we think about risk. Secondly, risk from your level of knowledge regarding the stock market. Although investing successfully may be simple, the fact remains that the more you know about stock markets and their history, the greater the chance that you're going to

succeed. We've seen many people who are investing in stock markets, either actively themselves or through their superannuation, who know very little about stock markets and their history. It's important that you understand the ebbs and flows of markets in order to generate solid investment returns. And thirdly, risk from the overall market valuation. As already mentioned, the stock market, like many things in life, goes through market cycles. In short, there are times when the stock market offers you above average returns, and times when it offers you below-average returns. This is a result of the market cycles.

And Steve and his Next Level Wealth program show you how they affect returns when they discuss the principles of market cycles and mean reversion. Suffice to say here, there are times to be heavily invested and times to maintain the reduced exposure given the level of risk in the stock market. So here's a different way to think about risk. how long am i going to invest this money for 10 weeks 10 months or 10 years this is important

because stock prices change daily and depending on your time frame you should not get frightened by volatility a word simply meaning the fluctuations in the stock price secondly how much do i know about this investment are you knowledgeable enough to know what you're doing For example, what's the price-to-earnings ratio? Steve explains this important ratio in detail in the book. And thirdly, are you investing systematically? Or are you investing or trading because you're bored? Or acting due to some other part of your personality?

And fourthly, is the market valuation favourable? Is the market price-to-earnings ratio cheap, average or expensive? Now let's think about this risk hierarchy as it applies to individual company shares. Remember, every investor seeks the holy grail, the investment strategy that is low risk but delivers high returns. After 20 years as an investor, Steve has said that successful investing is more about avoiding losses than it is in trying to find the next big winner. In this regard, the concept of risk relates to a permanent loss of your capital. Warren Buffett's first rule of investing is don't lose money. And the second rule is remember rule number one.

Now investing is about outlaying money today with a plan to get more money back in the future, however short a distance that future may be. And when we speak of risk, we're really talking about possible future outcomes. Risk, in order to be useful in investing or in most situations, must firstly have context to it. In other words, it's a subjective proposition rather than an objective, numbers-based one. Most investments are not a 50-50 proposition. Successful betting in horse racing, casino games or poker is about finding asymmetrical bets. Asymmetrical means that there's a difference between the payoff probabilities and the risk.

a hand of four aces will see you bet heavily in poker where whereas if you've just got a pair of threes not so much that requires us to look and wait patiently for situations or investment opportunities that are asymmetrical that is there's plenty of upside if you're right but only a little downside if you're wrong sam zell a u.s billionaire from real estate investing explains it like this. Listen, business is easy. If you've got a low downside and a big upside, you go for it. If you've got a big downside and a small upside, you run away. The only time you have to do any work is when you have a big downside and a big upside. Professional punters, poker players or experienced investors look at the odds, which is risk based on the contextual

probabilities in relation to the potential payoff before placing their bets. As Sam says, look for big upside with minimal downside. So how do we manage risk? Firstly, let's consider how the risk of buying the whole market is lower than when buying a single stock or share. If you immediately think, well yes, but the returns are lower, then we want you to remember what I said earlier. Becoming wealthy over time is largely about not losing money. And remember that most professional money managers underperform the market index. Here's why. If you look back over stock market history, about two out of every five stocks are a losing investment. Nearly one out of every five stocks lost at least 75% of their value. 64% of stocks

underperformed the overall market average during their lifetime. A small minority significantly outperformed their peers and only one out of five was a significant winner and loser. To borrow a line from Dirty Harry, are you feeling lucky punk? Well are you? index returns may be lower than returns from some individual companies but so is the risk with an adequate time horizon the lowest risk is probably achieved by buying the whole market thus if we're to produce a risk hierarchy for investing in shares would look something like this going from the lowest risk to the highest risk firstly purchasing in all countries global indexes, exchange traded fund or ETF. Secondly, purchasing a single country index using ETFs.

Thirdly, investing in a single sector, industry or style using ETFs. And then the fourth highest risk is constructing a portfolio consisting of individual stocks. And the riskiest of all is buying a single company stock. Now, this is not set in stone, as there are so many permutations, but it at least provides some framework for assessing potential risks and returns. Therefore, Buffett says that if you don't know what you're doing, buy an index due to the reduced risk. By the way, here are the criteria if you want to be the next Warren Buffett.

Firstly, your name is Warren Buffett Secondly, start investing and thinking about money at age 5 Thirdly, invest and do nothing else for at least 70 years And fourthly, be born in the right place at the right time We hope you get the idea None of us is going to be the next Buffett Thinking about buying individual stocks over a lifetime of investing means you are planning to select the best companies and investments more often than you lose

and those winners are going to perform brilliantly over the next 20, 30 or 40 years. Best of luck with that. Our systematic approach shows that the returns you can generate from purchasing a single country's index or a single sector can be quite substantial and the risk is much reduced from buying a portfolio of individual stocks, which is very risky. And when considering the long-term history of stock market performance, it's worth paying attention to the returns for each of the countries in the best years.

They're impressive to say the least, even for countries that have delivered modest average returns. And most are delivered when, in the previous year, they were among the most hated indexes. So remember, it's better to buy low and sell high. Our brains tend to absorb large volumes of information very well. Fortunately, there are only a few critical questions you need to think about when investing, rather than ploughing through a company's last dozen annual reports.

For starters, even asking yourself the most basic questions such as, will this country go bankrupt, is enough to give you a simple understanding of the level of risk. Hint, they seldom do. You can apply a similar methodology to sectors. Sectors of the economy, like countries, fall in and out of favour. That doesn't make them inherently any safer or riskier simply because everyone loves, say, information technology this year, but not energy.

You should gradually begin to see how important mean reversion to the mean is in investing, where reversion to the mean involves retracing a value back to its long-run average value. The concept assumes that a level that strays far from the long-term norm or trend will again return, reverting to its understood state or its secular trend level. Now, countries and sectors that have performed terribly in the recent past often go on to outperform in the immediate future.

Of course, you're welcome to try and pick a single stock or indeed pick a portfolio of 10 or 20 from the market of over 3,000, but you must understand the risk involved in investing in each one. You can also aim to build well fast, but this usually means taking more risk, either by chasing longer odds or increasing the size of your bets. So be careful of investment opportunities with a big upside, but also a big downside.

And this is very relevant to the current exercise where we're seeing boom conditions in most asset classes close to the top of their cycle, which means that there's potentially a small upside, but a big potential downside. As we get older, we also often have less tolerance for loss-making investments. Remember Buffett's golden rule, don't lose money. Instead of seeing risk as a single event, you can look at risk as a hierarchy. You can develop our strategy that builds wealth steadily while adopting low-risk positions. This information alone is not the holy grail of investing, but it might help you get there. And note that ETFs are exchange-traded funds that own assets such as stocks. They can be traded daily on the stock market, which often gives them really good liquidity.

Let's now turn back to the importance of emotions and decision making. As Warren Buffett says, if you can't control your emotions, you can't control your money. The second important component of Steve's investment philosophy is understanding you. Now recently there's been a surge in what is known as behavioural economics. It's different from the old ways of thinking in that it attempts to take a more nuanced view of people's behaviour rather than simply pretending that we're always rational. Now, this is certainly an improvement on the old idea that people are completely rational,

as in cold-blooded and objective, when it comes to money and investing. One look at the history of stock markets and you can see that this is incorrect. However, often behavioural economics is not granular enough in order to develop an individual investment plan. When you understand someone's personality, you can see where their beliefs about risks

and beliefs about money come from. We believe and see that many people have different risk tolerance and risk aversion levels simply based upon their personality. So understanding yourself is critical to avoid being overly emotional in your approach to investing. Hence why we believe in taking a systematic approach. We seek to look at investments as rationally as possible based on our experience and knowledge unlike many investors who make decisions largely based on how they feel about the investment or what's happening in the markets. For example just because the stock market declines it doesn't mean that it's become riskier which is the traditional view. Understanding yourself is critical in

developing an investment strategy and sticking to it when the pressure's on. Interestingly this ties into our notions of risk. The first question a financial advisor often asks is what's your risk level? The first problem is that most of us don't know. Most folks end up saying about average like everyone else. The second is that your risk tolerance will fluctuate with whatever's actually currently happening. Why? Because when the stock market has fallen by 50% and the media are running a series of doomsday headlines then you're unlikely to be thinking wow what a great time to put a lot of money into the stock market which is it usually is by the way now we've watched people spending their money and it often makes little logical sense for example we have a friend

who's extremely risk averse who sees the stock market as a gamble he currently holds a few hundred thousand cash earning next to nothing but he'll happily spend 500 bucks a week gambling on horse racing, football and probably two flies racing up the wall. Logical? Hardly. As Steve says, we could offer our friend an excellent conservative investment strategy that makes solid investment returns, but he won't budge because he's wedded to his beliefs, which stem from his innate personality and his approach to money. The reason why is that our individual personality heavily influences our approach to money, what money means and how it will be spent or invested. My spending may not make much sense to you, but that may be because

we have a different personality type from each other. Many things I do may not make sense to others unless they are the same personality type. We've seen this constantly on several levels. And as we pointed out last week, there are certain personality types that are more interested in money even though their reasons may be different. Steve, being a type 7 personality that likes freedom, is an adventurer and an optimist, likes money because it gives him the freedom to do what he wants, no constraints or obligations that he doesn't like. Pete Wargen, being a type 5 personality, which is a thinker, analyser and is very security minded, has an interest in money because for him it's about gaining knowledge and some material security. So let us give you an

example of how our individual individual personality can impact on our investing steve has a personality type 7 as he likes excitement and as a result has a high risk tolerance steve has come to understand that when the stock market's not very volatile then he's prone to looking for some action of course this is most definitely not taking a systematic approach. And so he constantly tells himself to go and read a book or play guitar, anything, but looking for potential investments. Why? Because our personality usually sees us repeating the same mistakes over and over again over time. It's best to at the very least understand what our trigger points are and acknowledge them and work on avoiding them.

By having a systematic approach, we're seeking to minimise the role that our personality and subjectivity play in our investment strategy. We are all wise in hindsight because the emotions of the moment fade away and reveal that we should have acted when we hesitated, or vice versa. Another reason why people don't invest correctly is that they don't have enough knowledge about how stock markets work, and so are unsure what the right course of action is. As a result, personality takes over along with group think and people make mistakes by often following the crowd even when it's the last thing they should do another reason that we already touched on is the incorrect belief that buy and hold works all the time steve book shows you why it doesn't

depends on what type of market you're in and when you buy remember the stock market comes to you and offers a range of returns at different times. When the market's cheap you get great returns but these are exactly the times that many investors withdraw their funds and become too scared to put money to work to get better than average returns. This is partly because they don't have the knowledge about market cycles which Steve's book discusses in quite some detail and thus allow their personality to dominate their decision making. It's important to understand your personality because when it comes to money and investing people often make the wrong decisions at the wrong time. We seek to understand ourselves for the following reasons. Firstly

we get to understand our own emotions and see how they impact our stock market investments and our responses to market events. Secondly we get to understand why we do things we do with money as a result of understanding ourselves and what money means to us individually. Thirdly we get to control our emotional responses better and thus not make bad decisions by simply responding to events. We develop an ability to approach the market and our investments more rationally. And lastly, we seek to counter our negative behavior before we act. On this basis, let's turn to the steps in the decision-making process. Significant market events generally occur if there is similar thinking among large groups of people and the news and media are essential

vehicles for the spread of ideas. Indeed, news functions more often as an initiator of a chain of events that fundamentally changes the public's thinking about the market. The media activity shapes public attention and their categories of thought, and creates an environment in which the speculative market events we see are played out. For example, in the crash of 1987, the US stock market fell 22% in one day. Robert Shiller set out to find out why the market crashed and he discovered this. Most investors started selling because the stock market started the fateful day by falling by 200 points. Shiller then asked investors if they thought that economic fundamentals or investor psychology had been responsible. A full 60% stated that

investor psychology was the reason. Schiller wrote, the crash apparently had nothing to do with any news story other than the crash itself, but rather the theories about other investors' reasons for selling and about their psychology. So why were people selling? Because everyone else was selling. When it comes to making decisions, because we're part of a broader society, we're usually influenced in our decision making by what others are doing and saying. Every asset class bubble,

be it in property or stocks or another asset class, is a result of many people thinking and wanting the same thing. Unfortunately, it never ends well and someone is always left holding the bag. People don't seem to perceive how often it's their own psychology as part of a complex pattern of feedback that's driving the economy. In the stock market, many investors do exactly the opposite of what they should do. Most don't actually sell when the market is high and buy when the market is slumping. The reason why is that at those times, folks are usually caught up with the crowd, their emotions and the opinions of so-called experts. Ignoring historical facts and rational thought means that emotions rule, and people tend to make decisions by applying

the least effort. This means we generally take the easy route first, and only after striking trouble do we tend to rethink and put some brainpower to work. I'll now run through an abbreviated version of how most of us actually make a decision. Most folks follow the crowd, and if that's the case, then you're probably not thinking straight. One of our principles is to buy low and sell high, and the book Low Rates High Returns explains why it pays to be a contrarian investor. When it comes to something we don't know much about, like stocks and investing, people tend to undertake a predictable process. Firstly, you read, see or hear about a company or the stock market in the general news media. Let's

say it's a stock. Your friends explain how they just bought a stock because one of their friends or relatives is in the finance industry and he's rich, so he must know what he's talking about. Perhaps you don't know much about stocks, but if your friend's buying, then it's probably a good idea. So you think about buying some. Your friend then tells you three months later that the stock's up to 50%, and so you focus a little more on it by checking it out. And your emotions take over because who wouldn't and who doesn't want to make money the easy way? And so you end up buying some. At this point, most folks have done a little research.

They know very little about what they're buying and they don't know what they should be thinking about risk. They can only see the potential rewards where greed's kicking in. Most of us are happy to follow the crowd and most of the time this is the sensible thing to do. staying in a group is an evolutionary mechanism that's designed to keep us safe we tend to make decisions using social proof and so the stronger the belief e.g property prices will never fall the more we're inclined to take on that general belief swimming against the tide

may seem like hard work but it's profitable the problem is the crowd often doesn't know what it's doing either. It's a bit shocking but you'll often find most investors know little about their investments. Just think about how much people know about their superannuation. If you follow the crowd then your investment returns will be the same as the crowd and no better. So how do we make investment decisions being contrarian? Well firstly we avoid the crowd because we know that the crowd is unlikely to understand much about the investment and what the risks are. The most successful approach is to have a systematic method that delivers the best probability of you making successful investments based on sensible decisions. As John Templeton, a famous

investor said, it's impossible to produce superior performance unless you do something different from the majority. It's difficult to stand alone but we can tell you this is how you can get better than average investment returns in all markets. And with more practice by using a systematic approach, your emotional framework will become familiar with the approach so it gets easier over time. There are investors who do consistently beat the market and here's a brief summary of how they do it. Firstly, they have a system that they stick to and apply. This is usually based on being contrarian, that is buying when the market's cheap. They don't wander off into the latest public fad or whatever's hot.

Secondly, they don't follow the crowd or act emotionally. You'll often find that the most profitable investments are made when everyone else is running in the opposite direction. For example, Steve made a series of very successful investments in 2009 when the global financial crisis struck, and again in 2011 buying US banks, in 2014 buying Russia, yes Russia, we know what you might be thinking,

but these are very successful investments that he still holds, and more recently, after Brexit. On each of these occasions, investing appeared on the face of it to be a dangerous gamble. Thirdly, they follow market cycles and understand that there are times when it's better to buy and better to sell. Fourthly, most of them use a rational decision-making approach when allocating their capital. And lastly, they don't put all of their allocated funds into the market at once. They average in to an investment because they're aware that even cheap stocks and markets can get even cheaper. The proof is in the returns generated over a long period of time and the superior performance of buying and selling shares using the value or contrary method.

The fundamental edge that value investors like Warren Buffett, George Soros and Ed Thorpe use to beat the market is rooted in the psychology of individual investment behaviour. and this approach has been successful for the past 75 years. Remember though, if you don't know about yourself then the stock market is a very expensive place to find out. So it's time to be dynamic because history doesn't repeat but it certainly does rhyme. The final component of our investment philosophy relates to time.

I'll now discuss a few concepts to think about regarding time and they're central to how you invest successfully. The first is static versus dynamic. You must take what we call a dynamic view rather than a static view. The static view is a traditional approach and the one promoted by the finance industry, which is literally buy and hold. We prefer taking our dynamic or active view

rather than being static or passive. Now, this doesn't mean we need to look at or to even act every day. It means that we think dynamically rather than statically. Steve shows in his chapter on market cycles that there are times to invest more and times to invest less. We know that over a full market cycle, the market offers different risks and rewards, and so you need to think about timing and how it impacts your investments. In the book, Steve explains further the principle of market cycles and mean reversion, and why it's critical to use a dynamic approach and not a static one.

The static approach states that the average annual return investors can expect is 8-10%. Now, this is somewhat misleading on two fronts, and we discuss these further below. Firstly, the difference between average versus geometric returns. Now, let's deal with a finance industry furphy, average returns. This is important because it plays a critical role in investors thinking that they'll be okay in the long run. Firstly, average returns are compiled by adding up each other's user returns and then dividing by the total.

For example, 1 plus 6 plus 8 plus 9 equals 24. The average of those four numbers is 6. Now the average return from a stock market is taken from the starting point up to the current year. You often hear that the average return is about 8-10%. But the problem is that we each have a different starting point and so our returns are bound to be different depending on our start and finish dates. Incidentally, the 8-10% average annual return comes from a starting date of 1926. If you started then, congratulations.

However, if you didn't start in 1926, then you're bound to have a different average return. And history shows that the annual average of about 8% seldom happens. As an investor, you receive the geometric return, not the average return. To explain this, let's use the following example. From 1900 to 2019, the average annual return was 7.1% in the US market. You often hear statistics such as $1,000 invested in 1900 will be worth about $1.9 million today. However, the real figure is actually closer to just $160,000, which is a geometric return of just 4.7%.

That's a big difference. This is because of something called the sequence of returns, which I'll explain in a minute. Though the average gain was 7.1%, your actual real return was only 4.7%, nearly half. Geometric gains are the relevant ones because that's what you actually receive when the cash is deposited into your account. Another reason, the average seldom happens and this impacts your returns. From the year 2000, a buy and holds portfolio's average return

certainly didn't average 8 to 10%. In fact, it's closer to zero. Why? Firstly, if you invested at the top of 2000, you invested when a secular bear market started where values were dropping and so basically you made nothing. But it's a little more deceptive still. Firstly, average numbers are a result of addition. Geometric returns are a result of multiplication. Let's add the following and then get the average. 1 plus 6 plus 8 plus 9 equals 24. Now the average is 24 divided by the four numbers equals 6. So the average return is 6. But the geometric return is what you get in stock markets because the gains or losses actually compound. That's why you seldom receive the average return. The stock market effectively

multiplies your gains and losses and so the average is actually largely irrelevant. The average is made up of totally separate individual returns. You're just one of the individuals that make up the overall average. Hence, you're not average. You want to have a high geometric return because that's the actual amount you receive over your investment lifetime. A simple example, you start with $100,000. In the first year, you make 20%. And so your total increases to $120,000. Great. Now, the next year, the market declines by 20%. A shame, but no worries, because you've still got your original $100,000, right? Or do you? Because the average return is zero plus 20 minus 20%. But the geometric return is negative, and you've actually lost 4% of your capital.

how because at 120 000 when you lost 20 which is 24 000 you end up with 96 000 so you actually lose 4 000 from your original 100 if you sell your portfolio you get back 96 000 the result of the geometric return not the hundred thousand dollars which is the average return now obviously this is a deliberately simple example. But consider what might happen to your portfolio when the market falls 40%, 50% or 60%. Therefore, one of our timeless principles is buy low, sell high. You must buy and sell to maximise your returns. Remember, what you get is the geometric return, not the average return. Still want to stay invested through the market declines? Finally, another important part of Steve's investment philosophy

is understanding the role that the sequence of returns plays. Put simply, you can either bolster or kill your returns. It's also why we take an active approach and use another timeless principle of rebalancing to enhance your investment returns. In the book, Steve uses the example of the personal wealth of two retirees, David and Carol, where, based on exactly the same starting position,

one ends up with $2.5 million in their pocket while the other ends up bankrupt. And the only thing that has changed between the two investors is the order or sequence of their returns while the average return for each was actually the same. Therefore, you need to consider the sequence of returns in investing. It's prudent that after a good run, you rebalance your portfolio

and Steve and Pete show you how to do that in the book. So here are two ways that the sequence of returns affects your overall returns. The first relates to negative numbers and compound returns. If you make 20%, then lose 20%, then the average is zero. But geometrically, you lose 4%. For a 20% loss, the required gain to get back to where you started is actually 25%.

It's the same whether the positive or the negative occurs first. A 25% gain is wiped out by a 20% loss. Secondly, we need to consider the range of returns effect. As returns become more dispersed from the average, the compounded return actually declines. Three periods of 5% returns is greater than any sequence other than that that averages 5%. For example, 6% plus 5% plus 4% equals a 5% average, but the compound return is lower at just 4.9%.

As the variability of the returns increases with greater volatility, there's a decline in the beneficial effects of compounding returns. So with annual returns of say 9% plus 5% plus 1%, this still results in a 5% average, but the compound return is only 4.9%. The bigger the swings in your portfolio, the more your compound returns may decline. This is most definitely what you don't want, especially as you get closer to retirement. Therefore, the sequence of returns really does matter. So it's quite clear that staying invested through market declines can be severely detrimental to your financial health,

which brings us full circle to the need to focus back on risk first. Your number one priority is to focus on risk. And by that, we mean don't lose money. Even before you buy a stock or a property, Think about risk. Focus on how the investment could lose money. Most investors only focus on the reward without considering the level of risk and their probability. You need to ask yourself the following questions. Are you adopting a systematic approach? Are you buying at the right time in the market cycle? Are you buying low? Are you allocating a specified amount of

your capital? And are you holding some cash against it? Often investors make the mistake of simply deciding to buy a stock and ignoring any potential warning signs, like a company that has a very high debt level and a shrinking cash flow. And remember that no one is perfect, including us. You can't make every investment a success simply because there are other people involved. And you'll never get to master the art of perfect timing. You'll probably buy too early or sell too early. So be it. It's just an accepted part of investing. And make sure you think about the long term. Again, this doesn't mean simply buy and hold, but accept that the effects of randomness will often apply. You won't always get the benefit of costs or of currency fluctuations,

etc, they will usually wash out over time and think like a contrarian. While we understand it can feel difficult, the most successful investors are the ones who swim against the tide. The wealthy buy low and sell high. They stick to their system and they make the big decisions when others hesitate. That is how they built their wealth. It didn't come from being like everyone else. We believe that anyone can become a successful investor. What Steve hopes to do is to convince you that with an understanding of a few crucial concepts, you can gain a good understanding of how the stock market works and more importantly, how to increase your wealth from investing in shares. He would also like to show that you don't

need to rely on the views and expensive advice of experts in order to achieve your investment goals. Indeed, they can often be downright damaging for your investment health. So to help you get your head around all of this, in the concluding part of my great conversation with Steve Moriarty, he goes into detail in breaking down his eight timeless principles and how you can apply them to building your wealth safely. Because for over 20 years, Steve's been a highly successful full-time private investor. He's the founder and wealth coach at Next Level Wealth. He's a podcast host, an author, and former political advisor. But as Steve repeatedly reiterates, your investment success all revolves around knowing yourself and your personality type

so that you can then construct an investment style and systematic plan that plays to your strengths and protects yourself from your weaknesses and your emotional limitations. So, as I've already mentioned, to clearly identify your personality type, jump on truity.com or crystalnose.com to take their quick and easy free questionnaire to find out who you really are. And as a special bonus for Get Invested listeners, once you've confirmed which of the personality types you fall into, you can email Steve directly at steve at gonextlevelwealth.com.au

to get your free personality type investment roadmap that's tailored to your specific personality type, just like my example that we spoke about earlier. Now, Steve also talks about all of this in much more detail in the excellent book that I've been quoting from, Low Rates, High Returns. So I highly recommend you grab yourself a copy as it's a really good and easy read

and one of the best books I've read in years. and if you like what you've heard and read next level wealth's uniquely tailored investment coaching program may be just what you've been looking for so reach out to steve at www.gonextlevelwealth.com.au to investigate this further in the same vein if you're ready to take the bull by the horns and get started on your property investment journey grab yourself a free copy of my award-winning intro book, Get Invested, by jumping on busheymartin.com.au forward slash books. You can get the e-book version at no cost. And if you like what you read, then you can upgrade to the full Freedom Formula book that gives you the detailed keys

on why, what, and how you need to invest to achieve your ultimate lifestyle goals and get your precious time back. Now, it's also important to stress that our discussions are general in nature and nothing that's talked about on GetInvested is intended as financial advice in any way, shape or form. And you should seek independent financial advice that's suited to your needs, your capacity, your risk gap and your risk appetite before taking any action. In the meantime, enjoy this inspiring and motivating conclusion to our great conversation with Steve Moriarty, where we pick up our chat from where I ask Steve to run through his eight Timeless Investment Principles.

I think this is a great point to jump into the eight principles actually because I would love to sort of lay out the framework and then talk about in bringing those all together what sort of a system people need to start thinking about and then how that system dispels some of these so-called truisms and myths that may not be actually everything they're cracked up to be. So can I start off by getting you just to outline what the eight key principles are? You've broken them beautifully into the thought principles

and the action principles, which I think is a great way to do it. And then I wouldn't mind, once we've just given a very quick summary of what they are, pick on perhaps the top three and why they're the most important and how should that influence investors as we move forward? Sure, sure. Look, the eight principles were developed over my last 20-odd years of extensive reading and, you know, thinking about stocks

and doing about stocks. And the wonderful thing about thinking and doing is exactly what we were talking about before where you read something and go, oh, that's the way I should do it. You go and do it and go, actually, it didn't work out the way that guy wrote in the book. So, you know, that was, there's your sort of life lesson. So what I did was I developed, I broke it into two parts

and said, first of all, before you rush off and invest in anything, have a think about these four principles and we'll go through them in a minute. Then when you've thought about those four principles, then you say okay now i'm actually going to buy a stock or buy a property or buy a piece of art and here's what you should think about when you action them so the idea was in its sort of totality to say to people here are eight principles which every single time you want to invest you should go through them and ask yourself a series of these questions so the four action

principles first of all you say to yourself am i investing systematically so in other words as we've discussed am i investing systematically or am i investing because oh jesus i'm bored and i really want to do something i've got an idea i'm going to go and buy a stock won't that be exciting um right that's the first thing so you've got to have a system which is tried and and tested and we've we've got that yeah the second part is thinking about market cycles um look you can be the smartest guy in the room but if you pay too much for an investment you're going to have a lower return it's as simple as that now what that says is well steve can you show me the points in history where i'd have made an absolute bucket load of money regardless in a in a broad sense

and I'm being a bit flippant here, but regardless of what I buy, if you buy the best stock, for example, Microsoft, in 2000, you spend 13 years not going anywhere and losing money, even though Microsoft continued to grow as a fantastic company. So price is really important and market cycles. The next one is risk hierarchy. and the risk hierarchy is something I've developed over the years to say to people, one thing we do, Bush,

is we talk constantly about individual companies. Oh, you know, Woolworths and Afterpay and all this sort of stuff. And you get these stories, you know, oh, if you'd have invested in Afterpay, you'd have made 8 zillion percent. Well, yeah, okay, if you'd have been lucky enough to invest in it. So what I say to people is you can make good money, and we do this systematically, by buying ETFs, which have a lot lower risk.

Yeah. But the example I use is go to a dinner party and say to people, you know, I just bought a Woolworths shares. Oh, you know, that's interesting. Let's talk about, oh, why don't you buy Woolworths shares? So it's, you know, again, a personality thing. If you go to a dinner party and go, you know, I just bought the Indonesian ETF, people go, oh, that's interesting.

Anyway, let's watch for dessert. It's not very sexy, is it? No. Most people want to talk about sexy stuff rather than talk about the boring stuff. But the boring stuff will make you money. So, again, you want to think in a risk hierarchical sense about how you make money.

so when you've done that and you've got all that sort of lined up then you think about four thought principles and they are this buy low sell high okay that's a no-brainer um you know and we teach people when things are cheap and when they're expensive and again we give them stock market knowledge to understand the cycles and so when something happens people can say not have an an emotional response, which is, holy Jesus, I need to sell all my stocks, to have the response that says, yes, yes, Steve told me this is what the stock market is like, and I can deal with it in a systematic way rather than an emotional way. The next one is diversification. And we talk about how you invest globally. I'm in Britain, Russia, Portugal, all these places. And that's really

important. The asset allocation is an absolute critical one that people get wrong. And the reason why is this. It's quite simple. If you've got $10,000 to invest, a financial advisor will invest that $10,000 for you. What they won't do is say, I'll tell you what we'll do, Bushy. let's put 5 000 into the stock market and look if it drops lower you've got some cash there to buy some more okay yeah now people will say well okay steve but i'm gonna make money on five grand what we show you is over time cash is a really critical part about how you succeed in investing yeah and how you allocate your money i've got 10 grand oh okay well steve how do i allocate it in investments um do i buy russia do i buy britain do i buy argentina that sort of thing yeah and

then lastly is rebalancing which is a really really critical aspect and it is sort of if i can sort of say to you the secret source of him of stock market investing um and that's because the markets are volatile and so what we do that if you want to talk about the main three bushy it would be first of all where are you in the market cycle now the reason why that's important is because if you come to me and you say steve i've read your book and i've got half a million dollars and by god i want to put these eight principles into action let's hit the stock market what i will say to you is my current portfolio is 20 in stocks and 80 in cash now most people will go oh steve you must be not making a lot of money so i won't bore you with the details but that's not

correct now the reason why it means you're not losing a lot of money either or putting a risk more more of the point mate absolutely absolutely i'm old and wealthy enough to say i don't want to lose money because i haven't got any more coming in um so what i market cycles as i say if i said to you, Bushy, the market's booming. Put a million bucks in the stock market. We use an indicator which says to you, Stephen, you need your head read because the stock market's probably going to blow up over the next 10 years. Now, I don't know what's going to happen in the next 10 days or the next 10 months. And so we teach people to manage their money. So first question, where am I in the market cycle? The markets are low. Right. It's a good time to put some money into the stock

market. Secondly, the markets are really high. Okay, it's a good time to be selling investments and building cash. The next question is, okay, let's say the market's low. All right, the market's low. Steve, how do I allocate my money? And again, as I said, it's really important, Bushy, because people put too much in. Then when the stock goes down, they go, oh, well, I haven't got any more money. Whereas when you use our methodology, what we're saying is if it falls, you can put more money in. And what we're saying there, Bushy, is again, what you just mentioned about focusing on not losing money, because if I'm right, I'll make money. Okay. Who cares? The question is, what happens if I'm wrong? Now, what I say to myself is, how can I guard against being wrong?

i'll tell you what i could do i could keep some cash aside and if i'm quote wrong unquote and the stock falls from a dollar to 80 cents well actually i can now buy some more rather than saying oh this stock's stupid now i've lost money and psychologically you're now going oh well god i don't want to put any more money into it even though it probably is a better value investment at 80 cents and it wasn't a dollar so there's that part of it and the third leg of course is as as we show people is the rebalancing and what that simply says bushy is look you've made a lot of money but the money that you invested when the stock market was low is not the money that you're in you're getting back now because the stock market is high and this is important bushy because

it gets to your point about saying personality and subjectivity and fear and greed because after you've made a lot of money what i say to people is look you've made you know you've made half a million bucks but the stock market now is saying to you bushy i'm only going to give you one percent over the next 10 years and in fact bushy according to history i'm going to knock off 40 percent of your capital now most people at the bar would go you're a bloody idiot steve you don't know what you're talking about it's going to go on forever all i'm pointing out to people is saying well look here's a chart of what's happened before could it be different absolutely my assessment is that it won't be different let's be prudent and take money off the table now it's it leads to

being basically quite contrarian and saying when everybody around you's drunk at the bar you're sober then when everybody's sobering up you're having a few drinks because you know that's the way to do it yeah and so it's but pulling yourself bushy out of that that um you know everything's going to be fine steve it needs an independent voice to say steve uh you know or in our case to say bushy i know you think you know you've done really well but now it's a good time to look at the market cycle and say Bushy when you invested money in 2009 and everybody was going to hell in a handbasket that was a great thing for you to do but that's not the way it is anymore the way it is now Bushy is everybody's drunk at the bar thinking it'll go never never

go on and that's exactly what 2007 and 2008 did so those market cycles asset allocation and rebalancing are what i sort of call the holy trinity of the of the broader eight principles everything sort of flows off those three yeah love it love it well let's let's um there's a number of things that came out of that that i wouldn't mind sort of diving into as well because what i'm what i'm very clearly hearing hearing is that unlike a lot of would-be's experts who talk about the you know principle of buying and never selling and buy and hold yes uh what i'm hearing from what you're saying there if you apply that over market cycles uh then that's not going to be a very effective strategy so yes and market timing is uh actually something that you're

proactively uh being able to do given the indicators that you apply to determine whether the market's too expensive or or it's cheap i'm guessing and is that where the cape ratio were and the Kelly criterion that you talk about comes into play? Yes, yes, absolutely. Can we expand on that a bit for the listeners who don't know what that means? Because I think it's such a really simple way of being able to say, well, the market's doing really well, but it's way above its average, and therefore don't keep throwing money at it.

And perhaps we take some money off the table versus, oh, no, it's actually very low compared to the historic average, So now is the time to be buying in with all guns a-blazing. Can you put some shape around it because it's such a, I think, an important yet very simple thing to be able to understand that will start to guide people's decision-making in terms of where the market's at and what they need to be doing about it. Can you sort of expand on that for us?

Love to. Okay, let's deal with market cycles first. Okay, so I say to you, listen, Bushy, the market cycles, that goes up and down, you go, oh, Steve, that's a great piece of information. Where are we? And I go, oh, I've got to find out, Bushy, I haven't got a clue. You would go, well, that's not very useful, Steve. So what we use is this thing called the CAPE ratio. And it's a simplified indicator. And CAPE stands for Ciclicly Adjusted Price Earnings. Now, all it's doing, Bushy, is saying, let me give you a metaphor. There's 100 men in the room, right? Let's leave it at men.

and i'm the i'm the average height i'm 175 centimeters or five foot nine in the old language which is the average now imagine if i said to you we start off and you and i are sitting there and we're looking at these hundred these hundred men and um we say oh look it's it's um it's at the average right the average height's 175 now we're going to let some more men in the room now what happens is we let some more men in a room and the next bloke who walks in six foot four and we go oh you know that's interesting but it's not you know but there's blokes that are six foot four and then another bloke walks in and he's six foot seven and we think oh jesus right now that's a bit unusual but it's doable anyway long story short the harlem globetrotters walk in right so

So now we're saying, holy dooly, the bloody average height's gone from 175 to 182, but it's temporary because what we know, Bushy, is over the market cycle, the average is going to be 175. So what should we expect after the Harlem Globetrotters are walking in the room that has pushed the average from 175 to, say, 184? Well, history tells us that we should expect jockeys to walk in the room. And a bunch of pygmies to come in, mate, yeah. Exactly, exactly.

So translating that into the stock market, what you will hear is this average return of 8%. Over the long term, Bushy, what can I expect? Oh, Steve, you invest for 30 years, you get 8%. Oh, okay, all right. Now, what we know is with the CAPE ratio, when the CAPE ratio is really cheap, what it is saying to me is, Steve, at this point, you can expect 10% or 11% or 12%. Now, that's a great time to invest, right? Those points are when people go, oh, my God, you're investing in the stock market.

Oh, you're an idiot, right? The stock market's terrible. It's just lost 50%, right? Now, that's the best time to invest. Now, alternatively, when the CAPE ratio is high, which it is at the moment in the US at about 38. 38, and the average is what, about 17 or something, is it? About 17, right?

So what I'm saying, Bushy, is the Harlem Globetrotters have walked in from 2009 onwards. So people are going, there's going to be more Harlem Globetrotters, and I'm going, dude, I think you're going to find we're getting some pygmies walk into the room. Now, that's because CAPE tells you that. Now, the tough part is that what that then says is, well, Steve, I should sell some of my profits. And I say, yes, you should.

And you say, but Steve, I've been told that if I compound my money, I need to leave it there for 30 years. So let me give you one really simple example of compounding. Compounding is not about time, okay? Forget compounding. And let me give you a little example. I'm going to offer you, Bushy, a you and I and investment opportunity, okay? So what would you like to do? Would you like to compound at 10% or would you like to compound at 7%?

It's a pretty obvious answer there, yep. Okay, you're going to compound at 10, right? So I'm going to take the low side and I'll say seven, right? So I say to myself, righto, Bushy, you and I have got $10,000 and bang, the starting gun goes, I'm going to invest mine and let's say I put it into the stock market and I'm getting 7%, right? So you say to me, well, no, Steve, I'm going to wait. I'm going to wait for a 10% chance.

Righto, Bushy, okay, but you're missing out. So for the first four years, here I am merrily earning 7% and you're sitting there in cash, and let's say you're earning 4%, like the good old days. Yeah. So I come over every Christmas and I, you know, how are you going, Bushy? Oh, mate, that's not doing you much good, brother.

All right, so I'm showing off. So then in the fourth year, you get an opportunity to invest the $10,000 at 10%, okay, but I'm still merrily getting my seven. After 10 years, we meet up again at Christmastime and you say to me, how are you going, Steve? And I say, good, good, I've been getting 7% for 10 years. And you say, oh, good on you, you know, how much have you got?

And you might say to me, you know, $27,600. And then you say, oh, that's unusual, I've waited, I've got 10% and I've got $42,000. Now, if you invest, and I'll use those figures, if you invest at 10% and 7%, after 10 years you end up with 16% more money. Now, the point is this, Bushy, it's not about time. If you compound your money at 1%, it'll take 72 years. There you go. That's a long time. I would rather invest at 10% and take 7.2 years to double my money. So importantly, what does that say? That says to us,

Bushy, it's where we start and invest our money is the return we're going to get. If you invest, and this is the asset allocation question if you then say well steve i'm going to use kate to allocate my money i will say to you bushy now is a great time to sit on the sideline wait for kate to hit cheaply which we know it will right because that's what history has shown us and you're going to invest at 10 or 11 percent and you with a dividend you'll probably end up with 15 yeah that's a lot better to sit there and wait in pain while your brother tells you how smart he is, but he's exposed all of his money to a stock market crash where Cape is saying, Steve,

you're probably going to lose an absolute bucket load of money over the next market cycle because that's what Cape tells us. But I sit there and go, no, no, no, Bushy, this time it's different. And it never is. And it never is. And what they're doing is they're chasing that 7%, but they have a real risk of losing 20%, 30%, 40%, 50% when the inevitable correction comes. Absolutely. So this is where it leads, Bushy, to rebalancing.

Now, the critical part there, as we talked about at the start, is saying, oh, Steve, I've been told buy and hold is the best way to do it. Well, I can tell you it's wrong. Now, it may not be wrong over 10 years, but it's wrong over an investing journey for most of us. So what we have to do is rebalance. And let me again throw it back here. Let me give you a simple example. You and I invest our money at the stock market bottom, okay?

Yep. And you've got $100,000 and I've got $100,000. And we say, righto, and we both go in and we both put $80,000 into stocks and we keep $20,000 in cash. Now, this time you're buy and hold, right, and I'm a buyer and seller, a rebalancer, and you say to me, oh, Steve, you're a fool. You know, the money is made over the long term. So the stock market, our $80,000 plus our $20,000 in cash ends up at the top

of the cycle at $240,000 for argument's sake, right? So we've got $220,000 in stocks and the market's booming and we've got $20,000 in cash each, and I'm simplifying this. Yeah, yeah. So we meet again at Christmastime and I say to you, you know, we're killing it. And you say to me, well, look, Steve, I'm going to rebalance my portfolio according to this CAPE-y thing

and I'm going to only have 20% of my total wealth in stocks and I'm going to put the rest in cash, right? So I say to you, Bushy, you're an idiot. You're going to miss out on all these gains, right? Yeah. So you're prudent. so you then say okay i've got 220 and 20 so i've got 240 20 of that is 48 right so let's say 50 so you sell 170 000 worth of stocks right and you you tuck it away now people are going to talk

about tax and all that sort of stuff and we can deal with that later yeah but now at the top of the cycle you've got 240 you've got 50 in stocks and you've got 190 in cash you fool you're missing out on all these returns right but i've got 220 in stocks and 20 in cash now inevitably we get the large fall of 40 to 50 so let's make it 50 with the cake where it is yeah now my 50 000 in stock has gone to 25 okay yeah your 220 000 in stock has now gone to 110 out now let's we've done a full cycle so i come back to you at the next christmas party and i say you know bushy how you going you go oh jesus you know i've got 110 in stock and i've got 20 in cash so you've got 130 000 you say to me oh mate you've been sitting in cash for a while how much have you got and i

say to you well you know like you bushy i lost half my money so i've got 25 in stocks but i've got 190 in cash yeah so at the next cycle you've got 130 000 i've got a hundred and i've got 215 000 to reinvest yeah so what that says bushy is eat tax or whatever aside the the purpose of investing is to not lose money and that says what is the risk and what people don't realize is the risk of losing money at the moment is very very high according to the numbers and according to stock market history so it's not steve with a i've got this you know secret little you know the moon went around saturn and therefore stocks are going to crash It's simply numbers and market history.

So it's a really, really important part of – and this is important, Bushy, because people then go, oh, so now I know why I need to rebalance. Yep. And it's that reason of saying that's the way you compound your money by not losing money because, as you know, Bushy, If your $100,000 goes to $50,000, that $50,000 has now got a double to get back to $100,000, and that takes years. Years.

Most people are saved by this dollar cost averaging, which is fine, but it's a ludicrous idea when I say to you, Bushy, the market's really crazy. Yeah, but Bushy, just keep putting your money in. Just keep losing it. sound well you you know it just doesn't make any sense bushy to say look um things are really expensive but look go ahead and buy them anyway it's like uh really and but steve will they fall in the future oh yeah bushy of course well shouldn't i wait for that well no bushy you

never know when it's gonna fall and it's like but that's not the point steve the point steve is when it falls i'm gonna make a lot more money and so the finance industry is not interested in that because an example, and it's crude, but it's partially correct. If you came to me and said, Steve, I've got a million dollars, and I said, Bushy, I'm going to charge you 1% to invest that money. I'm going to invest that money, Bushy, come hell or high water, right, because I'm going to charge you 1%. If you came to me and said, Steve, I've got a million dollars to invest,

and as my next level of wealth had on, I'd say, well, that's good, Bushy. let's learn about stocks but we're not going to invest your money bushy because it's a really stupid time to have a lot of money in the stock market what i'm saying to you is bushy i'm not interested in your money i'm interested in protecting your capital for your sake not because i not because i've got a yacht that i need to you know throw a payment on to yeah and i'm i'm not being i'm not being brutal there because i'm just saying look the butcher doesn't sell me meat because he thinks i'm a nice bloke he sells me meat because that's the way he's got to feed his own family and so from that point of view you need to go into these investments

with people such as you know yourself or and dare i say it pete wargent and i because what we're saying to you is yes we're going to charge you money but we are giving you an independent an assessment of what's going on. Yeah, lovely. We are not saying to people, Bushy, oh, yeah, look, Bushy, I'm going to teach you about market cycles, but, mate, we're going to put all your money in the stock market right now when I've just taught you that it's a bad time to do it.

Yeah, what I sort of just want to highlight there, and it's a really important point for those listening to take on board, and I sort of don't want to go down the Buffett road because everyone quotes him sort of when it suits but one of the one of the things that i think is quite applicable to what you're talking about is that he you know the old analogy of he's standing there with a baseball bat and he's just going to wait until the perfect ball comes along the rest of the time he's just standing there doing nothing is a is the same analogy of what you're saying is that given that the u.s market in particular and quite a few of the markets are if you use that cape ratio and

you know, the average cyclic side of the price-to-earnings ratio, and it's so high, which would probably apply equally to Australia, too, or the thought in the current scheme of things, Steve. What you're really saying is, well, at this point in time, depending on what personality type you are, because that's got to come into the equation, but you'd be, and I think you've mentioned already that you're sitting in 80% cash as we stand right now.

And I've got to emphasise here that everything we're talking about is just generic in nature and this is not financial advice in any way, shape or form. But given that analogy, you're not trading for the sake of trading to make the brokers and the financial industry wealthy. It's a matter of saying, well, I'm going to preserve my cash. I don't want to lose money. We'll buy when it's cheap and we'll sell when it's expensive. and at this point in time, right here, right now, this is a time to take some money off the table and sit in cash and wait for the inevitable drawback

that's about to occur. Am I summarising that properly? Absolutely. It's perfect because what I'm saying to people, Bushy, is always say to yourself, what is the earnings yield? And what I'm saying, what that does is it forces you to calculate a price or a return. And so if I said to you, Bushy, look, give me a million bucks

and we'll invest in the stock market and, Bushy, I'll get you a half a percent return, you'd go, Steve, I'm risking a lot of money for half a percent. Why don't I just wait, Steve, until the market gives me 10%? Then I'll put in a lot of money, you know, with diversification and buy low, sell high. That way I'll make more money over the cycle. Will you get rich tomorrow?

I've got no idea. But I can tell you most people who get rich quickly give it back because they don't know how they got rich in the first place. So your point there, Bushy, is really, really important. And what it says is be patient because there are good times to invest and there are bad times to invest but also bad times to have a lot of money in the market, which means you say to yourself, Steve, is it a bad time?

Yes, okay, I should be prudent and rebalance. That's the key. And the key reading for me there also is that good investing means that there's a lot of time where you're doing nothing. You don't have to be doing something. Doing nothing is actually a good thing. And the other thing is that I constantly see this in all asset classes. Good investment is as boring as batshit.

And if it's exciting, then you're probably not making any money. Yes. you're doing it wrong yeah no that's beautifully said mate look uh i think we could talk for hours uh and i with your blessing i'm i'm i've really enjoyed our conversation i'm going to get you back on the show mate because i think we've only just scratched the surface today and you've got this beautiful ability to sum up very complex subjects in in ways that are very easy to digest but i want to sort of slide uh neatly into uh the uh what i call the ambush round mate which They're just the top five questions.

So this is where it all goes to hell in a handbasket. That's the one. That's exactly the one, mate. So the easy exercise to kick it off, what's the top quote that you would suggest that you live by and why is it so important to you? That one's easy. And this too shall pass. What I'd simply – the reason why is quite simple.

First of all, it reflects my personality of movement, general movement. Secondly, absolutely critical point, don't get stuck in that moment. So when you think you've made a lot of money, don't think it's going to continue on forever. When the world looks really terrible, don't get stuck in that moment thinking the world's going to be awful. What age and history teaches me is it always changes. And what you need to do is understand you can use that effectively in investing in any sense, property or stocks or art, that leads you to say, it's really awful, and I'm going to be brave and put money into the stock market, and it works. Yeah, love it.

Love it. You're an avid reader, that's clear, and so am I. It's my favourite pastime, mate, actually. Yes. I can never learn enough. what's the top book that you'd recommend the listeners read and why? I think that, look, this, as you know, Bushy, this is like, oh, God, can I have the top 60?

Yeah, you give me a few. You're quite happy to give me more than one. There's Pete and I, Pete Wardgett and I, we have a podcast, Let's Hire Returns, so people can go on there and have a look at it. Pete and I a while ago talked about our top 10 investing books. If someone said to me, Steve, if I don't know anything about the stock market or investing,

what should I buy? My argument would be to buy Robert Shiller's Irrational Exuberance. Yep. The reason why is quite simple. It's a wonderful overview of market history and market cycles, and if you read no other book, you could develop an investment philosophy out of that that would stand you in good stead over your investing career. Yeah, that's a cracker.

Your own book, Low Rates, High Returns, is a cracker as well. What about a couple of others that you think that would be worthy of merit? Yes, another one called, it's from Ed Easterling, and it's called There's Unexpected Returns, which is a really great book. And Ed's main book has left me, but I'll get you the name of it and get it to you, Bushy, for your listeners. But you could Google Ed Easterling.

What Ed talks about, again, is stock market cycles, and he goes into greater detail than Robert Schiller. There, and again, it's a wonderful book because what it shows you, Bushy, is, again, this principle about saying, look, you can't just buy stocks and hold them forever. That's not a prudent way to invest. Personality-wise, I think the best, any good book on the Enneagram, E-N-N-E-A-G-R-A-M, or the nine types, if you Google that,

there's a lot of books out there. Anything by a lady called Helen Palmer is very good. I would urge people to read that because as we've discussed through the podcast, it's really important that you understand your own motivations and we teach this in the course and put emphasis on it because you will interpret what I say differently and the reason why is because you're interpreting according to your own framework.

At least when you say to yourself, I'm about to do something dumb the key is to say oh oh yes I am now I'm going to work a way around that and I think understanding yourself is critical to that you can you can be the best investor in the world but if you uh if you are overly emotional with your money then you know you're not going to go very well yeah beautifully said this one's a little bit left field but most Aussies believe they pay way too much tax. So what's the best legal thing that you've done to minimise the tax that you pay, mate?

My answer would be absolutely nothing. And I suppose as a labourer, I would probably – you could sort of well say yes, well, he would say that, wouldn't he? Pay your fair share. No, look, in terms of investing, Bushy, I often say to people, I never worry about tax. The reason why is because I don't invest saying, oh, this is going to be a really great tax idea. I invest saying this is going to make me money.

And so that's my sole focus. It doesn't, much to my accountant's distress, but basically I don't bother about it because I think you and I, you know, off camera, we were talking before about life. and I've always looked at it and said, oh, could I be bothered with all that garbage? No, okay, forget about it. Exactly. So, you know, Steve, I'd like you to do a complex tax return or I'd like you to read a book.

It's like, thank you, I'll take the book. And the reality is if you're, the good part is if you're paying a lot of tax, it also means you're making a lot of money. So it's not a bad place to be. I'll tell you a quick little story, Bushy. A guy, you know, when I was in the public service, this is 40 or 30-odd years ago, he came out of his office, you know, waving his payback, he'd go, oh, look at the amount of tax I pay,

which of course was, you know, code for, you know, look at how much they pay me. Anyway, I sort of, I said to him, oh, well, give me your pay slip, I'll pay your tax, you know, so, which is exactly what you were saying, Bushy, which was, you know, if you pay a lot of tax, well, you're probably earning a lot of DOS, so, you know, don't, you know. Don't complain. Don't complain, you know.

Now, back on the investment advice topic for a minute, and you've got a wealth of wisdom to share here, So boiling it down is probably going to be a challenge. But what's both the worst and the best piece of investment advice that you've ever received today? I think the worst advice is probably buy and hold is the best method for building wealth. I think that's wrong.

I think too many listen to Buffett out of context, which I think is really important. Quick distinction. Buffett got rich not by buying and holding. He's remained rich by buying and holding, but he got rich by buying and selling. So the worst advice in my opinion is don't buy and hold investments because you'll inevitably get, you know,

average or below average returns. The best advice I can give people about investing is read. Read widely and think. there is not enough thinking going on to say to to say oh steve you just buy and hold blah blah blah and you go oh right okay that's all right rather than what i do is i read and say well is that actually true let me go and i need to have a think about that um thinking is hard work but it's absolutely um rewarding especially in terms of investing when you can get away from people who have got a conflict of interest where you say, well, Bob said I'm going to get 10%.

I'm going to go and look and see if that's actually true. So I think thinking and reading are absolutely critical. Yeah, I love it, mate. Right there with you. Final one then, what's a personal happy habit, a daily discipline or a rewarding ritual that contributes most to your investment success oh gee that's a tough one um look i would i would generally just repeat the emphasis bushy on on thinking deeply um secondly knowing yourself and i think thirdly and this is probably the critical part is actually saying to yourself um what i mentioned before which is what if I'm wrong and the reason why is because that that absolutely smashes your ego out of it to think that you're going to be right on every occasion and uh you know there's just using

this recent COVID episode you know there are so many of us that think we're either right about the lockdown or we're anti-lockdown and so those other people are wrong I think it's really saying to yourself look you know there's there's no perfect answer to every question and by the time we figure it out the world's moved on and we've gone oh hang on that was you know it was a good time to buy that stock but now it's not a good time so i i think it's really in my own mind my daily habit is always to say to myself you know when i read things and go is that right and and then put my own overlay over to say well steve you know in a sense bushy it might be sort of if i can use politics to say the liberals have brought out a good pot well i can't support that

because i'm a labor person right and so you want to what you want to do is you want to pick holes in it rather than say actually that's a pretty good policy you know we should have had that policy which is often what they do in politics yeah love it love it and it's it's having that ability to look beyond yourself and and sort of take a helicopter view and say well what really is the best choice and best decision here and then forget about the Guernsey, be prepared to say, yep, well, that's actually good

or no, that's not so good. Totally agree, mate. That objectivity is something that's sadly lacking in the current world, but that's another topic all on its own. Mate, just to bring it to a close then and a big question that gives you an opportunity to really sum up the key messages here.

If I gave you a microphone that spoke to every single one of the 7.7 billion people that are currently alive in the world and I gave you a minute to talk, what would you suggest they invest in? Great question. I would invest in what I call the four Fs, which is another thing we can talk about at some other time.

And it's called fun, fitness, finance and philosophy. And what I've distilled, Bushy, after 58 years is they're the four main things that you want to focus on. Focus on money because it's important, but you want to focus on fitness because if you're fat and overweight and you've got a lot of money, you probably won't enjoy it. You need to have fun. You need to have fun for your own soul and we now realise

that laughing has such a great effect on the body and also for people around you. You know, we're social beings and when you bring an approach of laughter you know people will laugh with you um and the the last leg is philosophy which is again i can say to you at 58 i've developed a philosophy of life that i'm completely comfortable with um and that doesn't mean i'm right it just means that i continue to say oh i wonder if that's oh that's interesting i wonder if i am correct um so it it allows me to stay open-minded and also importantly bushy teach my children not momentary lessons but wisdom

yeah and to say to my son don't smoke son because it's a bad thing to do right it's a you know you will never smoke at any point in your life and go yep that was a really good decision you know so it's those sort of life lessons because they're the things that actually stand you in good stead You know, use the eight principles. Don't, you know, don't fall into going, oh, I'll just skip them. Yeah. Yeah, I totally agree, mate. Something that just before we close, because you've mentioned it a couple of times and it's really sort of grabbed my curiosity, you mentioned the Three Wells program.

Yes. Can you just sort of whet our appetite very briefly with what that's about? Okay. Just quickly. When we get a little personal, when I divorced, I got a, you know, I got a divorce. know, my ex-wife got her money and I got my money and I said, oh, what am I going to do? I'd looked after my children and I wanted to continue to go to fates and swimming carnivals and also live the life I wanted to live, which is what I'm doing now.

So I developed what I call the three wells. Now, the three wells is quite simple. How do we spend money over time? Okay, so what do we need money? Well one is about saying I need a cash flow for the pizza and, you know, the electricity bills and the kids' clothing and all that sort of stuff. So that's a, you know, think of that as an income. Well two is I'm going to take the kids to Europe in 2024.

It's going to cost me, you know, $30,000. Right, okay, well, I need to have an idea about that money. well three is saying um when i cark it i want to live the i want to leave the kids some money to ensure that they they live a a pleasant existence so what i have developed bushy is three separate strategies in the stock market using the eight principles excuse me that generates a cash flow that generates a well too so it'd be for example it'd be like saying steve i've got a million dollars how do i how do i live my life with this and i say all right bushy let's put half a million in superannuation and we'll buy an investment for example a property

that is a long-term compounder so we don't need to worry about that for the next 10 15 20 years in in well two with the remaining half a million let's use 300 000 let's use what we coach in our our program our etf strategy and that will generate about you know whatever money over three or four years and the idea is to get you to say that's what i'm going to spend on europe okay yeah well one is the remaining for example 200 000 which says steve teach me how to use this money so i can draw money off it weekly yeah and that pays for my the pizza and the cash flow you know the pay the bills the electricity and that sort of day-to-day cost and so what it does bushy is it gives people, again, a holistic approach which says I'm going

to buy, for example, I'm going to buy BP because it's really cheap, it pays 7% and I'm going to stick it in my superannuation because it's going to give me that dividend for, you know, 10 or 15 years. In well two, it might be saying I'm going to buy the Russian ETF at the moment because it's cheap and I'm going to sell it in two or three years when it's made, you know, 20% or 30% or 40% and it's a little bit more complex than that.

Yeah, I love it. And well, one is simply saying he's a very, very sort of good strategy that provides me with cash flow. So it's just categorising your money to accord with the way that you live your life. Yeah, I love it. There's sort of the elements of income and cash flow, the elements of savings and elements of legacy all wrapped

up into those three worlds. Love it, mate. That's a great way to bring it to a close. Really enjoyed the conversation, mate, and it's going to be the first of many. I know I just completely aligned with everything that you said today. So really appreciate you coming on board and looking forward to having you on again as soon as you're ready.

Thanks, Bushy. I've absolutely enjoyed it immensely. Thanks, mate. To get a summary of all this investment gold in the show notes, just email me on hello at khgroup.com.au. That's H-E-L-L-O at khgroup.com.au. Or check us out at www.bushymartin.com.au forward slash getinvested. I look forward to joining you next week for another episode of the Get Invested podcast.

So thanks for listening. And as always, dream as if you live forever and live as if you die tomorrow. Thanks for watching!