1 00:00:05,559 --> 00:00:08,319 Speaker 1: Welcome to Fear and Greed. Some are investing series brought 2 00:00:08,320 --> 00:00:11,680 Speaker 1: to you by Vantask, specialists in compliance led growth. I'm 3 00:00:11,720 --> 00:00:15,320 Speaker 1: Sean Aylmer. Last year the SMPASX two hundred hit multiple 4 00:00:15,360 --> 00:00:17,680 Speaker 1: record highs, as did many of its biggest companies, led 5 00:00:17,680 --> 00:00:20,520 Speaker 1: of course by Commonwealth Bank. It leads to the question 6 00:00:21,120 --> 00:00:24,680 Speaker 1: is the market over valued and if it is, is 7 00:00:24,720 --> 00:00:26,960 Speaker 1: the re correction on the way. As always, this is 8 00:00:27,040 --> 00:00:30,240 Speaker 1: general information only and you should seek independent advice before 9 00:00:30,280 --> 00:00:33,400 Speaker 1: making investment decisions. Roger Montgomery is the founder and chief 10 00:00:33,479 --> 00:00:37,080 Speaker 1: investment officer of Montgomery Investment Management. Roger, welcome back to 11 00:00:37,120 --> 00:00:37,680 Speaker 1: Fear and Greed. 12 00:00:37,760 --> 00:00:39,400 Speaker 2: It's great to be with you again, Sawan. It's an 13 00:00:39,400 --> 00:00:40,800 Speaker 2: exciting time to be an investor. 14 00:00:41,600 --> 00:00:44,839 Speaker 1: Is the market over valued? Roger, Well, I'll tell you what. 15 00:00:44,960 --> 00:00:47,559 Speaker 2: If you look at a lot of the traditional measures 16 00:00:48,040 --> 00:00:52,120 Speaker 2: that commentators are using to expect to forecast a crash 17 00:00:52,200 --> 00:00:55,880 Speaker 2: this year, then yes, you would say the market is overvalued. 18 00:00:55,880 --> 00:00:58,760 Speaker 2: But when you drill down into some of those indicators, 19 00:00:59,040 --> 00:01:02,640 Speaker 2: the market doesn't seem that expensive. Or it could be 20 00:01:02,680 --> 00:01:05,479 Speaker 2: that there's a very good reason that those particular ratios 21 00:01:05,560 --> 00:01:08,200 Speaker 2: are at very high levels. So one of them at 22 00:01:08,200 --> 00:01:10,600 Speaker 2: the moment that investors are using, for example, on the 23 00:01:10,640 --> 00:01:13,679 Speaker 2: S and P five hundred, is the price to book ratio. 24 00:01:13,760 --> 00:01:17,520 Speaker 2: So this is where you compare the price to the 25 00:01:17,800 --> 00:01:20,600 Speaker 2: if you like, the equity on the balance sheet on 26 00:01:20,640 --> 00:01:23,640 Speaker 2: a per share basis for each company. So when you 27 00:01:23,680 --> 00:01:26,480 Speaker 2: aggregate all of those for the S and P five hundred, 28 00:01:26,480 --> 00:01:28,880 Speaker 2: the price to book value at the moment is about 29 00:01:28,920 --> 00:01:32,680 Speaker 2: five point three times, which historically is a record, and 30 00:01:32,760 --> 00:01:35,440 Speaker 2: so investors are using that and commentators are using that 31 00:01:35,480 --> 00:01:38,800 Speaker 2: to say, well, you know, look at the market, it's crazy, 32 00:01:38,840 --> 00:01:41,520 Speaker 2: it's so expensive at the moment. What you have to remember, 33 00:01:41,560 --> 00:01:45,440 Speaker 2: companies today don't have a lot of tangible equity on 34 00:01:45,480 --> 00:01:47,920 Speaker 2: their balance it. They don't have a lot of tangible assets. 35 00:01:48,120 --> 00:01:51,320 Speaker 2: The most successful companies, the ones that are being elevated 36 00:01:51,320 --> 00:01:53,760 Speaker 2: into the S and P five hundred, they tend to 37 00:01:53,760 --> 00:01:56,280 Speaker 2: be technology companies. They tend to be companies with a 38 00:01:56,280 --> 00:01:59,360 Speaker 2: lot of intangible assets rather than tangible assets. They're not 39 00:01:59,720 --> 00:02:03,280 Speaker 2: acurately reflected. All the values of those intangible assets aren't 40 00:02:03,280 --> 00:02:06,880 Speaker 2: typically reflected on the balance sheet, and so the price 41 00:02:06,960 --> 00:02:09,840 Speaker 2: to book ratio could be very very high, not because 42 00:02:09,880 --> 00:02:13,160 Speaker 2: the market is expensive, but because most of the companies 43 00:02:13,320 --> 00:02:16,359 Speaker 2: that are succeeding don't have a lot of tangible assets. 44 00:02:16,560 --> 00:02:20,359 Speaker 2: The other one that's being cited very very frequently as 45 00:02:20,400 --> 00:02:23,720 Speaker 2: indicating the markets extremely expensive at the moment is Robert 46 00:02:23,800 --> 00:02:28,040 Speaker 2: Schiller's CAPE ratio, or the cyclically adjusted price to earnings ratio. 47 00:02:28,080 --> 00:02:31,160 Speaker 2: So this is where price is compared to earnings per share, 48 00:02:31,720 --> 00:02:33,760 Speaker 2: and if the market's very popular, the price is going 49 00:02:33,800 --> 00:02:36,640 Speaker 2: to be very high compared to the earnings because people 50 00:02:36,680 --> 00:02:39,960 Speaker 2: are willing to pay higher multiples of that earnings. But 51 00:02:40,080 --> 00:02:43,280 Speaker 2: with Robert Schiller's version of the index, it looks back 52 00:02:43,360 --> 00:02:45,960 Speaker 2: over the last ten years, so it's looking at the 53 00:02:46,040 --> 00:02:48,600 Speaker 2: average earnings over the last decade. But let's remember that 54 00:02:48,680 --> 00:02:51,680 Speaker 2: in the last decade we had COVID and so for 55 00:02:51,760 --> 00:02:56,600 Speaker 2: two years earnings were depressed, and so that's artificially brought 56 00:02:56,680 --> 00:02:59,680 Speaker 2: down the average earnings over the last ten years, and 57 00:02:59,720 --> 00:03:04,880 Speaker 2: that's influence that very high KPE PE or cyclically adjusted 58 00:03:04,919 --> 00:03:07,320 Speaker 2: PE ratio. So I think when you look a bit 59 00:03:07,360 --> 00:03:09,560 Speaker 2: deeper at some of these ratios that people are pointing 60 00:03:09,560 --> 00:03:13,280 Speaker 2: to and saying, Haha, the market's really expensive, I think 61 00:03:13,320 --> 00:03:15,400 Speaker 2: you can find that, you know what, there's a lot 62 00:03:15,440 --> 00:03:18,280 Speaker 2: of companies growing very quickly. At the moment, earnings are 63 00:03:18,280 --> 00:03:22,519 Speaker 2: going well. The economy in Australia and in the United 64 00:03:22,560 --> 00:03:26,160 Speaker 2: States is robust, There's expected to be tax cuts, there's 65 00:03:26,240 --> 00:03:31,640 Speaker 2: expected to be pro growth policies implemented, and that should 66 00:03:31,680 --> 00:03:34,080 Speaker 2: be very good for another good year in market. So 67 00:03:34,440 --> 00:03:38,280 Speaker 2: I don't particularly think the market is overpriced at the moment. 68 00:03:38,760 --> 00:03:40,960 Speaker 1: I'm trying to argue against you here, Roger, so you know, 69 00:03:41,040 --> 00:03:43,560 Speaker 1: excuse me, but what about something like the Commonwealth Bank, 70 00:03:43,800 --> 00:03:48,200 Speaker 1: which isn't necessarily an IP company. It hasn't changed that much. 71 00:03:48,400 --> 00:03:53,320 Speaker 1: It is incredibly expensive. It's obviously been rerated generally. Is 72 00:03:53,360 --> 00:03:54,200 Speaker 1: that too expensive? 73 00:03:54,880 --> 00:03:57,800 Speaker 2: Yeah, Look, I think it's difficult to see the growth 74 00:03:57,840 --> 00:04:00,760 Speaker 2: in the banks justifying you know, the common Bank's share 75 00:04:00,800 --> 00:04:04,160 Speaker 2: price at the moment. But in the absence of big 76 00:04:04,200 --> 00:04:08,120 Speaker 2: cap technology stocks in Australia, investors are gravitating to the 77 00:04:08,160 --> 00:04:10,520 Speaker 2: things that they think are safe and that will give 78 00:04:10,560 --> 00:04:13,680 Speaker 2: them some leverage or some participation to the market going up. 79 00:04:14,160 --> 00:04:17,080 Speaker 2: But as I've said several times before, you know what 80 00:04:17,120 --> 00:04:20,960 Speaker 2: the wires do, early fools do at the end, and 81 00:04:21,000 --> 00:04:23,800 Speaker 2: so it is important to be very very careful and look, 82 00:04:23,839 --> 00:04:25,559 Speaker 2: if you don't want to miss out and you feel 83 00:04:25,560 --> 00:04:27,840 Speaker 2: that the Commonwealth Bank is the place to put your money, 84 00:04:28,120 --> 00:04:31,240 Speaker 2: then your lever is the size of the position in 85 00:04:31,279 --> 00:04:33,520 Speaker 2: your portfolio, and you can reduce the size of the 86 00:04:33,560 --> 00:04:36,880 Speaker 2: position such that you still have some exposure but it's 87 00:04:36,880 --> 00:04:38,800 Speaker 2: not going to blow you up if it goes badly. 88 00:04:39,400 --> 00:04:42,600 Speaker 1: Okay, So just on that. As a retail investor, how 89 00:04:42,600 --> 00:04:45,120 Speaker 1: do I play the next twelve months? Then based on 90 00:04:45,160 --> 00:04:47,320 Speaker 1: what you've said in the last three or four minutes. 91 00:04:47,560 --> 00:04:49,200 Speaker 2: So what you need to think about is you need 92 00:04:49,200 --> 00:04:51,880 Speaker 2: to think about where there's tailwinds in industries. And one 93 00:04:51,920 --> 00:04:56,000 Speaker 2: of those, you know, the enterprise migration to the cloud, 94 00:04:56,040 --> 00:04:59,440 Speaker 2: so very very large businesses moving to the cloud. You 95 00:04:59,480 --> 00:05:03,719 Speaker 2: know that's still going. And where there's where stocks aren't 96 00:05:03,760 --> 00:05:06,640 Speaker 2: super popular. As long as and I've said this before, 97 00:05:06,680 --> 00:05:10,799 Speaker 2: but as long as we have disinflation combined with positive 98 00:05:10,839 --> 00:05:14,200 Speaker 2: economic growth or at least the expectation of those things, 99 00:05:15,000 --> 00:05:18,719 Speaker 2: then you're going to see high quality companies with growth 100 00:05:19,080 --> 00:05:22,919 Speaker 2: and benefiting from those tailwinds do well. So even where 101 00:05:23,000 --> 00:05:26,200 Speaker 2: the PE ratios might be a bit above average. So 102 00:05:26,240 --> 00:05:29,279 Speaker 2: I'm not talking about those companies where they're well above average, 103 00:05:29,320 --> 00:05:31,400 Speaker 2: but if they're a little bit above average, or the 104 00:05:31,440 --> 00:05:34,320 Speaker 2: average for the market. Then I think this year is 105 00:05:34,400 --> 00:05:36,960 Speaker 2: going to be a good year for those businesses, and 106 00:05:37,000 --> 00:05:39,479 Speaker 2: in fact, let me suggest this, in the absence of 107 00:05:39,520 --> 00:05:44,000 Speaker 2: any liquidity being drawn from the market, twenty twenty five 108 00:05:44,080 --> 00:05:46,520 Speaker 2: could actually be one of the best, if not the best, 109 00:05:46,520 --> 00:05:48,240 Speaker 2: of the last three years in markets. 110 00:05:48,720 --> 00:05:50,279 Speaker 1: Roja, thanks for your time this morning. 111 00:05:50,480 --> 00:05:51,120 Speaker 2: A pleasure saw. 112 00:05:51,560 --> 00:05:54,320 Speaker 1: That was Roger Montgomery, Founder and Chief Investment Officer of 113 00:05:54,400 --> 00:05:57,800 Speaker 1: Montgomery Investment Management. Remember to get your own independent advice 114 00:05:57,839 --> 00:06:00,719 Speaker 1: before making investment decisions. Is Fear and Greed. 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