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CIARAN RYAN: Too many investors leap in at the deep end, chasing hot tips or wild bets only to drown in risks they didn’t see coming.
In a financial world buzzing with noise, stretching beyond what you know or can stomach isn’t just bold, it’s dangerous. Now more than ever, getting what you’re investing is the lifeline separating smart moves from reckless gambles. In today’s podcast we’re digging into how clear goals, a rock solid strategy and old-school discipline can keep you from crashing and burning.
I’m joined by Adriaan Pask, chief investment officer at PSG Wealth, to unpack how investors can dodge the traps of speculation and overreach.
Hi, Adriaan. Good to talk to you again. There’s plenty of evidence of speculation in the market right now. How bad is this and what does it tell us about the market? Maybe you can also share some examples you’ve come across, and how they reflect on the broader issues of investor speculation.
ADRIAAN PASK: Yes. Hi, Ciaran. It’s good to chat to you again, and hello to everybody listening. I think it’s a very topical discussion in the environment that we are in at the moment because I think some of the speculation seems to be unwinding a touch. We’ve seen markets more turbulent and volatile.
And typically, when things like tariff discussions, something that we’ve discussed before – hit markets, typically the level of market reaction can be inferred by the level of speculation in the market.
That’s essentially saying the market will tend to be more volatile in environments where there is more speculation.
So, if there’s more froth in the system, then markets will tend to be more severe in terms of any price reaction. I think that’s why we’ve seen markets move over the very short term in the way that they have.
But if we look at what’s happened to long-term investing versus speculation, even if you go through varsity, they sort of separate the two. They teach you what speculation is, and they teach you what long-term investing is, and the two are directly opposed to one another.
But essentially what’s happened with on a very basic level is – and this has been happening over decades – if you look at the average holding period of a stock on the S&P 500, investors in the 1950s and 1960s used to invest in a stock and hold it for at least eight years.
To our mind, that’s the smart thing to do. Business cycles can be long. So, if you find a good company or business to invest in, you should give them a fair opportunity to generate value for the shareholder.
I don’t think investors in this climate are thinking about buying a share in a business that you believe in and holding on to it for the long term as it grows and generates value for shareholders. I think there’s far more speculation. The average holding period is now around five months; so, you can hardly make an argument that the average investor is buying into a business because they’re buying into the long-term philosophy as to how the business model works.
And you can see other evidence. If you look at oil, for example, we know that there are big volumes coming through trading in the commodity space, but if you look at the value of all the oil that’s produced globally and essentially bought up by the big refineries, and you put that against the trading volumes of well-related financial instruments, it’s 400 times the total value of oil being produced daily.
So, it just gives you a sense of how hectic this is.
That’s exactly why we’ve got strategic oil reserves because, if you are at the whim of markets and pricing you might find yourself in a position where you have to cough up money you don’t have to keep the strategic growth underpinned, because oil is a commodity that’s important for growth. That’s why the authorities typically keep oil reserves. It’s just too volatile and that volatility comes through speculation.
And if we extrapolate that same type of thinking into the crypto market, for example, as a newer generation commodity, if we look at what’s produced daily through bitcoin mining versus what’s traded daily, it’s a thousand times that’s being traded on a daily basis. So, it’s heavily speculative.
To extend that level of speculation, you’ve got businesses [where] a good example would be something like MicroStrategy. So, for listeners not familiar with MicroStrategy, it’s a business in the US that buys up bitcoin and you can then access MicroStrategy as a listed entity through the stock exchange in the US. Essentially what it does is buy bitcoin, and you can buy the stock. So, it’s supposed to be easy access. You don’t have to access bitcoin through an exchange.
You might have concerns around whether it’s the credible bitcoin platform, but essentially you would expect the market price or the book value of MicroStrategy per share to be roughly the same as the book value of the assets it holds, which are essentially all bitcoin.
But that price-to-book value is now three-and-a-half times, so the market is propping up the share big time.
If you compare that against something like a Growthpoint, which is also a company that obviously buys property assets and then keeps them on the balance sheet, the price of Growthpoint versus the value of the assets on the balance sheet is 70 basis points. So, it’s 0.7, just to give you an example.
The story continues. There are now even leveraged ETFs [exchange-traded funds], and you can buy a leveraged MicroStrategy ETF that gives you three times the leverage on the MicroStrategy stock.
So, there are very interesting examples of all sorts of speculation taking place in the market at the moment.
There are some more vanilla examples. It’s always good to use extreme examples to highlight the point, but to our mind even what we’ve seen over recent years, the amount of capital that’s flowing into private equity to my mind is also investor speculating. There are reasons why listed companies were historically a good access point.
This is where there’s heavy regulation, that’s true, but these companies need to jump through certain hoops and over certain hurdles to ensure that there’s investor safety.
So, it’s not to say all private equity is bad, but if you can’t access capital markets through the normal stock exchanges and you can’t access capital through banks, you can go to the private equity space.
But you’ve got to ask why the banks do not give these businesses capital.
Why don’t they find being listed easy on the exchange? Is it difficult to meet the requirements?
Again, it’s not that it’s a generalisation for private equity – it shouldn’t be. There are obviously opportunities that could be attractive, but broadly speaking, it’s a sign of speculation.
And even closer to home, to the vanilla things that we see in the tech stocks, I think it is an area we’ve discussed before. It sort of captures the imagination of investors in ways. If you look at some of the rollouts that they do for new products, for some of these tech businesses, it’s very easy to see how investors can get captured and find these things interesting and exciting. So, there’s plenty of hype around at the moment.
CIARAN RYAN: Yes, interesting with MicroStrategy – I was looking at the price quite recently – I think the price is up about tenfold. It was up about tenfold in the last four to five years. Of course, it’s dropped off very heavily now that the bitcoin price has fallen off itself. So, it’s been seen as a proxy for bitcoin.
And so, the fact that you would get a leveraged MicroStrategy stock which is already pretty leveraged to the price of bitcoin itself is quite astonishing. Of course, people who bought in there, thinking this is the quick and easy path to riches, would be taking quite a bath at the moment.
What makes these speculative investments so attractive for people at a time like this?
ADRIAAN PASK: Yes, I think it’s exactly that. I think in markets it’s always said that it’s ultimately a game between fear and greed. What we are seeing more recently is an element of fear creeping into the mindset of guys using the exchanges and purchasing stock like that.
Historically there’s been a strong element of greed involved – you start to ignore some of the other things that are important when you invest, like research or really understanding what you’re investing in. How transparent is the strategy, how liquid is the investment? Is there an event [to which] you can react or do something? Is there cash flow underpinning the valuation, or is this purely a sentiment-driven type of investment?
The market perception drives the value, not the cash flow. Those things aren’t typically the things we like.
But I think the biggest risk there is that your outcomes over the long term are uncertain. So, if I talk from a wealth-planning perspective, and you help a client to formulate a plan for how to reach their retirement goals, for example, you’ve got to be pretty sure. If you put down Client X needs 10%, I’m going to give you X fund or X equity to reach your goal [so] that it gets there. If you undershoot by one or 2%, missing the target significantly, ultimately that will impact the level of income an investor will get in retirement.
So, it’s not a small risk, and for many of these investments the long-term outcome is still largely unknown. They could be wildly successful, but they could also bankrupt you. So, does that seem reasonable to us from using a reliable instrument for planning purposes, or not really the kind of thing that we want to take that bigger gamble on?
CIARAN RYAN: Let’s talk about overreach, because this is something that’s likely to happen. People will get into a speculative mindset if they don’t set investment goals.
For example, looking at Tesla, it’s down more than half this year. A lot of people see it as a buy. All the indices are in the red just in this last week, and they’ll see this as a speculator’s paradise. How should one approach this market?
ADRIAAN PASK: I think that’s really the value of having a very well-engineered financial plan.
If you’ve got spare cash to invest and you do that without a plan, you are largely going to expose it to a situation with the internet and marketing and everything else that we read, and you could very easily be enticed into something that’s not really suitable for what you want to achieve.
However, if you’ve got a plan by which you know exactly what it is that you’re trying to achieve and for what reason – say I’m saving for retirement; I need X, and to get to X, I need to save Y monthly and generate a return of Z per annum over the long term – now you’ve got at least a foundation that sets your expectations.
If these other tempting things come past, you can say, well, how do they fit into my strategy? Do I really need to assume that level of risk?
Let’s use a bitcoin example. Do I really need that level of risk? What is the impact if I miss and things don’t pan out as I expect? Typically, when you don’t have those variables on the table and you don’t think of your investing activities in the context of your broader goals – your plan, your strategy, what you’re trying to achieve – you’re going to run into trouble.
So that for us is really important because it underpins your whole discipline, your whole thinking.
Like I said, I think an important component here is we need reliable things when we start to plan for the future. As soon as things become uncertain, if you go back to the statistics that are often quoted – something like more than 90% of investors today won’t be able to fund their existing lifestyle in retirement because they’re not providing enough or saving enough in pre-retirement – can an investor like that really afford to speculate if that’s your situation?
For me I think it’s much more important to then say, well, whatever I do needs to be a pretty clever strategy. It needs to be well engineered; it needs to be disciplined. And whatever investment vehicle I need needs to be pretty reliable so that if it says it’s going to generate 12% annum over the long term, I’m going to get 12%. There isn’t a standard deviation around that.
‘It might be 0% or it might be 40%, and let’s hope it’s 40%’ – that’s not a good plan.
CIARAN RYAN: Alright, we are going to leave it there. That was Adriaan Pask, chief investment officer at PSG Wealth. Thanks very much, Adriaan.
ADRIAAN PASK: It’s a big pleasure. Thanks for the chat. I appreciate it.
Brought to you by PSG Wealth.
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