The barbecue stopper
By Jim Parker, Regional Director, DFA Australia Limited*
Before we know it, the Australian summer barbecue season will be here – a time when many of us spend our weekends standing around a burner in someone’s backyard discussing the state of the world. When it’s male-dominated, the chit-chat over smoking steaks usually starts with the weather, before progressing to sport, television and New Year’s resolutions. Sooner or later, the question of investment crops up.
These barbecue conversations about money can be a little exasperating, particularly if you’re a long-term buy-and-hold investor with a diversified portfolio structured around the known sources of risk and return. So picture a group of people standing around a barbecue on a summer evening. The small talk exhausted, one guest who’s had a particularly good year in the markets, changes the subject to investment… “My broker told me to put a bundle on BHP and Rio this year,” he says, in between swigs on a can of expensive imported beer. “Best thing I ever did.”
There’s a gap in the conversation as the guests, all wondering whether they’re adequately leveraged to the commodity “super cycle”, nod sagely. Then, a second man pipes up: “Well, remember that tiny stock I told you about in March? It’s quadrupled in price since then; you should have been on it.” There seemed to be no arguing with that.
“Oh, I steer away from those rats and mice,” says the first guest. “You’re better off in blue chips. At least everybody’s heard of them.”
At this point the host – who’s invited everyone around to show off his new home – decides it’s time to put in his two cents’ worth: “You can keep your shares,” he says as he flips the sausages. “For my money, you can’t go past bricks and mortar.” Again there’s a moment of quiet as everyone looks around to survey the host’s spread. Nice place alright. Then, a gruff-looking man elbows his way to the hotplate, tossing back his third whiskey and jabbing his finger in the air. “Well I say you’ll all be ruined” he prophesises. “My advisor told me a recession’s on the way. I’m in cash and that’s where I’m staying.”
Amid all this testosterone-fuelled upmanship, one guest stands unnoticed in the background, quietly sipping on a white wine and soda and wondering what, if anything, she can add to the conversation. “I only wish I were as smart as you guys,” she ventures. “But you know what? I own BHP in my large cap portfolio. I probably own that little stock you were talking about, Jack, in my small cap fund. You mentioned bricks and mortar, Tom? I’ve got a global listed property portfolio. Plus I’ve got protection in cash and fixed interest. That’s my strategy and I’m happy with it.”
“So what do you call your strategy?” the host asks of the woman who by now has everyone’s attention. “I call it diversification,” she says.
“Look, it sounds like you’ve all had a bit of luck with your investments this year and good for you. A rising tide lifts all boats and all that. But the fact is a few boats spring a leak every year. And I want to make sure that when they do, they don’t sink my entire portfolio.”
The mention of leaky boats and sinking portfolios sends a couple of the less diversified guests scurrying away to call their brokers.
Now the woman has the floor. She turns first to the whiskey-swilling pessimist and says: “You may be right. There may be a recession next year. But none of us knows for sure. And I don’t want to stake my savings on a forecast. By the way, didn’t you tell us there was going to be a recession last year?” The pessimist blushes at this and decides it’s time for a refill.
To the man who won big on a single small cap stock, the woman says, “I’m glad your gamble paid off, but it was a gamble. I have stakes in thousands of small cap stocks, and not just in Australia. Some won’t amount to much. Some will. But this way I make sure I get the returns of that asset class.” The single stock guy swallows hard and makes a mental note to Google up “asset class” when he gets home.
To the blue chip fan, the woman says, “I like good companies, too. But there’s a difference between a good company and a good stock. The important point is how much you pay for it. Some stocks are cheap because they’re riskier. If I buy lots of risky stocks, some of them will grow up to be blue chips one day.”
At this point, the blue chip guest decides it’s a good time to go to the kitchen and help make the salad. “And another thing,” the woman adds, as she crushes a fly with an empty beer can, “do you guys know how much you’re losing in fees and taxes?”
Fees? Taxes? Blank looks all around at this one.
“Well, what I do is focus on things I can manage – fees, taxes, portfolio structure. Then, all I have to do is stay disciplined.”
The woman smiles, She’s said what she had to say. But no one can think of what to say next. The silence is broken only by the sizzle of the steaks. Then the host clears his throat: “Soooo, enough about money; how about that cricket, eh?”
*Jim Parker was formerly a senior editor and financial markets writer with the ‘Australian Financial Review’. DFA Australia Limited is the Australian subsidiary of Dimensional Fund Advisors and is a registered investment manager in Australia and the USA. It also provides investment research reports and insights.
Tags: asset class, investment