Podcast: Roger Montgomery talks about the best time to buy stocks
2020's stock market has been a rollercoaster, but is there an opportunity in the volatility?
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This year has been a wild ride for stock investors. Thanks to coronavirus, the oil price war and growing tensions between global powers, we've never seen a more volatile stock market.
In a single day in February, we saw share prices on the ASX drop by 7%, only to rise by 14% within a couple of hours. It was enough to leave the most expert of experts scratching their heads.
But where there is volatility, is there opportunity?
Fund manager Roger Montgomery of Montgomery Investment Management shares his insights about why the stock market is behaving so erratically, and whether there might be another crash on its way.
Topics discussed in this episode:
Investing chat 101
Investing talk can sound like a foreign language for those of us who aren't in the know or are new to the game. Here are some explanations for some of the jargon you might hear used in this episode.
Price-earnings (P/E) ratio: The relative value of a company's stock price to its recent profit results, i.e. the price investors are paying for every dollar of profit the company makes. A high P/E ratio may indicate that the stock is overpriced or that investors are expecting growth to occur in the future and are willing to pay more for it.
V-shaped recovery: Where there's a quick decline followed almost immediately by a quick recovery.
Private equity funds: Investment funds that hold private companies that are not listed on a stock exchange.
Fiscal Stimulus: Measures taken by governments or central banks to financially support the economy. May include cutting interest rates, tax cuts and funding.
CLO (collateralised loan obligations): A type of security that pools multiple company debts together. These companies are typically at a higher risker of defaulting on their loans.
CDO (collateralised debt obligations): Played a key role in the GFC. Investment products that can contain various types of debt and other assets, including corporate debt but also personal loans and mortgages.
GFC: Global financial crisis.
Read the transcript of this episode
Sally McMullen 0:10
Welcome to another episode of Pocket Money, everyone. Today Kate and I are going to be talking all about investing and the stock market crash of 2020.
Kate Browne 0:20
Yes, you've probably seen the stock market crash in a matter of weeks after hitting an all time high back in February. And it was a quickest transition to a bear market in history. We're talking a total rollercoaster here and we've never seen volatility in the markets like we have in the first half of 2020.
Sally McMullen 0:37
I know! What a wild year! So to walk us through it, we've got Finder's investments editor Kylie Purcell with us. Thanks for coming back on the show, Kylie.
Kylie Purcell 0:47
Thanks so much for having me guys. It's great to be here.
Sally McMullen 0:50
So earlier in the year we had you on the show and you took us through some of the basics of investing, which was a great episode. Definitely check it out. But we did mention in that one that the world has changed a whole lot since we recorded that interview. So our first question is why? What's happened, Kylie?
Kylie Purcell 1:09
Basically, when the market crashed in February 20, as you said it had reached an all time high. What happened after that was we've had COVID come in at the end of last year. It hadn't really impacted the stock markets yet, but investors were certainly nervous. Then the oil price war broke out between Saudi Arabia and Russia. And that's when we started to see prices really start dropping. So COVID was not great for the stock market, certainly, but it was kind of the tip of the iceberg. Really, economies were already really weak. Our interest rates are at record lows in Australia, we just had the bushfires, which wasn't great. We had a retail recession. COVID-19 was kind of just the last straw with some external markets crashing. Yeah, so all that kind of compounded.
Kate Browne 1:56
Kylie, I mean, it's been an absolutely crazy time and it continues to be so but I know there's been a lot of interest from people wanting to invest, you know, for the first time or get back into the market. Can you tell us about that?
Kylie Purcell 2:09
Yeah, there's been so much interest in the stock market this year. We've seen, I think it was around, it was over 4,000 new investors signing up to share trading accounts between February and April, according to ASX, and that was around 140,000 new investors and these are people that have never opened accounts before. So they're totally new and they've decided now is the best time to start investing, which might sound kind of irrational. But it's actually really smart thinking because, you know, people know that a stock market crash is a really good time to buy companies at lower price. Like a property price crash, you know, when the property markets crash, you get people jumping in and getting onto the property ladder. People are taking the opportunity to get onto the stock ladder, if you will. The volatility is a risky thing. Definitely. But it's also a really good opportunity. The big problem is, of course, is understanding where the opportunities are, and what companies are good quality because it's all well and good to say invest in good quality companies at discount prices. But how do you know if a company is actually discounted or if it's about to kind of hit zero, as we saw, potentially with Virgin in the last few weeks.
Sally McMullen 3:24
So with so much changing in the market, and with this wave of new investors jumping in, I understand that you did a little bit of extra research for us, Kylie?
Kylie Purcell 3:36
Yeah, I spoke to Roger Montgomery. He's a really well-respected fund manager and he runs Montgomery Investment Management. So I thought it'd be a great idea to get his opinion on where the stock market is going, why it's been behaving the way it has. We've actually started to see even though we saw a crash in recent weeks, we've started to see quite a big recovery. Amazing recovery, actually. We saw an unprecedented drop and now we're seeing an unprecedented kind of recovery happening. So whether that's rational thinking or whether we might be in for another big crash in the next few weeks. So I wanted to chat to him about that, and also get a few tips on what new investors should be doing, if they're looking to start investing now, and what kind of companies that should also be looking out for.
Kate Browne 4:17
Also, I guess, for new investors or people new to just even looking at investing. There's all kinds of jargon, isn't there Kylie, that investors use? And I know, in your interview with Roger, some of those were mentioned, we'll have a full list for them in the show notes. But do you want to run through just a couple that might make people go "What?".
Kylie Purcell 4:33
Yeah, there's a couple of technical terms in there. The first one would be the P&E ratio that he's talking about that's price to earnings ratio, he's really referring to whether or not a stock is cheap or expensive. So when he says a P&E rati o is really high, he means that stocks will probably be a bit expensive and if you'd invested when a P&E ratio was high, that means maybe you bought a stock for a price above what it's worth. And if a P&E ratio is low, often that means they're undervalued. That's a really, really loose kind of explanation. But that will kind of give you a better idea of what he's talking about there at the start.
Sally McMullen 5:10
Cool. I can't wait to hear it.
Kate Browne 5:12
Let's roll on with the interview.
Kylie Purcell 5:16
Hi, Roger. Thanks for joining us today.
Roger Montgomery 5:18
Good to be with you, Kylie.
Kylie Purcell 5:20
Well, I think it's pretty safe to say that the last few months have been a pretty wild ride for the stock markets. How would you describe what we've seen in 2020?
Roger Montgomery 5:31
Well, it's pretty obvious that markets were expensive before COVID-19 hit. So we had a record high price to earnings ratios on the S&P 500. We also had a record high price to earnings ratios for the ASX 300. And that was despite the fact that earnings estimates for next year were actually all for the year ahead, were actually declining. People were ultimately willing to pay a lot more for less. So they're getting less earnings, but they want to pay more for it. Now, that's an unsustainable scenario. And then, of course, we had a retail recession in Australia. We also had a 40% decline in new residential housing approvals, which is obviously a leading indicator for housing construction. The construction industry is the third largest employer in the country. Residential construction is about a third of that. And so if you have a retail recession, retail is the second largest employer in the country, and you have a residential construction recession, then you're going to have a recession in Australia. And so you had rising prices in an environment where the economy was slowing down. And then of course in Australia, we had the bushfires as well. That was an enormous hit to economic activity on the east coast of Australia. And then we had COVID-19. So that was the icing on the cake. That really put markets into a deep spiral.
Kylie Purcell 7:00
But now we're sort of seeing it rebound. Do you think that's rational? It sounds like this was the correction we needed to have now we're seeing it reverse. What are your thoughts around that?
Roger Montgomery 7:09
So the expectation clearly is for a V shaped economic recovery, and that is irrational. Now, what the market is doing is focusing on government fiscal support, and it's focusing on central bank liquidity support, which has been in place since the GFC. The problem that you've got is that when the Fed announces that it's going to buy leveraged loans, leveraged loans are the loans that are handed out or extended to companies that are so poor in terms of their financial condition, that they're very unlikely the least likely to pay back. Those leverage loans have been bundled up into what are called CLOs, which are collateralized loan obligations the same as CDOs that we had with subprime mortgages in the GFC. So the US has learnt nothing. They packaged up these loans, the loan market boom, the index, the S&P index for these loans went to a record high from 2013, up until January this year. And then on March 23, it collapsed that whole market collapse because CLOs own about 60% of those really poor quality leveraged loans. Then what happened is the Fed saw that collapse on March the 23rd. And it said, "right, we're going to step in, we're going to rescue the market, we're going to buy the securities". That's what equity markets are really excited about, that the Fed has got your back, the Fed will support markets, even if there's no fundamental basis for the price that they're paying, they'll buy them anyway. And so the problem with that thinking or the problem with that enthusiasm and optimism is that when the Fed is buying those allows it's buying those corporate loans. It keeps the interest rate on the loans cheap. But what it doesn't do is it doesn't give those businesses any revenue. Their loans are cheap, and those loans remain cheap. But if the economy slowed down, because unemployment is now at a record level, in the US and in Australia, and if we've got those record high levels of unemployment, then you haven't got customers, or you haven't got as many customers, so your revenue is going to be hit. And that fed activity that central bank support keeps interest rates low, but it doesn't give you revenue. And that's the disconnect. So in fact, if you boil it all down to a really simple difference, the stock market's definition of recovery is different to what yours and my definition of recovery is. The stock market defines recovery as anything better than the bottom. Right. It's like just as long as you're getting out of bed. You are not lying down. Right? That's a recovery. But are you as fit as you once were? Can you bench press as hard to white as you could before? No. And so our definition of recovery is back to what we were at. And we're a long way off that the stock market's definition of recovery is just, it's better than it was at the bottom. Yeah. Hmm.
Kylie Purcell 10:22
So it sounds like this kind of relief rally we're seeing at the moment might be a temporary thing. Do you think this is a kind of a case of like a dead cat bounce situation that we saw in the GFC?
Roger Montgomery 10:33
It's very possible and all that. All that comes down to one thing and one thing only the market is now set because it's so expensive, the market has now set a very high bar for company earnings. So the expectation is that the company's earnings will be very strong. If companies disappoint on that front, then the market will come back. And the answer to your question will be Yes, but it ultimately depends. on whether or not companies are able to deliver on market expectations for earnings. You know, we've got unemployment at the moment at about 6.2%. I'm just going to talk about Australia for a minute. So got unemployment at about 6.2%. But that recent April unemployment figure includes everyone on Jobkeeper. And they're not being counted as unemployed. They've been counted as having had a job in April, even though they might not have worked a single hour. And consequently, a bunch of those people won't come back to their jobs. When Jobkeeper stops, when rent relief stops when the anti-eviction rulings stop, when mortgage holidays cease, when all of that stuff stops, there's going to be a lot of people who think they're going to go back to their job and that job won't be there. And that's because you've got companies like Flight Centre that had 1600 stores - they're only going to have 800 stores, they're closing 800 stores. That means there's less jobs out there in retail that people come back to you.
Kylie Purcell 12:01
With all this in mind, we've seen a lot of new investors come into the market as record numbers of new investors opening up accounts to trading stocks. Do you think now is the time to be investing? And what would you suggest to these newbies out there?
Roger Montgomery 12:17
Well, if they're young, they've got a very long time horizon. You know, today or yesterday was the best time to get in, you know, the earlier you get in the better. And if you're young, and you're smart, then your earnings curve is going to get very steep, you do very well over your life, you're going to earn more money as you get older and become more successful. And so you don't need to worry about the small amounts that you're investing today. You don't need to worry that the stock market is going to fall $5,000 or $10,000. Might seem like a lot of money to you right now. But there will be a drop in the ocean in 20, 30, 40 years time. You know, it won't be much money at all. And if it has today, so why just buy more, provided? You're investing in quality. So my advice is this start early, start as early as possible start yesterday. But time is the friend of a wonderful business. Time is the enemy of a poor business. So it's really important that you're able to distinguish between a high quality company and a poor quality company.
Kylie Purcell 13:26
That's really great advice there. Thank you. Is there anything you'd suggest new investors should be wary of right now?
Roger Montgomery 13:34
Yeah, I think, look, I hope you don't mind me giving a plug. I wrote a book on investing 10 years ago, and in that book, I define a high quality business. So that would really help people. It's at Rogermontgomery.com. The book is called valueable. If they Google value.able or Roger Montgomery, they'll find the book. So the first thing is focus on quality and avoid poor quality. And in the book I talk about what the difference is. But the other thing economically I think people should be wary of, is the period between September and November. And the reason why I say that is because that's when all of that assistance is potentially going to end now might not end. It might be that the government extends those support programmes, and I think they'll have to, but if there's any fear that some of those support programmes are going to cease, that could result in a lot more volatility in markets, and volatility, something to be excited about. You know, volatility is something to look forward to, because you really should be buying stocks the way you buy blueberries. I don't know if you like blueberries, Kylie, I do. When they're $9 a punnet, I don't buy any, right, but when they're $4, a punnet or 450 or $3 a punnet, I load up and we freeze them. And that's the way you should be thinking about buying stocks like you buy groceries, when it's cheap, buy a lot more when it's actually pensive, don't buy any. And so volatility that the prospect of volatility later in the year is something we should be looking forward to, and particularly young people who are net buyers. If they're a net buyer of stocks over the next 20 or 30 years, then you should be looking forward to cheaper prices.
Kylie Purcell 15:17
I was hoping to do just a little section here called overrated underrated.
Roger Montgomery 15:22
Sounds like fun.
Kylie Purcell 15:24
I'd like you to say whether or not this product or asset is overrated or underrated, and why. So micro investment apps
Roger Montgomery 15:33
I think some are good, some are overrated and some are underrated. Let me say this. The micro investing apps like I'm trying to think of the one that was developed by George Lucas is Acorn
Kylie Purcell 15:45
Raiz in Australia, Acorn in the US.
Roger Montgomery 15:47
Yeah, right. I think it's brilliant. underrated. The others not so sure about.
Kylie Purcell 15:53
Property investing in Australia,
Roger Montgomery 15:55
Underrated. I think you should be doing more of it. And particularly, but you need to be really clever about it the way you're clever about stocks, you need to think about finding things that are unique. You don't want to buy something that's generic. It needs to have all the right characteristics you want to buy ideally in a gentrified area. There's actually websites that help you identify gentrification in Sydney, there's statistics that you can look out for that. And then you know what the great thing is, interest rates are so low. If you've got a secure job and you can afford the mortgage, then my suggestion is to get in early migration, we'll come back low levels of migration today and next year will have an effect on property a dampening effect, so you've got some time to find the right property and get in the early you get in early, you've got a roof over your head, the happier Your life will be perfect US stocks, they're more expensive than in Australia at the moment. However, having said that, there are some brilliant companies that just aren't available in Australia. companies with technology and growth runways that we just don't get in Australia. And for that reason, I think you should be investing in overseas stocks - that makes them underrated. But they're expensive at the moment. So that kind of makes them overrated to.
Kylie Purcell 17:16
Fair enough. The final one is ETFs.
Roger Montgomery 17:19
Exchange traded funds. Well, there's potentially some dangers in some of them. It's really important. If you're investing in an ETF, if you know nothing about investing, then exchange traded funds are the way to go. You know, if you don't know how to identify a high quality business, you don't know how to identify when something's cheap, then really, you should be letting investment decisions be made by somebody else. So ETFs are probably the cheapest way of doing that. That's great. But some of them are dangerous. Some of them are very heavily weighted in a very narrow group of companies or assets. The problem with that is if anyone if everyone decided to get out of that ETF at once, then the ETF manager will not be able to exit the underlying asset quickly enough to give everyone their money back. And so some of these things can blow up or close or freeze, and you may not get your money for quite some time.
Kylie Purcell 18:15
All right, that's awesome. That finishes off the questions for me.
Roger Montgomery 18:19
Fantastic. Kylie, great to spend some time with you.
Kylie Purcell 18:22
Thanks so much for joining us today
Roger Montgomery 18:24
Kate Browne 18:27
Wow, that was quite an interview. I feel like you know, we've been riding a roller coaster and a few more twists and turns a year to come.
So massive thanks to you, Kylie for always making investing easy to understand and super interesting. Big thanks to Roger for giving his time to us. If you missed it. Don't forget to go back and check out part one on Investing basics because Kylie gave a lot of really great tips for new investors in and out of the stock market crash in that one as well.
Kylie Purcell 19:07
Sally McMullen 19:08
And for those of you who already have investments, you can now connect your investment account to the Finder app and watch your money grow. It keeps everything from your savings loans, credit cards, track all of your money in one place, so be sure to download it. It's free.
Sally McMullen 19:23
Thanks again for joining us on another episode of pocket money. Feel free to leave us a review wherever you listen to your podcasts and tell a friend about the show. You can always join us on Instagram at Pocket Money podcast for money tips behind the scenes and also to let us know if there's anything that you'd like us to cover on the show in the future.
Kate Browne 19:43
Pocket Money is hosted by Sally and Kate. That's us. It's produced by Ankita Shetty and editing is from the wonderful Brianna Ansaldo from Bamby Media. Thanks again to our guests, Kylie Purcell and Roger Montgomery. Oh, so see you next time.