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Looking to turn Market Chaos into Investing Clarity?
Welcome to The Art of Investing - a brand new podcast that transforms market noise into clear investing strategies. Brought to you by IG, global investing platform, FTSE 250 and over 50 years in the markets.
This isn't your typical finance show.
Whether you're taking your first steps into the investment world or you're a seasoned investor looking to sharpen your edge, you've found your new secret weapon.
Every Friday, join hosts Rich McDonald, Mark Holden & Chris Fellingham – three investing legends bringing you a combined century of market wisdom. They'll decode the week's biggest moves, reveal the hot topics that could make or break a portfolio, and share the insights that separate winners from wishful thinkers.
But here's where we blow every other podcast out of the water:
Introducing our live Model Portfolio. With IG's access to thousands of global markets, you'll watch our strategy unfold in real-time, unfiltered investment action, that you can follow.
Every week, we'll pull back the curtain on exactly how the portfolio is performing. The wins, the losses, the lessons learned – it's all here. This is investing education with skin in the game.
Are you ready to master the art of investing?
This podcast is provided for educational and informational purposes only. The content presented is not intended as personal investment advice, financial planning guidance, or a recommendation to buy, sell, or hold any particular securities or investments. All discussions regarding the model portfolio are for educational purposes only. Past performance is not an indication of future results. Your capital is at risk. The value of shares, ETFs and ETCs can fall as well as rise, which could mean getting back less than you originally put in.
00:00:00:12 - 00:00:28:00
Unknown
On today's art of investing. It is the reader question special. So coming up. Spice answers your questions on Nike's latest profit warning. Is it time to pay a higher multiple for those trough earnings? And CJ goes all French on us as European politics hits the headlines again. Sylvie.
00:00:28:02 - 00:00:55:15
Unknown
Welcome to IGS award winning podcast the Art of investing with myself, Rich McDonald's Chris CJ and Mark spice. Holden. Morning gents I am. So of course this is the last podcast before we come live at Lord's, so we thought we would save some of our market discussion for that event coming up next week. So this week we're going to answer a lot of your questions that we've been receiving via the email.
00:00:55:15 - 00:01:18:06
Unknown
Thank you very much for those. So that's coming up a little bit later. But first of all, to have a look at this week's portfolio performance. We are up 0.6% on the week. That takes us back to up 13% on the year and up 25.5% since inception. Now to discuss how that has come about. We're going over to spice for the spice market update.
00:01:18:07 - 00:01:43:09
Unknown
Well thanks, Rich. It's been a pretty dull week, actually. Funny enough, the oral price has stayed pretty much around 100 $100. And that's despite the authorities saying that now we're back to 80% flows back through the Straits of Hormuz, 80% of where they were before the troubles started. The problem seems to be that the freight rates that it takes to transport this all have absolutely skyrocketed.
00:01:43:09 - 00:02:09:06
Unknown
So so basically, it's costing to hire a supertanker about $1.2 million a day now to use that. And that's up from less than $300 a day, $300,000 a day. So huge increase there. That may partly explain why the diesel price particularly has stayed higher than the ordinarily should be. But hopefully in the next couple of weeks that will sort itself out and we'll start to see lower prices and lower inflation expectations, which might well help bonds.
00:02:09:06 - 00:02:23:04
Unknown
Who knows. But they'll certainly help equity markets away from the oil market. Most things have been pretty flat. So the chips sectors up about 4%, which is good. That's helped in vedere come to a new all time high.
00:02:23:06 - 00:02:41:01
Unknown
And a recent purchase of us. Nasdaq makes an all time high as. And a more established holding. That's been a bit of a laggard for a while, but is now sort of making good grounds. The S&P 500 as we talk today, is just taking out all time high as well. So those are the main sort of equity sides to look at.
00:02:41:02 - 00:03:01:02
Unknown
We've had another very strong week for the US dollar. That's about four weeks in a row. We've seen it rise nearly sort of 2.5% over the last 4 or 5 weeks. This time it's been at the expense mainly of the euro. And I'm sure we're going to talk about this a little bit later, because there is a French budget that's trying to go through their parliament there does not being very well received.
00:03:01:06 - 00:03:22:13
Unknown
And those eagle eyed amongst you will know that Spain have had to go and call an election last week because their budgets are failing to get through. So governments are failing to get their spending plans through, markets are punishing them. And we'll look at that in the bond markets. But it's had a big impact on the euro as a currency.
00:03:22:14 - 00:03:48:03
Unknown
It's been much weaker than most others. Sterling has been a bit weak as well, but euro's been the main the main target in the corporate world. We're just a week or so away or a few days away from the big reporting season starting. So next week we get inundated with a load of US bank reports from Goldman Sachs, JP Morgan, Citigroup, all those are the guys from next Thursday and Friday onwards.
00:03:48:08 - 00:04:11:10
Unknown
They're going to be coming thick and fast. And that will then obviously become a big focus for markets in the next few weeks. As we go through the third quarter reporting season. Now, companies like to edge their numbers down a little bit, play the game so that they can come up to the year end, beat expectations, get all their big bonuses and share options, come out a nice level when they report their fourth quarter earnings, which come out in January.
00:04:11:10 - 00:04:32:08
Unknown
But for now, the next few weeks, we'll see what they do. Obviously, we've had a fantastic reporting season the second quarter where earnings were up over 30% for the S&P 500. So expectations are very high and the bar is high. So let's see how they deliver. Before that though our friend Nike and Rich knows it well as a sportsman have had another terrible profit warning.
00:04:32:08 - 00:04:52:01
Unknown
Now that's the fourth one in just over two years. And the share prices have completely collapsed over that time. And the earnings are just been absolutely devastated. I think just on on last week alone, they found 10%, but they're down about sort of knocking off for 60%. I think they were they were before they started those profit warnings.
00:04:52:01 - 00:05:12:14
Unknown
And that's where things like the S&P 500 in an all time high. And we've got a question coming up about that later spice as well. So stay tuned for that. Indeed indeed looking forward to that. And China is the big problem there. And we've talked a lot before that China, its domestic economy is really struggling at the moment, and the authorities aren't really that interested in trying to get that going.
00:05:12:14 - 00:05:36:16
Unknown
So all of the companies that are manufacturing are exporting to other countries like Europe or the UK or America, where they can, because obviously America has pretty big tariffs on some of these, but basically where they're producing these goods and they can't sell them, they're cutting prices and therefore winning market share and undercutting people like Nike dramatically. So their margins are being hit, their cells are being hit, their market shares are being hit is a horrible, horrible situation.
00:05:36:17 - 00:05:54:16
Unknown
But maybe we're getting to the bottom of it. Remember, we've talked in podcasts in the past about profit warnings don't come in packs of one. They certainly come in packs of three or in this case for maybe a five bagger. You never know, but we are probably getting towards the end of that. Who knows. They have put in place new management and we'll see what happens.
00:05:54:16 - 00:06:23:17
Unknown
But there we go. It's a single stock and it doesn't make the market move that much. The other big one was really Snyder Electric that some of you may well have heard of. They make electrical components and parts, and they've made their biggest ever acquisition for $22.6 billion by a company called PTC, who guess what they do? They take software, they use AI, they attach it to electrical components, and they make it work much more efficiently, efficiently and better.
00:06:23:17 - 00:06:49:09
Unknown
And so AI is now coming into industry. And I think that's quite an interesting move. That's one of the reasons I mentioned it is suddenly that industry is recognizing the power and strength potentially of AI, even in some of those old industrial processes. So we'll see. But it's a big acquisition. That's the point. I space I was in the IG offices this morning and almost got knocked over by a very large robot, which goes around cleaning the place, but honestly, it's the size of a Dalek and it looks similar to one as well.
00:06:49:10 - 00:07:06:04
Unknown
Brilliant, brilliant. Well, I was on the golf course yesterday. I saw them cutting the grass, but they've been around for a few years now. The grass cutters. But they're coming everywhere, aren't they? Thick and fast. The only other things I really wanted to mention. We've had quite a lot of economic data at the end of last week, which had been quite influential.
00:07:06:05 - 00:07:29:24
Unknown
Remember, we were looking forward to the Isms, the Industry Services Index, and basically that came out better than expected. So strength in the economy, that's all positive. But really the big market mover was the payrolls number in the US, or that's the way the US look at their employment data and how the job market is going. And that was very weak.
00:07:30:01 - 00:07:49:24
Unknown
So you would think with a strong economy there'd be lots of jobs being created, or actually there was only 29,000 jobs created and there was expected to be 90,000. And also layoffs, interestingly, were not increasing. So there's no job creation, but there's no real big layoffs. So we're in a bit of a stagnant state in the job market.
00:07:50:00 - 00:08:07:06
Unknown
Now. That's something the Federal Reserve remember, they have as their part of their remit when they're trying to decide what to do with interest rates. So they look very closely. And what happens to the job market that does, like me, would have taken heart from that and said, oh, look, that's an excuse for them not to put up interest rates.
00:08:07:06 - 00:08:28:18
Unknown
And actually, the market went from thinking that there was a sort of 70% chance of another interest rate rise of a quarter percent in the October meeting in a few weeks time, to just 20% now. So that's one of the reasons you see the S&P push up. And you'll see later on that the Russell 2000, the US markets have basically had a pretty good week compared to other the rest of the world.
00:08:28:19 - 00:08:47:22
Unknown
And that's pretty much the market update as far as equities and data goes. CJ do you want to say anything about bonds. We only had a pod 3 or 4 days ago so not much has moved. There's a couple of things I've noticed. We've been warning about these these higher bond yields and their effect as an article in the Ft today.
00:08:47:24 - 00:09:24:19
Unknown
The talks about borrowing costs for companies with the lowest credit ratings. So these are the the junk bonds that we talk about often the the triple C or lower have risen to a spread of 12%, over 5% on yields. So they are 17% now. Wow. So if you're if you're issuing that junk that you've been doing for a number of years and you've been saying, well, I can do that, I don't know, perhaps you'd be been issued that maybe 10% or 11% or maybe 12%, but I can I can live with that.
00:09:24:20 - 00:09:47:07
Unknown
You are now having to borrow at 17%. And you know, it's interesting. You know, spice mentioned, you know, how some of these equities are moving at the moment. Well clearly some are struggling with this higher cost of borrowing. And there's a lot of refinancing to be done in the next 3 or 4 years. So bond yields stay where they are at the moment.
00:09:47:08 - 00:10:21:14
Unknown
That's going to be a very, very strong tailwind to all the buybacks and all the other things that have been going on over the years. And so that's just something to mark the card. So a we are seeing that those bond yields pushing up more for the worst quality companies. And then I noticed today also that we've had a disappointing move in that the five year UK fixed rate mortgage market went over 6% today, which is the first time since 2006.
00:10:21:16 - 00:10:40:13
Unknown
If you look at the charts, you're going to start to think. You can start realizing that maybe the last 15 years with accept section, not the rule for where mortgage rates should be. And it made me think, what sort of a mad world were we in where ever you could borrow at 1% for five years, what world was that?
00:10:40:19 - 00:11:02:13
Unknown
But anyway, so we've got to go back to that world. Well, perhaps in time we might, but not for some time. We're seeing clearly that bond yields are starting to hurt sectors of the market, but it's not relevant for AI equities. As spice has said already, they're going to new highs. They're obviously saying come and have a go.
00:11:02:13 - 00:11:20:16
Unknown
If you think you're hard enough to the bond market. So the bond market will have another go of that I have no doubt. So it's going to be interesting to watch this one play out. But so far AI one bond nil. So just before we go on to the portfolio, can I ask you one last time and I promise.
00:11:20:17 - 00:11:44:09
Unknown
It's the last time because the influence of rewards are next week. Now we've dropped the link below if you would go on there. If you've not done so already, of course. And if you would vote in the category for Best Economist, then you might find the art of investing in there and feel free to, you know, vote for whoever you think is the best.
00:11:44:09 - 00:12:10:18
Unknown
But, you know, we want a high number of votes in there to make sure that the the contest is fairly one. We'd appreciate that very much. And as I said, the link is in the show notes below.
00:12:10:20 - 00:12:39:10
Unknown
So going on to the portfolio, it is one of the starkest contrasts we've seen for a long time of the rest of the world performing and UK and Europe. Disappointing. So if I take you through the top three, we've got the Nikkei 225 up 3.5% on the week. Then we've got emerging markets up 3.1% on the week, then over to the US with the Nasdaq and Russell 2000 both up 1.7 and 1.2% respectively.
00:12:39:10 - 00:13:06:13
Unknown
So really strong performance space there from the rest of the world and from us especially. Yes. As you say, Rich, it's been a very stark week with the, the, the rest of the world X Europe and UK doing well. And you can see our, our losers this week are actually centered around Europe and the UK with the FTSE 250 down 1.8%, the euro stock 600 down 1.1% and the FTSE 100 down 1.1%.
00:13:06:14 - 00:13:31:05
Unknown
I was performer, though, was Blackrock World Mining, which is down 1.9%. And we've talked before that actually this strong dollar that we're seeing mainly as a result of things like the euro being particularly weak because of their own politics. The Blackrock world mining and commodity companies were hit down 1.9% this week. And that was our worst performer and spikes, do you just want to remind everybody why a strong dollar is negative for commodities?
00:13:31:06 - 00:13:51:11
Unknown
Yes. Well, there are two reasons. One is that commodity all commodity prices are priced in US dollars. So for a country where their currency is weaker against the dollar, that effectively means that they have to pay more to get exactly the same amount of commodity, whether it be an ounce of gold or a barrel of oil. It's the same problem.
00:13:51:11 - 00:14:22:20
Unknown
So if their currency goes down, the dollar goes up. That makes it more expensive for them. And that's particularly so at the moment where you've got elevated an elevated price. Now the other reason is with this elevated oil price, mining companies particularly can get hit quite hard with the combination, this strong dollar, but also the fact that about a third of their costs come from having to use diesel because a lot of their processes use are quite energy intensive, and particularly diesel use.
00:14:22:20 - 00:14:43:00
Unknown
And with diesel, I don't know if I've driven down the motorway from Scotland. Today I saw a diesel price of 2.22 pounds a liter just as I left Scotland, and so that's pretty eye watering, frankly. And as we talked about in the last couple of weeks, you know, the US have been grappling with all time record high diesel prices.
00:14:43:04 - 00:15:09:11
Unknown
So clearly that hasn't helped. Okay, great. So as I said, that leaves us up 0.6% on the week, which, you know, over a two weeks basically were flat. But it will be really interesting over the coming nine days until we record again as we see US markets going higher. What will the performance be this time next week? So, as promised at the start of the show, we're going to answer some of your questions.
00:15:09:11 - 00:15:35:23
Unknown
So gents, if you're ready, we shall start with our first question and our first ever international question. It is coming in from Jean-Pierre in Paris and he is asking, I think this is for UCG. And his question is conference catastrophe, silly moment, the ashtray, the Action Francaise. If you'd like me to translate that, C.J., for you, it means so sorry I didn't.
00:15:35:24 - 00:16:10:05
Unknown
I was. I've got problems with my earpieces. I thought. I thought for a minute we were on a French podcast. I think it translates as what is going on in France at the moment? Is it time to buy stocks? Is it time to buy bonds? Yeah, it's been a really interesting start actually, to the quarter, because if we think back to when we last recorded, it was on the Thursday morning and we had put on our marks for Wednesday night and we were recording on how how equities and bonds had performed.
00:16:10:05 - 00:16:35:17
Unknown
At that point, things had all looked pretty calm. And then on Thursday morning, the markets suddenly decided they were going to focus on the French fine fiscal situation and treat Europe all together as one, as a bit of a basket case, if truth be told. What happened? Well, you know, it's it's really this high bonds, high bond yields, low bond prices, high bond yields everywhere.
00:16:35:17 - 00:16:57:14
Unknown
And as they go higher they unsettle various things. There was an old expression, I think it was by Warren Buffett which said that when the tide goes out, you see who's swimming without their swimming trunks. And so when bond yields are low, everybody is fine. They can finance everything. But when bond yields get higher and higher and higher, it costs more and more money.
00:16:57:16 - 00:17:27:23
Unknown
So we have a situation in France where they've not had a government with a majority since 2024. So essentially their fiscal position has just drifted and drifted. It got worse and worse. And in France, their budget deficit, a percentage of GDP is 5.4%. Now in our in UK remember with 3.9. France is 5.4 and their gross debt has percentage of GDP is 118%.
00:17:28:00 - 00:17:52:07
Unknown
Whereas here it's just over 100. So France is worse in both those measures. And what makes it even worse for France is that the euro area is meant to be working to a limit of 3% as budget deficits, as part of the rules of the eurozone. You're meant to be trying to get your budget deficit to 3%, and of course, it's nowhere near that level.
00:17:52:07 - 00:18:15:06
Unknown
And so the Prime Minister, remember, hasn't got a majority. He has put forward some budget cuts, public spending cuts, €54 billion to reduce debt to 5%. And there is a crunch vote coming up on the 20th of October. If it doesn't pass, then they'll have to go back to the drawing board again. Then everyone will worry about at all and drive things forward.
00:18:15:07 - 00:18:41:24
Unknown
Now there's nothing different here in France than there is in the UK. There is in the US and everywhere else. Everybody wants to spend more and nobody wants to put taxes up. And what do they end up doing in the end? They're going to put taxes up and sped less, and that's what's going to happen. We all know that's what's going to happen, but it isn't going to happen without more pain and more discomfort.
00:18:42:00 - 00:19:05:02
Unknown
Now for people who say, well, you know, this is all very interesting, let's just talk a little bit about what's relevant for Europe, which is really the spread of French bonds over German bonds. So given they're all members of the European Union, given we're not this is where we have an issue. You know, some people will argue we have many benefits from not being part of the the single currency.
00:19:05:02 - 00:19:32:00
Unknown
This is one area where we have an issue is that they're effectively all guaranteed by the German taxpayer, everybody in Europe. So everything trades off the German bond market. So you have a French bond yield, let's say let's call it four and the German bond yield at three. There'd be 100 basis points spread. Okay. Now that spread has varied between 150 and 0.
00:19:32:02 - 00:20:02:11
Unknown
When people have been really happy with Europe, French bonds have traded at the same level as German bonds. But now, with all the uncertainty about this fiscal situation, they have gone up to a spread of 131.3%, which is higher than really they were after the crisis in 2012, 2013. So this is the highest level since then. And this reflects the uncertainty that is going on in the French bond market.
00:20:02:11 - 00:20:24:07
Unknown
And so just like here as well, the government needs to do something about the deficit. Just like here. Great games are talked, but is it going to actually happen. And that's why the French bond market is doing what French bond market is doing. And its traditional that when you panic in the city about the French, you dump the euro.
00:20:24:09 - 00:20:42:00
Unknown
The hedge funds have been doing that for years. I spent my whole career watching people in the City of London trying to say, I'm really glad the euro is getting stuffed, I'm going to sell euros. And, you know, once again, you know, we look at them today, the euros rally nice and strongly. Everyone's getting caught short. At the end of the day, though, it's a proper problem.
00:20:42:00 - 00:21:10:14
Unknown
This we need to see determination from fiscal authorities to solve it. Remember it was the former president, European Commission and Prime Minister of Luxembourg, who said in 2007, we all know what to do, but we don't know how to get reelected once we've done it. And that is a perfect example of what's going on here. Every knows they've got a cut, but people are reluctant to do so.
00:21:10:16 - 00:21:31:07
Unknown
So the can down the road, aren't they? Exactly. The bond market has to do the hard work for everybody because they don't want to do it themselves. Yeah, and it's a bit scary. I was looking at the bond spread, the ten year bond spread between the UK and Germany, and we're up to nearly 2%. The British government has to pay 2% more than the German government does for ten years at the moment.
00:21:31:07 - 00:21:50:03
Unknown
So yeah, it's not just France or Italy. Even Italy is doing better than France, interestingly. Well, that that's a really critical point. You make their spies. If we go back to 2012, I know appreciate lot of people on this call. Can't remember the financial markets of 2012. I'm not sure Rich was born at that stage. Rich joking, of course.
00:21:50:05 - 00:22:20:08
Unknown
But you know, if you look at how Italy traded relative to Germany in the financial crisis of 2012, you're talking about sort of 8%, the spread 800 basis points. Now Italy trades closer to Germany than France does, which says the market is saying Italian bond market risk is less than French bond market risk. Shows you how far the French situations did as deteriorated.
00:22:20:10 - 00:22:42:06
Unknown
As I say, I'm not concerned. As long as you don't believe the European project is going to break, then I'm sure that we will sort this out. But it does say pressures are there. You've got to do something about it now. Everybody just reminds you at Lord's next week, if you hear C.J. calling anybody a pig, then he's not being rude.
00:22:42:07 - 00:22:57:16
Unknown
Spice. What does that term pig mean? And where did that come from? Well, that's that's that's a left field question. I think it's Portugal, Italy, Greece, Germany and Spain. Greece and Greece. Wow, wow. You know.
00:22:57:18 - 00:23:21:04
Unknown
Yes, Portugal, Italy, Greece and Spain. Pigs and acronyms. That's where Greece were going. Bust basically. And what happened to European equities through those years? It was I think it was 2011 really. It started wasn't it. Yeah I mean they performed worse than other markets a bit like they're doing this week. They underperformed the US markets but they didn't really suffer too badly.
00:23:21:04 - 00:23:52:00
Unknown
And part of that is that, you know, if your currency goes down if you like, when the UK came out of of the European Union, Brexit, the pound plummeted. Actually the FTSE 100 went up quite a lot because the pound plummeted over 10%, which meant that when Footsie 100 companies earn over 85% of their earnings from overseas, the value of those earnings went up by nearly 10% when the currency went down, and therefore the UK market looked quite attractive.
00:23:52:00 - 00:24:10:20
Unknown
And you had a similar sort of dynamic happening in the rest of Europe. But this week. Yeah, I mean, the first thing they do is they run for the hills and they sell everything to do with France and everything to do with Spain, and just batten down the hatches normally, take it back to the back to the US, because 70% of the world's assets are driven by US investors.
00:24:10:21 - 00:24:35:10
Unknown
So when they get scared, they take money home. I a great story. So of course I was working in emerging markets at that point in Greece was one of our markets that we traded. So there was a Greek bank that had to do a recapitalization. So they decided, right, we'll raise some money from international investors and will raise some money locally in Greece, from Greece citizens.
00:24:35:16 - 00:25:00:06
Unknown
And we we heard that, you know, there was a great amount being raised in locally in Greece. So that helped us with the international book and it was quite an easy sale and we recapitalized the bank. However, it came out a year later, there was an investigation because what had happened is that this bank that was being recapitalized had lent money to investors to buy shares in them.
00:25:00:08 - 00:25:27:07
Unknown
And so it was, you know, I have a hate to call something a Ponzi scheme, but if the shares had gone down, these investors were in real trouble because the bad loans would have been from the bank that had been feeling so. Yeah, good old classic European recapitalization, as you also remember, what happened at that stage was that there was a lot of uncertainty as to whether the the euro project would hold together, and everybody was pushing it very hard.
00:25:27:07 - 00:25:56:06
Unknown
And then the president of the European Central Bank came out, Mario Draghi, and basically said, we will do whatever it takes. We will support the bond market. And from that moment onwards, there wasn't a problem anymore. And we saw a wonderful bull market for most of these assets as it all drove forward. So really this is a question of will the ECB for force to come in and make some sort of protective noises towards France?
00:25:56:08 - 00:26:10:17
Unknown
Or will they say, you know, let's just leave it for a bit and see what happens? My suspicion is they'll say, let's leave it for a bit, see what happens, because there's no reason why they should rush in now. But I have said before, I have no doubt they will rush in and save the day if there's a problem.
00:26:10:17 - 00:26:39:12
Unknown
So you should probably be looking this as a as an opportunity rather than a risk, right? Second question is from Howard, and he is asking you to just discuss the difference between buying an ETF with a mix of gilts in it, such as glass, and the difference between that and buying an underlying gilt itself. It's a good question, because those people who are investors will realize they have two choices.
00:26:39:12 - 00:27:08:16
Unknown
If they want to buy bonds, they can buy, or they actually got three choice. They can buy a mutual fund run by an investment management company, invest in gilts, or they can buy an ETF of the guilt market. Or they could buy that individual gilt themselves. Now, there are some benefits, some significant benefits to buying individual gilts. The first one is for those who are not aware, this is something that's quite, quite well known.
00:27:08:16 - 00:27:37:02
Unknown
Or if it isn't, will be after this podcast that gilts do not attract capital gains tax. You have to pay income on the coupon, but you do not have to pay capital gains tax on the amount you get redeemed. So if you can buy a gilt at 80 and you get 100 back at the end, 20 points, but 20 points is not subject to any tax.
00:27:37:04 - 00:28:04:21
Unknown
So that's one attraction. Clearly only if you're paying tax. If you've got it in a in a retirement account, it won't matter. But if you're a private individual, private wealth looking, looking after your own money outside a tax wrapper, it's not a bad idea to buy some, you know, gilts. It then individually. The other advantage they have is if you buy a 15 year gilt today, in a year's time, it's a 14 year guilt.
00:28:04:21 - 00:28:30:20
Unknown
And in years for that, it's a 13 year guilt. And after that, etc. even you can work this one out, rich after 15 years. Tough isn't it? You get repaid your money. Whereas if you buy an ETF and it's a let's say it's trying to match the return of the over 15 year gilt index, when a gilt comes below over 15 years in maturity, it will be replaced and more longer data gilts will go in there.
00:28:30:20 - 00:28:50:12
Unknown
So you never get closer to redemption. You're always buying the return of that index, not of that individual bond. And you may have decided to buy that bond because you have, you know, you've got a liability in 15 years or 17 years time, and you bought that bond to match that liability. So that's again why it might be useful.
00:28:50:14 - 00:29:16:18
Unknown
The final thing that I think to bring in mind when you look at these things are the transaction fees. And for the transaction fees the ETF wins. So the ETF is a very low fee than managing it. And you deal at the single price point of the ETF. If you go along to your stockbroker and you say, I'd like to buy the 15 year guilt, he might make you a really wide price and charge you quite a lot of money to do it.
00:29:16:19 - 00:29:45:09
Unknown
So you have to think carefully about that. So my answer the question long winded I know, is if you're buying into a taxed account, i.e. you're paying taxes, capital gains and income, not a retirement account in any way, I would probably buy the individual Bob, because it's well worth while doing to get that capital gains tax uplift. If I'm in a tax free structure like an Isa, I would buy the ETF because it's a simpler way of doing it.
00:29:45:10 - 00:30:06:06
Unknown
And just a follow up question in what circumstance? Maybe there's an example from the last few years. Do you see a bond dropping in value from 90 to 80 to 70 to 60? You know what causes that much of a fluctuation? There's two two questions there. Or I'm reading in two ways. Tell me if I'm reading it wrongly.
00:30:06:07 - 00:30:35:08
Unknown
The first thing is, why would a bond ever trade along way below par? And it would only trade a long way below. Normally, when it's interest rates, it's paying is far less than the current yield on the bond market. So if you have a 4% bond and 10% was the return on the was the yield on these bonds, then there would be some capital gain to be had.
00:30:35:10 - 00:31:00:00
Unknown
So what people tend to do is those who are high rate taxpayers will buy very low coupon gilts, where all the return comes in capital gain. And of course they don't pay tax on that. So it's a very good way of avoiding that income tax effectively because it's coming in through in capital gain. Now your second part, which is just as valid, is in the course of events.
00:31:00:00 - 00:31:24:13
Unknown
Why? What else could make the move. Well bad events. You know Liz Truss for example, when Liz Truss, you know, brought out her mini budget with Kwasi Kwarteng and the market went, oh God, I don't like to look at that. All bond yields went higher, so all bond prices went lower. So some of these low coupon bonds went even further down, giving you a great buying opportunity.
00:31:24:13 - 00:31:45:03
Unknown
If you were a tax free investor it was a very, very nice opportunity indeed. So CJ, you said some people are interested in buying low coupon gilts there. And that that became popular during the Liz Truss episode. And it's happening again now. Why is that. All right look here's a simple example. I'm going to get my numbers a little bit wrong.
00:31:45:03 - 00:32:11:04
Unknown
But let's give me that flexibility. The the bond yields at the moment about 6%. So if I buy a 6% ten year bond it's going to be close. It's going to be priced close to par. Meaning every year I get 6% return from the income, which is which is the overall yield on the fund. Now, if I buy that gilt, I have to pay income tax on it.
00:32:11:06 - 00:32:35:18
Unknown
And a 50% taxpayer, let us say, means I've got to I take 3% home and I don't get the other 3% that goes to the tax man. If I pie in 0% ten year bond, right, it must give me 6% annualized per year in capital gain to give me the same return. So it will be priced at. Let us suggest 40.
00:32:35:19 - 00:33:02:16
Unknown
Wow. So you'll get 100 back. But you've got then 60 points over ten years, which is funnily enough 6%. It doesn't work like this. Please don't all all phone in and tell me I've got my numbers wrong. I'm doing it to keep it simple and that would all be tax free. So on one of those gilts I get 6% return and on the other one I get three.
00:33:02:18 - 00:33:29:06
Unknown
So you will find low coupon gilts trade quite extensively because a lot of high rate taxpayers will buy low, low coupon gilts. Excellent. Right. Back to equities then. For those of you that find bonds very boring it's quite can you wake me up. And that includes me as well. Right. We've got a question from Phil. And Phil is a specially interested in the Nike share price.
00:33:29:06 - 00:33:55:14
Unknown
It might be Phil Knight for all we know, but the question from Phil asked that he's read a lot about the potential for Nike to know beyond trough earnings. So the question is what are trough earnings and how do you think differently about a share price when it comes to that? So before we go on to that space, let me just give people an example of PE ratios in Nike over the past few years.
00:33:55:16 - 00:34:18:08
Unknown
And I'll use round numbers. So these aren't accurate. Again this is just for an example. But let's say Nike used to earn $1 earnings per quarter. So they make $4 in a year. And the market you know trust them. They're still think that earnings are going to grow. It's a good company great brand. They put it on 25 times earnings.
00:34:18:14 - 00:34:47:09
Unknown
So all that means is that we take $4 of earnings multiplied by 25. And the share price is $100. But the next year. Oh no no, we get our first profit warning from Nike. And they now expect only to make $3 of earnings that year. Now the market doesn't like profit warnings. So it might cut the PE multiple that Nike is now rated by the market okay.
00:34:47:10 - 00:35:11:11
Unknown
And this is where the art of investing comes in. Because again reputations kind of gone a little bit because they didn't grow earnings. And maybe the management hadn't warned well enough about what was about to happen. And people are worried about future growth. So earnings are now three. And they put that on a 22 times multiple. So it's been slashed from 25 times to 22.
00:35:11:13 - 00:35:38:14
Unknown
That gives you a share price of $66. Now fast forward another profit warning. Exactly what's happened in Nike. And this time it's down to $2 a share per year. And this time the market is not happy at all. So they put them on 20 times earnings. The share price stops to $40. And that's where you saw the Nike share price going into earnings last week.
00:35:38:14 - 00:36:06:03
Unknown
Now another warning. Yet another Spicer spy says these things happen not usually in one, sometimes in threes. So this time the EPs is expected to be $1.60. So it's come all the way down from $4 to $1.60. What do you do then spice. Well that's that is, as you say, is the art bit. And let me just explain probably a little bit why companies have more than one profit warning at a time.
00:36:06:03 - 00:36:22:08
Unknown
And I used to work quite closely with corporate financiers. And they would they would have their take us inside. This company is having problems. You know, they're going to miss their numbers. What do we do about it? We're going to put a statement out to the market that say we're going to miss our earnings expectations by 10%, let's say.
00:36:22:13 - 00:36:43:15
Unknown
What they've done though is and their business is probably been going up nice and nice slope and is suddenly has dipped and started to fall quite heavily. The analyst had forecast it was going up here, but instead of cutting your forecast straight to the worst point where you are now and that follow that trajectory down, they just slope it sort of a sort of a less of a sort of a steep angle.
00:36:43:16 - 00:37:01:02
Unknown
And it takes in 2 or 3 times to eventually a god. We just give up on this like, you know, there's a saying, let's kitchen sink it, which means you just put everything you all the rubbish you can, all the washing in there and you just, you just put go for broke. So trough earnings are what you would normally call unusually low earnings.
00:37:01:02 - 00:37:24:06
Unknown
Very unusually low earnings exceptional. And they normally come during recession. We see this across the whole market often during recessions because the economy is doing badly. Companies having to lower their expectations. There's no growth out there for them to lift their earnings. They have to do they have to do cost cutting to protect those earnings. And they have to and that these job losses, that makes the economy worse.
00:37:24:06 - 00:37:43:19
Unknown
And that's why central government, central banks want to cut interest rates to support the economy. And that sort of thing is happening. So it actually looks that the price earnings ratio at the bottom of a cycle or bottom of these big downgrades, and you've had four big ones from Nike over the past two years look very high. So it looks like it's on a really high p e ratio.
00:37:43:19 - 00:38:03:23
Unknown
It's like 25 times PE. Why would you buy that when actually the earnings have been going down to sideways, when you can buy the whole of the S&P 500 on just 19 times p e ratio. So you're paying a 25% premium to buy Nike over and above something that's really good, like the S&P which is not going to have these big profits warning.
00:38:03:23 - 00:38:22:17
Unknown
So not it's not going to be damaged in the same way as Nike has been. So the judgment then is have they kitchen sink it. Is it all in there. If it is. And Nike have said for example, they're going to try and get $2.5 billion of cost savings over the next five years. Now they've they've failed to deliver on those before.
00:38:22:17 - 00:38:45:14
Unknown
It's going to cost them $1 billion to get those because they've got to make people redundant. They've got to pay them off and do all the things you have to do, sadly. And they may dispose of other businesses. So that is entrenched now in the expectations for Nike to people at the next set of results from the next update will be looking whether those those cost savings are starting to come through, if they are starting to come through.
00:38:45:15 - 00:39:09:13
Unknown
Do you know what those low trough earnings will start to nudge up instead of down? And then you'll go, actually, I don't mind paying 25 times p e ratio for this thing, because if they get these $2.5 billion of cost savings, suddenly it's going to be on 15 times earnings because they will have delivered such big cost savings against a very low profit base, and the profits were therefore unusually high.
00:39:09:13 - 00:39:31:08
Unknown
And therefore sometimes it's right to buy companies on profit earnings. But you have to be sure in your own mind, this is where doing your own research is important, that the profit warnings are finished, you know, and nine times out of ten, you know, after the third one, you're getting close to the average. Most people don't know any have more than 3 or 4.
00:39:31:09 - 00:40:02:12
Unknown
So so squash just for for me, being a simple bond man, what you're really saying is that if you see a company that's been giving out profit warnings like, you know, confetti and it's suddenly on a very high PE multiple, what really the market is saying is we think the low of earnings is in and the next set of earnings will be substantially higher than the last one, which will then, by mathematics, reduce the PE multiple going forward.
00:40:02:13 - 00:40:21:12
Unknown
Is that correct? Right. Exactly right. So if they deliver those cost cut, that cost cutting, then the earnings will be much bigger. And actually instead of being on 25 times, it might be on 15 times going forward. And therefore even though you think you're paying 25 times for it, if you if you believe that you're actually think you're buying 15 times.
00:40:21:12 - 00:40:51:21
Unknown
So it's worth doing because in time it should go back to the same sort of valuation as the rest of the S&P 500, for example, on let's say, 20 times. And the chances are by that point, you've got a really lean business and you've taken all the the cost. So unnecessary costs, you've taken your staff numbers down low and the amount of leverage on the business at that point, if they do start getting product right, is much bigger than it was before you even went through the warnings.
00:40:51:22 - 00:41:09:15
Unknown
The other thing to consider there is when you know a company like Nike, there is a great brand. Let's face it. I mean, look, you know, it's still a great brand. It's having massive problems with dealing with China and the overcapacity that's going on in China. But what it is is still a great brand. And there might be sharks circling out there.
00:41:09:15 - 00:41:37:07
Unknown
And I wouldn't be at all surprised if you see at some point someone say, oh, I wonder if Nike is going to get a takeover approach and, you know, the shares will go racing up because when companies that have such a strong brand are doing this badly, they become very vulnerable to takeovers. And that's why it becomes attractive for people, like valuing what you call value investors to maybe come in and buy these situations and think, okay, I'll just hold it if I'm willing to hold it through.
00:41:37:08 - 00:41:54:05
Unknown
Maybe another profit warning, another one. If I hold it long enough, some will come in and take you over and you'll get a massive premium, or they will deliver on the cost cutting and China problems will start to die away and the earnings will start going up again. And I yes, I think I paid 25 times. I'd probably only paid 15 for it.
00:41:54:05 - 00:42:17:08
Unknown
And then therefore it will look cheap. But that is a matter of judgment and it's very difficult to to work out frankly. Now, now spice, what about the other end of the spectrum and what every new investor completely forgets and disregards? What about peak earnings? And there's a chance we might be seeing peak earnings in micron over the next two years.
00:42:17:08 - 00:42:39:24
Unknown
And that's why the stock is only trading on seven times earnings. But what if we're seeing peak earnings on something like Nvidia. What do you do to the P multiple. Then normally you would direct it. So you would say that if it is peak earnings then the chances of the growth rate continuing at the same pace as you're seeing already will start to diminish.
00:42:39:24 - 00:43:05:21
Unknown
And therefore you will want to pay less for it. And those earnings, therefore, you expect to sort of come down relative to the rest of the stock market. Now you see peak earnings when you get unusually high growth in businesses like you're seeing, as you say in in video or micron because of the the demand for memory. And you normally see them when there's a boom going on or, you know, in a, you know, a big economic growth period.
00:43:05:23 - 00:43:25:02
Unknown
And it can happen in individual sectors like you say, it might happen in micron or not, but the P often appears very rare. Like it's like low like you say micron is on seven times. But if they do deliver this year and next year then they the people will believe it. You brought it on seven times, they might trade on ten times.
00:43:25:02 - 00:43:44:15
Unknown
And you made, you know, 40% extra money by holding it through that period where people are skeptical. They say it can't get any better than this. I'm going to sell it now because, you know, it just can't get any better. How often does the market get it wrong? You know, when am I when a market puts something on a a trough or trough?
00:43:44:16 - 00:44:18:07
Unknown
As Rich would say, when someone puts on trough earnings or peak earnings, how often does the market get it wrong? I should you believe essentially that the general view is right, or does it often get it wrong? Is there a opportunity for moneymaking? I think if you swallowed a textbook on how to invest, you would believe that the market is efficient in the sense that the the share price reflects all of the news that is currently available to mankind that has happened in the past.
00:44:18:08 - 00:44:39:11
Unknown
Now, clearly the art then becomes predicting what happens next. And that's where certain value investors, as they're called, will look at these companies and go, oh yes, I think these are trough earnings. If they get this, if they get it right and they make an assumption, well, it's that anything you're predicting, it's probably a 5050 chance you're going to get it right or wrong.
00:44:39:11 - 00:45:04:09
Unknown
So I think that there are a lot of value investors out there. But when I started at the market 40 years ago, there were a hell of a lot more. And that is because as a as a art of investing, it's actually very, very difficult. And, you know, there's been some brilliant people out there who have lost their reputation, their companies have gone bust.
00:45:04:11 - 00:45:29:05
Unknown
The great Tony Di at Phillips and drew back, those of you who are old enough will remember him back in the 90s. You know, he was a perennial bearer of the US equity market. He retired six months later. The US equity market collapsed 25%. But by then he lost his job and his company had been taken over. So in a long, roundabout way, what I'm saying is I, I rather be a growth investor.
00:45:29:05 - 00:45:52:08
Unknown
And there was buying the ones that I think will keep growing rather than trying to pick the bottom, because picking bottoms is a smelly thing. So, so really, what you're trying to tell us or try and say to us is who is the Tony Di next this time? Well, yeah. And you know, like I say, there are some people who make you still, to be fair, make a living in that.
00:45:52:08 - 00:46:15:14
Unknown
But they're investors, the people who give them money to invest, understand what they're trying to do and so they will survive. So, so, so looking for people to take that contrarian view and as and as you say, over time, you find that the market is pretty right most of the time. But if you're really good at what you do, you can spot those opportunities.
00:46:15:17 - 00:46:35:15
Unknown
Yeah. I mean, look, you know, I know the way I invest and the way I invest is not trying to pick the bottom and be a value investor. I'm a growth momentum investor. But the minute what I try and discipline myself out is if I see the growth dipping off more than I expect was you expected to go up and it goes down and run for the hills.
00:46:35:15 - 00:47:05:04
Unknown
I'm out of it. And that's what I think. You know, I, I'm good at as a growth investor. A value investor may go I'll just buy some more because now is the time to, you know, that it'll just be a short term dip and then it'll start going up again. Great. So just before we go on to the last question, just if if anybody is currently paying these levels for the S&P 500, just go back and watch the last five minutes, because you are paying 22 times earnings that have gone up 50% in the last three years.
00:47:05:04 - 00:47:33:24
Unknown
But, you know, nobody would ever say that was peak earnings, which okay. So you're drawing that out. So I was keeping quiet because this is a perfect example. Not saying who's right and who's wrong of exactly what we're talking about here. The market is trying to say we've had peak earnings. So I'm directing the PE. And that is one of the big arguments here between the bulls and the bears.
00:47:33:24 - 00:48:02:06
Unknown
And I'm sure we'll be talking about this a lot more at Lord's next week. But it'll be very interesting to listen to people's questions around this subject. Right. The last question of the day is from dog. And so we've had two questions on the same topic. But Doug watches the portfolio very closely each week. Are the weights on the weekly slides, the target weights or the actual current weights of the portfolio?
00:48:02:08 - 00:48:25:24
Unknown
Do you rebalance holdings? You haven't changed back to their targets, and if so, how often? Before we answer the individual questions, let's think about what we were trying to do when we set up the portfolio. As such, we decided that we would set the portfolio up to a view, our listeners, an idea of what we felt strongly about and where we felt we should be putting money.
00:48:26:01 - 00:48:57:20
Unknown
If this was a live portfolio and we took the decision, then that we wouldn't adjust for market moves or dividends coming in, it just makes it too complicated. It's fine if it's an actual portfolio, but if it's if it's a paper portfolio, essentially, then it's very difficult to do all these things and get them in their correctly. We are hoping soon to launch a portfolio which will be a live portfolio, so will accurately for affect how our market weighting weightings drift with how the market is moving.
00:48:57:23 - 00:49:23:12
Unknown
So it will give a live performance, and it will allow listeners to invest in our portfolio without having to mirror it themselves and do all that hard work on their own. But it doesn't do them. If they want to carry on doing, that's fine. But we're hoping to have a solution which people will find attractive. In this case, we would not need to rebalance, as the weights we'd be looking at would be our actual weightings each week.
00:49:23:12 - 00:49:56:16
Unknown
And so if we disagreed with them, then we would change them by definition, performance. Then each week would be based on the weights within the portfolio. And so everything would be absolutely live and easy to to follow. One other thing I would say is we've probably understated our performance in this paper portfolio by not more accurately reflecting market moves because we haven't had that pleasurable, you know, drift up in a percentage when the market's moved up a long way.
00:49:56:16 - 00:50:15:24
Unknown
And we've said we've still got five, when if it had gone up by 10% we'd have five and a half. Or if we think back to the very early days when we had the Van Eck and then went up 50%, we have 5%, we'd have had seven and a half, which would have made a substantial difference to our portfolio performance.
00:50:15:24 - 00:50:39:00
Unknown
But we wanted to keep it simple, so we ignore those dividends. And that is where we decided to position ourselves for that. This first year, first year and a bit of our resistance. Thank you very much CJ. So that is the answers for the questions this week. If you've got a question, please write to us at the Art of investing at IG.
00:50:39:02 - 00:51:02:08
Unknown
Also, you should have your emails in your inbox by now for the live event at Lord's next week. If you just send us an answer back that it's going to really help us to work out the numbers and see, make sure we've got canopies for everybody. And if for some reason you haven't received that email but you did sign up, then please drop us an email at the Art of investing at iGCSE as well.
00:51:02:08 - 00:51:13:09
Unknown
Thanks everybody. So if you come along to Lourdes, we'll see you next week. But if you're not. Don't worry, we are still doing the normal podcast as well, which will come out usual time on Friday afternoon. Have a fantastic week.