“If you are saving and you know that you can continue to add to your stock market portfolio, either monthly, quarterly, every six months, every year, you are by definition, going to smooth out that upward downward volatility, the hills and the valleys out of the stock market.”
Danielle Ecuyer pursued a successful career in Institutional Equities Stockbroking and Wealth Management for 15 years. After retiring to have her son, Danielle became a full time investor on her own behalf. With over three decades of successful experience in share investing, Danielle has brought all of this and her expertise together to create Shareplicity: a simple approach to share investing.
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Stocks for Beginners.
I think people are much better off finding companies that they really love, that they understand, that they can appreciate, that they continue to grow their earnings over time. And normally you can continue to buy those companies at any point in the valuation of it and still make money.
Hi and welcome back to Stocks for Beginners. I'm Phil Muscatello. There's a certain simplicity to owning stocks. It's not like the commitment required to buy a property. You can buy tiny bits of the largest companies in the world across a vast range of industries. All you need is a broking account, a will to learn and plenty of care and due diligence. My guest today is Danielle Ecuyer, who has written a couple of fantastic books, Shareplicity and Shareplicity 2. Hello Dani.
Hi, how are you, Phil?
Good. Good. So thank you very much for coming on and talking to us. Dani, you pursued a successful career in institutional equity, stockbroking and wealth management for 15 years. You trained and worked as an equities analyst in Sydney and in 1990 and moved to London where you were employed as a director in senior positions at some of the world's preeminent financial firms. And then you retired to have a son and become a full-time investor on your own behalf. So tell us more about the background, fill out that story.
Danielle (1m 25s):
Yes. Well, dare I say, I've seen a few things in my time. Particularly living over in London working across global equities, specifically global emerging markets. So yes, basically I have experience that goes back to post university in the late 1980s. I saw the 1987 crash. I have lived through a crash with my own company, Barings, not my personally own company, but the company that I worked for and I've been managing my own money now since the beginning of 2008. And I am very much a proponent for diversification in share portfolios. And therefore the US is very much a part of my mandate of what I look at.
Phil (2m 11s):
I think it's important for people to understand that there is a history to markets as well. I mean, there's a lot of younger investors now who think that markets just go up and up and up all the time, but experience shows that there are going to be corrections at reasonably regular intervals.
Danielle (2m 26s):
Absolutely share markets tend to follow economic cycles over time. And normally one of the main reasons for share markets to come down is an expectation that a recession is coming. Typically the share market doesn't always realize it at the time and it may be, hints may be provided through the US bond markets as to what's going on. But yes, share markets over time typically go up and down. More often than not they have tracked the GDP growth of a country over time.
Danielle (3m 6s):
And the earnings that are generated by the companies that are listed on those stock markets would typically generate earnings in excess of that GDP. And that's one of the things that Warren Buffett has always said. He wants to buy a group of quality stocks with great competitive advantage that basically ride the wave of economic growth.
Phil (3m 29s):
So what was the difference for you between working in institutions and then investing your own money on your own behalf?
Danielle (3m 36s):
That's a very good question. And it's much easier to provide advice, particularly to a large institution, because, generally speaking, they are having input from a whole number of experts and therefore you can make a recommendation and whilst it's not ideal if the recommendation is poor, you personally are not going to lose any money. The big difference of course, is when you invest your own money, you see the value of the share portfolio, the stock portfolio move up and down. That creates emotions. That creates a reaction that you don't like. You want to get rid of that feeling that you either really love the share market going up, you don't want to get rid of that, but you want to get rid of the feeling when the value is going down.
Danielle (4m 22s):
And it really is when you are managing your own money, your own savings, the most difficult challenge is how you manage the risk of those stocks and how you risk adjust it for yourself and how you manage your emotions.
Phil (4m 36s):
That must be very difficult for a beginner to come in. I mean, you've come in with a lot of your own experience, but a beginner has to come in and start being very careful about how they manage their money by themselves. Are there any little tips that you've got just for starting out?
Danielle (4m 52s):
I think it very much depends on your age and your earnings capacity, savings capacity. If you are younger and you have a steady stream of savings that you're investing in the stock market, then really it's not too much of an issue. When you move to a phase, which I'm more at, as capital preservation, as well as growing it. It becomes much more challenging. So if you are saving and you know that you can continue to add to your stock market portfolio, either monthly, quarterly, every six months, every year, you are by definition, going to smooth out that upward downward volatility, the hills and the valleys out of the stock market.
Danielle (5m 35s):
The most important thing for investors to understand is, is that you really want to be able to add money during the periods of the big sell offs. That is when you make the most money. And so for people like me that are trying to manage investing for my future, but I don't have a large income at this point in of my life because I've actively chosen to write books or start my own small business, that is more about a risk management process of trying to keep my capital intact while trying to grow it over time. So everybody doesn't need to be fearful at all.
Danielle (6m 15s):
It's more a case of prudence rather than fear, fear will create knee-jerk reactions to the movements in the stock market. One has to be probably more risk adjusted and just say, "I'm taking a 5 to 10 year view here, and I will continue to invest over that period in really good companies or really good ETFs, exchange traded funds."
Phil (6m 39s):
Both of your books, commence with a car analogy, a story about cars. Why cars?
Danielle (6m 45s):
It just happened to be that I was sitting there watching Ford versus Ferrari. And as most people know, I think it's a great movie. It also says a lot about corporate cultures. And corporate culture is an incredibly important aspect for share or stock investors to understand because every company is different. Not only are they involved in different businesses, but they also have a different corporate culture. And I think most people that have worked for a great company versus a not great company will understand exactly what I'm getting at. So the story about cars became a story about two companies, Ford versus Ferrari.
Danielle (7m 28s):
Ford, this incredible bulwark who had created the mass production of cars in America, it had been a great success story, but it never received the prestige of racing in that 24 hour race Le Mans up against the best car designer in the world, Enzo Ferrari. And it really gave some insights, I think, of how to look at stocks. But more importantly, I actually then extracted further into the book, if you're investing in cars, the difference between the two car manufacturers themselves.
Danielle (8m 7s):
And it's probably no surprise that Ferraris, because they are not mass produced, they're handmade cars, go up more in value over time.
Phil (8m 20s):
But the initial price that you pay is much, much higher. And what I was trying to draw out with that analogy is that there is nothing wrong with a Ford and the Ford Mustang and those amazing cars that they made. And whilst you could invest in them to make money over time, really the collector's items were with the Ferraris. And it was to try and draw out that sometimes when you buy stocks, a stock can seem cheap on a valuation basis, but the ones that produce the long-term great wealth creation may not be the cheapest from a value perspective. And at the beginning of the second book, you started talking about Tesla.
Danielle (9m 1s):
Absolutely, I created a fictitious film; Ford versus Tesla. And you never know someone may make that film eventually
Phil (9m 9s):
It'll be in space.
Danielle (9m 12s):
Indeed. And again, the reason is quite obvious to me at least. Tesla is a transformational company in the energy space, in the mobility transportation space. It is directly gone out to challenge all the incumbent car manufacturing firms, not only in America but across the globe, to create the electrification of transportation as well now as creating the internet of cars, basically. So it is putting itself in a position with the development of its full self-driving software, software as a service, that it becomes more than just a mode of transportation.
Danielle (9m 59s):
It becomes a software company as well. So it was an example of how this upstart is changing the industry, how the incumbents would react and how do you, the investor, invest according to these changes that are being presented to you?
Phil (10m 17s):
So your books cover the basics of investing in stocks. What are some of the economic fundamentals to keep in mind?
Danielle (10m 28s):
Absolutely, Phil. As I touched on briefly, there's two aspects that investors need to understand. First is the economic cycle, economies expand and they contract. Normally the expansion and the contraction will be determined by the central banks. Certainly since the beginning of the 1980s, monetary policy as we call it, interest rate settings, will determine how much the central bankers, the federal reserve, wants the economy to either grow. And if it grows too fast and it becomes too overheated, asset prices are moving too high, but normally it's inflation that they're targeting.
Danielle (11m 7s):
They will seek to raise interest rates, known as the fed funds rate. And they will put up interest rates to slow demand, to basically inducing a slowdown in the economy. So the things that investors need to understand the most about, is that economies have these cycles that go up and down. They are predominantly determined by the interest rate settings, but there is one overriding feature that everybody needs to understand that in the 1970s, there was a huge spike in inflation for numerous reasons. And inflation got so high in the late seventies that a new head of the federal reserve, Paul Volcker, came in and he said, "We have to squash inflation."
Danielle (11m 54s):
Because interest rates had to move up to 14, 15, 16% to basically get rid of inflation because very high inflation is extremely bad for us, the consumer, it's bad for an economy.
Phil (12m 8s):
And in doing so, he created a large recession. But what he, in fact, in squashing the inflation, it is then being a policy that is then being used by every following head of the federal reserve, for Greenspan, for many years. Every time there was a recession or a stock market collapse, which usually coincided, he lowered interest rates. And interest rates have gone from 14% down to a quarter percent, let's say zero, in America. Across the world in Europe, they're all negative because inflation is higher than the interest rates. So we're now in a period in the cycle where everyone's starting to question as a result of the pandemic, which is creating a lot of supply disruptions, as well as major weather events, whether this creeping up and inflation is actually going to pose problems for the federal reserve.
Phil (13m 2s):
Yeah, we keep on hearing the word transitory thrown around.
Danielle (13m 6s):
Yeah, we do, we do. And there's good reasons why it could well be transitory. I was trying to write a piece today just to explain to people, inflation becomes a problem when inflation expectations become embedded. And just so everyone understands, that means you, the consumer, decide to go out and purchase a whole lot of goods in the here and the now rather than waiting for the sale to come in six months time. Which typically we have all become used to. Particularly over the last five years.
Phil (13m 39s):
So why are stocks the way to build real wealth as opposed to, say, property?
Danielle (13m 44s):
There are obviously many ways to grow wealth. The main difference is that property is a very liquid asset, okay? And shares are very liquid. And what I mean by that is, is that if you invest in a property, it's a lot harder to sell it if you need the money. Equally, some people have to take out a loan, a mortgage, which is great when interest rates are low because it gives you great leverage to the increase in the price, the capital price of the property, over time. But it also means that you have to cover those interest costs. Shares are very liquid; you can buy and sell them straight away. You can do it from your living room on your smartphone.
Danielle (14m 24s):
You basically don't have to borrow to invest. Although some people choose to. Personally I don't, I'm risk averse so I wouldn't do that. But they both have the same features that the price of the asset, the share or the property, should go up over time. And both of these assets, the share or the property, should provide an income distribution to the shareholders. In the case of the property, it's a rental income that they receive. And in the case of a shareholder, it's the dividend or more recently, it's been a dividend and a combination of share buybacks. And share buybacks, reduce the amount of shares on issue for a company which increases the earnings for the company.
Danielle (15m 9s):
Now, I just think that I should probably just go back to that interest rate thing. So one thing that everybody, when we talk about interest rates and inflation, how that impacts on shares and property. So all shares and all properties are basically valued off what is called the risk-free rate, which is the 10 year us treasury bond rate, which is currently around 1.33%. And we all know, if interest rates go up, your mortgage payments, go up. Equally for a company, if interest rates go up, they have to pay more for their loans to grow their business.
Danielle (15m 48s):
Equally the consumer may not buy so much. And it also changes the valuation of the share by virtue of the fact that investors like you and me might say, well, we mightn't buy shares because the income that I receive on a share is, let's say, 1.5% and I can achieve that by putting it in a bank deposit, okay? And that was basically a risk-free option of getting the same income return as you would out of a share. So that's really simplistically trying to explain to people that asset markets love low interest rates. They get nervous when interest rates go up and it does impact on the valuation of assets.
Phil (16m 31s):
So at the moment, we're just looking at this kind of debate really between the people that think that interest rates are going to go up and that the stock market's going to have problems dealing with that in terms of pricing, as opposed to those who think that no, we're going to be stuck in this low inflation, low interest rate environment for a long time.
Danielle (16m 50s):
Yeah, that's basically it. I think one needs to differentiate though, that there is scope for interest rates to go up, but it's not the end of the world because we're not talking about interest rates going up to 4%. We are talking about them, possibly moving up to, you know, one, one and a half percent, for example. But we're a long way off that at the moment, because at the moment there's what's called quantitative easing. And you have to stop that, which is the federal reserve buying mortgage-backed securities and bonds, before you even start buying interest rates.
Phil (17m 23s):
Commonly known as money printing.
Danielle (17m 26s):
Phil (17m 28s):
I know, it's a bit of a misnomer, but
Danielle (17m 31s):
Yeah. I mean, it's basically to inject liquidity into the system. And it was done in March last year because the financial system got gridlocked. So investors need to understand that it's always forward-looking and that is why people are discussing potentially what economic growth is going to be next quarter, next year, what inflation is going to be next quarter next year, and how the central banks, the federal reserve will respond to those economic outcomes.
Phil (18m 1s):
People who work in financial services and the financial industry are highly trained, they've been to the best colleges and they've studied economics and they've studied monetary theory, all sorts of things. But how can a complete novice begin to learn to value companies?
Danielle (18m 18s):
That's a really good question. The first of all, everybody needs to understand that a lot of the companies that you might want to invest in are a part of your everyday life. So you know those companies, you understand them, you either really like them or you don't really like them. That's the first point of call and that was something that Peter Lynch, who ran the famous Magellan fund in the 1990s, talks about. It's that very much that you can almost do your own research about Apple or Netflix or Google. These companies are at your fingertips and you use every day. When it comes to valuations, I just wanted to cite that in the early 1980s, the price to earnings multiple, which is one of the most commonly used valuation methods, was as low as three times forward looking for the stock market in the S and P 500.
Danielle (19m 7s):
That now has moved to around 22, 23 times. But yet over that period, you would've made a huge amount of money. So when you think about it, if 3 means it's cheap and 22 means it's expensive, you have to question why such great difference? And the difference largely relates to A) interest rates that have come down so dramatically, but also 2) that you have had tremendous earnings growth out of these companies in the S and P 500, which now is very much dominated by the FANG stocks and increasingly a company like Tesla. So first of all, valuation is a relative concept.
Danielle (19m 49s):
Be careful being very absolute about it saying, I will not buy a stock that's over 10 times earnings because you have to question why it is so cheap. And the other thing to note that when you use like a price to earnings multiple, it's basically saying if I buy a company on 20 times, it'll take 20 years of the company's earnings to pay back the price that I've paid. So the higher the multiple, it means the more the forward looking the earnings are. So there are a lot of software companies in the US, the snowflake is a great example, great company, software AI, growing really strongly, but like many of those software companies, it's not generating any earnings yet.
Danielle (20m 34s):
So when you buy it, you're basically, you're buying earnings that may be 5 or 10 years out. And the problem with that is, is if interest rates are rising, everybody gets concerned that you're paying too much for those earnings that may not materialize as quickly. So I think that everybody needs to realize that earnings, its valuation is one of the hardest things for people to understand. I think people are much better off finding companies that they really love, that they understand, that they can appreciate, that they continue to grow their earnings over time. And normally you can continue to buy those companies at any point in the valuation of it and still make money.
Danielle (21m 21s):
Because if you were looking at a stock price chart, it would show that the stock price started in the bottom left-hand corner and rose consecutively higher as you moved along the bottom horizontal axis. And so if we go back to those dips and those rises in the share price, if you average it out over time, if the company is growing the earnings, the valuation probably for a good quality company will always be higher than a cheap one. But you're not trying to manage a valuation, which is what you can't always predict.
Phil (21m 55s):
And that's also something to do with management, which it's a concept that is not something that you can lock down with numbers as well. The quality of management is really important for a company as well. And there's many ways of looking at management and whether they going to be good stewards of the money that you're investing,
Danielle (22m 14s):
Absolutely, management is incredibly important. It's one of those qualitative measures but there's been the evolution of ESG metrics: environmental, social, governance. You will often find though, great companies naturally do that. So when I worked at Barings in London, an emerging market specialist, we had an incredibly diverse workforce. They had a lot of women, they had an open door policy to management, you know, they were starting to introduce childcare services. This is in the 1990s. So that company, when they went overseas, they always partnered with a very good quality business or family in the emerging markets, whether it's China or Hong Kong or Malaysia or Indonesia.
Danielle (23m 0s):
So there were a number of characteristics that can be transposed to other companies. They have good cashflow generation, they invest for the future, they care about their impact on their staff, on their stakeholders, shareholders, the people around them, they try to create value over the longer term and basically, they're just really fair companies that are passionate about what they do without trying to rip off people along the way.
Phil (23m 33s):
So there's a big universe of stocks out there. There's a universe. International investing is a huge thing. Where can you start? How can you start narrowing down your choices to look for investments that suit yourself?
Danielle (23m 47s):
Absolutely. First of all, you need to understand what you're trying to achieve and how much money you have to invest. That's the most important thing. If they aren't large sums, I always say you can start with the backbone of an ETF product; you can buy the S and P 500, the NASDAQ, you can buy quality global growth companies. And once you've started to drip feed the savings into ETF products, then you can start to stock pick. I say very much, start with what you know. Because, as you say, there are a plethora of companies out there but you don't have to own everything, far from it. And you also don't have to be an expert in everything.
Danielle (24m 26s):
I still personally passionately believe in some of the secular mega trends that are coming across the investment world at the moment; be it decarbonisation cloud computing, the digitalization of everything from our workspaces to our shopping. So for me, I tend to gravitate in that direction. Equally, in the healthcare space, there is still growing demographics to support the health care and life sciences space. So I focus there rather than going to necessarily the cyclical stocks, but within some of the more cyclical stocks, I have some favorites that I gravitate towards.
Danielle (25m 7s):
For example, I really like the work that is being done by both BlackRock in its ETF space and it's screening metrics, which is, it's Aladdin project that it has, and I also like Morgan Stanley of what it is doing in terms of its evolution of providing advice to investing for the future.
Phil (25m 29s):
So I tend to gravitate towards those things that I'm interested in, that I believe, and I'm seeing the growth in and also that I can understand. If I can't understand something, I think I just really shouldn't go there, that's not for me. Because if you can't understand what you're investing in, then you can't respond appropriately when the share price moves around. Because for you, your only benchmark about whether the company is good or bad is the share price. And that is completely the wrong way to look at it. Yes, that's right. And that's part of the problem is a lot of people just sort of forget that there's a company behind that ticker code. And if you don't understand the company and at the price starts moving, where's your foundation, where's your rock on which you're investing is based on?
Danielle (26m 15s):
Absolutely. And that's the fundamental mistake that everybody makes. And it's very easy to make and it's also very easy to make because there's algorithms trading the markets, there's momentum, followers, there's charters. And they literally, well the algos look at different things, but it's very short term. Like they will respond to an announcement that is made by the fed at the beginning of the statement, but forget to listen to the rest of it and by the end of it you will have seen everything change again. And obviously if you're a momentum follower or charters, you are just purely looking at the share prices rather than the actual underlying fundamentals of the company.
Danielle (26m 56s):
And don't underestimate that when there's a lot of liquidity, as there is at the moment, and a lot of euphoria, share prices can go a lot higher than one expects for a lot longer.
Phil (27m 8s):
That's right. So an important part as well is to manage risk. Where's the starting point for new investors to look at starting to manage and help their risk profile?
Danielle (27m 19s):
Yeah. Risk is a really interesting one. The first basic one is to diversify your shares, the more concentrated your share portfolio or your stock portfolio, the more you have to believe that you have picked the right stocks. Because if one of them collapses, it's going to have a very negative impact on the portfolio. Equally, you don't want to diversify too much because then you dilute the returns. So if you want a diversified product, then an exchange traded fund like IBV or QQQ, those ETF ticker codes, they work really well. You're just saying, I want to capture the index. I invest generally around 5 to 6% into each stock.
Danielle (28m 4s):
Anything less starts to get a bit small, but sometimes one starts with, you know, two to three and then adds to it over time. Assuming one isn't going to use options to hedge your position, I don't use options, I'm not comfortable in that space, some people are, but you can hedge your position. Again, there was a story that I was very nervous in 2007, the latter part, and we had hedges in place for my portfolio. Well, they took them off because it was getting too expensive just before the market totally tanked in January, 2008. So that's the problem. The market can remain illogical for longer than one can remain liquid or prepared to pay the hefty costs of hedging.
Danielle (28m 50s):
So personally, I use cash and you can orientate your cash flow to suit your risk preferences. Sometimes if you're nervous about the markets, you can defer the purchases, build up your cash savings, and then when they fall, you just add more. So I typically use diversification and cash to manage risk.
Phil (29m 8s):
So what you're saying with cash, then, is that you have to keep a component of your money in cash, even though it's not going to be increasing in value. But cash is your bulwark against movements and to provide cash for purchasing opportunities when those changes happen downwards.
Danielle (29m 27s):
Yep, absolutely. That's what I use. And you'll find most fund managers, if they can, they'll hold a percentage of cash. Another way to do it that I learned recently, that you can pick low-volatility defensive stocks, or you can use ETFs to park your money. Because for example, let's say the NASDAQ falls by 10%, you'll find other stocks within the NASDAQ index. Those stocks might fall 25, 30%. So you can actually sell some of the ETF to invest in the stock. So there's different ways to do it as opposed to just sitting in cash. But the one that you use as the defensive one, typically has a lower volatility.
Danielle (30m 7s):
Verizon is a classic case in point, it's a share price that really doesn't move around too much and it has a decent yield on it. So you can stick a whole lot of money in a Verizon or a Procter & Gamble or something like that, which aren't going to set the world on fire. But hopefully when the markets fall over, they're not going to fall as much as for example, a Tesla or CrowdStrike or Roku or something that is more highly valued.
Phil (30m 34s):
Can you tell us a bit more about the book and how listeners can find out more about you and purchasing the books?
Danielle (30m 42s):
Yes, absolutely. The books, the first one is called A Simple Approach to Share Investing. And that basically goes through all the basics of how to invest and what to understand and macro-economics. The second book is very much focused on, as I like to say, the mighty US stock markets. Because really they are the elephants in the room when it comes to global stock markets. And it's an overview for investors. It covers everything from how to value stocks, what are the cyclical stocks, what to look for, how do interest rates impact ETFs, what sectors, what ETFs are in those sectors?
Danielle (31m 23s):
It's very much broad ranging so that people can invest with some confidence and understand the difference between buying a General Electric, Honeywell, Boeing versus buying some of the technology shares. How those valuations change, what the companies are exposed to as well as how to construct portfolios. And it also covers topics like active ETFs, which is something that everybody's very aware of with Cathie Wood, who's been a leader in that space at Ark Invest. And increasingly we're seeing people like Ross Gerber create his active ETF, Gerber Kawasaki.
Danielle (32m 4s):
And so, really it's a whole lot of goodies in that book to help investors become more acquainted with how to invest in US stocks.
Phil (32m 12s):
And you've got a website as well with lots of great information, haven't you?
Danielle (32m 16s):
I do have a website. You can download the first chapters for free. Shareplicity.com.au. The books, however, really the author signed copies are for Australian domiciles, not internationals, but the books are available on Amazon as well and all online generally everywhere.
Phil (32m 37s):
Dani Ecuyer, thank you very much for joining me today.
Danielle (32m 40s):
My pleasure, Phil. Thank you very much for having me.
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