Shani Jayamanne: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situations, circumstances or needs.

Mark Lamonica: Okay. This is not as she said welcome to another episode of Investing Compass.

Jayamanne: It's not just any episode.

Lamonica: It's not just another, it's the 100th episode.

Jayamanne: Which is really exciting.

Lamonica: Which is exciting. So we'll get to that in a second. But we also got an email, which I believe is going to be our 101st episode. So we won't give away what that episode is going to be on, but it was a question from somebody. But there are a number of things in that email that were interesting.

Jayamanne: Yes.

Lamonica: We'll get to one of them later in that 101st episodes.

Jayamanne: This is all very mysterious.

Lamonica: I know, but Paul sent this email. And was talking about our accents and he sent us like a test to go through.

Jayamanne: Yeah, we both have very distinctive accents comparative to each other.

Lamonica: Apparently, apparently. So there's a test and he wants us to go through and pronounce these different words.

Jayamanne: There's four of them.

Lamonica: There are.

Jayamanne: And so should we start with some context. So the first one is spelled S-H-A-N-I which is how you spell my name.

Lamonica: Yes.

Jayamanne: So Mark.

Lamonica: Shani.

Jayamanne: Shani. 

Lamonica: Don't tell me I don't know how to pronounce your name.

Jayamanne: The next one is S-H-A-W-N-E-E.

Lamonica: Shawnee.

Jayamanne: I feel like that's how you normally say my name?

Lamonica: That's not how I normally say your name.

Jayamanne: I will say Shawnee too. Like Pownee, Indiana.

Lamonica: Exactly.

Jayamanne: From Parks and Recreation.

Lamonica: Yes, exactly.

Jayamanne: And then we have D-I-F-F-E-R.

Lamonica: Yeah differ.

Jayamanne: Differ.

Lamonica: Defers the next one mate.

Jayamanne: Differ.

Lamonica: Yeah. Okay, anyway, I think we've done enough of it.

Jayamanne: Okay.

Lamonica: So, as we said, this is our 100th episode, which I think is exciting and I guess the question is, Shani. Do you think that we'd ever make it to 100?

Jayamanne: I mean, I was pretty hopeful Mark, but I actually went to. I went back and had a look at all of our episodes that we've written, and we've done 360,064 words of content since our first episode. And that's around 46 hours of listening to us. Poor Will has had to deal with countless mess ups, especially after nights where we might have had too many cocktails, which is normally every night before we record a podcast. And the one episode where Mark tried pre-workout for the first time, right before.

Lamonica: Yes, well, two things, that 360,000 words, to put that in perspective, that is half the Bible.

Jayamanne: That's crazy.

Lamonica: Yeah. So that's something. We also had episodes that we recorded through COVID, with COVID. We recorded one episode 4 times because the sound quality was so bad. So yeah, I think poor Will is, right?

Jayamanne: Yeah, I think that's the sentiment that we have here.

Lamonica: Okay, so we have what we hope is a fun way to mark our 100th episode. But the first thing we wanted to do is to thank all of you who listen to and support this podcast. Think I can speak for Shani or Shawnee, when I say that Investing Compass is the favourite part of our job, and that's because we're both passionate about empowerment through financial literacy. And it's about so much more than becoming wealthy. It's really about freedom, right, Shani?

Jayamanne: Yeah, and financial freedom means not having to put up with toxic work environments and abusive relationships. It means taking care of loved ones and supporting them in achieving their goals.

Lamonica: Yeah, so a big thank you for indulging our passion over the last 100 episodes. We continue to work hard and try to get better each week even if it doesn't sound like it, and we do hope that listening to this podcast helps you take better care of your finances and those in your life that are important to you.

Jayamanne: Alright, so let's get into today's episode. So what do you have planned for us today?

Lamonica: Okay. Well I thought today would be a good opportunity for a bit of a statement of purpose.

Jayamanne: Statement of purpose.

Lamonica: Yeah, we are going to plant the Investing Compass flag, Shani.

Jayamanne: Okay. So someone from a country who was colonised three times the whole planting the flag analogy is a little bit less appealing.

Lamonica: Three times.

Jayamanne: Yeah, the Portuguese, the Dutch and the British.

Lamonica: Does it count it as being colonised three times, if they just took it from each other?

Jayamanne: I think it does Mark.

Lamonica: Okay, they didn't have to leave.

Jayamanne: No.

Lamonica: Okay, just just making sure. Alright. So, we're going to do a declaration of values. Is that a good way of putting it?

Jayamanne: Yeah, that's good.

Lamonica: Okay. Because if you've listened to any of our first 100 episodes, you probably figured out that we've got some pretty strong opinions about the right way to invest.

Jayamanne: And we have these strong opinions because in all sorts of markets and over the long term these things work.

Lamonica: Yeah, and that's a good place to start. So the first thing we believe in is that you need to invest over the long term. So we know that taking a patient long term view helps us ride out the market's ups and downs and take advantage of opportunities when they arise. And we know that investors often overemphasise the importance of recent events rushing into hot stocks when they're overpriced and then fleeing from the market during a downturn.

Jayamanne: We've spent a good deal of these episodes talking about long term investing and the impact of compounding, so that's where we'll start. So let's go back 100 years and see the impact of compounding over the very long term.

Lamonica: Yeah, and obviously you are unlikely to invest for 100 years. But the lesson here is start early, invest for the long term and get to the point where compounding really starts to make a difference. So we're going to go back 100 years on the S&P 500 and let's look at what $100 turned into.

Jayamanne: Alright, so 100 years and $100.

Lamonica: Exactly.

Jayamanne: Seems appropriate.

Lamonica: We're on message, on theme.

Jayamanne: On brand.

Lamonica: On brand. So Shani if you invested $100 in the S&P 500, 100 years ago you would now have $2,321,000, which is a lot more than $100. So that would be an annual return of 10.52% and that of course includes both price changes and also dividends, and we shouldn't underestimate the impact of dividend. So the price return per year was 6.46% and the remainder came from dividends, so that's close to 40% of the total return. So dividends matter Shani.

Jayamanne: But we need to add a couple of caveats to that return. That of course does not involve fees or taxes, and we haven't taken inflation into account. If we include inflation than the $100 grows into $131,642.59 in 1922 dollars. That means, in an inflation adjusted basis, the $100 grew 7.41% a year on a real basis.

Lamonica: Alright, and the long term focus also needs to be realistic. So looking at real returns as Shani just did and taking fees and taxes into account matters. So being realistic means that we will actually stay invested over the long term because there's nothing that causes investors to quit, like failing to achieve unrealistic expectations.

Jayamanne: Okay, Mark. So let's move on to our second core principle that we believe in and that's being independent minded. Following the crowd may feel good in the short term, but it doesn't help much in investing and herding is commonplace in investing. It generally delivers average results in normal times, but then leads to destructive booms and busts, which is when many investors lose their way and make mistakes that impact their ability to achieve their goals.

Lamonica: Yeah, and the problem is we find it emotionally and psychologically painful to go against the crowd. And it isn't just retail investors. We see evidence that analysts exhibit herding mentality as do fund managers, and it's pretty simple here, why this is bad. Most investors underperform the market and they do that due to poor timing decision. So we've talked about the mind the gap study a lot during our first 100 episodes. But it shows that investors underperform the results of the actual investment. And this, of course, is compounded by the fact that most active managers underperform the indexes, so a lot of damage is done by herding.

Jayamanne: And of course, it's really hard to go against the crowd, but we hope that over the first 100 episodes of Investing Compass, you've developed some healthy scepticism about the conventional wisdom that passes for deep thinking these days. So just be wary of things that sound too good to be true and the next great investing product.

Lamonica: Alright. So our next principle, our core principle is that we are valuation driven investors. So we think much of what you hear on a day-to-day basis about the market is just meaningless noise and therefore the daily swings and volatility is also just meaningless. But our minds are hardwired to find patterns and therefore we gravitate towards trends and project them into the future.

Jayamanne: And if you've listened to this podcast, you've probably heard us mention the CAPE ratio and the fair value that our analysts estimate on the companies they cover. The focus on valuations is a great technique to rise above this market noise and to avoid the herd. And we've tried to put the recent market movements into perspective.

Lamonica: And a focus on valuation means concentrating on the fact that as investors we are buying businesses, which means we need to be concerned with some quaint concepts like making money and generating cash flow. And that can be very different than a carefully crafted narrative or just plain hype. So as Warren Buffett has said, repeatedly, being investor is being a student of business. Focus on the fundamentals of a business, selling more goods, keeping more of every dollar of revenue as profits and investing to grow the business at a rate of return higher than what it costs you to source funds.

Jayamanne: And we want to end this on something that we hope has come across in every episode we've published. Investing is about you and about achieving your goals. As an investor, you shouldn't care about investment products, ETFs, funds or any other product is designed to make somebody else money. They are means to an end. Same thing with trading platforms, micro investing platforms, robo investing platforms or simply brokerage platforms are once again simply a necessary evil as an investor. And remember that their interests are not the same as yours. In most cases they want you to trade more, but as investors we want to focus on trading less.

Lamonica: And we keep seeing this preoccupation with trading platforms and ETF providers. And it seems like many investors, especially new investors, seem to think that the most important decision you can make is what platform you trade on. And that is the least important decision you can make. Key to being successful as an investor, you should know why you are investing in the first place to understand what you are trying to achieve.

Jayamanne: So we talk about goals over and over again, but there is no single thing you can do to set yourself up for success more than knowing why you are investing in the first place. When you focus on where you want to be and put that at the centre of all your investing decisions, you can focus on what's important and that isn't the brokerage platform or some fancy new ETF.

Lamonica: And what is important is having a plan to achieve your goals, which involves knowing how much you need to save to get where you want to be, to know what return you need to earn. So you can focus on an appropriate asset allocation only after all of that should you start looking at what investments go into your portfolio, and then how you access those investments. 

Jayamanne: So if we haven't made it obvious, we believe in a goal based approach to investing, which is just a different way of saying that we believe each of us is unique. We all have different goals and different circumstances and ultimately success is about self-awareness. Building self-awareness is a great way to stay invested for the long term because you know what you're trying to achieve. It's a great way to avoid the herd. Because you know that all the people telling you about some great ETF or trading platform and what to do, have no idea what you're trying to achieve. No idea about your circumstances.

Lamonica: And this isn't really what many people want to do. Defining your goals is hard because it involves thinking about the future. Most people would like to just blindly trudge forward, hoping that things will workout, hoping that saving 10.5% means you'll have a great retirement because the government says you will. Maybe it will, and maybe it won't, but you'll never know unless you spend some time understanding what you want to accomplish.

Jayamanne: And our focus on Investing Compass is to give you the tools to do this yourself because we can't do it for you, and neither can anyone else. A star fund manager can't help you achieve your goals and a financial advisor can't help you achieve your goals unless you're able to articulate them. And this brings us to the last of our core principles, which brings us full circle, full circle, focus to where we started this episode. We passionately believe that knowledge is a foundation of independence and our goal in every episode is to help provide that foundational knowledge so you can achieve your goals.

Lamonica: A great education is not simply the ability to recite facts, great education teaches you to think and we want listeners on this podcast to be able to think about investing. Simply knowing what an ETF is or the price to earnings ratio or any other fact is only going to get you so far.

Jayamanne: So there we have it, we want each listener of this podcast to be an Investing Compass investor, which means focusing on the long term, it means concentrating on valuation levels and the businesses you are buying as an investor. It means being independent and not simply following the herd.

Lamonica: And it means taking a goals based approach and building the knowledge need to gain financial independence. And I certainly wouldn't call this an investing system, but each of these principles works in conjunction and reinforces each other. We both feel really strongly that this is a pathway to success. Might not be sexy, but slow and steady wins the race.

Jayamanne: We also hope that you've had a little fun along the way. Took part in the Warren Buffett drinking game and learned way too much about my dog's bathroom habits.

Lamonica: Yes, yes, which which we actually recently learned about reading a script. How many times have we talked about this? But anyway we hope you also learned that I consume (24-ish poppers) to make Shani's dad happy. The best burger in Sydney is at the Gidley and Shani's fear of birds and love of Harry Potter.

Jayamanne: And once again, thank you so much for supporting the podcast. We appreciate it so much.

Lamonica: Thank you very much. Once again we would love any questions or comments to be sent to my email address which is in the show notes and of course any ratings or comments you can put through your podcast app and Paul get ready for next week's episode, because it will be all about you.