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The London South East, Investing Matters Podcast, Episode 13, John Stepek, the Executive Editor of MoneyWeek

LSE 00:01

You are listening to Investing Matters brought to you in association with London South East. This is the show that provides informative educational and entertaining content from the world of investing. We do not give advice so please do your own research.

Peter Higgins 00:07

Hello and welcome to the Investing Matters Podcast, today I have the huge privilege of speaking with John Stepek. Author and executive editor of the MoneyWeek Magazine.

John is an expert I would say because I'm reading through my notes here and has been publishing for decades now, Families in Business, Shares magazine, Spear’s Magazine, Sunday Times, The Spectator, amongst others, he’s appeared as an expert commentator on BBC Radio Four’s Today programme, BBC Radio Scotland News Night, John, come on, Daily Politics, Bloomberg and you know, you've got the fantastic book, The Sceptical Investor, which I love, because as a contrarian is I just brought was like loving it, mate. Fantastic. But right, I want to start John really, because you went to uni and you finished and graduated at Strathclyde University degree in Psychology, but your family's in business? And I'm sure they're all going for John boy, he's going to be going into the family business. What was the decision there? Why did you go into business studies, then slip into psychology and then come out with a psychology degree?

John Stepek 1:25

What went wrong?

Peter Higgins 1:27

What went right?

John Stepek 01:29

I guess so my background was in family business, my grandfather came over from Poland after the Second World War, it's a very long story, and set up based on aerial repair business. So you know, TVs were just becoming very popular. And over time it and then I can a small electrical retailer, mostly located in the kind of east end of Glasgow, and then my dad took it over from him. And so that was always in the background when I was growing up. And I kind of thought to myself, oh, should I join the family business when I when I grew up, but also always wanted to be a writer right from a very, very young age.

I didn't always have a burning desire to be a financial writer, or even a journalist. I had a lot of scepticism about journalism. I used to read the papers whenever I was a teenager, and essentially just find a lot of it quite infuriating, really.

So whenever I was deciding to go to uni, I thought, well, what do I want to do, because I don't have, you know, I don't want to be an architect, I don't want a doctor.

So I thought I would just study Business Studies, because I thought, you know, that will give me an insight and aspects of the business in case I do decide to join the family business. And then also took psychology as an optional module.

But what I found really was that what was most interested in was, the psychology and the kind of human elements of business, because you rapidly realise, particularly whenever you're part of a family business, that the interpersonal dynamics are extremely important, and when they connect key things and that means the same way normal businesses but succession is a big breaking point for family businesses in particular, a lot of them faill at that point, and very few of them make it beyond three generations.

So I thought that's what I found most interesting over time. That's what I ended up specialising in at uni. And I must admit, I dropped the vast majority of the business subjects and just stuck with the psychology and sort of then feeds into the Sceptical Investor which is in large part a psychology book.

Peter Higgins 3:30

Yeah, it's because of that while we're speaking now and we've been blessed with you for X amount of years now the thing I was reading as well was you one of your first jobs was good old Teletext, you got into Teletext finance desk and I remember going you know coming home and looking around and like 15 minutes delay to the next page what a fantastic place to start John.

John Stepek 3:50

Oh it was superb I mean, Teletext was brilliant grounding and I just had to interpret the news as it was coming off. There were two shifts, there was a seven to four shift and a nine to six shift. And so you get in for like seven o'clock and the RNS’s would be coming off. And you know, you'd maybe have BP’s first quarter results. And you'd have until eight o'clock which is when the kind of the markets open to get these stories out there. And you'd be sitting there kind of like trying to write BP’s accounts in 20 minutes so you could write in a tiny space with like 65 words to write up the stories.

Peter Higgins 4:30

Even smaller than Twitter!

John Stepek 4:31

Oh, yeah aye. Yeah, it was actually thinking about it was probably good practice for Twitter. Thinking about it.. It was great because it really taught you focus on how to read a set of accounts really quickly.

I remember my boss saying start from the back because that's where a lot of the market is. And hopefully that's where you'll find a decent story. And it really trained me always go to the source because I think that's a really important thing for individual investors as well. Before you make a decision on something or you know, if you're taking investment decision seriously, just always go back to the original source. Journalists will sometimes get things wrong, or they'll have a skewed angle. And everyone in the industry is also got their own agenda, which is normal.

That's human. I'm not judging that is just the way things are. So it's always better to read the original text yourself. And think for yourself about what you think the important aspect is. But yeah, that was it was fantastic working at Teletext, it's a shame in many ways that it was obviously superseded by the internet.

But I can I was there for two years before the writing was, it was very much on the wall, because the vast majority of money in that business, and it was a very profitable business, but it all came from the travel pages. And obviously, the internet kind of destroyed that side of things. So but it was good. It was great.

Peter Higgins 5:50

Yeah. Well, the travel business got crushed by Was that sort of era, wasn't it when they came out? So when things were going awry, with Teletext, you know, towards the end, and it's been superseded. Was the family thinking, Oh, John's coming back to the business?

John Stepek 06:04

No, that's going to meet my decision by that point. And actually, in the eventually the family business kind of went bust, went into administration, which you know, is that's what often happens with businesses. And it was, it was a shame. And certainly, it was, you know, a shame for all the people involved. But by that point, I was kind of, you know, I was living in London, and it was well away from many thoughts, that kind of going back into it.

Peter Higgins 06:27

Okay, so we get to 2005. And you arrived in your first role at MoneyWeek, and you've just gone like that, like that like that like that. Ever since you know, you and your 17th year there, thereabouts now. So tell us about going in and what your thoughts were and what you want you to do within MoneyWeek, when you first arrived, because it's been a fantastic ride since then, culminating in where you guys are now in a much larger group.

John Stepek 06:50

Yeah, MoneyWeek was fascinating. It wasn't a title I was familiar with at the point that I went in what I then realised that my colleague Merryn Somerset Webb was the editor. And I had always been a fan of her columns in the Sunday Times, because she wrote for The Sunday Times money section at that point. And I thought, Okay, well, this is clearly a serious publication with somebody that really knows what they're talking about.

And also enjoyed the fact that at the time, it was owned by a chap called Bill Bonner, who's an American writer, Bill had always taken a kind of contrarian approach to writing. And also, he sought out one of the first email newsletters that I really read in detail, it was a thing called The Daily Reckoning. And the way he wrote about finance was very, at the time, it was unusual.

Now everyone kind of blogs, and everyone has quite a chatty style. And the some times they'll say something a bit controversial and a bit cheeky. But back then that was very fresh feeling. And then it kind of made me say, All right, you can, you're allowed to write like this about money. And you're allowed to have opinions. And that was the great thing about MoneyWeek.

So when I went there, my first job was basically to sort out the website. And we launched the daily email Monday Morning, and I still write Monday Mornings most mornings. And that was really just trying to find an opinionated voice that would maybe point to some of the things in the market that seemed to be not quite as they should be. Because obviously, it was 2005. And by that point, it was already quite clear that debt was a big issue. And so we were quite often just pointing the different kinds of things that could go wrong. We were also talking about how commodities were a good thing investment at that point, because obviously, that was the rise of China.

At that point, it still seemed like quite a niche investment area. So we focused a lot on that. And of course, so went along for a few years. And it was good. It was it was a rapidly learning curve, because I got on top of you could cover everything, you know, macro, small companies, bonds, everything. And of course, then 2007 came along and Northern Rock. And just as all that was happening, I ended up becoming the deputy editor at the magazine. So that was obviously was quite an exciting time to be taken over. Get a run in the day to day of the mag and then just remember, we were in a good place because we had been bearish and we had been talking about you don't look at the kind of level of debt in the global economy, something is going to snap.

And then obviously Northern Rock came along in the middle of 2007. The problem I’ve got is that getting new journalists coming in who had ended up 20s. And I think that there's already a younger generation that doesn't get how shocking that was at the time. Like seeing queues outside our bank in the UK, running a bank like in Mary Poppins was just incredible. And it was also incredible that at the end took a whole year before people woke up to the fact that actually this was a much bigger problem. The credit crunch. I think again people, this isn't emphasised enough, the credit crunch started in the middle of 2007. And the stock market didn't peak until the middle of 2008. And then Lehman came along and kind of blew up. And that made everyone realise, oh, my goodness, this is a big deal. But it's been going on for about the best part of 12 months to 18 months.

Peter Higgins 10:18

This is one of my questions, John, you're in there 2005. You there, you get promoted, it's 2007. And things start to go pear shaped. You've seen all these things going wrong.

You're seeing the signs, you're writing about it, you're showing all these investors out there and fund managers that read the magazine, because they clearly did. And they were doing it that time as well. And still do. We've seen all these warning signs is for MoneyWeek.

We've seen all these warning, you and Merryn and all the other team saying watch out, watch out and everyone’s going we're not listening. Why do people and psychology again, ignore the signs and always bullish until the very last minute John?

John Stepek 10:54

I think the industry obviously has a just has a bullish bias because I do remember we had regular round tables, so monthly kind of chats with fund managers that we put in the magazine, and they do remember that all the fund managers at that point, but clearly very uncomfortable, they were clearly worried. But it's almost like, well, what you can do, you know, if you're an equity income fund manager, you can just say, actually, I'm really scared, I'm going to sell all my stocks and sit in cash, because you know, you've got a remit to follow, I think it's very difficult for people in the industry to escape the fact that their job is to buy stocks, basically, and hold on to them. So I think there's that there's the industry side, as for individuals, I mean, this has been I think individuals have a bit of an advantage over professionals or it's the advantage that they have is that they don't actually have any portfolio remit beyond make sure your money grows.

And they also don't have any external pressure in terms of a boss saying, you know, you have to turn around this quarter, you have to make x percent.

But the problem is that it's very hard to escape the momentum. Because I mean, it's about like the today, growth did so well, for so long. And deflation, for so long has been the big threat, that people simply cannot adjust to the idea that is all going to be the other way around. Because what has what has worked for so long, and we just have a tendency to keep extrapolating.

And then when the turning points come, all of the things that you've relied on become useless, basically, because nobody really knows what an inflationary environment is going to be like. And also, I mean, in 2008, the idea that banks would go bust was unthinkable. Most people hadn't seen a major bank pop its clogs since you know, at least the 1980s. So I think that's the other thing, there's kind of, there's a lack of memory that these things have happened before. And then we go in as if it's something completely fresh. So I think that it's a, it's very difficult to turn course, after being on it for so long.

Peter Higgins 13:01

Absolutely. And people have difficulty with it. And they tried to just focus on where things were going well, and forget about the bad times, you know, psychology wise.

So I want to talk about the latter part of 2008 still, and when things were looking better, there's been that capitulation point there, John, right. And nobody else wants to go back into the market. And the market started to go like this a little bit. And then was like, no, no, it's complete denial that it was going to happen in the first place.

And the second denial was, it's not going to bounce back, it's going to come back so quickly. And then gradually, it didn't was almost about 2009, before everyone started to go look and start being positive again.

John Stepek 13:34

Yeah, I was the same from that point of view. And I learned a lot from 2008. Because I went and thinking this is a shared those are the kind of people who had the kind of slightly Austrian libertarian view on things at that point where it was like, this is going to be a cleansing fire that will purge the world of central bank fiat money can have corruption and all that.

And I was too bearish for too long. I failed to recognise that in March 2009. I mean, it weirdly enough, I actually remember writing the letter in March 2009. That was buying stocks, because otherwise actually, they'd go into the market at that point. But I didn't think that we were gonna get the rebound that we did, where there's obviously in retrospect, that's the point at which central banks got ahead of it, you know, did you see what's going to print all this money. At that point, we hadn't seen anything like that. And again, I made the mistake of thinking that was going to be hugely inflationary. And that was in for reasons which one of my favourite writers, James Ferguson had already pointed out, you've seen well, look, we're in a bank bust.

And when banks are bust, the monetary transmission mechanism stops working. And the only way we're gonna get back to you know, something approaching normal is once the bank balance sheets are fixed. And that always takes a long time and again, because James knew his history, and he'd looked back, all of the previous, you know, there's been a big bank collapse in the Scandinavian countries in the early 1990s. And he sort of did a chart of, you know, 7 or 8 of these things. And they always took an average, you can have 5 to 10 years before things got back to normal.

So, weirdly enough, the situation we were in before the pandemic, and that was actually what you typically get, after a banking crisis, you get a big deflationary bust, and it takes ages before they get back to health. So I think that's interesting, because if, if people had been paying more attention to history, they, they would have had a better understanding of what would follow. And that was a really big learning experience for me.

Peter Higgins 15:39

I think the beauty of it is history. And you've touched on it there with Ferguson. And I think also the fact that we tend to not read enough you and I read, I know you've read loads and Merryn as well. But I think a lot of investors don't read or you haven't got the time, or the say they haven't got the time to read stuff.

But I wanted to ask you this question and it goes back to what you were saying just now, we often talk about capitulation of investors were many hung on to usually declining stocks, investments, per se. Right.

They finally cave in and sell out. Right. And you spoke in your book about the point of maximum revulsion? I've not heard it phrased like that before. Please. Can you explain this? And why occasionally, this can prove to be actually the point of great opportunity for the contrary, because I'm a contrarian, as you know.

John Stepek 16:25

Yeah. I mean, actually, march 2020, is probably a good example of this. Because unlike March 2009, I would say that was one of the most obvious, like market capitulation points that I've seen. And the reason I say it's obvious is because I would say that almost everyone who was contributing to the magazine, all the fund managers that I spoke to, at that point said, I know this is the bottom. And I thought that was very interesting.

But yeah, capitulation is just the point where if you're an investor, and you'll recognise this, I'm sure most of the people listening will recognise this. So you hold on to something, and then it goes down a bit. And you think, Okay, well, it's not doing what I wanted it to, but I'm gonna hold on because it'll come back. And then it goes down more, and then it goes down more, and then you're doing the risk 60%. And you'll think, oh, my.

Then you get out and that is the bottom. And the point is, is because collectively, everyone who has then sold, and then it's just well, you know, there is no more kind of selling pressure. Obviously, for individual stocks that are playing in stocks that go to zero, and you should get out when you're 60% don't still barely have the money, then lose it all.

But in terms of things like actual global markets, the FTSE 100 is not going to go to zero. So that does always come a point where this is a buying opportunity, and it may even be quite an obvious buying opportunity. The other thing you're watching them in we may get one is this is definitely things like headlines, and magazine covers, those are good, those in my experience, those are good for sentiment, and getting a sense of if you look at a kind of newspaper headline, especially with something like the Times that doesn't normally have a business headline on its front page.

And if the tone is particularly hysterical, then, you know, you've got to the point where the vast majority of people are really worried and really panicking and, and if the vast majority of people are really panic, and that suggests that the panic has already been placed in the market.

So you can't have that much further don't go. I do do both. I mean, somebody I can't remember the name, but in the book, couple of analysts look to Economist magazine covers, and found that when the economist was very obviously bullish, or in a sector or a country, that it was probably a good time to sell. And vice versa, as if it were very aggressively bearish on something, then that probably marked that the time was near the bottom.

And it's not because writers for the economist or whatever clever they had, I mean, loads of Oxbridge graduates, etc. It's just because it's a mass market, magazine, this circulation is in the millions. So the point is, if they know about it, then everyone must know about it.

So and markets are all about expectations. I think that's the one thing that if I can teach or hammer through people's heads, markets are about expectations. So it doesn't matter if Britain's facing a recession.

If everybody already knows it is going to be in the price. What really matters is then a surprise either way, because that's what will move the market that I think that is a core thing that people often don't understand, because people say to me, all we just found that the second quarter GDP was shrunk. And I'm like, well, yeah, but the market doesn't get because the market knew about that while it was happening. And obviously the markets no thinking about what's going to happen in Q2 next.

Yeah. So I think that that's always an interesting element. The way that people kind of miss understand markets, I think.

Peter Higgins 20:07

Yeah, I mean, one of the famous magazines for being quoted a lot is Forbes. So they always reference Forbes to say, oh, that's peak, let's go in the opposite direction now.

So that does run seamlessly to the next question. You know, we had the likes of GamestopTheranos, the lady forget first name, again, Holmes and NFT's using media and he referenced it in your book quite a lot. How do we as individual private investors spot or would be better to learn how to spot bubbles? What's your thoughts there John?

John Stepek 20:36

Bubbles are fascinating, actually. And they are tricky and that I don't recommend people try to time bubbles as in getting to the top or that sort of thing. It's just good to be aware of them.

I mean, Theranos is an interesting one, because obviously, I mean, nobody would have invested in Theranos outside of venture capitalist, but she was on the cover of, I think it was Forbes or Fortune Magazine.

Peter Higgins 21:07

Every magazine, every magazine John.

John Stepek 21:09

Yeah, with this medical kind of like blood test. And I think it was basically within a couple of months that turned out that it was all made up basically in the know the revelations all came out. I mean, this is a classic when you know, that kind of, I mean Time just did one on Elon Musk as their man of the year on the front cover. And of course, you know, that's a roundabout at the time that Tesla can actually the wider of what I call can a jam tomorrow bubble actually started to pop. Cathie Woods is another good example.

Cathie has this exchange traded fund called The Art and evasion ETF and it invests in all the most speculative stocks out there. And people will sort of comparing it to Berkshire Hathaway, and the fund rocketed because it was based in all that speculative stuff. And then, of course, February 2021, I think I'm sure there was a big profile one out in the FT that marked the peak, that's when a lot hit the top.

And actually now, since 2014, which is when it was launched, Berkshire Hathaway is now outperforming that again, which is really useful lesson and taking the long-term view.

Peter Higgins 22:20

Absolutely tortoise and the hare.

John Stepek 22:22

Yeah, aye, I think what to do. The other thing I would suggest to people, when they’re reading things like the FT, if you get the physical paper, then again, like look at the back pages, because that's the stories that are kind of bubbling under. And they are the sort of areas where you can like find possibly ideas for opportunities and themes that might be becoming more popular, as opposed to the front pages, because again, that's all the stuff that's already known and it's already in the price. So just read the paper back to front, basically.

Peter Higgins 22:52

I mean, I used to do that with a football, you know, just go straight to the back page. We’ve touched on a few names there but won’t reference them again, but it takes me seamlessly to my next question, John. Intellectual humility is recognised as a psychological trait, a good trait? Yeah. However, we've seen and recognised numerous occasions the undoing of many and investor and fund manager, politicians as well, and CEOs of listed companies.

John, given your experience, what signs should we all look out for with regards to individuals running companies, funds, etc, regarding their lack of intellectual humility, and therefore we should be aware of putting our personal wealth at risk?

John Stepek 23:31

I mean, there's a lot of different elements to that intellectual humility, I mean it boils down to understanding you're all in limitations as an investor.

So I think that the main thing is watch for them fund managers, specifically, is stale drift, because what tends to happen is that fund manager gets knowing cycles, there’s two things, there's obviously this is a bigger risk for higher profile people, because the more adulation you're getting, the harder it is to be intellectually humble. And so what happens is that you'll see a fund manager like Neil Woodford as a good example here.

He became famous because he was arguably a contrarian and calm investor, who basically made an awful lot of money by buying tobacco stocks when everyone else was shunning them, and by avoiding getting stuck in the tech bubble.

So that was there was nothing wrong with that. I mean, I think that, you know, he should be pleased and proud that that's what he did. But then he started getting into something completely different, which was kind of effectively a form of venture capital private equity thing with is buying all these unlisted stocks, and really slightly out there.

I mean, I was almost like a kind of Cathie Wood type of investments. And so that I think was a very obvious one in saying that. Well, in what way does having spent 20 years successfully investing in FTSE 100 big, huge liquid stocks qualify you to be extremely good at picking winners from tiny unlisted stocks? Style drifters is definitely one good example.

Similarly, chief execs or acquisitions that don't make sense, apart from for ego boosting, I do think that empire building is a big risk among CEOs, you know, I mean, obviously, they have slightly different drivers.

Ego is a big issue as we saw we, the CEO of Royal Bank of Scotland, with his own personal fiefdom in Edinburgh, essentially. But it's not just that it's a desire to kind of grow through acquisition is generally not that great for shareholders anyway, but also they tend to do it on the other top, its’s amazing how much M&A activity appears close at the top of the market, rather than the bottom of the market when everything's cheap. I think it's just CEOs are human beings, like the rest of us and really, you know, they get sucked into the excitement.

And they'll suddenly believe their own hype. So it's tricky. It really is difficult. I admire somebody like Jeff Bezos, who put all of it all at the moment. He's clearly just currently having fun, but he's always been a very good communicator.

That's actually that's something I think investors should watch out for as a positive. If a CEO is very good at communicating a company strategy, the chief executive of Next is a very good example of this over here.

Aye, that's a really good thing, because it shows that the thinking clearly, they know who they're answerable to, because they're communicating to older people in my own, including the shareholders, and employees.

So in a way, you can actually see it as a positive for me, because I'm fairly cynical about ESG, and stakeholder capitalism, and all that sort of stuff. But those people are communicating with stakeholders. And they're doing it clearly, which shows that they understand what they're talking about. So I think that's a very, and actually BuffettWarren Buffett is probably the number one example of this. But yeah, so that I think is a positive thing to look out for.


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Peter Higgins 27:11

Well, let's go a bit more into your book, if I may, you wrote in one of the paragraphs, I must qualify this and say I love your turn of phrase. Sometimes when you write something like, how did he throw that in there? Absolutely brilliant. You wrote here, the first cockroach is rarely the last, the archetypes of profit warning, then you coined Britney Spears. Oops, I did it again.

Please, can you explain to our investing matters listeners and others as well? Why we should be vigilant of companies that announce a profit warning as they often happen in ones or twos? Or maybe threes rarely happen in isolation, do they?

John Stepek 27:47

Yeah, well, I think the thing again, this boils down to psychology. So the market again, is all about expectations. If you're a corporate chief exec, your endings are tied to the share price almost all the time. So that's the thing you're most worried about. So you don't want to deliver any news that disappoints shareholders. And at the same time, your employees probably are aware of that and they the way the level news is going to upset you.

So the difficulty is that everyone's trying to manage someone else's expectations. So what happens is that a profit warning only comes about when there's no other option except to fess up. And that means that the probably soft soaping in the first one. And there's probably other stuff that's about to come out that everyone's been too scared to tell the chief exec that's why you find that they do tend to tumble out in twos and threes. It's not always like that.

Sometimes a profit one is very clearly the result of a one off event or some contained event. And I think that if you can see the company as ahead of it, then that's fine.

But most of the time, or at least a good chunk of the time, it's as a kind of ongoing leak that hasn't been plugged and now it's time then eaten or know their bath is overflowing and combing through, you know, your kitchen roof. And they saw oh, everyone's going where I'm at. So yeah, there's, I think you have to be very careful if a company issues a profit one.

Peter Higgins 29:15

I'm going to say sometimes you see one of the directors going, then the CFO goes, and when the CEO goes you like it's just gone completely pear shaped now, it's that sort of sequences you're doing.

John Stepek 29:24

Yeah. And the CFO going is definitely a classic warning sign because you're like, well, look, who knows, but the numbers out there. If the diving off the board and that always makes me kind of makes me worried.

Peter Higgins 29:38

Right? So I want to switch it up now because you've written loads on fund managers. And you've written in the book as well about how to find a good contrarian fund manager.

I'm always another bit when I want to see fund managers and hedge funds. I always put them into the same sort of category. And it's tend to always go into the onto the same thing if one person is in that area or that stock or that sector. They're all in it together? So it's very rare you can find a contrary performer and if so how do we go about identifying those?

John Stepek 30:05

Again, I think a lot of it is actually similar to what we've just seen a bit chief execs, I think, if you can find a fund manager who can communicate the strategy very clearly, and then the way that retail investors can understand, then that's a good sign, for example, you know, your Terry Smiths, or your, you know, Nick Trains of the world.

Now, they obviously have, actually, they have a very similar style, or they're not all in the same stocks, I think the other thing you have to remember is the styles do go in and out of fashion. I don't think that if you're looking to investment fund manager, rather than go passive, then the first thing you want to do is make sure that not just tracking the index.

So that's quite straightforward. You know, just look at the top 10 Holdings, look at what they're saying about things and see if they've, you know, if they've just caught up in the index or not, when it comes to the contrarian thing, I think you really need to find people who are taking either big bets or just doing something very different to what the way the market is doing.

If you want to make money as a country. And if you want to beat the market, you have to do something different to what the way the markets doing. So that's the other thing. But I think that if you're looking for individual managers who are doing a good job with this, then I don't think you'd be able to communicate this strategy very clearly people is actually one of the number one things that I would look for.

And again, it's a very rare skill to have. And I'm not sure why that is, I actually think is mainly because there aren't that many people who do think without fully clarity about what they'll do.

And I think I think an awful lot of people in most industries, just kind of winging it to an extent, which they will reflect on the industry that I'm in I don't know.

Peter Higgins 31:46

That's a good point. Now give the shout out again, for the book, Sceptical investor: How contrarians bet against the market. And win and you can, too. Now my favourite section of the book, John, obviously, because I spent endless amounts of hours trying to find the sum of parts and intrinsic value of a company.

So I'm getting, you know, I want to pounds with a value on a page 50 pence or 60 pence that’s what I'm all about. So you wrote a brilliant chapter on it. What I'd like to ask, therefore, is that chapter buying companies for less than they're worth, please will you share with our listeners, the key concepts as to what they should be looking for regarding the fundamentals of investing?

Because I don't want everyone to spend 100 hours researching the stock, simplify it for us and the shortcut that? Well, I think that the main thing is there's a lot of talk about value versus growth, particularly, you know, that has been over over the last wee while, and the thing that you can really boil it down is something you really just want to so the markets all about expectations.

And markets are often right. You know, the reason we use them is because they're often right. So what you have to find, basically is a company where you think that the market has made the mistake one that's and then you think, well, what's the market currently got placed in? And why do I think that the market is wrong about this company, and then you need to get your margin of safety, which is what do I think the company's actually worth is that sufficiently larger than what the market says the company's company was for it to offer me enough room for manoeuvre if it turned out to be wrong.

Or if it takes longer for the market to wake up to this intrinsic value that I believe that the stock has that it hasn't put on it? I mean, that's not easy to do. And I do think that one reason that I draw the sceptical investor is to try and get across the investors who actually how difficult it is to be an active investor, and to beat the market. And just to kind of like, give a sense of the idea of that it's actually quite a lot of work if you're going to become an individual stock picker, to actually do this. And so you do accidentally go away and do your homework.

But in terms of the way to approach it, is that thing of well, what's the market think worthy, I think, why is there a difference there?

And is that a big enough difference that is worth me taking the risk of investing and potentially getting it wrong.

Peter Higgins 34:34

Thing is, and you and I are in the same boat in a sense of we're almost sometimes as a contrarian is going down the well, most of times going down the popular route and viewpoint.

So the element of psychology that you've studied, I've studied is a fact of, we've got to enable ourselves get in a position of being uncomfortable in unpopular sort of place, and also try and make it so that we can then maintain our own resilience to be patient.

But that's a really hard thing to build. How would you say that an investor could build on their resilience to remain patient for longer?

John Stepek 34:46

Yeah, I mean, that is a tricky one. I think the main thing and slightly there's always this tension between being somebody who writes about financial markets and the daily basis and the amount of time I think investors should spend and actually paying attention that financial markets.

And so I mean, our members have said a few times and I've sort of said, we should actually publish a monthly edition of Money Week that's shorter that we charge more for that, because that's the kind of frequency or even less that people should be paying attention to the markets. But that's I mean, once you know, one way is to improve your resilience is simply not to make a decision.

Know why you've made that decision. It's really important before you invest in anything, that you understand why you've done it, because then you can park it, then you can leave it until you need to go back to it and see if it has the story changed now. So I think that's really important. You have to kind of write down like, here's why I have invested in this. And that will help you kind of maintain your patience because you, you understand why you're doing that.

The problem when you're doing that, and not being fully cognizant of why you've bought something is very easy, then get your opinion changed simply by the fact that the stock's not going up, or simply by the fact that other people are saying, oh, no, but you should be investing in this instead or, or that stocks, you know, that's it's really stupid to be in the oil and gas just now, because electric cars are going to take over the world.

So as that you need to cultivate the kind of strength of mind to kind of go your own way. And the big part of that is understanding your rationale for buying something in the first place.

Peter Higgins 36:25

Love that reply. Thank you ever so much. Now I've got a final question to ask you John. Because obviously, the markets have been hugely volatile, S&P 500, Dow Jones is flying up and down three or 4.5%, all over the shop. And the warning signs have been there now for a year and the markets UK and Europe as well have been climbing a wall of worry.

And we've seen the last two days of action, 900 points up on the Dow 1,200 points or 1,100 points down yesterday.

What advice can you give? Or what sort of words of wisdom can you share with our investors and our listeners on this podcast has to how they can maintain some resolve regarding these volatile markets and what they should actually consider doing to maintain long term investing rather than going in and out of the market all the time?

John Stepek 37:10

Yeah, I mean, don't be a day trader, I would say is really try and avoid doing that I mean, I know some people can do it. But most of us can either avoid using leverage.

One thing you do with volatile markets is make sure you've got enough cash. Because having cash is important for two reasons.

One, it means you can use it because opportunities may come up for stocks that you like. But the other thing is that it gives you a mental cushion.

This is the kind of markets that the people who are leveraged get margin cold in, and stuff sells off for no reason at all other than the fact that people need to sell it to raise funds. So some of the most liquid, some of the best quality stuff out there gets sold off at times like these. And that's why you want to be the person with cash so you can pick it up for less than it's actually worth really is what it boils down to. So that's one thing can I hold probably a bit more cash than you normally would.

The other thing is try not to pay too much attention to the big swings. One thing I think's really worth remembering is that massive up days and massive down days all happen generally in bear markets. And they also happen one after the other. So you can see the Dow going up 1,000 points and feel oh, I should have been in there. So they will not look that this is just what happens.

It seems like these please put that sort of thing in your mind. You don't have to act at any point. Take a deep breath, step away from the terminal. It's you know, you don't you don't have to do anything. I know thanks. I mean, Mark actually said Mark Dampier, you interview them, I listened to the podcast. And he did make the point that this is an unusual time and things are changing. We're coming to the end potentially, of what has been a 40 year downward trend and interest rates.

That means that there are very few people still working in markets today that have not been in that environment for their entire working lives. So there's a lot of people are going to panic, regardless because they're not going to have seen an environment of rising rates and rising inflation, and they won't know what to do.

And that's why I think is kind of a good time to be patient and to revisit your asset allocation. Think about what you're hoping to get from your portfolio because it's going to be challenging, and things that we haven't had to worry about for a very long time like real returns as an after inflation returns are going to matter an awful lot more. I mean, the prevailing inflation rate since like 1997 has been around a bit 2% give or take in the UK since that time. And I know it was set in the seventh by the Bank of England said it may go up to 10.

So when the slightly the CPI which tends to be lower than RPI, not it's going to be a really challenging thing. I personally don't think inflation is going to go back to what we've seen over the last 10 years and even if it sets a 4% 3% consistently for the next five years, that's a massively different environment to the one that we've all been used to. So yeah, I think patience and try not to have too much conviction in one asset class or outcome, because there's a lot of balls in the air at the moment, basically.

Peter Higgins 40:20

I'm going to close it there, John, we might have to speak again, I think I don't think we've covered off the things that we could have covered today. I really, really appreciate what you've done. You're an absolutely phenomenal writer, you and your colleague, Merryn. Absolutely. Awesome.

And I want to thank you for this fantastic book that I've read from cover to cover. And I'm hoping you're going to do a part two at some point, because I think this book is needed for educational purpose. And I think everybody that arrives in your team should read this first before they start writing anything at all. And I want to send you some love from my good friend Phil Oakley, as well, who I know that you've helped and supported in the past regarding his writing as well. So I want to thank you ever so much, and wish you all the very best with your family and keep playing the guitar as well when you get some time off.

John Stepek 41:03

Thanks very much. I really enjoyed that. Really nice to meet you and talk to you.

Peter Higgins 41:06

And I'll speak to you and meet you in person at some point as well, John, all right.

John Stepek 41:11

Definitely. Take care. Take care. God bless.

LSE 41:23

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