The London South East, Investing Matters Podcast, Episode 15, Chris Dillow, Economics writer

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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 00:17

Hello, and welcome to the Investing Matters podcast. My name is Peter Higgins. And today I have the great privilege of speaking with Chris Dillow, the economist, writer, blogger extraordinaire of Investors Chronicle. But first, Chris started as an investment banker and worked at various different entities before joining the Investors Chronicle. We're going to talk about that a little bit throughout this interview. I just want to welcome Chris, how are you doing?

Chris Dillow 00:45

I'm fine. Thanks. Thanks for having me.

Peter Higgins 00:47

Thank you for coming on the show. I know that you've only just retired just barely a week. So what is the start with congratulating you on your fantastic performance. I've read something somewhere like, you must have written about 200 words during the time of writing that column. That's an epic number of educational information you've shared with the Investors Chronicle listeners and readers. So well done.

So Chris, what I wanted to ask you first, if I may, is going back, because one of the things I've read was that when you first started out, you started out as a stock broking firm. And within a couple of weeks, it was Black Monday, the crash of crashes, which most people, you know, of our generation now have tried to forget about. But markets fell on the Monday. I think it was 11%, followed by the Tuesday of 10%. What did you learn from that? And what could you share with our listeners regarding what they should consider regarding the fluctuations that we're having. And that's just what we're having in the moment fluctuations.

Chris Dillow 01:44

One thing I've learned is that returns aren't normally distributed. They're not shaped like a bell curve. Extreme returns are more likely than a normal distribution would suggest. Now, Nassim Nicholas Taleb made a big deal of this in his book, The Black Swan, but I can tell you that everybody working in stock markets, learned it precisely and learn it the hard way, on October the 19th 1987. And the point, I think, generalises, in that it's still the case that returns on equities, and I think also returns on commodities and bonds, tend to see more extreme losses than a normal distribution would suggest.

The Harvard economist Xavier Gabaix has suggested that extreme returns follow a cubic power law, such that we tend to have more than two standard deviations from the mean, do have a particular distribution, in that they are predictably more likely than you'd expect. That's one thing. Another thing I learned, which was actually written by Robert Shiller back in 1981, is it share price is a far more volatile than the economic fundamentals in that market might have been reasonably priced. On October the 16th 1987, might have been reasonably priced on October the 20th 1987. But it certainly wasn't reasonably priced on both of those days, share prices are more volatile than you think. And this is something which we still see today.

Peter Higgins 03:28

I love that I've got this question in here. So I'll put this in right now. Because this challenge with what's something else that Nassim Nicholas Taleb said, and his view was the problem with experts, and you're an economist, Chris, so you can verify this as well. The problem with experts is that they do not know what they do not know, in your opinion, how much credence should investors put on experts predictions with regards to economic growth, or future profitability of entities stocks, bonds, etc,

Chris Dillow 03:56

Taleb was right, they should put absolutely zero weight on it. I want you hear some work by Prakash Loungani, at the IMF, he has shown that economists have systematically failed to predict recessions around the world. That was true of the 1990s recessions true of the early 2000, mild recession through the financial crisis of 2008. And that seems to be true across all countries.

Now, there's a systematic failure. What does predict recessions is the slope of the yield curve, when the yield curve inverts, there's a very high chance of a recession. If the yield curve is upward sloping, there's a lower chance if you want to know whether we're going to hit recession or not. Look at the yield curve, ignore economic forecasts. And another piece of research that corroborates Taleb, is people looking at whether corporate growth is predictable. And there's been research done by the likes of Alex Code, Paul Jarvovski, Joseph Koniszchok,, which has a corporate growth is largely random, and that people who try to predict earnings growth, in fact fail to do so.

By and large, particularly longer term earnings growth, and what we're seeing that this year, and we've seen it with the collapse of Peloton, Netflix, and other shares that were pricing in big growth a moment those growth forecasts come into question, share price slumps, and prices of a lot of growth stocks are based on a far flimsier foundation than you think.

Peter Higgins 05:36

You've almost answered the question I've got here with regards to the stats and the data and historical research historically, regarding factors that you've seen, that causes significant long term decline of previously highly regarded large cap listed companies. What is that, Chris, for you?

Chris Dillow 05:55

Quite small changes. In long term growth expectations can lead to big changes. But also, what seems to happen is that the both Halo effects such that in a market panic, good stocks can get dragged down. And during the tech crash of the early 2000s, Amazon share price fell by over 90%.

Now, that tells us that investors aren't capable of distinguishing good stocks from lousy ones, they certainly can't do so in a panic at times of high volatility. And another thing that happens is that prices tend to overreact. And one reason for this is that they are prone to momentum, both upside and downside.

You know, the prices of big US tech stocks seem to have been momentum driven, we now know in 21, and now that momentum has turned against them. And that draws attention to one of the big deviations from efficient markets, which is that momentum stocks tend to keep rising and negative momentum stocks tend to keep pulling.

Peter Higgins 07:08

Love that reply. And I think the importance of what you've just said there, Chris, is that I suspect and you and I've been in the market for a little while, is that the momentum investors that have cottoned on to a trend i.e. Peloton, Netflix, late right, almost need a peak day of buying in them. And when it starts to roll over, they still think well, the momentum was going for that long, it's got to come back and bounce and carry on again. And often that's not the case.

Chris Dillow 07:35

Absolutely. And if you aren't going to be a momentum investor, you have to do it in a disciplined way. And that means you've got to abandon wishful thinking, and you've got to have a selling rule. One of the oldest mistakes in investing is what economists call the disposition effect, the tendency to hold on to losing stocks too long, you need some way of fighting against that. And one rule that I like, was suggested by Meb Faber, about 15 years ago, when he says just look at the 10 month or 200 day moving average price this fall below that, get out if prices rise above it, get back in now, that rule sometimes doesn't work. But when it does work, it protects us from very bad losses. And that's worth something.

Peter Higgins 08:29

Yeah, I've heard the 200 day moving average quoted quite a lot regarding investors keeping themselves safe. Well, you've touched on another aspect of it there, you know, the disposition effects. So I'm going to ask this question regarding psychology now, in the grand scheme of long term successful investing, how much importance do you put on investing psychology Chris?

Chris Dillow 08:48

Oh, enormous importance. I suspect if you're going to be a stock picker, you have to pay more attention to investor psychology than to corporate fundamentals, Goodwill fundamentals, earnings, cash flow and such like should be in the price. But investor psychology often isn't take three examples here. One is we know that shares are prone to momentum.

That tells us that investors under react in the short term to good or bad news, they cling to their idea that a stock is a good stock, even in the presence of evidence to the contrary. Second thing is investors tend to underprice defensive stocks, you know, they regard them as just dull and unexciting. And the third thing the counterpart to that is that they tend to overprice smaller speculative stocks. And the AIM Index for example, has pretty much consistently underperformed ever since the late 90s. And it's done so because people think that they can get rich quick in such as, the upshot is they tend to be overpriced and therefore tend to underperform in the long run.

Peter Higgins 10:04

Hence the reason we've got the tortoise and the hare we've got Cathie Wood, who was the hare and Berkshire Hathaway that was lampooned for being surpassed by Cathie Wood, she had the Halo Effects. And now we surpass there. Again, she's gone up, come down, and she's a slowly carried on up there. So what are your thoughts regarding that strategy, really, of investing long term and getting rich slowly? Is that what you are, you're an advocate for get rich slowly rather than based on the hare?

Chris Dillow 10:28

Yes. Well, with one big caveat here is that I don't think it's possible to be a long run, buy and hold investor in specific stocks, simply because creative destruction in the long run is enormously important. When I was starting out as a stockbroker in the late 80s, some of the big FTSE 100 companies with the likes of House of Fraser, Woolworths, British and Commonwealth, Maxwell Communications, a lot of stocks that are now unheard of a lot of which have collapsed.

So you can't be a buy and hold investor in particular stocks. What I think you can do is follow particular strategies, one of which is invested in defensive stocks. And that's what Warren Buffett does. There's some evidence that Buffett isn't a fantastic stock picker, what he is, and has been is a fantastic style picker. And that is gone for defensive stocks with monopoly positions, and visibility of earnings and cash flow. It's those characteristics. There's over the long run, beat the market.

Peter Higgins 11:47

With regards to Buffett then he's been heralded and continues to be heralded and so he should be, he's obviously made some mistakes in investing over the years. But I think the beauty of what he's done is that he's enabled other people to learn from some of his mistakes. And he actually, when he does make them, it cuts them relatively quickly.

Whereas I don't see a lot of other investors doing that. Sometimes they hang on, and almost are in denial, as are some fund managers. And we see that quite often. Why is that the case?

Chris Dillow 12:14

I think one problem is ego, you've got attack ego out of the equation, you've got to know when you're wrong, and know when to admit that you're wrong. Now, Buffett, in a sense, has got an easier job here, because his reputation is so big, and so secure, that he can afford to publicly admit that he's wrong, the rest of us whose reputations are more fragile, don't have that luxury.

But even so we've got to do it, we've got to know when to cut our losses. And as I say, you've got to have some kind of selling rule. There was a nice paper written by a chap called Alex Imas at University of Chicago recently, where he studied the decisions of American fund managers. And we found that a lot of their buying decisions were really quite good. If you look down at what they bought, they tended to outperform the market.

The reason why these guys didn't outperform the market, on average, was that their selling strategies were so terrible. And he found that they would have been better off just going through their portfolio and selling stuff at random than selling in the way that they did. And the reason for that is that people pay lots of attention when they buying, and they regard selling as something to do just to fund the purchases. But it's not like that, you know, you've got to pay as much attention to selling as you are buying.

Peter Higgins 13:37

Very, very good call. I almost feel like we're doing an interview here about Nassim Nicholas Taleb rather than yourself. Chris, I'm going to ask you a question again, because you've touched on the issue of ego and being fragile, about being anti fragile.

You've got companies that get strengthened by knocks, and you've got individuals got strengthened by knocks and mistakes, how could we embrace actually the learnings we get from the mistakes we make as investors, private investors, fund managers, etc?

Chris Dillow 14:03

Well, one thing that's worth doing, especially if you're a younger investor starting out, is to keep a diary to write down your reasons for buying the stock. Write down your reasons for thinking about buying the stock, but not doing so your reasons for selling and consult this regularly. And you might well see a pattern of mistakes that you make. And you can learn from that. Because it's very easy to have the hindsight bias, to think that you were right, for reasons that you've invented at the time, and that you were wrong because something happened that you couldn't see.

Keeping a diary reminds you of what you thought at the time, and why you were wrong. But also, I think, let's say you've got to take the ego out of it. And you've got to remember that it's not about you. It is about what strategies outperform the market, if any hammered predictability there is in share prices.

Too many people, I think, rely on individual judgement when picking stocks or time in the market, when in fact, what you should do is look at what has done well in the past. And we know that two particular strategies, momentum and defensives have outperformed over the longer, and possibly only two. And we know that there are some ways in the past, they're predicting medium term returns, such as the dividend yield ratio of retail sales to the all share index, the yield curve, and so on. So, rather than ask, what do I know about the market? Ask, what does history tell us?

Peter Higgins 15:46

I love that response. Because I really appreciate that. Can I ask you then, with regards to history, history is often said that the best way to invest is to be a value investment to look for deep value, as that would outperform growth. But we've seen that that's been different on this cycle.

Do you think value has a place in everyone's portfolio, anybody's portfolio going forward, going back to the old staples that could actually do quite well and be potentially recession proof?

Chris Dillow 16:12

I don't like the face value stocks. Because for me, they contain a stock in a high dividend yield, say is very often one of two different types. One type are those that carry lots of recession risk, lots of cyclical risk, like miners and housebuilders.

Traditionally, another type are stocks that have fallen out of favour with the market because the market just thinks they've gone ex growth with like tobacco stocks, utilities, telecoms now, now, that latter type of stock, I think, are often attractive, because what I said earlier that investors can't predict long term earnings growth.

So they're often mistaken not just about what's a growth stock, but about what's an expert's stock. So by all means, look at stocks that are on a high yield, because investors are sceptical about long term.

And as for those cyclical stocks, they are dangerous, they should outperform really well, if we escape recession, or when we come out of recession if we if we've had one, but over the long run, I'm not so sure that they do outperform because what you gain on the upturn, you lose on the downturn, and you can lose everything back in 2007, the likes of Northern Rock and Bradford and Bingley, were on great yields. Now, you wouldn't have done well, holding them and being a value investor.

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Peter Higgins 18:04

Now, I'm going to ask you that we've the conversations about inflation recessions are abound at the moment in the grand scheme of long term successful investing Chris, with regards to funds, ETFs, equities, commodities properties, etc., you've touched on them. And you've already mentioned the yield curve. Is there any other strategies that investors could use?

With regards to assessing whether or not their portfolio the mix in different allocations, we are heading into recession, and therefore, they should probably rein it in? You know, you mentioned the 200 day moving average, you mentioned that the yield curve, is there anything else that they should use to actually traverse and consider actually, I might be overconfident as to what we're facing going forward.

Chris Dillow 18:44

One thing is the dividend yield on the all share as a whole. That's a great predictor of medium term returns. But I think you've got to remember that recessions are largely unpredictable, except by the yield curve, there's very little that predicts recessions systematically. And what I think we've got to do is not try and be too clever.

Remember that there's an awful lot about the future that we just don't know and cannot know. And a lot of people who pretend to know are doing just that they're pretending they're offering you the illusion of knowledge post comfort. What I recommend is simply that you have some kind of balanced portfolio.

Don't worry about the weight too much in it because you can never optimise those. But if you've got some mix of equities, cash gold, if you're a UK based investor, some foreign currency assets are a good idea. Maybe some bonds if you're worried about the short term recession risk, that if you've got a balanced portfolio across most assets, just get on with the rest of your life.

Peter Higgins 19:58

As you're going to be doing now. Regarding your retirement mate, love that, okey dokey. Going to talk now about your stumbling and mumbling blog, the fantastic blog, you've been absolutely prolific on that, as well as being on the Investors Chronicle.

Now, Chris, in one of your recent blogs a couple of months ago, you wrote, everybody says we have an inflation problem, everyone is wrong. What we have is a relative price problem, please, could you expand on this and offer up? If you'd be so kind as to how best the BoE would be guided to deal with this ongoing price problem?

Chris Dillow 20:33

Yeah, what I meant by that is that what we're generally seeing is not inflation, in the sense of all prices and wages going up at the same rate, what we're seeing is very largely a rise in the price of oil, gas and electricity, relative to other things.

What this means is that if you own oil and gas field, you are raking this in, you're getting a bigger sharp share of the economic pie. And somebody therefore has got to get a smaller share of the pie. And inflation is the process whereby this happens, such that inflation is associated with falling real wages, which is what has to happen if oil and gas producers are to get a bigger share of the pie.

What's happening is a redistribution of real resources and real income towards oil and gas producers at the expense of the rest of us. And inflation is as it were, a symptom of this, not the fundamental cause.

Peter Higgins 21:38

Excellent reply. Thank you for that. And now Chris, very cleverly, I love the fact that you wrote this, two days after retirement, you made an amazing confession, my dear friend, you wrote, “Now I'm retired, I can safely make a confession. For years, I've been stealing a living”, please share with us, expand?

Chris Dillow 21:57

What I mean by that is that, for most retail investors, the amount of general financial advice you need is actually very, very small. For the majority of people, if you set up a regular direct debit into a general global tracker fund, and just keep saving for years and years, you'll do okay.

Combination of a general tracker fund plus cash is good enough, might not be perfect, but it will see you through to retirement, you know, and I know he worked for me. So you can finesse that we can point out that there are ways of time in the market.

As we discussed, there are strategies that might beat the market. But those involve a lot of work a lot of faff.

So for a lot of people save early, if you can save regularly, and that's going to be the best you can do. What I mean by that, therefore, is that I could have written just one article, maybe a long one, and just gone away. So the fact that I was writing articles for 25 years, means that there was an awful lot of diminishing returns in there, and maybe negative ones as well to the reader.

Peter Higgins 23:07

I think to interrupt it, because I think many of your readers will disagree with you. And I don't think there's any negative returns on what you shared with them. You were immense in helping them and educating them for those 25 years. So kudos to you, my friend.

Chris Dillow 23:18

Thank you. I like to think that if I haven't educated people, one way I've done so is in a negative sense, and that I've helped them avoid mistakes. And you know, there are two approaches to investing. One is to think of ways that you can make money. The other is to think of ways that will stop you losing it. And I focused a lot on the latter, because I suspect that what is easy to do.

Peter Higgins 23:45

After Preservation is key doesn't matter whether in your 20s or in your 50s 60s or 80s. You know, no one likes losing and you know, we'll all say we learn a lot from mistakes and lose them. Nobody likes it as an experience. And that's why across social media, you never see anyone celebrated for saying, hey, I've made a massive loss. Pershing come out just recently lost billions. Softbank lost billions not being celebrated early.

Chris Dillow 24:09

No. One problem is that we like to think we can learn from our mistakes. And if we're smart, we can, but you need to have sufficient capital with which to reinvest even when you're wiser. And if you've lost a fortune, you might be wiser, but it's not much you can do with the wisdom.

Peter Higgins 24:25

Absolutely, absolutely agree. Very well put. Now, you have written quite a lot, and you've touched on it in numerous articles you've written please tell me if I'm wrong here, Chris, that you're a strong advocate for passive investing. Please. Can you explain your rationale for this? And the strategy that you have and you've pursued on a personal basis?

Chris Dillow 24:45

Yeah, basically, we've got lots and lots of evidence that active management just doesn't work over the long run. Michael Jensen first pointed this out for U.S. funds. Way back in the 60s, Burton Malkiel confirmed and in the UK Financial Conduct Authority did a report on this a few years ago, but they pointed out active management didn't work.

David Blake, at Cass Business School and colleagues has done another report on this. We've got lots of good evidence that over the long run, active investment doesn't work. What complicates that is that some funds don't I'm speaking in the UK here.

Some funds do outperform when small stocks outperform large ones. But most funds underperform when large ones outperform. And that's been especially the case in the last few months. The reason for that is simple. If you're just say you're picking stocks at random, you just stick an amount in, say 10 stocks, if one big stock then rises, the index will be dragged up, but most stocks will underperform. Most fund managers will therefore underperform. And that's what we've seen in the last few months, we've seen the UK index been dragged up, or at least held up by great performance by the likes of shell and AstraZeneca.

Most shares have underperformed the market, therefore, most funds underperformed. So if you're going back active managers, what you need is for large cap stocks, you know, your Shell and AstraZenecas to underperform, and therefore for small caps to outperform. But we haven't really got a good way of predicting whether that will happen.

The upshot of which is I think that you might as well stick your money into a passive fund, therefore saving yourself fees. And also a passive fund has the advantage of in effect, it is a momentum fund for stock rises, it's way fund increases, got the advantage of low cost, plus a little exposure to momentum.

Peter Higgins 26:50

So with that, then with regards to your personal strategy for passive investing, how have you made allocations regarding you know what, I'm going to allocate my ETFs, if that's what you're using, here, they're in there, across this breadth of different strategies going forward, and then just switch off and have a nice walk around Rutland Water and the rest of Rutland? Where have you made your allocations Chris?

Chris Dillow 27:15

So you've got the diversification, almost all my money has been in global ETFs? Or well, the sorts of tracker funds, you know, unit trusts, I have had quite a decent cash weighting for some time with that simply because I was close to my target level of wealth and capital preservation. Sometimes I did follow this Sell in May buy on Halloween strategy, which very often worked. But really, it's been very largely a hands off approach. And one reason for that is that I know my weaknesses.

You know, I might talk about the importance of discipline and avoiding systematic errors. But in my personal life, I'm not at all sure that I myself have the discipline to avoid those mistakes. Warren Buffett said something important when he said that successful investing isn't about IQ.

He said, it's about character, and discipline. And I don't trust myself, and hey, I'm the guy who's retired. So it worked for me.

Peter Higgins 28:19

I love your honesty occurs. And this is a there's a massive overconfidence amongst fund managers, CEOs, private investors. And I often consider why that is the case. And I'm not sure whether that's because we need to be almost overconfident before we start, or we've had a good run and the markets been very kind to us.

You know, I spoke with Mike Dampier, a couple of podcasts ago, and he was saying we've almost been on a 40 year bull run, Peter, and I think this might be the end of it. So there's not been that many people that 1987, 2007/8, the recent investors haven't experienced anything of a recession slash depression where they've had the market stay low decline again and stay low for a considerable number of time. Do you think that's what's going on Chris overconfidence?

Chris Dillow 29:05

Oh, yeah. Overconfidence is enormous, not just in investing it’s in all walks of life. And one reason for this is simply that if a fund manager does well, everyone wants his opinion. So he gets a lot of attention.

The fund manager who does badly gets ignored, it gets sacked ultimately. So there's a bias in our attention towards fund managers who have done well and who are confident because they've done well. That doesn't mean that that'll go into the future.

Also, we've got some evidence from psychologists which show that people are overconfident and simply more likely to get a job than people who are under confident if someone pitches up for an interview and says, well, I don't really know I'm not sure about that. They're less likely to get the job than somebody who is far more fluent, far more confident, even if their actual knowledge base is the side.

Peter Higgins 30:01

Very, very true that touches nicely to the point I'm going to make here, Chris Chris since Black Monday, nearly 35 years ago, we've seen in recent years the greatest and fastest growth in newly minted millionaires and billionaires. However, you wrote in your brilliant stumbling and mumbling blog, some capitalists want a solution to the cost of living crisis, but not because of morality, but self interest. Despite the wealth of such capitalists, it's often appears that some of these individuals are seeking the attainment and status of respect. Chris, are we nearing the dawn where the highest currency for such capitalist are and is respect?

Chris Dillow 30:40

Oh, yeah. Yeah, I mean, this is Maslow's hierarchy of needs. Once you're affluent enough to afford everything you want, you want things other than material goods, you know, you want ego gratification, respect and acclaim of others. But I think capitalists have other motives for wanting some solution to the cost of living crisis. And that's their own simple self interest.

Quite simply, if people are spending all their money on the gas bill, they have nothing to spend elsewhere. And that means that if you're a retailer, you're struggling, a solution to the customer living crisis in the way of helping the poor.

So I've helped in Tesco is even a way of helping utility companies, because people are going to be able to afford their bills. Occasionally, you know, the interests of workers and the interests of capitalists coincide. And the cost of living crisis is one such example.

Peter Higgins 31:41

And unfortunately, it's going to get worse, I think we've seen that from the pandemic, Chris, I've working and support and volunteer in numerous charities in the community around Leicestershire, what I've found, historically, the near 40 years I've worked in the community, is the fact that if you leave anyone behind, you leave everyone behind, because it in fact, impairs and impacts the rest of society. And what we actually need is these millionaires and billionaires to actually consider everyone and not just themselves. Instead of seeking respect, they should go out there and actually do more.

You know, we see Bono, you know, doing all manner of different things. But actually, what he's seeking is respect is already wealthy.

Chris Dillow 32:18

Yeah exactly. But also, it's not. It's not just things like ego gratification and respect that these guys can get. It's simply higher profits. In some cases, if you increase the level of Universal Credit, you're increasing the revenues of Tesco.

Peter Higgins 32:34

So with this massive trend, one of the biggest trends at the moment, and lots of debate going on, and billions being poured into ESG, environmental investing, ethical investing, etc, etc. And there was a book written a little while ago by and I've got it in front of me here, John McKay, and Raj Sisodia, called Conscious Capital. Now, what are your thoughts on this idea of conscious capital? Or conscious capitalism, per se, Chris?

Chris Dillow 33:02

I'm really sceptical. I'm afraid for quite a few companies ESG. There's a lot of greenwashing going on, there's a lot of people just putting on a front because it's the fashionable thing to do. Of course, there are some companies that are doing good work to help address the climate crisis. But to a very large extent, these guys are going along with what's fashionable. They're trying to preserve their reputation. And it is very, very hard, I think, to be a large company, especially and remain ethical. It depends what your ethics are.

But it is really, really difficult to survive as a company if you are paying all your workers and suppliers very well, if you are dealing with let's face it, some very unsavoury regimes overseas, so incredibly difficult to behave ethically, I'm not sure we should even expect that from all businesses.

Peter Higgins 34:05

I agree that we shouldn't expect some from every business, but I think we should certain businesses should think far more ethically than they have done. You know, we see major fines going for almost every industry where they've not looked after their products, their communities around them, where they've mined, etc, etc. So what more could be done, I think, and hopefully then go to the bottom line to the poorest within the areas that these companies are as well.

So, you know, we'll have to wait and see on that. But I want to change it up slightly here, if I may. And one of the major trends at the moment, and has been for the few years has been the Netflix effect, subscription streaming economies per se, and you've got Netflix, Apple, Amazon, Spotify, Disney Plus, etc.

To name just a handful. And we saw, I'm not sure if was last week or the week before Netflix essentially say actually our subscription growth has slowed. Other people have their subscription basis have declined. Now, is this subscription model facing its first test a downturn? And if so how should investors position themselves regarding that sort of streaming model, and economy per se.

Chris Dillow 35:15

This is a really difficult issue. Because what we're in here is the so called attention economy. If you think of Netflix's competition, it's not just other streaming services, like Apple and Amazon. It's anything we could be doing, rather than watching Netflix, it's listening to Spotify, it’s watching the BBC, it’s going down the pub viewed in that sense, it's a very, very competitive business.

And one thing we know from Warren Buffett is that competitive businesses might be great for the customer, but they're not so good for the shareholder. And one difficulty here as you can fall into a negative spiral, not just from the point of view of investors, you know, selling because other people are selling, but as your subscriptions decline, it's harder to invest in new programming, therefore, your offering is worse, therefore, you lose subscribers, therefore, you can't invest in employment, therefore, you lose more subscribers, and you just get that death spiral.

Now, Netflix, touchwood is a long way from that, you know, but it is, it is a danger. And if investors start attaching a higher probability to it than they do now, then there's an awful lot more downside in the price. These are really dangerous businesses to be an equity investor in.

Peter Higgins 36:39

Very, very, very good shout there. I mean, we all recall the fact that the company the dinosaur that was I didn't know at the time, Blockbusters could have bought Netflix for peanuts. And that's gone. Now the question is, where does Netflix go? If it doesn't carry on growing? Does that become the next dinosaur? You know, and his replacement company? We may not even know the name of it yet?

Chris Dillow 37:00

Oh, for sure. You know, like I say, turn the clock back. 30 years, look at what were the biggest companies back then.

They weren't Amazon, they weren't Netflix bunch of stuff that young people had never heard of. Here, there is something that people tend to under appreciate that. What's good for customers isn't necessarily good for investors. What's good for customers is that we get lots of competition, we get lots of new startups, we get established monopolies being challenged. That's great for customers. Absolutely terrible for shareholders.

Peter Higgins 37:33

Very good. I love that, Chris, thank you ever so much. Now I'm conscious of the time so I'm going ask you a couple of questions. But I'm going to round them all into one now.

You've hit retirement, Chris, you've achieved financial freedom. Everybody wants to be in your shoes right now. So everyone's jealous. So just bear that in mind. Right? Are you going to fill your time enjoy your time regarding the beautiful spaces that you got around, Rutland, You love gardening, you're planning to learn Italian I hear. You love your music, so, what are you planning to do? Now you've got your time to yourself, and you're obviously going to carry on with your blog.

Chris Dillow 38:05

I'm going to carry on blogging, I'm going to read a lot more about economics. And so I'm not being quite as stupid in retirement as I have been at work. Yeah, there's learning Italian there's playing more guitar learning music theory.

I'm going for long walks around Rutland Water. I'm going to do more cycling you know, I hope to be a lot fitter in retirement than I was in work. But the thing that the strange thing about Rutland he's got this weird geological feature, which is that whenever I cycle anywhere, it’s uphill from my house to where I'm going and it’s uphill on the way back as well. You know, so I'm going to try and combat that.

Peter Higgins 38:45

Yes, the only the only flat bits I could find around Rutland, Chris was when I was based at RAF Cottesmore and around the Oakham side of it. You're in the valley there. You know, it's not many hills, apart from the road from Oakham back up to RAF Cottesmore is more so beautiful part of the world.

Chris Dillow 39:01

That's quite a nasty Hill.

Peter Higgins 39:03

It's a bit of hill. Yeah. Bit of a hill, Chris. It's been an absolute pleasure, we could carry on talking for another hour, I suspect. And I'd love to join you at some point for a walk around Rutland Water. But I want to thank you for taking the time and sharing your insights with our Investing Matters listeners, I just want to wish you ever so well, for the many, many years of retirement that you have going ahead. And I know from everybody that you've taught, educated, enabled to make less mistakes, and preserve the capital, just you know, lots of gratitude to you. And wish you all the very best going forward my dear friend.

Chris Dillow 39:33

Thank you. Thank you. I'm not disappearing.

Peter Higgins 39:37

You won’t be disappearing and hopefully I'll get you back and speak to you again. In the future. Your blog will be there. And lots of people going to be enticing you out of retirement to come and do things. I know you're going to be sought after.

Chris Dillow 39:47

Thank you. You're very Kind.

Peter Higgins 39:50

All right, take care, Chris. God bless and thanks again.

LSE 40:01

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