"It's not investing, it's a game": Anton Tagliaferro on what's wrong in today's market

After more than four decades navigating booms, busts and everything in between, Anton Tagliaferro believes today's market is behaving unlike any other period in his career.

The founder of Investors Mutual and now Investment Director at Fundamental Investment Management isn't worried about a recession, tariffs or the next interest rate move. He's worried about something much deeper: the way markets themselves are functioning.

Tagliaferro believes passive investing, quant strategies and momentum-driven trading have fundamentally altered price discovery.

"I saw a Warren Buffett interview the other day and he said the stock market is like a church with a casino attached. And he said a lot of the people are in the casino part of the complex - that's the mentality at the moment," he says.

His conclusion is even more pointed.

"It's not investing, it's a game."

While he believes value investing has endured one of its toughest periods in decades, he also believes markets are cyclical - and eventually valuation discipline will return.

You can watch our full interview above, or read the key takeaways from the discussion below.

Passive investing has changed the market

Tagliaferro doesn't dismiss passive investing altogether. He believes its popularity has created unintended consequences.

"I saw a survey recently from a New York trading desk of their daily trades and something like 40% of their flows were index funds, about another 45% were quant and only 15% were fundamental investors buying shares."

To him, that represents a massive shift in how markets allocate capital.

Rather than individual investors assessing businesses on their intrinsic value, money increasingly flows automatically into companies because they're members of an index or because momentum strategies dictate they should be bought.

The result, he argues, is an increasingly concentrated market.

"If you look at the Australian ASX 200, 10 stocks are almost 50% of the index. If you look at the S&P 500... the top 10 stocks are almost 40% of the index."

Value managers have struggled in that environment, but Tagliaferro believes investors are becoming too comfortable simply buying indices.

"There has to be a bit more of a balance between fundamental investing and all these other new types of investing."

Why he's gone back to small caps

After building IML into one of Australia's best-known value investing firms, Tagliaferro could have launched almost any strategy. Instead, he chose small caps because he believes they're one of the few areas of the market where valuation still has room to matter.

"If you look at the small cap index, it's a much more diversified index ... there are just more opportunities" he says.

That gives active investors a wider opportunity set beyond the usual big-brand suspects. It is also less researched, creating room for genuine stock picking.

He points to Count Financial (ASX: CUP), COG Financial (ASX: COG) and Mayne Pharma (ASX: MYX) as examples of stocks Fundamental is backing.

"Count Financial is one which looks cheap, well-managed, growing by acquisition. That looks quite good. COG Financial looks interesting. Mayne Pharma looks interesting. It's trading well below our estimated sum of the parts," Tagliaferro says.

His point is not that one sector is screamingly cheap. It is that small caps remain a stock-by-stock market.

"We're going through every stock and picking the ones we think look like good value, where the management is decent and where we think the outlook for the next two to three years looks good."

AI feels remarkably familiar

Despite the excitement surrounding artificial intelligence, Tagliaferro sees strong parallels with another technological revolution: the internet.

He recalls the late 1990s, when investors piled into anything with an internet story. A handful of companies went on to become extraordinary businesses. Many others disappeared.

The comparison isn't that AI is another bubble. Rather, it's that investors are once again trying to predict the winners before the technology has fully matured.

"Everybody was very excited about a new technology that was apparent that obviously no one really had worked out yet how it was going to be used, but people knew it was probably going to change things in a big way. And it did in some sectors, not all."

He notes that even the internet took years to transform consumer behaviour. Shopping online and searching for property online weren't adopted overnight, but over time they created enormous opportunities for companies such as Amazon and REA Group.

Today, hyperscalers are spending hundreds of billions of dollars on AI infrastructure, while semiconductor companies enjoy extraordinary demand and pricing power. But Tagliaferro cautions against assuming today's winners will dominate indefinitely.

"Is that going to go on forever? Probably not. There's going to be a big boom and then at some stage it'll come off."

Valuation always matters in the end

Markets evolve, technologies change and new investing styles emerge.

But Tagliaferro believes one principle has survived every market cycle: valuation.

"I think there has to be some sort of correction at some point. As I said, we have had this big move towards momentum investing, buying stocks on the next upgrade."

Today, he says, investors are increasingly rewarded for identifying the next earnings surprise rather than paying a sensible price for a business.

"At the moment it's irrelevant what the valuation is. As long as it beats the earnings, it tends to go up. But at the end of the day, valuation is a critical function of share prices," he says.

It's one of the reasons Tagliaferro returned to funds management after stepping away from Investors Mutual. He believes periods when valuation is ignored often create the best opportunities for patient investors.

He isn't trying to predict exactly when sentiment will turn, but it will happen eventually.

"Valuation discipline will become a very big part of investing again."