Outperforming the market: Why the US is still an attractive investment destination

In the latest episode of Stocks Neat, Co-Portfolio Manager Harvey Migotti joins me as we delve into the world of American investing. Harvey shares his insights on the critical lessons learnt from investing in the US market over his career, including the high liquidity and capital allocation priorities and how competitive the investor landscape is over there.

We explore why the US economy has outperformed other markets over time, with $100 invested in the S&P 500 in 1990 worth about $2,300 today versus only $510 for the same amount invested in an index of the largest rich-world stocks excluding American equities over the same period.

Whilst sipping on a glass of Starwood Nova single malt whisky, we wrap up the podcast discussing all the factors contributing to making the US one of the most dynamic, productive and attractive markets to investors.

There’s this idea that you find a growing economy and the stock market will follow. It’s not necessarily true, but it has been true that the US economy has been one of the better-performing developed markets and the stock market has followed.

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[0:00:39] SJ: Hello, and welcome to Episode 17 of Stocks Neat, Forger Funds podcast where we try some whiskies from around the world and talk about the world of investing. Today, I’m joined by a past guest of ours, Forager’s International Fund Co-Portfolio Manager, Harvey Migotti, sitting in the hot seat with me. Hi, Harvey. How are you?

[0:01:00] HM: How’s it going? Yes, very good. Thanks.

[0:01:01] SJ: Just back from a trip overseas, work, and a bit of travel as well.

[0:01:05] HM: Yes. Yes.

[0:01:06] SJ: How was it back in the air?

[0:01:08] HM: It was actually tedious, lots of long-haul flights all compressed into a short period of time. Went to the UK for a bit, then across the US to various conferences and company meetings.

[0:01:18] SJ: It’s quite a funny story. Harvey’s flight was – what was it? Three or four thousand dollars cheaper to fly LA, London, back to LA, back to Sydney, then it would have been just to fly to LA and return.

[0:01:30] HM: Yes. It’s bizarre, isn’t it? This weird little price deals if you just look for them.

[0:01:35] SJ: Back now, and quick trip to Japan as well.

[0:01:37] HM: Yes. Yes. A little hold in Japan as well. Lovely place, cherry blossoms, managed to catch them, very lucky on that front. So it was great. I love the country, food is fantastic. I feel like I need a month of recovery time now after eating all that wagyu, and sushi, and everything else.

[0:01:53] SJ: Yes, fantastic place. Probably my favorite place in the world to go on a holiday because it’s one of the last remaining places I think where you can go that’s completely, and utterly different, and very proud of their differences, and very unique, but fun, and safe, and comfortable experience. Gareth’s sick this week, so he couldn’t join us. I had a bit of that going around the office as well. Anyway, let’s jump into it.

We’re going to talk about one of the places you’ve just been today, and that is America. There’s a very interesting piece in this week’s Economist, I’ll post it in the show notes, talking about the economic success of America over the past 20 to 30 years, and the stock market success as well. It has been far and away the best of the developed world economies. We’re going to talk a little bit about the reason why that’s the case. You listen to politicians, and this is true around the world, but it’s particularly true in the US at the moment, and the places go into hell in a handbasket and everything’s terrible.

Then, it’s interesting reading some of the stats from the economist income per person in America, 24% higher than in Western Europe in 1990. Today, it’s 30% higher. It was 17% higher than Japan in 1990. Today, 54% higher on a per-person basis than Japan. In our world, a $100 invested in the S&P 500, a US index of stocks would be worth $2,300 today. So you’ve made 23 times your money over that 33-year period. If you’d invested in the rest of the world without America, so took it out of that index, you’d have just $510. We’ll talk about this later in the podcast. There’s talk about whether it is more expensive than the rest of the world now. But the magnitude of that differences is quite extraordinary.

You’ve lived in the US, you’ve lived in Europe, what are some of the broad differences that you see from an investing perspective? You’ve bought and owned companies in both parts of the world. What are some of the differences you’ve seen?

[0:03:48] HM: Yes. Well, I mean, the starting point is that there’s more things that are the same than that are different, I suppose. If you find a good business that performs better than its competitors, or has a strong moat, or whatever else, you will make money, whether you do it in Europe, whether you do in the US. But all other things being equal, and this is my personal experience. So valuation, and markets, et cetera, similar type businesses, I’d more often rather than not own a US business over a European one. I mean, there are a number of reasons for that. The starting point is, you have much higher liquidity for the same-sized company, really important. You often get small caps trading, $10 million a day. In Europe, that might be 200,000. It gets much harder to deploy significant amounts of money.

[0:04:29] SJ: Do you know where that liquidity comes from? Because you added up in some of these companies and the whole registers turning over the course of a year. You’re buying the number of shares that a company has outstanding trade across the course of the year. Is it the same people trading over and over again, or is that the typical holding period?

[0:04:45] HM: Probably in some instances, but yes, it’s a very active trading culture. There’s a lot of hedge fund money. There’s a lot of ETFs and whatnot. You do get a lot of trading and often, it probably is people just exchanging between one another. Millennials are selling to someone else. Three minutes later, they’re selling it back. For sure, that’s a part of it. But there are other reasons, it’s not just liquidity. I mean, capital allocation is a huge priority over there in the US. I don’t think you get the same focus on it across abroad or amount of European stocks. There are certain stocks that have a strong focus on them. Activist campaigns there, we see them all the time, and they tend to be more successful when businesses are being mismanaged. It’s easier to dislocate management teams there than it is in parts of Europe, I’d say.

I find that management quality is generally higher, looking across the broader market. Obviously, there’s exceptions, Safran, Airbus, amazing, best-in-class management teams, better than many US aerospace names. But broadly, that’s what I wanted to say.

[0:05:46] SJ: Sometimes though, as European well-managed companies also come with a longer horizon, I would say, than a lot of American companies in terms of – we’re making an investment here that we’re very confident will pay off over 10, 15 or 20 years. Whereas, there is more, I think, ruthlessness about the management in America. But it’s also more focused on – we’ve got to hit the next quarter or six months earnings, which is – it’s not necessarily a bad thing that lethargy can be very painful in Europe, and people are not willing to make those investments. And I think there are some positives as well to that. That long-term focus of some of those well-run businesses in Europe.

[0:06:23] HM: Yeah, definitely, 100%. You touched upon kind of quarterly, but the quarterly reporting, I think is an important part. Many places in Europe have semiannual reporting with some sort of kind of quarterly sales releases, or just general high-level business updates. In the US, you have filings every quarter, you’ll get a lot more data points all the time, and you have a better sense of how the business is doing.

[0:06:42] SJ: Gareth and I have got a meeting booked in on the second of May, for a London-listed company that we own that’s reporting its 2022 financial results. They come out on the second of May.

[0:06:53] HM: It’s ridiculous sometimes. At least in US, I think you have some finite time limits to doing this. If they slide, investors punish your stock, if you miss them. But there’s other stuff like regulatory risks in Europe can be high. I mean, look at the EU moves against big tech, for example. There’s numerous other spaces where regulators have gotten more involved in things in Europe and whatnot. From that perspective, obviously, the Biden regime is very different from a Trump regime, which was – there was a lot of deregulation. But broadly speaking, I think US has a little bit less of that than Europe.

This is a very important part, I think. The US has a large, relatively homogeneous market. If you’re successful in one part of the US – I know you launched a chain of restaurants in California, you can generally very easily expand to other parts of the country. Like, yes, it’s different culturally in the Southwest, and whatever, and Texas is different from California and New York. But broadly speaking, it’s the same language, and the same kind of type of population. Europe is much more difficult, obviously. You have something that’s worked well in Germany may not work so well in the Nordics or France. It’s not just the cultural differences, there’s a language barrier there, obviously, right? You put all these things together and all other things being equal, I find it often, not always, often easier to US business.

[0:08:12] SJ: Yes. I think that last point is especially true at that small to mid-cap end of the market where we like to invest. We find a lot of companies that have got a good 10-year track record. So you’ve got lots of evidence, but also just a really nice, long runway ahead of them to keep expanding across states, and geographical markets, and just doing exactly the same thing that they are doing. They’ve got that advantage, they’ve got scale, but they keep gobbling up. Businesses and market share, we wrote up that Genesis International for our last quarterly report, which people can download online if they want. But this is a pretty niche, specialized business that does infrastructure and building for self-storage REITs. That’s their whole business.

It’s really only in America that you could have a billion-dollar company, that that is all you do, is go around building self-storage facilities as a business. That’s still has plenty of runway ahead of it as well as they take more and more of that market. I think, especially at that smaller end, where you find something that’s a successful high-quality business, just the capacity for it to grow substantially is significant.

[0:09:17] HM: Yeah, 100%.

[0:09:18] SJ: I do think, though, the other aspect of the dynamism and the competitiveness is that the stock market itself is a very competitive place as well. There are lots of people running around trying to do what we’re doing. Every stock you look at, even when we find things that don’t have a particularly significant amount of broker coverage, there’s still a lot of turnover in the stock. You jump on Twitter, there’s a lot of people talking about most businesses. That’s the tradeoff here, is that that dynamism is true in the stock market as well, and makes for a very competitive market in terms of finding opportunities. I have found that that leads to the time horizons being quite short, and the market being pretty good at pricing things well, well, well, before they haven’t got this.

I’ve talked about it in some of our stuff before, we’re talking about this concept of the Schrödinger’s cat, which is a quantum theory concept. He was trying to explain quantum theory by talking about how you can’t know where a particle is, and also know how fast it’s moving at the same time. He’s talking about just opening a box, and you didn’t know whether the cat was dead or alive until you open the box. Once it’s happened, it’s happened. I think there’s a lot of that in US stock markets as well, that you can’t sit there and wait for things to become obvious and still make money out of it. That is true globally. It’s true here in Australia as well. But in Australia, in Europe, it’s often slower than I found it to be in the US. The market is well, well ahead of cycles. We’ve had some pretty good examples of that recently.

[0:10:50] HM: Yes. I think starting point, maybe we discussed this back in December of being an opportunity, the homebuilders and building material names. It’s funny, you look back at 2007, before the GFC. A lot of these names actually troughed in 2007, prior to the recession actually starting. The worst stuff happening. A lot of the stocks actually hit their lows at absolute levels. We saw that over the past 12 months. IBP, which we own, huge trading in the stock back into the start of 2020. All in the first quarter.

[0:11:20] SJ: 2022, you mean.

[0:11:21] HM: 2022, sorry. All happened in the first quarter. This was before any sort of weakness or worse in economic data and housing. It’s all forward-looking. It sounds obvious, but I think you get less of that. Like you said, in Europe, people kind of do wait to see the data slow and companies to start, some are cautious, then you can look down. But what we saw in IBP is, this was followed by a 50% recovery at the back end of last year and into the start of this year. A lot of housing stocks have done tremendously well. They’ve rallied significantly. This is because the market saw that things weren’t quite as bad as expected, perhaps, and some of the more pessimistic people out there thought, and they quickly repriced the valuations of these things. But if you look at, for example, earnings for this name in particular. It’s been consistent for 18 months. What they achieved and what they’re guiding towards at the moment is bang in line with what people expected 12 to 18 months ago.

Nothing’s changed from that perspective, but the perception of the risk or the markets has changed.

[0:12:19] SJ: It’s been true across the sector, I think, even in the businesses that the suffering is coming and they have guided to it. The stock price has started going up, as soon as people can see that there might be another side to this, that 18 months down the track, I can see that this company is going to be reporting a more robust pipeline. They’ll start buying the stock that far out. I do think that, again, it’s a competitive market everywhere. I do just think it’s slower here in Australia that people want to see the pain behind them before they buy the stock. Whereas, it’s so quick, I think to price that in in the US. That if you sit there and wait for signs of things to be positive, then you’re going to miss your chance.

[0:13:00] HM: Yes, I know, 100%. That’s why you have to take a more long-term view. We did that with IBP, we did that with Ferguson, which we added to during that weakness that we saw prior to Q4, and the stocks have done quite well since.

[0:13:12] SJ: Yes, and we were really nervous about IBP. We had the conversation a lot about at what point in the cycle are we buying this. I think it’s been a really important reiteration of something that we know that sitting here in Sydney on the opposite side of the world. We’re not going to win the timing game, right?

[0:13:27] HM: No.

[0:13:28] SJ: Great business, really good long-term prospects if we get a price that looks attractive relative to those long-term prospects, I think it’s our job to get out there and buy those stocks, and not try and get that timing game because it’s so dangerous. There’s a lot of people I’m sure that like that business. Know the management team will want to own it, and it’s still sitting there saying –

[0:13:47] HM: I missed it.

[0:13:47] SJ: Yeah, exactly.

[0:13:48] HM: Hundred percent. I mean, we saw the same thing with the semi-companies, right? These stocks bottomed in October of 22, a few months ago. This is just as – finally, you had some earnings cuts starting to come through the China semiconductor equipment ban to China, and some softening of the macro. You just started to see, and the stocks had derated, gone down a lot into this, into this happening. As soon as these cuts started coming through, they bounced about 50% since then. The market there reprices things quickly and rerates these names heavily during these periods. But totally makes sense why this happens, right?

I mean, the economic value of these businesses over the long-term moves much less than near-term cyclical volatility, right? The US just, I don’t know, it seems to me better up repricing these things quickly than certain parts of Europe, where –

[0:14:36] SJ: It’s interesting, because it still sells off heavily at the start, even though everyone knows these businesses are going to go through cycles, right? If it was purely long-term forward-looking then you wouldn’t get the dip at all. People say, “Well, it’s a cyclical industry.”

[0:14:48] HM: But that’s the opportunity for people like us, right?

[0:14:50] SJ: It just happened earlier. Both sides have an earlier, the fall happens earlier, and the recovery happens earlier. But the magnitude of it’s probably the same sort of short-term you see around the world.

[0:14:59] HM: Yes, definitely. That’s what creates these opportunities, these specifications. We’re actually seeing this fear and panic and in other spaces, obviously, retail and consumer discretionary names, they’ve been whacked ever in the world. It’s obvious why markets derating them significantly as expectations about falling margins and consumers being hit by higher interest rates and inflation for food, and water, and energy price and whatever. It’s all very obvious in the next 12 months, are tough, right? There’s no doubt that industry has seen excess profits over the past two years. Many retailers actually were hitting margins they haven’t seen in decades since COVID, since the lockdown stopped, and whatever. These aggressive market moves actually provide one with an opportunity, if you’re looking in the right space, and no other business are doing the work in the business and getting – trying to build some edge there.

[0:15:48] SJ: I think, again, if we invest in the sector, we’re just going to have to hold them through what’s going to be a difficult year. It’s obvious that it’s going to be a difficult year, the consumers are struggling, try and find the businesses with strong balance sheets. You know they’re going to survive, and the market price here, like everywhere else is going to recover a long time before the business profitability does.

[0:16:08] HM: And we’re doing some work on an interesting stock at the moment in this space. It’s a small cap, but it’s very interesting. The market’s derated to kind of historical lows at the moment, and this could be a good opportunity. Keep your eyes open. We might be writing about it at some point soon over the next few months.

[0:16:25] SJ: Exactly. Again, I think like IBP, for us, focusing on the structural long-term winners is the easier way to play this, I think as you can be confident that the businesses is going to navigate through the difficult environment to start with. Then, preferably come out the other side stronger and better than it was before.

[0:17:28] SJ: Okay. Let’s crack this whiskey open. We are drinking today an Ausie whiskey, distilled down in Melbourne, in Victoria. It’s called the Starwood Nova. This whisky has actually won quite a few whiskey awards, including some big ones in America recently. So it become very, very popular. It’s just cost me $80 a bottle for this particular version. They’ve got three or four different whiskies. This one I think is the second cheapest. They’ve got a cheaper one than this as well.

The unique piece about this is, it’s distilled in a wine barrel. Most are either new oak barrels or sherry casks you see a lot whiskey made out of so. This one’s a red wine barrel. I’ll open it up and pour your whiskey. Lots of good Australian whiskies out there on the market. Now, you mentioned one earlier, it was actually on the shelf downstairs, was 160 bucks.

[0:18:16] HM: Was it? Yes.

[0:18:16] SJ: What’s the name of it?

[0:18:17] HM: Coastal Stone.

[0:18:18] SJ: Coastal Stone.

[0:18:19] HM: Yeah, it’s a little brewery in Manly. Absolutely phenomenal. That’s probably not something you want to be drinking every day, but I’ve got a few bottles over the past kind of year of the different types. My personal favorite is the Pinot on the sherry casks. It’s amazing. For anyone in Sydney, it’s really well worth a trip up there. Yes, they have a nice tasting, where you get more than your bang for the buck, and also a 10% or 20% discount on the bottles after the tasting. You can go up there and stock up.

[0:18:44] SJ: Get up there and watch the Sea Eagles next door at Brookvale oval in the NRL as well. So you take a smell of this, I think you can smell the red wine. I would say almost zero on the burn front there. I know we say this a lot, but not someone that –

[0:18:57] HM: Don’t say smooth.

[0:18:59] SJ: Not someone that loves getting into your whiskey. Again, this is not one that’s going to make you feel horrible when you’re drink it.

[0:19:04] HM: I might have to take this one home.

[0:19:06] SJ: Definitely that red wine taste in it, which I think brings that sort of cherry taste or whiskey. And one for the beginners to really enjoy, I think if you’re getting a whiskey.

[0:19:15] HM: I’ve actually been quite impressed with the quality of some of the Australian whisky houses. I mean, Tasmania has a bunch of great ones. Obviously, Lark is world-famous now. But you mentioned the Coastal Zone, which you happen to find downstairs. Theirs is popping up and they’re amazing quality for I think the price, relative to what you would pay I think for a big brand Japanese or a Scottish one.

[0:19:39] SJ: I think economically, I mean, they don’t tell you on the bottle here how long they’ve had to age this for. I’d assume that means, it’s not 10 or 12 years or something.

[0:19:46] HM: No, it isn’t, because actually, this is funny, and you’ll get this if you do the little Coastal Stone tour up there.

[0:19:52] SJ: Yeah. All the people who have donated it for a long time will tell you that you don’t need to age them for a long time.

[0:19:55] HM: Well, the reason is actually the Aussie climate.

[0:19:55] SJ: Yes, they said the Melbourne one as well.

[0:20:00] HM: Yes. It’s the climate here that’s different from Scotland, and age there matters. While here, the evaporation process within the bottle happens at a much quicker rate.

[0:20:08] SJ: Because it’s hotter or –?

[0:20:08] HM: Because it’s warmer, yes, through the year and everything. I think the community plays into and whatever else. I mean, I’m not an expert, but you can read up about it, why actually it’s equivalent to 12-year Scottish whiskey and a couple of years here. It’s the climate and everything else. So yes, you could do that tour and learn a bit about it. I’ve totally forgotten though exactly what they mentioned, but that’s the reason. Actually, if they age it for 12, or eight years or whatever here, too much would have evaporated. You can’t.

[0:20:33] SJ: And you’d have 80% alcohol or something like that.

[0:20:35] HM: Yes, that’s right.

[0:20:37] SJ: All right. The last section of this podcast. I actually just want to spend a bit of time talking about the economy rather than the stock market. The distinction between those two things is really important. There have been Chinese stock market being probably the best example of economies that have grown a lot, while nobody made any money investing in the stock market. It’s probably still true today. I know five years ago, you’d had 20 years of 10% economic growth in China and the stock market had returned to zero over that 20-year period.

There’s this idea that you find the growing economy and the stock market will follow. It’s not necessarily true, but it has been true that the US economy has been one of the better-performing developed markets and the stock market has followed. I wanted to spend some of the last part of this podcast just talking about the underlying structural reasons why the economy has performed so well.

Before we kick off on that, I mean, you’ve spent time there. There are lots of negatives about living in America. There are lots of negatives about the economy, and the dispersion in incomes and wealth is crazy. The level of poverty is very high. The life expectancy is actually now five years lower if you’re born in the US than it is if you’re born in Europe. There’s plenty of social reasons why you might want less social, less economic growth, and more social cohesion in your economy. But from a pure numbers perspective, some of those things that make it a very, very harsh place have made it quite a successful economy as well.

A couple of things that I was really surprised about, because if you’d asked me, I would have said it was the other way around that people are, the education system is better in Europe. That article in The Economist, America spends roughly 37% more per pupil in education than the average member of the OECD, club of sort of 20 rich countries around the world. When it comes to post-secondary students, it spends twice the average. Now, at a high school level, they’re getting low scores on average for 15-year-olds when you do global tests. But the wealthy people and the people that make it to university are doing extraordinarily well. Roughly, 34% of Americans have completed tertiary education. I think it’s only Singapore in the world has a higher rate of people that have got high-level education. You’ve probably seen a lot more of this than me, but the quality of the education is actually really, really, really good if you live in the right area and you’ve got money.

[0:22:53] HM: I mean, definitely. Just to mention here, I’m actually not American despite the accent. I’ve spent a tremendous amount of time there because my family moved there 10 years ago, so I always visit. But I’ve actually never lived there or studied there. What I will say is that, it obviously like factually, if you look at all the rankings, this stuff has many of the best universities in the world. We know that in some of the greatest minds go to teach there. They obviously earn a lot more there than they do in many other countries as well. But yes, if you live in good areas, even the public system can be phenomenal there. Parts of Silicon Valley are good examples of that and so forth.

I was also surprised by this article, actually, because you think about the US and you think, “Oh God, terrible school system, terrible health care system, unless you have money, high crime rates, and whatnot.” Yes, this came as a surprise. Then actually, when you distill it down and ponder. When you cut it, yeah, the people that do make it up there, they’re some of the smartest minds out there, right?

[0:23:47] SJ: We’ve been talking about your preference for the general standard of management in the US. If we think about where that comes from, it comes from generally better education and a system that is focused on that

[0:23:58] HM: Hundred percent. I mean, there’s more to that than data. I think if you look at the top management teams in the world, in the US, they actually often command way higher salaries than the European counterparts. There is a strong emphasis on stock ownership through options or grants. We talked about a service comp quite a bit over the past few months, but it is pervasive to kind of the broader industry and not just the tech companies. It’s a decent chunk of your remuneration. This tends to lead to more alignment, and often a harder-working staff bench, so to speak.

I was looking – these articles had an interesting point. This think tank, the conference board founded between 1990 and 2022. American labor productivity increased by 67%, compared to kind of the low 50s in Europe and Japan. An American worker actually puts on average 1800 hours per year. That’s 200 more hours than your average European worker.

[0:24:52] SJ: When I worked at Vienna, 1pm on a Friday afternoon, everyone was gone. The office was empty. So there’s your four hours, just the one to five.

[0:25:00] HM: Try finding someone in August in Europe, if you’re finding an employee there, it doesn’t happen.

[0:25:04] SJ: Again, maybe you’d rather live in that world and the American one, but I think it does explain some of the dynamism of the economy there.

[0:25:12] HM: Yeah. I mean, there are other points too. You look at R&D spending across public and private sectors in the US, and it’s risen to 3.5% of GDP, which is well ahead of most other developed countries. America share of patents moved from 19% to 22% over the past 15 years. I think that’s an incredible statistic, because that is, by definition, innovation. I mean, part of that is because there’s so much tech there. It tends to spend a lot of R&D and results that has a lot of patents. But it is a symbol of strength there in parts of –

[0:25:41] SJ: I think, again, back to a very, very well-funded higher education system that puts a lot of money into this stuff as well, without necessarily even focusing on a return. There’s a research component to the R&D that happens over here that doesn’t happen in a lot of other places too.

[0:25:53] HM: Yes, 100%. There’s pros and cons to this. There’s social cons and economic pros. But hiring and firing people is much easier in the US, given the labor laws there and relative lack of unions compared to places like Germany.

[0:26:08] SJ: There’s a guy on Twitter today who just been fired from Meta, having just got a job at Meta after being fired from Twitter. In the past six months, he’s been fired twice. I shouldn’t laugh about that, but he was having a laugh about it on Twitter. But at the same time, I was reading an article about both Google and Facebook, still negotiating now on the layoffs that they’d announced six months ago in Europe. And expectation being that it will be at least a year until they could actually lay anyone off in those markets, while they did all of those negotiations that went through that.

If you think about it, again, I’m not arguing for which of those is right or wrong from a social perspective. But those very, very bright people in the US have left quite clearly unproductive jobs. I mean, in hindsight, those businesses are running just fine with 10%, 15% less people. They’re starting businesses, they’re doing new things, they’re working for other companies where they’re much more productive. That adds up to an economy that is far more dynamic and productive. I actually think it’s one of the huge differences that you see in terms of an economy being able to adapt, and grow, and take advantage of the opportunities that come along as a mobile workforce.

[0:27:21] HM: It’s 100% spot on. It’s really interesting. There’s a bit of a kind of, okay, this sucks, but let’s get on with the mentality there. If you look at people in the US, again, another part of this economist article, it’s really interesting. But the people in the US have a strong willingness and ability to get up and go, wherever the opportunities lie. I found this that incredible. One in four Americans had moved from one city within the country to another over the past five years alone, that number is 10%, one in 10 in other developed countries.

Five million people in the US move between different states each year. They generally tend to be the more educated part of the population, because they’re heading presumably for the most productive and lucrative jobs, or where the opportunities lie. That’s amazing. It’s not so easy for someone in in Germany to just pack their bags and move to Italy, for example. The language barriers alone in Europe make it difficult. But yes, it’s the willingness to do that, and everything else, it actually makes everything much more fluid. It actually allows you to quickly, whether you start in Austin, Texas, or whatever, get people to move over for a job.

[0:28:26] SJ: I think we see it – that’s at a worker level. We see it at a company level all the time as well, that they just – they have a culture of adapting to change and getting on with it, that is different to what we have here. You’ve seen that in the housing market there over the past – they’ve had more interest rate rises over there than they’ve had here, right? So most people have got 30-year fixed-rate mortgages, it’s not affecting the consumer as much as it’s affecting them here. But someone trying to buy a new house is now paying 6.5% on a mortgage, and that was under three just six or eight months ago.

That predictably created the market for new homes and home builders. But here, you get, well, we can’t build houses at that price, and we can’t make any money, so we’re not going to build any houses. You can see it dragging on here for a decade potentially, where we don’t have enough housing stock for the people that need it. Already, over there, housing are starting to go up, and the companies that build the houses have said, “Well, we just need to build them for less and sell them for less, you still make a profit.” They work out how to do that, and I just find that process over there, all right, it was a bubble or it was a crisis that happened. We’re just going to get on with accepting that the world is what it is now and we’re going to move on from there.

You see that housing construction market already start to recover. I find that extraordinary well, while we’re sitting here still working out how we’re going to navigate through the same problem.

[0:29:48] HM: Hundred percent.

[0:29:49] SJ: Look, I think for all of the positives about the economy, when you’re investing in the stock market, prices is everything in terms of what you’re paying. Jeremy Grantham for GMO is out with a paper this week. They regularly do these expected future returns from different markets around the world. They had both us large cap stocks, and US small cap stocks as the worst prospective returns from here, because the starting prices are higher than they are in the rest of the world. I think emerging markets value was the best category, and emerging markets, in general, was a good one. I mean, what do you think it means from here today? Because I do think that some of these characteristics, and the pessimism about Europe and the UK are fairly widely held. You say not unique to you and I sitting in this podcast room.

[0:30:36] HM: Yes. Well, I mean, what I would say is, the indices or the markets are a sum of the parts, right? It all comes down to what companies consistently make up that index. Generally, we’re still finding good opportunities in the US. Like we said, there’s a lot of volatility there. I mean, six months ago, the semiconductor companies, we’re trading at half of the price that they’re creating today. IBP was 30%, 40% lower than it is today, a year ago. The broader market might be inflated. I’m not going to give a yes or no on that. Grantham has his own view.

But when you turn up rocks over and look at individual kind of components, and look at the quality of the businesses in the management teams, there are reasons why many parts of that index should trade at premium. Some of the best businesses in the world are listed on the NASDAQ or listed in the S&P. That’s a fact.

[0:31:25] SJ: I’d also say, if anything from a bottom-up perspective, when we just go around and do our filters, we’re finding as many good quality growing cheap stocks, and I’m talking about sort of single-digit multiples for some decent businesses in the US as we’re finding anywhere else. That’s somewhat perplexing to me, because you look at the overall market aggregate sector say, “Well, this is so much higher than that.” I’m even finding the same in Europe. When you do see a good business that will run over here, very, very rarely does that trade at a discount to what you see in the US.

[0:31:55] HM: Funnily enough, that often can trade at a premium. I mean, we looked – there’s two businesses that do almost exactly the same thing. Ashtead in the UK, which is basically 95% US construction rental equipment, and United Rentals in the US, which is the same thing. Ashtead trades at a 50%, 60% premium. You have ASML, which is no doubt one of the absolute best business in the world, but it’s trading at three times the multiple of some of the US semiconductor equipment names. You’re seeing it in certain software names in Europe, Dassault Systèmes versus other small German players, Nemetschek, for example, that do the almost the same thing as Autodesk, trading at a big premium.

The really, really top-notch, high-quality companies in Europe, they do command a humongous premium. It’s just that there’s not that many of them in the US, there’s a ton of them, right? I think in Europe, you can probably on two hands count that really truly great, amazing businesses. I think that matters. If there were more of them, the index would be trading at higher multiples there. It’s kind of how I’d categorize it.

[0:32:56] SJ: Yes. I’d say, the other thing, we’re more than 10 years old with this fund now. The other thing that I think that creates enormous opportunities in the US is just the magnitude of the swings within sectors and within individual stocks can get pretty extreme in terms of – you just look at a share price chart for almost any business or sector, particularly the more cyclical ones, and the drawdowns, and the ups are very, very significant, which creates opportunities, even if the overall average were to be somewhat expensive. You get opportunities all the time in different sectors and areas.

[0:33:29] HM: Yes. Like we said, we’re seeing them a bit in retail. It’s obvious, but within that whole group that got tossed out by the market, and derated, there’s going to be one or two that are still growing, taking share, navigating it well, managing inventory well. Or this is actually a fabulous opportunity over the next five years to pick them up. We’re trying to pick our spots and pick our battles, and let’s see.

[0:33:48] SJ: I think that’s true all over the world, it’s true in our Aussie fund as well at the moment. One thing I’ve been talking a lot to the team about is, I don’t think here in Australia, globally, you look at overall multiples for markets, and you look at where interest rates are. You’re going to do fine, you’re going to make historical rates of return from equities of 8% or 9%. But it’s not screaming bargain territory by any stretch of the imagination. There are really good opportunities out there. I think it’s important to actually – the swings have been so frequent and wild that it’s important to keep taking money off the table and recycling it. You buy things at the bottom of a bear market, and you can make 10 years of returns just hanging on to the same stock. I think this market is, it’s throwing up lots of opportunities, but it’s not overall expensive. The key is to keep taking advantage of the opportunity when it goes back to trading at fair value or better. You take your money and you go and find another one, because they’re cropping up all over the place.

[0:34:44] HM: In other words, playing the range.

[0:34:46] SJ: Yes. I think that is true, because I don’t think – I mean, it can happen, right? Things can get stupidly expensive, but I don’t look at the overall market and say, “This is something that is going to offer up above-average returns relative to history. So the range is probably the most likely outcome.

[0:35:02] HM: That’s right.

[0:35:03] SJ: Well, thanks for joining us today, Harvey, and thank you everyone for tuning in. I would really recommend this whiskey. I think the Obon was my number one of 2022. I’d put this right up there with that in terms of one, to put in the shelf, and have a drink and one, that doesn’t cost too much and break your bank.

[0:35:20] HM: Perfect. Yes, I’ve enjoyed it too. Thank you.

[0:35:22] SJ: Thanks, Harvey, and thanks for tuning in.

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Steve Johnson
Founder & Chief Investment Officer

Steve began Forager Funds in 2009, and now manages approximately $350m across two funds. Offering a listed Australian Shares Fund (FOR) and an unlisted International Shares Fund, Steve focuses on long-term investing in undervalued companies.

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