Rudi Filapek-Vandyck has been analysing stocks for over 18 years, more recently he has applied this knowledge to constructing and managing his own ‘All-Weather’ portfolio. As it turns out, Rudi’s approach to investing has proven to be pandemic proof as well. I recently spoke with Rudi to learn more about his process and how he goes about building a portfolio.
“What I discovered while doing my research is that I had to create three or four baskets of stocks in the share market … Those baskets have served me incredibly well.”
In this discussion, Rudi explains these four baskets, he discusses why ‘reliability’ and ‘certainty’ are two words you should be looking for this reporting season and he reveals a number of the stalwart stocks that are helping him navigate this pandemic.
Rudi’s four buckets
In 2015 Rudi wrote a book titled Change. It focussed on what he believed were (and remain) transformational trends that would have implications on economies and the share market.
Rudi holds the view that, without doubt, this period will be the most transformative time of our lifetime
“To my surprise even today, there are hoards of investors out there that are paying almost no intention to the changes that are taking place in society.”
In conducting his research, Rudi said he found it necessary to use four ‘buckets’ to help him categorise stocks. These are listed below and covered in more depth in the interview.
- High quality stocks that are immune or not affected by the changes taking place in the world. Example: CSL Limited
- Stocks benefitting from change. Example: Afterpay
- Solid, sustainable dividend paying stocks. Example: Waypoint, previously known as Viva REIT
- Laggards. These are the stocks need to transform and change to survive in this environment.
- Why quality is more important than valuation.
- Rudi’s four buckets for categorising stocks.
- Reporting season preview and why ‘reliability’ and 'certainty' will be crucial.
- Dealing with bad news because there is lots of it coming.
- The stocks that Rudi sold (not all of them the right decision).
- The largest position in his portfolio (bit of a surprise here).
- A snapshot on the 'all-weather' stocks.
Stocks discussed: CSL, APT, TLS, APA, WPR, REA, CAR, NXT, RMD, AMC, FPH, ORA, MQG, JIN, AZJ, APX, AQR
Click on the video player below to access the interview or access the transcript below.
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Edited Transcript - updated 10:16am 6th of August 2020
Rudi, great to have you back on and thanks for joining us.
James, it's a pleasure to be here.
You recently published an article on Livewire, titled, My Seven Secrets to Investment Success. And it was a distillation of a number of lessons that you picked up from running your own, the 'All-Weather Portfolio', as you call it, over the past five and a half years and we might touch on some of the performance of that in a moment. But the first thing that stood out to me, was that quality beats valuation. Could you talk me through that view that you hold that it really is quality that outperforms valuation?
James, I can illustrate this with a very simple example. We all could have bought CSL shares in the IPO in 1992, and that would have cost us $3,000 at the minimum. If you held those shares until earlier this year, late last year, we would have been millionaires. So $3,000 becomes $1 million. If you are that type of investor that keeps shares for a long time, just ask yourself how much difference would they have made that in year one or year three, or even in year five of when you are holding those shares that your shares were temporarily overvalued? And that's essentially the long and the short of my analysis.
So it basically comes down to what type of investor you are. And if you are the type of investor that likes to hold shares for a really long time, then you have to realise that overvaluation is a temporary thing. As long as you have the type of company that increases in value over time and continues to find growth.
I think that's the simplest example that I can put forward. Well my observation, and I am going to insult a few people now and surprise the others. My observation is if you buy cheap stocks, on many occasions, they only bounce temporarily. The way I compare them is this weekend I went to the supermarket and I saw the strawberries very, very cheaply priced. I've now learned from the share market that if something is priced cheaply, there's something wrong with it.
So I basically, I turned up all the pallets of strawberries and almost every single one of them had one inside that had a little bit of mould to it. That instantaneously made me realise that's why they're cheap.
In the share market, you have to ask the same question, right. Do you want to buy cheap strawberries that you have to eat immediately and you have to fish out the one with the mould? Or if you want to stack up your pantry with, with some food that you don't have to eat? You're better buying good stuff, great stuff.
And you know what? For quality, you pay.
It doesn't mean that you never pay attention to valuation, of course, but it does mean that when you realise that you pay up for quality, that the PE ratio is not the only measurement you pay attention to.
People know I'm a big fan of CSL and I'm a long-term investor in CSL. What stood out for me is that every time investors would say, "You can't buy it, it's too expensive." And every year it goes up. So obviously, there's something wrong with that narrative. I think the problem with that narrative is that a reliable quality performer has a price attached to it. And it's not a low PE on a single digit.
Rudi, I think there would be not many people that could hold a good argument against your CSL example. It's proven itself over a really long period of time. I get the impression that the real frustration comes around companies with lower earnings and less proven business models. The buy now pay later is an obvious market segment to highlight, but there are others. I'm keen to understand your distinction between a company like CSL and a company like Afterpay, where the track records are far different and earnings profiles are not comparable.
It may be good to explain here, I'm not your typical growth investor. I'm a quality investor. But as the market evolves and as it has transpired, because I focus on quality, I am closer to growth than I am to value. That also means I understand quality better, because I'm not looking for cheaply priced assets.
Here's the very practical way of illustrating what I'm talking about. In 2015, I wrote this book called Change. I thought at the time, I better be quick in getting this out, because the financial world looks forward and they are going to be all on the case in no time. To my surprise, even today, there are hoards of investors that are paying almost no intention to the changes that are taking place in society. The fact is when I wrote his book, 5 years ago, I predicted that we would go through tremendous changes in society and that those changes will have an impact on economies and on the share market.
To my surprise, I underestimated the changes that were going to happen. Where are a lot of typical value investors have gone wrong is they have completely ignored those tectonic changes that are taking place. At the very least societies are going through a transformation that is probably the biggest in hundreds of years, even if that's not the case, it's definitely going to be the most transformative period in our lifetime.
What I discovered while doing my research is that I had to create three or four baskets of stocks in the share market. And my first basket was high-quality stocks that are immune or not affected by those changes that are taking place. Another basket would be stocks that are benefiting from those changes that are taking place. In the first basket you get the likes of CSL. In your second basket, you get likes of Afterpay.
Now, the third basket would be reliable, solid, sustainable dividend payers. For example, you put a Waypoint in there, previously known as Viva REIT.
The fourth basket is the one that I've been avoiding for the past decade. And those are the laggards that have to transform. That are facing headwinds and will find it increasingly difficult to maintain their profit level, their margins and create value for shareholders.
Those baskets have served me incredibly well in my views on the market. That's what I've been trying to communicate to investors. There is an element that low-interest rates has created an even larger gap between these baskets. That is because low-rates have benefited the quality stocks and the beneficiaries of the changes and not stocks in basket number four.
In addition, this year, you get a pandemic, which again, throws a lot of complications in those baskets.
In general terms, if investors had viewed the share market through those four baskets and had acted accordingly in their portfolios, they would have done much better than most would have done so far.
I'm saying this from anecdotal evidence and from the rankings I see and the updates I see from a professional investors as well.
So Rudi, let's bring it into reporting season. On that note, a lot of people are talking about this reporting season, being a bit of a judgement day and the opportunity to recalibrate expectations. Is this the inflexion point where bucket four starts to even, or make up some ground on buckets, one, two, and three and settle some of the score or are those frustrated value investors going to feel more pain?
I think they're going to be frustrated for much longer. The ruling narrative over the past two, three years from that part of the investment community was "the share market is crazy, the investors are paying too much for success stories. You wait until the next recession arrives and we will have our day under the sun." I have consistently been saying, "No, no, no, you wait until we have a recession and you will still not have your day under the sun." Of course, what happens in a recession, and what we've seen with the pandemic this year, is that the weakest companies get carted out first. That's exactly what happened in the sell off this year.
The cheap stocks simply became a lot cheaper and a lot of the so-called expensive stocks deflated a little bit, but they were back before you knew it. And that's what you get in a time when you have these tectonic changes, taking place. Investors want to be part of the future and they don't want to be part of the laggards simply because they are cheap.
When we will get out of this situation? And that's a big question mark. You will get a situation like 2009 for example, like the second half of 2012, like the first half of 2019, when the laggard stocks, the value stocks in the market will have their moment under the sun. But that's only half of the story.
The other half is that they bounce because they've fallen more in the first place. That's because it's part of the economic recovery story, which always benefits the weaker ones and the laggards, but it's not a structural recovery story.
I think there's too much emphasis on what the Federal Reserve does on low-interest rates and on what governments do with stimulus. It's basically a low growth environment and the weaker companies are finding it difficult to have consistency and reliability in their profit growth. And they're being punished for it, or they're being ignored for it.
It shouldn't be a surprise. Just like you pay up for a premium car or for premium handbag or a premium jacket. You do pay up for premium companies in the share market, and there's a reason for it.
Well, let's run through a couple of the observations that I've picked up from your recent reports about the upcoming reporting season. You've said guidance has never been more important, particularly around earnings and dividends. Can you go into some detail on that point? And where are some of the areas that you're expecting certainty?
I think on a general level, August 2019, a year ago was the worst profit season we had in Australia post-GFC. I was amazed after last year that some commentators would denominate it as not too bad. And I thought, that's fairly subjective, this is the worst we've seen.
February was very difficult to judge, because we basically had the pandemic raging through it already but it wasn't great. We will now see a reporting season that is a lot worse than August last year. So we will probably set some records here.
What the investors should be prepared for, is that the cut in dividends will be at least double the loss in profits. That is an indication of the fact that corporate Australia was not in great shape coming into this recession. Don't forget, corporate Australia started cutting dividends already last year. Payout ratios moving into the situation were way too high, including for the banks, and they will come down.
So you will get this double whammy where both the payout ratios will go down and the cash-flows will be down, and the impact will be quite severe.
Contrary to the GFC. This will not be done in 12 months. So we will have companies who will cut this year, then some will have to cut next year and then maybe next year and then the year after, we have different companies cutting their dividends.
So we are creating a context where reliability and sustainability are very precious words. They are rare, so those companies that can provide us with certainty and reliability will be rewarded for it.
To my surprise, the way the situation's panning out, one of the companies that has been quite a mixed performer is Telstra. Expectations are now growing that Telstra might actually crown themselves as one of the standouts this season, for that particular reason. They might be able to guarantee shareholders that they will have a certain payout and they won't waiver from it. Because of the current situation it might actually prove sustainable. That might, for once, create a different benchmark for Telstra.
If I could have a quick look at the U.S., between one fifth or one-fourth of all the companies in the U.S., have given guidance, which is well below what usually happens. And about a third of those has been negative. So you can see, and we've already seen that since February, that those companies that are able and willing to provide the market with concrete guidance will be rewarded for it. You see that in better share price performances and investors will be on the lookout for this year.
It all makes sense, it's about reducing your risk. Tere are some standout dividend payers in the share market apart from a Waypoint, which I've mentioned earlier. You also have the likes offer APA Group, you have the likes of APN Convenience Retail. You will have the likes of Aurizon and Amcor. These are all dividends payers that are expected to continue increasing their dividend payout for not just this year, but all through the years ahead.
You've also got companies like a CSL, ResMed, and a few other ones. But they do not necessarily feature on analyst's radar because they trade on higher multiples and then the yield is not high enough for your typical income investors to go for those shares.
Rudi, you also said that the market has developed a stomach for bad news, which means that bad news that you read in your report might not necessarily translate through to weak share price performance. Put some more context around how people should be gearing themselves for bad news and trying to sort of correlate that with market reactions.
Nothing is as easy as calling a share market or a share price overvalued. We've all been doing it as community for four years now. And every time we call a ResMed or CSL overvalued, the impact seems to be quite temporary.
The big lesson I've learnt over the years is that companies on high multiples that move on results are not usually the ones that come crashing down. It might happen temporarily, but there's not a correlation between high valuation, lower valuations and movements in reporting season.
You either disappoint or you don't.
Given the context at the moment, there is a general sense that maybe the share market has gone a little bit too far given what's coming. It's possible that investors will be on tenter hooks and become nervous. But I still think that that's the micro-picture that is determining that.
My observation is that for 80% or so, prior to results, the share market gets it correct. So where ResMed is trading is probably correct. And where GUD is trading is probably correct as well. And there's quite a divergence between the two.
I think that too many people are calling the share market overvalued, because they actually underestimate how the share market works and the best way to illustrate this is going back to the GFC. In 2009, there was no indication whatsoever that we were going to have a quick economic recovery, yet share markets rallied from the lows in March. And they kept on rallying until early 2010. And that by then they had done their dough. The share market now is trying to look forward. I think investors are largely ignoring 2020 numbers, unless the indication is that things are not quite right internally with the company. Then you have to revise your view.
You have two types of companies. You have the ones that have done well and are a beneficiary of what has happening, like ResMed, Fisher & Paykel Healthcare, Afterpay, Zip, and Carsales for example. They will be judged on any normal metrics as they always been judged. We put the share price on a certain level, how are you performing? Can we trust you that the years ahead will be okay?
The larger group is on lower multiples, and we know that their numbers won't be good. We know it's now about what don't we know so far. So they will have to convince us that the year ahead, maybe in two years, that they will be back at pre-pandemic levels hopefully. And as long as they can convince us, we will probably put their share price a little bit higher than where they are. If they can't convince us, then again, they will be a value trap for the time being.
We can stomach bad news at this point, as long as we can keep the confidence that next year, at least in two years time, those companies will be in better shape. This is also why the balance sheet and cashflow will be now very, very important. We don't care that a Qantas is only having a few planes in the air, we don't care that at Sydney Airport, there's nothing happening. What we do care is can these guys weather it out? Do they have enough cash so they can start operating normally again when things normalise?
That's another element that the investors will have to pay attention to. It's not about the bad news. It's about will they survive? And can they get back to normal?
Rudi, when I looked back at our article or our interview from February, one of the things that you said, "Well, you should never be afraid to sell, and it's never too late to sell." So that was before the pandemic ripped through our economy, global economy. So my question to you is have you had to sell anything? Have you forced yourself, have you changed your view on anything? Is there anything in there that wasn't all-weather?
Unfortunately, there's a few I regret selling, and there's a few I'm very happy I sold. One of the reasons why my all-weather concept works so well is that we are not living through normal economic circumstances. If you go back to late 2018, the second half of 2015 or early 2016. Before that, 2011, the first half 2012. Before that, 2007, until early 2009. We seem to have limited time when we have normal economic circumstances before we have these mini-crises that come along on a very regular basis. What I learned from these crises is that every time you check out what hasn't performed in your portfolio, it goes through a cleansing operation every time. It improves the portfolio each and every time. Now that's the theory. That's what I do every single time we go through those phases.
So what I do is I chuck out, for example, a Jumbo Interactive, which I owned. I wasn't that confident anymore. At the moment, I'm glad I don't own it anymore. I've lots of other stocks that have done very, very well.
I've sold out of Atlas Arteria, for example, because I quickly established that they were not going to pay dividends and I had them for the dividends. So, the reason I owned them fell away. Unfortunately, I also sold out of Macquarie and that's I came to regret. I thought they were in trouble. They have a lot of investments in infrastructure, including airports and the likes. I'm just as surprised as everyone else that the situation resolved quite quickly. We then quite quickly resulted in the share price that recovered quite quickly. To be honest, I can only blame myself. Macquarie would still have been buy last week, but you get that mental barrier that builds up.
Investing is just like golf. It's not like having a perfect game. It's just having a game that's good enough for your score. Investing is the same. You will make mistakes. There will always be stocks that you would have liked in your portfolio, or that you would have sold earlier. But at the end of the day with the stocks I own in the portfolio, I feel I could absolutely not complain in 2020 or in the years before either.
Rudi, I'm going to ask you for one or two stocks in a moment that you think can deliver this reporting season. Before we do, I'm keen to hear your view on gold equities, given the level of interest that there is right now. And it's something that seems to be proving a bit of a bright spot and a good all-weather style part of the market at the moment, but doesn't seem to fit the traditional buckets that you've put in on there.
Well, I'm got a surprise for you then, because I was about to respond. But you've asked the right guy. I approached gold as an investor and not so much as a trader or as a short-term investor. The largest holding in my portfolio this year was gold. And I'm quite happy with how that's performed.
Was that directly in the commodity?
No, I bought an ETF. So I go for gold and not for gold equities. And the reason for that is, is that I already have complications, because I'm buying gold in U.S. dollars so I already have the complication of the Australian dollar. I do not need even more complications where I get individual company risk as well. Some gold stocks have performed absolutely fantastically this year and some have not. And that's the risk that I don't want in my portfolio. You will go through times when having exposure through the share market relies on different dynamics than simply having exposure to the commodity itself. I'm a lower risk investor. I just wanted to have it, because of all the other stuff that was happening in the world. So early in the year, I made gold my largest holding in the portfolio. I'm not trading in and out, and I'm not seeking exposure to the share market either.
And I'm keeping my holding by the way.
Can you explain to our viewers and then why you've chosen to have that position denominated in U.S. dollars?
Well, it doesn't matter whether you buy in U.S. dollar or in Aussie dollars, because ultimately you always get the conversion risk. That's just my preference, ultimately we have to buy in and sell out at some point, and conversion is always there. So that's not the point. I think that the major decision you have to make is do your buy gold, pure gold, or do you buy gold producers? With the gold producers, you are taking on a different type of risk. I'm just after simple, straightforward and uncomplicated.
Righty. Finishing up. Last question. Outside of CSL, which we know is your Bellwether go to stock for reporting season. What are a couple of stocks that you're looking forward to reporting?
I own stocks like REA Group, Carsales, NEXTDC, Appen, ResMed, Fisher and Paykel Healthcare. You can tell from that group already, that the portfolio has performed well this year. So I'll definitely be paying attention to how well they are performing and whether I maybe should take a little bit off, or add a little bit more to those stocks. I'm convinced that all of those I just mentioned still have a long runway of growth in front of them. It's just that I have to pay attention a little bit to the short-term dynamics there.
I have other stocks, which have not necessarily shot the lights out. They're a little bit in that laggard camp, although not at extreme cheap levels. If they were, would make me worried that something nasty might be coming up.
But there are stocks, which I believe are still representing good entry points, good operational prospects, et cetera. It's just hasn't been priced in so far. We're talking about stocks like an Amcor and Bapcor. These are the ones that immediately come to mind. I also have Orora by the way. And they are definitely going through a challenging time in the United States, but they are for the time being going to pay more to shareholders. And that's probably going to keep their share price supported. I also have stocks like a Ramsay Healthcare, for example, and they're holding up quite well. And I suspect that once we're opening up in Victoria and in other regions that they should do well.
Basically, I pay attention to all of them, because I own them and I have to make a decision whether why I still want to own them post reporting season.
Again, most of those companies I own I tend to own for a longer time. The assessment I have to make is whatever they come out with in August, is that going to be enough to keep those prospects alive for years to come?
All right, Rudi, well listen, thanks for sharing your views and opening up on some of the stocks that you're holding and some of the ones that you're watching out for. If I'm to summarise your view on reporting season, you're telling people don't expect to get too many bargains for the good stocks. You're probably going to have to pay a little bit up for those earnings. The market is already expecting bad news, so don't be surprised if bad news doesn't see a big downside reaction. And the other thing that you're looking for is certainty. Those companies that can provide concrete guidance about their earnings and their dividends are likely to be rewarded handsomely. Is that correct?
I think that's very correct. I think you summarised it quite nicely. Don't assume automatically that a stock that has performed well, that the only way is down. Often there's more to come.
Okay, great. Rudi, thanks for jumping on the call. For all the Livewire readers, we'll be publishing Rudi's reporting season monitor every weekend on the Livewire website. It provides a full summary of the stocks that have reported, the key highlights from their result and whether or not they were upgraded or downgraded. It's a really great resource that Rudi puts out. You can check it out, obviously on the FNArena website, and we'll have it on Livewire as well. Rudi thanks again.
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Nice interview James, but was that transcribed by a computer? It’s so scrambled my brain hurts from reading it!
Hi Dave, I agree that the transcript was pretty raw I was keen to get the content out given that reporting season is on our door step. It has been tidied up now.
if csl is immune why is it in a down trend since april? i got burnt twice now buy it on the bottom of the range it was trading in before i bought, both times it dropped below them after i bought. sold both at loss after some recovery. obviously it's a must for long term but it looks to me like price will keep falling.
Chad. “Immune” relates to societal and technological changes, not to the virus. Also, your own horizon is obviously very short term. I still maintain that CSL’s long term outlook remains rosy, even though the short term might be clouded by, for example, a strengthening AUD
I’d just like to post an argument to the CSL example. Everyone who’s held CSL over the prior 5 years looks like a genius right now, no doubt. However, CSL’s net earnings over that period are only up 20% - yet the stock price has increased 200-300% depending on where you start. Now, while I’m sure it’s a quality business, I question those who hold it up as an example that should be bought *right now*. People were buying CSL at what looks like an approximate PE of 15 in 2014, which is not an unreasonable ratio. 5 years later, it’s PE is 45 and nearly all of its share price appreciation has come from multiple expansion. (And this is AFTER losing 20% from its peak..) Every holder is heady off tripling their money. Let’s put in place an alternative story. Let’s say CSL derates to a still generous PE of 22.5 (to make the math easy), roughly in line with global healthcare peers. If we assume it still grows revenues as fast as It has been and double it’s revenue and profits in 10 years (about what it has achieved over the past decade). It goes precisely no where over the next decade, a lost decade of returns. Investing in CSL in the past where it was much, much cheaper and exclaiming that it’s a buy now is just an outright misrepresentation of why it made you money.
Jordan, I think I explained that lower interest rates and bond yields have a beneficial effect on quality stocks such as CSL, so unless that particular context changes, why would CSL derate? The second fact is that sustainability and reliability have substantially decreased in the market, which equally reflects well on the valuation ascribed to long term performers such as CSL. Thirdly, CSL’s valuation has pretty much never been a straight multiple on earnings; there is a pipeline of products which can potentially unlock additional value, which is what investors like yourself do not take into account. I cannot tell you exactly what will unfold from here, but I do know the odds are stacked against you if you think the share price will not be higher in ten years time. I think a lot higher is a lot more likely than not. CSL’s valuation today is as much about the company itself as it is about the general environment
Hi Rudi, I understand the point of view, it just sounds too optimistic to me. Deratings come when companies are unable to meet the excessive expectations being priced in. P/E is a basic measure of a company, for sure, and is far from the be all and end all. However, it is, ultimately, what we are buying companies for. If CSL matches what it's achieved over the past 10 years, and doubles profits, and maintains a high P/E (reflecting a strong record of growth), that's still only a "doubling" in price (still impressive, and I don't mean to demean it). Compare that to starting the decade at a P/E of ~18 and ending at a P/E of 45, getting it to its $270 price today. If it had maintained it's starting PE it's share price would be ~$110. Multiple expansion supercharges returns, and makes companies appear to be much better investments then just the raw fundamentals would represent. My point would be that buying at these prices is buying CSL while a lot of good news and high expectations are priced in. It may well meet those expectations, and you'll do alright. However, if it's unable to grow as much as expected, or grows more slowly than expected, that derating can come fast and depress the share price before you know it. The risk in CSL is not necessarily an event such as Corona (given it's in healthcare, a resilient and vital industry) but in simply not performing to the same astounding standard as in the past, or even a general shift in sentiment. For a somewhat analogous example in a different industry, but instructive nonetheless, Microsoft (MSFT) started the millennium at a PE of ~60. Following the dotcom bust it took 15 years to reach its former highs, despite tripling profits and a resilient monopoly. You can be right about fantastic companies, but that doesn't save you if you pay too much for them. Good companies rightly deserve a premium, but at some point that premium can become so great as to be a significant, negative point on future prospects (as you'd well expect, in an "efficient" market) (I understand that MSFT has still delivered a respectable return to data from the dotcom bubble high, but the fact remains that 15 years is a long time to break even, and there were many other companies in the bust that may have looked similar to MSFT but simply never recovered)
Jordan, I understand your concern, and in theory it seems solid. But you are comparing Microsoft from a time of Nasdaq bubble with CSL today. That's simply a flawed starting point. Investing is not about trying to double your money in as short time as possible. It's about assessing whether the risk-reward is still in your favour. I think it still is. That's the long and the short of it
Jordan, some good debate and commentary on this - but I am completely aligned with Rudy's thinking here. Firstly, I'm not sure what data you're looking at to suggest 20% earnings growth in 5 years. From the data I can see, earnings metrics are up approx 100% in 5 years (this is the case looking at revenue or NPAT or EPS and is the case from 2014-2019 actuals or 2015-2020 forecast). I also see a PE of 23x in 2014 rather than the 14x that you've stated. But arguing about data sources is not actually the main point. When considering PE, I'd ask you what PE you think is relevant for a stock like CSL? Expecting a constant PE or expecting reversion to the mean would only be relevant if all else is equal. The low interest rate environment materially changes things. What if we valued Equities like we think about valuation for bonds? Warren Buffet once lamented that PE had become the convention rather than Earnings Yield (i.e. the inverse of PE, a stock with a PE of 20x has an earnings yield of 5%). With corporate bonds, we don't look at their yield as their valuation, we consider the spread above the risk free bond as a measure of their valuation. i.e. when the corporate bond spread is narrow, the market is not pricing in as much risk for that bond and it appears expensive. For equities, there are greater levels of complexity as valuation can reflect growth as well as risk, but it can act a general guide to consider. For CSL, the PE was 23x in 2014. The earnings yield was 4.3%. The earnings yield spread was approx 2%. i.e. you were getting a 2% better earnings yield, plus the expected earnings growth of CSL for taking the equities risk on CSL. Now, on a PE of 44x, the earnings yield is 2.3%. This is an earnings yield spread of 1.8%. Relative to bonds, the valuation has changed only marginally. So, my overarching question is what PE should CSL trade on right now? Given the context of the market, why shouldn't it trade exactly where it is? The market has an incredibly strong ability to factor in a lot of information. The Wisdom of Crowds is very powerful. From there, we can start to review what changes in earnings are likely to occur in the future, and strong compounding earnings growth seems the obvious answer for a stock like CSL.
Great interview James.I have read with special interest the various comments.I have no doubts that Rudi is on the money and as a small investor( not a speculator and not a blowhard) by way of example i began purchasing small parcels in late 2016 my highest point of ownership was 869 in April 2019.Being dependent to some extent on my shares for income i erroneously chose to sell a portion and to compound my errors i sold more in June 2019 to meet a totally unexpected expense and how i have castigated myself since that i did not remove the non performers from the portfolio instead of CSL. My holding is now 427 share at a cost of 58 cents per share without dividends.I am not complaining. JA McEwan