This week in The Money Café, David Swan and I discuss:
- Nine’s Fairfax offer is a digital play – it’s all about Nine acquiring Domain and Stan, and the papers are ancillary benefits.
- Facebook’s down 25 percent in one day, the culmination of a series of unfortunate events. It’s just not ‘cool’ anymore.
- Amazon’s going gangbusters, but its success has been Kogan’s pain.
- The CPI refuses to break into the RBA’s 2-3% target range, so expect the cash rate to remain on hold.
Hello, I’m Alan Kohler, Publisher of The Constant Investor.
I’m David Swan, Technology Reporter at The Australian newspaper.
And we are The Money Café.
The Money Café.
It’s great to have you here, David.
Yeah, great to be here, Alan.
Just for those who are interested David joined us at the Business Spectator five years ago?
Yeah, something like that.
And was part of Technology Spectator which we launched at the time with Supratim Adhikari and now Supratim is Technology Editor at The Australian and you work with Supratim, and all doing a great job. We’re going to be getting the benefit of David’s knowledge and expertise on technology which is good because today’s big story of course is the merger of Nine and Fairfax, although rather the takeover of Fairfax by Nine.
Yeah, that’s right.
Obviously, there are many aspects to this such as the disappearance of Fairfax as a name, as a company, but what about digitally. In terms of digital last time I looked Nine is actually number two digital website on the Nielson ratings and The Age and The Sydney Morning Herald’s ratings have actually slipped. Where are they? They’re down the list a bit aren’t they?
Yeah, still in the top 10 but not what they used to be, that’s for sure.
Does this put them together, do you think, do you reckon they might just combine their websites?
I think Business Spectator and The Australian is maybe a decent analogy in terms of what happened there was eventually they sort of merged, that took a few years to really happen as I’m sure you – well, you led that, but it’s something where they start off as their own sort of individual brands and then eventually it just makes more sense to combine them over the long term. This is really a digital play if you look at Stan and you look at Domain. Those are two quite strong digital assets and particularly Domain. That’s far more valuable probably to Nine than either the print assets or the SMH and The Age websites. So in terms of Domain and Stan, it’s quite a…
Okay, let’s just take those one at a time. Domain is 70% owned by Fairfax now, it’s a separately listed company so Nine now takes over that shareholding. Is your feeling that they continue it, that they keep it?
Absolutely. If you look at REA for example, what that’s done for News Corp, it’s been absolutely huge for News Corp.
Yeah but Domain is not as successful as REA. REA has been killing Domain lately in fact, hasn’t it?
But I see them on similar trajectories in terms of Domain is earlier and there is definitely room for both in the market place so I think as long as Nine now handles Domain well – there are a lot of question marks obviously but I think it has the same sort of potential to get to where REA is today.
It’s interesting because Stan is a similar business to Domain in some ways, it’s number two in the market to Netflix, Netflix is obviously dominant as is REA but Stan has been doing well, it’s number two isn’t it?
What are the numbers on Stan?
They’re not at that Netflix level and what they are struggling to do is really get that same level of original content that Netflix has. Netflix has obviously its own production capabilities and Stan is not quite there but in a similar way to Domain the potential is there and I think Nine is onto something picking up these assets, as long as they handle them well, that’s where the question mark is.
Do you think maybe it should be seen as Nine buying Domain and Stan and getting a couple of newspapers as part of the package, newspapers that it doesn’t really want.
It’s like when you buy a Herald Sun subscription these days and you get free headphones, I don’t know which one is the free headphones in this.
The Age and the Sydney Morning Herald are the free headphones?
I think you could make that case.
Dear oh dear, our friends who work as journalists at The Age and the SMH would be not feeling great about that.
It’s just the commercial reality and it’s sad in a lot of ways because this goes to the heart of democracy and all these sorts of things that are incredibly important.
Now you’re getting deep on me, Dave.
But I think it’s true though. In a commercial sense they’re not as important as they used to be and the important its of this deal, and we can’t hide that reality, is Domain and is Stan.
I think the journos I’ve been talking to at Fairfax are worried that they’ll end up with joint newsroom with Nine and with a lot fewer journos, which I think is probably a reasonable prediction given that’s what happened in Perth when they put together Channel Seven and West Australian, the newsrooms were merged, journos were sacked.
Yeah, and the reality is as well is that today in 2018 most of our eyeballs are on Facebook and are on Google and they’re not on the traditional mastheads. If that’s where eyeballs are the advertisers are obviously spending their money on Facebook and Google, the advertisers aren’t spending their money on The Age or on Nine. This is a way for them to try and claw some of that advertising money back.
Talking of Facebook the shares are down 25%, what’s going on?
They’ve had a horrible session. Facebook posted their numbers and they haven’t been up to expectations. The interesting thing about the tech giants is there are a lot of obviously assumptions built into their share price about growth and the second that you don’t hit that growth is when you get hammered and they have been hammered to the tune of 25% of their market cap.
Which is unbelievable in one day.
Do you think there’s something fundamentally wrong with Facebook, are they kind of tracking towards a cliff?
I do think there is something fundamentally wrong with Facebook but that’s separate to its business problems. I think there’s something fundamentally wrong with Facebook just in a broader – I don’t want to go all deep again…
Go ahead, it’s fine. Are you talking about morally?
Yes. We only have 20 minutes so we don’t have time to get into all those issues, and the whole reason I deactivated my Facebook.
You deactivated Facebook, you’re off it?
Yeah, and I think morally they make money off our privacy and there are a whole lot of issues there but with these results the issue is that all of these issues are catching up to Facebook. They’ve had a horror last 12 months in terms of congressional hearings, privacy issues coming to the fore and Mark Zuckerberg having all these horrible interviews where he says that holocaust deniers should be given a platform on Facebook. I think these things are starting to catch up to the company.
He’s become the apology man.
Yeah, and doing this tour around the US where he’s trying to visit every state like a politician would. Maybe just the fundamentals aren’t there and once you stop growing as fast as you used to the investors punish you for that. I think we’re seeing it in millennials particularly, I am one that’s getting off Facebook but there are a whole lot like me who are people my age in their 20s and teens particularly, Facebook is just not where you hang out anymore. Yes, you’re still on Instagram which is owned by Facebook but now it’s Snapchat and now it’s other platforms, Facebook is just not cool anymore.
There you are, got that everyone, Facebook’s not cool.
Especially because I’m off it now so it’s not cool anymore.
It’s certainly cooled off on the stock market but Amazon on the other hand is going gangbusters still, it’s up 3% in two days. Clearly the market is not falling out of love with Amazon.
I think one big difference here, clear difference with Facebook, is Amazon is making real money and it’s selling physical products as well as its web services platform which is incredibly popular. The good thing about Amazon for its web services platform is that’s the backend infrastructure powering all over the internet. In a way for Facebook, for its fundamentals to remain strong people have to be on Facebook but for Amazon web services to do well it’s not reliant on people visiting Amazon, it’s reliant people using the internet. It’s selling real products, its Prime Day last week was hugely successful, Australia had its first one ever. It’s selling products by the truckload and in a way that Facebook isn’t.
It’s interesting. On the subject of Amazon, Kogan, which is not exactly an Australian version of Amazon, it’s an online retailer here obviously, its share price has been hammered in the last few days. Actually, if you look at it for the first three days of this week it was down the same as Facebook was, 25% and that’s because it missed expectations in its trading update as did Facebook. How much of what’s happening with Kogan is due to concern about Amazon coming to Australia and what it’s likely to do, do you think?
I think what we’re starting to see now is a maturation of Amazon in Australia in a way that when they did launch here last year Amazon was pretty underwhelming really in terms of the products that they had in terms of the shipping everything was kind of second rate compared to what you could get in the US and now we’re at a stage where Amazon has got its act together, it had a very successful Prime Day last week and people are going to start using Amazon in Australia as their go to for buying anything. That will hurt Kogan, there’s no two ways about it because Kogan is an extremely popular retailer in Australia but it will have to lose some market share to Amazon.
I think it’s one of the things worth pointing out. You mentioned that Facebook’s price has fallen because it was a growth stock, the price was stretched, people were really building a lot of growth in and same with Kogan.
Exactly. Its share price has been on a tear since it IPO’d, I don’t know what the percentage is but it’s multiples, you can maybe have a quick Google, Alan.
I can, you carry on, keep burbling away.
They listed and their price has been phenomenal since then but of course nothing lasts forever and sometimes reality hits home and that’s what’s happened here, I think.
They went from $1.50 in June last year to nearly $10 in March, I mean fair dinkum, it was actually $9.80.
Yeah, and the interesting thing about that is that’s a growth rate that normally you’d see in software companies, for example like an Atlassian where they’re not reliant on shipping physical goods out, they can just sell software as much as they want because it’s effectively free and incredibly easy to get stuff out there. For Kogan to have those sorts of growth numbers even though they’re shipping physical goods out to people maybe the numbers just don’t quite stack up.
It’s certainly what the market is saying and they’re now down to $5.40, it’s a long way down from where they were so that’s been an interesting thing to watch. We’ve got a lot of questions, David, we always answer questions in this thing, Kirby and I, and we get terrific questions. Just before we do that just on inflation the numbers came out yesterday, CPI, headline rate was 2.1, underlying rate 1.8, less than expected. They can’t get the inflation rate above two, the underlying inflation rate above two, The Reserve Bank is going to be on hold for a long time. I reckon we’re probably going to be in Christmas next year with a cash rate of 1.5%.
Okay, so some interesting conversations to be had over a Christmas lunch, you think, next year?
I don’t know about you, I don’t talk about interest rates at Christmas lunch.
I assumed you would, sorry I assumed you would.
I would but my family would kill me that’s for sure. Let’s go into the questions. Tim has a comment about Raiz. We’ve been talking about Raiz lately and I’ve perhaps been exceeding my knowledge on the subject so Tim is just picking us up. Love the podcast. Just a clarification with Raiz, you can link it to a bank account not just a credit card so it rounds up any payment you make with any EFTPOS card. Do you know about Raiz, is it a credit card thing or is it an EFTPOS card thing or is it both, what is it?
From what Tim’s saying it sounds like both.
You don’t know?
I had it, I deactivated it like I did Facebook unfortunately. I found it wasn’t working for me.
Was it working off your credit card or your EFTPOS card?
I only linked it to my EFTPOS card but you can link it to your credit card by the sounds of it.
Yeah, but it wasn’t delivering me the results that I was after so I just removed it from my portfolio. That’s when I went into cryptocurrency and that’s a whole other story.
You did, what did you do in cryptocurrency, what have you done?
It’s a painful thing for me to talk about but basically I put a lot of money into Bitcoin.
At what price?
That was around late last year when it was around the sort of $20,000 mark.
Yeah, I don’t like talking about it particularly.
This is confession time.
Yeah, we’ve gotten very deep on the podcast today. Anyway, that’s a whole other story but basically those Lamborghinis that I was planning on buying might have to wait a few years.
Yeah, well that was the plan but now it’s looking more like a second hand Saab or something but yeah basically what I did was I took my money out of Raiz so they were Acorns and then they rebranded recently.
Okay. Anyway, thank you very much for that comment, Tim. Another Raiz comment it would seem to be here from Michael. I was just listening to you last week and like the listener who wrote to you in your podcast I thought you could do with some more input on Raiz. I started an account around August last year when it was Acorns and now have about $9,500 in there. I take it you didn’t end up with $9,500?
The way it works is that you set up a funding account which I think has to be a deposit account, in any case mine is. He also set up one or more spending accounts. We’re giving Raiz a big plug here, this is hopeless, we shouldn’t be doing this. You can also set up a monthly direct debit which for me is $100. Anyway, so there it is, I think Raiz has probably had enough of a plug from us. Adam says thanks for your always entertaining and informing podcast, I would appreciate your comment around the importance of liquidity when investing. As times get more challenging I reckon this will move to the foreground ahead of stated returns, fees, etcetera. I know you have voiced concern around this and ETFs.
Yes, I agree with you, Adam, I think that as the market becomes more volatile, possibly even goes down and has a correction at some point, liquidity becomes all important mainly because it dries up. My concern about ETFs among other things – there are a few concerns about ETFs but one of them is there is now half the market is now taken up by ETFs, a huge amount of investing has now being done into companies through ETFs. The trouble with that, as I said in a liquidity sense, is that everyone will try to get out at the same time and as with a burning nightclub you can’t get out of the door, everyone is trying to get out of the same door and it doesn’t work.
I noticed that a little bit a couple of weeks ago, Alan. We were trying this app, me and a few other journalists, it’s called Stake and you can use it to invest in US stocks. There was a bit of a competition between me and some colleagues at rival publications and the winner was the person who basically invested the least and just kept it all as cash. We were each given $500 to invest with in the US market and that was a way for me to discover how quickly things can turn. Everything was looking pretty good and then the whole market including tech stocks just really plunged and the one guy who basically invested nothing kept it all as liquidity won the challenge. I learnt how quickly things can turn, really.
The point is, Adam, that when things go pear-shaped the only liquidity that is actually liquid is cash because you might think you’ve got liquidity in a share market because you’ve invested in CBA or BHP, a very liquid stock, but actually that liquidity can dry up pretty quickly.
Same if it’s Bitcoin, it can absolutely dry up as well.
That sounded through gritted teeth there, David. Adam says on another note I think housing/banking has a bit more turbulence to come, do you agree? Yes, of course, house prices definitely have further to fall in my view. How much turbulence there is in banking I don’t know. The question of banking is slightly different to house prices, people tend not to sell their houses and go bust because house prices fall necessarily but where things come unstuck for banks is when unemployment rises and people can’t repay their loans. That tends to happen as a result of rising unemployment or falling small business incomes.
With the Royal Commission do you think some more things will sort of shake out?
Yeah, I think that there’ll be some recommendations from the Royal Commission that will require more transparency and better behaviour from the banks.
Nothing drastic though.
I don’t think there will be a big surprise but then again I could be surprised about that. Tony says excellent podcast,. Thank you, Tony. I really do look forward to listening to you guys every Friday on my evening walk home from work, you put a spring in my step every time. Excellent, Tony, well spring away. James probably won’t remember but Alan certainly will, a former Reserve Bank Governor called Bernie Fraser in 1988 from memory was when he told us that the industry super funds were the super of the future. Bugger me, the future is here and it looks like he was right. 30 years of pre-tax salary sacrificing into the things combined with their pretty good average returns has set me up for a long and comfortable retirement. They’re a wee ripper. I’m sure they’re skimming fees, etcetera, and partying in the board rooms to some degree but the fact remains they perform.
Maybe Alan could recommend some ETF or listed investment trusts that did as well over the years but really for someone of relatively unsophisticated financial knowledge the industry funds have done the job at minimal risk. I couldn’t agree more, Tony, could not agree more. However not all industry funds have done it. If you look at industry funds on average they’ve done better than the retail funds on average. Are you in an industry fund, David?
Yeah, I am, it’s Uni Super. I was in student politics back in the days and so I’m a member of the University Super Fund.
The best performing industry fund over 1, 3, 5, 7 and 15 years is Host Plus which has a long term return of 12.5%. If you’ve been in Host Plus, great, well done. My complaint about Industry funds and super funds in general is that you’ve got no really sensible way of choosing the one that is going to be the performer, the best performer, because you can end up with an industry fund that produces a return of less than 5% but you’ve got no way of knowing which is which particularly at the beginning, you can only do it in hindsight. It turns out to be a lottery. Tony has done well, I don’t know which one you’ve been in, Tony, but whichever one it’s obviously done fine and well done. Other people in other industry funds have not done so well and I just think that’s a fundamental inequality that is unfair.
Is there something you can do about that?
The only thing to do as I’ve recommended in my columns in The Australian is to have one default fund that everyone goes into if they don’t make a choice and that that default fund should be the future fund which has produced a very good long term return, not quite as good as Host Plus at 12.5% but it’s about 10% above average so that’s what I think should happen. It isn’t going to happen, the government won’t do it and the Productivity Commission has come out with recommendation for having the best 10 super funds as being the choice of default funds which I think is missing the point. They’re the best 10 but there’s still going to be a big difference between the top 1 and number 10. Your list of 10 to choose from as being your default super fund that your money goes into, how do you choose between number 1 and number 10?
Does it give an unfair advantage say if everyone got chucked into the Future Fund, does that not make it an unfair playing field?
At least everyone is equal. I think it’s unfair at the moment where people get big differences, some people end up with a poorer retirement because they’ve ended up in a bad fund that wasn’t their choice.
I mean we’ve seen the ads where someone is on an escalator going up and someone is on an escalator going down.
That’s the difference between the industry funds and retail super funds, the difference between them on average is about 2% in returns so something like 7.5% to 5.5% in average returns between the bank owned funds and the industry funds. Even within each of those categories there’s big differences. You work for somebody, whoever it is, the employer puts your money into a fund because the employer picks it maybe with the best of motives, maybe simply choosing the bank that they happen to have an overdraft with, and you end up in a bad fund that you didn’t even choose. I think the whole thing stinks, it’s terrible.
Finally, last question. I love your podcast, came across the 10/30/60 rule, your retirement income will be made of 10% deposit, 30% income investments earned during retirement, 60% after retirement. I’m almost retired and wish I had known this 35 years ago. I got to thinking about the 4% management fees I paid in the 1980s and as that 4% comes off the deposit I simply thought the rule became 10/30/60 from the 80s with higher interest rates but I wish I focussed on my super more in those days. So do I, Dave, you should have focussed on it.
The 10/30/60 rule is really old, it was invented, as you point out, back in the 80s when interest rates and returns were higher. It’s actually irrelevant now and you shouldn’t follow it. It no longer applies, the returns are too low, you’re not going to get that 30% in the investment earnings before retirement and 60% after retirement, it just isn’t going to happen like that anymore. I think the days of 10/30/60 rule are over. It is certainly the case that fees matter. There was a time when management fees were 4% and that really made a difference to your returns. Now, Host Plus administration fee is $1.50 per week which is a fixed dollar sum.
That sounds pretty reasonable.
It does sound reasonable except what is it per year, $75 a year, so that’s okay as long as you haven’t got $1,000 in your account in which case it’s quite a large percentage and that doesn’t include all the investment fees that are passed on are at least taken out of your account and the investment fees can range enormously from 1%, this is the fees the fund managers charge, they charge a fair bit for 1%, 1.5% to 2% even so that gets added on as well.
Would you come up with a modern version of the 10/30/60?
Well you’d only adjust the percentages perhaps and 15% or 20% from your contributions which is what the 10% refers to. I just think your contributions these days have to make up a higher proportion of your final sum. In the old days you could relay on higher returns while you were saving and in retirement than you can now. Maybe we’ll get back to that time but at the moment I think contributions have to be 20% or so these days, not 10%, just simply because the returns are much lower. We’ll have to leave it there for today, David, it’s been great talking to you, thanks for joining us.
Yeah, thanks for having me, Alan, had a great time.
Good. Don’t forget, everyone, you can subscribe to The Money Café in Apple Podcasts or your app of choice, while you’re there it’s helpful to leave a review or a rating and send in a question, we’ll get to it and we’ll answer it in next week’s episode. E-mail the question to email@example.com. Until next week, I’m Alan Kohler, publisher of The Constant Investor.
I’m David Swan, reporter for The Australian.
Next week it’ll be Sue Neales, also from The Australian who’s the rural reporter so we’ll look forward to that.
Talk to you soon.