Debunking Investing Myths, with Freddy Lim, Co-founder and CIO, StashAway

Episode summary

Philipp and Freddy debunk some common investing myths, such as allocating your assets based on your age, the ease of passive investing, and bonds are always a safe bet.

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Episode transcript

Philipp: So, thank you for joining us today, for episode 1. So, it's going to be a great start on the new podcast, In Your Best Interest. So, I’m really happy to have you here today,

 

Freddy: My pleasure.

 

Philipp: And joining us. Because the topic is quite interesting. We're going to be debunking some common investment myths, hopefully. But before we do that, I wanted to get a little bit more personal. I know we have known each other now for a few years already.

 

Freddy: Yes.

 

Philipp: But a lot of people are really interested to learn more about you. We see it also in the office, a lot of interns, they look up to role models, maybe they want to be in finance. And you had quite a long career already in finance. So, I want to take a little bit of a step back and ask a lot of questions that I have never even asked you before. May we start with university life. What was the choice you made? And where did you go to university and why? 

 

Freddy: Okay. I think my choice dates back to mid-February of 1992 when George Soros broke the Bank of England. And that's the first time where a young kid like me back then was like, “Wow, this intellectual person broke, this was like David versus Goliath. And someone won the battle by sheer intellect.” So, that was the first time that got me interested in looking at finance. And over time, I became a bit more inclined to mathematics, applied math and very curious about it, and then wanted to relate math and finance together. So, that resulted in me choosing Monash University to study econometrics and economics.

 

Philipp: So, in high school, so to speak, you already thought, “Hey, this is what I want to do.” So, you were really set on finance. 

 

Freddy: And the data part of it because I did a lot of research.

 

Philipp: Yeah.

 

Freddy: Monash was ranked 16th in the world for econometrics back then. The famous statisticians like Robin Enger, and Granger, Eger, Granger, yeah? And all this back in schools that you read a lot about them. They were actively on exchange in the campus for 6 months. And they were giving lectures and they were teaching there. And so, that's a lot of back and forth with University of California, San Diego, and between Monash and that in a Stats department. And of course, Dolly the sheep was cloned at Monash as well. 

 

Philipp: Yes.

 

Freddy: So, I was intrigued about the school, and I think it matches… their strength matches my desire. And so, I went into the program at Monash.

 

Philipp: Super interesting. And I think you mentioned a few names there. Pretty famous names as well. Especially when it comes to finance, economics. Was it any specific teacher or a lecturer or something that you said, “That was my role model”?

 

Freddy: Yes. There are quite a number. We had Professor Max King who is… he’s like a superstar and model… modeling economic systems, somebody who shocks a bunch of equations and it's like a system of equations. And he generates scenarios for the Australian Government. He also generates scenarios for organisations around the world. So, this is real industrial modeling that the man is doing. And I am fortunate enough to be in a lot of his classes, and I was his pet student as well back then. So, there's a lot of likes like that. And Professor Xiao Kai Yang who was Chinese scholar of the year back in ‘99, and an extremely intelligent man. So, there's a lot of intellect there, very academia. But I was after that sort of foundation back then.

 

Philipp: Yeah.

 

Freddy: Yeah.

 

Philipp: I think it's quite amazing. I think, for me, also going into finance into university, so it was already in high school pretty pre-determined. Because when I went to the US as an exchange student, and I was staying with a family there, and my host dad was into finance.

 

Freddy: Yes.

 

Philipp: They had their own company, running institutional money, and I was mesmerized by this. And this was (when is this?) ‘03, ‘04. So, markets were really good. [05:00] Institutional money was flowing in, obviously, just before the financial crisis. But those things shape you.

 

Freddy: Yes.

 

Philipp: And those things for listeners. Be passionate about the topic as well.

 

Freddy: Yeah.

 

Philipp: You will do much better in school as well, if you find something that you're passionate about, that you also would like to talk about with your friends or like you research even after class.

 

Freddy: Yeah. The people you meet, even in those early days,

 

Philipp: Yes.

 

Freddy: They do shape you later. Your mentors and also buddies who are studying in the same class. And there's a lot of successful really interesting people that I met back in that class. One comment came up when I chose the double first-class honors. 

 

Philipp: Yeah.

 

Freddy: I got 2 majors, and I got double first-class honors in both economics and econometrics. But before that success, people were challenging me, they said, “How are you going to get jobs? What kind of work would you like to do? Why should you be an accountant or engineer or architect and get a real job? What is econometrics, and what is economics? And what are you going to do?” And my response was just, “I like these subjects. I know I'm going to be passionate about it. I have no idea what I'm going to do. But this is what I want to know, want to study.” And it today came full circle. 

 

Philipp: Yeah.

 

Freddy: Every single day of my life, whatever I've learned back then, I am still using those knowledge and concepts today actively.

 

Philipp: Yeah.

 

Freddy: And more the other things that I acquire along the way. But the university education wasn't forgotten.

 

Philipp: Yeah. Which is good, because a lot of people don't use a lot of the things that they studied.

 

Freddy: Right.

 

Philipp: But in your case, you did, which you already said, people were asking you, “What are you going to do with this?” Next question then really and the next segment is what was it like getting your first job? Was it coming out from an internship that you may have done before or what was the process of getting that first job? Because that's also a question that comes up a lot. Or like I get asked that a lot. 

 

Freddy: Yeah.

 

Philipp: What do you do after university? People feel like, “Oh, now this crossroads kind of thing,” what are you going to do.

 

Freddy: I am a big believer of getting internship exposure. But there's no such thing back then. It was the year 1998, ‘99. 

 

Philipp: Yeah.

 

Freddy: And the world was not as organised or well-run like today. There's no such thing.

 

Philipp: Yeah.

 

Freddy: And so, what happened was I did a lot of holiday vacation work in a small way, small companies and all. There weren't formal programs. But I got my first shot at a real job with Lehman Brothers. And it was quite accidental. 

 

Philipp: Where was it?

 

Freddy: It was in Tokyo. But it was the Lehman Asia headquarter that hired…

 

Philipp: It was directly from Australia you went to Tokyo? 

 

Freddy: That's right. 

 

Philipp: Okay, wow.

 

Freddy: They were just going to hire 2 people Australia-wide, one from the MBA level and the other one for undergrad.

 

Philipp: Yeah.

 

Freddy: And I was going to try to fight for that one spot, right?

 

Philipp: Yes.

 

Freddy: And the funny thing is, I went to the wrong interview. I mean, you're young, you didn't know the difference between investment banking or trading in the markets, it’s very different. And so, I went to the investment banking interview, it was more about merger and acquisition and bringing company, listing companies or advising companies, helping companies raise funds. And it's interesting, don't get me wrong, it's interesting, but it wasn't what I wanted to apply. And my interview was a little bit disastrous. And I walked out of the interview, you know, halfway, because it's just clearly the wrong fit. But I was fortunate that the head of HR for Asia was just around the corner, and she suggested that I interview with Japan and that's an interesting trading role, an exciting market role that I should go for. And they flew me to Japan for 3 days. And we went through 23 rounds of interviews within a very short time, I got a job. Australia-wide, I got the last spot. 

 

Philipp: That’s crazy.

 

Freddy: Yeah. It was just very coincidental. I'm not a good example for today's organised programs, so I would strongly suggest people do plan properly. 

 

Philipp: Yeah.

 

Freddy: Because I'm standing on this side and I do appreciate a graduate who was well-planned, clear about what they want to do. 

 

Philipp: Yeah.

 

Freddy: And when you have a lot of internships throughout your undergraduate studies, it really improves your appeal, and in the qualitative matter, people like seeing that the proactivity.

 

Philipp: Yeah. And I think you also like this is when you shape yourself about what you want to do. This is the time to test.

 

Freddy: Exactly.

 

Philipp: Even if you're an engineer [10:00], but you want to do something in marketing, that's fine. That's the time to do it.

 

Freddy: Exactly.

 

Philipp: To do this, okay, so interesting. So, fast forward now you’re in Japan, getting your first paycheck. 

 

Freddy: Yes.

 

Philipp: What did you do with your first paycheck? 

 

Freddy: Well, the first paycheck went to paying the mortgage for the family home.

 

Philipp: Yeah.

 

Freddy: The first thing I did was to take the mortgage burden off my dad. As you know, I didn't come from a big wealthy family, we always were very normal folks. And the first thing I did was just to say, “Hey, let me… dad, mom, let me take over the home mortgage for the whole family. I'm making money now. So, let me start the payment from today.”

 

Philipp: Yeah.

 

Freddy: And I did that every single year and until they’re paid off. So, the first paycheck, a third of it went to the house in Malaysia. 

 

Philipp: Yeah.

 

Freddy: And another third went into sponsoring my brother's education. Again, it's a very traditional thing to do so. I don't see it often these days, but that's the first thing I did. 

 

Philipp: It's like, also probably will make you feel good.

 

Freddy: Investing in my family. 

 

Philipp: You invested in family, you gave back.

 

Freddy: Yes. 

 

Philipp: Because they probably helped you become what you are.

 

Freddy: Yeah. They went through,

 

Philipp: They probably helped you along the way.

 

Freddy: Hardship to put me through education. So, that was the first thing I wanted to do. And it was a voluntary decision. I didn't need to be persuaded. So, I was very proud of that first paycheck where it went to.

 

Philipp: I think that's pretty cool, yeah. And I think, I always still feel that way about my dad as well, because he made sacrifices to send me when I was 15 years old to the US. It cost a lot of money.

 

Freddy: Yes.

 

Philipp: Just for me to learn English. But without that, I don't even know where I would be right now, because I wouldn't have met my host parents who got into finance into university. It's very interesting how these little decisions in life ripple down.

 

Freddy: Ripples down later.

 

Philipp: All the way.

 

Freddy: Exactly. 

 

Philipp: So, it's super interesting. Okay, so that's great. So, very honest for the first paycheck and to feel good. Let's shift a little bit into investments.

 

Freddy: Okay.

 

Philipp: First of all, what have been the best investments you have ever made? 

 

Freddy: Okay. It's a financial asset. Unfortunately, I thought I had something cooler to say.

 

Philipp: Well, the parents' one was good. And that was the paycheck, but,

 

Freddy: I don't consider investing in my brother's education, because I never expected anything in return. It’s more about solidarity, family support. But my first real investment was in gold.

 

Philipp: In gold. Okay.

 

Freddy: And true physical gold bars. I’m a big fan of gold.

 

Philipp: So, that was paycheck number 2 then?

 

Freddy: Yeah.

 

Philipp: Pretty much. Yeah, okay.

 

Freddy: I mean, actually owning real physical gold. And jewellery back then was more heavy in gold content. And I'm talking about a less cool version of gold.

 

Philipp: Yes.

 

Freddy: Yellow gold, not white gold.

 

Philipp: Yeah.

 

Freddy: So, we've been accumulating physical gold over the years, every year. Every paycheck, I will always have a little affinity for gold.

 

Philipp: Yeah. So, you’re still doing that? 

 

Freddy: Yeah, yeah. 

 

Philipp: Okay. 

 

Freddy: Yeah. If I don’t do that, my mom would.

 

Philipp: Yeah, okay.

 

Freddy: And I think back then, gold prices were like something like $300 an ounce. And now, it's amazing, it’s $1,640 if I'm not wrong.

 

Philipp: Yes. Roughly right around there.

 

Freddy: Yeah. So, it's amazing how it always reminds me that, in the long-term, certain things, certain principles work. They always hold true.

 

Philipp: Yeah.

 

Freddy: And gold was special to me because my mom started the culture of..from when I'm baby, she has this little chain around the feet, and is all pure gold back then. So, she accumulated it every year as a birthday gift. 

 

Philipp: Yes.

 

Freddy: And when I got my first paycheck, I started buying myself some jewellery and gold bars and as a custom.

 

Philipp: Yeah, yeah.

 

Freddy: And today, they have grown in value. They are great portfolio insurance. And there's a lot of reason to like it. So, in a way, it reminds me of where I came from.

 

Philipp: Yes, totally, totally. No. And it's interesting because obviously, it's also upbringing.

 

Freddy: Yeah.

 

Philipp: For me, I have never bought a physical gold bar. I know my grandparents had some. And I think in Germany, it's also physical things that they like. It's come from the war times as well. So, physical gold or real estate. It's mainly those 2 things. Because I grew up with this, I'm very opposite of this. Because I feel like I need something less physical, to me. I want something liquid. And I know we talk a lot about investments, buying real estate or buying a REIT, for example. For me, it's been mostly the REIT. Because it's ease of use,

 

Freddy: Yeah, or Gold ETFs.

 

Philipp: Exactly, exactly, or Gold ETF, I still believe in Gold and having some of that in a portfolio. But it's quite interesting because of the history of where you come from. But it makes sense. It's sentimental as well. [15:00]

 

Freddy: When you’ve grown sentimental with the physical jewellery, or that, or the minted coin, and all, there's a certain attachment to it.

 

Philipp: Yeah.

 

Freddy: And you can smelt them and they will be worth something. But the thing is that you like them for their design and their sentimental value.

 

Philipp: Yeah.

 

Freddy: So, we do have a little safe just for jewellery at home, and it is insured. 

 

Philipp: Yes.

 

Freddy: And this cumulated over the last 18 years. 

 

Philipp: Yeah.

 

Freddy: Yeah. So, I'm quite proud of the collection.

 

Philipp: Yeah, no, I think that's pretty cool. And you can show it to your kids and grandkids and stuff in the future. So, it's actually quite nice.

 

Freddy: Yeah.

 

Philipp: From that value. So, then, you've been in finance for a very long time, we talked about Japan, now in Singapore. What still keeps you interested in finance? Because it's been such a long time, a lot of people, they have a career with a certain amount of time, and then they say, “Hey, I want to do something else.” What keeps you still interested in finance?

 

Freddy: I'm glad I started my finance career, not in Asia. Because back in Europe and the US, you get a lot more exposure. There's just a lot more going on in finance itself, because you have people looking at fixed income, the European market has a strong fixed income culture. And you start seeing a lot of bond issuers of different kinds. And I was involved in a lot of this innovative bond issuance and it was new back then. I won a prize in Japan for helping Morgan Stanley issue the first-ever zero-coupon bond for government agencies. And my team and myself were behind the design of the structure and it went on to clock in 400 billion yen of issuance in one go. So, there is a lot of interesting stuff going on elsewhere. But when I came back here to Asia, I realized that a lot of fund managers were more specialized in the equity markets. 

 

Philipp: Yeah.

 

Freddy: They were mostly stock pickers. When I first came back, I heard the stats were something like 66% of fund managers in Asia, they are single-name specialists.

 

Philipp: That's true, yeah.

 

Freddy: Where I came from a multi-asset background, fixed income, yield curve, stock indices of different markers, structured notes and all kinds of FX structures…

 

Philipp: Yeah.

 

Freddy: Commodities. There’s just so much to do. And when you came back here, it’s mostly concentrated on stocks.

 

Philipp: Yeah.

 

Freddy: Or properties. 

 

Philipp: Yeah, exactly. So, what keeps you still interested? Is that the tech side right now or is it, you know, what part of finance that you like now still?

 

Freddy: What keeps me going is I feel like now, Asia is just so much more ready,

 

Philipp: Yeah.

 

Freddy: To move on. And when Asian markets decide to move on, they do it quickly. But there's always some resistance first. But once we get over that, there's a lot of acceptance and can come very quickly. For example, ETFs were not even mainstream when we co-founded StashAway.

 

Philipp: Yeah.

 

Freddy: 3 and a half years ago. And now, it's quite in the headline. And now, you also see more acceptance about investing internationally, and not as a home buyer. There's a lot of changes in the next generation of investors, they are just more open,

 

Philipp: Yeah.

 

Freddy: To choices. And I felt like my skillset from before now is more applicable…

 

Philipp: Than ever.

 

Freddy: Than ever, yes. Came full circle. 

 

Philipp: Yeah. No, that is awesome. So, let's go over to the topic of the day, of the episode. And there are so many myths out there about investing that get thrown out all the time. And a lot of people just don't know, they listen to them falsely, or they believe in them. And I think explaining a few of them with your background as well would really benefit a lot of people. And I think we can discuss them quite openly. But let's start with one. And it's one that actually comes up all the time because I get asked this quite a lot, actually, is, “Should my age equal my asset allocation?” So, a lot of people say, “Hey, if, you know, Philip, I'm 20 years old. 20 minus 100, should I be 80/20?” Kind of that,

 

Freddy: Yeah.

 

Philipp: Concept and then rebalancing that the years go on.

 

Freddy: Right.

 

Philipp: And it's a big myth, actually, I think, and a good topic to discuss in general. What are your thoughts on that? 

 

Freddy: Well, if we take a step back from what StashAway is doing, but just look at this issue itself. I find it difficult to accept that an allocation, a static allocation can be recommended to anyone. Because circumstances change. Maybe I have a better paying job now, but maybe later that changed. I will be married. I may have a few pets or kids, and I may have other aspirations. So, it's hard to [20:00] say just based on age, that I'm a 70% stock person or a 30% bond person. And I find it more difficult is that not all stocks are made the same. Not all stocks are risky. And also, the same thing is for bonds, not all bonds are safe. 

 

Philipp: Yeah.

 

Freddy: A corporate bond of a poor quality is a bit more like junk bonds. 

 

Philipp: Right.

 

Freddy: And they could be quite risky, even more so than equity markets. 

 

Philipp: Yeah.

 

Freddy: And so, it's very difficult to just say stocks versus bonds. And so, I tend to go into growth versus protective assets. Because just to respect the differences in nature of different stocks. If I'm a consumer staple stocks, I produce food and things that people would need even in a recession,

 

Philipp: Yeah.

 

Freddy: I shouldn't be classified as risky as stock. I'm a protective asset really. Or I'm a bond, but I'm an aggressive bond in the emerging market world, and I give you a high amount of yield, but it came with a lot of risk. I'm really like the stock market. 

 

Philipp: Yes.

 

Freddy: And there’s growth orientation. So, I tend to split it into that. And from that aspect, yes, it's understandable that people tend to say, when you're young, you have more time to recover from any shocks that happened tomorrow, and hence, you can afford to take more risk. 

 

Philipp: Yeah, yeah.

 

Freddy: There's some truth in that. 

 

Philipp: There's some truth in that. But then, so also, because what I think people underestimate is also longevity. And just because you're now retired, doesn't mean you don't have to have growth assets in your portfolio. 

 

Freddy: Yes.

 

Philipp: That goes hand in hand with this. And then also, I believe that you should look at goals. What are my goals? Is it the goal to also hand down some to the next generation? Should that then be equal to your age? Probably not, right?

 

Freddy: Yeah, I think,

 

Philipp: Those are a lot of things. That’s not cookie-cutter like that, like age equals asset allocation.

 

Freddy: The time to your goals’ deadline. So, let's say I need to put a down payment for a flat in 3 years’ time. 

 

Philipp: Yeah.

 

Freddy: That's a 3-year goal. And regardless of my age, the clock starts and moves anyway. 

 

Philipp: Correct.

 

Freddy: I think that's the best example.

 

Philipp: Yeah.

 

Freddy: But however, retirement goals, I'm 20 years old and I want to retire at the standard age of 65, then it’s 45 years.

 

Philipp: Yeah.

 

Freddy: So, if I'm older, that time shortens. 

 

Philipp: Right.

 

Freddy: So, there's some truth in that one that age matters. But for other goals that are not as long-dated as this one, then I think the goal time would be more important than age.

 

Philipp: Yeah.

 

Freddy: Yes. And so, and to be clear about this as an example, maybe I can take more risks with more growth orientation with the retirement goal. 

 

Philipp: Yeah. 

 

Freddy: But I'm likely to do less risky stuff when it comes to a shorter-term goal.

 

Philipp: Correct.

 

Freddy: Pay downpayment in 3 years’ time. 

 

Philipp: Yeah, yeah, exactly.

 

Freddy: Yes.

 

Philipp: I think that's why when people like to think about goals and stuff, like make sure that you set up different pots. Each goal should be probably differently managed than this. And that's why maybe for the retirement goal, you can take this as an anchor maybe, the age equals asset allocation.

 

Freddy: Well, I don't blame them. You know why? Because up until now, we don't have digital platforms that are more flexible, you can invest very flexibly, you can withdraw,

 

Philipp: You went to the bank and said, “I want to invest.”

 

Freddy: Yes.

 

Philipp: “Here’s a mutual fund, or here's an ILP”. 

 

Freddy: Yeah.

 

Philipp: That's the usual way.

 

Freddy: Yes.

 

Philipp: It doesn't come holistic.

 

Freddy: There are lockups in the funds, there are minimum sizes. So, I think things were less flexible back then. And today, I think we are very fortunate we are in an age of consumer empowerment. And technology was behind the empowerment. You can have any amount of goals now. Each goal is a different portfolio.

 

Philipp: Yeah, yeah. And I think that the big role is the Internet in general.

 

Freddy: Yes.

 

Philipp: People are more educated. People can do research. And people can also demystify things themselves. Because you just do a nice Google search and you'll find different opinions and then weigh them out, the way you feel comfortable. Okay, let's go on. Here’s another good one. People always say, “Passive investing is very easy”. Is that a myth? Or is it the truth? 

 

Freddy: I think the hardest thing to do in the world is to do nothing.

 

Philipp: Exactly.

 

Freddy: So, for extreme passive investors, you have to go through changes in economic cycles. And knowing that a recession just came and the next 3 years, you're going to have some annoying portfolio performances, and doing nothing about it is a very hard thing to do. 

 

Philipp: Yeah.

 

Freddy: It's not saying it's wrong. I mean, it's okay because you have a long-term plan, you keep contributing monthly, averaging in over a certain time, it actually could be compatible with your goals.

 

Philipp: Yes. 

 

Freddy: But at StashAway, of course, we go about with the economic regime, we adjust to the environment, and we try to make it more smooth [25:00] for you to stay invested. 

 

Philipp: Yeah.

 

Freddy: So, that's just another approach. But in general, there's no right or wrong answer. But it's very hard,

 

Philipp: Correct.

 

Freddy: To be passive.

 

Philipp: It's not easy. But people can say, for example, a lot of times, people come to me saying, “Well, I'm just going to buy this 1 ETF, let's say All Country World Index Equity. Like global great. Very diversified, has everything in it, and we're going to stick with it for the rest of my life.” You say that now. First time volatility hits, it's down 10%, what are you going to do? How do you feel about that? And I think that's where the emotional impact comes in. It's just not that easy. It's not easy to stay the course. I've been there.

 

Freddy: Yeah.

 

Philipp: Like, when 2008, 2009 financial crisis, when people call into work, and it's actually they're crying on the phone because they lost 40% of the value of their portfolio. They're crying, right? They are almost there to retire. 

 

Freddy: Yes.

 

Philipp: They just lost this much money. Difficult, it’s not easy.

 

Freddy: Which is exactly why I think the financial planning bit will help it be easier to do passive. If you don't have a plan, you just randomly choose a risk combination like 70% stocks, 30% bonds.

 

Philipp: Yeah.

 

Freddy: And if you're unlucky, then you retire and then you have this massive drawdown. But if you are well planned, so for example, you have X amount of cash that lasts you X amount of time.

 

Philipp: Yeah.

 

Freddy: For an older person, maybe you can afford to have a small portion of a portfolio, but there will be enough to cover you for a few years.

 

Philipp: Yeah.

 

Freddy: A younger person probably can’t do that,

 

Philipp: No.

 

Freddy: But have more time. But what I'm saying is that, if you have some cash management plans, that helps you stay alright, and when the market is down, you don't need to draw on your portfolio because you already planned for it.

 

Philipp: Kind of insuring yourself.

 

Freddy: Yeah. And then you have the time to let your portfolio recover. So, in that case, what I'm trying to say is you need a cash strategy. 

 

Philipp: Yeah. 

 

Freddy: And then you should stay invested.

 

Philipp: Yes, exactly. But again, passive investing, not so easy, because there's still the emotional, the human part about it. And especially, with things like financial planning or having different goals set up, you can kind of instil more confidence in yourself, right, and hopefully, stick with the plan.

 

Freddy: Yes.

 

Philipp: So, yeah, so I think it's a very important topic. I think too many people think that way until they go through some downturns. And we have been in a bull market for like 12 years long now. So, people are forgetting about bad times. They do really quickly. And I think, for you, you were in the financial industry in ‘08, what's your opinion about it? I was very young inside of it. Just that was literally my first job out. So, you get thrown into this. My experience was 2008 in Munich, doing an internship at State Street on the asset-backed side, securitisation side, which blew up that summer. That business is gone.

 

Freddy: Yes. 

 

Philipp: But you were there and just from your opinion, because the younger generation has not been there, and the older generation has been there, but they forgot because it's been nice 10, 12 years now. What was your experience like during that time?

 

Freddy: Yeah, I've been through ‘97 as a final year student. And I invested, I've seen, I mean, I got my fair share of challenges. Then I saw it in August 2000 in the tech bubble bust. Seen it again in the 2008 financial crisis. And then seen it in 2011, European contagion. And then we have so many mini corrections. And you actually see a lot of it. It’s actually not rare to have a correction of 20% in bull markets.

 

Philipp: Yeah.

 

Freddy: And bear market, actually, that is a bit more gradual, but it just lasts longer. So, having seen…

 

Philipp: Is even worse, right? 

 

Freddy: Yeah. 

 

Philipp: Pretty much, right?

 

Freddy: Yeah. Having seen enough, I think there's a good old saying from senior bankers of whom I knew is when the tide subsides, you know who is swimming naked.

 

Philipp: Yes.

 

Freddy: And that means that whoever has the most leverage, whoever has the least discipline and borrow the most money to invest out of greed and complacency, they will be the ones swimming naked when things go wrong.

 

Philipp: Yeah.

 

Freddy: So, I would say the same thing. Every crisis always exposes the same principles. Have good cash management plans before you invest. 

 

Philipp: Yeah.

 

Freddy: And then perhaps averaging in. Invest your savings, not borrow money. And hence, every month have the plan to save after expenditure. [30:00]

 

Philipp: Yeah.

 

Freddy: When the markets are down, you're contributing and getting more assets of the underlying, and it's smooth the noises to your net worth. All this fundamental truth, they hold true,

 

Philipp: No matter what.

 

Freddy: Regardless of what market conditions you're in. 

 

Philipp: Yeah.

 

Freddy: I really have to go back to that basic principle.

 

Philipp: Yeah. No, I think, agree that they don't change. But again, you need some hand-holding sometimes along the way because people do get emotional. 

 

Freddy: Yes.

 

Philipp: In ‘08, to get back to that really quickly, you were in Japan still? 

 

Freddy: Yes. I've seen 10 years of deflation in Japan. 

 

Philipp: Yeah. So, what was the, you know, just for people to put it in perspective a little bit of how bad it was or how an impact was it for you on your job, personal maybe even in terms of like..? Because, like, again, I was very young, but I saw it crashing. 

 

Freddy: Yeah.

 

Philipp: It was pretty crazy to see the business that was supposed to join the year after the internship, it wasn't there anymore. I went to the US then. From being there 4 or 5 years before in high school to then when I moved there after college, very different, very negative, different, you know, like, no jobs.

 

Freddy: I'll give you an example. In the early 90s, the Japanese economy is so bubbly that the Imperial Palace in Tokyo is worth more than the entire State of California.

 

Philipp: That's crazy, yeah.

 

Freddy: And back then, people are going crazy about paintings and race cars, and the numbers are staggering. And then it all came crashing down in a very short time. 

 

Philipp: Yeah.

 

Freddy: So that was the part that I didn't experience. That was the part that I knew. And then I went into Japan in 2000, and it was already in deflationary mode. 

 

Philipp: Yes.

 

Freddy: But I was lucky I was enjoying it, because I was from the fixed income part of the jobs market. I benefit from the demand for protective assets. 

 

Philipp: Yeah.

 

Freddy: And whatever income I've earned, the purchasing power is always going up. Because it's deflation, right? Prices are falling every time for all the goods and services you have.

 

Philipp: Yeah.

 

Freddy: The high-quality stuff made in Japan and they're getting cheaper every year. So, people just want to hold cash.

 

Philipp: Yes.

 

Freddy: Not wanting to invest. It's good for me, but then if you look at the economic-wide basis, when everybody is just trying to hold cash and not do anything, then nothing happens. 

 

Philipp: Yeah.

 

Freddy: There's no growth. There's no progress, right?

 

Philipp: Yeah.

 

Freddy: And then you see them on a spiral, downward spiral for a whole decade. We call it the lost decade. 

 

Philipp: Yeah, you did.

 

Freddy: Yes. So, I've seen it. I’ve seen the good side of it as a person, but I’ve seen the bad side of it as an analyst of economies and markets.

 

Philipp: Yeah. No, makes perfect sense. Let's move on. Let's go on another myth that's out there. And I think we talked about it I think before, but Warren Buffett, I think, is a funny guy in that way. Because the myth is actually you should concentrate to build wealth. So, a lot of times people say, “Oh, why would I diversify my portfolio? Because in the end, the people who get really rich do 1 thing really, really well. They put all their eggs in 1 basket.” And Warren Buffett, why I'm going to get there in a second is actually because he concentrated everything on the insurance side and building that business first. It’s his core still. He knew this to the heart. He's diversified now. But he also preaches that you should be investing in the S&P 500 and the US bond market.

 

Freddy: Yes.

 

Philipp: Into ETFs. And that's it for his trust, should he pass away at some point.

 

Freddy: Yes. 

 

Philipp: How do you feel about, you know, concentrating to build wealth? Or are you more about, “No, you should diversify,”? Is it a myth? Is it the truth?

 

Freddy: I think it's a misconstrued perception of Warren Buffett because there's a background to it. He himself as a professional who knows businesses as well, he wants to roll up his sleeves and buy companies and change the management or help running the company get better, and hence sell it off later at a much higher price. It’s not the same as trading, buying, selling, or even investing. But he did say that for the average person, or the majority of people don't have those crazy sophisticated skills, they should just diversify. And think about it, he is essentially looking at a lot of deals. He is like a VC. 

 

Philipp: Yes.

 

Freddy: He deep dives into companies, he has armies of analysts behind crunching numbers. And then they would also run the company, change the companies, before selling it off 10 years, 20 years later for a profit. 

 

Philipp: Yes.

 

Freddy: His stock portfolio was always concentrated with names like Coca-Cola, right? [35:00]

 

Philipp: Yeah.

 

Freddy: And all the top names, See’s Candies, and today, they still have it, right?

 

Philipp: Yeah.

 

Freddy: And so, it's sort of like he knows that you need to be specialized to be good at something. And that's also the kind of return you see in terms of investing in startups or VCs. It is the same. The return always comes from the top-concentrated holding.

 

Philipp: Correct.

 

Freddy: If you look at the book ‘Zero to One’ written by Peter Thiel, he said the same thing. What his funds invested in, Facebook was the greatest investment they ever had. It was bigger than the return of all the other 999 names combined. And the second-best investment they had was Palantir, the cybersecurity firm that has Pentagon contracts. That was bigger than the other 998 investments return combined. And so, there's a J curve effect in terms of VC investing, where returns are concentrated, where the averaging approach wouldn't get you reasonable returns.

 

Philipp: You still need to throw money at different startups,

 

Freddy: That’s right.

 

Philipp: In order to get to the two.

 

Freddy: Yes, you need to be extremely good at what you do. And I think it applies in private equities and VCs. Personally, this is my opinion. But when it comes to investing in the S&P 500 or the majority of traditional asset classes is actually about the growth of the economy over time. 

 

Philipp: Yes.

 

Freddy: And it's about the average earnings and the growth of earnings of companies.

 

Philipp: Do you believe that,

 

Freddy: Yeah.

 

Philipp: There will be more Apple products sold in the future than now? Like, you're thinking about now, but that's what… what you're thinking, right? Like, the economy and companies grow over time. And new ones come up that take the old ones out, right? 

 

Freddy: That's the point I'm trying to get to.

 

Philipp: Yeah.

 

Freddy: The investing in an index asset class like say, S&P 500 top companies in America. And it doesn't mean you're getting mediocre returns, because these companies go through disruptions. 

 

Philipp: Yes.

 

Freddy: In fact, the disruptions are getting faster and faster now.

 

Philipp: Much, much faster. Much, much faster.

 

Freddy: That they drop out of the index and new ones come in. 

 

Philipp: Yeah.

 

Freddy: So, you're actually investing in the survival of the fittest over time, right?

 

Philipp: Yeah.

 

Freddy: So, it's by no way mediocre. And hence, for most of us, investing in a diversified manner can really work. 

 

Philipp: Yes, especially if you take the long-term approach, right?

 

Freddy: But the caveat is for a very niche area of the financial markets like private equity or venture capital investing that this is much more challenging. You need to really concentrate your expertise and do what you know well. So, Warren Buffett, actually, he's exemplary of both.

 

Philipp: Correct.

 

Freddy: It sounds like he's conflicting himself, but I think he's not. I think he is looking at asset classes that can be diversified, that makes sense, and certain areas you should be better at what you do. So,

 

Philipp: Yeah.

 

Freddy: I think it’s actually very sensible. Great advice from the legendary investor. 

 

Philipp: Yeah, I think so too. And I think, you know, when you hear, “Concentrate to build wealth,” I think people also look at business owners. Because they concentrate,

 

Freddy: Yes.

 

Philipp: All their risk, every blood and sweat too on top of that, not just the financial part, but also work daily, on one thing and that's their business. And, yeah, that can generate maybe in the future, more value than you working at a 9 to 5 job.

 

Freddy: Yes.

 

Philipp: But it has also much, much more risk.

 

Freddy: Yes.

 

Philipp: And time commitment and lots of sweat,

 

Freddy: Concentration.

 

Philipp: And tears. That's concentration as well. But when I think, like you said, when it comes to the stock market, would you rather bet that Apple will be there as a single stock in the future? Or do you rather buy the S&P 500 and spread yourself that risk?

 

Freddy: For when Apple is no longer in index, I'm,

 

Philipp: Correct.

 

Freddy: I'm owning another one is coming to replace it.

 

Philipp: The next one, the new one, right?

 

Freddy: Yes.

 

Philipp: So, I think this is where it really boils down to, right?

 

Freddy: Yes.

 

Philipp: So, another one that always comes up and one that I have to mostly explain to my German friends and family because they feel that way, actually, and that is investing in stocks is like gambling. That comes back to the thing that I said before. And I probably would think the same way if I would have never got out of Germany. Because in Germany, they like hard assets, like I said to be the gold, real estate for sure. 90% of everyone's net worth in Germany is probably,

 

Freddy: Fixed income.

 

Philipp: Real estate or fixed income. And pension, because they have pensions too. So, they're going away though, so there will be a problem in the future. But they got burned by big stocks like Deutsche Telekom.

 

Freddy: Yeah.

 

Philipp: When they got sold to the public and then went down. There are a couple of other ones. I didn't want to name them right now. The reason I actually got into investing [40:00] was, again, I went to the US and the US so open about it.

 

Freddy: I think we got to differentiate between single stock investing.

 

Philipp: Yeah.

 

Freddy: And.

 

Philipp: The stock market.

 

Freddy: … a general like buying an entire stock market as a diversified strategy. I think it's very different in the sense that, in the first one, if you look at any investment, you have 2 kinds of risks. A systematic risk.

 

Philipp: Yeah.

 

Freddy: Which is related to the general well-being of the economy or industry. It’s much more macro. And then the other one is more idiosyncratic, maybe the director just died, a founder just left the company, or some random specific events like the virus that we have now disrupt the supply chain and the business that’s exposed, a particular business, it will be 100% exposed.

 

Philipp: Yeah.

 

Freddy: However, when you go to the aggregate level for an entire economy or for 500 top names, that's like 11 industries in there, and they counteract each other. 

 

Philipp: Yeah.

 

Freddy: So, it's very different when it comes to a diversified manner. So, I would disagree with your parents when it comes to diversified equity market investing.

 

Philipp: Yeah.

 

Freddy: And I would agree with them when it comes to the more idiosyncratic single name investing approach. 

 

Philipp: Yeah.

 

Freddy: So, it feels that there are more elements of gambling because there's a lot of random movement in those names.

 

Philipp: Correct. And it comes back to what we talked about before. It's like, you really need to know that company then. You know, like if you do single stock investing.

 

Freddy: Even if you really.

 

Philipp: This is a full-time job.

 

Freddy: Even if you really know the company.

 

Philipp: Yes.

 

Freddy: You are subjecting yourself to a big chunk of the return explained not by the systematic part. You are trying to understand, but it's still a systematic part you’re understanding.

 

Philipp: Yes.

 

Freddy: That's the idiosyncratic, the random, unexpected part of it that’s quite a big portion.

 

Philipp: Lawsuits, whatever it might happen, you don't know; out of your control.

 

Freddy: Infringement of some patents, or got sanctioned by the government on your product. So, there are so many things that can go on. Think about Microsoft antitrust lawsuits and all in the early days after Netscape complained about the Internet Explorer. So, there are so many things that go on. And it's impossible to translate your understanding of the company.

 

Philipp: Yeah.

 

Freddy: Into returns.

 

Philipp: Yeah, yeah. No, it's true. But the thing is, the problem was always, for me, with clients was that they still want that gambling feel, or they think they know something, or like their friend told them about a stock. So, I try to always tell people, “Hey, let's limit your exposure to that gambling pile. Hey, take $50,000 and play around with it if that's 5% of your net worth and play around with it.” Because if you can't take it out of them, let them be. Like, and I think it's not a bad thing because you actually do some research, you're interested in something, don't take it away.

 

Freddy: I completely agree in a sense that,

 

Philipp: But manage it.

 

Freddy: Ultimately, it’s an allocation budget. 

 

Philipp: Yes.

 

Freddy: And you got to respect the larger idiosyncratic risks inherent in a single project investing.

 

Philipp: Yeah.

 

Freddy: So, you adjust accordingly that it’s more volatile, more idiosyncratic.

 

Philipp: Yeah.

 

Freddy: So, you can size it lower than the other parts. And the majority of it should be safer, diversified. It doesn't get killed because of 1 event.

 

Philipp: Yeah.

 

Freddy: So, I would say just a risk-adjusted approach to allocating. And there's nothing wrong with spending time researching companies you love and investing in them, a portion of it in them.

 

Philipp: Correct.

 

Freddy: That's a portion correctly by risk.

 

Philipp: Correct, yeah, yeah. And make sure that that's something that you set aside separately from the other goals.

 

Freddy: That’s right.

 

Philipp: To make sure that, yeah, and if it works, it works, if it doesn’t, that doesn't matter. But I think you get that a lot, so I saw this a lot in the Bay Area with clients.

 

Freddy: Yes.

 

Philipp: Because it's not even that they wanted it to be, but what happens a lot is, hey, like especially I'm talking Apple, Google, Facebook employees that were clients in the US for me back then, if the first time I met them, literally 90 to 99% of their net worth was in the company's stock.

 

Freddy: Yeah. It’s wasted over time.

 

Philipp: It’s crazy. Because, yeah, when you get more every year, times are good because this is in between ‘09 and now. So, times are good, stocks are appreciating, so… especially tech stocks, right, been doing really, really well. So, they were like, “Oh, well I don't want to sell it because,”

 

Freddy: Yeah.

 

Philipp: “Bill next door is not selling it and he's going to tell me that he made more gains because he held on to my company.” So, very emotional. This is the emotional part. But you are subject to so much risk now.

 

Freddy: Yeah. I mean, we have,

 

Philipp: This is your employer.

 

Freddy: We have met a lot of clients who were in this fortunate position of being awarded shares by their companies whose the benchmark tech names. But when I showed them the risk numbers in their overall portfolio, not just StashAway account…

 

Philipp: Yeah.

 

Freddy: Not just their bank account, but include everything they have in life, they were often surprised [45:00] by the amount of risk, amount of value at risk…

 

Philipp: Yes.

 

Freddy: The amount of downside risk they potentially can incur. Nobody would put it together and tell them the number. 

 

Philipp: Yes.

 

Freddy: And when we go through a lot of those exercises, they're often shocked about how much risk they are taking.

 

Philipp: Yes. And I always ask them the question very straightforward, right, “What do you think will happen if today, Apple… you work at Apple, you have 95% of your net worth in Apple and the stock is going down 50%, what do you think happens?”

 

Freddy: 49% impact.

 

Philipp: Well, your net worth is down half, pretty much. 

 

Freddy: Yeah. 

 

Philipp: But you might also not have a job, right? Because if Apple stock goes down 50%, I can tell you there will be some restructuring going on.

 

Freddy: Double whammy.

 

Philipp: Double whammy, right? 

 

Freddy: Yes.

 

Philipp: And now, what happens? You might have not saved up cash enough. So, now you have to sell it at a very bad place, right?

 

Freddy: Yes.

 

Philipp: It's all… it's like this avalanche that slowly builds and just blows up all your financial plans that you had for your future and goals.

 

Freddy: Yes.

 

Philipp: And so, this is the very, very difficult part about, you know, concentrating,

 

Freddy: Yes, I mean,

 

Philipp: Concentrated risk inside your portfolio.

 

Freddy: Always take a holistic approach.

 

Philipp: Yeah.

 

Freddy: Put everything into the simulator, or into the risk estimation.

 

Philipp: Yeah.

 

Freddy: If you are,

 

Philipp: What are you comfortable with?

 

Freddy: Amazon employee with a lot of Amazon shares, great. But maybe outside your company award, you need a lot of protective assets. 

 

Philipp: Correct.

 

Philipp: Yeah, just keep selling quarter. And so, you’re dollar-cost averaging out of the stock as well.

 

Freddy: That’s one way.

 

Philipp: In a nice way, right? 

 

Freddy: That’s one way.

 

Philipp: Yeah, and then move it over, and then move it over, exactly.

 

Freddy: If you don't have to buy it, buy something else. 

 

Philipp: Yeah, exactly. No, I think that makes a lot of sense. So, to close it up, let's get one more thing out of the way that… that is also there to debunk, I think. 

 

Freddy: Okay.

 

Philipp: And will be interesting to hear your take on this, because, as you said before, you did some fixed income as well. And that is people say, or the myth says, so to speak, that bonds are always safe.

 

Freddy: Okay, 2 answers. First part, not all bonds are made equal. We talked about that. Bonds of junk companies are still risky because the underlying company is risky. Now, how about safe entities issuing bonds? There are still some risks involved. I've often seen that when yields are too low and then the economy really turned around and does well, actually, government bonds can still have negative returns. 

 

Philipp: Yeah.

 

Freddy: The coupon the government promised to pay you will not be changed, and it's most likely they'll continue to pay that. But your yield has dropped so low that, you know, you're getting less and less protection because the yields are way too low. And if the market does really well, you can probably suffer 2 to 3 percentage point of negative return, even in a Singapore government bonds.

 

Philipp: Yeah.

 

Freddy: Conversely, when the markets are down, obviously you will do a lot better. So, I think the best thing to do is not to classify everything as…

 

Philipp: Safe or unsafe, right?

 

Freddy: Yeah.

 

Philipp: Yeah.

 

Freddy: You need a combination of both growth assets and protective assets that's compatible with your risk appetite. 

 

Philipp: Yeah. So, bonds are not always safe.

 

Freddy: Not always safe.

 

Philipp: Not 100% safe. And I think again, you know, doing some research and also understanding different bonds. What are you buying, right? 

 

Freddy: Yeah.

 

Philipp: Do some research about this.

 

Freddy: Yes.

 

Philipp: Before you get all hands-on and let's put everything in bonds now because stock markets are volatile or something.

 

Freddy: Mm-hmm.

 

Philipp: Yeah. Well, thanks, Freddy. I’m really, really excited that you were the first guest ever on our podcast.

 

Freddy: My pleasure.

 

Philipp: … inaugural episode. So, I know we'll be having you on quite a lot, probably. There are lots to talk about still and lots to learn. So, but I really feel like people got a little bit better background on you, not just the usual one that starts with StashAway, right, and being the Co-founder of StashAway, but from before.

 

Freddy: Well, thanks for the opportunity to better introduce myself and to also express my views in a more informal manner.

 

Philipp: Exactly.

 

Freddy: To our audiences.

 

Philipp: Yeah.

 

Freddy: I do hope to do this again.

 

Philipp: Yeah, yeah.

 

Freddy: And often.

 

Philipp: We have lots to talk about, lots to talk about.

 

Freddy: Yes.

 

Philipp: But, yeah, so we'll do that. And I hope everyone had a good time. So, we'll be back soon. 

 

Freddy: Yes, till  next time.

Episode notes

In Your Best Interest kicks off with Freddy Lim, Chief Investment Officer and Co-founder of StashAway. Freddy shares with us his university experience at Monash, the early years of his career and his experience as a financial professional during the financial crisis in the past decade. This episode debunks some of the investing myths that you may have heard, such as allocating your assets based on your age, the ease of passive investing, and whether bonds are always a safe bet. 

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Also, our lawyers would want us to tell you that the opinions of our guests are not necessarily shared by StashAway, that past performance is no guarantee of future results and that what you heard is not investment advice.

Episode contributors

  • Philipp Muedder (Head of Financial Planning at StashAway)
  • Freddy Lim (Co-founder and CIO at StashAway)