Andrew Craig: Stop Just Buying the S&P 500 (Here’s What He Buys Instead)

This transcript is auto-generated and lightly edited for readability, it may contain errors.

[00:00] Sammie: Andrew, welcome back.

[00:01] Andrew: Great to be back. You are fourth time?

[00:04] Sammie: This is number four.

[00:05] Andrew: Okay, amazing. I got it right. That’s so we did two solos.

[00:08] Sammie: We had one with you and Brian when we did the UK economy. We got a one-star rating for that, uh from someone that said this was like two, three angry adults shouting down a microphone about how bad the biggest.

[00:20] Andrew: It’s good to be angry adults at least, not angry children. Which made me laugh.

[00:25] Sammie: But you are our most requested returning guest. We get emails all the time. Um and everyone’s always like, When’s Andrew coming back on?

[00:33] Andrew: So I’m genuinely thrilled and honoured to hear that. It’s always quite random to hear that, mate.

[00:37] Sammie: We’re gonna do an episode today, like heavily on investing.

[00:40] Andrew: Yes.

[00:41] Sammie: Um, so you wrote a piece called Passive Ze Passive Zealots failed to see the whole board game.

[00:47] Andrew: Yeah.

[00:48] Sammie: What’s wrong with telling people just to buy an index fund in today’s day and age?

[00:52] Andrew: Not much. And so I think it’s really important because so I mean, we were talking before you click record about how I think it’s important. You know, I’ve done a lot of the angry young man. I was gonna say angry young man, but you know, angry man, I’m not, I probably can’t say that anymore, but you know, politics has been something that’s sort of crept into a lot of work I’ve done recently. And the reason for that is because my mission is to improve the financial affairs of as many people as possible. And I’ve restated that time and time again. It’s hard to improve somebody’s finances, they can’t get a job, right? And so I’ve become rather exercised about the state of the UK and the state of the London Stock Exchange and all this stuff. But to your point, I think it’s important that I recapture that mission, which is ultimately look, park all of that, because really, realistically there’s not much I can do about it, ultimately. Um, you can sort of be an angry man and rant about it. But the much more useful thing I think for me to do is go back to first principles and talk about stuff that works, that has, you know, many decades or even centuries of evidence around investment and get back, pivot back to that, like talking about what investment strategies and approaches work. So, in terms of the passive debate, I think it’s really important to stress that I don’t have anything against passive as a product. I’ve been talking about it for 10 years, right? I’ve been telling people what ETFs are, what passive funds are, that they’re a really fantastic innovation, they’re an inexpensive way to get exposure to, you know, stock market investment and other things, gold, whatever. It’s not just stock market investment. You know, the great thing about passives is that is there’s a fund for everything, right? And you’ve never had any more choice than we have nowadays. So that’s key. But I think, you know, sorry, and the other point is that being an investor, like the first thing is whatever you do, investing is the most important thing. So don’t be put off investing because of anything I may or may not be saying about the sort of nuances around what’s going on in passive. But set against that, you know, I’ve done this whole series. You might know, I think I’m on about video nine now, and it’s in a playlist on our YouTube channel, like passive versus active, and going down the rabbit hole on the dislocations and distortions to kind of capitalism. And again, it’s all wraps up in the wealth inequality debate. It’s about, it’s about the fact that capitalism at the moment isn’t capitalism, it’s crony capitalism. But what do I want? Going back to that first principles argument, I want people to get the best possible outcome for their finances, right? And so on that basis, people need to understand that the financial plumbing that’s basically allocating to date now $20 trillion of the world’s capital to market cap-weighted passive indices, primarily in the United States. So it’s, you know, basically the S&P 500. What the problems with that are, technically, and this is incredibly one of my frustrations is this is just so poorly understood by like people in the finance industry who should who should know better, right? Who I described in my video I published yesterday as being asleep at the wheel, and I really mean that, right? And so what’s happening is this tidal wave of money that sort of to unpack it, and by the way, so I now have this habit of having like giving you 10-minute answers and then I get self-conscious. So please stop my flow if I’m but I go all over the place. But basically, you know, if you have if you have this tidal wave, this wall of money going into market cap-weighted ETFs.

[03:58] Sammie: And just about say what that is.

[03:59] Andrew: Yeah, so that means so well, let’s take a works example. So last year, just Vanguard, uh market cap weighted S&P 500 ETF, took in about $250 billion of net inflows. $250 billion more came into that, those fund products than went out. So just call that roughly 250 trading days a year. Call that a billion dollars. So billion dollars a day goes into an S&P 500 market cap weighted ETF. Now, market cap weighted just means that the bigger a company is, the more, the higher percentage of the index it is. And so when a billion dollars flows in, 70 million of that goes into e.g. Apple, and only 100,000 goes into the smallest companies at the very bottom of the S&P. So that’s 700 times difference, right? So, what does that mean? And I think this is literally one of the most important things for people, certainly finance professionals to understand who are asleep at the wheel, as I said earlier, but actually for just like your average punter who’s investing in these products, right? Is that technically meant that Apple’s share price, just because of the inflow of money. So there’s all this money coming in, and there are more buyers than sellers. So it has a price impact, right? Not with whatever Vanguard and BlackRock may or may not tell you, it does have a price, net flows have a price impact. And the best research which is being produced by uh academics places at Harvard and Chicago, and you know, super smart like French hedge fund physicists, Jean-Philippe Bouchaud, who’s a very smart guy. You did you like my French accent? Yeah, but what it means, you know, work but and this is this is guilt-edged quality research. This isn’t like Muppets making stuff up, right? And it you know, it has complex Greek numerals and mathematical formulas, which if I’m honest, I don’t really understand. But you know, it’s people who should be listened to and sensible people. But what they’re saying is so take Apple. So if a billion dollars flows into the S&P every trading day last year, Apple goes up 0.17%, the share price.

[05:53] Sammie: Just from the end.

[05:54] Andrew: Just from the flows. They haven’t sold any more iPhones or Mac minis, or it’s just purely artificial, technical, a function of the plumbing, right?

[06:04] Sammie: So does that sorry to stop you there, but just to ask you, so like let’s say, for example, the Apple stock performance of that day in technical terms was zero, it would still go up by 0.17%.

[06:16] Andrew: Well, it okay, let’s so we’ll let’s look at let’s expand to the year because it makes it more powerful, right? So the point I was about to make is 0.17% doesn’t sound like very much, but over a year compounded is 23%. Wow. Right? Yeah, correct. And I’m and what blades my what literally blows my mind is that there are so many people talking about passive versus active financial advisors, private client wealth managers who do not know this. This is research that’s been out for years, um, uh, which is why I’m banging the drum on it because it’s really important, and we’ll come back to why it’s important for people’s individual financial situation, right? But so you think about that. So last year, the artificial technical impact of flows on Apple share price was 23%. Apple was actually only up nine percent. Okay. So what that tells you about Apple is that probably So minus 14%, it’s not an arithmetic uh calculation, it’s a geometric calculation, which is probably a bit pretentious, but because things compound daily, right? Over hundreds of trading days. But the but the broad point is yes. So what you could argue, and I would argue you should argue for people who really know what they’re talking about, is that Apple and Nvidia and Microsoft and you know all of the big, all of the very biggest stocks, we know that billion dollar a day flow argument is causing this artificial increase in the share price. And so if that wasn’t there, so if there were net sellers, and let’s think about why that why might there be net sellers? Because there’s X hundred million baby boomers all over the world who have T’s are on the brink of owners to take more money out of their shareholdings than put into shareholdings, right? So that’s what that’s what might because you know when you think about what might end this, because this has been going on for like 15 years, right? Yeah, and the reason for that is just more and more and more and more money going into these products.

[08:01] Sammie: And it’s likely to grow intensely over the next few years.

[08:05] Andrew: Well, so that this is the point. It’s like I never call a crash, right? And I’m never saying emergency, do this thing. I just want people to be aware of this and start thinking about what the options are to kind of mitigate this risk. But yeah, but if we just sort of go to the next level of what this means, sort of for humanity, as hyperbolic as that sounds, it’s why Elon Musk’s worth $600 billion instead of $60 billion, right? It is absolutely critical for wealth inequality and the wealth inequality debate. And I see when I think when I see people talking about the wealth inequality debate, if you don’t understand this, you’re missing a massive piece of the puzzle as to why billionaires are so disproportionately wealthy, like from the robber baron eras, the late Victorian railway barons, you know, Rockefeller and Vanderbilt and all that. We’ve got back to that kind of level of inequality, and a huge part of that is this point, which is incredibly poorly understood. And I think it’s important to understand it. But I guess, you know, again, pivoting back to okay, what does it mean for people? You can’t call it because if that tidal wave of money carries on, the outperform because what is this doing? This is this is why the S&P 500 is doing like 14.5% annualised for the last 10 plus years, which is unprecedented in history. It’s a, but it’s a, you know, I have described it and got pillory for describing it as almost like a Ponzi scheme. Because, you know, what is a Ponzi scheme? It’s that the money coming in today is funding the people who put the, you know, the sorry, the people putting money in today, the people who put money in years ago are benefiting from the people putting money in today, right? And ultimately it’s unsustainable and it all falls over, and then you get massive financial harm. The passive investing, uh market cap-weighted ETF investment into the S&P 500 in particular, has a lot of the hallmarks of a Ponzi scheme, definitionally, right? Which is why I’m saying we need to be careful. Now, that’s not to decry the fact that a lot of these companies are selling lots of product, like Nvidia is selling a lot of GPUs. Apple is a good company, throwing off loads of cash, you know, Microsoft is a good company. There is a lot of real economy stuff going on, but that only might I think that accounts for a certain amount of the price performance in the last, say, 15 years. A much larger amount of the price performance is just this technical craziness and the and the plumbing of the financial system. And I think it’s really, you know, I’m on a bit of a mission along with certain other people talking about this because I think it’s really important people understand it, because the answer to well, I know another thing we were talking about a minute ago is so I had site of some internal research at one of the UK’s biggest ISA providers where they established so 10 years ago, only about 5% of British adults had a Stocks and Shares ISA. And thanks to good folks like yourself and me or and others like us, with maybe even bigger audiences. Yes, a slightly pretentious way of putting it, but you know, but people talking about this stuff, um, that number’s got up to about 15%. But an awful lot of the delta, a lot of the new people who’ve opened a stocks and shares ISA, um, the evidence is showing have just sort of got the S&P 500 or two tech stocks. There’s actually like 2.4 tech stocks on average. So they’ve bought some Tesla and they’ve bought some Meta or they’ve bought some Apple and whatever. And part of my mission at the moment is to is to go back to all the stuff I’ve been talking about for many, many years, which is the importance of asset allocation. You shouldn’t, if you are just in equities or you’re just in a couple of equities, or you’re just in US equities, you’re far more risk-on than you realise you are over a lifetime of investing.

[11:21] Sammie: Yeah, even if you have 500 companies, it’s still very complicated.

[11:23] Andrew: Well, correct, because you don’t really, because 40% of your money’s in the top 10. Exactly. Right. And that this is the other point I made yesterday. But it but it’s that it’s the fact that people are far more risk-on than they realise. And it’s the old Warren Buffett quote about it’s only when the tide goes out you see who’s swimming without trunks, right? It’s very easy for anyone to listen to the grumpy old man like me going, Well, there’s a problem with the plumbing in the phone, and say, Well, yeah, but I’ve done 14% annualised for, you know, I’ve made loads of money. It’s like that doesn’t matter. And what’s also quite interesting about this is it may well continue for another little while, and all this concern I’m articulating might be wrong, right? But at some point it won’t be. And so I think so there are a number of sort of fairly easy things that people can do to just protect against how extreme, because of all the factors that have driven this in the last 15 years, go into reverse, which is what happens time and time again in markets, right? The downside, there’s a point I’ve made recently in various interviews, is if markets go from bottom left to top right over time, there’s a sine wave of volatility a lot. So, so here’s I’m trying to think which way to do it with the camera, it’s that way, right?

[12:32] Sammie: Yeah, yeah.

[12:32] Andrew: So historically, stock markets, because of fear and greed and boom and busts, have always done this, right? Around the long-run trend of like human progress and technological development and all the good stuff.

[12:42] Sammie: For those listening, Andrew’s creating a graph.

[12:44] Andrew: Yeah, yeah, yeah. Apologies. I didn’t realise you’re audio only. But my point is now the sine wave because of these plumbing issues are is now much larger. The amplitude of the wave. So that means the amplitude on the way up’s been massive, and people are cocka hoop, and you and I have loads of people saying, Thanks so much for suggesting I invest in passive in it, and that’s great, right? But people just need to be aware of what’s going on because the sine wave on the way down could be really, really historically unprecedented, like 1929 style, right? And then I guess what we I’ll shut up now, but what we could come back to is okay, so how do I mitigate that without sort of throwing the baby out with the bathwater and still having exposure to quality companies? And you know, you don’t you don’t it sh it needs to be evolution, not revolution, is my point.

[13:26] Sammie: Okay, I’ve got a few questions. Yeah, yeah, yeah. So first one is obviously, is that why you would you predict then that’s why we’re seeing such inflated, if you look at say the FTSE 100, which is probably a bad benchmark, but say the FTSE 250, a bit more flexible in terms of versus old money to sort of newer, more innovative companies, um, and the S&P 500, you see the PE ratio of the and the price earnings ratio of the S&P 500 absolutely through the roof.

[13:54] Andrew: And particularly the K, the cyclically adjusted PE ratio, which is the key one, that’s over 10 years.

[13:58] Sammie: Yeah, which is in record highs.

[14:00] Andrew: Record highs, but the Buffett Indicator of that to the US economy as a whole, record highs.

[14:06] Sammie: Largely down to passive.

[14:08] Andrew: Yes. This is my argument. But sorry to interrupt, but the so and the counts room is like, well, you people have been saying that for years. Like, yeah, because this theme continues to run.

[14:17] Sammie: Yeah.

[14:17] Andrew: So anybody commenting on the market’s really expensive, you know, it’s gonna crash without realising that the reason it’s really expensive is because of the point I’m making about Apple being up 23% last year, because of just the technical impact of passive flows, tidal wave of money, all bets are off because that never happened before. The last time the CAPE ratio was at 40, that even in dot com, right? Think about the madness of crowds. I remember I remember in the late 90s having a corporate email address, and I can’t remember what the stats are, but there’s an unbelievably small amount of the world’s population that was even on email in the dot-com boom in 98-99. It was like sort of relatively well-paid white-collar professionals, early, early adopter enthusiasts at universities. But you know, I can’t remember what the stats are, but like a massive percentage of the world’s population didn’t even have email, and we and this is my point about the amplitude of the wave. We had a massive boom and a massive crash, but actually, relatively few people were participating, right? Whereas now we’ve got three-ish billion people using Meta apps and on social media. So the that madness of crowds impact’s been much stronger.

[15:18] Sammie: Okay, second part question. I’ll try to I’ll try to give you a short. This is perfect. This is absolutely perfect. Never apologise. And then the uh the other side of that is the average person putting in a few hundred pounds a month is seeing these astronomical like average returns which we’ve had for the past decade. It’s quite unprecedented to see that.

[15:42] Andrew: 15 years basically.

[15:43] Sammie: Yeah, yeah. And they’re gonna turn around and go, Well, why the hell should I care if I’m 30, if there is a 1929 crush and I catch that wave? Because as we know, um, if things with the stock market, it’ll come back within sort of yeah.

[16:01] Andrew: So, and this is the basis of a huge amount of my work, right? This was the whole the funnels of my second book. So there are there are a number of reasons. One of the most important ones, you know, one of the best-selling books about finance in the last decade, or the best-selling book, is Morgan Housel’s The Psychology of Money. It’s done 10 million plus units. And the psychology point’s really important because it’s very easy. And I take, you know, I’ve been on a trading floor during the dot-com crash and during the global financial crisis, right? In the thick of it, talking to people who are down 40%, private individuals who lost a lot of money. It’s very easy to go, oh, I know quite a lot about the stock market, and I’ve looked at the record of the last 200 years, and it’s going to be fine. And to my point, like the it goes from bottom left to top right because of population growth and technological development, all that good stuff. When it actually happens, and you’ve got 50 grand in your ISA, let’s say, because you’ve had a great few years, and now you’ve got 22 grand in your ISA. This psychological pressure that it takes a very, very strong and well-prepared person to say, nah, that’s fine. I’m just going to keep buying it on a 10-year view, right? Realistically, which is why it’s again, which is why I spend time making all these videos and wanting to talk about this stuff. Because it’s like, that’s what you should do. Like with the proportion of your money, I always go back to first principles. What are we trying to achieve here is to spend between 20 and 40 years. So ideally 25 to 65, but lots of people start late and want to return retire younger. But you know, you got to do something from 20 to 40 years with a certain percentage of your money every month for the whole of that time period, and you’ll be, you know, you’ll be good, right? With the slight addendum that um you know my work around 100 minus your age, which is basically like you should you should have an age-appropriate uh as allocation to sort of more defensive things and more aggressive things. So the younger you are, the more aggressive you can be, the older you are, the more defensive you can you should be. Because if you’re 60 and you go from a million quid in your pension fund to half a million quid because of a 50% dot com crash, that’s a hell of a lot worse than if you’re 30 and you go from 10 grand to five grand for obvious reasons, right? But I guess what I’m trying to say is it with this situation, you can kind of have your cake and eat it because you can continue to be in equities in the appropriate amount of the stock market. But just if you’re concerned about that psychological point I just made about the likelihood that actually, if I really look at myself in the mirror and think, how would I feel if my 50 grand pension became 25 grand on my ISA, you know, you can you can just be just make damn sure you’ve got that asset allocation in place, you’ve got those defensive assets, is sort of step one. And then the other thing which I’ve just been shooting about is you can have a rather than just have US 500 and market cap weighted, so you’ve got a massive exposure to the biggest ones, you can think about global exposure. So you mitigate that by having great companies in Europe and Asia and whatever else.

[18:48] Sammie: How to in the world, okay.

[18:50] Andrew: How to in the world, exactly, it’s part of how-to in the world. Um, and by having what the video I put out yesterday, um, an equal weight exposure. Yes. So an equal weight is just if you own the S&P 500, market cap weighted ETF, 40% of your money is in the top 10 stocks. Um, if you own the equal weight one, you have 0.2% in it in each of the 500 stocks.

[19:56] Sammie: And it and to it’s actually done all right as well.

[19:58] Andrew: Well, it exactly because the other point I made in the video I published yesterday is over very long periods of time, uh, sometimes equal weight does better, and sometimes market cap weight does better, depending on what the animal spirits. So market out weight’s done much better recently because it’s been winner takes all largely because of this point about passive fund flows. If that unwinds, because baby boomers become net sellers, or algorithmic bot trading gets censured by the SEC. There are all sorts of reasons why the sort of wheels might fall off, or just because of gravity, you know, what goes up must come down. Everybody comes to their senses, or like a $600 billion circular financing fraud in the AI business, and everybody realising that you know Microsoft’s margin is going to be rubbish for the next or all of the big tech’s margins gonna be really poor because they’re gonna spend hundreds of billions of dollars on GPUs and electricity, right? Yeah. Um, so there are all these reasons why that might happen. And I guess my point is to sort of mitigate that psychological issue. If people at least start thinking about this and maybe making a slight tweak, you’ll probably that volatility in an equal weight with a bit of gold and whatever else in the next 20 years might help you feel a bit more comfortable along the way rather than being like completely gung-ho, you know, hair on fire, like I just want to carry on owning the top 10 stocks in the S&P. Anyway, yeah, sorry.

[21:16] Sammie: No, no, no, you’re totally right. But like I think that comes back to the point, like you where you’re talking about passive versus active. Um, when we look at the reasons that have been such positives for passive, yeah, is that I think it’s 82% of active fund managers fail to beat the index.

[21:32] Andrew: Yeah, over 10 years or whatever, yeah.

[21:34] Sammie: And so looking at that, if you see that as a headline stat, yeah, why would you want to be in active?

[21:40] Andrew: So, so yeah, well that and so it the using so I’ll let’s be clear, for the majority of people, I’m not saying switch out of passive into active. I’m saying switch out of uh 100% S&P 500 uh market cap weighted into equal weighted and a bit of global, which is still passive, right? Because that’s what I get a lot. Oh, you’re the guy who just, you know, oh fund managers just want to earn money and have yachts and all that, you know, the standard criticisms of active fund management. And what I would, by the way, before I forget, you know, the highest paid people in the world in finance right now are the guys at Jane Street, the guys and girls, which is a an index, a passive index ARB fund that’s basically a complete vampire squid parasite on the back of this huge theme. And they’re being they’re paid a multiple of any active fund manager, right? So again, it’s like maybe you should point the blame finger in the right direction. You know, actually, a good quality active fund manager does a perfectly good job trying to do a really important job in the economy. And to come back to that, so I think if you’re older and wealthier, you should absolutely have some active. And the and the active you should have is smaller companies. And then things like maybe biotech, right? Which quite often are smaller. If you want to get earlier stage biotech that’s got all the upside ahead of it. But let’s just dwell on smaller companies. So real smaller companies. So the smallest companies in the S&P are not smaller companies.

[22:59] Sammie: No, they’re absolute juggernauts.

[23:00] Andrew: Yeah. And so at the bottom of the foot, see, Burberry’s like a four billion quid company, Persimmon are 4 billion quid, 4 billion quid companies. I’m talking about 50 million quid companies. So the Russell might be. Yeah, it’s exactly the bottom of the Russell’s. So to explain to people, that’s the Russell 2000, the smaller companies in the States. But in the UK, you have the smaller company index, then you have AIM, the alternative investment market. And so it’s crazy stat. So the Numis Smaller Companies 1000. So the basically the smallest 2% of companies in the British stock market from 1955 to 2021 returned north of 16% on average a year annualised. With a lot of volatility. There were years it was down 70%, there were years it was up 50, 60% or whatever. But over time, if you invested, if you were a relatively wealthy individual back in the day, if you’re in your 40s in the 1960s, let’s say, your financial advisor and you’re quite wealthy person would have probably had you in some smaller company funds, right? So A, you would have performed incredibly well. But the bigger picture point that I’ve been making a lot recently is B, that’s why British companies were able to float on the stock market. And I know you’ve heard me bang on about this, but Yeah, I have.

[24:10] Sammie: I’ve got questions around it today because I think it’s this really interesting point.

[24:14] Andrew: You basically can’t, so I mean it drives me nuts that Rachel Reeves and um Lucy Rigby, the uh Treasury uh economics um sector or whatever, were crowing about the fact that the London stock market raised £2.1 billion last year. That is like peanuts, right? We’re a three trillion pound economy with somewhere between four and five trillion pounds worth of assets just in our pension and insurance funds, British funds, right? For us to only raise two billion quid, and by the way, up till September we’d only raised 200 million quid. You know, when EasyJet floated in November of 2000, they raised 200 million quid just for EasyJet to buy a load of airplanes, right? And this is a point I’ve done to death a bit, but I think people really, really don’t understand that if you don’t have a functioning IPO market and all the money, why is that? Because all the money’s going into Apple and you know to make Elon Musk worth $600 billion, and nobody, no entrepreneur in Britain can raise money to do biotech or software or you know, a new restaurant group or a new airline.

[25:14] Sammie: We can’t we’ve just tried it, it’s very different, even in the private market.

[25:19] Andrew: Correct. And so there are structural reasons why the stock market’s been challenged. The private and VC have taken a disproportionate amount of capital, but again, this is a thing, it just blows my mind how poorly understood this is. This is because people sort of I think the general public generally see the stock market just this sort of parasitical casino of like random rich people just trading with each other. It’s not that. It’s the it was it’s a technology that was developed to raise money for companies to do real things in the real economy, and it stopped working.

[25:48] Sammie: And it’s the lifeblood of everything you use. If you look around this room, correct stock market companies are everywhere.

[25:56] Andrew: And now there’s such a disproportionate amount of the world’s capital is going into the biggest companies, and it’s great, you know, we need a lot of money to buy Nvidia GPU chips if we’re going to develop AI and but I would just say that it’s the trouble is we’ve gone from an 80-20 world to a 99.9, 0.1% world. Yeah, yeah, 100%. And that’s super bad. And it’s super bad for employment of tax receipts.

[26:18] Sammie: If I ask around AIM, then what’s the like how small are we talking here in terms of businesses?

[26:24] Andrew: So the very smallest businesses aim are literally like two, three million quid market cap and probably worth steering clear of unless you’re very specialist. But you know, go back a few. I mean, what the way the stock market should work is that somebody a bit older and who saved off a few quid by investing in simple passive stuff and gold and all this, you know, the stuff that you do for the first few years of your investing trajectory should really then have at least a bit of small cap. Because back in the day, that was mean that meant there were billions of pounds to support IPOs, and the and that meant that was great for the economy, and not just in Britain, in Australia or Singapore, wherever, right? There’s the IPO market’s in trouble everywhere. Um, but the good news is it also tended to slightly improve your overall investment returns because smaller companies, all other things being equal, grew more. Because if you’re you know, if you’re a small think of like ASOS 20 years ago or Games Workshop or Britvic or what’s the other one, Fever Tree, you know, the Games Workshop is the most incredible business. And there are quite a lot of others. And one of the things people often get wrong about smaller companies is they’re like, oh, well, they’re you know, there are very there’s very few that like most of them go bust. Yeah, but across the portfolio, the reason they had mid-teens percentage returns is because if one of them goes up 30x, you can have loads that go bust or go sideways, and you still have a great performance across the portfolio. That’s the insight, that’s how that’s how VC investing works, that’s how small company investing works, right? Um, and in the past, people used to have an exposure to that, and sadly they basically don’t anymore. And so then that becomes a chicken, it’s a chicken and egg thing because everyone’s like, well, active fund management’s rubbish and smaller companies are rubbish. Look how well bigger companies have performed. Well, that’s for all the reasons I’ve just been setting out in this interview. And by the way, it that will go into reverse. So, you know, I get from the vantage point of today, I just my mission at the moment is I want people to understand these issues and just be aware of them because they’re not that complicated, they’re just incredibly poorly just you know no most of the finance industry isn’t talking about this stuff, right? The smartest academics are, and I’ve shared all that in my video output. But once you’re aware of this stuff, the simple answer is you can stay investing in passive stuff as long as you get your asset allocation right and aren’t just completely tech US tech only.

[28:37] Sammie: Yeah. It’s harder at the beginning because you just want to get them going. Yeah. And like do trying even explain what in a simple 500 index is hard enough. Yeah. And so getting them into something.

[28:48] Andrew: But then, but I th I think I’m right in saying you’ve been really good on this as well. It’s like, but just it’s the next step is okay, well, what’s an MSCI world? What’s a Vanguard or a FTSE all world? Yeah. And so, you know, the video I did a fortnight ago was like, okay, guys, here’s the challenge around you know, winner takes all concentration risk, these multi-trillion dollar US companies. This has been going on. One thing you can do is think about a global ETF and then just describing the key global ETFs, that’s easy. That’s really not much of an intellectual leap from knowing what an S&P 500 is. You can have 3,000 companies instead of 500, and they’re from all over the world. And then the next one is this equal weight one, which is a tiny bit more nuanced, but what my video yesterday was 12 minutes long. I think by the end of it, people are like, oh, I get that.

[29:30] Sammie: Yeah, well, it’s actually relatively simple. It’s like one’s 10% known now. Now it’s not, it’s 0.2. Everyone gets the same. Exactly. It’s communism in a fund.

[29:41] Andrew: I wouldn’t frame it like that. Yeah. I think it’s I actually think it’s like for the for the for human flourishing, it’s a fundamentally better approach to capitalising passive funds than market cap weight. But it’s a to be fair, that then is a very complex and nuanced debate. Because the counter-argument is there’s always been concentration, you know, good companies win, you want to invest in the good companies. But the counter-counter-argument to that, as I literally was saying this morning, somebody’s because they’re like, well, bigger companies are bigger for a reason because they’re better quality, like Apple or whatever. It’s like, yeah, but in 2003, you could have said that about Kodak Eastman, Nokia, Blockbuster Video, Ericsson, you know, Nokia was like a $200 billion business, and Apple was a I think at the bottom, Apple was like a $5 billion business back then. And you would have said, Apple, Nokia, big companies are good for a reason. I should own Nokia. It’s like, well, from a 20, this is the point. An equal weight would have captured the performance of Apple from 5 billion up to and protects you against Nokia being crushed. Um, a market cap weighted wouldn’t. It would have got so the equal weight on that basis with those two changes in share price, you’d have been better off in an equal weight and not a market cap weighted. So maybe that’s my point. Maybe we’ll we’re in a similar position today.

[30:55] Sammie: Okay. Well, that’s really interesting to know because I think we’ve got to get someone started, yes. And I always think with this journey, it’s like get something in, get something started.

[31:04] Andrew: Fastest through from A to B. Yeah. 100%.

[31:06] Sammie: Let’s get let’s get you going. And then once you’re going, then that’s the first hurdle. And so once we pass that point, then it’s like, okay, we’ll now start becoming interested around the rest of this because there is more.

[31:21] Andrew: This is 100% the point I always make. So at the moment I’ve been doing, as I just said, I’ve done global, you know, equal weight, market weighted. I’m now about to talk about company valuation. Because understanding the fundamentals of company valuation, things like you mentioned earlier, PE ratios, return on capital employed, earnings yield, all sounds very complicated. It’s actually not, right? But the key point is I want to I want to do a series on that before I then come on to talk about active funds and something called factor funds. So like dividends. You can have ETFs that focus on growth, you can have ETFs that focus on dividends. So but you need to understand what all these things are before you start thinking about whether to use them. But the broader point I wanted to make is none of which you should really need to think about until you’re like 45 and you’ve got 100 grand, or you know, because uh this is the point. If you start at 25 and you do a good job with your ISA on your pension, you’ll have a big five-figure and possibly even a low six-figure amount of money in your 40s. Very likely, right? Putting a couple hundred quid in. And that’s the point at which you then say, right, I’ve been doing this for 20 years or whatever, and I have I’m slightly more advanced and I’m really comfortable with all of this basic stuff. I’ve been doing it for ages and it’s worked really nicely. Now I’m going to think about active funds and small caps and factor funds and smart beta and all this stuff. So you’re right, the get started, and the younger you are, just get started. But as you get older, add a bit of complexity because if you do it well, like my point, you know, if smaller companies, smaller companies are the most destroyed and screwed they’ve been in like history, basically, because of all of this, which tells me that on a 20-year view, like I’m pretty bullish UK sport. I think from the vantage point of 20 years from now, we’re gonna have another, like they did 16% year for 20 years, even if we have a rough it’s called a catching a falling knife, you never know when to get into it. But if you do it, oh yeah, you can’t call the bot.

[33:08] Sammie: But somebody wealthy in their late 40s or 50s right now, I think should absolutely start to even look at that because like traditionally, AIM’s not been the easiest for retail investors to access.

[33:22] Andrew: Oh, and thank you, because you’ve reminded me about we always do this in our conversation, especially when I’m babbling away, is we do a little thread and so that’s a point I wanted to make. So, and I didn’t quite make it so you for technical reasons, smaller companies that are like at the bottom of the S&P 500 at the bottom of the FTSE 100, we were saying earlier, Burberry or whatever, are big, are still 4 billion companies, and that’s where I was going. And they’re technically they can go into an ETF because they can be automatically purchased by big investment banks and Vanguard and BlackRock just through bots trading with each other, basically. Smaller companies that are less than 500 million quid size, the really exciting ones, you know, the future games workshops or fever trees or whatever, can’t. So to get proper, there are smaller company ETFs, but they’re not really smaller companies. They’re not proper small, smaller companies, right? The bottom of the market. Uh, they’re basically, to my mind, mid-cap ETFs. So the point is that you so why does Active have a role to play? Because actually, the only way you can really own proper smaller companies is by having a fund manager picking stocks. Because the really small ones, firstly, it’s the company story, like what’s their product? Who are nobody’s ever heard of a lot that, you know, what are they doing? You need an expert to be filtering that. You can’t just like blindly just shooting a fish in a barrel, just buy all of them, right? Like you do with mega caps. And you know, some of those companies would take a professional specialist trader at a UK small cap or in America US small cap um trading desk days to buy. Like, so if the fund manager says, I want to buy five million quids worth of this stock that’s a 60 million pound biotech company that might have a cure for cancer, right?

[35:01] Sammie: It would literally say air certificates that you’re exchanging.

[35:04] Andrew: Well, it’s not quite like that. It’s still it’s electronic. But you but basically you have to get a longer. The way it works is you have to get a professional trader who knows all the shareholders to like ring all the shadows and go, look, we might have a buyer at this level. That is so different to how Apple stock trades automatically with billions of dollars, right? And again, so many people commenting on this stuff have no experience of this. Like I worked in UK smaller companies for 28 years, right? So when I see people going, oh, passive this and active fund managers all underform, and like you should never so you’re killing the smaller company market, which A has performed incredibly well over many, many decades, and B is absolutely important for the for the economy. And you can’t put it in ETF, and they don’t like these people with these really strong opinions, in to my mind, just don’t actually understand that those technicals of how the trading works.

[36:58] Sammie: So, how do we go about identifying fund managers that are credible in this space? And that uh that, you know, again, it’s you have to caveat this with past performance. Yeah, we’ve the lights of is it Terry Smith and Funds?

[37:11] Andrew: No, no, so Terry Smith’s so this is the point about passive versus active. So Terry Smith owns massive companies.

[37:17] Sammie: Yeah, no, I know, but like that’s an example of a fame of a famous company.

[37:21] Andrew: Yeah, but this, but uh again, because this is why I dwell up on the merits of active funds for smaller companies rather than just on the merits of active funds. Because I have a certain amount of um sympathy for the fact that you if you want to own large caps and have large cap exposure, just own a passive ETF, whether it’s equal weight or market cap.

[37:39] Sammie: And I meant it more on like it identifying a human being who’s doing it and what do you look at?

[37:45] Andrew: Well, so then what I was gonna say to that is you basically can’t, right? But it doesn’t matter. So my point being is so again, it goes back to the 20 to 40 year time period. What I’m always talking about is this big top-down, like what’s my okay, I want some smaller companies. Smaller companies did 16% annualised from 1955 to 2021. Sounds quite interesting. They’re on their knees right now, they’re completely bombed out. Structurally, that means they might be quite interesting. I’m a bit older and a bit wealthy, I’m gonna have some. I need an active fund. Now, of course, what you can do is you can look at all the smaller company investment trusts that trade in London, you can and smaller company open-end investment companies are two different funds or unit trusts, basically. You can go on Hargreaves Lansdown and or you can go on TrustNet or whatever and go, oh, this one’s done, you know, 200% in the last five years, and this one’s done 160%. Three years from now, that you know could be completely different. My big bigger point is if you find somebody vaguely credible that’s running a con that’s been doing it for a few years, you’re not going to be able to call whether it’s a Aviva or Octopus or Legal & General, or who you’re not, you’re like maybe they’ll carry on performing better than the next person, maybe they won’t. But if you basically, again, if you’re taking a long enough view and just saying, I want some smaller company exposure, because I think that small companies could do quite well, and the evidence is they will, anybody vaguely credible and good, as long as you buy that fund and hold it for and continue to invest in it for many years, I think I think you’ll be fine.

[39:07] Sammie: So when you get when you find one, are you looking at them, their thesis, the companies that they’re investing in? Yeah, there’s no when you assess anything, correct?

[39:16] Andrew: Correct. And it doesn’t mean you’ll get it right. You know, it’s a it’s a very it’s very hard. Past performance is no guide, by the way. But then this is the sort of reason I had a wry smile a minute ago with you asking this question, and I’m obviously talking about it specifically with reference to smaller companies, is this is what I’ve been saying, is you know, 20 years ago, there were maybe 50 smaller company funds in the UK. So there was Harry Nemo at Standard Life, there was the Black Rock team, there was Ninety One, there was Jupiter, there were, you know, all these brands, right? They’ve basically all gone. They’ve literally all shut down. And so, so you know, there I could if I was trying to raise money for EasyJet, I could call dozens, and me and my colleagues and our competitors would call around all these people, and it was clear who they were, and they might have had 400 million quid or 500 million quid to look at whether or not to invest in Burberry or EasyJet or whatever it might have been. And that was how companies raised new companies, entrepreneurs raised hundreds of millions or tens of millions of pounds to do new cool stuff in the UK, and it’s not just sort of a little bit worse today, it’s dead. Like, you know, does I think so Ninety One, Jupiter, BlackRock, Invesco, Aviva, like the list goes on and on and on, have all shut down their smaller company fund. So if you ask me the question, how do I invest in smaller companies today? It’s actually really hard. And why? Why have they? Ah, because so if you’re running a £500 million fund and your fees are 0.6% a year, yeah, you can that’s enough money to employ an investment manager and a couple of analysts and fly around the world and pay for them to have Bloomberg terminals, right? It’s a good business that was moderately profitable. It wasn’t as profitable as a lot of people think, and they weren’t as well paid as lots of people think. Jane Street people are making $100 million a year. These guys don’t, well, it’s you know, totally different world, six figures, if they’re lucky, right? The very best of them would do better than that. But and this is kind of my point. To me, the monkey on the back of capitalism, if you like, the sort of parasite burden of that ecosystem of people actually looking at companies saying, This is a good company, this is a bad company, was much less nefarious and all active fund managers or asses, and why should I pay? It’s a really important function in capitalism. Yeah. Why are they dead? Because over many years, all the people investing in those funds just went, Oh, actually, no, I’m gonna put it in the S&P 500. Yeah, yeah, that was good. So now so now, so if you had a 600 million, this is literally, I’m thinking of a one fund went from 600 million to 20 million over a period of four or five years, redemptions, redemptions. And the irony is that people were like, well, that’s because their performance was bad. Well, throughout history, there’s always periods of good performance and bad performance, particularly in smaller companies, right? But as I’ve said before, British pension funds in like 30 years ago had 50% of their money in British shares, and through incredibly stupid regulation and legislation, we now have about 3%, which is a roughly one and a half trillion quid that is basically being driven away from British shares. So, funnily enough, if you drive one and a half trillion quid away from British shares, they’re not going to perform very well, especially if they’re smaller companies, because smaller companies were always reliant on fund flows. So there’s no money, then they underperform, and then it’s just been this massive death spiral.

[42:32] Sammie: So this is why this is important too. So like the average person is going, oh, cool, whatever, but that’s the stock market. But no, because 1.5 trillion not going into UK companies means no hiring in the UK means no tickets going down. No new businesses, no new businesses going through because they can’t raise here elsewhere. So this is where the trickle-down effect of that is absolutely an astronomical.

[42:57] Andrew: Well, I have done work on this, and my estimation, based on some fairly conservative assumptions, is this has cost the UK economy 20 trillion pounds. And 20 trillion pounds is 460,000 pounds per working-age British adult. And it just to just to credit that statement, it sounds like hyperbole, and I’m some madman. That is why today, so income per capita in Britain’s half what it is in an awful lot of other countries, which I know we’ve talked about before. So 30 years ago we were roughly level with lots of other countries. Today we’re half. That’s income. Now, arguably more important is wealth. And the wealth point is so the average Brit at retirement has somewhere between a quarter and a fifth of what the average Australian, American, Singaporean, etc., have.

[43:42] Sammie: Yeah.

[43:42] Andrew: Norway’s a special case that people talk about. If you have a trillion dollars worth of oil wealth across 5.6 million people, you get a very different result from you have a trillion dollars of oil wealth across 66 million people. It drives me nuts. If people think it’s their political system, it’s like, plus they have uranium and hydroelectric power, but let’s not get bogged down by that. But so the opportunity costs of basically it was Brown and Blair that kicked this all off, but the Tories didn’t repair it, whether I want to be party political. But those decisions that drove one and a half trillion quid, because what the thing is, if you drive one and a half trillion quid away from British shares, every smart hedge fund in the world goes, let’s short British shares. Like it’s it gets worse, it’s a death spiral, right? And that’s basically what we’ve suffered. And my assumptions are pretty conservative, is basically if that money had been invested in British shares, the British economy would be immeasurably better off. And let’s just assume that British shares maybe did eight and a half, nine percent a year, and American shares have done 14. So that’s you know, maybe we would have had some tech companies. We could have had some. So biotech is an eight trillion dollar value market in the world, and I you know this is close to my heart. I’ve written a book about it. British intellectual British Britain basically invented stem cells, monoclonal antibodies, elucidated DNA, Watson and Crick. You know, British intellectual property is utterly foundational to develop that eight trillion dollar industry. We’ve got nothing because of what I’m talking about. Because British biotech companies, 14 British biotech companies have flo floated since 2018, 13 of them didn’t do it in London. And this is to your point, people need to understand this affects their lives and the real economy. That is why the average British person’s got like 100,000 at retirement, the average Australian and American’s got half a million.

[45:20] Sammie: Well, 20 trillion floating round the economy. Our national debt level is 2.6. So is it 2.6? I think it’s something of that.

[45:32] Andrew: It’s growing numbers out of four.

[45:36] Sammie: It’s going off a lot. We’re not going to do the political side of it, but the uh the that pays that off.

[45:43] Andrew: Yeah, but that’s it, and it and it’s in the you know like I say, that it’s I think it paints twenty trillion twelve these sorts of numbers are so Hard to act to but 43 million working-age British adults, each of them would be 460,000 pounds better off. That’s like to me, it’s like the whole what really makes me angry within all this is people like so many people are obsessed with Brexit, whether you’re a Remainer or a leader, Brexit, Brexit, Brexit was great, or Brexit was rubbish, or you know, never you if you find an economist pro-Brexit, they’ve got all the numbers that say Brexit’s actually been fine and Britain’s done better. And if you find a, you know, they’ll say, Oh, we’re eight trillion dollars worse, whatever. My considered opinion, based on spending a little many years looking at this and thinking about it and doing a lot of work on it, is that is a sh whatever Brexit is or isn’t, it’s a complete sideshow in terms of consequence as compared to what I’m talking about. And the mental thing is nobody talks about what I’m talking about, and it wasn’t even an electoral issue two years ago. Because British people are so disengaged from stock markets, they think, as I say, they think it’s just people in the city trading with each other. It’s like rather than the way that for two centuries it’s a technology to raise money to do stuff in the real economy, right? So yeah, you I get obviously quite passionate about that.

[46:56] Sammie: So, no, good. Because I Well we need to fix it. I don’t know how we’re gonna fix it. Exactly. So let’s say we’re at this point now. Has it got worse since we spoke about this 10, 12 months ago? Yes. And do we see uh any signs of the city waking up and starting to bang the drum about it?

[47:16] Andrew: Well, what we should treat quite quickly is everybody go, what a load of rubbish. The FTSE’s done really well on its uploads, right? Totally different.

[47:21] Sammie: Yeah, the FTSE does not.

[47:23] Andrew: 70% of earnings overseas. Uh the FTSE is the playthrough of global hedge funds. The reason the FTSE’s up is because it was so cheap. Like the British equities are a 50% discount to American equities, which is terrible. It’s largely because overseas American investors are just buying all our best stuff, which you know, when you buy a company off the stock market, it’s usually at a 50% or it’s a big premium to the share price. So if there are bid situations for dozens of FTSE companies or FTSE 250 companies, that means that the stock market goes up a lot. So it’s kind of basically, it’s not, I don’t want to say it’s artificial. Rolls-Royce is doing really well. You know, there are businesses that are doing, HSBC’s done really well. There are lots of companies that are doing well, but there is a huge element, again, of this artificiality of it being the plaything of stat orb funds and whatever else. Down at the level of small caps and what the IPO market is doing is dead as a dodo. And uh, I mean, we’ve talked about this before, but one of the things the government’s been doing is this thing called the mansion house accords, which is basically trying to get 19 of our biggest pension asset uh pension fund managers to agree to support early stage British companies. Problem is that they’re trying to figure out how to do that to support private companies, so VC, venture capital, and PE prova equity. And my belief, so that completely misses the smaller company, the listed smaller company scene, which to me is where the real problem is because that’s how you float companies, and that’s where, as I said earlier, all those dozens of UK small cap funds have just gone, they’re dead because there’s no money there anymore. So the solution apparently is to go and give all the money to VC and P who are the most expensive and at totally the wrong stage of the cycle, yeah, and who need a functioning IPO market in order to exit their businesses. There’s trillions of dollars worth of businesses in the world owned by VC and P at the moment where they’re doing this shuffling the deck. What’s the expression? Shuffling the pack. Shuffling the pack, thank you very much shuffling the deck, whatever. But they’re basically going, you know, we can’t float these businesses on a stock market because the stock the IPO market has stopped working all over the world. Yeah, yeah. This is a massive problem storing up, which is another one of those shoes to drop in terms of, you know, whether it’s an AI crash or a P can’t float companies crash. And so to me, you know, I don’t want to get political, but that we have politicians who are doing absolutely the wrong thing at absolutely the wrong stage of the cycle, and it’s not going to solve the problem, it’s gonna make it worse. Okay. That’s just my view.

[49:42] Sammie: So we do need someone that can come in and essentially try and drive this and turn this around. And I’m not bullish about that happening. Okay. Sadly, I mean I’ve got, you know, I’ve got to the point of sort of Well, then just to counter your point that you made earlier, then, if that’s the case, how can we be bullish about small caps being a potential investment asset? Because I might be wrong. Okay.

[50:04] Andrew: And again, because I mean that’s a really good question. But because I again I’m talking about people making decisions on a 20-year view. So if you’re 45 and you’ve got a few quid and you’re long of just you just US X, and by the way, you’ve done incredibly well, you might pause and go, I don’t know when this is going to turn around. Because the thing is, when these things, the evidence history is when these things start, you might be wrong for the first three years. Yeah. Like the other end of the spectrum, if I say, Oh, the S&P’s massively overbought now, and you know, Apple’s going up 23% a year for artificial reasons that nothing to do with the business, and there’s an AI bubble, and all these companies’ margins are going to get cut in half, it’s a sell, and then it goes up another 30%, right? Which is basically what’s been happening for the last few years. I’ve been talking about this passive thing for years, right? And the market’s gone up and up and up, and all, you know, Michael Burry, you know, or you know, Buffett’s got $350 billion in cash and he has done for years. And he’s all Buffett’s an idiot because he’s been in cash since 2022. It’s like Buffett doesn’t care because he knows he’s not going to get it right. Also, he’s 96 or however, so that’s the other reason he doesn’t care. But to for the for the person who doesn’t want to like overthink it, overanalyse, these are big, sweet, big picture things based on investing for 20, 40 years. And you might have a few small caps if you can find a fund. I mean, there are still a few soldiering on, um, and do a bit of that for the next few years because if as and when the tide to the pendulum swings, small caps will do 16, 17. Well, last time they did 16% a year for 50 years plus 60 years, because of how tightly the rubber bands stretch and how extreme everything has gone in the other direction, from the vantage point, careful with my microphone, from the vantage point of you know, 20 years from now, small caps might have done even better than that. So it’d be nice to have some, but they might go down another 30 or 40 percent. So that’s you know, I sound like the terrible fence sitter, but I think the way you win with these things, this big, broad sweep, deploy a few bets sensibly and then do it every month for many, many years. Yeah, it’ll all come out in the way. Asset allocation, exactly. Of a partial amount of portfolio based on a considered Exactly, and but I also think it’s just really important people know this stuff if only because if it starts happening, they’re like, ah, I understand what’s happening. To the psychology point, it’s like, okay, look, somebody might listen to me and go, you’re full of nonsense or whatever, or they might say that’s that sound wow, I didn’t know that. That sounds quite compelling. They might then not rush out to like you know change their allocation for being S&P 500, market cap where oh, I’m pregnant with loads of Nvidia and Apple and whatever. And they might, but at least they kind of might start thinking about it. And if there is a crash, okay, okay, that’s why that’s happening. And actually, to your point earlier, I’ll still just buy it because this is the other point. Over time, you know, let’s say you’re 35 today, to your point. If you even if there’s this big crash, just if you’re buying it every month, if you’re pound cost averaging every month, you’ll buy it really cheaply and it’ll be fine on the 23rd.

[53:11] Sammie: Yeah, but selfishly, I kind of want that to happen as well. And no, and you can get a few more, yeah, exactly. Because at this point, I don’t really like performance is nice, but where I know I’m not going to touch large amounts of it, hopefully it should, you know, obviously life could happen, but um I am just seeing it like bricks. That’s all I see it as. I don’t really see it as well.

[53:34] Andrew: And you can put some more, you can get more bricks at a lower price.

[53:38] Sammie: But I moved out, I you know I openly talk about this publicly. I moved completely out of the S&P 500 and I’ve stopped talking about it.

[53:44] Andrew: And how out of interest, how long ago?

[53:46] Sammie: Uh you’re talking two and a bit years now.

[53:49] Andrew: But you went in you went into global, right? Full global, yeah. Yeah, okay. So you’ve still been fine because the because the you know the S&P is still 65% of the MSCI world.

[53:59] Sammie: So yeah, but the you know, I went into the S&P like everybody else did because it’s been the performing benchmark index of course for the past 10 years. Um, but as I learned more about risk and association with a certain economy, I was like, no.

[54:20] Andrew: It has been a self-reinforcing technical thing this time in a way that no previous bull market has been. Totally. And that’s something that’s incredibly poorly understood. Like what it does my head in seeing people on LinkedIn or whatever on social, people who really should know better, like financial advisors, you know, private clients, stockbrokers were going, well, look in 1929, this happened, in 1950, this happened. It’s like, dude, there’s no such thing as an ETF, there was no such thing as WhatsApp. Like it that there’s a it’s a very dangerous phase in investment, it’s different this time. Although there’s a counter argument that says it the it’s the opposite. It’s actually it’s different this time, it’s a really important thing to understand in investment, you know. And it really is different this time, right?

[55:00] Sammie: And well, every time it feels different.

[55:02] Andrew: Correct.

[55:03] Sammie: It always does. Yeah, there’s a different reason. Is it always a different reason? Because I think like we’ve had Tariff Chaos, market swings, yeah. We’ve had all of these aspects, and no one will have really gone through that. Large, large amounts of the investing folk of this country will have never have gone through that.

[55:19] Andrew: Well, I they have, and but the but so that’s a really good point because there have been periods of mercantilism and tariffs and everything in the past, right? What’s really interesting about this? So if you roll back like last April, Freedom Day and tariffs, and then now Iran, right? You might have said that’s really bearish for equities and really bullish for gold based on history. Like the last few times this happened in the last two centuries, you’d be a buyer of gold and a seller of stocks and shares. Yes. What’s happened? Stocks and shares are up massive, gold’s down. So this is my point. Like, it’s like the problem is, and the all these talking heads going, well, you know, we need to be equities are overbought, and the cape ratio is 40, and it’s only been like that one time in history before. You say, Yeah, but last time you didn’t have 20 trillion dollars that have flowed into S&P 500 market cap weighted. It’s like you cannot, it’s not apples with apples.

[56:15] Sammie: And like what it’s you know, why it’s propping, it’s propping, it’s holding it, it’s holding that level of performance up in a large factor.

[56:23] Andrew: And but it’s it, you know, I know I get Pellerifus. It is there’s a real element of Ponzi scheme here. It’s like it’s because people make money and then they gear up and redeploy it, and it gooses it further, and then all the big hedge funds that have momentum-driven algo strategies that all that capital, all that capital comes in behind, and then everybody in Tokyo and Singapore, like, oh American equities are performing so well, I’ve got to have some. It’s just been the most insane. And that’s the you know, again, I’m not trying to call it timing-wise because nobody can do that. You could, you know, you could have said the S&P was massively overbought and in a bubble at like 2,500, and what is it now, 7.4. You know, how many people have been calling it like, is it 5,000, oh, is it 6,000? Oh, is it 7,000? It’s like it’s a mugs game, but it doesn’t change any of the points I’m making. That the a huge part of what is driving that nominal top line headline share price performance is not about like actual business performance, it’s about all this plumbing stuff. And that’s a worry, and more people need to understand it.

[57:22] Sammie: I really want to ask you about um AI. Okay. Just because I know you’re on the front line with all of this stuff. You see much m many more data sets than I can wrap my head in.

[57:33] Andrew: Well, actually, I was only saying the other day I’m in I’m in um what’s the expression? Uh consumption mode rather than broadcast mode on AI. Like I’m reading a lot of books about it at the moment, um, because I don’t feel you know, I’ve got a few things to say about it, but I’m certainly not an AI expert.

[57:49] Sammie: No, no, no. And I no, I just wanted your current opinion on it because uh, you know, I value your opinion and uh I was uh I myself are consuming an enormous amount on it. Um so I’m just fascin I’m one, I’m fascinated.

[58:02] Andrew [?]: Yeah.

[58:03] Sammie: And two, I think it’s really interesting from a um when you look at say the top 10 S&P 500, the capital outflows into AI investment data centres, etc. It’s the whole shooting match. Absolutely unprecedented.

[58:16] Andrew: Well, like Taiwan, the whole Taiwanese stock market was up 28% in April, and South Korea was up because yeah, the big exactly. But uh it’s to your point about unprecedented, like to have a whole country’s stock markets, Taiwan and South Korea, both of them one of them was up 26, one of them was up 32. I can’t remember which way around that is, but the whole stock market was up 30% in a month because they’re the suppliers of all the semiconductors, yeah. And the semiconductor infrastructure is nuts.

[58:46] Sammie: But then when you work out like the what’s baffling me at the moment, and I cannot wrap my head around this, and I’m sure many uh smarter people or people that are will be shouting at me at the TV screen right now, but fair enough. But I can’t work out when you’re charging £20 for a ChatGPT subscription, yeah, Claude Max is 70 quid a month. Yeah, yeah, yeah. Well worth it, by the way. But yeah, even then, every working adult paying that does not cover the outflows.

[59:14] Andrew: So 100%. So it’s fascinating because the uh to the point history rhymes and it’s not different this time and stuff. I’m sort of contradicting myself as usual. But the point I was gonna make is in every what’s sometimes called a potentially called a Kondratiev wave, like a m- So the railways, radio, television, aviation, like big 50-year waves of really consequential new technology, silicon, internet, whatever. And actually, Kondrativ waves are getting shorter because the world’s getting more exponential. Like it took you know, best part of a century to go from inventing railways to having ubiquitous railway coverage all over the world. It took X years to get from silicon chips to the internet, and now how quickly has AI been adopted fast? You know, ChatGPT was to 100 million subscribers in a month, and like exactly Facebook was like quite a few years, or like I can’t remember, like um what was the precursor to Facebook? My friend MySpace. MySpace, exactly. So Facebook was like 10 times faster than MySpace, and then this has been 10 times faster than Facebook. So the waves are compressing, but the broad point is that every time so railways are a really good old school textbook example. So basically, railways were super exciting, railways were going to change the world, railways were unbelievably expensive, like it was some incrazy percentage of Victorian GDP that went into laying track from London to Manchester and Edinburgh and Glasgow and whatever. And most people lost loads of money. Like if you invested in the railways, there was a railway mania in the like 1840s, wherever. And there’s actually, well, I was gonna say it’s an amusing story, it’s not really, it’s a bit macabre, but the MP for Manchester who came to the opening of like Stephenson’s Rocket was killed by the by the train. Like dude, it was ladies and gentlemen, and he got killed because they didn’t none they just couldn’t contemplate how fast it went, and it was like 20 miles an hour, and he got killed by the train. I read that the other day, I haven’t double checked it, but yeah, I shouldn’t admit, I sort of found it slightly amusing, but slightly weird, but never find somebody’s birthday.

[1:01:09] Sammie: Yeah, it’s because you don’t understand like how crazily fast that was going.

[1:01:13] Andrew: And you know they used to talk about so clinicians at the time used to describe something called railway madness. They literally thought people going at 20 miles an hour would suffer madness or death. You know, now you can go on a train in China at 400 kilometres per hour from Shanghai Airport. But anyway, but the broad point being is that to your question about AI and CapEx cycles, every one of these big cycles, tons and tons and tons of money has gone in, and uh a huge percentage of the market participants have lost their shirt. But what’s it given us? It’s given us railways, and it’s given us airplanes, and it’s given us shipping, and it’s given us silicon and the internet. I mean, the internet’s the most recent classic example, like think how many trillions of pounds have just got blown up.

[1:01:59] Sammie: But we ended up seeing from an immediate perspective, you see it from a longevity perspective because of the initial investment into the technology.

[1:02:07] Andrew: But the and the problem is it’s gonna happen again, but the problem is you as an investor, that’s why you that’s why people I think need to be incredibly careful of the adoption phase of any new Kondratiev wave. Yeah, yeah. Because the because like we’ve talked about this before, but you know, in 1998 to say the internet’s gonna change the world was correct, but that didn’t mean that you’re gonna end up the proud owner of Google shares and not Lycos America Online Excite or Pets.com yeah, you know, or mobile telephones are gonna change the world. I’ve made loads of money in Nokia, and then five years later you’ve lost 90% of your money, and now Apple’s on this. It was like, which is again why I go back to this 20 to 40 year time frame and just broad big picture asset allocation.

[1:02:53] Sammie: Well, look at look at um, you know, Facebook, it’s the tenth large social media network that got the main global network of Facebook. Right. So it’s net it’s never usually in that adoption phase.

[1:03:07] Andrew: Yeah, yeah, well, exactly. And um that’s exactly right.

[1:03:11] Sammie: Which I think is might slightly different. I think Anthropic is the in my opinion, uh when I look at that from a sort of if you look at where you know ChatGPT came along, you’ve got all of these you know large language models coming on like etc.

[1:03:23] Andrew: Gemini, and there’s a big fight there, but I think anthropic is that it seems to be the one that’s actually making tens of billions of revenue and yeah, it’s revenue kind of this hockey sticking like an extra. Because it is, I mean, yeah, the co-work thing. I mean you were saying about it. Yeah, I mean exactly. Like here’s an Excel spreadsheet, drag and drop, can you do this, that, and the other? Like Grok, I believe I’m right still right in saying Grok can’t do that.

[1:03:44] Sammie: Not yet.

[1:03:45] Andrew: Yeah, exactly.

[1:03:45] Sammie: Yeah, again, they’re all racing each other, but it yeah it from a like the way I look at it, it’s like they’ve come along and sort of became the Facebook to it’s my space.

[1:03:55] Andrew: Rather more quickly, but then but that’s the but are we are we still able to call I think what you say has merit, but are we still able to call that five years from now anthropic will be the Google, you know, or the Apple of we don’t know.

[1:04:11] Sammie: Well they well because of the capital that people like Google have, they can throw a hell of a lot more money at it without having to, you know.

[1:04:20] Andrew: But the other mad thing about AI, um, and obviously I don’t know if you want to get into it, but there’s the whole kind of threatening jobs and you know all that angle. Um I’ve I love doing this. I’ve just lost my the other mad thing about AI is I’ve forgotten what the other man is. No. Oh yeah, it’s sorry, sorry, nice one. I’ve got it back. I think I usually do that at least once in these interviews. Is that if so basically all the GPUs that are due to be delivered next year, I think I’m right in saying, this is not like two years out, so the most advanced Nvidia and other folks’ chips can’t be plugged in because we don’t have enough power to power them.

[1:05:01] Sammie: Yeah, that’s why Elon’s focusing on power.

[1:05:03] Andrew: And it’s like solar, he thinks, is the bet um and there’s so much like that he’s like there’s so much trash talking that at the moment, like the he’s goosing the SpaceX IPO because he’s saying the only way you’re gonna be able to power it is by getting power to put compute in space and using solar power, and like there are all these scientists coming out of the woodwork going, it’s just not possible. And then again, they’ve all the stuff he’s done with rocket technology and electric cars, they all said was not possible. So I think this is slightly more bumping up the limits of actually how physics works though.

[1:05:30] Sammie: But yeah, I watched his moonshots interview with uh Peter Diamandis, and that was incredibly eye-opening. I was like this the sheer uh like levels of thought, the like possibility was just like wow.

[1:05:43] Andrew: And as an aside, definitely read everything that Peter Diamandis has ever written. He’s like abundance, it’s yeah, but you need to take it with a pinch of salt, but it’s kind of up, you know, in the dark days of like Labour leadership competitions, you know, content the contests and unemployment and insolvencies and everything sort of going to pot in the UK. It’s quite nice to just take a step back and read some of that stuff. Think, well, maybe AI won’t destroy the world, and maybe the world could be really good.

[1:06:07] Sammie: Oh, the podcast is excellent.

[1:06:09] Andrew: Yeah, yeah, yeah.

[1:06:10] Sammie: I um have it on every week, it’s like a two-hour deep dive. Four of the top minds in the tech industry sit there and talk about AI, and it’s just fascinating.

[1:06:18] Andrew: I’m glad you reminded me about it because I love him and I’ve watched that specific one, but I it’s not one that I sort of go to the recently it’s a really good one to just like smash on in the background.

[1:06:30] Sammie: Yeah, it feels like you’re listening to sort of like a news bulletin because they’re like, Oh, this week someone’s done this. Yeah, yeah, yeah. Have you seen this of this about AI?

[1:06:37] Andrew: Because they’re now it can do this, and you’re just the pace is well, but and also you I mean I was sort of joking about it a minute ago, but at the moment, one of the things I’m trying to do, like almost like I have a reminder on my notepad in the morning, is try and find some bloody good news.

[1:06:53] Sammie: Because like well, that’s why it fills me with hope is listening to these guys. Yeah, because they’re so blindly optimistic about and they’re so excited about every little bit, and they’re like, oh, that’s gonna affect this, and we’re gonna because that’s now job, we’re gonna solve cancer.

[1:07:08] Andrew: Well, 100%. And the biotech, you know, I’m a big fan of the biotech stuff, and it is you know Well, he’s huge on his health, isn’t he? Um yeah, do I know this and longevity and all that stuff. But the but the because I think this is somewhat pretentious philosophical argument, but well, actually, Musk has a really good quote, which is like, um, it pay it’s better to be bullish and wrong than bearish and right kind of thing for your state of mind. I think that’s exactly right. And it’s very, very easy, particularly in Britain at the moment, to sing into a morass of like, oh, you know, I’m just kind of tired of it.

[1:07:37] Sammie: Yeah, sort of turned off from it.

[1:07:39] Andrew: And you might as well like be bullish and hope that actually the future’s bright because along the way, whether you’re right or not, life’s better.

[1:07:46] Sammie: Yeah, totally. And uh you know, I’m building a business here. Yeah, like I’ve got I’ve got an hour trying. Scale an app in this country.

[1:07:54] Andrew: Yeah, well, yeah, although that was a sort of to just pull that back a bit, like I although at the moment it does feel like in order to do that, we’ll have to move to Switzerland, sadly. Like every other rich people, a rich person.

[1:08:07] Sammie: I wouldn’t mind doing uh a trip up the mountains. Uh you know, we see some of those videos, you think, is that your view every morning? It’s very nice.

[1:08:14] Andrew: Everything shuts at 9 pm though. It’s fine for me now boring and old.

[1:08:22] Sammie: What a weirdos we are. Um, but mate, I’ve loved this. Honestly, I could sit here and talk to you for hours, but um, you know, we do have to bring it to a close. But I think just to sort of round off what we’re talking about today, um, the average person’s listening, we’ve covered a lot of ground. Um your mission doesn’t change, it’s get started, but understand what’s happening so we can potentially make decisions with asset allocation in the future.

[1:08:53] Andrew: Let’s go right back to first principles. The single most important thing is that you know, human progress is the ultimate investment theme. If you learn enough to get invested and you do it from the moment you’ve got a bit of money until the moment you can then live on your money, it’s not that hard. And the probabilistic outcome that you will be much better off, like life-changingly better off, is very high, right? So do that. Start off keeping it simple and all this stuff. I don’t think it’s that much more complicated than the stuff I’m saying, but I do think it’s worth people just investing a little bit of time to understand these issues. Because, you know, without wanting to be too smug, I started talking about gold 25 years ago, you know, for all sorts of it was a very similar structural, you know, gold might do this because of this thing, right? And now I’m talking about this because I think, you know, it’s similarly from the vantage point of a few years from now, people go, okay, that was logical, and it I’m pretty confident it’s gonna happen. Andrew Craig, you were right. Yeah, yeah, sorry. That was I shouldn’t have finished for that at all. I was right, but you know, but I think the thing is it’s not me, it’s like leading academics, it’s just that nobody’s listening to them. Yeah, yeah, yeah. You know, yeah. It’s not my work. I’m just trying to share work that’s already been done by really smart people, but you know, consume it because it will help you in the next few years.

[1:10:04] Sammie: I think it’s also just really interesting.

[1:10:07] Andrew: Yeah, I think so.

[1:10:07] Sammie: Uh you know, we might be.

[1:10:09] Andrew: Anything that very few people like that point about Apple being up 23% effectively artificially, 23% on a trillion, multi-trillion dollar stock. It’s quite important to know that, right? And it’s like incredible how few people know it. So yeah, check my work out.

[1:10:25] Sammie: Honestly, go and watch the video on the uh that you put out um on Plain English Finance about it, and there’s a couple of others if you want to delve back into it. Um because you do approach it really structured with investment charts, you’re showing the ups and downs of these things, it was brilliant. So thank you. Is that what you want to send people today?

[1:10:45] Andrew: Yeah, always so the snappily named Plain English Finance and Andrew Craig YouTube channel. Go check it out. And there’s everything’s in playlists. So if people want to learn about property or gold or bonds and inflation or how to invest so that crashes don’t matter, we’ve curated everything in playlists, and they’re all like five, six, seven, ten, twelve minute videos. So, you know, give me an hour of your time. Hopefully, it’ll have a really positive impact on your finances. I hope.

[1:11:10] Sammie: It a hundred percent will.

[1:11:12] Andrew: Thank you.

[1:11:13] Sammie: Like most people I speak to now, they’re like, Oh, I’ve read Andrew’s book. I was like, go on his YouTube channel. Thank you. And then go through that because that’ll give you the next leg of what you’ve learned in How to Own the World. And I think that’s important. Um if you want to get one of Andrew’s books as well, you can get those via his website and Amazon or Amazon to Spotify, they’re all they’re all that’s the other thing.

[1:11:36] Andrew: If you have a Spotify account, you and you can endure listening to me for like seven or eight hours or whatever. If they’re still here now, they can. Maybe they can, yeah. Um, then yeah, it’s well, I guess it’s freely available. If you have an account, you can listen to audiobooks on your Spotify account, and they’re all on there as well, if you prefer audio.

[1:11:53] Sammie: Well, I think it’s up there with the top investment books of all time, and I think you should be super proud of it. It’s absolutely incredible. Everyone I’ve ever met that’s read that book, or if they ask me what book to read, I say start with Morgan Housel because you’ll understand the psychology of money is and the psychological aspect of it is extremely important. And understanding stories to get yourself analogies and get yourself in the framework, and then next it’s you particularly as a Brit, right? Yeah, because Brit or J.L. Collins’ Simple Path to Wealth. Both of those, and if you read yours and that, I think you’re well away.

[1:12:26] Andrew: Yeah, agreed. And it’s the 80-20 rule, it’s like you know I’ll finish with this because I was but I always go back to it. 42 million British adults have got a driving licence. How long does it take to learn how to drive? Tens of hours, I don’t know, whatever. And my genuine belief is learning enough to achieve a life-changing outcome from capital markets from finance is no harder than learning how to drive. And I it’s my mission, that’s why I bang on about it. We need millions more people in this country to do that. We need 42 million people to do that and not just have a driving licence.

[1:12:57] Sammie: Well, the six people that are still listening now, hopefully that we’ve managed to solve that problem for you today. Well, honestly, mate, thank you so much. You’re a gent as always. Uh absolutely love this. And uh yeah, I can’t wait to do this again soon.

[1:13:08] Andrew: Me too, mate. Thank you very much.