The Cheesecake Factory is a US chain restaurant with a 21-page menu. Diners can choose between more than 250 options. The restaurant prides itself on making each dish from scratch. As you can imagine that takes a large kitchen staff.
Each day there are between 60 and 100 people who work in the kitchen with each chef responsible for overseeing the production of 30 menu items. The Nashville branch of the Cheesecake Factory has 18,000 kilos of ingredients delivered per week. It is an impressive logistical achievement.
On a trip to Japan in April I went to Sushi Kobikicho Tomoki for a 24-course omakase. There is no menu and you eat the fish that is in season. The meal was prepared and served by chef Kobikicho Tomoki, his wife and a dishwasher.
These are two very different experiences. At least I think they are – I’m yet to grace any of the 215 Cheesecake Factory locations.
There is a point to my restaurant juxtaposition. The difference between producing food at the Cheesecake Factory and Sushi Kobikicho Tomoki is the difference between mass production and a craft.
This doesn’t make one good and the other bad. But if you want to be successful in either kitchen you need to be clear about what you are doing – practicing a craft or working the assembly line.
I’ve been thinking a lot about the term craft. I wrote an article for Morningstar last week and referred to investing as a craft. Several readers disagreed by pointing out that all it takes to be successful is dollar cost averaging into a broad-based index fund for the next few decades. They view investing as mass production. That isn’t how I see it.
Is investing a craft?
A broad-based index fund is an investment. And there is a significant amount of research showing the merits of this approach.
But there is a big difference between an investment and investing. The craft isn’t what you buy – it is the process you go through to build wealth. That is investing.
A craft requires judgement derived from knowledge and experience. It requires careful and persistent execution.
Building wealth takes the foresight and discipline needed to save money over decades.
It takes patience so that compounding can do its work.
Building wealth requires the emotional fortitude to not panic in a bear market.
It takes conviction to stick to the same strategy when some other investment will always perform better over the short term – especially if you use a broad-based index fund.
You must ignore the naysayers and resist the compelling pitches for alternate approaches.
Final thoughts
Working in the kitchen of the Cheesecake Factory requires basic culinary skills and the ability to follow a recipe. You need to know your role in a crowded kitchen and execute the same tasks repeatedly. Each staff member is part of an assembly line. That is how mass production works.
Chef Kobikicho Tomoki trained for ten years before opening his own restaurant. Four of those years were spent learning to make rice. Once the restaurant opened it took twelve years to be recognized by Michelin.
This seems like a lot of work to cut a piece of fish and stick it on rice. But what sets a craft apart is how hard it is to do something well. Just dollar cost average into an index fund over decades is easy to say and hard to do.
I’ve never seen a study that suggests the average person is good at investing.
Dalbar and J.P. Morgan looked at the average performance of individual investors in the US between 1998 and 2017. They estimated that the average investor achieved a 2.60% return per year when the average balanced fund returned 6.80%.
Morningstar shows a persistent gap between the returns of investments and the returns investors achieve. This isn’t about what is in your portfolio – it is about you.
Call investing whatever you want. Just don’t pretend it is easy.
Mark LaMonica
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Weekend market update
From Shane Oliver, AMP
Global share markets rose strongly over the last week led by US shares on the back of renewed hopes for a peace deal with Iran to reopen the Strait, strong US earnings results and mostly good economic data. The Australian share market initially had a strong rise too but ended pretty flat for the week on the back of renewed doubts for an imminent peace deal and Australia’s perceived greater vulnerability to an extended closure of the Strait of Hormuz. For the ASX 200 strong gains in resources and financials were offset by falls in health, IT and retail shares. Bond yields were little changed - rising slightly in the US but falling slightly elsewhere.
The $A has risen to its highest since April 2022, partly offsetting the relative underperformance of Australian shares. It’s now around fair value of $US0.72 but absent a global recession its likely to rise further in response to the widening interest rate gap to the US and strong commodity prices. Metal, gold and iron ore prices also rose over the past week as did Bitcoin with the $US basically flat.
Renewed hopes for a peace deal saw oil prices fall, but it remains messy. The week started badly with an exchange of fire between Iran and the US Navy and UAE as the US sought to escort stranded ships through the Strait, but progress towards a resolution appeared to be resuming again with Trump saying “we’ve had very good talks” with the US proposing a gradual reopening of the Strait and a lifting of its blockade of Iranian ships with negotiations of Iran’s nuclear program to come later. Of course, we’ve heard it all before from Trump and by the end of the week it was all looking shaky again with another exchange of fire between Iran and the US and Iran yet to respond to US proposals. Pressure for a deal remains immense though particularly on Trump with his approval hitting new lows, and Trump’s lack of follow through on many of his threats suggests he wants to end the War and move on. And China appears to be urging Iran to agree to a deal. So, our base case remains that Trump will do whatever is required to stay on the off ramp to peace and that a deal will soon be reached leading to a bigger fall in oil prices.
Of course, it could just be another false dawn on a peace deal and the clock is still ticking as the longer the Strait remains closed the greater the hit to the global and Australian economies as the world will have to adjust to a 10-15% reduction in global fuel supplies. This would mean even higher fuel prices (a rough calculation is that oil would need to go to around $US150/barrel) and/or fuel restrictions. So far the global economy has been protected by reserve drawdowns, fiscal handouts like fuel tax cuts, just in case buying, expectations that it will be temporary aided by Trump’s regular comments that it will soon be over and the AI boom in the US. But oil crises have always impacted oil prices, shares and economies with a long lag. For example, the full impact on oil prices unfolded over four months in the first oil shock in 1973 and over a year in the second oil shock in 1979. So hopefully we are right and a deal is soon reached. The other big risk is that any deal reached is of low quality – with Iran effectively more aggressive than before and progress towards nuclear weapons just delayed. In which case it could all flare up again down the track.
The RBA hiked rates a third time citing upwards impetus from the oil shock to already high inflation and the need to lower demand in the economy below depressed supply. The RBA has less flexibility than most other major central banks which have mostly held rates constant because depending on the country being compared to inflation is further above target here, productivity is weaker and or unemployment is lower. The Norwegian central bank was an exception and hiked rates this week to 4.25% because inflation was “too high” and of concerns about “eroding confidence in the inflation target” if it did not hike – a bit like the RBA. The experience from the 1970s supply side shocks is that the RBA is right to be giving priority to getting inflation back down as a failure to do so will only lead to higher inflation expectations making it even harder to get inflation back down later. In an ideal world fiscal policy should be used to spread the load more equally than mainly mortgage holders but politicians cannot be relied upon to do so and often make inflation worse so its best to rely on the RBA and the blunt instrument of rate hikes. Unfortunately cash handouts to households in the WA Budget (eg $700 for a family with two high school children) are a classic example of how Australian governments are just adding to the inflation problem and making life harder for the RBA and hence mortgage holders. Hopefully the Federal Budget doesn’t make the same mistake. Our assessment is that having hiked three times in a row the RBA can afford to pause at its June meeting, but we are allowing for one final hike in August and then rate cuts next year in response to weak growth bearing down on inflation.
The Australian Federal Budget (Tuesday) has more riding on it than has been the case for many years with the Government promising a focus on reforms to address years of poor productivity while at the same time dealing with the impact of the global oil supply shock. Unfortunately, the latter could derail the former – but so far the signs are positive that it won’t. The Treasurer has promised a “responsible budget focussed on resilience and reform” with objectives around cost-of-living support that doesn’t add to inflation, budget savings, lifting productivity and capacity, tax reform, improving economic resilience and intergenerational equity. Key measures under each of these categories look likely to include:
- Cost-of-living support – a $200-$300 tax offset for all salaried workers. It looks like it won’t be means tested which is a bit silly as why do rich people need such help.
- Budget savings – Treasurer Chalmers and Finance Minister Gallagher have announced $64bn in gross savings and indicated that there will be net savings as well. The Treasurer has also indicated that any upward revenue revisions (which could be around $40bn over the forward estimates) will be banked. If this is all the case and any cost-of-living support is more than offset by savings elsewhere it won’t add to inflation.
- Productivity – cuts to red tape and money for states to make productivity enhancing reforms along with a boost to R&D tax incentives. Action to reform company tax as proposed by the Productivity Commission is possible.
- Tax reform – election promises for a 1% cut to the bottom tax rate and the optional $1000 standard tax deduction will be included. But beyond that so far leaks have flagged a return to taxing real capital gains with new builds given a choice of the old or new CGT systems, curtailing negative gearing to either limit the number of properties or limit it to just new builds, a minimum tax on trust distributions of 30% and a phased reduction in the EV fringe benefit tax break. Of course, if this is all there is it will amount to nothing more than a tax hike and not real tax reform. Ideally Australia needs an increase in the GST rate to finance a cut to income tax rates and tax indexation. This would make the tax system less distortionary, provide greater incentive and help deal with intergenerational equity by taxing self-funded retirees more (via the GST) & taxing workers less.
- Economic resilience – so far on this front a $10.7bn fuel security package has been promised to help boost fuel reserves to at least 50 days. There are likely to be more efforts to “make more things in Australia.”
- Intergenerational equity – so far all that’s been talked about on this front are measures to curtail the capital gains tax discount and negative gearing and the minimum tax rate for trusts. Unfortunately, I can’t see how these will improve intergenerational equity. Older generations have got the benefit of these tax concessions to grow their wealth and now they are being curtailed for the young! What’s more the property tax changes won’t fix the undersupply of housing. The key ways to improve intergenerational equity are to boost productivity growth so living standards grow at a rate older generations experienced, get the housing balance right with more supply and less immigration and raise the GST and cut income tax.
Ideally the budget needs to do these three things: cut government spending by around $100bn over the period to 2029-30 taking it back to around its long-term norm of around 24.8% of GDP to provide more space for private spending; provide serious tax reform and not just tax hikes; and slash red tape and provide more incentives to invest. It should also include a return to firm fiscal rules around spending, tax and the budget balance with a reform of the Charter of Budget Honesty to refocus on the headline budget deficit given the use of “off-budget” spending.
In terms of the budget numbers we will likely see this financial year’s underlying cash deficit forecast revised down to around $25bn (from $36.8bn in MYEFO) and next year’s to $24bn (from $34.3bn) with deficits still projected out to mid next decade. The Government’s growth forecasts are likely to be revised down to 1.5% for the next financial year with subsequent years revised down slightly due to slower productivity growth. Next financial year’s unemployment forecast is expected to remain around 4.5% and inflation is forecast to fall to 2.5% after 5% this financial year. Net migration forecasts are likely to be revised up.
Also in this week's edition...
Globalization continues to reverse in the face of geo-political strife. Arcadian Asset Management puts forward the case for cross boarder diversification to take advantage of this environment.
Inequality continues to dominate political commentary in Australian and overseas. Roger Wilkins and Peter Siminski take a look at the role housing plays.
Many investors have been burned by lithium. David Tuckwell argues that investors shouldn't dismiss the current rally.
Inflation is again in the news with the RBA rate hike this week. Quay Global Investors looks at why inflation is so entrenched in the Australian economy.
Around the world, democracy as a system of government is backsliding. Kate Griffiths, Aruna Sathanapally and Matthew Bowes outline how Australia can keep democracy alive.
Tony Dillon explores an area of the federal budget that is routinely ignored - off-budget accounting.
Ashley Owen's abridged monthly snapshot uncovers what is front of mind for investors around the world and his view on the likely outcome of the stand-off in the Middle East.
This week's white paper from VanEck looks at the limitations of the 'quality factor' in Australia's equity market when compared to global options.
Curated by Mark LaMonica and Leisa Bell
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