Disclaimer: The content of this interview are the sole personal views of the interviewee and in no way reflect the opinions, policy or practice of their respective place of employment and its employees. This is inclusive of any insights and views relating to investments, processes, and values. These also do not constitute as personal advice nor formal recommendations.
In our first installment of The Inside Word, I had the pleasure of (virtually) chatting with Joshua Nappa. Joshua is an Investment Analyst specifically focused on managed funds in the fixed income asset class. Josh is originally from Shepparton, a regional town in the north of Victoria. Josh graduated from RMIT with a Bachelor of Business in 2016, majoring in Economics and Finance, he has also completed Level I of the Chartered Financial Analyst program and is currently studying for Level II. Prior to his role as an Investment Analyst, Josh worked in wealth management aiding advisors in the management of their client’s portfolios.
It was truly fascinating to hear Josh’s perspective on the world of finance, which I certainly took a lot from, and I’m sure you will too. Enjoy.
i. What’s your coffee order?
Just espresso, no milk. You’re stuffing around with it at that point.
ii. Cats or Dogs?
Dogs as a companion, Cats for low maintenance.
iii. Early Riser or Night Owl?
I’m definitely a night owl, I think that’s when I get my best work done.
iv. 3 People you’d invite to dinner? (Dead or Alive)
I mean I could say the generic thing such as Warren Buffett and so forth, but in reality, they’d mostly be actors. I’ve always admired Robert De Niro, I’m a huge fan of his films. Secondly, I’d say Giovanni Angelli, he was an Italian industrialist known as ‘The Rake of the Riviera’ and was the principal shareholder of Fiat – he had impeccable taste in fashion and a sharp business mind. Finally, I’d love to sit down with Bill Ackman the hedge fund manager. He’s always been quite an outspoken sort of guy, and he’s quite prominent in the media, but his mind works in a very intuitive way so I’d love to pick his brain.
v. Pineapple on Pizza?
No, definitely not. That’s a sin. You’d get thrown in jail for that in Italy.
vi. Coriander. Yes or No?
You know what, I don’t mind it. I don’t know why people have this affinity with hating coriander for some reason.
1. What does an average day at work look like for you?
I’m an investment analyst at a research house and I cover managed funds. My job is to help assign ratings to managed investment schemes, my asset class coverage is specifically fixed income. The day can vary depending on what point of the review cycle we’re in, generally the majority of my time is spent writing reports, which is effectively my end output. But firstly to start off, I always like to read the news by browsing the Financial Times, Bloomberg, Wall Street Journal and even looking at Twitter and Seeking Alpha. I’m looking to see if there is anything material that will potentially impact the portfolios that I cover as well as anything major that I think is of note that the team would want to know.
Secondly, I’ll try and plan out what I need to do for the day however, sometimes I can go down a bit of a rabbit hole on a particular thing I’m looking at and that’s when time management can go out the window. Effectively, I’ll try and focus on what meetings I have first, whether it be with a fund manager, client or the team; from there I will then focus on the reports that I need to work on and plan it around whatever else I have lined up. So it’s highly variable but I usually like to get the admin things out of the way first then get onto the writing.
When it comes time to meet with portfolio managers, it is good to have kept in tune with what is happening in different sectors of the market. I get to view a fund’s portfolio before the meeting, so having that prior knowledge allows me to pick out anything that I think may affect the fund going forward. This can range from “fallen angels”, industry headwinds, increasing credit risk (ie earnings volatility) and defaults themselves. Linking up what the fund is holding with what is in the news / research you receive can allow you to be proactive and ask some on-the-ball questions during the meeting. However, not all funds in the sector are the same and are spread across a wide risk spectrum so relevancy of what you read prior is key!
The manager review part of the ratings process, which is where I actually go and sit down with the portfolio managers, analysts and business development managers, requires a lot of preparation, part of which I spoke about above. I essentially aim to interpret the information I have collected before the meeting which includes several documents and data files and deduce whether there are any significant changes or developments which need to be discussed. This stage also lets me see where they are taking risk, whether they are taking enough risk and most importantly, whether what they are saying lines up with what they’re doing. Nevertheless, my goal is to gain the best understanding of a strategy.
2. What or who inspired you to build a career in finance?
That’s a funny question. So I’m actually quite creative, I used to love doing graphic design and I was hell-bent on doing it in high school and as a career. I did VisCom in Year 12 plus a mixture of other random subjects like economics and languages. I guess you could say I was good at a lot of things, but not great at one thing. Definitely a mixed bag.
My parents don’t have a corporate background, so my inspiration was quite weird. I always knew that I wanted to move out of Shepparton because I loved Melbourne and I just knew there was more opportunity there. So I think the desire to leave my home town coupled with seeing how big Melbourne was and seeing a relative in a professional field really pushed me to pursue my undergraduate degree.
Funnily enough, I originally enrolled in a Marketing degree and in my first semester, I remember sitting in a class and thinking “I don’t know why I’m paying $30,000 for this”. I know that may sound condescending for people who have done a marketing degree, but I personally didn’t see the value in it however, for others it has been a very fruitful investment.
From there I remembered that I really liked Economics during Year 12 (thanks to an unconventional but fantastic teacher) as well as the fact that I had always enjoyed watching the market from early on in high school. I started investing in year nine when I bought a parcel of Rio Tinto shares, from then I was interested and had a definite curiosity which saw me switch my majors to Economics and Finance.
In summary, my love for economics combined with my dream to leave Shepparton and really see what was out there was what did it for me.
3. We can’t give any personal financial advice, but hypothetically, if you had an 18-year daughter who knew nothing about investing and was keen to get started, what would be the first lesson you’d teach her?
Well, I’d teach her two lessons. The first would be the value of a dollar and the second would be opportunity cost. I think opportunity cost is probably one of the best fundamental theories in economics that I’ve ever been taught and I’d say that ties in with learning where your money actually goes. My Mum always used to say “a penny saved is a penny earned”
The Value of A Dollar
To start investing, you need the capital to actually start investing. The more you have, the easier it is to get started. So knowing where to spend and where to save is critical to learning how to invest because it pulls you out of the mentality of short-termism. I mean I know of people who live pay check to pay check, they don’t have savings and they just spend everything they get. With that said, everyone has different values in life which may differ from mine, but the reality is in the future when they want to retire what do they have to show for it? So, learning to save and being smart about what you spend is crucial.
I think it really comes down to reaching a balance between being able to control your spending and what the opportunity cost of actually spending versus saving that dollar is. For example, you can go out and spend $800 dollars on a handbag or you can invest that $800 into a broad equity index ETF and watch that grow at the average market return. It’s about questioning yourself before you go to spend and thinking about how you can invest that dollar so you can generate more capital for tomorrow. A useful habit I have developed is to ask myself if I actually need what I am about to spend my money on and whether it is going to save me or make me money in the future.
“It really comes down to reaching a balance between being able to control your spending and what the opportunity cost of actually spending versus saving that dollar is.”
I recently bought a bike for around ~$320, I certainly could have spent more but I calculated my budget for it through this thought process: How much would I save per month on public transport? How much would this potentially save me from having a gym membership? At what point would I break even in savings by paying X amount for the bike? I know that is a very regimented and “bean counter” mentality and I certainly don’t do it for everything I buy because the fact is, some things are just for leisure and as humans we need those things to satisfy us and that’s okay.
You effectively want to determine whether it is a splurge or not and it’s okay to splurge at times. You just have to control your propensity to freely spend versus saving, so be smart about it by thinking of what you can achieve by saving that dollar for the future. People can easily learn how to invest later on in life through websites such as this, but it’s about getting the right mentality sorted so you have the confidence to get started.
4. What’s your approach to your own personal investing, do you follow a certain strategy or strategies(s) like passive, active, value, deep value, or a mixture?
Growing up I was always quite risk-averse with my money mainly because it’s how I was brought up. But as my education has increased and as I have become fonder of markets, the way I think about investing has changed drastically. So I’d say I’ve gone from risk-averse to a moderate risk-taker.
I don’t follow a specific strategy but I think it’s wise to think of your entire net worth as your portfolio. So if you add up everything you’ve got today, how much of that is cash in comparison to what’s actually invested and this is inclusive of your super too because your super is an asset. Putting that on paper and looking at things from a big picture point of view is a really great way to get started. Looking at things this way gives you a much wider lens to help realise that you might only be 20, or 30 percent invested once you consider your entire net worth.
“I don’t follow a specific strategy but I think it’s wise to think of your entire net worth as your portfolio.“
You also need to look at how much you’ve got allocated to certain asset classes like cash, shares, bonds, property and other asset classes. I like to put all that on paper and say to myself “Okay, Josh. Which stage of life am I at?” Because at the end of the day you need to align your goals with your investing.
So your goal might be to save enough for a deposit on a house in 5 years. In working out how much you might need for a deposit, you need to consider what your investment rate of return needs to be and what your risk appetite needs to be to achieve that goal. For myself, I’ve said in 5 years I want to have enough for a decent house deposit which has meant I have adjusted my portfolio to more of a moderate risk profile. In formulating that “required return” I have calculated how much I already have in liquid cash, I have then looked at the average volatility of various asset classes then look at forecasts of potential future returns to demine the expected end amount. So you’re looking at what per year percentage return do I need to achieve X amount of capital after X years.
You can balance between risks by simply looking at the average riskiness between different asset classes. Cash obviously carries the least risk, then there’s property which is typically a safer asset class but harder to sell and then you’ve got stocks that carry the most risk. What I’ve done is skew my portfolio to stocks, because at the end of the day equities is where the majority of my portfolio’s growth will come from. Equities are higher risk, but I also have bonds and cash in there to dampen the volatility. It’s really about finding the right balance to suit your risk appetite. There are other, more complicated ways of measuring risk however, they are generally beyond the scope of a novice investor.
So essentially my strategy involves looking at my net worth holistically, putting it on paper and then thinking about my goals and aligning them with my appetite for risk to determine my asset allocation.
5. What’s the dirty little secret of the finance industry that you think readers without any financial background should be aware of?
It’s not necessarily a secret because it’s right in front of our eyes, but I’d say it would have to be the fees that super funds, ETFs (Exchange Traded Funds), managed funds, and banks actually charge. I think the biggest thing that people don’t realise is that you can shop around for different financial products and especially with banks. Loyalty isn’t necessarily rewarded in finance, so just because your whole family is with the Commonwealth Bank it doesn’t mean you should remain loyal to them.
I think it’s good to be a savvy shopper in terms of investments, bank accounts, and credit cards. Unfortunately, not enough people pay attention to what they’re actually getting and compare it to other alternatives.
Know What You’re Getting
So it’s not a dirty secret, it’s more about realising what you’re really getting for your money. Take passive ETFs as an example, there are a ton of ETFs that track the S&P 500, but they’ve all got different fees, so really you need to understand the differences between them to see how they stack up. ETF providers could charge a 0.10% management fee, and another could charge 0.06% for the almost the same product. That might only be a 0.04% difference, but the extra money is better off in your pocket. Again, be sure to understand the structural differences in each product before you base your decision on fees alone.
It really pays to sit down to work out how much something is costing me for the outcome I’m expecting, unfortunately people don’t do that. They just stay with what they’re used to, and in reality, they should be shopping around.
6. Aussies are allowed to access $10,000 from their super this financial year and the majority of people withdrawing are under 30. What would you say to someone thinking about withdrawing their super if they didn’t need to?
In the face of a pandemic there are few things I’d say. Don’t touch your face, don’t touch other people, and don’t touch your super. Here’s the reality, unless I have a trust or a company structure that allows me to have an effective tax rate of 15% on earnings from my investments, I wouldn’t bother. People don’t realise what super actually is, it’s a tax-efficient trust for your money. Super is government mandated, tax effective and I won’t get a better tax outcome from anything else I can set up as an ordinary individual. That’s the stark reality for most of us.
“In the face of a pandemic there are few things I’d say. Don’t touch your face, don’t touch other people, and don’t touch your super.”
Before withdrawing their super, people need to ask themselves if they’re happy to pull out money from their super to forgo an estimated ~7% (invested in a balanced portfolio) compounded return until their preservation age when they can access it, versus the utility of putting it into an apartment or property, where you might only earn 3% per annum. And again, it comes down to opportunity cost and utility.
Unless you’re going to earn a greater return outside super, at a lower tax rate I don’t think it would be a beneficial decision. I wouldn’t touch it if I didn’t have to.
7. What are the most common mistakes you see people making when investing?
Don’t Just Listen To Your Friends
I’d say the number one mistake would be listening to your mates for ideas on what to invest in. Unless they’ve built a working model on how the company operates, performed a sound valuation, understand the business model, the competitive environment, have met with management or have researched management’s track record, how do they know more than what the market already knows? This isn’t me saying your friends are idiots, they may very well be successful investors but, having an objective view is important.
People need to realise that there can be an ulterior motive from someone who’s telling you what to invest in. It’s usually because they want validation on their decision because they’ve already invested themselves. If I didn’t work in finance and I didn’t have the knowledge I have and I invested in a stock that went up 30%, I’d tell my mates about it as well, because if they get on it, that’s just validating my investment thesis and more importantly, my confidence. That would lead me to think I’m really smart because I’ve just convinced other people to invest. The problem is, those people are likely to lose because that stock has already run up 30%. Therefore it is important to be critical about the opportunities that are presented to you.
“People need to realise that there can be an ulterior motive from someone who’s telling you what to invest in.”
Equity analysts don’t get it right all the time, but the way I’ve seen them come up with their recommendations, decisions and opinions are a lot more formulated compared to your mate’s analysis. Typically a friend will not have the skill to deduce what the actual risks are. Even if the equity analyst is wrong they generally have a much better grip on the risks inherent in the business model, the strategy, the management, and in the stock itself, whereas other people might not. That’s not to say only analysts can pick stocks, because there are some truly fantastic financial advisors and consultants out there, the point I am making is that simply listening to a layman friend without researching can be detrimental.
Don’t Fall In Love With A Company
Secondly, I’d say don’t fall head over heels for a company. It’s easy to go out there, buy a stock and on your way go and pick up a pair of rose-tinted glasses. At the end of the day, it’s just a company. People I know have just fallen in love with companies they’ve invested in. Afterpay is a prime example. People say they’re doing this, and they’re doing that but if you get emotionally attached to that stock, you’re going to potentially fail in being able to have an objective opinion about your investment when something goes bad.
I think people need to look at stocks as a homogenous assets. Homogenous in terms of realising that a stock is simply a piece of equity in a company as opposed to thinking every company is going to change the world. It may very well be that the company does change the world but, you need to be able to test your thesis. People have in the past, gotten it right when picking that company that gives them a tenfold return (ie Amazon or Apple back in the day) but, simply having blind love can get you really hurt. My ultimate point, is that you need to learn to test your thesis objectively and see whether it still stacks up compare to a year ago.
Know When To Sell
Thirdly, people need to learn when to sell. When I worked in wealth management I worked with a former stockbroker and he said to me, “no one ever went broke taking profits”. It’s easy to get greedy and let things run but you could easily lose 20% in a day if something unfavourable comes out about the company.
8. What’s the most important lesson you’ve learned during your career in finance?
It was my second job and my boss at the time had me figured out from the start. Obviously I like to talk and I’m pretty extroverted. So one day he said to me, “you really love to talk don’t you?” and I said: “well yeah, that’s me” and he said “look, I’ll give you a tip: 80/20, 80% listening and 20% talking.” I was just like “what do you mean?” He said, “at the end of the day if you’re talking 50% of the time you’re only ever going to get 50% from the other person”.
Speaking for 50% of a conversation is taking up 50% of the time where you could be getting information for your benefit. So I’ve taken that with me throughout my career so far, and that’s how I know what I know today, from just shutting my mouth and actually listening. I’d have to say that’s the biggest lesson I’ve learned. I have the absolute privilege of working with people far more experienced than I am, listening to them instead of talking has been phenomenal.
9. What’s your go to resource(s) for finance/business related content? (This could be podcasts, websites etc)
Honestly, it’s really just the Wall Street Journal, Bloomberg, Financial Times, even Reuters is mainly what I look at. We have lots of fund manager insights that are useful. I also read research papers, which also come in handy.
10. Do you have any must-read books you can recommend to our readers?
It would have to be ‘Thinking Fast & Slow’ by Daniel Kahneman. I’m halfway through it at the moment, and it’s teaching me a lot about people’s default cognitive ability as well as the fallacies that they encounter. The book hypothesizes systems one and two, with system one being your quick reaction system where you make intuitive decisions based on input. System two is your subconscious, which is a lot more accurate than system one. System two shows the psychological misconceptions between relying on your intuition versus sitting back and deliberating on something. Funnily enough, it’s written by an economist too!
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