Best of Money Clinic: Investment Masterclass — Stuart Kirk has ‘skin in the game’

This is an audio transcript of the Money Clinic podcast episode: ‘Best of Money Clinic — Investment Masterclass: Stuart Kirk has ‘skin in the game’’

Claer Barrett
Hi, it’s Claer here. The FT has given me some time off for good behaviour. So this week, we’re going to revisit our investment masterclass with Stuart Kirk, the writer behind the FT’s popular Skin in the Game column on Saturdays. Every week, Stuart writes about his progress investing all the money he has in the world. And on this episode he spills the beans about what’s inside his own investment portfolio and why. He’s got great tips for listeners, including how he sizes up a potential investment and why he thinks cash flows are the best metric for judging a company’s future success. Plus, why he’s bearish about bonds. I’ve learned so much from Stuart’s writing. I know that you’re going to enjoy meeting him, so keep listening.

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What if your investment portfolio was subject to weekly scrutiny by hundreds of thousands of Financial Times readers?

Stuart Kirk
So I took the brave, perhaps stupid step of revealing my holdings and promising readers that every week they would hear what I’m recommending and advising and I would actually do it myself, and the proof would be in the table that is published each week in the paper.

Claer Barrett
This is the challenge that our new investment columnist Stuart Kirk has bravely chosen to take on with his new column, Skin in the Game, which you can read every Saturday in the FT weekend newspaper. Every week, Stuart details his progress, managing his own retirement fund in his SIPP, that’s his self-invested personal pension.

Stuart Kirk
Even worse than that, Claer, it’s all the money I had in the world. For various reasons, divorce being the main one, everything disappeared. So I have no other assets, no other unit trusts, no property, nothing else, no other savings except one SIPP and one pension fund with a previous employer, which I’m hoping to put into a SIPP. So everything you see is what you read.

Claer Barrett
Currently worth £461,000, if his investment decisions work out, then great. But if they don’t, it’s a very public arena to make a mistake.

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Welcome to Money Clinic, the weekly podcast from the Financial Times about personal finance and investing. I’m Claer Barrett, the FT’s consumer editor.

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Now, Stuart Kirk may not have millions to his name at the moment, but what he does have is 25 years of experience in managing money, from advising portfolio managers to researching and now writing about investing. So in today’s episode, I wanted to get him into the studio for an investment masterclass. He’ll be sharing his views on how to choose potential stocks, understand valuation, why he isn’t keen on funds that follow a particular theme, and what he thinks needs to change in the world of ESG or sustainable investing. But before we get started, our usual caveats. Any views you hear on Money Clinic about investing are just that: our opinions. Always do your own research, and if you want professional financial advice, you’ll have to find a professional financial adviser.

Well, Stuart, welcome to Money Clinic. Could you start off by introducing yourself to our listeners?

Stuart Kirk
Hi, everyone. It’s a pleasure to be here. My second only podcast and in fact, I think you did my first, so quite exciting. I feel down with the kids.

Claer Barrett
We invited you back. (laughter)

Stuart Kirk
Yes. So my name is Stuart. I’m currently a columnist with the paper on the weekend and have a chequered history across various disciplines, from running money to advising people running money. I’ve done management consultancy, I’ve edited the Lex column in a previous guise, and everything in between. So quite a varied background and CV.

Claer Barrett
Now, the common thread running between all of the things that you’ve done in your career is investing. Either investing other people’s money or your own money. Now your column in the Financial Times, which has been running since last autumn, is called Skin in the Game. Why did you choose this name?

Stuart Kirk
Right. So the name comes from my belief that unless you can see what people are invested in, their views aren’t really worth the paper it’s written on. Unless, of course, that paper is a salmon pink. People say a lot of things. They give you a lot of views. Really, the only way to know what people are really think is to see their own portfolios and to see where their money actually is.

Claer Barrett
Now, I would imagine that people listening to this podcast are going to be really refreshed by the level of honesty that you have with your money. Because British people are so uptight about talking about money, and that really prevents us from learning, especially when it comes to investing, which is not an activity that all of us get to really participate in our lives. But we ask everyone this question on the podcast too, which is: what’s your earliest money memory?

Stuart Kirk
My earliest money memory was probably on the beach in Australia when my grandfather gave me five cents to go and buy two ice creams, which I’m not that old. I can tell you that it was a lot more than five cents.

Claer Barrett
Yeah. (Laughter)

Stuart Kirk
The first time I realised as a human, because you give your kids play money and things like that, that the thing in your hand was supposed to buy a) something from a vendor and b) that the thing in your hand could be greater or less than the thing that you were trying to buy. And in this particular case was very much less.

Claer Barrett
And how old do you think you were when your granddad gave you the five cents?

Stuart Kirk
I was five. So this was mid-70s when inflation was rampant, interest rates were high and my parents were paying, people forget now, you know, 25, 17 to 25 per cent on their mortgage.

Claer Barrett
And tell us a bit about your career running money as you go. I love the expression, running money. How did you get into it and where has it taken you?

Stuart Kirk
Yes, I’m quite old, so I graduated in the mid-90s and a number of people told me that if they had their career again, they’d get into the asset management game. At the time, not many people knew about it, really. It was the dull corner of finance. Everyone wanted to be an investment banker or a trader or something like that. So I got into asset management running Japanese equities. I spent my gap year in Japan, spoke a little bit of Japanese, and there was an opening at an English bank called Morgan Grenfell for being a Japanese equity analyst. So that was my way in.

Claer Barrett
And in these roles, how would you define running money? You’re looking after large slabs of cash for a big institution and deciding where in the world that money is gonna be invested.

Stuart Kirk
That’s right. So there’s two broad categories. There’s what you call retail asset management. Sort of for mums and dads and unit trusts and things like that. And then there’s what’s called institutional asset management, and you’re running money on behalf of insurance companies, pension funds, institutional investors, sovereign wealth funds. Ultimately all that money comes back to individuals and the mums and dads.

Claer Barrett
The people, yeah.

Stuart Kirk
. . . but it just depends who you’re sitting across the room from, whether it’s an individual or an institution. I have mostly run money for institutions.

Claer Barrett
So you’ve said in your column the best investors follow the data and clearly in every job you’ve ever done for the FT and for everyone else, that’s been at the heart of your investment process. So putting it into practice, how would you approach sizing up a potential investment?

Stuart Kirk
Yup. So what I mean by that statement is people get carried away and humans are very susceptible to manias, to fear, to greed, to trends, and they tend to be counter to what you really want to do. So people are maximum excited probably at the top of the market and they’re most fearful at the bottom. So when I say you need to follow the data, the data is only useful in keeping your feet grounded to allow you to not get carried away like everybody else around you and to give you an anchor point when everybody else is freaking out.

Claer Barrett
Or when everyone else is piling in.

Stuart Kirk
Or when everyone else is piling in. And so ultimately, equity markets tend to go up over time. But there are better moments and worse moments to buy and sell. And it’s nice to have a couple of numbers there and they can fool you. It’s a difficult game, but it just gives you something to fall back on to give you some confidence.

Claer Barrett
Now to listeners who wouldn’t have a scooby about how to approach looking at valuation of different companies on the stock market, could you give us some pointers and ways of understanding how professional investors like you do this?

Stuart Kirk
I mean, ultimately it’s, the question is, do you really even need to do it? For the average retail investor who would invest in an ETF or an index, you really can just ignore valuation and look at a 100-year chart of the market and be happy that over time they will go up. But if you want to get into the murky game of trying to outperform an index or pick absolute individual winners, it’s very, very tricky. There are ways that professionals try and do it, but the honest answer is they do it with mixed success. In fact, that’s even being generous. But if you’re one of the people that think that you really want to give it a crack, I would recommend looking at value on the basis of cash flows.

Claer Barrett
OK.

Stuart Kirk
Readers may have heard of the term cash flow. Basically, companies generate revenues. The price times the volume of what they sell. Then there’s a cost of what companies take to make that product. That’s the costs. And then you get earnings at the end or profits. You will have heard the term profits. But profits only take you so far. You’ve also got things like depreciation and so on underneath that. What you want to get to is a true definition of cash in the business. That’s ultimately what you want to get to. And different businesses have more or less amounts of cash. And over time, most academic research suggests that valuation measures based on cash flows is the most accurate way of predicting the performance of a stock going forward. Now, it sounds technical. I wouldn’t worry about it too much because over time, broader indices and markets go up. They’ve done that in most markets around the world. But if you want to get down and grubby, cash flow-based metrics are the best.

Claer Barrett
Now, it was always explained to me at the Investors’ Chronicle, where I started out, that cash flow was the lifeblood of a business because if it stops, it’s like the circulation to your heart has been cut off. Business will fail, the money can’t move around. Are there any particular businesses that have got really, really good cash flow? Well, on the flip side, really, really bad cash flow that you could talk about from any point in history?

Stuart Kirk
Yeah. So it’s first worth saying that cash flow only takes you so far. So for example, the Big Tech companies actually had pretty poor cash flow, but have done very well. But in general, companies that spend money on big lumpy things like factories or machines or trucks and things like that have poor cash flow metrics because they’re spending huge dollops of money over large intervals of time. Companies with excellent cash flow tend to be ones where the money comes through the door quickly. You could imagine a retailer or a supermarket where they’re literally wanting to give it back to you at the till. They’ve got so much cash. They tend to be high-cash-flow businesses. And you know, if they have a lot of debt, they can service that debt very easily because there’s a huge amount of cash in their coffers. So what does that mean? You can invest in companies with more debt if they have more cash, whereas a company with big spending commitments should have less debt.

Claer Barrett
And could you give listeners a flavour of what’s actually in your portfolio at the moment?

Stuart Kirk
Yup. So it’s equity-heavy. I have a large 25 per cent allocation to UK equities, which I wrote about in my first column that people can read mostly from a valuation point of view, to be honest. I have a large exposure to global equities as well because my pension provider didn’t provide a US-only fund, so I had to get US exposure through a global equity fund because US companies tend to be the main constituents of global funds.

Claer Barrett
Indeed.

Stuart Kirk
I’m excited about Japan, probably because of my background. It’s never worked, but I really hope that this time it will. Why am I invested in Japan? It’s only a 10 per cent holding. Japan is by far the cheapest equity market on planet Earth. Trouble is, it’s been the cheapest equity market on planet Earth for 25 years. But it does give you some protection if things go haywire in the world. And the hope is, perhaps irrationally, that one day Japan will come good. And finally, I have exposure to Asia. And again, that’s on valuation grounds. It’s quite cheap. I was hoping that China would open up post-Covid and it would relax its Covid rules. This has proved to be correct and we’ve had a nice rebound in Asian stocks as well.

Claer Barrett
Another topic that you’ve covered in your column is bonds. Could you just give us a very short little blast on what is a bond?

Stuart Kirk
Yes. So bond is basically debt that companies or governments sell in order to get money through the door, and in return they pay the person who’s given you the money a coupon or a return, and that return is fixed. So a company will say, “I’m going to build a new building. Can you give me some money, please?” And the investor goes, “Sure, I’ll give you some money, but you’re a bit of a risky company.” And the company says, “Well, OK then, I’ll pay you 5 per cent a year.” Or Argentina will come along and say, “I’m broke. I would really like some money, please?” And then investors will go, “We’ll give you some money. But boy, you’ve never given it back to us before. We demand 20 per cent interest.”

Claer Barrett
Mmm.

Stuart Kirk
So it’s a type of capital. It’s a type of financing where the company or government pays a coupon and interest rate in order to raise that money.

Claer Barrett
And in the news for all the wrong reasons recently. But do they deserve a place in our portfolios?

Stuart Kirk
Yes. If you look over a 100-year view, they most certainly should be. Traditionally, people have owned bonds because they have been relatively safe. They have generated a yield that retirees have eaten from. And they have moved in a different direction to equity markets. So when equity markets have fallen, bonds have gone up. The trouble is, for the last 10, 15 years or so, they have tended to move in line with equity markets. And so people have begun to ask the question, why should I bother? And this has become an all-pervasive view. But in general, in theory, they should move contrary to equity markets and therefore should be part of any portfolio, particularly after the sell-off at the end of last year, I felt — and many others felt — that they were getting cheap. And they have rebounded nicely since about November.

Claer Barrett
Now, you said in a recent column that you were interested to find ways of investing in the metaverse. I think you’ve been deluged with emails from readers about that. But in terms of the themes and the sectors that you’re excited about at the moment, what’s on your mind?

Stuart Kirk
Yes, so I did a piece on sectors and thematic investing and it was quite critical of thematic investing.

Claer Barrett
What is thematic investing?

Stuart Kirk
OK, so thematic investing is instead of investing in Japan or the US, you say, I believe that there will be a growing middle class in India or I believe in biotechnologies, or I believe that computers and robots are going to take over the world and I want to invest in companies that are exposed to computers. Or I believe in the circular economy or recycling or renewables.

Claer Barrett
Or the space race.

Stuart Kirk
Or the space race. And there are many, many themes that you can think of. So instead of picking companies or sectors or countries, you pick an idea or a theme. The trouble is with that, by the time that you’ve identified a theme, a lot of the time the companies have already doubled or tripled and you tend to be late to the party. So my idea was that you’re better off sticking to either country exposures or old-fashioned sectors like steel, industrials, coal stocks, chemical stocks, etc, because they’re easier to get your head around. So that was the, what I was basically saying.

Claer Barrett
Mmm. And industrials and banking were two that you said you like the most. Could you explain as an investor the reasons why they’ve appealed more than others?

Stuart Kirk
Yes, I’m quite a simple chap, so that was another reason I prefer sectors over themes. But going back to the valuation point in the data, when I look at sectors, I don’t really have a strong view on which will do better, but I pick them on the basis of valuation. And after underperforming tech for a very, very long period of time, industrials were looking cheap on an absolute basis, but also relative to their history, as were many stocks in the finance sector. With banks as well, they tend to do better when interest rates are high . . . 

Claer Barrett
Mmm.

Stuart Kirk
. . . or rising. And I’m sure you’ve talked about this with your listeners before because those cheeky banks tend to not raise the amount that they’re giving you on your savings and tend to raise the amount that you have to pay when you borrow. So the difference between those two things, the net interest margin, tends to widen when rates are high and banks tend to do very well.

Claer Barrett
Yeah, indeed. And they have all been doing very well since the beginning of the year. Now, one way of looking at whether a company is cheap or not is a calculation known as p/e. Now somebody listening to this podcast might think PE and think being forced to go running outdoors in the mud as an English school in the 1980s, which is certainly what comes to my mind. (Laughter) But in investment speak, what is p/e and how is it a useful way . . . 

Stuart Kirk
OK.

Claer Barrett
. . . of working out whether a company is worth its salt or not?

Stuart Kirk
Sure. So you can imagine that every year a company makes a profit and it will make the profit next year, the year after the year after that, hopefully into the future. So all that p/e is trying to do, and it stands for price/earnings ratio. And it’s the price that you pay in the market . . . 

Claer Barrett
For the shares.

Stuart Kirk
. . . for the shares, divided by the earnings per share or the net profit. And all it’s trying to do is to say, how many years will it take for me to get my money back?

Claer Barrett
Right.

Stuart Kirk
That’s basically what it’s telling you. And if I pay 10 today, it’s worth 10 years of earnings. So I will get my money back after 10 years. And so therefore, you can imagine that a company with a p/e of five is more attractive, because you get your money back after five years.

Claer Barrett
And you still own the shares.

Stuart Kirk
And you still own the shares.

Claer Barrett
And you can still sell them.

Stuart Kirk
Or if it’s a company on 30 times, takes 30 years before you get your money back. So you can imagine Amazon on 100 times, you have to be pretty confident that the company is going to grow very, very, very quickly or its earnings are going to increase very, very quickly for you to take the risk to give them your money. So there are lots of problems with p/e, in particular that earnings are very volatile. Is next year’s earnings going to be the correct number? Is your forecast earnings going to be correct? So we as analysts spend a lot of time trying to work out whether next year’s number and the years after that are accurate or not. And that’s what we spend most of the time doing. But essentially what you’re asking is how long is it going to take until I get my money back?

Claer Barrett
Yeah, I love it. Really, really great explanation. Now let’s talk a little bit about ESG, green investing. Now, you describe yourself as being pro-ESG, but one of the reasons that you’re working for the Financial Times again is because of something that happened while you were actually at an FT conference working for HSBC. In your own words, do you want to tell listeners about that? Because it’s quite a tale.

Stuart Kirk
Yes, well, it was a speech I gave in an FT conference around climate risk. Some people think I was talking about climate change, which I wasn’t. I never talk about the science, but it was about climate risk. And my point was to make, is to say to investors overall in the grand scheme of things, I think there are going to be more opportunities that come from the transition to a renewable future than there are risks and that overall you shouldn’t be too worried about it. The second point I wanted to make was that we should be investing more in adapting to climate risk and climate change than worrying about mitigation. Unfortunately, some of the terms and the jokes that I used around making that point, ie, that, you know, don’t be worried if Miami was going to be six feet underwater because Amsterdam has been six feet underwater for hundreds of years, uh . . . didn’t go down so well with my previous employer. And I was suspended and I ultimately was forced to resign. And so many people think now that I’m anti-ESG, that I’m anti, you know, net zero, which is absolutely not true since I was head of global head of responsible investing. So that’s sort of how my career ended at a large bank. But I’m still very much supportive of sustainable investing. I think it’s the right thing to do and there’s a right and a wrong way of doing it.

Claer Barrett
What would you say are the main flaws with ESG.

Stuart Kirk
The main flaw is that there’s no clear definition of . . . 

Claer Barrett
Mm-hmm.

Stuart Kirk
. . . what a sustainable company is. And I don’t think it’s right that investors or asset managers should be the ones to judge what a good or a bad company is. I think we need regulators or some government body to tell us.

Claer Barrett
Some kind of sticker.

Stuart Kirk
Some kind of sticker. Because everybody has a different view. Some people are interested in governance, the G. Some people might have a real passion around the toxic culture of a company, and the S. Some people may be very, very concerned about pollution and environmental factors and net zero and therefore the E is more important to them. And companies are a very complex beast.

Claer Barrett
Mmm.

Stuart Kirk
You have to take Shell for example. On the one hand, it drills gas and oil. On the other hand, it’s investing, you know, over a billion dollars a year in renewables.

Claer Barrett
One of the biggest.

Stuart Kirk
One of the biggest. You have other companies that makes, you know, recycles cartons but on the other hand makes cigarette packets. Who is the person to judge on whether that company is good or bad or not? Is 20 per cent of their revenues good being enough? Or should it be 50 or should it be 70? It’s not really for me or for anyone like me to say, but once we’re told we can then have the right sticker on the company and then the right sticker on funds.

Claer Barrett
Mmm. Now, Stuart, it’s great to have you sitting in front of a microphone because you’re not a guy who holds back. So are there any other lessons from your career running money that you’d like to pass on to Money Clinic listeners? I feel bad asking you this, you’ve given us so much already.

Stuart Kirk
There’s theory and there’s practice, and that there’s a lot of theory that’s not known so well to the generalist reader. For example, investors should be agnostic between dividends and capital gains. Companies are no more valuable giving a dividend. Dividends in themselves are not necessarily good unless you need the income. But yet we spend a lot of time at the FT and elsewhere trying to say that companies are better if they pay a dividend. It’s not necessarily the case. So if you have a long-term investment horizon, don’t worry about dividends.

The second thing that you often hear that is completely wrong is you hear people talk about money washing in and out of markets. Money cannot wash in and out of an equity market. The amount of money in an equity market is the same. So even yesterday in the FT, it said $21bn goes into Chinese equities. Well, that headline could just as easily be $21bn was sold out of Chinese equities because someone has to sell for every buyer. But you should always be wary when people are buying in large volumes. It tends to indicate the top of a market and a turning point. That’s one lesson that institutional managers know very well.

Point three is that interest rates don’t matter very much. We spent a lot of time in the press talking about, “Oh, rates are going up. That’s bad for equities.” It’s simply not true. So don’t worry about that very much either. And ultimately, try and be optimistic about life when it comes to investing. Humans are incredibly inventive. Companies are the source of most wealth creation on planet Earth. And owning a stake in them is the best way yet we’ve discovered in making yourself wealthy. And you’ll have heard this a million times before, but the compounding effect on top of that means that that results in the long-term charts that you can see that you should have up on your wall next to your bed or your office whenever you’re feeling down about the world and just pull up a 120-year chart of the Dow. And you can see the ingenuity of humanity at work.

Claer Barrett
Stuart, it was an absolute privilege having you in the Money Clinic studio. So many things to take from your interview, and I’m sure we’ll get a lot of emails from listeners saying. Thank you for coming.

Stuart Kirk
Thank you, Claer. Happy to help and happy to take questions from listeners.

Claer Barrett
Right. Well, there you go. The gauntlet is thrown down. Send in your questions for Stuart. Usual address: money@ft.com. We’ll get him back in the studio for another round. But thanks for coming in.

Stuart Kirk
Thank you, Claer.

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Claer Barrett
That’s it for Money Clinic, with me Claer Barrett this week, and we hope you like what you’ve heard. If you did spread the word and leave us a review. We’re always looking to chat with people about their money issues for the show. So if you’re interested in being part of a future episode and are looking for some expert money advice, then email us. Our address is money@ft.com. You could also take a peek at our website ft.com/money, grab a copy of the FT Weekend newspaper or follow me on Instagram. I’m @ClaerB.

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Money Clinic was produced in London by Persis Love. Our sound engineer is Breen Turner and our editor is Manuela Saragosa. You heard original theme this week by Metaphor Music. And finally, our usual disclaimer: the Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s all the small print for now. See you back here next week. Goodbye.

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