A pox on a tax on unrealised gains. May 2, 2025

29:07And so what I'm really getting at here is like the fact some old white dude in an office in Martin Place can shout from the balcony, the cost of borrowing should be 2.9%. I decree. It's like, what, dude? You don't know. You know what the cost of borrowing is? The cost of borrowing is whatever I feel like lending it to you at. I might be totally wrong and you might think I'm an idiot and we won't do anything. Or you might go, actually, I'm happy to borrow at that rate and I'm happy to lend at that rate. And the market will just determine it. And it would just be a thing of absolute beauty. And that, I would argue, is the natural rate.

29:41And you'll actually find that that natural rate is an average of very different rates spread across an economy. That's how we price toasters. It's how we price cars. It's how we price wheat. And I feel as though that, and you have to do it that way, because how can you possibly know the intentions, the desires, the fears, the plans, the relevance and the sophistication of those economic plans that everyone has, like literally millions of people across the country and then around the world, billions of people. You can infer that and then decide one size fits all price. Like, I think when you lay it out like that, it's just sort of like, oh, yeah, that's really dumb.

30:19And that's why I keep coming back to the bond market at the moment. My conversations, whenever it's like share market or anything sort of comes up, it's like bond market. Bond market is everything right now. It's something that fades into the background when the system is more or less functioning as hoped. But that's what sets the borrowing rate because that is a market rate. and and unfortunately when the market is trying desperately to tell you what it thinks we go no you're wrong uh when i say we like authorities think no no no you're wrong uh and so how do you how do you change a market how do you change a free and open market you go in there with a lot of a lot of firepower and you you do and you know made up firepower And then you just basically distort the market by acting as a buyer or a seller in that market to skew the supply and demand.

31:15And it feels like, again, it's like, well, so what? Maybe it's better. Maybe it's good that they do that. But what it does is it interrupts the entire price signal here. It's just there are people out there who have got cash, who don't know what to do with it, who are happy to lend it out. And they say, I just don't. And not because they're dumb or right or smart or anything. It's just like, I just don't want to lend it out at that. And that's perfectly valid, right? And then others are going, well, I guess if you won't, then we will. It's like, well, with what? Well, with this stuff that we just made.

31:46Okay, so what? Wait a second. And it's like share dilution in a company. And then we do all of this stuff. The road to hell paved, honestly, with good intentions. I get why you're doing it. But I don't know how many decades we have to try it and go, we tend to create more problems than we fix with this kind of stuff. Anyway, that was the short version of my rant. I kind of think it's like that is, it is just such, I do suspect in a thousand years' time historians will look back at this period and go, can you imagine that they figured out this thing and then they completely ignored it and centrally controlled the most vital thing that underpins the entire economy.

32:25To me, it's a madness. Anyway. I feel better. I got that on my chest. Yeah. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

32:41Let's move then across the water because we talked about the international impacts. And the other big bit of news this week was the US economy has contracted for the last quarter, down 0.3%, I think the number was. And it's worth unpacking this one a little bit too because it's a weird one. and as much as I suspect the US economy is in for a bumpy ride over the next 12 months, this data I don't actually think is that. And here's why. Completely speaking of either unintended consequence or just simply the natural reaction to things, the US economy contracted because when you do economic growth, you say, okay, how much did we make?

33:21And then you'd look at the exports, you add the exports on and you take imports off because we didn't make that, we just bought it in. so we didn't actually produce that stuff. Now, it turns out in the last quarter, the Yanks bought in a whole lot of stuff from overseas. Why? Because a whole lot of importers were trying to get ahead of tariffs. So you've got this weird scenario. It's a complete own goal by Trump in this context, except that when in the next quarter, they sell through all the stuff they've bought and don't buy as many imports because the price goes up, it's very possible that GDP bounces back.

33:47And again, we've ranted about GDP and calculation before, so we won't do a long work for that. I'll avoid that. I'll avoid it. No, you can't. And it's not an unreasonable measurement. Now, it's a bad representation of national well-being, but it's a measurement. It does what it does. Even the creator of it. Don't use it for other things, but this is, you know, how much do we produce is worth calculating. And it is worth saying, what do we export? You've got to count the stuff you send overseas. You've got to take off the stuff that we use we bought from overseas because we didn't produce it. So, you know, there's some value added by the importer and the retailer, but not really a lot.

34:19So why do I say all that? because, as I said, GDP is calculated that way. So you end up, and completely justifiably, GDP is lower in the US for the last quarter because of the imports that were brought in. But if they then sell those through, tariffs go up, they buy their stuff from overseas, you'll have imports probably, I don't know if they will or not. Again, I'm not going to predict it, but it's likely if you stock up and you sell through that stock, you're probably going to place a full-on border, right? So it's possible the next quarter will be higher. And it's important for a couple of reasons.

34:47Firstly, I don't like Donald Trump's policies. I don't like the man particularly. It's not a Democrat versus Republican view. It's just I don't like Donald Trump. I don't think his policies are particularly good. And there's a bit of schadenfreude, which I'd be happy to say, you know, if the US economy tanked, well, what do you expect? But, but, but, but, what's important is this is not that. And equally next quarter, if and when we do get a rebound in GDP, someone will say, see, I told you Donald Trump was great. Look what he's fixed the economy. That also won't be true. And so it's really important to have your ideological views, election coming up tomorrow here, have your political views, but also be realistic based in fact and so while i while i think don't try to be bad for the u.s economy this is not trump at least well it is actually in terms of bringing forward the imports but it's not for the reason that otherwise he's not he hasn't reduced demand in the u.s economy yet that might come u.s consumer confidence plans this week as well um this is just a just a bit of a an explainer on why gdp fell in the u.s why it might bounce back next quarter and why neither of those two numbers is particularly illustrative of the long term of the medium term future of the US economy and a new tariff regime.

35:49No, I 100 % agree. I actually say it's always true, regardless of the backdrop. It's sort of like, you know, one swallow does not a summer make is one of my favorite sayings. And it's just so true. It's sort of it's one particular data point for one quarter that measures a very narrow thing, which, you know, it's like I use my medical metaphor again, you know, it's like a doctor comes in and I don't know, takes your temperature, but does nothing else. And then and diagnoses you on that alone. It's like, well, there's a whole other bunch of tests I could do to kind of get closer to it. But that's kind of the madness of GDP because it is elevated to this pedestal of like, whoa, it means everything.

36:27And it's like, does it though? And even if it did, would one particular stretch of three months actually mean anything there? So yeah, I agree with everything you said. Take it with a grain of salt. It gets way much more publication than it deserves to get. Yeah, I don't know. no that's fair that's fair i don't know again i know i get a bit lost in where to go what does it mean well here's what it's part of the number though it's part of what matters right like that that's the other thing it's not it's not it's not the only thing that matters but it's it's i i personally think it's part of a reasonable calculation of national well-being national wealth national happiness it's part of yes it is i agree i agree with that so let's let's avoid avoid uh where i want to go why does it matter let's just deal with the framework that we have and the way it will be received.

37:17Well, the reality is... That's what I'm talking about. You're right, mate. You're right. And the decision makers do look at it, rightly or wrongly. They do look at it a lot. And we do too, by the way. When we vote, you know, if the recession we had to have is a line that still gets, you know, Paul Keating gets smashed with 30 years later. By the way, I think he was probably right-ish. Again, it was a bit like Phil Lowe. He used an economy of words that probably wasn't very helpful and the phrasing wasn't particularly good. But we were going to have it. Had to have, I don't know, couldn't avoid.

37:44That's almost certainly true. Yeah. And we vote accordingly. You know, we have better economic manager is the line that gets thrown around in the political landscape. How do we measure that? Measure it by GDP. GDP grows. I feel better off. We've talked about it over the years, Matt. We had seven quarters of a per capita GDP recession and no one talked about it. Well, you and I did. A few other people did. But the papers didn't. The pollies didn't. No one really understood it. We feel like cost of living is a problem. We never really realised, well, actually, we're making less stuff per person.

38:12This is not the root cause. Inflation is more important. But that combination of inflation and reduction of national output per person, that's a really rubbish output. We didn't talk about it because that doesn't get reported. Polities don't care about it. Media don't talk about it. So you're right. I absolutely agree with you. It's way too prominent. But we care because we're told to care. And until we kind of change that. Right? Exactly. And the powers that be care. And so in that context, well, and this is where the RBI and the Fed just get boxed into a corner because it's sort of like we've got these dual mandates that sometimes go, often, in fact, go at odds with each other.

38:55It's like we want price stability. Who doesn't want price stability? That's nice. I don't like my prices going up or bizarrely enough, I don't like them going down a lot either. But I also have a mandate to try and maximize employment. Yeah. And so what they will be looking at is, well, that is in our worldview, that is a contraction. Contractions are bad. That will probably lead to more unemployment. We've just got this one giant lever. It's the only lever we've got. I guess we're going to make rates lower. Whoa, whoa, whoa. Well, before you do that, you know, Michelle, before you pull that, inflation's still cooking.

39:36Yeah, exactly. Yeah, yeah, yeah. Oh, so I should push the lever the other way. Well, it depends. You can choose up or down. Yes. You can't choose. You can't have your cake and eat it too. It's one or the other. And my contention has long been, and I will die on this hill, mate, is that when push comes to shove, unemployment and GDP will always trump inflation, always. And it will be rationalized. And maybe it's not even, it's a framework you're operating in, you're in a possible situation. So I'm not even going to be too critical given the layout of things. But that's where it is consequential, because we're seeing this economic weakness as described per this measure in the context of inflation that is still not under control and given tariffs is likely to get worse.

40:27So it's sort of like, and again, the person listening to this is just cut to the bloody chase here. We're going up or down. It's like, well, that's a really good question. I don't know. No one knows. But based on all that we, of the data that we've got and the data we know that they're looking at, I would imagine that this pushes the Fed more to a dovish stance, if I can use the other parlance there. And we'll see. We'll see. I would be a very, very bold Federal Reserve Chairman, particularly under a Trump administration, that goes, yeah, we're going to let the economy kind of tank for a bit. Right, exactly.

41:07Because we're more worried about inflation. Yes. In fact, Trump's been very clear about that. Here's the other thing. We've said this before. Powell, Trump hates Powell. Powell's term is going to come to an end next year. so Trump doesn't have to fire me he'd probably like to by the way he's going to put someone in power who's going to spend the last two years of the Trump term doing effectively whatever Trump wants not because Trump's telling him to just because you pick a fellow traveller if you think the world is flat you pick someone who also thinks the world is flat it's the exact same thing it's why I'm so jaded and cynical on the arm's length institutions they're beyond politics BS they are for that exact reason.

41:51But anyway, the point is, just to round this part of the conversation off, GDP down in this world, bad. Yeah, it is bad. And probably means you've got more of a... That in itself probably increases the odds of a cut as opposed to a tightening. Yeah, fair. Mate, let's go to the election briefly. Election tomorrow, we'll talk about the election itself. We will talk about the policies and people will make their own views I can't honestly remember last time I was so unimpressed by the economic policies of both major parties. I know I've been on the screen a little bit. And they're saying something.

42:27That's a low bar already to start with. Am I wrong? No, I feel exactly the same. Even the policies that have nice, quote, intentions, they're rubbish implementations. They've been really, really, really timid, gutless, frankly, in terms of actually trying to address any of the real issues. And when they are trying to do, again, trying in inverted commas, housing affordability is a classic. Every policy is designed to look like an affordability measure and soak demand. So I've been really critical. I say that because most of the things I'm able to say, oh, the worst policy is this or the best policy is that, right?

43:06This time I'm like, I don't know. But I want to just come back to something we talked about a little bit in the past and it's come up again. And I want to be a little bit cautious. I've had people on Twitter do the, oh, this is going to be a, this is a thin end of the wedge. This is the slippery slope. This is going to, once they do it here, they're going to do it everywhere. I don't suspect that's true. It may be. I think it's largely a scare campaign. I don't want to feed that, but I do also, I don't want anyone to take the slippery slope from this, but I do want to be very clear about the, one of the, I can't even say it's the worst policy.

43:36It's pretty rubbish actually, but I know it's the worst one, which is the current government, if we're elected, is planning to increase the tax on superannuation balances over$3 million. I actually have an issue with that. I don't think super is undertaxed. The tax benefits are too generous. And as a financial person, I'm not supposed to say that. I'm supposed to just go into bat for every advantage a rich person can find and have. I'm not going to because I don't think that's true. So I do think we should be taxing super more reasonably, frankly, less attractively, particularly on large balances.

44:07So I don't have a problem with that. What I have a massive issue with, we've talked about this a little bit in the past, but I'll just bring it back up because it's been in the news. Jeff Wilson from Wilson Asset Management has been beating the drum pretty loudly over the past couple of weeks and month on this one is the plan to apply that tax to unrealised gains. And I don't know that I can think of a worse policy from a structural perspective. Like, again, am I crying about people with$10 million with a super having to pay a bit more tax or having to tax? No. So conceptually, practically, I don't think it's a huge issue.

44:41The housing affordability is going to damage more people than this particular tax. But as a concept, as an idea, as an implementation, as an ideology, and I'm not doing this slippery slope. Some people say, oh, that means the lady's going to do it on the family home or they're going to do it on shares as well. I don't think that's true. At least I have no evidence that it's true. I think it's a scare campaign or a bit of a convenient way to throw a bit of shade and a bit of dirt. But the stuff they have absolutely announced is just awful, awful awful policy and i want to just illustrate most people get it because they're smart people listening to the podcast here's the thing if you have a million dollar house just pick a number in in super and it goes up 10 it's now with 1.1 million dollars when you sell it okay you get 1.1 million bucks you're gonna give some of that back to the tax man you give 30 30 tax rate so 30 of 100 grand uh is the the the gain you have 30 30 the tax man and you walk away with 1.07 a million dollars and you're happy.

45:33This time around, the house goes from one to 1.1 million dollars. You don't sell it. And the ATO calls and says, I'd like$30 ,000, please. And you say, well, what for? Well, your house has got up in value. Yeah, but I haven't got any proceeds for it. Now, we can say rent. Let's actually make it, just for fun, I'll make a Bitcoin, mate, because this is, no, it doesn't appreciate anything. Because we know that's going up a lot. Yeah, okay. Good example. Let's go with that. All right. Let's use gold as a donkey. People say, well, you get some rent for the house, so you can afford to pay the tax. Now, you've also got to pay interest on the house, so the rent isn't unencumbered, right?

46:06There are claims on it. But I will use an asset that doesn't produce any value, like Bitcoin or any cash flow, so I should be clear with my language. Thank you. So it goes from$1 to$1.1 million worth of Bitcoin. That's a regular Tuesday. And also the government says, I'd like$30 ,000, please. You're like, well, I haven't. Now, Bitcoin falls down a little bit in the example because you can sell a couple of satoshis or sats, as the cool kids like to call them, and pay that tax. but the house you can't you can't sell the bedroom or the bathroom to pay the tax and so i just i just it's a long example but i just want to make the point it is a really really really really really rubbish idea i said when it was announced at the time i suspect it's designed as a de facto cap on super without saying it's a cap because someone in the in the political wing of the government thought it was a clever thing to do let's not let's not cap it because we'll get bashed for that let's tax rich people because we won't get in trouble for that and let's make an unrealized gain so that the rich people say all right i'll sell the asset or i'll cap my super or I'll take some money out.

47:00I suspect that's what it's designed to do. It's really clumsy. It's really, really, really bad policy. And the government really need to think about it. And just think of the regulatory reporting burden. Oh, right. I mean, it's already costs a fortune and takes all that. Now there's something else that I've got to pay. It's not only reporting it. I was going to say, you've got to pay someone to value the bloody place. Oh, the value is, I love the value. You know me. You know me and value is, mate. It's just sort of like one random dude rocks up and then decrees, this is worth this much. Again, it's as nonsensical as the RBA's thing.

47:34Well, here's the other side of it. So, make sure you're sitting down.

47:45Sometimes, I know it's hard to believe, but we can work through this together. Sometimes asset prices go down. And if that happens, do I get a check from the ATO? So, you actually do. This is a stupidity of the thing. Yeah. So it goes up$100 ,000 this year, you pay tax. It goes down$100 ,000 this year, they give you the money back. It goes a bit more, they give you some more money back. It goes up, you give them some more money. Every year you do something, even though, this is why it's stupid, mate, because it's only a timing difference. Yes. The asset will be disposed of at some point, and at that point, you get all the money.

48:16It's not like the government is short of cash flow, right? Yes. It's like, oh, dude, I'm running with loan cash. Do you mind paying the bill this year because I really need the money to pay the groceries? The money, it's exactly the same. It is an administrative nonsense, an ideological nonsense for literally zero. Maybe there's a time value of money. So maybe like we do this kind of cash flows. Maybe a dollar's worth more now than it is in five years' time. But the government's borrowing rate, it's kind of inflation-ish. It's a complete, complete, complete nonsense. There's no reason to do it other than I think someone got clever and wanted to collect some tax now.

48:46And as I said, I actually suspect never had it confirmed. I'd love to have a drink with Jim Trump and say, mate, let's be honest. I'm sure it's designed as a de facto cap on super. We'll just put the play cap on super. Right. There's better ways to reach the desired goal. And yeah, it is. I think it is a slippery slope as well, because once you do that, it is. I mean, it's very hard to just leap to the family home. Right. And we're going to do unrealized taxes on unrealized gains on that. We're going to tax it. But once it's done in super, I was like, well, maybe we could do it for, I don't know, equity portfolios yeah we should do it for that too but only only for people with more than yeah okay right yeah and it's just before you know it right it's it's one of these things where it's more than it's the directionality of things that kind of make a it's dumb to start off with but but it's like it does move us it moves the overton window what it does yeah it goes for something that's inconceivable to like yep actually now this is in our toolkit we might actually actively talk about this kind of stuff why not and again it feels like again we've got two investment dudes go hey i don't like you know taxes on my gains and it's it's you you've got to you've got to step back right it's sort of why why would we do this what's the cost of doing this what are the alternatives to doing this what are we actually trying to achieve i know it's very annoying for people anyone to look at someone who's wealthier than you and go sucked in right like everyone's got that opinion everyone's got an opinion on the capital gains tax everyone you know thinks it's too lenient until you start building some assets up and then he's like whoa actually super selfish there's you no tax on capital gains at all all of a sudden yeah you know and i'm not advocating for all of that kind of stuff but it's just sort of you know you've i i think too often again we we get lost in some of the weeds here and the big picture is like what's the problem we're trying to address and is this the best way to solve it and to your point if the problem you're trying to address is that super has gone from this really well-intentioned scheme to make sure that Australians can stand on their own feet in retirement to a tax haven for the rich like okay exactly what it is yeah that's that's what's happened that's why I'm addressing it I have no problem with the increased tax rate on over three million dollars on super I think it's perfectly reasonable sure sure I'm realized yeah it's yeah I don't even know where to go it's it's just so it's so it's really really dumb here's the other thing too let's say for the sake of argument that i own 100 investment properties and i own them outright there's no doubt i just own them and so you'll look at me and you go whoa you're really rich and it's like well i am i am there's a lot of wealth there yeah but it's like let's say i want to enjoy my wealth yeah how do i do that right like i have to sell or i have to borrow against it when incur a cost there so in other words you can be the richest person in the world but doesn't actually allow you to consume anymore than the dirtiest poor peasant that's out there unless you sell and that's why we go when you sell that's when we take the tax right or you get rental dividends in which case you pay tax on that when the money comes through that's the point yeah so it says we've um over the years you would have encountered this as well you'll see an asx ceo sell a bunch of shares and everyone will go whoa the CEO is selling what's going on very often when you speak to them they'll go well I got all these performance shares as part of my remuneration package the government treats that as income yes and it is income I'm not trying to say it's not or anything wrong with it but it's just like I just don't have the cash flow I have to pay tax so I have to sell shares yeah and it's a sort of like so I am you know it's sort of things get very messy and I've always I've always whenever it comes to the tax policy, I would much prefer something that is less, what am I trying to say here?

52:45Perfect is the enemy of the good. You want some, there is a lot to be said for simplicity. There is the most technically satisfying solution that is often the most practically infeasible to introduce. And this strikes me as going in that kind of direction where it's just like, Just keep it simple, you know. Anyway. You're 100 % right, 100 % right. Anyway, by the way, I'm not saying people then should therefore vote for or against the Labor or the LNP as a result of this. Every political decision is a complex combination of all of the issues. I desperately don't like people voting on a single issue.

53:22I don't think it's particularly smart. Policy, governance is important. So, again, I have last Friday. I will again today say, please put the majors last or as far down the ballot as you can justify. There are some awful independents and parties out there. You may want to preference below them, and that's okay. I'm not going to tell you how you should vote, but I just think to the extent that you can find a way to find an independent or minor who deserves your vote more than the majors, please feel free to do that and send them a message. If nothing else, preferential voting is brilliant. Your vote's never wasted, which is one of the awesome...

53:52We are so lucky to have this. Oh, God, are we? You know, they don't have it in Canada, this election result there recently. No, they don't. They've got first past the post. Yeah, the Poms have got first past the post. Yeah, so does the... As I understand it. and so does uh well the u.s certainly has a terrible system uh so yeah we're very like no it's impossible to waste your vote isn't that great it's like it's really really really cool um let's move on to something let's get out of politics and back to actually a company or maybe a company specifically but a theme in general um woolies sales route on thursday yesterday and i've i've i've banged on this drum before mate but i want to do it again because i think it's one of those there's there's you know the headlines are the headlines are the headlines and when things get cool and exciting and people want to talk about it, then it's all gets talked about.

54:36When things sort of stop being reported, it doesn't mean they're not happening. And I just wanted to talk about the sales growth for Woolworths. The actual total sales growth is pretty anemic. They're kind of getting beaten by coals at the top line at the moment when it comes to overall growth. But what I wanted to let people know, mentioned as part of the way you think about business, the way you think about the way the economy is working right now, is their online sales growth. So Woolies' online sales growth was 15.7%. And I just want to let that sink in because this is not Amazon. This is not Netflix.

55:11This is not a non-digitally native business or a business that has products that are easy and cheap to send directly. You buy something really high value, low weight, small size. It's a great online business model because it costs bugger all the sand. You make a fortune. You can't sell it. That's the reason that brick pits are local because they're really low value. They're super heavy, super big. you can't do bricks, you know, no one's going to buy bricks online, but you know, you can't think bricks have large amounts of space. But this is groceries largely. They do some other stuff as well. This is groceries, right?

55:40This is bags and bags and bags of flour. And I mean, everything's expensive these days, but you know, a bag of flour, a bottle of drink, you know, tin of baked beans. These are not high value items. They're not high value to weight items most specifically. They take time and effort to pick and pack. If you're shopping there, you know, again, buying a, I was going to say a CD because I'm old. Buying a CD online is a one-click shop, so it's easy. You shop at Woolies or Coles and you're buying, you know, 20, 40, 50, 60 products. You've got to pick them. You've got to jump online. It's a difficult thing to do.

56:12And most people aren't buying groceries online yet. But that's kind of why I wanted to make the point. So total sales are up 3.2%. Online sales are up five times as much. They're now$2.2 billion. This is for the quarter, the third quarter. out of a total of$17.3 billion. Now, that's not 50 % of sales. It's not 90 % of sales, not even 20 % of sales. But it's well over 10 and it's growing. And by definition, if the small bit grows much, much faster than the total, it becomes a larger and larger share over time. And I think, so look, why do I care? Why should you care? Firstly, if you're shares in a grocery company, it's worth knowing.

56:51Secondly, think about this across the overall economy. Think about what it does to the way products are sold. Think about what it does to physical retail stores. How many shops do you need eventually? Woolies are going to have to always pick and pack from somewhere, but is it a suburban shop? Think about business like JB Hi-Fi or Harvey Norman, if those sort of sales go online. How many stores do they need? Think about real estate, landlords. How many shopping centers do we need? What does it look like for the corner store? What does it look like for all of these things? So if you're an investor, this is one of those trends I really, really think.

57:21Look, I own so many commerce companies I'm not going to talk about. I'm not going to say you should buy them either. Because here's the thing. Woolies was not an e-commerce company. The so-called omni-channel, buy something from wherever you want to get it from Woolies is not only alive and well, it's absolutely thriving. So maybe it isn't the pure play e-commerce players that win. But what you need to be aware of is what's happening across the economy. Maybe someone who, I mean, if you listen to podcasts, you're probably reasonably technically savvy. I've spoken to a couple of radio hosts who are like, I never shop online, I always go and shop and try stuff on.

57:49So plenty of people do. I'm not saying we're the end of physical retail. Yeah, they're called old people. But yes, continue. Speaking of ourselves. but that's the thing right and I did say a member of my family does this it was actually my beautiful wife I was like well what if it's the wrong size just send it back it's not new how often my wife goes now there may be some parcels arriving today however don't worry I'm going to be sending a bunch of them back I just need to try them on I'm like, mm-hmm. Uh-huh. Yes, yes. We are keeping the Amazon delivery man in business here too. So, yeah, anyway, it's just a point worth making.

58:33One of the things that isn't being talked about and sometimes easy to miss, don't just go with the headlines, don't just go with the big things. Some of the real trends that are, you talk about, you know, a slower than suddenly, I think is the phrase. Gradually than suddenly. Gradually than suddenly, thank you. There's no suddenly in Woolies, it's going to be gradually, gradually, gradually, gradually. But you look back and go, huh, how did e-commerce sales get to 50 % of Wooly sales? It's like, well, because they grew it faster than the average rate for a very, very long period of time. And that's kind of what you end up, where you end up with as a result.

59:01We've seen Mosaic brands go broke. I have a pretty good view. Again, this is erring towards predictions. We will see more physical retails go broke. If you can't do online, you will go broke. Of course. We both own shares in Adairs. Their online sales are huge. JB Hi-Fi sales are huge. I don't anymore. Sorry. Sorry. Just for clarity. That's right. Premier Investments sales. They used to own JJ's and Just Jeans. I haven't seen the numbers recently, but I'm pretty sure the ones they retain, Peter Alexander and Smigel, do a spectacularly large amount of business online. They, at some point, won't need this many stores.

59:35I'm pretty sure Soliloo was very, very happy to sell off some of those apparel brands that are going to not be as successful in an online world. And he's left himself with the stuff that actually he gets to sell lots of online. and that, again, really, really good for online purchases. So, yeah, I just wanted to share that because I think it jumped out at me for Wooly Sales. It's not new. They've been growing faster e-commerce for a long time, but it continues at pace. Yeah. Oh, it's fascinating, isn't it? There's a couple of things that I find really interesting about this. One, it's 2025, right?

1:00:09The internet has been around for a long time and online groceries have been available for a long time. Yes. and it's like 12 % of total sales. So it's kind of like, I know I say this a lot to you, mate, and to anyone who'll listen. It's just like, we're so early in terms of the internet. It's just, we have this end of history fallacy when it comes to the interns. Like, yeah, we've got it now. And I was like, yeah, we know the internet is such a baby. And that is a perfect example of that. But also just to the pace of change, and where this is relevant for investors, and I say this more out loud because for my own benefit, because I've taken a while to, well, I don't know if I arguably still haven't really embraced the lesson here, but you can be right, but way too early.

1:00:57And if you're, who was it that said early and being early and wrong is indistinguishable. Yes. Yes. Yeah, exactly. Yep. And, and I think, in fact, I did. And I think a lot of people did in 2005 were saying, Oh, online sales, they're the future. Like that's, that's where we've got to go. I was like, well, 20 years later and it's only 12. I mean, even in context, one of the most efficient, successful retailers in the country have barely got into double digits in their penetration. So that's fascinating. And I agree, it's going to keep growing, but it's just like you can call the future right, but it's a long wait.

1:01:36And the other thing here as well, it's, yeah, you're interesting. You raised some interesting examples there. But in the case of groceries, the margins are lower. Yes, that's right. Actually, by a good couple percent. I don't know. I don't know, but I remember reading somewhere. It's a couple hundred basis points different between the margin that you get in store versus what you get online. Makes sense, right? So I've got all these big logistic apparatus, warehouses, et cetera, and I deliver to these big supermarkets where someone puts them all on a shelf. and people come and pick them up. Now I've got to like do that and then repack it back into another truck and then drop it off to door to door.

1:02:20It just, for the longest time, it was, Woolies lost money on it. Particularly as they were, they and Coles and others were going for the, you know, what do they call it? The greenfield opportunity. It's like, again, very smart people and very successful organizations. Online is the future. We need to be first and we need to do it best. Like, oh my gosh, that's a lot of infrastructure. There is a lot of trucks. And then have you noticed that anyone who does this, I'm sure you do notice, it's like now I'm paying for bags. Now I'm paying an annual membership fee. And they're still making less money than they do.

1:02:58So they're kind of doing it because there is a demand from the market to do it. And absolutely, I agree that that will grow. But it is also interesting at the same time. I think if they had their way, they wouldn't do it. It's like, I'd rather just sell the same amount in store, thank you very much, because this is a pain in the backside and very costly for me to deliver it to your door. And especially if a business has high penetration. Yes. Because if you're a JB Hi-Fi, you may be saying, well, look, if I do it, I might take a customer from Harvey Norman and they're only going to buy one computer every four years, so I really want that sale.

1:03:30And if I can make it convenient enough, I maximize my chance of picking up that customer. That makes a lot of sense. When you're Woolies and Coles, yes, we all shop everywhere because you shop wherever you are, wherever it's local. Most of us, two-thirds of us shop at Woolies and Coles each. something over a period of time. But when you're willing, you have that penetration. You're not stealing a customer from anywhere. You're taking the customer you already would have had. Yes. Now you're both offering it. So it's like, well, so we're both offering it. We're posting both of us more money. We're not getting any extra customers.

1:03:56We're just keeping the ones we've already got. So it becomes a cost of customer retention, not even acquisition. Yep, absolutely. And I mean, if you play it forward fast, far enough, I'm sure you get to a point where it is, you know, 50 % of your groceries are sold online. You get to, so an analyst would say, I guess technically I'm an analyst, so I'll say it, is that you, and in fact, anyone would have, I'm sure a lot of people have come across this before. There are gross margins. It costs me$2 from Heinz to buy their baked beans and I sell them for$4. I got a, you know, it's a 50 % gross margin on that.

1:04:37But then I've got all these fixed costs. And in this regard, it's like extra logistic resources, trucks, those kinds of things. And it's sort of like at a point where you can sort of, you will have a huge investment in building up all that infrastructure, be able to sweat it a lot harder though as well. So it probably gets to a point where it's like, we have built out that many distribution centers. We've got that many delivery drivers. We've invested huge capability in terms of IT and enterprise resource planning modules, et cetera, et cetera, that we can actually do this really, really efficiently.

1:05:09So I'm sure it will improve. That's the beauty of capitalism, right? Like it will improve because like if you don't, someone else will do it better and then you'll lose your market share and you'll go into obscurity. So that will kind of happen, but it's playing out really slowly. And for the moment, it's not great in terms of the economics, but I think it'll get there. I think it will get there. It's also why places like, well, Milk Run is interesting, right? Because Woolies owns that now. Correct, correct. But that was a child of the free and easy money SaaS delivery bubble that we had there a little while ago.

1:05:43Again, really, all bubbles have a nugget of truth to it, right? But I reckon if it wasn't for Woolies buying them out, they'd probably go out of business. Oh, yeah, totally. Why? People go, well, I use it. It's great. It's like, yeah, you use it. But the only reason Uber is successful now or Airbnb is successful now is because they ran uneconomically for years. And the only reason they could sustain operations while bleeding cash is because they had endless sums of VC money on which to do it. So it's been great for us as a consumer, right? But eventually, you either get to scale and then flex your pricing power, as Uber has done, which is why they're expensive as taxis always used to be.

1:06:22It's like, wait a second. Or you go out of business, right? So I don't know what I'm trying to get at here other than it's sort of like there's things that can be a good idea and that you can really love as a consumer. And maybe the business is forced to go that direction. But it might not be great for you. You know, if you want Woolies, one of the best companies in the country, one of the most insanely priced companies on the ASX at the same time. But I do wonder if they see it as favorably as we might as a consumer. it's a good point I'm sure that's absolutely right I think so I guess a couple things that's a really really good takeaway I think the cost of customer retention is going out until it doesn't and this is the challenge when you're a this is the Aldi success by the way when you do everything you've got to try and do everything and try and make money doing everything absolutely everything I want to have a bakery in store I want to have meat I want to attract the customers I want to fruit and veg now the fruit and veggies and Woolies have sent a whole lot of green grocers broke a lot of butchers are closed down because woolly sells again woolly's and coals sells meat but if we're trying to do everything you can't do anything in particular really really well yes so this is kind of this is digital banks right you bank it for nab what are the jet star at quantus they kind of went well we've got we've made the everything business now we're going to do the really specific thing business target a particular customer with a particular offering at a particular cost base so aldi's exactly that is like well not only now i just do and i'm on On one hand, fascinated and surprised they don't do home delivery and online shopping.

1:07:59On the other hand, it's specifically because they're kind of like, well, it costs us money. And it's also the in-store experience. The bargain hunt in-store, their customer wants to go in and see what's in that centre aisle and pick up a two-ton tractor at the back of Aldi because I'm special this week for$14, as well as grabbing the cheap baked beans and whatever. And they do a very small range, very small stores, very little staffing, only home brands, all the stuff we know. They know they're lame and they stick to it. Right, and they specialize. That's where specialization really works nicely.

1:08:29And it doesn't mean they'll beat Woolies. It just means that Woolies will have some customers at some prices and for some products, and Aldi will have some, and there's going to be both. I think that's absolutely true. What I think you need to be careful of is that you need to be either, and we talked about bifurcation products before, you need to be really good at the everything model or really good at the specialization model. The ones I, again, let's go back to Mosaic Brands going broke, they were none of any of those things. they were okay-ish while people were in a westfield wandering past and grabbing some off the rack i wouldn't be at all surprised look there's fashion and other things i want to over-diagnose the mosaic collapse they by the way they had um rivers and noni b and portman's and something else a couple others i don't want to over-diagnose or blame everything for that that demise but i suspect it's a combination not keeping up with the trends which is a which is a thing but also i think as maybe as impactfully i really honestly think the falling customer traffic in physical retail why Well, firstly, you probably bought your dress online until you're going to buy it for Mosaic.

1:09:26Secondly, even if you didn't buy that particular product online, you didn't go to the shops, you didn't need the other thing you were going to buy. So you didn't walk past the Nony B store and look at the dress or the shirt in the window and go and try it on. So it's a combination of you're going to have to be online to survive. You need to be able to sell those things. People are there, they want to do it. So that's kind of my broad takeaway. It's just, as you say, mate, be careful of cost-based for these sort of businesses, but also be very careful of you know what what's worse than making less money online is making no money because you're not online and so you got you got both those both those problems at the same time uh online cyber and you said hasn't fleshed out you don't know who wins the grocery war amazon lurking regularly going to be around the place right talk about by the way that is such an obvious thing for them to do yes because my point before they've got the fix they've got the warehouse yes they've got the trucks they've got the it so for them it's like yeah i can we we obviously need more space we need a bit more capability but it's not like they're building it up from scratch it isn't a hot and they they already they already sell groceries right so it's kind of like yeah they don't have they don't have margins to protect yes yeah and that's the beauty of it right because amazon says it's all upside well yeah we said we made 4.5 last year our our shelves expect 4.5 this year so we're gonna have to try and do that amazon's like well i don't make i don't sell any groceries it's all upside i can do a three percent margin sure i wouldn't i i'll do three percent all of a sudden it's like well that's their competitive advantage that's uh yeah your margin is my opportunity which is bezos's sorry i stole your thunder there you're leading up to it no i'm glad you because that's exactly right here uh we'll finish off mate but just just for fun unless you want to go with more than that uh you mentioned the the expensiveness of woolies trading on according to comsec just a quick look at 22.1 times earnings i happen to know because i looked at yesterday i own shares in google google's trading at 18 times earnings who's got What are better growth prospects, do you reckon?

1:11:14And they grew sales at 15 %-ish, and they grew profit at 31 % earnings per share last quarter. They're for 18 times. Woolies is at 22. I'm not saying you should buy Google. I'm not saying you shouldn't buy Woolies. I want to buy Woolies at a price, as you say, mate. I don't know how much cheaper it would have to be to buy it because it's a really high-quality business, 3.3. Maybe it'll be like 20s for me. And that might be pure fantasy, but it's like, you know, I can do other things with my money until, if it comes or whatever. but at the moment it's just madness. And again, it's nothing to do with quality.

1:11:44You can absolutely get your shirt, you lose your shirt buying the best businesses in the world, right? It's just, anyway, the point, what was the point I wanted to, oh yes, the point I wanted to make a little bit of a tangent and I'll finish it off after that. But it just, I feel as though whether it's a small cap on the ASX or you're just a business, thinking of getting into business yourself, I think the advantage is in you cannot compete with the big guys in doing everything. You just can't. You do not have the capital. It will take you forever to get there. And I was walking past my local butcher the other day and it was a real, what's the word for it?

1:12:27A real bespoke experience. They weren't, you know, they had the sausages and the mince and the chops and that kind of stuff. But it was mostly the value added stuff that they had. And it was pricey. But I just thought, oh, brilliant, right? Woolies ain't doing that. Yes, yes. Do not step into the arena with a gladiator that is bigger than you, that is dumb, right? Go to where there's – step into the arena where there's the scrawny dude with no armor on and a wet paper, you know, rolled up in a paper. That's the one. And sort of like you see it in really some fascinating businesses, heaps of them.

1:13:09which have had success by doing a niche and doing it exceptionally well and just doing that one thing. I've talked about some of these high-end raises before or the squatty potty, right? It's another classic example or, or, um, Oh gosh, I'm going blank here, but it's sort of like do the thing that the big guys can't do. And you'll find this on the ASX as well. It's like very, very common. You'll look at commonly, you look at a particular offering and you go, well, Google could do that. Yeah, but then I go, why? Exactly, that's right. Why would they do that for? Because even if they absolutely dominate and take 100 % of that market, it's going to increase their sales by 0.01%.

1:13:50So they don't bother doing it. But you can do it. Yep, yep. That's why you do it. So I am more and more and more, I am looking for these niche players, which might ostensibly be very small kind of industries and opportunities to a giga company, but to every other, it's like, it's still a$400 million opportunity. You know, maybe if we can capture 20 % of that, you know, that looks all right. Particularly again, to the Woolies example, if it's priced appropriately. So same thing when you sort of, imagine you're going to open up a cafe and you opened up one next to Starbucks. Yeah. And you did the sugary, milky kind of stuff.

1:14:30I was like, this is dumb. You know what you do? you lean into and you you make it a point of difference one of the my favorite favorite favorite i think it's a cartoon um uh is is the five dollar haircuts and there's a barber next door that goes we fix five dollar haircuts in other words in other words there's a there's a bit of a parable there's sort of like you know there's two barbers and they both start at 10 and one goes to nine they undercut each other and it's a race to the bottom until the other person goes i'm not playing that game and you lean into it and you go, oh, yeah, no, we're more expensive.

1:15:05We're 100 % more expensive. Be my guest. Be my guest if you want the$5 haircut, right? And that's where, again, whether it's a small business or it's a small listed business, you want that point of difference where it's just like, we're just swimming where there's plenty of blue water here and there's no one else around. And if I was ever going to get into retail, I certainly wouldn't be doing grocery delivery. i'll put a come full circle and and having said that things like um i don't know i'm trying to think of an example off the top of my head now but i bet you there's a whole bunch of there's a whole bunch of categories where they don't have the home delivery that woolies or amazon has got no interest in getting into and maybe that's the more interesting kind of sort of business to do so i don't know that's great i think the other thing too to your point is you can always as because as an investor as a business you're kind of all in right as an investor you can sort to say i'm going to go and play in that place where willy's isn't playing and then willy's walks in the next day like okay call i'm out then yeah yeah and and we we're not we're not saying trade we're not saying speculate we're saying invest in a good idea knowing that it's possible could google do it yes are they going to probably not but when they announce it like oh okay well they changed my thesis i'm out then and that you don't you don't have to say there is no you know could people say well google might get into that it's like well if they don't then there's an opportunity or if it takes 20 years there's an opportunity and if they do you can always sell out.

1:16:25The idea of don't just in case a thing happens. Again, I don't like selling stuff because I'm wrong or the thesis changed. I'd rather not, but avoiding the opportunity to make some money. You're not pig-headedly stupid at the same time. Thank you. I appreciate that. Not at all. Not at all. In this particular instance, anyway. In this particular instance. On that salubrious note, we might call into this podcast while going crying in my coffee. Mate, will you come back on Sunday? Yeah, look forward to it. Love the mailbag. I will try to be pig-headed or stupid. We'll see how we go. Until Until then, Fool on.

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