An investment opportunity in offices? February 16, 2024

25:45You can go from one bucket to the other as a client very quickly. But anyway, that was noteworthy. And the other thing that stood out and got a bit of play on social media was the, I think they had a slide in there on the impact of savings rates or savings for demographic. And we often, I think all of us are guilty of interest rates up is bad because we've all got a mortgage and we're all struggling. It's like, well, we forget that there's a very, very significant section of the population who love interest rates going up. namely the i look i'll use the term the boomers right who bought their properties off pay their properties off probably holding a whole bunch of money in in cash and pay extra interest is is always a nice thing to have and it was very graph it was very apparent in the in the graphic that they presented yes i don't know i don't my point is other than that no no and you know what's interesting i think i say lots of times when i'm doing media stuff that there's things we know and there's things when you see them in black and white you kind of go okay that's a real thing and partly that's just that's human bias we just we just when we see something physically written down or you know on a screen it feels more real or more concrete somehow than the general acknowledgement or acceptance that it's happening and that's probably frankly a bit of a bias as opposed to even really anything else so we should be wary of it uh but also it's pretty stark when you actually see this it's almost confirmation of the assumption which kind of cements it a little more and you're right the the cba put a chart out basically showing the change i think it was change in savings by age cohort and the the youngest people had the biggest reduction in savings and then as you got older it went from a smaller reduction then about flat and then a big increase or sorry small increase then a bigger increase as you got the age and it makes perfect sense right because as you say if you're paying more for your mortgage you're going to save less probably dip into the savings if you're if you've got some cash in the bank and you're getting more for it your savings don't increase because you're probably not spending everything you're getting there's nothing there's nothing even bad or inappropriate about it's exactly what you would expect to happen when interest rates change when rates come back down again those charts will reverse and they probably had over the last 20 years as rates went from whatever to whatever so none of that is surprising but the concrete um display of it i think is really clear and quite sobering and you're right about look you and i banged on enough mate i'm kind of mindful i don't want to become a podcast i'm just saying the same things actually we're already doing that uh but It's like, yeah, I don't want to...

28:09Too late. That ship has sailed, my friend. Yeah, but no, it's more just that. It's that point of, you know, it's why it has been such an awful thing for the politicians to simply say, no, too hard for us. Let's let the RBA do all the work to cool the economy. And again, you've got your thoughts on whether we use rates or not to do it, Ram. And I accept that. But in the event, the polis know what's going to happen because that's the structure we're in. And they simply choose to say, we could make a difference here. but we're simply choosing not to and bad luck you guys you guys deal with it and that's the that's the thing that really strikes me and i've said so many times i want to keep saying it it's not new you know there is some sense of boomers versus millennials rubbish or whatever it's not that right because the boomers were the were the millennials ages in the 90s when this exactly happened to their parents and their grandparents did well and and that's kind of how this works right it's the cycle is not new the fact we haven't had a meaningful cycle for 35 years is is why people don't recognize it but when you know the way the way governments have chosen to manage the economy is to use hopefully the automatic stabilizers of the budget but also monetary policy and when rates go up it helps saves it hurts borrowers when rates go down relatively speaking it helps borrowers and hurt savers that's it's just what happens i happened in the 90s it happened in the 80s happened in the 70s um you know there's a there's a tendency i I hate the generation wars.

29:31It gives me the absolute irrits because it's just, you know, the boomers think millennials suck and the millennials think the boomers suck. And it's like, I just don't... Well, firstly, I'm a Gen X. Gen X is clearly the best anyway. Well, that's true. No one ever paid any attention though, bastards. But no, it is that sense, mate, I think, of, you know, it's always been dust, but it doesn't mean we shouldn't try and fix it or change it. I think what's different this time around is the automatic stabilizers and the budget aren't working because we have a structural deficit. We have a setup that means when the economy is booming, we just scrape over the line for a surplus.

30:07And when the economy is tanking, we absolutely spend like drunken sailors. And the net result of that is the stabilizers don't work. We should have been taking money out of the economy over the last three or four years as we came out of COVID for a whole lot of reasons, including the pandemic specifically. For a whole lot of reasons, including your point about the money we've pumped into the economy, both printed and borrowed. We should have been paying some of that back as a choice. But the stable life should have worked automatically. It's like, great, we're spending less on welfare. We're collecting more company tax.

30:36We're collecting more income tax. Look at that. Wow, we've got amazing. I've seen some numbers. My speculation is we should have had a$100 billion surplus last year instead of a$2 billion surplus, which is everything you need to know. Taking that much money out of the economy at that point would have been great. And people who say, but I need that tax cut. Look at my interest rates. That's the point. Rates wouldn't need to be this high. if taxes and the tax and transfer system was actually reducing demand the way it's supposed to do. That's the conceit. That's the ridiculous thing. And that's when people say, oh, the RBA should do this.

31:07And I talk to Twitter all the time. Oh, the RBA this, the RBA that. Don't they know they're killing people? They're raising rates at a cost of living crisis. Like, what else do you want them to do? And again, I accept you'd say and do nothing and that's fair. But in the context of a policy choice to say the job of fixing inflation is monetary policy. They are the goalkeeper on the field. The other 11 players in front or 10 players in front said, we're just going to go have a drink. You'll look after it, won't you? And they wandered off the field. They could have had any other influence they chose to have, and they simply chose to have none, which is a pox on both their houses, unfortunately.

31:42Well, back to the chart. I think I can explain it. So politicians are going to play to their base, whatever their base is. And again, I'm not doing the generational wars, but the boomers are a very large, significant, wealthy cohort. And you're basically going to pay a lot of attention to them, more so than you will some millennial who's not that, you know, is never going to vote for you anyway. I don't know. It feels as though that's a big factor. And it also reminds me, speaking of repeating ourselves, of the bifurcated nature of the economy. And we've got to keep this in mind whenever we're talking about raw economic data, whether it's the unemployment rate or retail sales or whatever.

32:28These higher level numbers come from the aggregation of people who are 20 and people who are living paycheck to paycheck and people who are 70 with eight investment properties and a million dollars in cash. And so I think two things can be true at once. When you look at the high level and say, hey, things look pretty good. But under the hood, it's like, well, actually, yeah, but a significant and growing number of people at the lower end are doing it really tough. And again, not to make it about housing, but you look at that stress in the housing figures data from CBA. You look at, I mean, I think we kind of, I played it very badly, but our generation kind of just scraped in as to what was being able to reasonably afford a house.

33:13I don't want to be the bearer of bad news. If you're listening to this and you're under 30, you will never have a house. You will never have a house is the brutal, unless you're somehow an ultra high paid person or you come from a family with a huge amount of money. Back home and dad, yeah. It's kind of, it feels like a very blunt statement. Like you might be able to get something in Cuperpedy, I'm sure, that'd be nice. But you're not living in any of the major cities within a two hour commute. That is unless your somehow earnings capacity goes through the roof or prices come down. I feel as though that's a mathematical statement of fact at this point.

33:51And the trouble is, is that when you, this is what worries me is because these kinds of asset price appreciations need to be fueled to be sustained. And when what's coming in at the bottom, you know, where everyone talks about the bloody property ladder. And you know my views on that hackneyed, horrible term. No, really, do you have some thoughts? But that ladder requires someone to come up on the step below you and for the person above you to go up. That's kind of how it works. Now, if the people below, i.e. the younger people who are coming out of education, getting a job, starting families, saving up money, not only cannot buy a house today, but whose savings are going backwards and never will be able to, it's sort of like again just to extrapolate it doesn't lead it doesn't lead to just i think it just for me it suggests that something's got to give at a point whether that's tomorrow whether it's in 10 years yeah like how i brought it back to a bearish property well i think that would i mean that's yeah yeah i mean we don't have to get into that debate but i mean i just i thought that stood out i just thought that stood out from from well you see what you want to see right Yeah.

35:04No, I was going to say, it's not even a debate. I don't think that's the thing. We're on the same page there. The question is really what the curve looks like from here. I was going to say how it ends. It doesn't have to end, right? No. A stagnation, a slow decline, a very slow growth. You can improve affordability in a dozen different ways. And frankly, the reality of politics is it's very unlikely to end badly in an absolute sense because politicians are incentivized to make sure it doesn't. So they'll kick the count as far as they can. And maybe eventually it does blow up because it just simply cannot go any further.

35:35Or maybe there is some way of finding a solution that makes a little bit more sense. And I don't really know how it finishes, but you're right. That is the real risk.

35:46The challenge, I think, for all of us, I'd say for government, like, you know, the governments, they're the instruments, right? I think it's incumbent on us as an electorate to be a bit more informed and vote a bit more sensibly. And that's probably a pipe dream, but that's also what democracy is. we kind of get i don't see we get what we deserve because there are structural reasons that you know the major parties win and all that kind of stuff but frankly speaking of politics um have a look at some independence and minor parties around you when you're next voting right not because i hate the majors just because if they're not doing what you want them to do and someone else can do a better job then do that you know there's a there's a real okay i'll bang out about bang out about twitter again i'm trying to make it too self-referential but the whenever i'm saying i talked about the what was i talking about recently um might have been housing negative gear i can't remember what it was whatever it was and half the people or not half the people most people engage in good faith which is awesome and then there's the two rumps right and the two rumps are the ones who say oh well yeah labor's not fixing anything they've been in power they haven't fixed anything yet and they'll let say well of course we're like that the lmp was in power for seven years they didn't fix it so now we've got to deal with the mess and it's like come on guys just just can you stop can you just literally stop being the ridiculous mouthpiece for your preferred party.

36:55You know, I don't, it's just ridiculous, right? The opposition party, not the opposition capital O, but the mob you don't like are not the devil. Your guys are not the angels and the only chance for salvation in the country. It just doesn't work that way. And so I will say to our listeners, if you're someone who kind of feels like you need to jump to the defense of your mob or believe that everything the other mob does is terrible, can you just do me a favor and just kind of broaden the lens just a little bit, just a little bit. Let's talk about the issues and the policies and the ideas rather than resorting to, well, of course, Labor always suck, or because, of course, the LNP always suck.

37:29It just isn't true. History shows there have been great reforms, great policies from both sides of politics. And I know that makes you feel uncomfortable. That's okay. You are not the party. The party is not you, right? If you're a member of the party, argue for better policy from that party if you need to, but don't fall to the trap of, I need to defend my guy no matter what happens, or my girl no matter what happens, or attack theirs because that's just what I do. it's so bloody frustrating if you're better thing here's it if you're better outcomes then do better things don't just don't just bang on about your mob because trust me neither party has covered themselves in glory in the last five or six years yeah i mean it's dangerous in a lot of ways yeah i gotta get back on topic but but the when when things are bifurcated and difficult and the wealth gap is increasing, it actually also fuels and fosters sort of, when you talk about sort of the independent candidates, the more out-in-the-edge kind of characters.

38:27And some of them aren't going to be there just to advocate for a rational, sensible adult debate on big policy issues. There'll be plenty that just say it's all the other, you know, insert minority group here. Yeah, totally. It's their fault. And whether you like it or not, A lot of people are going to resonate with that. Again, exhibit A being Trump is the most obvious one. By the way, odds are at this point it's looking like a very good chance. He's the favorite to be the next president again. So it's sort of – and his policy – I'm not making this about politics, but to bring it back to economics and finance.

39:01His stated policy is to spend big on the areas that he likes. Again, remembering the context of a very significant budget deficit. So, and, you know, I guess this is why economics is so important. I wish people had a better grasp of it because it sort of, it does reflect on everything in life, in society, in politics, and the rest of it. And, yes, I'm with you. Don't just stick to the major parties if they're not doing, you know, what you want them to be. Don't be tribal. Look for the candidates that's best going to represent your view. I just hope that while this is all happening, we don't see the rise of more populism, which never leads to a good place.

39:42yeah um yeah i don't like your talk about politics other than i think there's two there's two ways populism rises but largely one of the things that is totally avoidable is politicians actually being responsible and dealing with some of those issues that can then be weaponized by the the you know the extremes on either side and we've seen that around the world uh trump on one hand we've seen some extreme left governments elsewhere um you know the unhappiness with the status quo is what gives rise to populism on the left or the right and so whatever whatever your view is i i we've talked about this with population before i'm not going to re i'm not going to re-argue the case but other than to say my real concern is i think there are reasonable people with reasonable views on population and there are other idiots who will choose to use racism and xenophobia and whip up that if the politicians themselves don't address it and that's you know that that's my my biggest concern is is that we end up in a really ugly situation culture we've been there before frankly uh we all know who i'm talking about um you know once it's left untreated and once the politicians don't address it not even the way that the rabble would have them address it just literally show they are in charge of this stuff or acting on this stuff it just gives so much oxygen and room for those who say i know you're unhappy i know you're unhappy for this reason i will fix it for you you know in a really ugly way and that that's exactly how these populists end up rising the the i'll be happy i'll happily say mate i think trump is completely unfit to be president not because he's a republican not because he's not a democrat or vice versa um but because character wise i just think he's a he's an unfit person for the office and i say that i said it's so it's so funny that you're going to sort of have to like qualify that it's like yeah totally right no it's obvious exactly some people are always better than biden it's like well no and it's not about trump versus biden or republican biden's like Like, I don't see some of his, like, senior moments recently.

41:36Like, it's a terrible choice, but continue. But, yeah, but my point is that, you know, that the Republican Party couldn't find a better candidate than Trump and that the Democratic Party couldn't find a way to actually, and may not again, as you say, find a way to mitigate that because he's just taking advantage of people's unhappiness and, you know, peed-offness. That's how this stuff happens. And we have, you know, if our politicians get their heads in the sand, we'll end up with something similar if we're not careful. That's just an ugly, ugly outcome. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

42:14Hey, mate, let's go back to banks just for a second. And here's another chance for you to whack them as we move through to another topic. Get my whacking stick ready. Get your whacking stick ready. This is, so investing in business, these overlap, right? and there's a lot of rusted on bank shareholders who've done really well for a long time and so can't hear that their favourite companies aren't wonderful anymore. The CBA sales, so they call it income because banks don't have traditional sales the way that other companies do because their money is their inventory, but their effective revenue or their net income, or income they call it, was down by 0.5%.

42:56In other words, they did less business this year than last year. Their expenses were up by 4%. Their net profit fell by 3%. Still$5 billion, by the way. So no one's crying for them. They're going to be okay. This is a very, very stagnant business. And their net margins actually fell. Speaking of margins, you were beginning to talk about Matt Common. Their net margins fell to less than 2%. Now, 1.99%. But remember, the sheer volume of cash they transact, that's a big chunk of change, right? So you've got this situation where Commonwealth Bank is going to be probably. we can't give a caratose probably gonna be completely fine but it's also fair to say mate that that strikes me as emblematic of other earnings we've seen so far this earnings season which is sales are kind of flattish because the economy is flattish expenses continue to rise we just talked about inflation and interest rates and so you are getting this meaningful margin squeeze jb hi-fi had a similar kind of outcome their sales were down a little bit their costs were up quite a bit and their profit fell 20 year on year again not unexpected not unreasonable reasonably but it's a it's an interesting kind of look at where we are as a an economy and for investors i think there's two takeaways here i think the first is remember these things are cyclical so that the the optimist in me says you know you've got to work out where these companies are in the economic cycle how they're being impacted and what the future looks like for these businesses based on how the cycle might play out and i have some views on that but i just want to kind of set the principle up first.

44:26So that's the first thing. Second thing is just being mindful of what you expect these companies to be able to do and the price you're paying for them, either whether you already hold them or you might buy them based on that. So you look at Commonwealth Bank, again, I said I talked about valuation, trading on 19 times earnings, which is, what, about a third high of the market average, maybe a quarter high of the market average. and yet profits sales are flat profits going backwards now again maybe it's part of the cycle i'm not saying you shouldn't buy cba you shouldn't pay 19 times earnings actually i kind of am but uh but i don't i don't admit it for that point other than to illustrate that you'd normally pay 19 times earnings for a business that was growing pretty decently not not super strongly pretty decently pretty continuously and had a had a bright future i don't know how reasonable that is so so there's a CBA point, there's a general economic point, there's a point about the cycle and frankly what we can and should expect for I would say the next 10 months or so at least.

45:26Eventually we start to cycle on these things and so you can reset your kind of growth levels and eventually the economy recovers and there probably are brighter times for most businesses. But it's worth thinking about what's happening as an earning season in general, i.e. flat sales growth and expenses growing faster than sales, which is pretty ugly, and then how much you pay for some of these companies. I mean, I don't get it. I don't get it. You said before that long-term shareholders have done well. And I think amongst our age group in markets, that is the feeling. Because of anyone who bought like late 90s, early 90s, all of the gains came in the first part.

46:09The last 10 years, every single major bank's share price is down. I know there are dividends, but they're down over 10 years during a mining boom, right? CBA is different. I was going to go. Oh, sorry. Don't even say mining. Sorry. Property boom. Got to get my bubbles and booms all straight. But you know what I mean? You said every single bank. CBA is at an all-time high, so it can't be every single bank. Sorry, I was about to say, except for CBA, it's up 53 % over a 10-year period. So about 4 point something percent annualized growth with dividends is not terrible. I'm not saying it's terrible, but it's not the kind of returns you would assume in a market which is in a frenzied buy of property buying mania.

46:54And companies are always valued on what people expect. So as you say, margins are falling here. you're oh i just pulled up the forecast for cba here on comsec and earnings are basically well the forecast they might be wrong but they're all flat yeah you know it's like eight different analysts and research houses have contributed as i mean i guess it's not not a crazy kind of outlook and it's like yeah i know you get a yield but it's sort of the yield i'm getting with franking if i factor in franking credits which i should is better than a term deposit but not much yeah And it doesn't make any sense to me.

47:32It doesn't make any sense. Not that I think the banks are doomed and et cetera, et cetera. It's just that this part of the cycle at that kind of valuation, given everything that they're sort of saying is – I think if you bought them today, you would probably in 10 years' time have your head above water. I don't know if it would be a market beating return. And I think that along the way you could – For them to go higher here at a rate that you might be desiring, like a double digit rate, for example, you need to see extraordinary growth in their income. And, well, actually, more than that, because they're kind of at a 20 multiple near enough, they're kind of priced for some growth.

48:15And so it needs to be even stronger than that pricing. I don't get it. Not for me. No, me either. Yeah. And I just think, I think, you know, and this is where I think you need to think very thoughtfully about your investing. And I say that thinking thoughtfully is probably a tautology, I assume. But you need to be very thoughtful about your investing. There are always going to be examples where prices stay high irrationally. There's an old line about, you know, the market can stay irrational longer than you can remain solvent. Now that's like you're buying money, obviously. But, you know, there is no reason CBA can't be trading on a PE of 30 in 10 years time.

48:51I'm not saying it should. I'm not saying it will. I'm just saying if it did, then that's - Stranger things have happened. Right. Well, at the end of the day, any price, we talk about supply and demand, if people think it's worth more, then it's worth more, or it's valued at a higher price. Maybe it's not worth more, but it's certainly going to sell for a higher price. So, and business like CSL have been expensive forever. CBA has been expensive forever. And they trade on trust. The supermarkets have been expensive for a long time. They trade on trust of people's expectations and the halo effect of being, well, it's CBA.

49:23The statement is almost self-referentially positive because - Archetypal blue chip. Right, exactly. And that's okay. So when we talk about some of this stuff, we're talking probabilistically. In other words, over time, it is unreasonable to expect a business trading at 20 times earnings and that's not growing will remain that way forever. The maths of investing mean that's a terrible, terrible, terrible odds of outcome. Doesn't mean CBA can't. Now, they can fix two ways. Either the growth could return. Maybe we are. Maybe this earnings is the worst for the economy. Maybe things tick up from here.

50:00Maybe loan growth grows again. Maybe interest rates do get cut. Maybe things look better. And we look back and go, yep, early 2024, that half-year earnings, that was the low point for CBA for the cycle. and thereafter they kind of you know the things that have been headwinds became tailwinds and they do grow and they can justify 20p because the market is right to believe the future is bright or the market might be completely wrong cba grows at very anemic rates for a long time and you know the the p is simply not justified now again it doesn't mean the price has to fall uh equally you buy a cheap company a p of seven doesn't mean that the price will rise just because the P is cheap.

50:38But probabilistically over time, it tends to be true that if you deliver as a business, we say price tends to follow value. If you under deliver, price tends, not always must, tends to follow value. And that's where for investors thinking about CBA or any other business, if you've got an expensive business on a PE basis or a price to cashflow, choose your metric, doesn't matter, that's not growing, one of the two generally speaking will converge. which maybe both maybe they meet somewhere in the middle maybe the price falls maybe the earnings rise but just just be mindful of that kind of reality and that's i think your point around about the last you know five years for the banks it was five ten years for the banks um they haven't grown materially and or they were too expensive to start with and those things are both true right we know during the dot-com crash in 99 uh the nasdaq fell 85 percent most of those technologies the vast number of those businesses went on to to thrive and be worth a whole lot more microsoft took 15 years to recover the level of 1999 it's now the second most expensive company in the world yeah by market cap right so i got there and it wasn't it wasn't a bad business just that if you pay too high a price you are going to get your backside handed to you so just be just be careful about that um i'm not saying don't buy cba i'm not saying sell cba i'm not telling you what to do i'm just saying be very careful about how you think about pricing uh and and if a business is price for you know i'm talking about but the title way when we started this pod yeah the tides away for com we'll think right maybe it goes higher of course it can it could go 25 times only if the mark gets excited is it likely to i don't know would i bet on it no do i think it's a bad bet yeah so just just be just be careful um the other thing by the way is don't don't be this is my point um well your point ram kind of combined they've been really great returns over 40 years but that doesn't mean a they have been recently or b they're going to continue to be and it's so easy to get lulled into that false insecurity of like well it was great once and i'm still at my cost base of two dollars and saying but it's a hundred bucks now i paid two dollars how can this be bad it's like well that's true but you don't have to own it forever just because you made money on it over a 20 or 30 year period which finished 10 years ago there's a you know you could have at that point said this price looks high the growth's not what it used to be i'll sell that i'll buy something else it's the opportunity cost even better exactly opportunity cost is exactly what it is so my best explanation if i put a gun to my head and say well why the markets it's very easy we often let me start again we often talk about how irrational the market is yes and it is but it can be dangerous to assume everything the market does is irrational sometimes sometimes it's you right and and and so i like to try and play devil's advocate and say okay well well, maybe the market's right here.

53:25Why would the market be right? My best guess explanation is it's a proxy bet on interest rates coming down. Interest rates coming down, yes, that will reduce bank margins, but it will probably help fuel another wave of lending. Yeah. And that will be good. Also, the dividend that they're able to pay, now, even if they don't grow this, they're all offering reasonable yields at the moment, will look comparatively better. So if you've got a firm view, And that tends to be the market's more broad view, the bond market's view. So that may – look, I'm not saying that therefore it's great, but I'm just trying to put that out there as a counterpoint.

54:02Yeah, yeah. What I would say, though, just on the other side of my mouth, we often talk about PEs. And, you know, it's a metric without units. And it's a very, well, what's high, what's low kind of thing. If you're new to it, one really interesting way to think about it is to invert it. So rather than P over E, the share price over the earnings per share, do it the other way around. Earnings per share over the price. What that shows you, so in the case of a PE of 20, you flip that around, that's 5%. In other words, if you want - Just let me do the maths very quickly, Matt. Sorry. So$20 price,$1 earnings.

54:3820 divided by 1 is 20. So 20 times earnings, which is the PE. If you flip it around, as you say, earnings divided by price, 1 over 20 equals 5%. Sorry, just for people who may have been a followed. No, yeah. Thank you, mate. Thank you. And so, well, I think that's easier for you to make a judgment on, well, is it cheap or expensive? Because what it says, and again, like all metrics, there's a lot of assuming this. So assuming that earnings are about the same and they continue to pay out the same – sorry, and they continue to pay that all out to you or at least have the potential to pay every last cent of net profit out to you as an owner in the business, you'll get 5 % on your purchase each year.

55:21Or another way of looking at it is there's a 20 year payback period on that. And is that good or is that bad? Well, again, no value judgment can be made in isolation. What other options are sort of out there? And I think in a, even if you wanted to take a nice easy example of a broad-based ETF, I think you or I would both say, look, we have no idea what will happen over the next 10, 15 years or so, But a broad-based index tracking ETF, somewhere between 7 % and 11%, maybe, something like that, with dividends included and reinvested. And that's a very easy, low-risk option. So the question is, well, if I'm getting a 5 % yield over here, and that assumes I get every single last cent of profit and that nothing happens to earnings, is that a good enough compromise to not invest over here, which is much less risky, trading at a better multiple likely to give me better returns?

56:13Does that make sense? Yeah, it does. Flip it around is what I'm saying. And that's another – it's an equally valid way to sort of look at valuation. There's plenty of companies I own who the earnings yield would be like 1 % because the PE is so high. But it's only because I expect those earnings are not static. I expect those earnings to grow significantly over time. But, again, that highlights the point, right? If you're buying CBA with an earnings yield of about 5%, you know, are earnings going to grow? grow and the rule of thumb maths here is like add the growth to the starting yield. So, you know, if you think that they will grow their earnings on average by about 5 % every year, and you're starting with an earnings yield of about 5%, 10 % is not a bad total return estimate.

56:57Again, very rough and ready, but it's a helpful kind of thing. If you think, well, they'll only grow at 2 % per year, again, using our rule of thumb maths, 5 plus 2, 7%. Is that good enough for you? And And there's no right or wrong here. Maybe it is good enough for you. But that's the question you need to ask. And you need to ask it in the context of what other alternatives are out there. So I think we've laid it on as thick as we can here without offering any advice. But I think our views are clear on this, which basically means CBA is going to double from here. You should probably buy some options and just go all in.

57:31Sell your house, sell your kids. Yeah. Mate, let's go from that to, I want to kind of take the CBA P &L, the JB Hi-Fi P &L kind of shape, which is a horrible cliche, jargony bit of rubbish. Basically when I say shape, I'm saying if you think about the ups and downs, you've got a flat top line, you've got growing expenses, you've got a falling bottom line. Makes sense, right? If you can't grow your revenues, but you've got more costs, you're spending more money to get the same amount of sales, that must mean your profit falls. We saw it with JB Hi-Fi, we saw it with CBA. we're seeing it across the board um with a lot of companies not every company there's other companies different structural places in their in their in their journeys but i i kind of wanted to to raise it mate because at the same time as that we've seen over the last week anz announced 170 jobs lost in their business bank paramount global which owns network 10 here in australia is cutting staff around the world including in australia um we saw a company directors I think it was a survey from memory, it might have been a presentation, where they had said they expected 2024 to be the year of right-sizing or downsizing, which is always euphemism for sacking people and making people redundant.

58:37I guess I just want to flag that, mate, because when we talked about that narrow path that Michelle Bullock's talked about, or Philo talked about before her, and the fact she's kind of feeling like we're on it, I'm not necessarily sure they're wrong. And I'm an optimist, as our listeners well and truly know. But it's also true that GDP growth was only 0.2 % for September quarter. It wouldn't take much for that to fall in negative territory. Inflation is coming down, thankfully, but still at 4 % is too high. And we saw from the US, no guarantee. It keeps coming down at the rate we want it to. And corporately, businesses across the country, not just large businesses, are facing exactly the same dynamics, which is flat sales, growing expenses.

59:18How do you resolve that? Well, maybe you go broke. Maybe you just suck it up because you've got good enough profit margins to start with, or maybe you cut costs, including staff. The RBA has already forecast unemployment to rise, so I think it's 4.5 % by the end of the year. And I just think it's, you know, we've fixed that on inflation for so long because it has been public enemy number one with absolute justification. But as and when that keeps coming down, we've got to be a little bit careful not to do the George Bush mission accomplished banner on the aircraft carrier, right? Because when inflation is done, the economic challenges aren't over.

59:50We're still going to have to deal with the implications of those. And I guess the other thing I want to sort of just lay out for people who maybe haven't been investing or following business for too long is this is also normal. We had 30 years without a recession, right? The simple reality is economies boom and bust. And when they do, these sort of implications do come to pass. And so we should expect after a boom, unfortunately, profits suffer, wages hopefully don't fall, but might go up as fast. Unemployment grows. That's not exactly planned, but it's very, very, very common. It's part of our experience.

1:00:28There's no reason to believe it's not going to happen. And so, I don't know. What am I saying this? I'm saying it because I think we should be prepared for it individually, corporately, as a country, as investors. Don't be inclined to think, great, inflation's over, therefore everything's good from here. Just be mindful there are still some after effects, some side effects that are still going to play out in the economy probably. And again, I'm no forecaster, right? But I imagine if we're really, really lucky, things start to improve kind of in the last quarter of the year, I guess. But I wouldn't be surprised if they go into 2025.

1:01:05Yeah. I mean, interesting times. You know what I often think of as well is that the, especially if you're like us and you're sort of watching this stuff all the time you know you you forget it feels like you know things take ages to sort of evolve on that but in when you sort of pan out things change pretty rapidly that it's only been what is it 18 months since the rate tightening cycle began yeah that's right and we kind of saw that and everyone said oh it's really bad that's going to cause problems and it kind of didn't and and it's because we're watching it every day and we're waiting for it and nothing really happened but the lag effect it's been talked about it's been there's papers on it right like the lag effect to these big monetary policy decisions and just general policy decisions in general have this 12 to 24 month lag sort of period so you know i i think especially with some of the stuff you're sort of saying there it's sort of like i i don't i don't know if if we did it just absorb that massive shock as easily and nonchalantly as we all perhaps started to think.

1:02:15Yeah, that's right. That's right. Yeah, yeah, yeah. So how to be fine. Yeah. And then again, look, let's just, I'm not do predictions, but just hypotheticals. If things do get worse on the employment front and the rest of it, you can imagine rates dropping very rapidly. Yeah. I basically think at some point they're going to have to do just because of everything. it will likewise take a year to two years for that to sort of maybe sort of start smooth things over so yeah it's interesting man i guess my point is though that we don't we won't get to another 30 year plateau so i guess i just want to make clear that cycles are cycles they go up and that's how these things happen the absence of a cycle for the last 30 years was was not the new normal it was the exception that proves the rule yeah uh and so you know when we will we will have some rough times how bad i don't know uh then things will get better and things get really really good and then they'll get worse and they'll be bad and they'll suck any better and that's how this it's just how these things go so it's just worth bearing in mind a they they may get worse even if inflation gets fixed uh they may then get a lot better but that a lot better also so i think four or five years in time guys think forward at that point don't believe that oh thank goodness that's all over now we're fine again uh i'm not saying it's bad but it's not ideal but it's it is the way these things go make your peace with the cyclicality don't expect that there's great times that a couple years of bad times another 30 years of great times that's really really unlikely yeah and it comes back to the the other mantra we often preach about which is that predict and don't sorry prepare don't predict yeah nice and it's it's always after a very aggressive period of asset price appreciation i mean they always is the would have could have should have should have bought more should have leveraged more frankly and i should have done all of that kind of stuff yeah and it's always a good idea until it isn't yes and i think so i mean look the reality is both of us have no clue i can quite just make that perfectly clear right neither of us have a clue as to what's going to be like to wax lyrical and use big words but we don't know no one no one no one does but i do know this i know again study history yeah never a forced seller be correct correct you know the people who we all when when we have to take our collective medicine and we all suffer a little bit of pain there are some that sort of have a little bit of a rough time and there are those that are wiped out and it's you're not there for the recovery because you as you say there are cycles it comes back the people that the people that uh survive actually in a good position to benefit from the eventual recovery at the expense of, well, you know, to the advantage of other people or to their own advantage against other people, I should say.

1:04:59So, but it's very hard to be that person that, because to be that person, you've probably not done as well during the good times or not as well as at least you could have in theory had you been hyper aggressive. Right. Yet it's a reminder that it is still nevertheless, nevertheless, the right move. It is better to sort of miss out on a little bit of upside, but be bulletproof than it is to sort of go all in and just go for that moonshot Hail Mary and maybe succeed, but only to have it all collapse on you a year or two later. And we just see it again and again and again and again. So again, not to say don't run out, buy gold, head to the mountains, but when you're analyzing a company or whether you're analyzing your own portfolio, the economy, just always account for the what if and the maybe.

1:05:52And just make sure that you can be relatively resilient in that circumstance. It's usually pretty good advice. Nice to put it. Let's finish off with some interesting times, just a quick little anecdote from the week in earnings, not here in Australia, but in America. Alyssa's may know or have used the Uber-like service Lyft, L-Y-F-T is the name of the company. Your intro is going to make sense all of a sudden now. Yes, like Uber. Lost a lot of money for a long time trying to build scale. Now, Lyft put out the earnings and said, guess what, guys, things are going to improve. and the market thought that was good.

1:06:32They said, you know what? This is going to be approved by, and they meant to say half a percent or 50 basis points. Now, a basis point is 0.01 % just because people like to do that sort of stuff. So 50 basis points is half a percent or half a percentage point. They press release said, we're going to improve things. It was supposed to be by 50 basis points. Turns out an errant zero was added, which again, as you say, Ram, was the point of our introduction. they accidentally in the press release said 500 basis points in other words margins were going to improve by five percentage points and uh that got the market very excited the uh the shares went up 60 percent in trading after hours trading i think it was in the u.s until i had to put out a press release say oh yeah that zero yeah not supposed to be there only 50 basis points um i don't know i don't really even know what the well firstly just be careful what you believe Secondly, maybe someone's looking for a new job today.

1:07:29I imagine the commercial relations person in Lyft is not there anymore. It's a heck of a thing, mate. Yeah. I mean, I said to you off air, my preferred way to look at these things often is what they call through Hanlon's razor, like never ascribe to malice what can be adequately described by stupidity. So it's a bit of a fat finger error. Yeah, yeah, yeah. But what a doozy, right? Yeah. Crazy, huh? And just speaking of crazy, I just call out just very quickly Lyft. You can. While you were talking, I just thought, I haven't looked at that for a long time. So, you know, the revenue is growing okay, you know, very sort of strongly, but their losses are pretty substantial, close to a billion dollars in losses every year for the last three years or so.

1:08:15Crazy high. Isn't it amazing? I mean, I caught an Uber the other day for the first time in ages. So Uber is an Lyft, but they're in the same sort of bucket, obviously. it was like 24 bucks for a five minute ride and it's kind of like it kind of well it always had to be it was so cheap not because like an app just all of a sudden made things super profitable they they're given strategy is go out there as a loss leader hoover up market share and then ratchet the prices and we're sort of now sort of seeing that um and yeah a company like lyft in an environment like this that's not the kind of mistake that you want when you're bleeding cash and you're fighting for dominance.

1:08:55Speaking of Kobo and Kindle, right, too, these ride shares tend to be – there's just not enough room in the market, I would imagine, for 50 of them, right? So maybe one or two, possibly three players, but one's probably going to have 80 % market share. It's Uber, right? So, yeah, I'm glad I'm not a shareholder in Lyft. And what was the price reaction? It jumped up 30 % or something. 60%. 60%, right? Happy to be a watcher. error and then you know and then correct it obviously so i'm happy to be a observer and not a participant in that folly yeah it's amazing absolutely amazing uh i don't know what to do as an investor what do you do with that do you kind of go wow that's amazing and jump on it i suppose you do i mean it's one of those things you can say maybe you should have been more thoughtful or maybe not believed or something but it's kind of one of those things where you know it wasn't unreasonable people to go wow this is amazing they've turned the corner fantastic yeah um there is probably one bit of you know just being a little bit careful with management guidance generally.

1:09:53But again, some management guides is legitimate and fair to come and does the right thing. This wasn't a management over-promising. They just literally screwed up the typing but still the same impact, right? Yep. Yep. So very quickly, I mentioned this to you off air as well. So there's a company I own called Ava Group. They had an announcement during the week as well, which was a good announcement, right? I mean, the news was good. The announcement was very poorly handled. So another example of like not great communication to the market and investor relations, a bit of a stuff up more so in the wording and the lack of clarity in the announcement.

1:10:29So you had like ostensibly good news, 20 % jump in the share price. The ASX said, no, no, no, that's not enough detail. What do you mean? They clarified things a little bit more. It's like, well, we've got a contract, but it's no minimum spend. And there is a, you know, they can walk away after 20 days, but you know, it's still likely to be a whole bunch of new work we weren't expecting before. The share price pretty much came back not far from where it was beforehand. So, you know, on one hand, like I often poo-poo it. Like I kind of like the business talk for itself. Like the results will speak volumes.

1:10:59But it can still have a pretty huge impact in the short term, right? And it's just amazing that you have these big companies, even what on the ASX, a small company. So I think what most people regard as a pretty big, you know, multi, you know, tens of million dollars worth of value business can make these really, really easy blunders. and it probably doesn't affect, like at the end of the day, if you're a genuine long-term shareholder and you're not speculating around earnings results or anything like that, it doesn't really make any difference because again, the numbers will speak for themselves eventually.

1:11:33But it does, it's not the kind of drama you need in your life as an investor. There's enough drama on the ASX without you guys just like trying to be a bit tricky here. Can you imagine getting the phone call? I think you made a mistake with the press release. 60 % you're going to have to go fess up to somebody even then it'd be like well did anyone else check it like really amazing amazing incredible incredible mate will you come back on Sunday you know I will apparently strawman.com is open actually by Sunday it might be closed so we're only keeping it open for a week so act now act now you heard it here first mate I will see you on Sunday until then enjoy the rest of your weekend and fool on cheers The Motley Fool and people appearing in this program may have positions in the companies mentioned.

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