Finding the next Star Wars. April 24, 2026

26:38There's some horrible, horrible listed companies, but most of them on average are better than the average non-listed company, kind of by definition. And so if I said to you, I'm going to have the property exchange with the top 1 ,800 or whatever percentage of properties that were the best, the best quality, the best areas, whatever definition you used, I suspect the Australian Property Exchange would do better than property in general, the same way the ASX does better than the average businesses, which is a long way of saying for Buffett's rule to continue to be applicable, the ratio of sales and earnings of listed companies would need to be the same over time as a proportion of the total economy.

27:19Now, I'm not sure if it's more or less, and it may be no different at all. But for that to continue to be true, you'd have to be able to carry the same thing through. Let's assume for the fun of it that the sales and profits of listed companies are now twice the proportion of the total US economy now than they were 50 years ago. The buffer ratio would need to be adjusted by that extent to be able to be used regularly like for like. So that's the first thing. Second thing is we know that these days it's something like, I can't remember the exact number, I haven't done it in a while, 40 %-ish of the revenue of the S &P 500 comes from outside America these days.

27:56And I don't think it's an outlandish assumption to believe that 50 years ago it would be much, much, much, much less. You know, Coke only really dominated Europe effectively after the Berlin Wall fell, certainly Eastern Europe. And so you kind of think about, you know, what – and US businesses have bought non-US companies and put them in. The internet has globalised the world, and most of that's based in the US. So I don't know whether the Buffett ratio holds at all. And I'm not saying Buffett necessarily is wrong in having that view at that point. I suspect the applicability of the Buffett ratio for those two reasons is just less certain.

28:35I'm not saying it's wrong. I'm not saying it's not applicable. It may well be the ratios are identical as to what they were in terms of those two things I mentioned. And maybe the Buffett ratio is a big deal. So I think that's the one I've never... So you never traded on that anyway, right? It was more of just a vibe check for one of a better term. And that's the other thing I was going to get to, which is the cash, right?

28:57I suspect that Berkshire is being left behind by the technological revolution. And in slow and almost imperceptible ways over time, but which are showing up in the cash pile. I suspect Buffett's looking at the companies he has a circle of competence in and is saying, I want to be able to deploy a dollar and earn more than a dollar. And I need to find returns that I think are attractive enough. And he's looking at tractor companies and retailers and trading companies and shoemakers and kind of going, those prices don't look attractive. And I don't think he's necessarily wrong. Because again, think about the composition, speaking of the market, think about the composition of the S &P 500 or the NASDAQ 100.

29:45Think about the top, the most expensive companies in the world. Amazon shares, Apple, Facebook, Tesla, NVIDIA. I mean, these companies that are creating massive amounts of value are the growing businesses. We talked last week about the Livewire article from Alan Gray, all of the market cap of the top. Yes. All the market cap growth in the last three months since this year has come from three or four companies. And so I suspect the growth that has happened has happened in some of those big ends of town and they're not the sort of companies Buffett would normally invest in, other than Apple, which he has had a stake in.

30:23So I don't know, mate. I think Buffett's not making a bet based on the Buffett ratio. He's gone, I got$500 billion and I should probably invest it at some point if I can find something worth investing in that meets my investment criteria. and given he's got so much money, and we talked about this before, there's no point in him investing in any Australian company at all that's going to buy the whole thing. And even then, you know, like is he going to buy some shares in, I don't know, pick a mid-cap, Suncorp Bank? No, it's too small. He's not going to look at it. And so Buffett's probably got an investable universe of, I'm going to say, just for fun of it, 25 US listed companies at best and probably another few hundred global private businesses.

31:14And that's kind of it, right? Because we just talked about the fact that his cash pile is half the Australian national debt. So what do you, you know, maybe buy Australia, but we could maybe privatise the country a bit like doing with sporting codes these days. Buffett could buy 49 % of Australia and we could, you know, take his money to do that. I'm kidding. but you know the the idea of of him having enough opportunity i think is the biggest issue for him i would suspect i don't think it's a view of the market as a whole because he doesn't buy index funds he does buy small stakes in very big companies when he thinks they're attractive but if you're universally certain size and think about it let's say it's 25 companies of those 20 are going to be tech by definition where the market where the market is so if you buff it you're like well i i don't i don't i can't use the money now i should pay a dividend by the way and And he won't, and I suspect that Greg Abel...

32:00That's how I was going to raise. Sorry. I suspect Greg Abel, who's the new CEO, won't do it in Buffett's lifetime, almost out of respect, although he's actually already made some changes to the portfolio and sold some stuff Buffett liked. So he's at least being independent of action, which I partly like, theoretically. Going back to the thing I started with, though, which is when you disagree with Buffett, you're probably wrong. So I'm like, Greg, I don't know if the boss has necessarily lost it just yet. Maybe don't assume. I would I wouldn't I wouldn't put money on anything I would reckon within five years of Buffett's death as a dividend I don't think that's a controversial prediction I agree because you're talking about the percentage mate let's roll that forward percentage wise the company's generating so much bloody cash it's going to be 40 % then 50 % then 80 % then I mean you can't get to 100 % because you can't grow fast enough and you know what you do that guarantees that you get bond type returns correct correct yeah which is why am I buying equity just to get exposure to a bunch of underlying treasuries, like, makes no sense.

32:56So a big buyback. Can I push back on it? Please, yes, do. So I agree. I mean, it just... So where I feel as though there might be at least an element in the back of their minds that we should keep some powder dry is because everything you said about nowhere to deploy is absolutely true. But they're on a PE of 15, Berkshire. Yeah, yeah. Buy back your stock. They have been. Pay your dividend. Yeah, the dividend. Rounding errors, you know, and it's sort of like. I agree. So if it was just a case of, ah, look, it's just very unlikely for us to find the kind of deals, like we just would get rid of the capital.

33:36And I'm kind of deliberately being a little provocative here, but it's like if you felt that, again, not because we've got 60 years of him telling us exactly how we operate. So I'm not trying to say all of a sudden he's thrown it out the window. I'm trying to time it and, you know, by fourth quarter, or are we going to have a bargain which people love to sort of do? He doesn't, but there must be an element in the back of your mind that's like, let's just keep this cash handy because if it was kind of like only what you said, and yes, he likes to have a very strong, quote, unquote, lazy balance sheet for the optionality and for the resilience, but that is way too much resilience.

34:16That is way too much of a buffer, you know? And the only way I can square that circle is like, well, we don't know exactly when, but probably not in like 20 years away or even 10 years away, we think we might actually get a chance to snap up half of corporate America at an absolute bargain price. Because otherwise you would just buy back your shares. Or we're buying$100 billion worth of Berkshire shares or$100 billion of dividends. And he talked extensively about the rationale behind dividends and capital management. And like it talks about how you should think about buybacks, how you should think about dividends.

34:54Like, well, according to your own philosophy, this is – I know you've got a legacy here, but it's like you're also a pragmatist. So I just – again, I guess I'm kind of fishing for a conspiracy that doesn't exist probably. But it's interesting that juxtaposition that it's just sort of like – because the argument that you put forward, which I agree with, it just feels as though, yeah, but you can actually have your cake and eat it too here, right? You can actually do all of those things and that can all be true but still buy back a ton of shares and pay a huge dividend. So I would – Buffett's – to your point about Buffett being very clear and very consistent for a long time.

35:33I don't – I don't – I will take the other side of that one and I could be entirely wrong. So I don't pretend to be – It's more of a provocation than a firm belief. No, no, it's a fair question. I suspect very, very, very strongly that if Buffett had a use for the cash he would use it rather than hold it aside. Because he knows this is a wasting asset. To your point about the Treasury returns, he doesn't want to hold the cash. He wants it. He talked. I can't remember. But he can deploy it in Berkshire itself. Even he must recognise it as one of the, well, I'm sure he does, as one of the best companies that's out there.

36:05And it's 15. I can buy Google at 40. Yeah. And I can buy Berkshire at 15. They have been buying back. So here's the thing. I, if your theory is right, Buffett has been horribly served by his own idea. Because even if he finally finds an idea next year when the market crashes, the chance that he makes any decent money, he's talking about having the elephant gun loaded. Use the phrase the elephant gun in the annual report. Maybe you can look up what year it was while I talk so you can tell our business. He's talking about using the elephant gun now for, I'm going to say over a decade. Now, any money that he withheld while that cash pile built and built and built and built and built, which it has for, I'm sure, at least a decade, mate, the reality of that is he's cost the company money by trying to wait.

36:54And so he has underserved the – if it was a deliberate, I'm going to wait for the crash. By the way, he had the COVID crash and he did nothing with the money. And so I would strongly believe that he is saying, I will invest the money when I can get the sort of return I'm looking for. And if I can't get that return, I'm not going to invest in the least worst asset. I'm going to hold the money aside. So imagine a scenario in my head. Imagine a scenario where you say, and I'm not going to put words in Buffett's mouth, but just for the fun of it, let's say he said, I will buy shares only when I get a PE less than 10.

37:27It's not what he does, but it's just easy for us to talk about. He's waiting for that to happen. And if it doesn't happen, he's not buying. And if it happens, you'll buy. And so it just so happened that over the past 10 years, or whatever the number is, he hasn't had the opportunity to put that money to work at his preferred hurdle rate. And in hindsight, I don't know. Buffett's very, very, very straightforward and doesn't mind rubbing his nose in his own problems. But there's a bit of ego there too. And I suspect he wouldn't say this out loud because he doesn't want to. I think if he was challenged, he would say it was a mistake, not deploying that cash earlier because the market got away from you and the cash drag has cost shareholders a decent amount of money had he invested in a slightly less optimal you know return on investment whatever number he was was highlighting he would have got a better return than waiting for that to turn up which never did and we can talk about the why's by the way which i don't want to get back into monetary policy and other things but the the reality is that maybe he was waiting for a crash not not because there was going to be one just because he thought when it happens i can deploy the money and that should happen every three or four years so my cash drag is only going to be a couple of years in the event the cash drag has been a decade and it gets worse every passing year could he or should he have bought his own shares back yes clearly yes in hindsight i suspect at the time he went i think berkshire is worth a dollar the shares are selling for um 90 cents uh that's not enough of a discount i want a bigger discount before i buy shares of anything including my own company in hindsight he should have done that rather than get the bond returns because that's been a massive cash drag um but i suspect he was like no no eventually i'll I'll be offered the price I want and I'll wait for that price to turn up.

39:03And we've talked before, mate, about being approximately right, sorry, roughly right rather than precisely wrong, and wanting the absolute price. You know, we've said before, gee, wouldn't it be great if you get Woolies at$10? Yes. But if you don't buy it at$15 while you're waiting for$10, you're going to lose a lot of money. And I suspect Buffett's probably been too picky. Easy for me to say right in hindsight. I don't mean to criticise the bloke. He's the goat. But I suspect he's been too picky. I suspect he was waiting for the too fat a pitch, which never came. And the flip side of that is, yes, by all means, keep the cash for the good idea.

39:33If the good idea doesn't come, there is a real cost to that. I think shareholders have borne that cost. Yeah, interesting. It was 2011 when he first used the - There you go, 15 years ago. Yeah, he's brought it out a few times since then. It's most recently in 2023. He said the elephant gun is still in the cabinet. Yeah. Yeah. So, I mean, it's interesting to speculate. I don't think... I mean, he was horribly, horribly wrong since 2011 in waiting for a crash and never came. Objectively wrong. Now, hindsight's 2020, right? So I'm not going to bag the guy. But I would suspect in 2012, if an idea had come along without a crash, he would have happily used off all his money.

40:12Or at least the money he needed above the... He keeps some money to pay insurance payouts. He's always kept. And he put aside an amount of cash. I don't think he's updated that number. It'd be about 50 billion, I suppose, these days to cover that. The rest, I'm sure he'd happily invest if you've got a good ROI made available to him. And I think he's just gone, I won't spend a lot of ROI of X, whatever that is he's looking for. And he hasn't been offered it in his decision set of large companies. So he just hasn't done anything. I think that's probably, I think he's like perfectly the enemy of good, frankly.

40:38I think he's hoped for too much. And he chased 15 and gave up 12 and ended up getting six. And so that's the risk for all investors if you try too hard to wait for the very, waiting for the fat pitch is a nice idea. Buffett's also said, by the way, if he had a million dollars, he thinks he'd get 50 % a year. So we don't have the same issues he's got necessarily. I'm not saying individual listeners shouldn't wait for the fat pitch. I do think the fat pitch, in Buffett's case, he's cost his shelves, and I'm not complaining. The shelves are actually really well, so I'm not complaining the slightest.

41:08But it's true that had he had slightly lower sites and not that perfect enemy of good, Berkshire would be more valuable today than it is. I think that's just objectively true. Yeah, that's occurred to me too. I do wonder if he is waiting for opportunities that made a lot of sense over the long arc of his career by just sort of applying various, because he's good at heuristics, right? Just general rules of thumb. He doesn't overcomplicate things. But in a world of, not to introduce the monetary component to it, but there is, like we've talked about on the pod. Yeah. It's unlikely. we can probably suggest, and I've suggested, I won't drag you into it, but you know, that maybe market valuations never really go back to the old normal because in a world of more structural inflation, it makes sense to trade at a higher multiple.

42:08So here's Buffett going, well, I normally, I'm making this up, but you know what I mean? Like at a PE of 16, I'm quite interested. So I'll wait for then. It's like, no, it's never going to, well, not never, but you know, they're far Far more unlikely. He hasn't got it. Yep. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

42:30Don't we say Berkshire holds half a trillion Australian dollars? They don't. They hold US treasuries, bonds. Now, a lot of bondholders have been wiped out. Not wiped out. Well, yeah. Yeah, pretty much, right? Because it's just a bit of bond math for those that don't know. when interest rates rise, bond prices fall. So if you bought a 30-year bond when interest rates were zero and then interest rates went up to 5%, well, you know, I don't know, can't do the math in my head, and it's not exactly, it doesn't make sense with 0%. But anyway, nothing makes sense when the cost of capital is zero or negative.

43:06We lived through that. Let that hang there for a second. But anyway, if you are holding half a trillion dollars in bonds that effectively collapsed in price, you've been wiped out. Now you can say, well, I'll hold to duration and I'll get repaid in nominal terms. But credit where it's due. Buffett didn't touch that stuff. He wouldn't, you know, I like him more and more every time I get into what he does. So all of their treasury exposure was basically six to 12 month exposure. So they just like, we totally can wait for it to mature. We don't need to roll things over and mark to market and all of this kind of stuff.

43:46But I do think that there is – or maybe this is just wishful thinking. But, yeah, actually now that I say it's probably wishful thinking. Go on anyway. But why not? Like the yield curve is not inverted at this point in time. Let me stop being so wankily technical. You get a better interest rate with a 10-year bond. Yeah, yeah. And he's got a lot of money and he could absolutely say there's probably a good chance that we can leave this money untouched. So it's the US government. And then why not buy three-year treasuries, five-year bonds, whatever it happens to be. It was like, no, we will park it here because we need to get some interest on that just to outrun the money printer.

44:26But we're not touching anything with more than a year duration. Am I overthinking that? Or if I'm not overthinking it, what's the explanation for a bond portfolio of such an incredible magnitude? shoot, as you said, half of the Australian debt, right? You'd have 5 % exposure to the five-year. You'd have 10 % exposure to the third, wouldn't you? No, Buffett's always in. Every other bank, every other big financial institution has, and he hasn't. No, but he's always kept it at short-term, mate, and for as far as decades. So it's not a new issue, and it's just because he'd rather be investing it. And so it's effectively, it's at call funds.

45:11And he doesn't want the duration risk. Don't stop. I know he doesn't want the duration return either. He's not trying to play that game. It's like, I've got the money. It's effectively a term deposit in Buffett's mind. It's just, it's a high interest savings account. If ING Direct operated in the US, he'd definitely put the money there. I mean, he wouldn't because he wants the support of the US government. But conceptually, it's just, I've got this cash. I don't want it. I'm not going to invest it because I haven't found a hurdle rate yet. So where should I put it so that I get some return until I find something to invest in?

45:41So there's absolutely no, he's not got a bond portfolio. And by the way, the portion of the excess cash they would keep in cash anyway for the insurance claims may be required within six to 12 months. So it's always been a case of money. That's a much more sensible explanation. Yeah. I mean, look, I don't want to put words in his mouth and I could be entirely wrong. But my understanding is it's always been super short term and it's always been a proxy for cash that actually is not just cash, cash, because cash is crap and you don't have money under the bed. You want at least earning something while you wait to put it to work.

46:10That's kind of his – it's a redraw account, right? It's just there because he hasn't invested it yet for the most part. With the exception of that float. Go on. Bond portfolios that's actually done well, though, in recent years. Relatively speaking. Because as interest rates have gone up, he's getting a higher return on it. Like, you know, it's just fantastic. I mean, yeah, in other times, as rates fell, he would have done badly on the same basis. So again, he's not claiming any expertise of, you know, I bet on the future of bonds. He's also holding more to maturity. So there's no, even if he had marked it market to market, it'd be marked down and marked back up again when it was cleared.

46:43So it would just be the accounting jiggery-pokery that he has to deal with. By the way, a Berkshire also has to mark to market its stock portfolio. And so when it reports quarterly, it reports big increases and decreases. And Buffett says, look, here's the thing. They call it GAAP over there, Generally Accepted Accounting Principles, G-A-A-P. And every time he says, here's the numbers, we have to report them according to the rules, and we should, but also know they don't mean anything because we had to mark these things to market. And whether up or down in the last three months is irrelevant to our long-term thesis for holding these shares.

47:15So that's kind of – he refers people to the operating earnings of the businesses and any liquidated kind of recognized gains or losses, obviously. if you buy something for 10 and sell it at 5, that's real. If you buy something at 10, it goes to 5, then back to 15, then back to 10. One quarter you lose money, one quarter you make money, the next quarter you lose money again, you're back where you started. So he doesn't – I'm pretty sure he doesn't agree with the marking to market, but he's obviously happy to do it because they're the rules and he's happy to play by the rules. He just chooses to then represent what he sees as the real and important data separately so that shareholders can make an informed decision about what's actually happening with the operating business itself rather than having those results be clouded positively and negatively by the rest.

47:54Yeah, right. That makes sense. It is interesting, though, just in general bond issuance, the US is selling, like, they're relying far more on the, sorry for the terms, the short end of the curve. In other words, we need to raise some money because we've got an ungodly deficit. So we'll sell you some IOUs. Now, what's, you made such a great point back in COVID, like why the Australian government and other governments didn't just load up on 30-year debt. There were buyers out there saying, I will lend you money for 30 years at half a percent, whatever it was, like insanely low. You're not paying back for 30 years.

48:35Yep. Yeah, no thanks. And the Australian government can print us, as much as they shouldn't print money, if worst came to worst, they could tax the buggery out of us and or print money to make good on the repayment. So they were never at risk of not being able to pay it back. Now, technical default otherwise aside, if you're the government, you're like, not only is this a good bet every day of the week, but in the very, very, very worst case scenario, we'll print the money and pay it back anyway. Yep. No doubt so. But what's really interesting is that the Treasury in the US is just like, well, not as much.

49:03So they are really relying on, when they need to raise money, it's like we just don't have much of the demand for the long-term stuff, which is telling. It's like we'll just issue the short term, which means that they've got more of interest rate risk. If interest rates do go up, it's like they're going to cop that straight away and it's already the second biggest expense for the US sort of government. Because, I mean, if they had their, I think, percent has said, you know, it's like we would love to, what do they call it? They called it Operation Twist at one point in time. But, you know, it's like we want to sort of, we want to make sure that our duration is more pushed towards the longer end.

49:40Would you just like get rid of all the nonsense speak? I just want to have a bunch of debt that I don't have to pay back anytime soon and roll over continually. But they can't. Not that they don't want to, but they can't. It's just like, well, we just don't have that demand at the moment. I know. It's just like, it's just a very interesting thing to me that it's like the risk, the quote unquote global risk-free asset is like, who wants it? Like, not me. Okay, but only if you pay me back in a year. I am not lending it to you for five years, let alone 30, you know. That's funny, right? Because it's, and that's kind of, there's two parts to that.

50:13There is the general, you know, repayment risk. And then there's just the rate at which you're being offered the money. And they're kind of the same thing, right? Because one reflects the other. But there's two things. Do people want long-dated treasuries? Yeah, at the right price. Yeah, hell yeah. Why wouldn't you, right? There's a price for almost everything, not absolutely everything, but almost everything. And so it's kind of like at some point, there's not like a lack of - If you could lock in risk-free, just a stupid example, 10 % per annum for 30 years, do you want it? Yep. So there's no lack of demand for long-dated bonds.

50:43There's a lack of demand for long-dated bonds at the price the government would like to issue them. Yes. And rightly so for both parties, right? Why? Why is that? It's like, well, because inflation, bro. You might offer me 5%, but, you know, in real terms, it's like 1%, 2%, you know? No. Exactly. And that's the challenge. I will say, I mean, the bond market is fascinating itself, mate, because it is a lower return asset class and much, much, much, much bigger than equities. And there's reasons for that which are legitimate, either in absolute rational fact or just in, like we say all the time, right?

51:21It doesn't matter what I think. Something is real, whether I think it's a good idea or not. So there are people who want bond-style investment options for all the reasons. And that's fine. They want the volatility. They want the ongoing steady cash flow. They want reliability. They want diversification. They want whatever reason they want to buy bonds, even though they are. And we've talked before about investors who say kind of the same thing to themselves. is, you know, I want to, I don't want to take, I don't want the volatility of shares. I will take a lower return because I don't want volatility.

51:51It's perfectly reasonable. It's actually rational. I wouldn't criticize it. It's not for me, but yeah, everything's trade-offs. It's like higher returns. Yes, please. Oh, but by the way, it comes with a lot of volatility. I'll take the lower return. And it's not throwing shade at that at all. It's like, yes, you've just, you've recognized the trade-off and you say, yeah, it's a lower return, but I'll sleep well at night. Yep. And if you're an investment fund, if you're a superannuation fund, and the members say, I want my money back now, please. Well, we can't because we bought these shares, and the shares market's down at the moment, and we've got to liquidate.

52:24Or I want regular income. We can have these dividends, yeah, but the dividends mightn't be paid. Good point. I mean, government bonds, you might not get the interest coupon, but you're almost certainly going to. And so, you know, I want the regular income. Okay, well, there's this. So there's reasons why entities should want bonds. It is, we're just about Berkshire, right? Now, Berkshire can put cash in a bank account, but generally speaking, in the Western world at least, governments are better risks than banks. So if you've got half a trillion dollars, what do you do with the money? Are you going to go and throw it in Commonwealth Bank?

52:53I mean, maybe. Maybe you're going to split it between a couple of banks or are you going to go, well, at least I'm a US-based investor, investing in US dollar assets. I'm going to get paid back by the government in the nominal rate. At least I know I'm going to get it. There's zero chance I don't get paid back that the money I put in plus some sort of nominal return. So do I want to put in a bank and take more risk? Well, probably not with that sort of money, no. Okay, well, do I want it in shares? Well, yeah, if I can get the right price. So there's very, very good reasons to buy bonds for those who have specific needs or desires.

53:23That's not what you would do, Ant-Ram. It's not what I would do because we're happy with volatility rather than minimizing it and paying effectively an insurance premium or a volatility premium and getting lower returns as a result. But it's a perfectly fine thing to do. The question, as you've rightly pointed out, is the durations matter and the prices matter and the market will determine how much they're prepared to pay based on things like how likely am I going to get paid back and what the inflation rate is going to be in the meantime. What return do I need to offset that inflationary headwind I'm sailing into?

53:53And that's that combination. And again, the uncertainty of future inflation is the other thing. The uncertainty premium is huge because maybe inflation is massive because they print a lot of money or maybe it's not. And we can have our own views on that. the reality is whatever the views are the future is uncertain certainly to the quantum of that inflation so you kind of gotta say well if i knew it was going to be between one and two percent i could i you know i'd want a higher return at two than one but you know the range isn't huge and if i'm getting four then i'm okay with getting something more than inflation if you say well inflation could be somewhere between two and five well okay now am i going to bet on four probably not make a bet on five maybe if i think the chances are likely it's two rather than five but if it is five, you get nothing.

54:34So maybe I want six. And so the range of outcomes is hugely important when it comes to bond pricing as well. You ready? Get this. I had to look this up because it's like, even for me, it was like, that can't be right. So again, this is, try and say it with a straight face, the risk-free, this is the risk-free rate. Okay. Now, I don't know what you understand by risk. so let's not even talk about predicting the future let's go back 10 years and don't forget have you seen the meme about with 2019 talking to 2026 yes the two girls talking yeah yeah and the other girls are just holding him like what yeah so so 2016 right like yeah it just it It was, a lot has happened.

55:26You don't need me to tell you, a lot has happened since then. I mean, the world was already crazy, but it was just like, you know, a teaspoon of crazy compared to the crazy levels we've got at the moment. Anyway, back in 2016, as a sensible long-term investor, I'm going to buy a 10-year treasury, right? It was 1.8%. Yeah. It was the yield, right? I was like, okay, and you still did it. So you put$100 ,000 into it. And we all know what happened to bond prices, et cetera, et cetera, But you didn't play that game. I held to maturity. After 10 years, if you put$100 ,000 in, you got$18 ,000 in interest, it's$118 ,000 return.

56:06The cumulative inflation between April 2016 and April 2026, 38%. Right. So in other words, for you just to not make money, just to maintain your money. And you have bought the lowest risk asset on the planet, according to accepted wisdom. On the planet, right? You would have needed$136 ,000,$138 ,000 to be square, right? And so you've lost about 1.8%, 1.9 % per annum on that investment held to maturity. And it really just emphasizes the point that you're making there. And it feels like there's a big so what, I suppose. And people can make up their own mind. As I've said, I would not buy them with your money at this point in time.

56:54But it is a great example of how unquestioned sort of financial wisdom can just really be diametrically wrong. Because inflation matters. Now, if you are of the view, I'm not talking about hyperinflation or anything silly like that, but just that inflation is higher for longer. And you're only getting, I forget what the 10-year, I should look at this up actually, but I just want to say it's around 4.8%, something like that. You want to hope that we don't run too much into inflation because you're potentially going to lose a whole bunch of money in the same way that 10-year bond investors have over the last year.

57:36And just in case you're thinking that I was like, I wouldn't be so silly, don't forget that incredible amounts of Australia's retirement savings have got into exactly those kinds of assets because it's mandated to, right? So very, very high chance, dear listener, that you've got exposure to these kinds of things. And unless you've got the size of a super fund to justify the setup of a self-managed super fund, you actually don't have much choice about it, really. Oh, yes, but I don't want to forget they have the option of direct investment within their retail super funds most of the time. So if you take just the default, you're absolutely right.

58:15Which is 90 % of people, though, right? There is a third path. If you don't do SMSF, most, if not all, super funds will let you choose a direct investment option where you can choose stocks or ETFs or investment strategies or components that exclude bonds if you want to. Here's the thing, though, mate. I think that's all true. But I also suspect there is a world in which rates actually are lower in five years' time than they are now. Oh, which case you'll do better, yeah. Right. So you wouldn't buy bonds with my money. I don't know if you meant historically It's 4.3 % sorry I just looked it up 4.29 % I wonder I'm not asking you to predict it all I think I wouldn't buy bonds with your money is a reasonable view if you expect rates to stay high or go higher If rates fall from here buying bonds neither do you get the 4.3 % but if rates are lower in 10 years time you won't get extra because you won't get the money back.

59:06If you want to buy that bond and then sell it at some future point at a higher price you actually may do better if rates were to fall even modestly between now and 2036 assuming you could find someone to buy that bond off you if the bond price did jump based on the falling official cash rate so there's there's there's something true that i don't be true i wouldn't say it's there's never a time when you should you could buy bonds and make money um now you should have the question of inflation but you know if you buy it 4.3 i'm i'm i'm not even i've I think I'm almost being devil's advocate for the sake of it, actually.

59:38But I just want to – I guess just for the sake of balance, for our listeners to understand, if interest rates fell and inflation fell over the next 10 years, you get a 4.3 % bond now, so you're getting net return. Inflation currently strayed at 3.7%, so you're not miles ahead. But let's assume that under some miracle, inflation is lower in three years' time. You're making less than a percent in real terms. Right. But let's say inflation is 2.5 % in three years' time and the official cash rate, let's go with that, falls to 2%, then the bond price, you could sell your bond having got an above average return for a few years and then sell that bond for way more than you paid for it and you can make a lot of money.

1:00:21So there are times when you can absolutely make money buying bonds. But now you're a speculator on bond prices, you know, which kind of defeats. I'm just saying there's not always a losing bet. I just want to point that picture for our listeners. It's not a case of you'll always lose buying bonds. I'm glad you did that. I didn't want to – I mean, my opinions are pretty clear, but I certainly don't want to frame it as a fait accompli, other than just to sort of say, understand the bet you're making, because I think too often when it gets talked about, it is talked about as in, like, people look at you like you've got two heads if you suggest that there's even a modicum of risk here.

1:00:57It's like, what do you mean? There's no risk? Here's the thing. Inflation just stays the same. It's 3.3 % in the US at the latest rate. So you're getting 1 % real. And we all know that the rate of return is there to compensate you for the risk, for the uncertainty. Now, I have no idea what's coming. You have no one. Buffett doesn't have any idea what's coming. But it's the whole Benjamin Graham, three most important words in investing, margin of safety. You've got a 1 % margin of safety here. You want to hope that inflation falls, right? Because if it doesn't – and here's the thing. It's just like, well, I mean, maybe different people see it differently, but I would suggest unless – while ever the deficit is the size of Christmas and growing and we're relying on the money printers, it's going to make the potential for inflation to go away is harder and harder.

1:01:54Correct. There's a lot of hope. Let's call it what it is. hope being put on AI. It's like, no worry, AI will drive incredible productivity gains and then that will offset it. It's like, I hope so because there's, as you say, the bond market and the US bond market is the gorilla in the global asset stage. It is far bigger than equity markets and most other markets, I think all other markets. And it's like, it just boggles my mind that it's just of such a narrow, narrow margin of safety on these things, particularly when we don't have to go oh there was a period in 1786 between 1786 and 1790s where if you held bonds you got wiped out it's like oh you know there's all these weird esoteric examples from history but it's like no the last 10 years yeah the last 10 years half of which was before covet even happened you know that that that strategy has has seen you lose two percent a year or 20 almost compound in total right like it's anyway it's safe to say i shall not be buying bonds in the new term.

1:03:00I am shocked. But you're not either though, right? No, no. You probably wouldn't either way. I wouldn't blame you. Right. And that's the... This is kind of where... Yeah, I think you're right. I wouldn't buy it either way. And that's probably why... You mentioned this speculating before. You can only get a... Well, over the long term, the data would suggest it's very hard for bonds to beat shares in general. So Or just the general level of economic growth. Right. So if you're buying those bonds, you are almost certainly either speculating on the future direction of interest rates and inflation, which I'm not going to do because I don't have any interest.

1:03:38Either way, to Ram's point, he's expecting one version of the outcome. I'm not, I don't, I think... You're agnostic. Well, no, I think you're probably right more than wrong, frankly. But am I going to bet on that? No, because it would be literally better. It'd be outright speculation. Yes. You know, will this happen? Well, I mean, anything could happen. I mean, Trump's new appointee to the Federal Reserve could cut interest rates in the US by two percentage points tomorrow. Okay, well, that changes the story. I'm pretty sure he was picked for a reason. Or he won't. And so it's like, we're still betting on that, right?

1:04:09So it's like, and even if it's likely, likely is not enough. I mean, you can spread a range of bets on a range of things and happily take a loss if you're wrong on that one, but you're still speculating, I think the Roosters are going to win this weekend. Okay, well, am I sure? No. Okay, there's a 60 % chance. All right. But, you know, am I going to bet my investment portfolio on the base that maybe they'll win, even though they're likely to? So, you know, at some point, and that's, I mean, all that shares as well, right? You diversify accordingly. But I don't expect bonds to outperform shares over the long term.

1:04:41And I don't believe I have a special insight that allows me to beat the rest of the market at bond pricing. I mean, the bond market, as I said, is already massively larger than the share market. And smart, well-educated, well-connected people are making their bets on the prices. That's what the interest rate is. The rolling yield on the bond price is, here's what we think it's worth paying as a group. So do I want to bet against that? Not really. So no, I'm not buying bonds either way, mate. I don't expect they will add to an investment portfolio's long-term return. I think it's a trade from it on average.

1:05:14And so I'm going to go and bet on things, literally use the word deliberately, that have a higher probability of happening and or a higher return if that probability plays out. And that's, to me, it's just an easy decision. Yeah. Actually, it's pretty much the same for me too. What the argument is is opportunity cost. Yes, correct. That's what the argument is. Right, 100%. Yes. And everything you just said, I agree with. But I bet, I know I would think differently, and you probably would too, if, let's say, a hypothetical scenario where the average market PE is 30, something insane and you know dividend the average dividend yield of the market is like 0.6 of a percent you know it's just things are just like whoa like like historically this is off the chart yeah and you could get from the u.s government or the australian government a bond that was paying eight percent i bet you'd reconsider this then i would yeah there's a price right exactly you know Now, if it was paying 8%, though, you would ask yourself, why would it pay 8 %?

1:06:14So that's the other problem. The most useful words for thinking through a theory are, if all else is equal. Because it makes sense where you get to control for those things and say, if nothing else changed, if I change this bit, what would happen? And it's a really, really useful learning tool because you get to look at the relationship of certain things. But then you've got to say, okay, so I get that. If all was equal, that would happen, great. What if all this isn't equal? What would happen for that bond yield to be offered to me? Well, Venezuela is offering 25%. There's a reason for that. You know, it's like, would I take a 25 % government bond yield?

1:06:51Yeah, buy it right now. Right now you get a 25 % yield from many, many governments around the world. Right? Fill your boots. No thanks. Hey, speaking of, this is massively random. I read this morning, it's entirely not even close to, it's a little bit relevant. but there's only 31, I think, liberal democracies in the world. Yeah, it's a tiny fraction. Yeah, that shocked me when I learned that too. Yes, yes. There's 170 sovereign individual countries, something like that. Yeah, that's amazing. We are so insanely privileged. And even within those 30-odd or so, there's a spectrum there. Yeah. We are not the norm.

1:07:34We're not. I think not to pivot it away and definitely not to get into this as a conversation, but it comes up a bit with this stable coin stuff that's sort of happening at the moment. It's the fastest growing product category ever. And it's just huge. And it really jars you when you hear this. Like, well, I don't see them. They're not in my world. And I think that's what you've got to remember is just like, yeah, but you're 30 out of 170. Yes. Like Latin America, Africa, Southeast Asia. Like there are man, Eastern European countries. So many countries like, oh, thank God, right? And it's worth remembering, I think, for us in these very particular situations, just how unusual it is and how fragile it is, frankly.

1:08:21Yeah, mate, I don't know. I don't know where we're going with all of that. It's worth, I think, unpacking a lot of these things because there are so many things that are just seen as eternal and everlasting and incontrovertible, but they don't actually stand up to much scrutiny. I caught this, a straw man member pointed out a Charlie Munger speech he gave in 2001 at a university. I hadn't come across, I thought I'd sort of come across all of them by now. Right, yeah. And this is a little, this is a complete tangent, But just in the idea of things being counterintuitive, I'm talking about the early days of Berkshire when it was a textile mill.

1:09:03Yes. And I don't know if it was apocryphal, right? I don't know how literal it is, but Munger was talking about how an employee came up and said, it's great, great news. They've got looms now that are 10 times more efficient. And Buffett said, that's terrible. Yes. Isn't that great? I've said this, Greg, keep going. Isn't it great? And you go, wait a second, you guys are in the textile business, or at least you were in the early days, and someone's just invented a machine that can increase your productivity many, many, many, many fold, and you're upset about that. And as Charlie Munger put it in a great way, he's like, well, none of the meat's going to stick to our ribs.

1:09:41That all goes to the consumer, right? And you go, well, what do you mean? He's like, well, everyone has access to these machines. Yep. And people probably need a 4%, 5%, 6 % return on investment of these big capital equipment sort of to make it make sense. So the mistake is to think that we can buy this and continue to sell at the same price and there'll be no impact to it. And this is a great, and he's making this point here, one, you've got to think about second and third order consequences. And two, these things generally, at least when markets are fair and competitive and open, this is great news for the consumer because your textiles, your clothing, your blankets, all of these kinds of things are now a hell of a lot cheaper.

1:10:20and it means that you're going to have to reinvest, not because you want to, but because you have to, because everyone else is doing it. And any cost savings you make goes straight through to the consumer. So a whole bunch of CapEx spending and no extra rate of return. And maybe you get, if you do it very quickly and you're first to it, you might get a year or two of some outsized returns, but that curve only goes in one direction. I did have some way of linking that to the point we were talking to. Oh, yeah. Just in like a lot of these things, I think they're really counterintuitive things that happen in markets and in economics all the time.

1:10:59And it's worth thinking about that. I mean, the classic example we've talked about a lot recently is sort of like cigarette taxes, you know, sort of like, well, look at that. Smoking rates have gone up for the first time and of course it pushed too far. Or, you know, look at the NDIS has actually increased the cost of services. You know, there are these sort of things that you don't think through. They're very obvious once the pain drops. Yeah, yeah. But at first encounter, it's like, no, well, obviously this would be a better thing. But it's like, no, actually it can be not just neutral, but detrimental in so many ways.

1:11:34Matt, let's throw that to the internet and the AI. I mean, that's the lesson of the internet. You know, for everyone who says, well, Google's a fortune, Amazon's worth a fortune, and NVIDIA's worth a fortune. Yes, absolutely. There are companies who will make money because the internet exists. There are companies who will make money because AI exists. Of course they will because they'll find a way to create value for someone and charge for that and make a profit on it because, of course, they will. And if that's true, as you said many times, that's a good thing because it says they've created something that people actually want to pay for.

1:12:02And that's cool, right? The thing is in between, the group in between, and that's my view on AI, and I think it's yours, but I suspect the most likely outcome for AI is like the internet. it's a cost of business for everybody else Woolies and Coles are Woolies is better than Coles because you use the internet and Coles is better than Woolies because you use the internet they both have to because if they don't Woolies isn't going to a website you can't shop online from them well I guess I'll go to Coles then so Woolies aren't doing it because they want to try and beat Coles you know everyone's able to access that as you said the textile loom that's exactly what the internet was we're using electricity that's a competitive edge No, it's not.

1:12:41We've got air conditioning in the store. Well, now everyone wants air conditioning in the store. Well, that's going to cost us more to provide. Okay, let's do that. I don't have air conditioning. I'm going to save money. Well, people are going to shop with you. Well, I guess I'm going to have air conditioning then. Okay, fine. Cold fridges. Well, I don't want to have cold fridges. Well, I guess you've got to have, okay. Fresh fruit and veg. It deteriorates. It goes off. You've got to throw a lot of it out. Let's not do that. Well, if you don't, people are going to go to Coles instead of, okay, I guess we've got to do that.

1:13:02There is, you know, the things that are genuine. This is, it goes about competitive advantage, mate. Those things aren't competitive advantages. They are requirements. They are tickets to the dance in business. The things your customers require you to have to even be worth going to. Yep. And just on that point of value. Oh, sorry. Go on. No, no. I was going to say, there's a lag. There's a lag. I just want to tell you, you're talking about the value creation of Google and the Amazons and that world. But you've got to look, to your point, you've got to look at it on a net. Can we throw in the legacy media as one industry, right?

1:13:37It's like on a net basis, there's like, again, that while value was created in this one sort of newish niche to properly account for the value across society or not even across, just within the business landscape. I would say it's not nearly as positive. I mean, massively positive to us as citizens, but not as not as positive if you only focus on the winners look at google they made a fortune they've it's like no no no they they they made a fortune because they created an insane amount of value for everyone else and a lot of that value was was bled from legacy industry right so it's sort of like it's like there's always this thinking i think it's this is the probably the core issue with a lot of political interpretation of of economics is it just starts and ends and doesn't even conceive of anything other than a fixed pie there's a pie who gets the slice and it's sort of like yeah but the pie can change size and i think that that's what we forget so i just wanted to throw that point but i cut you off and no it's it's i was going to make the point that we are the thing about the the consumer facing stuff the stuff like the textile mills in the back room you know we we could we could um we could use machines at our distribution centers to lower the cost of distribution of the goods from warehouse to the store and great well you're gonna make money then well yeah until coles does the same thing and then coles does it and pass on the saving to the consumer well now well is you got to do it as well and you can't not have a an automated distribution center because if you're still relying on people it's costing you more to do that and you can't compete on price so the investment as you say the textile loom example in the in the simple supermarket one is the this the automated a distribution center.

1:15:18It feels like a big deal, like, oh, this would be a great advantage. It's like, well, if it is, it's only for as long as it takes the other guy to catch up. And then you're back on even playing field because you've both got the same cost base. So the sustainable competitive advantage is the thing, not the thing you can do to lower your costs. It's a thing you can do to lower your costs that the other guy can't do. It's a thing you can do to serve your customers that the other guy can't do. And, yes, occasionally that might be some sort of proprietary technology. We've talked about proprietary data, for example, for AI.

1:15:46That might at some point, I think it's overblown personally. I don't know if you have a different view, mate, but I suspect the genuine incremental value from that is really limited because the stuff that's genuinely proprietary, that gives you a genuine advantage that's big enough and noticeable enough for the consumer. I mean, I don't know how big that is. Massive, by the way, in search. That's how Google smashed Yahoo. Same internet. They're both indexed the same internet, right? Google did it better. And people went, well, I like their search results better. And that proprietary, and the great thing for search is the feedback loop.

1:16:16Google knows how good the results are because they get the clicks. It's perfect, right? It's like, so if I give you that result, you click on it. If I give you that result, you don't. Okay, I'll give you that result more often. It's a wonderful feedback loop. They get instant feedback. And once you get a head start, that thing snowballs like no one's business. So that's really attractive and really a great way to do it. But, yeah, it's got to be the thing. It's called the PageRank algorithm if anyone wants to nerd out on it. Yeah, a really genius bit of programming. Yeah. And it's, so yeah, sometimes, yes, the, the, but that was a sustainable competitive advantage.

1:16:49It wasn't the internet. It wasn't the fact that indexed. It was that information. The broader question or comment, I think, is, is really the, I said, what is sustainable as a competitive advantage? What gives you an advantage that others can't get? Not what lowers your costs because others can do it too. No one makes you able to serve as customer faster because others can do it too. It's what can you do they can't do that your customers care about? and that's where the event genuinely comes from. Yep. I mean, yes. I'll just, I'll say this and then we'll move on, but it's just like, given all of that wider prices go up, like you've got to connect those two dots, right?

1:17:27And I'll just, I'll shut up by saying, I very rarely tweet, but I did retweet an article that I thought just nailed the argument so well by a gentleman called Alan Farrington and a co-writer with the Sasha Myers. Did a really, really good piece, are a little bit snarky in places, unnecessarily so. But it's just like, I couldn't help but throw that in there. It's because like, well, if everything you're saying is true, then how come everything's getting more expensive? And I would go, yes, it is a very good point. Should we do, where are we? An hour and 17 minutes. We are miles on. What do you want to do?

1:17:59Should we actually do the agenda? Because none of this was on the agenda when we sat down this morning. It really, really wasn't. You know what? I think we should leave the agenda. but there's nothing that's particularly – I'll leave those points in case they come up. Is there anything you wanted to throw in from the listener? No, not really, not really. I mean, I think the conversation off air was just like, what are we talking about? There's oil and it feels like we're sort of circling the same kind of thing there a bit, not because necessarily we're a dog with a bone, although that's true, but it's in the news and it feels like you run out of things to sort of say about it.

1:18:37and sometimes you feel like, well, I guess that's what everyone's interested in. That's what we could talk about. But this was far more interesting. So I'm happy to leave. Me too, me too. All right. We'll get back to it next week. Well, next week, episode 1000. Oh, yes. Next Friday, episode 1000. And I'm going to, well, I'll say this now. I'll ask you off air and then you can tell me yes or no. I'm going to hijack the episode with an announcement. Oh, okay. There you go. Well, you've promised it now. I'll say whatever I say. You can absolutely countermand it. There may not be an announcement next week, but if there is, we will go from there.

1:19:13Oh, but then that's unfair because now it's like, if there's not an announcement, it's like, so Paige threw some cold water all over that, did he? Mate, we're now at 15 and no one's listening. You know that. That's true. That's true. I'll tell Mum separately and we'll be good. Okay. Until next, not until Sunday actually. We're going to make it on Sunday, won't we? Hell yeah. We can't get to episode 1000 unless we do episode 999, That's what we'll do on Sunday. That's how it goes. Until then. Fool on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned.

1:19:43General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services License 400691.