How much bank profit is too much? August 11, 2023

In short

Motley Fool Money - Episode Notes

Episode Title

How much bank profit is too much? Date: August 11, 2023

Podcast Overview Motley Fool Money offers practical insights into finance and investing, hosted by Scott Phillips and Andrew Page. This episode discusses the recent profits of Commonwealth Bank of Australia (CBA), public policy implications, Berkshire Hathaway's performance, and the plight of WeWork.

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Key Topics Discussed

Commonwealth Bank's Profit
CBA's Profit Announcement: CBA reported a significant profit of $10.2 billion, prompting discussions on whether this figure is excessive.
Listeners' Perspective: Scott Phillips addressed public concerns about bank profits, debating if such high earnings are justified or indicative of systemic issues.
Public Sentiment: Many people feel uncomfortable with large profits, but the hosts argue that it's crucial to contextualize these numbers within the broader economy.

Arguments on Bank Profitability
Ownership and Exposure: Approximately 50% of Australians are indirectly invested in CBA through their superannuation funds, suggesting that profits can benefit many citizens.
Proportionality of Profit: The discussion included how CBA’s profit might be viewed relative to its market cap of around $180 billion, with a focus on its return on equity trends which have been declining.
Market Competition: Concerns about whether such profits create an oligopoly, potentially stifling competition in the banking sector.

Criticism of Public Reactions
Oversimplification of Economic Debate: Scott Phillips emphasized that labeling large profits as "bad" simplifies complex economic discussions, which can lead to a misunderstanding of capitalism and profit generation.
Historical Context: The hosts compared CBA's profits to historical situations, noting that U.S. banks often report even higher profits, suggesting that a larger profit scale may not be inherently problematic.

Public Policy Discussion
Tycoon Tax Proposal: The episode critiqued the proposal for a 'tycoon tax' on bank profits, suggesting it may be a populist measure lacking a fundamental understanding of economic mechanisms.
Future Fund Liquidation: The hosts discussed a proposal to liquidate the Future Fund to pay off government debt, highlighting the flawed logic in giving up higher returns for short-term debt relief.

Berkshire Hathaway's Performance
Record Highs: Berkshire Hathaway recently hit an all-time high, which the hosts attributed to consistent earnings growth rather than market speculation.
Warren Buffett's Strategy: The discussion celebrated Buffett's investment philosophy focused on long-term value and resilience, contrasting it with more volatile tech investments.

WeWork's Struggles
Company Overview: WeWork is approaching a crisis, contrasting sharply with Berkshire's success. Their business model's viability has come into question, highlighting the risks of investing based on hype rather than fundamentals.
Investment Lessons: The episode underscored the importance of analyzing the sustainability of business models over chasing trends.

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Key Takeaways

Understand Profit Context: Bank profits must be assessed in relation to their size, market conditions, and broader economic implications.
Public Policy Caution: Quick-fix proposals like windfall taxes can have unintended consequences and may not address underlying issues.
Value of Fundamentals: Investing in companies with strong fundamentals, like Berkshire Hathaway, often leads to better long-term outcomes compared to speculative ventures.
Economic Cycles Awareness: The discussion on banks and their dependency on real estate reflects broader economic cycles and the necessity for a resilient financial system.

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Conclusion This episode of Motley Fool Money provides an insightful examination of bank profits, public sentiment, investment strategies, and the implications of policy decisions. The hosts encourage listeners to think critically about financial news and consider the long-term impact of economic decisions.

Subscribe: [Motley Fool Money](https://fool.com.au/LiSTNR) for ongoing investment insights and market analysis.

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Transcript

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0:07Welcome to Motley Fool Money, the podcast that made 10.2 billion. No, we didn't. That's right. That was CBA. I'm Scott Phillips. He is Andrew Page. G'day, mate. How are you? Good. I mean, I'd be a lot better if we did somehow manage to make over$10 billion in the last year, but sadly, no. I can't tell you who disappointed I was when I read the number. I thought, oh, good, that's us. No, it's actually the Commonwealth Bank. It's been a week. How are you, mate? What's news? Yeah, not much. just you know trying to to swim in the choppy waters of the market absorbing all this yeah you know trying to absorb all the information that's out there and yeah one day at a time my friend how about you one day at a time very football coach of you mate game of two halves one day at a time full credit to the boys mate I'm I'm very very well ah sun's out mate I'm always happy you know what I've said this before I'm gonna this is not fair to our listeners this is genuinely the most fun part of my week, this podcast that we do.

1:08And I appreciate you spending time doing it with me. It's good fun. And we, at the dinner table at night, we try and teach our young bloke a bit of gratitude. So we do the favorite part of our day, just trying to, you know, make that focus. And almost every week or every Thursday, the favorite part of my day is doing the podcast. And it doesn't feel overly fair, I've got to say. We get paid to, or I get paid to talk. You're hopefully getting some business out of this as well. But yeah, getting paid to chat to each other for a couple of hours a week, which is pretty fun. Well, we've said before, if ever we get, Maybe we should say when we get cancelled.

1:36We'll probably just keep it in the diary and just talk to each other, right? Just keep recording and then just doing nothing with the file, just deleting the file and doing it again next week. It can't be far off from being cancelled, can we? Well, it depends on what topic. I keep talking about property and stuff and banking. It's only a matter of time. Either that or maybe, well, maybe not with the Australian obsession with property. Maybe that's the best way to stay uncancelled. Yeah, yeah. Anyway. way mate uh let's move on but before we do i believe once upon a time you started a business called strawman.com is that is that is that other rumors true they are true uh and and before you ask we're a private online investment oh yeah i wasn't going to ask that at all i was going to say that we had a uh a member a listener right in uh who by the way we'll talk about his question on sunday but uh he described you as i did as the man the myth the legend who is andrew now he said andrew property page which i thought was a different twist on my uh andrew ram page introduction but there you go maybe i missed a property after all i'm not sure if that's a good thing or a bad thing uh i'll i'll i'll claim it oh yeah exactly mate let's talk about uh money let's talk about well large amounts of money and as we started with talking about cva is 10.2 billion that's with a profit profit for the last uh period of time was last six months or last three months i can't remember which big number anyway um no it's for the year for the year it was fully Yeah, okay.

2:59Full of your property. Thank you. Massive number. God, if they're doing that every quarter, I mean, let's just wind the clock forward a few years and the property market rolls on. Then maybe, maybe that's exactly what's going to happen. Once another couple of banks merge, we'll talk about that in a minute too. A lot of money, mate. I have been on radio three times in the past two days. By the way, we're recording this Thursday morning, the 10th of August, a date stamp it. People say to me, so CBA's profit, that's not reasonable, is it? And I'm the poor bugger who's got to go on retail radio and explain why well maybe kind of there's some good and some bad but before i do any of that let me ask you mate is that too much money for a bank to make i mean it does it is an obscene amount of money um i have had some people make the comment of i think the government sold because this was a public a government owned entity i think i think they sold it for like 10 billion back in the day right okay yeah so inflation adjusts that etc etc but it does you know there There is probably something to be sort of said of, wow, we really gave the golden goose away there, didn't we?

4:04No, I mean, yes, it is a large amount of money, but here's a couple of – I'm going to be the last person to defend the banks. But a couple of things to bear in mind here. I think the number is one in two Australians own it or own a part of it. Right. Now, not directly, but through your super. So even if you just tick the most generic box that your employer gave you, there'll be a super fund somewhere that has an allocation to it. And therefore, you sort of benefit from that. So it's something that I think, you know, at least half of it. And I don't even know if that includes kids or just adult Australians.

4:36I assume it's like literally half the population full stop that has some kind of exposure to it. So, you know, be careful what you wish for in hoping for its demise. The other thing is as well is you've got to look at it proportionally. Is that an unrealistic profit relative to the size of the business? And probably not. In fact, they were at pains to point out in their presentation that their return on equity, the profit that they make relative to the net assets of the business, has actually been coming down. It's not as good as it's been historically. Funnily enough, after the Royal Commission and some of those changes were enacted.

5:13By the way, still very profitable, right? It turns out it's a wonderful business. But from that lens, no. And I guess for me, the question is the size issue for me is more relevant one when it bestows an unfair competitive advantage that limits competition. And therefore, the value that we as consumers get. And there's probably something to sort of say that the big four are as an oligopoly, if I can use that term, probably. Imagine you or me trying to set up a competing organization to that, which is a whole other conversation. But no, I think$10 billion is just large, but it is a business that is worth, well, what's the market cap of it?

6:04Like$180 billion? So in that context, it's probably about what you'd expect. yeah i i know i really want all the listeners to think about this i don't own shares in any of the banks not even my super fund i don't have a industry fund or a retail fund i do my own thing i don't have any i don't think i've ever owned cba shares as far as i can recall um i'm old but not that old i should remember um i have no dog in this fight right other than wanting as hopefully our listeners know by now good public policy and and reasonable reasonably well-run capitalism Those things would be nice.

6:39Our journos have a tough job. They are under massive amounts of time pressure. The model is being destroyed as we speak by online and everything else. And so I'm loathe to be too critical of the writers, the journos, all the mastheads, all the sub-editors, because they're on a burning platform desk. We're trying to keep the thing afloat. That said, when we say 10.2 billion is a lot of money, and a lot of money must be bad, therefore they're making too much money, you kind of just it's it's massively dumbing down the economic debate right you we can absolutely agree commonwealth banks making too much money in a whole different measures but to picking a single large number and saying that seems too big therefore these guys are bad is about as stupid a take as you can have and i i say that and then i think about i think i don't want to criticize any of our listeners who have or had that thought i just want to make the point that there is nothing inherently good or bad about 10 billion dollar profits i'm sure the u.s banks that are multiples of Commonwealth Bank size, make large amounts of money.

7:32Think about the size of the profit Apple makes and et cetera, et cetera. If you're a global business, you earn global-sized profits. If you're the biggest bank in Australia, you earn the biggest bank profits. These things aren't unusual, even unreasonable. They're not even unreasonable. That's the kind of key point. If you think about - Well, and also, do you want them to be strong, right? Right, 100%. So let's look at CBA, right? $10 billion, a lot of money, yes. Their profit was up 5 % year on year. Well, that's kind of about average across the ASX. Like that's not an unreasonable growth in profit.

8:03If you were in an economy that's growing, you know, like you've got more people, the economy's bigger. You'd expect that if you were one of the big banks, it's oligopoly, so let's get back to that. But if you're one of the big banks that gets system-wide growth of about 5 % profit, that's about what you'd expect. Not only that, their profit margins fell. So when it's the profiteering big bank, obscene amount of money, blah, blah, blah. so hang on they made they made less per dollar of revenue this year than last year that's not that's not banks profiteering it's not price gouging for all things we think and people say oh yeah people are doing it tough out there shouldn't the bank share the pain it's like well again be careful what you wish for right do we want do you want them to be silicon valley bank profitable do you want to be credit swiss profitable or lehman brothers profitable i don't think so i think we're i think we've been through this one before let's not let's not forget the lessons of history um now again i'm not i'm not here to defend cba but i will say also if you divided CBA up into 10 pieces and each of them made a billion dollars each, the bank profits would still be the same, but we wouldn't talk about it because the number was smaller.

8:59If you cut it 100 pieces and they make$100 million each, we kind of go, oh, that's not much. That seems reasonable for a bank to make. Okay, that's fine. Even though the total bank system profit would be exactly the same, that big number that kind of shocks us and makes us wonder what's going on, that's the bit that I think people are being let down by. So there are genuine reasons to criticize CBA and to criticize the banks. There are genuine reasons to think maybe this level of profitability mightn't be sustainable if the property market stumbles or if the economy goes into a funk. So those things are absolutely true.

9:28I just want to be really, really clear with our listeners that it's so important to look past just the clickbaity headlines or the didn't have time to think about it headlines or just put the number up there and let people draw their own conclusion headlines, which are all really, really, really unhelpful. Hopefully that's why our listeners are listening to the podcast, mate, because that's really important. To your point of safety, security that's the other thing i want to say quickly is you know i given the choice between banks that make a little bit more money than they should and a banking system that is you know um that is uh less secure than you'd like let's put it that way um you know right you know do you really want hey guess what cba's making less money but there's a chance the banking system will collapse or cba's making a bit more money bank system is pretty safe now not totally safe not safe beyond measure not you know uh devoid of risk but i don't know mate if i'm if i'm running policy for the Australian government or the Australian economy or the Australian society and saying, I'm okay if I've got to put a couple of chips here.

10:23I'm going to put a couple more chips on more profitable and more secure rather than less profitable and less secure. It just seems like a pretty easy economic bet to make. Yeah. And that's not reported. So we're talking about the income statement here. So what money was made over the year? I think on that point, we need to pay much more attention to the balance sheet. And they have strengthened their tier one capital. So this is sort of like the thing that underpins all of the fractional reserve lending that they do. And that's fine. You just want to make sure that they're pretty strong. I mean, it feels like sacrilegious to say it, but sometimes you mentioned before that when the economy is going well, the banks are going to do well.

11:03Well, the inverse of that, of course, is that when the economy is not doing well, banks probably won't do well either. And it's not a question of if, but when. And again, this isn't chicken little kind of everything's terrible and we're all going to hell in a handbasket. This is just a, I hope, a fairly balanced, reasonable view that the economy tends to move in cycles and sometimes it's up and sometimes it's down. And when it is down, I want to make sure that this is a business that can weather the storm without having to be bailed out with my and yours and everyone else's taxpayers' money. That's what's going to, if you want to get angry, get angry about that, right?

11:40Like that is really unfair to the rest of us. So it's, you know, capitalism on the way up, socialism on the way down. So I will give them some, well, not, I mean, I think I'll give our regulators some credit there because they really sort of pushed, pushed for that. The banks have all pretty much adhered to that and their balance sheet is in, is in better shape. And actually, you know, by global standards, pretty decent. So I'm not, I'm not going to be too critical there, but that's not reported right and um here's the thing though right um it's hard to do verbally so i will try to avoid the maths but the stronger the more that you want to fortify your balance sheet the more your profitability is going to suffer correct yeah because you've got and the more you're forced to do it right the other thing because regulators make them keep that capital which is probably more than they choose to keep because if it wasn't they'd have more already well why not why not take all that capital it's just sitting there on your balance sheet and go and buy Bitcoin or something, right?

12:35Like you could do whatever you wanted to it and potentially make a lot of money. It's just, it's what, you know, you hear some people refer to it as lazy balance sheets in the sense that it could be earning much more money. And it could, in the same way that if you take any remaining equity in your house, you could go and flip that into another 10 properties and make much more money when things are going well. But of course, we know the consequences of that when things go against you. So anyway, so that's my one point I'll make there. You know, the thing that sticks out for me is, and this is just depressing, is that when you talk about the Commonwealth Bank or any of the big banks, you can't not talk about it without talking about property.

13:18You know it's my favorite topic, right? So I was always going to swing it around here to this. but banks are banks as an institution as a concept are actually of all of the things that we talk about having led to increased human prosperity and our growing civilization the innovations within money and banking have been phenomenal right like it it takes money from those that have an excess and don't have a good use for it to those entrepreneurs business people that do and so scott's got all this money saved up he doesn't really need it he'll give it to a bank He'll give him a bit of interest. I'll buy it at a slightly higher interest rate.

13:56I'll go start a business. I'll employ people. I'll make stuff and we're all richer and better off for it. You know, that's, that's, that's, this is, this is a phenomenal thing, right? And you can go all the way back to Venice and even well before that as to some of the things that have, it was an unlock for us as a species to, to, um, yeah, just increase our general prosperity. um what's this the reason i frame it like that is what's disappointing when you look at australia which is really i saw a index the other day i think it's from the world bank but don't quote me on that one on economic complexity and it's good to have a complex diverse economy you don't want to be the so-called banana republic which is like we we sell bananas and that's all we do just you're not a very resilient robust economy and we're actually not very complex at all and And the old lament is that Australia is houses and holes.

14:50And this has really stood out to me when you look at the balance sheet of CBA. So of all of their loans that they issue, and they've got$930 billion of loans that are out there, 70 % of them are for houses. And Commonwealth Bank, like one in four home loans is Commonwealth Bank, right? Yes, yeah. So it's sort of like, why is that an issue? Well, it's an issue because these are unproductive assets, right? So we've all, as a society, levered ourselves up to the eyeball into things that we'll live in and we'll now spend the next 30, 40 years paying off. It's not creating jobs. It's not making us – it's a bit of a shell game, really, I tend to think.

15:36So I think – and then you go, well, okay, but there's still the biggest bank in the country. They're obviously lending a lot. Well, yeah, there's$165 billion in business loans. 17 % of their loan book is for business. There's probably about 8 % what they call institutional loans, which is a bit of a vague term, but I assume that's more along the lines of corporate, higher level corporate finance as well. So basically, you know, only a quarter of what they do is for business and the rest is for homes. And I find that pretty disappointing. 28 % of the home loans that they do are for investment. and in the last six months it's been 32 % of the loans issued that were for investment loans and about a fifth of them are for interest only.

16:20So the bank has done well and the bank – and you just – as I say, you can't talk about the bank without talking about property because that is what the business is. It is a business of taking our deposits and, in fact, this is another worth a shout out when you go through the details here. Three-quarters of their funding now comes from deposits. It used to be about two-thirds. In fact, it used to be about 60%. Right, right, right. So Australians didn't have enough money deposited at the – so again, traditional model, we deposit our money, they lend it out. There's a net interest margin. That's the margin that they make, et cetera, et cetera.

16:54Well, it still turns out today that a quarter of their money comes from offshore wholesale markets. So the CBA will go into the international market. They'll say, here's some CBA bonds. You can buy them and we'll promise you a certain return on that. The rest comes from deposits. And deposits are great. because they're the lowest cost, right? You don't have to pay as much as you do to global bondholders there. So what am I saying here? I guess what I'm saying is that of all of that money that we managed to save as an excess for our labors and toils and risk-taking, we give to the bank and the bank turns around and gives it to someone to buy property, who then gets some equity, who then uses that to lend against, to borrow more property.

17:37And onwards and upwards it goes. anyway am i am i am i being a little too cynical with with all of that is is it is it not is it not like think of think of the uh potential um um wealth as a nation that we could build if we were actually taking that money and putting it into new businesses and factories and big nation building projects and not just another another you know massive complex of black roofs out in Western Sydney. It's just, I find it really depressing. Good to know our listeners in Western Sydney. Thank you for tuning in. Can I say, mate, I have ideological sympathy for your point.

18:18Pragmatically, my issue has always, always, always been with that,

18:25the idea that housing isn't productive, but somehow investing in businesses is productive when it's more than just, so startup businesses, growth capital, absolutely productive, right? Andrew wants to start strawman.com. I'm going to throw you a tenner. say mate pay me back 20 bucks in a couple years time you're saying great otherwise i'll be able to start straw man that's productive capital if i use it to go and buy you know shares in bhp that you already owned that's not really productive capital it's just swapping swapping assets one one for the other right there's no it's true there's no productive generation my only thing is i don't know if i think betty from let's say gray stands let's go with western sydney for fun um you know i'm not sure her money is necessarily safer in property via a bank i.e deposits being lent out by the banks for property owners.

19:03But I'm also not sure that there is necessarily a dearth of capital for really great ideas in Australia that somehow we would be able to turbocharge our economy if only 5 % of that money could be diverted from housing to business. I get the ideological approach of if we had the choice, would we as a country facilitate more great ideas? Yes, 100%, a million percent. I agree with you completely. Am I sure that Bob Smith shouldn't be putting money in the bank but should be putting money in shares or or or you know some sort of equity funded crowds crowd fund to start up to you know build the next big beer company or something when unless those things are more efficient than the ones they're replacing you know let's let's go with breweries for fun you and i start a brewery we crowd fund it someone says i'll give somebody those productive use guys over there instead of putting it in in housing fine and then someone says okay well i'll buy i'll buy a page and phillips beer rather than to his beer no value is actually really credit unless we do it better unless we're cheaper unless you think about the productivity of the economy, you know, realistically, the only productive use of that is, of that money is if it finds its way to something that ends up improving the productivity of the economy.

20:05Otherwise, it's just, you know, Page Brewery rather than Phillips Brewery rather than Two-Each Brewery rather than 4X Brewery and around and around we go. I just, I get the property isn't productive. Frankly, I'd rather people consume it actually rather than invest it somewhere else, all things considered, because at least then you'd get some meaningful value from right go and buy another bottle of wine that some vineyard maker can be paid for rather than shifting capital around between houses i get that um i just i i i kind of struggle with the ideologically correct but pragmatically questionable view of there's a more quotes productive use of the money because i think it ends up kind of just in the same vortex of you know buying an asset rather than a different asset i'm not sure it makes that much difference does it no no i think that actually that's an excellent and very fair point it is it is more just i think it is very telling when you look at the structure of our economy and it's it's very telling in terms of when we talk about wealth i mean these we throw words around but in this industry more than any other and they i think we all have sort of a a a certain level of understanding but they're kind of like very deep sort of concepts and this idea of the wealth creation that we have engineered through increasing we're basically the easter islanders that have all just built these big heads and decided they're worth a lot of money and then we're swapping them for each other there's actually not a lot going on there other than being fed ponzi is too strong a word but really they're really being fed by new money coming in at the bottom right and and and us all having to sort of convince ourselves that they're much higher multiples so i guess where it gets to me as a while i totally acknowledge your point where it gets to me as a more than just a ideological lament is that it actually points to a weakness and a fragility within our sector.

21:57I'm going to assume the other banks are pretty much the same in terms of their structure. But it means that, again, at some point, it's not unreasonable, again, if history and other economies or any guy, that sometimes we have a recession. Unemployment won't always be at this 50-year low of 3.5%. and property values could go down. I'm not talking about a 50 % crash like a Spain or a Greece or something like that, you know, although that does happen in the modern world. To the realm of rent, exactly, yeah. You know, but let's just assume that things go down 15%, right? Yeah. This is very, very bad news for the Commonwealth Bank.

22:38In fact, if you want to look at their, so again, we'll do some balance sheet analysis here. Let's look at their total assets. So their assets aren't tractors and things like that. They're loans. Yeah, that's right. So they've got all these promises from businesses and people. In theory, tied to assets in large amounts of cases. So I guess you could probably reclaim the tractor and try and pay off some of the loans. There is some security for that, but that's kind of a second, third order one. Yep. Actually, I'll give a shout out there because you reminded me of something. I think the average LVR loan to value ratio is 45 % across the portfolio.

23:10Oh, okay. So that's pretty good, right? Well, average or average. but yes, go on. This reason matters is our regular units. Well, I mean, it's not 80%, right? Yes, go on. In terms of if everyone, well, if everyone, we're screwed if everyone fails to pay their loan. We're making K's at that point. So let's - If a significant number of people, they can always sell the property from underneath. You know, there's a whole social dimension to that, which I certainly don't want to gloss over, but just we're speaking balance sheets here. But what I'm saying is, it was when you look at their assets and as carried on the balance sheet, they are promises from people and businesses that I'll pay you this much back over this timeframe.

23:44That's their assets. Their liabilities are all of the money that we've given them in our savings accounts. Their liabilities, yep. Yep, and bonds that they've issued and they've got to pay back. So the difference, so they've got$1.2 trillion in assets and$1.1 trillion in liabilities. So in other words here, so let's forget the business loans, Let's forget consumer finance. Let's forget all of the other activities of the bank. If they're, and I'm just saying if, right? I'm not saying when, I'm just saying if their home loan book was to fall by 12%, they're technically insolvent. In other words, now, the point of it is, is that when you have 70 % of your business all on bricks and mortar, all on, and not commercial, not industrial, just family homes.

24:39Residential housing, yep. Yeah, it doesn't need much before there is trouble. And then a recapitalization. Now, if the recapitalization comes at the expense of shareholders, I'm pretty happy with that because, you know, welcome to investing in business. There's risk. And if my business gets into trouble and I'm going to have to put my hand in my pocket and the other shareholders are going to have to like sort of make it whole or we decide to go bankrupt. And so that could absolutely happen. but because i would say that banks enjoy a very privileged position within our economy because they are so systemically and structurally important the generally what happens if things get really bad we saw this in the gfc uh in the us and other places is they again we we will bail them out even if you've got no shares there right even if you're not the person being paid 10 million dollars a year who's running the whole damn thing you're right whatever matt's pay is i don't forget something large um um and and for my mind it it is something to i feel as though it's it's a little bit scary now now while i've said that let let's let's be positive again for a second um the rate of provisions so so what a what a business does is when they feel as though that there might be some losses in the future they'll they'll put that in a different bucket just you know that to account for that.

26:00So they do these provisioning. They put some money aside to say, hey, when this goes bad, we've got the cash here ready to cover it effectively. So they've got this thing called TIA in banks, Trouble and Impaired Assets. That increased 11 % to$7.1 billion. So they look across all of their assets and go, ooh, it's about$7 billion there that are in trouble. We're not sure if we're going to get it paid back. There's a bunch that are past the 90-day arrears point. They're not being paid. so they've increased their provisions by 57 % to$6 billion. Now, it sounds like a lot. It's less than 1 % of the total, right?

26:32So I'm trying to be sort of shocking and then I'm going to try and sort of be realistic. In fact, those loans that are in arrears of more than 90 days are less than half a percent and that's less than what it was last year and the year before and the year before that. So that's okay. In the last, those that are 30 days in arrears has ticked up over the last year, but it's still less than 1%. So it seems to be in pretty good shape. But what we know is these things can move pretty quickly. Everyone's heard about the mortgage cliff. There was a couple of interesting charts I want to pull out here.

27:11One is the amount of fixed rate mortgages that are going to expire. So everyone's heard about this. So in the six months to the June 23, this is when this financial report was prepared, they've still got a third of mortgages are yet to experience higher rates on their books. So they are still carrying it like extraordinarily historically low things. In the six months that we are now in through to the end of 2023 will actually be the biggest amount of loans that roll off. And people would be people in there that are literally going to be paying three or four times their weekly amount. in repayments.

27:50In fact, even in the six months after that, so from the start of 2024 to June 30, 2024, there'll be more rolling over than have rolled over in the first six months of this year. In other words, there's, and again, I'm not, I know I'm really not saying doom and gloom. I'm just sort of saying that it's going to be a tricky environment for them. And they themselves are worried enough to increase their provisions and put that up to$6 billion, increase it by 57 % or so. And my point is, is that when the balance sheet is so finely structured like that, it just, I would be more comfortable if they had more diverse operations.

28:29I'd be more comfortable despite their improving capital position that they would improve it even more. Because what history has sort of told us is that there's a very interesting game theory at play here, which is really well described as moral hazard, which is, I just need to keep lending, no matter what the consequences, because everyone else is. And if worse comes to worse, I'm going to get bailed out anyway. And that is something that is going to impact all of us in a very bad way if it happens. And if it meant for me that the bank was making lower profitability, but much, much, much more resilient, then I'd be a little bit more sanguine about all of this.

29:11But I feel as though, what is it, 30-odd years now without a recession? Every single person in the country up to the eyeballs in debt. We're now in Sydney at 13 times average incomes, household incomes here. It's just sort of like we have painted ourselves into a corner where the term too big to fail comes to mind for me in terms of the banks and in terms of the property market. in general. And it's just going to be a very interesting, I don't know, three, five, 10-year period as to how that returns to a situation where any productivity that we do manage to sort of generate as an economy, we aren't just going into servicing these extraordinarily high levels of debt, which underpin the very largest companies within our economy.

30:03and i think that's absolutely spot on mate i think uh and and for what it was with my comments around where the money is best spent you know the old productive enterprise thing the one thing that you one point you made almost tangentially was it's we're using debt to do it rather than equity investments and so there's a very big difference there in terms of how that money is being used and i don't know i can't my memory's fading me mate i'm getting old i can't remember talking about this last week but the the the article about i think it was ross gittin saying you know we The four-hour work week we envision in the 1960s, we could actually be doing right now should we choose.

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30:36Our standard of living has improved so much that we could be living a very, very, very comfortable life on four hours, eight hours, whatever it is, a week of work if our lifestyles hadn't inflated to the same degree that they have. And that includes things like competing against each other for housing. It's the main thing. It's the elephant in the room. Anyone listening to this knows, take away your mortgage repayment or your rent and how much richer are you? How much less do you have to work when you take that away? Exactly. So you think it's a whole different story. Quick cross promo. I'm not sure when it's coming out, but I interviewed Dave Gower from Strong Money Australia.

31:13He's written a book. Oh, yeah. One of the fire guys, financially independent, retire early. And he just kind of talks about this. And it's just really, really important, right? And I think we all suffer from it. I certainly suffer from it. Everyone does. but you know he's a pretty straight shooter to the point of the point of you know uh putting some people's nose out of you know saying look don't don't tell me you need these things you can choose them that's fine but let's be honest that you're actually choosing those things rather than actually needing them and writ large that's kind of the story right if housing was half the price if it had never let's not talk about a 50 fall because that has its own calamities but if it never risen this quickly or this far we would have the same incomes relatively other than maybe some real estate agents and we can argue about whether or not they deserve those incomes they Thank you.

31:56I was trying to keep talking so you didn't get in, but I had to take a breath. Yeah, it's just interesting. Hey, man, let's move on because we can - Can I call that one? There's 126 pages of their presentation, right? So there's a lot in there. The other thing that really stood out to me was they - and the title of the slide was something like The Pain is Not Evenly Felt. And what they did is they broke down home loan balances and deposit balances, changes in savings, changes in spending by age cohort, 18 to 24, 25 to 34, all the way up. And this is a point that you and I have made many times on the pod, but I'm, bears repeating because it's always nice when there's a bit of a data point that suggests your opinion is at least directionally correct.

32:39And that is that if you're under 44, particularly if you're under 35, you're feeling all of the pain of higher interest rates. If you're a generation that was born after World War II, life has never been better. Life has never been, despite all of the interest rate increases. In fact, your savings have increased. You're spending more than you ever have spent before because you've got all this excess money through interest and everything else. It is a bifurcated economy that we have created for ourselves. And it's no conspiracy here, but it is worth pointing out again that below a certain age, you're working your guts out just to put a roof over your head.

33:28And Philip Lowe and the central bank are making life extraordinarily difficult for you. And at the other end, it's just sort of like life's never been better, despite all the gloomy headlines, despite interest rates going all the way up. And it's just, I don't know what you do about that, but it's just it's a very real issue and even the Commonwealth Bank is calling it up very clearly in the hard data that they have I think that's true yes I have said before I think this is generational you know 30 years ago it was the boomers who were paying everything and their parents weren't paying anything and it tends to roll over but as we said many many times there are better ways to do it Motley Fool Money for more subscribe to the free newsletter at fool.com.au forward slash listener

34:17Let's jump out of the frying pan to the fire, mate. Just for the sheer so-and-so giggles, as Austin Powers would have said, can I throw three bits of just stupid public policy pronouncements at you? I think it's stupid. You may disagree. You're only going to limit it to three? Well, no, it's three just today or yesterday and today. In the last couple of days, we have had the proposal for a so-called tycoon tax on bank profits because they're apparently too big. We've just talked about that. We've had the Australian Center for Independent Studies, God love them, have decided that because the federal government sucks so much, federal government's plural, at running the national balance sheet of the income statement, so we've got this massive debt and growing deficits, instead of fixing that, what we should do is liquidate the future fund to pay off the debt.

35:03So don't worry about the fact that we just can't actually keep our current house in order. Oh, what? Yeah. And then the transport minister has said, you know what? Let's keep Qatar Airlines out of Australia. there. I'm sure it'll cost$500 million in lost opportunity, but we'll save some jobs. Oh, and we'll look after our mates at Qantas, who we've already bailed out for free. And we're just going to limit the competition that they... Well, we did. We bailed them out for free. I was going to say, when you say we, it was a different brand of we at the time. Both parties have been complicit in this one, because, you know, it was the former LNP government who threw the money no strings attached, and Labor are happily doing this.

35:38I just... I don't even know where to start, mate. Let's start with tycoon tax for fun um yeah i just you know what i just think it's let's say the tycoon tax i gotta love the god love the greens uh for a party that that wants to try and bring something or keep the bastards honest stuff they do a very very very good line in populist rubbish uh from rental freezes to uh the tycoon tax on super profits you know i i can't really honestly tell whether they believe it whether it's just some uneducated or undereducated people with some brain fart ideas or whether just straight up populism hey this will appeal to the people you just talked about people who feel like they're being screwed let's let's get back by screwing someone else that might get us a couple of votes i don't know which of those things is true it's not just the greens by the way um in italy they've introduced a 40 tycoon tax on banks i just for the life of me mate i just don't know how you measure how much is too much we've already got a scale which says if you make it all you pay 30 of it and the more money you make the more tax you pay i just i don't know how people think you can reasonably apply a progressive taxation system to an entity where individually sure i can only work i only live where many hours a week was 168 hours a week um i can only work so many of those so i get paid more than a certain amount for that work you know it's you can you can right size the income and then right size a progressive tax trying to trying to somehow put a sort of windfall tax tycoon tax on on profits i find that just bananas am i am i completely wrong no i mean look their heart's in the right place and people i mean again this is really complex stuff i'll spend my entire career up to my eyeballs in this i still trying to figure it out properly you know it's it's so it's so diabolically complex and i think people are right to sort of feel there's an injustice that's out there you know it feels wrong this explains the rise of trump and others totally 100 do you know what i mean so it's like they're picking up on that as politicians do of any stripe you know and they're and they feel as though it's got some currency.

37:36And I do think that the heart's in the right place, but I do think it also lacks a fundamental understanding of how the economy works and how finance works and all the rest of it. So, yeah, if there was blatant rent-seeking and monopolistic behavior and all of that, that's something that we absolutely need to address. If it's just like this number is too high and you don't like it and you want to change progressive rates across the economy, that's a conversation we could have too, actually, in fact. But when it's just singling out particular industries, I don't feel as though it's going to help.

38:18Actually, I get, by the way, making the banks pay for the government guarantee. You kind of inferred that or talked toward that a little bit before talking about being bailed out. There's no explicit government guarantee. I have no issue saying to the banks, hey you're going to pay us a percentage of your deposits for that benefit i mean that that's that's insurance premium 101 or if we're going to provide the insurance you pay the premiums that's that's a whole different story um and as i said you divide the bank into 100 pieces no there's no tax paid just because you can conglomerate it to one entity it's madness if you and i owned all of 100 different businesses all make a million dollars we pay no tax if we said well actually there's one business with 100 million dollars let's throw a tycoon tax on top The only difference is the structure.

38:57It just makes no sense whatsoever. It's, as you say, maybe the right motivation, maybe the right sense. A massive dose of populism, in my opinion. Just ridiculous. Let's go to the Future Fund then. God, I love the Centre for Independent Studies. They're saying, look, there's a lot of government debt. What we should do, the, listen to this maths, by the way, return for the future on 7.1%. Cost of government debt, 4.1%. So 7.1 return, 4.1 % cost. If we liquidated the fund, we'd make that 4.1 % back, let's liquidate it and pay off some of the debt. Now, frankly, if you could borrow at four and get a 7 % return, the sheer financial madness of that concept of saying, let's forego the 7 % for the 4%, we've talked so many times about the idea of, you know, paying off the mortgage.

39:44We get lots of questions about paying off the mortgage versus investing. This is a really simple one. The government has unlimited taxation capabilities and yet it's still only paying 4%. It's got 7 % in the future fund. In other words, it's making a 3 % margin and these guys are saying, actually, we don't want the margin. We want to get rid of the entire future fund. Have some of the debt. No requirement for the government to not run up any more debt, by the way. All you do is give me a free kick. It's literally the case of you're being bequeathed some assets by your parents. You spend a little bit too much one year.

40:11The credit card gets 20 grand. It's like, you know what? Let's sell the asset. Let's sell some shares to pay off the credit card and then keep spending the way we were previously. it is just like what am i missing mate like i don't even and this is like a professional think tank a short of ideology driving this i can't for the life of me think of a single positive reason to do what they suggest what am i missing no no you're not missing anything it's it's it's insanity it's absolute intent i mean it kind of it's in the name that kind of gives it away it's called a future fund it's not called a now fund you know exactly you know that's the line that's the tweet as the cool that's the tweet well it's just it is it's very short-term thinking i mean it it's like uh i i don't know i'm trying to think of an example but why don't we structurally fix the issue that's causing the debt to rise in the first place right before you probably think about selling an asset like if you had to give someone a free kick at least make them justify like you know if i give you this money it's like you kept money from my dad if i give you this hundred the ground will you will you put on the mortgage oh no no i'm going to use some of it to go over so put on the mortgage yeah i'm going to redraw for the mortgage uh every year and i'm going to put it over so trip well i'm not giving that money for that that's this is for the asset yeah but i want to spend anyway mom and dad's like well i'm probably not going to help you then you're stealing from the future and you really that's the that's the annoying thing yep you're stealing and from our kids and our kids kids and like this could be again i think it's such a we have as a country missed such an opportunity with the mining boom with china originally the you know, mining boom, Mark one and two, just an amazing opportunity to do what the Norwegians have done and build this huge sovereign wealth fund that will help pay for the roads, the hospitals, the schools, and all the great things that we want.

41:52Maybe even a sub or two or a helicopter, you know, they might come in handy as well, but wouldn't it be great to have this big portfolio that generates all this income each year? Yeah. That means that we pay less tax because we've like, that sounds really great. That sounds really great. And, you know, everyone listening to this gets it, right? Like we're all investing because we want a pool of assets that will grow in value and generate an income. That's what we want, right? Because when we've got that, we don't have to work. I don't know. Eventually, that's the brilliance of it. But I could go into my ComSec account now.

42:28I could sell my entire portfolio. I could have a really great year. And then I'd be stuffed, right? I'm deliberately delaying gratification for more gratification over time. Exactly. And, yeah, so, look, I've got no words. If they don't get it or if anyone listening to this doesn't get it, I don't know where to even begin. It just seems so obvious. Yes. Yes. I really can't even work it out. Anyway, I guess think tanks for a reason. hey um qatar airlines let's i know you've already had a bit of a swipe at this one um i get governments want to save jobs i i promise you i get it and i don't want anyone in the airlines who could lose a job there's some version of quantist stuff listening now saying hey phillips shut up i might lose my job here just just lay off a bit will you i get it i really really do even even aside from the cynical kind of you know of course they're helping their mates at quantist let's assume that's not even true now maybe that's a very generous assumption let's assume it's not true.

43:31$500 million is the national saving on one hand, or there's a few jobs on the other. Now, when I say a few, it might be a hundred, it might be a thousand, it might be 5 ,000 for all I know. The maths of that, the maths of that is just ludicrous. The idea that we would willingly, well, maybe I shouldn't be surprised, that a government would willingly put a$500 million bill on the Australian economy, Australian people, to save a few jobs. If this sounds like the car industry to you welcome to the game the the bloody winner you're picking winners and trying to protect jobs by over subsidizing and this is not a direct subsidy this is indirect subsidy government limiting competition means that the incumbents make more money and they guess who pays that money we do um it is just it i i don't know mate i you know i i i tweeted this morning why do we have to choose between two extreme ideologies when we're when we're voting you know So last time around, the government wanted to, well, a lot of things wrong.

44:27Spending your super and giving billion dollars of free money, no strings attached money to Qantas, as you mentioned, and all that going on on one hand. We go, okay, we'll give the other mob a go. And they're saying, well, who cares if it costs you all$500 million more? At least we'll save a few jobs and we'll look good. And we'll try and subvert the idea of competition and capitalism because it makes us feel better. I just want some pragmatists, mate. I just want somebody who's actually got a bit of an idea to say, you lot stop your whinging stop your carry on stop your you know posturing and and populism let's actually do some things properly is there any justification for a for you know save a few jobs to cost the rest of us five and a million bucks nope absolutely not and it's it sounds heartless but but i mean you know it's you've you've got to look at thing let's take things to its logical conclusion and if that was the only north star that we had as a society we'd still have blacksmiths on every corner and barrel makers you know it's sort of like we don't now because we just don't need them anymore and it's a tragedy for the for the blacksmiths you know but it's like we just i'm sorry guys the world has moved on and it's just it i've actually just so happens actually i still got the cba presentation open they've got 53 000 employees yeah right so we're going to go through all this expense and effort to what might amount to probably on a net basis yeah hundreds of jobs like it's nothing yeah absolutely drop in the ocean kind of thing i've often said too it's the same with um energy transition and the rest of it i don't think we throw people on the on the scrappy but that's i'm totally not for that but if we're going to spend some money let's do it on retraining or redundancy packages or something which just sort of helps us do what we need to do and make sure that we protect the people who are in the firing line who sort of you know it's easy to sort of say hey you got to take one for the team right because it's not me, so that's okay.

46:16But you need to take one for the team. That's a pretty brutal kind of thing. That's it, right? And the government are here of like, let's just, let's pick up the jobs so we can say we're saving some jobs because we're a workers' party. And those very workers and their colleagues, by the way, who are going to go to the Gold Coast for a holiday with their three kids to Disney, what was it? Went wild, whatever the thing is. Dream wild, thank you. They're going to pay it, but they won't think they're paying it. So I get to stand on the podium and say, look how many jobs I saved because I'm the workers' party.

46:40I'm going to cost all those workers a fortune in higher airfares because it makes me just, I dust. I don't know, mate. I'm an optimist 99 % of the time. The other 1 % of the time, I just despair. Those three things, the bloody, you know, the future from the tycoon text, Katara Island. I don't know. I just don't know what is going on. Yeah. Yeah. I think, you know, I think you can just, whether it's that and the gazillion other things that are sort of wrong out there, I come back to the idea here that, again, And it's not the cabal of lizard people running the world that, that are sort of having a conspiracy here.

47:16That's what you think. Maybe it is, but I feel as though you've just got everyone sort of playing there. Everyone's doing their own thing. Right. And there's a politician out there somewhere is like, I really want to get elected. And if I say this, it'll work. And you're saying it to people who are just desperately trying to get on with life and pay the mortgage and the rest of it. And that sort of sounds good. Again, it's always back to this. there's the there's the easy but wrong answer and the complicated but right answer and the person out there on the street corner giving the nuanced complex subtle take on things just like i don't have time for you mate what this guy this this democracy tends to who was it was plato or someone he said he tends to fail eventually because we all tend to vote for our our own hip pocket so we all vote from can everyone pay me money yeah exactly and we're all me at the same time as yeah not them Yeah, we enter the sort of late stage capitalism phase of these 400-year cycles where it's just sort of like where the easy thing is the thing that gets done, even though it's really, really wrong.

48:21And people with a bit more perspective, you know, can sort of say, hey, this is going to end pretty badly. It's like, I don't have time to listen or understand that argument. And all I know is, is that this person is going to tax me less and give me more money in my pocket. And I'm going to go for that. Thank you very much. And, and, you know, again, when you're out there and you're thinking there is, there is that sense of, gosh, things are really crappy and not as good as they used to be. And here's someone going to, oh, they're looking after the little guy. I like that. I'm for that. Yes, exactly.

48:53Who can be, and I don't even, I don't begrudge those people because again, the heart is in the right place. They're looking at someone who's downtrodden, who's in a difficult situation, and they're going, yes, the government needs, I'm glad that we've now got a government that's a bit more caring and is taking care of those people. So it's hard to be critical of that view, but it's just if you think about it a little bit more, it's not like we shouldn't help them. We can help people in more productive ways without introducing these massive inefficiencies and frankly just massive waste into the system.

49:24Yeah, I don't know. the other one mate the other special is the pharmacy guild stuff have you seen that one this morning oh no hit me what is it well it's not new news but they're back out trying to do it so the idea that government's trying to say to pharmacists you know what we previously said you can only dispense a month's worth of drugs at a time and that means that if you had a regular chronic issue you had to go back to the doctor get a script go back to the pharmacy all this stuff we're going to tell you something really really really simple we're just going to say hey you can have two months at a time that's it that's the change just get two packets rather than one the pharmacy guild have said that will cost them get this 20 000 jobs now i'm gonna i'm gonna i'm gonna suggest without naming individuals or talking about individuals what they say because i won't get standard as an organization that is about as fine a grade of bs as you're going to find and if it does cost them 20 000 jobs you know it's gonna be 20 000 dispensing jobs it's gonna be 20 000 jobs for people who are working in the retail arms where they actually make their money your pharmacies used to be a dispensing outfit they're now retailers with the dispensary at the back i know that i used to work in for blackness i used to work in this industry right i know how this works and the pharmacy guild so basically what's happened is they've come out big campaign against the government turns out now and again let's be i don't want to be political but i'll be policy for a sec um the lnp have decided they're gonna they're gonna repeal this 60-day dispensing if they if they get in the government for reasons that defy anybody's understanding other than the pharmacy guild is a very very powerful political lobby group so So I've just confirmed that we'll never, ever have pharmacy advertising on this podcast because no pharmacist is going to love me enough after that.

50:58And that's OK. That's life. We don't play this for the ads. Mate, I don't even know. I don't know. I don't know. I'm feeling I'm feeling not even cynical, just despairing this morning at the lack of genuine public interest policy that passes in Australia many days. Yeah. I mean, it comes back to good old-fashioned self-interest and those that have the ability to argue for that in pretty clever kind of ways and politicians that are dumb or cynical enough to sort of buy into it and the rest of us that are too distracted to do anything but go along with it. Yeah, probably right. It's just there are a lot of things that you look at it.

51:39So I've got some kids and they're getting older. So my boy's going to be 14 this year and he's just getting to that stage. Yeah, I don't know. Like how quick has that gone, right? So, and he's just asking questions. And so, you know, he's old man, we'll be driving somewhere and I'll be screaming at the radio in the news. He goes, why is it like that? It's like, I honestly don't know how to explain it to you. And then you try and he goes, oh, but wouldn't that mean this? And doesn't, how does that work? And it's just like, he's really struggling to wrap his head around it. And I think there's an innocence of a child and also just like a clean slate as a brain.

52:20You can look at these things in a fairly clear way and just go, yeah, that just seems really unfair or it doesn't make sense. And I, as someone who should know better, at least to be a little wiser in the ways of the world, I can't explain a lot of these things without just being hypercynical. and and and i don't know am i am i wrong is there something that i'm missing here with all this stuff where someone could say no no no it's really these lobbyists actually play a really important role in our society and they have led to better outcomes for everyone and like you know i don't i i don't know i shrug my shoulders don't know don't know let's um let's let's finish mate on a high.

53:00Let's finish with, speaking of high, pun intended, both in terms of an emotional high, a mental high, and a share price high. I am, of course, talking about everyone's favorite investor, Uncle Warren, Uncle Warren Buffett, and the company he runs, Berkshire Hathaway, which hit an all-time high on, what was that, was Tuesday this week? Now, I own Berkshire Hathaway. I don't think anyone needs to know that, but I will say it again. If you're a new listener or you've forgotten, you've got amnesia for some reason, I am a very happy Berkshire shareholder. Now, for the record, I wasn't going to mention it.

53:31You said, oh, we've got to mention Berkshire. So I am going to claim, oh, I didn't disagree with you, but I am going to claim a little bit of innocence here. It was your suggestion to cover. Matt, I'm going to, I'll throw it to you instead. Just say, you said we've got to mention Berkshire. Now, all-time highs happen semi-regularly on the market. It's more common than not, because that's what happens with CBA. Profits go up, company share prices tend to go up. Markets tend to go up over time. Why is it worth mentioning Berkshire's all-time high? I think it's worth mentioning because, again, perspective and context is really valuable when it comes to looking at business performance and investment returns and the rest of it.

54:11We were going to talk about WeWork, and I don't want to divert into that. We've run out of time. But I'll make the point here that WeWork, so this is where you would go in and you'd rent an office space or whatever, and it was a new business model, and it took the world by storm. And the punchline here is they're on death's door, right? They're about to go out of business. The stock's down 99 % from its high. Bonds are worthless. They're in huge trouble. They've effectively said they may not be able to continue. So we're not even speculating. The company's pretty much said, look, this may not end well.

54:41Yeah. And you know, oh, gosh, there's so much to say. But basically, when the unit economics don't stack up, no amount of scale is going to really sort of save you here. That's right. But the reason I mention that is that for many, many years, stocks like WeWork and others were just going to the moon. And boring old Charlie and Warren there in Omaha, old men, they don't even have computers on their desk, idiots. Buying their own railways and all this stuff. It's just sort of like the most ho-hum boring thing. And you get the usual, oh, they've lost it. They don't know what they're doing anymore.

55:22So it's worth mentioning because we're old enough to have gone through. It's not our first rodeo, right, as I'm fond of saying. We have seen the headlines. We've seen this play out again and again and again and again. Yeah, yeah, yeah. Yep. And it was just like, gosh, it wasn't that long ago when Berkshire stock, I want to say, just try and find it here. It was actually about last year. year it was 528 this is the a series shares uh it felt it felt 25 september last year that's it 25 so from 358 dollars for the b shares we've got the b's here 20 into march 2020 uh march was march 22 sorry by june it was 268 so 358 down 268 in the space of three months yep and and then and again this you can zoom out on that chart this happens all that this is normal right but So why it's noteworthy is that for a company that started out as a textile mill and became a global conglomerate, has seen a thousand different recessions, have seen a thousand different Federal Reserve chairmen come and go, have seen a thousand different – the economy today is – I mean, it's so vastly different to what it was even 20 years ago.

56:34And these are people that – Yeah, that's right. I'm sure Warren has a smartphone, but I bet you he just uses it to play bridge and get text messages. And yet they have continued, this all-time record high has been underpinned, not by hype and not by fad and fashion, has been underpinned by consistently rising earnings, per share earnings. Which shouldn't be a strange concept, but there you go. Who'd have thunk it, right? Fundamentals matter. Turns out you make some money, people will pay more for your shares. Eventually. This is the whole, this is like just to quote his mentor, you know, the long term, the short term, the market is a voting machine and the long term, it's a weighing machine.

57:18And the weight of earnings that Berkshire has consistently delivered. And the other thing, just to go a little bit full circle on what we were talking about before with CBA, they have done it with a balance sheet that could only be described as a fortress balance sheet. Berkshire is of a scale now that when the largest economy in the world gets in trouble, Washington picks up the phone to Warren and says, can you help out? Literally, like literally that is true, right? So what am I saying? Am I saying run out and buy Berkshire? No, because we don't give advice on this. But I am sort of saying that you could have bought this at any previous all-time record high at any kind of point where things look really dodgy, where, you know, and at some point they're going to drop off the perch and I'm sure that'll actually be a wonderful buying opportunity.

58:06But he has so structured this thing to be as anti-fragile as you can possibly imagine. And has relentlessly focused on not – they don't have an investor relations arm. You know, go to the Berkshire website. It was built in 1998. It is the most ditty website that you've ever seen. It is my favorite website ever. It's brilliant. It's brilliant. It's embarrassingly bad. Yeah, correct. And yet all of their time is focused on finding compounding machines. Businesses that can take in capital, spit out more capital, and then they can reinvest across the conglomerate. And it is a master class in what this whole game is about.

58:49And it just deserves, it bears repeating and it deserves mentioning. A couple of things, one of my favorite things, at the bottom of that website, it says, just listen to this. if you have any comments about our web page you can write us at the address shown above however due to the limited number of personnel in our corporate office we are unable to provide a direct response don't email us don't call us write to us we're not going to get back to you that's brilliant and by the way Warren and Charles I think Warren's salary is like 100k or something yep you know it has been for as long as he's been doing it I think or almost yep and it's just it's it's there is so much to to to it is it is so unusual and there's this really famous interview with charlie munger gave years ago i forget who it was but they're sort of talking about their track record and maybe it was becky quick or someone's going well how come no one else does it like that's right aren't you worried that someone else will get exactly yeah yeah it's like it's too simple for everyone to follow people expect complexity to be far to lead to far superior and they look for it they actively look i'll berkshire too easy there must be reasons why it won't keep going i'll go and try and find something much more difficult to invest in instead yep so what do you so i just really quickly mate this is radio so it's hard but the uh berkshire shares in 1998 25 years ago 52 dollars is all us dollars i'm not going to convert it 52 bucks right dot com mania takes off goes nuts by march 2000 the shares have fallen from 52 odd to 29 dollars because people went actually i'm gonna buy those tech stocks instead did it get that low it got that low this is split adjusted this is b class by split adjusted so oh okay you got it they're all they're all split us so 51 down to 20 was it 29 bucks right 2000 then gets up to $93 in 07.

1:00:42Depths of the GFC, $46. Effectively halving, right? This is Berkshire Hathaway. And by the way, this is not hindsight bias. Firstly, I owned the shares then. Secondly, this is not, Buffett had been running this thing for 40 years by then. This is not, this is not flesh in the pan. Oh, maybe it's a brand new company. What if it doesn't survive tomorrow? This is Berkshire, right? Gets up to, in 2020, $226. January 2020, what happens next? $226. Falls to $169. It's still Berkshire. What are you people doing? Gets up to, as I said,$350 in April 2022. Falls to $200 and whatever it was,$268. Here's the thing, right?

1:01:21So a couple of things. When those shares fall, everybody looks around trying to find a reason for it. Why are the shares falling? What's going on? What should I do now? Maybe it's time to sell. Buffett lost his thing. The human tendency to overstate the short term, both forwards and backwards yeah is just phenomenal right and we've and fear is more important than grace when things fall we think what if someone knows them what if what if it's right maybe what if this time it's a problem and you kind of think oh man there's just so much there's so much in that that um i think you really really want to want to kind of call out uh now if actually shares could crash again again as ram said i own shares i think you should buy shares but we're not giving you formal advice here this is not what it's about um but i and you know with warren diet yes unfortunately i choose to believe he's immortal, but I dare say he's probably not.

1:02:08So I may be wrong on that one. Now, by the way, the board's going to have probably authorization to repurchase shares. And if the shares fall, maybe they'll be repurchased or maybe there'll be a buying opportunity. In either case, in 10 years time, when we look back again, as it's been over the last 55 years of Berkshire's life, what are the odds that that's a permanently lower price? Not very high in my opinion. So you know what else is interesting, mate? I'm going to it's late in the podcast but if you're still here I'll probably mention it on Sunday because I want to but the Vanguard index chart was out this week I don't know if you saw it was released on Wednesday oh right the single best most important picture in finance jump on one of my socials I posted about it this week in all of the socials you can find a copy there go to Vanguard index chart find it there jump on the full website you'll find it there not to give myself a wrap or get traffic I'm just saying go and look at it because and you know so I posted it during the week and I got the whole, yeah, but what if dot, dot, dot?

1:03:03Well, what if it's just money printing? What if it's just this? What if it's just that? What if the, and it's kind of one of those things where people have a really interesting, I don't know what it is, mate. You might have a thought on this and I don't want to take too long with it, but the idea of like, hey, let me tell you about the last hundred and something years of compound returns in the stock market. Someone's going to say, yeah, but what if it's over now? And I just, I find that fascinating. I don't mean it critically. I just find it genuinely fascinating where someone says, you've shown me 120 years of history.

1:03:29i'm going to choose to believe that maybe possibly today is the day that history stops being relevant and it's not that people should be shouldn't be questioning something you shouldn't always maybe things do change i think there is always a first time for everything they do change there are reasons or people say what about japan i'm like yeah japan had a crap 30 years what about every other economy that didn't like it just the ability to pick the one you know the exception that proves the rule right and say what is that exception it's like statistically probabilistically I just don't get it. What am I missing?

1:04:01You're just missing human nature, I think. What is it about human nature that does that to us? That's what it can't work out. Well, I think about this probably too much, but I think we have no recognition of how unusual our lives are. If you were to get a piece of string and pull it out 100 meters and say this is human history since we, you know, biologically we're sort of became homo sapiens same same cognitive abilities or every every everything like that it's really only in the last few inches that we've lived in this modern modern age and for the most part of our evolution it was like you know i'm just trying to get through the day without being eaten by a saber-tooth tiger and eat some poison berries or something i just i the ability to think long term is is unnatural for us and so someone like buffett who's a freak in the very real sense of the term, who is capable of doing, is unusual.

1:04:59It's not to be critical. I think all of us struggle. That immediate gratification is always going to be very difficult to sort of overcome. And things always look scary and it always feels too late. And, you know, it's just very difficult to wrap your mind around that you'll hopefully, well, you'll either be dead or you'll be around here in five and 10 years time. And the other thing that we've got no ability to do easily without using a higher order sort of cognitive functions is to understand what compounding is. You know, you can fold a piece of paper 42, well, you actually, you can't. No. But if you could, if you could fold a piece of paper 42 times, you'd get to the moon, right?

1:05:48Like that's compounding for you, you know? And so I think people look at it and go, oh, it's too hard or whatever. And I need it to be bigger. And just like, you know, shut up, right? Sit down, buy some good quality company shares. Sometimes you'll be up, sometimes you'll be down. You know, it'll probably average up a single, let's call it eight, 9%, maybe if you're lucky, 10, 11 % per annum. And in a decade or so, you'll wake up and you'll just be insanely wealthy. That's it, right? That is it. That's literally it. Exactly. And you don't need to be super smart. It's like, oh, I can't pick stocks.

1:06:23I don't know how to. It's like, okay, fine. Buy an ETF. I don't know. It's like, how easy do we have to make it for you here? That is so true. And we can't, you can't compete. It's like the politicians before us. Like, try building a business based on that, right? Like, you can't do that. I'm going to create a hedge fund, which is going to promise you 20 % returns. With a truckload of risk that maybe you'll lose everything. But have a go anyway. Again, who's lining up? No one's coming to my shop. Everyone's going to, you know, Fast Tony over there who's offering you instant riches. It will always, I don't care.

1:06:56We will have robot assistants and AI, you know, products out there. We will still be doing this because we are still human and that is the answer. And it's why we have said and every famous investor has said, it's not a secret. It's just something that you need to internalize. You don't have to be super smart to do this stuff. You just have to have patience, discipline, and fortitude. You've got those kinds of things. Just do the truly unremarkable stuff, but just doing it consistently for a long period of time. And my favorite analogy, I think, is with health and fitness. I'm not a big health.

1:07:33I should be healthier and fitter than I am. But it's not complicated, man. Cut out the Big Macs, right? Stop drinking the fizzy drink. Maybe go for a bit. And you know what? a week later your life is not going to be any different at all you know six months later to a year later you've probably added 10 15 quality years to your life is that substantial right and it's not hard it's you don't need a personal trainer you don't need a special meal kits you don't need to buy protein at the gym you know just it's so basic it's so basic but it it again we we were evolved when we came across to the bush full of lovely succulent berries we gorged ourselves on it because we didn't know when we were going to find it again you know so to to to act against that is is very hard but if if if i can finish this rant with anything it's just to keep that in mind and keep in mind that you yourself are your own worst enemy and you need to set systems in place which is really is just like i'm going to put this much aside each month and when it gets to a certain amount i'm going to put it into an etf and that's what i'm going to do and that's a got that's sacrosanct that i'm never going to change that you know just keep doing it i've got I've got a friend who's really good at it, but then every two, three years he notices he's got a big pile of money there and he goes on holidays.

1:08:47And I'm like, oh, dude, what are you doing? And we wonder why superannuation is important. Do you know what I mean? I mean, literally, that is – I've often said, man, this is – I've got to do this better, but I think my current version of it is successful investing is literally defined as the ability to overcome our evolutionary impulses. Yep, that's it. I literally think that's – It's a superpower. It's not a technical definition, but it really is. It is. Yeah. Anyway. Hey, we've gone well and truly over time. Will you come back on Sunday and answer some questions? Absolutely. What are you laughing for?

1:09:19We always go over time? Well, yeah, that and also answer some questions, yeah. And then there's probably like, go off on a massive tangent and answer about my favorite topics again. Probably that, you know, but I'm here for both of it. Come back for the Sunday tangent bag at eight o 'clock or so Eastern Standard Time. And we will be back in your ears with the Motley Fool Money Podcast. You can hit us up on all socials. I'll give those out on Sunday. You probably know them already. And in the meantime, enjoy the first half of your weekend and Fool on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned.

1:09:55General 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.

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– CBA makes how much?

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