How we invest. June 27, 2025

26:18And fortunately, you have the luxury of choice. I really don't need, me personally, I think I don't need anything more than 20 stocks in a portfolio. I'm more than happy with 10, frankly. And there's 2 ,200 and something on the ASX. So I can afford to be really fussy. But the very first filter I kind of really have is like, can I get to that answer to the question I just posed before? What do you really do? And if I can't do that, and I can't, I'm going to say at least 70%, probably higher. It's just like too hard pile. I think they've stopped having me on Ausbiz because I'm pretty much convinced that it's because they just want to, bloody hell, mate, just tell me, buy, hold, or sell.

27:02And I'm like, well, it depends. I don't really understand this. I need to understand that better. And it's a really frustrating answer, right? But it's kind of the best answer, I would say, right? Because I can either, I can have this false hubris or I can be honest. And as I said at the beginning, like the easiest person to fool is yourself, right? Because you want to be spot. And we feel as though, you know, it's like when you're at the Olympics and you're on the balance beam, right? There are extra points for degree of difficulty. In investing, it's not, right? You can invest in the dumbest, simplest business, or you can invest in the most complicated business, and you might get a 10 % average return out of both of them.

27:45Which was the better one? It was clearly the one that was easier. is that there is no added bonus. There is no added return because you decided that you were going to invest in this really weird boutique financial services company that's doing, I don't know, something with stable coins and they've got this relationship. And it's very hard, right? And particularly if you're not familiar with that industry, it's sort of like, I just don't get what you do. So I've really got to understand that basic, basic, basic thing. And life's too short. Life's too short to really think, well, I don't understand it, but I'm going to spend the next six weeks doing a massive deep dive into it to try and understand.

28:27If you want to do that, you can. I think there's something satisfying in learning about anything kind of new. But keep it simple. Keep it simple. And if you're really not getting a good sense of something, chuck it in the bin and move on. There is always something else around the corner.

28:48forward slash listener.

28:52The next thing I'm going to talk about is quality.

28:57I obsess over quality businesses where I can find. Now, you don't always get everything. The other thing about investing, you don't always get everything in your checklist. Like, just do that up front, actually. Perfect is the enemy of the good. Right, and someone's going to say quality. Someone's going to say, well, that's not as high quality as this for that reason, or that's not this. So I will say I obsess over quality, and then I will say, well, some of the companies I own aren't necessarily quality the way that everything's got hairs on it right so but but i think for me it's if here's the other thing we talked about long term before right and you have to if you're going to be a long-term investor if you're going to hold companies for the long term inherent in that in that intention is to have businesses that can and are likely to perform for an extended period of time because you know if you're if you're if you're a value investor and good luck to you, I'm neither because I'm either a value or a growth investor.

29:47If you're a value investor, you're looking for $0.80, right? The problem is when you get $0.80, even if you win, it goes to$0.93,$0.95, so it's like, well, okay, I've done what else I'm going to do. I'll sell now and look for something else. Now, that's a nice return still, but it means you have to keep finding more and more and more things every time, every time you look good, find something else, find something else, sell that, sell that, sell that, buy something else, sell that, sell that, sell that. You just pulled a rabbit out of the hat, right? Now do it again. Now do it again. well, right?

30:11So I'm not saying you can't do it. I'm just saying that for me, that's hard. Particularly, frankly, it's not our market. There's not that many companies that regularly can be undervalued by enough. Now, when I say that, and this is where I'm going to still say I have the elements of value in my investing because I'm not going to buy things that are overvalued. I was going to say, there is no other rational... Anyone who says they're not a value investor, I think you're an idiot, really. You can be focused on income. You can be focused on growth you can be focused on all these other kind of things but fundamentally at the end of the day you want something that's offered to you at a lower price than what it is is truly worth like obviously right otherwise i mean i suppose you can still go okay with that but it is really just a greater fool theory like this is regardless of the quality this thing is not good value but i think it will be even less good value in the future and that's a that is a game of chicken you don't want to play.

31:05I think that's a lot of way to put it. So I, so, what's important for me in that sense is you get the value. So rather than having to find something new all the time, rather than saying, I'll buy something for 80 cents and sell it against your buck. I'm going to say, I'm going to buy something that's worth a dollar that's currently 80 cents. But in a year's time, I reckon the business will be worth$1.10. And you have that hopefully worth$1.25. You have that hopefully worth$1.50. Again, I'm not going to do it even. Now, why is it worth more? Because the business grows, it is larger, it's more profitable.

31:37And for as long as that remains true, you hopefully get to hold that business if you get it right for years. Now, if you want to hold it for years, if you're looking for that business, the longer you want to have it work for you, the better quality of the business has got to be. If it's a one-trick pony, it does the trick, it's like, well, that's over then. So you mentioned Apple before, I mentioned Coke. They're great examples. I love brands. It's another bit of a tangent on quality. But, you know, Apple has got a very, very long runway. It won't go as fast as it used to because it's not exactly saturated, but pretty saturated.

32:06Coke's very saturated. So it's not enough. You need growth potential. But if you've got a company, how old's Coke? 140 years old probably, give or take. It's probably got something going for it, right? And so rather than trying to find a Scots Cola that's an 80-cent dollar, I want something that, again, has that growth potential. But if you look for quality up front, it gives it the potential to continue to do well. Now, what is quality? It's lots and lots of things, right? It's competitive advantage. I'm going to give you a laundry list until we collect some of these. Competitive advantage, right?

32:35Why is it better? Why will it keep being better? Growth runway. If it's already saturated, I like Coca-Cola or Amatil, you're going to have struggles, right? So it can't be just the biggest businesses of the world. It's got to have good management, preferably founder owners. We've talked about these things before. Why? Because they care more. They're less likely to screw things up. They're less likely to get blindsided. They're less likely to do things that aren't in shareholders' best interests. And again, if you're holding for the long term, if you're choosing to ride with someone, You want to check the credentials of the driver.

33:01So that's really, really important. And I mentioned balance sheet wasn't the be-all and end-all, but it's bloody important. And so not having – you've talked a lot. I've incorporated this in my own conversations and thinking. Not so much how big will it be in five years, but are we sure it's going to get there in the first place? Are there any – will it survive? And so the balance sheet gives it that potential. Now, companies take on lots and lots of debt can get lucky and survive. Companies with no debt, with a massive balance sheet, are going to survive. Worst case, you do slightly less well than you hope to do.

33:29So you can't, I've said it in different contexts recently, leverage is the only way a smart man can go broke, as Warren Buffett has said, which is a smart person, but you know, the quote is the quote. Companies are the same. I mean, you have to suck for a very, very, very long time. If you've got a balance sheet with truckloads of cash, you have to lose money for years and years and years and years and years. And then you might still have some cash left over. And so, you know, it doesn't need to be, again, not all these things are going to be in the same place and size, But quality for me is just so, so, so important.

34:02It sounds obvious if you're that. Someone who thinks that already, then great. I just, I'm not interested in buying. I'm going to throw another Buffett quote. I apologize in advance. There'll be a few. Yeah, but one of Buffett's most famous ones is, it's far better to buy a wonderful business at a fair price than a fair business at a wonderful price. And why? For all the reasons I've just talked about, that's the potential opportunity. Yeah, so true. Yeah. Yes, I love that. Yeah. Yeah. So I would define quality. You're right. Gosh, we could do a whole episode on just what is quality. I think when it comes down to it, when you want to - Yes.

34:40The evidence for quality is ultimately reflected in the financials. As you say, they're backward looking. They are limited. They're not perfect. But you don't ever get a situation of a business that's really high quality, but just never delivers any good financials, right? And the financials that matter, I would say, what is the level, what is the return? Well, there's different flavors of this, but let's just go with the more common one. There's a good high return on equity. In other words, you have a business that earns a million dollars a year. I have a business that earns a million dollars a year.

35:17It's just that I put a million dollars of equity in and you put in 10 bucks. Your business is vastly superior to mine. You put in a little bit and you got back a lot. I put in a lot and I got the same back again. I say it's just one of that is far more efficient. So you want a business that has the capacity to really get a good return on the money that you put into it. Not what you bought the shares. When you bought the shares on the market, you just paid some other person for it, right? I mean, the money that was put into the business when it started or money that they raised from shareholders along the way?

35:52What's the return on the equity, on the net assets value? And ideally, not only that, you want a company that once it has made a good return, has the capacity to reinvest those returns at similarly high rates of return. Because when you have those two things, you have a compounding machine. So it's different if like, even if you you say, well, I only put$10 of equity and I made a million dollars, but you were a one trick pony. You released a killer app, it went viral, you made a squillion dollars and then everyone just got sick of it. Like Pokemon Go, right? It was the thing and now no one knows.

36:31Well, got to be careful. It's probably still very popular, but it's not so much in the zeitgeist anymore. Now, if you can do that again, it's like, well, just made a million dollars off my$10 investment. I guess I'll retain it within the business and I'll get whatever the percentage return on 10 to a million is. Like I'll do that again and again and again. We're going to have to play a drinking game here with Buffett. Except not very secret. But that's the secret sauce, right, of Berkshire. Yeah, it's not even a secret. But it's that conglomerate of just like we make a lot of – we generate a lot of cash flow and then we direct that cash flow to the areas of the business that has the best chance of getting a good return on those retained earnings.

37:16It's why Berkshire doesn't pay a dividend, right? It's because, well, we think we can get a better return just by keeping it within the business. So that for me, I want to have that potential. And where the historicals are helpful is that they don't guarantee anything, but it certainly does give you peace of mind. It shows you that it's possible. A company that has a consistently high return on equity and any return on incremental equity is the other version of this that they retain. The return they get on that is also likewise attractive. Yes, doesn't guarantee anything, but shows you that they've been doing something very right up till now.

37:54It is harder for earlier stage companies because they might have only just commercialized, right? Like the figures can look really awful. In fact, some of the companies I'm holding, they're not even making earnings at this point. They've got sales, but there's no earnings. And there are companies that have got earnings, but the margins are razor thin on the net margins. And the return on equity is just awful. Again, you're looking at a flow over one period of time. But I would argue I think the capacity is there for those earnings to really start being spun off. And then as they are, they'll be able to be reinvested into the business at similarly high rates of return.

38:29If you don't have those things or the potential for those two things, you don't have quality. To your point, you're right. The financials do show what has been delivered, but what can be delivered when you've got no profit. I mentioned Kogan for us, we were drinking games. But, you know, I'm not going to – and this is what I'm saying. Is it as high quality as Woolworths or JB Hoffman? No. But the potential is there. So that's the trade-off of a growth runway versus quality. And there is always going to be a trade-off to some degree or other. now I think the quality is being demonstrated in certain ways picking up I'm not chilling for it by the way and by the way I might have been I probably haven't I might have sold them by the time I had this podcast by the time of recording I still own the chairs not that I'm looking at yourself but just you know it is what it is um that that's kind of the that's kind of the the reality I like the so it's what things does it have that are I will say statistically likely because we are in a probabilities game I'll talk about that in a second too to to give us that sort of return to give us that sort of growth to really deliver that sort of um a market beating returns what we're looking for right so that that's those things are agglomerated to some degree more or less in some categories and say you know not any company owns as a founder ceo but i love them um not every company has a fortnox balance sheet but i love that i will i will make trade-offs where we're appropriate if the business seems to be demonstrating its ability and the one Another phrase I use too regularly is more things to look for customers more often.

40:02In other words, the customers are buying more things than they used to. There's more of them and they do it more frequently. It's a holy trinity. You don't always get there. But that's kind of what you're looking for, right? So that's the, to my mind anyway, that's what you're looking for when you look for those qualities. Am I seeing it demonstrated? Is it likely to keep being demonstrated? I love your point about returns on equity, mate, because I think that's something that investors, I'll say miss it's a little chicken and egg because again it's that relative to the price relative to the future all those kinds of things and by the way unless they're paying out good dividends the ROEs for most people will drop slowly over time as they grow because they can't they're keeping more cash they know what to do with not everyone and if you can use it then you're doing really well but that's kind of what you're looking for right you're looking for value creation and that's you know Charlie Munger said our job is to turn a dollar in more than a dollar of value.

40:56And it's typically going to say that away, that's the only job. But that's what return on equity measures is, I've got a dollar. How much value do I create with that dollar? And I think it's really, really important. It's a sign of quality of a business. It is worth the... Return on equity is the money retained by the company, but you're not normally buying for the equity price either. So there is that, as we talk about valuation, right? So if you're paying book value, which is just effectively the same as the equity value, then that's the return you're going to get if you're paying 15 times 25 times 40 times equity then you're going to get a much much lower return so be careful about not you but be careful about using ROE too liberally it's great to see high ROEs but if the market already knows it you're already paying a high price and so it's it's always valuation it's always price but as I said as we said before the buffer quote find a wonderful business and a high ROE is it's really a bit well so I will throw a bit of a the only thing to be careful with ROE is the level of debt being used and so you can I was going to say there's no bad business with high ROE that's absolutely untrue you can turn a low ROE business into a high ROE business by borrowing an absolute crap load of money right please yes do can I just go back just drill into that a bit so the other because I said before there's various flavors of this you can use return on assets or return on capital you know but they're all they're all measuring it's not a matter of saying you made money Well, good for you.

42:23You made money relative to what? And so return on capital, return on assets is actually rather helpful in this regard. So when you do look at return on equity, look at those other ones as well. For a company that has very low return on capital, can have a very high return on equity in the same way that you can make a property investment very, very, very attractive. Now, property, I know this is going to be a shock to Australians out there, but doesn't normally grow at 7 % compound forever. But your personal return can be made to, like if you've got a million dollars, I've got a million dollars, we both buy a property, we get 7 % say, right?

43:06Well, one way for me to do better is I'll just borrow 90%. I'll put$100 ,000 down, it goes up 7%. Well, that's$70 ,000 return on a million dollar property. But my contribution was only$100 ,000. So it was actually a 70 % return. Like all of a sudden, our return on assets was the same. The return on equity was miles different. So yes, it's such a good point that you make.

43:34For me, I think it's – I wrote about this recently actually, is that capital is potential energy. So you mentioned the balance sheet before. The balance sheet is so important. These are the assets that the company has to work with. These are the things that generate the earnings. And it doesn't have to be, you know, it's easier to conceptualize when you think of factories and farms and these sort of more traditional kind of things. But assets can be intellectual property. You know, they can be brand. They can be other things that are less tangible, less real, but very real still.

44:14That can be deceptive. Let me give you an example. I used this recently. I'm going to go up and I'm going to drop a 100 ton excavator in your front yard and say, right, I need you to do some landscaping. I come back at the end of the day, you just destroyed that land. Like it's just chopped up. It's useless. You know what I mean? Like you've probably broken the machine as well. So there's probably going to be extra impairment costs on all of that. I give that to a seasoned operator. They're going to move a mountain like that. Like it is. never going to be revealed by looking at the balance sheet.

44:49It's like, well, Scott's got a 10-ton excavator. Andrew's got a 10-ton excavator. Okay, they're the same kind of company. No, no, no, no, no. Who's behind the wheel? Makes all of the difference, all of the difference in the world. So you want good assets, absolutely, because assets are the foundations for growth. You want a good return on assets because that's what's going to point you towards high quality. But you want a good custodian and manager of those assets as well. Now, this is a bit harder to sort of determine, but I think what you want to look for here is that someone who is very judicious with where they make capital expenditure decisions.

45:29In other words, if they are buying more assets, whether they're acquiring another business or they're just buying new plant equipment and machinery, they're doing so in a way that It coordinates all of the assets in this elegant ballet, this synchronous, you know, fluid movement of all the various parts of human capital, of financial capital, of machinery. And it is an elegant thing that just comes out and spits out a bunch of cash flow at the other end. good operators tend to in my my view tend to make lots of little experiments burying stuff and killing it super quickly if it's not working and doubling down on the things that that kind of do so you will see you you will see a little bit of a movement within the balance sheet too not these big wholesale changes like well we're all about coca-cola amyotill is a great example we're all about fizzy drink.

46:26Actually, now we're also about tinned pineapples. Like what? You know, it's different, right? Like they went into, they went into different areas. I don't know. Hindsight is kind of easier here, but, but what you're, what you're wanting is a, a business that has, I guess, agility, um, one that has optionality, you know, it's, do I have a warehouse full of equipment and machinery and parts that can only do this one thing? All I can do is make fax machines. That's it. I can do it really well, but that's the one thing I can do. And if fax machines ever go out of vogue, I'm screwed because I just can't pivot that to anything else whatsoever.

47:02Now, again, this is very, I think probably if I've done a decent job there, that's pretty obvious. It's much less obvious in trying to sort of identify this. So what are you trying to look for here? Again, things like high inconsistent return on equity and return on retained earnings, all those kinds of things are very good. If you see a business that has fairly regular asset write downs, that's a red flag. That is very clearly a sign of a management team and a board who just don't know what they're buying, right? Because it gets added to the balance sheet of what you paid for it. And it gets written down because the bean counters go, there's no way it's worth that much.

47:37I know you paid that much for it. It's just not worth that much. And it's not worth that much because it's not generating the kind of cash flows that it kind of should. So we're going to write it down. Now, even the best businesses in the world will suffer from that because you can't predict the future and you've got to throw stuff at the wall, see what sticks. But as I say, good operators will do it judiciously, tentatively, small little experiments, ramping up as is needed, killing and pivoting as is needed as well. So have a look at not just a balance sheet, but how a balance sheet sort of changes over time with that kind of idea in mind, because the asset base, the asset mix, how that fluctuates and changes and evolves over time is actually quite revealing in terms of what the stewards of the business are doing with their very, very limited resources, whether they're a trillion dollar company or a corner shop.

48:28They have limited resources. And how are they best using that to maximize the flows? Everyone focuses on the flows, the earnings, the profits, the earnings per share, as they should, because that's bottom line that's kind of what you that's the goal but but you you're gonna miss you what you want to you want to know will that continue and if to know whether that will continue you need to look at how the sausage was made not just at the sauce it's a lovely sausage very plump and juicy but how it's good that's what i want to think how to want to take does that make sense i think probably a little over the place there yes i think i think that's right i'm trying i'm trying to take me i try to take it to effectively what i'm then i'm then looking for is i talk about the the the growth potential and it's it's that combination right of the past history the current circumstances and what the future might look like and i think that's where i so what where i wanted to go to is that variant perception again i want to talk a little bit about contrariness um i'm not a contrarian at all i'm an optimist i'm an eternal optimist as our listeners well know but but slash and um i think optimism is smart now i would say that because that's hubris and that's my view and i wouldn't say i'm not that's stupid but i'm not optimist um optimism wins uh in life it wins in investing wins in business and the the what i what i in terms of how i invest i'm never happier as i said before than being the only optimist or a pessimist um because it's that time it's covid it's the trump tariffs it's the whatever everyone's like oh this is terrible the world's gonna end it's like i could but the last 158 times you've said that didn't and we've always gone on i've said that i've got to again i said before i'm gonna fix this line i've still gotta fix the line um but The market has never yet failed to regain than surpass a previous high.

50:22Now, unless that stops, every time we're below that previous high, I'm not going to say it's free money because it sounds a bit over the top, but I need to be careful. The most of us have a financial service license, I want to be very careful about what I say here. But just because, you know, maybe Fran De Pot, I'm talking about investing being free money. But as a rule, if everyone's really disappointed about a thing, particularly a thing that's been proven in the past to have been really good, back to the quality stuff, back to the return on equity, you talked about you know when everyone's like oh the chairs are terrible oh yeah i mean right now it feels that way but again go to that long-term perspective you know we talk about recommendation ideas at work and everything someone will say to me and they know they shouldn't um oh i'm not sure the tariffs might be bad in the next six months or so and i honestly my response is very politely very kindly i really really don't care in fact i like that you think that because other people think that as well i'm probably getting a good deal and again i'm not contrarian for the sake of it i'm not taking the opposite view of everybody all the time i'm not i'm not a pessimist where everyone else is optimistic i'm not i'm not looking to disagree with people i'm not i'm not argumentative as a matter of course but where i see that opportunity to be contrary to be optimistic take that approach say hey you know what things actually might be okay um but you can't see through it um david garden the motley full co-founder we referenced him a couple of times but um he talked to years ago i might have been i can't remember when i want to say gfc times it It feels like it was more recently than that.

51:46Anyway, he talked about dark clouds he could see through. And that's exactly the story. So when you get a chance to buy these things that people are ignoring, forgetting about, putting aside, not worrying about, all that kind of stuff, that for me is a great opportunity. So if you can – what is it in a nutshell? It's basically saying I have a long-term perspective. I finished where I started, which is if we go back to that, what's really going on, what is long-term? long term is saying there will be bumps but i expect this business to be positive to do well over the long term not in the absence of those bumps but despite the bumps that come along the way and that if you can have that view gives you a chance to not freak out when other people are selling if you own the shop oh the stock but also it lets you buy what other people are are selling there's some there's some retail businesses that were trading for like high single digit very low double digit pe's during some of those covet years and by the way some went broke so you've got to get the right ones but it was like well do I really think this this large household name quality retailer with you know long histories good balance sheets great brand recognition are they really do sales never really never pick up again the profits never really never recover because right now they're down um so yeah I again I don't I don't call it being contrary because I'm not and it's not about optimism all the time well I'm always optimistic but it's not about buying any price because I'm optimistic.

53:09It's just that idea of looking around and going, hey, they're all really upset and disappointed and depressed. That feels like an opportunity to me.

53:21Yeah. For me, the key question when those things happen. In fact, there's a part of me that really wants bad things to happen to good businesses. Because the great business that everyone knows is great and the sky is blue and there's not a single storm cloud in the sky, it's just not a great investment. I mean, maybe over 15 years you'll do reasonably well, but it's not a great investment. It's not really going to set the world on fire. So I want something that's got problems, but I always describe it as I want a cyclical problem, not a structural problem. In other words, I want a problem that is just a consequence of, ah, their economy's not doing great right now, or, you know, ah, there was some supply chain snafus and it screwed them up for this quarter.

54:12And, you know, it results in something quote unquote bad. Earnings fell, you know, sales were depressed and like no one's cheering that. But it's like, is it because we just realized that every single product we've sold over the last 10 years is chock full of carcinogens and asbestos and we are absolutely, we've got a legal thing in front of us that we're never going to come out from and we've got to completely retool the whole thing. And like, or, or is it just sort of like, well, there was this like, you know, big economic sort of thing, whatever it was. Insert your favorite thing here because there's always something on the economy that people are fretting about.

54:52That's kind of like not great, but doesn't speak to the quality of the business. Good businesses will go through tough times, sometimes of their own making, very often have nothing to do with them whatsoever. And that is such a perfect setup. That is such a brilliant setup. It's just like, yeah, earnings are down. We miss guidance, all of that kind of stuff. But it says nothing about the long-term earning capacity of business. That is just such a beautiful, beautiful, beautiful setup. When you have signs of something that is structural, no price can be cheap enough. And dear listener, let me tell you, I have learned this the hard way.

55:25Because you try to do the, oh, I'm going to be greedy when others are fearful. And oh, look, everyone's freaking out. And they're probably freaking out more than is necessary. but there's just something that's just revealed about the business that this is like through and through, there's just, it's just a poison within this business, whether it's a cultural problem, whether it's just, you know, the result of years and years of underinvestment, whether, you know, there's, I could list something as long as your arm here. And this is hard. These, these things are hard to spot. What is, what is helpful in this situation, but extremely rare is a candid forthright management team that will help you understand what's going on as opposed to, look, it's everyone else's fault except ours.

56:11And don't worry, it's always going to be brilliant. You know, that is what you want to hear. And that's what most people will say. And it's very comforting. But I think, again, you will get those occasional managers who will just say, yeah, we dropped the ball here or this happened and it's not great. So we were expecting these sales to come through in this half. It's going to be pushed to the next half because, you know, it turns out that all the shipping containers, you know, just weren't stuck in a port because of some tariff thing that Trump was doing. It's like, oh, that sucks, but people still like your product.

56:44You're still solving a very real problem and you're doing it in a way that's far superior to everyone else who's in the space. And now you're much cheaper than you were yesterday. It's like, that's a pretty good thing. Yeah. I don't think. Yeah, that's really important. Structural versus cyclical. You're going to do the cyclical. Just know what you're buying. Know how it's going to react. Know how you're going to react when it does react that way. But also to think about what the – so I talked a lot about quality and long-term all that kind of stuff. If you're going to buy a cyclical business, you're either going to ride the ups and the downs, and that's fine, but know that the share price will be super volatile, or you are potentially playing a slightly different game.

57:26And I will say there is a place for that if you want to do that. but you've got to know what that cycle is and so if you're gonna if you're gonna um what's a good i mean oil is always an easy example it's just all over the joint right now if you're gonna buy if you're gonna buy an oil drill up because you expect 20 years time it's gonna make a fortune that's that's completely cool um but just know over that time the share price will probably rise in full 50 percent many many many many times just because that's what tends to happen now you can try and time and buy low and sell high and then buy low again and some people do and that's not an unreasonable approach if you want to um but if you're not going to just just know if you're buying sickle stuff know it's going to be like that right it just is um we've recommended elders to our members for example it's a rural services company and they are commodity prices and crop yields like it is just all over the place and so you either say well i'm going to buy low and sell high or you're going to say you know what it's going to be it's going to be all over the place and i'm going to some years are going to be absolutely rubbish we're going to lose 40 percent some years share price wise i think it's going to make more than that and over time i expect the The total will be better than where we are now.

58:27You're just going to have to strap in for that ride. That's all. So just be mindful that you're dead right, mate, on the cyclical versus structural. I think that's absolutely right. The other thing is that Buffett, the salad oil scandal at American Express, hardly known in Australia these days, but basically it was found that Amex had, I can't remember the exact details of it now. There was an investment that had some, yeah, so basically there was oil tanks supposed to be full of a shim, was it oil? Fascinating. As in crude oil. Anyway, it ended up being filled with something that wasn't supposed to be there.

58:53And so it was just fraud. and the company got smashed and Buffett bought shares at that point because like, well, the Amex franchise is way too big and too powerful. It will continue to do really, really well despite this. It's not going to be existential risk because it's not going broke but the market hates it because there's one thing going on. He's looking out 20 years and going, Amex is going to make a fortune in the next 20 years despite this and if people are ignoring that, this is the other benefit of the short-term panic is whatever's happening now is a puffed-eenth of the total full life of this company, right imagine coke call in 1912 someone says oh people start drinking coke this year because of something you know it's now obviously in hindsight we can do more easily we can with with a very cloudy crystal ball but that's kind of the idea and i think that's that's my um just just adjoined it to you to your to your point is just that know that that's going to happen and just be prepared for that as well on the buy side but also don't sell in panic if those things happen because they will and they do and that's just life and it goes back to things we've said to add it's quality it's value it's all those if you've done the work if you own the right business then that's kind of what you're looking for isn't it it's one of the things yeah i thought it might yeah gosh this hour is going really fast um i feel as though we're only still at the beginning here so one of the things i'll just reiterate a couple of points we've made before in the past but i think it's important here is just to diarize your thinking um you write it out why are you buying this company What is it you like about it?

1:00:22What do you expect? Are you? It's so valuable. That's why you did it. Yeah, totally. We've got that functionality. But look, it's just very much designed that way. It's like, that's why you did it, right? Like it's just think about it in advance. And where I'm getting it here in particular is with the risks. So whenever I buy anything, I'm trying to go, well, this might go wrong. This might go wrong. This might go wrong. So when it happens, I've already thought about it. And within that list of things that can go wrong, there'll be the sort of more existential, more damaging, more structural stuff.

1:00:53And then there'll be this like, like if I was buying a retailer, I guess I would put it in risks, but I wouldn't see it as a risk just as a characteristic of the company. It's like, yeah, it's probably going to do really well when people are confident, they've got lots of money in their pocket, and it's probably not going to do too well when everyone's really scared. And that's just normal. That's just normal. And I'll fold that into my second point, which I'm leading up to, which is, and this is the last thing, the last thing you do. And I know there's other things to sort of say, but the last thing that you do is look at the share price.

1:01:25It's the first thing that everyone else does. Like, you know, why? What does that number or even the history of that number on a chart tell me if I can't put it in context? Like it's a completely meaningless number. I don't know what to do with it. Is it good? Is it bad? Unfortunately, people go, well, it's good because it went bottom left, top right. So it's good. And monkey brains are really good at extrapolation. So let's just extrapolate that. So therefore it will always be good. And it's just like, it's really, really, really, really bad ideas. So what I'm trying to then do is just basically say, yeah, yeah.

1:02:04Okay, I like the business. Now I'll look at the price. In fact, no, no, I've skipped a second. What would I pay for it? What do I think it's worth? Forget the price. Forget the price. Like, what do I think it's your – what would I – if this was just – I'm a gazillionaire. I've got all the money in the world. I'm going to go and make an offer to the chairman and just say, listen, I want to buy your business outright. What is the number that I would put out there that is realistic? You know, obviously, a dollar would be great, but they probably won't sell it to me for that. So what's the price that – At what point do I stop getting enough value for the business that I'm pursuing?

1:02:39I would love to buy it for a dollar, but I'll pay – to your point, let's do our total business – I'll pay$48 million for that business. Yes. Up to that. If I get it for less, I'll take it, but I wouldn't pay more than that because at that point I'm not getting enough of a return to justify either the cost of my capital or more importantly, the opportunity cost, one of your favourite words, phrases, of giving up the opportunity to invest in something else instead. Yep.

1:03:04Absolutely. And within that too, I am very much acknowledging during that process that I can't see the future. So three most important words and investing is margin of safety. So I don't want to be a hyper-specific. I think this company is going to earn$1.32.3 in earnings per share next year. And then after that, it's going to be$1.46.9. And no, no, but roughly speaking, what does it look like? And then let's discount it. My hand on heart, my best guess, but let's try and get 10 % under that, 20 % under that, because it accounts for the almost inevitable reality of me being wrong in some way, shape or form.

1:03:50It means that if you are wrong, it's like, well, I wasn't buying something where everything had to land perfectly for me to get the return that I desired. In fact, if it does as I originally expected, I'll get an even better return because of the margin of safety. If it does better than I expected, the return will be even better. It's okay to be wrong when you've been too conservative, right? Like that's happy to be proven wrong. Thank you, Mr. Market, for showing me the error of my ways. I was hoping for a 10 % return. I got a 20 % return compounded over 10 years. Like, thank you. I am happy to be wrong.

1:04:25I don't want to be wrong in the sense where I was expecting all of this stuff to happen and it fell short. And it's just like, well, you can get a scenario here with a million examples we could go through as people go, this is a great business. They're going to be much more profitable in the future and be right in that analysis and still lose money. Not because they didn't earn more money, but just not as much money as everyone else was expecting and was priced for by the market. And again, we could do a whole episode on valuation, but that's that last point. And then can I get it? And very often, once you've gone through this whole process, you go, listen, I think it's probably something I'd be prepared to pay around here.

1:05:03Oh gosh, it's 50 % above that. So just chuck it on a watch list, set an alert, Get on with your life. One day it'll go ding. And you go, ooh. Yep. Ooh. Yep. It's the price I said I would pay for it. No, man, let's have a look. Let's see if anything's changed. If nothing's changed, like, go for it. Do it, right? But you'll do two things that you'll do, right? The same with auctions. You talk about what would I pay up to. Every single mug. And I say this having just done this about a year ago. We're not spending more than this. This is the price that we're going to offer. We're not going above it.

1:05:35And, of course, you go over it, right?

1:05:40it happens with shares too, right? Because you want it because it's going up. If I don't, FOMO is going to kick in. And same on the downside as well. You'll do all these other kinds of things. So again, the value of having it written down and the value of having a consistent process and sticking to that process. A commentator, two things I've said before, excuse me, sorry. Two things I've said before, which are related, which is I buy to hold, not buy and hold. I will sell if my thesis is broken in valuation. We're not going to do valuation now, but effectively, if I'm a thesis broken, I get offered a stupidly good price or I've got a better place for my money.

1:06:15So I'm buying to hold. I'm not buying and holding regardless, but I'm also not buying for the short term. I'm not buying to flip. The second one is one of my favorite lines. I know you like this one is I try to be slow to buy and even slower to sell. And that is if I've done all the work on the way up, if I've created the value, if I've found the value, if I've understood the quality, if I think it's all positive, it kind of goes back to the point we were making about not selling too quickly in terms of panicking but even evaluation i gotta say i'm i'm probably too lax but i find it being too likes being better than being too strict on it which is if it's if i've done a little if i like the business if it's a great business if it's done its job and it's a little bit expensive i'm probably gonna stick with it because it'll probably surprise me you know not always and not ever and some are gonna disappoint but that's that's the broad approach so buy to hold and be slow slow to buy in other words do the work don't jump at the jump down the gun do the work first and make sure you really really want to buy it has really justified its place in your portfolio.

1:07:08Once it's done that, give it plenty of rope in my view.

1:07:15I know. We will. We'll have to do a follow-up episode to this, right? I do unfortunately have to take my daughter to an appointment so we've kind of scheduled things and my internet dropped out just a little bit behind the curtains here. It's in the beginning. We're well over the hour. For some reason, notion we set, but... Hey, thanks for suffering through this first of our pre-recorded episodes. When will I learn? I have to say that. You're going to correct me every time. We appreciate you listening to us. We will be back. You'll come back on Sunday, won't you? All right. Until then, have a great weekend and fool on.

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