Investing in structural shifts. May 24, 2024

33:10But there is, to my mind at least, some question as to how we've structured the housing market. And I mean market in this context, i.e. the point at which we actually make the transactions, with the deposit itself. And I don't have a problem with banks choosing to protect themselves and their depositors from defaults. That's what they should do, right? and if you can lend only 80 % of a property's value, if it falls 19.9%, you're still okay, you're still in front, you've still got the asset, everything's sweet. And I get that. And frankly, this is probably the wrong time in the cycle to impose this suggestion because of high, arguably too high or arguably very high house prices.

33:50So maybe it is more systemically dangerous to do at this point. But I have to say, given that the borrower is on the hook for the debt, I do wonder whether the deposit itself isn't an unnecessary hurdle for most homebuyers. And so, but CBA's not doing this, as you say, to help the homebuyer other than to get more business for themselves, right? So if that helps the homebuyer, it helps them, then they'll argue that. It probably does help. But I guess I'm wondering out loud, mate. I said, when prices are extremely high, you want more deposit because there is more of a chance of property fall. So I get on one level, this is almost exactly the wrong time to do it but we had a 20 deposit requirement in 1993 as well or 19 whatever it was um and i just i just it strikes me that and again the previous government did that first home by deposit scheme whatever they call that thing i just i think it probably is useful and i do wonder whether net net if we if we ran the same you know assume we were living in a simulation we run one version with the current settings and we run run version changing nothing other than the deposit requirement.

34:56I suspect we would have more people in owner-occupied, i.e. paying off the mortgage, but owner-occupied homes than renting who wanted to. And I would suspect the vast, vast, vast, vast bulk of those people make the repayments and cover the debt and everything's fine. Of all the systemic risks we're taking, I'm not sure requiring a deposit. Again, I'm not saying CBS is doing it because they're trying to fix a social problem. But I do wonder if the result is actually something more of that which is let's not make people save up for 15 years for a deposit while they're renting or living at home if they can well and truly cover the repayments i don't i don't i wouldn't necessarily impose or make the banks or anything differently but i do wonder if the system is a little bit broken or just just not quite work as well as it could be because of that deposit requirement is that is that miles off the mark oh two things i'd say is that the again it's it's the fragility argument it's like Like, well, let me start with the other point first.

35:51The first point is all it's going to do is push prices up. Because people who couldn't now can. Yes. And so you're adding extra demand, right? And so that's going to push, all else being equal, that's going to push prices up further, which is going to - Except that. Except that if they were to buy rather than rent, it would take, like the net-net result is there'd be fewer rentals. Like there is some removal of investors from the market for the same basis. if your renters to go around. So there is an offset, not perfect offset, but there would be an offset in terms of rental demand would fall.

36:24But go on, Kigga. Yeah, yeah, true. But it's also enabling people to do this. We're doing you this great favor. Ultimately, the price is just going to go up and it's all going to normalize to some point. But you're a debt slave. And now you're going to be a bigger debt slave, right? We've joked about it before. It was a one-income family would get a 20-year mortgage and you'd pay it off and you'd have a home. Now it's a double income on a 30-year mortgage. We're at the point where there's going to be generational mortgages, right? And it's not like it automatically guarantees disaster. Yes, correct.

37:10But it increases the likelihood of that. So there's a pile of bush behind my house. Is there going to be a fire there? I don't know. Maybe, maybe not. Probably at some point in time. If there is a fire or a fire threat that comes through, what's more dangerous? One where I've allowed the fuel load to build up over the last five years without doing any management whatsoever, or one where I've been pretty prudent with that? You can't predict the shocks and the black swans that are going to come, but you know they're going to come because that's the world we live in is chaotic, messy. I will happily bet my left arm in my first born on the fact that there's like stuff's going to get real at some point over the next 10 years.

37:51Like we had a pandemic, you know, before that we had a GFC, before that was a European sovereign crisis. Asian financial crisis, Stockholm. Asian finance, it just is, right? It's just going to be. And whenever we go into the next one, whenever that is, if it's tomorrow or if it's 10 years time, if it's a little, if it's bad, we are getting into a system where it's just like one tiny wobble. you or your partner get sick you lose your job something like that no you're screwed you're absolutely screwed there's zero buffer that's that's there and everything that we're trying to do here is just make is putting again not the banks in in theory the banks but not really notionally you're just putting all of the risk and the people carrying the can here the people carrying the burden of this are the mug punters themselves that are being that are being told that they need to get ahead.

38:39They need to get on the ladder. This is the only way to wealth creation. It's not. The bank has literally created money out of thin air and they've offset that with an asset on their balance sheet, which is your pinky promise that I will pay that off over the next 30, 40, 50 years or whatever it happens to be. And great. That's great. Maybe most people will and most people have. But the more difficult we make, the more precarious we make that, the more chance there is to something that will go wrong. And you're going to be the one living in your car. Matt Common's going to be off. He's going to be with Pina Colada in hand in his massive, you know, beachside mansion, perfectly fine at the result.

39:19As I've said to you before, you know, and we constantly talk about incentives matter. If the bank thought for a second that, wait a second, there's no one's going to bail us out if this goes pear-shaped, what do you think they're going to do? They're going to be far more prudent with their lending standards. They're going to create far less money than just to throw onto the bonfire of this insanity. And yeah, I get it. Notionally, it's going to make it harder for people to get into the market, but it is also going to help normalize prices and it's going to create a more robust system. If the only way to get ahead is to financially engineer our way out of it without addressing any of the structural issues, it's just tinkering at the edges and it's doing so, So, again, playing with the financial well-being of ordinary mum and dad people.

40:11So, I agree completely with that. I'm going to come back to the specific issue though, right? Because to your point, it's like saying it's the shampoo bottle. So, should we fix the whole system? Yes, absolutely. Is it necessary? Would it push up prices? Maybe. Probably. Not by only as much as it might otherwise seem because that offset, but it probably would. That being said, there are only – this is going to sound like a silly thing, so let me explain what I'm going to say before I say it. They're artificially low relative to where they would be if there wasn't that deposit requirement in the first place.

40:41In other words, there was no – there is no or was no, you know, you talk about laws of physics. There's no reason why you need a 20 % deposit to buy a house other than that's just kind of traditionally what someone decided once and so everyone did it, and that's what we kept doing. Because back in the day, we used to have bank failures that had massive consequences for everyone. I thought, well, maybe we should have some rules around this so it's not a highly flammable situation. That's why we have deposit requirements. That's why there's APRA buffers and T1 capital adequacy ratio. We go through it all the time.

41:11Banking disaster, oh, that's ridiculous. How can we let the banks do that? Let's make sure that we don't do that. And then we water them down and then the party starts again and we go through these. But wouldn't it be better to have a higher T1 capital ratio than a 20 % deposit for the home buyer? Absolutely. And that's all I'm saying. that's the argument i'm not saying you should not sit with anything i just i feel for those people who are saying i earn x dollars a year i could afford to repay the house now but i can't take the loan out for five or seven years because i haven't saved that money yet and i don't know that we do that we don't we definitely do them any favors by making them wait particularly if prices keep going up frankly uh anyone who could have bought five years earlier over the last 25 years would have been miles ahead and it doesn't mean that that's what the future is going to look like but i just i think the deposit requirement is again it's more an intellectual exercise because no one's making the banks really do it the banks do it for themselves and there's mortgage insurance and other things i just i just kind of think it feels a bit archaic given there is in the u.s in some states there is no personal liability for the loan right so if you're the bank yeah you're going to take a 50 deposit because like dude you're going to walk and i'm going to have time trying to sell this thing and no i'm doing that if i'm like well hang on page if you if you you know if you walk default in the mortgage i'm going to keep i'm going to go after you until the last day you're alive or until you get to play bankruptcy which have gone first um to get that money back and so i don't need as much of a deposit in that in that context that's all i'm again that's my point like who's carrying the can like it's it's it's the person who's just trying to put a rope over there in their family's head is desperate who's desperate you know yeah we're gonna we're gonna give it to you because again we're gonna chase you to the end of days we're gonna make your life an absolute because we can yeah yeah and again you know any sane proper open and free market, it would be, hey, you know, you're deciding to lend money.

42:58If I'd give money to you and you don't pay me back. Yes. Well - I can knock on the door from the bloke with the baseball bat, right? Yeah, well, you know, I've learned a valuable lesson there, right? If I can lend you money and it doesn't really matter what happened, I will always be made whole, even if it's at the expense of the taxpayer. I'll lend money to anyone. Oh, yeah. why would you bother being careful why would i why why wouldn't i do that right and so that

43:28let's just take it to its natural conclusion okay so ten thousand dollar deposits all right that's a thing in a world where the median house price is 1.2 million in sydney okay right okay um five thousand i guess so it's just sliding one thousand hey let's not even have a deposit let's just let's just make it all created out of thin air and we'll just offset that against an oblique a future liability for the counterparty and it just that's where you get to so so i don't look we can debate the toss as to whether 10 000 is appropriate maybe it should be 20 000 or whatever it is or you can use in percentage terms my only point is directionally it is it is it is going in a even further along a uh insane path because that's where it leads to that's where it leads to yeah that's you know yep i i say just feel sorry for the person who's saying i can i can i could take the loan now you just you just put this artificial deposit requirement in front of me saying i can't do it if i you know if i've got if i'm a teacher or uh someone who's got a you know amber you've got you've got a government guaranteed job effectively for life short of sickness or something else and you're wrong about that too um is it is it really yeah sure is it does anyone serve by making me wait five seven ten fifteen years to save a deposit for anything i can afford to pay now.

44:42If you kind of describe that system to someone who came from space, as you say regularly, look, here's the thing. These people have got great jobs. They're making a fortune. They could pay this house off. We're not going to let them buy it because they haven't saved enough money yet. But they can pay their house off. Yeah, but we've got to have a deposit. Why? That's what we've always done. Okay. You know me, man. Free market. Let it go. There'll be some lender out there who'll go, yeah, I'm happy to do that. Cool. Have at it. Have at it. Go nuts. But when it goes bad, then it's you carry the can.

45:14Like that, again, Charlie Munger, right? Christianity without hell doesn't work, right? Capitalism without failure doesn't work. It's moral hazard and it just needs to have that. So I would imagine in the world that I would be the architect of, there'd be all kinds of silly things happening out there. But the brutal reality of the situation would mean that they're the ones that fail and go out of business. Darwinian, yes. but you're left with a far more robust system, a far more rational, reasonable set of incentives. And you're going to have those that prosper and win are those that are prudent, those that are sensible, those that are taking depositors funds and using it in a sensible, smart capacity.

45:59Not those that are just throwing money at a wall and seeing what sticks and going, well, there's no downside. What harm is there in it for me? And I think I'll just quickly, without going on too much of a tangent i've just got to bring this up because it's something that is unique to australia where we view that the only path to security is by owning a house and just sort of like everyone's talking about all these solutions it's like i would just you know again what i would do i would change the rental laws i would give i would make it such that renting is not some dirty word that thou should never you know you know why not why can't i get a 10-year lease.

46:37As a landlord, why wouldn't I want someone that stability and certainty of income and tenancy over a long period of time? The only reason I don't care about it now is because I'm probably not making money on the rent because I'm negatively geared. All I make money on is on the flip, which means that I've got to kick you out like Albo did, kicked out his tenants so he could flip his property. Like, well, why do you have to kick out the tenant for? Another investor might well like that. And again, they would change things. Yes, it would. But it's just like this is not a bond this is not a this this is a an a quote-unquote asset where there's a family living inside it it's a little it's it's different right to a share or to something else and and as i say it is it is really the foundation of of of security that from which everything else is built your your um your employment your earnings capacity your participation in the economy without a how you try living in a car and doing your washing cooking your food turning up of time, you can't do it, right?

47:36And yet we're going to take this foundational thing, we're going to financialize it, and we're going to do everything that we can to allow people to flip it, as long as it's convenient for the investor, losing complete sight of the fact that a property is a utility. That's what it is. It is something that is used, that is beyond its immediate financial reward. Not that it doesn't have financial value, but again, the cart is in front of the horse. And that's where we have completely lost the plot on this country. By the way, in that scenario, it doesn't mean investors can't do well. They can do incredibly well.

48:10And that's historically what landowners and property owners have done well on is because, hey, I've got something that someone wants and they'll pay me for it and I'll derive an income stream from it. We're so bummed backwards in this country in the sense that you can't even make money renting it in fact in fact we will intentionally design it so that i lose money on a cash flow basis and the only way that makes sense is if i can flip it so i have i have to flip it right otherwise i've got a liability but in in a sane world it was just like why would i ever why would i ever ever sell this wonderful asset that pays me a really good yield each and every year you know like that that's a that is a good thing and and to to architect this in entire thing to to the to such an extreme that we have lost sight of those basic i would say pretty i think they're really controversial if you really think take take your own self-interest out of this any property investors listening and and think about what what i'm saying here is it's not But everyone can win under this scenario.

49:21We've just painted ourselves into a corner that to get back to that level of sanity will require some pain. And it'll be the, yeah, it's going to come probably at the expense of prices, which is going to impact investors. That's a very, very good summary. I got there from$10 ,000 deposits. Sorry. God, it drives me crazy. Our listeners will be shocked to hear that. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

49:58I jumped on some retail numbers this morning. And it was... How do I care about how it started now? I was up too early and sitting around and had the computer in front of me. I don't know how I got to this point. But I looked at last month. Now, when was that last month? It was the April data released. No, March data released in April, sorry. we haven't received the April data that's coming out the next week or so for retail sales in Australia and I just I just I don't know why I went to the ABS site had a look at the data and I just found some really really interesting things now I don't know if you've seen my tweet maybe you've seen the I haven't no lay it on me okay so well here's what I want to ask you over the far this is really unfair to do I'll we'll have a pause for our listeners and I'll ask you over the past five years what do you reckon the average annual growth in retail sales has been average annual growth in retail sales the past five years uh real or nominal nominal so in other words not not adjusted for inflation the actual prices that people are paying actual yeah five percent well done five point five percent is the so in other words zero real terms no not even that bad because inflation hasn't been that high as you well know over that five-year period no not even close not even close it's not in 2019 come on inflation hit to what 2022 you got three years of inflation yeah but then it was above five percent okay okay right okay anyway it's going to be less though let's let's agree on that right agree well that's what that's kind of part of where i wanted to get to i i so a couple i just it's just some general reflection i was looking at these numbers going what does this mean what can i what can i share so it was a bit of a twitter thread it was 14 tweets long um with my with my twitter followers just kind of sharing some of the thoughts, both in terms of the categories and the impacts and that kind of stuff.

51:43So if I'd said to people, how's retail going? The first response would have been, oh, terrible. It's down 0.4%. 100 % absolutely true. That, by the way, is the seasonally adjusted number. No, the trend number. Seasonally adjusted number was up 0.8%. Still terrible, still awful. But up 30%, 30.8 % actually over the past five years. In other words, retail sales are 31 % higher than they were in March 2019. And that's despite a pandemic and that's despite inflation, it's despite everything else, higher interest rates, everything else that's going on. And I don't say that, and I started this tweet thread by basically saying to people, just put aside the, aha, I knew that, or yeah, but don't worry, but what about this?

52:24I want people to put away their preconceptions. Just simply say, just sit up with the numbers for a minute. Because there's some goodness and bad stuff about them. And that's kind of the point. I think too often we look at data and the reason I wanted to raise it was, A, to talk about retail, B, to talk about the way we kind of approach stuff in our lives. We have these preconceptions. So everything we see and do falls into the, ah, I knew that was going to happen, or see those bastards, or yeah, that's not right. That's not right because it doesn't suit my preconceptions. I had some people say, well, monetary policy makes the banks more profit.

52:54It's like, well, no, it actually doesn't. That's not how that works, even though it seems like it because people pay more on their mortgages, right? So all that stuff is kind of, you know, the preconceptions of if I see this data, I either accept it and say, good, it proves what I thought, or I say, yeah, yeah, no, but that can't be right because of X, Y, or Z. And that's kind of the key point. So a couple of things from that, mate. Firstly, as I said, up 31 % over the past five years, 5.5 % per annum, but up only 0.85 % over the past year and down month on month, which was the decline between February and March.

53:28So, you Retail, really, really poor over one timeframe. Actually pretty good over the five-year timeframe. And then you've got to adjust for inflation. So all those things happening at the same time. I wanted to share retail online. So I know I've talked about this before, mate, and I'll keep doing it because I really want our listeners to know. I think there's some investment opportunities, by the way, and some risks, some really significant risks in this one. Given that data, okay? So I'll just go with the aggregate numbers because it's easier for now. Over the past five years, total retail up 31%.

53:58online retail up 140 percent annual growth in retail sales five and a half annual growth in online 19.2 percent and again just think about what that means right does it mean that no one's buying in the shops anymore no but it also means that it's now you know basically the share of sales made up online has now doubled from a bit above five to about ten uh in five years again is 10 % huge? Not really. That being said, if you had 10 % of your sales taken out of your shop in the local shopping mall, that's enough to go from effectively for most businesses, profit to loss. So really, really big implications there.

54:37Total retail. You've already mentioned the first one, which is inflation. 31 % is good. Well, is it good? I don't know. It is if you're a retailer. It's good. It shows economic strength. If you have pretty low inflation, if you have very high inflation, maybe you're just standing still. Now, the ABS put some data out about nuts two months ago saying between january 2020 so this is different time frames so don't don't correlate the two numbers necessarily but you can kind of draw some conclusions from january 2020 to january 2024 food prices are up about 19.8 percent i think from memory now it's one year less so you got to take back that out and to round to your point is it probably you know largely inflation yes most of it would be absolutely all of it no but most of it and then let's add we talked about housing before let's add the growth in the population since then the population growth about two percent a year well that 5.5 percent if inflation is going to be at least three percent a year and immigration has been at least two percent a year roughly over that five year period again much much more in the last two years like like inflation uh much less than the previous three years but over time maybe retail is actually going backwards despite what looks like a really really big number when you adjust for per person and for inflation and one last thought then i'll throw to you, mate.

55:51Even if that's true, retail, if you're Woolworths, do you care about the per capita numbers? Not really. You just want to sell more baked beans. Do you care who you sell the baked beans to? No. If I buy two or two people buy one each, they don't care. And again, this is not, by the way, a cynical comment. I'm not suggesting that the companies are bad people, but think about their motivations, their incentives, and why and where immigration is actually really good for businesses. If you're an investor, having a bigger market is wonderful. You love that. Man, if we've more people who can buy my thing, toilet paper or Vegemite or whatever, it doesn't have to be just food.

56:24I'm just eating food here. It can be people at the cafe. It can be people buying shoes. Then it matters. And to some degree, it also creates employment because if we're only selling more baked beans, maybe they need more baked bean shelf fillers and more baked bean scanners at the checkouts. So there's lots of different things. And I guess that's where my 14 tweet thread, I said, what's the so what? Well, it depends. And there is no single line. People look at But retails will say, aha, it must be inflation. It must be immigration. Or, gee, up 30%. That's really good. What are people complaining about?

56:56The economy's fine. Or whichever one of those you want to go with. My point was kind of like, actually, you know what? I mean, it depends, yeah. But also, there can be multiple outtakes, some which are contradictory in their impact. But it doesn't make it any less true. And I think just having to think about the complexity of a very simple, single number, retail sales, dollars, total versus last year. what does that what does that have in it it's got about 85 different moving parts and some people right now are thinking that feels too hard can i just have the simple version and the easy answer was well yes you can but no you shouldn't what's your favorite thing about that um what's your quote about simple and wrong you got a great line about the it's a cartoon or something there's this kind of oh yeah there's the two booths and there's a one that offers um simple but wrong answers and complex but right and everyone's lined up behind the simple but wrong right and so there's variations in that i think it's a new yorker cartoon originally yeah but i love it i love it yeah i'm not saying everyone should necessarily want to think about the complexities or whatever i just and again even if you want to do this tweet people some people reply with yeah but see it's this like no it's not just that that's the point you know um i head against the brick wall stuff.

58:04But yeah, I just wanted to share that because I think it hopefully adds a bit of context to why otherwise could be presented in the media as a single number, as if the number is all knowing, all telling, and any conclusions can be drawn from it. And often, too often, the conclusion you already want to see, ah, see, I told you retail's fine. Ah, I told you immigration's a problem. Ah, see, but it's all inflation. Ah, but it's all this. That's kind of the point when you really break it down and see what's going on. Just quickly too, mate, one last one. The growth over year on year was 0.85%. When you back out online, growth is 0.45%.

58:36In other words, half of the growth. So only 10 % of the sales, but half of the growth in retail sales is coming from online. And again, not pure play online. Everyone knows I own Kogan and Amazon, and it's not about that. Willis is doing a great job with click and collect. Premier Investments doing a wonderful job with Peter Alexander. You don't have to be a pure play retailer, pure play online retailer, I should say, to make use of online sales. But you better think about what company you own, whether they're ready for it, whether they're participating in it. If you own a real estate REIT in the retail space, man, you want to know what that business does and who its customers are and how they're going to hang around.

59:12There's just lots of different bits and pieces going on here. I just want to drag that out because when we see a one-number quote in a news headline, there's much, much, much more going on beyond that. Yeah. I mean, we talked a bit about GDP the other week. Yes. Yeah. Same thing, right? Right. These are, well, they're guesses. Let's be real. Okay. We don't know. So we do surveys and extrapolate. You know, like the statisticians are clever people, right? I'm not saying the numbers are useless. And they're always revised, right? Because they have to be. But it gives us a bit of a feel, but it only gives us a bit of a feel for the aggregate.

59:54Like what's happening below the surface? To your point, there's a million things happening. Yeah, true. So which is the dominant factor or whatever your theory is the dominant factor, as far as you're concerned or I'm concerned. That's exactly right. So you've got to be super careful with this kind of stuff because you will see what you want to see. So for me, I tend to pay more attention to the general directionality rather than the specific numbers. I think that's useful there. And as I said, in the context of GDP, I think you've got to look at things holistically. Retail sales, you can give me the most accurate retail sales data in the world.

1:00:32And I mean, I'm not going to be making any macro investments based on that alone, right? Like I need, okay, that's one part of the pie. The analogy we gave the other week was like looking at a company's revenue and making an investment decision based on that without regard to debt, margins or earnings or, you know, cash balance or any like 4 ,000 other things that you might think that are important. You know, just to take it outside of the financial realm. Imagine you're dating someone online and their profile says likes cats. Oh, yeah, I'll date that person. Oh, they're also a neo-Nazi, you know.

1:01:09You've got to have more than one guard point there. And what happens too is, and I know it's a bit of a hobby horse for me, but I think underneath the surface here, we've got this increasing bifurcation within the economy of those that have lots of assets and those that don't right like and you know how do you square the circle that on aggregate things are looking not terrible but food banks and people living in cars and there's never been worse right domestic violence is through all these sort of societal metrics that might indicate that there are there are things that aren't going in a great direction and not evidenced there yeah and it's it's it's masked in a lot of way by those that are doing extremely well.

1:01:54So it's, you'll find the story that you want to find there. So I guess I'd say that. The other thing that I find really interesting in that data there, and it's something that I've, it's almost become a religion to me actually, in terms of investing, which is looking for the structural shift. If you want to look at the great investments of the world, going back whatever period of time you want to, the best money was made during periods of structural shift. So the buggy and whip maker was not the place to invest when Henry Ford came along. It wasn't. Newspapers were not a great investment when the internet came along.

1:02:37Retail, brick and mortar, not the greatest investment with the rise and rise and continued rise and will only continue to rise of online shopping. on the flip side and those that invested early in these spaces did incredibly well and not because they had a nice couple of years there because they had a you know decade-long plus tailwind where the entire world shifted from doing things in a certain way to another way and when i'm always on the lookout for those things because they're rare um but when when you find them they're powerful and the other thing that's really hard is is that when you find them and when you confirm them because it's too early it's like ai is too early to invest in for me right now um i'm i'm hyper bullish on on ai it's just too early to know what the dominant player is and how it's going to play out it's like trying to invest in tech stocks in 1998 it's like is the internet going to be a thing hell yeah which is going to be the winners that's a bit more difficult so you tend to sort of wait until it becomes a bit clearer which who the gorillas are going to be um but what makes it hard that makes sense sorry i think it makes sense to me at least uh the hard thing is is that that means you'll be buying into something that's already 10x yeah and at that point in time looks super expensive right that's hard to do that's super hard to do but i know we're off the point of of retail sales here and that but i think when That's a good point.

1:04:04Like, did we know in 1999 that a whole bunch of people are going to be shopping online? Yeah, but I don't know. You could have invested in pets.com, the famous disaster, right? It's like, well, a lot of people like pets, a lot of people like dog food and all that kind of like, it's going to be huge. Yeah, but it's not going to be them, right? But you could have waited a few years like, oh, Amazon has clearly got the traction. Amazon have clearly got the things working, the business model figured out. They've clearly got the scale. They've clearly got the brand recognition. Okay, shares are 10 times more expensive than they were a few years ago, but this is the horse to bat on, right?

1:04:40And I think when – look out for those things. Gosh, we've mentioned before one of the best investments, I think possibly the best investment you could have made on the ASX since 2000 was REA Group. Why? The rivers of gold from classified advertising switched from the newspapers to online. And car sales also have been an incredible investment. ProMedicus, right? We've gone from having these picture and archiving systems that were just clunky and localized to now streamed online in the cloud. Everyone's doing it. Why would you do it any other way? Lo and behold, they're an incredible investment.

1:05:19Well, they have been an incredible investment because of that. So I guess I'm a bit off topic here, but I'll summarize it by saying, pay attention to the structural shifts but wait until a dominance has emerged and this is, I'm just parroting the conclusions of a book called The Gorilla Game which we often reference on this podcast, which is great, under the radar book, which talks exactly about that and investing in tech this is actually years ago this thing was written right, before the smartphone kind of stuff but it was right, it was absolutely right and, oh there you go, you're holding up your copy i am i'm just trying to find the uh the publishing date because i you i think what i like about the point you just made is you know for all of that you could have read the gorilla game and then still invested in this sort of the new technology you know at that 1999 funnily enough isn't that bizarre so that was talking about chip manufacturers and other things there right at the time when the internet was was booming and whatever but if you'd read and learned that and to internalize the lessons you you actually saw all of that here's a more recent example the sass phenomenon yes like you know software as a service think about how you used to do accounting like think about that yeah i had a shoebox with receipts in it but god caveman kind stuff and i'm like okay it's gonna go to the cloud it's gonna go to software first and then it's gonna go to the cloud obviously it is who's gonna win i don't know who's won zero is one right zero and intuit in the ua there's a handful of companies so what do you do all in on those right Forget Reckon.

1:06:50Forget the others. Forget Myob. They're one of these. They can't compete. And those that recognize that are going to do insanely well. Give me another example. There must be other ones that are on the ASX whose entire success has been that structural shift. I mean, the whole classifieds of businesses, whether it's Seek or Car Sales or REA, the same versions of the same theme. You know what's interesting? It's kind of network effects. So not necessarily ASX, but think about Facebook. Think about Google. The guys that become the gorilla. And I think that's the, we talk a lot about Facebook or is it MySpace.

1:07:27And I think when you don't know the answer, that is the too early that Andrew's talking about. You know, there is a move on. It's possible that these social, were you ever on schoolfriends.com? Do you remember schoolfriends.com? No. So that was, honestly, that was the original Facebook. And it was like, you put your school in and then you would join that school. So I was the school's class of whatever. You put that in and you would join all your friends. It was literally you kept in contact post-school. We had everyone's phone number or whatever. We had this thing. It was great. And, of course, that became Facebook.

1:07:56MySpace started off as just anyone following music largely and kind of merged and morphed into Facebook or not morphed into it, got destroyed by it. But you don't need to have picked which one of those three was going to be the one. In fact, at the time, I don't think Facebook would have been the primary choice. And then all of a sudden it gets bigger and bigger and bigger. And at some point it's like, obviously, this is now the winner. What's really important, Andrew, I love what you raised. I think what's important when you're saying, you know, it's not bleeding edge stuff is, of course, you could have said, well, I won't buy a pet stock in 99.

1:08:22I'll buy Amazon in 99. I'll make a fortune. And of course, you could have said that. And in hindsight, it's going to be really tempting. Someone listing more than one. Right. Okay. Well, what do you do? You just find the Amazon back there. You don't buy pets. Of course, you buy Amazon because obviously if you bought Amazon, you'd be fine. Or maybe you bought everything. Well, if you bought everything on the NASDAQ, you lost 85 % of your money at one point. This was not a small change. um and even then you had to know that one of them was going to be the amazon because again you know i i came from a background in my deep distant past i worked for 20th century fox in the home entertainment business and this was the this was the the era of dvds now you know was was the move from vhs to dvd the game changer no in high time it felt like it this look everyone's dishing vhs grabbing dvds this is the new thing this is going to be great and then while i was there it was like oh this new thing called blu-ray or high definition dvd that'll be the future and it wasn't that it wasn't the future it was that the structural shift that was still to come was this thing called the internet and and streaming and that was that was the big shift you know we're talking about how do we how do we maintain dvd sales while this new digital things kind of hang around the outside as a company i left before fox really grapple with this but you know at some point you say well we also keep selling dvds but let's realize the main game is not this anymore and so the structural shift you're talking about it's really important to not jump too early now you don't want to wait too long yeah but jumping too early what are you okay i'm gonna all in on blu-ray dvds oh bugger was it dvd all in on dvds no there was remember laser disc i remember going to a i don't know i had a mini disc player there you go there was a laser disc was this they were jukeboxed in like the i vividly remember being in some rs or bistro when i was a kid and god i don't know how old i was i was possibly a teenager maybe not and it was a jukebox they had these laser discs so you choose your song and play music and show the video i was like this is amazing what great technology this is awesome we live in the future right and it kind of was for about six months until until dvd turned up and did everything at once but my my only point is is just to echo yours which is there are some really really big shifts like the ones you've talked about there are some wannabe big shifts and wannabe companies that might possibly win from that and it's tempting to say and the other thing by the way is there's just don't even happen yeah you know the thing that was going to you know if you bought the uh the hoverboard company or the flying car company back in 1970 because hey the shift's coming i don't know which one it's going to be one is going to make flying cars and when they do i'll make a fortune sometimes they just don't happen at all so you can't just say i'll buy every tech company wait for one to be amazon you just don't have that much money you diversify so stupidly big it wouldn't even matter if amazon made money you couldn't you couldn't have had enough money in it so it's it's that balance between looking for the structural shifts, looking for the step changes, but waiting.

1:11:07That's the key. It's the white of the eye stuff. The old war movie where the side is saying, wait, wait, wait, fire. It's that kind of thing. You've got to wait. And it's so hard because in that initial euphoric period, everything is going to the moon. And you're there going, no, I'm going to wait. I'm going to wait. You're going to make up MySpace. This thing's going to be great. How can you not get behind this? The internet is the future. I worked. I worked. at a trading floor at that time. Like, just like, get on it. Get on it. Everyone's getting rich. Are you an idiot? And it all ended in tease, as it always does, right?

1:11:40Correct, correct. And you've got to be wary of the hindsight bias. Barron's famously had this article called Amazon.bomb. Yeah. Talking about how Amazon has an unviable business model. They're bleeding cash. Then, you know, and it's just sort of like, because it's, we laugh. Yeah. But no, that was a really, reasonable take back in the day. And at least one universe, Amazon does go broke. Yeah, yeah, yeah. Tesla goes broke because it hits a recession. I've said this before at the wrong time. Musk had said it way back years ago now, if there'd been a recession, we would have gone broke. I mean, you know, we kind of look at hindsight and see inevitability.

1:12:16Yep. And it's a really, really massive mistake. A bigger mistake in looking ahead. But it's a massive mistake to look back and go, oh, see, what I should have done back then is this because it's obviously going to happen. It's not obviously going to happen just because it happened, which sounds stupid. But if you really think about the logic of that, the range of outcomes at any point in time are massive. And the way things go was completely unknown. We've said a million times. Betamax and VHS, videotapes. For the kids, there was a thing called videotape. I won't try and explain it, but just trust me when I say there was.

1:12:43And beta was the, I've used this example a million times, beta was the better technology, considered by all the boffins to be the better thing. And VHS won. Why? Because some different industries, notably the industry, made a decision to say, we'll use this technology. And that was enough to give VHS a kickstart. and get critical mass such that Benamax couldn't keep up. Now, you didn't have to be better. And if you looked at it as an expert in the field and said, the main expert, and said, I know video technology. I know this is better. Obviously, it's going to win. It's just that idea of just being so careful.

1:13:13You don't want to miss everything. You don't want to wait forever for perfect information because you might still be saying, well, Amazon at some point sales will slow, so I won't buy shares yet 25 years later. But there is a point. And that point, as you said, the Gorilla Game, great book. If you can get a copy, you can do it. really really useful yeah i mean that's the lesson though in it right there and it's it's kind of they they follow these familiar patterns there's the the um the gartner hype cycle google that g-a-r-t-n-e-r gartner hype cycle and it basically uh shows you the the evolution of new technologies from their initial conception some early adopters a period of initial there's got names for these phases i'm not getting them right initial euphoria then there's a trough of disillusionment like oh it didn't change the world instantly it's done it's not stupid and then it finally gains adoption hits critical mass and then you get mainstream adoption you get you get an s-curve adoption and it's super powerful um i mean don't don't forget like a more recent example here on the asx i remember i was working with you at the time and and zero was doing its thing yeah yeah and it went from gosh 10 bucks to 30 40 bucks 40 yep because everyone said it's going to be the new way of doing accounting and yeah but then it went all the way back to 12 dollars and it took five years for you to get if you'd bought in at at the peak there and there was any sensible investor was just like well just stand back from the hype here clearly this is going to be a thing are they going to win well let's see and what you will see bring it up bring up the data, go back to some of those reports, you'll see every year subscribers increased.

1:14:49Every year, revenue increased. Every year, market share increased. In an environment where shares dropped 70%. Yeah, that's right. What's not to like you? Now, who was interested? People were interested when things were running well ahead of reality and shares were going to the moon. That's right, exactly. Number go up. I'm interested. Underneath the hood, you've got a business that is getting more and more powerful, more and more dominant, bigger and bigger network effects, and the share price is going down. Oh my gosh, what a thing of beauty, right? And that will happen. Mark my words, mate.

1:15:24That'll happen with AI. It'll happen with robotics. I was going to say that, yeah. Guarantee you. Think about AI and search, right? There's a very significant chance of a structural shift going on right now. I literally, so you mentioned going on the hype cycle. I didn't Google it. I used Google Gemini, as it turns out, for reasons I'm a Google Shell. That's not why I used it, but just let me disguise that now. I dropped it in. What is the hype cycle? It described it. It gave me the five stages, the five phases you were talking about. Hit me. So the innovation trigger. That's right. The peak of inflated expectations.

1:15:54That's the one. The trough of disillusionment. The slope of enlightenment. I hate consultants. And the plateau of productivity. But my point is that, at some point, at some point, it replaces search. Because why go and look through all of the search results and see if you can find the answerable thing? Maybe you get the first link. or maybe you just get it from Gemini or from ChatGPT or whatever else you're using. That idea of kind of, you know, is there a structural shift? Maybe. Maybe not. Maybe it just gets engrossed, you know, developed into Google and Google just has a different generation of its own technology.

1:16:25Or maybe, you know, in 25 years' time, kids don't talk about Google anymore. They talk about something else, you know, Andrew Page AI, your digital personal assistant who's doing its thing. Or maybe it's just a commodified service that everyone has. Like every company has email. you don't have a competitive advantage because you have email in the internet and a website like everyone's got that dude is email a massive game changer yeah it is uh but it's nothing special it could i'm not saying it will but that that's why you need to wait and because it might be that yeah ai is this incredible new you know brain in a box thing that we've invented but if everyone's got it yeah i mean there's free and open source models that are out there and they're getting quite good as well, actually.

1:17:09So it just might be that you're not special because you've got AI. How many companies have you spoken to or seen recently where AI is mentioned? Like every single one. Oh, we're doing AI. We're doing AI. It's like saying, oh, we're using electricity. Are you? Oh, great. Good for you. And by the way, I don't know. It may be that in five, ten years' time, there is one monolithic AI company that just has the AGI that controls the world, or maybe that's the one thing to bet on. And I tell you what, I'll be all in on it once that trajectory has, nothing's certain, but once that has become a lot clearer.

1:17:49But again, I'll just reiterate the point. At that point in time, I'll be buying into something that may have already gone up 20 fold. And that is going to take an incredible amount of humility to get over all of the behavioral biases and say, oh you know i've missed it it's too late it's too high and it's like no now we know the network effects are such that this thing can't be broken you mentioned beta and vhs that's a really interesting one i think that's for those that are looking for better like for something to be disrupted it has to be better that's true but when you've got anything that has a very powerful network effect it has to be 10 times better i i can i can guarantee you that there are better enterprise solutions than SAP that are out there.

1:18:35Yep. Better email clients than Gmail. Yep. Are they 10 times better? Yeah. No. Well, I'm not going to do it. Yeah. So you can imagine the customers who have got these deeply embedded, like into their systems and processes, and you knock on the door and say, oh, our widget will give you a 10 % boost on this. Is that enough for me to rip the guts out of this, face the execution risk, be the first person in line to sort of test it out and make sure that it we just it's it's too hard so what what you need is the 10x you need the 10x improvement for for it to be good but more more than anything else you need that validation in the market and when that comes yeah go hard and and get out of the way right because the the other thing other mistake that you're very likely to make i'm not being critical so i will make everyone we all do it is like even if you can to overcome all of those challenges and you buy you'll double your money and you'll sell and you think you're a genius and by the way of all the problems they have that's a pretty good problem you doubled your money right but i can guarantee you in 10 years time when you're looking at something would have been 100x yeah you'll be crying into your weepix every morning like just it's it yeah so so so patience wait for validation buy shut up get out of the way i love that i'm And one more thing to it, mate, which is you should apply the same approach to companies you already own who are being disrupted.

1:20:05Oh, gosh, yes. It's obvious just by comparison. But if you own the buggy whip, the new car's coming. If you own VHS and DVDs turned up, whatever those things are, they're bad examples. But you get what I'm saying. If you own MySpace and you see Facebook doing its thing, it's like, okay. you know not only is is there an opportunity to say this guy has done it and it's working and they're off to the moon but i know i've made this mistake mate i recommended years ago reckon uh for i own reckon personally i think i might as two actually um and it was that idea of like okay they're not zero but they're cheap and in a in a winner takes most scenario and they're not all winner takes most right so it's also important to work out what you own and who you know if you got a local monopoly if you're a local cement company in in adelaide you're probably gonna to get beaten by a bigger one in brisbane right um because it takes a lot a lot of time effort expense weight to carry something from especially cement from from brisbane adelaide but if you are an a winner takes most market where consumers switching you know i've just mentioned online retail and i mentioned you know real estate i'd be really really worried if i owned retail real estate right now maybe for no reason and i'm not saying sell right now i'm just saying you look at that trend that's happening you're seeing it happen uh sales up 140 in five years market shares doubled, maybe it stops here, maybe this is it, or maybe it's not.

1:21:25But at some point, particularly where they're business with tipping points, like retail, where you can absorb a little bit of loss, but not much, and all of a sudden, if retail businesses start to struggle en masse, and particularly if you have an ongoing downturn, for example, this year, or maybe sometime after that, just be careful that you understand those structural shifts that are impacting on the companies you own, not just the ones you could buy. And again, the endowment effect is really powerful, right? Even if you've done really, really well owning these companies for a long peer design at some point if and when the dynamics change you need to be aware of that again we're not saying sell everything we're not saying sell too quickly i'm a long-term buy and hold investor i'll probably get caught with some of these myself at some point but it just it just makes you look at the opportunities but also the potential risks or the exposure you have in your portfolio companies that are being disrupted as well you know it's really tricky i saw it's such a good lesson god we're over time but you know yeah we're here now um um in the day um back in the day back in the day if you were to look at the financials of reckon yeah it was gosh it had this beautiful stepwise earnings growth they were gushing cash they were paying a dividend i think their balance sheet was in tip-top shape zero bleeding cash that's right constantly raising money yeah yeah you know there was no earnings yeah the more they sold the more money they lost yet yeah you know it was all of this kind of stuff and and so it wasn't and i i i was right and i was wrong i kind of thought yeah zero is better and all the rest of it but look this is just as you say it was cheap i got into the i got they call them the value traps because they look cheap um it was cheap and they had better financials.

1:23:05We talked about RFG Group the other day as well. The financials were great, at least at a higher level. It's like, wow, everything is going in the right direction here. So we've got to remember as those that look at these fundamental data points, they're all backwards looking. Yes. Right? So, yeah, Amazon looked terrible. Xero looked terrible. All of them, which anyone who started a business is going to know, right? Because I've got to put all the capital in just to get the plate spinning, right? And it's going to take some time. And the company that's about to be made irrelevant might look brilliant.

1:23:44The buggy whip maker had some really great financials right up until the point. So that's going to be another thing that sort of messes with your brain here. The past is really helpful as an investor because it gives you a sense of, well, yeah, there's evidence here that this company is viable and making money and knows how to allocate capital and all of these really good things, that it won't tell you what might happen during a period of structural change. Correct. And it's, yeah, I don't know what my point is here. Other than there are non-obvious kinds of signals that are there. So you need to sort of marry a whole bunch of expectations of the future, firmly grounded in some data points that you can point to today that shows evidence of this thesis playing out and recognizing the fact that companies at different stages of the life cycle will have different financials, you know, and won't always...

1:24:44It's what I've said before. You've got to put the right hat on for the right investment, you know, and the Warren Buffetts of this world are never going to get the next big thing early. Which is okay too, by the way, as long as you know how you're investing and what you're doing. Which is fine. Buffett has made an absolute squillion dollars. I'm not having a go at Buffett. No, no. But where people go wrong, though, is they quote, they go into an area that's completely outside of Buffett's sort of playground, and then they'll put a Buffett quote out there. They quote it. It's not applicable to that scenario.

1:25:18Correct. So you can make yourself feel better by quoting Buffett here, but he would never do that. That's right. He famously never invested in tech. Apple, as I've said before, Apple's his largest listed holding at this point in time. He got there and he got to the point and he's like, oh, this is clearly a thing. He's clearly winning. I'm going to invest in this. Again, we're way over time. You know what's interesting though? He didn't buy Apple because it was a tech company. He bought Apple because it was a consumer products company. Yep. Yep. And even then people say, oh, Buffett's finally got tech.

1:25:43No. Yeah. He's just recognized that the screen is the most valuable real estate in the world. Yeah. And people love the hell out of this thing and pay a lot more for Apple than for the equivalent product. Yeah. He's bought Apple on the same basis he bought Coke. Yes. And that's the other thing is like just, you know, be careful about the rationale because, you know, The idea of Buffett's finally got, he bought OBM because it was a services company and Apple because it was a consumer products company, not because it had any to do with tech. He had no view of what the future of tech is. He just went, great, well-run company, consumer products, okay, I'll buy it.

1:26:11Which again, I think it's a fair rationale. It was a very good rationale, frankly, for Apple. But Buffett wasn't all of a sudden getting tech. And that's the other thing is people sort of say, oh, Buffett's now in tech, it must be because I don't buy tech. It might be, but don't do it because Buffett's doing it because he's not doing it for that reason. And admittedly, he's also missed a whole lot of great tech because he hasn't invested in it either, which doesn't make it a bad idea. It's, as you say, mate, horses for courses. And it's make sure the style aligns with the company line. Yes. If you're going to buy a Buffett-style company, use Buffett-style thinking.

1:26:40Yes. If you're going to buy a tech company, don't try and apply Warren Buffett's approach because you're not going to get there. And it is another example of being late and still doing, quote-unquote late. Yes. Yes, that's a very good point. Doing incredibly well out of it. Yeah, yeah. It's like it's too late. We already know Apple's the greatest. you know and like yeah it's it's it's not and anyway if any any listeners have got anything that's um here's here's the here's the um things to look out for and let us know so we can invest it's a technology that's that seeks to uh disrupt an existing incumbent and probably a very large and and powerful one which would be great which has developed the network effects such that it is very likely to be a winner or amongst a small handful of winners.

1:27:25And ideally, if I'm being picky, it's gotten to a point where it is able to self-fund its growth. If you sort of get those sort of three things, yes, the price will, you look at the pricing, oh, but it's up a lot. But that is, that's something I'm pretty interested in. As long as there's enough market opportunity left is the only thing I'll add to that. Because you can be expensive and have saturated your market, in which case you're going to fall over. I will say, by the way, for REA, I looked at that yesterday with the team, and it is extraordinary. Everything you said of REA is right. It's also in Australia on 90 times earnings.

1:27:56Yes. And it's saturated in the Australian market. So it's kind of like – Yeah. Now, again, to your very point, I'm not saying sell it because maybe there is another leg of growth. Again, you ignore these companies or you kind of sell them at your peril because they have a habit of finding ways to grow. So I'm not saying it won't. I'm just saying REA 10 years ago was not REA today. And so there is a point at which you say, hang on, isn't the market saturated? Where does it go from here? If you can answer that question, then again, I'm not saying don't do it. I'm just saying at least have that conversation with yourself about, so where to from here?

1:28:29Because otherwise, this thing is really expensive. I've got, we've got to go, but this is my last example. And I can't believe it escaped me here. It's the number one ranked stock on straw man. I was like, how did I miss this, right? Ordinate group, AD8. Yes. Fits everything we just said. Yes, yes, yes. Anyone who's worked in the AV industry, there's just cables everywhere. It's all analog. Again, it's caveman stuff. There's now a digital way of doing it. And Ordinate had some really impressive tech. Was it obvious back in the day? Not really. But now they're pretty much integrated into every OEM manufacturer, original equipment manufacturer.

1:29:06They are by far the market leader. by far the market leader, and they are demonstrably 10x better than the existing system. It is guerrilla game material written all over it. So you don't need me to tell you, but, you know, the shares have gone to the moon. You know, you could have 10 years ago got them from$1.50, and now they're like$16.80. By the way, interestingly enough, they've had a bit of a sell-off recently. There you go. Let it continue, right? Like, isn't this beautiful? But it's always, these drawdowns happen for all of the winners, right? And it's sort of like, what's happened? Well, nothing.

1:29:38The company's never been in a firmer position, I would argue. Maybe some valuation considerations or some traders worrying about interest rates or et cetera, et cetera. And valuation does matter. But just before anyone says, oh, yes, but the shares have gone from$22 to$16. And they're like, yeah, whatever. That's normal for Amazon, for REA Group, for Xero, for all of these ones. That's what happens. Nothing goes up in a straight line. But if you want to point to an example on the ASX of a technology disruptor that's now dominant in its industry globally, which is a very large market with a huge way to run.

1:30:10This, by the way, now got a product in the market that's not just for audio but for video. I don't know. It ticks a lot of boxes. And having climbed the slope of enlightenment, we are going to let our listeners go and enjoy the plateau of productivity on their Friday evenings or whatever it is you're listening to this podcast. Thank you for sticking with us for what is a 90-minute podcast. I think we have broken yet another record for length of podcasts, Andrew. I don't think it'll be our last one. I'm going to make a prediction. I'm not sure this will be the longest we ever do a podcast for. but we shall have to wait and see.

1:30:40Please rejoin us on Sunday. If you want to send us an email or jump on our socials, I'll share them next time because frankly, no one's listening, no one to accept our mums anyway and they don't have phone numbers. So other than that, enjoy the first part of your weekend. We'll see you on Sunday morning and full on. Yeah, thanks for listening. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General 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.

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