It’s expectations season! February 13, 2026

24:09You know, it's just I don't need someone to tell me whether – how I should spend my money if I want to go to Crown Casino and gamble it. Or, you know, anyway, we probably have slightly different views on that. It's kind of – whatever the point is, I'm just making the point that when you tax capital gains, you have a couple of things. You're effectively taxing a pool of income that has already been taxed. You're disincentivizing investment. And also what you're really doing is you're incentivizing a lock-in effect. So what you're – now, I would say for a – if you really want to maximize the efficiency of the economy, not because it looks nice on a spreadsheet and that's just what turns you on.

24:50Because what leads to greater prosperity and human fulfillment – let me just make that point because that often gets missed in the mix. But it's sort of like, and you see it all the time, right, with the people you speak to, I know I see it all the time, who won't sell something because of the tax bill. Yes. So we have this very inefficient allocation of capital. Well, banks shareholds, mate, frankly. Yeah. I mean, if you've made money over 40 years in the banks, you've done really well, even for the right reasons, for most of that period of time. Yeah. And most people who won't sell them now are like, well, I won't sell them because I have to pay capital gains tax.

25:19Well, banks have gone nowhere in, we'll talk about banks in a minute, actually, they haven't gone nowhere in five years, but I'm still holding because I'm not paying tax. The lost gain over that period of time probably dwarfs the tax you would pay, but it's just the - And not even the lost gain for you as an individual given the opportunity cost, but the opportunity cost that is born by the company that never got your investment in the first place. Yeah, yeah. Right? So there's all this money locked up in these assets that historically have done very, very well that going forward may not have the same return potential.

25:51and here I am or here a very significant swathe of the population going I look if it wasn't for this I would probably take my money from here and put it there but I'm not going to do that because of tech net rational irrational doesn't really matter the fact is that's what it happens and so I can go on and on and on and this and my point and we can get really lost in the weeds here but just just to stand back here and just to really make the point is that what frustrates me more than anything is that again it's just too myopic it's too narrow we're not thinking about it in the context of what the second and third order effects are.

26:23We're not considering it in the context of how it fits with other taxation regimes and what we want to encourage and what we want to disencourage. And it's why we have a tax code that's an absolute basket. It's just a spaghetti mess, right, where you get to the point. I'm doing my taxes at the moment, right? Me too. Here's a privileged whinge, you know, first world problem for you. But I've got an SMSF. I've got my business. I've got a trust. I don't know why I've got a trust. It's completely not worth it the way things are structured now, but I was talked into it by an accountant at one point in time.

26:59With the trusts, I've got some PTYLTGs that act as the trust. So it's like I'm going to spend like 10, 12 grand this year or whatever the heck it ends up being on bloody tax. You're right. And again, I'm not on the tax. I have to pay someone that much money in aggregate so I can pay it. And again, I'm not against tax. It just feels like that feels really like, especially in a world where everyone's banging the table about lost productivity and all the rest of it. It's like, this is what we're doing. This is how we're spending our time. This is what we're paying people to do to decipher these arcane and intricate, complicated rules.

27:40And then what really gets, you know, the bee in the bonnet really comes from the unfairness of it. everyone is subject to the same rules yes that's true but i can guarantee you someone who's quite wealthy that has very very good legal and taxation advice is getting a better deal because they can afford that and that doesn't that strike you as wrong as a system that it's sort of like oh yes single parent in the outer suburbs is like you don't know that if you did this and you structured that it's like no i don't know about any of that's really sort of complicated well therefore you don't get the tax benefits that are there.

28:16It's just like, if the system is so complex that you can only really make the most of it through very expensive advice, I would say it's inherently unfair. So anyway, for me, it is never going to happen. We've talked about this before. Yeah, correct. Burn it all to the ground. Burn the whole damn thing to the ground and start again. And there are a lot of people, a lot of experts who have studied and written dissertations and theses on this for many, many years. I know there's strong agreement on this, but there are lots of good options. Lots of good options that we can at least discuss. Correct.

28:50Let's just fiddle while Ryan burns. Too hard, don't have the political courage. Ken Henry did a report in 07 or 08. Let's just try some of those. What are we, 6pm, 7pm through since that happened, both parties, and still see you on the shelf gathering dust because no one wants to touch it? It's just a nonsense, mate. I completely agree with you. I think I you know and you know how I would start I've written this on Twitter and no one likes it because it's a bit wonky and whatever to your point about what you're taxing the first question is how much money do we need to raise what do we think government should spend money doing on behalf of the people and again we'll have various range of you know anarchy through communism in people's answers and that's fine but that's the first question what services specifically not how much they cost right now just what do we want government to do okay we want to do that thing because that's better for us It's either it's easier if someone single does it or a business is not going to provide it or no business is going to provide safety nets, so you do that.

29:44Okay, add all that together. How much of that cook us for this much? All right, good. Then the next question is, well, okay, what is the, I'll say fairest, and fair gets people really riled up, but the concept is still real. They'll say, what do you mean by fair? I don't know. You work it out. That's the conversation we'll have. But then you say, well, okay, we need to raise this much money. What is the fairest way for those in society to contribute to that tax need? The fairest way for most people is someone else and not me. Right? And that's it. And it's easy to say, oh, that bludgeon shouldn't be on the dial.

30:14That billionaire should pay more tax. You know, whichever way your political, you know, winds blow. But the reason I put it that way, mate, is because when people say, I shouldn't have to pay more tax or we shouldn't tax capital or we shouldn't tax labor or we should, this, it just comes down to, you know, okay, we've got to pay the bill. And who is in the best place in a reasonable way to pay the bill? And most of us would say, if you earn more and you're wealthier, you probably should contribute a little bit more than someone who's a single parent. That seems reasonable, right? That's what the minimum wage is all about.

30:46Put the food on the table. Right, now we can talk about, you know, that's the minimum requirement. There should be a minimum living standard, which is, okay, well, it's reasonable to have in a modern wealthy society this much money with which to put food on the table, put a roof over your head. That's a side point. Should we tax anyone earning less than that? Probably not because that seems a bit, you know. Gina's over there and someone can't put food on the table. We can say everyone should pay tax because it's flat tax. Okay, but I think that's unreasonable. And again, I don't want to get into my personal view on who should pay what necessarily, but you've got to start there.

31:16And that's when people say, I shouldn't pay more tax on this, I should pay more tax on that. So if you're not paying tax, someone else is. We know how big the bill is. Now we're using debt, which is stupid, but let's pretend we're not for a second. We know how big the bill is. So if I'm not paying it, you are. If you're not paying it, someone else is. And so the question is simply, if you were setting, you've made a great example before. If you didn't know where you were being born or who you were being born, what you were being born with, how would you design the system if you didn't know your place in the system?

31:39It's exactly the right question because it's that idea of, okay, who contributes what? Who has the means and either the income or the wealth or both to provide a reasonable amount and have lots left over in a fairest way? And that's kind of - And the only thing I would add is that you want to maintain, because this is always the argument that's trotted out, you definitely want to maintain the right incentives, right? So you don't want to punish success, right? But at the same time, you want to make sure that those that can best afford it do. So there is a huge overlap. It's not a disagreement at all in what you say, but it does get trotted out.

32:16It's like, well, if you do this, no one will want to be, no one will work hard or invest all that, which is a little bit of BS. But you certainly don't want to make it so punitive as to like, you know, If I've got a billion dollars, let's say it's a very simple example, and I'm like a nicer version of Elon. That's a crazy version of Elon, right? It's not hard. That's a low bar. Okay. Let's shoot. We're getting letters, yeah. But, you know, incredibly impressive person from an entrepreneurial standpoint. Let's just say that's the person I am, right? And I have a lot of money, but it's like I've got 400 great ideas for other businesses.

33:02Businesses that don't rely on government support stand on their own merits and create immense amounts of value for society. It's like, well, I mean, these are very fringe examples, but I think it's still worth having. You don't want to get to a point where it's just sort of like we will actively disincentivize you from doing that. but yeah it the thing is mate everything that we're talking about isn't so far out of the realms of possibility as to almost be a useless conversation not a possibility but likelihood right it's all very possible there's not going to do it and I know that's what you mean a possibility but just to define that it's very you could do it tomorrow a government with some sort of gas would just change tomorrow and they go to an election with it easy so it's super possible I know you're not saying that I just want to make that point that it's not even like it's not possible it's entirely possible that's not going to happen because they are just too gutless to actually have the conversation and try and do things.

33:53They don't have the skills to sell it. And that, to me, is the greatest irony of all of this, is that if you framed it properly and you articulated it, what you're really saying is that we're going to make these changes. Look, on the margins, some people will be better off, some people will be worse off. But in aggregate, we're all going to be a lot better off for this, right? So look at the bigger picture. Let me make the case for you as to why, even if, you know, you and your high-powered partner with no kids are both on$400 ,000 a year and have 20 different investment properties and a$10 million portfolio, you might end up paying tax.

34:30But let me tell you why that's still going to be better off for you. And I reckon you could do that. I reckon you could, you know, not easily. I mean, I'm not going to pretend I could do it without tripping over myself. I prove each week, mate, that I can barely form an articulate sentence. You and I are never going to be politicians, are we? So it's not going to be me, but I think that's that rare combination. You need three things, right? You need someone who's got the smarts to understand it, someone who's bold enough to do it, and someone who's got the, not just the political capital, but the personality to bring people along with them.

35:06It's such a rare combination. Do you know what's funny? I think that's right. Well, I thought that was right. I still think you're probably right. But if you're just saying that, I'm thinking, who had less personality than John Howard? And God love John. No, no, but I mean that in a positive way in the sense that he didn't need charisma. He needed conviction. Yeah. And so to your point, I think you need to be able to sell it. Yes, you need to be able to make it explainable. He did a pretty good job of that. He had a very good way of talking to middle Australia, which obviously worked. The whole Howard's Battlers thing was a phenomenon.

35:35So I think you're not wrong in terms of being able to sell it, but I don't think you need to be a born salesperson to get it done. I think you can demonstrate sound policy, strong conviction and earn people's trust that it is the right, you're doing it because you think it's the right thing. And whether you like Howard's policy or not, replace Hawke or Keating if you want to, whatever. And Hawke had more charisma than Howard, but say to everybody else. But you know, it was just largely that we are doing this because we think it's the right thing to do. And, you know, it's the old joke. I always told the story of a mate of mine years ago who was the son or a real estate salesman said, Dad always told me that this kid is selling real estate sincerity.

36:17And once you can fake that, you've got it made. You've got it made. You're so good. Such a good point. So as long as you're genuine. But no one doubted how it's genuine. They might have loved or disliked or hated his policies. But it was kind of just one of those, okay, I understand that you think it's the right thing. You've taken the time. You've explained it. It's understandable to me. So you're right, it needs to be that. But I just think convictions are winning. I honestly don't think – where are the conviction politicians these days in anywhere? I don't have any. if a focus group doesn't tell me what to think I don't know what to think and even those who are get bent over by the focus groups people love or hate Malcolm Turnbull he had his convictions he just got absolutely worn down and turned inside out by a combination of a party room didn't want to play ball in the focus groups and said he was losing in the polls you can have that worn away and so you kind of have the faith of the party room first and then the population as you're right it's bloody hard to do I'm not saying it's easy, but if someone actually had some ideas and had some suggestions and was grounded in this is how it works, and I think that's the thing about, you know, we bagged career politicians and probably justifiably, but we used to have polis who got into politics because they had ideas about how they want to improve the country.

37:29Not just motherhood statements, not I think we just should do better things. It was like, no, no, this stuff. There were some of the industry ministers in Australia. I think industry policy is generally kind of left in the 70s. But some of the people we had who did it had genuine, on both sides, genuine belief in what they wanted to do, how they thought they could improve the country. Tax policy, the same thing with some of the old treasurers, right? Even the lady, what's his name, Ralph, apologies, Ralph, what's his name? I don't remember. You know, when Keating toppled Hawk and then went to the back bench, Keating had treasurers and Hawk had treasurers that were, you know, just policy wonks.

38:00And they just, they loved doing their stuff and they had ideas about how they wanted to fix things. And they don't have that anymore. Yeah, yeah. Yeah. You know what I would do? Just final point before we move on. I think one way you short circuit it and it's this idea of perfect being the enemy of the good. And I think in order to shepherd through some very bold sweeping changes, you just necessarily grandfather things and you put it in a future date because the pushback is always going to wait, wait, that's going to hurt me now or in the near term. I don't want it. But you sort of say, listen, we need to do it.

38:30I know that this is unfair right now, but we're going to let you keep doing it. If you've done it already, then that's fine. And like, it feels wrong. It's like, why are we letting them do this? No, we've got this vision. We're going to be like, yeah, but we also, I mean, what are they saying in politics? If everyone's unhappy, you've done something right, right? Like it's the art of compromise. Yes, yes. And I think it's a really good compromise in the sense of saying, you know, if that's what it takes to get it over the line, then let's just do that. And at least we know that the fix is coming down the pike as opposed to never happening, right?

39:02And I think it was - It might have been the Kiwis who did this as well in terms of smoking. That was always tough, right? So, like, there's a lot of people who like their ciggies or, let's face it, extremely addicted to a very addictive drug. And it was always hard to sort of suggest a very authoritarian prohibition kind of thing. And I believe they basically said, right, here's the date. Anyone smoking before, get a license, you can fill your boots, do what you like. But after this, you can't buy a packet of cigarettes. Someone will correct me on this. It might be the wrong country that I'm thinking of.

39:34but amazing success. Did it fix the problem overnight? No. But it meant that the smoking rates dropped precipitously after that point. And also politically, no one was unhappy. The smokers were like, wait, so I can keep smoking? Yeah, go for it. Brilliant. The non-smokers are like, well, I don't smoke anyway, so I don't care. You know, it's just, it was a really nice way of getting through something that was otherwise very difficult to do. Yeah.

40:00That's been my view on negative gearing for exactly the same reason. It's like, you know what? People say, it's not fair, it shouldn't be happening. It's like, yeah, okay. I mean, I don't necessarily even necessarily agree with them, but I hear what they're saying. But it's like, well, dude, how many property investors are there? You're not going to make – this doesn't get through unless you say, as you say to people, right. I think we should stop needing to be on residential property back to the first conversation we had rather than CGT because that's the one – no one goes to the accountant and says, how can I pay this capital gains tax?

40:24They go to the accountant and say, how can I pay this income tax? And the accountant goes, I've got an idea for you. You're going to lose money every month on property. It's like, okay, sign me up. Let's do that. Sign me up. right but that's exactly I and I've never I've had some one person did something on Twitter so I now have to say one person who's ever said that capital gains tax was even slightly a motivator for them buying investment property but every bastard says I wanted to pay less tax and so I could do that by needing to give a guarantee so you know in terms of actually changing behaviour get rid of that it's great but let's not we don't need to screw people over who have got investment properties already and you know some maybe don't deserve it some do I don't know but if it's the firey and the nurse who bought an investment property, an investment unit in the boondocks and you need someone to try and make some money and they're in the hole by 300 bucks a month.

41:08Making that worse just because we don't like negative gearing, I mean, it's justifiable on a policy basis, but not really fair to those people. I mean, do they make sleeves risks? Well, they made a decision under a certain set of assumptions. And with advice they were given. And I just think there's no need to screw them over. And yes, it means change will happen slower than it would have otherwise because otherwise there would have been four sellers and had to swallow six-figure loan losses. But that's a crappy way to set policies over there. lock it in okay you did it fine you get it from tomorrow or from yesterday or from today at the end of this you know Sunday afternoon announcement tomorrow morning no I'm going to give you our new properties so other than that if you're already in good luck to hear yes it's not fair and people say oh boomers got it we should get it too okay but that's just you know it's a politics of envy at some point it's like just let it happen I know it sucks by the way whenever you get a tax cut no one says oh I want I didn't I didn't invest on that basically that tax cut so I'm going to pay a higher tax everyone's happy to take the tax cut It's always, anyway, just one of those things.

42:03Different story. Isn't it? Mate, let's, speaking of expectations, as I make a clumsy segue, we are in the middle of expectations season. I mentioned earnings season, but expectations season is well and truly upon us. And we've talked about this before, so we have to do much more of this than we have in the past. But just a reminder, I think, is worthwhile. We had two announcements over the past 48 hours. uh again i'm recording this on the thursday 12th agl came out and their profit was down six percent now you know i know you know the answer to this ram but listeners what do you reckon happened to the share price profit down six percent share price was down no it wasn't it was up up eleven and a half percent why because the market expected worse your share price does not move because earning does not go in the same direction as earnings just because if earnings are up share Share price is not necessarily going to go up.

42:58Furnings are down. Not necessarily going to see a fall on the share price. It comes down to what investors expected would happen and the future they priced the company for. And it's perfectly logical. This is not even slightly irrational. It's perfectly logical. If you said to me, I'm going to send in my news agent, but next year the profit is going to be half what it was this year, I'm not going to pay you a model this year's profit. I'll pay you less then. That's kind of, you know. And by the way, if you want to buy it back from me, it's slightly better than it was. I could probably sell it to someone else for more than I paid for it because the future looks brighter than I thought it was.

43:27That's perfectly reasonable. Today, Thursday, ProMedicus, a company we've talked about regularly. Profit up 29.7%. I think I'm doing off the top of my head, but I read it only just before we started recording, so I think that's right. What do you have to do with the share price? Profit up 30%. Really, really impressive. Reported profit up 200%. We'll talk about that in a second too. So the shares are, yeah, down 16.75%. Last I looked, I haven't refreshed, so this will be changed. They're down a lot from their high. 16 % now. They are a lot, actually. From their all-time highs, they've dropped in half, right?

43:58More, about 60%, 58%. 60%. Yeah. But that's a different story for the story. Makes Bitcoin look tame. No, it's about the same, actually. But yeah, my point is on earnings directly. Literally on earnings, the shares fell 16.75 % today, even though profit was up 30%. Why? Because the market thought profit would be up even more. And so it's just a reminder, I think, to our listeners to, who I guess I get questions all the time. Why are the shares up? I thought the profit was good. Sorry, why are the shares down? I thought the profit was good. Or why are the shares up? The company's losing money or whatever else it is.

44:32It's just one of those situations, I think, to remember that the market is always pricing for its view of the future. Now, do you have to play the same game? Kind of. I mean, you have to have a view of the future to work out what the price is. But you don't have to necessarily buy into the market's view of the future. And this is exactly what it's about when you look for shares that you think are underpriced, to buy or overpriced to sell. You're looking for situations where you're like, the market price seems to suggest that sort of growth and man, I don't think it's going to be that good. Or in AGL's case, you might've bought them a week ago saying, I mean, the business is in some trouble, but it's not that bad.

45:08The market thinks there's nothing going on here. So that's exactly what we do when you invest in individual stocks. And again, most of our listeners hopefully know this. If you don't, welcome to the game. You're looking for things you think the market is wrong about. And that's exactly what's happened in those two companies over the last two days. the market has realized or now believes it was wrong in the past. We thought this was going to happen. So we thought that was worth this price. We now realized that's not happening. And so we are going to pay a different price. And that's the market doing what the market does.

45:39Our job is to find those beforehand and say, what is the market too optimistic on? I might sell that. What is the market too pessimistic on? I might buy that. That's kind of what we're trying to do. The only thing I will say too on expectation season, it's also outlook season. And I'll just get back to expectation. Just to finish off the thought, then we can come back to it. Outlook season is when the company says, and particularly now, they'll say, well, the results for the first half of the financial year, which ends December 31, are X. And they'll normally say, and for the first six weeks of this year, we're doing Y.

46:09So it's not even necessarily the earnings and the expectations of the earnings that people are responding to. It can just be a case of last year's earnings were up 20%. The first six weeks of this year, sales are down 15%. What are they going to respond to? Yes, the earnings a little bit, but also the outlook tells you what's happening right now. Well, not the outlook, but the updated kind of updated sales or unordered numbers for the first bit of the new half. That also gets price in. And then my point about the outlook is then they say, and we're expecting for the full year this to happen. And so you've got all that information the market's trying to roll together.

46:40Now, in some case, I think it's way too short term. The market's a bit silly about this stuff. But just be mindful if you're looking at share price movements, the combination of what profits did they expect, how have sales gone so far this period, and what is the company leading investors to believe about the future? Because it's those three things in combination that will generally govern share price changes. Now, there's sentiment on top of that. So the market's going to have its own view of those things and respond. And sometimes that's just pure emotion. but think about not just last year's profit up or down share price up or down is way more complex than that you don't have to worry about it because you're a long-term investor so if the last six months or the last six weeks doesn't impact your long-term thesis feel free to ignore it entirely but just know that's what's happening when share prices move when companies announce their earnings yep yeah nicely said um it's funny how we always think the market is wrong before we buy it's like oh, that's cheap.

47:35The market's wrong. And then you buy and it's like, oh, it's gone down. What does the market know? The market knows something. It's right. We take the price. Is it wrong? Yeah. Or is it right? That is so true. That is so true. You get to this idea, you may have come across it before, listeners, this idea called the efficient market hypothesis, which is actually, it's easy to laugh at, but I think there's truth to it if you frame it correctly. And what it basically says is that at all points in time, the markets accurately reflect all the available information. Now, that's the very strong version of the theory that I very much tend to reject.

48:11I think most investors do. But it tends to, by that, it suggests that outperforming the market is impossible other than a statistical aberration as a fat tail, you know, like there's enough investors, someone's going to do it. But generally speaking, you just got no chance of doing it. Everything can be known as known. And so if that's the case, then it's not possible to know something someone else doesn't know, and therefore you can't outperform them. It's not possible. You can't outperform the market. Now, the softer version, which I've got more sympathy to, is basically saying the market is usually pretty good at taking the available information and reflecting that in the price.

48:50At least over a long enough timeframe, it tends to sort of hover around what you might consider to be reasonable. but no matter how you, where you draw the line or how efficient you think it is, like the, no one knows the future, right? And we can all have an opinion on it. And that's, you talk about the game, that's the game. Your whole raison d 'etre as an investor in the markets is to go, well, based on all the available information, the consensus view as reflected in the price is that this company is worth this based on what it's expected to do. Now, you may have a different view to say, no, I think the market's being overly pessimistic.

49:31I think earnings will be higher. I think sentiment will be better. Whatever it happens to sort of be. And if you don't think that, then buy an index fund, right? And just get the average. And nothing wrong with that either, by the way. I'm not trying to throw shade at that at all. But if you are a stock picker, and I think you and I both know enough people personally and just, you know, others that are out there in the public domain that have so consistently and thoroughly beaten the market for long enough to know that it absolutely can be done. But it very much requires this ability to walk that fine line, as we've often discussed, of being hubristic enough to think that you know better than everyone else, but humble enough to respect the market when it's telling you something.

50:14And where you sort of split that is very, very tricky. But yeah, I think that's the way I sort of look at these kinds of things. When results come out, did I ever make an investment on what the last six months of this company was going to be? Absolutely not. And as you said, it's already happened. And now I've got shares, I'm really exposing myself to what the future will bring. Nevertheless, it can inform you of the quality of the business. You certainly made some assumptions on what was going to happen over the longer term. And if the six months that were just passed didn't work out as well as you thought, but there was some broader macroeconomic considerations or it just happened to be a softer sales fee or just the normal machinations that happen within business, right?

51:02Just anyone who's run a business, no, some years are better than others. Even if you're doing absolutely everything right, that's one thing. But sometimes you get, not sometimes, very often, in fact, There is insight below the headline numbers that will help you understand, actually, this isn't just a tough run for the business or conversely, this isn't just a very good period. This suggests that this company has far greater earning power than I had previously thought or not as good as I had previously thought. And that is not being reflected in the market still, despite whatever volatility has happened.

51:39And it's just, if what I'm saying sounds incredibly tough and difficult, well, I won't sugarcoat it. It is, right? And even then, it's all very probabilistic at the end of the day. But too many people do freak out about things that they feel don't make sense when they see market prices reacting. And you've just got to remember, it's like, well, why do you think the market owes you anything to make sense to you and the way that you think of it? Your job here is to second guess the market and just respect it enough to know that it's pretty good at what it does, but also recognize that it's often very wrong.

52:14And that's exactly why you're here. If you're not, what are you doing? What's the point? Yeah, I think that's right. I think it's just that that's the that is the challenge. So look, it's just we say we say most earnings seasons, I suppose. if you've listened for a few years, you've heard this one before, but just be mindful of what you believe the market is telling you and what you should listen to. By all means, take the opportunity to look at the price that you're being offered and buy or sell accordingly. Yes, absolutely. I understand why the market does this thing because the market's often right.

52:45So, you know, we're trying to find, as you say, mate, trying to find that point of humble enough to realize that the market's probably right most of the time and we're wrong sometimes, but also arrogant enough to say, well, I'll try and beat the market anyway. There is a natural, and that's the hardest part of investing, right? It's why a lot of people don't invest. That's why a lot of people do invest and get it wrong because they just have these convictions that are too strongly held, too iconoclastic or too whatever, and just don't understand the changing circumstances or simply understand the bear case.

53:09And you've said a million times, understand the bear case better than the bears. So, yes, do those things. Just recognize that you don't have to respond to share prices. What the market is telling you is what it thinks or how it feels, not anything else. There's no truth in that. It may happen to correlate with the truth, but the market has no more foresight than you have. As a group, maybe it's better, so be careful of that, as I said, but yeah, that's the way it works. I also think, too, we put way too much significance in these daily moves. I mean, let's go with ProMedica, just looking at it right now.

53:44My goodness, 17 % down on the day, right? It's huge. Now, the reality is, let's not get into the debate about it, right? And I'm a little salty with ProMedica, so I'm... Damn you! Yeah, correct, correct. Well, you'll just get back in as you want to say about Bitcoin. Well, right? So this is the thing, is that you can always... It's one of these funny games. You can always get back on the horse that you got off if you wanted. But the point I always make, too, is that honestly... I mean, value nations matter a lot, a lot, right? And they especially matter for companies that don't have a wide range of possible outcomes.

54:25So large, mature business. We've said often, Woolies is never growing at a sustainable rate of 20 % per annum, which is not going to happen in any world that we inhabit. But if you're looking at something like ProMedica's and your thesis was, I actually think they can sustain 30 % per share earnings growth for decades to come. They are absolutely at the forefront of a massive structural shift in how medical images are shared around. and they've got a tightly embedded ecosystem, blah, blah, blah. It's an incredible business and it's going to earn huge amounts in the future. Okay. Well, at$148, that was terrible.

55:01But at$140, it's like a screaming bargain. Yeah, that's right. The hyper-specificity on all of this. And by the way, even if you think you can flip it around and go, oh, this is incredibly overvalued. But it's like, well, if it's stupidly priced at$148, it's stupidly priced at$140. Or less, like, definitionally less stupidly priced. But generally speaking, you know, these moves, I guess what I'm trying to say is these moves feel very big. But they're really not. And I see it on Twitter all the time. It's like, oh, 10 % dip. This is a generational opportunity to buy. That's your margin? between like a great investment and a terrible investment is a 10 % move?

55:42Like, no, that's just not how this game works, right? And by the way, call it generational opportunity. Let's say a generation is 20 years. That's half a percent a year and not even compounded. That's average. So the actual gain or difference is probably over 20 years, was it 0.3 % probably per year compounded to get to that sort of number? I mean, if that's, to your point, the specificity of that and the silliness of that, if you're right, you're going to be right. If you're wrong, you're going to be wrong. 10 % is not the story. Particularly if you're a long-term investor. This is where we've said a lot of times, growth covers a multitude of valuation sins.

56:16And the reverse is also true. But if you've got a long-term compounding business, not shares, business, and it's going to grow at that sort of rate, finding that business and paying a decent price, not a great price, just a decent price, is all you need to do. I say all if it's easy. It's not. But, you know, if 10 % matters that much, you look at the wrong business. I mean, and of course you take a discount, of course you do. If something owns 4%, 10%, you bet I'm more likely to buy more of it. But that's because it's cheaper, so why wouldn't I? Not all of a sudden it goes from… But it had to be cheap in the first place or at least reasonable value in the first place.

56:45Right. And if it falls 10%, maybe it goes from reasonable value to a bit more reasonable. Or maybe it goes from really cheap to really, really cheap. Or maybe it goes from overvalued to a little less overvalued. Those aren't the big changes that are going to change your return over any length of time. Maybe you're lucky. Maybe the share price pops 10%. You think, oh, I'm a genius or whatever. But realistically, if you're a long-term investor, you're looking for those compounders that have long-term potential to get meaningful gains, whether it's, for me, a big, modest outperformer over a very long time like Sol Pats, whether it's some of Andrews looking for a small cap that's going to be worth a lot more in two or three years if it gets a few things right.

57:19Either of those cases, the 10 % share price is not making the difference. Just not. Yeah. I mean, I make the point all the time. I'll just stick with ProMedicus because it's in front of me. But you and I have a chat, I don't know, five years ago, and we go, we both like this company. And I go, you know what? I'm in. And I buy some at$44. What was it? $44.68 per share. And for some reason, you decided to tour Antarctica that month. And so, you know, you wait a little bit longer and you buy it at$56. Now, who got the better price? Now, this isn't a trick question. I definitely, and I got a very, like on a percentage show, I got a really different price.

57:57Fast forward to mid-2025 and it's$300 a share. Are you kicking yourself? Are you, oh, bloody Andrew, you got such a better price. in a terrible, no difference, no difference at all. Like, yeah, yes. You can be a pedant about it. Obviously the lower, the better, but it just, my point is it doesn't change a good investment to a bad investment. And likewise, it might've been in a different reality. These guys just dropped the ball and drove the business into the ground and it's now trading at three cents. Again, I bought it at 44, you bought it at 56, you know, it's not like I'm going, ha ha, you idiot at least i only paid 44 i'm only down 99 you're down 99.8 right it's just it's so stupid and i think and this is this is one of the things i no one no one does it but i i try and encourage wherever i can don't place my don't place limit orders when when you're on your brokering app um there is an exception to this rule which i'll which i'll come back to but but you know i've decided I want to buy CSL and what is every, and I, I can tell you right now, there's a lot of people smiling to themselves because they're looking in the mirror going, I do this and I do it too.

59:05Sometimes I know this is, it's easier to sort of say what you should do than what you should actually do, but you can't help yourself. You go, Oh, I really want to buy. I don't know. Let's go Prima Dicas. $140 and 54 cents. I look at now, I'm going to put an order in. Yeah. I'm going to buy some. And I put a limit order in for$139 and 86 cents. That's right. Like it makes it put a Market order in. Just say to your broker, like, buy it. For all of the reasons that I said. As I said, the one exception to the rule is when you're dealing with fairly illiquid stocks where, you know, if you were to put a$10 ,000 order through or whatever it happens to be, you're going to move the price up 20%.

59:38Don't do that. That's really dumb. You're trying to pick a great price and somehow make a couple of pennies. You're just saying, I don't want the machinations of the market, the lack of liquidity in depth to end up with me paying a silly price rather than just saying, if it goes up and down a couple of percentage points, it doesn't matter. That's how the big smart money plays. They just sit on the bid, right? They wait for the market to come to them more often than not. You know, do you think BlackRock just goes out there and goes, I'll take$1 billion in NVIDIA, please, and just market, like smash buys that order?

1:00:06It doesn't happen. But, you know, if you're not BlackRock and you're not dealing with those kinds of sums of money and it's a reasonable, and like most of the, you know, top 200, very liquid stock, just market, buy it, for God's sake. You're not that good. No one is that good where, you know, the difference between success and failure is like less than half a percent or frankly 10 for that matter motley fool money for more subscribe to the free newsletter at fool.com.au forward slash listener man can we get back to something i've got a bit of a a bee in my bonnet which unusual for us i love that bring it on kind of okay it's one of those things well what else do I expect?

1:00:48The answer is nothing. But because I like to be Pollyanna and like to think the world could be a better place and we could actually improve some stuff, it still annoys me. And it's also worth highlighting for our listeners. And I'll give you the example of ANZ that released their earnings today, Thursday the 12th. I can just date stamp this if you've been paying attention before. And they kind of put their announcement out and said, hey, here's what happened. And so they said $1.94 billion cash profit plus 75 % on the second half 25 quarter average. That is a massive jump for a high premature large blue chip business.

1:01:21So that's massive. In brackets, plus 78%, excluding significant items. Oh, okay. So it's not really 70%. But they're insignificant, right? They're not insignificant. So, yeah, it's okay. What they don't actually put, this is the box at the top, right, in their first quarter trading update. So big number statue profit, big number cash profit, big number cash return on tangible equity, big number on the tier one capital ratio, So 75 % up versus the average of the second half, or 17 % if you're excluding city-made items, because why would you not put 75 % first, a bigger number? And then you read all the details.

1:01:55Cash profits up 75 % on the quarterly average of the second half of the financial year, ended whatever, et cetera, et cetera, excluding the impact of these. Eventually, you have to look at the table, halfway down the first page of the press release. And on the right-hand side, and they say, Cash profit versus the same period last year, plus 6%. Didn't write a mention in the boxes at the top. That's very different from 75%. I'm not strong at math, but that feels like a big difference. Not mentioned in the box at the top. Not mentioned in the commentary. Not even the first five, six columns of the table.

1:02:32The very right-hand side, halfway down that table, halfway down the first page, plus 6%. And it is just an absolute non - So now, is anything they said untrue? No. Defense of truth? Absolutely. But does it actually make a difference? No. No, it doesn't. And this is where it really, really matters. Now, most investors are smart enough. It's just misrepresenting the truth. It's like, I exercise religiously every day. Have you? Well, the last two days I have. Exactly. Well, that's very different, dude. That's very different. Now, it's not even misrepresentation, right? It's selective representation.

1:03:12because they give you all the information you need. They will say, we gave you everything. And we told you we'll see you made items and what they should have done is said, profit up 6%. If this was, so Buffett's always said, he communicates with his shareholders, or he used to when he was CEO, communicates with shareholders on the basis of what he would want to know if their positions were reversed. If that was the approach, and it's not just ANZ, ANZ is just the one that got my goat this morning, got my ghoulies. No, they all do it. Right, and so I'm being a little unfair to ANZ by calling them out in the sense that I'm not, I don't want to pretend they're not, you know, everyone's not the same.

1:03:44But they absolutely deserve to be called out for doing exactly what they've done, which is if our positions were reversed, if the ANZ shareholders were wanting to know how's the business done, guys, and they said, well, how about I tell you, CEO, how we've done, they would come out and say, all right, well, business has been good, operating income, so revenue up 3%, and profit up 6 % year on year. Because that's, they say his knowledge is real. Okay, cool. That's good to know. Now, hopefully things might be getting a bit better because of the quarterly average of the second half, as if that matters, but for what it's worth, we're actually up 17 % on that.

1:04:21So actually business is kind of improving sequentially. That's really good. And look, officially profits up 75%, but there were some other numbers in that. So just ignore that number. That's what you, if you were trying to help, if this is a private business and the owner came and said, mate, can you give me a quick update on what's going on? What genuinely, what do I need to know? that's what you tell them. Of course, it's exactly the reverse. Why? Because ANZ wants to highlight the stuff that it can do or has done, and you get a couple of nice numbers, and you put them at the top of a press release.

1:04:48So you look impressive. Most people look through it, particularly the banks, the average retail investor. Again, I love retail investors, Andrew. The average retail investor looks at that and goes, 75%. Oh, that's good. Okay, thank God. They might read the plus event and go, oh, that's still pretty good. Okay, good. Well, at least I feel good about my investment. I can not worry about it then. it's not helping the average investor understand how the business is performing this is not that's what any press release any asx should be about is please help me understand and i'm going to say to your point we have accounting rules right for that exact reason or what one of those that's one of the reasons i would honestly i think um we're talking about rules for things and you know what people can and can't do uh i i would absolutely happily have a rule or a regulator in place that does the and excuse me for the kids at the adult the adult movie um uh uh court case was like i can't define it but i know when i see it and i would absolutely be very happy with a very large amount of money going to charity for someone at the asx or asic to go this is not designed to give people a fair and reasonable understanding of how the business performed.

1:05:57As a million dollar fine for you, it's going to kids with cancer, right? And because there is no effort to try to inform reasonably and fairly and justifiably and in any way that's appropriate. This is purely designed as PR spin, which is bad enough if it's just a politician doing it. But when you own the shares, you are literally the owner of the company and you're being sold to by your own staff. I don't know, mate. I don't know what you do about it necessarily other than maybe make a noise about it on here. But seriously, I would happily be, I do it for free. I'd go to the press release and go, does that present a fair and reasonable view to the average investor of how the business is going?

1:06:33No, good. There's your fine. That's your only job. I'm not going to be harsh about it. If there's a bit either way, okay, fair enough. To not mention the plus 6 % year on year, which is what every investor reasonably looks at, and says, how's the business performing? It's just nonsense. It's cynical and it's awful. and again, we should expect more for the companies that we, I don't know, I answer shares, but the companies we own. You work for me. Tell me what, tell me the truth. Give me the unvarnished reality so I know what's going on. Oh, we do. It's in the statutory account. It's all there for you to look at.

1:07:03In the black and white printed pages rather than the colour glossy ones at the front, exactly. Yeah, yeah, yeah. I mean, the other one is we've talked about this before too is the chart crimes. Yes, yes. Where you can do clever things with axes and stuff or, you know, It's just sort of like you look at an image and line go bottom, left, top, right. It's fantastic. Wait a second. It's gone from 31.3 to 31.8 and you've compressed the Y axis to it. It's just like what in any other view would be just pretty flat, sort of nominal kind of growth. It looks like you're the next AI startup, right? The bottom of the chart is 31, the top of the chart is 32.

1:07:40So it looks like the line's tripled in size. It's like, wow, that's amazing. Wow, exponential. Exponential growth. The other thing I do sometimes, I say it just quickly, is very rarely people, if there's no growth, you put last year on the right-hand side. You get to the bars side by side. Do this year and last year, and then it goes up. But it's actually, you're reading right to left rather than left to right. Yeah, cynical. Very easy to do. Well, the point I would make, and I'm with you. I'll say that right off the bat. I agree. It's just egregious. Sorry to anyone who works in PR, but I don't know if you're really adding to us, our collective civilizational strength.

1:08:17Not even a little bit. Unless your aim is to be clearer about the reality. In that case, if someone at ANZ said, sorry, I cut you off. If someone at ANZ was going to say, hey, we think the numbers are really hard to understand, we'll actually make some effort to help you understand them better and tell you all the things. Oh, sign me up. Right? But what I was going to say was, though, it doesn't work anyway. It doesn't work. Like, name one example of a company that's tried to be cute with its presentation and the market's swallowed it hook, line, and sinker and gone, wow, it's really great. Now, this is where averages can be deceptive.

1:08:57I know your point is a good one because there's plenty of the ordinary mum and dad investors who easily get snookered by this. It might have a long-term impact to the share price, but it will end up with people buying stuff they shouldn't be buying at price they shouldn't be buying for because they misunderstand. And that's where it's not victimless. Does it make a difference to the share price over time? No. Does it mean some people are buying stuff they shouldn't be buying, other people are selling at too high a price because they're gullible at buying? That's the crappy thing. That's the one that really gets me.

1:09:23Yeah. Yeah, it gets me too. I even say in the short term. I find it, unless there's a GameStop type stock, which is very, the trading is almost exclusively dominated by quote unquote retail, okay. But I really struggle to find an example where a company's been cute with that and it just hasn't been immediately called out and acted on the day so it's kind of like it doesn't work and yet you still do it and and i and i've even got sympathy if you want to present those numbers in the way that you do but then but then be very clear as like as to what we've done not fine i shouldn't have to go hunting for it like we're presenting uh we're presenting these numbers in this fashion uh because it helps you understand the business so i i was i sniggered before when you said significant items.

1:10:11There's actually a part of me that goes, it's actually entirely appropriate to move extraordinary and significant items if my goal is to get a view of what might be considered a more normalized view of earnings. Because I'm really buying part of this business. I don't, yeah, these were one-off, genuine one-off items that aren't expected to be repeated. They absolutely had a very real world impact, but they're not expected by definition, this is how you define them. They're not expected to continue into the future. So it makes sense to exclude it. So just to backpedal a little bit before the accountants get upset, because there's a very legitimate angle to that, but it's all about how it's presented, right?

1:10:51And the thing is with all of this, it is a little subjective and it does come down to a matter of preference. What I like is I like the companies that whatever way format you've decided to present your results, It's consistency and completeness is what I really like to see. Okay. You like to call out these particular metrics. Fine. The big no-no for me is that next six months, it's like there's a different set of metrics. Six months after that, it's a different set of metrics. And you're cherry picking the wombers that present the best story. It's like, no, what are the numbers that I need to understand as an owner of the business?

1:11:29even if they're not the statutory accounting standard types that are required in the financial reports. But whatever they are, stick with them and explain them. And if you do that, and I'm actually really, really supportive of that. You mentioned self-pats. I'll give them a shout out. They report what they call owner earnings, I believe. There's no formalized definition. I think they call them normal earnings, I think, from memory. Normal earnings, you're right. But yes. I think it's borrowed from Buffett's idea of owner earnings, right? And you can Google it if you want. I'd encourage you to because it's a very sensible way of looking at what earnings actually mean.

1:12:10But there's no accounting standard that says you have to report on that. That's all right. There's no legal basis for it whatsoever. But it allows you to cut through a lot of various equity adjustments, wonkish kind of stuff. Yeah. But they just do it because every financial presentation is the same. These are our numbers. Sometimes they'll – not exaggerate. Sometimes they'll present better than the statutory numbers. Sometimes they present worse, but we always present them in this way. And for me, it's like four marks. I love that. That's all you should get. And to that point, you're talking about making adjustments.

1:12:44Buffett does it all the time in his reports. He will say, here are the – they call them gap numbers, generally accepted accounting principles, G-A-A-P in the US. So here are our gap results. We do them because we're supposed to provide them, and we will, and we faithfully will do what the accountants require us to do. But also, you need to know they don't actually help you understand the business, because some years we have massive share price gains on the equities we hold, and we have to book that as a profit. Other years, we have massive losses, and we have to book those as losses, except we think the business are worth owning.

1:13:12The fact that went up or down in a six-month period is irrelevant to our long-term holding period, because some of those have been held for 40 years and yet they're still required every single quarter to report profits and losses when the share price just jumps around we've just talked about share prices moving um you know and so and he says look here's how i look at it we're going to exclude any of those changes in valuation that are just you know random changes we're not going to sell anytime soon it makes no difference to us we either own it for the long term we own it for the dividends or we have some other view on it it's just not relevant so if we look like a big gain because the share market was doing well.

1:13:44We're not going to celebrate that. We're not going to celebrate a loss if shares fall. If we sell, we absolutely recognize the capital gain or loss, and that's appropriate, but otherwise we're not doing it. I think, yeah, I really think it's a must for anyone who wants to invest to learn a bit of accounting. It is the language of business. It is dry as buggery, and it can get a little bit complicated, but it's not beyond anyone's capacity to understand the big ideas because I think it helps you understand the rationale for when numbers are presented differently and helps you understand what's important.

1:14:18I'll actually give you a recent example from yesterday. So CSL, which maybe we should talk about one of these days because it's talk about another blue chip sort of stock that makes Bitcoin's fall look timid. But anyway, they report impact. I just, every opportunity I get, I'm inserting that. I can tell. Because people are like, oh, it's dead. No one's going CSL is dead, right? No one's going, oh, equity investing is a scam. Anyway, this is my issue to deal with. CSL's profit. CSL's profit. So they report MPAT A. Yes. Not net profit, net profit, but we exclude the amortization charge. Whoa. Hang on.

1:14:57This feels like a bit of a crime that we're sort of talking about here. Actually, no, they're pretty consistent on that. And actually, amortization is sort of like depreciation, but for intangible things as well. So basically, a lot of that comes from they have acquired other businesses, and those businesses have some intellectual property. It's not a tractor that is actually depreciating because of the second law of thermodynamics, right? Like it is something that they have to say, well, it's not going to last forever. There is a certain value to it. We need to spread that cost out over time.

1:15:31But it really comes down to an amortization schedule that the auditors think is reasonable. It's usually overly conservative. And it's absolutely not a cash cost. It's not a cash cost in any particular financial period. It's not recognizing a mistake. It's not a write down because you overpaid for a business. It's not something that's deteriorating. It's just literally. Telcos do it with customer lists all the time. If you buy a telco company, you've got to say, okay, we bought this. This is a million customers we bought, and we've got to assume they're all going to disappear in five years. So the amount we paid has to be amortized over that five years.

1:16:05Well, customer list is worth nothing at that point. Yep. And if you've got a massive churn, that might be true. Is it nothing? Correct. I've still got 30 % of that list as active customers. And by the way, if you require customers organically, you don't put those on the balance sheet and amortize those. You recognize the marketing expense is the marketing expense up front. Yes. So it's all very different. And amortization is necessary because in some, as a concept, and just for our listeners because it's a bit arcane but it's kind of fun. If you buy a business for a dollar that has 30 cents of hard assets, you have to put the rest of that value of the business on your balance sheet because you paid a dollar for it but you only bought 30 cents worth of assets.

1:16:41Now, in the past you would say, I bought a farm and I got a tractor. Okay, what's the farm worth? Is it worth just the tractor plus the sheds? No, it's worth the productive capacity of the fields to grow wheat or fatten up cattle or whatever you're doing with it. And so what I'm paying for it as its future earning potential and I'm capitalising at the price. But the accountant say well okay, the million dollars you paid you reckon, okay I've got a tractor and I got a farm, a shed and I got a whatever. So that's worth something. Where do I put the rest of it? And they put in what they call goodwill.

1:17:09When it comes to acquiring customers you have to put some of that into effectively an asset which is the customer list asset and you have to depreciate that over time or amortise I should say. Over time I mean directionally it's not wrong. Customers die, customers leave you know there's some idea of And it's not even a bad way to think about how to make the accounting match because that's the whole idea of accounting. It's the matching principle, right? So it makes some sense. But if you find a business where it's like, well, hang on, if you'd have acquired those customers with marketing, you wouldn't be reporting a loss over the next four years as they disappear.

1:17:41You've got the customers for as long as you've got the customers for. If I think the customer lifetime is longer than the amortization schedule, they're hiding the profitability of those customers. It's pretending they're all going to go after five years. If half of them are still out after 20 years, that I've advertised dramatically aggressively. I mean, conservatively in the sense of doing it quickly, but the schedule doesn't match the actual customer experience. I mean, gosh, we're going down a path here, but the other great one is the capitalization of R &D and things like that, which is basically rather than treating it as an expense in your income statement, you add it as an asset and then you sort of depreciate it.

1:18:15Because you've built a system and that's going to be used for the next five years. Again, accounting-wise, there's justification for it at some level. Oh, yeah. But some companies, Objective Corp is a good example. And they're out there. They're rare. Actually, maybe they've changed because they do get a bit of pressure from it. But there's a lot of, not a lot, there's some companies out there that fully expense it in that year. This is the cost. This is an expense. Now, you can look at that. If you're comparing two peers, one capitalizes such expenses and the other one doesn't, you're going to get a very different picture of earnings.

1:18:45And it's like, well, which one is more accurate? Again, you can have a debate on this, but it's sort of like it's worth understanding the difference here. The great thing about AI now is you can just upload an annual report and just help me explain. They help understand this. They don't take it for VATAM. But, you know, these tools are so wonderful. I use them all the time, particularly for the really arcane stuff. It's like, help me understand that again. How does that actually work? So the barriers to understanding are far lower than they ever have been. I just put that out there for anyone who's sort of dozing off at this point going, you have lost me.

1:19:17And I'll tell you, I was slower than most to get my head around. And I still am an absolute rookie compared to some of the members on Strawman or other investors that I know in terms of their accounting skills. But I am just saying a little bit of knowledge can be dangerous in a good way, like with this kind of stuff. And it is worth your time to learn a little bit of it because it does allow you to see through the fog and also to our original point, see you through the malarkey that companies often do with their shiny presentations. I think that's right. I think the, and that's kind of the, that's kind of the challenge.

1:19:50And it's where investing is harder than you might think sometimes. And that's okay. It does require time and effort and energy. And you're right, there's some great tools to do it with. But amortization of customer lists is not the first thing you're going to learn when you start investing. And that's okay. But as you learn over time, and hopefully we're helping you here a little bit, you get to find some pockets of extra value. And it's a bit like you mentioned amortization, oh sorry, capitalization of R &D. it's also why the cash flow statement is important next to the profit loss statement.

1:20:20Yeah. Because that shows you where those gaps are. Where is the money, where's the cash going that's not being reported in the P &L? I don't mean it in a bad way, I mean in a good way as well. So in that case, you're right. If you're capitalizing your R &D, you're seeing an asset with no expense, but the cash is still leaving the business. And that prompts the question of what's going on there? The flip side is also true. And I find capitalization of R &D really difficult, mate. I really do. And like all of us, you know, you made the point, if you start with the PE, then you get really complex, come back to the PE.

1:20:47everyone goes through hey P &L is what it's all about then you go but that's accounting speak what about the actual cash well there's the cash like but the cash is lumpy what if I could smooth that out to show what it actually means so then you're back to the P &L that's kind of my journey I went through this whole idea of oh P &L it's cash is king it's all that matters and with the R &D stuff it's like if you're going to reinvent your computer system once every five years and you do it one year the cash in year one is atrocious it's all flowing out so the next four years it's like oh man that cash has really turned around they've stopped spending profits oh well not profits So net cash flow is up.

1:21:17This thing's great. And then year six, like, oh, my God, what happened? The cash has gone again. And so it's kind of that's why, I know you know this, but for listeners, that's why you have accounting rules that say if it's going to be used over five years before you have to replace it, you show a fifth of that cost over that period of time because it matches the use of the asset. In this case, the computer system or the, if it's only for pharmaceuticals, you know, you're putting this money in for a future payback. And so you put the expense of that investment up against the return from the investment, which are the use of the computer system or the sale of the new drug or whatever it is.

1:21:47And it makes perfect sense. It also can hide a lot of stuff. So that's where you've got to be really careful about what are you actually seeing. But I just think in both cases, I went from it's all about the P &L to it's all about cash and kind of went back to, I kind of like the idea of if it's a lumpy business, I want to see some sort of smooth version over years to get a sense of what the actual earnings power of the business is. And the P &L generally, if it's being used, this is back to what Ian said, if it's being used to inform, the P &L is so much more useful than the cash flow statement.

1:22:16If it's being used to obscure, the cash flow statement is more important than the P &L and you've got to work out whether you trust management. Well, don't forget the balance sheet. The balance sheet is what ties everything together. Really, but the balance sheet is the financial statement and the income statement or the profit and loss statement or whatever you want to call it is what sort of bridges one point in time balance sheet to another, and the cash flow just accounts for actual cash in and out, which is only one item in the balance, just the asset, right? There's the other non-cash items there.

1:22:46But if you can focus all your efforts on the balance sheet and then understand how that bridges to, or how it bridges to the next one via these other statements, it's really, it's actually, can I say the word elegant and beautiful? Like there is something, double entry, bookkeeping and stuff. It's a revolution for society and civilized. Like, come on. Like, seriously, dude? Like, yeah, yeah. Actually, it actually was. And it's why I think you need to know all of this. Now that we've gone down this rabbit hole, I'll give you one more example because it just came up yesterday. We interviewed Troy Middleman from – I'm so sorry, Troy.

1:23:25I think I blanked on your name. I've got that right. Anyway, the CEO of Gale Pacific. These guys make the shake cloths. You would have seen them in Buddings and stuff. Yes, I've looked at that company in years. I looked at it ages ago. Well, it's interesting. The origins go back to the 50s. They used to make scarves. And then they invented the knitted shade cloth. Troy Mortelman, mate. Just to give him his credit. Mortelman, sorry. Troy Mortelman. That's all right. I'm terrible with names. That's okay. And he was a really nice guy. He gave us a good overview of the business. Anyway, the only reason I mention it is that I was trying to get a better understanding of the capital equipment involved.

1:23:56Like, how do you make these things? And he goes, well, the machines that make them are actually 40 years old. They've been fully depreciated. It's like, whoa, whoa. So wait, wait a second. Back up on that. What do you mean? It's like, well, if you look at their balance sheet, it's sort of like they've got all these machines that are actually the bedrock of their business and they're carrying them at zero value. It's like, are they zero value? And again, it makes sense. Like someone had to make a call. It's like, well, we built these things and I guess they're going to depreciate. But they're always maintaining them and expending them.

1:24:26But it's like, it gives you, it's important to understand this stuff because it informs you as to the reality of the situation as opposed to the accounting representation. And again, not that that's nefarious or intentionally obscure, they're all for very good reasons, but it helps build out the understanding. The other one that you'll know, and I want to say this was a hospitality and leisure, now a vent, I believe. I think it's all even 10 now, actually. They've changed the name again. Have they really? Yeah, yeah. I think the very first recommendation I go for dividend investor back in the day.

1:25:00I shouldn't have said that because you're going to look it up now and go, it's down 90%.

1:25:07I haven't looked at it for years. Please tell me it's up. But the key thrust of that thesis was they were carrying a lot of property assets at acquisition price. Yeah, that's right. Why? Because they have to. That's the rules. Why? Again, that's a whole other separate conversation, which we're running out of time, so I won't go there. But my point is, it's just like, what does this company own? There is what the balance sheet says, and there is what I or you or any other reasonable person would say. It's like, I know that it's listed as$1 million, but that property that you've got on the Gold Coast, you know, 10 meters from the beach is clearly worth more.

1:25:45If you were to sell that on market, you just can't. The fair value accounting treatment of that has obscured that. So again, this is just trying to throw a bunch of different examples out there as to why sometimes it is worth digging into the weeds because it can give you a different view. So that was DJ's big part of it. Oh, and Harvey Norman's similar camp, right? Like the actual asset base is not properly. Improperity is not the right word. It suggests something wrong, but it's not accurately reflective of reality. That's how to put it. I reckon speaking of reality, we might stop there because of the reality of the fact we've almost gone for 90 minutes.

1:26:24But I suspect in my future reality, maybe on Sunday morning, you might come back and answer a few member questions. Yeah, and just quietly, Scott said at the start of this, because we started a bit late today. I said, let's do a shorter one today because we don't have a long time. Here we are at the 90 minute mark or near enough. I've also got a very patient bloke trying to fix my internet while we're chatting. I have to go and deal with it. So yes, you're welcome, listeners. We did it anyway because we can't help ourselves. Just tell him we were talking about accounting standards. Obviously, fine.

1:26:50In that case, go back and do some more. We won't. We'll come back on Sunday instead and answer your questions. Until then, have a great weekend in Fulham. Cheers. 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. The Motley Fool operates under Financial Services Licence 400691.