Mailbag: incl. Are ETFs just fancy CDOs? December 8, 2024

24:20There'll be all kinds of different financial engineering that goes on. I mean, we could, we won't because it's a deep, deep rabbit hole. But MicroStrategy is a US tech company that's Michael Saylor's company. They've gone all in on Bitcoin. And they're doing some really interesting things with all of this as well. We sort of help. It's kind of like the George Soros speculative attack on the British pound, which is a very worthwhile Wikipedia article if anyone's interested in sort of understanding what's happening there. But this is an evolution and an unfolding, and it might not ever get there.

24:57Let's be real. It might not. So I've got to temper some of these things. It's one of those things where if A, B, and C are true, then D is inevitable. So you have to sort of believe in A, B, and C. Yes. And B and C haven't happened yet. So it's tricky. So I guess what I and others are sort of saying is if there continues to be adoption, if the price and liquidity and volume reach a stage where it can actually facilitate those levels of trade, then it kind of becomes a self-fulfilling prophecy. One of the ways it's often described is that it's money for enemies, which I've always loved that description.

25:38And anything that can do that is super, super, super, super valuable. So that's what gold does, right? You can hate Vlad Putin, but if he's going to give you a truckload of gold, that's real. You'll accept that. I don't have to trust him because as soon as the ship arrives in port, it's mine. Why is it mine? Because I hold it. That's why it's mine. It's a bearer asset. We've now got that except it's sort of digital. So they will absolutely, if, again, if and if, it just reaches those things, it becomes a settlement layer. for the globe to transact in a way where you don't need to trust the counterparty.

26:18Now, again, you'll be thinking like, what problems is this solved? But again, I would say, check your financial privilege person living in the West under a very stable institutional regime. Ask the average, well, ask the Russian authorities or the Chinese authorities if they would find value in something that could be used in replacement of the USD. What have the BRICS nations? Don't listen to what people are saying. Listen to what people are doing. And again, I'll give you the thread. You can tug on it yourself. What are all the central banks for those countries doing? They're letting their treasuries roll over.

26:59The US paper as a reserve asset for their central bank is declining and their gold reserves are increasing. Why would you do that for? Because when Russia invaded Ukraine, by the way, I'm not trying to okay what happened here, right? I'm not saying that the US shouldn't have done anything, but the unintentional consequence here is the US monetized the dollar. And all it did was to go, oh, why remind me? Imagine you're at the Kremlin, right? And someone puts their hand up and goes, remind me again why we're selling our oil and everything in a currency that someone can just rug pull us on? Like it is literally a promise from the US government who is our blood enemy and who has already locked us out of the systems.

27:45I mean, think about it on a personal sort of scale. If you were being, if I was, you and I had these commercial relationships and I was paying you an Andrew bucks and you'd accrued a big pile of them and I turned around and said, your money's not good here anymore. And by the way, you can't spend it anywhere else on my system. It's like, this is not as valuable to you. It's not only less value, it's significantly less value. So, what has stopped them from moving away from it? A viable alternative is what stopped them. have stopped them so they've talked about well we could peg it to the yuan and we could peg that in turn to commodities but you have what's called in the in the game it's called the oracle problem because no matter what you do you need a trust me bro at the end of it yeah you need china to go trust me bro we've got the oil and gold and wheat that's backing this currency do you really yeah we really do okay because if you're not you could you could potentially clip the coins here and like But we're not.

28:40Now, I'm not trying to say that they are or would or whatever, but they could. And so, if you've got something that solves that problem, it's kind of a big deal. Now, we're not there yet. When I say there's no viable alternative, there's not an alternative yet. It is now a$1.8 trillion USD asset, right? It's more valuable than all the silver in the world, but it's still not big enough for all of these other sort of use cases. Right. Which again is why it's such a mind bend and so at odds of what everything you and I have been taught throughout our career is that it's a Veblen good, the economists will call it.

29:15It's this really weird thing where actually the higher the price goes, the more valuable it becomes, which is the exact antithesis and opposite of a stock. Because obviously the higher the price goes, all else being equal, the value goes down, right? So it's a bit of a mind bend like that. So let me just summarize everything and I'll shut up and move on. So, yes, it does have that potential. No, we're nowhere near it. It might happen many, many years down the track. But as long as that price, volume, liquidity continues, it becomes not guaranteed, but it becomes something that's viable. And that's why I always say when it comes to this thing, the North Star is adoption.

29:58If adoption continues to grow, everything else that follows from that is almost inevitable. If adoption stalls, the project's dead in the water. That's what you need to watch. And can I go to the specifics? I would presume that the two things happen at the same time. The increased adoption, if it is to become a reserve currency, happens as and when and almost because volatility starts to decline. In other words, you get towards that end state. And at that end state, everyone's got as much as they want and it has some implied value. I mean, no one set the price of gold, but it's kind of relatively stable-ish.

30:33It still moves around, but then so does the US dollar versus the Australian dollar. So there's always going to be that question. Everything's relative to something else. Even if we lived in a world where there was only one currency, it was US dollar. That dollar is measured in relation to fish and cars and bricks and labour. So everything is relative. I suppose on one, the only thing I would say, and I don't know if you have a view on this, Matt, we won't drag out too much. You know I do. I assume you probably do. No, no. There's probably some...

31:05if you're America, you probably care more about having your own reserve currency as the reserve currency because you don't have to worry about that. I don't think Trump's really thought through some of the implications of the strategic Bitcoin reserve. I don't necessarily mean in terms of the strategic stuff, although that's relevant. I mean, actually, just in terms of value. Yeah. If you can have your own currency as the reserve currency, you don't have to worry about that volatility by definition, right? So that's beneficial to you. And there's zero default risk. Exactly. Well, which is not – there shouldn't be Bitcoin anyway.

31:32Well, nominal default is impossible, but there's still another form of default. We've talked about that, correct, yes. Allegedly, if you choose to define the word that way. We've had that argument before. No, but so I think if you're America, you're probably – a Bitcoin central reserve currency is probably not as good as your own. For everybody else, it's probably better because of the reasons you just highlighted. Well, this is the epiphany that I think a lot of the world has yet to wake up to, is that having the world reserve currency is brilliant. I mean, there are certain trade-offs. It does hollow out your industries and there is called the Triffin's Dilemma if someone really wants to geek out on the economics of it all.

32:11There are downsides of that. But it's a wonderful benefit and it's a disadvantage to everyone else. Like ask any country in the world, would you like it if your currency was, yes, please. So one day at some point, potentially, if things keep evolving in the way that they are, the world will go away. And this is why it's such a big deal, you know, because people can't get past, you know, oh, it's for drugs or it's for this or, you know, some stupid talking point from 2012. It's like forgetting about or putting everything else aside. You're telling me that a global, neutral, non-sovereign monetary unit that is digital and can be transported instantly at the speed of light around the world is perfectly verifiable and mathematically provably scarce is not valuable?

33:09Like, how is that not valuable? It is, again, back to my point, it's money for enemies. And that's what a good money is. Money is, the value of money is that I don't have to trust the person I'm interacting with. I only have to trust the money. I can put an ad on Gumtree and I can say, here's my rowing machine that I thought I was going to use and I never have because that's what happens with rowing machines, he says as he looks at his rowing machine. And I put that on Gumtree. Some rando walks up and hands me some paper. And I'm like, what? It's madness until you realize it's like, I don't have to trust you.

33:48I just have to trust the money. I just have to trust that someone else will accept it, right? that's what's so special and powerful about it so that that it's kind of it's kind of and and i'm just trying to scale this up to the sovereign global level yeah is that what you're telling me that i don't need to trust russia or canada for that matter or zimbabwe or name name your country all i have to do is trust that the units uh uh will be accepted by someone else in the future and if i've got that assurance and i've got that assurance essentially via a social proof from just observable reality, it becomes immensely valuable.

34:25We're not there yet. We're not there yet. I'm talking in the future, and it might not happen. It might not happen. And I think it's fair to say, sorry, Gar. Well, but that's the thing to watch. Again, I think this is what's been frustrating with this. I use the term cycle, so I've got to be careful with it, but it's back on the radar again. Chulips keep coming back for some bizarre reason. and people who criticize it are offering criticisms that were levied in 2012 that were really valid criticisms. And we all have an opinion on it because we've all encountered, in the year 2024, we've all encountered it before and we've all thought about it briefly, maybe peripherally, but we've all thought about it before.

35:05And so when it resurfaces five years later, we go, oh, I've thought about that. I'm dismissing it. All I'm saying is that what you're dismissing today is a very, very different beast to what it was in 2020, that it was in 2017. So again, that's not to sort of say that therefore you should be all in and you're an idiot if you don't lie. I'm not saying anything like that at all. But as this thing continues to grow in terms of adoption, volume, liquidity, all of the things that kind of matter, it's just like those criticisms become less and less and less valid. And again, it's a logical thought exercise.

35:42You just extrapolate that to the nth degree it comes to a point where it's like literally every person in the world is he's holding it pricing in it denominating in it trading in it and you're there going oh but it's it's it's for uh drug dealers and you know what it's just like at a point it's silly now i'm not saying it's silly now it's a little bit valid it was very valid in 2012 it was less and and and and so just it's the technology is exactly the same the blockchain exactly the same. Nothing has changed there, really. But the dynamics have changed, and that's what you've got to watch. Nice.

36:19I like it. I would suspect that there is a steady state. I say steady state, not precise, never changing, but steady state price for Bitcoin at the point of maximum adoption when it becomes like gold. It's reached a relative saturation point. When it's as big as whatever it needs to be, it'll still fluctuate because gold does and the US dollar does and for different reasons. But generally speaking, just to Nick's point, there will always be volatility, Nick, because every currency or every asset is volatile relative to others, to Ram's point. Cheese has volatility. Exactly, exactly. Right. Cars have volatility.

36:59Yeah. But at some point - Haircuts have volatility. Sorry. It's more likely to oscillate around a range in a mean reverting way once we've maximised out the adoption uptake. Yes. uptake this is this is what's so fascinating about it and i think this is you i'm really glad you raised that point if you're viewing this thing as when do i get to buy a lambo be careful because the gains that we saw in the early years were insanely massive of course they were because the people buying it then were buying on a hope and a prayer there was no gosh back then it could have easily failed a thousand different ways right so it's sort of like the fact that we talk about it all the time when it comes to stocks it's risk versus reward i can buy some cash guzzling biotech company that's got some interesting science but zero product and zero fda approvals and and zero scientific credentials but you know it looks interesting and if it works we'll cure cancer we'll make trillions of dollars now if you buy that you buy it very cheaply because everyone knows that there's a long way to go before that becomes real.

38:03Fast forward 10 years, they've developed the technology, they've got FDA approval, there's a product in the market, consumers are buying and it's saving lives. It's the same company. Are you telling me that the risk reward proposition is unchanged? Of course it's changed. And what goes hand in glove with that is as a consequence of the risk going down, the return potential likewise goes down it has to yeah but but but what is interesting is that despite the the amazing when you think about it like gosh it could die tomorrow but the fact it's gotten as i say it's overtaken silver and most of the 160 fiat currencies in the world there's it is more valid the fact that it has gotten to here is is is kind of remarkable and and then as it continues to go all of these, all of these, what am I trying to say here?

38:58All of these things become, propositions become less speculative. And as a consequence of them being less speculative, you'll find that the volatility declines and that the return potential declines. It's just not going to grow at 80 % compound forever. It just can't. But that's why it's so interesting you my god dear listener you were born at the exact imagine being born when the printing press was invented or steam power was invented right you were invented when the the world discovered and i think it was a discovery and not an invention discovered an energy-based digital currency that's non-sovereign like that's like now right like wait till 2100 when it's fully adopted great and it'll never be too late in other words it will still have value because You're opting into a network that is widely accepted and doesn't debase.

39:49It's still negative to it. But you're not going to make gains. Potentially now you do. And the reason that you now do is because you are, and this is me being very honest with myself and with everyone, is that it could fail. Yes. That's why there's interesting return potential right now. If we weren't answering these questions and everyone was like, yeah, of course it's a thing. It's real and I obviously saved some money. Who doubt it? Yeah, that's right. Yeah, yeah, yeah. I said it to you the other day off air because I get frustrated. Ah, why doesn't anyone see it? And then you go, shut up. If everyone understood it, the opportunity is not there.

40:29You couldn't keep stacking sats. Do you know what I mean? It's the exact same. You and I are old enough to remember, and there'll be plenty of people listening who are old enough to remember as well, but I vividly remember, and anyone who's below a certain age, this will sound hard to believe, But in the 90s, when the internet came, lots of very, very, very smart people dismissed it. And we laugh at it now. You look at the old David Letterman interview with Bill Gates. There's a thousand of them out there. It's like, oh, isn't that just a radio? Or can't I just do that on the TV? And sorry, I've got a telephone, so why would I do that?

41:05They're laughable now. They weren't that stupid back then. Who are the richest people in the world today? They're the tech billionaires. They're the people who took the risk early on, who saw the potential. And again, a lot of people got absolutely crushed along the way. But my point is, is that if you and I say, hey, let's launch an internet company, how much upside do you think there is by virtue of the adoption of that as a tech? I might do free email. We must steal that market share off someone else. In the early days, you're creating the market. It's a very different dynamic. And that's why we're at such a unique point in history, to my way of thinking.

41:50I think to the share market investor, the analogy might be that in the early 1900s, there were a whole lot of department stores that provided service. And at some point, Woolies went, I think what I'm going to do is I'm going to have self-service. And in doing so, change the game of grocery purchase. Now, at that point, others then followed. And I don't know the numbers, but I would suspect there was probably 400 individual stores who did that. The local milk bar, my local sort of milk bar slash general store slash, you know, whatever it was at my grandparents' house. It was literally around the corner.

42:24It's no longer there. It's now a hairdresser. And Woolies now has 1 ,000 stores across the country. Right. And so, investing in Woolies when it was one of 400 companies or 400 individual stores trying to do this new self-service grocery thing was massively risky. Investing in Woolies in the end was like, oh, well, obviously they've won the war. The other 300 or 400 died. That was a really risky because it was like, will it work? Will Woolies win? Will it get big? How big will it be? How much will it be worth? Fast forward now to 1985 and you say, Woolies is 20 % market share. This thing's kind of happening and seems like the trend's going to keep going.

42:58If it does, Woolies would get a lot bigger. Fast forward then in 2024 and it's like, Woolies is pretty much saturated. They'll open a couple of stores a year in large population centres as they're growing, there's still some upside there because they will still probably grow, but the gains are gone. Now, was there massive more upside if you bought in 1983? Of course there was. But at the same time, there was also the risk that at that point, Woolies doesn't exist today. Remember, there was a million different independent grocery chains, Wise Owl and Foursquare and whatever else there were. By the time you get to that point, it's obvious in hindsight that you should have done it.

43:32There are points along the journey which You go from, Jesus, you're self-servicing, may or may not work, then to, okay, maybe if it does work, there's 400 others who are trying to do it, through to, well, it's now 50 chains and it's 1952 and Wully's doing okay, but so are the others and who knows? But Wully shares are already up tenfold. I missed the opportunity. And then again, you go through that process. Great example. I would point to cloud-based accounting software. So, Xero is an Intuit. The gorilla's in the room. So at some point it became really obvious that no one is going to order a set of floppy disks through the mail, install it on their computer, have to get regular updates with various versions being made.

44:15It's like caveman kind of stuff. So who made a lot of money? The ones that were early on this theme. But, and this is where I'm, but can you do well by buying zero shares now? Yeah, sure. It's a great company. I really like it. I probably think it's a little bit expensive, but it's a great company, right? But those early gains from going from a dollar to, gosh, what is it even now? Like they're gone in the same way that buying Bitcoin at$100 is never coming back, right? Like it is absolutely gone. But the point I want to make is that people will go, yeah, but how do I, at that point in time, how do I know that zero is the one to back?

44:54Yeah. I bought Wreck-N-Chez back in the day. I own Wreck-N-Chez too. Don't listen to us. Oh, man. I did have some zero. Well, actually, yeah, I had some zero shares, and then I was very smart by taking a 30 % profit on that. You idiot, Paige. But my point is that, yes, some unknown Kiwi company with a funny spelling comes onto the scene and says, we're going to change the world. It's like, well, maybe, but we've seen this story before. More often than not, you're not going to. Maybe it happens. Maybe it doesn't. Maybe the thing you see happens, but you don't get there first. Maybe you get there first, but 15 others do it as well, and there's not much value created.

45:31I'm convinced that online software, like SaaS accounting software is a thing. I just don't know if you're going to be it. Here's the thing that, and like just take Bitcoin out of it. Like this is for any company that's disrupting another one is that you will, and look, find on Amazon and buy a book called The Gorilla Game, which was a book about technology investing before the internet. Oh, just as the internet was coming out actually. So it's a very old book, but it talked about the dynamics that were at play here. And what it's, the TLDR of that book is, look for an industry that is undergoing disruption.

46:07Yeah. Wait for a leader to emerge because winners tend to keep winning. Once you've got the dominant market share, you've got the dominant cash flows, which allows you to reinvest, which allows you to get better. And there's a positive flywheel. We get to the stage now where it's just like, I don't care how much VC backing you and I get, we're never beating zero. Yeah. Right. We're never beating WiseTech. Yeah. We're never beating C. Like, it's just – There's no other technological change that is a step change again from whatever it is that we have. Oh, maybe you invent something in your garage that no one's – Yes, so you're right.

46:37But on their terms? Yes, correct. According to the rules that they define? Like, we can't – no one can do that. The network effects are way too powerful. So, what I'm saying is that at every – Microsoft looked way too expensive in 2002. Apple looked crazy expensive in 2005. I remember when I was with you and Joe and Matt recommended zero at$42. $40, yeah, exactly, yeah. And the outrage from the community. It was like, oh, it's so ridiculously expensive. There's not even an earnings there. It's an infinite PE. And guess what happened? The shares dropped from$42 to$15. And outrage, outrage. It was like, no, they picked it like a dirty nose.

47:21They absolutely got it. And the market did something stupid, rah, rah, rah, rah. But the point was is that that was at the point where you could say a couple of things definitively. A, this is the future of accounting software. And B, nothing guaranteed, but these are very, very likely to be one of the winners because of the network effects, because of the market share that they have captured. So what do you look for when it – there's a thousand ways to skin the cat. What is one approach when it comes to technology investing? And I include Bitcoin in this. look for something that is new that has definitely got traction is definitely going to be a future and where a dominate a dominant leader has emerged and if you want to like look at crypto quote unquote like 60 of it is bitcoin and then then and then 15 000 other stupid tech scam projects make up the other 40 and they're all hot they could never realize that kind of stuff so it ticks every box it takes every box right but no you can't buy a coffee with it i'm sorry yeah Are we done?

48:21Okay, I'm done. I'm done. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

48:33We've got me a month from Aaron, which is not about Bitcoin, thankfully for me. Thank God, because we're already whatever long in. Hi, Scott and Ram, says Aaron. After watching The Big Short a couple of times, great movie, he says brackets. Great movie. I'm still struggling to understand what exactly a CDO or collateralized debt obligation is. I like how Anthony Bourdain explains it as recycling weak old fish into a new fish stew, but it basically seems like mutton dressed up as lamb. Try as I might, says Aaron, I can't shake the feeling that ETFs are kind of the same thing. Throw a bunch of assets into a pot, maybe some good ones like Nvidia and Tesla, maybe some rubbish like banks, bonds and cash.

49:11Give it a trendy name with some buzzwords like low cost and tech and the people are eating it up, not knowing exactly what it is they are eating. What am I missing? Thanks for the rants and full on, Aaron. Let's try and break this up, mate. Do you want to have a go at CDOs? So I'm not going to do as good a job as Margot Robbie, who explains it really well while she's in a bathtub in that particular movie. But the description is actually - Lots of bubbles and a glass of champagne, as I seem to recall. Yeah, it's a great scene. She's a great actress. It's a great scene. um uh you you you basically take a whole bunch of different debts you package them all together and then you divide them into tranches so you sort of say which is basically like saying everything goes pear-shaped you guys are first in line then you guys are next in line and you guys are third in line and the mathemagic here so supposed is that we've diversified so much that the individual risk of any loans or even a somewhat significant number of loans going bad are okay because we're so diversified, which actually isn't wrong, except when you get, what's the word I'm looking for?

50:29When you get system-wide correlated risk. In other words, all your eggs are in multiple baskets, but all the baskets suck. And also, it wasn't the diversification that it seemed because the assumption that Houston real estate and Detroit real estate and LA real estate were diversified. Yes. When in the end, what happened was they were all incredibly correlated. All very correlated. The assumption and the risk, the ratings agency said, well, hang on, just buying Detroit debt, that's risky. Yeah. But if you buy a little bit of Detroit and a little bit of LA and a little bit of, whatever I said, Boston, and then if I say, well, I've got first call and you've got second call, then not only is mine, I'm further up the ladder, but I also get a diversified bunch of it.

51:11therefore a B-rated individual mortgage when I pack up with everything else because they're not all going to go badly. Surely it becomes A+. Yeah. Some parallels there where you mentioned long-term capital management for as well. What they call it, only a Six Sigma event could blow us up. And a Six Sigma event statistically is something that's like so rare that would only happen once in the age of the universe, you know, like that kind of thing. And yet it happened like within years of them starting because they miss the correlated nature of things. So, maths is sound. A lot of very smart PhDs are well beyond my mathematical capability.

51:46Came out very rigorous, very rigorous, I would say right, assumptions in the world of theory that if it is genuinely non-correlated, then it actually makes sense. But it's not correlated. And this is, I think we have to remember this in asset markets globally now. It's the butterfly. I mean, you might look at your whatever assets you've got and go, well, if the US blows up, that's there. My assets are over here. It's like, I hate to break it to you, but it's all connected. Like, you know, and actually that's the story of the GFC. You know, like the Icelandic banks blew up. Iceland, what the hell has that got to do with people in Detroit buying houses and CDOs being like, it just, that is something that's very, very worthwhile understanding.

52:32Yeah. Yeah. I know. And then Aaron asked about, aren't ETFs the same thing? I'm going to just refer back to your point you just literally made then, which is isolating banks blowing up. Aaron, they could be the same thing if they were a bunch of debt thrown together and the downside risk was as massive as it otherwise might seem, i.e. a default or any event sends them to literally 2-0. If you're betting on paying a price based on a certain number of people paying you back and your returns are so low, and Ram will not be able to avoid ranting about the banks in general in a second as I say this, but you're taking - You know me well.

53:06I do. You're taking that risk on that outcome, which is the debt doesn't get repaid, wipes out all the equity, goes to zero. ETFs are different in a couple of key ways. Firstly, they're not created or put together and given a rating or even presumed to be more valuable or better than the underlying assets themselves. In other words, if you were to buy shares in each of those companies rather than buy the ETF, you'd have your own portfolio and that portfolio is fine. Now, if you bought a whole lot of high-leverage banks, you are absolutely at the same risk of that sort of thing happening. But the reason why it's different is this is just a diversified – firstly, diversified from an industry, geography, currency, all that stuff anyway.

53:48But they're not at the same – CDOs are bets, right? You're betting on a repayment rate to get you a return. And if you get that bet wrong, the chance is zero. You could go to zero. That's exactly the way they're structured. Could all shares go to zero? Yes. When we're all in caves with baked beans and shotguns and the equity markets are worth exactly zero because World War III or aliens have landed and killed us all or the zombies have finally taken over or whatever, then the stock market is worth zero. Absolutely. And at which point the least of your concern is the value of the portfolio. Right.

54:20When do I eat next? How do I stop that horde of zombies attacking me and my family as you're more pressing concerns at that point? Now, we had COVID and the market fell 38%. Another GFC might. Let's for fun do this. Now, GSMR2 happens in 10 years' time, and two of the banks go absolutely stone motherless broke. Yep. And they lose all their money. But Woolies still sells groceries to somebody, and people still want BHP's iron ore, and maybe not for a year, but maybe in a year's time. And just for our listeners, Catapult will continue to provide sports tracking equipment because after a year off, everything went to hell for a year, we went back out and played sports, and competitive tensions kind of took over, and my Sydney Roosters decided they wanted to win another comp and they went, oh, I could use that catapult stuff again.

55:05I could probably scrape together. It's the smart choice. It's the smart choice. In some future time, unless the economy is worth exactly zero, these companies are worth something. And they're probably worth a lot more than zero almost. Certainly, again, no guarantees because I said zombies and aliens, but that's the difference, right? So, CDOs, the risk was they blew themselves up because they used debt. And as Buffett will say a million times, people gamble with debt and they gamble what they have and need, what they don't have and don't need. Play stupid games, win stupid prizes. Right. So I get the sense, Aaron, I understand what you're saying about if we just kind of merge all these things together and pretend they were diversified, that would be true.

55:41I wouldn't want to be betting on an ETF, taking a whole lot of callable leverage on the whole market that if it fell 10%, I had a margin call. I mean, that's, you know, a margin call ETF investment is a CDO style result. If you borrow 90 % of the purchase price and the deal with your broker is if this thing goes down 10%, I'm taking them back and you're getting nothing, then yeah, you're right. It's exactly like a CDO. But leverage is what makes the CDO different to the ETF. Ram? No, you nailed it. I mean, so you own a small little part of real world businesses. A lot of them have real world assets.

56:15There is a residual value. Not that things can't go bad. And there can be correlations. Like we see it all the time. Markets as a whole goes down. And when something like COVID happens or the GFC happens, everything gets sold down, even the really high-quality stuff that actually doesn't feel it. There's companies listed that are gas pipelines or toll roads or things that have lots of hard assets with mandated contracts. Again, it's not that it's all bulletproof, but it's just like there is no rational explanation, even under dire economic circumstances, for them to fall 50%. But they do. But if they did, they would come back.

56:52They would come back. zero and they're going to yeah yeah yeah so but but you're right you're right like it is it is there is a correlation there of sort in terms of short-term sentiment and and that could see that if something untowards happens a whole bunch of companies are going to unfairly get sold down the market as a whole will unfairly get sold down and you will you will experience correlation um but you're not you live to fight another day and i and and i think it's a reasonable conclusion to say, well, when the dust settles, some companies will absolutely go broke. Others will muddle through.

57:25Some will actually do really well. New businesses will be formed. They'll get into the index. And that's why it continues. That's why you can say with a straight face, this thing's going up forever. Not because standard oil is still going to be kicking around in 400 years, but they'll fall out. Something else will come in that we haven't thought of yet. Correct. You know, and it's a little hyperbolic, but really what you're doing with these broad-based ETFs is you're making a bet on the collective productive capacity of humanity. I know how that sounds. That sounds a bit, really. But it is. It is.

58:00It's absolutely what it is. I think that sounds funny. Look at the history of the Vanguard index chart or the stock market generally, the economy generally. I mean, what powers the economy over time is productivity. What powers productivity is people finding better ways to do stuff. It's not any harder than that. And so I've seen many times, you know, people say, oh, the market's at a peak. I'm like, well, if you think we have reached the peak of human capability, if you think productivity is dead, we'll never invent a better mousetrap or do something more cheaply or more quickly or more efficiently or better, then yeah, sell your shares.

58:31If, however, you think, well, maybe there's a chance that just as we've done for the rest of humanity's literal life on earth, but certainly since the industrial revolution, that some people are going to go, oh, I've got an idea. I mean, AI, who thought of AI for you? I mean, other than, I was like, as a mob and whatever, but as a general economic force, You know that. Not on the radar. Right. And so, the internet before that, to your point, photocopiers before that, cars before that, buggies before cars. Robots are the next one, by the way. The humanoid robots are coming. Okay. That's the next big one?

58:58I don't know if it's the next big one, but it's within the next 10 years. There will be such - Man, I don't - Look, I can go down the rabbit hole on this. I can't do that. Let's move on. I'm just going to say that you'll be able to buy a butler for$30 ,000. The family will make the same calculus as they make with a car. And I can tell you a lot of people would happily spend that money, or even if it's on a lease arrangement, it's like, I get a butler that never sleeps, never talks back, never steals the silverware, and like, yeah, I'll take one of those. Except for this one final point, mate. Yeah, what's that?

59:29My 11-year-old's already got a butler, and he's talking to you right now. Yeah, right. We don't need more staff in our house. We've got a butler. Yeah, true. I can probably do a butler. Some of the stuff that's happening. Allow me a very quick tangent here, There's probably an illustrative point that I can find to make it relevant. If you will not talk long enough, yeah, go on. But there's like a lot of technologies are impossible without the foundational technologies that come before them. So, for example, and it's really, really, yeah, right? Like things that are hard to see. So, for example, the ability for us to make large quantities of aluminium through an electrolysis process is what led to commercial aircraft.

1:00:07Like you don't have commercial aircraft with steel, you know, not to this. It was a foundational sort of technology. It was a light and strong time could happen. Yep. Right. And then there's a thousand other things in that as well. So with robots, we've actually had pretty good actuators for a while. Batteries have been okay for a while. The hard thing with robots has always been programming the damn things. Right. Like you pick up that apple, it sounds super easy to a human. Like, no, someone's actually got to go extend arm 30 degrees, open you know it's now they're applying the same training mechanisms that they do for llms in other words it's sort of like the the the brains behind it has changed and it's the breakthroughs in ai that are precipitating the breakthrough in robots so robots have always been threatened although you know jetsons i remember in the 50s people were saying that it's like rosie's around the corner the difference is now is that again start looking online there's some really, really cool companies that are starting.

1:01:05And this is like, their robots are like folding, washing. It's like, you can see it. You can see it happening. And it's like, and exactly what Elon's trying to do with the Optimus and that as well is because the cost curve will come down very fast as Tesla's did, as most technologies do as volume ramps up. The first robot will be super expensive for the rich, just like seat warmers wearing cars and electric windows. And now your bog standard Toyota's got those, right? And I suspect there's a good Lex Friedman podcast on it as well. Not that I should point you to another podcast. But, you know, these are in the next 10 to 15 years where it becomes within reach of the average household.

1:01:44Anyway, slight divergence there. But look, the investing lesson I'll make up with that is skate to where the puck is going, right? But by the way, when that happens on the market, don't run out and buy a robot ETF. Don't buy the first company that lists. And by the way, that ETF will go bananas when it happens. Oh, yeah, absolutely. But do what I said before with Xero and Apple and all those. Wait for the clear leader to emerge and then back up the truck and get out of the way. And clear leader, I want to be really careful with this, mate, because I love that point you made before, and this is probably a nice way to finish the pod.

1:02:19I think give the clear leader enough time to actually genuinely cement itself. Yes. Myspace was the clear leader in social networks. True. Until it wasn't, right? Yep. there is more than one example of the pretender. Yes. That is the early clear leader because they just had stolen March, but there is a critical mass. And it's bloody hard to work at. It's really, really hard. What point in time? Yeah. So all I would say is just, you know, you don't even on the bleeding edge, and that was kind of your point before. It's completely okay to go, gee, it looks like it's MySpace. I might just wait and see.

1:02:50Now, you know, we know what happened there, of course. Search engines, you mentioned, you know, Google before. So people old as us might remember AltaVista. or speaking of butlers, Ask Jeeves. Yahoo was the search engine. Speaking of funny internet names. So I love being an early dog. I love my gadgets, right? But for all of that, I'm also quite a creature of habit. I think I was probably the last person using Yahoo as a search engine 10 years ago before I find it. Oh, all right. I'll try this new Google thing. It's fine. Never looked at it. But yeah, right? And so just be, you know, which of those was the early leader?

1:03:23There was three or four early leaders. Yep. Until one kind of got that critical mass. career-wise doesn't have to be 80 % of the market, but just an unbeatable lead, and that's kind of where you want to really think about. And again, it's not possible to know with any objective analysis because it's all subjective. It's all guesswork to one degree or another, or you wait until today. I own Google shares. I bought them really late. I bought Alphabet shares. Yeah. I mean, probably a while ago, maybe eight, nine years ago now, but late in the internet years, right? Yeah. It felt late at the time.

1:03:51Exactly. You look at the share price chart and go, I'll look at all the gains I've missed out on. Right, yeah. But also, if I had not bought it, I wouldn't have missed another game since then. Oh, you've done pretty well since then. And that's – by the way, it wasn't supposed to be a humble brag. My point was just, you know, look for the early leader. You're not too late, yeah. But look for the – but make sure the leader is a relatively locked in, permanent-ish kind of leader that's not going to be overtaken, right? And so, the art in this is to look at it and go, I think I see a thing. I would say that with AI right now, but I don't know your thoughts.

1:04:20But chat chipped is on everyone's lips. But I use Google. I'm a Google shareholder. and I'm probably biased, but I use Google and when I get a search result, more often than not, no research, but more often there's an AI answer at the top. And I look at that and go, that's really cool. By the way, if you can hear that, my little Google assistant just started talking because I said the G word and it started, if that didn't come through, then you won't know what's going on. I literally started talking while I was talking. Yeah, you know, now, I don't know. Maybe AI becomes the new search and maybe the G company has it covered because we all use that search.

1:04:51Or maybe ChatGPT does become – I would say right now, ChatGPT is obviously the early leader. But I think we're in my space kind of territory in terms of timeframes. And whether it continues to remain the leader or is overtaken by Google or somebody, anybody else, right? We're so early. Same with robotics, as you say. When we get to that point, it's like, oh, that's a thing. Firstly, is it going to be a thing? Yeah. Don't know. If it is going to be a thing, what's the thing going to be? Is it the first iteration or second or third? And once you have that iteration, who is doing them in large enough quantities?

1:05:25And where's... The other thing is look for something that's... Network effects are easier with social media because you can kind of see that network effect. If it doesn't have an absolute network effect, then think about what is the thing that gives it that relative permanence of leadership that can't or is unlikely to be overtaken at... By point X, whatever point X is. And it might be the smarts of the system. It might just be pure scale and cost. It might be... For example, I'll use Tesla. I'm not a Tesla fan as a company necessarily. It's an amazing business. I'm not an Elon fan. That's probably a better way to put it.

1:05:53And the thinking was, well, Tesla was so early and so good. It's got so many miles under the proverbial bonnet, or frunk as they might say, that it can't be overtaken. It's going to be the winner. Yeah. Now, right now, BYD sells more cars than Tesla. I don't know whether that continues or not. Maybe it does. Maybe the BW Rise is a false dawn. Or maybe BYD is the eventual winner. Or maybe they sell more like Android. There's more of them. but the profit's still made by Tesla because it makes more profit per unit, like Apple. That's what I mean about it. Even I think in EVs, I'd be interested in your thoughts, mate, as we kind of close, but I don't think the EV winner is known yet.

1:06:28I'm not sure there will be one. It may be one where there is not a single winner. At certain times, it looked like Tesla was the only game in town, and it may well again be. But right now, it seems like plenty of existing and new car companies are kind of catching up and, if not overtaking it, at least making it not necessarily the guerrilla game style one big winner. or maybe profit-wise it does because it's the only one that makes any margin. So, yes, such an excellent point. So I probably should qualify what I said before, wait for the winner and then back up the truck. I think it's different when something arrives on the scene and there's a thousand scrappy sort of players trying to buy for dominance and buying that basket is generally not going to work out well because although you, by definition, buy the eventual winner, the losses elsewhere are so numerous and so great as to not make it very worthwhile.

1:07:20It's a little bit different though. If you're getting to a situation where there's three, four, five likely candidates, I think you can buy the basket at that point. Oh, that's interesting. And I think what you do, and this is the hard, well, I was going to say the hardest thing in the world, it's certainly up in the top 10 of investing challenges, is averaging up. Everyone loves to talk about averaging down. very few of us can have the ability to buy more of something at higher and higher prices because it's just like you just you anchor i was like oh i should have bought more you don't yeah but but but i look for the next one instead but whoever is the eventual ai winner right anthropic i'd throw into the ring i think there's actually a lot of yeah true open ai people there um oh man they're doing really cool stuff um perplexities another you know like there's a whole range of them there but you you you probably could work it maybe not yet because it's still early but there'll come a stage where it really comes down to two or three or four and then buy a range and then and then revisit it periodically whether it's every six months or something it's like oh no anthropic is really here oh wow and you sell down one and you buy like you can you can sort of fine tune as as the picture clarifies yeah without having to sort of buy everything and I don't know what threshold that has crossed that.

1:08:40That's what I was curious about because the other thing is, we could have said something about airlines, right? Air travel is going to be a big thing. I don't know who's going to win, but let me buy all of them. Is that just a natural byproduct of sometimes it's not going to work or is there a – so taking it from this is an innovation, this is a big deal, it's a brand new thing, the market's growing, is there a clear leader? No, it looks like there's five or seven of them. I'll buy shares in all of them. I'm not being critical by that. I'm teasing out the thought of at what point do you kind of go, and I kind of could come up with an idea, but I'll ask you because you roast it.

1:09:11From, you know, the theme, how do we go from theme to investment? Because you and I have talked a lot about don't invest thematically, right? Yes. You want to think about what's there. Yes. So I guess there's something in that decision of like, it's a technology, it's a company, there's some leadership, there's a single or a basket, but there's got to be a bit in that which is kind of like make sure there is money to be made by somebody or make sure there's going to be value accrued in that process. Or do you kind of just go, Well, you'll get the airlines every now and again, and that's just going to suck, but you'll buy AI, and you'll buy the internet, and you'll buy Bitcoin, and you'll buy – I mean, you could have done something with cryptos, right?

1:09:43I know you hate them, but some might have said, hey, I don't know, but I'll buy the top 10, and it's still doing remarkably well, even though, you know, as long as you sized your investment accordingly, and then, as you say, add it on the way up. How do you think about that idea of separating out, you know, how do we know when robotics becomes investable rather than just really cool, adding zero value but improving society versus buying the best or one of the best or a basket of the best robotics companies is going to make me rich. Yeah. For me, actually in question, because a lot of the companies I happen to have invested in are what you call B2B.

1:10:18So they don't service us consumers. They service other businesses. And that's hard because I don't have any direct personal experience with those products, and I never will. I'm not going to implement some of these institutional software stacks at home. They wouldn't have me as a client. But fortunately, and every B2B has a great story, right? Yes. But there is one bit of signal that is pure signal, which is show me the money. So, I don't know exactly how good, I don't know, pick an example, Ava Risk Group's perimeter detection system is because I don't have one around my house. But I do know that more people are buying it and those that have it are buying more of it.

1:11:09Yeah. Now, that's hard. Doing it well and probably doing it as well or better than its competitors. You can't fake that. Now, it doesn't mean that someone can't. I love that. Someone might come up with a better mousetrap and disrupts them and they're gone. But to answer your question, it's not about me getting a bunch of subscriptions to different AIs and going, oh, I really like this one. I think Claude is better than ChatGPT. When you start getting financials and it'll say, well, whatever you prefer, the reality is that the market is choosing this one. I think that to me is the biggest signal that you could have.

1:11:49And it's also a very, I think it's a very good one because we all do this as investors. We think that everyone thinks like us. So, remember back in the day I was at the Fall and you guys gave me a bunch of grief because I bought Kobo instead of a Kindle. That's right. I'm glad you read so I didn't have to. How's that going? Well, as you would have imagined. And here I am going, it's exactly the same. It's the value play. It's exactly the same and it's much cheaper. So, why wouldn't I go for it? Right? Well, the reality is I was the only one in the market who thought it was a good idea. And I don't even know if that – maybe it's still kicking around.

1:12:26I doubt the company is still there and it's all Kindle, right? Yeah. And I guess my point here is it's just like – that's why cash flows and sales are such good signals is because it's just – people are voting with their money. Actually, I'll give you a really good example. It's why the polls for the US election were saying, oh, it's 50-50. And the betting markets were going, no, it's a Trump landslide. And it's like, I will put, look, they're both prone to inaccuracy, but I will always take the signal where someone has laid down real cold hard cash. Like, you know, I walk out of a polling booth, someone shoves a microphone, he goes, who'd you vote for?

1:13:07I'm going to go this. I mean, I don't have any buy-in. When I'm putting down a thousand bucks because I think someone's going to win, that is much bigger signal. It's the same kind of, I think, thing that relates here. So, it's a long-winded answer, but when it becomes obvious that more people are using a particular one, whether I think it's the best one or not, I think that's the time that you say, wow, that is pure signal.

1:13:36And why it's so powerful is that these flywheels are so strong. So, let's go back to the Xero example, right? So, they've got so much money and so much sales coming in. that they can hire the best programmers. They can hire more programmers. They can add more features. They can add more integrations with other software packages. It just gets harder and harder and harder. Look at Microsoft. I mean, I'm a Windows user. So before anyone gets angry because, you know, people like to be very tribal on this thing, Windows sucks. Windows stinks, right? And it has for a long time. But the network effects that this thing has is so strong that you can even overcome some of that stuff.

1:14:21Whereas there are so many other ancillary points of value that you'll put up with all kinds of rubbish. And it's sort of like, that's why winners tend to keep on winning. And this is one of the companies from the very first tech boom, right? Back in the late 90s, still kicking along, still one of the most valuable companies in the world. So what am I trying to say here? So, wait for a leader, define leadership as actual cash flows, and if you've got a half capable management team that recognizes their strength and continues to reinvest and double down and strengthen the moat, as Buffett says, I don't care what you did this year, sales revenue wise, just tell me, did you strengthen the moat?

1:15:00As long as those things hold true, nothing's a guarantee in investing, but I think you put the odds considerably in your favor when you use that framework. I like that a lot. I think the other thing too is you mentioned the zero thing. Just my last thought is size and scale, as long as the culture is right, gives you every chance to combat, overcome, compete with, or buy, frankly, any new potential disruptor. You know, the issue happens when Walmart decides it doesn't want to buy Amazon or Blockbuster, doesn't want to buy Netflix, because it's trying to circle the wagons. That is the one thing to watch out for for the old companies, is, you know, at some point, they go, no, we're not going to do that.

1:15:43That's not going to work. Jerry, how did we try to do that at Harvey Norman, right? Nintendo's not going to work. People are going to buy servers online. It's never going to be a thing. Eventually, they had to come around to, okay, fine, I'm going to do it. Now, why? And scream about how everyone was dumb in the process. Yeah. Well, if he had one store and a dodgy balance sheet, he probably wouldn't survive that, right? Because everyone's now ordered a store online. He said, no, get stuff, not going to do it. Mosaic Brands is a great example. They went broke a couple of weeks ago. Katie's, Noni B, whatever.

1:16:07Why? Because they had no online presence. They decided they would keep doing what they always had done, and it wasn't going to work. The company that says Harvey Norman, I own shares for record, who say, actually, this sucks. It's not going to work. It's not going to work. It's not going to work. It's not going to work. Or everyone's doing a better join. When you're big enough, like a zero, a zero keeps adding features, to your point, because it makes it more bulletproof, widening the moat, as Warren Buffett might say. But not only that, they kind of see someone else do it. When straw man goes into the provision of real-time employee spyware, and it's working, Zero goes, huh, well, we'll go and throw Andrew$84 billion, that's what straw man costs these days, to buy straw man or we'll actually do our own bit of that and we'll actually incorporate that.

1:16:51We'll hire 15 people, put them in a corner and in three months' time, we'll have a solution that does that as well. So who's going to go to straw man? Because I'm going to go there for the investment community, of course, but I'm not going to go there for the spyware because Zero's got it and Zero's got the other stuff already. I'm already using Zero anyway. So powerful. And so the power of incumbency until that becomes its own millstone, and it does in so many places, so be careful. Yeah. But once you get big enough, that early leadership, I think you want to see, to answer my own question, you want to see the ability to turn that leadership into profitability and a likely path.

1:17:23Not just, oh, it's possible maybe of circumstances. It was like I can see how zero, when they stop spending all this money on R &D and marketing, when they get enough scale, they're already so big, these guys probably, not definitely, I think there's nothing's definite, have a market winning advantage and can almost certainly take that customer base and put the price up and make a bit more money and turn that into a really, really nice business. I think to me that's the difference between lots of people are flying. The question should have been at that point, that's a real thing. Okay, well, who's going to win?

1:17:52Not sure. Okay. Are any of them going to have something that sets them apart, gives them a competitive advantage, let's make more profit than others? I don't think so. All right, well, maybe give that a miss. And that to me is that different point. I mean, Silicon Valley have been better at it than most other industries. I mean, Google buying YouTube was one of the most brilliant masterstrokes of all time. They could have absolutely developed that themselves. But they recognized that there were network effects generating there in terms of traffic and uploads and the rest of it. And they just bought it, which is another way to flex your current competitive advantage.

1:18:30Think about this. Rupert Murdoch is not shy of a buck, but he would be easily by far the richest man in the world if he had grokked, as the kids say. I love that term. If he had grokked the significance of the internet. Yeah. I mean, he's making Elon Musk look like a pauper. And what did he do? He whistled as he walked past the graveyard going, oh, he's internet being dumb. And this is a company that's zero technical chops. Zero technical chops. but they could have just used those cash flows to go, this is a threat. We're going to buy it. And I'm actually very forgiving of companies that do that, not just everything that looks like it might be able to fog a mirror at some point, but strategically do that, even when it turns out that, okay, it wasn't a thing.

1:19:15Because what, I mean, this is a very different conversation from an antitrust standpoint. So let's put that to one side. I've got strong thoughts there as well. And I think that is where there is a role for regulation and all the rest of it. But putting that aside, that is why if you are of a certain size and scale, you should, in theory, continue to win. Who was it who said only the paranoid survive? Oh, Andy Grove maybe? Yeah, maybe that's right. But it's such a good – I mean, like every business leader really needs to have that tattooed on their forehead. Yes. Because as soon as you think now we're indestructible, oh, God bless.

1:19:54You know, these kids who started this like online lay-by service called Afterpay. We're not going to do that. That's ridiculous, right? And yet, which is the – what's the actual term for it? Buy now, pay later. BNPL. Like it's Afterpay. And then there's a massive – there's daylight and there's zip and then the Commonwealth Bank's got its own product. But that's the point. You couldn't even remember the name of the service. Yes. Afterpay has become so synonymous with what that thing is. Speaking of leadership, that's the point, right? Yes. I'm going to Afterpay. What's it called when you Afterpay?

1:20:28I don't know, just Afterpay. Just Afterpay. That's the point, right? Google something. Who's talking about web search? They could have knocked on those. I forget the names of the guys now who started that, but they could have knocked on their door very early on and said, here you go,$100 million each, and would have been the best investment they've ever made. Now, again, we put the whole BNPL thing to one side because there's other things there, But it's a classic example of companies allowing themselves to be undermined and disrupted. And when you circle the wagons, the risk is when you say, that's a threat to my business, so I will try and pretend it doesn't exist.

1:21:02I've used this example a million times. Jeff Bezos sent the Kindle team to the other side of the country. Why? Because everyone in the physical book business is like, e-books might kill our physical book business. Well, let's try and bury e-books. And to your point about Kobo and Bezos. Well, that's what Kodak did. How'd that work out? Right, exactly. so can I finish with this you mentioned a podcast everyone listening to this once you've finished must go and subscribe to Chris Collar's YouTube channel he has just I am insanely jealous because he just nails it I'm like that's what I want to do that's amazing he does a bit on Kodak he does a bit on Google sorry on Yahoo saying don't want to pay a million dollars no tell them to get lost don't want to pay a billion dollars no tell them to get lost so go and look up Chris Collar's It's K-O-H-L-E-R.

1:21:48He's Alan's son, spelled the same way. He's a genomic zone, right, by the way, but that's why the name's familiar. Fantastic. Lovely bloke too, by the way. If anyone deserves success, he does. But go look up the Kodak and the Yahoo videos he's done. They are brilliant. Yes, I will second that. And I've only had a very brief couple of interactions with him back in the day when it was, what was the TV station called? Your Money? Your Money. It was correct. Yeah, and very humble, nice, friendly guy. So shout out to Chris. Yeah, like, no, I don't really know him that well, but he's got some great content that he puts out there, which just sort of nails it.

1:22:22I didn't know him that much better than you, mate. I've had a few more interactions with him at nine now. He wouldn't know who I was, I'm sure of it, yeah. I'm not sure who's not either. But yeah, check out the YouTube channel. It's funny. The test is you show someone who's under finance, right? My wife looks brilliant. It's like, yeah, he's gone. Yes, yes. Anyway, we've talked for long enough, Ram. Will you come back on Friday for me? Yes, of course. Okay. Until then, hit us up on email info at fool.com.au. You've got a very short amount of time to get some questions in for our Christmas pre-record.

1:22:51So please do that and we'll see you Friday. Until then, Fool on. 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.