Mailbag: incl. Are the academics right? November 24, 2024

27:15There's no real business there that can support itself. You know, BHP could, you know, could withstand making a loss for the next five years and still be a going concern, right? And will still be producing, you know, contributing to the economy at large in that period. It will still be worth something, right? Like a company that doesn't have a product or doesn't have any sales or, you know, like that's probably not going to come back. Yeah, that's right. Exactly. you just own some know what you own and why you own it does that guarantee the price won't move around no but at least you know it's good that's always the main question is it going to be around in the future and is it likely to be earning more money then than it is now if those two things are true everything else is secondary you know i like it i like it and no we're not going to do another bitcoin episode i don't know we probably will at some point we're not planning to we probably should do one let's do one let's do one at 100k us so next week the hardest part with that so honestly this is one of the andrew i talk about andrew's a massive bitcoin bullers you know just a quick behind the curtain there's kind of a lot going on and we talked about a little bit last friday um but most of it's kind of like it's it's the concept itself which is important and edward to great you'll explain it on that podcast so kind of going back to the well of like well we're kind of back there again how do you do a part two nothing's fun well nothing's changed but in terms of the actual the landscape's changed adoption and stuff yeah exactly exactly but the kind of like war you know the investment case i would argue mate other than strengthening because of that adoption is almost you could replay we could literally put the january 6th one out as a new episode and say so here's an interview on bitcoin i hasn't changed at all right other updating the numbers you'd say the same things right 100 actually this i mentioned this to a friend on the weekend not to i promise i'm not segwaying into an author but they were doing the usual finance guy thing you know it's like there's no earnings there's no one and i'm just sort of like that's that's that's kind of the point like isn't it cool but i don't have to worry about whether the ceo is having an affair isn't it kind of cool with like there's no earnings forecast like it's just a pure monetary asset like it there is no once you get it like that's it that's it there's nothing there's nothing nothing to add the only thing as you rightly point out scott is is adoption growing and there's forever that is true then it's worth holding and if it's not then get the hell out yeah yeah and it is not entirely mathematical it's pretty close to mathematical from this point the value now isn't on anything that gets invented from this point it's simply a question of in how much demand is it and how valuable is it is it perceived by those who own it or want it.

29:52That's literally kind of what we're down to. That's exactly it. And stop comparing it to a stock. That's all I'll say to other people out there. It's not a stock, right? It's money. This is about the weekend, isn't it? I just hit my head against the wall. It's like, you are describing the yen. You're describing the euro. So if your points are valid, the whole damn thing is like cooked, right? So anyway, shut up, Andrew. Shut up. You have come punch you this morning, mate. I like it. Monday morning, Andrew, is a whole thing. We did get a question last week asking us to do another midweek episode.

30:25I'm thinking, you know, Monday morning Punchy Andrew might be a thing. We'll have to find out. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

30:39Hugo sends us a very good question and also, by the way, buys into your timeless approach to podcast listening. Hello, gentlemen. Says Hugo, love your work. Let's bust right in. Compound interest, the eighth wonder of the world. We're all long-term investors. However, what happens after 200 years of collective compounding at 10 %? Does the eighth wonder of the world have an upper limit? Or is everything just priced in Bitcoin by that point? Have a glorious... You can't escape it. You can't. This is, you know, sooner or later. It's like the Japanese adopting gunpowder. It's like, oh, you don't want to adopt it?

31:22Let's see how that goes. Hugo finishes with, have a glorious morning, evening, or afternoon, which that's the time reference I was mentioning before. I'm going to leave Bitcoin out for now, unless you genuinely think it's part of the answer, but I don't think it is. Because however the compounding is accounted for, it's a very good question, right? I mean, Buffett himself has said that Berkshire can't grow forever at historical rates or it becomes bigger than the US economy. Yeah. The US economy or not the US economy, the collective value of every company listed on the stock exchange can only be some proportion, in theory at least, or maybe not, of GDP or of total wealth or of something.

32:00How, what happens? Is there an upper limit for compounding, Andrew? Depends on what we're talking about here. Are we talking about the monetary value? Are we talking about the underlying real value? Things get very deep, don't they? I mean, this is, I'm not trying to be shady, but it's like, like to take an example, right? So Argentinian bonds will give you very high yields. Compound that 30 % for a hundred years and see where you end up, right? But I think that's his point. At some point that compounding, can it literally compound at that rate for that long? That's the hypothetical question. It can, absolutely it can.

32:39There's real value compounding at that. But I know it feels like I'm being a bit tricky here and I am because there is a and i'm not going where you think i'm going but oh it's where everything goes there everything it's it's but it's why the unit of account kind of really it sort of sort of matters here so yeah you know the um the old saying is trees don't grow to the sky like there that so you don't there have i'm trying to think of anything in nature where there is a runaway uh logarithmic growth yeah maybe but even if that stabilizes it's more it's better thought of as an s curve like you have this flat period this exponential logarithmic sort of you know uh growth and then and then it plateaus because you hit these natural ceilings and so things absolutely can compound insanely but they it will you run out of space right so it's a very deep question um and i think let's take the monetary let's take the monetary bit out of it for now yeah let's let's assume we're in a world where everything is pricing bitcoin just because it make you happy yeah so that there can be there can be no growth in in the money supply now there will be and i'm not suggesting there won't be or we can't we shouldn't let's do that just as a hypothetical not about the b word just that there's zero monetary inflation yep so so woolies is growing its sales and profits faster than the overall market at some point woolies becomes either the growth stops or it becomes the entire grocery market and then becomes the entire something else retail market and then amazon is probably a great example right like for those For those who've watched WALL-E, think about Bayon Low, which colonised the world effectively before they shot off into space because the planet went to pot.

34:15Maybe that is the appropriate analogy. I'm not sure. But at some point, I mean, company values can't grow faster than the economy in total, can they? I mean, it's all relative. No, they can't. The economy is the upper bound here. Now, the economy itself can grow, but within the economy, you can't go beyond that. But can the economy grow that fast? I mean, again, at some point, we've talked before about the fact that productivity is really the only thing that improves living standards because the rest is just a unit of account to your point. Yeah, yeah. So, I mean, does capitalism break, does investing break down?

34:50Is there a point at which we kind of go, huh, well, that couple of hundred years was an anomaly and now we're back to everything grows at 3 % because that's just what happens? Yeah. No, I think that's actually – so on a perfect fixed monetary system, hard money system, if you will, you will find that growth is absolutely tied to the rate of productivity growth. So in other words, if we go 100 years where we just don't get better at making stuff, we can't do more for less or even more for the same, then there's no growth. And there's not – by the way, that's not the terrible thing that a lot of economists like to make out.

35:26Society, at least. Puts you an eye out of a job, but it's not a bad outcome for the country or the world. It's really not, right? It's absolutely a problem where the monetary base continues to inflate by design. That might be an issue. But anyway, I'm not going to go there. So you've said three times so far and gone there each time. It's so hard to resist. I know, I know. This is why it's so hard to avoid talking about. Yeah, yeah. But no, it can't. Now, that being said, I think that if humans are smart and we don't blow ourselves up, I would imagine that we do continue to compound it at that rate.

35:59And we'll probably, like, the reality is, is that it won't be a steady 2 % or 3 % per year. It'll be like nothing for a few years, and then there's a big breakthrough with AGI, and there's massive productivity, and then there's nothing, and then someone figures out how to, you know, do fusion, cold fusion in a suitcase, like, wow, and there's a massive productivity boost. But that will be the story of civilization long, long, long term. And I'd like to think our descendants from 2000 years from now will have God-like powers and, you know, an abundance that we can possibly imagine. In fact, that's probably the end point if we don't blow ourselves up.

36:35You know, that's the technological sort of nirvana that we get to, which is just pure abundance. We've got a Dyson sphere around the sun, unlimited energy, whatever you want, you can have. It's sort of like that kind of has to go to that point. or maybe it takes 10 ,000 years or we plateau forever or we destroy ourselves. We want to talk about being philosophical. Oh, that happened. Yeah. It's kind of where it has to go. Yeah, you're not wrong. So, look, I think it's probably a point where it asymptotes for a bit. If you go back to when we were hitting the bones on the rocks and throwing them up in the sky, you know, And then we track productivity growth there through to the end point.

37:20It'd be the curve that sort of grows very rapidly and then sort of slowly asymptotes off. But that's hundreds of years off into the future. There is so much growth left to be had. There is just a difference between – it's where I started here. There's a difference between the growth that would be implied by the monetary value versus the real growth. And I use real in the term that even economists would use it here. In other words, accounting for inflation, what has been the growth? And that's why I use the Argentinian example here, because there are some places in the world where the nominal growth is impressive, but anyone on the ground knows that there's nothing real about that growth.

37:59And we may be privileged in the West to only have, what are we at, three and a half, 4%, whatever, at the moment, still way too high. But it's the exact same thing. We want growth. What's the point of getting a 10 % return per annum on average on the share market? If my purchasing power erodes by 10%, all I'm doing is preserving my wealth. I mean, yeah, you better go backwards. If you don't invest at all, then you're going backwards by 10%. So that's the value of it. But you're right. At some point, it's either backwards or flat. None of those are particularly good outcomes. I think I made a real mess of all of that, but it's such a – No, it's good.

38:35I think it's such a – I think it is the question in a lot of ways. How would you go about answering it? So I would start where you started, actually, and I wouldn't have, so I'm glad you did. Hugo, you've got to look at the 10 % in nominal terms versus real terms. And so what I'll do is I will take it back to 1906, I think, is the Credit Suisse data, where they said that the Australian stock market was actually the best performing market in the world. So yay, Australia, oh, yoy, oh, and all that kind of stuff. We gain, and they measure in real terms. So Australian stock markets gained 6 % per year since 1906 in real terms, so about 9 % before inflation, which is roughly what we all, again, talk about being the rough stock market return.

39:14So it's lovely that it kind of fits in nicely. Not because we made it up, just because it's always nice to have more confirming evidence that that number seems roughly right. Now, what happens when the market grows at 6 %? Well, a few things happen. One is that, to Ram's point, well, so let's start with nine. So let's shave off 3 % for inflation historically, and you get down to six. And what is that six made up of? Well, it's made up of a couple of things, or maybe more than that, but I'll kind of try and stratify it for fun. Part of that is productivity growth, economic growth. The economy has probably grown at, well, the thing is, you can't be prepared to grow massively recently or even necessarily in the past.

39:49And again, we've got to put it in real terms because you've got monetary inflation, but you've got massive amounts of productivity increase from those rocks being smashed and nomadic herding and nomadic gathering through to fixed agriculture manufacturing technology that the last couple hundred years has given us. The good news is, up to 200 years of that, we've still got much more upside to come. But, but, but, but, some of that 6 % companies have gained have done a couple of things. One is they've come from other companies. So the wealth of the 200 largest Australian companies listed on the stock market, not even the largest 200, it's the ones on the stock market.

40:25Think about it, excludes Hancock Prospecting, Junior Reinhart's company, excludes Vizzy, Anthony Pratt's company, a whole lot of massive and medium and small private businesses aren't there. So some of the returns for listed companies have come at the expense of unlisted companies. Think about Woolies and Coles. Think about the banks. Think about the market share gains they've been able to, not just the sheer growth for its own sake, but the market share gains. How many corner stores have gone broke in the last 50 years? Hundreds, thousands. Now, is that good or bad? Well, societally, we can make a different decision, and we should, and that's all good.

40:57But the actual returns themselves that come from the companies have come from gaining market share of their categories and those categories of the total economy. So partly, let's say Woolies. Woolies has grown. Why? Because we're more productive. We're eating more groceries because we can afford to because life has improved. They've grown because they've shut down, you know, corner store. Joe's Milk Bar corner store has closed down. Some of the chain competitors, Jewel, Franklin's, Flemings, for those who knew those names, others in other states. Jack the Slashers. Jack the Slasher, exactly, yes.

41:41Not quite right. Have all closed down. Their market share has been consumed by Woolies and Coals. So part of the last 30 years of Woolies and Coals and the banks, this is why it's really important. I'm not going to get Andrew started on the banks, but I will try and reference it and then move on. Why have the banks done so well over the last 40 years? Well, because the economy's grown and because finance has become cheaper to provide because it's digitized, but largely because they've just gathered up, gobbled up market share. You know, again, back to Woolies, because I know the industry. Woolies and Coles together were less than 45 % market share in the, I think it's the early 80s.

42:15Now they're 85 % plus. That growth has contributed to their long-term returns. You back out that market share gain, and ask yourself what Woolies profit is today. So that kind of growth happens. Now, why am I highlighting that? Because that has got an end point. There's an upper limit to grocery market share. Yeah, 100 % is the limit. And what's over, it's 100 % for the category, but the upper realistic limit is Woolies, Coles, Aldi. We're probably there. We're probably roughly there, right? Short of digital disruption, which is possible, by the way. So again, this can all change. So why do I say that?

42:51because when we track the value of listed companies, we're tracking their efficiency, we're tracking the size of the economy, and we're tracking the degree to which they have gobbled up market share, sales, and profit from unlisted companies. And the last one there really, really quickly, I'm not going to get too ideological here, is capital, that is equities largely, other forms of capital, have actually gained a larger share of national income from labor over the past 30 or 40 years. So that's also boosted the profits and the value of listed companies. Now, think forward 100 years or 200 years to your question, Hugo, and ask yourself, where do some of those additional gains come from?

43:29Have we got more advanced in our standard of living? I desperately hope so. Do we get more productive? I desperately hope so. But can these companies and their existing industries take more share from other players in that industry? To some degree. Buffett said himself, if Berkshire was to grow at that same rate in the future, it'd be larger in the US economy. So it can't. there is a natural limitation to how big these king things can get so you're right you go i would suspect in 22 24 200 years time i'm not going to be here and you're not going to be here although there is some rumor he's going to be frozen cryogenically so he can be reborn when bitcoin is universal uploaded to the cloud uploaded to the cloud um the blockchain just the cloud blockchain blockchain is not enough space to hold this intellect my friend that is true a separate blockchain.

44:17Bitcoin 2.0, that's possible, right? Find an old Commodore 64 somewhere. There you go. Yeah. Old Dick Smith Electronics tape drive. So yeah, at some point, there will be the value of company profits will grow at the rate of productivity growth. Just will, because there's nothing else to be gained outside of that. Now, by the way, what will still exist is investing in individual stocks. So ironically, the closer we get to that, the more value there is in working out which company is going to win at the expense of other companies that's where the outperformance will come from yep but the economy will grow at a real rate of productivity that's probably a few percent a year max and once the share of capital labor income is stable once the share of listed versus unlisted companies is stable that's kind of you're there right so so the system only grows at productivity that productivity growth is shared between capital and labor and within capital those companies that already win or don't win or lose or whatever that's kind of how it's going to work so yeah i i think i think companies are going to long it'll see me out don't worry about that um but at some point yeah it almost must by definition when berkshire keeps compounding and becomes three quarters of the u.s economy we probably say it's probably done by then and that's going to grow at the end of living woolies will probably grow at the rate of you know grocery sales at some point um unless amazon or someone else disrupts them uh bhp will grow at the rate of demand for steel those things will find there and why do i know that because we kind of and that's grocery sales generally grocery sales grow at roughly population growth that's because why because that's all they can do so every industry finds maturity and i suspect capitalism matures at some point i suspect that's a century away but that's my best guess no capitalism never matures i don't think but but there's upside i mean the the ability to capture that value in real terms.

46:13It's all it can be, right? You're right. But, I mean, I also am mindful of – I could go back 100 years and talk to, you know, oh, I've got this thing called GPT. It's literally a brain in a box. That's just one more recent example. It's not even that they find it hard to believe that you could blow their mind. So just when you say it's all done in 100 years, I don't know. I mean, maybe we're teleporting to Alpha Centauri and, you know, we're just like literally printing atoms. And, you know, I don't know. Like that's, there's a long way to go. What's it called? The end of history fallacy where every generation since cavemen have thought, wow, look how far we've come.

46:56You know, oh, we've got steam power. Wow. You know, like this is it. We've made it. But it just, it always, it just keeps, human ingenuity just keeps pushing us forward until we really do deeply understand every single aspect and law of the universe and have the power, you know, to manipulate that. We're kind of not there. And that's probably a long, long, long, long way away. And to say capitalism will never die is only just, it's such a bastardized term and everyone has a different meaning for it. But it's like, will human beings continue to trade in the future? If you think the answer is yes, than capitalism is alive and well, because that's really ultimately, you know, what it rests on, just the free ownership of, free and private ownership of property and the ability to trade it with other people.

47:41That's it. Layer on whatever ideology you want on top of that, but that's kind of what I'm talking about. Yeah, I guess I'm talking about the,

47:51I guess I'm talking about the growth that will come. I think what you're talking about is actually just productivity. I guess it's my argument. So I'm not saying there's no more productivity growth left at all. I think what I'm saying is at some point, the compound returns we're getting now, the last 120 years, we haven't seen share market values grow just on productivity. Productivity plus, plus, plus those things I talked about before. I think those other things mature. And so the returns to shareholders en masse at some point must be equal to productivity growth, unless there are moves in the share between capital income or I can't, again, at maturity, not now, but at maturity, the economy can only grow up productivity.

48:32Companies can only grow up productivity unless they're sharing between themselves or among themselves in higher or lower amounts, which is what takes me kind of back to that stock picking thing. Yeah. Oh, man, gosh, it was such a deep question. It was a good one. I love, actually, if you want to go to the strawman blog, strawman.com slash blog, there's a two-part article I wrote just kind of on this stuff just recently, which is why. Like, why? These are really deep questions, and it's no easy answer to any of this stuff. But, I mean, one big part of it is that the amount of money, which is just the way that we measure all of this stuff has grown at 6.8 % over the last 100 years in the US using US data.

49:09So that's just like right there you've got to have enough real growth of that similar extent just to maintain your purchasing power, right? So in other words, the 10 % growth that we talk about isn't real. It's probably 4 % or 5 % real growth. And they're for the reasons that you discussed. So it's sort of, I'm struggling here because it's sort of like, but wait a sec, the thing that we use to measure it is saying this. Like, well, it's true. It's just that we've got a ruler that every year gets 2 % or 3 % shorter. So you've just got to account for that is all I'm saying. I like it. Let's get a question from Cam, mate, who I can't see.

49:53I think we're a perfect score on Pod Machine references, which I'm very, very happy about. You know that. We may have a podcast, Pod Machine maturity. Hi, Scott and Ram, says Cam. I listen to you each week on my drives to and from work on the beloved Pod Machine. Now, no only does he say that, he's got Pod Machine in capital letters, which I think is the appropriate treatment of the all-powerful Pod Machine. And I want to say thank you, he says, for all of your comments and thought-provoking conversations that have helped shape my view not only on investing, but finance and economic policy in general.

50:25My wife and I are about to have our first child. Congratulations, Cam. Congratulations to your wife as well. And I will be setting them up with a sum of money, investing in a couple of broad-based ETFs after some recent podcast discussions got me thinking about the best way I can set them up going forward. My journey started with a simple investing strategy at age 20 and now eight years later bastard i can see the enormous benefit and tangible impact of compounding and regular dollar cost averaging so i want the same for my kids future that's brilliant mate i think if you if if all we felt was you and nobody else we've done we've done a good thing so i'm glad we've been part of that process for you now comes my question says cam i'm currently completing post-graduate study with one of my units being finance initially he says i was excited about the concept of this until academia took over and made bonds sound like the most risk-averse asset class suggesting a portfolio of 60 corporate bonds am i missing something has academia failed to catch up with recent history i'm keen on your thoughts on some of the textbook scholar beliefs especially around bonds and how this compares to the current reality and over the past few years i'm not against bonds or anyone who invests in them and understand they have a place i just struggle to understand why someone with 40 plus years of compounding left would invest in such a strategy again i also can probably 60 plus years mate as always your thoughts and insight are much appreciated thank you and fool on cam now ram i'm going to stop you before you start because that's important we have talked about bonds already feel free to go back to the well on that one if you want i think we've done that to death but feel free but he asks about some of the textbook scholar beliefs and i thought it was an opportunity for us again feel free to go back to bonds if you want but um to talk about some of the things that maybe and not even necessarily academia though that's where it starts but some of the more um what's the word tenacious as tim mentioned might say beliefs um don't i i love i love the line in white one in the sun i don't believe just because ideas are tenacious it means that they're worthy And that might actually be the subtitle of much of what we do on this podcast.

52:36Tim is just such a great songwriter. It's such a great lyricist. It's brilliant. Anyway, what ideas are tenacious but unworthy in corporate finance, academia, and the financial world in general? How long have we got? Unfortunately for all of us, there's no time limit, but I might apply one. There is so much nonsense in that, like, I feel for you, Cam, because there is, I don't know. where do I even start with that question? By the way, the questions this episode have just like, they've ticked all of my most favorite topics so far. We've touched on Bitcoin. We've talked about the real productivity and growth and how it's all measured.

53:17And now we're talking about bonds. Just, yeah, they're an absolute madness. They're not an absolute madness. It's just lending someone something money, which can be a brilliant idea if the counterparty is great can be the stupidest thing in the world if the counterparty isn't so it's sort of it's hard to be generic you know um i don't know can i let can i just palm this to you mate because i just feel i'm gonna like flip-flop all over the place and then yeah you go give me Give me some structure that I can write off. Oh, dear. All right.

53:54So, I think academia makes the mistake of wanting to go for certainty and absolutism and maths. It's physics envy. Yes. Economics was a much better discipline when it was taught as effectively. And we're getting back to this, by the way, applied psychology. How do humans behave? That's what it was always a study of. And it used money or units of account, not even necessarily money, as a way to examine human interactions. That's kind of what economics is, all it is. And then all of a sudden, we got computers and calculators and abacuses, and we went, what if we could assess, calculate the way this will and does work?

54:37And all of a sudden, what happened was the math took over. and our desire as humans to make things absolute and precise is a worthy idea where we fall down and i'm getting back to the answer where we fall down is trying to find precision where there is none and enter i've talked regularly about wanting to be roughly right rather than precisely wrong and most of the field of finance is precisely wrong and it's in the pursuit of excellence it's in the pursuit of trying to help and i don't i don't think there's sometimes in corporate finance is a bit of chicanery because trying to make money but most there's no there's no academic admissions who want to make things worse or want to misunderstand or mistake things they just humans are weird right we're weird in lots of different ways and our desire to just believe we can just you know easily simply put things in boxes brings us horribly undone where where those boxes don't exist to your point mate in physics it's fine in math pure maths is also fine there There are mathematical realities.

55:37But to pretend that we could say, and by the way, economists have got this great phrase, ceteris paribus. They've borrowed it from Latin, which basically means all things being equal. Yeah. Let me know when that happens. Right. And that's the thing. So like, if the assumptions I made hold true, this maths is true. And they're right. The problem is if those assumptions hold true, it's useless. What's the old line? No plan survives first contact with the enemy. That's exactly what economics is, right? Or maybe in honor of Mike Tyson, who avoided getting completely destroyed by Jake Paul on the weekend.

56:09No, you know, everyone's got to plan to get punched in the face. Poor old Mike Tyson got two rounds through and it was a bit sad. But yeah, look, so I think that's the starting point, Cam. And so I will give you some thoughts, but that's where it starts. The first one is the efficient market hypothesis or the efficient market theory. And the assumption there goes everyone knows everything there is to know. and so everyone's using all that information they have to make all the decisions they make therefore nothing is actually knowable outside that and therefore the market is efficient as going to be no no one can outperform because everything is known now you and i know warren buffett is a walking refutation of the efficient market hypothesis uh as is by the way people who lose money in exactly the same way we don't look at those people both of those both those groups are proof of the fact there is no efficient market hypothesis.

57:00Why do economists want to believe there is? Because it means you can put it in a box. Once you believe it's efficient, then you can apply the maths to it because there's no unknowns. And how good is that? Problem solved, right? Except it doesn't happen. So you kind of start there. Ram's already mentioned volatility and risk. That's the next one for me, which is simply the case of there's apparently upside risk. Right? Which, again, the way they use it. I'll take some of that. I'll take some. Now, if you choose to define, it's partly definitions. If you choose to define risk as the chance that a price moves, then you can have upside risk.

57:35But then you could also call that peanut butter and say, there's a chance of upside peanut butter too. But it's a stupid, I'm being literally deliberately silly here, because it is silly, right? To use that word risk as if it's not got a real world meaning or that somehow the academic meaning is better, They should just use – here's the other thing. They could just use the word volatility and be done with it. Talk about upside volatility. We're there for it. Talk about downside volatility. We're there for that too, although we don't like it. Once you call it risk and then have people say, but it doesn't mean risk – I don't want to lose money.

58:06That'd be bad. I want to avoid risk, don't I? That sort of thing. It's just dumb. It's really, really dumb. And it's unnecessarily dumb because you don't have to do it that way. Yeah. Just quickly, Buffett defines it as the chance of permanent loss of capital. Correct. That's what risk is. Risk is in volatility. there's risk in the market because you buy something it falls and it never comes back that's a risk so you buy something in the market it drops 20 % and then three years later is up 80 % it's not risk correct and just sorry one other quick thing what we have to remember is that volatility is the natural default state of the universe and of financial market it is normal But world is volatile.

58:43Like non-volatility is a front against nature. It doesn't exist. It only exists through a huge expense of effort and compromise and sacrifice. Volatility is normal and natural. And whenever you do anything in the world or in finance in particular to get rid of it, all you do is undermine your return potential, frankly. So it's just, again, what do you want here? Do you want a good return with a bit of volatility or a really bad return with no volatility? I mean, I don't know how anyone's going to answer in the secondary part there, unless, as you rightly point out, I'm retiring in three years and I just want to make sure it's all there.

59:27That's the one exception, you know, or buying a house in two years or something like that. So I think there's that. I think I'd add to that. So that's the economic bit. From a markets bit, then you get to hubris and ego. and what does the market get wrong? That somehow trading systems that you can somehow systematize winners and losers in the market. It was possible to be arbitraged away already, by the way. So when I'm saying it's not possible because we don't do it or we don't want to do it or we can't do it, if it was possible to be arbitraged away, if it was knowable, and by the way, I might get us closer to this.

1:00:00I wouldn't be surprised if it did, but everything knowable is knowable by more than one person that gets arbitraged away. Why? Because if I see an opportunity, I buy it. by the act of buying it, I close the opportunity. Now, me personally, I don't. I've got$15. I buy 15 bucks with a BHP. She has not closing the opportunity. But if those things are knowable at scale, for people who have millions and millions and hundreds of millions and probably billions of dollars on the line, some of the big funds, if they could find that gap, they're closing that gap as fast as they can, right? Which means as soon as it's closed, it's literally gone.

1:00:28So you've got to move on to something else. So the idea that trading systems or that, again, talk about roughly right rather than precisely on price targets are stupid. um the idea that ram already said you know i don't know most important words in finance or marginal safety maybe the two two three word um slogans in the political sphere those days um marginal safety and i don't know do nothing other than that you'll probably outperform the market i would suggest um but you can't not know because that was just you're not capable if you're capable and you haven't got a job or you're not a good investor or you have to admit to yourself that the ego maybe doesn't you know is writing checks that the intellect can't cash um that's okay by the way just roll your ego back you don't have to yeah you have to cash those checks just don't write them that's that's the point right so you know i think i think that's for me and just off the top of my head ram add some more um but they're probably they're probably the biggest ones um i will say just in closing i discounted cash flow was really helpful conceptually i like it a lot the inputs are unknowable by the way so don't let anyone say if you use a dcf you will be able to value something you can approximate a range of values for something if you're roughly writing your inputs but that doesn't sell textbooks it doesn't sell trading courses um but the concept behind dcf is great really really thoughtful um ignore measures of volatility as if they're going to be somehow you know there's alphas and betas and deltas and god knows what any anything um what is it um did Charlie Munga say beware of geeks bearing formulas yes I think it's one of his anything with a greek letter just run the hell away from uh because again it's trying to there's some sense that just because a share is volatile somehow it's worth less in the future just it's just like complete stupid stuff um i will say very quickly i i have a i have started twice i think the graduate diploma of applied finance and investment offered through a couple of different industries and this you get all sorts of qualifications having been an investor for long enough before i started it i just couldn't finish it because maybe i'm just lazy but the they're teaching you the academic stuff and i'm just like even waste of time well just and really quickly i will stop at some point um asic the corporate regulator makes you do a test to give financial advice.

1:02:36And on that test, you have to, you get marked right or wrong based on how you answer the questions, right? And I don't think it's controversial. I don't think I'm going to lose out the Motley Fool's license. If I do, by the way, it's been lovely knowing you all. By saying a lot of that stuff, I'm answering the question that is quotes right about the efficient market hypothesis or about discounted cash. Yeah, I know what answer you want. Right? And it's like, this is right. No, I don't believe in this. But if I put the right, what i think is the right answer i get marked wrong now i'm arrogant enough to believe that maybe i know a little bit more and frankly not because i've done it but you mentioned isaac newton last week mate standing on the shoulders of giants i'm happy to say i'll tell i'll compare your academics and my bloke uncle warren just standing over there beside me not that i not that i have his intellect or his knowledge or anything else but the things i've learned from him stand in stark contrast the things you tell me are quotes right i will give you the answer you want because i've got to pass the test uh but just trust me when i say if uncle warren says i don't think that's right i'm i'm going with warren i've ranted it's not even it's not even warren right like there's there's so many examples to point to here in australia even within our friendship group like you just you know it it's it's who do you who do you want to tell you what to do someone who has never applied it in the real world but has an incredibly fancy degree and i'm not having too much of a go at academics here i'm actually you know i i'm a big supporter of academia it's an incredibly important institution but there are just some things that when it applies to the practical world there's just not a lot there right you know it's like here are here are it isn't an interesting too that when you particularly when you look outside of like the big institutions and funds, all of the best investors I certainly know don't have the formal qualifications.

1:04:29And those that all have the formal qualifications are all terrible investors because they're using bad mental models. They're using bad techniques. They're using these things that are beautiful and elegant and, you know, lovely in the theoretical realm, but they don't work in our real flesh and blood realm. And they can't because that's actually what we're trying to predict and measure here is you know millions and millions of these hairless apes running around making individual decisions based on their own unique preferences right or wrong how do you predict that like what that is impossible of course it is of course think about it for a second now no no you know and that you can like look at a few squiggly lines on a chart or apply some metric or ratio to now that's to be fair here there a lot of these things are useful in terms of helping you think about things you mentioned the discounted cash flow and now i think it's really valuable way to think of what is value it frames it in a way that makes a lot of sense so i would never say don't learn this kind of stuff it's useful but you don't don't treat it as in you know um the law for kinetic energy or or newton's force equations like they're They're not that, right?

1:05:45They're heuristics. They're not algorithms, I suppose, is the best way to put it. They will give you generally roughly right answers if you think about them in the right way and you use the right sort of inputs, which you can never be sure if you are ever doing or not. It is not something like, huh, cannonball leaves the cannon going at 200 kilometers an hour at an angle of 30 degrees. Everyone can always work out exactly where that cannonball lands, to the nearest centimeter. Finance just doesn't exist that way. So we've reigned all over this particular parade. So I think we've made the point here.

1:06:22You will do far better if you're interested in this stuff. Read the Berkshire letters. Read all the classic. Google Motley Fool reading list. You guys have got a blog post somewhere there. Read some books. You'll spend$300 on books. You won't get a pretty piece of paper afterwards, but you'll know so much more. than a lot of the graduates. Oh, by the way, go to the library and borrow the book and do it for nothing, literally nothing. And yeah, it's price of everything, value of nothing is what some of those degrees. And I don't want to bag, I was going to say other things, I don't want to bag people with those degrees.

1:06:57It's increasingly a ticket to the dance in investing. The things I would have to do now if I was starting my career from scratch in a traditional finance firm would be this degree and that. And it's actually doing them harm. Like that's the other thing, right? There are some really useful theories to know and to learn. The other, just a really quick plug. Ask your professor to show you their portfolio returns over the last 10 years. If they've smashed it, be my guest. Fill your boots, right? Maybe they're worth listening to. Correct. A great piece, which I'm pretty sure is available online, I'm not certain, is The Super Investors of Graham and Doddsville.

1:07:29Oh, right. It's an essay that Warren Buffett wrote. I'm going to say 30, 40 years. He was a much younger man. But he talks about the fact, again, the so-called efficient markets. He makes the point that people who learned from, so Graham, Ben Graham, and Dodd's, what's Dodd's first name? Oh, I forgot. You had it. Graham and Dodd were two people that they co-wrote the security analysis before Graham or an intelligent investor or vice versa. And basically Buffett's point was if you learned this way, there was an extraordinary number of people in a small cohort who all did really, really well. Beyond what chance would ever suggest.

1:08:04Correct. Exactly. You can never do it. And so, you know, that kind of idea of maybe there's something to it, really, really good, really useful one to do. So, yeah, we've, Cam, we've absolutely, as Ram says, put all over everything. But yes, that's kind of the key. That's kind of the key idea. I think using that for, I think as a starting point, I think is a useful way to approach investing. Some of the theories are worth knowing. Some aren't. You learn them so you can disregard them. is what we're saying right like like and not just finance it's a lot of things as well they're they're important to know at least and to know how a lot of other people are sort of thinking about these things actually you just mentioned something there i just tie back to an earlier point so you talk about ben graham right so he was way back in the day you know in a different world the world was a completely different place but his whole shtick was look for net asset value that was greater than the market value.

1:09:01Yes, yes. And buy a huge number of shares. And on average, you'll work out really well. Now, it did work out really well for him. You can't do it anymore. And just to underscore that reflexive nature of markets and when someone spots an opportunity, an edge, once it becomes widespread, it ceases to work because the very prosecution of that. And so it's not to sort of say, don't read any of the books or dive into any of the thinking there. it's valuable but it is it just to try and preempt a lot of the things that we get here is is that if ever someone's touting to you a system a process you know it's just sort of like if it was that good and it just would have been done and it would have been figured out by now and i just i point to ben graham as a classic example of that something that absolutely worked good luck to you trying to work to apply that strategy today you're just not going to make a single cent correct correct It's not there anymore.

1:09:56I think we've probably done that to death. We've annoyed every academic and professional finance person listening. And I'm sorry to annoy you, but I'm not - Let's compare portfolios, Mr. Professor. Let's go toe to toe. Andrew, punchy page this morning on a Monday. This Monday morning podcast might happen. We'll have to see how we go. But I have thoroughly enjoyed chatting with you. This won't come out until Sunday. So we're hoping you're enjoying your Sunday or as both Andrew and one of our questioners says you're after an evening or morning. We will be back with you next Friday, as always. If you want us to answer one of your questions, hit us up.

1:10:31Email is the best way to get them to us because, frankly, the member services team at The Motley Fool is more organised than I am and they put them in a nice queue for me. So if you want a question answered, info at fool.com.au is your very best way of getting that answered. Otherwise, you can follow us and you should follow us on all the socials. Andrew is exclusively on Twitter at Sage underscore Simeon or at Strawman Invest. I am all over the place like a mad woman's breakfast. Can you say that anymore? Well, probably not. I am on Twitter and Insta and Blue Sky at TMFScottP and Mastodon, that one too, but I haven't been there for a million years.

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