Mailbag, incl: Aren’t Baristas in the manufacturing industry? April 19, 2026

14:13Chris Hill:15 minutes into the mailbag episode. Should we open the mailbag? Probably should, yes. But no, you're great. Yeah, it's endlessly fascinating. All right. Russell sent us in a question. He says, greetings and a humble knee in the presence of those bastions of the true path to financial literacy, Scott and Ram. I appreciate he knows it's the true path because I think that's important. It's not just a path. Other people think they have the truth. We actually have the truth. Of course. It's obvious. My name is Russell, says Russell, which is good because his name is Russell. He tells us his name is Russell, so thanks, Russell.

14:44Chris Hill:I have a stake in a small cap pharmaceutical company. It's performed badly the last few months, but my strong conviction, in brackets, stubbornness, which has served me well, means I am keeping my stake, at least until new information may dictate otherwise. However, they recently had a share purchase plan for existing shareholders. This in itself is no worry, as the purpose is to help sustain the new sales opportunities. But I'll get back to that. They also have an option to buy shares at a future date for the same price. Having decided not to participate, I am now questioning my conviction, as surely that since I think the share price will rise, why would I not take up the offer?

15:30Chris Hill:Noting I'm not expecting a benefit from my investment for at least another three years, though. I invest a part of my portfolio on a principle of a 3-to-1 shot at a 10-to-1 price. This is simplified, knowing it is not a certainty. So, sorry for rambling, but my question is, are options red flags or even other things requiring consideration with a capital raising?

15:54Emily Flippen:No, not at all. I mean, it's easy to be cynical on that because, I mean...

16:00Chris Hill:We're good at that.

16:00Emily Flippen:So there's thousands of companies on the ASX and most of them don't do well. I looked at it just recently. Like last year, 140 companies delisted. Now some of those are mergers and acquisitions and the rest of it. But, you know, it's super, super challenging and a lot of them don't just die suddenly. It's sort of like we run out of money, we raise more, we raise more. The hope springs eternal. And so I do notice that amongst a lot of my contemporaries where it's just instant cynicism and derision towards any company raising money. And I get it because a lot of the time it is you are throwing good money after bad.

16:44Emily Flippen:But I just think as a general rule, then no. And, in fact, I would argue the more sane way to look at it is it's like it's a question of, well, what do you need the money for? right now i need money because we've run out of money and if i don't meet payroll we're going out of business and everything's going to zero it's like gosh well that's a difficult decision isn't it am i just you know and how long does that sort of keep you alive for and what's going to happen in the meantime a lot of these pharmaceutical companies they're they're the classic overnight success that was 10 years in the making so the ones that do make it and there are they are the minority they're the exception to the rule but when they do make it they make it and they've spent 10 years and a billion dollars in the lab.

17:25Emily Flippen:They got it from the test tube to the rat all the way up to the human and now they've got FDA clearance and TGA clearance and they're ready to go. And it's like we need to ramp up the sales team. We need to ramp up manufacturing because we're just making it in very small samples up to this stage just so we can do tests on it and the rest of it. Now we need to make sure that we can put a vial in every hospital around. It takes money. You've got to spend money to make money. And in which case, it's like if you're at a point where you've got a very, very high conviction on getting a very, very good return on that money, take as much money as you can.

18:00Emily Flippen:Take out a loan. Raise, raise, raise, raise. Because you talked on Friday a bit about the sunk cost fallacy and anchoring and that kind of stuff. You've got to – that's all in the past. If there is a good high-value use of the capital, then we should stop being critical of companies that raise it. think of the alternative i've just got a cure for cancer here it's here it's brilliant i've been you know slogging away in my garage with my beaker and i'm just a stupid example i know but i've got it right now johnson and johnson and astrazeneca and moderna and everyone they they want a piece of the action i'm like well i'm keeping it i'm not selling it to you i'm not selling you the license i'll say i'll send you the raw material i want to i want to be vertical integrated i want to capture all of the margin for myself, is like, well, yeah, but I've only got 10 grand in the bank.

18:52Emily Flippen:What am I going to do? Am I really just, am I going to like not die on the vine? Right, exactly. Die on the vine or raise some bloody money and set up a factory?

19:03Jason Moser:Now, again, the kind of person who can't see beyond their own nose, just go, oh, this money's going out the door. It's like, yeah, but to build the infrastructure and capital equipment that will underpin decades of profit, Like that's what matters. No business just turns up on day one fully formed without having made serious investments.

19:23Emily Flippen:So again, I'm probably over-egging that particular pudding, but just to sort of make the point. So I don't know the company in question, Russell,

19:30Jason Moser:but if this is a good company that's actually getting to that point where it's like, yeah, and they've got a sensible use for that money, then you should, you probably should. I mean, I'm not telling what you should do in this particular instance, But if that's your conviction, then yeah, why not? Why not? I mean, one why not would possibly be, it's like, well, I've already got a very, very high weighting. You know, I don't need any more. And if it goes well, you'll still do well either way. Maybe you don't have any spare cash or maybe there's just another, it's a good opportunity, but there's 10 other really great opportunities on the side and you've got to sort of wrestle with the opportunity cost dilemma.

20:07Jason Moser:But all said and done, I am very encouraging of a sensible capital raise, particularly if the share price is high. That is just another way of saying a very cheap cost of capital. So, yeah.

20:25Chris Hill:So, I agree conceptually. You are usually a cynic here, mate, so I'm finding myself in a difficult situation here where you've gone, it's all fine, it's all good. All reversal. Okay. Well, I'm just saying it's not necessarily automatically bad, even though statistically it probably is more often than not bad. So, yeah. So let me start, Russell. You say, it's no worry as the purpose is to help sustain the new sales opportunities they have, which is true. But every failing company says exactly that. Every failed company says exactly that. Every biotech or miner who's 10x their share count over the last 10 years has said, oh, we're just going to do it.

21:02Chris Hill:So when we get to that point, we want to stay alive so we can do these things. And again, I know the company either, Russell, which is wonderful. So I don't have to comment on or hedge my bets here. I'm not saying it is the case either. I'm just saying every reason to raise more capital is sensible in terms of what they are trying to do with the money. They're never going to say, we need money because we're screwed. Exactly. And so even that they're – I don't think they're being dodgy. I'm just more saying that every company does that because they need the capital for that purpose doesn't necessarily mean the capital will end up being deployed successfully, right?

21:32Chris Hill:We need to do this a bit more research. We're almost there. We're almost there. We're almost there. Next year, the year after. We've done a lot of work and we're almost there. Now, Russell, I'm not saying it's not the case. You're right. You know what you're buying. You've said you're buying a three-to-one shot at a ten-to-one price. Perfect. Which is a great way to think about it. Yeah, exactly right. I really love that turn of phrase. Knowing, by the way, that most of them won't come off. That's perfectly fine. A three-to-one shot means two out of three times you'd be wrong. That's cool. So I'm just saying don't do it at all.

21:59Chris Hill:Ram, it's not. But just be careful of that because the justification will always make sense because there are smart people trying to do good things. I mean, it's what we would do. Ram, to your point about you've got the cure for cancer. Maybe you haven't yet. You've got the beakers and the eyedroppers and the pipettes and all the science-y type things that you know more about than me. And you go, I'm almost there. I'm almost there. And maybe you eventually get there. CSL, bad example, just flat out of government. But plenty of farmers, plenty of miners start with, Fortescue starts with, there might be some iron out here to multi, multi, multi, multi, multi-billion dollar company.

22:29Chris Hill:Now, they do well as do badly. So again, no view other than a justified reason as in there was a real reason they want the money doesn't necessarily mean it's a good bet. The second thing I'll say, mate, I've said this before, a few times, Russell, but I'll say it again. I really don't like share purchase plans and capital raisings. Not because, I agree with everything, not because they're not worth anticipating or not because the companies don't need the money, not because they can't use the money well. But we've talked a lot on Friday about behavioral psychology. What does a share purchase plan do?

22:59Chris Hill:It puts a piece of paper in front of you saying, you could buy some shares at this price if you want. And now all of a sudden you're doing a binary, should I, shouldn't I buy shares in company X? If every company in the ASX sent you a letter every week and said, hi, I'm BHP. I get some shares at$36.50. Would you like some? You've paid$15 ,000 at that price. It closes on Friday. Let me know what you want to do. Oh, well, maybe I should. Hi, I'm Woolworths. I'm selling shares at$36.82. I'm raising$15 ,000. Would you like to buy some? Let me know by Friday. Oh, maybe I should. Hi, I'm CIS. Hi, I'm NewsCrop.

23:30Chris Hill:Hi, I'm Woolworths. Down to every, the tonics that will buy. And you're like, they're all raising money. Maybe I should take part. But even if you own the shares, I own all the shares. Well, raising my money, maybe I should take part. They sent me a thing. Here's my, I think the bigger question, Russell, is actually metaphorically, don't literally do it, metaphorically throw away the piece of paper. Put it in the shredder, burn it, do whatever. And then say to yourself, I got 10 grand. It's in the back pocket, in the investment account. I'm going to invest in something. What do I want to invest in?

23:59Chris Hill:Now, if that decision isn't pharmaceutical company X, then you shouldn't take the purchase plan just because I sent you a letter. but human nature is i've been presented with a choice now i'm actively considering because someone said what do you think about x do you want you pull back the coat jacket do you want to buy a watch sir well i wasn't thinking about buying a watch but now i am do i want to buy one or not i'm there's only a few left i'm going down the street when i'm finished uh okay i'll buy a watch what do you buy a watch for because you got you got presented the opportunity i'm not having you russell we all get the same thing um as a motley fool our view for for share purchase plans generally speaking for members is, unless it's a particularly steep discount, it's like if you're going to buy anyway, sure, buy this because it's a little bit of a discount, there's no brokerage.

24:37Chris Hill:If you're already going to top up, do it. But if your best idea is not this company, if you've got 25 other ideas and any one of those is better than this company, do that. Just because it's essentially a piece of paper, don't feel, I say bullied. No one is going to feel bullied because they feel like they're all in charge of their own minds. Don't be led. Don't be subconsciously led into that yes, no decision on this company rather than the general question, which should be, I've got 10 grand. There's 1 ,500 companies in the ASX. Which ones deserve my money most? If it's this company, great, do it.

25:06Chris Hill:If it's not, don't throw good money. I won't say after bad. Good money after good. Just because the company's asked you to buy some more shares. Because again, any company could have done it, when you own, when you don't own. The market's open six hours a day, five days a week. You can buy anything with that money. If this is your very, very best idea, go for it. If it's not, then in my opinion, walk away, find your best idea. If it comes back to this, wonderful. But just because it's something, don't be sucked into. Feel like you have to do it because somehow it's a limited time deal. There's a piece of paper in front of you.

25:36Chris Hill:And what if I don't? And they go up. That exact, metaphorically, think about that question being asked by every company ASX every trading day. That's what's going on. Don't be used by the piece of paper.

25:47Emily Flippen:Excellent. Well said. A couple other things. With the discount, I think that's the thing that gets you, right? Because speaking of anchoring, right, it's sort of like we're trading at$1.38 on the market. We'll let you buy shares for$1.10. So, ooh. Now, it's cheap, quote, unquote, relative to what you could buy on market. There's a couple of things. One, you've got to work out what the pro forma price is once you roll in the effects of dilution. Like, you know, there's some maths that you can kind of do with that. So it should be cheaper. It also needs to be cheaper to sort of attract people into it as well.

26:23Emily Flippen:But it's kind of like if this is really the – and I'm sorry to stick with the example, but the cure for cancer, like whether you buy it now or at a 15 % discount, you're going to make a bank no matter what, right? Or if this is a bust and it's going to go to zero, whether you buy it now or 15%, you're still losing 100 % of your money.

26:44Chris Hill:And the more to it at that point is even crazier, right? Because you're throwing real money off the bat. Yep, yep, exactly.

26:50Emily Flippen:So I don't let the discount seduce you.

26:57Emily Flippen:I always think it's a really strong sign or it's a sign of strength when there isn't much of a discount because what the company is saying is just like we don't need to discount. We need money because we've got this incredible opportunity, but we're going to do it at the highest rationally because they want the lowest cost of capital, in other words, the least dilution. You know, we should sell it to the market at the highest price we can possibly get. Not for some cynical kind of ha-ha-ha gotcha. No, it's just because, like, this is a good deal. We're telling you this is a good deal.

27:32Chris Hill:And to protect other shareholders, by the way, because I was deluding unnecessarily.

27:35Emily Flippen:Absolutely, right? So, you know, and when you see very, very, very steep discounts, it kind of, it's a tell, to use the poker term. You know, it's sort of like, why do you have to make it so cheap?

27:47Chris Hill:What's the catch, exactly?

27:49Emily Flippen:This is such a great deal. Now, again, they need to have some kind of a discount. And there's usually an expedience dimension to it. So there is that. The other thing to be aware of, too, is never ask the barber if you need a haircut. And what I'm talking about there is that every deal is slightly different.

28:04Jason Moser:But generally, there's an underwriter. So the way it works is the company is we need to raise some money. Someone will come and say, well, we'll buy all of it. How many shares are you offering and what price? We'll buy all of them. And we'll then flog them to our clients.

28:17Emily Flippen:and if there's any shortfall, they will make up the difference and we'll try and make a spread on that. So they're going to sell it as best that they can sell it and the best way to sell it is to sell a very exciting kind of story. Now, it might be a legitimate story,

28:33Jason Moser:but it's not going to be an unbiased story,

28:37Emily Flippen:either from the underwriter or from the company. The company wants to sell the shares. They need the money. The underwriter wants you to buy the shares. they want it to be oversubscribed. They want to, they don't, they're not in the business of being long-term shareholders. They're in the business of buying and then selling very, very quickly and

28:54Jason Moser:being the middleman who clips the ticket on the way through. So it doesn't mean that they're all dodgy. I'm definitely not suggesting that. I'm just saying that they've got a vested interest in telling you a good story. And it's just like, you know, you've got to sort of keep all of that in mind. But yeah, look, it is a conundrum. And I can tell you there's been there's been times I have and times I haven't and honestly in looking back on I don't think it ever really made a massive difference as to whether the investment was a success or not like it slightly lower my average cost base which means I made a slightly better profit than I otherwise would have or a slightly lower loss than I otherwise would have so it's not a game it's not a game changer in and of itself I guess is what I'm saying yeah

29:41Chris Hill:again by the way if you have a chance to buy more of something you love at a cheaper price take it But only if you were going to. That's kind of the story. Yeah, yeah, yeah. He has a follow-up question, Russell, a quick one. He says, one more small cap question, please. The volume of transactions in small cap land, the price can vary quite a bit, but only a minor percentage of the shares are ever really changing hands. So is price always a good reflection? Thanks and full on, Russell.

30:08Jason Moser:Yeah, this is a good one, right? It's not even small caps, Russell. This is the biggest of the big mega caps are the same. I mean, let's just look.

30:17Chris Hill:I did a quick search. Woolies, daily trading, 0.22 % of shares are traded any given day.

30:23Jason Moser:So 99.68 % of shareholders don't do anything. I might be off by 0.1 % or something there. But yeah, so I think it's a really good point. The thing to remember is that people could trade. so so you're like doing nothing is a decision um it's an easier decision sometimes but it is it is still a decision so i've got i don't need to get specific i've got certain shares in certain companies and i've got no intention of selling if i wake up tomorrow and they were 10x high maybe

30:55Chris Hill:maybe that opinion changes intentions are yeah it might be changed yeah right and so and so but i

31:01Jason Moser:could try i was like why am i not selling because i just i'm very happy with where my capital is sitting at the moment. I don't want to move it anywhere else because I feel as though I am holding something that is inherently more valuable than what the market is telling me. Why would I get rid of that for? Now, if that changes, I will change my mind. And yeah, does that make sense, mate, what I was saying? Because it just tells you what, yes, a very small number of people chose to participate on a given day, but anyone could have, if they wanted to do it, if the circumstances were different or if their circumstances changed.

31:41So it's, yeah, it's very

31:43Jason Moser:circular, isn't it? Because it's like, I don't want to, why not? Because of the price. Well, by me not trading, I'm not impacting the price. And it kind of, screw with your thinking a little bit there, but it is where it's, where I think where the observation is very helpful is to remember that when something does move quite a bit, oh, what does the market know? It's like, well, what does the 0.22 % of people who traded that day know or think, or think they know? So it is a good, it can temper your, we have this view that it just, everyone knows something except for me. Not necessarily, actually.

32:20Jason Moser:Actually, probably not. There's a lot of people watching it now thinking about trading after a big move. But prior to that, they didn't do a damn thing, and they still haven't done a damn thing. So, yeah, and you've got to resist that urge

32:37Emily Flippen:to let the market inform you. As the great saying is, or was it Benjamin Graham or someone, the market is there to serve you, not to inform you.

32:46Jason Moser:And as soon as you forget that, you just start, you get into the lemming trap. Why am I doing this? Because everyone else is doing it. It's like, that's a really hard to outperform the market if that's your rationale for doing things. Why am I buying? Because it's going up. Why am I selling? Because it's going down. And it's laughable when you say it out loud. And yet, I would say 70%, 80 % of your average punters, that's exactly what they do.

33:10Chris Hill:And even us, we're instinctively drawn to it. We don't necessarily do it, but it's human nature. Russell, I would just add to Ram's point. It's spot on. I don't think it makes any difference to pricing. It does make the share price more volatile because sometimes there are literally zero trades or one trade or 1 ,000 shares at 20 cents or something. so yes I would suspect price discovery on volume now few people follow small caps so there can be opportunities there because you haven't got as many people looking at it so there's opportunities but I suspect it's not really about whether the price is accurately reflecting the value based on volume traded I think it's probably less covered so maybe opportunities and also just more volatile percentage wise it just goes up and down more because individual single trades or couple of trades or whatever can move the price back and forwards.

33:58Chris Hill:So just keep that in mind, but I wouldn't ramp-snarl it in terms of the proportion traded. In fact, some small caps are traded more than the large caps because they get to be story stocks and everyone loves the hell out of them and buy, sell, buy, sell, and there's mad people doing mad things. So sometimes on that basis, small caps, some small caps can be more, quote, efficiently, unquote, priced than the large companies, but I don't think that's necessarily true either. It's just, I would ignore it. And here's the thing, even if it was true, what would you do differently? And the answer is still nothing because you've got to buy if you get a good price.

34:27Chris Hill:You've got to sell if you get a good price. That's all you need to worry about. I always know who cares about the share price. We all do. But it just doesn't matter, as you said, about the markets there for those purposes.

34:37Emily Flippen:One other wrinkle, just to be technically correct, because that's the best kind of correct, is that there is a concept called free float. So sometimes there will be – oftentimes, in fact, there will be a certain percentage of shares that won't trade because they can't trade. Actually, just earlier this week, I was looking at a company that I think is really interesting. Anyway, they only listed towards the end of last year, and the two founders have a very, very large shareholding, but they're in escrow until I think later on this year they can sell a part and then another part next year. So share price could do anything.

35:16Emily Flippen:Legally, they're not allowed to touch them. In fact, that's why Solpats, go to a different end of the spectrum here, was outside of the All Ords, I want to say, or the ASX 200 or something for a long time.

35:28Chris Hill:Might have been both, yeah.

35:29Emily Flippen:Now it had the liquidity and it had the market cap. It met all the conditions. It didn't have enough of what was a free float because of the very large holdings from Brickworks, was it? Or was that what? You'd know more about it than me.

35:42Chris Hill:Yeah, Saltpats and Brickworks had a cross-share holding. In the middle of the family themselves, I own a massive chunk of it and don't trade much. So it was, yeah, it's all changed since the merger. That's right, yep. So they own 44 % of Brickworks at the merger time. Brickworks actually sold down some saltpats. They might have owned 20, 24 % of saltpats. But even that, take that, take the Miller family's own shareholding. It gets quite large quite quickly. I'm just going to quickly pull this up because I'm about one button away from doing it. Yeah, the Miller family, yeah, it's messy actually.

36:16Chris Hill:It's hard to see exactly. So, yes.

36:18Emily Flippen:But they're not available for trade in the traditional sense, I suppose.

36:24Chris Hill:Yeah, that's right. So substantial shareholders, Robert Melner owns 11.8 % and Thomas Melner owns 7.06%. There's some cross-shareholdings and not cross-shareholdings, but mutual. It's complex. But, yes, to your point, mate, more to the point, a lot of it is absolutely wrapped up in, or was at that point, wrapped up in shares that simply weren't going to be traded. That is, the free float was smaller than the actual total shareholding, which is fine. It's not good or bad. But from an index perspective, the index providers don't like it. There's not lots of shares traded because they want it to be liquid and for those reasons, it's not a big deal.

37:01Chris Hill:I think they're a bit silly about it, but that's their view and that's their decision. But, yeah, you're absolutely right.

37:07Emily Flippen:Outside of formal definitions, there's a lot to be said for the amount of shares in, I don't know, CBA or whatever that's held inside index funds or inside super funds. It's just like, yeah, technically they could be sold, but not really they're going to be sold unless everyone draws down their – everyone's now eligible to draw down their super and decides to do so. And the ETF providers and the super funds are forced to sell. So they're effectively not available for sale. So this is – you know, here's the other thing, right? I love illiquidity. Everyone hates illiquidity. I love very thinly traded stocks.

37:45Emily Flippen:It means that they're very, very volatile, right? And so that's what scares people away. But when you've got something that doesn't have a huge amount of free float and the company starts delivering, it's just supply and demand. It's like, oh, everyone decides, oh, I want to buy some shares. Like, there's not a lot of shares for sale. I'll make up a number. 20 % of shares are actually available for sale in theory from people who would be prepared to let go of them at the right price. So it just means that demand far exceeds the available. So you would just assume, well, every share is available for sales.

38:20Emily Flippen:Well, given everything we've said, actually, no, actually, no. And so when demand overwhelms supply, you don't need me to tell you that there's only one direction that price can go. And that works in the other direction too, right? There's no buyers and everyone rushes for the exit at the same time. So that's why you get the volatility. But I think that is a big and overlooked reason as to why some of these small caps, when they start going up for the right reasons, you've been out in the wilderness for forever trying to do your thing and you're doing it and people are noticing you and you're selling stuff and everything's just going great and there's just not a lot there.

38:58Emily Flippen:and the price goes parabolic. And it just, it goes parabolic because it's sort of like, the only way you can get your shares is to offer an obscene enough price where the rusted on, you know, long-term shareholders go, no, I'm in this, I've been a believer from day one. I'm not letting go of my share. That's right. Maybe, how much? No. How much is always a good question. Wait a second, how much?

39:19Chris Hill:How about now?

39:20Emily Flippen:Yeah, I think it's really fast. Can I make the example here? I promise this is just as an example, but I think that it's a big part of the Bitcoin story every cycle as well because you have these, because as you know, it's a cult, right? So there's a lot of, I'm buying it as a future of finance and rah, rah, rah, rah, rah. And then you sort of see the ETF launch and everything and a lot of people sort of scratching their head. It's sort of like, why is the price gone? Who's selling? All these great things are happening. It doesn't make any sense. And it's like, yeah, well, the diehard libertarian save the, you know, fix the money, fix the world types who bought it at a hundred bucks.

39:55Emily Flippen:They've got a price too. And we can see it through the on-chain data. There was something like a million coins sold.

40:04Jason Moser:It's paper Bitcoin and the markets are being manipulated. No, it's not. It's just a bunch of OGs who decided that they... And before you judge, before you judge anyone who may have bought around these recent prices, think what you might do at a price that's 100x above this. And it's not about a matter of cashing in or not believing in the potential. It's just like, I would like to have a mansion. and the yacht, I don't know, whatever it is that people want. And it's a really nice example, I think, not to make it about that, but just any kind of market. When those supply-demand imbalances sort of happen, you need these big exaggerated price moves to induce supply onto the market.

40:47Jason Moser:And then when you get them, it becomes a self-fulfilling prophecy. Markets are so endlessly fascinating, you know. It's sort of like, I'm not going to sell, I'm not going to sell. Oh, it's 10X, okay, I will start to sell. And that selling pressure pushes things down. Oh, what's happening? Everyone knows something. Oh, now I'm going to sell too. And all these things, you know, all these mad monkeys back and forth trying to second guess each other. And it's just, it's everyone reacting individually to their own set of circumstances, you know, and beyond. And to the original point of Russell, you know, that only needs to be a relatively small percentage of the total to affect some of these changes.

41:25Jason Moser:And I think our natural instinct is we look for a sophisticated answer that there is something that's going on that everyone knows except for me. And it's like it's just it's an aggregated behaviour of literally millions of people operating in their own little spheres with their own set of incentives. And sometimes that's all it is, right? And you can read the wrong thing into that. It's like, oh, something bad is happening or are people just cashing out? Nicely put, nicely put. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

42:05Chris Hill:Mate, question from Peter. A couple of questions. Good morning, afternoon, evening or night to the mighty purveyors of the pod machine. Long-time listener, first-time caller. And I do thank both of you for the education mixed with entertainment and long live the rant. Don't, Peter, don't. I think I'm a smidgen older than you two, so I get away without being called a bastard. Eh, eh, eh. Not a young bastard, anyway. Although I do think, could I turn the tables? For the record, I'm a landlord of the type that gets grumpy when the tenants don't tell me of problems so I can fix them immediately. And usually half the recommended increase from the real estate agent.

42:43Chris Hill:I'm in the horrible spot now where I'm cashflow negative, but positively geared. But my investment thesis has been long term. Tenants help pay off the asset by retirement, so it is then an income stream. Plus, it's a property we can move into when the mini farm gets too much for us to handle. Sounds perfectly original to me. Yeah, no notes. My first thought, says Peter, is more food for thought. We commonly view manufacturing as the hard-working VB ad stereotypes, whereas the service industry is more white-collar. My son is a heavy vehicle mechanic, so definitely blue-collar, but definitely service industry.

43:19Chris Hill:And why are our baristas labelled service? Isn't manufacturing defined as taking raw materials and processing them into a new product? So baristas take coffee beans, milk, or a million and one substitutions thereof, man, and have you seen the menus recently? Water and a smattering of components put through an industrial process and produce a product. Therefore, the barista industry is actually a manufacturing industry. So we really have more manufacturing businesses than ever before in Australia. Thoughts? Ask Peter.

43:50Emily Flippen:Yeah, I agree, 100%. I mean, look, it is a very natural and practical thing to group things together. Like there's just too many things in the world for everything.

44:03Chris Hill:You need more groups than make sense. Having everything bunched into one group is not very useful, so you divide up as much as you can. As much as you can. Yes, yeah, yeah.

44:10Emily Flippen:I mean, look at even broader, like you'll have the materials sector. Yes, that's right. What does that mean? Everything from gold to ore to, you know, the kind of thing that is 0.1 of a gram per tonne of dirt to something where it's like 60 % on very high-grade sort of ore bodies. And then the different markets, the different end use, they kind of share certain similarities, but once you start pushing those definitions, you do, yeah. I actually think they're very unhelpful, and this is where I will go. Here's a rant for you, Peter. What drives me insane with the professional investing advisory class is that they'll go, you should have exposure to energy and exposure to this and exposure to that, right?

44:58And why? Because it sounds good. That's why, you know? And it's like, what did you call it? The Noah's Ark portfolio? Yes, two of everything. Two of everything. And it's just like, but what if that's a really crappy sector and a really crappy, oh, but you must have exposure. But why? Should I have exposure to the fax machine industry genius? Or, you know, like what else should I have? Because it makes no sense. And then you go even further and you go and you see people building portfolios in this way.

45:29Emily Flippen:And it's like, well, I've got this because I need exposure to retail. And it's like that retailer could not be more different to that other retailer. Like I know that they are technically both retailers, but like the markets,

45:43Jason Moser:they serve the customers, they serve the product that they provide, the business model, the costs, the margins. You know, it's just sort of like, you know.

45:53Chris Hill:Tech's even better, mate. Tech is even better because like there's Apple that makes iPhones. There's Amazon, which is online retail. There's Cisco, which does network computer switches. There's Facebook, which is social media. There's Netflix, which is effectively entertainment content. It's all tech. It's like, yeah, at some point, like, okay, sure. But then, you know, my local ditch digger uses his phone to book appointments. I mean, you know, where does tech start and stop? And, of course, it's a stupid example.

46:18Jason Moser:And in a backhoe, it doesn't have to. We think tech is like a silicon-based IT thing. It's like a hammer is technology, right? Like it's silly. You're absolutely right. And ignore it. Absolutely ignore it. You don't need two of everything. What you need is a good business. whatever you want to categorize a good like what what sector it might fall under is is i mean i i pay a little bit of attention because i i you know if i if i have my druthers and you know i i would prefer to have a business where there is some there is a wind in their sails right like there there is an industry tailwind there you know they are in a part of the economy which is itself expanding.

46:58Jason Moser:That's nicer. That makes things easier for you. But I mean, it's got a very low down the list of on my wishlist. You know, I just, I'd far prefer a really, really well run company in an area that doesn't have much of a tailwind than a really badly run company that just happens to be in the hot zone at the moment in terms of what everyone's sort of chasing after. So yeah,

47:20Chris Hill:ignore it. But to Peter's point, I think there is, I think he's absolutely right. And I think this is where we really we've got to be really careful about how we think about the economy right because uh you know there would have been a time when the same could have been applied to something else you know um we we primary manufacturing oh you know we don't we don't need primary manufacturing more everything's everything's secondary industry those everything's manufacturing we everyone wants to make stuff rather than actually growing things like we used to in the old days and this honestly 98 % of this is is nonsense ideology rose-colored glasses and nostalgia with a little bit of i've said this before there's something in the dna about making stuff and it just feels like if you're screwing bolts on a thing it's not like making a coffee and somehow website isn't making anything right it's like well yeah yeah well you know if we don't stop making it all we'll have is baristas so okay if i'm prepared to pay for the coffee and the British are getting paid and they're spending their money in the economy, why the hell should I care what the person does?

48:24Chris Hill:Now, there are some very reasonable criticism of Dutch disease, which is where you only do one thing to the exclusion of others. And I mean, literally exclusion as in it makes other things undoable, unproducible, which is not our word, but it is now. So at the extremes, there's some value in that, but not because it's manufacturing or not, not because it's services or not, not because it's prime industry or not. for our purposes Dutch disease could be mining, it could be making fax machines, to Ram's point. You know, if we made fax machines so well and so profitably that every fax machine in the world came from Australia and 6 % of Australians were in the fax machine business, that would be bad.

48:59Chris Hill:Not because it's manufacturing or not, because the services are not, because we just are, you know, not, we're over-concentrated in certain industries. But yeah, you're 100 % right, Peter, and the nonsense about we should just make stuff here really isn't, there'll be some people who are offended by this or annoyed by me saying it, and I don't mean to offend, but I'm not going to take it back. I just think it's just a silly thing. Well, silly is the wrong word. It's natural and it's normal and it's real and people feel it, right? So I don't want to rain on people's parades for the sake of it. I would just say to those people, when you think that, just really think it through.

49:33Chris Hill:What are you actually saying? Why is the coffee made by the barista any less valuable than the widget made by the factory worker? Literally, it's a thing. Yeah, okay. But the thing in theory gets used up eventually. The coffee gets drunk in a day or a minute, five minutes. The widget is useful for a month and a half or six months or 12 months or five years. At some point, what's the point of making the thing? It's just not – yeah, I understand the instinct. I really do because I get it myself. But I think you've got to peel it back simply. If the economy is running because people want the thing that's being made and they're going to pay for it and that provides a living and it provides a profit motive and it provides actual profit and that money gets spent around the economy, Why do you care?

50:15Chris Hill:And I really don't think there's any... I mean, people will throw national security and sovereignty. I don't want you back into that conversation. But broadly, at an industry level, I think it's a little bit silly. Yep. Second question. Oh, this is one for you, mate. Thankfully, it's not a proper Andrew question. It's a sort of Andrew question. My second question is mainly directed at Andrew, but it doesn't relate to Bitcoin, House Ponzi's, or the RBA. Andrew just walked away, yeah. But rather to small caps, what are your thoughts? I am, it's all right. I like that. What are your thoughts on a small cap ETF?

50:46Chris Hill:For example, VSO, ISO, or SMLL. Okay, I'll stop riling Scott up now. The Vanguard MSCI Australian Small Companies Index ETF, ASXVSO. See, Peter, you're catching on. The iShares S &P ASX Small Ordinaries ETF, ASXISO. Or the BetaShares Australian Small Companies Select Fund, ASXSMLL. Well done, Peter. Thank you. I suspect that would be fairly volatile, but would have the potential and potentially track record to produce good results in the long run. I don't enjoy fishing, but I'd rather pick an ETF and go camping. Me too, mate. As I haven't got enough ego or agreement from the wife to pick my own stocks.

51:24Chris Hill:Thank you both for your services to all of us listeners. I always hear your comments about only your mother's left listening. Have a great day and full on cheers, Peter. Peter obviously tries to listen to us to go to sleep and doesn't quite manage by the end of the podcast, which I apologise for. This is PS. Please keep me anonymous. PPS, just kidding. It is my real name. and I know Scott would have missed this anyway. Thank you, Peter. I appreciate it. Small cap ETFs, mate. What do you reckon?

51:48Emily Flippen:I don't like them. Oh, well, I mean. As a stock picker or as products? You know what? This is actually a wonderful link back to Russell's point. You know, it's this definitional kind of, was it Russell? I'm sorry if I've mixed up the questions here, but small cap just means small. Yeah. Like we just kept an obvious here. But I don't want something just because it's small, right? Again, I want a good business. And I tend to think as a group, small caps, they're actually small for a reason. Most of them are pretty ordinary. Yeah, that's right. They're subscale. They haven't yet got product market fit.

52:41Emily Flippen:You know, they're capital star. There's a bunch of challenges with it.

52:44Jason Moser:And on a statistical basis, you're more likely to lose your money in a small cap than somewhere else. You're not really selling me on the idea of it, Andrew. But it's just like where I like it is that if you can apply a little bit of selectivity to it and a bit of fussiness to it, I think there are incredible advantages here. The trouble with an ETF is just, oh, we just buy everything that's small. Now, I'm being a bit unfair to the providers because they'll have different ways of picking it. They'll use different benchmarks to sort of construct the ETF. So it depends on what their actual thing is.

53:15Jason Moser:But if it is just it's small, when they mean small, they're just like, let's just take the top 500 and we'll exclude the top 100 or 200. And so they're still pretty large companies, really. But that's generally how they kind of do it.

53:31Emily Flippen:And it's kind of like, it just seems like a funny, it feels like a funny thing to base an investment strategy on is on size alone. Here's the other thing too, it just doesn't add up.

53:43Jason Moser:I only remembered the first one that you read out there, Pete, the Vanguard MSCI Australian Small Companies Index, so VSO. And I compared that to the All Ords over the last 10 years. The All Ords is up 72%. The small cap one's up 61%. You know, that's not like a year, you know, you're going to get a lot of noise in the short term. So it's kind of like the argument would be, well, they're smaller, there's more room for growth. They'll do better. And it's like, yeah, the ones that do better do really, really well. But there's a bunch of them that don't. And the average, at least in this particular example, at least over the last decade, is an underperformance.

54:18Jason Moser:So you've got more. And is it more volatile? Yep. More volatile and underperformance. And it's sort of like I just can't be sold on it as a filter in and of itself to invest in. Now, if I've got a really great company with some really good opportunities, and by virtue of it being small, there is more upside, there is less competition, there's not a lot of analyst coverage, et cetera, et cetera, et cetera. Sign me up. I love the space. I think there's huge advantages for those that are prepared to do the work in that space. But even having said that, I don't know, I'll make up a number, like at least 70 % of companies that would be defined as small cap, I wouldn't touch with a barge pole.

55:00Yeah.

55:03Chris Hill:Yeah, you divorce that, though, from your stock-picking preference. In other words, if you're an ETF investor, you're going to say, well, I'll buy an index ETF and go fishing or go camping, as Peter says, as I'm with you, Peter, on the camping. Happily do that sort of fishing, but I'll do both. Is there a role for a small-cap ETF in an ETF portfolio? Because the same is true as large caps, right? You would rightly say, don't buy a large-cap ETF. You get some stuff that I think is rubbish and not worth buying. And your answer would be go and pick stocks, which is very, very reasonable. I'm just wondering for an ETF investor, if they said, I've decided to be an ETF investor, either wholly or in part or most or whatever it is, and in my ETF portfolio or ETF portion of my portfolio, I'm working out whether or not to have a small cap ETF in that part of the portfolio.

55:48Chris Hill:Does that change? I'm not trying to change your answer. I'm just wondering, does it change your answer in that context? Is there a role for a small cap ETF among other ETFs? Or is it a case of going for the big guys at the big end of town? Yeah, I side with your thinking on this, mate, where it's sort of like there are people who want to have their cake and eat it too, in the sense that they want to be an ETF investor, but then they just have like 20

56:15Emily Flippen:different ETFs. It's like you're getting to the point here where it's just like just pick some stocks, for goodness sakes. Like, you know, it's sort of the argument back to Jack Bogle and the whole inception of the idea. It was just based on the observation that, wow, it turns out that most experts underperform the market. And you know what? If you just buy the market, you tend to do pretty well out of it. And that's a really great idea, really actually revolutionary idea, in fact. and it's just like and then and now we've got everything under this like there's so many etfs and there's so many specific sector etfs or strategy etfs and it just it it kind of you go full circle to like i've done this specifically so i don't have to think about what to invest in just give me exposure to the market and i will take the average and i'll be very happy and you're sort of yeah i want that but now i'm actually going to try and pick winners again it's like whoa whoa whoa are you are you just going for the average you're trying to pick winners.

57:11Emily Flippen:Now, the winners you're picking might be more general than a specific stock because it's a sector or it's a thematic or it's a market cap size, but you are unavoidably trying to pick a winner within a subsection of the larger whole. So look, if you've got a really strong view on a particular sector or you've, you know, there's a very, I don't want to be too, you just don't want to be too dogmatic with a lot of this stuff. I just find that if you're going to go that way, and I actually applaud anyone who does go. My advice for 99 % of people I run is just buy an ETF. Which one? Just the market average.

57:47Emily Flippen:I don't know. The cheapest, biggest, broadest one, that's the one you should probably go for in any given market. And frankly, US and Australia is all you need, right? Super diversified, super safe. I don't know what you'll get, but you'll probably get the average by design and the average will probably be pretty good. It's like, great, I'm going to do that, but now I'm going to do this, this, this, this, this, this, and this.

58:08Jason Moser:Yeah, okay.

58:09Emily Flippen:And again, I mean, I do it. I've got some ETFs, right? But I'm not trying to suggest the listener is doing this, but I mean, all you need to do is really just highlight the point that I did. This is like for all of the marketing that come with these ETFs, they've underperformed.

58:30Jason Moser:They've underperformed the market. So it's kind of like, well, and they're more volatile. Now, here's the beauty of the market. you'll find it you'll find periods and products where the opposite is true so you you can piece together the the evidence you want to build the case that you want because there's just so much different stuff that's sort of that's sort of out there but even when you do it's like you're not looking at massive differences i i i just think i think this i think that the stats are against you here in in the sense that again most small caps are rubbish so i just i don't i don't want something that is mostly rubbish.

59:04Jason Moser:And here's the other thing, right? Think about the one that is the, I don't know, the pro medicus that is a small cap and then isn't a small cap. You're selling that. You're selling that the second that it stops being a small cap. So you're kind of like cutting the flowers and watering the weeds, right? There's the rubbish company that was in the top 100, and it's, I don't know, I won't pick on any companies in particular, but it's dropped out. It's like, so your fund is buying the one that's on the way down and selling the one that's on the way up. Now, I guess there's something that comes in at the very bottom and then moves its way, you know.

59:37Jason Moser:I'm being overly harsh. I don't really fault the thinking. It's not the worst idea in the world. It really isn't. I just think it's unnecessary is probably what I would say.

59:48Chris Hill:What do you think? I'm going to agree that it's unnecessary, but I don't think it's uninvestable personally. Oh, no, no, no. I take that over a lot of other things for sure. Yeah, but interestingly enough, the reason you've identified. So the challenge with the Australian market is there is no whole market ETF. So in the US, you can invest in a Vanguard, VTS is the code, Vanguard US total market. And you're getting effectively everything. Are we in Australia? One of those. As an ETF? Yeah. I'm not disagreeing. I'm just surprised. Yeah, yeah. As far as I know, at least not from the major ETF providers.

1:00:27Chris Hill:So for what it's worth, I actually think you can – you don't need to, to your point. So I agree with you there, mate. But if you were to size your investment in an ASX small company's ETF alongside an ASX large company's ETF, proportionally, that's actually a more passive way, ironically, to invest in the Australian market. So I actually do think – I think I did – I have some units in the VSO, I think from a young bloke, and there's not many of them, I don't think, from memory. I won't bother telling you why and how, but basically, well, no change in strategy. Just, yeah. So I just, just to disclose that.

1:01:04Chris Hill:Not that matters if the ETF is not going to make any difference what I own. They're all priced independently. But yeah, so if you wanted to own the Australian market and passively, I think there's actually a theoretical or pragmatic justification of actually going both side by side in proportion. If you want the whole market. I wouldn't own just the small ordinaries. And for the reason that you've said, Ram, which is exactly the case, which is when a company gets big enough, it disappears. And so you miss the growth. Imagine getting, pick a company, a CSL, and it goes from$2 to$300, right? And you buy it, you get it at$2, and then they sell you out of it at$40 when it gets too big to be in the small orderings anymore.

1:01:42Chris Hill:And you miss everything after that. It's like, oh man, I had the company there and I got all the early growth, and then I lost it all, which is kind of the point you're making, mate. So I wouldn't own, personally, I wouldn't own the small orderings index only or the small companies index, ETF in this case. at all. I would, though, happily own both together because I want a whole market. So if you said I want the broadest exposure to Australia, I would say you buy yourself an ASX 200 or 300 ETF, and you buy yourself a small ordinary ETF or a small company's ETF. And those together are more representative of the Australian market than one or the other.

1:02:16Chris Hill:So that is the basis on which I would do it. I would not buy it personally as an active choice, which is your point, Ram, about By the time you start choosing which ETFs you want, you might as well go and pick stocks because you're making enough of the investment decisions that you're either deliberately choosing them or out of some degree of, what's the right word, uncertainty or indecision. You think you half make a decision, half not. That's kind of the worst way to be passive, right? Either pick your stocks or go completely passive. Now, you don't have to own the small ordinary ETFs at all.

1:02:47Chris Hill:You really don't. but i if you if you if your aim was i want to own the u.s market the australian market you might for example own vts which is the vanguard um u.s total market and the vanguard asx 300 and the vanguard small companies index and that would give you the broadest representation across both those markets and that would be the most passive thing you could do um just buying the asx 300 etf from vanguard for example i own that as well um would give you most of it because because the big companies in Australia particularly, even the US these days, are massively dominant. So you're getting almost all the value when you're at the top end.

1:03:21Chris Hill:So you don't need to add the small lords. But I would probably, if I was trying to be completely passive, I think I would actually own both, but only to be passive, not as an active choice. And I wouldn't, I would, if you're going to be passive, do it properly. So ask yourself, right, what's the proportion of the top 300 versus the small ordinaries? And if it's, the Vanguard MSCI indexed at Lynx, the MSCI says it covers, 14 % of the ASX I read somewhere. So if that's the case, and check to do your own research, then yeah, six-sevenths of your ASX portfolio should be in the 300, and the other seventh in that.

1:03:56Chris Hill:If you're going to do that completely passively, perfectly reasonable. And I would have every support on that. I just don't think you need to, and I definitely wouldn't do it as an active choice. Otherwise, to Ram's point, start picking stocks, because you're not going to. You're going to get lucky or unlucky if you're trying to pick that to try and have some sort of small-cap exposure just because. And to Ram's point, company size he said a lot of times a lot of rubbish in there lots of great companies in there small caps i know more risky or less risky just individually than big companies as a group they probably are and that's the risk uh but just be be careful about what you're buying and if you're doing it to be totally passive be passive if you're doing it to be active i think you owe it yourself to do more than just uh assuming that's big it's actually just looking at vso over the

1:04:38Emily Flippen:the last five years and it's done 8.7%. The all odds has tripled that more. Yeah, exactly. You know, it's like, wow, that's a big difference. And again, that's been a more or less, well, at a higher level, a bull market, right? Like, investing's hard.

1:04:56Chris Hill:And honestly, the thing about the Australian market is the difference is probably less about the small ordinaries more about the banks, frankly. Yes. You know, if the banks are having a run, you're having a run. If they're not, they're not. And this could be exactly the reverse next year. And that's why I personally would say, if you're going to be passive, be properly passive. Don't try and choose one over the other because it's going to be better or worse than the other. Just be passive, be passive. If you're going to be active, pick the stocks, as Ram says.

1:05:18Emily Flippen:That's just the point of the ATF, is I don't want to think about it.

1:05:22Chris Hill:Mate, can I share an email from John, who's obviously been listening when my dog has been in the background? Okay. Scott, mate, what were you thinking? You called your dog diesel. With the price of fuel these days, don't you know how much diesel is getting pinched you should have named him herpes then nobody would ever pinch him love your show keep up the good work regards John thanks John I probably won't mostly because I don't have to explain to my 13 year old why we want to call the dog herpes so it's easy it will be but yes maybe the lowercase d or something else I don't know I'll find something but yes you're right probably look it was a while ago but yeah in advance maybe just be a little careful I wonder if

1:06:07Emily Flippen:Johnny Diesel's star is rising he's not even Johnny Diesel he's just Diesel now he is Diesel yeah he's still Johnny Diesel and the injectors as he was once upon a time very first concert I ever went to hey there you go

1:06:19Chris Hill:the 10th Worth

1:06:20Emily Flippen:Services League

1:06:21Chris Hill:back in the day what was the I Don't Need Love was that the was that the breakout

1:06:27Emily Flippen:I know you're testing me is that one maybe

1:06:31Chris Hill:Johnny Diesel I didn't say I was I'm I'm sorry Johnny I don't remember Or Mark Lizotte. This is actually his real name. Oh, there you go. And Jimmy Barnes' brother-in-law. That's right. That is right. There you go. So Diesel the dog, Diesel the singer, and Diesel the fuel. It's an interesting unholy trinity right there, but we'll leave it there. I mean, Diesel does sound a lot better than unleaded, doesn't it? It's a LPG. That's not a cool name. I remember back in the days it was super and regular. Do you remember that? Yeah, yeah, yeah. Super regular, both leaded, of course, because that's how petrol came.

1:07:08Chris Hill:So I let it turn up and yeah, there you go. Another example of something that was, believe it or not, controversial. Yes. Do you remember? Take a little bit of petrol. What? People had very strong opinions on that. And I remember at the time thinking, lead's bad for you. Like, shouldn't we? Yeah, people are funny. People don't like change. We still do lead smelting. and it's like the testing I think I've said is it Port Piri Port Ferry one of the South Australian towns they actually literally still have lead tests in the main street kind of checking lead levels and let people know if the lead levels in the area are too high it just blows my mind wow right well I mean

1:07:46Emily Flippen:we need it right I suppose it's got to be dug somewhere yeah

1:07:51Chris Hill:you wouldn't have thought a suburban area was a great place

1:07:53Emily Flippen:look I was just

1:07:54Chris Hill:going to say

1:07:54Emily Flippen:I'm going to say something that's going to be interpreted incorrectly so let's move on okay let's move on

1:07:59Chris Hill:I'll save you So you're in favour of lead poisoning, eh? No, no, no, no, no. All right. Sony says, Scott Phillips and Andrew Page, the masterful maestros of the Motley Fool Money pod machine, propelling powerful perspectives on finance and fortune. Your fearless finance finesse, fascinating market rants, and finely tuned money mastery make every moment mesmerising and meaningful for your motivated listeners. Had to do that carefully. Well done, Stoney. Now that the greeting has been graciously given, I now need to get to the gist of this gifted message. Always, always alliterate, Stoney. This message is date stamped Sunday the 22nd of March because as of this date, the Motley Fool Money podcast has hit 988 episodes.

1:08:50Chris Hill:So by my reckoning, in about three weeks, you'll hit your thousandth episode. It's highly probable it will fall on a Sunday mailbag. Now, we have deliberately engineered this a little bit, Stony. It is going to be April the 30th. So you can keep that one, write that one down. Getting close. Don't build it up too much, mate, because we don't have any plans, right? So you're going to, don't like, careful what you're saying. It's like, it's just crapping out about the same stuff. So Stony has a comment, and then I have a question. My annual listeners are looking forward to seeing how you commemorate slash celebrate this marvellous, momentous milestone.

1:09:26Chris Hill:There is no question. Just this query that hopefully with all honour has you fully prepared for a perfect procession of the podcast presentation. Sincerely, your duplicating servant. You certainly have Stoney. So my question to our listeners is, what do you want us to do in the 1 ,000th episode? Ram and I are nowhere near prepared enough and not diligent enough to organise anything. We'll do some reflections, I suspect, on what has been the best part of a decade of podcasts. So that'll be fun just for the sake of it. But if you've got stuff that you want us to chat about, But if you've got some thoughts, if you've got some issues, ideas, we would love to hear them.

1:09:59Chris Hill:So let us know. Is there anything in the 1 ,000th episode you think makes particular sense? I will probably, if I remember, bring back a term that I created on this podcast, which created much mirth for you. I'll bring that one back up. We may well... You don't remember? You must remember. Don't say if you do, but do you remember? I don't. Stand by. Well, I've got a memory of a goldfish, so this doesn't say much. Yes. we'll bring that one back up we may well talk about the differing views and fortunes of the

1:10:29Emily Flippen:oh yes okay I think so yeah yeah

1:10:32Chris Hill:well done and yeah not much else we'll probably just have a regular podcast relatively speaking which befits hopefully our lack of need for grandstanding but also it's kind of cool that we got there and we love that you guys have stayed with us for some or all of that journey so we really do appreciate it it won't be super special I mean special because it's special obviously but yeah we'll see how we go but if there's nothing you want us to talk about stuff you can suggest or bring up we'd love to hear from you as you do you stoney of course but anyone listening let us know what you think info at fool.com.au uh let's finish with one from ethan mate which is a kind of interesting combination of macro and policy good morning gents and gusto to you thank you ethan question real ongoing seesaw of interest rates i know you both believe interest rates aren't an effective lever to slow inflation i'm going to stop there ethan i think we both think it is an effective level, whether it should be used, and to what degree it could or should be used is probably different.

1:11:27Chris Hill:I think we both acknowledge that higher rates dampen demand. You're in that? Oh, absolutely. Yeah, yeah. And Scott has spoken in the past about a more effective way to take money out of the economy through super contributions. This pulls every worker in Australia out rather than just homeowners. Now, I'm going to stop here. Speaking of the last 1 ,000th episode, that idea came originally from a listener. I've absolutely jumped on it and repeated it ad infinitum everywhere. I've written about it. I've talked about it in the media. we talked about a couple of times in the podcast but it came from a listener so if you are listening and you probably list us by now uh but if you are still listening let us know who you were because i don't have record of it and i'm not that diligent so let us know but i think it's a really really good approach ethan at least an approach one of the available approaches but ethan says fuel prices have exploded all over the world which got me thinking what if instead of interest rates the government increased the tax surcharge on fuel when money needed to come out of the economy This would pull a larger sample size to slow spending than interest rates alone.

1:12:27Chris Hill:As we've seen in the last month, a 40 cent increase can cause everyone who fills up to get slapped with an extra 30 bucks a tank. Wouldn't this slow our spending far more than interest rates? What are your thoughts? Thanks, Ethan. What do you reckon, Ram? Fuel instead of rates or instead of super contributions? No, I reject the whole premise.

1:12:46Emily Flippen:No, I mean... I'm shocked. Yeah, Ethan, it's the framework in which we operate, but it rests on a false premise, which is why I'm being a bit difficult about things. I mean, just the idea that it needs to be controlled, I think, is the original sin here. You know, it's like if only someone, I don't know who this someone is, but they're very, very farsighted and they're very all-seeing and they're very honest and they're very ethical and they're very capable. If only they were given the right set of tools, then they could, quote, unquote, manage the economy. And it just misunderstands what the economy is and the fact that it can even be controlled.

1:13:32Emily Flippen:You know, I reject the entire premise of it. Now, that's not to say laissez-faire, anything goes. There should be guardrails. There should be more for law and order, right? I don't want anarchy. You know, I'm not. I'm not arguing for zero government or anything like that, but I am absolutely, I'm, Milton Friedman had this great TV series in the 70s called Free to Choose. And it really rests on a simple premise, a real philosophical kind of dimension to it. It's just like, do you know what I'm for? I'm for every single person listening to this podcast, getting to decide how they spend their money in the manner that they want to spend it on, more or less.

1:14:11Emily Flippen:As long as you don't avoid the do no harm sort of mantra, you know, it's like, I don't think anyone should have the ability to choose to hurt another person by violence or theft or seizure or anything like that. But if you want to spend your money and you know, like that's how the economy is managed. It's managed by you deciding to put your capital at risk to create value or your time at risk to create value and by seeking value from others and trading your time and energy indirectly via the form of money with them. It's a beautiful thing.

1:14:46Jason Moser:It's a beautiful thing. Stop helping. And the reason I say it is because it makes a huge amount of sense, except every time you look at it, and I mean, look at it from an objective empirical standpoint, more often than not, it creates more problems that it solves. It solves very narrow, immediate, specific problems at the expense of far longer term diffuse problems. You know, we are, I know I've said it a lot lately, but the problem du jour right now, and for a while now has been the cost of living crisis. And that is directly downstream of us trying to, quote unquote, manage the economy when a pandemic hit.

1:15:27Jason Moser:You know, it just, we can argue whether the costs and benefits

1:15:31Emily Flippen:were sort of worthwhile and how it should have been done. But the point is you had a group of individual human beings who had to make a decision and they made some bad decisions.

1:15:38Jason Moser:And maybe another group of people could have made a better decision, you know, and maybe there's still decisions that needed to be made. Again, I'm not advocating for laissez-faire, but usually, and when I say usually, like at least more than 90 % of the time,

1:15:50Emily Flippen:these interventions have very negative consequences. So why? Do you know what the cure for high prices is? High prices.

1:15:57Jason Moser:We just said the price of oil has gone up. Well, that's taken money out of the economy. That is taking money out of the economy because now, rather than the extra spare money you might have had to buy a Pavloca, Pavloca, Pavloca, I don't even know,

1:16:15Chris Hill:fruitcake from the local bank car. Pavlova. I'm going with Pavlova. Pavlova. There we go. I don't know why that's a random example.

1:16:23Jason Moser:You know, I'm putting that money that would otherwise be spent elsewhere or saved, I'm putting it into the fuel tank, i.e. demand is being taken out of the economy. This is what's so nonsensical. Oh, my God, there's a cost of living crisis and, oh, prices are going, petrol prices are going up. How do we fix that? How do we fix it? Let's make everyone pay more on their mortgage. And it's like, what? I mean, again, someone draw a line between those two things and how that fixes it. And I said at the start, well, yeah, it fixes it in a very immediate, narrow way, but not in a good way. And I've given the example on the pod before.

1:16:57Jason Moser:Why don't we just lock everyone up? Home detention for every person who lives with an odd number street address. Boom. Demand goes. Inflation solved. But you go, yeah, but Andrew, that's a little bit. It's sort of like cutting off your arm to fix an ingrown nail. It's like, yeah. Yeah. So that's why I can sort of speak out both sides of my mind. Yeah, it does take out demand. but by unfairly burdening a particular segment of the society, i.e. and by the way, the segment had nothing to do what's happening in the Middle East at the moment. Like it's not, your milk isn't expensive because you're being greedy with your milk consumption, right?

1:17:42Jason Moser:Like it's not that. Sorry, I'll take a couple of deep breaths and walk away. It is, other than just to say I will die on this hill because unfortunately we need, we are dealing with very, very real problems that very much impact real people. And we just, we can only see it in one narrow, through one narrow lens. And it never works. It never works to the extent that we expect it to. And we think that if only we were just to maybe we'll go about it in a different way. And I'm being a little unfair here. And maybe if we were, if like, I'm sure you'll say maintenance is a good point. It's like, yes, but if we have to do something, then could this be a good?

1:18:28Jason Moser:So I was like, well, yes, but, but, but, but we don't have to, you've got to remember, there's not, there's not a law of the universe that says we must try and manage this kind of thing. You know, we, we don't have a department of tides that tries to manage the tide because that's stupid. Right. And yet we have, we have umpteen number of departments that try to manage the economy. And what does it do? It creates crony capitalistic structures and malincentives and bad investments. And we choose winners and we choose losers rather than letting those who create the most value win and those that extract and destroy the most value.

1:19:08Jason Moser:We actively work against that very, very natural process. The great challenge, I keep saying I'll shut up. the great challenge with civilization right you can really be summed down into it's a trouble of scaling we evolved over a very very long period of time to live within very very small groups and a lot of the problems of civilization and society go away at small scales because i know everyone if scott wants to be a bugger i just don't deal with him because i don't trust him and no one trusts him and everyone knows you don't do business with scott because he's a dodgy bugger He'll steal from you.

1:19:43Jason Moser:He'll lie to you and you just don't deal with it. Now put yourself in a city of a million people. Well, how do I do that? Yeah. I mean, it's really good. Now put yourself on a planet with 9 billion people. How do you coordinate that? You can't possibly keep track of everyone in your town, let alone in your state or your country. That is the nub of the problem. And economics and political economics, which is really where the term kind of came from, originally is trying to figure out that exact problem. Unlimited demand, very, very scarce resource. So an unlimited demand with finite supply and, you know, and we need to somehow divide that up and we need to somehow make sure that the things that we all want we get and the things we don't want, how do you do it?

1:20:30Jason Moser:And there's really two ways if you really boil it down. You can do it by political mechanisms or you can do it by market mechanisms. and we always, the media, everyone goes, oh, political solution, political solution. It's like, no, there's a really good solution that's right there if you would just let it work. And we never really allow it to work to the full potential and for very well-meaning reasons, which is what the tragedy of it is. And when you advocate for the other side, you just sound like a heartless bastard, like, ah, for everyone on the fire, he's not creating value for the economy.

1:21:06Jason Moser:And it's not that. It's really not that, you know, but it feels like that and it feels far better. We watch the budget, mate. We know enough to know that whatever is said, they're going to come out, they're going to splash money everywhere. Why? To help. Why? Because the economy needs to be managed. Now, you tell me, am I being cynical to think that's probably going to make this problem worse? like i think i think i think we were unless they happen to come up with specific political solutions that we align with or you know and if we align with it well you can bet that a bunch of other people don't now we're choosing winners and losers again right and it it's just it it's a it's a very very hard solution with a lot of institutional sort of problems that have become institutionalized where you kind of get to the point it's like you know the only solution is to Tear it down, salt the earth and start again.

1:21:57Jason Moser:Well, maybe not salt the earth. Tear it down. Some institutions. Some institutions. We're going to throw people into the fire, yeah. Tear it down. Tear it down. You get a bunch of crooks together and there's no tweaking the org chart that's going to make that a better, you know, maybe you'll make them less dodgy. Maybe you'll take away some of the horrible powers and stuff and distorting influences that they have, but you're fiddling at the edges. Like, get rid of it. Get rid of it. And we can actually point to, I think, throughout history, there's some pretty good examples just like, huh, turns out that it works.

1:22:38Jason Moser:The usual objection to it is what's called the Nirvana fallacy because someone goes, oh, but if we did that, here would be a problem here, as if we're critiquing it from a point of perfection because everything works perfectly well at the moment. and then I can identify an area that isn't absolutely perfect with that solution, therefore we shouldn't do it. It's like, yeah, but it's not saying it's perfect, it's just more perfect or less imperfect, I should say, than what we've got now and I really will shut up.

1:23:09Chris Hill:So I think that's too ideological. I think we live in a mixed economy in general. I don't think we need to have an either or, and you know that, we've talked about that before.

1:23:18Jason Moser:And I'm not right at the end of that spectrum.

1:23:20Chris Hill:No, I don't. I think that's important because you're saying conceptually here's the right direction. Let's work out where it doesn't work or where there are reasons why we'd say if it did work in the abstract or even in the extreme, you know, the... It's a north star to aim for, right? Yeah, sure, sure. And I think that's kind of the idea. Look, so I will just direct my thoughts to the question directly, just in terms of Ethan's question about using field exercise. So should we do something, right? So we're going to reject the premise of the question, Ram, obviously. But to Ethan's point, rates versus super versus fuel excise.

1:24:00Chris Hill:I'm going to reject the premise of the question again from a different direction, Ethan. I would add GST in there. The purest way to intervene would be to have the broadest possible impact on as much spending as possible. And GST is the obvious answer to fix that, right? Because it's just wherever the dollar is spent. You don't have people saying fuel or something else or mortgage or something else. You're not just targeting those who are putting fuel in the car versus EV drivers or mortgage payers versus renters versus fully owners or any of that sort of stuff. I think it's super anyway. So if I was going to force rank it, and the other thing about fuel, I suppose, is I try and be ideological.

1:24:41Chris Hill:I try and be philosophical and pragmatic rather than political. No government's ever going to put the fuel excise up on people. to cut no government no treasurer is going to ever say yeah good idea would it be a good idea would be better than superannuation i don't think so i think superannuation is a it removes the spending from the end um the end of the chain so i get paid i spend the money yes that impacts on my demand for other things so i mean nothing's at the end of the chain right so it's it's all feedback loops by definition fuel is on the fruit and veg that goes to the shops and it distorts other prices and it's probably just it's really hard to tangle and untangle because it happens further up the supply chain and so when you want to then move it up and down the the feedback loops the mechanisms and the and the pass through mechanisms get really really tough to manage um so i i hear you ethan i think it's broader than rate so i agree with you there i would if you asked me to force rank it you didn't but i will ask myself scott what do you think um i would do gst first again speaking politically impossible um but that that's the broadest and most obvious one to use the second one for me is superannuation contributions again because it's closest or closer to the end consumer it captures more people doesn't capture absolutely everybody oh sorry actually i'll take one back speak of politically impossible um gst first income taxes second because again if you're not earning a wage and making super contributions you are paying tax at least at some level so it'd be it'd be gst then income taxes then superannuation then fuel excise probably before rates i think you're probably right i probably wouldn't do any individually i'll probably combine them but yeah and that if you ask me to force rank them that'd be that'd be the order i think ethan um i like your idea i like broadening it out amongst more than mortgage payers i don't know that i just don't think feels better than super um it captures people who are not working so retirees would have to pay some of it so that's a bit broader i suspect so i don't mind that element of it i worry about it being such an input cost so right at the beginning of the supply chain right everything is everything's got oil and fuel and at some at some level and multiple times through the supply chain probably um you know the the truck that takes the plastic to the manufacturing plant that uses a diesel engine to make a product that puts it on a truck to send it somewhere else gets turned to something else and sent by truck to to woolies and someone goes and picks it up from woolies using their car i mean it's not bad in that sense just it's so messy in terms of its impact it can be really really hard to do um not how to implement just hard to kind of manage and govern so yeah that'd be that'd be how i'd do it um by the way the easier one of all of these comes back to the automatic stabilisers that are built into surplus and deficit budgets if they're structurally balanced, which I know I've broken record on.

1:27:19Emily Flippen:What? Surplus?

1:27:20Chris Hill:Explain that one to me. The money that's coming out of the economy now, the RBA wouldn't need to take it out. Even, again, RAM's broad principle notwithstanding, that's what balanced budgets do, structurally balanced budgets do. They add to demand when you need it, they take demand out when you don't need it, But that's the point. And without that, the rest of the mess doesn't need to happen, at least anywhere near as much as it does. So, in fact, yeah, I go all the way back to the beginning, before GST, structurally balanced budget. And that does most of the job. If we would have run, I'm going to just make up an absolute number from complete thin air with no work.

1:27:55Chris Hill:We would have probably had a budget surplus of somewhere around$60 or$70 billion this year if it was structurally balanced. Why? Because unemployment is down, company tax receipts are up, commodity prices are through the roof. the government will be raking it in and by the way people complain oh you're making a profit you should give it back to us we're doing it tough that would have had those impact RAM says you know prices it's an intervention so it's not as pure as RAM wants it but the idea of it not being a hands on thing just like the mechanism itself looks after that increase and decrease in overall demand by simply not adding stimulus to the economy when it's not needed and taking it out when it's needed taking it out when it's not kind of does the job so I would start there.

1:28:35Chris Hill:Sorry, it's been a long answer.

1:28:36Emily Flippen:This is how we do it. This is how we do it. We spend, right? So we say, oh, price is going up. All right. Okay. So first point of call, let's make all the mortgagees pay more money. Second point, let's put together a 20, I think$20 million was the figure. I know it's small, but small beans overall.

1:28:52Jason Moser:But we're going to put a marketing campaign out there going, for the country, use less petrol. Yeah. Okay.

1:29:02Emily Flippen:Oh, by the way, here's some cost of living relief. Yep. And we're going to reduce the excise on fuel. It's like, wait, do you want me to use less petrol? Yes, we want you to use less petrol. In fact, we just spent millions of dollars to communicate that message to you. Okay, great. I guess we need to use petrol. Oh, by the way, we're going to cut the tax on that so it's not so expensive so to make sure that you don't have to use less petrol. What? I'm not following here.

1:29:25Jason Moser:Can you, wait a sec, break out a crayon and a piece of paper and just draw some, help me understand how that works. And I would be laughing if I wasn't crying because that is literally what we are doing in response to a war in the Middle East.

1:29:42Chris Hill:Yep. 100%.

1:29:43Jason Moser:Mortgagees have to pay more money. We're going to tell you not to drive as much. And then we're going to directly incentivize you to drive more than you need to.

1:29:56And trust us, bro. We've got this in hand for the next crisis, right?

1:30:01Jason Moser:Like, it's a madness. it's pure pure madness and and there's no other way to say i i would challenge anyone anyone to get in front a group of 16 year olds and explain that in a way that just anyone could understand and and you won't be able to without referring to a whole bunch of big words and just hoping you can confuse everyone enough that they go i guess it makes sense because i certainly don't understand it and i don't want to be the one who puts my hand up and goes that makes no sense because everyone else is like nodding along to applauding the emperor's wonderful clothes and and robia's like i guess it makes sense god i don't understand any of it don't mention it yeah but i'm happy enough to put my hand up and go i just you have lost me on the rationale there how the hell does that work and not only how does it work how much of our money your money dear list of my money scotts money have you spent in in this you know you you you're pushing and pulling at the same time the left hand's giving, the right hand's taking away.

1:30:58Jason Moser:I know it just, it gets me so angry because at the end of the day, it's real families that ultimately suffer from these, these things. And then maybe some foreign run business out there is doing all kinds of stupid things. And the second they get in trouble, we'll bail them out again with your money. And we'll be told we have to do that to sort of manage the economy. It's just, it's so, and I'm not saying there's a perfection over here, But it's like, all I know is just like, and I would love to someone, if anyone's listening at it, to give me a long list of government interventions that had very strong net positives overall in them.

1:31:35Jason Moser:It's like, well, it's kind of almost never worked before, but I've got a good feeling that it's going to work this time. And I'm sure that once we just get past this crisis, normality will return, sanity will return, and we'll go back to doing the things that we should do. You know, it's just, yeah, it's not going to happen.

1:31:53Chris Hill:I've got some good news for you. It's finished? Well, yes. That wasn't the good news. That's the good news for the listeners. Well, they're not here anymore. They've gone. No, the good news is we're going to start next Sunday's Mailbag with a joke. Okay. I've seen the, I can't tell you what it is. It's an economics joke. There's a nice teaser. It's an economics joke. So if you've listened this long, I'm sorry. And thank you for listening. But, yeah, we'll start next Sunday. Well, Friday episode in the meantime, but I've seen the first Marbad question for next Sunday, and it's up with a joke. So look forward to that one in the meantime.

1:32:28Chris Hill:Have a wonderful, wonderful week. We'll see you on Friday for our 998th episode, I think it'll be. Yeah, okay. There you go. Stay tuned. We're almost there. Until then, full 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.