Mailbag: incl. Can investors really make an ethical difference? February 16, 2025

26:58But it's not. So there's something else that's at play here. And the more fundamental economic issue, and again, remember, economics is distinct from politics. It is distinct from ideal. Economics is economics. It is just, you know, the way we deal with scarcity. It's how we count, how we count the things that we do. That's really obvious. Yeah. Yeah. And it's, it's kind of like, it's, it's, it's just, it's just a measure. And the big trouble here is what they call externalities. So the simplistic example here is I buy the products that some factory makes and the factory dumps all its waste in the river.

27:40Now this factory happens to be located in Bangladesh. I don't live anywhere near the river. No one really owns the river. It's a public good. So it's sort of like, is there damage being done? Yes. Is there damage being done specifically to specific people? Yeah, absolutely it is. Who do you point the finger at? There is no direct mechanism that feeds into it. It's external to the system. Me buying the product halfway around the world, I don't see that. It doesn't impact me. I'm making a decision outside of that. And these are problems that very smart people have wrestled with for a long, long, long time.

28:19Now, one way to do it is to force a market mechanism on it. So I'm a big fan of a carbon price, right? Or, you know, carbon tax is sort of like the next best thing. And before anyone says, well, we've got one of those. Yeah, but I mean a proper one. Not one that's been like, you know, corrupted by vested interest groups. Because what that does is it actually makes it part of the equation. So it takes an externality and makes it an internality, if that's the right word for it. I don't think I like it a lot. You know what I mean? The people who have tried to wrestle with these things have come up with some really good answers.

28:55And then when things get reflected in prices, we allocate resources accordingly. It influences supply and demand accordingly. um so so so i just i just want to i just want to pull people back from the brink a little bit here because you are right to be angry and outraged by some of the some of the corporate actors that are out there but it is it is more of um um it is more the referee that you should be angry at not the players and the referee is is the one who gets to set the rules and say no you can't do that you can't dump into the river we will fine you for that that's not part of a normal natural market mechanism but it enforces something onto it so be angry but don't be angry at the evil greedy corporations because corporations are always greedy and probably some of them a good deal of them are either it's beside the point it's not that you're wrong it's just like well it doesn't it doesn't fix or do you want a solution or do you want something that sounds good and if you want something that sounds good you've got to this is where there is room for regulations because we say as a society, you know what?

29:58Little kids are really good at fitting down tight holes and digging out diamonds. We should use their, like, economically, they are the best human resource that we could use there. But we might decide as a society, that's just not a really good thing to risk children's lives and send them down. So in a perfectly laissez-faire capitalist society, that might happen. But we might decide, no, we don't want that to happen. And therefore, the referee comes in and says, you just can't do that. And if you do, there are legal penalties as a consequence of all of that. So I guess what I'm saying is there is a political dimension to this as opposed to a socialist revolution.

30:33Because even if the revolution was successful, you're still going to be doing plenty of damage to the environment. You're never the same problem. Yeah, that's right. I think that's where... Yeah, I can't disagree. Externalities need to be priced. That is the funder. That is the... And honestly, Matt, that's the... It goes all the way back to the tragedy of the commons. Yes. I mean, that's... And we've never really been able to solve for it. and it's a hard problem probably almost by definition but this is where capital economics and lowercase economics kind of you know fall short which is it describes the things i give up and the things you give me uh in return that it's the exchange that we do it doesn't describe those things that can't be or aren't priced because there is no you know there's no mechanism for the transaction to be recognized yeah and so that that's the that's the fundamentally pollution is the simple one right just literally you drive a car down the street goes into the air eventually causes more smog, pollution, respiratory issues, climate change, all that kind of stuff.

31:26I paid for the petrol. I drove the car. I paid my tolls. I paid for the car. You know, you got the money from that, all that kind of stuff. The output, the externality, the thing that gets created or off to the side, no one pays for. And that needs to be solved for. If we don't solve for it, you know. So the tragedy of the commons comes down to commons was like common land in England. And if everyone grazed their cows on the commons, eventually the commons would be destroyed. There'd be no fodder for anyone. So sensible, thoughtful use of that common, and that's where we get to kind of the common resources, that's where it comes from.

32:00And things get left behind on that at the same sort of idea. Go on. It's the economic equivalent of the trolley problem, if you're familiar with that philosophical problem. Like, you know, I won't go into it, but it's just like, there's no right answer. You know, there is, I mean, that's not, yeah, the answer isn't obvious and it's very difficult and it's open to debate. Yes. We said we touched on this on Friday. It's this idea of concentrated benefits and dispersed costs. So it's very, very sort of difficult to do all of this kind of stuff. So I just I feel as though the best thing that we can do is is advocate for change at the political level and force the referee to sort of, you know, just just do just to sort of help guide things in the right direction.

32:46the other the other issue with it as well is you've got to be careful of the unintended consequence of a lot of these actions as well so these are just so i said at the start these are such big problems i i absolutely sympathize and understand the concern like concerns me a great deal as well yeah but it's it's it's not the kind of thing on a podcast you just go oh yeah here's the solution like there i don't know if there is one like yet that's been that's been discovered or not at least one that doesn't have massive trade-offs or at least huge coordination problems or, you know, just the execution of any said.

33:22There's A, the problem of coming up with the plan, and then there's executing the plan, and then there's doing it in a way that's like as equitable and fair as we – it's just diabolically very, very, very difficult. But they do have impacts. I mean, look at – again, you mentioned with consumer choice, a good example here might be free-range eggs. Now, the labeling is a dog's breakfast, you know, corrupted by various interest groups. But at least in theory, what you do is you allow the consumer that choice. Hey, here's a T-shirt. It was made by a three-year-old who wasn't allowed to take a toilet break in 10 hours.

33:54And here's one that was made in Germany by someone on a minimum wage. You know, now you don't, you've got to be careful with sort of enforcing ethics on other people. but if you give people the choice and you make it a clear choice, you will find there's plenty of people out there that go, you know what? I'll pay 5 % extra for my eggs because I don't want chickens to suffer. Or I will pay 10 % more for my t-shirt because I don't want a kid to make it. There'll be others out there that go, I don't care. Stuff the kids, stuff the chicken. But at least you help people. You inform people to empower them to make a more informed decision.

34:29And I would put it to you, and maybe this is me being the Pollyanna, but there are enough people who do care about a lot of these kinds of things that it would affect change, at least enough beyond the margins where a poultry farmer might go, you know what, I'm just going to do it this way because there's a very strong market for people who care about this kind of stuff. Anyway, this is tough. We could go on all day. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

35:01Let's go to a question from someone who signs off Mr or maybe Mrs X. It's mysterious. Greetings to the Statler and Waldorf of the podcast world. Thank you. Can you please keep this between yourselves and me? I assume you mean your name rather than the whole question, otherwise you wouldn't send it. So I'm going to assume that this This is for Podcast Mailbag. And if not, my apologies in advance. I have a financial advisor and I've been happy with him since 2009 when I first took the plunge into the stock market. I'm working a dividend-focused buy and hold strategy, which has also included selling some shares at times and buying more companies I already hold or taking new positions in new companies.

35:41He's recently suggested I sell some companies and buy some beta shares indices. Obviously, index tracking ETFs. I don't agree with this. However, I pay good money for a result which I've been happy with. But if we're suggesting index funds, well, I can do that myself. Let's face it. I've been listening to your rants for enough years to be confident to choose an index, and you gave me this knowledge for free. I'm not sure if there's a question here or I'm just having a competing rant. Thanks for starting the pod machine and keep them coming. Looking forward to that podcast number 1000, signed Mr.

36:13or maybe Mrs. X. I'm not sure there is a question here, Ram. other than maybe the role of financial advisors we've kind of talked about before. It's a funny one. I'm curious why... Here's my challenge to the disembodied Mr. and Mrs. X. They don't want the financial advisors to buy indices because they want to buy individual stocks. Yet they are saying if they don't buy indices anyway, they might as well do it themselves. I don't know, I'll give you up on your phrase, how to square this particular circle. I kind of on one hand want to say, well if your financial advisor doesn't want to buy stocks and you don't want to buy them yourself maybe find a new event advisor who'll give you different advice on different stocks you're comfortable though with what's been done to date by this advisor it seems like a funny kind of problem to have i don't mean funny in a bad way just it's a difficult one to try and untangle um yeah your thoughts yeah i

37:10Well, I would say the measure here isn't have they made you money, although it's a big part of it. It's a pretty good one. It's have they made you more than you otherwise could have by just following the most basic and simple of strategies in the world, which is just put all your money into ASX 200 fund and go do whatever you want to do. And if they haven't, after fees, then even if they've made you 20 % per annum, but you would have made 23 % per annum with a different strategy net of all costs, well, then you're not. You're actually, you're paying someone to do worse than you could have done yourself.

37:43So maybe that's, I don't want to suggest that that's what's happened here. But I, again, anecdotally personal experience, I've had more than a few people, oh, my guy's fantastic. And you go, all right, what did they do? And then you do realize that's worse than the average. Like, what do you mean? I made all this money. And it just, you know, it's an easy thing to miss if you're not into all this sort of stuff. So I make that point. But yeah, look, apologies, but I have put the boot into that industry a lot in the past. I don't think unfairly. I think even the financial planners I know, the good ones are the first to point out that.

38:15And I'm the first to point out that people in glass houses shouldn't throw rocks. We work in the scummiest industry that there is. 90 % of the people I meet in this industry, I just want to slap in the face, right? Like just useless, time-wasting middleman grifters. And I say men deliberately because it is. It's a massive sausage factory and it's depressing. So, again, I say it in a very hyper-aware kind of fashion. But there are absolute rainmakers within that. So if you're very, very happy with them, if they've done far better than you would have by yourself, if they've done far better than you would have with just an index fund, and now they're suggesting this, it's just like, I wouldn't be quick to dismiss it.

38:57They might, you know, they've obviously proven to be worthwhile so far. I'd be hesitant to let that go. But again, yeah, you can pick into this a little bit more. Why that? Is it because there's a wholesale change in strategy or is this a short-term strategic direction based on some broader macro view or something like that where they're going to put you into an index fund just, you know, for the foreseeable future with an intention to go back to direct stock picking when opportunity and value. value allows. You know, it's a very different story. It's like, you know what, we've just found that this is too hard, so we're just going indexes.

39:32Yeah, that's right. If that's the case, and by the way, it's not a terrible take, but if that is the case, then yeah, do it yourself. Yeah. Yes. Yeah. And I think that's, I think that's fair. I, yeah. One more point where you think, and again, the listener did not say this, but, And I love your saying here on this. People talk about buy and hold. And you adjust that to buy to hold. That is, you buy with the intention to hold. Because the dream here is that I buy something that just compounds at an insanely high rate for many, many, many, many years and makes me a fortune. That is the way to wealth.

40:11Absolutely. But too often, people take buy and hold to mean I never sell. And things go terrible. The company doesn't work out as you expected it to. Righty, right, righty. No, but I'm buying hold. Never sell. well, and it's just stupid at a point, right? Like there is things that made, there was a good rationale for at one point in time when facts and evidence suggest that it's actually a bad decision, you change your mind, right? And so don't confuse I'm a buy and hold investor. And I'm not saying the listener says this, but it's a common enough phrase that I hear and that it's worth just mentioning on the pod.

40:44It doesn't mean never sell, right? If things change, absolutely sell. Sell very, very quickly and very decisively. I got a question from Ethan and Ethan has a question. I don't, I, I, I want to say I reject the premise of his question, but I don't want to do that too promptly in case I'm getting something wrong. Hello, gents and gusto to you, says Ethan. Pod machine question. Well done regarding franking credits. I understand they're a tax credit, but what if the franking credit is above 100 %? I recently received a dividend with 300 % franking. Does that just mean the tax man actually pays me?

41:22In brackets, gives me a credit, but saying he pays me feels better. For those dividends. As the company has paid 300 % and my marginal tax rate is 30%. I don't know either of you are trained accountants, but a franking credits for retail investors rant would be great. Many thanks, Ethan. He puts retail in capital letters. Thanks, Ethan. Thank you. I suspect it's a typo. I was just trying to say, I don't think it's legal to pay out more than 100%. Well, it's something that it couldn't be more than 100 % franked because it just means the whole dividend is franked. You can't frank more than the whole dividend by definition.

41:51Yeah. So that being said, in the past, you could distribute franking credits separately. I know we've had that where a shared buyback had a massive chunk of franking credits attached. You remember that? I think Harvey Norman used to do it when it was allowed. And they'd basically do a buyback where they'd say that there was a tiny capital return and the rest was dividend or vice versa. I can't remember which way it was done. So you distribute massive amounts of franking credits really tax effectively. It might be what you're talking about, Ethan. and it hasn't been allowed for at least a couple of years from my reckoning.

42:23I don't want to say you're wrong and I don't want to say it necessarily is a typo. I don't know any circumstances in which it's possible. What I will say is that in the past, companies have distributed excess franking credits using a various range of kind of off-market buybacks where they would reduce the capital value, a large amount of buyback was a dividend, the rest was a small capital return. the way they kind of structured it for tax purposes. I think Woolies did it too at some point. It was all the rage for a while. Basically, because companies had generated a whole lot of frankincredits over a very long period of time, here's what happens.

42:59You earn a dollar in profits. You pay at 50 cents in dividends. You actually get a tax credit for all those profits. So you've got a dollar's worth of profits that you've got a frankincredit for. You're trying to pay half of it, so you kind of keep the frankincredits in literally a frankincredit account, they call it. It just keeps growing, growing, growing. to the point where you kind of can't pay that much back because you're not paying enough cash to catch all the franking credits. I mean, you could eventually sort the cash and pay it out, but there were excess credits in a lot of companies.

43:27They kind of used that to do it. The government sort of cracked down and said, well, hang on, you're basically, you're ripping off the taxpayer here. You're paying off a massive amount. You're calling it a dividend or something else. It's all that kind of stuff. So I don't know the answer.

43:45Pretty sure. I've been Googling while you've been talking. I'm pretty, look, again, as you rightly point out, I am not an accountant, but I'm almost certain you can't do it now. To the second part of the question, though, let's assume that you can. Or for whatever reason, you've got an excess of franking credits over your taxable income. Yeah, absolutely. You can cash them back in. They'll give you a refund. Cash, cash refund. Which is what happens when people, and this is where, if you have a zero marginal tax rate and companies pay tax effectively on your behalf is the way the franking credit works, the tax officer says, well, hang on, you've got this$100 dividend, you owe me zero tax, but the company's already paid$30 in tax, here's your$30 back.

44:23Yep. So that's kind of how it works. It was the subject of the 2019 federal election. Yes. And Bill Shorten, I was going to say fell on his sword, but was speared with his own sword. Hoisted by his own petard. There we go. I love that. Yes. I have my thoughts on Franken-Credit reflux. There's a lot to say there. Let's avoid it. Well, if you need to ask for a rant on it, Do you have thoughts on frankincredits you want to kind of throw it quickly or should we move on? Look, the purpose, again, often it takes a step back to really frame it up. And the big idea here from Keating was we just want to prevent double taxation.

45:02You're a partial owner in this business. The business has paid tax, right? Now, this is an after-tax profit that we are distributing to you. So we've already taken the chunk of tax out. And it used to be the case, and it is the case in most countries, was like, well, no, we're going to tax you. It's like, wait a second. You had two bites of the cherry here. You've already taxed this. Why are you taxing it again for? Effectively, the company profit ends up being taxed twice. And you collect 30 % from the company and then another 45 % from the individual. That's 45 % of the lower number. But it's a large amount of money.

45:31It ends up, you know, the dollar of company profit ends up being taxed at something like 60 cents in the dollar. Yes. Is the effective tax rate on that. And you kind of go, hang on, that doesn't seem like that should happen. And so the government in their wisdom at the time said that shouldn't happen. Let's not, that's not how it should happen. Philosophically, I sympathise with that, frankly. I 100 % agree. I think it's fine. As long as it's evenly applied as a standard across other assets and et cetera, et cetera. Here's why it's important. Because if I own a block of flats and I rent that block, I'm just making it big, I don't own a block of flats.

46:02But if I did and I own that block of flats as a company, in other words, I was Scott Phillips Incorporated, I would pay 30 % tax on the profits. And then without franking credits, I'd pay tax again when the company paid me as the shareholder, the dividend. If I own those block of flats as an individual, I only pay tax at my marginal rate. And so the difference, this is what it's getting at, is the difference between the treatments of the structure of the sole partnership. It was anything other than a company, the tax rate would be different. There is no reason why, just because it's PTYLTD, a proprietary-ledded company or a limited company in the case of a public company, there's no reason why that should be taxed differently just because the structure is different.

46:40That's the equalisation that's kind of is done by the franking credit system is to say whether you own as an individual in partnership or through a company structure, the tax owed on the profit should be the same across the board. And that's exactly why. And it isn't the same across the board because you effectively pay tax at your marginal rate. That's the point. Really quickly as an aside, I was not in favour of Bill Shorten's policy because the issue is not the franking credit. The issue is the marginal tax rate of the taxpayer. Yes. And that's where he should have attacked it rather than the whole class war fat cat.

47:15I don't get the politics of it necessarily. It was dumb politics. And if you don't think someone should get a tax refund, a frank credit refund, the frank credits aren't the problem. The problem is they shouldn't get a zero tax rate in the first place. That's where you should be aiming the effort. Bill Shorten should have, six years ago. Wow. And he screwed it up. He got the politics wrong. And frankly, it was just bad policy. It was genuinely bad policy. Fruitcake problem, right? Birthday cake, yep. Birthday cake, sorry. Again, I think this is the trouble with, again, they hoist themselves on their own petard too often here.

47:49It's just like, stop treating me like an idiot and just explain it like a normal person, right? Like, unfortunately, we always pitch to the lowest common denominator and it's sort of like, I feel as though we should try and lift people up rather than talk down to people. It's sort of just depressing. if the level of discourse must always be aimed at the least cognitively able. And that's not to sort of try and sound like intellectually superior or anything like that, but it's just like, well, we have, most of us are pretty reasonably, you know, endowed. And I'm not talking like PhD level or IQ, just the capacity for basic reason and judgment.

48:29I think most of us do, right? And if you just spoke like, again, I always think you get these guys over a beer at a pub, they'll just lay it out. You go, wow, that's a really good idea. Why didn't you say that to Channel 10 when you were on there instead of trying to go to the focus group questions? But yeah, totally. Question from Kat, hopefully a reasonably quick one. Hi, Scott and Andrew. Thanks for the bi-weekly insights, observations, and please explains offered up all weeks of the year. Not sure if one of us is Pauline Hanson, but I'll take that under advisement. I have a question regarding dividend reinvestment plans.

49:02I have a couple auto set. However, I'm wanting to cancel them off so I can be more in control of my distributions. My question relates to the outstanding amounts that will remain in credit upon the cancellation. How do I go about getting that money back? Or is it simply a gratuity offered to the companies that have offered it? I've tried to mathematically calculate the cancellation upon a$0 balance, but due to the ebbs and flows of the market, this makes that idea pretty much untenable. So how do I deal with it moving forward? Thanks if anyone manages to read this. And even bigger thanks if it actually makes the pod.

49:33Regards, Cat. It has made the pod, Cat, so thank you and well done. This is pretty simple for me, mate. It depends on the details of the individual DRP plan. Each company, there is no rule that applies universally to DRPs. Every company is entitled to make the plan their own version of the plan. Most of them carry any balance forward to the next time. I suspect in most cases you simply forfeit the difference if you withdraw from the plan. Sorry, I'm a bit slow. You need to lay this out a bit more. So I've got$100 in dividends and shares are$90 each. There you go. So they've given me one share.

50:08They can't give me 0.1 of a share. So I've got this$10 balance. Yes, and that applies next time you get a dividend. Okay, right. So next time you get$100 dividend, you get$110. You still only get one share because it's$90. You carry$20 forward and so on and so forth until you get to the point. Now, that's a big example of the dividend being very large compared to the share price. It's very rare. it's like that, what you'll find, and you know this, by the way, just for our listeners' benefit, you'll find it's a, you know, you get$100 dividend and the share price is$0.48, and so you'll end up with a$0.24 left over or for$15 left over.

50:42The proportion left over is that proportion of your dividend is always tiny because, you know, you never get a dividend that's the same value as the share price. You never own just one share. So it's – but, yes, conceptually what you're saying is exactly right. So that's what Kat's asking. Thanks for making me go through that because I hadn't explained it at all. it depends on so the dividend reinvestment plan it's an internal structure to the company they are entitled to using their own rules and each company will be different or they have different ways of treating that leftover balance your best option is to honestly sorry Kat Google the DRP details or ring the company asking for the DRP plan and understand what happens it'll be different for every single company unfortunately I really want to go a little bit deeper can we do it quickly so I generally I've got less and less companies these days that pay me dividends.

51:29But I generally like the cash. Yeah. Partly for that reason. Partly because I, my, not that I don't want to reinvest it. I'm not retired yet, sadly. But I want to, I don't have to reinvest it in that company. And it might be that, look, I ranted about Commonwealth Bank on Friday, right? This is like, if I was a, and I wouldn't be for the record, if that anyone was in doubt. if I was a shareholder, give me the cash and I am not buying that company. I just find it way too expensive at this point. But as a DRP, you're buying it whether it's expensive or cheap. This seems a bit silly to me. Which is what Kat says.

52:07That's why she wants to take control of her thing and make her own choices, which is awesome. I think it's actually easier tax-wise as well. Yeah, that's true actually. Because when you go to sell those shares in 10 years time and you've got like, you're trying to work out your cost base. Yeah, that's right. Not impossible, but you know, It's just a bit of a nightmare. So there is that. You touched on this. Was it this part or Friday? It's about the underwritten dividend. I can't remember. But yeah, that's Friday. Very quickly. You can't do underwritten dividends quickly. Well, I'm just going to say that there are some companies will have a treasury stock of shares.

52:39In other words, or they will buy the shares. So you want to reinvest them? We'll go and buy the shares for you and then give you the shares. Or we've got some shares that we've held in reserve for this specific purpose. But what tends to happen is they just create new shares. So let's say that, to keep the example simple, every single shareholder elected for the DRP and the DRP was underwritten. In other words, it was$100 million paid out in dividend,$100 million in new shares would be issued. So you get more shares, but so would everyone else. So you're kind of all a bit diluted. Now, it's not necessarily terrible from a company's perspective.

53:15It's brilliant, right? Because you get to pay people dividends in money that you just printed up. And you get to keep the cash. Like the cash is like what you can actually spend. BHP can't go out there and, well, maybe BHP can in some weird instances. But most companies can't pay their suppliers in their own stock, right? They can with cash. So it's a wonderful way to sort of say, hey, we pay a dividend, but without really having to pay any cash out or to minimise the amount of cash that's paid out. The cash goes out but it gets picked back up again. Yeah, that's right. Yes, yep, yep. So, yes, yes.

53:50I emailed Domino and said, please stop doing that. It's a bad idea. And they said, no, no, we think the dividend's important. If you need the cash, don't pay the dividend. So, if you're underwriting your dividend, it's because you want the cash or need the cash. If you need the cash or want the cash, keep the cash, don't pay the dividend. When you say, oh, it's an underwritten dividend, you're going to go, hang on, so you're paying it out and then selling more shares to the same amount. so you needed the cash, you want to pretend you're not. When you pay out the cash, you're reducing my – you're diluting my share ownership as a result because I'm getting your dividend, but I own less of the company because you issued new shares to somebody else.

54:19Actually, it's worse because they're like, hey, here's a tax obligation without any cash. Wait, what? So I've got no money. No, no extra money, but you do have to pay tax on that. Correct, correct. So, yes, it's a terrible idea, generally speaking. The only time it would be a good idea is if your shares are undervalued and you're issuing – sorry, overvalued, you're issuing shares to a higher price. And the company's got a great use for that capital that it can invest at a high rate of return. Yep. They are the capital management, man. Like it has got to be the biggest hole in corporate, I was going to say Australia, the corporate world is like one of the most important things that a board and management can do, but that too few of them understand.

54:55And not because it's, you know, only giga brains like you and me can possibly wrap our hands there. No, it's really dirt simple, but they, maybe it's just a question of incentives. I don't know, but they do a bad job of it as a general rule. It's absolutely incentives for a whole lot of things. It's subconscious, some of it. Some of it is just, and this is where it's difficult as a shareholder because you look at your fellow shareholders across the metaphorical room and that person says, I just want the dividend, I don't care. But it's destroying value. I don't care, I want the dividend. Okay, well, you're, there's a total of, one vote with value, right?

55:25There's a total of that view. Other people will say, I'm a short-term shareholder. I just want Domino's shares to go up this year and if you don't pay dividend, they might fall. So please pay the dividend. Okay, well, again, stupid, yes. Self-defeating, yes, but they're entitled one vote, one vote. The hardest part is sometimes management are doing stupid things, which is exactly what the shareholders want. Not some – so on more than one occasion – I'm not saying no one's being stupid. Let me be really clear just before I get a little bit of trouble. That sort of thing can be stupid by some companies who are otherwise nameless or generic, and if they do that, that could be stupid and that could be bad.

55:57Go on. I've got shares in a – I'm in a few companies that I've owned, and they're earlier stage businesses. They're doing well. well, this sort of pivoted past profitability and we're going to pay a dividend. And when we do interviews on Stroman, I'll say, why? A, no one is buying your shares for income, right? Like you're very much a growth company. B, you're a growth company. You need capital to expand. Why are you paying it out for, right? Like reinvest it. And every time I sort of put this to the CEO, they very reasonably go, yeah, I hear you, but shareholders want it. Right, yeah. Yeah, but they're wrong.

56:36Yep. They're allowed to be wrong. They own the company. They own the company. I was like, but, but, but, but, and I'm like, I kind of get it, right? It's the hardest thing for managers who actually might want to do the right thing. And I'm being, you know, think about who owns the shares. You're a CEO. You work for the shareholders. Yep. And every day you have someone, some big fund manager on the phone saying, can you please fix the share price? Can you please go out and do a really attractive, spinny ASX release, telling everyone how wonderful you are because we would like the share price to go up, please.

57:03Yeah. And then you kind of go, so first of all, the CEO either doesn't know better and goes, well, a high share price should be good. Yeah, everyone's telling me I should do it. Right. And the share price goes up so that can't be bad for anybody. What's your problem? That should be a good thing, right? Exactly. What's your problem? It's really, really, really hard. Having said that though, it's one of the biggest, I was going to, what's the opposite of red flag? Green flag. There you go. That I see is that when you have a leader who is a leader Yeah. and they go, I know you want this, but I'm not going to give it to you.

57:35In the same way, it's like parenting, right? I know you would love to eat that entire thing of ice cream and all of those chips and sit on your smartphone all day, but it's not good for you. And I'm not going to let you do it, even though you want to do it. And a good leader goes, I hear what you're saying. It's not appropriate. And this is why it's not appropriate. Now I understand that that might disappoint you, but it isn't, you're entitled to sell your shares and go somewhere else. If you're on this train, or as long as I'm at the front in the engine driving the thing, I am not going to do that because we need capital to grow.

58:07This is the cheapest form of capital. And we're going to invest it at much higher rates of return than you ever will be able to out there in the private market. And believe me, this is in your own interest. The best example of this actually was the big short, you know, Michael Burry. Yeah, yeah, yeah. All of his customers saying, I want out, I want out. He's like, I made you a fortune. What do you want? No, I'm not doing this. I am right. And all of his clients hated him. And it's not to say that you should have a leader that just disregards the wishes of owners, but there is something, it is a rarity and a very strong signal for me when you get someone who goes, no, I'm very firm in my beliefs.

58:42I'm going to explain it to you. I want you to come along for the ride and understand what we're doing this and this is why we're doing this and this is why I think it's better for you. Now, that rationale might be wrong, in which case you go, well, I'm out. But I just think that the world would be a better place with a few more people who were able to sort of have the courage of their convictions, particularly when their convictions are right. I agree with the exception that in that circumstance, the shareholder says, okay, on your bike. Yeah, you're fine. We'll put someone in who does. Right, you can try to convince the shareholders that you're right, but you don't have the choice to say, you know, in your example, the kids can't say, I'd like a new dad, please, or they can, but they can't get a new dad.

59:19In this case, the shareholders entitled to say, you said that's good for me I hear you I hear you but do it to your fight well okay now his way okay I guess I'm doing it right and so the even better version than your one you're absolutely right when you find a leader who can take those shells on that journey guys I know you I hear what you're saying stick with me we're going to make more money for you this way just give me some faith and they go okay I believe you I will stick with you that's what you want the better one for me is actually the the founder preferably or the CEO who has a large stake in the business preferably a controlling stake but enough Jerry Harvey's a great example, right?

59:52Love or hate Jerry. And plenty of people whinge about him. You know what you're getting with Jerry? You're on the Jerry trainer, you're not. Jerry's like, here's why I'm going to run the company. I'm going to buy milk cows when I think it's a good idea and it's going to be a bad idea. I'm going to sell them and go, that was a stupid idea. But you know what you're getting, right? Jerry's not going to say, I'm going to run this one for the way that the short-term shareholders wanted me to run it. I'm going to run this thing for the long-term benefit of shareholders in my best view. Now, to your point about CEO's getting it wrong, Jerry got the farming thing wrong.

1:00:18It was an interesting decision to make. But, you know, you know that's the train you're on. You're getting Jerry. You're getting Warren Buffett. You're getting, I don't particularly love him, but you're getting Elon Musk. Tesla shareholders cannot be surprised when Musk runs Tesla Musk's way. If you like that, great. If you don't like it, then go away. But either way, he has the autonomy and authority to say, this is where we're going. This is what we're doing. This is how we're doing it. If you don't like it, to your point, get off the train because this is where the train's going. That's the one, you know, Buffett famously doesn't talk to analysts.

1:00:47He doesn't do conference calls. He turns up at the AGM once a year, does media every now and again, I'm not doing it but we'd like you to do it I don't care I'm not doing it and that's the sort of stuff that you know if you find a good quality leader who has the ability either of influence of you know literally convincing people or enough shares to be like I don't care if you believe me or not this is what I'm doing that's where that's where founder owners and founder CEOs or people who think like founders are so incredibly valuable and you build a culture like that one quick example mate I'll finish Saltpats I own shares as everyone knows I own shares in Berkshire as well the Milners have built a culture amongst not their company, they have but again, amongst the shareholders you know, when someone wanted Buffett to pay a dividend at Berkshire how long ago, was it 10 years ago, 15 years ago?

1:01:31Oh, at least and he said, I don't think we should but everyone can vote and no, a certain people went, we trust Warren so we're voting no now, would they have liked some money? sure, but they believe that Buffett would reinvest that money well similarly with Solpats they have a culture of, when someone came in and wanted to break this thing up, the cross-shareholding between Brickworks and Solpats try and create value or whatever euphemism they use. The management said, we don't think we should do this, but you guys decide. And the shareholders overwhelmingly voted not to. Why? You get the shareholders you deserve.

1:02:00I have long said that. I have long said that. And this is where the managers, leaders that cave into the demands of the hot money really get it wrong because they'll speak to them and say the things that they want to hear, which they love, but they will drop you the second it's convenient. They are fair-weather friends. And then you have these massive run-ups and then these massive crashes. Now, the more, I don't know, what's the word, sanguine, balanced, reasonable manager just doesn't play that game. And they miss out on these big run-ups. But then they get the long-term focused shareholders that give them enough rope to do what they need to do.

1:02:42And I won't say always, but almost always, just do so much vastly superior than what is effectively just another name for a pump and dump, really. And it's just, so part of what we do at Strawman is we line up CEO interviews. And I like it and I don't like it. I like it in the sense that I feel as though it evens the playing field a little bit because if you work for Baron Joey or any sort of like highfalutin hedge fund or big brokerage house, you have one-on-one meetings at the CEO. Oh, yeah, yeah, yeah. And I'm just like, what? And now, oh, we don't say anything that's not publicly disclosed.

1:03:18Well, I was an analyst for a bit, and I can tell you there are all kinds of signals and wink, wink, nudge, nudges under the thing. It doesn't do you any favours, by the way, and it's highly illegal, but let's just be real for a second here. And just like that sticks in my craw so much. Yeah. And so, you know, we're trying to level the playing field. But occasionally you come across someone and they'll say, no we don't we don't do that and i'm kind of like i'm disappointed because i really wanted to interview you but i'm also like good like yeah we've got something to say we'll release an announcement we don't we don't do meetings so that's actually even though it's disadvantageous to me and the business i'm like i could totally respect that in fact i find it as a bit of signal the exception to that is they go no we don't want to speak to you because we're having a meeting with JP Morgan next week.

1:04:06And I'm like, whoa, whoa, dude, like get real. And, and, and again, people will say, but no, nothing, nothing that isn't out there already gets discussed. Well, if that's true, why have the meeting? Yeah, correct. Why have, oh, we, we just, we're just trying to flesh out some deed. It's not that it's market sensitive. We just need, we just think, so it's either important to know, or it's not important to know. Yeah. If it's important to know, and it hasn't been disclosed, but it's being disclosed to you, like it is unfair. It is outrageous, frankly, and you'll and then unfortunately it is the majority that will go around they'll have the I know it because earning seasons we're in the midst of it you know and they they release their results and they go on road shows they call them road shows right they go it's like the book tour or the film tour from the end they go around all the capital cities they have little pally one on ones just with less attractive cast members for the record yes right I'm not saying you know business people I'm just saying they're not a show biz yeah they're less definitely I agree with that but I mean if no one's outraged by that you should be outraged by that right and there's no smoking guns which is why it sort of gets away but it's just like it's just a little too comfy that click for my for my anyway i just like i like it when people push back and say no i i will i will push back slightly just to kind of add to that because i've i've had those meetings before in my current role and you've i think you've probably been there plenty and it's it's less about it's not well like everything and you've talked about the scumbags in our industry there's a wide range right so why have I had company I've had company because I want to understand more about the company I literally just want to know more than has been I will say disclose publicly I don't mean I want the inside information I mean hey I've got a question how does this thing work what's the relationship it hasn't been withheld it's just that no one's thought to ask it or no one else has indicated that they're interested in understanding that part of your business and you don't have the forum to do it often you can't you know the shareholder conference calls twice a year are an hour long with 15 people on the call ever gets to ask one question.

1:06:03It's like, well, actually, Domino, can you help me understand the store level profitability? I don't really know how this works. Or famously, we went to a retail food group. How do the franchise agreements work? It's not material non-public. It's just help me understand the business. Now, in a perfect world, you'd have live-streamed town hall meetings where those questions can be asked and answered, moderated to some degree, I suppose. You know, people ringing up saying, you know, my pizza was cold, you know, at my local store in Key Lower East in Victoria when I ordered it last week. Go to a Woolies AGM if you want those kind of questions.

1:06:39But the AGM is the other place they should be asked. So, you know, the worst thing is that this isn't even hard. I was just in a perfect world, like it would take a lot of effort to do. It really wouldn't. Not really. You'd have a meeting once a month and interest in the elders, the question is vetted or moderated by somebody who is independent and useful to say, actually the pizza question no thank you this guy's asking about your store rollout plans the next three years we throw that in yeah that's entirely and you can say i don't want to answer the question too by the way yeah but no but no one gets the answer rather than someone wondering what was asked and answered yeah is it is it particularly for i go and see i haven't seen domino so i can use that example i said hey tell me about your rollout strategy so i get a bit more clarity that is it is it material maybe a little bit frankly is it non-public well yeah because otherwise i wouldn't have to ask it um that's if it wasn't material you wouldn't ask it right Right, right.

1:07:28And that's where it gets, you know, is it reasonable to ask? Yeah, absolutely. But I shouldn't have that information to the exclusion of somebody else who didn't ask the question or wasn't in the room. Yeah. It's getting better. In the day and day, in the Zoom era, there is zero excuse to not live stream every AGM, every results call. Yep. Just here's a link. Click on this. Now, not anyone maybe has the right to answer a question if you're not a shareholder. What have you got to do with anything, right? Yeah, exactly. but it's amazing how few do that it's like literally I'll open up my laptop and just point the webcam at you, it's not hard to do with my phone I can do it and people ask questions and that's why Buffett doesn't do analyst calls because I will tell everyone everything at the same time you'll all get it at the same time this is how we do what we do it's really really not hard and if there are questions that people want answers to you either answer them and answer them to everybody or you don't answer them So here's the – you mentioned incentives, mate, and we say it all the time.

1:08:27It's the old manga quote. Never think about anything when you should be thinking about the power of incentives. Show me the incentive. I'll show you the outcome is the other one. So, you know, the CEO wants to hold those calls because they want the share price to go up and they want the shareholders to understand so the share price will go up because they've got a good story to tell. Usually genuinely, probably self-delusionally sometimes, but they're genuine about it. They go, hey, I want to tell you how great the business is going to be. If you say no to an analyst call, are the fund managers going to sell you stock?

1:08:52Are they going to buy your shares if you don't meet with them? Because they're saying, look, I'm interested in investing in your company. We can't have a meeting so I can understand a bit more about the business. What do you say? No, get stuffed. I mean, again, if you're incentivised to get the share price up, here's the other thing. Even some of our members will say, I don't care about the long term. I just want the share price to go up now. Again, is that reasonable? Well, they're entitled to that view. If they own the shares, they're entitled to put that view. But, yeah, this is where the incentives come in.

1:09:16and it's nobody's interest to say, I'm not going to give you some specific time so you might buy the shares or hold the shares or recommend the shares to somebody. I'm going to try and impress you so you'll do all those three things. Why would I not do that if my job was to get the share price up? And so it is back to that great leader who has integrity, who has capital management skills, who actually cares about the long-term interests of the business, who has operational excellence and strategic insight, who can do those things. They are rare. That's why. So rare. That's why it's hard to find great businesses because that combination, you have some really great salespeople who suck at capital management, great capital managers who are happy to bend over fundies if they tickle in the right way.

1:09:54Trying to get all of that at the same time is really, really tough. Yep, which is why when you find one, you make a big call and you stick with it, right? Because they are rare. Yeah. I think we've probably done enough. We're an hour and 10 minutes into this. I was going to ask another question, but I'm restraining myself because I know if I do, I look right at it and I go, this is a five-minute question and 15 minutes later we'll still be here. So I'm not going to do it. I'm sorry to let you down. If you do have a question to ask us though, please hit us up on email, info, I-N-F-O at fool.com.au.

1:10:25As I've said before, it's the best way to ask the question because largely our great member services team put them in a queue for me. If you send them on other platforms, I try and remember to ask them, but I got a Twitter question here, an Instagram question there, and a Blue Sky question there, an email question there. It's just, I'm not that smart and not that organized. So info at fool.com.au is the best way to get your question asked and answered. Follow us on the socials. if you want to chat if you've got some thoughts if you want to see what Andrew's up to what I'm up to what I'm banging on about is probably the best way to describe my particular Twitter feed follow Andrew at Sage underscore Simeon or at Strawman Invest on Twitter it's not called anything else I can't remember the last time I tweeted out anything right I've got to just be clear on it of course it was it's probably been fun follow me at TMF Scott P on Twitter and Insta and Blue Sky or grab me on Facebook at facebook.com forward slash Scott Phillips money.

1:11:16I thought we were going to make the pod without mentioning the B word then and then you just showed it.

1:11:23I don't know. The next contract we negotiate, you may drop straw man for Bitcoin instead. I'd like to see what that conversation looks like. There is only so much orange peeling someone can take before everything else loses any relevance. I presume. Not taking the bait. We will see you next Friday and full on. Cheers.