Mailbag: incl. Can you be diversified and high conviction? March 16, 2025

24:45I just think I would, I would argue, mate, that across the investing universe, more mistakes are made out of hubris than out of diversification. And so I do think there's, there's just, and I don't think you disagree with that, but I only, I only want to make that point, you know, when you get to the point you're at where you can reasonably well judge risk and return, when you've got a good track record, when you've, you know, been through the ringer a few times, when you're, you know, you're, you're reaching a level of expertise, that is the point at which, and if you're Warren Buffett, you're probably born with it, but But that's the point at which you go, you know what?

25:14I'm good enough at this to do this well. And I just – I hear everything you're saying. You're a million percent right. But I do – I've also got our listeners on the other side of my – on the other shoulder going, should I really do what Andrew's doing? And not that – Well, there's someone out there going, I'm so high conviction on this early stage biotech and they're going to cure cancer. And they don't. And you lose everything because you had 50 % of your portfolio. And Andrew said it was okay to be high conviction because I did have high conviction. I often talk about – you know, we talk about that with some – when I talk about TV and stuff, particularly Ausbiz, it's like you don't just have to believe it's true.

25:43You have to have a rational basis for believing, probabilistically weighted. It has to be true. Right. Well, that's the thing, right? Ultimately, yeah. Oh, no, I think it's going to happen, so I'll put money. It's like I think or I hope or it might, you know, or no, I'm sure. Why are you sure? On what rational basis have you formed that conclusion? And that's the difference, I think. Not the difference. The addition I want to add to yours, which is I completely agree with you. Being over-diversified is mad. Just buy an ETF, go fishing. Who cares? Don't waste your time, effort, energy. More than enough diversification there.

26:13But have higher concentration the more your conviction is deserved, put it that way. Yep. And that's something you've got to really struggle with because, as I said, ego, I hate ego and hubris and arrogance among investors. It's a really unattractive trait and, frankly, I'm just waiting for that person to fall over and we've seen it more than enough times. Oh, yeah. I won't give specific examples. I won't give the people why I don't intend to give them a bad rap. It's not. They don't need it. But when you kind of go, I'm sure, I'm sure. Well, I'll give you one example. for one of Buffett's projects, which I actually can't recall, was so sure that the bank was coming.

26:46Very early associate. Yeah, and did beautifully for 40 years. And then just doubled down and tripled down and quadrupled down on US banks coming into the GFC and got absolutely wiped out. Oh, I was thinking someone else actually. So 40 is a great performance. Like great, wonderful ones. And just went, made a bet, high conviction, knew in quotes, he was right, and just blew himself up, blew the fund up. And you kind of go at that point, for 40 years, you've done the right thing and you've just got ahead of yourself. You got over your own skis and guess what happened? You hit a tree. So you're absolutely right, mate, conceptually.

27:18I will say to people, take your conviction and halve it and then see how you feel. Not because you don't have that conviction because there's every chance. And you made the point. You could be wrong, right? So I just want people to take your suggestion but then factor it back by the likelihood they actually are right. And if you're not sure what you think, ask your second one another. well, honey, how lucky am I being right about this? And they'll tell you. So maybe start there. But, yeah, look, as I said, mate, I don't want to disagree with you. I just want to add that for people. I don't want people to get a bit of Dutch courage from, oh, the guys on the multiple podcast said it was okay to be concentrated.

27:51It absolutely is. Just do it smartly. Yeah, and there's also a huge amount of difference between a 2 % position and a 10 % position and a 70 % position. Yeah, that's right. Exactly. So, again, you can adjust the sliding scale. You know what, mate, for me, the ultimate test of conviction, because everyone's got conviction when it's easy to have conviction. If the price of your asset drops 50 % and you can shrug that off, you've got conviction. That's the litmus test. If you go, I'm super high conviction, it drops 50%, oh, what do I do? And you start panicking. Like you never had conviction in the first place, Sunshine.

28:25Like you just, you didn't, right? And like, yeah, it's happened to me a lot of times with companies that I can tell you there's plenty of things that have dropped down precipitously as I've held them. Some things I felt really nervous about. Other things, I didn't lose a second's worth of sleep. You know which ones I had the high conviction in, right? I can imagine. And again, whether it's justified or not, but like that, I think that's your subconscious telling you, do you have it? And so maybe try and mentally go through that exercise. Like, I think it's really good. If it halved tomorrow, would I still think it was really good?

28:59Yeah. I mean, that's hard because you'll tell yourself whatever you need to do. Yeah, that's right. You don't know until you know. It's absolutely true. Think about even maybe not even share price-wise. It's always share price, even business-wise. If the business sales fell 20 % tomorrow, would you still want to own the shares? Now, there's a reason why you wouldn't if they, you know, whatever isn't happening. But, yeah, it's like if this business hits rough orders as a business, do I feel good enough about the products, the company, the management, the brand, the whatever, to believe it's going to trade out of this problem or am I really saying, well, shit, at that point I'd be in trouble?

29:30I'll happily share. Yours is a bit cool you were mentioning. Berkshire Hathaway and Solpats are my two largest shareholdings. They just are. And they are... Are you happy to disclose the percentage holding of your 20, 30, 40? Not each, but together easily, yeah. That's pretty concentrated. Yeah. But I also have another... I probably own 20 different positions overall, but I've got a lot of money in a few of them. And that makes the other one smaller by definition. So I take your point about having, you know, 2 % or 3%. I kind of have reversed that way. But yes, yeah, so between Solpads and Brickworks, it's about 22 % of my Australian portfolio and Berkshire is about two-thirds of my US portfolio.

30:11Now, I'm going to suggest you didn't position it that way. It just evolved that way. In part, yeah. Which, by the way, is no difference really structurally. Yeah, no, that's fair, yeah. A bit of both actually. So I will disclose I bought some more Solpads this week and I can say that because I'm now past the trading period even though it's already a very large portion of my portfolio. So, you know, yeah. Sorry, no, it wasn't something. It was Brickworks. Jeez, I'm always missing quite a bit. It was Brickworks. The share price fell about 10 % earlier. Speaking of falling 10%, it fell 10 % earlier in the week, so I bought some more.

30:43And again, it's not a recommendation. Don't go and buy it. Sky bought it. I already have a largest share of white. It was too good to ignore. And I wouldn't do that with all. There's only very few stocks I do that with, frankly. There's probably those three. At some point, I'm like, you're taking too much risk. Different reasons. they're all internally diversified businesses. They've all outlasted management teams. They are largely investment company related earnings, all that kind of stuff. So there's a bit going on. But yeah, and that's... So look, to your question, James, it's a struggle. There's never a bad time to buy salt pads.

31:18There's never a bad time to buy a Berkshire. I mean, sometimes the share price is too high, but you know what I mean. I could happily do that regularly if I wanted to. So I've got to do both. There is nothing else I have. I am we talk about strong convictions as a weekly held ram and I think that's for me that's the approach I kind of try and look at it's where does the where does the investment thesis cross over I try not to be overly positive about anything I try to be really I try and practice what I preach we talk about hubris and arrogance and that kind of stuff the old joke about you know you're really humble you must be really proud of that but you know I do try and be I try and look at all these companies like well i could we're talking about dominoes before we're talking about kogan before i guess these scenarios where they're both going to blow up right because that's just what happens um and so kind of you know i don't think it's going to happen but i i own them i own them i like them enough to have bought them so those are those are positive things um but i'm not sure i would arbitrarily say forever these are absolutely going to go to the moon or they're absolutely bulletproof i just think on balance they're pretty good um i am also though by the way very sanguine when they fall and that's just a combination of tests right and it's human human I mean, it's just my own personality, but it's also experience.

32:27We've been there and done that before. Yep. Yep. Should we move on another question? Yes. I don't think they're just – because it comes up a lot on this pod where people will say, oh, I've got 17 ETFs, and I just think, oh, it's too much. It's just like – you're just not going to – like why, right? Like you get it to a point where actually you are hurting your returns for no added benefit. I'll take some – I mean, obviously the best investment is just go all in on the one that's going to do really well. What's the next investment over the next 10 years? Buy all of that and nothing else. That's the best performance, but you don't know.

33:01Yeah, right. Exactly. You don't know, right? So every time I dilute, I reduce that. But as I said before, you get to a point where it's just sort of like you are so over-diversified, you might go okay, but you're never going to go wonderful. And like, defeats the purpose. Just to some degree. Some of them might be happy to do okay, by the way. So again, it depends on what you're looking for. And that's the other part of this is what are you trying to do. And you know, I think that's yeah, I think that's the approach. Hey, can I throw you a good one from Kimberly? I love this. Can I share this with you?

33:33Hello, Scott and Ram, says Kimberly. I've been listening to your podcast for a while now. I have a question regarding a budding young investor. Her favourite subject at school is learning about money. Now my favourite thing about this is it's a mum asking a question for her daughter, which is just cool. I love our female listeners, as everyone knows. So I'm so glad that you're listening, Kimberly. Thank you. And I'm glad your daughter is getting into it. This is such a great story. Last year in grade four, my 10-year-old daughter had a year-long activity. The class had to purchase a block of land at auction and build a chicken coop and own chickens.

34:03The money used was behavior points. She realized if she bought a smaller block of land, she could buy two blocks and then had to on-sell the block to a boy who missed out. After building her chicken coop, she began to buy chickens and a dog to protect her chickens. The chickens would lay eggs after two weeks. Each chicken would lay on average two eggs a week. The eggs were converted to behavior points and she could go on to buy more chickens. At the end of the year, the kids could use their behavior points to buy items from the school market. She quickly caught on to the idea that if she used her money to buy chickens, she would end up with more points and could buy more chickens.

34:37It got to the point that the teacher had to cap her chicken population and she ended up with the most behavior points by far, courtesy of the chickens and their eggs. She now realizes she can do this with money and is interested in using her money to buy some ETFs. There are educational apps available. However, the cost seems to far outweigh the benefit of investing through those platforms. For a child that is very interested in money, where can she be directed to learn and practice these skills and what platforms would be kid-friendly to buy some ETFs? Thank you so much for listening and keep up the good work, Kimberley.

35:08I love that, Kimberley. That's so good. So, g'day to you. If your daughter's listening, you haven't told us her name, that's fine, but Kimberley's daughter, if you're listening, well done. We're very, very, proudly, very impressed. That's awesome. You're going to be just fine. You're going to be so fine. Like, I mean, so there's a couple, before we get to the question there, there's a, the real insight that Kimberly's daughter has picked up on is that growth doesn't come from nowhere. It comes through investment, right? And she's, she has figured out something that a lot of ASX 200 CEOs haven't yet figured out, which is if you want to grow your revenues and profits, you need to make investments now.

35:48If you're making investments now, you're reducing your free cashflow. There's a certain amount of money that's thrown off at the end of the year. After everything is said and done, the tax man's been paid, employers and suppliers, everyone's been paid, and there's a profit. And you can take that money and you can, as we say on Friday, go buy yourself a jet ski, right? Or a jet plane. Or you can take it and invest it in the business. In other words, you can defer that consumption. And you would do that because you've found something really great here that, wait a sec, the thing costs less than all of the future cash flows that it will generate.

36:22I'm going to do that all day long until it gets to the point where I'm buying chickens that don't lay eggs anymore. I will keep doing that. Now, the more I do that, the more I'm not actually making money today, but the money I ultimately make is huge. I think reinvestment is something that I actually just, I've really leaned into this in more recent years is that I love, here's a lovely setup for ASX investors, where you've got a company where people will look at, especially with everything being online these days, they'll scan for things like growing free cash flow and all the rest of it. I like companies where they've actually, cash flow has not been growing, but not because the business is doing badly, but because they're taking all their money and they're investing it into an area where they've absolutely demonstrated success before.

37:08They're doing something better than their competitors can do. And they've realized that they get, for every dollar we retain, we're getting a 30, 40 % return on investment on that. Let's keep doing that until that tap is turned off. Let's keep doing that. And why it's interesting and why it's a bit of an edge is because a lot of people miss it. Because what even analysts miss, right, is just like, oh, free cash flow is going down. No, it's not a healthy business. Something's going wrong there. It's like, no, no, no, they're deliberately investing money. And in a few years time, when the chickens that have been bought are starting to lay more eggs, then they will notice and then the share price will react.

37:43But if you've got a little bit of foresight, and again, you've got to assume that they are making sensible investments, et cetera, et cetera, and a lot of time money is not invested well. But it's just like Kimberly's daughter has really cottoned on to something that is just fantastic here. Buffett famously, we've talked about him and we will continue to do so, has never paid a dividend. And he's never paid a dividend because he thinks, potentially rightly, that he will do better with the money than you will, not in terms of satisfying your immediate needs and wants, but in terms of growing the money.

38:12So it's like, you know, I'm dividend and you're going to go put it in an ETF or you can just leave it with me and I'll invest it for you and I'll make much more money. That is why long-term Berkshire shareholders have done so insanely well. If he'd paid out 100 % of profit as dividends, still would have done okay, but not nearly as like not even close, not in the same ballpark as well. So anyway, I've flogged that horse to death. I love it. I love that she's cottoned on to the engine of profit. So good. What was the question? What's a place that she can be directed to pursuing her, take that chicken lesson into investing?

38:46I don't, I actually don't know. It often comes up like where do I invest for my kids? As a kid, you've got all these administrative barriers in front of you and you've got to set up all of these structures. And I've long said, it's not that I'm against doing all that stuff, but I'm just lazy. And for me, I just invest under the structures that we've got. And when my children are adults, We'll just give them some money then. Or even then probably like because there'll be tax events and the rest of it. I'll shout out to straw man. I'm not saying pay up. If you have a free account, you can buy anything.

39:19There's a play money portfolio,$100 ,000. Fill your boots, muck around with that. And then you might want to invest that in real terms on the sidelines so that she can grab when she's 18 or 21 or 30 or whatever age you think is appropriate. I'm going to give a different answer. and I've done, I've said before, I've done exactly this for my young bloke. So we've got some money invested for him separately and we could have done our own name around to your point. We did it in his but six or a half thousand other, as you say. I'm just lazy. It's just a pain in the back. No, totally. Well, here's what I think for Kimberly's daughter though, mate, is that it's the exercise of doing it that I think is actually most beneficial for her at 10 rather than the money that she'll make or not make.

39:55So it's the idea of like take the chicken lesson and turn it into an investing lesson so that she sets up a lifetime of investing. So rather than investing money for her or, you know, Like, yes, if you want to give her some, put some money aside for her, which is out, do it by all means, Kimberly. I would suggest one thing. It's what we've done. So I've got some money aside for a young bloke. He's got a, will you share these? I wouldn't, I think it's probably not a bad option, you know. There's plenty of others around. Shares is a very, very visual platform. Super easy to use. Put it up in your own name.

40:24Tell her it's her money. It's not a big deal. And because I assume what we're talking about, she's not going to be investing tens of thousands of bucks. She's not going to be pocket money or something. And there's two parts. The chicken example is a great one. Ram to have an internal reinvestment, that's great. I would suggest actually, given the chicken experiment, that you find some dividend-paying companies, not because you're trying to maximise her returns. This is about the education and the practice and habit, love of investing. So what I would do personally, again, do Ram's thing, invest her separately, but give her some money or let her earn some money and get her to buy those ETFs on the platform.

40:58Does a couple of things. When they pay their dividends or distributions, as ETFs do, that'll go back into that account. And she has to reinvest that money. And so what you'll see is two things. One is the ETFs will grow in value over time, not necessarily straight away. And that's part of the, volatility is part of the lesson. The chickens, I don't know if the chickens ever went down, but the shares will. So part of it is just, she can see the units of ETFs. She buys a hundred bucks, go to 103, then 105, then 104, then 107, then 101. But over time, she should see it grow. So that internally, she'll see the asset value grow.

41:27What you want to do is, well, I can't tell you what you should do, Kimberly. What I would suggest though is think about something that pays dividends and ETFs generally do because what happens is there'll be cash paid out and they're the eggs, right? And so she can actually choose to eat those eggs now or reinvest that money into more units in the ETF. So what she'll see over time is the value of each unit growing, the number of the ETF price effectively going up over time. And she'll see the number of units she owns increase because she's reinvesting those dividends. Now, why do I say sharesies?

41:57Because they allow fractional purchases of shares. Most, it's not chess sponsored. We've talked about that before. Any serious amount of money I would be chess sponsored for. This case we're talking about just hopefully some pocket money. If it all went belly up, it's not going to. If it did, the loss is not massive and it's a life lesson. But you can go and buy a tenth of an ETF unit or, you know, I think I said before my young bloke's got 0.23 of a Tesla share or something. And because you can add more money regularly, you don't have to wait until you get a round number. It really works with small amounts of money to get started.

42:27So that's what I would do personally. Ram's approach for building wealth is right, but I think in this case she wants to do the chicken game. This is the share market chicken game she can take part in. Shares is relatively inexpensive to do. By the way, while, again, we're not talking about large amounts of money, the cost is going to be something that she's going to have to bear or you can bear for her to make it work, and I think it's probably a pretty cheap investment in her future is what I'd probably suggest. Yeah, nice. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

43:05Should we get another female listening? Awesome. Thank you, Leah. Leah sent us an email. Hi, Scott and Ram. Absolutely love the pod machine. Thank you, Leah. A small clarification. You're listening on the pod machine, but the podcast is the... So you love the podcast on the pod machine. Language is important, as we found out about inflation on Friday. I'm just poking fun, Leah, sorry. Have been listening since the midst of COVID, she says, which is when I started investing after the market rebound, sadly. Yeah. With a limited time I've had, which I have, I've stuck to ETFs rather than stock picking.

43:37My portfolio of ETFs is now up by 15%. That's awesome. So whilst I was drawn to the pod for the share investing discussions, which I still enjoy, I found I'm really more interested in the wider economic discussions. Well, hopefully you made it through Friday's marathon on tariffs. And I am partial to a good long rant too. please keep them up as if we need extra incentive. Count on it. You ready for a list, Ram? Yep. I want to know your top five or more books, not on investing, but on economics. The more esoteric, the better. Oh, God. You've asked Ram. You've seen him off. I want to get into the nitty gritty of global markets and money and the really deep stuff.

44:16I would also really like anything on tax policy if you know any good books on this. By the way, I also love listening to The Good Oil. Thank you. and have found more great stuff through that pod like Cameron Murray's podcast, Fresh Economic Thinking. Thanks very much from Leah. Leah, that is awesome. Thank you very much for your kind words. I'm glad you're enjoying it. Economics and investing is kind of the same thing. I mean, they're not, I said on Friday, you've got to separate them, but it's all part of the same kind of, what's the word? I'm trying to think of a very fancy word. I'll just say the whole box and dice.

44:48Melange, melange? I don't know what's going with that. It doesn't matter. Mate, books on economics. Gosh, you know, it should be a, look, it is often a pretty dry topic and it's taught in a pretty dry way. But I'm really big of the, I was trying to have this conversation with my son the other day. He was saying, well, it's so boring at school. I was like, actually, I believe you, bud. I'm sure it is taught. Get out of your son's teachers if they're listening. Oh, like we all, we've all had that teacher that has inspired us in an area that we just had no interest in. And when someone is passionate on something and interested in something, I don't care what it is.

45:30I love hearing people talk about their passion because it's contagious. And it might be something I've got personally no interest in. I mean, my degree is actually in microbiology. When I started the science degree, I didn't know where I was going to major, but the biology lecturer was just brilliant. Like it's just like, whoa, this is so interesting. Had it been that I just had a really good chemistry teacher, I probably would have gone down the chemistry route, you know. Right, exactly. So don't let a few terrible experiences at school or with some economics textbooks put you off. Economics couldn't be, like the more I've gotten into it, the more fascinating it is because it starts off with this supply and demand and this and that, but it really is the mechanism through which we coordinate our society and our civilisation.

46:18I can't think of any, it sounds hyperbolic, but I can't think of anything more grand, right? Like it's like this grand, massive human experiment that we're all living through. Instead of like, how do we, wait a second, how do we carve up the stuff? And how come some of these monkeys have more stuff than the other monkeys? And why is that? But how do we do it in a way that we would regard as fair and in a way that incentivizes us to continue to improve our lot and the lot of our fellow person? Like these are profound to me. Maybe I'm a bit nerdish, but I think like it's really profound. And it was something that I came to pretty late, to be honest with you.

46:59I came to the share market because I'll tell you, I'll be honest, I wanted to make money. It's lazy. I think as a young man, I thought, stuff working. I want to make money. Oh, I can buy shares and they can go up. All right. Woo-hoo. And then, you know, you get your fingers burnt and you go, oh, it's really hard. And then you go deeper and deeper and deeper and deeper. And I took a lot of things for granted. And it's really just more later in life where I came to economics and then started to question some economics stuff. So as you know, Scott, and as our listeners know, I've very much gone from the Keynesian tradition to the Austrian tradition, which I just think is, there's different philosophies here too, right?

47:33So when you say economics, well, what school? Is it the Chicago school? Is it the monetarist school? You know, like it's not physics, right? Like it's not like no one's going to – you can't go to the physics profession and say, listen, I've got to, you know, hear my laws of motion. It's like, well, you can, but no one's going to take you seriously. In economics, well, I probably argue that that is also something that's harder and harder to do from a first principal's perspective, but there are different takes on it. So then you have to say, well, which one? And I'm not going to be dogmatic on it and say forget all the other stuff.

48:04I would say read it all. And find out what you really resonate with. Because there is some, and it's not a black and white thing. There are some things that the Keynesians say that are actually perfectly sensible. And there's some things that the Austrians say that are insane. I enjoy all the meats of our economics, too. And I think there's lessons and insights to be gained from all of them. You know, probably the first book I read that really piqued my interest was Freakonomics way back in the day. Yes, yes, yes, yes. And it's a nice one because it's very soft. It's a popular book, but it just like it makes you question like, oh, yeah, it gives a rational economic explanation for why people do things.

48:44And it kind of, it shows you the so what, that's why a supply-demand curve might be something you might be interested in, right? Or, you know, this is why the cost of money is important. You know, there are things like that. A friend of mine put me on this very old book recently. It's written in the 40s. It's called Economics in One Lesson by Henry Hazlitt. You'll find it's free, the PDF. It's really short. It's like a pamphlet. I've heard of it. But it's an Austrian book. But I think it's really, really good. If you want to get really deep into the weeds, you can sort of get into Rothbard and Mises and Manger and all of these things.

49:24And YouTube gets a lot of grief, right, because there's a lot of nonsense on social media that's out there. But you'll find some really, really interesting old lectures and stuff out there as well. So some of the Thomas Sowell stuff is pretty interesting. I think he's got a good take, particularly in the early stuff, the foundational stuff he does on prices and why prices are important and how you need to think about prices. It's like, again, really, in one hand, really basic, obvious stuff, but then when you start to like question, not question it, but really understand that first principle stuff and then inductively reason your way through that, It leads to some really surprising outcomes, which I just think are fascinating.

50:08And don't get me, don't worry about like Isaac Newton was reportedly a real piece of work. He was not a pleasant person to be around, you know. But so what? It doesn't change the insight that he had. And so I think often I talk to them, I think, oh, but didn't they think there's like, yeah, that's probably a complete a-hole of a person. Like, but don't, you know, their thoughts is separate from the person. and so I avoided a lot of that stuff because of a lot of that stuff for a long time but I think there's some interesting stuff in there. You go, mate. I'm talking for two more. Well, I've had time to think while you've been talking, which is very, very helpful.

50:44So I've come up with five from me and I'm going to go from not the basics but I'm going to start with two I think really useful books to read. First is Gittin's Guide on Economics by Ross Gittins. Oh, yeah. Yeah, that's good. Newspaper journo. Hopefully you read his stuff. He's a must-read in The Herald, or I think he's probably in The Age as well. Please read Gittin's stuff. He's actually using our website too. I think it's non-paywalled, so sorry to the people at Nine Newspapers. But Gittin's got economics. I read it at high school going through studying economics, and it's an economics – I'll say it's not a textbook, but it's a textbook-style content in a really approachable way, and that's kind of what you want, right?

51:27Honestly, the best way to do it is to start with some textbooks if you really, really wanted to. But that's a hard slog, right? And depending on what you know or don't know, trying to pitch that at the right level, is it to grab a high school textbook, uni textbook? They're hard. Honestly, it's what's being taught. They're probably the best places to start for a really, really deep and thorough review. Not, by the way, complete, because as Ramsey, there's different schools of thought and some of it will be taught in unis and some won't. But Gittin's Guide to Economics is the first place I'd go.

51:52You mentioned YouTube, mate. The other thing I'm going to talk about is Ray Dalio has done a great video called How the Economic Machine Works. Highly recommend both of those as really nice introductory pieces that make a lot of sense. Principles is the other big book he's done. It's pretty deep, by the way, pretty dense. But the How to the Economist Show, it's a YouTube video, so you can kind of watch it in, I think, half an hour, 25 minutes. Really good. A couple of others. Why Nations Fail, I've just finished reading. Very, very, very good book. Talks a lot about the sorts of pressures, opportunities, risks in economics.

52:25not a technical book in terms of supply and demand. You won't see elasticity curves or laugh at curves or anything, that sort of stuff, but a book worth reading to understand the kind of broader position structure of economics. And then two new ones or newer ones, not new at all, a few years old now, but relatively new. I'm Massive on Behavioral Finance and Behavioral Economics is another version of the same thing. Nudge by Richard Thaler, Nobel Prize winning economist or winning the, what is it, the something-something prize in memory of Alfred Nobel. There's no official Nobel for economics, but economists like to pretend so.

53:01It's very much bank, I think it is. Anyway, Nudge is a really, really good book. It just explains how we make decisions. And so economics can be the structural stuff, you know, show me the supply and demand curve, show me the value of money, the volume of money. This is just tell me how people think and how they make decisions. And that is the economy at the end of the day, right? And there's overlay with other stuff. The last one for me is one I have never finished, but would recommend at least reading the first third of, which is Thomas Piketty's Capital in the 21st Century. Really interesting historical review of how economies have risen and fallen over the past 100 years.

53:33Not deeply historical. Why say the first third? It's stupid long and he spends a lot of time talking about individual data points, which is just mind-numbingly boring. So for everyone who said they've read it, I reckon about a third of those have actually bothered finishing it. I never did. I may or may not go back to it. I probably won't. even if it's not an audio book, it was even mind-numbing on audio. But the concepts in the first third of the book are really, really useful. The historical stuff is really interesting. So, yeah, none of those are particularly technical books, but if you want to kind of get your head around economics, they're four plus on a YouTube video that I'd recommend.

54:06I don't know what account I was up to, but it's helpful when you're talking because I can Google it. What was the name of that book? The one I was searching for was Free to Choose. It was written in 1980 by Milton Friedman. I just thought it was excellent. I guess I'm censoring some of your Austrian stuff here. He's more of a Chicago economist. He actually did a TV series in the 70s. He was in the 80s as well. But he's got some great YouTube interviews as well. That's true. If you've seen the one on the pencil, I just love it. I don't know. He just talks about a pencil. It's like how did this pencil come into being and talk about the coordination globally amongst people who don't know each other or care about each other to bring this thing into reality and how no one person could really ever make a pencil.

54:50I've actually seen YouTube videos since where someone has said, I'm going to make a pencil and it's an eight-month ordeal. Yeah, right. And it costs$48 ,000, right? Yeah. But it's a parable. Not really, it's a parable. Yeah, it's a story which shows you the brilliance really of the economic system and how it can bring something into existence through the coordination of things. And it's just, so yes, so Free to Choose is a really accessible book and it's, yeah, it's not Keynesian. It's not necessarily Austrian either. But anyway, as I say, read them all. Read them all and form your own opinion.

55:29Another one that I read years ago, and I have been desperate to try and find another copy of this because I don't think it was in print for long. It's by a Canadian philosopher, right? Right. And it's called Filthy Luca. Okay. Which is a French word for money, filthy money. and the subtitle is Economics for Those Who Hate Capitalism. I picked it up when I was a stinking hippie backpacker going through Southeast Asia. I found it in a second-hand bookshop and it just blew my mind. It started off with a Star Wars story. It's like how come there is no ads in Star Wars? You know, like how come people are not advertising their products?

56:04You know, it just leads you into it and it's like and it just explains things in a very, too often with academic books, because they jump straight into the deep end. And you're talking about Laffer curves and this and equations for that. And it's just like, it's just completely out of touch. These things just build it up from a basic intuition as like, ah, you know, it clicks. And then you can get into the deep stuff then if you want to. And then you'll come full circle and realize that all the deep stuff is rubbish anyway. So it's just like, it's like with investing, right? It's like all of the, you know, too many of the valuation calculation that is just like handy in a way, but really not practical and useless.

56:40So Filthy Luca is fantastic. It is by a guy called Joseph Heath. That's right. And it's not technically economics, although it very much is. There's a recent book from an author called Lynn Alden called Broken Money, which is just, it's got a bit of a Bitcoin section at the back. But stop reading if that doesn't float your boat. But read everything up until that point. Yeah. And it will, I think it'll blow your mind just quite. There's also a YouTube video on that as well by her. It's a good 25 minutes long. Well, the best, look, You can go watch an episode of, you know, The Housewives of Whatever tonight and, like, rot your brain a bit or you can spend half an hour watching that and become out a lot smarter.

57:18Nice. I like it. Let's go to one from Ivan who has a question or comment maybe. Hi, Pod Gurus. I enjoy your pod twice a week and I enjoy the banter. I listen on a free Android app known as Podcast Guru that is not supported by ads apart from those you read, so I can't follow any direct links to email your pod. Well, that's okay. Info at fool.com.au is the – I don't even put the links on the podcast descriptions even. I'm pretty sure we don't. I don't do it. I'm watch 12s, mate. I rock in, do the Krusty the Clown version, bum, bum, bum, bam, out the door. I love it. In reference to your thoughts on Rex, this is from a couple of weeks ago, says Ivan, I think you may have missed something.

57:52There are medical staff that work in metro hospitals that service country areas, and many see hundreds of patients as a FIFO, as in fly in, fly out, locum service. If Rex didn't exist, there's hundreds of patients would have to be transported to the metro hospitals. The cost of doing this could possibly be more than the cost of keeping Rex operating, possibly actually, because every one of those patients can be paid a refund for their travel expenses when coming more than 50Ks from the hospital. The money for this may come from a different bucket than the state-funded medical system, but it still comes from the taxpayer.

58:22So which scenario is more cost effective? Keep up the rants, Ivan. Great, great question. And Ivan, read some of these books that we just read out because that'll answer the question for you. So you've got to distinguish too between what's a point-in-time solution versus what's a sustainable longer-term solution. So like there's going to be a vacuum there, it's going to cause pain, it's going to be disjointed, and there's going to be all these other additional costs. And I take your point. It's a good point. But the longer that plays out, the more inefficient it becomes. So what you're saying here, I think I'm going to paraphrase you correctly, is that there is a legitimate demand for a regional airline.

59:04And I would say, yes, there is. And I would say, if that is true, someone will rise to meet that demand. And they'll do it because they'll make a buck out of it, right? And if they run it well, they'll do it in a viable sense. So Rex wasn't the first regional airline, right? It wasn't before. They came because they thought they could do it and they did it well successfully for a while and then they did some dumb stuff and they went out of business. And like as any business should if it's not meeting the – it's not satisfying the demands of its customers. Again, no one's evil here. No one's being nasty.

59:36It's just like you just – I don't want what you're selling. But the person isn't wrong. I'm going to sell you a rock and I'm going to paint it purple and I'm going to call it the page rock and I'm going to sell it for$1 ,000. You don't want it. Oh, that's unfair. the government should subsidise me because I'm trying to create a job here. And it's like, no, no one wants your stupid rock, Andrew. That's the reality of the situation. And so I would say if you let this thing collapse, and again, moral hazard is the key thing here. Go back to Friday's episode. I won't repeat everything here. You'll find that someone grows to fill the void and they will, particularly if there's no overt promise that no matter how it's dumb and reckless and greedy you are, you will be bailed out, you'll probably run it in a really prudent, judicious manner.

1:00:24Now, whatever cost there is for the consumer that is going to reflect the cost of delivering that service plus enough of a margin to make it worth the while to do it in the first place. Profit isn't evil, right? And if you think it's evil, then you should go out there and donate all of your time for free. Like obviously you need a reward to do something, not because you're a meanie, it's just because, well, I mean, just there's a million really wonderful charities out there that are desperate for people to donate their time. And if you want to do that, that is fantastic. But in terms of being viable and continuing to do it, these are the kinds that you need that kind of profit motive.

1:00:59So all I'm saying is you're right. There's a legitimate demand. Someone will grow to fill that demand. And if they do a good job, they will thrive and prosper and deservedly so. And if they don't, they'll fall by the wayside and someone else will come in. And that's what all of these books will sort of will tell you. And the great thing is it doesn't require some idiot in a suit in Canberra to wave a wand or to give a speech to make it happen. It'll happen because humans are really ingenious and ingenuity and have a huge amount of ingenuity. And that's the reason why I'm speaking to Scott through an LCD screen hundreds of miles away, you know, in my air-conditioned room.

1:01:36The air con's not on, but you know what I mean. I'm living a life that kings of age couldn't dream of because of these mechanisms that we're talking about. So it's just got to stop short because I'm sorry to rant on it a bit more, but it's too often these days people see a suffering and they are the very natural urge to say we should do something about it. It's just that often the doing something about it, again, there's no free lunch, right? You're going to take resources from somewhere else to do that. And overall, we may be worse off as a consequence. And any time there is tried to be an economy that is centrally controlled, that's why there are bread lines.

1:02:13That's why Cuba, North Korea, communist Russia, East Germany, like it's either the most huge coincidence in the world or it just doesn't work. And it doesn't work, right? Sorry, rant over. Well, I think you're mostly right. The only bit I'm going to add, mate, is the markets don't always solve for everything that are social or public goods that we otherwise want to have governments provide or support or subsidise. Strong agree with that. Absolutely. You can't be too ideological. Right. So where I actually agree with you entirely is we need to work out what we want to pay for as a public good and what we want the market to do.

1:02:50And to assume that we need a third airline, a regional airline, doing all things it's currently doing, just throw out some money until it's profitable, would be the mistake you're talking about, which is the moral hazard of Rex can now do anything it wants and lose as much money as it wants because the government's going to pay it. Now, not as much. That's too extreme. But you get the idea, right? What it might be is, for example, another regional airline would be able to service two-thirds of those airports profitably. Okay, so now there's about a third of people who miss out. Of those third, is it a chartered plane once a week rather than scheduled flights three times a week?

1:03:26Do we pay for those people to go to the local hospital because not subsidizing the two-thirds means the one-third can actually be provided appropriately or profitably or at less taxpayer cost? Yep. I think this is where we need to break down. The status quo impact is really strong and it's just human nature. It's not a whinge at you, Ivan, at all. It's literally just a, we kind of think, well, we either keep it or lose it. And that's fair, but that's a binary view. The question would be, and I don't even intend this by your question, mate. You're right, by the way, and I haven't done the numbers, so you may well be entirely right.

1:03:55Maybe it is cheaper to keep Rex going than not, but it might be cheaper, again, to find a third option, to find a better solution. If we had a situation where there are X thousand patients who live more than 50Ks from their local hospital, how would we best service them? And we might say, well, it turns out that we can have two-thirds of them go by plane currently the way it is because that wreck will die, but someone will replace those routes, not all of them, but most of them, and that will work. In those other places, here are the range of options we can come up with. And is that cheaper or more expensive than subsidising wrecks?

1:04:23It may be that you're right, Ivan, and it's cheaper to subsidise wrecks, in which case a smart government would say, okay, wrecks, here's a limited amount of money for these routes in these circumstances while these conditions exist, and we'll review it every 12 months. It might be that we can say, Rex, fail, Quantas will pick up some, Virgil will pick up some, or someone else will come and do the rest and we'll pay for these 15 flights once a week from there to your local regional areas. It might be cheaper to build a bloody new hospital for what it's worth and actually have better healthcare somewhere else.

1:04:50So you're not wrong to ask that question. It's absolutely what we'd hope our politicians are considering. Well, they are not an open question. They're not. Well, there is that. Obviously not, right? What's political is electoral, right? Let's be really honest. No one's going to let Rex fail before an election. But, yes, so, mate, you're 100 % right. Those are absolutely the considerations that a smart bureaucrat or politician would be considering. It's a proxy moron right there. Be kind. The solution is probably not either everything we've got now or nothing. There's hopefully some solutions somewhere in between.

1:05:22And to Ram's point, if you start with where is the best use of resources and you'd quickly come up with a solution that may be one or the other or might be somewhere in between and something better. So the other thing just to say on that too is that sometimes things can be unviable, often things can be unviable because of malinvestment, mismanagement and greed. So let's say Scott and I go in, Rex fails, we buy up the planes. By the way, we're probably buying them for pennies on the dollar, right? So we've got a much lower capital base and if we're smart, we'll probably make some money and deliver the service and everyone wins.

1:05:56But let's say that we're a little bit selfish, a little bit greedy and we don't make money. And the reason we don't make money is because we just, we siphon all the money out. Yeah, right. So, Scott, you're on$10 million a year. I'm on$10 million a year. And then we turn around, shout out to the universities, we turn around and we go, we're not making any money. It's really unfair. Someone needs to bail us out. It's like, well, in a real world, it would be different if it's sort of like it's all hand-to-mouth kind of stuff. but it's because the vice chancellor is being paid$14 million or whatever stupid figure these guys are.

1:06:33I love the university system. I think it's all important but it's sort of like when you've got a balance sheet the size of Christmas and you're paying these egregious salaries and then you turn around and say, oh, but we lost money in the last fiscal period, it's like we'll maybe cut back on some of those costs as well. And you look at that when you see the corporate welfare that goes around, there's a difference between corporate welfare that is needed because of some extraneous event that has just hobbled you and that no reasonable person could have predicted or anticipated and, you know, it's such a vital service that we feel it important to do it.

1:07:07If it's just because, no, you just ran it really badly, you refused to reinvest in the business, you extracted all of the capital to you and your crony mates, you set up third-party related businesses and you siphoned all the money, this happens all the time. And then you turn around and go, I need a handout. I'll go look at the jobs that are going to go. It's sort of like I feel as though, and again, moral hazard, that's what you reward and incentivise whenever you offer to bail out people. You need that sort of Damocles over your head to a degree to sort of force you to do the right thing. So you've just got to be super careful when you say we should do this because it's a question of, okay, are they losing money?

1:07:50Why? Yeah. They're very different answers and some of them are sensible and some of them aren't. Yeah, agreed. By the way, Google what a vice chancellor is paid in Australian universities. You might be interested. Only half what a CEO of straw man gets. I understand. Thank you. Only because we provide such incredible value to our customers, Scott. You see, there's a difference. And there is a lifestyle we should become accustomed to, to be fair. If you knew my lifestyle. And we were just talking about mowing our own lawns before we recorded this. so that tells you exactly where we both are. As he looks out the window, it is beating down Nis and Tito, right?

1:08:27All right. Mate, that's been an absolutely fun chat. I've already said it once before, but if you want to get in touch with us, email us, info, I-N-F-O, at fool.com.au. Let our wonderful member services staff know it is a mailbag question and they will send it my way. You can follow us on all of the socials. I believe, Ram, you were at a Bitcoin conference last weekend and you had some people come up and say g'day, some people who followed us on Twitter or listened to the podcast. It was so great, actually, because it's always nice to meet people in person. So, yeah, special shout-out if I got the chance to meet you.

1:08:58There you go. So you know how to get us, but in case you don't, at TMFScottP on Twitter and Insta and Blue Sky or Scott Phillips Money on Facebook. Get Ram at Sage underscore Simeon exclusively on Twitter or at Strawman Invest. Until next Friday, let's hope there's no more announcements out of the US on tariffs and full on. Don't hold your breath. 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.

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