Mailbag: incl. Do you eat your own cooking? April 14, 2024

24:44And our valuations could differ significantly. And where we've really not changed too much in terms of our assumptions. So you realise that. And we tend to think the more work I do, the bigger I build out my model, the more variables I put into it. So, yeah, we're all trying to get to earnings growth here, but I'm going to think about sales and margins and growth in R &D and dividends, and I'm going to layer it all in. I actually think it's a very worthwhile exercise for the, as you say, for forcing you to think about these things. But you see it a lot in the professional class where they have such beautiful models that they forget that it is a model.

25:22It's not reality, right? And they forget the sensitivity to it. So I, I've really evolved to very simplistic valuation. And I say evolved, I've got to go backwards. And I think that's the thing to be aware of as you go into this, definitely get the grounding, do all the hard work, know the models and that. But then once you've come through all of that process, you can come out the other side and go, well, really this is the thing that kind of matters. And if this is broadly right, then I only need to, you know, I only really need to settle on some vague notion of roughly what growth is like, how does that look in the content?

25:55And, you know, and it's, what am I, there could be some small cap now that's at five cents, right? And it might be that it's got this big potential. And if it's right, it could be two, three dollars a share in five years time. If it's wrong, it could be one cent or two cents a share. So if that's the truth, then, well, that's the range I'm dealing with. You know, if I buy it at 10 cents or eight cents or six cents or 12 cents, I mean, you don't need that high. You're going to do really well if it does half of what you think it's going to do. And equally, you're still going to lose, you know, whether you're losing 80 % or 63%, it's not the outcome that you kind of want.

26:30That's a really good point. And I know the danger is not so much in over-egging the pudding and, you know, expecting these really great things and they don't come to fruition. But it can be the other thing where it's just like you're too conservative in that. And I have not invested in some of my favorite companies for forever. because I've looked at it and go, it needs to be cheaper. I demand this. I am Andrew Page. I demand this price and I shall not grant you my capital. And I was like, because it's too expensive because I think it. And it's like, well, the market's never given me that chance again.

27:08And you watch there from the sidelines waiting for you to get to a value that you don't. So you just sometimes, what are we going to say? You put a pin on it. It matters, but don't get too carried away with your own mathematical ability. and generally right as opposed to specifically wrong. Very nice. Trent sent us a question and said, G'day, boys. I really enjoyed listening to the pod machine. So well done on that front. Again, Ram. As a bit of a snapshot and a couple of questions. Sorry, Ram, we do own a few properties, but we only started investing in the share market a few months before the crash in 2020.

27:41What a riot, he says. And continued investing and dollar cost averaging straight through that period. We own about 20 companies. Most of your everlasting income recommendations, Scott. Thank you. as I subscribe and a lot of recommendations from ShareAdvisor. Jeez, you want to discount on your membership this, right, Trent? He says, it's a low six-figure portfolio outside super, which we've done to build our family income quicker than inflation erodes it and hopefully bridge that gap between late 50s and retirement if we want to slow down a little. My wife and I are currently in our early to mid 40s.

28:13At the moment, we put money aside and dollar cost average buying every few weeks and all dividends go straight back into building the portfolio and will do for another 10 to 15 years. Well done. We also have a self-managed super fund that has just paid off a large landholding that gets leased out and creates a small income. Nice. He said, it's worth eight to 900 ,000, but we need to start building a share portfolio within this self-managed super. I wasn't sure whether to mirror our current portfolio or maybe Vanguard ETFs, maybe NASDAQ 100, starting from scratch within our SMSF. I know you can't give personal advice, but just looking for a general direction at our age.

28:52He's got a second question. We'll stop there for a sec. Yeah. So this is kind of the super versus personal portfolio and whether there should be a different or similar strategy across those two different structures. What do you recommend? Is there a case for saying your best ideas are your best ideas or is there a case for saying, well, it's super, you've got different timeframes, different restrictions, different tax treatments, maybe you should do something a bit different? I'm in the camp of your best idea is your best idea. Super, the only difference with super is you can't touch it and you get tax advantages.

29:24Yeah. And so you might have a bias towards things that are longer term in nature or things that for whatever reason you feel as though you want to move in and out, which would probably be counterproductive, but if you wanted to do that, you're not going to suffer the tax consequences along the way. But, yeah, I'm in the process. I think we discussed the other day of setting up a self-managed super fund. I want to much more align that with what's outside of super. And the reason for me setting one up is because I feel as though I'm too restricted in what I can do at this point in time. I don't want different for the sake of different.

29:59I want the same. I just, well, it's a different pot of money. I can't touch it now. My best ideas I'm already invested in over here. Well, just why aren't I doing it there? And I want to do it there and then just, you know, I'll take the benefits of the structure. But the best idea is the best idea. Yeah, nicely put. By the way, the super conversation is next week. Oh, you pre-recorded. So this is who I want to do with. You missed an episode. You didn't. We're just recording out of sequence. I'm going away next week. It's all a blur. When we record that way, we always try and do the current episodes, if you like, late on the usual schedule.

30:30We kind of pre-record the ones that are coming next week. So yesterday we sat down and talked about next week's episodes. So you'll hear a bit about, there's a bit of a tease. Should you or shouldn't you have an SMSF? What should you consider? Andrew and I go into that in some surprising different ways. It was. It was. I think I agree with you, Ram. With the only rider that the personal portfolio has been set up correctly. And I know that sounds obvious. I don't mean that the slightest way to have a dig at Trent. But it's one of those, you know, I've got a portfolio full of speccy stocks. I'm going to do the same with my super because I basically have my best idea.

31:03That's kind of true if those speccy stocks are genuinely going to turn out for you. But, you know, just have a think. Some people maybe – and I don't love this at all. but some people say, well, I'll put my proper investing in my super and I'll have my play money be my personal account. I wouldn't do that either but some people do and if that's your case, we're not saying take a bad strategy and do it in both places. Not that you are, Trent. I'm just saying that the only time it would be different for mine, I'm with Ram entirely. Your best idea is your best idea. My super fund, my personal account are I think almost entirely overlapping.

31:33There might be one company in each that isn't in the other for just different reasons, largely due to time I bought them actually when I had cash. I wouldn't try and make it the same for the sake of it, by the way. I wouldn't go out of your way to say, well, there's 30 % of that in that account and 20 % in the other or hopefully 2 % or 3 % or I've got to buy them both at the same time or worry about you bought one earlier so the price has gone up. You can mess with your head a little bit that way. But your best idea is if you've got cash, more often than not, I would suspect you should be buying the same company at the same time in both accounts.

32:02If you've got cash in both accounts, it's your best idea. And it's not any extra work too because you're already keeping track of the portfolio. So that's not, I mean, there would be an argument to say, and we often throw this as a variable in there, like how much work are you prepared to do? And there's no foul, no harm, no shame. And if you just say, I couldn't be bothered. Okay, great, do an index and passively invest and life will be good. But you're doing the work anyway, right? And presumably you're not doing the Vanguard ETF outside of super because you feel as though you're going to get a better result there relative to the effort you need to put in to do it.

32:35and hey, you and me are doing the same thing, right? So that's our contention. And if that's our contention, then why not over there? We should do it. Yeah, exactly. No extra work. I mean, look, you know, again, think about personality. So that's the rational answer, Trent. If yourself and your wife, you're saying, well, actually, we don't want Super to be as volatile as our portfolio. We feel better if we know that it's invested differently. Or, you know, if you have different psychological approaches to Super that suit you, then by the way, do it differently if you want to. You know, if you're of a view, look, I don't mind my personal account being volatile but if my super was that volatile i'd worry about retirement and i wouldn't sleep at night then yeah just do some do some things differently if that's kind of what you want to do uh but no need to from an investing perspective in our view yeah his second question mate he says our kid our three kids six eight and eleven all have share portfolios we are trying to build good habits and have a 20 20 60 approach 20 save for a rainy day 20 invest and 60 do whatever you want with.

33:32They've all asked for chores that they get a small income from and to talk to them about why we invest, we're keeping it very simple. We've only invested in ETFs, the Vanguard International ETF and the NASDAQ 100 ETF for them but would you recommend further diversification or maybe some growth stocks? Our 11-year-old said 11K, nice, in their share portfolio. Again, just looking for some general advice for the kids. I'll drop you in first, Nassau Ram, only because your So 20, 20, 60, Trent, is almost exactly the same as I'm doing with my young bloke. We're doing – this is not a – I feel like I'm going to say yours is wrong and mine is better, but we actually do 10, 10, 20, 60, which sounds more complex.

34:10So 60 % spend, 20 % save for something big. We don't sort of say rainy day, but if you're saving up for something that you can't use, you might get, I don't know,$10 for this or$20 for that or some money from grandma or something. If you want to buy something that costs$100, you've got to save up for it. So, yep, 60 % knock yourself out, do whatever. 20 % save for something bigger. And then we've split the last 20, 10 and 10. We do 10 % investing and 10 % giving. And that's just our way of just trying to kind of make the point. He doesn't love the investing or the giving bit, by the way, at the moment because it's just difficult and hard.

34:42Because, you know, you can't spend it. That's the lesson we're trying to teach. That's the natural instinct. Of course it is, yeah. Of course, that's the normal instinct. If you're not upset by that. That's right. You're probably sociopathic, yeah. Yeah, I mean, it is a very... I found with my, sorry, I interrupted you, mate. I'll let you finish first. Oh, well, okay. So very quickly, so yeah, we do it slightly different, but same kind of idea, mate, exactly as yours. We are doing, so investing goes two ways. We talked about this a little bit in the past. If you want to maximize their income, make it easy for them, get them on a train, they can follow through their whole lives, ETFs are great because it's like, you know, if you're a six-year-old doing this, and they do it for the next 60 years with 10 % or 20 % of their money, then it won't matter what they invest in in a sense of you might be able to earn a little bit more buying this share or that share, but you keep doing that.

35:34You're going to, I assume, do very, very well. You don't have any Australian exposure, by the way, so that might be something you might want to think about for them. International, excluding Australia, is the international ETF and the NASDAQ. So they don't have to have Australian stocks, but if you wanted to, you could. Have an Australian index being added to the mix somewhere. In terms of adding individual stocks, So there's two thoughts, as I said. Firstly, just compounding, compounding, compounding, compound. They won't need anything more than that. If you develop these habits for them now, putting the money away and time are the two things that are going to massively outperform any stock picking they do.

36:09On the flip side, they can outperform over time if they do get good at stock picking. I wouldn't discourage that. Also, too, if you're trying to kind of get them engaged with it, owning a bit of an ETF. ETF is hard to explain to a 40-year-old, let alone a six-year-old. If you own shares in, I'll just pick some numbers. I own shares in Disney, so I'll, you know. Disney or Woolies or Telstra or places you - Something visible. Yeah, places you use, you shop. Microsoft, almost certainly. If they're playing Minecraft, it's owned by Microsoft. Might be Nintendo if you've got a Nintendo games console.

36:41Yeah, the stuff they can see and the stuff that they use. My old kid went through a Smiggle stage for a while, about 11 or 12. You know, that's just, you know, those things, so Premier Investments owns Smiggle. If they're things they can kind of, not just, as I said, not just see but actually use themselves, it helps them think about a couple of things. Firstly, they're more interested because they see it's physical. Secondly, it helps them think about businesses as being an owner. There's something fun about it. We own part of that. I say to my young bloke all the time when we get something from Amazon or he's got a fraction of a Woolies share in his little account.

37:16You know, and so I said, you know, we made a little bit of money when we shopped at Woolies. So they kind of get the idea of shopping. They're also thinking like business owners. Why do they do that? What's in it for them? A different way of thinking about just rather than being a consumer, think about being a business owner. So there's really good value in owning individual stocks for that. Partly, as I said, if you want to outperform, partly just to kind of make investing more real. ETFs can be a bit vague. And telling a six-year-old that by the time they get$66 million, they just can't really get their head around$1 million all being 60.

37:46So something just kind of takes them on that journey. over time. I think my young bloke's Amazon shares are up like 77 % since we, boy, he's got a tiny number of them, right? But he gets a kick out of that because he shops at Amazon and they're up and that's all positive. So that's my thought. He's got more money. He's got more money. Yeah, he gets it. He wants to take it out, by the way. I bet he does. Can I have it now? No, you can't have it now. Yeah. I mean, but that's the point. You can, I could take every kid under 10 and put them around the clock in my education camp of, you know, why delayed gratification matters, the power of time, it will be absolutely for naught.

38:25Some things you just have to experience to learn the lesson. Like you don't touch your hand on the stove more than once kind of thing. And I've found this with my kids as well. It's just you can preach all day long, right? And I don't care. I want that. They don't have the frontal lobe. It's just the human condition. It's not even - It's all of us. They can't do it. Yeah, that's true. That's true. Now or later? Now, always now. But when you sort of have the experience, and this is the thing that they'll notice, whether it's ETFs or direct shares, is like, yeah, one day, and you can't rush it. You can't force open the petals of a flower, as I like to say.

39:03It'll happen in due course when it needs to happen. And when it does happen, you get that, aha, that's really interesting. It's like, now do you see? Yeah, now I see. And no amount of theory and preparation and preaching is ever going to prepare you for that. And then you'll find that it can be very addicting. You know, it's like, huh, I want to do more of that, please. Can I take a dollar and turn it into more dollars without actually, you mean, what do I have to do? Well, you have to wait. Do I have to do any work? No, you just have to wait. Like, okay, that becomes a pretty good deal. And when the penny starts to drop and that you can make money by waiting is super, super, super powerful.

39:40I think it's just, even if you take investing out of the equation and you just think of it in terms of money. So again, my kids just useless, right? And money until, until we made it more about you can buy whatever you like, no rules, no rules whatsoever. But this is the money that you're going to get through, through doing a few jobs. And then, and then you start doing that and they get some money and they go out and they spend it. And then they see something else that was like, well, you have to work for it and earn more. and welcome to the real world, my friend. Welcome to the party. This is where we're all doing this.

40:14And again, that's a lesson that you can't teach. It's a lesson that you can only show. And then they realize that, well, I do want the bubble gum, but if I don't have the bubble gum and I don't have the whatever, maybe I can then get the earphones that I'm after or this or that. And they've done that a few times. And then you start to – they really get that opportunity cost, which for me is just one of the most fundamental concepts in all of money and investing in life. Everything is opportunity costs, right? And it's sort of like that, I just think you have to expose them to it in a little bit of a brutal way where it's kind of like, I won't stop you necessarily in spending that, but I will remind you that that could have been a different path.

40:58Maybe this is just my kids because I just know that the preaching doesn't work for them. but they are, and you can't rush it again, but as they get older, so our older one now really gets it and he was useless for ages and the little one's kind of just getting that. But again, it's because they've faced the consequence of their decisions. God, I sound like a bad parent, like a really harsh parent, like you will learn through bitter experience how cruel this world is. That's right, that's right. Daddy didn't become a peasant by not trying hard, kids. You know, so I mean, look, we spoil them stupidly at the same time, But I think there are, there are, there, I guess I come from the school of thought where it's sort of like you, you, you need to let your children experience consequence to some degree, because that's the only way that that's how I learned.

41:45My mom and dad told me plenty of stuff, but I thought, yeah, right, whatever. And only later on do you realize that they're right. Yeah, right. And you get, again, just because eventually you learn the consequence of your actions and you think that actually this is a path down here, there's a path down there. I can see exactly what's going to happen because I've gone through previous paths like that and I'll just make a better decision. Whereas this is why trust fund babies and those that are born to the ultra, they have no clue in why generational wealth is always lost and why they're always prats, frankly, because, you know, it's that old school, you don't know the value of a dollar and it's like, no, you don't.

42:23And, and it is, it is something that I think, even if I won Powerball next week, I, I would, you know, my kids would have to, uh, I'm sure they'd get some toys, whatever, but they, they, they would, they, I would still want them to get a job when they're old enough. I would still want them to, to have to face that dilemma that we all face when we go shopping is like, well, I do want that, but I also want this, or do I want 10 times more than this in 10 years' time. Like, you know, you start running that analysis and it just, yeah, anyway, long rant over. Can I quickly tangent and then we'll finish up Trent's question and ask another one.

42:58I had, sorry, I was telling you before you recorded, I had some internet technicians at my house. I'm pretty sure I'm putting their kids through school. Got it fixed, which is all wonderful. And you know what's great? This is so incredibly nerdy. So I am a massive fan, no one will be surprised, of the Van Dyke Index chart. And every year I write an article for our readers and members. And last year I think it was called Happy Index Chart Day to those who celebrate kind of idea, which is just kind of fun. And I love doing it because it's just so incredibly powerful. Anyway, as a thank you, Vanguard sent me a framed Vanguard Index Chart poster.

43:31Did they? Yeah. And God love my wife, genuinely. She said, let's put it up in the house near where Ayumbo has his toys so he'll see it all the time, which is really cool of her. That is cool. So anyway, that's up on the wall. The techies come to fix the internet today. And then we're hanging around. The guy's like, is that chart serious? I was like, yeah. He said, so, and it shows the, this is the 2022 version. So it shows the US market was up from 10 to 180 grand. Australia was 10 to 130, something like that. It's like, so 10 grand all I had to do was wait 30 years. And it was like 180 grand.

44:06I was like, yeah. It's like 80 times my money. It's like, yeah. And it was just a really cool kind of, you know, There was two guys there. One was a very young, much younger bloke. Other guy was younger than us, not much. And just having that conversation, it was one of those great moments of like, look at this. And you see the penny drop. He's like, well, so maybe I should buy some shares then. I'm like, well, I can't give you advice, but you can see what's here. So what did you have to do to get that? Nothing. You had to wait. Right? Yeah, did not consume. Exactly, exactly. Back then, you had to delay that gratification and you had to wait.

44:38So those teachable moments happen at any point in life, and I guess that was my – it was a really, really, really cool example. I kind of myself, you know, I love it when people kind of – you almost physically saw the penny drop. It was just really cool. It was nothing other than a picture tells a thousand words. That's the value. The only downside with that is not that particular example but the best advertisement for investing are bull markets, right? Yes. Because you notice it. Yes. But it's also unfortunate because it sets false expectation that it's always going to be like this. and when you look backwards on the chart, you see the wobbles and the crashes, but they just don't look that bad in hindsight, you know, and you're not really braced for it.

45:19So unfortunately you do get that buying at the worst time, selling at the worst time kind of phenomena, even though it's kind of important that people notice that, yeah, this is what happens. But I think I'm very quick to follow up with, yeah, but what that chart doesn't show you is a lot of wiggles and drawdowns along the way. But it's kind of also the point. This is like, well, that's why the return is better. Exactly. Yeah, it's both. So don't not be excited. You're noticing what you need to notice, but just also understand that this isn't a cost. It isn't a free lunch, so to speak. There is a cost that you must bear, not a financial cost.

45:57In fact, the financial return is positive, but it does place a cost on your soul. Correct. And not everyone's prepared to pay that cost. That's what I said to him. I said, look, mate, you know, plenty of people do it because they like the chart, but look at these. I did say, look at some of these big falls. I said, if you're going to do it, you have to know that you know that you're not going to sell out and freak out when this happens because the worst of not investing is investing, then losing money, then selling everything, never investing again. You literally burnt money in the fireplace of life and walked away.

46:24So just be mindful. Exactly as you said, those big falls, look at the COVID crash. You hardly notice it despite how big it was at the time. So it's both those things. It's absolutely a reason to remember to stay invested when it happens, but you also don't want to understate how bad it's going to feel when it happens because it looks little on a 30-year graph. It looks really, really, really, really big in the month and a half or so that that took to unfold. Yeah. But look, just the back of the question, I just think it's like, I'll make the comment again. It's like so many questions we get. They're all so right.

46:53Like we get to the point where we're really just discussing the finer points here. Was it Trent who wrote into us? But like brilliant. I've got zero criticisms on what you're doing. So you can fine-tune it. You can find what works right for you. but I'm the last person who's going to say, nah, you need to go back to the drawing board. You're not even... You're so... Yeah, you're there. I think your kids will be very grateful for what you've done. You're doing the job. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

47:26Speaking of things we haven't talked about or have talked about before, Ben sent us an email to take me to task. Hi, boys, he says, I've been an avid listener of your podcast since day one. And I've recommended it to many mates who share my enthusiasm for your insightful discussions, bracket rants. Which is all lovely. I think, oh, that's really nice. Then he's going to say I'm disappointed, which always makes me sad. So I hope you're still going to stick with this, Ben. But he says, after listening to a recent episode, I felt compelled to reach out for the first time. I wanted to address Scott's comments about the Yimby movement.

47:58Yimby being yes in my backyard as an opposition to the not in my backyard or the NIMBY movement. Scott mentioned some reservations, Ben goes on. which surprised me given his past alignment with similar ideas. Before delving further, I should disclose I'm a member of Sydney YIMBY, which is an organisation, so my perspective may reflect a certain bias. So firstly, thank you for disclosing that, Ben. Super, super responsible and gold standard stuff. But also we all bring our own biases, so that's okay. It's a bias if you're in YIMBY because you're in YIMBY because it's a bias, that's different. If you've objectively decided to join an organisation like that because you believe they're right, is it a bias?

48:36kind of it's a pre-decision or preconception but it's not necessarily a bias in the same way you shouldn't feel too bad about that Ben says I believe the crux of the issue is a lack of awareness about the legal barriers to medium density housing in many parts of Australia enforced by local council zoning regulations for example in Sydney's inner west council 43 percent is designated as heritage conservation area severely limiting modifications to existing dwellings and inflating housing prices. The INB movement has been advocates for allowing medium density housing in suitable areas near public transport and amenities.

49:13The issue is complex, but I believe it's solvable. The New South Wales government is taking steps to improve building regulations and is currently working up zoning areas near public transport hubs to address supply constraints. Successful upzoning initiatives like those in New Zealand have shown promise in both in moderating housing costs and increasing affordability. Ultimately, I believe our goals are aligned to promote affordable, sustainable and liveable homes for all Australians. I hope this clarifies what the IMB movement is trying to achieve. Cheers, Ben. That's a very, very thoughtful and well put argument.

49:48I'll just throw it to you first, mate. Any thoughts, comments, suggestions, ideas? Yeah. Yeah. Look, I'm not too close to the specific movements themselves. I actually, I'm going to embarrass myself here. I thought the NIMBY-YIMBY thing was more of a general description of a certain stance as opposed to more organised movement. So NIMBY wasn't, but YIMBY have kind of made themselves in a movement to kind of combat what they say is the NIMBYism that's doing bad things. Oh, okay. So the YIMBY groups have kind of sprung up around the country. Okay, cool. I mean, they've got a point, right? I mean, this is like, both sides have a point.

50:23Like, I do not want to see beautiful old houses all torn down and replaced with 40-foot Meriton skyscraper. I shouldn't mention brands. You know, skyscrapers probably aren't built that well and just going to be, you know, future slums. But at the same time, it's like, yeah, we can't all expect quarter-acre blocks in the west of Sydney. You know, that might be a little bit naive. I know my brother did some renovations a few years back in an area and they brought in the heritage laws just recently. So virtually every house on the street had been just McMansionized and just disgusting, right? But they had to keep some like semblance of their original one, which was, and it wasn't a special house.

51:04It wasn't there, no significance. It's just that before and after the fact, and it's kind of like a little bit too heavy handed on that. Like the horse had bolted and it's like, really? We have to? And nothing else is done. And actually, anyway, it's sort of, you see this come up again and again, or it's just like there's a middle path here. So I'm glad that there are two sides here sort of arguing the toss because probably both are wrong in the extreme. That's right. You know? Yeah. You get better results when you take a bit from everything and kind of, you know, but for those who are prepared to understand and accept different ideas or build on their own ideas, that's, that's where progress happens.

51:37Right. Yep. Absolutely. I mean, I do think councils are often too much in the pocket of developers. It seems to be that the debate is ultra high density or three bedroom houses. And that's the debate. And I'm like, well, can we have a set of, there was, there was a couple of examples where I used to live, I was in the inner West and you know, they're not the exception to the rule, but there are some lovely little townhouse estates. It might be six sort of houses, three bedroom sort of size thing, two story, you know, not huge, but it wasn't just a massive block of two bedroom units. And people had garages and stuff.

52:10And that's a middle path, again, where you don't have to go up into the sky and put massive extra stress onto the roads and the resources and stuff. But it's certainly where once there was like two families living, now you've got five times that amount, right? and there's a good argument, I think, for just sort of recognizing the realities of the situation and needing to address it and we don't have to like go to one extreme to solve it. But I don't know. You know what I'm saying? Does that make sense? Yeah, totally makes sense. It's so vague though. It's like an aspirational statement from me.

52:48I've got no specific solutions here. This was so hard though, right? But I think – so, Ben, I've been pretty clear, man. I've also been pretty clear on Twitter. So if you want to jump on there, you may not want to if you don't love what I'm talking about. You know what strikes me is I have no issue with medium and high density, frankly, if that's what the people living in the area want and if that's what the people looking for housing want. My view is I guess a bit collectivist in nature, which is that I think I'm a member, I live in my house, but I'm a member of my community, whether that's street, suburb, region, whatever.

53:28And I think my personal amenity and hopefully the amenity of all those people who live around me is kind of commingled in terms of the decisions that we all make about what we want our areas to look like and be like. And so I don't think that's unreasonable. I think there's a reasonable degree of absolute ownership of your own home and kind of collective ownership or collective responsibility for the broader environment. And that includes everything from the look and feel of streetscapes to rubbish. There is some idea of actually community is a good thing. And I think there's some value in recognising and appreciating what a community wants from their community.

54:04Now, the challenge I guess I have is a couplefold. I feel like Yimby is a bit of an ambulance to the bottom of the hill rather than a fence at the top, which is, well, bugger, look how bad things are and they're kind of getting worse. We really need to find a way to fix this as opposed to, hey, let's address some of the core issues that are causing this to need to be an issue, right? So why are we tearing down potentially heritage listed whether they're deserved or not and putting up medium density? If it's because someone wants a townhouse and you want to build a townhouse and they want to live in the townhouse and the townhouse is nice in that area, then great.

54:40We should absolutely, I'm not against medium density adding the slightest. If that's what people genuinely want, free of this is all I can afford or this is the only place I can live or whatever else. If they genuinely want that, then great. Let's do more of it and let's give people the opportunity to do that. I am not a big, on heritage grounds, I really don't have that much of an issue other than to Ram's point, eyesores aren't good for anybody, but I don't really care as much about that. Cameron Cusher is, I think he works for Seek, I don't know, maybe he doesn't, I shouldn't, anyway, on Twitter.

55:11He tweeted this, this is kind of, kind of encapsulates, you know, sometimes people twist, like oh i wish i'd done wish i'd said that he said quote it's an odd one that when we when the world is progressing we expect young people some willingly some not to live in higher density smaller and worse quality dwellings than their parents and that's kind of my starting point you know at a at a national state regional community level i'm kind of like you know what if this was if we were part of a cohesive community and one of our members of community said look i'd really like a house that's like this and we say well you can't have that now we don't want a 10 bedroom mansion no one has a 10 bedroom mansion but they say look i'd like a house with a backyard please and our answer is you can't because we have engineered a society continue to engineer a society in which that choice can't be made because of whether it's transport or population or infrastructure or whatever reasons you may not have that you may only have or you can afford all i'm going to provide um within some distance of wherever you want to be is a two bedroom shoe box built by a company we won't talk about might start with them and run with eriton uh the uh you know that's kind of at a really really basic starting point if we are making policy decisions that that force those choices on people because that's all they can afford that's my issue or when we say you know would medium density housing make housing more affordable i guess in the sense that it's more affordable to buy a two-bedroom unit than a three-bedroom house so yeah more of those so it's more affordable so we fixed it uh you don't really fix it you just make them choose uh by either directly or indirectly that option because that's all they can choose now again plenty of people would say well that's better than the fact i can't afford a house at all right now and i agree with that so let's not hold them out of that sort of space but my argument is a starting point of like well if my kids your kids would like a certain uh you know degree of amenity in their in their dwellings we have the have every possibility option to to do that uh and so i'm not a NIMBY or a YIMBY, I'm a, let's actually work out what country we want to live in and what we want it to look like and feel like and be like and what opportunities.

57:13And we talk about policy stuff all the time. This is just another one of those, which is how would you set up, let's pick Sydney because you're in the inner West, where I was. I used to live there, not the inner West, but I did actually for a while. If the reality is that to live within X distance of the CBD or to have, to be able to afford a house at all or dwelling at all, I've got to have a two-bedroom because that's all that's available to me and all I can afford because of pricing pressures and development costs and population growth and everything else. I don't know. I feel like when you start from that position rather starting from, well, maybe we could do some other things.

57:49I find, Ben, I don't mean this critically of you or the movement at all generally, but I think if you're going to try and address these issues, what I struggle with is the acceptance of the inputs to the problem being either unresolvable or no effort putting into resolving them. There is a pragmatism to that, and I appreciate the pragmatism of if we're going to have this many people, we should find the best way to house them. I think that's perfectly fine. I struggle with a starting point which says, I will assume these things are unchangeable, but I think these things are changeable, so I'll change these things.

58:20If I said fix the housing crisis and your answer is YIMBY, I don't think that takes full account of all of the inputs, I suppose, to the issue. So that's why I have an issue with the Yimbyism as a broadest concept, not with individuals at all or people trying to make a genuine improvement. It's just that starting point of people want to live there, great. Let's build a house they want to live in or dwellings, homes, units, townhouses they want to live in. Great. I think it's awesome and we should do that. If we cannot meaningfully impact the humanity of people who already live there because why should my desire or need to live in one place impact yours if you already live there?

58:56I don't know. I don't reckon I should be putting that on you. I've got no dog in the fight, by the way. I live in regional New South Wales. There is no risk of me being yimbyed or nimbyed here. So it's not going to affect me at all. Personally, I've got no dog in the fight. But nationally, at a national level, and for, frankly, my kids and other people's kids, I don't think, as Cameron says, that the phrase, you know, we expect people, some willingly, some not, to live in higher density, smaller, and worse quality dwellings than their parents. It just strikes me as a societal failing if the best we can offer them is, well, here's something we made for you from knocking down an old place of putting up two new ones that are smaller.

59:30I'm not sure that's a win societally, I suppose. Does that make sense, Ram? Yeah, it does. I mean, again, I'm not close enough to the movement to know, but I suspect the retort there would be, well, it's not a silver bullet, but enabling more flexibility in planning and approvals will move the dial, right? Like I'd have sympathy with that approach, in fact. You've got to strike a balance because I wouldn't want to buy a house in a nice levy suburb and then next day wake up with a massive tower above me. It was like, well, no one told me this. So I think usually what's best in, and this is really what councils, government should be doing here is, and businesses all the time.

1:00:08It's like, well, whatever you're going to do, do it. But just be, just, we want certainty more than anything else. Yeah, exactly. So I think that once you've got certain more clear parameters on what things are likely to be like, and everyone can work. I think if, by the way, if your aspiration is to live in Glebe or somewhere, if you're lucky enough to afford it now, coming in fresh. And, you know, some of these kinds of places. I don't know if you can expect, you know, a five-acre lot with horses running around. Like, you know, just take a stupid example here. You kind of like you're signing up to higher density housing.

1:00:43Yeah, totally. And if it gets slightly more dense but that helps in aggregate sort of, if it happens in a lot of places sort of sort of help solve the issue, then yeah. And I think it's anecdotally, and that may be the wrong way to approach it, but I know that when we've been looking around, that's really the choice you've got. You've got to really pay up and get the three-bedroom brick house or you get the unit. There's very little option in between. And so I think with Yimby sort of saying, well, come on, let's be a little bit more relaxed on things. Let's understand that a compromise is required.

1:01:15Let's understand that it's not a cure-all, but it does help shift things, at least move some things in. It helps address the problem. But I've got sympathy for that, I think. Yeah, I like that. That's reasonable. Hey, let's finish with a question from an anonymous listener. He says, hello, Scott. And the man who runs that premium private investing club, I can't remember. I think you're thinking about Andrew Rampage, anonymous. I am just wondering, he says, why people who have equity in their primary place of residence don't take a loan out against the house but buy broad-based ETFs as an investment.

1:01:48I'm not sure what the point would be of having equity in your own home and investing in the stock market with your hard-earned personal money. I could just be missing the point. Please help me out. Ram? Yeah. No, I mean, I've got sympathy for that. I mean, borrow money in a depreciating asset, use it to buy, you know, oh, sorry. Use a depreciating asset, i.e. the currency, to buy something it's going to appreciate. If I can borrow against my house at 5 % and I can get a 10 % return, it feels like money for jam. I 100 % get it. It makes perfect sense. Of course, the trouble is, is that where you draw that line, you know, maybe that funding cost is much more than you thought.

1:02:27Maybe the return that you were going to get is much less than you thought. So you can't argue against the proposition with a certain set of assumptions, but just be careful on what assumptions you're using. Now, the response, yeah, but if I just use averages and I have a huge buffer and it's not too excessive, then yeah, I see that now. Actually, I think I was pretty late to this realization. I've always been very anti-debt. And I look at myself now and later in life and go, no, there's good debt and bad debt, right? And good debt, I would argue, is used to buy things that are going to give you greater –

1:03:08they're going to grow far more than any cost you have to bear to sort of borrow that kind of – it just seems like it's shorting the dollar is effectively what you're doing. So I'm going to take my value, which I've worked for and I've saved up value in this currency. I can leave it there in the bank. I can print it up or get it out of the ATM, put it under the mattress, or I can put it in this thing, which is going to be the better proposition. It's like, well, I know that this thing, even as designed, is going to go down 2 % to 3 % in value. I'm going to buy something with it. And if I can get very safe debt that's not going to be margin called and it's going to be very conservatively geared, yeah.

1:03:40Yeah, you should do that. I wish I'd done more of, I wish I'd done, done that more, done it. You're right. Like not aggressively, but I wish, I wish I had done that. I think it, I was far more robust and bulletproof in my financial situation, but probably too much. So there's a fine line that you walk and I, do you see what I'm getting at here? Like it feels like the, the proper, uh, responsible response I should have is no, that's, that's reckless. I don't know if it is. It's, it's, it's, it's a, it's a question of degrees, I think, is the point I would make. And at a point, yes, it's stupid, but I don't know if it is stupid.

1:04:14In fact, I actually think it's probably sensible at a modest... modest degree. Am I wrong? I don't think so. I don't think – I'm not sure I'm getting the analogy entirely because I don't think it's a case of cash in the bank versus investing. By equity though. Yeah, but that's – and if your house increases in value, it's not the same as cash that's depreciating. So if you've got a house that's growing in value, you know, the cash isn't cash until you borrow it or somehow remove it from the house. Sorry, but you're borrowing that – the cash that you borrow, you'll be paying – like someone who borrowed a million dollars in 1980, that was a big loan.

1:04:47You know, it's not that big a loan these days to sort of pay back. But those loans that are written over generally 30-year periods, you're paying it back with money that's not worth any. Think of, again, let's just not get crazy here, just like 2 % inflation from here into infinity. It's like I'm paying that loan back with dollars that aren't worth anywhere over a 30-year timeframe, not even close. So it makes sense. In that scenario, the only use for cash is for transactions, really. And in all other cases, I just, I minimize my exposure to it. Yeah. I suppose. Like we talk about that all the time.

1:05:27And I've heard you say, you know, would you have, and I know you don't, and why would you, why would you have any money in cash at the age that you're at? The only reason is that you're, I've got a, I've got a big purchase coming up. I want, I want to buy a house or put a deposit on a house in the, in the not too distant future, or I'm at an age where it's just like, I, I, I don't need the return. I just want to make sure there's no volatility. I mean, other than that, it's madness to have cash. But again, he's not saying he would have cash. Sorry, sorry, sorry. Sorry. Well, but he has very easy, low-risk access to cash and very cheap in real terms, defined in real terms over the tenure of the loan.

1:06:04So there's a subtlety there. Yeah, you effectively got, even with the equity, assuming your house goes up at some point in value and or the shares go up in value, the asset that you've swapped the debt for, increases while the debt doesn't. Yeah, it's more the debt. You've got to treat it. It's not even about the house price itself. If you've got the collateral just to make sure that that debt is never called, whether it goes up or not, it's just sort of like I will never get forcibly called on this debt and I can then extract cash from that and use that cash that will earn me a higher rate of return than what it costs me to borrow that cash.

1:06:36You know, if I'm going to maybe get an 8 % return and it's going to cost me 7%, you know, this is very marginal and maybe things can go wrong very quickly. But I do think, again, what's the standard variable right now? Like six-something percent, 6.2. Yeah, there you go. And if I feel reasonably confident that I can get a 10%, 11 % return on average in the market, it's not crazy, right? No, it's not crazy. I'm more conservative than you, I think, in this context. And I kind of end up saying the same things or using the same language, but effectively it's a behavioural question, not a rational question.

1:07:13you're about to say I've said many times if I could borrow my next 40 years worth of investment contributions at non-callable at a decent rate I would do it tomorrow and that absolutely remains true so the behavioural stuff comes in for a few reasons I suppose

1:07:35it assumes you're investing correctly or sensibly it assumes that you're right in your investment choices. It assumes that you still don't get hit with some sort of Great Depression style decline. Now, I'm the last person to predict that or think it's going to happen, but I'm also the last person to say it can't happen because it has. So at some point you borrow, I know you take half a million dollars out of your residence, you invest in your shares and it falls 10, 20, 30, 40, 50%. And again, if it comes back, is it a problem? No. If you, as you said before, mate, you buy at the wrong time, sell at the wrong time, it opens here's what it does it opens up your life to more fragility to more risk to the to a greater chance something going wrong um as warren buffett has said and i've said many times quote leverage is the only way a smart guy can go broke end quote and so you kind of say well hang on i'm in front here i've i'm achieving my financial goals i'm going to make my financial circumstances more precarious so let me throw another buffettism in he talked about people betting what they have and need for what they don't have and don't need.

1:08:42In other words, you've got a million dollars, I could bet half of that and see if I can make some money on it. It's like, well, hang on, you've got a million dollars. Why would you bet any of that? Why would you take that risk in terms of some sort of preservation or some sort of preparedness for not going back to square one to make your life less fragile? The upside of making more money is great, But the downside of losing that is far more, the same amount of money. It's never, again, we'll use asymmetrical. It's never a symmetric thing. The amount of money you gain or lose could be entirely symmetric.

1:09:17But the impact on your life, you know, if I had a million dollars and I had a 50 % chance of winning a million dollars and 50 % chance of losing a million dollars, that's in theory, you know, the same bet, right? But the impact on my life of going to zero or going to$2 million, they have very, very, very different outcomes. And I'd like to go from a million to two. I don't ever, ever, ever want to go from a million to zero. Now, again, you're not saying that. I'm not saying you are. It's a question of degrees. It is a question of degrees and a question of, you know, maybe I'm just, I'm not risk averse at all actually, but I'm stability risk averse.

1:09:51There's going to be a better phrase for that, you know, but the idea of like do I want to take that risk? Even if the odds are small, even if the odds are tiny, Buffett talks about if you had a gun and a million chambers, he still wouldn't play Russian roulette. The chances of you killing yourself are tiny. But the output of that, the response, that's still not worth doing, right? So that's kind of the way I think about it. Well, let me, yeah, I mean, there's no right or wrong here. It depends. But let me give you a slightly different hypothetical just to see where you land personally. You've got a million-dollar house and it's paid off.

1:10:24Yes. Right? Thank you. When do I get that? Wouldn't it be nice, wouldn't it? and you could borrow against that at 6%. Would you consider taking on, like drawing down 10 % of your equity, for example, at 6.5 % knowing that, you know, you've been in this business for a while. I assume that you think you could probably get a better long-term average return than that. Would you do that? And one thing I'll say before I let you answer is, is that what's really the worst case scenario of that? and so well I'll let you answer but I suspect you've got to go yeah I'd consider that it's why I talked about the behavioural stuff mate and I'm absolutely talking about both sides of my mouth I would do it I'm sure you'd do it right would I I mean why wouldn't you well because let's say I've paid the house off it's free money but I've paid the house off right so at some point I'm like well I have the psychic emotional benefit of having the house paid off no one can take the house away it should have been confiscated by government for you know horribly doing something that I've done badly and I get fined something, it's mine.

1:11:30Yeah, but you're only going to lose it. In this scenario, it's got to drop 90 % before you've wiped out your equity, right? But it's just the loan itself. At some point in the accumulation of wealth, you kind of go, for me, it's a ratchet. You tick that off and you move forward. And so it's a good question you ask, actually, mate. I'm thinking about it because I'm thinking at that point, do I go and remortgage the house? And I honestly don't know. I don't know, mate. I don't know that I will. I don't know. Would you? Yeah. I mean, if we were talking about with 80 % - Four points. Free money? But on your numbers, it's three grand a year.

1:12:07You borrow$1 ,000,$100 ,000. Three grand I didn't have. But you've got to get a loan over your house. Yeah, but I guess I would say it, yes, but the risk is so - If house prices are falling 90%, there are some serious things I need to worry about other than my investment. I wouldn't do it because I'm worried about getting wiped out. I would do it because my financial strategy is to accumulate assets, not to accumulate debt. I just have no interest in being clever or smart or fancy for the sake of – no, so honestly, theoretically, would I do it? Yes. Am I actually going to do it? I don't think so.

1:12:46I really honestly think I'll go, great, land title, back pocket, job done, let's move on with the portfolio. I don't think I would – rationally, is it smart to do it to your point? Yeah. Would I remortgage the house? I don't think so. Someone pointing this out to me recently, and it's such a good point. Why does Coca-Cola have debt on its balance sheet? There are companies out there that have been around for decades that are as bulletproof as bulletproof can be, you know, and even if they are going to die, it's going to be a very slow decline. Coke's a great example of this, right? They don't need debt.

1:13:24they could entirely run without it but they do because i think the boffins have just worked out it's like this is this is a much smarter move now the the conversations get difficult because it gets it gets very um black and white and binary because you know and and obviously that'd be a dumb thing for coke to do if it's debt to equity ratio is 300 on it like you're gonna wipe because all of those things become real but then you when you slide that slider across you get to the point where it's just sort of like this is the rational thing to do and the smart thing to do because the risk is virtually nonexistent and the upside is sufficient to justify the additional effort or work or thinking that goes into it.

1:14:09And even if you want to take the principle, I'm rich enough and I don't need anymore, it's like, well, then you've got more money to give to charity or you've got more. Like there's – I feel as though – there might just be a point where I just don't care because I've got other priorities in life. It's like, yep, totally get that. But if it's not 10 % for you, is it 5%, is it 3 %? At which point are you saying – and even if you say, well, the upside for me each year is like$300, it's like, well, $300 you didn't have. You know what I mean? And it's money for jam. I wouldn't trade the holding the asset free and clear.

1:14:39So I'll take your co-collar because we haven't mentioned Buffett in any more than enough times yet. I'll raise you Berkshire, which simply chooses to have no debt. And it chooses to be that business. Now, Buffett, imagine how much Buffett would be worth. Well, a lot of coke. But imagine how much Buffett would be worth if he'd mortgaged half of Berkshire for the last 55 years. I reckon he'd be worth more. I agree with you. But my point is he doesn't need to, hasn't needed to, and sees the chance that if something goes badly, I don't want to be holding. There's just no – the upside for him psychically, emotionally, financially isn't enough to take the downside.

1:15:14So, yeah, like I'm glad you asked me the question because – It's a perfectly valid point, you mate. Yeah, but while I said I would borrow the money now and I would, I'd actually, and this is, it's all purely psychological, right? I'd borrow a million dollars against a non-callable ETF tomorrow. I wouldn't borrow a million dollars against the house tomorrow for the same thing. I guess I would treat that as non-callable as well, in essence, in practicality. No, you're right, but that's why I'm separating them. I'm literally separating them and saying, despite that, I wouldn't use my house as security for the debt.

1:15:41Right. I just have no, I'm not, this is going to sound like I'm being critical or pejorative, I'm not. I'm not greedy enough to say I will take the extra money and mortgage the house. If I'm a mini-dollar house free and clear, I'm like back pocket, cool. I'm in the monopoly game, right? I'm accumulating the asset, right? Asset accumulated. Let's move on to the next one. Let's move on to the next one. Could I give more money to charity? Yeah, but then the loan's going to be paid off for my estate anyway. At some point, I just don't want to be that clever or that tricky. And it's not even that clever or tricky.

1:16:13I'm happy to go, good, done that job. Let's move on from there. but this is why there's no wrong answers right it's a personal thing yeah it's what to what degree do you place that psychological benefit what degree of benefit you know and then some people say not much others will will say a lot and then that's that's your answer but i guess to the question to the questioner's question uh it's like in theory i don't see anything wrong with it but just provided provided that you understand that there is a line at some point you cross which it goes from rational to irrational. And I'm not being equally irrational by not doing it, by the way.

1:16:52I'm a million percent comfortable with that. Like that's the personal psychological emotional choice, which is just, you know, and I think you're right, mate. I think your point of if you are a very rational person and you know you can withstand the slings and arrows of the market, then I have no problem with that strategy. I don't – would you borrow at six and a half now? My only question would be what margin of safety would you give yourself? I expect the market would do nine. If I'm borrowing at six and a half, I guess it's deductible and things taxable. So it's still probably the same margin.

1:17:27Would I do it for 3 %? Again, because it's free money if it happens, but you don't know it's going to happen. Yeah. I don't think I'd borrow a million dollars to buy an ETF portfolio today at six and a half. I'm very sure I would do it at four and a half. Yes. And it's just gut feel. In between, I don't know where the cutoff would be for me. I wouldn't lock in six and a half for 30 years, I don't think. I expect it to do well anyway, but I don't know that I'd be so comfortable that the margin of safety was sufficient. I'd probably lock in five. There is a lot to be said for the certainty of being fixed for 30 years at the same time.

1:18:04Yes, true. That's a really good question as well. You're right. If it's not six and a half, is it seven? Is it seven and a half? I mean, where's the line that you cross? So it's an excellent point. And 4.5 % is very different from 6.5%. 4.5%, absolutely. Like how could you not? Especially if you felt like interest rates were going to fall down and all of that kind of stuff. But if that's all that was on the table was 6.5%, but at least it was long. No matter what, I know exactly what I'm going to pay. I think I would still take it over a 30-year timeframe because I don't think I have to be Warren Buffett to get 9 % or 8.5%.

1:18:43And the market does what it's supposed to do, though. I mean, there's always the, you know. Yeah, yeah. I mean, that's the risk. It also depends on what you've got to do. It depends also how you've got to fund it, right? If you don't need the dividends or the gains to fund the loan, again, so we've got some timing issues there. If I could have no call and no interest payable, for example, and I can pay the interest at the end of 30 years after the proceeds, that's easy. Oh, that's different. Or if I had the money in my own personal, if I was earning enough to fund the interest, that's cool too.

1:19:13But if I had to every single year find the difference, a couple of bad years in a row early on, I'm not sure it's terminal, but it's meaningfully terrible. If you didn't invest, I guess if it's an ETF, maybe you get 4 % yield, so maybe it helps if it's a straight ETF. But you can imagine a couple of years where you're getting 4 % dividend, COVID years, right? The bank's cut the dividends. I don't know what it did to the average yield of the ASX. Maybe it's 3.5%. the market's down 15 % or something, and all of a sudden you're like, hang on, I've got to sell at 15 % to fund the gap between the dividends and the interest payments.

1:19:50Again, the reverse could also be true. If the market jumped 25 % in your first year, you never got a problem again. But, yeah, it's an interesting kind of thought experiment. Yeah, and it does. It's the assumptions. Yeah, exactly. The timing matters and, like, what return are you going to get? You know, if you get 20 % per annum over the next 30 years, you borrow at 20%, you know, 10%, 15%, whatever. It still makes sense. But I do think a reasonable person, and the listener said, right, it's like if it was a broad-based Vanguard low-cost index ETF, I'm just going to thumb suck that over a 30-year period that will be close to what the last 30 years has been.

1:20:23Maybe I'll add a margin of safety and just say, I don't know, 8.5 % to that kind of stuff, and I'm guaranteed 6.5%. That's the proposition in front of you. Very, very low risk, 2 % return net. Yeah, yeah, yeah. And, yeah, I think it's reasonable. I think it's reasonable. You'd take six and a half? Yeah, I think I would. I think I would. Because I don't have to shoot the lights out, right, to make that worthwhile. And let's say I'm wrong and the market delivers me a compounded 6.5 % over 30 years. By the way, that's a disappointing outcome. I can't imagine it's a world that's been as prosperous as it should be, but I haven't lost any money.

1:21:01It's a wash, you know, even at that really disappointing kind of level. So for me, and then even if it's a little bit of a loss, this guy is disappointing, but this is, we talk about asymmetry again. It's sort of like, how bad does this, do my returns in the world have to be for this not to make sense? And even if it's just average and not even good, it's going to work out really well. So it's like pretty good chance of getting an okay return, small chance of getting a very negligible return, or it's even smaller chance. It just feels like I'm not betting the farm here. And you and I can have a discussion in 30 years and no one's going to go, you idiot, that was such a dumb thing to do.

1:21:39You ruined your family. So I'm like, probably didn't need to do that. Yeah, you're right. But it hasn't cost me anything. I agree. But there's probably a greater probability of where it's like, well, it wasn't great, but I got 2 % free on 100 or 200 grand over the last 30 years. It was like, eh, I'll take it. And to the extent it's free, it's not even 2%. It's just literally free money, right? It's literally free. When they line up, the capital base doesn't matter, which sounds stupid to say. if it's we're talking about extremes and I'm generalizing if it was an absolute guarantee of the cost of funding and the return and all those are guaranteed right that could go in any different direction but it's a bit like you know if you borrow 100 % of a house purchase when you sell it what's your return well it's infinite because I didn't put anything down if you borrow 100 % of the value of any portfolio I mean it has a nominal value when you buy it but if it's all borrowed money your equity is zero And so the gain is infinite, which is even better than, to your point, the 2%.

1:22:37It's like, well, it's just whatever the dollar value is. If it's, you know, two grand a year on a million bucks, it doesn't really matter what the basis is. You're just getting two grand a year for nothing. It's like that's, you know, someone's just giving you a, you know, a stipend from the long-lost uncle Monopoly style, you know, pass, go, click$200. That's literally what you're doing every year. Yep. It's beautiful from that perspective. I mean, what we're talking about here is bank's business model, right? I'm going to take this money and then I'm going to lend it there. I'm going to make a net interest margin.

1:23:02We were talking about CBA and stuff on Friday. I wasn't going to go there to prolong the thing, but you're exactly right, and that's it. It's risk management. It's literally what they do. Now, again, think about are you borrowing long or borrowing short? Are you matching your durations? Are you matching your risk profiles? That's exactly what they do, which is also why I find it so incredibly fascinating that banks won't provide non-callable margin loans because they've seen the long-term history of this stuff. I know it's not cash. I know the reason I don't do it is because finance orthodoxy says shares are risky and cash isn't.

1:23:35So they would say, well, hang on, I'm putting non-risk cash against a risky asset. Why would I do that for nothing or not be able to call it back? But the reality of the long term, they could handcuff me. They could literally handcuff me. You can't touch centers for 30 years. Okay, I'll still do it. Well, yeah, but it's going to cost you this. I'll still do it. They could set the conditions as long as the durations are matched and I get to choose the investments. And again, I'd help you do ETFs if that's what the bank said. Okay, you want me to pick stocks? Fine. You don't know ASX got to be global?

1:24:03Fine. You know, you call the numbers. I can't imagine in what scenario I wouldn't be happy with that kind of outcome if I was given that choice because it's just money for jam. But again, you come full circle and say, well, hang on, why wouldn't the banks do it themselves? And that's kind of, that really starts to mess with your head because, you know, where is the bank's capital best employed in lending for houses or buying shares? I mean, that was, speaking of Buffett, that's his entire business model. He took the insurance float and said, I can leave it in cash or I could buy little pieces of businesses that are generating cash with it.

1:24:32That's literally the genesis of the entire idea, both for Berkshire as the original mill where he said, well, I'll take the excess cash and do that rather than reinvesting in the mill and then insurance where it was genuinely give me your money, I'll invest for 12 months and give you back what you need, I'll keep the difference. That's not banking but it's not miles off. Yep. I mean it's just really deep at a level because I want money and I want my money to make more money. That's right. and well, how does money make money? And you think, well, because I take it and I buy something with it and that thing becomes more and I pay it back.

1:25:09But it's just like there's a lot of leaps of faith in all of this kind of stuff. This is why we have credit booms and busts and the rest of it because, hey, here's money. Oh, there's money everywhere. I'm going to use it. I'm going to get a 3 % yield over here and a 10 % yield over there and I can do all this kind of stuff. But at the end of the day, that yield has to come from somewhere. It's one of the things you must always ask as an investor, So where does the yield come from? And it can only sustainably come from genuine value creation. And that's why where you borrowed money, money itself is never going to make money.

1:25:42So you've really got to, it's a shell game. I've got to convert this money, which is what money is for, into something that will generate value. And then once it's generated said value, I can then convert it back for more money. That's where the yield comes from in that particular instance, when it's played out well. But if it doesn't, because I bought a bunch of monkey NFTs and it turns out that it didn't create any value for anyone and I can't flog it off to anyone else. That's where it all comes undone and there's like the yield that was expected does not come to fruition. But what you want to know, and I think what the genesis of all of the launching off of this sort of discussion is, is like if I do have money and I don't want to spend it now and I don't want to spend it for a while, I really don't want to keep it in money because I know it's just going to melt away.

1:26:26And if I've got something that I can convert a small amount into money, but then convert that again into another really high-quality asset, you know what I mean? Yeah, totally. You're moving pieces around here, but, you know, it's the pieces that you control that really, really matter. And money is really just, I mean, it's just if you can get – this is another reason why big companies have such a big competitive advantage. If you can get easy, cheap access to capital, it's a superpower, right? Because money doesn't make money in and of itself, but money enables the creation of money via the value creation mechanism, if I'm not going too deep.

1:27:06And if you can get that part right and you're backing the things that will create value, and if you're backing an index, you're probably just banking on the wider economy creating value, which is not a terrible bet. It all has a certain elegance and logic to it. It feels very financial engineering. It feels very fancy and it can be. And when taken to a certain extreme, it almost always is. And when it's malinvested and all of that kind of stuff, it's always a disaster. But again, I've got a real tangible asset here in my property. I've got oodles of equity. There's something else over here that is, you know, of quality and generating value.

1:27:47And you're saying I can take some of the value locked up in this and put it over into that. There's going to be a cost, but the cost will be far less than the potential return. It just makes sense to me. Again, at a point. I like it. I like it. We need to finish. I've rethought my answer. I would, because I don't want to be in a hypothetical, because I don't want to be pushed out of an asset when it's cheap to fund the interest cost, I would probably want to borrow. I would cap my, and this is not your answer, which is fine, I would cap my borrowing rate at roughly, if not a tiny bit above, the likely income yield because that way I know I can make it.

1:28:30Services itself. You get the capital. Yeah, right. And maybe that's too greedy, but in terms of if you've got to sell parts of the capital to fund the debt or to fund the interest on the debt, you are at the mercy of the market too significantly given that while you're getting 2 % on average every year, some years are plus 10 and some years are minus 15, I don't think I'd want to make a bet at a single starting point which because again if it goes down in the first year or the first couple of years you're behind the eight ball for a very long time trying to make that back and then get ahead of the game.

1:29:03So I think I'd probably say I'd probably want the interest rate to be roughly the dividend yield more or less. Yeah. And Frank will help on that by the way. Yeah, it does. Speaking of which that gives you a mixture of buffer. So maybe, yeah, maybe, oh, six and a half? No, five and a half. But the point is there is a point. And that's the number. That really rounds out the conversation because there is no yes or no. Yes, you should, no, you shouldn't. Well, here's the other thing though, by the way. If it's truly cost-free, then why not borrow$20 million or$100 million? Yeah, exactly. At some point, that's what blows your mind.

1:29:34There is no limit to that because there's no equity required, which is also just weird. Absolutely. Should we finish this podcast? You probably should. Mate, I appreciate you spending some more extra time with me this weekend. We are, as I said, we've pre-recorded a couple for next week, but please hit us up, info at fool.com.au if you have any questions or on any of the socials. Ram is at strawmaninvest or at sage underscore simian. I'm at tmfscottp or scottphillipsmoney on Facebook. As always, in both cases, please look out for imitators. Use the handle or check the handles. I've had some more imitators this week.

1:30:09So just, yeah, just be careful. neither of us are going to try and sell you Bitcoin, even though Ram loves it. And if you get friend requests from us out of the blue, it's not going to be us. So just be careful with that. Make sure you check the handles of any accounts because it's happening unfortunately right now. Or just basically you said if one of us are contacting you with an opportunity, it's not us. It's not us. In which case, we'll see you next Friday and full on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only.

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