Mailbag, incl: How should Australia’s Sovereign Wealth Fund invest? June 14, 2026

23:20Just buying my shares. Australian business doesn't get any money from any fund, any investor buying on the secondary market. So let's put that nonsense aside. I don't mean that partially, by the way. If that was your view, I understand it. I've hopefully disavowed you of the knowledge, of the notion. So, yeah, so firstly, a minimum amount. Secondly, all outside Australia. Thirdly, I don't... Andrew and I are biased. We're stocks guys, right? I would happily, honestly, I'd have one person running the fund. I buy a range of international ETFs. It's just what I would do. It doesn't need to be more complex than that, including a Bitcoin ETF vendor who would like it.

23:56But, you know, we don't need them picking companies, picking stocks, picking properties. You don't need it, right? Buy a super low-cost ETF. Honestly, if they put half in the Vanguard S &P 500 and half in the Vanguard All World X US, I'd be happy with that. Just do that and let it run. Just do it, right? We've talked before about, I mean, maybe the percentages are wrong. We've talked before about passive active and all that. active, passive, all that kind of stuff. So I do that. Berkshire is looking for market-beating investments, Adam, and there's a real dichotomy in my thinking. I try and pick stocks that beat the market side of the Andrew.

24:32As a small stock picker trying to do this for my own benefit, I think that's a worthwhile thing to do. I think our listeners should, if they're interested in doing it and want to do it, try to do the same thing. If it doesn't work for them, don't do it. At a sovereign wealth fund level, I don't want a sovereign wealth fund picking winners. That's not what it's there for. It's there to accumulate and compound. And so I would do that directly with a range of very, very low-cost ETFs. I don't think it's that hard. If you want to throw bonds in there, you could. I wouldn't bother. If you want to throw property in there, you could.

25:00I also wouldn't bother. I mean, maybe it makes sense. If it's a sovereign wealth fund, it's literally an eternal fund. Does it make sense just to be more diversified rather than less? Probably. So maybe some direct property would make some sense. again, not because I expect to be the best returning asset, but, you know, in a world where in some version of the future, shares are worth meaningfully less or something, you know, Rambo talked before about, you know, not making any more resources. If you're under a decent amount of farming land or something, would that be a useful addition to a very big long-term sovereign wealth fund?

25:32Yeah, yeah. Dude, I'd have oil and gold in there, you know? Would you really? Okay. Yeah, hell yeah. Yeah, yeah, yeah, yeah. So, yeah, I think that's probably, I probably, if you're asking me, Adam, and I was setting it up, I would say half US, 30 % global, XUS and 20 % property. There you go. Just for fun. Just for hell. I haven't thought of it. Something like that. I wouldn't argue it. Right, right, right. Any gaps in that, mate? Anything you would add or subtract to that as a thought? I mean, it's one of those classic examples of something that we'd be 90 % a lion on and then we could, like, vigorously argue the last 10%, you know.

26:10You tried? No. Well, yeah. I totally would. I thought that 10%. There you go. So, yeah, great question. Love it. So, just quickly to answer the rest of your question, though, would the Sovereign Wealth Fund face the same issues? I mean, yes, if you were trying to be Berkshire and beat the market. Yes, if you're a super or pension fund. But, I mean, just buy a proportional share of the US equity market. You know, the problem with – and, again, I'm talking about both sides of my mouth, right? I'm saying I'm trying to pick stocks, but they shouldn't, which is obviously hypocritical by definition.

26:42Yeah, but the only victim of your malfeasance would be you. Correct, correct. That's been 100 % right. They're investing on all of us, and not only all of us, all of us who are unborn and will be on over the next centuries, hopefully. And so it's kind of like in what world does it make sense to try to be too clever and beat the market? I mean, back to Buffett's Got Rocks group of, you know, the helpers, we're only divming it up anyway. And so the reality is, are my helpers better than their helpers? Are they going to always be? Peter Ram's point about setting up for the long term, I would happily mandate it.

27:14It must be index-based investing. Even the property stuff, I'd be happy to use an exchange-based property exposure and invest in listed REITs or whatever. You buy farmland REITs and there's office REITs and there's whatever else. REIT is real estate investment trust. I shouldn't use the jargon. So, yeah, I would have no issue. And it was one person. Here's your allocation. Okay, I'll see you next Tuesday. Yeah, okay, come in. Cash it. Are we chasing the allocation yet? Nope. Okay, cool. See you next month at the board meeting. it needed to be that hard. If you can't write a basic AI LLM to handle it, then it's too complicated.

27:46Totally. Maybe let's have a human or two look at it. I'm not going too far with that thought. I'm going back and saying AI is way too clever. If a 12-year-old couldn't do it. Yes, exactly. By the work experience, just check it. Is it still the same number as yesterday? Yeah, good, okay, back to work. It's not that hard, I think. Yeah. The last thing, I mean, it's like, tell me where I'm going to die so I don't go there. What do we want is an interesting question. What we don't we want is a better question. And what we don't want is some high-paid douche who thinks they're a master of the universe who's going to start doing reverse covered core iron condor strategies with this and that.

28:23And they're going to have a team of quants and a supercomputer. And they got their like glass tower in downtown wherever. And, you know, like that is just absolutely guaranteed to blow up spectacularly. 100%. But they're going to have a great old time doing it. And, you know, that's the other thing, mate. It's not even they've been deliberately, usually with Maffesas before, it's just stupidity and ego. It's hubris. Oh, yeah, it's all it is. It's not even someone trying to, it's like, I think I'm smarter than them, I'm going to do it. It's like, well, like, and then to your point, you lay a fish.

28:53Look, I've been doing it for five years and it's been brilliant. I'm like, oh, really? Yeah. And if that guy doesn't do it, the other guy promises he can do it. It's like, guys, stop trying to pick winners here. You're investing that large amount of money for that long a period of time, picking winners is not the job of a sovereign wealth fund, in my opinion. Yep, yep. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

29:19Hey, Luke sent us an email, mate, and Luke says, good morning once again to the Pod Machine Engineers. Name's Luke. Feel free to use it. Thanks, Luke, I did. Thank you for continuing to shovel the coal, keep the wheels greased, steer the train, and whatever else the broad title of engineer covers. And I don't know enough engineers to know what else it covers. We're talking about, you know, obviously manual engineers, not the desk. I was going to say write the code, get the syntax correct. Yeah, I'm deep in the code and hold it. Oh, he's a prompt engineer those days. Yeah, prompt engineer. Prompt engineer.

29:50That sounds so much better than Vibe Coder, doesn't it? What do you do? Prompt engineer. So you write something along? No, no, no, no, that's a code. You play Chichip 2? Yeah, no, that's what I do. Yeah, okay. Vibe Coder, I don't do that. Vibe Coder. I got called a bastard on my last question, says Luke, because of my age, 25. This time I'll give you another reason. Good, because you're still a bastard, Luke. I have been fortunate enough to take a four-month-long solo trip across Asia, Central Asia and Europe. A mini-retirement, as I like to call it. Yes, I hate you for being young and I hate you for having four months off and travelling through Asia, Luke.

30:25You're a bastard. Sounds great. It was entirely funded by my, quote, reckless portfolio, end quote, of Hail Mary speculative investments that I had no intention of holding long term. One of my largest holdings was Drone Shield, which I managed to catch on the way up. It's important to note my core portfolio remains fully intact. This speculative pot was purely to scratch my reformed gambling tendencies and was entirely separate from the minimum 10 % of my income that is invested responsibly. All I'm saying, Lucas, despite your four-month holiday, you sound a little bit guilty, so I'm going to leave that there.

30:58I digress, says Luke, to the question. During my travels, I've had to navigate public transport in more than a dozen countries. That's got the makings of a film, either a comedy or a drama, I'm not sure which. This came up in conversation with other travellers and the argument was made that like destinations such as Luxembourg and Belgrade, all public transport should be free and funded entirely by taxes. Upon contemplation, said Luke, I'm inclined to agree. Tax funding would encourage public transport use and ultimately infrastructure as a second-order effect, which is far more environmentally friendly compared to a high volume of cars with only one or two occupants.

31:36Additionally, those who consider themselves too wealthy to use public transport would effectively be subsidising anyway. In my mind, a slight mitigating factor to wealth inequality. What are your thoughts on the economic impacts of completely tax-funded public transport? Cheers, Luke, in brackets, a.k.a. MotleyBastardNo372. Luke, you're worth$372. You've gone up in the charts after both being young and having a four-month paid holiday with speculative stock wins. So I'm going to upgrade you to Motley Bass$183. We'll check in on that one in a couple of months' time. What do you reckon, mate? By the way, can I say, Luke doesn't say free public transport, he says tax-funded public transport, which is also important.

32:16Yes, that was a real... Thank you for saying that, Luke, because there is no such thing as free, so thank you. I also like... I really do... I actually will congratulate Luke for having a basket of speccy stuff. Yeah. And the reason I say that is because I think as an investor, the first law is know thyself. Yep. And if you've got attendance, I'm not even saying it in a judgmental way. I've got the same urges, right? Like you can't help yourself sometime. I've just got to go for the shiny thing. Even if the, like, so the lizard part of your brain is just like, like buy the thing, buy the thing, it's going up, I can make a million.

32:56And the rational, you know, the frontal cortex is like, that's probably, you're not, no, don't do that, don't do that. And what happens is that some people can't listen to that rational part of their brain, they just go all in and then it ends up a disaster. So if that's part of your personality, and I think it's all part of our personalities to some degree, it's not that I would say, yeah, my instinct is to say, why do it at all? because statistically it's probably not going to work. But if it keeps you on the straight and narrow for the lion's share of your capital, then I think it's a good thing, right?

33:34It's kind of like it's enough to keep you out of trouble. You'll never blow yourself up and you never know you might fund a four-month boondoggle around the world if you get it right. I think it's a good little guardrail to put in if you know that you have certain tendencies. So it's actually really smart. Oh, I don't know. I don't know. It does strike me as a little unfair that, you know, someone who lives in regional Tasmania is paying for the bus rides of someone in Sydney, you know, whether they're rich or not, you know, it just feels like, well, I never use it. I don't mind the idea of, like, it's like with tolls, right?

34:19It's sort of like I'm going to talk out of two sides of my mouth here because I don't really actually have a good answer. Yeah, yeah, yeah. But, I mean, do I like, I mean, there are some things like roads and rail lines and light rail and all that. It's just sort of like it's a natural monopoly. I can't just open it up to bidders and let four different parallel roads go, you know, from A to B. It's just never going to work. And I think it, and so, yes, I think the public purse should fund a lot of that. But it is, again, I'm just driven by a fairness contemplation that, well, the people who use it should probably pay more, right?

35:03Like it feels as though that's appropriate. You certainly don't want to make it so onerous that it's only accessible to the rich or things like that. But I'm a little bit like the taco ad. Why not do both? I don't think we need to be black and white, you know, on these kinds of things. What's both in your mind when you say both? You mean a bit of funding from both sources or do you? Well, that's how we have it at the moment, right? Yeah. So it's sort of like if, I'm sorry to be so local here, but in Sydney we've got CityRail and it's fun. That is a 1980s reference and I love it. It hasn't been CityRail for a very, very long time.

35:38Oh, no? I was transporting New South Wales these days. Okay, yeah. I love it. It took me back to my childhood. That was brilliant. But still in every city, like CityRail, right? Yeah, totally. Same people, the same computer systems. I still can't call Service New South Wales not the RTA, the Roads of Transport Authority. I said, I went to the RTA and renew my licence. I haven't been there for a million years, Scott. There was RTA, there was Roads of Maritime, now Service New South Wales. It's just RTA to me. It's just where you go to get your licence. My dad was in the public service. He used to joke all the time.

36:05He was just like the department name would change every five seconds because a new minister would come in and it's like, everything's working really well. Let's change it. You're like, okay, now you're this. So, like, all right, so am I still doing the same? Yeah, you absolutely are. But we've got a new T-shirt and a hat for you to wear and the marketing department, you know, it's a nonsense. They'll let it head right as a make a fortune, yeah, yeah. Oh, yeah, no. So in City Rail, what's it called? Sorry, whatever it's called. Transport New South Wales. Transport New South Wales is taxpayer funded, but you've still got to pay for a train ticket.

36:36The train ticket is effectively very, very heavily subsidised. Yep. And I think that, I just, I don't know, you're going to get into a slippery slope of where you are, where the line kind of draws and it's like, well, Andrew, aren't you talking out both sides of your mouth? There's plenty of people who don't catch it. There is also the argument. I mean, we talked recently on a pod about where government should get involved and I've said wherever there's instances of market failure. That's in a future pod, by the way. It's a future pod. That's a future pod. I mean, still, nevertheless, I'm pretty sure we've touched on it before and it's like transport is a great example of those kinds of things where, again, it's not natural to have competition.

37:16I've mentioned that before. But it's also another failure of, potential failure of markets is that they aren't great at looking at a holistic view of things. Yeah. So economists would call them externalities. So if I'm only focused purely on my paint production factory and I don't stop my business, I don't really ever go to the beach or care about the river, I can just dump it all in there. It's like, what difference does it make to me? You know, so there are, and there's, you know, carbon pollutions and other ones. Pollution's a really easy one. But it's a tragedy of the commons dimension to all of this kind of stuff.

37:52And that also, from my mind, is the natural area for government to come in. And where that relates to public transport is that by having very high-quality, efficient, safe, reliable public transport, you actually reduce a massive burden on the road networks. You actually make outer suburb areas far more attractive for people to buy, invest and live in. There's all of these downstream benefits that aren't immediate. If you look at the rail network, it's like, okay, I can look at it got Sally from A to B, but it's like, but it also did 50 other things that are much more difficult and less obvious to kind of see.

38:37Now, it's still left with the problem of, well, you've still got to do it well because if you don't do it well, and there's a lot of grift and waste and fraud. Like, you know, no one's interested in that. And I'm sure, Luke, on your travels, I mean, I've been to many of those places as well and I would not want my children riding on some of these networks. Like, it's pretty wild, you know. I don't want to single out any particular companies. Countries, but it's like, whoa, you know, I've seen my life flash before my eyes on a number of occasions backpacking around various places. so I don't know.

39:10I'm all over the place, mate. Over to you. While you were chatting, I looked it up. So Sydney, this is New South Wales, because you mentioned CRL, so I thought I'd do that, but also others. Sydney trains, apparently, is the new phrase they're calling for the CRL network. Right until 2028, until we rematch. They'll be trains Sydney. You can't just be trains. Remember when you put Australia out, it's cricket. The Australian people were going, cricket, Australia, and football, Australia, and you had to do it that way. So it should be trains Sydney if you're giving up, kids. But ferries, the metro, trains and buses, all between 25 % and 27 % is fare funded.

39:46The other is three quarters by the taxpayer. 41 % of the light rail is funded by fares and 59 % from the taxpayer. I suspect that might have something to do with density, actually, which I'd love to know. Maybe the fare's just higher, but I suspect it's, you know, a very, very, very small network, super high utilisation. And New South Wales Train Link, which is the regional services. They're probably in the payback period too. Yeah, that's true. So they're trying to call back some expense. Regional trains, only 10 % is covered by the fares, 90 % covered by the taxpayer. Yeah, right. Which is almost an argument to not have it in some...

40:17I mean, let's just not go down that part. But it does suggest at the very least, like, so is anyone actually using it? Or is the benefit enough given the cost of keeping it? If lots of people are using it, it might be because it's a very, very, very big network and the costs are pretty big and all that kind of stuff. That's true too. It does make you wonder about... And then you've got the trade-offs, right? So the thing about Rex that went broke, Did it go broke because people were using a heavily subsidised train system instead? Which, again, is not either good or bad, but it does kind of...

40:40There's more than just the airline kind of question, right? It's roads and rail and everything else. And by the way, a lot of the roads are funded, or most of the roads are funded by taxpayers anyway rather than road use because the fuel excise doesn't cover it. It was never supposed to. It was supposed to for about five years of the entire century of fuel excise. And they've broken that link decades ago. They said, let's stop pretending because it never did and never will. So, yeah, there's lots of moving parts here. Back to public transport. You've covered it beautifully, mate. The tragedy of the commons is great.

41:09Look it up, by the way. Commons literally been common areas. So if you've been to the UK, you'll know things like Clapham Common. It's just a large parkland, a large common area, and that was kind of what they were called in England. This is where the tragedy of the commons comes from. And the idea is if everyone can access it, it was free. You could graze your cattle on the commons. It was kind of in the way, way, way old days. It was common land, so you could have your own land. If you had some cattle, you could bring them out to the commons to graze. And, of course, if you could do that, why wouldn't you do it?

41:34because you can do it for anyone else's resources. And so your mate did the same thing, and his mate did the same thing, your enemy did the same thing, and everyone did the same thing. All of a sudden, the commons got grazed down to zero. And no one cared about the commons in terms of the impact you were having because you just wanted your bit out of it. And that's Raymond's point about the rivers and the beaches, is when you kind of don't care as much as you... You can benefit more than you bear the costs. Of course, you're going to do it. And the tragedy is, of course, in that circumstance, without appropriate...

41:58And by the way, you mentioned the future podcast about intercom and intervention. You're right. The externalities is the one, I'm going to say, almost unarguable case for involvement in government in these sort of things. There might be 13 people listening, one listening, 13 people in the whole country who are saying, actually, no, I think companies should be allowed to dip, dump, paint the river, who cares? The market will sort it out. Like, we know the market. That's why there aren't rules. There aren't rules because the market sorted it out. Put it that way. The rule didn't come first, right?

42:25The market failure came first. That's why we have rules that you can't dump, paint the river. um so all of that so that that all said back to the public transport thing you what i love mate is you talked about obviously the benefits for the travelers who get subsidized there is the cost for those who don't use the network directly i.e i don't use the trains why should i pay for it and then you've got the bits in between so the direct externalities like carbon pollution really important um extra economic mobility people who wouldn't or couldn't otherwise travel by car can travel by train and that's subsidised.

42:58So it does mean they can use those services. That's important. You mentioned the ability to remove congestion off the roads. So even the road users benefit from the rail network being subsidised. Imagine shutting every bus and train in Sydney, right? Or Brisbane or Melbourne, wherever you are. Now, everyone's got to get to work. I mean, remember every public transport strikes. I mean, the roads to be nuts because we can't. So there was cross-subsidisation everywhere directly. There's money changing hands, but just, again, opportunity, costs, trade-offs, all those things, they all come into play.

43:38And then there's the broad environmental questions you ask. I think that's a really honestly, frankly, important one in terms of the way, Luke, that kind of plays out. I'm a big fan of environmental action, so I like the fact it's there. I also, by the way, here's the other thing. And this is a small one, but we've mentioned before, mate, about tourism. And I've said a million times, make Sydney ferries free. Why? Because tourists are going to go, this is amazing, take a million photos, send them all home to their friends. Their friends are all going to come and go, I want to do that too. And yes, they'll all use the cheap ferries, but they'll buy their coffees and cakes and either one, they'll go to the zoo, they'll go to circular, again, this is Sydney reference, apologies, go to all these places.

44:16Why? Because they're a beautiful harbour. Why the hell wouldn't you? Melbourne Trams, same thing. Why? Because people can get around the city and actually go and spend their money. if they're government-owned enterprise in a lot of cases, it's an investment in the return, right? And it's every... I'll throw my own company under the last. Why does The Motley Fool have free articles on the website? Partly because we want people to read them, partly because we want to help people find a way to become members of The Motley Fool. Now, someone at a head office could say, that editorial team is a cost centre.

44:46They don't make us any money. We pay all these writers and they don't make any sales, so we should get rid of them. And the answer is, well, we do that because it actually helps lead generation, which helps us make a sale. So we're happy to lose money over there so we can make money over here. I think too often we don't think of the – we shouldn't think of the government as a company or the country as a company. But there's also some mature, responsible, complex thinking about where do you want to spend a bit so you can make a bit somewhere else. And I think there's some value there. Look, I think on balance, the one question I don't know the answer to, mate, is the concept of if people don't pay, they don't value.

45:23And that can be really ideological. And it's people who use that in too many places. Would people value public transport if they just got on or didn't have to pay for it? Would that change the way they interacted with it? Do you take better care of something you've paid for? I don't know the answer. I suspect it's a bit of a straw man argument. No pun intended, Ram. I suspect it's a straw man argument. You owe me a royalty. Exactly. But I don't know if it is, and so I don't know that for sure. You also have to work out there is going to be somewhere to a question of what do you... You made the point about regional trains, Ram.

45:59Let's say you completely freely fund it, or freely fund it, public fund it, taxpayer fund it. Who decides when the routes are viable or not? If everything's free and there's no P &L, then every route is justifiable. And so there's a question about how much weight you draw those. And there's other ways to do it. So, again, look, I must say you can't do it. You get natural tendency for bloat and inefficiency, not for incompetence or evil. It's just natural because you don't have that natural corrective mechanism of profit and loss. So it's sort of like anything can be done and just very quickly you find that, oh, my gosh, a train driver's being paid$500 ,000 a year and only works three days a week and, you know, et cetera, et cetera.

46:43And shout out to our friends over in Greece. Now, that could still happen now because you've got 25 % and it's not 25 % of every route is 25 % funded. It's the whole system. So I'm sure there are some routes that are maybe they're in break even. If the city circle in Sydney where the trains are always packed, maybe that is 85 % ticket funded, right? and the outlying station where the train only goes three times a day and one person gets on, one person gets off, that entire station is 99 % public funded. So you've already got that cross-subsidisation and you should because it makes sense, right?

47:16You can't set, you know, a network is valuable because it's a network. That's kind of the point. So, yeah, there are some potential drawbacks. On balance, I would have, well, see, I think, so I'm going to sidestep the question, Luke, in one way. I was about to say, it'd be great to see it happen, see what the changes were. We actually know because a couple of states have actually provided cheaper or free public transport as a result of fuel prices going up. Victoria, well, Melbourne's done it, I think. Queensland's got their 50 cent fares. It won't be that long till we can actually look at the data and actually find out the answer, at least economically.

47:50But then you've got those externalities you can never count. You've got the trade-offs around road usage and that kind of stuff. So at some point it is a value judgment more than an economic one because nothing is – well, not something to – public firms never use a paid entirely. So we're saying how much subsidy, somewhere between nothing and 100%. I don't know what the right argument is. I probably lean towards making it cheaper. I suspect – here's the other thing too. The costs are already – most of the costs are fixed. So if you're not putting on another train and just filling the current one that's already running, that's a that's kind of there's no incremental cost on that there's no incremental cost i mean there's a bit of wear and tear on the steps because people walk up and down them or something but realistically it's bugger all so if you're saying hey i've got a half full bus if we made it free would everyone use the bus yeah okay well that's a no cost you know that and more cars off the road um both in terms of environmental and congestion reasons i i think i'm in balance i think i'm in favor of it on balance but i get to say i don't know and let's wait because we're actually literally seeing a free experiment right now.

48:55And someone hopefully in Victoria and Queensland at some point, probably this time next year, can start to do the work. And you've got some great natural examples too because New South Wales hasn't done it. So not only do you get to say Victoria before and after, and that's useful, but you don't know what other causal factors were, you can then say Victoria before and after and versus New South Wales during. So you get to do the whole experiment, not perfectly, but it's a pretty good natural experiment. It's a pretty good same country, roughly the same sorts of fares, roughly the same sorts of demographics.

49:25I'm looking forward to, as an economics and data nerd, I'm looking forward to seeing hopefully someone do that work and say what happened to the roads, what happened to the cars, what happened to the emissions, what happened to all these things. I think it would be fascinating to see. So I don't know the answer, Luke. I'm kind of in favour of it, but I'm also happy to say I don't, I'm taking a, I'm putting it to a hard basket, knowing we'll have some indicative data coming out sooner rather than later. I mean, in all aspects of life, I love an empirical data-driven approach. I just think it's sort of, I don't know how you argue anything else, unless your view is I can intuit everything.

50:03Yeah, that's right. And I'm like, well, can you though? And I was just like, what you find very often is that solutions, public policy solutions, really counterintuitive. The things that work is like, really? Yes, yes, yes. Yes. You know, like Portugal making all drugs, decriminalising all drugs, like that's going to reduce drug harm. Sight-rejecting rooms. Yeah, it works really well. Or there's a thousand examples of it. So it's sort of like that's why you've got to go with the data because the things that feel like they won't work, I mean, again, once you've got the data, it's like, well, I get that.

50:41I mean, it felt, yes, no harm, no foul, felt like a good idea. We tried it. We tried it a thousand times. So did all of our peers around the world. Never once worked. Let's not do that again. Call me crazy. But this thing worked. Let's do more of that. It's really obvious. And we should. I love that, mate, because the other thing is we should. We've got to be more mature about experimentation. Guzman and Gomez, I don't know if we will have talked about by the time this comes to air. I suspect we probably will have, so I won't do it in a lot of detail other than to say they went to the US. Now, I thought that was a pretty low probability bet.

51:14You're taking Mexican food to a country that borders Mexico. This is not. And has very good Mexican food. Correct. If you take Mexican food to the UK, maybe you're a chance, right? Not that the UK has got great Mexican food necessarily, but at least it's not literally on the border, right? Yeah. And as I say, it's well and truly into its, you know, you're not there first. Guzman got to Australia first on Mexican. I mean, Taco Bell try, but that's not really Mexican. It's kind of just crap in a bag. But have you tried Taco Bell? Once. Once many years ago and I'll never do it again. It is awful.

51:47Anyway. So, yeah. But here's the thing. So it was a low probability bet, right? Yes. But also, if it worked, it was a massive. We talk asymmetry. You talk about it all the time. It was a massive. Imagine, so Goosby goes to the US. Four times out of five, they fail. One time out of five, they end up with 1 ,000 stores. Okay, that's worth doing. One time out of 10, they end up with 1 ,000 stores. I'm still saying that's worth doing. One time out of 10 ,000, I don't know where the line is, but it's somewhere between 1 ,000 and 10 ,000 probably. Was it worth a go? Yeah. Now, it was low probability.

52:17So there's plenty of people who say, of course that was never going to work. To your point, the surprising is things that you didn't think would work did work. So just because you don't think it's going to work, you're not going to not do it, right? And so you go, right, so we know that. So they went, they gave it a go. And they were then smart enough and had enough humility to say, we tried, we tried, we tried. We're going to stop trying because it's costing us money and we're not making any progress. That was the smart thing. That was the really smart thing. And I think there's just so much value in trying and failing quickly and then doing something else.

52:47And I think, you know, as an electorate, as a populist, we're too easily riled up by the tabloids and the shock jocks and the whatevers and general tribal bananeness about which political party we prefer. Rather than saying, you know what, a government should say, I'm going to try this thing, and maybe it'll work, maybe it won't. If it doesn't work, then we won't do it anymore. And if it works, we'll keep doing it. And it's like, why would you not do that? In what world is it not saying to do the experiment? You know, it might not work. Okay, but it might work, yeah. And if it worked, would it be good?

53:14Yeah. Would it cost us much to try? No. Should we try then? No. No, just in case it doesn't work. It's like, what? So, yeah, I love the examples you gave, mate. It's a really important one. Yeah, I think trying is worthwhile and we get to see it play out and that's a win. I think that's actually a good rule of thumb for any public policy. I would love to have something which, when enacted, has at the start a deliberate end date. Not to assume failure. Yeah, yeah, yeah. But just to avoid that momentum of, well, we've got it now, I guess. What do we go? Oh, we can't do it because we'll lose job or whatever it is.

53:49It's just sort of like it's why there's a natural ratcheting effect with a lot of sort of public bodies. It's because, you know, we never allow for the fact that it might not work great and we're never prepared to sort of make the hard decisions if that ends up happening. So, yeah, it's really good. I mean, it's just, and as you say, there's no, it's hard to be, if you're being sensible and mature about things, it's hard to be critical. if it was a reasonable idea, reasonably conceived, and you tried it in baby steps, you didn't just throw everything at it. Yeah. You know, it's like, guess what?

54:23We're not having a military this year just while we tried some better, faster trains in Melbourne. You know, like, okay, a proportional and then if it works, keep doing more of it. If it stops, if it doesn't work, then stop. That's a really, we should do more of that stuff. I've often said with investing, if you're not failing, if you're not making mistakes, you're not taking enough risk. And I so genuinely mean that, you know. The kind of person who never makes an investment mistake is a liar. The kind of person who makes very few investment mistakes is leaving a lot of money on the table, I would say.

54:59Love how that put it. I think thinking a little bit more like investors would behove our government as well. Mate, Jared sent us a question. Good morning, Motley Fool team. Go, Jared. A question or a potential topic to cover off on an upcoming Motley Fool podcast, if of interest to a wider audience. I appreciate the humility there, Jared. It is in a picture, so we're going to ask it. How should, he asks, an investor evaluate a company's debt levels? With some very well-known companies carrying significant amounts of debt, e.g. BHP, how would you recommend an investor form a view on risk associated with that debt?

55:32Lots of company presentations refer to net debt, leverage, free cash flow, interest cover, and so on. Only using BHP as an example for this question, but it would be great to get your views on this from a broader business perspective. Should investors evaluate debt differently through different lenses based on the industry the company operates in? Cheers, Jared. Great question, Jared. Great question. How do we evaluate them? How do you evaluate the debt level of the company you're looking at? Yeah, I mean, it definitely depends. It depends. I mean, the great example here was Transurban or Sydney Airports back in the day.

56:06You know, you're essentially running monopoly type assets that extremely long lived that have mandated minimums, I think, in some instances. Like it's just like the cash flow is there. The asset is the debt is backed by real tangible assets that definitely have value. It's like you're silly not and you're silly not to have debt. And frankly, from an investment standpoint there, it's kind of like the returns on on capital are probably not going to be great. So a little bit of debt to juice it is reasonable. You know, if you're a small retailer selling fidget spinners, if they're still a thing, then it's really dumb because you don't have the reliability of cash flows.

56:51You don't have a lot of assets to back it. And if you have one or two bad quarters, let alone one or two bad years, you're gone, you know, because the debt is just going to wipe you out. So it definitely depends. I mean, you can get quite deep down the rabbit hole here. It's just I read an article a little while ago which just really got me thinking on all of this and it was all a different angle. But anyway, why does Coca-Cola have debt? Why are these 100-year-old companies that gush cash flow and moats the size of Christmas have no, even the biggest of bears might say they're overvalued or they're not growing.

57:27No one's saying they're going away. Why do they have debt? And you kind of think, well, because they're shorting the currency. right? Because like, well, why wouldn't you? Why wouldn't you take money that as a corporate giant, you're going to pay a cost of capital of pennies on the dollar, you know, bugger all, three, four, five percent, right? That you know, you know, one, in real terms is going to deflate and two, more importantly, you're going to get a higher return of capital on that. So it's not like, do you need the debt? Absolutely. We don't need it in any way, shape or form. But there's a capital efficiency argument to be made there.

58:02Now, again, you can get too cute. You can get too cute with all of that kind of stuff. But that's a really funny thing and people are too binary with it. You know, it's funny because if you sort of said, you know, it's not funny at all, actually it makes a lot of sense, but if you talk about a mortgage, no one really thinks you're doing anything reckless whatsoever. But if you said you got a margin line, it's like, ooh. You know, all of a sudden, very, very different perception. from a higher level viewer. It's like, wait a second, I'm borrowing money to invest in an asset that I think will grow at a faster rate than the cost of capital.

58:37So why wouldn't I do that? We do have to allow for the differences in structures of the margin loan versus the home redraw to invest in shares is different, but yes, yes. Totally. Volatility of the asset, all of that kind of stuff. But it's why the question comes in so often for the pod. It's like, what's wrong with the margin loan? And people make some really good points. And you've articulated that it's just not for you because of temperament and preferences and all of that kind of stuff. But when you get down to the sort of the baseline, so what, it's hard to argue against this kind of thing.

59:08So, and it's also, it's a spectrum, right? There's the difference between I've got a margin line, but my portfolio is one stock and I've got an LVR of maximum 75 % versus I've got a portfolio of 50 blue chip stocks and ETFs. and I've got a margin loan, but my LVR is 20%. My loan to value ratio is 20%. Both investors are borrowing money to invest in stocks. Which one do you think is, I mean, are they even within of each other in terms of any kind of sane risk assessment? So Jared, was it? Jared, I think you have to look at it in those kinds of lenses. One, as always, what's the money for? Like I will always bang the drum.

59:52If you've got a very high conviction investment idea as a business and a board and you feel as though like we've got, we do something that no one else is able to do and I know if we threw some more money at it, we'd get a 20%, 30 % return for the next few years and we can borrow money to do that and we don't have to dilute shareholders. Do it. Dilution is forever. Debt is temporary, right? So it is absolutely. That's really great. Yeah, yeah, yeah. Isn't it? It's actually great. And, yeah, but if you're just doing it because you feel like this acquisition might help boost a bit, you know what I'm saying?

1:00:25So, A, what's it being used for? Two, how easily can you survive things not going your way? And it's all, again, I mentioned it, was it last, another pod anyways, that whole Charlie Munger tell me where I'm not going to die thing. It's like what could go wrong under this financial setup that would wipe me out and how comfortable am I with that kind of stuff. Don't look at what can go right. We're all going to look at what goes right. You know, we all load up on debt and buy our, you know, 15th negatively geared property because we're convinced it's going to the moon. Yeah, great, because if it happens, it's like hard to argue.

1:01:00The rationale makes perfect sense under that set of assumptions. Under a different set of assumptions, the most reckless, stupid thing you can possibly do. So at least know what assumptions you need for this thing to sort of go right. so it's a very long-winded it depends kind of answer and it's going to be very unsatisfying don't look at things just like debt to equity or interest cover they're useful metrics they'll tell you something but you've got to couch it in that broader consideration to my view i'll shut up mate what do you think no no no perfectly great job i so how do you look at debt um everyone's doing the ball Warren Buffett drinking game get ready um so a couple of things Buffett has said leverage is the only way a smart guy can go broke.

1:01:43And he said something along the front of the exact quote, actually, about you never want to rely on the kindness of strangers. Okay. And so what are both those lines are telling you is that by taking on debt, you are adding risk, full stop. It may be appropriate risk. I don't mean risk pejoratively. I just mean it is by definition adding risk. Definitionally, you're riskier than you would be without. Yeah. Yeah. Like you owe$10 on your home loan, the bank holds the title deed, right? You don't, you owe. It's just objectively, directionally true. It doesn't mean it's bad. You have too little risk even with debt.

1:02:21But I'm just saying it must be true. Relying on the kindness of strangers gets to Ram's point about the question of where do you draw the line, and it comes down to at any point if I'm forced to rely on other people being nice so I don't go broke, then I've gone too far. Now, to your point, Jared, you asked about should investors evaluate debt through different lenses based on different industries. Yes, for exactly this reason. And we've talked about the shop selling stuff versus a toll road. The question is absolutely about the reliability of your cash flows and the exposure, the size of that debt and the size of the interest bill.

1:02:58Even though Ram said, look at interest cover, don't rely on it. He's right again. But think about the way those things interact. so if I've got a$10 mortgage left on my house I don't need to rush to pay that off I probably would because$10 is why wouldn't you but you know if the bank says actually Scott time to get you I'm going to take your house if you don't have any money I'm like here's the$10 the bank's like oh bugger all right well fine we'll discharge the loan then that's disappointing the bank comes to me and says Scott you owe a million dollars on your house it's worth$900 ,000 I'd like the money now please and I'm like ooh okay that seems bad And I'm using deliberately stupid streams to make the point, right?

1:03:36And, Rame, you made the point exactly the same about margin loans and about company debt. It's all – it depends. Of course, it is because it must be. And you've asked – and you questioned, Joe, significant amounts of debt. And, again, significant is a relative number. And I want to make this point because is a billion dollars a lot of debt? Well, it depends on the rest of your business. Is$100 ,000 a lot of debt? It depends on the rest of your business. Is$50 ,000 a lot of debt? It depends on the rest of your business. If I'm a dress shop and I turn over$25 ,000 a year in revenue and I've got$26 ,000 a year in expenses and I've got$5 ,000 worth of debt, I'm in a world of hurt no matter what, right?

1:04:13Not because the debt seems to feel small, but I'm losing money every year. I'm not even paying the debt off, but if they do call it, I've got nothing. If the bank says, oh, time to come in for just a creditworthiness check just to make sure we can continue your loan, you're like, oh that feels bad i i don't like that um and you're gonna tell me you're gonna tell me i want the money now it turns out the dress shop sucks uh give me the money i haven't got the money and the bank says okay um we'll have the keys and the inventory please off you go uh and you'll be spending your seven years undischarged bankrupt okay too much debt right bhp has i don't know how much it doesn't really matter um well it doesn't matter because maybe it's too much so i probably shouldn't use the example another company a big company with a lot of debt but a massive massive amount of assets.

1:04:57So debt of a, I don't know, pick it up,$100 million of the debt, but it's got$200 million worth of assets, and it makes$50 million a year in profits. That's a very, very, very, very reasonable amount of debt, as long as you're in an industry where that can stop tomorrow. And that's the next thing, is how certain, how reliable are your cash flows? And it sounds obvious, right? Now, I will say for BHP, I would be less comfortable in most, maybe, or many, because what's the iron oil price going to be next week, next month, next year? I mean, if it's$40 a ton, everyone's having very serious conversations, right?

1:05:27If it's$200 a ton, everyone's popping champagne corks. And BHP, very low-cost producer, almost certainly going to be fine. I'm just making the argument that even... We haven't talked for a while, mate. I haven't read about blue chips for a while. The idea of a blue chip is it's big and everyone knows it and, of course, therefore it must be safe and it must be secure and it must be this, must be that. Look at AMP, right? AMP, how can AMP possibly go badly? It's a household name and it's in the financial service industry and the finance industry has grown like Topsy and, of course, AMP will be fine.

1:05:53They can carry a lot of debt, can't they? Now, they didn't, thankfully, or at least not too much because they're still in business. But in a different world where they said, we're AMP, how can things possibly go wrong? And then you fast-forward like, oh, that's how. Now, they may not be around right now. Now, they are and that's fine. So those things are really, really important. So think about the reliability of the cash flows, the size of the debt relative to, I'm just going to say X here, because it's not just one thing. It's the assets you own, the cash flows you generate, All of those things matter.

1:06:25The other last one quickly is allow for some sensitivity of interest rate changes. And it feels obvious now. We were saying this years ago when mortgage rates were 2%, the official cash rate was 0.1%. Don't assume that's forever. So as and when interest rates rise, company interest costs rise, and that eats into profit. If you're a business that's a lot of debt and your interest rate doubles and your repayments double, that can make a huge impact on your business. And here's the other thing quickly, Jared. It's not just a matter of whether they go broke or not. Because in that case, even if a company doesn't go broke, but its interest bill doubles and it's a very indebted business, its profit's going to be meaningfully lower.

1:07:02It may be meaningfully lower for a long time. And so the company may not go broke, and that's a win, but it might actually be permanently worth less than you thought because you'd factored in or the market had factored in a low ongoing cost of debt that simply wasn't the case ongoing. It stopped being low, and the profit got crunched, and so the PE got crunched and so the share price fell and you're like, oh man, I thought this thing was great. It still might be a good business. But if you misunderstand the role of debt and the cost of that debt on the balance sheet and on the P &L, then you've got some significant issues that may come.

1:07:38Also, that was all pretty negative. Positively, to Ram's point, you can use debt intelligently. I prefer companies that don't have any debt at the corporate level. Berkshire is a great example. Buffett's, some Buffett's subsidiaries have debt. We shouldn't call Buffett's anymore. He's the chairman, he's not the CEO. Berkshire's subsidiaries have debt. The company at parent level doesn't. And what that means is if the subsidiary gets us off in trouble, it can't bring the parent down. And Buffett's view is just, we don't need to use the debt and introduce the level of risk that we don't want to take.

1:08:07And that's completely reasonable and okay. I sleep better with companies with less debt because it's just one less thing to worry about, one less risk that can come and get you. Now, could Buffett have half a trillion dollars worth of debt? Yeah. Would he get it from the banks? You bet he would. They would fall over themselves to lend to him. But he just chooses not to. And I think that's also completely fine. I invest with companies with debt. I invest in companies without debt.

1:08:36The risk with debt is it's a little bit like, you know, we say sometimes companies that pay dividends just tend to be more disciplined because they know they have to pay the cash out. And there's expectation that you're going to. So it kind of, it forces a bit of discipline on the capital allocation. You can't just go and throw the money at the new great growth thing that someone in, you know, that the M &A team came up with because, oh, mate, we're going to be great. Okay. If you're paying a dividend, you don't, you can't use that cash. If you're not using debt, you can't just increase the debt to justify doing a thing, right?

1:09:04And so there's kind of, there's a bit of discipline forced on a company from that perspective as well. But yeah, I'm not against it. I think understanding it in small doses is perfectly fine. too much of it, not even an uncertain amount of it proportionally. Is it too much? If you don't have to ask the question, it's too close to the line for me because you are opening yourselves to a range of outcomes. Frankly, how often is there a pandemic? Once a century. Turns out, you know, 2019, we look back and went, has it happened for a while? Okay, that's cool. Let's assume it's not going to. You mentioned, by the way, just really quickly, ready to finish off, Webjet and Flight Centre had massive amounts of debt.

1:09:41their business was shut down all of a sudden, they had double their share counts. You mentioned equity being forever. They had to issue some forever equity to pay off the temporary debt because cash flow evaporated. Now, I'm not critical of those companies for not forecasting COVID, right, because no one could have. But I think at the time, and certainly in hindsight, they were assuming it wouldn't happen and nothing would happen that would cause that to happen. And that's a very real-world example of where they absolutely got tagged for having what would have been considered a month earlier a reasonable amount of debt because that wouldn't happen.

1:10:15What are the odds of, you know, the global airline market network shutting down? That's not going to happen. We'll take on some debt. It's like, ah, guys. So, yeah, I think I don't want to use that as the only example because there are 99 % of other companies didn't have to do that. And so on average, if you own Webjet and FlightSan and then another 100 companies, you're perfectly fine. You got through COVID fine. But that's the sort of thing that if you, at a company level, it might only be a 1 % chance. That means it happens once every 100 years. That's not nothing if you're holding for an extended period of time, right?

1:10:45So just I think there are things worth keeping in mind. Yeah, nicely said. I think we probably frustrate listeners because it's so tempting to be able to say, you know, if the debt equity is above 80 % and the interest cover isn't 4%, and I'm smoking because I very much used to espouse this kind of stuff. Oh, yeah. You wouldn't do that. But I'm like, well, life's just not so neat, right? Yeah. Like it depends. It really does. And I think Scott's laid out a good framework there to think about it all. I want to just double down on one thing I said and we'll wrap it up. But I made the point of you at Flight Center, we've got a hundred other companies.

1:11:24And one of the things that's really hard for investors and really hard for companies but very much worth thinking about is what is a company-level risk and what's a portfolio-level risk? and those are really difficult unanswerable questions in any absolute sense as you said remit depends still does why don't you know if for example let's go fortescue um it's it's an iron ore company it's in one asset class you could say if i was running fortescue i want to diversify so that i'm not exposed to this and that and the other thing so i'm going to do going to diamond mining and gas drilling and we'll be diversified miner and some have done that south 32 is a collection of stuff.

1:12:04BHP built and merging gave them some diversity of income, diversification of income streams and all that kind of stuff. And as an investor, the portfolio instinct is, that's a good idea, yeah, because you're diversifying that, that's smart. Problem is at a portfolio level, I can do that for myself if I want to. So would I rather have a diversified BHP Billison or would I rather have 20 companies in my portfolio that do one thing really, really well each and let me look after diversification. And it's unanswerable, right? Because the company can't know who its owners are, at least in terms of total assets and whatever.

1:12:39Some of the owners do want diversification entirely of the company because they want individual positions to be diversified. I don't want to buy a single resource asset. I want to buy a mine that does all the things. So BHP hears that and goes, well, we'll do all the things then because that's what our shareholders tell us to do. But do you want BHP to do it or do you want to buy BHP and Fortescue and Woodside and Newcrest and whatever and do your own diversification? And again, there's no objective answer to this question, but it's an important one. And I raise that because when it comes to the debt thing, how much debt should an individual company have is a really good question for its own survival.

1:13:13But Ram's already made the point about the ability of leverage to maximise or to improve returns. So if you own 25 companies, if I owned one company, I'd want no debt at all because why would I play roulette and eventually get a zero, right? I want no debt in that company. If I had 25, do I want them all to have a decent amount of debt so that they maximize their overall returns, even though one of them is going to go broke every 25 years? Yeah, I do, actually. And so, again, you've got this kind of conversation of, at a portfolio level, what does the investor want? You don't need 25 risk-free companies if you're doing the risk mitigation for yourself.

1:13:51And so I hope that is exactly around the idea between what I want for me versus what the company wants for it and how the company forms a role in a portfolio, it doesn't need to be, not every company needs to be dead safe if the portfolio itself is safe because I've diversified appropriately, for example. Oh, totally. That's why I'm saying if you never make mistakes, you're not taking up risk. Yes, yes, yes. Because the safe bets are never going to 10X. Correct. They're just not, right? So, and not that everything, it's a bit of a silly example, not that you should invest only in things you think are going to like multi-bag in a very short space of time.

1:14:24But, you know, like that's kind of, you, if you want to catch a particular type of fish, you've got to use a particular type of bait and fish in a particular type of area, right? You know, there's no point going, I'm going to go to the local creek and see if I can catch a marlin. Like, you know, good luck. It doesn't matter how good your technique is or what bait you use. It's just never going to happen. And, you know, I really tortured the analogy out here. It's like someone who does go marlin fishing and goes in the right spot, not going to catch one every time. But you know what? Correct. If there's a fishing competition on and there's 100 boats go out there, someone's coming back with one, right?

1:14:59Probably more than one. It's, hey. And then people will say, yeah, you got lucky and et cetera, et cetera, and they'll point out to the ones where it didn't work. It's like give us stuff because your point is what matters is the portfolio. And it's hard, right, because it requires you to think at both levels at the same time. And so, Jared, I guess to your question, I'm not going to reject the premise of the question and do the politicians thing, But I think the nuance is a bit more than just how do I think about a company's debt versus how do I think about the usage of debt across my portfolio?

1:15:29And the answers are really different. Because if my job is to make sure BHP never dies, the answer is no debt. But just because if never, literally if you're saying never, it can never die. Do everything you can so BHP never dies. Okay, that's easy, right? That said, I'm going to get much lower returns. But I did what you told me today. Even that, I'm sorry, I'm going to be a pedant here, ruin your point because it's a very good point. But even then, there is companies who are just like, you know what, let's not spend the money on the R &D. Let's not explore this new market. And then fast forward, it's like, oh, the other competition that did has crushed us and they've just run it.

1:16:08So it's kind of true in all areas. Playing it too safe is a risk in and of itself. Just as we would sort of say, hey, if you want to never experience volatility or have a loss, put it all in cash. That's a perfect example. And that's exactly – that's a great example too. And again, so, Jared, at a company level, hopefully we've given you some ways to think about it, and I think that's true. I just would say maximising your portfolio returns does not mean only picking companies that have very little – I won't say never because you're right, Ram – have very little chance of being killed by debt.

1:16:38Yeah. Not in the near term, yeah. Because you don't need 20 out of 20 successes to be successful as an investor. And by the way, if you've got 20 out of 20 and they're all – I know, CBA or what's a pedestrian something? It doesn't matter. Willies, I know. Right, yeah, yeah, yeah. You have 20 willies would be fine. Or you could have five did extraordinarily well, 14 do okay, and one fall 90 % because I had too much debt. You know, again, it's not that binary either, but just thinking about it that way, think about the portfolio, not just individual companies when it comes to analysing the debt you're carrying.

1:17:13Unless you're an investor who just never wants to have any risk in any company, that's fine. It's hard to get rid of his ranch. Have fun staying poor, as the cool kids say. I haven't heard that one for a while. Is that still going around the internet? I'm bringing it back. You're bringing it back. HFSP. I heard it here, if not first, for the first time in a while. I'm told 6.7 has gone too. I try to use that. It's because people like us started saying it, and that instantly kills it. Dad, people aren't saying that anymore. I know, Matt, but I still am. Stop it. Anyway, I think we're done here.

1:17:45We're at 6-7, mate. We've naturally come to our conclusion. Thanks for the questions. We hope you've enjoyed it. If you've got more questions, comments, feedback, suggestions, topic ideas, all the good things, if you want to throw money, info at fool.com.au is the way to get in touch with us or jump on the socials. Ram occasionally tweets about things other than Bitcoin and central banks, so you don't want to miss that day in the decade. Go to sage underscore simian or at strawmaninvest on Twitter. You get me at tmfscottp on Twitter and Insta and Scott Phillips' money on Facebook. Buy the one-page investing plan.

1:18:19Oh, yeah. Tell them Scott sent you. Endorse. Strong endorse. Until next time, full on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.