Mailbag: incl. How should I invest at 60? May 25, 2025

25:18You caught me mid-Google. I'll kick off. Do you want to go first? Yeah, if you've got to go. Well, okay. I was just going to say, I'm asking, ChetGPT, what is the average life expectancy for an Australian that is 60? The reason I ask that is because when you look at demographic sort of stats, you'll hear the average life expectancy is X. But it gets massively skewed, not massively, but significantly skewed down because of child mortality, car accidents, you know, these kinds of tragedies. Once you're 60, here you go, in Australia, you can honor, well, he's nailed it, you can expect to live into your mid-80s.

26:00There you go, perfect. So because you've lived long enough where you're not doing the dumb things that a 20-year-old will do anymore, right? Let's get real here. You got through childhood disease, you got through misadventure. Yeah, exactly. You're not base jumping off, you know, in the Kakadu Ranges somewhere. So you've kind of like the old saying, I used to have a deal with a few clients. They'd say, I'm too old. I don't even buy green bananas anymore, which I always loved as a saying. But I was just like, no, dude, you've got like decades left to go. Decades. And so you are a long-term investor.

26:37But the way I would answer the, so I'd make that point. The way I would answer the question though is, and I often say this, but it depends on the pool of capital you're working with. just to make a stupid point if you've got 10 billion dollars absolutely invested right like what you can't spend it so what else are you going to do with it yeah if you've got enough where you can draw down 50 grand you paid off the house you got 50 grand a year that's enough for you know the groceries a bit of a medical bill and the odd holiday then it's a very different way you can't put all of your money into the market because the market might drop 50 and stay there for three years.

27:10And you just don't have the means to support yourself in the interim. So it depends on how much money that you've got. Once you get beyond the point where you're not earning an income anymore, I think it's, there's no perfect answer for this, but I would think it is prudent to have at least one year, certainly probably two or three years of living expenses in the worst investment possible, which is cash. And it is a terrible investment, but you know it's there, right? And if there is a, what do I say, if, when, over the next 24 years, there's going to be another horrible bear market because we've never had a stretch without such a thing.

27:51And you'll go, well, that really sucks, but at least I can, never a forced seller be, right? That is the last thing you want to do. And if you've got cash on the sidelines, you can fund your lifestyle. You can wait for things to recover as they almost always – well, on average, they always do. So that's how I'd answer it. Yeah. I agree with a slight twist, which is I would – it gets messy and it's not that difficult, but just for what it's worth. I'm with you. Don't have any capital invested that you need in the next three years. but I say capital deliberately because if your investors are producing income then you don't need to have as much pure cash on the sidelines so take an example, I'll use a 50 grand number mate if you're in a situation where you're investing and you've got dividends and your dividends are paying you 50 grand a year in dividend income, then you can probably say well okay, let's assume it goes down to 30 in a bad year, I'll keep 20 grand on the sidelines and assume I'm going to get 50 a year.

28:57And if it goes to 31 years, then I've still got the 50 to spend. So I wouldn't say I keep three years of absolute cash-cash on the sidelines. Now, if your assets aren't producing any income at all, then yeah, absolutely, you don't want to be a forced seller. If your plan is to sell down some shares every year to fund that retirement, you want to have a bit more on the sidelines because you don't want to be funding down, as you say, Matt, as a forced seller or a bad price. So it kind of depends on how you're structured a little bit. But yeah, take that kind of, the axis. You are on two sides. You want an amount of cash that you need to meet your bills and a very conservative estimate of what cash generation your portfolio is delivering.

29:34And the difference between those two numbers is what I put on the sidelines. Yep. Does that make sense? Yeah, it makes perfect sense. I mean, isn't that the perfect scenario? Yes, of course. If you can just have enough where, as I say, you're not working for your income, but your money is working for you, it's just a thing. And you can afford not to care about the share price because you're not going to sell. You're just taking dividends from it more often than not, something like that. There's a wonderful chart from going blank. Noel Whittaker? No, not Noel Whittaker. Peter Thornhill? Peter Thornhill.

30:02And he shows, he delineates the share market between resources and what he calls industrials. It's a broader definition of industrial. Non-resources. Non-resources. And he just sort of looks at how dividends on average have sort of changed over time. And when you have a 2009 GFC or a COVID or any 87 market crash, obviously things get bad. Companies cut dividends. But they don't fall by as much as you would imagine. And they recover very quickly. And the volatility that we associate with the market just isn't there. When you look at the bar chart, it's kind of like up and to the right with the occasional dip.

30:43And I'm like dip. Slot dip. Yeah, that's right. You'd be surprised how many companies continue to pay dividends. because I'm only paying out 70 % of my earnings. And, okay, my earnings dropped, but I can still afford to do it. And I know people value that. What is it? Solpats is now how many years without dropping a dividend? 25. It's now a dividend aristocrat. Finally hit the threshold only a couple months ago. And it would have suffered more 20 % drawdowns than you can count. Correct. So it is a – even for those that are scared of the volatility, again, assuming you've got enough cash there where the yield itself can support you.

31:18It is a thing of beauty. You don't need to worry too much about the volatility, other than the big caveat being is that a company that goes out of business is not going to be able to sustain dividends and then recover. So you want a resilient business backing it up or a group of businesses. Yes, exactly. Yep, yep, yep, yep. I'm going to throw a quick plug in, not because it's supposed to be a plug, but because it's literally a worked example. We run a service. I run a service called Motley Fool Everlasting Income, and it was literally mirrored off a portfolio put together for my mother-in-law in her retirement.

31:48to do exactly that. And I went back and looked at the GFC because it was, actually, we set it up. The server's about eight years old, I think, and the portfolio, she must be at least 10, that we put back together for her. And so 10 years ago, it was 2015. We looked back at the GFC and I literally went through it and went, okay, here's the companies I recommended and here's what happened during the GFC. And yeah, the dividends dropped a little bit. I think it was 15 % across the entire portfolio was the maximum at that point. and so yeah but you know short long story short we turn that into a monthly full service because we figured other people might want that advice as well that help as well and what we actually do is we keep a year's worth of we call them paychecks but you got to differentiate between the income to the portfolio and the income to the individual so we have a portfolio account and we keep a year's worth of that portfolio income in cash and we invest the rest and that way we know it does two things that lets you manage the variable timing of dividends.

32:45So some months are great because they all turn up. Other months you get no dividends at all. But so you can take out a regular, and again, it's not an added, I'm not going to give you a link or anything, a sales offer. But we've done it that way. So you can draw down regularly, not worry about the timing of the dividends and having a full year's worth of income in cash plus regular additions. It'd be a really, I can't perceive of what would have to happen for that cash to be completely removed and have to sell something. Our aim is never to sell, to supply that income. And so far, eight odd years later, almost exactly, actually.

33:16I think it was April or May last, in 2017. Eight years later, that's exactly what we've done. So we went through the COVID crash, all sorts of stuff. Again, not to say you should join our service, but it works if you do it that way. The combination of some cash just to allow for fluctuations of cash flow timing and potential reductions in dividends, but also just to give you that level of comfort that you've got enough if you need it, and it's worked perfectly well for the last eight years. Yep. Nice. Another question from Todd. What is the difference between Vanguard and Fidelity? Are they close enough that it really doesn't matter or is the difference noteworthy enough to pay attention to?

33:52In the context of the ETFs they provide? I suspect that's what Todd's probably asking you about, yeah. Yeah, no difference. Well, no. No meaningful difference, I would argue. They're both subject to the same regulations, the same laws, the same licensing conditions. You could make a view on the morality or competency of management and the rest of it. But they're both in that. And look, you could say some nasty things too if you wanted to. Let's be real here. There's plenty of finance companies that are not great. But yeah, they're all birds of a feather. I would say. It all comes down to the management fee and the investment options you're choosing.

34:40So, you know, if you're doing an ETF, I personally would go very passive and I would go very cheap. And personally for me, that's been Vanguard almost entirely. I have a NASDAQ ETF, which I think is a beta shares. I think that's right. Yes, it is. So it depends on what you're looking for and what the options are and what the fees are and all that kind of stuff. But, yeah, as long as it's a licensed Australian managed fund provider, then they're all much for much. Just in terms of the structure, the fees will be different. The financial – sorry, the strategies will be different. So not every ETF, the same as every ETF, even across within a fund or a fund manager, let alone between them.

35:13So if you're comparing like for like, if both of them have an ASX 200 ETF, then you're getting the ASX 200. They're going to follow the index. There's going to be a fee, which will probably be relatively close. Doesn't need to be too big a deal. That being said, there's a very big difference between an ASX 200 ETF and a double leveraged gold bear China ETF, which is picking stocks every day. So ETFs aren't ETFs. Unfortunately, as I've said many times, I wish I had a better name for the proper ones because the journey come lately is just rode the coattails and have muddied the waters a little bit for investors.

35:45Finally, says Todd, this one's Andrew's fault. Sorry for the rampage I'm about to start, Scott, but in a previous pod, Andrew said he wished more people would be deep thinkers. Here we go, says Todd. What if the ATO taxed everyone at 10 % and we didn't have to do a tax return? Sorry to all you accountants out there, he says. Would it be worth the government's discussion? Would it help generate enough extra income to lower the country's national debt or just prolong the agony? Look forward to your thoughts and wisdom and thank you for keeping the pod machine going. It has made me financially smarter and opens up discussions at work.

36:18That's a good one too. Regards, Todd. What do you reckon, mate? Tax everyone 10 % be done with it? I love the elegance of it. I'm big on simplicity and elegance when it comes to tax. I do think it's a little unfair. Yeah. You know, someone working part time, you know, in a low paid job, you know, maybe scraping together 20K a year, they're going to pay$2 ,000 in tax. Like, you know, I know the proportion is the same, but it's sort of like there's it. I do like a progressive. What am I trying to say? I like a progressive nature of our tax system. And it's just, all it is, it's not, let me really hasten to add, it's not punish the rich, which is a lot of this stuff sort of comes from, which is everyone's opinion until they become rich and then it's the opposite.

37:14No, all your success to you, I think, but no person exists as an island. You know, your fortune has been built by virtue of the social, financial, physical capital that is around you. Try starting a business in deepest, darkest Africa and see how well you go, how hard that is. And if you have any success, it'll probably be confiscated, right? Or bandits will, you know. Property rights, roads, infrastructure. You have no idea. Law courts. The size of the market, the discretionary income of consumers and the rest of it. starting a business in America and Australia and Europe is such a different ball game.

37:56And it's just like you have benefited from the wealth and collective institutional strength of that country. And it's just, I think it's not unreasonable to give back. Again, not for punishment. And I don't think we should tax the living hell out of people. I think it should be fair, but proportionate, I think as well. So that's the only criticism I'd have with the approach. I agree with you. Yes, elegant is good. Simple is good. Although, as Einstein said, everything should be as simple as possible, but no simpler. And so that's kind of, you know, I think that's the... Here's my thing. Your point about the after-tax income, mate, is what comes down to me.

38:32God forbid, don't use the word fair when you talk about tax because people jump in your throat really quickly. So I'm going to use a different word and just say... Subjective. If we... No, it's also, you know, it's fair for me to keep my money. It's a different meaning of fair. um so i'm going to say similar things to you but i will for the sake of todd's question i um we have a we have a society now and there's a lot of there's a lot of presumptions in all these conversations because ideology right so if we think a society is a worthwhile thing and if we think that society should provide and benefits from communal what they call public goods in other words the things we all get access to then we say right it should land by the way if you disagree with that you want to be an individual's anarchist that's cool and we're not going to agree and that's okay you can have that view but if you believe we have a society and the society is as public goods then the question is uh who should provide the funding for those public goods given that we have different needs and given we have different means and i think it's reasonable as opposed to fair reasonable for those with additional means to throw in a bit extra compared to someone who has less means because we never talk about because no one's interested in respecting from a lobbying perspective, we always talk about how much money we make and how much tax we pay.

39:44That's very reasonable, right? What I would love someone to publish one day is a disposable income chart for different income groups. Because it's fine to say, as you said, mate, someone earns 10 grand or 20 grand, they pay$1 ,000 in tax. Makes sense, right? 100 grand, 10 grand in tax, makes sense. except the person who earned 10 grand and pays a grand in tax is still begging for food and the person on 100 grand is driving a BMW. And again, they're entitled to do that. To your point, mate, I have nothing against it. But who is it more reasonable to ask to contribute more to the national project?

40:20The person on the bread line or the person who's got four Maseratis? Well, I'm going to say directionally, and that's what progressive taxation does. Directionally, I reckon it's fair to say to the person on the Maserati, mate, you've got more than enough. That poor Boko there is really struggling. should I really be going for him for more money or should I maybe say, look, dude, can you, you know, next time you're filling out the Maserati, put half a tank in and put the other couple of hundred bucks into the national till. I reckon that kind of makes sense. So I hear you on the simplicity, Todd, and the easy 10%.

40:53I would, though, by the way, speaking of simplicity, and I've talked about this before, Ram, I'd get rid of almost every tax deduction out there. That'd make it a whole lot simpler. 95 % of us shouldn't need a larger tax return, which is your point, Todd. And when I say that, I guess what I'm generally meaning is the ATO gets our payroll information as it is. They know how much I earn. They tax me accordingly. I should need to go to the ATO and press the OK button. Do you have any other information to add? No. OK, good. You got my health insurance information automatically. You got my bank accounts automatically.

41:23You've got whatever is automatically. You got all that stuff. Cool. Just take, you know, yeah, I'm done. That's the way to simplify things. I don't think we need to equalize or standardize It's particularly the stage of computerization. You know, it doesn't – you know, if RAM's on 35 % tax, I'm paying 32 % tax and you're paying 48 % tax, it's not hard to calculate. The ATO does it for us. It's all very simple and very easy. So, yeah, I get the simplicity of it. I think that probably is an argument from a greater consumption tax, frankly, a GSC to be higher and offset that against some marginal tax rate reductions.

41:56Again, though, I would be careful to make sure we don't disincentivise those on lower incomes because they can't avoid the GSC and so they would end up getting whacked more. We might have to do things with wages or welfare payments or minimum tax rates, tax rate thresholds, that kind of stuff. But broadly speaking, I understand where you're coming from. I would simplify too. I just wouldn't go quite as far as you're suggesting, Todd. I would tax. And the other big thing, I would tax wealth, not income. Yeah. Very different. I would, speaking of making me unpopular, I would tax inheritances. I would tax wealth during life, but I'd tax inheritances.

42:32Same thing at the end of the day, right? So whatever's unspent. We're question when you tax it, I suppose. Yeah. Oh, it's a whole debate. It's a whole thing. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

42:49Let's get a question from Brett. Hi, Scott and Ram. Firstly, feel free to use my name. In brackets, Brett. Thanks, Brett. Secondly, I'm a big fan of the pod machine. Since deciding to grace my ears with your lengthy rants and otherworldly athletic feats around 18 months ago. Thank you, Fred. My question, geared versus non-geared ETFs. If I have a long investment horizon, 30 plus years, yes, that means I'm in my early 30s, bastard, sorry, he says, and plan to dump a lump sum into an ETF, would I not be best going into a leveraged ETF versus a non-leveraged one? I acknowledge a fee difference between the products and understand that leveraging could also supercharge your losses in a downturn.

43:28so I'm hoping there's no GFC 2.0 in my first year of retirement aren't we all Brett but with a long term view would a leveraged approach still not lead to a lot greater gains what am I missing cheers fellas and full on Brett do you want to go first or you go first yes so

43:50pride comes before a fall I so if you can control all of the circumstances then as long as the market goes up by more than the cost of debt you're better to gear than not that by definition if i can borrow at six and invest at 10 i'm gonna do that as often as long as i can as long as there are no circumstances in which i either have to have a margin call or i have a situation where uh the losses simply magnify too quickly and overcome the value of the debt and and and leave me in trouble now is it likely to happen no during the great depression when stocks fell i don't have fun they fall during the great depression do you know off the top of your head mate i want to say 80 but that sounds too much would have been that much okay at least that um so yeah i'm on mute i'm on mute sorry i'm making these profound statements i'm not getting anything back i see you talking go on uh yeah it was big It was a big fall.

44:50So let's say the geared ETF has a 50 % gearing. In that period of time, look, losing 80 % of your wealth would suck. Right? Suck, suck, suck. But the other 20 % still had to recover. If you'd borrowed half and the geared ETF, sorry, the geared ETF, but you don't borrow it. If the geared ETF borrowed half, it could be wiped out and you don't get to recover at all. So the real risk is the degree of margin, the cost of the debt, and the degree of control you have or the degree of expertise demonstrated by, just don't believe, by the way, just because they're a fancy finance person with a tie and a good business card.

45:26They're not necessarily good at this stuff. They hopefully would be, but you never know. The risk is that the circumstances of that ETF are such that you don't have the chance to come back from it. And so that's always the, you know, I'm more conservative than around when it comes to debt. We've had these conversations in the past. I would, if I could borrow a million dollars tomorrow at a below market, below average return rate. So if I'm getting at 9 % on average on the ASX, if I could borrow at five, I could borrow a million dollars tomorrow and I had to pay that million dollars back with my own, you know, my other dollars investor over the next 20, 30 years, I would do it in half a bit.

46:03Yes, a million percent. As long as there was no margin call, as long as the debt was never going to cost more than that 5%. And as long as I was reasonably confident the market would deliver more than 5 % on average over the life of my investing. Yes, in a heartbeat. But I'm designing that to suit myself, right? No margin call, fixed amount of debt cost. My choice of term or timeframe, yes, in a heartbeat. I don't know about the hedged. I've never looked at a hedged ETF. I probably should have by now, at least in terms of as an investment. But yeah, you want to be a little bit careful just to make sure that the ETF won't be overwhelmed by a market drop.

46:45Again, it would suck if the market fell that much, but at least if you've got the money left over, you're there to recover and markets do recover. I've said a million times, they've never failed to regain their surpasser previous high. So as long as you've got the time, you'll come back. But if you don't have the time because your legs are swept out from under you by the structure of the investment, then you're in some trouble. Ram? I don't have much to add to all of that. But I mean, I very much, debt is one of those things where, you know, I heard it explained like this on another podcast the other day, which is, it's like fire, right?

47:18Like it can heat your home, it can cook your food, or it can burn everything to the ground. It's how you use it. It's how you use it. So am I using debt to like trade NFTs? You know, that is not a smart idea, right? You know, am I using a little bit of debt to buy a house? I don't think many Australians would disagree. So I actually get a lot of sympathy for it. I personally, and this is not, this is just me, just me. I'm carrying a far, far bigger mortgage than I need to, but I want to because it just gives me, you know, really what I'm doing is I'm borrowing to invest. Basically. I mean, I could call it other things, but I'm just, I'm using the equity in my home to leverage.

48:06And it's kind of like, it's very appealing to me because it's very low risk. It's collateralized. You know, it's very low interest. The lowest form of interest me as a little old retail investor is ever going to get. I'm never going to get a margin call on it. Like, why am I paying this thing off for? It's your point. As long as I think I'm, what's the interest rates now? 6 % or something. I'm not on the low dock loan anymore. So it's actually a big saving. That's how keen I was for it, by the way. I was so keen on not selling as many shares as I wanted to that I took a low dock loan. And you should have seen the reaction to the mortgage program and the accountant.

48:42It's like, you know, you get those people, they like, they, because you're their client, they can't call you an idiot to your face, but they can say, no, Andrew, are you sure? Yeah, yeah, I'm sure. No, no, no. Are you really sure? Worked out pretty well. But, yeah, so I mean, I'm very much a believer in that kind of thing. But it's where do you want to put the slider between zero debt and, you know, 100x leverage? Where are you in those two points? At some point, perfectly prudent, sensible, normal. At another point, insane. And I always like to, because I can't predict the future any better than anyone else, I just like to ask, you know, what is the worst case scenario?

49:31What would have to happen? We can talk about probabilities later, but as a starting point, what has to happen for this to blow up? And you'll think through those various things, and then that'll help you determine where the line sits.

49:46The other thing I was just going to try and do here, I'm doing this on the fly. I've just built up, put up the GEAR Australian ETF, which uses leverage to give you exposure to the ASX 200. and I'm going to just use – I couldn't think of an ASX200 ETF off the top of my head. Can you get one? I know it's VAS, the Vanguard one, but that's ASX300. Oh, true. It's the iShares one, which is – I can't remember. While you look that up, I'm going to quickly share some data from the S &P and you can be a spout. I looked up the – I flicked it for me – which is the GGUS. It's the Geared US Equities Currency Hedged Complex ETF by BetaShares, which is an absolute mouthful.

50:26Now, over five years, done pretty well. And that's completely fine. What I wanted to share, though, just to highlight the risk, because I think that's appropriate, I pulled a three-year chart up. On the 14th of February, the total return from the hedge DTF was 237 % against the S &P 500's 117%. So massively smashing it, right? The problem was that was when shares started to fall. Now, if you go back to the data, it fell from a gain of over three years. This is not an annualized gain. It's a total gain. It was 96.8 % over three years, down to a gain of 31%. In other words, it lost not two-thirds of its value, but two-thirds of the gain you'd made was wiped away.

51:10At the same time, the S &P 500 fell from 58 % to 29%. Right. And it's what you would expect, right, because this particular fund is 2X geared. Yeah. What that effectively means is if the market drops 50%, you're out. and that's not likely, but it's not impossible, and I wouldn't want to bet my life savings on never having that circumstance at some point between now and retirement or between now and death. So I just, it's a, you know, now you say, well, I would get out, I would sell, whatever. Maybe you would, maybe you wouldn't, maybe you don't know, maybe you do know. But again, if you're getting out halfway there, you at least save your capital, but you've already lost the leverage benefit because it's dropped as you're selling or before you're selling or while you're selling.

51:56So, yeah, it's doable. Can do it if you choose to. By the way, over five years, that fall in February, wiped out every dollar of outperformance of the hedge fund up to that point. Yeah. So, again, I'm not trying to, you know. It came back. It would be better now. Yes, exactly. And that, yeah. Go on. Well, I was just going to, you've already made the point. If you can stick it out and you can handle the volatility. And as long as it doesn't go down by more than leverage, you're going to be entirely wiped out. That's my biggest – two things, being able to handle – emotionally handle the volatility, which would be massive.

52:35I think investing is hard. Investing here geared way is harder. But if you get stopped out, if it's wiped out or something, if you get wiped out, you're wiped out. There is no coming back other than starting saving with your first dollar again. I couldn't feel good about taking that risk with the risk of – So again, if you borrowed 50 % and it's not linked, it's not a margin, your point about it, if you've got a million dollar house, you borrow half a million dollars, you're 50 % geared, you put that into shares and you never, ever, ever, ever, ever get a margin call. Yes, if you lose 80%, it goes down to what's the number on that?

53:08I don't know, something. 100 grand, there you go. And then it recovers, great. You're not going to get a margin call. No one's going to make you sell. Your equity might even go to closer to zero when you think about the value of the debt, but it's not the single same instrument where the whole thing just shuts up and goes home. Because at some point, beta shares lenders, I assume, would say, I don't know if it's for a fact, and if you're listening to beta shares, feel free to correct me because I don't want to mislead anybody. And this is not about their product, it's about geared stuff in general, so I shouldn't use beta shares.

53:35If the fund's lender says it's been fun but I want the money back now, please, they have to close the fund. Again, you don't want to be put yourself at the mercy of a lender. Yeah, yes. so just to complete the thought bubble that I came up with here so yeah over the last five years the geared ATF has done really well 117 % return versus the ungeared 51 % that's really nice you take that yeah by the way we're all so high well at this point in time yeah I'd also be I'd just be curious I'd read the PDS the product disclosure statement just out of curiosity because there's there's a thousand different ways to achieve leverage in some ways are better than others.

54:20I suspect it can't go to zero if they're using an option strategy that I'm thinking of. It's like saying you can, no matter how something falls, it can always drop another 99%. Like it's that kind of issue with it. So I don't know if you would be completely back to zero if that would ever happen, but you could get to such a small capital base as to really struggle to climb out the other side of it. So I'm not philosophically opposed to it. The devil's in the detail. And it's just how far you want to push it. Yep. It's not dumb. I'm not going to say it's dumb though, right? I'm really not because what I just said I'm doing.

55:06You should see where the money's invested, for goodness sakes. It's madness, right? The difference with me, though, is that you're not subjecting yourself to an equity wipeout in the asset itself before you have a chance for it to recover. That, for me, is the big difference. You just explained how you've – borrowing money to invest is – I said I would do this. If I could lock in a 5 % funding cost and borrow a million dollars now, I would do it tomorrow as long as there was no margin calls or the equity couldn't be wiped out by someone calling the debt and having to meet the objective – meet the obligation.

55:39Yep, yep, yep. Question from Hussey who says, Hello, gents. I'm a keen listener of the pod machine. I have a question I am grappling with. Us too. It's the story of our lives. If you own shares in a company after it has IPO'd, i.e. if you bought them on the ASX, how does this benefit the company you own shares in? I note as an investor you benefit in the form of having ownership and receiving a share of the earnings by way of dividends. However, how does the company benefit directly from their perspective? Moreover, in the primary market or IPO phase, the company benefits as it is sourcing funding by issuing equity.

56:12However, once it's done, when it starts trading, then you buy into it by buying shares on issue, someone else is willing to sell you. How do the company benefit? Having said that, says Harsi, I do note if companies have a DRP in place, they benefit by the ongoing capital injection by way of new shares being issued. If you can clarify the inner workings from a company perspective for someone owning shares, for me, I'd be very grateful. Thank you and keep up the great work, Harsi. Harsi, yeah, great question. You're talking about what's called the primary versus the secondary market. Primary market is when the shares are issued to the public for the first time.

56:43And they say, hey, we'll give you a bit of the company. You give us some cash. And it's a great source of capital for growth and expansion. It's brilliant. It's really only equity or debt. They're your two choices, really. Yeah. But once if I buy shares on the market today, the company doesn't see one red cent of that. They still benefit from it, though, because the market price effectively determines what's called their cost of capital, because they could say we're going to issue new shares. And it happens every day almost, right? Like not every day for a company, but on the market, geez, every other day, particularly at the smaller, scrappier end of the market, there's always someone raising money.

57:22So if I'm trading at a dollar a share, I probably will have to offer a little bit of a discount to encourage people to open up their wallets and to account for the inevitable dilution that comes with that. But, you know, I can probably I can probably raise a bunch of money at 90 cents per share. It's pretty good. If I'm trading at 20 cents a share and let's assume that the profits are unchanged. There's like the cost of capital is very different, very different. They might, even if you exclude the equity component, a lot of companies have debt, and there will be covenants against that that might include the share price.

57:57So if the share price falls too much, because no one wants to hold it anymore, sellers want to get rid of it, buyers don't want to buy it, that can have very serious ramifications as well. And perhaps of most importance to senior insiders is that your bonus is tied to the damn thing. So you want it to go up, right? and that is a fact. And I'm just, you know, it sounds really, what's the word for it? I don't know, degenerate, but it's just humans are humans are humans and we like reward. And if you say to someone, hey, do this stuff, I'll give you a bunch of shares. Now, they're not getting shares on whatever, they're not getting money based on whatever's happening on the market, but it certainly sets the price and that impacts you and it makes a hell of a lot of difference.

58:44So yeah, it matters. Let me sum it up by saying it matters in terms of what it could potentially represent in terms of the access to capital that you have. When Tesla is trading at some whatever insane multiple it's trading at, you know, because it's whatever, 12 times, I haven't looked at it for a while, maybe it's changed a bit. I mean, it just means that they can effectively raise capital very cheaply. Think about my little corner shop example, right? We make$100 ,000 a year in net profit. Now, let's say I want to borrow another 100 ,000 a year, but for whatever reason, when I shop it around on the market, I can't get anyone to pay more than 100 ,000 for one times earnings for it.

59:31It's like, gosh, that means I have to cut my shareholders in half to raise that 100 ,000. If I'm at a million dollars a share, I only have to dilute you by 10%. and I double the amount of capital I've got access to. So, yeah, it makes a big difference. Does that make sense? It does. It does. I was going to start by saying I disagree with you. I was going to wind that back a little bit. I think you have perfectly summarized - I'm never making you the CEO of my company. Well, exactly. I just imagine the interview, the board members are there going, Scott, tell us why you're the best member. Well, I don't care about the share price.

1:00:10And yet - Next. And yet they shouldn't, right? And this is – you've beautifully outlined times when it is important. And we're not really talking about the money that is being – that is changing hands, but the prevailing share price, the prevailing mood of the market does impact companies' abilities, as you say, mate, to raise capital and pay bonus, all those things that you've just absolutely summarised. So nothing you've said is incorrect. I just think it matters a lot less than others do because it depends which company you are, right? Does it matter that I bought shares, you bought shares?

1:00:45No. If we're both excited about it, can you raise capital at a better deal? Yes, you can. And so I'm kind of, I kind of get that. I'm kind of,

1:00:56the problem is you get into share price management at some point. And that's its own field of jiggery pokery and IR investor relations people carrying on and doing what they do and kind of making their own little lives. Interesting. the company doesn't benefit from the exchange. The company doesn't benefit from the change of hands. The company doesn't care who owns the shares, who bought them, who sold them. They do care about the prevailing share price for all the reasons, Ram says. And the exchange of those shares does impact the prevailing share price. That's a bit, mate, you're absolutely right about that.

1:01:30But generally speaking, other than that, and maybe that's too cute to say other than that and pretend that stuff doesn't exist or isn't important. But most companies, most, well, and it depends on what sort of part of the market you're in and whether you need money and all that kind of stuff. A company that never needs to raise more capital has no interest in the share price other than for the ego of the CEO and board and to keep the investors off their back because the shares go up rather than down. We've talked a lot about cyclical businesses and that sort of stuff and share prices move around all the time and this isn't a Buffett quote, it's a Buffett quoting Ben Graham quote, in the short term the market's a voting machine, in the long term it's a weighing machine.

1:02:06So at the end of the day, in the intermediate period of time, can you juice your share price a little bit and maybe get a better capital raising away by being hyper-promotional as a CEO? Yes. If I'm the two of your company, I'm like, I don't care about the share price. Are you annoyed sometimes if the price is lower than it otherwise might be? Probably. But overall, over the long term, again, if the market's a weighing machine, if things are being done roughly at fair prices, it's kind of not that important. That doesn't really matter that much. The one thing I do want to pick up, Harsey, actually your point is how does it benefit the company directly from their perspective?

1:02:40And I kind of want to just take the opportunity to kind of separate those two because the company really isn't a thing. I mean, it's a non-person or what do they call it? What's the legal term? It's a legal fiction. Legal fiction, thank you. So, you know, it has a status in law and it's independent of its shareholders. But the company has no aims in and of itself other than for the interest of those shareholders. So when we say how does it benefit the company directly, it doesn't because the company doesn't deserve to, doesn't need to, isn't benefited because the company isn't a third party in this particular instance.

1:03:14So you kind of got this situation where I'm not going to explain this very well. You might have to jump in here. But effectively, if I'm a shareholder, the company is just a representation of my interest. And so the company doesn't benefit, existing shareholders benefit or don't benefit. If the company gets some money, existing shareholders are proportionally wealthier. If the company loses money, the shareholders are proportionally less well off. Now, it's a separate legal entity, separate legal fiction, as you say, but the company doesn't need to benefit because the company doesn't exist independently of its shareholders in that context.

1:03:49Because what is the company? If it's the people who work there, they get a wage. If it's the buildings, well, they're owned by the company's shareholders. There's not really a that, not really a there, there, as the cool kids say, to benefit from anything. It's just a question of whether the shareholders themselves, the remaining shareholders or the existing shareholders, the continuing shareholders, benefit from the current share price on the ways that Ram's already said. Improve that for me.

1:04:16No, I don't disagree.

1:04:21Yeah, it's like so many things. It matters, but it doesn't matter. It doesn't matter, but it kind of really matters. Yes. It's like context is really important here, you know. Yes. In some senses, it's everything. In other senses, it's nothing. I know this is like the most super frustrating way to answer a question, but it's kind of true. You want a good share price. Of course you want a good share price, except when you're a buyer and you want a really cheap share price. That's right. And guess what? You don't get really cheap share prices when things are going swimmingly well and everyone agrees that you're a genius and the company's brilliant, right?

1:04:58Yeah, that's true. But no, I got nothing to say. Look, I'm a big believer in, it's kind of like the saying, if you look after the pennies, the pounds look after themselves. And if I could twist that a little bit, it's like, if you look after the business, the share price will take care of itself. Right. That's why it doesn't matter in the sense that, and if there's ever a red flag, it's a CEO that's myopically focused on the share price. It's like you're going to do anything you can to short-term pump that thing without building the foundations for sustained value accretion among shareholders.

1:05:31It's a very different thing. And if you want to look at the, you know, pick your favorite superstar long-term compounder, it's because they created incredible value for the world. That's how they got there. Maybe they did some dodgy things along the way. They're not all angels, right? But you don't get the company that lasts 10, 20 years and the share price at 100Xs because they have some really glossy images in their slide deck. It actually works short term scarily enough because humans, but it never works long term. So, yeah, I would agree with that. I think Buffett famously basically came out and didn't say Bursher was overvalued.

1:06:13He said, we don't see value in the current share price. And it's kind of one of those things that has never been uttered ever by any other CEO in the history of the world, or probably never will be again, because they're all so ego-bound, pushed by their investors and their board to play the stupid game that you end up with this sort of, you know, let me tell you how we're great, what we're doing. And Buff's got an ego the same as everybody else. He's just able to kind of go, I don't need to pretend. I don't need to pump it. I'm going to let time do its thing. I'm an investor. I know how this works.

1:06:41I will just do the thing. And I don't know I'd do that with Fels Buffett. My ego wrapped up my company's share price and I wanted it to be higher and I'd feel bad if it was lower. But to come out and literally just say, yeah, we don't see value right now. It's like, man, Buffett's out the same if people are buying right now. In his company, stop you, idiots. What are you paying that price for? That's just stupid. Because he doesn't need capital, right? And that's exactly right. And he doesn't need the ego because he's already a billionaire and done those things. So you kind of go, you know, in some cases it's easy for someone like that to say, no, I say that.

1:07:11how many billionaires do you know who've taken the foot off the pedal and not you know drunk their own kool-aid um but but in theory yeah you're right you don't need the capital yeah even if you it's hard right there is if you need the capital there is a very self-interested and even in the interest of current shareholders argument for seo to go out there lie cheat and steal to get the share price up because they're creating value for their shareholders the existing share is only worth 50 cents and you get the price to a dollar and raise capital a buck you've pulled off one of the greatest swindles in the world, right?

1:07:43You've literally robbed people of half of their money because you've said to them, you know, can I please have a dollar knowing that what they're buying is worth 50 cents. I mean, you know, that's not miles away from fraud, frankly. Now, you could never prosecute it because of someone's view and evaluation is always subjective. And the market says it's worth a dollar. So who am I as a CEO to tell the market they're wrong? So, yeah, I mean, at some level, to your point, mate, and again, that's why I was going to say I disagree and I didn't because that's a meaningful difference. The price at which you can raise capital, if you can raise twice as much money or raise it at half the price, that's a remarkable return.

1:08:20Should you do it when you know a company is overvalued? I think if you know it is arguably illegal, certainly immoral. But where do you draw that particular line in a world of cut and thrust capitalism? I don't know. On the flip side, if the share price is too low, you can't raise the money at all, as you said. You kind of dilute your shells massively to do it. So the share price matters. And I guess to your point, mate, just to draw that direct link, the share price is not – me and you trading is not the share price. But if there's a lot of buyers and that pushes the share price up, the act of us trading at that higher price does create the higher price.

1:08:54So it's not the fact that I own the shares and then you own the shares. The company doesn't benefit from that transaction at all. No. But if the net result of all of those transactions are that there's excitement in the market and the price goes up, then it benefits from some of those things like, as you've already said, debt covenants or money being able to be raised at better prices, all that kind of stuff, which is not nothing.

1:09:15It's icky and it shouldn't, you know what I mean? The process of engaging in that kind of share price management is just rubbish. And to your point, it's not because of the trade. I've seen lots of companies raise money at stupidly low prices. why? Stupidly low, did you say? Stupidly low prices. In other words, they've given away too much to the company because they ran out of money. Yeah, exactly. Very, very few of them say this is overpriced. I've used the example before and I can never remember. It's the Teledyne example and you'll remember who the person is because I forget every time we have this conversation.

1:09:51There's a great CEO in the US who's I assume long dead. It was 70s and 80s who ran this business and he made a fantastic career out of basically buying shares back and issuing more shares at really attractive share price. You just, a bit of the Buffett kind of, you know, I knew what the company was worth, worth a buck, was trading at 50 cents. I'm going to buy back as many shares as I can. When it's trading at$1.50, I'm going to sell as many shares as I can. And through that process, you massively enrich ongoing shareholders if they hang around because you're managing to dilute them at more than intrinsic value and you're buying back under intrinsic value.

1:10:25That's creating huge amounts of value if those shareholders hang around. Who was it? teledine is the company's name and i want to say john or jack um i know it's just it you know what i'm surprised it doesn't get more coverage or it's not a more widespread story because it is a master class in capital management it just really is and it kind of feels like it's a little bit of just fancy henry singleton sorry that's the one yes yes yes yes go go well it sounds like I'm always suspicious of things that just feel like financial engineering. That's what it was. But not in a bad way, like in a prudent, sensible way.

1:11:09Here's my option set available to me. Wow, I can raise money super cheap. Okay, I will do that. And shareholders should applaud that, even with the dilution. Yeah, totally. If, if, big if, if you can deploy that money and get a higher rate of return. that if your cost of capital was X and your rate of return is 2X, dilute me all day long and I'll ask for more and more and more because I am going to be richer as a result of it. By the same kind of reasoning, if whatever reason the market's just in a funk and I can buy back my shares and spend$10, I will spend whatever X dollars and get a 2X increment on the per share value, I will also do that every day.

1:11:49Is it financial engineering? Yeah, I guess so technically it is, but it's actually just playing the cards you're dealt in a very, very shareholder-friendly way. And the term financial engineering sounds too dismissive. And it's right to have that aura around it because more often than not it is just done in ways to make something seem as though it's not. But in that instance, I get angry when it happens to me a lot because it's just the ASX. In fact, it's just markets in general. Share price goes on a run. Bet your bottom dollar. The investment bankers are picking up the phone to the board going, you should raise money.

1:12:33You should raise money. And they do. And it's like, why? It's like, well, we can. and again if if you've got a great investment opportunity please do it this is a really this is a this is a setup for you but more often than not it's like i guess we should and then you read this statement it's like to strengthen the balance sheet to give us more optionality and it's like there's something to be said for strong i mean there's a lot to be said for strong balance sheets and optionality but if you're raising if you're raising without a specific use it just it strikes me as imprudent because once you have that money, it's going to burn a hole in your pocket and you're probably going to spend it in a dumb way.

1:13:13And I'm probably not going to benefit from that raising of money. Correct. And, and yeah, it's, it's, if you've, I've always thought if you've got a really good idea, you'll find the capital. Like you will, because people like to make money. And if you've got a good story and you can articulate it well, you'll attract the capital, right? I'm just raising capital because insert vibe, here um and and then you're then you're gonna like you know like a like the dog that caught the car it's like what do i do with it now right i guess i guess we'll make an acquisition i guess we'll do this i guess we'll strengthen the team and it's just you'll probably waste that money and you'll probably dilute shareholders in a non-accretive way yeah i think that the buyback we kind of get a little off topic but the buybacks and the and the sharerships is are actually financial engineering is normally internal we that that phrase kind of and that's where it's most often kind of used the whole take up a lot of debt and kind of make – someone doing this well is just acting like an investor.

1:14:12Why? Because they're buying shares when they're cheap and they're selling shares when they're expensive. And that's what we do for a quid, right? And you kind of think if a company is half good and if it's – you said a million times, mate, that culture and capital management are the two most important jobs of a CEO. If you can literally buy shares in your own company cheaply and if you can sell them when they're more expensive, as an investor, that's your job, right? Now, you're right. If you just leave cash around and you don't use it for anything and it becomes a problem, then so be it. But by the same token, you know, how much of a straw man are you going to sell me at a cent?

1:14:41Probably nothing. How much of a straw man are you going to sell me at$5 billion? Probably half because it's worth$10 billion. What do you want? Let's talk. But, you know, so there's – and it's exactly that, right? So that's kind of all – you know, if someone gave you a valuation of$10 billion tomorrow, you'd be like, well, I can probably sell off some of my shares. And, you know, you're making existing shareholders richer by doing that. Yeah. And then again, someone says there's a tech crash and someone else says, I wouldn't give you a dollar for it. Like, okay, I'll buy them off you then for that price because if that's what you think they're worth, then we'll do that deal.

1:15:09That's kind of all that's happening in that space. That's where there is real value created. On behalf of ongoing shareholders, we talk about dilution a lot. You're also concentrating their ownership at times when you can do it cheaply. And that's a great thing too. Let me just, and I will add here because the other egregious part of it when done wrong is when companies buy back their shares when they're not cheap. Oh, all of time. And how many times, right? Because they, well, here I am criticizing them. They're just doing what, when the ducks quack feed them, that's the saying, right? It's like people love buybacks, so we've got some extra cash, we'll do a buyback.

1:15:44It's like, but you're trading at eight times sales and 200 times earnings. You are not cheap. You are not cheap in any, like, unless you're somehow going to sustain 50 % compound earnings growth over the next two decades, you are not cheap. And yet it happens all the time. and it's like you are basically burning my money on, you're setting it on fire and you're doing it in the name of my interest. And by the way, and I feel better about it because I feel excited you're buying back shares. Wow, that's amazing. I'm feeling richer because you told me I am. The whole thing is a complete farce. And like, look, I get that the armchair casual investor is not going to know this, but like, you know, the corporate titans that are out there as the custodians of our company, like you should, like if you don't know this, you're not fit for the job.

1:16:27Like it's just like, and it's not complicated. It's not complicated stuff. It's very much just obvious common sense stuff. But again, you just look at the incentives and then you'll figure out everything you need to know. There's good fees to be made. Ask the Millionaire's Factory how the fees are for these kinds of things. You'll see it actually. You don't even need to. You'll find out exactly because when a company raises money in the prospectus that they issue, they'll tell you exactly the cut that the investment bank is getting, the underwriter is getting on it. it's a good little trade. It's a good business.

1:17:00It's a good little trade, right? Yeah. All right. That's probably it for us. Mate, I've thoroughly enjoyed this hour or so. Always more than an hour, but that's okay. Or so. Enjoy the rest of your weekend. What do you got to plan for the weekend? Anything exciting? If it stops raining, I'm planning to just potter about in the garden because I'm an old man and that's what I do these days. Nice. Enjoy. Enjoy. I'm going to be, about now, I'm getting up after watching the Panthers play in Bathurst. I'm taking my young one who's a massive Panthers fan. to the game in Bathurst, a couple of three and a half hours drive, but it'll be a fun road trip for the boys.

1:17:32So just me and the young guy. So that'll be a bit of fun. Hopefully they had a win. Otherwise it's going to be a very miserable and sad drive. I haven't roost his fans. I don't mind, but he's going to be filthy. So hopefully they have had a good win. Okay, fingers crossed. That's it for today. Until we speak on Friday, have a great week. And feel long. 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.

1:18:05The Motley Fool operates under Financial Services Licence 400691.