Mailbag: incl. Improving returns before retirement. September 3, 2023

27:31It just lets you change your perspective. The same is true in reverse, by the way, Ram. Tom Gaynor, who is the chief investment officer, he might be CEO these days, co-CEO of Markel. It's like a mini Berkshire in the US. I own shares for the record. He has a portfolio I had at the time, I assume to speak four years ago, probably it was 2019, about the stocks he owned. And he owns hundreds of stocks. And you kind of go, hang on, he's supposed to be the mini Buffett, mini Berkshire. what's he doing with hundreds of stocks in his portfolio he owns tiny tiny tiny amounts of hundreds of stocks and his rationale is he tricks himself he's like i will pay more attention when i own the shares yep so if he wants to learn out and learn more about a company he buys a little bit just so he forces himself not forces himself he tricks himself into caring more spending more time thinking about it because he owns it now could he do that without owning of course he could he can have a watch listen to do it but he knows himself and he knows he's going to take more of interest once he owns the shares and i would highly highly highly encourage anybody out there to trick yourself take advantage of evolutionary biology frankly it works against us investing most of the time if you can if you can use it if you can you know take advantage of it when the opportunity arises then absolutely do that um and and you know use some of those tricks in your favor rather than rather than always against you yep i love it i love all of it um don't don't disagree nice um i i have a a thought or a question uh from percy i don't think i read this person has a message back in june he says another one uh on the weekend uh the june one i'm not sure if i've read um he uh he said hi scott i'm still loving the pod on the pod machine and andrew has turned into a great partner for the banter and i love his passion if i ever get to meet him i'll have to ask him what that scarecrow thing is that he's into he says lol laughing out loud then duck uh so there you go thank you for that you better duck here's the new one hi scott and andrew i have a i'm still loving the pod i have a boring question i'm trying to read some more financial reports to get a better understanding i have a question how can a company be positive operating cash flow but have an ebitda loss what am i missing how is it possible mate to actually you have cash coming in and still report an accounting loss?

29:49It's usually going to be timing reasons, right? So it may be, so you have to register. You can't recognize a sale until that transaction has been completed. But maybe the cash hasn't been collected yet. Maybe in some instances, cash is paid up front before the deliverer certain milestone payments. There's all the, it depends on the nature of the product and the nature of the sales contracts and all of these kinds of things. But there are often timing mismatch. Actually, interestingly enough, a couple of companies I've followed rather closely had a little bit of a mismatch because they had some big orders come through right at the end of the financial year.

30:25And so they couldn't report that. The cash flow did not reflect that, the cash flow statement. It was like, they pointed it out, right? So any astute investor will notice this. Here's the explanation. Now, they could be lying. It'd be really dumb if they were because they're getting a whole bunch of trouble. and so yeah but so but but yeah i don't know is there something else i'm missing their timings are the big one right time is big one mate the other one is just accruals which is kind of a version of timing to your point oh okay it might be previous accruals for example or previous expenses so it's possible that uh it's almost the reverse or not the reverse but this is the right after you're doing the before i'll add the after which is you can have a situation where you have expenses based on having received that cash up front in a previous period yep and then you have more expenses now because you're you're you're the the the you're recognizing the accounting expense even though you're not paying cash out to match it because of the way that that transaction is done so it can be the other side of of the same thing in that context it's also possible that um we talked a lot about uh capitalizing stuff on friday a little bit anyway um accounting choices basically what you know what what is revenue what is an expense um you know we talked about swapping assets.

31:40So in some cases, it's almost the reverse, actually. You can have cash outflows and an accounting profit. You can have cash inflows and accounting loss. Again, based on those accounting decisions, it's not common. And the larger the business, the less likely this is to be an impact. I don't know the company person didn't mention it. I would suspect it's probably a smaller business where the timing and the flows really does matter a lot because it might be a newer company as well. That's usually the case. Much, much easier to have an accounting loss when you've got a massive write down, for example, of an asset and solid positive cash flow.

32:17Harder to have an accounting profit and a cash outflow, but that's often the case. It's sometimes handy, particularly for smaller companies that do report on a calendar basis. You can sort of like plot it, just break open a Google sheet or something like that and just plot EBITDA. The Lions should really move in the right direction. There are very reasonable explanations one period to the next, but they really shouldn't diverge too much over time. That's more of a red flag. If there is a consistent miss there, something seems to be going on. Unless there is something in the way of ongoing capitalization of something or ongoing expense of something.

33:00An easy example, right, is take two businesses. They spend a million dollars on a piece of software. One company says, I'm going to expense it in year one. So they have a massive cash outflow for the million dollars and an expense of a million dollars because the accounting expense is the same. The other company says, oh, I'm going to use this for 10 years. I'm going to spend the million dollars up front. So that's a cash outflow. And then over the next 10 years, I'm going to recognize $100 ,000 a year as an expense. And that's the so-called matching principle. I match the expense against the activity itself.

33:28This is a 10-year asset. I use it for 10 years and it's gone. Cars are a great example, by the way, of this. It's depreciation rather than expense, but the same kind of idea of you buy a car up front, you pay the cash. It's got a five-year working life or 10-year life. So you expense it. Oh, you depreciate it over that period of time. Now, EBITDA is before depreciation. So this is not what's going to cause this particular one person that you asked about. So I don't want to keep that. I don't want to confuse them. But there are those sorts of accounting decisions are normally what's behind that kind of circumstance.

33:58it's also possible things like um it yeah it's it's largely it's it's accounting decisions is the best way to put it and and accountants can decide anything revenues as you said ram expenses i'll give you an example at the motley fool we um take a payment up front for a 12-month term for our memberships if we balance our books up to six months we've got 12 months worth of cash but only six months worth of revenue. The other six months has to be considered an unearned asset. Some cash we've received, it will become a revenue over the following six months, but the timing difference matters a lot.

34:36So like you said, people who, companies who sign contracts in the last couple of months of a year, they deliver on two months worth of services, but they get 12 months worth of cash. And that can be a bit screwy. Again, it's not really common. You wouldn't expect to see it a lot, but those are some of the reasons. Again, And first of all, there's a particular company. There may be something else going on. And the last thing is there could actually be shenanigans, frankly. So if you're asking, you know, how would it legally, rationally, you know, appropriately be possible? They're the answers. Could a company be playing funny buggers?

35:06Yeah, that's also potentially true. Yeah, a couple other thoughts on that. The good management teams, it's pretty common, really. They'll break it out for you. They'll be at pains to point it. There'll be slides there. Yes, they will bias towards the metrics that cast them in the best light. But there should be an appendix there that reconciles things and lines it all up for you. What's really great these days is that increasingly companies are holding their briefings online and they're allowing just private investors to join. So you'll often see it on the ASX announcements. Here's our results.

35:47We're holding a briefing here. here's a link register to join you can join you can ask questions right um so i really encourage you to to do that um a lot of people it's funny i sort of mentioned to somebody's going oh it's a real hassle it's like dude you have literally got ten thousand dollars invested in how long did you work and save to get that and you can't be bothered to tune into a like a you know 45 minute zoom session like are you kidding me do it do it and ask and and too often i think we're all oh i feel Like this is a dumb question and people are going to love us. Who cares? I, I find it a super, the older I get, the less I care.

36:24And I'm, and I'm, and more often than not, I find that when you do ask the quote unquote dumb question, like 50 % of the room goes, thank God, it's not just me. I'm so glad someone asked that question. Cause I didn't get it either. And even if it is a legitimately dumb question and you're the only one who, who didn't get it. So what? You're allowed to ask it, right? And you'll learn something. And then you'll, you'll be, you'll, you'll, you don't learn unless you ask. I look at some of the briefings I attended as a young girl. I was like, Oh, I'm so embarrassed by what I said. I'm just like, I cringe.

36:56Like, I feel as though as an older person now, if there was a 20 year old in there asking these questions, I just want to slap them. Right. But that's how you learn. It's how you learn. And so, so don't, don't be, don't be too worried about that. The final thing I will say too, because this does come up a lot. Cause I think we, you're right. There are absolutely financial shenanigans. Actually, that's a good book title. And there is a good book called, I've got it on my Kindle, Financial Shenanigans. It just takes you through some of the shenanigans that accountants and CFOs can get up to. So they're possible and they happen.

37:36But I feel as though some people I know at least are so cynical and jaded that they see it everywhere. and the reality is is that they're the exception to the rule and i tend to take the approach that i will take you at face value unless there's a very good reason not to unless there's all kinds of red flags and you've you know tripped all kinds of different tripwires i i would i would take management at face value because when you when you adopt that stance you you jump at every single shadow that comes along and you never stay invested for and and statistically most are going to be on the money because what they're really risking is very serious penalty, you know, and well, fraud essentially.

38:20So again, it happens, but it is an exception. So I think as investors, the best we can do is just assume that they are telling the truth because 95, 98 % of the time they are, right? That's fair. That's fair. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

38:42question from someone who asks we call them lucky so there you go lucky thank you please go be lucky not my real name though i like it says lucky a serious question not specifically designed to bait scott he says in brackets who i love listening to especially when baited but i know i can be annoying my lucky nephews have inherited about 150 000 each the rule from the grave is that it must be invested until each is 32 years old they can enjoy the income until then but not the capital capital becomes available at 32 which is six or seven years away the hope is that they get an idea of what it's like to have some assets perhaps income from them and or seeing them grow will inspire them they nor their parents have ever had any assets investments will be in their own names do you have any sage advice stocks question mark etfs question mark etc what might we mention to people, not these two, because we can't give specific advice.

39:44What would we suggest to a 25-year-old who had 150 grand to invest, and maybe those who might help them invest that money, knowing they've got a six or seven year wait till they can get to the capital? What investment ideas, approaches to investing it, ways to think about trying to help them learn at the same time, Ram? Oh, God, what a brilliant gift. Not just in the size of the money, but I think waiting to 32. By the way, anyone who's under 32, it feels like that's a long time away. I can tell you on the other side of that, that just, you know, what I would give. Don't wish those six or seven years away.

40:25Yeah, exactly. It'll come quicker than you imagine. And it's not to sound critical, but you are just going to make better decisions at 32 you just are right like you again i just i i think if you to my earlier point if you don't look back on the things that you said thought you did five years ago and cringe you're not growing frankly and if i ever reach a point where i where i don't have that i feel as though well i'm i'm stagnating so i think it's a wonderful thing that you will look back as a 32 year old and go oh my goodness i'm so glad i didn't get that money then because i would have bought something dumb with it you know i would have it would have wasted it and and that's that is being critical because i actually know a whole bunch of people in their 20s are just like so beyond their years in wisdom and the rest of it so i am generalizing here um but i do think it's a wonderful thing and a couple of things firstly well actually that that could be 300 grand in six or seven years you know if you take the rule of 72 and you take the uh the average compound growth rate of the market that could absolutely double right um it's uh so i love it i love it i think it's a wonderful idea um what would i do i would be tempted to maybe maybe the 80 20 rule i'd be tempted to go 80 in a low-cost broad-based index etf because i'm gonna probably go okay with that um even if the market's in for a bit of an ordinary decade or so you know i'm probably going to go okay um and it's it's going to be a very easy sleep at night factor i actually though would encourage a bit of stock picking with the other 20 and not to not to encourage a speculative stance but to to give a bit of a taste for i guess not just the rewards but the risks that that can bring, but also to introduce you to the concept of investing in stocks directly.

42:28What makes a good company? What makes a stock cheap? Why would this go up over time? What are the kind of things that I need to think about? And you'll probably make a whole bunch of dumb investments. Lord knows I did and still am, right? Like you just will. But what a great experience. And if it does all go pear-shaped on that 20%, you know that the vast bulk of your money is okay. A bit of compounding on top of that, you'd be better off than just getting the$150 ,000 in cash. And I'd probably keep it simple. The temptation might be for someone who has a high time preference would be like, okay, so I get the income, but I don't get the capital.

43:08All right, I'm just going hardcore into income stocks because then I'm going to get a bunch of dividends that I can spend now. And I would probably urge you not to do that because if there's multiple cousins and siblings here that are all doing that, I'm sure that the one who focuses less on the income at the end of that seven-year period will probably be better off. And we'll have the last laugh. Yeah, it's a good point. You mentioned being 32. I remember he's now passed away. the fairfax columnist sam de brito uh wrote a wrote a book called no tattoos before you're 30 great advice for life right just like you know you are by the way new zealand is talking about giving the vote to teenagers 16 17 year olds and as much as i love the the new generations they're probably smarter than some of their older counterparts uh i also know from my wife who's an educator that uh the development of the frontal lobe for boys in particular doesn't finish at like 21 22 23 i'm like ah you know i love our teenage listeners and i love teenagers in general and my nephews are wonderful people but i'm not sure they're ready to cast their votes on on the future of the country so yes wait till you wait till you're at least 30 is i think that's very good advice from the grave lucky as you as you the way you put it um oh dear i

44:26i'm gonna say well so there's there's two things here right and this is where it's easy for us now at our age with our circumstances to give advice and it's harder to be 25 and 26 these days particularly with the cost of housing we've talked a little bit about housing andrew might have a view every now and again on housing uh if you haven't listened before i'm absolutely understanding that i have some thoughts you have some thoughts so and i'm so i'm kind of i'm kind of torn because part of me wants to say this is their this is their lotto ticket win right if you start with 150 grand at 25 26 you're going to have a squillion dollars when you retire and so this is this is their this is their golden ticket this is the charlie the willy wonka golden ticket right This gets them to more than a million dollars at retirement under any significant fully invested circumstance.

45:14And so part of me is kind of like, you know what, lock this thing up, let it do its thing. They will have the most comfortable retirement they could imagine, because they're going to keep working, by the way, and have super contributions and other things. This is literally the golden ticket. On the other hand, 150 grand start, plus whatever it earns over the next six or seven years, will get them into the housing market, or they may not be able to currently. And that in itself is its own golden ticket. But the way you then deal with this is very different. And it changes the circumstances quite markedly.

45:44Because you've got a chance to do a few things here. You can show them the power of passive investing, of just letting, don't have to do anything, just put it there, look, watch it grow. When 150 grand becomes 160, then 180, then 200, then 240, that is just, you quantify the dollar value of the gain. That is mind-blowing. It should be mind-blowing for those, I'll say kids, they're not kids, they're adults but you know what i mean um and and the opportunity is is massive so part of me is thinking you know what just seeing that hopefully lets them continue with it the other part of me is thinking well you know if i'll take it by a house i don't want to stop them and stand in their way um but the opportunity cost is is significant um of either right so so have a think about that maybe there's a bit of both so that's kind of you know thinking that through is makes my answer really difficult because i don't really know specifically what to go with it i love as you said the idea of having some assets, seeing it grow, seeing the income from them, give them a sense of what's possible.

46:40That is really, really powerful. And I think it's very hard to overstate the power of watching that happen.

46:51I think I'm probably going to go something close to RAM. If they are not even slightly, well, so I'll go back a step. If they're not ready to pick their own stocks not going to listen to you go etfs um scattergun dartboard too much money in too many stocks without proper diversification could could actually end up costing them money or whatever if they if they love you know i won't i won't name the stocks a couple of hot stocks right now they might be hot stocks in a year so they lose 50 grand of that like this is a stupid idea i can't believe if i did this what a terrible idea so i think honestly starting remember i've talked about you know making mistakes when we're younger but something with small amounts this is not that this is something with a lotto ticket so i really i've got to say like i love individual stocks most of my portfolio is in them but i really would start with massive amount of etf exposure and then i would try and by the way they're adults so they can make their own decisions but if you can encourage them or they're listening to this i would encourage them to then invest in a range of companies and a broad range right so split it up this is the etf bit this is the company bit make sure it's diversified make sure there's a lot of companies there so a lot of that mean a million I mean, a large enough number that one company's successful failure is not going to put them off the whole idea.

48:05I would encourage you, even though they're normally just for teenagers, but they're a bit older, but they're just starting investing. Again, because it's a lump sum, try and get some of those investing lessons that these are pieces of businesses. So I really would encourage you to find, if they love business and they love the idea of running through the statements and reading the announcements, then find some cool, unknown, interesting businesses to follow, some of the stuff that Ram likes, for sure. but if they're not that person if you just want to kind of almost make it simple go with some really well-known big businesses that they can go i own a bit of that and i want i don't want to necessarily use examples but think about a you know west farmers that owns bunnings or a woolies or a telstra or something they're not great investment ideas necessarily but some element of that because i've had family members who've said at one point i'm a family member in some david jones shares and you walk into david jones and he said to me i i walk in differently i feel like I own the place.

48:56I look around, I see it differently. And that in itself is so incredibly powerful as an educational opportunity that I wouldn't want you to miss out on that. So it's a bit of a rambling answer. It's lucky I can't be more specific because everyone's different and the circumstance is different in terms of what they might want to do with the money, their own personalities, how lucky they are they really want to get into this. But I think help them see the power of compounding, help them understand what it means to be an investor to think about it and if you're interested in investing yourself try and find some businesses that you can both own because you can have those conversations if you own willies and they own willies chat about the willies result chat about what's going on the stores chat about the impact of amazon chat about whatever it is make it a um hopefully their nephew so maybe it's something you can do with them as a as a bit of a you know nephew uncle thing uh but make it make it a conversation make it interesting have those conversations regularly um and things they're interested in.

49:51Last one quickly, don't ignore overseas opportunities. Largely for that buy what you know thing. I own some of these, but think about Google, Apple, Amazon, Facebook, I can't think, whatever the usual ones, Microsoft, the stuff that they're going to use and know, again, for exactly the same reasons. Any more on that, Ram? Yeah, just a couple of quick thoughts. I think a lot of us will be listening to this going, oh gosh I wish old Uncle Fred left me exactly so I would say I mean not you know most of us are not in that situation but you can still do exactly the same thing if you can scrape together a thousand bucks whatever it is right the same lesson will be learned like you know to your 25 year old sort of say hey look when you're 32 I'm going to give you this money the catch is you just can't whatever that money is whatever you can afford to do even if it's 500 bucks right but here's the rule you just can't touch it till you're 32 same exact setup the maths is the same the dollar values are different correct that's right but you know that's a good point you're gonna you're still gonna double it after seven again i'm assuming 10 so it could be five percent it could be 20 who knows but just it's a nice round number you will on a 10 you will basically double it in seven years time yep um the other thing that's always nice too is that you might be surprised for me to say this but i i actually think it makes a huge amount of sense to like secure some some shelter for yourself there's a very big non-financial return in that.

51:18And I can testify to that, but you can kind of have your cake and eat it too, right? So you could say, well, let me, let me just invest this away and compound it for seven years. In seven years, I'm going to take that 150 grand from old uncle Fred, and I'm going to use that as a deposit in the house. The other 150, I'm just going to leave in there. And if I leave that in there, you know, that is then going to be another 300 grand by the time I'm 40. And that's going to be 600 grand by the time I'm 47 and it's going to be 1.2 million by the time I'm in my mid fifties. So you can kind of, you can kind of do it.

51:51And, and, and the, and the experience itself, I think will sort of help illustrate that, but that very potential and you can kind of, kind of, kind of do it both ways. No real wrong. The only wrong answer here, we've, we've really flogged this horse to death. The only really wrong answer is, is, you know, don't take it all and go to Vegas or buy a stupid sports car or something like that. Yeah, correct. Because at 32, these, I was going to say kids, they're not kids, these young adults will look back and they will be, oh my gosh, I should have put it all in Bitcoin. Oh my gosh, I should have put it all in.

52:23You will know in that point in time that there was something much better you could have done. Why didn't I back our AI overlord? I could have owned part of the global dictator at this point. But there are no real wrong answers as long as you're learning the lesson of compounding. yep nicely put mate um this uh let's try and do this relatively quick fire so we can get through this one and get to another one good morning a good sunday morning lad says and now it's nikhail i think n-i-c-h-a-l-e i'm gonna say nikhail i hope that's right if i've butchered that i'd apologize in advance um or in the reasons it turns out i love the show as always even though i have not loved the stock market this year hear that i hoping this thing you talk about compounding and cycles is real and it's worth it in the long run.

53:07Nikhil, I will say to you, you don't have to believe or hope that the thing we're talking about is real. I will again bang on about the Vanguard index chart. If you're not sure, go look at that. No promises. The future doesn't have to look like the past, blah, blah, blah. But you'll see cycles. You'll see volatility. You'll see bad years and good years, bad days and good days. So you have our conviction, but you haven't got our promise because we can't do that uh but be be mindful of that just some basic questions if possible one who buys your shares when you sell them i have some shares sitting in on perla for the last month still pending ram who buys your shares when you sell them uh i don't know some random person out in the wide world um so so here's the thing is well usually the question is framed like you know who's selling them to me often i think when you're new you think when you're buying shares, you're giving it to the company.

54:04On an IPO, initial public offering, when they're raising capital, that's exactly who you're giving it to. We'll give you part of the company, you give us some cash, that's the deal. You get to own a part of us and we get to take your money and hopefully invest it sensibly. After that point, it's just, we're all just swapping it amongst ourselves. And so, you know, it could be a broker, it could be a short seller, it could be a bot, could be me and and i i actually think about it a lot still because oh gosh you'll you'll know this when i forget i'm gonna say charlie munger because it's a safe bet but it's always consider you know both parties to the trade think they're making the right trade right yeah someone's someone's someone's wrong here uh well actually that even that's not true because the different circumstances one one could be doing something exotic and you're just buying for the long term and maybe you're you're both getting a benefit out of it.

54:57But generally speaking, you know, I think it's very worthwhile sort of saying, well, why is this person happy to sell me these shares at this price? Or why are they happy to, I want to sell these shares. Why is that? I don't know who they are, but someone's happy to buy them. It's just, again, it's worth putting yourself in that hypothetical situation to just try and force a little bit of intellectual honesty. But yeah, the short answer is some random person or institution. If they're still sitting waiting to be sold, which is what I'm assuming you're implying there, it might simply be that you're asking for a price no one wants to pay yet.

55:31So who wants to buy your shares? Someone who thinks the price at which you're selling is attractive enough to buy those shares. It's probably. Two, what is an A stock and what is a B stock? I assume this is a question probably related to Berkshire because we've talked about that a little bit. There are two classes of shares. I'll grab this one, Ram. Yeah. Effectively, a company can, most Australian companies have, just one class you buy cba shares you're buying cba shares they're all the same it's possible to have different classes of shares that have different entitlements to them uh different proportional parts you can you can you know one can be worth more because it has a larger think about um let me get my pizza i like to have a pizza again uh you could have two size slices of a pizza right they're both slices but one slice is uh two centimeters wide one slice is five centimeters wide they're both slices one is just a larger chunk so it's worth more you should You pay more for that larger slice.

56:23When it comes to shares, it can come with higher dividends or more voting rights. So the votes you cast are worth more. For all intents and purposes, mate, ignore all of it. It's largely irrelevant. It's a bit of a game that companies play. Not a bad way. It's just not necessary. The AB is the Berkshire example. Warren Buffett has shares that are now worth$500 ,000 each. What he did at some point in the past, he split them. He said, okay, not everyone can buy shares that expensive. I want everyone to have a chance. I'm going to break them up. So I'm going to keep the ones that I've got. He could have got rid of the A's altogether and went straight to B's.

56:54He probably kept them for largely ego reasons. Could have just done a share split. He could have split the whole thing. He probably should have, honestly. But I think part of him likes the idea, and I'm not going to bag him, but part of the last year is like, that number gets higher over time. It's kind of a nice way to demonstrate value creation to people. Amazon, by the way, has split their shares entirely. So there is no second class. But in this case, that's kind of what's going on. We see that a lot on the Aussie market. I think the most expensive share is like 300 bucks. It's a CSL or a Cochlear or something like that.

57:21And they've done it before too, right? And it's purely psychological. It's surprising. You talk about like tricking ourselves, right? It's surprising that I've had many people over the years say, oh, I want to buy X company but shares are$60 and this one here is$2. That's right. What? And companies know this. So they just go, well, we'll just cut the pizza into more slices. It's the same pizza. But if it makes you happy, it makes us happy. There is probably something to be said from a liquidity standpoint at a certain point, at a Berkshire point. But other than that, don't worry about it. I don't mind, by the way, this is probably more for a private company perspective, but I don't mind having classes of shares if you want people to have exposure.

58:08I agree. You want to keep the control. I agree. Yeah. I haven't done it for my company but I might you know if ever we're looking to raise capital but I wanted to make sure that the key decisions were made by the sort of the people I valued more I suppose but I wanted to give other people I can do things like that purely just to sort of say I want you to have exposure I just don't want you to have a say and be upfront about that kind of stuff that's legitimate to some extent as well but yeah you don't really see it in Australia too much last one I'm going to put you on a two minute timer for this one oh no We bought land on the Sunshine Coast just as COVID hit and sold after COVID.

58:45We made a really good profit off this sale. I've tried to tell my partner that shares, despite our success, is better than real estate as an investment. However, given our share results in 2023, he thinks I'm crazy. Even I sometimes think about switching. Can you help explain why shares are better when we did so much better in real estate? Have a lovely Sunday afternoon with a beer in hand. Thank you. That's from Nikhil. I hope it's Nikhil. Oh, gosh. You give me two minutes? Two minutes. Okay. Let's go. Well, I mean, that is entirely spurious reasoning in both directions, whatever way you want it.

59:21I can say, hey, I bought this stock for 0.1 of a cent. Three weeks later, I sold it for 10 cents. Ergo, shares are the best investment that you can ever find. Now, is that evidence of that? No. I mean, there's 2 ,000 shares out there. I can cherry pick the data to find something that will make Bitcoin look like it's an ordinary investment, right? Like it's just anything that - That's a lot of ticket. I bought a lot of ticket. I won. Therefore, a lot of tickets are a great investment. Yeah. I put it all on black and look, you've got double my money. Like why wouldn't you do that? So it's not to say that property is a bad investment, but if you want to take one example in one period in time and then use that as evidence to support that that will always be the case.

1:00:01I think it's very spurious reasoning. And if the situation was reversed and your partner was doing that with shares, I'd likewise say that. I would also say the best thing you can do is just let's do it again. Let's bring up the Vanguard chart. Historically, it tends to be that property over longer periods, I mean, investments, equities over long periods of time have outperformed property. That being said, it's not a massive difference. And the great thing about, this is me saying this, by the way, the great thing about property is it's so damn illiquid. So you can't, it sort of protects you from yourself because it's harder.

1:00:39It's much more friction and cost to buy and sell and buy and sell. So you tend to stay invested for longer, which tends to be a good thing. So if anyone, you know, I'm not going to die on the hill of saying, you must invest in equities and property is awful. I mean, some property investments are objectively awful, given the risk return and the valuations and that kind of point. But my point being, as an asset class, I really don't. I think you're going to do much better than if you're choosing between that and emu farms or just leaving cash under the mattress. So I don't know. Is that two minutes?

1:01:11Have I got any more time? Close enough. I'm going to add very quickly. We talk about asset classes. Individual stocks can do well. Individual properties can do well. Individual stocks can do badly. Individual properties can do badly. And so we've never said you should not buy a great property at a great price. You should buy the worst shares instead. What we would say is from a top-down view, what's likely to happen? My very simple story on property versus shares is this. Property prices can only grow up, can only go up, I'm sorry, as a function of interest rates, wages, and people's propensity or willingness to pay.

1:01:50So let's break that down very quickly. if rates go down, you can afford to pay more for a property. If your wages go up, you can afford to pay more for a property. If people simply want to pay more of their income, I don't want to pay 40 % of my income on property, I want to pay 60 % instead, then property can go up. So those things are all true. Interest rates are higher than they've been in a long time. We'll probably go down again at some point, but how much further can they go down and will they stay down lower? I don't know, but I wouldn't bet on it. How fast can wages grow? They're probably going to grow up 3 %-ish a year.

1:02:21on over time. So that's probably your baseline. How much more can people spend for property as a portion of their incomes? Not much more. We know there's a whole lot of mortgage stress already. So I don't see the conditions for the property market as a whole to do particularly well from here, despite the fact that some properties and even the whole market for during the 80s, 90s and 2000s did really probably was great, right? Because rates got low, incomes went up because second incomes were added to households largely. There was great opportunity for that to happens. So I don't see a high probability of property continuing to perform as well as it has in the recent past.

1:02:57On the flip side, the ASX has 2 ,000 companies, which is a lot, except nothing like the same X million small businesses that are around the country. So you get the cream of the crop. These are the businesses that have justified themselves, that are on the market, that are big, that are largely defensible. A lot of rubbish, by the way, on there as well. But the cream of the crop is on the ASX, and they will probably continue to take market share and grow faster than the economy over time because they are more successful than the average. Now, the same would be true if you took the top 2 ,000 properties, judged by some metric, and said, will these do on the property market as a whole?

1:03:31Maybe we're talking. But if you're asking me the property market, i.e. every house in Australia versus the ASX, which is 2 ,000 listed businesses of which there's probably 250 great companies, will they do better over time? I think the answer is probably yes so that's my bottom line answer but also to ram's point check the vanguard chart can i squeeze can i squeeze one more comment just very quickly i just whether it whether it is an emu farm or a property or a share i think the the great thing that you can the great equalizer here is is the cash flow lens so just ask yourself what does this business what can it reasonably spit out don't have to get super complicated you know maybe you're woolies you're like here's the earnings on a per share basis.

1:04:14And I think you can grow three or 4%, 5 % if you want. I don't know, pick your number. That's what it's going to grow like. Here's my investment property that I'm currently considering. And here's the rent. And I think I can increase it this much each year. Make up the numbers, right? Whatever you want, just make sure you're being realistic. And here's my emu farm. And I think I can sell this many, I don't know, whatever you sell from an emu farm, eggs and meat, I suppose, feathers. And then map it out and then account for all of the costs. and then to see which one gives you the best cash flow profile.

1:04:46And that's the answer. That's the equalizer. That is the objective way of doing it. And, yeah, I feel as though I'm with you, mate. At this point in time, particularly in my neck of the woods, where people are actually on negative real yields, net yields, it's sort of like, okay. it just seems it is purely a greater full theory kind of play at this point in time let's finish with a question from Brando he says hi comrades long time listener first time questioner and this is I love this question it's a really unusual question mate I want to know your thoughts and I'm going to try and formulate mine I would like to know your thoughts says Brando on the proportional mix of small medium and large businesses in the Australian economy?

1:05:36Is there an ideal or optimum ratio an economy like Australia should be aiming for? Building on this, given your views on the ideal mix of enterprises, do you think Australian policy settings, particularly tax, which is set at different rates based on the company's size, is incentivizing this? Do we coddle small businesses to the detriment of large enterprises or do we give big business a free kick rather than fostering competitive medium-sized enterprises. Thanks in advance. Yours in foolery, Brando. I just love this. That's an excellent question. Isn't it great? Yeah, I'm going to shoot from the hip here because I haven't thought about that.

1:06:17But I guess, I guess, so small business is the backbone of the economy. Like it employs far more people. Cliché alert. Well, what were you going to say? So it was just back by the economy. No, I'm just saying that. Oh, yes, yes. But it is, right? Every talkback host and politician in the country has said that line at least four times, I reckon. It's a fact, though, right? It is a fact. We put so much emphasis on bloody Qantas and, you know, and really it's not really, I would argue, it's not true capitalism. It's more crony capitalism than anything else. It's sort of, you know, favors for mates and all this other kind of stuff.

1:06:56And don't get me started. so I think that small businesses are probably more important I think that they are the cut and thrust of capitalism more on the front lines you tend to as a result get more efficiencies and as a society we get better outcomes because people are more competitive in competing for our dollars and in being more competitive they're all trying to offer more and more value for less and less and less and we all do really well We touched before, it was on Friday's episode about ASX and its monopoly status. And, you know, it's like monopolies generally don't do anyone any favors except for the people who own the monopoly, right?

1:07:38And even then they're so bloated and, you know, lazy that it's not even the shareholders do well. It's usually just some of the rent seekers in control of it. So anyway, I'm veering off already into a tangent. But that'd be my quick take. I would be far more likely as a voter to vote for policies that were more favorable towards small business than to large businesses. Jerry Harvey does not need - Like a true small business owner. Jerry Harvey does not need another racehorse, right? He doesn't. Alan Joyce does not need another Bentley. But, you know, Mary - So the small business people like you are arguing for more small business people like you.

1:08:19Am I hearing you say, I just want more for straw man. Hell yeah. Hell yeah. We're doing far much more, you know, and it's sort of like. Just reads his ugly head again. Mary, who's out there as a sparky, you know, like helping thing or Bob with a hairdresser just to sort of mix things up a little bit. Like they're doing us as society much more of a favor that I think than some of these big, you know, mining magnates. clive palmer and gina can can they're doing okay without without any sort of government assist don't think i didn't know she mentioned hairdressers might take advantage of my lack of uh like of her shootness uh podcast machine um i love this question brando and i think there's a couple of different ways to approach it is there a is there a an ideal optimum ratio not that i know of there may well have been research done um the challenge of all these things is the sample sizes are so small any research is going to be horribly skewed anyway um quick semi-tangent i saw some research the other day you know i argue about population andrew or no you just disagree and someone said oh immigration is the problem because it's not the biggest contributor to population growth like that doesn't those things don't have to be true at the same time again whatever you view the idea that so it is adding to population yeah but it's not the biggest it's not the biggest problem so we shouldn't talk about it it's like that it might not be the best solution or even the you know, a solution might be a terrible idea to kind of immigration, but saying it's not worth talking about because it's not the biggest thing is like, it's just, anyway, blew my mind.

1:09:51And these were, these were academics. I won't name them because I don't want to embarrass them. It's, you know, anyway. They're doing a good job of embarrassing themselves. Oh, thank God. Oh, by the way, have you seen that recently? The, the usual thing now about 90, 90 % of Australian companies are owned by overseas. Have you seen that coming around again? It probably comes up, it comes up every now and again, doesn't it? It's not, not true if anyone's wondering. Anyway. way um so i don't know if there's any research done mate i i'm a so i'm a big like ram i'm a big fan of capitalism right um but i'm i've said many many times not a fan of free markets i'm a fan of well-regulated markets um i've heard other slogans uh fair markets not free markets choose your choose your pick some of those are related with associated with ideologies or parties or people so i don't want to kind of go too far down that rabbit hole i don't have a particular favorite person who says that or i'm not buying into their version of this um it's true that big businesses tend to get big because they tend to take competitors out either by buying them or putting them out of business or making them irrelevant and so i would say the more large businesses you have proportionally the greater the chance that competition which is exactly ram's point isn't working as well as it otherwise might both as a cause and effect um let's pick on Woolies and West Farmers.

1:11:06I've said this before when I started working in grocery business years and years and years ago. In the early 80s, Woolies was about 20 % market share and so was Coles. That's more than doubled depending on which category you look at in the meantime. Now, on one level, frankly, I'm not someone who thinks Woolies and Coles is profiteering, by the way. And I actually, very unpopularly on Twitter, have a view that if we broke them up, we pay more for grocery rather than less. Because if you double up the supply chains, you add inefficiencies at store level head office level if we had 20 grossers rather than two i'm relatively sure frankly supplies would be much better off because they wouldn't have the big guys screwing them down so hard i actually think as a consumer i wouldn't think i'd pay more the margins might be lower the percentage margins might be lower per grocer but they're probably lower because they've got to double the or you know duplicate the entire supply chain truck fleets uh store sizes locations like you know they get further between the stores because they're not close enough.

1:12:02Now I'm not saying we should not have more than two grosses. I'm just saying, careful what you wish for. Now at some point, that flicks the other way around and we end up getting stuffed by having that. Two airlines, probably not great. So the more that large businesses dominate the landscape, the greater the chance that we're paying too much or that supplies are getting too little or both. So I think I would say more small businesses are almost certainly better for a health of a capitalist democracy or democratic capitalism, whichever way you want to phrase it, than having larger businesses. So unlike Ram, who's going to feather his own nest by wanting more things for small business owners like him, I'm going to say idealistically, ideologically, and without self-interest or without, you know, I'm kidding, of course, bias, I think he's right.

1:12:50I think we want more small businesses. Now, there is some benefit of scale. And by the way, we're talking about Australian businesses. If there's small Australian businesses, but big international-wise, that are eating our lunch, then we've got to be careful. So frankly, on a global scale, how bad are Woolies and Coles being massive if the alternative is Amazon or Walmart from overseas? Which, yeah, choose carefully, right? Because we say we want 10 small grocers, and so we do. Amazon says, I'll have all of that business, thank you very much, and you can't break me up. You can stop me operating in Australia.

1:13:21You can't break me up because I'm an American business. now what are you going to do so we're going to be a little bit careful about the the impact of the decision we might make locally we are small we're a small economy the yanks if they broke amazon up or walmart might be doing the rest of the world a favor but we're not going to do it same as google or facebook or choose those choose those guys um so be a little bit careful i now you ask about policy settings i think australian competition policy is woefully generous to big business i probably own shares that benefit from that so i'm talking about both sides of my mouth but i've said many times i'm not i'm not unusual but i am rare rams the same i'm going to put you in the same bucket as me mate i own full rescue shares and i reckon resources companies should pay more rents i own telstra shares and i reckon there should be more competition in telcos i would be hurt by both those things and yet it's the right thing to do policy wise i can absolutely do the same that both those things at the same time not a lot of people do they all talk their own book which is sad for democracy and sad for for well-functioning markets um there are there are there is not enough competition in the market the accc and the courts are too lenient on competition they allow too many mergers that shouldn't probably be allowed they are not strict enough to make sure that competitive pressures remain at the forefront interestingly enough the government's actually announced a review now government's announced reviews and they often go nowhere but into competition policy in australia i think they're a really good thing i hope it i hope there's some genuine um engagement i hope there's some genuine findings with teeth uh not because i don't love big businesses and if you own them you're probably yelling at the podcast machine now saying hey philips back off my you know quantus or woolies or or telstra or whatever it is that's cool you can have that view um i'm i'm more interested in the policy outcomes for the country i think we have a better economy with many more businesses rather than fewer large businesses and So policy settings aren't right.

1:15:13I don't think tax rates, I wouldn't have given small business a lower tax rate than big business. We get into that super profits tax kind of idea of like, if you make more than a certain amount of money, you should pay more tax. It's just not very useful. We talk a lot about margins and other things. Woolies has more business, but it makes a 6 % margin. The ASX is much smaller, it makes a 50 % margin. So Woolies would pay the extra tax and ASX wouldn't really. So super profits tax are frankly, I'm going to say economic illiteracy. it's it's politicking and positioning by people who don't know better and maybe they shouldn't but they should start if they don't know better um to be really blunt uh we should be able to change the way we run competition policy and tax policy but i wouldn't give small business a free kick um not because i don't deserve it but you pay a proportion of your profit so if you make less money you pay less tax you make more money you pay more tax i think that seems perfectly fine to me so i wouldn't change that uh i would i would focus on competition policy and if you want to help small business stopping big business using their market power to to push the little guys around is far more useful i think to them uh than giving a bit of extra tax just to buy a few votes yeah it's so it's so hard you know this is why i think you i'm very i'm a big fan of sort of or an anti-fan of anything that like I think we try to plan things with really good intentions but you are trying to plan something that is literally a chaotic system and is unplannable really it's very difficult to do so I think there is something to be said for allowing things to evolve organically and just making sure you've got the policy settings in place to make sure that nothing too egregious sort of happens there and sort of keep things within within within their lane type thing but but really get the hell out of the way because there people will always have an incentive to better their own situation and and the best way to do that is to sort of help everyone else freely when it comes down to it yeah but it's it is so hard it is so hard there's if i can end the episode by pointing to the great um economic teacher which is uh south park um There's a great episode, season eight, episode nine.

1:17:26I looked it up. It's called Something Walmart This Way Comes. It's a great episode. And so basically Walmart comes to South Park and they put all the small businesses out of it. So the townspeople are, this is outrageous. You know, poor old Jim's drugs is not doing well and the rest of it. So the townspeople burn Walmart down and then you sort of flash forward and Jim's drugs is like this huge big Walmart behemoth. Because it fills the void, right? So it's sort of, you've got to Walmart got to where it was by being the best. And so it's sort of like, we'll do it. And created a huge amount of value for people and gave people much cheaper products than that they otherwise would have got.

1:18:03Now, can the pendulum swing too far and the rest of it? I don't know. But my point is, is that this stuff is super, super, super, super difficult. And I think really the baseline principle should always be fairness, I suppose. and all's fair in love and war to a point. But when you get to a point where you have unfair advantage, that's probably the line at which we want to say, okay, okay. Because then you sort of get into sort of the robber baron kind of phenomena of you stifle competition, you stifle true value creation, and that's a bad thing. But gosh, talk about asking a huge question to end the episode.

1:18:45It's a big one. it's a tough one mate because capitalism tends towards monopoly that i mean that yeah it does the dog eat dog eventually all the dogs are eaten except the big dog that that's that's literally how it happens right and that's not that that's a that's a feature not a bug so the we want to incentivize that idea of being better than your competitors by bringing a better price a better product better service whatever it is that improves the market that's the whole idea of competition right it's it it iterates towards a better outcome the problem is at the extreme when it's let to get there they just they do the walmart story the amazon story the if you've seen wally the movie uh buy and low um you know the and they're they're fun fictional examples but the southpike example i haven't seen the episode ram you might surprise you don't know um it's it's exactly that right something will fill the void the the challenging for governments i take your point made about not getting too involved i i just think generally speaking you want to see competition work and when it doesn't work you know some the hardcore free marketers will say well at some point someone will come and start doing it to which i say well good luck if you're going to try and start a grocery store and you're and you're around the corner from all these and so i'm gonna do it slightly better than walworth's and they're eventually they won't be able to put me out of business i will be able to get big enough and bad enough to compete on my own terms that structurally you're just you're not gonna you're never ever gonna have that opportunity right you're never gonna be you can be a little bit niche a little bit different you know you can bring in a few customers that want something slightly maybe more local more niche a little bit cheaper a little bit something but you you know the the odds that that people are able to compete with Woolies before Woolies put them out of business not even deliberately just because of the use of that market power there's a point at which you say that's not good for the society not the economy the society the different things um and i just think generally speaking there is then i would i would i would not want a world where competition regulators walked away and we said let them fight it out because i think we know how that would end it ends with the rob varons as you said mate um it ends with those sort of outcomes and by the way as i said right now i i'm sure i'm paying less for bullies groceries than i would if there was more grocers but ask the ask the milk the dairy farmer i ask even some of the big package goods providers who basically you say, well, I've got Woolies and Coles and nothing.

1:21:01So if one of them says, no, I lose half my market, what do I do? I do what I'm told. I try and get as much as I can, but I do what I'm told because I can't afford not to be in those grosses because I need the scale. Okay, well, think about market power, right? So I'm winning. Woolies is winning. The poor supply is getting stuffed. Is that competition, does it resolve itself? Do we let them fight it out? I don't think we can afford to. I think we want a society, we want an economy that has competition evident rather than seemingly, obviously, stifled by a couple of large competitors who managed to kind of sweep over for them.

1:21:38Yeah, it's why I like sort of the concept of a self-correcting kind of mechanism where it might be something where the larger and more powerful you get, the more onerous the tax burden becomes. It's sort of like there's still a huge incentive to be that person, that business, because you're going to make squillions of dollars, right? Yeah, yeah. It's hard to say, oh, well, I'm not going to try if you do that. Yes, you will. oh that is the greatest misnomer in the world i will call that bluff every day of the week oh so once you're the biggest most powerful company in the country you know we'll tax you a bit more so therefore you're not going to try come on please we all we all know you're going to um not i'm not saying make it crippling for them but just you've got to remember that these it's what the libertarians miss out on i think is is that the it has been the society that has enabled you to do that the rule of law the structures that we have in place and you've benefited from the roads from the hospitals from all of this stuff.

1:22:27And it's like, and so, and, and we, we want you to have that incentive to create wealth. We want you to, to enjoy the spoils of your risk taking and your hard work because we have all benefited from it, but don't pretend that you did this in a vacuum. Right. And so the, the reward is great wealth, but also that you need to give some back, you know, and, and more so than the smaller people. And, and then at the other end, I think we are more generous with the support that we give and the tax that we do and so it it it doesn't mean that things won't continue to get bigger but if they do it's kind of like well we're all going to win because there's all more money in the tax pile that we can spend on ourselves whether that be through social security or better services or whatever it happens to be but it's all it sort of leaves the core of capitalism and the great aspects in place but and when we're saying it just means if you get super big you're going to pay a lot more tax And if you stay super small, we're going to make sure that we support you.

1:23:24To ensure that you've, you know, it's sort of like we're going to put Rocky Balboa in the ring and me. Okay, that's an unfair fight. But if Rocky has to sort of like wear lead shoes and wear blindfold, he's probably like, okay, he's still going to win. Maybe, but I've got a chance now. I've got a chance. And I think for the spectators, in my very horrible analogy here, it's probably a more interesting fight as well, rather than just me getting punched in the face in the first second and falling on the mat. there's that i i'm not i'm not entirely sure the after tax as you know that using tax as the thing makes the difference because you got to pay more of it but you're still going to smash your competitors unless unless that's actually yeah it's to limit your competitive abilities yeah uh it gets hard but i but i take your point i'm also mindful by the way that that argument of you know someone says i you know if i if i have to pay 48 of my income in tax i'm not going to work any harder what's you're going to you're going to destroy an entrepreneurianism the answer The answer is, if I get a million dollars, I'm going to pay 48%.

1:24:19Where's the incentive? The$520 ,000 you get to keep, dude. Let's not pretend there's a disincentive here. You might hate it. That's different. You might want to pay less. That's different. There's no disincentive there. Do you mean if I start making$10 million a year, I have to pay 90 % tax on every dollar above that? That's outrageous. I refuse to try. I'm quitting work. I don't want the$5 million I'd get to keep. I would rather have nothing. Thank you very much. That's more satisfying too, Mr. No. Okay. Let's stop lying about these sort of things. It's amazing how well that works though, that argument.

1:24:48Isn't it? The other one is like we've got to lower corporate tax because, you know, to attract businesses. So this huge market that is, you know, we're not the biggest market in the world, but we're bigger than, I think we're the 13th largest economy. So business is going to turn their back on this huge opportunity because they might have to pay tax if they're successful. Like, come on. I don't buy it. And by the way, when they do, someone here will do the job and then pay the tax. Yeah. There is no, we don't lose that. What do you think we're losing out on in that scenario? Yeah. Hey, by the way, mate, the good news is if our listeners did what you told them to do, they are about three quarters of the way through their 10 ,000 steps for today.

1:25:28So you're welcome, listeners. You are very, very welcome. How about we just finish with that, mate? Well, that was a terrible question to end on. That was a great question, though. A great question, but that was a dangerous question. we've probably we've probably not only made people walk very far we've probably like really annoyed half of the audience too the good news is if they weren't paying really good attention and just walking they're probably an hour and a half in the wrong direction so they're going to walk an hour and a half back there you go you're even more welcome this is three hours of walking time until next week walk on walk well and full on thanks for listening thank you the motley fool and people appearing in this program may have positions in the companies mentioned.

1:26:09General 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 License 400691.