Mailbag: incl. Investing for income. May 26, 2024

30:00I'm more than happy to give them my money. If I'm an existing shareholder, I'm happy to buy in after the fact if I'm not. You do get a lot of companies that there's nothing more dangerous than someone who's got money burning a hole in their pocket or that has the potential to put money in their pocket very easily and very cheaply. So share price goes to the moon on some short-term sentimental factors. They raise a bunch of cash. Everyone's calling for growth, expecting growth, demanding growth. I guess I'm going to go buy some growth. And it's not done from the desire and process has been initiated to try and be a self-fulfilling prophecy on what may be unrealistic market expectations.

30:41Contrast that with a company that's like, we have a very clear idea of our value proposition. There is an opportunity which has immense strategic value, be it through some kind of expansion or broadening of our product set or perhaps acquiring some customers in a different jurisdiction uh wise tech's been pretty good at this right like they've they've done they're all they've done is acquire in a lot of ways right but there's a rationale to it there and and i guess i'm all over the place here mate but i'm you like with so many things in investing we just like that if you see that bad if you see that good and that's so true and i did and i know i I know that's not what the listener is saying here, but it's why there's, at least I won't speak for you, but at least why there's these meandering, it depends kind of answers from me because I'm sad to say it is.

31:33That's kind of what it is. Yeah, true. I'll let you have a go at it, but I'll try and think of some examples recently of bad and good capital raises. While you do that, Luke, so if you're raising – there's two reasons to raise capital. One is because you want to. The other is because you have to. And so, you know, in the context of Andrew's comments previously about the banks, he's not saying I'm going to invest in them when they're raising capital because they want to buy another bank overseas. He's saying when things are so desperate, when the banks are forced to raise capital, they're literally forced by the regulator or forced by good governance to raise capital to shore up the balance sheet, that's when I'd be interested.

32:12Now, why would Andrew be interested at that point? I'll put words in his mouth and he can tell me I'm wrong. He's interested because at that point in theory, the business is pretty challenged. and the share price is probably really low because people are freaking out and they're having to raise capital to stay in business. Now, at that point, you would say, well, assuming they can raise the capital, which I'll get to in terms of when, but assuming they can raise the capital, this is stay in business money. And at that point, the shares are about as cheap as they're going to be. It's not a zero chance they still go broke even after raising the capital.

32:40And there's not a 100 % chance they can raise the capital. But if they can raise enough money at that point to stay alive and see it through to the other side of the problem, then that can be a good time to be buying because the shares are cheap for all of the reasons we've just talked about this is the proverbial great business on the operating table now maybe banks aren't great businesses but that kind of idea of one that he expects to recover but that you're getting at a good price because everyone's freaking out right now and in that case it's after the fact right because correct the the reason so cba just to pick on them um went from 60 bucks to 30 bucks in the GFC.

33:13Yeah. And the reason being is that they thought a bunch of loans are going to go sour and they're not going to have any net assets and they're going to go out of business. Now, the very act of raising capital made that go away. Yeah. We've shored up the balance sheet. So now, that risk is gone but the shares are still 50 % down. Yeah. I'm interested. I'm interested. It's super low price with the existential risk now removed. Now, before the fact, maybe the capital raise doesn't get away at the price that they want or the amount that they want, et cetera, et cetera. After the fact, I mean, I'm no fan of the banks, but they're going to be around for a while.

33:51They are very politically connected and favoured. Yeah, they're going to be around. And yeah, I don't think people really recognise the fact that how levered they are and how sensitive they are to economic conditions. Because again, we don't do recessions anymore, apparently. At least it's what people tend to think. but when that if and when when sorry when that happens at some point backing up the truck man it's going to be an incredible investment now I just want to add mate only to that which is to say the CBA could still go broke after that circumstance so Andrew's not saying there's a guarantee but the probability is much lower correct and I'm not saying that to disagree with your point mate I just want to make clear to our listeners that is not a no risk or return opportunity there's still plenty of risk there because it solves the first existential risk stays in business but if more go if more go to the wall Maybe they've got to raise more capital.

34:40Maybe it happens more quickly. Maybe there's a run on the bank. There are still circumstances in which CBA goes broke after that point. Not very likely at all, but I just want to make that point. So Andrew's saying, I want a cheap price. That way, my risk reward is skewed in favour of the upside. Not perfectly and with no downside risk, just on the upside. And the reason you would buy after is if you do it beforehand and they don't raise capital, they go broke. You probably don't get a chance to raise during the capital raise because normally for existing shareholders or institutions, if you get a chance, you could.

35:08but you don't know whether that raise is going to be enough money now like we said before on friday about the companies that grow and grow if you listen to the 91st minute of the podcast um you know you'll probably pay more after than during or before but you do so knowing that you've removed a whole lot of risk and so in that case it's definitely worthwhile um luke also asked about what we think the big four would look like in a world of a australian capital recession situation i i will say that i we don't know is is the is the honest answer um and because it depends on how deep how long what's caused what it's caused by what unemployment does there's a million different things that could go wrong so i'm going to give that really frustrating answer it depends um i and going back to the gfc by the way uh lloyd's bank in the uk uh was 90 nationalized by the government so every investor lost 90 of their money uh northern rock i think might have gone broke we're almost broke was taken over having lost most of the money um other banks were bailed out uh merrill lynch was bought by bank of america lehman brothers goes broke in the u.s um now those those were different circumstances and so i don't want to i'm not drawing a parallel at all i guess i'm making the point there's always a range of outcomes in every crisis others did fine others raised capital um some didn't participate at all there's all those things going on i think the risk of a meaningful recession is if you own the banks they may be forced to again by the regulator or by their own boards to raise meaningful amounts of capital that dilute existing shareholders meaningfully um to stay in business uh there is a non-zero chance they go broke uh during the 90s recession westpac and anz needed more money kerry packer almost ended up being a large shareholder in Westpac from memory.

36:52Yeah, Westpac. They were close to the wind. Like an inch away. Right. An inch away. Would the government have let them fail? I don't know. Would it these days? Probably less of a chance, but not zero. And when we say fail, we don't even necessarily mean the Commonwealth Bank ceases to exist. We mean it gets bought by the government or assumed by the government and shells get wiped out either entirely or mostly. Might as well get wiped out from your point of view. Exactly. Exactly. So, mate, look, I don't know. I don't know the answer. I don't know what they look like. They record massive losses.

37:22They probably raise capital. They may or may not end up having meaningful chunks of them owned by the Australian government. It's one of the downside risks you need to be aware of. I mean, no one pre-GFC thought Lloyd's was going to be effectively become a government bank. But that's what happened. So those things happen. AIG was effectively a government owner almost at one point, the insurance company in the US. So we don't know is the answer. And again, in a small recession, a very short recession, where the GDP is negative for a couple of quarters, Australian property goes down 4%, and we're out of the recession, unemployment goes to 5.2%.

38:03The banks look like they look now. They probably put in some paper losses, or maybe they don't even do that because they put away the provisions for bad debts. They soak those up, a little bit of loss. So there's everything, I know this is stupidly annoying, everything from we didn't notice it through to the Commonwealth banks now owned by the government again. But the depth, severity, and the way that recession happens in terms of mostly unemployment, frankly, which is what would hurt house prices, that's, I don't know if you have any better ways to frame the odds of those, Ram, but it is honestly anyone's guess, Luke, and I'm sorry to be that vague.

38:36Yeah. I mean, yeah, it depends what you mean by capital R recession, but I think any reasonably decent recession, they're in all kinds of trouble. I mean, there are statements. Can we define all kinds of trouble though? Because I think that's everything from, are they going to lose a bit of money or are they going to go broke? What do you mean by all kinds of trouble? Well, I'll do a statement of fact. People can come to their own conclusion as to the likelihood of it. I'm doing this from memory, so I might be a little bit off. But I believe, because the banks are basically mortgage machines these days.

39:08That's the vast majority of their business. They don't really do much business lending. They don't do much investment banking. they sell home loans. You only need, I think it was last time I looked at it, 12 % of their loan book to go sour and they're in negative equity. Like you're insolvent. How likely is that? Well, not very likely. I don't know. You make your own conclusions. But it is the nature of these entities is that they are reasonably levered. And you've got to, like balance sheets are an interesting thing. It's all flipped on the head with banking. So what we would normally consider a liability as an asset for a bank.

39:44So your loan is their asset. So they get some money, they get it from depositors mainly, and then they'll borrow some from capital markets, the issue bonds and this kind of stuff. And then they will lend that out and more, as much as 10 times more if they want. Again, it's just fractional reserve banking. It's kind of how it works. So their assets are people like you and me saying, I promise I will pay this back over time that's the asset and we might not be able to so if unemployment got to 10 percent a lot of people are not going to be like it doesn't matter what your intention is or how much you like your house you just can't pay the mortgage you just can't do it um goes to the bank and then they're a forced seller sends prices down which puts other people in negative equity and then so on and so forth these are these are the dreaded contagion effects that people always sort of talk about and so i like my point isn't i i people hear what they want to hear it's not to say this will definitely happen it's gonna happen get the hell out and when it happens it's gonna be you know it's all gonna end up in in tears and everyone's going to zero yeah um it's more about saying that it you don't have to rock the boat that much for it to get into trouble and we lack that is I've said to you there and others before there are people who are knocking on the door of 50 who have never had a recession in their life and they look back at their entire career and go these banks have never ever gotten themselves into trouble despite uh the GFC um despite uh COVID it's like yeah I would say but neither of them were actually in Australia that bad in terms of recession certainly wasn't like the mid-90s recession uh certainly wasn't like ones we've had in the past.

41:30But it doesn't mean that we've solved the economic cycle. And again, for me, it's not to sort of say it's going to happen and this is when it's going to happen. I think that's the height of hubris and you're just going to look like an idiot, right? But I could probably be reasonable in saying at some stage, we're going to get into some wobbles. And if those wobbles are reasonably significant, these entities by virtue of their structure and operating model and the nature of their balance sheet and the quality of their assets, which are just a bunch of households promising to pay money back. They could very – almost certainly going to get bailed out by raising money or getting the government to sort of nationalize it in some way, shape, or form.

42:17We can argue that the degree of damage that you suffer. Honestly, you know, is it like, oh, well, I was only 50 % down and a permanent loss of capital versus 80%. Like, at what point do you kind of write this off as a meaningful downside risk? And I would, yeah, it just doesn't take much. And there's a time and a place for any kind of business, I think, and at any kind of price. And I think we have a bit of a scenario where we have these entities that have appeared to be reasonably bulletproof over very long stretches of time. And we've now just taken that to mean that there's nothing that can ever go wrong.

43:02And it's just maths, right? It's just maths. I'm not making the numbers up. You can go and explore the balance sheets yourself and then you can form your own conclusion as to the likelihood of these events. And I don't know how to handicap it. All I know is that even when things have been sort of muddling forward, there've still been terrible investments over the last five years, right? In this environment, right? And longer, in fact, in many of them. So if and when we ever do get into a decent recession, they'd be there. And they're priced as if nothing can ever go wrong. And I always talk about asymmetry.

43:36And here you've got a scenario with the banks where everything sort of, you know, we kick the can down the road, we muddle ahead, and maybe I'll go okay. Like not brilliant, but okay. Or there is some unexpected wobble and I lose 50 % plus of my investment. I don't know. It doesn't tempt me in the slightest. No, no. But at the other end of the cycle, there will be a point where it's like, oh no, they've shored up their balance sheet. They're still going to be around. Now trading on, you know, some kind of reasonable expectation of a forward multiple of, you know, single digit or something like, okay.

44:12Now that asymmetry has changed. It's like, yeah, there's still downside, but most of the downside has already been realized, assuming that there's no existential crisis. And on the other side of this, they're likely to do extraordinarily well. So now I'm interested. Yeah, I think that's right. I mean, CBA's profit was down for the third quarter by 3%, and yet you're paying 21 times earnings for that business. It's a tough one. The only thing I want to say, mate, is just there is, like handicapping any odds is really difficult, right? Because you've got the possible catalysts, which Ram's talked about, and then you've got the possible impact of those catalysts, i.e.

44:48how far my house prices fall or unemployment rise or business bad debts rise. and then you've got the what is the course of action that follows that um in one version of the future government's side to guarantee deposits up to a million dollars rather than a quarter of a million dollars they give cba an emergency bailout of 58 million dollars it doesn't need to be repaid and shareholders don't get touched at all even though house prices crash 20 percent yeah in another scenario the house price fall 20 percent the government says oops your problem nationalizes the deposits the bank goes broke and the new commonwealth bank gets born and the channels are entirely wiped out.

45:19And so you've literally got that range. Even if you get the catalyst right, even if you get the timing right, even if you get the circumstances right, the then what is an open question, and particularly with banks, because they are too big to fail as institutions, not necessarily as shareholder. And again, be very careful here. When we say the banks are too big to fail, it doesn't mean the shareholders are too big to get wiped out. It means the institutions themselves survive under some other sort of ownership structure, and the depositors are fine. So the bank is too big to fail. But really what we're saying is the deposit base is too big to fail and the loans will be carried over to some other new entity.

45:55So just, you know, again, the range of outcomes Andrew's pointing to here are really important. Now, this is the other thing. You can say, well, the government doesn't know that the banks fail. I think that's true as institutions, as I said. Doesn't mean that that's not the same as the government would ever let shareholders lose money or the government would ever have, take a meaningful ownership stake. And, you know, those things are different things. So just be careful when we say the government won't let the financial sector and the financial contagion and the financial implications. I mean, if the finance sector crashes, we're back to baked beans in caves for a couple of years.

46:29We sort our stuff out. In the meantime, between those, and that's why it won't happen, right? So there's always the question of, you know, how big could it be? How bad could it be? What the implications could be? We just don't know. And by the way, if you haven't got much upside and all those downside risks, that's what, to Andrew's point, what you're saying saying what what do i have to assume happens right for me to make money in this in this idea and that's when you almost have to ignore the potential downsides you have to think they're likely you just have to say well hang on at best case i do okay-ish and worst case is something much more horrible than this even with even with odds that are you know okay is a much higher probability than disaster yeah but okay still not a great return and disaster is awful so trying to choose between those two um there's heads on heads on wind tiles i don't lose much This is kind of like heads I don't make much, tails I lose a lot.

47:17And that's still not a particularly good set of odds. That's such an awful, awful proposition. I've got to clarify what I said before earlier. I said last five years you wouldn't have done well. That's true. Over the last 10 years, Westpac's share price is down 20%. Right. ANZ is down 14%. NAB has managed to gain 9.2 % over 10 years. So 0.9 % roughly speaking on average. they were doing terrible before COVID, right? In a property bubble. We should say too, their dividends are probably 4 % or 5 % a year. So the total return is meaningfully better than that, but compared to the market, very ordinary.

47:56Pretty ordinary though, right? So like with dividends, maybe I've preserved my capital. I haven't made any money. And these are incredibly privileged institutions, you know, and I just kind of think if that's what you do when things are okay, hey, what do you do when things go bad? And it's not like, again, they're not trading at necessarily timid multiples here. And I think in a lot of these cases, I should probably check some of my data here. Yeah, so even if you want to look at like some of the yields that are on offer, they're not that much above what you're getting in a term deposit. So even if you say, yeah, but I don't care, I'm just about the dividend yields.

48:35Well, A, I refer you to our comments earlier on dividends and growth being necessary. but b it's sort of like not much growth in those institutions cba has been the exception granted um but i could have almost zero risk and and get pretty much a similar return in the term deposit like where's the reason to get out of bed here i don't i don't i don't get it and we've got too much particularly the older generation because they they really benefited like if you bought the banks in the 90s incredible insanely good returns right like but but you know that was then this is now right you're not if if we're talking about investing with the benefit of a time machine okay fair enough but but a i would say we've got to keep up to date and i don't think looking over a 10-year period i'd be accused of short-termism in any way shape or form and uh yeah given given Given a lot of the challenges, given the concentration of their assets, given all of the problems and challenges that we are talking about in terms of housing and interest rates and inflation, just give me a reason to get excited here, you know?

49:44And for what? Five, 6 % yield? Come on. Not for me. Yeah, I like that, mate. I like that. I think that's, yeah, that's a good one. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

50:04Hey, let's go to a question from Ben, who, maybe a comment. Hi, Scott and Andrew. Your comments in relation to investing and achieving a deeper context and meaning recently were so profound. Regardless of how much money you make, the ability to understand, investigate, establish mental models, and start to predict real-world economics and business cycles was brilliant. I will say only one thing. We're not predicting anything. We don't ever make predictions. So understanding how things could eventuate, understanding the range of possible outcomes, for sure. And either Andrew or I, well, I would speak for you, mate, but I'm pretty sure I can speak for you by saying we don't do predictions.

50:38That's for crystal ball gazers and economists. Especially about the future. As Yogi Berra said, my son resonates with everything you say, says Ben. He's 18 and he can't understand why not everyone is compulsorily trained in economics on the curriculum at high school, at least to a base level understanding. Thanks for bringing balance and levity to the topic of investing. Oh, here we go. My son and I are looking forward to taking each other on head-to-head on the straw man investment challenge. One step further in our direction of making greater meaning of real world affairs. Thanks, Ben. That's cool.

51:11There you go. Comments, thoughts? I mean, I've said this before. I think investing is notionally from the outside. I think a lot of my mates and friends and family, it's all about the money. You want to make money. There's a greed element. There's a Gordon Gekko element to it. Yeah, I want to make money. I'm not ashamed of that. Don't we all? Like, can we just like be, it's like when you go for a job interview and they say, oh, do you have any questions or what do you want? It's like, dude, I'm here for the money, right? I'm not applying for this job because I'm a billionaire trying to fill my time.

51:45It's the money, right? So you can sometimes say the quiet part out loud. Yeah, I think that's a big part of it. But I also think that investing is that probably the only real vocation where it requires a, well, mental model is a cool way of saying it now, but, you know, just an understanding of how the world works, not as you would have it, but as it is. Correct, yes, yes. Because that's how you make money, by having a correct view on the future. And you're only going to have a correct view on the future if you've kind of got, I mean, it's so much hubris and ego. You've got to be careful because I don't think anyone can know the future.

52:26You can't. but I think you can have, there are better models of reality, right? On one end of the spectrum, you've got the flat earthers. And then at the other end, you've got people with a more nuanced understanding. And for me, it's that challenge of just, it's that curiosity of how does the world work that makes this such an interesting game beyond any of the money. I've said to you many times before, Or if I win the 150 million Powerball, whatever it is this week, I'll still invest. By now you would know you've won. That's the beauty of it. You're already rich. That's true, right? I mean, because it's fascinating, right?

53:07Why is it that company X is going to do better than company Y? And there's no squiggly chart pattern or balance sheet analysis that's going to tell me that. It's a bad understanding. Extrapolation. Yep. You know, it was like, huh, there are these human constructs called companies that operate in a wider legal and democratic system that compete against each other in this capitalistic gladiatorial arena. And that, you know, I guess the scorecard is the money and that enables things. You go deeper and deeper and deeper and deeper, and there's a great satisfaction and what is it? What's the word I'm looking for here?

53:54I just find it endlessly fascinating, right? And why is Elon Musk one of the richest people in the world? Beyond just sort of poking fun at some dumb thing that he said or a tweet that he said, or Jeff Bezos, or Gina Reinhart. you know there are there are reasons that go beyond and it's not right to say well they're a genius because i can point you to any number of poor geniuses right um that's so true but there is a reason for it and it's always easier in hindsight but i think when you what i've found is that the more i've and i don't think you ever reach a point where you go yep i've got it or if ever you do get to that point that's the pride before four moment so exactly if you ever start catching yourself thinking that be very careful yeah but but it it helps it helps you refine that model of the world so we've often said things which probably can seem unfair i'd never invest in that move on it's like whoa scott you've never even looked at it no i'm not interested well come on no no what you don't understand like no and it's not because you're definite on that that company's going to be bad but you know that you know most mining mining exploration companies are very bad investments they just always have been and there are exceptions to the rule and there are spectacular exceptions to the rule, but by and large, they tend to be pretty powerful.

55:07And you've now got a really good heuristic that you can apply. And that's come from observing the world and trying to think about how the world looks, not from an ideological lens, just by what has happened as being a student of history, applying a bit of reason and logic to it. And then there are other things that you will say, well, it's just like, oh, this is a business with incredible network effects and scale advantages that's uh got a lovely industry tailwind behind it and a competent and aligned management team and it's again these are all heuristics but you've just seen that they work really really really really really well and and that's investing investing is a game of probabilities yeah literally it is it's it's you know i said before we there's a school of thought which is you know betting is gambling and investing is sensible and smart and somehow different and they can be right because well no here's the thing they're not the the only thing you need to do is understand the odds of the pursuit you're pursuing which is a horrible way of explaining because i should have a different word for pursuit and pursuing but i didn't so uh if you're trying to do something where the house takes 15 and you have no edge i think you can assume that's gambling right if you have a pursuit where you have or could or believe you may have an edge where the expected return is actually positive when you're playing poker right the the the ante is the ante the the table stakes are the table stakes you you can only make what's been put down by other players on the table right when you when you buy shares you have a chance to even you know if you're right you don't just get the two dollars that you bet the other guy you get the two dollar share that can be worth three four five dollars and pay some nice dividends over time so the the what they call the expected value for everybody is positive everyone in the share market of a expected value because shares go up over time well they always have and i don't think they're going to stop anytime soon i can't promise they will because that's just as it doesn't let me um but you know things will if things improve i think i don't think capitalism has peaked i think we're still good um as that happens we should expect that the positive expected value and to ram's point if you get those probabilities in your favor that starts to pay out pretty well so is it is investing i'm investing gambling the same thing no clearly not are they based on the same set of criteria or the same framework?

57:18Yeah, 1 million percent. Because what you're trying to do is say, if I pay this price for this thing, what is the likelihood that my return is going to be larger than the money I put down? Yeah. That's it. Now, the stuff we call capital G gambling, you put money in a poker machine, you're mad. I mean, do it for fun, but don't do it. Try and make money. On the races, the tote takes a decent chunk and you've got to share the rest with other people. So there's a negative expected value. Everyone, every horse race has a negative expected value. The winners will win less than the losers lose. I mean, and if you can be a winner, then fine.

57:50If you're a regular winner, that's fine. This is a negative expected value. Toss a coin, 50-50, positive zero, neutral expected value, right? You get back roughly what you put in if you play long enough because 50-50. Assuming you're getting a two-for-one deal. That's the difference. So probabilities are all it's about. But understanding those probabilities, applying them, like, as you said, mate, it was a long way back to, you know, good management teams tend to produce better results than bad management teams good balance sheets tend to produce better companies than bad balance sheets businesses with bright futures and long runways tend to produce better results over time than businesses that don't have them not every company not every time but often enough you're playing with a loaded coin yep yep and it's it's yeah i just i find it an endlessly fascinating i how many times you sort of get this a bit in the public arena where you know some what's a non-swear word

58:45person oh aren't you the guy that likes x y and z you know that's not done well as if it's like some like you know burn like so you're saying that i'm not an all-seeing oracle that knows guilty guilty man uh may i refer you to the scorecard you know it's just like i'll put it out there and i'm happy to do it you are too the full publishes it i publish it have i covered myself in glory no could have i done better yeah have i outperformed the market yeah happy with that yeah that's right have i made him yeah will that continue i don't know i hope it does um will i be wrong again yes lots of times i'm gonna make so many mistakes i mean it is not the burn you think it is to point that out, right?

59:31And by the way, if you have found some guru out there that is promising you that everything that they touch is going to turn to gold, run a mile and ask why they're charging you a million dollars for their subscription, right? Like it just, it does not exist. And you have to, and even if you're going at alone, it's just like lean into it, embrace it. You're going to be wrong. You're going to be wrong all the time. And that's cool. The only time you got to beat yourself up is when you keep making that same mistake again and again. And that's where you, yeah, that's, you need to look yourself in the mirror.

1:00:02And by the way, I don't know how many times I've made the same mistake. Not doing that again. I mean, that is the definition of insanity, right? Like doing the same thing and expecting a different result. But I can guarantee you that if you stick at it and you make the inevitable mistakes that every single person has made and you learn from them, you're just going to get better at it. Whether you're juggling or ice skating or chainsawing or whatever it happens to be, You do it enough and you learn the lessons. You're going to get better and better and better at it. You're going to find more enjoyment at it.

1:00:32And you're going to create a better future for yourself and your family. It's like, and if you ever, it'll be super high and noble. Your little contribution to the capital allocation game is going to help direct society in the direction that it needs to go. You feel it needs to go, right? It's like you fund the things that you want to see more of and you keep your money the hell away from things that you don't. There's all kinds of, you know, butterfly-type ripple effects that you can have in this kind of world. And, you know, you're just going to be groping in the dark if you've got no sense or even an attempt to try and understand how it all fits together and what it all means.

1:01:08So it's very deep and philosophical, I would say. Nicely put. Nicely put. We're going to finish with a question from Bernard, mate. A couple of questions, actually. And I've got some details. I'll take the first go of this just because I've got the data he's asking for, but then we'll broaden it out. Bernard says hello power ballad Phillips and disco Satoshi Page I'm loving these inventive openings I do like disco and I am a fan of Satoshi so guilty as judge disco Satoshi Page I like it I could be potentially guilty of the occasional power ballad too just quietly bit of lady in red Christoburg late at night it's got some legs anyway Bernard says a question for the pod machine regarding company announcements I realise this requires opening attachments therefore may be better suited to a holiday special covering what company announcements mean we're not going to do that Bernard but we are going to tell you he's asking about company announcements Appendix 3G, notification of issue 2A, application for quotation ASX compliance email to a company well I'm not looking for you to say just to break down the information specifically about a company what I'd appreciate is a general explanation about what it means and the implications of it for us retail investors he says as a follow-up i know it's quite a difference between the company stats on yahoo finance and my brokerage account is that normal thank you both for your pro bono work on the pod machine rock on and turtles all the way down cheers bernard that's a long time listener right there thank you bernard uh mate so i will i will very quickly uh cover the the announcements because i just can't it's just easy to get out of the way ramo i've actually done some a little bit of Pre-look on this one, unusually.

1:02:42I need to Google it, yeah. So the forms, God love bureaucrats. They have forms for lots of things, and those forms are given code names. In the US, for example, the quarterly announcement is called a 10Q, and the annual income statement is a 10K. It just is because it is because it is. By the way, for those like us, the UK pop band UB40 was named after the UK unemployment form. I didn't know that. There you go. Oh, I did not know that. Okay. So there is a form for everything. So let's go through it. Two, and look, so it probably doesn't matter, but I'll explain what they are first and we'll talk about where they matter.

1:03:22Appendix 2A. If you are listing additional securities on the ASX, if you've issued new shares, if someone's exercised some options and got some new shares as a result, those shares need to be advised to the ASX. If I had 100 shares on issue and I employed Ram and he was a great employee, I said, mate, you've done such a great job and I'm going to give you 10 new shares, then I've now got 110 and those new 10 have to be told someone's going to tell someone and you have to use a form to do it to make sure it's done properly in the right format so the ASX has a form for that 3G is different and they're the ones that aren't quoted on the exchange these are normally things like the options themselves or securities under employee share plans so think about again I just mentioned before if instead of giving RAM 10 shares and saying thanks for a good job done I give him 10 options and say here's some options thanks for a good job done.

1:04:08They're not shares, they're options. So they use Appendix 3G for that. So effectively the same kind of idea. And that's kind of really all you need to know about those. I'll talk about the context now. The ASX compliance email to a company, generally speaking, is when the ASX is concerned that something wasn't done properly, or they want further information about something. It might be - Please explain. Okay, thank you. That's exactly right. So it might be, hey, I noticed you guys put out a notice of direct to selling, but it was sent out a month after we sold it, especially within three days.

1:04:39Can you let us know why that happened? Or it might be, hey, the share price got up 15 % yesterday. There's been no announcement. Anything you need to tell us? So it's basically any email from the compliance department for anything it doesn't seem like. It's either not following the rules or where something's happened that's unusual or extraordinary. And the ASX just wants to remind the company that's paying attention and see if there's anything else the company needs to tell the market. So that's what they all are. Do they matter? Kind of yeah and kind of no. You want to know whether there's options out there that convert to shares.

1:05:11Let's use my 100 share example. If I had 100 shares on issue and the company's worth 300 bucks, you go, okay, great,$3 a share, I get that. And then you find out that Andrew's got a million options, which will convert to shares if he turns up to work on Monday. So hang on, on Monday afternoon, afternoon there's going to be 1 million and 100 shares so that company's still the same size all of a sudden i've been diluted massively my three dollars of value is now worth you know three hundredths of a cent oh hang on i didn't see that coming so you need to you deserve to know that they're available similarly if i'm going to issue those shares to ram you want to know you've been diluted a little bit and i should tell you you should know about it and so what should you think about it well depends uh were the shares issued fairly were they priced fairly are you comfortable with the amount of dilution being done are you getting enough value for that dilution all of those questions you know this is this is the proverbial slicing up the pizza in a smaller slices you've got a smaller slice now you know when either those two appendices come out you've got a smaller slice your question is am i happy to exchange the smaller proportional slice for a larger pizza overall in other words i might have one 100th of the company rather 150th but the company's out 10 times the size yeah i'll take that deal any day so it's all about that and it's why they issue them so you can make that decision for yourself um implications again it depends on what the what the issue price is how many of them are but do that maths and say right i used to own this proportionally now i own that does it feel like a good deal for me as a shareholder that that's pretty much what they're are what they're inviting you to do and what i think you should do ram yeah um the one that i pay particular attention to is the 4c which is the quarterly reports um which is a requirement for companies that are, oh gosh, you'll help me here.

1:06:56It's not a up to you kind of thing.

1:07:01If you have yet to produce, is it two quarters of positive cash flow? I think about it. Is it cash flow? It might be profit. Profit. They're admitted on, I think the phrase is something like admitted on the basis of cash flow recording or reporting. It's that kind of idea. is if you're so small and you're not delivering any profit, you're just there, you've got some cash flow, so you've got to tell us that more frequently because you're not profitable. I think that's why. Yep. And so in the small cap space, they're super valuable, right? And they don't, like, outside of that in the Australian context, you only have to report twice a year.

1:07:33But these have to come out quarterly from a cash flow perspective. So they're actually really informative in terms of what's been happening for a business. So I pay a lot of attention to those. A lot of them are, they're just not super important. They're not important. They're just not the main factors that I think are important. Yeah. And there is a lot to be said for formalizing the disclosure requirement, but these forms are like, oh my gosh, they might as well be in hieroglyphics. I mean, like, just, can you just, I always find this is one of my bugbears. whenever there is any kind of capital adjustment, whether the buyback or a share issue and stuff, because I often have to do manual adjustments on straw man to fix up the woeful data that we get from some unnamed provider that I won't mention, which is a whole other rant.

1:08:27And you think, oh, okay, there's been a share split there. Or there's a capital raise here. Just tell me what was the price? when was the date that needed to happen and you can find it it is technically there but it just like can i just get a human being to write one sentence at the start give me three bullet points just tells me what i need to know it's like for goodness sakes it's just so it's so uh unnecessarily um opaque um what was the other part of that question the last part that was the so it was really interesting it was actually the question about the difference in the stats It's the data between Yahoo Finance and the brokerage account.

1:09:07Yeah. So there are, if you want data, right, there's a bunch of people who will sell it to you. The only real official source is the company and what they formally disclose. But for that to go into a, if you want, that's just for a company. So if you want it from a company, you can get it. If you want it for the market, well, you need to get someone who's going to put it all together. And then you've got companies in there that some are like financial institutions, some are trusts, some are, you know, some will report things on a gross revenue basis or net rate. You know, it just, life is complex, it's messy.

1:09:53We want everything to fit in these boxes. And so there are subjective judgments that data providers will make in terms of how they provide it. who's right or wrong it's like me saying i only use a forward-looking pe and you say no i only use a trailing pe which one's right up to you there's no pepsi or coke there's no you know there's no right i say scott's wearing a coca cola t-shirt as i as i look at him through zoom so i know i know what his answer is but but you know it's these are these are subjective things but on top of that just to be a little bit nasty they're also uh pretty inept i would say and and You can afford to be when you've got a very cozy oligopoly.

1:10:29I put my cynical hat back on, which let's face it, it never comes off. And you can really treat your customers like dirt and overcharge them. And like, what are you going to do? Are you really going to rebuild all the API inputs and that? And they know it, right? They know it. So you have this public quote unquote data that you have to, you know, basically, you know, mortgage your house just to afford. and even then there are holes in the data all of the time and even then when you point it out right the amount of money that this company is they got a 50 bug bounty program now you got to fight through it but i'm i'm petty enough i'll fight for that 50 bucks i was like the data's wrong no it's not yes it is no it's not yes it is here it is all right can i have my 50 dollars can i have my 50 dollars hello hello oh yeah thank you and you get it eventually right but But it's very frustrating as an experience.

1:11:23Anyway, the point of it is always go back to the source material. Yes, I was going to say as well. Always go back to the source material. Start with, you know, if you want to find out some rough information, start there. But don't trust that information. Oh, yeah. The other thing too, by the way, sometimes, so for example, on my broker's account, the PE is actually kind of, they kind of calculate the PE weirdly. Yeah, it's called blended PE. They take a bit of last year's, a bit of next year's. And I think they even do a proportion of the year gone and coming up and stuff. And it's all, it's in quotes, clever.

1:11:56But the future PE depends on consensus forecast estimates, which could be wrong as well. And so you lose this PE and go, well, hang on, what is the PE really? And is there even consensus data available? Because most companies, analysts don't cover. So it's that, yeah. So just be a little bit, well, be very careful. Use it as a starting point and then go and confirm the information. And if that feels like hard work, it can be. and if that's not okay go buy an etf because uh investing on the base of someone else's data is you know well if and when it comes you become a cropper and it often happens the stuff that either small stuff frankly because it's less likely to be accurate and or tested by someone else so the errors are likely to persist for longer which i knock on those companies and knock on the data itself and and then you say well hang on i'm using that but if you do use it there's every chance you don't know the company quite so well the market doesn't know quite so well you kind of magnify the risk of of a mistake and it can be a positive mistake sometimes too.

1:12:45The PE can be too high. So it's even lower than you think, which is always nice news. But yeah, always going to do the work. Yes, I was going to go around on PE's. I'm not going to do that. Other than to say PE is not the be-all and end-all either. And that's the PE. That's like probably the most mainstream metric in the world. Other than the price. And there are problems with that. So you can imagine once you get a little bit more esoteric on some of these things. So they're useful for a broad cut, you know, quick and rough and ready kind of look at things. But then when I say go back to the source material, It's not that hard.

1:13:16You know, I was saying to you off air how much I'm using AI in my workflow at the moment. That's a classic example. You know, upload the annual report into one of these models and query it. It'll do the search for you. And then you can go and say, what page is that on? And then go and double check to make sure it hasn't made any mistakes. But that's pretty powerful stuff. But it's not – the more annual reports you read, the more – there's a real format to them, you know. Yes. Where you can, you know, the top 20 is always at the back, right? The financial statements are always somewhere in the middle.

1:13:55And you can just like control F and find that, you know, you'll get better at it with practice. But it isn't as difficult as you think, particularly in PDF world where you can just search for a term, you know. the only thing i can say about you quickly is the the opportunity is not in getting access to the data everyone else has got access to uh in other words said if i can screen for it and everyone can screen for it and everyone listening can screen for it screen for it then it's not that there's no there is no source of advantage in knowing the p is 12 or 15 or 18 right everyone knows that already it comes down to either the stuff no one else is looking at or your different interpretation of what the future is likely to be and i guess that sounds hard it can be that's the point um but if everyone if all it took was historical data and screens there'd be no outperformance because everyone i mean i have got the the worst supercomputer in the world there is there is hordes and hordes and offices and offices of people in shiny suits you know in the cbds around the country who have bigger batches of computers and quant analysts and all sorts of stuff who can do all this stuff much faster better than i can uh if that's all at some point by the way maybe things get harder for stock pickers but for now at least we're pretty good and you know if it was just up to the data your best data everyone's got access to the same information there is no advantage there by the way which also means if you don't do the work you're giving someone else an advantage anyway but just remember it's not about finding the company with a pe of 12 no one else has seen because trust me everyone else knows that company's got a pe of 12.

1:15:17It's the interpretation of the data right like that's that is what really really matters there. It's what can ever be yeah yeah it's also by the way the best chance for individual investors to beat AI and for that not to go to nothing because if the future to whatever extent the future is knowable it's already priced in yes you are looking for mispricing which means you're looking for times when the market is wrong about a thing now you have to be right the market has to be wrong because sometimes you'll think the market's wrong it's absolutely right you're the one who's wrong um but that that's that's the only way this this happens is if you get to that point i've said before as well the older i get the more emphasis i put on the qualitative and less the quantitative yes totally the things that there is no number for yep you know it's like what do i what do i put in my spreadsheet what what goes in c3 for love you know the same as everybody else puts in the same spreadsheet so exactly yeah it's just too it's too yeah but it's it's um that edge is gone i think there was a period maybe in the early 2000s or 90s where there there was something to be said for the for the the quants that we really needed to build your own proprietary data sets and you needed the the computational chops to be able to sort of crunch numbers and go through all that it's like anyone with an internet connection has got that now right anyone so it's sort of like it's not an edge anymore um and and too many people particularly certain service providers say well if you get our data you'll you'll see the real thing like wasn't that it was really nice of you to sell that to me and not just use it yourself to make squillions of dollars exactly maybe i'm being cynical again a little bit a little bit but that's okay that's how we love you i think we've probably done this one to death but a really really good question a really important uh one that's what i want to cover the appendix stuff is is kind of a bit dry but the so what really really matters and that's kind of what we're trying to do i i funnily enough you know bernard this is that's kind of exactly a uh a lovely analog for exactly the conversation we just had which is there is there is the stuff there is the the detail, the data, and then there is the so what.

1:17:22The so what is exactly, as you asked, where the value is and what matters. So hopefully that's been useful. We hope you enjoy the rest of your Sunday and in fact, the rest of the week coming up. We will be back next Friday. If you want to send us a question or a comment, if you want to follow us on the socials, you can follow Ram on Twitter at Sage underscore Simeon or at Strawman Invest. Follow me on Twitter or Insta at TMFScottP. I'm on Facebook at Scott Phillips Money. You can follow The Motley Fool on all those platforms as well. And until next Friday, enjoy your Sunday. Enjoy the rest of your week.

1:17:54Try not to rant too much about housing. I'm going to ask you to do the same. But until then, Fool on. No promises. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.