Mailbag, incl: Quarks, physicists and engineers… and investing. May 17, 2026

27:01I just want to flesh it out for a few people who may not have followed directly. You're not making a moral value call, say, you're a startup, you found you made a profit, therefore you must have created value, like saying there's a moral dimension to the profit. You're saying that the business took a whole lot of costs and turn those costs into a thing that people wanted. And they wanted it, it was worth more to them than the combination of the raw materials. That's how the profit margin is created, right? Because I can do Scott's baked beans and it costs me$5 a can. And if I can sell it for a buck, I haven't created any value.

27:32Some people like to bake beans, but I've destroyed$5 worth of cost to create a$1 output. I've just torched stuff. And all the beans and the sauce and the aluminium, that because you consume that, elsewhere in society couldn't consume it. Right. And it's like, okay, that's one thing if you were like spinning off even more value at the end of it, but you're not. And so I was like, you have definitionally, objectively wasted resources. Yes. Now, if someone can make the same solid bakement and use 80 cents worth of materials to do it, people have thought the bakement's worth a buck and only put 80 cents worth of cost in it.

28:09Okay, well, I've created value. I've turned that into more than it was worth previously. literally by definition and he said well hang on you put the profit margin on so yeah but people have to pay that margin they're not going to pay if they don't want it like my example of my baked beans are rubbish and so that i just want to explain that's where you say creating value it's not you're not you're not morally saying oh you must have created value because you've earned a profit therefore it's just the maths of it as well as the logic say that when you take your costs and you you do something with those that people say huh that thing's worth more to me than what it cost you to create that's that that's their value creation call it consumer surplus that's where it is that's what comes out of it it's it's this nonsense of the labor theory of value where it's just like well it costs this much to produce therefore there's some divine right for me to charge at the top of a margin it's like absolute nonsense very quickly i had a very lovely teachable moment with my daughter just yesterday actually she's discovered baking and so she's just baking up a storm and she's like good for you yeah well not for the waistline um anyway she's like oh she's a little bit sheepish like dad i've used up all the flour can we get more i was like sweetheart we have as much flour as you like like i'm not we're not rich but we're we're flour rich like you know whatever you need dad will provide in flour and she's like oh isn't it expensive it's like no you don't want it i can get a coles or woolies i can get like a kilo of flour for a couple bucks she goes oh but cakes are so expensive it's like oh let me sit down i'm just dad's gonna grab the whiteboard but like see what you have done is this is what's called creating value now and she's like yeah but why wouldn't someone else do this like well that's a great question for a myriad of reasons darling but like someone is obviously can bake a cake like that Well, not as good as you, but they could still bake.

29:59They could bake a cake, but they choose not to because they're putting their value elsewhere. And it's this beautiful, some of the parts, a creative kind of process where everything is worth more at the end because someone has said, I will give you... The Australian government and the country could learn a lot from value-add mindsets, right? And it's just like to think that this thing that you're making just add up the flour and everything else. I was like, no, it's your time. It's your specialty. It's everything else that you've put on top of that. And it's like, oh, but dad, but then how do I make people pay that?

30:32It's like, well, this is the beauty. This is the beauty, my darling. You don't have to make anyone do anything. You're like, what? It's like, but they will want to? Yeah, because otherwise they've got to bake at themselves. It was so good. And I'm like, within three minutes, like, can I go now? And I'm like, no. No, no, no, you can't. I was going to ask you how this finished, where it was like, wow, thanks, I don't know. All right, dad, I get it, I get it. I think she pulled her phone out at one point and just started scrolling I just kept on going Dad's going to lay down economics for you right here in the context of a bakery That's brilliant It's a very cool teacher woman I love it Let's be real It was entirely for my own benefit Sometimes you just have this Solidification of all these thoughts and you're like, yeah, it perfectly demonstrates what this person said and this is it and it's so elegant and lovely and it's brilliant.

31:27Okay, sorry. I don't know how to do anything with that, but I don't want to underestimate our audience, but I don't want to underestimate our audience. That conversation is actually, I don't know how you do it. I don't think it's a really different structure, right, without going off in many different directions. But, I mean, that whole idea is kind of, it's assumed by those who know it and it's misunderstood by those who don't. Yes. And there's a connection there somewhere that needs to be made and not because people are silly. It's hard to see. It's hard to see, that's all. You mentioned, you started to mention, speaking of budget, I'm not going to go back to budget, other than the stupid argument, and I apologize if you have this view, listener, but please let me disabuse you off the notion.

32:07Sorry, not sorry. Sorry, not sorry. The idea that if an owner-occupier buys a rental property and the rental stock goes down and so there's now a shortage of rental properties. That's classic. It's like, where does the owner-occupier come from? They're a renter. So there's one less renter on one less rental property, right? Yeah. There's still a rental shortage. Let me go back again. Let me get a pen and paper. Wait a second. I put that note on Twitter on, I want to say Monday, and I must have had 100 people disagree with me. Yeah, but it's like, no, I don't know much. I genuinely don't know much.

32:44I can do rental stock minus one. And add one. Renter cohort minus one, rental stock minus one, net result, same. That I can do. I actually saw the thread. I'm okay with single digit subtraction. I saw the thread. Yeah, but immigration is like, that's a separate thing, right? That's happening anyway. Yeah. So you're not wrong, but I'm just making the point, all else being equal, one number go down, one number go up, then it's a wash. There's a whole range of other factors that you can bring to bear for your argument, but you cannot argue against that one logical point. And yet they did for hours.

33:21Anyway, sorry, long story. My point was, some of those things we think are obvious to us because we either get it or we've learnt it or we're wired a certain way. And again, people said to me, some sympathetically said, oh mate, I'm sorry I've had to do that. I'm like, you know what, I really don't, I don't mind having, if someone says, I think this, I go, actually I hear you, but I think you're wrong, here's the maths behind it. They go, oh, okay, cool, thanks, that's good to know, thank you. There's one who go, yeah, no, no, but still. I'm like, no. They're the ones that are frustrated. I've just explained it to you.

33:51You can choose to ignore it. Don't read it and then go, yeah, you're still wrong. It's like saying one plus one is two. No, no, no, it's not because it just is. Massive tangent. I forget the quote. You can't change someone's mind whose livelihood depends on believing falsehood or something like that. And it might not be in terms of livelihood, but it's just. I just did it then. I'm an investor. So I'm an allocator of capital. I buy parts of companies and I've just made the argument that profit is a moral obligation. Like, you know, there's a very, there's a part of me that's just like, you want to believe that, Andrew.

34:26You want to sort of rationalize that what you're doing is not just making money for yourself and your family. It's actually you're creating value for wider society. Do you tell yourself that all day long, buddy? It's like, there are components to all of this kind of stuff. And the property investors are just the same, right? I don't even begrudge you for doing it. Absolutely. Why wouldn't you do it? But come on, let's not pretend. Let's make our own facts. Yeah, like, you know. All I heard you then say, Andrew, was, you want me on that wall. You need me on that wall. You sleep soundly at night because of people like me.

35:01The blanket is... What is it? Something I've arrived. I forget now. I forget. It was such a good scene. You goddamn right. A few good capital investors, I think, is the movie. I want to see that. I want to see you as Colonel Jessup. Nathan Jessup. There you go. That's the one. Good memory. Yes, yes. Man, I'll tell you what. Weren't Tom Cruise and Demi Moore young at that point? How old do I feel? I watched that when it first came out. I look at them and go, man, they look young there. I was like, oh, I probably was too. The factoid I always remember, this is like a 10-year-old factoid at this point.

35:34Do you remember the movie Cocoon? Yes. Steve Goodenberg, I want to say. But anyway, they go to the nursing home, and the old dude in that was younger than Tom Cruise was in Mission Impossible 4 or something. Isn't that funny? He's aged well. He's aged bloody well, I should say. Yeah. All right, let's move on. 35 minutes in, question two. All right, well, this is a quick one because Burrow just corrected me, which thank you, Burrow, I appreciate it. Hey, Scott, read your comment on the small ordinaries in a previous episode. This includes companies in the ASX 300 minus the top 100. so an ETF like VAS Burrow you know better Vanguard Australian Shares Index covers the small lords anyway cheers Burrow thanks Burrow appreciate it mate nice to be there add that in thank you that's correct by the way really quickly we are two now questions in thankfully because Burrow this was quick it was a statement really info at fool.com.au we are I feel partly guilty I'm going away again for four weeks in July so we are going to pre-record some episodes if you want your question answered Now is a wonderful time to throw it at us because we are looking to fill the Marbag so we can empty it over the next four or so weeks in advance of my trip.

36:45So please do that, info at fool.com.au. Also, we're going to record some, we call them evergreen episodes, basically because they're pre-recorded. We can't make them topical. And it means we get to kind of step back a little bit, riff, discuss, rant about things that we care about but aren't time sensitive. if you have a topic, a concept, a question, an issue, something you want us to cover that's not time sensitive, info at fool.com.au. Hit us up, let us know, because we can use that information to plan some of these episodes. Partly because we're desperate for it to his, but mostly because we actually, if there's something you want to know and something you want to talk about, we'd love to do that because we love the mailbag episodes.

37:21You get a chance to make effectively a normal episode, a mailbag episode with a really good topic or two. And we can do that. So please let us know. Again, lots and lots of questions will be wonderful. And so I was just having to talk to ourselves about something we, well, it'll be Bitcoin against it. Don't make me do that. I was just thinking, please. Did I hear a follow-up to the hard money double episode? No, you did not. Did someone at the back there? Okay, we'll take note of that. Shut up down the back. Shut up. Shut up. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

37:58Here we go. One from Frankie. Frankie, hi, thanks for all of the good work that you do. I'm a repeat questioner, so not sure how many times I would need to kiss the ring, etc., but here is one for good measure. You are clearly the masters of the pod machine with, can I say, four exclamation marks. Frankie, as the song Fortunate Son says, when they ask me how much should I give, the answer is always more, more, more. More, more. How many times do you think you need to kiss the ring, Frankie, is not enough is all I'm saying. That is an insanely good song, by the way. Isn't it? Massive random tangent.

38:32You know the song Simple Man by Leonard Skinner? Yes. You know that song? Yes. I came across, because YouTube music is a wonderful, bizarre rabbit hole, an Irish folk version of Simple Man, and it is so bloody good, I must have played it 10 times during budget week. So there you go. There's a recommendation. Just really stripped back. Delta Ash is the name of the artist. You find it on, I assume, all the streaming platforms. Simple Man, Irish folk in brackets. by Delta Ash. Do yourself a favour, you will thank me, I'm pretty sure. It's not overly folky, it's got, I like my Irish music, so I like it anyway, but a bit stripped back, guitar, really, really great version, so do yourself a favour, have a listen.

39:09Nice. I'll give a shout out to Freebird, while you mention the band. Freebird? Yeah. Oh yeah, you'd know it. It's one of those pieces, where it's, I think I'm getting it wrong, maybe I got my right, wires crossed here, someone will let me know, but it's like a pretty slow, uninteresting start, and just like the most banging guitar riff ever, at the end. Right. Okay, cool. You'll recognise it. And speaking of Delta Ash, have you heard the song Bar Song Tipsy by Shaboozy? Do you know that one? Oh, it's ringing some bells. I'm sure your kids would have played it. I was going to say Sing It and then I thought, no.

39:40No, no. Good choice. How I found the Simple Man one was this same band did an Irish folk version of Tipsy, which is just very funny. My son hates it because he likes the original, right? But it's kind of... So yeah, that's hence the robot hole I fell down. So yeah. Nice, nice, nice, nice. There you go. Anyway, back to Frankie. It's all about Frankie. I wrote in a little while ago, reconsidering portfolio construction, particularly when looking at risk parity and efficient frontier structure. The thoughts from you both were helpful in solidifying where I already was in building a robust two-fund ETF portfolio with a little bit of orange coin on the side, says Frankie.

40:16Is that trunk coin? Of international and Australian shares. This is for simplicity for me, but also easy to tweak as I get closer to retirement or if something were to happen to me, a bit easier to make sense of. But a follow-up question. How do you think about legacy holdings within your portfolio? I have a couple of the ones that have come up on the pot of late. Things like Argo Investments and Global Fund Limited, which is a listed investment company that holds Berkshire but is underperforming Berkshire by half over five years. Ouch. Would you leave them and avoid the capital gains tax? or would you clean it up and put this capital to better use?

40:54I had bought these over 10 years ago and I'd always imagined them as sacred cows. But looking at performance of late, this thought has shifted. How do you manage this when you bump into it? Cheers, Frankie. I mean, I used to really shill. We're still on the song. So Frankie, I'm hearing Relax. You know the song Relax? Yes. I'm sure you hear it all the time as well, but there you go. Very much in my head. Legacy Holdings, Ram, what do you do? I used to shill Argo a lot very early on in my career before ETFs were a thing because it sort of offered the same value prop. But in the modern context, I don't think there's much justification for it.

41:38And no offense for what they've done. But also, I mean, the performance hasn't been great. I always say there's variations of this question that always comes up. I just think you always want to minimize your tax wherever you can, but just not to the point where you're shooting yourself in the foot. So if you've got a long time left of your investment horizon, something that's going to continually, even if it's like a decent return, but an underperformance of 2 % or 3 % per year, gosh, that's going to make a huge difference over time. Yes, you've got to pay tax on it, but well, Well, speaking of the budget, the capital gains tax is changing, right?

42:17So if there was ever an incentive or something to sort of push you towards potentially locking in that capital gain, maybe do it before things get a little bit more onerous on that front. But look, if you've got – I'm looking at Argo or I forget the other one, you know, and you think, oh, there's something here. I think maybe that can be 2 % or 3 % better per year. Okay, no. What's the point? But if there's something that's of a comparable risk, but a significantly better return, I say take the hit and be thankful for it in the longer term. Yes, I completely agree. Global Masters Fund, I think, is the fund.

42:53GFL was the code. I looked up Global Fund and couldn't find it, but Global Masters Fund is an ASX limited fund. I agree with you, Ram. the only thing I would say about the tax thing is just think about how much your tax is and recognise you're going to have to clear that hurdle with the new investment. So let's use the most extreme example of someone on a 47 % tax rate and let's say they bought the shares so long ago their capital base is zero. It's not going to happen but I'm just doing it because this is the most extreme example of what we're talking about. And if you get the 50 % discount your capital gains tax is 23.5%.

43:25Now you sell a hundred bucks worth of Berkshire, I don't know Berkshire, Global Fund, Global Masters Fund, and you pay your tax, you've got$76.50 to invest again. Now, how much more do you need, how much better does the new investment need to be than the old one to give you a better result overall? The answer is heaps. Because trying to get to, you know, from$100 to$120 is a 20 % gain. From$76 to$120 is about a 60 % gain. So there's a lot of work that your after-tax capital needs to do to keep up with post-tax capital if, in the most extreme example, you're paying absolutely full amounts of tax.

44:02Now, if you're on the 30 % tax bracket, you're paying 15 % tax capital gains. And if your capital gain is 15 % rather than 100 % or whatever it is, then you're going to make up three or four percentage points. And then it's a very different story. So don't do anything, as Ram says, to minimise your tax specifically maximize your after-tax return. So don't pay more tax than you have to, but also don't avoid the opportunity. So it really does, to my mind, I would be saying, do your capital gains tax tax on the back of the envelope and say, right, I've got a hundred bucks now. If I sell, I don't pay the tax, what have I got left?

44:35And do I think I can find something that can do well enough from the newly after-tax base to make money from that point forward? And that's the way I would look at it. Now, I don't want to complicate it, but it's important to give you the full answer. So I will add just quickly, you're still going to pay tax on the$100 when you eventually sell that investment instead. So it's not like you're going to hold Global Masters forever if you don't sell it now. So that tax is still due and payable at some point. So the gap is not as big as I make out unless you're never, ever, ever going to sell it. so i know and frankly i get this complex right and so i'm apologizing for for making it more difficult it needs to be well it's not more difficult than you would like it to be but those are kind of the maths you have to do if you're going to sell everything in 10 years time anyway then you've got to pay the tax on that hundred bucks you've got you're on global masters already so it's not a matter of avoiding the tax forever it's about putting the tax off and that's got benefits because you you're you're compounding pre-tax income or pre-tax gains which is always worth something but it's not as stark as my previous example outlaid it's that stark in the current tax year, but in one, you've paid all the taxes, starting from zero tax owing, you have got an unrealized gain that at some point you'll realize and pay tax on with the other one anyway.

45:47So it's not as stark, which takes me back effectively to Ram's point. Over the long term, maximize the returns you can find. Ask yourself, are these the best investments I could make? And ask yourself what you expect from these investments over the next 10 years, and then compare them with some other investments. So what do I think that could do? And if the answer is, well, meaningfully more, I think you've probably answered your question. If the answer is not meaningfully more, you've also answered your question. But I think that's probably how I think about it. It's funny. I put Global Masters into ComSec.

46:19And then, ooh, it's a smash. Like, oh, it's an absolutely terrible investment. And then I click 10 years. It's like, ooh, I take it back. It's double the performance. And it reminded me, I mean, one, context always matters. and it's another, I think we've talked about it on the pod many times actually, but it's this weird thing where the better performing long-term investments often show the worst short-term divergences. So you've got to be careful as I just almost fell into the trap of doing is like bring up a chart, it's gone down, therefore they must be a bunch of shysters because my natural predilection is just to be sceptical and cynical towards professional money managers.

46:58But look, this is a reflection on all of 30 seconds worth of research while you're talking there. But hats off to them. They seem to have created a hell of a lot of value. Like it would have been the far better choice than an ETF over the period that they've been around for. So, you know, just shout out to that. And also, too, I made the point just to really hammer this home. I mean, it's a very well-known observation in fund management land is that the fund that tops the rankings in any particular year sees a bunch of inflows. Everyone goes, oh, they're really good, and they pile all in, not realising that there's a very serious mean reversion phenomenon that's at play there.

47:41And in fact, not that you would suggest the opposite, but it would be a better tactic to find the worst performing fund and invest in that. And the observation I think I've made recently on the pod is that the best, when you look at track records over meaningful timeframes, like 10 years sort of plus, the ones that top the charts are the ones that never get into the top 20 % on an annual basis. They're just always middle of the pack, but slightly above. That's all you need to do, yep. And it's that consistency of performance. So it's like, you know, I'm not a golfer, but, you know, just like birdie, birdie, eagle, and then, oh, you know, eight over par, as opposed to the person who's just sort of like, you know i'm getting tangled up in my golf analogy here but just just like slightly better than par for a long that stuff really sort of adds up so this is not an endorsement for global masters fund but i i would be having looked at the longer term record far far more um open to some really good stuff happening there even in spite of them having a shocker year because because i always think the best investors you know who didn't ever have a shock a year madoff didn't have a shock yeah like they're the kind of you know there's some okay i know there's one or two exceptions but there's some really weird fat tail outliers that is generally the case so it's i i actually think if you as an investor aren't having a serious underperformance occasionally you're not trying you're not trying is not the right word you're not taking enough risk yep yeah yeah the other better not underperform is either be incredibly stupidly, amazingly lucky, be a fraud or shadow the index.

49:19Yes. And none of those things is a reliable investment strategy. Yeah. I mean, well, you shadow the index, then buy the index. But in terms of, you know, there is no – if your fund manager is lucky or a fraud, you got lucky or you got screwed. But either way, yeah, if you shadow the index, don't pay management fees, just buy an ETF and pay tiny, tiny, tiny, tiny fee instead. I mean, look, there is the potential for that very rare genius, you know. But then you've got to ask yourself. But even the genius, mate, to be right every year. Buffett's a genius and he's had shocking years. Yeah. I think we said last week one in every three years Berkshire's underperformed or something like that.

49:57Yeah. So I love you finish with that, mate, because I was going to say the same thing. You say performance of late has shifted, Frankie, and you've got to be really careful with that. Your only question is where to from here, not where's it been recently. And why did it underperform? You know, do they back something that in hindsight was just ridiculously stupid? Or maybe they've got a bunch of really great companies and we know what's happened to like the CSLs and the cockleaders of this world, you know, so who knows? Can I frankly help you by also giving Ram a rap? You tweeted on Wednesday a Byron Buffett video.

50:33Oh, wasn't that cool? From the Berkshire annual meeting of 2000 it was. I haven't seen that before. I hadn't either. And so 2000, again, it kind of – talk about performance of late, Frankie, and Buffett had a terrible year in 99. I'm pretty sure 98 was terrible too in relative to the market sense. And the share price was down. Everything else was up. He was getting absolutely spanked by the market. And the Berkshire meetings, when Buffett was still running them, he and Charlie would spend six hours answering questions from shareholders. And they had six or nine stations around the massive stadium.

51:08They'd take it in turns. Anyway, some guy gets up and look, jump on Twitter, at Sage underscore Simeon. Ram tweeted out. Just scroll past the Bitcoin stuff. And the RBI hatred, you'll get to the Berkshire video. I'm kidding. You'll be scrolling for a while. You'll be scrolling for a while. And if you go too far, you'll never get back. No, come for the Berkshire, stay for the rants. So it's a video, and Buffett takes a question from a – do you want to tell the story, mate? Ross, you tweet it. Oh, no. Well, look, the guy basically says, what are you doing? And he couldn't help but put a humble brag in there.

51:43He's like, well, I've doubled my portfolio by pursuing more active growth investments. In the last year or something, you said. This was.com mania. So, this guy's going through the roof, right? It was really relevant because we are now very much in an AI. I want to say hype because there might be a lot of validity to the hype. But anyway, there is nevertheless a lot of hype here. And again, you've got to cast your mind back to this era when everyone was just absolutely wetting their pants about the potential for just consumer electronics in general but the internet specifically. And Buffett's completely missed it.

52:13He and Charlie up there, two old fogies. You completely missed it. Why aren't you doing it? Surely you could just spend some of your, he said brain power, to just put 10 % of Berkshire's money into it because look what I've done and you could do that too and you're smarter than me. And Buffett's answer to paraphrase was just, he didn't defend it at all. He said, oh, I'm sure there's people who can do that And if you find them, you should invest with them or you should do it yourself. But don't invest in Berkshire if you want that. And he wasn't saying tech stocks are bad or I hate the internet.

52:43He just very simply said, all we do and all we ever done and all I promise you we all will ever do is we will invest in things that we understand. Now, we don't understand. I think he gave some example of like Middle East oil companies or various things. And it's like, does that mean they're a bad investment? No, they could be great investments, but we can't be confident that they're great investments. So we just don't invest in them, which is of the long term. I can irk people by feeling slippery on what do you think of this? I just don't have an opinion. It's not bad or good. I just don't. And it's just that humility is so important when it comes to investing.

53:21And that's what I loved about Buffett's answer was just sort of like, we just can't do it. So we're not going to do it. In fact, all we're going to care about is the business. We don't even really pay much attention to the share market at all. You know, it's there for sometimes we can trade if things are good value, but we measure our success in what the businesses are doing. Within that answer, there was a lovely example of, I think he's talking about Kansas farmland or something at one point where, you know, that recently the price of this land has gone up a lot. But commodity prices haven't changed and farming yields haven't changed and costs haven't, like there's nothing in terms of this operation has changed except the sort of price.

54:03Now, I couldn't have picked that and I don't know why. So I'm not going to do that. But if I can buy a patch of land that is productive and going to give me a positive rate of return, I can understand that, then I will buy that all day long, even if the market price is doing all of this kind of stuff. And it's an incredible, it's one of those things that like everything he says, it's just so on the money. And really, when you think about it, it's just like so blindingly obvious and yet so easily missed. And it's easy for all of us to sort of say, but when push comes to shove, it's hard. Sorry, I'm rambling, but I do love the clip.

54:36Use myself as an example. I've often said, you know, and again, it's not a brag. I've made so many dumb decisions and I continue to make so many dumb decisions. But all of the best decisions that I've made looked like dumb decisions for a long, long time. Now, the reverse isn't true. Just because something has gone against you doesn't mean, well, don't worry. Ergo, it must be a good decision because it didn't go well straight away. More to the point that you almost, if you want a bargain, if you want something that's going to give you great potential for our performance, it almost definitionally must be on the nose for a great majority of the market.

55:13Otherwise, it's not sort of cheap. and to wander into an affair like that and have everyone look at you and laugh at you and then after the fact, even like still look dumb 12, 18, 24 months into the relationship, you know, it's like, no, I like this and I still continue to buy it is again, conceptually not hard, emotionally almost impossible. So yeah, watch the video clip. I was all over the place of that. Sorry of it. No, really good. And you gave us some really key points. So Sage underscore Simien on Twitter. You'll find the video. It's relatively recent. Have a watch. I tweeted about it, mate.

55:49I'm not going to give myself a rap with my tweet, but I will repeat it. I think because I thought the point I took from it was interesting. I said, next time you're suffering from investing FOMO, the fear of missing out, watch this. Over and over again until the FOMO disappears. And it's kind of Buffett just saying, this guy's made some money by speculating. And yeah, that was the other thing. This guy's a Berkshire shareholder. And he's like, couldn't you spend 10 % and just speculate? It's like, oh my God, what are you doing? You're at Berkshire. Do you know where you are? It's like going to a PETA conference saying, couldn't we just spend 10 % of the money eating animals?

56:23Wouldn't that be okay? So you're just 10%. We'll just give it a second. No, there's not anyone. So that was interesting. But what I did say, I'm glad you brought up the farmland thing, mate, because I had not had this thought before, at least in a single thought. And it's not particularly insightful. But I never really... Buffett uses farmland a lot as a way of demonstrating... It's the best example. I love it. And I kind of wonder, really deep down... So Omaha's in the Midwest. It's called the Cornhusker State. Pretty sure that's right. So obviously they grow a lot of corn, a lot of farming. And other than Midwest being very down-home, very folksy, not caught up with the fancy stuff, That's an advantage in terms of being a fundamentals-based investor.

57:09You're not chasing the hot new thing. You're not trying to keep up with the Joneses. You just do what you've always done. So there's that culturally. But then throw on the farming thing. I can't remember if you told me I had a farm or not, but you guys have been farming country. And so I'm in barrels. It's not exactly regional, right? It's basically out of suburban. But they have the country hour on radio here at lunchtime, which I just love. and they go through the pork belly prices and the wiener prices and it makes no sense. I get no one. I still snigger when I hear wiener. Sorry, that's just me.

57:42Thank you. Continue.

57:46My apologies to farmers listening who are just like, you know. Anyway, you come from the land, mate. You should know this stuff anyway. But it just occurs to me, and I could be entirely wrong about it, by the way, but it just seems to be likely, in my view, the combination of the mid-west culture of not getting over your skis, not getting carried away, a bit humble, just actually work on the fundamentals, don't worry about the cool stuff. And then the background of just pricing farmland. What's a farm worth? Well, you know the inputs, you know the price, you know if the price are unusually high or low.

58:20It's just a stupidly good grounding in basic economics, investing, valuations. Right? Because it's so beyond justifying. And it is the perfect metaphor for all of that kind of stuff. The other great one is the desert island. Between a desert island and a farm, you've got all of the rhetorical tools necessary to explain any complex economic or finance. I mean, farming is just a business. You can couch it in the context of modern AI data centers or whatever. It's still the same thing. I've got a certain amount of capital. There's imports, there's outlets. But there's something about as a species with 10 ,000 years of, you know, agricultural history under our belt.

59:06You know, I think it's a metaphor that resonates more than most. And you don't have to evoke too many sort of seemingly advanced concepts to get the point across. I could wax lyrical on farming all day without knowing next to nothing about it other than the broad metaphorical. You get your analogies. That would qualify us both as having all had no cattle, I suggest, the farmers might say. Yes, yes. But no, I think it's really important. And I think you say you can explain it without having all these fancy concepts. And your point was both, I suspect, it doesn't need them, but also it doesn't need them.

59:50In other words, you don't need to resort to them, but also the fact you don't need to resort to them is the point in and of itself. It's like not only do you not need to break, you're not saying you can simplify it down and not have to reach for those really useful tools. You're saying the tools are largely not very useful because you just don't need them. Like if you understand, as you say, the farm in the desert island, what else do you need? You can put them, and to be fair to some of those who like using algebra and fancy terms, they are describing the same thing in a different way. So it's not even necessarily a lot extra.

1:00:23It's just like it's not that hard. for all the effort to make things more difficult. I gave a shameless plug to a book about an investing plan that only has one page in it the other day. But it's, I mean, the whole idea behind the book, this is not a plug, well, I guess it is, but the idea, you know where the idea came from? The idea of the whole title of the book. You and I have talked a million times about financial planning and tax rules should be that simple, that all you would need is a single page to actually plan your financial life. And this doesn't do any of that tax stuff because it can't because the tax system isn't that simple so it could look it's not a one page tax plan but the idea of like couldn't you just in a page outline the things that you could do reasonably well and repeatedly and build a very very nice life for yourself and the answer was kind of like well you probably could literally that was the genesis of it which is not again not to plug the book the point is the fundamentals that get you from zero to 95 % it's Pareto principle stuff but on steroids it's like the extra bits maybe worth something.

1:01:26I mean, Buffett can do this kind of cash flow in his head. The guy's not easy. He's not a wheat stalk chewing hick who's like, well, I just reckon. I mean, he knows the things right. He's a smart dude. But he also knows not to go further than he needs to, which is, as you say, this is the point of the video, do I understand it? And I think he made the point, and I'll let you get back to you about it and I'll stop talking. But he said, and when we say, do we understand it? what we mean is do we have an edge yes and i think that's important because you need to understand it more than than everyone else or at least well enough to know when the asset is mispriced yeah yeah so you know i know you're saying the same thing but i just want to make that point because when we say do i know it better than everybody else no i know nothing better than anybody else right because i because i can't know someone else knows more about everything than me i don't need i don't need to i just need to beat the crowd broadly and roughly and no and i don't know more than them, just know enough within myself to recognize when a price seems to be wrong based on what I understand about the business.

1:02:29And that's, I don't need to have the extra decimal place. I don't need to get there earlier than anybody else for the sake of it. It's nice if I do, but I don't need to beat them to it. I don't need to have more money than them. I don't need to be smarter than them. I don't need to know more about, in this case, let's talk about farming. If I know that historically, let's go with weaners, Andrew, to make you happy. If I know the price of weaners is stupidly cheap right now based on the things, Other people could know that too. Other people could know with more certainty or with more detail or with more clarity or with more basis.

1:02:57I don't need to beat them on that. I just need to look at it and go, that seems cheap or that seems expensive. So if it's cheap, what do you do? You buy awareness. If it's expensive, what do you do? You sell awareness.

1:03:08Here's the other thing. With the book, I had to make the point like, so this seems really simplistic, right? And so some people will say, how can you possibly, you haven't talked about all these other things in the book and so how can you possibly say you've got the answer? It's like, if that's their view, fine. If you need to complicate things to make yourself feel smart or make yourself feel like you've done a job, go for it, right? For the rest of us, do the simple things relatively well, slightly above average. You made the point about fund managers. Slightly above average for an extended period of time is an enormous superpower.

1:03:39That's what you need to do. It's not being the smartest, the fastest, the best, the most informed, the fastest computers, the shiniest suits. Just, I think I know enough to know when something is mispriced. I understand it. Do I understand farming? Not very well. No bad example, but let's go with that. Yes, I understand farming. So does everybody else. Okay. Do I understand it well enough to know if there's a mispricing? Yes. Great. That's your answer. Okay. You know, you use that knowledge over and over again. Whenever you see mispricing, act accordingly. It's kind of that simple. Two quick points.

1:04:12This is the trouble with the mailbag is that it's really not a mailbag. It's really just send us in launching points that can start a massive tangent. That's all we're after here because we only need two or three per episode. I would reverse it a little bit, not to go against what you're saying, but to come at it from a different direction. If you can't get a senior economist or whatever to explain to you these concepts in the context of a farming analogy, I would go as far to say that they don't understand it. Not that everything will lend itself to a perfect neat comparison, but you should be able to draw a line from 99 % of things back there in a way that that context makes sense.

1:04:59If you can explain to me with a very advanced formula about why the velocity of money is very important, but then cannot put that into the framing of a farm or something like that, it's kind of like, what does it mean? It might be the most elegant, sophisticated formula ever, but it's ultimately got to translate back to that. That's a really good point, actually. Yeah, and there is too much charlatanism that is masked in sophistication. It is the best cloak for the charlatan because say big words, sound impressive, you know, it works. It works really, really, really well. um okay so we're we're we're contemplating doing some renos on the house right and i don't think we're gonna be in a stage to do it anytime soon but you know you can dream you can dream and we're talking to the the the architect dude and he's like oh i'm like so what are we looking at here and this and that because i'll tell you what we're gonna send out we're gonna get you a costing there's this company out here and they'll come in and they'll add up every sink every tap every tin of paint, they'll give you a really accurate formula.

1:06:08I couldn't help myself. I was like, oh, there's this really interesting paper from, I think, 2004. And it talks about false specificity in expert estimations. And you're like, what are you talking about? It's like, wow, it's really interesting. And what they found out was that, like, you know, they use the analogy of the building, which is why I thought about it. So there's the old brickie who's been on the job for, like, 20 years. who will, when you say, how much is this going to work? They'll go, how many square meters? Oh yeah, what's this? Yeah, no, suck the farm. It's going to be this much.

1:06:41It turns out when you, no, I'm going to look at every individual brick. I'm going to look at the price of sand. We're going to add in this kind of cement here. Labor costs are this at the moment. We're going to produce an 800 page report and this is going to be our estimate. Now, they're not idiots and they're not charlatans. I'm not trying to suggest that for a second. that they're actually very intelligent people trying to make a very sophisticated go at it. But the reason that this, I've got to think of, I've got to Google it or AI it. But the point of the paper was the rule of thumb tends to be far more accurate.

1:07:16Isn't that funny? Because you're dealing with things that are so multifactorial and so complex and so interdependent. And, you know, it's really, the things tend to move together in unforeseen ways. The reason I've come across it before, and it's always resonated with me because it's a very good story, story's not the right word, lesson in valuation. And I always think, because I've kind of gone on this journey over my career of just like, start with a PE, super advanced, sophisticated, 200 gigabyte DCF. No, I just use the PE. So I've sort of come in that sort of full circle, recognizing that it's very, very simplistic and overly simplistic.

1:07:52But if you recognize the limitations in it and your accounting, there's a name for it and it's just escaped me. accounting for this false specificity thing that it's actually far better. In the end, they said, I'd really prefer if you went and just got the costing stone.

1:08:12That's the same story entirely. I'll shut up at this point. No, no, no. I mean, well, that's just, it's human nature. I mean, unpacking that whole thing is the second third or impact of that. I'm like, yeah, but we're used to using this. I've used an example format, speaking of tangents on tangents. remember you telling the story about what was at sky news business way back in the day and we were talking we were talking about um company forecasts and i made the point on i'm almost certain or not about it's a long time ago now it's like well term management forecast like oh they're all rubbish the blah blah and the guy looked at me and went i know but what else do i put in the spreadsheet yeah i was like which is hang on floors you right yeah you're deliberately Oh, yeah, I totally know what's wrong.

1:08:57But it's in the spreadsheet now. Can you give it to me anyway? Yeah, yeah. I was like... Honestly, with a straight face. I don't know who it was, and I'm glad I don't know who it was, and I'm not going to doctor anyone or whatever. It's just like, oh, my God. You get the other thing, mate. You mentioned about putting it in the farm analogy. I think it's probably also a good rule of thumb to say anything that can't fit in a farm analogy easily is probably... I'm trying to show you the right words. questionable to pursue. So if someone's talking about the bond market futures for Chile in 2028 or something, it's like...

1:09:36Doing a multi-legged option strategy around this 4X pair is like, okay, maybe the fuck. That's going to be tough. What I mean is, at that point, it's like, are you really investing or are you speculating? I'm making a completely unsubstantiated claim here that whatever doesn't fit to the farm analogy should probably be avoided just just because again not entirely but if it doesn't fit easily what do you do you on especially are you likely to understand it probably not if someone's selling your pup probably is it likely to be a zero sum rather than a positive expected value at trade like an options trade probably um is it likely to be consequential to your returns probably not again could it be yes it's an unspecialty claim which you know really should break down component parts but just thinking through that kind of idea of if it doesn't easily fit the farm analogy how likely is it to be proper investing is a pretty actually and again you've just you've made me think of it it's a pretty heuristic right it's like if it doesn't lend itself or the person doesn't lend themselves to fitting in that framework it's like could you can they make money doing it probably someone will is that something we should be kind of paying attention to trying to do ourselves listening to paying attention to Probably not.

1:10:49He's just got a degree in advanced mathematics and something. Maybe, but if you're just an ordinary person. If it's an option, it's better for something else. Is it investing, I guess, is my point. It's like much outside there, investing stops at some point and becomes speculating or trading or something else. I don't know. If it doesn't match the farm, if you can't map it to the farm, is it investing? I think that's a pretty good heuristic. I'd have to think about it. I may come back next week and say, yeah, I was completely wrong and here's a dozen examples why. I reckon it's probably a pretty good heuristic.

1:11:19He is a mathematical formulation that seeks to be a quote-unquote theory of everything. One of the great remaining challenges in physics and natural sciences is to marry the quantum with general relativity. And no one's really been able to do it, but string theory is a leading candidate. And I'm not even going to pretend to understand. It's just like so diabolically. I can talk to you about little vibrating strings and then that's it, I'm out. I don't get it. But what I understand about it is It's got a lot of appeal from a mathematical standpoint, but it does have the one small problem of having zero theoretical evidence sort of behind it.

1:11:57And that's where I feel as though we get into where there's a lot of economics and finance and investing which is similar. It's just like you can look at a certain philosophy theory, and it is. It's an isolated thing. It's like there's something beautiful almost about it. There's certainly something very appealing to it. but string theory could be they're going to come out tomorrow and say it turns out we've proved that string theory is true but but but at this point it's sort of like we've got to we've got to not we've got to remember that just because something is elegant and internally consistent that it actually applies to the real world it might not it might not apply to the real nature does not care about your precious theory no matter how beautiful and elegant it might be It might be just a complete nonsense.

1:12:44And again, sorry to the physicists out there. I am not saying string theory is nonsense. Just saying. I think that's what you just did. So far, it's not yet proven and actually lacks, I think, almost all experiments. That's a wonderful pursuit to have. But we love this appeal of sophistication. We love it so much. Whereas the engineer who's out there actually building stuff in the real world. Again, this sounds like I'm denigrating the theoretical physicists. I'm not at all. I absolutely love what those guys do. It's just nice to see you, actually. We've already got rid of all the financial planners in the past.

1:13:18Real estate agents have gone. The bankers aren't listening. It's nice to be starting the sciences. It's just important that we kind of just slow the carve off our listeners. There's everything wrong about a physicist. Let me tell you. But the engineers don't give a start. There is no engineering meeting ever where anyone discusses quarks or whatever. Why? Because it's not relevant to it. And where I'm going with this analogy is if you are an investor, none of this stuff, I'm not saying it doesn't matter and maybe there's something that's interesting inherently in and of itself, but you don't need to know any of this kind of stuff in the same way that all I need to know is how much weight can a steel beam bear?

1:13:55That's kind of all I need to know. And even then, I don't even need to be super accurate because I'm going to over-engineer it anyway. And there's really something nice about that metaphor when it comes to investing. It's like, oh, but I don't understand the capital asset pricing model. Should I be buying generally? No, you should totally never, ever waste your time with that other than as a sort of intellectual curiosity to figure out what it's about. Maybe there's a couple of lessons in there. But when it comes to buying shares and trying to build your wealth, this is completely irrelevant. Do not worry about it all.

1:14:21In the same way that string theory doesn't apply to building bridges. I'll end the analogy there before I tie myself up in knots too much more. Can I end with a slight tangent on a tangent on a tangent on a tangent on a tangent? Let's do it. Only because literally, not that I wasn't paying full attention to you, mate, but I just saw a tweet come in and I tweeted something that a builder had shared with me on Twitter. Just interesting. Just like, here's what's going on out there. It's like, come on, tweet it. And the blokes come back. John, and I'm not going to talk to you. He's like, an anecdote from one builder does not an industry make.

1:14:51I'm like, I agree. Just an interesting thought, right? Yeah, yeah, yeah. He's come back and said, I've talked to a lot of builders. They're not economists. They're not an economist's pinky finger. They know about what's in front of them and their next job. But beyond that, I would take their opinion with a mountain of salt. Look to the Property Council or the Urban Development Institute of Australia, etc. for commentary. And it just reminded me exactly of the point you just made about, we could ask the builder, or we could go, can we have someone come in and count the taps? And I don't know, so I replied, lobby groups over operators?

1:15:17Nah, maybe. I don't think so. I know who I'm going to, I know who I'm going to back on that one, right? If you've met a decent builder, you're like, dude, just tell me what's going on. I was like, right, here's the thing. I had my, so you mentioned you had, looking at doing some stuff. I had a deck, just rotted. I don't know how old it is, before he got the house, had to have it just replaced. Beams up, beams down. And this bloke's too up. He's just honestly like, he's one of those guys you go, you're a decent bloke and you're going to do the right thing and I'm going to pay you what's worth. And that's, we're good and he's going to just, and it was exactly what he was looking at.

1:15:49Right, about that much. He's not going to do this, do that. I know what I'm doing. Great, fantastic. No BS, no carrying. I was like, that's, I don't know. I'm trusting that bloke rather than saying, hi, property council. I wonder if you've got a lot of, I mean, an economist there who could, I shouldn't say, I'm sure the probably council economists are wonderful people, so I don't mean to slander them. Let's just not do a lobby group to get myself out of trouble. The Avocado Growers Industry Association of Australasia, they're probably a thing too, so again, I apologise to them. Be careful. I've got nothing.

1:16:17Anyway, if you're a lobby group, I mean, your economist is obviously, you know, someone who is very good at the job and trained and does that thing. You don't pay for someone who's going to tell you you're wrong, right? No, no, eat this song I sing, that's all I'm saying. Yeah, I love it. So anyway, only to your point about experts versus people who actually know what they're doing. And then, I mean, you made the point about the efficient market hypothesis. That's exactly our industry. Yes. It's like you can talk to Buffett who says, I just look for stuff I understand. Or you talk to the academics and say, let me tell you about the efficient market hypothesis and capitalized debt pricey model and, and, and.

1:16:50This is what you should do. Buffett's like, no, no, no, I'm just going to make squillions of dollars doing the sensible things properly. when you go and play with your Nobel laureates who as we've said a million times blew up long-term capital management, this hedge fund because it was 12 Nobel laureates, I want to say. Oh, brain power in that room was off the charts. Right? By the way, Charlie Munger, when he was alive, was talking about, he always decried the number of people in finance, smart people in finance rather than science or engineering doing actually important things. Oh my gosh. Now, you and I have, we're kind of pointing at, well, we're not the smartest people in the world so maybe we should be doing finance and smarter people can do stuff.

1:17:21Our talents are not wasted. It's not like, oh, if only Andrew and Scott were in this other field. it'll be so much better oh so much let's keep them here where they can't do too much damage the podcast free that's okay they're not costing anyone any money then yeah let's do it on a Thursday morning we'll keep them off the streets yes other than to say you're 100 % right it just you know the the practice again you're right about not bagging the physicist and we shouldn't bag well actually we'll bag the academic economists most of them because yeah bag them they're easy targets and not all of them so again it's important them to separate out the behavioral economists get it um the the the anyone whose model is all else being equal is fine the person who those says and therefore you should use this model in the real world is a danger to shipping because that's where you go from in a perfect here's the relationship of these things it's perfect i love it and and science do it the similar theories are in a vacuum this would happen cool good great to know do we have a vacuum no but we at least know the relationship of these two elements or atoms or whatever is get it so so in those conditions these things happen is really useful.

1:18:27And economists, I've said a lot of times, mate, they are great. Really great. Economic historians are the best economists. Yes. Because they're great at explaining relationships and great at explaining circumstances and how we get here and how things interact. Really useful. The smartest of those... Hey, every time we've done this, this has been the outcome. That's right. Yeah, but my model says this, like, yeah, well... That's it, right? Every civilization since the dawn of recorded history, when I look at it, and they, I don't know, print money or pick your favorite thing, It's not ended well.

1:18:57But your model says it's going to go, okay, all right, let's go with that then. And it must be indicative because natural laws are natural laws because water plus oxygen is water. Just is, right? Just is. I don't know. It is. But labour plus capital, well, it depends. It depends on all the things. So it doesn't mean you shouldn't make a decision. It just means you need to be humble enough to go, I don't know. This is not reliable or it's reliable historically 65 % of the time. Cool. Good to know. When you start to say, so what I've worked out is this theoretically is how money should work. So I'm going to pretend that's how it works in the real world because that's the only model I've got.

1:19:40It's willful ignorance. Willful blindness because you're not ignorant. You know. You just need to ignore the fact that your model can't work in the real world because the real world is different to the assumptions of the model. Oh. Yeah. No, well, so, I mean, I'll, I, as you know, better than anyone else on the planet, I am very, very negative towards, you know, economic forecasts. You know, from the Reserve Bank. I mean, the Reserve Bank, I think I did it once. There's 800 people that work there and like pretty much two thirds of them are PhD economists, right? It's a great, great gig if you ever want to detach yourself from reality and have a cushy job for life from which you never held to account.

1:20:15Get on. But I just like instantly dismissive of any forecast. And just to flesh that out a little bit, it's not from an ideological standpoint per se, or it's not because I think they are just idiots and if only they applied the theory in a more rigorous and accurate way, they would come up with the result. No, it's just like you're trying to do an impossible task. And again, you look at history, it's just like, you're just always wrong, not because you're an idiot, but because you're trying to do the impossible. in the same my favorite example i know i say it all the time but it's just like in the same way as like we would not take a meteorologist you know seriously if they were going to tell me it was going to rain 18 thursdays from today it's like it's a chaotic system you can't do it you know it's a three body problem um you know like our corpus of knowledge is so vast on these things that we just know that there are certain there only so far you can push things forward in complex dynamic feedback system before it just becomes absolutely nonsense, absolute nonsense, right?

1:21:16And yet, and I wouldn't get so angry about it, except these are the things that are used to rationalise and justify decisions of, it's hard to think of, that could be less important. Like these are the very things on which we steer this entire country is based on things that we know in every other context. It's just impossible to know. It's not that your forecast is wrong because you didn't apply it, right? It's wrong because it's almost statistically impossible for it to be right. So can we please stop talking about it? And it's just like it is an emperor's new clothes kind of moment for me because you're either going, they've got no clothes on.

1:21:56You do know that. And everyone, like, are you wearing a tinfoil hat? It's like, no, I'm not. Oh, I might be. You are. So I'm going to have my clothes on. but for all of these for this entire discussion it illustrates that point so wonderfully well and it's like again i'm not saying i've had a discussion with someone recently so i said yeah but it's still worth thinking these things through and coming up with some models for some guys like i agree you actually don't i'm not gonna disagree on that yeah let's stop treating it and talking about it as like you did a freudian slip on friday which i you know just for fun picture up and you said well we'll the budget will return to surplus in that's right 2034 yeah i know you didn't mean it i know you know this better than anyone else but it's just like that's how we talk about it it's like will will yeah that's right well we can't go out we can't go 18 months out without forecast blowing up into our face and it's and it just makes you sound a doomer or negative or you're just always skeptical on this and you hate this and you're And it's like, I just feel as though let's treat these things and these ideas with the authority that they deserve.

1:23:02And they don't deserve much authority. We can use them to inform ourselves of things. We can use them to, all models are wrong. Some models are just less wrong. And models can teach you things and they can help you understand things. But they should never, ever, ever in these kinds of contexts be used as a or treated as a crystal clear path into the future that, you know, that we will know with perfect clarity. And it's such misunderstanding of that has led to so much real world damage for people and their lives and their prosperity is that, you know, it's not it's not like two academics arguing about something like string theory.

1:23:41it's never really going to impact you know Bob and Jane who are trying to get ahead in the world and this absolutely impacts every Australian that's out there trying to get ahead and it's like okay so let's base it on that okay but maybe I just can't get behind it anyway yeah I hear I hear speaking of 12 tangents in I was going to say welcome to the tangent bag I mean the mail bag if you got this far I'm not sure if you can say you're welcome or I'm sorry or some combination of both we'll have to work that out in due course we will though be back next Friday I'm not going to ask Andrew. He's so worked up.

1:24:12He's got so much more to say. I am. I'm sweating here. Go and do your fun one. Again, info at fool.com.au. Send us your questions for the mailbag. Send us your topics for some pre-recorded episodes in the next few weeks so we can keep this... I guess I don't know what to call it. Rollercoaster ride going here at Motley Fool Money. Until next Friday. Have a great weekend, Fool on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. general advice only. Please speak to your financial professional to understand how it may pertain to your situation.

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