Mailbag: incl. Retail deathmatch. July 9, 2023

28:34And in five years, time earnings are lower than they are today. And if they are, not by much. And if they are, I will be paid a decent yield for those five years. And this should be roughly what they're worth now. Plus, if they're still worth that, they're probably still cheap. I just, if you do a range of outcomes, this is not going to be a 10 bagger anytime soon. But I'll tell you what, if you want to, if you like your franking credits, if you like your dividends and you like understandable businesses, you like cheap businesses, you like brands, you like retail. I don't know. I could be spectacularly wrong.

29:05People will absolutely hit. So we're recording this, date stamp it, being played later, recording this on 22nd of May, 2023. By all means, knock yourselves out. Email me in 2028 and say you're an idiot, Phillips, and so be it. But again, I wouldn't just buy these two stocks because part of a diversified portfolio, that's why I bought Harvey Norman. I just looked at that and went, well, I don't really understand what the downside is over any meaningful period of time. In six months' time, who knows? People say, oh, why don't you wait? Well, because it could get, you know, share brush could go up even if the market gets worse.

29:31So I don't know. Why don't you do this? I don't know. I can't predict the future. All I can say is, if Harvey Norman's as profitable as it is now, and I buy it for single-digit PE of current earnings, and I get paid enough dividend on the way, I don't know, mate. Nothing's a slam dunk. Nothing's a guarantee. I don't want to at all suggest this is a fail-safe, idiot-proof investment. I just think, given the range of outcomes, I'm very, very comfortable owning Harvey Norman shares. I wouldn't be that uncomfortable with J.B. Hyfer either for what it's worth. I bought Harvard because I think it's cheaper.

30:00The dividend yield was higher and it's property backed. And if I'm going for a low PE play, if I'm going for a value-ish kind of investment, Harvey's just an easy one given the choice of the two. I think part of being an investor is having a preparedness to look really dumb for long periods of time. Yeah. Because you will, right? You will. And, yeah, by the time you sort of indicated, everyone forgot what you said anyway, and we'll put it all down to luck. So it's tough, but you're not in this game to, like, sort of make friends. You're in the game to sort of try and nurture and grow your wealth.

30:35So there are some really good lessons from history, though. Let's go back. Let's wind the clock back to 2007. Economy was booming. Jerry Harvey's making – he's buying racehorses and everything that he likes to do. So, you know. He loves his racehorse, Jerry. Loves his racehorse. Have I told you in this podcast you had a horse called Motley Fool? No, really. Have I not told that story yet? No. Maybe the Shakespeare reference or the company reference? No, the company reference, funnily enough. Wow. Story from the other day. Keep going. Wow, now you're interested. We'll come back to it. You had my curiosity.

31:08Now you've got my attention. But what was interesting, right? So, in 2007, Harvey Norman was making about$1.3 billion in revenue. It's a big company. Right. 2008 made a little bit more. 2009 still 1.4. 2010. So we've gone through the GFC, right? Top line didn't really change that much. 1.3, 1.5, then 1.4. I'm out to 2013 now, 1.3. So the top line just sort of stagnated for a little while. Interestingly, though, if you look at the pre-tax profit, even if you strip out what they call unusual items, they like to strip out one-off costs and things that aren't symbolic of what the true underlying performance potential of the business is.

31:51So again, I'm being generous. We have that argument as to whether you should do that. I'm just trying to pick the better measure, right? And in 2007, they were making$400 million in profit. In 2008, they actually did okay. There's a bit of a lag effect here. They actually made$450 million. Then they made$377 million. And then a couple of years later, it was$256 million. So what's going on there? sales actually held up really well profit really fell away you might know that the the the story there but i would i would guess that they were selling things at much lower margins um uh or they bulked up a lot of their fixed costs as they tried to expand into other areas but the point was this point was this they um they survived in fact they never they never dipped into loss you know Even the worst, worst year.

32:43I mean, they were still making money and still paying out a dividend. And in 2007, 11 cents per share. It was 14, then 11, then 14, then 12, then 9, then 14, then 20. This is maybe where some of that investment started to pay off. 30 cents. And so everything that someone, a very bearish person was looking at back then would have made the argument, things are going to get very tough. It would have been right. Even though sales held up better than maybe a lot of people thought, they really had to do it at much thinner margins. Profit really got whacked. But they maintained their dividends. They weren't cut in half, as we're sort of talking about, but they pulled back significantly.

33:22And they went on to prosper. In fact, when was the best time to buy? Right at the nadir there, where things were just bombed out. The dividend had been pulled back a bit. Profit had been falling. The multiples were super low. and I'm quickly flicking across to another chart here. Hashtag research. You know, here you go. So 2014, you could have picked him up for 260. 2017, you double your money, right? That's, I suspect, the hope that you're looking at here. So it'll, yeah. That's the multiple you just talked about, right? When you get growing earnings and then growing multiple of those earnings, that's what happens.

34:05Yeah, yep. And I mean, look, back to the original question, which one of these two attributes and characteristics make it a better company? Well, whichever one generates the free cash. But I suspect with two companies like this, both – I'm with you. I don't own shares. But both I suspect will survive. But both will probably have a rough patch in between. But if you're sort of looking beyond that, yeah, it's – here's the thing, right? I like – I don't want to make a prediction. But I want to – it's prepare, not predict. is my mantra. And so let's say there isn't a recession. Well, even better, right?

34:42Yeah, that's right. Wow, actually things get really good there. But even if there is, it's sort of like you're accounted for it. You've accounted for that to some degree. So it's just tough. Just expect it. Expect it with these kinds of companies, in any kind of company that has a cyclical dimension to it. And most do. Most do. Correct, correct. I think, mate, that's a great summary. I don't think I'm going to add much more to that. I own Harvey Norman because if you're looking at these two, I think you're probably playing a value game. I think if you're trying to find a growth story, knowing the economic circumstances we potentially run into, I think you're probably going to – your odds of success are lower than if you're looking for a value way to play this.

35:29Not because I have – again, I'm not predicting, but to your point about challenging economic circumstances if that's going to happen you want to get through that you want to take advantage of cheaper prices Harvey Norman stands out to me as I said we recommend them both I like them both I think they're both market leaders we wouldn't have recommended them otherwise so big fans of both businesses I think they're going to be completely fine will they have some troubles? probably but who knows and we're looking at the other side bigger or better yeah probably because the Australian economy is not shrinking anytime soon permanently and that's kind of the story bottom line mate for me this is you don't have to buy these companies to be a long-term investor.

36:03You don't own them. That's completely cool. But this, to my mind, is exactly what every long-term investor should be able to understand, acknowledge, and appreciate because this is the very definition of looking through short-term issues to long-term value creation. It's what happens in five years' time, not what happens in the next six months or 12 months. Maybe the market goes up or down. Maybe the market goes up and the shares go down. Maybe the market goes down, the shares go up. Maybe the economy has a recession maybe it doesn't you can't know this he's trying to trade on them is in my mind just madness like really crazy stuff wayne gretzky uh uh ice hockey player has this great i think it was wayne gretzky said you skate skate to where the puck is going to be not where it is yes and i just it's just it's so wonderful you know it it's it's that that's that's what investing is is all about yeah and if you can position yourself for for where it will be not where it is i mean that's why I can sort of on one hand say oh you really want good companies and yet you look at my portfolio as a bunch of loss makers in there yeah yeah they don't make profit at this point yeah I know that but but they sure are making a lot of sales and those sales are growing and their costs are reasonably fixed and it feels like that could pass an inflection point some point in the next few years in which case you know these these these PE of infinity looks insane now but if they can sort of do half of what you expect actually they're probably on a very low PE at that point in time you know so you know yeah think think for yeah like that yeah absolutely um that that's and that's the point right because it's where where is the puck going to be after the recession if there is one someone's going to say what comes your own now oh the ones are going to benefit from the rebound in consumer spending oh like jb and ho-fi yeah yeah but the share price is already up because the market's already expecting that oh bugger you know you've got you've got to be you don't have to be contrarian for its own sake but once the market's already pricing a thing in don't buy on the basis of that thing because you that that's that's literally the definition of insanity, right?

37:54If you want to take advantage of a thing, whatever that thing is, do that thing when no one else is doing that thing. That's how you make the money. If the market's already recognized, like the COVID recovery, right? The market crashed before COVID arrived and then recovered before COVID left. If you're waiting for the event, if you're waiting to buy it either, I'm going to sell when COVID arrives. Well, the shares are already up. I'm going to buy once COVID's gone. Well, the shares are already up. You've literally got to, you don't have to do anything. You don't have to do this if you don't want to, but if you're going to try and play that sort of story, you've got to start with that position.

38:22Yeah, have to. You have to. I think I've said it so many times before, I know I'm repeating myself, but I think approach it like a business owner. If you've got a potential to open up a retail store in some main street in a town and make a lot of money over the next 10 or 15 years, would you not do that because you're worried that there could be one or two years in there that it's pretty tough? I mean, you know, the value of the company is the sum total of its – all of its cash flows over its entire life. It's not about what it's going to make next year. In fact, it could lose every – it could, you know, make a massive loss next year and then make a squillion dollars the year after.

38:59You've got to look at it on balance. And this is the real – there's not many edges you have as a private investor these days because you're up against very well-resourced institutions and individuals. frankly people that have studied it and have better access than you and all of these unfair kind of things but the only advantage that you really that the advantage you have is that they operate under some institutional imperative that says they must try and outperform the market every three six twelve months you don't you don't have to do that so they'll be i reckon if you spoke to some of the you know harvard educated analysts out there be going everything you're saying is absolutely true i'm just not going to buy it because i'm going to look like an idiot in 12 months time i want to get my bonus and if i'm wrong well everyone else has done the same thing so i'm not i mean i'm it's always better to be wrong as a group than than wrong by yourself you know you don't have that pressure you don't have that pressure and that is that is that is something that you should really focus on it's a huge edge man we doubled down that first question didn't we gosh yeah and that's the podcast for this week let's assume it's not at least for the purposes of our recording.

40:05Let's go to the second half of the same question, which was actually a different question. But he was asking about whether he should alternate between ETFs one month. So he's been to the Vanguard Australian Shares ETF, which is the ASX 300. The AS is the code. And then buying companies the other month. So ETF, then Brickworks. ETF, then something else. I should say I own shares in Brickworks. And I'm pretty sure I own units in the VAS in one of my kids' accounts, I think, from memory. So just disclosure, disclosure. disclosure um what do you recommend is that is that a workable reasonable recommendable way of building a portfolio i suppose i mean or you could just take whatever money it is and put half in a in the vas and half in a share i mean the the dollar cost averaging effect i don't think is going to be materially changed whether you split it 50 50 each month or you alternate each month do the maths on that there'll be a difference it won't be a big difference So it's kind of minimizing costs and doing one thing and having like putting all the money in one place rather than spreading it across brokerage costs or something.

41:05I don't really know. I'm speculating. Yeah. I wouldn't make it so formulaic, frankly. I would say, how much can I save each month? Each month I'm going to invest that. Now, some months will come along and it's like, I've just got no ideas. I don't know what to buy. Buy the ETF. Easy. Yeah. One month will come along and you'll go, oh man, I've really got this great idea that I'm really passionate about. high conviction in in which case and that might maybe maybe the month later you still like it you know that so so act opportunistically and not i'm not saying that from a timing perspective yes let let the opportunity set that sits in front of you at that point in time make your decision for you and i think probably if you're anything like me most of the time it'll be actually i don't you i good ideas are rare i was saying to you before the pod right they're very rare and a lot of them don't come along that often so just be patient sit on your hands and but you want to keep investing you want to keep dollar cost average so do the etf i i think that we we could talk about you know perfect is the enemy of the good right and so i don't know can we discuss whether buy and buy monthly or is is better or that i i think it's much a muchness frankly but i would as i said i would let the opportunity set dictate my actions i like that mate i'm gonna only add a couple of thoughts by way of trying to round out the answer because you've done a really good job uh first is i would do that i would also though do it in the context of two things the first is portfolio management so if your best idea is brickworks one month then next month it's still brickworks the month after that still brickworks and 12 months later you got a lot of brickworks nothing else you might have done yourself any particular favors in terms of building a diversified portfolio so um always start with your best ideas but then ask how does this best idea add to or subtract from my portfolio as a whole and they're two we don't talk about enough mate because it's a really squishy topic and maybe we should try and do it someday but i don't believe in portfolio rules necessarily of this much of that that much of that or you got to sell over this much or but don't buy more than that or whatever it is but i do think i do try and think about the context of my portfolio if i'm going to buy something so my best idea is this do i already have too much of that yeah i do okay well what's my next idea so i think you need to think about the portfolio a little bit when it comes to just how you're going to allocate that money.

43:21I do like that of doing it every second month if brokerage costs are an issue and if you're going to get smashed by buying two stocks a month, for example, if you've got to pay a deal, it's a brokerage, just pay one instead. If that's an issue for you with your chosen broker, there's no harm in that. Particularly if you're talking about, if it's a 25-year deal, what's 25 times 12, mate? Is it 300? Yeah, close enough. Then you've got to buy 300 trades. There's no hurry to get one this month and not wait till next month, right? Over a lifetime of dollar cost averaging, it's really not a big deal.

43:48So take your time, do what you need to do. Keep your costs low if you can. Think about the portfolio itself as a whole and make sure you're comfortable with the house you're building. You know, laying brick by brick by brick is fine. When you realize you've got, you know, a 16 foot wall on one side, nothing on the other side, you've probably overdone it. So just think about how that might build out in a kind of achievable way. Other than that, I think Ram's right. I think absolutely that's a great way to do it. I would maybe think about international ETFs if you want to think about adding to ETF exposure a little bit just to kind of, again, on a portfolio perspective, round that out.

44:22That can be useful. But over time, you're going to do very, very, very well if your dollar cost average into quality businesses at decent prices. And to Ram's point, take your best ideas. If you're going to buy the ETF, but all of a sudden your favorite stock's on special, you know what? You can afford to dip into that one and buy an extra bit of that this month and then go back to the ETF next month. 100%. Mate, let's go to a question from... I'm just checking to see if it's anonymous. It's not, which is good. This is from Tim. Good morning, fools. Quick question about the proposed - Tim's doxxed himself.

44:49I know exactly who you're talking about. Oh, dear. No, it's the other Tim. I do think that sometimes we get a bit worried about this stuff. I mean, unless you've got a really unusual name, no one's going to know who you are if you give us your first name. Anyway. Andrew Page isn't really Andrew Page. It's actually Rainbow Bright, but we call him Andrew Page because Rainbow Bright gives him away. Exactly. Good morning, fools, says Tim. Quick question about the proposed super changes. Would you keep contributing to super if you're a few years away from retirement and already over the$3 million mark?

45:20I know. Good problem to have, he says. If not, what would you otherwise do with the money? Thanks for your stamina and keeping the podcast alive, Tim. Would you? Oh, man. I've had a few people of a certain demographic whinge to me about this. And I have zero sympathy. I mean, for goodness sakes, it is – I know Tim's not saying this, so I'm not lumping you here with this. It's a very, very good question. I mean, it's still preferentially taxed, so it's still the best alternative, right? And it might be different if you're 40 years away from retirement. I was going to say, yeah. God knows how they're going to change.

46:03They'll change the rules. I can guarantee it. But when you're close and maybe you're on the highest rate of tax now, but you can get, what is it, 30 % instead of 15%. Like, come on, come on, you know? But the amount of people have whinged. To be fair, Tim's not whinging about the tax. He's not saying it's unfair. No, I know. It's my latest bugbear because it's like hyper-rich people complaining about paying 30%, which is very, very favorable. Only on balances above$3 million. I'll tell you what, I'll swap your position. If you hate that so much, let's swap. oh my gosh it drives me crazy yeah can i tell you can i tell you my favorite can i can i can i is people who want stage three tax cuts and god knows what's happening between now and recording and going live but people said they deserve the tax cut and i'm kind of like come on so you might think you pay too much tax and that's fine when you when you consider the alternatives used for that cash you say i deserve a tax cut more than i don't know a pension deserves to have the heater on or you know someone on welfare deserves enough money to actually pay the rent uh i i am i suitably the word deserve has come it's become this political thing i i think it goes back to well in my in my recollection it's the tony abbott as opposition leader thing where politicians realize not saying his fault but i think it was that time because the governments never do it right because that sounds terrible so the opposition say we know you're doing it tough you deserve a tax cut you know you're you need some help we will help you the idea of making the voter slash citizen giving them the impression feeding that holiday of they're so hard done by that only we can help you and your life is terrible and we're really sorry about that.

47:43And I just think if politicians were fair dinkum, they'd all get up and say, we live in Australia. We have universal healthcare. We have a passable but probably could be approved safety net. No one is paying more tax than they can afford to in any real sense unless you made some really stupid financial decisions. Life is pretty bloody good. And frankly, if you want to swap your problems with anybody else in the world, knock yourself out because I'm not going to. And that would be the honest political ad. It would be, you know what? actually we're both we're both pretty much the same lives and labor we're all the same we've got some difference on a couple of edge cases and you can argue that one of us might be better than the other one but either way you're gonna live in you're gonna live in one of the best countries on earth one of the best potential you know like seriously what you want you want to line up your problems and have a whinge i i don't have to say this on a podcast mate but it's and it's a very different thing but also very similar you know when when um military veterans come back from war and look around all things we whinge about and they say what the hell is wrong with you people I've just been here and done this, or I've just seen that, or people come back from third world countries as aid workers.

48:42I can't imagine the additional trauma that adds to PTSD and other things they've already got when they come back and say, and by the way, here's my problem. I didn't get across the street fast enough. The bloke in front of me didn't. I didn't get a tax cut as big as the other guy, or my$180 ,000 isn't enough. I deserve more. Perspective. I'm not surprised. Perspective. Perspective, right? Yeah, yeah. I think I did a lot of backpacking in Southeast Asia when I was very young. I didn't know that. I came back so thankful to be living in Australia. I mean, beautiful parts of the world, but I mean, very different economic privileges and the rest of it.

49:22And, you know, I think we lack all of that. It drives me a little bit batty too about, well, I'll pick on the baby boomers because I can. You know, you - Come on, that wasn't a surprise. You had free education. you had um you you were you were able to buy a house at three times household income and only one of you had to work uh you had 30 years of structurally declining interest rates you had uh you know just every i mean look you play the cards you're dealt i don't blame anyone for doing anything but don't stand there and tell me that you worked harder and you deserved it more than like a gen z today who has to now both of the couple has to work and even on that combined income in Sydney they're paying 12 times their income for a house and you're going to say oh it's because you eat too much abo on toast and that but I was really smart and I worked really hard it's like no no you we we underplay the role of luck in our life you know and and you're at a point now where you could spend the rest of your days perpetually on holidays traveling around and just have an incredible life and good for good on you I don't begrudge you for that I would have done the same kind of thing but don't turn around and whinge about these kinds of I mean just probably one of the luckiest generations that we've seen.

50:36In fact, we're actually seeing life expectancy and a lot of key metrics actually for the first time starting to decline. It seems to me as though this was just a question of being born at the right place in the right time. You know, not just extra points, a lot of extra points for being white and male, right? Wow, that really helped. You know, ask someone who wasn't in that demographic how tough it's been over that period of time. So again, you know, you get the cards you're dealt, you play them to the best of your advantage, but just stop pretending that there was something special that you did that no one else has done.

51:09It just, it's very frustrating to me. Anyway, sorry to all the people. I know I'm lumping them all together, right? Here's the thing I find as I get older, every generation is exactly the same, you know? We all are. We all are exactly the same. The baby boomers were the hippies. they were the revolutionaries you know they were the ones that's my point you know and and i remember the ethos right guys go back to woodstock and what you were protesting about and everything you know you've you've lost you've lost sight of what matters and enjoy your good fortune and and and and stop whinging now it comes in the hate mail coming thick and fast now well page p-a-g-e we uh we both feel much better mate which is good but tim is not complaining about sorry you're going to pay.

51:57He's doing exactly what we would do in our same circumstance to pay as little taxes as we're allowed to. Not begrudging the higher rate but saying, hey, I'm not going to pay more tax if I don't have to. If I'm given the option, I'll take the lower tax option. Thank you very much. Yeah, of course. So, Tim's a few years from retirement. You would add money to super. Is that what you, if you had to spare 50 grand, you're like, what do I, do I invest in my own number? Do I invest it in super? You throw it in super? It depends on what my current rate of tax is. But if my tax rate is lower in super than without and I only have to wait a couple of years, then hell, it's a no-brainer.

52:27It's an absolute no-brainer. Yeah, do it for sure. I would actually have the other view, right? And it's only because... I agree with you about distance from retirement, which makes it less likely it's a big deal. My only issue is as proposed, the government is intending to tax unearned income. In other words, unearned capital gains and stuff, which might actually require you to sell some assets to pay the tax if there was enough cash in the super fund to meet that criteria. so I gotta say because of that well you might be forced to sell anyway and it's a wrinkle but it's a really important wrinkle it's my for all of the I completely agree with you about everything you've said and I don't know if you disagree with me about this one taxing on an income I think is a complete debacle so I'm very very very happy that they are taxing super higher I've talked before about how I recreate super altogether not recreate it but restructure it so that it wasn't as even as tax advantage as it's planned to be I'd be even harsher than that but taxing unearned income is madness.

53:25So I actually wouldn't make it for that purpose, for that reason. I just think it puts you into a category where you could invest that money in your own name, keep it for 10, 20, 30, 40 years. You're not going to pay tax on the capital gain until you sell it in super. Potentially the way it's proposed, I actually hope they change it, but the way it's proposed, you will still have to pay tax. On unearned income, on that basis, I would probably keep it outside. It's so dumb. You see some really bad takes in the media every now and it's like a billionaire that's like you know such and such as net worth increased by 400 million this year and they didn't pay any tax like it was they didn't actually i mean the value of their their securities and stuff went up and i'm not trying to stick up these people do not need to stick up for them but it's it it is it is when they sell that and they need to sort of redeem that in some way so that they can spend absolutely tax tax them to the maximum extent possible and frankly they get away with very low rates of tax in in a lot of jurisdictions but that's exactly right.

54:20Taxing unearned income. It's like me claiming losses on unrealized losses. You know what I mean? It's just bonkers. Imagine the value of your house going up. Tell you're an$800 ,000 house, the price of your house goes up 10 % in a given year. You somehow made an$80 ,000 gain that you've got to pay 30 % tax on. Yeah. I mean, it gets silly. By the way, Jeff Bezos, the Amazon share price, own shares, everyone knows that. Last year, the shares fell in half. Can you imagine the tax refund you'd be due on unearned capital losses? Yeah, let's pay Bezos a bunch of money because he's... Right? Yeah. Can you imagine that outcry?

54:51Oh, my gosh. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

55:03Mate, last question for the podcast. By the way, after my rant, thank you to this particular questioner who starts with, Hello, Scott and Ram. Anonymous in capital letters. If you use this email in your podcast, see, this person i was going to name him just for sheer amusement for myself but i'm not going to because that's just from read this person gets it they put it at the top firstly congratulations on your podcast says our anonymous emailer and the breadth of issues covered thank you also thank you both your commitment to contributing to providing a tremendously important source of education to your listeners oh you're very welcome thank you for the kind words about me says our listener old bloke who first started investing in the share market in 2007 just before the gfc In the days before podcasts, the only thing that kept me from panicking or jumping from a balcony was the marketing material emailed to me every few days from The Motley Fool, assuring me things would eventually get better and the dark days would pass.

55:58I know you are critical of some of the marketing. Shh, don't say that out loud. But I believe it kept me sane, of which I'm extremely grateful. In case your listeners are unaware, the fallout from the GFC was quite extreme. even though i could pick up shares in great companies at huge discounts the overall decline in prices for blue chip shares i own was so steep that my portfolio only returned to the black in 2010 which nicely underscores what we're saying before about long-term investing yeah yeah let's talk about csl he says and if you like resmed and cochlear as well i own shares in all three and i agree they're expensive using the metrics you described the other week i can say i've never looked at their financial statements or undertaking a DCF of any company I've invested in.

56:39And I am a chartered accountant and I have an MBA prior to retirement, also a chief financial officer for over 20 years. To a large extent, the market sets the price investors are willing to pay for the future discounted cash flows of a company, having regard to uncertainty and sentiment at a point in time. You either pay it or you don't. But in my opinion, it says our listener, it's your assessment of its future prospects that is most important. Looking at financials that are six months old or more won't tell you much at all. The most important thing I focus on is my assessment of management and the board's capacity to continue to successfully execute a strategy that will build on and reinforce those elements that comprise a company's sustainable competitive advantage.

57:26Sounding very Buffett-esque there. The email goes on, all three companies have a long and successful history of doing so. Of course they had their fair share of problems. Cochlear suffered a product recall in 2012-13. CSL recently bought Vifor for$18 billion, a large acquisition to be bedded down and may take years to provide the synergies forecasted. All three companies occupy the number one position in their field and continually reinvest a large proportion of their profits in R &D to maintain that position. They continually innovate and develop new products that will produce new and increased cash flows into the future.

58:00This strategy has been rewarded by the markets for a long time, and hopefully that will continue to be the case. Buying shares in a company with a lower multiple can be a more risky proposition if management and the board don't have a proven track record of developing and executing successful strategies, or if they operate with no economic moat. As Ram alluded to the other week, market sentiment may change, and these valuations may decline in future. Certainly, CSL's share price has been volatile in recent years and has not yet reached its pre-COVID high of around$340. But there would need to be something that would act as a trigger for this to occur, which I suspect would be a loss of confidence in management.

58:40In the absence of any indication of this, I remain a very happy investor in these companies and have no intention to sell. As Buffett would say, my favourite holding period is forever. regards Stephen I tipped into a Tony Jones enter so I'll take that as a comment but I won't I will ask you for some reflections on Stephen's pretty passionate defence of some of these otherwise theoretically at least overvalued companies I mean they're great companies just fantastic companies and don't look at the share price chart look at what their profits have done over the years the stability strength of growth you know he says they're leaders in their fields They'll be around, I suspect, for many years to come and have a lot of growth potential.

59:25So I don't agree with any of it. I disagree with any of that. And if you gave me the choice between those three and really, frankly, 90 % of other stuff listed on the ASX, it'd be those three any day of the week. But I think that value and quality is very widely recognized and understood. And Buffett also says you pay a high price for a cheery consensus. You know, CSL is on a price earnings multiple of 44 or so. Yeah, it's expected to grow. It's probably going to grow pretty well. But the risk I have, I think, is the potential here is that they absolutely deliver on expectations. But if the PE drops from like 45 to 30, 30 is still a high.

1:00:11It's double the market average, right? Yeah, that's right. So it's not like a collapse in sentiment. but that erodes 30 % of any upside that you're going to have. So I just, I don't really have any, and if you're holding this forever, and it's like if I had to put together a forever portfolio, those three would probably be in it to be honest with you. But I don't know, am I trying to be too clever or I feel as though there are better risk-adjusted return opportunities out there in the sense that maybe the companies don't share the same level of quality, but the return potential is higher because it's just not recognized in the price to date.

1:00:55So, but I'm not, look, I'm just sort of trying to give another side of the argument here. I really can't fault any of the comments there. It's just that for better or worse, my personal view is that they're sort of all a little bit on the X-y side and that's cool. That's, you know, different opinions make a market. So that's, at some point, I suspect, just because that's what markets do, they'll get bombed out. Remember when CSL, I remember well, actually, there was when the Aussie dollar was above one US, it was above parity. That's right, yeah. CSL got, well, I got a hit for six because everyone's like, oh, you know, the exchange rate means that their Australian dollar profits fall.

1:01:31It was all true, by the way. But super high quality. The market just overreacted. Was the dollar ever going to stay above parity? Probably not. I'm no Forex trader, but it seemed like an unreasonably ambitious expectation. And it was the buyer of the century. You know, okay, now I'm overegging the pudding. But it was an incredible opportunity. And that is something that would tempt me back in. Absolutely. Something like that. Something which is not great. Cochlear had the product recall. You know, there'll be something that goes, quote, unquote, wrong, but won't point to any structural disadvantage of the business.

1:02:09The market will get its knickers in a knot and get all scared. And, you know, we'll have a different conversation at that point. But until then, yeah, just the value is not there for me personally. Yeah, I think I'm tempted to try and straddle the fence here, mate, and it was splinters in the backside because I think there's a really interesting long-term... Let me start one again. I have a different run. If you're looking for returns in the stock market, you want to know how you're planning to do that. And you want to know, in my opinion, I think it's hopefully reasonably straightforward. You want to know that the way you're planning to do it is a way that has value, that has some degree of nothing's ever proven, certainly because the number of sample sizes are too small, that kind of stuff.

1:03:01You know, it's likely to continue to do well and that you are likely to be able to do it well, which are two very different things. I can know how to jump 14 cars on a motorbike, but I'm probably not going to be able to do it well myself, right? Can it be done? Yes. Could I learn to do it? I don't know. Probably not. It doesn't mean it can't be done. It just means it's not for me. So the reason I'm stuck in between the two of those is for exactly that reason. On one hand, I am tempted to say, we talked about Harvey Norman, right? And the other day, the sheer potential for that business, given a really, really, really, really, really low PE, doesn't even have to have the best growth in the world.

1:03:41If you're CSL, you're at a PE of about five times that. So you want to hope that value outs. Now, I will say I've been a long-term Cochlear fan. I've never owned the shares because I'm an idiot. But I think Cochlear has got a multi-decade runway. And the big watch out, the biggest bogeyman on the horizon is gene therapy, which may completely destroy the entire business. but if it doesn't and again you don't have to be sure you don't have to say you know i'm not going to hold it 40 years no matter what but this is again to the questioner's point you know a leader in its field it's going to have more and more and more and more and more people diagnosed with hearing loss it's going to have better products to solve that problem it's a leader in its field i think it's got a multi-year multi-decade growth run csl i'm less sure about and this is where i want to this is why i want to kind of straddle this fence a little bit i you have to csl for all of its size.

1:04:30We talk about companies that are ham sandwich companies. We talk about companies need good management. CSL is so dramatically, enormously huge, both in absolute terms, $150 billion market cap, but more importantly, it dominates its field so almost completely that you have to have a pretty good sense of where the growth is going to come from. And why I've been on the fence on CSL for the longest time is that I can say cochlear, I can see absolutely, not with absolute clarity, but prepare, not predict. I can see a range of outcomes. Is it likely more people have hearing loss in future because more people are diagnosed with it?

1:05:07Yes, because the world's becoming more affluent. There are more people being born. There are more countries, more citizens being able to afford these things. And when you're a customer of cochlear, you're a customer for life because you've got an implant literally inside your head. This is not a fashion item, right? And so I can see a super long-term story for that one. I've made a mistake, I've said millions of times, with Coca-Cola or Amateur before. where I went, this is one of the highest quality businesses in the country, literally in the country. What did I forget? I forgot there wasn't enough growth left.

1:05:33It was so incredibly dominant. It was so ubiquitous. Where was the growth going to come from? And so I got that one wrong, not because I misunderstood the quality, but because there wasn't enough growth opportunity left for this business to continue to do that well. And so I think you've just got to be careful on those two. I don't have a view on CSL, a view on Cochlear, a view on ResMed. I have used a lot of them you know i mean uh i would just i would just guess as you're thinking about these by all means i'm a big believer in quality i'm a big believer in the buffered-esque idea of time is the friend of a wonderful business uh you want to pay a fair price for a wonderful business rather than a great price for an okay business those things are important so i think you absolutely should have csl cochlear resume in the very very top echelon of your i wish i could buy these at the right price list and you also need to add to that in my mind a bit of an inside inside baseball here, Ram.

1:06:22We've launched a service recently, and I won't give it a plug because I don't want to, but we've kind of coined a term, which is not really a coined term. I'm calling it QGARP. You know GARP, which is growth at a reasonable price. So QGARP is just, and it's just, we just did it because it was easy, is quality, then growth at a reasonable price. And the idea is exactly that, right? So anything at a terrible price is a terrible investment, but a good price for a business with no growth that's low quality is also a terrible investment. So we've said, okay, well, Buffett's done really, really well by putting growth first.

1:06:51And probably quality first, sorry. And so if that's true, let's do the same thing. Let's find the highest quality business we can find on the ASX. Then let's make sure there's enough growth left. And then let's make sure the price is reasonable, not cheap, but reasonable based on that quality and growth. It's not the usual work you're using of GARP. You know, Buffett's not exactly a GARP investor, though. You could argue he kind of is. But we just use that framework to try and say, okay, Buffett's right. And you want to build a super long-term focus portfolio of the best companies you could find.

1:07:17And as long as you make sure you buy them at the right price, that's exactly the approach we've taken. So I think, you know, I absolutely get where our listeners are coming from. I don't think he's wrong in any meaningful way. But I do think you just have to make sure, in my mind, you tick each of those three boxes. Even if reasonable price is 40 times earnings, if you convince yourself that's okay, that's cool. Just make sure there's enough growth left for each of these businesses so you don't replicate my mistake with Coca-Cola or Amatel. I think, I mean, I think there's still some good growth potential left.

1:07:47But yeah, just sort of by definition, it will get harder and harder. I mean, if you extrapolate the growth rate, historical growth rate forward, at a point in time, you exceed the world's GDP. So logically, it will level off at some point. Now, it could be 20 years away, right? And this is the work you need to do. So yeah, look, I don't think any of us are saying anything too controversial here. And I don't think anyone's necessarily wrong or right. I mean, investing in value is very much in the eye of the beholder a lot of the time too. So, I mean, look, of all the portfolios and holdings you hear people having, I just got nothing bad to say about someone who holds these three stocks, right?

1:08:29That's right. I don't think you're doing anything too reckless here, not even close to being reckless. and the good thing is with the companies of these qualities is that if you do get the valuation wrong and you're a long enough shareholder, it might mean that you average out at 7 % or 8 % compound instead of maybe something that's double-digit. And that's not a disaster. It's not what you want. You'd like a bit more, but it's not a disaster. So, yeah, I think just – it's a question. Here's the other side. You can be too fussy because I don't earn any of these as well. And I've said before, oh, when things get rough and really get a bit old.

1:09:11Well, I didn't. I have. I had opportunities in the past and I didn't do it. Up and up they go. You know? And so there is a lot to be said for not trying to be too clever with these kinds of things. I think that's important. I'm going to just add one more thought, mate, and then we'll probably wrap it up. The other thing I think just, and it's one we've talked about with the banks before, and it's really, really... Humans are weird animals, right? We all like confirmation bias and we all like to subconsciously rely on our evolutionary benefits. The things that helped us become more functioning humans, the things we take for granted, the heuristics and rules of thumb, those things that kind of just help us get through life, right?

1:09:51If you had to wake up in the morning and think about, should I get out of bed? Okay, which leg will I pick up first and which muscle will I use to do that? And then will I walk to the bathroom or the kitchen or the lounge room? And then if you had to make all those decisions consciously and really think them through for first principles, you wouldn't make it out of the house. You know, the number of decisions that we make heuristically end up being what they are. And one of those things is we get used to patent recognition and we extrapolate. And so my only last comment, I don't even make this actually even seriously about any of these three companies, as much as I do about the banks, which I absolutely do make this point.

1:10:22But I want to raise it just given the context. We're talking about historical performance is every big business that fails was a successful big business before it failed. Or every big business that is now mature was once a growth business. Woolies is a great example. It went through, I was lucky enough to work in the food industry, work for some supplies for Woolies for a decade or so. And when I was going through that journey, I was at those companies kind of about halfway through Woolies growth story. These used to be independently run state-based grocery organizations that were small market shares each.

1:10:59I think Woolies had 20, 22 % market share, something like that in the early 80s. Not that I was there then, but that's kind of where they came from. And there was Safeway in Victoria. Woolies kind of owned it, but it was its own brand. It ran its own thing and all that kind of stuff. And then over the kind of 20-ish years, 25 years from the early 80s, these businesses became the dominant retailers. Flemings went broke. Franklin's went broke. You know, IGA, which we kind of know now used to be about 25 different brands, most of which died and they kind of consolidated what was left in YGA. Individual wholesalers went broke.

1:11:33Australian Independent Wholesalers was a wholesaler down in Canberra at one point. It went broke. It was bought by Woolies, I think, from memory. So the consolidation of the grocery industry happened over that 25-year period. Now, when you consolidate an industry, you get growth far ahead of the industry if you're one of the eventual winners because you just gobble up like Pac-Man everyone else's market share. So not only do you grow at the pace of the market growth, you grow at market growth plus market share growth. That's how you get your total returns. Now, what happens when you and your competitors end up with 100 % of the market left between you and no one's taking share anymore?

1:12:05Well, then you're just left with market growth. And that's completely fine. It's completely fine. Willys and Coles will be fine. But they also got there a different way. They had growth opportunities that they exploited during that 25-year period that simply don't exist anymore because the market is the market is the market. And so you shouldn't expect that just because you can't look back and say, oh, well, they've always grown at Tempacity. They always will because they're just great and they know what they're doing. if you don't consider the very reality of why they got to grow at that rate, which was they're gobbling up market share.

1:12:34And so I just want to flag that we've said it with the banks a lot. And I want to use someone different use the supermarkets this time around, because I was kind of there, I knew a bit about it, but also it saves us being accused of bank bashing or people switching off. But just remember, what gets you here? Those factors eventually, some of which will drift away, as to your point, Ram, you can't get bigger than the economy eventually, you can't compound at that rate forever. The same is also true of even sectors. you know well these and coals can't get bigger than the grocery sector because they will be the grocery sector at one point the banks can't get rid of the bigger than the banking sector and as those things mature you just have to expect lower growth and as an investor you have to make sure you're not paying a growth multiple for a business that stops growing because that's how you end up potentially getting your backside handed to you yep absolutely especially when it's priced for growth and the growth doesn't emerge there's one thing to correct you know And that's the price.

1:13:24On that cheery note, I think we're done. I think so. Will you come back on Friday? Yeah, let's do it. I look forward to it. Until then, I'll try and think of a new intro for Andrew and we'll see if we can trip up or something. Please no Bitcoin questions. Thank you. If you don't mind, that'll be great. Awesome. Until then, full on. Bye. 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.

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