Mailbag: incl. Should I go with Private Equity? October 8, 2023

36:39Do I feel as though they have some kind of competitive edge? And do they at least have some kind of track record that shows that there is something there beyond good intentions? Love it, mate. I'm actually not going to disagree with any of those. I'm going to add to them. so if I'm going to add a couple of things the first thing, the next thing I would try and understand is I'm going to call it underlying earnings power, it's a phrase I've grown to love and it's just looking at the business and frankly it's financial so this is where you've got to pull out the annual reports online or whatever and understand how likely are they or what amount of money they're likely to be able to make on an ongoing basis and so I guess I'm looking at things like Woolies is a great example because you can pretty much take any year for Woolies because it's about as non-cyclical a business as you can find.

37:22But you want to look at if a business has volatile earnings, what level of earnings is reasonable? Now, there is no easy answer. By the way, if you've answered Ram's questions already, you're much closer to answering this one because you can say, well, okay, I get that. What's a good example of building materials, right? Some years are great because they're building a trillion houses. Other years, the economy sucks. I don't invest in oil companies. But again, think about the changing profitability based on the changing oil price. Think about discretionary retailers, for example. This is a great time because discretionary retailers had a really, it's been really difficult.

38:00I mean, fun because I'm an investing nerd as Ram is. But we haven't had a proper, as I said, clean financial year since the 2019 financial year. Because we've had COVID come and then COVID go and then echoes of that and booms and busts. And people have pushed spending forward and pulled spending back. and try to work out how much is genuinely, you know, reliably able to be assumed. There are some businesses that will have tough years this year because of the economic slowdown, discretionary retails in, you know, in negative same-source sales territory right now. So very probable that the 2024 financial year ending in eight months will be down on the previous year.

38:36So your question is, well, does that mean this business is in structural decline? Okay, maybe it is. Or is it a one-off? Maybe it is. Was last year too high? or was it reasonable? So trying to work out, pick a business, excuse me, I don't own because it's easier, JB Hi-Fi. You've got to look at the numbers and say, right, what's a reasonable level of earnings for JB Hi-Fi? What can I assume is their base level of earnings? And there's no perfect answer and you can't do it with any sort of precision, so don't try. Just try and get a sense of what you know about the market, what's happened over time, how's that likely to play out?

39:07So you get a starting point for that. And that helps you with valuation a little bit. We talked about PEs. a business with a you know jb hyphers on a really low p e right now because people are expecting sales and profits will fall now if they fall and stay low then the p is going to be too expensive if they fall and come back the p might be cheap it's kind of my view but i could be entirely wrong but but having a sense of that what the underlying earnings power on an ongoing basis because you're investing for the long-term future not for the past so how how representative is the current level of earnings and sales uh and then what's the future likely to look like the last one i'll simply add on is the growth bit.

39:41So you've understood the business, as Ram said, you've understood where its competitive advantage is. You've understood the business is earning power. And then you're just looking at the future and saying, what is this business likely to do in future? Now, if you're Woolies or a bank, you're limited, frankly, by the size of the market, because the banks between the top four, they're 85 odd percent market share. Woolies and Coles, funnily enough, about the same, about 85 percent market share. They can grow a little bit by taking a little bit of share, but they're not going to get great growth. So how are they going to grow?

40:07Well, a little bit of price, maybe. A little bit of population, maybe. A little bit of GDP, maybe. Some of those overlap, by the way, so be careful you don't double count them. But, you know, Woolies is probably going to grow at population plus a couple of percent because that's about as much as you can expect, right? If there's more people, there'll be more cans of baked beans sold. So let's assume that's likely. Maybe Woolies take a couple of points of share from Aldi or Costco or IGA or the grocer or they come up with ready meals and take it away from fast food or eating out or something. Or maybe they don't.

40:38Maybe they lose that, by the way. And maybe they can find a bit more in cost savings, maybe a bit more efficient. So, you know, population plus a bit, maybe what, three, four, five percent a year max, probably on a long-term basis, be my guess. That's not bad. But having a look at that now, can Kodak keep growing? You would have been right to say, I'm not entirely sure. If a business in structural decline, be mindful of that. So the future growth trajectory, roughly again think about the slope of the line rather than the absolute numbers um and that kind of put all that together and then obviously we then look at valuation which is a whole different conversation but they're the bits i'd add to rams otherwise excellent answers yeah i mean it's it's hard to sort of limit yourself you'll find that it's sort of there's a you're in a five-year-old who will then go but why is it okay you answer that question that's great but why and And then, and then, and then.

41:30And you just keep going and you keep going and you keep going. And I don't think there's a single company that I own and some I've owned for years and years and years where I wouldn't be confident that if you really quizzed me on it that I would know everything about it. Actually, I'm sure I don't. So there's always something that's more to learn. You don't want to suffer from analysis paralysis, which is that you just never invest in anything because you never get to that stage where you feel as though you understand it all. You don't need to understand absolutely every last thing. And you probably, it's impossible to understand every last aspect of it.

42:03But certainly you want to get to a point. I think you know when you know, it's like that definition of porn. Like, what is it? Well, you know it when you see it kind of thing. And it's sort of just a bit of a crass example, but a good one, I think. And you, I'm sure you've had this feeling too, mate, when you're, you're going through some companies and something subconscious almost just goes, I like this. i like this a lot and you keep digging yep that's even now i like it even more then maybe sometimes you convince you're tricking yourself i'm sure we're all guilty of that to some extent but you'll you'll find that some things just resonate and and you build a conviction and that conviction is i know i often crap on about but it is so important when because you will be tested at times and you will be shaken out if you don't have any conviction and i feel as though So the point at which you can sort of take action and move it away from theory into practice is when you can feel as though, look, I don't know everything about this.

43:02I'm sure there's a lot of things I don't know. And I don't know what I don't know as well on top of that. But I feel as though I could be very comfortable holding this. And I think even if the shares were to drop 30 % tomorrow, I would still not only be confident to continue holding it, but I'd be tempted to buy more. that's probably a good thing to ask yourself is like well how would I feel if the share not because there's any you know they've just announced that the CFO has run off to Jamaica with all the money but you know there's no change in what the business has done but the share price drops 30 % would I still be happy with that and then if you can be answered the answer to that is yes and an honest yes then you've probably understood it to a deep enough level where you can take action I like it man very nicely done Motley Fool Money For more, subscribe to the free newsletter at fool.com.au forward slash listener.

43:57Let's get a question from Burrow. Good morning, fellas. Thanks again for getting up early, for squeezing your Sunday morning exercise before recording this episode. I hope you're not too puffed to answer my question. Funnily enough, Burrow, we're fine. I like to be as close to 100 % in the market as possible, and I don't like having a large percentage of cash to you on the sidelines. Me either, mate. My solution, says Burrow, at times when quality companies are not being offered at attractive prices, is to keep dry powder in a low-cost Australian shares index fund, e.g. the Vanguard Australian shares ETF.

44:28The reason being that I can continue to benefit from any upside in the market as a whole, but can sell down the ETF to buy specific shares when opportunities arise. I assume the ETF would be less volatile than any single company. It would rise less in a boom, but also fall less in a bust. can you please punch holes in this strategy cheers burrow you go first no no i'm i'm you go first all right um so burrow i

45:00i know i can't i can't criticize the strategy in itself i think that's perfectly fine as a strategy and i think investing in shares in my view i've said before is better than cash because over time shares go up at least historically no promises about the future i always have to put that disclaimer because i'm not allowed to say that they always will but i think they probably always will so you know probably is enough to get me out of trouble uh but no guarantees so i want to be invested the longer i'm in cash the more i think i'm likely statistically to miss out on opportunities yes sometimes holding cash will mean when the market falls i get a chance to buy something which is great uh market fell a couple of you know one percent earlier this week uh if i'd had some cash i could have used it but then it was probably up the month before the month before that right so it's kind of one of those things where statistically over time you look at the Vanguard chart again, as I say regularly and say, at which point should I have held cash?

45:47The interest is almost never because if you'd invested early enough, you'd have done really, really, really well. So time in the market is my favorite. So I can't disagree with that. The only thing I would say, Burrow, for what it's worth is, let's say you can't find quality businesses at good prices. Buying the ASX buys all those companies and more companies at either lower quality or worse prices. Because you're saying, I can't find individual companies to buy. So I'll buy all of them, even though none of them look attractive to me. And what I guess I'm inferring here, and this is not a criticism at all, but just a bit of a thought, is even if you can't find specific individual companies that are absolutely knocking the door down, but you're going to buy the ETF anyway, if your ability to pick stocks, both on quality and valuation, is better than average, you're still better to buy those higher quality, better value stocks than by the ASX, which by definition, you get the rest of the stuff that's even worse.

46:40So let's say there's nothing of great value or there'll be quality companies. So let's say there's nothing of great value right now. Nothing at all. Absolutely zero. When you're buying the ASX 200 or the ASX 300, whichever ETF you're buying, you're getting the quality companies, the top 10 or 20 or 30 that you really, really like, plus the other 270 that are lower quality. And if that's true in the market, you can't get quality in the good stuff, valuation attractiveness and the good stuff, the chances that the rubbish stuff is going to be more attractively priced are also reasonably low. So I would almost, if I was a betting man, say that if you think you can pick stocks, and not everyone can, and that's fine, but if you think you can, I would almost say picking your highest quality 5, 10, 15, 20 companies at less than super attractive valuations is probably still going to give you a better return than buying a whole index, in which case you would assume the others are probably either lower quality or worse valuation or some combination thereof.

47:37Does that make sense? Am I explaining that well? Yeah, yeah. No, I think that's right. Yeah. Go on, add some thoughts. Or disagree entirely. No, no, I'm not going to disagree at all. I just think that you can have a little bit each way, right? And where you put the slider will depend on, you know, on your personal preference and experience the rest of it. So go into the ETF, stay fully invested. And then just every now and again, you'll come across something that you just actually really like this. And it doesn't hurt to put 10 % of your money into that because you're still extraordinarily, extraordinarily diversified elsewhere.

48:16So yeah. Also, as to being fully invested or not, I think that is the way to go only because you just, you won't ever pick it correctly. not that's not me saying you know bless your little cotton socks you know that you think you can none of us can no one can and and even when you see some of the people who get trotted out on CNN every now and again who you know predicted the GFC and that well that's the only thing they predicted and by the way they were predicting that for eight years before it happened right it's like me and property for goodness sakes like you lose all credibility at a certain point so bubbles always go on longer than you think they always end unexpectedly yeah it is always darkest before the dawn.

48:58Like the best time to buy never feels like the best time to buy. So just get out of your way, right? Yeah, that's also true. And just stay invested. Yes. It's the easiest thing in the world to say. It's the hardest thing in the world to do. Unless you automate it, mate. And I guess that's my other thought. That's why I'm a fan of dollar cost averaging. It's also part of the reason I'm not a fan of keeping cash on the sidelines because there's always a reason not to invest at any point in time. which, you know, sometimes you'll save money, sometimes it'll cost you money, but statistically over time, it's been more costly to be out of the market than in the market.

49:34Oh, I can speak from experience. I've actually had a pretty decent, or so I say I'm fully invested. I am, that's not technically true. I do have a chunk of cash on the side. And that, when I first started the business, I mean, I was just, didn't have an income for several years. And it wasn't a view on the market that kept some money. It was just, I just needed to live. I don't want to have to be in a situation where I'm selling shares if the market drops 50%. So, you know, and we've sort of had a couple of years of cash flow now. So that's sort of gradually changing. But has it helped me? No, it's really not.

50:10Even after a horror year, you know, it's sort of like I would have been far better off just staying fully invested as it turns out. That being said, if I had my time again, I don't think I would have done anything differently, which is why the advice is different for someone who's in retirement and doesn't have the capacity to dollar cost average and doesn't have the income stream, you know, unless you've got$20 million or something stupid, then you can afford any drawdown and be just fine. But I think you, in that scenario, yeah, you do want to have a bit of cash on the sideline just because you want to know that you can meet expenses and you can ride out, you never, you ride out any market turmoil.

50:45You never want to be a forced seller, A forced seller never be. And that's the exception of the rule. Otherwise, just, you know, strap yourself onto that rocket and off you go. It's going to be the scariest up and down of, you know. A rocket's not the right thing. It's more like a bucking bronco, right? But it is something that we know with as much confidence as we can probably muster without being specific on the future, that it'll probably work out if you just manage to do the average thing consistently and well and, you know, for the long term. They're incredible gains to be made. Too often, mate, when I'm speaking to investors around the traps, it's often, it's the person you least expect who has had the best performance.

51:36And they're not always the person who will appear the most sophisticated and can give you a disc, you know, some really highfalutin finance kind of talk. It was like, oh, you know, I learned from my parents that this was worthwhile. And my whole life, I've just sort of thought companies that I thought were decent, I bought some shares in and chucked them under the mattress. And a whole bunch of them did really bad, but a whole bunch of them did crazy well. And overall, on average, I've compounded and grown my wealth at like 12 % per annum over 30 years. And, you know, they're probably worth many, many, many millions of dollars.

52:08And weren't investment bankers or surgeons, just, you know, normal hardworking folk. But their superpower was consistency and simplicity and not trying to time and not trying to be, you know, looking at a sharp ratio for their portfolio or God knows what else. They just did that, right? And I think about that a lot actually because sometimes I do worry that I am trying to be too clever by half when it's probably not helping me. In fact, it may even be hindering me. I think that's absolutely true, mate. It's also, I think once you, I'll add to that to say that it's like that with risk and reward.

52:56And we've tried to say this regularly through the podcast and we'll keep saying it for years is reaching for the absolute maximum return is almost certainly a terrible idea because in reaching for that, you're likely to trip yourself up for reasons of omission or commission or just simply things that happen to you along the way. You know, I want to Buffett's lines. I love, I love all of them. But, you know, don't risk what you have and need for what you don't have and don't need. And that is, you know, you will invest at a compound rate throughout your investing career. And you know what, would I like 15 %?

53:29Sure. But would I like a small chance of 15 % or would I like a very good chance of 9 % or 10 %? I'll take the latter every day. Why? Because if I fail at the 15 and end up with 4%, then I'm much, much, much worse off. And so at some point, you've got to say to yourself, the bullseye is in the middle for a reason, right? It's not the top of the dartboard. It's not the very, very, very, very top. It's in the middle. And if you miss the bulldoze a little bit, you're going to land somewhere perfectly fine. And that's kind of, you know, you want to, investing is about being perfectly fine and then better than that if you can.

53:58Not as good as you can, but maybe you end up terrible. It's just the trade-off is not worth it. So yeah, absolutely. Slower City wins the race. There's a very good reason for that. reliably adding as you said mate some really pedestrian investment strategies end up being really good there's some a great bit of research that the best fund managers over long periods of time don't have to do much more than be adequate all the time and and what i mean by that is they go from being in any one period perfectly adequate to being great over the long term why because they avoid blowing themselves up or doing something stupid yeah and it literally is it's survivorship bias but in a really positive way for those who know your your biases you don't just look at the survivor and say that's obviously how it's done because it doesn't necessarily work but what you can do is say the ones who end up winning are the ones who stay alive yeah that that's that's you know again even winning is you don't need to win an investment i've written an article i haven't yet published but um we're working off the off the footy from from the weekend you know in footy you have one winner and and 718 loses depending on which competition you're following you know and anyone who doesn't win sees it as a failure and that's in professional sport that's fine in investing you don't need to even make the finals you just need to have a result where you go you know what that was good i'm i'm i'm now comfortable i can afford my my expenses i can afford to retire like you know that is that is perfectly good risking it all on on maybe getting a bit more but maybe losing a lot it's just not worth it no it really isn't mate's a question from nick who says hi scott and ram firstly thank you both for all the work you do to bring sound, no BS advice to everyday investors like myself.

55:33I'm a long-time listener, first-time questioner. Thank you, Nick. I'm in my mid-30s, says Nick, and I have been with an overpriced super fund for far too long, thanks to my enterprise bargaining agreement at work. I researched all of the major super funds, and I think I'm going to switch to Host Plus. I like their very low fees, the choice of Australian and international low-cost index options, and more importantly, their host choice option that lets me pick my own stocks from the ASX 300 ETFs and listed investment companies if I want. But I have a reasonable amount of money to transfer over, which is currently invested in Australian and international shares, not indexed.

56:11I have the intention of investing it in Australian and international low-cost, broad-based ETFs, but I am aware of the terrible exchange rate at the moment to the USD. Is it wise once I transfer the funds to be buying back into international stocks at this time? But what are the other options? Should I keep it in the cash account until it looks more appealing? Or maybe just wait more heavily in Australian shares at this time? Am I overthinking it? He then says, Scott, I was thinking of signing up to Motley Fool ETF Investor, no plug intended, to help me with my super fund investments. Do you think this would be a suitable match for what I'm looking for to allow to follow along in my super fund and also help my investments outside super?

56:49I know you can't give personal advice, but any thoughts would be great. Thanks again. Keep up the great work full on nick so mate he's got some international australian shares they're going to all be sold he's going to change funds and you're saying well do i reinvest in international etfs right now given the australian dollar that's a tough one i guess if you're selling and buying in the same environment and it's a wash like yeah it doesn't it doesn't make any difference um and the transaction costs you can't avoid by by doing this so yeah i i don't i don't think i would worry too much about that well but i'm hesitant here i'm doubting myself am i missing something this is all psychology um see nick the thing is the dollar is so low right now you could actually even if you weren't changing super funds you could sell those international shares right now at a low dollar bring back even more australian dollars and reinvest in australian shares right now without changing super funds but you're not and neither am i and that's okay but now you're changing structure you're saying well should i reinvest in those u.s funds.

57:52The answer should be the same. If you weren't going to sell the US investments now in the current fund, why would you not invest in them in the new fund? It is a psychological difference only prompted by a change in structure. Now, I say that not to be critical and frankly, not even to say you should do the same thing as you're doing now. What I would ask you is if I made you go to cash today and brought it back to Australia, would you reinvest now back in what you already own in the US? In theory, you own those US shares because you like them, because you like the prospect and you like the businesses and you like the evaluations and you like their futures and so that probably tells you a whole lot i but but it's a really really really great question and it's why ram and i are both hesitating i've said before around half of my portfolios in the u.s about half's in australia roughly i don't know what the numbers actually are right now but close enough it could be temps on either side quite frankly i don't do the maths that often but uh particularly with the australian dollars i haven't bothered converting it probably higher actually in u.s because the strain dollar has fallen um but you know i even this literally this morning before we jump to this podcast i think to myself i don't know if i should sell my u.s shares with the strain dollar at 63 cents and bring the money back and here's the thing i could do that but it would require me to have more confidence in the businesses i would invest in then in australia that i have in the businesses i invest in the u.s knowing that the exchange rate is going to go both ways over over the long term and i'd have to pay capital gains tax on some of that now you don't have to nick because you're going to sell anyway to move funds so you again you're in a different situation um i have amazon i have berkshire as everyone knows i've got a whole lot of other but i've thrown a whole lot three or four other u.s companies uh maybe five um you know do i should i sell them and bring the money back part of me thinks yeah maybe i should but then i often also think well am i going to find the same quality as berkshire or amazon over here uh am i going to be sufficiently diversified if i invested here rather invested over there Do I expect those companies to keep growing over there?

59:42Yeah, I do. If you take Berkshire, for example, the shares are up about 30 % over the last 12 months while the Australian dollar has been falling. Now, you know, what's going to happen next? I don't know. I wish I knew. It'd be great to know. So it's a really, really difficult one. I don't, again, I can't tell you what you should do, Nick. So let's obviously start with that, as you well know.

1:00:05I would favor, see you'd mentioned being too clever by half before ram honestly here's what if i was setting up an account from from scratch i would still invest in the u.s today with exchange rate at 63 cents why because i want the diversification i want to buy some of those great quality companies in the u.s um for the sake of it for what it's worth i own businesses like mercado libre which is a uh international south southern american latin american kind of amazon ebay kind of combo PayPal combo I own Disney I own a little insurance company called Markel Corporation which is often considered a mini Berkshire I own Shopify I think that's it there's probably others plus Amazon and Berkshire I like those businesses a lot I like their futures I'm also relatively hands off as an investor I sell really infrequently so I'm happy to kind of let them do their thing so if I didn't own any Berkshire today would I buy some?

1:00:56I probably would yeah I'd probably send some money across the US and buy some would I maybe not put as much in as I would if the dollar was at 80 cents? Yeah, absolutely. That's absolutely true. So I would absolutely probably, hedge is the wrong word, I mean, in a formal sense, but I probably would think about putting more in Australia than in the US right now. And if and when the dollar goes up, any incremental investments you're making can then be very balanced in the US. It's probably how I'd do it. I don't have a real number in my head. I think I'd probably be tempted to go something like two thirds Australia, one third US right now.

1:01:30Because I don't want nothing, right? I think Amazon's future, I own Google too. Google's future, I think it's really bright. I don't know that, you know, I wouldn't want to bet that Google's growth won't outpace the fall of the exchange rate or the subsequent return in the exchange rate. I think Google's long-term future is really attractive because we also don't know how long the exchange rate stays low for or how fast it recovers. So, you know, just be careful of that as well. Nice. In terms of the ETF investor, Nick, I don't want to give an ad, but yes, we recommend ETFs that anyone can follow in their portfolios if they're building an ETF portfolio it's one way you can do it I will give the link just for fun it's fall.com.au forward slash join dash ETF dash investor it's 29 bucks to join for the first year it's stupid cheap I think the long term it's like$39 a year for renewal it's really really cheap I think it's super great value but if it's not for you that's cool but yes we do recommend an allocation across a range of ETFs so yeah if that's what you're looking for we can hopefully help you out but mate you can do it yourself there's plenty of resources online to help you build an ETF portfolio as well without without paying us for the privilege

1:02:41anything on that mate no I think that was perfectly done all right one last question hi Scott and Ram thanks for your podcast and bringing thoughtful commentary to investing and markets I've always liked Uncle Warren's advice that people who don't have the time or inclination to analyze businesses should invest in broad index ETFs, while for those who have the capacity to analyze businesses, they're better off concentrating their investments on a relatively small number of companies. In fact, Buffett has suggested that three wonderful businesses is all that's needed for the latter group. As a thought experiment, what would you think of a three ASX company portfolio of Macquarie Group, Seven Group Holdings, and Sol Pats?

1:03:21Do you think these would deliver superior returns to an ASX 200 or 300 ETF? At the risk of appealing to hindsight bias in my amateurish backtesting indicates these three have outperformed the ASX 300 on a total return basis by about double over the last 10 years. I suppose the irony is that these three companies are conglomerate-esque in their structure and like Buffett's Berkshire Hathaway, which presumably would be one of Buffett's three wonderful businesses, they have fingers in a lot of listed and unlisted pies, so are highly internally diversified anyway. The risk of Rob Milner, Kerry Stokes, or Shamara Wikramaniaka having a brain fart or series of brain farts that sink their respective businesses is not quite zero, but pretty close to it, you'd think.

1:04:07Is it possible to be overthinking this? Is it acceptable to have part of your portfolio in a passive structure like an index ETF and part in a small number of individual companies it could be like wearing a belt and suspenders at the same time does that even matter uh if it makes you some kind of investment schizophrenic in the eyes of dr buffett with all my foolhardiness alex really great question mate three three wonderful businesses what do you reckon macquarie seven groups holdings and soul pats yeah you could you could definitely do worse than that i don't know if they'd be the three i'd pick but then they just sort of get into the realm of like you know subjectivity i like again they they all look that they've all done really well over time um i'd be mindful that macquarie and seven probably reasonably um economically cyclical in the sense it's not a bad thing by the way but you know with three just three stocks if if we hit a recession or when we hit a recession at some point and markets really tank.

1:05:11I mean, they, Macquarie in particular is probably going to get hit pretty hard. The deal flow slows up quite substantially. The business will be fine. Right. But I just, I just mean, you're going to be, you're going to be a lot more volatile than you are almost by definition than a, than a, a broad, a more broadly diverse, diversified portfolio. But if you're comfortable with that, then yeah, absolutely. And seven, I guess is, there's a lot of construction-oriented businesses in there, which again, I'm hesitating here, mate, because personally, I'm someone who doesn't care too much about cyclicality.

1:05:47But I feel as though it's worth pointing out because it would be a feature of a portfolio like that where, you know, I can imagine in a pretty brutal recession slash bear market, it gets hit pretty hard. At the same time, across the cycle, it probably does pretty well.

1:06:04so whatever they are you know you shouldn't have a broad basket a small basket is fine you just watch those eggs like a hawk like you really need to thoroughly deeply understand those businesses and have a high degree of confidence in them I've long said that I'm very not that concentrated but I'm a pretty concentrated investor I tend to be really comfortable if I've got 90 % of my money in 10 stocks. I'm very comfortable with that. So I, you know, things have to go really bad across a whole bunch of companies for me to do badly out of that. And I think too often, I'm also a big fan of Buffett's idea of was a Lynch or Buffett, you know, one of the two where it's diversification, where it is a, it is a, it can really hurt you in the sense that, I mean, you either go the, you either you're all in or you're not.

1:06:54You buy a broad based ETF and as I say, go play golf, you know, to do something that you like and you'll be just fine with that but if you're going to be managing an individual portfolio which holds 40 different stocks it's just like you're a masochist at some point there's so much to sort of keep an eye on and and and um you know even if one 10x is in that and they're all reasonably evenly weighted it doesn't move the dial diversification protects you from the from the horrible disaster but it also protects you quote unquote from from the wonderful outperformer as well so i don't know it's a horribly rambly answer save me here mate give me some insights it's really nicely put mate um i can't i can't answer it either other than to say other than to say um so i think if you're holding three companies on top of an etf then those three companies become smaller overall so if you're saying well if i if i had a third of my money in each of three companies that's one thing if i had half my money in an etf and the other half in those three companies, okay, well, the weighting is now 16 % rather than a third.

1:07:55And if I have 75 % of my money in an ETF and the other 25%, then I'm only down to 8 % per company. And so it does depend on how else you structure the rest of your portfolio. I would absolutely recommend against holding only three businesses. Buffett has said you only need to own three businesses, but as you rightly yourself pointed out, Alex, you also said for most people, an ETF is the right solution. And so I am generally someone who tries desperately to remain humble and to not give in to hubris and some people say that's not very hard because i don't have that much to be proud about that's probably right too but uh but in terms of the the way i invest i think it's not taking unnecessary risk there are there is more than three wonderful businesses out there or more than three worthy businesses out there so again if you've got 70 % in etf then it's not an issue because you've you've already done the diversification i wouldn't just hold three businesses like you couldn't make me do it um By the way, I think they're fine.

1:08:48I'll get to the businesses in a second. I have said, if you make me hold two and put them in a bottom drawer, I'd buy Sopcats and Berkshire and be more than happy to come back in 20 years, right? So I wouldn't own three. I'd own those two happily. Not, by the way, foolproof, but if you'd maybe only hold two, they were the two I'd choose and it'd be an easy decision. It'd be daylight, third, fourth, fifth, eighth, ninth, and 10th. But not impossible. Either or both go badly. So I wouldn't want to just do that. I am with you, Ram. I probably got 90 % of my top 10, it's probably likely. Berkshire, Saltbats, Corporate Travel, a few others.

1:09:27So there's that. I wouldn't want three. I'd probably want at least 10, probably. I don't think I'd want to own less than 10, personally. Again, Alex, you do you, but I wouldn't want to own less than that.

1:09:40So the thing about those businesses, I love founder-owned businesses. I love high insider ownership and CEOs who are running the place because you know they're going to watch the place like a hawk. You know they only care about long-term value. They're not looking to maximize the share price to make some stockbroker or fund manager happy. Kerry Stokes is going to be Kerry Stokes. He's going to do his thing, and that's great. So I love investing behind that. Rob Milner is the same. I'm sure he doesn't give a stuff about what he thinks about Solpats. His money, family's money, a lot of other people's money.

1:10:09And by the way, Solpats is a really strong long-term shareholder orientation. They care about the share price. Of course they do, but they're going to make the investments they think are right for their investors. So those businesses I think are great. Macquarie, I would just mention Babcock and Brown, not to continue to tar Macquarie with that brush, but just to remember that any business in finance that employs meaningful amounts of leverage as part of its business is just risky by definition. And I would know just three, as I said, if I did, i wouldn't make macquarie one of them personally um i like macquarie it's a buy for us at motley full share advisor there's a free stock tip um i think the future is bright for the company they've got some super smart people they're super aligned incentive wise um sara does a wonderful job running that business so i like it a lot but am i sure it's uh rock solid enough uh no i'm really not not that i'm predicting anything else i just our job as i just finished saying with the last question is not to you know maximize the returns at the at the possible not try and maximize the returns at the risk of losing a lot of the money if i get it wrong so i wouldn't make macquarie one of those personally i would think it's a new roadback conglomerates mate i would actually throw west farmers in there probably so to macquarie um similar reasons similar outperformance similarly internally diversified but that's part of the beauty if you're only going to hold three they're great businesses to own and there's some other great quality businesses in australia i think uh well worse i think it's one of the best quality companies in the asx you're not gonna get get spectacular returns from it, but it's a great business.

1:11:35The problem you got with buying these things is most people already know a lot of that, as Ram kind of said, before you're paying up for the presumed quality or the perceived quality. That's not necessarily bad. I would happily do that. We've launched the service not long ago at Motley Fool. I'm not going to give a plug. It's called Odyssey. You can't buy it. It's not available, so I'll mention it. And we're shamelessly focusing on quality first. We're saying quality, then growth at a reasonable price. That's the entire idea of the service for the reasons you've just highlighted. I think quality business will go on beating the market over time as long as you're not paying too much.

1:12:06You don't have to pay a dirt cheap price. It's Buffett's wonderful business at a reasonable price rather than reasonable business at a wonderful price. I always, always want the former, certainly for a long-term investment. So that's kind of my broad answer. Similarly, probably rambling, but I think that's what I would do. Your last question, is it acceptable be part of a portfolio in a passive structure like an ETF and impart a small number of individual companies I think that's the perfect way to do it if you want to just buy a few I think that's a wonderful wonderful way to go I think that's perfectly fine as I said I don't dislike Macquarie I don't dislike Seven Group I like Kerry Stokes running that business I'm a you know if I had to if I had to choose one criteria here's one as we finish the podcast Ram if I choose one criteria for investing and I can only choose one it would be high insider ownership that would be it you know if I only choose one There's nothing that would beat that because if I've got Rob Milner, Kerry Stokes, Jerry Harvey, David Dicker at Dicker Data, Tony Brown at ARB, there's millions I'm not thinking of, Ram.

1:13:09But if you made me choose just one criteria, I'd hate it. But if I had to, it would be high insider ownership for sure because those are the people who are going to be running these things the right way for the right reasons with the right care and passion and organizational DNA. so that's probably how i'd tilt my my idea i mentioned west farmers for that they don't match that they do have a long uh internal dna uh so you know you could go for for only founder owners and go that way but that's how i think about it yeah you know if i was uh king of the land i'd almost be tempted to make a rule that you can't be a director of a company unless you have at least a quarter of your money in it you know something crazy like that uh which would never happened right but i feel as though teleb wrote a good book you know he's written lots of good books he's a interesting individual and i don't agree with him on a lot of things but he's a good writer and he one of his books is skin in the game right and it doesn't guarantee success but you know people are really trying like you're really trying um so yeah it is i i agree if there was one metric to look at that's that's a that's a pretty good one you could probably form a portfolio and that's just like an only buy companies where the person running it is has a significant portion of their their family wealth tied up to it it i i wouldn't be surprised if you back tested that you got a uh you got a pretty decent outperformance even better if they were the founder or from the founding company yeah that's your family so that that being that being said there is i i have seen a number of examples where there's a different skill set in starting a company and running a small company that's true as opposed to to running a large company the trouble that the founder has is that they were everything within the organization at one point like they literally did everything and it takes a it takes a certain well it takes a different skill set to be able to let go of that micromanagement and and be someone who's more about delegation because you know the the ceo of woolies can't be across everything they just can't so you need to sort of let that go and sometimes you do see people struggling in in that regard and um so i only point that out because you sometimes see that in very small cap land where it's like this this person is deserves a whole bunch of accolades and success because they did take something extremely small and grow it into something that's big by any sort of small business standard but tiny by ASX standards and they just sort of they languish there because they're never able to let go of the reins and they you know what i mean it's um i don't want to sort of name any names there but but yeah i'm i'm i'm just like a a slightly different sort of wrinkle on that thought but overall i 100 agree that's a good point i ended up i wouldn't just use one criteria right so the things you're mentioning absolutely come into it but if you had to just pick one thing yeah i don't i don't think you can go past that one yep yep agreed Mate, we've talked for long enough.

1:16:05Hopefully we've entertained and amused and hopefully educated our listeners at the same time. Mate, enjoy going. You've got the second half of your run. You finished the first half. You're off to the coming. I might do some laps. Might do a beach swim. You might. You're not going to do that, are you? Chances are not good. Grab another coffee and scroll through Twitter. We'll see. If, however, you are down at Bondi and you see Andrew Page doing laps across the beach, you'll know why. You've heard it here first. Will you come back next Friday? Yeah, mate. Looking forward to it. Beautiful. Until then, thanks for listening.

1:16:37Cheers.