Mailbag: incl. The market says you're wrong. February 25, 2024

27:45I've got$5 of debt in my business. So if you want to buy the business and then pay off the debt, So you're just looking at the business itself without the capital structure. You have to pay$15. $10 to buy it and$5 more to pay off the debt. So the enterprise value of my business is$15. Now, if Ram's got a business that's got a market cap of$10, but he's got$5 of cash on the balance sheet, you buy that business for$10. You take out the$5, say, thanks very much. What's the business itself worth? The$5 that's left. So someone paid, yeah, so they paid$15 for your business. Right. Sorry, that's how they should be.

28:20Because after both of those deals are done, again, you've got the exact same business. It's just that one that you ended up net with$5 and the other one you had to pay$15. Correct. I've got that run the wrong way. One, you paid$5. One, you paid$15. Yeah. It's really useful. It's a useful concept. And that's why you mentioned EV to EBITDA before. It's one of these acronyms that stands for earnings before you count for interest and tax and your depreciation, your amortization. And Charlie Munger called it BS earnings and for good reason. But the valid way of considering it potentially is that it is itself an earnings measure that is agnostic to capital structure.

28:55Correct. So that's why where we might, with the market cap, we have the PE. We take the total value of the company and divide it by its net profit. And with EV, we use EBIT or EBITDA because it's trying to take out that capital component to it. So the real question is, well, what's – okay, so that's what EV means and that's why I'd be interested in it. What's a high or what's a low multiple? And everything that we've talked about previously with PE ratios, you can cut and paste it. It's the same thing, right? Anything you'd add? No. Other than just to quickly illustrate why EBITDA rather than net earnings or bottom line earnings.

29:30And you've already mentioned talking about hanging out the capital structure. The I is the most important part here, which is interest. And again, in the two contexts, if you add back the debt, then you have the interest to pay. So you want to look at earnings before the interest. That's kind of the point of removing that. There's no interest to pay if the debt's been paid off and the debt has effectively been assumed to be paid off if you add that loan value, the liabilities, to the market cap. So that's why you use that level. Whether you use EBIT or EBITDA is irrelevant. And like anything, it kind of doesn't matter which one you use.

30:02And even the numbers themselves aren't of themselves important. It's kind of a relative metric a lot of the time. So is an EBITDA of seven good or bad? Neither. which is really annoying to say. I don't think you should necessarily remove depreciation and amortization, by the way, because if the company's got to buy more machines at some other point, that is a real cost. So excluding that, I think, is a mistake. Taxes, similarly, you've got to pay taxes either way. So I don't... Man, I very rarely use EV2W, but I have to say. Enterprise value is a useful concept because it does make you think about the debt and the cash.

30:41To my mind, the price earnings already allows for the interest that's paid on the debt. So it's almost in and of itself capital structure agnostic. Because as long as the debt can be paid, then the bottom line earnings allows for that, and there's no reason the debt should have to be paid off if the enterprise can carry that debt into perpetuity. So I kind of, I love the thinking, I love the mental journey you have to go on to think about it and think about why a business with net cash would be cheaper than a business with net debt. It makes perfect sense, right? People don't often think about it a lot.

31:09I've used the example before of, back in the day, Meyer and DJ is trading on a similar PE. DJ's had a squillion dollars worth, a couple of million dollars worth of property. Meyer had debt. Yet the PE was the same. People say, well, it's all the same, isn't it? It's like, well, no, because there's debt. So it's a useful process. I don't think... You know what I've said? I've never relied on it to value a company. Go on. When there is significant levels of cash or debt, I think it's more useful. I think it's useful for a comparative basis too. And I think it's also... I actually think it's quite useful for getting a lens on the economic strength of a business.

31:47And what I mean by that is that we've talked, I'm not going too far off topic here, but you may have heard of things like return on equity, which is the net profit relative to the net assets of the business or the equity of the business. There's also a thing called return on capital or return on assets. In fact, if you want to do that as well, which basically saying, well, what's the return I'm generating against all of the assets that I'm employing here, all the capital, if you want, that I am deploying here? What's the return I'm getting? So you do find there are more companies than you'd think that when you look at their return on equity and their profitability and their earnings growth, it actually looks pretty good, but it's been juiced by debt.

32:26and in the same way that you're if i put a 20 deposit on a million dollar house and it goes up by 200 grand i've doubled my money on my on my equity component it's the same thing so is that good or that bad was it's it's neither it it depends um they're they're like if you're sydney airport and you've got all these tangibles you know high quality assets and you can do that you can do it safely why wouldn't you do that right uh if you're a services company that has extremely lumpy and unpredictable income, then maybe not. And the thing you've got to remember is you can always change it after the fact.

32:58That's what private equity often do. They'll come in to a company with a reasonable balance sheet and just lever it up, take out all the cash and lever it all up to hell. The thing still keeps working, but they've taken a bunch of cash out of it. I always think with investing, we always try and build a little toolkit of ratios and formulas and stuff that are helpful. And that's really valuable to do, by the way. But we've got to remember that it's the holistic view that's the valuable one. No one metric or data point is going to be perfect, and they're all going to have their cons as well. So EV to EBITDA is one of them.

33:33But I think if you understand what it is it's trying to tell you and you contextualize that with other aspects of the business, yeah, I think it can be helpful. I think that's right. On Kingston, I'm not going to go into detail. It's a resources company, a development exploration based in P &G. honestly so it's lost money for the last nine years and made some money last year i would suspect the market is betting that well either the market is betting that it won't keep making money and again thinking about the history you need to look at the whole history not just the last earnings now maybe it will by the way and that would be lovely and if it's if it is you're probably absolutely right they probably are gonna make a lot of money and the share price would be cheap and there's plenty of resources companies that have absolutely hockey sticks when they go to be from being loss making to being perpetually profitable there's also more than that who are profitable in a year and then lost money after that.

34:18And we're never seeing it again. So I don't know the answer to the Kingston problem. You're right to look at it. The key with any of these metrics though is to use them based on future earnings, not past earnings. PE, EBITDA, price to book, all these metrics, it only matters the future, not the past. So if this business is going to keep the same level of earnings forever, then paying less than four times earnings is an absolute it's steel if it's not you could end up paying way way way too much maybe it never makes a dollar again i don't know anything about kingston i'm not making a prediction either way i'm just saying that's where you can't look at the historical data of one year and say therefore this will be the future um again for both reasons maybe maybe it's even cheaper than it looks because next year's profits are double that uh or maybe next year's results are a loss and uh and you lose all you do so i don't know um plenty of investors in kingston probably have their views uh yeah just Just tread carefully, but look at the long-term trend and look at the likely future returns.

35:16And by the way, if you're not sure about the future, it's not going to give it a pass. I'd look at this and go, huh, like I've just said, if I only stay at this level, it looks like it's steel, will I? I don't know. Okay, I'll move on then. It can feel like you're missing out. You're walking straight past a fantastic deal, and you might be, or you might walk straight past a disaster. You won't know until time passes. Yeah, usually you need to be – it doesn't mean the market – I mean, the market is crazy from time to time, But your default assumption has to be you're the one that's wrong. And the onus on proof, the burden of proof is on you to say, no, no, no, the market is wrong.

35:50So the market, and there's a lot of eyes on this thing, even the smallest of companies, there's going to have a few hundred pairs of eyes sort of looking at it and making judgments on it. And a lot of people who are just much closer to the company, frankly, and know it a lot better. And they are saying it's only worth four times trailing earnings. They might be wrong, but they might think, well, actually, we're not going to get earnings. I'm just having a quick look through the Prezo, actually. And, you know, it looks like it's an exploration company. Their share count has exploded over the years.

36:17They've had to do raise after raise after raise to sort of stay solid. And maybe they're on the cusp of something that's great. But that's the question you've got to ask yourself here is like, what are the earnings going to be and when are they going to come? And then look at the share price in that kind of context. And don't forget, too, that you need money to make money. So they might have$10 billion of gold under the ground. Well, it's under the ground right now. It needs to be brought to the surface and purified and transported. And that's phenomenally expensive. So, yeah. Yeah, that's all I've got to say.

36:49No, I like it, mate. Hey, question from Cam. Oh, sorry, mate. Sorry. Just one more thing I thought was really an interesting part from Steve. He said there at the end, isn't it all just supply and demand in regard to the shares? And like, it actually is. Like, that's it. Like, full stop. That's the shortest answer you can give. It doesn't matter how crazy or rational the market is being. You know, the price is where people who want to sell meet the people who want to buy it. And it's on the margin. And that doesn't talk about anything. That's exactly what it is. We talked about the price, not the value, of course.

37:21And that's the trick, is sometimes the point at which they meet will be an extraordinarily great deal. Sometimes the point at which they meet will be an absolutely terrible price. Your job as an investor is to either, well, to either work out which is right or wrong or simply not choose to play that game if you don't know the answer. Your bet implicitly is that the market as a whole in aggregate is wrong now, but will be right in the future. Which is our own special humorous, isn't it? That's what you're saying. Because you're saying, well, I expect the company to do this. It's like, well, the company not only has to do that, but that has to enthuse the market enough where there is more demand than supply and the price goes up.

38:00You can't get away from all of that. I think we can try and pretend that we're a bit more sophisticated than just the chart jockeys and the traders and whatever by just saying that, look, the market does have distortions, thank goodness, all the time. But it does tend to be rational over time. And it might take a while for the world to realize that Kingston is sitting on a gazillion tons of gold and they're going to make a fortune tomorrow. And if that's the case, then by all means do it. But that's the question you've got to ask. Just quickly too, mate, I want to add to that, only to remind listeners that that very dynamic we talked about is exactly why you shouldn't expect your shares to do well and in fact why you probably should expect them to fall after you buy them.

38:39Yes. Because you think about it, right? You are looking the rest of the market square in the eye and saying, I'm right, you're wrong, na-na-na-na-na. And then tomorrow when the market still thinks it's right and still thinks you're wrong, the price doesn't go up. And the week after that, why would the price go up? The market still thinks it's right and still thinks you're wrong. It's not going to come to the same epiphany, the moment that, you know, the day after you did, right? And in fact, if the market doesn't like it, it's probably going to dislike it more, almost not exactly by definition, but it's taken a, it thinks it's worth this price.

39:07So if you think about the way that would play out, I would suspect that if your aim is to say, I think the market is most wrong about these companies, that's why I'm buying them relative to the real underlying value, there's probably a better chance they go down than up almost by definition. Now you say, well, okay, I wouldn't buy it then. Well, if you don't do that, you never get the chance to buy the bargain. So it's why it's a difficult case. But when you buy, we regularly laugh about the fact that we jinx it when we buy shares. Of course, they go down the next day. Obviously. It's not a 90-10 thing.

39:36It might be a 51-49 thing. But either way, if you're saying the market's wrong, don't expect the market to change its mind or realize it's a mistake just because you bought the shares. It doesn't work that way. And so you're going to have to wait for the market often to realize, well, you could be wrong firstly. But if you are right, the market's going to have to come around. And that can take some time. And that's okay. That's how it works. The other thing is, if you say the market is wrong today, don't wonder why your share price isn't going up tomorrow. Because if you say, I bought it at 40 cents, still 40 cents tomorrow, when you get to tomorrow, you say it's still 40 cents today.

40:04What you're saying is, yesterday I thought the market was stupid. Today, I'm letting the market tell me what to think. Yes. Which in itself is its own very special cognitive dissonance. Completely normal, completely natural. Everyone does it. But have a think about exactly what you bought shares because you thought the market was wrong. And then you overnight decided the market was suddenly right. And I should judge my investment based on what the market now tells me. That is a special type of kind of craziness that, again, I'm not blaming it. We all do it. But if you think through the logic of that, if the light bulb goes off, you're like, oh, man, yeah.

40:35You'll start thinking very, very differently about share prices. Yeah, look, and I can tell you, look, we love to tell share war stories. There's all kinds of bad investments that I've made. I'm sure I'm holding more than my share of dogs at the moment. But there have occasionally been ones that have gone right. And I can say pretty much without exception that all the ones that went right, even the ones that went really right, they went really wrong in the months afterwards in terms of just the brutal reality of the share price. It's like you kind of feel as though this isn't so bad. There's got a decent future here.

41:08You buy it. You get more excited. You do more research. You get more conviction. The price gets lower. You buy it. You buy it. You buy it. And it is hard to do. And then you kind of think, no, that's what Buffett says. I've got to do it. I'm going to do it. Yeah, well, six months later, 12 months, 18 months later, and it's still down. You know, like the demons come at night and they really start to haunt you. But it's always a gradually and a suddenly thing with these things. I don't know about you, mate, but it feels like that's – and I think when you look at all of the great winners, if you want to like cherry pick the ASX and you go, oh, look, it started at$1 and now it's$200.

41:44Yeah, but it didn't just go and then it was$2 and then it was$3. It was$5 and then it was$3 and then it was$1 and then it was$8 and then it was$7. And it was just, it is unavoidable. But that, I think, the only reason I'm hammering on about it so much is I think really at the end of the day with all that we do, given that the wealth of data and analysis and education and everything that is out there right now, if you're a quote unquote retail investor, you know, out there with your little portfolio as me and Scott are, like trying, you know, against this giant, you know, capital machine. The only advantage, I think the real genuine advantage you can have is one of temperament to be able to sort of say, I will look through that.

42:27I will get the big returns and the chunk of my soul that I will pay will be the many, many months of looking like an idiot. Yeah. And it is normal. Now, be careful here. That doesn't mean you should just always hang on to something because it's not going bad. Sometimes the thesis just isn't playing out and the underlying business is not doing what you're doing and you really need to get out of that situation. But so long as the investment case remains true and you've got that temperamental advantage, I mean, you might not be Warren Buffett, but I guarantee you outperform the market. Correct. Motley Fool Money.

43:01For more, subscribe to the free newsletter at fool.com.au forward slash listener.

43:09Mate, let's go to a question from Cam. Ask him around, love your show. and the down-to-earth not advice that you provide each week. I really enjoy listening to both episodes back-to-back on a Sunday. Makes the errands go a little easier. They must be really bad errands. I have a question for the mailbag regarding inheritances or windfalls in general. If you were to receive a large sum, say maybe half a million, what would you do with it? I feel it's a good number to pick as it's enough to change your life, but also not enough that you could afford to do ridiculous things. I love that. An easy, unsexy answer is just to put it towards the mortgage, right?

43:47But I personally feel a better option would be to even just whack it in something like an Australian Top 200 Index and just use the quarterly dividend payments towards the mortgage repayments instead. Or just YOLO it into Bitcoin, I guess, with a smile. A third option would be an even split between the above-mentioned fund and a simple S &P 500, as well as 50-50, so you can just capture a nice chunk of growth for the future. or would you still somehow stick to slowly deploying it across ASX companies? How would you think about optimizing the use of a large sum of money like this so as not to waste a potential once-in-a-lifetime opportunity?

44:24Fool on, Cam. So, Cam, the real key word there was at the end, opportunity, because everything in investing in life, there's an opportunity cost. and the answer is you should like so the the textbook sort of theoretical answer would be you should deploy that capital where it gets the highest relative risk adjusted return on investment now that is the most unsatisfying answer ever but it's the but it is the technically true one the most boring answer for the world but go on and why it's why it's why it's frustrating is because well okay einstein you tell me what the next best performing asset is i i don't know so for me and so this is just me but if i was in a situation where i had a lot of debt say a mortgage and that was causing a bit of you know stress and anxiety i think there is a huge return on investment paying that thing down even though technically if i put it all into bitcoin in 10 years time i'd be laughing right you know what i mean like it's sort of it that is a personal subjective analysis is, and it's not, it's not going to show up in any cashflow analysis, but it's still, I think a valid one.

45:33Um, there'll be other people's like, actually, I've got a really solid job. I earn, I earn some good money. I'm actually not worried at all about covering this debt. This is actually something that I can deploy. And then, well, where's, where is the best return that I can get for the effort and my expertise and all of that? And that, and that becomes a sort of a separate conversation. Um, but yeah, for a lot of people, I think, I think we do as a society ride a little bit too close to the edge. We love to have all of our chips on the table. But there's something to be said for a bit of padding in life, I think.

46:04And even if it's not most purely the economic rational thing to do. Yeah. I keep a warning answer too, Cam. You mentioned 50-50, mate. I think that's kind of right for me. Along the lines of what Ram said, but a slightly different take or something like an angle is, I think it was Bezos or Jobs or somebody, one of those people, talking about having the regret minimization framework, which is simply, if I do these things, which one will I regret least? And I got to say, here's the thing about a once in a lifetime opportunity. It's kind of like superannuation once you retire. That's the most you're ever going to have.

46:40Now you'll add more to your savings, but in terms of, let's say you won a lotto, you had an inheritance, whatever happened, you're half a million bucks. You won't get another one of those, right? So your job is to use it in such a way that you don't regret what you do. And frankly, you don't muck it up. At some point as you're adding capital, you can afford to take more risk. Because the first$10 I invest, if I blow it up, I can add another$10 tomorrow. If I was lucky enough to have that half a million dollar portfolio, I make it a million dollars. Then the downside of losing the million, it's hard to add another million if I really screw that up.

47:14And that's kind of when you start to think about the cost. The further you are away from zero, frankly, the more you tend to want to preserve rather than grow because you know instinctively how hard it is to get that back. Now, I don't know too many people who will, after getting a windfall, be able to replace that windfall. Then more, speaking about opportunity cost and time, even if you were adding more to it, to save that much again would take decades. and so your kind of number one job i reckon i can't give you advice mate but it's kind of not to not to blow it up and and this is where i kind of come to where the behavioral stuff trumps the the theory because if you put half a million dollars into shares and the market falls 38 percent as it did in march 2020 now hopefully we don't have that again or at least not for a long time well those of us with cash probably like a chance to buy some shares but uh your your half million dollars would have fallen to 320 000 bucks now 310 310 000 bucks now at that point if you went oh my god what a stupid thing you do i might just take it out now so it's safe i'll put it in cash you christ now i'm not saying you would do that i'm just saying for anyone listening as a group somebody's going to do that are you so sure that's not you are you so sure you would do it correctly.

48:35I don't know. And so, add to that about Ram's padding thing, there is a heap of psychological, mental, emotional value. I've said before, ages ago, we haven't been able to do this for a while, mate. We've paid down a chunk of our mortgage rather than, this is a few years ago now, rather than investing the money. I am sure I would have done better financially if I invested the money over a compound future period. Not necessarily between then and now, probably, but maybe not, but over 40 years, do you reckon that money would have been better if invested rather than paid a mortgage? Yes. Financially, theoretically, absolutely.

49:10Why do we do it? Because there's nothing that beats the psychological benefit of saying, at least I've paid that off. Because now, worse comes to worse, I can, I guess, redraw a phone in here or sell a house, we've got some equity or whatever. Just mean you can sleep at night. You won't worry about, what if I lose my job? What if the Motley Fool gives me the wrist saw? Whatever happens, uh i i'm okay and so that that you can't put a price on that uh depends on your age depends on your family situation as rams already said depends your income capacity all that kind of good stuff i have to say and this is why it's hard right so me personally if i was if i inherited half many dollars tomorrow i would i would invest it all in shares and i would um i would probably invest, for me personally, I probably put half an index fund and half an individual stocks, probably what I would do, I guess.

49:58I'm thinking about this on the fly, but let's go with that. Now, that's me being an old bastard, having paid a decent chunk of the mortgage, all the stuff that kind of goes with that, right? So I'm in a very different situation. I also know myself, I've been through April 2020. I know I'm not going to do anything stupid. I don't mean that in a critical sense and sell shares at the bottom or invest in some high-flying stock that I might triple overnight and then all of a sudden it doesn't i lose it all um i know myself if this was my sister who i love dearly who was not an investor would i want her to put half an individual socks that she shows herself probably not not because she's dumb not because she's stupid not because she can't do it but she doesn't have the experience in the market as an analyst she doesn't know what it's like to go through those gut-wrenching falls and go oh my god what do i do she'd probably do better than me frankly but would i suggest it no because i don't think that's right for her I can probably give her personal advice because she's my sister, but I can't give it to you, Cam.

50:51So that's kind of the scenario. I think I would, to Ram's point, with that much money, give yourself the permission to be flexible and be conservative is what I would probably counsel most people to do. Can I say the wrong thing that we should say as well? Yes. Have a bit of fun. Yes, that's a good point. Go to Disneyland. You just got half a million dollars. Take the family to Disneyland. I don't know. It's a random example. I'm probably the last place I'd want to take the family. But anyway, my point being is like, splash it around. You know, you don't – don't go out and buy three Ferraris and trash them.

51:26That's dumb. Yeah. But you've got to – again, money is a tool for use, and I think sometimes you've got to treat yourself. Perfect, mate. That's a great, great piece of advice. Tim says, G'day, Scott and Andrew. Love the podcast. Been listening for a while, and it gives me hope there are still some sensible folks that can have grown-up, nuanced discussions exploring alternative points of view which contribute to a more worthwhile conversation and understanding of the subject matter. Thank you, mate. This unfortunately seems not to be the norm these days, says Tim, for many politicians and media outlets, but that's a bigger rant for another day.

51:59My question relates to structuring family finances. See, this is what I love, Tim, the opportunity to say something your life's not going to agree with and earn her permanent enmity. My wife and I, says Tim, are in her early 40s with a young family. and nearly paid off the mortgage after many years focused on extra payments to maximize the benefit of what were very low rates. Spectacularly done, mate. Good job. Smart. Our current plan is to keep the home loan active. He says it has no ongoing fees, with a very small repayment and the small remaining balance interest offset. This will give a sizable rainy day reserve available through the loan redraw if we ever needed, but will also be relatively out of sight.

52:38This would be paired with a small amount of cash savings increasing over time. We also have a high growth robo advice fund, which we plan to increase our dollar cost averaging amounts with some of the extra cash flow. We're pretty happy with it as it has low capped fees and makes tax time very easy. Is there anything else to consider with this type of approach? Are there any gotchas that we should be aware of? Thanks for your weekly dose of sanity. Rant on. All the best, Tim. Yeah. No, I mean, just so spectacularly done. I mean, it would have been very easy in that scenario to the moment you got any equity to roll into another property and just look at YouTube, right?

53:19Like, everyone's doing it, right? We're making money for nothing here. And frankly, financially, you'd be much better off if we're just looking at the historical record. You know, it turns out if I know what ball, you know, what color the roulette ball is going to land on, I'm going to do very well. So it's easy to sort of say in hindsight, but I still applaud it because I think what it gives you is such incredible optionality and flexibility. I do the same. You know, I don't like having debt, but I would keep that redraw alive for anything that might come along. And I would tip any other savings into, you know, we could, again, debate around the edges of exactly how you deploy that into equities.

53:59But I can't fault what you're doing. Dollar cost averaging into a reasonably low cost exposure to growth stocks. Yeah, sure. there's nothing wrong with that whatsoever

54:13and not to say that you can't judiciously use some of that equity for investment purposes even if it is another property I'm not that ideological right but as long as you can be done where you're not up to the eyeballs and the slightest wobble is going to undo all of that years and years of hard work and paying extra money and sacrifice can be undone in an instant so I think you've got a lot of options on your plate I think you're in an incredibly anti-fragile, robust position financially, no matter what comes your way, even to the extent such is the situation that you could probably afford to be.

54:47I'm not suggesting this, but I'm just, you know, you could probably afford to be a little bit more aggressive with some of the access to that capital. So, yeah, well done. Well done. But there's not much I can do other than some fine tuning. And that would only be in the context of what I felt was appropriate to me and might not work for you. So, yeah, hats off. Yeah, I'm going to jump on that out, mate. Tim, you've got it sorted. But you're asking for some thoughts. I'll give you some thoughts just as devil's advocate or alternatives to consider and weigh up. First thing is I would be inclined – you can always – if you have a structural reason with enough time to do it, you can always remortgage the house should you need to.

55:28The only reason you need to have a redraw available is if you have an unexpected, large, and sudden need for the cash. I would encourage you to think about the we just finished talking about this the psychological and emotional benefits of actually having the mortgage paid off and the title in your hot little hands so you know you should have a decent emergency fund rainy day fund but if I got to a point where it's like well okay I've got x dollars whatever that is to you six months expenses something like that in a rainy day fund you say right that's done I'm going to say expenses I mean I mean you know essential expenses not you know the 15 streaming services and whatever else But if you knew you could pay the fuel, the energy, the food, whatever else for six months, you paid off the mortgage theory for six months, it's nice to have...

56:11Again, it's a personal preference thing, right? Do you want to have the comfort of knowing the redraws there if you want it? Or do you want to have the comfort of knowing the mortgage is paid off and the title is in your hot little hands? Choose for yourself. I would just add, Ram's taking one view, I would add the other, almost devil's advocate, but with a slight preference, I suppose. as long as you've got enough rainy day fun money, keeping up the redraw only makes you tempted to spend it or use it. And I think there's some real value in A, saying it's ours, it's ours, no one can take it away.

56:41And B, if we want to buy the new car, we can't just tap the redraw. Now you may not and that's great, but some people will even though they promise themselves they won't. So just be mindful of that. I would say, I think it's an excellent point, right? That you said before, know yourself. Yeah. Given Tim's track record though, right? Totally. He seems like the kind of character that wouldn't be frivolous. I guess. I think that's absolutely true. In terms of the DCA, yeah, go for it. If you're liking the Robo Advice Fund, go for it. You say it's capped fees, which is great, and that's fine. The alternatives would be, again, this is just the alternatives for the sake of it, because you asked, a plain vanilla ETF on the ASX with effectively zero fees.

57:24I mean, they have fees come out of the fund, but there's no money to pay on top of that, and they're not trying to give you advice. So at some point, the index fund should be cheaper than the RoboAdvice fund. The thing I would say about some of these things, and again, I don't know which fund it is, which is good because I don't have to catch my words or whatever, is the RoboAdvice section may have low fees. But you may be paying a double level of fees as well. If they're putting you into ETFs that have their own fees, just remember you're paying two lots of fees, which is probable with some of these things.

57:51If they say you should get 50 % NASDAQ ETF and 50 % Vanguard or BetaShares ASX 200, that's fine. But you're probably paying the robo-advisor for fees. And then you're paying fees on the ETFs they're putting you into as well. So there probably is a second layer of fees just to be mindful of. Again, is there a reason not to? No. If you're happy with it, go for it. Just think about that double layer, which you could save if you were comfortable to do your own thing. If you're not, I've said lots of times, advice is expensive until it actually saves you from making mistakes that cost you more. So if it works for you and the RoboAdvice works, then stick with it.

58:22Go with it. Knock yourself out. Yep. Ram, one from Francisco. He says, Francisco, I love the property discussion today. I'm not sure when that was. Relatively recently. Almost any week there is a property. Exactly. I was going to say that. It's Australia. Come on. What else are you going to talk about? Francisco has not been listening to you, Ram. You have been asserting for years that somehow I'm vetting these questions based on positive feedback and all that kind of stuff. He just says, straight into it, please. So I'm going to ask this question because it's the right thing to do, Andrew. Not because, contrary to your sceptical views, I only ask questions where they say nice things about us.

58:57I'm just about to apply with the ATO for an SMSF registration, says Francisco. Just your thoughts, please, since I know the choice is ultimately mine. A couple of questions. Is an Aussie tech ETF better or economically safer than a USA tech ETF? Secondly, if you're going to invest your savings at age 60 and keen to include a medical or health company or two in your diversified spread, which of the following would you exclude? Ramsey or a similar private health company, sorry, sorry, similar private hospital property listed company, ResMed, CSL, and or Ram's favorite, starting with P. He said also, is there a glaring health or medical sector omission I made here?

59:39That's from Francisco. So first things first, mate. Is an Aussie tech ETF better or economically safer than a USA one? I'd say no, but I don't know. I mean, it depends on the companies that are in the ETF. So let's look at the Aussie landscape in terms of what's listed here. We've got some pretty good tech companies. We punch above our weight for a small, you know, 2 % of global GDP. We do okay. Kiwis do great as well if I'm allowed to compliment our cousins. Generally not, no. Yeah, not. I messed up there. Do they compete? with silicon valley i i don't know given given some of the network effects at play given the resourcing they have for r d you know you got you got a company like meta that's spending like nine billion dollars a year on developing goggles right like it just yeah yeah you just can't compete with it so whatever the next whiz bang gadgetry that hits the world could come out of a garage in bankstown i have no idea but it's probably going to come out of like a mega tech company in the US.

1:00:47So, you know, but who knows? Who knows? It's hard to predict where the next breakthrough comes and the industry that grows up around that and who the economic agents are in that mix. It's so hard. It's so hard. But I would lean probably towards that. I think we can call it a center of excellence when it comes to modern tech. Yep. Especially with AI, right? Like that's the only game in town basically going forward and it's all happening there. I think that's right. But I would say we made the point on Friday about Microsoft and the 15 years in the wilderness share price-wise. So, again, and you said on Friday too, mate, separating the business from the share price is really important.

1:01:23Yeah, good point. Now, look, I own – sorry, fair disclosure. I own a NASDAQ ETF, units in that. I don't own an Australian tech ETF. So, my money is probably where my math is to some degree. The problem, I suppose, if you're saying, right, you're investing it now and then it's going to be, you know, an investment forever from this point, Do I know for sure that one or the other will outperform the other for the foreseeable future and thereafter? No. I'm with Ram, though. I've said it lots of times. It feels like a marketing line, which I kind of shrink from. But these are the companies that are inventing the future, right?

1:01:55There's some cool-strand tech companies doing really cool little stuff around the edges. And it's great because you're in this market. You're doing a great job of that. Technology One is a great company doing enterprise resource planning software for councils and governments and healthcare. It's been a great success, actually. Right. And great. but it's kind of niche-ish versus as you say mate meta which owns facebook trying to invent virtual reality you know or amazon trying to colonize the world with the e-commerce or you know the sheer size of these things i own amazon shares um it's so look i think i'm with i'm with ram i think the us is far more likely as a as a group of companies to outperform i dare say those companies probably end up with a bit more froth and bubble in their share prices and a bit more Pessimism in their share process from time to time.

1:02:39So I wouldn't want to say at this particular point, this is the, you know, from this point, this is definitely going to be a winner. But man, if you think about 20 years in the future and say, where are the best businesses? By the time you're 80, Francisco, where are the best businesses in the world going to be in the tech space? Probably the US. Will we have 20 years of underperformance? I wouldn't expect so. So I would do that. Again, you can always do both, right? There's no need to choose one or the other, but a very, very, very different set of businesses and very different scale. I share, gosh, I'm not going to be able to give it the proper credit here because I forget where it was.

1:03:11But I read an article recently talking about the potential for SaaS disruption. So anyone who's been investing for a while, remember the SaaS way, right? We all went to the cloud. It seems so passe now. But at the time, I was like, ooh, what's the cloud? How does that work? I don't have to get a floppy disk and put it in the computer and run my software locally. Kids, ask your parents. Yeah, there was a time before that. And I'm happy to say I did very well out of that boom. That was great, right? That was a really nice disruption. Industry disruption creates a lot of opportunities. One of the really cool use cases of AI has been in aiding of development, of coding, of programming.

1:03:57So where it was once, and it's largely you need to learn a whole other language besides just sort of having the mathematical mind to do it. But there's a lot of developers out there, some really great developers that are out there. But you and I, Scott, are not coding up a bit of software anytime soon. We might be able to, though, in really only a year or two, where, in fact, there's already some really cool demos out there where I can just say, make me a page that looks like this. And I can iterate on that. I'm oversimplifying here. so so one of the the article was making the point that it's sort of like unless there's something else to the offering like if it maybe there's a network effect because it's a social platform or something like he says with bias with someone who runs a an online social platform but but unless you've got something above just the value of the software so if you're probably being disrupted because someone else will be able to spin up a pretty great version of it very quickly it may have taken you and look trust me for someone who's built software before it's a lot harder than you think it takes a long time you got to pay very high paid developers a lot of money to make it all sort of happen when i've got an army of developers who are all excellent and i pay a 20 a month subscription fee to access them and i'm you know there's a there's a million kids in their mom's basement hacking away like there is the potential for a real flood of new apps and low cost high quality to flood the market so there's i think there's a lot of tech companies on the ASX, which will struggle to have a point of difference when they're trying to sort of sell software at a$900 a year subscription, for example, when there might be someone perfectly happy to sell it for$1 a year and just get – like that technological price deflation is a risk.

1:05:34That's right. So tech – yeah, on IT, I think they often have very powerful network effects and a lot of power sort of cruise to the top of these stacks in a lot of ways. But things move very, very fast. And that's one thing to be wary of as an Australian tech investor on the ASX is just how quickly the landscape can kind of change. Do you remember Reckon? Reckon before zero was a great little company. Had a wonderful history. I owned shares at one point. I owned shares in it. Yeah. And it didn't do well for me because they were late to the SaaS party in the transition. But they had everything going for them, everything going for them.

1:06:15And someone found a way to deliver the exact same bit of software much easier and much better. And imagine if you and I can now spend a weekend with some AI agents building a better Xero. Does that put Xero out of business? No, I don't think it does. But for a lot of people running businesses who want accounting software, who look at some of the fees that Xero is able to charge, I think, well, maybe, I don't know. The future is in flux is all I'll say. Correct. And that's always the case. Mate, healthcare is interesting. He asked what companies to exclude to Ramsey, ResMed, CSL, or your favorite study with P, ProMedica, I think we can assume.

1:06:47I would throw in Cochlear as one business in that space that definitely included. I think that's probably... I'm going to say that is the lowest risk of the five, in my opinion, which is interesting, but you might have to review. I don't own it, but I've recommended it before. Which would you exclude, Matt, out of that list? I can't give an honest answer because I just haven't done the work. I'll give some thoughts from the hips, but just take them for what they're worth, right? Because the real, you know, you need to have a variant perception to the market. And you're only going to get that if you've actually spent a bit of time investigating and looking at what does CSL do?

1:07:28Ask the man in the street, what do they literally actually do? Name the different business units, name the economics, name their major competitors, name the markets in which they operate. Like, you know, and I just haven't done that for a long time. So it's going to be like, all I can base it on is they've all got a long history of wonderful wealth creation. They're all, I think, deeply sort of motored kind of companies. I think they'll all be around. So it's a hard one to sort of exclude on that basis. And a big part of it would be the valuation. If it wasn't for the valuation, ProMedicus, anytime.

1:08:01They've got the far best margins. They've got the far longest runway. They've got the far best economics. They've got the far best management. You know, the most scalable cost space. I can go on and on and on about ProMedica's, but it's at a PE of 120 or something. You know, it's just like, I can't. You know? So it's a really wimpy answer. I'm sorry, but that's the answer. I ask which one you exclude that, not which one you would choose. Do you have a - Maybe Ramsey. Maybe Ramsey, because it's - Again, I haven't looked at it for a while, but from memory, they've got a lot of property and a lot of debt to support that kind of property.

1:08:37And so it's not necessarily - I mean, there's a lot of advantages to not having to lease and the rest of it. But there are costs and risks and everything around that. And they operate, I think there's big European operations and stuff. But yeah, take this with a large grain of salt, because there'll be people who know these companies well going, you're an idiot. What you don't understand is X, Y, and Z. Yeah. I would also exclude Ramsey, actually, mate, which is disappointing, because it means that there's nothing exciting to say about it, particularly for all the reasons you've said. this is a very large capital-intensive business, very hard to move the dial in terms of growth from this point because it's already so big, but also there's not particularly great financial components.

1:09:17You know what I love about the question? Francisco has highlighted it beautifully. He's called it a private hospital property-listed company. That's exactly what it is. And I think what I find fascinating is the things we call it, a bit like tech. We say tech, I've said before, there's a massive range of what is really tech, and none of it's really real. It's retail. happens to use technology or it's you know consumer goods it happens to be sell a a product that has a computer chip in it um these companies are very very very different you know uh even frankly resmed is it health care i mean it makes machines you know like it is a consumer product or is it health care well i don't know you know does it help your health yes okay what's an eye what's an apple watch if it has you know ecg monitoring uh is that a timepiece or is it you know i don't mean to be deliberately obtuse i guess i'm just making the point that these big big you know terms again putting putting pro medicus in with csl again think about the difference between those two businesses um i'm not saying either is right or wrong but it's a very very very broad brush squalmol healthcare yeah um funnily enough pro medicus is probably more a tech company than a healthcare company and plenty of other companies called tech companies probably retail companies right so you think well what is it really um i francisco i'm going to quickly just take a again as I like to do.

1:10:31Reject the premise of the question. Do you need any healthcare companies? Maybe. Do you need three of the four? Probably not. In fact, almost by definition, you can add that to other stuff. How many sectors, how many companies do you need your third best healthcare business? Maybe. If there's three great healthcare businesses and they're all better than every other idea you've got, go for it. If your best healthcare business is your 25th best idea, you probably don't need any of them. So I will kind of just start by taking a slight, or not start by, add to that by taking a slightly different perspective.

1:11:00But I would also exclude Ramsey for the reason I've just talked about. As a business, I would absolutely exclude Prometheus on valuation, not because it can't, but just because who knows. Again, we talked before, was it Friday or Sunday? I can't remember. Today or Friday? Just about the too hard basket. If you're in a business on a PE of 120, it's got to increase profits sixfold to be on a PE of 20. And when it does that, if the market has to stay flat and you still don't make any money. So just by the current price, right now, profit might have to be six-ish times, I think, call it five, call it seven, who cares, larger, right now, now if the market goes up 20 % while it happens, well, you've got to go up another 20 % to catch up with that.

1:11:40If the market goes up 50 % while it takes that time, then you're 50 % behind. I'm not saying it can't do it. If anyone can, it probably is ProMedica's, given the scalability we just talked about. But probabilistically, if I have a scarce amount of money and I want to invest that, my most likely idea is, do I want to invest in a business with 120 PE? No. So again, not saying it's wrong to do so. I don't want to do it. I don't have the required degree of certainty given the sheer mind-boggling maths that's required to do well from that investment at the current price. So I don't know. I might even exclude Prometicus before Ramsey, but I'd probably exclude both for very, very, very different reasons.

1:12:18Resmin I like a lot. CSL I like a lot. Notwithstanding to Ram's point. Can you really get your head around it? No, you've got to trust management. The sheer size of CSL means in five years' time, it's going to have to invent some income streams that I don't know about yet because it's just so huge. The market can't grow organically enough, given how big it already is. You've got to add stupid amounts of billions of dollars worth of revenue and market cap. Can they do that? I don't know. So you're going to have to trust management and background and R &D spending, all that kind of stuff. I hope they can do it.

1:12:48So that's probably less certain. ResMed, I think the sleep apnea machine market is great. I think the ozambic risk is way overblown, but it's not nothing. I wouldn't hold ResMed forever. Cochlear, the same. if a gene therapy fixes a lot of deafness, the cochlear implant might be one of those things we see in museums in 10 years' time. Maybe not. So, yeah, that's right. Yeah, I like all of that. Just while you're doing that, I had a quick look at Ramsey just because, as I said, I hadn't for a while. So, wow, did COVID really knock the wind out of their sails? So I'm trying to piece it together just from the numbers, but I reckon a pretty good guess, and people who have been following it will know if this is right or not, But I suspect they had a massive impact.

1:13:28They raised shares. It looks like they raised 10 % or 12 % extra shares. It was a big dilution kind of event. And their return on equity, their earnings just fell away. But let's say they get back to their former glory. Oh, the point I wanted to make was this is a good example of when capital structures can go against you. Right? Because they did have a lot of debt, which was fine because it was hospitals. And hospitals are reliable. And there's a super safe source of revenue and blah, blah, blah, blah, blah. Well, it is until it isn't. And it's not to sort of – just to make that point, right?

1:13:58Because this is when things go really hairy for companies that carry a bit of leverage and suffer an event like that. The other thing, though, is with it, you look and say, well, okay, maybe they get back on their feet in the next few years. Looking at the forecast, they're saying$1.50 in dividends in three years' time, recovering strongly. They're doubling, in fact, from where they are at the moment over the next three years. well a dollar fifty uh in dividends what is the share price now fifty dollars yeah yeah that means that in three years time if this analysis is correct i'll have a company that's yielding me about three percent on my purchase price so in three years time right not now in fact it's it's 0.15 or 1.5 % or something now.

1:14:42So yeah, I would exclude Ramsey. I'm not going to flog the horse too much further, mate, but I'll share some numbers. Five years ago, sales per share of 56 bucks. Now sales per share of 62 bucks. So gain of about 10 % per share sales-wise over five years, which is anemic at best. Now, yes, COVID in between that, maybe they're going to bounce back. They did have a decent jump between 2022 and 2023. So maybe this financial year is different. And again, I'm not saying it's not. I'm just giving you the numbers. Five years ago, earnings per share,$3.20. Earnings per share now$1. So fallen by two thirds over that period of time.

1:15:21At the same time - I bet you it was the cost of capital. I haven't done the work, but I'm going to guess here. A bunch of debt, interest rates went up. Their costs went up because of all of COVID. Their revenue took a knock. Yeah. Over that same time, that share count has increased by 10 or 12%, as you say, Ram. and their debt has doubled. None of that is the sort of story you want to find from a business that frankly, now again, COVID is really weird. So don't draw any direct conclusions from this. It's the weirdest time and or I've ever lived through as investors because it just dislocated everything and trying to draw any trends for any of this stuff is impossible now for almost any business, right?

1:15:56There's a break in the series, as they say. But that being said, this is not the sort of business you're going to look at and say, wow, it's doing so well, I can't wait to buy some of these shares. And it's why resiliency is important too. Yeah, it's not so cheap. You look at that and go, well, it's doing a bit ordinarily, but it's cheap, so I should buy it. I could get behind that. If it was sort of like, look, we had this Black Swan event, right? And it's knocked everything around, but structurally, we're still fine. The same opportunity persists and the rest of it in a few years, we'll get back to it.

1:16:26And if I had this proposition in front of me, and maybe that is the business proposition, but I'm actually getting a 3 % yield today, with some franking credit. Okay, maybe that's a very different question. At a 1.5 % yield? There you go. Probably exclude Ramsey. Mate, we've rabbited on for long enough. You've got to go and run another couple of marathons this afternoon, so I don't want to do it too much longer. Will you come back next Friday? Yeah, you bet. Excellent. Fools, thank you for listening. If you have any questions for us, info at fool.com.au. Hit us up on the socials. Andrew is at sage underscore simian at strawmaninvest exclusively on Twitter, which I will still refuse to call by its new name.

1:17:07I am on Twitter and Insta at TMFScottP. Or you can get me on Facebook at facebook.com forward slash Scott Phillips. Money on Mastodon. I was on Blue Sky these days. I haven't logged in since I got the account. So I'm not sure what I am. I think I'm the same as that. I'm not entirely sure. You on Jack's new thing? Jack's all about Nostar these days, which is a whole other conversation. And we shan't have that just yet. Until next Friday. a lot. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation.

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