Mailbag: incl. “The meats of our philosophical stews”. May 19, 2024

31:34No, it's not. In fact, it's wrong very often. So what you need to do is you need to have a view of the business and its likely growth prospects. And once you've got that, then you can actually put that into a PE very effectively. So I would say that if I thought a company like, let's go with Woolies, I think they can probably do 3%, 4%, 5 % on average long term, something around that kind of ballpark, sometimes better, sometimes worse, but on average it'll be around that. Given that, for me, I think that probably anywhere between a PE of sort of 14, 17, 18 is probably about right.

32:17Because when you sort of – this is hard to do as well. You get – PEs actually very much relate to DCFs and stuff in a way. They very much relate to cash flows. Actually, this is terrible, mate. I'm answering this so badly. Let me answer it by flipping it around. Instead of talking about the PE, talk about the earnings yield, which is the PE just flipped on its head. So instead of dividing price by earnings, divide earnings by price. What is the yield? So for every dollar I'm paying for the shares, what's the yield in terms of the earnings on that? What's the earnings per share of that? That's much more informative, right?

32:55And then you'll start to find that PEs make a lot more sense when you sort of look at it there. So if I say a PE of 20, is that high or low? Well, a PE of 20 is an earnings yield of 5%, one divided by 20. So what I'm really saying is, am I happy to get a 5 %? Now, I'm not directly getting it because they're not going to pay that all out as dividend, but I am an owner of the business. And as an owner of this business that is generating a 5 % earnings yield, what do I think about that? Well, that's interesting, isn't it? That's much more informative than an ununited 20 or 16 or 12 or something. So you can take that to bigger extremes.

33:34Is a PE of 50 high or low? Well, it's a 2 % earnings yield, and that's not very good as well. But if my earnings are going to double next year and then double again and then double again, then all of a sudden it's looking pretty good, right? So start with the earnings yield. Is that high or low? Look at that comparatively. What else is around? What can I get in a term deposit? What can I get in an investment property? What can I get anywhere else on the market that's like that? And then how can I make that make sense? If the market is giving you a PE of 50, it is saying in no uncertain terms, we expect growth and we expect quite a bit of growth.

34:09So then your question is, well, geez, at 2 % of an earnings yield, and if I probably want something around double digits, I would say like 10%, something like that, I probably need to see some close to 8%, 9%, 10 % double-digit kind of earnings growth sustained over a reasonable period of time for this to make sense. Do I think that that is likely? If the answer is no, then it's too expensive. If the answer is yes, then it's fairly priced. If I actually think it can grow more, then it's actually cheap, even with that PE of 50. I've done such a bad job at that, so I'm going to ask you to – I'm going to pass the baton and ask you to solve it for me.

34:48You summarized it beautifully. No, I didn't. There was a thing that used to be used a lot during the go-go days of the dot-coms. It wasn't very good, but it was interestingly, they called it the peg ratio. Remember the peg ratio? I do. It was the price earnings ratio divided by the growth. Yeah. And the idea, yeah, that's right. The idea, it was a times growth, you know, whatever it was. The idea was basically that - Divided by it. There you go. That basically the faster the growth, the more the PE you could pay. And doing a quick PE divided by growth makes a difference, right? So you've got a company with a PE of 20 growing at 1%.

35:17Okay, that's a PE. That's a peg of 20. A company with a PE of 50 but growing at 100 % a year, that's a PE of a half. And that kind of the lower number, the better. One was fair. Less than one was good value. More than one was expensive. And I don't think that's necessarily – It was way too – Massively flawed. Thank you. But that kind of idea that it is the relationship of the PE and the growth. That's all it can be. Now, to ask about where to go next, I'm not going to give you a full financial analysis course because you don't want one and I don't want to give one and it'd be boring for everyone else.

35:48a couple of things. Firstly, so have a look at the growth to Rams point. Add to that the quality of the earnings. And when I say quality of the earnings, all I'm really talking about is two things. One is, is the company using a lot of debt or is there something else in the business that kind of makes it riskier than it otherwise looks? And then secondly, simply how long can that earnings continue at the current rate and or grow to Andrew's point? So it's kind of the same thing, but there's that question of, don't just pick a current number of earnings and say growth or X percent, therefore it's worth something.

36:15If it's a cyclical business, well, don't start with a peak earnings level. Don't start with a trough earnings level necessarily. That gives you a big margin of safety. But think about just the quality of that earnings. It's a horrible term. It's a bit of a jargony term because there is no easy definition of quality of earnings. But just think about how likely that would be continued and how much risk the business is taking or not based on how much debt it's got. That's probably where I'd go next. The next step, if you really wanted to, is you mentioned discounted cash flow RAM. I think there's a lot of value in investors doing a DCF just to understand the moving parts and the value of the compounding.

36:46It's said regularly that humans can't understand compounding or exponential functions. We think in straight lines. But if you have something that grows at 10 % every year, it doesn't go from 10 to 110 to 120 to 130. It goes from 10 to 110 to 121 to 133. The increments get bigger as the percentage stays the same because it's not a bigger number. And we just can't think that way instinctively. What a DCF will let you do, grab a DCF calculator online, do it yourself in Excel. it's a little bit of work and you have to kind of understand some of the thinking it can you might have to really kind of push through for an hour or so with excel and kind of go oh man what am i doing how does that work or google sheets by the way if you go over excel you use google sheets does the same thing and do it just because when you start to put the numbers in and then play with the changes those numbers and really see what it does and if you're not particularly nerdy you may not want to stick with it very long the reason i say that is because uh it's another way of thinking about the growth question that andrew raised is how much growth is implied by the current share price.

37:42So if you want to go do a little bit more with numbers, play with the DCF. If you don't, think about the price earnings growth ratio, not as, please don't invest on the basis of it, but use it to just get yourself a bit more familiar with how much am I paying? How fast is it growing? And the relationship between those two numbers. There's no perfect answer. There's no perfect outcome. The future is inherently unknowable. So it's all just indicative. But what it generally gives you, and to your point about Buffett Ram, you know, Buffett doesn't do a DCF in his head, but he kind of done enough of them and thought enough about it to roughly work out that if I've got earnings of this, I think it grows roughly at that.

38:14I'm going to pay roughly this much for it. That's how he's doing the math. He's got those in his head. And you can actually, in the old, old, old days before computerized spreadsheets, there were just tables. You could use a table and you can run your finger down one side and get the growth rate, run the finger along the other side and see the price, and it'll give you a rough multiple. And so you could, yeah, that's what Buffett will have in his head, I'm absolutely sure of. Okay, if I'm paying this much, I'm growing it this much, there's how many times I'm saying I can afford to pay and get a good result.

38:38There is a heuristic and a table of data you could create. You do it yourself and yourself. You want to create that table. That's kind of how I think about it. Can I just – this is not what – Sir, what was the listener's name? Rob. Bob, the market's doubled in the last 10 years. So it's great to have you back. Great to have you back. Absolutely. But let's recap what's happened in the last 10 years. Actually, let's not. like oh my god how scary how scary yes yes yes um yes and it's it's it is always something you'll look back on with regret you will yeah um so welcome back uh the next 10 years are probably going to be even crazier i dare suggest uh who knows um or not but that's the thing we don't know we don't know but you know generally you'll probably see that that kind of thing so the worst mistake you can make is is not being involved in that even if it i know a lot of the stuff we say it's just easy to get into the weeds and it's very hard to to sort of articulate a lot of these kind of concepts and it's just perfectly natural for a lot of people to throw their hands up in the air but just by the passive low cost index ETF and you got that guaranteed guaranteed right so I just I just wanted to to to make um that point the other thing I would would do as well is is just with all of this um you you never i think i went through this you went through this everyone goes through this when you first come to the market you look for a set of metrics or numbers or formulas that if you only knew you would know which stock to buy exactly and it doesn't exist it doesn't exist um on strom in the other day some of the members were talking about rfg group remember remember rfg group oh my gosh thank you uh i don't want to i don't want to bring up bad memories we both recommended it back in the day and and what was interesting about retail food group was these they own uh brumby's michelle's patisserie uh uh dunkin donuts a whole bunch of stuff now if you looked at the financials their return on equity was excellent.

40:48Earnings per share was consistent and rising. Balance sheet was strong. I can rattle off every reason as to why that was a good investment. It went down 99%. Yeah, that's right, exactly. It went down 99%, right? And I wouldn't touch it with a barge pole today. What did they do, by the way, incidentally? They completely lost sight of the end customer experience and they engineered their way into disaster. By trying to cut costs, They forgot the actual value proposition of what it was that they were doing. And you can do that for a while and then it all collapses. But my point is that no amount of financial metric or balance sheet study was ever going to really reveal that.

41:31You needed to look at a whole bunch of other qualitative factors to sort of realize that potentially something is a little bit iffy here. And people did start to sniff it out earlier than we did, that's for sure. It was a really great learning experience. I'm glad it's sort of embarrassing as it is to raise it because I don't, I never beat myself up with making a mistake. I beat myself up when I repeat the same mistake. Exactly. Exactly, yeah. So what I'm trying to say to you is this is a really powerful tool to have in your toolkit, the PE, but it's only one part of a far broader holistic consideration.

42:06And it's only something that's ever going to make sense when you've got that ability to incorporate that one measure into a broader framework of thinking. And there's no shortcut to it. There's not. I mean, if there was, we'd all be Buffett. We're not. You know, we're just not. You could count on one hand the number of really successful long-term investors. Most people just give up or they're not prepared to put the work in. And again, there's no shame in that. You know, a lot more people could be triathletes if they wanted to, but most of us aren't cut out for. I'm certainly not, despite my Sunday morning exercises, right?

42:44But the point is, you've got to do the work. And I think this is the thing I struggle with a lot of my mates who are only interested in stocks when the market is pumping and love to laugh and point the finger when it's not. You know, and it's just like, but when it is pumping and things are good, they're just like, what do I buy? What do I look for? As if I'm just going to be able to have a five-minute conversation. And like I even know, right? Like I'm figuring this stuff out as I go along. And I think true wisdom in investing knows is that it is a lifelong journey of learning, of making mistakes, of trying not to repeat those mistakes.

43:16And I just want to sort of emphasize all of that kind of stuff. Because if you're sitting there listening to this going, you've just confused me even more. And that is very difficult. And it sounds like a lot of hard work. Then I say, yes, that's true. But however, however, if you're a curious individual and you like to reason through these things, there is exceptional reward. Not instant reward. I don't know how to get rich quick. Exactly. But there is exceptional long-term reward. The odds of getting much slower are extraordinarily high. Oh, it's so. Do a few things right. Be diversified, add regularly, stay the course.

43:54It's very, very hard not to do well. I mean, if I've just got to put enough money in, but the math looks after itself after that. And even if you are the person who's prepared to do all of that, you can't rush it, right? It's going to take time for these thoughts to simmer and percolate and incorporate. And it really does. And then during this whole process, you're going to be given all kinds of false signals because you're going to do dumb things that get rewarded and you're going to do smart things that get punished all the time, right? 100%. And so I guess what I'm trying to say is I wish we could give the easy answers.

44:29We can't. But I would also very much encourage you to stay on that journey because it is not just monetarily. It is incredibly enriching to the soul, I would say. And it's very satisfying intellectually as well. And stick with it. beautifully put well done Motley Fool Money for more subscribe to the free newsletter at fool.com.au forward slash listener hey James sent us an email a message and it starts with gents one for the Andrew and Scott AI large language model machine I can tell you James if someone's going to create an AI bot it would not sound like Andrew or I would all have the content that we provide so we are We are iconoclastic for a while yet.

45:13Eventually, maybe there'll be a replacement. Not far away. I say that. By the time this goes away, someone will have invented one and sent us a link to it. I like the Sattler on Waldorf. By the way, if you haven't checked that out, I did post that image on my Twitter account. James says, with all this talk about productivity, something that's been on my mind is also the role of different industries in the economy, particularly the distinction between industrial companies versus companies in the resources and financials sector that essentially provide inputs for the industrial companies to create value with.

45:46Yes. Which, of course, make up a lot of our ASX index. Yes. How do you guys think about the distinction in value creation from these types of entities when you think about economics and investing generally? James says, Brownie points for any further thoughts on how this may tie into career planning for how you may create value at different types of employer companies. Thanks in advance for your thoughts and Fool on James. You go first, mate. All right. You've got some thoughts, haven't you? I do, but I feel as though I always have first crack at the win. Yeah, you sound pretty positive, so I was going to let you jump in.

46:22All right, I'll go first. So let's start with the economics, get back to the financials, the investing, sorry. Economically, I am, man. I think we need, the money doesn't care about the values we assign to the money or to how it's created. So honestly, on one level, mate, you're absolutely right about productivity and value add. On the other hand, we've got a lot of really, really, really valuable stuff under the earth, and we might as well dig it up and sell it. And there is no shame and no, that's not second-class company. It's not second-class money. It's not, if it's there and people want it, sell it to them.

46:58Like, it makes no sense not to do that. Similarly with our financials. If people want to transact and find value in using you as an intermediary, then that's fantastic. You are creating value. I think we can fall into a trap a little bit. I'm not going to say you're doing this, James, but we talked on Friday about the Future Made in Australia stuff that the government's on about. And it's not just making stuff that creates value, right? There is arguably more value in providing a financial service that helps a business along, that creates that opportunity for that business to grow or thrive or whatever, than making a$6 t-shirt for Kmart.

47:34Now, I'm not bagging either the t-shirt manufacturer or the bank. i'm just saying there is i think it's a little bit economically at least a little bit of an artificial difference in that context now the minerals run out at some point so yeah we better have plan b now hopefully it's 100 years away uh by the way with climate change some of those hydrocarbons in particular might need to stay in the ground in which case maybe it's not 100 years away but there is absolutely no shame no problem no drama and even productivity wise um productivity just measures effectively the amount of input labor or capital so that the value of the input per unit of output if i can use a machine or a person and dig up 100 bucks worth of coal if i can do that for less than 100 bucks that's productive if i do it for 120 bucks i'm not making any money um so overall i wouldn't draw too strong a distinction between them in fact what i would simply say is productivity as a country is about maximizing the outputs per input and so if i can get$120 worth of coal out with an hour's work, or I can make a$6 t-shirt with an hour's work, I should do the coal every day.

48:36There is no downside, no negative, no whatever about that. And same with banking. If I can, or financials more broadly, if I can create or sell an insurance policy to someone that actually creates value for them, and that's, you know, it's not going to be value until I need a claim on it, but gee, I'm glad there's an insurance company there when I want it. I'm glad there's a bank who's going to lend me the money to buy my house. I'm glad there's a bank account I can put my money into. Andrew will have different views on financials possibly based on his view of money but but for now at least let's let's go with that so that economically that's that's what it's at there is absolutely a need if I we talk about industry policy a little tiny bit tangentially on Friday there is potentially some role for government arguably on a social level not an economic level to have a more complex economy just to protect us from the downsides of being too concentrated we just finished talking about diversification in portfolios we have a relatively concentrated economy.

49:27It's not as concentrated as people think employment-wise because only a really small number of people actually work in the resources industry, less than work at Mac, as I'm told. So, you know, we're not as government revenue-wise as concentrated. Employment-wise, not so much. I think we kind of make too big a deal of the houses and holes thing. It's all a bit ha-ha-ha. We need to be careful that we don't do too much of it, but it's not as concentrated as it otherwise seems at an employment level, which is really at the end of the day, what matters for me and you. Investing-wise, very, very, very, very different.

49:59Because if you're an investor, you want to max... What's not actually that different? It's opportunity cost, but in a different sense. You want to put your dollar down and get more than a dollar later. And so what you want to find is a company who can grow their business and make your dollar worth more over time. And that one there is not so much for me, at least, a sector starting point. Ends up in a sector. I'll get back to it in a second. But it starts with actually, what does this look like as an investment? Now, I want, for example, businesses with competitive advantages. I don't care which industry they come in, nor do I care which industries they're not in.

50:34I do a company by company and say, right, where is the opportunity for me to, or for that company actually, to create more value for me? It's going to be where they can either charge more, grow faster, do better, be more efficient, be more profitable over time based on what they do. Very, very, very, very, very hard for a miner to create economies of scale much past a certain level. Yes, they can have bigger mines. You just can use machines rather than people. It's going to take one machine, one hour to dig X amount of iron ore. If you have a second mine, you've got a second machine. So you can multiply it, but you can't get economies of scale in the same way.

51:12Yes, one CEO, one CFO, one HR manager, but two machines, two men or two women doing that work versus for example a software company that builds it once and sells it to one person then 10 people then 100 people and a thousand people a bugger all incremental cost other than the sales and marketing a company like coke has a fantastic brand that you couldn't kill with a stick and so they can charge more for a very very very long time than their competitors and when things get tough coke's gonna be okay pepsi's gonna struggle on the home brand coal is gonna go broke so there are there are sources of competitive advantage it's really rare for a resources company to have a sustainable competitive advantage uh the closest they get is low a low cost advantage which our iron ore miners have over their international competitors and that's really really good much past that very very hard very hard and even if they have one it's the incremental value they create is relatively small because you're selling a ton of iron ore and yes the iron content matters but but for the equivalent quality iron ore tonnage you're gonna get the same price no matter where it's mined who it's mined by what brand you put on the ship it's all the same stuff so in that context very hard for a miner to grow productivity at a company level faster than a company in a different industry i mentioned software um you know retail by the way has a great advantage when they become national brands you know the opportunity for a super retail group for example it has bcf and rebel and mac pack and super cheap auto they get fantastic economies of scuff from advertising which is one of their big competitive advantages your local car parts mob might send a brochure around put it in the letterbox uh and you know wherever they send it if you don't go to their shop they get nothing no value out of it super cheap that throws out on a bus or a tv out or something else you're talking to you know 27 million australians at the same time or whatever portions see it um that's a massive competitive advantage once you get to that sort of size and scale woolies and coals the same for example so that that's an answer um i don't know how good it is ramble ramble improve it in terms of career planning i'm going to say something entirely different james which is um well actually not different go if i had the choice i would always work for a growing company because growth means opportunity and it also means less chance of redundancies and whatever else is find a growing business that's doing good things um i don't mean good as in ethical but go for that if you want to i just mean a business that has a bright future it's just going to be a better you're going to like going to work more you know more success less stress less unhappy bosses and all that kind of rubbish to do that um and in that vein if you can find a business that has those competitive of advantages, just as an investor would, you simply like to have a better career on average.

53:40Again, no guarantees and individual circumstances, the boss has always come and go. But working for a growing business is just so much, I know from experience, so much better than working for a business that is stagnant or declining. Ram? Yeah, and just to extend that, make yourself the kind of company that you would invest in. Yeah, nice. You want to be able to bring something to the table that isn't commodified. So if I'm going to go clean toilets, and all of us can clean toilets, any of us can pick up a scrubber and a bottle of bleach and we can clean a toilet, right? So that tends to be a very low paid job because it's a commodified sector.

54:23Very few people can operate on a brain. And so turns out the brain surgeons get paid a lot more, right? Now they're very extreme things. So what I would say is try and make yourself as unique as you possibly can. And don't come at it from a too analytical angle. Because you've got what you've got to work with, right? And it's all good and well for me to say, you know what? Brain surgeons, I'm just not smart enough or disciplined enough or hardworking enough to ever be a brain surgeon. That's not realistic. But there are some things that I can do pretty good. And I think all of us have something that we're just better than average at, whatever it happens to be.

55:04So find out what that is for you. And importantly, make sure you enjoy it. Because if you don't enjoy it, even if you are really good at it, you're not likely to succeed. So there's a lovely Venn diagram out there somewhere that has something that I'm better than average at and that I enjoy. And isn't easily replaceable, right? Then you will succeed. I guarantee you. That's why resources – so I was going to direct James to motivatedmoney.com. Not to shill Peter Thornhill's work, but he was where I first saw it, where he's got these very long-term charts which looks at the market, but he breaks it up into industrials and resources.

55:52And industrials here is best defined as a company that makes stuff. resources just deal with the underlying commodity right so if you go back to 1980 and you look at it on an accumulation basis so you factor in dividends which why wouldn't you factor in half of your total return so you obviously you do you factor in dividends and factor in share price growth you put a hundred thousand dollars into the asx in the end of 1979 you've got eight and a half million dollars actually i lie because this goes through to 2021 so it's probably a little bit more than that now. But you get the picture, right?

56:24Not too bad. Had you done that to the resources sector, the same exact thing, you've got half as much money. That's interesting. Had you done it to the industrial sector, not as S &P defines it, but as I've sort of just defined it, and as Peter defines it. Non-resources. Yeah. You've got twice as much as the all-olds. You've got$16.842654 million from your$100 ,000 investment. That's really interesting. And it goes to show you that the, where the, the value add is where, is where you make the better, the better money. Yeah. Right. Just to mess with your brain a little bit though. And this is, this is, this is a circle you have to square.

57:06If I want to look at any random period in time and say, what was the best performing stock over the previous five years? It's always a resource company. Always a minor. Yeah. Correct. Always is. And so how do I square those? I've just said on one, they've tended to like go half as well as the market. and yet they're always the best performing stock. It's because in this space you have the incredible outliers. So you do have the thing that's 18 standard deviations away from the norm that goes from one cent to$100. And the big industrials or just any half decent established industrial is going to find that very, very difficult to do.

57:40But they're the edge cases. It's like me saying the best investment return is a lottery ticket. It is. It is. I'm going to pay$4 to get a nice little bit. You can't make more. Correct, exactly. And I'm potentially going to get$20 million from that$4 million investment. So when you say to me, what has been the best performing investment over the last, at any point in time, I'll say, it was the dude that bought the Powerball ticket had the best investment. So you have to deal with averages or medians. You have to look at it in a more statistical lens. And it just turns out that the industrials are going to give you more.

58:16It doesn't say you don't invest in resources, But the only edge that a resource company has is scarcity. There's just not enough iron ore or there's not enough lithium. Low cost sometimes too, to be fair. You can buy a particularly low cost deposit if you're lucky enough. True, true. But even if it's not a very low cost, if it's scarce enough and therefore the price is high enough, you'll still be viable and you'll still be in business. The trouble is that scarcity evaporates by the very prosecution of that opportunity because everyone goes, well, my God, how many times have we talked about this?

58:48I'm going to do a victory lap here. But we said it. We called it. Everyone's, you know, losing their heads over lithium batteries. And, you know, like, yeah, yeah, we agree. We agree. But it's an awful investment because there's a lot of it around. And this price is going to send a signal to everyone with a shovel. Actually, that's not true because you don't really tend to dig it up with a shovel. You know, go get some lithium. Which is going to produce a bunch of supply, which if you've done year eight economics, you will know that, you know, increasing supply, all else being consistent, And even within the face of a high demand, we'll put prices down.

59:19And so the very thing that has given – the scarcity that has given you the opportunity of a high price sows the seeds of its own destruction eventually. And so it's just a very, very, very difficult industry to be in. So if all else being equal, favor the industrials. Yep. Love it. Really nice way to explain that one. Mate, one more, I reckon, to finish off. But really good question, by the way, James. Loved it. Loved it very much. what am I going to go with here? I'm going to go with a question, a late question actually, just to finish this off, mate. This hopefully is not too, might do I take too long?

59:54We'll see. It's a very broad question. Cam sends us an email. Hi Scott and Ram. I wanted to ask a simple question. How much is enough? The longer version is, I've been looking at compound interest calculators online and crunching some numbers. Portfolio contributions, he says, and mandatory super contributions start to add up to some pretty large sums if you compound them out for 30 to 40 years. So it got me wondering, how much is enough? When do you stop contributing as much to the portfolio and perhaps leave more money on the table for experiences or other lifestyle items? Are there any rules of thumb that can be applied here?

1:00:36What are your thoughts on the matter? Would love to hear what you both think. Thank you for all the great episodes, Cam. how much is enough ram it depends um i'm some for some people it's never enough um and they're always miserable no matter how rich they are and i pity them i really do yeah you know some of the happiest people i met are not i wouldn't describe them as financially successful i mean they're not living under a bridge but you know they're not driving a ferrari either um uh i think it's a very spiritual personal question i i i can't answer it for you i i can answer what the answer is for me me is enough where i can retire and have the odd holiday eat the kind of food that i want and live in the kind of house that i want and i've got very modest and i'm not trying to virtue signal here i just you know i i like for me wealth is freedom anything once i've got the once i've got enough money that grants me the freedom that i can wake up any morning and decide what i want to do with my day is enough.

1:01:38So I think once I've paid off the house, I reckon I'd only need one or two mil. I don't need a lot. I only need one or two mil. God, listen to me. Sometimes you catch yourself speaking. I don't know. I don't know if we knew that yet, by the way, right? Don't talk terrible, finger in the mouth style. One million dollars. One million dollars. But I feel as if I woke up to his old uncle Fred died and left me with, you know, enough money to pay the house off and have that. That's enough for me. You'll be done. Yeah. You know, we can still go on an overseas trip occasionally. Maybe we'll add a pool into the backyard.

1:02:12And I'm going to learn how to look after a beehive and plant chocos. I don't know. I'll figure it out. Like what did Thanos do after he completed his evil plan? He went and he became a gardener on some remote planet because, you know, he'd had enough. He'd reached his goal. Sorry, Avengers. Weird, obscure Avengers reference there. But I think that's what you want to get to. A lot of people, I think it just becomes a scorecard more than the actual money itself. They see their own value in the size of the bank balance. You know, the really tricky thing with this is as humans is that we are very, everything's relative and we're very social.

1:02:56And there's been a huge amount of research that sort of conclusively demonstrated this. how wealthy and well off you feel is more a function of your peer group than anything else you know i pick you up and i plonk you in downtown zimbabwe you can feel pretty pretty damn good about yourself right uh if all of your friends are multi-billionaires with their own private yachts and helicopters you're going to feel really hard done by um so that's going to be really hard too so i i do think you have to you reach a point i think i did anyway where it's just like i'm gonna stop spending money i don't have to buy things i don't want to impress people i don't like like that exactly we all do i mean i think a lot of us do that right because it's so like we again we're social creatures and then i just think well i don't have the money to do that i don't really want it anywhere and i don't really give a stuff what anyone kind of things you know this is what makes me happy going being able to go i'm gonna do it after this actually i'm gonna go for a nice little bushwalk around the corner it'd be beautiful you know immerse myself in nature it's going to cost me precisely zero uh and i'm going to have a massive smile on my face the whole time now you know maybe maybe if i had a ferrari that i could take a few laps around the um the racetrack on and then follow that up by some caviar and a helicopter ride to aspen i don't know maybe i'd be pretty happy with that as well but uh i'm not and and and i and i think you know there's a really good random thing actually i saw on twitter the other day from jim carrey and he said he wishes that everyone could have all the instant fame and success very early on so that they could figure out that it absolutely brings no pleasure because he's funny and actually quite sad it's sad well he nearly he was suicidal he went through a big period of depression because he just got it all so early on in his life and it's very common it's very common right so you know travel your own journey ask ask yourself what is enough and and everyone on their deathbed No one looks back and says, I wish there was an extra zero on the bank balance, right?

1:04:49Because you can't take it with you. It's always, it's social connections, it's family, it's friends, it's experiences. It's what it is. And it's the wisdom of the ages. And it takes a lot of us a long time to learn that. I'm still learning that. But the sooner you can learn it, the better off you can be. Love that, mate. My thoughts, Cam, are not miles away from Rams. I think I'm very lucky. I was going to have my wife, but also my wife has said, she doesn't know many people that care less about what other people think than I do, which I think she means as a compliment. And also I'm indebted to her for not caring that I don't care because I'm sure she would love me to dress more nicely.

1:05:32Are you wearing that? I heard that the other day. I went out the door and my lovely wife said, are you wearing that? I'm like, yes. I have, as Ram would tell you on the Zoom, I have about four t-shirts that I wear regularly. And the reason I do that is because when I wash them, I put them back on top of the pile. And so I've had to do the wash twice a week. I only go through three or four t-shirts and they come back out again. So I literally wear the same ones till I go. And then I'll be like, new t-shirts? Like, no, no, it's the fifth one on the list I haven't worn for six months. There's a little bit about me you didn't want to know.

1:06:02The reason I say that though, Cam, is that if you start with, to Ram's point about, you know, what do you really like in life? The other thing is I've been pretty like, I had a really lovely upbringing with great parents who really weren't particularly materialistic. And I got a great start from them. Basically, I love toys. I love gadgets. I like my computer. And I like camping gadgets. And they're fun. Other than that, though, I really don't actually need that much and want that much. And so, honestly, enough starts with not wanting more than you need. And we're finance guys. I spend a lot of time at competitive advantages and consumers and brands and stuff.

1:06:44And that's absolutely true. By the way, I love my R.M. Williams stuff. I've got one pair of boots and a belt and a couple of T-shirts from them. So again, I'm not immune to it. I like the brands that I like. They don't look at the T-shirts I wear regularly. They hang out in the cupboard. I wear the rubbish T-shirts most of the time. So if you start with that, then what you find very quickly is your needs actually shrink. So what is enough? Enough is actually understanding what you actually need and working out for yourself what's important. And I'm not saying everyone should wear crappy T-shirts like me or have our respective wives say, what the hell?

1:07:16But you know what? If I don't need the fancy car, I've just saved myself 10 grand a year in at least three payments, right? Probably more. If I don't need the fancy house in the fancy suburb, I'd probably save some money. I drive a secondhand Hilux, dude. And I love that car. And by the way, it's the lowest model version of it because I want to make it, I thought if I bought something that was nicer and it got dirty, I'd be unhappy. So I just bought the base model, right? because you don't need any more than that. Now, some people listening are like, oh, dude, you need to live a bit. Go and do this thing.

1:07:42That's great for you. Like, go for it. Seriously, go for it. For me, it's like, I don't need that much. So to Ram's point, okay, what is enough? Enough is a portfolio large enough to fund the things that I want to do with my time, which is exactly what Ram just said. And so for me, it starts with, what do you actually need? I don't want to be in the rat race. I see people drive down the street in their fancy cars and I see the fancy clothes, the car. I'm just like, oh, I'm so glad I'm not that person. and again if you are that's cool and it's not it's not a value judgment but for me what it means is i don't have to keep up so i've saved a fortune i try to keep up with people who i don't want to keep up with uh which again is your point around about you know people you don't like or don't respect um i also learned very early in life by the way slight tangent not much um i had a i had a colleague who was a real prat um a really nasty piece of work not a very nice bloke and i went i won't say what company was for and i just had this realization at one point of like i don't i don't want to try and earn the respect or admiration of people i don't respect myself and when you start there it's like oh man that opens up that opens up your world right i don't honestly care what you think of me if i don't respect you i don't give a stuff what you think of me and will that cost me occasionally a job or a something yeah but i'll tell you what my life is so much simpler and easier and so there's a long way of answering the question um about how much is enough for me it's about so in a perfect world i have an income that i earn every year and while there's always inflation expectations inflation or lifestyle inflation um enough for me i would i would stop well i would stop work no actually because i like my job but you know would i would i change the way i work tomorrow if i had a portfolio that generated enough income to replace my work income yes yes that you know enough enough to pay off the loans the mortgage car enough to generate passive income that replaces your income more or less yeah absolutely um i wouldn't stop doing this podcast they could they could carry out of this one in a box would i work five days a week with the responsibilities i have probably not um again i love my responsibilities but to ram's point i want to wake up in the morning go what do i want to do today i've got to work for the fool two or three days a week or i've got to do this much content i'm going to do this i'm going to make these decisions but i don't have to get up at eight i have to get i have to work till five and i have to by the way we don't watch the clock at the fool but you know that that kind of idea i i want to go on holidays that for me that's actually the other one is going holidays when i want go and see the things i want to see do things i want to do with my kid or just you know in life um so i think that's i think that's how i think about enough is you know in my current i have expenses that i pay for if i if i remove the tax i pay because you get some franking credits right so that's also nice but if i really broke it down said right i save some money every month to invest.

1:10:22I don't have to do that if I'm no longer adding to my portfolio. If I get to enough, that point, which enough is enough, I'm not adding to my portfolio because I don't need to anymore. So you take that out. You take out mortgage or rent or whatever, and you take out, you know, you're earning after-tax money. So you're getting frank and gross to pay for that. You do the math and go, okay, how much would I need to earn every year to pay for my living expense? That's the answer so work backwards cam start with what does my life cost how much of that do i actually really want to keep spending if i didn't have the new car every year but i had a you know a used two year two year old used car that i bought six years ago that i'm still driving it's perfectly great okay well that's it that's a pretty good start okay so now what does that cost you can pretty easily work out what your life's life's budget looks like and how much you would need in your portfolio to generate that kind of return and that's that that for me would be enough um i'm I'm going to finish, mate.

1:11:13We're way over time. I've said this before. I've used it lots and lots of times. It's a story told by Jack Bogle and it was about Kurt Vonnegut. Oh, I love Kurt Vonnegut. Yeah. Such a great author. Speaking of Joseph Heller, who wrote Catch-22. Oh, I love this. Now, I've heard Jack Bogle tell the story. I actually found the original piece that was written by Kurt Vonnegut, which is not exactly the same as Bogle's story. Bogle paraphrased it, but this is lovely from Kurt Vonnegut. He says, Joseph Heller, an important and funny writer now dead, and I were a party given by a billionaire on Shelter Island.

1:11:47I said, Joe, how does it make you feel to know that our host only yesterday may have made more money than your novel Catch-22 has earned in its entire history? And Joe said, I've got something he can never have. And I said, what on earth could that be, joe and joe said the knowledge that i've got enough yeah not bad rest in peace end quote that was kurt vonnegut sort of semi-obituary for it for joseph heller um it is just it is just spot on right you mentioned before and some people say never there's never enough if you if you measure your life by the number of shekels in the in the in the box you'll never have enough right at some point you say what is important to me and it's not going to be well if again if it his money then go for it like it's as ram would say regularly you do you um but for me it's like you know what life life is pretty good go and go and get out in nature go and have a coffee at the cafe go and do whatever now if you're 22 and listen to this i'm sorry you are still decades away from that and i don't mean that anyway you know um in a funny way i know i generally hate young people but you're gonna have to work and save and build a portfolio but don't don't don't work to live and don't don't spend or plan to spend 45 years doing it because that's what you have to do um don't spend as much this year and next year and the year after but save a bit more invest a bit more build a bit more of a portfolio again i'm not saying don't have fun i'm saying don't don't spend money on things you don't actually like or want why am i doing this why have i got a two million dollar mortgage where i could buy a house for 1.2 million dollars or why i've got a 1.2 million dollar mortgage i buy a house for half a million bucks why have i got this car why do i spend this money on these things if it's if you genuinely love it go for it like if it really brings you joy knock yourself out but it's like well i just actually you know what i don't know why i'm doing this and moreover if i didn't do this and could retire three years earlier would i do it yeah okay well there's your there's your decision and it's not easy and it's the rat race is hard right um because just everyone else is doing it and you're living to work with these people and you're trying to keep up with the joneses and i really really get it um i'm just i'm just weird and so i have never really felt that strong need and that's not that's not to give me any credit that's just happens to be the personality i am which makes my life easier um not everyone's like that and that's just kind of the way these things go let's wrap it but I'll say strong recommendation on Sword of House 5 or Breakfast of Champions two of Kurt Monaghan's most famous books but anything he has penned he's one of the great modern American writers he's just so good the prose some really bad movies made off it don't judge it on that it's like Hitchhiker's Guide to the Galaxy they've never made a good movie about that it's like an incredible book and Douglas Adams is one of the great writers as well so I'll say that and I just want to just thinking while you were talking there I think there is an exception to the rule for me where I would love to make a hundred million dollars yeah not because of the private island and the jet and that but it just it gives you up it gives you the resources to do things that I could never otherwise do even if I was perfectly content for me and myself and my family and we've got everything that we ever need for our modest thing that's that's great but I tell you what,$100 million in the pocket, yeah, I reckon I could do some pretty cool things.

1:15:00I reckon that for me is how you separate a, I mean, got to be careful never to meet your heroes, right? Because I'm sure, you know, but I'm being cautious now to name names because it might get me in trouble, but there are some billionaires. I look at them and go, I mean, I just love what you're doing. I love what you're doing. I don't 100 % agree with you. You've got some truly awful takes out there, but but wow like i i can't i can't drive humanity towards a multi-planetary species and someone's trying to do that like he's a nutbag in any other kind of way but it's kind of cool you know mike ken and brooks like doing some stuff with energy it's like they are they are doing things that is beyond their immediate um uh physical needs or wants or desires it's it's more about i can i am now i'm completely comfortable i don't need to work but i can now do stuff yeah great you know uh and there are other billionaires out there who's just going to spend all their money on lobbying for further tax cuts and you know they just again everyone knows who i'm talking about but but but there are a lot of them right and and i kind of think those people i guarantee you are miserable and they you know they've they've they're they're not going to die happy people um so you do what you you do what you can where you are too like i think if i if i if i had that much money at some point i actually would stay in the finance space i would do a not-for-profit financial education thing you said that's me yeah and that's not that's not going to change the world right that's not going to i wish i could cure cancer with the money well i probably could maybe i should give it some research and knock yourself out right but i don't have that facility i'm not an energy expert i'm not you know there are things i can and can't do i would probably try and do my best in my in my sphere where i can add some hopefully add some value with my time not necessarily the money because it's not gonna i'm not gonna celebrate anything i'm gonna it's not, you know, but the idea of just doing something that I can do.

1:16:52By the way, if you can't do it, Buffett's giving 99 % of his wealth to the Bill Gates Foundation. He's like, I can't run a charitable foundation. And this is what I love, just really quick aside, the humility of that. I am the world's best ever investor. I'm the world's eighth richest man, but I'm not going to pretend I can create the Warren Buffett Foundation and have my name on a building and fund this thing and try and build and drive a charitable foundation in my own name as a vanity project. I don't know. But I do know a bloke who can do this better than I can. Bill, here is God knows how many tens of billions of dollars.

1:17:26Go and invest it. What's I say? Invest it in good causes. Go and spend my money well. I think that is the most, and I'm a massive Buffett fan. Everyone knows that. I think there's the most amazing humility. I don't know any other person in that position who wouldn't, I mean, Bill literally created the Bill and Melinda Gates Foundation to do stuff. He wanted to do it. He wanted to be the guy. Buffett's gone, you're better at that than me. Here is literally more money than God. Knock yourself out. And I just think that's something that's super, super cool. Yeah. And that's why it's my exception.

1:17:53If there was a passion project that you would like to do, you need resources for, then maybe you could keep that money compounding for a little bit longer. Yeah. And that was Buffett's original deal, was he was going to wait until he was dead to give any money away. And at some point he was convinced that giving somewhere before he died would do some good. And that's the other problem is, you know at what point do you do it and that's by the way back to cam's question that's the other challenge you ask about when do you stop contributing money to a portfolio um cam my my answer would be honestly when you feel if you're working you want to keep working so the answer is just to answer the question um depends how quickly you want to retire or stop doing what you do a change course for me if i'm still working enjoying work i will stop adding money to my portfolio long before i retire because the money i'm adding will be dwarfed by the compound returns of money I've already got invested.

1:18:42And by the way, this is a massive ad for doing it early. If someone had put aside 40 grand for me when I was born, just pick a number, it doesn't need to be 40, just came out of my head, I wouldn't have added a single dollar to my portfolio my entire life. Because the compound value of that over time was going to dwarf anything I could actually add. That's why I would be better off spending my money on either good causes or good experiences. Because I couldn't have made a material difference to the final compound value of that. I mean, I could, but maybe I'd have 101 million rather than 100 million you know the the increment would have been irrelevant if i'm building my portfolio and it gets to a size i'm like well i'm going to get there in a quick enough time you know if i want to retire tomorrow then or you know five years rather than 10 i'm going to keep adding and adding and adding until i get there quicker so adding money always gets you there quicker but at some point to you as you recognize cam if you've here's my here's my framework i if i have paid off my loans so that I can never be thrown into my house.

1:19:38If I have saved enough that the portfolio is on track to compound to a large enough number by the time I want to retire, then I don't do any more money to that. I'm free and clear. I'm working for the fun of it now. And I might as well spend that money on other things. If I think though, I might lose my job sooner than I expect, there's no point playing the compounding to 67 and losing a job at 48. At that point, it's like, oh, okay. Now I'm in a hole because i can't work and i haven't got enough in my portfolio i've fallen in the chasm between those two places of full-time employment on one side and funded retirement on the other so you know there is a bit of a guessing game as to when and how much but honestly mate the answer would be if and when i knew my portfolio was on track to be enough by a time i was comfortable with at that point you might as well stop adding because you've got enough that that's the very point any final thoughts mate no i think everyone's well covered it's a good question though That's a good question.

1:20:31That's kind of the point. That's why we're doing the rest of this stuff. Money is a tool. That's the thing. You've got to always remember it's a tool. You can't eat the money, right? You can't live in the money. It's purely a tool. It's probably the most versatile of tools and the most powerful of tools. But it's a tool. But it's a tool. And I think you've got to keep that in mind. It's more about what the money can represent than the number itself. Beautifully done, sir. That is us for today. If you want your question answered, we'll try to get through a few more questions next time. This one's good, though.

1:21:05Hit us up at info at fool.com.au or at sage underscore simian is Andrew on Instagram. Sorry, I'm on Insta or Twitter at TMF Scott P. And on Facebook at Scott Phillips Money. Until next week, until next Friday at least. Have a great week and fool on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. general advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under financial services license 400691.