Mailbag, incl: The Motley Fool Money drinking game? May 24, 2026

23:57Kids call each other these days. And so on the t-shirt it had Dada, Daddy, Dad, Bra. I'm just kidding. The evolution of kind of, you know, the boy language or labels for the old man that was pretty good. That's hilarious. Hilarious. Have we gone far enough of tangents to go to the next question? Yeah, let's back on track. Thank you, Russell. Have you got any other? By the way, I'm happy to collect these, right? So if you're listening now, info at fool.com.au, with all seriousness, if there's stuff you want to throw at us, we'll compile a list. He says, doubting his own ability to follow through on the promise.

24:27So flick him through. I'll make a list if you can think of stuff that I should mention. Maybe in the next couple of episodes we'll throw that in and we'll see what we get to, see what sort of list we can compile. We'll do our best. I do, in meetings, you all remember this, Ram. Towards the end of it, I was like, any comments, questions, feedback, anything else? It's my kind of standard. People are like, oh, here he goes again. Not even to be funny, just sometimes cliches are cliches. So there's that one. Well, speaking of trigger words, there is a lot of those corporate speak kind of phrases. Oh, we should do a list of those too.

25:00Oh, ooh. Circle back and put a pin in that one, right? You know what I hate most at the moment is names for companies. Names. Oh, we don't invest in any of those names. You're being an idiot. You're just, again, let me throw it for a third. You're being a wanker. It's a good company. There's no need to use the alternative word. It doesn't summarise anything. It's not shorter. It's just, you know, I don't have anything to use names. We have words. We have words for things. We have words for things. Use the words, people. Use the words. Says the old man shaking his fist at the sky. All right, let's get another question from Simon, who actually is going to make you and I fight.

25:37Team Scram, he says. I like that. Simon here, long-time listener, multiple-time questioner. Thank you for asking my previous questions over the years and for the investing insight you both provide. You're welcome, Simon. I particularly enjoyed the last couple of Friday episodes. We've steered away from the weekly rant over the latest poor policy enabled by the government of the day, a pox on both their houses. There you go. That's one I should have thrown in. There's another one. And reflected more on your own investing aptitude, which is generous, and how to navigate through these uncertain times, which seem to be so currently consequential.

26:08Here's another one. But you know will no doubt become just another small blip on the annual Vanguard index chart in the years to come. There's another one. Another drink again. Well, listen to a recent episode. It's all so obvious in hindsight, isn't it? Oh, so good. Well, in the last Friday's episode, my ears pricked up when the discussion steered to the valuation of CSL and it being, quote, stupidly expensive over the last 10 years, end quote. As a Motley Fool member, a member of Odyssey, he says, I'm curious how the team weighs that, quote, stupidly expensive tag against your buy recommendation.

26:40Well, I'm a total believer in the quality of the business. I'd love to hear Scott's thoughts on what justified the valuation during the last recommendations in June and September 2023. Where is the line between paying up for quality and a price that requires everything to go perfectly? End quote. Kind regards, Simon. I'll jump on this one first, mate. I was wrong, Simon, so far at least. So the answer may well be in the fullness of time, we paid too much. And by the way, I didn't say it was stupidly expensive. Ram did, and that's fine. I don't think it's as expensive as he thinks it is, but I think in hindsight, it obviously says prices have come down, right?

27:16Well, it's the thing, right? So the share price has come down. And maybe it goes back to those prices, maybe it never does. So this is not an excuse, by the way, but at any point in time, all you can say is from point X to today, this has happened. And I've used the example of many times where Tesla went nowhere for five years and then 10X'd. Okay, so, you know, it was, it was, you know, oh, well, it's cheap. And so it's only in hindsight we can genuinely know for sure because we can never know the future earnings. whether a valuation was expensive or cheap. We can say versus past earnings or versus expectations or a balance of probabilities.

27:49We make all those sort of assessments, and that's totally reasonable. But you can't really know other than hindsight. I mean, Amazon's another example. I own those shares. I mean, it looked expensive, expensive, expensive. And, you know, when was it expensive? Never. And yet another company trading on a lower multiple looked cheap and then went broke. AMP is a great example. It's looked cheap all the way down. And so you kind of go, okay, where do you pick that up? Still too expensive. Right, exactly. So CSL is a...

28:19CSL is difficult to... I don't know. I think I was probably wrong, Simon, is the honest answer. I think we probably paid too much for it because too much had to go right, which is exactly the last few words of your question. In the event, what we had suspected or hoped or believed was that the value creation would continue at scale and at pace. That would continue to justify. So the thing about high multiple, sorry, I didn't finish this, continue to justify high price. The thing about high multiple is if something's expensive in 2003 at 50 times earnings, but in 2020 it's at 18 times earnings and profits are 5x cents, then it wasn't really expensive back then.

29:01It grew into the earnings or grew into the valuation, as we say. And CSL hasn't, just hasn't. And in fact, I actually think right now it's probably inexpensive. I don't know if it's stupid cheap, but there's lots of current year problems it's had. And I love those examples of current year problems because you look back and go, was that bad news really going to last forever? No. And did the market assume so? Well, based on the price, yes. Well, there's an opportunity, isn't there? And so that's one of my favourite things to buy. Warren Buffett talks about a great business on the operating table.

29:32And it's kind of that, I think, for CSL right now. As you were saying, I was just Googling. What did he say about the operating table? Yeah, beat me to it. Warren Buffett, there you go, drink. So, yeah, I think you're right. I think in hindsight too much needed to keep going right and didn't. Was there a scenario under which things kept going right? Yes. And the valuation was justified in time? Yes. Did it happen? No. Statistically, from an odds perspective, we brought it wrong. All we can do is use the actual facts and say, at least for now, unless and until it gets back to that level and then goes on from there and beats the market from there we overpaid so i think that's true from an odyssey perspective it's not an ad for the service but from an odyssey perspective we built odyssey specifically around quality businesses and it doesn't mean it's not an excuse at all it's not a justification for overpaying but we put together a full portfolio of quality businesses on the expectation or the basis that over time we thought they would probably, hopefully, go on to deliver strong compound returns because quality compounds more than anything else.

30:39You can't compound value really. You can recognise value and then earn it and then sell and then take the money. That's a great way to invest if that's what you want to do. Odyssey was built specifically, the whole idea of the Odyssey was this endless journey, right? This kind of idea of setting up a range of quality businesses and holding them for the ultra long term, hopefully, not as a promise but as an aim. and letting the businesses justify the investments. So CSL, for example, wasn't a share advisor recommendation until relatively later. But the idea of adding it to Odyssey was exactly that, was to try and find some of the best quality businesses we could find that were trading at reasonable valuations.

31:14I think in the event, we probably over-egged the pudding in CSL. I think we paid too much. I think it's... I'd love to come back in 2030 and say, oh, thankfully I was eventually right, which I had to hold for the long term. It's still a buy, by the way. I want to say it's a buy. the way our portfolio services work is to buy up to our current allocation. So we're not saying buy more all the time. We're saying if you're following the portfolio and it's, I don't know, 5%, whatever it is, then put your 5 % portfolio in CSL. So we're still saying we would hold it as a 5 % position. So it's buy up to allocation.

31:42In other words, if you don't own it yet, buy it. Once you've got that allocation, stop buying and hold from there. So it's kind of a buy and a hold at the same time. I know that's confusing, but just for Simon's perspective. It's actually a better way to frame it, I think. I think so too. It feels a bit wordy and a bit kind of like it feels, how can you buy and hold at the same time? It's all that kind of stuff. So all the portfolio holdings are holds. But if you're just joining, then we're saying buy after that because if we're holding it now, we want you to hold the same thing. So buy it until you've got to what you've got to.

32:05Yeah, so don't let Ram jump in. I'd love to believe that this is, that I'm right, and this is just a, you know, going through the valley of the shadow of death and eventually we'll come out the other side and go, oh, thank goodness we're right after all. I mean, huge thing. Bad acquisition. The vaccine rates in the US, like the whole post-COVID RFK thing, I don't care what you think, vaccination rates in the US are as low as they've been in decades and decades and decades. Could we have foreseen that? Probably, maybe. That's a hard thing to foresee. It's like, hey, one of the richest, most prosperous nations on the planet is going to turn its back on, like, you know, decades and decades of incredible science.

32:45But maybe only months ago I could have seen RFK do his thing. And, again, I'm not going to defend it, Simon. I'm not going to make excuses for it. I'm also not going to necessarily declare defeat. But the price is the price so far. And right now the market's saying, you overpaid, Phillips. And I kind of got to cop that on the chin. What I will say very quickly, and the reason it's still a buy, is we shouldn't compound that error with selling it to lower price just because we bought it to a higher price previously. You've always got to say where to from here, not where have I been. And so the comments on CSL absolutely apply to the past.

33:18For now, it's still a buy-up to that portfolio allocation on the service. I suspect vaccination rates pick up over time. I suspect the lull in blood products business probably picks up over time. I suspect the innovation lull probably picks up over time. If these things do revert to anything like the average, the future is brighter than the last 12 months. Is it bright enough to make back the purchase price? Probably not. Maybe not. At least not fast enough to justify the market that we're chasing and lagging the market. But don't make the mistake, in my opinion, any stock, of just because it's down, don't sell just because it's down.

33:52and re-evaluate from today and say, is this worth buying at today's price? Your thoughts, Ram? That's what I was going to say too. I've made the point many times and I do it because it's always nice to have a little humble brag, but it's also just shows you how dumb you can be and it'd still be fine from an investment standpoint. I use the word dumb very loosely, but where you buy something, it drops 30%, it sits there two years and it's very hard to kind of say, no, it's still good. It's still good. But that was my catapult story. Yes, that's true. Oh, gosh, I don't even want to list them. There's too many of them, right?

34:30Hashtag Humblebrain. There's too many times I've been right. Who can count them anymore? I've been too many times where I buy it and it promotes. But that's exactly the point. I think there is no mistake in buying a stock that doesn't work out. And I say that because it's going to happen like at least 40 % of the time, at least, probably 60 % of the time, like all the time. It's not like, oh, by the way, you should prepare yourself mentally for the occasional loss. Like, no, it's going to be your loss and embarrassment are your constant companions on this journey. It just is, right? And that's as true today as it was when I, you know, 20 years ago, whatever it was, when I first bought, oh, God, 20 years, I wish, 34 whatever years ago it was when I bought my first stock.

35:20Buying bad stocks out, I'm buying and holding bad stocks today. But, Scott, you nailed it, mate. The real mistake is when you compound it. The real mistake is when, and I hear it all the time, it's like, well, I don't like it anymore, but I'm just going to wait for it to go back to what I paid for it and then I'm going to get out. It's like, dude, the market doesn't know what you paid and it sure as hell doesn't care. And it could drop another 90 % from here, like get the hell out. Like, you're being silly. But often when things fall and the thesis hasn't changed and the price has changed, it's actually you've gone something that was like, in the case of CSL, if I'm reading you right, it was just like, I don't think the argument was ever it was cheap, but a quality business at a reasonable price, that whole Buffett thing, right, drink.

36:07But if nothing's changed, I'm not saying that's necessarily the case here, But if nothing has changed and the price is 60 % lower, like, I mean, this is the kind of thing everyone says, oh, I mean, the number of people I've had the conversation with over the years, like, oh, I like CSL, it's a bit expensive. If it dropped below 200, I'd buy it. It's like, oh, are you buying it? Oh, no. Why not? Well, it might go down further. It's like, what? You know, and you start framing or you start considering your choices based on the past trajectory of a sometimes very irrational share price. Like it doesn't make any sense.

36:48Sometimes the more sensible view is like, oh, buy more and I'll buy more. Oh, as long as the market is giving me opportunity to buy this thing at a discounted price. As long as you're honest with yourself, because just as often it goes down, it's like, oh, this isn't a mistake because the price went down. It was a mistake because I totally didn't see these issues. And now that I do see these issues and I'm aware of them, it's very, very clear to me that this is no longer a good investment. Rip the Band-Aid off. I mean, it sucks. There's no way to sugarcoat it. But don't compound the problem. That is, I wouldn't say the number one, but if I was to list the top five mistakes, the top three mistakes that investors make, I think it is anchoring on past prices and trying to sort of shield their ego from loss by pretending, you know, it's that old saying, it's not a loss until you sell it.

37:38Like keep telling yourself that, sweetheart, because it's a loss, man. It's a loss, right? And it's just that emotional detachment is your friend. You know, when the facts change, you change your mind and it's the only rational thing that you can do. Look, in regard to CSL, I think there's another lesson that, again, this is Harry hindsight and I certainly wasn't making this case a couple of years ago, but I think, and I haven't looked at it particularly closely, although I really should start to given what's happened. I feel it's a common story for companies that have a long, long history of high quality and success where you can get a little bit cosy.

38:23We're indestructible. You know, it's that Kodak kind of thing where and it looks as though at least from the outside that they didn't make very sensible acquisitions. They started listening too much to the demands of the market, which is we want growth. And it's like, yeah, we want to deliver growth. Don't get us wrong. But when you force it, not always, but it almost always ends up, you know, with egg on your face. If there is a compelling growth opportunity, oh, for the love of God, go for it. But it's like the market's screaming growth and it's like, and you're a massive, massive, multi-billion dollar company.

39:04It's like, I guess we buy this other big company. And he's like, eh, again. So that was clearly a big part of the write-downs, right? It was. I forget. What was the name of the? Yeah, that's it. Vi-4, yeah. Vi-4. And they clearly overpay. If they didn't overpay, they would be writing it down on the book. So they clearly overpay. Well, can I throw an exception there, only just for the accounting rules because they're interesting? The overpayment, write-downs are funny things. I'm not defending CSL at all this, actually. Let's separate it from CSL in general. So let's say a straw man with its petty cash buys the Motley Fool and you buy the Motley Fool for$84 because that's trading in seven times earnings and then next year the company, rather than earning$12 in profit, earns$5 in profit.

39:49The orders say, well, actually, this thing's only worth seven times earnings so you have to write this down now. You go, okay, I'll write it down. The year after that, the earnings go back to$15. You go, I'll kind of write it up, please, and they go, no. No. No, it only goes one way. You can't do that. And so, by the way, I'm 100 % behind the accounting rules. Buffett said before they're not always relevant or appropriate, but they're important to have and important to follow. Which sounds like you're talking about both sides of my mouth, but I think he's right. Consistency is what matters and then use your brain to make the appropriate interpretation of whether it's appropriate or not.

40:21And so I don't have a view on the VIFOR business. This is not an excuse. It's not a – other than just to say a bad year, you have to write it down, even if a good year is to follow. You can't know that at the time, obviously, which is why they make you do the write down. So sometimes you genuinely overpay. If you bought AMP at$20, you've been writing it down for years, okay, because it was just a rubbish business and whatever. But if you bought a business that sucked for a year and then flew and the account orders made you write down the mean time, it can be the case you didn't overpay. They probably did for buy for it again.

40:50But you may not have overpaid. You may have just paid a price and then fell in a hole. Think about a cyclical business. Think about you buy a, I don't know, a retailer that sells, what does it sell? flat-screen TVs, and there's a recession. Yeah, the long-term, it's the same as investors. Here's the thing, and this is, speaking of Berkshire, this is what Jimmy Buffett has to do all the time, is they have to recognise losses and gains on their equity portfolio. And Buffett's a long-term investor. It's like, well, say the shares fell 10%. I mean, you make the point about not losing money for yourself, which is, you know, it's also the other side of that coin.

41:21But if you think a$10 stock's worth$25, and it goes to$8 in the meantime, if you're right about the$25, you don't really care, and you can write it down and write it back up again, but they're just paper transactions. So Buffett makes the point. Worth doing, should do, have to do. The VIFOR write down is absolutely appropriate and perfectly fine. If they manage to write that ship, they'll never get the money back they had to write down, and it doesn't really matter because it's just an accounting entry at the end of the day, but it is worth saying. Sometimes you write it down because you're just simply overpaid.

41:50That's a great example of a completely written-off acquisition. I can't think of it. Oh, God, what was that media company?

41:59Sentia. Remember Sentia? It was Sentia? It was a media monitoring mob. Was it Sentia? Oh, yeah. What was that? Anyway. Yeah. It bought a business called King Content and two years later it was like, actually, this is worth zero. We wrote the whole thing off. We just completely screwed up. And you're not coming back from that. That's a genuine one. So, yeah, sorry, mate. I didn't even interrupt you, but it's fascinating. It's worth thinking about when you hear it written about and talked about. It's also, too, investors can tend to be a little bit too pessimistic and what's the right word, not gnarky.

42:31Scepticism and cynicism are close cousins but not the same thing. So there is a tendency among a lot of investors to go, well, obviously you write it down because obviously that's crap and obviously it's – and it's like that – we talk all the time about pessimism sounding smart, right? It's like, well, yeah, of course you write it down. It's like, okay, and you should. Again, I'm not – but even when they recover, it's like, don't just assume just because that happened once this is the end of the story or that it's broken thesis. As you made the point, don't compound the mistake by necessarily assuming that's the end of the story.

43:01It's a related idea, but I found myself the other day in regard to a company saying, my gosh, they're trading below their NTA, which is their net tangible assets. So get rid of all the non-touchy stuff and add it all up on the balance sheet, divide it by the number of shares, and you'll find examples where it seems like I can buy the net assets of this company for less than their market rate. And that might be the case. I don't want to say the company because it just doesn't matter. It's irrelevant. But it might not be the market that's wrong. Yeah. It might be the carrying value. Can I jump in quickly there too because NCA and NAV aren't the same thing.

43:42Yes, that's true too. And so you've got to be really careful as an investor. Net tangible assets are literally as ramps of things you can grab. If you've got a company trading for$18 and bucks that's got$20 worth of cash, cash is about tangible as it gets, right? Ironically. Well, yes. Let's not go there. Sorry. For now at least, until tomorrow when they print more of it. But a company that is trading for$18 with a net asset value of$20, those assets might include the Beanie Baby collection and the Pokemon cards and the special crypto coin that went to the moon last week. And that's an asset value.

44:17It's not a tangible asset. So just be careful when you hear people talk about net asset value and net tangible assets, they're not the same thing. Tangible assets, again, the machinery, the car out the back, the photocopier in the office, the cash in the bank, those things are tangible for more or less without setting me off. Net asset value is just, well, the accounts added up together and they reckon that the brand I bought last week is worth this much money and so therefore I'm trying to lessen that asset value. You're like, oh, dude, it's really nice that you've bought, you know, kodak.com, but it's, yeah, man, maybe not as much as you think it's worth.

44:49That kind of stuff is important. You've got to look at all of these financial statements, not cynically, but as you say, sceptically. It's like, okay, that's the carrying value. Where did that come from? Is it reasonable? You know, it's all good and well. I mean, I can tell you about my own balance sheet, right? There's stuff. And when we put sort of, we spent money on development and then we capitalised it on the balance sheet. Great point, yeah. Which is just where I say, you know, I make up a number. I spent$100 ,000 building a website. Boom. It's worth$100 ,000. Why? Because that's how much it's spent.

45:17Now, someone else could look at that and go, well, I could do it for$10 ,000 right now. And I can also tell you that if I was to buy this business and try and sell that data, which is effectively all that code, it ain't worth that much. It ain't worth that much, right? So you've got to be very careful with all of those things. I mean, I forget the details now, but, I mean, didn't they change the rules for how bank balance sheets are kept just to avoid mark-to-market with their bond portfolios because... Yeah, this went huge soon. And this is... You're right. This is where... That's a great example, right?

45:52Because mark-to-market is if you had to sell it all now, what's it worth? That's a very, very fair question. Especially when it's your collateral and your, like, liquidity sort of... It underpins the liquidity of your entire operation. Yes, yes. Now, Buffett's point is his share portfolio needs to be marked to market every quarter. But is Buffett going to be forced to sell it anything less than he wants to sell it for? Of course not. Yeah. So is it, you know, and again, if you think Buffett's Buffett, he's bought something for$100 and they want to market it down to$80, it's like the chance Buffett made a 20 % mistake is not high.

46:20You know? And the accounting rules can't say, well, he's Warren Buffett gets different rules. You have to, whatever the rules are, you have to apply to everybody. Yeah, yeah, yeah. So the thing about the banks and mark-to-market is if you're forced to liquidate, you're screwed. If you're not forced to liquidate and you hold a maturity, you're completely fine. Yeah, yeah. Now, which one of those scenarios will happen, who knows, and whichever accounting is used. It's not a problem until all of a sudden it really is a massive problem. Often the accounting rules say I can hold this to maturity. It's like, yeah, dude, everyone wants their money out now.

46:49Where's the money now? I was like, oh, can you wait 30 years until our bonds expire and we'll give them back to you? But that's the thing, right? But neither is right or wrong. So both are absolutely, and your point about being safe, both are absolutely valid. If they're not forced to liquidate it. In the right context. Yes, if they're not forced to liquidate it, you know, let's say, That's just for fun. Let's say a bank holds 100 % of its capital, you know, as equity. You know, what are the chances for us to liquidate those to meet the repayments? Literally zero. Okay, well, then marking the market is interesting but not very useful.

47:19If a bank is levered to 100 to 1 and it says, I'm sure it'll be fine, guys, assuming you're going to hold those to maturity, also ridiculous. And so it's not – and you can't – you can't really let – can't let the banks – well, shouldn't – let the banks choose, oh, I think we're going to use this method this month. It's like, of course you are because that's what you want to look like. So that's where both of those methods are totally appropriate and totally fair and totally reasonable and very informative. You've just got to understand in what scenario. Because, frankly, a mark-to-market where it gets marked down, if you look at it and go, I think this bank's going to be fine, and yet the financials say, if anything's looked at it tomorrow, it's a problem.

47:55Well, hang on, I'm getting a bargain then. And then conversely, if you're saying, no, look, I've seen the financials, it's fine. This has got$100 billion worth of assets. It's like, yeah, but there actually were$10 billion currently on the market and the depositors are lining up beside the front door. You don't want to be stuck carrying that stuff. And that's where this is really, really important. And as you say, context is king. It's all that matters, right? A bit of context, a bit of perspective, that's where the key happens. So whether it's a share portfolio, whether it's your bond portfolio, whether it's the write-down of a carrying value of an asset you've bought, the rules are the rules.

48:28And the best part about the rules is not that the rules are right or wrong. is that everybody knows what the rules are. And so you know when you see financials, this is the basis, excuse me, upon which they've been prepared. And that allows any investor to go, I can then make my own adjustments if I choose from this point knowing that everyone's used the same rules. I know what the rules are. The company knows what the rules are. I can, for all intents and purposes, trust this information and then adjust from there. And that's where the power is for the individual investor. Yeah, just for those playing along at home, you mentioned that there.

48:59I think Australian banks are levered 20 to 1 against their tier 1 capital basis. Is that much? Yeah. I want to have to check. I know that the tier 1, what's it called, the common equity tier 1 ratio mandated by ASIC is 12.5 % or something like that, I want to say. So there is. But it depends on how you. It's interesting. So once when I was blackpilling myself, which is why not, it's fun. You start looking at these things and you realise it's kind of, it's entirely just built on faith and trust me, bro, but it is quite a bit of leverage there. In other words, more simply put, getting rid of all the nonsense jargon, it's like if you want to, if everyone tried to get their money out and come off back, it's not there.

49:43And it's not like, oh, we're a little bit short. It's like, no, like a very small fraction of you are getting your money back. And again, that's just how it is. I'm not going to get too dark and conspiratorial here, but I just had, I couldn't leave that go uncommented on because it's just sort of every time I mention it around friends and family, they look at you like, what do you mean? Yeah. I think half my friends, 90 % of my friends and family think there's literally a vault at the bottom with like gold in it or something. Yeah, yeah, of course not. And I start talking and they like look at you as if you've got two heads.

50:12It's like, I know, I know, it's surprising, right? No, it can't be true. Well, that's what's also surprising. It is. Anyway, I've annoyed like pretty everyone there because there are plenty of people who will happily defend that. But let's get back to the topic at hand with CSO. It's such a good jumping off point. Hopefully this is all helpful, this kind of stuff,

50:37is I think the market, everyone's, me more than anyone, I've been pretty bearish on a lot of things, but I think for the first time in a long time, things are getting really interesting, right? If you were to ask me, you were talking about Odyssey before and high-quality companies. Here's a list of stocks that I would love to own and have never owned. I would love to own ARB. Great company. I would love to own Objective Corp. Brilliant. CSL. Yes, please. I'll take some of that. Cochlear. I mean, I could go down the list of like just companies that have got long track records of high internal rates of compounding and insane levels of shareholder wealth creation.

51:13Now you look at it in a very narrow recent timeframe, it's like what are you talking about? But I need to step back. Step back and look at this business and what it has delivered and created over the years. they're actually incredibly wonderful. So why not own them? And it's like, I just couldn't, or Prometicus, right? Oh my gosh, like there's another great example, right? Easily one of the top five businesses, I would say on the entire ASX. And it's not that I didn't like any of them. And it's not that I even didn't think that they could justify their valuation. I'm just, and I know I always say it, but I haven't said it for a while, so let's go again.

51:52I just, my whole, a big, my whole deal, a big part of my whole deal is as an investor looking for asymmetric opportunities. I know I'm going to, I said before, I'm going to be wrong a lot. So that's cool. But if I'm wrong, I want to be like, okay, I lost 30, 40, 50%, something like that. Not that it's what I want, but, you know, okay. But if I'm right and it's a 10X return, if someone says, hey, hey, let's play a game of heads and tails. Every time it lands on tails, you give me a dollar. Every time it lands on heads, I give you$5. Do you want to play? Yes, I do. Yes, I very much want to play.

52:33I will play all day long and I will spin up, you know, the wrong whatever is the wrong one for me 100 times in a row and I will still happily pony up more money because I'm not an idiot and the maths is on my side and I will play that every day. What I can't wrap my head around, I even said this last week or the week before in regard to CBA. It was just like, how do you make that math math? Like, that doesn't make any sense at all. It's sort of like everything is tickety-boo, it continues along, and maybe with dividends, and let's be generous, we'll throw in franking credits as well, maybe as a total average return I'm going to get an upper single-digit type return.

53:04Nothing to sneeze at, not terrible, not saying it's awful, but that's about it. Like, that's it. Maybe if you get lucky with the timing and the sentiment goes your way, you know, you could get a low double-digit return over a few years, you know? Great. What if it doesn't go that way? And I'm not, again, people are, oh, so you think, no, no, no, no. It's not about, we're in the game of probabilities and handicapping yourself and that. And my argument has always been highly cyclical enterprises, very much exposed to an asset class that is self-leveraged up to the eyeballs, you know, and it's just like, if there is any kind of implication, well, let me say this, if there is just a broad-based recession, and I'll go out on a limb and say there is going to be one because that's just, I don't know when, maybe it's 10 years ago, but there will.

53:50Banks do terrible in that kind of environment, in which case even in the GFC where the Aussie banks really didn't have that much exposure, there were very, very dilutive share raisings, share price dropped, what, 50 % more or something. And so here's the proposition, and this is why I'm so bearish on it. It's not like there's some crystal ball, like I'm seeing round corners because I'm just so amazing. I'm like, no, I just, I don't like those odds. And when I was looking at some of these other companies, I was just sort of like, yeah, great company, no question about that. But it's like, that's what has to go right.

54:25And if it does go right, I'll get an average return. And if it goes wrong, I'm going to absolutely cop it. So I just think, and why I say it's interesting now, and again, it's not an endorsement for any of those stocks and do your own research, no recommendations, all of that stuff. and I'm not even trying to sort of signal or code it by sort of covering. Honestly, I'm just trying for illustrative purposes. For the first time in a long time, that's starting to look different. And that is, to me as a long-term investor, is a very interesting kind of setup. The one thing to be mindful, of course, in all of that is that there are plenty of companies that look like that and they drop in half and then they drop in half again and then again and again and again.

55:07So it's It's like, you know, don't automatically assume that a lower price still instantly means more value. It's absolutely possible for price to fall and value to fall at the same time, as it's possible for the share price to double and actually as a value proposition to improve as the business has better and better opportunities. So, yeah, if this is all sounding confusing and hard, welcome to the party. It is. But it's another mistake. It's just such the classic mistake of new investors to feel as though success means winning all the time, you know, into knowing what this looks like. And it's just like, you know, you know it in your job as much as anyone may.

55:43Hey, you got this one wrong. Explain yourself. It's like, yeah, I got it wrong. And I'll get many, many, many, many more wrong. This is not that. I mean, show me someone who's never made a mistake and I'll show you a liar or a fraud, right? And I say this not to protect your ego. the people listening to protect your own ego when you start looking, oh, I was so dumb. And I mean, everything is obvious in hindsight. As I said before, just don't compound the problem, right? And just try and find opportunities that where if you are wrong, it's not that bad, at least relative to the potential upside.

56:21Yeah. Just to balance out some of that, because I've tried to paint myself in a very knowledgeable, smart way. so let me disavow anyone of any kind of false impression here. There's been plenty of companies where I've gone too expensive and then it's quadrupled and then it stayed there and then the earnings exploded and then the PE came down and any argument towards it being overvalued was thoroughly, thoroughly crushed because, you know, sometimes it's hard to sort of see that kind of growth and you'll get it wrong in a lot of times too. But, again, that's why that flexibility in thinking is so, so, so important.

56:58I thought this, whatever, don't lose a second sleep over it. What do you think now? What do you think now? That's the only thing that matters. And it's easy to say, it's very hard to do, but we'll keep saying it because, you know, the market doesn't know or care what happened in the past. As you said before, all that matters is going forward from today. Yeah, for sure.

57:28Hey, question from Hamish who says, Hi, Scott Andrew. Long-time listener, second-time questioner. Congratulations on a recent episode, 1000. Thanks for answering my question about margin loans. I've steered away. For now. Says Hamish. It's like, oh, I hear you. I don't really want to, but I will for now. We'll see. So up to you, Hamish. We can't give personal advice anyway, mate. Feature to their own, for sure. Your call. Your call. I think I said I've got a margin loan, right? Yeah, exactly. Do as I say. I was hoping if you could please explain the tax implications of investing in an ETF of ETFs or an ETF of funds of the sorts such as, hey, you should be listening way long enough to know better than this, VDHG, which of course is the Vanguard Diversified High Growth ETF.

58:14I've been dollar cost averaging into this for a few years now as my core investment strategy, two-thirds portfolio into that ETF and one-third in shares. and I am now, as I become more investing literate thanks to yourselves and skin in the game, considering implications such as fees and tax drag versus if I had simply dollar cost averaged into the Vanguard Global ETF and Vanguard Australian Shares ETF all along and manually rebalanced. Have I been tricked by the suggestion of a fancier product? I know Andrew has previously said not to invest with tax specifically in mind, like he did and he said don't put tax first, always keep it in mind, but don't invest just for the tax.

58:53But I feel I may be on the losing side of an opportunity cost. And if that is the case, do you move money over or stop and let VDHG roll on and then dollar cost average elsewhere? Thanks for the podcast and what you've done for financial literacy for myself and other Australians. I recommend your show to anyone I can. Thanks, Hamish. Thank you, Hamish. That's very kind of you, mate. I appreciate you giving the podcast a plug with people you know. That's how people find it, largely, actually. You can find them on the charts and other things. Oh, by the way, Rem, this week our last two episodes, two of the top six episodes in the business section on Apple Podcasts.

59:29Hey. One third of the spots in the top six. That's nice. Yeah, five and six as it turns out. I'll take that. But I'm taking two of the top six. That's absolutely, yeah. I'll take it. I'm only behind Diary of a CEO, which is this cult breakout hit, a Mark Baruch episode and something else. So I figured we'll take that for sure. Okay. I mean, it's a good title, right? I'm almost tempted to click on that. Yeah. Do you want me to start this one or do you want to cover this one? Yeah, I mean, I'll just quickly just say I think and I'm more and more of this view. It doesn't mean I won't change my view, but, I mean, as I've gotten older, I've gotten more strident in my view.

1:00:05I think diversification is something that is, you know, I took out both sides of my mouth. I think it's super important and massively oversold. You know, it's important to a point and then it's just a waste of time, in my humble opinion, and in the opinion of maths in any way.

1:00:28Not that you can't have... In the opinion of facts. In the opinion of being right, you know. But, I mean, I've got to be careful because I know some really successful investors who have hundreds of stocks in their portfolio, but even that misrepresents things because actually when you look at their portfolio, it's like 70 % of the market cap is in six stocks. Yes. And there's just a very, very long tail. And they call them watching positions. I buy a little bit to keep me interested and keep me honest, but it's not really core holdings. But in terms of just the thing, and I know I've said it before, is that diversification protects you from the upside as much as the downside.

1:01:05Yeah. Like, I mean, when you get, ETFs are already insanely diversified and then to be an ETF on an ETF and it's like, you know, why don't I have an ETF of ETFs that hold other ETFs? Yeah, that's right. You know, you just don't get like, yeah. So global GDP, and everyone knows my issue with GDP, but let's go with it. Global GDP on average over the last 30 years is what, 2%, 3 %? Yeah, probably toned off, I suppose, I would guess, but yeah. A broad enough GDP is that? Yeah, yeah, yeah. Is that? That is what you're, that's the asymptote of the curve, right? Like that you are going towards that. The more you diversified, the more mathematical gravity draws you to that thing.

1:01:52Why? You could have just the Aussie diversified one and, you know, the top largest, most significant stock in that could absolutely blow up and go to zero and you'll take a 3 % hit. Like, you're diversified. By the same token, by the same token, you could see the biggest stock triple and overall it increase by 2 % that day. I can't do the maths in my head. But it's not significant though and it's sort of like if your goal is, and this is a very worthy goal, I'm not having a go at it at all, it is my go-to recommendation for family and friends who are not interested in being more active in it, is buy it.

1:02:30But you're going to get an average result and that's good. That's the whole point. The average tends to beat the professionals and it's easier. I'm not saying it in a derogatory way at all, but don't expect the Ferrari next one. Who wants a Ferrari anyway? But you know what I mean? Like, don't expect a Ferrari next week. It's impossible under those things. Everything has a trade-off. And I just think when you're getting such massive diversification from these broad-based index ETFs, maybe you want some in the US market or, you know, the Australian market, that's perfectly fine. But when I just think at this level, it's just, it's a reasonable idea carried way, way too far personally.

1:03:09Personally. Yep, I like it. So a couple of thoughts. I hope I'll work this backwards. I don't... This Vanguard Diversified High Growth ETF, VDHG, is my least favourite Vanguard passive ETF. And that's because of the name and the implication. So we've said before, this thing is 10 % fixed interest. That is not a high growth ETF. It's just not. It's diversified, but it's not high growth. And Vanguard's a lot to do with it and people are entitled to buy it. I don't know. I just, fixed interest over the long term will almost certainly underperform everything else, and so why hold it? And if you want high growth, if it was a Vanguard diversified balanced ETF, I'm like, okay, it does what it says on the tin.

1:03:55I think this one's a misnomer. They're not trying to be misleading. Vanguard's a not-for-profit. They're not trying to screw anybody. They're good people. You know, it's, so yeah. But it's my least favourite of their passive ETFs, not because it's the worst ETF they sell or they offer, but because of the way people buy it, if it's a one-stop shop. Two things that that implicates. The first is the fixed interest bit. The second is the fee is 0.27%. Why? Because it's rebalanced regularly and it's managed and it's got hedged products in it. It's all the things I just, it's just, it's not the last ETF I'd recommend, but it's like the 85th.

1:04:31But it's super, super sexy because everyone sees Vanguard, diversified and high growth together and they go, what more could you want? And it's fine. It's fine. You'll be fine. So, Amish, I don't know what you should do, mate. I'm not saying you should move the money over or keep it. It's up to you. You'll be fine. You'll do very nicely indeed with that one, right? Probably not as well as the individual sector or country ETFs, but you'll be fine because it's, you know, 90 % listed equity. You'll be fine. You'll be more than fine. So I don't love that it's got the interest. I don't love the fee.

1:05:00I don't love that it's hedged. There's three reasons. I also don't hate massively, Amish, but you're right. anything that's a fund of funds, particularly when its objective is to rebalance itself, to hold 10 % fixed interest, you're going to create capital gains tax events. Because if you let this run, if I'm right, and equity is out for fixed interest, the 90-10 split currently becomes 91-9, then 92-8, then 93-7, then 94-6. Why? Because one outgrows the other. It's just a proportional conversation. so they have to in in um in good years sell shares to buy fixed interest now in the bad years i can do the reverse but over time as long as i'm right over time they'll sell more shares and buy more fixed interest rather than letting the shares run so it harms your potential return which goes back to what we're talking about but not only just because you start at 90 10 because they return to 90 10 over and over and over and over again and so yes there are tax implications because inside the fund, they are selling assets to rebalance.

1:06:03Is it a huge deal? Probably not, mate. A little bit of a deal? Yes. Do I hate it? Hate it? No. Would I run screaming from it? No. But it's a good reason why you should know it, in my opinion, not you personally, Hamish, but I would absolutely say if you want what they have. If someone said to me, I'm looking at the Vanguard Diversified High Growth ETF, what alternative would you recommend or what would you suggest or what should I consider? I would basically, so you said, and that's kind of what we've talked about a million times, Amish, a Vanguard Australian ETF to a Vanguard Global ETF, whack them together.

1:06:35You get a 90 % upfront. You're paying bugger all in fees. You're not rebalancing unless you really want to. I wouldn't bother. You can rebalance by adding, by the way, if you're adding regularly, your dollar cost averaging, so that does the job for you. I think you're kind of there. So have you been tricked? No. Is it fancier? A little bit. To give Vanguard its due, I think they've tried to responsibly provide a single stock product for people who just want exactly that. If you're a one-click product and you want it from Vanguard and you want it to be diversified and you want it to be largely high growth, it's a fine product.

1:07:07And for people who, again, you know, I remember before, if you get the average a bit less than that, you're perfectly fine. I wouldn't buy it myself. I wouldn't recommend it myself in the sense that I wouldn't say don't do it at all. I would say do these other things instead. And if it was me, mate, yeah. Yeah, the hardest part with the mix, even within the Vanguard product, is trying to work out the best potential return versus the return that people are most comfortable with, or the mix people are most comfortable with. So this ETF at the moment has 36 % Australian shares. It's got 43 % international shares, hedged and unhedged.

1:07:43It's got 5 % emerging markets for 6 % international small companies. I mean, you know, I've been tricked. It's not fancy in any meaningful way. Talk about fancy mission AI, ETFs earlier around. I mean, that's fancy, right? This stuff is not even trying to be fancy. But if it was me, I wouldn't go hedging. I wouldn't go fixed interest. I wouldn't try and go international small companies. I might go emerging if you really wanted to, but for me, I'd happily go half and half Australian and international, VAS and VGS or whatever it is, and that's, for me, more than enough. I wouldn't try and rebalance.

1:08:16I wouldn't try and play funny buggers. I think you're right around about the passive thing about, you know, being diversified in the Australian market. I would add for what it's worth for me personally, and you don't have to agree, mate, but there are industries and sectors we don't have any or as much exposure to that you can get by being passively invested outside Australia. So I wouldn't do it for capital deed diversification, which is the bit where you say, how can I defray my risk so much, nothing matters. But I would say it's worth being exposed in a larger proportion to, for example, international technology companies rather than just, you know, banks and miners in Australia.

1:08:50So not for capital diversification, not because you've got 300 companies in the Vanguard Australian shares fund, you need another 500 to be diversified, but rather because across your portfolio you're getting a more representative exposure by sector by being invested internationally compared to being invested only in Australia. So I honestly, it's not much harder than 50-50 across those two, the Vanguard Australian Shares ETF and the Vanguard Global Ex-Australia ETF, that's as complex as you need to be. So have you been tricked? No. Is it bad? No. Can you do better? Probably. The risk about this, just quickly, I'll wrap up, mate.

1:09:27Vanguard have chosen an allocation of international versus Australian in that VDH2 product. And if yours is different to theirs, you'll have different results to theirs. And they might be right. You might be wrong. So I've already said, if I just look at the percentages, I'll try to have this up in my head, 26.5 international plus 16 international hedged, that's 42.5. Throwing international small companies, 6.5, that's 49. Emerging markets, 54. Now you take out 10 for the fixed interest and you're almost at 2 to 1 international versus Australian. So if international markets outperform Australia, this will do better than a 50-50 split between vanguards to Australian and international ETFs.

1:10:06You could, if you wanted to, like this product, mirror that percentage to kind of get the shares bit. But to Ram's point, you're getting a bit cute at some point. So, yeah, the hardest part with all this stuff is, in hindsight, we'll know exactly what the rate allocation would have been. At the time, you can't know. All you can do is, and because you're being passive, that's the other thing. Pick an allocation you're happy with and you'll be almost certainly very, very, very, very happy, even if by definition it won't be perfect. Because let's be honest, the other thing with ETFs is you're never going to pick the best performing stock because you can't.

1:10:35ETFs are always going to underperform a decent chunk of the market. ETFs underperformed Nvidia, it's underperformed Pro Medicus, it's underperformed Amazon, it's underperformed, I don't know, what else has gone really well in Australia, mate, right? CBA over time. I mean, the reality is, if you know in hindsight, Fortescue, if you know the top stock in hindsight, you can always beat the market. If you want to just own the market, own the market, keep it simple. Yeah. And I should just say, I mean, I was negative on it, but I mean, I always think too that there's, these are far from terrible picks.

1:11:08Right, right, right. Like you're not going to blow yourself, like of all the things you could invest in, like, you know, a fund of funds. It's like I'm being picky just to give you the impression, but, you know, it's like you're not buying Ethereum, you know. You're buying something that's got real value to it. Yeah, yeah, yeah. Yeah. Beautiful. All right, Matt, I reckon that probably wraps us up for this Sunday morning. Mike, see you on Friday. You know you will. I know I will. Try and stop me from showing up. Until then, have a great week and full on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned.

1:11:46General 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 Licence 400691.