Mailbag: incl. The perils of low P/Es. November 10, 2024

26:13And there's not wrinkles within that and there's not exceptions to that. I've got to be careful here. land is the classic right it's like let's say the saudis bought up tasmania um they can't take it with them right and they unless they can change the rules and the legal structure and the political structure it's sort of you know it's sort of yeah it's it's tough to think about i'm gonna throw it to you because i'm all over the place no it's great mate you've nailed i think um so lots of moving parts here. So let's think about someone buying Australian, I'll say shares, I'll tell you what, I'll say from property for now.

26:49Well, BHP, Qantas, all of these names are very significant foreign ownership in all of them. Right. Now let's say, so I own BHP shares and a foreigner wants to buy those BHP shares from me. So firstly, they give me money for that. So they are taking their foreign currency and throwing money at Australians so that they're throwing some money at us. Now, in return, they get the future cash flows of BHP from now until eternity, until they want to sell the shares, of course. But let's assume it's a one-off transaction because it gets messy when you start buying and selling. But let's go for that. Now, the only question really, and I think about the time value of money, when we do a discounted cash flow analysis, we're saying a dollar an hour is worth more than a dollar in 25 years' time, right?

27:31We all know inflation. I won't get Andrew started or it'll be a four-hour podcast. So, we know there's just we want returns and I want to spend the money now. So I want the dollar now. I don't want it in 25 years. I mean, without inflation, because if I'm only getting your dollar back, why would I bother? I might as well have it now. I'm not going to wait 25 years for it if I have a choice. So let's say it's all fair value. If they buy BHP at the appropriate discounted cash flow basis, then they're giving money now. They're getting money back later. Net, net over time, there's no change. Now, right now, they throw cash at me.

28:03Next year, the cash only flows one way. But the idea of discounted cash flow is they've given us up front the value of all those cash flows we're giving them back. So there really is, even without the foreign currency thing, it's a zero-sum game. Now, if, and this is where people say with land, for example, there's only so much of it. We sell it to the Saudis. We sell Tasmania to the Saudis. I like that example around. Here's the thing. How much money do they give us for Tasmania? Because I've got to say, if someone from Saudi Arabia wants to come and give me$48 million for my house, they're buying an asset for way more than it's worth.

28:34I get the value. I get all that cash for that. I can go and use that cash for my lifestyle. We should want to, if you can sell someone an overvalued asset, if you're going to find a patsy, sell to them. Sell them to Tasmania. If they want to pay us$84 billion for Tasmania, knock themselves out. Now, we all know, by the way, some of the treaties, or I'm sure probably treaties in quotation marks, in the US, the deals that were made with some of the Native American tribes for some of the land over there, buttons and blankets. but conceptually if the price had been appropriately set by a fair exchange of value from people who had similar amounts of information education ability to forecast future cash flows there's nothing bad about that for its own sake if you're prepared to say this is worth more to me then why wouldn't you we put these national barriers up if someone from new south wales wants to buy land in victoria is that a problem no well then why is it a problem if someone from england buys some land in victoria or from vietnam or from bangladesh or from new zealand do i use that one already there's nothing necessarily bad about it now if they buy it undervalued you know where i what does frustrate a little bit ram is markets are really volatile and that's great for us as investors because we get take advantage of other people's short-termism what really frustrates me and japanese are great at this they've got a heap of our food companies why because we kind of go oh food's not very cool i don't like it very much it's not very trendy right now the japanese like Like, we've got a 100-year timeframe here.

29:59Okay, I'll buy your undervalued assets, sure. And then we say, those foreign investors, they're buying up all their assets. We should be saying, those bloody Australian investors are selling our stuff too cheaply. Blaming the person who buys it because we offer it to them at a destructive price. We're the ones selling it. Whose fault is it? So that kind of drives me a little bit nuts. So look, the money doesn't leave the economy in any meaningful sense, even before we exchange foreign, even if they use Australian dollars in their lives, without a currency exchange, as long as it's done at fair value, That's exactly what we do every time we buy and sell any asset.

30:29The fact that someone overseas makes zero difference to the Australian economy as long as it's done at fair value. If they buy at too high a price, we win. If they buy at too low a price, we lose. If they're at fair value, by definition, there is no value loss or gain. We just swap an asset for a cash flow. That's what every investor does all the time ever. I will very quickly touch on residential property, Ram, because this is different. and it goes to, why is it different? Because rental property is shelter. It's not a financial asset or it shouldn't be a financial asset. And so when you have, now there's also a distinction here.

31:06If you have someone who buys Australian property from overseas, who doesn't live in or rent out that property, they're removing stock from the market and impacting the supply and demand imbalance. And that is something that at a national interest level, we should be like, you know what? It's more important that Australians maximize their ability to access shelter rather than letting someone from overseas. And I don't mean overseas in a bad way, not in a xenophobic way. An Australian living overseas is the same problem, right? It's not the fact that they are a foreigner that's the problem. It's the fact they're taking supply off the market.

31:39And so to the extent that happens and probably puts some upward pressure on prices, housing's so bloody unaffordable right now, we should just stop doing that because it just makes no sense to keep doing it, right? So it's not even ideological. It's just pure supply and demand right now. A bit like Ram and I have a different view on big versus small Australia. but we both agree that right now the rate of change is the problem. And if you can influence the rate of change by saying that some foreign investors, foreign owners, sorry, guys, probably not the best idea. Now, I will add one exception, by the way, though.

32:07And this is if a foreign investor wants to buy some Australian property and then rent it out, the same as an Australian landlord would buy it and rent it out, there's actually no difference. And again, this is where we've got to be careful about the xenophobia thing, right? Let's say, I'll use Twiggy because he's normally a pretty good guy. Let's say Twiggy was to buy my house and rent it out. And let's say a foreign investor instead buys my house and rent it out. Is there actually any difference whatsoever? Assuming fair value, again, as I said before, it doesn't matter who owns it. The foreigner is not the problem.

32:37It's the fact that it is or isn't an investment property, and it is an appropriate rent or an appropriate price. So we do have investors as a class and the impact they have on prices, but the fact that foreign or local is literally irrelevant. it. And so be careful when people dress up xenophobia as those foreign investors, they're screwing our property market. If they're paying market prices and the rent's covered and someone else would have bought it otherwise, it's only an issue if they're taking housing out of owner occupied available housing. And that could be any investor, not just a foreign investor.

33:06It could be Twiggy, it could be Gina, it could be anyone, Mike Cannonbrooks, I'm just being billionaires for the fun of it. It could be Jerry Harvey, it could be Andrew Page, who's suddenly a property mogul. If you care about the number of investors that are occupiers, great. But don't pretend that the fact that foreign makes any difference at all if they let that house go back into the investment stock. It's only an issue if someone buys the house and leaves it vacant. That's where it reduces the supply. What do you think about – they are bringing in capital that wasn't in our swimming pool, though, in the sense that there is – we all know it's ultimately supply and demand.

33:43Yes. the supply is fixed, but that it is an additional source of demand that otherwise wouldn't be here. Does that have an impact? I mean, it doesn't have an impact in terms of whether the house exists. So I totally get your point, right? And whether or not it's available to be rented out according to the rules of the land and all of that kind of stuff. And yes, they're free and open competition with local buyers. So that's all 100 % true. But what I'm less sure about is it's just that We're adding demand that otherwise wouldn't be there, which while the stock doesn't change, the prices change.

34:15And that's the distortion, I guess. Kind of. And that's why for now I would just say don't do it because - Yeah, it's an easy one. Whatever we can do to limit the growth in demand, we should do because housing is unaffordable. And so there's the conceptual versus the ongoing. going but for company for bhp shares for example if there are more potential buyers for bhp shares than there would have been otherwise and that pushes the price up it's more likely you get to sell at an overvalued price which is great yes and if you don't get the price you want don't sell and this is kind of back to the ben graham warren buffer thing of you only have to mr market will offer your price if obviously investors are like i really really want to buy australian assets like cool guys come and chat but i'm going to set you a price if you really really want it here's what you're going to have to pay for it.

35:01Why would we not want that to influence the price of the assets we own? If we could sell our assets at an overvalued price, we should do it every day. It's Mr. Market, right? If you offer you a cheaper price, take the money. You're 100 % right. Just for the point of balance, that is from the perspective of an owner of assets. Yes, correct. So I graduate today. Mum and dad don't have a lot of money. I'm not going to get any inheritance. Now I'm competing in a much bigger field, so to speak. So the fact that some boomer gets a great sale for their property, you know, it's like, okay, on net, that's good for the country.

35:38Not for me, it's not. And as I said, I don't know if I'm more wrestling with this as a concept. What's different about BHP and property is that, I know I go on about this, but property really is so foundational for everything. Yeah, totally. In terms of families and your employment. You can't do anything if you've got nowhere to live and wash yourself occasionally. If it turns out that excess demand floods into the country for BHP shares, the worst perturbation or distortion, if you wanted to call it that, in a negative way, would be that the share price there gets overvalued for a bit. BHP gets a lot of very low-cost capital that they can at least theoretically deploy for returns.

36:22but maybe investors get a sub-pi return in terms of a return on invested capital kind of perspective. When it happens at large on a residential housing basis, it's sort of like there's this, again, we're talking about this a lot lately, but that second and third order consequences where it just impacts the ability of people to have that firm foundation from which to build a job, a career, a family, and all the things that matter. I absolutely agree. But at some point we get to distributions, right? because at some point we say, well, hang on, if I own BHP shares and they go up, I make money, but the other person doesn't make money.

36:55Therefore, I shouldn't be allowed to own shares. I shouldn't go up. Yeah, it's hard. And you're not saying that, right? No. I hate the phrase slippery slope because it used to justify anything, which is dumb. But, I mean, it's the right issue to wrestle with, right? And this is where, you know, we talk about finance and economics and investing, and I like to think we do some tangents, but I think it's because we understand the context, and context matters. And, you know, yes, making money. It's like the management conversation we had on Friday. I mean, you know, context matters. Yes, we want to maximise the returns on our investments individually and separately.

37:26But you and I both realise, I'll give us a wrap because, you know, why not? No one else is going to. You know, we are mindful of the impact that has on other people, the impact that commerce and economics has on the rest of the society. And just to be clear, I'm only caring about that because of how it selfishly impacts me longer term as well, right? No, that's not true. You care about other people. Oh, I do. But my point always made to that point is that even if you were perfectly inwardly focused and selfish. I agree. I don't want to be the richest person in a failing democracy. Correct. I would rather be middle class in a very prosperous society.

38:00Yeah. The last person out of Iraq is not making a fortune. So, yes. But I just want to make that point. Hopefully, we've answered the question. Yeah. I don't think you need to worry about it too much other than, as Andrew, I've both said, residential property is a different kettle of fish. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

38:27Another anonymous question who starts with, please keep me anonymous, which is a good start. Hello, Scott and Andrew. I was wondering if you could critique my thesis. I have an SMSF which was created to purchase property. That's not the thesis, Andrew. Hold on. I was able to achieve my goal, and I'm happy with the outcome, as it suits my behavioural biases. That's really smart. However, there are funds left over that need to be invested. I've invested roughly 30 % in the Vanguard Australian Shares ETF, 30 % in the Vanguard Develop World Ex-Australia ETF, 30 % in Vanguard Diversified High Growth, and the rest in seven individual shares of high quality that I intend to keep for a long time.

39:08in the idea of straw man. Please critique my idea. I understand it's not personal advice and you do not know my personal circumstances. Kind regards, anonymous. I'm not sure if we get in trouble for giving personal advice to someone who's anonymous, but we probably can't, so we won't. Well, who knows? Regulations. That's a can of worms. Yeah, exactly. They'll get us. What do you reckon, mate? 30 % Australia, 30 % global, 30 % the diversified high growth ETF, VDHG, for those who are playing at home, and the other 10 % in seven individual shares. Straw man away, Mr. Page. No, no major notes. And I know this is the really disappointing answer, but...

39:44You don't have your straw man case here. Come on, dude. Help yourself out. The straw man case is, like, if you'd said I'm going 90 % into some crypto token on something, like, that's a bad idea, right? Like, I'm putting all my money in some biotech hopeful. When we get to the end of the spectrum where we are with our listeners, where it's like, hey, I've got this particular mix and they're all pretty decent assets and they're all sensibly allocated. Is my portfolio look? No, but I'm a different person in different circumstances with different views of the world. But we're not miles and miles apart.

40:17It's not like I'm doing something radically different and you're doing something, you know, it's sort of. So in that vein, I just really want to make, it's a cop out, but I really want to make that point. You're so close to, I don't, A, no one knows. Ask me in 20 years what the perfect asset allocation would have been in 2024. No one knows. We've all got our theories, right? But no one knows. So based on that, I can't give any harsh criticism because whatever happens, given the sheer spectrum of your exposure there, even if you underperform what might be whatever standard benchmark you want to do, you're not going to do it by much.

40:56I can't imagine. You're going to do pretty well. well, if I, now in having all of that, having been said, I tend to come back to when I'm particularly going over longer timeframes, I personally lean into more concentration than is typically advertised or, and I've got to be careful with that too, because people think, oh, it means you've got four, all your money in four baskets. It's not, but when you, You count out the number of assets that are included in that exposure. There's literally thousands of them. And that's the point. I mean, that's the point of the strategy. I get that. But for me, again, this is hubris or arrogance or whatever you want to call it.

41:41I feel even if I could get down to 20, I'm pretty diversified. But within that, I've got a much better, not guaranteed by any stretch, but a much better potential for our performance, particularly if you've got an inclination and the curiosity for, you know, just to bury yourself in this stuff and to think about it more than perhaps is healthy. But, you know, if that's your passion, I think you can do that. So that's my feedback based on what I would do and I would think. I think sometimes people take the idea of diversification, they go way too far with it. And it's the diversification, as Buffett calls it.

42:21But again, I'm really just being critical because you asked me to be critical. and I've really got nothing wrong with what you say there, Anonymous. I just personally would be not hyper-concentrated, but a bit more concentrated. And that's just...

42:38So, I think that makes a whole lot of sense the way you've approached it. Again, we can't give you personal advice, but if you're an ETF investor, 90 % ETF makes a whole lot of sense and 70 % of your stocks you like makes a whole lot of sense and that's completely fine. Like RAM, do I have a major problem with it? No. Diversified high growth, I think, is the... I want to say the worst product Vanguard offers, which is something to be really, really harsh, and it's not even their fault necessarily. I hate ETFs as a rule that are named to market to you rather than help you invest well. And Vanguard are the least worst of this one, right?

43:16They're really good. When you call something diversified high growth, people think, well, how could that possibly be bad? It's diversified and it's high growth. sign me up like who would not want that right well no no i want the diversified low growth option can you walk me through that concentrated high growth option concentrated low growth and so you're gonna go okay well what's what's kind of you know how can you complain and i'm not really complaining except for two things one is it's a reasonably expensive management fee at 0.27 compared to the other ones they've got right just be a little bit careful of that the other thing we've said this before we've talked about this before when they say diversified high growth is diversified, but 7 % of it is in international fixed interest and 3 % of Australian...

43:58What? In high growth? Well, this is the problem, right? Outrageous. That is outrageous. Well, it's diversified high growth, right? So what their argument would be, to be fair to Vanguard, remember when people say balance? Balance feels like it should be good except it's 25 % property and cash and you kind of go, balance but not very good or aggressive is somehow bad. There's no emu farms in there. Where's the balance? Exactly. So is it High growth? Well, 36 % is Australian shares, 26.5 % in international, unhedged, 16 % hedged, 6.5 % in international small companies, 5 % emerging markets. Those are high growth investments.

44:32So broadly, it would fit on the higher growth end of any reasonable portfolio allocation, right? Now, you and I would disagree because we'd say high growth in the context of shares, for example, But in the context of a, quote, balanced portfolio, only having 10 % in fixed interest is pretty high growth relative to average, right? And I don't necessarily have an issue with it because, frankly, you've got 30 % in Australian shares, 30 % in international shares, 7 % in individual shares. Having 10 % of 30 % in fixed interest is going to kill you. So, again, I can't really complain. No. But I would just ask our listeners to reflect on why you might own this.

45:10What specifically are you looking for past the name, which sounds like it's a no-brainer choice? Now, this will give you less volatility than shares-only ETF, by definition, because there's cash and bonds in there, right? So it'll be less volatile, just will. But does that make it better for the long-term investor? Well, not unless each of those component parts is adding to your return rather than reducing your return for the sake of less volatility. I'll just say very quickly that volatility and long-term performance are usually inversely correlated. Correct. In the sense that the more volatile assets are the ones that tend to perform longer term.

45:47The least volatile assets are killers over the long term. And you've got 16 % of the international shares exposure, which is hedged, which you're paying for. You're paying for hedging, right? It's not in the management fee. It's in the returns. You don't see it. Again, Vanguard are being dodgy here. It's just what they've done. Now, for many people, this is better than balanced. If it's balanced or diversified high growth, go this one, right? in my view. Because again, to Ram's point, less property, less cash, more shares, more equities, you're going to probably get better long-term returns. So not bad.

46:17But if you're asking me, I would not own this. I don't want to pay for hedging and I don't want fixed interest in my portfolio. So I wouldn't own it. But again, if fixed interest is 10 % of 30 % of your portfolio, then 3 % in bonds, it's not going to matter much. So again, in the spirit of - Buy 3 % of Bitcoin, right? If you're going to do something like that. No, no, don't do that. Yeah. Look, I think for me, that's – you're asking us to – the other thing, by the way, is this is largely duplicating what you already own, which is the Aussie shares, international shares baskets. So kind of – and it's not bad.

46:52There's no harm in having duplication. You just don't need it. Me personally, I would – if it was me, I wouldn't own this. I just own the other two ETFs and the shares. If that's the approach I was taking, you don't need to double up in the third. That's the other thing I was going to say. Yeah. If you go to the ETF, people take a good idea and they compound it. So I want diversification, so I'll go on ETF. Well, if I'm going ETFs, I'll get a diversified portfolio of ETFs. To my earlier point, it's too much diversification. If you just hold one ETF, maybe two, you've got the Australian one and you've got the US one, that's it.

47:23You were so insanely diversified. It's not fun. You were at a level of diversification that was undreamed of even 15 years ago. That's right. And for tiny fractions of a percent. Yes. fees yep yep yeah so look that that's oh yeah i don't hate it and by the way if you've owned it already and you made some gains i also wouldn't sell it and crystallize tax gains for the sake of yeah we're splitting hairs at this i just wouldn't allocate it yeah uh cool so hopefully that answers the question i think it's i think it's pretty good um this is a great question from matt hi scott and ram thanks for the weekly insights commentary rants and laughs i'm almost imagining Matt means that in proportional order of importance slash quality or value, but I'm not sure.

48:07And a big thank you for your advice on how to mentor and coach our kids in investing, which is why I love this question. And that is, as Matt says, the basis for the question. Upon your prompting, I helped my son purchase some shares earlier this year. He chose Tesla and Domino's, both of which have given small returns. but the real benefit has been his changed attitude in understanding that he is now a part owner of real companies. He now smiles proudly as we pass Tesla's or Domino's outlets while driving down the street. I love this. An even nicer surprise was when we last week received our invite to the Domino's AGM that included a code for discounted pizza for the year ahead.

48:49He is now fully sold on the benefits of share ownership. my question is to ask you if you know of any other nice share ownership perks that might prompt my son to look to invest in other companies keep up the great work and full on matt matt you've done you've done an amazing work mate that that light bulb i've seen it in family members adults and kids by the way huge huge difference um it's why when people ask about what should i do to invest there's two it's like well how do i maximize my kids investment returns to one question how do i kind of build the love and interest in investing it's the same question but they're potentially very different.

49:22You've done a good job, I think, helping him buy a couple of shares of businesses that he likes and can see. That being said, Ram, perks, everyone loves something for free. Any other perks you know of around the ASX? When I was first getting started, it was the David Jones shareholder reward scheme. Or was it the Myers? We always had one too. Yeah, well, yeah. Colesmeyer, that's right, it was Colesmeyer. They had it. And as a shareholder, you got discounts off all their stores. Yeah. And I had a very high number of shareholder events where people were just like, zero view on the company other than I get a 20 % discount.

49:59But it was actually a very real return component to it. Sadly, they've fallen a bit out of favor. Businesses have probably thought it's a lot of bother and expense for very little upside. But I think it's a wonderful thing. So I don't know of any – you might have some that come to mind, but I definitely think you can do what you've already done, which is go for the visibility angle. I could tell you some stocks I'm holding right now. I've never heard of them. What do they do? I don't even know what they do. What's that thing that they sell? I'll say, oh, it's really great because in the business world of structural monitoring of borders.

50:39And then I'm like, what? Something that you can, if you go to the, you know, like Woolies is the classic example, even the banks, God forbid. No, don't say the banks. It's not worth it. But, you know, something that, as you say, when you're just out and about in the world and you're walking through a Westfield, you know, or you're in a Westfield, right? And you can just sort of say, I own part of that. I own part of that. I own part. It is, to me, it brings the tangibility to the fore. It's always been one of my bugbears how people go, well, you know, shares suck because you can't, they're not real.

51:08you can't touch them, but property is real, you can touch it. It's like, no, these businesses exist. I can go and touch any of these stores at any point in time. And that's what you definitely want. The other angle to that in terms of the visibility is this is going to defy what I would do from a returns maximization perspective, particularly for a young person, but get something that pays dividends. I mean, you don't want dividends as a young person. You want growth. But when they get that six-monthly check or that direct credit into the bank account, it's that visibility component again. It's like, oh, what's it?

51:47Hey, dad,$50 turned up. So, yeah, it's your dividend. And then, oh, actually, now it's$60. It's like that will do wonders. That will do absolutely. Is it going to be the best returning investment financially? No, probably not. But in terms of, to your point, Scott, that, you know, will it force that light bulb moment or accelerate that light bulb moment? 100%. 100%. Yeah, it's really, it's just, and that's so much more important than maximizing return. People want to invest for the, as I've said before, I have two, my young bloke has two investment accounts. He doesn't know about one of them. Not that I'm, well, he'll never listen to the podcast.

52:23I can pretty much, you know, do whatever I want at this point. I give him the Wi-Fi password on the podcast. He's never going to listen to it. So I have one, which we are putting money aside for him. and one where he gets, he has to, he doesn't like it always, puts some of his pocket money into investing in shares. It's got literally a couple hundred bucks in it and he gets to choose his own shares and they are two very, very, very different reasons, you know, and it's literally all about, mate, what companies do you like? What do you want to buy shares in? You're an owner in this. You're up, you've made some money.

52:50I think Amazon might be up 70 % or something. It's like, really? Yeah, how much am I up? I made 40 bucks, what, for nothing? Yeah, you made it for nothing. Wow, like a dividend? Oh, that's cool. those things really really matter um i don't know many there's not many other perks ram dominos was a surprise i'm a domino shareholder i was surprised when i got it too um they kind of get out of fashion because they're kind of expensive and annoying and difficult to run and people don't particularly love them and um i'm sure the uh professional fund manager like well we don't get some of it the other thing by the way and this is a bit of technical detail which is kind of important because it should be but it's just a bit annoying if you're a smsf and you buy those shares in the SMF, you can't use the discount.

53:26You're actually not legally allowed to. Oh, get out of here. Are you serious? Yeah, because superannuation assets have to be for the sole purpose of the member's retirement. And so you can't use the discount. You're just not allowed to, which is dumb. Because if Domino shareholders who hold it in their SMF get a discounted pizza, that's okay. Correct. Fair enough. And look, it's the same idea as if you buy art for your superannuation, you can't hold it in your house. So you want to look at it rather than for the investment returns. So that's the line of thinking. I agree with you, Tim. I agree with you completely.

53:57But that's probably impacted why and how people or companies offer these things. So Dom, as you, Event Cinemas used to do it. Woolies and Coles Myer used to do it. I have a feeling Treasury Wine Estates, I own shares in them, I think they have like a shareholders wine kind of club thing. I'm not entirely sure it's not just kind of marketing. I'm not entirely sure it's a big discount doing it. It might be kind of those, hey, you want the shares now, buy the wine. And shareholder loyalty matters, by the way. And this is the other thing. If I was them, I would do it, right? Here's the thing, though, I guess, is I don't know about you, Ram, but I'm more likely to shop somewhere I own shares in and vice versa.

54:32So maybe the companies figure they got my loyalty because I'm a shareholder. There's no point paying for it twice. And at the end of the day, the perks come out of your own returns, right, at some level. So if there's a bit of a robbing Peter to pay Paul, I still like it. I think it's worth doing. I suspect Domino's will end up selling some more pizzas because of it, including to Matt's son. and that's I think they miss I think they rational ultra rational people sometimes miss the value of some of that behavioral stuff and I would imagine the marketers and some of those companies would be like are you kidding these guys are already loyal to us because they're shareholders we're taking their own money from them anyway so there's no downside if you give a discount that comes out of your own investment returns if they use the company's products more it's better for the company everyone better for them why would you not and it's like I would do it if I was them but I understand they won't can I can I have very quickly Miniran just on something you said Completely not in the context in which you said it, but it reminds me of something I often hear, which is you said, I got money for nothing.

55:23Yes. Oh, you don't like that, I know. I really don't because, you know, no one likes to show off and no one likes to see their neighbor get rich, as Oscar Wilde said. But I very much, I'll say it to the investors out there listening that have managed to generate a few returns. You absolutely did something. You delayed consumption. right you said i you you passed the marshmallow test you said i don't want something today because i want something greater tomorrow and in directing that i'm not doing it to the exploitation of anyone i'm giving this well i know i'm not giving it directly to the company on the secondary market but i am at least contributing to the stock price in my small way and the demand that i do to it to enable the company and to empower this company which is a productive enterprise and generates value for society and only enriches me if it does create value for society if no one's buying No one cares about it, then it doesn't.

56:18So it's sort of like I have directed, I have saved, which is a very noble act in my humble view and a very consequential one to how society works. And I have allocated that savings to areas that are far more productive than I myself had the capacity for at the time. And the third component to it is I sat there when the demons of the market, you know, right up there seeing the whites of my eyes, the terrors that I have experienced, the temptations I have resisted, you know, the delayed gratification and the extension of time preferences. I just think when you make money as an investor, you should celebrate it because it wasn't easy.

57:00You didn't do nothing. and if you want to be hyperbolic enough you could even say you've helped further society in terms of assuming you've allocated the capital behind a company that's a force for good so there there's my mini rant I like it greed is good I'm Gordon Gekko-ing here you are Gordon Gekko-ing you should thank me for making money god damn it that's right don't you know how hard it was to get rich I want your sympathy I want your approval I want you to thank me some other idiot invested in a bunch of stupid startups that didn't go anywhere and misallocated resources and impoverished society at large.

57:37We want success as a society as long as that success is earned, I guess is my philosophical angle here. And this is where I'll tie it together. If you invest well, you have earned that and done force for good too. I won't disagree with you strongly. I will say if there are degrees of earning things, the bloke breaking rocks and the bloke who says I didn't spend it aren't quite any exactly the same way is all I will say I'm not going to you're not wrong you're not wrong I'm not going to but for the point that the the economist in me would say the fact I have the money is because I broke the rocks in the past you know what I mean and so and now the person who breaks the rocks today chooses not to spend all of the money made from breaking the rocks could then allocate it or they could just throw it all up against the wall in some stupid extravagance you know but think about it which is better i don't disagree i'm just not going to ask for sympathy uh let's let's go to a question from dave this might be our last one um this is this is for the pod machine thank you dave see i appreciate that i'm a long-term listener and really appreciative of you both thank you which people say that i kind of feel like they really mean one of us but say both because they don't say i really appreciate of you both it's like i like you both it's okay it's like no you don't really i heard in a recent mailbag said dave that an investor was bullish on keen out securities due to the low PE ratio.

59:01This made me laugh for two reasons. One, I purchased Keener a few years back at 90 cents and held it for about three years before selling it 80 cents. Not a great return. And two, I recently bought into both Volkswagen and BMW due to their low PE ratios, but also long-term holds as I think European cars will triumph and return to strength eventually. I'm currently down about 25%. PE ratios are a good indicator, says Dave, but sometimes the forward PE ratios look low because the market doesn't think the future is attractive. Have you guys ever made a good or bad investment based largely on an attractive PE ratio?

59:39Dave? PEs are the best and the worst at the same time. When you have the proper context in terms of what ends up being a reasonable expectation of growth, they're just a brilliant shortcut. It's just really you could derive it from the discounted cash flow model. You know, it is very informative. If you have no view or context of the earnings trajectory of the business, it's useless. Right? So we often give the example, a PE of 10 stock could be a lot more expensive than a PE of 100 stock if the former is going, you know, bankrupt next year and the other one's compounding its earnings at 30 % per annum.

1:00:22Like one is very cheap and one is very, very expensive. Although not if you just looked at the PE. So that's how those two things can both be true at the same time. And to your question, yes, I have made some very dumb investments over the years because I said the PE was low. And the PE was low, but it was actually very high. The published PE was low. So the actual forward PE as reality unfolded was insanely high because the earnings never materialized anywhere near where I thought they were, not even to the extent that a low PE would compensate for it. So that's a pretty verbose answer, but that's how I would come at it, saying, yes, it's important and not important.

1:01:09I've done both, Dave. I've invested in companies with low PEs that have gone well and ones that have done badly. and my Achilles heel, well, I've got a million Achilles heels as an investor. One of the biggest ones is I'm a kind of sucker for value. It looks just like, oh, it looks really cheap. And as you rightly point out, mate, sometimes they're cheap for reasons that are, you know, the fact that simply they're cheap because they look cheap, the profit's going down, not up. And you should be aware of that. That's kind of been my experience a couple of times. So I've definitely been there. Yeah, I think Gage was cheap at one point.

1:01:45Gage Rose, we've talked about a lot of times. I think that was one of those. That being said, I've also done okay with some of them. Pacific Brands, way back in the day, was really stupid cheap. The market just kind of figured it was this left for dead company. And I thought, well, actually, hang on. There's value there. The cheap, I think Buffett talks about having a great business or a good business on the operating table. And sometimes if you can simply – we talk about being contrarian to that Morningstar and their ratings. If you can see a better long-term future than the market gives it – so low P is low for two reasons.

1:02:17One is earnings are high and getting lower, and the market's simply allocating that accordingly, or earnings are low but going to get higher and the market doesn't see it yet. And that's kind of the opportunity. Dave, your point about future PE is kind of the point rather than past PE as well. So are profits going to recover, going to return? I will say that I did do some buying during the COVID crisis, not as much as we always say that we would like. That's actually worked relatively well on average. I bought Webjet in February of 2020 because I'm an idiot I thought how bad could COVID possibly be but I also bought some stuff during there that was kind of like gee that just looks way too cheap based on short term expectations retail has done very nicely for me over the last couple of years some of those retailers I bought at you know very low PEs because the market kind of went but COVID's a thing and people are going to buy as much online and it's like yeah they didn't and then COVID went away people went back to the shops and guess what sales picked up again so that's one I did do okay with Overall, I'm probably ahead on that type of investing, but not as far ahead as I'd like to be because I'm a sucker for value and I tend to get trapped.

1:03:22One of the ones I recommended to our members, which I need to apologize for, is Nine Entertainment. It looks cheap and whatever. Now, maybe it comes good, but it's got worse and it hasn't got better yet. So yeah, I've got to be a little bit careful of myself there. Sometimes I can look at a price and go, all it has to do is this, which is true, but it doesn't always do that. Do you know, just looking at ShareSite, My best investments have always been, not always, I've typically been ones that have insane or even infinite PEs. Right. Tell us about that. How can you have an infinite PE? Well, there's no earnings.

1:03:55The company's not making any profit. But again, before you mistake me for a reckless speculator, I would argue that that's true, but they still had a product and service that had been commercialized, had incredible traction, and was just not happened to be profitable yet, but was on the cusp of it. And it's become a real core part of my investing process, honestly. The maths that occurs around inflection point, break-even inflection points, just breaks your brain a little bit because revenue can keep growing at 10 or 20 % or whatever it is. And you go from loss, loss, loss, loss, break-even, and then profits start growing at 70 % or 80 % per annum.

1:04:38The kind of levels that feel stupid to kind of model out. And it's deceptive just because you're working off a very, very low base and the costs of the business are relatively fixed. And so as the profit and the gross profit sort of goes up, more and more and more, a bigger percentage of it falls to the bottom line. It's a thing of beauty. So, you know, and even then though, I would still say I'm still relying on a PE. I'm just not – where people go wrong is they look at ComSec or, you know, the AFR or whatever they're getting their information. Oh, here's the stated PE. Well, firstly, you'll notice that different places state a different PE because they're either using trailing or forward or blended or, you know, different – you know, whatever it happens to be.

1:05:23So, there's a million different ones. I'm using my PE. And in almost all of those cases, just basically saying, well, what do earnings look like in three or five years? What's a sensible PE for that at that point? And then just working backwards from there. So I still have an eye on PE, but it has to be one that is informed, to my original point, informed by my outlook for the company, not what the trailing 12-month earnings happening to be. That's going to throw you a lot of curveballs. I think, yeah, I would still say look out five years. the way I've and I drive the team nuts at the moment by the way when I look at retailers for example I go back to 2019 now you shouldn't assume that nothing's changed since then Mosaic Brands went broke, we didn't talk about that but it went broke recently basically because it went from successful to unsuccessful during that period you couldn't just use 2019 earnings and say well obviously when it gets back there it'll be fine but I have used that to say for example some companies, well hang on 2019 was the last year pre-COVID since then, as long as the brand franchises has not been, has not suffered, as long as the competition hasn't got different, as long as the financials haven't meaningfully, permanently changed.

1:06:32And some have, by the way. Think about inflation, think about cost basis, that sort of stuff. So don't just assume that. But if you go back to 2019 and say, well, hang on, do a certain level of sales or profit then, if nothing fundamentally has changed in the business, and lots of stuff has, but if it hasn't, then they should at least do that, plus population growth or CPI or add something to that. And so, well, in the five years hence, It's business as usual should have gone to about here. And so I look at what I call underlying earnings power. I mentioned this before. And I go out five years and simply say, all right, in five years' time, if the underlying earnings power is roughly this, I use 2019 or some version or average or something and say, well, by then it will have grown a little bit, you would expect.

1:07:10And if it gets back to that underlying earnings power and maybe grows a little bit, compare that to today's price and say, would I be glad or not glad I bought shares at today's price? if in 2029, for the sake of picking a year, profits are back to where they were, maybe a little bit higher, would I be happy with that? I'd be stoked with that. Well, that's the decision. Maybe shares go up and down in the meantime. You're doing the same thing. You're doing exactly the same thing as I just outlined. Correct, exactly. That's what I'm saying. Yep. But I use that underlying earnings power as the starting point for existing business.

1:07:37For Ram's point, with infinite businesses, infinite PEs, you're looking for what could the future look like. So I just want to give a different - No, you're still doing the same. You're still asking what the - You're just going from an established business that's had a hiccup. I'm going from one that's transitioning from, you know, not cash flow positive to cash flow positive. Correct. Same thing. No, no, I agree. Same thing. Yep. Yeah. A hundred percent. A hundred percent. Hey, mate, I reckon we've probably wrapped it up. If you've listened this far and you want us to answer one of your questions, if you haven't listened this far, we're so happy to answer your question, but you haven't heard this, so it defeats the purpose.

1:08:06Email us, info at fool.com.au. With the question of member services, Fools will make sure we get it. Hit us up on the socials. You can follow Ram at strawmaninvest or at sage underscore simeon, which is what, smart monkey or something? Yeah. It's initially intended to be self-deprecating, but I think sounds really pretentious when I listen to it these days. I'll say smart for a chimp. Shouldn't there be laser eyes on your Twitter portfolio? I've resisted. I've very much resisted. For how long? One day. One day? Well, it's too passe. You needed to do it early when it was cool and energy and stuff.

1:08:50Ah, laser hand. No, diamond hands? Diamond hands, yeah. Haven't done that for a while. There's plenty of laser eyes. There's not a lot of diamond hands anymore. For people that don't know, Scott's giving a Bitcoin reference, yeah. That's better than you. Is it red pilling or orange pilling? Orange pilling? Orange pilling, yeah. I've got to keep up with all the... Good luck staying poor is the one I've come to know recently. I've copped a lot of that on Twitter. Yes. Anyway, go to Twitter for the... I'll resist the bait. I resist the bait. Go to Twitter for the Bitcoin references. Stay for the smart for a monkey stuff.

1:09:19At Sage underscore Simeon. Follow me at TMF Scott P on all the socials or Scott Phillips Money on Facebook. Thanks for listening. Have a great rest of your weekend and we'll talk to you Friday. Until then, full on. See you next time. 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 Licence 400691.