Mailbag: incl. What, exactly, is consensus? May 14, 2023

24:04I invest as a group, but we're just quite with it. Aren't they? You know, like, and, yeah, I think in any other pursuit and other period of history, it would not be a happy existence. But fortunately, we live in a time where that's a skill set that you can use to your advantage. Yeah, you're exactly right. Mate, let's move on. Speaking of growth stocks, speaking of evolution, one from Dan. Hi, gents. I'd love to hear your thoughts on the medicinal marijuana industry and in particular, Can Group. The industry was hot, in quotes, a while back and seems to have cooled. Was it just meme stocked? Are investors not sure on the industry in general?

24:44So not talking about it anymore? Or is it just that there are better opportunities elsewhere? Cheers, Dan. It's one, mate, I use regularly as an example of what I'm going to plump, I think you probably will tell, or Dan's thought that maybe it was meme stock land. Or not even meme stock land necessarily. Meme stock actually suggests it's kind of the social media driven thing. It was just the hot stock because it was the hot stock because it was the hot stock. And when prices were going up, it became a self-fulfilling prophecy of medical marijuana is going to be hot. Look, the share price is going up.

25:14Oh my goodness, medical marijuana is going to be hot. Look, the price is going up. That self-reinforcing loop. These are shares, by the way. So back in 2017, 67 cents a pop. They went up to$4.01. by the 5th of January 2018. So this was close enough to a seven bagger, maybe six bagger, in seven months. Then the shares went from$4.01. They're now sitting at$0.16. It's very much a story I'm going to suggest, mate, of a little bit too much excitement for a business that frankly still doesn't have earnings some six and a half years later. not to say it can't or won't but this is to my mind one where sentiment expectation momentum whatever else took over and maybe got disconnected from fundamentals the question though of what comes next is a really good one and so i'll answer that one but i'll let you have your thought on how did we get there and what was medical marijuana industry for the last six or so years.

26:21Yeah, it's hard to talk about it without giggling a little bit. You know, it feels a little bit naughty as a stock and it doesn't feel like it could be a serious investment. Not giggling, because you've bived before the show. Yeah, right. But, you know, there is legitimacy to some of the beliefs that were there. I mean, there are a lot of purported great benefits with it. It seems as though the regulatory hurdles were being cleared. We've seen how big that industry can get, particularly in the US where it's been commercialized and decriminalized and all of these kinds of things. And, you know, in 2018, the company was making, you know,$500 ,000 in revenue last full year, it made$6.5 million in revenue.

27:03So that's, you know, you get it, right? It's not as though the world went completely mad, but I think too often investors get, they mix up sort of what Howard Marks calls first order thinking and second order thinking. So they take an industry that has the potential to get very large very quickly and that there's going to be a lot of players and a lot of money spent in that industry. And they automatically assume two things, that one, everyone that's sort of branded as a player in that space is going to do well and that the success will be rather immediate. And, you know, it just gets to a point where it's sort of like there is so much in the price there that it just can't possibly live up to expectations, even if it does show some decent growth.

27:45And it has shown some decent growth at the top line. Now, coupled with that, I mean, is the sense that although their revenues have been growing, their profit has been worsening. In fact, there is no profit. There's just a loss. And even though they're only making$500 ,000, you know, back in 2018, the net profit was, well, it was a loss of$4 million. Today, despite all the growth, they're now losing$26 million. So here's another lesson is that it takes money to make money. And growth requires investment. and often costs can run way ahead of the revenues that come in and companies get into trouble all the time over that kind of stuff.

28:21So as much as it sort of feels ridiculous in hindsight, and I'll admit I was absolutely saying it's not going to end well at the time because of all of these factors. But not to say that, yes, there is something here, but then how big can it get? How likely is that to happen? What are the risks against it not happening? What does that future look like? What are the economics of this kind of business? At the end of the day, it's a weed, like literally naked weed, right? It's not hard to grow as I understand it, you know, and you've got to wonder where is the competitive advantage here. There'd probably be some licensing advantage that you could have.

29:06There's certainly some scale advantage and distribution and all of that kind of stuff. But at the end of the day, it always felt to me as though, and still feels this way, I'm pretty confident longer term there'll probably be a more legitimate industry around this. But I suspect it will be pretty commodity-type margins because, you know, anyone who's in this space making, let's say, 20 % net margins is just going to attract competition like you wouldn't believe. And that's what's going to drive margins down. And you can entirely have a very big growing sector but very poor shareholders. And the classic example, I know we talk about it all the time, is airlines, right?

29:44So it's just a great example of that. It's wonderful, isn't it? I find this one, yeah, look, I'm with you, mate. So a couple of things I think are worth pointing out. And this is where, this is one that went badly. For every Fortescue that goes to the moon, a can group and someone else goes badly. And they both start with, hey, interesting idea, interesting theme, maybe possibly if this thing got big, imagine how big maybe it might possibly one day be. And I'm deliberately throwing lots of coulds and possibilities there because that's kind of what happens, right? Everyone gets excited about it.

30:17That's exactly what happens. Well, yeah, this could be a thing. And everything that starts could be a thing, right? Every possible cancer treatment, and we hope they all are, but they're not. Every possible gold explorer, every possible, in this case, medicinal cannabis by the way lithium i think it's probably uh running in the running as something that may well either do well or badly and again in the same vein kangaroo had not much in the way of revenues no profits uh there was no particular time frame for the licensing of medicinal marijuana it was all a case of if some things might happen then these things might do well and in a parallel universe kangaroo shares probably 16 dollars a pop right now rather than 16 cents because things changed.

31:01Governments jumped on it. They found some way to have a competitive advantage to your point, mate, some sort of moat or something. And they became the biggest group in the sector and they cornered the market. And the newest billionaires were the canned group founders. That's one version of this. And so I guess that's why... Now, the challenge with that is, you talked about probability before, mate, because there's a thousand of them that want to be the next X, CSL, the next Fortescue, the next whatever. Maybe one or two will. So the odds are dramatically against you if you're trying to find the one that might be the next one.

31:35It doesn't mean the story's not compelling, but it is just that story. And particularly when investors are getting excited about this stuff, at 16 cents, frankly, the same problem still exists. I mean, this thing's not profitable. There is a chance. It goes really, really well from here. And we look back and go, man, 16 cents, what a great time to buy Kangaroo. There's also another possibility that it has to raise a lot of money to keep itself afloat. shares are three cents in five years. So, and we go, huh, well, there you go. That's what happened. You can't know in advance what that's likely to look like.

32:05And I think that's the real challenge. I mean, sales are still two cents a share, have been for the last couple of years. Cash flow has been negative for the last five, six years straight. Earnings have been negative for the past six years straight. These are the challenges that these sort of businesses face. By the way, number of shares outstanding, 100 million shares in 2017, 350 million today, which is part of what's driven the share price down by the way but also not surprising because they're raising money and raising money and raising money, desperately trying to find a way to be cash flow positive and stop burning cash.

32:35Can I make a wild prediction? Go on. They will be raising money in the very new term future. Have you looked at the balance sheet or it's just on balance of probability? I just brought up the latest 4C which is companies that are unprofitable. I forget the exact rules for it but they have to lodge quarterly cash flow results. And so what you can see for the most recent quarter ended 31 March is they made$4.1 million in sales for the quarter, which is really great. But they had something like$9 million in expenses. So they bled$5.6 million. And again, that's not, by the way, not necessarily a bad thing for a growth company.

33:11You can spend a lot of money up front and get really reap benefits longer term. But the reason why I can be so confident in my prediction is you just scroll down the page and it's got cash at the end of the period,$1.2 million. So they don't even have another quarters left of cashback. So that's why the shares are where they are. I'm suspect. Maybe there's some more nuance to that, but this is just me literally bringing up the most recent 4C and having a look at it. Which, by the way, how easy was that, listeners? Like you can do this too, all on ASX.com. It's a really great thing to read for these early stage companies.

33:42It'll tell you away from all the counting mumbo jumbo, how much money came in, how much money went out, where did it come from, where did it go, how much is left in the bank. How much is left exactly? That's the game on the track. You know, and that is a very, very, very easy way. And by the way, I'm not divining. I'm not Nostradamus here. It's no secret. Everyone, of course, is hyper aware of this. But it is a trap for new players. And, yeah, so what do you do? I think I don't want to throw shade at the company at all. I wish them every success in the future. But I think an objective look at it will basically say, well, You've got a company here that incredible opportunity, growing really strongly at the top line, but just burning through cash at a prodigious rate and ever increasing rate, in fact.

34:29And so, yeah, you might look back in time and go 16 cents, what a bargain. But I know we make this point a lot, but I'll make it again, is you don't have to be early. You can get in at a higher price, but at a much lower risk adjusted sort of entry point. And that's still pretty good, right? I mean, do you want a 1 in 100 chance to get 100x? Yeah. Or do you want, you know, a 4 out of 5 chance to get a 15 % compound return type thing? You know, one's obviously much better, but it's just a moonshot at a certain point. And I just don't know as an analyst or as a curious investor how you can really know with conviction exactly which way it's going to go based on what we know at this point in time.

35:12So, you know, put it on. If it grabs your attention, chuck it on a watch list. Look, say in advance, what do I need to kind of see before I take this start seriously? For me, it would be a real reduction in the cash burn and the short-up balance sheet as a minimum, and then I'd take a much closer look at it. Nice. I love that, mate. I think that's true. So yeah, putting a quick line under this one, it was a story stock. People got excited about it. Honestly, I'm kind of contrarian a bit by nature anyway, but honestly, when everyone's jumping on the latest new thing and the share price is rocketing, buy now, pay later, lithium, medical marijuana.

35:48What else? Missed it, missed it, missed it. Hey, to our point earlier about looking wrong for a long period of time, right? Yeah, right, good example, yeah. I can't tell you how many times I was on Ausbees or something like that and here I am sort of being Mr. Doom and Gloom. And not that, you know, you feel pretty dumb because, again, in hindsight it looks different, but these were very long, many, many, many months of this thing just going further. And you look at it and going, that's ridiculous. It can't possibly go any higher. And then it doubles. and then it doubles again. And it just, you've got a lot of egg on your face during that period of time.

36:18But it is, again, resisting that FOMO and just sticking to the process, as I said, usually works out. There you go. Let's go to one from Brent who says, G'day, Scott and Andrew. I have a brief question about the term consensus. I hear it all the time where a company performs or otherwise against consensus. What is consensus exactly? Yeah. So there's any number of brokers and analysts and stuff out there. They will, as part of their coverage and service to their clients, they will provide price targets, recommendations, expectations of next quarters, halves, financials, what they think the earnings per share might be, et cetera, et cetera.

36:59And they publish all of this and people just aggregate it together. So it's like a poll of people who have publicly disclosed sort of research on this company now how seriously you take it is is an is another thing and this isn't just to again try and be um curmudgeonly and difficult and negative towards a lot in this this space but it is a guess you say consensus estimates forecast sounds very scientific it's guess from from people and i i often have friends send me research reports on companies that i own and sometimes you're very happy to receive it because they go oh they like it too and it's a very nice high target price oh it must be right yeah exactly you know because you look at you you read the top right is it a buy is it not what's the target price usually like the shortcut the number of times though i've dug into it and you kind of go wow to get that and again you can i can deliver you any number you want me to deliver i'm not saying there's any nefarious sort of actions behind it but again i can and you you you start it's not so much what those forecasts and that are, but it's what's the reasoning that's behind that?

38:04Wow. They expect sales to triple and they expect the margin to like expand by 10 basis points or whatever it happens to be over that. That's the more interesting thing, not the number itself, but how you got there and how sensible that is. So they're useful to some degree. I actually, I cheat a bit when I'm like first looking at something. It's curious to sort of say, well, those that have followed it at least, they might be as fallible as we all are, but where do they sort of land on this? The funny thing that sort of sends you crazy is that it's always the company that misses the forecast. It's not the forecaster that missed reality, which is a little bit of a bugbear that I think you and I both share, but that's exactly what the case is.

38:49The company's always going to do what it was going to do and you guessed wrong. It wasn't a miss by the company, it was a miss by you. That is so true, man. And that drives me bananas. Yeah, company missed expectations. Like, no, we're never trying to get that. You were putting expectations on it, you know. It's funny when you control the narrative, right? I'm mindful of this week when we had the federal budget and they talk about cost of living relief and everyone parrots the line. Cost of living relief, cost of living relief. And the average reader of the paper or listener to the news always says, oh, the government's going to be cost of living relief.

39:20That sounds good. Now, I know you have issues about the phrase cost of living, but even that aside, when you get to paint government spending as cost of living relief, you're kind of already winning the PR war, right? When people parrot that, whether you agree with it or not, it's a different thing. When people parrot that phrase, as if the government is doing this, the government is doing it, the government is doing it, the government is doing it. I've never heard a poly or a newsreader or a journo say or write that phrase a dozen times. The spinners in the political office are like, yes, they're all using our phrase.

39:47That's awesome. They're going to love us after this. And it's just everything's about context and framing. It's just a really, really important thing to remember. Yeah, company-based expectations. that's your fault, not mine. Did you make the expectations? Yeah, but it's his fault. He missed them. I don't think that's how it works. So no, I love that, mate. Also, I'm going to just throw one more thing on consensus though. It's just a reminder. I think the market is made up of all participants in the market, right? So everybody who buys and sells or could buy and sell, the kind of net result of those who do and those who could is what sets prices on a daily basis.

40:22If you look at consensus estimates, say, oh, that's what the market's expecting. It's like that's what gives you the current price. You know, there is no free lunch from knowing that consensus because, I mean, Mark's not super efficient. There are other players who don't give their estimates and blah, blah, blah. But broadly speaking, if BHP is expected to earn, I don't know what the numbers are. Let's say$3 a share. I don't know how close that is to reality. Oh, because this is$3 a share. Okay, that's good. Everyone goes, okay,$3. We all think it's$3. Great. How much do you pay for that? Oh,$30.

40:47Okay, well, that's a fair price. Yes. So if I think they're right about the consensus, they're probably right about the share price. They're right about the share price. Where's the opportunity? There's just that. And of course, share prices are more than just one year. But I just wanted to remind people that if you say, I'm going to buy stuff that's mispriced because the market might be wrong, and then you ask the market what it thinks and use that information to help make your investment decisions, you would literally just completely undermine your entire idea, which is I'm going to pick stocks by taking my own view.

41:13And that's not bad. But again, if you're at that place, buy the ETF. That's when you buy the – if you don't want to do the work to have a view, again, I'm not being critical. I'm not trying to challenge anyone directly, but you can't – I mean, you might be lucky and do it. You can't consistently and probabilistically, to your point before, Andrew, beat the market by asking the market what it thinks, taking that into account, paying a price based on that, and then saying, why didn't I beat the market? Because you literally asked the guy playing the game if you could play his game. That's what you literally just did and then wondered why you couldn't win.

41:43The house always wins and you're part of the house. A lot of listeners will be familiar with Bill Ackman, pretty famous US investor. His fund is called Variant Perception, which I've just always loved the name. I love the phrase. Yes, it is. And it's really saying, I mean, by definition, you're buying something, it's because you think it's good value. If it's good value, it's because the market doesn't see it. If the market doesn't see it and you do see it, it's because you've got a variant perception. Correct. And it's kind of uncomfortable. Yes, exactly. When everyone in the consensus thinks this and you think that, that is an extreme, well, it's a big act of arrogance, frankly.

42:28We've talked about the dilemma with investing before, the humility to recognise that you could and probably can be wrong and to act on it, but the strength of your convictions and arrogance to know that you're right and the market is the one that's got it wrong. It's a very difficult balancing act and very uncomfortable. But that's what you've got to have. You've got to have a variant perception. You either need to, when looking at these consensuses, you need consensus. Consensus. What's the name? Consensus. Yeah. Yes, I don't know. I don't think so. No, I don't. You've got to ask yourself, is there – I need to have a better view of what they think the company is going to do or a better view of how the market will value that outcome.

43:12Yes, exactly. For me to sort of get that outperformance. Again, as you say, by definition. And, yeah, it's an act of arrogance. So you need to have that conviction to really back yourself because even if you're right, it is going to probably take some time for others to recognise that you're right. And in the meantime, all kinds of difficult things can happen with the share price. But, you know. 100 % true. Which is why I often say you can borrow, and I'm always very reluctant to give recommendations to people because it is, you can borrow an idea, you can't borrow the conviction. And if you want to hold, you kind of need that conviction.

43:52And you can't get that just from, well, I heard Scott say it on the podcast. It needs to be, I've done the work, I've got the belief, I've got the conviction. You're never going to be 100 % sure. But yeah, you need a variant perception and the conviction to stay with it.

44:12Listener.

44:15Mate, let's go to Brent's second question because he says, also, I was just watching an episode of The Call on Ausbiz where the analysts were talking about a particular company. Long story short, he says, I thought I had my head around the company, but, and this is a quote from one of the analysts, quote, if you look at analyst forecasts, there's a$500 million capex spend coming up in the next two years for a$200 million market cap company. He says, which, as the analyst points out, is a concern. As in these markets, where will the money come from? But my question is, can regular old unsophisticated investors like me gain visibility of this sort of information somehow?

44:50Also, can we see consensus anywhere? Yes, you can get access to that information because generally speaking, the companies will disclose that in their decks or in their material. If they are going around giving information to institutional investors and private analysts that they are not sharing publicly, I would argue extremely strenuously that they are passing around inside information, which is illegal. So they're usually pretty aware of that. And I'm just going to start with you really quickly. We say they're decks. I just want to unjargon this for a second. When you say that the companies have it on their decks, what are you talking about?

45:26And where can you find them? So yeah, these days, everyone has a PowerPoint presentation and it's just much prettier way to digest rather than just the document, there's pictures, there's slides, charts. There's all these kinds of things in there. And they generally, any time you get a release, it's usually done in a quote-unquote deck. So yeah, a presentation deck. Exactly, yeah. Presentation deck, yeah. Back in the day when it used to be a printed, when I first started working, I used to make the PowerPoint presentations up, then I would print them out, bind them and take them to the meetings.

45:54That's how old I am. It was literally a deck. It was a paper deck with a chunk of information, 60, 70, 80 pages of literally bound A4 pages, colour printed if we were lucky with information on it. Yeah, yeah. I mean, and so the information will be there. Sometimes it's not explicitly said, but it may be that some analysts get way into the weeds. The ones that really do their jobs well may have come to that conclusion because of the age of their plant and equipment or various other things that just look at some point. They can't push this away forever. I remember with Sigma years ago, they were competing against API at the time.

46:34API had spent gazillions on updating their logistics infrastructure and the rest of it, and Sigma hadn't. So Sigma made a lot more cash. API burnt through a lot more. But then a few years later, it's like one was well behind the other and people could see they had to monomize. They had to sort of spend it even before the company admitted it. So this is, again, the value of getting really close to a company and knowing it and the rest of it. But look, generally speaking, those big things they will say. By the way, I don't know the company, but I wouldn't automatically say that that's a bad thing.

47:07Except that they're going to have to pick, they're going to find two and a half times the market cap to do it. Yeah, absolutely. But I don't, yeah. So I actually just before I got on this call with you, for Strongman we'd spoke to the CEO of Paragon Care, Mr. Mark Hooper. There's a medical equipment distributor, whatever, and they roll up play. They do lots of acquisitions and the rest of it. Is that X Sigma Mark Hooper speaking of which? Yes, actually it is. There you go. A nice segue. Yes. Um, uh, but he made the point that like, when there is a clear and evident investment opportunity, it's usually not hard to raise the money, which I think is a reasonable point.

47:45That's a really good point. You know, so if, I mean, it depends on the circumstance, right? But if they've got something that for some reason they've got the opportunity to have a crack at, and it's going to require you to raise a bunch of money and dilute a bunch of people and take on the risk of execution and the rest of it, it could still absolutely be the right move for you, even if you don't top up your shares and you cop the dilution, because it just becomes more valuable. Again, anyone who's done a business knows this. You spend the money on day one to sort of set up and then the money sort of comes.

48:14So these kinds of big things can really knock financials around for the short term, but can prove to be incredible investments long-term. So I don't share the view and I don't know what the analyst said exactly, but I do hear it often. Oh, they're going to do this, therefore bad. And it's like, well, Yes, it's risk because it might not work out. And if it doesn't, and frankly, we know that two-thirds of acquisitions don't work out, statistically speaking. So it's definitely something to be aware of. I just don't jump automatically to that conclusion that it's bad. Yeah, I think that's right. What can I add to what you said?

48:49You've covered it all beautifully, mate. I guess a couple of quick thoughts. But often, as you say, mate, a lot of those numbers will come from the decks themselves. It can be the case that the consensus estimates are created by analysts who fill in their own spreadsheets. So it's possible, for example, if you're an organization, there's a couple of them out there, that collect all these forecasts, there may well be a CapEx line on those forecasts. And it may well be the company that's like, okay, well, I know they've said they're going to do this thing. I reckon thumb suck. Okay, let's call it half a billion dollars.

49:21Let's put that in a spreadsheet. So the numbers actually may not be available in black and white in those presentation decks. It might be inferred by the analysts. I mean, as much as we bag analysts with missing expectations and all that kind of stuff, I mean, these people work hard to try and understand their businesses and put their own numbers in some spreadsheets to try and work these things out and get it roughly right. So they're not going to, by choice, get it wrong, and they're going to put some effort in either from the decks themselves, which hopefully it's there, would be nice and easy.

49:49If it's not, they're probably just thumb-sucking going, okay, well, they're going to make five more plants, they're going to do this and that and the other, and that's probably what's going to happen. So it's possible that it's not publicly available, not very likely. I think Andrew's most likely right. It's probably in a presentation deck somewhere. But just keep that in mind. Don't forget too, if you really get a bit further into the weeds here, CapEx won't impact necessarily profitability or anything. It's just the way because that investment is capitalized on the balance sheet. It's not, you know what I mean?

50:15It's not on the income. It's very much a cash flow movement. You've got to be aware of that nuance. And if you get it wrong, you will have a write down. And at the time they will say, well, it's a non-cash impairment. It's like, well, yeah, but it very much is a real actual cash cost to that. It's just the way that all of the accounting works. And I would encourage people, I know you've said this before as well, but you don't need to be a CPA by any stretch of the imagination. But I think some basic accounting, It's the language of the trade that we're in, you know. It's not super complicated, frankly.

50:52You know, the big brushstroke kind of ideas, the major statements, what they tell you, some of the key line items that are worth keeping track of. Again, I know a lot of people will be listening to this. It sounds very boring and a lot of hard work and it kind of is. Yeah. But it's a skill. It's a skill and it's just everything that can add up to give you an edge is worth pursuing. for the way I see it. And also too, mate, I'd be really clear to your point there. I don't want to discourage anyone from investing because investing is incredibly powerful. But also kind of, if you're looking for the shortcut already, can I just plug it in and also beat the market and make a fortune?

51:29If it's that easy, everyone will already be doing it. And I don't mean that to anyone in particular listening. I certainly don't mean it to the person who asked the question. It's not about that, Brent. I'm not trying to say because you can't work it out, you don't deserve to do well or buy the company. Just know that to Andrew's point, it does require a bit of application, knowledge first and application of that knowledge because you can't do the work. Otherwise, again, we're back to that market consensus thing you asked about originally, which is if I was assuming the consensus numbers, you're going to get the consensus result, which is probably about the market average, which means buy the ETF.

51:57Literally just buy the ETF. Save yourself the hassle and the cost and the time and the effort and just regular dollar cost averaging on a good ETF and that's most of the work you'll probably need to do. Yeah, but don't think, I mean, like anything, it gets easier with practice. Yeah, gotcha. Absolutely. You know, and it is not unobtainable. You don't need to have the brain the size of Jupiter. You really don't. I'm not trying to sort of - And don't start with those companies. Don't start with a$200 million market cap company with a$500 million capex requirement. Look at Woolies or David Jones or Meyer or something.

52:27Don't necessarily buy them because you look at them, but look at them because they're easy to understand. You know what they do. You know how they work with a bit of, just a little bit of reading. You can get your head around Woolies Financials. That's a massive company. Really, really easy. JB Hi-Fi. Same thing. Really simple. Right? What does it do? Okay, I know it does. Okay, well, how many stores has it got? How are sales going? What does management talk about? How do they explain it? Those things are really, really relatively easy. Yeah, we'll say easy to understand. Now, then you look through the PNLs.

52:51Okay, well, they said sales are up. What's this revenue line? It's that. Okay, cost a good sale. What's that? Google it. What's that? Okay, oh, it's the inventory they sell. Okay, cool. I got that. It's really, really not. If you care a little bit and you're interested enough to make the effort, which you are by definition because you're listening to this and you're investing in stocks. um but i can tell you mate i can tell you i don't have any formal qualification you just said just google i think i've i've just googled it over the last 20 years basically it's like you come across new ideas and and wow what does that mean look into it you know you'll figure it out that's not a bad thing like that that's that's it's perfectly good that there's no there's no you don't need it honestly i have started so there's this thing called the graduate diploma of applied finance It's an investment, right?

53:30It's the air quotes gold standard for analysts. I have started that thing three times. I finished, I think, a subject and a half. It just bored me to tears because it's all of the useless algebra and rubbish that goes with it. Buffett said if he taught business school, he would just teach business. So was it margin of safety and what's the other one? Mr. Market, I think, Mr. Market analogy. He's like, that's all I teach in business school. It's like the whole idea you need to do all this ridiculous algebra to try and find a way to invest. It's really, really not that hard. So, you know, but the only thing I was going to say is speaking of Buffett, he says he doesn't try and jump over seven foot bars.

54:09He looks for one foot bars he can step over. And you know what? If you look at a company, go, so it's this business, got$200 million market, $500 million worth of CapEx, burning camera. You know what? I did this for a quick, I'm like, I'm not looking at that. I just, you know, there's easy things to go and do. Go and look for the one foot bars, right? Do I know if they can fund it? No. Well, do I want to take a punt on that? Almost certainly not. I mean, maybe have a look and just see if, you know, if you can find the answer, how are they going to fund it? Oh, we've got a guaranteed line of funding from Westpac.

54:36We're going to do, okay, great. Okay, now we're in business, right? Or there's a strategic shareholder. We're going to do this and this and this. Great, okay, fine. If it's not, it's like, well, you probably, you know, sometimes a bit like the medicinal cannabis thing we talk about, just kind of go, I don't know, move on. It's really okay to move on. There's 2 ,000 companies out there. It's really not that. I don't overplay it. I don't want to also make it sound like it's either too hard or too easy, but it's not as hard as it might otherwise seem. I think you can reasonably assume you're going to get there.

55:07You know that meme where it's got the bell curve and it's got those sort of faces at the left end and the right end and then right in the middle of the distribution? It'll say something on the left like all you need is a PE ratio or something. And then you've got someone in the middle saying, no, I need a multivariate DCF cash flow extrapolated over there, blah, blah, blah. And then you've got sort of the Jedi at the far right that just says, just use the PE ratio. Yeah, yeah, yeah. You know, I'm paraphrasing. There's various versions of that. But I do love it. There is a journey I think you go on as an investor.

55:39I think it's actually very worthwhile getting into some of the concepts that they teach at business schools and the rest of it. So, you know, because they are valuable as long as you don't take them too literally and seriously. That's right. And I think having gone through the journey, you return back to where you started from, but just much wiser and knowing really what it is that you're looking at here. And you can, again, you can look at, two people can look at one metric and get very different sort of outcomes from it. And the person who sort of understands more of that nuance is going to just sort of fit it into a, what am I trying to say here?

56:17You will, simple is often better as long as you've got the depth of understanding to understand the power in that simplicity and to know its limitations. There's a great quote. I think it's an Einstein, but it probably isn't. Maybe JP Morgan, to use our usual joke. Everything should be made as simple as possible, but no simpler. Yeah, I think there was Einstein. Yeah. There you go. I get one every now and again. There you go. Or Mark Twain. Probably Mark Twain. Let's finish off, mate, with one from Twitter, one from Nimbus, who just says, hi, Scott, I have a question for the pod machine. It gets back to what we were talking about, which is why I'm throwing it in here.

56:52I've got a question for the pod machine. Once you have found a business you like that ticks most of the required boxes below, I'll get to those in a second, how do you determine if the current share price is cheap or overvalued? I understand the rest, but struggle with determining if a business is cheap or overpriced. And Nim says, my criteria for a good business, one, it's founder-led, two, competent and honest management, three, a good balance sheet, including low debt, four, will be bigger and better business in five plus years, and five, has a competitive advantage. I like those five. That's a pretty nice.

57:22Good list. isn't it great list but you find that how do you know whether the price is right man

57:30um exactly right yeah yeah um well i mean the the you you can't answer that question without having some view on what the future cash flows look like and i'm not saying to 10 decimal places for every quarter from here until eternity but i again i i think i've outlined a simple approach i quite I'm quite fond of is I'll go out three or five years. What's the profit like at that point? What's that look like on a per share basis? What's an average multiple for a company like that? Multiply the two together and you get what the share price might be at the end of that period. And then just look at it compared to the current price.

58:12Is it enough? If I buy it now, does that give me a 10, 20, whatever percent return between here and now per annum? If so, it's cheap. If not, it's not. And that's kind of, it's a really great way of looking at it. Of course, it's only as valid as your estimate is, but I would come back to that point of don't overcomplicate it. I like to do a very nice sanity check of just saying, well, sales and revenue are the best one to look at because that's sort of, it's right at the top line, right? There's before any adjustments and whatever can be made. Look at that. How's it growing? I don't know. Is this the kind of company that's on track for three, four, five, you know, slow growth, mature business, or is it a growth business where it's growing 20, maybe even 30 % per annum?

58:54What's a margin look like? What's a net margin for a company like in this kind of space look like? Times one by the other, you've just got the profit. I've only guessed at two things here and I've hopefully made pretty informed decisions. And then all I need to do is come up with a guess multiple. I mean, again, three guesses and those can compound out to be wildly off. But, geez, it's much easier than going way, way into the weeds. It's a really nice hack just to sort of start there. And then, again, I will say it is a starting point and then maybe an ending point once you've sort of backfilled all of the other things that support the assumptions that you make.

59:33But I think that's a pretty good way of going about it. Do you reckon the analyst community, or us and other people, really did new investors a massive disservice? I'm talking about the PE rather than the earnings yield. Yeah. Massive disservice. It's the same number. Right. It's the same number inverted, right? Price-earnings ratio is the price divided by earnings. Price of$10, earnings of$1, the PE is$10. And you'll say to me, is PE 10 good or is it bad? Now, there is no single answer to that for a whole lot of reasons, including the growth you talked about, Ram. But if you started with saying, actually, what's the earnings yield, which is earnings divided by price?

1:00:11So think about interest rate, right? If you're going to get$1 a year, you put$100, up, 1 divided by 100, that's 1%. Okay, I'm getting a return of 1%. People get that, right? We just get those sort of returns. It's cash in the bank. Now, the bank says I'm going to give you 2.5%, so you know you get$2.50 for every 100 bucks. But you do it otherwise. You say, okay, well, hang on,$2.50 a year,$100, 2.5%. Okay, fine. You can do that with shares. Rather than saying price divided by earnings, saying, well, it's 10 times earnings, you say, well, hang on, I'm getting$1 of earnings and I've got to pay$10 for that, so I'm getting a return of 10%.

1:00:42Okay, well, I understand that then. Return to 10 % seems pretty good. Okay, well, that's a decent starting point. And I honestly might think, you know, we're not going to change the world, unfortunately, but if we just literally change that around, I reckon there'll be heaps more investors who always go, I get the first thing. Now I'm on that page. Now, if you get a 5 % upfront return, you're going to say, well, that doesn't seem very much. I hope it's going to grow reasonably. I mean, it must be, you know, it's going to be growing. I guess I'll start with five. I get more in future years because earnings goes up.

1:01:09Which is a PE of 20, right? Right, right. So that sounds pretty good. But if I get a PE of, if I get an usual of 15%, like 15%, wow, okay, well, either this company is really, really, really cheap or the earnings aren't sustainable, but you kind of know that because 15 % seems really good, but how consistent and sustainable is it? I just reckon it's a much, much different way to go. So when you're asking NIMS about the right price to pay, generally speaking, a lower PE is better than a higher PE because it's a higher earnings yield, rather lower earnings yield, but the growth matters. If you get an upfront return of 5%, but that's going to grow quickly versus 10 % that's never going to grow.

1:01:43Imagine in your head the graph, right? 10 % is a flat line, 10 % every year. Good, really good. But 5 % next year is 6 % and the year after that is 7.5%, the year after that is 15%, the year after that is 25%. Wow, hang on. It sounds ridiculous, right? Think about the growth in share price of, say, I don't know, Apple or Tesla or something else. Luckily, you're paying a high price five years ago. That price looks really, really cheap right now. Yep. Yep. And remember, wasn't that only a few years ago? It was very common to see growth stocks. We had to use price to sales because there wasn't any earnings.

1:02:14They were pre-profit. Well, we didn't have to. Some of us like me, speaking of looking stupid for a while, I was always the curmudgeon in the corner going, price to sales is the most stupid metric I've ever heard of in my entire life. You people are idiots. And it was like, well, look at this and that. Well, that's what people did, right? Yeah, yeah. Yeah, yeah. And, yeah, so you were getting companies regularly, big ones too with price to sales of 50 and stuff. And people would say, well, is that high? Is that low? I don't know. We just think it through from first principles. What that means literally is that this company maintains its sales for 50 years, somehow manages to operate with zero cost and paying zero tax and pays out every single last cent of sale for 50 years and you'll get your money back before you've even adjusted for inflation.

1:03:05Exactly. That's how – is that a big number? Yeah, that's a big number. Now, in some cases it's actually fine because the explosive – the growth can be so explosive for companies that go on to scale globally and the rest of it. And again, there is the variant perception, you know. But it is – it should show you that it's a pretty bloody big hill to climb and that you need to be super, super, super confident of your growth. Otherwise, you're going to get it handed to you. Now, some companies get there, by the way. Amazon probably would have priced at$50 at some point. I imagine Salesforce.com in the US similar.

1:03:39Even Xero here may have been at one point and it just managed to do that, scale those mountains. But again, remember, those are the three examples and frankly the only three examples I can think of. There'd be more, but they don't come to mind, obviously. How many companies would have been on eight, 10, 20 times sales, what, 18, 24 months ago? More than I can count very quickly. Can I just say, apparently I just dialed up Xero on ComSec here. Yeah. The PE ratio is 2 ,579. That's a lot, right? That's a lot. It's a lot. Now, before anyone writes in happy zero shareholders, yes, I understand that there's a reason for that.

1:04:16And I understand that earnings could jump a lot higher too. There's a lot of sort of growth investment in all of that. But again, it gives you a really great starting point, doesn't it? Man, there's a lot of stuff baked into this. How do earnings grow to the degree that they need to grow at? And they'll lay it out for you. or at least they'll lay out what they want you to understand about the business in these decks, so-called. But, yeah, I think full circle, on answering the question, we've not done anything with the spreadsheet so far, but you can still just with these numbers get a handle on something.

1:04:50You can at least put it in a ballpark of cheap, expensive, average. And, again, once you've got the context of the growth that you think is likely achievable, then you can start making calls like cheap or expensive much more definitively. Yep. I think that's a really nice way to finish off, mate. And Nims, there is no – here's the thing, right? There can be no universal formula for absolute success. Forms are ways to calculate things. There's algebra you can use. But if it was that obvious – and this is the hard part, right? If it was that obvious and easy, then computers would do it and Android would get another job.

1:05:25We'd go fishing or we'd have to work in those mines or something because there'd be no, the very perception you talked about, mate, earlier of here's why I think the market's wrong and here's what I think the market's wrong about. And that is just really, really hard. But I really would encourage everybody, including, I think almost every question we had today, keep it simple early on. Really don't try to do the triple twist with pike up front. Go off the one metre board and just try and get the diving technique. Just try and get in the water without splashing too much, right? And then you can work on complexity and you can go up to the higher things.

1:05:59Those things will come in time. It's tempting to want to keep up with the Joneses and medicinal cannabis. Everyone's making money. The shares are on a tear. Gee, maybe I want me some of that. I get a really absolute... I was that guy when I started, right? There's no criticism here. Like I've been there. But what I have learned, what you've learned, is just really honestly keep it simple. Just find a business you can understand. Understand how it works. Understand what sort of growth you're expecting. Pick a bullies or coals. how much are they likely to grow at? You and I can probably say, you know what?

1:06:29They're pretty saturated. They're probably going to have a lot of stores. Maybe Aldi takes a bit of share. Maybe it doesn't. The growth's probably going to be roughly population plus a bit maybe. Okay, so there's your starting point. Okay, and then you can start to say, right, well, now what would that might look over three, four, five years? Okay, that gives you something. You can say, well, how much am I paying for that? By the way, well, this seems expensive to me right now because for a relatively slow growth business, you're paying a per year. Is it still 20? You know, these are expensive.

1:06:53But start with these. 28. It's 28. Don't start with the one where you've got to add CapEx or you've got to wonder whether the new technology device will be able to come to market before more shares need to be raised, how much tax they might pay, whether the tax rate will change. I mean, these are all real questions, right, for those sort of companies. And when you get to it, by all means, dig in and really go to town. But don't start with the triple twist and pie. You're going to bring yourself undone. You're going to give up investing because it's too hard. You'll lose some money. Oh, I'm never going to be able to do this.

1:07:21I knew I wouldn't. This is terrible. you know, genuinely do yourself over. Start with the easy stuff and then work up from there. Mate, Woolies is such a good example. I've been saying it for years. It's just like I think it's one of the best companies on the ASX. Oh, yeah. It just is. It's going to be around for a long time. It's going to be earning a lot of money. It's going to be paying lots of dividends and the rest of it. It's just too expensive. Huge customer base, great brand. Yes, it is. That's right. I mean, it has been since 2021, you know. Like it just is. And it's not because I'm some savant or that I can read into the future.

1:07:51It's just how does a company – so flip it around again. Let's call it 30 just to make it sort of easy here. I'm basically getting a 3 % earnings yield. In other words, if they pay out every single last cent of profit, they don't leave anything for growth. They don't leave anything for anything really. It's just any money made is straight out the door. It's going to take me 30 years to sort of get my money back. And that's fine if you think that they're going to grow at 8%, 9%, 10 % per year for a sustained period of time, but ask yourself, and it's not impossible, right? They could go into something, maybe if they made a real success of hardware, then that would have been the story.

1:08:30But how else is it going to happen? There's not many places left that doesn't have a Woolies, right? There's only so much you can put up prices and screw suppliers, right? They will do what they can do and they have sustained exceptional growth for a very, very long period of time. But for the last 10 or 20 years, it is single digit, mid-single-digit sort of ballpark. And I think the market is implicitly saying right now, and I don't get it for any, I don't make any sense of it, but that it's somehow now as an even bigger company likely to grow at a rate far greater than historical average. Yeah, that's right.

1:09:05My guess is that it is, there's a safety premium that gets put on it. I think there's a lot of, if you've got a lot of money and you're a bit worried about the markets, inflation, these kinds of things, it's a store of value asset and it's probably not great value, but more or less the bulk of my capital, more pertinently, the bulk of my purchasing power will be there in five and 10 years time. So I'm happy to buy ostensibly well over what it's worth for that very reason. That's pure speculation on my part because otherwise it makes no sense. And again, before anyone writes in angry letters, I think it's a great business.

1:09:44I just don't think it's a great price. I think you're right, man. I think it's absolutely safety. There's a 200 % fully ranked dividend yield. So some people actually don't care about the share price anymore. They're there for the income. And I don't mind that, by the way. You know, once you get to a certain age and you've got a certain amount of money in your portfolio, the share price kind of, you know, you can afford to simply say, well, I bought an annuity. I bought an income stream from Woolies. And I'm going to get that. And the share price will do whatever it does. And I don't really need to care because as long as I have my dividend check every six months, I'm sweet.

1:10:09Although I would say very quickly, that still doesn't make a lot of sense at the moment when I can get a term deposit with a better rate. Even if you gross it out with franking credits, it just sort of seems like, God, there's not even that argument there at this point in time. Least versus cash. Yes. I think there's a blue chip thing to it. And a lot of people, we talked about CSL last week. There is some sense, I think, of that holiday of just is what it is, what it is, what it is. So it's kind of, everyone's paid a fortune for all this forever because they think it's safe and a premium, therefore it's kind of got one.

1:10:36And that works until it doesn't. Well, this was$20 a share a few years ago now, but not that long ago, down from 30-something because it might get a bit carried away. then realized it wasn't so good. By the way, mate, let's finish off. We've gone a bit over time, but this is just, I'm not going to name the analysts. You can see it on ComSec. I'm a ComSec customer. I don't know how much of this is their IP that I'm paying for one way or the other, so I won't disclose it all publicly. What I will say is they list on their website the recommendations from some brokers and analysts, as well as the aforementioned consensus bringing us full circle for the episode.

1:11:10The share price is currently$38.55 as we're recording this on Tuesday. recording earlier this week uh we uh but so 30 keep 38.50 in your head roughly one analyst has a buy target which is a stupid idea anyway of 42.80 and they're saying it's a high right one has a sell rating with a price target of 27 dollars now this is one of the biggest and best companies in the country where nothing is unknown about wallace right it's not There's no information asymmetry. There's no knowledge gap. And not complex. One says$27. One says$42. $43. Another one says overvalued. The fair value is$33.95. And the consensus estimate is hold.

1:11:58So make of all that what you will. What do you do with Woolies? Well, one else says buy. One says sell. The average is hold. By definition, someone's wrong in that. At least one person is wrong in that group. It's just a reminder, mate. that don't ever think the smart money is that much smarter than the rest of us because they're not smart people, they're not trying really hard. The future is unknowable. But if you'd have said, what's the consensus? Well, it's hold. I think one brokerage is buy, one brokerage is sell, so the average is hold, sure. But that's the old economist thing of the economist, the bloke who puts one hand in the oven, one hand in the freezer and says, on average, it's pretty comfortable.

1:12:34It's still very useful to anybody. So yeah, it just takes us full circle, back to consensus and all that sort of stuff. I know we've gone over time, but I guess it's on you, dear listener, at this point. As always. But I think it's a really nice way to tie together a lot of the things we've been talking about in this episode. So just indulge me a little bit here. We'll go through an exercise using consensus and valuation and trying to tie it all together because it's such a wonderful example with Woolies. So one of the earlier questions which we forgot to touch on is where do you get this consensus?

1:13:07Well, where I happen to get it from is ComSec. Why? Because I just happened to, that's the broker that I use and I know they have it. I'm sure it's in a million other places, but that's, that's where I go. I just go to the forecast tab and then it's got, it tells me that in the year 2025 consensus earnings per share estimates is$1.63. Right. Okay. So 2022, they did$1.36 and it's not terrible growth. It's actually pretty decent growth. Okay. That's what they're expecting. So let's not just assume that they're right, but let's assume what's implicit in that assumption. Let's also assume that I want, and this is, you enter your own numbers that's appropriate to you, but I kind of want, I kind of desire at least 10 % total return per year, every year.

1:13:50Just to keep it easy, I'm going to leave dividends out of the equation. Frankly, by the way, because that's what the market does. It's not that you desire that, but you can pretty much get, likely, no promise on the future, you can likely get that with an ETF. So it's not even a case of, I have this outlandish view of this is how much I want. So it's like, no, literally you couldn't get close enough to that buying ETF. Yeah. So, I mean, that's what I want, you know. In fact, I want more. But that's kind of a threshold for me. So, well, it's$38.50 as you said at the moment. So times that by 1.1.

1:14:18So add 10%. Then do that three years in a row. So we go out to 2025 financial year. So it says for me to get that return, again, we're excluding dividends. The share price needs to be$51 and change at that point in time. Okay. okay, well, the analysts reckon it's$1.63. So I can, again, divide price by earnings and get a PE of 32. So what it's saying, so what I can back engineer this and I can now say what the market thinks, or at least these analysts, is that A, earnings per share is going to go from 136 to 162. I can't annualize that and do it in my head, but it's actually pretty decent growth for the size of the business.

1:14:58So A, do I think that they can do that? If they do do that, I still need the market at that point in time in the next three years to be giving this company, which probably works out to sort of be, I'm going to guess it's 7%, 8 % per annum, something like that, that figure. For a company that's growing at that respectable rate, not eye-watering, it's worth paying an earnings yield of less than 3 % on at that point in time. Now, again, stranger things could happen. It could be on a PE 50 at that time. I don't know. But that's, now I know if I'm looking at it today or I'm holding it today, what do I need to see happen?

1:15:34I need to see a combination of both of those two things. And if one of them falls short, the other's got to do more heavy lifting, i.e. earnings per share have to be even stronger or the multiple has to be even higher. And to me, it suggests that even if you expect a really good consistent growth, let's say it happens. Again, I can do it a different way. So$1.63. Let's say that the, and this is also somewhere on the side as well, but this gives you the average annual PE ratio of the business. So it goes back over 10 years. So in 2014, it traded at an average PE of 18. Interest rates were different then, but you know, let's, you know, it's sort of 16, 20, 21, 22 for most of the period.

1:16:15And then in recent years, as I've argued, it's gone up quite, quite a lot, but it doesn't mean, it means that, okay, well, let's, let's assume that the PE is 25 at that point in time. That's still a pretty high PE for a company growing at this kind of rate. Well, again, I can do the math. 163 times 25 equals$40.75. In other words, I buy shares today at 38.55. The company grows exactly in line with consensus estimates. It still trades at a PE that is above its long-term historical average and pretty robust just on an objective basis relative to the kind of growth it is achieving under our scenario.

1:16:54And I get to sell it three years later for$4,$40.75. In other words, I'm making a$2 capital gain for every share that I make. I have, what, four years on a$38 share price? Great company. Great company. Where's the asymmetry there? It's like if I'm right, I might get the tiniest of tiny returns and, yes, add in some dividends and it gets okay. If I was very happy for a very safe long-term return of 6%, 7%, I think Woolies is probably worth having a look at. If you want a better return than that, I just can't for life of me make that make sense. No, I'm right or wrong, but hopefully that sort of helped you think through the – well, at least how I've approached it there to sort of arrive at that conclusion of whether it's expensive or not.

1:17:46And I think it's expensive. I think that's perfect, mate. And I think what we need our listeners to know, to understand, is we're not saying the price can't do those things or won't do those things. It may well be a$51 share price in three, four years' time because the market could simply decide to pay even more for those shares. Now, if you're an investor who's saying, well, how do I know how much the market's going to pay? You can't. There is no possible way to know that. What you can do is say on a reasonably, not even necessarily hyper-conservative, but on a reasonable assessment, I can't assume or rely on the market being irrational at that point.

1:18:24To Andrew's point, what he's really saying is if I get$51 at that point, the market will still be irrational and probably more irrational than it is now. And that's the bet I'd have to make. Yeah, that's the PE going from 28 to 33. So I'm actually expecting a high PE to expand further. And those earnings growing at a pretty good rate, like a pretty good clip for a very, very, very, very mature business. Those things aren't small assumptions. Now, it could happen. But on balance of probabilities, what you're looking for as an investor is where are the short parts? Where are the one foot bars that I just talked about, right?

1:18:56It's the degree of difficulty or the things that have to go right for Andrew's thesis to play out and buying Woolies now and having a 10 % annual return for the next four years. It's just really, really unlikely. Hopefully, that's reasonably clear by the description that Andrew gave before about what would need to happen for that to work. Now, I will say the flip side is also true, mate. I bought Amazon shares when it was making no money. It was unprofitable, right? Yeah. And people said to me, how can you possibly buy Amazon? There's no dividends. There's no earnings. How can you value this thing?

1:19:25And honestly, at that point, I had – now, I've been investing for a while by then, but I had taken a view that the sheer astronomical rate of growth of Amazon was growing at 20 % plus a year for years and years and years. And it was big, but still, I think at the point, it was a fraction of the size of Walmart or maybe something. Anyway, my view was that it could grow meaningfully quickly for a meaningful amount of time based on some assumptions. Now, those assumptions may not have come true either, but I paid an astronomical PE, if you like. There probably wasn't one. If there was any earnings, it was probably 1 ,000 times earnings or something, specifically because I thought the future was going to.

1:20:01Now, I've been right thus far. I may still be wrong, and I'm not saying this to hashtag humblebrag. It's literally a case of, in that case, I knew what had to happen. I thought it was likely, so I was happy to do it, And by the way, I thought at that point, I didn't buy Woolies, I bought Amazon because of the things Andrew's talking about. Woolies has always been reasonably expensive. And you go, well, hang on, it's not going to grow. So we've said before, growth covers a multitude of valuations since. If Amazon can double and double and double again as a business, there's a very good chance it can find a way to become profitable enough to pay my then purchase price X number of years ago.

1:20:35And look, so far so good. It could have gone very, very differently. But what's really important is you think about what needs to go right for you to make the return you want. That's what Andrews had just described with Woolworths, really clearly just going through it, saying this is what the process looks like. This is what needs to happen. These are the returns I'd need. The market would need to pay this much. The market would need to believe Woolies is only worth an earnings yield of 3%. At that point, is that likely? No. Is it possible? Yeah, of course it is. Anything's possible. Every company's worth buying if you only care about possibilities.

1:21:07But if your job is to say probability, say what's the probability Woolworths is? you know, at that price at that point, not very high. Now, again, we've ignored dividends deliberately, but just I want to mention that again just quickly. Otherwise, you've got to say, well, okay, what needs to happen? And by the way, the other thing is you don't need a view on every stock. You look at Woolies and you go, is it likely? Probably not. Okay, well, let's move on. Let's find something else to buy because this one doesn't seem likely to give me a great return. I don't need to work out when specifically to buy Woolies, wait for them, and just buy Woolies.

1:21:36I can say I've got$1. There's 2 ,000 companies out there. I'll start with Woolies. Does it look attractive enough to buy? No. Cool, what about Coles? No. JBO High Five? Oh, that's interesting. That's only 10 times earnings. That's an earnings yield of 10%. Okay, well, sales might be bumpy. Okay, yeah, but will they be bumpy forever? And will JBO High Five be a better business in five years than it is today? And if it is and I'm buying a yield of 10 % now, aren't I getting an even better return then? Yeah, maybe. Okay, well, just in retail land alone, I've kind of already now got some sort of hierarchy of potential ideas, what I think, what might happen, how likely that thing is to happen.

1:22:10I'm in a reasonably good point at that point because I'm happy to take a 10 % starting yield on that one. It's a, by the way, free pick. It is a recommendation of Motley Fool Share Advisor. I don't own it personally. But we've taken that view that the downturn might be interesting over the next 10, 12 months. I genuinely don't care because I'm going to hold this one for three to five years at least. And so I'm looking at that going, okay, well, I think it's very reasonable. If I buy an earnings yield 10 % now, share price is probably going to be as high, maybe even higher. If it's the same level, I get 10 % a year.

1:22:38Great. Yeah. If I don't, well, okay. If it goes a bit better than today's level of earnings, I'm ahead by a little bit more. Okay. Is it possible to go backwards? Yeah. By much? Probably not. There's my asymmetry there you just talked about. There's more. There you go. More upside than downside. That's exactly what you want. Spot on. I love it, mate. I'll finish the thought in the sense of because the next logical question is, well, if it's not at the right price for you now, what is the right price? Yes, exactly. And again, so let's just start off with the basic numbers. was in FY22 they earned$1.36.

1:23:10Back to Woolies, yep. Probably far enough through the year where you could have a better guess at what they are now. But look, just for the exercise. And I said before I think sort of mid-single-digit growth. Now, again, I don't think that they can't do more than that. I think the target here is based I think on 6 % or 7 % sort of growth. But, again, I want margin of safety, right? I don't want to have to assume perfection. So let's just say I'm just going to get out the old calculator and times that by 1.05 for three years. I buggered it up. I times it by 1.5, which is going to be a whole bunch more.

1:23:4350 % growth in the next three years. I'm buying Woolies today. What did I say? 1.36. Oh, I buggered it off, mate. This is the dangers of doing it. Live podcasting, baby. We should do a genuinely live episode one day on YouTube or something. Yeah, that'd be fun. Just for sure. Go on. I've done it. So I got pretty close to consensus there. I got$1.57 in the year FY25 just by taking today's number, the most recent full year number and growing it by 5%. Sue me. That's been my assumption. Again, you can plug in your own numbers there. And I am going to say that, well, for a company that's growing at mid-single-digit rates, I think something like, you know, it's going to be hard to be more than a P of 20, right, because that's a 5 % earnings yield there to use your better definition.

1:24:29So I'm going to go of 20. Again, use the numbers that you like. So that means it's going to be$31.48 in three years' time under my scenario. Again, I want 10%, so I'm just going to go divide that by 1.1, three times. I have a target price. There's your favorite term. A target price of$23.65. Will it ever get there? I don't know. Have I been a little bit too aggressive there? Maybe, maybe. But as a scenario, it's not unreasonable. Yep. Yep. Yep. And I don't look, I know that my, I know that that target valuation is going to be wrong because it just, it all, it always is, but directionally probably not too badly wrong.

1:25:09But when I look at Mr. Market and say, well, I can buy it for 38.55 and I've just worked out that a much more attractive investment is at 23.77, they're miles apart, miles apart from each other. At some point in time, I suspect it will change. I don't know for whatever reason or when that will happen but it'll happen as it as it surely does and at that point this is a very different conversation even with the exact same growth growth assumptions if i could pick this up at twenty dollars a share i'll probably never get the chance but if i if i can sell everything and back up the truck right because it's an not only is it a decent return but on a risk adjusted basis given it's woolies it's an incredible return until then as you say plenty of other fish in the sea Now that we've said all of this, mate, can I just timestamp this because it is early May 2023.

1:25:58Someone will be listening to this in six months' time and the share price will be$100 guaranteed. We should go out and buy it right now. We're not going to. We should. Mate, great, great conversation, great summary. I think it's a really useful way. A bit of an unexpected bit of valuation class at the end of this podcast. It doesn't have to be hard. I will remember that we should do a live YouTube or something just for the sheer fun. Yeah, I'm up for it. Just for a laugh. Maybe even a live member Q &A. Listen to Q &A. That'd be fun too. All right. Yeah, cool. Anyway, let's round this one up. You can, as I said, follow Andrew on all the socials.

1:26:32Actually, only one of them. Twitter, at Sage underscore Simeon. Only one underscore. At Strawman Invest. Follow me, TMF Scott P on Twitter and Insta or at The Motley Fool AU on both or Facebook. Facebook.com forward slash Scott Phillips money. Email us info at fool.com.au. With any of your questions, we will get to them as quickly as we can. We actually haven't got too many in the bag. Now is a great time. If you're still listening, you're probably not. If you're still listening, now is a great time. If you have a question you want to ask, we've got a few, but now is a great time to add yours to the list, get towards the front of the queue.

1:27:06Yeah, hit us up. Will you come back next Friday? Yeah, man. Try and stop me. See you. Until then, full on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.