In short
Podcast Summary: Motley Fool Money - Mailbag: incl. What if Ram was king for a day? (July 14, 2024)
Overview
In this episode of Motley Fool Money, hosts Scott Phillips and Andrew Page address several listener questions in a special mailbag format. Key topics discussed include valuation metrics, unlisted assets, and hypothetical governance reforms proposed by Andrew if he were "king for a day."
Key Discussions
- Listener Questions and Valuation Metrics
- Valuation Metric Debate:
- A listener named Ram posed a question about the effectiveness of different valuation metrics, specifically the EV to EBITDA ratio versus the PE ratio.
- Definitions:
- EV (Enterprise Value): Market capitalization plus debt, minus cash.
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): A measure of a company’s overall financial performance.
- The hosts discuss that while both metrics serve a purpose, there is no one-size-fits-all answer regarding which metric is superior.
- Margin of Safety:
- Importance of understanding the business model and overarching market dynamics when assessing stock value.
- The need to use multiple metrics for a comprehensive view of a company’s valuation.
- Dollar Cost Averaging and Market Timing
- Ram also inquires about dollar cost averaging and its effectiveness when investing in potentially overvalued stocks.
- Scott emphasizes that while dollar cost averaging can reduce risk, investing in clearly overvalued stocks can still lead to poor outcomes.
- Governance Hypothetical: Andrew as King for a Day
- A listener named Ian asks Andrew what changes he would implement if he were king.
- Proposed Changes:
- Restrict Government Borrowing: Andrew advocates for stricter fiscal discipline, arguing that excessive government borrowing leads to long-term economic distortions.
- Central Bank Role: He suggests limiting the central bank's ability to create money to prevent inflationary pressures and economic bubbles.
- Economic Philosophy:
- Andrew draws parallels between government spending and addiction, suggesting that short-term relief can lead to long-term consequences.
- He believes in creating a system where government spending aligns more closely with sustainable economic growth.
- Discussion on Unlisted Assets
- A listener named Jesse raises concerns about investing in unlisted assets, questioning if they are now a safe investment.
- Key Insights:
- Scott and Andrew caution about the opacity of unlisted assets and the risks involved, including liquidity concerns and valuation uncertainties.
- They stress the need to evaluate unlisted investments carefully, as they can be just as risky as listed equities.
- The Role of Financial Discipline
- The hosts discuss the importance of a balanced approach to financial management, arguing against the mere chase for growth.
- They emphasize that sound investment decisions should be based on analysis and context rather than following trends or popular opinion.
Key Takeaways
- Understanding Valuation:
- Utilize various metrics and understand their implications on valuation.
- Government Spending:
- Strive for fiscal responsibility and limit the government’s ability to print money.
- Investment in Unlisted Assets:
- Exercise caution and thorough analysis before venturing into unlisted investments, considering the added complexities.
- Long-term Perspective:
- Focus on long-term financial health rather than short-term gains, promoting sustainable economic practices.
Conclusion The podcast episode covers complex investment and economic topics with a focus on practical advice and long-term strategies. The discussion emphasizes the importance of understanding market dynamics, careful investment decision-making, and the interplay between government policy and economic health.
--- For more insights and updates, consider subscribing to the Motley Fool newsletter at [fool.com.au/LiSTNR](https://fool.com.au/LiSTNR).
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Transcript
Automatic transcript. May contain errors.0:29A listener production. to this podcast exactly to point out um i was going to ask you what you've been up to this morning but turns out one of our listeners already knows oh okay so we got a question from ram now this is not you this is another ram who who then gives me his name and asked me to pronounce it correctly um now he his name seems to be it seems to come from the subcontinent though i'm no linguistics expert uh and he's giving me his full name now i'm a little bit i'm a little bit puzzled because he says here's my name try and pronounce it correctly and i'm like i'm not sure it's a joke and I'm not supposed to say his name or he actually wants me to say his full name because he gave me his first name and his last name and I'm like, I don't know.
1:05I'm really not sure whether I should go ahead with him. I'm going to pronounce his first name. Can I describe some popcorn before you start? I know. Well, and this is like, I'm like, I could do it but if I do it, I'm like, at least he doxed the guy. I'm like, that's cool. So, I will only use his first name. He says, my name is Ramanathan. I think that's what I'm going with. That sounds right. Yeah, okay. Ramanathan. Scott, try to pronounce this correctly. He says, if you can't, it's okay. You can call me Ram. I will now call you Ram. He says, how are you mates? I guess Andrew might be full of energy after his Ironman workout.
1:35I didn't realize that Ram knew your Sunday morning schedule, but that saves me asking. He says, I've been listening to your pod ever since COVID and I never miss it. I listen to it while I'm cycling or doing any activity, which I do not like, which my wife asked me to do. He said, you keep me sane. Imagine me cleaning utensils, drying clothes, changing nappies, etc. Thanks for listening around. If we can get you through changing nappies, mate, you're at your head. I mostly invest in ETFs, he says, but last year I started investing in stocks. I invest based on quality. I own shares including Solpats, West Farmers 7, Macquarie, Pro Medicus, REA, Ordinate and Altium, all via dollar cost averaging.
2:18I recently read an article regarding the quality trap, which argues that the EBITDA to EV ratio is a good... Sorry, I'm trying to paraphrase this one around. Which argues to look at the EBITDA to EV ratio to determine whether they are overvalued. What do you guys think? Is this a good way to look at timing quality stocks when to buy or should I just use the PE ratio? I know we need to look at business model and other metrics, but I'm asking purely to understand margin of safety. Also, by dollar cost averaging, he says, for the same stocks, I am eliminating slash reducing this risk. I thought this was interesting, mate, because Ram's kind of, on one hand, he's saying, hey, I'm going to use this and try to do valuation based on that.
3:04The other thing he's saying, well, I'm using dollar cost averaging to reduce the risk anyway. At one level, if you purely dollar cost average mechanically, it's entirely different trying to pick the right prices and times to buy. By the same token, dollar cost averaging into stuff that's clearly overvalued would be just as dumb as not doing it at all. So I thought it was a really nice combination of these two to get our teeth into for our first question on this special mailbag edition. What do you reckon, mate? Let's go with EV to EBITDA first. Now, let's explain our terms. EV is enterprise value, which takes the company's market cap, so the value of all the shares, and adds the debt or reduces it by the amount of cash on the company's books.
3:45And the idea is basically you're buying business value. And then the EBITDA, earnings, poor interest, tax, depreciation, and amortization, which I'll let you give the Charlie Munger version of. I know you're bursting to. But the idea is basically because you're adding debt, you're taking out the repayment of the debt and that kind of stuff. You try to look at just what does the business cost in total? And what does it generate? What's the fundamental business operating earnings look like? So what do you recommend? Is that the right metric? or just use the PE or other ways to think about valuation?
4:16No, I mean, there's no wrong answers here. Well, there are wrong answers. Well, there can be very wrong answers. There really can. I don't know what you mean. When it comes to these valuation multiples, there's dozens of them. You know, the PE is the classic, but even the PE comes in multiple flavors. Are we using forecast earnings? Are we using trailing earnings? Are we using blended earnings? Do you know? Cash earnings? Like there's, all of them just seek to take, a price on its own is worthless, right? Like the shares are worth$3.87. Well, what does that mean? I mean, it's got no context. So to give it context, we compare it to sales or cashflow or earnings or whatever kind of earnings you want, operating profits, you know, which is EBITDA.
5:03And we can even look at the value of the company in terms of its market cap or in terms, or in a capital structure agnostic manner, i.e. the enterprise value. It's just like I don't care how you've structured the thing, whether it's loaded up and dead or it's pure equity. I just want to know what it looks like when I look through all of that kind of stuff. And that's where the EV, the EBITDA metric comes into play. But they all serve a purpose and there's no single formula or metric in existence which is, oh, this is the only one you need. It doesn't exist. So it's one way to look at it. And it's got absolutely, it's got value.
5:42Then you have to ask, is okay, well, then what's high and what's low? And it's like, well, you can contrast it with similar companies. You can contrast it with what the historical average is across markets. Again, it's just to give you a bit of a feel. And so it's, I mean, I'm not going to say it's wrong, never use it. But I would say, well, you know, use it, but use it in combination with a whole range of other different tools that will give you some kind of handle on the business, how good a business it is and how expensive or otherwise that business is relative to its, you know, in the very most general of terms, earnings, whether that be cash earnings or operating profit or net profit or whatever it happens to be.
6:26That was a really unsatisfying answer. I know it is. It depends on you. Yeah, I mean, the desired answer is usually, yeah, no, use that better than PE. And you want a figure that's under 15, right? And then just buy and you're fine, exactly. Yeah, and it just doesn't work. I mean, look at, you know, Ram mentions ProMedicus. Like, well, the PE or the EBITDA is on some astronomical figure. Yes, yes. But I could have made that one. In fact, I did make that argument when it was at 60 bucks and it doubled. Like it was compared to history, compared to its peers, compared to almost everything. think it was just like wow that's a it's a lofty multiple exactly and it doubled yeah you know um and maybe it halves from here maybe it drops 90 or maybe it continues to go it's the market can do all kinds of things that that might not conform to any one of our world views as to what is appropriate and what isn't appropriate and plenty of value investors in recent times have had their you know pride handed to them you know because like it's ridiculous you know it's like me and property you know i can shake my fist all i like like the price doesn't make sense like yeah well it keeps going up doesn't it so it's it's um i don't know i'm i'm gonna make a complete dog's breakfast of that explanation and then palm it back to you it's a good one so ram i think so i gotta tell you what ram said you by the way both rams uh you are he's done a great job of summarizing exactly what you need to think about why it's important and i will say that underpinning ram's point is effectively knowing what makes each one up is where the value is that's why none of them particularly are useful because it's actually the difference between say a pe and an ev to ebitda metric that actually tells you something which is why are they different how are they different what is that telling me about the business what do i need to know what are we to look into so it's that kind of stuff that matters um god love the the growthy growthy people who love their price to sales ratios or their uh the new sometimes you've got no choice right because there are no earnings.
8:23So I've relied on it before because like, well, I got to put something. I want to contextualize it somehow. Yeah, and that's a great word actually. Contextualize is exactly the word because when you look at any of these ratios, they are relative numbers. I mean, they're absolute in their own sense, but is a PE of 15 cheap or not? Well, again, to use Ram's favorite, it depends. There's no units, right? Right, exactly. What I think, and this is, so the other thing I'll say around, so those are the, I mean, they're absolute in the sense that the ratio is absolute. but if we're using to compare to work out whether 15 is cheap or expensive what i would say is as always it's the future that matters and so it's the it's the growth in earnings or the change might even declining the change in earnings that actually does matter more than any of this sort of stuff and this is where most people get trapped we've talked so many times about the fact that a p of four can be bloody expensive and a p of 100 can be cheap yeah and it really depends on what happens next i'll use amazon i own some shares i didn't own them unfortunately at two bucks but um you know amazon looked expensive for a very very long time and people would have said the The only way Amazon can make sense is if it grows earnings at 20 % a year for the next 25 years.
9:26Well, guess what? That's exactly what it did. Now, could they have known, should they have known, you'd have your own argument. Now, the same is true of a business that's declining significantly. AMP would have looked cheap. I'm sure I don't have the numbers in front of me. I'm sure it looked cheap a lot through the last 20 years as the price fell and fell and fell and fell and fell. It's exactly the opposite version. So, EV to EBITDA is really useful. It's also completely useless, as is PEs, because it's only when you put that context, Ram's point or Ram's word, of the future that matters. In other words, is it growing?
9:58How fast is it growing? And again, even there, there's no absolute numbers, but that's kind of what you're looking at. And I will say that's where I would add to that. I'll give you a third one. I really, really, really want all of our listeners who are picking stocks, go and do a DCF, a discounted cash flow analysis. Not because you need to do the algebra, not because it's going to give you a magic answer, but because you get a sense from that of what that growth story actually looks like. And do me a favor, do a reverse DCF. You don't have to use any, just grab a, I'm sure there's templates online, you can grab a DCF template.
10:25Don't have to use a separate one for a reverse one. Just put the numbers in until you get the current share price and ask yourself, okay, what is the market therefore implying? And that's where you get a sense of how the current PE interacts with the growth story. And that's, you know, as an investor, it is that context, it is that, you know, I've done this a few times over and over again. Okay, now I know. That's why Ram's used the example before of the PE. You get all really complex and end up coming back to this one. And it's the same kind of idea. If I get a PE of 10 growing at 20 % a year, I'm buying with me as pin back.
10:56If I get a PE of 8 that's declining, I wouldn't touch it with a barge pole. And again, there's no perfect version. There's no line of best fit. It's close-ish. It's not a straight line. That's the key because compounding is compounding, right? So if you compound your earnings at 20 % a year, the growth of that in year 10 when you compound at 20%, that 20 % you get in the 10th year is well and truly more than, you know, year one's growth in total in dollar terms. So it compounds difficultly. It's an exponential curve. So you have to be a little bit mindful. That's kind of how I'd think about it, Ram.
11:26I hope that's useful for you. I know we've probably given you more answers than questions, or sorry, questions and answers. I think in terms of dollar cost averaging thing, I think dollar cost averaging is perfect for indices. It's good for stocks, but you just got to be careful. It doesn't absolve you of that valuation thing. Because as I said, if you're like, I was averaging an AMP, you just get back to hand to you day after day. If you're like, I was averaging into, I know it was stupidly expensive and didn't go well. I can't remember. Anyway, you get the idea. If you go too hard too fast, you will bring yourself undone.
12:00I mean, just the big picture here is that the lower, the better. All else being equal. Oh, yeah, exactly. Yes. I want to pay, you know, if I can pay 50 cents to get a dollar's worth of earnings, That's far better than paying$20 to get a dollar's worth of earnings. Right. And it's just think about it and always, you know, convert to the local corner shop metaphor, right? Like here's a corner shop. It's the owner say, I will sell to you at 50 times last year's profit. It's like, well, if nothing changes, right, I'm going to take 50 years just to get my money back. Yeah. Now you might be cool with that, right?
12:35Or you might think, geez, that's a long time just to break even. or you might think well the previous guy was running it really badly i could triple earnings just by doing these things in fact i'm getting a bargain on a pro forma basis like when i but but that's really what it comes down to so you said it perfectly there's nothing wrong with with paying up for quality companies that have you're very confident are going to grow and grow in a fairly decent clip and for a reasonable amount of time you absolutely don't want to be too clever by half. That's right. That's right. Right. But at the same time, it's just the number of times I've seen people do badly in companies that did really well.
13:16Like objectively, you look at over the last 10 years, like, wow, the earnings tripled. It was like, oh, but the share price went down 10%. It's very hard. If you're not familiar with this stuff to reconcile that, how does the share price go so badly? It's like, well, it was overpriced. People were paying stupid money for it so you know that the thing that normalizes there is the pe or the evita evita or whatever you know multiple you're using there so just just always just frame it in the local corner shop yeah and that and that's and the other thing i like to do as well is just remember that you can always invert these multiples and that will give you some kind of earnings which i think has more i mean it's the same thing really it's just looking at it through a different mathematical lens.
14:00I think it's useful, mate, because people think in interest rate terms. Yes. And so earnings yield is effectively the interest rate yield. It's different for different reasons. You don't get the cash. It's internal to the company. But that idea of, I know 5 % interest is good. 10 % interest would be amazing. 1 % interest is crap. That's a PE, by the way, of 20, 10, and 100 respectively. But we don't think in... If I did a price-earnings ratio for my bank account, the PE of my cash is 100 times. And it's not wrong. The maths is entirely the same, but just inverted, as you say. We're just so conditioned to think in interest rate terms, think about the earnings yield rather than the PE, or I guess you could do the EBITDA yield as a percentage of EV.
14:41But either way, that maths rolls out the same. Yep, absolutely. And in that case, the higher, the better, right? I want a really high yield. For every dollar I pay, I would love to get like a, you know, a 20 % yield would be fantastic, right? The only other thing to remember with all of, well, there's like 50 other things to remember. So I always liked Howard Marx's book, The Most Important Thing. And you read the book, which I highly recommend you do. There's like 20 most important things. And in the intro, he makes the joke is it's like, you know, over the years, when talking about investing, he goes, well, the most important thing is this, except that there's 20 most important things.
15:21And now I've completely lost my point. What was my point going to be? Oh, yeah. Just remember that the, again, you do need to be a little bit of a realist. So let's say for the sake of example, Ray mentioned REA Group, great company. I think it's done spectacularly well. So, well, I'm only going to pay a PE of 15 or an EV to EBITDA of 20, or I want an earnings yield of 20%, whatever it happens to be. It's like, that's fine. We all have to draw our line in the sand. But if you're too demanding, the end result is you never get it. Is it better to have Pro Medicus at a PE that is a little bit above what you would consider ideal but still have exposure to it or just wait for it to get to a PE of 10, which it never does, which means you never buy it, which means you get no return from it whatsoever.
16:14so you have to be you have to be realistic to some extent as well and the important thing there is just to flesh it out mate you're waiting for p of 10 the p might be currently 20 right but the p might be 20 that still might be cheap because the business got such an amazing growth in front of it yeah that that waiting for the p particularly on one see the thing about the e is it's one year's earnings it could be the last year could be the next year could be even an average of both but it's not going to be it's not price divided by the next 15 years earnings yeah right that's effectively what dcf will do for you that's why i'm recommending it but it's that growth that makes the difference.
16:43That's to Ram's point. That's why you will miss out on REA if you wait for that cheap price, even though the shares have gone incredibly well. How is that possible? The market undervalued it even at 20 times earnings. It was probably higher than that. It was probably still undervalued at that price. That's the key. Can I just add one more thing, Ram, quickly? This is a bit of a tangent, but it's important. You didn't mention Munger's description of EBITDA. No, yes. Would you like to share that? Well, the cleaner version is it's BS earnings, is what he calls it. And the point is, because interest and tax have to be paid, depreciation might be in accounting adjustment but if you're an operating business it's a real expense because it just it just reflects the ongoing requirement so if i have to buy a new car every 10 years and i appreciate it over 10 years the cost of that car one tenth of the cost every year is very reasonable because i'm going to replace it so depreciation is a real cost you can't pretend i have to ever replace the car now you never have to replace land you have to replace uh a brand but those are have to be depreciated the same way if you have an appreciable asset it appreciates because it needs to be replaced that's the very basis of the accounting rules so when you ignore depreciation amortization it it is a big deal um and so it's why i'm not as i i think i've ever used ev to ebidara as a valuation metric of my life ram really honestly have you yeah i think i've ever bothered i might i might have looked at a calculator but i don't remember ever going that looks expensive or cheap on that basis that will be a decision maker it's sometimes handy for companies that i think have a lot of debt or something if you're just sort of trying to look through oh yeah you know it's just Sort of like, because a lot of like debt, that's a funny thing, right?
18:12Like debt, we all know debt that's going to juice our investment returns on property, right? Like in fact, without debt, I would argue very strongly that property is a pretty ordinary investment, even with some of the accelerated rates we've had over the years. So it's nice to sort of say, well, okay, this company's done well and the PE doesn't look too bad, but it's just massively juiced on debt. If I took that capital structure away and it was just there was no debt and it was just purely just shareholder equity. What would that multiple look like? It's just – I actually do that with a lot of metrics.
18:46It's just not to make a firm decision, but I wonder what does it look like if I look at it through that lens and what about that lens? I'm like I've got my microscope and I'm just adding different optics to it, you know, to try to get the full picture. That's not perhaps the greatest analogy, but that's what you want to do.
19:07there's another point I was going to make it's gone as well memory's not holding up well today mate after you do an Ironman there's only so much you can retain it's absolutely understandable and reasonable I've actually wanted a coffee too so it's one of those oh no I haven't quite I'll be alright for a while we'll keep going then mate if you speaking of having your synapses stretched are you ready for a big question? oh gosh okay I'll try my best there's not property or bitcoin you'll be either happy or disappointed to know when our listeners equally. This one comes from Ian and he's giving you the floor.
19:39Hi Scott Andrew. I've been listening to the pod for around a year now and find it very informative in all aspects of investing and the wider social contexts that are discussed. Thank you Ian. Yes we did start as a business and investing podcast and we've kind of broadened slightly. A few weeks ago he says Mr. Page mentioned Mr. Page if he were king for a day or presumably some other form of leader PM, question mark I'm not sure if that's a suggestion or not, that, quote, things would get very dark very quickly and for some time, end quote. Now the federal budget has been released, showing a national debt growing into the trillions.
20:13I'm keen to hear about the austerity measures that Andrew would apply as king. Aside from exiling all real estate agents and buyers agents onto a desert island forever, what other theoretical solutions would apply to the country's problems? Cheers, Ian from Canberra, who then says in brackets, works in private industry. So, that's a Canberra reference. Maybe you want to know you're a public servant. That's not motivating your question or thoughts. So, that's interesting in itself. Ram, you did say things get – I remember you saying this. Things get pretty dark very quickly for some time. I wonder if you might – I will let you off the leash, but, you know, just not too far, not too long.
20:50What would you change and what would happen? Oh, it's such a big question. Isn't it? That's what I'm saying. He's giving you the floor. Well, I mean, actually, I did see something on the weekend again, which I always thought was good. Milton Friedman, I interviewed once, he was comparing some of the monetary, what he felt needed to be done on a monetary basis, comparing that to alcoholism. and and he said the problem that that we sort of have in these modern economies is that what when we're able to sort of conjure money out of thin air and and and direct it it's it feels really good now like we all like that kind of stuff yeah but as with an alcoholic you know years later it can feel really bad and you get into a very dark place not you know no alcoholic wants to be an alcoholic right those first first you know a few drinks were fantastic felt great right and three years on under a bridge not so great yeah and the reverse is also true the cure is stop drinking and when you do that it feels awful it like the withdrawals it just it's it's a really really bad bad feeling but it feels really good longer term right and so i guess what i would do is i would have a if i could only do one or two things i would have a um far more restraint on fiscal spending, I think would be really important.
22:21Explain restraint for me. What framework would you use? This is where it gets super complicated because then you have all the unintended consequences. That's the hard part, right? That's the super hard part. I don't think there's anything wrong with governments borrowing money. I don't think, honestly, and there'll be times when, emergency times, whether it's a massive pandemic or a war or something like that. It's like, well, we just need to do this kind of stuff. Borrowing is just taking money from the future. It's bringing stuff forward. And that's fine. But what happens in modern economies, and I mean, this happens in all of the major ones at the moment, is that when they can't raise what they want to raise from the private market, you have the lender of last resort, which is the government's, or which is the country's central bank, which just means, well, we just press a button and we make more ones and zeros and we buy, we print money.
23:12I mean, it's not literally printing money, but for all intents and purposes, it's printing money. And again, you might say, well, that's okay in dire circumstances. I think history speaks very clearly that it just never gets repaid. Debt has only gone up. Every now and again, it eases back and then it goes, just bring up any chart that you want, Australia, the US, France, you know, Germany, UK, and anyhow, just up in one direction. And so I would get rid of that ability. I would sort of say as a central bank, you can act as a, like a reinsurer might act for insurance companies. We can pool our collective risks for the banks.
23:51So Westpac can lend a CBA when they're a bit short and vice versa, nothing wrong with that. But I would get rid of their ability to create money out of thin air and buy government debt. I think that is a very, very slippery slope because one that when that facility is there it gets used we've seen it being used it will always be used there will always be an emergency that needs to be done i will always give me my drink now i will you know what is it lord grant grant me um chastity but not yet or whatever yeah yeah lord grant me chastity but just not today right and and and yeah i i think you i think it would hurt a lot i think it would get dark because the the end result is for governments that send beyond their means is that when things need are forcibly brought back in line someone somewhere is getting a service will no longer getting a service that they were and they're not going to be happy right and you know the government spends i think i want to i know in the u.s it's now close to half of all expenditure is government-based right so it's near a record sort of high it's getting up there for australia as well so again you just take that spending out of the economy someone's spending is someone else's income and it's going to it's going to be a very painful period of adjustment my my premise is that we would come out of that and we'd be in a better shape we'd have less malinvestment i think we'd have more financial prudence hopefully a bit longer term thinking in some of our things it's it's one of i mean this is a question that you can give to someone and they could go for like six weeks and still only scratch the surface so if i'm going to constrain myself fix the money fix the world so you're saying stop governments borrowing you're saying stop the central banks creating more currency yeah cool yep because that way so let's play that through so the government's like okay well i'm still i'm not going to um uh pull back on my spending say okay so an investment bank a pension fund, a private investor somewhere has to go, okay, well, I'll give you money.
25:56A bond is just an IOU. It's exactly what it is. Okay, give me the money and pay me back with a bit of interest. Now, in a world where that is taken away, where it's actually, you don't get to just create airdrop tokens out of thin air like you do at the moment. We'll laugh at that with the crypto pros doing it. It's like the same thing, right? We're doing it here. When you take that away and they go to the private markets, they lend us some money, the private markets will go, well, okay, but I'm not giving you money for 30 years at 3%, right? In a world where you were spending like a drunken sailor, like, no, give me more.
26:33And so the cost of funding will go up, which usually will mean that you have to be far more careful about what you're spending it on. It is painful. No one wants to pay more for their debt, right? But it is going to enforce more discipline. The reality of the world, you get rid of all of this money nonsense, is there's just so much stuff in the world, right? We've got to account for it somehow. Conjuring up extra money doesn't make more stuff. It just doesn't. But it does distort all of the systems. I feel as though if you could have one lever to pull, I think after a pretty painful period of adjustment, we'd come out the other side in a far better shape.
27:12Just like the alcoholic who's like, okay, I'm going to abstain. and I'm going to feel really crappy for a long time as I detox. Yeah. But I will be better and healthier for it in the long term. I'm curious, mate. You mentioned – we talked about government deficits and stuff before and you've kind of – you know, you hate the fact it's done, but not the fact – you don't hate the fact it's there, you hate the fact it's being misused. Yeah. And I wonder if you were king for – if we made you dictator for life, would you equally still get rid of that capacity or is the capacity a problem because it's misused?
27:46I'm not trying to split hairs. I'm curious as to your thoughts. There's one which is if you could print money when you needed to, but then actually retire that printed money, because the same works both directions, right? There's no... No, it's MMT. No, straight away I can answer it. That exactly is the definition of modern monetary theory, which I dismiss. I think you and I both do. When the bonds expire, though, they could simply not be reissued. That would reduce the money supply, right? I'm talking about that bit of it rather than the... Because MMT, so they use tax to create the difference.
28:11I'm just making the parallel on the other side of that, which is what we've got now with money printing. You could, with not having those bonds reissued, then shrink the money supply similarly, the same way we run budget. No, it won't work. I mean, it does in theory, right? And again, I know I've used the example before. That's what I'm saying, but if you were the dictator, you could do it your way, is my point. Yeah, but I wouldn't, I don't, I am not, no one is smart enough and all-seeing enough to look into every corner of the economy, to foresee every future demand and want and desire and properly accounting.
28:45Like a super AGI, maybe that could do it. But no human, no group of humans can do it. And so that's why communism is great on paper, but it just doesn't work. Because even if you say, well, actually, no one's going to be corrupt and everyone's going to do the right thing, no one can possibly plan that well. That is Adam Smith's invisible hand. And the beauty of it is, is actually it's an emergent phenomenon in the sense that the economy just arises out of all of us doing our own thing for our own self-interest. And humans will find ways to satisfy the wants of themselves and others in very creative ways.
29:25And we're all just doing our own thing. And it all tends to work really magically well until you have some well-intentioned person come along and say, no, no, no, this will make it better. and then not realize the 50 other unintentional consequences that come as a result of that. And so I hear your point. I hear your point. Yes, and you're right. If there was some mechanism to take that money out of the economy again, but again, I would challenge you point to one example, just one in all of 10 ,000 human history where that has happened. It just hasn't happened. And so I think - That's why I'm asking the difference though, right?
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30:05Because I'm saying if you're a dictator for life, I'm trying to separate. But I wouldn't do it either. I wouldn't do it either, right? Because I can see, look how easy it is. But I would be really good. I mean, I wouldn't. Maybe in the first year, maybe the first decade. After a while, I'm just going to be human. And to err is to be human. And I'm going to err. Or you're going to err. I mean, not me. Everyone is going to err at some point, even if it's unintentional. So you just get rid of it. Get rid of it. And it's really not a radical thing. It's radical in the modern era. I mean, we have only really been running this experiment fully since the 70s.
30:45So we all look at it as though it's always been thus. What are you talking about? It's like, no, it hasn't. It hasn't always been thus. It's been about 50 odd years or so. Pure P.A. it's dead. And I would say that what we have seen since that is actually a lot of growth because we have – I mean, debt can be wonderful, right? Debt really does just give capital to where it's needed. And so it's not – you can get very ideological with this kind of stuff. You really can. And it should never happen. And we shouldn't have fractional reserve lending. And everything should be duration matched. And I would argue that under such a system, we would probably find that the past 50 years, we didn't have nearly the same amount of growth that we did.
31:23Because people who wanted to start businesses couldn't get the funding because the lending conditions. I get that. I really do get that. But I'm not saying you go all the way to that extreme. I think we've gone too far on the other extreme where we have realized that, oh, we can bring a lot of consumption forward. Okay, but let's do it responsibly. Yep, agreed. And we kind of do, right? For a while. Hey, the world hasn't broken. Let's do it a little bit more. And then you fast forward and here we are now in 2024, again, where people in their 50s have never had a recession because we just bail out.
31:57Every time something happens, we bail them out thinking, oh, it's fixed. And again, it's the alcoholic just drinking more and more and more to put off the hangover. So do things actually get dark then, mate? I mean, it sounds like it's not so much getting dark very quickly, but at the first time of crisis, it'd be, I'm sorry, I can't help you. You're going to have to deal with the fallout. Well, straight away in Australia, I would say in the next five years, if you were to do that, you would find a lot of headwind in the property market, which is a major sector of our economy, right? All the easy credit drying up, that would be a consequence.
32:24No more government subsidies of giving first home buyers or investment schemes or all of that kind of stuff would probably make it more difficult. There would be services that need to be cut. I don't know which. Do we cut the military spending? Do we cut social security? Do we cut education? I don't know. Somewhere, somewhere has to be cut, right? Or we have to raise taxes. None of these scenarios, anyone listening here is going, do not give this guy control because he's just said is going to cut services and increase my taxes. Because I mean, that's kind of what has to be. And it's just, it's not because you want to be mean, but it's just what it does is I think that worldview acknowledges reality for what it is.
33:06And the reality for what it is, is that we have finite resources. We just do. I said to you the other day, a really great quote that I hadn't heard before, which is the first rule of economics is scarcity. This first rule of politics is to ignore the first rule of economics. Such a great quote. Isn't it a great line? It is so good. And it's so true. And that is, it gets very deep and I've just, it's taken me a long time and I'll probably continue to have my thinking evolve on it. But just that, just that idea that, you know, then we need to stop stuffing around with this stuff because it feels good.
33:49It allows us to do stuff. If only we're good, if only we're not corrupt, if only we're smart, if only we've got the right foresight, and then we'll fix it. And then we'll bring everything back into line. I just, I think, in fact, in the longer we've been doing it, the more the distortions have been. I mean, look at us right now. Right now. We're not in a recession. Unemployment is insanely low. If you wanted to point to a bunch of metrics that said the Australian economy is going gangbusters, you could. Oh, yeah, absolutely. And yet here we are talking about interest rate cuts already off relatively or not very high rates, historically speaking.
34:24You know, so it's sort of like there is what happens when there is a crisis? Like, I mean, a real crisis. We've got very little dry powder. We've already, you know, and. That's my issue with the amount of debt, too, is, you know, you want to have something left over. but that's, this is, you know, it's about you, not me, but that's why I've always argued for a structural budget balance because you spend more in the bad times because you have to, welfare and reduce tax receipts and you just have to and the good times you collect more because welfare goes down, tax receipts go up. That's why we've got a budget surplus.
34:56Despite, despite both parties best efforts, there's actually a surplus and I mean that deliberately. I'm literally saying they have tried desperately to spend all the money they could and it just happens that Jim's got a surplus because commodity prices were so good that even better than, than, And the Treasury expected, and if you think that's unusual, then look at every possible future forecast where we're deeply in deficit again, which is exactly what they want to do. Yeah, that's the fundamental problem, right? We're not balancing things out the way things should be balanced, and that's the problem we've got.
35:27Yeah. I mean, my dad used to work with a lot of farmers, right? And I farm a salt of the earth. I'm not going to be anyone who's going to criticize them because that's not politically popular. and and but there are now i think anyone in the industry will know that there are people out there that when they have a good and and this is this is the definition of boom and bust sectors right you will have perfect weather and you will make a fortune one year yep and then you'll have three years of drought yep and then it's super struggle and and the and you know the majority of farmers recognize the reality and they plan accordingly and yet you have some some that don't and it's They're like, oh, woe is me.
36:09Government needs to bail me out. It's like, what about all that profit you made that year? Oh, we spent it all. Well, it's like, well, that's just basic business planning. And, you know, it feels, and it's so politically palatable. Like, well, it's a food bowl. We've got to do this. We've got to do that. And it's like, as soon as you protect bad business practices, you kind of entrench them and everything suffers longer term as a result of it. Again, it's not a popular thing to say, but it's so important for our system to have failure. It is. I mean, not me, hopefully, not you, but otherwise, I mean, just play the counterfactual forward as a thought exercise.
36:52Anyone can start a business and if it goes bad, quote unquote, the government will bail you out. Now just play that everyone's going to start a business. No one's going to lose money. Clearly most businesses aren't going to be able to create value or like a real genuine value which means that we're bailing them all out i don't know where the money's coming through because there's not enough capacity from those that are working out to pay for the ones that aren't and so now i'm creating money and again i'm just distorting the whole system we've got scott phillips deciding that i'm going to make this brilliant business where i sell snowshoes to people in dubbo you know and it's like it's not working but we're not letting him suffer as a result of it and well this is this is a future made in australia problem right is that yes that that's exactly what's going on money's being shoulder those things the the the greatest of us not the greatest one of the one of the amazing things i have this conversation on twitter sorry what massive tangent sorry i'll keep going because i started but i apologize already go um i go on twitter about this stuff and people like yeah but but make stuff here is good we want jobs here we want this we want that it's like okay i was in the car industry the number people say to me yeah joe hockey killed the car industry the bastard it's It's like the money we spent on that came from your pocket, everyone else's pockets.
38:02For what? For a nice, warm, fuzzy feeling of at least we use things here. For 2 ,000 people in Adelaide. Not to dismiss those individual people or whether it's the co-workers in Newcastle. We need to protect people who are the world. I get that. Protect the people, not the jobs. That's the difference. Yeah, let's make 17, 18. Well, I'm dating. Let's make 25 million people all slightly worse off for these 2 ,000 people. Yes, exactly. Like it's... But not only that, except that's real, to your point, then you flow it forward. If you save every business, who's paying the taxes to do that? Yeah. The whole thing stops working at some point.
38:39You can protect the people who suffer from that, the individuals, but not the businesses, not the jobs, i.e. the capital J job. The car factory worker in Adelaide should be looked after if they're 45, have no other skills, can't find another job. Let's help them out because that's a reasonable, decent thing to do. Keeping the car industry going and then putting more 25-year-olds in for the next 40 years of their lives just because we don't have the, you know, where we all say, actually, that money would be better spent nationally for everybody doing it differently, including that car worker who now has got to buy a car themselves, pays more tariffs or has subsidized cars.
39:11You know, it just, it becomes this, yeah, it's crazy. Can I elaborate a little bit more here? This is why we should not do bank bailouts, in my mind. Like, full stop, period, we don't do them because that's exactly what's happening, just using them as the middleman. By the way, bail out the depositors. Happy to do that, right? To a certain extent, but let's not bail out the bank. Banks are a proxy private equity companies when you really think about it, right? So I've got all my money. I'm not going to keep it in cash under the mattress because someone could rob me or my house could burn down.
39:47So I need to put it in a bank somewhere. Bank takes that money, pay me a certain amount of interest and they lend that out. Actually, that's not even true. Most of the money they lend out, they create, right? And they create that and they give it to someone else, a business person or someone to buy a home and that person goes and does stuff with it. Now, if they're lending money in a poor fashion and to businesses that aren't really viable or to people who have no capacity to pay their mortgage, remember someone's debt is another person's asset. Your debt is the bank's asset. And if you say, I'm not going to pay that, or I can't pay that back, that asset loses value.
40:25And such is the structure of these balance sheets is that you only need something like 15 % of their loans to go bad. And the whole bank has negative equity. It's got no net assets. It becomes default, insolvent. And what they do though, is they turn around and go, oh, it was systemically important. We've got to be bailed out. And what it effectively does what we were just talking about. It means that they can lend. I would argue, again, this is what I would do if I was king for the day. I would change the reserve requirements. I would say you have to, I wouldn't go full reserve, but I would bump it up a little bit.
41:03And I would make it very clear that if you, you're a private enterprise, you lend money to whoever you think is worthwhile lending to. But if you lend up to a bunch of commercial property REITs or whatever, and they over leverage and go bad, it's like, you're carrying the can there, dude. I'm sorry. That was your call, right? Because that will indirectly sort of solve that. Well, otherwise, we are bailing people out in a roundabout kind of way. And the banks have all figured this out. They very much figured it out in 08, 09. And now they just know that that is the case. And again, what is the reality of such a policy?
41:42The reality is it's going to be much harder to get a loan. But I bet you, I bet you they think much more carefully about giving, you know, money to the 26-year-old with 15 different negatively geared investment. But I might, maybe I won't lend it to them. And again, it's not necessarily a bad thing if you want a more robust, resilient economy. I think that's right, mate. I think we have grown on shakier foundations. And there is a – growth has become a fetish. And there's a difference between growing as a healthy, functional economy and growing as a fetish. So, again, I'm sorry this is about you, but I'll just jump in quickly and then we'll move on.
42:26It's even – and this is – I know you've made a similar – you might have just grew entirely at this point. But people say if there wasn't so much property, there would be lending more money to small businesses to go and start up a new business, right? Now, I'm not sure if that's absolutely true. I'm not sure if one is actually displacing the other. It may be. It may not be. But I also would say that that even in itself shouldn't be encouraged past a responsible level of borrowing for exactly the reason you've just talked about. So when we say everything outside of business, what we're going to do is juice the economy, get banks lending more to people to start business.
42:53That's going to be a great thing. And I think broadly, is it good for people to be able to start businesses? Yes. Is it good for banks to form a functional part of that? Yes. Do you want more of it? Well, only more in the sense that more is actually a sensible way to allocate that capital. More good investment. Right, exactly. Not more just because we want more of it. I guess I just want to talk to that fetish thing because there is that idea of kind of like, you know, we should do more of this, then the economy will grow. That's what we have to do. It's this really simplistic, again, it's like the Made in Australia stuff, really simplistic.
43:24Australia has holes and houses, and all we need to do is get more businesses. So make sure to spend money, invest it with lots of entrepreneurs, there'll be problem solved. And it's kind of like that whole idea of like, I don't like A, so B must be the answer. And don't worry me with the details. And it's just, it's a really important point to say, I want the economy to grow. But to your point, it's kind of where it was getting my stimulus from is, you know, the really solid foundational growth that says we might even grow a little bit less strongly, but we'll grow healthily. You know, cancer is growth, right?
43:53Yes. So there is, and I'm not saying it's cancer. A, it's not a very nice analogy. You use people who are actually struggling with cancer, but it's also not all growth is that bad. I'm just making the point that you want to say, let's actually have healthy, not stable growth, but reliable, responsible growth on solid foundations that when the earth does shake, it doesn't get torn down. 100%. That's how you advance rather than throwing everything at the wall, having this kind of pretend inflationary growth of like, look, everything's growing. We must be doing good things. We all feel good about it for a while.
44:23Yep. But when you look under, it's like there's nothing there and that's when you're in trouble. It's so true. I mean, we just went through that period in tech land, in VC land, you know? I mean, the amount of businesses that were being funded because all the VCs, it was just free money there for a while. And they would just fund anything. Just like we'll just throw stuff at the wall and see what sticks. And we're surprised that all these businesses failed. There was the number of articles written about zombie companies. I know, I know. Bang on the money, right? And by the way, I reject the premise that some people say, oh, but no business will be founded.
44:56B.S. If someone looks on the bank's door and goes, I've got a really good business idea. Here's my business plan. By the way, I've got 30 years of experience. I've put this board together. I've put this team together. A good business idea will find funding, right? Because people like to make a return. And the banks like to make a return too. If you're a depositor, do you really want those banks making bad loans? You're right. It's your money they're lending out. Well, again, you've talked about fractional wishes, right. But it's your money they're lending out. It's your solvency they're risking by making these dodgy loans.
45:26It's like, you don't want to make a silly loan just for the sake of it. And that's what I mean about people don't really think through the entire implication. I don't necessarily blame them because they don't spend their lives thinking about stuff we think about because we're nerds and boring. But they have interesting, exciting lives. But you've got to actually have done the work before you kind of assume you can step off. I'm not going to, you know, opine on nuclear fission and fusion because it's cool, but I don't know enough. It's okay. I can learn and do some things. But, yeah, that's that short-circuit of thinking where it's like, I don't like A, therefore B, must be right.
45:55whatever that is. Or I like B, therefore A must be right. And this is made in Australia. I think we should make stuff. So however we need to get there, that must be fine because it's okay. Yeah. That's not how this is. I just think also too, just the hubris of thinking that one person or group of people can, can be the architects of this kind of stuff. It doesn't. It just. Top down central planning. It just doesn't. I mean, like you, you need to have a goal. You need to have a referee on the pitch, right? You need to have, you need to have good boundaries. is you need to clear articulation of the rule set all of that kind of there's definitely a role for for someone to sort of be there to sort of help direct traffic but not the not to a fine detail you kind of need to let it be it is an emergent system it is something that organically develops you know the fact that i can go get a cochlear implant was not because a government bureaucrat said that hey we should do that some scientists invented it and an entrepreneur put it together and started a business and now you know tens of thousands hundreds of thousands of people around the world can now hear because of that you know no one told elon to to start tesla no government agency did or that's probably a bad example but you know what i mean like these things will start and and they and then they will came from a garage not not from a government edict you know and and And it's got to be careful because when I have conversations with my friends, they automatically frame it within a political ideological lens and go, oh, so you're saying this.
47:28Like, no, I'm not saying that. Right? There is black and there is white and there is a whole bunch of gray. And if you're going to give me this false dichotomy or we've got complete anarcho capitalism on one side and we've got communism on, that's my choice. Like, I reject. I have a statement that happens to align with one of those. is I must believe all those other things necessarily as a matter of course. This is not how this works. I'm a big believer in, is it Simpson's rule? Like the amount of work will fill the... The available space. The available space, right? And there is... So I'm one of these people who think that, you know, government just tends to grow and grow and grow in terms of its size and its influence.
48:10Am I against government? No, I'm a huge government fan, right? But it just feels like it's something that's just going to invariably grow with not a concomitant increase in efficiency or outcome, I would imagine that part of the reason is because it doesn't face the same competitive dynamics that I do if I open up a lemonade stand. I just start selling really bad hot lemonade that's overly sweet. No one's going to buy it. The problem is going to sort of fix itself. If you're a government agency and you're selling really bad lemonade and no one else can sell it and you're just, you're going to be able to, you're not going to have that reality check.
48:47So I think that there is, I think that there are, there's more, what's the word for it? There are directions that you can sort of aspire to without going full ideological in one. Anyway, that's probably a long answer for Ian's question, but fix the money. Oh, he enjoyed it. Fix the money. Fix the money. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.
49:18Hey, a question from Tony. Hi, Scott and Andrew. I've loved listening to you both over the past year or so after coming across Andrew on another podcast. Your mailbag episodes are one of the podcast highlights of my week. Thanks, Tony. Full of sage advice. What are your thoughts on Pacific Equity Partners as a private investment alternative to the stock market? And we did talk about this. Tony did ask, what are your non-personal finance thoughts if we were to sell our shares in individual companies and invest in PEP instead? Anything else you would recommend if it was your choice? We have covered that, Tony.
49:50But then Tony says, yes, it's Tony spelled with an I. I'm a female slash woman. I promise not to get offended, whichever label you choose to use. I just hope there are more of us female investors out there than one might think. So Tony, I'm going to give your question a short shrift only because we have answered it a week ago, two weeks ago. So, but usually we get, we get a bunch of questions sometimes. It's fascinating. We got probably within 10 questions, two on the same one. So we have covered that. Andrew mentioned Bailador Investments. Just scroll back a couple of episodes, you'll find it.
50:21But more importantly, I wanted to, well, not more importantly, maybe for me, if not for you, just call out another female slash woman listener. I will try to get my pronouns right and hopefully won't offend anyone else. But thank you for writing in, Tony. Really appreciate it. And I hope the previous question or previous answer helped can i just say something on that i just looked up pep their website pacific equity partners yes i always find it really strange when you look up an investment company and you can't find their returns like that just seems i would advertise my return frankly i would that i feel as though you know show me the money it's like oh okay you guys do that brilliant cool how have you gone it's a secret why exactly oh it's really good well i mean why just like i don't know and someone in within the organization is probably spitting their coffee out or go no no we're incredible to which case i would say pop it on your website like that's that seems like an incredible marketing opportunity they do they do go out of their their way to talk about um uh the target internal rate of return right 20 plus like cool i i also target 20 return do i get 20 no i don't i just yeah i i think it's easy to be it's easy to be cynical when it comes to a lot of these and and the reason being is that history in fact will say that on on average most of them tend to be subpar.
51:53And you've got to be careful there because there are exceptions and they're really notable exceptions and they're fantastic, okay? None come to mind immediately, but, you know. Just be careful. Yeah, be careful. Be careful out there. Tony, thank you. Thank you for the question. Speaking of coincidences, this next question is also from a female listener. Hi, Scott and Andrew. I'm 40 years old and most of my investments are in passive ETFs. I have, however, taken a bit of an active approach with my super. Instead of simply selecting the high growth pre-mixed option, which has 60 % equity, 30 % unlisted and 10 % bonds, I've gone with my own asset allocation.
52:39Yes. And I've selected single asset classes with 65 % international, 25 % Aussie index shares and 10 % international listed property. I have a passive ETF outside super, hence the lower allocation inside super. I avoided unlisted assets during and after COVID as I had concerns the book valuation may not be true to the real asset value. Also, by the way, that also can be true on companies listed on the ASX property. So just because they're unlisted doesn't make them necessarily any better or worse, but we'll move on. My questions are, one, is it safe, in quotes, to get back into unlisted assets now from a valuation standpoint?
53:20And two, I'm usually a 100 % equity girl with a very high risk tolerance. I'm proud to say that although I make less money than my husband, I do, however, have a higher super balance than him, thanks to my high equity allocation. And she puts in the strong muscles kind of emoji going on. Excellent. I have noticed, however, a few big super funds have increased their unlisted asset allocation to their premixed investment options. I'm wondering if I should add a small allocation of unlisted assets of around 10 to 15 percent to my super. My struggle is, because you don't know what the underlying unlisted assets are, I find it hard to make an assessment.
53:57If the unlisted investments are more defensive than equity with potentially lower long-term returns, or if they are just as growth oriented. What are your thoughts on unlisted investments inside Super? Thank you and love your podcast, Jesse. Jesse, that's awesome. Thank you for listening. Thank you for being a female slash woman listener, whichever you prefer, and some really great questions. By the way, well done on beating your husband too. I'm sure you've given it to him plenty of times on that one. I will say, I think because I've been through this, pride does come before a fall, Jesse. Just pull back half a gear because if he gets back in front of you, you're going to hear about it until you get back in front of him.
54:35and only because I have to because I just have a boring so-and-so. I will also just mention that just be a little bit carefully, not trying desperately chase each other in the short term and possibly make some, you know, competition-fueled mistakes, trying desperately to get an extra bit of growth rather than focusing on the long-term, tortoise and the hare and all that. So again, you probably don't need me to tell you that, but I will just throw that in. Beating your husband next year is going to be wonderful, but having more in retirement is even better. So focus on that long-term for me. Other than that, Ram, firstly, is it safe to get back into unlisted assets from a valuation standpoint?
55:09I get the question, but it's so hard to answer. The reason being is that when we – what do we mean by unlisted? Well, it just means it's not listed on the ASX. What does that mean? Is it growth? Is it this? Is it that? It's all of the above. It's such a broad term. Listed, we have the same problems. Same problems, right? Is it going back into listed assets? Well, it depends if it's a Specky Goldminer or Woolies or BHP or – yeah. You cannot get more different than Woolworths versus a mining prospector. You just like they fit in the same. You can pigeonhole them together. If you compare them on one trade, i.e.
55:47are they on the ASX or not? In every other regard, they're completely different. And so that's why it's hard to sort of say, oh, yeah, you should do this for Unlisted because what companies are we talking about here? Who's picking them? You know, so it's hard. I think a lot of the time financial product providers do it because it's another option. It just helps rationalize their existence. Again, the big unspoken secret here is just like, it's really easy to do it yourself. It's not that hard, right? I need to use big words. I need to have complex things because then if you realize how straightforward this is, you might start doing it and i will stop getting fees i'm gonna be cynical again so i don't i don't think there's any need to have unlisted exposure i really don't if we lived in a world where there was like three companies on the asx and then most of them were average okay and you can get international exposure for example either and you kind of you know yeah like all of the best biggest and best company i want to say all like you know 98 of the biggest and best companies in the world i can buy on an exchange somewhere.
56:52Are there incredible unlisted companies? You betcha there are. And there'd be some in our backyard that we wouldn't even know about that's been run by a single family for the last 50 years, never raised money, just gushes cash. It's just not reported on. It's not known. You maybe use their products every day and it's just, you know, made in Geelong or something. It just, you wouldn't know about it. And they're incredible investments, but also tons of really bad ones as well. So - That's probably what we know about, by the way. There's Gina Reinhart's Hancock prospecting. There you go. Vizzy from the Pratt family.
57:25Yep. Harry Trigeroff Meriton. Three that's come off the top of my head, top of the rich list. They'd be in the top, you know, five, I think. Maybe even top three. Anyway. Yeah. Maybe top ten. Yeah, there's three just off the top of my head. I mean, they are - Okay. So, with that aside, they are riskier, generally speaking, because they don't have the liquidity. We spoke about that the other day as well. just how important liquidity is. And again, I've been slow for this realization. The ability to press a button and buy and press another button and get your cash back in a very short space of time is something that's worth paying a premium for.
58:00You don't have that in unlisted companies. So if it goes bad, it's a bit of a lobster pot. It's very hard to get out of. Or even if you do it and things are going well, it might take a long time for that sort of to happen. And it's just opaque because there are different reporting requirements as well. So what are they really worth? That's the beautiful thing about markets. Markets will tell you exactly what things are worth because I'll tell you, well, right now, right on. That's right. Sorry. I'm not sure what they're worth. Actually, that's a really good clarification. But, you know, I like these providers have to, they'll bring in an independent valuer.
58:38So even if you're not trying to be cynical, like it's like, well, two different valuers can reasonably have different views. It's just, it's all subjective. It's hard enough. Yeah. When a single office block is hard enough to get a common value on, let alone an operating business. I mean, take Sydney Airport, right? It was gone private, owned by pension funds and super funds. Right. At the time of sale, it was worth something or at least was selling for something on the market. Yeah. What's it worth now? Well, maybe business has got better or worse. Maybe it's got a lot better. Maybe it's got a lot worse.
59:07Maybe the future is brighter. Maybe it's not. So the Motley Fool is a private company. We are a private shareholder company. I own a poofdeenth of a percent of the business like literally the Gardner brothers who started own more than half and there are many, many large shareholders who've been with the company for a very long time we have every year an internal market and I won't give too much more detail away because it's all proprietary blah, blah, blah but we have someone come in from the outside because you have to which is weird, right? We're an investment company you get someone coming from the outside and give you their view and they kind of they throw up all these comparators of public market comparators or recent private sales and they kind of go well, the business might grow at this rate and there's a discount to your point, mate.
59:44There's internal, it's a big discount too for illiquidity. So would you pay as much for the Motley Fool as a private company as you would if you buy the shares on the market? You'd pay more on the market because you could sell them if you wanted to. And that's the same in private market valuations all the time. So yeah, we're unlisted. We have someone come in and do that. They have a range because that's all you can do. So what's it really worth? Well, something between X and Y. And that's kind of like, well, so which one is that? And it kind of matters, right? If the range is, you know, more than 20%, that's, you know, it's not a small difference in a big company.
1:00:15Yeah. And none of this is to say don't do it. Just don't do it for the sake of doing it. Just because some of the big super funds, it's like they change tactics and philosophies like they change underpants, right? Like honestly, it's like, it's all about ESG one year and then it's all about this and now we're going to do this. It's just, just because they are doing it doesn't mean you feel, I wouldn't feel obliged to do it. In fact, you could live happily ever after and not have a single private equity or unlisted investment, I would say. But on the other hand, there'd be plenty of people listening, oh, actually, I've got some really good unlisted investments and they've been great.
1:00:48I believe it. So, it's that really frustrating answer of it depends. It's like people saying, oh, you must have retail exposure because. You must have mining exposure because. You must have unlisted. Well, what's the because? I don't get the because. If the because is this just happens to be a really great company, it's available for you at an attractive price. Hell yeah, that's a good reason. If it's not that reason and it's just because it's a label that's in vogue, I just don't see the point. I think the because is because it exists too often. I agree with you, Jesse. I think, you know, you're not asking, why shouldn't I have rare coins in my super fund?
1:01:24Or why shouldn't I have art? Why shouldn't I have beanie babies? Why shouldn't I have Bitcoin? Why shouldn't I have whatever? And I'm not saying those are bad ideas at all. Again, some of them will be, some of them won't be. Vintage cars. Yeah. You know, Polish retail companies or, I don't know, Russian, whatever. A million things. Yeah, because they exist is often the answer. You're right to – but I don't want to dismiss it. You're right to look around and say, hey, there's an area over here and it could be a source of return. Should I have some of that? It's a very, very reasonable question to ask.
1:01:57Ram would say I should have some Bitcoin. I don't, and that's a different view. But I should have at least considered it, right, because it's there as an investment asset, and people smart people think it might be worth something so you're right to ask the question um the only answer but but if it's if it's an arbitrary allocation i don't think there's necessarily an argument for it because you have no basis for working out whether or not that allocation could be useful and around his point the difference between listed and unlisted assets is they're unlisted which i know by definition is clear been in the in the label but it's like well I don't you know um if the reverse was true if BHP wasn't listed but Hancock Prosperty was would it be better or worse I mean if they're both listed or neither if here's the thing if they're both listed would you reduce your unlisted allocation because of another you know unless a company that was also unlisted it gets a little bit um difficult to work out at some point if you think there's a very good chance of unlisted assets being a great long-term performing asset class then sure like from a passive index based approach which is what you've taken with the rest of your stuff i think that's that's perfectly smart um it's almost it's almost hard to be impassive though right because there isn't a single index of like someone somewhere is going no this particular private investment is what i'm giving you exposure to a different investment or the investment gets sold or relisted yes you're not a different type of asset i think just being there because you're there because you're there uh the further further you go away from long-term observable track records, i.e.
1:03:25share markets. Not because I'm a shares guy, but I don't care if you don't do it. I sell stock picks for a living and I sell people buy ETFs, right? I'm clearly not here feathering my own nest. Yeah, just because they don't get sucked into it. Yeah. Mate, I reckon we have filled a podcast. I have one favour to ask of you. Assuming you don't let this go to your head and become king for a day and all of a sudden start to dictate in the new Hutt River Province, Sydney, what would the right word be? Prefecture of the Hutt River Province. Assuming you're still with the rest of us, will you come back next Friday?
1:04:01Well, I've got to order my decrees from some platforms, so this is as good as any. And now I just feel guilty for a providing one. Until next Friday, enjoy the rest of your weekend and fool on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. general advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services License 400691.
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