Mailbag: incl. What would the economy look like without COVID? September 22, 2024

26:45Not really, no. Big property bank, I like Jerry. I think he's going to add value to the business. But do I think it's going to be so much that when he goes, the business is materially worse off? I really don't. And I'm sorry, Jerry, if you're listening, he's not. And that's insulting, but that's where I see the Jerry. Now, if it was someone different, if it was Kogan, for example, Drink Everybody, that's a different thing. Because again, that's the Twiggy Forest doing it, but doing it differently and still building something. buffett berkshire incredibly mature incredibly diversified harvey norman pretty diversified pretty mature uh i'm sorry i'm sorry very different very pretty mature um not a lot of growth left not a lot of entrepreneurial kind of drive there uh the model's set so you know if jerry left tomorrow and someone took over would i be disappointed yeah would i sell my shares no because i don't i don't think it's gonna make that much difference anything come up your mind on that reply?

27:37I just like, reasonable people can reasonably disagree. I don't like Harvey Norman. Earnings have gone nowhere for 10 years. Return on equity is falling. Share price was, what, let's look at it, five years ago was about$440. It's$480 today. I just, I don't. Ah, but if you bought it, I don't see the, you know, yeah, I, you know, I just don't see him as the retail genius he likes to make himself out to. But like, not to take anything away from what he did in the early days, but, you know, what have you done lately? Jerry what have you done lately and what he's done is complain that the internet makes that's why I think Harvey Domb is a problem the revolution was in the 80s and 90s it's done it's done this is a business usual business now yeah and a pretty bad one we'll see I think I'm making money by Harvey Domb but that's okay if you don't like making money around that's up to you Motley Fool Money for more subscribe to the free newsletter at fool.com.au forward slash listener

28:39Georgia sends us a question. Says, hi, Scott and Ram. I have a question for the podcast. I've known about the Motley Fool since 2020. But this is a young person problem. Can I hate you, Georgia? Probably, yeah, I hate you. Sorry. I didn't know the podcast existed until Scott appeared on the Hamish and Andy podcast last year. Since then, I've listened every week and loving it. I've learned so much and apply my learnings to my own investing. For everyone who didn't catch that episode, they basically called me up because they're part of the same listener network that we are and just said, we need a straight man for a joke.

29:10Can you come and do it? I was like, yeah, sure, that's fine. And the producer was really apologetic. He was like, I'm really sorry. Look, it's not really about your finance knowledge. We just have this joke. We kind of wanted to find an expert. Would you mind? We don't want to be rude. We don't want to be mean. It's like, dude, that's fine. I take myself too seriously. So they literally wanted someone to answer questions so they can practice their replies. That was the entire point of the whole segment, as Georgia well knows. But thank you, Georgia, for at least listening and following us over here.

29:34Oh, dear. You ready for a big question, Ram? How long have we got? Okay. My question is, says Georgia, what do you think the Australian economy would look like today if we hadn't had COVID-19? As a year 12 economics student, she says in 2019, that's why we hate you, Georgia, or I do anyway, I was fortunate enough to attend a Queensland economics forum where Phil Lowe presented. I remember that at that conference, he spoke about how the natural rate of unemployment might need to be revised down from 5%. And the difficulties the RBA was having with bringing inflation up to the target band, which, as she said, is painfully funny to think about.

30:10You're absolutely right. Yeah, wow. Due to a whole host of reasons, including the Banking Royal Commission, business confidence was lower and inflation remained stubbornly below the RBA's target range at about 1.7 % per annum. From memory, the outlook was not the most optimistic. It appeared the economy was groaning to a halt. Even the housing market was predicted to see a decline, with economists worrying about how that would translate to the wealth effect. The RBA then proceeded to declare multiple rate cuts during the second half of 2019 from an official cash rate of 1.5 % in June to 0.75 % by November.

30:45Fast forward to 2022, says Georgia, when inflation started to heat up. It seems there was likely initially cost push inflation, with initial drivers being global supply constraints, limited production and shipping costs due to lockdowns. At a domestic level, we had floods and strikes that exacerbated the issue. Now, Ram, this is for you. George says, without sending Ram off on a rant, the housing market was running red hot, with every man, woman and child leveraging up to the eyeballs with cheap debt and buying properties. We've seen house prices grow well above long-term averages. By the end of 2022 and still through to today, inflation now appears to be demand pull, driven by pent-up spending, cash handouts and tax cuts, putting money into the economy.

31:29Please excuse the long run-up and I could be missing something. But to me, the Australian economy looked like it was on a different trajectory prior to COVID. I would love to hear your thoughts. Thanks for your podcast and keep up the good work, Georgia. Tell you what, Georgia, you paid a lot of attention to economics, mate. Well done. You've nailed the circumstances both before and during COVID. That's a very, very, very good summary. So I hope you're working in the economics field somewhere because you should be. You're doing a very good job of it. Ram, what would the Australian economy look like today?

31:57Yeah, I mean, it's such an interesting question, but it's an impossible question, Georgia, because, I mean, the counterfactuals, who knows, right? Like, what would the weather be what the weather is today if there wasn't a butterfly in Ecuador three months ago that was flapping around? It's kind of, it's a bit of a, you know, tongue-in-cheek response, but it's kind of the point here. We are talking about highly complex dynamic systems. And so you can't know. Doesn't mean I'm not going to have a crack at it. I love the run up. I don't know. No one can know. No, it's impossible. It's impossible.

32:33So let me answer. So what we did is we, yeah, we weren't in a great shape. There were definite concerns. And then we had this massive dislocation that was met with a wall of money, you know, And that money created, it papered over a lot of cracks and created far bigger problems, which is usually the way it goes. Usually the way we have some kind of crisis unforeseen, which is usually how they emerge. We react in an imprudent manner and we kind of muddle through. But then, you know, five years later, find that we're dealing with a far bigger problem of our own making. Yeah. I would say. Yeah, the inflation that we suffered from supply chains and Ukraine and all of that kind of stuff was the kind of inflation that's, I want to say okay, because it's just a natural consequence of a fall in supply.

33:29And what else is going to happen? Prices are going to go up. But prices are also going to correct because higher prices are going to induce more people to supply, and that's exactly what should happen. But layered on top of that was the fact that we literally created, you know, squillions of dollars, literally squillions. We created squillions of dollars. We pumped it into the system. Assets went to the moon. And, you know, a lot of dumb investments were made, a lot of malinvestments were made. And lo and behold, prices are going up. And all the problems we're dealing with today are indirectly a consequence of COVID.

34:09It was not so much the virus itself. It was the economic response. I would argue to it. Now, I'm not saying, you know, it's easy with hindsight to kind of say a lot of these things. So again, what would it look like if we still had COVID but we didn't react in the way we did? I don't know. We'd probably be facing not the same problems but a different set of problems. I don't know. But I do think that some of those authorities have a lot to answer for in how they dealt with some of these issues. Yeah, I'm less critical than you, mate. I've got to say. I think I was very, very in favor of the initial job keeper, job seeker.

34:52I've said before, big, fast, and ugly was all that was required. It was treasuries advice during the GFC, treasuries advice this time around, like don't let things fall over. Because once you stall the engine, it's hard to get going, then keep the momentum. So what do we do? You put your foot flatter, you drive a bit faster, maybe you need to, maybe a lot faster than you need to, but it's better than stalling the thing or crashing into a ditch. And so I was a big fan of that. I remain a big fan of that despite criticism. I think they botched up learning from it in phases two, three, and four as the pandemic went on.

35:20When you've got, we've got no time. Like, we've got to do it this week. All right, what do we do? Pull out the bottom, draw a break glass, press the button. You know, let's just do the thing. So, I have no issue with that. But subsequently, once we kind of knew things were settling down, I mean, the market itself had recovered within a month. um the i'm i'm really not sure the size scope and length duration of the of the payments were necessary i think we know there were businesses giving money speak of harvey norman speaking of jerry yeah well and then and then stuck his middle finger up to the rest of us and said i deserve it guess i think i mean but think about what a class act i've got i've got thoughts about that too um subscribe to that you know the thing is they met the criteria right but but it ended up not being necessary.

36:03So what do you do? You change the criteria. So phase two, three, four, the government should have, then government, should have changed the criteria in making sure we didn't waste a whole lot of money and pump prime an economy more than was needed because you might go at 100 rather than 80 to get around the next obstacle if I torture the metaphor. But at some point, you're like, okay, pass it now. We can afford to slow down a little bit and just reassess where we are rather than keep the foot down and to hell with the consequences. And that's kind of what happened.

36:26So being more, the payment should have been made after the fact when the circumstances were shown to have been true, i.e. lost revenue, lost whatever it is. Speaking of counterfactuals, the one area I am, the reason I think it is important to think about what was spent and how is we don't have the counterfactual, how many jobs would have been lost without it? So Jerry can say, I don't know if I can make it about Jerry, but we can if you want. Jerry can say, well, you know, did you deserve the money? No. Okay. Didn't need the money? No. Let's do the counterfactual. Let's do the counterfactual where there's a massive pandemic.

37:02Everyone's worried. And Jerry's getting money from the government now, so he keeps those people. In a different world, Jerry says, well, maybe sales aren't great. I'm going to sack you all. And I'm going to bring you back on if I know sales are okay. So we don't yet know. Did it actually save jobs? Probably, in all seriousness, yes. Because if I know I'm going to get money to keep little Sally in the sales room doing a thing, I can afford to do that because I know I'm going to get paid for that no matter what the sales numbers are. If I don't know what sales are going to be, and I think that might be technical, terrible, most conservative option might be sack everybody and only bring it back on if there are sales there to be made.

37:34And would that have made things worse? Maybe. I won't even say probably. I just want to hold that counterfactual open. The JobKeeper literally did stop the severing of employer relationships because the bosses went, I'll shoot first, ask questions later. And I'm really not sure whether that wasn't the case. Again, we can't know. There is no answer, but that counterfactual possibility is there. Back to George's question then about the economy. I think I will say, George, things are always cyclical, right? And so what would it look like with that? Again, to ram us, we can't know. I would suspect that, frankly, by the end of, let's say middle of 2025, we're probably roughly where we would have been anyway.

38:13Now, I don't assume by that time, but at some point when inflation is back under control and interest rates are back down and notwithstanding the issues and the implications we've got, the economy as we know it, unemployment, businesses, GDP, probably roughly where they would have been anyway, I would suspect. Not because I know that at that point it would have been there, but because cycles are cycles. And so you take off the one-off shock. We've had recessions. We had the GFC. We had the early 90s recession. We had the early 80s recession. They come around every seven to 10 years. Recessions come and go.

38:45So you kind of go, well, over a long enough period of time, it kind of goes away. And that's where the COVID payments and frankly, even the COVID impacts on both sides of that, they are temporary issues. Now, Ram and I disagree about the role of governments and central banks to deal with that stuff. I would happily, as I said before, chop off the tops and fill in the bottoms of peaks and troughs in the economy if it means causing less human misery by more unemployment, more business failures that can be avoided. Ram's point is you just kick the can down the road and that's a reasonable view as well.

39:20But I think we kind of end up in roughly the same spot. If the governments did and central banks did well, they avoided some human misery that otherwise could have been avoided. If they did badly, they've created more misery or simply prolonged it for no good value. But I suspect over time, the trajectory of the economy, if you draw the straight line from 2000 and whatever, pick your year to 19, and then put a dash line from there to 25, I would suspect in both the current and counterfactual worlds, we end up somewhere similar enough. because once the dust is settled, there's the same number of people buying the same number of things, doing the same amount of work.

39:52There is some natural kind of, not natural as in preordained or unavoidable, but the kind of the interactions of capitalism, the number of people, the resources we've got, ability to use those resources, the inventions of the world that make that more productive. I kind of think it'd be roughly in the same spot. We'll never know. We'll never know. I mean, it's interesting though, when you think about these framings from first principles, things just seem to like maybe they're not, but they seem very obvious to me. Now, what happens in a world where no one goes to work for a long period of time?

40:26Right. So again, that just means that there's less stuff being made and there's less services being rendered. And yet at the same time, we create money and give that to everyone. So less stuff, more money. I mean, and then for the next God knows how many years we have to listen to all these experts explain the phenomena of inflation. Oh, it's very complicated. It's like, no. It's just like that. That is the obvious, obvious consequence of less stuff being made and more money being created. I mean, if creating money solved any problems, we'd never have any problems because we'd just create more of it.

41:05Yeah, exactly. Like literally, like, oh, there's a problem? Create money. We'll fix it. It doesn't work. But that's what we did, right? And so one thing I would say is, and again, I want to remove the human dimension to it because a lot of people would have lost their jobs. I mean, well, actually, the counterfactual there is interesting. So that would have maybe been the case, but we would have also seen a lot of that demand also go. We wouldn't have had the inflation problem. And as we came out the other side, those people would have been hired again. So yes, a lot of pain, but it's not like we avoided pain.

41:43We're just suffering a different type of pain. We're all suffering pain now through inflation. You don't need me to tell you how painful that is. Look at your shopping docket, right? Like it's painful. Look at anyone who's renting. Look at anyone who's servicing a mortgage. And you know, newsflash, inflation sucks. And it's very painful and it hits pretty much everyone, right? And so it's not as though we avoided pain by the path that we took. We just had a different type of pain and arguably a longer lasting one. And the thing that gets my blood boiling, one that massively favors one group of society and massively disadvantages another group of society, i.e.

42:25the poor. They're always the ones that suffer vastly more than the rich when it comes to inflation. and I don't know. Do they both suck? Yep. Which one sucks more? I don't know. It's hard to know, but they both, you know what I mean? It's just like, I really does get in my craws. Some of the, you know, iconocrats that get out there and go, look what we did. Aren't we clever? Look what we avoided. It's like, yeah, well again, it's the counterfactual. Did we? I don't know. We're still, we're not in a great position. Open up, open up the financial review or any financial publication. It ain't great out there.

42:58So I don't know. I'd be doing any victory laps here. Anyway. I don't want to prosecute the case. I still – the thing we don't know, and you're right, in either direction, is the aggregate pain that we would have otherwise carried. I mean, in the worst – I mean, Treasury forecast for 15 % unemployment. Now, if that happens, that's probably a two-year recession bordering on depression. Now, maybe it doesn't happen, right? So, I don't want to make that the only counterfactual. We're probably not at 4.2 % unemployment by now, I would suggest to you. We're probably at 6 % or 7%. So, again, where do you put the pain?

43:30We talked before about inflation versus interest rates and who loses their job and who doesn't and what's the standard for everybody else and what's not. And they are unanswerable questions, a bit like the price of a life. We talked about the end of Friday's episode. If you missed that philosophical discussion, feel free to go back and listen. How much inflation is worth? How much unemployment? There is a line there somewhere. And I don't know what that line is. And even if I did, as you say, the counterfactual is unknowable. So we can't know. Would it have been 15 %? Maybe it was eight. Maybe it was 20.

43:56Okay, well, that's a bit different. Okay, what do you do to avoid it? Well, you do a little bit to make sure it's only seven rather than four or 12. Okay, that's different again. It's really, really, really hard. You know, I think, I honestly think we, doing nothing, I have a very strong suspicion we would end up with something akin to the Great Depression, but not quite as bad. I think it would have been the worst recession effectively since the Great Depression had that happened. And now, you can go back to should we have locked down? Should we have closed the borders? isn't it? I mean, it reduces effectively to, you know, just being up our own backsides at some point.

44:32But if you are going to do those things, the impact on the economy was so incredibly severe. And had you not given JobKeeper and JobSeeker payments, I don't know how you escaped a 10 % plus unemployment probably. I know it was 15. I don't have the models in front of me. Depends how long lasting it was, I guess, too. Is 15 % unemployment terrible if it lasts for one or two years? I mean, it is. I think so. So that's the thing. I'm absolutely in that camp because it doesn't go back to four the next year. It goes to 13, then to 11, then to nine, then to seven. Eventually it gets to five and a half.

45:05And have we avoided inflation? Yes. Have we avoided higher interest rates? Yes. Rates are probably lower, actually, rather than higher. So the irony is maybe it gets in the same position, right? So what do you do? When unemployment hits 15%, you've got negative interest rates? Okay, what does that do? I mean, the whole counterfactual gets really, really messy real fast. You know, one thing that worries me about it too is it's the unintended moral hazard of it. Yeah. In the sense that we've talked about this previously where we are in the modern age, corporations don't have much in the way of a treasury.

45:40Yeah, totally. You know, we're an operating business that's been around for 50 years. We've made oodles of profit and we just leave a big pile of it sitting in the Scrooge McDuck vault. Yeah. You know, and every MBA under the sun will tell you how that's a terrible idea. And, you know, you're foregoing wasted returns, et cetera, et cetera. But as we've often said, there is huge resilience that comes in that. And what it's basically taught us as individuals and our companies is you don't need to worry about that. Because if something bad happens, you'll get quote unquote bailed out. Now, in a world where perhaps we did have to take our medicine a bit.

46:17And again, we don't know. Correct. But I would imagine that one of the lessons from any prudent business person would be, you know what? We really need to have a little bit of extra insulation around us for the unknown, for the unexpected. Because there is one thing I can guarantee you right here, right now, that we're going to have another crisis. I don't know when. I don't know what shape it's going to take. But we will. I mean, that is the history of humanity. like the world we live in there is going to be some unexpected black swan that that comes and well by definition it's you know it's unexpected yeah that's right and and it's going to happen and i tell you what i don't know i i won't know the specifics but i can confidently predict that the companies that um that uh are leveraged up with you know they can't take a quarter without about positive cash flow before they go bankrupt.

47:14That is not a good system, I would argue. And so households have learned this lesson as well. It doesn't matter. Whatever happens, the government will give you money. Oh, will it? Okay, cool. So I don't need to worry about saving? No. We were talking about on Friday, the savings rate. It's at something ungodly low level. It's like, well, why wouldn't you spend your savings? Oh, I might as well. Everyone else is having time with their lives. And if you know what, worst case scenario, I'll get a check from the government. and it's just like there is a moral hazard dimension to all of that, which like with bailing your kids out of every little problem, all it teaches them is like I don't really have – it's a consequence-free world.

47:50Anything that goes bad, mummy and daddy will come in and save me. So I am going to be a little so-and-so. And it's not a terrible analogy, I don't think. And it's always a harsh statement because, well, that's not nice. I was like, yeah, but I know. I really get that. I really do. But it's like, that's just the universe we live. I wish I could, I wish I could wave a magic wand and wish that it wasn't like that. And bad things didn't happen. And good people didn't get horrible illnesses and have tragic accidents and, you know, just, but it just does. And, and, and to pretend otherwise, I would, my argument, my standpoint tends to be is just like, well, we can paper over things, but we usually end up making things worse in the grand arc of things.

48:30And so, yeah, fail regularly and minimally rather than just letting things build up to incredibly dangerous levels and teach wrong lessons and just make an incredibly fragile system where we're always on the cusp of disaster. It doesn't strike me as prudent. Fair. I think, as usual, I'm a little cynical than you, but I think the answer is the same. I don't think people actually expect to be bailed out. I think most people forget that bad things happen if you look at the history of of financial kind of circumstances over time recession to recession and we talk about national savings it's a great thing to track because what happens after recession people build up their savings and as soon as they get better what do you do you spend down your savings because you forgot that things get bad again it's regulators do it legislators do it companies do it i think some of them probably say i'll be fine the government will bail me out honestly i can particularly for most individuals i don't think anyone really thinks again i mean maybe after covid we start thinking that but pre-covid no one thought we're gonna get a bail out because it hadn't happened you might get unemployment benefits but no one's going to take massive risk to go on the dial so but i think it's i think it's some some will be as you say i think the other group are just the whole oh that was a long time ago when i've spent especially in australia we spent 30 years without a recession right so you're kind of in the situation of like how bad can things really be i don't i don't remember a time when things were really bad it's why our grandparents still save stamps and and the kids will throw things on buy now pay later it's not it's partly because they're younger but it's mostly because they haven't been through the experience and can't kind of remember it, not because they expected you out there, just because they don't know what it's like to do that or to think about that.

49:59I think it's all human nature. We forget so quickly. It's an excellent point. I mean, that was the generation that set things up for an incredible period of human prosperity after the depression because they learnt the hard lessons. They took their medicine. I'm not saying that was handled particularly well and what the response there was. Yeah. But that's a big part of the reason, you know, as to why we did so well because, oh, that's what happens when you play silly games, you win stupid prizes type thing. And that generation learned that. Exactly. Subsequent generation. We haven't had that lesson.

50:37That was in the history books. That will never happen again. I can't turn the TV or the radio on without someone saying, here's a problem and the government should do something about it. And it's just like, oh. Yeah. You know, as if that's the solution to everything. Anyway, we should probably get to the next question. Hey, let's do that. A question from Brent, who says, G'day, Scott and Ram. I like this preamble too, mate. I love the pod to pieces. Thank you so much. Brent, get a life. I was going to say, I never miss an episode, but that's a lie. One day I was looking to re-listen for an old episode and realized I'd missed one a few months earlier.

51:12Outraged at myself, says Brent. I played it immediately and properly forgot it wasn't current. he was already doing a live version the following week at the gold coast and as i missed the first live event i made sure i booked the day off work got there early and was even looking at staying the night down there so i could have some bevvies while i attended all i had to do was press the book now button when it dawned on me this is an old episode there's only one event and that had already happened and i'm a dill so if you do another live show at least you know one person will rock up. Thank you, Brent.

51:43We appreciate it. He says, I've got a question for the world famous Motley Fool Money pod machine. This one, oh dear, oh dear. This one is mainly for Andrew to begin with, but only if he's caught his breath after doing his hill sprints up Kosciuszko. Brent asks, I've been a shareholder in Bailador for a couple of years now. My rationale, as I'm barely technologically talented enough to restart a crook printer, is that these people know the technology sector much better than I do and will invest my and their money successfully in that space. I understand they conservatively value their investments on their books when it comes to valuing net asset value and hope to surprise to the upside when they sell.

52:23I also really like that they... Sorry, I lost my place. Here you go. Also really like that the investments are into companies which are already established and generating revenue, which in my mind, D, risks the investment significantly and it pays a 6 % dividend. end. Sorry for the preamble, but it sets up this question. Since I've owned Bailador, their shares have always traded at a significant discount to net tangible assets. If it was as simple as paying$1.20 for$1.70 coin, everyone would buy in, but they aren't. So it got me thinking, is there something blatantly obvious I'm missing? Is the market pricing in that some of these businesses will fail?

53:04And also, are there any tricks to look out for when considering net asset value, net tangible assets, or the book price of a certain company's shares? Warmest regards, Brent. Oh, wow. What a good question. Isn't it? Really thoughtful too. Yeah. So, Bailador is essentially like a private equity company that's listed. So, you know, they've got money. They invest in early stage tech companies and hopefully those companies do well. And that's how you as a shareholder make money in Bailador, where you've got indirect exposure. So, they actually own some listed companies. Well, part list. They do. Sightminder is the big one, really.

53:40It's actually very, very major. What's the other one? I can't remember. AI Media? No. We'll get back to it. Straker, translation. Well done, Straker. Thank you. Yeah, that's it. We've spoken to the CEO. It's a really interesting business. Anyway, so what they do is they publish this NTA figure, net tangible assets. So it says if we sold all of our investments today and we sold them for this price and then we paid tax on it, this is how much it would be per share. And I know what the figure is off the top of my head, but as Brent rightly points out, it's higher than the current share price. So why?

54:14Why is the market looking at that? Well, you got to remember that these, particularly the unlisted companies, they don't, no one really knows what the price is. What's the price? Well, in the market, we know what the price is because we can just look at what people are actually trading for. Whether they're right or wrong, quote unquote, that's what shares are trading hands. I know exactly to this cent, What BHP is considered, what it's worth is determined by the market. If I sold all shares today, I know I would get that price. I'll get that price. There's enough liquidity there, give or take a few percent, maybe if I'm selling a huge volume of them.

54:47But that's basically what I'm going to get. Now, a small company that has no market for its shares, it's just the private market. I've actually got to go physically find someone who will buy them. And then I don't know what price we'll agree on. So I have reference prices. So the last time this company raised money, they raised it at this price, so we're going to go with that valuation. You can do it that way, which they do. Or another way that they do it is they say, we get an independent valuer in, which you just get the opinion of one dude. I don't know if they undermine their trade, but it's the opinion of one dude, right?

55:20And reasonable people can reasonably disagree. And so there is going to be some maybe skepticism is the word for it. I was like, well, just because that was the last price a transaction occurred, has the business increased since then? Can you still get that? I don't know. Was the person who valued it, were they right or were they wrong? I don't know. So it's not uncommon for it to sort of trade below these figures. For me, one of the big part of the thesis is that, look, every management team in this game will tell you that they're conservative at valuations. Baylor will have a pretty good track record of being very conservative.

56:00And we can look at past transactions. They've carried these or done these calculations at a certain value. And then when the next round of financing occurs or when there's an exit transaction or something like that, it ends up being much higher than what they've carried it at. So it's like they're very conservative in the numbers that they put forward. So there is a case to be made that actually the real NCA is actually higher than what they publish. if you wanted to take that kind of view. We don't know. So at the end of the day, it's just a bet on management being very good capital allocators and that the numbers that they're publishing are reasonable erring on the side of conservatism.

56:40You've got to make your own judgment towards that. But here's the other thing with Baylor. SharePrize has gone nowhere in three years. It's down about 13 % from its 52-week highs. It's like, okay, so the company hasn't done anything. Well, I don't know. Look at most recent presentation and their NTA, as they've determined, has been growing at a reasonable clip. You know, they're paying a very healthy dividend. As you know, cash is king, right? You don't need to worry about an independent valuer telling you what the cash is where you can see exactly what's in the bank account, right? So that's very good.

57:14The net cash balance represents 30 % of their market cap. Let me just let that one sit there for a moment. So this is like, so yes, reasonable people can reasonably disagree on valuation, but gosh, that's a lot of cash. And gosh, they've got a lot of history of being conservative. Now they might all go absolute pear-shaped all of their investments to mine. That's right. So I'm setting this up very favorably, full disclosure. I've got exposure myself. So, you know, I'm biased. There are plenty of people on straw man who've said, you're an idiot. I don't like it. Here's what, here's what you're missing.

57:49So, you know, but, But you're right. You're asking the right questions. I think the best you can do is say, before you look at any of these numbers, you've just got to try and form a view that these are competent, ethical people. Because if you don't pass that hurdle, everything else is - Especially in this sort of business. It's a moot point. It doesn't really matter what the numbers say after that point. So you've got to reach that conclusion. I don't want to tell you what to think. But if you feel as though that's the case, then yeah, I would say you can make a case for value. And there's also a pretty good track record too on, as with any investment, particularly early stage investment, particularly early stage tech investment.

58:30I guarantee you not all of their investments are going to work out. Not all of them have. And I'm sure there's a couple in their stable right now that are going to prove to be absolute dogs. You just don't know which ones, right? What's my point? My point being is you buy this because you trust management and you want exposure to earlier stage tech that you can't easily get as a private, quote unquote, retail investor. And so I like it. But I've got to be careful. We talked about this the other day. You're on a podcast or you're on some platform and you say, I like this. And you've got to remember that when we say that, I am covering my butt a bit here, but it's an important point to make.

59:14it's one of oh gosh at least in terms of the material weightings you know at least 12 other companies that that i that i sort of hold yeah right and and i certainly don't have all my money in it you're selling a house to buy shares yeah i'm not selling the house to buy shares here right um in fact i'll go on to straw man right now because it'll tell me 3.2 percent right and so So I'm not betting farm on this. It's not nothing. I run a pretty concentrated pool. My biggest position is 24 % at this point in time. Yeah, right? But yeah, good problem to have. I didn't put a quarter of my money into it.

59:54It just, it's done rather well. But what's my point? Be careful. I just try to be guarded with these comments because you say something favorable and three years later, you find yourself defending a thing that you sort of made one positive remark on and it becomes tied up with your ego and your identity. And so I like the stock. I like the stock. But whether that means you should like it is an entirely different thing. And as I like to say, I say it all the time, you can borrow an idea, you can't borrow the conviction. Could we wake up tomorrow morning and bail it all is down 50 %? Andrew said he liked it.

1:00:32Yeah, well, does he still? I don't know. Do I even value his opinion in the first place? I don't know. His circumstances are entirely different. So you need to pad these kinds of things out. But hopefully, listen more about, think more about sort of the things I've asked you to think about rather than what my individual conclusions are. Nice, Matt. That's a really good summary. I'm going to add my thoughts, Matt. I'm going to be a bit of devil's advocate, not because I – No, please do. So I full disclosure, I've recommended this in the past in a service that we no longer have. So I liked it then.

1:01:01We didn't sell it other than because the service closed. So I don't have a current view on it. but we like we've also had it's my turn to say mate we've spoken to david kirk and paul wilson uh at a motley full platinum event uh they're good guys they know their stuff um good histories um smart capable people that's pretty cool too if you're a rugby fan right very cool those who don't know david kirk was the ex-captain new zealand all blacks and uh yeah super cool um there was a bit of bit of awe in the room can i say we had some members there and we were there and i think it was over a certain age to be fair a lot of the younger people that i work with with whatever.

1:01:33He's just the CEO of... He also ran Fairfax, by the way, so a storied career. So if I was going to... So a couple of things. You mentioned the$1.70 buying for$1.20. The $1.70 is a pre-tax net potential asset value. According to the most recent data, the post-tax is$1.57. Is that a big deal? No, but just be mindful that tax is payable unless, you know, Baylor can avoid paying tax, unless you can avoid paying tax. What they're going to have left after disposal is$1.57, not$1.70. So that's just worth being, you can't make up the 13 cents for the fun of it. Now, it compounds pre-tax, so you get upside if it continues to grow.

1:02:08So I'm not saying it's only a one-way street. Just be mindful of that. In terms of their NTA, I don't like NTA for investment companies because they're not tangible at all. No. And even listed companies, even 100 % listed. I've done the same with Salt Pats, by the way. It's not about Bailador. The fact that the share price is currently X, you mentioned Bailador could fall 50 % tomorrow. so could their largest holdings. Sightminder or Striker could afford 50 % tomorrow. In which case, the NTA, the T-tangible, how tangible was it? It wasn't really. It was a number on a screen. It was something that someone would have paid at a point.

1:02:38It wasn't incorrect. It's just not very tangible in the same way. Now, it's not their fault for using NTA. Everybody does. It's not Baylor's chosen metric. But it's like price and value, right? Well, we can sell something for it. Is it worth that? Not necessarily. So be mindful of that. Of the$1.70, about half is private investments. And Ram's already talked about that. If you back out the private investments, leave your cash and listed investments, you're down to about 85 or 90 cents. So really what the market's saying is either they fear the listed investments falling and or the private investments are harder to value and not certain in terms of the result you're going to get from them.

1:03:14We've seen plenty of, in fact, even really big, remember where WeWork went broke? It was valued on the venture capital funds balance sheets at millions and billions and billions of dollars. and then all of a sudden zero. Now, is Bayloader investing in WeWork? No. Are the companies like WeWork? Not really. Do I expect that to be the outcome? No, I like Bayloader as well as Ram does. I don't have any exposure at all. But could that happen? Yes, absolutely. And then lastly on cash, again, just to be devil's advocate, I'm not, again, I'm positive. I'm just showing the negatives for the fun of it and to kind of help round out the conversation.

1:03:45No, no. They got 30 % of their market share is in cash, which is great if it remains in cash. If I take 30 % of my market share and go and blow it on WeWork shares, then does it worth the cash anymore? No, it's worth much less than that cash. And I need to clarify something too. So I was reading my notes on Strongman from when I wrote them after. So it was 30 % of their market cap. It's about 19 % of their NTA component. Okay, cool. So it's still very, very meaningful. That's not miles off 30 % of the market cap then given the discount actually. So you're probably still right. So it's about right.

1:04:17But just if someone's looking at the latest thing going, wait a second, it says 18%, Andrew said 30%. I was comparing it to the market capitalization. Yeah, which is totally appropriate. and that's it's actually more relevant to my cap actually as much you're you're trying to be good about it it's more relevant because you're saying well hang on i'm buying for a dollar 20 and 30 40 cents that's cash so you know the risk i'm taking is only what's left so that that's i think it's absolutely valid um but you know you can go you can go and buy the cash i'm not one and this is not a dig at you mate um plenty of people say oh i'm buying this company because it's x percent cash and therefore i just remove it from this calculation so you might get the money back yeah that's fine if you're getting the money back but you either believe in these guys which Andrew does and I tend to as well or you don't but if there's cash they're not using then guys use the cash if there's cash they're going to use and use badly then is 30 million dollars worth of cash worth 30 million dollars worth of cash or is it worth 25 million or 15 or zero because they buy WeWork shares with it or is it worth 60 million because they go and use it really really well and again given Ram's background in terms of explaining how well they've been they've done conservative invested well gee 30 million bucks if they can use that money it's worth even more So yeah, lots of moving parts.

1:05:21You're right, Brent, to think about it exactly that way. You're not missing anything at all, mate. You've nailed exactly what's going on. Why is it worth less? Yeah, the market is not convinced that either listed investments are worth what they're trading for, or the private investments can be realized for the value or both, or the market's just generally pessimistic. It might not be about Baylor at all. It might just be about these sorts of businesses. I will say I'm not a big fan of, you know, too much director action telling you much, but I will say a decent number of the directors have bought shares in the last little while, including David Kirk, who bought something close to half a million dollars from the look of it across these various entities, super funds and private companies and stuff.

1:05:57So there are some people putting some money to work here saying, gee, we want more of this stuff. No, they're getting - Money, yeah. Money talks and you know what walks, right? Yeah. I mean, look, I mean, I'm always a bit careful of that. You know, directors often buy for window dressing. If you own$10 million or something and you buy 100 grand's worth, is it really a big deal for you or for the market or are you just trying to window dress? I don't know. I'm not saying David Kirk's doing this, by the way, or Paul Wilson. Yeah, I always laugh when you see the$10 ,000 purchase from a person who's worth$12 million or whatever.

1:06:24Exactly. And similarly, selling creepy for a dozen reasons we've said, including Marcus Blackmore famously buying a yacht. So look, I think this is a really good company. I think it's very well run. I think the guys know what they're doing. I'm not overly super, super comfortable with the massive exposure they've got to those couple of businesses. Think about your own personal portfolio, that the importance of Sightminder and Straker to Baylor is pretty big. So if you got, one thing I would say, Brent, honestly, is get your head around as much of their investments as you can. Well, either do things, either say, I trust David and Paul, they're going to do their thing, I'll let them do it, I won't worry about it, which is fine, just know what risk you're taking.

1:07:01Or you say, I want to see what they're worth and just have a look at those two and any of the private investment information that's available and just say, does that seem like something I'm comfortable with? What would I pay for that or how comfortable am I with the current prices or valuations being provided for those. If you don't know or you can't know, that's cool. Make your choice on David and Paul and go with that. If you can or want to have a view on that, make an effort just to have a bit of a squeeze and see what you think you can get from it. While we're talking about it as well, more for illustrative purposes, one of the things that you really, well, I certainly like, I think most people would like when they're looking at a business is real predictability and consistency in earnings.

1:07:40It's a nice thing to have. You're not getting it with bail at all. No, no. It's a cash box. You're absolutely betting. You're betting on people making bets on early stage tech companies. Yep. And so you look at their earnings per share chart and it's up and down, it's up and left and like, whoa, this looks like the most erratic business. But of course it is because they put all this money to work and maybe they don't sell any shares. Maybe there's no exit for any of their investments for three years. In which case, what are you guys doing? Where's the money? You stop paying a dividend. Oh, now you're paying a special dividend?

1:08:12Oh, now you've cut the dividend? No, no, no, no. Expect that. That is absolutely the appropriate thing for the kind of business that they run. And so you're not buying it for a smooth, steady stream of earnings. You're buying it for the skill of the capital allocation and that in the future at some indeterminate point in time, some of them will become really good. They just bought a company that does software for gyms of all things, right? Yes, yes. Early stage business. You know, in 10 years' time, it could just be every gym in the country is using the software and it's just to the moon. And then they sell.

1:08:43And then they get the cash. But in between, nothing happens, right? Or no one uses the software, goes to zero, and they go, bugger that. We tried. We couldn't get scale. Someone else's, you know, pages, gym software took over, and it's worth zero. Or somewhere in between there. Yep. But I know that I've seen other investors do, oh, look, they're very erratic. They're very lumpy earnings. It's like, well, how could it not be lumpy? I mean, Bailador itself is illiquid by ASX standards. And the companies they're investing in are hyperliquids. Even if they wanted to sell shares, there might be something in their portfolio that, gosh, I would love to get out.

1:09:21But it's a lobster pot. How do you get out? The only way to get out is to find a buyer. And then you've got to hope that they're happy to pay a price that you're willing to accept. So it's going to be all over the place. And it's just, it's something to be super, super, super mindful of. So it's the kind of business where it can look like nothing is happening for ages. And then all of a sudden they just knock it out of the park because, oh, they sold this thing for five times more than what they said it was worth. And now it's cash, right? And, oh, that's very odd. To your point, maybe completely went to zero and we're sorry, we're not going to do that again.

1:09:57So, yeah, it's not a good entry-level investment, but it's a fascinating business if you're interested in digging into it. Just understand what you're buying. Think about it as a closed fund. If you invest in a venture capital fund, you give them their money, and that's going to get back to you in five years' time. Yeah. You don't get the earnings. You don't get dividends with the bailout. You don't get dividends with the venture fund. You're just like, Liz, give us your money. You trust us. We're going to turn you$10 ,000 to$20 ,000 over five years. We may or may not do that. Come and see us in five years' time.

1:10:24Doing this on a daily, weekly, monthly basis, even with the NTA, it's the wrong way to look at it in my opinion. I mean, the nice thing about this is when you do it right, and it's fraught with failure, but when you do it right, so the multiples you pay for private companies are just so low compared to a listed company. The exact same company unlisted might be eight times earnings versus maybe an average of 16 on the ASX. So just by virtue of going, if any of their investments float on any public market, they'll probably double the valuation overnight. And not irrationally, just because liquidity matters as I've talked about before.

1:11:04Yeah, so I don't know, just bear all of that in mind, right? It's going to take a bit of thinking with this one. I feel as though I'm always nervous when we talk stock-specific stuff because there'll be people listening go, oh, Scott and Andrew like that. I'm going to go buy some. I mean, do it if you want, but just it's on you, right? Again, I'm covering my backside, but it's also, it's just a bit of a harsh reality of it. If your investment strategy is two randos on a podcast said something nice, you might want to look at the mirror. I like that. I like that. That's all covered. We did wrap this up, but I'm going to do a block tease.

1:11:43Next week on the block, this first question starts with, Scott, I've listened to you and now I've lost all of my money. Want to hear the rest of that? Tune in next Sunday, live on the block. We will answer that question. We will address that issue. We will, well, it could get ugly. Next week on Motley Fool Money. But until then, we hope you have a wonderful rest of your Sunday or as I am, like I say, Wednesday afternoon or 3 a.m. on Friday, if that's what you're doing. We appreciate you spending a bit of time with us. Send us your questions, info at fool.com.au. Follow us on all the socials. Go to strawman.com.

1:12:18Go to fool.com.au. And until next Friday. 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 Licence 400691.