Mailbag: incl. Will Bitcoin impact FX rates? April 21, 2024

25:09It just, it's huge. But NVIDIA is there, right? Let's like, we know that they're there. I think the only case against NVIDIA is a valuation one. And I just haven't done the work, right? I know that there's a lot of growth priced in. It may be rational, it may be not. But, yeah, as I look as a company, I think NVIDIA is very well. I think it's pretty future-proof unless we go in a really radically different direction. And even if we do go in a radically different, like, you know, there's like computers that run on organic materials, I don't know, some weird thing. They'll be the people that develop it, you know, and if they don't, they'll be the people who buy it very early stage and then develop it and commercialise it.

25:43So, you know, I wouldn't bet against them. You know, that's fascinating, man. I'm going to take the other side of this, not actually because I'm convinced by it, but just to kind of, just to flesh that out because it's a really interesting conversation. I have no idea either, by the way. So I'll echo your first thought and then we probably should finish there. But because we both like to talk and share our thoughts, we will keep going. I don't think you're wrong. Devil's Advocate would say the same would have been instead of Intel X years ago before NVIDIA came and took over the world and kind of that idea of the new type of chip.

26:09And all of a sudden, Intel could have bought them. They could have invented it. They could have done whatever as well. So again, I just say that because I predicted or because I think you're wrong just because I want to make sure others are at least aware of it. I also would mention with NVIDIA, you mentioned valuation, mate. There was a time, and this will go back to crypto. There was a time when NVIDIA absolutely soared. Again, it's a slight bump in the share price chart given what's happened subsequently with AI. But they were the people making the chips for the Bitcoin mining machines. And that was a massive surge.

26:39And the surge kind of like a big wave, the water comes in, it kind of goes back out again. And it doesn't need to go all the way back out. But to our listeners' question, I think that's kind of part of it. I think that's part of the idea of where there is a chance that the valuation is too high and or that the volume is a spike in volume which may not be maintained. Now, if you're – I use the phrase regularly underlying earnings power. There is some element with NVIDIA. You've got to say, okay, well, what do I think this business can keep earning for the next five or seven or ten years? Now, it's probably going to be up and to the right directionally, but at what angle, how quickly, and at what valuation?

27:16I'm with you, mate. I don't know the answer. I think you are generally in business better off betting on the winners to keep winning. That tends to be the way things work out. But as I said, Intel got overtaken by NVIDIA. I was remembering earlier this morning that Microsoft Edge, or Intel Explorer, sorry, when it was bundled with Windows, was going to be the big thing that the antitrust people were worried about, right? And now I think number of individual devices with Apple and Android and Microsoft even got rid of Vindicate Explorer and got Edge out there and you say, well, hang on, was that a point in time?

27:47I don't know the answer, but I do know that if you think through the chance that there will be more changes, I don't know. Now, I think the safest bet probabilistically, not with money, probabilistically is NVIDIA probably keeps on winning. Doesn't make it a good investment at today's price. I have absolutely no idea. I would suspect, I don't know. I would suspect that those companies that harness AI probably generate more total value than NVIDIA itself over time. But how many companies you need to have to get that value, NVIDIA may still be the focused highest ROI play. But if you think about it, I think AI is probably, in my mind, going to be more akin to the internet than to a proprietary technology harnessed by a single company for a single benefit.

28:34That being said, NVIDIA may well sell every chip that's used for AI for the next 50 years, in which case these guys will absolutely wipe the floor with everybody else. So it kind of depends on your investing style and approach and, frankly, portfolio construction as well. I wouldn't buy NVIDIA at the moment, not because I know it's overvalued, just because I'm not sure that it's not. I think there are better ROI, better risk-reward, frankly, risk-reward opportunities. I own some of the companies that were mentioned by a questioner. I'm sure they'll use AI intelligently because they're massive organisations with huge R &D budgets.

29:05That gives them an opportunity. R &D budgets are a bit of a superpower, not always exclusively, not always used well. But if you think about a CSL or a Google or an Apple or a picky company here, their ability to throw so much money at this stuff to keep themselves at the top is just, again, not a guarantee, but it's a very, very, very good head start. Oh, well, look at Facebook. Yes. Now it's meta. It is completely rebranded. Right, right. And it's all about the metaverse. Social media is sort of a secondary thing now. Yeah, that's right. You know, so, yeah, there is, yeah, as I said, the only question for me is one evaluation because it's very, it's a very meaty evaluation at the moment, but, yeah.

29:46That's pretty a kind of way.

29:51I'm hesitating. Munger himself made the comment in the early part of the century that the internet really wasn't going to do much for business because everyone's got it. It's like, well, we've all got, I've got a fax machine and I can sort of send documents around really quickly and other people are using couriers, I've got an advantage. But then everyone's got a fax. Now everyone's got the internet. Like I said before, everyone's got the email. Now everyone's got a bunch of AI models that they're employing in various different ways. So there is that will value be created? Undoubtedly, like immense value if it lives up to its potential.

30:25It's just who manages to capture that? We've touched on before the idea of a value chain and like whatever you've got in your pocket or in front of you has come through like, God, you know, a hundred different stakeholders at various points. There's usually a handful of them that really cream all the margin in that supply chain. I just suspect it's more NVIDIA at this, or not NVIDIA, but the chip, let's put it more broadly, the chip manufacturers at this point in time too. And it's sort of, it's such a fascinating space because it's not just AI, it's just general compute and server requirements there.

30:56There's edge computing, which is where a lot of the computation happens on device as opposed to being sent back to a server. There's Bitcoin mining, you know, the hash rates there are going up. There's all kinds of – oh, robotics is the other big thing. Mark my words, mate. In the next few years, that'll be the next buzzword on the market. Prediction here from Andrew Page. It's just fascinating. It's so fascinating what is happening on that front. And it's really an amalgam of what AI is doing because it's more the AI that's enabling the robotics. But gosh, it's super exciting. and they need specialized chips as well.

31:32NVIDIA is doing. I would imagine very strongly that in 10 years' time, NVIDIA is making a chip for a thing that none of us are talking about at the moment. And is that going to be a better proposition than some company that may take some aspect of AI and create a lot of value and a lot of profit for its shareholders? I don't know, right? But I just know that it's a pretty good space to be in and that NVIDIA is pretty competitively protected. it's just a shame that the price is so high because I'd prefer it at a cheaper price. Exactly, exactly. Mate, can I talk about the B word and can we keep our answers relatively short?

32:09We'll try our best. We'll try our best. This is actually fascinating because it's actually, well, it's all about Bitcoin, not about Bitcoin at all, which I kind of like. And it's a really interesting, not that I'm happy to talk about Bitcoin itself, by the way, but I just like the thought. Tim starts by saying, hi, Andrew and Scott. Yes, at last, I finally have a Bitcoin question so you can light up the pod machine and rant on, which is not a great way to start, Tim, but I will allow it. So Bitcoin ETFs got approved by the SEC. This is the US Securities and Exchange Commission. And all was pretty quiet, says Tim.

32:39But since the start of Feb, there has been growth. Now, this email came through at the beginning of last month. So it's a date stamp, but it's not important. In the last few days, he says, this is why I'm mentioning it, Bitcoin has reached, quote, the highest level since 2021, end quote. But that was looking at Bitcoin against the US dollar. If you look at Bitcoin against the Australian dollar, then it has reached its highest level ever. I assume this difference is because the AUD and USD exchange rate has changed over the last few years. Now, since I started writing this email, there has been a significant spike in Bitcoin value, so the USD value is also the highest ever as well.

33:15And by the time you read this out on air, no doubt there will be another significant movement in this asset, either up or down. But this moment in time when Bitcoin was the highest ever, in Australian dollars but not US dollars, got me thinking. Isn't the promise of Bitcoin that it has a value independent of central currencies? Given the rising market value of Bitcoin, at what point does that asset class start to affect the currency exchange rate? And given I can buy Bitcoin in one currency, sell in another, at least notionally without any exchange rate issues, are there any opportunities as the market capitalisation rises to arbitrage, such as to buy Bitcoin and Aussie dollars, sell in US dollars, convert US dollars to Aussie dollars, rinse and repeat.

34:00And is some of that opportunity related to the massive spike in daily volumes in the past few weeks? Looking forward to this five-hour episode. Cheers, Tim. It's a really good question, mate, isn't it? I mean, at some point, Bitcoin becomes large enough to be a viable, I'll say alternative currency, you'll say it's always viable, but in volume or value terms, in its role as one of the basket of potential ways to value each other's currencies, does Bitcoin start to put influence on the way currencies are exchanged? I don't think so. It just adds another currency to the mix. I mean, within that question there was, does Bitcoin become independent of these?

34:42And I think, no, it never does and never can because value is always relative. You know, if I want to buy your house, I could pay for it in cows, right? Like you would be really annoyed with me and it would be just such a pain in the backside. But there is a price in cows for your house that you will say, okay, I'll give you, I don't know the cattle prices, but I'll give you a million head of cattle, your house. I'm assuming that's going to be worthwhile, right? But even with the friction, so value is always relative. And in fact, that's where you kind of get deep on it. It's like money is just, it's that thing that allows us to keep score because otherwise I have what economists call the coincidence of wants.

35:23You've got lots of extra fish. I've got lots of extra apples. You know, I want fish, but you don't want my apples, so no trade occurs, right? Money sort of solves that problem. And money is like, it's three things. It starts as a store of value. It's used as a medium of exchange. And lastly, it's a unit of account. And the reality is, and the reality will be this way for a long, long time yet, is that in our particular jurisdiction, the unit of account is the Aussie dollar. So that's, that's the thing that everything will always get measured against, whether it's cows or houses or Bitcoin, right?

35:52So it's, it's never going to be independent. Can you arbitrage it between different currencies? Yeah, you can just in the same way that if I hold yen, I can buy Aussie dollars and then sell them over in the US and I can trade these different, there's 160 national currencies around the world. I can hold as many of different ones as I want and trade them in different markets and, and scalp differences in local exchange rates. I can absolutely do that. But guess what? People do do it, right? And people do it with Bitcoin too. So very, very early days, you could do it. You could. Even within the country, it's like there's one small exchange operating over here.

36:26There's another exchange there. I've got an account at both. You know, I just have an algorithm that scans the bid and offer. And whenever there's a no-brainer trade, I just lock it in. You make fractions of a cent, but you do it a million times a day and it's worthwhile. And it's a good idea, except the problem is people had that idea. and now like if you log on to any of the exchanges, even on the stock exchange, not even just, you know, Bitcoin exchanges, you will see all these weird little tiny trades. That's bots arbitraging things and that's what keeps them in place and you can play that game if you're ultra sophisticated and ultra well resourced and even then you probably won't make it worth your while.

37:02So it's a good idea but that ship has sailed. Yeah, that's right. Those opportunities cease to exist once people realise they're there effectively. And then just, yeah, lowest common denominator, cheapest, fastest wins. Unless you're cheapest and or fastest, you're not going to win that game. But it's a really good way to think about it. Go on. I was just going to say, stay humble and stack sets. Like that's the strategy, right? Just hold it as if you were holding gold, right? Because that's the kind of best mindset for it. I would suggest at the moment too, mate, as much as Bitcoin is growing in relevance and popularity, it's almost certain, well, I shouldn't, yeah, well, I think it's almost certain, maybe.

37:35Don't talk about it if I'm wrong. That effectively the US, the Bitcoin is effectively priced in US dollars. Oh, yes. And the Australian dollar value of Bitcoin is effectively just the Bitcoin price in US dollars times the exchange rate, in which case there is no opportunity because it doesn't really trade independently in a way that the Japanese yen, the Australian dollar, and the US dollar are all very different because, to your point, they're local uses. And so there is a – that gives it to some degree – yen isn't priced in US dollars, it's priced in yen. And Bitcoin is still priced in Bitcoin, but when you think about the exchange of that, there is no – because it doesn't have its own physical jurisdictional market or economy at least yet, it is a derivation of US dollars and therefore everything is effectively, a bit like the oil price, right?

38:12Could you buy barrels of oil in Australian dollars and sell them in US dollars? Yeah. But the reality is oil doesn't have its own intrinsic value that's expressed as anything other than the base currency in which it's denominated. It's the unit of account. You can't get away from it. It's the measuring stick that we're holding against it. And Bitcoin's slightly inferior than against the national currency in that context for that purpose. No, I'm not trying to... No, no, I get what you're saying. Just in that sense, I would suggest it's probably even less opportunity because it has no independent value at the moment for the rest of the world other than US dollars first and then mathematically translated to other currencies as it goes.

38:48Yeah, US dollar is special because it is the world reserve currency, but also because it is, when you look at Bitcoin markets, it is the largest and deepest and most actively traded in the world. This is why the ETFs were such a big deal. We had ETFs in Canada and Australia and stuff before then. That never got anyone excited, right? Yeah, exactly. Now, these things have been the most successful ETF launch in history by a very significant margin. And they're already doing volumes that put them in the top 10 of global ETFs traded worldwide. That's because the US opened up those doors. So you're right.

39:22In fact, I tend to look at the price in US dollars, to be honest with you, because it clears away the exchange rate differences. I mean, at the end of the day, I live in Australia, right? So ultimately what matters is the Aussie dollar. But yeah. But don't think about it in any of these kinds of ways. Think about it.

39:48It is just a different type of money. It's a new type. We haven't had it before. It's got all these really interesting properties, but I would argue make it incredibly superior and that just only grows with the network effect. But it's not something I invest in or I trade in. You know, I hold it because I feel as though I will have a, it will have increasing purchasing power in the longterm, even though as it monetizes it, bootstraps from zero, it's going to be super volatile. It's not something that I would ever, I said to you before, sort of jokingly a couple of weeks ago, and you said, oh, you got to sell some of your Bitcoin or whatever.

40:22I said, no, I never sell. I might spend it occasionally, but I'm not selling it. And that's, and it's sort of a, it's a bit tongue in cheek, but it's also, I'm really serious about that. Yeah. It's an important point. it's that's it's it's money it has no intrinsic value on in the function that it serves and it's such a mind uh messer yes is the right word thank you um keeps pg for another 50 minutes yeah so it's kind of you kind of got to go on that journey before you even want to think about it if it's just sort of like hey it's booming it's at a record high and i'm going to buy some i'm going to invest in bitcoin and then i'm going to trade it i'm going to buy some ethereum and i'm going to do like you're doing it wrong and you're going to get wrecked i would say mate let's go to a Thank you for that.

41:01It's a really, really good answer. And it's a really good question, by the way. I love the way that the kind of, you know, the thinking that goes behind some of these questions, including one from Sam. He says, hi, Scoot and Ram. Thanks for all the great work that goes into this podcast. He says, insert complimentary comments about the pod machine here. Thanks, Sam. I just, you know, I'll remind you around that you used the word pod machine. Between this one, the good oil and the other places, you guys are, you'd think I'd be sick of hearing the sound of your voices, but I'm not yet. I love you says, well, you didn't say I'm not, it's I'm not yet.

41:28Sorry, I just leave you open the door, which is probably, I think that's smart. I have a fair few companies on my watch list, says Sam. Some I'd like to buy and others just for curiosity. I've watched as company share prices have dropped significantly in the past year or so, only to recover. Some as much as 70%. Some recover in a month, others in a year. A few of these are WiseTech, Xero, CSL, ResMed, ProMedicus, all Australian quality compounders. Scott, a while ago, on an episode, sorry, yeah. Scott, while you're on an episode, Sam says, Solpads has fallen by 6 % along with Brickworks. There seemed to be no reason for this other than Mr.

42:06Market being the market. You mentioned you took this opportunity to buy more. When we see these dips in large companies, can we throw PE out the window and see it as a good opportunity to buy and make a smooth 50 % on the way back up? What steps would you recommend taking to work out if it's market fluff or fundamentals of the business? Or am I just trying to be too clever? or in brackets, or too dumb, he says. How do you deal with the psychological aspect of buying when a company's share price has taken a hit? For example, I purchased Meta right before the 70 % drawdown. I had to sit for a long time with my head in my hands before it got back up, but I couldn't bring myself to buy more while they were cheaper after my resolve had been shaken.

42:48I think I can see a few holes in these questions, but would like to hear your thoughts. Thanks, Sam. right well yeah i mean this is why it's so important to have an independent notion of value because you don't know whether i mean firstly you just you start with the assumption that the timing is going to be terrible i i always joke because it seems like this is how the the universe backs it up with with results but whenever i buy that share is falling the next day or week you You know, probably a lot. It just happens. And when I sell, it'll rally afterwards. But that kind of doesn't really matter because I'm not trying to trade it.

43:27I've reached a conclusion, rightly or wrongly, that these shares represent good value. And I've done a bit of work to figure out what that is. I don't want to pretend that it's like super advanced, 12 gigabyte spreadsheets or anything. But I've had a thought of what growth could look like, what margins could be, you know, what kind of market multiples needed for this thing to make sense. and I've come up to the conclusion that I want to own it and I think shares are good value. So if shares fall the next day, it puts you on a much firmer footing in terms of your resolve because it's kind of like, well, I thought it was good value at a dollar and now it's 90 cents.

43:59I mean, ergo, it's better value. And that's very different if I bought it and then the company released some information that would undercut some of my assumptions or question some of my assertions and forecasts and all of that kind of stuff. So we always say it, and we've got to be careful with this. Like it's very easy to deride Mr. Market. Mr. Market's irrational, does all these dumb things. Yeah, that's true. That's a good point. Yeah, but not always. He's not that crazy, right? He's actually usually pretty close. And he just has these flights of fancy every now and again. um so i i try to i try to stay independent of the market and just basically remind myself that it is there to serve not to inform i.e it's not good or bad because it's gone up or down since i bought it it's just what people are prepared to exchange it for now and i i will continue to hold it so long as i think the market under appreciates the true value of the business and i might be wrong and i might be right yeah yeah but until that changes now that might change the shares might go up 50 % and I might think it's actually cheaper now because the fundamentals are now even stronger and the outlook is even better or it might fall 30 % and I think it's actually a terrible proposition than it was at a even though it's cheaper it's like a worse proposition because the company's just going in the absolute wrong direction so just to come full circle here that's why you want to have that version I you know you bought Meta because you thought it was a good company great in fact I think there's a lot of potential there as well but well what's it what's it worth?

45:34Don't, don't give me something that's 18 decimal places, but, but what is that backed by? What, what kind of growth do you think this company is going to, you know, fill it in that way. And that will, that will just give you that added, uh, touchstone to come back to when deciding, do I hold, do I wait, do I buy the dip? No, no, no. Forget all of that. It's all a distraction when it's cheap or when it's, when it's appropriately valued relative to the opportunities and risks of the business, just to state it formally, you should continue to hold it. And you should look at that in context with other opportunities that are out there, because it might be that it's a decent opportunity, it's just there's one that there's far less risky and far better return potential over there.

46:13So there's an opportunity cost dimension, but that's really it. And it's very hard to dissociate yourself and separate yourself from the ups and downs. But from my mind, any of the best investors I've ever seen, that's what they do. They will tell you that, you know, the market's wrong or the market's right, but here's how I think that you should think of value and here's my reasoning. And it just, it gives you something other than the current market price to refer to. Because if that's all you've got to refer to, you know, you'll be sent mad. I think that's right. I, yeah, so a couple of things, Sam, I just want to clarify.

46:49I didn't buy because it was down 6%. I wasn't waiting for a dip. I was always happy to take advantage of market unhappiness. If I was going to buy anyway, I was like, hey, that might have been the one I bought rather than something else because the price relatively went down. I've never ever bought something because it fell 6%. Because it fell 6%. It's not what I do. I have no interest in doing that. As I said, we talked about it before and have been in the past a lot. I expect things to go up a lot over time. I want to be on the train, on the escalator, on the way up. Even though it stalls occasionally and falls backwards sometimes, I'm not waiting for a 6 % fall.

47:21But when the market threw the toys out of the cot and I had some money to invest, I'm like, cool, okay. I'll take advantage of that. Of course I will. I liked it yesterday. It was 6 % more expensive. I should like it more now today when it's cheaper. And you've got money now too. You didn't have money yesterday and now you do. Exactly. That's all it was. So that's true. You know, and again, because I'm generally a little bit lazy, I probably didn't have the money. It was in my account. I probably should have got around to it. And it may have been the case that I kind of went, oh, that's a catalyst to buy as in to get off my backside and do it.

47:46But again, it wasn't the thing where I went, I wouldn't have bought it yesterday at that price. I will buy it today at this price all of a sudden because there's a material change in value. In terms of the market, so Andrew's gone through beautifully the psychology and the maths or the valuation and thinking about it. In terms of is it just the market or is it me, Andrew's right, start with a sense of your own value. That's a good start. Secondly, I think I don't reckon if you own the company already or you've been looking at it for a while and you like it and you know a bit about it, I reckon 95 % of people can look at an announcement and say, is this going to damage its long-term earning potential?

48:20And if so, by how much? Roughly. And I think that's kind of all you need to do. You know, get your glass in hand. I know it's early on Sunday morning. Let's have a drink. Kogan went from, you know, 6 to 25 and back to 3 and now back to 8, roughly. Now, I don't know what the price is now. It was about 8 bucks a few days ago. It puts volatile, so it could be more or less than that now. during that entire time there was inventory issues and there was warehousing costs and there was you know COVID booms and busts and all that kind of rubbish my only question right through that period I asked myself was do I believe that this business has yeah has the business's future potential changed and if so by how much and so that was what kept me on I bought some shares at cheaper prices some more expensive prices that was the only question I needed to ask myself Corporate travel management, another one I own.

49:12I'm using these as examples because I can use them absolutely. It's been from, you know, it was 14 up to 28, back to 18, back to 21, back to 14, back to 18. I think it's about$80 now again. I haven't looked in a while. You know, what's the long term? Now, corporate travel sense, they signed a contract with the UK government, which was a bust. The contract was fulfilled in terms of their obligations, but they didn't have the same degree of volume they expected. So if I'd used last year's estimates of management guidance, said, right, on that basis worth this, it should be worth less than that now by definition.

49:47But for what it was worth, this was a one-off contract. I hadn't allowed for a lot of that in the valuation I'd done. I thought it was cheap at 18. It fell to 14. It's cheaper now. I'll give a free stock away. We recommended it to our share advisor members about that time because it was just too cheap not to. It was like, well, the market cap has fallen way more than the bit of business it lost. And so you kind of go, well, hang on. I mean, it should be more because it's a multiple, but you know what I mean? It was disproportionate, the fall. So, well, hang on. We kind of thought it was a good value then.

50:18Yes, it's lost a contract, but the value, the price fell even further than that. So I think honestly, so do the work where I'm talking about. Do the work in advance. Work out what it's worth. But then even when there's an event like Facebook or Meta, ask yourself. You know, shares fall 70%. Is it really worth 70 % less forever? Is every single dollar of profit from here to forever worth 70 % less? Now, sometimes yes, because the share price was stupidly high in the first place. You know, if Nvidia falls 15%, it's not all of a sudden a bargain. Now, if it's a bargain, now it's still 15 % cheaper.

50:49But it's not like it doesn't go from, you know, unbuyable to a screaming bargain, right? So just because it's fallen is not a reason. Maybe Facebook should have fallen 70 % because the profits were unsustainable. People had bid up the price based on the metaverse going to be everything and everything. And it's not going to be that, at least not the short term. Zucks pulled some money out of that investment idea and said, I'm going to pull back on that bit and kind of go back to running the business as a business. You've got to make your own calls as to what that does to its long-term future potential and whether the price is attractive based on that potential.

51:19But that's exactly what Ram said. I think you can do both. You can preload it with what I think it's worth before I buy or while I own. But then also ask yourself, as it changes, has it changed by, Has the business's future changed by enough to justify the fallen share price? The answer is no. Then you've probably got your answer there as well. Yep. Yep, well said. Buying the dip is intrinsically a timing affair. Yes, yes. And just refer to our earlier comments on timing. It always frustrates me when people say it because it's like, well, I don't have the – where's this pool of cash that I've just got constantly sitting there waiting for these kinds of things to happen?

51:53And, you know, if I get the 6 % pullback but it's gone up 20 % And while I waited for it, it's like, wait a sec. It just doesn't work. Yeah, exactly. Mate, question from, what's it now? Hang on. There we go. A question from Michael. It's actually about Kogan as well. So two drinks for today's podcast. But it's not about Kogan itself. Although I guess he's asking about the company, so we'll answer it. But he says, hi, Scott and Andrew. As I'm sure you're aware, Kogan Drink, he says, has been buying back shares for the last several months. Originally, shares were being purchased at just over$4. but today's announcement showed that the shares were being bought back at double the price.

52:32Do you have any thoughts? Now, I'll lay this out. I might go first go this way. You can jump in. Yeah, please, please. So let's lay it out. The company's authorized their share buyback program. There are rules about the price you're allowed to buy shares back based on previous trading values. I can't remember the exact rules. The company's kind of hamstrung a little bit. By the same token, they're not going to get an offer to sell back the shares and less than the current market price anyway. So the question is, they were buying it back at four, now they're buying it at eight. Do I have thoughts?

53:04I assume Michael might be implying they're buying at an expensive price or much higher prices should they keep doing that. It's a really, really good question.

53:13So first things first, the question really isn't how, again, it's a bit like buying our own shares and anchoring to past prices, right? If I'd bought Koga shares at four bucks, should I keep buying them at eight? The answer, as I'm sure you know, Michael, is, well, it depends on whether I think$8 still remains inexpensive. Is it still good value at$8 to buy shares for myself? Because effectively, that's what the company's doing. They're buying shares on behalf of every investor who retains their own shares. On behalf of shareholders, they're increasing our stake. So they're effectively using company money to buy back shares on our behalf, fractionally and relatively own shareholdings.

53:48Do I have any thoughts? They shouldn't stop buying back shares just because the shares have risen. That would be madness. because, I mean, look, in hindsight, could they have gone back and bought more at four? Sure. If the share price falls, should they buy more? Yeah. But the question really for them as for us is, was it worth buying back shares at$4 or was it worth buying shares at$4? And then is it worth buying shares at$8? Now, here's the other thing. If you're a shareholder and you think they shouldn't be buying shares at$8, what you're really saying is, I think they're overpaying, in which case you shouldn't be a shareholder either.

54:18So it's kind of a funny, again, messes with your head. what should they do? I still think Kogan is a buy at eight bucks. I think it's going to beat the market from eight bucks. I could be wrong. If Kogan as a company thinks the same, they absolutely should keep buying back shares. If this is a company that's, for example, worth$10 a share and they can buy shares at eight, of course they should. Absolutely. Now, if it's not worth eight bucks, then they should have cancelled the buyback. And you're right to wonder whether the institutional imperative takes over at some point. We've got this authorised.

54:49We might as well keep doing no matter what the price is, that would be crazy. I hope someone at Kogan has a view of what the company's worth, and I hope they would stop at some point. Berkshire Hathaway, I own shares. Buffett has said the board has approved them to buy at a certain multiple of, I think it's book or intrinsic value, I can't remember. But basically, the board has put rules not just around the price per share, but around the proportion of that price to the company's own internal value. And every good business doing a buyback should do exactly the same thing because every good investor doing that should do exactly the same thing and that's why it ties back beautifully to Andrew's last point about Facebook and dropping or meta dropping in this case the same should apply to Kogan rising if it was worth six and you're buying at four that's great when it goes to eight you should stop if it's worth 15 you should buy as many as you can at four and at eight and at 10 and at 12 and at 14 if you get the chance right yeah I mean it's it's purely a capital allocation decision and that's kind of everything really isn't it so So they could give you a dividend, they could go and invest in the business or buy a new business, or they could buy back shares.

55:54So you want to hope that, yeah, they just think that that's the best of the three options. Two, I would say more generally, too often companies do buybacks when they shouldn't, when it's not appropriate to do. Exactly. You know, it's a way of, this sounds wrong, manufacturing growth, at least at a per share level, which is what we care about. If your profit's unchanged year on year, but you've bought 10 % of the shares back, you're going to get 10 % EPS growth. I mean, maybe the math isn't exact, but it's, you know, pretty much in the ballpark. And I'd say actually owning, okay, right? Like I want earnings per share growth.

56:31That's my north star with all of these investments. I want the profit of the thing that I own to go up in proportion to the amount that I own it. Like it's just, oh, sorry, you know, my stake in that at least be proportional to my ownership. So it's sort of, it's fine. And that might actually be a really prudent investment if the company continue to be viable, generate enough cash, buy back its shares and generate all of this growth while still sort of preparing for the future. It's an absolutely perfectly decent and sensible thing to do. But as you say, it depends. Have the board and the management got it right in terms of the valuation?

57:06You want to hope so, and I presume that they do. But gosh, at$4, they must have thought it was really good value, in which case, you know, there are times when you've got to like really just buy with your ears pinned back. You'd hope so. You'd hope so. And again, investors have the chance to make that choice for themselves. So that's kind of, I think, the core one. It is exactly the same. The reason I put them together is exactly the same in reverse of the previous question, which is just what's it worth? And if it's worth more than the current price you should buy, regardless of what's happened, whether the price has fallen 70 % in Metta's case or doubled in Kogan's case.

57:40The only question is, is today's price cheap relative to the value of the company based on your expectations of the future? And there is no better investment opportunity in front of you. So they could have some opportunity to expand Mighty Ape or one of these things here and just triple their money. But yeah, presuming that's not true, then yeah. Or if it is true that the share buyback is still more valuable. Right, right. And that's kind of, you know, So while the art of valuation is incredibly difficult and kind of, you know, hard to grasp, it's like trying to grab at smoke, it's still absolute value in the sense that could I invest money in MightyApe and try and grow that business?

58:18Yeah. Would it work? I don't know. How much could I grow up by? I don't know. What would the ROI be? I'm not really sure. If you have a reasonable view that – and again, let's look really around numbers. If Kogut's worth – and again, I'm not trying to make this case. I know I own the shares. But if they reckon Kogut's worth somewhere between$10 and$13, which is a big enough range and pretty reasonable, then$8 is clearly a guaranteed return or a guaranteed price. You might be wrong about the valuation, so nothing's absolutely guaranteed. But if you have a reason to believe that you think it's going to be worth, let's pick a midpoint,$12, just to make my life easy.

58:50If you think it's worth$12 and you buy at$8, that's an immediate ROI of a third, right? You're getting that return automatically. In fact, it's a 50 % gain from the point you're buying to the intrinsic valuation. So whichever way you do the basis, the price you pay is a lock. And so to extent your valuation might be right or wrong, the upside is there. Paying more to invest in another marketing angle for Mighty A may or may not work. It may, in which case you should absolutely do it. You should make it work and really pedal the metal. But there is some more certainty in a price paid for a buyback.

59:25Now, the calculation could suck. And as Ram says, frankly, I'm generally allergic to them because most companies get it wrong. So you want to be very, very careful. But if they get it right, it is a return. You don't have to hypothesize about if I buy this newspaper ad, how much will my sales go up? You've got the – you know the value you're purchasing, so you get a chance to do that straight away. Yeah. Does that make sense? Yeah. I mean, just for absolute clarity here, like – so let's say they do think it's worth$10 a share and they're buying at$8 a share. They're not getting any – there's no return in owning the share.

1:00:00They tear up the shares once they buy them. They buy them and then throw them in the incinerator. They tear them up. So it's not, that's not the return that the company gets. The return is that the owners of the business, i.e. the shareholders, their proportional ownership increases. So your return isn't because the company's made any more money. You just own a larger proportion of the company. Now, framing it through the lens of intrinsic value is correct because that's the way – that's where the maths works out. You buy less than intrinsic value, you will add value for shareholders and vice versa.

1:00:35So you're absolutely right. But I just want to make that point clear that this is – that the mechanism involved here is I am – it kind of irks me it always has when they say we're doing a capital return to shareholders. Like, no, you're not. You're returning capital to the people who sold you the shares on market. Yeah, that's right. You know, and then you're tearing those shares up. The existing shareholders don't get anything. Well, they're not getting a return of capital. you're boosting their ownership in the business. You're saying you don't have to put any more money in, but you own 0.0001 % of the business.

1:01:06Now you own 0.0001 % of the business. And I'm not trying to laugh at that. That is a legitimate benefit to shareholders. Again, provided you like the company and think it's good value. And that is at the end of the day the core reality. so yeah I think just as we would say don't anchor on your buy price don't anchor on the company's past buy prices either it only depends on what you think what the company thinks Kogan shares are worth if you think they're worth 10 then they should buy back all the way to somewhere north of$9 if they're worth 5 they should be buying at 4 but stopping at$4.50 or something and that's kind of your call to make and this is where you get to put your valuation skills against the buyback and say hang on and by the way as I said though if they're buying at this price and you don't think it's worth that price, you should have sold your shares already.

1:01:55So there is also, and again, it's not saying the question doesn't therefore remain valid as a theoretical approach, but you're absolutely right to say, well, I need to ask myself what I think it's worth, because they are buying on your behalf as a shareholder. As you say, mate, you don't get the money, you get a slightly increased proportional ownership, which is super valuable if you, you know, your entitlement to the company's future profits and earnings grows, dividends, sorry, grows. But yeah, just be, approach it as an investor would, and ask yourself if you were the company, would you make that price?

1:02:23Would you make that deal? That's probably the best way to think about it rather than any movement in share price. Yeah. And sometimes too, the more rational approach is the dividend because especially if there's a big bank of franking credits and stuff there as well. So you've got to make sure that they're doing it for very good. They've got a very good rationale behind it. One other word of caution, I guess, is if you're looking at the ASX announcements for the companies that you own and you see a buyback announcement, very often companies every year they renew their buyback policy and they basically say, we reserve the right to do buyback X amount of shares and it will be at the board's discretion.

1:03:01And sometimes it gets like it puts people's noses out of joint, but they're just putting the mechanism in place should they wish to employ it. And you often see them not like we said we earmarked that we could buy up to$10 million, but we're only going to buy three because the value wasn't there. And that's a different thing. So look at what they're actually doing. Yeah, very, very nice. That's a really good way to finish. Mate, speaking of finishing, we are going to wrap this one up. I'm sure you've got the second leg of your triathlon to run, so I'll let you go and get on with that. In the meantime, will you come back on Friday?

1:03:30Yeah, looking forward to it. Good. Now, if you want to get in contact with us, info at fool.com.au. Jump on Twitter. Still called Twitter, not called anything else. Sage underscore Simeon or at strawmaninvest. You get me at TMF Scott P on Twitter and Insta. You can grab me on Facebook at facebook.com forward slash Scott Phillips money. And until next Friday, enjoy the rest of your weekend and Fool on. See you later. 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.

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