New Year, New Investment Thesis? January 3, 2025

25:28Again, I don't want to gloss over the things you mentioned because they're really important, those parts of the thesis. But you create your thesis and say, huh, I think Woolies is going to grow at 10 % of you. And you know what's weird? the market thinks it's only 5 % a year or implied, or I think therefore it's worth$40 a share, and the market's only pricing it$30 a share. Yeah. And that's the light bulb. That's the – now, it's not enough. You've got to go and investigate it. Make sure you understand, and as Ram says regularly, understand the bear thesis better than the bears. Yep. But that idea of, huh, that's the arbitrary.

26:01That's the difference. Now, you might be wrong is the other thing, by the way, and we'll talk about this one too. You might go – We'll often be wrong. Right, right. And you go, I think it's worth 40 bucks. I think it's going to go 10 % because they're going to go into hardware and it's going to be amazing. This new master's thing is going to be awesome. You wait till you see how good this is. And then they do it and it fails and you go, oh, bugger. Or you say, I think I'll take market share off Coles. And they don't. Or you say, I think this online thing is going to go really well. And it does, but Coles or Amazon do it better.

26:26And so there's, again, we'll get back to the RAM points because they're really important. I do want to break those down again, Ram. But this is, and we'll come back to valuation at the end because that's kind of where you do then work out, based on what I think about this company's future, now what would I pay for that future? And is that an attractive price relative to the current market price? If I think Amazon's worth$2 ,000 and it's for sale for$1 ,000, I'm there. Yes. If I think it's going to grow really, really well and it's worth$800 and you look at the market price and go, huh, this is amazing.

26:56But it's going to go really quickly. But the market thinks it's worth$1 ,000. I can only really justify$800. But even though you're right about the thesis, even though you're right about the future, If that's an amazing, wonderful business, you can still pay too much for even the best of businesses. So that's where valuation comes back. And again, that arbitrage, both in terms of the thesis and the price or the narrative and the price, that's exactly what we're talking about. Can I just flesh out that one, just to riff on that a little bit further? Yeah. I would say the valuation is part of the story.

27:29Yes, of course. So, I don't know if that's what you're saying, but you're not just saying, I think it's worth$2 ,000. Yes. You're saying, I think it will – and again, it's under the framework that you – and it's actually probably the dominant framework that markets tend to price things. Based on my view of where earnings will be and how that is reasonably historically priced by the market, that gets me to that price. Now, there's 1 ,200 different ways you could arrive at a price, but you arrived at it that way. I just wanted to make the point that even that, A, the valuation component is part of the thesis, is part of the story.

28:03Yes. And that itself must be comprehensive, causal, and falsifiable. Thank you. That's a really good, important point because it's one of those – and I think that it also does – can I say, too, without going too far off the reservation here, part of that is actually understanding what your approach to valuation is and looks like. So, why would I come up with that price? And why do I think that's a reasonable price? And why do I think that price - Why do I think others will arrive at a similar conclusion? Now, the easy way to start with this is to start with a hyper-growth business. If it's doing a million dollars in profit today, and you think at some point if you're going to do a hundred million dollars in profit, you can be reasonably sure that eventually the market's going to pay more for a business if the market's pricing half reasonably, right?

28:48If you're saying, well, hang on, this is a million dollar business and everyone's paying 12 times earnings. So, therefore, it's$12 million market cap. If it gets to$100 million in profit, there's a pretty good chance they're going to pay more than$12 million for the business. Yeah, it's not an unreasonable assumption. Right. And I start that with a really extreme example because then we work back slowly to the investment maths, right? Once you say if a business is much, much more profitable, much more successful in future, it should be worth more. Now, it doesn't mean the current price is fair.

29:16It doesn't mean the future price will be fair. But we can say at a business level, a business doing$100 million in profit is worth more than$1 million in profit. And if you start with that, this is where the investment maths comes down. You don't have to be a hyper-value investor. You don't have to live in the world of this kind of cash flow analysis if you don't want to. PEs will do most of the job for you. Even then, you don't have to necessarily dive into that one. But at some point, you're looking for a future and saying, this company in the future has a range of outcomes, which is sales, profit, market share of this sort of range.

29:45And again, we'll go back through the comprehensive causal and falsifiable later. But you start by saying, okay, we think, well, I think this business will be much, much, much bigger in the future. And so if there was a fair value today, may not be a fair value, but let's say it was. If it's a fair value today and it's going to be valued a fair value in five, seven, ten years' time when it's$100 million in profit, I reckon the fair value should be much, much, much larger than it is now. And so once you've done that, that's the starting point of any of these sort of valuation-based analyses, which says, firstly, as you said, you've got to work out, can it get to$100 million?

30:20And that's the narrative part, if you like, or the story part or the business part. And then you say, and what price would it be worth at that period of time if it was able to generate that sort of profit and consistently and all those kinds of things? And then how do I compare it with today's scenario? Now, we talked about the dot-com boom last Friday. There were businesses, Microsoft spent 15 years getting back to its dot-com high. So even though Microsoft will be a great business in the future, and, and, and, and, and, and, but do I really want to pay a dot-com high for that business? Now, if it said, by the way, if you bought it at the highs, you still made money now.

30:57It did come good, but it took 15 years to get back to those levels. So it would have been possible at that point to say, here is my narrative about the growth of Microsoft. It's going to be huge. Windows and Word and Internet Explorer and eventually cloud computing and, and, and, and. So I reckon I could pay this price for the company shares, which is, again, Andrew's point, is part of the same narrative. And you look at it and go, huh, the market sees what I see, but either its expectations are way higher than mine in terms of its growth, or it's prepared to pay a really, really high price for the same level of growth I see.

31:30That doesn't feel like a great deal for me. I mean, I like that it's growing. I love that it's a great company. But I've got to see that, again, that arbitrage Ram talks about. In that case, you might have said, well, I would like to buy it at a price that's about some sort of range of$40 to$50. It's about$100 right now. That kind of feels, even if I stretch, way too much to go with. And this is the arbitrage story is, is the market right about the business? And is it paying a fair price? And you want to make sure you can – both can be either, by the way, but very rarely because they're kind of two sides of the same coin.

32:06But what does that look like? So, yes. And it doesn't have to be as hard as it sounds because sometimes, more often than you think, I mean, they're challenging because they do seem so obvious. And if it's so obvious, how come everyone's pricing at this? You can really mess with your brain. But let's go with an extreme example like COVID, right, in March of 2020. Yeah. We obviously had the market lose over a third of its value in a very, very, very short space of time. So the narrative went from there's no such thing as a global pandemic to there is. And we're further than that. We're all in biohazard suits for the next 20 years and living in bunkers underground.

32:51And, you know, in fact, to be fair, there wasn't even a narrative. It was just like, I'm scared. I'm pulling out. I'm not thinking about value, which is more likely really what happened there. I don't think anyone at that point, God, even if things get really bad, some of these things are still worth something. And that's where the opportunity lies in that narrative arbitrage where either all narrative has gone out the window because it's purely a fear-driven market, or the narrative is just unbelievably pessimistic that you don't have to forecast how long the pandemic lasts or this. You know, broadly, you need to be right.

33:28But if you think society goes on and in the next five years, people will still like to, I don't know, make telephone calls and have electricity to their houses or pick any number of real world value creating activities. Or go to the supermarket, use your Woolies example or whatever. Now, it might be a very bleak economic future and we're in a deep recession. But these have always been the fat pictures that Buffett talks about where, to my initial point, I don't have to be Nostradamus here. All I know is that, and you get some scenarios where it's like, gosh, even if their earnings drop 20 % and then stay there for five years, and even if the market's only happy to pay eight times earning on that, I'm still getting a good price.

34:16I'm not saying, I'm not laying out prescriptively, the market must do this, this, this, this, and this, and if it does that, I'll be right. It's kind of like, gosh, if it only does this, like here's my minimum threshold for success with a huge area above the curve. It's sort of like these scenarios are sort of once a decade kind of scenarios. but it's why it's why having that clear unemotional objective rational view narrative story thesis mental model on a company comes in so super valuable because you just don't you just don't know what the world is going to throw at you and what the market is and sometimes it just does and then all of a sudden it's like oh gosh i've been wanting to own that company for ages it's so good it's like oh it's on sale oh my god it's really on sale and and not because the the cfos run off to the Bermuda, you know, and, and blown all the money.

35:14But, but because it's, the bar for success is so low that the market is pricing this for absolute, it's pricing it for zero in a lot of ways, you know, it's sort of like, you've just got to be on the lookout. Now at other times and more often it will be not that drastic, but still, still you'll find opportunities where it's kind of like, what is wrong with this picture i don't get it and and it's so hard because first you've got to have that realization two you've got to have conviction in that it's more than just a gut feeling i took to the earlier point of the narrative but then also the ability to allow the thesis to play out because we've talked about this recently on the pod as well as that we have this sort of unconscious expectation that the moment we buy shares is that the moment the narrative flips like, oh, entry board.

36:05Oh, obviously. Oh my God. How did we all miss this? Yes. The price must obviously be much higher. So you buy your shares and then it's just like, you must wait for the market to come to you and to realize your vision. And usually what will happen is that before that event, it might continue to be rather negative and you sort of meander around for what feels like an eternity and it's super hard. But those that can have, as i say a hopefully unbiased fairly unemotional reasonably objective rational view of things and and can comfortably sit there when the majority view is you're wrong like you're definitionally you and the market are in disagreement yes by definition yep yep which is easy to sort of say before you pull the trigger oh i think the market's wrong okay okay let's have a bet and that's what you're doing you're having a bet with the market and you're saying i think you're wrong and then it's like and then we have to wait for the match to play out and then we'll turns out I was right or turns out I was wrong.

37:02But I'm just saying that that journey, that period is often rather lengthy and often very uncomfortable, but just as important as everything else. Yes, having a good thesis, being open to changing it and adapting it, and then allowing it time to bear fruit. I'm going to use a footy analogy, mate, because the sport analogy tend to come easily in investing. But it's the equivalent of you're the coach of a football team, you've been appointed for a five-year term, and you're taking over a team that's coming just outside the finals. And so it's okay. It's fine. And you're saying, I think we can actually, I think this can be a premiership winning team.

37:43So what I'm going to do is I'm going to buy these players, I'm going to set up this structure, I'm going to work towards the premiership. And then after the first round, you lose the first game. But I thought this was going to be a winning team. I thought we're going to go somewhere with this. And then you get to the next round, you're still not winning. And then a year later, you might have made the finals. You might not have. You're kind of there with the rest. Like, ah, stupid strategy. It's never going to work. I told you it wasn't going to work. This is awful. Now, you're in theory hoping that the thesis wasn't, I'm going to buy these players so they'll win the next week's game or win the grand final in the first year.

38:12Of course, you want to. But the reality is you're building towards something. You're saying, I think these are the preconditions that get me to success in year whatever. And you're working towards that. And we kind of get it in for you, right? We know that changes happen overnight. We know that circumstances are what they are and there's things that will change and take us forward. The difference is making sure you can get to that point and stay the course. Be confident. This is where a thesis matters. When you think about what's going on in terms of the approach you take to the investing that you're doing and the approach you're taking is not to say, oh, lost the first game.

38:50The market's telling me, you know, I'm no good at this. This was a terrible idea. Why did I do this? It's, well, what did you expect to happen? and you're working towards something. And this is, I think this is the value of the thesis, mate, to your very point, because when you get, the market says you bought Willis at 30, now the share is 29, now they're 28, now they're 27, 50. You start by, everyone, you and I do it. Oh, bloody market, maybe I am wrong. What have I missed? The benefit of the thesis really well constructed in the way you've outlined is to go back and say, that's right. I didn't expect, I was expecting that over time, sales would grow and profits would grow and market share would grow and the business would be able to grow into this thing by doing these things well.

39:33And so that's what I'm looking for. I'm looking for the five-year turnaround story. Now, if you get in a year, would you take it? Of course you would. But as we all know, buying a footy term is expecting a turnaround in 12 months unless you're Ted Lasso. It's probably hard work. But as an investor, you've got to do that work of saying, these are the reasons it will be successful in time. And so that's got to play out. You might get lucky. The market might see the changes happening and you get rewarded early. Sometimes you've got to wait until they happen. And they finally come in and you go, I expected that.

40:04The market goes, huh, we didn't. That was weird. In 2007 or 2008, it finally happens. It's like, well, that's kind of what I thought. Right. At that point, it's like, oh, now we get it. And you see that. Tesla was a great example. It went nowhere for four or five years straight. If you look at the graphs, it's a straight line, straight line, straight line, straight line, nothing, nothing. All of a sudden, bang. And it goes up phenomenally in the space of 12 months. It was always working towards that goal. Now, I'm not a Tesla shareholder. I didn't own the shares at the time. You know my views on Elon.

40:33But those who saw it said, it'll happen, it'll happen. Just give it time. Just give it time. Just give it time. Here it is. Other times, you get a different story where it's like, huh, incremental improvement. And you do occasionally get up and to the right slowly, which is always nice to have. But either way, Tesla shareholders weren't wrong, in quotes, for that four years while they waited for the thesis to play out, any more than, you know, willy shareholders were wrong if they went up slowly over time, eventually got to that point they expected. That's how you get that result. But the thesis, the narrative is what lets you stay grounded.

41:03I thought this was happening. Is it happening? Yes. If it's not happening, now you can say it's broken. But also, so I want to ask you about that, mate, because I'm an 80-20 kind of guy, right? And I used to, we've talked about this before, when I started investing, I used Microsoft XL 95 or whatever it was. It was a very long time ago. And I would get, again, physical copies of the annual reports because that was all that was available. Yes, I'm old. And I would literally type in. I type in the revenue line. I type in the COGS line. I type in the gross margin number. I don't think I did the math.

41:33I just typed it all in. I type in the selling general administrative expense. I type in the interest expense. And then I'd calculate the cash conversion ratio. And I calculate the quick margin and the gross margins. And I calculate all this stuff. I had, I think it was 30 or 33 is in my head ratios that I calculated, right? And I was the guy who knew the price of everything and the value of nothing because I could do all the work. And eventually you get to that 80, 20 where it's like, okay, this is actually what matters. And the reason I'm asking you about that is I want your thoughts on two things.

42:00One is how do you think about the short-term volatility of some of these measures versus the long-term? And also how do you think about having enough specificity, then you can have comfort in your thesis without so much that you say, huh, I expect a margin to go from 36.5 % to 37 % in the fifth largest division of the company, and it only went to 35.8%, and so therefore the thesis is broken. How do you think about both the duration and also how do you not major in the minors, but do enough work to make sure you're not just kind of blasé, oh, I'll put a couple of round numbers in and that'll be enough?

42:39Yeah. Yeah. We've talked about it actually in a slightly different context, but I, I, I mean, the hard thing with all of this is separating signal from the noise because there is so much noise in there. There is, there are good companies doing good things, good investments that have bad quarters and that where metrics don't go perhaps where you think that they might, but it's not, the question isn't, is that good or bad? Is it like, is that a exogenous? external, like the economy was just weaker over all that period, but otherwise it's still a really great company and the hell that really was.

43:15You've got to be mindful of the normal vicissitudes of the market, as Munger sort of puts it, versus what is genuine underlying signal and trend. And I think the way to do that best is to avoid false specificity. I think you want to, we always say it, you want to be generally right as opposed to specifically wrong. so i never say i expect margins to go to 37.8 percent right i say i think their costs won't grow as fast as their revenue it's a scalable business model i would expect over the coming years this margin to expand yep um and that's broad but it necessarily is broad right like it kind of it kind of has to be it is another way of saying margin of safety which is a very popular concept as well, which is, you know, I'm just, I'm going to be, forecasting is hard, particularly about the future, as they say.

44:09And so the more specific I am, the more likely I am to be wrong. And the more my thesis rests on me being very specifically accurate, the more precarious it is. So I just, I'm looking for the, like Buffett, I'm looking for the one foot bars to step over, not the six foot bar to hurdle over. I just like, I don't know, but you know, it should, it seems like they've got a lot of sales momentum. The business is operating very efficiently. They've been meaning to sort of scale up volumes and get better margins because of this, this, this. And you know what? It seems to be playing through in the numbers.

44:43And as long as that is true, then I kind of go close enough is good enough type thing. It sounds a little bit reckless perhaps, but I just don't know. To my mind, the more I've thought about it, the person with the 400 terabyte spreadsheet is the one who's being a little bit silly here with this. No one's that good. No one can – it's too multivariate. It's just you're fooling yourself if you think you can map reality into a document or a spreadsheet or something like that and be fully across all of that. Can I see my favourite anecdote on that one just quickly? Yeah, go for it. I was on TV. I've told this one before, but it's always fun.

45:23I was on Sky News Business way back in the day. You used to do that as well. And I was there and I was sitting at the desk with a guest who I can't remember their name. It was a bloke. I can't remember his name. And I'm glad I can't because it saves me from libel or slander. I'm sure those tapes have been burned by now. But we talked about, I was like, there are companies forecasts or the market forecast. I can't remember which one it was. And I made the comment, well, they're always wrong. And he literally looked at me with a deadpan serious face and said, yeah, I know they're wrong, but what else can I put in the spreadsheet?

45:51and it kind of blew me away and I've never forgotten it because that was the kind of the person I was talking to was obviously so clearly um that that was the process I don't care if it's wrong as long as the number in the spreadsheet I feel better about it and that's kind of your point about you know like it should it still makes my head explode I still can't quite comprehend and explain it but that idea of like just because the number in a spreadsheet makes you feel good, that it's probably wrong and that you're going to do it anyway because you don't feel like you have another alternative. It's like, that's the problem.

46:23When you are so wedded to following the process, putting the numbers in, the false specificity you talk about, rather than I don't know what that looks like, so I'm not going to put a number in or I'm going to assume or roughly, it wasn't that. It was just, I'm going to put the number in because that's all I've got to go with. Yeah, yeah. It's like, man, really? I mean, and back full circle, that's part of the narrative framework that they're operating in. Yes. And so it is in that context, it's like, well, of course I do. And I'll even look in some defense, I'll say, and I do play around in a spreadsheet.

46:54I'm not, I'm not diminishing anyone for doing this kind of stuff, but the smart way to do it, all the good investors I know play around with it. You build a model. If you want to go this deep, you build a model because it will teach you things. Yes. That's good. Not for the number that it spits out. Yeah. Yeah. And then once I feel as though it helps me get some sort of insight into the mechanics of the business and the accounting and how it all works, then I can absolutely, I'll put a number. I have to put a number in. But I'm not going to – don't hold a gun to my head and say, pick a number.

47:28You can only pick one. I'm going to play with the model. I'm going to, well, let's try this. Let's try that. What does this look like? Which is more likely? Which is less likely? And you can just come up, you come up with like, you know, umpteen different versions of the future, but it gives you a flavor of, you know, you're looking for those, you're looking to build something with an error band or standard deviation around. It's like, I have to have a best guess. Like at the end of the day, I do need a number, you know, even if, even if that number is a broad general around, you know, about eight bucks around 750 or something per share is what I think is, is, is reasonable.

48:05But hopefully that number is informed by a variety of different scenarios, all been tested, you know, and it just helps me get a feel for how things might look if any one specific set of assumptions prove to be wrong, if you know what I mean. So I'm 100 % in agreement with you. And that's where those people kind of dominate the industry, where I think that they miss it. And for them, I guess it makes sense because what they're really selling, they're not doing this research for themselves, they're doing it for their clients. you're researching your services and it's just it's the natural incentive structure of the industry when hey mr professional investor um i would like to invest money with you what do you think and if they say listen i've got some broad ideas i think this might happen this could happen it kind of sort of settles around here and this is you know eight ish about eight ish i think maybe maybe you should buy something around that you know is is by the way i'd be like take my money if that was me, but for people who haven't thought about it much, it's sort of like, I'm going to that person over there who has just given me a 12-month price target to three decimal places with a table full of margin and revenue forecasts and share issuance and debt interest rates.

49:33They seem like they've thought about it a bit harder than you have, which is ironic because that they haven't. They've not thought about it very. They've been forced to pick a version of the future and pitch their flag on that hill. And it's kind of like, okay, good luck with that. Sometimes you'll be right. Can I say too, I reckon they have thought about it more than we have. They just thought about it incorrectly. Yeah. Which again, sounds horribly arrogant. I'm absolutely sure those people spend hours and hours and hours and hours and hours trying to justify why the gross margin in 2028 will be 0.3 percentage points higher.

50:08I'm absolutely sure they have. I'm sure they've kind of thought about, well, the bank has said that this is going to happen and loan growth, they're going to be about that. And so they're going to probably have pressure on costs. So they're going to probably try and make people redundant. I'll put this number in here. I have absolutely every expectation they have thought and thought and thought a lot about it. I just think they're thinking wrong. I think they're using the wrong, to your point, mental models to come up with their solution, which is that way of thinking doesn't give you better outcomes.

50:32I don't think it does. Well, they're trained to think, I have to put a number here. Yeah. So what I'm going to, and hand on heart, I'm going to choose the best number I can, they're not lying. Like this is my best guess. They just, they underappreciate the highly variable nature of these calculations and that it's the odds of you being right across umpteen different metrics that will coalesce and combine to form a very specific number. It's just madness, really. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

51:32reverse um and he's talking about academics but i would i would suggest to you that it could be anybody um in the finance game looking to look smarter than the average bear quote if you stand up in front of a business class and say a bird in the hand is worth two in the bush you won't get tenure higher mathematics may be dangerous and lead you down pathways that are better left untrod the second quote the more symbols they could work into their writing the more they were revered which is again a bit we're talking about the last one and this is the kind of key one this is where I think I come back, mate, to as we think about the arbitrage idea of your narrative arbitrage.

52:06Buffett says, quote, if you need to use a computer or calculator to make the calculation, you shouldn't buy it. Now, we use computers all the time. I don't think Buffett's talking literally about not doing the work. What he's saying is, if you think something's worth maybe between$7.10 and$7.25 and it's selling for$7, you know, the chance you're that accurate and that good and that right, probably pretty low. If you find something that objectively looks like it's 10 or 11 bucks a share and it's selling for six yeah you know that again we should look at me wrong but that's the margin of safety that's where and this is where for me mate the the the specificity really drops out i i use fewer and fewer and fewer inputs into my calculations these days as time goes on not because i'm lazy not because i'm smarter than i used to be i hope i'm a little more thoughtful i hope i'm a little more aware than i used to be i hope i'm a little bit more uh exercise better judgment because i've learned a few things not because i'm smart i've learned a few things having made all the mistakes under the sun and then some probably more than enough twice um is actually what kind of matters and and it's you know if you're if you're reliant on their margin going from 28 to 29 percent over three years to get an investment return then you could probably pretty well stay away from it if you find a business that's got a million dollars in profit you think might be 20 million dollars in five years time then you know and maybe it's already priced highly enough but that you know if it's fairly priced now for a million profit and you can get to 20 there's a fair chance you're gonna do pretty well and sometimes it's kind of you know if you've got to work out that we'll lose is currently selling at 30 it might be worth 28 or 32 i mean you can play that game if you want the chances of you being right and right enough to get enough upside to down to offset the risk when you get that occasionally wrong by a little bit um we talk a lot about you know the motion you lose 100 the motion the upside is infinite i don't necessarily mean that in this case but if you're playing a game where you've got to be right and get a 7 % or 8 % or 10 % upside, you'd be right a lot and hope you're not wrong much to generate a reasonable return.

53:59If you can compound at reasonable rates, and this is for me where it's, the longer you go out, by the way, the further away those lines get. A market that says it can grow up 5 % forever, and you say, well, it can grow up 10 % for the first five or six years and then 5%. The further out you go, when you compound those growth rates over multiple years, this is where the long-term investor wins, in my view. if you're trying to trying to buy something that for 90 cents sell it for a buck each time over and over and over and over again you do a lot of work you'd be right a lot if you can find something that's worth a dollar selling for 90 cents but in five years times with five bucks that's that's where the that's where the real upside is and that's the to me at least the value of the thesis is if i'm right over the long term this could be worth meaningfully more and it's why from to my mind if you're right about the business you should be right about the price but the upside i reckon comes in understanding the business, not the algebra that gets you the right discounted cash flow or the right margin calculation in year three of a massive spreadsheet.

54:53Yeah, I mean, you know full well that for me, asymmetry, I think I've said if I was ever getting a face tattoo, asymmetry would probably be one of the words I'd go with. If anyone's out there who can use AI to put a face tattoo on Andrew Page with the word asymmetry, please do that because I just want to see it now. There's your challenge, listeners. I just, I think it's the only way to invest is to, I mean, again, we act as if they're impossible to find. They're rare, but they're out there, you know. You're right. I mean, it's why I just, I really, unless you get very big market dislocations and bear markets, I just find the big stocks boring.

55:36because even as much as we like to put the boot into all the analysts, I mean, there's such big, mature, stable companies that the market is really wildly wrong. And if it is wrong, like you might capture a little bit of upside, but it's just not exciting to me. And I'm not saying I need to take immense risks to be excited. No, it's about sensibly growing my capital. No, I want the kind of business that if I'm wrong on, okay, I might lose 30%, 40%, but if I'm right, it's 10x over the next decade. That's what I want. And the math just works out so much better for you. Even when you do make inevitably a bunch of mistakes, you catch one or two monsters.

56:13It makes all the difference in the world. So it comes back to sort of formulating that thesis, looking for forecasts, building models and that. I want the kind of thing where it's like, gosh, if this goes right, then the market is really not thinking there's any chance of it going right. And I think the market's wrong on the odds and wrong on the upside. And yeah, sure, it'll take a while to play out. But all of my greatest returns, you know, the Andrew Page greatest hits album is all full of those kinds of stories. And I can tell you, too, that they all took a long time to play out. So, as you know, I deal with a lot of, I like a lot of business-to-business kind of companies.

56:53I mean, you speak to the CEOs, they're on six to eight-month sales cycles. Yeah, yeah. You know, you talk about allowing the thesis to play out. It's like you put everything together, you build up a narrative, you're like, geez, like they've got a really good product, they've got some traction. Even if they've got a million people knocking on their door tomorrow, it's just like, you've got to go out, there's to be a site visit. You know, they have to get sign-up from the higher-ups within this big organization compared to that one. There needs to be a test study done. Even when everything is going great, it just takes time for things to sort of play out.

57:25But if they do play out, there'll be some in the market go, oh, yeah, maybe it can grow at 5 % or something per year or whatever, and not thinking, no, it's a really small company that's about to really break through and its sales and profits, its sales will be 10 times higher in the next year and its profits will be 80 times higher. um and again look just look at the big names today that that was zero going back uh since yes that on the market that was wise tech you know that that was any name it bhb back in the day that they fortescue they were companies or it's just sort of to your exact point no one who made life-changing money on that did so because they felt the market was under cooking earnings growth by three or four percent per annum yeah they were looking at going oh my gosh the world and china in particular really needs a bunch of iron ore and these guys have got a hell of a lot at it now i'll pull back a little bit here because it just occurred to me that for a lot of companies you will always have a very good narrative right like you always have that the hope springs eternal and potential is always there right the worst terrible company could always just somehow pivot into something great and be a massive success story, right?

58:39So you definitely look for these asymmetric sort of outcomes. You definitely look for that potential there, but it's also back to the thesis of being deep and causal and falsifiable and all that. You need to have a good reason as to why you think that that will be the case. So I just wanted to pull back a little bit there and sort of say, no, I look at it because the natural consequence is, oh, I just found this biotech company and they're working on a cure for cancer, if, if, if, and if. And I was like, yes, but that's very different if they're still at the lab versus someone who's got a product in the market with FDA clearance and is just selling, you know, 30 % more stock every quarter.

59:14Like, there is a spectrum there. Can I talk to that? All over the place there. No, no, no. I was going to say something entirely different, but I want to jump on that last point and really amplify it. I have been on so many different – the call on Your Money, which is a great show to be on. and I sort of say, so if you have an investment thesis and you think this and this and this can happen, then it's worth buying. And someone's like, yeah, I think it can. So, okay. No, you think it's worth buying and then you retrospectively. Or it's both. It's the ifs that you're happy to accept are possible, right?

59:48And you're getting a lotto ticket. If I win a million dollars, that lotto ticket is cheap. It's absolutely true. I mean, by definition, it's true. If I buy a hundred lotto tickets and win a million dollars, then it's true. In other words, if the outcome is what I think it could be, then the investment is worthwhile. Yes. And I wanted to – so I've kind of talked about having a reason to believe you are right or a basis for believing the probabilities are high enough because your point about the biotech is absolutely true. And every company, you can come up with that thesis because you say if Woolies can go to America, the market there is three times the size.

1:00:20And so the market – share price is 30. If they go to America and do really well, it could be worth$120. Therefore, the upside is fourfold. therefore I'll buy the shares because if they do that, we'll make a fortune. Yes. And it's not untrue. Which is true. That's 100 % true, right? If then. Right. And so this is where you've got to do the probabilities. If the biotech discovers a cure for cancer, the shares are worth a fortune. Yes, that's absolutely true. But is it likely to? And on what basis? You can't say, well, I think it will. And you made the point about it being falsifiable. You made the point about it being causal and comprehensive.

1:00:51That is really important. So just being able to say, a thesis isn't, I think this company will discover a cure for cancer and therefore it is worth much more. I mean, again, it's a statement you can make, but how do you... It's a thesis, it's just not a very good one. Right. You'd have to base on some degree of, not even evidence, but a probabilistically weighted set of assumptions. Why do you think that is likely to be the case is the question you've got to ask yourself. So yes, have your thesis. That's the comprehensive part. Right. Yeah. Mate, I want to finish off with a question about volatility And it's one around not volatility, or volatility is share price to some degree, but I tend to give companies too much rope, quite honestly.

1:01:34My view is, I'm slow to buy and slower to sell. Now, and I think we said a couple of weeks ago, I've kind of, Blase is the wrong word, and it sounds like I'm negligent or somehow I'm not doing my job, but the quarterly and half yearly results, I kind of go well unless it actually disproves the thesis I'm kind of going to ignore it and so I'm kind of much I'm much more tolerant than most people with I thought it was going to grow, this quarter didn't grow some people say therefore the thesis broke and get out it's not growing anymore, we're done I'm kind of one of those people who says well I think the long term story was always this and I didn't have any reason to believe it wouldn't be bumpy unless I did in which case that's fine but if my thesis was every single quarter I expect it will grow 20 % and that was the specific thesis then And I should be intellectually honest enough and falsifiable to your point to say, I thought this would happen.

1:02:23It didn't. Therefore, this is broken. But my thesis is rarely, I think every three months or six months, we will get an equal and, you know, repeatable percentage growth compounded forever. That's why I'm buying it. There are great businesses that have stumbles. There are great businesses that have just simply, you know, don't grow as far some months than others. There are great businesses that go grow and grow and grow and never stop growing. I'm curious, as your thought, how do you think about? working out on a timeline basis? When a thesis is broken versus when results are just variable because that's business, that's life, that's the economy.

1:02:58Well, for starters, I do hang on for too long. More often than not, I'm very overly lenient. I don't know if that's the – I sometimes think people who are under lenient sometimes are making the bigger mistake, like one strike you're out. That's why I do it, but yes, yeah. Yeah, so there is a middle ground somewhere, and it's a very hard thing to find. So I sort of guide myself by the saying of one swallow does not a summer make. So, okay, this wasn't the greatest quarter. That was a bit surprising. You know, your management seemed to indicate that they were getting a few contract wins. It didn't really come through or there was a problem with the execution of one product or some of their supply chains got this wrong.

1:03:40That's kind of. So first I try to put it in the, I try to answer the question, was this something that happened to the company or was this a own goal of the company's own making like did they try something that just clearly isn't isn't working or did they get hit by external macro kind of factors so if it's the latter i'm far more more tolerant even if it's the former i think i think like in life if if businesses aren't making any mistakes they're not trying that's right i really mean that like i'm not saying throw it you know throw everything at the wall and see what sticks but yeah you know you you've got to sort of push the boundaries let's try this let's try because every now and again you know you strike gold right either figuratively or literally and and so so if if it is the format in the sense that it is okay that was a disappointing quarter and it looks like the company has made a bit of a mistake that's not an it depends on the nature of how big the mistake was but generally speaking it's not enough of a uh it's not a red card you're not going to get it's a yellow card one i don't know what the exact number is but when when it's sort of several quarters in a row or longer i very much start to to start i think look you know fool me once shame on shame on me fool me twice shame on you no you know what i'm doing the george bush thing now ever since he did that it has gone in my head i think wait is this the right way of saying it oh it's anyway you know what you know what i'm you know what i'm saying right so i'll give you i'll give you a real life example and this isn't i haven't you got to be careful because don't don't make any investment decisions based on this but for the longest time i liked a company called envirosuite they do internet of things kind of stuff they they sort of have these environmental sensors that you can put around mine sites and ports and that it's really cool little um device and then they sort of reverse listed with an airport sense it coming in you know look there's a whole saga there but the long and the shorter it is the thesis didn't play out as i thought and a lot of people on straw man were pointing out to me that it doesn't seem to be working and i clung on to it but eventually and i did it too long i held on too long still did okay overall but you know i held on too long and um i just reached the point where it's like i can't in good faith argue for this thing anymore yeah like it is like how many quarters do you need to tell me that you're about to hit cash flow positivity and not do it how many quarters you about to tell me that you know that revenue is going to shoot through the roof and it hasn't and there was always a reason there was always all this happened and and and you know some legitimacy to all of that kind of stuff and it wasn't so much again to make it not to make it purely about this particular company but i'm also looking at that in the context of where else I could put my money.

1:06:29So it wasn't like, so this would be careful for anyone who's holding shares. Oh, I think it's totally uninvestable. No, the fact that I've now out of it would probably suggest to you that this is a brilliant time to buy all else being equal. But relative to the menu in front of me of all the thousands of company, I just sort of like, gosh, I thought it was going to do this. The thesis clearly isn't playing. It might, but it clearly hasn't. And when I reformulate the thesis, it's just not as compelling as other theses that are out there in the market. So I'm going to take the money and put it somewhere else.

1:06:58I like that. I think particularly, I think that that can be the, Hope Springs Eternal, particularly when you already own the shares. And I think that's a really good example made of actually cutting bait at the appropriate time because it can always be awesome. Oh, I should have done it sooner. Well, but it's not there yet. It'll get there. It'll start doing it sooner. The team and I were talking about a stock yesterday, I won't name it. But we were kind of – it's one of those companies where it should have all the things – actually, I'll never forget about it. We did recommend it ages ago. Challenger Financial.

1:07:28It sells annuities, right? And so the idea is if you're an investor, you don't want to pick stocks anymore. You don't want the volatility of asset prices or returns. You basically buy annuity. You give this mum a whole lot of money, and they give you back a regular income stream, either for the rest of your life or for a fixed term. And it's basically just being able to say, I know I'm going to get the money. I don't have to worry about investing it. They'll do it for me. They'll guarantee the payout. I don't have to worry about the asset price. Now, I don't love annuities as a product, but it was probably five years ago now.

1:07:53I looked at it and it went, this thing looks inexpensive. Boomers are retiring all over the joint. The market's super volatile. A certain number of them, a growing number, are going to want more annuity products because we know people freak out about volatility. So you kind of go, it should play out. If you've got that market environment, people are effectively, you're virtually not going to do something, please help me out here. And yet, so we own it for, we recommended it for about three years, I think it was, maybe a bit longer, I can't remember now. But over there, it's got to come good. Challenge was the biggest name in annuities.

1:08:26Every financial planner knew them and loved them. It was kind of one of those, hey, this thing surely at some point will, it's got to crack, it's set up for it, right? It's a layup. This thing's winning 40 love, you know, one ace and we're done. And it's never cracked, it never got there. And I still look at it and go, there is no reason this thing shouldn't be able to do it but we kind of eventually it went I mean I can wait forever for it to happen but the evidence just even though my analysis says this should be a slam dunk for whatever reason known to me or otherwise executional strategy or whatever it's not going to it's not going to get there it hasn't got there and so what's the definition of insanity was you know doing a different thing or doing the same than expecting a different result was like we're out you know as much as I think this is it's frustrating as hell because like how can you not make how can you not do this what is wrong with you people But you kind of go, okay, well, for whatever reason, it's not going to happen.

1:09:17And you've got to, at some point, say, hang around for the sake of it just because maybe one day, possibly, they might. And I already own the shares, so I might as well keep them. Your point about opportunity cost is absolutely right, which is maybe those things will be true. But if you've got a better place for your money or better odds, take the better odds. Yep. The thing that makes that really difficult for me is that when the thesis is busted in the sense of, oh, the business is just not doing what I thought it would do. but the share price goes down. And so in reformulating it, I go, well, it wasn't as good as I thought, but now it's in the price.

1:09:54Like now is not the time to cut bait because I, granted, my growth ambitions were optimistic. I can see that now. But you know what? Even if I knock those growth ambitions back a little bit, given the share price is so low, it actually still makes sense. And, you know, regardless of what I could have, would have, should have done, the fact is right now it seems cheap and it's a dangerous spiral to get into. sometimes you'll be right. I did have a catapult. It worked brilliantly well. I've done it with other companies. It's not worked well at all. You know, you just keep saying, well, it's worse than I thought, but it's cheap.

1:10:25And that is particularly, what's the word, pernicious? Just, yeah, it's difficult. It's difficult. Mate, I think we're probably towards the end of this particular podcast. I'm going to put you on the spot and ask you to give people one tip. so I'll keep talking so you can have a think one tip if you want to improve if you want to improve if our listeners want to improve the quality or the depth or the value or the outcomes from their investment theses or from their investment narrative arbitrage, which you have a phrase people prefer what one thing would you recommend people do or change or include or exclude or what's the lowest hanging fruit for people to improve the way they go about building an investment case?

1:11:19Oh, there's a thousand things I could say. Yeah, I know. And it's a journey, right? Like, I don't think you ever hit a point where it's like, oh, this is how I do it now and this is it. That's true. I'm a very different investor today than I was even a few years ago and I'll probably be different again in the future. It's right, it's normal, it's natural to evolve. But at this point in time, I would say, I'll give you two answers if I can sneak in two. I'd say a good thing to do is, what's it called? The five whys? Yeah. So make an assertion and then I'll say, I think revenue is going to grow.

1:11:51It's been growing really well. I think they'll continue to sell more. Okay, why? Because their product's better. Okay, why is that? They've put more in R &D and it's just, whatever it is, margins, revenue, market share, management, just making an assertion, even a good sounding assertion is a great start you've got to do that right i think this but but to check yourself before you wreckety wreck yourself as we said the other the other week is is to is to then go yeah but why and then but why and then but why and try and do that as many things as as you can and with without trying to therefore just don't just look for the thing that confirms the why like ask openly honestly in a curious fashion yeah but i i think this but well why do I think this?

1:12:38And I think that's valuable. And the other thing I would say is once you have formed a view and you're starting to get excited and interested in an opportunity, pretend that you're on the debating team and the teachers just switched you out. You're on the affirmative and now you've got to play for the negative. Put forward the bear case. Try and say, well, look, I clearly like it. I've done all this work. I've got all this reasoning. I think it's good if I was wrong what why would I be wrong you know I've always something I learned at the full actually when I was there I always loved with the investment advice you guys put out there's a very big prominent section called risks and why we would sell which is real I mean it's not done enough right and I guess but do that put put put on the put on the bear uh hat uh play devil's advocate and say what does what does failure sort of look like just force yourself to think through that now ideally you do that and you go gosh i really tried here and i just can't put together a too convincing case that's a good that's good but it's forced you to think about it both of those things just force you to think about it more the other answer i was going to was just write it down but again for the same reasons it just forces you to think about it yeah mine is um mine is gonna be major on the majors uh which is kind of what we said before But if you want to do one thing differently and better, this is both a remove and an add.

1:14:04So my suggestion would be think about the really important things that drive the business. What are the main levers of a business's success? What things have to happen? The big things that if they happen will go well. If they don't happen, it would be problematic for your investment case. And it's different for every business, right? It could be new product. It could be new markets. It could be cost control, whatever those things are. For this company to be successful into the future, for it to grow strongly and maybe faster than the market expects, this is what it will do. And are there other things that could add percentage points to the return?

1:14:44Yes. But these are the biggest one, two, three, five things that I need to see over time to be successful. And what does that do? It does two things. It makes you concentrate on actually trying to identify them, rather than going through the motions of sales, gross margins, costs, market share. What are the things? And be specific. To Ram's point about being comprehensive, be specific at what you think it needs to be. So you take out the stuff that doesn't matter as much, so you're not spending a lot of time on the stuff that's not going to move the dial, but also you make yourself identify what is going to move the dial.

1:15:15Both of those processes, same thing. But looking on one hand, adding the stuff that matters and removing the stuff that doesn't helps you refine your thinking. And this is kind of about, I think, self-improvement as much as that particular thesis, is it really makes you think about what is going to have to happen for this to actually work. I think that for me is probably the biggest one. The other one is just give it time. I said one, but just extend your time horizon. Ram and I both hold for too long by both our own emissions. That being said, the holding time has been phenomenally successful for me.

1:15:52And for the most part, had I not sold too early, I mentioned Domino's again for fun. We haven't done it for a while. The lost opportunity for selling too early, yes, you might avoid losing another 10 % or 20 % of your share price, and that sucks. But the one you sell too early then goes up 100%, you're going to pay for a lot of those ones you don't sell too early on the way down. And the maths of investing tends to work as long as you are half good at this stuff. And again, as we've said a million times, if you're not good at it, buy an ETF. It's no disgrace in that. But if you are and want to be better at this, then, you know, give your – if you've done the analysis properly, give the company's time – give it time for the analysis to work out, to play out, right?

1:16:29And it'd be slow to sell – slow to buy and slower to sell. It's probably the last one I'll add. Yeah, that's nice. And gosh, you could add a thousand – Yeah, you could. A thousand more things. The key is just, I think, it comes back to – for me, it's not intelligence is not a factor here. Yep, great. Thank God because I'd be in trouble otherwise. You want to have the capacity to know to put the round object through the round hole. It helps. You know, if you can do that, I really think your best attributes are curiosity and emotional fortitude. Yes. Can I add humility to that just quickly? Say again?

1:17:06Can I add humility to that too? Yes, I said that. Brilliant. Absolutely. Absolutely. You just – the best investors are the most curious investors. It's just because it's the curiosity that drives you to dig deeper. And it's not because, oh, gosh, I have to do this because to figure out if I should buy this bloody thing or not. No, it's so hard and painful and I hate all of it. It's no people are like, huh, that's that's really interesting. How these how do these guys make all this money? Gosh, they're doing really well. Well, it seems like they could probably continue to. It's just it's that's what pulls you into all of this kind of stuff.

1:17:39And to be curious, you have to be humble in acknowledging what you don't know and being prepared to sort of find it out and not just accept what someone who might be super confident on TV is saying. That's always a bad, it's a great signpost that might go, oh, maybe that pulls me more in that direction. Maybe piqued my interest. I might look further at that. But it's always a bad, if that's the beginning, middle and end of everything. so I don't know what I'm saying here be curious, be humble, be open minded be calm and you'll go a long way and on that note have a wonderful 2025 we hope this is the first of many times you will spend a little bit of time with us on the Motley Fool Money podcast I don't know even what year this is of doing it mate but I love doing it with you I really appreciate your time and effort your energy and your intellect it's always fun we agree on a lot, we disagree on a bit and that hopefully what makes it interesting for me, I hope it makes it interesting for our listeners.

1:18:37As always, if you are listening still, thank you so much for that. I mean, honestly, let's be honest, Rem and I would chat anyway. My boss at some point might say, dude, you haven't published a podcast in three years, you need to stop pretending. But until that point, we really do appreciate you listening. A big shout out actually, mate. You don't know this yet. Not that it's a huge deal, but just kind of, I noticed it the other day. We were, The Motley Fool Money was one of the top five business podcasts in the country. And we had two of them. When you say top five, I take that to mean number five.

1:19:02Well, yes. Otherwise you would have said top four. Correct. But also we had two of the top six episodes. Hey, well. Again, I say top six, it was three and six. Okay. They literally only had six on the graph. So it's literally two of the. What episodes were they? Well, they're always the most recent ones because that's the way it kind of rolls. Oh, I see. It's one of the, you know, whatever timeframe they use, it probably was the last weeks with episodes. But we're the only podcast. No, sorry. We were one of two podcasts with two of the episodes in the top six. So that was kind of cool. Spotify if you're listening listener if you want to you know we can we can we can have discussions about some Joe Rogan kind of deal if you're interested you have our number you know where we are yep we are we are we are let's call a spade a spade we are top rated podcasters so you know the rankings don't lie Scott unless until we're not in the top and then they absolutely lie there's a bit of hubris in believing in anyone including listener or Spotify listening at this point in the podcast either by the way.

1:20:00So we should put that at the beginning rather than the end. I say that because I'm not bragging, but I wanted to thank our listeners for listening and for engaging with the podcast. We get plenty of comments on social media and other places too when something comes up and I occasionally get Ram tagged in a tweet. So, oh, Ram, I love this one. Do you guys get us on the podcast? So it's fantastic. We love the interaction. We love doing what we do and we love bringing it to you. So thank you for sticking with us for yet another year. We have an almost unbroken record. We've only missed one episode in the entire length of time we've been publishing Motley Fool Money on our regular schedule.

1:20:32So we will continue to do that this year. Hopefully, good Lord willing, the creaks don't rise. But until we chat on Sunday, thanks again and Fool on. Yeah, cheers. Thank you. 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.