Our budget verdict. May 12, 2023

23:44Like if you can't get off the smokes, if you're going to pay$50 a pack, whatever they cost these days, and you still are smoking, it's purely just revenue. There is no public health benefit now of cop working harder, you know? The demographics are such too that again it tends to be the least advantage who have a higher proportion of smoking. So I agree. I mean they shouldn't be cheap. I'm all for an excise. They've done it for a long time but it's every year like clockwork. You guarantee that thing is going up. Because it is easy. It's still going up and they're going to add more to it. That's the other thing.

24:14Like inflation is already 7 % so there's the excise this year plus another 5%. And I just think, man, Like of all the people who raise money from, the poor bastards who are addicted to this stuff, who, you know, no one smokes at that price by choice. I mean, maybe four people do, right, just to stick it up the government. But everyone else is like, I don't want to spend that much money on smokes, but I'm chemically addicted to this stuff. You just make my life worse. And I just think, I don't know, I find that really hard. It is. It gets to the, it's just, there's a spectrum and it's just moved too far to one end of it.

24:44I don't ever see it changing, by the way. No, that's true. It's just brutal. Yeah, speaking of free markets and that kind of thing, my view is that what the government should do is they are there for when there are instances of market failure. I agree. Or where it's likely that a market won't work. Yes. And also to put guardrails and regulations in place to make sure that things that we do want private enterprise to do, they're at least not exploiting people. I think that's another market failure for me, but you're right to call it out separately, absolutely. Do you know what I mean? And just to separate the two, because again, it's very hard to talk about this stuff without you instantly being pigeonholed by someone because it sounds like you're against what I firmly believe in.

25:27Yeah, that's right. But again, they're very nuanced views and I feel as though, and I also think like there was a billion dollar in cheap loans for homeowners to like put double glazed window panels in, electric hot water systems there. I think that's great. I love that. I mean, it can be, execution is everything. So, I mean, look at the solar panel rebate for the feed-in. They were way too generous in hindsight and the rest of it. Oh, do you reckon? Like the pink bats. I think so. See, I reckon that's momentum. You want to do that exactly to get the early uptake to kind of kickstart the industry.

25:58I'd have no problem with that actually. Yeah, well, you know, look, of all the problems, it's a small one. And that's my point really is where you want to help direct things, where there's a very clear benefit, particularly when there's a lot of externalities that are involved, which is exactly the problem with climate change. that's what government really really needs to do um uh when so so utilities are a great case in point poles and wires these kinds of things yeah um jails um uh hospitals these these kinds of things are just uh more amenable to that kind of stuff when they start getting in in areas where they just have no real competitive advantage um yeah and whether there's a perfectly functioning market or one that will do.

26:43Now, maybe it needs a little bit of a hand. It kicks up because it does have so many benefits outside of the benefits to shareholders in that company alone. Absolutely kind of do it. Otherwise, get out of the way. And, again, it makes you sound, again, like a libertarian or something like that. It's not. It's just about we have this wonderful mechanism that's been really good at making sure I've got affordable clothes and food and shelter and all that. That's free markets and capitalism. And they need a bit of guiding at times, absolutely. You need to step in at times, absolutely. But, again, that pendulum can swing too far.

27:15And I think the history of the modern era has been that whenever governments have tried to do too directly influence things, it just doesn't end up working. A lot of capital gets burnt and a lot of things get wasted. It is, and I think partly it's politics, partly it's just a belief they can fix everything because they want to. I find the car industry subsidy is just a really important example of that, right? It's a great example. How many billion did we spend over 40 years pretending Australia could have a car industry? Or waste the money. Just another year's subsidy, maybe eventually, finally, the car industry will stand on its own two feet.

27:50It was just never going to. Anyone could see that. It was at best, at best, it was trying to protect an industry and some workers and look after them. At worst, it was just political, you know, handouts to make it look like we were doing things. There was nothing that, speaking of electoral catnip, this is not the i'm sure there are others but the only we should make stuff here is just like you want to get people coming out of the out of the woodwork when i say we should stop subsidies from making stuff here on twitter oh my goodness the people are coming say well of course we should make stuff here because it's good to make stuff and i'm like so hang on how are you going to how are you going to replace the you you want to subsidize a lower wage we've got three and a unemployment you want to subsidize a lower wage lower tech more in it more labor intensive manufacturing process because you're like making stuff here rather than let that person work for higher wages, less government support somewhere else.

28:38On what planet does that make sense? It just drives me bananas. Besides the free market had chosen. The reason they were shutting down and in trouble because no one was buying the damn cars, right? You can't make the market all of a sudden want it because you support it. That's just cloud cuckoo land stuff. Now, what's happened? This is interesting. What's happened since then? Have we had difficulty? Right. Issues with COVID aside. Have we had difficulties in getting cars or anything like that? I mean, no. Has there been a massive spike in pricing? No, it's not. It's absolutely being traded as this wonderfully mutually beneficial thing.

29:10There is an exception to every rule. And while I largely agree with you, there are certainly strategic defensive kind of considerations for certain things. I get that. I absolutely get that. But, yeah, in the main, it just tends to be a horrible waste of money. It's usually done under the cover of we've got to protect these workers. And, again, I'll come back to my point. all for making sure that people are treated fairly and stuff. But imagine the money you could have spent on either redundancies or retraining or whatever. People don't care about that particular job. They care about a job, right, and one that's equally as fulfilling or whatever the case may be.

29:49But you could have, if that's what you're, and when you look at the pie chart of these things and you think, wow, that's going to impact a lot of people, it's like, oh, it's 1.3 % of the population. Like Coles literally employs more than that entire industry. It's sort of, it just makes no sense. And here's the thing. It's not even that we don't care about those people. I'm sure those people want the job in auto manufacturing because that's what they do. And I'm sure that they get a lot of value from it. Those things are all true. The question is at a government level, to your point about return on investment, government has a limited amount of money to spend, short of racking up stupid debts, which frankly we're having issues with anyway.

30:24But let's assume the amount of money to spend. The question is at a total national level, So which spending are we best of going with? Which spending should we say, you know what? It's a shame we can't do more. Here's what we can do. It really looks after people. This is great. I will say, by the way, speaking of that, the government's – you've seen Utopia, haven't you? The working dogs. Oh, great show. There's the net zero authority, which sounds very much like the nation building authority if you say it quickly, but apparently they're going to put work in places that are going to lose coal-fired power plants, for example.

30:59That's exactly what you want to do, right? You want to say, we're going to make these changes. It's going to suck for you. We're really sorry, but it's necessary. What we'll do is everything we can to look after you and make sure the changes we know we have to make because the responsible thing to do are as painless as possible. And I can't make it go away for you because we've got to stop producing energy with coal. That's just life, right? Now, I can let you swing or I can help you out. That's the least we can do, but it's also the most we should do because that's the right thing to do. Wasting government money chasing these things is just, as you say, it's madness.

31:29It makes no sense. What's wasting our money? it seems like someone else's problem when you say government money it's our money that's a really good point you know because you know what i like about that is when people say well you know i say to people there should be a structural deficit uh structural balance and we should cut stage three well they're taking our money and you know they if they're not going to use it better they can't have it's like they're going to run up a deficit the deficit's in your name dude like you know you're not not by name but undersigned by you know the citizens of australia that you don't get out of this this is there is no there is no them there's only us the us has a different structure but the Australian government is us.

32:01We are, you know, we can either have individual interests or the group interests but there is no alternative way where the money doesn't cease to become a claim on the Australian country, the Australian society, the people of Australia. That's what we're in the gun for, right? If it happens, it happens. And again, we also need a more nuanced discussion on debt. You know, it's like with companies. Bring it back to the investment lens. If the government, I mean, frankly, the government should have borrowed squillions at 0 % and had the chance and invested it into infrastructure that would last for decades and give real productivity boosts.

32:35Yeah. Because what you do is like when you borrow money, you're obviously paying an interest expense on that. But if you're earning more in the form of a return, that is a very smart thing to do. 100%. Risk-adjusted, of course. You don't want the country to go into the business of emu farms or something like that. But that's – I'm all very supportive of very carefully considered debt that is not so much used to be spent but rather invested. The trouble is that we and the US in particular and many Western countries, particularly in Europe, we're getting in the trouble where we're borrowing money just to keep the lights on, just for day-to-day operational kind of stuff.

33:15It's not an investment. It is literally money out the door with no direct expected, you know, decent return on capital. it's it's that's that's what's concerning about it and just your earlier point that it is structural and it just the maths or the government's own forecast are saying it's going to get worse and that's that's probably something that's been watered down a little bit because you don't want to present the most bleak scenario but it's we'll all pay we all we all will pay and it might not be obvious but i think the most likely scenario for me is we just we all pay through uh increased inflation at the end of the day, right?

33:51But it's not even that. There's increased interest bills due on a higher level of debt in the future. We are literally saying to people, and I have people say to me, oh, why would you have a structural balance? Why would you have a budget balance with people out there doing X, Y, and Z? It's like, I get it. I get it. And again, if I had all the money in the world, I would fix both problems. But what you're doing is you're saying that now is important and the future can go and get stuffed. And there is no consequence-free world where you get to pretend that spend anything you want on now and let the future look after itself because who cares?

34:18you are you know future you and frankly future you's kids and future you's kids kids are going to have to say well thanks very much grandpa you cared about you then and yeah sure you put some people in work or you spent money on this or that and that's great knock yourself out but look what you left me you so and so that that's exactly my problem is that idea of somehow that you can just let the future worry about itself because we've got problems now it is a really this is this is the real world stuff that's fantasy land stuff where we could pretend that somehow now is fixable and somehow the future won't have consequences.

34:48And if we just close our eyes and desperately hope enough, it'll all go away. Look at the US. Look at the US, the world's for now largest economy. I'm going to forget the exact ranking, but the third or fourth biggest line item in the budget is the interest. Like just the credit card debt, that is paying off past promises. There are consequences. And this is why it's called a debt spiral because you just, like anyone who's gotten in over their heads with a credit card knows. That's the problem. I mean it happens at a national level. And they say, yeah, but they can always print their own money.

35:28It's like as if that solves the problem. It just steals from all of us. You know, it's like we used to bleed people in the past when they had maladies, right, just literally cut open a vein and bleed. It's where the barber pole comes from. and it just makes it worse and this is unfortunately when you take a long view of history this is the challenge that we will be facing in the coming decade or so I don't see any way out of it except for increasing inflation or just like we're all poor we might have more money in our pockets but we're all we're all poorer probably some kind of financial repression and that sounds harsher what that basically means is they'll restrict where pension funds can put their money there'll be certain mandates that you have to buy certain amounts of government bonds, the limit capital flows, all of this kind of stuff.

36:16And that's not very a nice outcome. That's happened a lot of times in history as well. And then there is the, we take our medicine hard and fast. We just slash costs. We boost taxes. It's going to be super painful as well, but it kind of gets us back on the right track. Certainly politically impossible, you'd kind of argue, just given the system we have. And the final option is we just grow our way out of it, which is the Hail Mary, somehow we just managed to grow at such an incredible rate. We create so much real wealth for the nation that it's easy to pay back the debt, right? And it just, I find that, I don't know, as much as I'd like that to be true, I find that very hard.

36:55So it, and you can deal with the problem in two ways. You can deal with this where the US is at this point now with the debt ceiling. You can deal with the problem when it's thrust upon you. It's just that can, just you can kick it as many times you like. It's just not bouncing further down the road. That's all right. Or you can start to kind of address it now before it becomes too big a problem. Our debt to GDP is a fraction of the US. We're actually in a pretty good shape. We've gone up a lot in the last few years, but I think, what are we, 40 % I want to say from memory? Someone can fact check me on that.

37:27But it's not anywhere near the levels of the US. I still go in the wrong direction, by the way. But it's going, that's my point. If anyone hears you and says, oh, that's okay. At least we're better than the US. Like, no, that's not okay. So being the second least worst, or not second, but you know what I mean, being slightly less drunk than the drunk guy in the corner doesn't make you sober. Yep, exactly. And again, you can stop drinking now and suffer the headache that's going to come tomorrow, or you can keep drinking and just have one more mother of hangovers down the track. Motley Fool Money.

37:55For more, subscribe to the free newsletter at fool.com.au forward slash listener.

38:04now mate um let's go to something very different it's well it's not that different i suppose because it does talk to the strength or otherwise of the australian economy that's something that you know i mean i half laugh but it's it's a serious issue and the back half of i think this calendar year is really going to be an important one for a whole lot of reasons for a whole lot of people um some more signs maybe that either things are getting worse or that companies are finally are getting religion or maybe some combination of both. You were mentioning to me before we recorded that there's been some big tech staff last.

38:38Maybe you can just run through those for us. Yeah, so just a couple. I mean, this has been a bit of a theme for a while now with a lot of the executives that we've been speaking to at Strawman and I noticed more companies are just making mention of this. You say gaining religion and we've talked about it before, all about revenue growth. Now it's more about sort of sustainable kind of growth. And part of the strategy it appears to be is that it's called cutting your way to greatness. Not possible, is it? Yeah, it feels a bit hard. And so the ones that caught my eye just this morning, and again we're recording this on Wednesday morning, Wednesday afternoon.

39:19Gosh, the day has flown too long. We had Appen. I know a lot of people will be familiar with this. This was a very popular high-profile stock a couple years ago. They provide data sets to train AI on. Sounds sexy. In particular, a lot of the voice assistants and stuff back in the first, not the sort of modern-day large language models, but back in the day. And they made an absolute fortune out of that. But people took the theme of sort of AI and the growth of tech and whatever, and they ran with it. And shares got to, oh, gosh, I've closed my screen down now, but it got to some insanely high valuation.

39:56Shares have since down 90%. Now, we know Mr. Market can be a bit crazy at times. So, this is a$40 stock,$40.08 back in August 2020. So, it was at two and a half years ago, almost three years ago. Now down to$2.33. $40 to$2.30. That's brutal. Yep. So, they're saying that they had a last year things were down. They've now just come out this morning and said, actually, trading conditions have not improved. Year-to-date revenue is down 21 % odd and change since the last year. They'd already announced$10 million in annual cost savings. That's a pretty decent sum of money. They've come out and said, actually, we think we can find a further$36 million in cost.

40:44Yeah, and they're doing what they call a strategy refresh. Now, there's very few heuristics that are very reliable or, you know, super high probable. But whenever you hear strategic review or strategy refresh, no one's doing that when things are going well. Revising our strategic options, exactly, yes. Yeah, and so they've read the room. They know which way the wind is blowing. So it's all about focusing on what they're calling generative AI. So these are the chat GPTs of the world, which, of course, is expected to grow at a gazillion percent per year. So it might work, by the way. I shouldn't try and be too negative here.

41:25It might absolutely work. They make, like, I forget what the top line is, but it's a very, there's a lot of sales and stuff there. But it's just the sheer size of these costs are so substantial. And it's worth pointing out, too, that even at$2.33, if you pro rata the first part of this year, it's still on a price to sales ratio of close to one and a half times. Now, that's not crazy. It's certainly not crazy for a growth stock, but it still requires a bit of decent growth, right? So that was interesting. Sorry. You got any other companies now? Well, I'll quickly go. I'll mention the next one because it is so stark, and that is Redbubble.

42:05These are the ones where you can go and get a T-shirt and get some art put on it. and you sort of make coffee mugs, these kinds of things. And if you're an artist, you can put your content out there and people can put it on a shirt, gets delivered. Did really well in COVID through masks, by the way. You know, you saw those sort of bespoke masks. Well, Comanche, a shot from home and selling masks. I mean, that's a pretty good one-two punch, right? Right, right. And so they've come out and said, yeah, we're also doing massive costs. and damn it, I've lost my notes, but the sheer magnitude of it.

42:41Anyway, I went to the annual report and looked up their employee costs. Again, this is all public domain stuff. Just look it up. It's easy to do. And you go to the income statement, employee and contractor costs of$77 million. Now, this is a company that's top line, I think, is somewhere in the vicinity of$200,$300 million. It's not a small amount. It's a big company, right? Like despite what the share price has done, it's a sizable entity. but the size of that employee cost is$77 million. Imagine having a staff bill of that. Now, not to downplay the challenge of the business, but, you know, it's a website with some, do you know what I mean?

43:24Like the big part of them is sort of getting Google search rankings and the rest of it. There's a lot to it, but gosh, that's a lot of money. And so no surprises, they've found a bunch of things to cut as well. So the question really is, like logically, it boils down to there's one of two possibilities or perhaps a combination of the two. The first is that you just had too much bloat. When times were good, capital was cheap, you hired like a drunken sailor. And, you know, you had all kinds of staff perks and benefits and harbour cruises and whatnot. And it was just things just got really sort of really crazy.

44:00Right. If that wasn't, and in which case, you know, you've got to feel like no one owns it, right? But that's what's happened. That's why you're able to sort of cut so aggressively. Exactly, yeah. And they all say, CogState was another one actually that came out this morning. This is an interesting company actually we don't have time to go into, but they're going to be cutting a whole bunch of staff as well, something like 13 % of their total staff costs. And they said it doesn't impact our ability to pursue our growth ambitions. And this is more or less what all the other companies said. We're appropriately resourced to pursue them.

44:35So which is it? Which is code for we so horribly mismanaged the company before, we've finally seen the error of our ways, but trust us, it's okay this time. Yeah. And, you know, anyone who's been through this personally or just like within the workplace that they have, I mean, there's massively demoralising factors. And companies usually take a bit of it. And really impactful people who gave up other jobs to take these jobs because they thought the company was going places. It's not cost-free, right? It's not cost-free. So there's two ways to look at it. One is a recognition of those past mistakes that are now being remedied, the long-term vision and opportunity remains in place.

45:13And I don't want to suggest here in any sense for any of these companies that that may be the case. But it's exactly the right question to be asking given the circumstances. Absolutely. And it could be. We could look back on some of these opportunities and go, wow, that was the time. They made a few missteps. The market got a bit overvalued. It was sort of, you know, partly the company's fault, partly the market's fault. But, you know, there is a real business under here. And this is what companies, what, you know, a lot of private equity will swoop in on companies that may have just been operating poorly, but there's a real nice core to it that just needs to sort of be turned around.

45:46So it could actually happen. But the other angle to it is, and maybe this is more the case for Appen than others, but you're facing a very, you're very raison d 'etre is a threat here in just the very way that the AI development scene is playing out. That's right. Do you know? Like where we get these machines that largely sort of teach themselves and it's actually a very nuanced topic. There's a thousand different ways to sort of attack the problem. I don't think the way that they have been doing it with human annotated data is going to disappear anytime soon. It'll still play a role in that. But it was predicated from an investor's point of view on it being sort of everything and it going to the, you know, just getting bigger and bigger and more and more demand.

46:32And that's not the case anymore. So when companies are going through a completely different direction strategically, and again, they're all undergoing the strategic reviews and the rest of it, it's a very different proposition for an investor who can look at a business whose existing operations have been in play for a number of years and have a track record there and you can see, yeah, whatever you're doing, people are paying for it and you're making money out of it. It could always turn. It could always turn, but it is different to, well, we're going to try this and we think it will work. And that is, I think, the challenge.

47:04I don't know, mate. I just say, it really, there's very, I own shares in Amazon as our listeners well know. And that's one business where they put on a whole lot of people because demand went through the roof. Demand's fallen back because people are back in shops and not shopping only online anymore. They are some staff. I mean, I think there are some businesses that are genuinely, their staffing is a function of volume. So there's some argument if you're a retailer or you're a business that has some combination of, you know, volume-based resource requirements, I can make half an argument for that.

47:37Because, you know, Amazon couldn't have grown without it. We want those sales and all that kind of stuff. That's all probably reasonable. But when you're a business that scales beautifully like a technology company, I don't know, mate. I wouldn't sell a business necessarily that had that experience, but I've got to say I'd mark management down a few notches because as you say, either they're kidding themselves and trying to – I won't say they're trying to kid the market because no one's being deliberately dishonest. But if you believe you can cut your staff by X percent and have zero impact on your sales, either you managed this thing so horribly badly in the past that you wasted that much shareholder money for how long, that's a pretty damning indictment.

48:15If you then say, well, but we can get rid of them and not lose any sales moving forward, then again, do I believe that? Whichever one of those is true, it reflects badly on management, surely. Yeah. Yeah, it does. And I think sometimes we can be too unforgiving. I think we expect perfection from our management teams. We probably do. They're human. They're going to make – I don't care too much. I mean, I prefer they didn't happen. But I think when mistakes happen, I think there's something to be said for those leaders that recognize it early, accept responsibility and change it. You know, that's a very different story, right?

48:56Exactly. Yeah. So it does bring all of this kind of stuff into question. And, yeah, I know, again, from a lot of the CEO interviews we were doing, is that there was a time probably about 18 months ago now where we always ask, you know, what are some of the challenges of running the business? Like, oh, we just can't get enough people. You know, good tech talent is very hard to find. And if you find it, it's very expensive because people fresh out of uni can go to San Francisco and earn, you know,$10 million a year in options and the rest of it. It's just very, very, very sort of tricky. I feel as though that's going to reverse a little bit too because we also know what, I mean, Elon kicked it off with Twitter and all the other big tech companies over there have followed suit.

49:43We're seeing the same exact thing here. I wonder if that's another sort of positive, I guess, for those companies that do have good traction and momentum and good product and market fit and all the rest of it. They will now be able to get a much, there's a much larger pool of talent available now. Yeah, that's true. it's uh yeah and that goes both ways i suppose the question is whether or not take the canary in the coal mine economically it's i think there's a question as to you know what happens with unemployment being for me so you know if you're a tech company investor uh not necessarily a tech company in this case they're largely tech companies because they're the ones who've been hurt worst you know what i you know i'll tell you just quickly why i'm most skeptical about all this stuff is not only do i worry about which of those two things is true and either of them is great either I mismanaged it or I'm going to hurt sales moving forward.

50:32But also the idea of like, but why are you doing it now? And the why you're doing it now is in a few cases, because we're going to run out of money if we don't, that's scary enough in itself. We don't have a choice. The other one is because the share price is down and a fund manager is telling me to cut my costs because they want me more profitable. Again, in which case you overlay that and say, so you're letting the share price dictate your corporate strategy. And they'll all say, no, no, of course we're not. And in their quiet moments, I think a large number of them would say, yeah, we kind of are.

50:56And again, if you think about what's genuinely driving that business, if you want to you know I just they all feel like they have no choice they'll justify it themselves and at some point if they have to raise capital at some point maybe there's some value in having a higher share price not a lower one but again even that kind of second order kind of thinking about it it's like why are you doing this now you know and either again why are you doing this now firstly you're going to run out of money if you don't well dude that was a pretty risky business strategy and that doesn't reflect well on you unless you said this is death or glory which no one does no one says so here's the thing we're going to try and run this business without making a loss for a long time, rely on raising capital if the credit markets freeze up, we're in trouble.

51:35Now, if that's in the risk statement of the last company presentation, full marks. If it's not, then realizing all of a sudden you're just raising money is a problem. And if you're doing it just because the share price is down and you're not going to run out of cash, it's even worse. But either way, why now? And the why now answer is because the market's telling me I should. And that is just the very worst reason to make any decision ever. Yes. I think, and to your comment, Ree, the canary in the coal mine, again, we've got to be careful with this label of tech because tech is everything these days.

52:05Yes, exactly. Do you know what I mean? So what the current macro backdrop I think is revealing, this is the classic, you don't know who's swimming naked until the tide goes out kind of buffer kind of quote, where we just had a lot of companies that were just bleeding cash and that was fine because there was funding available. I didn't need to fund my operations internally, so I didn't. And I could actually even do that with a reasonably straight face because this was about inventing and breaking into new markets and, you know, very large markets that have very big payoffs. And, again, there's lots of examples of companies that successfully prosecuted that, just bled cash for years and then turned the money taps on.

52:48So I think that's what's changed. If you're in a company that isn't at or near cash operating cash flow, that's what's changed. I think you're going to find it much more difficult. And there are some companies that will be in that situation by choice in the sense that we had a lot of growth initiatives and stuff that we in R &D, we can dial back while keeping the core business going. And that's fine. But if you're just not, you know, there's nothing left to sort of cut and you can't do it. I mean, this is business, right? And this is, I think we're going to see more and more of this happen. But I also think, and this is the interesting part, that within all of that, these kinds of things just wash over everything that's similar looking or sounding.

53:34Yes, exactly. So one example off the top of my head, and I mention it because it was in the news today because there was a cyber attack, is a company called Technology One, which I'm not sure many people are aware of. But they provide institutional grade software to governments, basically. Kind of like SAP kind of enterprise solution software. Very high margin, very sticky from a customer that's guaranteed to pay. They have not gone backwards in like, I mean, I haven't seen the latest kind of outlook or whatever, but their net profit was up 22 % in the most recent full year. And it's just one of those when you see the chart, it's just that perfect staircase of bottom left, top right.

54:18Every year they just make more and more money. And that's on a 30 % pre-tax margin. That's high. In other words, for every dollar, they keep 30 cents before tax, right? It's just, so I guess this is not a pitch for technology one. I don't own shares for the record. It's a whole other story.

54:40But this is why I kind of look at this with a little bit of optimism and rubbing my hands together because I feel on one hand, to your point earlier, two things can be true at the same time. Yes, there was a lot of bloat and malinvestment and stupidity in this kind of sector and that will be revealed and it will probably be something, you know, it's statistically significant, you know, percentages of various industries will be revealed to be thus. But there will also be within all of that a lot of interesting babies that get thrown out with the bathwater. And I'm not saying this from a timing standpoint, we'll just wait for this, this and this and go in, but all of them, even the really good ones, have all come back from highs and probably they needed to come back a little bit.

55:22But now we're at the other side of the spectrum. I don't know how much further we'll go with a lot of these, but I guess what I'm trying to say is there's opportunity in all of this negativity. I think that's absolutely right, mate. And that is babies and bathwaterers are really – I'm not really a contrarian investor per se. People think contrarian investors are those who either see the worst in everything or are the kind of the deep value cigar butt guys and that's not me either. But I do tend to really get allergic to the crowd running in a particular direction. I've got that contrarian kind of nature in me.

55:56like if everyone loves a thing, we talk about this, actually it might have been Sunday's episode, we pre-recorded that one, I can't remember which one it was or was last week, one of the two. Either you have heard or you will hear about it. You know, when everyone's running in one direction, either direction, I'm like, it's probably overdone. You know, that idea of like when, you know, Warren Buffett says in the stock market you pay a high price for a cheery consensus. In other words, when everyone's loving it, you've got to pay a high price for that. When everyone's hating it, you'll pay a high price to ignore that.

56:23In other words, the consensus itself is the problem, not the underlying view. The more certain everybody is about a thing, the more you should absolutely be worried about. When everyone says the market's doomed, probably a good time to buy. Whenever thinks the market's spectacularly great, everyone's excited about it, I'd be thinking twice about what you're paying for some of these stocks. And that's, I mean - I think, can I just on that, I think the problem that people have with contrarianism is that they think that it is, I do the opposite of the consensus. Universally by definition, yes. By definition, no, no one's saying that.

56:54I mean, I'm going to stick with the consensus that jumping off the Harbour Bridge is a bad idea. That's a strong consensus. I'm not going to challenge that consensus. Yes, yes. But I think you always want to take the counter, not the counterfactual, you want to be the devil's advocate. And often you go through that journey and you still come out and you go, actually, no, I'm still as excited, if not more, because I feel as though I understand the downside. But yeah, that to me is what a contrarian is, is someone who takes seriously the other side. They may end up rejecting it, but I think to blindly just run with that crowd is just one of the dumbest things you can do.

57:31Yeah. And again, as you say, also dumb to blindly bet against the crowd. I mean, I mentioned Amazon already, so I'll mention it again. You know, it was stupidly expensive in 1997, stupidly expensive in 2004, stupidly expensive in 2015, stupidly expensive in 2022, and here we are in 23. Down for ties, by the way. But just that idea of just, you know, be careful assuming that the market is wrong all the time because it's not. but when you kind of particularly when it's sentiment driven when sentiment's in one direction like well maybe there's something there and I think it's again I'm not saying you shouldn't necessarily even do anything particular just be careful what you do do in that scenario think about buying out pay later stocks 12 months ago 18 months ago right cannabis stocks we're going to get a question about that on Sundays I'm not going to pre talk about that one other than say just listen out because we have a view on that there's a whole lot of stuff and it's just worth keeping in mind I think it's it's a really good point you make mate and a really, really important one.

58:23Hey, let's just finish off with, speaking of famous investors, that very famous investor, the very one, had an annual meeting of his company on the weekend of Berkshire Hathaway. Warren Buffett we're talking about as well and let's get the disclosure of the I own shares in Berkshire Hathaway, had their meeting on the weekend. 58th. Yeah. 58th annual meeting. This was a failing textile company. now a multinational conglomerate that literally bails out foreign, you know, nation states. So I'm going to just run through some thoughts. Let's try to make this a bit of a speed round of sorts because there was so much ground they covered.

59:05By the way, go to CNBC's YouTube site. Now, I'm going to make a challenge for our listeners, mate. Our podcasts are long, right? They are. The Berkshire meeting was probably about six hours long. And here's my challenge to our listeners. You might even disagree with this, mate. If you do, that's great. I will say just tongue firmly in cheek and yet not completely unseriously. If you're not prepared to listen to the greatest investor ever tell you about how to think about investing for six hours, you may not want to be an individual investor. And I guess I said, now if you've listened to 15 of them already, you're probably going to learn anything new, to be fair.

59:44But I guess I would just make the point where people say, oh, yeah, it's very long. I'm not going to bother. It's like, dude, this is Warren. This is Warren. You get to literally hear Warren Buffett answer questions for six hours, get the full value of his expertise. And Charlie Munger. Right? And kind of - Two for one. If you don't think you have the time or it's boring or it's not interesting or whatever, that's cool. That might tell you you shouldn't be an investor is all I'm going to say. I don't mean that pejoratively. I don't mean that to be overly harsh, tongue a little bit in cheek, but also not entirely because literally these guys will give you for free the benefit of, as you said, 58 years, of running Berkshire Hathaway, being investors.

1:00:21Buffett was born in 1932. His investors is 11. This is not the dude you want to ignore, right? This is the guy who knows a few things about a few things. I'm going to say, yeah, if you can't make some time. Andrew, you and I have been to the Berkshire meeting in person before, which was fantastic. So let's do a quick cook's tool, mate. Now, I'm going to cheat. I'm using an article from Guru Focus just because I should give him the credit because I'm going to read some of the stuff out here rather than reinvent the wheel. But what I like about it is they went through effectively topic by topic as the questions were asked and answered and talked about.

1:00:52So here's the first one, AI we've talked about a few times. Buffett said, quote, it can change everything in the world. Sorry, take it back. Buffett mentioned Albert Einstein, quote, talking about the atomic bomb. And Einstein said, it can change everything in the world except how men think. Now, we can say people these days. and Buffett said the same would be true of AI. In other words, he could do a lot of stuff for us but it won't change how we think, how we potentially approach investing, the things that matter, Buffett has said before, temperament matters. A quote from Buffett, I'll get your thoughts.

1:01:28Quote, new things coming along don't take away the opportunities. It's people doing dumb things. End quote, that create those opportunities. AI, mate, blessing or a curse for investors? uh geez i i i think a blessing to humanity if you really want to go there but i i it's it it could be the exact opposite um i i look i will listen to buffett all day long um i i seem sacrilegious to say it but i i don't put a lot of stock in him and charlie's view they're not technologists, right? They claim that themselves. And Warren Buffett's BFF is no other than Bill Gates. And he does know a bit about technology.

1:02:14And so Buffett did reference him and sort of pointed to some of the scary things that could kind of happen, but he doesn't know. I mean, what Buffett enjoyed, and he again says this, right? He, the luckiest person in the world in terms of the lottery he won in where he was born, the circumstances he was born and the time. that he was born. He got to do this stuff where no one really had any kind of science behind sort of investing. He got to do it through an incredible period of prosperity and growth for the biggest, most powerful country in the world. So I don't want to – I've got to be careful what I'm saying here.

1:02:47I don't want to tread on Buffett at all, you know. And there are plenty of other people who lived through the same circumstances who didn't achieve anywhere near that kind of success. But this is – I mean, if you want to get grand, this is like a once in a civilization kind of event with AI and I don't think he or even someone like Bill Gates or any of us really understand the potential for that. So it's interesting. I mean, Buffett tends to be very, nah, this too shall pass. You know, there's nothing new under the sun kind of thing, which is more of an old man to say. And I discount a little bit of his views on AI.

1:03:22Fair enough. We're going to get a couple minutes, Matt. Circle of competence. I love this quote from, well, This is actually a combination of quotes from Buffett and Munger. Buffett says, quote, we don't get smarter over time, but we do get wiser. And Munger replied, we are not so smart, but we know the edge of our intelligence. Now, Munger is a genius polymath, as is Warren Buffett. So he's being very, very humble and very self-deprecating. But isn't that good? We don't get smarter over time, but we do get wiser. I don't know. I'm not sure that doesn't go a long, long way to describing investing success.

1:03:57Oh, a hundred percent. I mean, I, it's a religion for me. Like I am very, very aware of what I don't know. There's so many companies I come across, which just in so many ways look interesting, but I just don't get it. I mean, I just, I'm, I'm completely unfamiliar with the industry, the business model, exactly what it's not. You might be targeted for surgeons in Southeast Asia for some niche kind of proceeding. It sounds good. And I'm happy just to let those ones go by and you regret it sometimes, but most often you don't. So I just, I love that idea of with investing, I think you feel as though you need to be across everything and steeped in all of this stuff, but just know where you've got a little bit of extra competency and just focus there, you know?

1:04:40Isn't that great? Love it. Very, very cool. Mate, I want to finish off with this one.

1:04:48So talk about the challenges America faces. Now, Buffett's always been to your point, very much, it'll be fine, don't worry about it, but we need to kind of make sure we work on it. He said, the problem the US faces is that partisanship has turned into tribalism, which means democracy needs to be redefined. He said, it's an exciting world, it's a challenging world. And then Charlie Munger, who can be a little more taciturn, a little more, I'm not sure pessimistic is the right word. Well, no, it's almost that kind of, he said, the best road ahead to human happiness is to expect less. And I thought it's both incredibly true.

1:05:22It's also a little bit sobering, kind of like, yeah, and I don't think he necessarily meant things are going to get worse. I think he's just generally saying it's a very Benjamin Franklin quote. You know, what is that thing? It's not Franklin, but happiness is reality divided by expectations. Oh, yes. Expectations. I think he's always been a low expectations kind of guy. But I did think it was an interesting kind of exchange in terms of the challenges facing the US, the Western world, and potentially investors in the future. Yeah. Yeah. Yeah. I thought it was interesting. He also got asked on the, a question about the, the budget, the debt ceiling and the budget and the deficit and all of that kind of stuff.

1:06:03And his answer was, we've said it before. He must be listening to the podcast, I think. You know, the fiscal response needs to be much more heavily used. You know, what are you expecting of one central banker to do? There's only so much and we need to change. but it was interesting I said to you off air he acknowledged that well it'll be a problem if we don't do something about it Munger was even more blunt about it this is bad they didn't downplay the seriousness of the situation but it was a little bit disconcerting I'm sure that cooler heads and wiser minds will prevail jeez I hope so you better be sure he didn't really offer any path not that I'm expecting him to it's a big question so that was interesting And the bank side of things was interesting too because he has sold down the banks, but he did mention something that he would be an interested player.

1:06:56And I chuckled to myself because, look, I don't know, so I'm just completely navel-gazing. But when you've got that much cash, how many billions they've got just stuffed under the mattress there, and you know what's happening in the US banking system, you're just going to sit back and the phone will ring when it's time, you know, and he did it in the GFC. I'm pretty sure he'll do it again. He will be picking up wonderful assets. Oh, gotcha. Pennies on the dollar. Absolutely. Pennies on the dollar. And so I don't expect him to go and make any big direct plays now. It will be an off-market transaction if it happens.

1:07:35And, yeah, I thought he was a little bit coy with his answer. What I thought was interesting, mate, is they've sold all their banks except for the Bank of America deal that they did. And what's the issue about Buffett too, this is worth just quickly highlighting. Very interesting. It's worth, Buffett's view is, and I think I'd like to think he's right, maybe just because that's what I think anyway. He's holding back, he didn't say as much, but he initiated the Bank of America deal. He called the Bank of America CEO and said, hey, let me give you some money, give me some preferred stock, really great deal for me, and it'll shore up your kind of support both financially and kind of politically or whatever.

1:08:07That was important. But then he said he sold everything else. And I think he didn't sell Bank of America because he felt like he did the deal and so he owes them. Well, not owes them, but owes them the support that he offered them in the first place. And I just thought that was worth thinking about because, yes, you don't want to let loyalty take everything, but also being someone of your word is important because next time there's a deal, you know they'll take it. Oh, yeah. And Bank of America is arguably a different proposition as well to others. All right, mate. Well, it was a really – I really enjoyed it.

1:08:39I've got to say it's kind of like going to church, you know. It's one of those things where the preachers never say anything different. The Bible's not going to have any new words in it. It's not like all of a sudden they go, oh, it turns out we found a new thing, right? So it's always a case of what was there, what did we find, what was it worth? Not much genuinely new, but that's kind of the point, right? It's that idea of just being brought back to, that's right, these things matter. These things maybe don't matter. Particularly, I mean, we've just spent time talking about tech and the gyrations there and everything else.

1:09:06And Buffett and Munger, Berkshire's just kind of the old diesel train that keeps chugging along, a tortoise and hairstyle, you know, pick your analogy, pick your metaphor. Okay, cheers. I'm a big fan. I am still hopeful that Uncle Warren and Uncle Charlie are immortal. I'm not convinced yet they will eventually die, but Warren's 92. I think Charlie's 99, I think. By the way, if you have, if there are any smarter, more, they were really, really sharp for 90-year-olds or, you know, You know, 92, 99-year-olds, really, really, really sharp. Fingers crossed, hey. Bloody impressive. Yeah, that's definitely a life goal to be able to be half as articulate at that age.

1:09:46That's the thing. It's one thing to live that long. It's the other thing to be so incredibly good, like just really, really great. I sat on chairs for six hours in front of a stadium of 40 ,000 people and a live stream answering questions with no notice. I mean, you know, it's bloody impressive. Yeah, and really like he knew detail that you wouldn't expect the head of such a large conglomerate to know. like the number of planes and, you know, just like all kinds of things, which was just, yeah, super sharp stuff. Super, super sharp. Yeah, very, very impressive. Yeah, well, despite what you said at the start, I didn't watch it.

1:10:20Oh, no. Yeah, I didn't. I definitely catch up on a lot of clips and stuff. I let others on Twitter and other places do the heavy lifting for me, partly because I have sort of seen it so many times. I was going to say, honestly, you know, I still watch because I think it is that church service thing, but it's not like the first time you hear the gospel, right? That's a different thing. The first thing, I don't think you can, well, I don't think you should not ever have watched a few of these because I think that's important. After a point, as you say, it's just the sound bites are enough. Yes. Yeah.

1:10:50I just like, I think the thing that's changed and the lesson that so many fail to learn from it is it's, the big part of the success is, well, obviously having a winning strategy, but it's not a complicated strategy. like in broad brushstroke terms, it's not that hard. But it's the consistency. That's the thing that sticks out for me. Just to show up, just do things day after day when times are good, when times are bad. When times are good, they're not rushing out to spend money and expand, you know, they just every decision is framed through the lens of return on invested capital or some version of that.

1:11:32It sounds crazy to say, but so few companies do, right? It's just like, it's not the amount that you're spending or what it's going to do to earnings per se. It's more about what is the return that I am getting. So there's that massive hyper-discipline focus on that. And when times are bad, doing the opposite, not being afraid to invest. And where everyone else gets too wild and crazy in the good times, they get too scared and fearful in the bad times. They're not. They're just very, very consistent. I think that's the point, right? I mean, they themselves say, you know, most of us are just comfortable not doing anything stupid.

1:12:06Yeah. Avoiding the own goals and just kind of letting time do its thing. This is investing 101, right? Like it's not – I mean, look, they are incredibly smart guys. We're not going to be as smart as either of them ever. So I'm not anyway. You might. But I'm not going to be that smart. But you don't need to be. That's like the entire point for all of the activity, for all of the trading systems and software packages and whatever, everything else that goes with it. It's just like, no, no, we just do the right thing over and over again and slowly but surely, compounding takes care of the rest. And people want more.

1:12:39Yeah, but what do you really do? What stock should I then buy? Okay, well, that's good for everyone. But if you want to really do well, what do you do then? It's like these guys are the best ever. These are not the average investor, the old bloke in the corner who bought two stocks and did moderately okay, roughly in line with the market and he's saying, I've got the secret. These guys have streeted the market for 58 years. Like there's no, and not by doing anything particularly genius. There's no, oh yeah, what we did was X, Y, Z. You know, we discovered this flaw in the system. We exploited this inefficiency and we used this software to trade this or high-speed market.

1:13:16There's none of that. It's just literally, yeah, we just bought good quality business and we found them and then recycled the cash. It's like that's literally it. But that's, I mean, look, execution is again, another thing, but they're focused on the right North Star. And I think the other thing that Berkshire gets so right is culture. I've long thought that the CEO's role is just twofold. It's capital allocation and it's culture. You can't, you know, particularly of any reasonable size organization, you just can't be across everything else. And so that's why culture is so, it sounds like this airy fairy kind of thing that's, yeah, I guess it makes a difference, but no, it's kind of everything.

1:13:53and all of the really great companies. People love going there. They love showing up. They work harder. They just, it is so, and this is what Buffett has done, just to your earlier point, why I don't think you need to be worried as an investor when he and Charlie either retire or was forced to retire is that they have set up such a great culture. So all the businesses they buy, they don't send in their own management team. They don't gut the place out. It's like, this person's been running this business incredibly well, come into our fold. We will be an unlimited source of capital for you, but keep doing your job.

1:14:28100%. So, you know, they don't do that. They don't micromanage. There's no financial engineering. It's like there's nothing, genuinely nothing unusual or weird or special. It's just literally just do the simple things moderately well. Like it sounds too good to be true. It sounds like we're not trying hard enough or they're not trying hard enough. Like that's literally their thing. The other thing, and again, that idea of Buffett has made many comments for many, many years now about they could have juiced their growth a lot more had they deployed more of their cash and done that, but they've always kept this gigantic cash cushion, which is really a handbrake on things.

1:15:09Of course. If you think it from a financial. Imagine they spent that all and borrow more again. Yeah. Oh, they could have been 10 times the size or they could have been zero. Exactly. Right? And so there's another lesson sort of full circle in what we were talking about before. It's just sort of like they were obviously they're after growth and obviously they have grown. But it was never done. The company's existence was never threatened. Correct. You know, by any of that. Not that they couldn't have gone out of business, but they didn't put themselves in a situation where they were on thin ice.

1:15:41And, you know, I was watching a doco on YouTube of all places last night on Credit Suisse. And again, that was the other thing that stood out from the counter example here is that the culture was so bad and everyone in the industry knew how bad it was and they were all cowboys and cocaine and hookers and just, I'm probably being very unfair to a lot of really high quality people that worked there. But, I mean, you just have to see the litany of what happened throughout the last decades, you know, of what they were involved in with money laundering and oligarchs and all kinds, you know, tax dodging and it just, and they had CEO after CEO after CEO come in, I'm going to fix it.

1:16:22I'm going to fix it. And you can't fix culture overnight. My favorite local example, as everyone knows is AMP, the same similar kind of thing that's, that's there. So I find my, I guess my broader point is if you find a company that, and it's look, it's very hard to tell from the outside, but if you find a company with a good culture, it's an incredibly hard moat to build. Uh, and And it's an incredibly powerful source of competitive advantage, I would argue very strongly. And that's what Buffett has with Berkshire, an incredible culture, disciplined leadership that are very, very patient and very, very disciplined.

1:16:58And I think, mate, that is a wonderful note to finish on. The old – I have a T-shirt, which I think my – pretty sure my wife bought for me, which got WWBD on it. What would Warren Buffett do? Oh, right. Okay. And I think that's a very good, like seriously, if you're trying to do something different to Buffett, even though you disagree with Buffett before at AI, and you're probably right, my general approach is if I disagree with Warren Buffett, I assume I'm the one who's wrong. If more investors just did it that way, not that they'd be right every time, but generally speaking, that's a very, very good heuristic to try and actually make some serious long-term money is if Buffett disagrees with me, I want to really, really reconsider whether I'm doing the right thing.

1:17:42Yeah. I should clarify, I'm not saying that I disagree with him per se. He's just not my go-to for information. It's like if I wanted some advice on the best strategies when you're playing Fortnite. I'm not asking Buffett. I think this is one of the frustrating things just in general, but with the meeting there, like because they are on such incredible pedestals and they're incredibly good at what they do, it is often assumed that, well therefore you know everything about everything and there's some things that they've opined on in the past which i just kind of think look i have so much incredible respect for you but this is just you talk about circle of competence it's like you know i did charlie on that did charlie mention anything about china because he's been very pro china for a long time and i feel as though that's getting a more difficult situation for him to articulate um he did i it was interesting actually i think the both both buffett and manga i can't remember who said what and it's kind of usually not much difference anyway basically saying that both governments are going out of their way to not be friendly with each other which is pretty counterproductive for everybody was i think the kind of the broadest very safe answer yeah yeah which is the kind of idea of like you know um picking fights with each other is probably not the smartest thing to do when we get much more by working together yeah which was which was pretty interesting though i will say buffett sold out of taiwan semiconductor because yes based in Taiwan.

1:19:08A lot of questions on Taiwan. Yeah, which is fascinating. Hey, mate, will you come back on Sunday? Yeah, let's do it. I think I already have. Well, yeah, there's temporal blah, blah, blah. There's something Star Trek about it or what's the time travel one? Quantum Leap or something, I don't know. He was Scott Bacula. Lovely, that's a great reference. There's a throwback. Most of it, yeah, most of it always won't get that but that's a great show. Let's go with Rick and Morty, that's a bit more contemporary. I have no idea. You don't know what I'm talking about, do you? I've heard of them. That's all I can tell you.

1:19:35Oh, do yourself a favour. Oh, it's great. I doubt that very much. Until yesterday slash Sunday, both through at the same time, that's Quantum Leap. Fool on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.