Prepare for earnings season! January 26, 2024

0:07Welcome to Motley Fool Money, the podcast that can't remember what stage of the tax cuts we're actually up to. I'm Scott Phillips from The Motley Fool. He is Andrew Ram, Page Esquire, no less, from strawman.com. Not even from strawman.com, the founder, the managing director, and yes, the chief cook and bottle washer of strawman.com. Ram, good morning. Good morning, Seth. How are you? Good. This is going out on a Friday afternoon. Of course, we're recording this Wednesday morning, which is topical and relatively annoying, given what we know is coming over the next 24, 48 hours. before this podcast makes it to air.

0:46I'm heading up to Port Macquarie for a couple of weeks, a couple of days, sorry. Bit of a long weekend getaway. My wife's got some work up there tomorrow on Thursday. So we're going to drive up Wednesday afternoon, spend a couple of days in the Australia Day long weekend, and then head home, ready for school to go back. That sounds lovely. Yeah, it should be fun. I am going to keep my New Year's resolution, mate, which is not to ask you what strawman.com is. I'm going to let our listeners find out for themselves. But just for those who've been listening, Just know that I know that you know that I know that you know.

1:14That's all I want to leave people with. Mate, big week. Big week. Yeah, yeah. Let's kick off with the macro. We try and start there. Sometimes we finish just quietly. There was an episode, was it last week's episode, where we struggled to get to two different discussion points. But let's do our best to get past that today. We'll make that a very, very low bar. Just don't bring up one of two topics. No, correct. We shall not mention either of those two things. Good news is no mailbag, so I can generally steer us away from most of that. The big news, mate, is stage three tax cuts. I am shocked on one level, not shocked at all on another level, that the federal government is, as of recording, reportedly considering changing stage three tax cuts, as of listening, almost certainly has done so.

2:04And Albo is actually scheduled to talk to the National Press Club on Thursday. So again, yesterday in podcast time. Well, as you said last week, Ram, people probably listen to it on tuesday morning in which case it was four or five days ago uh but uh we will we will just touch on touch on stage three mate um so again what we know right now what we think we know and and we're pretty sure because the same stuff's been leaked to every single news outlet which uh tells you tells you the government wants you to know things uh the original plan was to give a little bit of money to low and medium income earners a heap of money to high income earners uh up to nine grand i think if you're on two hundred thousand dollars That was kind of where it maxes out the tax cut.

2:40It seems that the government's decided to take some of that money from the higher income earners, or it was in-marked for them, and give it to low and middle income earners, increasing the tax cuts for everybody, they say. Albo said every taxpayer gets a tax cut from$45 ,000 up to$150 ,000. We'll get more than the original stage three proposals. And the million or so taxpayers above$150 ,000 will get less than the original stage three tax cut proposals and or legislation, I should say it's not a proposal. And apparently the cost is going to be the same. So they've basically just moved the deck chairs around, taken some, once I take money, you've got to be really careful here.

3:18No one's going to be paying more tax, but more tax than they would have otherwise paid. That has been legislated to pay. So that's kind of the facts of the situation. I want to take this from a few different angles, but let's kind of kick off first with the surprise or not. I got to say, I was pretty surprised on one level that they made a change, having promised they wouldn't change stage three over and over and over and over again. According to the opposition, who obviously counts these things for political purposes, a hundred times or more than a hundred times, allegedly, the government or government ministers members have said, nope, we're not changing stage three.

3:52They voted for it. Remember, of course, before the last election, they took a promise to the election to keep it. and now at the 11th hour they've made some changes on a purely political basis on one level if you weren't going to change it up until now i am i'm really really surprised except when you then think about the why let me be a little bit cynical here this is a government that is bleeding support that has mentioned the cost of living in every single possible press release interview conversation doorstop since the new year who made a big song and dance a lot of theater about calling the mps back to Canberra to deal with the cost of living crisis.

4:27And then all of a sudden, we have money being thrown at a whole lot of people. And the government gets to throw more money at more people by changing the tax cuts. So I think there's a few things. There's the economics of it. There's the politics of it. And frankly, whatever is in between the idea of trying to... I guess there's some reasonableness to the idea. So let me just start there, mate. Are you surprised by the tax cut so you did you expect this to happen uh what's your what's your take on what has inspired let me get that out what has transpired this week um look there's a lot of things that sort of happen where you think oh like you're surprised when you first hear it and then and then on pondering it for more than a second you go yeah why am i surprised yeah exactly exactly never ever ever bet against self-interest right and and i'm the only surprising thing is it took them so long to read the room yeah um you know right the polling must be terrible over christmas i'm asking like oh my god we better do something all of a sudden yeah like i mean i i get the political calculus here but just like what is is it i don't know this is it's hit a critical mass in terms of feedback okay i mean what political damage is done by breaking a promise i would say very little because we're all so cynical and we're just used to it it's just like oh you know shock horror politician breaks promise like you know you might shake your fist at the sky for a second or two but then it's just like why am i surprised you know so that there's there's that um yeah and i i do i do think it's the the biggest thing for me is that how they can hold two very disparate thoughts in their brain at the same time in that you want to fight the cost of living and yet you want to give everyone more money.

6:20Oh, I know. That's the... So, yeah, go on. You come. You go. Yeah, well, that to me is the madness. I would... The other broader point I would make is because it's very... The way that the media is these days and probably has always been, I guess, is that, you know, we're going to sort of kick this thing around and the media is going to kick this thing around for the next however long. But the bigger question here is what do we want the tax system to look like? There's a whole bunch of services that we expect from the public sector. They've got to be paid for somehow. And there's a whole bunch of different ways you can do that.

7:01And so this is, and let's get into it, but this is, to my mind, a tinkering when there is far more fundamental things that could and should arguably be done. it's actually top of mind for me at the moment because i'm going through um the process of doing my tax and yes i've left it way to the last minute here um but it's nightmarishly complicated um it's ridiculous it is isn't it it is so complicated i'm trying i'm digging out phone bills and this and what percentage of time did i do that and then it just it's so and i i do lament particularly as a business owner you think gosh i the amount of time i spend on admin and this kind of useless stuff rather than trying to provide value to my customers is is just insane so i i feel as though i'm very big on the idea of tax reform this is has its as its pros and its cons um i'm keen to hear your thoughts on it because i know you're much deeper in the weeds than I am.

8:04But it feels as though if we were going to go down this path of changing things, I would much rather big structural changes. And the final point I say, and no one really talks about this, my bigger concern is not so much as how you get the money, although that's super important. I don't think it's not important, but it's more about how you spend it is usually what angers me more than it's that side of the ledger than than the it's the expenditure rather than the income that tends to boil my blood more often than not but i know as i said you're you're you've been tweeting up a storm um on the stage three tax cut so this this is this is my invitation to you to grab grab the soapbox and and let's have at it sit back everybody here we go no i'm kidding yeah that's right thank you mate i appreciate it um so i think that there's so much there's so much to say so much to say i the tax system is fundamentally broken right and so whenever you talk about a a proposal it's like well okay in the context of everything else it's rubbish is this slightly does it make it slightly less rubbish and that's that's okay and that's you know they say politics is the art of the possible so that's where we are i would do a absolute truckload of stuff if i was treasurer for i don't need three months and then no one would ever vote for me again but i'd get a lot of stuff done and by the way some people hate what i would do some people love it i think you know i'd i try and do it reasonably fairly first thing i will say mate is i will get less of a tax cut under the current under the proposal so straight out it is not you know if i was going to be self-interested i would say hey elbow hands off give me my money um that's not my view uh but so let's rewind i have said for a long time including on this podcast i'm sure although we haven't done it for a while actually um i think the stage three should be cancelled that right.

9:50There is no justification for increasing government debt and increasing the structural budget deficit to buy some votes. If people think they're paying too much income tax, that's reasonable. Then we have to find alternative ways to match that funding, either raise taxes elsewhere or cut spending elsewhere so that these things are at the very least cost neutral. We have a structural budget deficit, which means over the cycle, we borrow more than we pay back. We run up the national credit card. Some years here, we pay a bit off. Most years, we add a bit to the debt that is unsustainable and the level of debt by the way is approaching a trillion dollars so we have a we have a slowly but very obviously burning platform and in that environment giving i won't i'm not about who gets it just now adding reducing revenues while not reducing expenses is madness so either we should be matching so i've said three things about about stage three as originally proposed mate i said they were unaffordable and irresponsible that's one thing second is they are inflationary and thirdly they were unfair because i don't think it's i've had a very a lot of arguments on twitter and people will hate me saying this on the podcast as well i don't think you can justify giving someone on 200 grand a nine thousand dollar tax cut while someone on 50 grand is doing it tough trying to put food on the table uh it just it just i can't come again i would i would save i would save money make money you know pay this tax whatever under stage three i like and i would love that money i'm actually a little bit you know i'm glad they made the changes but part of me is disappointed because like i kind of would have liked that money i could have spent it or invested and i kind of feel a little bit ripped off even though i was out there banging the drum saying don't give me the money so it's you can have those two thoughts at the same time right yeah so look i wouldn't they should they should cancel stage three altogether or fund it i don't care which one i'm gonna you know we argue about which programs get cut or which other revenue should be raised but at the very very very very least it is deeply irresponsible for either party to support put this through for having voted for it in the in the the last term of the morrison government um or the lmp government the australian government that it's just it's just an irresponsible tax cut they're putting 21 billion dollars worth of money new money into the economy so firstly that makes government debt worse it makes the structural deficit worse that is grossly irresponsible secondly it adds to inflationary pressures it just does which is again in the context irresponsible it is less unfair than it was so i kind of i'll tick that box so they've at least address that bit but overall i think i think it's i think it's terrible policy now people say hang on i want to pay less tax i want my tax cut they're not spending it well enough those things are all fine to say some of those things are true some of those things may be self-interest it's probably always a mix of the both and that's fine too all i'm simply saying is if you think the tax cuts are justified fine but they shouldn't be provided until and unless there is matching revenue increases or cost reductions to match if i want to go and work four days a week and get bring in less money that's fine but i can't keep spending what i was spending or i'm going to find something else to do that other day to make the money back now i might be sending the the kids out down the salt mine it might be cancelling my you know um my new brand new car lease on my brand new mercedes which i don't have because i would never have a car lease but let's let's just have the fun of it um you know you choose you can raise money elsewhere you can catch your spending elsewhere you can't simply say i've decided to work for you know four days out of five and keep spending what i'm spending that is just grossly irresponsible so that's that's my issue well you you can you can yes true you shouldn't you there will be consequences yeah and that's it that's it right so by the way some people say at least when i was bad as everybody else and you've talked about us debt before and i'm kind of like well yeah but being the least sick bloke in the hospital isn't the objective you know it's like well at least i've only lost one arm he's lost two it's like okay but you know can you be happy you're not at least as bad as that bloke sure but part of you but part of you'd rather both arms right so yeah so there's that um so yeah i think and by the way for all of my objections to stage three the fact it was changed has nothing to do with why i objected to it nothing to do with the politics as we've just said so even those who will take a victory lap today this week and say oh they changed stage three i was right i got it they didn't change it because of policy they didn't change it because you were persuasive they didn't change it because they'd realize the error of their ways and you were intellectually more more correct or or more persuasive they looked at the numbers went if we don't do this we're going to be voted out so so let's be really honest now we'll take the outcome right if you think if you agree with me and people may not, that this is fairer than how you get there is still worth getting to.

14:08However, let's be real. It was not a win by civil society who managed to convince the government they should change their approach, right? This is pure self-interest, dressed up as anything else you want it to. And there'll be Labor supporters out there who will dress it up as much as they possibly can. There'll be those who argued for it, who said, oh, look, I'm right, I did this. No, no, no. This is just pure self-interest up front. They're only lucky, frankly, they had stage two to do it with because if there's no stage three tax cuts and people were still doing it tough right now they have to find some money somewhere else to make these people happy so they get the vote so at one level at least the broken promise is the least worst outcome for the government because they get to say it's revenue neutral it was always going to be given away anyway we're just giving it to different people which is about the the least defensible argument you can make so uh can i just add one one thing to it there and and you you're right in everything you say well in my opinion obviously yeah um but but the the one thing i would challenge is is um in are you better off yeah so yeah you know nominally you're better off so i just looked up the table so let's just pick a number 180 if you're on 180 000 you were paying 51 000 you will now pay 45 000 under the sort of current stage so you're about six grand better off so after tax your take-home pay is about 4.6, 4.7 % higher.

15:27Yeah. So you are better off, right? But if the inflationary impulse is equal or greater than that, you are worse. So again, we've got to talk in terms of these are all – the numbers are kind of arbitrary. What really matters is how much effort do I have to put in per unit of consumption. Yeah. And if – as I say, maybe not, but, you know, All else speaking, being equal, if that inflationary impulse is of that magnitude, you're actually not better off. You feel better off because the number is higher. But, you know, it's just like, you know, earning 100 grand in 1985 was an incredible salary. That's right.

16:07Exactly. Yeah. Yeah. Do you know? And it's just like, yeah, I don't know. I just want to make that point. And that's what's so counterproductive about this whole affair, to my mind. Now, to be fair, if there was no tax cuts at all, you'd be 4 % worse off. So at one level, it's still better than it would otherwise be. I do want to touch on the inflation. But if it didn't push inflation around. Right, exactly. So you've got to, I mean, and we don't know what the inflationary impulse will be, but it's more the real income that matters rather than the nominal income. 100%, 100%. Yes, I'm not going to get back into housing, but with the exception that debt remains the same.

16:47So depending on your circumstances, answers there are there are benefits in real and nominal in different directions that's um which we'll talk about another time no i think that's a really really good point and by the way um an anz number i saw quoted i haven't read the the report so again i can only kind of say it was reported as having said um but anz apparently believe that the 21 billion dollars worth of stimulus and by the way this the new version of stage three is exactly the same cost allegedly as the old stage three, according to the news reports we've read thus far. ANZ reckons that is the equivalent of about half a percent in rate cuts.

17:22So that's the other part of this, right? So it's like, yes, you're getting more and some of that's inflationary. And yes, at some level, you're making up for some inflation at the level you're causing some. But also too, if you're a homeowner who's paying a mortgage, again, ANZ's numbers are back of the envelope, you know, finger in the sky. So there's no absolute guarantee. But their view is it's about the equivalent of two rate cuts. so again you take stage three off and say okay now rates could be half a percent lower now what and so there are there are winners and losers right across the spectrum and this is we talk about the counterfactual a lot and this is again just a bit of a lesson here is you can say we're now here we're going to be there what's the difference and that's fair right we're going from no stage three to stage three what changes but you can also ask yourself is what would have happened if stage three hadn't come into effect so the rba won't jack rates up half a percent because of stage three so on one level so well rates are no worse see it's perfect what the counterfactual is what would have happened had the had the decision or the action not been taken is in anz's view it would have been half a cent lower so we are absolute there's an opportunity cost of this which is half a cent of interest rates for the tax cuts that have been given i i would if you're going to go through a stage three mate i would at the very least delay it i would i would delay it you know so my preference is cancel it uh my second preference is fund it and my third preference if you're going to do it at least for the love of god delay it which you're not going to do so that we are in lower inflationary times at that point it's always going to be upwardly it's always going to put upward pressure on inflation as the as the pollies like to say but upward pressure on inflation from the inflation rate of two percent versus 4.3 percent is very very different and so you know it would have made sense to say you know what we will do it if you're going to do it um in in either form the current legislative form or the new one but we'll do it in 12 months time now that's possibly passed an election if you're a politician you don't want to do that you want people to have money now because that's what politicians do so you know there's there is an element of pollyanna in my in my thoughts but the beauty beauty is we can talk in terms of policy not have to worry about the politics and you know it makes the politics jobs harder i suppose you've got to be empowered to make the changes so there is a reality to that but uh you know the politics is driving away too much of this as it was in the last one by the way um so that this is this is where we find ourselves i yeah i the changes solve one of the three issues i've got doesn't solve doesn't touch the other two makes it worse the for all of for all the changes that are made and have been made in this new period of government the best thing could probably said economically is at least they resisted the urge to spend more you know when it came to the budget surplus they took i think it was 75 percent of the increase in revenue didn't spend that uh stage three they're at least not spending more than that the early reports by the way earlier in the week were they'd keep stage three and add more for lower income earners which would have been an absolute debacle um so yeah that's where that's where we find ourselves yep it's so depressing it really is and i don't even necessarily know what you'd change to make a difference i mean well everything and that's what your point about tax is really real mate like you know i gotta say if it was made this a bit of a tangent if it was me i'd get rid of 95 of tax deductions outright and then you could actually lower oh my gosh i love i love my tax deductions right so that but that that's where all my heartache's coming from at the moment it's trying to work it all out it's like why don't we just all agree that if you work at home you can deduct this yep you know or whatever just just give like so it's just an outright application of a set figure where i you know do you know i do i'm sure if i would i would just say no deductions here's two percent off your income tax rate i just i think because because that's what we're doing right you get claimed a little bit more than me I get to claim a little bit more than you as deductions.

20:54Or we could both just pay, I don't know, two percentage points less than be done with it. No tax return, or a one-page tax return. The ATO's got most of the information. Anyway, you just press the button and say, yes, that's correct. You're not paying 30 cents in the dollar, you're paying 28, or you're not paying 45, you're paying 43. And as a result, deductions go away. It's just, you know. And it comes to me, like, you know, because politicians, economists, they love to talk about productivity for good reason, right? Productivity is real. You know, I want more bang for my buck, right? That is a really important thing for us to focus on if we want, you know, improving living standards over time.

21:28But it's like, here's an easy way to improve productivity. If I'm spending less, like small business is the backbone of the economy, is the biggest employer by far. And we're making all of these brickies and painters and hairdressers and, you know, corner stores doing all of this nightmarish like admin where it's like, just take that away. And they can spend more time doing the thing that they're there to do. Like it's such an easy thing. I remember I've mentioned this on the pod before too. We interviewed the CEO of a big accounting listed firm. Right. And he basically said, I mean, it was not a secret.

22:03It's just like, look, the tax system is diabolically complex and it is fantastic for us. And by the way, and you go, well, what if they change that? He laughed. It will never change. If anything, it will get more convoluted and complicated over time. You know, so I think there are... And not because it needs to, by the way, but because politicians will politic. There is nothing, just to really underline that, there's nothing inherent in the economy that says, oh, well, in the 20th century, tax needs to be more complex and in the 21st century needs to be more complex again. It just was because politicians decided they'd give a tax break here and a boondoggle here and a payout here and a subsidy here because they felt like they wanted to.

22:41It's a death by a thousand cuts kind of thing. They're all like little incremental changes that in isolation might not be entirely wrong. It's like, well, actually, this is something that we should change. Yeah, let's change that. Okay, what about this over here? Okay. And then, you know, this Frankensteinian thing just evolves over time before you just think, whoa, this is so complex. And, you know, anyway, it's what do you do about it? I don't know. I think what you do about it is what we're trying to do about it and what everyone can do about it. Just have the conversation. I think a more informed, objectively informed populace is going to vote more appropriately.

23:20And obviously, I think human nature is never going to change. We're always, and that is, you know, that is a daydream to think that all of a sudden humans are going to be far more altruistic. So that is never going to happen. But I think if you have a more informed conversation, you can make the case that, again, while you may be nominally better here, are you, you specifically, better off in the long term? Yes, that's right. Under these settings? That's right. You know, well, your pay might go up, but your living expenses might go up more. You know, so make those kinds of things. Or, you know, okay, we can get rid of this, but then don't say goodbye to this government service that you receive.

24:11Correct. So we have this wonderful ability to shake our fists at the sky because the healthcare system is falling apart, and yet we don't want to pay for it or make any reforms that will sort of help that kind of stuff. i know there's there's there's something the the books have to balance at some point you know things have to be paid for in some way and and i just it's that that's what you do about it i think is you talk about it you have the discussions and and you try and frame it in a way that sure it might be sort of focused individually on you but but are you better off longer term yeah are your children better off longer term that's that's the that's perhaps the only thing you can do I think that's right.

24:51I think also I think about you in the broader sense. I don't necessarily mean the community, though I do mean the community separately. But if you're looking at yourself, I understand not just how much you get in the pay packet, but how is the community, the society, the economy in which you want to live, work and invest impacted by this? Because if you're a business, you need customers. If customers have got the money, guess what? They're not spending. If there's an increase in crime, if there's an increase in social unrest, if there's all these things can happen. I think we know from history that the broader, the greater the inequality, the greater the social unrest.

25:20and frankly, the more exposed and fragile an economy and a country is to being rent a thunder. And so you can't just be careful what you wish for kind of things. I'm not an absolute equality guy. I think capitalism incentives are really important, but greater inequality is very, very, very rarely linked with better outcomes. Yep. You know. You want equality of opportunity. That's the way I come down at that. I want, no matter what your circumstances, that you have the ability to rise to the top of the pile. that's that's the equality i want i mean i mean i would love perfect equality but again you need to be realistic people have you know people are just different and and and some people will have a capacity to be better at certain things than others and and it's kind of how it needs to be if you deeply deeply sort of think about it um so yeah that's that's probably the way i'd frame it yeah i like that mate that sounds that sounds pretty good hey um a couple of big changes in the fund world reported this week too and i think this is interesting for our for our listeners who are thinking about the structure of the markets and the economy on one level not particularly important at a structural level far more important i think for an individual an individual investor um these are the first area we don't play much at all though we've talked about a lot second is very different but again worthwhile so two headlines this week i saw mate one is that ETFs have now become larger than managed funds for the first time.

26:46Now, ETFs, again, a very broad church here. Anything that's exchange traded and a fund is an ETF. So yes, it wraps up the super low cost Vanguard plain vanilla boring index fund and the hyper triple double leveraged oil, gold, China, lithium.com ETF. Because, you know, not all ETFs are passive, they're not a low cost. But the broad idea of ETFs have really, I mean, we know they've taken off They've been growing for years. Numbers this week apparently suggest that ETFs are now greater in size than the funds management industry, the non-traded funds, which I think was, again, inevitable, probably, certainly though remarkable in the event and the fact we're here, we're here.

27:23The other thing, mate, is the I was reporting today, again, we're reporting this on Wednesday, recording this on Wednesday, so it's worth saying as well. But industry funds are continuing to really drive hard and they are getting the vast, vast, vast bulk of fund inflows. It's one of those things, an industry fund, again, think about the not-for-profit. Plenty of people give me grief because some of them are union-affiliated. I don't know why you would care about that more than actually having money in retirement, but some people do, and that's fine. But it is remarkable, remarkable growth. Here's some numbers, mate.

27:55Australian super, the net assets grew by$41 billion in the year to June 2023. ART, which is the Australian Retirement Trust, up by$40 million. $40 billion, I should say. Mercer was the third interesting, up$38 billion. But it's just remarkable. Apparently, Australian super got 37 % of total fund inflows during - Wow. Isn't that amazing? I kind of read that twice to make sure. For existing new members, which is remarkable. I'm sure they've taken that scale advantage and passed that on with some lower fees. Well, the thing is, Australian, that's why I like industry funds, because they're not for profit, right?

28:35So, yeah, they could probably gold plate it. They could probably employ some more people or have a nice brand of caviar at lunch. Suffice it to say, they're going to give the money back, which is why I quite like it. Oh, it's better than for-profit, for sure. Well, that's the thing, right? It tends to be the case. Here's the other stat, which I thought was fascinating. Conexus is the research mob, but here's the quote. Quote, 11 funds received 115 % of all industry flows, which means the rest of the industry is in net outflow, which is fascinating. The big guy's getting bigger. That was amazing.

29:14I was really, really, really surprised. He also says, quote, outflows are concentrated in the four largest retail groups. So again, those retail funds are absolutely bleeding. AMP, Insignia, Colonial First Aid, and BT are the big four. Look, no, I mean, frankly, I'm happy. I'm very happy. it tends to be the case that industry funds outperform. The fees are lower. I have nothing against for-profit. You and I invest in for-profit businesses. You own one, I work for one. No issue with profit and the profit motive at all. But if you can, as a consumer, an investor, if you can find a lower fee option because it is a not-for-profit, then you absolutely should take it.

29:52That's a healthy tension to have. And at the moment, at least, as I said, ETFs outpacing managed funds. And at the same time, industry funds beating retail to the punch when it comes to super. So some pretty significant changes, I think. Yeah. I mean, what's there to say there? I feel as though ETFs, a lot of great things about ETFs. The bigger picture may be that it's sort of like the appeal here is that you can't save in cash. You need to invest. You need to invest just to stand still. And it's sort of like that's, I do lament that in a way. It's sort of like one of the core utilities of money is no longer fit for purpose and that it doesn't store value.

30:38So there's this, we are all investors. No matter what our vocation, we have to be because otherwise you're just holding a melting ice cube, which is a little bit depressing. And I guess if that's the case, it's far better to just go the passive index approach because, you know, it's very effective. It's very easy. I don't need a master's in finance to do all of that stuff. We've talked about this before. It does change market dynamics to a degree. And I don't – sometimes I think my – I flip-flop on this. When you have got – I was speaking to someone in the industry the other day, and they were saying the number of sell-side analysts have been on a very significant decline over the decades.

31:30And ETFs is part of the reason why. A lot of the fund flows are just going straight in there. In other words, I don't need someone to sort of tell me which is the best investment now because I'm just going to index. So I don't need you. And is that a good thing or a bad thing? I tend to think it's a good thing for me personally. And again, my comments on self-interest from before are relevant here because it does lead to miss potentially, at least on the margins and maybe at least for a period, a bit of mispricing where you will get companies trading. I noticed this very much in small cap land where you look at some companies now forget about the market cap like the size and you put two companies like a company you know outside the ASX 300 and something in the top 20 and you say here's what the PE ratio is here's what the debt to equity just you just you put a bunch of metrics that are out there and they could be absolutely the same but the bigger one is going to trade at a much more significant premium why is that because there's no there's none of these passive flows going into this other one they're all going there and you think well that seems like a distortion is that a good thing or a bad thing and i'm like well it's probably a good thing because it gives me opportunities and then where i say i flip-flop is but maybe that maybe it's maybe the i'm keen on your thoughts actually maybe the error is in thinking that this distortion resolves because if it doesn't there's no outperformance potential so i'm buying something out here thinking my gosh look at compared to the average market multiple this thing is so so cheap yeah you know when the market realizes the error of its ways i'm going to make a killing except the market never realizes the error of it ways because that's just the structural nature of markets yeah the reality of it is so i'm i'm tying myself in knots here and this is where i find myself intellectually on these things what are what are your thoughts there is that is that something to lose any sleep over it's a really really good question mate i

33:35there's the old quote the market can remain irrational longer than you can remain solvent that's i love that so and the good thing about that by the way is it doesn't matter unless you're taking you're taking on debt because solvency is effectively impacted by debt right so yep uh it's a it's a lovely quote and a big warning it shouldn't be a warning for most of us necessarily now we could say the market can remain irrational forever and you may not get the value you think is there which is your point and that's less pithy but but maybe more appropriate for more people um i wouldn't i wouldn't bet on valuation gaps closing on individual companies but we also know that it tends to be true not because it has to be just because it tends to be that price follows value over time so if there is and again tends to doesn't always and doesn't always do it quickly but tends to follow value so if a business is is better than than the current price suggests over time the market is very likely to recognize that at some point that being said there are businesses that are just unpopular forever altria the u.s cigarette maker is one of them we'll talk about ethical investing in a minute in a slightly tangential way but it had a low p.e.

34:39for for 50 60 years right and yet it was one of the best performing investments you could have made over that period correct correct but but the valuation gap in quotes never closed because yes that's true right um others uh csl or commonwealth bank perennial favorites i don't remember the last time that valuation seemed reasonably supported by the fundamentals of either business and yet the the the you know investors tend to love them because they are considered quality blue businesses now on one level if you'd believe that as i did about csl for the entire my entire investing career uh i've never bought the shares we did recommend them relatively recently one of our services but hadn't for years i i was i had my backside handed to me by not not investing in the csl for years right because it always looked too expensive and frankly it always was too expensive except that the market continued to believe that that that price was worthwhile and so i continued to be you know wrong but i want to put that in quotes because i missed the opportunity now at some point you would assume in most cases those gaps close at some point someone should realize ultra is worth more than the market believes at some point someone should say hang on i'm paying 40 times for csl growing at 10 a year that doesn't work uh and yet and yet though by the way i picked numbers out of the air on both those companies but the direction is right um that that hasn't closed so that being said they are the exceptions because as i said we know over time pe's for the market tend to hover around the same sorts of multiples sometimes higher sometimes lower based on economic circumstances or history or sentiment so the market as a whole has those issues but those pe's tend to be stubbornly mean reverting in other words they tend to go back to the average over time and so i think that that proves out uh at least an experience not not a law not a not a guarantee but proves out that experience i so i don't i don't think i think it's reasonable that there's enough capital in the world to take advantage of mispricing where it exists more often than not.

36:42That's a half answer because there are no guarantees and no certainties, but that's probably my best response. Does that make sense? Yeah, it does. Something you said there, I think, made a lot of sense to me, and particularly in mentioning Altria, is that you can – I think I have never ever – well, maybe I should be careful with my language. There's always an exception to the rules. I don't think I, or I certainly try not to make investments on an expectation that the market multiple will increase. In other words, I don't want to bet on what you might unfairly call the greater fool theory. In other words, that the price will go up, not because there's any great improvement in the business, just because people are prepared to pay more per every dollar of earnings or sales or cash flow, whatever metric you want to talk about there.

37:40It's always nice when it happens, but I never want to bet on that. When it's way down low, as in the case of the cigarette companies, you do tend to hit a lower bound there. It's not set in stone. It's no rule of the universe. But, you know, it is very almost impossible that you'll see a company that is viable with where any reasonable person could see that there's still going to be profits for the foreseeable future to trade below a PE of five or so. You know, it can always go lower, but it's quite easy on an average, ordinary day to see a company on a PE of 40 go to 35. Right, exactly. Lose five points.

38:30It's less likely to see something on five go to two, for example. The magnitude difference there. Yes. And so at least when you get to those, if you get to these companies that, again, the key thing here being, you know, viable profit generating companies, especially ones that have the capacity to share that profit with shareholders in the form of dividends, as was the case with Altria, is that you don't need the market multiple expansion to do well. So that's probably the answer here is that maybe if ETF flows are causing distortions here, it doesn't matter if you're able to get a return beyond what may be generated through changes in sentiment.

39:18Does that make sense? So, for example, for those that aren't familiar with the story, Altria makes cigarettes. Cigarette usage is - Used to call Philip Morris, for those who recognize the name, Philip Morris when Altria. Yeah. I mean, and smoking rates have declined very significantly over the decades. But shareholders still did incredibly well. So, it feels like, wait a second, that's counterintuitive. How is it that that happened? Well, they'd already had huge amounts of plant and equipment. that had been invested. So you just need a little bit of maintenance. I'm not building anything new. There's no new growth CapEx.

39:56I'm just running these machines, making sure they stay oiled, occasionally replacing a part. And I'm just, I'm gushing cash. Now what these companies did extraordinarily well was they let go of their hubris and they just said, yeah, we're going out of business eventually. And so let's just run it down. And they just paid out huge amounts of, very high percentage of their net profit to shareholders. So when you look backwards and you look at the total shareholder return, and you say, well, here's all the dividends I've received over the years, plus there were buybacks and all the rest of it. The PEs were very low as people recognized the writing was on the wall, so they couldn't get much lower.