Should we neuter the AI arms race? September 25, 2026

18:09Emily Flippen:And that has always been true. And you fix one thing and you break another, and that is just how technology kind of works. And this technology actually allows us to prevent the very thing that we're worried that it... We're trying to diminish the very threat it also represents.

18:28Chris Hill:Correct.

18:28Emily Flippen:So you've got to think a little bit more deeply about these things. And I would be more just, which actually they're already doing it because the labs don't want to be sued, right? So they go, oh, crap, this is really powerful. Maybe let's just release this to government and big corporations

18:44Jason Moser:so they can harden their systems before we put it out to the public, which they've done. Not because they're necessarily nice guys, because they value their business and livelihood. Exactly.

18:53Chris Hill:You know? But also here's the other thing, mate, is someone else has that capability overseas. Yeah. And again, it's obviously easy to point to China. I hate that China's the big bad guy because they're not the only bad guys in town and choose your decade. We're blaming someone else. It was the Russians. It's been everywhere. It's been the Middle East, Africa. I mean, there's always someone to blame. But here's the other thing. If someone else is going to have that capability at some point anyway, I would like to, again, arms race outside with mutually assured destruction, I would like to know that we can call on the tools that can at least combat that, find that, resolve that, deal with that, You know, the idea that we would somehow say, well, okay, the OpenAI and the Anthropics are saying we'll do the right thing.

19:30Chris Hill:The guys over there who aren't doing it, I want OpenAI and the Anthropics to get there first and say, hey, guys, we found this. Before someone else finds it, we thought you'd like to know so you can patch it. If we're second to the party, I mean, think about Medicare being hacked by someone who's not one of these guys, who's like, guess what? We've hacked Medicare. You guys are screwed. By the way, these services were being hacked well before AI as well. Sure, sure. If you've ever used a government platform, you're not the most robust kind of thing. But my point is if it's going to happen, you want the guys who are following the rules, who are inside the tent, to get there first and let you know.

20:03Chris Hill:The idea of like, let's not let them do that. So you're not going to let them do it anyway. You have no control of them. So you're not going to stop the ones you can control. Allow the ones you can't control to do whatever the hell they want. They're not going to be the good corporate citizens because why would they? They've got nothing here. it's a nonsense to imagine that we somehow win in that scenario I just think, I understand the thinking I understand the emotional response of oh my god we should just try and stop it and again if it could be done I'd have that conversation with you it can't be done because we can't control all the people who are doing it and so just controlling the good guys, again take the powers off Superman it's like you could do that but how does the movie finish in that world I think it's a really significant mistake to believe we can do it and then to try and do it on that basis and potentially put ourselves at a massive competitive geopolitical economic defence, choose your category, disadvantage, because we decided we'd, you know, new to the guys who, I mean, imagine a world where the US, and again, this is a bit dark, but the Manhattan Project's like, oh, we probably shouldn't do that.

21:02Chris Hill:Now, I don't know how the Second World War ends. I don't know whether Nazi Germany ends up, you know, developing a nuclear weapon or Japan. I mean, but you kind of, I don't want to say they should have dropped the bomb, but I'm kind of glad we had it just, you know, if it didn't be needed. The idea of doing the diverse way around, I don't know how things end, but I'm not sure it's pretty.

21:20Jason Moser:You can't, you can't, I mean, ideas are very powerful and very sticky and they just, they live in people's heads. There's not something that you can grab and point at and get rid of, you know. You can tell someone not to think it or not to know it, but it's silly.

21:38Chris Hill:It's like. That's exactly it.

21:39Jason Moser:You know, it's just recognising the nature of the problem and having something that sort of fits a purpose that's there. You know, the other thing to remember with this kind of stuff too

21:50Emily Flippen:is like nuclear tech is interesting because at least with like bombs, you need extremely expensive and difficult to build centrifuges. You need very convoluted, tightly controlled supply chains to get, you know, the uranium and the plutonium. Totally fair. You know, it's like you need inter-ballistic missile technology, just like the bar to jump over. Like, you and me ain't doing that in our garage. No matter how smart we are. Like, we're just not doing that. And if we did, it would take us 10 years and every single red flag in the world, which we'd throw up and we'd have a hundred And the money and the time and the machinery and the, yeah.

22:25Chris Hill:We don't do it.

22:25Emily Flippen:We can't do it. We can't do it.

22:27Chris Hill:Yep, yep, yep.

22:28Emily Flippen:This tech. Okay, we think of the frontier models, the open AIs and the Googles and the Anthropics and that, but there are literally thousands of open-weight, open-source models that are out there. Are they as good? No. Are they as good as the frontier was three months ago? Yep. And they're catching up really fast. That's probably the best conspiracy theory as to why all the big guys want to be regulated. It's like, well, you want a regulatory mode is what you want. And for good reason too because a lot of money was spent on the fact that this is going to change the world, we're going to make a fortune if we own it.

23:00Emily Flippen:But that was predicated on the view that only you guys could build it. And in that world, back to your point, sure, sure, regulation is a very powerful tool. But when a very small team, literally, like, let's just get in my garage. I don't even need to get in my garage. You stay in your house, I'll stay in mine. We use this thing called the internet. We'll coordinate it. We'll hire a few VPS, a few, you know, server computers, and we'll just run some training runs. You know, like, it's not, like, I'm speaking as if I know how to do this. I don't, but I know enough to know that it's not something that you must be an extremely well-financed gigabrain

23:37Jason Moser:with a team of 20 PhDs to do. It's like, no, not even close, which just makes the point of let's not do it ridiculous. People are just going to do it whether you want them to or not, right? Correct, correct. It's like saying, let's ban the dark web. And it's like, well, a lot of bad stuff happens there. But I'm all here. Like, let me hear your plan there. You do know how the internet works. You actually do know that the whole purpose of it was originally conceived as something that couldn't be taken down. Like it was almost, not almost, it was very much designed as something that, as a communications network in the event of nuclear war.

24:15You know, it's like, it can't be shut down. You're just sending ones and zeros. It's like, once you understand and grok the nature of the thing itself, a lot of these sort of we shoulds,

24:26Jason Moser:just laughable, like not like, well, I'm not convinced that maybe they could be a way. It's like, no, it's laughable. It's nonsensical. It doesn't make any sense. and yet that is the depth of the conversation that we seem to be having. Agreed, agreed.

24:44Chris Hill:Mate, let's go to something, well, I'm not sure you're better, at least less dystopian maybe. Warren Buffett, the Oracle of Omaha, the Sage of Omaha, Uncle Warren as we like to call him reverentially, another step away from Berkshire this week. He announced, I think it was Monday from memory, He has resigned as chairman of Berkshire Hathaway to be replaced by his son, Howard. Buffett remains a director and chairman emeritus, which is always a lovely title. I want to be well-known enough and old enough, mate, to be something emeritus. It may just be podcaster emeritus, I'm not sure, but I'll take it if it's being offered.

25:20Chris Hill:It's kind of, I mean, look, I mean, the guy's 96. So a surprise? No. Unexpected? No. Always going to happen? Yes. I mean, you know, I still like to pretend he's immortal because that just suits me, but apparently he's not. Greg Abel took over as CEO, what, a year and a half? I don't know if that was last year. I thought it was just last year. Yeah, last year. And then Howard Buffett taking over as chair. It does really feel like that changing of the guard is almost complete. Warren Buffett saying, yeah, father time is undefeated. It just, it's hard to read between the lines, but I suspect he's got to a point where I think probably two things.

25:58It's not hard to read between the lines. He's 96, man. He's like, you know.

26:02Chris Hill:But I suspect I agree between the lines a bit. I have trouble getting out of bed. He's nearly double my age, right? I'm in the process, though. I suspect Greg Abel was given the CEO's job. He stays as chairman, then he resigns as chairman. It feels like if the time he wasn't predetermined, it was obviously going to happen because it makes sense, right? You don't resign as chairman and CEO at the same time. I've been thinking about this since the time was 63, you know. Of course they have. Speaking of that, poor Howard Buffett. He's 71. Talk about an apprenticeship, right? You've been at the board of directors for I think it's 30 years and you kind of, I'm sure he loves his old man, but you're kind of waiting and thinking, when's it my turn, Dad?

26:35Chris Hill:It's like I'm 71, I'm six or four years past Australian retirement age and I'm finally getting the chance to chair the company and you're still a director anyway, so you're still, the shadow looms large. I like the way that, go on.

26:48Emily Flippen:Well, I don't know what I think about that. Is there a nepotistic dimension to it? Yes, totally. I don't know. I mean, on one hand, on the other hand. On one hand, he's had an extremely long apprenticeship. He's been there four decades. He has been there by the side of Warren as he's made all the big decisions. He's probably very, very, very qualified and very well tested at this point. So probably is a great choice for it. On the other hand, he's the son. And I actually don't have a view, but there's a part of, I'm just nepotism in general I'm not a fan of. but sometimes, you know, sometimes like maybe the son or the daughter are the best candidates.

27:33Emily Flippen:So what do you think?

27:34Chris Hill:You know what's funny? It's a great topic to talk about the role of boards in general, I reckon. I'll read what Buffett wrote because this is his thinking and I think it tells us a bit more about what's going on and why. So the quote is, quote, Howard has been a Berkshire director for 33 years. That is a longer apprenticeship than I served before taking the reins at the age of 34. Greg, this is Greg Abel, runs the company. Howard will guard its culture and values, both worth more than anything on our balance sheet. Think of Howard as a policy the shareholders own and hope never to claim against.

28:10Chris Hill:Howard cares deeply about Berkshire, as do all of our directors. No company has been or will be more shareholder-minded than Berkshire, end quote. And I think that's... Because I think the answer to your question, I think you're right, mate. But the answer to your question is what do you want a board to do? And it's not a rhetorical question. It's not a question to answer. It's just more I suspect in this, and particularly in the US, where CEOs are often chair and CEO, it's a really common thing. And CEOs have incredible – if you ever read – I know you have Barbarians at the Gate. Yeah. The power – the CEOs effectively choose their directors.

28:47Chris Hill:They choose their chair. So the CEO is very – in Australia the directors very much are the power, with a couple of exceptions where CEOs have large shareholdings or are particularly well regarded or, you know, in some certain circumstances. But for the most part, the CEO serves at the pleasure of the board. In the US, it's almost the other way around. And so that's the kind of cultural context. I know you know that just for our listeners. But what I thought was interesting about Buffeting is like, hey, Greg's going to run the company. Howard's job is basically to sack Greg if he sucks. And that was kind of, you know, the culture and values, and that's what he says about how it is a policy that shareholders own and hope never to claim against.

29:24Chris Hill:It's in US kind of company administration, it's the ripcord, it's the trapdoor. It's the person who's going to say, right, Greg, you do whatever you want, but if you step out of line, far enough, we'll fire you. And that kind of feels like all the boards, for the most part, tend to do. So I don't know. I don't have a strong view. I'm a shareholder. I'm not happy with it. Greg Abel's been there for years as well. I think, you know, the culture of Berkshire runs deep. The directors have been there forever. I think it's a don't scare the horses appointment, frankly. Is it nepotism as in Buffett thinks that Howard's the only best person for the job?

30:01Chris Hill:Maybe. Maybe he does think he's the best person for it. But I think the why is important. And the why is, Buffett has said for years, we're building a business with a culture that will outlast me. And I think to the extent he sees Howard as the most likely to not be the best decision-maker or the best investor or anything else, just the person who's most likely to be able to, because of that family history and duration as a director and a shareholder, most likely to see it through the way it was designed.

30:30Emily Flippen:Yeah. Yeah, no, I think that makes sense. I don't really have a great issue with it really, but it's just... That's a good question.

30:39Chris Hill:Yeah. Here's the other thing, though. Who else would... Well, I should tell you, by the way, just quickly, And only because it's worth it for our listeners. I'll read very quickly Buffett's, just an abridged bio from the release from the company. This is Howard. He served as United Nations Goodwill Ambassador Against Hunger for the World Food Program for nearly a decade. He's been the director of numerous public and private company boards, including Agrotech, Archer Daniels Midland, Conagra Foods, the Coca-Cola Company, Coca-Cola Enterprises, First Tier Financial and Lindsay Corporation, including as chairman of the board.

31:10Chris Hill:Okay. So he certainly had experience. Now, did he get those jobs because he's Warren Buffett's son? Probably at least in some cases, sure. And so at some point, you know, is it only less nepotistic to say, well, it turns out he got all these jobs because of me, now he gets this job because of me? Probably not, but he's not not experienced. By the way, here's just a random and a bit of a left field one. He's donated more than a billion dollars to Ukraine as part of the Howard Buffett Foundation. A whole lot of food relief and other stuff, which I didn't know, hadn't been paying attention. So that was kind of cool as it goes.

31:40Chris Hill:But, yeah, I don't know what view I have. I tend to trust Warren Buffett to make the right decisions in the first place, I suppose. I do think the culture is something different. And you and I have talked a lot about professional management versus founder CEOs, and I suspect the same is true of boards. The last thing you'd want is someone from, you know, Corporate America Central Casting to come in as new director and, you know, the things that make Berkshire special, the benign negligence and the incredible amount of, what's the word, when you kind of give power more broadly. There's no decentralisation of power effectively.

32:17Chris Hill:Managers get their own decisions other than excess capital comes back to headquarters. I think the organisation as it is, you would want someone who was very deeply rooted in that. Whether another director, another long-serving director, would have been better as chair, that's probably an open question. I will say too, just quickly because it's fun, I can't remember who it is. I want to say it's Susan Decker, but I could be making that up. there is a separate lead director because Howard Buffett is not considered to be independent, nor was Warren, by the way. There is a lead director. Yeah, Susan Decker will continue to serve as lead independent director.

32:45Chris Hill:So there is something of a, again, I don't imagine she has a whole lot of power in the context of when Howard says, Dad would want this and all the showers go, yeah, we agree. The cult of personality will outlive Warren Buffett, I'm sure.

33:01Emily Flippen:Speaking of charity, I mean, this is worth a mention as well. It's sort of noteworthy. So far, Buffett's donated$70 billion US to charity. It's$100 billion Aussie. Right. And 99.5 % of his estate goes to charity. I think the one Howard manages, actually, upon his passing.

33:20Chris Hill:All of his kids' foundations, I'm pretty sure, are split between because Peter, Susan, Junior and Howard, and I think they get roughly a third each from memory. Okay, yep.

33:28Emily Flippen:But yes, same thing. Just phenomenal. Yeah, yeah. The other factoid I've always liked about Buffett, there's a few, but one of them is that he was rejected by Harvard Business School after a 10-minute interview. That's crazy. And he says it's the luckiest break of his life. And the reason was is because that pushed him to Columbia. That's where he met Benjamin Graham, which is, I'm sure everyone listening knows. He's talking about sliding doors. Yeah, you know, and it's just sort of like there is, had that interview gone a different way, would we, I mean, he probably would have been an extremely successful investor.

34:03Emily Flippen:I don't know how consequential it was, but, yeah, sliding doors, right? It's so amazing. Yeah, yeah. Also, what's Buffett's worst investment?

34:17Chris Hill:Is this a trick question? Well, in his own words, this is the... Justin Boots went broke. Right. So he bought a boot come and it went broke. That's what I would say.

34:26Emily Flippen:Well, he frames it differently himself. When I asked that question, he said, Berkshire Hathaway is the worst investment he ever made. Yeah, that's a good point. Because he bought, not what it is now, obviously, but it was just a failing textile mill. And he bought it out of spite because he had a disagreement with the owners. It was like, it's a very emotional purchase. And I love this. I love the way he framed it. It said, it cost me over$200 billion. Now, this is in 19, diggity-doo or whatever. So it was like - 65 or 63 or something like that. It obviously didn't cost that much. But it cost that much.

34:56Emily Flippen:He frames that in terms of the opportunity cost. You know, if I had just set up my own company and used that as the conglomerate holding company for everything I was going to do, I probably would have$200 billion extra today. You know, it's just like, I just love that, right? So crazy. It's actually one of the things I like most about the guy. He's just so humble and so quick to admit to mistakes. It's very rare, particularly if you're male, which all our female listeners go, oh, really?

35:30Chris Hill:Is that so? Yeah. I'm not something to ask for directions. I'm fine. That's right.

35:38Jason Moser:But it is a very male-dominated industry in investing and it's just such a rare thing. And it's not, I don't call it out because, oh, it's such a noble and nice thing, which it is. I call it out because it's actually, to me, it's absolutely core to anyone's ability to be successful. Without that humility, you're in a lot of trouble.

35:59Chris Hill:Yeah, I agree, mate. I mean, look, there will never be another Warren Buffett. We will long tell stories of him. Much past times our kids stopped caring. I mean, when you get old, you've always got to keep, you've got to be careful of the nostalgia and the rose-coloured glasses, right, because it's a real thing. but it's hard not to think about the circumstances that breed to Warren Buffett. Literally from the Midwest, farming stock. I mean, you don't want to over-romanticise it but the next great investor is probably going to come through one of the glass office buildings in some capital city with all the things that come with that.

36:41Chris Hill:Even some of the better and more widely quoted executives these days are kind of from central casting. And I don't know, mate. I just don't, I don't, it's too easy to say we'll never see his luck again, but it makes you wonder. Again, not even for the investing returns per se, but the way he went about it, the humility, as you say. I don't know. I don't think we get another one.

37:07Emily Flippen:I, who knows? Probably not, right? I do suspect, I got nothing to back this up, But I suspect that there is lots of little mini Buffetts around the world. Probably right.

37:19Jason Moser:I mean, you probably know a few. You know, it's the person who's never written about in the AFR. They're not managing a billion dollars, but they've been managing their portfolio for the last 25, 30 years. Absolutely crushing it, right? You know, and largely taking, at least in flavour, the lessons from Buffett in that sense of, you know, I'm not trying to meet quarterly targets here.

37:47Emily Flippen:I'm just trying to invest in things that I understand within my circle of competence. I'm just quietly compounding away, working to the beat of my own drum. I think there's, I think, when I say a lot, I mean, they're obviously in the minority here, but, like, globally, there'd be thousands of people like that.

38:04Jason Moser:I've met a few and it's just very humble people just like, what do you do? I invest. How long have you been there for 30 years? You know, and you kind of put two and two together. It's like, gosh, you must be doing all right. I don't want to dox anyone or mention names, but they're just sort of like, and it's the kind of person. Yes, exactly. The kind of person who doesn't. I mean, it's just that I think that for me is very, very inspirational because too often I think,

38:31Emily Flippen:particularly when you're young, you feel as though, oh, this game is about getting an MBA, about wearing a suit, about going into the city, about doing this, about understanding. And it's just like, actually, no, no, that's not true at all. I mean, by the way, if that's your fancy, then go fulfil your dream.

38:48Jason Moser:But it's an archetype that's not necessarily or relevant and it doesn't have to be the path. and the more, for me, the more inspirational path is the one that doesn't get talked about. And there are so many people that just sort of have taken these ideals and there's too much institutional friction, I think, these days for that to happen. Like you would have to have a very strong, dominant founder, controlling state kind of personality to do that in the public sphere. But in the private sphere, in your own little sphere, it's like, screw you, I can do whatever I like, I'm doing it this way, right?

39:27I don't have a board that I have to report to that makes sure

39:31Jason Moser:that we check this box and we do some whatever, you know, nonsense. It's sort of that to me is sort of like where I would like to, I guess I take inspiration and certainly sort of convey that to others that are listening here is that there is something to be said for the quiet humility of just doing it for the love of the game and its own reward. Yeah. Not about the recognition, not about having the biggest stack that's out there, you know. It's just about leaning into a difficult, challenging, but very rewarding kind of endeavour and succeeding. And it's a field where you can always succeed more.

40:12Jason Moser:Like it's purely about number go up, but succeeding in the sense that it's sort of like doing far better than what you would through a managed fund or something like that, which, let's face it, it's not that hard to do. Anyway, I don't know what my point is. It's just it's the unsung heroes that there's plenty of them that are out there that I think Buffett has spawned a lot of that.

40:34Chris Hill:I think that's right. I guess I just mean more Buffett in the whole. There'll be investors who do well, but the investor who is Buffett in all of the Buffett ways, the teacher, the statesman, the kindly uncle, for as much as we laugh about it, But the idea of who is the, you know, you and I learned from Ben Graham effectively via Buffett, right? That's kind of how we get there. And Buffett moved on from Graham. But all I mean is there's that linkage back. And you kind of think as Buffett recedes into the background at some point, he's still with us, by the way. Let's not eulogise him too quickly.

41:06Chris Hill:We'll do that at some point when it's necessary. But I don't know who has that public role or quasi-public role. Maybe you don't need it, but you probably do. I mean, if I think about, you're right about those who've done well because of Buffett, but who does well without Buffett? You know, I draw a lot of my investing lessons, actions, whatever, from Buffett's own, you know, teachings and story and way of doing it. And yes, we can always look at the historical record, but as much as we're not going back to the, you know, the also-run investors pre-Buffett, I'm sure there were plenty and maybe someone does rise to prominence because of the vacuum left by Buffett when he eventually goes.

41:46Chris Hill:But I just wonder about not just the investing returns but the teacher, the lessons, the style, the approach, and the track record that proves it all out. That's the other thing, right? Buffett could have said exactly what he said over the last 60 years and no one pays attention to him if he's got$400 ,000 in a super account in suburban Omaha where he was a farmer, right? So it's just that combination. I wonder where we'll get that combination of humility and success and willingness to teach in the public domain in the same way. That's the kind of combination I think we'll struggle to repeat, I suspect.

42:18Emily Flippen:Oh, 100%, 100%. And I don't disagree at all. It is that figure is a very inspiring one that maybe no one emulates perfectly but strives towards, I think, you know, particularly on the outside. to have that success and to not even be so ostentatious about it. He doesn't have a power yacht. He lives in the same house he's lived in for 60 years, you know. Exactly. He's giving it all away, you know. It's just like what a force for good for the world and society, you know. Literally saved the US economy in 2009. Yes, I know, right. Or made it less worse than what it otherwise would have. Like it just, there is something to be said.

42:56Emily Flippen:I actually wrote an article last week. I think it's probably on the blog now. for anyone who's listening about how Buffett obviously is very,

43:08Jason Moser:well, actually it wasn't about Buffett, but I referenced in the piece that it's sort of like he was sort of the thing that his thinking was what attracted me or made me more interested in investing and the thing I tried to emulate. But I'm honest, I look at my style today, it's like it's a million miles away from Buffett.

43:26Chris Hill:Oh, totally. It's not the copying, it's the learning. Yes. I think that's it.

43:33Jason Moser:And it's also, too, it's a degree of specificity you want to get to here. Like in terms of all the big ideas, I'm on the same page and I try and do the same thing, right? Yes, I like to have good companies at a sensible price, you know. Yes, I like to be greedy when others have. All of that stuff. Compared to advantages.

43:49Chris Hill:Yeah.

43:50Jason Moser:Modes, you know, all of that stuff. So I don't want to suggest that Buffett doesn't know what he's talking about. I've found a completely better way. It's like, absolutely not. My point is that it's a very foundational kind of stuff. But what matters more is not trying to be like Buffett, because to your point, there really is only kind of one. But it's sort of, I think the more important point is for investors is you've really got to find your own path. It's not that you'll find a path that is better than Buffett per se, but you'll find a path that is better for you. We all have different temperaments.

44:24Jason Moser:We all have different situations. We all have different risk tolerances. So you can say I invest like Buffett, but you don't because you're not him and you're a different personality. I'm not saying it's in a critical way. It's like everyone's different, right? And I feel as though that's his, it's that sort of inspiration and laying the groundwork of the big sort of philosophical underpinnings of this whole endeavour that are super valuable. but from there you sort of take that and you fold that into something that you feel works for you. I'm just honest in how I am as a human being, the kind of temperament I have, the unique situation I find myself in, these are the things that I sort of lean more into than others.

45:06Jason Moser:But it's a process of self sort of discovery. And what I find interesting, it's actually true for really big famous investors because they all quote him as well.

45:18Emily Flippen:Did you read Howard Marks' latest missive? He had one out this week. No, I haven't read that yet. Yeah, and he quotes Buffett in it as well. He's trying to explain things and he's like, actually, Buffett. And this is like, this is one of the best investors of all time

45:30Jason Moser:in my humble opinion, Howard Marks. And yet, like, they invest differently to him. But they acknowledge sort of like the North Star he provided, I suppose, and that underlying wisdom in terms of not specifically how to think, but sort of like a framework to think within. Am I making any sense? I don't... Probably not. You absolutely are, mate. You absolutely are. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

46:06Chris Hill:I'm going to move over now because I think it's useful. It's a lovely segue to what we're going to talk about anyway, which is actually Solpets. And you and I have been in Omaha, Nebraska, at the Berkshire Hathaway annual meeting in the past, as has Robert Milner. This guy is a billionaire. If anyone's got the right to say, I'm good, thanks, Warren. You're great, but I'm doing pretty well myself. I'm good, I'll do this. And no, they go to the Berkshire meeting and they go and line up and they go and sit in the seats in the general stands next to the person with one chair, you know, a billionaire and his family and mates are there, just sitting in the chairs beside them.

46:42Chris Hill:doing their thing, right, because Buffett is worth learning from. And Solpats, I own shares in both Solpats and Berkshire, as everyone knows. It's not Berkshire. It's a kind of diversified englomerate, so it's not miles away. But it's different in really important ways. The key, though, is that, to your point, you know, the Howard Marks quotes Buffett, the Robert Miller flies to Omaha and Nebraska with his billion-dollar wealth and goes, I'm going to spend a couple of days. Now, yes, this is networking. Yes, there's other reasons to be there. But he goes to the meeting and he sits at the meeting for six hours and he listens to Buffett share his wisdom and he takes it all in.

47:13Chris Hill:I just think there is, speaking of humility, I mean, you know, Rob's got his own, he's a lovely bloke. You and I have met him a few times. He's got strong opinions on different things, but the humility of saying I'm going to go and sit there because I think I've got something to learn when you're already a bit. I mean, count the zeros, right? Rob Miller couldn't spend all of his wealth. What's he doing? He's there because he thinks I might actually learn a few things, meet a few people. This might be worth my time and effort to come away from home, away from running the business and go and make a difference.

47:39Chris Hill:I think that's really, really impressive and speaks a lot to Rob Miller and the family. Tom was there with us and a couple of the team, Tom Miller, Robert's son. So, yeah, just kind of – by the way, I feel like I'm name-dropping. I don't mean to be. I'm trying to give, you know, a little bit of credit here. So he's done the thing. He went and, you know, spent the time where he didn't have to be. But that's a nice segue, mate, because I read only Thursday morning a report out in Livewire quoting Todd Barlow, who's the CEO of Solpats. Rob's now the executive chair. Yeah, Todd Barlow's head honcho there.

48:10Chris Hill:Not miles away from the Buffett-Greg Abel approach, by the way, speaking of which, and maybe Rob's going to at some point disappoint us and leave as well, although I hope he is as similarly as immortal as Warren Buffett, I hope is. But the big statement today, mate, they are 20 % in cash. Yeah. That's$3 billion for those playing along. Right, if you don't mind. Yeah. You know what? So this is me basking reflected glory, by the way. Last week we talked about the idea of the risk-free rate and we talked about all that sort of stuff and what it's worth and what the hurdle rate you need to get. And I read this in Todd Barlow saying similar things like, oh, we're like Todd, we're kind of like soulpats, which is me just, you know, fawning and trying to bask in some tiny bit of reflected glory.

48:52Chris Hill:But it was more just an illustration of what we were talking about, which is Todd Barlow kind of just said we're getting a few, I think 120 basis points, so 1.2%, I think he said, above the cash rate for our money. and he said we're effectively getting equity rates and we're not going for the ride. And so it was just a really nice summary of if you listened last week, this is what we talked about. Again, I'm trying to claim some sort of credit by association here. But it was exactly what we talked about. And it was just a nice kind of to be able to say, yeah, that's the example of what we're saying, which is sole pads.

49:22Chris Hill:And they're not holding cash strategically. Barlow's just like, well, we're getting these returns and if we're going to invest the cash, we're going to invest it when we think we can get better returns. I'm not trying to time.

49:33Emily Flippen:just until we see something in front of us that makes sense.

49:37Chris Hill:And most importantly, because the cash rate is as high as it is, because you can get more than that by investing your money in cash, and he doesn't talk, I don't think, specifically about what instruments he's using. I suspect some combination of it's bonds or it's something else. I don't know what they're using. But the idea of being in cash... If it was bonds, their mark-to-market returns would be very negative. There you go. Maybe short-term bonds. Either way, the idea is they're getting enough. to say, well, when we get a better option. They're treating cash as an investment category. We've got 20 % over here in this category, in this return.

50:11Chris Hill:And when a better idea comes along, we sell and, you know, sell cash, but, you know, effectively sell your cash and buy something with it, whether it's... They're now in private equity, private capital, shares. The other thing that was interesting, mate, from the report, and this is me, again, I'm a SOPAT fan, as you know, they are massively into private credit. And with all the kind of baffle stuff, the New South Wales developer went broke. You kind of go, oh. oh, and Barlow said, yeah, we've got a stupid amount of money in private credit. He said, not a single dollar of it is in residential construction.

50:39Chris Hill:And it's like, you know when oils ain't oils, the old Castrol ad, right? It's like, it's all private credit, but it's not all private credit, right? If you are sensible and smart and you make the right decisions. And this is, let's go back to culture in Berkshire, mate. I thought this was, so we'll do the cash thing, we'll do the private credit thing, I'll get you to jump in in a minute, but while I'm on a roll, what I thought was just really interesting about it was they see an opportunity in private credit but they're not playing the game because everyone else is playing the game. And they're not investing in residential construction because it's there and everyone should have some residential construction in their portfolio or because...

51:10No bucket-filling mandate, they've called it before. Right, exactly.

51:13Chris Hill:There's no... Invest in it if it makes sense. And obviously, and I don't know what they saw or didn't see, but they looked at that and went, the returns aren't good enough for us in that space, adjusted for the risk we're taking. We're not going to invest our private credit fund or private capital in residential construction. We don't see the value. We'll go and invest it somewhere else. We'll do other things with the money. By the way, in the last four or five years, they've got a 14 % or 15 % return from their private credit portfolio, which is also pretty impressive. But they're only swinging at the pictures that make sense.

51:45Chris Hill:And the reason I raised that in the context of the cash was the same thing. They've got a private credit. And here's the other thing. They haven't got a private credit fund in the sense that they've got a certain amount of money to invest. They can take money from private credit and put it in private equity. They take it out of private equity and put it in cash. They take it out of cash and buy shares. They can sell shares and put it into private credit. There is no mandate where they have to say this much gets invested here, so what do we do with it? Or in stock parlance, I'm the resources analyst, so I have to find a resources company to recommend, or I'm the retail analyst, so I have to find a retail company to recommend.

52:10Chris Hill:They've just got money. It's like we've got this much money and we're going to invest it somewhere, $16 billion. Where do you want to put it? I don't know. Where's the best idea? Let's up the private credit, decrease the cash, let's increase the private equity, decrease the share portfolio. They are literally just deploying money where it makes sense. Well, that's shouldn't we all?

52:27Emily Flippen:Right. I've always railed against this stupid idea. I mean, there's so many mainstreams established truisms, quote, unquote, that it's just like you just do this. This is, you know, like the 60-40 portfolio or you've got to have exposure to this or that. It is a nonsense. You have finite capital. You have a gazillion opportunities globally. Place your bets.

52:50Jason Moser:They're not your children. You don't have to love them all the same, you know. You can play favourites. you should play favourites. You know, you can be hyper, hyper fussy and hyper, hyper selective. And why on earth wouldn't you be? The number of big swing and idiot, I won't say it, but, you know, masters of the universe. Well, we always try and allocate 4 % to commodities. And it's like as if what? Well, what you did was you back-tested something over a narrow range. It spat out this and you're just doing it under the, you know, illusion of being sophisticated. I mean, I love, I just, what you say with what they're doing is like, yeah, of course it makes sense, but it's kind of worth talking about because it is so unusual.

53:32Like, it's like not many people do that. We have a mandate, so we're going to do it.

53:37Jason Moser:It's just sort of like, okay, but, you know, like it's just a made up thing. You can change. I mean, I don't know. It just, so the other thing to mention with Soulpads is a big part of it is they sold their industrial property portfolio to Goodman.

53:51Chris Hill:Yes.

53:51Jason Moser:So that's given a big influx of cash. So there's a timing element too in terms of we just sold a bunch of stuff, a bunch of cash came in. That's why we've got, that's part of the reason we've got 20%.

54:01Chris Hill:Yeah, yeah, yeah.

54:02Emily Flippen:That's true. Another thing there. He did make a recent podcast I saw him on. He did make mention of elevated equity valuation. So echoing Buffett there a bit actually. Again, not timing.

54:15Jason Moser:People always misunderstand. Oh, they think the market's going to crash. No, you idiots. No. How many times do they have to say it? No. It's just we look around and there's nothing that's compelling. What?

54:26Emily Flippen:And this is a long run-up to the point I'm trying to make because the so what here for us mere mortals at home is that you know this as well as anyone, mate, and Lord knows I do, there is nothing more difficult than having money burn a hole

54:41Jason Moser:in your pocket. You know, you've had an inheritance, you've sold some stock, something has happened where more than just your weekly savings have hit the bank account. It's just sitting there. So true. Oh, I've got to do something. I've got to do something. I've got to invest it. I've got to invest it. And all these guys are saying is just like, well, yeah, that's what we do. We're investors. We want to invest it too. But we're not going to force it. We are going to wait until we have that right combination of quality and value. And when that happens, we'll act decisively. And it probably won't be the bottom.

55:12Jason Moser:And it'll probably keep falling after we buy. But that's how we do it. And it's something, I'm kind of hammering the point here a bit because it's a particular weakness of mine. You know, it's hard, right? You liquidate something, it's like, oh, I've got to put it to work. I've got to put it to work. And it's like, anyway, I'm not saying it's that hard to wait a week or two. Try waiting six to 12 months. Try waiting 24 months. Exactly. And by the way, try doing that in a market that's going to the moon. And every idiot you know is just everything they buy is just doubling and it's like I'm sitting in cash like an idiot, you know.

55:48Chris Hill:So it's so hard. Watching everyone else get rich. Well, back to Buffett, mate. That was 1999. Yeah. Tech fans go to the roof. The What's Wrong Warren headline gets written. Buffett's lost it. He's not keeping up. He doesn't understand the new economy. And Buffett's like, I'm just not doing it. I'm just not doing it.

56:03Emily Flippen:Just, just, and I guess that's the point that I would make

56:07Jason Moser:is just wait until you have that level of conviction and, you know, confidence and then do it. Then do it. You'll never get fully confident. 100 % conviction doesn't exist. It's a fallacy.

56:18Emily Flippen:But, you know, I think that is also rare. One, not having to conform to certain mandates and also not having to feel as though you must, you know, dance when the music's playing.

56:31Jason Moser:You don't have to. It could be a terrible song. It could be the end of the night, everyone said way too much to drink, fights are about to break out. Like closing time, the lights are going on. Oh, it's really, you know, and the lights are not flattering, you know. It's the whole, the tide goes out and you see everyone swimming naked kind of thing. And again, again, none of them are saying they see an imminent crash. Just like, I just don't, it's just not something I want to invest in right now. Actually, the other part of that too, which is a challenge,

57:00Emily Flippen:is that it's not, I shouldn't frame it up as in that this is a situation one finds themselves in in a raging bull market where there are valuation concerns.

57:07Jason Moser:It might just be that, oh, a bit of money came out of left field and I just haven't actually done any work, I haven't had a look around yet or I haven't had a look around for a while. And so it's just like, whenever you find yourself in that kind of situation

57:21Emily Flippen:or any kind of situation where there is just like... So there is no need to rush. There will always be opportunities, you know, and whatever opportunity you miss and you'll miss a thousand of them, you'll miss most of the good ones.

57:32Jason Moser:Everyone always does, you know, but just to have that patience, one, to wait for that Buffett calls it the no strike pitch. What's he call it? The no strike. No called strikes. No called strikes.

57:47Chris Hill:So just you go, yeah.

57:50Jason Moser:Well, you know, in baseball, three strikes and you're out, right? It's like you can just, you nearly had to go through to the catcher every single time. Just wait till the pitcher throws something slow and easy and right in the middle of the seats, then swing, right? And that is, whether that's due to what market conditions are or just what happens to be on your desk in terms of, you know, the radar that you're looking at, is there anything that's on here? That for me has been something that's been difficult to do, but when I have done it well, it's worked out pretty well, you know? And because what can happen is like you force the trade, you buy something, it goes against you.

58:27Jason Moser:Something that probably would have fit the bill a bit better comes along but it's like now it's like, oh, I don't want to sell this because I'm down. Like a thousand other dumb behavioural come into sort of play. So anyway, I just make mention of just fleshing out Todd's sort of thinking on that cash pile there as well. It's just that opportunity cash I think I've heard him refer to it as, which is really, really, really nice. Again, it's not a strategic cash holding necessarily, although absolutely they're getting paid to wait. It's not necessarily a mandate that we all always hold 5%. It's just sort of like, man, it's nice to have some dry powder.

59:02Jason Moser:Yeah, exactly. One thing we know, markets change. And, you know, there's few things more frustrating than seeing a really lovely fat pitch come along and not have any cash to take advantage of it, right?

59:16Chris Hill:Yeah, I think that's right. And that's the challenge is doing all of that at the same time as – you're right. And the other thing Buffett talks to speak of baseball is the idea of, you know, when he was in New York, you know, it was like – it's like walking – being in a baseball field and someone yelling, swinging your bum. It's like, just do something, just do something, just do something. Do something. And that combination, it's a beautiful example. not only is it tempting when someone's pitching at you and you're like, well, should I buy that? Should I buy that? You've got people on the stands going, go on, have a go of your mug.

59:47Chris Hill:You know, what's going on? And that combination is really, really tough. Everyone's buying DrainShield. Why haven't you done that for?

59:52Jason Moser:Everyone's going to the moon. You missed it. Oh, you've lost it now. You know, I shouldn't even pick on those companies. There's a thousand of them that are out there. And it's more the issue with the investor base than the company themselves in a lot of the cases. It's like, you know, we're just doing our thing and you've all decided to go lose your minds over it. Yeah, exactly. It just, you know, it is hard not, it's all very, I find these conversations all very like, ha-ha, yeah, people are so dumb kind of thing until you find yourself doing it. Oh, yeah, yeah. And that's the thing to be mindful of because, you know, you're going for a walk, you've got me and Scott in your head, we're saying things that are just so self-evidently true.

1:00:30Jason Moser:Why would people be so dumb? And then you find yourself doing it and you will, you will, because it's just, it's to our is to be human. And these people do it all the time because it's very, it's almost instinctual. These reactions are just so, so, so difficult to push against, which is why we're like a broken record. Like, it's like you've got to say it. And as much for ourselves as anyone, it's just like repeat it, repeat it, repeat it, repeat it, because it is, you know, to be, to really own that thought and understand it is to go a long way to mitigate. I was going to say, to avoid the risk, but to at least mitigate that kind of risk because it's all very stupid until you find yourself in the middle of it.

1:01:16Chris Hill:Yeah, I think that's exactly right. Mate, let's finish up, just speaking of being in the middle of stuff, poor old Maya. I mean... Yes. It feels like it's one of those situations. I've been expecting it to die for years and... Me too. I think I wrote during the week, I'm not saying it's circling the drain, but I'm not saying it's not. It is just in a world of hurt. Sales grew 0.3 % last year. They highlighted the comp sales growth of 0.7%. And it's only better than the total sales growth because they shut some stores, which is, you know, it's fine. And you're negative in real terms as well, by the way, right?

1:01:52Right.

1:01:52Chris Hill:Well, not only that, since the end of the year, their sales have now done 2.7%. And you mentioned negative in real terms. And why that's important is two things. Obviously, you're not selling more stuff. You're probably selling less stuff at a higher price in a likelihood. but your costs aren't going up at 0.3 or 0.7%. And so what does that mean? And we know from the numbers the combination of a cost base that's growing and a sales base that's not is going to absolutely smash your profit. Now, they reported a$300 million loss. That was largely a statutory loss with, you know, administrative and non-cash write-downs.

1:02:22Chris Hill:But their actual underlying net profit was still down more than 30%. And it is just one of those businesses where, I don't know, mate, they've done much better online than I expected, much better online than I expected. It's really, really impressive. So full props. I suspect if there's no online business at Myra's broke well and truly before now, I don't know how it survives. If you think about how many stores it's got around the country. Online, I haven't got the up-to-date numbers, but I should have got them. It was about a quarter at one point of their total sales. So imagine that one quarter of your total sales come from effectively one warehouse.

1:02:55Chris Hill:That might be a few, but one sales operation, one channel, if you like, and you've got the rest of the 75 % of sales come There's massive stores with few staff, fewer customers, massive amounts of inventory. It's just one of those situations where you look at it and just think, man, it's a really hard to see how Mike climbs out from under this one. I don't know what they would have to do. Solly Lou's now on the board, by the way, so he'll be moving and shaking and I wouldn't be at all surprised to see him potentially launch Takeover bid at some point. He's been keen for forever. Hasn't he? I've got to say, at some point, I feel like taking a side, So, Solly, I know you want to jump in this in 1985 and that's fine, but, dude, give up, walk away.

1:03:33Chris Hill:This is not. Yeah, you might win the prize and Roo actually having won it. But, look, Solly's a genius. Maybe he finds a way to revitalise these stores because that's what they desperately, desperately, desperately need. I don't know how you do it. I don't know how you take a large format, large floor space, a department store, and remember, department stores are multiple departments. That's the idea of it. That's a shopping centre these days. You don't need shoes and dresses and books. Think about the cost of rent in this country. Anyone renting doesn't need that to be pointed out, but commercial tenants have the same exact issue, right?

1:04:07Chris Hill:Correct. I mean, they get better rent per square meter than anyone because they're considered anchor tenants. But at some point in the shopping center, they've got to be reconsidering that. I mean, maybe they don't have enough tenants to take up that space, but it's like I wanted a mire there so everyone would come and shop at the mire so they'd shop elsewhere. The order of the anchor tenant was, please, please, please, put your mire, put your DJs in my centre so people will come. I've got to say, these days it might be like, please go away because I could let most of that space, that double, triple, quadruple the per square foot rent you're paying because I needed you.

1:04:38Chris Hill:Now I don't want you. It's a mall within a mall.

1:04:43Emily Flippen:That's my problem. That's exactly it. When you go to a Westfield and then you see the Myers or the DJs there, it's like, oh, it's another mall. It's like the mall.

1:04:52Chris Hill:Except for things I don't want because I've got the specialty store outside because I don't want a shoe. I'm going to go to the shoe shop. It's a ghost town every time. I want a pair of jeans. I want a new shirt. I want a suit. I want a book. I want a... There's no... The world just changed on them.

1:05:03Emily Flippen:Yes. Yeah, look, I don't... Look, I don't want to throw too much shade at them. They are... They found themselves in the middle of a structural change that was bigger than them. Now...

1:05:15Chris Hill:Yep.

1:05:17Emily Flippen:We have been talking about this forever and we're not particularly smart or farsighted. So I feel like there is probably some blame to say you didn't see the writing on the wall soon enough and act quick enough. I mean, their online initiative is a great example of that. Yeah, it's now a big part of their business. But, I mean, you didn't get serious on that. Like, the internet was out for a while before you guys decided to get serious about the internet. It's like, oh, it turns out it's going to stay around. It's a thing, yeah, yeah. People like convenience and lower prices. Who would have thought?

1:05:51Emily Flippen:So, I mean, they definitely blame in terms of dragging their heels. But, yeah, look, at the same time, it's like they're not going to reinvent themselves as a frontier AI company, right? They're not going to pivot into, like, mining iron or, like, retail is what you do. That's what you do. That's the format you've got. It's not an easy reinvention. And if it is a reinvention, it is a radical reinvention that has all kinds of risks and costs and, as you sort of say, write-downs and the rest of it. So I don't want to be too critical here.

1:06:21Jason Moser:It happens to, in fact, give enough time all industries over a long enough timeframe. And it's another good lesson of the you have to just, sometimes you have to destroy your own business to survive, you know. And I think Maya's probably a good case for this. There is a parallel world out there where they did see the direction of things and they pivoted hard early and took it on the chin before it was more existential. Now in late 2026, jeez, man, I don't know. Now, at the same time, there will be the deep value investors out there. And I remember in 2020 when it was last at this price, Myers, and I had a mutual friend who actually bought a bunch, I think, at that point in time.

1:07:12Jason Moser:He's like, what are you doing? Well, long story short, they 10X their money between early 2022 and start of 2025, right? Like it went from$0.14 to, well, not 10X almost,$1.20. So there is a chance that the market has been overly negative, that it's not as existential, that they will crawl out of this, that we will see some multiple expansion. And you are looking at an absolute screaming bargain. Talking of Buffett before, he often talks about our favourite opportunities are when companies are on the operating table, you know? And it's like, well, it's on the operating table, bro.

1:07:47Chris Hill:He does say great businesses, to be fair. He does say great businesses. He does say great businesses. Not that you're wrong. Look, just to be abundantly clear here, I am not buying any, right? But I am, I've been, it's not the first rodeo. I've been humiliated enough times to not be certain on this. And so I'm kind of, what am I doing? I'm sandbagging. I'm totally sandbagging here and sort of saying that, yes, looks like it was inevitable. I'm not surprised at all. This is a long terminal structural decline. Ha, ha, ha. Told you so. Still, I could totally be wrong and we could be back at a dollar next year and this is the trade of the century.

1:08:28But that's the play, though. That's the play. If you're thinking of that,

1:08:31Jason Moser:your bet here is are they around in 10 years' time and have they stopped the bleeding? Yeah, I think that's right. Have they actually managed to engineer some real growth? And if so, bargain of the century. Well, maybe not. That's over-egging it. But it's a good bargain, right? But it's tough. It's tough. One other thing I just wanted to touch on, maybe it's a teachable moment, maybe if I can put it out there. You said something which was accurate, which was... Don't be surprised by that place. They did a bunch of...

1:09:04Chris Hill:It was accurate. There's finally a teachable moment. You said something true, Scott. Oh, there you go.

1:09:08Emily Flippen:Well, here's a turnip. But they did a bunch of write-downs that were non-cash, right? And so what does that mean?

1:09:16Jason Moser:Like companies love to say, well, look, the statutory profit was through the floor, but that was all these non-cash writers. Like, so you didn't lose any cash? No, we didn't lose any cash. Like, well, that's true. So let's just unpack this a little bit because it is a very common point of misunderstanding. They've got this thing called the balance sheet.

1:09:33Emily Flippen:It just lists everything you own and everything you owe and the difference between the two. And you had a bunch of stuff on that balance sheet where it's property, brands, a whole bunch of any asset that you can think of that was determined to be worth a certain amount.

1:09:45Jason Moser:Now, auditors or the accountants or whatever look at that and go, I know that that's what we thought it was worth, but realistically, it's not worth that anymore. So we're going to write the value of that down. So it's really just changing a ledger entry on the balance sheet. There is no cash being lost there. However, it is a very, very, very real loss. And what it's, really, it's sort of like, well, there was no loss of cash in that particular reporting period. But the reality is it was carried, the most simplest example is it was carried at that value because that's the amount of money that you put into it.

1:10:16Jason Moser:Now, you haven't sold it. You're still keeping it.

1:10:19Chris Hill:Yeah, correct.

1:10:19Jason Moser:But it's like a good example here might be I bought a house.

1:10:24Emily Flippen:I bought a castle in southern Italy. And I say that because I was looking at one the other day. It was like, hmm, two bedroom unit in downtown Melbourne or literally a castle in southern Italy? anyway so I do that I buy it for a million dollars six years later the valuers come in and they go oh man you got water damage here the foundations are screwed like this thing is not

1:10:48Jason Moser:like if you tried to sell it now you'd be lucky to get 200 ,000 so look you don't have to do anything but your balance sheet says it's worth a million it's not worth a million we're going to make you write it down so okay I write it down but it's non-cash non-cash now but if you sold it that loss would be crystallised. So just acknowledge the reality of it being no cash in the moment, but it is very much a real loss. And maybe even a loss that's understated, because when you actually, the only way to ever know a price is to test it in the market. And when you come to do it, maybe it's like, well, we wrote it down by 80%, but we should have written it down by 95%.

1:11:27That happens a lot. That happens a lot too. Sorry, it was a tangent to the topic. No, it's a good one.

1:11:33Jason Moser:But, yeah, any other watch outfors when it comes to write downs you can think of?

1:11:41I... I'll give you one more thing. I'll give you one more thing. The other one is, the other one to watch out, which is a good one, is that there are certain accounting rules that say you can't write up the value of an asset.

1:11:51Chris Hill:Yes. Yes, that's a really important one.

1:11:53Jason Moser:Which is, there are examples of companies out there and you go, oh, they've got this much in assets, like, actually got tons more of their assets. Yes, yes. Tons more.

1:12:01Chris Hill:Well, unless you're a property developer, book value of the purchase property is often the case. And by the way, speaking of Saltpats, that was the Saltpats story. They used to carry, they'd buy these way, way, way out of suburban, like really edge properties for brick pits. And they'd make bricks for decades. By the time they'd finished making them, the suburbs had advanced so far past them, they went from owning this marginal land to owning this really, really, really high quality land, or at least popular in-demand land in the middle of suburbia all of a sudden. And yet they were carrying that at really low levels.

1:12:30Chris Hill:I think that's a really important one. The other one for me is you mentioned the good write-downs or the write-downs or the, you know, kind of the hidden stuff. The other one is acquisition when you acquire customers. Ah, yes. You're forced to write those. And we did OKFive members. This is years ago now, so I'm not big noting myself for the sake of it other than to use it as an example of where it matters. Remember the old little telcos? There was M2 Telecommunications and Amcom and Focus and IINet. Was that originally? I think it was originally a separate company called TPG, bought it. Anyway, there was a whole heap of them that started up right at the time when broadband was taking off and laying fibre cable was taking off.

1:13:02Chris Hill:I went to a Vocus thing in Sydney Harbour. We literally had the cable come out under the harbour, pull out the other side, and it was cool, right? It was a thing. But if you bought another company, you had to write down the value of those customers over five years. Now, I'm not saying that was good or bad. Maybe the customers weren't worth that or maybe they were worth more than that. But you don't have to write it in your own customers as you require. So if I run a marketing campaign and 100 people walk in the door, I don't recognise it as an asset, but I don't write them down either. If I buy a telecommunications company, I've got to say, well, the customer's worth this much, and I write that down over time.

1:13:36Chris Hill:So it reduces my profit, even though the same customers I acquire, even if I pay the same amount of money for those customers in marketing, I don't write them down over a period of time. I expense the marketing when it happens. And so what was happening was those companies effectively were understating the value of their businesses because of this non-cash write-down that really was treating acquired customers, if you bought the company, different from acquired customers if you'd done the marketing. And that was a nice little, once you understood that wrinkle, there were some good opportunities there because what it meant was the valuations looked higher than they really were, stripping that out.

1:14:07Chris Hill:And these things were reasonably inexpensive and it ended up being a pretty good deal because you understood where the money was going. And it's kind of why I'm not, like all of us, you start with the P &L, then you go to the balance sheet, then you go to the cash flow, I go, I found it, and five years later you're back at the P &L again because that's just, you know, it matters more. But it is a good place where the cash flows and the P &L discrepancies are really worth looking at and saying, what is actually going on here?

1:14:30Emily Flippen:It's worth pointing out too, before we make any accountants angry, these are totally appropriate rules. These things get very heavily debated and discussed and thought about before they're accepted into generally accepted accounting principles.

1:14:48Jason Moser:And they've got very good rationale for them. However, it's worth arming yourself with a bit of accounting knowledge

1:14:56Emily Flippen:for this kind of thing. You don't have to go too deep into the weeds to sort of wrap your head

1:15:01Jason Moser:around things. Buffett actually talks, back to Buffett, in some of his letters as well. It's like, well, we report this because it's the rules. We have to report it and they're appropriate and they're fine. But also here's also what's happening. And it's just you want to be able to sort of read between the lines yourself, Not because people are hiding stuff on you or it's anything that's dodgy or inappropriate. It's just sort of like there's accounting land and then there's the reality of things. Another good example, because it's just a duty of mine to sneak Bitcoin into every conversation, that's changed.

1:15:37Emily Flippen:But to illustrate the point, it's actually changed now. But under the old model, you had to carry that on your books at cost. And if the price fell, you had to write it down. But you could never write it up. Right.

1:15:48Jason Moser:So in the case of strategy or micro strategy back in the day, it sort of carried like when you looked at the balance sheet, you've got, oh, that's the value of their Bitcoin. It's like, no, not at all. It's actually the other thing that's more pertinent these days too is, and again, not to get onto this sort of topic, but a lot of banks and financial institutions, a lot of institutions in general just hold bonds at, they're not mark to market, you know. And so it's sort of like, well, be careful what you see there because if you had to turn around and sell it tomorrow and you were a false seller in a market that was also mass liquidating.

1:16:21Jason Moser:You're not getting that pro. Like it's not, I don't care what the balance sheet says, it doesn't matter. Again, all of which is to say it's worth having an understanding of these assets and these accounting treatments because it just lets you get closer to the reality of what's going on. And each perspective illuminates a different thing and is valuable. So again, I feel like I'm sort of like, ah, it's all a nonsense. Just ignore it and look at that. No, I'm not. But I'm just sort of saying that the, it's so much in life, the truth is a little bit more subtle than a lot of these headline figures would otherwise make out.

1:16:56Chris Hill:Yeah, nicely put. All of that said, Myra is still in a world of hurt. Oh, yes. Back to Myra. No, I was only just to say, you know, the, and that's why I really, I mean, non-cash write-downs are absolutely, the blame should be laid at the foot of the people who made the transactions originally. They don't necessarily unless you believe they were worth more than the accountants now tell you their worth. It's irrelevant to the person buying today or irrelevant to last year's profit performance. In total, it's an issue because I wasted the money. But if I was to work for Strawman for a while and I decided to buy the Motley Fool and I paid$84 gazillion for it and then Andrew a year later goes, well, I fired Philips and I've written that down, now the business is back to where it was before.

1:17:40Chris Hill:Did it really make that loss? Yeah, but the money was wasted when I made the stupid purchase. not when Andrew wrote it down. And if it's the same people doing the same thing, then you've got a reasonable view of going, hang on, guys, you screwed this up and you're still there. I'm not going to hold it against you necessarily, but I'm not going to give you free reign. If it was bought 10 years ago, the CEO and three quarters, 90 % of the board have moved on, you wrote that down. At that point, it's kind of like, well, I mean, the company still made a bad mistake and it is absolutely appropriate to recognise that, but it doesn't reflect the ongoing cash earning capacity of the business or the year-on-year cash earning or profit earning capacity of the business on any basis other than to keep the accountants happy.

1:18:20Chris Hill:And as Buffett says, he often says, look, the accounting principles don't always tell the full story. We still will and always should report our results under the accounting principles because the principles are important, and so this is what it says. But also we want you to know this. They have the same theme, mate, with asset increases and decreases. Every quarter they say, oh, profits are up this much, down that much, and it's just because of the share price of the holdings moves. Now, in strategy's case, Bitcoin is their business. And for Buffett, yes, the equities are kind of the business, but the gains and losses in a quarter.

1:18:50Chris Hill:He's like, I'm not planning to sell these. It makes no difference to me. It doesn't change what I think. If I think Coca-Cola company is worth$40 a share, whether it goes to$60, then to$20, then to$30, then to$50, then to$40, you know, the movements in the meantime were irrelevant. I mean, they're real and they're important and they're reported, but knowing what to include and what to exclude is really important.

1:19:10Jason Moser:Yeah. Yep. I mean, it's about, it's always about context, isn't it? Yes. It's sort of like how does this feel?

1:19:18Emily Flippen:I mean, I'm trying to get an accurate representation of this thing that I want to buy a little bit of and there's a whole bunch of different things I need to lay in. What do they actually own and how do they owe it and how do we account for that? Yeah, 100%. Why are they worth that? Is that because they throw off a certain amount of cash and why do they throw? Is that because, you know, I just find like investing is a lot of dumb questions iterated on again and again.

1:19:45Jason Moser:Not dumb questions. I'm trying to be self-deprecating. I shouldn't. It's just like very obvious, reasonable questions. Yeah.

1:19:53Emily Flippen:But too often questions that people worry about are obvious and if I ask it, I'll look dumb and stupid. Because no one else seems to be asking it. I feel as though if you're that kind of person who's able to ask a quote-unquote the dumb question or what feels like the obvious question and then go, but then what? And why? and why. And why. And you just, you get to a point where the understanding is much, much deeper. And that is such a potent edge. I, you know, obviously, I don't know how to articulate that. It's so important. It's clearly an edge, right? If you can have a handle on it. Back to AI very quickly.

1:20:32Emily Flippen:I feel as though this is the danger of this tech in the realm of investing. and I've seen it where, because now I can get up my latest, greatest model and go, tell me, do an analysis on a company, whatever, and like reams and reams and reams of really, you know, detailed kind of stuff. But at least at this stage of the technology here, it's going to throw out a lot of commanding, convincing kind of stuff, but without that proper sort of context and understanding and nuance that you, I think, you need to be responsible for when you're interacting with these kinds of things. So hopefully some of this kind of stuff will help you.

1:21:14Emily Flippen:I'm certainly not saying don't use it because Lord knows I do and I'm never going back to not using it because I'm not an idiot and I don't want to use an abacus instead of a calculator. But I guess these are the sort of prompts, sort of you want to make sure that you're aware of these kinds of factors so that you can, I guess, peer through some of the slot that's going to come your way. And I guess the point I was really getting at there with all of that is that it's actually, there is still a huge advantage in, even though everyone's got these super smart geniuses in a box, if you're the kind of person who can sort of think independently and try and get to a clearer definition of the truth, you will be far more, you still will have an edge over the other investor who's just going to verbatim take out any slot that's sort of spat out because it sounds impressive and technical or whatever, but you really don't understand what it's saying.

1:22:07Emily Flippen:And that's fine you don't understand what it's sort of saying, but keep up. That's the great thing about this tech. It's like, well, what do you mean by that? I don't understand. Explain it more simply. Keep going, you know, and either you'll still be lost, in which case don't invest, or you'll have a much clearer picture and you'll know with much more certainty what to do. Sorry, man, that's four tangents on different tangents there and start off with Maya. Yeah.

1:22:28Chris Hill:Well, that's the point, right, because when you say, well, what's going on with Meijer? It's tempting to say, well, it's a non-cash write down, don't worry about it. It's like, yeah, but also the underlying numbers matter and also why is the write down there and also what does it mean and what do you learn from it? And that's the benefit. Are there more things that could be written down? Right. And what does that do? I won't go too much attention other than to say some companies do have loan covenants that are based on asset value. Oh, yeah. So if you write down a value, well, hang on, this thing's worth a million dollars, okay, now it's worth$5.

1:22:56Chris Hill:Well, hang on, the loan was based on the fact your asset value did be more than half a million bucks, now you're in breach. And so there are absolutely, I'm not saying this case in Meyer's case, but there are absolutely circumstances where it matters a lot. It's not a non-cash write-down. The non-cash value, the book value of the asset, may be being relied on by the bank or the lender, and that's important as well. And don't wait for the write-down.

1:23:18Emily Flippen:Don't wait for the write-down. I mean, you can't order it to the degree that it's sufficient to be certain in any kind of way, but, I mean, you can read the balance sheet and you can say, Huh, turns out this company thinks it's got$400 million worth of property. It's like dig into that a little bit. Why is that? They're notes to the financial statements there. You'll find more information and even, you know, no one does it anymore but you'd actually contact the company, go to the AGM, I know, you'd ask questions, right? These aren't gotcha. These are legitimate, reasonable questions that any thinking potential owner would be reasonable in wanting answers to and you've got a right to sort of have them answered and if they're not forthcoming in an answer, well, that kind of tells you something as well, right?

1:24:02Emily Flippen:But, yeah, what am I saying is it often takes people by surprise, but if you can sort of look at it with a critical eye and go, well, I, geez. You know where I most often came across it was with software companies who would capitalise their development expenses and the other companies that didn't. So what does that mean? That means that I spent, I paid all these brilliant engineers, a million dollars to build this software platform. So I've got a, the software platform is an asset. I do carry it on my balance sheet. And so it's a million dollars. Why is it a million dollars? Because that's what it costs me to build.

1:24:37Now, it's kind of a bit like the antiquated labor theory of value kind of thing. It's sort of like, well, whatever it costs you to build, I mean, I could employ the world's greatest tech developers to build me a bit of software that no one wants. And I was like, well, but it cost me$10 billion to build. So therefore, that's what it's worth. Like, no, it's worth what anyone else will buy. it off you, right? So you would often find these disconnects in two different directions. One being it's like, I know that that's what you're carrying the value of the software, but there's no way that it's worth it.

1:25:05No one is going to buy it off you for that amount. In fact, I could probably build it for half the price, right? Particularly these days. I was going to say, is that a big question?

1:25:15Chris Hill:Keep going.

1:25:15Jason Moser:Oh, that is a huge question. Is one of the things the carrying value of this software? A lot of this software? And then you get the more rare company, which was always a big tick for me, which was that we just don't capitalise it. We just see it as ongoing operational expenses so it doesn't touch the balance sheet. It gets pushed all through the income statement as well. It's a cost. This is our staff. We pay them. They do stuff. And that used to be Objective Corp. They changed their treatment on this more recently. There's a few hidden examples that are sort of out there. And what that insight did, it gives you actually what looks...

1:25:52Jason Moser:it would reveal itself in a very high PE. And that's because, yeah, but a similar company doing the same thing but capitalising their costs don't have that cost expense on their income statement because it was an investment. It wasn't an operating expense. I'm getting too far into the weeds here. No, it's good. But what it means is actually you can't do a one-for-one comparison with that tech company and that tech company once capitalising one is not. But when you normalise and you adjust for that, it's like, actually, this thing is pretty damn cheap. All they're doing is if they change the accounting policy today, then the rest of the market will, oh, my gosh, it's only got a PE of this.

1:26:29Jason Moser:That's right. And again, you know, errors in both directions there if you're not careful. But what am I doing? I'm just trying to sort of circle the point here that is that a good analyst is one that definitely looks at the numbers. But with a degree of scepticism and questioning and wanting to sort of understand it, I mean, it's how Burry shorted in the big short, right? It's like looking at the carrying value of these things. And all worth that, right? Back to private credit. Back to private credit. We touched on that today. Why are things blowing up there? Because those balance sheets were fiction, pure fiction, right?

1:27:04And it's like turns out that no, it's not worth that at all.

1:27:08Jason Moser:And then things start to unravel very quickly. And usually there's a variety of commonalities of things that sort of collapse very quickly. Debt is a big one, but also overstated asset values has got to be up there as well, particularly when used to secure other debt. I'll shut up in a second, but back very quickly on AI.

1:27:29Emily Flippen:The good thing, dear listener, you've got these days is that you can just upload reports and just keep asking these dumb questions. And now again, don't just take it verbatim, but you can use that to prosecute these kinds of questions and get to a level of understanding faster than you otherwise would have.

1:27:44Chris Hill:It's a great starting point. It makes a huge amount of sense and, yeah, it's brilliant. Only – we've got to bring this to a close – but only on the IT stuff, I'm really torn on the capitalising versus expensing.

1:27:57Jason Moser:Yeah.

1:27:57Chris Hill:And it depends entirely to me on whether – You can argue both ways, right? Right. If it's an ongoing regular cost, a million dollars every year forever, then you expense it because, you know. But if you're going to build a bit of software and then you've got to rebuild it in five years' time, you have a massive expense in year one. Years two, three, four and five, there's no expense because you haven't put that big project work in. And so in those years, because you expensed year one, year two, three, and four, five, there's no IT development. You look really, really profitable. So you buy the shares and go, oh, this is really profitable.

1:28:26Chris Hill:The year five, it's like, actually, we're now going to spend$2 million this year because we're going to update the software. It's like, I wasn't expecting that. Now, profits are in the floor. Over time, it's the same number. If you average them out, that's the other thing about the matching principle in accounting. There's no magic money being credited or removed. It's just a question of how you spread that expense, that cost, that profit over that period. But, yeah, I think business as usual, IT, of course it should be, you know, I say of course as if everyone does it, they don't. Of course it should be expense because it's just, you know, you paid the bloke to come to work to make sure the server didn't break.

1:28:56Chris Hill:He's doing that every day of the year, every week of the year, you know, every year of the decade. You don't capitalise that rubbish. If you're genuinely doing something like, hey, we're going to create, we're doing new research on a new car, a new model of vehicle, and when the Edsel Phillips comes out and it's the best car since sliced bread, yeah, all the days and years and months and millions of dollars we spend on that, of course that should be expensed against the cars as they're sold because that's what the money was for. It's part of the cost. You can't pretend the cars are really profitable and the R &D is stupidly unprofitable.

1:29:25Chris Hill:It's like, well, it's kind of linked. So, yeah, you're right and I'm not disagreeing with you but I've always really struggled. Originally I was, hey, expensive everything because it's really conservative and it looks good but for me it depends on how lumpy it is. If it's really lumpy, I'd actually rather them put it through the balance sheet so you can see that average over time. If it's smooth, then it's an expense every day of the year. But that's just my view on everyone has different perspectives.

1:29:49Emily Flippen:I mean, look, both perspectives are legitimate. Right, right, right. And I'm not trying to force a choice. I'm just trying to say be aware of those different perspectives because they illuminate different things and they inform you of different things. I'll peel back the curve. I'm happy to say it because I'm not a listed company. Go on. My balance sheet for Straw Man shows an embarrassing number for the development of the software. Right, okay. I tell you and every listener right now, it's like overstated massively. Not because I'm going to do anything.

1:30:22Chris Hill:It's really what it costs, but if you had to do it now, it wouldn't cost that much to replace. In the current world, I don't even want to say, but not that much, not that much, not even close to that much. And by the way, if I tried to sell it based purely on, Well, that's how much I spent. It was like people would laugh in your face. I don't care because I can get a ChatGPT subscription and build it in the weekend, right? Like it's sort of, it's going to be interesting. Speaking of all of this kind of stuff, it's going to be interesting to see the carrying value of a lot of software going forward.

1:30:52A hundred percent, right. Because of this exact thing.

1:30:54Emily Flippen:Again, it was nothing nefarious here. This is just all proper standard treatments,

1:31:00Jason Moser:but under, predicated under certain assumptions that may not prove true.

1:31:08Chris Hill:Yes.

1:31:09Jason Moser:And that doesn't change anything, right? Right. It's more about like, well, I mean, what really matters is like, well, whatever it costs you, how much cash can you generate from that asset? That's kind of what matters. And that's what, with the basis of your valuation and the basis of how you independently sort of determine the value of these sort of assets. But, yeah, just as I said before, just take a cautious eye of scepticism towards any kind of line item in a balance sheet and just sort of say, well, is it really that much or is it roughly right? Let's not even go into AASB lease treatments or whatever.

1:31:50Yeah, let's not. That was a big deal. Not at this point in the podcast anyway. But just to try and tie it back to Maya.

1:31:56Emily Flippen:Actually, I haven't even looked at their balance sheet, but I suspect that they don't own their properties, do they?

1:32:04Chris Hill:No, that was the fascinating thing when Maya was relisted in DJs. They were both in the same PE. Let's not go too much detail, an hour and a half in. They both listed at the same PE. And DJs owned all of its stuff, Maya owned none of its stuff. Yep. And it was kind of like, these are not the same businesses. I mean, they're both department stores. They're both struggling. They both got their own structural challenges. but there are two very different businesses here. One benefits from a rising property cost and one doesn't. Or even just as rents go up, one's absolutely protected and immune from it and the other one's not.

1:32:35Chris Hill:Now, there's a difference in debt on that basis, so your debt versus your assets. Maybe it's still better off having the leases and not having property but also the debt that goes with it if you've got that debt. So there are always, and this is where it's funny, you know, mate, like investing is not that complex but also it does, you have to do a little bit of work. You have to think through some of these issues. The company, Harvey Norman's a great example versus JB Hi-Fi in a current space. I own shares in Harvey. It owns, it's almost, it's trading for very, very little above its book value.

1:33:01Chris Hill:It owns billions and billions of dollars worth of property. JB owns effectively none. And again, think about those two businesses. Yes, they're both retail businesses. One is effectively entirely asset-backed by property and the other one is not. And neither is good or bad. They're just different investment propositions. It's important to know. Important to know. Right, exactly. When you think about how do I value it, if things go bad, what does it look like? Now, I'm the first to say as a Harvey Norman shareholder, the carrying value of that property is probably not worth as much as they have it on the books for if the Harvey Norman retail business goes broke.

1:33:32Chris Hill:It's like, I've got this land, so which tenants are you putting in there? Because you just shut that shop. You know, you can try and do what you offer to DJs.

1:33:40Emily Flippen:Turn it into a Krispy Kreme or something.

1:33:42Chris Hill:Or redevelop it for housing or something. I'm not saying it's worth nothing either, by the way. I'm just making the point that if you're looking at that from the outside, So you've got to look at it and go, you know, the property is worth something. It's worth, and it's not worth, you know.

1:33:53Emily Flippen:And it's why it's a fundamentally different investment case, right? Yes. I get the sympathy. I really do have sympathy for that argument on Harvey Norman.

1:34:01Jason Moser:Like, if it wasn't for that, no, I was just like, what are you doing, Scott? It was like, no, I get that. That actually makes sense. And it's kind of.

1:34:08Chris Hill:It's a$5.208 billion business trying at 1.06 times asset value. That's market cap to asset. Yes, so it's$4.91 billion worth of property and other assets, but effectively property. You'll buy for$5.2 billion. Now, on one level, you say, so I'm getting the operating business almost free. Yeah. Right, which is not, and then that's kind of not been the base.

1:34:32Emily Flippen:Is that net assets or total assets?

1:34:34Chris Hill:That is book value, so net assets. Okay, yeah. That's book value. Again, it's not fire sale prices, but that's what it's been. It's literally at 1.06 times price to book. I mean, being great business by net-net businesses, This is 6 % away share price-wise from being worth less than the assets it owns. Now, if the operating business is rubbish, then it should be. I'm not making an argument. Don't buy the shares because we're talking about it, by the way. But you look at that and go, I don't know what more you want. You're kind of getting$4.9 billion worth of property for$5.2 billion and an operating business thrown in for free.

1:35:07Chris Hill:For me, that's a pretty good deal. Now, again, profits are only that high because they don't have to pay rent. So remember, someone else's, you know, JB's got to pay rent, so its profits are lower because they're paying the rent, but it's also... So, yeah, there's puts and takes. JB's a more profitable business before rent than Harvey is before rent, like for like, but they've still got to pay the rent. It's there. It's a thing. A lot of Harvey's rent is paid by franchisees, so it's not even paying rent to itself. It's a very complex business, ironically, for a very simple retail operation. But it's worth...

1:35:38Chris Hill:That's where you look at that and go, JB and Harvey are not the same. Harvey at 1.06 times book value. I'll just say JB for fun. and we really need to stop talking. Whereas JB is four and a half times price to book. Again, not bad. It's capital light. So, by the way, so one is like, hey, it's cheap on a book value basis, yeah. The other one, JB, oh, it's really cheap on a capital light, no capital involved, all the money goes back to shareholders. You know, Harvey might be able to sell probably$5 billion, give it back to shareholders. Okay, now you've got a business. You know, what's that worth?

1:36:09Chris Hill:Maybe it is worth more if they pay it back. and then we talk about lazy balance sheets and conservatism and all sorts of stuff. But, yes, it's not good or bad. It just is what it is. And it gives you the opportunity to look at them side by side and say, what is it? Here's the numbers out of interest, mate. You pay$7.4 billion for JB Hi-Fi with, what's that, five times, I'm going to say, we're going to make$1.5 billion of assets. So you're paying$6 billion for the operating business of JB Hi-Fi and$300 million worth for the operating business of Harvey Norman. hey you know I own Harvey Norman I'm not making an argument don't see your JB Hi-Fi shares don't buy Harvey Norman I'm just making the argument that it's a really nice one of these things is not like the other is the argument

1:36:50Emily Flippen:and it's just like 99 % of investors will go both retailers B versus B let me just look at this but it's little it's not impossibly complex that no mere mortal could understand but it's not that simple either at the same time

1:37:06Chris Hill:Yeah, exactly. And that's entirely the story. Anyway, let's finish up, mate. We have had a lot of fun. Hopefully you've enjoyed this podcast. Thanks, Mum, for still listening. Andrew's mum probably, my mum probably is not that kind. She's a lovely lady, my mum. But thanks for listening. Until Sunday, enjoy the first half of your weekend and full 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.

1:37:40The Motley Fool operates under Financial Services Licence 400691.