The hidden opportunities in a slowing economy. December 1, 2023

24:19Yes. So just, again, I know you've taken the property angle and you're entirely welcome and correct to do so, but I'll just finish by saying hands off super Senator Bragg. I appreciate the idea to solve housing affordability. I did tweet during the week. I said, Andrew, if you want to solve housing affordability, I've got lots of options. Come and talk to me. If that's genuinely what you want to do, I will happily travel down to Canberra. I'll sit in a room. Let's have a chat about some housing affordability solutions. that don't actually necessarily involve super. I'm yet to receive a response from Senator Bragg.

24:48I'm sure it's coming. I'll tell you why. Sorry. One more. One more very quick. It drives me insane here. We talk about affordability improving. No one talks about prices coming down. That's how you improve affordability. And that is why you will never get a reply to that offer, mate, because he's not an idiot and he's going and he's like, mate, all you're going to do is come into my office and tell me how property prices need to go down. And I am not going to let that happen. Anything I can do to avoid that I am going to do to avoid that. Cause no one, we are, we'll be lynched. We'll be mobbed in the street.

25:24We'll have our arms torn out of our, our torsos. Like that is, that is the reality of it. And it's just, it's such a bugbear of mine. Everyone talks about affordability. No one, even my, even my 11 year old gets that that means lower prices, but we can't say it out loud. or acknowledge the reality of it. That's what improving affordability means, that or the entire country gets a 30 % pay rise. I don't know. Yeah, very ranty. Mate, I want to talk a little bit about a story that's been kind of bubbling along and it's in and of itself not very interesting unless you happen to be an Origin Energy shareholder, but it's kind of, it's interesting I think at a macro level, not macro, I was in macroeconomics, but at a kind of, it seems to me that things are starting to change a little bit.

26:13And this is fascinating to me for a whole lot of reasons. We've talked a lot about the – every now and then we get a question from someone who's read some fund manager who self-interestedly says, oh, those passive ETFs, they'll destroy the market and there'll be nothing left and then everything will go to hell. So don't do that. Get active stock picking and pay me fees to do it. And you and I, despite the fact we actually do pick stocks ourselves, I do it for money, you do it with your members, We both say that is complete tripe and active pickers will be completely fine. The market will be completely fine.

26:42Don't worry about it. So there's that. Oh, no, worse than that or better than that. Go on. It's just like if you're there as an active stock picker complaining about something that's going to make the market more efficient, again, check yourself. This is good for you. You want distortions in the market, right? Are you actually advocating that this is going to make the market more like less efficient? Like isn't that a good thing? That's right. That's right. So really the fund managers are all about us. They're just trying to help us be more efficient. That's really what they care about. Such nice advice.

27:10So we talk about active versus passive a lot. And active is kind of those fund managers, you know, the Magellans and Perpetuals and Platinums and all those names that you've probably heard out there. They pick stocks, that's what they do. And then there's the passive ETFs that kind of do their thing. And for the longest time, mate, I'm going to say that generally speaking, I think most people consider superannuation as an industry, as a group, to be more kind of the passive side than the active side. I mean, yeah, they're kind of, you know, they're buying stocks or, you know, a lot of the funds themselves actually sort of subcontract out that stock picking to someone else, right?

27:45You might, if you're with an industry super fund, they might have, I don't know, a panel of fund managers. They might put 5 % of their money with this manager and 10 % with that manager and they get the overall results. And generally speaking, those funds are kind of managers of managers. You know, their job is to pick other people to pick stocks for them, which I've got issues with anyway, but that's a whole different story. So that's kind of, they've been this kind of relatively, and not always, and people will be listening and saying, no, no, no, they've been active or whatever. And you're right, you're right.

28:10But in terms of the market kind of participation, they're relatively passive kind of players. They're not out there making big stock calls. Over the last, I'm going to say, is it two months, three months? We've seen this origin takeover from Brookfield Asset Management out of Canada. Now, I'm not particularly excited about the idea. It's a, I don't love the business anyway. It's an electricity generation, a retailing business. It's not going to be a super high-quality business in my view. I could be entirely wrong. And not many people I know don't really care about the company itself. If you do and you're listening, then great.

28:40I'm glad you do. But, you know, we haven't talked about it a lot because just it's a bit boring. Takeover, you know, the latest news in the takeover is like, oh, who cares? The business papers love it, by the way. It's been written up. Just because of the personal drama, that's all they care about. It's got a billionaire in there. You know, it's just electricity prices are topical, you know, anyway. but what I think is interesting mate and this is why I wanted to kind of bring it up because Australian Super has waded in the deep end with a really big stick and I can't remember the last time and I'm sure it happened and maybe not happened a lot or very prominently or too many times but Australian Super basically said actually no we don't want this deal to go ahead and they own I think at last count something like 16 or 17 % of the company it's far far in excess of Australian Super's share of the overall market.

29:31In other words, they've taken a really, really big and specific bet against this one company. And I think it's interesting for a couple of reasons, mate. One is, firstly, what does it mean about Origin as a business? Why this one? Why do they care that much? Secondly, part of me is impressed or at least happy that they've said, we're going to take a role on this. You know, most fund managers will happily say, and this is a horrible generalisation, most fund managers will say, hey, this is returning at$10 last week. I get a takeover off of the 20 % premium. I've just had a 20 % gain in a day. I'm going to lock this in and tell my shareholders or my unit holders at the end of the quarter how smart I am and how much money I made them.

30:07So I will take any short-term win because, hey, it's a short-term win. So there's something about Australian Super saying, you know what, we knocked back a meaningful increase in the share price because we think there's more value out there. And I love that. It's what more, frankly, shareholders in general, fund managers in particular, should do is say, you know what, yes, I want to get a short-term gain, but if I'm genuinely here for my shareholders, my unit holders, my investors, I want them to make even more money. If I've got a dollar coin that was being offered for 50 cents last week and now someone's offering me 70 cents for the dollar, I'm going to hold onto it because I'm going to wait until it's worth it.

30:40I think it's worth a dollar. I'm not going to sell it for 70 cents just because it was worth less a week ago. So that's really, really great. I will also say, it strikes me as interesting that Australian Supers Investment Committee is happy to stick its neck out on this one. I mean, fast forward a year, if these shares are worth 30 % less than they are now because the takeover premium goes away and there's a couple of bad results and all of a sudden Origins is another, you know, dud company, there's a massive reputational risk for the investment manager for Australian super as a business. And the last one then I think, and I'll give you thoughts in general, but the last one is just the changing role of superannuation funds.

31:18And I think it's worth commenting on because they've probably always been the kingmakers in the background. You know, they use these so-called proxy advisors, these, again, another bloody layer of bureaucracy and cost. The proxy advisors say, hey, we've reviewed the voting, the AGM resolutions, and we think you should vote this way. You'll hear the companies saying that, you know, and a lot of these big funds subscribe to them. So CGI Glass Lewis is one of them. If they say, hey, you should vote against Andrew's re-election as the grand poobar and benevolent dictator of strawman.com, then most funds will say, okay, well, you've done the work okay, we're happy to outsource this to you.

31:56We'll vote against it because you said it was a good idea. There's something really kind of meaningful about these guys saying, actually, we're going to go and make these calls for ourselves. We'll actually get involved rather than just doing whatever the proxy advisors do and maybe casting a vote for the board or maybe applying a bit of background pressure. This is really, really active involvement in a really big and public way. I don't know whether it's negative or not, mate. I don't know. I really have no view. I do like that someone's saying, hey, we're flogging off the national assets a little bit too cheap here.

32:30We've lost both our brewers. We've lost most of our food companies. Overseas investors with longer horizons say, well, if you don't think Foster's or CUB or Coca-Cola Amatil or whatever else are worth this money, Blackmore's, we'll buy it because we've got long-term horizon. We'll take all those businesses away from you. We're happy to pay up. And Australian investors kind of go, oh, well, okay, well, you gave me a premium. You gave me an extra dollar for the shares. Like, sure, you can have it. Okay, that makes sense. And the other guys are like, well, You don't do the deal unless you think it's worth more on the table.

32:57So I like that someone's standing up saying, actually, let's not flog off the family silver too cheaply. But I'm also mindful this is a new – it's a very, very new phenomenon. And I think as super funds keep getting bigger, it is something we'll see more of. Yeah, I'm the same. I don't know what to make of it. I am very much against it if you're taking an advocacy role for, let's say, ESG reasons. Let me unpack that a little bit because I'm not that I'm against being ethical or having good governance or anything like that, but it is a term and a mandate that is incredibly subjective as we've talked about before, and it leads to all kinds of dumb decisions.

33:40The main mandate for these super funds is to protect and nurture and grow the retirement savings of people. That's it, right? It's not there for you to take a political view. It happens to be one in many instances that I agree with. I personally feel as though we should be doing more for the environment, et cetera, et cetera. But there are often situations when decisions are made that A, against what I personally believe in B, it's just not your job. Like just no, get butt out. I mean, if you're taking a stance here because you are incredibly good stock pickers and recognize the value and have a clear reasoned, reasoned, articulate thesis as to why the market will in the not too distant future recognize that value, then I think actually that's hands off.

34:26I applaud you because you don't want to be getting rid of, we should all be thinking like this, right? You don't want to be giving up something that's more valuable than the offer is worth. That is silly, right? I just don't, I think that there are often other forces at sort of at play and that's what concerns me a little bit. I mean, And I have the right as an individual shareholder to vote as I see fit at AGMs against certain things and resolutions and all the rest. I can have my sort of say, yeah, it's not much of a say compared to the stake that it had. But again, I can form up with the Australian Shareholders Association.

35:04There's things I can do, right? I just feel as though, I'm not saying it's a perfect system, but when I start getting superannuation investment managers involved in that process, now I've got to think about, well, who's the best person to manage my money and who's the person that best represents my ethical and moral outlook on things? Like that, oh my gosh, it's just, do you know what I mean? Am I explaining myself clearly there? Yeah, absolutely. 100%. Yeah, and this is the, I mean, well, I've ran through before and I think ethical investing actually works at least not any meaningful way. But as you say, even if you assume it does, that whole idea of my ESG, even among those who are diehard ESG fans, you will get, it's a bit like politics, right?

35:45people will tear down their own side for not being ideological enough, not being pure enough in their views. And it's the same with ESG investors. You get the idea of like, well, what do you mean you're investing in that thing? They do that. Well, they do that. Well, that doesn't matter. Yes, it does. That matters. And you should do this. There's pro-social and there's anti-this and there's just guns and tobacco. Well, there's guns, tobacco, and alcohol. Guns, tobacco, alcohol, and gambling. Guns, tobacco, alcohol, gambling. And around and around it goes, right? And consumerism, well, okay, at that point, you might as well give the whole thing away.

36:12What are you left with? but you're right, mate, and that is – it's by definition impossible, and I do wonder – and it's interesting, you know, it half goes back to your point before about people watching politics, right? There's a lot of people out there. I own shares in Australian Ethical, I've said before, and I see no issue with that at all because they're investing a certain way and people want to use that product. I wouldn't use the product. I would recommend people not use the product. I'm literally speaking against my own investments here, you know. If I want to go and fill people's cans, like, go and invest in Australian Ethical, it's great it's good jump in it's great ethical investing is wonderful um i unfortunately mate despite my my delusions of grandeur i know that no one's gonna listen to me so it's literally as you say like ethical investing sounds good wouldn't i rather be ethical and unethical of course i would okay then if i've got some money to invest i guess i'll invest it with these guys but it doesn't work yeah well maybe it does maybe it doesn't and it's better than doing nothing right yeah and i would say probably not you would say probably and but either way it's you know um it's going to happen regardless because people don't want it just it's just better to think about it than not it's it's can i can oh this is a tangent can i share this with you mate i know you have a different view so i will absolutely give you a chance to rebut it but okay um you know i use the broker perler um oh yeah yep and they sent out a a infographic uh with four aussie etfs and they sent out uh so the vanguard australian shares index etf the beta shares asx 200 etf the van ek australian sustainable equity etf so sustainable is a key word there and the beta shares Australian Sustainable Leaders ETF.

37:43And they weren't making the point about ethical or not. There were just four options, right? I assume there's a popular ETF, so they're kind of sharing the details.

37:55Not in the order they've listed up. So by fee percentage, the beta share is ASX 200. Fee is 0.04%, 125th of 1%. Okay. Five-year annual return, 7.3%. The Vanguard ETF, 0.07%. So it's still stupidly tiny, but meaningfully more. Five-year annual return, 7.2%. So a little bit higher fees, a little bit behind. Are these returns net? Sorry? Yes. Yes, okay. Then we go to the VanEck, Australian Sustainable Equity ETF. Management fee, 0.35%. Nine times the cost of the BetaShares product. Okay. Five times the cost of the Vanguard product. Five-year annual return, 6%. Not 7.3 % or 7.2%, but 6%. Okay. Then there's the BetaShares Future Australian Sustainability Leaders Index.

38:54Sorry, the BetaShares Australian Sustainability Leaders and ETF, it's called. Fee, 0.49%. So 12 times as expensive as the BetaShares product. Seven times as expensive as the Vanguard product. Their five-year annual return.

39:134.6%. Now, I'm not saying this couldn't have been different. I'm not saying that five years is necessarily representative. I'm just saying that we've said a million times, mate, you and I, if you can't control anything, at least control your fees. And the fees aren't directly correlated to this either. It's not the only difference here. Except if you compound half a percent for five years, that starts to take a decent chunk out of your money, right, compared to 0.04 % per year. Compound that for five years. Now, again, five years is not long. And again, this could change and blah, blah, blah, blah, blah.

39:42I just got it. I was like, I'm not making a big deal of it because it's a short period. And, you know, as much as I don't think ethically investing is super worthwhile, I don't hate it either. I don't have a problem with people doing it if they want to. Other than if you're paying a squillion dollars more in fees and getting a lower return, that's hard to support. Yeah, I've got nothing against that. I'm against what you said. I'm on board with all of that. I mean, it shows you how cynical it is. I mean, this is the genius of it, of the move. Like the branding of saying sustainable and ethical and all the, I mean, what right-minded person is going to have a problem with that?

40:16Of course I want to be ethical. Of course I want to be sustainable, right? Yeah, it's most obvious, you know, this should be the easiest marketing in the world, by the way. Yes. Who doesn't want to? Yes. Well, you know. I'm going to have the, can I? No, actually, you know what? Give me the ASX 200 Killing Babies Fund, please. That's the one I'm going to go for. Like, of course, of course, right? Right, it's true. But it's just, so I've got no problem against anything that you said. I agree wholeheartedly. Why does it cost that much extra? I don't know. Correct. And B, what is your, I bet your origins in all of those funds, right?

40:53Yeah, probably is. I don't know. Again, this is the problem because people are going, well, yeah, why wouldn't it be in there? It's like, well, you know, they do a lot of gas. They do a lot of fossil fuel, you know. Now, again, other people will have a different view on that. But they're going green. Well, where's the line between exactly? Yeah, totally 100%. How much of their, you know, and again, it's beside the point. The point is that we can have a debate. That's the point. It's not like this is a clear-cut thing. That is ethical and sustainable. That isn't. You know, it's clearly not. And just back on Origin, it's just sort of like the thing I've always thought.

41:29I don't know it well. I'm not following it closely because why would I, right? Like this is a company that is a disaster is too strong a word, but like mediocre is putting it nicely. You're going to be a long, long-term investor in this and have done nothing except lag the wider market, lag CPI, frankly, over a long enough period, over 10 years. I think it's just been, it's actually, the shares are still down there. I mean, they have a return on equity that's less than what you get in an ETF, frankly, you know? So I'm buying this thing in late 2013 for$12 and now it's$8. And yeah, okay, I've got some dividends along the way.

42:05It's like massively capital intensive, massive regulatory, a burden on top of this thing, massively dynamic, rapidly changing industry. Why? I don't know. Can someone explain to me why I'm interested in this? Exactly. Is it worse on the A6? Yeah, a lot worse, but it's a lot better as well. Anyway, off the point there, other than just to say that there is a lot of nonsense in this area. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

42:42How do you feel about superannuation funds becoming more active on the ASX? No, I'm not a fan. Is it just another fund and who cares what they're doing? Is it Madoka's a super? I mean, they're kind of probably going to buy longer life assets. Isn't them actually privatised? Is it strange who bought Sydney Airport in consortium? It might be, I think. Maybe, yeah. I mean, they are becoming bigger and bigger players. Do you care? Do we care? Does it change the market? Does it change the opportunity? Does it add risk? Or is it just one of those, who cares? I genuinely have the view that there is a lot of wasted time and effort in the finance sector more broadly.

43:18I mean, it is when you, I forget, I think this might be an American stat, although I'm sure it holds true, that going into finance is one of the top three desired vocations for university graduates. Yeah. Why? because it pays really well. That's what the money is, yeah. Now, so does being a surgeon and so does being certain types of engineers and the rest of it. The difference is those people actually create real value for society. They do a real thing, yeah. Whereas, and there is, look, I should be careful here. There is the efficient, sensible allocation of capital is actually a really important thing.

43:56So I'm glad that there are, at least in theory, experts out there who are focused on that because it's actually, a big kind of deal. I would just say that there is so much hot air and rubbish in here. What I would do is basically just say, we just have one giant sovereign wealth fund. It's basically an ETF. That's your choice. That's your choice. Now people will be up and down to an incredibly controversial statement. But I would say is, yeah, but think about how much money we save in fees each year. Think about the brains that we unleash onto the wider economy. Like you just stop having this brain drain that just goes into this useless thing of finance, you know.

44:40And dare I suspect, backed by every research ever conducted in this field since, you know, Adam was a boy, we get better returns on a fee-adjusted basis. So that would be the better return. Yeah. I will say one more time, I think I mentioned it, I'm sure I mentioned it before. Warren Buffett's written a great essay about this in his Berkshire Hathaway letters. Google, so it's helpers and got rocks. One word, God love Warren. It's a bit hokey and whatever. The got rocks family is kind of the people he talks about. But do yourself a favour, Google that. Warren Buffett, Berkshire, got rocks, helpers.

45:13I'm sure that string will get you somewhere close. Exactly your point, mate. We as investors get the entire return of the ASX as a whole, less whatever we pay in fees. So if we paid half the fees, every ASX investor on average in total, and not everyone would win, but you get the idea. Everyone would be, as a group, we'd be better off because we wouldn't have that money being siphoned off to the so-called helpers. Mate, these investment bankers don't need another Audi. You know, they're okay. They're all right. They're only buying Audis for their housekeepers and their kids. Sorry, I'm way behind the time.

45:44They don't buy Audis. Yeah, very good point. But I mean, that's the thing to remember is that money comes from somewhere, right? It comes from you. Yes, exactly. And it goes to them. and again there's no I don't think any capitalist would ever begrudge anyone earning a fair day's pay for a fair day's effort you know it's like hey you've created real value you deserve it this is where I can sort of say there are some CEOs who are worth the squillions that they're paid like absolutely but but generally speaking this and you look at all the big super funds and like what if you all disappeared tomorrow and you replaced it with our strategy Exactly.

46:20I mean, what are we losing here as a civilization? I think we're gaining something massively. And now I think when you start, it's very clever in a way, when you start getting into these other areas like, well, not only do we manage and steer your capital, but we're also a force for good because look how we're using our powers to influence all these. You start getting what sounds like more and more centrally controlled economies, which I have a problem with. I think history and reason and logic could have a problem with a lot of that stuff. It just takes us in a direction I don't think I'm a fan of, to put it bluntly.

47:00I think it's very well put. Mate, I want to finish off today with something very different. We're getting towards the end of the year. And I don't remember why I was thinking this, but you've talked a bit about strawman.com, which apparently is a young man. Anyway. Almost had it. It'll come to me. It'll come to me. I won't ask you I was working on myself and you talked a little bit about I'm sure you've done it publicly you've certainly talked about it privately if you had a mate who said I've got this little business it's only worth this much when you invest in small caps you say well if a bloke met me at the pub and said I've got this business that turns around$80 million a year and I make$5 million a year in profit you'd be like man that's amazing oh it's only a little tiny small cap business it's only a micro cap right$5 million a year in profit that's amazing so so that's all we've talked about that a lot and it and it occurred to me a couple of weeks ago as i was thinking about that just thinking your investment approach is is pretty you know you and i are different a lot we have the same approach we apply same issue approach we apply in different parts of the market and we have different preferences in terms of company styles and stuff and hopefully that makes for a good podcast but i thought to myself you're also a serial entrepreneur.

48:12This is not, strawman.com is not the first business you've run. And I wondered how, as you've gone through the process, particularly of strawman, where you have higher aspirations for it relative to your previous businesses. You're in a national marketplace being an online business by definition, which gives you more opportunity. You've rubbed shoulders with people in the VC field, angel investors and all that kind of stuff. And I'm curious, mate, speaking of time wasters, but yes, go on. I'm interested. I mentioned to what degree your investment approach has actually been altered, improved, changed, redirected by that experience as an entrepreneur.

48:53Yeah. You mentioned this to me. I really loved that framing. I think it has helped. There's a phrase from speaking of Buffett that I'm very fond of, which is he said, I'm going to butcher it. You'll correct me. I'm a better investor because I'm a businessman. I'm a better businessman because I'm an investor. Is that it? Okay. Yes. And I think that is very true because as we often say, these aren't just ticker symbols, you know, and a wiggly line on a chart. There's a real business there. And I think there's no better teacher than practice, right? So having run some businesses, you can read all the books in the world, but you definitely learn a lot.

49:31And I think those lessons carry through to your investing. And in reverse, having been a student of business and invested in many different types of businesses. I know when I make decisions for my business, I'm guided by those. I mean, I'm not running a$400 million, you know, multinational kind of company, but I've seen what those kinds of companies have done and what has worked and what hasn't worked. And I think it's always better to let others make the mistake. And it's better to learn from others' mistakes than to learn from your mistakes, I will say. One lesson is probably stickier and more real, but at least the other one's less painful, right?

50:07That's right. Mentally, emotionally and financially, yes. Oh, gosh. So I think it definitely has.

50:17I also realised a little while ago too that the – and I think anyone listening to this who's gone through this journey will hopefully resonate with them is that I think it's very – money is the language of business, right? that's the goal. I want to, I want to maximize profit. And that's true. But I think the long, maybe it's just an age thing, but the older I get, the more I've realized that actually that isn't it. I'm doing every million things wrong. If that was the main goal. And I've recognized that sometimes less is more, you know, for me, I think we've used the phrase before lifestyle business and that's what it is.

51:04Right. I sort of like, I've got all my money invested in the market. I'm as much wanting to run straw men as to get the benefits of membership as opposed to what the business itself generates because it doesn't generate a lot as much as I wish it was 50 times more. But it pays the bills, right? And that's it. And I could. I could do this. I could do that. We could have a different tiered offering. We could do some newsletter stuff. We could do this. We could do that. We just don't. And the reason I don't is because it does what it needs to do. And for me as an individual, lifestyle is super important.

51:38The fact that I can go for a walk and pick up the kids from school and get my hair cut in the middle of the day or what all, you know, this is really, really, really important to me. And so where am I going with all of this? I think what I've had this lesson reinforced lately too is particularly when you see a lot of the mistakes that have been made in small-cap land where a lot of companies have grown themselves broke, which is a saying I'd heard years ago. And now like, how do you grow? It seems like an oxymoron. How do you grow yourself broke? Like growth is good, right? And you see that what happens is that usually almost always the male ego gets involved and you want it to be bigger and better.

52:22And, you know, it's nice to be the founder and CEO of a company that, you know, puts a hundred grand in your pocket each year. It's much better to be one that puts a million dollars in your pocket each year and is in four different continents and the rest of it. The trouble is that you can very easily get into situations where your revenue grows. Maybe even the market value is determined by some idiot VC or whatever has grown as well. But in terms of actual growth in real free cash flow, in terms of growth in terms of what we talked recently about the concept of internal rate of return and all the rest of it, But it often actually a lot of the efforts that have been made in small cap land in particular, very counterproductive to the idea of increasing value as perhaps best measured by rising per share earnings for the business.

53:12And so I've taken that lesson to heart as well. Guard what you have and don't risk it for things that you could have, which might be nice but aren't essential. so I'm very hyper aware of the downside as well. I don't want to take all these risks to make my ego feel a little bit better when I could jeopardize everything that took years and years and a lot of stress and a lot of money to build. Do you know what I mean? So that's a rambly answer all over the case. No, it's fascinating. But I do very much find that there is a bi-directional nature there, whether it be investing helping business or business helping investing.

53:51thing I find that massive. The best way to learn is to do. Have you thought about, from that perspective, mate, I guess as you say, failure is always a knock on the door away or a 2am sleepless night away. On the other hand, the upside is massive. Are you likely to keep management on a shorter leash, a longer leash? Has that changed at all? I'm thinking about the, on one hand, you know what it's like to make some business decisions and maybe get some wrong and get a lot right and there's something about, you know, kind of taking some risks and that kind of stuff. Yeah. Having worked so hard to do, you know, to build straw man, have you thought about how that kind of plays out?

54:36Has it changed your approach to risk taking and management teams? I'm actually, well, almost to a point where it's a flaw, in fact, where I'm very sympathetic towards management. I think it's easy for the market. We've talked about this often, in fact, where management makes some decisions that don't work out well and the investor reaction can be brutal. And, you know, we shouldn't feel too sorry for these individuals. They're paid extraordinarily well. And a lot of these decisions were dumb at the time, not just in hindsight. So I'm not trying to say, oh, leave the poor CEOs alone. Yeah, yeah.

55:13But there's been a bunch of decisions I made which are really dumb. And I can tell you, had you asked me at the time, if you were a shareholder, why are you doing this? I said, I'm doing it because of this. And it was all good intention. I'm not trying to con. I mean, I genuinely thought this was a good decision. And you know what? It ended up being a bad decision. And you see that happen where I think too often the board's too quick to fire the CEO when it's just sort of like I think anyone who's actually been in business recognized is that you often don't know until you try. And, and a lot of things are going to end up being bad mistakes.

55:51And I think you can point to the, you know, I don't know if you point to Tim Cook or I don't know, name your, your guru CEO out there. And I, I, you show me a CEO that's never made a mistake and I'll show you a liar, right? Like it just, it happens all the time and I feel as though I'm pretty sanguine when it comes to that with CEOs. Where I have less tolerance is where it was after the fact there's no ownership of the mistake and there's no clear path out of it. It's everyone's fault except for mine and how could we have possibly known? And here we're now we're going to do something else, which seems to me like you're making the exact same.

56:31Like that is a very big red flag, you know, Fool me once, shame on you type thing. Fool me twice, shame on me. And I think we all as investors have to recognize that when things go wrong, it's not because the CEO was an idiot or stupid or corrupt. And I would actually go the other direction as well, where I wish I could point to myself as an example here, but I can't, where people have done some things that worked out incredibly well, right? Like just like, like surprise themselves. wildest dreams kind of stuff, right place. I think you recognize too that there's so much luck in business. And I said to you a while ago, I used to read a lot of biographies, autobiographies from CEOs, and they're all a waste of time, I think.

57:20I completely agree. They're interesting for the story, but it's, oh, I worked hard and I saw this and I took this risk. All you had to do was exactly, yeah, that's right. It's the problem of survivorship bias where it's like, I'm not saying you didn't work hard. I'm not saying you're not smart. There's plenty of very smart, hardworking people whose businesses collapsed three years in. Yes, yes. Because it's very, very, very hard and things come at you that you can't foresee. But you sometimes just land on it, right? And you're just like, oh, my, I was the guy that decided to do streaming just as the internet infrastructure got to a point where it could sustain that.

58:05You know, whereas the guy who did Quick Flicks three years before was like the biggest idiot in the world where you're now on the cover of Forbes magazine. It was like the only difference was one of timing, right? And so what am I saying here? On both sides, sometimes you see some small caps do incredibly well and the CEO is lauded as some genius, you know. And again, I don't want to take anything away from them, but I try to be, I think, a waffly way of answering, I think having had the experience of running a business, you start to recognize that on both directions, luck plays an important role.

58:40And that's fine. There's not much you can do about that. But I think it behooves you to be honest in recognizing your good fortune when it comes and recognizing as an investor and being a little bit more tolerant when things go bad, that it was, okay, it was a mistake. Let's pick ourselves up and let's dust ourselves off and let's keep going. It's also why you never bet the company. You don't never put yourself in an existential risk because you might be able to grow the business by two or threefold. You know, it seems, and it's just surprising, especially when we speak to a lot of CEOs at Throneman, where it's like, wow, this guy's paid this much and he's in charge of a company that's worth$500 million.

59:20It's like, they put their pants on one leg at a time, like, you know, as the old saying goes. And you just, I don't know what I'm trying to say here. I'm just trying to say you get hopefully a bit more of a realist's view of things. You take some of the shine away from the gurus and you're more tolerant of the charlatans.

59:47This is not about me, it's about you, but I have, so you're right about the, I've used that better business because I'm an investor and vice versa line a lot for me because I spent a lot of time in industry working for kind of fast-moving consumer goods or kind of packaged goods companies, so Heinz and Woolworths and Diageo and alcohol company, a whole other blackmores, a whole other besides. And I think I did a better job at work because I was an investor because I thought about the world through that lens. I'm also sure that that experience helped me think about the sort of situations companies find themselves in.

1:00:21One thing I'm always really allergic to is the analyst who thinks I know better than management. Yeah, yes. They're like, well, no, I've seen this and you should do that. Yeah. And I kind of, the hubris that required for someone who rides a desk for a job, saying to the boss of a manufacturing business, you know what you should do? You should do this thing. And I've never done it myself, right? I've never done that myself. Not only that, but I've never done business. I got my fancy finance degree and then I got my fancy qualification at Kaplan for FinC or whatever. And now I'm running a desk and somehow I think I know what's going on.

1:00:53And I've always found that and the absolutism of that, honestly, I find it personally off-putting, but professionally, an analyst who doesn't realise what they don't know is really dangerous. And I've got to say, I think a lot of management teams are very good to basically hear people like you and I out when we want to actually talk to them or ask questions. I think the capital allocation thing is something investors tend to be better at than most managers. But I do find that whole idea of like, obviously the strategy you should pursue is X. Like really? You know our customers and suppliers and our product materials and, you know, our operations and our, you know, I just find that really, really frustrating.

1:01:27Has that been something you've kind of noticed or bristled at? Yeah. Oh, definitely. The other one I think is there's the, from the analyst class, there's the lack of recognition that there's no such thing as an overnight success. Like one of my favourite sayings is it's the overnight success that was 10 years in the making. Yeah. You know, and it's sort of like, oh, gosh, There's some good examples on the ASX, I think maybe XRF Scientific, Laserbond. They're almost all up by definition, mate. There's, you know, even ones that have been on a steady path still took a while. Even when you compound, you know, you start with one, then you go to two to four to eight to six.

1:02:08I think a hundred looks like genius. Everyone's got to start at one, whatever point you list on the market. Dicker Data is another one that probably ARB. Yeah, yes, yes, yes. I mean, these are all little, you know, niche-ish businesses that started off doing a thing and they kind of went, oh, maybe we should do more of that. Maybe this could work and maybe I can find a way to deal with customers and supply it differently and away you go. And it's just this, so I dial into quite a number of analyst calls and that and I say, mom, you know, your free cash flow was down 0.3 of 1%. I noticed in 0.4 of the notes to the financial statements that you've changed your amortization schedule.

1:02:43It's just like, oh, my God, you're so into the weeds, you can't see what's in front of your face. and here's a person running the business is like, well, mate, we got to grow and that requires more plant and equipment and that takes money to buy and then install and then set up and run and then stuff. And it's just like, and all of this costs money. We spend money today in the hope that more money comes back in the future. And you're looking at this one quarterly period where this happened to be down. Like, where do you, how else do I grow without expanding my resources, right? Like I need salespeople out there in the field to generate sales.

1:03:20I need operations people to make sure that my customers are served. These are decisions that I make now on the best information that I've got available now that if I am right will prove the correctness of their rightness two years from now. And I think that is a huge thing for me as well. So a very quick story, as I've mentioned to you before, we're looking at buying a house. We've had to go through the banks and the mortgage brokers to sort of reveal our, spare our souls to these people and show everything. And, you know, people who work at a bank, you'd think it'd be better. And they look at your financial statements and they go, what the hell?

1:04:01Oh, so what we've done, we've got a very small shareholder base. We recapitalized, we paid a special dividend and we did this and that. Oh, yeah, but there was no profit. Yeah, but that was because of this. And I didn't pay myself a salary that year. So that's why the profit looks insane. But the next year I sort of paid equivalent of two. You know, you're just explaining it to someone from a standpoint of this is a perfectly logical and rational decision for this. And you're missing the forest for the trees. But how easy that kind of stuff is just missed. And it's like, I don't know how to explain this any easier.

1:04:29I think anyone who's run a business is like, oh, yeah, that makes perfect sense as to why you would do that. Actually, you know, one of the things that got us over the line was the cash balance in the business. And I was sort of like, because I've just left it there. I haven't just paid it out yet. I remember saying, oh, yeah, but that's six months of pay and I've also got to invest in some more development and we also have this annual contract with Standard & Poor's for our data and this and that. Yeah, but it's cash there now. Yes, but let's back up. Let's back up. Watch my lips. This is what I'm explaining to you now.

1:05:04This money is not going to be earmarked, right? It's going to be spent. Oh, yeah, yeah, yeah, yeah, but it's good. The bank will love this. Yeah, okay. But it won't be there next month. I don't need to know that. Like sometimes your brain just breaks a little bit when you're having these conversations. And obviously I think that the situation there is, you know, don't ask the barber if you need a haircut there. Show me the incentive. I'll show you the outcome, all of that kind of stuff. But you do see that though with the analyst and broking class where they have this skill set of being able to read financial statements.

1:05:40And they, there's this great saying, which is the map is not the territory. There's a beautiful bit of artwork from French. There's a picture of a pipe and I can't say it in French, but it's in French. It says, this is not a pipe, right? It's a picture of pipe. The map is not the territory. So the financial statements are really important. They tell you huge amounts. I'm not saying for a second, don't look at them, but it's, it's, it's the map. It's not the territory. And, and the, and the, the sheer lack of people, I think, who haven't had the real world business experience, they, they lose themselves in the abstraction that is the accounting and they, and they lose themselves within the confines of a given reporting period, whether that be a quarter or a half or a year that they, they don't step back and, and understand.

1:06:26I've done, again, I'm not complaining. I've done very well out of this epiphany and insight. Um, you and I have to, I don't want to say the company cause it's too small and illiquid, but for years, they've, It's doubled in the last three months. I'm very happy with it. It's still very cheap, right? But by the way, I sat on that for 18 months. It didn't do a damn thing, right? And I'm really not trying to say I'm clever here because there's plenty of others that did the exact opposite. But what inside information did I have? None. Zero. It was all there. Management said, we're doing this. Okay.

1:07:00And well, how come this hasn't happened? Oh, because we did that. Oh, okay. and we divested that. Listen to what these people are telling you. Look at the evidence here, right? Yes, free cash flow went down this year. Yes, their sales were stagnant in this particular period. But it's – and this is why I often say to you, mate, it's like I think scans are a waste of time more often than not. You know, people love the ability to sort of filter markets and scan it. Some combination of metrics exist out there that if I could only filter for that. The computer can tell me what to invest in. And it's, it doesn't work like that.

1:07:39And, and being a good investor means being a student of business and, and, and having a direct experience is the best sort of way to be a student of business, but you will, you will very quickly get to the recognition that there are things happening in the real world, capital allocation decisions that have a lag, that have opportunity costs, that have consequences that all translate into an increase or decrease capacity to generate cash in the future. And if you can get a sense of that, even though the market was guaranteed not to recognize at the moment that you buy, like it will take time, it's a massive, it's a massive, massive edge.

1:08:18And yeah, I've probably made the point. It's trying to be too much like an analyst that is going to be your undoing. And put it this way, all of them are working for their money. They're not investing for their money. That's right. Right? That's also true. I think it's interesting, mate. I think that's right. The other, just quick, as an aside, as almost a corollary to your point is not only that, beware the management who says to the analyst, oh, actually, good point. Yeah, you'll like me more if I do what you say. Oh, that's so true. Because you want management to say, dude, I hear you, but I'm doing it differently because this works.

1:08:54As opposed to, I get the quarterly number. Okay, I'll do this differently then. That's when you do get that sort of long-term stuff. I can't tell you how many times I've meant that exact point to management because they will say in the interview, thinking that it's what we want to hear, oh, we've heard from the market that, you know, we need to do this and so we're really putting an effort on cost control. Now, whether or not that's a good or bad idea is a separate thing. Doing it just because the market told you to isn't like, no, no, no, no. Don't listen to us. Tell us what you're going to. we will make our decision as to whether or not we want to join you on this journey or not.

1:09:30But if you're going to the trouble with listening to investors is investors don't know what they want, except for immediate and easy riches. And that's going to be different too, by the way. That's it. I want that. I want it tomorrow. I want it. I want, I want risk. Yeah. And I want, this is kind of everyone's talking about AI. So now it's AI and now they're talking about an assassin. So I want it to be this and I want this buzzword and I want that buzzword. It is, I love it, love it, capital L love it when a management team will push back and go, no, we are not doing that. And I tell you why we're not doing it.

1:10:04We're doing this. In fact, I'm making a decision here that is actually going to send our profits backwards for the next two years. Now I'm interested. You might still be wrong in your strategy. But here is an independent thinker who's not just blowing, whatever way the wind blows, they're going in a very, very deliberate direction and they're making decisions that go beyond a fairly narrow time frame. They're rare. They're really in the exception, but you make the point often that founder-led companies are better companies. And I think that's true because there are people who are making, they're not professional managers.

1:10:40They're making decisions based on the long-term value creation of some of the capital allocation decisions that they are making. And lo and behold, tends to work out more often than it doesn't, then the person is just trying to look really smart to a bunch of 28-year-old brokers next quarter. Never works, never ends well. I think that's a very, very good place. Speaking of ending, to finish our podcast, I made fascinating insights into the world of entrepreneur and how that's changed your investing. So I really, really appreciate you sharing a bit of honest feedback from your own experience. Will you join me on Sunday?

1:11:15Mate, if you ever give me a chance to talk about myself, I'll be there. What do you think about me? Exactly, exactly. Well, we may or may not. I'll keep you in suspense, mate. I may ask you about it on Sunday. I may not. And listeners will have to just wait and see. Until then, have a great weekend and full on. See you later. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener.

1:11:53The Motley Fool operates under Financial Services Licence 400691.