The house doesn’t always win. September 13, 2024

25:40I mean, there are some very serious authoritarian controls, but the economy itself runs effectively as a market economy. Although the CCP did not think of and implement those big Chinese chat platforms. They were founders who just came up and there was a million other people you've never heard of who tried the same thing. And it was put to the natural experiment of reality and reality chose that as a winner. Why? Because it was just the one that satisfied the most wants. You know, it works really well. And there's a point I've often made as well is that if you're for world peace, you should be for global unfettered trade in a lot of ways because that really does disincentivize conflict and war.

26:24Because here's the thing. Trade is a mutually beneficial act. Correct. Like both of us win. I've got – I told you off air. I bought something on Gumtree the other day, right? And I won. I was happy. And the seller was happy. No one told us what we had to do. There was no department that said what price that should be at. He would have liked a higher price. I would have liked a lower price. We met at a point that we were both happy and we both walked away happy, you know, without anyone's input. Now multiply that up and go cross-border, go transnational, and it's kind of the same thing, right? And it's just a very, again, there will be edge cases.

27:10There will be exceptions to the rule. So you can't be too ideological with these things. But I just think it's a very, very slippery slope. And politicians will promise things because they sort of sound good. But at the end of the day, most of us are going to suffer from these policies if enacted, is the reality of it. Again, point me to an example where that wasn't true. But even if it's possible, it's a moonshot, right? Like you've got to think very carefully. Like maybe this will work. Possible problem are very different things, right? There's a one in a million chance it'll work. So let's do that.

27:48Like, okay. Yeah, it's pure madness. Let's talk price caps quickly because it's kind of related to what you just said. I don't want to spend too long on it. But effectively, the economics behind this one are that it sounds smart to put a price cap on a loaf of bread, for example. No one's going to pay more than a dollar for a loaf of bread. That sounds great because we all want cheap bread. And how could that possibly go badly? They would fix inflation. Why stop at a dollar? Go 10 cents. Right. That's even better. Let's go a dollar because we're not going to reduce it. We're going to cap it. Okay.

28:16Except then what happens is tomorrow, the price of wheat goes up a little bit and petrol goes up a little bit. Wades go up a little bit. And all of a sudden, bread goes from being profitable at a dollar to being unprofitable for a buck. And what happens? You end up with massive, massive, massive shortages. Why? Because in no one's interest, you mentioned the guy selling and you were buying. No one's going to sell you a bread at a buck. The price could be a dollar. That's fine. I'm just going to stop making it. If I'm told that I can only sell it at$1 and it costs me$1.10 to make, I'm just going to stop doing it.

28:43Yep, totally. And so, and again, speaking of other countries, the Russian bread lines are famous for a reason, right? Yeah. And that's exactly that reason. They couldn't make enough because there was not enough incentive to make it. You couldn't do it profitably or successfully. If you put a price cap on something, an artificial price cap, I mean, I put a price cap of$20 on a loaf of bread, that's fine because it costs less than that anyway. And so, everyone will sell it for less than that and it's useless. Yeah. If the cap has to – the cap is unuseful if it's lower than what others would be charged by the market.

29:10If it's lower than what others would be charged by the market, it's a disincentive for someone to actually make and supply the product. That's the stupidity of a price cap is somebody just goes away. No one's going to produce the product because why would you – you're going to go to business or you'll do something else. How is this being discussed of all places in the United States of America? That's right. Like if it was Cuba or somewhere else, you know, okay, all right, I get it. But like in the US of A, this is a key plank of one of the, you know, leading candidates. It's just like it blows my mind like that that is even entertained.

29:46And I think we've just lost our way. We've failed to learn the lessons of history. And, you know, I mean, again, I get the intent, right? I get it. Everyone's crying out because life is too expensive. It's just that the remedy is not going to work. In fact, it's worse than not going to work. It's going to make it worse. Yes. You've got a cost of living issue right now. I'm going to do this, which for the first six months might make you feel a little bit better, and then it's going to get really bad after that. That's basically what's being promised. It's sort of like just, I don't know. It's mad, right?

30:21Spending so much more money than you don't have. Maybe that would help. Yeah. Hey, last one is company tax cuts, mate. We'll spend a little bit of time on this one, but not too much. Donald Trump's offering, I think it's 15 % Then it's the corporate tax rate in the US. And it kind of harks back to the trickle-down idea of if taxes were less, people would do more stuff. That's going to be true directionally at a psychological level, right? Why? Because enough people believe it, even though it's ridiculous. Why is it ridiculous, by the way? Well, you only pay tax if you make profit. So to not do something that's profitable because you might pay tax on it is about the most stupid idea you can think of.

30:58If I could, let's go back to the bread, right? If I can make bread profitably at the Australian tax rate of 30%, I'm not going to stop doing it if I can do it profitably and the tax rate goes up to 35%. Or I'm not going to make twice as much bread if I can do it profitably at 30 % and 25%. To have not done it at 30 % because I might pay more tax, even though I'd make more money, is really dumb. I will say asterisk there. Some people will actually do that because that's just dumb and they don't realize it's dumb, right? So, directionally, as I said, I actually think he's not 100 % wrong behaviorally.

31:28Some people will absolutely do it, even though it should make absolutely no difference to them. They cost themselves money if they're not producing the things that are higher tax rate. Again, because tax doesn't make you lose money, you pay tax on the profit. That's the point. So you've got to be profitable in the first place. But of course, the risk, I call it reality, I think, rather than risk, is that you're not going to get enough growth in total tax revenue with lower tax rates to pay for the reduction in the marginal rate. and in fact we know this i can't remember i think i want to say kansas apologies kansas if i'm wrong they literally tried this about 10 years ago maybe 15 years ago now one of the states just lowered all their taxes like what we're gonna do is lower our taxes everyone will pour into the state there'll be massive economic activity and we'll prove the trickle down works now i don't want to burst anyone's bubble here it didn't work and so they can put the tax rates back up and so it's just one of those you know is it going to get some votes for trump probably because again ideology trumps reality too often so there'll be people who are like yeah yeah we should I'll pay less taxes, do that thing.

32:25Unless it's going to be matched with spending cuts, even then we should be careful what we're cutting. But even if it's not going to be, so what do you end up with? You end up with more debt. And that's kind of, you've been very eloquent on the risk of US debt and the growth in that. I'm not as pessimistic about it as you, but I am pessimistic about it. In either case, making it worse would just be the most stupid thing in the world. And I've got to say, I don't think anyone believes Donald Trump is so economically aware, trained, thoughtful to believe that he'd done the numbers and he's worked out that it will be revenue positive.

32:58He's just gone, lower taxes means more things. That'll do. Let's just do that. And I think that's, you know, why are we talking about it? Well, because it's topical. It does have potentially an impact on the global economy if the US does actually end up going down the gurgler. But more than that, I think, frankly, for me, why am I talking about it? Because I want to have those conversations now because at some point, I bet you bottom dollar, someone will suggest tax cuts and some will say those tax cuts are going to be stimulatory and we'll be doing having a similar conversation now is a great time absent the local political tensions to talk about some of those issues yeah i mean i i am firmly in the camp as is everyone on the planet of i would prefer to pay less tax so let me put that out there right um of course of course i want more money in my mind that's just as a person you know but then of course i we we could you can play it through as a thought exercise.

33:50You go, okay, no one pays any tax anymore. And you fast forward 10 years and it's kind of a bit, it's like that movie Idiocracy, you know, it's like the world just like fall into pieces. Like there's no roads, there's no infrastructure. Like it's just, you know, the police don't come when there's a home invasion or the NBOs don't rock up. Like just things break really badly. So, so, okay. So there is a, there is an argument to be made that we all have to sort of chip in for these sort of social goods. Okay, cool. But the fact that it's happening that this is being discussed in an environment of incredibly um dire and widening federal deficits is is me is the height of stupidity it'd be one thing to sort of say hey we've been running this surplus for ages you know what we should probably charge less tax because we're taking in far more than what we need so let's so we'll pass that on to you it's like great that that's that's very good to to say actually we're spending well beyond our means here and we're not going to stop any of the spending but we are going to reduce our income from the from the government's perspective yeah that's right it's like so you're gonna make it worse okay let's play that so so so where does the difference come from comes from debt so in other words you know we just we we we create the money because at a point the free market goes well i'm not touching your dead.

35:07So the Federal Reserve goes, well, I guess we'll buy it then. Here's some money we just created to do that. It's hard to say with a straight face because it just sounds so mad. And yet, that is, you know, don't take my word for any of this. Like, look it up, research into it. It's just sort of, it's sort of like one of the most bizarre aspects of modern life that no one seems to talk about, which is, and yet it's so fundamental to everything. So again, fast forward that and all the things that we're all angry about right now, let's ask whether that gets better or not. So, okay, I'm paying less tax.

35:38That's better. I've probably got far fewer services or less quality services. That's not good. There's a whole bunch of extra money sloshing around the system that didn't exist before. So all my savings have now been debased and I'm earning much more, less of an income in real terms. So this cost of living crisis has just gotten far, far, far worse. And then in response to that, the government comes out and again says, well, I guess taxes are too high. So we'll cut them further. It's like, no, no, no. stop helping stop helping at this point you're just you're it's fuel on the fire or you know it's it's the exact opposite almost of of what you need to do and it's just i it's the kind of thing that you would imagine if you were trying to sell it to a nine-year-old who watched a three minute clip on economics might go oh yeah it sounds like a good idea but to any adult in the room who spent any time thinking about it's just like you know it's not it's not like this is crazy enough to work it's like no no no no one on the planet who spent more than five minutes thinking about this think that has got any chance whatsoever of work and i'm pretty sure even those who are pushing the policy is cynically going no it's not going to work but it's going to help us in this this and this way um yeah it's it's it is pure madness and and the fact that that things like this can be suggested with a straight face and not not have people laughed off stage that's what's that's the scary thing you know i i i there are some things you kind of you you think well i i short of breaking out a sock puppet you know i don't know how to explain it in any way that's and even then it's like if i'm at that's it's at the level that i'm having to explain it as if i'm on play school right like something is fundamentally broken here so yeah And for our listeners, I should say, Andrew does not have a sock puppet right now as he's talking.

37:25He's doing it sock puppet free. This is a theatre of the minds. If you choose to believe he has a sock puppet on his hand, I'm not going to stop you. So you choose. You take my word for it. Or imagine what you need to. But that's why I think it's almost, particularly with Trump, right, but certainly Kamala as well, you know, he's like sit them down and like, I've got one sock on this hand. Hi, I'd like to pay less tax. Oh, that'd be great. You need to sort of play it out in a little pantomime kind of thing. is there's like something that would capture their attention and just like maybe lead them through the thought process here to go, well, you know, didn't we learn a lesson today, didn't we, kids?

37:59That this is a terrible idea, right? I would say too, mate. I think it's – I've said this before. This is kind of about politics, not party political, but politics generally. I mentioned Nixon and O 'Farrell. There was a time when political parties and kind of, quote, civil society – it's a horrible phrase – but kind of just observed standards of behavior. And so you didn't have to explain to Joe Bloggs that tariffs were bad. You just took them away and reasonable people took reasonable advice from economists who know this stuff. I almost said something else and stuff. And say, okay, well, we'll take them away because that's probably better for everybody.

38:33And you go, okay, cool. And I don't mean that we shouldn't be clear and honest with people who aren't economics experts. And you and I aren't experts. We're kind of hopefully reasonably informed. But you kind of say, well, okay, there's people there who know this stuff. and I think the breakdown for me is that when you go effectively straight rank populism and bypass this stuff I don't blame most people thinking yeah tarot's going to save my job that sounds good to me because they're not they're they haven't how do they come to the last 25 years right they haven't there's not what they're doing what they're thinking about so of course it's going to sound good and it was up until 10 years ago ish politics kind of held themselves accountable to that sort of rubbish we'll actually do we'll disagree on ideology that's fine you know Reagan was different from Clinton and Clinton was different from Bush.

39:16But they kind of, for better or worse, kind of went, well, we think this is best and we'll do what we think is in the best interest of the country. And we'll disagree, but there's reasonable kind of theory or expertise or modeling behind some of this stuff. And we'll take a different view. That's always been the case. But the sheer, complete, I'm not only going to ignore it, but I'm going to then pander to people's base interests and lack of knowledge or take advantage of the fact that I'm neither a nuclear chemist nor a mechanical engineer nor a whatever. You know, you say whatever you want to say and you get away with it.

39:49I think there is an element of that, which is we've either got to hope that politics returns to some sort of normalcy, which I guess we can always keep hoping. The other option, I guess, is we need to have a smarter, more informed electorate because otherwise we are going to get taken for a ride by people who say this sort of stuff and people don't have the skill, background, education, experience to, and they shouldn't have, right? If you're a nurse or a fiery, I don't want you to have to understand, you know, 35 years of economic history or the implications of expansionary monetary policy. I just want you to think I'm going to go and look after the people that I have to look after as part of my job and trust that politicians advised by experts will try and do roughly the right thing.

40:26And that's kind of the big gap I think has opened up. And I don't know how we close that. Can you imagine if we built rockets or trains in the same way where it came down to opinion and, you know, and vibes and things? And I think it sounds really good. But you know what? The trouble with rockets is that they're too heavy. So we should really build them out of wood because that would save. Yeah, we should. But they might have, no, I just think it's better and, you know, it helps reduce carbon. It's just like, no, no, no. Orbital mechanics and structural engineering and physics, like no one disagrees with that stuff, right?

41:03It's just because there is a very potent feedback mechanism at play, which is called reality yeah so so the person who builds the wooden rocket yeah i mean actually they they did they've got wooden satellites now it's a whole other thing but anyway they the person who builds the builds that finds out very quickly i'm going to build a skyscraper you're going to use steel um i'm going to use bamboo right like oh okay so there's a feedback there i'd probably suggest that it's the same with economics it's just that it's over much longer longer periods and it's much messier so it's so there's part of me that kind of thinks yeah this stuff will resolve because except the cause and effect is hard man i think you know in 15 years time by the time we realized something went wrong someone's going to say ah back in 2024 it was this and someone's going to say well that's because the experts say that but it wasn't really that wasn't i mean how do you know it was that i mean i you're right that well we still debate the the great depression you're right exactly well i think we deserve i'm just not sure whether we'll actually learn the lessons is my biggest concern yeah although i guess the feedback is is that is that we might not be able to pinpoint and diagnose exactly how and where we went wrong but we can all look around and go oh this is objectively worse yeah something has gone wrong again i was not that i don't want to name any countries but there's no shortage of ones it's like would you rather live in australia or x you know and you you fill in x where you want it's like okay, so are the human beings there?

42:32Are they less intelligent, hardworking, capable? No, that's stupid. That's clearly not the case. So what is it? Probably the economic and political system, right? Like what else is it going to be? And okay, every time we've tried it this way, it's just, again, it's just there are some things where you can have an opinion and people can reasonably disagree. And then there are other things where it's just sort of like As close to fact as you can get in terms of, well, look, for every 100 times we try this, 99 times out of 100, it goes this way. So that's something. That is the problem, though. You put your finger on it beautifully is that the lag effect is so big and it's so messy because there's like a cacophony of different factors and variables all acting at once.

43:19It's very much what a mathematician would call a chaotic system, full of feedback effects and all kinds of weird sort of behavior. So it is hard to pinpoint and it is hard to trace back to sort of single thing, which is, but we do get to a point where it's like, oh, standards of living is worse. And that is potentially the wake-up call. Look at, where was Malay? He got elected recently. Where is he from? Maybe that's Argentina, actually. I've gone blank. Javier. Yeah, I don't know. Oh, I'm sorry. I really should know this. But a real firebrand and really out of – and it's sort of like, whoa. Now, I don't want to be a supporter or otherwise.

44:03I don't really know enough about it. Argentina, thank you. Where things get so bad where people just get desperate and they'll try anything at that kind of point. So it does reach a point where the country just breaks and then we try something else. That's my concern though, mate, is it ends up being recency bias, right? So people will look back a year and say, oh, that was the problem. It's the proverbial straw that breaks the camel's back, right? Oh, it was that last straw. Yeah. No, it was kind of all – there was a breaking point. I fear because we have this populism and because we're being promised these really simplistic but wrong answers, that even after that, you and I and hopefully some other smart people, or maybe not smart people, you and I plus other smart people, might look at this and go, oh, we get it.

44:49We see the cause and effect there. but if joe blogs the fire is like well actually two years ago you did this thing and that's now we've got this that's that was the problem i i worry that again even even a decent unbiased genuine attempt to understand the problem we bypassed for again more simple but wrong causes and potential solutions yeah it's how you get scapegoats right i mean history is also full of that uh there are some problems let's point i think it goes to these people um i've been listening relatively recently to the history of world war ii i think i mentioned this in the past uh and and the scapegoating done by the nazi regime in world war ii was astonishing right and so it became everything is bad it was these people who did it let's let's let's get back at these people and fix the problems completely wrong 100 incorrect but you know attractive enough as a as a pressure or if i don't have to think i can just accept it and move on um you know not everything's about World War II and hopefully we don't repeat the same mistakes in any sphere of life.

45:47But that's my only concern, that smart, thoughtful people may find the real problems. The populist who appeals to the masses and says it was them or this or that that caused it ends up being perceived or considered to be right because it's just easy to believe that can be true. Again, the simple but wrong rather than the complex but right. Gosh, I don't know what the answer is. It's so complex. I don't know. I mean, you said it before. It's just like an informed populace. You know, a thoughtful, informed populace. I think so. Is the answer for this. Well, okay. How do we get there? And then 40-something percent of Americans voted for Donald Trump.

46:27Right. Maybe move on, what do you reckon? Yeah. You end up in this sort of dead end of like, okay, so there's no easy solution. I've got no solution. I don't know what it is. I just know that it's not working. And I think maybe all you can do is just continue to sort of talk about it and just encourage people to just think through things in almost from a first principles kind of thing. There's too much, particularly in economics, where it's just things get said as fact all the time in the media. And it's like, that's not true. That is not true. Or at the very least, that's debatable. Right. And it's very complicated.

47:06and I don't know how you fix it. I don't know how you fix it. Hey, speaking of fixing stuff, I want to talk a little bit about lithium, which is not something we do very often.

47:19I want to share with our listeners, mate, the story of lithium thus far. He says grandiosely as if he's going to be able to do that. But I want to talk about lithium in the context of what's happened the last week or so. Because I think it's, we talked about supply and demand, mate. You spend a lot of time talking about the market and kind of the, you know, I want to sell, you want to buy. We agree on a price. That's market, right? That's how it works. And it's a really, really, really powerful force for good, by the way. Not always perfect, but a powerful force for good. The lithium stocks jumped, it was Wednesday this week.

47:49The top four stocks in the ASX 200 were all lithium companies. And they jumped between 11 % and about 16 % on a single day. And the reason was that China has announced it was going to mothball or close two big lithium mines inside China. speaking of a command economy and getting to make these decisions arbitrarily. Why? Because the lithium price had been too low. And as a result, if you take some supply or potential supply off stream, then there's the same amount of demand, less supply. What happens? Well, economics 101, the price goes up. The price goes up, the share prices go up because at a higher price, you make more profit.

48:22That hopefully is relatively clear, relatively straightforward to our listeners. If it's not, welcome to economics and we'll do a little bit about this. It's news to anyone who's in the property game, I tell you what. Supply and demand is – anyway, let's not go there. Good idea. I thought it was interesting, mate, because I want to go back to the beginning. In the beginning, there was God. Not that far back. Let's go back to the beginning of battery technologies becoming a viable solution for transport and for home storage. and let's go back frankly a little bit further than that to the development of lithium-ion batteries i'm old enough to remember uh back in my first mobile phone a nokia 121 that had a removable battery that you would take the battery off the back of the phone you put it in a charger you put it back on the phone yes kids i'm that old um it had a nickel cadmium battery and you could upgrade it at the time to a lithium-ion battery which was amazing it had all this great storage and it cost more but it was cool anyway fast forward more years than i should i should uh I should cop to.

49:27And you've now got lithium-ion batteries powering a lot, probably most, I think, of the world's battery storage, whether it's cars or home batteries or big grids, big batteries and grids. And so people kind of looked at that and went, ah, I see. We're going to use a lot more of these things. And if you use a lot more of something, then the price should go up, right? Because more demand means higher prices. That sounds really good. It sounds perfectly fine. I can see the future. There's going to be more batteries used, more lithium mined. Therefore, I'm going to make a lot of money owning lithium mines.

49:57Speaking of simple but wrong, because that's not untrue, except it misses the supply response. And again, we're going to talk about supply and demand. What happens when there's a high price and everyone else, including the miners, think, oh, I see what's going to happen here. We use a lot more lithium. Now, if you own the only lithium mine in town, you're going to be very, very happy if you're the only lithium mine in town, because everyone's going to pay you that higher price. If you don't, you're going to say, hang on, I can grab a proverbial shovel, metaphorical shovel and I can go and start digging where there's some lithium.

50:26And I can produce lithium. I can supply that market at really, really high prices. And then you might just put a price cap on it. And the Black Cross town does the same thing because why wouldn't he? All of a sudden, you've got five lithium mines all vying to produce more lithium. And slowly but surely, that massive demand and the massive demand overhang relative to the available supply that pushed the prices up, well, supply catches up and it catches up really quickly. And what happens when supply catches up to demand, you guessed it, kids, when supply increases at a given level of demand, prices tend to come down because there's more than enough lithium.

51:00Why would I pay a massive overs for lithium if I can go and buy it for the other guy for a cheaper price? So the first guy says, well, I'm going to lose my business. I better lower my price too. This is markets. And exactly what Andrew was talking about before with widget A and widget B, right? Everyone wants widget B, that's lithium. So everyone's going to produce a whole lot more widget Bs, more lithium being mined. And so we had this massive lithium boom for, was it 18 months, two years, maybe even longer. And then all of a sudden we had this massive lithium crash because all this lithium either came on stream or the markets could see it coming.

51:31And when you see a train coming at you through a tunnel from the other direction, you're going to get out of the way. And that means the price is going to fall. So markets did what markets are supposed to do, a demand response, then a supply response, then a price response. Now, what I said before, during this week, China's announced a couple of plants will be closed. Why? Because the price is too low, and they can't make any money mining lithium if they're only going to sell it at the current market price. They take the mines off stream, the supply dries up or potential supply dries up, and the price starts to move back up again because we removed supply for a given level of demand.

52:12And guess what? When you do that, the price starts to move back up. Now, I don't really have a direct so what here. I don't know what happens next with lithium. Maybe you do, Andrew, I'll ask you in a second. But what I wanted to illustrate was to make sure you always, always, always consider both sides, supply and demand, when you look at any investment case, any market, frankly, certainly any investment case, it wasn't enough to see that demand would go through the roof of lithium to justify buying shares in lithium companies. It just doesn't work that way. And so you've got to be really, really careful.

52:44If you corner the market below, if you're only lithium miner in town, you're sweet. But if you're not, if you can't corner the market, if you're not a monopoly provider, then you better believe that as prices rise, more supply is incentivized and all things being equal. And almost always, that results in lower prices for the commodity. How'd I go, mate? What'd I get wrong? Nothing. That's really obvious when you think about it. The odd saying is never a commodity be. And the first level sort of take on that is you think commodity commodity, like wheat, oil, iron, all that kind of stuff. And absolutely, it applies to that because a commodity by definition is something, it's like an asset without an issuer.

53:26It just, it exists and it is what it is. Lithium is in the periodic table. The lithium that we have in your battery is identical to the lithium that you'll find on Mars and on Alpha Centauri. Like it is exactly the same. so it's different if you were to sort of say hey i'm a lithium producer but my lithium's extra cool it's like no it's i mean yes i before the geologists chip in yes there are grades and the rest of but we're speaking to a specific grade here then it is what it is and and a buyer will get it if i can get 99.5 pure lithium from you yeah and i get it from me uh and i'm half the price you're gonna get it from me it's different this is why brands are so powerful like apple is the only one that can make an iPhone.

54:11Yeah, I'm trying to learn. And the margins, that's a great example because the margins that Apple make, there are people that have other phones. Yeah. So could I get another touchscreen phone? Yeah, I'll get a Pixel. Do you still have your Pixel? Yeah, yeah. Samsung phones, everything else. The margins made by Apple, I don't have known the numbers recently, but it's multiples of the rest of the market combined. Not because they got lower costs. Yeah. I'm just waiting for the fanboys. I don't care. I don't even want to have that debate. Just don't. It's like Xbox versus PlayStation. You know what?

54:43We're at a point, maybe in 2008, it was a reasonable conversation. And this point is like, they're all the same. And the other saying from business is in the long run, everything's a toaster. And you can imagine - Yeah, I've used that one for a while. I love that. It's a great one though. Like you imagine like the day that we didn't have toasters and someone invented a toaster. It's like, oh, it's a game changer. I no longer have to get a stick and hold my piece of bread over the coals. I can just press this button and it's like brilliant. Oh, this company's making it? Whatever the price is, I'll sort of pay it type thing.

55:13Now, everyone, I mean, anyone can make a toaster. It's like, it's ridiculous. And that's what happens. So your point about everything is a toaster is it's become such a commodity. There is no brand premium left. There was no product premium left. It's just price and features all that's left. Yeah. And look, we're not there yet, clearly, because Apple can charge a premium, right? But we're going very strongly in that direction. So my point here is that when it comes to commodities, I think too many investors get sucked into just that first level thinking like, oh, we're going to need a lot of this.

55:48So I'm going to buy that. Yeah, but it just negates that whole other part of the equation. So you can then maybe say, well, I'm just going to know when to get off the train before that happens. And maybe you can. But again, there's a lot of very smart, well-resourced, well-connected people playing that exact same game. So with you and your laptop out the backyard, you know, I don't - And there's still guesswork. There's so much guesswork, you know? And you're going up against some research house that has like five PhDs from MIT, supercomputers, and they're all politically connected and they're all getting inside information.

56:29Like just good luck to you. That's not fair. No, it's not fair. And that's the game you're playing. So don't play it, right? And here's the other thing too. So as I understand it, maybe some chemists will correct me here, but there are superior battery technologies. It's just that we went with sort of lithium at a point in time for a various set of reasons. And it's now got the scale advantage where there's a lot of sunk cost and infrastructure and things have been built around it, which kind of gives a little bit of a competitive moat. But if we were starting from scratch today, hey, we might go in a different direction in terms of battery technologies.

57:06I might too. That's the other thing. Yeah. So this is the thing, right? What you don't know with this, and this is just true for almost every company, so it's not unique here, but there's no sure bets, not just in terms of the supply and therefore the price response, but there could just be something that some kid in their garage just comes out with a far, far superior battery technology, longer lasting, easier to charge, easier access raw materials you know it's just sort of like and then overnight virtually these things get disrupted so it's it's the market being the market the prices rose that day okay right but i would i would almost say without exception take any one of those companies that had a great day and hit maximum view on your chart and you'll see very disappointing performance It's massive spike, massive fall, disappointing.

57:59And that's the story of commodity companies, right? You know who wins? There's one edge you get in that. And you could point to some of the bigger players. BHP is a good example. Fortescue is a good example. Where they just have the cost. They're so big and the grades that they have access to are so high quality that their cost of production is low. So while the product is identical, they can dig it out of the ground at a much, much, much lower price. so they have no control over margins. They have no control over price. They just, when prices do start to fall because of that supply response, they'll still be standing.

58:34They'll be making a lot less money. Let's not gloss over that, but they will be making money and it still makes economic sense for them to continue to produce. So if you're going to get into this game, I would say this, understand exactly what Scott said in terms of supply side response and commodity pricing and how that tends to work. focus on the low cost producers. They're the ones that will still be sent. And also understand, even though there's a difference between surviving and thriving, right? Yeah, right, exactly. You don't survive to thrive, but it doesn't mean you're going to exactly, yeah.

59:06If you're modeling things out basing on the fact that they will maintain that margin forever, there is nothing more alluring to a potential competitor than a fat margin. You know? As soon as you see someone over there going, wait a second, and they're selling that thing for 10 times more than it costs them to deliver, I'm going to do it too. Because why wouldn't I? In fact, I'll do it for nine times more because I'm still making out like a bandit. And then someone goes, well, maybe I'll do it for eight times more. And so on and so forth. And that beautiful competitive response, not beautiful from those in the industry, but beautiful from a consumer standpoint, drives things to this almost – just above the marginal cost of production is where things settle.

59:47And we end up getting things very, very, very cheaply. and the competitive dynamic delivers that for us. It's a wonderful thing. But to simply just say, world's going to need more of this. Nothing will ever change. We'll be using lithium ion for decades to come. And the price is going to stay the same. And the margins are going to stay the same. It's just the volumes are going to increase. I just think you need to sort of think that through a little bit more because whether we're talking lithium, whether we're talking copper, any of these things, it's always the same. It is always the same. So beware.

1:00:18Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

1:00:28My last one I want to talk about today is, speaking of things we don't cover very often, Star Casino is at the time of recording and news is moving, so maybe for the time you listen to this, it's already been resolved one way or the other. They are really, really up against it. And I feel so sorry for them. That was a couple of ways. That's so unfair. They didn't do anything wrong. Jeez, life's unfair sometimes. Yeah, go on. Sorry. Well, here's what I think is worth talking about. So a couple of things. There is an investment angle on just companies with debt. So the first observation from me is that you, and we'll get back to why casinos may or may not be good bets, but no pun intended, but any company with debt is vulnerable as soon as its economics start to falter.

1:01:18And I'm not saying don't buy any company with debt ever. What I am saying is the more debt you've got, the more reliant you are on business not changing. You talk about surviving and thriving before, mate. We can add the debt realities to the surviving bit, right, which is even separate to price, although it's a function of it. Depending on how much money you're paying back in interest, depending on how much profit you need to make. And by the way, here's a really small tangent, but really, really important. We learned during the GFC and ever since that while most investors before that, I think it's fair to say, focused on how much is the debt costing?

1:01:51How much money am I making before that debt is due or the interest payments are due? I kind of cover it. In other words, if I'm going to pay 90 bucks in interest, I'm making 100 bucks in pre-interest tax, then that's okay. I can cover that, right? That seems reasonable. What we learned was this little word or big word called covenants. In other words, the rules that the banks put in place. Before the GFC, I think I was certainly ignorant of this. I think most investors were, but maybe it was just me. You think, okay, as long as I can cover the debt. As long as I pay the interest, that's fine. That's enough.

1:02:18And what we actually learned was it's not enough because banks would put rules in place which say your profit before interest has to be three times the interest bill, whatever the number might be. If not, you are in breach of the debt agreement you have signed and you must pay the debt back. And so we kind of went from this world of it's just about the maths to actually, gee, the contract matters and sounds almost ignorant and irresponsible, frankly, in hindsight. Okay. How did you not know that, Phillips. It was never an issue. No one got called on debt covenants. They just didn't. It was always about whether you could pay the debt, whether you did pay the debt.

1:02:53And then it became actually banks are putting rules in place to protect themselves so that these businesses need to be uber profitable relative to that cost. Why? Because they want to make sure that you're a going concern. And if you fall below that covenant, they're going to call you to account before you lose all your money and go broke. So they basically want to get to the front of the line. And how do they do that? They have put those warning signs in place which say, if you miss this agreement, we get all our money back now. Let's fast forward to Star. They have a business that has struggled for years post, as Andrew might have implied, the allegations slash findings and inquiries that they were doing the wrong thing.

1:03:31Their businesses weren't sustainable the way they were running them legally, let alone economically, allegedly. And so the challenge for that is - I love how you can just say that, You can say whatever you like and then add that at the end. Allegedly, yeah. It's so cool. I'm also about a company of people, so I'm pretty good for slander. I'm not going to mention anyone's name to keep myself out of jail or out of the courts. So you have this situation where all of a sudden the banks are saying, well, actually, you guys aren't compliant anymore and we can withdraw this funding if we want. Now, normally that's used to get better deals for the banks.

1:04:03They say, well, okay, we'll let you keep going, but here's the new rules. You'll now pay us even more interest and we'll take these assets and we won't let you do these things unless you'll clear it with us first and sometimes you work out of that and sometimes you don't so that's kind of the debt side of it from a from a business side of it mate what i think is fascinating for this one is i've been asked many times i'll talk about this one on radio on tv but scott doesn't the house always win and what i think is really fascinating about this and again think about businesses right think about again second third order impact thinking we've talked about that a lot today does the house always win yes absolutely if you play the game long enough you sit on a blackjack table a roulette table you play the poker machines for everyone that walks away with with the squillion bucks firstly if you're playing against other players the house just takes its cut it's beautiful right you're not paying you're not betting against the deal of the house you're betting against other players that's perfect if you are betting against the house the rules of the game literally are designed to make sure the longer the game's played the more the house makes Not every spin, not every deal, but over time.

1:05:03So the house always wins at a game level. And that was enough for most people to say, well, then it must be a good business. All I have to do is buy it and just let the house win and go from there. Why didn't that work with Star? Well, we haven't had the postmortems yet. Hopefully, we won't need one for those shareholders. Hopefully, things will continue along for them at least. But the reality is that the structure of the business isn't the same as the games being played. What do I mean by that? Well, you can play roulette as long as you want. But if the roulette table is in a room full of staff, in a building that's been leased, in an environment where you've got a heap of fixed costs and you can't make sure you're going to keep the place full, you don't get to spin the roulette wheel as often as you want to.

1:05:45You spin it as often as someone comes in the stands in front of the machine and puts$10 down and says, I'll have some chips on number 10, please. That's how it makes money. So on a game-by-game level, that's fine. But the structure of the business is not just a variable cost business based on a spin of the wheel. You've got a croupier, you've got a supervisor, you've got a security staff, you've got hotel staff, you've got buildings, you've got lights, you've got furnishings. So the structure of the business isn't the same as the structure of the game. So as a gambler, you bet the house always wins.

1:06:15As an investor, we know for a fact with Star, the house doesn't always win. And so just think a little more carefully about the business itself, not just in this case, the product, even though the product is stupidly profitable for those who want to operate them, you've got to do it in a way that the rest of the cost can be covered by those who are gambling at your tables or sitting down and playing the machines. Yeah. I mean, you only have to look at the history of Star as a listed company, right? Like it's just, it's woeful. Here's the thing. It's like for all the societal ills that it brings upon us, right?

1:06:49I love how it's called gaming I love the euphemism of gaming I'm not gambling anymore, it's gaming I love it, this is like well done marketers you know it's sort of like you would at least think oh well okay it's a real bad for society but okay people own it are making out like bandits like nah, shareholders have not done well, not done well at all which is kind of like who's winning here and again there will be a very small select group of insiders that I'm sure have paid incredibly well and have done very well nicely out of it. Throws a bit of money into the hand of state governments and these kinds of things.

1:07:23Maybe that helps a little bit too, but it's just a slow moving train wreck of a business. The return on equity, so that's just a financial metric that's a pretty important one to my way of thinking. It basically says, what's the profitability relative to the net assets of the business? It's like higher the better, right? I mean, they almost never get above like 10%. The best that they can do is sometimes you get some anomalous years because the equity has been damaged, not because the profit has surged. But, you know, like they may have got close to 7%. So they're taking all the money, what the initial founders sort of put in.

1:08:05That's another way of thinking of equity is all the money that's sort of been put in and then since retained, right? And all of that money, they're getting on average on most years sort of 5%, 6%, 7 % return. I tell you what, Apple's making a better return on equity than that. Dozens of companies in the ASX that are doing far better than that. So it's like marginally profitable, incredibly lumpy, massively regulatory risks as far as the eye can see. Oh, and it destroys lives and families. So I was like, tell me, where do I sign up, right? Like, this is a desire. And then there'll be some poly alternative and go, oh, but it's important for employment.

1:08:46Like, Star Group employs 6 ,000 or 7 ,000 people, I think, something at its peak. It's literally 0.02 % of the population. I want to say, Matt, I believe the number's less than 3 ,000 now. Three, right, okay. And again, it sounds like, oh, you uncaring bugger you that you don't like. I've been accused of that. I've literally been accused of that. It's like, don't you care about those people working? Should we bail the company out so those people can keep having jobs? Well, let's have a heroin dealer in every corner because they need to support their families too. I mean, you've got to draw a line at some point.

1:09:14Heroin dealers are people too, Andrew. You know what? A lot of those, most of those people too would be perfectly employable in other areas of hospitality. The only way to work a bar is in a casino. The only place to be able to serve food and drink is in a casino. No, there's other places to sort of go here. So I just - It's also the other thing about pokies, mate. We need to have more pokies so that people can keep working at the RSO. It's like, if your job is literally predicated on you stealing money from pensioners, I'm okay with you. I feel sorry for you if you get out of work, but I'm not going to support your job just because that's what you do.

1:09:46We'll double your dole if that's what the deal is. I'll do that. Sure. Let's do that. Let's not support a job that's somehow needed to fleece people who are addicted to gambling. And here's the other thing, right? So students of probability will know this. is humans are very bad at understanding what randomness looks like. So you give someone a lottery ticket and say, pick some random numbers and we'll space them out, right? Because if that's sort of all under 20 or clumped around this, it just doesn't feel very random. That's so true. But where I'm getting at here is that true randomness tends to be, well, it often looks clumpy.

1:10:26It's often unintuitively random. And so even to your initial point of the odds being in your favor, I'll give you this example from a casino. I could go to the roulette wheel and, you know, they've got the little thing there that shows you what the last 30 spins have been and it could have been red every single one. Now, what are the odds of being red on the next spin? Now, instinctively you'd go, well, there's been 30 reds in a row. We're due for a black. Surely the next one black. It's got to be black. Now, the odds are 50-50. Well, not exactly because there's a green zero in there. But, you know, basically, right.

1:11:00Again, and that is how the house tilts the edge in its favor. Yeah, correct, correct. They're not in the business of giving money away. But my point is, is that it could be 2 billion reds in a row, 10 trillion reds in a row. The next, I mean, it's a very unusual universe that that's occurred in, but it's possible. and yet still the odds are still 50-50 on the next spin. And so what I'm getting at here is that often when you read – I haven't done it for years, but last time I read the financials, it was Crown, I think, and a little bit of Star, where they give you an adjusted win. That's normalised.

1:11:44That's right. Yes, yes. It's like an adjusted profit based on what it would look like if the laws of probability were standardised over a very long sample set. And the reason they do that is because when you actually read the actual statutory numbers, they're often quite distorted from what you would expect from probability. Is it because the probability theory is broken? No. It's just that in a purely random circumstance, you're going to get distortions from the mean. The average might be this, but it doesn't mean that it's going to land on that every single time. so even when you have the odds in your favor it's absolutely within the bounds of possibility that you just have three or four years of awful luck and that's all it is it's just bad luck the maths is right everything stacks up so you've got that going for you as well right and it's just like i i cannot see for the life of me why anyone would go would touch this with a with a 10-foot pole frankly um is her i i'm gonna say yes but can i say yes yeah please by the way very quickly i looked up the stars details this is a quote from their recent earnings release they say quote normalized results are adjusted using an average win rate of 1.35 on actual turnover taxes and revenue share commissions and are before significant items in other words they said well okay if we you know again if you spend the virtual real it will enough times the amount of money that would bet this is what we should have taken sometimes higher sometimes lower because the as you say randomness is random and significantly so like yes it's surprising you think oh something's wrong no that's how it works yeah go ahead I'm pretty sure this is not apocryphal but it might be my understanding is that Kerry Packer was responsible for a footnote in a Vegas casino's annual report when they said something like one they're called a if you're a big bear you're called a whale right yeah and basically the note said one whale actually had a really really really big win and so our profits are lower than normal and I believe that was Kerry Packer wow remember KP just because you go and bet lots of money it's one of those one of those one of those funny stories well it's gonna it's not like geez I wonder if that could happen.

1:13:45It's going to happen. Enough spins of the world that you're going to get someone who's going to come in, make a huge bet and they're just going to win. And that's how you win at a casino, by the way, is you get lucky and you walk out. When your number comes up, take the money and run because it's all downhill from there. Can I share a quick story about Kerry Packer and gambling? Just because we might at this point in the podcast. I'm just going to find the article now. He's got some great stories. Oh, yeah. Most of them, unfortunately, aren't. here we go I'll just quote it from the SMH because it's fun one of the more colourful stories that went with those my page is refreshed sorry mate here we go one of the more colourful stories that went with those visits to Las Vegas can also be taken fairly lightly or it can be enthusiastically adopted it involves a Texan who approached Packer at the tables in Vegas and started making a nuisance of himself when asked to give it a rest the Texan supposedly replied with the old do you know who I am?

1:14:43to which Kerry Packer said, no, I happen to be worth 100 million, said the Texan. I'll toss you for it, said Packer.

1:14:53Which is just fun. I'm sure it's not true, but it's a great story. My point about Star, mate, just go back to that because, you know, we should get back to it. When I said yes, but, there is no reason why a casino needs to be a bad business if the circumstances are appropriate. And I think we talk a lot about businesses and we don't talk a lot about business structure and we're probably about right Because business structure is both boring and usually not all that relevant. But it kind of is here, right? Because let's take Star and let's take its business with a number of tables and machines and whatever else, right?

1:15:23Let's just say that those things are real. Now imagine that I were paying, and again, I'm going to make this number. Of course, they're not possible, right? But I just want to illustrate it for our listeners. Let's say that the lease cost was suddenly halved. And let's say you could run it with 50 % fewer people. and let's say that there was a massive tourism boom and a whole lot of high rollers started coming to sydney to gamble and there's wishes that star's got a queensland casino it's opening soon uh let's go with the sydney one whole lot of people come from overseas uh big high rollers and bet a lot of money and the casino is full the entertainment venues are full the hotels are full and they do a squillion dollars over the tables because everyone wants to be there in that case star's gonna make a fortune and so i think it's one of those situations where and that's why i did the yes but you know do i do i think they're going to no so i'm not going to buy their shares i'm not saying anyone should either i just want to make the point that structurally the two two businesses of exactly the same structure i.e x number of tables and x number of machines can have very very very different outcomes so is every is every business with star's characteristics a bad bet no again no pun intended is everyone a good bet no star has shown us that if you're paying too much for rent if you can't keep your tables full um same with airlines, right?

1:16:32If you could find an airline that was 100 % full all the time, it'd be the best investment ever. But if you find an airline that's sometimes 100 % full and sometimes 50 % full, you're probably going to do your dough. And I just think it's worth, again, not knowing you're wrong at all, but I just want to highlight that for our listeners was, would I invest in Star? No, because I don't think those hypotheticals I just put out are going to happen. But if they did, there are absolutely scenarios in which Star makes a lot of money and frankly, the share price today would really, really cheap if those, now they're not going to happen but if they did happen and i guess that's all i wanted to just draw out doesn't make them bad bets no i'm glad you said that it's so true right because it should be a good business it should be right that's and that's you kind of think how is it how could you possibly not run a casino well like think about it it's addictive you have the odds are in your favor yes you have people who are just you've basically got legislated monopolies virtually right yeah how could you and that's why i tell you how i tell you why because because you're you're a clueless idiot is how is because allegedly you know sorry allegedly allegedly so i mentioned you off air before we started that that i'm i'm interested in buying some shares in an airline which is just like the dumbest thing you can do if you have any if you're any student of history like airlines are you know terrible investments um but but and i don't want to give the pitch on it i don't even want to mention it because it's a distraction but my my point is is that what what has piqued my interest is that the speaking to the ceo uh that they have a hyper awareness of the difficulties and challenges of that of that industry and they structure the business appropriately and that's the key here so so what could have star done better well it could have run a far more resilient balance sheet yeah right don't don't you know like load up on debt yeah exactly like that that was your first, you know, sort of stupid move, you know.

1:18:26The second is knowing the massive regulatory risk, operate squeaky clean, right? And then you've got, you have nothing to worry about when you are a squeaky queen, right? And I don't want to make any allegations. Great. Please come. Look through the books. I'll show you all the stuff we're doing. You'll walk away happy. I'm happy. You're happy. Everyone's happy. It's actually a competitive strength because you can rely on the rest of the industry not to be squeaky clean. You would actually forego short-term profit for long-term viability. And that is the smarter move every time. And you can go on and on and on.

1:18:56But my point is, as with the airline CEO I was talking to, is like the first thing you need to do is understand where are your strengths and weaknesses and lean into the strengths and avoid or minimize the weaknesses as a business leader. That's what you need to do. To think it is different, you know, and just say, oh, it's unfair because the regulator did this. Oh, well, the bank took our money away. And like, no, you signed the contract, right? You allowed this. You had the poor compliance. You did everything. You know what? That's why as a CEO, you get paid some ungodly, unconscionable amount of money that would make any mere mortal weep with the amount of money that you were paid.

1:19:35It's like we can have that debate about CEO pay, but it's like, for the love of God, I'll at least be happy with that when you're creating oodles of wealth for your shareholders and you're being a responsible custodian of the assets, When you're paid a king's ransom and you can't even understand the basics of your business and you run that into the ground as a near, you know, legislative, legislated monopoly in an industry that is selling an addictive product where the max is 100%. Like it is, you know, these captains of industry, someone at some point just has to go, the emperor has no clothes.

1:20:08There is no clothes on here. And they'll bounce back. They'll bounce back. Give it a year or two for the things to blow over and they'll pop up somewhere else. I mentioned this before. John Hempton's a famous short seller from Bronte. Basically, he just runs this big book of people that he predicated on the view that leopards don't change their spots. Every business this person has touched has gone belly up. Oh, they're running another business. I'm going to short it. Now, John's not listening, but I don't think I'm too far off the core element of the strategy. Conceptually, if not actually. Yeah, obviously there's a lot more to it than that.

1:20:48But there's a lot of financial analysis, et cetera. But it's a pretty good heuristic, right? And it goes the other way too, I think. When you've got a management or a management team that has shown success in multiple endeavors over long periods of time, and they're now running this business, I wouldn't be the sole core of my investment thesis. It would count for a lot though. It would count for a lot. And what I find amazing is how? How do you do it? I feel as though if I was to do that just once, I couldn't get arrested. Like anytime I showed my CV, I was like, no, we're going to go with someone else, Andrew.

1:21:31Thanks for applying. but these guys maybe it's just a white male privilege thing where you just happen to be connected through your old boys network or whatever bs that happens to bear is like you can do no wrong and even if you do there's a safety net to catch you maybe it's as simple as that but it does it does boggle my mind that that you can screw up that badly and still be not laughed out of a room when you apply for other jobs it is a little unfair yeah no but i think it's fascinating i think and like i we probably don't go back to the work there's a lot of work but it'd be fascinating look if star does implode it'd be fascinating to go back and really look at what was achievable and what should have happened because if you kind of think about why why didn't it work and you know i think debt is number one right we say so frequently right as buffett said leverage is the only way a smart guy can go broke you know star star could make no money i mean i guess it's possible to make lose lose enough money eventually the shales capital was wiped out and couldn't run.

1:22:28But not having to pay that debt back goes for a long time. Now, would it have been a lazy, quote, lazy balance sheet? Yes. And would someone have complained about there was a lazy, why don't you leverage up? It'll be great. You can maximize your returns. Well, guess what happened to Star? Again, we don't know what will happen eventually, but it's pretty dicey right now. That's a really open question. Think about the structure of the business and think about the bets. I literally don't mean it to be a pun. Think about the the decisions taken, right? Someone said, you know what? We should make it a really, really, really, really big venue on the waterfront in Sydney.

1:23:02Oh, hang on. Won't that be really expensive? Yeah, yeah, yeah. But we'll keep it full. And so think about the risks that were taken. I wouldn't say hubris because I don't know they were necessarily unreasonable risks. There may have been. We might be seeing the random outcome here. Maybe not in another universe, a star makes a fortune, right? So I don't want to say it was always going to be the case. But if your job was to say, let's shepherd their shelter capital, let's try and maximize the returns, but let's not push so far that we're blowing things up. Someone might have said, why don't we put a street back?

1:23:34Because we could probably save half the rent. And why don't we make it maybe 25 % smaller? Because it'd be nice to have all those tables, but I'd rather have people lining up than have a couple empty. And why don't we just kind of cool our jets on the number of different venues and restaurants and stuff? Empire building. Empire building. Exactly. It's responsible for so much destruction of shareholder capital. And in some universe, they are still chockers, and they wish they'd gone bigger. And again, maybe it was a perfectly fine size to do and place to put it and all that kind of stuff. I'm not necessarily saying it was obvious, it could have been obvious or should have been obvious to me 20 years ago.

1:24:11They got it wrong. But I am saying that they made some bets. Again, I'm going to call bets because - Yeah, well, they did. That's exactly what they did. They put some chips on the table and said, we want to take these risks with shareholder capital to try and get the best possible return. Yep. But what I think it's fair to say, as a company didn't do, is say, what's their downside prediction? What if the people don't turn up? What if the rent doesn't end up being too big? What if we don't run this thing properly? And I think that's where, and it's not just Star. We're picking on Star, and I think probably justifiably given the circumstances.

1:24:39But think about every other company you own. And think about how is your management team making sure they are taking calculated bets that won't blow the company up if it goes badly. Or if they are, that you understand that's what they're doing. and in your portfolio, you size it accordingly. You know, a star is going to be a half a percent position in my portfolio because they're taking massive, massive bets, and it might play off or it might go to zero. I know that's what they're doing. They've said that's what they're doing, and we are all on the same page and taking this risk together. Rather than the house always wins, it's the star, what could possibly go wrong, we'll leverage this sucker up.

1:25:12Again, I think we know the answer right now. Crown's had its own issues. Right now, owned by Blackstone, the private equity mob. You know, does the house always win? yes but if there's too many casinos if there's too much space if the costs are too high there's too much debt you're not going to win this yeah because you know owner doesn't always win the table might just be very careful but just i'll just on that whether it's casinos or any business fish and chip shops or whatever any any entrepreneur any businessman person is making bets like on the future we're making bets on the future with our portfolio so it's not to say that you know they were wrong for making a bet but you don't make a bet that if it goes wrong you're wiped out.

1:25:50You make a bet where it's like, okay, that didn't work out. We blew up a little bit of capital, but we get to try again. And that's just the nature of business. You see, you throw stuff at the wall, you see what sticks, you make lots and lots of little bets. None of them are existential. And every now and again, you'll hit something which just goes to the moon and it sort of underpins the next leg of the journey. And that's, so it's not that you made a decision in an environment with incomplete information and uncertain outcomes. That's welcome to the universe, right? That's just how it is. And I know you're not saying otherwise.

1:26:23It's just, that is the point though. You never want to be the person who puts it all on black. So I could go into the star right now and I could liquidate every single asset I own. I could put my entire worth on the line and I could bet on black and I've got a near 50-50 chance of doubling my net wealth. And if I walk out of there and go, ha ha, see, I did it. It was a dumb thing to do. Whether or not I won, you know, I can play Russian roulette and not kill myself, but that doesn't mean it was a smart thing, right? And I think that's the thing that you can level the criticism at here. It was that you took such excessive debts with other people's money, which is the easiest way to make big bets, that were an existential threat.

1:27:09And we better wrap it up, but I wanted to just point to one quick story as you were relating before mentioning Buffett and leverage, the only way a smart person can go broke. I'd forgotten about this story of Rick Gurin. Do you know him? Name rings a bell, but I can't quite place it. Go on. He was a contemporary of Buffett and Munger back in the late 60s and 70s. So they made a lot of investments together. They worked on a lot of deals together. He's been forgotten by history, largely. Anyway, they all had incredible track records. They're all very similar in their approach, you know. But in 1974, he got wiped out, this guy called Rick.

1:27:49And why? Have a guess. Leverage. Leverage. And Buffett later, commenting on it, said, Rick was just as smart as us, but he was in a hurry. There you go. That's a lovely line. Isn't it brilliant? That's a lovely line. And that's the point here. It's not to say that you, you know, I think this is where a lot of smart quote-unquote people go wrong because they go, I get all of the things that I hear about leverage, but I'm smart. Look at the documentary, The Smartest Guys in the Room, about Enron. Right? Look at long-term capital management, LTCM. Like gigabrain people that, gosh, I barely fog a mirror next to what these guys are capable of doing.

1:28:32So it's like, but they're almost the most dangerous because they are so convinced of their genius that they feel as though the normal rules don't sort of apply to them. Or that the rules, as they said, the rules of probability apply arbitrarily and can be counted on, which defeats the purpose, right? When you think you have a mastery of this stuff, you can't master randomness and yet you kind of convince yourself. Mate, just a final thought for me. I think the lesson here is you've got to know when to fold them and know when to hold them and know when to walk away, know when to run. Absolutely, yeah.

1:29:04if you have a couch of money when you're sitting at the table there'll be time enough for counting when the deal is done mate once we've finished counting after this deal will you come back on Sunday and we'll do some more absolutely we threw a Kenny Rogers reference in there it's all you had to say Buffett Kenny Rogers we even talk about Marge we didn't mention Bezos specifically but your Marge is my opportunity is the other one so we've hit our quota for today until Sunday enjoy a bit of Kenny Rogers and Fool on cheers The Motley Fool and people appearing in this program may have positions in the companies mentioned.

1:29:36General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under financial services license 400691.