The market says the crisis is over. April 17, 2026

27:15Here's my warning for listeners. We haven't had a proper recession for 25 years, okay? That is more than half of the working life of more than half the people listening. And if you... Well, more than that. If you break it back and say, will it be around? Of course it will. Well, okay. But if your retail is making 2 % margins, are you sure the sales can't fall enough to put it at risk? Oh, actually, maybe not. Okay, let's say your company has got a lot of debt and it's carried the debt. Of course, it's been fine. Well, Westpac reckons, we'll talk about this in a little bit, there's going to be three rate increases this year.

27:51Let's say that happens. Now how comfortable is the company? Well, that's probably okay. Okay, well, now add in a recession if there is one. Now is it still around? Well, I don't know. Probably. Okay, well, is that enough? Are you being paid enough for a probably answer? And I'm not saying for a second never buy a company with debt or only by companies with 40 % net margins because those two things can be eroded pretty quickly. And by the way, as you say, it doesn't mean you shouldn't necessarily just buy them. You've got to work out the value. But really, really ask yourself, I want to be kind here, but there is so much hubris in investing.

28:28Hubris is one of the biggest, if I see an investor with hubris or arrogance, it's one of the first things that turns me off, right? If you are talking in absolutes and, he's like, this will set you off, Ram. Sorry, only because I thought about it. I was sitting at a pub last night before we recorded this and off to the side was a group of people who were having some sort of event, celebration, whatever. And I swear to God, mate, if I say to you, this bloke was talking like an eastern suburbs real estate agent, you'll picture exactly what I'm talking about. And it was that loud, arrogant, certain, almost half condescending conversation where, of course I know all the answers.

29:05No, yes, no, you're clear. and it was just like my skin crawled and then you got back into your Toyota and they jumped in their Ferrari exactly he flipped the bird and drove off back to his gold mansion correct but my point is that arrogance and hubris if you see it there what it means is sorry let me go back a step not if you see it if you see it in yourself that's the risk but of course it will Maybe check that out. Or I think it will because, okay, your view is not, and your opinion is not invalid, but just check the opinion against the range of possible outcomes. You know, I hear so many people I've said a million times, you know, with commodities, you've got to have a reason to believe the oil price is going to go up.

29:53Oh, no, of course it will because of X. No, I'm asking you for opinion. I'm not saying, do you think, could you guess, can you be like every other prognosticator in the world and say, oh, yeah, I know boats. I reckon this. So maybe. but on what rational basis can you, what has to go right? What has to happen? How can you be sure I just think? Okay. If you say I just think, you should pay 20 % less each time you have. Every I just think should take 20 % off the share price you're prepared to pay, right? Not because you're necessarily wrong, just because you were speculating. It's pure spec. And that's okay.

30:23You can speculate all you want. But if you're investing on the base of a speculation, that's where you kind of got to pull yourself up a little bit and go, huh, maybe not. Yeah. And the other great one is recency bias. So it's sort of like, well, yeah, but you say, well, why is that true? It's like, well, look, it's true. You know, but that's the dude at the roulette table that goes, well, it was red last time, so I'm going to do red this time. It's like, yeah, I don't know. It must be red. Or it must be black. Both those are stupid. It's random chance either way. There is no tell in the data.

30:57The ball has no memory. Yeah. You mentioned the top stocks, mate. There was a Livewire article published only yesterday, I think, shared by our head of marketing, Matt Burgess. G'day, Matt. If you're listening, he's probably not. The ASX version of that. So Alan Gray wrote an article, Suhas Nayak. I'm sure I've butchered his name, so apologies if I don't mispronounce it, Suhas. This is returns for the first quarter of 2026. Okay. I'll run through it again. Numbers are boring. BHP, this is total return. BHP, plus 12.9%. Commonwealth Bank, plus 5.8%. NAB, minus 2.1%. Westpac, 2.3%. ANZ, minus 1%.

31:34The weighted average return of the top five stocks, and again, market-weighted, 5.1%. The ASX 300 index, down 2.0%. So the weighted average return of the other 295 out of 300 ASX 300 stocks, minus 5.4%. There you go. Now, there would have been lots that are up in that group as well. So it's not like the whole 295 are down. But just to that point, mate, the index is up. We talked about this the other day with energy and tech, right? But yeah, just again, for what it's worth, just to give some more data to your point of the stocks you own, the stocks you missed out on. And again, of those top five, and they listed the top five, which is fine, two of those are negative.

32:17So realistically, we're talking about the top three, or not top three, three of the top four. BHP, CBA, Westpac have done way more of the heavy lifting. The numbers would be even worse if they just lose those three rather than the top five. Very, very different number again. You know, I won't go too far down this path, but it just blows my mind. Like when you say what has happened on the markets, what's sort of driving sentiment? Oh, massive recessionary fears, inflationary cost of living crisis. Oh, there's a war. Oh, yeah, yeah. I'm going to buy a bank. And I'm like, whoa, whoa. Like, I applaud the decision to deploy capital in the face of uncertainty.

32:56But it's just like, it is, I think, anytime I speak to someone who's not Australian, right, they don't get it because they've got a very different context. But here, I think it's the recency bias. And when I say recency, the last couple of decades. But it's sort of like when you remember what a bank is and it is inherently leveraged by nature. Like that's what I'm... Literally, it's a fractional reserve system. That's the entire job. There are two things. There are two things that you do not... Like outside of banking, no one will blink at what I'm saying. But if you're worried about a recession or something like that, you don't want highly leveraged companies that are very cyclical in nature.

33:40What is a bank? A highly leveraged company that is very cyclical in nature. You know? If we don't do cycles anymore. if we don't do cycles anymore. But that's like, I guess I don't know how many times I have to sort of shout at the Skynet at a point, you just got to go, well, I guess that's just how it is now. But that, if you had sort of said, oh, yeah, but it's, you know, it's, I don't know, energy companies or AI, whatever's the hot kind of crazy thing at the moment, gold companies, you know, like that. Okay, yeah, yeah, yeah, that makes perfect sense. Banks, like, wow. Wow. It's all right.

34:17What else do you want? Highly, highly mature banks as well, right? It was just like there's very, very little natural, like organic growth potential beyond like the, you know, broader economic growth, which at best is going to sort of be around 3%. And it just, but anyway, I've been scratching my noodle about that for a long, long time. And it's even weird too, because when you dial it up on, you know, something like ComSec here too, because they've got those sort of standard reports there. and things from Morningstar or whatever. It's all overvalued, overvalued, sell. Yeah, right. So I was like, well, no one's paying attention to that.

34:53And I'm not even saying you should, right? Actually, I'm absolutely saying do not buy or sell based on generic AI slot. But there is an emperor's new clothes or something there or am I just too curmudgeonly and I need to get over that? Riddle me this. How does that make sense, I guess, is what I'm saying. I don't think it does, but I think if you're asking me for the devil's advocate or at least to answer the question, I think, and this is worth thinking about because you mentioned sentiment before, right? Yeah. And this is, it's really, really unlikely this remains the case because markets tend to just over time normalise.

35:28But you've made the point that, you know, you weren't in housing 15 years ago, 10 years ago because it looked stupidly expensive, but it still is and it's worse. And so it's kind of, the answer to your question, if it is to remain true, if I was going to make a bull case for the banks or at least a case for why the banks aren't going to lose value, okay? Some combination of, and I'm not, again, advocating to say it'll happen or should happen. Some combination of governments providing effective perpetual backstops, which remove recent amounts of the risk. A sense of property being a cultural touchstone as much as anything else, which keeps prices high.

36:10a market dynamic where the top the big four banks own the market and so are able to generate protected margins uh their margins are falling over time by the way against each other so i i make the point all the time not to be um not to be contrarian for the sake of it just to remind people that what we think is true is not always true so bank margins have fallen over the past decade uh but they are higher than overseas and able to probably be so because there's a four pillars banking policy and so competition is largely avoided and they've bought up the little guys uh how the occc let them do that is beyond me but they bought up little guys and that's protecting them against competition so if i was going to say it's a special case category as in as a sector as an industry i.e housing we're just mad for it and maybe we always will be or at least for the foreseeable future and in that environment the government provides a literally a implicit plus an explicit guarantee,

37:07the market probably continues to reward it because it's making unusually large profits. Those profits aren't at risk if those other things remain true. Now, I'm not saying they will, and your point is, we'll agree in 10 years. One of the answers to the banks to be around 10 years is, well, not if X, Y, Z happens. So I'm not for a second that people should buy the shares. I don't own any bank shares. But I could, I can see how, I can make a case for the prices of bank shares, or the multiples particularly, not falling meaningfully over the next 10 years in those circumstances. And I don't know if it's going to happen or not, but I'm just making the case that if you're saying, how could it be true?

37:45Not what people believe now, but what things could actually happen in the next 10 years to mean that that cyclicality and that leverage doesn't bring them a cropper, that's probably the picture I'd paint. I think you're right. It makes sense, but that still blows my mind. because the proposition here is like if, if, if, and if you'll get an okay return. Exactly. Okay. By the way, if it doesn't, I'm not saying it won't or whatever, but if it doesn't, like you are talking about a very serious fall. It's the, you know, it's word of the day always. Asymmetry, right? But they're not the good kind. Heads I win a little bit, tails I get wiped out.

38:26It's like, okay, sign me up, sign me up. And I'm like, why? I just because, and it's always been this way, and if people think this, and if they admit that, and they're like, mm-hmm, I don't know. I agree with you. So I just want to be clear, I'm not making the case. By the way, Exhibit A for your argument. Because you're not a fool. Well, not with a lowercase f anyway. It's in the business name. Oh, yes, right. I'm not going to put it that way. So here's the other thing, though, and I know you'll love this, but CSL is a great example of what happens when the story stops being made. because CSL has been stupidly expensive for its entire – well, not even the last 10 years.

39:05Stupidly expensive on any – not as a share price, not as a price per share, but as a multiple of the company's earnings. And stupidly expensive. And the argument always was, well, it's a quality company and people are paying up for quality and there's only so many great quality companies in the ASX, so CSL will always carry a premium – a price premium that reflects its quality. You could just replace CSL with Eastern Suburbs property or something in that thing that you just said. Yeah. And so that argument of – it was true. It was true for a decade, right? And so every time you said – I said, someone said, CSL, I'm not paying 100 times for CSL.

39:46That's crazy. Why would I do that? And for years, we were wrong. And like, you know, wrong in the sense that the market disagreed with us. And that's kind of what wrong is in investing, at least to some degree. until the kind of generally accepted common health view breaks. And all of a sudden the market goes, you know how we thought CSL was bulletproof in quality? What if it isn't? What if things aren't as good as we thought? What if, what if, what if? Now, by the way, the shares have fallen from$312 in 2024 down to$139, okay? So I'm going to call that because my math is not that great. Well, it's probably a 55 % fall, something like that.

40:29And yet, the P is still 35 times earnings. Okay. And over the last seven years, they have doubled their profit. They made$23.5 billion in revenue last year. In 2022, they made$15 billion. It's like, what's wrong with this? There's absolutely – and I've always got to hasten to add here. You insinuated it, but there's nothing wrong with the business. It's a great company. It's a great company. No one's saying that it's not a great company. Just as like your house is a wonderful house, right? Like just as, you know, all these other things are good, but price is what you pay value is what you get.

41:05And that's what worries me about the banks is that if that sentimental shift happens and it's not like I would go short if I thought I could time it. I can't time it. I'm certainly not dumb enough to short the banks. But that's the kind of the proposition that you're dealing with here. It's just sort of like, yeah, okay, maybe they actually, they are around in 10 years. I'm sure most of them will be. And probably earning more in 10 years. Like, yeah, actually, both of those conditions are still true. I'll just reiterate. I wasn't saying I invest on those two bases. That is permission to start investigating further.

41:41But those things could be true. But if CBA's net profits or per share profits are 3 % higher in five years' time, and the goes from 27 to 20, which is still well above the long-term average of a bank, of mature bank, of that 16, 17 times. Even under all of those soaps, you haven't done your dough, but you've done a lot of it. I hate the term because people, oh, it's a stock picker's market. It's always a stock picker's market, you idiots. Unless you're a broad-based ETF investor, which is fine, then fine but but other than that of course it is but but oh man it is a worry that when you sort of say well this is what the market has done oh it's because of these handful of companies you go okay well i guess they're doing really great something well they're okay it's really just for purely sentimental reasons and and if there's one thing i know about sentiment and human nature is it'll change it's a little fickle it's fickle and it'll change and I just I am not going to put my life savings into something where it's just sort of like it just gosh it strikes me as precarious it really does anyway I'll keep railing and being angry at being wrong so I wanted to bring the CSL bit we will move on but you talk about CSL profit growing and the price cratering The reverse is CBA.

43:11Now, over the past five years, Commonwealth Bank's share price, not even dividends, has doubled. So doubled in five years. The earnings since 2017 are up 10%. Not per year, in total. In total. Now, you can make your own... I'm not going to make a prediction because that's just stupid and I'll be wrong. This feels like CSL three years ago. What's a quality business? Profits are okay. It is a quality business. This is trading on 30 times earnings for a business that's grown profits 10 % in total over nine years. 1.1 % per year, probably 1 % compounded per year. Now, yes, it's paid a dividend and I'm not bagging the – Commonwealth Bank is a very, very good business, right?

44:09Because it's massive and it's all a gobbly and it's government protected and it's all the things, right? Also, by the way, leverage and risky, as Ram said. But even that aside, we are looking at a business paying 30 times earnings where the share process has doubled in 10 years and profits are, for all intents and purposes, flat or just a bit better. Now, before someone says it or thinks it to themselves, I was like, well, Scott, you're always telling me how the market values things based on the future. You go, okay, all right, well, let's look at the forecast. And these are just forecasts. I always take them with a grain of salt.

44:44But, you know, all the banking analysts, I'm just looking at the consensus here, are saying in 2027, they're forecasting for CBA about$7.03 per share, which represents between now and then about 5 % annual profit growth. Now, if I had gone, oh, well, actually, I haven't looked at the bank for a while. Well, it turns out they're going to grow their earnings per share at 15 % compound over the next couple of years. Oh, actually, PE of 30 is perfectly sensible. Absolutely no problem with that. I've long made the case that you can have stocks that are on a PE of 50 that are much cheaper than stocks on a PE of 10 because the one on the PE of 10 is on its way to the graveyard and the other one is quadrupling its profits every year.

45:22It's like one is much cheaper than the other, even though what the PE kind of says. But this is generally pretty, you know, sell-side analysts tend to be pretty optimistic for the companies that they cover, at least if they want to have continued access. Just ask any journalist. Don't say mean things about the politician if you want to get the interview. But my point is, is that even with all of that, no one's forecasting phenomenal growth here. It's 5 % per annum. And it's on a PE of 30. As I say, let's say that happens. Actually, let's do some fun here. Let's say it smashes that. Let's say, where are we?

46:04We'll do this on the fly. $6.30 at the moment. Let's say it doubles the rate of growth and it grows at 10%. I'm only going at two years because that's all that's in front of me. And we're actually not at$7.03 in 2027, but$7.62. And let's say that they're trading at a PE of, let's say, 22, right? Still well above the current. That's a share price. Oh, I forgot to carry the one. Of$167 per share. Yep. The current price is$183. So I'll just unpack that a little bit here. These are just guesses, right? But as I almost say every week, just do some scenario analysis. I think this is going to grow. Not only is it going to grow, it's going to grow not even a little bit more than what everyone thinks.

46:51It's going to double the rate of growth, right? A very, very mature bank with all of the issues that we're dealing with as a country and as a planet, it's going to do that. Okay, ambitious, but I'm with you. Oh, and it's going to continue to trade at an elevated PE. Now, not as much of an elevated PE. The PE is still going to compress from 30 back to 22. But again, I'll just remind you that long term, on average, any kind of developed market you want to point to, when you look over long periods of time, it tends to be around 16 or 17. And that might be worth unpacking at a future point. Why is that?

47:30But just for the sake of this argument, that's roughly where it is. And I'm losing money under that scenario. Now, I had someone, oh, you haven't factored in dividends. Well, if you think the 2.5 % current yield is going to save you from that mass, I mean, I've got a bridge to sell you. And I will just go there. I just will go there to that other point there because it is an interesting one. The PE is the price divided by the earnings. The other way to look at it is just to invert it. It's exactly the same number. It's just upside down, which is the earnings yield. So why is it that we sort of see these 15s, sort of 16s?

48:06it's because it's just a ratio. It's sort of, well, what does that mean? Why is that higher? Is that low? A P of 16 represents an earnings yield of about 6.25%. In other words, if I give you some capital, and it doesn't work this way because I don't pay it all out and some is retained as reinvestment and all the rest of it, but as an entity, for every dollar it's quote-unquote worth, it's going to generate a 6.25 % return. Now, in a world where official interest rates are sort of around the, where are we? I don't even know. 5 %? Yeah. Upper fours. You know, this is like, yep, bit of a risk premium.

48:48Yep, that kind of makes sense. Now, let's just do the maths on an earnings yield for a company that's on a PE of 30. That's giving you, a company that's on a PE of 30 is giving you an earnings yield of 3.3%. So you're basically saying, I'm happy to get a 3.3 % sort of earnings yield on this investment. So to me, it's, I don't know whoever came up with the PE, but they kind of, it just sort of became the standard that we sort of use as a shortcut. But I think it's more intuitive to think about it as an earnings yield if you flip it around. Because we're used to that with property, right? Because we think about the rental yield.

49:26Right. So I was going to say that's – I'm going to – for people who – most of them – this is a popular follow-up. But just to flip it, rather than do it that way, I'm going to flip it the other way. If you're investing money – if you've got a bank account, your term deposit is paying 4%, your bank account has got a price-earnings ratio of 25 times. Yes. Yep. And so that's kind of – and you're right, the yield is a better way to think about it. I don't know why we think we do PE rather than earnings yield. We should do earnings yields. But as much as you can compare four to six and a quarter, I just want to do it the other way around and kind of say, Okay, if your rental property is paying 2 % yield, it's a P of 50, 50 times.

50:02Now, again, as you said, mate, it's slightly different because we're not talking about the dividend or the cash going to the shareholder or the owner. We're talking about what it does internally. But that's the right way to think about it. And you're right, we should... I don't know why we don't have to talk about anything. You know what I think it probably is, mate? Honestly, I think it probably predates a lot of those calculations and I think it probably is just it was easier to do it that way coming up with a number that are decimal. It's a bit like a sort of boogie maths, you know? And I don't say that in a derogatory way whatsoever.

50:27Bookies are just the most incredible mathematicians. But these wonderful heuristic rules of thumb that just sort of like, it's a shorthand, right? Well, yeah, odds were expressed as, you know, five to two. Yes. What does that mean? Or even, and back in the day, I mean, when you and I started investing, American share prices were expressed in fractions. Yes. And not decimal fractions, but halves, fourths, eighths, sixteenths and thirty-tooths. So you'd buy shares at 32 and 5.32. That was the price, or 5.16. That's literally how it was quoted and how you would pay. You obviously paid in cash, but that was how it was done.

51:07So I suspect, honestly, it was decimalisation just came too late. I think that's probably why the market's picked it up. But either way, to your point, you're absolutely right. Think about it as a PE. The other thing you do with a PE, by the way, is do the – again, discounted cash flow is even worse because even more maths. But 16 is about the average. If you kind of work it backwards, 16 is about the average you should pay based on if you want to get about a 9 % return, just the way the maths ends up working out. And again, don't trust me on it, verify, but equally just trust me on it if you want to.

51:40I think it's growing at 3 % with a 9 % discount rate. 3 % of perpetuity is about a 16 times earning. So that's kind of why the market tends to average about that because companies tend to grow out about that. It's just no reason it should. Well, the reason it should, no reason it has to because, again, we talked about sentiment before. We spent a lot of time on it. That's just how it nets out. Yeah. Can I – and I just – we'll move on, but I just – I make the point only because I'm paranoid. Well, I've done it long enough to know how easily it is to be misunderstood because a lot of people – you say this and then everyone goes, oh, you think – so you think the banks are going to fall tomorrow.

52:16It's like, no, I don't. I think they should fall tomorrow. But I don't, I would, and as I said, if I seriously thought that I would, I would short it, right? I would try and capitalize on that mispricing. I just, whether it's the banks in this example that we've been talking about or any particular company that you're looking at, you've just got to look at the range of outcomes that need to happen for you to get a good return. and you need to have a confidence of that. And it's not to sort of say that you can't do well with your bank shares from here. It's Australia, anything's possible. They're probably, when I think about it, just because God hates me, they are probably the best available investments on the planet right now.

52:58Just be aware that what you are implicitly saying is that either earnings are going to grow really fast or the market is going to sustain a very, very high multiple for the duration of my multi-year investment. And that's fine. It might. But if it doesn't, what does it look like? And this is what you're trying to do as an investor, is trying to reconcile the fact that uncertainty is unavoidable, right? So at least go to where the uncertainty is reasonably narrow or relatively narrow. and where it falls in your favor in the fact that what you want to do, when you look back in years to come and go, gosh, turns out that all of my assumptions were wrong, which is almost guaranteed, you want it to be as like, oh, I was too conservative.

53:49Oh, I wasn't ambitious enough. That's the kind of wrong that you want to be, right? As I bought this thinking that they could probably sustain 18 PE and maybe they could grow at this. Oh, they grew much faster than I thought. And the market just absolutely continues to love them. Oh, I've made three times more than I expected. Like, that's the grade A gold-plated, you were wrong. And you are going to be wrong when you start forecasting the future. You don't want to be the, well, I was right because this hyper, hyper specific and very narrow range of possibilities that had to happen for me to go, well, it actually did happen.

54:23And thank God it did because if it didn't, in any other scenario, I actually lost my shirt. And I feel as though a lot of investors are making that bet right now. The markets in general and the banks in particular. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

54:45So, Qantas and Virgin came out this week. And there's a couple of interesting things to that announcement. And I'll try and touch them briefly and you can do them in detail. Qantas comes out on, I think it was Tuesday, and said, hey, we're going to have to spend an extra$800 million on fuel this year. The fuel bill is going to be$2.5 billion. You've got a fuel problem. It's now going to be$3.3 billion. By the way, we're also increasing fares, unsurprisingly, and we're cutting a whole lot of flights. Fair enough, by the way. I'm the last person to defend Qantas. I am the last person. I have no love for them at all.

55:25But that's a perfectly rational move for them, right? If you had Qantas real estate agents and banks lined up and you had to save one of them, who would you save? Don't give me an impossible. Do not do that. That just occurred to me. I'll let you not answer. I can't. That's hard. You're sitting in a corner rocking. I got you. So, yeah, no, totally rational. 100 % rational. And slash but slash my cynical side. Two things. Oh, well, one thing and I'll get to Qantas. There's a version. Totally rational to do. Also a great excuse. Sure. If you're going to bump people off already booked flights and make them go on to other flights where you can actually improve your yield, if you've got two half full planes or one full plane, it's a very easy choice, right?

56:12And normally you probably couldn't have justified cancelling the flight because of the PR issues. Someone who kind of has gone... Or someone would go to a competitor. Right, yeah. Someone's gone, hey, guys... If they're in a viable competition. Let me get to that, exactly. Right, right. So someone's gone, hey, guys, we've got this fuel crisis some half full planes do you reckon we could get away with it no yeah okay let's try it people think the guys in the Motley Fool Money Pocket say well it's fuel price what do you expect so I think there's I think there's more than a little of that and get out of here on it Qantas listening the second thing was actually the competition we see you exactly second thing was the competition thing you mentioned mate so Qantas the version the very next day comes out and says yeah we got fuel prices yeah we got fuel issues too and we're going to cut flights and put it fares up as well.

56:56And I'm only going to, I've said this a lot of times, I'm not going to go back into it, but other than just to mention that when you've got a duopoly and perfect mutual self-interest and game theory is a thing, of course they're going to. Of course, yeah. The alternative in, people will, and this is really important, right? I will just touch on, I'm not going to go back down the path, just to explain it. People will start thinking, and Qantas used to have this idea, it wanted to have a 66-pen market share back in probably five, seven years ago. and I was like we just want to be the biggest airline right and they did it because they figured that that meant they had economies of scale and stuff and that makes perfect sense in a really big market really competitive market scale matters a heap because you want to be bigger than the other guy because you've got scale advantages and all the stuff right so really good reasons to want to be big and then they kind of realised I can't say they realised I can't say it was deliberate or even conscious because I have no proof of it but at some point you go hang on there's only two of us and if I put my fares up and you put your fares up and this sounds like a conversation I shouldn't if I put my fares up and they put their fares up then we'll both be fine because no one's going to want to cut the other one and we'll both make a bit more money because I'm going to charge 10 bucks more receipt they're going to charge 10 bucks more receipt and yes version is cheaper than Qantas because people have their brand things and that's okay we can live with that I'm going to put one up I just put one up oh great do they undercut us?

58:17no do they drop their prices to take advantage to take market share and take customers? No. They put their price up as well. Huh. So next time I put my, I'll try it again. Put my price up again next time. What happened? They put theirs up as well? Okay, cool. I'm going to put my price up again. And it's not a hypothetical. I've said to you before, mate, I work for a company. That exactly happened. And it was no collusion. It was just like, we put our prices up. And if the competitor put theirs up, we go, oh, thank God. And if they didn't, we put ours back down again. And so it wasn't even a signal.

58:44It's the prisoner's dilemma. If you haven't come across that, just Google it. So anyway, so my point is, And for all we know, Virgin may have been planning to do it anyway and whatever. But in a market where there's duopoly and mutual self-interest, again, no communication, just pure mutual self-interest. Or even when I say no communication, if Virgin wasn't already ready to or thinking about it, Qantas comes out and says, hey, here we go. And it's like, well, hang on. We've just, you know, I can afford to now make those decisions, knowing what my competitor is already going to do. And I said to you the other week, I don't know how we deal with this in a competition policy way because it's clearly not in the consumer's best interest.

59:22And so at some point, markets start breaking down. And we can, I don't know, we've probably gone into it before. We don't need to, we can if you want to. But I thought it was interesting to think about, firstly, the fuel crisis is real. Secondly, they have to put their price up because you can't absorb that sort of stuff. Fuel is their largest variable cost and it might be the second largest actual cost, I think, behind the planes themselves. I think it costs even more than staff. I'm sure it does. so you know you're a flying tank you're a flying tank right so you've got you've got to put your prices up and you've got to cut flights it's all very rational and normal and reasonable to do it's just interesting that in that market I suspect if I'm if I'm a betting man mate I'm betting this time next year or not next year when they release their next set of results probably probably this time next year actually I'll get a full year's worth we might see it somewhere in August based on a couple of months worth in the current financial half I suspect the domestic business is far more profitable than the international business because there's dozens of players in the international market.

1:00:16You've got to compete with those guys for price and capacity. In Australia, as long as you're both acting in your own mutual self-interest, then things will be fine. And I suspect that's how the numbers will net out when we see them in six months' time. Yeah. I mean, well, the other option is that you don't, you can't put your prices up to the same extent, but you just eat it on the margin. Don't forget, Qantas has, as of last Last year they had a 7 % net margin, after-tax margin. Look at other airlines around the world. They look at that with – Oh, yeah. It's like our backs. How did you guys do that?

1:00:51Oh, that's right. Oh. It's like there are various test tubes that you can sort of have controls with and look around at other parts of the world. It's, you know, what – as you say, they're just big aluminium sort of shells with wings on them. And, you know, people all around the world like to sort of travel. And it's just like, why is it fundamentally different? Actually, we're a really small country. It's really geographic. Actually, the economics should be worse here if you think about it. And yet we don't. And it's, look, I'll let others draw their own conclusions. But I think that's always the first thing I think that you need to look at.

1:01:31We talked about with the supermarkets, with the allegations of price gouging. Now, they do have very good margins compared to their competitors. but they didn't exploit that. It's not like they increased. They already did. They already had great margins. Nothing changed, yeah. Nothing sort of changed. It's like, well, why is it in all of Europe that you're more like 3 % as a net margin on a supermarket or in the US, et cetera? All it says to you as a breadcrumb to follow is like, well, that's interesting. Why is that the case? Now, I think the answer that the PR people would have you believe is we're just exceptionally well run.

1:02:09That's right. Yeah, there's something special about us. And like, oh, you just don't have any competitive. There's nothing to force you to do it. And again, I said it right at the start. Actually, what they're doing is perfectly rational. Any business owner out there, if you're a Sparky and the price of copper has gone up and all your wiring is now more expensive, guess what? You put your prices up and that's not an evil thing. That's just adjusting to, there comes a point where I think what a lot of people forget here, there does actually come a point where it's like you can tut tut and wave your finger and all of that kind of stuff.

1:02:43But at a point, it's just like, you don't make money. If you don't make money, you don't do business. If you don't do business, you're not providing that service. And then everyone actually just doesn't exist. Do you want something that's a bit more expensive or do you want something that doesn't exist? And that's really where it gets to here. And that's why price controls tend to result in famines, right? It's sort of why rent controls, interestingly enough, as much as I'm passionate about rental advocacy, they have these unintended sort of consequences. So I don't know what my point here is, is, is, is that it's sort of like, yes, it's understandable, but under a better competitive dynamic, they would, they would be forced to eat a little bit of margin and still be profitable, by the way, as opposed to just do what they're doing.

1:03:31In fact, so yes, you dear customer and traveling public would face a little bit of extra pain, but they would share in that pain a little bit more than they are at the moment. And that's the risk when it comes to thinking about companies you own with high margins. I've said this before, mate, but you and I went through similar arcs of investing kind of experience and learning and stuff. And I love businesses with high margins. And I still do. It's not a but. There is an and, though, which is I'm mindful now of how vulnerable that is. Jeff Bezos famously said, your margin is my opportunity. I've said that a million times.

1:04:04but every business anywhere. You know, if high margins are defensible, they're wonderful. But kind of, you know, you have painted a target on your back and it's really big and it's really red and white and you're just asking for everybody out there to go, I'd like some of that. Do you reckon I can get some? And often they can't. We've had a dozen third airlines in Australia over the past 50 years and every single one of them has failed except, ironically, for Virgin, which ended up out of business and ended up back with two airlines again, right? And so that's kind of the challenge here. Now, I'm not saying you shouldn't own Virgin or Corner shares on the basis of what may or may not have happened competition-wise.

1:04:45I just think – we talked about the ASX before in a monopoly position, right? They're great as long as they last. If they last forever, you look like a genius. I bought the home margin business. Now, the next size is pricing power, and I made a fortune. And it's absolutely true. That's what I'm saying. It's not a but. I still love them. The thing you've got to be mindful of is just that the higher they are, the thinner that kind of ledge or the thinner the pedestal and the more arrows being pointed at you because everyone wants some of that stuff. And if you can get some of that stuff, I worked for Blackmoors years ago and Swiss turned up.

1:05:16Everyone knows the Swiss brand. It was pretty new. I think it had just hit the market when I joined or something. And Swiss kind of went, you guys are expensive, high margin, and you focus on pharmacies and health food stores. We're going to go and do cut price vitamins, cut price margins for supermarkets and sell a truckload of the stuff. And it was beautiful. It was a perfect strategy. They kind of went, everyone else is selling really expensive stuff and they're not selling it where people want it. We're going to go to the supermarkets. And it wasn't quite the online, offline thing, but it wasn't miles away.

1:05:44It was just a brand new channel, massive amount of foot traffic. The retailers wanted it because it was high per unit, high dollar per weight product, perfect for retail. That's what they want. And so it was an easy strategy. Heinz had the same problem with baby food. Every few years, someone would turn up with another baby food and say, we want to be here. And for a while, Heinz batted her back, batted her back, and eventually wants to knock under the guard and change the category. It's a very, very different set of circumstance. And it is just that idea of the margin was high enough and they want to protect that high margin.

1:06:13And so it just gives lots and lots and lots of room for someone to undercut them. I'm not saying companies shouldn't exercise the pricing value. They should. They should bank as much money as they reasonably can. You've just got to always be a little bit paranoid and always just look over your shoulder and make sure no one's going to undercut you. And all of a sudden you look back and go, man, where did that go? Because that's the risk. And again, I'm not saying cost-in-version shouldn't do anything different yet. but I just think if you're investing in those guys on the assumption that they can maintain those margins, you have to believe no one will ever challenge them.

1:06:38And maybe they won't, because maybe governments and landing slots in airports, it's a whole conversation. It's not a bad bet, right, frankly. But it's also, it's kind of a binary bet too, because the margin I'm going to fall from seven to six and a half. They're either going to stay at seven or they're going to fall to three. And I don't know which one it's going to be, and I'm not suggesting you do or don't invest in cortisol, I'm just saying it's, you're not going to, You know, there's no scenario in which is like, well, you know, it was slightly more, slightly less. It's going to be really good or it's going to be terrible.

1:07:07I mean, and the thing to emphasize with your example there with Swiss and Blackmores and all of those ones is that who comes out ahead here? Yeah. And the answer is the consumer. You do. You've got more variety at a cheaper price or the same kind of price but a better quality. Because that's how, without pointing a gun at your head, that's how they get your money. I'll offer it to you. I'll offer you the same thing cheaper. I'll offer you a better thing. You know, it's just like, oh, I want that. And that is the beauty of it. It's when you interfere with that process because of jobs or because of whatever political thing you want to sort of throw out there.

1:07:52It's just sort of like it feels, I mean, that's the, again, it's so ironic. The irony is we're helping the voting public by doing something. No. That's right. You're propping up a cartel effectively, and it is actively against our interests as consumers, you know? And I think the Ansett, the airline situation, is such a beautiful, elegant example of that because when Ansett went bust, I mean, where did all the planes and the hangars and the staff and that go? They just rebadged. The entity, the corporate entity died. The real stuff didn't, right? And like most of the people, it's not like all of those workers just went and retrained as IT professionals and then when Virgin came along, they had to retrain a bunch of ground crew and baggage handlers and pilots and it's like, no, they already existed.

1:08:43And it's like we've got to keep that in mind when there's a big, particularly if there's a bit of nationalistic pride that's sort of in there, it's like, well, the Australians who are working there will, you know, if there is a demand for the service or good that they are providing, they'll be just fine. And you know who won't be fine? The shareholders who back the entity and the management and board team that ran it into the ground. And again, it's sort of like, it's not to celebrate their misery. It's just to sort of say, welcome to capitalism. It's like, there's no heaven without hell, right?

1:09:16Like you don't get all the upside and none of the downside. and we let that kind of play out and we are, and more of us, much more of us are far better off when that happens. And so, you know, we should in a better, I was going to say run economy, I don't even like that term, but in a better managed sort of playing field, we should have much cheaper fares around the country right now. And there's a reason we don't. Yeah, that's right. And that's, yeah. And don't forget, even on international flights, they stopped, who was it, Qatar or Singapore? That, for me, is the big one, because I can absolutely understand how a third airline can't make money in Australia.

1:10:02You know, we are really dispersed. There's no hub-and-spoke model like they have in the US. Our population is not big enough to, you know, Southwest Airlines was born effectively servicing half a dozen airports, and it was able to grow from there, and had enough scale at that level to be able to grow from there. there is a natural problem certain supermarkets at some level there's a natural problem with the geography and population distribution in Australia it doesn't support scale in the same way because of the distances between the main cities the so-called flyover states in the US are kind of humorously slash disparaging or referred to but that idea of you're not very far from a hub and spoke or from a hub airport makes a huge difference and I think I don't I'm not surprised even if you even if even if you got rid of all the things that might be anti-competitive domestically and tried to stand up a third airline I really I'm far from sure you'd be able to do it successfully because we had the third airline Qantas Virgin had the money I mean it lift you put Antieta out of business because the market really wasn't big enough for the scale required the infrastructure all the stuff the planes and the numbers and the I mean these things are terrible businesses because they're really really capital intensive and the margins are pretty ordinary because they're selling commodity tickets.

1:11:19So I don't know, mate. I'm not in disagreement with you. I just, I think, I don't suspect you could run a third airline successfully, but I do think that, but there's no excuse not to let foreign airlines fly domestic routes, in which case you don't need to send up a third airline. You just need to provide air services to Australians. And that, I think, is A, a no-brainer, and B, would be hugely beneficial for Australian flyers. Oh, it's absolutely, it's, what do they call it? Slot dominance, all right? So, and exclusive terminal infrastructure. It's the, they are the moats. Yeah, there are moats that come with scale and that, but yeah, plenty of big operators that can easily overcome that and actually have greater scale in many areas.

1:12:02I'm trying to think of it. There's an 80-20 rule in terms of slots that you're allowed to have. But I mean, Qantas is a lot of things, but it's not silly. and that is sort of what makes it harder for people to compete as opposed to some of the other things. Anyway, I shouldn't ever make out like these things are super easy. Yeah, no, they're not. But it is – Yeah. Giving international airlines access to domestic fruits is not difficult either, to be fair. I mean, for everything else, that's a pretty simple – even if you can't justify standing up a third airline or you're not sure, okay, cool. Just let anyone who wants to – are you airworthy?

1:12:41Yes. Are you safe? Yes. Do your pilots have the appropriate training? Yes. Are your planes maintained? Yes. Then I don't care what's on the tail. Why would I care? I mean, me as a flyer, I mean, me as the proxy for the Australian people slash government. Why would the Australian government care, whether it's a Qatar or a Page Airlines or a Philips Airlines or a Qantas? If we're safe, reliable, all the things, there absolutely should be, of course, safety processes being followed. But assuming that's all done, why do you care what's on the tail? There is no good reason to care. Yeah. No, but we don't though.

1:13:12And as I say, it's we that suffer. And the genius of it all is that a lot of people cheer it on because of some nationalistic pride in a commercial for-profit organisation that's got really nothing to do. Speaking of the biggest trick they've ever pulled, Qantas gets to say, we're a private company, we're Australia's national airline, spirit of Australia, you love us, remember? Oh, yeah, that's right, we do too. But hey, what? Just brilliant. I mean, you know, you can only cry but still be a little bit impressed that you're able to pull that off. Well, Australia's led to petrol, mate. Why can't we keep these led to petrol?

1:13:51Why don't you care about Australian companies? That's it, Australia. The romance of air travel is just, if you're into behavioural finance or behavioural economics at all, just straight psychology, frankly, but from our angle, it is just, it is still mind-blowing. I mean, I get it at one level, but just think about it. I've said before, first-class tickets cost you$10 ,000. You can fly to London for$500, economy,$10 ,000 first class, right? If someone offered you$8 ,500 to sit in a chair for 24 hours, would you take the money? I bet you everyone listening would take the money, right? Even the people who fly first class.

1:14:27Like, if you're$8 ,500, sit in that chair, sit in the lounge for a day. Really? Yeah, can I go to the toilet? Yeah. I'll just go to have your meals at the chair. Okay, I'll do that. Sure, no worries. That's fine. and you kind of go frequent fly points same thing I will pay 600 bucks an annual fee for a credit card I will change my behaviour I will shop there I'll do this I'll do that so I can collect some frequent fly points what for because they're frequent fly points I get to fly somewhere the romance of air travel is we are we are such unevolved creatures we are you know we are and it's not even like not even our lifetimes we've known people our age Ram you and I are old people our age have known nothing but cheap, available, plentiful international travel.

1:15:08I get our grandparents being like, man, when I grew up, the seaplane would land in Sydney Harbour and the fancy people got off with their tuxedos and it's like, oh, I want to be like the king of England and Cary Grant. And I get that romance bit. People are already going, no excuse. We've just inherited this kind of weird. And again, everyone's entitled to what they want, as I'm sure you'll say, or at least I know you're thinking. is that, you know, I don't want to say people shouldn't do it. If that floats your boat, no, kiss off out. I just find that the study of psychology, I don't think, I can't think of any consumer good.

1:15:41I'm sure there are some out there. I can't think of any consumer good that demonstrates it more than our approach, our transactions, our behaviour when it comes to air travel. It's just phenomenal. And it's funny, right? Because in some areas it works spectacularly well, in other areas it doesn't. I always think about Dick Smith and Vegemite. Yes. So it took about Australia. And so was it Kraft who took over Vegemite? I guess originally it was, yes. It was Kraft. And then everyone got upset because, oh, that's Australian. It can't be owned by. I was like, oh, okay. And so Dickie set up Ozemite, was it?

1:16:23Ozemite, correct. Ozemite, yes. And it officially closed in 2019. And you'd think, well, wait a second. That's Australia. It's just as good. and blah. So we said we wanted. Yeah, but we don't care, Dick. We just don't care. We don't. And I don't know why. I'm not saying people should or shouldn't. I think people should do what they want with their money. I'm very, very big on that, in fact. But it's sort of like, well, why with the airline and not with the Vegemite, you know? Is it because it wasn't Vegemite and it was Oziemite? Was that enough of a difference? Like, it's really hard to sort of pick this stuff, you know?

1:16:59It's the same too with Clove. We always get upset. said, oh, this crap from China. Oh, we should buy Australia. It's like, yeah, but no one is, dude. I get it. I don't fault your sentiment, but it's just not happening, right? And it just is what it is. Airlines, yeah. Everyone said, we want Australia. Same with bonds going overseas. Right, that was the other one. We want everyone to ask people, would you buy Australia made? No, I'm just going to say yes. Yeah. We did a natural experiment. Hey, bonds are Australia made. I don't want that. I want the cheap stuff from China. Yeah. Okay, we'll go to China then.

1:17:29What do you mean? We want Australia made. it's like no you don't you you literally it wasn't even after the fact you you know the the venti might think was ozumite was introduced as an alternative this was like you had the australian thing already you could you all you had to do was choose it and you chose not to that's fine everyone's not but then let's not pretend this is the practice the political problem mate of the things we think we think and things we actually think and the way we actually behave and they're those three things are just so incredibly different um and it's no wonder the populist politicians get up to some degree because they say the thing and we think the thing and want the thing, except we don't really want the consequences.

1:18:02We just want the feel good. I want Australian made and I want it to be cheap. Well, who are you going to pay a dollar an hour for to make Benjamite? No one. A bad example is made here still. You know, singlets. Yeah. You want Australian made singlets? Yes, I do. Okay, how much are you going to pay for them? Oh,$3. Well, we can't do that. It costs$20 here. The$3 one comes from China. Well, I'll buy the Chinese ones. But I think you want Australian ones. I do. But I'm for$3. Well, you know, man, that's okay. the choice is totally fine totally reasonable it's just a yeah it's an interesting it's an interesting idea I don't know I don't know what else we should or could expect but it is it is the reality it's the and by the way Qantas plays on it and good luck to them again they're entitled to right the other thing about you mentioned kind of the the price and value thing before value is not just a rational choice in fact it's rarely a rational choice every time someone buys a car 99 % of cars out there are not the best value cars, but they say something about us in some way, shape or form.

1:19:04And they're the things we say we value. And we will defend to our dying breath for most of us why we thought that car was worth that much money. Because that's right. It was. You know, I'm not saying it's not. You said, I want to pay that much money for that car because I think it's worth it. Cool. Knock yourself out. But the value is not just, it's not faster. If it is, you can't drive it any faster because of the speed limit. Okay. Is it more fuel efficient? Well, maybe a little bit. Does that justify$20 ,000? No, okay. Is it got an extra seat in the back for the large family? Yeah, but there's other options in there as well.

1:19:33And that's fine, totally fine. It's just that, you know, as the psychologists tell us, most of our rational justification is actually just that, where we're justifying after the fact an emotional decision is kind of the way that most of the research points to, which I rationally chose for this reason. Did you or did you just find rational reasons for going with the thing you actually at the heart wanted in the first place? That's fine, but that's where marketing is so incredibly seductive. That's why Frequent Flyer, Connors makes in a bad transport year when fares or fuel or something are bad, they make more money from the loyalty program than the flying.

1:20:05Yes, yes. Which is like, that is the example that we care more about the Frequent Flyer points than actually the flying, which is just, again, it's totally okay, fine, because that's what people choose. But it still blows my mind a little bit. We should really do an app on Frequent Flyer points or loyalty programs at some point because they are faster. It is effectively money printing. Like, you know, it's like we affect, like when you boil it down, it's like we have the ability to print our own money. It's great. It's like just the most genius thing that anyone ever sort of came up with. It's like, well, if we print Australian dollars, that's counterfeiting.

1:20:42We'll go to jail. Let's see the RBA. But we can make up our own money. We'll call it frequent flyer points and you can only spend it with us. It's genius. It's genius. You've gone to a similar-ish but different kind of approach. Chris Collin has a great YouTube video and it's like, so you've invented money. Okay, good, it's money. Can I use it anyway? No, it's not actual money. So it's restricted money. Yeah. And so you want me to go and spend, change unrestricted money for restricted money. Yeah. So you give it to someone who may or may not want to spend at that place. Yeah. It's like, okay. It's genius for the company's, isn't it?

1:21:17But yeah, it's a thing. And it works, right? It does work. Of course it does. I've joked with my mum a bit too because she'll like to give the kids a gift card or something. It's just like, mum, there's a gift card, right? And go with me here. It's accepted in every single shop in the country. Like, really? Yeah, it's called the Australian dollar, mum. For goodness sakes. What are you doing? You're making it harder. We have... I bought them a gift card from that shop. Yeah. That's so funny. It's so... But it's weird, right? Like when you peel back some of these things, it's like... I mean... Back to the point about value though.

1:21:53it's because the gift card feels like you've thought about the person. Yes. I didn't give you money. I gave you the money for the thing I think you like. So I'm showing that I'm interested in you and I've paid attention. And for the recipient, they'd probably rather the cash too. There's an actual – and again, this is where human – whenever you study economics or think about economics or business or investing, if you only ever think about it rationally, you're missing somewhere between 25 % and 75 % of the point. Yes, yeah. Because this is how to contribute to behaviour is just vital, right? You would never buy shares in the more.

1:22:25Coca-Cola. Why would you buy shares in the cola company that costs three times as much? You'd buy shares in the cheap one because more people will buy it because it's cheaper. Why wouldn't you? Well, let me introduce you to psychology. And that's the whole story. So, yeah, you're 100 % right, mate. Those things are fascinating. I mean, cynically, you can look at it as you say, hang on, how did you convince me to do that? On the other hand, the flip side of that is it really does underscore human behavior. And as an investor, honestly, unless you're only ever investing in commodities, even then probably.

1:22:57But the idea of brand, the idea of convenience, the idea of service, any of those things that are other than just purely a pound of rock for a couple of cents. And even then, by the way, the robots just go into something else with gold, man, jewelry and everything else. when that's a whole thing too. Yeah. But yeah, Munga said never think about anything else when you should think about incentives, and he's right. Yep. I would suspect that a very reasonably close second is never think about anything we should think about. You should think about behavioural psychology, either for yourself or the people who are engaging in dealing with the businesses in which you are planning to invest because that is the story.

1:23:39Yeah, back full circle on, you know, the price of shares or the price of oil. This is, I mean, just to again go into bat for capitalism here, proper capitalism, that's why you can't plan these things because it doesn't, if you get really smart, well-informed people together and they think, well, what should people want? You're not going to guess right, not because you're dumb, not because you're ill-informed, but because it's just, you're trying to guess what a very, very large number of irrational, faulty human beings are going to decide. and you can't. Markets are an evolution. They're a process.

1:24:19They're a process of discovery. What do people want? I don't know. The only way to know is to test. And that's what entrepreneurs do. That's what businesses do. Someone out there today woke up out of bed and got, I reckon, actually I'll give you an example, just near me the other day. I've long looked at this empty pizza shop with interest. Not that I'd like to get, And I think, I reckon I can make a go of that. And it's set idle for ages. But anyway, someone woke up the other day and said, I'll do it. Right. Because they reckon, and I reckon they're right, they reckon they can make a go of it in that location.

1:24:57Now, I reckon they're right. Does that mean they're right? No. Could be the worst decision because the person who owned it before didn't think they found out the hard way it wasn't right because it closed down. It didn't close down because they were making too much money. Right, right, right. Like that's not a thing, you know. and and and and so will it be successful well if enough people like it and buy it then yes it will and that and that's like oh there's the experiment they oh it turns out that that is that is the thing oh really people love it there's a line out the door it's like ah maybe someone else will wake up and i've been going you know what i might just open up another one three doors down right i was like and again that we'll we'll experiment we'll test we'll see how it goes and at the end of the day we're all there going man this isn't great to have all these different varieties of pizza that's really cheap.

1:25:41It's a really good thing to do until someone steps in and goes, actually, you're not allowed to do that because of this, that and the other. What? Hey? Very funny. Anyway. Mate, I reckon we are done here. Will you come back on Sunday? Hell yeah, always. I look forward to it. Until then, enjoy the first half of your weekend and full on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener.

1:26:19The Motley Fool operates under Financial Services Licence 400691.