The risk of economic pain is growing. November 3, 2023

30:44I'm telling you right now and everyone who's listening, I don't think I could pay it. I don't think I could. Not because I might get sick or there's a bad quarter or no, I just mean everything as status quo. I don't think I could do it easily or barely at all. Lord knows, not if there was another half percent increase in interest rates. And you said you couldn't borrow responsibly. But again, I've just gone up there. I mean, I'm not going to, right? Because I don't want to I don't want to risk everything. But the banks, this is the moral hazard that they are in because they're going, well, if I don't do it, someone else will.

31:20And who cares? You know, worst case scenario, I'm going to get bailed out anyway. I mean, that is the absolute implicit guarantee that is going to happen. So it's sort of – that is where the issue is. And that is right. That's why I agree with you. That's why they should – why are we reducing the mortgage buffers for? For goodness sakes, why aren't there more restrictions around money laundering and property? Why aren't there more restrictions around having to disclose proper accounting for your applications? Why aren't – you know, they just aren't. And whenever that is the case, that's where you're going to get these really, really perverse kind of outcomes.

31:57And I mean, I was saying to you off air, Matt Common – I was reading the CBA CEO who's – the bank has lost market share in housing. Right. And they made a decision earlier in this year to pull back on housing. And his comments were, everyone's writing loans below the cost of capital. Now, unpack that. What does that mean? It means the bank is borrowing money from you, the depositor, or from offshore markets, or from the RBA, and they're lending it out at a lower rate. Now, I'm not the world's smartest financial guru. But - That's probably a bad thing. that's a bad thing. It's not, every loan you write, you're losing money on and they're doing it because market share.

32:45Yeah. Like what? And now they pulled back, CBA was the first to blink on that, but they have, in all of the banks and this is what Matt Common was basically saying is like, well, it's just, it's not very profitable. Two thirds of their loan book is all in housing at very, and at rates that, that aren't really allow for much profit. We have seen bank return on equity over the last decade. half. We've talked before about how really, with the exception of CBA, and that might just be juiced for some other various reasons, but none of the bank's earnings or dividends have gone anywhere in five years.

33:22As a country, we've had very great demand for all of our rocks from people overseas. We've sold it to them. We've flung it all into houses. That's what we've done. And the banks have enabled this through policies that in yesteryear would not have just got across the desk of the loan officer. They're like, no, I'm not approving that. That is reckless. Why would I do that for? And again, I would say it's because, well, who cares? If we don't, someone else will. And even if something goes wrong, we'll get bailed out. That's it. That was the lesson from 15 years ago in the GFC. They made a movie about it.

34:01That was the last line of the movie, right? I was like, yeah. So anyway, history is one damn thing after another. We've learned nothing and we're in a more precarious situation now because we didn't take our medicine when we should have. And arguably you go back to the dot-com boom before that. So I don't know. On that bright note? I don't know how we're going to fix it is all I'm going to say. Interest rates keep coming. We don't want to talk about it each week, but something big happens and we keep doing it. And I just, it is just tinkering around the edges. And I feel as though what tends to happen economically is that we do, we kick cans as long as we can kick cans.

34:40But at a point, the weight of gravity becomes so much that it's sort of like, there's just no kicking anymore. And I don't know if that's next week or 10 years away from now, but it tends to be a, there's a collision course. Unless there is a course correction, there is a, we're on a collision course, I would say. And I say that just through the powers of logic and reason. Just for fun, I don't want to drag that for too long. You said I don't want what we should do. I'm going to throw some ideas just to try and add a bit of a thought to this piece. We can kind of go from there. If I was treasurer tomorrow, and this is not a pre-prepared list, I'll try and kind of think about this a bit, as you do, so I'll try and come and promise everything, or maybe even I may change my mind at some other point.

35:20First thing I would do, mate, is I would increase the lending buffers on new loans now. Easiest thing in the world. Isn't it? You got my vote. I would also cap mortgage lengths. I think it just encourages - You are sending property prices down. You do, right? Just so you know what you're doing here. Not necessarily, right? Because there's new loans. So it's kind of one of those - My idea would be to stabilize prices. I don't mind if they fall a bit, quite frankly, because it doesn't really matter as long as you can pay the - You're not making friends right now. I know, I know. Just say it. As long as you can pay the bills.

35:53Well, that's the hit. Yeah, no, I'm not. No, that's okay. By the way, when rates go up, when interest go up, share prices go down, and they should, and social property prices because they're assets. And that kind of, you know, the pretense of property always goes up. I don't want to get into the blaming of who says what and what they should do. Just the reality is that the way an asset price should be calculated in the real world is that when the cost of capital goes up, the asset price goes down. It's just the way it has to work in any rational assessment. I'll just very quickly add, if I'm getting 5 % risk-free, volatile volatility free in a term deposit why am i why am i investing in an asset that's giving me a gross yield of two percent right correct correct that that's how you square that circle yeah so um yeah so i would i would uh increase the buffer i would then use the buffer counter cyclically so by the way if rates kept going up i would have no problem with the buffer actually coming down a little over that time and not entirely but just proportionally right if if rates go to 10 there's no point making someone qualify at 15 right and if but if rates are at I want to qualify at six.

36:52Yep. You know, it just matters. So I'd put the buffer up, then use it counter cyclically. I would cap a mortgage length at 25 years. I'd go back from 30 back down to 25. It doesn't do anyone any favors except the banks when those things happen. So that's - Well, you probably don't want to give a 50-year-old a 25-year mortgage either, like just quietly, like, you know? Yep. This is controversial, but I would meaningfully reduce immigration intake for a period of time until the supply and demand of housing caught up. The easiest decision ever. Yeah. Regardless of what you think about the long-term, big or small Australia, and that's a whole different conversation.

37:26Well, I'm big Australia, mate. We've had it before. I mean, I'm a big Australia advocate. I say bring us your smartest, your most capable. You know, let's be – we are strong. We are an immigrant nation. We're stronger for – I'm all for immigration. But you've got to have the capacity to absorb that effectively. Yeah. And the building targets of the government, state and federal, is ridiculous. 1.2 million houses aren't going to get in five years' time. it's not going to happen. Just mathematically, they wouldn't have enough tradies, materials, land. It's not going to happen in that period of time.

37:55Can it happen over time? Yes. Could it happen in that period of time? No. So those are three very, very simple ones, mate. I don't think it needs to be that much more complex. I would, in my interventionist ways, which you don't always agree with, I would simply try for a soft landing by just limiting the upside and letting wages catch up. I think that's the only thing you need to do. I don't think there is necessarily a need for, despite your point about the further we kick the can, the less far we can continue to kick the can is absolutely true. I think stability at this point would be enough to get us out of trouble over the long term.

38:27We'd lose a couple of decades of meaningful asset value growth, but that's better than having a 25 % crash. I don't disagree. The best way to take your medicine, of all of the scenarios here, going sideways for 10 years is much better than a 30 % crash in a Great Depression. Yes, I will take that. Perfect. I don't think that's even necessarily needs to be controversial or difficult. Those things are really, really simple to do. You can do it tomorrow. It requires no more than that. Frankly, it would stabilize rents. It would stabilize house prices. It would mean affordability increases over time.

39:01And you could even, even with the buffer, you could increase the buffer slowly over a year, a year and a half. If you want, again, if you don't want to create a house prices tomorrow, you could cap mortgages at 30 years and then 29 years next year and 28 years the year after. These don't need to be fast and hard. But what you need to do is say to yourself, a bit like your version made of, you say regularly, if you're going to design a system you'd say what system would i design if i didn't know where i was going to fit um you'd say we're the same in this case but in a slightly different context you'd say what is the best place to get to be okay and then how do we best get there without causing undue damage and that's what you do so you design the perfect system or as much as we can get the perfect now is that right well if i did it tomorrow i break things over what period of time can i introduce this without having a massively deleterious impact on society i don't even care about the housing market and I'm worried about society generally, right?

39:46Because I'm worried more about unemployment than I'm about house prices. So I don't want to cause circumstances that, as you say, lead to a recession or depression. So you just simply say, what do we need to get to? What are the mistakes we've made? Let's get there at an appropriate speed, which gets us to the right place because that's important but doesn't jeopardize prosperity on the way. What else would you add to that, Matt? Is there anything else you kind of low-hanging fruit? I mean, I'd have to think about it, but they're just all no-brainers. I mean, I do think though, I mean, while I 100 % agree, I think that you would have people throwing tomatoes at you and being very angry with you.

40:23Because under your scenario, prices aren't doubling in the next seven years, right? No way. I suspect even if you avoid a hard landing, you're still going to see a bit of a fall there. You take away those drivers and, well, what else is there? every time i read an article lately it's like prices are up huh why uh population so of all the you know what's weird of all the own goals that one is the most transparently obvious and avoidable yeah like you know like does the longer mortgage terms yes okay mortgage buffers yes okay uh that literally was like hey we've got five houses let's bring in six people but that doesn't i know isn't that clever it's like you just it it drives me it drives me mad mate that that one is i like to give politicians benefit of the doubt generally speaking i like to believe that they're for the right reasons overwhelmingly i like to believe that they genuinely care about good policy that is just you know i use the example i've shared on the podcast before if you're if you're in a football stadium and you have more people coming into the stadium you had seats for you might you might build a new grandstand but you keep the people outside till you finish the grandstand you wouldn't let them in and then try and build the grandstand while they're all milling around and, you know, wondering where to sit.

41:39It's not hard. Can I just put that, because I heard this from Matt Barry originally, CEO of Freelance's Big Property Bear, but I do think it's a really nice way of framing it up because big numbers kind of become meaningless at a point. The amount of people that we're letting into the country is equivalent to a Canberra every year. So a Canberra side - I think this is even more than a Canberra, mate, because we're half a million people as of the end of September. It is actually. is more than yeah so I'm just looking I googled it Canberra population as of 2022 is 460 ,000 there you go so we're above that we're already there and we've got and here's here's the thing too it's not like all of these people are evenly pro-ridering themselves around the country Sydney and Melbourne are like doing the heavy lifting there for whatever reasons right as someone who lives in Sydney it's clearly the best Sydney in the country I mean that's an objective fact but you know that's where people are coming because that's where the jobs, the opportunities, the social networks, all of that kind of stuff is here.

42:42So you've got a Canberra coming into these, predominantly these two areas. It just, it doesn't work. Can you imagine if you said to everyone in Canberra, guys, sorry, we're evacuating the city. Can you just jump in your cars or jump in the train or a bus, drive three hours north and then get out and find somewhere to live? Yep. Good luck. That's literally what we did. That's what we did. it's mad i don't i i can't even find the words because it just it's so obviously stupid yeah that i can't even normally i can do the whole yeah well i might be thinking this on the other hand that there is no on the other hand here yeah it just genuinely is not well the other hand is the other hand is you're and i hopefully are coming from the point of view of a what's better for the country longer term yep if you're coming from the view of i've got 12 of investment properties I'm giving to the eyeballs.

43:39Bring them in. Bring them in. You know? And we know that there's not an insignificant number of the population of those. Actually, it might be madness on one level, but personally, for me, this is a great thing. Personally, for me as a politician, this is a great thing too because more and more of my constituents feeling wealthier. I'm feeling wealthier. GDP goes up because more people are spending money in the economy. Yeah, yeah, yeah. It looks good. It's the ultimate cannon to kick down the road, isn't it? It is, that is, show me the incentive, speaking of Charlie Munger, and I will show you the outcome, right?

44:10That's the incentive. And so anyway, it's a madness. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

44:23I own shares in Treasury Wine Estates, which I'll say up front. They announced during the week they're going to spend$1.4 billion, dollars australian about 900 million us buying a wine you're an american winery called dao it's spelt d-a-o-u-o but it's pronounced dao um the fastest growing winery in the u.s last year uh very significant mid-range and luxury portfolio which which treasuries for a long time been saying we want to get a commodity wine and into this kind of higher price stuff why because the margins are better makes obvious sense it's exactly what treasury should have been doing it's actually part of my own shares because the strategy is really smart and to the extent they can execute against it, it makes sense.

45:07We should also mention that hopefully we'll get let back into China soon. It seems like there's been a bit of a breakthrough, which is nice. So I'm happy about that. I'm less happy about the acquisition, mate. And I wanted to raise it and talk about treasury in particular, but talk about the acquisition in general. And I guess I try to be skeptical without being cynical. They're going to buy this winery. And they say by buying the winery for the given price, so$1.4 billion, they're just thinking an earn-out thing if sales and profits keep growing. And they say if and when they buy this, it'll be earnings accretive.

45:43In other words, it'll add to the company's profit in the first year. And in the first full year of the acquisition, after it's been done, it should grow profits by between, sorry, high single-digit percentage, I think they said. So sort of 7%, 8%, 9 % is kind of the expectation. now the company's market cap is about 10 billion round numbers might be closer to nine um so they're spending you know a very large chunk of change about 15 of the current market cap they're raising capital to do it and i'm a bit non-plussed by this so i guess i'll i'll give you my thoughts mate you can tell me what to think now it's still a buy i still own it still a buy for us it'd be really really clear because sometimes members get confused when i criticize things with companies i like i've done it before um it's possible to think the company's worth buying and also not agree with every single decision management makes.

46:29And my general concern is this, Ram, and I want your thoughts. They're going to spend$1.5 billion. They're going to issue more shares to do that. We've said before, debt is temporary, but equity is forever. So, they're issuing more shares to do this. And in the first full year, the profit's going to grow by single digits, single digit percentages. Now, I'm going to say to you that for most companies, is that growth in the kind of high single digits is about what you'd expect from a above average quality business just doing its thing. You know, you'd love more, some will be less. You know, Willis will do 5 % or 6 % on average, probably.

47:08Some better businesses might do 10 % or 11%. Treasury is big, it's pretty dominant, it's pretty widespread, it's pretty saturated. So, you know, high single digits is about what you kind of expect. And I guess if I was framing a marker on this one, I'm going to say, well, hang on, And if you're half decent as a business, you should be able to do that sort of growth anyway, organically with what you've already got. If you're going to spend a billion and a half dollars and raise two thirds of that, about a billion dollars from shareholders to make this happen, and all you're really offering me is an average year's growth out of that, is it too cynical of me, mate?

47:42Am I expecting too much to say, that's a lot of risk you're taking and a lot of permanent dilution for the chance that you might get a relatively average, moderate level of success? because if it doesn't do as well as you hoped, if this business has a massive amount of wind in its sails right now, if the wind starts to flag a little bit and that business isn't as good as you think, it's a really, really, really big bet using permanent capital for a relatively modest result. And it feels a bit to me more like, frankly, empire building than it does genuinely trying to deliver long-term compound growth for current and potentially new shareholders.

48:24Yeah, but I get to be on the board of a much bigger company. I'm much more important as one of the top insiders in that business, right? My pay remuneration goes up. It's better to be the CEO of a$10 billion company than a$10 million company. I didn't tell you that much, right? Yeah, it's absolute madness. The other thing is as well, all of this, the expectation is, I just opened up the presentation, as you say, mid to high single digit EPS accretive. So, you know, the profit on a per share basis should be boosted by anywhere between five and eight or 9%.

49:06Assuming our forecasts are correct. Right. That's, and to be fair, it could go better. So I don't want to, I don't want to suggest that's the cap, but it's also not a flaw either. Now, why be cynical on that? Why? Well, I think you don't need to be cynical, but you need to be healthily skeptical because when you look at history, which is always a useful thing to look at, and you look at the history specifically of acquisitions, the rule of thumb here is that about a third of them add value. A third of them don't do anything. It's kind of like a bigger company, but as a shareholder, it hasn't really done me any favors.

49:40And a third destroy value. So I've only really got, there's a one in three chance here that they're right statistically. Yeah. Yeah. So now if this was an acquisition that could give us 20 % growth or significantly enhance our moat or put us in a much stronger strategic position for the long term that is going to enable or lay the foundations for much stronger growth down the track, maybe that's worth that kind of risk. But to your point was like everything goes as we hope and I might get 6 % or 7 % extra profit. and if things don't go as well as I like, and let's remember how quick things can change in this industry.

50:21Remember what happened to Treasury Wine when China decided, yeah, no, we're not going to let you come in at any more. Overnight, stroke of a pen, the business just like billions of dollars up in smoke. Now, I'm not saying that's going to happen, but that's the nature of business is that unexpected stuff happens all of the time. And so I often, as you know, I love asymmetric bets. This strikes me as asymmetric in the wrong direction. heads i win a little bit tails i potentially lose a lot that's not right you've got to believe if your median case is mid single digit growth you've got to believe there's a very very very very good chance of something approaching that and a very very very small chance of this going badly and i have to say when you're buying a branded consumer goods business i have no i have no doubt that dow is a great business and i'm sure the brands are great i'm sure the market consumers love it and all that sort of stuff.

51:14And I don't know Dow as well as I should. If Dow was buying Penfolds and saying, we think this is going to be a good business, I'd say, well, they're probably right. This is a super long-term brand, super premium. People love it. I get that. But anytime you're buying something that relies on consumers continuing to maintain the current beliefs they have, that in itself is a massive risk. If I was buying, I'd be knocking 20 % off the price on that basis alone. I'm not going to pay full price for something that requires me. i mean think about do you remember um surf stitch yes public a6 listed business right you know billabong rip curl and something else remember was it quick serve i can't remember now um i own shares for a short amount of time in that one it was a disaster um but that was one of those businesses where simply just consumer tastes changed and and you know people of our age ramble will fondly remember some of those brands and the kids listening like what the hell is that you know and i don't i i would love to think i was cool enough to say they'd talk about these other brands i'd love to name those brands that kids these days love but i got no idea you probably we know i don't um but that idea of if you're buying a business that requires the current consumer preferences to be maintained hopefully grown but to be maintained you're already taking risk and then there's execution risk and then there's you know and then and then on top of that uh i just it just again i still own the shares i still think it's a buy i'd rather they didn't do this deal i don't hate it because it's should be at least hopefully modestly eps accretive um but If they'd asked me, should we do it?

52:41I would have said, no, what the hell are you people kidding? Why would you do that? In fact, one of the prominent analysts on Treasury apparently was reported in the AFR during the week and saying, why don't you guys just buy back your shares? You've got this great business in Penfolds. It's a cash cow machine. Harvest the cash and return it to shareholders in some form or other. I'm not entirely sure that's the only or best answer, but it's a very good alternative. We'll pay a dividend. Right. Increase your dividend. Yeah. Yep. versus putting$1.5 billion on the line, including new capital. That's the other thing, right?

53:14We're being diluted if you don't take up the rights. So you kind of, they've got to go for a barrel a little bit. Actually, one quick wrap for them. This is a renounceable rights offer, which I absolutely love. And I don't want to get into the jargon this late in the podcast, but effectively most companies say, we're raising capital. You either send us some money or you get diluted, you choose. That's pure overall. That is literally, well, hang on. Now I've either got to send you more cash that I didn't plan to, or you're going to tell me I own less of the company as a result. Those are two pretty crappy outcomes.

53:44The corporation law allows it and it's probably appropriate because these are very large, big businesses with very diverse shareholder bases and there is, you know, it's like the compulsory takeover rule. When you get to 90 % as a takeover, you get to buy the last 10 % on a compulsory basis because make sure every single investor agreed to do the deal so you could take it over would be crazy. But that's non-renounceable. These guys actually said we're going to have renounceable rights. In other words, you can send us the money you can let it lapse if you want that would be a crazy outcome given the choice or those rights will be available for sale on the asx in other words you can get some money for those rights so you don't miss out on the upside potential and so for all of my criticism of it's not really a full-throated criticism because maybe it works just seems not a very good risk-adjusted bet they're making but at least they're doing it the right way and allowing those rights to be traded on market yeah no i'll give them credit for that too and look it may work out well i mean there's one in three situations that it does and we're all we're all better off i i feel as though the a lot of heavy lifting usually gets done in terms of the rationalization in terms of synergies you know it's like in other words it doesn't really make two two plus two if that equals four and i'm twice as big but there's twice as many shares or you know there's like the maths can work out in a way that i'm now a shareholder of a much larger company but you know when it all boils down, I'm still getting the same shareholder benefit.

55:10That is sort of pure ego. So unless, as I said before, it's actually doing something that I couldn't do myself easily or quickly, then why do it? The types of companies that can resist that pull of empire building, as you call it, and focus just resolutely on capital management, which is just the core skill of any leadership team is that when you find those ones, they just, they just provide such incredible value for shareholders. Even if they tend to be smaller companies, I mentioned jumbo in a recent pod, not, not to harp on that again, but they could have easily gone into a thousand other things and they, they didn't, you know?

55:56And in fact, they're much smaller and less known than they probably could have been. I'm sure they could be a much larger company, but a much less profitable one and one that's delivered far fewer returns. The ability to just be resolute in your understanding of what it is that creates value for your customers and your shareholders and only prosecuting the things that strengthen that and saying no to everything else is exceedingly rare in the corporate world. And I think that's why their stats are the way they are, that most acquisitions don't work out. So anyway, I wish them well. It looks interesting.

56:31They always look interesting and maybe it is. That's right. But yeah, I feel as though less is often more. I like it. Speaking of less being more, we mentioned at the beginning of this pod about the challenge for small caps in the current market. We kind of talked about this on and off over the last little while, a long while actually. It's probably been a tough, is it getting close to 24 months? Maybe close to a tough two years, I think, for some small cap companies. Yep. And it kind of seems to, well, I mean, you specialize more in this area than I do, but it seemed from the outside that they're really getting buffeted pretty hard by changing investor expectations and demands, both in terms of what they're being, I'll say forced.

57:17No, nothing's forced, but they're feeling forced to do and the way the share prices are responding. so there's there's a the way i framed it on strongman the other day is there's there's a few different buckets i think here in small cap land there are the companies that have absolutely going for growth but have been pretty restrained in their again the capital management they've been well-funded attractive unit economics i there's real attractive gross margins in the business and there's a very clear pathway to cashflow positivity or they're already there. And they were kind of overshadowed a few years ago.

57:58It was the companies that were just going for growth at all costs and didn't really matter. And then the world changed and the access to capital just dried up. They couldn't raise at the same prices that they could before. No one's going to give them a loan. And they're left in a situation where it's like, well, you might have the biggest total addressable market in the world and, you know, a half-decent product and the rest of it. But if you can't fund your operations and no one's going to lend you any money, you're in big trouble. And so when you look at the real disasters in that area, it has been a case of the tide going out and then, oh, gosh, we are not a viable entity under our current structures.

58:37We have to cut our way to greatness, which is always a difficult thing to do. So Alcideon is the case in point at the moment. This week, shares dropped 25%. It's a great little company that do really cool software. They've like founded in Adelaide and like in their short history, they've done a lot of good stuff, but they overreached. They overextended themselves. And then they did this really weird, poorly timed, poorly communicated raise. I raised$5 million. Like a bad combination. Yeah. And then all the markets are, whoa, I didn't even, it wasn't even on the radar. I thought you guys had plenty of cash.

59:11What's going on here? And it's just a road, like once trust goes, once confidence goes, everything goes. and I feel as though it this is going to sound contradictory in small when I look at the market I think by far and away the best opportunities are in small cap like and and a lot of like even Howard Marks and others are sort of saying that in the US markets as well it says there was a lot of a period of excess and exuberance and it's being washed out now and a lot of it deserved to be washed out but there's been a lot of companies that actually that you've got a good product you've still got a good opportunity.

59:45Maybe you overextended yourself. Okay. That's a fair criticism. Maybe you didn't write the ship as quickly as you needed to. Maybe you made some investments that you really weren't prudent to make at the time. But they're probably at incredible value right now, despite those challenges. The tricky thing is, is that within that mix, you've also got companies that actually you're never going to be viable or it's so far off into the distant future that requires so much funding and assistance is to, you know, make it a very poor journey for shareholders. And that's going to be the tough thing to sort of pick apart at this point in time.

1:00:20These are the great, when you have these big market ructions, if you want to call them that way, that is the stock picker's best friend because that's when you get in discriminant selling and people are really jittery, opportunity abounds. But you've just got to be careful not to tread on a landmine because there's a lot of things that look like opportunity that may just be disasters waiting to happen. And they only look quote unquote cheap in reference to a former irrational price. And the price may still be incredibly irrational and ambitious today, even though it's 20 % of what it was. So I think that's my lay of the land at this point in time.

1:00:55I think that this is very challenging, but a necessary cleansing, if I can come back to our original sort of discussion. And one that actually presents for the discerning investor that presents opportunity. I don't see it resolving anytime soon. Market needs to see companies that can stand on their own feet and can continue to drive growth without the assistance of free and easy money. There's plenty of companies out there that I mentioned to you off Air Red Bubble, I think might be an example of this. Incredible revenue growth there for a period. But it was basically bought. that revenue growth is incredibly high marketing expenditure.

1:01:38Is the business viable? Are the unit economics attractive in and of their own right without that spend? In other words, you take away all this easy money. Can you continue to grow? And moreover, can you continue to grow in a way that is sustainable? I don't know, actually. But for those that can make the transition and pivot, I would imagine in three to five years' time, And we look back going, wow, I could have bought that at that price. That's amazing. Yeah. And that's the hard part, isn't it? Because at some level, by the time the financials are obvious, they don't need the money. And when they need the money, the financials aren't obvious.

1:02:17And trying to get that balance right is really tough. I mean, a bloke with a good idea who then says, well, I need some money to make that work, doesn't have any. a unit of making sure even at that point a lot woeful because you've got to get to scale at a unit economic level and then at a company level, and then eventually you become Woolworths. But that journey on the way through starts with someone saying, I'm going to go on, you know, I'll use all these examples for fun. I'm going to go on, you know, rent a premises, buy the fittings, buy the stock, try and make it work. You know, for the first year and a half, you lose money, lose money, lose money.

1:02:49Eventually that store becomes profitable. And then you might open a second one, and that's hard because you've got to get that up and running. And eventually you look back at Woolworths and go, well of course it was always going to be Woolworths. It's Woolworths. Why would it not be? But for a large amount of that journey, Woolworths itself wasn't certain. And those who would be the next Woolies aren't necessarily in that place either and fall by the wayside despite having similar plans and objectives. It makes it hard for an investor to work out at what point to jump in. Do I assume from your comment, mate, that that kind of unit economics is, for you at least, the ticket to the dance.

1:03:27Before then, too risky. After that starts to become reasonable, even if it's not profitable. Is that where that crossover is for you? Yeah, it's a big part of it. I mean, I want to see a really, I'm a simple man. Bring it back to basics here. Do you actually have a legitimate product here? Not some bunch of jargon strung together that sort of sounds good. I don't know really what you do. When you see a business who has very good organic sales growth and very low churn, in other words, a customer buys it and sticks with it. And you can actually put prices up year to year. That is a very strong signal in my world.

1:04:02And it says that there is an opportunity here and that maybe you should invest more to bulk up the sales team, to bulk up production, to bulk out new offices in different geographies because there is a wonderful sort of opportunity there. So yeah, I think you need those things at the core. And for one of the ones, I've had plenty that have just, they're down in the dumps at the moment and i think the problem has been more at the fixed cost line and i think they did extend themselves too far i think they did bulk up too much i think they did make some acquisitions that weren't there and they're all negatives and i'm not trying to sugarcoat it but what keeps me in those large number of those ones if i'm being honest probably a lot of it's just like pig-headedness but but hopefully there's also yeah yeah you know sure But hopefully there's also a recognition of that, yeah, despite those missteps, there is a genuine product here with a genuine opportunity.

1:04:58And if they can navigate through a more challenging funding environment, they will emerge out the other end and it's game on. One other point I want to make is I think the – given the lay of the land that I presented, we may or may not agree. but if you did agree you might say well why wouldn't i just go for the ones that are already profitable that have made that switch i don't have to wait for that and i would say yes that's true but then again the the market so i mean so laser bond xrf uh uh crisis um uh drop suite uh just the ones off the top of my head small cap growth tech ish kind of companies um yeah they've kind They've kind of walked through and threaded the needle there.

1:05:48It's just like, actually, we are viable. In fact, LaserBond and XRF, they've consistently been profitable and paying a dividend. And we've grown while being able to support ourselves. Great. But the challenge is there is that those share prices have held up remarkably well and in many cases are doing great. So it's sort of like, it's back to the point I made a month or so ago now. It's like, unfortunately, to get a bargain, you need uncertainty. The companies that look fantastic, I wouldn't say it's completely fully in the price. I still own shares in XRF and LaserBond and the rest of it. But they're not the bargain that potentially exists elsewhere.

1:06:27The ones that are less certain are cheap potentially because of that uncertainty. And that's the conundrum. It's very easy for people to go, I just buy the best quality. It's like, yeah, but you might get really crappy returns only buying the best quality, right? anyway therein lies the conundrum it does indeed and one we will have to continue to puzzle with over the next couple of days until Sunday morning when I'm hoping desperately you might find your way clear to having finished your Ironman triathlon just cool yourself down have a drink the Sunday morning mailbag edition can I count on you?

1:07:03you know you can I'll make sure I'll set the alarm for 3am so I'm well and truly done by the time we're recording is that 3am you going to go to bed or get out of bed. No, get out of bed. Of course. Lift the weights, do what I got to do. Man the soup kitchen, you know, everything. Help the kids. Nothing like commitment. The kids are up at 3am, mate, you're doing something wrong. Otherwise, I think that's probably the right thing. Okay, until Sunday morning, thank you for listening. Enjoy the rest of your weekend and fool on. Thanks, cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned.

1:07:38General 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 Licence 400691.