What to make of the 'Magnificent 7'. March 1, 2024

28:13So let me just go through the list for, I own some of these, Amazon, Apple, Alphabet, which is the company that owns Google, NVIDIA, the chip maker, Meta, was the old business called Facebook once upon a time, Microsoft and Tesla. Now these are called the Magnificent Seven. The, the reason they've kind of risen to prominence is the market capitalization, the value gains of these businesses are extraordinary. Now, to give you a concept of how big these guys are, there's a Deutsche Bank report that was out in February this month, February 19th, there you go, about a week ago, quote, the Magnificent, It's a twop up going on.

29:00Quote, the Magnificent Sevens combined market cap alone would make it the second largest stock exchange in the world. It's amazing. They are just phenomenal. The gains they've made over the past 12 months in particular has been extraordinary. It is just, and it's worth talking about for a couple of reasons. One is we've just, and we've kind of already done it, mate. you kind of touched on the these are all tech companies literally all them in tesla arguably a car company and again i've talked about tech before and tech is a stupid term except that when you think about the the way these guys are creating value it is utilizing that technology in new and different ways i've said before i've talked about the nasdaq as an index being the companies that are inventing the future we've talked about why and how again think about what these companies are doing it is it is just remarkable as a result by the way and we've talked about this in an Australian context.

29:59Deutsche also says, quote, sorry, I shouldn't quote yet. The US stock market is, quote, rivaling 2000 and 1929 in terms of being its most concentrated in history. Now, we're used to having half our market here made up of banks and miners. The US was much, much, much more broad only five years ago. Now, very, very concentrated because of the growth of these guys. Apple and Microsoft, close enough to$3 trillion US dollars of market capitalization each. It wasn't that long ago we're crossing a trillion dollars. Will Apple ever get to a trillion dollars with their headlines? Now it's at$3 trillion.

30:37Meta's not far away. Alphabet's not far away. These are just huge, huge, huge businesses. And I will say, mate, I am not going to suggest there's no froth in the share prices. What I will say, I own some of these, I own of this lot, Amazon and Alphabet. What I will say is if you look at the price earnings ratios, they are absolutely high, absolutely elevated, but they're not stupidly stratospheric. No, they're really not. There might be 30 odd times, but these businesses have grown like the clappers. Yeah. Apple's 28. I'm just looking now. Right. Even Tesla's 45. These are not stupid nosebleed, can't possibly do it.

31:15So when they talk about 1929 and 2000, and people think, okay, great depression, you know, dot-com crash, et cetera, et cetera. And again, these businesses could halve and the P's wouldn't be cheap traditionally, right? A P of 30 for, I think, Apple might be under 30, I think Meta's about 30. If it was to halve to 15, that'd be market average. And yes, it would hurt shareholders. You know, a halving and a share price, never good. Yes, it would hurt the index, by the way, because how big these guys are. But if you kind of just consider that, you know, that's about, I might say as far as they can go.

31:45In 2000, the Nasdaq fell 85 % because there were stupid valuations for companies. These might be too high. They might be a bit frothy. They might be a bit over the top, or they might not be, by the way. But it's not like there is no basis for the valuations of some of these companies. Can I just put that in context? Please. Clarify something here. You're right to stress that these are high multiples. When you look at the long, long-term average of the markets, what did you say? 15, 16, something like that. So when you see Tesla at 44, and also given the size of it, the Motley Fool can grow 10x itself and still not be on the NASDAQ, right?

32:24Stormank at 100x itself and still not even be on the Newcastle exchange, right? So there is a lot more room to grow when you're small. When you're that big, yeah, there's still growth potential. Please don't at me all the Tesla bulls and stuff. But it is just much harder to grow. But I think the reason we sort of say it's not that bad is that, A, despite their size, there is still pretty decent growth potential. But, B, look at it comparatively. Let's go to the ASX. And I think if we didn't have our local context, maybe we would be looking at these numbers going, geez, that's a bit high. So, when you were talking that, I just did a quick search.

33:04Zero. The company zero, the accounting software. the PE is 168. Oof. Pro Medicus. We've talked about a lot. Drink. The PE there is 130 or something. Right, right, right. Altium, the chip designing software company, got taken over recently. It's currently going through a takeover offer, a very generous takeover bid from a Japanese firm. PE, 74. WiseTech, another, what do we, they had the Magnificent Seven. We had the, what was our acronym? Wax. Wax. So this is the W in wax. WiseTech, Altium, Afterpay, Happen and Zero. Well, Happen's interesting. Afterpay too, by the way. But with WiseTech, it's on a PE of 122.

33:50Can I just say for the record, I think every company I just listed there I really like. I really like them. I don't own any of them. And that's why I don't own any of them. But before you, you know, if you think that makes me smart, it probably doesn't because I could have sort of made a similar argument when they were all at a PE of 80, and it's gone up another 50%. Exactly. But it does, and each company has its unique circumstance in growth expectations and all the rest of it. But from an Australian perspective, sort of seeing some headlines about the Magnificent Seven and the multiples they're trading, and you go, oh, geez, I wonder what they are.

34:27And you think, oh, that's not that bad compared to what I'm having to deal with here on the ASX. So whatever remarks you want to make about the valuation of the Magnificent Seven, if you want to take a local look of things, I'm just finding it harder and harder for anyone to rationalize these valuations. It's not that they can't be proven reasonable in the fullness of time. But as I often say, the asymmetry and the returns there is sort of really unfortunate. It's either they shoot the lights out and you'll beat the market, maybe 5 % a year or something. They do what everyone expects, which is what everyone expects.

35:06And you maybe get sort of the market average return by definition. Or they fall a little bit short and you lose 30%. It's just the math's not attractive on it. But I've been really wrong on all of those stocks so far. So take it with a grain of salt. And it's worth saying, you know, businesses like Amazon, I've owned shares on Amazon for quite a while. They had PEs above 100 at some point previously too. And investors were right about those. So it's not to say, well, you can't be right about these other companies. It's also maybe true that these guys have lower PEs now because they're becoming more mature as businesses.

35:32And so there is only so much more growth left. And maybe, you know, maybe it is better to buy the high PE stocks when they're young and small and can still grow by, you know, three, four, five, ten times. But given the growth of these businesses, the profit growth of these companies, revenue growth, is still extraordinary for businesses of this size. They are reinventing the future or inventing the future. And that's almost your point before about the sheer pace of technological innovation. No surprise that almost all these businesses are using AI in some form or are benefiting from AI in some form.

36:02Again, not in a frothy way, like investors love these things, so the share prices are high. I mean, they're doing things, and that's actually adding to sales and profitability. They're genuinely growing, doing and using these things. NVIDIA is the one I'm least comfortable with, honestly, mate. and this is maybe this is going to, you know, someone will record this and play it back to me in a couple of years time. They are making the chips that are powering the AI revolution. They have something like 90 plus percent of the market share of chips used in that purpose. That's exactly why sales and profit are through the roof.

36:35And they're just, they're growing like the absolute clappers. Now, whether they can continue to do that if and when other players come to market or other things happen, that's an open question. I have no answer to that at all, no view uh but it's worth kind of saying that as much as they're benefiting from what's going on now of the seven they're probably the one i think that are least obviously uh have a have a moat that's that's protectable if things continue to innovate and change so that's just my personal view again like you i've been massively wrong on this because obviously the share price has gone through the roof and i haven't haven't owned the shares um but you know will it be their chips that are used in the future i don't know will the growth be the same in the future i don't know um and i don't really think it's possible to know you might say well they're there now they might keep winning that's not a bad thesis by the way uh but i couldn't i couldn't you know i can look at microsoft and say well we know what they do we know what consumers and businesses think of them we know that you know are they no one's protected from competition but there's seemingly more defensible parts of their business um nvidia is the only game in town right now at some point when you're a monopoly provider that's almost the biggest risk right because you only need someone to come in and start doing it and all of a sudden your business comes under some decent threat not unlike intel by the way which was the only name in town and chips for a while until amd turned up uh so i don't know i don't make no predictions but they're probably the one i'm least comfortable with there was a wonderful animation i saw on i believe it was twitter going back 2014 comparing nvidia and intel all right both you know intel's at 140 million 140 billion sorry market cap in 2014, NVIDIA's at 10.

38:12And, you know, it's an animated chart. And obviously one just shoots up beyond, you know, just insane. And so now you've got NVIDIA at like 500. That can't be right. 500 billion? No, well, not now. Oh, wow. So this chart only goes, oh my gosh, this only goes through to 2021. $1.97 trillion. So it's 4X'd since that chart. So, well, the reason I mentioned that is because it shows you, back in 2014, you could have made an argument that Intel was the dominant player. And if there was some kind of chip boom, that they would be the major beneficiary of that. By the way, you haven't done terribly in Intel, but you haven't done what you've done in NVIDIA.

38:52And so it's, I think if you're going to invest in these companies, actually, there's people I know who really have a strong conviction on this because they've gotten way into the weeds. You can't invest on this because you think, I think AI is big and NVIDIA makes chips, so I'm buying NVIDIA. That is a recipe for disaster. That's my concern, yes. Yep. And that's what a lot of people do. So it needs to be that kind of, no, I understand the industry. I've done a lot of work on this. Here's their edge over competitors. Here's why it will be maintained. Here's the market opportunity. This is what they'll capture.

39:22These are the economics they'll have. It sounds like a lot of work. It is a lot of work. But that's kind of where you sort of need to go with that. One other quick point I want to make on that chart, which is it gets me every single time because people do these things all the time, is that on something that is just an absolute to the moon rocket, the number of drawdowns along the way are gut -wrenching. That's true. Gut-wrenching. So, NVIDIA went from$200 billion to$100 billion over 2019. And then it had these other, you know, just massive, massive drawdowns. And it's why… So in 2021, so November 2021,$329 a share.

40:03By September 2022,$121. It fell by two-thirds over that period of time every year. So the reason I bring this up is that we all secretly want the 10 bagger, the 100 bagger, right? Like that's what we want. It's nice to plod along and get 10 % per year. But by the way, you only need one of those stocks to really make the difference. no one gets it though very very few people do because the the psychological toll of riding through that and it's why i always say some it's very easy to look back in hindsight and say oh you got lucky yeah you bought amazon in 2001 and i i really bristle at those comments because i think no i take my hat off to you i applaud you that that took such incredible conviction and strength of fortitude to be able to cling on through all of that.

40:54You deserve every single cent that you made. And it is not – for anyone to sort of point to that and go, look how easy that was. You bought something 10 years ago and you did nothing. It's like you have no idea, no idea of the difficulty in that, and people that are able to do that just deserve all the credit and reward that come to them. But if you want to be one of those people, it's going to happen, right? You have to be the person who can sit there. But in the last eight months, you've just lost two-thirds of your money on paper. And then buy more. And I'm not saying you buy whenever something drops two-thirds.

41:27But again, full circle, if you've done the work and you understand this, then I'm all for you backing it. Otherwise, be very, very, very careful on just getting onto these hype trains. because the other reason to that is not only that you're buying something without any sort of objective view or at least trying to be objective view on value, is that when, not if, when the drawdowns happen, your whole investment thesis was couched in number go up and number now not go up. And so you panic and you sell. If you want to be a holder through that, conviction comes through understanding. Understanding comes through research.

42:07It's just, I'm sorry, there's no shortcut to it. And it's why there's only one Warren Buffett and a handful of famous investors that we sort of like to talk about because they are so exceptionally rare. But take the lesson is, I guess, my point. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

42:28Speaking of Buffett, let's move on to him because he released his shareholder letter last weekend uh and buffett writes it doesn't speak that frequently to the media um off and on uh doesn't speak to analysts at all uh but puts his puts his thoughts in in writing once a year when he writes to the shareholders of berkshire hathaway i am one as a listener as well know um and it's one of those it's one of those things that i think is worth just taking a step back from it's not exciting as nvidia it's not going to change the world like ai um it's not even Bitcoin blivered out, Ram. But I think it's worth thinking about.

43:06He's written a whole lot of cool stuff this year. BerkshireHathaway.com is the website. Do yourself a favor, read the letter. It's short. I mean, the whole thing, he puts like the company analysis and stuff, but his commentary letter, it's probably five, I don't know, eight pages or something like that. I don't know what it is. It's really, really short. Very, very worth reading and worth thinking about. I'm going to share some quotes. I wrote an article about it earlier this week. So I'm just going to share some of the quotes and maybe share my thoughts and get your thoughts on the same thing.

43:30and then you can add anything you want to that. But he, unusually this year, and not unusually or not surprisingly, but unusually, he spends the first page talking about his longtime business partner, Charlie Munger, who died last year. We did an episode, a Charlie Munger episode, late last year. So hopefully you got a chance to listen to that one. But he, and Buffett and Munger, both very, very humble guys, always gave each other massive amounts of credit. So no surprise that Buffett does the same here. but a couple of just thoughts about Charlie or Charlie's value and what he said to him. Warren quotes him as saying, Warren, now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices.

44:13In other words, abandon everything you learned from your hero, Ben Graham. It works, but only when practiced at small scale, end quote. I thought that's, again, hopefully that concept of that quote, you know buy wonderful business at fair price not fair business at wonderful prices that kind of echoes it should be new to our listeners it also echoes exactly what you said before mate about if you're going to compound your money in a single investment it needs to have a long-term trajectory because if you if you buy it because you want to turn 80 cents or a dollar well i guess a dollar then what do you do well you got to sell it and find another 80 cent dollar right and then you got to pull the rabbit out of the hat all over again yeah as as munger said to buffett according to buffett it happens at small scale i guess you can probably do that regularly enough if you try in ben graham's day who was warren buffett's mentor for those who don't know in the 30s and 40s it was super easy because they were just there wasn't the computing power there weren't as many investors there were more mispriced opportunities you made a lot of money doing exactly this these days no both at large scale but frankly in the days of you know uh universal inflation and and computers that stuff doesn't exist anymore buying wonderful business at fair prices because they can continue to be wonderful businesses for a very very long time is is well worth doing yeah yep um i buffett said before on that he's talked a bit about that before he he's brazenly perhaps is the right word sort of said that if he was his biggest handicap today is this sheer size of the money that he is holding um and i think that's the one thunder i'm getting into that okay okay i i guess i i speak i was selfishly um here i guess talking about my own sort of investment journey you sort of all you i think there's no one right way to skin a cat but you've got to find something that resonates for you and something that you you can sort of find a passion in and i've i've gone through that journey or i used to be all about very high quality companies at fair prices and i've sort of shifted more to the early buffet kind of stuff i don't know if it's going to end up being the right move or not but i i love that idea that they're still acknowledging that that when it's worth saying because not everyone listening in fact i'm going to go out on a limb and say no one listening is a multi-billionaire who's got you know hundreds of millions by the way but thanks thanks guys for for tuning in well it you know it sucks to be the smallest fish in the pond in a lot of ways but i i'm flipping it around to sort of say if that's you, you get to play in an area of the market that the bigger people can't.

46:46Even if they wanted to, they can't do it because of the capital that they've got. And that's something that I find great solace in, in that you have far less competition. So much less of the quote unquote smart money that you're competing against. And it's a point worth making, I would sort of say, Not to say push people in any one direction or that, but it is, I think those inefficiencies in the market are getting less and less over time, but they remain much more prevalent at the edges than they do at the top end. Yep, I think that's a really good point. He goes on, mate, to talk about, and this again, just a bit of a Charlie Munger rap.

47:25He says, quote, quote, in the physical world, great buildings are linked to their architect, while those who had poured the concrete or installed the windows are soon forgotten. Berkshire has become a great company. Though I have long been in charge of the construction crew, Charlie should forever be credited with being the architect, end quote. You know what, mate? My strongest thought about that is actually just the humility of Warren Buffett. Like you're Warren freaking Buffett, right? And yes, maybe he doesn't lose much by giving someone else some credit because he's to Warren Buffett and he's still going to have that halo.

47:56But when you kind of say everything I've done over the last 65 years, you can kind of, you know, it's actually Charlie, not me. That's no, you know, I don't have too many other people who would willingly not only defer some of the credit, but effectively defer all the credit to the design of what has been the greatest investment conglomerate of, I'm going to say all time, certainly of modern times, to somebody else say, yeah, look, I kind of, you know, I manned the till, someone else put the strategy in place. I think that sort of humility, frankly, is missing from public life. And we can do with a whole lot more of it.

48:31I don't have an investment takeaway necessarily other than stay humble. It's a pretty good way to start investing and keep going on the process. Humility is everything, you know. And he's just such a gentleman, Buffett. But I think it's just such – honestly, I don't think I know a good investor who isn't really humble. and not because it's a necessary – not because I just like – I think we like people who are more humble than those that are very braggy and arrogant and the rest of it. But my point being is that arrogance and hubris leads to disaster. Yes, it does. Yeah, exactly. It just does. When you start reading your own press, you're in trouble.

49:11Oh, you really do. And like, you know, how many times have we seen the pride before fall moment? The fund manager that's flying high, the AFR is all over them. Funds are flowing into their vehicle. They can't lose. And then boom, down 80 % and never heard of again. It's the idea of there are old generals, there are bold generals, but there are no old and bold generals. And yeah, so yes, I agree with you. It's just, it's always nice to see Buffett. He's always been very humble and very, very quick to sort of share praise and the rest of it. But I would just sort of say again for you personally, if you're that kind of person that can't listen with an open mind and good faith to other arguments, especially the arguments that are against your position, you're just not going to make it as an investor.

49:59I'm not saying you have to agree with every person who argues with you, but you need to take them seriously. And speaking of Munger, how many times has he made that point? You're rereading his book again at the moment, right? It's just sort of like you need to constantly challenge your assumptions. You need to constantly make the assumption that I might be wrong here. and if i am wrong where am i wrong um you know if you don't ever consider that as a possibility you are going to walk into so many traps and and and and in a way that probably makes it unrecoverable so yeah don't be arrogant i guess yep i think we add to that mate just to really flesh out your point not only do you have to be humble enough to realize to really search hard for you might be wrong you're gonna be humble enough to realize you're going to be wrong anyway Yeah.

50:42And so while you can try and minimize the errors, you will still make the errors. Yep. And so investing accordingly, diversifying, dollar cost averaging, the things you can actually do to avoid that reality of, I've been as careful as I possibly could be. Yep. Buffett's bought businesses that have gone broke. Yep. Subsequently. Yeah. Plenty of occasions, yeah. Right? If you think you're going to avoid that, then good luck to you. So, you know, the idea of, you know, the humility of making sure you understand the downsides of your own ideas, but also even when you've done as much work as you still can, you're still going to be wrong sometimes.

51:18And so investing accordingly, it's just necessary. And I think when you start to believe that you have all the answers, you stop leaving room for, A, your own errors, as you said, mate, and trying to find them, identify them. But also simply saying, well, I think I'm right about this, but there's a decent chance I'm going to be wrong, so I'm not going to put all my eggs in this basket. or I'm not going to take this approach or I'm not going to assume I'm right. Once you, if you set your course on, this is the IOA, this can, and we've seen this so many times. And again, it's an old Hackney one.

51:45I apologize, Steve Keen, yet again for mentioning this one. But Keen's gone, I've done the maths. The housing market can't crash. So I'm going to sell everything, which he did. And then his response afterwards was, well, I would have been right if government hadn't changed. Now, what he didn't allow for was the fact that government might change. Wasn't it his reasoning was wrong or his analysis was wrong or in a all things being equal, economist world he wasn't wrong and again it's not not the fact the prices went down or up and i'm not i take no joy in giving him a hard time i've spoken to him quite a lot he's quite a decent guy um i don't always agree with him but you know the the the error was not allowing for the fact that things may not turn out the way he expected them to because he had such conviction that if the analysis he'd done was right then therefore that must happen he just didn't allow for those alternatives and and put himself in a position where you know he and again he's perfectly fine but um but that idea of drawing a conclusion if you if you have a view of geopolitics or technology or something and you are so convinced that you throw all your eggs in that basket be very very very careful because if this doesn't work out that way you're in you're in a world of hurt oh yeah 100 100 mate um we'll move quickly through this we have a couple of things to get to uh quote our goal at berkshire is simple we want to own either all or a portion of businesses that enjoy good economics that are fundamental and enduring.

53:05Within capitalism, some businesses will flourish for a very long time, while others will prove to be sinkholes. Then he goes on to say, quote, it's harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake oil salesmen, end quote, which actually probably just reinforces the thing we've just said before. I I think I've got much more to add on that other than Buffett does it with his usual flair, a very, very simple way to do it. Yep. And he's previously defined the best business as one that generates large amounts of free cash flow that can be reinvested at high rates of return, which is a bit of a word salad.

53:44And to throw it at you very quickly like that, it takes a little bit to absorb that. But it's just basically a company that can sustain its operations without having to continually reinvest into just the existing operations. so it throws up all this spare money what we call free cash flow and then actually i can not pay it out as a dividend i can keep it and i've got this little opportunity here where i can invest that and get 20 30 rates of return you do that all day long and do that for decades you end up being like warren buffett so yeah he's he's he's got a he's got a good formula very easily outlined very difficult to prosecute but very very elegant and very correct too nice um this is interesting too might think about the way people invest quote though the stock market is massively larger than it was in our early years today's active participants are neither more emotionally stable nor better taught than when i was in school for whatever reasons markets now exhibit far more casino-like behavior than they did when i was young the casino now resides in many homes and daily tempts the occupants.

54:51This should be tattooed on people's faces or put the bottom of their, you know, if you're a decent stockbroker, this would be your login screen. Now they're not because they make money doing it, right? But that's that idea of somehow that, you know, we're talking about technology and the advances in technology. I've said many, many times, our biggest challenge is our brains haven't evolved as quickly as our society has, whether that's the economy more broadly or technology in particular. and we are bringing a knife to a gunfight of this stuff. You know, the fact that marketers and business people looking to make a buck from us, not for us, can create these casinos in our pockets.

55:30You know, they're not poker machines so somehow they seem more respectable and more reasonable and it's investing, it's not speculating, it's not gambling on buying and selling shares. Maybe it's better to say it is the function, not the form that defines casino-like behavior. Yeah. I'll point to the GameStop movie again, Dumb Money. It just demonstrates that so well, right? Yeah. And it's a good thing. I mean, just to be selfish again for a moment, you know, in the sense that it means that there can be really big perturbations from a reasonable notion of fair value because of over-exuberance and then over-anxiety.

56:11if you want to call it that. So yeah, long may it last. Nice. Last one, mate. Oh, there's two here. I'll do two. I don't care. Quote, we cherish their presence. This is what Shia was talking about. We cherish their presence and believe they are entitled to hear every year both the good and the bad news delivered directly from their CEO and not from an investor relations officer or communications consultant forever serving up optimism and syrupy mush. strong agree isn't it no one's going to do it no one's going to do it but but also very it'll be the exception to the rule but it is yeah yeah remember as an investor that's what you're getting you're getting optimism and syrupy mush from uh from from most every company you see report and talk about their business so uh discounted accordingly last one uh quote the lesson from coke and amex question mark when you find a truly wonderful business stick with it patience pays and one wonderful business can offset the many mediocre decisions that are inevitable which again is pretty much exactly what you said before yep yeah i mean i i i you and i have both been in this industry for a while and um i think when we've ever had to deal with a client who is unhappy and you're dealing with money it's kind of going to um no matter how good you are yeah it it usually people i think it's and this is true in life in general i think it's usually a mismatch in expectations versus the reality of things so everyone says i like this share market thing i feel as though the long-term average return of 10 is better than what I'm getting elsewhere.

57:56It's got a lot of advantages. It's super easy to do, low cost, fast settlement, et cetera, et cetera. Yeah, I'm down for that. Not recognizing the reality is that, well, within that, probably four to seven of your investments out of 10 investments are not going to work out. It's going to be a minority that do all the heavy lifting and it's never going to be 10 % a year. It's going to be up 30 % and then down 40%, but it's going to average that 10%. And I think that's worth, it's just worth sort of stressing here that, as you said before, even someone like Buffett is going to make all kinds of mistakes, but just to remember that, hey, this is normal.

58:30This is, this is, don't get upset. And the worst thing you can do. And it's hard to sort of give this advice to a client because you, you are inherently self interested in the, in the sense that it's like, well, I want, I don't want my client to go. So I'm going to, you know, it feels as though you're saying what you have to say to sort of keep them, But I think it's the truth. Coming back to that earlier point of it being much more of a casino, the incentives at play are very interesting here. We've talked about this before. You and I set up an advisory service. We're going to be different from everyone else.

59:03And our marketing is going to say, hey, come invest in the stock market. Super scary, hyper-volatile. You'll watch your net wealth jump around by huge orders of magnitude from time to time. A lot of the investments will go bad. but we think over the long, long term, you'll do very, very well. Here you go,$200 a year membership. No one's signing. Not a single person on God's green earth is signing up. The person who says, hey, look at this one. This one's going to the moon. You need to get on this now. And here's some other ones that we want. They almost, the industry selects for the bad actors because the bad actors just have such better marketing because they're more prepared to give you that rose-colored sort of view of things.

59:45The trouble with it is it's this churn and burn of customers. People get wrecked. They still make their money. And it becomes this insidious, horrible kind of industry. Whereas, you know, hopefully with some of the stuff we're sort of putting out there, we can just hammer home these more difficult messages and still hopefully get through to people. But it's still worth it. It's worth it despite the agony. Yeah, love it, mate. Love it. I'm going to finish, mate, with a rant. Can I rant? I haven't ranted specifically for a while. That's not a podcast if we don't rant. Coles reported its earnings this week.

1:00:20Woolies last week. We talked about Woolies results last week. And I even ranted about this a little bit last week. I am so sick and tired of the absolute BS that goes around the alleged price gouging by our supermarkets. It is just absolute and complete nonsense by people who, frankly, either do know better and are cynically using it to make a political or social point, or don't know better but should. and I'm not entirely sure which one of these is wrong. I've done the numbers, Ram. Here's the thing. Let's take Woolies profit for the last six months. Add Coles profits for the last six months.

1:00:54Net profit? Then multiply it by two to get a yearly number. Okay. Sorry, so net profit are we talking about? Is that what we just make? We're talking about net profit? Net profit. Net profit. Okay, yep. Divide that by the number of Australians. Then divide that by the number of weeks in a year. To have Woolies and Coles within five minutes drive of 95, 98, 99 probably percent of Australians with fresh food, big range, great service, cheap prices,$2.17 per person per week. We pay more for Netflix. Now, I don't know what they think is going to happen here. If Coles and Woolies profits halved, we'd save a buck a week per person.

1:01:40I live in a family of three people. I would save$150 on groceries, which frankly would be lovely, and I would take it and that'd be fine. There is no profiteering when I've got to pay at my household$300 a year over and above the cost of providing all of this great stuff, the range, the service, the price, the location, the convenience. I can pick it up from the store. I can have it delivered to my house,$2.17 a week per person in profit from Woolies and Coles. And I just, mate, for the life of me, I don't know, well, I suspect I do know why, but the absolute, I'm going to say stupidity of people who either, as I said, should know better but don't, which is indefensible, or do know better and don't care, which is indefensible, or should know better, haven't bothered to find out because it just they like the idea of blaming these grocers for profiteering is just completely mind-blowingly stupid we have a dozen different problems in australia big problems but you've talked about housing we've talked about housing before we've talked about resources taxation we've talked about multinational tax avoidance we've talked about all of that not talked about all other stuff that's a problem as well productivity maybe, Treasurer and Lobby Group and newspaper journos.

1:02:55It is just absolutely freaking nonsense the carry-on that we hear about a profit margin that is two bucks per person per week, that if it halved would be fine, but hardly move the dial. It is just so incredibly frustrating. We've just talked about the mortgage cliff. We just talked about at the beginning of the program, the fact that 1.6 million Australians are in mortgage stress. What does government do about any of that? Nothing. But there's four or five different inquiries about grocery prices, because somehow Woolies and Coles are the biggest problem we have as a country. Now, yes, we can do more than one thing at a time.

1:03:29Yes, we can do an inquiry on grocery prices and other stuff, but we're not doing the other stuff. And the number of tweets from the people who should know better, the number of public pronouncements from politicians and lobby groups who should know better, the number of journos who get caught up in this rubbish and think that somehow they should know better. Shout out to The Guardian, by the way, a paper that I genuinely quite like, but has been running this Australia versus UK grocery margin story for God knows how long and obviously paid by the story. Mate, it drives me absolutely bananas that given every problem we've got, given every opportunity we've got, given the challenges, given the things that our governments and a serious interested media and really, really smart people working for think tanks and lobby groups could actually be doing, they're spending all this time and effort on absolute nonsense.

1:04:18you know there's yeah i don't know you go i'll shut up i totally take the point and i i agree with you that it's it's a storm in a teacup it gets way more attention than it should um but i'll push back a little bit um maybe i'll repeat some of the stuff i said last week but just the the terms gouging the terms profiteering are they doing that well i don't know what the formal definition of that is like as i said this semantic angle to this that as a free market capitalist i guess i would say that a company should make as much profit as it can make as long as it operates within the the rules of of of law as we have it um so so i don't i i don't i don't know where yeah look object let's just go with some object objective facts because there's always a nugget of truth to some of these things.

1:05:14Gross margins increased. They just did. So yes, the prices that Coles and Woolies had to pay for their suppliers went up. They passed that on and then they added more than what they normally do. So that's fact. Now, again, could they do that? Yes, they clearly could. Should they do that? Well, shouldn't they? It depends on what you think the mandate of the board and management is. If we want to have a discussion on sort of limiting the profitability of certain industries. I think it's a very slippery slope. It's a very dangerous kind of slope. But I do get the argument that you did clearly pass on more than your added costs.

1:05:52I know there are things below the bottom line. Added product costs, just to be really clear, because their net margins actually fell as well. Yeah, but then you're especially in the – I didn't look at Coles, but in the case of Woolies, though, that's with big W and stuff in it. EBIT operating margins increased for supermarkets. So, and again, I'm not, I'm sort of stating, two things can be true at once. I'm stating a fact, right? Like, so this is what, so starting with the premise that, yeah, it's completely overblown because the numbers that we're talking about are not going to move the doll for me at all.

1:06:20So I get that, but just to be pedantic and argue the point, well, hey, you passed on more, all right? And in your supermarkets division, you made more money. My broader point is, well, if we don't think that's okay, what do we do about it? Yeah. And I think mandating things just very quickly sends us in a direction economically that's very dangerous. And, you know, you get to bread lines and all kinds of stupidity very, very quickly in that regard. I've long been on the record of saying, you know, competition is the solution, you know, to these kinds of things. But these companies have incredible market power.

1:06:57They just do. And it's a motive. So I get the story. I would far prefer the Jono's focus on much more important things. there's an element of truth to what they're saying it's just overblown I guess that's my point Fair enough Because it is right like it is because like the margins are the margins are the margins and they went up and they sit 50 % higher than where they sit in the US and the UK Fact Is it a good thing or a bad thing? Different conversation How do you fix it? Different conversation Does it deserve all the attention? No it doesn't I just think that the the savings you could make by so you know willy's willy's gross margin up 25 basis points right so that's that a two percent increase would be two cents in the dollar a point two percent is two is point two of a cent in the dollar let's have to give that back and the gross margins are fine what what what what difference it just it's just the dollars per person per australian or whatever it's just it's just such a stupid argument relative as you say the numbers are the numbers but relative to every other problem we've got the number of column inches radio talkback time politicians ranty time lobby groups carry on let's let's say we did let's say we made him give it back okay so so the average australian would be a tiny tiny tiny tiny tiny tiny tiny fraction better off well done guys congratulations you sold the biggest problem we've got we're all everything's okay now um australia's now much more prosperous much more better off thank you very much for all that hard work you can you've done your job you can go back right off into the sunset yeah it is just you know look at look at the the profits made by energy companies look at the issues with productivity look at the budget situation look at resource taxation look at the lack of us again there's so many and even if you disagree with all of those things you'll have another five things you think we should do yeah and almost none of those things are going to be uh sorry it will grocery market is not going to be more impactful to anybody than any of those things it is just this nonsense conversation it's either it's either misunderstanding or misdirection either way it is just it is just so ridiculous here's the other thing by the way mate i've said this before i think i said this last week too you know how they're making that money by screwing the supplies not by screwing the customers that the simple i've worked for food supplies i worked for half a dozen of them earlier in my career can i tell you it is not you know the consumers like when they did when colesley will use the one dollar milk campaign it wasn't the consumer getting screwed when they dropped the price of bread it wasn't you and i paying too much they are absolutely If the margins are too high, and this is the other problem that frustrates me, mate, is, you know, what is it, lies, down lies, statistics.

1:09:31The margins are higher. Yeah, they are. Do you know why they're higher? Now, I can't say for sure because there's no way to absolutely pull us apart. But the pressure they put on large and small suppliers. I've worked for large multinationals. The pressure they put on these large suppliers, let alone the poor small guys, is just phenomenal. I would bet a very large amount of money that if we broke up with Lizz and Coles in three or four parts each, the margins would go down. And if I say, hey, the margins are good, that's great. You know why they would go down? Because the food prices would go up and the suppliers would get paid more.

1:10:04And frankly, they probably should be paid more because they're getting screwed. But the outcome here is not the consumer getting taken for a ride. This is the suppliers having to put their hand in their pocket or frankly, having other hands put in their pockets to fund this stuff. Yep. I don't own chairs. do i don't choose any suppliers i don't think so uh i don't know anyway it's not it's not about not about me not about my i've worked for both as i've worked for all these i've worked for suppliers i've been on both sides of this conversation it is just like you know the using a percentage margin saying therefore it must must be true that x is happening as you say mate the numbers the numbers there's no argument about what the number is yeah the lack of serious consideration and thought and interpretation of this in any objective way rather than i have a preconception let me prove it to you yep it's just it's just the standard public debate on this stuff is so low it's crazy yes you're right and and i guess what i'll i will legitimize is people i think are right to be angry i i think take it take it to the average person in the street kind of perspective here and you can talk all you want about margins and competition and regulation and all the way all i know is is that over the last few years my purchasing power has gone down a lot yes i go to the supermarket and petrol and things that are in my face every day like there's only so much money coming in and a hell of a lot more is going out and i'm not buying more stuff yeah everything so that anger is legitimate and then you say well why is that you say well let's sit down for a 14 week seminar and we'll go through some very detailed monetary theory and you know it's it's very hard to grasp so i i do want to legitimize the anger that people have and and i honestly think if people had a better grasp of well why is it my life getting harder there would be riots in the street but it's it's so hard to see and i don't think anyone clearly sees it because it is so nebulous and complicated and dynamic and i don't want to please don't think that i'm saying oh i i see what everyone else doesn't see i don't i don't I mean, I've got my opinion like everyone else does, but it is so difficult.

1:12:12But I feel it's a bit of a – not a deliberate bait and switch, but it is – I think there'd be a lot of parties that are glad that the supermarkets and Qantas are copping all the heat when maybe the more influential factors behind this phenomena, it's just no one's looking at it and they're thinking, good, good. You got all the blame. So it is a bit of a frustration that we don't have more mature, broader, deeper conversations about, well, why is everything getting or seemingly getting worse for so many people? What are the root causes and what can we do about it? A supermarket inquiry is not going to fix that, right?

1:12:55It's not. Printing up squillions of dollars and giving everyone, regardless of their personal financial situation, vouchers for their kids to do swimming lessons and that kind of nonsense particularly the states did and everywhere else and in the u.s handing everyone a sixteen hundred dollar stimulus check it's just sort of like there are there are consequences to these actions and we're we're dealing we're taking our medicine in a lot of ways now i'm not saying they're the only factors but they're big factors but they're the factors that that no one talks about which which i find frustrating it is just yes and i yeah i don't i feel better having had a rant mate just if you care about policy you'll you'll you'll ask people to actually do stuff that matters and you know is this as i say is there a kernel truth yes are the numbers real yes is it is it anything close to the biggest issue or sizable issue that everyone's talking about no no what's happening talk back hosts and politicians and journos are grandstanding those who hate profits are grandstanding because they think they can possibly get away with it because maybe there's a groundswell here and they can make their political points or their ideological points yeah there is very very very little in the way of someone objectively saying i have really seriously thought about the challenges facing the australian economy and society and this one is the one with you talk about because this is the one that if we fixed would have the biggest impact on australians it is just absolute nonsense as an aside this is why difficult economic times are so dangerous not just because of the impact it has on our well-being but it just leads to political populism that's i mean that's what you're saying right it's a populist kind of um uh response to this where you know we 500 years ago we all would have grabbed our pitchforks and marched up to the castle with torches in our hands right like and and now we're sort of doing it railing on on social media but it is there's a lot of anger it's just very poorly directed i guess i don't know i agree i feel better now mate will like will you come back on sunday can we talk about some other things that maybe our listeners have raised for us to chat about instead i always i always really enjoy the mailbag episode so yeah let's let's give a shout out for more questions to come through as well we shall do that by the way quick heads up there might be something special in the works i can't say too much just yet suffice it to say if you think the pod machine is cool imagine if you could have this podcast without the pod machine that sounds weird that sounds interesting i wonder i wonder i wonder if people i can't i I can't say anything else.

1:15:23All right. I'm leaving you there. See you on Sunday. Until then, Fool 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. The Motley Fool operates under Financial Services License 400691.