Live Show, Macro Investing King Chris Judd joins, Apple’s $3,500 Foldable Bet, Australia’s Housing Mess, Cogstate and the Firmus Moneyshot

25:03You would say, because I'm so young. That is not actually the reason. The reason is because you're not enough of a nerd. But in the world of nerds, that stuff was expensive. And so, yeah, it was. It was definitely a premium brand. And certainly Apple II had a price premium. The Macintosh had a price premium. But it wasn't, I wouldn't say it was a luxury brand in the sense it is now. No, you're right with that. But because you're not a nerd, you don't know that there were all sorts of other brands that named themselves after Fruits at the time that Apple launched. There was an apricot computer.

25:32There was a cherry computer. Are you serious? Yeah, yeah. There were lots of other brands. And then there were a trillion other brands like Amstrad, have you heard of that? It was an IBM one. And so there were lots of cheaper things that you could buy than an Apple IIe, for example. I'm not saying it was a discount brand. Maybe what they did is transition from a premium brand to a luxury brand. I think the luxury brand is pretty recent and it's probably in the last, even the last five or six years, has really made that jump from and it's been able to and i think there's plenty we can criticize uh tim cook for and really the product development pipeline but what he has been able to do is and i think the apple stores have played a big role in this as well it's one of the great retail unlocks and certainly when we looked at launching our we've now got two retail stores looking at a third we based it completely on apple the apple model uh the small number of stores large footprint heavy capex not as much apple spends 10 million plus on their stores we spend two but certainly compared to other travel stores like a flight center we tried to appleify our stores and create that luxury image i think apple have done such an incredible job with brand more than any other power well should we talk about what their real powers are because you and i always disagree on these powers especially with apple so process power i can't roll my eyes because we're on a podcast but anyway i would if i could um there's a camera in front of you yeah we can so i'm not so i'm not sure about process power but i can't believe you can argue foxconn has some of the process power well now let's start with real powers like for example the cornered resource of them owning their own chips and making their own chips so that is a huge advantage one reason like a macbook gets such better battery life at at high processing speed is because that hardware ecosystem is their own and everything is optimized to work with everything else there's a bit of process power in that all right well you can have your process power i'll give you a process power but like i don't really know what that is so you can have it keep it it's yours um brand we can't disagree with that brand's an easy one yeah now the one that we agree with but there's a some orders of magnitude or not literally in our views on this which is which what you think apple has got this amazing ecosystem that gives them mega switching costs all right and i say they've got some switching costs but compared to the biggest switching cost companies i always use sap as an example they're not that but they do have some some switching costs i think they've got decent at the switching cost.

27:48I agree. But I think they are really demonstrating how much you can push that brand and charge for it. I agree. I don't think scale, because they're obviously a much smaller scale-wise than call it the Android universe. Obviously, Android is a number of different manufacturers, but I think Android's got 70-plus percent market share. Less in the US. Well, they kind of beat larger-scale businesses at their own game. Like Samsung should have been effectively getting their own chips fabbed for their own phones like that ages ago. And they didn't. And they had the scale to do it. And so I think… Samsung does make chips though, which is strange.

28:25I know, but like what Apple did with internalising their supply chain and literally like designing and manufacturing their own chips, they should have been gazumped by a larger player away from that advantage. But they've done a great job. I think Tim Cook, I mean, you can say the product pipeline is bad, but the fold phone didn't pop up since he left. Like that would have been a big part of what he was doing. Yeah, seven years planning, absolutely. So I think he was the perfect CEO after Steve Jobs. That's my view of him. Certainly shareholders would have felt that way. The question is long-term, how will he be remembered in 10 years is the question.

29:00How long was he CEO? For 15 years. Yeah, about that. Well, that's a long-term. He did a great job. Good long-term CEO. He certainly created a lot of shareholder value. I think he created more shareholder value than any CEO in history. So you've got to give him credit. of that. We've got a special guest coming on in a second, but we get to him. I just want to talk about this story, which is pretty interesting. So rocket ship legal AI business, Harvey AI, saw its valuation rocket again. It raised 550 million US last week at a$15.5 billion US valuation. The round was led by Diffusion and Lightspeed Venture Partners.

29:32This follows a $200 million round in March, six months ago at$11 billion. And a few months before that, an$8 billion valuation. So it's gone from$8 billion in December to basically$16 billion now. The company has raised$1.5 billion total and doubled its valuation as in nine months. TechCrunch is really interesting on this. It wrote that Harvey announced its first in-house LLM Harvey tenant built from open weight model Kimmy K3 and trained with legal data with the help of inference provider Fireworks, which also worked with Cursor. In addition to offering a model, Harvey is encouraging its customers to adopt and post-train their own open weight models.

30:07Harvey is quickly becoming an example of how entire industry, being law, can heavily use AI and not rely on proprietary frontier AI labs like OpenAI and Anthropic. I thought that last paragraph was the most interesting part of this story. Forget the valuation, which who knows how accurate this is going to be. Training its own models and getting off these expensive frontier models, that's going to have pretty significant implications for... I mean, I think that's been the future for a while. That's where things are heading. I mean, we talked about Hugging Face, which is the home of open source models.

30:41I mean, I've got two things to say about this. Number one, we should write a letter to the founders of this business. Dear founders, sell shares from the contrarians. Like, this is the time to sell secondary. When you're doubling every third week your valuation and people are giving you a billion dollars, just take 100 mil of it. Like, this might not last forever, probably won't. So definitely I'd be advising them to sell down. But no one ever listens. They're all drinking their own Kool-Aid, right? And the second thing I would say, I've thought a lot about this since we spoke about AI in industries like law.

31:12I think there are a lot of industries where the core differentiator is less about the process and more about the personal relationship. And so I think we had this discussion, like law is one of those at the partner kind of level. and so but I was talking recently to like insurance brokers for example like insurance brokers when they deal with the client the client doesn't say but did you check like 14 possible policies for me or just eight like there needs to be a process but the fundamental differentiator is not process it's this maybe I would call it brand this sense of trust that develops between the practitioner and the client and so I do think that all of this AI is going to do great things on the process side of things but i think the fundamental differentiator between law firms i mean i might be proven wrong but it feels to me it's going to be less about who's trained the better model and it will still be the relationship that the lawyer has with the client is my guess how does this have how does it move on in a second but how does this impact anthropic and open eyes valuations if one of the key sort of use cases is now able to transition off their models and onto that essentially their own much cheaper models and then allow clients to train their own open white models how and this is the kind of this feels like almost the sort of first cap off the rank how how much of a competitive advantage or what are the competitive advantages of anthropic and open i if if big effectively should be big users of that product and harvey used to i think they used to use anthropic they said we're not we're going to use your expensive model anymore we can do this ourselves how does this flow down the line well if i say to you the attitude of a group of a company's customer group is god i wish i didn't have to use this thing and i didn't have to pay and i don't want to pay and i wish i could stop using it but i just can't because i need it that sounds an awful lot like a drug of addiction to me and so i don't think that is a very good relationship to have with your customers over the long term and that has been that is the direction of every single major customer of every frontier model it's too expensive and also the added sophistication you get from the frontier model like anthropic just released fable 5.1 i use it it says we chew tokens three and a half times the speed of it the whatever medium max choose three now okay that's a weird number to me three and a half times what?

33:44like a bag of rice I don't know so I've never I've never run out of tokens and I use them a lot right and I don't pay a crazy amount so everyone wants to use the most sophisticated frontier model almost nobody needs it for anything does everybody want to use the most I think Harvey's shown that no no as in people gravitate towards the most sophisticated model just because it's the current best when you're not paying for it sure yeah and then companies don't want to pay like they and so I think the trajectory of this is not good for the economics of frontier models, which we've said for a long time.

34:17Like, I don't think it's good for them. I think if the economics of frontier models fall over, the economics of data centres fall over, which I'm sure Chris is going to refute when we talk to him. But I think a lot of, maybe I would say, the entire tower of wealth of AI is built on this singular truism, or assumption I'd call it, that companies will endlessly pay massive premiums for NVIDIA chips and that will power the capital for the whole ecosystem one way or the other. And if people want to move off frontier models, they absolutely do not need, data centers do not need to pay for those premium NVIDIA chips.

34:57Concerning. So we'll go to a super quick break, back with our very special guest just in a moment.

35:10And we are back with a very special guest. Not often we sit next to one of the best fund managers in the country. Also, we happen to win a couple of brown lows, but that's less relevant today for us. But great to have Chris Judd with us, who, amongst other things, runs a fantastic fund called Serity Fund Management, I think you call yourself. Tell us a bit about what you're doing these days. And your performance has been pretty good. I see you on LinkedIn and you're talking about some of the recent couple of massive market beats. So I'd love to hear what the fund is. and just your philosophy on why you're different to not only other active funds, but obviously why your fund versus an index fund versus obviously the other options investors have.

35:48Thanks, Adam. Yeah, thanks for having me on the show. So Serity Macro Fund is a long-only equities fund. We call ourselves a macro fund, which can be a bit misleading. Traditionally, macro funds invest in bonds and currencies and commodities and things like that. We only invest in long-only equities. we refer to ourselves as a macro fund because our idea generation comes from macro ideas. So companies that are exposed to macro tailwinds that are secular in nature or have the ability to last multiple business cycles. So a lot of equities funds will have an index they're trying to beat and they'll relative trade stocks in that index and they do that to look to lock in performance.

36:32and to us that's almost like playing the game of investing in funds management. We don't find that interesting at all. We really just buy stocks that we think are going to go up in value. We get measured against a benchmark, which is the Small Lords Accumulation Index with small listed companies in Australia, but we don't look at that to guide where we invest. We just invest in stocks with great management teams that are involved in sectors with tailwinds and, you know, annualising at about 15 or 15.3 % since we started a bit over three years ago. So, you know, it's not tech returns, but it's been pretty steady and we're happy with how it's going.

37:11What's been a pretty challenging environment, to be honest, for listed equity managers. Can I just say, firstly, I think you're a great guy, but this is testing our relationship, how close we're sitting together. So that was – you can blame the producers for that. But I'm interested to know how you think about – because you just said it's a very tough environment. And so how do you feel about that concept of toughness that you mentioned versus professional sports and that idea of toughness? Like how are they different? How are they similar? Yeah, so I guess I caveated it with the hardest time to invest is always now.

37:51it's easy to look back and say what you would have done five years ago when you know what happened and what you do in the future because you don't have to commit capital to it so we recognize that fact but there is still just a lot of short-term volatility and a lot of sort of exogenous effects occurring all at once which can make particularly trying to predict what's going to happen in the short term from month to month incredibly difficult and we don't think we've got any great skill at trying to predict what happens from month to month we're not short-term traders I think dealing with uncertainty and you know particularly in today's climate the rewards are going to go to those that can tolerate the most uncertainty and that's not too dissimilar to professional sport you know if you think about all the all the most iconic sporting moments we'll use football as an example what's exciting about that moment is the tolerance of risk to the athlete committing to an event so when someone goes and takes a speck in he jumps on top of someone's shoulders there's uncertainty around whether or not he's going to end up landing on his neck and that's captivating to watch and to experience if you're lucky enough to be able to do it it was never something in my repertoire you know same with when someone puts the ball under their arm and takes off at full speed looking to evade opponents you know they've taken risk they've stepped into the unknown and not only is that the exhilarating to watch if you look at which teams are doing best today, they're the teams that are taking on that risk and able to tolerate that the most.

39:21And so there's some correlations with investing in that sense. I think the other thing that professional sport can really teach you is the binary nature of it in that there's only one team at the end of the year that is actually deemed to be successful. So it really does pay to use first principles to think about how you want to play in sport, to just follow best practice in sport never gets you where you want to go. Not necessarily the same in business, but certainly the rewards that correlate in sport and business, the biggest ones belong to those that think for themselves and are happy to stand aside from the herd.

39:57And I want to ask you one more. We'll ask you lots of investment questions and business questions, but just on a personal level, you know, like there are moments that everyone goes through in whatever endeavour you're involved in where things are terrible at a moment and you're like, I don't know if I really want to be doing this and continuing, et cetera. And so, like, have you ever had that experience in either your first career or this second career? Or do you feel like whatever is thrown at you, you're a person who just has a way of kind of wanting to, being able to get back up in any circumstance?

40:30Yeah, there's certainly been hard times in both fields. Yeah, but I guess I've never let it change behaviours. and I guess I've always just focused on, you know, really shortening the time frame. So if I go back to football, the most challenging time for me in football was when I got traded to Carlton. I got traded in with huge expectations. I'd just undergone a groin operation, got made captain of a team. I didn't know this was a challenging period and to come to a new club and not be able to make a good impression by how hard you want to train, you know, I felt the weight of that. and so the solution to that was just to rather than focus in November on how I was going to be going in the middle of March when the season started because I could barely walk or get out of a car that just seemed so far away to just really shorten the time horizon and think about what needed to be done the next day and was going to be able to win the next day and the longer those days you metaphorically win and you string them together before you know you are able to play in round one and you're able to form at some sort of a level.

41:36I think that's a great answer, honestly, because everyone in this room and everyone who listens, et cetera, in business, it's a tough economy and hard things are happening and I think that's a great answer. I think that's a super helpful answer. Thank you. In business sense, if you look out a year, that can just be too much to tolerate, but you can look out a day and think, what do I need to do? If a day is too long, you can look out for the morning and if you've got to shorten the time frame less than that, you probably need to talk to some professional help because things are pretty stressful.

42:07But yeah, that'd be my main advice. That's how I run. Just look at the tree that's five metres in front of me and don't think about how much I don't want to continue running. It's a great point. And you've always shot me as a really contrarian thinker. We name our show that and we like to call ourselves that. But I think for a fund manager, most fund managers try and, can I just beat the index or kind of hug the index or beat at less fees? but you tend to think quite differently. I'd love to actually get your thoughts on inflation, gold and what you're thinking about the macro environment. That then colours your views on how you think about stocks but before we get to that, talking about resilience essentially, let's say you are underperforming and I don't think you have underperforming the market.

42:44You haven't crossed this yet but if I'm going to underperforming the market, you've got a thesis on ABC, market's going against you, Buffett at 99. How hard is it to stick with that thesis when everything's going against you? people are pulling money, how long can you stick with a temporarily losing thesis that could come good in six months but you don't know? And you could say what would be, because you haven't gone through it, what would be your advice to a fund manager going through it? Well, I mean we're currently, as of this financial year, we're a few percent below the index. So it's not drastic but I'd prefer to be above it.

43:18I think there is a balancing act. There is a balancing act between just being a contrarian for the sake of it and then when you've got to analyse when you've actually got something wrong. So there's a real balancing act and there's a skill there between being stubborn and being wrong. We would generally, we just get great comfort in looking at the macro themes that we like and are they strengthening or weakening. Often there's a stock that's going down in value but that's easily explainable but largely around what we struggle with is a lot of funds will try and be perfect. So say GDG, Generation Developments, Grant Hackett's business, we like that, we're shareholders of that.

43:57Their costs are a little bit higher going into this year, so in a way it's a transitional year. Most funds will refuse to put up with that. They won't want to wait. We're going to sit there and wait because the reason those costs are higher, their main product are investment bonds that are really tax effective. They want to capitalise on that opportunity, so we're willing to look through that. So they're the sorts of things we practically do to look through, are we wrong, are we early, and if we need to change, change tact. I mean, Buffett's got the luxury of having permanent capital, which we don't.

44:27And he's got an enormous track record, which we don't. So we will probably be respectful of how much volatility our unit holders can put up with, probably more so than a Buffett because we've got to be cognisant of the fact that our capital isn't permanent. And he might have come back in a time machine from the future. I mean, it's almost uncanny, his performance, right? Your investors are mostly high net worths? Yeah, just wholesale only. Okay, so are you speaking to them very frequently? And I've said this before, like, I know fund managers that are managing billions of dollars of money, and they have institutional investors, ring them, like, every day sometimes, to ask about individual stocks that they own and why they haven't done things.

45:08How much are you in communication in general with investors about performance? So all of our investors get a monthly performance update and a newsletter about how we're tracking and what we're investing in and how we're seeing the market broadly. And then it's a mix. Some people will call us regularly. We've got one investor who would speak to us, you know, weekly. And then, you know, some of our investors are invested through Hub and we've never met them and wouldn't recognise them if they were sitting in the room. So it's a real mix. But I think being a smaller fund, one of the things a lot of people do get comfort in is they can just pick up the phone and call and that's available to them.

45:44And to be honest, we prefer to do that. It's really hard to just borrow someone's conviction. To be able to pick up the phone and communicate is something that our investors do get great comfort from. 25 years ago when I had Wham shares, like the original Wham LLC, yeah, I sent an email. I think I might have called actually. I called him, that's right, and he picked up the phone and spoke to me personally. So, I mean, that was obviously much smaller days. But I thought that's definitely stuck with me, the fact that – I mean, I was young, but the fact that he, the principal, actually had a conversation, that definitely made me feel much better as a customer of that LIC, no doubt about it.

46:24Yeah, I mean, we're respectful. In fact, it's ultimately your money. It's the unit holder's money, and we're custodians of that. Just talk about your macro views. How do you think the world – we talked about it before the break, but how's the world economy tracking you? Are we headed towards the recession we haven't had since 1997, really? Will we get through this? Are my or our views on AI too doomerish? Where do you sit on these sort of key thesis points? So we probably start, like, we generally invest in Australian small-cap stocks, but our views start with the US because it's the dominant force in financial markets.

47:01And the US economy is strong and the US markets are strong. The big problem that the US have is they've got$40 trillion worth of debt and they've got bond yields that are exploding higher and they've got a deficit north of$2 trillion a year and interest payments north of$1 trillion a year. So when you talk about – and think about a huge part of their revenue comes from capital gains tax and stock-based compensations. So all this is occurring in an environment where stock prices are really high and they're still losing a couple of trillion bucks a year. So when you talk about the GFC, that was – I was – well, lucky enough because I learned some lessons to be investing in that period as a footballer in his mid-20s that had a higher level of confidence than he should have and had margin debt on my positions, which I've never done since.

47:55And wow, what a run. And my memory of that though post the crash, which was brutal, was you had 18 months to pick apart the carcass and pick apart stocks that were wildly cheap, you know, Automotive Holdings Group, which had a lot of debt, but the debt was backed up by inventory, so it wasn't proper debt. It was trading at 40 cents with an 18 cent divvy, you know, and a sustainable divvy, and you could pick that up for a long time, in a north of 12 months. Then you fast forward to COVID, and that was a scary crash, and you had six weeks to pick apart the carcass. Then you fast forward to Liberation Day in April last year, which was a pretty nasty crash.

48:33I reckon about 18%, top to bottom, maybe a little bit more. And you had six days to pick apart the carcass. And I think what that's showing is that because of the US's fiscal situation, the amount of time that powers can put up with that sort of price depression is diminishing because their bond market is largely reliant on the tax revenue that capital gains taxes bring from equities and other asset prices. So we have investors at times convinced that the huge crash is coming. And look, they might be wrong. They might be right. I might be wrong. And they talk about, you know, look at the Great Depression, you know, stocks crashed 90%.

49:20In the Great Depression, the US dollar was back one to one with gold. So the stocks didn't crash 90 % against a fiat currency being debased. They crashed 90 % against gold. And that's very different to crashing 90 % against a fiat currency, which in that environment, recent history will say, authorities will step in pretty quickly. And we know what solves the problem. We know liquidity solves dropping asset prices. The AI thing's interesting. I'll say with the Great Depression and the crash, no one owns stocks. They were so thinly held by the general population. And there were raising rates into it.

49:56They thought raising rates was going to help. It was just, there was no, I mean, there was no Federal Reserve. Like, it was just... The Federal Reserve was... Federal Reserve was around. You're right, you're right. They tried to, remember in 1929... There was no SEC maybe? The SEC was post... Yeah, I think Joseph Kennedy was the first SEC. And in the end, they solved that by doubling the value of gold versus the USD and then things were away. It did take 27 years for the S &P to hit, I think it was 1954, or hit the 1929 post-bubble, pre-bubble price. So it did take a while to come back. But everyone in this room owns shares somehow, like indirectly or directly.

50:30And so there are lessons to take out of, I think, the Great Depression. I've read lots of books on the crash. But also it's not analogous to today. Like whatever happens today will be quite different because of the base of shareholders. And so it could be worse, but it will definitely be different. And I think the drop will look completely different. I would say this one thing to you, which has been my experience, because you talk about the narrower and narrower time to pick the carcass apart. I think the real bargains do not come from panic. They only come from despondency. And there hasn't been enough time for despondency in the last two disasters.

51:04And so I don't think that's why the prices haven't been at these crazy levels where they're no-brainers mostly. So my view, and this will be, I would hope this doesn't get picked up as a bite-sized headline, and this is not a base case. If you said whatever you say on this podcast, something has to be the headline on the front page. It might be this. So this is not a base case scenario. I would think there's more likely to be a crash up in asset prices than a crash down. A crash up because the US choose to crash the currency, which is a way of crashing their debt in real terms. The idea that you're going to crash down in asset prices, if you think about it in foreign exchange, There's always, if you're trading AUD, it's AUD versus what?

51:54It might be AUD versus yen, AUD versus USD. If you think about asset prices the same way, it's stocks versus what? It's not stocks versus gold like it was in the Great Depression. It's stocks versus USD or stocks in AUD. If they crunch stocks and effectively push up the value of the currency in real terms, what's that doing to the debt? US debt in America is 120 % as a percentage of GDP. that feels a bad time to have a strong currency. And I wonder if you're an AI believer and on a long time frame I am in both I think when AI meets robotics that's when you really get huge secular change in terms of productivity and deflation.

52:37Deflation on 120 % debt to GDP that's terrifying. So is this the last chance to inflate away that debt before you can normalise interest rates get debt to GDP down to 70 % in the US, something like that. But if they don't, and if AI and robotics are deflationary, well, that's a disaster. That's scary. Yeah, I think there are lots of things that are scary about the US at the moment. But, you know, mostly predictions end up being wrong. Like, obviously, the future is almost impossible to know, and you've got a good track record with macro outcomes. but how this plays out in a circumstance where there's no precedent for it and we don't know what levers they're going to try and pull.

53:23I agree with you. The logical thing is for them to try to devalue the currency as much as they possibly can without people taking to the streets with torches and pitchforks because all of their savings are worth nothing and they can't afford anything. Yeah, and these are pretty extreme events I'm hypothesising about. We really don't invest for 100-year events and we think it's ill-advised too because 100-year events by nature don't happen very often. We don't care about them. The hell do you care about 100? You're going to be here for your 100-year event? I'm not. I'm happy with 10-year events.

53:55It's been about 100 years since the Depression. Yeah, but you can say it's been 100 years since the Depression, but the Depression before that wasn't 100 years earlier. There are cycles. 1990, wasn't it, the one before that? It's very easy to fight the last war. I think that's the challenge. I think one difference we're seeing now is compared to COVID, compared to even the GFC is rising bond yields in the US. I think it's the highest since 2006 now. You've got a pretty hawkish Fed. We've had some very – even you can argue Greenspan was originally hawkish and rain, but it became very dovish in the Greenspan put.

54:30Then you had Ben Bernanke, who certainly to many Austrian economists was a disaster. Then you had Janet, who was a disaster. In Australia, it's been a bigger disaster. So you've got Federal Reserve and RBA governors who haven't cared about inflation at all, but they've got away with it because bond vigilantes went away. And are we seeing the return of the bond vigilante at 5.6%, 5.7 % yields in the US, which makes it really hard to inflate stuff away? Yeah, potentially. Yeah, I mean,

55:00you know, Besant is certainly nervous and the fact that he's buying back bonds at the long end and selling them at the front end is a sign that he's uncomfortable with where long-term bond yields have gone. He's intervened with the yen already. So these are all warning signs that something's coming. But I don't take the view that Walsh is going to be a hawk. I think that's – I don't think he can be. So, I mean, if we look back to the Volcker era, which is the – Volcker's the sort of hero of central bankers around the world. Everyone wants to be tough like Volcker. When Volcker came into power, debt in the US as a percentage of GDP was 30%.

55:38So it could be tough. At 120%, that's not an option. I don't think that's an option. You can't take it to 17, but can you take it to 8 or 9 or 10 and they'll pay north of$2 trillion a year on interest? I think that's unlikely. I think that's going to be problematic because you pay an extra trillion bucks a year on interest and you receive how much less than cap gains? Significantly. Before you know it, your deficit's at$4 trillion a year, $5 trillion a year. I think that's going to be really hard. So I don't think that's what's coming because even if he wanted to do that, I don't think they've got the fiscal stretch to be able to tolerate it.

56:18So how does this view translate into what kind of stocks you're looking for? And we'll talk about some specific things. Can I say one thing before that, which is a summary of your position, maybe for almost as long as I've known you, which is this conversation. The biggest economic problem in the world today is debt. I mean, that is the biggest problem. No one's ever seen debt of this size. No one has ever, I would say, until 20 years ago, even contemplated debt of this size. No one knows what to do about debt of this size. And so all of these discussions are essentially people saying, how do we operate an economy on the background of enormous amounts of debt and interest payments?

56:55Well, I think we do have a... So post-World War II, you had debt to GDP in the US the same size, 120%. That's the only time it's been this high. And the playbook there was to cap yields. and inflate that debt away so that by the time Volcker came into power, near 40 years later, that debt-to-GDP ratio was down to 30%, not because they got rid of the debt, because they got GDP to rip. And I think that's the only option they've got here. But they were post-war. They had this huge industrial boom. Huge CapEx spending like maybe we have now. I mean, that's why the pushback on why they can't do that up until recently is because the leading businesses in the US were CapEx lite.

57:35They were platform businesses. They were tech businesses, which involved seemingly no capex when you compared to the highways and the factories. Well, they've solved that problem. Haven't they? Haven't they just? So that feels almost like the missing part. Now all of a sudden you've got a legitimate capex boom underway. We've got a capex boom. It's hard to tell if it's legitimate. Sorry, it's capex boom underway. It's actual capex. One of the companies we'll talk about is connected to that capex boom. But we could say we talked about Apple a second ago. So the open question about Apple is, did Tim Cook miss the AI boom or did he save the company$400 billion in bonds?

58:12I mean, basically that's the question that will play out depending on how this CapEx boom plays out. John, let's talk about a couple of companies that you've been looking at that you know much more about at last, so we're guided by you. But I want to talk about CogState, which is effectively a really interesting, we'll call it not a pharma business, but works with pharma businesses to effectively – I'll let you explain it better than me. So ageing demographics is a theme we like. By the year 2050, half the people in the world will be over 65 and over 80, component of that, will be growing most rapidly.

58:44So CogState do sort of digital cognition tests on patients going through clinical trials for Alzheimer's drugs traditionally but also now for drug trials in depression and other cognitive disorders. we don't invest biotech's almost the only business we won't invest in because it's just so binary of nature and it's just it's just been a money pit for me in my past life as a private investor so i won't touch biotech i'm not a scientist but this is almost a platform approach to biotech where they deal with lots of different drug companies um they've got lots of shots on goal if you like they're not dependent on a trial It's more of a data business.

59:27It is really a data business. And also I think with AI, you're going to have a lot more potential compounds proliferate that are going to be interesting for drug development, but they're still going to need to go through traditional trials. So we think CogState's a real beneficiary of that. You know, Australian earnings multiple in the mid-20s, growing well, you know, EBITDA margins, about 30%. They've got a bit of a tech bill this year, so the real re-rating margins are probably an FY28 story. 50 million in the bank, Aussie doing a buyback. So it's a comfortable way for us to play that ageing demographics theme, which is why we're there.

1:00:07Like a service provider to biotechs, essentially. You know that clinical trials are the single biggest claimant for the R &D tax incentive in Australia? I didn't know that. It's unbelievable. I thought it was Atlassian. Atlassian is the single biggest company, I think. But the single biggest industry, I think, historically, has always been clinical trials. Yeah, global companies love coming to Australia to run clinical trials because they tax refunds from the government for it, yeah. And this business that makes about, what, US$12 million in net profit, trading on a$527 million market cap, doesn't feel crazy expensive.

1:00:38$527 Aussie, yeah. So it's about 25 PE sort of thing and growing well. And how do you come across these businesses? I've never heard of these businesses. Yeah, so one of the things we do which has been really useful is, with good relationship with different brokers all around. And this particular one, what we have is we have, you know, Canaccord might say we've got three of our analysts come, they'll come and they'll present their best idea. And we really like that because it forces us to look at ideas outside of our comfort zone that we aren't already on top of. And this was a bit of – this was an example of that where it wasn't on our radar.

1:01:13I think it was Canaccord. It was one of the broking groups came and it was one of their analysts' best ideas. And it just fit the need we have. We really don't want anything exposed to the Australian economy. So we don't have stocks where their core business is, you know, Australian property, for instance, or consumer discretionary spending. Like a JB Hi-Fi or West Farmers. Yeah, that's right. And so this is not exposed to the Australian consumer, and it's exposed to that thematic of age and demographics, which we didn't have a lot of exposure in, which we really like. It's the most predictable theme you can really come across, is how old people are today and how old they'll be in 30 years.

1:01:49I heard Bernard Salt. You know Bernard Salt? I heard him. Demographer. Demographer. ABMG. Yeah. I heard him speak in an event recently, and he basically said now's the time to buy nursing homes because this wave of people turning 80s, like late 70s to 80s, are coming through. No, that's true, but, like, the wave is not quite here, so we don't fully feel it, but it's only a few years. I think it's seven years away in Australia. I reckon the at-home care is a big opportunity. Even nursing businesses, nursing consulting businesses, like you could roll some of them up because I think the in-home care for elderly, particularly if you add a little bit of tech, I reckon that could be a very cool sector.

1:02:30Very good friends of the pod have a great business in aged care. I want to move on. Actually, just before we do, and I hold a similar view, certainly on West Farmers, trading on a multiple of 33 versus – and with basically 2 % growth versus a cog state multiple of 25 on 30 % growth. You're long only. You've obviously got some pretty strong theses on stuff like the Australian consumer. Why don't you have some shorts in your portfolio? Just not great at market timing. And it's hard enough to get the longs right. So even if we go back to as well, more broadly speaking, like money supply on average goes up about 7 % or 8 % a year.

1:03:11equities on average go up about seven or eight percent a year that to us is not the value of the equities going up it's the value of the denominator measuring them going down each year so if you short in our way of thinking you're starting with a seven or eight percent headwind at the very start and um and just we're not skilled at timing we're not short-term traders we think with at least a sort of a three-year time frame so it's just really not not suited to our skill set let's move on to mass group holdings which we are you and i are super fascinated by this business uh obviously it was a construction business it's actually selling so where's mass which list i think is worth 800 million bucks now arl player rugby league player don't think he played that many couple of games yeah not quite your level but yeah well he's it was a good pivot yeah i mean impressive there's a few pivots in his life and he went i think he went to like newcastle wollongong or something and created this great um construction business and selling that for 1.7 billion to heidelberg the german conglomerate uh and now he's investing in in, among other things, Firmus.

1:04:10So let's give you your background, your thesis on the business, why you like it and what the hell is going on with this Firmus thing. Whether you've met the Firmus founders, I'm interested in that as well. No, I've met Wes. I haven't met the Firmus founders. So a bit of background. Maybe briefly I'll give you our view on AI. And we hear a lot of people compare, say, AI and the boom in AI compared to the dot-com boom and the run-up in the dot-com boom. I mean, when I think of the stocks that were doing well in the lead-up to the dot-com boom, you know, pets.com is one that springs to mind that 100x or whatever, probably 1 ,000x, whatever it was.

1:04:46Now, when I look at pets.com, I don't think for a second that the US administration thought if we don't win the online pet retailing war with the rest of the world and with China in particular, that's going to be an existential risk to the US going forward. I do think they think that about AI and I think that's a rational thought. hence when liquidity got pulled away post the dot-com boom crashing that market i think the likelihood of that happening with the ai race is less likely still possible but less likely and i think ai on a long enough time frame and ai and robotics in particular i think that's transformational and ai for us is sort of part of a broader thematic in terms of you know the rise of the robots.

1:05:33AI is the robot's brain. You know, there's the robots in the physical form. The electrical grid is the robot's diet. You know, rare earths and copper is the robot's skin and their veins, et cetera. So it's a bit esoteric, but there we go. Mars Group. Honestly, if I could go long on our AI overlords, I would definitely go long on that. My question is not about AI. It's which of these will survive to be the successful business. And that's probably fair, but they're all going to need a heap of data centre compute. and Wes Mars, who we view as a winner, we like founder-led businesses, we like people that are risking their own capital and are aligned with their investor base, has pivoted his whole business, staked his whole business on creating these, what are they called, power cubes for Thermos in particular.

1:06:20They've got the exclusive rights to do the electrical work for Thermos in Australia and they've got some other small contracts in their electrical division but it is very concentrated Thermos. They've got some experience of building these types of things for underground mines. And the margins on the PowerCubes, EBITDA margins of about 15%, are higher than you would get for a typical sort of electrical engineering business in the single to high, mid to high single digits. And so, yeah, they've sold their construction division, as you mentioned, for 1.7 bills. So they'll be net cash, well, it was 500.

1:06:57They spent another 300 on firmest shares. So they're a firmish shareholder now. Their value of firmish shares is about$450 million. They've got a couple of hundred million bucks in the bank. One megawatt of work. Megawatt's bigger, isn't it? Megawatt's smaller. Sorry, one gigawatt of firmish work is$2 million of revenue to Mars Group. and firmness are pointing to 3.3 gigawatts in the next few years as a goal. You wouldn't take that to the bank. A lot of that's offshore, right? Malaysia and Indonesia. That's in Australia. That's the Australia's... Tasmania's 100 megawatts and gigawatts mixed up.

1:07:43So it won't be 100 gigawatts because... I think they talk megawatts usually. ...it would be the Earth's energy. No, 100. Not literally, but I think megawatts. Small one, the Tassie's 100 megawatts, I reckon. I think my recollection was 180 megawatts. It was enormous, but that is pretty enormous. Yeah. So, yeah, Mars have the exclusive option to build all of those. So that really underwrites business, but it also creates a high amount of customer concentration, which investors, some are uncomfortable with. How much is it effectively a bet on Thermos? Well, a significant amount of that book is relying on Thermos listing.

1:08:21And we think they'll be able to list. They've raised a huge amount of capital already. Because you think it's dependent. By the way, do you remember there was a James Packer, a Packer entity, and all it ended up owning was a chunk of Fairfax and it sat on the ASX publicly as a company and so you would buy shares in this company but really all you were buying was an indirect way of buying shares in Fairfax and so this is not that. I mean, this is more specific because they actually do something but I agree, this feels to me like obviously a bet on Firmus but I'm interested to know why you think it's a bet on Firmus' IPO as opposed to the next five years of Firmus.

1:08:56No, it's not. It's Firmus getting funded. So Firmus recently raised$2 billion. They've been able to get funded really well so far. They've got NVIDIA as a shareholder. BlackRock have committed capital. I think the listing makes it easier because it'll be a higher capital core, but I don't think it's reliant on a listing. But it'll be better if it does, and there's the potential for the uptick in Mass Group's equity component in their shareholding, which we think that's a real possibility as well. So Firmus, their Aussie valuation is around$15 billion. It's an eye-warning valuation. There's a world where they listed a higher multiple of that and Mars Group get an uptick on that$450 million they've got invested there.

1:09:38But we just need them to be funded well enough to commit to a large chunk of this work and we're confident that'll be able to do. When you look at their partners, they've just signed a compute deal with OpenAI. and we think these things need to be built in all different jurisdictions. I mean, if you look at the energy crisis we've experienced with the war in Iran, people are going to want their data at a sovereign level in their own country and firmness is going to play a big role in that. So there's no question there's an upside story there. There's also a downside story and that is the backlash that's growing, rightfully or wrongly, I think many of us would argue wrongly, against data centres.

1:10:14I lived next door to a data centre for years and didn't even know I was there. But certainly the political backlash, and in recent days there's been anthropic people quitting and saying it's going to ruin society. So it's a growth... Oh, it's more than ruin society. There's a dude that came out and said there's a 10 % chance of human extinction in a decade. And there's real questions on the whole anthropic sort of push to regulate and then dominating regulation. But it also is clearly consumer or voter backlash against data centres. We've seen certainly a bifurcation of left and the right splitting and One Nation growing and et cetera.

1:10:49How risky is the political environment that stops Firmus, that stops every data centre being built and they're just caught up in this maelstrom? I don't think it'll stop every data centre, but, you know, there'll be individual data centres that get slowed down or get challenged or can't get access to the electrical grid. But, I mean, ultimately, it would be like saying we're not going to, you know, we don't want to move to electricity, you just want to burn fire because it creates a heap of jobs with cutting down trees and it keeps us warm and we like it and we don't like these power poles that are above our houses.

1:11:26I think ultimately human beings progress and they want a higher standard of living and that's going to come from data centres and AI and there'll be those that oppose it, those that don't like it, there'll be people who are pissed off about their electricity prices skyrocketing. But someone's going to get – I mean, it's not like you can squash AI development around the world. If you choose to not engage it at a country level, I mean, China will keep doing it. Other countries around the world will keep doing it. And we'll just – productivity numbers are really disastrous. Imagine where they'll be if we don't – These voters are being rational, though.

1:12:08So China doesn't have this issue. They're not a democracy. We're seeing US states. There's significant backlash. and some, even Greg Abbott in Texas is talking about a moratorium. I just think there'll be states that compete with each other. So NT is really pushing data centres because they've got a heap of gas up there. Queensland will do the same. Before you know it, their economies will be doing much better because of all the capex and investment being spent there and all the jobs being created. So I think even in a country like Australia, there's internal competition for these sorts of projects.

1:12:41and I think government's pretty acutely aware in terms of private sector jobs, in terms of areas in the private sector that are attractive at the minute, it's data centre capex and it feels like it's daylight anywhere else. So particularly in a non-mining state like Victoria, we don't have much mining here. And if you want to really squash down on data centres as well, I mean, you can do that, but just the standard of living drops even more rapidly than it has been. I'm sure the Victorian government really cares that much about standard of living. Do you, Adam, are you still a believer that the Firmus IPO won't happen or do you now think it will happen?

1:13:13I'm more a believer now because I think there could be some fair bit of offshore capital supporting it. I don't think Australian investors have the spine that Chris has. I think they're more likely to back out. I think there's a lot of money. You're not investing in Firmus either. More indirectly through us. So I just want to say CTM relisting, box ticked, Firmus IPO, looking more likely. You're in the listing camp. See, I'm very bearish on Firmus as a business, but I'm very bullish on them IPO-ing. I've always been bullish on them IPO-ing because too many powerful people with lots of money are very keen on that IPO happening, and I think there's just momentum for that to happen.

1:13:52And I say I'm bearish, but I can't see around corners, so I don't really know what's going to happen. I definitely think it's better than Iron. I'm much more bearish on Iron, being a neocloud, but I don't think I've got the sophistication or the contacts to know, for example, if the Tasmanian thing is really going to get built or not. There's all this conjecture in the media and I don't have any insight running on that. So I don't know. They could barely build a footy stadium there. Hopefully they can build a data centre. But I just don't know. And so what Adam says about voter backlash against data centres, it's definitely going to happen and it will happen for a period of time.

1:14:30But it might be one year or it might be three years. Who knows, right? It depends. politicians i'm sure you've worked this out that they like votes and so if you give them a bucket of votes whatever those people are saying they will say yeah i think that vote for me and so i think there will be a big headwind for data centers but someone has to win a data center well like someone's going to be building these data centers and so is it air trunk that's going to keep being dominant is it also firmus like i think that's the unknown factor why didn't you just invest directly in firmness because they're not listed no i mean that's part of it will you shift your investment to firm no we won't no we prefer to to um we like businesses that are making making money so that's a novel concept i mean mass groups sort of a fy27 pe of sort of 17 now moving to 13 and fy28 if if consensus hits so that's a business we can get our head around we can tolerate um you know some of those i mean they're gonna be lost mate and i don't really love businesses with really high capex and huge depreciation so i prefer to play the the picks and shovels if you like to that thematic well that's the end of the hyperscalers for you i mean every hyperscaler is mega capex off its balance sheet to buy yeah i don't know i don't own any of them either depreciation schedules yeah we're gonna wrap up in a second but you touched on where's where's being a founder uh is is the founder thesis obviously l1 guys have gone heavy into founders and generate a heap of alpha are you a similar view will you prefer to back a founder we had this founder mode manager mode stuff with with paul graham and and brian chesky last year but do you seek out founders or do you sort of are you ambivalent and you're looking at no we find that huge i think that's almost the the most important part of that story for us is the fact that it's a founder-led business and his own capital is in there aligned with investors.

1:16:21Have you ever found a business you like, just before we go? Oh, I mean, Vaisan is a diversified water service business. I like that already because that is so boring. I mean, that's terribly boring. So that's good news. No one's interested in that thing, right? I mean, James, who runs that, has$20 million worth of stock and the chairman has, you know, closer to$100. So they're not founders per se, but they're very much aligned in that business and that's another one that we love. But just about the vast majority of companies we own, the management teams, even if they weren't founders, they have significant stakes in the business.

1:16:58And, Jody, are you taking capital at the moment? Is a fund open? Shart, how can people find you? Yeah, the fund's open. They can head to our website and get the details. And, yeah, we'd love to hear from you. Put in the show notes. Michael, chuck in the show notes. You have to ask about one founder, though, because I agree with the founder. Obviously, I agree with the founder thesis. What was that guy? Tinkler. What was his name? Nathan Tinkler. He was the founder. He had a coal business. I mean, he's trying to come back. He picked the dodgiest founder. I know. So it's the youngest self-mind billionaire of all time.

1:17:25He was. It's amazing to actually have had a genuine billion dollars. He had a coal boom billion dollars and then to have just kind of disappeared and gone bankrupt. So I think he is like the outlier of founders in this founders thesis. We have founder mode management. Go back five years ago, manager mode was in fashion. Founder mode was at P. Wanted managers, not founders. It certainly flipped during COVID. and it's where i'd obviously agree with juddy as well we're very founder focused here but it can flip back pretty quickly as well like founders aren't always in favor there are plenty of periods where people hated founders yeah not me i didn't hate founders thank you juddy thank you idea thank you to our incredible audience uh we always talk about having the smartest listeners in the world in the world as a podcast we've got a huge number of ceos and and fund managers and vcs in the audience and it's incredible to look at what an incredible talented group that we're We're super flattered for listening and for coming today.

1:18:19Thank you, flattered that you joined us, Juddy. And thank you to our amazing team. We'll be back on Saturday for our Ask Us Anything episode. We'll actually have Juddy join us for that episode as well. So thanks again. We'll see you on Saturday. Thanks, man.