Expert: Emma Fisher – Mineral Resources, PWR Holdings & Investor Psychology | Airlie Funds Management

Bryce: [00:00:16] Welcome back to another episode of Equity Mates Or should I say, ladies and gentlemen, welcome to the next fabulous episode of Equity Mates. We're here to vogue our way through the world of investing. Whether you're a virgin investor or you're striking a pose like Warren Buffett. Our goal is to open up your financial horizons from Material Girl to Wall Street. Queen. Oh. As always, I'm joined by my equity buddy, Ren. But who am I? 

Alec: [00:00:43] Well, I was going to say Anna Wintour. But you, Madonna. 

Bryce: [00:00:46] Yes. Yeah. 

Alec: [00:00:47] Yeah. I think the vogue. The vogue almost got me. I don't. Wintour's editor. 

Bryce: [00:00:52] Sorry. I'm not sure.

Alec: [00:00:54] Sasha is nodding, so I have confidence. 

Bryce: [00:00:57] Material girl is what flipped it. 

Alec: [00:01:00] Yeah. You see, I think there were a couple of show tonight. Yeah. Yeah.

Bryce: [00:01:03] So Virgin or whatever it is.

Alec: [00:01:05] Yeah, yeah, yeah. Anyway, for people who needed a show. Welcome. Bryce got sick of doing his normal introductions, so he asked you to translate it into different famous characters. And we, as the audience, have to guess. But, Bryce, this is a really exciting interview that we have coming up. We're about to speak to Emma Fisher, who is the deputy head of equities and portfolio manager at Airlie Funds Management. And Emma is a favourite of us and for the Equity Mates community. We've spoken to her a number of times on the podcast and she always has some really insightful things to say and has some interesting stocks for us. Yes.

Bryce: [00:01:47] Yeah, Really looking forward to this one. We're going to split it into two parts. First is understanding the psychology of investing and how Emma really approaches the mindset of investing and some of the biases that we all face as investors. And then the second half, we're going to go deep on a number of stocks which we're really pumped about because as you said, I think every interview we have with Emma, we leave feeling inspired, like we've learnt a whole heap of stuff. And just like, you know, she really knows what she's talking about. 

Alec: [00:02:17] So now that we've given Emma a really big pump up to make sure she's on our game and she delivers, but I'm confident she will, we'll get it straight to her in a moment. But before then, it's important that we remind everyone listening that whilst we are licensed and whilst Emma is licensed, none of us are aware of your personal financial circumstances. This show is for education and entertainment purposes only. Any advice is general advice Seek professional advice if you feel like you need it, always do your own research. But Bryce, with that said, let's crack in.

Bryce: [00:02:53] Well, Emma, welcome to Equity Mates.

Emma: [00:02:55] Thank you. Thanks for having me. 

Bryce: [00:02:57] Now, you're a fan favourite here at Equity, right? So we've gone to the community to ask them if they have any questions, which we're going to put in throughout the episode. But we've got one here from Mark to kick things off and he wants to know what is the worst investment you have ever made?

Emma: [00:03:13] Oh, Mark. Oh, there's so many. There are so many. You know how they say like the first cut is the deepest, which I think they're talking about? Your first love. Actually, it took for my first really, really big mistake. Definitely Slater and Gordon. 

Bryce: [00:03:29] No, I. 

Alec: [00:03:30] Know. Yes. I also made that mistake. That was literally my first cut. My first investment. 

Emma: [00:03:35] Interesting. Wasn't my first investment. It was my first big blow up as a so I started my first job in the markets was on the sell side like working for an investment bank in equity research. And then I got a job on the buy side. This wasn't it early, so I was, you know, in my I don't even know I was 24 or 25, you know, knew nothing, thought I knew everything. And I remember. So, you know, at this fund, you work with all sorts of portfolio managers that could invest globally and this one portfolio manager, who I thought was probably the smartest guy I'd ever come across, he ran an Asian fund so he could invest anywhere in Asia. And his largest position is Fund with Slater and Gordon. And he just thought it was, you know, I remember him just saying, I don't know what the economy's going to do if it's going to go up or down, but I know people are always going to need lawyers. So I kind of came to covering the stock thinking is really smart guy has made this is largest position and I think maybe that coloured my view a little bit, but no excuses. Like I could not have got to stock more wrong. And I think the lessons I guess I was coloured by that also coloured by it had just an enormous, you know, track record of going up, really. That's all it ever did. It only ever gone up since it at listed. So you know the really big lessons from that are firstly you know cash flow like cash flow is king The clue that this business wasn't what it said it was was a consistent divergence between the earnings that it was reporting to the market and the cash that it was generating. Now, there's always a narrative. There's always a narrative why cash lags? I've seen it in so many different businesses. Their narrative was, you know, basically it was a recognition around it was like a no win, no fee model. So they had to recognise revenue as they went. And, you know, either way I'd like just look through, pass the narrative, look at the facts, the facts of cash. So I learned a really powerful lesson there. It's given me a lifelong fear of big acquisitions, debt funded, big acquisitions, roll ups, because it was essentially a roll up. And yeah, I mean, I learned a lot of really powerful lessons, but it was really painful experience. But there have been a lot of other mistakes as well, and there will be a lot of other ones in the future. But I think the difference now as you get older and I guess more confident as an investor is you don't you know, you don't let yourself fall to pieces because you can realise that it sounds so trite, but like you learn so much through your mistakes and it does make you a better investor, so you just don't get as caught up in it as I think I did back then. And I don't know if that's your experience as well. Like when you hear Slater and Gordon, do you still feel like something? 

Alec: [00:06:03] We've made so much of it on the podcast that it's, you know, net net, it's probably worked out for me, but I think it was a really good learning experience. And I think the first two investments I ever made with Slater and Gordon and then A2 Milk and both of them, I was dumb and overconfident and didn't know what I was doing and won. I lost all my money, literally. I lost so much money on Slater and Gordon that I couldn't cover the CommSec brokerage to $2,012, I had left over sat in my brokerage account until Slater and Gordon cleaned up their register. Wow. But then the second stock A2 Milk I got lucky on because, you know, it wasn't smart or anything and I made more than I lost on Slater and Gordon. And it was a real lesson for me that like, there's an asymmetric upside in investing. You can only lose what you invest, but you can make a lot more than that. I think those two experiences, I learned a lot and I got hooked. 

Emma: [00:07:00] Well, I also think the other really powerful lesson is, is knowing that the worst is zero. Right? And I know you're saying in the sense of you can only lose whatever you put in. But the flip side of that is, you know, we are equity market investors. So the businesses that we own can be worth nothing, not because they don't have assets and not because they're not still viable businesses, but because we rank below the debt holders, which is why it's given me a lifelong aversion to debt. Basically, the first part of our process at Airlie is the balance sheet. You know, we want companies with good balance sheets and it's just been so formative for me to understand that that even decent businesses that are still operating and people in I mean, Slater and Gordon was different because obviously, you know, people people in the real world were aware that that was blowing up. But you can have other businesses that seem like everything's going well, but if they have too much debt, they will go under. So I think it's always a really powerful lesson as equity investors to realise that the equity doesn't have to be worth anything. 

Alec: [00:07:53] Yeah. Mm hmm. Well, I think this is a good segway into what we're talking about today, which is investing psychology. Because you mentioned there, you learn a lot but also there was some, I guess, mistakes in your analysis and how you were thinking about the investment coloured by other people that you were working with. So I think there's a few aspects there that will draw out in more detail. But let's start generally when we talk about the psychology of investing, what are some of the key elements that come to mind as important for you? 

Emma: [00:08:23] Yeah, I think even Ten fitness is really important. And probably actually the most important thing is that you've got to be willing to be wrong. I think this is true in a lot of jobs, like actually reading. Before I came here, I was reading some Vogue living, actually Flex. I'm very sophisticated person. I was reading Vogue Living, and it was just an article about an interior designer and this guy been working for decades. And they basically asked him like, what's the secret to interior design? And he said, you got to make mistakes. I make a hundred mistake a day. Try things. Doesn't work. Try something else. And I think it's the same with investing. You know, hopefully you're not making a hundred mistakes a day, but you've got to be prepared to be wrong. Because if you're not prepared to be wrong, you just either sit on the fence or your own. The really safe, obvious stuff. And I can assure you the safe of stuff is probably overvalued or fairly valued, and it will never make you outperform, which is, I suppose, the goal of my job. It's a little bit different. The goal of a personal investor is to grow their wealth. So, you know, you can grow your wealth through safe blue chip investments, but you can also, you know, just invest in the index and probably get a similar, if not better, return. So my job is effectively to outperform the index over the medium term. And the way that I think we seek to do that from a psychological perspective is you've got to be able to lean into the fear. You know, there's lots of ways that I think I've kind of helped myself do that over the years. The first one is, I guess it's exposure therapy, right? Like I remember when I first started in this industry, so many people said to me, you know, if your success rate is 60%, you'll be one of the best. You'll be one of the best. And I kept thinking I was really young. Right? You come from uni, you're a high achiever. You want to get high marks, like 60%. Just watch me. Yeah, it pays. And he studied degrees and pays actually a degree in funds management. Yeah. So I was like, yeah, I'll be that. That'll be easy. But it's true. You know, you probably are going to be wrong. 40%. I learned a really powerful lesson over the last few years in managing a portfolio, which is just recognising, you know, so we own 30 stocks typically at one time, recognising that not every stock is going to work for you every year. If you look at them individually and try to make every single one of them work that year, you'll basically try and cut all risk off the table and then you'll never succeed. So just acknowledging when you look across a portfolio that some things are going to work for you, some things aren't that year, but hopefully in the long term, you know, they're all winners and not trying to outrun bad news. You know, I always say to myself, if it's in the news, it's in the press. You know, the big the big kind of, so there's two things I say to myself. Firstly, if it's in the news, it's in the price. And then secondly, the lower the share price, the lower the risk. Like I think there are two really important refrains to keep in mind when you're investing. But the big caveat to both of those rules is the balance sheet, because in fact, if the balance sheet is poor, the lower the share price, the higher the risk. Because if they have to raise the the market can see it coming a mile away. And there was a stock last week, Integral Diagnostics, their radiology company, they had a downgrade. It wasn't even a massive downgrade, but the stock was off 30% because immediately the market was like, Yo, your gearing is now shot up to like three and a half times net debt to EBITDA. Your covenants, your debt covenants are only slightly above that you're going to need to raise. And so what what was, you know, really just a blip, I suppose, in this company's earnings history became a really huge day of value destruction because the market suddenly cottoned on to the fact that this company had a really stretched balance sheet. So if the balance sheets bad, don't touch it, that's where I think you need to have a sell discipline of. If you can see how it's all about the reflexivity of of earnings and the balance sheet. So if earnings fall and then the balance sheet suddenly much more geared looking like they need to raise, then that's an instance where I think you should cut your losses. But if the balance sheet is good and it should be good, you know, that's why we start with it. It should be good. Every investment you make should be a business with a good balance sheet because it covers all manner of sins. If the balance sheet is good, then you know, the lower the share price, the lower the risk. I've had that refrain sort of going through my head at the moment. You know, one stock that we've been buying a lot of his ResMed and it's been falling like a stone, right? So I've had this refrain going through my mind for weeks watching this thing gapped down because obesity suddenly cured. And so we've been adding to it every day. Basically. And I just keep telling myself we've got a good balance sheet cracking balance sheet. So the low the share price, a low there is like that's all there is to it. So I think you just have to be a little bit dispassionate, which is it sounds easy, but it's really hard because when your money's on the line, like, you know, that incites passion, right? Like, and people are so risk averse and they feel I think, you know, you feel like you need to take action when things aren't going well, when a stock's blowing up on you. You really feel like you need to do something. But actually, sometimes the best thing to do is nothing. I remember when I was working at Slater and Gordon was blowing up. I'm pretty sure setting that or something else that was blowing up had an analyst that I worked with. He was older than me. He was probably one of the more respected analysts in the team. And he came up to me and he said, You know, my advice for you today, it was one of those days where, like, the stock was down 20 or 30%. And he's like, my advice to you today is like, you know, just turn off your computer and go for a walk. In the Botanic Gardens, which was opposite our office. Just remind yourself of how well you did at uni and your true offence in life. So it is like remind yourself how well you didn't uni and what you've achieved in your life and like your family and friends. Like just forget about this for a day. And I did it and it was really helpful, right? Like because you want to do something when something's happening. But actually, you know, you probably shouldn't do anything now. So I don't go to much different at any one of those days or as gapping down, you probably would have done well to just sell out. Yeah, but this is why I come back to the balance sheet thing. I remember a similar time. This would have been a decade ago. Again, with Richmond, we haven't owned it for a decade, but we did it in a decade ago and they were doing a trial clinical trial and basically they wanted to kind of move up the acuity curve and sell something into hospitals. And so you need a lot of clinical evidence to prove that something is safe and a good treatment to sell into the hospital channel. And so they were doing this big clinical trial and they suddenly put out this announcement that said we've had to stop this trial because it's had a safety signal. Our safety signal. Basically, you've got an ethics committee that kind of have a look at the trial results while they're going. And if the safety signal is triggered, they stop the trial. Now, in this instance, it was triggered because not only was this product not doing what they wanted it to do, which was reduce incidence of heart failure, it was actually killing people. Like are you seeing higher incidences of heart failure when people were on this device? So it's like the worst kind of safety signal you can get. So not only did it. Remove kind of like a Horizon three for ResMed, opportunity to sell something into the hospital market, but that dusted the money on the clinical trial. And there was all sorts of like I suppose in the moment, fearful kind of implications from this. So the stock opened and fell 8% that day and I can't remember exactly what I did. I don't know whether I can't really remember in the story if we did take any action or if I said to sell or anything like that. But I remember feeling very fearful that we should be selling. I remember again a colleague saying, Well, maybe just think about it, sleep on it. And if you think it's worth selling tomorrow, do it tomorrow. Which was really good advice. And again, now I would look, I didn't have this framework at the time, but now I would look back on that instance and say, Well, you've got these two situations, one where Slater and Gordon is dropping 20%, one way resonance, dropping 20%. What's the difference? The difference is the balance sheet. So ResMed yeah, something bad has happened, but this business is going to survive no matter what. And hey, it's now 18% cheaper. Like that is an enormous move. Like how long in the real world does it take for businesses true value to change by 20%? Like it takes longer than a day. But it can change that quickly in the share market. So, you know, now with that framework, I can kind of sift through those two things and maybe make different decisions, but always allowing yourself that time to pause rather than take action I think can be helpful. So that's a very long. 

Alec: [00:16:35] That's alright. Have you finished what you finished. There has just reminded me of one of the quotes that's always stayed with us from the first time we spoke to you back in the beta two studio years ago, which was markets move quickly, but businesses change slowly. 

Emma: [00:16:47] Yes, right. I like I like hearing myself. Very small. 

Bryce: [00:16:54] I think Buffet also said that he agrees that temperament is more important than intellect, I think is the quote. Something along those lines. 

Emma: [00:17:01] Definitely. Actually, I reckon the smarter you are like to be on a certain point, it's it's not only is it of no use to you as an investor, it's probably works against you because you've got to be comfortable with greys. Like there's no black and white in investing and you're never going to get the answer. There is no answer. You've just got to come up with a thesis based on your investing framework, and hopefully it's right. But I think really, really smart people can see the risks and they can see both sides of the story and they don't ever get off the fence. So yeah, I think everyone I've ever worked with in the industry is smart. It's in no way differentiating factor. It's just a prerequisite. It's like uni prerequisite. Be smart, but beyond the certain point. You know the of that smart set the dummies probably do a bit better. 

Bryce: [00:17:45] And nice. 

Alec: [00:17:48] Did you ever think would be about uni that much? 

Emma: [00:17:50] Yeah, I like bring it back a long long time. 

Bryce: [00:17:55] So, Emma, I want to move to habits because having some sort of rules based system or like clear habits that you get used to and sort of employ is part of your investing strategy, helps to remove that panicked decision or a decision that you're going to regret later on. How would you describe the habits in your day to day when it comes to investing? 

Emma: [00:18:18] Yes. So the first thing I guess, you know, I feel like such a wanker saying this, but. I'm one of those people that believes that meditation is really, really helpful. Like I've just started doing it regularly, twice a day for the last two years, and it's made all the difference in my life and definitely for investing. And I remember I was listening to this podcast of this meditator who's, you know, I've been doing it for 50 years, and he was talking about, you know, take this with a grain of salt, I suppose, but he was talking about how the reason he did it was because he felt like he gave him a higher consciousness state. And he said, I know that I've got a higher consciousness than other people because all I see all the time everywhere is people overreacting to things. And I loved that quote because I thought that is markets. That is markets every day. It is just people overreacting to this every single day. So that's really stayed with me. So on a personal note, I think meditation, many, many life benefits not just for investing the other habits. So I think those refrains that I talked about are really helpful. So I just always tell myself if it's in the price, sorry, if it's in the news, it's probably in the price. And the time at which it's dominating headlines is not the time to get pickbearish. So, you know, we saw that a year ago, this time with Medibank, right? Like that was when it was in the news dominating the news flow and the share price had fallen 30%. That was not the time to get peak bearish. And interestingly, basically, every board we talk to at that time and actually for the next six months after that, when you talk to them about cybersecurity, they all say it is a matter of when, not if we will be hacked. So you know that and the stocks are covered. So buying it on that rather than thinking, oh my God, I need to outrun this fear, I need to take action, you know that buying it instead and leaning into the fear was, you know, a very lucrative opportunity. I get a lot of people, so I've just come off the back of like a national roadshow where we're, you know, spruiking, spruiking our wares effectively. And basically every presentation I had, somebody asked me about Qantas and Qantas. It's really going to haunt me because now I put this view out there. But even before when I was talking about if it's in the news, it's in the price. I think Qantas is the one that springs to mind right now, right? Of like, well, this is the one that's dominating headlines. This is the one where the regulatory pendulum is like really hitting them right now. Surely that makes it the time to buy it. And I think, you know, it does look really, really interesting. But I guess the problem that kind of keeps us away from it at the moment is the CapEx profile. Again, it goes back to that balance sheet discipline, but anyone that's following quite a series of notice, I got to replace those blades. You know, they used to fly planes for about 15 years. And this is dodgy, right? But it's true. When they're at 15 years end of their life that sell them to like African Airlines or Latin American Airlines, and they'd fly them for another ten years. Now Qantas flies them for the full 25 years and we feel it as users of that product. So those planes are at the end of their lives. They need to be replaced. And so if we come on board as shareholders now we're the ones that are funding all of that replacement. Now that is not the story that's being debated in the news, right? So that's why I'm sort of like, okay, well, one part of me is like, this is it's in the news. It's got to be in the price. But then there's this other really important part of the thesis that isn't really being talked about. So, you know, I guess you have to be there's always kind of nuances to a simple refrain like the one that I'm using. But I think it is, you know, broadly a pretty powerful one. 

Alec: [00:21:42] It's just it's wild that someone who hasn't looked at Qantas's capital spending at all, it's rather than just have like a continuous program, like some budget every year rather than every 25 years we go to that level. 

Emma: [00:21:58] Well, They used to. 

Alec: [00:21:59] Okay, yeah. 

Emma: [00:21:59] They used to, but they haven't, they haven't been spending on planes in the way that they should have, which I think is why there's been a lot of anger directed at the management team and board. You know, we owned we owned the stock from 2016 until 20, until the pandemic, really. And it kind of recovered from the pandemic. I think we sold at about $5.50 and around all the way up to eight bucks. And we felt like idiots. That's come all the way back and feel like it's resting. But, you know, when we owned it pre-pandemic, it was just a cash machine. The Virgin was rational. And when Virgin's rational that golden triangle flights, you know, up and down the East Coast for Qantas is a cash machine. Now, it was a cash machine that they should have been using to reinvest in the fleet, but they weren't. So there was an element of, you know, they were using it instead to pay out dividends and buyback stock. So we were enjoying that a share. It is at the time. But clearly in hindsight, there was an element of, you know, just bringing forward future returns at the expense of future shareholders. So I guess that's kind of coming home to roost now. 

Alec: [00:23:03] Yeah. So one thing that we are finding, I mean, especially doing this podcast, speaking to experts every week, speaking to members of the Equity Mates community, it's very easy to get caught up in the investing hype. And we've seen a couple of big sort of hype cycles this year. Well, we've come off lithium recently, but then at the start of this year it was AI. Now it seems to be ozempic in weight loss drugs. How when you're doing your analysis, how do you avoid the hot topic, the latest fad? And really, I guess trying to stay long term and rational. Yeah. 

Emma: [00:23:37] Yeah, it's a good question. I mean, like with respect to something like AI it really helps being a massive lot I know I'm. Never going to be at the forefront of this stuff, but my husband and I have a joke, you know, like the apocalyptic movies of like, zombie movies I like. There's a bunch of people that kind of go blissfully in the first wave. Yeah. And then the whole movie is the rest of them trying to survive. I've always said, like, I'm a first wave. So if robots are here to kill us. So. Yeah, yeah, yeah. You guys have to sort it out. So I just. I don't try to be at the forefront. It's people's minds work in different ways, right? Like for some people. And I've met people like this, and, you know, there are incredible investors that are really, really good at this. They just get drawn to this big, big stuff and they really want to figure out these huge trends. My mind doesn't write that way. I'm just genuinely not interested in it. I'm interested, I suppose, in the inverse of like, you know, when's it more than priced in? So if you take as mpic for example, when I started to read, you know, a bunch of broker reports saying that it was going to be a global upgrade for airlines because of fuel efficiency. Standards, because people were losing weight. Yeah, I was like, maybe we're at the peak of this. 

Alec: [00:24:47] Or that. Like Pepsi and Walmart are all going to lose their customers. 

Emma: [00:24:53] Yes. Yes, exactly. So like for ResMed, right? I mean, to cut through the noise, you just got to go to the ground and do the work and, you know, find out what the facts are. So I've been doing like 1 or 2 calls a week with sleep doctors in the U.S. for months. I've talked to so many people because at the end of the day, I don't really care what other investors think. I don't care what brokers are saying. I don't care what, you know, newspaper reports are saying. I care what doctors are saying, like how they interpreting the data that's coming out and is it going to make them change their behaviour. So the doctors are telling us no. The doctors I remember one one very eloquent sleep doctor saying, you know, I've watched the, you know, the decimation of the ResMed share price with interest because I think it's overdone. He said, I think what the investment community are missing is that the history of medicine, it's very, very rare to have something new come along and just totally knock out the old way of doing things. Things get layered in terms of treatment. So in the same way that we didn't see statens cure cardiovascular disease and we didn't see metformin cure diabetes, it's unlikely that this is going to cure obesity. What it is, what it what it will mean is basically the pathway of sort of diagnosis and treatment for sleep apnoea in in the U.S., which is ResMed, its dominant market, but it's pretty similar everywhere, is that you will go to your doctor, your doctor, usually if you've got a BMI above say, 30, they'll they'll probably say to you you're very likely to have sleep apnoea and they'll send you off to a sleep lab. And then, you know, you spend the night in a sleep lab and they diagnose you with sleep apnoea, he said. What we would always say to those patients is let's talk to you about, let's get you on SleepAp, which is the device that ResMed sells. Let's get you on SleepAp. But also let's talk to you about your weight because you need a weight management plan. Your sleep apnoea will improve if you lose weight. And he said, Now we've just got a tool. When we talk about a weight management plan, we've got something we can prescribe them, a tool that enhances our ability to help them lose weight. That's all that is, that these doctors aren't saying, well, we're not going to put them on SleepAp. We're going to send them off for hope that in two years time they lose enough weight that their sleep apnoea is cured and hope they keep it off forever. That did. They just don't work that way. They're very data driven and they've got, you know, decades of data telling them that when you've got a patient with sleep apnoea, you put them on SleepAp because it effectively cures it overnight while they're using the mask and they're compliant. So that's what I mean, like you kind of just cut through the noise, you know, I've presented it in a certain way. I suppose in this podcast there are no risks and I'm very, very certain of this thing, but that's not the case. You know, this is an evolving area. So then you balance the facts that you're getting told. You balance them against what? You think the share price is implying? So that's when you're looking at the cash flows that a business has generated historically and what you think they're going to do in the future. So you can kind of back Sol from the current share price, what it's implying in terms of what degree of the total addressable market are going to be, you know, basically no longer available to them because they'll be cured from obesity. And our best guess is it's implying somewhere between 30 to 40% of their total addressable market is no longer available to them. Now, that to us, just so you know, again, taking it back to the facts. About a third, just under a third of patients for ResMed have sleep apnoea. That has nothing to do with their weight. So forget about them there. They're locked in, locked and loaded. ResMed will always exist to service that community. So you're left with 70%. So if the share price is implying 30 to 40%, let's call it 35 at the midpoint, the 70% where it's obesity related, they're basically implying that half of those obesity related patients lose enough weight forever to to no longer have sleep apnoea. I think that's a very, very high hurdle. Now adherence is an issue. So again, you go to the data, there's a big study from a payer in the U.S. who had a look at what proportion of people that started on these drugs. The GLP one is in peak type drugs. What proportion of them are still on them one year later? And the number is 30%. So 70% of people are just coming off them for one reason or another. So again, the idea that that half the market, it's cured, that just seems far fetched to me. 

Alec: [00:29:27] There was a study we looked at and it was a two year study. The first year the patients were on Ozempic and they lost like 15 to 20% of their body weight. And then they were off it for a year. And basically they all put in most.

Emma: [00:29:41] Exactly. Yeah. And well, that's the other thing is like, you know, it's a good model for Novo Nordisk because you need a patient for life. 

Bryce: [00:29:50] Yeah, 100%. It's designed so it's designed for that. But they're not going to be like, This is the miracle. 

Emma: [00:29:56] Exactly. 

Bryce: [00:29:57] The one year or, you know. 

Emma: [00:29:58] Yeah. I have to say, I have been trolling like the Ozempic credits. It's like just to see what people who are actually on these drugs are saying about them. And for a lot of people, it's really life changing. But for a lot of people it's just on tolerable. 

Alec: [00:30:11] It makes people feel sick. And so. 

Emma: [00:30:12] Exactly. And a lot of people saying basically it kind of takes away their enjoyment of life. So. I mean.

Bryce: [00:30:19] Why would fading? Well, I.

Alec: [00:30:21] Think yeah, because. 

Bryce: [00:30:22] It suppresses a lot of stuff, doesn't it? 

Alec: [00:30:24] Dopamine, Doesn't it? Yeah, yeah.

Emma: [00:30:27] Yeah. So they're actually looking at whether it's going to have applications like problem gambling.

Bryce: [00:30:31] Yeah, yeah, yeah, yeah. 

Emma: [00:30:32] Yeah, yeah. So, like, I'm pro these drugs, I hope they're massive success. Like they're going to, you know, add years to people's lives. But I think the bet that I'm taking in owning ResMed is that it's too extreme to suggest that, you know, half of their addressable market will disappear, which is what it's pricing in so, so quickly. But yeah, the idea that you'll stay on them forever. Seems a bit. 

Alec: [00:30:52] Now I'm just thinking, could you imagine if this is not only a weight loss drug, but it's a drug to solve addiction?

Emma: [00:30:59] Yeah. 

Bryce: [00:31:00] I never know. This could be the most valuable company. 

Alec: [00:31:07] We've. We've spoken enough about Ozempic on the podcast over this year, I think. Let's take a quick break here because on the other side, we've got a couple of stocks that we want to unpack and we maybe will tie them back to some of the investing psychology points we've spoken about earlier. Welcome back to Equity Mates. We're here with Emma Fisher, the deputy head of equities and portfolio manager at Airlie Funds Management. Emma, we've spoken about investing, psychology and how you think about, I guess, managing your emotions and building good investment habits to cut out the noise and focus on what's important. We want to turn to a couple of stocks that can sort of bring those themes to life a little bit more. But before then, we had a community question from Charley. She remembered a previous time you've been on the podcast and spoke about P.W.R. Holdings, and she wanted to know with the increased interest in F1 over the past few years, particularly due to drive to survive. Has that changed how you think about P.W.R.? So maybe let's start with that and maybe for people who haven't heard our last interview a little bit about PWR, and then we can go from there. 

Emma: [00:32:28] Yes. Well, thank you, Charlie, for the question. It's a good question. I think a lot of people that liked F1 before drive to Survive hate. Like non purists like me that are they really know about the sport through this Netflix show. You know, I guess to answer the question directly, it's helpful in the sense that anything that makes the sport more popular generates more revenue for the teams, which gives them a bigger budget to pay PWR out of. So that's good. But more broadly, the PWR faces. So often., So I talked about how the first step in our process is balance sheet, the second step in our process and basically we spend a lot of our time is business quality. And for us, the metric that you look at for quality is return on invested capital. It's such a good metric because, you know, it takes all of the noise and the judgement out of, you know, you know, trying to assess whether business is good or not. You know, I remember like probably last time that we did the podcast, you know, Afterpay would have been a top 20 ASX stock. The whole buy now pay later space. Again, if you just have this rule of if a business is a good business, it's going to show up in its returns. It's going to be a high returning business. So a business like, you know, all the buy now, pay later space, you know, people were attracted to this huge total addressable market, but none of them ever made money. So they didn't even have a return on invested capital was negative because they were loss making. So you've got this really clean metric that takes all the emotion out of it. So what is a high return on invested capital? I think, you know, so the average business probably about 12%. A good business, I think, is one that can sustain better than 15% for a long time. A great business would do better than 20. Often we find businesses by screening for listed companies that have sustained a high return on invested capital for a long period of time. And through doing that, it threw off a list at this time that PWR was on. A number of years ago and it had a return on invested capital in the 60s. So that's like a big clue. It only IPOd in 2015, so you don't have a huge length of time to judge that over. It was net cash. So like looked good to us on that metric. The third thing we look at is management quality and we're really big fans of founder their businesses. And this was a founder that business, the guy, he's real, he's the CEO. He was like a mechanic in this. I think he started in the 60s and he basically, you know, he and his son were like, yeah, we can make radiators. And then they went to like a trade show and Red Bull came up and was like, Well, could you make one for us now? Yeah, we can do it. And apparently the guy who's standing next to was like shoving in the ribs, being like. We got what are you committing to? He's like, Oh, I want to you in six weeks time. And they did and they loved it. And then the first year that they put it on was the first year that Red Bull won in ages with Sebastian Vettel. So they went from supplying cooling systems to Red Bull. This would have been, I don't know, 15 years ago. And then they've just gotten every single team now in Formula One, so they supply them all. Now who are they using? Perform mostly their internal teams. So they engineers are basically gone. All of these guys do it better. Let's just outsource that part of the car to WR. So it's a brilliant model. Now when you go to their site in the Gold Coast, it's pretty cool because you can see they've got all these little separate rooms where they're making stuff for each of the separate teams so that they can't see what each other like. 

Alec: [00:35:48] Also like there's engineers assigned to each team and they never. 

Emma: [00:35:52] And they work with the engine like, you know, basically they work with Red Bull. Red Bull engineering team might have an idea Let's try a curved I don't know Yeah. Do not Like that are not the terminology. Let's try to do curved. Yeah and that will be faster. So they try different things with different teams but it's Yeah. So that's half their business. And then the other sort of exciting kind of growth angle for the business is that a lot of the stuff that they've got in this Golf coast plant and they've also now got a plant in the UK, a lot of the stuff that they own from a CapEx perspective can be used in other markets. So EVs are going to be a big one for them, for EVs, thermal management is really important to the performance of a battery. You've got to keep it within a range, so it's quite a bit more sophisticated. The system that's required to cool a battery so that I think that they're going to win a lot of share there. There are other applications like radar and satellites and aerospace, unmanned drones and things like that. So they're like a really, you know, basically sophisticated engineering outfit focussed on thermal management with, you know, 50% of their business kind of throwing off the cash flows and the investment in the technology to stay at the leading edge of this stuff. And then they've got some huge addressable markets where they can apply that technology. That's the thesis. Fly in the ointment. When we first bought it. So I've talked to. So we start with a balance sheet with them looking at business quality. Then we're looking at management quality. The final step for us is valuation. Now, when I first bought it was this business with 60% return on invested capital and the PE ratio was like 24 times, which is a smidgen more than the average business in the market. So again, I said the average company makes about a 12% return. This company was doing 60 and you're paying like 1 or 2 times higher PE point for it. So I thought, Oh my God, this is a no brainer. And we made it one of our largest positions. Now, you know, luckily it has more than doubled, but a lot of that has been driven by a rewrite in the PE. So now the valuation today is on just under 40 times earnings. So I think it's a cracking bottom drawer investment for the next decade. But I'm just flagging that that valuation piece has changed and it's certainly pricing in a lot more of the upside, which mathematically has to reduce the, you know, the future returns. Yeah. So we still like it. We still like every part of the story. But just that valuation piece is not the same as, you know, when we bought it for five bucks, it's now like 10.50. 

Alec: [00:38:26] Yeah. So on, you know, it's talking about investing emotions. And I want to take you back to the first half of this year where many people who own this stock probably felt a little bit emotional. Between February and June, it fell about 30%. And, you know, it would have been expensive at the start of the year. And then it fell a lot. And I'm sure that some people panic sold. So take us into the room at that time. How were you thinking about it? How are you managing the emotional time of seeing it fall pretty substantially in a pretty short period of time? 

Emma: [00:39:02] Yeah. So it's interesting. So in January we halved our position because it had performed so well, it got to 12.20 and it had become the largest stock in our portfolio. And again, you know, nothing under the nothing in the thesis had changed, but the valuation had changed. So we felt that it no longer warranted such a large position. So, I mean, that's that in itself is a difficult that's you've you've got you know, we've talked about the psychology of like when things are going wrong, but the psychology of what to do when things are going wrong is is equally difficult because, you know, you've got you know, you've got a lot of positive association with business. You've got it right. So you think like, you know, I've got an absolute genius on this stock and, you know, you just have to stick to your knitting. So we did half the position, but look like if we were brilliant investors, we would have completely sold out and then swooped in 30% later. So we didn't do that. So obviously, you know, we rode that 30% fall as well on that half that we had remaining. But, you know, things don't go up every year, right? Like that's that's the reality. I guess what I was saying before about not every stock in your portfolio has to work for you every year. This one had been a cracking performer over the prior two years that we'd earned it. It comes back, gives back over a year. Hopefully, you know, it rallies from there. 

Alec: [00:40:20] Well, I mean, the thing is, if you had sold when it was, you know, falling that 30%, you wouldn't have missed the recovery in the second half of the year. No one times are perfect. 

Emma: [00:40:29] Exactly. So I think it's just another example of how I think what we're so I get a lot of friends kind of ask me, you know, what's your best stock idea? And as you can imagine and really what they're asking, well, they may not even know this, but what they really ask me is tell me a stock that's only going to go up every single day from the day that you die. 

Alec: [00:40:49] Yeah, yeah, yeah. 

Emma: [00:40:50] I want linear growth and nothing in life gives you linear growth. You're anything like it's not a natural concept, right? The only thing that gives you that growth forever is like cancer, right? So, like, growth forever is a bad thing in nature. It's not a natural phenomenon, so we shouldn't be expecting it from investments, from companies. And it is that expectation or that desire. Fellini Growth that causes dramatic overvaluation of companies. Now we try to like bow out when we see it happening like it was. We started to see it happening. We paid out. We also we reduced our position. But there are many companies out there on the ASX that if the task was pick the best companies with the best prospects, you could name these companies, these businesses like Aria. You know, car sales businesses like that per medicus Cracking business. But in investing, that's not the task. That's only half the task. The task is find good investments. And a big part of that is, you know, find stocks that are going to go up. Now, a good business can always be overvalued. Always. You know, we found that the tech bubble, like everyone thinks the tech bubble, was just tech stocks. It was such a broad based rally that if you'd bought you know, if you bought like a Disney in 1999 or, you know, like a Procter and Gamble and things like they went on to full 70% in the next year. Microsoft, if you bought Microsoft in 99 at the peak and then you know, suffered the drawdown, you've got if the goal was pick one of the winners for the next few decades, you've nailed the goal, but it took you 17 years to get your money back from the peak. So you can always overpay for good business. And that's what we're very wary of. And that's why, you know, even though we'd love to own some of what we think are the best businesses in Australia, you know, I know that you guys did a podcast with my colleague Will Granger, who was talking about NewsCorp. A lot of our interest in News Corp is because we think it is hands down the best listed business, but we can't own it because it doesn't pass out. You know, the valuation filter doesn't mean it won't go up. Believe me, it's been going up. The whole time. Say this I think on our last Podcast I said it was probably, I thought, the highest quality business. But, you know, you kind of get a cheap access point through News Corp. Yeah. Which has also done well. 

Bryce: [00:43:05] So I'm speaking of some of the best businesses in Australia. One that often pops up is mineral resources. And it's a stock that you have brought to the table today. So let's start at the top again. For those that have just tuned into Equity Mates for the first time, what is mineral resources and why? Why are you interested in it? 

Emma: [00:43:25] Mineral resources. So it's actually, funnily enough, another one that we stumbled across through screening for high returning companies and what. So we did a screen for businesses that are generate a return of us to capital I think greater than 50% for the last decade. This would have been back in 2017, I think. And it's part of this list. Mineral Resources was one of them, which really surprised us because it was a miner. It's a mining services company. So most mining services companies, you know, they make good returns like one year in ten when commodity prices are high. And the other nine years, you know, they're blowing up. So that intrigued me. I kind of wanted to understand why it was in this list, in this kind of exalted company when I had put it in the bucket of, you know, should businesses, to be honest. And the heart of the model is like the key difference. So it is a mining service company at its heart. But the difference is for most mining services companies, you know, they would work on a CapEx project. So if BHP is bringing up a new mine, they'll put it out to tender. These mining services companies will win the project, they'll build the mine and then they're done. So there's money to be made when there's work around and there's no money to be made when there's not. Now, the CapEx, cycling commodities is driven by the commodity price. So it's incredibly cyclical. Mineral resources, mining services business is production linked, so they do crushing for the majors, so they do crushing for Rio, BHP. Roy Hill. Now production in WA in commodities has been like a secular growth story. And you produce every day. It doesn't matter given where these assets sit on the cost curve to absolutely the bottom and the cost curve doesn't matter what the commodity price is doing, they're producing. So they're crushing ore and they own all of the market. So basically, if you go to like Mount while back at BHP mine, the part of the mine that Mineral Resources run, they own it all and it's their staff on site. So again, like mining service companies, the risk is you get kicked off contract and somebody else comes in. If they wanted to kick mine off, mine would pack up that part of the mine. And so BHP would lose all of that production and bring somebody else in lower operational risk in that. So it just doesn't happen. So they've got very, very long tenure and they're able to make really good returns every single day out of this mining services business. The other thing that's a little bit different about them is the guy that runs it and founded it. So another founder of that business, Chris Ellison, he's got a very, very good track record of basically being an awesome deal maker, incredible value creator. So what they do is the model is basically like they put their foot on a resource. So there are a lot of explorers out there and I wouldn't touch any of them like this. If you want to blow up, if you want to just buy a lottery ticket, like if you want to blow up, you know, you pay portfolio it, go out and buy a explorer because the time that you buy them will be the time when that commodity price is high and they will be, you know, telling you that they've got you know, it will actually offset export. But there are all sorts of African explorers that you can if. You really want to lose your money. So For explorers, they don't have a balance sheet. All they've got is a patch in the ground and they're all telling you that they've got an enormous resource. So what they do is they buy, you know, they're savvy about where they buy, they set, they buy counter-cyclical. So they usually buying, you know, when that commodity is not necessarily in favour, but they buy, they get their foot on the asset and then they bring up the mine because they've got in this mining services business, they've got people that know how to build and run mines. So they bring up the mine themselves. Then they lock in the life of mine mining services contract to themselves, which is great because you're never going to kick yourself off a project. So then you've got in these assets, if they have like a 30 year mine life, which some of their lithium assets do, for example, you know, you've got 30 years of earnings in that mining services stream and then they'll sell down the asset, which reduces their exposure to the commodity price cycle. So that's what they did with what China watched as their biggest lithium mine. And it was a tantalum mine. And they figured out it might have some lithium in it and they bought it for so cheaply that the company that sold it to them then got sued by its investors. For giving it away for a song. Yeah. So. So again, like that's not when you start to see this pattern of somebody always being in the right place at the right time. Like, I think there's a reason why there's so many billionaires in Australia are mining billionaires because there's so much value to be created over in WA if you know where to look. So I think you follow the people in WA and he is an incredible value creator. So he was in the right place at the right time with that asset, bought it online, built this mine, sold half of it to Albemarle for a price that I think they take $3.2 billion. They sold half of it so 1.6 they sold to Albemarle. And at the time I think the market cap of mine was like two and a half bills. So it was an incredible deal at the time. And you know, so that threw off a lot of cash there and used to invest in other parts of their business. And now they're doing it again in iron ore. They're bringing on a low cost iron ore asset. So there's a lot of production growth in lithium, there's a lot of production growth in iron ore to come. Now this year the stock's gone from 90 bucks to 60 because lithium lithium prices in the fall. And now again, I think you just need to zoom out, right? This business has gone from, you know, 12 bucks when we first bought it to 90 at one point, now back down to 60. You know, it's it's this is it's commodities, right? It's going to be a volatile ride at its core. This is you know, this model is improving, in my view, getting bigger. And they're doing it again. You seen that they've been putting their foot on all of these little lithium assets that are located quite close to Mount Marion, which is the other lithium mine. So I think the game plan there is probably, you know, to, again, either bring up these mines and give themselves a lifeline contract or some sort of consolidation piece. So, you know, essentially, you know, you're backing the people and this guy's got a great track record of value creation. He had another one when the iron ore price fell a few years ago at a high cost iron ore asset was put into receivership. And they went to the government and said the government didn't want it to be shut down. So they didn't want all the jobs in the area to be gone. So they said, Well, we'll keep it running. And I think they bought it for a dollar and they got like five years royalty free from the government. And then the iron ore price turned and within a quarter, I think that asset was making like $100 million EBITDA for themselves. So it's a non-zero, you know, the probability of somebody knocking it out of the park in lithium by buying a tantalum mine, knocking it out of the park in iron ore. You know, this clearly, he's got this incredible mindset. He knows where the value is. So you're backing that. But it's not going to be a smooth ride. It's going to be very volatile. 

Alec: [00:50:15] So here's the question. I've just had a little bit of a look at Chris Ellison. He's 66 years old and the success of minerals has made him a billionaire, I think according to the IFRS of 55. He's 55 on their rich list. What happens if he decides, you know, I've done enough for my life, I'm going to enjoy the billions of dollars I've created by yacht or something. Yeah. How do you think about minerals without, you know, if so much of the mining story is followed to find the right people and follow them? What if Chris decides to pack it up? 

Emma: [00:50:51] Really good question. Right? So that's one of the risks in the investment. And this is always one of the risks for investing in founder led businesses. It's the same with PWR. To be honest, in our case, it's not a spring chicken. And you know, part of our every time that we meet with the management team on boards, like you've got to have to stay on top of the succession question. Now, men always say that they've got, you know, a bench strength. The people that they think they can take over. The other side of it is I think Chris wants to do it forever. And I am starting.

Bryce: [00:51:17] With some of these billionaires to just. Yeah. 

Emma: [00:51:20] I don't think it's about the money for him. I think it's about a he's just a businessman and sorry, like not a businessman and like you know, he says using the stock. He's a deal maker. He loves it. Yes. And we want him to do it forever. Like, as you know, as long as he is doing a good job. But the succession thing is a risk, I think, and they would point to some bench strength. But I think over the years, you know, it would be great if a really obvious candidate emerged. 

Bryce: [00:51:52] In terms of your final process early being the valuation hurdle. What was 3.35% since the start of the year? Where does it sit in terms of valuation? 

Emma: [00:52:02] Yeah, I think it's I think it's a cracking idea here for sure.

Bryce: [00:52:06] Nice.

Alec: [00:52:06] Do you remember low price is lower risk. 

Bryce: [00:52:08] Yeah, but you never know. It's still like, considerably higher than when you bought it at 12 bucks. So it's the. 

Emma: [00:52:14] Second largest position. Yeah. So we think there's some good value there. I think you've got to have the appetite for volatility. If you're investing in resources. Like what? What are the risks? Where could I be wrong in the short term? You know, lithium could go to $800 a tonne for sure. That wouldn't be my base case, I think. I'm really interested to watch right now because what we've got with lithium is a very nascent cost curve. I haven't seen. So you've had a lot of supply come online. That's a very high cost in China. It's called lepidolite. It's very low grade. And so when we draw out what we think the cost curve looks like, we think that that Chinese lepidolite, which is, you know, about 20% of supply. We think it doesn't make money at current prices. So if we're right on that, you should see that supply be curtailed and then prices stabilise. 

Alec: [00:53:03] Is this the counter argument to that, though, that Chinese lithium miners don't need to make money like it's a strategic priority to own battery metals, China would say. 

Emma: [00:53:14] And that's what I'm worried about, because you can see with BYD, basically the other thing that I'm worried about, I've always ignored the demand side because I think supply matters more. But the demand side obviously is a big part of the story here because everyone's got from here to 2030 this really nice linear increase in EV penetration and you're starting to see signs that the OEMs basically China is flooding the world with cheap. It is. And probably to your point, walking all the way back through the supply chain and losing money everywhere because they want to dominate EVs with Bhiwadi and the Western OEMs in a real quandary because, you know, like Ford, for example, is using $5 billion a year in vehicles and they cannot compete and their shareholders aren't going to be, you know, everyone wants, you know, the everyone wants the energy transition to occur, but they don't want to be the shareholders funding it. So there's a lot of pressure on the management teams and boards. What are they going to do? I suspect what we start to see is like a little bit of a walk back, maybe pushing hybrids rather than pure electric vehicles, and that has implications for demand. So that's the bear thesis for lithium, and that's something that we have a very open mind to. Now four min it's not. So they have an iron ore asset that's coming online next year at Onslow. That's going to be a cracking asset for them. And they should earn, you know, many billions of dollars from that asset, particularly if iron ore stock prices stay anywhere near where they are now. And they've also got this mining services business, which is about 700 mil EBITDA today, probably going to about a bill when this iron ore asset comes online because the price price, they give themselves a contract. So those two pieces of earnings, you know, have nothing to do with them. The lithium side of the business. So we feel we can take on the risk, especially now that lithium lithium prices have gone where they've gone. Like again, when lithium prices have fallen 75%, now is not the time to get peak bearish on lithium. But it's such a nascent industry that you got to pay attention and stuff because you can be really wrong. So again, like, I just like to bring it back to the facts and, you know, stay nimble. And if the facts change, you're always allowed to change your mind. And that's probably why, even though I think it's an incredible asset, I personally would find it difficult to buy Pilbara minerals here because it is pure lithium. Now it's really interesting, right, because it's net cash. They've got a good management team, it's a good quality asset. It's very low on the cost curve. If we have a bench of stocks that we would love to own that we think, you know, the quality falls away really quickly in resources. So there's probably only a handful of businesses that fit our process that we think are actually investable under our process. Pilbara Minerals is one of them. So we're very positively disposed to that business, but we just haven't been brave enough to pull the trigger there because of this kind of bear thesis on lithium that we're still exploring. 

Bryce: [00:56:13] Yeah. Well, I mean we could keep chatting about stocks all day, but unfortunately we have run out of time. Thank you so much for coming in today and sharing your time with us. Thank you to Charlie and Mark for the questions for Emma. If you'd like more information on early funds, we'll put a link in the show notes. But thank you so much. Fascinating as always. 

Emma: [00:56:31] Thank you. Thanks so much for having me.