Expert: Tim Carleton – Mineral Resources, Nick Scali & What makes a great Australian company

Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How you.

Alec: [00:00:30] I'm very good, Bryce. I'm very excited for this episode. Here in Australia people often say they know summer's coming when Melbourne Cup comes around. Yes, well, I know summers coming when a different event comes around and that's the hearts and mind conference every November. It's the investing conference that stops a nation. 

Bryce: [00:00:49] It does stop the nation and we're lucky enough to be able to partner with sane hearts and minds to get access to some of the brilliant investors that will be presenting on the day. And this year is no different. It is our pleasure to welcome Tim Carleton to the studio. Tim, welcome. Thanks, Bryce. So Tim is the founder of Aussie Cap Asset Management, which he's been running since 2012, prior to Oz Cap. Tim worked at Macquarie Bank and Goldman Sachs. He's also previously pitched stocks at Two Hearts and Minds conferences, pitching Macquarie Group Ripper of a stock back in 2017 and JB Hi-Fi in 2008. And he's back again in 2022 with another stock pitch. So we're really excited to have Tim in the studio today. But Ren for those that haven't heard of Soane, what is it? [00:01:35][45.8]

Alec: [00:01:35] So SOhn hearts and minds. Investment Leaders Conference is Australia's leading finance conference dedicated to supporting Australian medical research. And we've been supporting the conference for the past three years and we're doing it again this year, hosting a series of interviews from some of the investors who will be pitching at the conference. Tim being one of them, that's it. And when we say pitching to investors over the course of one day pitching the best idea, that's it. [00:02:04][28.2]

Bryce: [00:02:04] It's an exciting conference this year. It's back in real life. It's been online for the past two this year down in Hobart, Tasmania. And not only is it an amazing venue, but Stone is dedicated to raising money for Australian medical research. This year's major beneficiary is the Menzies Institute for Medical Research at UTAS, with all of the proceeds from tickets going towards medical research. So some amazing names have been in the past. We have Bill Browder as the headline this year with more speakers to be to be announced. It is on Friday, the 18th of November down in Hobart now. And the best part is firstly tickets are $3,500. [00:02:41][37.4]

Tim Carleton: [00:02:43] The best bets, the best possible. [00:02:44][0.7]

Bryce: [00:02:46] All going to medical research as we said now yes deductible. It don't know. I'm not a test. [00:02:51][5.1]

Tim Carleton: [00:02:52] Term potentially. [00:02:52][0.4]

Bryce: [00:02:54] But Soane have been hearts and minds have been incredibly generous and given the Equity Mates team to to give away to the Equity Mates community. So to do so to be in the running, to win a ticket worth $3,500, and see these expert investors in real life travel and accommodation not included. Head to community dot Equity Mates dot com. Sign up to our forum and comment on this episode. Which stock you would pick if you were at the conference? [00:03:22][27.5]

Alec: [00:03:22] Is this just our way of getting some stock tips? [00:03:24][1.6]

Tim Carleton: [00:03:25] Yes. [00:03:25][0.0]

Alec: [00:03:28] And make make it to Hobart. Just jump on the forum anyway and see what other people are pitching. [00:03:32][4.2]

Bryce: [00:03:33] And that's it. That's it. So look, $3,500 in value tickets are limited. It's an awesome opportunity to to hear from some of the best investors from around Australia and the globe community. Dot Equity Mates dot com. Sign up to the forum comment on this episode, but enough with the previous. [00:03:49][16.7]

Alec: [00:03:50] Tim, you've been sitting there very patiently. We appreciate that. Now we turn the spotlight on you and we'd love to start these interviews by hearing the story of people's first investments. So can you kick us off that? [00:04:03][12.6]

Tim Carleton: [00:04:03] Yeah, sure. And I have no doubt that my answer is going to disappoint a little bit, because I, I cannot remember my first investment, but I am very confident that I lost money. And so I'll I'll set the scene for you. It was the late 1990s. And I think like a lot of my colleagues at university, we had our trusty CommSec account and we're in the late stages of the dot com boom. I think names like Sausage Software and One.Tel and LookSmart which made do anything but were all the flavour of the day. And all I remember is losing money in the equity market and that's because my university started in 1999, so I was there for more of the crash than the boom. And it was a very, very useful experience because I realised how easy it was to lose money in the stock market if you didn't know what you were doing. And I also realised that there were two sorts of participants in the stock market. There were investors which you want to be, and then there were speculators looking to get rich quick and invariably it ends up being quite a costly experience and. You know, these days, I, I guess lecture at City University, actually in a portfolio management course. And one of the things I tell the students is speculate early speculate in your twenties. I mean, anyone that gets involved in the stock market at some point is going to engage in a serious form of speculation and will invariably lose money doing so. And it's far better to do that when you're risking 1000 or 3000 or $5,000 than at a later stage in life when you have more accumulated wealth and you feel like your bet size should be substantially bigger. So I tell them to get involved in the equity market early. And to the extent that you need to speculate, and we probably all do get that out of your system when even though it feels like an expensive exercise to lose one or $2,000 early on, that's the best form of education that you're actually going to get for the rest of your life. And if I think back to my two formative experiences over here that knows me will tell you I'm a reasonably sceptical person in relation to investing in the stock market. And I think part of that comes from the fact that my first experience when I was a complete novice was in the dotcom period where shortly after I started investing, everything crashed. Right. So that makes you a little bit wary. And then my second real experience was when I moved from Macquarie to Goulburn's in an equity and equity trading role. And shortly after I joined, we had the GFC. So you tend to be a little bit jarred by those experiences because their formative in how you think about the equity market. And in many ways I think both of those experiences were actually quite useful in creating a level of scepticism that has been very, very useful to me since. So. And unfortunately I can't and probably fortunately I can't remember what I, what I did invest in at the at the outset. But the losing money part was very, very important for making sure that I didn't want to do that on a go forward basis. [00:07:10][186.6]

Bryce: [00:07:10] Yeah, nice. So before Founding Icecap, you mentioned you worked at Macquarie and Goldman. What were some of the sort of key learnings that you formed during that period of time? And was did it sort of change any preconceived notions that you had about finance and investing, you know, before, before starting in those roles? [00:07:29][19.1]

Tim Carleton: [00:07:30] I mean, at Macquarie I was quite lucky. I joined in the investment banking team and then within a pretty short period of time ended up on some principal transactions. So that was Macquarie was putting its own money to work and I was in a team that was working on some reasonably complex transactions and I had some great mentors and one of them had this skill for developing a back of the envelope valuation. And the reason I called it such, or the reason I was known as such as he would literally have envelopes on which he'd scribble a few things, and I would often spend weeks, if not longer, building these massive Excel models. You know, this this was my formative training and Excel and valuation and how the market works, how investment banking works. And so I'd be building these ginormous models. And after weeks of toiling away with a thousand different inputs, we'd go to present these models to to the directors at the time. And one of the directors we'd get to the opening page where there was an output, which was the valuation from, you know, your 20 tabs of work. Right. And he'd sit there and go, that doesn't look right. And you're like, I haven't even got to the second tab. [00:08:36][66.4]

Tim Carleton: [00:08:37] And. [00:08:37][0.0]

Tim Carleton: [00:08:38] It doesn't look right. And he did a scribble down before that meeting, two or three shorthand ways of thinking about how he would value the business. And one of them might be, you know, a price to earnings multiple, but a lot of the others were more complex. He might use option theory to try and value this particular part of the business, or he'll use some other theory to value a different part of the business. And he'd come up with two or three back of the envelope valuations, and if they triangulated within 5%, then he knew his answer was approximately right. And so if my answer wasn't similar to that, right, with my complicated Excel model, he'd say, Well, that can't be right. Because if I look at it this way, I get this answer. If I look at it that way, I get another answer. And so your answer is just too far away. And invariably, the the meeting would become a discussion of can we find the error, right? And every single time he was right. So it became a very useful way of learning that you needed to think about valuation lots of different ways as a cross-check for the work that you're doing. Because sometimes when you are, a lot of people base their valuations on work that they don't excel. But you need a cross-check to make sure that you haven't made some fundamental error. Probably the second experience that I learnt from Macquarie was that everyone was terrified of of presenting any principal investment idea to the powers that be. And so they made sure that they stress tested their analysis because when they were presented higher up the chain and at the time you're talking about people like Alan Moss, who was the CEO at the time, Nicholas Moore was head of an. Some banking while crappy it was senior investment banking and you'd go into these meetings and within 10 minutes that of identified the key risks and also the key flaws in your analysis. So you wanted to make sure that you had stress tested everything and you were right on the key risks before you went into those meetings. And the meetings were all about risk management. They wanted to make sure that they did not lose money. It wasn't about making money. If they worried about not losing money, then the rest will take care of itself. And so they were they were probably the two takeaways from Macquarie. Macquarie is a very special institution. It trains an enormous number of, you know, finance professionals in the domestic market. And, you know, I considered that was a very fortunate first experience that I then moved to an entirely different role and really the first role I had with investing in equity markets. So I moved to Goldman Sachs. It was early 2007. I'd been interviewing in late 2006 and the head of equities and FICC at the time was a guy called Simon Rothery, who is now the CEO of Goldman's, and he was responsible for a proprietary strategies team. So that was the team that was responsible for investing Goldman's own balance sheet into domestic equities and other asset classes within the domestic market. And the equities team owned, I think was about five micro-cap small cap exposures that he felt deserved a bit more rigour in the financial analysis. So he had interviewed me and said, I really want you to come in and look at these five companies and and tell me what you think they're worth. And the quid pro quo was, listen, you know, you prove yourself over time and you'll get to manage your own portfolio within the equities team. And so I came on board and started on the first microcap exposure, and Goldman's was substantial in it, and it was a small telco. And as I was looking at this business and I was looking at their relatively low gross profit and looking at their very high cost of doing business, I very quickly came to the conclusion that I can't see how this business ever going to be profitable. And so I came back with the conclusion that I thought the equity is worth zero and we should exit. Well, I don't think that was the answer that they were expecting. So so we ran through the analysis and we couldn't really find any flaw in the analysis, so we exited the position. So then I get to the second stock and it's a small financial services stock and I'll leave the names out of this. But very quickly I realised it was a fraud. There were accounting shenanigans going on and you know, I met with management multiple times and they were evasive about responses and I just couldn't make any sense of the accounts. So I came to the conclusion that again, I thought the equity values were zero. I presented that and again there was sort of a few looks and we exited the position and after five of these and I'd concluded that. [00:13:04][265.8]

Tim Carleton: [00:13:04] Over the head with zero, I mean, the. [00:13:06][2.5]

Tim Carleton: [00:13:06] Questions started to rise, you know, are you going to find any value in any of these equity positions that we had to analyse? But within 6 to 12 months, all all five had gone to zero. Wow. That all gone out backwards. Wow. So. So pretty shortly after I was running my own portfolio and and I was up and away, and at the time, I didn't have an investment philosophy. I mean, until you start investing professionally in the market or even investing in your own right for a substantial period of time, I think you're searching around for an investment problem. Yeah, philosophy. And I was lucky in that I was in a team full of very, very good investors and they had very different training styles. There were some that were very fundamentally driven, which was sort of similar to my own, a natural instinct as to the way I wanted to invest. There were others that were that were pure traders, and they'd just be looking for short term mispricing that they'd take advantage of. So there was a range of different skills and expertise, and I was able to sit there as the youngest member by far, and just sponge off all of these incredible investors. These were the these were people proven to generate profits year after year for for Goldmans. And I really had free rein to do whatever I liked. I could look at anything I wanted to invest in, anything. I wanted to travel meat companies. And because I had a business card that said Goldman's on it, invariably almost no door was closed. So I'd spend a lot of time travelling with one or two of the other guys that were fundamentally based meeting with CEOs, CFOs or other senior people with all these listed businesses. I mean, we'd go on trips to Asia and visit ten, 20, 30 companies in a week, right? And it was it was a pretty incredible experience. So to be honest, I just tried to soak as much of it up as possible. And it was probably when I started to really think about, you know, an investment philosophy. And it was probably the point in time when I started to take. My investment learning seriously. I mean, I think a lot of people have this expectation that you do your learning in university and then after that you should, you know, you should really be practising. But in investing, I think you learn the whole way through your lifetime. You're a constant process. So at the time, I was pretty young. I had no kids, I had no real other responsibilities. I had all this freedom in my role. And so I just tried to read everything that I could, every finance book I could get a hold of, I would read. I'd take five on trips, even if the weather at work related or holiday related. My wife often jokes that my repertoire of reading was, was, was very, very narrow in that I would go on holidays and I'd take five finance books and be incredibly excited that I got an opportunity to read these things, which I thought was somewhat humorous. But it was, you know, investing is my passion. And that became very obvious to me through that period. And out of that, really, my investment philosophy developed. [00:16:06][179.3]

Alec: [00:16:06] Well, let's get to that, because we love to unpack people's investing philosophies. And after Macquarie and Goldman, you went out on your own with Aussie Caps. So let's start with the philosophy and then the journey from there. So what was what is your philosophy? What was your philosophy? And are those two answers different? [00:16:24][17.9]

Tim Carleton: [00:16:25] Yeah, it hasn't changed over on caps existence. So by the end of the time at Goldman's, I had a very, very clear view on the philosophy. And so we're value investors with a quality bias. I think you refine your process over time. And so over the journey of Occupy, I think our focus on quality has increased and our focus on value has decreased. And I think a lot of value managers find that you want to more and more buy great businesses and you're happy to pay a fair price. And it's terrific if you can find them at a, you know, attractive price. But it's the old Buffett adage from, I think, his 1989 investor letter that it's better to buy a wonderful business at a fair price than a fair business at a wonderful price. And you learn that through painful experience. If you're trying to buy something for $0.80 on the dollar, if that investment goes up to a dollar within a year, that's a great 25% return. If it takes three years, then suddenly your annualised returns less than 8% and in that time period a whole lot of things that can happen to fair businesses that are potentially negative to their outlook, which all of a sudden erodes your margin of safety. Whereas if you own a great business that's constantly reinvesting and therefore growing its earnings over time at very attractive rates of return, and then even if you slightly overpay in the short term, the company will grow into that valuation pretty quickly. And so, you know, we look to buy what we think are best of breed businesses at prices that are fair to attractive. And so I guess the obvious question is, well, what makes a great business? And that's really a distinguishing feature for better managers. And from our perspective, it comes down to a business that's able to generate a better return for each dollar invested than its peers. Right. Because that tells you that it has some sort of competitive advantage. And from that point, you can go and work out well. Is is it a sustainable competitive advantage? What is that competitive advantage? And if you work out that it's sustainable and growing, right, then the returns on capital are likely to improve over time, not get worse. So you see that in the accounts of the businesses because businesses that have a sustainable competitive advantage consistently have a higher return on equity than a lot of their peers. It's telling you this business has some sort of advantage over its peers. Now, in the case of BHP, it's obvious it's got better deposits that are closer to transport, that are easy to mine, that are higher grade. That's a really easy one. To identify a business like Nick Scali, it's far more difficult to automatically work out what the competitive advantage is and why its return on capital is so much better than its peers. So you need to, in many cases, unpick what the competitive advantage is so that you can work out whether it's sustainable, whether that moat that they have is growing or shrinking, and what that means for the future revenue and earnings growth of the business. That's what we spend a lot of time doing and we think we've identified what are the really great businesses, the domestic market, and then it's just a case of having the patience to wait for prices that you consider fair, which will still make it a very good investment. Or occasionally you get these opportunities to buy into these great businesses at attractive prices. And that's that's when you get really great investment opportunities. And it's typically because the company is either experiencing a temporary hiccup or more often than that, the whole market is experiencing a downdraught because of some macro economic concern that's giving you an opportunity to buy into into. Businesses at what are very attractive prices. And in those moments, everyone softens. They focus on the macro that people forget you're actually buying into individual companies. So if you get an opportunity at a discount to what you think it's worth, then it's a great business. Then make sure you get involved. [00:20:26][240.9]

Bryce: [00:20:27] Well, it's obviously been working since you launched Icecap in 2012. You've returned 15% per annum compared to 9% for the ASX All Ords. How do you think about portfolio management like you super concentrated? How many stocks in the portfolio just for those sitting at home? How do you think about approaching that? [00:20:47][19.5]

Tim Carleton: [00:20:47] We're currently running 35 stocks in the portfolio. It's reasonably concentrated and there's a few reasons for this. We would rather have a greater exposure in our highest conviction ideas. And you don't have many very high conviction ideas at any point in time. To the extent that we've entered into a into a position that we think is a great company at a very attractive valuation and our thesis is playing out, then obviously that stock is becoming a bigger proportion of the portfolio. We try very hard to the extent that the investment thesis is still intact and the is doing what we expect and growing earnings and the valuation is still attractive not to play with that exposure. The temptation always is you think, oh, it's a bigger percentage of the portfolio now, so we should actively reduce. Well, that is, as the phrase goes, cutting your flowers to water the weeds, right? You want the stocks that are the great investments to become bigger percentages of your portfolio. They often tend to be the ones that continue to outperform in the future. And so you want to avoid the temptation to reduce your exposure to the companies that are doing well in your portfolio, to weight into the companies that are actually not proving themselves and not doing what you had anticipated upon entry. So while we hold typically 30 to 45 holdings at the moment, as I said, it's 35, we find that the top 20 positions make up north of 80% of the portfolio and we may on occasion have positions that are even double digit percentages of the overall assets that we have under management. [00:22:28][100.7]

Alec: [00:22:28] Yeah, nice. Now Tim, we've mentioned a couple of stocks that might exhibit the characteristics you're looking for. And Nick Scali was one and BHP was another. But we'd love to, I guess, get specific and talk about some of the biggest holdings in your portfolio, not the stock that you're going to pitch at the conference. You can tell us that off line if you want to. But to really, I guess, illustrate some of the concepts that you're talking about with your philosophy. Do you want to share maybe one or two stocks that really exemplify your investment philosophy? [00:22:59][30.3]

Tim Carleton: [00:23:00] Sure. What am I? What am I? Pick two. The first one you want mentioned let's let's start with Nick Scali because it's a good example. So at the moment, everyone's concerned about any company that's exposed to the homewares market or the furniture market. And the reasons for that are obvious. We were all stuck at home because of COVID for a couple of years, and by and large, the majority of people's incomes didn't change. Their expenditures went down because they were having to suddenly travel to and from work, and as a result, the savings ratio went up. Combine that with the fact that we're all sitting at home every day and people decided that they would furnish their home. And the end result of that was companies like Nick Scali experienced a very significant boost in sales as people replaced a lot of a lot of their lounges. So fast forward to today and everyone is quite concerned that on the other side of that, we've got to see a material slowdown in sales and that you'll see earnings go backwards for a period of time. And as a result, companies like Nick Scali are trading at look like exceptionally low valuations compared to their historic earnings. So at the moment, Nick Scale is trading on 10 to 11 times the actual reported FY 22 numbers. And this is often what creates opportunities to invest in really, really good companies because when it comes to Nick Scali, what they're doing within the company is far more important than the things that are outside of their control. So what's inside their control is more important to the future earnings of the business than what's outside they control. And that is very, very fundamental to understanding that you are investing in individual companies. So in Nick Scully's case, prior to COVID, they didn't have an online business, right? They implemented one very, very quickly that's now growing very, very quickly and giving them all sorts of opportunities to expand their business they recently purchased plus, which is one of their competitors, and it looks like they got that at a very good price. And the synergies that are dropping out of that acquisition are enormous. It's also meant that they now have a very, very significant store rollout in front of them. They're planning on nearly doubling their existing store network across the two brands. And that is a very, very long runway for revenue and earnings growth for that business both in Australia and New Zealand. So yes, they're going to suffer temporarily from a retracement in. Store earnings at the store level, but the initiatives that they have in place that's within their control in terms of growing the store network, extracting synergies from the acquisition, doing a lot of sensible things in relation to their online business should more than offset the slowdown in revenue and earnings growth that you might see as a result of people spending less on the home. So, you know, we're very excited by this business because it's at a very unusual valuation for a business of this quality. And to give you an idea, I think it's the only company that we're aware of that has a ten year return on equity north of 50%, and they have done that. And so they've been net cash every year. So it makes it even more extraordinary. So that's a better and a better long term out way than ARIA Group or Carsales or any other very, very high growth business that you might think of. And they have an enormous runway of growth in front of them. And you're getting this for a valuation that from our perspective, is very, very attractive. [00:26:08][188.0]

Alec: [00:26:08] You just wouldn't think about that from any retailer, let alone a furniture retailer. [00:26:12][3.9]

Tim Carleton: [00:26:12] Exactly. And you know, they're led by Anthony Scali. He's one of the best retail managers in the country. So you are buying into a business that's that's very, very capably run. The second stock I was going to give us an example is one that's more excitable to a lot of people than than a boring furniture company. We don't think it's boring at all. But the second company I was gonna talk about has is Mineral Resources and it's, it's an amalgamation of four businesses. Its base business is a mining services business. It does a lot of mining work for the likes of BHP and Rio. That's been a very, very strong growth business over the last couple of decades and we think will continue to grow very materially in the next couple of years. And in addition to that, they have a few other businesses. They've got an iron ore business which presently is a high cost operation. So when iron ore prices are high, they make a truckload of money. When iron ore prices are low, actually the business doesn't make any money at all. And at various points in time they've closed down various operations. At the moment they are in the process of transitioning their business from being a high cost operation with relatively low tonnage to a much lower cost operation with much more significant tonnage. So they've got two projects that they will develop in the next five years. That should mean that they are a very substantial producer and that their costs per tonne produced go into the lowest quartile. So that will become a much more consistent earner for the business than it has historically. But the really exciting aspects from our perspective are, first of all, the lithium business and the reason lithium is exciting. It reminds us in many ways from the reminds us of iron ore in the early 2000s is that we are getting to that point where EV adoption becomes mass market. And when that happens you hit the steepest part of the spend in terms of adoption and electric vehicles require lithium ion batteries. And so lithium is obviously a key ingredient in Australia's very dominant in lithium production. Australia produces more than 50% of the world's lithium each year and we have some really great assets. Well, mine resources is lucky enough to own two wonderful assets, being Wadjda and Mount Marion that will position them well and truly in the lowest quartile of the cost curve. They're very significant assets. They'll consolidate their position as a top five producer globally over the next five years, and they're trying to capture the whole value chain. So they're not just going to they're not just going to sell what comes out of the ground from the mines. They're going to take it all the way through to selling lithium hydroxide, which is the product that actually goes into the lithium ion batteries. And as a result, they capture the economics along that whole supply chain. You know, as we sit here today, it's difficult to see how supply will catch demand. We're currently in a supply deficit situation. Demand is exploding and it's very, very difficult to see how supply can catch up, which means that you get very strong prices for some period of time. And you might remember, if you think back to iron ore in the early 2000s, prices needed to explode so that prospective producers that had deposits at much lower grades were incentivised to actually get those into buying. Right. And we sit here today and the guys that you want to own, the companies that you want to own in that environment are the low cost operators that already have their hands on these very, very high quality products. And sorry, these high quality mines and mine resources is absolutely in that basket. So as we see it today, it's probably on a mid single digit PE with plenty of growth in front of it and we haven't even talked about the second exciting angle to mine resources and that is their gas business and they think that they have found in the last couple of years the largest onshore discovery of gas in Australia's history, really. And this is a business that could be worth many billions of dollars to them. And in many of the analysts valuations it's little more than a footnote. So this is very, very exciting and a company that we think has a lot of tailwinds over the next five years. [00:30:16][243.8]

Alec: [00:30:17] Well, I mean, there's so much we could unpack about both of those businesses. But one direction that I want to go is both of the businesses are led by very entrepreneurial leaders. Yes. Is that is minerals is that is still the founder that runs it? [00:30:31][14.4]

Tim Carleton: [00:30:32] Yeah. So Chris Ellison still runs it. And Anthony Scali. [00:30:34][2.4]

Alec: [00:30:35] How important is that for you that like founder, CEO, entrepreneurial lead are. [00:30:39][4.1]

Tim Carleton: [00:30:39] Very important for two reasons. At the moment, north of 80% of the portfolio is founder or major shareholder led. Okay. And we have a big focus on this for two reasons. One, they tend to take advantage of every opportunity that's in front of them. I mean, if you go back five or six years, I mean, Rez wasn't in lithium. Right. And yet all of a sudden it's probably the biggest part of their valuation because they took advantage of an opportunity that was in front of them. And even though it was in a different commodity to their traditional exposure of iron ore, they saw the merits in that, and they were entrepreneurial enough to take advantage of it because Chris was thinking about the opportunity as a shareholder, because he owns a substantial stake in the company. Not as all this is going to increase my workload. Right. So you tend to you tend to find that they take advantage of every opportunity. You also tend to find that they're very disciplined with capital management. So both of those companies have a very, very strong arrow focus, and they won't engage in marginal expansions to the business. But just as importantly, you also take away agency risk. And agency risk is that company management do something that is in their interests, but not necessarily in the interest of shareholders. So anyone that engages in empire building, undertaking projects that are marginal but mean that they manage a larger business and can command a bigger paycheque. This agency problem is often the source of the majority of negative surprises that we have experienced in running Icecap over the last ten years. So increasingly, our focus is on owning businesses that have found a lead, and that certainly represents the vast bulk of the portfolio as we sit here today. [00:32:14][94.8]

Bryce: [00:32:15] Yeah. Wow. Well, two fascinating pitches. Can't wait to hear what you do it. So in hearts and minds and speaking of will touch on that. But before we do, we'll just take a quick break to hear from our sponsors. So Tim, you're presenting and pitching down at the sign Hearts and Minds conference in Tassie. Super pumped to hear what what you bring. As we said, you're going to have to wait to find out. We'll get it offline. But that's okay. Why? Why is participating in the Hearts and Minds conference important to you? Third year now? Yeah. Tell us what it means. [00:32:45][30.9]

Tim Carleton: [00:32:47] Well, it's a very special conference and it really is a fantastic initiative. And I would strongly encourage anyone that can get along, go and make a holiday, but get down to Tasmania. It's a very, very unique experience, but both the conference itself and the stock picks that come out of it at the end of the day fund a lot of medical research and it's medical research in areas that are really important and will probably touch all of our respective lives or the lives of our loved ones at some point. The biggest problem with a lot of research is the need to constantly source funding. And so what this does is it enables some of those institutions to have a source of regular funding. And the way they do that is not only through the ticket prices for the conference each year, but in the conference you get 12 managers that pick their best investment ideas. Those investment ideas, along with some core managers that they're selected, form the investments for a listed investment company. So the hearts and minds listed investment company and people can buy into that investment. And as a result, they get exposure to the best ideas from managers that are selected by a committee that have very, very strong performance track record. So hopefully that listed investment company over time performs strongly and gives investors a return. Instead of charging a management fee. All of the investment managers provide their services, including the initial idea and ongoing management services for free. And so that allows the listed investment company to donate one and a half per cent of the assets under management every year to charity. And as a result, since 2006, more than $40 million has been donated to various causes. And these causes, the big issues and the big issues that require research, you know, we're talking mental health, diabetes, cardiovascular disease, EMS, other neurodegenerative diseases. They're big research areas that need a lot of research so that we can come up with solutions. And a lot of the research that is being undertaking will no doubt be groundbreaking in the years and decades ahead. So having a source of funding that is recurring in nature as it is with this listed investment company is particularly important. So this is a very small way for investment professionals that otherwise are otherwise relatively little involved in the fields of medical research and supporting these sorts of initiatives. It's a very small way for us to get involved and support the work of some very eminent researchers around the country in trying to come up with solutions to problems that that society really needs. I think it's just a fantastic event. I would encourage you if you are attracted by some of the best minds in the investment market, speaking and telling you about their greatest ideas to get onto the conference. And not only do you get those investment managers presenting their stock pitches, but you also typically get a couple of very big names presenting in a longer format, some of their experiences. And so, you know, in recent years we've had Charlie Munger, Howard Marks, Ray Dalio. I mean, these guys are some of the biggest investment managers in the world. And this year, obviously we've got Bill Browder. Now for your listeners that don't know who he is, go and Google him. Because given his background with Russia, I think, you know, it's going to be a very, very fascinating interview that we experienced this year. [00:36:17][210.3]

Alec: [00:36:17] Yeah, we should say, if you don't want, don't even Google him. Just go on this podcast feed and listen to our interview with him because yeah, he's pretty phenomenal. And I think, you know, we just want to echo that. You know, you guys donate your time and your expertise and your stock pitches. And it is it's really it's really amazing what what they're doing and some of the stories that you hear on the day about the organisations that are being helped. It's it's really profound and yes it's, it's cool that Bryce and I get to play an even smaller part in it by just talking to you guys and promoting it. If you can't make it to Tasmania, go and look at the listed investment company. One is the ticker because yeah, it is. It's really phenomenal what you guys are doing. But Tim, back to the investment side of it all because the pressure's on you, you've got to get up on stage in a couple of weeks and present. And one thing that we're always fascinated by is you don't just have to pick a good company, but you have to pick a good company that as a catalyst in 12 months because that's how long one holds these companies for. So, again, without revealing your stock pitch, how do you think about that? What what are some of the. The central catalyst you look for. [00:37:27][69.4]

Tim Carleton: [00:37:27] Yeah, well, there's probably three that jump out. And the first one obviously is that the company is expecting some particular development that it's talked about for some time and you anticipate that it will occur in those 12 months. But that's often not the case and very difficult to time. The second is if you just have expectations that the earnings that will be delivered by that particular company are substantially above the market's expectations. And so certainly, you know, in many of our high can highs conviction positions, we will often have a view that the market is underestimating the strength in the growth of earnings that we are forecasting to see over the coming years. And we might have particular confidence that that is relevant for one stock more than another. And then the last source is that there are often companies trading at depressed valuations because of fears that are macroeconomic related. It's not actually got anything to do with the company that we are, that we that we really like its macro concerns that we think will abate. So we've got a good foundation for thinking that these concerns will abate over time and as a result the stock will rewrite. [00:38:34][66.5]

Alec: [00:38:35] And that third one feels like it's going to be a real theme this year that the macro picture is bleak. And for fund managers that I guess have a positive outlook, there will be some turnaround stories. And I guess that leads us to an article that you wrote recently, the rationale for remaining positive. Now, we're almost out of time today, but we have to get your rationale because it's pretty hard to say positive sometimes. 2022 has been tough, especially for some of our listeners that are newer to investing. They may not be investing anymore, so help us remain positive. [00:39:12][37.1]

Tim Carleton: [00:39:12] Okay, let's start with the big picture. And the big picture is the last. [00:39:15][2.6]

Bryce: [00:39:15] Stocks of stocks always go up. [00:39:16][1.4]

Tim Carleton: [00:39:18] The last hundred years the Aussie market has delivered 11 to 12% compound and we've gone through world wars, we've gone through pandemics, we've gone through all sorts of crises, we've gone through stock market crashes. So the biggest risk a lot of the time is after the market's already declined, people decide that's the point to exit, right? The market is forward looking. Anything the old reading about today is most likely already priced into stocks. Yes, things can deteriorate further. They always can. But it is a mug's game, I think, to try to predict what is happening at a macro level and use that as the basis for your investment decisions. Think of it the other way. When stocks are on sale, when they've gone down a long way, forget about what your existing portfolio is doing and back the truck up on your favourite investment propositions, right? Your favourite investment ideas. If you had a simple rule of thumb, that ideal lifetime, every time the market was down 20%, you added to your exposure to equities. I have no doubt that you would probably outperform the indices. Right? So keep it relatively simple. If the house next door is at a 50% discount, you'd be looking to extend your credit and go and buy it. Think the same way with equity markets because I think it's the right way to think about things. And unfortunately it's the opposite to how a lot of people do interact with the with the stock market. In this particular case, everyone's worried about inflation. And the result of worrying about inflation is interest rates need to go up and that has the potential to tip the economy into recession. We often spend a lot of time analysing where we are as an economy. We have no idea what's going to happen in the future. But if we start with where we are, we can often assign probabilities to various outcomes on a go forward basis, right? So how it marks in the at the end of his most recent newsletter, which is worth reading, points this out. You should know where you are in an economic cycle. Right? And the point is that we made in the newsletter is, listen, a lot of the lead indicators in relation to inflation have fallen. Right. So oil's at $78 as we sit here today, it peaked at $130 at the outbreak of hostilities. That's a very, very substantial decline. Right. Lumber has declined significantly. Copper's declined considerably. Most of the hot commodities and most of the soft commodities have pulled back quite materially from their recent highs. The shipping index, which caused a lot of inflation in the course of the last couple of years, is declining at a precipitous right. Right. And a lot of these things you won't see in the inflation numbers until they go through the supply chain and they go from raw ingredient inputs through to the finished products. Right. So there is quite a time lag on what we see with the raw commodities coming out in the form of inflation with finished goods. Right. And so at the moment we are reasonably confident that you've probably seen a peak in US inflation. Now it may stay elevated for slightly longer than we anticipate because it's unclear exactly how that lag, how long that lag is. But ultimately the fact that we're seeing a lot of primary goods declining in price materially at some point should mean that we see a reasonable abatement in the inflation figures. And if that happens, then obviously the pressure to raise interest rates for central banks around the world will ease. And probably more importantly than that, I actually think the biggest. Risk at the moment is that central banks push too hard, too quickly. Right. And I would consider that a policy mistake. We're not seeing that sort of talk out of the RBA. So the RBA said, listen, we think we're pretty close to back to neutral. We know that there's a transmission effect, i.e. delay between adjusting interest rates and its effect on the economy. So we're probably going to take it more slowly from this point forward, and I think that's very, very sensible. So I give a lot of credit to our central bank. They get that. They get a hard time a lot of the time, but they need it to bring rates back to a more normal level. They have done that and I think they will take a moderate course of action on a go forward basis. So, you know, that leads us to valuation and we're seeing compelling valuations at the end of the day. Don't forget that when you're investing in stocks, you're investing in individual companies, you are buying into individual companies. Our time horizon for investing in individual companies is a long time. In an ideal world, we'd never have to sell them right if they keep performing in line with their expectations. So if you are getting an attractive entry point into a company that you think is a great business, then take that and try to forget about the short term gyrations of the market or that particular stock over the next couple of months. If you're happy with the price and the valuation on which you're purchasing the stock, then that should be all that matters over the medium term. [00:43:41][263.1]

Bryce: [00:43:42] Love that. All right, Tim. Well, before we move to our final three questions, just a reminder for the Equity Mates community that if you would like to get your hands on one of the two tickets that we have available to the Sewn Hearts and Minds Investors Conference down in Hobart, Tasmania, all you need to do is head to our forum which is at Community Equity Mates dot com and on the post for this episode. Tell us which stock you would pick at the sewn conference. We don't need a thesis. Can just be one word. Could give Tim and co a few ideas as well. [00:44:14][32.2]

Alec: [00:44:14] Well, I think you'll be stilling next college for sure. [00:44:17][3.0]

Bryce: [00:44:19] But we'd love to hear from you and your ideas. The tickets are worth $3,500, as we said. And hopefully you've been able to hear from Tim today the quality of speakers that are going to be at that conference and actually just that we're not going to be out to get down there this year. Ren, but there will be hopefully next year so far. Three Let's. [00:44:38][19.1]

Alec: [00:44:38] Do it. So Tim, when we're at the start of this interview, you were talking about going, travelling and taking five investing books with you. So I've been waiting in anticipation to ask you this question. All interview the first of our final three questions. Do you have any books that you consider a must read? [00:44:55][16.7]

Tim Carleton: [00:44:55] Yes, and I will limit it to a few. I have hundreds. So anything by Warren Buffett. But if you're if you're reading what he has to say, Laurence Cunningham has put together a compilation of his letters to investors in a very digestible format. So I would strongly encourage that. Phillip Fisher Common stocks and uncommon profits is a very good one. The most important thing by Howard Marks is also outstanding and strangely for a value manager. One up on Wall Street, by the way, you're already laughing at me, so maybe we maybe we. [00:45:32][36.9]

Bryce: [00:45:32] Delete that one. Okay. [00:45:34][1.2]

Tim Carleton: [00:45:34] Good. [00:45:34][0.0]

Tim Carleton: [00:45:36] By Peter Lynch. [00:45:36][0.4]

Alec: [00:45:37] Love it. Love that. I love that. I was busily typing notes there. We love the idea of pulling out what makes a great company. And so forget the investment thesis today. Forget the valuations trading up today, just purely on the fundamentals of the company, what it does and who runs it. What's the best company you've ever come across? [00:45:54][17.8]

Tim Carleton: [00:45:55] I think Google, the fact that they were able to achieve a near-monopoly in search in many developed countries is an extraordinary feat. And as a result, that business just prints money. It's extraordinary. [00:46:11][15.6]

Alec: [00:46:12] It's unbelievable. Yeah. Yeah. And then final question. If you think back to your youngest self taking a punt on some Internet stocks back in the day, what was that, sausage software? What advice would you give to your younger self? [00:46:27][15.0]

Tim Carleton: [00:46:28] I think two things I'd say in relation to investing. Be patient and time is on your side. Let the opportunities come to you. And then the second would be read widely. And we have a philosophy within the firm which is the the longer it took the person to prepare the material, the more you should focus on reading it. So if it's a if it's a newspaper article in the morning that, you know, a journalist pumped out with five other articles, you say it's got news, it's got news value. But in terms of helping you as an investor, it's probably less useful than, for instance, the, you know, life recollections of a very successful investor that gets to the end of a 50 year investment career and decides to put all of their investment wisdom into a book. Right. And if that book has survived a period of time, it's probably because the lessons are invaluable. So we. Try to spend a proportion, amount of time reading material that spent that was, you know, took longer to repair because it's indicative of the value they're going to get out of it. [00:47:38][69.9]

Alec: [00:47:38] I love that. And all that makes that makes me think of is all those algorithmically generated articles about like I'm sure that it's all is. [00:47:47][8.5]

Bryce: [00:47:49] Well, Tim, it's been an absolute pleasure. Thank you so much for coming on the show. Thoroughly enjoyed that interview as I'm sure many of the Equity Mates community would have as well. Cannot wait to hear what you put up for the sign Hearts and Minds Investment Conference, and we'll definitely have to get you back on at some point to to unpack that stock pitch plus I imagine many more. So thank you so much. 

Tim Carleton: [00:48:09] Thanks