Expert Investor: Andrew Brown – Finding Opportunities in 2020

Bryce Leske: [00:01:28] Welcome to another episode of Equity Mates, a podcast where we help you learn to invest in 45 minutes or less. We break down the world of investing from beginning to dividend so that you can hopefully make some returns. My name is Bryce and as always, I'm joined by my equity buddy Ren. How's it going. bro? [00:01:41][13.4]

Alec Renehan: [00:01:42] I'm very good Bryce very excited for this episode. I don't want to play favorites, but one of our favorite experts back on the show, the very first expert to come on Equity Mates actually all the way back in 2007. [00:01:53][10.8]

Bryce Leske: [00:01:54] Yeah, hopefully not the last. No, it is a great pleasure to welcome back Andrew Brown to the show. Andrew, welcome. [00:02:02][7.6]

Andrew Brown: [00:02:02] Thanks, Bryce Good afternoon. [00:02:06][3.5]

Bryce Leske: [00:02:07] For those who have just joined the show and haven't listened to any of Andrew's episodes, firstly, welcome to The Journey of Investing and Equity Mates. Secondly, we suggest you seek out the interviews with Andrew because they are incredibly full of insight. And thirdly, Andrew is a highly experienced investor with a history of 35 odd years. Investing in the markets has worked in Australia, London, New York. So pretty experienced. And we're happy to bring him back to unpack sort of what has been going on since we last spoke to you, Andrew. When was that mid crisis? [00:02:40][33.0]

Andrew Brown: [00:02:40] Yeah, it was. We spoke just before the crisis, really. And then we had a quick chat during the crisis. Yes, I think. Right, right. In the sort of epicenter of it. [00:02:49][9.1]

Bryce Leske: [00:02:50] And since then, buy now, pay later has gone nuts. Donald Trump has gone more nuts and the markets have just gone even more. [00:02:57][7.1]

Alec Renehan: [00:02:58] So you're here to be the voice of reason on the show end. But before we do, there's one piece of housekeeping we're halfway through. I'll build an ETF competition to build excitement around ETFs for our three part series that we're going to be releasing in October. So if you haven't signed up or if you haven't submitted your entries for the competition, think of an idea of an ETF that doesn't exist yet. Submit it for your chance to win a thousand dollars, then go to the Get Started Investing podcast feed and subscribe there, because that's what we're going to announce the winners. And now, Andrew, I'm going to turn it to you. This whole competition is about coming up with an idea for an ETF that doesn't exist yet. But you think should I'm going to put you on the spot. Do you have an idea for an ETF? [00:03:41][43.7]

Andrew Brown: [00:03:42] Oh, I certainly do. [00:03:43][0.8]

Andrew Brown: [00:03:45] you may remember in my year, right. It's February twenty eighteen when the VIX went nuts in the US. And you may remember they were a couple of products which were one of which was done by Credit Suisse First Boston, and they were what were called inverse VIX ETFs. And what had been happening is people had been basically buying these inverse evicts. And because of the way the VIX works, the VIX has stayed really, really low. And these inverse VIX seats were basically just minting money for people. And you may have heard the phrase picking up sixpences in front of a steamroller. And that's effectively what these people were doing. And what happened is with these inverse fixes, one day they were quoted at 99 and the next day they were zero because the VIX went bananas. So my idea for an ETF is the inverse buy now pay later ETF, which is basically an ETF comprised of short positions in buy now pay later companies. So basically, if if these things go down, it will go up. And of course if they carry on going up, it will fade away to nothing much at all. So there is an inverse being pale. And of course if you want to get really sexy because most of these inverse products, they don't just have an inverse product, they have a three. Tomsky Yeah. So so part B is the triple play. [00:05:17][91.6]

Andrew Brown: [00:05:20] the ticker code will be CRASH [00:05:22][2.1]

Bryce Leske: [00:05:25] Nice [00:05:25][0.0]

Alec Renehan: [00:05:29] There you go. Well that's a good one. I think we will be touching on the buy now pay later highlight a sector later in this conversation. So let's not front run all of your opinions on Shimao by letter, but I'm sure people have a general idea of where that conversation is going to go. [00:05:43][14.6]

Andrew Brown: [00:05:44] Yeah, there's some subtleties. [00:05:44][0.7]

Alec Renehan: [00:05:47] So as Bryce said, we touched base briefly in the midst of the crisis. But, you know, a lot has happened since we really sat down and had a conversation. Yeah. So I guess if we start General, what's what's up? How do you make sense of just everything going on over the last few months? [00:06:04][16.6]

Andrew Brown: [00:06:04] Sure. It's not that hard to unpack. Funnily enough, it may sound really strange. It's not that hard to unpack. If you go back to February, the markets actually topped out on the 19th of February. I'd get to really make reference to the S&P 500 in the year because that's been the key driver of other markets, to be blunt. Yeah, so not the Aussie market specifically, but the index really topped out the. At about 30, 400 or thereabouts starts to see people just be a little bit wary about what was going on with the virus, and then that really start to gather steam, obviously, as we got into March. And you start to have this extreme volatility in March with, you know, markets moving seven, eight per cent a day, you know, basis circuit breakers being invoked in the US virtually every day. And it really culminated on the twenty third of March, which is the real bottom of the market. And the bottom was really created by the Federal Reserve Board saying we think the market for US Treasuries is illiquid and you are talking US Treasuries are the most liquid piece of paper on the planet. They are the piece of paper about which virtually every other instrument on the planet bonds, you know, credit spread between your bond and the yield on a Treasury bond and equities. You know, it's the ultimate risk for a yield. So you put some kind of pricing mechanism above that into equities and they were getting illiquid. So that's when the Fed really came in and said, you know, unlimited liquidity, you know, unlimited. And, you know, we will print money. We will do what you know, it's not the whatever it takes, but it was just unlimited liquidity that got the market to settle down a bit. And that wasn't surprising. But what was surprising, of course, was what happened after that was once we got into April, May and beyond, which is that the market just took off. And the reason the market took off with the benefit of hindsight is the fact that there are a whole bunch of stocks in the US that were really pretty much Covid safe. So the major technology companies, most obviously the Apples, the Googles, the Facebook, the Microsoft, some were categorically Prokop. So Netflix most obviously, and those kind of stocks took off and they've been repriced to the most astonishing degree. That's the astonishing bit. By way of example. If you go back to the end of 2018, Apple shares were trading on about seven point eight times the value of their equity, plus their debt. They have net cash, obviously divided by the earnings before interest, tax, depreciation and amortization, which is a mere 79 billion dollars between you and I. Now that those earnings are not moving, they're not going up. Okay. What's happening is basically earnings for Apple for their products are coming down, but the earnings from services obviously are expanding quite rapidly. So you would expect the multiple of that 79 billion to expand a bit when it's expanded a bit, it's gone from about seven point eight to 24 and a half. Wow. Okay. And in essence, that's what's really gone on with the major technology companies. To the extent the Big Five tech stocks now make up over 21 percent of the S&P 500 index because they've just so dramatically outperformed, if you want to see that in action, just Google equal weight S&P versus S&P and you'll see that the equal weight S&P has lagged really dramatically. Equal weight just means that you'd put basically a dollar into each of the 500 companies. Yeah, as opposed to the capitalization weightings, you know, where Apple obviously, you know, gobbles up the most [00:09:42][218.3]

Alec Renehan: [00:09:43] as part of our ETF competition. I've been behind the scenes lobbying to get some equal weighted ETFs into Australia. [00:09:49][6.5]

Andrew Brown: [00:09:50] Yeah, absolutely. Yeah, they do make a bit of sense. Sure. So that's been one of the most fundamental things. And so what you've got is you've got big tech has turned out to be Covid cyphers. You know, the reason that you don't need Valenstein to work that out and there's various other sectors obviously have just been decimated and have not really bounced to any great degree. So the Covid SCIAF, it's dragged along a few other things, most obviously just bog standard basic consumer products companies. Okay. You know who, you know, have the same issue in the US? We did. So, you know, you have to look at the stock price, someone like Clorox, which makes bleach as boring as four years. And, you know, all of a sudden, you know, it's up [00:10:30][40.4]

Alec Renehan: [00:10:30] dramatically when Trump tells you to inject it in your arm. [00:10:33][2.3]

Andrew Brown: [00:10:35] Exactly. But if you have a look, I mean, one of the most obvious things in the US market, for example, the most the biggest laggard sector is financials, which is banks. So something like JP Morgan just give you an idea. They were 135 bucks, pretty, pretty Covid, let's call it. They got down to about 88 and they're still only 99. So they've bounced, but they're really bounced like 10 per cent. And you can see that with Bank America, they were 35. They got as low as 21. They still only 24. [00:11:03][28.3]

Alec Renehan: [00:11:04] Is that because of the low interest rates? Absolutely. Yeah. Just for people who aren't familiar with banking stocks, maybe if you can do a bit of a basics one on one to explain it. [00:11:13][9.3]

Andrew Brown: [00:11:14] Yeah, absolutely. The best way to explain it is imagine the price of your cost of goods sold, which in the bank's case is money. Imagine the cost of it is. Zero. It really can't go below zero for a bank it has done in Europe, I acknowledge. But let's let's just take that out of the equation. And as interest rates come down, the amount of money you can charge your customers comes down so your margin gets squeezed. OK, so you're not really getting any cheaper money to to lend on. And the margin that you can lend it on is getting squeezed. Your fees are getting squeezed because of competition and because of the economic environment in the US and everywhere around the world, your propensity to lend is much less. OK, well, you can see that in Australia we can have all the job keeper in the world and people sort of sustaining themselves on it. And, you know, whilst the economy's obviously in a bad way, it's kind of, you know, it's sort of off the bottom. But the problem is banks are not going to lend you money if your income is job. Yeah, and it's exactly the same in the US. So the volume of money these guys can lend out is reduced. And so the banks are making money out of securities trading, particularly bond trading and everything else. And that's not a big. Yeah, that's that's not a big multiple business, I'm afraid. Yeah, that's a broad reason why [00:12:37][83.3]

Bryce Leske: [00:12:37] just do a little off topic. And I know we've got a few things to get through and Alec wants to touch on Trump. [00:12:41][4.2]

Alec Renehan: [00:12:42] I'm pretty. [00:12:42][0.1]

Bryce Leske: [00:12:44] Just briefly, given that interest rates are so low and you mentioned before, Andrew, the using, I guess, your risk free rate when it comes to Treasuries, how how are you thinking and valuing stocks now, given that you're risk free rate is essentially squat? [00:13:00][16.2]

Andrew Brown: [00:13:02] That is there is a really interesting question, Bryce, because that is the fundamental break, if you will, between someone who would describe themselves as a growth investor and someone who's a value investor, a growth investor now can ostensibly counter or my stocks worth infinity. Yeah. Kiss my, you know, my interest rate zero. And so you've got to compensate for that with with a higher equity risk premium. You know, in other words, you know, a bigger risk component that you're using in a discount rate to discount back tomorrow's money to today's value. And that's not being done quite clearly. People have adjusted discount rates down dramatically. That's the heart of the argument. You know, the Tina argument, there is no alternative. That's the heart of that argument. And the other issue is, I mean, you know, these very low rates are going to be around for quite some time. Yeah. If they're not, we're going have a hell of a problem. Yeah. If in trying to stoke inflation, central banks are too successful. [00:14:03][61.1]

Andrew Brown: [00:14:06] That will be really painful. It will not be nice. And yeah, there are some people stuck in that sort of place, some very kind of out of the money bets on that [00:14:14][8.5]

Alec Renehan: [00:14:14] happening on inflation [00:14:15][0.7]

Andrew Brown: [00:14:17] on inflation picking up. I'm pretty cynical about it because I think the demand side of things just won't be there, should start taking government support out. But there's a point of view for that. But that no, you've hit on the real issue Bryce the, if you will, infecting equity markets. People can justify, particularly for companies that are growing. Yeah. They can justify any valuation they want. And so they don't bother with the valuation because it's too hard. And so what they're doing is they're focusing on the business model. Yeah, this is a great business. These guys are really good at it, blah, blah, blah. And I mean, there's a myriad of examples in Australia, let alone a myriad of examples in the US. The biggest thing that it's doing is it's pushing out the time horizon over which you want to see a profit from the company that you're investing in. So it may have a good product. It's not quite making money at the moment, but you think it will make money and you're quite happy to wait till 2025 for it to make money as long as the trend is moving in the right direction. And there's a whole sector in the US, the SAS stocks, I mean, there's a proliferation of these things that are cash flow negative, were it not for the fact they paid large slabs of compensation in stock. You know, if you if you turn that stock based compensation into cash, they've been in horrendous trouble. And of course, there's plenty of companies in Australia in that kind of sexy growth areas is doing a similar thing. [00:15:44][87.2]

Alec Renehan: [00:15:44] Now, let me play devil's advocate for a moment. Isn't it good that the market is willing to be patient and let companies develop and make a loss for a little bit of time and, you know, fully mature? Like, isn't it good that investors are becoming more long term in their thinking? [00:15:59][14.7]

Andrew Brown: [00:16:00] Yes and no. In terms of yes. You know, just in essence, you've put the pro case for it being more long term in your thinking about the extent to which you have to be long term at these type of prices for companies is absurd, because what's happening is that you are going to create if these companies have access to capital markets. We see what's ostensibly zero cost capital, then they're going to become zombie companies, they're going to keep spending on marketing and other things. Yeah, and as we've seen, we'll touch on BNP Pale. But, you know, I obviously don't want to obsess about it like the end of this broadcast. I mean, there is no market in the NPL. It's pretty obvious. But that's enabled, you know, every kind of, you know, Bryce pie and Ren pie and Andy pay to, you know, emerge out of a cave. Yeah. And it's because there's basically been free access to capital for, you know, for basically a bunch of coders that have been able to code up a sort of installment pay app and get some backers for it. [00:17:09][69.4]

Alec Renehan: [00:17:09] I've got a thesis about by now Pilade. I'm interested to have that conversation with you, but we'll leave it till the end because we will obsess about it. Yeah. I want to come back to Bryce's original question around discount, right? Yeah. And tie that up. Yeah. We've spoken about how difficult it is given the risk free rate of US Treasuries. Yes. Next to not. If I can ask a personal question and feel free to just answer generally, what are you using for your discount rate at the moment? [00:17:36][26.2]

Andrew Brown: [00:17:36] Okay, depends what sector I'm in, but I still want if I'm an equity investor, I'm reckoning. I need to get basically somewhere between a seven to 10 per cent annual return. And in spending on the risk in the business, I want much more than that. Yeah. OK, what's remarkable, guys, is that the discount rate, if you will, for stocks just just as a generalization is kind of, you know, pretty close to zero, you know, in a lot of these companies actually make. No, I mean, there is no cash flow to discount. Yeah, exactly. Okay. So, you know, you can just put a finger in the air. Of course, the alternative is when you start looking at other sectors and I will touch on two today, real estate and in particular retail where it will start and oil, you know, the discount rates are enormous. They are gigantic. And so, in fact, the risk premium in those sectors is too big. Hmm. Far too big, in my opinion. I mean, the thing that we get going to get to in this is that the opportunity for things that are bombed out and underpriced versus things that are just extravagantly overpriced. We're in kind of April 2000. It's as good as it was then value investors and had a seven year run, the like of which they've never seen in their lives before, versus growth investors who were just scrambling around in the dirt [00:19:03][86.5]

Alec Renehan: [00:19:03] for people who may not get the April 2000 referents tech wreck. Yeah, you're saying that the market was so top heavy with tech stocks, but at the same time there was a lot of opportunity in unlove sector. [00:19:15][12.2]

Bryce Leske: [00:19:16] But surely the underlying conditions now for the stocks that are beaten up is completely different to that of 2000? [00:19:21][5.7]

Andrew Brown: [00:19:22] Not necessarily. Depends what sectors that you're looking at. [00:19:25][2.9]

Alec Renehan: [00:19:26] Trump said we'll have a vaccine by November. [00:19:27][1.4]

Andrew Brown: [00:19:28] So I don't want to mix different cycles because you know, where we are now, I think got real mixtures of the tech wreck, which was 99 into early 2000 and the peak in March 2000 when the dotcom bubble burst. And what you had, you had a whole bunch of other stocks. I mean, go back and read Warren Buffett stuff from that time because there blokes washed up. Finished. Yeah. And then, of course, you perform the house staff in the next few years. Yeah. You could see the same in Australia. I mean, I remember you know, I was at Rothschild at the time we bought we were buy really good Australian companies on PEs of 11. Mm. [00:20:04][36.3]

Alec Renehan: [00:20:05] Must be nice. [00:20:05][0.5]

Andrew Brown: [00:20:06] Yeah. And of course they then you know some of these things just doubled in size six months and then of course you have 2000 and eight, nine and there are some nice comparisons we can make with one or two things. They're different set up obviously, but certain value type things got absolutely smashed at that period of time. [00:20:29][22.8]

Bryce Leske: [00:20:29] Well, you did mention retail and oil. Yeah, I know there are a couple of stocks in that sector. So before we jump to Ren, let's let's run. [00:20:38][8.4]

Alec Renehan: [00:20:38] This is an interesting company. Yes. [00:20:39][0.9]

Andrew Brown: [00:20:40] Yeah. Just just to give you an idea. I mean, in Australia, I mean, one of the biggest sectors in Australia, I mean, you may say Australia got away with, you know, with next to nothing in the GFC. OK, of course, if you are an investor in rates, real estate investment trusts in Australia in 2000, like 2007, you got absolutely smashed to pieces. And it virtually is irrespective of which sector you were in, you know, whether is retail office or industrial. And some of us, you bounce quicker than others. And what you found is that because all these trusts had too much debt in them at far too much debt, to give you an idea, I went back to some notes I had from March 2009, which was a. Out the bottom of the sector and the sector in Australia, the market value of 44 per Dollars billion and it had debt of 88. [00:21:30][50.4]

Speaker 3: [00:21:31] Wow. [00:21:31][0.0]

Andrew Brown: [00:21:32] OK, so the debt to equity market value is two to one. And of course, they're all out there frantically raising money as quickly as they could. So you look at GPT, for example, which is a big, you know, big rate JP théâtre to Jumbie Rights issues to right the ship. And if you're an investor in 2007, you're still you're still underwater. Yeah, well, okay, you're underwater 13 plus years later. But one of the things I used to look at is rates are great because they really stabilize your mind about what the hell investing is all about. And the reason I stabilize your mind is because there is a real asset underneath the rate. Yeah, it's an office block or a shopping center or or a tin shed, as I call them, and industrial units. And obviously this time around, the things that suffered of office and retail. I am not a bull on office because I think the rents have been too high. And I think that people's way of working is changing. And, you know, I believe we're going to work from home forever. But I do believe that we may be only going to visit the office maybe twice a week. I think people have called if they like the flex and they like the flexibility. And if that's the case pretty much everywhere around the world, we've got too much office, real estate. I mean, one of my biggest investments at the back end of last year was Vornado Realty Trust, which is the biggest office property stock in New York. The stock looked really, really cheap at 70, had some fantastic developments and everything else. And of course, the world's changed stocks now 33. Yeah, and you wouldn't touch it with a bargepole. [00:23:09][97.2]

Alec Renehan: [00:23:10] New York's a particularly difficult market because it's developing so much new stuff. [00:23:13][3.7]

Andrew Brown: [00:23:14] Yeah. Donata is the biggest developer of the new stuff as well. So, yeah, that's just one of the things I don't think has changed the shopping center. Okay, so the show [00:23:22][8.4]

Alec Renehan: [00:23:23] is interesting in the [00:23:23][0.8]

Andrew Brown: [00:23:24] short term. Yeah, absolutely. Of course, you know, they're not in a good spot, but they've reinvented themselves to degree already in pre Covid because they've become more entertainment complexes. People actually like going shopping because it's a social activity. [00:23:38][14.3]

Alec Renehan: [00:23:39] You and I have very different views on shopping. [00:23:40][1.5]

Andrew Brown: [00:23:45] I am not saying that you are not going to order in a substantial amount more than you did pre Covid online. I accept that. But there is there is a certain element about actually going shopping, going visiting, having coffee. My shopping centers have got a Coles or Woolies in them, you know, so they're the key attractions. Some of the centers are going to get decimated because, you know, it is inevitable Myer will go broke. It's probably inevitable that David Jones will downsize depending on the South African parent. Okay, so that's going to create some problems. But these things are real destinations. Okay. You know, they've got lots of other things in them. Now, what's the thing behind this story? If you look at a property trust, it's got the value of the equity in the property trust and they've all got some debt. Okay. Now, with one exception, they've got a lot less debt than they did last time around. But what's happened because the share prices of these things have all not all, but a lot of them have caved in, is there are now three large scale retail property trusts that you can buy, which values the property that they own at around a 25 to 30 per cent discount to book value. Well, OK. Now I'm saying sure. Short term. Yeah. You know, think got Solomon Lew, you're not kicking him up the bum saying we know we want to change the rental scheme and everything else. Obviously some of them, like shopping centers, are a shop, OK, but they will come back. They will bounce back, they will get tenanted up again. They're still getting about 80 per cent of Ren. Not too bad. They're paying the way in with low debt. They're okay. So, yeah, for example, to you know, to give you let's put some numbers around and just give you a bit of an idea to the biggest ones that are based in Australia are company called Vicinity. The stock's stock has PVCs. They got a market value of six and a half billion. They got data three point seven. So the total value of the market is ascribing to their assets at ten point two billion. The value of the assets in the books is fourteen point three billion. Wow. OK, that's on about a five point seven per cent capitalization. Right. [00:26:01][135.8]

Alec Renehan: [00:26:01] I might just explain when you've taken the company's market cap and then added in the debt. That's a metric known as enterprise. [00:26:08][6.1]

Andrew Brown: [00:26:08] That is a metric known is enterprise. I imagine the best way to conceive of it is imagine I want to take over Ren. All right. So I pay so much equity for four for Ren and I assume Ren debt. On his house. So basically, if Ren has a one point, one million dollar house and he's got a million dollar mortgage, okay, then I might pay him 50 grand for his equity. And I get in a bit cheap because I get his one point one million dollar house for one point five million. Okay, so that's what we're looking at here. So what I'm saying is you can buy fourteen point three billion in shopping centers for an effective value, just over 10, and that's about a 30 per cent discount. Hey, guess what? That's where this whole sector was at its worst in March 2009, sent a group, by the way, similar calculations, 12 billion of equity value, 14 a debt, 26 billion. The properties are worth 34. Okay, according to the value. Now, I should tell you, property trusts ply their valuers with very expensive Japanese whiskey. [00:27:19][70.5]

Andrew Brown: [00:27:21] and other things we can't talk about on the podcast. [00:27:23][1.9]

Andrew Brown: [00:27:27] So that one's about a 25 percent discount. The best one. Also the best. The last is the big kahuna of the lot center group, by the way, on Westfield in Australia. OK, so that's where so Westfield Bondi Junction is center group is not owned by anything called Westfield anymore, which is owned by something called Westfield High, albeit part of a great big lawn company name called UNIDO or a Demko Westfield, Yenny Bells, French for Damasio's, Darch and Westfield Dinky Di. They own 56 billion euros of shopping centers around the world, you know, like us, Poland, France, London, the other and the big things that Westfield, London, Stratford, next to the Olympic Village, things like that. [00:28:14][47.1]

Alec Renehan: [00:28:14] They own the thing that Westfield that Westfield built up near the 9/11. [00:28:18][3.9]

Andrew Brown: [00:28:19] Absolutely. That's right. Yeah. So they've got they own that it's 56 billion euros roughly of book value property. Now, you might think the book value is a nonsense because the stock market certainly does. These shares are down the best part of 80 per cent. Wow. OK, they tried it in Australia as a what's called a CDI, which is a it's basically a depository instrument. So their real trade is in Europe. They've got an equity market value now, down 80 per cent of only four and a half billion euros. Well, they've got 24 billion euros of debt, which they're about to reduce because they're going to have a big equity issue. And so what it means is if we had 24 to four to bit, we get 28 and a bit billion euros versus the property in the books at about 56 billion. So it's nearly it's a 45 per cent discount to the book value. Well, I don't mind telling you. I've got to disclose. I have a shareholding in vicinity. Yeah. And and I have a much smaller shareholding because it's pretty obvious if the market thinks the equity is worth 400 billion versus debt of 24, it's a bit risky, but I do have a smaller position in the individual as well. [00:29:28][69.2]

Bryce Leske: [00:29:28] What's your time horizon on these, though? [00:29:30][1.6]

Andrew Brown: [00:29:31] Oh, 12 months. Really? That's OK. They don't. Hey, imagine people start getting bad. I mean I mean, let's be blunt. One of the things about vicinity and while the discounts so big is because they've got 70 centers in Victoria, many of which Shasha, I've got to say, if you think Victoria's going to open up and explode positively from an economic standpoint is probably the most obvious place you can find. [00:29:55][24.6]

Alec Renehan: [00:29:56] So let me ask you, why the discount then? Because, you know, there meaningful discount and it's not, you know, a discount to an expected future. Cash flows mean the discount to the value that a valuer is putting is put on. [00:30:10][14.5]

Andrew Brown: [00:30:10] Absolutely. But you can do your own valuation if you want. You can create your own values for these things. It's really big. Professional portfolio managers do that. They build you know, they build out DCF and spreadsheets to do so. [00:30:22][11.8]

Alec Renehan: [00:30:23] Is the market expecting the value that the the properties are valued at to come down? Absolutely. And with that equity, [00:30:29][6.6]

Andrew Brown: [00:30:30] yeah, it's expecting it to come down. And I mean, there are two or three things. I mean, first of all, they're expecting obviously distributions or dividends, if you will, from these rates to be not, you know, not as good as they were previously. So you've got to price the equity down for that. Secondly, a lot of people are taking your standard view online. Shopping is going to kill is going to kill off a lot. Yeah, okay. I mean, we've all seen pictures of malls in the U.S., but they more you know, the US is a different demographic to Australia. There are so few major cities in the US. It's not funny. Yeah, the big cities are not big, you know. I mean, the fifth biggest city in the US barely existed in the 1940s and 50s. Phenix Right. Why is middle of desert. Okay. And so whereas, you know, in Australia, well, we've got we've got these two behemoth cities, you know, Sydney and Melbourne, OK. And the whole point of shopping centers is clustering you cluster shopping centers to create local monopolies, you know, which is you know, that was the Westfield model, you know, what do you think, Westfield? I mean, it's like got Bondi Junction. What's the next biggest shopping center near the Bondi Junction? [00:31:37][67.3]

Alec Renehan: [00:31:38] He's isn't there one right next door to Bondie? [00:31:40][2.0]

Speaker 3: [00:31:40] Yeah. Yeah, it's not big. I that's that's small. [00:31:43][3.3]

Andrew Brown: [00:31:45] I was going to use another analogy. I altered my list. It's a different set up in Australia, but you know. Yeah it is. It's all about people saying offline shopping. Ed, we're all we're all just sitting at computers and we don't shop online, and there's going to be an ongoing decline and the rents are too high. OK, that's the third part of it, that rents are too high. Yes, they are. I agree with AdCenter group have not distinguish themselves in this, you know, trying to hold people to rental agreements through Covid, you know, without any give and take and no sense of trying to do it in many cases to the sort of commercial agreements that Scott Morrison put out there. You know, whereas most other tenants have, you know, Citigroup, a group, have been hard and maybe too hot. [00:32:30][45.3]

Bryce Leske: [00:32:31] Now, before we move to Trump, which I know everyone wants to do. You did mention oil there. And I know you want to talk about Exxon Mobil. But, Andrew, you also did say in a text message before that you want to chat about the most infamous phone numbers in an exchange, a nine nine eight four. Yes, you will get a shock. [00:32:49][18.3]

Alec Renehan: [00:32:50] And honestly, we had no idea what that meant and we didn't look it up because we wanted to be sure. [00:32:55][4.6]

Alec Renehan: [00:32:56] Well, should we talk about oil? [00:32:57][1.0]

Andrew Brown: [00:32:58] This is obviously Exxon Mobil just got booted out of the Dow Jones Industrial Index. You're basically in a situation now because of the machinations in the oil price really over the past two or three years, oil stocks have been obviously very poor performers. In many cases. They've been over distributors of dividends in many cases are geared up to buy back stock. And Exxon certainly has been guilty of over distributing on the dividend. But what you're now left with is a situation where Exxon is likely to write down its reserves. One of the key things about an oil company is if the oil price is really low. So if the oil price is 40 bucks and you've got an oil field that's only really profitable at 50. Mm, you can't book the reserves because you're never going to drill. You're never going to drill them out. Quite clearly. If the oil price is what you notice, you can see this, you know, go-go look at any oil company in your report. You know, it's the oil price, 100 bucks a barrel. You know, all of a sudden their reserves expand dramatically, you know, because the areas that were marginal now become very profitable. So Exxon a lot you to write the reserves down by about 20 per cent. I've sort of flagged that, but haven't done it yet. But even if you take that into account at the current market value of Exxon and adding in their debt, their net debt is actually quite small, then you're paying about eight point fifty for every barrel of oil in their reserves. That's pretty damn cheap for, you know, one to one of the top, you know, four or five oil companies in the world. So it's a pretty interesting area to start, you know, looking across. So I own Exxon, but I also own something called. I See, which is the iShares Global Energy T.F.. Okay. And the top three holdings in that, of course, Exxon, Chevron and Total the French company. So, yeah, oil's a really interesting countercyclical play. You've got to remember, there's far more oil traded on financial markets than in reality. And that that's why oil moves a lot, because you find traders go one way. If you find hedge funds are really sure, oil just go go long because they get it wrong time after time after night. So it's one thing they just get wrong time and time again. And, you know, if you can tell me why, you know, in a couple of days leading up to this podcast, oil was down six percent and then up six percent because of Donald Trump, you know, makes no sense. I'm going to keep nine nine eight four for life. [00:35:24][146.4]

Alec Renehan: [00:35:25] OK, Can I just ask one follow up question about oil? So you were saying that Exxon's reserves are priced at about eight dollars a barrel in their share price? And for context, the West Texas intermediate oil prices around, what, 40 bucks? [00:35:39][14.3]

Andrew Brown: [00:35:40] It's about? Yeah, it's just slightly under forty. [00:35:41][1.4]

Alec Renehan: [00:35:42] So what is leading to that discount? [00:35:44][2.0]

Andrew Brown: [00:35:44] What's leading to a discount is a few things. First of all, there have been some deliberate divestments of Exxon stock based on basically green trends. You know, so, you know, for example, one of the world's largest investors, the Norwegian Sovereign Wealth Fund, you know, they've basically been divesting various fossil fuel stocks. [00:36:03][19.1]

Alec Renehan: [00:36:04] Ironic that so much of that fund was built from fossil fuels. [00:36:07][3.1]

Andrew Brown: [00:36:07] Absolutely correct. [00:36:08][0.7]

Andrew Brown: [00:36:09] And there are a number of other investors around the world who've taken a view on fossil fuels. And so, you know, Exxon goes like divest it. Secondly, obviously, at current oil prices, you know, the company is profitable at current oil prices. But don't forget the last quarter they made a loss because the oil price you might remember the infamous day, the old price hit minus Ren. So, you know, they obviously were hit with a weaker price then and they did lose money. So their earnings are obviously very, very depressed at the moment as well. But I mean, it's pretty well known. You always buy you buy resource companies, not when they're, you know, not when their product prices are very high. You buy them when the prices are very low, when they're barely making any money. And then obviously the product price increases the. They are highly levered to most resource companies are highly levered to the product price because their fixed costs of extracting whatever the product is, no matter what gold or iron ore, oil or whatever [00:37:06][57.0]

Alec Renehan: [00:38:19] So Andrew, Bryce keeps flagging it every time we move to a conversation about what to talk about Trump and obviously this last week has been a fascinating one because the president of the United States has got Covid. And it appears that an event at the White House was a super spreader event. And a number of White House staffers and politicians have got Covid as well. I guess from a market's point of view, how have markets responded and how do you expect them to respond to some of the, you know, different range of outcomes? Sure. [00:38:53][34.0]

Andrew Brown: [00:38:54] One of the obvious things to me is the market obviously fell quite sharply when it became clear that Trump had Covid and then it's bounced quite sharply. There's some different questioning as to why it's bounced quite sharply. And I certainly tend to probably the minority view. I think that a second Trump presidency would be inexorably bad for stock markets. And the reason why is because he will probably, you know, he won't have an overall majority. There's no way the Republicans will hold, you know, the House and the Senate. But with the second presidency, I think quite bluntly, Trump will go mad. And will, you know, the more extreme components of his makeup will come to the surface. And I think that will be horrendous because you just think about what you've had in his first presidency. I mean, you've had horrendous trade disruption between the US and China. No make no. You know, I make no comment on the politics of that. There might, you know, rationales for it and others that are not. You've had a complete desertion by Trump of his friends in Europe. So, you know, the US coalition in Europe is very weak indeed. And I think that, as I say, I think a second Trump presidency would bring that to extremes, which would have much more impact on stock markets, because the first one basically was, you know, was was driven by a big tax cut. You know, the added sort of 12 Dollars plus the S&P 500 earnings is a one off. So I quite frankly, I was a bit surprised that the market was worried that Trump had Covid on Friday and fell to the degree it did. Whereas I think a Biden presidency, you know, notwithstanding, he's old and people are frightened, you know, rigid, that it becomes a Kamala Harris presidency. So I acknowledge that risk. But Biden's going to be really much more straight down the middle. And so you're actually going to get a return, I think, to much more sensible equity market conditions that do not get driven, you know, by are we in a way kind of negotiating with China? Yeah. The amount of inside information that's going on. Yeah. And the amount of leaks that have driven markets sort of driven into, you know, two, three, four percent gains in a day, you know, and you sort of things kind of, you know, sense a Trump tweet or something. So I think we're going to get rid of that. And I think it's generally going to be good for markets. I think there's going to be a lot less unpredictability. You know, Biden's going to be fairly predictable. And I happen to think that's good for business, is good for earnings. And I think over a period of time, Biden will actually be good for stock markets, much better than Trump. You will have to get over the hurdle of the fact that the likelihood is that the corporate tax rate will go back up. And it wouldn't be surprising if the Democrats started to put some measures in place to basically equalize the US society by taking away money from multimillionaires and redistributing it elsewhere so that you may think, well, it's bad for markets is actually not bad for Mark. [00:41:56][182.2]

Alec Renehan: [00:41:56] Yeah. Potentially increases the consumption from a lower middle class. [00:42:01][4.6]

Andrew Brown: [00:42:02] Absolutely right. So my view certainly is that if Covid is derailing Trump's campaign, which inevitably it is because it's derailing some of the people that are helping him, if it means and certainly the betting markets are saying that Biden's chances of strengthened dramatically over the last week. I actually think over sort of a two or three year period I think is a good thing. Yeah. You know, quite frankly, on a personal note, because of the impact that he has and because of his unpredictability, I don't think I could stand another four years as an investor. [00:42:33][31.2]

Alec Renehan: [00:42:33] Yeah, well, they always say that the presidential second term is a little looser because they never have to answer to voters again. [00:42:39][5.4]

Andrew Brown: [00:42:39] Absolutely not. And yeah, this is a guy who's been pretty loose in his first as well. [00:42:43][4.6]

Andrew Brown: [00:42:45] And I just think for American society as well, quite frankly, it's [00:42:48][3.0]

Alec Renehan: [00:42:48] just one more question about covid more generally. Obviously, we're entering a period where, you know, different states in the US have different policies, but also just more generally across the world, we're seeing a real fragmenting in. Oh, yeah. How different countries are responding and the different Covid statuses. And, you know, financial markets and international trade is so interconnected. But covid is there's just a lot of different responses going on. How do you think about that? [00:43:13][24.4]

Andrew Brown: [00:43:13] One of the most interesting things is that if you look at what we would typically call emerging markets and Asia. I heard a great comment this morning, if you take the Pacific Rim, which is kind of China, Japan, Malaysia, Singapore, sort of Oz, there's less than a thousand cases a day well across the current stage, whereas, you know, you got 7000 in London. So Covid is a real European issue. Why? Because you've got no boundaries. You know, you can move through Europe with alacrity and that's the problem. And so you get spreading. And that's been very much the case in the US as well. And so I think what's clear, even though you've had a big increase in Covid cases in Europe and in the U.S. more recently, the death rates are much lower and there's a lot of good reasons for that. You know, drugs, the treatment, the ability to treat and knowledge about it. Maybe there's a little bit of immunity, you know, whatever it is. So the death rates a lot. And so what's going to happen is these countries are going to really come out and say, forget it, you can have to live with it. Because if they if they shut down again and they starting to I mean, that's really that's that's really bad for the economy. How do you know that? Well, look at Victoria. We reopened and then we shut down time and yeah, Australia's been, you know, sort of on a bit incredible. Now, you know, we're always having reporters sort of parked outside, you know, kind of like now there's you know, we we think Ren may have Covid. So, you know, you go live to our reporter Bryce outside Ren temperatures up a little bit. You know, it's down to that level seriously, which is stupid. And we're now starting to over damage our economy with border closures and everything else. We've got to open it up and accept the fact that he's going to come back. But we know how to treat it. Now, back in February, we didn't know enough about it. We know heaps about it now. Yes. We'll eventually get you know, we may get a vaccine if you get vaccines are hard to come by as we've seen. But I think, you know, these countries have to learn to live with it. Mm. [00:45:16][122.5]

Alec Renehan: [00:45:16] It's I mean, we're obviously all speaking in Sydney and we Bryce and I live near a cluster that broke out. And I was really impressed by how quickly all these resources were pushed into the area. So much testing, they shut some places down and they contained it. And then a lot of that is now got I [00:45:34][18.3]

Andrew Brown: [00:45:35] got I saw it because I went to apply for my birthday. [00:45:37][2.2]

Andrew Brown: [00:45:40] Yeah. So yeah, I got I it for nine days effectively. It was brilliantly done. I got yeah. It was amazing. Always, you know I've never been so impressed with bureaucracy. Yeah. Yeah, yeah. Really. [00:45:51][10.7]

Alec Renehan: [00:45:52] I feel like that's the situation where it becomes manageable and like because I worked with a whole lot of people in Victoria who were pretty down on the whole thing. And it's like there is a way out of it. [00:46:02][10.0]

Andrew Brown: [00:46:02] You know, the economic damage at some stage starts to overwhelm, you know, from closure, overwhelms the, you know, the damage of Covid itself, particularly if you isolate nursing homes and things like that, you do sensible stuff. So, yeah, I mean, certainly, you know, I've been to Canberra recently and you know, what's Covid. Yeah. You know, the place is pretty much open, but it's just it's just strange behavior. It's about booking in. Yeah. You've got to book stuff now, you know. [00:46:28][26.0]

Alec Renehan: [00:46:28] Yeah. You've got to be in a better way to do the signing thing as well. That's really annoying. [00:46:33][4.3]

Alec Renehan: [00:46:33] But anyway, the minor gripes borne out by later has been tasered. Yes. And love hearing your thoughts on buy now pay later you last time we had you on the show, you were very strong about Afterpay. Yeah I guess [00:46:44][11.1]

Bryce Leske: [00:46:46] the stupidest speculative boom in years. [00:46:48][1.9]

Alec Renehan: [00:46:49] Yeah, absolutely it is. [00:46:50][1.6]

Alec Renehan: [00:46:51] So I'm not even going to ask a question. Just it's Bryce. Let's, let's start with that quote and say, all right guys, [00:46:57][6.0]

Andrew Brown: [00:46:57] let's look at one thing. By now, Pelada is one component of the fact that the great banking oligopoly of Australia is unraveling. OK, let's get that absolutely clear. There is a role for buying our pie later in Australia and elsewhere around the world, to be fair as well. And it's the simple part of the fact that basically millennials don't have a relationship with a traditional bank. By and large, you know, I have three kids all have accounts within GE, which is not a traditional bank in Australia. It might be in home. It's not okay. And so I have no affinity with the bank. You know, the old days of wearing a collar and tie and introducing little Johnny to the bank manager is I will well and truly over. And I forget being paid is not the only part of that. Yeah. One of the interesting things is that certainly in very, very recent times, there's been quite big moves in the mortgage broking stocks. So mortgage choice, which was absurdly cheap few weeks ago as it's bounced out, Australian finance group IFJ and then even some of the smaller ones. Why? Because basically, you know, 50 to 60 per cent of loans in Australia now organized through mortgage broker because there's so many different sources of money. And then when you think about the fact that big money suppliers, you know, like the KKR and the Blackstones of the world. Coming into this and you've got mortgage backed securities in the market here as well, yeah, the traditional banks basically are sort of now being left bereft, OK, because you guys don't have a relationship with them. You don't necessarily want one either. And you get your mortgage organized. If you want one by a mortgage broker, you're quite happy to take credit from some other source. And BNP is just another one of those components. The issue with BNP is it tends to appeal to lower socioeconomic groups, by and large, people who can't afford to go any other way. There are some smart other people and I forget Afterpay, you know, forever show you are you know, we're not sort of you know, we're not just tendering to people who don't have a lot of money. We're actually got some affluent customers. Yeah, that's because they arbitrage their credit card. Hmm. OK, you can arbitrage your credit Coulombe NPL very easily, so there is a role for it. Let me get that clear. Let me also get clear, particularly the case of Afterpay, and I think zippi as well, these companies are really well-run. You know, there's there's no question I mean, Luay Afterpay has been built is phenomenal. Their marketing is unbelievable. It is absolutely fabulous. Okay. But the question is, is it worth 24 billion dollars at the current stage of development? And the answer, in my opinion, is categorically not. They're starting to cheat a bit as well, which and when I say, OK, [00:49:47][169.4]

Andrew Brown: [00:49:49] when I say cheat, it's in terms of the marketing in the way that they're trying to get the investment community to look at them. And that usually raises bells in my mind. [00:50:00][11.4]

Alec Renehan: [00:50:01] Can you be a bit specific? [00:50:02][0.9]

Andrew Brown: [00:50:03] I would be very specific of extremely specific. [00:50:05][2.4]

Alec Renehan: [00:50:06] If you don't want to throw allegations. [00:50:07][1.0]

Andrew Brown: [00:50:10] most interestingly. So on the 19th of August, they gave an update and they said the bidder for the year ending June 30, 2020, previous guidance was 20 to 25 million. And they said we've upgraded that to 44 million. And so the stock obviously went up very, very sharply on the back of that, despite the fact it was already capitalized, you know, tens of billions. All right. So just think about how much you're valuing the extra 20 mignonette anyway. So then when the report comes out, they make 44 meaning of sort of companies, stated Eviatar, which excludes significant items which they'd specified. And I got to say the release on the 19th of August was really carefully worded. That's perfectly legal. They did not say anything in that that was in any way misleading. You had to go to the footnotes to make sure you check that out. And then once you find the 44 million that's sort of reported before, significant items and then the significant items are 30 million of costs in share based payments, six point four million of one offs, which include such one offs as international expansion costs. Why are you investing in this country? Because it's expanding internationally, you know, so that's not a One-Off cost. And that's that's that's a part of doing business. The rental bit, you know, because of the changed accounting, don't forget. So that's not Afterpay issue is just change accounting. So it's five point three million of rent not included in that. They capitalized 41 million dollars worth of software expenses that weren't included in that. So by the time we got to statutory Bittar of 24 million, down from 44 between the two is also 20 million foreign exchange gain. So 20 million of the 24 million available, it was a foreign exchange gain and then say no, Ren, you know, because that's a different part of the game. And capitalized software, a 41 million so on my numbers that she made have 41 million dollar loss. [00:52:13][122.8]

Andrew Brown: [00:52:14] Well, that's what I call cheating in inverted commas. Yeah. Okay. It's basically every company to a degree. Does you massage the numbers to get the stock market to look at what you want them to look at. And Afterpay is no different to, you know, the other 2000 listed companies. It's just that, you know, when you see a big stock price reaction and then when the result comes out and you look in the detail, you kind of go on a second. So this company is actually making these companies making what would in any terms be a cash flow loss. It's valued at 24 billion dollars. Okay. It's got a great position in its domestic market. Now it's going overseas. I believe, you know, categorically the economies are going to struggle. Okay, because, you know, as government support gradually weaned off, you know, we know a lot about it in Oz. You know, I believe their bad debts are going to rise. I believe there's significant competition. You know, we've seen that. Remember the PayPal announcement. So, you know, I just believe that the. Market capitalizations of these companies are miles too big relative to where they're actually at. OK, do I discredit the company? No. To our discredit their product? No, there is a role for it, but it's a very competitive product. Are Afterpay the best of the bunch? Probably. But they still have that significant regulatory risk that some others don't. You know, because the credit check issue and you know, are they the most overpriced of the bunch? Probably, yes. In nominal terms, you know, in terms of Dollars. But yeah, there are some other by now lighter stocks that, you know, I just think, you know, we'll do extremely well to avoid bankruptcy, quite frankly. Yeah. Afterpay will, you know, have no issues on that score because, you know, there's enough cult followers to, you know, put 786 Dollars million into it after the 30th of June. [00:54:11][116.2]

Bryce Leske: [00:54:11] So your players to go short. [00:54:12][1.0]

Andrew Brown: [00:54:13] I have a small short position in Afterpay. It is a cult company, which is why it's got a 24 billion dollar market valuation, just like Tesla is a company. You know, there's no there's no rhyme or reason why the valuations are where they are. But you've got to accept they're cults. And therefore, to have a large short position now would be silly. And I do have a small short position in ZIPPI as well. I've had short positions in other smaller buy now pay later companies. And there's one in particular I won't discuss because, you know, I think it's on fraudulent well. And, you know, basically the stock flies around a fair bit and it's recently fallen fairly sharply, but now picking up again. And I think there's another bit of scope, you know, to have another short positions. So I discuss it [00:55:03][49.9]

Bryce Leske: [00:55:03] well, a lot to think about for those that are in that competition [00:55:06][3.0]

Alec Renehan: [00:55:10] as an Afterpay cult member, as a card carrying. [00:55:12][2.0]

Bryce Leske: [00:55:13] I mean, to be honest, my only bull case at the moment is just to continue the riding, the wave of everyone getting into Afterpay. I've sold 50 percent of my stock. [00:55:22][9.1]

Andrew Brown: [00:55:24] lets you know, let's make it clear this this is this is a real business. There is a real role for it. And they run and they've built it brilliantly. I have absolutely no quibble with your management or anything other than the fact that I think that they are starting to sort of tweak the, you know, sort of push their version of the numbers a bit aggressive. [00:55:42][18.8]

Alec Renehan: [00:55:43] Yeah. I mean, yeah, they created a category like. Yeah, yeah. The label left before, but there wasn't really like they've been up highlighted. I led the charge on. Yeah. [00:55:51][8.3]

Bryce Leske: [00:55:52] Sort of close out Andrew. [00:55:53][0.8]

Andrew Brown: [00:55:54] Well we've got nine nine eight four. [00:55:56][2.3]

Alec Renehan: [00:55:56] Yeah. We've been waiting all day. [00:55:58][1.3]

Bryce Leske: [00:55:58] Infamous phone numbers in an exchange ticker. We will get a shock. [00:56:01][3.5]

Andrew Brown: [00:56:02] You'll get a shock. 1994 is the Tokyo Stock Exchange ticker for Softbank Group Corp. OK, OK. Not to be confused with Softbank Corp, there are two. Softbank Corp is controlled by Softbank Group Corp. So Softbank Group is obviously the top company in the in the pyramid. It's the one the massive Isa Sam owns 27 percent of. It's the one that's got the vision funds that have the way working and everything else. It's the one the the aggressively bought call options over a whole bunch of US technology stocks in August and seemingly made an awful lot of money out of it. We won't go into the machinations actually here all night despite my questioning of tech valuations. And I have a number of small shorts in SAS companies in the U.S. over ten separate short positions, [00:56:58][55.9]

Bryce Leske: [00:56:58] all Salesforce, one of them? [00:56:59][1.0]

Andrew Brown: [00:57:00] No, it's not [00:57:00][0.4]

Speaker 3: [00:57:00] good [00:57:00][0.0]

Andrew Brown: [00:57:03] examples of things like Splunk, DocuSign. Okay. I have a very serious small short in Zoome, which is about valuation. The valuations crazy. The products are really good. Yeah, but the valuations bonkers. So there's a few others. But one of my counteractions that is in fact I have a long position in Softbank. OK, which sounds absurd because obviously, you know, Massachusetts san, you know, has sort of acted like a bit of a maniac for a long period of time. But the degree to which Softbank basically is trying to dig gear and deliver their balance sheet is phenomenal. The asset sales, they've made a phenomenal they've made them at good prices. And the thing that tipped me over the edge to go is the fact that they they're selling ARM, which is a UK based chip manufacturer to Invidia for 40 billion US dollars, which is not a big return on what they paid for it round about. Basically, three quarters of that holding rests in Softbank, the other quarters in the vision fund, and it helps to keep declaring Softbank. My estimate of Softbank net asset value is around about 14000 yen plus. And the current stock price is sixty nine hundred and it got as low as 2800. I've got to tell you and you've got a round about ten and a half thousand yen a share of Softbank is their stock holdings in Alibaba. So if you're a bear on Alibaba, don't go near this. But it's a really interesting hedge for me to some of the other things that I'm sure and, you know, the way they do gearing and also they've alluded to the fact that they might look to go private and there's some rationale behind going private so the sand can get off the pills and go wild. [00:58:55][112.5]

Alec Renehan: [00:58:57] Isn't that a risk, though, if they go private and the share price is around 7000 yen, even if the net asset value is at that 14000 number? [00:59:04][7.3]

Andrew Brown: [00:59:05] Yeah, you might you may not get the whole NIV. Yeah, yeah, yeah. They've had Elliott management on their register. You know, they did help a activist big, big activist fund. They're the guys that got on BHP that it guys who tried to unwind hundi and things like that. So yeah, it's been really interesting, I think. I mean, basically he's obviously going to settle down. He sold assets for a little while. Look, he'll go through another wave of things that make you uncomfortable, but maybe that will be when he's private. So why do I bring that up? Two reasons. One is just so you don't think I'm a bear on everything technology. But secondly, I think it just underpins, you know, perhaps a lot of what we've been talking about tonight, which is we've been talking about how do you buy assets really cheaply in a world where many, many assets are fundamentally overvalued? Are there any cheap assets left with stock markets where there are? Absolutely. There are so sure. You know, Melbourne shopping centers that are currently closed may not be your cup. So Big Oil may not be your cup of tea for a variety of other things. [01:00:06][61.4]

Andrew Brown: [01:00:17] and it's a really complex company. So if you want to if you want to go analyze it yourself, take a week off work because I know. [01:00:24][7.0]

Alec Renehan: [01:00:25] So just to recap on those numbers. So you said the stock price was seven thousand [01:00:30][4.7]

Andrew Brown: [01:00:31] sixty nine hundred yen. At the moment. [01:00:32][1.3]

Alec Renehan: [01:00:33] the net asset value was fourteen thousand. Yeah. [01:00:35][1.8]

Andrew Brown: [01:00:35] In my estimation. Okay. And that other people will give you different numbers. [01:00:38][3.5]

Alec Renehan: [01:00:39] But of that, fourteen thousand yen, around ten thousand yen was just in stock of Alibaba. That is correct. That's a pretty concentrated bet. So. [01:00:48][8.8]

Andrew Brown: [01:00:48] Well you've got to remember, he was he was one of the first external investors in Alibaba and he just let it go. He sold some along the way. [01:00:56][7.3]

Alec Renehan: [01:00:56] Does that because the Softbank is a Japanese telco at the end of the day, correct? Not yet. So does that net asset value include the whole telco business? [01:01:03][7.5]

Andrew Brown: [01:01:06] what I've done is I've consolidated Softbank Group Corporation's balance sheet and obviously they are the largest shareholder in Softbank Corp., which is the telecom company. Okay, okay. They also have a major shareholding in what's called Z. Holdings, previously called Yahoo! Japan, and is there's a bit of telco in there as well. And then, of course, they've got another telco, which is they've recently merged Sprint, which while they were the majority owner of with T-Mobile in the U.S. and they've got a bunch of T-Mobile stock, which basically they they're getting out of through some quite complex derivative transactions. There's nothing easy. Listen, [01:01:47][40.1]

Alec Renehan: [01:01:47] this sounds like a highly complex. [01:01:49][1.4]

Andrew Brown: [01:01:50] This is this is MBA material. So, you know, they're the main things and they own basically a chunk of the vision fund, but they have obligations to the other investors in Vision Fund, which the Saudis in particular, and they have to pay them a preferred return. So they are leveraged to the returns of the vision fund, which is why the stock went down so badly, because, of course, they were leveraged. The returns of we were actually negative. [01:02:17][27.6]

Alec Renehan: [01:02:18] Well, it wasn't just way well, I mean, when was the big one? But they threw a lot of money at a lot of companies did their faces was go for it. You give one company in the sector so much more capital, they'll kill everyone else. Yeah. [01:02:29][11.5]

Andrew Brown: [01:02:30] Basically what they were doing is it's kind of like, you know, I Ren I'll get you going. I'll buy ten per cent of Ren for ten dollars. Yeah. Okay. And then and then we say, right. We'll buy the next ten per cent of Ren for 20 thousand dollars [01:02:42][12.7]

Andrew Brown: [01:02:48] I mean in essence that's what they're doing. Yeah. OK, I mean I don't mind telling you there is some unadulterated crap in my, in my view, in the vision, the crazy valuations. Okay. And stuff that won't make money or stuff that when it comes to public markets have take a write down. So I mean, obviously, you know, Uber was, you know, one that kind of public markets. They obviously have a big stake indeed as well. So, I mean, they've they've sort of Covid off every ride share thing that you can cover off. I wish they. However, off on Atabay, otherwise known as Cabcharge, because his white shirt [01:03:24][35.9]

Andrew Brown: [01:03:24] Its a payments company now Bryce [01:03:25][1.1]

Alec Renehan: [01:03:27] my favorite Softbank Vision Fund investment. And we're not just trying to beat up on this investment, but I love this story. They invested 300 million dollars in a dog walking contract elsewhere. [01:03:37][10.1]

Andrew Brown: [01:03:38] Absolutely wrong. [01:03:39][0.7]

Alec Renehan: [01:03:40] Have a guess if they made money or lost money on that investment. [01:03:42][2.1]

Andrew Brown: [01:03:44] They've already realized [01:03:44][0.5]

Alec Renehan: [01:03:46] they've written it down [01:03:46][0.6]

Andrew Brown: [01:03:48] there's some you know, if you said to me, kind of like this guy is a bit out there, surely, you know, and justify this and justify that. The answer is I could what I'm looking at now is in an environment where he's divesting assets at not too bad of prices. I mean, you can't justify the price he paid for in the UK. Know why it was nuts when I had. Yeah, when I was running my spreadsheet on Softbank a year ago, you know, I had written down dramatically from from what they're now going to sell it to Invidia for. So that's that's why, you know, in each of these things as a catalyst and I should say, the stock's gone up pretty, pretty sharply over the last few months [01:04:29][41.2]

Alec Renehan: [01:04:30] at the end of the day. And like all jokes aside, about vision funds, bad investment, like the thesis that you have there that you're buying, you know, thousand yen for six thousand nine hundred ten like that is that is classic value investor. Yeah, absolutely. Yeah. [01:04:42][12.4]

Andrew Brown: [01:04:43] Which is why you've seen value investors in it, which sounds crazy. And you know, it's all about, you know, can you justify the 14000 yen. That's where you were. That's where your homework comes. Yeah. I mean it's actually getting to I mean in Softbank is getting to understand what they actually own. Yeah. So there you go. But, you know, hopefully that gives you, you know, a few clues that there are a lot of value things out there. You can buy a lot of stuff that's pretty cheap. Yeah. In Australia, obviously, you know, our index is probably being held back by the fact that, you know, a quarter of it's in banks and, you know, they still probably got a rough patch to go through that debt and crimp margins and everything else. [01:05:21][38.2]

Alec Renehan: [01:05:21] Well, if we really are in April 2000, we may see a decade of value outperforming growth. And if that's the case, we look forward to continually getting you back on the show to hear you crowing about it all. [01:05:36][14.3]

Andrew Brown: [01:05:37] I never crow because once you start crowing, there's a car accident. Round the corner is very humbling. Investment markets, just when you think you've got a child, they know it very well [01:05:50][12.8]

Bryce Leske: [01:05:50] Andrew you always leave us with a lot to think about. So thank you again for absolute giving your time to come on the show. [01:05:57][6.4]

Andrew Brown: [01:05:57] Not a problem [01:05:58][0.3]

Bryce Leske: [01:05:59] we look forward to. What are we October now? So we'll be coming up on our bold predictions. So yeah, that's a reasonably soon. [01:06:07][8.0]

Andrew Brown: [01:06:08] I have come in, I think, from one of the ball predictions last time. I think we did chat quite extensively about baby bunting last time. And yes, I am coming in on the day that baby bunting had their annual general meeting and put forward some pretty good new sales numbers. I've been very conservative, won't give a forecast for the year, which is understandable. But, you know, I think the stock market has lost 180. And it's now, you know, it's not for five bucks. Well, you know, it is you know, it's a phenomenal business that any kind of part time MBA students should be able to work is a phenomenal business. Yeah. So there you [01:06:45][37.5]

Bryce Leske: [01:06:45] go. Well, we can touch on that in a couple of months. But again, thank you, as always. A pleasure. Good to have you on. [01:06:50][5.2]

Andrew Brown: [01:06:51] Absolutely. I've thoroughly enjoyed it, as usual. And so happy hunting out there, guys. Thank you. Thanks. [01:06:55][4.7]

Bryce Leske: [01:06:56] Thanks, Andrea. [01:06:56][0.0]

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