Expert Investor: Andrew Brown – Part 1

HOSTS Alec Renehan & Bryce Leske|19 March, 2017

Meet your hosts

  • Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

The brilliant and entertaining Andrew Brown, Executive Director East 72 Holdings Limited, is the first guest in our interview series. Andrew has over 35 years investing experience, that has taken him all over the world. He is passionate about stocks and passing on his knowledge to those who want to learn – us! We cover a broad range of questions, from words of advice to someone beginning through to the current state of the economy and what that could mean for us as investors. There is advice and actions in this interview that everyone will be able to take away. Enjoy! In this episode you will learn: • Andrew’s perspective on value investing • The best thing you can do to improve your investing success • What has been Andrew’s best investment • How to overcome challenges of getting your first investment • What characteristics Andrew looks for in a company • Why one investing book is worth over $1000! Stocks and resources discussed: • The Margin of Safety – Seth Klarmann • Any books by Mohnish Pabrai – website with 307 books! (


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Bryce: [00:01:37] Hi, Equity Mates, and welcome to The First in our interview series, where we interview the best and brightest investors out there, both professional and amateur, and bring them right to you. We talk about everything from the highs of success and the lows of failure, different strategies for choosing stocks through the words of advice and hot tips to help you on your journey. Alec and I are very excited to bring you our first investor for the series, the brilliant and Entertaining Andrew Brown, who is the executive director at a Seventy Two Holdings Ltd. Andrew has over thirty five years of experience in investing that has taken him all over the world as we debrief to the end of Episode four. This is a fantastic interview for us to start with because it's full of words, of wisdom, advice, tips and tricks that we think will appeal to all levels of investors. Personally, we've learnt a lot from this interview already, so we hope you're enjoy it. As always, we'd love to hear your feedback. And if you have any questions for us or even Andrew, then please hit us up on our Facebook or our website. So what got you interested in investing? [00:02:39][62.6]

Andrew: [00:02:41] Pretty simple. I did in years 11 and 12 at school, I did economics and in those days we're talking mid 1970s here. So let's bear that in mind. And please bear in mind the economic situation in the mid 1970s was best described as horrific. Doesn't matter where you are, Australia, the UK obviously grew up in England or America. So I did economics in the equivalent of years 11 and 12. And in year 12, we had a stock picking competition as part of the economics piece, which looks about what the stock markets do. Yeah. And what this means of raising capital for companies and allocating capital. And as luck would have it, I happened to win the stock picking competition with a company called Tompsett Organisation, which at that time owned a whole bunch of UK newspapers, which it sold to an enterprising young lad from Adelaide, Rupert Murdoch. So I won that. And it just got me really, really interested in economics and econometrics at university econometrics is that statistic. A little bit of economics, which for people who can't do maths, it's the sort of next best thing. And then I basically, when I did the rounds of getting a job after university, had a few offers and one of them was to join the Prudential, which at the time was the UK's biggest investor in the stock market, the property market and every market said big life insurance company. And I was lucky enough to get a job with them on the overseas investment side, which is overseas shares. So and to be blunt, I've been doing for 35 years. I've never done anything else. So, you know, as she said in Sydney this year, so I've never done anything else and sell cars or whatever. Just, you know, I've always had my head in the stock market. So I suppose as far as why it is, it's it's a unique occupation and it's a unique interest on a number of grounds. And the first unique thing about it is every employer tells you to hire somebody that's smarter than you. And of course, nobody does because they frighten the smart boy or girl. Take your job and invest it. I mean, it's unique because that's what you're looking to do when the time is to give money or invest in people that are much smarter than you are. And of course, you get hundreds of opportunities to do that, whether it's a company that's run by brilliant management or giving your money to an investor who is a fantastic investor. Secondly, you get to learn about a multitude of industries. You know, everything in Australia, everything from mineral exploration, you know, mineral production through to insurance, life insurance. You know, we've got a few pharmaceutical companies, whatever. So and what you'll find is obviously you have a natural tendency to gravitate towards certain types of companies because you understand them a bit better or you just have a passion for them. I have a lucky I have a passion for financial companies. So banks, insurers and insurance scares the hell out of most people. You know, just the profits are illusions. You know, they're made up by actuaries, fund management companies and things like that. And we won't discuss. They all get very excited when stock markets going up and down. So is this really unique thing that, you know, if you're interested in investing, you can never, ever get bored. You will meet all kinds of people. You will meet some of the smartest people you've ever met your life, and you will meet rampant crooks. Helping to distinguish between the two is a really good idea. Yeah, so it's great. And of course, it takes you potentially if you do it professionally, it takes you around the world. Yeah. You know, I've worked in London, I worked in New York. And obviously, you know, I now choose to work in Australia. Yeah. Increasingly now, of course, with, you know, with the ubiquitous Internet, unlike the old days where if I wanted an annual report from the US bank, I wrote to them by mail and they sent me one back by mail. So if we're lucky, it took two weeks. Now everything's on the Internet. You can sit and listen to the webcasts of quarterly or half or full year earnings. You know, with all these amazing people, you know, talking, you can ask questions. Yeah. As a small investment, you can certainly listen. You can see in the presentation slides. And so you can get to understand these industries, these businesses in these companies, you know, literally sat in your. So much, it's fascinating. It's just I can't in this I don't know that there's another job that is this interesting. [00:07:44][303.0]

Alec: [00:07:45] Yeah, yeah. So taking you back to your early days and seeing what what was sort of daunting for you at the start or what did you struggle with at the start of your investing journey like these? [00:07:55][10.2]

Andrew: [00:07:56] Three things I like that I really probably struggled with. The first is the most obvious one, which is losing money you have when you're starting out, unless mom or dad or you have a very rich uncle decides to give you a ton of money. I mean, basically you don't have a lot of capital to invest. And so you are paranoid about losing it. And and yeah, of course, it's a great paradox that the best way to learn is to lose money, OK? And so that you don't have much to lose. So what that does is the second difficulty. It makes you really impatient. OK, so you find him and you make a 10 percent profit, let's say, on on your investment and you take it and then you find you actually live another 90 per cent on the table. And, you know, because you've just been so jumpy that you've made a profit. So that's the second thing that's really hard is the patience. And you've got to find a way to get over that. And I'll try and explain as we go on some ways to do that. And the third thing is probably it's just the realisation of how little you really know, you know, because you're starting out and, you know, this will go on. It's just it sort of becomes a bit frightening unless you can commit time to it. Yeah, OK. And, you know, it is it is so, so, so important that if you are going to be an investor, aren't you going to look after your own money, whether you're doing it privately or whether you're doing it professionally, you have to dedicate time to this guy. And so then you've got to work out how you dedicate your time. If you can only do it at the weekends and a little bit at night, then you've got to slim down what you're looking at if you have a lot more time to dedicate to it. And obviously you can look at a whole lot more things. So that's that's the that was the third thing really is that whole issue of realising my goal, I just don't know. [00:09:54][118.3]

Bryce: [00:09:55] I think the three things that resonate with me pretty much still likes to like [00:09:59][4.2]

Andrew: [00:09:59] through the [00:10:00][1.2]

Bryce: [00:10:01] fear of losing. It's just like. [00:10:02][1.1]

Andrew: [00:10:02] Man, absolutely right. [00:10:04][1.8]

Bryce: [00:10:05] So where where has your investing journey sort of taking you everywhere? [00:10:10][5.3]

Andrew: [00:10:12] Yeah, it's basically time across the world. I've been lucky enough to invest in global equities as well as the Australian shares. And so, I mean, on company visits and as an analyst, obviously, I've been to different countries looking at different operations. But I was a stockbroker, a stockbroker for quite a number of years. So I used to be one of the best known banking analysts in Australia and also insurance analysts. And so, I mean, that's taken me across the world to speak to clients about Australian banks and Australian insurers. And it's the obvious places, the UK right across the US, you know, it's Tuesday. So we must be in Boston sort of idea and obviously to Asia and right across Europe. So, you know, it's taken everywhere, basically. [00:10:59][47.7]

Alec: [00:11:00] Well, have you noticed any major differences between Australia and some of those other. [00:11:04][3.8]

Andrew: [00:11:04] Yeah, absolutely. Australia is ridiculously insular. Oh, really? It's crazily insular, which is really sad because one of the big things about Australia is Australia is the world's fifth largest pension market, thanks to the innovations of Paul Keating. And what you guys now know is the superannuation guarantee charge. You know, we have this absolutely massive pension market, which for a lot of years. I mean, I can tell you, you know, 40 per cent of your money, if you put it into just a normal balanced fund, would have got into Australian equities. And yet the Australian share market is really it's actually quite boring because a third of the market or a third of the index that you see on the television, it's not the Standard Poor's 200. Yeah, that's bank stock. Yeah, OK. And then there's another 17 percent or so, the index of resource companies and there's four of those absolutely dominate BHP, Rio, Woodside and Fortescue and and then sort of in the top 10, the top 10 are about 60 odd percent of the market that's made up of er retailers like Woolworths, you know, this conglomerate, which is very well managed but has an inherently slow growth, which is Wesfarmers and you know, and the nightmare of everyone's life, Telstra. [00:12:26][81.8]

Bryce: [00:12:27] So why is it you think that they don't look more [00:12:31][3.8]

Andrew: [00:12:31] broadly as well? Increasingly they are. Thankfully there's there's a lot bigger allocation now to. S. shares a lot of that stuff through Australian domiciled fund managers such as Magellan and Platinum. And the the increasing fact is, I mean, if you look at the Australian stock market has not only two sector of any consequence, it has one pharmaceutical company of any consequence or farm or related company, which is CSL, Commonwealth Serum Laboratories. So we have all these sectors that around the world, when you look at Australia versus the rest of the world, it's basically we got too many financials, a lot of basic industries, too much property in the form of real estate investment trusts and rates. And we don't have any really sexy growing, you know, the really sexy stuff that you sort of say, hi, how am I going to kind of cover my retirement with the industries that are going to be around in retirement? And so, thankfully, bit by bit, people are sort of pushing the money to overseas managers. But Australians love talking to the people who manage the money. I mean, the guy who manages the money is in sort of Des Moines, Iowa. It's a bit difficult. [00:13:39][68.5]

Bryce: [00:13:42] What's been your best investment? [00:13:44][2.2]

Andrew: [00:13:46] I'll give you two or three answers here. I think my best investment is an ability to raise, which we've got to come onto in a minute. But in terms of finance, I mean, I think there's two ways to look at your best investment. There's the best investment, which is Baoji, the biggest financial return, either percentage wise or goal wise. And there's also the best of the best investment in the sense that if you reason out why a company is undervalued and will talk about the valuations in a minute, if you reason that out and your thesis on a company works out as opposed to just dumb luck, there's a really you know, you get a seriously warm glow about the fact that you actually analysed it properly, you did it properly, and you've got the end result that you thought was right. So in financial terms, things like Magellan Financial in 2009, in March 2009, you could have bought stock in Magellan Financial at 35 cents on the stock at the time, had about sixty seven cents of cash and investments. So you've got the two fantastic people who at the time were running the company and trying to build the company up. Hamish Douglass and Chris McKay, both of whom had credentialed careers prior to going out together to form Magellan. And it was a period of time where basically you had to pay quite a lot of money over net tangible asset backing to sort of invest in those guys. And then you actually do that in a sense, because you were buying it half of net asset backing. They were coming to work for you. Brilliant. Their private accounts and where I could see that now, course, the stock's now twenty three dollars. Well, I don't own it. In fact, I actually have a short position in the moment, but so I mean, that's just, you know, that's just a multi, multi, multi bagger for anybody got there. Probably my favourite investment by a long way in terms of just working things out and giving you that really warm glow as a stock. I made about three times my money in about eight months. The stock will national hire group and that's why a national hire and about a dollar thirty a share. And within that eight months, you've got a takeover offer at three point sixty. And the rationale behind it was that two guys or two groups of people owned, 88 per cent of the company, says only 12 percent of the company was available for public investment. Yeah, Kerry Stokes 66 per cent through Seven Group Holdings, which is his holding company listed on the stock market. And the richest man in Tasmania, second richest man sorry, I called Dale Elphinstone. I'm twenty two per cent. And what you raise and doubt and it's a really good lesson to think about when you're investing, is if you think a company's really cheap, it's a really good discipline to say why might it be cheap? OK, you know, because I mean, there's all this information we get. So why might it be cheap? And some companies, they might be cheap because it's really obvious if two guys owned eighty eight percent of the stock and, you know, the residual stock trading on the stock market had a market value of only twenty seven million dollars, then it's not likely that the AMP Bugti are going to be investors and it's too small. So it means there's a chance it's mis priced. So that's number one. Secondly, its biggest asset was an unlisted company or forty six per cent stake in an unlisted company. That unlisted company is a company that. You will see on every other street corner, especially at the moment, Cote's higher, higher safety barriers and tigers and God knows well. So what I did with the help of believe it or not, I'm going no older than you. An intern who worked for me at the time is we did all the research on OPSEC. We worked out what we thought. The value of the stake enmeshed in Cotai was. We worked out what we thought the rest of the company was worth. And believe it or not, we reasoned out that we thought the stock was worth about three dollars 60. So we actually nailed it to the penny. There was a clause with the reconstruction of his empire that Kerry Stokes did that meant that he was going to have to make a recompense to seven group holdings if these shares weren't valued by an independent expert at more than two point fifty, which meant he would have had to pay 100 dollars million when the cost of actually privatising it was about 30. Wow. So anyway, in the end over eight months and it was just great to see the roadmap of how it happened come off as well as the valuation. And if I say to you, hey, here's a dollar thirty, that's with three point sixty, you're going to think I'm mad. Seriously, why is nobody picked up the dollar 30 in cash? So you've got to think like that. Well, that's great. So there are a couple of good stories, I think. I mean, I'll be blunt with you, the other best investment and it goes back to what we're talking about, how young people find it difficult, some of your other best investments in companies that go bankrupt because you won't do it again. You won't make the same. You might buy another company, but you won't buy it in the same industry. I can assure you, you will you will have to go long and hard to find a retail stock in my portfolio because there aren't any [00:19:29][343.4]

Alec: [00:19:30] I think businesses come close to my [00:19:32][1.9]

Andrew: [00:19:32] you know, my you know, my track record of investing in retail is pretty ordinary. And so I just reasoned that it's just one of those things. I'm not like that. [00:19:41][8.3]

Alec: [00:19:42] Just leave it on my on my first investment with Slater and Gordon. Yeah. So I've learnt that lesson the hard way. [00:19:47][5.8]

Andrew: [00:19:49] I hope you learnt. I mean, there's this one fundamental I mean, the fundamental lesson about Slater and Gordon is really, really simple. And you've got to remember, this is actually very, very, very astute investor base in Australia who invest globally called Rob Luciano. And he runs a company called Vgi. They, of course, had a very public short position in Slater Gordon. A short position for your listeners is basically it's where you sell shares in a company that you don't own, which you borrow the shares so you can effect the settlement. And of course, the idea is you're selling them on the basis you're going to buy them back at a cheaper price because you think they're going to go down. They actually had a short position in Slater and Gordon and if I remember rightly, well over six dollars a share. The lesson on Slater Gordon is really simple. One very simple sentence. Profit does not equal cash flow. I can show you companies going out of business that are reporting profits. Yeah, I can also show you companies very much staying in business that are reporting losses but are generating large amounts of cash. Yeah, okay. And the problem with Slater and Gordon was cash flow and profits were on different planets because they were capitalising, they were capitalising the costs of all these mom and dad cases they were taking. Yeah. Here and then. Yeah. And particularly, of course, in the UK when they made an appalling acquisition [00:21:15][86.6]

Alec: [00:21:17] that I participated in the capital raising for. [00:21:19][1.9]

Andrew: [00:21:19] Oh yeah. You have to get profit [00:21:22][2.9]

Alec: [00:21:23] from cash flow. [00:21:23][0.5]

Alec: [00:23:19] OK, so I guess from that conversation we should ask, what's the most important thing you've learnt through through the 35 years of investing? [00:23:27][8.7]

Andrew: [00:23:30] I think that the really I think there's three things I three things. The first is you've got to do your homework like the stock market. If you want to make it a casino, that's up to you. But most casinos, I go to win money off the punter. OK, it's not these are not pieces of paper. They're not they're not four legged animals that run over twelve hundred metres. They are stakes in a business. So if you don't understand the business that sits underneath the share in the business that you're buying, why on earth would you buy a share in it? If I came to you and said, you know, race for number five, you know, you'd ignore me. And yet so many people just speculating shares because they don't do the homework. So the first and really important thing to do your homework. Number two is what I've said already. You've got to be patient, OK? You know, you might get lucky, you know, very quickly, you know. Yes, I have. But I have periods of time. You need to hold your shares now. If you then put those two things together, it's the third thing. I think that's really crucial as well. If you think you know something about the business, then basically what you're putting together is a thesis as to why you want to own shares in the company. You might be buying shares of the Dollars that you think are worth two dollars. OK, and is a thesis behind that. How can that dollar become, too? Are they going to sell a loss making division? And our earnings are going to grow really rapidly because they've got new products or they just well positioned. What is it? OK, so secondly, obviously I say going to be patient, but you've got to have a thesis about it and then you've got to keep interrogating that thesis. OK, so if we take you know, you take something like, you know, something simple like Woolworths, OK, which obviously had a dream run from when it was taken out of the Adelaide Steamship Company in nineteen ninety four. Then, you know, it's when Woolworths inability in the last five years to keep reproducing, you know, their growth in cash flow, using other people's capital, not not able to get the margins and then particularly doing something called diversification, you know, is taking a great business, getting the cash flow off it and investing that in rubbish. And that's basically that's the history of Woolworths really over the last ten years, is taking a brilliant supermarket business, taking the fantastic cash flow out of it. And instead of giving it back to shareholders, they decide to blow up two billion dollars plus in taking on the best retail business in Australia, which is pretty stupid. So once they started doing that, if your thesis on Woolworths is the ability to get cash flow back to me and grow earnings in supermarkets and and liquor, and I do stress on the other great businesses in Australia. As Dan Murphy's As soon as I started putting that money into other things, your thesis should have started falling down and you would have then sold your shares. Yeah, yeah. OK, so it's once you're there, you've got to keep interrogating the reasons why you're there. OK, that is really important. If you stick to those three lessons, you will not go too far wrong. OK, seriously, the lessons. [00:26:58][208.0]

Bryce: [00:26:59] So sort of backing off the lesson. No one doing your homework. Yeah. And going to the next question if your investment style. Yeah. For our listeners, what are some sort of things that you look for in the way that you invest? [00:27:11][12.2]

Andrew: [00:27:11] Right. There are two broadly different investment styles and there are lots of sub styles within these. But let's keep it really simple. Like some people basically invest in growth businesses. So what they're doing is they're looking for businesses where they believe the earnings of the company can grow at a much bigger rate than the economy at large. And so they tend to be less interested in what the valuation of the shares is or how much they're paying for it. OK, what they're focussed on is, is this business continuing to grow and then press the button and their thesis starts to getting validated when these companies slow down in some way or other. OK, so what you would find are typical companies like that in Australia. Obviously, Domino's Pizza, I think, has been one of the most obvious ones. CSL has been one of the most obvious ones, are a group for real estate, dotcom. So if you find a fund manager that's got those kind of stocks in their portfolio, you would characterise them as a fund managers much more interested in growth. That's not me. I'm one of the other people I'm one of the boys at. I basically want to buy a dollar for 50 cents on what's called a value investor, and there are different strains of value investors and I tend to be what's called a deep value investor. In other words, I tend to be a bit of the extreme. OK, I'm looking to buy companies at a significant discount to what I think they can be liquidated for, OK, or what I think they're really worth. So if you look at my portfolio, it's full of all sorts of things, which at a discount to net tangible asset backing, it's full of companies that trade on what's called a price earnings ratio or the number of years earnings that I am paying for. Obviously, the lower the better of below 10. And it's also full of companies that you would think are really pretty crappy businesses. And I think they're not great businesses either. But I just think the market's undervalued them too much. And I'll give you two or three really good examples as we go on over the past two or three years. And I'll give you one absolute classic example. Migrants do that now. It's a Benjamin Graham style. Don't forget, Benjamin Graham style worked in the 1920s, through the 1940s and everything else. But you have to adapt the Benjamin Graham style. The reason for that is that particular industries changed so darn quickly. They changed really quickly because of technology. The speed of technological change over your generation and certainly over the latter part of my life has been absolutely staggering since really the early 1990s. Yeah, with the advent of the net and then what the net enables you to actually do, you know, don't you know when you think about what the next DUNTA banking, you know, and what it's actually done to the banks beneficially? You know, it's tremendous. Um, I'll give you a really good example of of sort of deep value investing. And it's also I really want to emphasise this. One of the things you've got to think about being a good investor is don't do the obvious, OK, let's merge if we merge those two things together. 18 months ago, I had a roaring argument on Twitter with somebody who publishes a newsletter in Australia which will have to remain nameless. But the last word of it is exactly what this particular individual is full. [00:31:00][228.9]

Alec: [00:31:01] All right. Now, our rival podcast, The Motley [00:31:07][6.0]

Andrew: [00:31:07] Fool, said short Cabcharge, it's going out of business is going to kill it. Well, Mike, tell me something we don't know. OK, now tell me something we don't know that is here in Australia. It's being legalised and it's having an impact. Yeah. Wow. That's you know, that's that, you know, that's the scope in so Cabcharge. So he says, sure, Cabcharge at the time had gone long Cabcharge and I started buying Cabcharge shares at two point seventy. The reason I stopped buying Cabcharge shares at 070 was that Cabcharge had a whole bunch of other assets. Cabcharge owned 50 percent of Hils buses. Cabcharge owns 50 per cent of a whole bunch of cabs and stuff in London and Aberdeen. Cabcharge owns a whole bunch of taxi plates, in other words, and rents the camps to people. It is the biggest taxi plate owner in Australia Bryce, New South Wales, Victoria, Queensland, South Australian territory. And Cabcharge basically gets its name from the payments system, which three years ago is taking 10 per cent skim off your credit card when you type in a cap. And that scheme is now being mandated by law to come down to five per cent basically everywhere across Australia. And it is one state left where it's not SA Cabcharge whose earnings were coming down. Their profits were coming down, obviously. But what's interesting is what Schoop didn't realise is that the ridership in Cabcharge is taxis was continuing to grow. The simple fact of life is what you've done is grown the market for people who want to use private hire private car services to get from A to B, and it's quite clearly brought the price down. We all know that. OK, but what it's done is it's grown the market. And what Cabcharge have done is they've taken their cost down. They have created new apps. You know, if you go now, this is one three cabs, which is a new app. They developed in a relatively short space time and it has everything and overlap. Does you all know about surge pricing on either side? If it's raining, what are you going to get a cab or. No, I'm telling you, you're going to get a cab. Yeah, OK. And so what's happened is that you're seeing the ongoing demand for cabs will grow. Now, the ratings have gone down. Because they're 10 percent cuts gone down to five. OK, now it's no business can withstand a halving of the price of their product without their profits going backwards. But what's happened in the meantime is, of course, Cabcharge have decided, well, we're in the you know, we were in the private transport business. So they've sold their 50 percent share in those buses. They've sold a property they had in Surry Hills for 80 million dollars. They've repaid all their debt effectively, and they're now about to disgorge a 90 cent fully franked dividend to their lucky shareholders. That's a one off 80 of it is a one off. The upshot is 18 months on from two point seventy, the stock price is now four point ten. And in the meantime, I've had 30 cents in fully franked dividends to keep me happy, which is pretty good. And it's all because of the investment thesis being that Cabcharge we're going to get rid of their non core assets, that non core assets were not as valuable as they said they were in the books. But even at my much discounted valuation, at one stage I was buying the cab business at what I effectively thought was a pay of about four. OK, well, now I don't care if it's going out of business, as long as it takes more than four years to go out of business. I'm happy. Yeah. And what people assume sometimes is that the failure rate on old things is really steep. It's often a lot shallower than you think. The best example of that, of course, is cigarettes. Yeah. There's no way any percentage of your generation smokes in the same way that my generation did at your age. But of course, some of the best investments in the world over the past five, six, seven years have been tobacco stocks. Well, if you don't have an ethical problem, speak to fight. Right. People assume that it's too to quit. Can I just give you another really good example, thinking outside the square a little bit. One of the I've made really good money over the last two or three years investing in media stocks. OK, now you've got to read your papers about Channel 10. I've had a brief flirtation with Channel 10. I've never owned Channel Seven. I have and do own Channel Nine. I have. And I've tried it and do on Fairfax. And what you found is that all these media companies, as they're called business, was just being eaten away by the fact that your generation don't read newspapers know you get your news off the net, your generation don't watch rubbish on television. You know, you watch it on streaming services like Netflix or whatever. Then what you found is these companies in the midst of cutting costs, they had so many surplus assets. And so what you found is all these companies had of little businesses that the stock market really undervalued as a company called IPN, which is strong, strong provincial newspapers. They had a fantastic outdoor advertising business, which they span out to shareholders. They got they they they basically maintained their radio business and they ditched the newspaper business. So people just undervalue the earnings stream. Fairfax, which you, of course, think is a newspaper business, you know, its newspapers, it owns it owns about half of the Macquarie Radio Network, which is the radio network you don't listen to because you've [00:37:05][358.2]

Alec: [00:37:07] got a network that's [00:37:08][1.0]

Andrew: [00:37:08] good money. But the key driver, Fairfax, is not a news. It's a it's a property company. And the reason is probably companies Fairfax owned Domain and Domain is going to be spun off. And the valuation of Devine is obviously much higher that, you know, than the valuation of a dying newspaper business. And the newspaper business is dying. So, yeah. So at certain times, you know, Fairfax got down at one stage to, what, about 40 cents a share. The stock's now in the high 90s. And if make is far off, I think it's obviously on the stock. I think there'll be some benefit from that. And Fairfax management have been really astute in trading assets, selling off assets, creating new digital type assets and then selling the good valuations and and everything else. They've been very good at that as shareholders benefit. Yeah, well, so that's that's what I mean. Let's just carry those two examples with you, you know, and say, hey, if everybody, you know, think outside the box, the obvious is not always the case, you know. [00:38:16][68.2]

Alec: [00:38:17] So we Channel nine. Yeah. Is the thesis similar to, like, good management? Yeah. [00:38:21][4.3]

Andrew: [00:38:22] Yeah. The thesis is similar to Channel Nine in that the the fight rate on the Nine Network itself. It's pretty it's pretty shallow whilst ever they've got rugby league. Yeah, you know, that's good. The management are actually extremely good. Yeah. And so what's the network is making less money each each year. It just means cash flow and Channel Nine have relatively little debt. They've got a tiny bit, but it's very, very small. They sell will be the headquarters. So they sold that asset off. They used to own Ticketek, so I sold that asset off. But they actually have one growth asset and they own 50 per cent and Fairfax owned 50 per cent of Stan. And Stan is the most rapidly growing esveld or streaming video on demand service in Australia. And they have a really good can't. They have really good content deals with the prime suppliers of content? The US, I call them studios, but it's people like Showtime in their case. Yeah. And so what they're doing is, I mean, you know, the way you watch stuff has changed dramatically. You've got to sit there in front of the idiot box waiting for you. But it's probably going to come on. You stream it. Yeah. Yeah, really. What are you, Australian, legally or illegally? And Stan has some really good content on it. And so, you know, this subscriber base is really rapidly increasing and the thing will break even in financial year 18. And so there are a lot of people arguing it stands with 400 million bucks from a standing start in about two years. And so that's turning in a piece to Fairfax nine. And when you consider the Channel Nine's value to less than a billion dollars and the network makes about one hundred and eighty million dollars of cash. Yeah, I do understand is the future, Stan, of future. Yeah. [00:40:09][106.7]

Alec: [00:40:11] So has that philosophy of investing. They value investing. Has that changed over the years or is it not. [00:40:16][5.5]

Andrew: [00:40:16] The philosophy hasn't changed that how you do it. It's the adaptation of that that's changed. I mean that's the you will all you'll get given Benjamin Graham books to read and everything else. And it's it's obvious the philosophy is fantastic, but trying to find what are called net nets, which is, you know, stocks trading under the net working capital is a bit difficult. The other thing changes. I mean, basically, if you go back 15 years and if you read books that are 15 to 20 years old and some of the great books I'm going to mention to you, we're published publishing. You'll see the best industries. They'll talk about newspapers because newspapers, they were so-called rivers of gold because of classified advertising and display advertising. There's no other way to do it because that's changed. So it's a matter of the the the philosophy hasn't changed. But how you do it has management, I believe, is so much more important than they were years ago, mainly because, you know, management has got to be smart and keep up with technological change and infuse that change into their business. You know, whatever you think about Domino's pizzas, work practises and payments, the fact is, I mean, the infusion of technology into their business, you know, it's brought their cost base down. It's made the you know, he's basically it's just making a fat because it's easy to order pizza. Yeah, I think as well it's it's valuation versus price again. I mean, the valuations are different. You have to look at a lot of much longer term income streams. You know, you don't value a away based on this year's earnings. You know, when the motorways got 30 years of franchise. Yeah. So, you know, that that type of thing, the work you have to do to value things is becoming a bit more complex. And I think the third thing that's that's really important and that, you know, is changing when you really look to companies that are shareholder friendly, some companies are downright shareholder unfriendly. You know, they're not you know, the more, you know, it's the management. They're interested in feathering their own nest or, you know, a major shareholder doesn't care about minority shareholders. I mean, you might contemplate the recent furore or Channel seven in relation to the chief executive officers private life. You know, when you look I mean, you really need to ask yourself the question, do you think the actions that Channel seven have taken, the shareholder friendly? Yeah, I'll leave you to answer that question. [00:42:50][153.6]

Bryce: [00:42:51] And I think for some for people starting out in that side of valuing or getting understanding of the companies is a lot easier if they didn't have the technical ability. [00:43:00][9.2]

Andrew: [00:43:00] Yeah, what what you need to understand about shareholder friendly is really two to three bits to it. I mean, it's basically it's management, the welcome shareholders. You know, I sort of, you know you know, they're open to a little bit of critique from shareholders, if you will, and everything else. But what you really want to see out of a management is that they're driven by, you know, creating value for shareholders, such as buying their own shares back when they really, truly not being empire builders. I mean, you know, let's be blunt about it. I mean, Woolworths. Went on this big ego driven empire building idea to take on their main supermarket competitor when this main supermarket competitor was not at its strongest and they said, oh, we'll go attack, we'll go attack the heart of their business. You know, the Wesfarmers business, Bunnings. What a stupid idea that was. Yeah. Was that driven by shareholder value to Woolworths shareholders? No, it was driven by management and board madness. OK, so you've got to have the right management in the right board that are driven by returns to shareholders. There is a fabulous book called Outsiders. Oh yeah. Which is well worth looking at because it's basically there's a whole series of case studies in there. And every single case study revolves around the fact these companies buy back their own shares when they think they're cheap. I'll give you an example in a minute of another company that's doing that. But when the shares when the company fails, the shares are undervalued, not just any old time, but when they when they feel issues around the value, then they buy their shares back. You mention if you're a company and shares are trading at a dollar and you think as a company with a recent analysis, they worth to Dollars. You know, I want to be a shareholder in that company to Dollars because I'm going to buy some stock myself. And B, I know you're playing alongside me as well, so it'll be less shares on issue. So I might part of the company. I've got more of the company and it's worth. [00:44:59][119.2]

Bryce: [00:45:01] That's not to say every time a company does a buyback, though, they think investors are undervalued. [00:45:04][3.3]

Andrew: [00:45:04] No, there's too much in Australia in particular, there's far too much ego around buybacks and there's too many companies end up buying their own shares back and then issuing shares at a lower price to fund a new factory acquisition, whatever. So that's a great way to check out whether you think management are actually really any good if they're buying the shares back at a crazy valuation. I mean, that's. Well, very good. Yeah, really. You know, they're not you know, that's not a shareholder friendly thing that's doing something else. They're frightened of a takeover. Yeah, something like that. It's got some ulterior motive. [00:45:39][35.1]

Bryce: [00:45:41] So if you were to give advice to someone who's just starting out investing or is interested in starting to invest. Yes. What what would you say? [00:45:50][9.3]

Andrew: [00:45:51] Oh, that's really easy. Read, read, read, read, read. And when you finished reading, read. And luckily these days, listen, listen, listen and listen, you have access thanks to the net. You have access to anything you want. As we discussed right at the start of this podcast, you have access to anything you want on the net. I have recently listened to the webcast of the fourth quarter results of the world's largest aircraft leasing company. OK, and those guys are staggering. They are smart at running their business. They buy back a heap of stock, but always at a discount to their net tangible asset backing. And so, you know, these guys are mostly based in Dublin. So I'm sitting here in Sydney and plug some headphones into the laptop and off we go, you know, and it's open to anybody. So you have the biggest problem you have is actually working out what not to read and what not to listen to because you either will never sleep at night or you won't have a day job because you'll be doing something else. So that that is there are books there is so many brilliant articles on the Net that people just willingly put up there. What you find is that people who have a bias like myself to value investing, they're really good at sharing their ideas. They tend to be very, you know, giving sort of people there are lots of sort of chat boards and things like that, you know, like really good quality ones, not not rubbish where you've got people trying to get you into buying shares in something really good quality chat boards, you know, whereby, you know, you can just look, you know, and that's that's what's so good about it. You can take you don't have to give. It's brilliant. You know, it's equally as selfish as you want, but you've just got to read, read, read and read. And it's through that that you will start to understand different businesses. And if you've got a full time career, it's something else. I'm telling you one thing. If you can't find stuff in your investing career or you're investing interest that you can't apply in your full time career in management at work, I'll be amazed. You know, you must have an extremely specialised career if you can't apply that. So you've just got to read, read, read and read some more and read some more. And there's an infinite amount of material. Yeah. [00:48:22][151.1]

Alec: [00:48:23] So given that there is such an infinite amount of material, what do you prioritise in terms of what you. Read or listen to [00:48:30][6.7]

Andrew: [00:48:32] what I prioritise is basically I mean, obviously companies that I think I'm going to be interested in [00:48:36][4.2]

Alec: [00:48:36] and is the sort of annual report. So, yeah, [00:48:39][2.3]

Andrew: [00:48:39] it's it's things like it's annual reports, quarterly reports of the companies, the US, it's company presentations. I read a lot of stuff from other investors. Remember what we said at the outset. It's great, great occupation. This because you can contract in people that are smarter than you. And the way you do that is to read what they say. So I read a lot of hedge fund newsletters that hedge funds are sort of on the nose for a lot of people in the markets. I've performed very well. But, you know, a lot of hedge funds are really good about giving maybe a two page thesis on why they own X, Y, Z companies. Some hedge funds give sort of fifty two page presentations on why they own something or other. I mean, clearly all they're trying to get people to do is go buy it all. But you can yeah, you can look at it, you can interrogate that and say you're wrong. I think you're wrong because of A, B and C, so I prioritise that sort of stuff. But I do read things like, yeah, you'd be nuts not to read things like Jeff Bezos and, you know, to Amazon shareholders, you know, I'm not a shareholder in Amazon, but, you know, there's so much great information in there now. It's the same, you know, the Warren Buffett letters are sort of starting to become a bit of a parody of themselves. Unfortunately, they're not, you know, you know, which you must understand. You know, as the guy gets older, they're not going to be as pointed and quite as to the point as they were 20 years ago. That doesn't stop you because you can find all the old ones. They're all on the net. You can find you know, you can find any reports of the old Westco, which was Charlie Mingus company that's now been absorbed into Berkshire Hathaway. So, yeah, those kind of things, they are really good writing, unfortunately. You know, as I say, you need to read some of the older, I think, books, actual lessons rather than necessarily the new ones. But you can read great shareholder letters like that. Yeah. And it's great reading whether you're interested in the company or not. They're going to teach you something else. [00:50:37][118.2]

Bryce: [00:50:38] Well, we've both read it, but it's. Well, are they a conglomeration of all of these letters? [00:50:42][4.6]

Alec: [00:50:43] Yeah, it's cool. I think the book's called were the words of wisdom. [00:50:45][2.2]

Andrew: [00:50:46] Yeah. There's there's several there's several sort of compilation books of Buffett. To be blunt, I think the best book to read on Buffett is is Roger Lowenstein's of the making of an American Capitalist, because it it it focuses on Buffett, the investor, and it really does start from scratch. You know how he got started, the original Covid partnerships of winding up of those the stake in the Berkshire Hathaway, this crappy old cotton milling, et cetera. So it actually takes you through what you've got to understand. And I mean, the best chapters in the book revolve around nineteen seventy four because, you know, the world was in serious crisis in nineteen seventy four. And, you know, obviously the guy was buying shares, they were going out of fashion because they were so cheap, you know, but you know, it took, you know, even he was sort of getting to the point of exhaustion on that. That's a really good book because that tells you sort of how you got to where he got to. And, you know, obviously, this is quite a bit about newspapers in the Buffalo News and The Washington Post. But of course, it's got there's there's a famous court case involving the two newspapers in Buffalo, sort of, but it's paper effectively put the other out of business. And I can't remember the exact quotes, but the judge asked Buffett about that. Is it is it true that he he characterised the Buffalo Evening News as being a great business? And Buffett explains what his best business is, which is the only Tonbridge into town? Oh, yeah. Yeah. How do you tell Bridge into town? And Australia has a name for that. It's called Macquarie Bank. So, yeah, I mean, it's, you know, lots of books, but no, you know, it's a sort of annual reports and the presentations and everything else that are kind of key things. But if you see other research, you must mean broker research is you know, it's got its detractors. But and, you know, some of it can be quite interesting, but it tends to be a bit repetitive and it's rare that a broker will really systematically carve a company to pieces. So there you go. Yeah, good. I up to a seventy two books, I bought six of the books. Yeah, I have a my favourite book. OK, I have a I have an Amazon print out there for my favourite book of my favourite book is written by a gentleman called Seth Klarman. Seth Klarman runs a hedge fund called Vail Post Posti, and he wrote a book some years ago called Margin of Safety, which is given to about postal employees and the ones that leave keep it and then sell it on Amazon. And the reason I sell it on Amazon is because the going price of it, it's not in print is nine hundred and ninety five dollars. [00:53:48][182.1]

Alec: [00:53:49] It's got here and Amazon five new from one thousand six hundred and ninety nine dollars. So did he not publish this. He just gave it to his employees. [00:53:56][7.3]

Andrew: [00:53:57] Yeah. It was sort of published a long time ago, but he's now out of print. However, if you look to your left. There is a folder next to you. Oh, OK. If you know where to go on the Internet, you can pull down a copy of it. Not that I'm suggesting you do anything illegal, something that's a bit easier to get. And I'll preface this with some of the things I commented to you earlier on. Some of these books are from the 1980s, the 1990s. And so some of the industry analysis you're going to find difficult because it doesn't gybe with you. Two of the great books were written by a gentleman called Peter Lynch, Peter Lynch Ren the Fidelity Fidelity Magellan Fund for a number of years, and he published two bestselling books. The first one was called One Up on Wall Street, and the second one was called Beating the Street. And it's actually it's a bit of a rarity sometimes when the sequel is better than the original. And I think in this case, the sequel is is actually slightly better than the original. So what's what's great about the sequel is it's got 25 golden rules and the 25 golden rules and includes such absolute gems as investing is fun, exciting and dangerous if you don't do any work. And then you know the other one, which you might sort of recognise a little bit from some of my earlier comments. But nobody can predict interest rates, the future direction of the economy, all this, all the stock market dismissals, such forecasts and concentrate on what's actually happening to the companies in which you're invested. So if you sit there listening to Tom Petrovski and his little things on the news, and if you sit there listening to financial television like CNBC and everything else, you are going to start voiding some of the first things that I told you to be patient, because they are telling you huff and puff rates are going up, rates going up, the market's going to crash down. And you get right away from what the hell this is all about, which is the fact that you own a small claim on a company. So the Lynch books are great. These are more recent book called 100 Baggers, which is actually an update on a previous book, which was which was written 30 odd years ago. And it's by a guy called Christopher Meyer. It's called 100 Bagger Stocks that return 100 to Wall and how to find them. In other words, you put a dollar in, it comes with 100. That's a really that's a really good book. It's actually it was only written last year. So it's actually really good because it teaches you patience. I'd recommend most of the Warren Buffet type books. I think they're pretty good.Tap Dancing to Work by Carl Lewis is probably a really good one. Which is which is, you know, they're really good. I have given Bryce and Alec a copy of a list of books by a gentleman called Mohnish Pabrai, and I hope that they will publish a link on the website for sure if they don't just go to Deep Dive called Chat with Pabrai PIB. I like dot com and go to his bookshelf. And if you don't have enough reading this, 307 books on capital allocation in there and most of the ones I've mentioned to you are contained in that list, as you would expect. Yeah. [00:57:47][230.4]

Alec: [00:57:47] Oh definitely. [00:57:47][0.1]

Andrew: [00:57:49] Yeah. Well, the other things I do recommend to you is investment biographies or business biographies. Read about people who've been really, really successful in business. So there's heaps of business biographies about guys who have done amazingly well in one particular industry or other and also read biographies about business disasters. OK, because you learn just as much, if not more, from the ones about the guys who get it wrong and go bust, as you will from the guys who get it right and make tons of money. [00:58:24][35.2]

Alec: [00:58:25] Yeah, well, some of them pretty keen on. Yeah. So that brings us to the end of the first half of our interview with Andrew Brown. We hope you've taken some things away from that. We definitely learn a thing or two. If you click on Episode six of Equity Mates, you'll be able to hear the second half of the interview where we delve deeper into all things investing. [00:58:25][0.0]


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