Expert Investor: David Prescott & Jack Trengove – Can value investing make a come back?

Bryce Leske: [00:01:28] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing. 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][13.2]

Alec Renehan: [00:01:41] I'm very good. Bryce very excited for this episode. We've got to guess which might be breaking new ground for us. [00:01:47][6.1]

Bryce Leske: [00:01:48] It could be an Equity Mates first. Yeah, I think we've done this before and very much looking forward to it. It is because we are joined on the phone by David Prescott and Jack Trengove from London. Welcome. [00:01:59][11.3]

David & Jack: [00:02:00] Thanks for having us. Guys, thanks a lot, guys. [00:02:02][1.8]

Bryce Leske: [00:02:02] Just a bit of background. David is the founder and managing director of London. He has over 18 years funds management experience working for firms in Australia and the U.K. He's previously head of equities at institutional fund manager CP2, formerly known as Capital Partners. David's got an economics degree from the University of Adelaide, a graduate diploma in Applied Finance and from an investment from the Securities Institute of Australia and is a CFA charter holder. So a lot of experience there. And in terms of, Jack, you may have heard of Jack through the AFL's system. He was a professional AFL player for both Port Adelaide and Melbourne and is now an equities analyst at Lannan and has been there since early 2008. So, David, Jack, welcome to the show. We're very much looking forward to speaking about what's going on at Lantian and all things market. So let's get stuck in. [00:02:55][52.3]

David Prescott: [00:02:55] Great. Thanks for having us. [00:02:56][0.9]

Alec Renehan: [00:02:56] Before we get stuck into your backgrounds and your investing philosophy, we do like to start with a bit of a game. We call it overrated or underrated, where we throw out some themes, some topics that we may not otherwise get to speak about and get your thoughts on whether they're overrated or underrated at the moment. So, David, we'll start with you. Overrated or underrated? The ASX 200 index? [00:03:18][22.1]

David Prescott: [00:03:19] currently outside the ASX 200 is overrated. We're trading on extraordinarily high multiples. I think industrial PE multiples about twenty seven times at the moment. I think that's pretty close to the highest on record. Probably all agree economic conditions are far from buoyant so and is being very highly valued. So I'd have to say, unfortunately, ASX 200 is overrated. [00:03:42][23.2]

Bryce Leske: [00:03:43] So then Jack, moving overseas, if we go the Nasdaq 100, overrated or underrated? [00:03:48][4.9]

Jack Trengove: [00:03:49] Yeah, I think I'm going to have to go similar to Dave here on the overrated side of things for similar reasons as well. I think we're just seeing, you know, a huge dislocation between sort of value and I guess the underlying earnings in so many different companies overseas. And, yeah, I think it's unfortunate that we're struggling to find some value over there and definitely overrated [00:04:12][22.2]

Alec Renehan: [00:04:12] in both your answers. You guys have tipped your hats in terms of your investing strategy. You guys are very value focused, which we're excited to get into because, as you've noted, markets are frothy at this point. But before we do, I do want to ask about another asset class, which is arguably also quite frothy. David, overrated or underrated? Australian residential property? [00:04:35][22.8]

David Prescott: [00:04:36] I'll probably say underrated. Actually, I don't have a strong view about the short term direction of the housing market. But if rates stay low and unemployment doesn't skyrocket, housing will probably do fine. Philosophically, though, I think aspiring to own your own house has some pretty strong societal benefits. So I'll say underwrite it. [00:04:56][20.2]

Bryce Leske: [00:04:57] Nice. Another asset class, Jack, that is not in the equity stream, but has been copping a lot of attention lately or has throughout history, I guess, overrated or underrated gold. [00:05:07][10.1]

Jack Trengove: [00:05:08] Yeah, I think considering I guess, opinions on the ASX 200 and Nasdaq 100, I'm going to say gold is underrated. We hear Lanying a very long gold and have been for a while now, which has been, I guess, beneficial to us of more recent times. And we've obviously seen the gold price go up and then probably pull back a little bit more recently. So definitely, I think just the longer outlook and the underlying value of gold certainly underrated at this stage as well. [00:05:34][26.6]

Alec Renehan: [00:05:34] And then to close it out, one asset class that gets a lot of attention and stirs up a lot of controversy. David, overrated or underrated Bitcoin? [00:05:44][9.6]

David Prescott: [00:05:45] This is a tough one. We don't pay a lot of attention to Bitcoin. But I. Sardesai but I would say it's overrated. It appears to us that given its immense volatility, it really is a terrible means of exchange and a terrible store of value, which I'd say both pretty important this year, supposed currency. So I would say Bitcoin is overrated. [00:06:04][19.5]

Alec Renehan: [00:06:05] Yeah, fair enough. Now we like to start these interviews, getting to know you guys personally and hearing about your investing journeys. And we like to start with people's first investments. We generally find there's a good story that comes out of it or maybe a few lessons that come out of it as well. So I want to hear from both of you the. More stories of your first investments. Jack, maybe we can start with you. [00:06:31][25.3]

Jack Trengove: [00:06:31] Yeah, sure. Yeah, I guess throughout my studies is when I sort of started taking more notice in the markets. And the first company that I officially bought stock in was I'm not sure if you heard of that catapult. Yeah, that's a I guess the reason for that. And there's no more reason more to the fact that it's technology sort of piece of product or equipment that athletes wear on their bodies that track sort of the GPS and the data goes straight through to sort of the fitness guys and the coaches and whatnot. And you literally you can't hide anywhere because it's tracking you at every step, how fast you're going, where you're moving and everything like that. And I guess from my time within AFL footy, I just saw every AFL club had them and we're using them every day of the week. And I saw them across many different codes as well. So there wasn't much of a thesis behind why I bought it, but more so the fact of the popularity and I thought was just going to keep growing. And I think I did get it about a dollar, you know, going back a few years and it did rise to four. Little did I know that it wasn't profitable at all throughout this time of profitable to. So I certainly wouldn't be going back and buying it at the moment. I've had my time again, but yeah. An interesting learning that's for sure. Yeah, nice. [00:07:46][75.1]

Alec Renehan: [00:07:47] It's an interesting company. We recently did an episode with Andrew Page who actually gave us a thesis for investing in Tadpole. So he obviously thinks profitability is ahead. But I, like you, invested in, you know, a product or a company that you knew and a product that you used. It's very much in that Peter Lynch style of investing in what you know. So, David, if we turn to you and we ask you the same question, can you tell us the story of your first investment? [00:08:11][24.8]

David Prescott: [00:08:13] Only down here. I invested in two companies. I knew very little about this. And I said a [00:08:19][6.0]

David Prescott: [00:08:22] my first two investments were not long after I finished university in the late 90s, I invested in to closer to oppose. I were the Ten Network, which is Channel Ten, obviously from the free to air TV broadcaster, which is a pretty ordinary business, which is probably a much better business back then, have turned out to be a pretty difficult industry. And also that was one of my first investments. The other one was the New South Wales today, again, through the initial through the IPO process, both of them were pretty good outcomes for me personally. I think more luck than any war, definitely no luck and no skill. That's after that old somewhat hooked. And that was the start of my investing career. [00:09:03][40.9]

Bryce Leske: [00:09:04] Nice boy. Looking forward to unpacking a bit about your role at Lanyon, but before we do, Jack, we just want to close out the background piece with a bit about your journey through AFL and into the markets. And, you know, we've spoken to a number of sportspeople and it often is the case that, you know, you get into professional sports and then it's all about the housing and that sort of stuff. And very little is spoken about stocks. So we're interested to know if, you know, in the locker rooms with the boys, was there much chat about the stock market at all or was there a preferred asset class otherwise? [00:09:34][30.3]

Jack Trengove: [00:09:36] Yeah, there's certainly plenty of talk about it. I think any possibility to make money. People are the competitive individuals, like a lot of athletes want to have a bit of a piece of it. But I think over my journey, I sort of found that a lot of athletes were certainly more comfortable with buying property. I think it's a bit more simple to understand. And obviously you've got the tangible asset there have been out of touch and feel it and say it versus the stock market where a lot of people, you know, just chose not to try to understand because I guess without sort of knowing things, it is quite difficult and quite hard to sort of navigate at different times. So once people sort of got wind that I was working and I'm pretty passionate about the equities market, then every day I walked into the change rooms are after tips. But the thing that I disappointed them on most is that they were after sort of the the diamond explorer in Botswana that it was going to for a couple of days, which I certainly wasn't providing them with that and been sort of more value side of things. They weren't interested in doing the time and waiting for your value to sort of be appreciated and uncovered. So certainly there are certainly similarities, sorry, between the two industries, both very competitive. And, you know, you're constantly getting judged against the market. And, yeah, it's been an interesting transition from AFL footy into the sort of funds management, but I've thoroughly enjoyed it. [00:11:00][84.6]

Bryce Leske: [00:11:01] Yeah, I just want to pick up on something you mentioned there around the deep value. And we do have a question around London's investment philosophy in a sack for Dave. But how did you, I guess, come to that investing philosophy when you first started out? Like, was it something that you had heard of and decided to go down that route, or was it a process that you sort of tried the momentum growth and sort of landed on the deep value? [00:11:21][20.6]

Jack Trengove: [00:11:22] Yeah, probably an element of Bryce. I mean, you know, I was extremely fortunate. Meet Dave a couple of years ago, and while I was still playing footy, we had a day off every week where I was coming in to London and took up a desk and was just trying to immerse myself in in everything that the market has to offer. And I guess what resonated with me most once, meaning Dave, was he's certainly more to the deep value side. And I think he always explains the sort of our investors and different people, whether the boring cardigan wearing guys that, you know, really go through and do our day and every company and make sure that the underlying value exists there. And I think it's only been confirmed. The reason as to why I'm in this sort of investing in more recent times is, you know, the buy now, pay later, and everything that's going in the sort of the tech side of things. And it's all just I'm not going to say fake money, but, you know, it's going to the moon, really, when at the end of the day, there's no actual sort of deeper value underlying these companies, which, you know, you just sleep better at night knowing that you've got something there that you've sort of, you know, as investors were investing in the company, as though it is our own. And you want to make sure there is something underline that sitting there, you know, in case a rainy day comes, which I sort of fear for these other sort of companies that don't have the same sort of asset base there. You know, in a downturn, what happens to those companies is is a scary thought. So certainly sleep better at night knowing that we're more deep value in sort of capital preservation. [00:13:01][98.6]

Alec Renehan: [00:13:02] That leads neatly onto the next question. Dave, can you tell us what you do and I guess, and in particular, what your investing approach or investing philosophy is? [00:13:13][10.9]

David Prescott: [00:13:13] Atlantean probably talk about this with a degree of apprehension, given the fact-value investing has been a horrible place to [00:13:20][6.4]

Alec Renehan: [00:13:21] come to your house. [00:13:22][1.6]

David Prescott: [00:13:24] In fact, I was reading this morning in the equity that value investing has been condemned to Covid condemned value investing to its worst run in two decades. So it's had two decades of value stock underperforming. So yeah, I say this with a bit of trepidation and fear, but we are value investors unashamedly. What we try and do Atlantean is we're obviously buying listed securities. We're looking to buy securities that are highly free cash flow generative when we can buy them at discounts to intrinsic value. So we're long only guys, we don't do any shorting and we're actively engaged. So we do our selves as owners of stakes in companies. And we we do take our shareholding seriously. Our approach is, you know, it's not formulaic, it's not rigid. And we look we look everywhere to find opportunities and to uncover value. [00:14:15][50.5]

Bryce Leske: [00:14:16] So you mentioned that the two decades of hardship that all value investors are undergoing has Covid made you rethink any of your approach at all? [00:14:25][9.5]

David Prescott: [00:14:27] I think we were constantly rethinking our approach, given the fact value investing is not. It's certainly been easier, I think, to make money chasing high growth and momentum stocks over a significant period of time. So you're always questioning as an investor, unfortunately, you're always questioning yourself. But I think Covid there's been a lot to think about. Obviously, there's been a significant change in a short space of time. But our core investing approach hasn't changed. We're thinking about a lot of things. We're thinking about which companies are going to be the winners from new ways of working and consuming and learning and providing health care. We think about digitization. We're thinking about the enormous changes that we're seeing in the commercial property landscape, what we're seeing with the potential partial reversal of globalization. But we're not changing our investment approach. [00:15:16][49.3]

Alec Renehan: [00:15:17] Dave, on that point around, people saying, you know, value investing is dead, you know, similar similar headlines to that. And I always ask this question with a grain of salt, given that this isn't the first time in history, you know, value has been put down. And, you know, there's all those stories of Warren Buffett back in the day underperforming for a long period of time and then value outperforming again. So I think, you know, if we take the long lens of history, value outperforms at times and growth outperforms at times. I guess the question is, though, what do you think the catalyst is or what do you think will change for value to sort of have its moment in the sun again and to start outperforming growth? [00:15:54][36.6]

David Prescott: [00:15:54] Yeah, it's a really good question. And there's not an easy answer, because I think everyone knows that the the performance of the market's been driven predominantly by high growth and momentum stocks and even you could say concept stocks. And so it'd be easy to put your head in the sand and kind of cry yourself to sleep as a value investor. But I think the reality is, if you look hard enough and you search broad enough, there will always be pockets of opportunity. There are always going to be investment opportunities. If you work hard enough. There's a great book from Peter Cundall. A famous Canadian value investor in the title of the book is There's Always Something to Do and that that really underpins our view of markets. Yes, whilst the markets might be focused on growth stocks and they might be the better performers. There is always opportunities. If you do the work and work hard, you'll find investment opportunities. So I don't know specifically, I don't know what's going to be the circuit breaker here. We know that the Fed continues to be the predominant driver of financial markets. And if we see a change in the interest rate or inflationary environment, we could see a enormous change in the way growth stocks are being priced. So that's not our central case, but that could be a massive inflection point in markets. [00:17:12][77.8]

Bryce Leske: [00:17:13] So, Jack, how do you guys actually define value Atlantean like? You know, I'm sure a lot of our audience think of it as beaten-down companies that, you know, have been underperforming. But, you know, everyone has their own sort of view on value. And we're just interested to know how you guys sort of define value. [00:17:28][14.8]

Jack Trengove: [00:17:29] Yeah, I guess it is sort of forever changing in a way. And I guess the old, you know, cigarette value sort of companies have been beaten from left, right and center. That's where you sort of can find some great opportunity. But as they've sort of alluded to, we're sort of trying to find value in all sorts of different ways now. And, you know, through a lot of research and a lot of deep thinking, I think, as I sort of alluded to, the value sort of comes from the underlying intrinsic value of of the company itself, which is what we're continually looking for. But opportunities that present themselves every day at the moment purely from a company that sort of, you know, on the nose a bit, that shareholders just lost faith in, that we think we can buy sort of at a cheaper price and where it is sort of undervalued. So it's sort of hard to have a specific definition, I think, for what value is for us, because we can find it in many different ways, but we go for the approach where is against the grain? A bit in the way that people are thinking about different companies and where we can find our advantage over other investors, where we think we have a bit of an edge and a lot of the time that comes from, you know, people actually disliking the companies that for whatever reason, as you know, before we start buying. But generally, it is as a result of companies that have on the nose are sort of sad or, you know, just out of favor for whatever reason. [00:18:56][87.1]

Alec Renehan: [00:18:57] Equity Mates, we're going to pause here and here. A quick word from our sponsors. [00:18:59][2.6]

Bryce Leske: [00:20:10] Now let's get back to the show. [00:20:11][1.2]

Alec Renehan: [00:20:13] So I think Jack sense that there is a really good Segway into talking about luncheon's investment process. And I think one of the things that Bryce and I most appreciate about doing this podcast and being able to speak to people like yourself is we get to get some insight into how the professionals invest and how they think about investing and in particular, how they go about the process of discovering stocks and researching stocks and forming an investment thesis. So we would love to unpack some of that with yourself and Jack now. So I guess if you can take us to the beginning of your investment process, what is your investment process start? [00:20:50][37.9]

David Prescott: [00:20:51] Yeah, it's a good question. One of the most important steps in our process is the idea. And the stock as an idea is incredibly important. And ideas, we would say, can come from a wide variety of sources. So we quite deliberately don't have an incredibly rigid or formulaic approach. We like to remain flexible. We like to remain opportunistic, and we like to look broadly for opportunity. Now, that doesn't mean there's not some daily disciplines that we don't go through to make sure that we are giving ourselves the. Or providing the best opportunity for ourselves to find mispriced stocks, so we do things like on a daily basis, we will routinely troll the 52 week low list. And this was a discipline that Ben Graham had used to do this every day of his career, where he'd searched the market for opportunity based on stocks that had hit the 62 week low list the day before. We are doing that as an investment team every day. We've obviously got quant filters where we're filtering the stuff. We're filtering the market for stocks that may look mispriced. We review companies that are doing very well. We review companies that are doing very poorly. If a company has hit a period of distress, there's a fire in a factory or the chief executive has been hit by a bus or there's a class action, whatever that is, and the company becomes front page news and there might be a wave of selling pressure in a particular stock. We will you know, we'll always investigate and start doing a little bit of work on a company. Now, if those ideas start to look interesting, that's not supposed where the real fun starts. And we will do a significant amount of fundamental research that's both building financial models and meeting with the management team, meeting with their customers and competitors and suppliers, directors, opening engagement with the board. So there's a very detailed and comprehensive process that follows that spark of an idea. [00:22:50][118.4]

Alec Renehan: [00:22:50] If we pick it up from there. And I might ask you this one, I assume the process is both qualitative, you know, speaking term management, understanding their people and culture and, you know, doing speaking to their suppliers and their competitors and stuff like that. And then also quantitative, looking at, you know, they're figuring out intrinsic value and then also figuring out their earnings and projecting their earnings forward. Do you guys lean on one side of that more qualitative or more quantitative, or do you do a bit of both? Can you sort of talk us through how you do that company research process once you've found potential stock idea? [00:23:28][37.3]

Jack Trengove: [00:23:28] Yeah, absolutely. I think, you know, the critical part in all of this is we don't really lean either way, so to speak. We want to sort of try to take in every bit of, I guess, research we can possible to make sure we're making, you know, great investment decisions for the long term. And, you know, I feel like as analysts here, Lanying, we're in a very privileged position where we do have the ability to sort of sit down with the CEO of a, you know, a large company here in Australia or, you know, walk down the road and have conversations with people in different industries and different competitors that a lot of investors don't have that ability to do. So from that point, it's you know, as I said, we're in a very privileged situation to be able to take all that information in and then make decisions on the back of it. And I guess the key part also from a, you know, modeling and financial point of view, we go back historically with the company trying to figure out sort of how they've gone in the past and where they're going in the future, forecasting future cash flows. And you know, what's happening from a macro point of view, where are the trends heading, where's the opportunity for them to grow? We really want to see a long sign of continued growth over time for us to be sort of, I guess, hitching our wagon to the back of that company and letting them run as we sort of want them to. And I think one of the things that I've learned more so in more recent times and how important it is to back strong management and it's a huge part of our decision process is, as I've sort of alluded to a few times, we're giving the company money and investing in that company as though we actually own the company. So we want to make sure the people at the top, you know, are running it right and true to their word and, you know, have a great reputation and look after their shareholders, because at the end of the day, that's where our money is going in. That's how we're going to realize sort of profits into the future. So, you know, I think that's a lot to probably take in, but we don't sort of follow any specific way. We want to go out and be extremely thorough in the way that we analyze these companies, because we're not only investing our own money, but, you know, a lot of our investors and clients their money as well. So I'll go back on that. Sleeping easy and not thinking again is that we want to be as knowledgeable and know all the ins and outs that's going on within the market in that company specifically, so that we can make informed decisions for the long term and be confident doing so. [00:26:00][151.7]

Alec Renehan: [00:26:00] Probably the most underrated part of an investing process is actually what you do after you've bought a stock. People sort of conceptually understand the research that you do to form a thesis and then then you hit buy or, you know, you call your broker and you and you buy. But I'm interested to know what your process is in sort of managing your portfolio after that. How do you check the company is performing as you expected and. Test your original thesis. So, Dave, maybe if you can tell us about what you do after you've bought a position in a stock. [00:26:34][33.3]

David Prescott: [00:26:34] Yeah, it's a really good question. And I suppose that's where the real fun starts, right? Once you started your analysis, completed your investment thesis or your understanding and made a decision that you're going to make an investment in the company, that's where really things start get a whole lot more serious. And so from that, once we have an investment in a company, I think our level of scrutiny, the depth of our research only accelerates. So we're not an investment firm that makes an investment in a company. What does a bunch of research makes an investment company in a company and then forgets about it for the next five years and hope things go well? We tend to stick very, very close. So we think it's a process of continual reassessment of our investment thinking. We want to increase our understanding of the company. We want to understand that business as well as any other investor or analyst within Australia. That's kind of our ambition or a goal within the investment that we make. Quite often we go through the passage of time. It doesn't matter what business or what industry that you're in, but typically your relationships deepen. So our relationship with the CEO or the CFO or other members of the executive team or even the board will strengthen and deepen on occasion. Our level of engagement with the company will increase. We might have a stronger view on shareholder value and how that can be created or enhanced. So we might make our views known with the company. We've got strong, strong views on our value as a shareholder can be enhanced. That's not what we don't always do that, but we do that on occasion. And obviously we are constantly reviewing various data points on whether or not that is a company issue. Data from their financial results or any other information they put out to the exchange will constantly monitor what's happening with within the industry. We will constantly and continually talk to competitors and suppliers. So we just so our understanding of a business is enhanced and only grows through time saying that we are wedded to this concept of intrinsic value, which we introduced earlier. So if we make an assessment that a company is worth nine dollars a share and we're lucky enough to be able to buy five dollars a share, if the stock performs very well and it trades through our estimate of value, we are very deliberately wedded to that intrinsic value estimate. And we'll look to get out of the business. And we quite often sell securities in companies that we think have very prosperous, are lucky to have a very prosperous future, but of that training at a level that exceeds what we believe is fair value for the company. [00:29:15][160.6]

Bryce Leske: [00:29:16] So, David, speaking of intrinsic value, the underlying value of the company, one of the, I guess, key phrases or pieces of terminology that value investors use is the margin of safety. And I think on your website, you make mention that you look for a large margin of safety between the price and the underlying value, which you just spoke about. With rates so low now, what are you using as your risk free rate when you're doing these valuations? And I guess more broadly, how are you actually thinking about this low rate environment? Well, this [00:29:45][29.5]

David Prescott: [00:29:45] has been the key driver of financial markets, right? So far, I think over the last many years, central banks led by the US Federal Reserve continue to be the predominant driver of financial markets. So by holding interest rates down, central banks have influenced investors behavior to bid up the prices of securities. And recently that's been irrespective of the economic backdrop. So we would say the Fed and other central banks around the world are distorting risk markets, arguably on a scale that we've never seen before. Interest rates, as we know, a highly likely be heading lower here in Australia, and possibly we're heading to 10 basis points in a week and a half time. So whilst it's entirely justifiable that the risk free rate stays low for no consensus or contrarian view would say that inflation could rise given we've seen 10 trillion dollars of fiscal support. And that's largely come through money printing and there's been distributed to what we would call Main Street. So and we've got a trade war with China. So there's potential inflation risk from the geopolitical situation. So it's not impossible that inflation and interest rates go higher. They're not going to say whether or not that's our best estimate or not, but that's it's certainly not totally implausible. So to answer your question, we tread very cautiously here. Many investors, both retail and professional investors, would be increasing there. Valuations for securities based on incredibly low risk-free rates when not ramping our valuations by incorporating multi-decade lows for risk free rates. So it's a really complex problem. I don't think we've got this completely right as an investment organization. I mean, the smart thing to have done, yeah, eight or nine years ago was just fire securities aggressively because stocks pretty much only headed in one direction. But we're conscious of the fact that it's not totally implausible that rates and inflation and rates head higher, which will have a detrimental effect on securities valuation. [00:32:04][138.5]

Alec Renehan: [00:32:05] We'd love to unpack some individual securities here. We love hearing about some of the names that the experts we speak to looking at or potentially holding. Now, we don't want you to give away any of, you know, herbs and sacred herbs and spices or anything like that. But it would be great if you could share maybe some companies that you're interested in at the moment or some that you are holding. So maybe if we start with you, what's taking your interest at the moment, [00:32:32][27.6]

Jack Trengove: [00:32:33] as we sort of mentioned at the start, where, you know, here Lanying, we're pretty long gold and one of one company that we've worked for a number of years now and it's done very well for us is evolution mining. It's got a market cap of about 10 billion dollars, I think sort of a leading growth focused Aussie gold miner. At the end of the day, it I think they operate five wholly owned mines for here in Australia is one over in Canada last year. They produce this little under seven hundred and fifty ounces of gold. They're one of the lowest cost gold producers. So there's a lot of things sort of heading in the right direction for us. And we're certainly we've hitched our way into the back of them for a number of years now. And I think Dave might be a bit embarrassing me mentioning, but he's got a slight crush on their CEO. [00:33:24][51.1]

Jack Trengove: [00:33:31] everyone needs one, right? I think and yeah, we view him and the management around him as being one of the best management groups in the country. So they released their quarterly this morning, I believe, and all the things were heading in the right direction and positive. So we're confident to give it our money to them because we know that they can do the right thing by us and we've got a longer term view of gold and what that's doing. So, yeah, that's one company that we've been invested in for a couple of years. [00:34:02][31.0]

Bryce Leske: [00:34:02] And Dave, what about yourself? Obviously, other than, you know, Jack's just stolen your man crush and anything that is particularly of interest to you. [00:34:13][10.2]

David Prescott: [00:34:13] I've got a lot of man crushes, actually. That's just one of them we like. Yeah. Quite a few other companies are pulling our thoughts and energy at the moment. We've been an investor in mineral resources, again, run by an incredibly capable CEO. Some Mineral Resources is a mining contractor, but also owns some iron ore mines. So incredibly well formed company is an extraordinary amount of time. It's since it listed in 2006, it's me that EPS growth of north of 15 per cent per annum return on invested capital is around 20 per cent total. Shareholder returns being in excess of twenty four per cent compound over almost 15 years now. So we think that's an incredibly good Australian business and that's for another company that we've still Jex language that we've reached our wagon to. Over recent years, we've been quite actively engaged with some, I suppose, reasonably public positions over the last little while. We bought a stake in a Hong Kong based toll road, essentially an infrastructure investment company, which we thought was extraordinarily undervalued, which has been we received a takeover offer back in early September. We've also been buying, yeah, probably surprisingly to other institutional investors, because this has been the domain of the retail investor. We've been buying a basket of listed investment companies here in Australia, companies that are run by very capable fund managers that are trading it, in some cases 75 or 80 cents in the dollar. Well, we see that as a potential opportunity for them to be trading much closer to 100 cents in the dollar. So we think that's an interesting space here in Australia as well. [00:36:01][107.8]

Bryce Leske: [00:36:01] So no Afterpay. [00:36:02][0.4]

David Prescott: [00:36:04] I wish I had. So what's that, a ten bagger in six months? I know it's it's frustrating. [00:36:12][7.6]

Bryce Leske: [00:36:13] It's not we're not Afterpay investors fickle. I wouldn't I wouldn't expect so being the deep value guys that you are a bit Equity Mates. We'll just take another quick break and hear from our. Ponce's. So, Dave and Jack, before we move on to our final three, we just wanted to touch on a couple of questions, I guess more about the broader market. And we have heard sort of your thoughts on some of these would be good. Just to hear a few more, Dave, how do you see the next 12 months perhaps playing out both here and in the US from obviously a market point of view, given that we've obviously got the election coming up and a whole bunch of other stuff? Quite hard to get your head around sometimes. [00:36:51][37.8]

David Prescott: [00:36:52] Yeah, look, it's a fascinating time to be an investor, right? There's lots going on. Covid just adds another dimension. The US federal election is imminent and will have a bearing on markets. Look, we you know, we would say that US equities are expensive on almost all traditional metrics. They look expensive. You could make similar arguments for equities across most developed regions. So we you know, typically when equities are expensive, you know, one of two things happens. Either, you know, they correct or you see strong growth in earnings to justify the valuation. We think the strong growth and earnings possibility is probably lower, lower on the list of likely outcomes, whereas a potential kind of cooling of equity markets is is more is more likely. So we're holding significant amounts of liquidity in all of our funds, because whilst it's very difficult to call this short term direction of markets, there is enough things there's enough elements that are causing us to worry. So we're treading reasonably cautiously. Now, I say that again with a degree of apprehension because picking the short term direction of markets is frankly near impossible. And that's if anything, I think what we've learned recently is markets just go up. So, yeah, calling that that might not be the case in the near term is dangerous, but we don't aggressively have to spinnaker out at the moment [00:38:16][84.4]

Bryce Leske: [00:38:17] or Ren went into the crash in March so illiquid that he was selling his shoes to get some money to put to. What have you learned from that Ren? [00:38:27][10.4]

Alec Renehan: [00:38:29] I've got a little bit of liquidity. Good. The residual from the shoe sales the last week are little. [00:38:33][4.5]

David Prescott: [00:38:36] Good to hear. [00:38:36][0.1]

Alec Renehan: [00:38:36] Hear, Jack. Maybe building on what David said there. Obviously, it's incredibly hard to pick the direction of the stock market in the short term, but there are obviously some major sort of macro trends playing out. Bryce mentioned the US election. Dave mentioned the US China trade war and the incredible amount of money printing we've seen from the Fed. When you look at the macro environment, what are some of the key, I guess, trends or key events that you're paying particular attention to and you think will have a particularly profound impact, I guess, on markets? [00:39:09][32.8]

Jack Trengove: [00:39:10] You know, they've probably Covid on of over most of it just before. But, you know, you mentioned the US election, the trade war, and whatnot. I guess the thing that I've been looking at a lot and what we've probably, I guess, been shocked about since the start of Covid is all this stimulus that's being pumped into the economy and, you know, just keep printing cash and worry about the consequences tomorrow sort of situation that's been unfolding everywhere. And I guess we've been trying to sort of think deeply about what the economy looks like once this stimulus rolls off. And, you know, I think it's been made pretty certain that we're just going to keep printing money into, you know, we get out of this and we're going to make sure that we don't go through an episode like the GFC, you know, over 10 years ago now. And so different sort of, I guess, forces that that that will affect. When the first set of stimuli came out, we were just shocked at the amount of money that was getting pumped into retail and sort of online gambling. And you know that just since sort of sales and revenue in companies within those industries, so much higher than what we could have ever imagined. And, you know, once sort of job kaper and the sort of stimulus packages like that roll off, where does that leave us? And that's what we're sort of really trying to sort of figure out. And I guess that's the probably the concern and why we are sort of going forward with a fair bit of conservatism, because it is really hard to sort of figure out what what that might look like. And then not only to mention that, I guess reopening the economies around the world, you see what Melbourne and Victoria have been through more recently. And I know they're just trying to relax restrictions, but what sort of effect will that have on, you know, more travel happening and potentially people going out and maybe spending money? But, you know, do they have the money in their pockets any more, all these different sort of forces and catalysts that have been ongoing for the past six to nine months? And it's going to be really interesting. And I find it, you know, incredibly privileged to have gone through a pandemic such as this early on in my career. You know, I started only recently in Infant. Management and, you know, taking up a full time job in the equity markets, and there's always people before me talking about how they went through the GFC and back in my day sort of thing, and I started in the middle of a pandemic where it's doing extraordinary things for the markets. So while I wouldn't wish upon anyone to go through it again, but it has been an incredible learning experience for me. And the next 12 to 24 months are going to be even more interesting again, I think. [00:41:56][166.4]

Bryce Leske: [00:41:57] Yeah, I think the same would probably apply to a lot of our community as well, that there were many of them who, you know, even made their very first investment in February, you know, and then saw half their life savings wiped out in March and then and bounced back in a matter of days. So it has been a pretty phenomenal experience to go through. So you. Yeah, just echoing those comments there. [00:42:18][21.1]

Alec Renehan: [00:42:18] As Bryce mentioned, we do have a final three questions that we like to end the interview with and we'll ask both of you to answer them. But before we do, if people want to learn more about London or either of you personally, is there a particular place they should go, you know, website or social media or anything like that? [00:42:35][16.6]

David Prescott: [00:42:35] Well, not great on the Sociales, to be honest, but we do have a website which is Lengen. I am so Lengen Asset Management, Londinium dot com, which has details on all of our funds and how we've been going over the last decade [00:42:48][12.2]

Alec Renehan: [00:42:48] and so on. So we'll get into these final three questions and I'll ask and then if you just want to answer it one by one. So Dave if you want to answer first and then Jack, so we'll get started. The first one is, do you guys have any books that you consider must reads and these can be investing or otherwise? [00:43:07][18.4]

David Prescott: [00:43:08] Well, tragically, I pretty much only read investing books, but I strongly encourage people that are interested in investing to read safety by Seth Klarman, which is just a terrific investment book. [00:43:22][13.7]

Alec Renehan: [00:43:23] Hard book to get your hands expensive on Amazon. I think it's in the four figures to buy it. [00:43:27][4.5]

David Prescott: [00:43:28] That's right. I think there is going to be careful what I say search far enough on the Internet versions that pop up. So that's a book that I would certainly recommend. Obviously, all the possibilities. You know, they're obviously readily available and freely available. It is a phenomenal education in those letters. I also like the Capital Returns book of the Marathon Asset Management. That's just an excellent investment book as well. [00:43:54][26.3]

Jack Trengove: [00:43:54] and for me, yeah, I'll go down a similar path with Dave. But I think for people sort of starting out in their investing career, one book that I've sort of found incredibly insightful is the seventh edition of Valuation. And Bio color got out and Wessells, they sort of go through, you know, ways that measure and manage the value of companies, and it sort of breaks it right down from the beginning of the process to the end. And I think if you are interested in this space, which if you're listening to this, you probably are, it's a great place to start in terms of trying to understand how you actually value companies. And I guess the different forces within that Allbright trend a bit here and go away from investing. Another favorite of mine that I read probably on over five or six years ago. But I'm a bit of a sports fan and a lot of every bit about sport and the way that different athletes think and sort of the competitiveness that they sort of show in their careers. And the Andre Agassi book is a phenomenal read. And just to hear about sort of where he started and where he got to and the various pressures that he sort of dealt with along the way. Yeah, it's just a great and very entertaining read [00:45:07][72.5]

Alec Renehan: [00:45:08] and saw on some great books there. The second question we like to ask is, what's your go-to source for investing and financial information? [00:45:15][7.0]

David Prescott: [00:45:16] So we obviously read broadly, you know, probably my preference. Well, there's a number of things right. But we do read I read four newspapers a day, some local, some offshore. And we. And that's obviously not easy. But finding the time to do that, we think is important to stay abreast of what's going on in the world. We obviously read academic journals, we read broker research. We read the investor letters of other investors we admire. You know, we talk about where ideas come from. They can come from all sources. And so we feel like we give ourselves the best opportunity to find ideas if we're writing broadly. [00:45:52][35.4]

Jack Trengove: [00:45:52] Yeah, I second that as well. The AFR is on my desk every morning and I have a read through it. Just update myself on all sorts of things and the is a common read also. But yeah, as many resources as possible really to find different information. And you know, we speak about the art to this game is really finding the edge over your competitors. And the only way to find that edge is to read and get yourself more information. So that's probably been one of my biggest learnings from getting into the industry, is there's never enough time to read and consume and take in as much as you possibly can. [00:46:29][36.6]

Alec Renehan: [00:46:29] That's a great thought worth echoing. The rumor is that Buffett reads 500 pages a day. So there's just that compounding effect of knowledge. The more you read, the more you understand put can put together, you know, a whole bunch of various different industries and form investing thesis. His final question and we want to thank you guys both for taking the time and speaking to us today. It certainly is great to get your insight. And we've definitely learned a lot if you think back to early in your investing journey. So, Jack, when you were buying Catapult and David, when you were subscribing to the Channel 10 IPO, what advice would you give your younger selves? [00:47:07][37.8]

David Prescott: [00:47:08] Look, I made a mountain of mistakes over 20 years doing this, but I think the early mistakes that I've made probably centered on two things. One, relying too heavily on the opinions of others. So that's probably a big mistake and something that I would encourage myself not to do if I was 20 years younger again. And the second thing is you're investing in businesses that look optically cheap. I have some significant or substantial structural challenges and hoping for improved outcomes. They've been mistakes that I've made, and I probably encourage myself to think a little bit differently if I could. [00:47:49][40.3]

Jack Trengove: [00:47:49] Yeah, I guess the thing if I could sort of give myself advice of, you know, eight to 10 years ago, I think it'd be as simple as starting younger. I think the best learning really comes from jumping in and immersing yourself in sort of all of the ins and outs that come with the market. And, you know, Dave just mentioned then some of the greatest learnings he got was from the files and the poor decisions that he made. So obviously don't go all-in with everything. You've got early days, but I think just immersing yourself in everything that comes with the equity market, whether it comes from, you know, reading company announcements, understanding the different industry and macro forces and environments, and just taking it all in and reading as much as possible and then investing your own hard-earned money into that, because that really teaches the lesson of being, I guess, careful and smart in the decisions that you're making going forward, because, you know, it is the money going up and down day by day and your long term investment decisions that you can really make a difference. And I think the other thing that I sort of learned also is the fact that you know, I start early and you can really see the benefits of compounding interest, I guess, do this thing. And over a longer period of time, you can be in the market and sort of navigate through the ups and downs that come in short term and understand where you're trying to get to in the long term than the earlier start, the better you are. [00:49:17][88.1]

Bryce Leske: [00:49:18] Nice. Well, Dave and Jack, it's been awesome having you both on the show today. Very much appreciate you giving your time to come and share what you're doing with the Equity Mates community. So Ren and I certainly got a lot out of that interview and I'm sure our Equity Mates community will as well. So thank you very much. We'll look forward to keeping tabs on how you guys are going and getting you back on at some point to, I guess, discuss if value investing is going to come back [00:49:44][25.4]

Jack Trengove: [00:49:51] sooner rather than later. [00:49:52][0.8]

Bryce Leske: [00:49:54] But thank you very much, guys. [00:49:55][0.8]

David & Jack: [00:49:55] Thank you so much, guys. Appreciate it. Cheers. Thanks, guys. [00:49:55][0.0]

[2758.0]