Expert Investor: Emma Fisher – Finding Great Australian Companies

Bryce Leske: [00:00:56] Welcome to another episode of Equity Mates, our aim is to help you on your investing journey, break down the barriers from beginning to dividend. Whether you're an absolute beginner or Warren Buffett, we guarantee that Equity Mates will have something for you. My name is Bryce and as always, I'm joined by Equity Mates Buddy. How are you going? [00:01:12][15.6]

Alec Renehan: [00:01:12] I'm very good, Bryce. I'm very excited about this interview. We've got a superstar fund manager joining us. Yes. [00:01:18][5.3]

Bryce Leske: [00:01:18] Big star. Looking forward to it. It is our pleasure to welcome Emma Fisher to the studio. Emma, welcome. [00:01:23][4.8]

Emma Fisher: [00:01:23] Thank you very much for having me. I'm very excited to be here. [00:01:25][1.8]

Bryce Leske: [00:01:26] So Emma is a portfolio manager and head of research at Airlie Funds Management. She co manages the Australian Share Fund, which its ticker is Asef on the ASX. Emma, we always start with a game, so let's get stuck in. [00:01:39][13.7]

Alec Renehan: [00:01:40] So the game is overrated or underrated where we throw out an investing theme or index and we just get your thoughts on whether you think it's overrated or underrated at the moment. [00:01:49][8.5]

Emma Fisher: [00:01:49] Love the game. [00:01:49][0.3]

Alec Renehan: [00:01:51] So we'll start at home with Australia's benchmark index. Overrated or underrated, the ASX 200. [00:01:57][6.0]

Emma Fisher: [00:01:58] Look, I think in the long term it's underrated for Australian investors. I'm assuming a lot of your listeners are local investors. And I think, you know, you can't underwrite the value of investing in your own backyard and businesses that you see, you know, the experience as a customer, you understand them. I think another thing in favor of the ASX investing in the ASX is from a tax perspective, the franking credits, and the dividend structure as well. As, you know, when you look at Australia and compare it to overseas markets, you know, we have a small but wealthy population. So you have these profit pools that often only really support maybe two or three players. And so, you know, hopefully we'll see isn't listening. But, you know, you do tend to get these really cozy oligopolies and businesses that do have phenomenal returns, profiles as a result of that. Like I always think when I go to London, I'm just sort of assaulted by the amount of advertising and competition there is like five big supermarket chains is five or six telcos. And then I come back to Australia and I think, oh, it's so sleepy. And New Zealand is the same, you know. So, foreign investors, I think that long term, it's underrated. I think there are some really good businesses here that can earn really good returns. [00:03:07][69.4]

Bryce Leske: [00:03:08] Yeah, nice. So then overrated or underrated, the Nasdaq 100. [00:03:11][3.0]

Emma Fisher: [00:03:13] I'm going to say it's overrated, you know. Well, yeah. Look, there are some businesses within that index that I'd love to own bottom drawer. You know, businesses like Microsoft for sure. But as a whole right now, I feel like we've been here before. Guys like Aviva Sales into perpetuity. Like it's you know, my problem with it is, you know, everyone reads these statistics about, I guess, the proportion of loss-making businesses in the index is becoming, you know, as high as it was in the tech bubble. And the issue with that is, you know, if you require equity funding to sell the dream and to fund your business, rather than it being funded through your internally generated cash flows, you know, you're relying on the equity window always being open and it's not always open and it won't be open and it will have nothing to do with these tech companies. It will be a global sell off. So we saw it in March last year. If you'd had to raise at that point in time, it would have been very difficult to do so. And that was an anomaly of a downturn. Like if it was a downturn, like the GFC, where you wouldn't, the equity window would have been shut for these companies for 18 months, for two years. You know, a lot of them would have gone bust because they couldn't have funded their operations. So I think that's a really big risk that people are taking. And I think, you know, you might disagree. We might have different views on where we are on the valuation clock, you know, but I think most people think it's eleven. It's eleven thirty. Like midnight is coming. You know, we've got to drive home like it's not the time to be doing tequila shots. [00:04:31][78.3]

Alec Renehan: [00:04:32] So I was looking at US snowflakes valuation yesterday and it's 141 times next year's projected sales. And it's just like when you think of that. [00:04:42][10.5]

Emma Fisher: [00:04:43] No, I mean, like, oh, God, I don't look, I imagine we can get into this a little bit later, but after pay is also like eighty, eighty nine times trailing sales. So I mean, all it says is, you know, you're like, oh, or you can make a judgment about his risk-reward. Right. And so for me, I think the risk reward for a lot of these loss making businesses looks pretty negatively skewed. [00:05:04][21.3]

Alec Renehan: [00:05:05] I'm speaking about risk reward are overrated or underrated GameStop. And given that it's dying down a little bit, I guess more the GameStop saga. Sure. [00:05:16][10.9]

Emma Fisher: [00:05:16] Yeah. Well, OK, so the stock itself is clearly overvalued by any any normal sort of valuation metrics. But I guess as a saga or as what it's telling us about society, like, I don't think we should sleep on this. Like, you know, whenever wealth inequality gets stretched right now through history, you see revolution. And I think it's kind of funny that we had French Revolution, Russian Revolution, Chinese Culture Revolution. And today's revolution is just a bunch of guys on Reddit, you know, buying meme stocks up, you know, in perpetuity. But I think that you know, if you actually go on the Reddit forum and you see what these guys are saying, there is. Clearly, this is there's this mentality that, you know, that asset price inflation coordinated by central banks, it's just it's led to this world where the haves have increasingly more. If you own assets, if you own a house, if you've been in the share market, you've seen your wealth expand. And if you haven't, then you've been left behind. So, you know, even though everyone over time, over very long time periods, everyone's absolute level of wealth is rising, wealth is such a relative concept. And if everyone else is getting richer than you, then you feel like you've been left behind. And I think, you know, you read some of the stories in this forum. It's people that want to stick it to Wall Street because their parents lost their jobs during the financial crisis and they feel like everyone got bailed out and no one was held accountable. Like, I think they picked the wrong target. I mean, hedge funds weren't bailed out. It was insurance companies and banks and things like that. So I think that and the other thing that I think is a shame about it is I think shorting where long-only fund. But I think shorting is a force for good in the market. Without shorts, you will have rampant fraudulent activity. And that's going to mean that retail investors are much more likely to be burned. So I think it will be anything that, you know, that threatens shorts is a force in the market. The long term is bad. But I think we should be paying attention because, you know, the markets right now priced for perfection. They're not priced for revolution, I guess. And this seems to be a revolution. [00:07:12][115.9]

Bryce Leske: [00:07:14] So overrated or underrated, the Australian property market? [00:07:17][2.8]

Emma Fisher: [00:07:18] Uh, I, I think it's underrated. I think, again, you know, from a tax perspective that the tax system is geared towards you making the bulk of your wealth through your family home because you don't pay capital gains on that. And then clearly, the mortgage market is considered too big to fail. So you get this coordinated policy response from fiscal and, you know, the Reserve Bank and the government designed to keep property prices high because they're so endemic to our economy. So I wouldn't want to I wouldn't want to be short Aussie property with that kind of backdrop. [00:07:51][33.4]

Emma Fisher: [00:07:53] Exactly. And you know what? It's maybe like long term, it's not a very attractive ROI return on invested capital, but it's very attractive ROIC because you're using other people's money, using the bank's money. So, yeah, for those reasons, I think it's it's probably okay. [00:08:06][13.3]

Alec Renehan: [00:08:07] And then final question in the game, we couldn't go without asking about cryptocurrency. So overrated or underrated bitcoin. [00:08:15][7.5]

Emma Fisher: [00:08:15] I feel like I should have a really strong answer on this because I guess technically I'm a millennial. But the short answer is, I don't know if you if I had to pick a fence, like I think buying one bitcoin and putting it in the bottom drawer is probably not the worst thing that you could do. I understand why people are buying it. Maybe I could propose an alternative investment, which would be if you're trying to protect your purchasing power in a world where everyone's control pee on, you know, the money press, I would suggest gold. You know, gold has a three thousand year history of protecting your purchasing power. Bitcoin. Sadly, gold mining is probably better for the environment than Bitcoin mining as well. I don't know, actually. I'm just guessing that [00:08:52][36.3]

Alec Renehan: [00:08:52] that's actually a good question. I'd love to know that. [00:08:54][1.7]

Emma Fisher: [00:08:54] Yeah, we should put them head to head, but I just like the track record. I like the track record of gold. But I think it's pretty sensible to react to what's happening in the world with some sort of view that, you know, you might want to put your money into alternative assets versus the US dollar. [00:09:08][13.9]

Bryce Leske: [00:09:09] So, Emma, we always like to hear the story of our guests first investment and perhaps any lesson. So are you able to share yours with us today? [00:09:19][9.8]

Emma Fisher: [00:09:20] Sure, yeah. I think technically my first investment was my grandfather gave my sister, my brother and I fifty Commonwealth Bank shares when we were like ten. And I paid no attention to it, except that I got a dividend check like twice a year that I probably used to buy lollies or something. But I do remember in high school looking at the paper and looking up the share price in the paper and that's sort of like I don't know, sparked something in me, but I never really paid attention to it. But I did always like making my own money, like I had a paper on at eleven. I begged my parents to sign a waiver so that I could get a job below the legal age. I mean, I wasn't being shipped off to the coal mines or anything so I could get video easy. [00:09:58][38.6]

Emma Fisher: [00:09:59] But my older sister had a job. She went to Brazil and she used to bring home bread. She could buy her own clothes. I was like, oh, I got to get on this racket. Like these, this job thing sounds great. So I had all these menial jobs through high school, through uni, and I always put my own money. And then investing, I think was the next step about liking making my own money. My grandpa, I think I would be about nineteen. He gave me an annual report I Commonwealth Bank annual report. He loves the Commonwealth Bank clearly, and he had it open to the page like the board of directors. And I think his argument was like, oh, look how many women there are. You could do something like this maybe one day. And it just sort of like led to a discussion about what an annual report was. You know, you get it once a year in the mail and it tells you how your business is doing. And then from there, like, I think he was just desperate for somebody in his family to invest with him. I did not come from family investors. My mum was a school principal. And my dad works in industrial relations, so I'm the first one without a real job, basically in my family. So, you know, he was my so is definitely my grandfather's influence. Like he was a child of the depression, very cautious about money. And I think he loved this idea. Like he's a classic dividend investor. I love this idea that you could put a lump sum of money to work for you and produce an income. So I think the first year, so he showed me how to open a trading account. And I think the first year I bought with QBE and then I just did that classic rite of passage. When you're in uni and like your mates are giving you tips and you buying like these Speedie mining companies, you've got, you know, it's actually interesting. It reminds me a little bit of like when you read Wall Street bets, like you read these people and I remember being nineteen and like thinking just because I owned something and I really wanted it to double that, it was going to double like just because I wanted it to. And like that was my thesis. Like I bought it. I knew the ticker, like what more do you want sort of thing. And I mean, I can't remember. I probably lost some money on some spivvy, I think a graphite company, a speedy graphite company. And and basically at that point, like, I had the bug and I also thought I needed to figure out what I was doing. So I transferred my I was doing commerce law, hated the law, dropped that, and I transferred into finance. But you know what? Like when I look back, I actually don't think you need to study finance to do this job. [00:12:08][129.5]

Alec Renehan: [00:12:09] I hope not, because I know [00:12:11][1.9]

Emma Fisher: [00:12:12] I actually think that's a bit of a waste. [00:12:12][0.5]

Emma Fisher: [00:12:16] I mean waste your time. Like everything I've learned about investing, I've learned on the job or I've learned through reading books, I think you can really self teach it. There are a few concepts. I go to uni, but I think I would have come to them anyway. So when I was I was working at Fidelity before I was at early and they would send all their new recruits to London. And so you'd be you know, I wasn't a graduate. I'd had a role in an investment bank beforehand, but we would go and we would work. We did this sort of intensive training course with a bunch of graduates from the London office, and they'd all come out of like Oxford and Cambridge, and they had to do this crash course in finance for two weeks before they could do the course with us, because none of them that all studied like geography and Russian literature and things like that. And they got it in two weeks, in two weeks. And I thought, you know, I should just if I had my time again, I would have, you know, studied something way more interesting. [00:13:03][47.2]

Emma Fisher: [00:13:03] You know, I love finance, but corporate finance like, you know, Modigliani and Miller and dividend theory and all of that, like someone else can have it. [00:13:10][6.4]

Emma Fisher: [00:13:11] So if I had my time again, I would have done something differently. But yeah, that was my path into investing. And I thought I had to study finance to get better at it. But really, it's just, you know, it's reading the books. It's reading the Warren Buffett letters like what everyone does. [00:13:22][11.8]

Alec Renehan: [00:13:23] Yeah. So you're now all you're a portfolio manager there. Before we get into talking about what you do there, have you developed a personal investing philosophy? [00:13:34][11.3]

Emma Fisher: [00:13:35] Yeah. So I think, you know, at at ARELY, the investment process is we look at balance sheet, we look at business quality, we look at management quality and we look at valuation. And that's how we pick stocks. But I think any portfolio manager or any investor really also brings to it their own experiences, their own concepts. And for me, there's been a few things that I've come across in my career that like these concepts that really have stuck with me. So the first one and, you know, I've just rubbished my finance degree, but I did learn and I did learn it during my finance degree was this concept that financial markets are secondary markets. So they are they exist to allow the real world to access capital. And I think that's a really important concept to never lose sight of that you're investing in a business and all of the stuff that we talk about every day like, you know, liquidity in volumes and trading and PE multiples and things like that. That's all the secondary world. That's financial markets. You're buying a piece of a business in the real world that has customers and, you know, costs and things like that. So that's a really important concept to, I guess, focus on. And then the second thing and it flows from that is that businesses change slowly. You know, they change maybe even in with the fast pace of disruption that's changing over years and decades, whereas in the stock market, their prices are changing really quickly. Like if you have a look at the 52 week high and low for, you know, the ASX 200 in a normal year, it's moving on average by about 45 or 50 percent from their highs in their lows like a year like last year. It's probably I haven't looked at probably like 60 or 70 percent. And that's interesting because we know that these businesses aren't changing in true value by 50 per cent in a year. But these opportunities are coming our way. And so that's always like that's what's enticed me into financial markets. That's why I find it exciting, as you always every day have an opportunity to find a mispriced asset. And then finally, the thing that I think about the most, I guess, is that when you're investing, you're the thing that's going to determine the success of your investment is the economics of the business that you own. And I think about it like as a personal investor, if I wanted to start up a business, you know, there's not many opportunities that I would have to put my money to work and earn an attractive return on capital, because basically everything that is available to me is going to have pretty low barriers to entry and as a result. Probably pretty marginal return, so, like, I could start a cafe, I could start well, maybe I could start a competing podcast, but you guys would be in the superprofits space. You clearly stumbled upon a very successful niche. But, you know, I could start a hassle and things like that. And traditional economic theory is just going to be down my return to to a normal level. But through investing, I can access these businesses that do have high barriers to entry, that do have huge moats. And I can just hitch a ride to these businesses that have phenomenal opportunities to allocate capital and earn high returns. So I've always liked that concept and that's something that I always kind of keep in mind. And, you know, as as everyone, I'm sure is worried about the power of compound interest. So holding these businesses for the long term, I think, is a really powerful and exciting concept in investing. [00:16:42][187.3]

Alec Renehan: [00:16:43] I actually love that idea about the everything we could do has low barriers to entry. So why not hitch a ride to a company that has a real moat and definitely get a steal that needs that. [00:16:53][9.3]

Emma Fisher: [00:16:53] So I think, you know, in the stock like and you guys, you run your own business so you'd understand this like at the start. It's a really hard slog and it's very difficult to make a return. And then if you stumble upon a really good idea, eventually you can make phenomenal returns. But, you know, maybe you could just short circuit that and invest in these really good businesses along the way. Like, I'm not trying to dissuade people from starting their own businesses. I'm just saying, hey, in the background, you know, the share market is there. And I think it's you know, I really believe that everyone should learn the basics of investing and buy stocks themselves. [00:17:25][32.0]

Bryce Leske: [00:17:26] You've covered of two things that we try to talk a lot about on the show, and that is you don't need a degree to start investing and that then the share market provides an awesome opportunity to invest in the brightest minds around the world from your bedroom, which is pretty phenomenal. So, yeah, Hitch a ride will definitely [00:17:44][17.8]

Emma Fisher: [00:17:46] I feel like at some point I should plug the fact that you could also invest in the early strength. [00:17:49][3.0]

Bryce Leske: [00:17:49] We'll get to that. We'll get to that. [00:17:52][3.6]

Alec Renehan: [00:17:54] Yeah, we'll get to that. But before we do, we need to protect our podcasting super profits and [00:18:00][5.9]

Alec Renehan: [00:19:18] So Emma as we touched on before, you're the portfolio manager for the early Australian Share Fund ASX Ticker HSF, if anyone is interested. So I guess for people who haven't heard of early before, can you maybe give us an overview about, you know, what you do, what you invest in and you know just a bit about. [00:19:38][20.4]

Emma Fisher: [00:19:39] Yes, a little bit about the history of the business. I guess so. It was founded by John Severer in 2012 and the portfolio manager that I worked with, a John and Matt Williams as well. So John and Matt, before I joined Ali, I'd heard about their reputations. They have phenomenal reputations in the market as really good investors. They've both been investing for around 25 years. And they really built Perpetual into one of the most, I think probably at the time, the largest domestic fund manager. And then John left to start early and eventually Matt joined him. So we were running for a few years as an institutional only business. So we were running about eight billion dollars of primarily super money. And three years ago, Magellan acquired us. So the thinking there was that, you know, we John loved picking stocks. But when you're running a business, as you guys would know, there's a whole bunch of admin and in our industry, a whole bunch of compliance that takes you away from your day job. So the tie up with Magellan really allowed us to give all of that back office to them. And they do it fantastically, as well as being a retail product to market. So this early Australian chef on launched just after we were acquired by Magellan. So we launched in June 2018. So we're coming up to our third year of running the fund and run it with Matt, Matt Williams. And the partnership with Magellan has been fantastic. They have, you know, world class marketing and distribution people. And it's a really high quality business. [00:21:02][83.4]

Alec Renehan: [00:21:04] Yeah, nice. Yeah. We're big fans of Magellan. Yes. [00:21:06][2.1]

Emma Fisher: [00:21:07] Yeah. [00:21:07][0.0]

Bryce Leske: [00:21:08] And we had admin. [00:21:08][0.6]

Emma Fisher: [00:21:09] So now you know, what I really respect about Magellan is a few years ago they came out and promised you Hamish hasn't slipped me 50 bucks to say any of this. A few years ago, they came out and they said, you know, we sort of unabashedly put our unit holders and our investors first before our shareholders in, you know, the listed mfg. And I think that is a really good concept. Like, you know, we talk all these trends in the market about ESG and social license to operate and things. I think a lot of companies would do well to sort of sit down and think more broadly about who their stakeholders are, who the end customer is, versus this kind of you know, again, I guess I've always been taught that the role of a board is and the role of management is to maximize value for shareholders. But even that is a little bit problematic because it's sort of like, well, what time frame with shareholders? Is it the long term shareholders or is it the, you know, the people that are just there for a quick buck? So, you know, Magellan founded their business. You know, you asked before about Alien, how we pick stocks. And one of the things that we always like investing in a family business is now obviously we can invest in Magellan, but we do. We own a number of businesses in our fund that are run by the original founders of the business that have huge skin in the game. You know, some examples of that in the fund will be Mineral Resources, Premier Investments. Nick Scali. Yep, there's a bunch of them. Yeah. [00:22:31][82.8]

Bryce Leske: [00:22:32] Nice. Well, speaking of stock picking, the fund is quite concentrated, investing in, what, between 15 to 35 stocks, thereabouts. How do you think about managing such a tight concentration of stocks? [00:22:44][11.9]

Emma Fisher: [00:22:44] Yeah, so I think firstly, you have to believe in concentration as the road to outperformance, which we do. I mean, you know, I look at businesses, conglomerates, you know, and most of the time people will apply a conglomerate discount in their valuation because this is for you, for businesses, that diversification is sort of diversification, that you have good businesses and it off against the average businesses. And you left with sort of like middling bunch. And I think it can be the same if you own too many stocks, like I always think you only have so many good ideas at any one point in time, like why would you want to dilute those good ideas with less good ideas? So I think, you know, concentration is is something that I believe in for investing. I don't think you just have to diversify away any sort of idiosyncratic risk because then you're probably just going to get a market like return. So you have to believe in it. And then secondly, you know, you have to know the source of your conviction, like you are taking big positions in companies. The composition of your fund won't look like the composition of the index. So your returns won't look like the index and hopefully in a positive direction over time. So, you know, you have to know why you own a business and you have to do the work. Like, you know, if I think about it from a concentration risk perspective, a few years ago, we had our largest absolute position ever in CSL. Now CSL is a big part of the index. So I guess to express a positive view on it, you do have to sort of tie up. I think at one point it was eight or nine percent of our capital in that one business. And that was a function of, you know, doing the work, I guess so for CSL, I went to Europe. I met with. You know, there's not that many players in the industry, so you meet with them all, and the thing about CSL is from a supply perspective, it takes three to five years to open a collection center and have the new product available to meet demand. So you have to be putting into place now the supply decisions for the demand that you see in three to five years. So when you meet with all the competitors and you say how many collections then is you rolling out this year and next year, in the year after, you can build an industry model and you can you know, if you take demand, which for three decades is run at six to eight percent and you grow that at six to eight percent, and you then see how many collections. And as everyone's rolling out, it was pretty clear that CSL were the only ones that were rolling out enough to meet market demand. In fact, they were rolling out enough to make two times market demand and their competitors won. So basically, we formed this view that they were going to be able to grow. Not only were they in an attractive market in many markets, you'd love to see six to eight percent demand growth after 30 years. I can't think of many businesses that have that kind of demand profile. So not only was it a good market, but then you layer in the fact that they'd actually be running volumes at twice that. And then you have a look at consensus expectations and we formed the view that they were too low. So all that confluence of factors kind of came together and we took a big position. I mean, to be frank, today we have sold a lot of that position. We still own it and our fund. But I don't think the argument for the huge overweight position is there today when the share price has a lot of that valuation gap has closed and everyone's expectations have risen. I think people now have cottoned on to the fact that that there is a market share gains story as well. So but that's an example, I think, of when you run a conservative fund, you really have to do the work. And then the final thing I'd say is with a concentrated fund, sometimes you have to think about what businesses you are just happy to kind of let go through to the keeper. Like, I'm not saying that these businesses are bad businesses, but I don't, you know, so I'll give you an example. So a business like a construction business, I think that's quite difficult to put in a fund like ours, because you see it on the outside and, you know, all the information that you get is maybe they've they've won and they've won a billion or a billion dollar revenue contract to build, you know, a light rail or something like that. And if they've modeled internally correctly, then they might make a five percent profit margin on that. And if they've model it incorrectly, then they stand to they're on the hook for all the losses. So you as a shareholder are on the hook for all the losses. So that information asymmetry makes me nervous. We did a lot of work on Fletcher Building a few years ago. We went over to I went over to New Zealand. I met with a number of competitors. So Fletcher Building have a lot of really good businesses, but they had this construction business. And and I'd always had this rule that I don't like construction businesses. So I wanted to get a bit of comfort around that. And we met with a number of other construction businesses in New Zealand that had been under bids on a lot of the tenders that they'd won. And if you added up the sort of the hundreds of millions of dollars that these under bids had been out on the bid by, you got a number that was pretty close to a billion dollars. And that ended up being I can't remember exactly, but they lost they ended up being on the hook for between one or two billion dollars with the losses because they'd underpriced these contracts. So, again, it's one where, you know, the whole business, the way that they made money was not from their construction business, but it had a very different risk profile to the rest of the business. So I think sometimes you just have to say, that's not my type of business. We sort of feel the same way about I guess I made some comments earlier about loss making tech stocks. You know, that they I'm not saying they're bad businesses or bad investments, but they're not usually they're not for us because they are reliant on equity funding. And I don't think that's it's a foregone conclusion that there's always going to be available. [00:27:59][315.1]

Alec Renehan: [00:28:00] Yeah. So I imagine one of the most difficult things about running a concentrated portfolio is knowing when to sell and knowing when to move on because there's a better opportunity out there. How do you think about holding time and when to sell? Do you have a usual holding time? Are you, you know, thinking in months or years or decades, most of the thinking there? [00:28:22][21.7]

Emma Fisher: [00:28:23] I mean, it really does depend on the stock. But broadly, we try to you know, we're forecasting two to three years out. We're trying to buy businesses for a two to three, you know, hopefully five year plus period. Just because you do all this work, you know, the best dividend for it is to own these businesses for a long time. But sometimes, you know, sometimes your thesis is wrong. And I think you should sell if you think your thesis is wrong, like the reason you originally bought it isn't playing out. Sometimes you have to sell for an opportunity cost perspective. So, you know, I mentioned we've trimmed some CSL and recycled that cap capital back into, you know, ideas that we think offer better relative value. But there's also, you know, this is all kind of, I guess, a bit of a textbook answer. But I think I've been thinking about this a lot. I think there's also a little bit of, you know, there's emotion involved in it. When you're when you're buying something, you really have to listen to your head, not your gut, because your gut is going to tell you you're wrong because you usually you're buying something that's unloved or it's got a few flies on it. Or, you know, you really have to listen to your judgment, your head, your analysis. I remember when we bought mineral resources, for example, so we went substantial close to eight months ago and stock had fallen from 20 bucks to 12, kept falling as we were buying it. It was at an all time high, short interest. I remember going to some event and it was a bunch of fund managers there. And for whatever reason, the stock came up and somebody near me sort of scoffed at, well, that's a short and I felt like an idiot. You know, you do you immediately think I'm wrong, not the masses. And you really have to lean into that. You have to go back to your analysis and say, no, I think I'm right for this and this and this reason. So it's you know, it's almost biological. Like you're this you're safe with the herd. You know, if you out on your own, you're going to get eaten by wildebeests like that's what it is in investing. So you have to kind of like lean into that fear and try to be very rational. And then when it comes to selling, it sort of flips if especially if the stocks worked for you. So you look at the ticker and, you know, diffused with, like, positive energy, your mind's flooded with dopamine and you're like, I am an investing genius when it comes to this stock. It can be really hard to know when to get off the train. So then you have to listen to your gut. You know what your original assumptions were in your DCF. You know, when you're in your DCF and you get the result that you that looks a bit low. So you get back in there and you know, that job, you not just your margin expectations, you lower you. Obviously, we never play around with that stuff, the dark hearts of DCF. But, you know, when you you know, when you've moved from being conservative to being aggressive in your assumptions. And sometimes I think you have to listen to that gut feeling. The bigger risk that you should always be aware of, I guess with a winner and with a really good business, is the risk that you sold to Ali, because there's nothing big, no bigger pain trade than watching. You know, I'd give you an example. A guy I worked with at Magellan, I was just telling the story. He sold some Magellan stock to fund a pool at like fifteen dollars. And so this is just become the most expensive of all time. [00:31:16][173.7]

Emma Fisher: [00:31:19] Anyway, so he doesn't mind me telling that story. So, you know, these are the things you have to think about. So I wouldn't sell like if the thesis was playing out and everything was going right and the evaluations not in the realm of crazy. I would just keep the business because, you know, valuation, it's I don't know if something's worth 25 times at twenty eight times or I don't think anyone does. But yeah, it's selling is hard. It's definitely hard. [00:31:41][22.0]

Bryce Leske: [00:31:42] So you mentioned the mineral resources, Nick Scally, Premier Investments, CSL. Are there any other stocks that are sort of really piquing your interest at the moment? Are you spending a lot of time researching on that you're allowed to sort of share with the masses? [00:31:55][12.7]

Emma Fisher: [00:31:56] Yes, well, one of them we've been so we just put out our quarterly and we talked about this stock in our quarterly. So actually to stock. So I'll talk about them, Tabcorp and Heliostats. So both fall into this category of businesses that we like where basically there's some asset rationalization, opportunity, where you can shrink the business and get better returns. And I think, you know, broadly, when I think about investing, there are two types of businesses you want to own as you see yourselves and your areas and you really good businesses where you make money. The only thing that everyone knows that good business is they're always on high multiples. Basically, the only way that you make money is by holding them for longer than people. You know, everyone expects a fade in their modeling. And if you do the work that suggests that either the earnings expectations are too low or that people are fading the earnings too quickly and the quality of their barriers to entry and sustainable competitive advantage mean that they're going to make super profits for longer than people think. So those are businesses where you want to own them for a very long time. But then there are other businesses that people, you know, unloved businesses where, you know, reversion to the mean can happen quicker than people think. And that the best type of business like that, the best kind of turn around is one where you've got a good business and a bad business and you can do something about the bad business, whether it sell it, spin it off. And then you've left with the good business and everything rewrites like an example of that. I mean, I wouldn't call it a bad business, but Wesfarmers, you know, [00:33:21][85.1]

Emma Fisher: [00:33:29] It isn't a bad business. Calls isn't a bad business. But it was more capital intensive. And I think that you know, Coles does I don't know, about 15, 20 percent return on capital Bunnings, 65 percent return on capital. It was being lost within the value. Bunnings is being lost within the conglomerate group. And so that was a really successful example. So for Tabcorp, they have the lotteries business. It's 65 per cent of their earnings and lotteries, you know, fantastic business. It's I would call, you know, a tollroad like business, but I actually think it's had a better year than the dollar. [00:33:59][29.7]

Alec Renehan: [00:34:00] lot of that is actually priced buying lottery tickets through covid. [00:34:02][2.3]

Emma Fisher: [00:34:05] And it's also it's got this big tailwind of shifting online. Like people spend more money when it's online. They also don't have to pay 10 percent to the retail, out to the newsagents when people buy it online. So for many reasons, it's a good business. I think we all know that. And then wagering has been a real problem child, and now they're in this situation where so when we bought it, we thought that they could just spin off wagering. Now it looks like there's a number of bidders who are interested in buying the wagering business. But either way, it comes down to the fact that you've got different natural investors. Its pension funds that have a very low cost of capital, will be pretty happy to bid lotteries business standalone up to a pretty high multiple, but they don't want the cyclical wagering exposure. So when you split those two businesses, you're going to realize the value from a sum of the parts perspective. I think you're going to make money from realizing the different different cost of capital for those two businesses. [00:34:52][47.3]

Alec Renehan: [00:34:53] I'm surprised in Australia that wagering cyclical. I would have thought that would be a structural. [00:34:57][4.1]

Emma Fisher: [00:34:58] Yeah, it actually is If you look at the history like the growth kagara of wagering spend, it is structure. It is a structural growth story. The problem for Tabcorp has been competition. They used to make a lot of money through TOTE and the pricing is just too high for corporate bookmakers fixed odds. So their price has been coming down and they've had a number of headwinds that way. As the market sort of opened up and you've had a number of new competitors come in to earnings have actually halved in that business. So it hasn't even been cyclical. It's been a one way ticket down. But are there enough reasons that we thought that that was sort of bottoming out? Plus we thought, you know, the corporate interest angle, that that the stock was too cheap from that perspective. And then the other one in a similar vein just quickly, was Helios. So Helios used to be known as primary health care and it used to have a medical center business, a pathology business and an imaging business. And the medical center business was like the Coles. It was the case. [00:35:50][52.2]

Emma Fisher: [00:35:51] Well, actually, much worse in Coles. It was you know, it was a bit of a broken model, if you ask me, like they never made a return above its cost of capital, very capital intensive. And so they solved that problem. And it also had two high gearing for us. We have a balance sheet filter that won't allow us to invest in businesses that we think are carrying the wrong amount of debt for their financial structure. And Helios was at about four times net debt to EBITDA. So in selling the medical center business, they got rid of their problem child. They bought their balance sheet back down to, you know, below one time. Zebediah, add in the fact that they're making an absolute killing right now in pathology with covid testing, which is, you know, don't put that into the multiple, but it's real cash that the business is going to be generating over the next 12 months or maybe even longer. And we think that, you know, they've rerated the business towards the better quality business. [00:36:39][48.4]

Alec Renehan: [00:36:41] Well, well, look, I could listen to you talk your book all day, [00:36:44][3.1]

Alec Renehan: [00:36:46] OK, we're going to have to take another quick break and just hear from advertisers. So, Emma, while whilst we could listen to you talk your book all day, we will move on, given the year we just had in 2020 and you know that the speedy drop and the recovery and then the unbelievable end of the year for, you know, U.S. tech stocks and the like. What were some of the major lessons you learned through that year? [00:37:12][26.1]

Emma Fisher: [00:37:12] Yeah, I think whenever you have a market drop, like the speed of which we've never seen before, you know, it's always for an individual investor. I think you can make a lot of money at these inflection points. And it's not about picking the bottom line. If you're trying to pick the bottom, you will not do it and you'll keep yourself out of the market. But at times when there's just panic and blood on the streets, it's a really good time to be allocating, you know, capital to the markets. And so I look back and I think, you know, what were they like? Look for the anecdotal signs that you're approaching a bottom for me. It's you know, I had a friend call me and say someone at their office was telling everyone to shift their super to cash. [00:37:48][35.4]

Emma Fisher: [00:37:48] Oh, lucky. I was like, don't do that for me. I don't think I should ever listen to this. But my mom, God bless her. She's sort of my contrarian indicator. Like in January, I should have known the market was at a top because she owns a bunch of stocks. She texted me. She's like, my portfolio is up 40 percent this year. I should be a fund manager. I like science from the top. And then in March, she was saying, I'm not buying anymore stocks. The market's going down way, way worse for me. So, again, that's really that's my, you know, like your dentist or you would drive me and my mom [00:38:19][30.4]

Alec Renehan: [00:38:19] so you could package up that and sell it to other fund managers and listen to what your mum say. [00:38:22][3.2]

Speaker 4: [00:38:23] So that's true. Like, oh, God bless my mom. She actually has [00:38:28][5.0]

Emma Fisher: [00:38:28] legitimately done very well through her investments. So maybe she should be if I measure. [00:38:31][3.3]

Bryce Leske: [00:38:32] So just on that, where, you know, you don't try and pick the bottom, but it's an opportunity to allocate capital. At the time when the market was falling so quickly, we had a lot of members in our community wanting to put money in, but unsure about the actual strategy of how much to put in and how often to be putting it in. So do you have a strategy around allocating capital at that sort of point in the market? [00:38:54][21.9]

Emma Fisher: [00:38:55] Well, so for us, we can only run 10 percent cash as a maximum. And so we were kind of lucky that we were running pretty close to that, selling into the crisis. And that was we don't usually try to like time the market and take a view with our cash holding. But she had that reporting season that was just very, very little value on offer. So we let our cash run out towards Spotfire. So we had the opportunity to sort of bring that down as we saw opportunities while they were falling. But for the individual investor, like maybe you could do it in tranches, like if you have, I don't know, 50 grand to invest in the market, break it up into three and just say I'm going to buy, you know, a third of it every two or three weeks. You know, the speed it's worth talking about the speed of that drawdown, because that was very unusual. You know, in the GFC, it took 210 days for the market to fall 30 percent from its highs in the in the Depression. So this is you know, when you think of the Great Depression, you think of people jumping out of windows tragically because of the speed of the wealth destruction and that that fell 30 percent over 30 days. So in March, it fell 30 percent. Over 22 days like this had never been seen before. And I think a lot of people, a lot of the conversations that I was having and hearing were this view that we were going to have time to assess the information and know when to turn more positive. It just didn't happen. So I think it's a little bit of a lesson like you have to, you know, when when the opportunities are becoming available to you and markets are gapping down like that in and of itself is probably a force that tells you that where you are on the panic to greed sort of scale and, you know, you could have bought anything, you could have bought anything, imagined you would have made money after pay. [00:40:30][95.3]

Bryce Leske: [00:40:30] You would have made a loan. Yeah, exactly. [00:40:32][1.1]

Emma Fisher: [00:40:32] You had a lot of money. And definitely, I'm kicking myself that we didn't buy after about nine point. [00:40:36][4.0]

Bryce Leske: [00:40:37] I know. Yeah. I remember looking at the screen being like nine non-voice crazy and did nothing about it. [00:40:42][4.8]

Emma Fisher: [00:40:42] You know what? This goes to my earlier point that if, you know, if March had gone on for longer and every drawdown in history would have told you that statistically it was likely that it was going to take longer than 22 days for the market to bottom, then businesses like off to pay. They raised in July like they needed to raise. Luckily, they raised it at sixty bucks, not nine. Yeah, but you know, they got lucky in that respect and buying it at nine. I remember at the time why you don't because you start. You think this business hasn't seen a cycle play out. And you know, you asked me I guess about the lessons. I worry that one of the lessons of this downturn, you know, is is is is a bad lesson, is that this isn't about off to pay. But businesses didn't really feel the full effects of the capital allocation. You know, we focus on balance sheet. So we went into the crisis with businesses that had better balance sheets, I guess, in the average company. But we I think we should have, you know, benefited a little bit more from that, like it was really only virgin that was allowed to go to the wall. Like we try to own the best or the second best player in the market. And a downturn or a recession can be great for the number one player because it moves out all the weekends. So we didn't really get to see a full economic cycle play out and I wonder about what that's taught people in terms of their risk tolerance. [00:41:56][73.7]

Alec Renehan: [00:41:57] I wonder about that as well. Businesses also, you know, businesses with bad balance sheets were protected in some ways by, you know, the Federal Reserve printing money and the Reserve Bank supporting the bond market and allowing them to raise debt that way. But then also the government stepping in and, you know, paying job keeper and stuff like that and protecting their cost structures as well. Do you think businesses, the sort of like the learning that the government will step in and at some point the government want? [00:42:29][32.4]

Emma Fisher: [00:42:30] Yes. Is the short answer. I worry that that would be the case, that it was a bit of a funny crisis in the sense it wasn't a typical credit sparked crisis. It was generally like, how do we put our economy on hibernation to keep people safe? So I think the government did the right thing in terms of opening the taps for fiscal stimulus. But you're right, like broadly companies that make poor capital allocation decisions, you know that saying like it's only when the tigers out, you see who's swimming. You know, I'm not sure how to turn this into an analogy without getting into, you know, who was naked or not. But it was, you know, basically really only Virgin. And I think it was Grocon was the other one that were allowed to go to the wall. And we don't want to see companies go to the wall. I don't want to see, you know, people losing money and people being permanently put out of jobs and things like that. But I just think that people's risk tolerance, that it's a bad lesson to learn that we always had this view that, you know, the Fed was going to step in, but now layering in that, you know, the government's going to save you, I think. Yeah, for for risk tolerance. And given we're starting valuations right now, I think that's a dangerous lesson to have learned. [00:43:39][69.7]

Bryce Leske: [00:43:41] So, Emma, before we move to our final three questions of the interviewer introducing a new segment, four hour into interviews this year. So you're the first person cab off the rank. [00:43:51][9.9]

Alec Renehan: [00:43:52] This could go very poorly this year. [00:43:54][1.9]

Bryce Leske: [00:43:55] We've had a lot of fun today. So we're going to be introducing the fund manager of the year award or we want to do is just introduce our audience through is a bit more about yourself and all the fund managers that we're going to be interviewing throughout this year. But part of that is to get from you a stock, an industry or a trend that you think we should be keeping a solid eye on over the next sort of 12 months. [00:44:21][25.6]

Emma Fisher: [00:44:22] OK, thinking of the top of my head. Yeah, look, this is going to sound like a pretty vanilla answer, but a lot of the focus right now is like covid winners and losers and things like that. But what I would be watching is businesses that have been long term beneficiaries of some of the changes, like the big changes that we've seen in society play out over the last 12 months, like the obvious questions that we'd be asking are, you know, what's the future of office? You know, what's the future of online shopping? So I would be wanting you know, I think there will be pockets of opportunity where everyone sort of indiscriminately sells off anyone that's viewed as a covid winner. I'm saying that in inverted commas. And I think they're actually going to be some businesses that get quite cheap because they're in the covid winner basket that actually structurally benefited from covid. So I'm thinking of some of the online retailers, for example, Premier Investments. So the position that they're in now is phenomenal. They've got 70 percent of their stores on hold over with landlords. So basically rolling rents month to month. So when when they go to renegotiate those rents, you know, they've got a lot of power. And I think they can permanently enshrine maybe a four to five per cent percentage point increase in their Ibut margins permanently as a function of lower rental expenses because of the position that they're in right now. They're also a beneficiary of the shift to online because a lot of retailers online is actually dilute. If you're a bricks and mortar retailer, a lot of online sales actually dilutive to your group margin. It depends on how you're setting it up. But if you know that if you're giving free shipping, if you don't have a centralized DC, if you if you're, you know, getting the product from individual stores and shipping it to the customer, if that's your online strategy, then it's dilutive. Whereas for premie, because they've invested in this centralized DC and a number of other reasons, they actually make more money from an online sales. So they're pretty happy to see their sales shift online. And I think in the future they'll go forward hopefully with a pretty similar number of sales and growing. But with the mix of that sales coming more from online and less from bricks and mortar retailers. So I would be thinking about that. Like, I think there'll be a time where the market will just really quickly go, right. Vaccines, it's all back on baby like long, all the store, all the opening up to make sure all the stuff that worked last year. And actually you're going to get an opportunity to buy some really good businesses in that. [00:46:37][135.0]

Alec Renehan: [00:46:39] So we really want to thank you for coming on today. We're almost out of time, but hopefully, this won't be the last time you join us. If anyone in the Equity Mates community wants to find out more about yourself or more about Ali, I hope I said alright, that's all. Where should they go? [00:46:55][16.6]

Emma Fisher: [00:46:56] So our website such just Google early Australian chiffon. We've got a lot of information on our website. We share a lot of stock stories, quarterly's videos, things like that. [00:47:04][8.4]

Alec Renehan: [00:47:05] And that's one. Now, as I said, we do like to end with the same final three questions, so we'll get stuck into them. And the first one is, do you have any books that you consider must read and these can be investing or otherwise? [00:47:19][13.3]

Emma Fisher: [00:47:19] Yeah, I'm glad that you said that the otherwise part, because, like, I know I know a lot of people and a lot of friends I have in the industry that are sort of like they'll only read a book if it's, you know, how it mocks or they'll only go to the movies if it's a wolf of Wall Street in life. I know that. I did. I do that when I was younger. I read all the investing books and I'll read if it's really good or somebody recommended to me. Now I'll read it. But I, I prefer fiction, nonfiction, anything but investing really I think. Yeah. You never know where you're going to get information. Like I was at Nelson Bay for a holiday last week and they just had a bookshelf there. So I just picked up Mao's last dancer and that's a biography. And I just walked away from that thinking. Like if you want to understand why the Chinese people have this pact with the Chinese government where they're willing to give up a bit of human rights for ever increasing economic growth and standard of living, I read that book. I read about what life was like for the average Chinese person in the 70s in the Cultural Revolution. I don't teach you everything that you need to know so you never really know where you're going to get a lesson. So I think reading widely for investing, the number one book I'd recommend is a book called So it's by Math Marathon Asset Management, and it's a book called Capital Returns. I'm sure people have recommended this on your podcast now, but so basically. Oh, God, it's such a good book. But basically there it's a bunch of their investment letters over the years and the research that they've done, but they're their ideas about investing through a capital cycle. So it's just very easy to understand. Brilliant book. Another one, Anything by Joel Greenblatt. I think it's a really good writer. [00:48:48][89.0]

Alec Renehan: [00:48:54] That's what we're finding throughout the investing landscape. One of the best basics books we've ever read was Patrick O'Shaughnessy, but he's called it Millennial Money. [00:49:03][9.7]

Alec Renehan: [00:49:04] Yeah, terrible name [00:49:04][0.4]

Emma Fisher: [00:49:06] Yeah, exactly. Other nonfiction books are anything by Malcolm Gladwell. I just read his new book. It's Fantastic. There's a book called Fact Fulness by Hans Rosling. That's brilliant. Another one in a similar vein. So basically, like the thesis of that is that the. Well, it's just gotten so much better on any measure that you can look at, and we yet so often you hear people say like things have never been worse. I think I think of that last year, you know. If our generation's like World War Two is like sitting at home watching Netflix like shipping in, I don't mean, you know, I know people were dying, but you've got to put it in the context of, like, 100 years ago, you know, people were dying of infectious diseases at a rapid rate. Infant mortality was through the roof. So in the context of where we've come from, I think there are always reasons to be really optimistic and put the challenges that we face in context. So Factualness and another one in that vein is anything by Steven Pinker. But he has this really good book called I think it's called What's That? Saying That The Better Angels of Our Nature. So, yeah. So that's the book. It's about the history of war. But again, like when you read it, you like we had some really horrible ways of killing each other thousands of years ago. So, you know, you read these books in like the terrifying. But I think it's useful to know where we've been and where we've come to. [00:50:22][76.2]

Alec Renehan: [00:50:23] Yeah, that's a great list. So the second question, which we're trialing again this year in 60 seconds, what's the best business you've ever come across? [00:50:34][11.3]

Emma Fisher: [00:50:35] Yeah, it sucks because we don't own it. We've never owned it. And I'm sure you get this answer a lot. But it's got to be REA. [00:50:41][5.8]

Alec Renehan: [00:50:43] Really?Why? [00:50:43][0.0]

Emma Fisher: [00:50:45] because so if you think about it as a user, you sell your house maybe once every seven to 10 years. You've got no idea what the price of marketing is every seven to 10 years. So your agent says, oh yeah, and it'll cost you two and a half grand lisbona. You've got no idea if that's been inflated or no idea. And what's your alternative like? Are you going to stick a sign up in the window of your house saying, like, for sale? No, like it's exactly like it's the biggest asset you own. The difference between meeting every eyeball possible and not can be hundreds of thousands of dollars. So you'd never try to scrimp two and a half grand? Actually, I know some people that probably would, but most people never would try to scrape two and a half grand. So it really honestly, over time, they could double that. What are you going to do? They've totally skewered the market. I know demesne is probably in a similar vein in some pockets, but if you were, you know, if you did have sticker shock, it's almost as though as more expensive than area becomes, the more likely that you drop the second player, you know. So if you did have sticker shock at the cost of marketing, I do worry that you know, maybe it would be demain that you didn't go for. And then all of this is in the context of the fact that you know, before Ariah Intiman, we used to spend a lot more money advertising in print. So, you know, a really big print campaign today, you could be spending 10 grand. So I actually think the value that, you know, that consumer surplus, the value that it gives consumers is is more than the cost of the advertising. So it's a business with pricing power, very high margins. And I say, you know, it's painful because we don't own it because we come so close at different points in the past. And I've made that mistake that is so easy to make of thinking. You know, the multiples just do high for me. So that's something that I always try to push back against because, you know, for a business with phenomenal returns and free cash flow generation, the multiple is always going to be high. It should be high because a dollar of earnings from that business is worth more in your pocket than a dollar of earnings in a capital-intensive business. So, yeah, it should be high. And that's a mistake that we've made. [00:52:44][119.6]

Alec Renehan: [00:52:46] Fair enough. I'm really liking this question. We're getting some good answers. [00:52:48][2.4]

Emma Fisher: [00:52:49] What do you what's the most common answer? [00:52:51][1.3]

Alec Renehan: [00:52:52] second time we've asked to first answer was Macquarie group. [00:52:55][2.9]

Emma Fisher: [00:52:55] all right. Yeah, we own that. That's a good business. very good business. [00:52:58][3.1]

Alec Renehan: [00:52:59] And then the final question, if you think back to your younger self, you know, when you're getting your first 10 Commonwealth Bank shares. [00:53:05][5.7]

Emma Fisher: [00:53:07] 50 [00:53:07][0.0]

Alec Renehan: [00:53:08] What advice would you have for your younger self? [00:53:10][1.9]

Emma Fisher: [00:53:11] Um, I think I guess is what I said before about like, you don't have to study finance. You don't have to take this cookie cutter path. I feel embarrassed a little bit when people ask, you know, even your CV, like, it just feels very vanilla. Like I went to Sydney Uni, I studied commerce, finance, economics, and then I, you know, did internships. And then I went straight into this industry. And that's fine. Like it's worked for me. But like, I think maybe I would have had more fun or stretch my brain a bit more if I'd done something else. Like I think the UK model where you, you know, go off and study whatever. Like if you want to study Russian literature, like ship in the Dostoyevsky, you don't need to study finance like that. That would probably be my lesson. [00:53:53][41.8]

Bryce Leske: [00:53:54] Great note to finish on, Emma. We have had such a bull with you today. It's been very interesting and I know a lot of our audience would have got a lot out of that interview. So I very much appreciate your time. As Ren said, hopefully, it's not the last time this year. [00:54:07][13.0]

Emma Fisher: [00:54:07] So thank you very much. Appreciate it. [00:54:08][1.4]

Bryce Leske: [00:54:09] Thank you. For the rest of the Equity Mates community, the podcast doesn't finish here. You can keep in touch with us at equitymates.com. If you want to contact us, you can hit us up at contact@equitymates.com. Don't forget about Comedian vs economist and also get started investing podcast for the beginning of Buffett's out there. But again, until then it's been fun. We'll chat next week. [00:54:31][21.8]

Alec Renehan: [00:54:31] Yeah. Sounds good. [00:54:31][0.0]

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