Expert Investor: Hamish Douglass – Magellan Financial Group

HOSTS Alec Renehan & Bryce Leske|24 February, 2021

Meet your hosts

  • Alec Renehan

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

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

In this episode, Alec and Bryce are joined by Hamish Douglass – the Chairman, CIO and Lead Portfolio Manager at Magellan Financial Group, a fund manager he co-founded with Chris Mackay in 2006. Hamish is (in our opinion) the best investor in Australia today and amongst everything else is a fellow podcaster, hosting Magellan’s In The Know podcast.


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Bryce Leske: [00:00:56] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status, our aim is to help you break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my Equity Mates. Ren, how are you going? [00:01:12][15.5]

Alec Renehan: [00:01:12] I'm very good, Bryce. I know I often say I'm excited, but I am very excited for this one. Yes, we've got an expert investor, probably the expert investor in Australia at the moment, and I can't wait to pick his brain. [00:01:25][12.9]

Bryce Leske: [00:01:25] It is our absolute pleasure to welcome Hamish Douglass to the show. Hamish, welcome. [00:01:29][3.4]

Hamis Douglass: [00:01:31] It's great being with you guys. Alec, you know, I've been looking forward to this big fan of what Equity Mates has been doing and it's growing. Audience Looking forward to the conversation. [00:01:41][10.0]

Bryce Leske: [00:01:42] Thank you. For those of you who are unaware of who Hamish is, Hamish is the chairman, CIO and lead portfolio manager at Magellan Financial Group, a fund manager he co-founded with Chris McKay in 2006. Hamish is, in our opinion, the best investor in Australia today. And among everything else is a fellow podcast hosting Magellan's in the Know podcast. So bit of a competitor, but that's OK. We'll let that slide to kick off today. [00:02:11][29.1]

Hamis Douglass: [00:02:13] We're not a competator. But thanks for the plug, though. [00:02:16][2.8]

Alec Renehan: [00:02:16] It is a very good podcast. If anyone out there has finished all the episodes of Equity Mates would recommend giving in the listener. [00:02:23][6.7]

Bryce Leske: [00:02:25] As always, we like to start with a game, Hamish, that is overrated or underrated, which really want to kick it off. [00:02:30][5.8]

Alec Renehan: [00:02:30] Sure. So we'll start at home with our major index. Overrated or underrated? The ASX 200. [00:02:37][6.2]

Hamis Douglass: [00:02:38] Yeah, I'll Cregeen played the game. But first of all, you have to take a multi-year view. I've got no idea in the next six months. Okay, I'm an equity guy. ASX 200 is underrated. [00:02:45][7.7]

Bryce Leske: [00:02:46] It is nice. The Nasdaq 100. Overrated or underrated? [00:02:50][3.5]

Hamis Douglass: [00:02:51] Definitely underrated. If you take a view every time [00:02:53][2.3]

Alec Renehan: [00:02:54] we suspected you would say as much. Um, Wall Street bets has been in the news a lot lately after the the GameStop saga. Underrated or overrated, the impact of Wall Street. [00:03:06][12.0]

Hamis Douglass: [00:03:06] But I would actually say underrated over time. I think this is a there's a big movement. You know, I believe in the wisdom of crowds. You have to also be careful about the foolishness of crowds as well. But it's bringing mass audiences to looking at issues in markets. And, you know, and you may underrate the effect and of course, there's been huge noise around it at the moment. But I think this is you to say and underrated, I would put it. [00:03:30][23.8]

Bryce Leske: [00:03:30] Yeah, nice. Underrated or overrated. The Australian property market [00:03:34][4.3]

Hamis Douglass: [00:03:35] Australian probably, I'd say overrated at the end of an equity guy, but it's a bit of low interest rates there. At the end of the day, you know, it's an illiquid asset class. It's a very high transactional cost. But residential property has been going up at probably twice the rate of average wages growth for twenty years. And ultimately, that's a disconnect. And the reason it is is because interest rates have kept falling and interest rates are now at their all time record levels. So property is just a bet on interest rates staying low. So I'd put in the overrated category. [00:04:06][30.8]

Alec Renehan: [00:04:07] And then finally, Hamish, we've got to ask, overrated or underrated bitcoin? Overrated. [00:04:12][5.4]

Hamis Douglass: [00:04:13] Overrated? It probably some of your audience think that might switch off at this point. [00:04:17][4.1]

Alec Renehan: [00:04:19] I'm out. Yeah, I think the price will look overrated. [00:04:22][3.7]

Hamis Douglass: [00:04:23] I would say you're running ultimately a very large central bank risk here. You I know exactly what's going on. It's the classic wisdom of crowds issue, amazing underlying technology and the theory behind it going on. But if it becomes too large, there's a very large risk that one of the major central banks will effectively outlaw it. And they don't want it becoming a dominant part of transactional activity in the economy. It's not traceable. It's not with the central banks. The central banks ultimately won't want digital currency sitting in their purview. And, you know, if the US bans Bitcoin at some point in the future, this thing will go to zero. And, you know, the question is, can you be smart enough to have this, too? That will happen. It keeps going up. There's a huge crowd effect in it. The underlying technology is incredible in theory behind. It's incredible, but I don't think it's a very, very dangerous place to play. And good luck to people. [00:05:15][52.4]

Bryce Leske: [00:05:17] Good luck. Good luck. [00:05:18][0.7]

Alec Renehan: [00:05:20] So, Hamish, we love to hear the story of people's first investments. We generally find there's a good lesson or a good story that comes out of it. So to kick us off today, can you tell us the story of your first investment? [00:05:31][11.5]

Hamis Douglass: [00:05:32] Yeah, I'm going to be a little bit cute here because my first investment is probably not a great one. It's my second investment opportunity. My first and then maybe the second one actually had a little bit more lessons. My first investment was at university. It was just after it was in October 1987. And people I've studied markets on. Nineteen ninety seven was pretty famous point in history where the stock market crashed and just after the stock market crash, without doing any research or understanding much about equities, ended up buying Elders, which was controlled by John Elliott that became Foster's. I ended up making a little bit of money, but I wouldn't call it an investment. It was just marketing. It crashed. And I wanted to a little bit of money saved up and put some money into two elders. I call that just dumb investing, real investment, which is probably back in nineteen ninety one. When I just started work, when I'd accumulated a little bit of money and I was paid thirty six thousand dollars a year when I started. So you know, and that was working at an investment bank. How things have changed. They even adjusted for inflation. People have paid a lot more today and I invested in a company called the Franked Income Out. And people might not remember this, but the Franked Income Fund was a entity that effectively had a controlling shareholding in a company called Wesfarmers. The people may have heard with either Wesfarmers was a fabulous business and we had a series of businesses and we're compounding capital at very attractive rates. But you could get into Wesfarmers and maybe a 30 per cent discount by buying these holding company that said above it, which was the Old Farmer's Co-operative. And I love the underlying Wesfarmers business. And I thought if I could buy in at a discount and I'll put all my networth into this at the top, I've actually still got all my Wesfarmers shares. And the theory I had is a lot of the underlying business, but only because of this value gap sitting there that the franking comes on would be wound up in the end and therefore you would get a double gain. You'd get I thought Wesfarmers was trading at a discount to its value and then I was buying at a 30 per cent discount into a discounted value and a long term business. And I put Sydney at the time a meaningful amount of money. And believe it or I've still got all the Wesfarmers shares of gold, I think I'll probably compare out of my capital since nineteen ninety one at twenty per cent per annum by going in there and just holding it for a long duration. So the, the lesson there is is compound returns in duration really matter. And probably when you see something that looks like a up, you shouldn't holbeck back to Charlie Munger sort of thing at the end of the day with something just staring you in the face and it's and is a double discounting to it. And you think the business is really high quality. Those are the times you should strike. And I lucky I learned that lesson pretty early on and it's been a very, very favorable experience. I actually think my average entry pricing to Wesfarmers nowadays is negative. Not only dividends would be substantial, I'm getting more dividends per share then than I paid for the original shares. But they returned all the capital. Wow. So so I got all my capital to just give it back. And I've got these shares that worth millions of dollars now that are paying me a lot of dividends every year. And I go to my money back. Well, and we are always very lucky I got that lesson early on. This was the second year I started working. [00:08:51][198.3]

Bryce Leske: [00:08:51] Yeah, well, we just did an episode on the power of compounding. So it is perfect timing that you are following up with. The biggest one of the biggest lessons for you is understanding that power of compounding [00:09:01][10.3]

Hamis Douglass: [00:09:03] compounding is super important to them. And one of my favorite quotes is from one of the founding fathers of America, Benjamin Franklin. And Ben Franklin said money makes money and the money that money make more money. And that's what compounding is all all about putting away some money today and let that money work for you over time. And my investment in the Franklin Company was just such a great example of what sort of thirty years can do for you. Yeah, it's been a fun ride. [00:09:34][31.4]

Alec Renehan: [00:09:35] Well, Hamish, I think you get the prize for the best story of the first or second investment that we've heard so far. And I think for our listeners that that [00:09:44][8.9]

Hamis Douglass: [00:09:44] gives us a bit of a dot. I have to [00:09:45][1.5]

Speaker 4: [00:09:45] say, pretty [00:09:47][1.1]

Bryce Leske: [00:09:47] sure someone said their first investment was a goat. But anyway, we can tell you. [00:09:51][3.7]

Alec Renehan: [00:09:51] But I think that gives everyone a flavor of what's to come in this interview. You've got a very impressive track record. But before we get into what you're doing at Magellan today, we're just going to take a quick pause and hear word from our sponsors. [00:10:04][12.4]

Bryce Leske: [00:10:05] When you are all about getting fit, you've bought the gum and you bought the golf membership, you bought the gym membership and you're on my MasterChef. And even in lock down last year, you bought those resistance bands of Instagram that from memory didn't even come. [00:10:19][14.0]

Alec Renehan: [00:10:20] No, look, they didn't come. But all of that effort really was canceled out by the numerous menu log orders that were a real staple of my lockdown experience. [00:10:30][9.5]

Bryce Leske: [00:10:31] Well, we've just entered into a new financial year, so I think it's time you get money fit with Virgin Money, our latest sponsor. [00:10:38][7.0]

Alec Renehan: [00:10:39] That's right, Bryce, with a high-interest savings account bundled with a seriously rewarding everyday transaction account, you can manage your money easily on the go smash your savings goals, and be rewarded for it. [00:10:51][11.9]

Bryce Leske: [00:10:51] And. With the Virgin Money Go transaction account, you can earn rewards on your everyday spending with zero monthly fees. Sounds like just what you need, right? [00:11:00][9.3]

Alec Renehan: [00:11:01] Yeah, the FBI twenty one get Rende didn't quite work, but if y 20 to get rent money, it might be to go [00:11:09][8.4]

Bryce Leske: [00:11:10] back to your own Bayt Virgin money terms and conditions and monthly criteria apply. Now let's get back to the show. [00:11:16][5.8]

Alec Renehan: [00:11:18] So, Hamish, as I just said before the break, Magellan has made a name for itself investing in some of the best businesses in the world and has an incredible track record as a result, Alphabet, Microsoft, Facebook, Starbucks, chief among them. Tech is obviously a very interesting space for a lot of our audience. How are you thinking about some of these tech giants like the Alphabet's and the Facebook's of the world going into the twenty twenties? [00:11:42][24.1]

Hamis Douglass: [00:11:43] It's a very, very good question. first of all, I'd say that these companies, particularly the ones you're mentioning, you said Alphabet, Microsoft, Facebook, are some of the most extraordinary business models that you've ever seen in capitalism in terms of the market share that these companies have in their segments. They need monopolies and they've got very, very powerful network effects around the around the businesses. And, of course, that's going to attract the regulators when you get the monopoly. So we could talk about regulatory risk in these investors. So, first of all, you just in an extraordinary rarified air in terms of history. And I also describe these business models as sort of capitalism without capital, normally the very dominant firms of history have got to their domination by having huge capital intensive business models. If you look at the railways, if you looked at what happened in Standard Oil when they went with that and they got broken up, if you look what happened in AT&T and then it got broken up, very, very capital intensive businesses. But these businesses, because a digital networks can kind of expand with no incremental capital, it's just extraordinary what can happen. And you've asked the question sort of what is the outlook for these companies for the twenty twenties, which is a very good way to to to frame it on on on Microsoft. You know, it's really about the ongoing digitalization of enterprises in the world. You know, they have the largest software as a service known as Sask in the world in this space is on fire. But office three sixty five. So when you think about office with Outlook and Word and Excel and others, it's now effectively available over the Internet, stored in the cloud, and they're adding more and more functionality to that all the time. And they've got hundreds of millions of subscribers. If you add up enterprising individuals there and it's a subscription service and now you're thinking of teams, we're on Zoome at the moment, but they own a video platform called Teams and they deeply integrating collaboration on teams. And then if you think about also digitalization, it's about the cloud. And they one the four hyperscale cloud players in the world with the Azure platform. And they are in an absolute sweet spot for the twenty twenties, both in the SAS fighting digitalization and the cloud infrastructure business and a few other players in that space, by the way. But they're in an absolute sweet spot at the moment. It's our largest investment we bought in 2014, Microsoft at twenty eight dollars a share when it was deeply at a loss at twenty eight dollars a share. We made it our largest investment. And to that six years later, it's two hundred and fifty dollars a share. And we've been paid lots of dividends along the way as well. And we still hold it because we still think it's got enormous Ramli. So so this is going to be probably at least a 15 year investment we will hold, which comes back to the original thing. I was talking about Wesfarmers. If you can find these things and sit on your ass and if you like, growing companion, Microsoft is very large. It's that I think it's the second largest company by market cap in the world after Apple at the moment. And it is compounding its revenues at 15 per cent a year. At the moment, it's just mind blowing, extraordinarily Alphabeat. Again, it's got a near monopoly in Western search. And what is driving search is what I'd say is the digitalization of commerce in the world. So you've got a massive tailwind behind, you might think, sort of their advertising businesses is mature. But if you're a business and you're now wanting to change a business model and you wanting to connect with consumers who are online, you're literally going to have to advertise and go to the top of the search. There are a few competitors in that space, but the advertising industry is now consolidated down to very few players. The traditional advertisers are dead and there's a long runway. And then localization is a very important thing, connecting local businesses to people who have a mobile phone and they know where you are. And you're going to know so much about those businesses. And the connections of connecting consumers in their physical presence to that local business is a huge opportunity. And then they've got emerging businesses. They've got a cloud business called Google Cloud that is just like the Azure business it and Microsoft that's losing a lot of money, but it has enormous potential. YouTube, of course, this is you guys will understand this you if you're on YouTube as well. It's a very, very powerful business. It's still in the very early stages of its monetization augmented and virtual reality in the. I quantum computing, and then you've got autonomous cars, so so there are so many aspects of the alphabet, it's just not the twenty twenties, it's probably the twenty thirties. It's just simply one of the most advantage companies on the planet. Facebook is the third one. That's a slightly narrower. To be honest, it's not quite the breadth there. It's much more just an advertising business. But even their advertising businesses, your Instagram hasn't been fully monetized in their messaging platforms. Messenger and WhatsApp haven't been monetized at all at the moment. And of course, it's a social network that they're very, very dominant. But I would say slightly narrow business model than Alphabet. And Microsoft is. [00:17:00][316.8]

Bryce Leske: [00:17:00] We've got a blocked from Facebook this morning, though, after these new rules have come in, you know, with the news and whatnot, with the Australian government, Facebook of clumpiness into the section of, I guess, a news outlet. And we can no longer speak to our audience through Facebook. So damn them. [00:17:18][17.6]

Hamis Douglass: [00:17:21] Yeah. I've got sympathy for the Australian government around the importance of media here. I don't sure I fully agree with the way the government's been attacking it. And Google and Facebook are responding in different ways to that legislation, although I fundamentally blame Facebook either about their decision. You know, these are complex issues and they're making choices. And I think it's just unfortunate. [00:17:43][21.7]

Alec Renehan: [00:17:44] So, Hamish, you just spoke about the outlook for some of those big companies, especially Microsoft and Alphabet, you know, with incredible growth potential, it seems in the future, there are a few risks that are on the horizon around antitrust regulation or increased regulation in the states. There's some talk from some fund managers around digital decolonization where, you know, those US big tech companies are being challenged by local tech companies. How do you think about some of those challenges for the big tech companies going into the next decade? [00:18:21][36.5]

Hamis Douglass: [00:18:22] Decolonization is just another word for competition, but it's localized competition against and but decolonization is a much fancier term. It's much more intellectual. Is that involve competition? At the end of the day, it really depends on how advanced the development is of those digital markets in various economies around the world. Is there a chance with the games still being played out where effectively local competitors could either be sponsored in Russia or India or Brazil or wherever this may be and create business models? I would say in search it's probably the games being played out. I think someone launching a search engine in Brazil, good frigging luck to them. At the end of the day, I just don't see that as a major risk. I don't think Microsoft is going to be seriously challenged, you know, colonization within cloud infrastructure, you know, trying to build your local infrastructure in Brazil or something and take on Azure and add some things. So I think it's fanciful that's going to happen. But e-commerce is a very intensely competitive game and it's a very local game. So notwithstanding Amazon's complete domination in the United States, it's had very, very hard to get traction and a lot of other markets. And there are some very, very good businesses that have been building in South East Asia and Latin South America that are very, very competitive in the e-commerce sphere. So so to me, there's always competition. But if the games played out, the game is is played out probably in our hand. I'm probably not as worried about that sort of local competition issue. But we are in some very big platforms in China and there's a lot of internal competition in e-commerce. Let me tell you a lot going on in that space on the threat of regulation. It's omnipresent. It's present everywhere in the world. There are very serious big public policy issues when you get very, very dominant firms occurring in the regulators, the right to look at these at these topics, whether they be privacy or content or purely anti-competitive behavior, is do we think they're going to clip the wings? Yeah, they're going to put their wings. We're less concerned about Microsoft. And it's interesting, in the 2000s, Microsoft was actually anti-competitive zone where all the regulators were after. But it's largely a large business company, doesn't really compete in the consumer space. And it's really not in the viewfinder of the regulators. But Alphabet and Facebook and the Chinese tech companies and Amazon and Apple, because of their domination and some of their activities, could be viewed as anti-competitive of there is going to be regulatory action. And we spent a lot of time thinking about that. And the job is to say is where do you think the bulls headed and is it in the price? How much do you think it's going to affect the business model? So we're not losing a lot of sleep at the current prices of the ones we're owned about the regulatory risk. But it's a. Super, super important issue to get your mind around. Mm hmm. [00:21:20][178.9]

Bryce Leske: [00:21:21] So, Hamish, everyone obviously knows the big names, the Alphabet's, Microsoft, etc. But are there any lesser known companies that are, you know, you're really finding particularly compelling at the moment without a [00:21:34][12.8]

Hamis Douglass: [00:21:35] really high price? I'm not going to give stock tips about names we don't know at the end of the day. And so various reasons, obviously, that there is genuine competitive reasons for doing that. But there also if we don't if we if I held something and we hadn't disclosed it yet and I would disclose on the thing and then it goes to boy, people would actually say, what would be my motivations for doing that? So you just can't get caught in that game. But there are things we've recently bought that people may not be that aware of what is very well known that we bought. And one is probably really listening to it. They're really well known. Business is Netflix, which is now coming to our portfolio. And again, this is the compound story. This is the 10 year story of how we think that industry is going to play out. And even though this business is now with two hundred billion dollars, we think over the next decade we're going to make a serious amount of money by being in Netflix. So I have no idea where the share price is going the next six months, and that will just be about subscriber growth in the short term. The business, it's lesser known and actually I didn't in that podcast, which will released shortly with Jeff Sprecher, who is the chairman and chief executive of IntercontinentalExchange, and he truly is one of the great entrepreneurs of the last 20 years. He's one of the great founders. He actually bought a business called Continental Power Exchange, and he bought the business for one dollar in nineteen ninety seven. He then listed the business on the New York Stock Exchange in 2005. And for 15 years now, that business since listing has compounded at 17 per cent a year. It now owns the New York Stock Exchange as well and its exchanges in the in the world. And they started with one dollar. It's a little bit cheeky, actually. There was two million dollars of debt that he wasn't responsible for, but that that has been turned into now. Sixty four billion US dollar business. And now he's he's identified that he's effectively looking to digitalize and create a marketplace or an exchange over the whole mortgage industry in the United States to effectively take a very paper and analog process and digitalized the whole application and closing process of mortgages, including linking all lawyers and brokers and banks and everything into a network, and then effectively getting the data from that and digitalizing mortgage data for financial markets. It's absolutely visionary. And the nature of these things, you probably almost get a monopoly if you end. And he's a visionary person. I just don't think that's using the price at all, to be honest. I think this business is probably going to become as big as the whole of the current IntercontinentalExchange. And he's got such a track record of doing this. So there is one people probably haven't thought about. They've probably never heard of Jeff Sprecher. And I put Jeff Sprecher up there with Jeff Bezos. He's one of the true visionaries of it, of an industry. And maybe people want to watch watching the now he's going to be on our next episode. He's a remarkable individual. [00:24:42][187.5]

Alec Renehan: [00:24:43] That's fascinating. Himesh, I've got to ask a follow up about Netflix, because, you know, we've watched the journey. It's a compelling company, but the market is becoming incredibly fragmented and oversaturated, I guess you could say, especially in the US with the number of streaming services. So what's the thesis there for Netflix and how do you think they sort of continue to separate from the competition? [00:25:07][23.8]

Hamis Douglass: [00:25:08] Yeah, these are ultimately a scale game. And you're right, there's a number of content to now putting out streaming services, sort of all that content producers and putting out streaming services there in the United States. You know, the thesis on Netflix is effectively the broadcast television industry and the pay television industry is in terminal decline in the United States. There are a hundred million subscribers to pay television and they're paying 90 plus dollars a month for the pay television. That money is all up for grabs, so that's going to zero pay. Television on a global basis is going to disappear because it has a virtuous cycle on the way up. The more users you get and pay television, the more you can pay for the content. It becomes a virtuous circle. But as soon as you start losing subscribers, you lose the ability to pay for the content. And once you lose to pay for the content, you either have to put your prices up more or you have less content. And that's a vicious cycle. So pay television is going to zero and all that money is going to head into into. Streaming Netflix and Disney have such advantage here in terms of the scale of where their content budgets are, and if you look in the last year, you say the top watched television series in America last year, the top 10 nine were from Netflix. If you look at the Emmy Awards, thirty five per cent of all Emmy Awards were nominated to Netflix, so I think they had thirty five or thirty six nominations in the Emmy Awards. The next closest content producer had nine just to put the scale advantage. So they're going to keep scaling up their content on a global basis. And the competitors outside Disney, they're not doing it global. They're producing US content. And a lot of that US content about the office and other things. People are signing up for these things at the moment because they know these current content and they want to watch it. But once they watch what they've watched, I suspect the churn is going to be pretty high on a lot of these others. And if you look at Netflix, some of the series that they've done, if you look at Leupen, that was produced in France for France. So it was a local French one. And it's gone global on Netflix. If you look at what happened, money, it was it was a series that was stunning and spying for the Spanish audience. If you look at what Niarchos was done, that was done for Mexico and it's gone global. If you look at Bridgitte that it's been done. If you look at some of the series they've just released, this stuff you've never even heard of it becomes massive. Sixty five million people watching them in the first week. So what I would say is because they've got such a scale in so many markets that get these massive global, it's just not a US guy. The other people applying at a US game and competing for that US staff, unless they can scale that content budgets very, very dramatically and take it global, I think that Netflix and Disney are going to be the center of people's bundles. And because they'll keep producing these content and these hits, you get enormous value out of Netflix. I just don't think people are going to switch off Netflix. In a very simple analysis on Netflix. Two hundred million subscribers at the moment, slightly more than two hundred million. If you look at last year, they had a lot of subscribers because of the pandemic. We're sitting in houses. They got thirty seven million subscribers last year on a global basis. But let's say that average 20 to 30 million at the lower end of that probably get to four hundred million sort of households in a decade's time. And then it all comes to pricing by television has average pricing a six per cent per annum, which is very neat, three times inflation, even if you do a much more modest numbers, they're currently getting about eleven dollars a month on average on Global for their Netflix subscription. If you rent it at twenty dollars a month at a decade ahead, if you made that assumption, they would have 100 billion dollars a year of revenue. Wow. Maybe their total cost and their content, 50 billion. This is 50 billion dollars pretax Netflix would be worth at least a trillion dollars then in the future. So what's happening is whilst all these other supplying is all this money that's in paid television is all up for grabs and Netflix and Disney are definitely going to be two people standing there, will people because they've been spending ninety dollars a month, they're going to sign up to Hulu, will sign up to peacocking and others will use Dan and some other things. They're not going to be it's going to be a small thing, but there's going to be a bundle people put together. And the scale of the content that Netflix has is I just think in most people's bundle, Netflix is always there. And then it turns into an oligopoly for the next 30 to 40 years, in my opinion. So this is the broadcast television or pays television for the next 30 years. Netflix is in the Senate. Disney, it's not as pure play, but Disney's got amazing scale content as well. And the rest of the guys have got kind of content that people have been watching and want to watch the rest of the series. But how much are they going to scale? New content is the real question, or are people just going to come in and out of them, sign up for a month and then turn the subscriptions off and just watch what they want to watch on some of these other services? It's a it's a scale game. And Netflix is just way in advance of of nearly everybody else at the moment. And and reason isn't going to stop. It's going to keep scaling. [00:30:35][326.7]

Bryce Leske: [00:30:36] Fascinating. So, Hamish, let's move to China within Magellan's portfolio. There are some you know, you've got Tencent and you did have Alibaba. But correct me if I'm wrong in that. And we've seen the impacts that China can have on domestic companies here, Treasury wine as an example. So how do you think about investing in China more generally and then we can go from there? [00:30:58][21.4]

Hamis Douglass: [00:30:58] Yeah, it's a really good question. The first question I'd ask is, why were you interested investing in China and then how to invest in China and what are the risks? The first thing is why are we interested in China? China is going to become the largest consumption economy in the world and bidding against China would be a seriously bad thing to do. There are very, very few places in the world where you can get growth in what enduring growth economically in China is one of the most exciting places taking a 10 to 20 year view of the development of the consumption. The economy, it's driven by urbanization, is driven by ongoing wealth creation in China, and getting China right over the next 10 to 20 years is a very, very important thing in your investment portfolios. So that's a draw. There is a growth driver sitting there that's going to generate an enormous amount of sort of shareholder wealth. The question is, how do we participate in that? And your question around Treasury Wine Estates is a very good one because you need a diversified approach because of the of the risks. And you're right, we own Alibaba and Tencent, two of the best companies in China, but we also have very large investments in Starbucks. We're also invested in LVMH and Estee Lauder. So we've got Western firms who have amazing businesses in China and those businesses are growing at 30 percent a year. And they're becoming very, very large components of the valuations of those Western firms. But they can get caught up in the geopolitical risks between China and the United States or China in Europe or China and Australia at the moment. So you don't want to have all your eggs. You may feel you feel more comfortable about just owning a Starbucks to approach China because it's easier to speak to the management teams and everything else. Do you think the accounts are easier, but there are geopolitical risks if there are tensions between the countries where China could take action against companies in retaliation to geopolitical issues. And we're seeing that with Australia at the moment. So you just have to be mindful of those. That's one risk in investing in China. The second major risk in investing in China is what I'd call that the CCP, the Chinese Communist Party. Political risks have no misapprehension who's in control here. It is the Communist Party. If you go there and you assume something else, you're making an incorrect assumption. From time to time, the Communist Party is going to intervene against businesses if they're doing things that I think are against the party's interests or against the country's interests at the end. And we're seeing that with Alibaba at the moment. After Jack Ma made those comments just before the IPO, I didn't predict Jack would be so stupid to make those comments, but I cannot predict what the Communist Party would do after he made those comments. So so we're aware of those risks. Of course, there are regulatory risks operating in China here, but the regulatory risks, I don't think they are fundamentally different from the regulatory risks elsewhere. You'd face by owning a very dominant company. Facebook's facing regulatory moves. Alibaba is facing regulatory risks. And they're equally as important in both companies. And the last risk about China is just reputational risk that could be about human rights issues or other issues. You need to think, and particularly if you're doing things in a public sense like we are, we need to really think about the companies, how they operating, what they're doing, where where they are, and are they doing things that really are socially bad or socially good. And we make judgments. Not everyone might want to agree with our judgments and those things, but we think about those issues. So you need to diversify yourself that. But I would say getting access to the China growth story is a very, very important thing to get right over the next five, 10, 20, 20 years. And we're doing it in a multifaceted way at Magellan. We're just not in we're just not interested in Alibaba. They made the meaningful investments. But as I say, we've got big investments in things like Starbucks and LVMH and Nike, which we don't and has a fabulous business in China. Apple has a fabulous business in China. Tesla is trying to build a business in China at the at the moment. [00:35:09][250.3]

Bryce Leske: [00:35:09] Yeah, it is fascinating. Before we take a look at twenty twenty one, we'll just hear from our sponsors. So, Hamish, as I said, we'd love to get your views on the outlook for twenty twenty one, but also we obviously haven't had a chance to hear your thoughts on the craziness of 2020. We saw the fastest crash and then rebound in the history of the markets. And we'd like you to help us try and separate the signal from the noise for sort of what happened in 2020 and with the unprecedented response from central banks around the world. How are you or what are you taking from 2020? What were some major lessons? [00:35:44][35.3]

Hamis Douglass: [00:35:46] Yeah, it's interesting what you take from the lessons of 2020 and whether we're witnessing that appears many people are taking the lessons that their lessons, these markets can do extraordinary things. You know, in March, we had one of the most violent selloffs in Italy of a 30 year period. It was incredibly violent in a very complex situation. Then we saw an extraordinary response of epic proportions by central banks around the world and then also by governments around the world in just throwing money at this at this problem. And then when we sort of hit pay, Dionne, with the with the vaccines, we saw the strongest market rally in November in forty seven years. So, you know, we'd seen sort of staring down the abyss of Armageddon and we'd seen the absolute euphoria all happen, measured against history sort of movements. Just, just extraordinary. And what I'd say to you is, you know, don't let the markets guide you, but don't lose sight of the fact that markets can react violently in extraordinary ways. And we're in this period now because we've had these vaccines and we're seeing all these sort of government spending around the world, that there's this euphoria in markets. It's like things can't go wrong and twisted. And 20 sort of told you things can really go wrong, but people might take over. Got the lesson is, don't worry, the governments will solve this problem so we don't have to worry about anything here. And I would argue at the moment, I would describe twenty twenty one as the year of living dangerously. I don't think many people feel we're in an environment that there's any danger at all. And I look at this and I think it's one of the most complex sort of situations to assess that I have ever seen in my investing career. And the reason I say that if you ignore the virus at the moment and you just saying is what we're doing is we're vaccinating people, that's all going to work. And at some point into this year or next year, the big question, Democrates, are we going to get inflation and what does that mean for monetary policy? And could that to soothe markets? Will not that is a complex equation. Thinking about the interest rate markets and whether inflation comes or not, and that doesn't worry when you think about those things all the time, if we really got inflation and in twenty, twenty two, the Federal Reserve started tightening monetary policy because inflation was coming. Hold on to your chairs. That is so ugly for markets. It's not funny. But if we get just not much inflation and rates, I really lie with all this stimulus, we're off to the races. So in the absence of the virus, you'd say you just have to answer these questions. I don't think that many people are even thinking about that inflation rate, that markets could be in for a really rough ride if that was. I'm not saying that's going to happen, by the way, but it's a very genuine question. But it's much more complex than that at the moment because of the virus. And people assume that the virus is over because we have these vaccines. And I got only if it was that simple. Is very hard putting probabilities. But this virus is mutating and we know it's mutating so far. If you'd read all the signs, none of the mutations we've seen is likely to provide the vaccines. And that's what we're seeing in South Africa. They're not abiding people. More people are getting sick, but they're not going to hospital once they've been vaccinated. Oh, well, this is fine. The vaccines are fine. But that's just a picture today. What we don't know over the next few months or six months, whether or not we get a mutation that renders these vaccines ineffective. And they've been some very interesting lab studies that will go right into them where exactly that happened in exposing them to antibodies. And I think it is a 50 50 probability that in the next six months these viruses are going to invite the vaccines. And 50 50 is a very polite way of saying, I have no idea and I don't think anyone else has any idea. But because you're hearing the vaccines are holding up against the variants we see today, everybody's relaxed about it. And then I also hear, don't worry, we can just recode the current vaccines for any mutations. You can't confidently say that unless you know what the mutations are and some of the mutations that are happening like this South African mutation is actually a charge change. So it's gone from positive to negative charge and it's now repelling the antibodies. So I'm not sure how easy it is to retaliate for what is known as a fluoride fulci and make antibodies that will now attach to that zone here, because it's a change in a structure around that part of the spike protein. I don't think it really matters because we still know that the vaccines are working in other areas to stop them getting sick. But the chinks in the armor or are being attacked every single day and depending on on that chink, we know it's going to keep happening. So what happens if we wake up in three months time and now we start getting evidence that the current vaccines no longer work and we're in this euphoric mode that all these bets are being put on and then we start finding evidence that maybe it's not so easy to read code for. I'm not saying this is going to happen, but it's absolutely in the viewfinder. If you studied science, the scientists are terrified of this. And yet the markets are just like, let's just get caught up, let's buy Bitcoin, let's do all this other stuff, and let's ignore all this complexity. Therefore, I'm saying it's the year of living dangerously. This and the lesson to us from 2020 is this could rapidly unravel as quickly as it traveled up. That's a lesson to take out of 2020 and it will depend upon it. And I say it's a question of nature. Nature will take its course, it will do whatever it does, and we are at the mercy of how nature evolves, and I tell you is I don't know how it's going to evolve. So we're a little bit risk averse here because we don't know [00:41:47][361.5]

Alec Renehan: [00:41:49] why aren't on speaking of unraveling quickly in the year of living dangerously and not being sure what could happen. One thing that Bryce and I are particularly interested to get your thoughts on are current valuations and how you're thinking about valuation. You know, we had Howard Marks in his recent memo discuss the perils of traditional value investing approach. Some of the valuations we're seeing in the US seem very stretched. How are you thinking about current valuations? And then just more generally, how are you approaching that task in twenty twenty one? [00:42:23][34.2]

Hamis Douglass: [00:42:24] Well, first of all, I'd say is in the end, value metrics always matter. You know, as Ben Graham, who wrote The Intelligent Investor said, in the short term, markets are a voting machine in the long term weighing machine. So you can get a huge amount of momentum that has no connection to valuation metrics in the short term. And it's all about storytelling and everything else. But in the end, is a reckoning. And what really matters is valuations and valuations are very, very simple. What's the cash flow of business that can generate between now and judgment day? And you have to discount it back in an appropriate discount. Right. And you get the value today. That doesn't mean companies need to earn money today. And that's what Howard Marks was talking about, that you can have businesses like Netflix that are on very, very high PE multiples, but we can see a lot of value there because we're making the prediction about what cash flows this business is going to generate in the future. And when we discounted back and sensible rates, we think it's undervalued in that you could do the same thing on Amazon. It's trading at very high multiples. But then there are other businesses that I would like to see people's assumptions they're making at the moment of doing actually doing a discounted cash flow analysis of what market share assumptions they're making, what margin assumptions they're making and at what time period they're assuming it's going to be earning enough cash flow discounted back to die. That justifies an eight hundred billion dollar valuation. It defies any any sort of logic of reality. And in my view of making any sensible assumption, big crowds can can move in directions that can inflate these things to extraordinary levels at the end of the day. So so ultimately, valuations will come home to roost. In the end, Tesla will reflect its sort of discounted cash flows in the future or whatever that profitability is. There are areas of the market that just look crazy to me where there's a lot of crowd like behavior around them. But there are other areas where we see a lot of value, particularly defensive equities. There's been a massive rotation into these sort of opening up scenario in there. And the stimulus, there's a huge amount of money that's being made, some of these free money sort of sort of cultlike areas where there's a huge amount of money that's gone in, but that other things have been left behind. There's some consumer staples that are trading at their lowest multiples in ages and nothing's changed there. And of course, one of the biggest judgments you have to make in that sort of intrinsic value, not you have to try and predict these coupons in the future and that that could be hard here. The other thing is what the interest rate is. And it's very difficult to judge whether our interest rates are going to stay at this low level. Buffett describes interest rates as a gravity of market. So as you lower interest rates, assets are worth more at discounted cash flow basis. And if interest rates go up, assets are worth less. You have to make that judgment call. But I don't think any of the fundamentals change it just over a period of time. In the short term, when things are going up, you go, well, that doesn't matter anymore. Of course I better. Yeah, in the end. [00:45:24][180.0]

Alec Renehan: [00:45:25] Now, Hamish, I'm sure we could listen to you talk about investing all day. But we are nearly reaching the end of our time. We do like to finish with the same final three questions, so we'll move on to them. But before we do, if people want to find out more about yourself and Magellan and your podcast, where should they go? Are there any particular social media that you're particularly active on or anything like that? [00:45:49][24.0]

Hamis Douglass: [00:45:49] Yeah, I would say probably the best place we're pretty old fashioned. Probably go to our website and it will direct. We've got to sign up for any stuff in the night. It can be fun and all the podcast services. We do a lot of video stuff as well. But the logic that's distributed via we put that on a YouTube channel and we put that on our website and in the news on all the podcast services. [00:46:11][21.6]

Bryce Leske: [00:46:11] You're not on tiktok yet, Hamish. [00:46:13][1.1]

Hamis Douglass: [00:46:14] On TikTok just at the moment. I need to I need to water my views, but I hate to sound like you'd spend hours on it, but that was later. It stood as flicking the finger on. It's crazy and it's really funny. [00:46:29][15.0]

Bryce Leske: [00:46:30] Yeah. Crazy platform. [00:46:30][1.0]

Alec Renehan: [00:46:31] Yeah, we're. Dabbling, but trying to figure it out, it's a whole different world out there, so we'll get to these final three. Himesh The first one is, do you have any books that you consider must reads? [00:46:44][12.5]

Hamis Douglass: [00:46:45] Well, reading is one of the very important things. I think we never stop learning. And I could probably give you a list of 100 books that I think are must-read books, but I won't do that to you. I'll split it very carefully between some investing books and probably non investment areas where I would suggest people reading I find fascinating. Of course, the all time classic is The Intelligent Investor by being by Ben Graham. It's quite a technical book that was written in the 30s, but there are two wonderful chapters. One of the chapters is on the margin of safety and the other chapter is about Mr. Market. And those two chapters are probably two of the most important chapters that have ever been written in investing. So you probably don't need to read the whole book. But I'd really suggest you read two chapters out of Ben Grimes, The Intelligent Investor, another book that people may not have read that I really love. It was a book called The Wisdom of Crowds by James Sarah Watsky. And it is if you want to really understand sort of crowd behavior and what happens, it is a very, very good book. And on the same sort of topic, there was a book that was written a long time ago by Charles Macci, and we've sort of touched on this a little bit. And it was quite extraordinary popular delusions and the madness of crowds. And if so, what happened on a game? And you and you're looking at what's going on in Bitcoin. And, you know, I had a friend the other day who said, look, this 90 year old mother, she really wanted my view on Bitcoin because all her friends are talking about it and she thinks she should take some investment in it. Maybe she should read Charles Mkhize book in that I think one of the all time classics sort of collections is another book by Lawrence Cunningham. It's called The Essays of Warren Buffett. So what it's done is taken all the annual reports he's ever written, and it's a symbol to all the different stuff into different topics. And if you're if you ever want to learn from Warren Buffett and if you're interested in investing, that's probably one of the greatest collections of distillation of sort of Warren's thinking over his lifetime. Put into one easy consume book just outside the investing thing. A book I really loved was a book called The Perfect Weapon, and it was like I could David Sanger. And it's really talking about cyber risk in a world and cyber terrorism. It's a great read, but this is one of the great dilemmas of the twenty first century cyber risk in the world. And last I'm going to give you a particular book because it's the numbers here. But if you really want to think about the future of humanity and it's something on fascinated about and particularly the evolving of artificial intelligence and anything that Reichert's will has written on this topic is really worth going to read some of Reichert's will stuff. But you can listen to right on YouTube and other things and get a snapshot of it. Really bend your mind about where humanity could be headed. [00:49:34][169.2]

Alec Renehan: [00:49:36] So the second question is, in 60 seconds or less, what's the best company you've ever come across? [00:49:42][6.1]

Hamis Douglass: [00:49:44] Yeah, unfortunately, it isn't Magellan, and it actually isn't even Berkshire Hathaway, I would say, look, I think it's a really, really difficult question to answer because I think probably the most powerful company that's ever been developed is still evolving. And it's probably hard to really pick which one it is at the moment. Amazon would be right up there in that list of probably the most powerful company ever being created. But e-commerce is more competitive. The advantage is obviously an AWS and the advantages in infrastructure they're building out. Alibaba is extraordinary. In China, it's it's sort of an Amazon lookalike alphabet, probably has a depth behind its its research base that can be seen. But it's difficult to pick which one you would say could still work in progress. They're really some of the most powerful businesses that have ever the world has ever, ever seen, and therefore they're going to evolve and competition is going to evolve. So it's big. So we're watching a movie, but we haven't got to the end of the movie yet. So I put those top three out there. If I had to pick a company that is just going to endure the test of time and this person hasn't built all the brands, but they've been put together, LVMH, I think is extraordinary, these bands of two hundred year history. So I think they've there. And you're never going to form a new Dom Perignon. You're never going to form a new Louis Vuitton or Christian Dior. This is sort of game, set, match. And if you want to doing a single brand, it would probably amaze as well. Most companies disappear after 30 or 40 years. These brands have been here for two hundred years. There are very, very few things that have got duration like that. Bernard, I know who's one of the richest guys in the world, has seen these things with this collection of businesses together in LVMH. But I find it hard. If I won, I would be one hundred percent confident that I will never get a road in. This company is going to be here in two hundred years. You'll probably be LVMH because I just I think consumer habits are going to change over that period. But which one is going to turn out to be the most powerful business the world has ever seen? You know, I would say maybe Amazon or Alphabet would be in the front of the queue here, but it's still the game still playing then. [00:52:11][147.1]

Alec Renehan: [00:52:11] Final question, Himesh, if you're thinking back to when you were first starting out as an investor, finding a way to buy Wesfarmers shares at a 30 percent discount, what advice would you give to your younger self? [00:52:24][12.8]

Hamis Douglass: [00:52:25] Well, the first thing I'd say is you need to read, read, read. How did I get to that Wesfarmers franked income investment? I asked early on the Liberian to put every broker's report that came into Schroder's. I worked at every single day on my desk and probably got six inches of brokers reports. And every night at about 10:00 p.m., I'd sit up at home and I'd read every single broker's report that came in. So there's no substitute for hard work and and reading and and you have to have patience in these games. I read, read, read, patience starting early. This is a compound interest game. If you want to start accumulating knowledge and start investing when you're 50 closer to your retirement, you kind of lost all the advantage of time here. So, you know, unfortunately, you have to spend less than you earn and millennials aren't very good at it or live today. And don't worry about tomorrow. But if you really want to get ahead financially in life, you want to be a little frugal early, early on and you want to stop the compounding game early on. You really need to understand. I used to have when I was 15 and 16, always that compound interest tables up on my wall of spending a bit of a nerd. I don't think a lot of people had that, but I was enamored about duration and I used to go after 30 years in a different rights and seeing what the multiplier was. I'm going is I just have to have time. You know, one of my problems in life is I'm running out of time in my scale. If I don't get to do that, you know, and if you're young, the advantage you have is time. And you need to understand that time is your real friend when when you're young and don't waste it, don't waste the time. And the only last thing I'd say is enjoy yourself. You just don't get too obsessed about making money and all those things. You have to enjoy yourself in life as well and enjoy your friends and everything else. And to some extent, I work super hard. When I was young and maybe overworked when I was young, I used to work seven days a week, was probably working 12 to 14 hours a day, and did that for years and years and years and years. Maybe I should have taken that foot off the accelerator slightly when I was younger. But I've got no complaints. [00:54:28][123.6]

Bryce Leske: [00:54:30] Well, how much we truly have enjoyed this conversation with you today. As we said at the start, it's been something we've been looking forward to for a while. So thank you very much for your time. I know our audience certainly would have got a lot out of this conversation. Looking forward to seeing. You grow Magellan to be the best business that you've ever seen. And, yeah, thank you for your time. Hopefully we get to chat to you again at some point this year. [00:54:52][22.7]

Hamis Douglass: [00:54:53] Right now, like it's been an absolute pleasure. I'd love to speak to you guys again. [00:54:56][3.1]

Alec Renehan: [00:54:56] Thanks, Hamish. [00:54:56][0.0]


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