Expert Investor: Michael Dee – Solving The Investor’s Dilemma pt. 1

Bryce: [00:01:30] Equity Mates, Episode 22, exciting to be here, as always, the podcast about breaking down the world of investing. Make it easy and accessible for you guys. And as always, I enjoyed my equity buddy. How are you going? [00:01:44][14.0]

Alec: [00:01:45] I am very good. Bryce how are you? [00:01:47][1.4]

Bryce: [00:01:48] Can't complain, as always. Saturday morning here in Sydney and Melbourne. I think you have great weather down there. [00:01:53][5.3]

Alec: [00:01:53] Yeah. Beautiful and sunny down here. Nothing better than to be sitting inside and recording. How exciting. [00:01:59][6.4]

Bryce: [00:02:01] The sun is shining and we're having a great time. So this week we are going to be bringing another expert investor in our interview series. And this one is going to be of a different flavour. You want to give us a bit of a rundown of who he is? [00:02:16][15.0]

Alec: [00:02:16] Yeah, definitely. So this week we interviewed Michael Dee. Now, this is only the first part of a two part interview. Michael has started his own fund harvesting funds management and also runs the website Pythagoras's Investing Dotcom. Now, the reason we were interested in speaking to Michael is his theories are a little bit different to what you'd find in the mainstream and what you'd hear from most of the interviews that we've done so far. He looks at volatility, which is something that we'll go over in the interview, and he looks at that as a predictor for market events. He successfully picks the global financial crisis and actually started his funds management business just as the global economy was melting down and he managed to get a lot of companies at bargain prices. This is an interesting one for us. There are some things that we hadn't heard before. He has some very interesting views on China, on value investing, on volatility and predicting market events. But I guess part of this podcast is to be exposed to ideas that we hadn't heard of before and hadn't really thought about. And this interview definitely gave us a lot to think about. [00:03:34][77.5]

Bryce: [00:03:34] Yes, I really enjoyed it. And he speaks in a way that is very easy to understand as well. And definitely, you know, the first half of the interview, it's got a lot of basic stuff in there for those listeners out there who have just joined us and are starting their investing journey. And then I think, as you mentioned, Ren will split this into two parts and then the latter half goes into a bit more detail. So, yeah, we're excited to bring it to you. We just want to plug as well that if you haven't already signed up, sign up to a weekly Equity Mates thought started this email. You can do that on our website, Equity Mates dot com or find us through our Facebook page. Just Equity Mates investing podcast. Each week will send out an email with five interesting links that we've found during the week to help you get an idea of where we look for information and what we sort of use to find stock picks and also just keep up to date with markets and trends. So get on board Equity Mates dot com and sign up. And as always, you can find this on YouTube as well. [00:04:41][66.9]

Alec: [00:04:42] Yeah. And to to give everyone a bit of an idea of what they can look forward to if they sign up to talk starters. This week we have a content from a rival podcast. So, you know, it's good if we're going to one of our rivals and but it's a checklist that they use when they're looking at stocks. So some really easy to write, practical advice that will help you pick good stocks that you can hold for a long time. And then also we've got an interesting article about how Germany's trying to fix Facebook, so. Yeah, yeah, yeah. When I go into it any more. But it's interesting. Obviously, it has big implications if anyone owns or uses these tech companies right now. [00:05:29][47.1]

Bryce: [00:05:29] I also want to let our viewers, listeners know that as of next week, we will be starting a bit of a competition for our listeners where they're going to have an opportunity to win an investing account through a fund that we're doing a bit of a partnership with our over the next couple of months or so. So if you're out there and you do have an investing account already or you're starting your journey and would like to start one, then keep listing and also watching our Facebook page. But more importantly, sign up to our email list, because we're going to be giving you the opportunity to start your investing journey through us and just to name a bit later on during the week. So stay posted. [00:06:16][47.0]

Alec: [00:06:18] Yeah, very exciting. First and hopefully not last chance to win money through Equity Mates. [00:06:23][5.7]

Bryce: [00:06:24] Yes, yes. Ren. Well, without further ado, I guess we should jump into this into this market day. And as we said, we will split this across two weeks. Now, we're not going to wait a fortnight. We will be releasing first one, obviously, this week and then the next one the following Sunday. So you don't have to wait a fortnight. [00:06:45][21.0]

Alec: [00:06:46] That's it. All right, everyone, thanks. Thanks for listening and enjoy the interview. What they like, Michael, here at Equity Mates, we're fascinated with how people how the people we interviewed got started in investing. So can you tell our listeners what got you first interested in investing and how you got started? [00:07:09][22.5]

Michael: [00:07:10] Yeah, sure. In a funny sort of way, it's not a not a story that's dissimilar to the peer review. I was in Adelaide, in University in Adelaide, and I had a great mate who we used to talk all of the time about the stock market and investing. And it was in that period just after the 87 crash. And really the markets went nowhere fast for quite a long time after that. And so I learnt a lot through him. And, you know, you would fascinated as a good one, because that's what I became quite fascinated. I really got started once I got my first job Obai for my sins. I did an accounting degree to begin with and I pretty much went out and did a year's work, what I would call now work experience within an accounting firm. But the best thing it did for me was got a bit of capital under my belt in those days. I'm pretty sure it's better now. I think I was paid nineteen thousand dollars for my first year of accounting. And so at that stage and this was ninety two IPOs were really running hot. And there's a thing called the IPO window. Does that make sense to you, that term. [00:08:29][79.3]

Bryce: [00:08:31] Not me. No, no, not really. [00:08:33][1.6]

Alec: [00:08:33] What does that mean. [00:08:34][0.6]

Michael: [00:08:34] Okay, well, let's spend a minute. You know that there are phases in the market where it's running hot and not running hot and running down and running up quite significantly. Um, when the market's running down or in a very uncertain phase, there's a period of time where IPOs just aren't accessible to get into the market because the investors just say, nope, not interested. I don't want to take the risk, don't know the company well enough. And that's known as the IPO window being closed. But where you see a rush of initial public offerings, I should have made that clear IPO happening. You know that you're either at the bottom or near the bottom, either just before or just after. And so you see this wave of activity. So I hope that makes sense at this. [00:09:32][57.4]

Alec: [00:09:32] So it's it's a key indicator of the market turning around that year. [00:09:37][5.0]

Michael: [00:09:37] Yes. Look, it's not a direct it's my observation, I suppose, more than anything that I always take note of that when there's a flood of IPOs and you could probably look back over the last 12 months and see this, I think we had something like 150 new floats in the last 12 months or maybe 15 or 18 months even. But when we were at that time in 92 was exactly there. So Australian Provincial News, Fairfax floated, Woolworths floated not far afterwards. You had the likes of even though the years are probably running on a little bit further. But yeah, Commonwealth Bank, Telstra, we're all in that very early period. So for me, it was it was really my objective to get my cash into as many floats as I could. And that was sort of easy at that time. And but the thing I learnt about that sort of philosophy, even though it doesn't exist in the same way today, you needed a relationship with a broker. And I had a good relationship with the lady at JBWere in Adelaide who just looked after me a little bit enough to get me going. [00:10:54][76.4]

Bryce: [00:10:56] All right, so, Michael, I mean, the relationship with the broker is something that our generation doesn't really have. I mean, we, you know, have our trading on online now and micro investing and that sort of thing. So in a way, it's quite easy for us to get access to the market. So was that one of the hardest things that you found about getting started [00:11:20][24.3]

Bryce: [00:11:21] or what was one of the hardest things and what did you take away from it? [00:11:24][3.7]

Michael: [00:11:25] Yeah, so really the the hardest thing was the capital at that point. But the second hardest thing, even if you had the capital, if you had any more than 2000 dollars, you had Buckley's and none of getting it into one of these hot flights. And so that the thing that I learnt was that you really needed this. You scratch my back and I'll scratch yours relationship through that period of time. Does that make sense? [00:11:50][25.2]

Speaker 1: [00:11:51] Yes. You're saying now were just too oversubscribed or. [00:11:54][2.2]

Michael: [00:11:55] That's right. And the other thing is that they would quite often it would be money, your check in and you would wait sometimes two to three months just to know whether you were going to be successful in your application. And then it might. Yeah, might be another month or six weeks before it hit the market. So, you know, little old me, I was drawing money off my credit card, which didn't have a very big balance at the time, out to put money into floats so that I could get as much leverage as I could. But you would quite often wait three or four months to to see whether you well, at least three months to see whether you were in. And then it might be another one or two months to see whether it listed. Well, so it was that was fascinating. [00:12:41][46.1]

Alec: [00:12:41] That's some serious commitment to put IPOs on your credit card. You must have had some confidence that you knew what you were doing was right. [00:12:51][9.4]

Michael: [00:12:52] Yeah, well, that's true. You know, in those days, to have an accounting degree and to be investing was weird and and I didn't really understand that until I got to QIC some probably three or four years later. And then I realised that understanding financial accounts was actually quite rare. And so I had already done that. And I had a pretty good understanding of markets and things weren't hard. Businesses to understand Australian Provincial News and Fairfax and similar sorts of businesses, they had reasonably robust histories that you could look through. And to be honest, when I look back on it, I think, you know, it really was the easiest money you'd make, but you could only get it in 2000 dollar lots. [00:13:41][48.7]

Alec: [00:13:41] Yeah, fair enough. So I guess, you know, the 90s and you were focussed on IPOs, did not did that focus extend to the sort of IPO mania that was in America with all the tech companies? [00:13:55][13.8]

Michael: [00:13:57] So that was more 2000. So I think you're referring to the the tech bubble. [00:14:02][4.9]

Alec: [00:14:02] Yeah, exactly. [00:14:03][0.4]

Michael: [00:14:03] Yeah. Yeah. So look, um, so that was my very early strategy. Those IPOs, the tech bubble, to be honest, I was in a different phase of my career. I was not investing in terribly many at that stage. I would have read. Something up to 200 prospectuses a month for probably two or three years for tech companies through that time. Wow. And not if so, I learnt to read them very quickly. And I remember I remember sitting on the end of the the bed in the hospital where my second child was born and just reading through prospectus after prospectuses, all the boring stuff was happening. And then my wife was sleeping and the baby was, you know, not doing anything terribly exciting. But you learn to read a prospectus from the back to the front and you learn to really spot spot the critical information quite quickly. And if you don't, you get caught. So so that tick, tick or that tick bubble period, we participated in a select number of those opposed at a QIC level. This is a fund level, but it became increasingly, increasingly obvious to us once we started to get into crazy sales multiples that we were heading into troubled territory and we started to stand against that TMT technology media company trend took a little while, but we ended up making a lot of money out of not owning them in that respect. [00:15:47][103.9]

Bryce: [00:15:49] So, Michael, you said that you were reading this prospectus is back to front to find the critical information, but critical information might be different from investor to investor, depending on what your philosophy and attitude and style towards investing is. So can you give us a bit of a rundown on what your philosophy was towards investing in the companies you were looking for? And has that changed from back then to today? [00:16:17][28.4]

Michael: [00:16:18] Yeah, good question. Let me just answer the first part of that hidden in the back of any prospectus, the most important details. And they tend to be hidden in the notes to the accounts. So when I say you read them from the back to the front, that's what I mean. You don't read the glossy bit and work your way through. You start from the end and look where they've hidden the bodies. And that's what that was. [00:16:43][24.6]

Bryce: [00:16:44] That's exactly. [00:16:44][0.3]

Michael: [00:16:46] Yeah, it literally is. And look, I can I can remember there were even statutory sets of accounts which you actually had to go further to get a hold of with the best information was always buried in those. So anyway, look, my investment philosophy pre GFC, I was a long term investor. I had a belief in putting stock in the bottom drawer and we made a lot of money over a long period of time, even though the industry was changing with the invention of asset consultants who were more focussed on the shorter and shorter term. Um, post GFC, my philosophy changed entirely. I really don't believe that you can be a responsible investor and not understand geopolitical events because you can't make money long term without understanding the geopolitical. Further to that, I simply don't trust the fragility of our economic system post the GFC. So. [00:17:54][67.9]

Bryce: [00:17:56] So you think the GFC has drastically changed, obviously not only the way you invest, but the financial market. So it sounds like forever. [00:18:05][9.2]

Michael: [00:18:06] Yes, I, I absolutely believe that. And even though we're probably not going to have a lot of time to talk about it today, that's rooted in China and the way China invested and the way they actually take or took a position, particularly over America and the way they've asserted themselves around the world in foreign exchange markets, particularly in bond markets that you can easily read about. Yeah, so look, today, you know, we'll get to talk about Pythagoras's shortly, but really I use that and it's all about for us the changes in volatility, which predict events with share price effects. And what we do is therefore try to try to head of those predictions. I no longer read annual reports. I wouldn't have read a prospectus in years. I don't read broker research. I don't, to be honest, even worry about the geopolitical or the company specifics. I just follow the the recommendations that come out of Pythagoras's. Further to that, just just to add a little a little bit more. I'm not not an emotional investor and I really don't believe you can succeed if you're an emotional investor. And I've always been particularly good at not regretting any decision that I make and just living with the consequence, because in all parts of your life, I'm sure you would do the same. You take the information you've got at the point in time. You make your assessment and you make your move. And if you made a poor decision because of a piece of information or you change your mind and you move on. [00:19:59][112.6]

Alec: [00:20:00] So I guess that's a good lead into talking about Pythagoras's, which you founded and you're the CEO of. So can you explain to our listeners what you're doing at Pythagoras's and how it may differ from other investing advice services out there? [00:20:16][15.9]

Michael: [00:20:17] Yeah, sure. I'm just going to take a step backwards and and give you more perspective on the industry. You see, the stock market is analysed by events and you guys have got an interest in this. So I just spend a minute when analysis occurs, it causes people to trade. And what our competitors or what the competitors in the advice market do is take a known piece of information. So an acquisition or a downgrade or a CEO resigning or a CFO being added. They take that data, they record it and they offer it back to the investors in the hope that the investors can profit from it. But the problem with that is the information's already known to the entire market. And what that means is it's too late because everybody's doing the same thing. And this is what I call the investors dilemma, because they tend to be particularly retail investors, the last to know. So that's what the the traditional investor does. What we do is analyse the market through maths, through volatility, because what we've proven and shown is that market sensitive events are predictable via changes in volatility. And therefore we can predict share price behaviour and we can buy and sell ahead of the market. Now, just to further underline that, just just to make the point, traditional analysis, what happens is these analysts call them in broking firms, but it doesn't matter where they are. They're not looking at company X, Y, Z until something happens. And when something happens, they dust off the file and that's literally the truth. And they will get sharpen their pencil, work out what they think it means, and then they will write research and then they'll talk to their clients. And as I say, the problem with that is it's too, too late. Everybody already knows. So the Pythagoras's system is to constantly take price and it makes those mathematical analyses and creates its volatility and as I say, predict the event and we buy and sell ahead of any event. Now, you might say, okay, that sounds good, but what does it mean in practise? So here's a couple of numbers. If you take dividends out over the last ten years, the market averaged a return of three percent per annum. Now most fund managers produce plus or minus one per cent overall or below that. If you used all of the Pythagoras's recommendations, you would have made 30 per cent. Wow. Yeah, such so what it's doing is it's it's the I've designed all of this with the. Retail investor in mind, but it surprised me how quickly the institutions have become quite interested. It takes away the complex analysis it's looking while nobody else is looking at. It means that the investor doesn't have to be market savvy and keep abreast of the market and you don't have to read all of those annual reports. So what we're doing is we're giving a better return for less time. So so a lot of ways we're selling lifestyle. [00:23:46][209.1]

Alec: [00:25:41] So can I just ask about the mechanism that leads to this correlation between volatility and then an event? So when you think when when you break down what volatility is, it's just a lot of people trading and a variation on the sort of price that buyers will accept and that sellers will sell for. How how is that? What's the mechanism that that leads to an event? Or is it something where there's like insider trading? And so you're using that as a tool and then and then, you know that events coming. [00:26:15][34.2]

Michael: [00:26:17] Yeah, good question. Now I use the word volatility because it means a lot to me, but I'm aware that it's a term that's not very well understood broadly. So what you've described is the general understanding of volatility. So I'm in error. I should have put that up front. What we calculate is a proprietary volatility. And what we're looking at is the mechanism that the mechanism we're looking at is when that changes. So when volatility is travelling in a particular fashion, it has meaning when it changes. Now, you would have worked out by now that when volatility or let's call it changeability in your world rises, then prices fall. Would you agree? [00:27:06][48.9]

Alec: [00:27:08] Well, look, to be honest, I'm still not 100 percent sure what you mean by changeability. [00:27:12][3.4]

Michael: [00:27:14] Well, if you think volatility is it, people typically think of it as the changeability of a price. So I guess that's what they think of volatile, something volatile. It changes a lot. Yeah, the way we use volatility is quite different from that normal everyday use of the word volatility. Does that help? [00:27:37][23.5]

Alec: [00:27:39] Yeah, yeah, I guess so, yeah, so so if it's if it's different, I know, I know a lot of this will be proprietary, but it is it. So you said you look at a trend and then when the trend changes, so are you looking at sort of price momentum and then it changes the other way, or is it you're looking at volume indicators or what is changing? [00:28:03][24.5]

Michael: [00:28:05] Yeah, it's priced with none of this is earnings momentum based or volume based or charting or anything like that. It's this is actually knowledge that's not been used anywhere in the world. I've done a big search and I've never come across anyone who's doing anything similar. It it's really about the mathematical calculus and the volatility and then the behaviour of that volatility through time. Now, the beauty of that is you don't have to worry about it because we've got 130000 lines of code that decode it. It it decodes yes. It's taken a long time. It decodes exactly what's going on. And so. You know, you're right, it's commercial in confidence, the underlying all of the underlying IP, of course. But if you can just hold that basic thought that when volatility is increasing, then prices falling, it'll start to help you get into your head a little bit more of what we're actually trying to do or what we're actually doing. [00:29:15][70.0]

Bryce: [00:29:15] OK, so I just want to jump in there, Michael. Sure. With your pregnancy, [00:29:22][6.3]

Bryce: [00:29:24] you know, put the stocks in the bottom of the drawer and don't look at them value based sort of buy philosophy. Um, it's this sort of information, these fundamentals fed into the system somewhat as well, so that the recommendations are still coming out, you know, with the companies similar in terms of their underlying fundamentals, or it is a completely different company that the stock that the programme recommends [00:29:50][26.3]

Michael: [00:29:51] every stock has its own unique volatility calculation. Every sector has a localisation of its unique character characterisation. But I want to take you back. We're still dealing with predicting events. If your fundamental analysis analyst, you're dealing with events. All we're doing is we're predicting the events and we're reacting to them before traditional investors can. So we're not dealing with different things, with just mathematically predicting them. Does that help? [00:30:27][36.3]

Bryce: [00:30:28] Yeah, yeah. And obviously, this is the time in which you're predicting would change. But are we talking, like, down to the millisecond or are we talking talking months just for our listeners to get an idea of how this algorithm works? [00:30:43][15.0]

Michael: [00:30:44] Sure. Look, it recommends it. It has three time intervals where it recommends each day. Sometimes it will buy on a day and sell on the next day. But more likely, it will be in for 10 or 20 or 30 days and sometimes longer. So it's not it's not just trading for the hell of it. It's reacting to the information contained in the price which is in the market. Gotcha. And just to give you an idea, the way we work is we allow people to recommend sorry to subscribe to her stock. So we're not saying you need to take 70 stocks. Each of those stocks on average has 40 buys in a year and 10 sells. So you're pretty much doing something each week. And the recommendations come out at about midday. So everyone's got five or ten minutes and their lunch time to go into their whatever account, their Audry or they Comsec or whatever it is that works for them and transact that recommendation. So that's what it's doing here. [00:31:52][68.4]

Alec: [00:31:53] All right. So just to clarify, so there are people who sign up for literally just one stock and yeah, they might be obsessed with Telstra and just track the recommendations that come through for Telstra. [00:32:06][13.4]

Michael: [00:32:07] Yes, that's right. Yep. So so we don't what we say to people is we'd rather them have three now not everyone can afford three, but three gives you diversification. So if you chose an agriculture start, an infrastructure enabler, stock and sports and entertainment stock, you're actually getting a good amount of, let's call it economic diversification. If we're buying 40 times in a year and selling 10, you're getting diversification within the stock and you're getting different opportunities to be in and out. So, yeah, look, we say to people, ten grand is about the minimum amount of capital you need. And that's really because we've got fixed cost or you've got fixed cost being brokerage. And you need to get ahead of the costs of the service and the costs that the brokerage enough to make money for yourself. So that's that's really the point. [00:33:02][55.0]

Alec: [00:33:03] OK, interesting. We've spoken a bit about macro events. It might be worth explaining it a bit further with some examples. So I know when we spoke previously, you used the example of North Korea. So maybe do you want to explain that to our listeners? And then if you have any others that sort of illustrate what you do with Pythagoras's investing that you can share, that would be great. [00:33:26][23.2]

Michael: [00:33:27] Absolutely. Okay. I guess the first question really is why do we write about geopolitical because it's it seems to be at odds with what I've just described to you. But let me just run through what we're trying to do is give people an understandable reason for the stock or the market behaviour about a situation. And why do we do it? Because geopolitically we believe are so powerful, you just can't ignore them. And without understanding them, you're pretty much on a hiding to nothing. So we try to describe the issue and its likely outcome and the idea there is to help people make sense of that world, whatever that world is, at that particular point in time. So from my point of view, it's really an acknowledgement that what people are doing or trying to do is actually very, very difficult because investing by yourself is nigh on impossible. Further to that, the human mind really can't decipher stock markets well enough. There are just too many actions and reactions that are going on all of the times and and most of them aren't clear without real insight. And then you add to that people find it impossible to predict human reactions to events. So now let me go on with North Korea, that missile, in fact, those missiles over Japan. I like that because it's a great example of one that the mind can comprehend once you understand the information. And I'm sure when I described it to you or you read the article, you immediately go, yeah, I get that. So let's go through it. Japan threatened by North Korea not once, but twice, so in the blog article on Pythagoras's investing, what we said was Japan will be muscling up, whether it's quietly or overtly, to make sure they aren't vulnerable like they were this time around. Now, that could be a multi-year effect and the timing is unclear. But the underlying trend is quite important and clear to me. At least now, once it's understood, you can then turn your mind to the fact that this is actually going to cause Japan to create infrastructure that they haven't had before. And that means commodities. That means resources and mining and contractors. And in essence, by helping people understand that geopolitical, they can then use that as a backdrop to what they want to do with their own stock selection. So all of this underlines how difficult it is to be investing without a protector. I'll just give you a pause to see if you've got any questions there or anything that [00:36:19][172.0]

Alec: [00:36:20] I do have one question about that. So in that example, how do you account for or how do you determine likelihood? Because when we think about that Japanese example, it does make sense that in response to North Korea firing missiles over the island, they will look to build up their military or their military capability. But then, you know, it may be just as likely that they buy weapons of America or of another ally rather than building them themselves. And so then maybe the second and third order effects of North Korea's testing missiles won't actually play out. And it may not actually benefit, you know, Australian resources and in the way that we expect. So how do you account for likelihood? [00:37:07][46.7]

Michael: [00:37:08] Sure. That's a good question. I like that one. Okay, so our view is a view and it's and and certainly at the time it was very, very different from others. But I noticed that it's become more mainstream as times went on at that time. It was a reflection, an accurate reflection of what we thought. And I think that will come to pass. But you see, if you look at this Article nine in relation to Japan, there has never been a greater time for the government to change that old agreement and stand up and defend its people. So we believe that with or without authority, overt or not, the Japanese will be readying themselves. So for us, it's a structural reason to be interested in that sector. Now, you make a good point. It might be built somewhere else. But here's the thing. We actually don't need a lot of change in demand to change the price of a commodity. And it doesn't matter where that demand comes from or goes to, because commodities are international markets with international pricing and parity pricing at that. So with any additional demand comes a consequential price move, and that triggers the entire industry. So make the equipment where you like. Australia still wins. So from my point of view, if I'm even if I'm not precisely right, our system Pythagoras's will make the adjustments to make sure that I am trading correctly. So that's that's pretty much my answer to that one. [00:38:38][90.0]

Alec: [00:38:39] It's a good one. It's one of those. It's better to be generally right than specifically wrong situation. Yeah. [00:38:44][5.7]

Michael: [00:38:45] Yeah, I get it. Like I said, I was just going to go on. You sort of posed a couple of other questions in that one enormous question. Yeah. Yeah. The the fact is Pythagoras tells us what's happening without naming the event. And so it doesn't doesn't only predict the event, it works out the recommendation and it works out what comes next. And as I've said, we act in advance. So we're taking out in all of this the human frailties, the good days and bad days, the sick days, the bad days and the egotistical. And the great thing from my perspective is even though this is meant to be of use to mum and dad style of investors or retail investors, my biggest readership is directors, CEOs, investment managers from around the world. Now, on top of that, you asked about other things that I'm looking at. Yeah, I'm on the front page of our website. And even though this isn't what you would call a current issue, we've got an offer there where people can grab what we call the industry conflict paper. Now, one thing I've learnt over the years is you get what you incentivise. And the problem is people by and large don't understand how the investment industry is incentivised. And so I've written what is probably a 12 or 14 page paper. Which goes through step by step, segment by segment where the money is made and where people ought to be looking to, because you will remember things like a real estate agent when you're buying from them, isn't making his money from you. So he has no vested interest in you buying at 20 or 50000 dollars cheaper than the asking price. He's got every vested interest in getting a better price because the person who pays the bill is the owner. So it's the same sort of argument applied to the finance industry. But don't tell too many people about it, because I'll probably get Mastrov for telling too many secrets. There are three blogs that if I had my chance to recommend to people to have a look at again on Pythagoras's investing website, there's the 12 early indicators of the next GFC. Now you guys can read it and make your own judgement. I don't believe we're there yet, but there are some quite worrying signs. There are two others that are sort of the pigeon pair. One is the stock market cultural chasm, which is talking about Eastern versus Western logic. And the second one that is quite important there is the real superpowers, China. And I've spent a lot of time over the last 10 years making comment on China and the US versus China. But if I had to summarise, it's this. Western analysts find China hard to understand or almost impossible because their starting position is fundamentally flawed. They're using a Western logic in an Eastern dominated world. And what that means is you and I. Believe in economic rationality, but they don't they don't care about economic rationality because China and Chinese are building a nation and that actually throws into doubt just about everything that competes with China. And in reality, what hope is an analyst got to analyse a company's prospects when it competes against China. Who doesn't care about profit? [00:42:22][216.6]

Alec: [00:42:22] That's a really interesting comment. So I guess then, as you know, sort of everyday investors, what should what should we know about that difference in thinking? Like, what are the key things about the Eastern philosophy that everyone should understand? [00:42:35][12.6]

Michael: [00:42:37] Well, firstly, don't invest in things where you're competing against China. So that that's that's your number one point of view. But also, you've got to really understand and again, today is probably not the time, but China consumes somewhere between 20 and 40 percent of the world's commodities. Now, they can't afford for the world to be too strong or indeed too weak for them to create the nation they're trying to create. So the one thing you can count on is that the Chinese need commodities. So you can use that to guide your investment philosophy if that's of interest to you, because they actually have to have a lot of these commodities and they don't have natural resources of most of them themselves. But be aware they are very clever people and that they are very clever at negotiating and renegotiating agreements that you thought might have existed. And with an economic rationality hat on, you might think you're pretty safe from, but all of a sudden they just don't send a boat and the rugs pulled from underneath you. So so really start to think about those things don't compete against China. And if you're going to feed into it, be very aware that there's trading shenanigans. They're the oldest trading country in the world that will be their stock in trade. I understand they fly drones over the Australian stock piles of commodity companies right across Australia and they're watching how big those stockpiles are. And they're just looking for opportunities to throw a spanner in the works. [00:44:18][101.3]

Alec: [00:44:20] So I know a lot of people these days talk about China's debt and they talk about China debt bubble. Do you do you have that same concern or do you think that people who talk about China's debt as being a serious structural problem misunderstand China and the Chinese economy? [00:44:38][18.0]

Michael: [00:44:40] They misunderstand it. And the simple fact is you've got the one of the wealthiest catch cash rich nations on in the world. It's true that let companies go broke with too much debt. But you've got to keep in your mind the whole time. This is a country that's creating an infrastructure, roads, rail, buildings to advance a nation. This is not about economic rationality. So, again, if you hold that in your mind and keep thinking all of the time, that's just money moving around from one entity to another. And you saw it in the GFC. Big government corporations just took over those big debt piles. [00:45:22][42.3]

Alec: [00:45:23] Yeah, that is true. [00:45:24][0.7]

Michael: [00:45:26] And the other thing that people say a lot about China is all the growth is, you know, it's failing, it's slowing. And fundamentally, that's true. But I would challenge you to be able to add up the numbers to six and a half per cent, because I think they're still growing at more like 20, 20. [00:45:45][19.3]

Alec: [00:45:45] Now, you think they're growing at 20 percent a year now. [00:45:47][1.7]

Michael: [00:45:48] So whatever. No, I mean, my rule of thumb is whatever number they publish, it's about one third of the real economic effect. [00:45:56][8.3]

Alec: [00:45:57] Well, why do you think they will raise. Yeah. Why do you think that under-report. [00:46:00][3.2]

Michael: [00:46:02] Yep, this simple fact, they can't be seen as too strong and they can't have the world too reliant on them, you see, if everybody knew they were running at 20 per cent, commodity prices wouldn't be where they are. If people really think it's running at six and lowering and failing and those debt. And I guarantee you, the Chinese put out these great stories from time to time. And I can feel one starting to build now where they'll start to talk about all of these issues. And they're quite open about talking about these issues. And what you find is the commodity markets drop and in three months or six months, they'll say, oh, well, we were a bit wrong on that. And actually things have been quite robust. And and they've just come in and bought all of our commodities cheaper than they ever would have. They're very, very clever people. And as I say, again, just bear in mind that they're the oldest trading nation on Earth. [00:47:01][58.7]

Alec: [00:47:02] So, wow, if that if that is the case and China is, you know, growing at a rate far faster than is officially reported and is talked about, wouldn't wouldn't that be something that, you know, China isn't sneaking under the radar anymore, like everyone's aware of it and everyone's watching it and a lot of people have invested in it. Wouldn't that be something that more people are talking about and more people realise if they were growing at an unprecedented rate of 20 percent year on year? [00:47:29][27.6]

Michael: [00:47:31] And think about this, when they were growing at 16, 17, 18 per cent, they were really growing, in my view, three times that. Look, I'm not afraid to be a bit different in my beliefs. And so that doesn't worry me. Whatever everybody else thinks doesn't worry me in the slightest. All I'm saying is, having looked at that economy over a long period of time, I can't make their numbers. Their growth numbers add to six and a half per cent. It it's materially bigger. And if you look at the draw on commodities and the draw on, well, let's stick to commodities right around the world, they're growing at a far bigger pace than six and a half. And guys, even if it's 12 or even if it's 15, it it matters very little. They're growing very, very quickly. And not too many nations on earth can grow at that sort of speed. And by the way, in their wake is India and they're growing at quite an alarming speed. And so it doesn't really matter all that much if China backs off the speed of pace a little bit. If you're talking about commodities or, you know, some of the biggest revenue earners for Australia, India will be there sitting behind waiting for their opportunity to grow. And they've got similar. Even though they're more capitalist by nature, they've still got the same problems. They're trying to grow a nation. So it's you know, we've got quite a lot of growth with a lot of volatility over a long period of time here. [00:49:07][95.7]

Bryce: [00:49:08] Yeah, very interesting. And a lot of opportunities. Well, I would guess, but yeah. Buyer beware. [00:49:13][5.1]

Alec: [00:49:20] All right, so that brings us to the end of the first half of our interview with Michael Dee. Make sure you tune in next week to hear the second half where we talk about his experience during the global financial crisis and what he's looking at in markets today. Until then, thank you for listening. [00:49:36][16.2]

Speaker 3: [00:49:37] Equity Mates and the people appearing in this programme may have positions in the company's pension. This is general advice for me. Please speak to a financial professional to understand how they pertain to your individual situation. [00:49:37][0.0]

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