Expert Investor: Michael Frazis – Frazis Capital Partners

HOSTS Alec Renehan & Bryce Leske|3 March, 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.

Here at Equity Mates, we love finding up and coming Australian fund managers that have interesting perspectives and different approaches to markets. In this episode we speak to Michael Frazis, portfolio manager of Frazis Capital Partners, who certainly fits that description.

Michael has just come off an incredible year in 2020, beating his benchmark index by more than 100%! In this interview we unpack his unique investment philosophy, some of the companies that have driven his returns and his view on two sectors of particular interest to him – technology and life sciences. 

In this episode you will learn:

  • How Michael when from studying chemistry at Oxford to managing his own fund
  • Why Michael looks for companies with “customer love” and “incredible growth”
  • His take on traditional valuation metrics and why he’s happy to invest in companies losing money
  • His investment thesis for some of the hottest stocks in markets today, including Tesla and Afterpay
  • Some of the companies Michael finds interesting in the life sciences space
  • Why Frazis Capital takes a ‘customer first’ rather than ‘management first’ approach to research

Bryce Leske: [00:01:27] 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 break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my Equity Mates Ren. How's it going? [00:01:41][14.3]

Alec Renehan: [00:01:41] I'm very good, Brian. I'm very excited for this episode. I think the best part about doing this podcast is speaking to fund managers and learning about fund managers we wouldn't otherwise know about. Yeah, and this interview is going to be a good one fund manager who's had an incredible couple of years and is also our age. So what are we doing with our lives? [00:02:03][21.8]

Bryce Leske: [00:02:05] It's our absolute pleasure to welcome Michael Frazis to the show. Michael, welcome. [00:02:09][3.3]

Michael Frazis: [00:02:09] Guys, thanks so much for having me on. [00:02:11][1.9]

Bryce Leske: [00:02:12] So for those who are unaware, Michael is the portfolio manager at Frasers Capital Partners, a fund focused on investing in companies with true customer love and explosive growth will unpack that in a second. Michael's fund had an incredible 2020, returning over 100 per cent despite the tumultuous year in markets. So, Michael, what a year [00:02:33][21.4]

Michael Frazis: [00:02:35] was a while there, wasn't it so many twists and turns in the last two years, probably starting mid 2018, those that big, you know, rates were rising that big, 20, 30 percent sell off and it was just turbulence. Ever since, so many twists and turns, changes in monetary policy, you know, big rallies, big sell offs and I guess the coronaviruses kind of at the peak of that. Yeah, that's huge. Sell off. Yeah. And in subsequent [00:02:56][21.1]

Alec Renehan: [00:02:56] rally. Yeah. Well, not only have you did you deliver over 100 percent last year, but you were telling us before that you're up what, 30 percent year to date, [00:03:05][8.6]

Michael Frazis: [00:03:06] something like that. But it's kind of like a midmonth number [00:03:07][1.6]

Alec Renehan: [00:03:10] 10 or [00:03:10][0.4]

Michael Frazis: [00:03:12] 12 in January, actually done something similar this [00:03:15][2.8]

Alec Renehan: [00:03:15] year. We'll get into all of that. But before we do, we do like to start with a bit of a game just to talk about throw out some topics that we may not otherwise get to in the interview show. So we call it overrated or underrated. And we'll start with our major index at home, ASX 200, overrated or underrated? [00:03:32][17.3]

Michael Frazis: [00:03:33] Oh, I would say overrated, because basically, that's how everybody puts their money. And most of those companies are very slow growth and relatively low return. [00:03:40][6.7]

Bryce Leske: [00:03:42] Then overrated or underrated, the Nasdaq 100. [00:03:43][1.9]

Michael Frazis: [00:03:45] Oh, that's a good one, because relative to half the Nasdaq is basically those big tech companies like Microsoft, Apple, Amazon, Google, they're probably actually quite cheap, whereas like the kind of other parts of the market, like software, they're more expensive. I think of all the places to put your money, the Nasdaq has got to be one of the better ones. You know, those companies are growing at 15 to 20 percent and well into the future. And now they're thinking about the Nasdaq or the new challenges that will come up. Do there see something pit Microsoft or Facebook and Google and Amazon? They'll probably come up through the Nasdaq. And that means that, you know, you kind of get the benefit of that. Yeah, that's why indices are so good. You know, the companies that disrupt come up through the indices and as one company's going down, another one will be rising. Yeah, but overall, you know, more and more money is going to flow that way. And those companies to take more and more market share out of the rest of the world, [00:04:27][42.0]

Bryce Leske: [00:04:27] it's getting it before it gets into the Nasdaq, though. [00:04:29][1.9]

Alec Renehan: [00:04:30] Yeah, that's what we focus. [00:04:32][2.2]

Michael Frazis: [00:04:33] Most of our companies are made into about ten billion, but we go a lot lower than that in terms of market cap. So most of our companies have we have very, very little overlap with the Nasdaq, even though we invest in tech. [00:04:42][9.6]

Alec Renehan: [00:04:43] Yeah, those are overrated or underrated Wall Street bets. [00:04:47][3.7]

Michael Frazis: [00:04:48] Oh, interesting. I would say it was very much underrated because of some smart people on that thing and some great posts. Then there was that moment where like everybody around the world was talking about it. It was like that that that first speaking crypto like two years ago, as you got to the point where literally everybody was talking about it and that was the top. And sadly, a lot of people got sucked in, then, you know, those short squeeze always end the same way and they always end up as a forced buyer. Everybody pushes up the price, either wittingly or unwittingly, until that forced buy or sell. So it buys everybody knows that person's coming. Once they come, once they buy, that's it. Yeah. There's literally no reason to own the stock then it's just a case of selling as soon as you can. And that is the dynamic that happens in every single short squeeze in the past and will happen every single short squeeze in the future. It's kind of sad because you guys will know is one of the funniest weeks in finance. The means that were going around were hilarious. The whole thing was just great. You know, all the famous people got involved. But they're also always going to be this sad ending with us, those people that got sucked in. We're going to lose our money. [00:05:46][57.5]

Bryce Leske: [00:05:46] So did you get involved in the I [00:05:48][2.0]

Michael Frazis: [00:05:48] got involved as a spectator, so I was watching closely and actually wrote something about it. It was like a short squeeze as always in the same way. Yeah. So I wasn't trying to the extent that I could, I was trying to like the handful of people that read my stuff. That doesn't end well. I think I've got a little brother I think he bought right at the top eight hundred bucks. It's like [00:06:06][17.9]

Bryce Leske: [00:06:08] overrated or underrated Australian property residential I, [00:06:13][4.8]

Michael Frazis: [00:06:14] I would say it's tough on I'd say scene is generally underrated. I mean cities small like if you wanna live in a flagship suburb or even that kind of inner city suburb, there's not. How much, you know, such limited supply in such a fast growing city, so, you know, it's pretty I think people throughout our life certainly put most of their wealth in real estate and it's going be competitive. You want something good enough to pay up in this place? Yeah. [00:06:36][22.1]

Alec Renehan: [00:06:37] And then last but not least, overrated or underrated Bitcoin. [00:06:41][4.0]

Michael Frazis: [00:06:42] Bitcoin. That's interesting. One, after the rally, I said very underrated before. Now it's I don't want to be kind of getting people into the tunnel. [00:06:49][7.3]

Alec Renehan: [00:06:50] Yeah. Do you think this is a top, [00:06:52][2.3]

Michael Frazis: [00:06:54] uh, not a long term top? No. I mean, one of the benchmarks I've been using to say is this crypto makes sense and there's a few of them. But one of them would be how does the crypto market cap, whatever that means, you know, the value of Bitcoin. How does that compare to, say, a big tech company? Yeah. And, you know, a few months ago that was two or three hundred. So it wasn't even like a big companies, like a tenth the size of Apple. If you think of something that, you know, is globally relevant that a lot of people are going to own in some aspects of it, you know, like our generation will buy a stock or crypto if there's a funny name about it. Yeah, like we have proven that as a generation again and again and again there is that element. But, you know, crypto has real use cases. So if you're you don't need to worry about Australia. But if you're in, you know, some random country that's unstable political environment where people. Yeah, if you create a lot of wealth that could be taken from you at any moment, it does make sense to have some of this stuff in that it's also got a use case in crime against the West, putting crime. You know, you can like say, look, there's people that actually need it for that. Yeah, there's a host of reasons that people will use it. Even if you don't like those reasons, that's the reality. So there'll always be that demand for this coin. And if people are going to try and put money in this stuff, that will have some value. [00:08:03][69.1]

Alec Renehan: [00:08:05] Now, we should clarify that Equity Mates officially does not support crime, but it is a fascinating thing to watch. So as we move through this interview, before we talk about what you're doing at Fraser's Capital Partners, would love to get to know you a little bit. And we like 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 can you tell us the story of your first investment? [00:08:31][26.4]

Michael Frazis: [00:08:32] I've thought about it so long. I think I was. Here's a company called Kimeli Diamond, some random commodity stock, and then it dropped. It's like diamonds. It's like the people's stock is often a gold company. Feel like they think it's something [00:08:44][11.7]

Alec Renehan: [00:08:44] we ask this and it's often a miner or a mining explorer or something in resources. [00:08:48][3.6]

Michael Frazis: [00:08:48] Yeah, but then it dropped a lot and then the management sold out to another company at a loss for a lot of shareholders and those kind of things. I spent a lot of time private equity and then often that's a trap in these small cap companies like I think a lot of people, when they start investing, they'll start going out and find like some undiscovered company that nobody knows. And that's generally a poetic like maybe a 20, 30, 40 per cent shareholder there that has a plan to effectively take the company to buy it out really cheap or to sell it to some related entity. You know, it's really hard to know what's actually going on in these companies. And the small companies, often very fragile as well, like the shifting winds of of global economics, can easily just wipe out a series of companies, whereas the more globally significant ones, you know, generally have a lot more staying power. Yeah, but it's funny how everybody goes the same journey. You know, we all read this more or less the same books had the same idea of buying a dollar fifty cents. But then that's just not what's worked in the last ten, twenty years. You know, like the companies that do really well are the ones that are spending and actually losing money. You know, they've been the best performers. [00:09:48][60.0]

Alec Renehan: [00:09:49] Yeah, we will get to that because I think that's a really interesting mindset, I guess, or approach that you have. Before we do, though, you mentioned you're in private equity. What was your journey from making that first investment to starting phrases? [00:10:04][15.1]

Michael Frazis: [00:10:04] Capital, I think, is one of those weird kids that always knew what he what he wanted to do. So I always wanted to do what I'm doing now. So that's pretty. When I was 17, 18, now I'm kind of thirty two, I guess. Fourteen, fifteen years. Private equity was actually chemistry, so I had to England and studied chemistry there, undergrad and kind of postgrad decided the lab wasn't really for me like doing some of the things every every day at the time. At the time, there wasn't much commercialization going on in that university. Now there is I think if if I was there now, I mean, completely different story. And I think if the coronavirus happened when I was studying science, my whole career would have been different. It was so called medical science at the moment, you know, and all the money's going there. It's extremely well funded, both from the business side of things and also the government side of things. There's all this support. You know, I think it's really interesting that, you know, your whole life decision like path might have been different, but, yeah, then I just want to work in finance because some fun, exciting dynamic basically got the only job that somebody would give me. I did that for five years, but was always, you know, again, we did so much work like private. You work so hard and you do so much work and so much analysis. And that entire time, you know, those tech companies were just grinding up. You know, they dramatically outperformed everything we did, basically. And that was the lesson. I think that was that was what I noticed. [00:11:23][78.6]

Bryce Leske: [00:11:24] So, Michael, do you have a an investing philosophy that kind of drives what you're doing at the moment? [00:11:29][5.0]

Michael Frazis: [00:11:30] Yeah, we've got like a catch phrase, which is like we invest in companies with true love and explosive growth. And you kind of you can both those things during elaborate, you [00:11:38][8.0]

Bryce Leske: [00:11:40] know, I don't know, we get at [00:11:40][0.8]

Michael Frazis: [00:11:43] the truth of an explosive growth. So you need both. If you think if things people really like something, you need to have to see it in the numbers. Likewise, if something is growing really fast, there's probably something going on. Not always, but probably. So I think investing a lot of people trying to figure out what's going to happen next and what's going to work, we've got a far more productive to figure out what's working really well now and what can we prove it data that's actually it's actually something interesting is going on. Like if a company is growing at 10, 15 percent, which is like where most people kind of invest, you know, it's probably not changing. The world is roughly the same size now as it was last year. If companies got twice as many users now as it did last year, might actually be changing the world. You know, it might be something going on. And then you can see there's so many examples of this, you know, whether it's after, you know, doubling five years in a row or host of different US tech companies, we've done a really good God. I mean, there's two probably the two interesting stories that our listeners were familiar with is probably Apple and Tesla to rewind to kind of 2009, 2010, when Apple launched their first iPhone. Back then, there was a host of competition. So investing in those, think about competitive analysis and you know, you can write books on a current competitive situation of anything single face Apple, then at Microsoft, BlackBerry and Nokia. It's kind of incumbents, particularly Nokia, BlackBerry. And then you had Samsung, Sony, a host of new Asian entrants, HTC companies. You remember now all extremely well resourced or raising a ton of money, already ready to go for it in many cases. You know, I think phones had better features, you know, but there's only one company that people would pitch tents up three days before to get their hands on the first one of, you know, ten thousand iPhones. You know, it's ridiculous in hindsight was one of those cultural phenomena. You know, people love that company and they really supported it. And, you know, fast forward ten years. So think about how difficult it was to pick who was going to win there. Fast forward ten years and, you know, Apple charge a few hundred dollars more for every iPhone that you use. When they captured the entire profit margin of the industry, they grabbed two trillion dollars of value, became the most valuable listed company. So isn't that true love, explosive growth, the right answer to a really difficult question like how do you analyze this extremely complicated, you know, market with like ten plus different actors? Tesla similar. We first bought Tesla. I think if you just Equity Mates about sixteen bucks before the actual fact that I mean that that I run now. But again, was a similar dynamic. You know, you got all these car companies struggling to sell cars, competing on price and features, and you're one car company that gets hundreds of thousands of preorders with the presentation. Yeah, that's true love. And then what happened? You know, they went up, increase production from 2000 cars to 500000 cars, you know, went up. What's that? Fifty times or something? Twenty five times. Uh, check the numbers after. [00:14:16][153.4]

Bryce Leske: [00:14:18] So, Michael, before we jump into a bit more about what you're doing it at your fund, we'll just take a quick break and hear from our sponsors. When you are all about getting fit, you've bought the Garmin, you bought the golf membership, you bought the gym membership, and you're on the my muscle shirt. And even in lock down last year, you bought those resistance bands of Instagram that from memory didn't even come. [00:14:40][21.4]

Alec Renehan: [00:14:41] 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. [00:14:50][9.5]

Bryce Leske: [00:14:51] 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. [00:14:58][7.0]

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Bryce Leske: [00:15:11] 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? [00:15:21][9.3]

Alec Renehan: [00:15:21] Yeah, the FBI twenty one get. Didn't quite work, but if y 20 to get rent money, it might be to go [00:15:30][8.4]

Bryce Leske: [00:15:30] back to your own Bayt Virgin money terms and conditions and monthly criteria apply. Now, let's get back to the show. So obviously, pretty phenomenal year in 2024, phrases, capital partners, some phenomenal growth since launch in 2016. You've returned 31 percent a year or thereabouts, [00:15:51][20.4]

Michael Frazis: [00:15:52] over 40 now. Wow. No, no, no. After fees and things. [00:15:55][2.8]

Bryce Leske: [00:15:55] So do you attribute all of this to just finding companies with true love and explosive growth? [00:16:00][4.5]

Michael Frazis: [00:16:01] Yeah, basically. I mean, we're we're actually pretty diverse fans who have 40 to 50 stocks, maybe a little bit more now. So we don't have very large positions. It's very fashionable in tech investing at the moment to have, like, big positions, you know, maybe four or five of your best ideas. But I think if you can get it's kind of like a challenge. Like if you get four or five, you should be able to get 40 or 50. You know, can't we just getting lucky once or twice out of four stocks, you know, which is basically what can happen. I think what there's a couple of things we do is we push the growth like way far further than anyone else. You think about computer gaming, you know, Starcraft, those games, you know, the people, the winning strategy to generate the extremes. So all the different ways you can play these games. But generally the optimal strategy is actually to push, you know, just create one type of unit, the most efficient unit, and then focus on that and then like swarm the enemy. You know, I think, like investing can be a bit like that and that and, you know, I haven't heard anybody else talk about it like this. You know, there's a million different factors and you could weigh them all differently. And people are not systematic about the way they do that. There's a lot of thought that goes into it. You know, if you're buying a stock because it's cheap at P eight, why aren't you buying a stock that's cheaper to be of six? Because he of them. Why not? You know, that's a no no fund manager can really answer that question because there is no answer. You know, they're just taking into account a million different factors that aren't systematic and generally result in pretty weak returns. But we think if we want to get like these fast growing companies that people really love with lots of evidence behind that, you know, Web stats, reviews are huge traction in the market around talking about them. And we want the ones that are growing as fast as possible. So most of our companies will usually go and buy something that is growing at over 100 percent. And that's kind of the basis of the returns. So the companies are five to six percent bigger every single month. So you kind of get paid to wait. That's just [00:17:44][102.7]

Alec Renehan: [00:17:44] crazy. [00:17:44][0.0]

Michael Frazis: [00:17:45] Yeah, well, I think the method I think last year or two things about it and it's interesting the matter then, because they mattered every year before the things that drove it to performance was how much do you have in these fast growing tech companies or tech companies? And then did you stay steady in March or did you panic or do you change your exposures? Are you sure? A few stocks. You know, those were the two things. The trick in 2020 with the benefit of hindsight, was to stay long and have the more tech you had, the better you do, the more you did. The funds that had arthritis than zero did pretty well. You know, the funds. The lesson is you can actually do math the last ten years and it's the same thing. Did you panic in 2016? Did you panic in the euro crisis? And how much of those tech companies did you own? And so that was the case in the past and that should be the case going forward as well. [00:18:33][48.0]

Alec Renehan: [00:18:33] Well, speaking of going forward, I feel like there would be a lot of listeners listening to the companies you're talking about and asking the obvious question, which is all of these companies are quite expensive based on traditional valuation metrics at the moment. At some point, the music's got to stop. The tide has got to come in. And, you know, the record of Bull Run was saying has got to slow down. How do you think about investing in those times with this strategy? [00:19:02][28.9]

Michael Frazis: [00:19:04] There's a few things there. So the same thing that we used to get the right answer in March twenty twenty, which is basically stay invested, is the same thing we're using now, which is obviously give us a really good start to the year and actually made us finish strong early last year. Do you think let's say I got thirty four years, hopefully you know if health holds up, you know investing in the market. And so what is the optimal strategy for that. You know what is immature thinking. Okay, there's a big crash. What do we think. Let's, let's weigh up a million factors and come to a decision as like that. Every time the market drops 20, 30, 40 percent, what are we going to do? And that's a much easier question to answer, because I'm sure we can all agree that the answer is just to hold and ride it out over the next 30, 40. I'm going again. Yeah. So let's ah, that's that's that's when things are going down now and things are going up like now, what's the right answer. You know, it's the same, it's the same answer if you want is for thirty or forty years particularly what companies growing at five six percent a month. The answer is to hold and just compound that many times when you run ahead. I think things run ahead of themselves. Like now you can look smarter than you are and they'll be times like when you look really stupid, nothing's working like now. It's like one of those months where everything's working. There'll be times when nothing's working. You know, over that period, you know, these companies will grow, the lows will be higher, they'll be higher highs and lows. And and your long term performance will depend on how how far your companies have come. [00:20:22][78.4]

Alec Renehan: [00:20:23] So then for you, in terms of selling, would it just be if customers fall out of love with a product or they stop growing at those incredible rates? [00:20:32][8.2]

Michael Frazis: [00:20:32] Yeah, so we look at we track the organic growth rate of our portfolio closely and every time we make. And we assess how that changes, that, you know, sometimes it it's been I'll give you two examples. When we did it, we actually sold out of we don't know any of the big tech. Now, it's almost like a strategy thing, like you're going to find there's no point owning it. You know, people can buy it for free. There's just no you just got to overlap 50 percent with every other fund. It's boring. It's not exciting. You're doing anything, you know, any value in any way. So we don't want any of those companies, no Alibaba, no major tech companies. Anyway, I've completely forgotten where I was going with. It's about selling. Yes. So he sold Apple. So I just want to clarify that we don't have anything [00:21:10][37.9]

Bryce Leske: [00:21:11] noted, but [00:21:12][0.7]

Michael Frazis: [00:21:13] it's in 2018. This way I do like the smartphone market is saturated like, yeah, people will upgrade their phones every now and then. But it wasn't like before where a handful of people in San Francisco had iPhones and it was just so obvious that it's going to roll them out of the entire planet. And revenues are up a little bit, but basically flat since then and the stock has tripled. Yeah, so. So another one happened was zero zero growth dropped like we were buying. I was kind of 40, 50 percent and then it dropped drop to 20, 30 percent, sold out of that. And again, it rallied. I think what's happening is often these companies, as they're maturing, they're starting to throw a huge amount of free cash flow. And that's when all the other professionals are coming in. And that's when we're kind of selling OK, because the growth has slowed down like we want that bit. The perfect family for us is one that's actually it looks like it's losing money, is actually creating a lot of value. And that's like a weird paradox in markets right now. [00:22:02][48.5]

Alec Renehan: [00:22:02] Well, yeah, you wrote about that in your twenty twenty update and you spoke about how sometimes the companies that are losing money but actually losing more money every year. For most investors, it may look like a red flag, but for you it may actually be a good thing. So can you can you just explain that? [00:22:18][15.6]

Michael Frazis: [00:22:18] Yeah. So it's actually quite, quite deep. So it's a bit technical as well. So if you think about the phrase EBITA that people are quite familiar with. Yeah. So if you read like the early investing books, none of them use that phrase and it wasn't around then. It's actually like kind of 20 thirty years old. Remember the eighties, whenever that was, it's increasingly more like forty eight. It's just the idea is you take it earnings before interest tax, but you better take your earnings before you make the capital spending decisions, how much you spend on interest, how much you depreciate your assets and give you get an idea of the underlying profitability of the business that now this is just makes a world of sense to everybody. And it became widespread because it was such a good just just simplified a lot of things. The problem you got now is, is and it's not a problem. It's just it's just the way things are is that the best companies in the world now are spending above the line. So it does kind of like after you spend money on salaries, R&D, marketing after that, whereas the best companies in the world are hiring brilliant staff, they're opening new offices, they're spending a lot of R&D. They're getting dinged for that. And so almost every professional investor will describe themselves as a value investor. They want free cash flow. They want earnings. But those things, if you if you spend on marketing, if you have a brilliant computer science, if you open a new office for a software company, a new country, and all of a sudden a hundred million people can now use your software at zero marginal cost, they'll penalize you for that. Is that insane? So if you screen on on on cashflow or even which we've been doing for so long, you're going to get the wrong answer to all those all those questions. And it's not even the wrong answer. You get the opposite answer. So you're going to see the best software companies in the world and you can think they're cells. You know, all the companies that can actually open a new office, spend some money and then five X, you know, their sales. And you think that companies sell, you know, like and there's so many examples like Tesla after pay, like they're the ones people know. But you could go you can generalize it to the entire software space and you can generalize it again to the entire fast growing technology space. And so if you're a business owner, it is this stuff is mind numbingly obvious. You know, it's like you can't meet your demand. You can't hire enough. There's there's revenue dollars coming in. You're going to spend those revenue dollars. And the best ones basically match their spending and their revenues. And so no earnings, no cash flow. You know, it's it's so obvious they should spend that money and get that next leg up of growth. But the traditional approach of investing, the value investing, the free cash flow, all that stuff will miss every single one of those companies and get them the wrong way round. And said Tesla, if they like software, these are the most shorted companies in the world. You know, we had to come to Covena or thirty six bucks. Sure. Interest was seventy percent of the free float. You know, they're completely tied up. Everybody's betting against this. All the investment banks for sure. You know, those short reports fly out the front and center was a screaming buy. You know, it's gone up like eight, nine times since, you know. So it's not that it's not just that these companies or Tesla, I think about the debate over Tesla after pay now, Lafargue. And now we can actually look back, you know, like as you know, as observers and go, what happened? That there was a huge debate and then the stocks didn't just perform well. They just muddle along the best performance in the market, you know? So how did the professional community get it not just wrong, but the reverse? You know, how the buy sells? These are smart people. I'm not saying that they're not they're not smart or they don't they're not reasons for them thinking that way because they are. But I can tell you, like you can drive from. First principles, the same way they did with the idea that any fast growing company will be investing above the free cash flow line, they'll generally be investing by hiring staff. So be no balance sheet assets either. So you can't screen for balance sheet. You know, it's something really profound going on in markets is great news for us because very few people [00:25:55][217.4]

Alec Renehan: [00:25:56] are doing this. So then you you can't look at the balance sheet. You can't look at traditional metrics like profit after tax ibbett abda free cash flow. So I guess the question then becomes, what are the metrics that you look to? [00:26:08][12.8]

Michael Frazis: [00:26:09] Yeah, look, there's you can definitely you can 100 percent use the same value methods. You just have to think about it a bit differently. So an example is there's a couple of lessons in this stock would be zero that everybody knows in Australia. And so think about what is the value of a customer that comes on zero and pays thirty dollars a month. You know, software, the odds of serving an extra customer is basically zero. That customer is worth a lot like thirty dollars a month into the future. How many times a year? If they grow their business, they'll pay more. Now what is the impact on the company's financials? Is getting technicals I have to do. [00:26:40][31.0]

Alec Renehan: [00:26:40] Oh no, this is good. [00:26:41][0.6]

Michael Frazis: [00:26:41] It's interesting. Yeah. What is what is the impact on the financials? Well, they were to spend some money to get that customer. You just see a marketing expense. What we see on the balance sheet, nothing. You know, there's no line that says customer value, but we all will sit here and agree that that customer is worth something. And so this is like I'm talking about kind of five years ago, not many people realize this. I kind of like freaked out with zero. Like zero is pretty good at, like, explaining that again, it's in the investment community didn't get before the actual business people, people actually doing real stuff. The entrepreneurs, they just you intrinsically get it. It's so obvious on that side they should be spending to get new customers. They're going to pay 30 bucks a month for the mistake I made is I should just generalize it. If I had to do was ask one question that what other companies are there in the world like this? And I've led you straight to software like the US when they're trading at five, six times sales. And you think about these these these are basically 90 percent gross margin businesses, some more, some less that that that sells multiple. It's basically a profit multiple almost at a six times is insanely cheap. And they're all going super fast then and the world was open. So I do somewhat regret that. And that's actually shaped why we hold so many stocks. [00:27:48][66.9]

Bryce Leske: [00:27:49] And so you mentioned the market or the professionals got after pay wrong Tesla wrong and they became the best performing stocks. What in your universe at the moment do you think the market or the professionals are getting wrong? [00:28:00][11.2]

Michael Frazis: [00:28:02] Who took one? Look, obviously, one thing I'll caveat on that is like there's always two people in every market. I'd say that the pressure got it wrong because officials were shorting retail doesn't short. It's actually retail buying. And I will answer a question, but I just want to make one interesting observation was that had in March, in March, the investors or hit the sell button actually track the flows from investors versus retail and as mass investor selling. And it was like in Australia, like Magellan, you know, in the US, it's like Warren Buffet, like the top guys in the industry were like just hitting the sell button. You know, talking is being valued by dip. And then, you know, the dip came and just hit sell. And the glorious thing was like retail bought. Yeah. It was like I like my brother Bridge. My brothers bought their first stocks in that. Did you know? And that was like a microcosm of what was going on all around the world. Yeah. What was the question that I thought what [00:28:50][48.5]

Bryce Leske: [00:28:51] what stocks are in your universe at the moment that you think, you know, the professionals are getting wrong? [00:28:57][6.8]

Michael Frazis: [00:29:00] Look, there's a few heavily shorted things in the United States, but I think now is it's just a weird moment now because everything has gone up. So it's very hard to find something that people are universally against, I think are the fast growing companies that I've seen have kind of errors now publish academic research saying, you know, it's it's fast growing companies that drive the rest of tat's? You know, I think it might be a thing that the market and I think we're we're finding most of our staff is actually is actually in kind of life sciences. It's about 30 percent of what we do is in health care to some degree, it's like digital health, handful of drug companies, companies synthesizing DNA companies, creating tools, medical devices. There's a you can find companies like that that are growing exceptionally fast, you know, five, six times sales and get the uplift on both sides. But I'd say it's more it's not than professionals getting wrong. I think most people don't look in that space because it is very technical. And when people when people kind of do dabble in that space, they generally dab in the wrong places. You know, they'll just be drawn to the one that's the best promoter. You know, there's people and they're kind of traps. So I'd really recommend people that kind of stay away from the life sciences unless you really have some idea of what you're doing, because it's a very tough one and you'll probably get sucked into the one with the best story. And that will almost certainly be the one that doesn't have any substance to it. [00:30:16][76.5]

Alec Renehan: [00:30:16] Yeah, well, Michael, we do want to ask you, even though you said we should stay away from Lifesciences, we do want to ask you a couple of questions about that industry. But before we do, we're just going to take a quick break and hear a word from our sponsor. So, Michael, at the start of the interview, you said you are you studied over in England and I think you are being a little bit modest. You have a masters of chemistry from Oxford. So is there anything this guy can't know? [00:30:43][27.0]

Michael Frazis: [00:30:45] Very flattering. [00:30:45][0.2]

Alec Renehan: [00:30:47] And I think you said you just took a job wherever you could get one. But I'm pretty sure that was at Goldman Sachs, wasn't it? [00:30:51][4.1]

Michael Frazis: [00:30:51] I did internship there that I could have worked in. I could have worked in an investment bank or I could have worked in a small private equity firm. And then, for better or worse, I chose the small private equity firm. [00:31:04][13.3]

Alec Renehan: [00:31:05] There you go. Well, you've taken it here. And I don't think you can complain about where you are or what you're doing. [00:31:09][4.6]

Michael Frazis: [00:31:09] Well, I think you have two different things. If you want to do different, get different outcomes in I of work in the bank. [00:31:16][6.3]

Alec Renehan: [00:31:16] Yeah, yeah. But on life sciences, you said that retail investors or people who don't have specialized knowledge should be careful or stay away, given you have specialized knowledge, we're just going to grill you about it anyway. So it feels like the 20s is shaping up to be a particular decade for life sciences, you know, sequencing of the genome, personalized medicine, new cancer treatments, new vaccine methods, all that stuff. It seems like there's a lot going on in that space. So starting at a high level, how do you approach the industry and how do you decide what signal like what's actually breakthrough and what's just noise and hype? [00:31:55][38.7]

Michael Frazis: [00:31:56] Yeah, I think I think you're right. The life sciences sort of exciting at the moment. There's been a few breakthroughs recently. They've been a long time coming. So one of those was actually Moderna. So I was kind of aware of Moderna because I met one of the I think it's the third or fourth employee, kind of the chief scientific officer right at the start. Now, this guy had set up a company called Similar Role at a company called Elna. It's worth five billion. He sold another company for like four billion. And he was one of the first people, Madona, which is now worth tens of billions and actually is going to Oxford to set up a new company, which I met him. And it was like running. I was like, this guy's got like, what, five billion, three, five billion companies? And he's setting up a new one, as I obviously have to back this whole platform technology thing. Now, we're I can find anybody who was interested in it. Like I didn't have a dollar amount of the time either. So it's like I could have done it. But I was like, really like I really tried anyway. So I was aware of Moderna long before this happened. Then this was kind of last year's postmodernity year. Because what Madona did is they are it's probably not Moderna like it was probably last year was a year that I think Balaji really became a data science. And by that I mean the Chinese scientists decoded the coronavirus genome, the DNA they put there in a text file that they got sent around the world through the Internet. Madona downloaded that text file and then created their vaccine from the data without having any access to the actual virus. Well, and that is the vaccine that is now being basically administered everywhere except Australia. For some reason, somebody made a decision. They weren't going to buy the best one. But we'll get the ones whose side effects. And but that's profound. I mean, Moderna, the idea is basically you can use the DNA of of a release of Vidino virus and create create a vaccine from that data. And Madona had like a pretty big pipeline that's very slow going. Like vaccines are tough because the safety stuff is so strict. If you got somebody that would like a terminally terminal disease that might have three to six months left, you know, you can actually be quite experimental with treatments in your ethically justified. And it makes sense that people in that situation who want to try certain things can do it. There's a much lower bar on safety, something like a vaccine where you're giving it to everybody. It has to be so safe because if it's one in a million people die, that's not good enough. You know, they'll be twenty people die in Australia or something. If you kind of have it has to be so strict and then people it's not something that, you know, again, if somebody is terminally ill or there, you've got a child that you want to cure them, it's you're very justified in spending hundreds of thousands of dollars on a treatment, if not much more. Whereas for a vaccine that people might get, it's very hard to spend more than twenty, thirty, forty dollars, you know, as it's very hard to develop vaccines. And Moderna was making very slow progress in this new form of DNA. I think the leading one was seeing various types of herpes, unsure if they've got anywhere with that one. But now they've proven that it works and they proved it in fine form by doing it with four four globally significant illness. And so now they should be able, in theory, just roll out vaccine after vaccine. Yeah, I think there's a way they can do it for cancer. I'm not sure about that. I think the the data's not quite there yet, but they should be able to constantly replenish their pipeline of new conditions and they'll also be able to quickly adjust their vaccines if, you know, mutates in a way that's really harmful. So that's, I think, looking for things in life sciences. You kind of want platform companies. You want companies that can regenerate their pipeline and throw off any candidate of any candidate. Any candidate takes off the risk. A lot of the. The investing is actually, you know, it's very similar to what we invest in normally, you know, they're selling something and it's growing really fast. And you can I think actually you need to zoom in on the key decision makers. So in all kind of business, there's a decision point, which is one thing or another. You might be one restaurant or another restaurant. Listen to one podcast instead of another or, you know, buy one stock over another or click after pay or PayPal or Zipp at the end. There's always one moment where you're making a decision and you need to zoom in on that moment to see where the value is going to go. And in life sciences, it's actually the doctors. And so there's so many trips to the unwary. For example, what's a good example? For example, doctors might be compensated in a certain way. They might be getting pay. The specialists in a field might get paid to do a certain type of surgery, speak up and say here's a fifty dollar test. They might not like that. You know, they might actually push against that even if it works. And that's like a dynamic they'll only get if you understand, if you speak to those people. I mean, that's that's quite a cynical example. But there are examples of that happening around the world. So it's just there's so many trips there way the pyramid lifescience actually investing as most people get their information from the company. And the company will give you a pretty a pretty warped view of of kind of the landscape. And the other thing that gets retail people in, which is why I was wanting, is they all have huge markets. So if you cure basically any disease, you can make a ton of money. But there's so much more complicated than that. You know, you have to you have to there might be 20 companies going for that disease. You know, the odds of any of them solving it are low, but often two or three do it and only one of them's going to win the market. So if 20 companies are valued, as they've all got like a 50 percent chance of winning, like there will be net value destruction. And so example, that would be something like I'd say crisp is pretty hot right now. And gene therapy we've invested in, some of these companies have done pretty well, like one triple and then dropped. And I think we held we've done okay, but they're all going for the same things. They're going for beta thalassemia, sickle cell disease, a handful of leukemias, because they're all blood diseases. They're easy to treat sort of 20 companies going for them or with a pretty significant market caps. So I don't know how that plays out. But I do know on average that on average they have to lose value. And that's good. Like this what we want you want these companies to have be able to raise money and to develop things, you know, people talk about. There's always this idea that when markets run hot, that's bad news. It's good that some people raise money and do things and build things. You know, that's generally a good thing and it's a good thing in the life sciences. But there's just so many traps. [00:37:54][358.1]

Bryce Leske: [00:37:55] And speaking of traps for those of us retail investors that don't have an Oxford degree, how how should or how would you suggest that we approach investing in this space? [00:38:05][9.8]

Michael Frazis: [00:38:06] In that space? I would focus on companies with visible. I would say we do it is we kind of look at things with traction that are working. You know, that is probably the best bit of advice I could give. [00:38:17][11.0]

Alec Renehan: [00:38:18] What about like biotech ETFs and stuff like that? Do you think that's just a given that you were talking about how you seiners value destruction in a lot of these industries? Because a lot of these companies aren't successful with their treatments or their vaccines or whatever, would you say ETFs and just buying an index of biotechs is a good way to go or would you avoid that? [00:38:38][20.5]

Michael Frazis: [00:38:40] It's a tough one because it depends on what else you're doing. But biotech ETF are probably heavily weighted towards the bigger biotechs that already have a series of treatments and are probably throwing off cash or be kind of a little bit like the Nasdaq ETF, for example. Whereas if any of those companies does really well, tracks gold, they'll rise up through the index. So you will capture it if you had to guess. And this is pure speculation, not how I make decisions is I guess a lot of money is going to go in that direction. Yeah, I think so, yeah. So that's probably something to consider as well. Yeah. [00:39:11][31.1]

Alec Renehan: [00:39:13] Well, we'll stop grilling you about life sciences now. When we were talking, before we started recording, we were talking about how a lot of fund managers we speak to talk about are going and speaking to CEOs, looking at them in the eye and asking them questions and how that's something that a lot of managers, hedge fund managers and institutions can do. And. Right. And I would love to somehow be able to do it as a retail investors. You were saying that you have a little bit of a different approach to to those CEO conversations. Can you tell us about that? [00:39:46][33.1]

Michael Frazis: [00:39:46] Yeah, I mean, there's a couple of things. I mean, I always find amusing. It's it's an amazing marketing angle. So if you're trying to pitch somebody, why don't you, like, invest in my fund and pay me fees to invest on your behalf? If you say, look, I've got amazing access and I spoke to CEO, all of a sudden it's like, oh, I can't obviously can't do that. So it makes sense for amazing marketing pitch, been tried and tested and is great for raising money. Imagine like trying to break down what that actually means. So what are you actually saying? If you say you guys make the CEO like all information is public, you know, they're not actually allowed to tell you anything. You're not really allowed to ask, you know, not how to use information that's, you know. So what are you saying? Yeah. You're saying like you're getting information that nobody else knows and you're getting an edge because it seems to be like that, that the only way that you could get extra returns is if that's the case. Of course, that is the case, that is what they say. [00:40:32][45.4]

Alec Renehan: [00:40:32] Yeah, I think I think to to play devil's advocate for them, given that they're not here to defend themselves, I think they would say you can get a test, you can assess their, like, character and like, are they good manager? You know, are they going to run the business? Well, are going to make good decisions and that kind of stuff. [00:40:48][16.2]

Michael Frazis: [00:40:49] Yeah. So my take on that is, and we've given this a lot of thought is you don't that's not that's not generally not useful information. It's just a measure and assess them as a salesperson. Absolutely. And then sales is like the number one thing in business. You need to like motivate your employees. You need to win contracts. It is very important to be able to, in a 20, 30 minute meeting, give a really good impression. It's like it's like probably no one see a skill, but they're going to get you into the wrong wrong stocks. You know, it means you're going to be you're going to be going for the best people at that. Whereas we'd prefer to look at the data like, what are the Web traffic doing? What's the revenue growth? What are the users doing? So everyone's focused on the management. What are the customers doing? Yes, sounds like the customer love being like focus on that end. And that's been so much more productive. An example would be something like Tesla. Elon Musk was pretty unlikable two years ago. Yeah. Now it seems just so profound. That is pretty hard not to kind of respect the guy, but those that moment was doing all that crazy stuff. And his tweeting is smoking is like tweeting about pedophiles in like Thailand or something, you know, just being so unlikable and horrible. A lot of people didn't invest on the back of that. But what was happening in a Tesla was doing great. You know, the customers were still buying the cars and pushing it forward, you know? So I think that's by far the most important part. And that's actually available to anybody, you know, Web traffic. There's a company called Alexa, that company. There's a website called Alexa which tracks stats. So you can see websites rising and falling. You can see Google Trends is accurate. It's commonly called similar web gives you very good monthly data on websites that's available to all of us. And I'd say that's far more useful than speaking to see something. [00:42:23][93.8]

Bryce Leske: [00:42:24] So, Michael, before we move to the final three questions of our energy future, we ask everyone we are introducing a new segment this year called Fund Manager of the Year, which our community are going to be voting on based on these interviews, how much fun we've had, which I reckon we've had a pretty fun. But one of the questions that we want to add to this is, what is one stock that we should be keeping an eye on this year from your point of view [00:42:49][25.0]

Michael Frazis: [00:42:50] or a person prepared this? [00:42:52][1.3]

Bryce Leske: [00:42:54] We don't like giving people preparation. [00:42:55][1.0]

Michael Frazis: [00:42:58] There's some interesting stuff going on in the life sciences at the moment. So I'll give you I'll give you a long or short answer. My medium. Medium. Okay. I'll try and keep it quick. So there's we do a lot of work on kind of like this idea of a blood test for cancer. So liquid biopsy. So we've always known since the 40s that tumor cells share DNA. The problem was, let's say you take a sample of blood from someone and it's like a tiny little bit of stray DNA with the candidate's marker on it. How do you find that? You have to sequence all of it? It's literally a needle in a haystack. And it took them like ten years or something to do one genome from multiple samples. I was thinking how how far the technology has come now. The technology is there and you can do that. But the issue with that stuff is that there's it's kind of really complicated mathematically because you kind of false positives. You can't tell people they have cancer. They don't. And then so that is like a false negative and a false positive. And the problem is with cancer, the way everyone kind of approaches is you have to fight it. You know, you have to fight it. And traditionally, that's generally been a bad idea because that means using experimental, unproven methods that are often kind of overturned with time. So you look back at what people are doing twenty, thirty years ago with surgery and it was barbaric. So this idea of getting blood and just testing accurately there, that's something that's going to that is now fact. You know, the technology is there. The trial, the trial results are very good. And there's multiple companies working on it. But there's one company that I thought was really interesting and I was doing something similar, testing for DNA testing for melanoma. But the idea is, instead of one of the challenges melanoma, I'm by no means an expert. But I think it's pretty tough for the GP's to not to do, you know, because they have to either, like, assess it, send it to a specialist. Maybe the specialist has cut a bit out, but people don't necessarily want to do that unless there's a very high chance it's there because nobody wants, you know, a knife in them. Well, this company does is basically got a bit of sticky tape and then put that on on the tumor, wipe it off, then test that for tumor cells. And that's like obviously gross simplification, but that's what they're doing. I think that's something they could really work to. Seems to make a lot of sense. I like all kind of dermatologists in the US swinging behind it. So of was like a novel approach to just shows when you got these new technologies developing in this case, you know, DNA testing for cancer, how many different little businesses and ideas can be done? Yeah. [00:45:08][130.2]

Alec Renehan: [00:45:08] So what was that company called [00:45:09][0.9]

Michael Frazis: [00:45:10] DERM Tech, the A.K.? No, it's run very hard, so don't rush out. But yeah, it's been good for us. [00:45:17][6.6]

Alec Renehan: [00:45:17] But yeah. So, Michael, we want to say thank you for coming on. First of all, I think it's been a great conversation and I've certainly, you know, learned some things thinking about things differently. And I'm sure our audience have as well. If the Equity Mates community want to follow you, hear more about you, where should they go? [00:45:36][19.0]

Michael Frazis: [00:45:37] Yeah, we've got a website, Frazis Capital Partners dot com. We do a podcast, occasional postings on YouTube. Yeah, it's been fun. Thanks so much for having me on. [00:45:45][7.9]

Alec Renehan: [00:45:45] That's all good. We'll have to get you back at some point. Before we do that, we do like to finish with the final three questions, so we'll get stuck into that first one. Do you have any books that you consider must read and those can be investing or otherwise, [00:45:59][14.6]

Michael Frazis: [00:46:01] I guess, since you're asking about life sciences. So imagine there's some interest. There's one coddlers billion molecule, which is a fascinating take. It's just a story about, you know, the trials and tribulations to get one drug to market. It's fascinating. It's like barbarians at the gate. But for the life, that's quite cool. You know, probably the last pocket doesn't have quite the same element. I highly recommend a billion dollar molecule. Nice. [00:46:25][24.3]

Alec Renehan: [00:46:25] We'll check it out. Second question in 60 seconds. What's the best company you've ever seen? [00:46:32][6.5]

Michael Frazis: [00:46:34] Wow, that's Tesla again, I should have done I should've done my homework on this one I outside, it's pretty hard to knock anything. Elon Musk has done in terms of I mean, it's boring outside and he landed a rocket backwards. Yeah, I know that that is insane. Like, shut up and landed it backwards and then the electric vehicle thing, like everybody knew they made sense, but nobody knew how to get from A to B.. So you had this, like, stage strategic approach very long time that you can fault the guy. Yeah, he's impact on the world. [00:47:04][30.6]

Alec Renehan: [00:47:05] Yeah, 100 percent. And then final question. If you think back to your younger self buying that diamond company as your first investment, what advice would you give your younger self [00:47:15][10.6]

Michael Frazis: [00:47:16] just to just buy tech sooner and just only do that? Yeah. Cool tech companies that everybody knows, like Netflix or Amazon. Yeah, just the obvious stuff. Don't don't go like don't go searching for diamond in the rough. Yeah. No pun intended. Yeah. That's what's actually in front of you. Yes. [00:47:31][15.3]

Bryce Leske: [00:47:32] Well Michael, it's been an absolute pleasure chatting to you today. Inspiring, I'm sure a lot of our audience have taken a lot of value from that conversation. So all the best with your fund. We're going to keep a close eye on it. If you're looking for investors, hit us up. [00:47:46][13.4]

Michael Frazis: [00:47:48] We are hiring right now. Actually, I [00:47:49][1.4]

Bryce Leske: [00:47:51] may be wrong [00:47:51][0.3]

Alec Renehan: [00:47:52] to get flooded with applications from the Equity Mates, [00:47:54][2.6]

Bryce Leske: [00:47:56] but I very much appreciate your time. [00:47:57][1.1]

Michael Frazis: [00:47:57] Yeah. Thanks so much. Really enjoy that. Thanks, guys. [00:47:59][1.7]

Bryce Leske: [00:47:59] And a reminder to the rest of the Equity Mates community. It doesn't stop here. We do have another podcast to get started investing podcast for all those beginner Buffett's and also the Comedian versus Economist podcast where Adam and Thomas break down the world of macro economics. So go and check that out. But as always, it's been really fun and looking forward to chatting next week. [00:48:21][21.5]

Alec Renehan: [00:48:21] Can't wait. [00:48:21][0.0]


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