Expert Investor: Michael Glennon – The Art Of Small Cap Investing

Bryce: [00:01:29] Equity Mates Episode No.12, thanks for joining us, guys, im Bryce. And as always, I'm here with my Equity Mates buddy Ren. How are you? [00:01:36][7.8]

Alec: [00:01:37] I'm good Equity Mate. [00:01:38][0.9]

Bryce: [00:01:39] That's good to hear. It's been another fun way for us both. And we're excited to bring you an expert investor this week. [00:01:46][7.0]

Alec: [00:01:47] Yeah. So Michael Glennon is the founder of Glennon Capital and he specialises in investing in small cap companies. As the name suggests, small cap companies are companies with a smaller market capitalisation. So, you know, you're not investing in your banks or you Telstra's you're investing in companies that are a little bit smaller and potentially have a little bit more room to grow. So Michael has over 17 years experience in financial markets and over 15 years experience as a portfolio manager and a director of several boutique investment management firms as one of Australia's most experienced small cap fund managers. Michael was one of the first managers of a boutique listed investment company running the listed investment company Pacific Strategic Investments, which is now part of Brickworks Investment Company, an 800 million dollar investment company. While Adam Smith Asset Management as a specialist small companies manager, he was awarded the YMCA Money Management Fund Manager of the Year for small cap Australian Equities. Michael regularly appears on ABC Radio, CNBC and the Australian Financial Review and contributes regular updates on stocks, sectors and other topics of interest. We're really excited to bring this interview. We've got a lot out of it and we're sure you will, too. [00:03:11][84.3]

Bryce: [00:03:14] All right, we're here with Michael Glennon from Glenanne Capital. Thanks for being with us today, Michael. We got straight into it. So what got you interested in investing? [00:03:22][7.8]

Michael: [00:03:23] I think I had a pretty inquisitive mind when I was young, so I was always looking at different businesses and investments and and my parents work for themselves and they bought their business off my grandfather. So I always thought about working for myself and different things like that. So when I first started out, when I was a part time, I worked at ANZ looking at small businesses, and that's where I started to get that interest in investing in businesses. And I think, you know, I just had that wanting to get involved and see what drove businesses. [00:03:57][33.9]

Bryce: [00:03:58] So did you study any sort of finance related degree? [00:04:02][3.9]

Michael: [00:04:03] Yeah, look, I did economics degree. I liked it. I found that, you know, looking at the supply and demand and what affects businesses and everyone's making it. It's a really good foundation because fundamentally these key things that we look at in investments. So if you're looking at that basic economics and in that degree of accounting and law and things like that, they're all good things to have to form that foundation for how you think about businesses. And it's true that simple supply and demand. And I think about it's a business that you're behind and it's no different to us going and setting up a business. And, you know, we own a coffee shop and you really just think break it down into very basic things. So how much do we sell and how much do we sell it for or our costs and how much comes out the bottom? And so all this fancy stuff that goes on in, you know, with catalysing stuff, that's really at the end of the day, if we look like a profitable business because we're capitalising everything, you don't think about that way when you actually own the business and how much cash we've got in the bank, it's about cash. Can we make more or, you know, someone sitting across the road and charging less, much less cash that we're going to have. And I just think about business is very, very simple perspective. If I owned the business, how much cash I'm going to get in the business, [00:05:23][79.8]

Bryce: [00:05:24] and what's one of the hardest things that you found about starting to invest? [00:05:27][2.9]

Michael: [00:05:30] Well, when you're young, it's capital. Know how you get capital. So I didn't know what I was doing when I first started. So I got a friend from school, had so talked his way into a stockbroking firm. They were doing an IPO. And I remember it actually it was it was a coal seam methane company. I did it. I didn't even understand what that was. So I did a huge, huge amount of research on it, just finding out what it was. So I understood what I bought because I didn't actually want to ask him what it was. I had no money and he was. And this guy has been very successful, retired now, but he said, I don't worry, just go to the bank, get a credit card, get a cash advance off the credit card, you know, Amasia, three grand to get into your IPO. And so that's why I didn't do that. But the thought of that sounded horrible to me. But that I put a small amount of capital in. I put the three or four thousand dollars at that one thing we made money on. I wasn't sure why I paid 20 cents and sold it for 25 cents. And it was good, interesting, good experience. [00:06:39][69.1]

Bryce: [00:06:39] It's something we try and talk to our listeners about is putting away small amounts of cash, each paid so you can get that initial amount of capital to begin with because. Yeah, I mean, not everyone has four or five thousand dollars just ready to go to invest. It's definitely something that is a hurdle for a lot of people wanting to start but not necessarily have the ability to do so. [00:07:02][22.1]

Michael: [00:07:02] I think that's key. If you can get in, if you get your pay going to bank and then you can put a portion of that, it's so it's so easy now because when I started just didn't have Comsec or let's call it broke. He had to transfer cash, which meant going down to the branch and and doing it. So now you can go and do it and you can buy it. Brokerage costs. So save enough for some impact and just be adding. [00:07:27][24.9]

Bryce: [00:07:28] Yeah, yeah. No, it's a good piece of advice. So as your investing journey taking, you would have been some notable highlights. [00:07:35][6.5]

Michael: [00:07:36] I'm here in capital and I got my name on the door. So that's the journey. But it's a great you know, this is a great business and investing is good. And if I mean, if you're working for me, if you're doing your own personal investments, you're working for yourself anyway. So you saw the names on the door. You can tell some things together. But you know, the advantage we've got as professionals as you gets going, you talked about the journey along the way has been really good. And I've worked with some amazing people. So I was lucky enough to when I was young. My first exposure to funds management, I think I was twenty two or twenty three, I left ANZ with my degree and went to our mutual and that has produced some of the most amazing small cap managers in Australia. [00:08:28][51.6]

Bryce: [00:08:28] How long have you been running and gunning for this business? [00:08:31][3.1]

Michael: [00:08:32] We set up into valves and then on a licence in 2010 and that's of we keep that off. [00:08:40][8.5]

Bryce: [00:08:41] And so just for our listeners, you're a specialist in SmallCap investing. Can you explain what a small cap is and how you became to specialise in that? [00:08:51][10.4]

Michael: [00:08:52] Yeah, there's two and there's there's two thousand two hundred two thousand three hundred companies listed in Australia. Mixing amongst that is listed funds and different things like that. So what small caps are is the smaller so the very smallest stock up until our definition of it is anything that's not in the top 100. So we don't invest in BHP nipsy any of the top one hundred. I don't know what's going on there and I do find them a little bit boring. I think the really sexy end of the markets, the small and they're easier to understand and NAB is like 10 or 20 of my companies. So everything outside the top 100 by definition, is a small cap to small. All these stocks range from one hundred and one to three hundred. So the top one hundred, top one hundred and the next to hundreds. What the constituents of the small roads by definition. But that then also leaves a lot of stocks that are outside of the index to choose from. So mathematically it makes a little bit should make a little bit easier to perform because your choice, if you're a top one hundred managers, those one hundred stocks, if you're a small cap manager, you've actually got to say those two thousand stocks has to take up that one hundred nineteen hundred and you're only getting measured against the index stocks in these two hundred. So you've got a big set of which he says should make it easier to find 30, 40, how many stocks that are attractive. [00:10:19][87.4]

Bryce: [00:10:20] So you're saying theoretically you're saying that the ASX 200 is actually made up of 50 percent smokeout [00:10:25][5.1]

Michael: [00:10:26] half of the two hundred of these small perhaps we don't really invest. We're more skewed towards the smaller and the three hundred million is really where we play because I think you can get it's a lot easier to get a business that goes from making those profits to nearly Dollars than to get a company that's making 50 million to go to one hundred and twenty profit [00:10:46][20.3]

Bryce: [00:10:47] or going of that. Then what is your investing philosophy or style? [00:10:52][4.7]

Michael: [00:10:54] That's common sense. I always view it. If I could only have one investment. So any one of the stocks in the portfolio. So I think the number one of the businesses we're buying a business is not trading shares, whether you're buying a business. And so that leads us towards thinking, well, investments need to be longer term because it takes more than three to six months for, you know, those the decisions that needs to come out and share prices and affect the profit. So, you know, we're buying a business, the business we want at some point in time, if that was our only investment, to be able to generate income from that investment perfectly dividends, however, with small caps, a lot of them using all that capital to grow, in which case that's fine, because we're seeing the value of the asset increase all the time and where there is a partner to providing capital, that's our role if we understand the business. And that's a good situation. So as I said before, we were in the coffee shop downstairs and it's growing and we want to go buy some seats and we put some umbrellas up because it's growing. We say more and more coffee. We might actually not have any cash profit. And then the growth actually could be a problem that we need someone to bring someone else in to help us get bigger. And so we just that's that's our view on on the small caps if they're not producing cash. But we're happy that the business is growing. [00:12:09][75.5]

Bryce: [00:12:10] So if you were to put it in under an umbrella, I mean, we talk in the show about value investing, growth, momentum. You put yourself in the growth. [00:12:17][7.5]

Michael: [00:12:18] I can tell you I don't put myself I don't know myself in technical analysis because I don't understand it at all. I just think I'm buying a business. So we're looking long term what we think can happen with the business and where it can go. So we're just buying businesses where they're listen, we do buy some unlisted businesses here, so there is no sort of liquid market in them. It's about what we decide is what the management team is doing. But we do have some growth and we have some value investments. And I've always struggled and we've had a few missed opportunities. So one of the things we've never owned is the real estate dot com business, because always to me, it looks very expensive. And if anything, I was probably a little bit cheap not wanting to pay out for it. I've gotten better at doing that by saying, hey, he's a he's a good business. It's got good people running it. It's got good prospects, however it is. Looks expensive, but if you can say, but hold on, I might be paying 50 times in terms of pay now for this business, but what is it going to be three, four or five years out, just being a little bit longer term and a little bit more strategic about that investment. But we don't want to pay for Blue Sky. We've got to really clearly be able to see what the company is doing, how it's getting there and what's happening in the market. And I couldn't do that with an aria. [00:13:35][77.4]

Bryce: [00:13:36] So examples would sort of come to mind for me with those with that is both amusing to milk. And I go to the villages and then to get out before it hit the floor. And I milk is worth trading at a very high. [00:13:50][13.2]

Michael: [00:13:51] Exactly. Describe the profit again. [00:13:53][2.1]

Bryce: [00:13:53] Yes, sir. I like the other cars myself. Sit back and go should we go alkies in it. But I'm not. And I'm thinking is it too expensive? And sort of along the lines of what you're saying, I like to spend to cheat because still four or five years down the track, it might be a challenge. And, you [00:14:10][16.6]

Michael: [00:14:10] know, that's the challenge with the business. But I'll give you another example of something. OK, so one page, one page was listed and it was a new paradigm getting a job and so that we can use this piece of Facebook and different social media to sort of bring people in is going to save a lot of money for big corporate users who are getting thousands of applications coming in. And I was sort of going to make the whole lot, you know, streamline sort of process. And so the shares went from 20 percent and I think they went up to six point eighty. So you would have made a huge amount of money. And because it was running up so much, you know, I thought, well, maybe I'm missing something. I'll have a look at it. So we start to do some research. And first, I couldn't understand. I couldn't understand. So I can't invest. I can't understand. And I think that you best if you don't understand it and you spend a bit of time trying to understand just how different it's two thousand companies out there of investing. Just find some that you understand and you understand really well. But with one page, what would you is I went back and I had a couple of presentations which I downloaded from the stock exchange. And this is stuff that anyone can do. And it's a common sense sort of filter through what I'm clearly missing. Something I want to go back to. The accounts are missing even more because the revenues it was less than three hundred thousand two hundred fifty thousand dollars for a half or a quarter whatever. It didn't justify the six hundred billion dollar market cap company. I would never have been able to feed myself if that was my investment. And yes, it had grown. But that's just pure speculation because I went through and I actually got on LinkedIn and in the presentation she had four or five companies that they were working with, big blue chip companies in the States. So I am now the chief technology officer of all those business. And I had great little banter on email and then all of them didn't respond. And I asked them we had banter about what they would be prepared to pay for that service and a single one in reply to that email, which made me think I'm going to pay anything and are all using it because it's a free trial. And it was obviously free because it's not revenue coming in to the business. And now that stock's suspended. You know, they've kicking Herranz back at twenty cents on the dollar. You know, we were talking about shorting it. You know, that was one way we got in there. I couldn't understand it. I did some work on I should have been able to understand and I couldn't. And as a result, now you felt bad when it was running up. And there's this fear of missing out on getting it on the write down, you're saying? [00:16:34][144.1]

Bryce: [00:16:35] Well, you mentioned in that one piece of advice is to for someone starting to invest is definitely investing something that you know and understand. Is there any other piece of advice that you would give to someone starting out? [00:16:46][11.0]

Michael: [00:16:46] I think that it's common sense. Just think about it as you're buying a business and, you know, you might be really just buying assets. So it doesn't matter whether you buy a business or if you buy a car, you've always got this decision about you buying an asset. So it's not trading shares. And as I look, I don't understand the technical stuff where these lines or across each other and they go up. I don't know anything about it because I think I'm buying a business and I'll go out and say a lot of these companies and I talk to the people that are in the business and they don't talk about the lines either. So if you're thinking about it, it's it's and it's about value. So if you know that you want to buy, you know, a five year old Commodore, it's worth twenty thousand dollars. If you can pick that up for eighteen thousand dollars, you sort of instantaneously made money and you look around and you look at money. Is it and it's the same with shares, if you know that. You know, I don't think coal companies are great. But if you can pick up one on a PE of three or four and you don't think there's any sort of downward risk in terms of the coal price, you're getting a bargain. So look around here through ignore all the noise. We've made good money just by having common sense. You know, if a company misses a no forecast earnings number by a small amount and we've seen it just happened, it's reporting season and the share price is down 30 or 40 percent. That business is not 30 or 40 per cent smaller because they missed a small target. So I think it's just common sense. Know what you're buying, having a bit of conviction because to make. Really good money, you have to own them for the long run. You know, you have to start. And if you start when you're young and you hold them for a very long period of time, you can make fantastic money. And I wish I'd never sold a share because I've had some amazing things that I've sold too early and I've gotten better at holding them. [00:18:30][104.1]

Bryce: [00:18:31] That's a really good piece of advice and it's something that I'm still learning as well as the value of patience and the value of time when it comes to this sort of stuff and compound interest as well. [00:18:42][11.7]

Michael: [00:18:43] That's the big thing, the compounding reinvested dividends. It's like free money to reinvest. You know, it's just so important that compounding and reinvesting and saw something the other day that and so this is relevant for young people. If you invested something like five thousand dollars when you were 14, which is a big ask, I guess. But then if you only put a thousand dollars in a year until you're 19 and you invest all of your dividends into the market, you know, you end up and it's a long period of time. But just from that small investment. Sixty five thousand dollars. Wow. Something of that magnitude. You know, it's a big number just from a very small investment and the compounding at a low rate. So and then if you add to that all the time, and that doesn't include adding to it. And then if you add just a little bit of money to that, you know, 12 bucks a month or whatever it is, you know, you end up with a very big dividend [00:19:38][55.4]

Bryce: [00:21:33] Well, what has been one of your best investments? And this doesn't have to be a financial investment. It can be anything that you feel has been of benefit towards your investing career. [00:21:42][9.6]

Michael: [00:21:43] Yeah, look, I think the best investment for me, this is going back a long period of time. But and I'll be really honest about was a company called Riak, which was formerly Reinsurance Australia Corp. It was listed it was a reinsurance company. So it was providing insurance, insurance, and it went into the stock trading insurance and they wound down the book, the insurance book. And to me, this is one of those things we do talk about doing analysis. And so, to be honest, I bought it at twenty eight cents and sold it at twenty six or something like that. Not lost money there. No water, 24 cents. And I lost that the whole time. I kept trying to work out. I knew there was a big asset base within the business and I knew that for each of the insurance claims and insurance sternlicht payout money they try to fight you to. And so, you know, I wrote it. I lost money like consecutively all the way from the 20 cents down to twenty eight cents, down to about seven cents. And I bought them at seven. And I was the very bottom of the market and I bought more if they had way surpassed the small amounts of money. So I had a be and we stood here. Yes, it had stock losses. And so when I got down, wasn't losing too much capital, but I was convinced because the amount of work I'd been doing. And so my timing wasn't right. And so when I got in, I probably should have waited till it had started to turn a little bit. And that was. More and more people, so I think I was probably onto that idea a lot better than most people, because if I'd been light would have already turned out to work out. Hey, look, there's a big pool of money, and I ended up from seven cents to make ten times my money on that investment. And that paid for that. We go out and have a very nice deposit for a house or an apartment as it was. And and so that helps Benan and done the work. And I was convinced and and then we have a similar sort of situation with and was nice because I had that experience. We had a similar situation with brands and that that business when we went through a similar experience. So there's been a lot of good investments that we've had. There's not a lot there's been five or six that we've made amazing money out of that don't come along that often. You know, I'm looking every day and I've probably had five that made 10 times our money on. But they're getting getting in, doing the work, keeping an eye on things. And that was that wasn't growing business. Our asset plays that were right. And that's a real value type situation. [00:24:15][151.4]

Bryce: [00:24:16] It's also another good thing to point out as well, that not everything is a win, because I know starting out some a lot of people often think that this is a winning game. You put money in and you hear all of these crazy stories of people making 10 times, 20 times their money, but they often forget to tell you how many times they've lost their money. So it's comforting to know that you're one of your best investments has been one where you bought in and actually lost money before you made. [00:24:44][28.0]

Michael: [00:24:44] So, yeah, I lost money five or six times. But you have to be careful about these people who do have that perception. The stock markets is quick money type of thing. You know, I know hundreds of people that are in the stock market and I believe that a lot of money out the top and but you still hear stupid stuff. I was in going off that lift the other day and I was people talking in front of me and someone said, I have got this stockbroker, you know, and he's the type of guy you give me ten grand slams into one hundred grand. It doesn't happen. So it was enjoying to hear the conversation about these people talking about stuff, but it doesn't happen to people. I know they're the best investors that have made significant amounts of money. It's taken them a long time to do and they don't. And you get the you know, you talk about compounding. The other thing is not paying tax. So if you think about it, if you had Seybold, Macquarie Bank, it had twenty five dollars a few years back and it's close to one hundred dollars now. And, you know, you've got to pay tax on on your profit. And depending on what you write is whether you got a company or whatnot, you know that share price can come back a long way for you to be in the same position. So, you know, getting that free loan of the government and that's that's part of the company. Warren Buffett doesn't sell a lot of shares available as investments for a very long period of time. So that adds to your company if you're doing these short term trading and every time you make a dollar, you pay to be and what you're going to be and pay up to 50 percent tax on it, you sort of shooting yourself in the foot to get that compounding effect. So you buy them, you hold them. If you want to diversify, don't reinvest the dividend into the same stock invested into something else. And there's that look, I like the Warren Buffett stuff. I don't think the market operates the same way as I did when he was starting out. But, you know, people want to look at stuff and you read his stuff. It's common sense. A lot of it. It's very simple. [00:26:35][111.0]

Bryce: [00:26:36] Do you do you have a must read book that you would recommend to people just starting out, [00:26:41][5.0]

Michael: [00:26:42] you know, If I had to give a list, I could give you seven or eight books I think have great books to go and read. You know, I think you go and read all the Berkshire Hathaway and your papers, because I think it's common sense. I think there's a couple of people who've done studies on the investments that would have been made in the early days. I personally like for a bit more entertainment value. I like financial markets, history or books that have been written about periods of time. So I've read books on, you know, early entrepreneurs in that the big families that did well in the US develop in the US. Trevor Sykes books here on on things. So we went back and we bought a copy of Money Miners, which was his book published in 1978 about the Poseidon boom. And that was that was people retired off the side of boom, that it only went for about three months. Certainly very interesting story about resources in Australia, but that really puts into context, instead of a numerical basis, you can get a copy on Amazon.com like five or six points on a book. So things like that are interesting. Looking at what happened in the dot com boom. Look, any book can get on finances is is good and reading about what happened so you can you become more knowledgeable and make you a better investor over time. [00:28:06][84.5]

Bryce: [00:28:07] So you're obviously a specialist in small. Is there any particular industry that you're focussing on at the moment? [00:28:15][7.4]

Michael: [00:28:15] Well, look at where we look. We're more bottom up so we don't try. And the one industry where we've got investment now, where we did specifically target the industry, was the real estate industry. But we didn't targeted because we went out and looked at real estate. We targeted because one of the things we look for in our portfolio, which is good for small caps, is disruption. And it's a trendy sort of word, but it's always been there. So you had all the ISPs were disrupting Telstra because Telstra was doing a dial up and and these guys were then able to buy wholesale Telstra and be smaller operator, lower costs and Telstra getting better economics and the area under the curve for Telstra to drop their price just a little bit. I mean, they would lose so much money that they just didn't do it. So all these little players were sort of like feeding off the carcase of Telstra to develop to the big businesses. So it. And so and that was really a disruption in that space. And so we had to look at what's left to disrupt now. So fintech is a big area where we've done well out of. But I think the next one for us, one industry I see that hasn't been. And every time I say this, we get emails on our website from disgruntled real estate risk that hasn't really been disrupted. So RJ and Sete disrupted classified advertising, but real estate is still charging two per cent to sell your house. So open the door and show you. So I think that will get disrupted. And you're seeing it now. This this Buy My Place, which is an interesting small business. We don't have a shareholding in it, but we're watching it. There's purple bricks, which is advertised on on TV and they've got now fixed. They'll sell the house for a fixed price. It's about five thousand dollars. And then there's we have a business that we've got investment in which is unlisted called local agent, but it's all about stockbroking, used to charge two percent commission rates. And now I can try it as an institutional buyer for seven or eight basis points, a massive price cuts there. And so that's been disrupted through things like CommSec and ETrade, low price. So now that filters through the rest of the market and real estate. You know, the prices dropped on by my place and people breaks. And I say that that will shift and give me more price competition to the other guys as a matter of picking who will do well. So we have a comparison website where we're investing because I think we'll take a very long time for property to get disrupted. Travel got disrupted with things like Webjet and we sold out of that too early. We were in there very early in the piece. I think we sold it about four Dollars and kept going up Shinsei because I thought everyone's using Webjet. It's over now. But the vast bulk of people are just your mass mass publications are just getting into that. So I got along with that, really. But we still made a profit from making a profit, but it went up a lot more. But, you know, it was that that dynamic of people shifting from going to the travel agent or calling travel agent to do it themselves online. So I think that industries that do have high barriers to entry and other things that, look, there's no barrier to entry to becoming a real estate agent. It's a two day course to come. But to build a brand in that industry is hard. So on the disruption, you know, finance has been disrupted and there are big barriers to entry for the barriers, capital and so capital. If you've got the contacts, you know, I mean, if I set up a business that wanted to provide some sort of so we've got investment in money and Afterpay has been a very successful company that is similar to it. Money is different, but small. But they've disrupted because they've got they're bringing technology in and then they can raise capital and sometimes with various capital. [00:32:00][224.7]

Bryce: [00:32:00] But I like the idea of Afterpay. [00:32:02][1.4]

Michael: [00:32:03] That's the important point about if you don't if you live beyond your means and you constantly have a credit card, you're buying stuff with Afterpay or is it money or whatever, it'll be hard to achieve those financial goals or something. [00:32:17][14.2]

Bryce: [00:32:17] That's very interesting. And I'd like to know thoughts has been medical marijuana industry. That's something that you're keeping an eye on or you think it's a buyer beware or what are your thoughts on that? [00:32:27][9.3]

Michael: [00:32:28] It's an agricultural stock and throw into the mix that it's an agricultural stock that's got highly regulated, you know, licencing issues. That's my view on it. I think I go buy an almond crop and it's unregulated, but it's subject to all the same factors that most agricultural stocks I mean, I'm sure some of the businesses will do well in that sector, but it's just a crop in the end of the day. And I think it's a very small in market run. [00:33:00][31.7]

Bryce: [00:33:01] A video that you recently did on your website was about volatility and something that I hear a lot of my mates talk about, people starting to. It into a narrative in the media is how how do you capitalise on a volatile market? Should we buy the index or jumping on a list of investment coming in? That's following trends, that sort of stuff. What are some ways that you think beginnings could capitalise on a volatile market? Or is the market at the moment? Buyer beware as well in the sense that. [00:33:30][29.8]

Michael: [00:33:31] No, I think I love volatility. That's probably what we said in the media. Volatility is really good if you know what you're buying. So for us, we would probably have at any point in time, we only own about 40 positions and probably got 10 orders on now bit below market. I'm very patient. Sometimes I don't always get my stock, but because small microcaps a pretty liquid, there can be a five percent spread between the bid and the offer price. So I'm happy to sit back and happy patient, happy, get my stock. If you read that stuff on Warren Buffett in some of their investments, it took them two or three years to get their investment. So if I'm patient, I get stuff at the right price. And all the analogy is if everyone thinks the world's going to end. And they sell off of stocks. It's like buying you twenty thousand or five thousand dollars if you keep picking up eighteen thousand Commodores, you know, and there were 20 and you think that they're worth 40, you just get that little bit extra incremental return. And then I look at our in shows and analyst investment company. I was surprised how largest individual shareholder I myself was. He told me what his average price was and I was surprised that he's just sitting there in the market. And when he thinks we get sold off because either someone's changing their portfolio, they found something better to buy. He just sits there and picks them up. Well, basically, he capitalised on the stuff. We're capitalising on the volatility as well. If you know the business, if you're comfortable with the business and we're doing work, I'm excited now because we have seen all this volatility because borax has been sold off. You've had measures been sold off, a Dollars has been sold off. Godfreys has been sold off. Jager's been sold off. You know, reach out to these is with this carnage out there. I like that is who is everything top price. You know, I'm going to work out what what we want to get out of this half price sale rushing some things we bought straight away, [00:35:31][120.4]

Bryce: [00:35:33] but particularly in some instances. That's because a lot of some of those businesses are businesses. [00:35:39][6.0]

Michael: [00:35:39] Yeah, but when you find the one that's not crappy, that's the one to buy has been my baby being thrown out with the bathwater. There's nothing wrong with the business. [00:35:47][7.4]

Bryce: [00:35:47] I do think that the market at the moment is teetering on the edge or is overvalued or in a broader scale and then also in a small caps. [00:35:56][9.0]

Michael: [00:35:57] I have no idea whether the market's overvalued because the market when people talk about the market, they talk about the index and the index level and the index level is is like 90 percent top one hundred and out of the top one hundred and like 50 percent banks. I don't know anything about the banks other than a lot of businesses. And I don't think there are like I like the price they're trading. And so we run on we're run a watch list to about two hundred resource companies and maybe about an hour, maybe four or five hundred industrial businesses. So and keep an eye on them. If anything happens with the price every week we review it and spits out things. We put a price on what we think that business is worth. What we know we're constantly updating it with a couple of young analysts do that, and that helps keep track of this this big list of companies. So don't worry so much about the markets on an individual basis. What's that business worth? I'm getting it cheap. I'm going to see a lot of companies and sometimes we get things wrong or the business is better than what we thought or someone with whom we change the price because there is a price for every business. And I'm ignoring the stuff that are not real businesses like the one page that was a real business. So real businesses that make real cash flow it people turn up every day and there's cash coming in. At the end of the day, there's always a price for those businesses and the low quality businesses. So if you look for tik-tok factors that don't have barriers to entry, things like that, the better the businesses, the higher the multiple you pay, the the more commodities the businesses, the less you want to pay. So you just remember those prices [00:37:30][93.4]

Bryce: [00:37:32] like Amazon trading one hundred seventy seven. [00:37:33][1.7]

Michael: [00:37:35] Yeah, it's look, it's a good business. It's done well. It's been amazing. I feel I was on the Financial Review and Bezos was standing next to me. So I thought I have just got to make a move once by side of the Financial Review. And it was a separate article. But now but he's been incredibly entrepreneurial. Yeah. And we we talk in Saudi Arabia about not investing with people who have had a bad track record for a long time to build that. I've been doing this a long time, and so I remember the failures that people have had. But you can look yourself about where people have been before and what happened with that business. It's hard to gauge how you've been there. It's an experience thing. But the other thing is we really I've got a huge amount of time for some of our best investments and investments have been with our operators. And so it's someone that knows that they may not take a huge salary at the business because they get their their wealth grows through the business, doing well in the share price. Appreciate it. And they'll make a decision for that, I think will be best for the business for the next three, four, five, ten years, whereas quite often lower quality professional managers will make a decision. That's right for them to get the maximum amount of their short and long term bonus. And there's been studies done on that. And you can see there's been sort of a hedge fund guy about the other day and he said he mentioned a couple of companies, all those directors and CEOs should be put in prison. He felt very strongly about it. [00:39:04][89.2]

Bryce: [00:39:04] Well, so, I mean, Amazon is making a profit, but proportionately to its revenue. It's very small. And when we're talking small cap, something I like to look at as well as obviously, if it's just. Generating some revenues, not per research, that's microcosm. What's your opinion on you talk about cash, but are you talking revenue or are you talking profit or what's the interplay between the two that [00:39:29][24.9]

Michael: [00:39:30] look when you look at so if you go back to the dot com, then it's probably before your time to us. It was amazing how many of those companies were able to build them very quickly with no profitability. So it's how sustainable the revenue is. So if it's not making a profit in terms of a cash sense, you've got to look at what's happening as you look at the cash flow statement and what's happening to the profit. So you want to make sure when there are all these high growth, I don't like these tech type start-ups where you get a room full of people and they've got a it's a great place to work the pong table bar fridge here and it's full of stuff. But you want to make sure that if it's not making money, this growing revenue, the revenue sustainable, recurring, or that they're building something that it will get a little. I've struggled historically. With businesses that trade very hard, I mentioned before, I've struggled with that because I do just like buying businesses that make cash that are growing, they've got someone who's got a vision if they're going to raise capital of shareholders, that they're going to make sure that that capital is incrementally more creative and adds value to the business. It's a big thing [00:40:43][72.6]

Bryce: [00:40:43] then from an economic standpoint, where do you see the broader economy and how is that helping or maybe disadvantaging small capsule? [00:40:51][7.1]

Michael: [00:40:51] Well, I have this fundamental view. If you look at the equity market over the last 50 years, it's grown and it's had periods for decades where it hasn't grown. So we try and buy a portfolio of businesses that we think will be bigger or generate cash flows. So when I look at the economy and where I think it's going on, most of the businesses we've got and then in the context of the market has grown if the economy's growing, this GDP growth rate. And so there's an inflation rate. So provided that the economy's growing and the world is growing, the market should over time get bigger. If you look at the constituents of the ASX 100 now, they're not the same companies that were the constituents 10, 20, 30 years ago. If you want to get into the businesses, the non-violent situations, to get a small market to come here and write it all the way up and let it be kept in your portfolio, you've never sold it, you know, maybe make a hundred times your money hasn't happened to me. That's so I just think in the I'm not so much worried where the market's going short term, as long as there's nothing that's going to impede growth in Australia and my knees go backwards as long as we have that rate of growth was three, four, five per cent. I just need to get companies and I always ask myself, can this company grow faster than the rate of GDP over a long period of time? [00:42:15][83.8]

Bryce: [00:42:16] If you were to give a piece of advice to encourage someone to start investing, what would you say? [00:42:21][4.9]

Michael: [00:42:23] I think it's I think it's daunting. I think if you want to be really if you're very conservative, which you should be with your money, I think there's easy ways to get in. I think the easiest way just to get used to the process is to buy if you take a long term view and you're buying something that's sensible, that if you want the lowest risk approach because the market often does go up in the short term, you might lose money by an eighth of the index. It might go down, might go down three, six months. But I'm pretty confident the next three, four, five years as the economy grows, the stock market will grow and you won't lose money. And so that's the basis. Then you go familiar with the process of buying and selling out works and using whatever software you're using. I think CommSec may try great platforms. And then I think after that start, if you want to do it a lot of risk. I look at some of the Elyse's out there, some great people managing, and I say it's not because it's what we manage, but because they're listed. And I think the ASX is a great platform. The ASX is such a great platform. You buy in and see buy out NYSE and you go to the ASX announcements and you can see whatever our is. Every month is commentary on what we're doing. There's annual reports. They can look at the balance sheet, at the business and see the gearing and things in it so you can start to get familiar that way. But then there's the common sense thing. It's like buying the buying the time is why I make that analogy. You're buying a business. So do you like the business? But, you [00:43:53][90.8]

Bryce: [00:43:53] know, I'm happy that you've said that because in previous episodes we actually talked about ways in which you can find some companies to invest. And if you had no idea and one of them was just to look around your day to day, if you work in a shoe shop, for example, and look at the brands that are selling the most and then have a look at those [00:44:11][17.6]

Michael: [00:44:12] sites, that's great. See if you work in a shoe shop and you were there. Now, you would know that right now, this year, that apparently Adidas has it all overnight. No one's buying. Not really. And so and little things. And it's a good example. So we talk to I saw the share price of ACG, which owns Athlete's Foot and I hot. OK, so it went from dollar for a lot of cheap stuff, somewhere in dollar forty to a dollar and got straight in the taxi and I went out on, went out and so on. And I spoke to the guys and I got a bit of a feeling that was going to be a bit soft. So we didn't buy any shares and then they've had a subsequent profit downgrade and that business is now it's gone down 40 down to a dollar. And then it went straight down to about sixty eight cents now. So it's a lot cheaper now. But on the weekend and this is nothing you can do, I've got a separate email address. And for the retail guys or anyone I go, if we're looking at business, I've got a website that I subscribe to so I don't get that email a lot because it gets spam heaps by all these people. But Ribeau had a sale on. Saturday, they put out 20 per cent one day, only 20 percent of everything in the store or last Saturday. So two good things. You subscribe, you can get everything cheap. And this is my second. It's a bit of a late indicator that these guys are really must be stronger than what they thought. Is it going to affect the results? So it's good to have all these subscriptions to different things. So there's little bits and pieces that can always do to start to check. [00:45:44][92.2]

Bryce: [00:45:45] Now, there's some good, actionable things that I think are value. And also even subscribing to your weekly videos, I think is a great opportunity to get access to people like you. For you, like the amount of information. S is fantastic. I just want to quickly go back and say for our listeners that Elyse's a listed investment company and an ETF is an exchange traded fund and that Glenanne Capital is a listed investment company specialising in small caps, which we've discussed today, and they are open to retail investors like myself. But I think it's been great. Michael, thanks for your time. Really appreciate you coming on the show. You've had some great piece of advice and I really appreciate it. [00:46:27][42.8]

Michael: [00:46:28] Thank you, Equity Mates. [00:46:29][1.3]

Speaker 6: [00:46:29] And the people appearing in this programme may have positions in the companies mentioned. This is general advice for me. Please speak to a financial professional, understand how they pertain to your individual situation. [00:46:29][0.0]

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