Nick Griffin is the founding Partner and the Chief Investment Officer of Munro Partners. He is responsible for the investment management of Munro’s key investment funds and the formulation and implementation of the proprietary investment process. Has has extensive experience, and has been managing global long / short equity mandates for over 12 years.
We were honoured to chat with Nick about his investing philosophy and process searching for growth companies.
Nick is also a conference fund manager for the Sohn Hearts & Minds conference in Australia, and will be pitching again in 2020. Nick pitched the Trade Desk (NASDAQ: TTD) at 2019 Sohn Hearts and Minds Conference which is up 150% (since pitched on 22 November 2019).
This was a fantastic interview, where we covered:
- Where his research process starts?
- How do you know when to enter and exit a stock when looking at it through a growth framework?
- Does value mean anything – what do you say to people who look at the P/Es of Amazon, Afterpay etc and comment on valuation?
- Discounted cash flow and his views on record low interest rates
- Plus so much more!
We hope you enjoy this interview as much as we did. If you want to see more of Nick, a reminder you can buy tickets to the Sohn Hearts & Minds Conference to see his stock pitch, along with other fund managers. For 20% off the ticket price use HM1MATES
If you want to let Alec or Bryce know what you think of an episode, contact them here.
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Bryce Leske: [00:00:57] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing. We break down the world of investing from beginning to dividend so that you can hopefully make some returns. My name is Bryce and as always, I'm joined by my equity buddy Ren. How's it going? [00:01:09][12.4]
Alec Renehan: [00:01:09] I'm very good Bryce very excited for this episode. We have a returning superstar. The Hearts and Mind episode with Rory Lucas was so good that we've brought him back. [00:01:20][10.8]
Bryce Leske: [00:01:20] Yes, it was a great three 100th episode with Rory about Hearts and Minds initiative, which is just a phenomenal investment vehicle for our audience, which we've had great feedback. So, Rory, good to have you back. Great to be back. And we welcome another superstar to the show. As we said, we're going to be having some previous conference people from Soane come on the show. And we are delighted to welcome Nick Griffin from Monroe. How are you going, Nick? [00:01:45][25.2]
Nick Griffin: [00:01:46] Yeah, good guys. Thanks for having me. [00:01:47][1.3]
Bryce Leske: [00:01:48] Nick is founding partner and the chief investment officer at Monroe Partners and is responsible for the investment management of Munros, key investment funds, and the formulation and implementation of their investment processes. He's been managing global long and short equities for over 12 years and at the last conference pitched the trade desk's stock, which the ticker is TTD. So go and check that out at the 2019 Sewn Hearts and Minds conference, which is up 150 percent since it's pitched on 27 November. [00:02:20][32.7]
Alec Renehan: [00:02:21] very impressive. Well done, Nick. [00:02:22][1.2]
Bryce Leske: [00:02:23] Thank you, Nick. [00:02:24][0.4]
Nick Griffin: [00:02:25] Yeah, we got okay with that one. [00:02:25][0.3]
Bryce Leske: [00:02:28] the plan for this episode is just to unpack what Nick is doing over at Monroe. And then we'll also touch on some of the hearts and minds stuff as well. So before we do, Ren has got a bit of a game. [00:02:36][8.4]
Alec Renehan: [00:02:37] Yeah, Nick, we do always like to start with a bit of a game, throw out a few indexes and themes that we may not otherwise get to speak about in the episode and get your thoughts on whether they're overrated or underrated. So we'll start close to home with the ASX 200 index. Overrated or underrated? [00:02:53][16.2]
Nick Griffin: [00:02:54] I'm afraid I'm going to say overrated to that one. [00:02:56][2.4]
Bryce Leske: [00:02:57] Any particular reason? [00:02:57][0.8]
Nick Griffin: [00:02:58] I just you know, we run a global equity mandate, a global growth mandate. Your goal in equities, put simply, is to find the very few exceptional companies and to avoid the thousands of average ones. That's how equity markets work. And the reality is, is if your goal is to find those few exceptional companies, the vast majority of them are probably going to be outside Australia. I'm not saying there's no good companies in Australia. There's some great companies in Australia. There's some great things to invest in Australia. But but but I think it's on the balance of probabilities. The vast majority of the best ideas are probably going to be outside Australia. [00:03:30][32.2]
Bryce Leske: [00:03:31] So then overrated or underrated, the Nasdaq 100, [00:03:34][2.4]
Nick Griffin: [00:03:34] I'd still say it's underrated, to be honest, but I recognize it's more recognized today than it has been at any time in the past. [00:03:40][6.0]
Alec Renehan: [00:03:41] Coming back to Australia, an asset class that is on a lot of people's minds all the time. Is property so overrated or underrated? Australian residential property? [00:03:51][9.5]
Nick Griffin: [00:03:52] Never ask a fund manager about property the way we buy houses at the top and we sell them at the bottom of the. So I'm not even going to close it out. [00:04:02][10.6]
Bryce Leske: [00:04:03] Overrated or underrated gold. [00:04:04][1.5]
Nick Griffin: [00:04:05] Overrated massively. Look, I know how disappointing a lot of people here. I started my career as a gold analyst. You fly around planes in Western Australia and look at holes in the ground. Yeah, you've made a lot of really crazy people. I think this is a currency and I think it's going to be you know, it's a store value. And I completely say that argument, but I just don't see anyone actually using it as I just see a lot of people. I think it's that and I just I'm just not sure. In the long run, I do think there will be other stores of value that come along. And so so I do think it is slightly underrated here. [00:04:35][30.1]
Alec Renehan: [00:04:36] Fair enough. So, Nick, we love to start these interviews with learning about someone's background and we love to hear about people's first investment. We generally find there's a good story or a few good lessons that come out of that. So to kick us off today, can you tell us the story of your first investment? [00:04:51][15.7]
Nick Griffin: [00:04:52] Yes, I'm very lucky as so I'm sort of in my late 40s and I grew up at a time in Australia where lots of businesses were privatized. So things like Commonwealth Bank or things like Telstra privatized. And so the government effectively handed out these gifts of businesses that were run by bureaucracies that were privatized, and they offered it to all taxpayers, anyone to fill in the form got stock and the stock. You generally were getting a gift. And they and a lot of them did really well, at least initially. Telstra did well in Commonwealth Bank, did amazingly. And things like Qantas and others came along at the same time. And so there was sort of they weren't free money, but they were really good opportunities. And I priced them very well to keep investors happy. And those were my first experience investing. And so I had a good experience which ultimately led me into the industry. [00:05:37][45.3]
Bryce Leske: [00:05:38] So then from that to where you are now at Munro Partners, have you developed an investing philosophy? [00:05:43][5.1]
Nick Griffin: [00:05:44] Yes, I'd come back to what I said at the start. And so equities are very different to every other asset class you look at. So if you invest in a bond, for instance, you're investing in fixed interest security that's run by the government. You know, just sort of these faceless. Look after the deficit in Australia, and that's what your bond does when you're investing in an equity, generally investing in someone's vision, someone's idea that could be truly great or it could fail spectacularly. And the key thing to remember is the vast majority failed spectacularly. So, you know, we can show you some analysis and I'd be the same in Australia or anywhere else in the world. But if you looked at the US market over the last 90 years, there's actually been 25 and a half thousand companies listed and more than 14000 of them have gone to zero. So 60 or 60 percent of all companies go to zero the next eight thousand nine to make enough to offset what the other 14000 lose. And you end up with just a thousand companies. So less than four percent of every company listed creates the entire value of the US stock market. And out of those 1000 companies, if you take the top 50 of those thousand companies that make up 50 percent of the value. So 50 companies out of 25000 when you started make up nearly 50 percent of the value. And so we know who those companies are and we know who they are. They're Microsoft, they're Amazon. They're Google, they're Apple. You know, Home Depot, they're Wal-Mart. But what's interesting about him is that usually a couple of strong individuals behind it and there's usually a structural disruption or a structural change that they're looking to exploit. And obviously, everyone's now focused on tech and I'm sure we'll end up talking about it. But if you go back to the time, it was always something that was happening, whether it was big box retailing creates Wal-Mart depot or quick service restaurants, creates McDonalds or entertainment, creates Disney or air travel creates Boeing. But what's interesting about it is there's always only a few women's rights. You know, thousands of companies tried to build a plane, but there's only two companies that can build a plane that you and I will knowingly get Boeing, Airbus and Boeing. And so so once you understand that is your philosophy, you realize that equity investing is actually about just going out and trying to find these exceptional companies. You know, they're going to get to be a few of them. You're probably going to make a bunch of mistakes along the way. But you want to find these exceptional companies and everything else over around the underweight sectors or where interest rates are going away, the economy's going is actually not that material. It definitely affects the short term, but over the long term, it doesn't really affect it. [00:07:59][135.0]
Alec Renehan: [00:07:59] I love that that explanation just gets me so excited about investing and trying to find those good companies. Now, I want to get into your work at Monroe Partners and hear about how you find those good companies. But before we do, we're just going to take a quick pause to hear from our sponsors. [00:08:13][13.8]
Bryce Leske: [00:08:14] Ren, you are all about getting fit. You've bought the garment, you bought the Gulf membership, you bought the gym membership, and you're on the mind MasterChef. And even in lock down last year, you bought those resistance bands of Instagram that from memory didn't even come. [00:08:28][14.0]
Alec Renehan: [00:08:29] 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. [00:08:39][9.5]
Bryce Leske: [00:08:40] 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. [00:08:47][7.0]
Alec Renehan: [00:08:48] That's right, Bryce with a high interest savings account bundled with a seriously rewarding everyday transaction account. You can manage your money easily on the go smash your savings goals and be rewarded for it. [00:09:00][11.9]
Bryce Leske: [00:09:00] 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. Ren. [00:09:09][9.3]
Alec Renehan: [00:09:10] Yeah, the FBI twenty one get Ren didn't quite work, but if my twenty two get Ren money fit might be to go [00:09:18][8.4]
Bryce Leske: [00:09:19] back to your own bait virgin money terms and conditions and monthly criteria apply. Now let's get back to the show. [00:09:25][5.8]
Alec Renehan: [00:09:27] So you mentioned that your investing philosophy is all about finding those great companies, those select few that drive the returns for the overall market and for the overall indexes. And Monroe Partners is growth focused investing house. So you must be loving life at the moment with some of the movement in some of these growth stocks. [00:09:45][19.0]
Bryce Leske: [00:09:46] Well, we interviewed a value investor yesterday and [00:09:48][1.9]
Alec Renehan: [00:09:48] it was clear he was not having fun. [00:09:50][1.8]
Nick Griffin: [00:09:52] Yeah. So, look, it's a good time for what we do. We agree. You know, and I'm sure the value investor talked about interest rates being low in the economic cycle, not really being here. And I would agree they are tailwinds to try to invest. But we'd also argue that, you know, this concept of disruption is actually accelerating and there's a lot of reasons for that. And the disruption is accelerating. And people are coming more to this viewpoint that there are fewer and fewer winners and losers begins. And that's really around digitalization. And so that's what's driving the category. But, yeah, it's been a good time to be a growth investing. It's an exciting time to look at new businesses, that's for sure. [00:10:24][32.2]
Alec Renehan: [00:10:25] We'd love to unpack your process a little bit on how you actually find those select few businesses, because, as you explained, there's a lot of businesses out there that wouldn't pass your tests and wouldn't fit that description. So if we start at the beginning, how does your research process start? How do you go about actually starting to figure out which businesses are even in the universe of ones that you want to research more in investment? [00:10:47][22.5]
Nick Griffin: [00:10:48] Yes, I'd encourage your listeners to just think about, you know, keeping your eyes. It's amazing how many equity participants just constantly look at. So look at what certain stocks are doing and a certain index and stop looking at what's actually happening around them. And so the first thing to do is do what we do is try to identify areas of structural change. So use a historical sample to begin with, which would be like smartphone penetration. Right. So every person on this call can probably remember the dinner party or the time they saw someone with their first iPhone and they went. That's pretty cool. I'd like to get myself one of those. And we'd all been walking around with our Macías Americans for a while and the iPhone came along. And so you knew this was going to be a big shift. You just didn't know who was going to win. And so the first thing to do is identify areas of structural change. So smartphone penetration, e-commerce, cloud computing, innovative health care, decarbonization of the planet, are the areas where the big structural changes will occur. And so they're good places to look for those next big winners, because what we're trying to do is not work out who the big winners were as a growth investor. We're trying to work out who the next bunch will be. So, as you know, is it Netflix is Salesforce is Atlassian, is it those sorts of things? You've got to start looking in the right place, to begin with. And so what we do is identify these areas of interest, all these things that we want to focus on. [00:12:04][76.0]
Bryce Leske: [00:12:04] So then once you, I guess, find your stock and identify that area and you're pretty confident on what that next company is, you know, something that will get us throughout our community a lot is particularly with these growth companies, is how do you know when to enter into one of these positions? And then particularly, how do you know when is the right time to exit when looking at it through a growth framework? [00:12:25][20.5]
Nick Griffin: [00:12:25] The key actually is once you find the area, you probably won't find the stock straight away. So, again, you might find the area. And what we would do is then work out who the participants are. And so let's go back to smartphones. It's Apple, it's Motorola, it's Ericsson. It's Nokia. It actually says it's Samsung. So that was they were the ones in the area back then, in 2007. And then you had to work down and find who were going to be the few winners. And so that's where we do qualitative tests. And so what we would look at really closely are obviously we build models on the companies that work out where we thought their earnings are going to go. But we'd really look at the alignment of the management in the group because remember, it's all going to be about the individuals that drive the process. So when you look at these great growth companies that generally got a dominant founding shareholder in Apple's case and Steve Jobs, who was Steve Jobs or Jeff Bezos or Elon Musk, and you'll find that even down into the small companies like in Australia. So CSL has been run by the Australian for over 20 years. You'll find that stability and management and that beautiful alignment that they have with the outcome for the shareholders. And so that's a key indicator. And the last thing that you should really focus is on what the customers think of their product. And so generally, you know, the customers will love it and go all the way back to the Apple scenario. People thought it was a nice product because it was so expensive. But customers have always loved the Apple products, and that's why apples proved to be successful. This is so those are some of the key qualitative characteristics. We'd look for terms. James, your last question is as to when to buy and when to sell it. So arguably, if you think about this on a very long term time horizon, the buying in question provided you find the right company, the value you pay for it, and the very, very long run is irrelevant in the medium run. It's very relevant and in the short term, it's incredibly relevant. And so from that point of view, find the right company first and then we would build an earnings model, fund the valuation where we felt the risk-reward would be right to buy it and then we'd buy it. And then in terms of selling it, if they're still executing along the timeframe that you think and across the entire total market that you think's achievable, we'd argue in most cases it pays just to run a. To continue to run it until the day they stop executing and once they once you decide the facts are change, then you change your view. And those are the way that we think about it. The last thing I just say here is you are going to make like a lot of mistakes when you do this. It's inevitable that it's a game. A few winners, a lot of losers. You've got to make mistakes. So the other thing that we spent a lot of time on is having a stop loss process, having a process where how do we realize we've made a mistake? How do we realize the BlackBerry's not going to be the big smartphone and that comes around a stop loss framework. So those are the two things together that help you, but then run it, but also cut it [00:15:10][164.9]
Alec Renehan: [00:15:11] following up on that idea of a stop loss. How do you balance between a company where your thesis is wrong, i.e. BlackBerry and you know, they're not going to keep growing or a short term price disruption that might trigger a stop loss. But your thesis is actually right. And over the long term, they will continue growing at good rates of return. [00:15:30][19.0]
Nick Griffin: [00:15:30] Yes, that's a great question. And so the stop loss would argue you do not follow religiously. It's more a reaction function. So we would use a stop loss to make us review the investment case. So, for instance, over Covid, we own Amazon. Amazon trigged through the Covid crisis and so on our sugar levels. But we came we reviewed the investment case, decided Amazon was better off and kept it. We didn't sell it. But at the same time, Airbus trigged or UBA trigged. And in both those cases, when we reviewed the investment case, we decided things had changed and that we'd just step to the sideline for a while. That doesn't mean we won't come back. It just means for now we're going to step to the sidelines. And that's it's to not use it as a religious-like, you have to sell to use it as a reaction function. Because of the problem you'll end up with and everybody on the podcast, I hope is get us not knowing their heads. But they're going to end up with if you don't have a formalized Stop-Loss arrangement, then you end up buying a stock, which seemed like a good idea at the time. It doesn't work out. You ignore the fact it doesn't work out. And in the end it ends up in your bottom drawer of your desk and you've lost and you've lost more than 90 percent of your money on the stock. [00:16:39][68.9]
Alec Renehan: [00:16:40] As someone who's lost ninety nine percent of their money on a stock, I can attest to that happens. [00:16:44][4.4]
Nick Griffin: [00:16:45] Yeah. And so that has a twofold effect. On the one hand, you've lost ninety nine percent on the value of the stock, which there is nothing embarrassing about that happening because the vast majority of stocks do go to zero. But the other problem that happens is spin stops you from going back to your thesis and actually finding the winner. So, you know, if you could have stopped your BlackBerry investment would have stopped at two thousand and you could have easily moved away from BlackBerry and decided that Apple was the winner and you still would have made seven times. So. So not only does it stops you from finding the winner as well. And so that's why it's quite a useful process. [00:17:20][35.1]
Bryce Leske: [00:17:21] So, Nick, you touched on value then? I'm interested to unpack that a little bit, because with growth, you know, what do you say to the people who look at the pages of Amazon and Afterpay and even years ago when they were still trading at very high PEs and sort of say, you know, you know, even though they've got good growth potential, they're far too overvalued. I'm not going to pay for that. And yet they've continued to trade on such high multiples for a very long period of time. And still, I guess the growth horizon is still, I guess, impressive. How should we be thinking that about that is sort of beginner investors and going through our journey? [00:17:54][33.1]
Nick Griffin: [00:17:55] Yeah. So it's important to remember that the PE multiple for a company is basically a shortcut to the company. You're not actually valuing the company, the value of the company as it's discounted cash flows over a long period of time. And so people used to say a company is expensive, but actually what they're doing is just being a bit lazy and not actually doing the work. So what we would argue is, is, you know, people should do the work and work out what's possible. And so, you know, Afterpay is a great example of Australia. You know, if they succeeded in Australia and succeeded in the UK and succeeded in the US, you know, and you put a probability on that, what would that actually be worth and then put a probability on them not succeeding at a probability of somewhere between and then you'll get a much more realistic value of what the company could actually be. But you've got to take a longer term view. You've got to look more like five to ten years out. The other thing I'd say, if you think about just a company like Netflix, for instance, you don't actually want them to be making any money because you know that over the top is going to win. You know that you're probably going to be subscribed to at best five. I mean, how many video subscriptions do you have at home today? [00:19:02][66.6]
Bryce Leske: [00:19:03] Too many, [00:19:03][0.2]
Alec Renehan: [00:19:06] at least for that I can think of right now. [00:19:07][1.9]
Nick Griffin: [00:19:08] Yeah. So I've got three. Right. And I think most people are going to be between three and ten. But the reality is, is there are five to six commercial television stations in one hundred and ninety five countries around the world. So in linear TV, there's 200 options in over the top. There's five to ten that are realistic. So you know that this is about to go from a game of two hundred to a game of five to ten. And you want to be in those five to ten and so. The problem for Netflix is, you know, that you want them to be one of those winners, so you want them to spend as much money as they can on content and attracting as many customers as possible so that that network effect will work for them. The last thing you want them to do is to pay a dividend or to be cash flow positive because that means their chance of losing, which means they lost nothing. And so and in many scenarios, we look at around the world where there's software or music streaming or even in renewable energy or electric cars, you've got to spend money to it. And so if you're looking at the pay multiple, you're potentially missing the bigger picture. So unfortunately, you just got to do the work. [00:20:08][59.9]
Alec Renehan: [00:20:09] So, Nick, I think you're the first investor on the show in 300 episodes who said they're looking for a company that isn't cash flow positive, that that's a new one. But it makes sense and I like it. The description you just gave of Netflix is a new way of thinking about it for me. I've always thought this fragmenting is going to be a bad thing for Netflix. But it's an interesting thesis, just point out. [00:20:31][22.4]
Nick Griffin: [00:20:31] So the point is, obviously, we prefer to find positives and we prefer to find them at really low pay multiples. That would be great. I just don't think it's realistic if we look into the future that you're going to find these great winners a pace of 15 times in cash flow positive. Yeah, the value guys will do that. Dido's from the bottom to the top, and that's what they do. And that makes perfect sense for them. It's just not what you're asking us to find. Who's the big software winner in the future? And you're not going to be a big software winner in the future if you don't spend money on your product. So you've got to think of it differently. You've got to take a longer term view and you've got to be prepared to accept a bit of cash flow negativity for a while, almost like [00:21:11][39.4]
Alec Renehan: [00:21:11] Rory's been sitting here waiting patiently. So we're going to get to him into hearts and minds in a second. I do have one more question before we do, though. You mentioned how valuation isn't about Payet. It's about the discounted value of future cash flows. And I'm interested to get your thoughts on what risk free rate you use. You don't have to tell us the exact number, if that's part of your investing secrets. But with interest rates so low and potentially getting even lower. How do you think about the risk free rate and what do you sort of use to benchmark that? [00:21:41][30.1]
Nick Griffin: [00:21:42] Look, at the moment, we're still using most cases around eight percent in some cases, like for some of these client names, we might use lower because they have a lower cost of capital because of green bonds, etc., but maybe around eight percent. No. The key is just to look a bit further into the future as to what the cash flows could be. And so you had a good example of that uses like Google listed in 2005, I think at 80 times earnings and a fifty dollar share price and cash flow negative. And today, Google's fourteen hundred dollar stock, it's on 30 times earnings and hugely cash generative. And so when was Google cheaper? In 2005 or 2020. And the answer was it was actually cheaper in 2005. You just had to do the work. You just had to work out the network effects would kick in and that will be only one search engine and work your way through that. And you learned a lot over that timeframe about what could happen in the future. [00:22:32][50.4]
Alec Renehan: [00:22:33] Yeah, well, we're speaking a day after Microsoft reported that quarterly earnings and the operating leverage that they are showing is just unbelievable. The amount of revenue that's flowing to that bottom line is pretty crazy at the moment. [00:22:44][11.8]
Bryce Leske: [00:22:45] So, Equity Mates, we'll take a quick break to hear from sponsors. So, Nick and Rory, it's, I guess, a good time now to head to the Hearts and Minds conference, which, Nick, you are going to be involved in this year as a conference fund manager. And we're very much looking forward to seeing the pitch. We will be there. So say no pressure. I guess. Let's start at the beginning. And I know you have a few words to say here as well, but why is it important to you, Nick, for you to actually be involved in something like this? [00:23:14][29.3]
Nick Griffin: [00:23:15] From our point of view? I mean, obviously, we definitely want people to invest. So GDP is made up of consumption plus investment plus government spending. And so you want people to learn how to invest. Investment is a very important part of the economy. The more people who learn and understand how to do it, the better job growth will be in, the better. Our quality of life will be for everybody. And then our hearts and minds brings to that equation is not only promoting people to invest, but also promotes redistribution. So to great causes along the way, which is, you know, the capitalist system inevitably creates inequalities. And this is your chance to to try to help with redistribution as well. And I think the guys do a great job with that. So there are two main reasons why we like like [00:23:54][38.6]
Alec Renehan: [00:23:54] Rory Nick Pitch last year and we'll get into what he pitched. But why did you extend the invitation back to him again? And I guess more and more generally, I imagine it's a difficult process to actually determine who gets to pitch. There's so many good investors in Australia. So how do you navigate that? [00:24:10][16.3]
Rory Lucas: [00:24:11] Yeah, well, we got Nick back because we are a fantastic investor. As you can see, Nick is clearly very intelligent, as we've just been all been listening to for the last half an hour. He's a fantastic presenter as well. If you're going to have a conference, you have to be able to present well, there can be the really smart people who are introverted and don't speak well in public. Nick's not one of those. Nick speaks fantastically in front of a thousand people, and he's clearly very intelligent in terms of hearts and minds. One of the important things is that you stand up and you pitch the stock. But because we invest in it for the next 12 months, you're in it for the next 12 months. So you need to remain engaged with management. And Nick has been fantastic with that. Yeah. So for us, it's a privilege to have someone like Nick in our suite of conference presenters. And the other thing that I just wanted to say was that fundamentally hearts and minds doesn't exist without our fund managers. We've got our core managers and we've got our conference managers. These guys are the guys that recommend the stocks for our portfolio so that we can invest in them without stock recommendations. We've got nothing and therefore shareholders don't have the returns that they've achieved in the last couple of years and the beneficiaries haven't got the donations that they've received. So I just wanted to make sure, Nick, you and all of our other managers understand how much we appreciate your contribution to hearts and minds. [00:25:30][79.1]
Alec Renehan: [00:25:31] Yeah, it's an unreal thing that you're doing, Nick, and that the other managers are all doing. Roary, you mentioned there it's not just a stock pitch and then all the managers go their separate way. You don't talk for another 12 months. It's an ongoing process of engagement throughout the year. And it would be interesting to hear you tell us a little bit about that, because you're right, like the company is constantly evolving and changing and things are constantly happening. So what is that process like and how hands on are the managers and how hands on are you throughout the year? [00:26:00][29.1]
Rory Lucas: [00:26:00] Well, as I said, it's the fund managers that recommend the stocks. We have an investment committee which I report to and I recommend which stocks get pitched. Generally, all of them will be put in the portfolio unless that we can't execute them because they're on an exchange which doesn't exist. That isn't [00:26:17][17.1]
Alec Renehan: [00:26:18] That was what I was going to buy stock exchange that didn't exist [00:26:22][3.9]
Rory Lucas: [00:26:23] or that it's not liquid enough for the size of the positions that we need to deploy our capital with. As Nick said, a lot of stocks can and do go wrong. And we have the highest conviction ideas from a fantastic set of managers. But sometimes they can go wrong. And so, as I said, it requires the engagement for the twelve months. Fortunately, since Hearts and Minds began as a listed investment company, most stocks have performed well. So it's more been about when do we take profits? And like you guys were asking me, how do you exit a stock? So that's where I come in interactions with Nick and all of the other managers, because I've got one of their stocks in our portfolio to manage. But they've got their 30 to 50 stocks in at least one of their portfolios. And Nick manages multiple portfolios. So he may not have seen a trade desk move as quickly as I might have seen it, because he's looking at a whole lot of other things. And so I'll be in touch with Nick. You know, if something has happened in the stock or if he has any concerns with any upcoming events like quarterly reporting seasons. [00:27:20][57.1]
Bryce Leske: [00:27:21] Erm, so, Nick, you're coming off a stock pitch that's up hundred and fifty per cent off the back of last year's conference. And you've just heard that Rory generally accepts all stocks into the portfolio. Are you feeling confident about your pitch for 2020? [00:27:33][12.5]
Nick Griffin: [00:27:34] Yeah, I think we have to. The targets that I think was a good idea, but was one of those ones where the P multiple was very high. So we had to really get the valuation and just believe in a much longer term. And that ultimately, Ben. When you're looking at a 12 month horizon, that means it can you know, it can go wrong, you know, they don't need to miss one quarter first for the stock to go down. But the long term thesis would be fine this year. Got just as good a long term thesis, but it's cheaper. So it's a little bit more undiscovered. And so there's a little bit more downside protection there than there was, say, on the trade desk. [00:28:07][32.9]
Bryce Leske: [00:28:08] So we were talking about this with Rory when we had him on the mindset that you need to take into this, given that you're pitching a stock for 12 months and also that we're about to head into a U.S. election, we've got a potential vaccine announcement maybe within the next trainspotters to try to get so much going on. Are you expecting or do you factor in any of these potential catalyst events when you pitch for this next 12 months? [00:28:31][23.5]
Nick Griffin: [00:28:33] Probably not those ones, but we have looked at things like capital markets and stuff that we expect the company to to to announce some new stuff along the way. But those ones know, you know, those are the stuff. You know, if you're worried about that stuff, you would never actually pick the stocks were pitching. You got to pitch them on their own merits and hope that applies up. And the only bad bit doesn't play out within 12 months. Well, sometimes it doesn't. So I'll give you an example. I pitched to Amazon the first year and Amazon went home for seven years. It's the biggest position, the fund. It's probably my all time best stock. You know, we've made well over 10 times our money on the year that we held. It was the worst year it had, I think it about 18 percent for something. And so that was a little bit frustrating, but still a [00:29:21][48.6]
Rory Lucas: [00:29:21] pretty good return. It was, like I said, every time. [00:29:25][3.5]
Nick Griffin: [00:29:26] Yeah, but it's put on like 60 the year after that. And then another issue this year. So that was a little frustrating. So I went for the safe option, thinking that'll make them a good 30, 40 percent. And it happened to put it was the year that Jeff Bezos got divorced and all these other things that I really as I said, that's new it's really the 12 months, the rest of it. Now, we don't look at that closely. [00:29:48][22.0]
Alec Renehan: [00:29:49] We've mentioned the stock a couple of times, the trade desk, it trades on the Nasdaq under the ticker today. It would be great if we could firstly get you to describe the stock and then we might get into your thesis for the stock. But, yeah, to start with, for people who've never heard of this company before, can you tell us what it is and what they do? [00:30:07][17.9]
Nick Griffin: [00:30:07] Yes. To put simply, it's a demand-side platform for programmatic advertising. So so it put simply, you know, those ads that follow you around the Internet. Yes. Those are really irritating. Yeah. Follow your podcast. Exactly. That's them. And so it's a previously fairly unloved industry. But as you would know, you know, you're doing a podcast right now and you'd be selling the ads for this podcast into an exchange. And depending on which country they're listening to it, you would get different ads. And that's what the trade discussions facilitate. It's a platform that allows people to buy ad inventory all over the world. And ultimately, it's a way of amalgamating the non walled garden. So you've got Facebook and Google are what we would call the walled garden. So you have to deal with Facebook if you want to advertise on Facebook and everyone else is in the rest of the normal governance and trade distance, just as a really good job of amalgamating all that inventory for advertisers to use. [00:31:02][54.2]
Bryce Leske: [00:31:02] I imagine that there's quite a number of companies that are playing in this space. You mentioned the stock part of your process is identifying the area of growth and then thinking about what companies are going to be the number one or two in that area. What is it about Trade Desk that makes it sit in that top one or two? [00:31:19][16.3]
Nick Griffin: [00:31:19] Yeah. So the clever thing they did in Jeff Green, the guy who runs it, he'd already sold a couple of ADTECH businesses prior to setting up the trade desk. He just made it a buy a platform. It works more like a Bloomberg screen rather than a return on investment products. And most of the products in the market are like, you pass this and it goes into a black box and we'll get you that. He just provided. It's actually just a piece of software that allows people to pick the inventory they want to manage. They're our allies. And so if you go to an advertising agency, you know, there's a trading desk now, hence the name the trade desk. And so you should think of it a bit like a Bloomberg terminal to how you access the advertising markets around the world. That would say a clever nuance. And the reason why we pitched it last year and the reason why it's worked so well is because all this new inventory came to market. And so we just talked about inventory and podcast. But the big inventory that came to market was all the direct TV. So Digital TV took off Disney plus launched peacocke launched stand. All these other Netflix competitors came along and a vast majority of them are ad supported, you know, in every sport in the world started doing their own streaming platform that ad supported. And so instead of just being banner ads on the Internet, it suddenly became audio ads and TV ads. And so they basically got to work their way into the largest pool of advertising inventory in the world, which is television inventory. And the trade desk became the vehicle for people to do that. And so that's why we pitched it last year, because we knew that change was coming and that's what happened, which is good. [00:32:41][81.8]
Alec Renehan: [00:32:42] I actually watched your pitch. We should give a plug if people want to say it on the Munro Partners website. You guys have posted it this so people can watch the full hearts and minds. Twenty nineteen pitch there. You had this great chart that had the rise of digital advertising in the rise of Facebook and Google and then this programmatic section. Then you basically showed how all the offline advertising was going to become digital and a lot of it was going to become programmatic. It was a good shot that really made that thesis very clear. And it seems that it's playing out. [00:33:15][33.3]
Nick Griffin: [00:33:15] Yeah. Yeah. So what we said it was the next big winner in digital advertising. So that same thing since that got us into Google was the same thesis that got us into Facebook. And then the last thesis is how does everyone else go digital? Will they need it amalgamate and that amalgamate, we think. Will be the trade desk and the markets so far, Greece doesn't mean it's going to play out that way, but that's what we think. [00:33:38][22.4]
Alec Renehan: [00:33:38] We mentioned that the stock's up 150 percent since you pitched it. Unfortunately, though, it's Abida was down about a quarter. I imagine that was a bit Covid related. It's also trading at a very high Payet. I just looked at it before. I think it's two hundred and forty nine price to earnings ratio. Not so. So I guess now in where are we. October 20 20. Does your thesis still hold? Are there any caveats or updates to the thesis or how are you thinking about the stock now? [00:34:07][29.1]
Nick Griffin: [00:34:08] Look, I think what we should have had a market cap of around eight billion dollars and now it's sort of in the mid 20s. Ultimately, you know, this could be a 50 to 100 billion dollar business at some point in the future. But we'd argue it probably has got a little bit ahead of itself. You know, we have advised Rory to bank the position before the results next week just because it's only three weeks to go and he has to bank them all anyway. So it's probably a bit of a ahead of itself. But ultimately, it's executing along its trajectory that I talked about earlier. And so if you did hold it, there's no reason to sell it today apart from, you know, short term volatility. It has it continues to execute along the trajectory we think might be a bit ahead of itself at the moment. But ultimately, there is a destination that suggests it could be bigger in the future, [00:34:49][41.3]
Bryce Leske: [00:34:50] five or 10 times bigger. Rory, it must hurt to have to get rid of it. [00:34:53][2.9]
Rory Lucas: [00:34:56] Like I said, we were happy with 18 percent return from Amazon last year to get 150 percent sure we're happy with that 12 month return. I know. But yes, it did set a little bit like DocuSign. [00:35:06][10.7]
Bryce Leske: [00:35:07] Yes. [00:35:07][0.0]
Alec Renehan: [00:35:09] Jeez, you guys are going to be spewing if they come out with a good earnings result next week. [00:35:12][3.3]
Nick Griffin: [00:35:13] Yeah, I think the result would be fine. I think the result will be fine. But I mean, look, it is it is you know, when we set a price target for this, the five year price target was six hundred dollars and it's got there. And one, you know, admittedly and their business, as you point out, is actually got worse this year because of Covid. But but the digital TV things definitely happening, the elections happening. They are executing. But I would argue I agree the valuations are a little ahead of itself, but there is no reason to step off it in. If you if you take a three to five year view. [00:35:41][27.6]
Bryce Leske: [00:35:41] So Equity Mates if hearing about a stock that's gone up 150 percent and hearing from Nic hasn't excited you enough, the good news is that we have another 25 tickets available for the Equity Mates community to attend the Sewn Hearts and Minds conference. And the better news is that that is at a 20 percent discount. So for 400 bucks, you can join the already twenty five plus Ren in ISO twenty seven, whatever it may be, Equity Mates who who are going. And you two can be hearing from Nick and the other fabulous fund managers who will be speaking on the day. Don't forget, Bill Ackman will be talking. So it's a pretty phenomenal opportunity to do so. Head to Son and Mind website. We'll include that in the note. [00:36:24][42.8]
Alec Renehan: [00:36:24] Sewn hearts and minds and hearts and minds, will you not? [00:36:30][5.4]
Bryce Leske: [00:36:30] I'm not going to worry about spelling it out. We'll just make sure we include it in the show notes and use the code HM1 mates to receive twenty percent off. It's an awesome opportunity. So yeah, [00:36:40][9.2]
Alec Renehan: [00:36:40] we should, we should clarify that we've got twenty five tickets, twenty percent off. There are still other tickets that aren't discounted. So yes. Yes. Even if you can't get the discount it's still worth going. Absolutely. So make sure you jump on and get your tickets. Now the conference is on thirteenth of November, so make sure you get your tickets before then. [00:36:58][17.8]
Bryce Leske: [00:36:58] The good news as well is that the content will remain available 48 hours after it all actually occurs. So if you can't make it on the Friday and take the day off, although we recommend that you take [00:37:07][9.4]
Alec Renehan: [00:37:08] the day off, [00:37:08][0.3]
Bryce Leske: [00:37:09] you have the weekend to watch it. Before we jump to final three, are there any other big guests that might be coming, Rory? [00:37:14][5.0]
Rory Lucas: [00:37:15] Yeah, there is one. We've announced our second keynote speaker just this week. His name's Scott Galloway. Professor Scott Galloway. He teaches at the I'll get this right, the New York University Stern School of Business. Oh, great. And as I said, is professor of marketing. And we've heard a lot about digital marketing and advertising today. So it'll be fascinating to hear an academic perspective on marketing and a whole lot more, especially straight after the presidential election is hopefully decided. [00:37:43][28.3]
Alec Renehan: [00:37:44] I'm to see you've got two Americans speaking the week after the election. That's yeah, it's going to be interesting. [00:37:49][5.0]
Bryce Leske: [00:37:49] All the information is in our show notes. Please do join us and everyone else at the conference. It's going to be awesome. So Ren final three for Finnick. [00:37:56][6.6]
Alec Renehan: [00:37:56] Yeah. So, Nick, we do always like to end these interviews with a final three questions before we do. If people want to follow you online or read more of your work or anything like that, is there any particular website or any social media channel they should follow you on? [00:38:11][14.5]
Nick Griffin: [00:38:11] Yeah, so thank you. So the Dollars website is full of lots of information in terms of those videos that you talked about. And so we encourage people we're very reasonably transparent about our ideas. We can't guarantee they're all going to work, but we're definitely transparent about the fact that that we will tell you about them. And then we have a YouTube channel also. And lastly, you know, a good opportunity to say we are quoting the. On the Australian Stock Exchange next week, so the fund is available on the ASX as of the second in November, and so it'll be quoted under the code and NAET. So if you want to invest in the point, you can just buy it on the exchange and let us do all the work for you. [00:38:48][36.3]
Alec Renehan: [00:38:48] Jeez, that's great timing for us to be having this conversation. So excited to see how it goes. [00:38:53][4.9]
Nick Griffin: [00:38:54] Thank you. [00:38:55][0.2]
Alec Renehan: [00:38:55] So we'll get into these final three questions. And the first one we always like to ask is, do you have any books that you consider a must-read? [00:39:02][6.7]
Nick Griffin: [00:39:02] Yes, I saw a question in the preview. And the sad news is I don't read a lot of investment books. We try to define our own style. I do read industry books like The Second Machine Age or things around all the optimization of robotics. And I strongly encourage people to read those from the experts, but I don't read many investment books. The other thing that are really important to read, and lots of people don't do this, but you should just read the conference call scratch transcripts. I mean, we're so lucky that, you know, the session at the Microsoft results just came out. You can read. He'll give you 40 minutes of his time. Anyone can get the transcript. Just read it. He'll tell you what's going to happen. And they've got the biggest CapEx budget in the world. And so they tell you what's going to happen. You pretty much know where the money is going to. You know where the money is going to go. You can work out where to invest. And so that's what we do, spend a lot of time writing. [00:39:48][45.4]
Alec Renehan: [00:39:48] That's such a good call, Bryce. And I often talk about how we can bring those conference calls and the transcripts and the audio when it's recorded more public because they are just such a good resource and really underutilized. But anyway, that's a conversation for another day. Yeah. The second question we like to ask is, what's your go-to source for investing and financial information? [00:40:09][20.5]
Nick Griffin: [00:40:09] Yeah. So that's a really around a network, really. I mean, so we generally have developed a reasonably good network of people we can talk to about new software products or new areas. It's reasonably obvious where to look. The hard thing is to find the winners. And so that's that's the network of people we talk to. And as I said, those transcripts, those are the main areas that we get. But but ultimately, you sort of like a super sleuth. You're trying to find all these different pieces of information from lots of areas to try to work out what's going to happen. And once you've worked it out, your job is just to work it out before everyone else does. [00:40:40][30.2]
Alec Renehan: [00:40:40] Yeah, yeah. And then the final question that we like to end these interviews with, if you think back to your younger self, when you were just starting out investing and getting your, you know, your Commonwealth Bank or your Telstra shares for the first time, what advice would you have for your younger self? [00:40:56][15.6]
Nick Griffin: [00:40:56] Just focus on this concept. A few winners and lots of losers, and to run those three winners for long periods of time, you do spend a lot of time finding one good idea and then trying to find another one. If that makes sense, you just keep going down a hole and sometimes you're better off just focusing on the one you've got and making sure it's bigger. But it's really around running. Winners and losers. The better you get at that, the more money you make. [00:41:19][22.6]
Bryce Leske: [00:41:19] Love it. I think, you know, some of the information that you've provided today has been refreshing. And I'm sure a lot of our listeners will have got a lot of value from it. Nick, so thank you so much for giving us your time this afternoon. We very much look forward to seeing your pitch in a couple of weeks time. And just a reminder to our Equity Mates community, you, too, can also join and watch next page. So thank you very much for joining us now. [00:41:42][22.6]
Nick Griffin: [00:41:42] Thanks very much for having me, guys. Really appreciate it. [00:41:44][1.7]
Bryce Leske: [00:41:44] Finally, as well, Rory, thank you for your time as well and for everything you're doing and hearts and minds. [00:41:49][4.3]
Rory Lucas: [00:41:49] No problem. I'm happy to be here. [00:41:50][1.0]
Alec Renehan: [00:41:50] Thanks, guys. [00:41:51][0.3]
Speaker 5: [00:41:51] Appreciate it for listening to Equity Mates investing podcast production of Equity Mates Media. Please remember that everything you hear in Equity Mates investment podcast with general advice on link content has been prepared without knowing the personal objectives, specific financial circumstances or calls. The host of Equity Mates Investment Podcast may maintain positions in the companies discussed before considering any investment. Please read the product disclosure statement [00:42:13][22.1]
Unidentified: [00:42:14] and consider speaking to a licensed financial professional. [00:42:16][1.9]
Bryce Leske: [00:42:26] Ren, it's not surprising news to the Equity Mates community that I have a real frustration with the fact that you only have one designer t shirt in your wardrobe, and that is the Equity Mates shirt. What are we going to do about it? [00:42:36][10.1]
Alec Renehan: [00:42:36] Well, I think, first of all, you should just calm down on worrying about what I'm wearing. But that is why I'm a big fan of expanding the Equity Mates Mirch range. So I have a few more options when I wake up in the morning [00:42:50][13.5]
Bryce Leske: [00:42:50] or in the perfect partner to expand our merch range would be square. Square is more than a little white credit card reader. They have the tools to connect every side of our merchandise business, even setting up our website. It's super easy to grow our business online. [00:43:06][15.7]
Alec Renehan: [00:43:07] That's right, Bryce e-commerce is constantly changing. You, as the self-described retail whisperer are all over that. We're going to bricks and clicks. We're going to e-commerce. Retail is a tough landscape that's constantly changing. And Square is allowing us to keep up with that changing shape of commerce and giving us the tools to sell, grow and thrive online [00:43:31][24.2]
Bryce Leske: [00:43:32] with powerful tools for e-commerce payments and the ability to future proof. Our merchandise business square seems to be the perfect partner Ren. [00:43:40][8.4]
Alec Renehan: [00:43:40] So get your business online today head to square dot com to see how you can grow more online. Do more, sell more, grow more online square dotcom. [00:43:40][0.0]