Expert Investor: Owen Raszkiewicz – Software and Small Caps

Bryce: [00:01:28] Welcome to another episode of Equity Mates, a podcast where we help you learn to invest in 45 minutes or less. 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, bro? [00:01:42][13.9]

Alec: [00:01:42] I'm very good. Bryce very excited for this interview. One of my favourite voices in the Australian financial landscape after you, of course. So, yeah, I'm very excited to get stuck into this interview. [00:01:52][10.4]

Bryce: [00:01:53] Yes, likewise. It is our great pleasure to welcome Owen Raskiewicz to the show how I own great sellers. [00:02:00][6.9]

Owen: [00:02:00] Thanks for having me on again. I've got to say, favourite voice as well. Yes, I'll take it. [00:02:05][5.2]

Alec: [00:02:05] I've really pumped you up here, so don't disappoint me now. [00:02:08][2.7]

Owen: [00:02:10] No pressure. [00:02:10][0.2]

Bryce: [00:02:11] In fact, I don't think I've ever heard you say any favourite voice other than Owen. [00:02:14][3.1]

Alec: [00:02:14] So if I if I said everyone was my favourite voice, then not everyone would be my favourite loses meaning. [00:02:19][4.9]

Bryce: [00:02:19] Just like you say, every episode is exciting. [00:02:21][1.5]

Alec: [00:02:22] That is true. I love doing this podcast, so I'm always excited for these interviews. [00:02:26][3.8]

Bryce: [00:02:27] So for those of you who have never come across Owen before, he's the founder of ROC Australia and lead investment analyst for Raschke Invest. His members only share research service. Prior to founding Ross, Owen was an investment analyst at the highly regarded managed funds research business Zenith Investment Partners, and also a writer and analyst for The Motley Fool Australia. He is also the host of two podcast series, The Australian Investors Podcast and the Australian Finance Podcast, two of Australia's top drink investing and Finance podcast. So definitely go and check them out. They are a fantastic listen. Owen also founded Rask Media, which is an investment news website attracting many thousands and thousands of people a month. And again, we recommend you go and check that out. [00:03:14][47.3]

Owen: [00:03:20] I feel like I could've just said yeah, I just invest. And I started a few things [00:03:24][3.7]

Speaker 3: [00:03:25] and now [00:03:27][1.6]

Bryce: [00:03:27] I look, it's incredibly impressive what you're doing. We've been admiring your work for a long time and you have obviously been on the show in some capacity before you've come to our live events. So, you know, it's it's great to have you on in its entirety. In a full episode, we realised we actually hadn't had you on [00:03:43][15.6]

Alec: [00:03:44] hold you before you presented our live shows, but we realised we'd never actually interviewed you. So well done. A full, full episode. So we're excited to get stuck into this because you're doing some. Thank you. Doing some interesting things at the moment, particularly in the small cap space, which we're excited to get stuck into. [00:03:59][15.3]

Owen: [00:04:00] Yeah, thanks, guys. I just I haven't said it, but thanks for having me on. It's always a pleasure. [00:04:03][2.8]

Alec: [00:04:04] Before we get into the mate of the interview, your background and some of the stuff you're doing today, we do like to start with a guy overrated or underrated. So we'll throw out some different themes and stocks and ideas and get your thoughts on them. And we'll start broad and we'll start overseas in the market. That's capturing most of the headlines at the moment. Overrated or underrated? The S&P 500 index? [00:04:26][22.3]

Owen: [00:04:27] Underrated. Oh, well, I was going to say I love this little segment, by the way. But I just think, you know, businesses with all the free money that's getting poured into the system, it's pretty easy to say where it's going to go. And that's going to go into more businesses and good companies. So underrated. [00:04:42][14.8]

Alec: [00:04:43] It's going to go into multitrillion dollar market cap companies that say, [00:04:47][3.6]

Owen: [00:04:49] yeah, I love free money as much as the rest. [00:04:50][1.3]

Speaker 3: [00:04:50] Yeah. [00:04:50][0.0]

Bryce: [00:04:51] And bringing it back home then overrated or underrated, the ASX 200, [00:04:54][3.2]

Owen: [00:04:55] I'd say the same again. I probably say this all the time, but again, like this so much stimulus and there's so many good companies in Australia, which I'm sure we'll get to if I'm going to put my money anywhere, it would be insurance companies. So underwrite it. [00:05:07][12.2]

Alec: [00:05:08] Well, I'm glad that you said that, given that both you and Bryce and I here have dedicated our time and our working careers to investing. It would be worrying if you said you're actually going to put your money in property or something like that. [00:05:19][11.5]

Owen: [00:05:20] I will actually. Funny you mention that we actually settle on our first house next week. [00:05:23][3.6]

Speaker 3: [00:05:24] So they got very brand. Still very exciting. [00:05:29][5.5]

Owen: [00:05:30] Yeah, we'll get to that show. [00:05:32][1.4]

Alec: [00:05:33] So you mentioned the stimulus that was saying around the world. So we'll ask overrated or underrated the Federal Reserve's response to covid-19? [00:05:41][8.4]

Owen: [00:05:42] Oh, I mean, I'm not much of a macro thinker, but I'd say underrated. I mean, I think that's gonna have a huge impact, enormous amounts of money with interest rates so low, it's going to inflate asset prices, in my opinion. [00:05:54][11.3]

Bryce: [00:05:55] Speaking of assets, overrated or underrated Bitcoin? [00:05:57][2.6]

Owen: [00:05:58] Oh, overrated. I'm not a crypto guy, you could say. But yeah, I probably it's one of those where I should be sitting on the fence because I don't know enough about it. But yeah, I'd say. overrated. [00:06:06][8.2]

Alec: [00:06:07] So another asset class that has done very well in this recent Covid period is all precious metals. But we'll ask you specifically about gold. So overrated or underrated gold? [00:06:17][10.3]

Owen: [00:06:18] I'd say way overrated. I think, you know, there's been some people recently noting that Buffett, for example, has bought shares in a gold company and they've. That mean that he thinks gold is a good investment, you don't have to know that a product is actually worthwhile to make money from the company that provides it's a good example would be Blackmore's here in Australia. Like I honestly, I don't think they vitamines have any efficacy, but it's just like a good for you vitamins. And that doesn't mean that the business is brilliant. Right. But the actual things that they sell doesn't necessarily mean that they're not necessarily good for you. But I think people making the distinction that gold is suddenly good because Buffett's buying it is a little bit happy for me. And just the metal cost you money to store rather than paying your dividend. So that's another thing, [00:07:03][45.0]

Alec: [00:07:04] that attitude of buying a company, even if the products they sell a terrible is prices approach to tobacco companies. [00:07:09][5.2]

Speaker 3: [00:07:10] Not true. [00:07:11][0.5]

Owen: [00:07:13] Well, this is funny, guys, because I read an article from Morgan Housel who worked at The Motley Fool about four or five years ago, and he went back and looked at the best performing company over one hundred years. And it was a tobacco company. Even though there's all these rules and regulations, you know, it kind of proves that idea that even if it's bad, it can still make a lot of money [00:07:30][17.5]

Bryce: [00:07:31] overrated or underrated, the wax stocks here in Australia. So you've got wise tech, APEN, Afterpay, Altium, Altium and zero. [00:07:41][9.8]

Owen: [00:07:42] Good and bad in there. So I'd say about right. I think some of those companies, for example, Wisetech I'm not in love with Afterpay pretty much the same. But some of the other names like Apple is a really interesting business and I own shares in zero. So I've got a I've got to wave the flag to that one. [00:07:55][13.1]

Alec: [00:07:56] What did you think of Altium's recent earnings report where the CEO started using cricket analogies, talking about needing to take 20 wickets and all of those like is this Justin Langer? [00:08:06][10.2]

Owen: [00:08:07] Let's to admit there's been some really interesting things coming out of reporting season, some crazy things. Yeah, I just think these businesses are pretty resilient. So cricket analogies are not I think it's I think it's a pretty good business. [00:08:19][12.4]

Alec: [00:08:20] So last one and this will be pretty close to your heart, given you're just settling on a property overrated or underrated, the Australian residential property market overrated. [00:08:30][9.8]

Owen: [00:08:31] I mean, as markets with markets. But if I'm going to give you a high conviction answer and I have to go one way or another, I'd say overrated. We didn't buy the property. I would consider what you call an investment grade property. So I think it's going to make us money. But at the same time, I don't see property as kind of like a wealth creator in itself. It's just benefited from easy money and inflation and wages. Yeah, overwrites. [00:08:51][20.0]

Bryce: [00:08:51] That's a nice will own. Before we jump into reporting season and some of the smallcap work that you've been doing, we want to just touch on your background a little. We love hearing the story of everyone's first investment so you're able to share yours and perhaps any of the major lessons that you learn from it. [00:09:06][14.9]

Owen: [00:09:07] Yes. And so the first company I bought shares in was NAB. I created a brokerage account and I looked around all the things and thought of all the companies that I knew. And I started plugging that into my time. It was CMC Markets account putting in Apple, [00:09:19][12.7]

Speaker 3: [00:09:20] Google, [00:09:20][0.0]

Owen: [00:09:21] Facebook that became a bit later. But all these companies that you know and use every day and then I realised none of them were showing up. So, oh, well, maybe this is like maybe this isn't like the place to buy those things because I didn't realise you have to, like, kind of separate accounts sometimes. Yeah. And I end up buying NAB shares and it didn't really do anything. It kind of just sat there for about a year. But there are two other examples I just want to quickly touch on. One was Nyama back when I was like probably two years into my investing, maybe three years, and I put about five to ten thousand dollars, which was a lot of money for me at the time, into the AMAP, about fifty cents. And then I sold it. I reckon it would have been like a year later for the the same price or maybe even less. But then you fast forward five years, maybe five to ten years now and it's the two Dollars fifty. So I got bored with it and that's why I sold it, which is a crazy thing to say now. And the second one was a company called LNG Ltd, which I to believe went to administration about three months ago. So I bought two and a half grand at this company when I didn't know what I was doing and I bought it below 30 cents and then I sold it about 14 months later for four point fifty. [00:10:25][63.5]

Speaker 3: [00:10:26] So that's 20 grand. So the lesson is, [00:10:30][4.4]

Alec: [00:10:30] don't know the companies you're investing. [00:10:32][1.3]

Owen: [00:10:34] Totally. So this is what happened. I went in, I got some research from this broking house and I went for the name that looked like it had the most discount to the analyst price target. So, like, we all know how conflicted that is nowadays, but like, it was like thirty cents and I had like sixty cents price tag on my wall. That's like one hundred percent. That's easy money. Anyway, it got swept up in all these hot so I just got lucky on that. And then I got Wijaya confident a started trading options and warrants and all this weird stuff and I ended up probably losing all that money that I had. It was probably a bad thing for me early on in my investing career. [00:11:07][33.1]

Alec: [00:11:07] And so from those early investments to now, have you developed a personal investing philosophy that you apply when you're investing personally? [00:11:15][8.2]

Owen: [00:11:16] Yeah, totally. So I spend a lot of time on this, as you guys are privy to the I guess the investing process is about the people. You spend a lot of time around them and you can think of some ways that you can apply it yourself and. I've been constantly refining this idea is to say you guys can put on the show not to listen to us, but this basically 10 rules that we've come up with at our company, Rescue Australia, and I'll just rattle them off. First one is capitalism works. So the reason why it works is that companies and entrepreneurs create value for society because they solve problems. And the shareholders that support people to do that should be rewarded. So you should be finding companies that are solving problems and try to make money from that. Second one is the stock market is a vehicle for transferring the wealth from the impatient to the patient. You guys would probably be familiar with that from Warren Buffett. Third one is I believe that investing can be summed up in two words and that's accumulate assets. So not like buy low, sell high, but just buy and buy again. It's a really important distinction for people because we're taught from such a young age. Buy low, sell high. But what about if you just buy low and then buy again and again? If it's a good asset, don't sell it. Number four would be fewer investment decisions often result in better decisions. And I've found and we did this as a study when I was at Zenith, the fund managers that had fewer positions in their portfolio tended to outperform those that had more to say, more more than 30 positions. They tended to do two or three percent better every year over a five year period. So that's quite meaningful over a long period of time. Number five, I think diversification is really important for beginners. And if you've got index funds and that type of thing in your portfolio, that's why you would have them then I think the diversification. But number six would be that for professionals and people who kind of know what they're doing, the evidence would suggest that after, say, 10 or 20 individual positions, the benefits of diversification go away. So I try and structure my own portfolio as a really high conviction portfolio. So I'm prepared to put a lot of money measured in percentages of my portfolio into an individual position if I think it's a good business. And I think that's where I differ significantly from most people because I would be prepared to put a lot of my money in an individual position. Number seven, and this is an interesting one, which I'm guessing you Covid offer to listeners sometime or spoken about it is that less than five percent of companies on the stock market are responsible for all of the stock market's excess return. So that was from a study from Bessen Bonda. And it's been repeated a few times and it shows that this is a very small cohort of companies that produce extraordinary returns. But then the vast majority. Ninety five percent, in fact, just average or worse. So if you think about that, you're going to be really picky. Number eight would be that there are three investing edges, one being behaviour. And I'm going to be analytical ability will be the final, the information. And so what I mean by analogy is like if we all do the average thing, we're all going to get average results. You've got to do something different. And what we found is that typically there are three ways that you could do better if you behave better, if you have superior analytical ability or if you have better information and you hear of high frequency traders and that type of thing. Number nine would be most people. It's going to be a shocker for you guys. But very controversial is I think most people shouldn't invest in individual shares, especially those who lack the time and the inclination or curiosity, because I think the secret to investing well is curiosity and tolerance. And if you don't have time, there are other ways you can invest like index funds, ETFs, etc., and maybe a few individual shares here and there. But if you're starting out, perhaps like the very beginning, you'd be wise to, I think, diversify a bit, take your time and really ask yourself if you are curious enough to learn about investing. We spoke about at the top of the show, you get kicked off the horse a few times, right. So you could have the curiosity and the willingness to get back up on that beginning and go around the number 10 would be you don't have to make a decision. You don't have to choose between being an active investor and picking individual shares or being a passive investor in investing in index funds. And I spoke to Vanguard and the guys from Beta shares all the time. And they're doing great things for people because they're making it easier for people to invest well. And it's like that the little girl and the Tortola or the talk about whose account I can't remember the Spanish right where they are, which is like the hard shell or the the the flatworm. [00:15:24][247.9]

Speaker 3: [00:15:25] So what can we get? [00:15:29][4.2]

Owen: [00:15:29] And people this is what you call a false choice. And people kind of like they wave the flag so that whatever the company they're working for or whatever at any point in time. But the reality is you don't have to choose. You can do both. So I've got ETFs and I've got index funds and I've got shares. I've got it all I just accumulate. So I know this is going on for a while, guys, but I just want to sum this up with five things that we look for when we're looking at individual shares. Number one, the company must have a competitive advantage. Number two, management must be aligned. Like if someone was going to invest in my business or I was going invest in your business. I want to make sure that you guys own shares in the company Iran and are aligned with me for the long term. Number three is that it must be within our circle of competence. So you never see myself or anyone in my team make a recommendation to invest in resources or biotech because we just don't have expertise in that field. Maybe if you're like a doctor, you might invest in those types of businesses like a biotech, but we're definitely not going to do that. Number four is the business. Must operate in a growing industry, or at least one that's like structurally important. So a good example of that would be like cloud stocks, which I'm sure will mention a few of them. But companies that are involved in the cloud and working, we think that's a huge industry. And so we want to be invested in that. And the fifth one, which is a bit different, but also important, is that we also want to make sure that the businesses that we invest in are reasonably valued. So we're not bargain hunters. We're not looking for to buy Woolworths on the dip, but we do need to have kind of a sanity check in there. That's the one. That's a lot to take in, guys. All of that stuff is a lot to take in. So I'll send you a note so you can maybe include it yet because it's so much in net untack. It could be an episode in itself. [00:17:05][95.3]

Alec: [00:17:05] I think that's great, though, like all of those points really resonated. And I think they're all really important. And it probably gets to a broader point that your investing philosophy doesn't need to be, you know, a pithy six word slogan that encapsulates everything like investing is complex and it's a lifelong journey of refining and learning. And I think it will definitely include that in the show notes, because there's a lot there that I think a lot of people should really think about and take in and and apply to to their own investing philosophies. [00:17:36][31.3]

Owen: [00:17:37] So I think with investing, there's a book that I'll recommend to your listeners, which is Investing The Last Liberal Arts by Robert Jay Hagstrom. And he suggests that you should think about the share market. And this is very philosophical, by the way. It's kind of like a biological thing. So through the through the lens of a scientist or someone like that who thinks about an organism that grows and moves over time. So, for example, the stock market today is very different to the stock market 10 years ago. It's very different to one hundred years ago. And that's because it's constantly evolving. And what I say with investors and particularly really good investors, you might say, investors that have a really good five year track record of tenure, track record, but then in five or 10 years from now, they're actually they've got a really poor track record. And I think that comes from their inability to adapt to different environments into different companies and different opportunities. And I think if you kind of take it as you being flexible in your philosophy and you're willing to change when you think it needs to change, then I think you're going to have a better time investing really well over a long period of time. [00:18:36][58.8]

Alec: [00:18:37] Yeah, for sure. Now and we are obviously in the middle of reporting season. We're recording on Friday, the 21st of August. A number of ASX companies have reported, as well as a number of companies reporting quarterly results overseas. So I guess we'll start at a high level. We're obviously seeing a lot of earnings results being impacted by covid and companies talking about what that has meant to their businesses. So how are you thinking about this reporting season and what maybe some of the things that you've learnt and that you're applying to your investing strategy? [00:19:08][31.3]

Owen: [00:19:09] Really good question. And it's just I love that we can talk about this now because I think last time I was on the show, it was the depths of the Covid crash. [00:19:17][7.7]

Alec: [00:19:18] Yeah. That was we're calling people just to try and understand what the hell is going on. [00:19:22][4.2]

Owen: [00:19:23] Yeah. Yeah. And that was great. And that's the the right way to think about it is to just hear from people and get some of the, I guess, opinions under a lot of uncertainty. And to answer your question, Ren like my strategy has not changed from, you know, from the 30000 foot view. It has not changed. You know, what I think is important is that people need to understand that when you invest in the share market, you're investing in something that is in the future. So what I mean by that is you get the future profits and the future cash flows of that business. That's what you get. And sure, one year might change or two years might change. What happens to the cash flow of a company. But sure, you guys are well aware of this. When you discount profits back from the future or cash flows, what you find is that over a very long period of time, any one individual year tends not to have a great impact on the valuation of a company. You just a forecast as we go, but I haven't changed any of it. The one thing that I would say in ASX reporting season in particular is that it's become obvious that many companies in Australia, whether they are small businesses like mine or the multibillion dollar businesses like BHP or what have you, many of them have benefited from stimulus. So when you are looking at results, even overseas to extent companies like Apple, for example, what you can find is that some of those companies have kind of artificial cash flows. So they are being propped up by government stimulus job keep here in Australia. That can impact your valuations. So that's a big deal. But some companies aren't telling us whether they've benefited from those from the free money or whether they haven't or what kind of stimulus they've received. I think the bigger picture, the idea of investing in great businesses is still just as relevant today as it was three months ago. [00:21:05][102.5]

Bryce: [00:21:06] It's going to be interesting when these businesses try to cycle the numbers next year, particularly some of the retail businesses. I mean, you think about Coles and Woollies and the ridiculousness of the numbers that they're pumping out. Trying to cycle that again through the next year will be very interesting. But is there anything that's really surprised you this reporting season and I guess. A follow on for that is what have you been looking for from businesses who have been reporting given what's been going on? [00:21:32][25.9]

Owen: [00:21:32] Great question. I think the waters are also muddied for bigger companies like, say, Woollies and Coles because of changes to leasing and accounting standards this year, which has had a significant impact on how we calculate things like cash flows and debt. And so I think what has surprised me is just how bad some of the poor quality companies have performed. So companies like what I would say by poor quality or low quality is a business that has really narrow margins. So they're not really able to weather a marginal impact. This is an example, let's say, like Woolworths, if it can earn five percent profit margins versus a company that's like a technology company that owns like a 30 percent profit margin. What you find is even if revenue falls a little bit, if your business is only earning five percent margins because it's got high fixed costs or what have you that fall in revenue, you can actually have a big impact on the margin and the five percent can effectively disappear. This is a company that's more nimble and has wider margins that can sustain that and still be profitable and not need to raise capital and and that type of thing. So I was pretty blown away by how many companies needed to raise capital here in Australia. But other than that, I'd say the other thing that surprised me is how quickly the market has responded to pushing up the prices of really good companies and just hammering those that are actually really low quality with lots of debt, thin margins, those types of things. And that I thought when we spoke last time, I thought I had more time to act. I had about 30 companies on my watch list that a few analysts and I were going through. And we thought, OK, we've still got time to buy this. We haven't got enough clarity on that. So I'm going to wait about the time we waited on a lot of those opportunities that just flown away in real time. [00:23:13][100.8]

Speaker 3: [00:23:14] Yeah, yeah. [00:23:14][0.4]

Owen: [00:23:15] That's a good example would be impalements, which is the ASX listed payments. Well, kind of like fintech company. We were looking at that when it was just getting smart and we're thinking we could just put a lot of money into this and would probably make money, but we don't know for sure. So we'll hold off. And then by the time we got that clarity, we had already just flown away. But the thing in particular, Bryce, the thing that I'm really looking for and the thing that I was looking for then is the adoption curve for technology companies. So if your listeners are familiar with an adoption curve, it kind of looks like a bell shaped and it represents, I guess, how fast the people in society and the businesses adopt new ways of doing things. So it's a good example would be, you know, in the very early days, Afterpay was only used by people that were really focussed on like fashion or those types of online businesses. But now it's used by everyone and that's what we would call the majority. And so what you want to find is companies at the beginning of that journey when they're only the early adopters are using it. And typically those are people like engineers or like people that are like influencers really up to date with the latest tech and and what have you. But what we've found as a result of covid is it's brought forward all of the adoption. So a good example here would be Microsoft when they came out and reported, I think it was the March quarter to say they said they had five years of demand for their cloud technologies like Microsoft, three, six, five and all that in one quarter to five years of demand brought forward into one quarter. And that's incredible when you think about it. Another company that I own is called OCTA. It does online security for cloud connected devices. And it said the same thing. We've had five years of demand in brought into one year. And I think that's incredible because these companies have always been there. But it's taking something like this to push that forward. And we're still looking for that. We're seeing it in less obvious places now. So it's not just Microsoft and Apple. There's actually other businesses that are benefiting from this. So that's what we're looking at now. [00:25:10][115.2]

Alec: [00:26:34] So at this point, we've covered off your personal investing philosophy and some of your thoughts on the recent reporting season. Now we're really keen to get stuck into the work you're doing in the small cap space we've been watching from afar as you launched your Roski rocket service. Yes, pun intended there. And we're really interested to really unpack what you're doing and to to get some of your insights around the small cap space, because there's a lot of interest in that space and there's a lot of interest in companies that you're looking at. But I guess if we start at a high level for people who maybe aren't too familiar with the small cap space, haven't really doubled at that end of the market. Can you tell us why you find the small cap space so appealing? [00:27:48][73.4]

Owen: [00:27:49] Yeah, sure. So I want to put a caveat or disclaimer on this to say that when you get further down the market, you often find people who are willing to trade individual positions and then talk about them on social media or other places. And it could become pretty murky. You don't know where incentives lie. So just be warned that I am an investor in these companies, but I'm a long term investor. I'm not looking to hype anything. I want to say how fantastic any individual company is. But for me, small caps are a great place to invest because one, this is really important. There's often little or no analyst coverage of the companies. So if you were to go to, say, the Wall Street Journal website or you to go, you'll go to Bloomberg or wherever you go to get your information. And as analyst notes there, what you'll find is that a company like CBA, Commonwealth Bank of Australia, would have between 20 and 80 analysts covering at any one time. And so what insight I get on Commonwealth Bank versus the other seventy nine is probably not going to be that meaningful. So, you know, they probably found it before they've spoken to management and got a different insight. So again, this comes back to doing something a little bit different, not just being the average investor, I guess. So small caps are good because if there's no analyst covering them, then the chances of you finding something, a piece of information or a little edge that you get can often just be yours. And that's a great thing, because then you can build a thesis or build an investment strategy around that and and you can hold on and wait for that to play out. The second thing is that access to management is a lot easier. So for someone like myself or even any of your listeners, if you if you want to find out who's running your company, you can't just go to CBA and say, hey, Matt Coleman, who's the currency? Can you just respond to this short email? Three questions for me. You know, there would be 30 people between you and him receiving that email. But if you go to small companies on the ASX and what we mean by small companies is anything less than, say, 200 to 250 million, everyone's definition of what is a small cap varies, but I'd say less than two hundred fifty nine for a small company. If you go to the ASX announcements for those companies, chances are there's actually an email address on there. And half the time it is the CEO or it's like the CEO's assistant or whatever, and you can just email that person and just be like, hey, I'm looking to speak to you, blah, blah, blah. Can you put me in touch? Or here's a question I have. And the reason this is so important is because many people tend to forget there's actually a business behind a ticker symbol. And if you want to get the best possible clarity on what the business does, it's so easy just to hear it straight from the horse's mouth to speak to the manager and hear it from them fully prepared for that interview or that conversation, because CEOs are typically the best salesmen and women. So you've got to understand that they're looking to sell you on it. So that's one thing. The third one that I bring up is and it's pretty obvious is that people talk about upside in small companies. So if you're investing in Commonwealth Bank of Australia, it's one hundred billion dollar company. Let's say it's dominating in Australia. It's not going to expand overseas because it has no competitive advantage overseas. So the upside is pretty much what it can grow at, which is probably a little bit more than the GDP plus the dividend. But if you go down the small end of the market, there might be a company that's coming up with some new product or service, or it could already dominate its industry. But it's a very small industry now starting to branch out. And so you could get a company that, for example, is really good at something here in Victoria but hasn't expanded into the New South Wales or South Australia or wherever and is planning to do that. That's just a hypothetical example, but it gives you an understanding of it. The next thing is that and this is a crucial insight. And I think you guys are the same kind of train here with me is that people often confuse volatility with risk. And so what I mean by that is when you see the share prices bubbling up and down or sometimes bouncing up and down, people sometimes think down five percent today. Well, no, you know, that's just what we call volatility. The actual risk of owning shares in a company over the long term. Is it the company itself? Something happens to it. And what what you find is small caps. For example, one of the small caps that we had in our rocket service, it actually went up something like 35 percent in the wake of. What we've released the research and then the day before, it fell at twenty five percent for no reason, there was no news, it was just a random thing that happened that people would have been so scared off by that. But like I said, it's not so fun. It's been no announcement and everything seems to be fine. And so people tend to confuse that volatility and uncertainty with what is actually risky. And what's risky to a small company is things like if it's a really fragile business model, if it's not yet cash flow positive, you know, if it's in a space that you don't really understand, you probably shouldn't be going to. So these are just some of the reasons. But one of the risky things about small caps is that, well, there's a few, actually. First is that management teams can be dodgy and just self-serving. So you need to know where their incentives lie and be really critical of them. I read a company announcement from a buy now pay later small cap, and they said that market opportunity was four point five trillion dollars. [00:32:57][308.7]

Speaker 3: [00:32:59] That's bigger [00:33:00][0.2]

Owen: [00:33:00] than me. Like that's two and a half Australia's. So I don't get that. And so you see these promotional management teams and in this ad that a sucker people in because they want a higher share price so they can do the capital raisings, get their bonuses, etc.. So I'd say stick to profitable companies, stay away from industries you don't understand. For me, that's like biotech and resources and focus on companies that have positive cash flow, for starters, then dive into your deeper research and go from there. [00:33:26][26.2]

Bryce: [00:33:27] So speaking of research, you've recently written an article that listed 10 ASX listed software companies under a billion dollars. And we're interested in hearing a couple of the ones on that list that are tickling your fancy. But I was interested to start with, what is it about software companies that led you to, I guess, curated a list of 10 and go down that path? [00:33:52][24.9]

Owen: [00:33:52] That's a good question. This is just kind of like a mini series I did. I wanted to we got our hands on a whole heap of data of companies throughout Australia. And I wanted to go through the list and find companies that are specifically in the software and technology industries, because I think that they have the best chance of going on to return multiples of our money. And I'll get to why I'm used to it. But if I could do that and then we'll zoom in. The first thing that you want to understand about any business is what's the best way to measure success? And I think the best way to measure success is most businesses and not individual shares in the share market businesses. So the things underneath them is to focus on a metric called return on invested capital or ROIC for sure. And what this measure is, is it's the amount of money or the return that you get our company gets for every dollar that's invested in it. And so that's the debt that it has on its balance sheet or takes out from the bank. It's the equity, the shareholders money that was first invested and its cash and all that type of thing that's on its balance sheet. So we compare with ROIC, we compare the profit to the amount of money invested. And a really good way to spin this for people that aren't like accounting nerds like myself is to imagine I put an empty tissue box in front of you and then I say, you've got to put one hundred dollars in. You're going to invest 100 hundred dollars into this. It's your books. And then you come back a year later and then magically this little tissue box spits out a pineapple. So 50 bucks, it just a fifty dollar notice comes flying out of it right now. What you actually have done that is you've got a return on investment of 50 dollars or 50 percent. So we would say that the return on invested capital is 50 percent at any time. Whenever you have money, it doesn't matter if it's shares or if it's property or whatever you've got to think of. Everything is its own little cash box. Money goes in. Money comes in. Right now, the difference is with the share market and individual businesses that are little cash box, that every company has its own little cash box. It's got debt inside it. It's got their own cash on the balance sheet. And then its business is making money and returning money to its own balance sheet. So that's what we measure when we're talking about return on invested capital. Now, this is a really impressive business. If you could put a hundred dollars into this tissue box at fifty dollars, that's a 50 percent return in one year. There are not many places in the world where you can put a hundred dollars and get fifty dollars at each and every year. But the share market is one of those places. And when I say you get that out in this example, you know, this is the company putting money into their projects and getting the money out. So you as a shareholder don't see that every year. That would be a dividend. That's something different. But you're saying the business compound, what it has been started already. Now, there are some examples here in Australia where businesses have achieved more than 50 percent. So a good example would be Labasa before Covid. Of course, it was that fast fashion retail store you'd see in every Westfield shopping centre across the country just about. And what they actually did was when it put out a new store in every shopping centre, it had a return on invested capital over one hundred percent per store. That's almost unheard of. The reason people don't notice is because they don't actually dive into the numbers and speak to management. What that actually means is let's say it cost two hundred and fifty thousand dollars to put a Levasseur store with an. He's in a Westfield shopping centre near you after a year. That store has made the cost of everything more than the two hundred and fifty thousand dollars. So that's why the return on invested capital is over one hundred percent. And Lovaza did that for a few years, and hence why its share price went like five times higher in about five years. So if I was going to focus on one thing, I'd say focus on that return on invested capital, not all of your brokerage accounts. Sometimes you have to start up the things like Morningstar to get that information, but you could just calculate yourself, which takes a bit of time. But that's something you can look for. Now, speaking of Morningstar, this is how it relates to software. Star is probably the best source for understanding return on invested capital and understanding what a competitive advantages to the reason that some businesses do better than others and can return high amounts of capital at the time. But what they did, there was a study that they did a while ago. I did a study of every industry that I followed, which is every industry, and they said, OK, how many companies in this industry have what we call a wide net, which is the best type of competitive advantage, and therefore the highest returns are expected from that company. How many of those companies in that industry have a narrow which is like a good it's not the best, but it's kind of in between? And how many companies have Nomoto, meaning that their return on invested capital isn't really good enough to invest in right now. And what they found was that the three best industries for wide most companies were defensive businesses are consumer defensive businesses. So things like Costco, Woolworths and Coles would be a good example here in Australia. Another one was health care, which is things like CSL and a company I'm about to get to. And the technology industry is that kind of like a broad industry, which would be a company like XERO, which we spoke about. The worst industries were real estate and materials or resources. And then the third one was communication services like telecoms. So what do real estate, real estate companies, mining companies and telecoms like Telstra have in common? They're all really capital intensive. So you put money in instead of putting one hundred dollars in, Telstra might put like ten billion dollars in to create a five G network. And then even once it builds that, then Optus is caught up. And typically telecom is there, too, by the way. So, hey, you can't just charge what you want because we're all going to compete away your margins. And so what I look for in software is companies that don't require that amount of capital. So the software is able to be rolled out again and again and again. Are you guys old enough to remember commentary about [00:39:34][341.8]

Alec: [00:39:35] on that doesn't ring a bell? [00:39:37][1.6]

Bryce: [00:39:37] No. [00:39:37][0.0]

Owen: [00:39:38] OK, so this is an old skip on the fruit, or is this old guy with a filthy moustache and wear like an apron and he runs a fruit shop and software is so good because every time you create a piece of software, you don't have to create another version of that to sell it to the next customer. So that means you don't have to put another hundred dollars and you get another fifty dollars out. So the way I thought about this and describing it to your listeners is gonna figure out who's this dodgy fruit shop owner. He buys an apple for a dollar to sell on to his customers, but let's say his dollar, which is what he has to invest to get the product. He then sells that apple for two dollars. So he would make a pretty good return on his investment in that Apple. However, with software, he could sell that one Apple a thousand times because it doesn't matter. And you probably are familiar with this from Microsoft's example. It doesn't matter how many times you sell the software, you can just keep selling it again and again and again and again. And it doesn't cost you any more money. And that is what leads to huge amounts of return on invested capital. And the other two things that I'd mentioned about software is, one, it's super sticky. So once you install a piece of software or business installs a piece of software, that is going to rip it out, number two. So is typically unique, like if I sit down here in code, something that creates something wonderful, I can then go and sell that online to companies who will use that software that I can sell it again and again and again, just like before. And it's my code, you know, I've written it if I want to do it themselves. Sure. But it's mindset's here. It's available. So that's a really roundabout way to describe why I focus on this industry. But it gives you a sense of what's so appealing about it. [00:41:12][94.3]

Alec: [00:41:12] I like the explanation of things that are infinitely scalable, just like podcasting. You create one podcast can be listened to all over the world. So looking forward to seeing some SmallCap podcasting businesses get listed in the future? [00:41:26][13.6]

Owen: [00:41:26] Well, who knows, maybe Equity Mates Ltd becomes a billion dollar company [00:41:30][3.4]

Speaker 3: [00:41:31] and well, [00:41:31][0.3]

Alec: [00:41:32] let's just say if Rask-media ever goes public, we would expect to be in that pre-IPO round. [00:41:36][4.6]

Owen: [00:41:38] Well, I feel like you'd be looking at the financial sector, which is a sign of a return on invested capital. [00:41:44][6.0]

Alec: [00:41:45] We love that description of software businesses. But your recent Rask Rockets thing has been broader than that. You peaked. Now, correct me if I'm wrong here, but you peaked 10 ASX listed small caps and gave them to Rockit subscribers. You were telling us before. Some have really popped recently. One, I think has seven Baghead since you told it to members. So you've obviously done some work and pick some good stocks there without giving away any of the ones that you've kept secret and kept for members. Can you tell us about that service and maybe some of the companies that you picked and why you picked them? [00:42:21][36.4]

Owen: [00:42:22] Yeah, sure. It's not quite a seven bagger not far off at the Ren, but people can Google Rockets performance and now there's a public version of our performance. It updates every twenty minutes on our website so you won't see the names of the companies, but you can see how our returns are. And I think that adds transparency. One of the companies that we did share with the. Public, which was included in that 10, which I'm happy to talk about, is a company called Bopara Health Technologies, so it's listed on the stock exchange. It was the biggest one of our 10. And I always get a bit funny when I took my book because I don't want people to take this from Willink. I'm not boasting or I'm not telling you to go out and invest in this right away. But it's just an interesting business and it gives you a sense of what I look for. The journey for Bopara really started in the late 90s, early 2000s, when a guy who was doing his Ph.D. at Oxford teamed up with his professor at the time and they realised that he was a mathematician. He's actually his name's Ralph Hinan and he's actually a mathematician and he's super bright. And he realised yet that the state faces on something. So what he chose to do because he couldn't really find ideas was focus on breasts and in particular, I should say, breast cancer. And so he found that people were developing breast tissue with dense breast tissue. And what he found was that the current methods for assessing women who have early stage breast cancer or even late stage breast cancer was just so inadequate. It was unbelievable. But we have to fast forward about 10 years because he went off and created another business which is solid. And then he finally got back to this thing called Bopara, which at the time had a different name. But what he did was he sat down and he's obviously very intelligent, mathematically minded physics and that type of thing. He came up with a way for companies to do a typical mammogram of the breast and then use mathematics to effectively determine whether that woman had a dense breast or a non dense breast, and then determine if the risk of getting breast cancer. And this is unbelievable stuff. And it's crazy to think that some radiologists, clinics around the world still haven't adopted this. But what it does is it effectively goes beyond just giving people a score from a manual exam and it tells them more about their breasts and it helps save lives at the end of the day. And this software that he's created now has been sold to many, many different hospitals and radiology clinics throughout Australia and New Zealand and particularly the USA. The great thing about the software from a capitalist point of view is that once this software is installed at a hospital, for example, it requires some some integrations and what have you. But once it's installed and the radiologists are using it and the doctors are using it to assess patients, they're not going to pull that software out of the hospital because it's proven that it actually works. There's numerous patents. There's numerous studies that have been done, peer reviewed that proves that breast density, scanning and measurement actually has a really positive impact on the hospitals because it results in fewer women getting called back for a procedure that can be quite invasive and quite uncomfortable. And it also results in breast cancers getting detected early. So it's kind of that this win win for the hospital, save money the woman just to find out what her risk and ultimately potentially save people's lives. And Bopara puts it software. And every time someone is scanned and someone gets a breast density report, they get a tiny little fee. So if you think about that, a business like that starts off. I'm very much a loss making business. But after five years, after 10 years, after 15 years, if it's getting paid for every exam that goes through and begins to just layer on top more and more money. Meanwhile, the software, if we go back to our con the fruiterer example with the Apple software, hasn't necessarily need to be rewritten again and again or sold again and again. It just sits there and it makes money. It's effectively a cash machine. And so that's a really good example of a business that we chose the rocket service because we're looking for smaller companies that we can hold on to for five to ten years. My minimum time for any of the companies is five years, but I would ideally like to hold them for ten years. And one of the companies that you mentioned, there was a very small company, so had a market cap when we when we recommended it of around about 40 million dollars. So that's tiny. It had seven staff. So, I mean, that gives you an idea of how small these companies are. But that does not mean that they're not very impressive. Like that story about Bopara gives you a sense this company has been 20 years in the making and it's only now starting to take off. And so, you know, these are really interesting businesses for your to sake. Unfortunately, with close that programme, we only take a certain number of investors every year. But that's just one of the companies. It's also in our other service, which is called Bresch Best, which focuses on slightly larger companies. But again, that's kind of what we look for. And that's that's the type of business we're trying to find every day. [00:47:13][290.5]

Alec: [00:47:13] So when can we expect the russkie rockets like they [00:47:17][3.1]

Owen: [00:47:19] feel like they might be a few eyebrows, right? [00:47:21][1.7]

Speaker 3: [00:47:24] Yeah. [00:47:24][0.0]

Owen: [00:47:24] And that that would be in time. But I don't know about that one. But maybe there is a marriage fund in the works a few years from now. But at the moment, I'm still I'm very happy just to have a research business where I help people invest and they can choose to take our research or not. And yet it's. Worked out well for them and for us. [00:47:40][16.3]

Bryce: [00:47:41] Well, speaking of Owen, before we move to our final three questions, you do have a number of fantastic offers available through Roski. You cover off a lot and you are generous enough to offer the Equity Mates community some pretty significant discounts on the programmes that you do offer. So I'll just run through them. Now, as you mentioned, as the Value Investor Programme, which is your sort of flagship online course for Equity Mates listeners, you're offering 200 bucks off, which is massive. So I'm assuming that comes down to 599 for the course. Yeah, that's right. Correct. Yeah. So that's a complete training for stock market investors. Highly recommend you guys going and checking that out. Additionally, if you're interested in all of the research that Owen and his team are doing, there's Raschein Vest, which Sean just mentioned. It's the subscription service and only offering one hundred dollars of that for the first six months. And that's the best research members only community. Additionally, there's Roski ETFs, which is an investment subscription as well, with a focus, obviously, on ETF research for Ozzies, looking to get more info in that space, which I can imagine will be pretty popular, 50 bucks off that for the first six months. So some really awesome offers there. And I mean, we wouldn't be talking about these if, you know, we didn't back in what you guys are doing over at Rossow. Fantastic opportunity for the Equity Mates listeners. Head to www.youtube.com Dollars. You slash affiliates, slash Equity Mates with a hyphen. We will put all of that in the show notes for you to make it easy just to click through and check that out. But yeah, I think thank you, Owen, for making that available to the Equity Mates community. And we encourage you to go check that out. [00:49:26][105.3]

Owen: [00:49:27] No worries. I should have said at the top of the show, guys, it's funny because I didn't grow up with finance or investing, but I didn't come from a wealthy background or anything like that. And money was always a point of anxiety for me. And to think that I'm now an investor is just wild. But the big focus for us has been educating people as it is for you guys. This is a huge opportunity for people to do good things. And yeah, even if people don't take up our paid services, we've got courses and we want to enrol 10000 new students over the next year to have free courses. So, yeah, I mean, we don't make money from that. But I just wanted to put that out there. And we should also say this is the thing that we prepared five minutes before. So we didn't come onto this podcast intending. No, absolutely [00:50:09][42.4]

Speaker 3: [00:50:10] not. Play fast and loose and loose [00:50:12][2.4]

Owen: [00:50:14] just [00:50:14][0.0]

Alec: [00:50:16] before we get stuck into the final three questions. I guess the final thing is, as well as the courses and the memberships, the Bryce was just talking about, if people want to well, if they want to listen to you, you've got two podcasts I'll hand off to you in a second to people spiel for. But also, are you active on any social media where people can follow you if they want to hear more from you? [00:50:36][19.4]

Owen: [00:50:36] Yes, sure. So we've got a very, very, very poor Instagram presence, which I have [00:50:40][4.3]

Speaker 3: [00:50:41] picked up, [00:50:41][0.3]

Owen: [00:50:42] but which is funny because it's kind of like our target audience now. I'm on I'm on Twitter at Ren. I am on Instagram, my own rescue. But seriously, like, if you got a message you want to send to me or just get in touch, you use Twitter because I don't even know how to use it. Sounds like a fifty, but I don't know [00:50:58][15.4]

Speaker 3: [00:50:58] how well you did [00:51:01][2.9]

Alec: [00:51:01] ask us before how all the way and then reference a cultural thing that we didn't recognise. [00:51:05][3.8]

Speaker 3: [00:51:05] So I'm pretty sure the same age. I was confused by that. [00:51:09][3.5]

Owen: [00:51:09] Yeah, I don't know. Maybe I don't know. I've grown up with parents who watch these crazy. Yes I, I'm twenty nine year old [00:51:17][7.6]

Speaker 3: [00:51:17] son and my 27. I'm the youngest to shave. But anyway, so much wisdom. Yeah. [00:51:25][7.8]

Owen: [00:51:25] And the true forecast of the Australian finance forecast which is great for beginners. It is an investing show, but it's not really like you guys, for example, you guys have a really good focus on investing. It's more like holistic wealth and finance and that type of thing. And then the investors podcast is similar to this, but different because it's mainly fund managers that I speak to every day. I know you guys spoke to some managers, too, but probably a little bit philosophical. But it's just kind of the two markets, I guess, that kind of sophisticated investment philosophy and in the beginning stuff. But, yeah, I mean, they're out there. They're not quite as highly ranked as Equity Mates. [00:51:55][29.8]

Speaker 3: [00:51:55] I sure do. [00:51:56][0.4]

Alec: [00:51:56] Well, yeah. And I mean, the great thing about the Australian finance community that's building between, you know, what we're doing, what you're doing and what a few other people are doing is that, you know, investing is a lifelong learning journey and knowledge compounds and all the different variants of the podcast's and the subscription services and stuff out there just build people's knowledge and help people get smarter with their money. [00:52:17][20.7]

Owen: [00:52:17] Yeah, well said. And you guys are doing a great job with it. [00:52:19][1.8]

Alec: [00:52:19] Securitise, thanks. Oh, now we'll get into the final three questions that we like to end every interview with. So the first one here is do you have any books that you consider must read and these can be investing or otherwise? [00:52:32][12.9]

Owen: [00:52:33] Yeah. So I've got five the first one which I recommend to everyone. If I walk past a dog in the straight up like, hey, man. You've got to stop and read this book. It is that good, so it would be Factualness, which is written by a guy called Hans Rosling. It's got very little to do with investing, although you could find some parallels, but it's got everything to do with everything. I think Bill Gates had it on his number one reading list for like forever. Bill Gates is known to read between 10 and 15 bucks a week. So for him to have factualness is number one. It says something. But it's a brilliant book for investing the grill again. It's written by Jeffrey Johnson. And Tom Coppola has written about the nineteen ninety nine ninety nine seven. It's about investing in technology companies is really interesting. One for those that are that way inclined. The next one is investing the last liberal arts, which is by Robert Hagstrom. Really interesting book, but it's about reading around investing and how that all kind of comes together, like how physics relates to investing and how, I guess, writing relates to investing or how all these different things relate to investing. The easiest one to read on the topic of returns on invested capital that I've come across, you guys might have other ideas is the little book that beats the market by Joe Green. [00:53:40][67.0]

Speaker 3: [00:53:40] But it's a [00:53:42][1.1]

Owen: [00:53:42] super easy book to read. And it just it focuses on two things. This one is like high quality businesses. And the other thing is like how they generate returns and there's a magic formula and all that sort of stuff. And the last one, which is for the business people, the people that want to learn how companies actually generate returns. It's called The Outsiders by will form another great book. Yeah. So those are my top five. I've got some things associated with you. [00:54:03][21.8]

Alec: [00:54:04] Awesome. Yeah, very, very good list of books. Soudas. I'll stop admiring that list and we'll move on to the next question. So the next one is what's your go to source for investing and financial information? [00:54:15][11.0]

Owen: [00:54:16] Well, obviously, Equity Mates [00:54:17][0.9]

Speaker 3: [00:54:18] goes to that day [00:54:18][0.5]

Owen: [00:54:20] now, like we have a few websites where we have contributors. And so we've got our new site, which is Reste Media. But if you want to invest the way I invest, the best thing you can do is just read company financials. There's nothing like the actual source documents. Even if you go like we use Morningstar for dollar. And if even if you go to Morningstar, I'd still like a look at the financials, but then I'd still go back to where they got the numbers from to to confirm and to to do my own work. But I think, you know, if you had let's say you have like 90 days and you have a goal for the next 90 days. Go and read one chairman and CEO introduction, so if you get an annual report, typically the chairman of the CEOs letter will be at the top and pretty much most of them are like two pages each. So it's four pages of reading. If you read, they start at the top of the ASX 200, start with the top company and work your way down. If you read the chairman and CEO letter one a day for the next 90 days, you would know a little bit about the top 200 companies in the country, but you would know a lot more about business investing. And I think that's a really good way to just round out your knowledge and kind of accumulated over time as well. [00:55:26][66.7]

Alec: [00:55:27] And then the last question, if you think back to your younger self when you know you were making your first investment in NAB, what advice would you have for your younger self? [00:55:37][9.6]

Owen: [00:55:38] This is a kind of an interesting one because I have a very similar question when I interview people and it just gets to the bottom of what's important for me, it would be. Find and invest in really good people. And so what I mean by that is if you are investing, I find people that can teach you something and can help you on your journey. And because not only in investing, but the connexions that we make with other people in life are the most important thing that you can create if you're investing for five good investors and strengthen your connexion with people that work, do whatever you can to kind of emulate some of the success and hopefully it rubs off on you. [00:56:11][33.2]

Bryce: [00:56:12] Yeah, nice. Or someone will. Fascinating conversation. We covered a lot there. So we will try and endeavour to put as much of that in the show notes as we can, particularly the links through to the affiliate programmes for your services and the books and your top 10 tips. And there's a thousand things that we can put in there. So we will ensure we cover that all on our website as well. So awesome conversation. Thank you so much for your time today. Oh, and look, loving watching what you're doing over at Rock. And look, we'll definitely be keeping in touch, so. Thank you. [00:56:44][32.1]

Owen: [00:56:44] Yeah. Awesome fellows. Absolutely. My pleasure. [00:56:46][1.6]

Alec: [00:56:46] Thanks so. [00:56:46][0.3]

Speaker 5: [00:56:47] Thanks for listening to Equity Mates investing podcast production of Equity Mates Media. Please remember that everything you hear in Equity Mates investment podcast is general advice. Only the content has been prepared without knowing your personal objectives, specific financial circumstances or goals. The host of Equity Mates Investment Podcast may maintain positions in the companies discussed before considering any investment. Please read the product disclosure statement and consider speaking to a licenced financial professional. [00:56:47][0.0]

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