Expert Investor: Tobias Bucks – Searching the World for Surprising Companies

Bryce: [00:01:15] 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? [00:01:30][15.2]

Alec: [00:01:30] I'm very good. Bryce. How are you [00:01:31][1.2]

Bryce: [00:01:32] pumped? Yes, we've got another series expert investor joining us here in the studio. I think it's the first expert investor we've actually had live with us in the studio. So pretty exciting time. That's a big honour. Yeah. [00:01:45][12.7]

Tobias Bucks: [00:01:46] Thank you. [00:01:46][0.3]

Bryce: [00:01:47] So without further ado, I'd like to introduce everyone to Toby Bucks Tobias, as his mother calls him, but we'll go with Toby. Toby is portfolio manager at Ausbil Investment Management, specialising in global small cap. So welcome to the show, Toby. Thanks a lot, guys. So before we get stuck into the meat of the episode and a bit about Ausbil and small caps, I always like to start with a bit of a game, break the ice a bit and understand where you stand on a few asset types or strategies and that sort of stuff. So it's overrated. Underrated will throw a few things at you and we'd love to know your opinion on where you stand and perhaps why so overrated or underrated. The ASX 200. [00:02:27][39.9]

Tobias Bucks: [00:02:28] Look at us. I'd say overrated. I think it's overrated. I think it's over researched. I think it's overvalued. And I think it's got a really narrow opportunity set. So, yeah, overrated. [00:02:36][8.4]

Alec: [00:02:37] Sound like a small cap fund manager. Yeah. So we can probably guess the answer to the next one, but we'll ask it anyway. Overrated or underrated. The Nasdaq 100. [00:02:46][8.4]

Tobias Bucks: [00:02:47] I think it's overrated. There you go. Look, it's great growthy large cap names. These are really good business models. They've got great themes behind them, but they're really well researched. They're over research. There's not a lot of inefficiency. There's not a lot of unrecognised growth. You pay for what you get. But relative to global small caps, they're overrated. [00:03:04][17.5]

Bryce: [00:03:05] So we'll probably pick up on a few things that you mentioned there a bit later on again. Then I can assume the same answer is going to apply here. The FTSE 100. [00:03:12][6.7]

Tobias Bucks: [00:03:12] Yeah, overrated. Saying things like it's a good mixture of multinationals. Brexit resolution might help, but at the end of the day, over researched, not that inefficient, many more opportunities in global small caps. [00:03:24][11.2]

Alec: [00:03:24] So we actually have interviewed a couple of UK gas recently. And as people may have been able to pick up, you're from the UK. They have both said that the FTSE 100 is a very weird index and they didn't really elaborate on that. So do you think the same thing and maybe we can finally get someone to elaborate on why it's weird. [00:03:41][16.3]

Tobias Bucks: [00:03:41] It's a bit like the Australian index. It's quite concentrated in what's in there. So in Australia, we got we got financials, we've got banks and we got miners quite cyclical. And they quite they drive the returns quite a lot. When you look at the FTSE, it's quite a lot of international names in the FTSE. So they might be resided in the UK, but they're genuinely multinationals like Unilever, etc.. So those kind of businesses, I suppose a funny way to put it is when the when the pound is pound sterling improves, the footsie goes down. And likewise, if you see the FTSE go down, you'd expect to see the pound go up. But at the same time. So it is kind of weird like that, but it's mostly a good quality multinational businesses. [00:04:16][34.7]

Bryce: [00:04:17] So then probably a bit more in your wheelhouse, Toby. Overrated or underrated? The global small cap sector under [00:04:24][6.8]

Tobias Bucks: [00:04:24] eight thousand managed to catch up [00:04:28][4.2]

Tobias Bucks: [00:04:30] like underrated, under researched, under owned, massive opportunity, set to find absolute gems. [00:04:35][5.3]

Bryce: [00:04:35] Yeah, really looking forward to unpacking that because I think there's a big opportunity as millennial investors particularly to bring small caps into our portfolios. [00:04:44][8.4]

Alec: [00:04:45] So overrated or underrated, the US China trade wars affect on Australia's economy overrated. [00:04:52][7.7]

Tobias Bucks: [00:04:54] Look, the Australian economy really does depend on the health of the Chinese economy, but also at the same time, the Chinese economy was going down before trade was started, even if trade was don't get resolved, which they look to be getting resolved. But even if they don't get resolved, the Chinese economic environment could still continue to improve. It's been improving for two to three months in China and that that could keep going through reform and stimulus. So it's not necessarily the be all and end all, but it does have an effect. [00:05:20][26.3]

Bryce: [00:05:21] So one thing that we've been discussing on the show quite recently is using leverage in our investing strategy, overrated or underrated for [00:05:30][9.5]

Tobias Bucks: [00:05:31] your own stocks, like buying stocks on margin or buying companies that have lots of debt, [00:05:35][3.8]

Bryce: [00:05:36] buying stocks on margin [00:05:36][0.8]

Tobias Bucks: [00:05:37] like it makes your investments more volatile. I suppose one good thing about it is, is that you can make more money. The bad part about it is your ability to stomach a loss goes down a lot because you're so levered. So I'd say it's underrated, it can really help you, but at the same time, you're going to need to do a lot of work on what that means for how much money you should put down on an individual bet, because essentially all you're doing is timing what you invest by a lot so it can affect how long you can hold a position that's going against you. But if you're really sure on something and you think it's going up and you buy CFD in the right direction or you take some other sort of leverage, then you'll do really well. [00:06:13][35.5]

Bryce: [00:06:13] What about the other one, buying companies with a load of debt? [00:06:15][2.0]

Tobias Bucks: [00:06:16] See, I think I think leverage is underrated, but it depends. If you're looking at long duration assets like infrastructure assets with certainty of returns, then you should do that and buy leverage. But if you're dealing with quite cyclical, like mining services companies, you don't want any debt there because it can go south pretty quickly. [00:06:33][17.1]

Alec: [00:06:34] So last one for this game. Overrated or underrated? [00:06:37][2.9]

Tobias Bucks: [00:06:37] Studying finance at uni, massively overrated. Do something less boring, like it's the one time in your life when you can really go and have a good time and you should and go and study something that makes you think that's me speaking from personal experience. And also, if you ever get into investments, the investment firms will pay for your study so you can do it all. Then outside of uni, I think studying finance is underrated. We shall be learning as long as we can in life till we die. And if you're interested in investing, you want and you want to make loads of money. So the more you study, the better you should do. [00:07:08][31.0]

Bryce: [00:07:09] So let's get stuck into your personal journey, I guess, where I would like to get an understanding of how you got to where you are and guess some of the lessons that you learnt along the way. What did you study at uni? [00:07:18][9.3]

Tobias Bucks: [00:07:19] So I did an undergrad, a master's in social anthropology. [00:07:22][2.6]

Bryce: [00:07:23] Just about the fun stuff. [00:07:24][0.9]

Tobias Bucks: [00:07:24] That's the fun stuff. This is the [00:07:26][1.9]

Tobias Bucks: [00:07:26] study of people and culture. And it's really interesting. It teaches you how people think and how power operates between people. And hopefully it should teach you to think of yourself and critically assess material. I did science at school, which I really enjoyed, but I didn't want to go to university and have to get up at nine a.m. for labs. I wanted to go and read books and think so. [00:07:45][19.0]

Bryce: [00:07:46] And has that helped you? Do you think, in your profession today? [00:07:49][3.1]

Tobias Bucks: [00:07:49] I definitely think it's a huge help. I'd encourage most people to try and read some sort of arts or philosophy to try and understand how they think. It's about how you think, not how someone else should tell you to think. And that's a journey you need to go and discover. Textbooks don't teach you how to think. They teach you how to do a calculation. So I think you can learn how to do a calculation. When you're in an environment where you're having to do those calculations every day for your job, then it's applied. Then it becomes more interesting. But if you sat at home with all your mates are out partying or at a social anthropology party and you're trying to work out the discounted cash flow of some bond, you're not going to have your heart in it. You can learn that when you go and join an investment firm at uni. Should be, I don't know, or before that you should be discovering yourself and trying to work out what makes you tick and what you care about and what your own personal biases are, because it's a big part of anthropology is bias and cultural bias and personal bias. And one of the biggest things that holds back any investor, I think, is your own personal biases, your emotional bias, your confirmation bias. Very difficult to call yourself a terrible investor when you made a bad mistake, but you kind of really need to go through that process. [00:08:53][63.3]

Alec: [00:08:53] So I'm interested in how you went from a social anthropology student to a global small cap fund manager. But to get there, we always like to start with people's first investments. We think people learn a lot and there's generally some good stories that come out of people's first debut in the market. So what was the story of your first investment and did you learn anything from it? I learnt [00:09:14][20.9]

Tobias Bucks: [00:09:15] a bit. My first investment was quite boring, so I'll go through that first one I had the first time I took a punt on a stock after that was more interesting. But the first thing I did is I had a few shares left from three companies that my granddad left me in, companies he worked for, like Rolls-Royce, businesses like that. When I first got a job, I sold those shares and put the money in the fund that I was working on, which is great because my boss thought it was brilliant that I was personally invested. I suppose the key learning is that you've got to invest in something that you're close to, something that you care about and something that you understand and want to work more on. Like you've got to be able to touch your investments, because if you can't really do the research from inside your own heart and care about it, you're never going to have the attention or the understanding to get your head around it. You've got to be passionate about it and it's got to be close to you a bit after that. I did try and invest on a stock I didn't know much about investing. I was fresh out of uni on my learning curve and one of the Cole analysts told me about this great Cole stock that was definitely going to make so much money. I could buy a house and I lost everything on it pretty much. So I think, again, it's the same thing. Don't don't trust someone else. If you don't know about what you're investing in, don't invest in it. [00:10:22][67.5]

Bryce: [00:10:23] How would you define your personal investing philosophy? [00:10:25][2.1]

Tobias Bucks: [00:10:26] I've got an investing philosophy now that's been been affected by doing this over many years and it's based on academic research and based on personal experience. My philosophy is I try and keep it quite simple, but there are three main things to me. You want to buy quality companies and you want to buy quality companies at the right price and you want to buy unrecognised growth. And I'm all about unrecognised growth. And it Ausbil, we're about what we call positive earnings revisions, which is unrecognised growth. When people out there get pleasantly surprised by companies announcements, the share price goes up. Focus on quality, because at the end of the day, I'm a firm believer that you want to buy a really good business. And that's what quality means to professional investors is a really good business. So what we define by that is peer group leading returns. So you get a better return on the money you invest than other immediate industry peers who want a management team that does exactly what they say they do on the 10. You don't want to invest in people that will tell you one thing and then come up with a range of excuses, you know, like your mate who never pays you back at the pub. And there's always an excuse. You don't want to invest in those teams. You want to invest by quality as well as a company that's really focussed on ESG. And for us, that's really important. At Ausbil, we're one of Australia's leading ESG houses and ESG is is a really complicated issue right now. Shouldn't be that complicated, but it's quite nuanced maybe in the investment community. And it's really important for us. And it's not just saying we're not going to invest in coal mines or we don't invest in oil and gas. It's more about that. You can get really good returns by a company that improves its industry position. So if you've got a company that over many years is getting better and better industry position through having a very forthright and set out view of what's right and ethical for their industry and their stakeholders, what happens is that all the employees, the customers, the suppliers, everyone comes along for the ride and the company improves its industry position and you get really good industry returns. And so when I say you want to focus on quality management teams with a strong focus on ESG, what I mean is if you get a quality management team that's really focussed on the environmental factors and considerations in their business, the social considerations and having improving their governance, that tends to bring everyone along for the ride. It's not mutually exclusive to have a company that's really focussed on profitability but isn't focussed on its impact in the community or focussed on its impact on the environment or what it can do to make the lives of its employees better. Those two aren't mutually exclusive. They go hand in hand. So you want to invest in quality and I think you want a company that's got a good thing behind it, improving industry position. So those things, they make sense. And I firmly believe that if you do that, you stand a really good chance of getting positive surprises, not negative surprises, and then value the second of the three key pillars. Value is really important because you make your money the day you buy something, the price you pay for it that day because you don't really know when you're going to have to sell it or why you're going to have to sell it. Maybe you want to buy a house, maybe you want to buy a new car. Maybe you've got a bill you've got to pay. You just don't know when you're going to need to liquefy investments. So it's really important to make sure you pay a good price for it and then the unrecognised growth part. And that's a key pillar. And the reason for that is you can buy quality companies at the right valuations, but if they're not delivering positive surprises, you're not going to get that that positive share price reaction and buy unrecognised growth. I mean, it's like I said earlier, when when people see the result in the market of an acquisition or of their actual underlying quarterly results and they say and they get pleasantly surprised, that's more than we expected. The future looks rosier than we thought it did. Share price is going to go up. And also academic research shows style research throughout time shows that if you focus really on quality and on value, you will outperform, but also just interestingly recognised growth. So companies with high forecast growth underperform over time as a style factor. So if you're always going out there buying companies that are expected to grow a lot, you won't make money. You've got to go out there and buy. Companies aren't expected to grow, but actually deliver growth and that's the unrecognised growth. [00:14:26][239.7]

Alec: [00:14:26] So I think the first two concepts, there are good companies at a great price. People are familiar with the Warren Buffett quote is brought out a lot. The third one, I think is new and really interesting. And the question that immediately comes to my mind is, how do you recognise unrecognised growth? Because by definition, you're doing something that the rest of the market you're saying something the rest of the market isn't saying. Yeah. So what's your process and what do you look for there? [00:14:52][25.6]

Tobias Bucks: [00:14:53] Yes. So, yeah, social activity. Yeah, I'm afraid I can't tell you right now. [00:15:00][7.0]

Tobias Bucks: [00:15:00] I feel like you're right. That's the art form. Right. They say it's a science and an art can use maths to do the science part to work out what companies have a better return on invested capital or return on capital employed. And you can plug the numbers with Quant and you will come up with stocks that are high quality and stocks that are cheap. And you can do the work around ESG that I've spoken about and you can find those two factors. But the third factor is that. Heavy lifting, but that's that's the art bit, it's a bit like it's the NCAA, it's like the dark at the bottom of the stairs. You can kind of see it, but you can't define it. You can't touch it and you can't understand it. It's just the inchoate. And to get your head round that, I think basically that's the luck part. A lot of it, because you're saying I understand the narrative of this investment case better than the market understands the narrative, which is essentially an incredibly arrogant statement and prone to screwing up. So it's hard. And I think the thing is in anything that's kind of the chance comes into it. You've got to give yourself a head start. So what we try and do is say, well, this is the stuff we understand. And if we try and get enough of this research right, hopefully will come out well. And that's essentially what any investors trying to do, isn't it? Is trying to get your head around some of it. You know, you don't know what the definite answer is, but you're trying to give yourself a head start. So by Head Start, it comes back to management teams that under promise and over deliver. They do exactly what they say on the tin. So if you're starting investing in companies that previously have gone out and said, we've got this business plan and we expect to deliver this, if historically that same management team has under promised and over delivered, you've got a good chance that going forward they're going to under promise and over deliver. If you start with a management team that says they're going to deliver 20 and they only ever come out with 15, and there's excuses and that's not a great start. So I think definitely you can, as Newton said, stand on the shoulders of giants. You can give yourself a massive head start by just focussing on businesses under promise and over deliver. And that's half the game. And I think the other half of the game isn't about the narrative of the investment case. What we do is we look for businesses that compound value creating events together. So what we're saying is you have a really good management team and they've got value creating initiatives. Even if three of the five, only three of the five initiatives work out and come off, that that three of the five, the sum is still greater than the underlying parts. And we'll give you positive earnings revision. What you've got to do is discern yourself. What is it you're doing in these five areas to create value? And if you're compounding these initiatives together, even if it's the management, screw a couple of those up on the investment roadmap, you're still going to get huge value creation. So the unrecognised growth and those two parts, one, give yourself a head start by backing people that have under promised and over delivered and stuff that you care about, we think is a good theme behind it. So by Digital Broadcast, they're not a newspaper. And then the other half is what is that management team doing to create value? And if they're a good team and they're doing lots of sensible things and your research or you think those things can work, they make sense that they're tangible, then you've got a good chance [00:17:59][178.9]

Bryce: [00:18:00] able to give us an example of something I guess you've been either working on or that's in your portfolio at the moment that maybe ticks all five of those value creation or, you know, you came to understand the narrative and went down the path. And it's been a success just to, I guess, tie that whole thing together and give us a bit of a concrete example of a company. [00:18:18][18.2]

Tobias Bucks: [00:18:19] Yeah. So since the start of the fund and before that, we've owned a stock called the Trade Desk. It's listed in the US. It's about 12 billion dollar market cap now. It's gone up a lot and we bought it at sixty bucks. I think it's now trading at 240 and we're starting to sell down the position. We still think there's a lot of upside, but we see sort of 200 or 300 per cent upside in much smaller stocks. And we've already had a massive return out of the trade desk. We expect it to go up a lot over the next few years. But we've got some other ideas we think are more interesting. So so how does that business fit in? Actually went around telling people that it was the next Google about a year ago, which brought on a lot of laughter from my colleagues. People thought I was being a bit silly, but it is the next. [00:18:58][39.4]

Tobias Bucks: [00:18:58] Rightly so. Is it still the next Google? But yeah, it's [00:19:01][2.2]

Tobias Bucks: [00:19:01] still the next alphabet. So the trade desk is programatic, buyside, demand-side, programmatic advertising platform. So programmatic advertising is now on video, on demand, subscription funded, so Disney, ESPN, plus, etc. It's on podcasts which are actually growing two hundred percent. In terms of the advertising on podcasts, it's huge. You guys are well aware. Right. And also every time you look at your phone or your computer, every time a banner or advert comes up, those things are bid for in the background. You guys all know your media. You mean [00:19:33][32.5]

Tobias Bucks: [00:19:34] content kings picking you [00:19:37][2.6]

Tobias Bucks: [00:19:37] up, selling your inventory as we speak. But I think just to give a little bit of background, all these things bid and there are loads of different different platforms and loads of people bidding and huge algorithms bidding this data saying, you know, because they know about you. What did you last look at? Some information about you and that helps people bid. And so just to try and finish off the story, the trade desk is an independent business. I mean, it's taking market share off Alphabeat, which is Google and YouTube and or Facebook, which is Facebook and Instagram. And it's taking share away from them. And there's many reasons why. But the main reason is because Facebook and an alphabet Google are turning the lights off for the Internet. They're making things harder, whereas the trade desk is turning the lights on and it's got a much improving industry position. So to try and that's that's just trying to give it some type of background. You've got a business that's going to really take part in the growth of programmatic advertising, so you go from having targeted audience only to having reach and targeted audience. So now we all watch Game of Thrones or we all watch whatever we want to watch, but we're going to get an advert that's very specific to us. So the value of that ad inventory is going up and up and up. And if you can help people bid for it, you're in a great place to take share. 75 percent of the Internet, Google, alphabet and Facebook now turning the lights off. You can't see the how much or how worth your advert was if you placed it through Google AdWords at all. So that's the background back to those five areas to try and tie it in for you. So Trade Desk was founded by a guy called Jeff Green after he sold his business to Microsoft in 2010. It was a programmatic ad business. He left Microsoft with his partner, Dave Pickle's, and they set up a whole new algorithm for how to measure what someone was interested in, because they said at the very start, in our industry, you shouldn't know people's personal information, you shouldn't know their email address, the date of birth, the name. You shouldn't know that stuff about them because it's not right and ethical. So they built that and they offered it to people. And what happened is Google and Alphabet and Facebook went on their merry way, turning the lights off the Internet, putting up these walled gardens to control people and not give them information and gouge them for price. And at the same time, the trade desk was saying, well, you know what? We're actually going to find a way for you to put to have targeted advertising, but without people's personal information, because we've built a way for you to do that. And so now we're offering you a better solution than what Google offers you. And people have flocked to that. And that's because at the beginning, they set out and said, this is what's right and ethical for our industry. You shouldn't have people's data. It's not fair. And as you move through time, you've seen that Google and Alphabet and Facebook have come and had issues. And when Facebook had the Cambridge Analytica scandal, where that data was was was taken and used maliciously, Google got scared and removed third party cookies. And so now everyone needs to use trade desks equivalent, which is called unified ID solutions to help them be able to target people. And it's because the Trade Desk thought about that beforehand, said we need to create a way of being able to target people without using that information that now everyone's going to them on a capital structure just to go back to the five points. They've got a great balance sheet, lots of opportunities to invest. We see that money being invested and invested well in terms of the cost structure. They've got operational leverage, they got scale. Essentially what you've got is a massive algorithm. So all you need is computing capacity. So this huge scale in that anyone can see on the new products and new markets, well, they're interconnected TV. So video on demand like Disney, ESPN and audio like Spotify and Pandora. And they're also on most of the Internet, pretty much the whole Internet access Instagram, YouTube, Facebook and Google. And then on the segment part, the product mix part, the advertising you get in connected TV and audio is worth way more than it is on digital banner advertising on a desktop page. I don't look, I don't remember any adverts I see on a desktop page anymore. And then on the management side, they're improving their management team. They're bringing in more and more people, but they've always had a lead on ESG. So you go through and you like, well, you guys are compounding lots of value creating events together. There's a great theme behind what's driving you. I know that advertising is going programmatic and it's going digital. So anyone can work that out and anyone can work out that you don't turn on the TV and start watching the seven o'clock news anymore. You go and watch exactly what you want to watch, whether it's on YouTube or any other sort of video on demand. And you watch it on your phone and you watch it in bite size and you do what you want. So the world's changing and it's going to benefit. [00:23:58][260.7]

Alec: [00:23:59] So I'm interested. Well, firstly, we could just listen to you talk stocks, [00:24:02][3.4]

Tobias Bucks: [00:24:03] although I think I got loads. [00:24:04][1.8]

Alec: [00:24:06] I reckon there's a lot of Google searches for the trading desk right now. What they like, but I'm interested in using that example to transition into discussing small caps more generally, because you've just given a really strong case for why the trading desk is a great company, and yet it's at 12 Dollars billion market cap. Now, it's probably not a small cap anymore or it's not for long. And you're selling down your position despite the fact that it is this great company that's creating so much value. So with that as the context, can you tell us why you focus on small caps rather than just good companies in general? [00:24:46][40.3]

Tobias Bucks: [00:24:47] Yeah, so it's about the return you get. I'm more interested in finding a company that no one really knows about and doing the work on undiscovered way, but that's just trying to be cool and enjoy myself as an intellectual. That's not about your risk return, but there are small cap risk return is so much better than the one you get with large and midcaps. It's not funny and that's something that needs to be stressed. So to put it in context, global small caps have outperformed global mid and large caps by three and a half percent a year over the last 20 years. Historically, it's actually more than that. Three and a half percent a year doesn't sound like a lot to someone, but because you have to pay one percent every time you use your credit card for three and a half percent a year, three and a half percent a year, compounded over 20 years, is double your return. And the reason you get much better return with small caps is is twofold, really one underlying growth. And to not many people, it's under under researched and it's a more inefficient market. You get more opportunities to cover stocks. So stocks, stocks, we look at a Covid by two to eight people. When you go and look at stocks like Alphabet, which is Google or Facebook or MasterCard or Microsoft, you're dealing with 40 plus 50 analysts. So you're not going to find something unrecognised. Everyone knows, and it's very arrogant to go out there and say, look, I know more than these people that have been covering this industry and this stock for 30 years for Merrills or Goldman in New York. Like, you just you're going to lose that game every single day. But just going back, you get a higher return and you get a higher return because you get more underlying growth and you get less. People are looking at it and doing the work on it, on the growth characteristics. You also get a much better risk adjusted return with small caps than you do with large and mid-cap. So not only you get a better total return, you get a better risk adjusted return, which is effectively your return divided by the risk you've taken. And the reason why you get a much better risk adjusted return is because what drives the stock price of a small cap is research says 75 percent what the board and the management are doing, and 25 percent what the US yield curve or the interest rate looks like what we call top down factors. So what Trumps tweeted overnight or what's happened in the US China relationship or what the Federal Reserve chairman said or where the yield curve is going because of that stock specific risk? You get a lot of opportunity to get large upside because in an environment where maybe a large cap peer of a small cap stock might be suffering, say they're an industrial business, and if the industrial economy is slightly weakening, a large cap, industrial stock will go down because they're so diversified. There's not much they can do to get around the fact that the economy is going backwards for a bit. If you get a small cap industrial nation, what they do, they may only have one or two segments that they're very good at. And there's a reason why that stock might be taking over more of its industry and growing market share. So it doesn't really matter what Trump tweeted last night. You're still going to go up because the earnings are still going to go up. [00:27:42][174.8]

Bryce: [00:27:42] How do you, Ausbil, actually define the difference between small and medium? Large. [00:27:47][4.6]

Tobias Bucks: [00:27:48] So it's slight difference between domestic and globally. So on a global basis, five hundred million US dollars to five billion US dollars market capitalisation is defined as a small cap globally, around sort of seven billion, up to twenty five billion is defined as a mid-cap and above that is defined as a large cap in Australia. Obviously X 100 would be a small cap and the X ASX 300 would include quite a lot of mid-cap and small cap companies that are average. Market cap at the moment is about just over four billion US dollars. So domestically we'd be considered more of a small to mid-cap fund. Globally, it's not the same now and there are reasons for that we can go into, but I don't know if we [00:28:30][42.1]

Tobias Bucks: [00:28:30] got long enough. It's not [00:28:32][1.9]

Tobias Bucks: [00:28:32] that interesting. [00:28:32][0.1]

Bryce: [00:28:32] I'll just have a quick follow up then. Why global small cap and not just focus on the domestic if what you're saying the majority in our market would be classified as sort of small medium, why spread the wings a bit? [00:28:44][11.3]

Tobias Bucks: [00:28:45] I love that question because it's what I'm passionate about another softball. So to put it in context, it's your opportunity set. So how many stocks you get to go and pick from? And the second part is what sort of companies there are. So if you look at Australia, 60 percent of the market is banks and materials. Only two and a half percent of the index is it [00:29:07][22.4]

Tobias Bucks: [00:29:49] So I actually brought the figures down because it's something I love to try and ram down people's throats. But I think it's the reason why everyone should look at investing globally, particularly personally, because you just get more opportunities. The more things you get to pick from the higher chance you have of picking a gem, you only get to pick from two or three stocks. You're not going to get the best in the world and you want the best in the world. Also, almost all businesses are global now, so it doesn't matter what you do unless you're a local cement dealer. But any other type of business, whether it's in health care or I.T. or whatever, they operate globally. So they're all in the same industry, whether they're listed in Sweden or Japan or Australia. But there's 300 stocks in the ASX, 300. In fact, there's not. There's about 200, 96. But we don't need to worry about that. And there's four thousand three hundred fifty four companies in global small caps. So more than 10 times the amount of businesses to go and look for. And also in the ASX to 300, you have twenty IT stocks to choose from. And they're all very expensive because they're the only stocks that domestic I.T. people can buy. We've got four hundred and sixty six. So many more opportunities to go and find the next Google like the trade desk. Also in industrials, we've got eight hundred and two industrials to look at. Domestically, you've got twenty nine and we've got 600 consumer discretionary names to look at. There's thirty three in Australia. So overall you just got many more opportunities to go and find many different stocks and stocks in industries that we don't have in Australia, which is a key part and it's a more balanced opportunity set. So it's not all focussed on people digging or out of the ground and people dealing with lending money. It's more to do with people doing all sorts of other businesses. And I think that's really important because one of the main things I feel so close, I tried to touch on it before. But if you're an investor, you've got to really care and be passionate about what you're investing in. You've got to be able to understand it. You've got to be able to touch it, particularly when you're when you're younger and you're starting to invest. There's no point going investing in something that you find boring, like a toll road, like go and invest in something that you know about because you'll get so much more out of it. [00:31:51][122.2]

Alec: [00:31:51] So I'm interested. Four thousand odd stocks. That's a lot. I've only got so many hours in the day. And I assume you've only got so many researchers at Ausbil. So when you're confronted with that much choice and that much opportunity, so many global factors, how do you start tackling that number of stocks and how what's your process and your team's process to whittle down to the stocks that have great quality, great value and unexpected earnings surprises? [00:32:19][27.9]

Tobias Bucks: [00:32:20] That's a great question. We always get asked and I tell my bosses I work so [00:32:23][3.4]

Tobias Bucks: [00:32:25] hard and [00:32:25][0.3]

Tobias Bucks: [00:32:26] I am ready. You know, like anything, we've got a process. Yeah. So we really like quality and value. So as I said, you can you can create algorithms to search the market for quality and value in the way you define it, which is going to be up to you. And that can help you look at all the stocks in the world based on how they score versus each other. And so then you can get a selection. So what you do, you narrow down your target list of stocks to go and research yourself on a what we call a fundamental basis where you you know, we go through the annual report, we speak to management, we speak to customers, we speak to suppliers. We'd go and see what people in the industry think about them. So you've got to narrow it down first and then you kind of know what you're looking for as an investor because everyone's got their own personal style. And after many years in the industry, you'll get to know what you really like and why you like it and understand how it's going to work. And when you see business models with the experience, you'll start to say, oh, that business model is actually a little bit risky or that business model is less risky than people think. So that that naturally evolves over time. But yeah, so what we do, we narrow are all down using what we call a screen people in the industry we'll call a screen, and that's based on the quality and value factors. And then of that we go and look at them and do heavy lifting on those stocks. So we probably look at 500 to 600 stocks in detail, some of which of those we start researching early on in the piece when we decide that managements may be a little bit overall optimistic or not on top of their environmental factors or don't care about their employees, or when we go and research the employees you find the employees don't really like the business or they don't feel nourished. That's a bad sign. You know, you've got to buy businesses where the employees want to be there. That's so key. [00:34:00][94.0]

Bryce: [00:34:01] One of the biggest challenges I think any investor faces, you know, particularly early on in their journey is when it comes to small caps, is actually finding enough information on the. Companies without having to actually go and chat to employees or go to their AGM and actually suss it out for yourself, what's something that we could do, I guess, to alleviate that pain a little and perhaps bring small caps into our portfolios more without just buying a small cap index? [00:34:26][25.6]

Tobias Bucks: [00:34:27] And this is where I think younger people have a massive edge on old people who wear double breasted suits and have already earned all that dough that we so desperately want. So, yes, annual reports, absolutely key. Listen to conference calls. All this stuff's on the website. I'd urge people to go and look at employee on the Internet. You've got a plethora of information so you can go and find that there's very specific industry, professional forums, sites. So if you're looking at a company that you want to invest in because you think it's going to go up a lot, no one else realises that yet. Then you want to go and whatever industry it does go and find that specific industry professional website, there will be a forum on the Internet, just like there's a forum for people who play Sims. There's a [00:35:09][41.7]

Tobias Bucks: [00:35:09] forum for people who are [00:35:11][1.4]

Tobias Bucks: [00:35:11] very specific type of gas engineer or a very specific type of of development operator. You know, for a software company, they're very slow. Go and find that stuff and read what people are saying, because you you'd be so surprised by how much information's out there. People will write when they have a bad boss. People will write when they love their company. People will write when the company is investing. So you can go and find that YouTube. Nice talking about the trade desk instead of Google YouTube. Fantastic. You can do this 10, 15 years ago. So when you go find a small cap, they'll probably do something that you don't understand, even if you're passionate about it. Whatever they do do, there will be a video of it on YouTube so you can immediately learn yourself and get that learning of how it works and what they actually do. So I'd recommend everyone's got the same Google, you know, get up your Web browser of choice, be it big thing. [00:36:01][49.4]

Tobias Bucks: [00:36:01] Hey, come on, big the good fight [00:36:04][2.5]

Tobias Bucks: [00:36:04] and Firefox and and get up that Internet Explorer or anyone [00:36:09][4.4]

Tobias Bucks: [00:36:11] get up that get [00:36:12][1.2]

Tobias Bucks: [00:36:12] up that Web browser and just start looking down the rabbit warren of the Internet because you don't need to go and speak to people or go to these homes where no one's going to listen to anyway, especially as a young millennial, like just go out there and do the research yourself because you will know it'll be written there. What you want to try and do is get an understanding for what's going on in the industry, not what's happened to a particular company's contracts. That's a no no. You were going to sing sing. But it's more important to say, OK, is this company improving its culture? They're hiring people. The people want to go and work there. The people like working with them. Is the stuff they tell us in their company presentations true or is it a pipe dream? [00:36:46][33.6]

Alec: [00:36:46] So I guess the the flip side of the opportunity set that we were talking about before is I'm sure there's often times where there's more stocks that you want to own than you can in your portfolio. So can you talk us through how you manage the portfolio and when you decide you want to sell? [00:37:05][18.2]

Tobias Bucks: [00:37:05] Yeah, absolutely. I've got way more stocks than are currently in the portfolio. [00:37:09][3.6]

Tobias Bucks: [00:37:09] And I said, you guys are listening. I like to talk about stocks [00:37:14][4.4]

Tobias Bucks: [00:37:14] all day long if you want to do another podcast, because there's so many great businesses out there. And I think talking through examples can give people a better understanding of what makes a good investment. So what do we do? Well, look, we run a portfolio where we want to deliver what we call niche businesses that are going global. So you want a business that's in control of its niche. It leads its niche is really good. It it got the quality aspects I've described before, but it's expanding. And if you get a niche business that's going global, what you've got is an emerging global titan. So we stuff our portfolio full of emerging global titans. The only one we've seen in Australia, there's a few, but the one that stands out would be CSL. CSL was a was a niche leader. It owned its nation plasma and it started expanding globally. That's an emerging global titan. Don't you wish you bought CSL a long time ago? Yes. So so that's what we're stuffing our portfolio full of. Look, we manage risk because and one of the reasons you want to be global is because you diversify everything. So we've got businesses in Sweden, we've got businesses in Italy, Spain, the US, Japan, Hong Kong, Singapore. The more diversity you have, you improve your risk return profile. So you'll get the overall same level of return, but less volatility and return. So it's important to be diversified. So we diversify across markets and across different sectors. Ultimately, it's much easier to find emerging global titans in health care or software as a service than it is in materials where it's a lot of house builders and cement and chemicals companies or in consumer discretionary where they sell stuff. It's much harder to find businesses that are really niche leaders going global there. But you want to be diversified. So you need to work really hard to find businesses in those sectors that you think are huge opportunities. You want to be fully diversified because it's very difficult to work out what's going to happen in the next six months. In terms of macro views, what's Trump going to tweet next? Two days ago, the trade deal was off. Now the trade deals back on this has been going on for nine months now. You can't make money betting on that. You might as well go and take your money down and start punting it on foreign exchange. You've got no chance and you want to diversify. So, yeah, and we've got a big buy list of stocks that we want to buy. And when we when that when they they get to an attractive valuation that we think, yeah, that's what we've been waiting for. That's that's, that's a really good valuation. Then we'll bring it in. And likewise. So when we sell a stock, it's about whether that growth is recognised. So I said trade desk. I think it's got a fantastic future, but that's going to be priced into the stock. The stock's rerated from six times sales up to 14 times sales. It's not a new story anymore. When the story is not new, it's time to go and look for the story that's unrecognised. [00:39:48][154.2]

Bryce: [00:39:49] I think we can do a whole new series called Tobi's Watch List [00:39:52][3.0]

Tobias Bucks: [00:39:53] just [00:39:53][0.0]

Alec: [00:39:56] so totally. You've talked about your long watch list and a lot of a big opportunity set up out there. So I want to ask you, what's the most eclectic out there stock that that's on your watch list and what was the research process and thesis behind it? [00:40:11][15.3]

Tobias Bucks: [00:40:11] Oh, wow. Okay, that's a really good question. One that should have been submitted in advance. [00:40:15][4.1]

Tobias Bucks: [00:40:17] Okay. [00:40:17][0.0]

Tobias Bucks: [00:40:18] Wow. Eclectic as in what they do is really interesting or that their business model is just like that. Shouldn't be a business model. [00:40:24][6.4]

Alec: [00:40:25] Whatever, whatever comes to mind really. [00:40:27][1.9]

Tobias Bucks: [00:40:27] We got loads, we got businesses to do hearing aids. We got guys that build machines that count blood, not thinner us, by the way, [00:40:33][6.0]

Tobias Bucks: [00:40:34] that's a different one. [00:40:35][0.5]

Tobias Bucks: [00:40:35] We've got businesses in oil and gas and software and guys who make the haptic devices for phones niche play. So on your phone, did you touch a phone in? Vibrates it things have come a long way since Nokia, where you had one vibrate. Now there's an interaction between how hard you press and where you press and what sort of vibration you get and what sound you get. It's called a haptic driver. It's really important. There's one company that sells them all to Apple. It's called Cirrus Logic. We own it in the States. It's the world leader in haptic drivers also does voice recognition. So, you know, not going to have facial recognition. Now, what's gonna happen is you be able to speak and your voice fit, your voice print is way more accurate and rare than a fingerprint. So you can't fake a voice print. And so everything's going to be voice identified. And then now the leader in the voice identification security technology. So you got a really niche player there that's got huge runway. [00:41:26][50.8]

Alec: [00:41:27] Wow. So fine. I find that fascinating one, because I had no idea about some of those things. But just just that you find these companies out there, like with those examples. Well, was a sort of top down like IVF is a big fame. Who are the big players in that sector? Let's go down that way. Or was it bottom up in terms of let's start with every company and look for sort of key metrics and then research the industry after you find companies with good metrics? [00:41:53][26.4]

Tobias Bucks: [00:41:54] So for us, yeah, it's definitely find bottom up first and then understand the industry, because you can go and say, I really like IVF or I like digital programmatic advertising. There's a whole range of businesses that look good at the start of this year that have gone bust like one of the biggest in the world. Seismic fell over in the US about four months ago. Everyone was raving about it, bankrupt. So you've got that emotional bias that when you find a theme, you really, really like. And I'm going to bet on this theme. You've already told yourself you're going to put your money into the theme. Then the only question is which one of the stocks are you choosing not to completely ask about the wrong way of doing it? What you want to do is find the characteristics that you want a company team that's not going to lie to you, company team. It's going to under promise and over deliver a company team that's got a good thing behind it, that's got a good return on capital versus it peers. You've got to start from the ground up, then see what you've got and then go and research the industry. That way you always make sure you've got a solid base in good quality management teams. And that's the thing about small caps as well, that we said large caps is more about the top down risk, not what the company's actually doing in small caps are all about what the company is doing at the top down in small caps, you do get much better rates of return. But also management is so much more important in a small cap than a large cap. A great management team can be the difference between a very average stock and an emerging global titan. So understanding management, the quality of the company, the culture of the employees is key first. [00:43:18][83.3]

Alec: [00:43:18] So I've got another one. I'm just going to keep asking questions until Bryce tells me so. There's obviously a lot of duds in the small cap space. There's a lot of companies, as you say, that have bad management teams, bad business models, whatever it is. Do you do you look at shorting those companies as well or do you just look at going along? [00:43:38][19.2]

Tobias Bucks: [00:43:38] In my fund? We don't short, but we do have long, short strategies that Ausbil that are domestically focussed and they're very successful as well. We don't personally short in the fund. I run with Simon no [00:43:50][11.5]

Bryce: [00:43:50] well before Ren can ask a thousand other questions. It's confirmed we will be back next week with Tobi's Watchlist. No, look, fantastic to get you on the show today. We really appreciate you coming on. You know, I don't think we've had a conversation this detailed about small caps before, so I've absolutely learnt a lot. But before we do wrap up, we like to finish with three final questions that we ask everyone. So we'll kick it off. The first one being, do you have any must read books, investing or otherwise? [00:44:17][26.9]

Tobias Bucks: [00:44:18] Yeah, I do. So I thought the first thing is I try and reference one that got written recently because everyone gets told to go and find books written, rich written really, really early on, which I will come to. But just so I can get the pronunciation of the name right, I do think it's really important to longrun investing. So Stocks for the Long run by Jeremy Siegel. It was written in 2014. It's a great way of trying to understand long term investing, which is what I'm about as I've tried to explain unrecognised growth over the longer term and finding the next Google. That's got to be an emerging global titan quest that that really helps in that one. Up on Wall Street by Peter Lynch is a famous fund manager that really I think that's important as well, because I'm saying you've got to invest in something you understand and you can touch and you get you can get your head around and want to research. And that book really helps you working out how to invest in brands, et cetera. And then obviously, you can't not say Benjamin Graham. So the intelligent investor, it is the foundation text. You've got to go and read it first. It is semester one, year one textbook. You got to go and read it. [00:45:20][62.3]

Bryce: [00:45:20] We have read it is dry. [00:45:23][2.9]

Tobias Bucks: [00:45:25] It's so dry. Yeah. [00:45:26][1.0]

Tobias Bucks: [00:45:26] If you if you're not sleeping, if you're feeling very lonely, that's a great book. [00:45:31][4.9]

Alec: [00:45:32] Know and then you can do security analysis as well after that. [00:45:35][3.3]

Tobias Bucks: [00:45:35] Yeah. No. [00:45:36][0.7]

Alec: [00:45:38] So our second question we like to ask is what's your go to source for investing in. [00:45:43][5.2]

Tobias Bucks: [00:45:44] Yes, so annual reports go straight to the annual report that will have their earnings call transcript on the website will have a recording of their earnings call and then you can hear what management say and more importantly, what questions the analysts are asking them. These analysts that the whole job is to understand the company, you want to get your head around those questions. So first thing on your reports and second thing, we use Bloomberg, in fact, to get that information which isn't available to everyone I know. But what's really important is I said industry forums, get on the Internet, go and find what's out there. It's all publicly available and you can find so much. [00:46:20][36.2]

Bryce: [00:46:21] So if you could go back to when you first started investing or perhaps when you sold your stocks and went for the coal mine, what would you tell yourself back then as a piece of advice? [00:46:30][9.2]

Tobias Bucks: [00:46:31] I think be patient. Don't try and come up with the answer too quickly. Just take it time for it all to settle in all your research. Secondly, do your own research. And the third one is just don't be don't be satisfied with an average stock. Go and find an absolute gem. Go and find the next CSL. They're out there. You'll get much more excited by that than putting your money in in a bank in Nablus, CBA or BHP or the latest gold miner your mates told you is going to go up a lot. Like don't do that. Go go and invest in something you you care about and that you understand and that you think that. Absolutely. [00:47:06][35.4]

Alec: [00:47:08] I love that I'm inspired and I don't settle for an average stock. [00:47:12][4.1]

Tobias Bucks: [00:47:13] No, don't don't you know, average. I know [00:47:15][1.9]

Tobias Bucks: [00:47:16] I have an average stop [00:47:16][0.6]

Bryce: [00:47:18] time. If anyone wants to find more information on you or on Ausbil, what would be the best way to do so? [00:47:23][5.1]

Tobias Bucks: [00:47:23] That definitely first place would be the website Ausbil dot com you. And that's got everything about our company. We're a very long established company in Australia. We've had good returns so far over a 20 year period. We really like the opportunities we see out there in terms of the client base. You can find information about our fund and the other funds we run Ausbil on on the website, but definitely be the first place to start. [00:47:45][21.9]

Bryce: [00:47:46] Nice. Well, fascinating conversation. As I said, thoroughly enjoyed taking your time to join us on the show. So a massive thank you on behalf of Ren and myself, Toby, some awesome examples there of some cool stocks that we've never heard of. Hopefully our listeners got as much out of that conversation as we did. So thank you very much. [00:48:04][17.7]

Tobias Bucks: [00:48:04] Thanks for having me, guys. Was really good fun. Thank you. [00:48:04][0.0]