Expert: Roger Montgomery – When the market busts, load up

Bryce: [00:00:04] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing. Whether you're an absolute beginner or approaching Warren Buffett status, our aim is to help break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you going? 

Alec: [00:00:30] I'm very good, Bryce. I'm pumped for this episode. The markets are down. Well, we had a good week last week, but you know, overall, 2022 has been tough and we've taken the opportunity to speak to as many of the experts in the Equity Mates network as possible, learn from them, say what they're looking at. And we've got a great expert today. I'm excited for this one. 

Bryce: [00:00:51] I'm so excited as well around that. I couldn't wait to get into it. I forgot to press record when we started this. 

Alec: [00:00:58] So for the second time. 

Bryce: [00:00:59] I got the second time back by popular demand. It is our pleasure to welcome Roger Montgomery. Roger, welcome. 

Roger Montgomery: [00:01:04] Glad to be with you guys again, again, again. 

Bryce: [00:01:08] So we are recording, which is good. And Roger is the chairman and chief investment officer at Montgomery Investment and has been on the show a couple of times as well as on our Ausbiz channel. So make sure you go and check that out if you'd like even more info on what Roger does at Montgomery Investment. But Roger, so much going on in markets will start with just sort of your general thoughts. So how do you sort of summarise what's going on at the moment? 

Roger Montgomery: [00:01:33] So we've had an enormous compression in P/E ratios, and historically that happens every time interest rates go up or inflation accelerates right back to the seventies. We've just had the biggest sell off in bonds since the 1980s, and in response to that, pays have compressed. And what's interesting is the S&P 500 is off about 18% or thereabouts. P/Es have compressed by about 20% in aggregate. There's stocks that have compressed a lot more than that. We'll get into those. 

Alec: [00:02:04] A lot of them don't have earnings. 

Roger Montgomery: [00:02:06] No earnings in those ones. And so what that tells you is that, you know, the fact that they there's there's sort of a reasonably high correlation between P/E compression in the market fall tells you most, if not all of that market fall has been the result of P/E compression. It hasn't been because earnings have declined yet. In fact, earnings estimates are still rising. The FactSet data for consensus earnings shows the last update analyst earnings expectations for both 2022 and 2023 have gone up. What's actually happened, if you dig down a little bit more, is revenue. Expectations have declined slightly, but profit margins have gone up. And so the net effect has been a rise in profits. So at the moment, all of the stock market fall that we've seen has been this PE compression. If we get earnings declining, you know, and a lot of economists are forecasting a recession or some are not, all of them are, but they're all forecasting lower growth next year. If we got a recession, then what you'd find is the sell side analysts that are responsible for feeding the data into those facts. FactSet Consensus estimates a lot of those analysts would be reducing their earnings expectations or D rating. And in that case, you then get P compression and then another leg lower because you get earnings declines and we're not there yet and we're seeing the market bouncing. 

Alec: [00:03:21] So, Roger, you just mentioned there that they expect revenue to drop, but they expect profit margins to increase, which doesn't seem to gel with the idea that inflation is running rampant across the economy. Indeed, and in particular, producer price inflation is up. That wouldn't suggest the profit margins are going to expand. So what's the thinking there? 

Roger Montgomery: [00:03:40] Well, I think at the moment, the sell side analysts are optimistic. And I'm just reading between the lines. They're optimistic that these companies will be able to pass on the price increases, partly because people's wages are going up, because the labour market is really tight. 

Alec: [00:03:53] But then you would expect revenue to be up as well, wouldn't it? 

Roger Montgomery: [00:03:55] Yeah, indeed. Well, you'd expect revenue to go up and we expect profit margins to expand. That's right. Both would go up. That doesn't seem to be happening at the moment. 

Alec: [00:04:04] So we're calling out sell side analysts here. We're going to. 

Roger Montgomery: [00:04:08] Say. So it tells me that, you know, what you really need to be doing now is thinking about individual stocks. You know, the macro has driven the macro economic picture, has really driven a lot of what's happened in the market so far. And until we see the US Federal Reserve and the Australians Australia as RBA working to contain short term inflation expectations, you're probably not going to see a sustained rally in stocks. Having said that though, today I literally just instructed my bank to add to an investment in one of the funds that we distribute in Australia run by Polen Capital in the United States. And they've got a small and mid-cap fund called the Poland Global Small and Mid-Cap Fund. I invested in that at inception, put in what would be a lot of money for a lot of people, but relatively small proportion of my portfolio because it's global small caps. When we started distributing in Australia, the BPA of the portfolio was 40 for the PS, now 25 well so the portfolio has fallen by about what's actually happened about. 70%, 70% of the decline in the unit price has been due to pay compression and about 30% actually being earnings growth. So the portfolio is off about 35% and most people who think, well, that's terrible, you must be panicking. Well, now, in fact I'm not. You know, Warren Buffett has just invested 51 billion USD in equities in the first three months of the year. I'm putting more money in. In fact, I as I said a moment ago, I alluded to a moment ago, I called my banker this morning, sent them an outrageous transfer request and said, I want you to top up my investment in the fund so I'm putting more money in the market. And if it if I get it wrong and the market falls further, well, I'll add I'll add increasing amounts as well as the payments get lower. 

Alec: [00:05:52] So I just want to contextualise this fall in pay in relation to what like the long term averages because ease have fallen, but the last few years were incredibly high. Yes. So where are we in relation to the long term average? Are we there yet or are we still above? 

Roger Montgomery: [00:06:09] The long term average is not that important. We're about the ten year average. Okay. Right now, just to put just below it, actually, we're just slightly for the S&P 500 was slightly below the ten year average. Yeah, but that's probably less important than having a look at where plays are relative to other times, pages of compressed air. So in the 2018 correction, we're about the low point of the 2018 correction and we're very, very close to the low point of the 2020 covered sell off. So that gives you a better idea. You know, we really are in the doldrums. We really are very low in terms of recent history. But remember, after the 2020 sell off in the market, we saw unprecedented fiscal and monetary policy support. And after the 18 sell off, that was when the Fed started lifting interest rates quite rapidly. Then they once the market fell, they stopped. I think the market fell about 20%, they stopped and then they started cutting rates really quickly again. And at the moment the US Federal Reserve is being rather hawkish. You know, they're saying, well, we're going to keep raising rates until we can control inflation. Remember, this is the same Federal Reserve that, you know, six months ago were saying rates would stay at zero for all of 2022. And prior to that, the Fed was saying inflation would be transitory. I actually am probably the odd one out. I still believe inflation will be transitory. I still believe that if we can contain short term inflation, inflation expectations, long term inflation expectations are still very low. As long as we can contain those expectations and not give in to demands for higher wages, we'll see some of this pass. It will be painful and it will take longer because of course a lot of it is supply driven. The Fed and the RBA and Australia can't do anything about the supply constraints. They can't do anything about the bottlenecks in the supply chain, they can't change that. So all they can do is contain demand, try and bring back throttle demand. And the way to do that, of course, is to lift interest rates. What you've got now is and I'll share with you, a friend of mine owns a chain of dry supermarkets in Victorian rural Victoria. He, along with others, are dedicating the amount are increasing, the amount of space in the fridges that they're dedicating to mincemeat because people are trading down, you know, they're not buying as much. LAMB They're not buying as much expensive cut, as many expensive cuts and they're buying mince. We know that high petrol prices is acts like a tax on people spending. We know higher interest rates acts like a tax. You know, we know the US dollar acts like a tax on the rest of the world. You know, all of these things are having an effect on people's ability to spend at the same time that house prices are coming off not only in Australia but in the United States, in Canada we're seeing it. In New Zealand we're seeing it. It's happening as well. Here it started and so people are feeling less wealthy. So the combination of those two things is enough to contain spending. So I don't think that central banks will need to raise rates quite as much as what the market currently expects. 

Bryce: [00:09:02] Yeah, that is super interesting. And I remember when we spoke to you late last year, you were very, I guess, sanguine on the fact that, yes, yeah, inflation is transitory and this is something that we'll sort of get through. So I guess if you still sort of believe that, how are you positioning your portfolio at the moment or thinking about investment opportunities now versus everyone else who's now saying, you know, forget the growth, get into the industries that are inflation, the. 

Roger Montgomery: [00:09:30] Defensive stocks, you know, the typical sort of, you know, your more mature businesses that have stable income streams. That's where everyone went to at the start of the sell off. And now, relatively speaking, those stocks are expensive. So it's the growth stocks that have fallen the most. It's the quality growth that's fallen the most. So if pays, say just I mean, it's a basic, basic arithmetic that's really useful knowing when it comes to investing. If you buy and sell a stock on the same PE ratio, your internal rate of return equals the earnings growth, right? So if you buy a stock, the turning point today on a piece of ten, you paid $100 for the shares if it grows at 15% per. You're going to double your money in five years. You're going to get 15% because the earnings are growing at 15%. Your return matches the earnings growth rate. And so now that piece of compress, you're getting these stocks quite cheaply. I mean, the reaction in the market has been unbelievable. You know, there's a a telecom discretionary telecom provider called it stocks. AB They basically said that their subscription growth was slowing slightly. They announced that it would impact their revenues to the tune of 1%. The stock fell 35%. 

Alec: [00:10:43] But that's. 

Roger Montgomery: [00:10:44] You know, so. So you're getting these overreactions and you've got to remember that old Buffett aphorism, which was be greedy when others are fearful and be fearful when others are greedy. Well, right now, everyone's super fearful. So it is really important to be investing during this time. So back to your question, which was, you know, what are you investing in? Well, there's a couple of things. So one of them is we want to go for things that are structural growers. We want to look at companies that really are sensitive to changes in economic circumstances. So, for example, Macquarie Telecom is a business that fits that mould. You know, it's a business that we know it's selling enterprise level cloud and you know, and defence level data centres. It's got growth ahead of it. And as it fills out its data centres they're in, in Epping or North Ryde. You know it's going to just start throwing off cash when it's fully tenanted and it'll be able to increase the rate that it charges for those services. And guess what? Someone like a Canadian teachers pension fund will come along and take it over. You know, that's the sort of business that we like. Another thematic that we think makes sense is quality growth. So these are your classic businesses like ARB. They've fallen 35%. You know, there's there's been some pull forward demand. So there's going to be a bit of an air gap in terms of their earnings. And the market's really nervous about that. But that's why you can buy it, not at $55. You can buy it at $30 today. You know, it's fallen a long, long way. And this is run by the Brown brothers and it's extremely high quality business. You know, the generating 20 to 23% return on equity. Got no debt to speak of. They've made some tactical acquisitions and raised some money over the last ten years, you know, and I reckon they're worth about $28 now where you get to buy at a discount to $28, I don't know. But I've already bought some, you know, thinking that, you know, they're worth you know, they're worth close to value or they're trading close to what they're worth. And I'm owning them for five years. You know, everything that we do at Montgomery and with the funds that we partner with, everyone's thinking, if I was a bear, a grizzly bear, and I went into hibernation for five years and I came out and opened my eyes and had a big stretch, would I be worried about the things that we're worried about today? Probably, no. The world's moved on from those things and we might look back on this year and go, Wow, I can't believe I got to buy that company at that price. But having said that, the caveat is that we do get much more broad acceptance of the possibility of a recession. So notice I didn't say we get a recession, we just get broad acceptance of the possibility. You just need sentiment to change towards the possibility of a recession. And that's enough for people to bring down their earnings estimates and then share prices fall. Then that sets you up again. You know, there's that there's a silver lining to all of this, because what happens at that point is that markets have a much easier ability to actually beat analysts expectations. And then you get rewrites. They get big reversals back up in price. I've been doing this for a long time. Guys have been doing this for 32 years. And I can tell you, I've seen the market sell off lots and lots of times. I've seen it recover slowly. I've seen it recover quickly, but every time it recovers.

Alec: [00:13:55] Yeah. So, Roger, we're getting to some individual stocks. How you positioning your portfolio. And I think that's where we want to spend most of this time. But I do want to ask one question about in, I guess, inflation, interest rate, central banks before we move off that you mentioned there that the Fed said they were going to keep rates low and then they changed their mind and they are now increasing aggressively. We had the RBA here say that weren't going to raise write rates until 2024. That's right. They're rising, right? Yes. And yet so despite the fact that a lot of what central banks say at one time turn out not to be true, people still put so much stock in what they say today. 

Roger Montgomery: [00:14:33] Well, I think the reason why there's been this compression in pays or why there's been so much fear and anxiety in markets is for the first time in a long time, you haven't been able to rely on what the Fed says. So the central banks have become another variable where previously you knew what they were going to do because they did what they said they were going to do and everything else was a variable. But now central bank policy itself is a variable and that makes it a lot harder. That's another another plight that we have to spin and try and stop from crashing. You know, it's another another difficult thing to try and anticipate. 

Alec: [00:15:06] So do you try and anticipate them at all? Now, you know, we're. 

Roger Montgomery: [00:15:09] Looking at individual stocks. You know, we're. Thinking about growth. We're thinking about businesses. You know, I mentioned earlier that I've put some more money into this Polen Capital, small and mid-cap fund. The average return on equity of the stock, a stock in that portfolio is double the market. Average earnings growth is expected to be circa mid 20 percent's sort of 25% for the next five years. And you can now buy it on a PE of 25. Whereas you know, in October last year it was 44 times earnings. So you got, you know, you got this great growth. These are companies like Tool. You know, if you if you ride bikes Bryce I know you ride bikes, you know, you know, about to roof racks and bike carriers. Yeah. You know well, in 140 countries in the world to fly is number one. It's a global small cap. There's only 200 companies, countries in the world. And in 140 countries in the world, it's number one.

Alec: [00:15:59] I haven't heard of it all way. 

Roger Montgomery: [00:16:00] Way to take you. Yeah. Oh, okay. 

Alec: [00:16:04] You are not a cyclist. 

Roger Montgomery: [00:16:06] Some people call it fall. They come up with all different ways of pronouncing it. It's too late. 

Alec: [00:16:10] Yeah, I count us. 

Roger Montgomery: [00:16:11] You know, another one, which is another business that the fund owns, which I think is just an amazing business, is a company called Yeti. Yeah. Yeti. Yeti have a cult following. 

Alec: [00:16:22] The microphones. No skis.

Roger Montgomery: [00:16:25] Also like skis, but they have a cult following. In the United States, people pay 400 USD for an S3 cream. I ask about my skis. Here's a funny thing. I've got a property in north east Victoria, a little farm, and there's a post office there in a little town called Mount Beauty. And in this town called Mount Beauty, there's a post office and the new guy who's bought the post office. What he's done is he's shrunk the post office part of the store and he's expanded the outfitters part of the store. So he's got mountain bike gear, he's got hiking gear. You know, it's a real adventure playground down there. Yeah, it's right near Falls Creek. And one of the brands, he's toxicity. If a white page was nowhere a map of no way mount beauties in the middle of it. And you know, but it is a beautiful place, I've got to say. I probably shouldn't be talking about it because I want to keep it secret. But they're of all places in the world, they stock yeti. Now Yeti's revenue is about 95% generated in the United States. If they can build the cult following that they've got in the US, elsewhere in the world. Well, the sky's the limit, you know. I mean it's just incredible. So, you know, and if you like gin and tonic fever-tree, you know, make a really great brand of tonic. They've got a really, really interesting strategy for rolling out their tonic water and displacing the incumbents in every country they go into. What they do first is they go into the pubs, they go into the bars. They only supply it to bars and pubs. So people order a green tea or another drink that's got tonic in it. And people, you know, the bartenders pour it and everyone has never seen Fever-Tree before say, oh, what's that? And I explain what it is. And then a little while later it's in the supermarkets and guess what? Everyone bars. 

Alec: [00:18:01] Pubs.

Roger Montgomery: [00:18:02] So, you know, these are these are great businesses. They've fallen a lot. You know, the share price and the p share price falling because the piece of compressed. But they're still growing. They generating cash. They're all profitable. They're not these profitless prosperity companies that you alluded to earlier. And, you know, these are the sort of businesses we want to be investing in. And you want to be, as I said earlier, you want to be hungry or greedy when everyone else is fearful.

Bryce: [00:18:25] Yeah, love that. Well, Ren sold his car this morning just to get some liquidity. 

Alec: [00:18:29] Getting liquidity? All the banks to get. 

Bryce: [00:18:31] Into the. 

Roger Montgomery: [00:18:31] Market. You are. I'm glad you mentioned I sold my car, guys, two weeks ago. I got what I paid for it five years ago, even though I put I paid for it. And my son, I advised him to sell his car as well. He's going to Japan for an exchange programme and he sold his car. He was going to keep it because he was only going for six months. He was going to keep it. I said my second-hand car price is going to drop and you want liquidity. So I sell your car now and just buy scooter and get an electric scooter. So I bought an electric scooter and he's riding around on that, catching the train. Yeah. And I think second-hand car prices are abnormally high and everyone talks about supply chain bottlenecks and you can't get a new car. You will be able to get a new car. Yeah, it'll take a year or two, but you will be able to. And when that happens, second-hand prices are going to plummet. Yeah, they'll go back to what they should be. They won't go back 10% or 15%, they'll drop 30, 40, 50%. 

Bryce: [00:19:27] It's really testing everyone's, you know, everyone's is so used to now being able to get everything they want here and now. I went to buy a new computer yesterday and Apple's usually two day delivery. Yes, 12 weeks at the moment while they go away. And I was just blown away for a company that prides itself on it, we will get this, too. I mean, in the. 

Roger Montgomery: [00:19:48] Meantime, you're going to use a stone tablet. Yeah. 

Alec: [00:19:50] Yeah.

Bryce: [00:19:52] So, Roger, I just do want to close out the inflation pace. What indicators or, you know, over what period of time will it take you to consider that it might not be transitory? Like, what would what would it take for you to say, you know what. 

Roger Montgomery: [00:20:06] If short term inflation expectations creep into long term? Of inflation expectations. So at the moment, if you look at the 210 Treasury spread, which is the yield difference between two year bonds and ten year bonds, you can see that that's inverted. If you look at the tips, which is the Treasury inflation inflation-protected securities that's inverted, that tells you that the bond market at least forget about what the equity market thinks. But the bond market at least thinks that inflation is transitory, that longer term inflation is going to be much, much lower than current inflation rates. If that starts to flatten and steepen, then that would be a signal that short term inflation expectations are starting to inflate. In fact, long term expectations. And then the bank would banks would have to be a lot more hawkish, and that would be a much more negative scenario. 

Bryce: [00:20:56] Yeah, right. Well, Roger, before we move on and talk about some more stocks that are in the Montgomery portfolio, we're going to take a quick break to hear from our sponsors. 

Alec: [00:21:07] Now, Roger, before the break, we have spoken about we covered a lot of ground already, but you've mentioned five stocks and I've been madly typing as you've been talking just so I'm getting them all down Macquarie Telecom are be the way to to to. 

Roger Montgomery: [00:21:23] Say that everything about the.

Alec: [00:21:26] Wizard of Oz is testing. You are not very good. Very good yet. A lot of microns. No. All the microphones and fever-tree. I've had a quick look at all of them, all profitable, all have a p e ratio and. 

Roger Montgomery: [00:21:40] We, we try to only invest in quality. Right. 

Alec: [00:21:42] And I want to turn this conversation to unprofitable tech because that is the part of the industry that's really hurting. Yeah, we're saying zip down 90% overseas. We've seen similar stories play out. But I want to start with this question. Those five are all profitable. Would you invest in an unprofitable tech company? 

Roger Montgomery: [00:22:01] Do you know what? There is a scenario where a small cap fund would do that, and that's because those profitless prosperity stocks are more leveraged to a recovery in the stock market. Right. And so they go up the most. I wrote and I'm not suggesting these companies now, but, you know, I wrote about we work in Peloton and those businesses last year and the year before when they were at all time highs. And it was absurd that we work was trading at a higher market capitalisation than all of the property owners that it was renting properties from combined. You know, and then Peloton, you know, the idea that Peloton, which sells a stationary bicycle was worth, you know, $18 billion or whatever it was at the time. It might have even been higher than that. That was just crazy, the fit and everyone knows that the fitness industry just said just it literally lurches over the decades. It just lurches from fad to fad to bed. That's how the fitness industry goes. And this is just another fad that will pass. And so would we buy those sorts of businesses? Look, if we felt that it gave us the most leverage to the upside and it was relatively the best quality in a sector that we were underweight, the small cap fund is trying to beat the small cap index by 10 to 15% per annum, and the only way to do that is to neutralise any risk of a particular sector going up and driving the index higher. So what you what the small cap guys want to do, Gary, Rollo and Dominic Rose is they are saying, okay, well, we're underweight. This part of the index. These stocks are in our index. We're underweight that. Do we have a negative view on that? Do we are we should we be short because we are effectively short if we're underweight and if they're not willing to be underweight, they'll neutralise it by getting to market weight. So they will own those sorts of stocks. And the fact is that they, as I said a moment ago, they do have the most leverage to the upside. They'll bounce the hardest when it's risk on again, when people decide it's time to load up on stocks, they'll want to take those crazy stocks again because they're the ones that are going to rally the most. 

Alec: [00:24:03] What a moment that will be. 

Roger Montgomery: [00:24:05] Might be some way off. Yeah.

Bryce: [00:24:07] And say what if you go to the other end of town, the big and the big profitable and the Amazons and the alphabet, you know, where where are you sitting on on that? 

Roger Montgomery: [00:24:16] Well, they're the last to be dumped, you know. They're the most. Right. They're the ones that came off most recently. They were the stocks that people held and that they were the stocks that held the market up, disguising what was going on underneath. You know, there was a real rot that was happening underneath. A lot of the small caps were already falling. But those companies are rare businesses. Even in business school, we never anticipated that a company could generate a high return on equity as it got bigger. Yeah, typically as companies get bigger, they attract competition and the easiest thing to do is to compete on price that erodes your profit margin or your profitability. And so return on equity starts to drop. But these businesses, the Microsofts Apples, Googles, Amazon, even Netflix to a certain degree, those businesses, they kept generating higher rates of return on equity as they doubled and tripled and quadrupled their equity. And you couldn't contemplate that's first prise in investing. Right. I said to you here's a bank account. So it ran his bank account with $1,000,000 in it, earning 1%. But if you can get $10 million in it from family and friends, I'll give you 10% and if you get 100 million I'll give you 20% and you get a billion, I'll give you 50%. Yeah, that's what those businesses were doing. They were increasing the equity and generating a higher return on equity. They're still going to be doing that in the future, I suspect. 

Alec: [00:25:37] And the crazy thing is last week Alphabet was trading at a time. Pay Yeah well it's bounced back a bit this week but I think. 

Roger Montgomery: [00:25:44] You can buy Apple on a lower pay than that. You might want to check it out. Yeah, the forward pay for Apple is even lower. 

Alec: [00:25:50] What you've just said there about how amazing these businesses are is a new news. Like people have been astonished by those businesses for a number of years. Why was it that Apple and Alphabet had a lower pay than Coles? 

Roger Montgomery: [00:26:06] You're asking me to. To explain sentiment. 

Alec: [00:26:08] And I want to do that. 

Roger Montgomery: [00:26:10] Why do people do what they do? I mean, these are this is why I love the stock market so much as a place to work, because people are irrational with money. And you put them all in one room in one place, and you get them to trade with their money where they you know, it's not like property where it's mark to market once every ten years. You know, it's when you sell it, when you trade it or seven years, it's mark to market every minute. And so it reacts much, much more quickly to reflect people's change in sentiment, and it can build on itself very quickly. I can't explain why people do what they do, but I'm glad they do.

Alec: [00:26:43] Yeah, great opportunity. 

Roger Montgomery: [00:26:45] Correct? Yeah. Yeah. And and I mean, as I said earlier, I'm investing for five years plus. I'm not investing for tomorrow or next week or next month. And so I'm you know, I say I ARB or race or RDA group or Fisher Paykel, Healthcare or Cochlear or CSL or Macquarie Bank. You know, I see these stocks fall 20%, 30% or more and I think I'm real. This is great. 

Bryce: [00:27:11] Yeah, well, that's what we've been talking about on the show over the last few weeks. You know, we're trying to ensure that everyone in the community feels like this is an opportunity that should be exciting. Not one way you're looking, of course, everyone's looking at a portfolio and seeing a lot of red. But, you know, you've listed some companies there that we've for the last 12, 18 months have been speaking about as some of the best companies in Australia. And they are. And yeah. And then you get an opportunity like this and well are selling this country. 

Roger Montgomery: [00:27:37] Can I share with you a quote from Warren Buffett? And I'm going to do this off the top of my head. But years and years ago he said this. He said, your job as an investor is to purchase at a rational price, a part share of an easy to understand business whose earnings are virtually certain to be materially higher in five, ten, 20 years from now. He went on to add after that, he said, put together a portfolio of businesses whose earnings much upward over the years and so will the value of the portfolio. And that's that's all you have to do. You know and what is irrational price. Well down 35, 40, 50% more rational than it was before that's for sure. You know, and remember the lower the price you pay, the higher your return. So to do that, be fearful when others are greedy and greedy. When others are fearful, you can't help but do well. And I know a lot of your listeners are people who are young. They have a really long runway for investing ahead of them. If you're in your twenties, you're going to be investing for potentially another 80 years. You don't think you are, but you are. And I promise you, there's going to be more booms in the next 80 years and there'll be some busts in the next 80 years. But when you see the busts load up, you're going to do fine. 

Bryce: [00:28:49] Well, I'm spewing because I'm heading into a wedding soon. Roger's burning my absolute top dry powder, that's for sure. 

Roger Montgomery: [00:28:56] I know you don't want to go into a wedding and say, Look, darling, I saved 40%. Yeah, that's not a happy start. 

Alec: [00:29:03] Do it, just. 

Roger Montgomery: [00:29:04] Get through that, get through that and then start saving the best thing. 

Alec: [00:29:07] I think price at the wedding should have a wishing well, but rather than cash, people give him stocks through sites. Yeah, no Reg. 

Bryce: [00:29:16] Right, they might.

Alec: [00:29:17] Yeah. So, Roger, you said that and you know, you made it sound so simple by great businesses with growing earnings at a rational price. And I think where people get tripped up is the rational price part of it? Yes. I want to give your book shout out valuable. It's a it's a really good one. You can buy it on Roger's website. You can buy it wherever good books are sold. But there's some great valuation stuff in there. But for people who haven't read the book yet, when you're trying to work out rational price, yes. What are some of the steps you and your team take? 

Roger Montgomery: [00:29:49] I'll make it really simple for everybody. Let's say you've got a business with equity of $10 and it's generating a 20% return on equity. So it's throwing, it's generating $2 of earnings on its $10 of equity every year. What would you pay for that 20% return? Obviously if you could buy it for $10, you're going to get 20% a year. You own the whole business. Yeah, I just buy the whole thing. Forget about the stock market, turn the stock market off and just own the whole business. Well, in this environment, you know, I'd be happy with a 10% return so I could pay double the equity, I could pay $20 for that $10 of equity and I'm going to get a 10% return. So what I do is I search the market looking for those opportunities. Where can I get, where can I pay the lowest multiple of equity for a business that's sustainably going to generate a high rate of return on equity? And that's all I'm trying to do. So I wait for the really bad days, you know, when the the Nasdaq closes down 4% or 5% or 6%, and you know, it's going to be a bad day on the market in Australia the next day. Those are the days where you get some really crazy overreactions. As I said earlier, you know, there was a stock that downgraded their revenue by 1% and its shares fell 35%. I mean, that's what you want. Those sorts of businesses. But, you know, the question investors should ask themselves before they invest in any shares, don't ask yourself, is this stock going to go up tomorrow or next week or next month? Ask yourself this question. Is it going to earn a lot more money? Sure. It's going to be earning a lot more money in five years from now. Because then what? That question, the answer to that question raises a whole bunch of new questions, such as who's going to stop it from earning more money when it starts earning more money? Are there other entrants that have got deeper pockets that could compete with it more effectively? I get offered opportunities to invest in unlisted businesses all the time. So what I'm always looking for is, you know, who's going to knock this business off its perch? How can I be sure this is going to be the. Yes, it's obviously a very good business now. But who is going to knock it off its perch? How can it be knocked off its perch? Why do I believe that these guys are going to win? And that's what you want to ask. Is this going to be the company that dominates its competitive landscape in five or ten years if it's doing it today? Well, it sustain it if it's not doing it yet. How's it going to get there? Answer that question. You'll know whether or not it's going to earn a lot more money in the future.

Alec: [00:32:11] Yeah. 

Bryce: [00:32:12] For those in the community who are sitting there with a bit of dry powder or selling cars to get some cash or thinking about, you know, hearing everyone say this is a great opportunity, but also knowing that it's, you know, you don't want to try and be timing the market or waiting for the bottom. What are some simple strategies or way to ways to think through about entering the market at times like this or, you know, the process of buying into a falling market. 

Roger Montgomery: [00:32:35] Turn the stock market off. Turn off all the noise. You don't need it. You know, it's just distracting you. You know, when you buy a house or you buy a farm or you buy a Domino's Pizza franchise, you know, do you go on the screen and have a look at where it's trading at at lunchtime? You know, do you come home and you say, ah, darling, you know, two bears are going through the moving average. We should sell and buy one better, you know? You know you don't you know, you nobody behaves like that with other assets. So why do you behave like that with stocks? Turn the stock market off. Don't think about it. And just look at the business and say, you know what? I reckon this business is a really good one. I think it's got, you know, structural tailwinds. It's going to keep growing irrespective of what's happening in the economy. Okay, turn the stockmarket back on now. Where's it trading on? Gee, it's fallen 40%. Fantastic. I'll buy it then turn the stock market back off again. Stop looking at it, you know, and put it in the bottom drawer and you want to keep up to date with how the business is going. But you don't need to keep up to date with how the price is going because if the business does what you analysed it would do, then the share price will look after itself. 

Alec: [00:33:40] Hmm. 

Bryce: [00:33:41] Awesome. Love that. Alright, so to close out, Roger, you've already mentioned, as Ryan said, a couple of great stocks there. But are there any others that you know, you've dropped that 30, 40% that are really getting your shot at the moment?

Roger Montgomery: [00:33:55] Yeah, so I'd say education, the code's ill feel that's a business that we think is going to see some really, really strong growth in earnings in the short term because for a number of reasons I'll talk about in a moment, but longer term, they're going to continue to do well. What they do, they run the aisles, which is the international English language testing system. So if you want to get a job in Canada or the United States or in the UK or in Australia, you want to become a resident or you want to become a citizen. You got to do the Isles test, you've got to do the English language test, and it costs money to do that. They run that test globally, and they also do a lot of university placements. They run those university placements with Cambridge. In Oxford, you know, they've got university partners. They've just bought out one of their university partners in India. India is one of the fastest growing for university placements into English speaking countries. The other problem that they've had is that they haven't been able to raise price very much. And the reason why is they've been competing with their partner in India. They've bought their partner out. There's no competitive competition anymore. So they'll be able to increase prices and a large portion of that price increase is going to drop straight to the bottom line. So they're going to see rapid growth in earnings in the next couple of years. And beyond that, they'll continue to see growth because as borders reopen and we start seeing migration again and people returning to universities internationally, as things normalise and people become less fearful about being locked in to a country, then what you're going to see is you're going to see earnings growth sustained over a long period of time. So they've got a relatively high P still, but you're going to see growth that's going to bring down that P.E quite quickly. 

Alec: [00:35:40] We spoke to Julia Lee last week and she was also a big fan of why they pay education. So it's getting a bit of getting a bit of buzz at the moment.

Roger Montgomery: [00:35:47] I probably should sell it. Everyone's actually talking about it's tough to sell it. 

Alec: [00:35:52] Yeah. Any, any others that are that are front of mind. Yeah. 

Roger Montgomery: [00:35:57] Well, another small cap that we think is interesting is a company called Symbiote. Simbi is the old mine it phone. What they do is they provide old network functionality for new network convenience. So, you know, when you you've got an Uber coming, you know, there's a little message there. You know, the Uber is on its way or the driver sends you a text, you know, I'm at the front gate and you write back, I'll be there soon. You know, whatever the message is, that's pre-populated by Uber. Yeah, you have to use a phone number and if you're, if you plug in your phone to Apple Airplay into the car or I think it's Google Play or Apple CarPlay, you'll see this sort of really long 20 digit number or three digit number. They're real phone numbers. That communication between you and the driver is occurring on a phone network where real numbers are being used. You don't see the number. You think you're talking to the driver. You're not calling his mobile. He's not texting you from his mobile. Yeah. And CBO provides that network of phone numbers for all of those services. So they've got massive customers, you know, really big customers using those services. Now, what's really interesting about them is they dominate in Australia. They've just moved into Asia and they think the market in Asia is ten or 20 times bigger than Australia for them. If they can even capture, you know, a decent percentage of what the size of the market is, then their business is going to be substantially larger than they are today. Remember earlier I said you want to find businesses that you're very, very confident are going to grow their earnings over the next five, ten, 15, 20 years? Well, there are two businesses that we think we're very confident. Are going to grow their earnings. 

Bryce: [00:37:39] Yeah, right. 

Alec: [00:37:39] I love that, especially because it's an Australian tech company that I've never heard of before. Yeah. And it they go even more. It's a profitable Australian tech company that I've never heard of. That's great. Yeah. Yeah. 

Bryce: [00:37:52] Awesome. Well. Any more? 

Roger Montgomery: [00:37:55] Oh, look, I've got dozens, dozens and dozens. 

Alec: [00:37:57] Every. 

Roger Montgomery: [00:37:57] Day when we come back, get me. 

Bryce: [00:38:00] Back next time. So just to close out, we had a few that you mentioned throughout the episode. Macquarie Telecom eBay to lay. 

Alec: [00:38:09] Yeah you got it right yeah. 

Roger Montgomery: [00:38:10] To like. 

Bryce: [00:38:12] Yet fever-tree you rattled off a race aria group I'd say education symbiosis. So plenty of opportunity. And I know the list is extensive and I will definitely have to get you on. But Roger, thank you so much. 

Roger Montgomery: [00:38:26] It's a pleasure to be with you guys again. I always love talking to you guys. 

Alec: [00:38:29] It's great. 

Roger Montgomery: [00:38:29] Seamless for me. 

Alec: [00:38:31] Because. 

Roger Montgomery: [00:38:31] You make it so easy for Roger.

Alec: [00:38:33] You make it easy for us. 

Roger Montgomery: [00:38:34] Yeah, he very kind of you. 

Bryce: [00:38:35] Very seriously. That was enjoyable. I learn a lot, as I always do, and I'm sure that Equity Mates community did as well. So fantastic for your time. 

Roger Montgomery: [00:38:42] Pleasure, guys. Look forward to seeing you again.