Expert: Wayne Jones – Low activity investing

Bryce: [00:00:15] 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 doing?

Alec: [00:00:29] I'm very good, Bryce. I am excited for this episode. We have a veteran of the Australian finance industry, someone who came recommended to us by another expert that we interviewed. So I'm excited to pick his brains and say what we can learn.

Bryce: [00:00:44] Likewise, I love a good recon and it is our pleasure to welcome Wayne Jones to the studio. Wayne, welcome. 

Wayne: [00:00:49] Good morning, guys. Pleasure to be here.

Bryce: [00:00:51] So Wayne is the co-founder of Gains Capital Management and portfolio manager for the Gains Focused Value Fund. Since the inception of the fund in 2002, gains have returned 12% per annum, compared to 9% for the ASX 300 accumulation index. So as I said, being in markets for a while, plenty of experience for us to tap into and unpack. So let's get going.

Alec: [00:01:14] Yeah. Wayne 20 years of outperformance. He loved to say that and we look forward to delving into it. But we want to take you back to the start of this interview to the very start of your investing journey. Can you tell us the story of your first investment?

Wayne: [00:01:28] Sure. Well, I was studying accounting, and I'm an accountant by background and always loved the stock market. And so my first time when I used to go to uni, there was an investment newsletter there called Bridges Newsletter as in Bridges Hotel. And so I used to go there and read that newsletter in the library every time I was at uni and they had a little stock for a company called Pacific Tyres. So this is the early eighties, a company called Pacific Tyres and they said we think this might be taking up a candidate and sure enough I bought the stock and sure enough a month or two later there was a takeover bid by Dunlop and so that became part of Dunlop Olympic. And, and so I made money and thought, how easy is this? I was hooked and it was all downhill from there for about ten years. 

Bryce: [00:02:18] So we'll have to start by understanding the investment philosophy that our guests take and then and then go from there. So how would you describe your investment philosophy?

Wayne: [00:02:29] I wasn't, it's nothing controversial. I'm looking for good quality companies, which we can hold for the long term. So there's nothing controversial about that whatsoever. When I started this 20 years ago, I was very hung up on valuation. And so I'd sit there and do spreadsheets and work out what was a good price to pay and or sell things when things got up to that price. These days, it's evolved a lot more in recent years where I'm still looking for good quality. Companies are still on to hold them for the long term. IAB and Race are probably the first two companies that are putting the fund and I still own them 20 years later. But in recent years I'm not quite up to a valuation. I'll let things run and we'll probably talk a little bit more about this investment process. But I let things run a lot more as they go, and I don't hold as much cash as I used to. So when I first started, the other ones have quite a bit of cash because otherwise I would be thinking I need some cash for opportunities. These days I tend to be very fully invested, only a couple of percent with cash and if I see something I want to buy then it becomes a process. Then I've got something I want to buy. And so that means I've got to have something I need to sell. And so my next investment opportunity has to be better than the worst idea in my portfolio. That's my opportunity now. So the cash has been waiting on my portfolio. My investment returns have always been better than the cash return. So the cash has been like a weight. So now I look at it that my opportunity cost is the worst idea in my portfolio at the moment.

Alec: [00:03:54] On that idea of, you know, there's value in the name of your fund, but the concept of value investing, well, it obviously had a difficult ten years as growth investing. And, you know, those big American tech names really just overtook the market. Do you still consider yourself a value investor? 

Wayne: [00:04:13] Oh, look, there's many nuances in that name there. When we started 20 years ago, I was very young. So hence value was in the name of the fund. I wasn't just sitting there buying good members just after the internet boom. I wasn't buying stories, stocks of buying businesses, which I could value and look at their cash flows and that sort of thing. So value was in the name then, because that's how I looked at the world these days. I'd probably just call the investment fund rather than anything else because I'm not quite so hung up on that valuation anymore. 

Alec: [00:04:43] Yeah, fair enough. I think a lot of new investors, you know, you start by reading Intelligent Investor and the Buffett letters and I certainly went through this and I certainly consider myself a value investor, early days looking for net nets and all of that. But I think, you know, the more we do this podcast, the more we speak to experts. You really learn that those labels aren't as black and white as it feels. And it's a lot more interchangeable. 

Wayne: [00:05:08] Very much so.

Alec: [00:05:09] As well as the. The changing of the. I guess, you know, the philosophy over the last 20 years. But one other thing that's changed is the assets under management, and it's a pretty incredible story. In 2002, you started with less than $100,000 assets under management. Today you managed $65 million. Tell us about that, that growth story and what you've learnt over the time. 

Wayne: [00:05:32] Well, the 100,000 really was just initial seed capital that we put in was just cells. And then just the investors have just grown over that time and had some financial plans status for the fund as well. So yeah, so that's how it's gone. It's just been a gradual process. I mean the GFC was fairly ugly which we'll talk about, but yeah, it's just been a gradual compounding over 20 years. It wasn't a get rich quick sort of thing by any stretch. 

Bryce: [00:06:01] So Wayne, we're obviously in a part of the market cycle at the moment that a lot of the Equity Mates community might not have ever experienced before, or it might be only the second time that we're experiencing a significant downturn. You've been managing gains through 2008, 2020, and now 2022. What advice would you have for those that are experiencing this for the first time when it comes to actually investing through downturns? You know, are there any tips around portfolio construction rules that help you capitalize on moments like this? What is your process when you're experiencing a downturn?

Wayne: [00:06:43] And the first thing you said yourself is this too shall pass. And if you live long enough this will pass. I would say to the way I sort of think about it is to really understand the businesses that you own. And if you're right about the business and you can look at the business will get through these periods. You don't have to worry about the markets so much. It's if you're right about the business, you know, they're well funded. They're not lost making the landing, the brand capital. That's what's going to get you through these periods so that if you don't need to transact, just don't look at the market. I mean, if you're not buying or selling that day and you got in the business, I mean, if you own shares in Woolworths, you can see people walking in and out of the supermarket. I don't need to look at the share price to tell me that business is going okay. So looking at the share market every day, it's just going to give you a whole bunch of anxiety you don't need, especially because there's a lot of red there. So if I look back at the GFC and I actually think what we're going through at the moment is pretty mild compared to the GFC we COVID. There was a period in the GFC between January 2007 and March 2009 before we got the bounce that 20 month period, I had 15 down months for 20 and every single month that it was just grinding down and it was down, the fund was down 50% from top to bottom, some of those months within double digit. So it wasn't as if we couldn't predict that. In fact there were lots of people saying, look, this American housing market, it's going to collapse. This is not going to be good news. But I think most people did, I mean clearly just under anticipating bad this was going to be so but you know I had good businesses that didn't have any businesses that went broke. I have been flooded with my two biggest holdings through that period and they came out the other side. So this too shall pass the other side. And especially if you've got a lot of years in front of you and your target markets are coming up 30, 40 years in front of it, what's happening in the next six months is really not going to be important in the scheme of things. But as long as you understand the businesses you own and you understand how they operate and that they can get through these periods, that's more important than the market itself. If you look at COVID, I mean that can fill 25% in two months. That was a very short fall. But when I looked at that I thought, well, I didn't waste time trying to work out well, how many people are going to die? I didn't even understand what the lockdowns grossly underestimated what the lockdowns would do. But the first thing I did was under the stream of hopefully, okay, we can get through it. And most of the companies I had done have debt, so that was a non-issue. So I thought, well, if that's the case, this will get over. We'll pass through this pretty quickly. I was buying with my ears pinned back and I wrote to my unit in March 2020 saying this is the best opportunity we've had for ten years and market to have for another ten years. I've got everything in here like this and funds buying the business to those 50 because you can just see people panicking on the screens where people will just come in on the open and just absolutely pound on price. And you can see that these were not informed sellers. These were people who were just panicking and wanted to get out of the market. So you just don't want to be a panicked over forced seller. You just want to have businesses around and you stick with them. And as I say, we'll forget it all a bit in five years time. We might remember this now, but we won't be talking about it. It's like you'd be talking at an obvious time. 

Alec: [00:10:15] Yeah. This too shall pass. Love that. I guess that you said earlier that the cash waiting was a drag on your portfolio compared to your investment returns, and so over time you had less and less of a cash weighting. And that makes a lot of sense in, you know, 2009 to 2019 where, you know, life was good. But in a market like this where a lot of stocks, the majority of stocks are down, that cash weighting sometimes outperforms, but also there's an opportunity there to deploy cash. How are you thinking now about reducing that cash weighting? And I guess, you know, you said in 2020 you were buying hand over fist. Did you have to sell opportunities? You had to sell companies that were down to then free up that cash to buy? 

Wayne: [00:11:07] Yes, I saw little bits and pieces here and there, but I was fortunate. I had that I was putting money in. I could see it as well. And I was looking at it for every dollar I could get my hands on the stick in the fund. So it was just one of the things I said , basically a joke at the time. I said, I'm looking for 27 pieces down the back of the lounge. Now I'm just sort of trying one and, you know, to put in the fund. So yeah, so the cash weighting, I'm not trying to predict when the market will turn because invariably I'll be wrong. I had no value to the equation there. My ability is to find businesses that will grow over the next decade or more. My ability is not in picking people like Stanley Druckenmiller to pick markets. I can't. I don't pretend to not be. And if I did, I'd have to admit I was lucky. 

Bryce: [00:11:53] You were way. And you'd be. You'd be interested to know that Alec sold his car to try and free up some liquidity to get into the market. So I must say I didn't get a lot for it.

Alec: [00:12:05] Though, so.

Wayne: [00:12:07] I sympathise with you. I don't think the screaming buyers in this current market, but I'm finding things that I think, yes, I think you'll do well from here. If you buy certain companies you'll do okay from here. 

Bryce: [00:12:18] Mm. Well we can't wait to unpack some of your top holdings and some of your opportunities a little bit later on. But we want to turn to your investment process because it's all well and good to know where you are in the market cycle and know that you have an opportunity to take advantage and have some cash on the side or potentially not as much cash as you would like. But looking to invest, then it comes down to actually finding those investments. So what is your process to discover potential opportunities on?

Wayne: [00:12:47] Look, I'm probably a little bit different from most of my processes. I'm actually trying to screen things out rather than screening things inside. I don't tend to run screens on the market at all because the things I'm looking for don't screen well, like management quality capital allocation skills. They don't screen in, they're not in the spreadsheet. So I'm looking for businesses that can just grow over the next decade or more and can get high returns on incremental capital. So what I tend to do, and I only probably put one new idea in the fund each year, so I don't sit there. I'm not coming up with lots of ideas and going, Oh, what am I going to buy now? It might literally be. I put two new companies in the fund this year, which is Whitehaven in New Hope. Last year there was one company which was PSC insurance. I'm a very low activity kind of guy so I'm just doing a lot of reading and reading annual reports I hope. And one of the things I have changed in recent years is I use YouTube a lot and I'll search for CEOs and watch them giving presentations at conferences and things like that just to get a bit of a feel for the person. Because when they're doing ASX presenting their earnings announcements, they're very scripted and what they've got to say they because that's what they get from the ASX, whereas you can find them talking at conferences, not go off script and not talk about their business and they'll talk about things that they might not talk about in front of analysts. So I use YouTube, I'm just reading, I listen to lots of podcasts these days. So to give you an example, a few weeks ago I listened to a four hour podcast about a business called Transdigm, which is a business in the States, not because I want to buy Transdigm, but because I can look at that business model and think, okay, well is there a business like that in Australia where I can see how that model might work? So, I'm using podcasts, just reading a lot. It's very eclectic and it's more a process of screening things out. It's like a job interview where you've advertised for someone to come work for you. You're not sitting there trying to find out about resumes you've got. You're not trying to find all of them. You're just trying to get rid of the 98 or 99 that you don't want to interview.

Alec: [00:14:54] The four hour podcast on Transdigm. Was that a business breakdown?

Wayne: [00:14:58] No, it's 56 weeks. The film. Oh yeah. I listen to business breakdowns B, one of my favourite podcasts. Okay. And it was for one or two years. And you had the founder there.

Alec: [00:15:12] Okay. Yeah. I love how much information there is out there and listening to you talk about your research process. When Bryce and I quit our day jobs to do Equity Mates full time, that was my vision of what we would be doing, just listening to podcasts and researching companies, and we haven't quite got there. We decided to throw a massive festival instead. But hopefully we can get back to that because it just sounds like really just intellectually stimulating, just being able to learn and then being able to find ways to monetise that learning. You mentioned that some of those companies you've held in the fund since day one or, you know, you've held for more, more than a decade. And I think that's really the North Star for a lot of people in our audience, finding those long term compounders that can just grow. And as you said, they're not the ones you can't find on a screen. You can't screen for, you know, sustainable competitive advantage. You can't screen for the ability that to reinvest, you know, earnings over time. So I guess the question is then like, what are the hallmarks of those companies and how do you actually go about identifying them in your companies? You said you screen them out, but for that one year that you use for a company that you put in, how do you actually go about researching it and giving it that tick against your investing checklist?

Wayne: [00:16:40] So what are the I'll read the annual reports and I'll read a whole archive and report so that I get a bit of a feel for like how they said this this year and I'll build a financial model of the capabilities that I'm looking for, you know, the indicators I'm looking for and I might make some notes. They said, okay, we're in 2012. They made this acquisition. How did that work? Through the pay. Now, 2015, they said, are we going to do this? How does that sort of work through? And I've just got a whole bunch of indicators. I'm just building this financial model so I can look at the history of the business. And it's not predicting, it's just looking at the history of the business. And so you're looking at one of the biggest things I'll look for is profit margins. So if you look at something like Robeson, which is in the funds, 80% gross profit margins. Now, if you can buy something for a dollar and sell it for $5 to someone, you're doing more than just selling your product. You're selling something that people were happy to pay for. You look at 30% profit margins. So that's sort of, you know, profit margins are one thing. One of the things that Gordon Transdigm said, basically, he said, I want to buy a quality business. Then the guy said, well, what do you think is a quality business? And you said, Well, it's a business where I have some intellectual property. And there was a small thing going into a big thing. You know, I couldn't describe PWI better because it makes cooling systems for Formula One cars. It's only a very small spend in the overall spend of the Formula One car, but it's mission critical. So a Formula One car, if the radiator stops, the cooling system breaks down. So it's mission critical. They can charge it. They've got pricing, you know, because they've got intellectual property into small things. I mean, the big thing. So that's one of the things I'm looking for. So I'm also looking for businesses where they're just trying to reduce customer friction. So if you look at Domino's Pizza, everything they've done for the last ten years through the apps and the intellectual, the artificial intelligence is all about speeding up the process for someone when they buy a pizza. So that's it. If you can see where they're just so focussed on the customer that they're trying to reduce that friction for the customer, their customer focus, then that will show up in number. So profit margin return on equity, return on incremental capital. And then it's a case of me saying, well, okay, I've done this for ten years. What do I think? Can I do this for another ten years? And what? Yeah, that's how I sort of think about it.

Bryce: [00:19:02] Yeah.

Wayne: [00:19:03] I'm, I'm trying to get away from just the story stocks where you've got to see coming to market, promising that it's going to take over the world when he hasn't even sort of got on ground zero yet. So I'm looking at guys with done what they said they're going to do and I'm pretty confident they'll keep doing what they've done.

Bryce: [00:19:22] Yeah, well I'm interested to unpack some of the holdings and you've mentioned EWR holdings then and Whitehaven and Olivia, certainly this is a stock actually that over the last few weeks I reckon as I've heard three or four people talk about. So I'm looking forward to hearing your thoughts more on that. But let's start with Pay Holdings. It's your number one holding in the portfolio. You did just briefly mention what it does. Maybe if you can just expand on it a little bit more. But also if you could talk to the Bear case, like what would it take for the thesis to change and for it to no longer be part of the portfolio?

Wayne: [00:19:53] I think we are listed about 2016, I want to say. So I'm pretty much on the since the diagnostic is I could say this is great business and I have to say PWI, I've been able to hold that, but by 2016 hold for six years because I and I have been for 15 years prior to that because it's sort of a bit similar in the way it works. It was a business that had some intellectual property and it was mission critical in something that was bigger. So I had to use a mission critical suspension system for drop. So Casey was the founder of the business. He started 20 odd years ago with his son Paul. And so Peter was actually Paul racing. That's how he got involved in the business. Matthew Bryson, who's the chief engineer there and also my shareholder, were at an auto show in Germany and they said We'd like to get into Formula One. And at that time there was a competitor called Monster and they had the solution: they would make the cooling system for a 41 and say, here's the radiator, you've got it fit in your car case. Turn that around. You show me where you want it to go and I'll build the radiator for you and solve your problem. So Red Bull, so McLaren was the first team, but then Red Bull said, Look, can you go and make this radiator? And I can't remember the numbers, but if you can reduce the weight of a car, it's worth X amount of seconds per lap. So Red Bull said, can you reduce the weight of this radiator by X amount? And that should help us. And anyway, they did that and some and then Red Bull obviously won the championship. And of course, it was off to the races because then all the other teams started to want to get into the. And if you look at the factory when you're down there, it's just amazing work. Set up how they got it in there. Like the guys doing F1 got their own Formula One booths and you can see pictures of the racing cars and the teams there. So the guys and sort of work your way up the line. So Formula One is obviously the pinnacle of it. They do every Formula One team on the grid these days, but they also do rallycross. Rallycross is a great customer because they just smash their vehicles up all the time, but not Formula E that they're doing that. I think 22 of the 25 cars in modern use are in their cooling systems. And when you say cooling systems too, it's more than just the radiator they've got to cool. The more electronics you put on a car, the more you go to cool that as well. So I think there's something like 14 cooling systems on a Formula One car now and just getting more. So that's the sort of thing that they do. And I guess the smarts there is that they've got engineers that can design these things, but then they've got the smarts to be able to turn that into a physical product which you can put into account. But it's probably engineers who can design it, but they've got the smarts to put that into a physical product. So it's a beautiful business. And when Marsden died to pay for all the models, the business and Marsden couldn't sell the business because they use this technology in aerospace. So it was only natural that you could join the dots on cable when they were going to aerospace because they fit the technology to do that. And sure enough, that's where we're at now. So this case came out and said six months that in the next few years, probably next three years, the aerospace part of the business will be bigger than the sports part of the business. So they just cracked $100 million in revenue for the first time this year. So it's growing very nicely, very profitable. High returns and equity cases have found earnings a real gavigan and. MATTHEWS There is the chief technology sort of guy, and he's just a very smart guy. I can design these things so it just ticks all the boxes for me in terms of what they're doing. And I think this aerospace will have lots of opportunities down the track for that and also the high performance car. So if Mercedes is doing like a $400,000 high performance road car, it will have Peter be my point system here.

Alec: [00:23:54] I'm looking at this chart, the price chart this year and between May and June it fell 40 a bit over 40% and then since then it's rebounded and it's sort of back to where it was, what happened in late May, early June. 

Wayne: [00:24:10] I think it was just a case of it was like spotting falling like everything else in my portfolio had fallen 40% between January and it didn't hold up and that's nice to know, but then it just fell as well. And so I think that was just market forces. So there's no news around it. And I've said that in the June update because there's no news around this except that it's probably done expensive and people thought more made money on this also this month.

Alec: [00:24:35] And now they're back in. 

Wayne: [00:24:36] And they came out with a really good result and not only a good result, but you can see now that this aerospace and the new technology stuff is really starting to take off.

Alec: [00:24:46] We've had experts talk about PWI on the show before. I believe Emma Fisher from Aly also chatted to us about it. It's sound, it's such a fascinating company and I love finding these companies just operating in nations that I never would have known about if I wasn't doing this podcast. It's a real reminder of how lucky we are, but I think about who they're supplying to. You know, the best Formula One teams in the world with teams of. Hundreds of engineers designing their cars. And I often think like, what's to stop them doing it themselves or what's to stop other companies around the world saying what P.W. Are they doing it? And, you know, you explained how they sort of flipped the design process on its head and, you know, were able to work with these car makers a lot better. What's to stop other competitors copying that business model or, you know, the Formula One teams with these big engineering budgets doing it in-house?

Wayne: [00:25:43] I don't think that the manufacturing process or the desire to go and do it. So do Formula One teams. And you've got to remember, cooling is only one part of the car. I understand that if you're talking about the motor or the tyres where that's a much bigger part of the system, cooling systems are quite minor. It's mission critical, but it's quite minor in the actual budget in the Formula One car. I think Ferrari spends like $300 million on their Formula One team per year. And I would, I'm just guessing, but I would think that Iran gets 15 million of that, maybe not even that much. So it's a very, very small part. And that is the advantage of you, someone coming into the industry, there's just not enough business there for now that they've got all that industry and all that business is not enough scale for someone to come in there and say, I will to get that business as well. And also you've got to convince them that they've got to change as well. Know, it's not easy if you're dealing with someone that it's mission critical, part of your car.

Bryce: [00:26:49] Great business, great business.

Wayne: [00:26:51] It is a great business. Probably the biggest risk actually for the business is if they change the formula one rule is to look more like NASCAR and they say, okay, we want all the cars to look exactly the same going around the track and so therefore you end up with the same gear. And so, I mean, it'll be incredibly boring for the sport. And I don't think anybody who owns the media run Formula One, I don't think they would allow that. But that would be the better case for them. They just standardise and that's only Formula One. So someone's only one part of their business. But I think if I standardise rules for cars in Formula One, that would probably be the biggest risk to the business at this point in time. But I don't see what is happening.

Bryce: [00:27:29] Well, Wayne, let's turn to your second largest holding and potentially the sixth, because they're both in the same category and that is coal. So Whitehaven Coal, New Hope, obviously Hot Coals have been having a great run. We look back on the last 12 months and I have had no exposure to it or anything like that. But if you have, you've obviously done pretty well. So what's the thesis here, these long term plays, is this why these two companies? 

Wayne: [00:27:55] So every now and then I find opportunistic things, which I think there's very little downside here, and I should be able to double my money regardless of how markets perform. At the start of the year, my portfolio was looking expensive and I wrote to the Indian holdings in December and said, look, the share prices have gone ahead of the value of the portfolio. So we might be conservative. I call that subdued returns. I wasn't expecting a 28% fall, but I said we've probably had some subdued returns. It sort of came up on my radar that the price had popped up and I was just talking to a friend and you can work at the name of a coal company quite simply. Once you know the coal prices, you know how much it costs to get out of the ground. You can work out the pay now or the cash flow of the business pretty quickly. And so I thought these things are selling for like one times cash flow if the spot price stays where it is. And so it's as simple and as complex as it was, I thought, okay, well, I'm buying something for one, maybe two times cash flow. They were already making fairly friendly noises to shareholders. You've had some mine news we're going to give this money back to you are the three buybacks, the dividends. And so I just looked at that and thought, okay, this is a fairly safe place to put some money where I've got very little downside. And I thought, look, if this doubles over the next two years, that would be a good outcome. It's more than doubled in six months. I just believe it's a little bit quicker and I thought it was going to. But this is an opportunistic play. I'm having this conversation in five years. I'll be incredibly surprised by then. It served a purpose and it's serving a purpose at the moment, but it's not the sort of thing I would go and load the portfolio off on.

Alec: [00:29:36] So Wayne, on those coal companies, you know, if you mention it's opportunistic. I would love to understand when you think about selling, but before then, we're just going to take a quick break to hear from our sponsors. So before the break, we were talking about two of the major holdings in your portfolio, Whitehaven Coal and New New Hope. And unlike some of the other holdings which are, you know, these, you know, decade multi-decade long time horizon investments, these coal investments have been a little bit more tactical. And so it's probably a good opportunity for us to unpack your process around selling investments. So I guess let's start generally when do you know when to sell? What are you looking for? And then specifically about these coal investments, what are some of the indicators or factors that will tell you now's the time to get out? 

Wayne: [00:30:30] So generally, I would like to think if I've got the business right, I never need to sell. In days gone by, I would sell on valuation purposes. These days I don't do that just because the share price is going up. It's not a reason to sell. So I only have to sell if I want to buy something else. And the thing I want to buy I think is a better opportunity or the business is broken, but I know the business thesis is broken where they said they were going to do something that hasn't worked or I'm not happy with what they have, the capital allocation skills going or if I've just made a mistake about the competitive advantage of the business. But I thought they had a competitive advantage and they just don't. And, you know, the world has changed. So then in general that's what happens. And that tends to my portfolio turnover be less than 10% per annum. So it's a very low turnover by most standards. So I only pretty much so when I make a mistake is generally or I see a better opportunity in terms of the coal stocks. I will either sell them if I see other things, which I think I'd rather have my money in X, Y or Z rather than this, or if I think the risk reward relationship isn't there anymore. So when I was buying this one, the two times cash flow was a very high reward to the risk taking $11 a share and probably about four times cash by the reward now is not as good as the risk taking so that's that's how I'm thinking about it. There's no time target. There's no price target. It's just that risk reward relationship goes and what my other opportunities set looks like. So in some of the other stocks that I know very well and I'm very comfortable with, if I were to halve from here and sell Whitehaven in a heartbeat and buy something else 15, 20 years. Yeah. 

Bryce: [00:32:20] Well let's turn to the third stock in your portfolio, which is Lovisa, a discount jeweler I would say, or cheaper price. Yes. So talk to us through the company you mentioned there. You love the margins that it has. As I said, I've heard it brought up multiple times this week. So talk us through what the company is, what is the thesis and why you love it so much. 

Wayne: [00:32:45] This is as it's a low priced costume jewelry business. So if you're looking for a piece of jewelry for your wife, you've probably got a little bizarre. But if you're an office girl and you need a pair of earrings for the races on Saturday, you might go in there and buy these events for $10 or $20 or for the week or whatever. So they have an 80% gross profit margin and about 20% profit margin. You know, once they pay the costs, they started off ten years ago. And then Brett Lundy is the chairman and he's the largest shareholder in the business in Brooklyn. He's a retail genius. His shareholding in the best of these guys is worth about $1,000,000,000. So that's how successful today is. They now have about 650 stores and 150,000 in Australia. Australia is pretty well built out now. They say that's a mature market. Australia is only 150 of the 650. They've got America as the main market. Now we've got about 115 stores over there, but they're also expanding into other markets. They've got a new CEO, a guy called Victor, who's a Spanish guy who used to work for Zara, who is in tech and also worked for Guess. And now he's been incentivised and heavily incentivised to roll this out and grow the business. It's got wonderful economics, so the stores are about 50 to 80 square metres. My guesstimate is the store turns over 6 to $800000 a year. So the sales per square metre on this. These stores are really good, very easy to roll this out. Costume jewellery, women the world over wear it and it's a single line business. So I think there was a competitor there in Australia not so long ago who went broke. And if you're going to be in the fashion industry, from my reading of it, if you're going to be in the fashion industry, you are at the very bottom of the price market in the budget area or at the very high end. So you go Louis Vuitton makes 80% gross profit margins and Zara and the business make 80% gross profit margins and then it's a race to the bottom as you go back into. So you want to be one into the other and you want to stay in that. There was a competitor that had a discount for my costume jewelry, but she was also doing handbags as well. Now you would sort of think theoretically of handbags, 80% gross profit margin. That should work. But it's a different business model because when you walk into the shop to buy a handbag, you're not buying that thing. In 5 minutes, you're going to sit there and look at it. You have to have space for it. You want to train the staff differently. This costume jewelry, it's just the people buying the stuff every week or every two weeks. It's a repeat business, it's a single line business and it doesn't take much of a store. So and so this thing can grow for a long time to come. They really surprised us with the results. In 2022, profits are up over 100% on the year. I mean, it is extraordinary. And I can just say if I had to pick one stock in the portfolio, which might surprise me over the next ten years, the best would be the one. Wow.

Bryce: [00:35:45] I love that.

Alec: [00:35:46] It's fascinating. It's a fascinating company. It's like fast fashion for jewelry. You really just get it shape, get it out the door, change your lines constantly, have new things coming in and out. 

Bryce: [00:36:00] What's its competitive advantage, though? Like what's stopping Ren and I going to Alibaba? Not that we have any knowledge of jewelry, but like getting cheap, cheap jewelry and just setting up a small shop and pumping it out the door. 

Wayne: [00:36:15] Because it's just it's beyond it. You could do it. Yeah. And I'm sure you could do one store.

Alec: [00:36:19] I don't know if we could do it, to be honest. It was a strange analogy. The price.

Bryce: [00:36:23] You know what I mean? Like, it's not. There's no innovation in products. There's no way you can pick up that product that's pretty cheap from China.

Alec: [00:36:32] Couldn't that article argument be made for most retail businesses?

Wayne: [00:36:36] Yeah, I was going to say you could make that argument to Zara.

Bryce: [00:36:39] You could.

Wayne: [00:36:40] And you can make that argument for Wal-Mart. You can make that argument for Costco. Yeah, you could. These guys, it's the logistics and the culture behind that that you don't get and on and again they just reduce the friction. So when you walk into a store, if you're buying a piece of costume jewelry, it's not behind counters, it's sitting on a rack. It's a very easy decision. And if I get like ten bucks and $20, you just reduce that friction. And because they've got this scale there, you would think it shouldn't do as well as it does. But I can sort of see why Thumbs do as well as they do. The risk would be if they became a multi line, if they went and did the same thing as some of these other competitors didn't do. I can do a costume during the night with pretty good margins on that let's do something else that we can make good margins on. I think that's where they would go wrong and our sales per square metre would drop, this kind of footprint would go up and that's that would be a disaster.

Alec: [00:37:37] Yeah, because I was thinking a little bit differently to Bryce. I wasn't thinking that he and I would go on Alibaba and start buying jewelry. But I was wondering, what is to stop the other fast fashion players? You know, the H&M and the Zara is from really having it going head to head with Levis. I'm sure they do. I'm sure they have cheap jewelry at the checkout and stuff like that, but the sales per square metre, like the fact that you can crowd into such a small store, is something that a lot of those fashion retailers, those clothes fashion retailers I guess can't do. 

Wayne: [00:38:11] So it's not the it's not their focus. Look, I'm sure people do go to the gym and buy custom jewelry. I mean, you're not going to get 100% of the market. But if I'm walking through town or a shopping centre, I think I need a pair of earrings for the races on Saturday or for drinks on Friday night. And this is just that one. It's going to be one of the names. It goes through your head. And that's what Harvey Norman used to say. People are going to look on, look at TV's anywhere else. Want to be one of the three names that people think of when they're looking to buy a TV. And I think, look, this is in the same boat. Yes. You might be engaging in buying a dress like this and earrings on the camera. Buy them, too. But if you're just thinking, I want to get some earrings for an occasion, I don't want to spend a lot of money. You just want that to be the top of mind before you're one of the choices that don't like when they're gone, when they're making that choice.

Alec: [00:38:59] Well, three blokes talking about buying jewelry. Probably not. The experts in the field. 

Bryce: [00:39:06] Have bought jewelry from Luisa. Have you? Yeah. Costume. 

Alec: [00:39:10] Okay.

Bryce: [00:39:10] Super easy, super cheap.

Alec: [00:39:12] There you go.

Wayne: [00:39:15] And you can make the wrong decision. You're not going to get bent out of shape.

Bryce: [00:39:18] They're also massive. Massive in rural towns. Massive. And we'll go, oh, really? Yeah. Yeah.

Alec: [00:39:23] There you go. Yeah. Let's talk about one other company that you mentioned earlier that isn't as big as there is. I think it's the eighth biggest holding in your portfolio, but it's definitely one that is front of mind for a lot of people. And that's Domino's Pizza. And when you were speaking about it earlier, you were speaking about how it's just so focussed on cutting friction. And surprisingly enough, pizza has been one of the best growth stories on the Australian share market. Forget. Heck, it's all about pizza. But Domino's hasn't had a great year. This year. It's down 42% year to date. What are your thoughts on Domino's at the moment?

Wayne: [00:40:01] I still like the business and I think if you go back and look, if you look at Domino's ten years ago, they did $200 million in turnover. They had a thousand stores. Most of them were in Australia. If you look at Domino's today and they're basically just the Australian market and a bit of New Zealand. If you look at Domino's today, they're doing $2 billion in turnover, up nearly three and a half thousand stores. And it's a global not a global business but in multiple markets and a wonderful, wonderful management team. And they're just getting scale in some of these European countries like France and Germany, just to get scale where the television advertising really drops through and you can pick up customers. I just look at this as they've had one bad year. You just have to, that's part of being in business that Japan. Two reasons but for me it is the two main reasons why the profit fell this year. Japan came off sharply because when people were in lockdown, they couldn't go to restaurants that had to go buying takeaway pizza. They set the business up thinking, okay, well, even when the lockdowns come off, they'll keep buying pizza because that's what I did in the rest of the world. In Japan, they didn't. They started going back to restaurants. So I'd set up all the marketing spend as if they were going to keep getting those customers. They didn't come through. So the profits in Japan went down. The other thing they've done is they've taken over the area for Denmark and then lost $12 million in Denmark. Now that's what will build that business back up. So I'm not terribly worried about it on a year to year basis. I mean, they're going in the right direction. They've got new territories now in Asia. Japan will just keep growing. I mean, that business is going to be a really good business in decades time. It's got the highest number of stores per franchisee. One of the things I really look at is the stores per franchisee, because if you've got existing franchisees buying new stores or adding new stores to the business, then they're pretty much making money and happy. It's when you get franchise numbers dropping, that's when you've got a problem and the numbers in Japan are still going up. So I think it's a wonderful business run by a wonderful management team. They're just so focussed on the customer, you know, they've got to the stage now where when you order a pizza they know that. So when you bring up, say you are always going to have a pineapple pizza, when you order up, when you bring up, they will start using, yet they start making him a pineapple pizza. Now you might change your mind and say, okay, I'm not going to have him pineapple pizza, but someone else will. So they keep making it because someone else will order that pizza, but they've just got it so that they can do just this once a day. So they're just making this process faster and faster and faster. And I don't know the domain name system of Jeff Bezos, but he's all about the customer. Now, you just have to reduce the friction points for the customer. So growing Australia is a mature business, but the rest of the world, France, Germany, Japan, they're going to be big, big businesses in the next decade. They've gone from a thousand stores to three and a half thousand stores in the last decade. I see no reason there might be six 9000 stores in ten years time. So worrying about the price of cheese or the labour costs or whether they're going to make their profit projections for the next six months is just not something I'm worried about. That's information that won't last. It's permanent information I'm looking for. And while I think they can do the next ten years.

Alec: [00:43:26] Or when we want to say a massive thank you for joining us today we have almost run out of time. If people want to find out more about yourself, your investing or gains, where should they be going? 

Wayne: [00:43:40] We'll go to the websites, probably the best time WW games capital dot com dot AEW and probably read my fund updates. I sort of put a fair bit of effort into those because I want people, even if you're not a unit holder, I wish people, right those days when I was starting out. And so the idea behind the fund updates is to give you some information about how I think about markets and the investment process and why I own the things that I own and how those business models work. So then sort of the letters that I wanted to read when I was starting out, so that's why I'm writing them the way I do it is not because I'm trying to be smart and get them investors. I want to help them. I'll look at the Nick Slate letters that he wrote for Nomad, and I just think that point and I often look at women like that in Australia.

Alec: [00:44:30] Yeah, yeah. We, we often talk about how underutilised and undervalued investors are and we're pretty lucky that we can read them from investors all around the world. But Wayne will get into these final three questions. And the first one we like to close the interview out with. Do you have any books that you consider must write? 

Wayne: [00:44:51] Yes. As you can see behind me, I read a lot. I won't recommend intelligent investing because I think Intelligent Invest is very dry book and it's probably something you want to read five, ten years into investing. So I've got three books here, which I would recommend. The first one is Common Stocks and Uncommon Profits for Fisher. This guy had about a 60 year career and he only owned 14 stocks in his entire career. Most of his money was in four of them and he was all about and Warren Buffett says, I'm 15% Fisher. He was all about buying good quality businesses and just holding them for years and years. That's with that book, 17 years old. It's still fairly accessible. The writing's fairly accessible. If you want to read about an individual who sort of took that process. This book called Davis Dynasty is a biography of Shelby Davis. Now, Shelby Davis borrowed $50,000 of his father in law after the Second World War, and he turned that into $900 million by the time he passed away in the 1990s, and he donated all that 900 million to charity when he died. And all he did was he invested for the long term, never owned a company. He wasn't a founder. He just mostly invested in insurance stocks. He knew the insurance. He was an expert in the insurance industry. And he just did that by buying that. And as a bit of trivia, his grandson now sits on the board of Berkshire Hathaway, Chris Davis. The other one that I really liked is, you might say, well, shall we? Davis did that buying in insurance stocks, and you couldn't do that now. But this book called 100 Bankers by Chris Meyer, that just shows you that there are 100 bankers everywhere in the market. And that's again, be patient and good things will happen. The other book I'd just briefly mention is Richard Wise and Happy Hour, because it's got a chapter now on Nick Sleep and all the letters he wrote. So it's worth it. Just about that one chapter. 

Alec: [00:46:45] The Love that four great book recommendations. And you've mentioned Nick Sleep a couple of times there. If people have read the Buffett letters and they're wondering where to go next, I definitely think, hey, it is next on the list. But why? And the second question, we like to close the interview out with forget the company as an investment today. Forget what it's trading at just purely on what the company is, what it does, and who runs it. What's the best company you've ever come across? 

Wayne: [00:47:14] Google? Fine, I'll Google on that. Won't be displaced in my lifetime. I don't think YouTube and Google search and Google Maps. It's a boring business in the world. But fundamental change before that business is very.

Bryce: [00:47:29] Crazy if we say it over.

Alec: [00:47:31] Ten phrases and we just have to make sure that we're paying enough attention to the stock market to get on that. Tom, that would be. 

Wayne: [00:47:40] Wow. Wow.

Alec: [00:47:41] Final question, if you think back to your younger self investing in Pacific tires for the first time, what advice would you give to your younger self?

Wayne: [00:47:50] I'll give you three pieces of advice to make you happier, richer and wiser. The first piece of advice is outside. Don't look at the market every day. Would drive you nuts if you're not transacting on that day, the price of what you own won't matter, and that will just make you take so much anxiety out of your life, seeing red and green arrows up and down on the screen. So don't look at the market on a daily basis. The second thing I would say is when you're looking for information, try and find information that's going to last and it's going to add to your knowledge of how the world works. So whether whether that's getting accounting knowledge or whether it's getting knowledge about psychology and how markets behave or whether it's learning how scale works and how business models work, go and find information that's going to last a long time and add to your basic knowledge, don't go hunting for what I call decaying information. So trying to work out whether Domino's is going to beat the six month forecast, that information is useless in six months time. So you want information that adds to your knowledge base, so that will make you wiser. And then what will make you happier or richer, I should say wealthier is stop trying to make market forecasts. If you get the business right, you don't have to worry about the market and the businesses. You get your returns from the business, not from the market. And predicting whether this was the right time to buy, this is the right time to sell. It's time to stop looking at the market. Actually the information you're trying to gather is long lasting and make sure you write about the business and stop trying to make market forecasts like that.

Bryce: [00:49:29] Three very actionable pieces of advice to to close it out there. One, I very much appreciate it. And thank you so much for your time this morning. I know that plenty of our audience would have really taken a lot away from that. You've certainly got a lot of market experience. And in a time where we're experiencing volatility, some of us have never experienced a downturn like this before. Those pieces of advice that really do provide a bit of comfort. So we appreciate you spending time with us today. Thank you. 

Wayne: [00:49:56] So this, too, shall pass. 

Bryce: [00:49:58] This too. 

Alec: [00:49:59] Shall pass. Yeah. Love that. Thanks, guys. Thanks, Wayne.