Is Core and Satellite a cop out?

Bryce: [00:00:16] Good day Equity Mates and welcome back to another episode of our journey of learning to Invest. Whether you are an absolute beginner or approaching Warren Buffett status, our aim is to help break down your barriers from beginning to dividend. Now, while we are licensed, we are not aware of your personal circumstances. All information on this show is for education and entertainment purposes only. Any advice is general advice. But with that said, my name is Bryce and as always, it is my absolute pleasure to welcome my equity buddy Ren. How are you?

Alec: [00:00:43] I'm very good. Bryce. I say that you're leaning into the Australian nature of this show with a good day. 

Bryce: [00:00:49] Yeah, well, I was listening back to some of my earlier intros and I really dragged out equity mates. And I've really fallen off that bandwagon, so.

Alec: [00:01:00] But you didn't do that. 

Bryce: [00:01:01] I know. I'm going to start. I'm going. I'm working up to it. 

Alec: [00:01:03] Okay. Okay. But the good day. 

Bryce: [00:01:06] Good day Equity Mates.

Alec: [00:01:07] It's good. I think there's a debate in podcasting to Australian Voices Travel. Do people overseas want to listen to Australian voices? Let's answer in the affirmative. 

Bryce: [00:01:17] Yes. Good day mates, welcome. So a massive show coming up today. We are starting with the continuation of our journey with our mentors, which we kicked off last week and we're super excited about. And then we've got a community question that has come through all about capital gains tax and how to treat that if you're auto investing and dollar cost averaging. So before we jump in, we launched the Equity Mates merch range last week and they're flying off the shelves with the pre-orders are flying in, I should say. We've got three new t-shirts available if you want to support Equity Mates. Buying some merch is one way that you can do that. We've got a white tee with an Equity Mates embroidered logo on the left pocket premium premium, which is a navy and red logo. We've also then got the FinFest unicorn with a guy drinking a beer also on the left breast. That's quite popular, but the most popular and probably the most historic of all of them is again a white t shirt with the OG Equity Mates logo on the left pocket. It's you and I riding the Wall Street Bull. The very first piece of graphic art we do here at Equity Mates. 

Alec: [00:02:20] Yeah, there are some things that just go down in history as like vintage, you know, like vintage US sports jerseys are really having a moment. The vintage Equity Mates logo will be the true testament to a long term Equity Mates.

Bryce: [00:02:34] Yes, that's it. So jump just. Equity Mates. 

Alec: [00:02:38] So look, they're pretty good quality, actually. Really good quality. I'm surprised by how good quality they are. 

Bryce: [00:02:44] Yes. Now pre-orders are only open for three weeks, so it won't last long. They're incredibly limited. They're incredibly exclusive. If you want to support Equity Mates, we would really appreciate it if you did this equitymates.com/merch link will be in the show notes for the. 

Alec: [00:02:56] First 50 orders which are fast filling up. You will also get an Equity Mates tote. 

Bryce: [00:03:02] Alright, Ren last week both you and I called our mentors. I had Henry Jennings, you had Andrew Page, both of them really excited to be part of the journey over the next year or so with us as we as we publicly continue our journey of investing. We're going to be super transparent with them vulnerable. We're going to be talking what's in our portfolios. It's going to be an exciting next few months. 

Alec: [00:03:26] Yeah, well, this episode is mine and Andrew's first sit down chat. Yeah, both of us are going to start with talking about investment philosophy of our mentors, how they invest, how they approach the markets, how they actually go about finding good ideas to them to further research on. So that's what we spent a bit of time in this episode talking about. We are also going to share how we approach investing, and I started by telling Andrew about my core and satellite approach for investing. Yeah, which he promptly responded to. I think core and satellite's a cop out, then proceeded to tell me why I like. He makes a very good point. It has certainly made me think. It hasn't made me change my view. Maybe over time I'll change Andrew's view. Maybe, maybe, probably not. 

Bryce: [00:04:18] But this is the whole point of doing this. I'm not going to say exercise because this is genuinely us over the next period of time becoming better investors. And if that does mean changing your strategy because you learn that there's a better way of doing things, great. 

Alec: [00:04:34] Yeah, I know I keep saying it, but I'm really happy with my choice and it's like I'm feeling really inspired about investing and doing the work of finding individual names. And yeah, I learnt a lot and yeah, I'm really excited to do it all. 

Bryce: [00:04:51] So well to that point. Ren, what we're going to be doing, if you're just tuning in for the first time, firstly welcome, thank you for joining Equity Mates community. And secondly what we are doing is taking you inside the room and we're having these conversations with our mentors. We're not trading these conversations as podcasts. It's genuinely us sitting down and talking through investment process, talking through our idea talking through how our mentors approach investing and then taking that and bringing them to you in the hope that you can also learn, learn with us. So when it's your turn to kick off, I've got Henry next week. Let's get into it. So, okay, we are up and rolling. 

Alec: [00:05:30] Right. Well, no. Nervous. 

Andrew: [00:05:32] Me too. 

Alec: [00:05:34] Well, let's let's start with investment philosophy. How would you. How would you define yours? 

Andrew: [00:05:40] I guess. I guess I define it as not so much trying to speculate on price, but by trying to find good assets to own. And I feel as though if you find a good asset and you buy it at a good price, you can't know what that's how that's going to play out over any sort of short to medium term. But almost by definition, it has to do well for you in the long term. So I'm kind of big on the idea of pretending that I'm a multi-billionaire and am I going to buy this thing outright. You know, like I've got lots of businesses I could buy. I've got to be selective. So it's not just a question. There's plenty of really decent businesses that I don't own. And it's not because there's anything wrong with those businesses. It's just I've got limited capital and I want to concentrate on the best ideas. 

Alec: [00:06:27] So I think this is why I really wanted Andrew to be my mentor, because he is such a bottom up stock picker. He's really trying to find those few great businesses. I think the standout of America is that 4% of companies are responsible for the vast majority of stock market gains. And I'm hoping that Andrew and his bottom up stock picking skills can help me find the next companies that will be in that 4%. 

Andrew: [00:06:55] Entrepreneurs. People who've run businesses tend to be better investors. And Buffett says this all the time. I'm a better investor because I'm a businessman. I'm a better businessman because I'm an investor. And if you have a great business and sentiment is down, or maybe they are because the economy is doing it rough or anything like that, I mean, yeah, it's not great for business. Like, let's be real. But but it's still a good business. It's still going to be generating a profit. It's still going to be putting dividends in my pocket, you know, and sort of like the market could shut for ten years. And if I've got a really great business, it's just going to be providing cash flow. And that's what underpins an investment. 

Alec: [00:07:33] So what for you like what is great? Are there any like key criteria that you're looking for 100%? 

Andrew: [00:07:40] It's kind of like if you're trying to describe to someone how to do the perfect golf swing. I'm not a golfer, by the way, but it's a good analogy. Arise like just keep your back straight, keep your legs bent, you know like you can yeah, that's kind of good. But actually doing it and like give me some specifics here. How what do you actually mean? What is the perfect swing? I think at the end of the day, a great business is just an economic a wonderful economic machine. And a wonderful economic machine is one that can spin out more capital than it takes in. And the greater the degree that it can do that, the better it is. But you just don't want you don't want something that can generate, say, just a high margin. I mean, that's a nice thing to have. But I want companies that can take the profits that they make and then reinvest them at those high rates of return. That's what underpins compounding. And compounding really is the eighth wonder of the world, you know. And so I want a business that's got really strong economics that is, you know, it is able to generate really strong profit cash flow, profit from the revenue that it generates, but then can further take that money and continue to do the same trick again and again and again. That is just such a wonderful business. So much capital is destroyed by businesses that are chase growth and they might have a wonderful little business at the core, but they're reinvesting into very bad ideas or expansionary plans or new products, and it just blows up. It's the easiest way to destroy shareholder capital. So it's got to have that ability. I think another really important thing is, and this is just fundamental to understanding capitalism, is that profits attract competition. You guys found a new business model and you're able to generate 50% net margins on that and the market's wide open and you're growing. I mean, that people will notice that and people will emulate that. Right? So I'm going to come in and I'm going to do the same thing. We can argue about who does it better or not, but there's plenty of market share to sort of go around. And then it just sort of it's sort of that very act of competition sort of drives things back to a marginal cost of production. So commodity producers are such difficult businesses because, you know, you can be digging out lithium. I can be digging out lithium. It's lithium. It's an element in the periodic table. Right at the end of the day, I just need a certain purity at a certain price. I don't care how you got it or what you did. And as that demand and price soars, guess what? More people go, Oh, it actually happens to be an amazingly abundant element in the universe and within the Earth's crust. And I'm going to dig some out too. And guess what? That increases supply. And, you know, you two in economics will tell you that that will bring prices down. So this is a long bow way of saying that another really important characteristic of a of a of a great business is that they have, you know, the moat, the sustainable competitive advantage, the thing that makes it very difficult for someone to come in and do the same thing. You know, I said lots of great examples, but you know, a well used one is Apple. There's a lot of smart phones out there and lots of people making them. For some reason, Apple can charge a hell of a lot more for their phones than everyone else. There's something there, right? So, yeah, I think they're the most I think they're the most important things. 

Alec: [00:10:54] So at this point, I really wanted to turn to how we actually find those companies, because everything that Andrew was saying made a lot of sense to me. And it's things that we've heard from, you know, some great investors on the podcast and also investors that we look up to or listen to or have read their books. But where the rubber hits the road, and I think where I struggle the most is actually taking all of that theoretical stuff and then actually applying it to my investment razor. 

Andrew: [00:11:24] Sort of say, I think with an investor, you, you really want to be more of an investigative journalist than anything else. You can observe the facts, whether they be metrics or certain things, but then you've just got to keep asking like a 12 year old, just going to keep saying it. But why? But why? But why? And you can throw fancy words out and jargon out and all this stuff, but now you really need to be able to explain it. In 12 year old times, you'll find that more often than not, you actually you actually do find a reason for why. And it might be something that's barely talked about because everyone's focussed on the last six month price performance or, you know, the fact that the Federal Reserve is doing something or, you know, it's just so secondary to what really matters. 

Alec: [00:12:07] No, it's well let's put a pin in some of those specifics. But I guess let me talk to you about how I've been investing and you can give us your honest critique of that. So for me, this two, you know, the the core and satellite approach is that classic investment approach that you hear all the ETF providers speak about. And it's certainly something that I've internalised. And for me, core is a world where I am just so supremely confident. And then satellite is the complete opposite. And, you know, core I know what I'm investing in. It's a basket of market tracking ETFs from around the world. I'm automating it. I'm doing it every second week because we get paid fortnightly here and I know why I know what. But then then in satellite, I feel like I invest without any clear rhyme or reason. And, you know, we're in this privileged position, hosting this podcast, interviewing experts and being able to just like read and listen to find out stuff all day that we come across so many companies. And for me, it's my interest will be piqued by something. I'll do a bit of research, form a thesis and then add it to the portfolio. And so my portfolio looks like a a real hodgepodge of different lines of micro caps and massive companies from Australia and overseas. And another company that I recently bought was back end of last year. It was metal company that I have just never haven't been a fan of for ages and Bryce and I actually have a bet. He reckons it will become a $2 trillion company. I don't think it ever will, but for me sentiment was just so negative and so many of the facts were being misreported around the metaverse investment and stuff like that, that for me it just felt a pretty asymmetrical opportunity. But again, it's for me, you know, back to that theme of just not being confident. No, like not not having like an overarching, like worldview or an overarching portfolio view. And then, you know, being consistently applying that to all of the opportunities as things come up, I'll take random swings at things. And yeah, I think, you know, I guess I'm critiquing myself rather than letting you critique me. But I guess that's sort of how I approach my satellite portfolio at the moment. 

Andrew: [00:14:27] I aim a little bit negative on the concept of core and satellite because I feel it's a copout. 

Alec: [00:14:34] I love this. 

Andrew: [00:14:37] In the sense that it's saying you're justifying making a self admittedly poorly rationalised investments, but that's okay because it's a satellite. Do you know what I mean? And it's sort of like I look at every single dollar as precious, like super precious. So I think a way to it, I mean, it depends how you want to sort of define satellite. It might just be that I like, I like the safety, the ease of ETFs, and I want to do some stock picking. And as I'm building up my experience, I'm going to increase I'm going to allocate five, 10% of individual stocks and I'm going to develop and grow and learn over time. And I'm going to expand that as my confidence in my experience builds a different story altogether. But we you know, I've come across a lot where someone goes, Oh, I've got this, but it's only speculative and it's like, you know, it's still money. And, and with every with every with every I mean, a dollar can't be in two places at once. I hesitate, as I said that because I'm thinking of the modern banking system. But go with me here on a dollar cut. But that's a Whole other kettle of fish. But but a dollar can't be in two places at once. So for me, I think I think I probably first heard this from Hamish Douglas who sort of used the. This analogy. I think he probably borrowed it from some way too. But it was this analogy of you've got to field a team, right? And you've got all of these players, you've got all these reservists, and what do you want to do? You want to put the best, depending on what sport you're playing, you know, 12 players on the team, on the on the on the field at any one time. And so for me to take someone off the field and put someone on, they need to be objectively better and not a little bit. It needs to account for a margin of safety and the vagaries and vicissitudes of prices and all the rest of it. But it's sort of like, no, you know, if all of a sudden I managed to draft just this incredible rookie was just brilliant stats. And the worst player I've got in the field just doesn't doesn't even compare right. You're being switched out. But if I can't make that, I'm not going to do it. So in that context, I just I'm not I'm not trying to be too harsh because it depends on how you define satellite. 

Alec: [00:16:52] At this point. I realised I'd chosen the right mentor. 

Andrew: [00:16:55] The other trouble with with that is as well is that you end up, you end up spending more and more and more of your time on what is a relatively small part of your portfolio. Now there is intrinsic value in just that learning process. And so that's that's a separate thing, but it's a bit like the 8020 rule. You got to spend 80% of your time looking after 20% of your capital and it just doesn't feel right. Like you're you should really be going for the biggest bang for buck in terms of your unit of time invested in investing, right? So I'm lazy, I'm a lazy investor. I don't want to have to be poring through dozens and dozens of financial reports and stuff. Every day. You build up a set of ideas and familiarity around the market. And you just once you've sort of spent the time and invest the time in understanding that business and building conviction and the rest of it. That is, there's a sunk cost in that, which is something you've got to be mindful of. You don't want to, you know, not walk away because of that endowment effect, etc.. But at the same time, you know, that that probably gives you an edge over. People have only looked at it in a very peripheral way, which in some of the ways you describe some of these stocks was sort of peripheral. Right. You know, I had a good thesis pitched and I went, yeah, that's fine. I mean, that's where we all start, right? But but it just sort of it your goal is to maximise your returns and sometimes, you know, it's the Peter Lynch idea of the best stock to buy is probably one that you already own.

Alec: [00:18:27] So I think there's plenty of good thoughts from Andrew around the corn satellite approach and how I've approached some investments in individual stocks. So certainly some stuff for me to go away and think about. We then spoke about Meta in particular, a company that I mentioned earlier I bought at the back end of last year, and we get into this idea of asymmetry where the potential upside or the amount of money that you could make appears to be a lot higher than the potential downside. 

Andrew: [00:18:57] So I really want to highlight this point. You mentioned the word asymmetry, which is if I was ever to get a tattoo, would probably say asymmetry, right? 

Alec: [00:19:06] Because I love to say I would even pay for that. I'll pay that for things. 

Andrew: [00:19:14] Give me a few drinks and anything is possible. But I just I feel as though it's it's I mean, this is let's be honest here. I don't care how smart you are or how great an investor you are. It's a probabilistic endeavour, right? You can do everything by the book and buy a good book and still make mistakes. Right. So it's Mohnish Parise, another great investor from India. He talks about this idea of heads I win, tails I don't lose too much. That's what you want, right? You want those, but you want those ones that when they go well, they go really well. And when they don't, the downside is somewhat limited. And that's and that's why I think you're starting off on the right way with something like Metta. I mean, you've taken a very contrarian standpoint at that. You've gone beyond the headlines and you've you've started by saying, I actually don't think it will be a $2 trillion company. You're actually starting from a bearish standpoint, but then you've gone to that second order thinking and said, Yeah, but it's in the price and then some. And I think that is a really, really important skill for investing. You can do really badly in companies that perform exceptionally well just because you overpaid too much for them. 

Alec: [00:20:26] Yeah. Isn't that that stat about Microsoft where it's like you, if you bought it in 2000, it took you like ten years just to get back to even even though the business itself was great in that decade. Yeah. 

Andrew: [00:20:37] And this is the lesson this is the harsh lesson that a lot of us have had really in the last year and a half, two years or so, is that you had businesses trading on 60 times sales, which means even if they had zero costs, it's going to take you 60 years to get your your money back. Now, those businesses may have continued to go on really well for the. As I said before, approach it as if you're buying the whole damn thing like and you can't flip it off to someone or what they call the greater fool. You know, you you're stuck with this thing. That's a pretty bad investment. Alan's finding this out the hard way with Twitter at the moment.

Alec: [00:21:08] Yeah. So when you're looking at your investment universe, do you have any limitations on that, be it geographical size, anything like that? What are the boundaries of your investment universe? 

Andrew: [00:21:21] I tend to focus purely on the ASX because sadly I don't have billions of dollars to allocate. Right, And there's more than enough depth and availability here. So it just know it's already 2000 stocks. So it's like if I can't find 20 that on average are going to do well is something that's going wrong. Now do I want to? There's no extra points for degree of difficulty in investing. Do I want to now go across to a different market? You know, I never lived in the States. I don't you know, it's it's I don't feel as though I have. I think you want to try and focus on areas where you feel as though you can have an edge. And and and for me, rightly or wrongly, I feel Aussie small caps I have an edge. And why is that? One has a lot of clear water. There's not much competition. It's maybe a handful of people who might know what they're doing and a whole bunch of idiots on Hot copper. That's pretty cool. Right? Well. That's the field I want to play on. Do I want to play at the big end of town where there are literally hundreds and hundreds of really smart analysts who have far better access and better systems. And I just. Where's my edge there?

Alec: [00:22:25] So this was really motivating for me and a real reminder of why people love investing in small caps. The idea that the biggest fund managers in Australia and those with the deepest pockets don't play in this space is for many people the reason why they do. But I'll be honest, it's not something that I've spent a lot of time looking out over the past year or so. We're getting back into it with Uncovered, our Content series that tries to uncover stocks that are uncovered by brokers and analysts. You know, the small and micro caps in Australia and around the world. And I've just been reminded how interesting a lot of those stories are. So I'm really excited to work with Andrew, learn from Andrew and really get back into the small side of the market again. So then the obvious question becomes, well, how do you start 2000 stocks on the ASX? That's a lot of annual reports you're going to have to read. So I wanted to ask Andrew how he sifts through all those names to start finding the companies that he wants to do further research on. What's your filtering process? You obviously have a great community at Straw Man to help you, I guess, you know, see what's out there. You've got some good brains filtering it down. But yeah, when you're looking at the ASX boards and you're trying to figure out what to research, where do you start? 

Andrew: [00:23:49] You know, I'd love to tell you I had some really sophisticated scanning filtering algorithms. 

Alec: [00:23:55] Yeah, I would love you to tell me that as well. 

Andrew: [00:23:58] I don't. I mean, you come across ideas in very organic, unexpected ways. It's having a chat at the pub, it's listening to you guys on the podcast, it's reading something in the fan and something will just put your interest and then you can just sort of start digging into it. And there's a few high level heuristics I sort of look at. So I'm very comfortable investing in pre profit companies. You don't have to have free cash flow. What of my companies don't make any money, but they do have sales, they do have a product and there is strong momentum at the top line. I think that's really a nice place to start. There are other companies like that again, please don't hit me on Twitter. But the companies we beat, for example, we beat Nano. They're doing some really cool reram memory technology, computer chip fabrications well above my pay grade. And it could be the best thing since sliced bread. And those are getting early going exceptionally well if that proves to be the case but we've got no evidence for that yet. And so I happily forgo being an early buyer. I think you've got to look at the potential returns on a risk adjusted basis. You are sketching up a business plan on a napkin to take over the world and anyone who invests at the bar next to us is going to do extremely well because it's just an idea. But statistically, there's a very high chance that we are going to fail now if we have the exact same business plan, but it's three years later, we've now got customers, we've got traction. You know, momentum is building not on price or anything. We just we're just selling more and more and more stuff. We might not yet be profitable, but that's something that something's happening there, right? And that's sort of like, okay, that's a very important filter for me to sort of get past. And when you're looking at Aussie small caps, that one filter alone is going to knock out 75. So that's, that's I think I think Yeah. So you'll, you'll just come across ideas and then I sort of start by looking at. That's a very good tell that there is something happening under the hood. But then before you start getting into financials and metrics, you just ask all the dumb questions that we do a lot of CEO interviews at strawmen and the question is always at the start, what do you do? And I think don't quote me a bunch of jargon and how you're revolutionising this with a new SAS platform with machine learning and AI integration and like, honestly, what is the problem that's out there? How are you solving it? How is it different now? You should be able to explain that in really basic terms. And then if you don't understand that or you don't feel as though you can ever sort of really internalise that, chuck it in the too hard basket in my my too hard basket is very well used. And I think it needs to be that you don't, you don't have to master and understand everything you want. Simple, right. So then I want a business that I feel as though I can understand. It makes sense. It's not hot. By the way, this is one of the really great things about small cap businesses. We call them small, but often these are like $100 million businesses like you are. I would be so happy to own one of these businesses. But they're just next to BHP. They look absolutely tiny and they are in that context, but they're still a very substantial sort of business. But if yeah, if I can if I can find a business with some good sales traction that I feel as though I can get my head around, that I feel as though I can understand, then I just keep going and I just keep going until I hit a blocker and then chuck it in the bin and move on. So again, you applying a whole bunch of heretics that you've learned the hard way or maybe the easier way by learning from other people's mistakes and you just keep going and going and going and you'll find that you build up something of a narrative. And the more compelling that is, the more I'm inclined to sort of continue to really feel as I can build that conviction. And notice that up until this point, I've not even looked at the share price or considered because it's irrelevant. I mean, how am I possibly able to appraise or contextualise the share price if I don't understand the business and its prospects? I guess it's ridiculous how you know, I can say all the P is for, therefore it's cheap. Well, not if earnings are on their way to zero within three years. Like you know what I mean? So it's sort of I'm kind of rambling at this point, but that's it's it's not I think a lot of people like to have very formulaic approaches and the world is just very messy. And one of the things I've learnt that over the time is that it's actually the qualitative aspects of a business that tend to be more important than the quantitative stuff, like the stuff I can't put into an Excel sell, you know, like quality and alignment of management. Yes. Example right? You're going to find that in the financial statements and yet that's everything because these are the people steering the ship.

Alec: [00:28:41] I think that's such an important reminder and something that we've certainly learned over the journey. When I started looking at investing, when we're at uni and living in a share house together, you'd really try and find the perfect formula, you know, the perfect set of ratios or growth rates or whatever it was that you could put into a stock screener and you could filter through. And the gem of a company would just be there waiting for you. And what we've learned over the journey is it's just not that simple. If you could put the perfect pay ratio and revenue growth rate and gross margin into a stock screener and find that company that easily, then the opportunity would be arbitrage to why the biggest investors? Well, everyone would just be doing it and there would be no opportunity left to invest in. The fact that investing is hard is what makes it worthwhile. And I'm really excited to go down those rabbit holes with Andrew and find the companies and do the work and have Andrew check my work. But yeah, listening back to this chart, I'm just so motivated to go exploring and see what I find. Well, what I'm, what I'm keen to do for our next session is to actually go away and come back with a few Aussie small caps and then talk to you about why I've chosen them and then get you to sort of talk to me about what you say in them. And we can sort of compare notes and get really practical. But I guess, you know what I'm thinking about the small cap world. You know, you said you read the Fin and I instantly think the fin don't write a lot about small caps. And then you said you listen to us. And I said, well, you shouldn't. And so I guess my question is like, what are the when you're just doing that, you know, writing broadly, being intellectually curious, seeing what's out there, exercise what, what are some of the good resources that you're writing or listening to? 

Andrew: [00:30:48] Honestly, it is just blogs, friends. I mean, I don't want to be too much of a shill, but I mean, like, I'll be selfish here. The whole point of straw man was because I was sick of being the idiot that puts recommendations out there and has everyone crap on them. Right? Like you give me your ideas, like, let's work together, you know? Okay. No responsibility. Here's what I think. What do you think? Right. Like. 

Alec: [00:31:10] And for people that aren't familiar with Strawman, that's the idea, right? Everyone has to contribute to the community to be a part of the community. 

Andrew: [00:31:17] You don't have to, but we try to incentivise you to do it. So the more work that you put in, the more recognition you get, the better performance. We have an award program, so it really heavily subsidises. So the top performers basically don't pay anything because they're putting all this work in and we've got a bunch of people who are happy to sort of sit on the sidelines and sort of be the fly on the wall and they don't get much of a rebate at all because they're not contributing much. 

Alec: [00:31:41] So I mentioned earlier one content series we've started this year on Equity Mates is uncovered where we look at small cap companies and micro-cap companies that don't get a lot of coverage, not as buy, hold or sell recommendations, but purely to just explore this world and see what interesting companies are out there. And one company that we looked at recently is HitIQ, just five and a half million dollar market cap, tiny company, but it's trying to make a smart mouthguard that measures head knocks for sports people. And we just thought it was interesting because concussions and head knocks are really in the headlines at the moment. So I figured, you know, I've got Andrew on the call. I might as well ask him about it. And he suggested we have a look at it in real time. So here's Andrew in real time without any pre-warning having a look at this company. 

Andrew: [00:32:37] Shall we go? Is there a little bit of a process in real time? Yeah. Let's see what See what and see what it is. Yeah. So I'm just using CommSec because that's my broker. It's not an endorsement. There's nothing that I probably should change because they're quite expensive. But you know, I'm lazy and I just I've been with forever. But let's, you know, I say so again, What have I got here? Well, I've got two years worth of history and this sales so that's interesting. $400,000 in revenue in 2021, 600,000 in 2022. Okay. They've got a product and they're sold 50% more of it than they did in the previous year. So it's that first box kind of tick. Those same seems interesting. Next, what the hell do they do? Well, you kind of just sort of told me, but, you know, it's equipment for athletes to protect against a thing that we know is actually really serious. Right. So the next question I guess it would have is someone who's not got any familiarity in that space is what are the alternatives that are out there? What's the cost on this? What is the go to market strategy here? How you marketing this? How are you doing? This is don't forget, you can get a lot of really good sales growth in an uneconomic fashion. Like if I had a business model that said, buy your iPhone off me and I'll give it to you for ten bucks and I'll throw in $100 gift certificate, I'm going to sell a heap of iPhones right like that. But my unit economics are terrible and I'm going to like more. I sell them more, I'm going to lose. So I'd want to dig into that a little bit as well. One of the things that again, stands out so although they've got the although they've got the sales trajectory. Know, the data points, but there seems to be sort of something there at the same time, they are unprofitable and that's fine. That's just the nature of the beast for early stage companies. I mean, they're all that it's not necessarily a bad thing, but this is where I think the next point of call would be. Let's have a look at the balance sheet and let's have a look at the cash burn, because you I don't know why investors are still surprised with capital raisings because it is the easiest thing in the world to sort of spot. Right. If I've got $5 million of cash in the bank and I'm burning through $2 million a quarter. So, I mean, yeah, I'm going to be raising cash.Very, very high chance, right? Oh, yes, I could borrow money and there's other alternatives as well. But that's really one of the benefits of listing, is you get that other source of capital and small caps are going to tend to go that way. So in this company is like, okay, they're still burning through cash. What's how far away is this inflection point? Have they got the runway, the runway to be able to achieve that on their own? They might not. And maybe that's still okay, because the reality is that nothing is perfect. The best companies have hairs on it. So it's kind of like I envisage it like a scale, you know, I've got the pros on one side, the cons on the other is always going to be cons. Like they just always are. So maybe there's enough pros out there that I a likely capital raise wouldn't be enough to dissuade me, but, but it would worry me. Right. And so that's an important thing to check to. 

Alec: [00:35:48] So to close out my first session with Andrew, we spoke about some things for me to go away and work on and research so next time I can come with some company names and some of the work I've done and we can keep learning. In terms of homework, I think it would be great for me to bring some names. Next time, share them with you ahead of time and then we can actually talk through them similar to like what we just did with HitIQ. But rather than putting you on the spot, give you a chance to have a look. But I think it'll be an interesting exercise for me to go away and try and find some names just to say, see what I come back with. 

Andrew: [00:36:30] Don't feel as though you have to get a new name either, right? Like, if you might have have something in your portfolio over three years that you want to talk through. Like let's you probably know it much better than something you've just found in the last year. Yeah. 

Alec: [00:36:41] That's a good point. 

Andrew: [00:36:42] It's a point worth making because, I mean, I'm a sucker for this. I think all investors are new and shiny is always more interesting. It just it just is right And it but it's a distraction though it really sometimes that what you know is is better. So don't don't go for the new thing just for the sake that it is new. 

Bryce: [00:37:04] All right, guys, We're back now in the studio having just listened to Ren's first session with Andrew. Ren really enjoyed that. I know that that was only a short clip of what was actually quite an extensive conversation. 

Alec: [00:37:14] Yeah, we spoke for over an hour. That clip ended up being a little bit over half an hour. I think Andrew and I are going to really need to time box. Okay, So I have a premium. 

Bryce: [00:37:23] Premium feed where all audio is released and if you want full access, you can you can pay for the premium anyway. That's a business Decision. 

Alec: [00:37:30] That's actually a really good idea. 

Bryce: [00:37:33] Thank you. But I think for me at first, really enjoyed the final moments where you did a live session that really took me into HitIQ.

Alec: [00:37:42] Geez, HitIQ had a good run. 

Bryce: [00:37:46] HitIQ if you're listening. What I initially started getting out of this is that it's not rocket science. A lot of the stuff that Andrew talks about, it's just like having a clear view on what is very important to him that makes a good investment and then making sure you stick to that when you're looking at opportunities. And it's not like here, the first thing he did was not crack out a DCF or maths or anything like that. Like it's encouraging that. I mean, I'm hoping people that are listening are encouraged by the fact that these professional investors start in very similar ways that you and I start and obviously have more nuance to it and do a lot more behind the scenes. But it's not as daunting, I think, as some people might think it is.

Alec: [00:38:29] I'm very excited to hear how your session with Henry went on Monday's podcast episode next week, so make sure you're listening out for that. But after the break, we've got a question from Jason Ellis not talking about the tax implications of dollar cost averaging and auto investing. We know it's a popular way to invest. It's certainly a way that I like to invest in my call portfolio. So let's unpack what it means after the break. All right. Price will jampacked episode today. We have heard how Andrew and my first coaching session went pretty happy with it. I'm feeling pretty inspired. 

Bryce: [00:39:06] It was Good. 

Alec: [00:39:07] Now I've got a bit of homework to go away and find some names so we can get really practical in the coming episodes. So we've got a community question that we wanted to unpack because we think it will be super relevant for a lot of Equity Mates listening. So it comes in from Jason on Instagram. We don't have a recording, so do you want to read it out for us? 

Bryce: [00:39:28] Sure. He says, Hi Equity Mates. I just wanted to ask a question about capital gains taxes when auto investing. If I'm buying shares every month for over a year and elects to sell some, do I pay capital gains tax on the shares that I bought over a year ago and get 50% off? Or am I selling the shares I most recently bought? It's a confusing process as I'm selling a number of shares, not specific shares with specific timestamps as to the date I acquired them. Thanks for your help. He'd love to hear an episode on this. Well, we will answer this now for you, Jason, as it is a question that often comes through and can be confusing, but it does have a simple answer and it is the first in, first out method when it comes to capital gains tax and selling shares now. Now you've got to caveat that. You do need to obviously keep records of when you're buying and how much you bought your brokerage platforms will definitely do that. I would recommend using a platform such as share side or an visa to to track your portfolios as well, because it will really help when it comes to tax time. But tracking is important. But what is the first in, first out method? This is where the shares you sell are the first ones that you bought. That is it. So if I'm selling shares that I've invested, been investing every month for the last two years, if I sell today, the first shares that I'm going to be selling are the ones that I bought two years ago. If I'm selling in a month's time, it's the ones that I then bought a month later. So it's really just the first shares that you got in are the first ones that you sold, and then you apply the capital gains to those buckets.

Alec: [00:41:06] Can I actually take your simple answer and make it a little bit more complicated? Yes, There's actually three ordering methods that you can apply, and it's actually up to you which one you apply and you just tell the ATO which one you're doing. First in. First out is the one that you spoke about that feels like the right one for a lot of people. Not always. Remember, this is just general advice. We're not sure of your specific circumstances, specifically around tax. It often pays to speak to a tax professional, but first in, first out, A lot of people prefer that one because of the capital gains discount you get if you hold an asset for more than 12 months in Australia. So that's number one. But there are two other ones that you could opt to do if you wanted to do. 

Bryce: [00:41:53] Last in first and. 

Alec: [00:41:54] Last in first out or LIFO. And that's where the shares you bought last are sold first. I can't think of a worst example of why you would do this. 

Bryce: [00:42:04] Different capital gains on those compared to when you bought them a year ago. Like you might have a loss on those ones compared to what you bought a year. 

Alec: [00:42:12] Right? Answer Yeah, yeah, yeah. And then the third one and that relates to what you just said is highest in first out so that's high or sometimes referred to as highest cost first out and that is you opt to sell the most expensive shares first regardless of when you bought them. And so that is probably a specific one for tax. Yeah. 

Bryce: [00:42:40] So the key there is when, as you said, you get to choose, you just need to let the ATO know which one you're going with when you file tax return. But it is up to you depending on how you want to treat your tax. When it comes to tax time. So Jason, thanks for the question. I hope it I hope it did help. I think the key is you just make sure you're tracking so that when you do get to tax time, it get the job is a lot easier. But please do send in questions to us and we'll continue to answer them on the show. You can hit us up on our Instagram channel, Facebook. We've got a contact@equitymates.com email address as well. If you want to hit us up on those channels, we'll make sure that we get your question answered on one of our shows. But when that does bring us to the end, we've got a massive couple of weeks coming up. Mental continues next week with Henry Jennings and myself. 

Alec: [00:43:25] Yeah, can't wait for that.

Bryce: [00:43:26] No, We're also giving a bit of insight into the future of Equity Mates. A lot is happening. I've got an interview with Jesse Feld. We've got another asking advisor coming up. It's a huge month before we hit Berkshire Hathaway in May. 

Alec: [00:43:39] Yeah, I'm actually taking a week off, though. 

Bryce: [00:43:41] You are taking a week off. So if you feel ratings have been absent from episodes over the next few weeks, that's because he's taken a random holiday. But now we've got some awesome episodes and make sure that if you are, if you're not already, tune in to get started investing. We're doing a ten part series with Global X on going Under the Hood on ETFs to give a bit more information. An insider on how to analyse ETFs and build an ETF portfolio. If you could hit, follow and subscribe as well, that would be much appreciated. But as always, Ren loved trading stocks and we'll pick it up next week. 

Alec: [00:44:11] Sounds good.