Quick Finfest Wrap + Emma Fisher on the difference between uncertainty and risk

Bryce: [00:00:09] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing. Whether you're an absolute beginner or approaching Warren Buffett status, our aim is to help break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you going? 

Alec: [00:00:31] I'm very good. Bryce is very excited for this episode. Somewhat exhausted as well. We have just come off FinFest and we are excited today to be able to share some of the content that we recorded on the day. And we've got heaps in the bank, so this won't be the last time. But yeah, exhausted. It was a big effort.

Bryce: [00:00:53] It was a massive effort. We took a risk. We wanted to prove that finance events were able to still attract and engage the next generation of investors. The Equity Mates community. You and I for so long have been going to very valuable events put on by financial institutions around Australia and we felt that the content there was always so good and valuable, but it was in a stuffy room serving Waldorf sandwiches with a lunch and an afternoon tea break, and it never engaged us. And so we tried to prove that we could do something different. Stamp out stamp the Equity Mates mark on a finance event. 

Alec: [00:01:32] Yes, we probably could have done with some more chicken world. So.

Bryce: [00:01:35] I know, I know. I did say that, look, we did run out of food, but hey, first time first, a major event the last time. 

Alec: [00:01:42] Definitely, some lessons. 

Bryce: [00:01:43] The last time you and I ran an event was just before COVID. And it was, I think, about 100 people in a pub. 

Alec: [00:01:49] Yes, yeah, yeah, yeah. So we stepped it up. 

Bryce: [00:01:52] Stepped it up. 

Alec: [00:01:52] There were three food trucks that cancelled on us the week of. So we knew that it was going to be a tight, but pretty, pretty epic day. Thank you to everyone that came. Thank you to all the sponsors. Stake, our headline sponsor, Magellan, Owner, Coin Sport, our major sponsors and everyone else. It was so much fun. All the speakers that gave up this Saturday to speak and to share their knowledge. You know, for so long, the industry is thought that only people with self-managed super funds rock up to investing events. Well, FinFest hopefully changed perceptions. Retail investors do want to be engaged. 

Bryce: [00:02:28] Yeah, big time. So we've got Emma Fisher coming up after we have a bit of a debrief and one of her sessions. She was straight off the bat and in a highly engaging session. No notes I think. So we do have her coming up in this episode, which we're really excited about. But Ren, you're right, I was super proud of the diversity of the audience, so super proud of the Equity Mates community and it was just so exciting to see our community there on the day. So just again, a massive thank you to everyone that came and supported and even those people that came and had no idea who Equity Mates were. Shout out to Al for leading the advertising that he did leading up to that. 

Alec: [00:03:05] Yeah it was, it was, you know, for so long you and I just sat across the table from each other and stared deep into each other's eyes and talk about stocks. And you don't really say who is listening. And so to be able to meet so many people was really cool, slightly overwhelming. I was so nervous before we got on the stage to start the day. 

Bryce: [00:03:30] Yes, me too. Yeah. So I ran on with him. 

Alec: [00:03:34] 2 minutes before Bryce gets a way to get up. I'm going to run on with high days, just the bloke. It's like, Oh right. 

Bryce: [00:03:42] And I did and we did record it. Some of the sessions were filmed in video, so we'll get that up on our YouTube channels. All of the sessions were recorded in audio and we know that on the day a lot of people didn't get to see the sessions that they wanted to because we sold more tickets than we thought. The stages didn't have the capacity to facilitate all of that, and that's a learning for next time. But everything within the next few weeks will be available online in audio on YouTube. 

Alec: [00:04:08] Yeah, we're going to endeavour to get as much of it up as quickly as possible. But some of the domes are just like an eight hour recording block. 

Bryce: [00:04:17] We've got to edit 400 gigs of content.

Alec: [00:04:19] Yeah, Bryce's trying to upload it all, and it is a nightmare. Lucky for me, the external hard drive didn't recognise my device, so I can't help. 

Bryce: [00:04:29] While I'm battling away, blowing through my internet at home and at work. But anyway, it is what it is. I'm glad that we managed to record all of the sessions because there were some absolute bangers. We really encouraged our experts on the day to think outside the box. We were putting them in environments that would have really been challenging to present in our, y'know, dome. It was a 360 amphitheatre. Nowhere to hide us surrounded by people. We had a catwalk in the Magellan greenhouse that people were walking up and down like we were forcing our guests to present no PowerPoints that had, you know, plenty of words on them images only. So we've got some really awesome content for every type of investor to release over the next few months. 

Alec: [00:05:14] Any funny stories, any key takeaways, what's the overriding feeling? 

Bryce: [00:05:19] Well, I think one funny story and I don't know if you will appreciate me saying this or not, but I did hear rumours that a couple of the female attendees on the day had been given hall passes with a hall pass. So kudos to that. Kudos to that.

Alec: [00:05:38] Yeah, I don't know about a couple, but one had agreed with their husband that..

Bryce: [00:05:42] You had a home pass. Well, play it on that front. There was no event, but it was funny to hear that.

Alec: [00:05:51] Pretty flattering.

Bryce: [00:05:52] I can imagine. So that was a highlight. I think meeting a lot of the people in the day was a highlight. And look, we can't reiterate that it's a massive thank you to the Equity Mates community for allowing us to take these risks to continue to be the conduit between you guys and the world of finance, and to bring that gap closer and allow you to make your own investment decisions become better. Investors feel more confident. You know, Ren and I are still learning every day whilst trying to run this business. We're still pursuing becoming better investors and learning as much as we can. So it was just a phenomenal event. Yeah, we're exhausted. 

Alec: [00:06:31] We're exhausted. We're really proud. And I guess we're pretty humbled that we get to do it because there was certainly no grand plan to get to this point.

Bryce: [00:06:41] Absolutely. 

Alec: [00:06:41] And every year we were lucky to get to do something, you know, 2020, we got to launch new shows that weren't hosted by you and I. 2021, we launched a book. In 2022 we launched FinFest. What are we going to do? 

Bryce: [00:06:54] Oh, my God. Well, someone was saying we have to do an Equity Mates cruise. Yeah, next about the cruise. Next year, Equity Mates goes to Fiji with 50 fund managers on board and over 2000 people. That would be pretty epic registrations now. 

Alec: [00:07:12] Yeah, well, no, in all seriousness, FinFest 2023 registrations are open so equitymates.com/finfest If you want to make sure you're signed up. So when we recover our sleep and get ready to do this all again, you'll be the first to find out everything about it. But Bryce, that's probably not navel gazing, I think. Let's go to the real reason that this day was so good and so many people loved it. It wasn't you and I. It was the speakers that gave up their Saturdays to share their knowledge. And we can't thank them enough for doing that. Um, the financial community is better when professionals and people with a lot of knowledge share that with people that are trying to learn. And so for them giving up their time to do it, we say a massive thank you. This is just one of the 25 plus sessions that we recorded and that we'll be releasing. We're releasing everything on YouTube and we'll release some of the more popular ones on the podcast. But Emma Fisher has been on the podcast before. We were blown away when we first spoke to her and I think the FinFest audience were blown away when they heard us speak. 

Bryce: [00:08:23] Yes. Yeah. You say 25 plus it's more like 50 sessions. So we've got plenty of content up our sleeves. 

Alec: [00:08:29] Right. 

Bryce: [00:08:30] We'll take a holiday, but that's our summer. Oh, yeah. So before we crack into Emma Fisher, we must again say a huge thank you to Stake, who headlined the partnership with Equity Mates. They poured in a whole bunch of time and resources to help us get it off the ground. So a huge, huge thank you to Stake as well as as you said at the top Ren Magellan CoinSpot and when I future who were our major sponsors as well so couldn't have done it without you guys but without further ado here is Emma Fisher. The session was called Risk versus Uncertainty. How uncertainty can be your friend. So enjoy. 

Emma Fisher: [00:09:13] This is a great turn out. I wasn't sure what the turnout was going to be like being on this early in the day. I had my mom on standby to stand in the front row and clap loudly for me just in case nobody came. But this is good. I've ditched her. So welcome. So full disclosure, I am here today to spruik my product at the end of the day, the Australian Share Fund. But I also want to start with a bit of a defence of my asset class Australian equities. It sounds a bit boring and I'm conscious that today you're going to hear really exciting pitches from crypto products, from global products. So I want to make a case for the humble Australian company. I get it with crypto, you get it's new, it's a whole new payment system. But in Australia we have some innovative financial models as well. And you know when you're looking at global companies that they're going to sell you, that you can invest in these great megatrends like tech and cybersecurity. But there are local plays on cybersecurity available here. And I get it, you want to invest alongside the billionaires like Elon Musk and Jeff Bezos, but you can do that here as well. You can invest alongside some really nice local Australian billionaires. You probably just don't want to see some of them succeed quite as much. So look, I think there's something to be said for investing in companies that you know and understand as a local and as a consumer. So don't write off Australian equities, but obviously that's not all there is to it and that's where we come in. So I work at Airlie and I work on a product called the Australian Share Fund, so it's listed on the stock exchange under the ticker AASF and basically it's a fund that finds between 25 to 35 Australian companies and invests in those. So I wanted to pick this topic today of risk versus uncertainty because I think it gives you a helpful view into how we pick stocks and how you can pick stocks yourself to minimise risk and maximise the opportunities that that uncertainty gives you. So I want to start with a show of hands. How many people in the room have invested in a company where the shares have gone to zero? I'll put my hand up because I definitely have. Right. Well, almost counts. I think the people that have their hands up are going to end up being the best investors in the room at the end of the day, because you've learnt a really painful, really powerful lesson about the difference between true risk and investing and uncertainty. So these things are not the same thing, but the market hates them both and treats them both equally. Risk is the chance of permanent capital impairment, so risk is the chance that you do not get your money back. Uncertainty is you don't know what's going to happen next. And I think when you hear it defined that way, it's pretty clear that uncertainty, it's a part of investing. It's always a part of investing and it's a part of life. So there's nothing we can do about uncertainty. And actually, hopefully at the end of today, you'll think about uncertainty as your friend. That's what creates opportunities in investing. But risk is not your friend. You really want to minimise risk. So I want to outline some rules today for minimising risk and investing. But before I get into that, it's important to note that we're never going to be able to bring risk down to zero. So if you want a zero risk investment, you put your money in the bank, or maybe you stick your money under the mattress and you're probably thinking, Well, the reason I don't do that is because I don't get a return from that. And that's what the risk curve is designed to do. You're pushed out along the risk to the tantalising returns that are available in equity land, but you can't achieve those returns without recognising you're taking risk purely by investing in equities, because equity holders obviously rank below debt holders in the stack. So there's no guarantee that your equity is worth anything. So this is a risk, this is an inherent risk in investing. We can't minimise it away, but there are things that we can do to minimise the chance that you will permanently pay your capital and then the chance that you're going to have a good time investing over the long term. So uncertainty by contrast, I want you to think of uncertainty as your friend. So on the screen I have these are the top 20 Australian companies. There are 52 week highs and lows in the year 2019 and I wanted to pick the year 2019 because in retrospect it's probably the last boring year in all of our lives. Like, I can't. I don't know about you, but I can't remember one thing that happened in 2019. And yet the top 20 most boring Australian companies have seen their share prices change by 54% on average in that year. And if I do this analysis for 2020 or 2021, that number is even larger. It's moving towards more 70 or 80%. So we think of the top 20 stocks as the most boring companies and we know that companies, their value changes over years and decades, but their valuations and their share prices are fluctuating rapidly in the market. So we know that the true value of these 20 businesses hasn't changed by 54% in one year. So we know that some of these assets have been mispriced and that's what gets me excited about investing. The fact that there's always this opportunity set out there because of uncertainty, because of not knowing about the future and everyone guessing about what's coming next and pricing those guesses into share prices. So we like uncertainty but we don't like risk. So for rules too. For minimising risk in investing. The first rule is to focus on financial strength. I'm going to say a lot of stuff today, but if there was just one thing that you could take from this whole presentation, just one rule: humans. Me Please just buy companies that make money. Just buy companies that generate profits. If you do this one thing, you will avoid the riskiest part of the market. And you might be thinking, Okay, Boomer, my big strategy. Lithium stock is up eight fold in the last year and it doesn't make any money. So what do you know? And to that, I would say firstly, ouch, I'm not a boomer, I'm one of you. And secondly, the reason that I say just avoid companies that are loss making is because they have the worst track record of performance. So a broker created this portfolio and he called it the Birds Without Wings portfolio. And all he did was he bought every loss making company listed on the ASX every year from the year 2000. So let's have a look at that portfolio when it's the blue line. So if you invested $100 in the year 2000 and every loss making company on the ASX today, your portfolio will be worth $0.24. And if you just invested in the index, this is the power of compounding. This is why we love equities. If you just invest in the index, you $100 would be worth nearly $600 today. So there are discrete periods of time where loss making companies do very well. And the most recent time coming out of the pandemic, this Birds Without Wings portfolio was up 60% in the year from when markets bottomed in April 2020 to the following year. So there are small periods of time where this really works, but the longer trend is so, so stock. So, you know, you really have to have these facts in your back pocket because these are the most enticing stocks. They're your biotechs. Your explore is you tech stocks. They all paint you the world because their business model is for you as an equity holder to fund them because they can't get debt holders to fund them. So the clue is if you're invested in a company that continually is raising equity, usually they'll put out a great announcement, then they'll raise equity. They're selling you the dream. You know, none of these companies are going to be the next Afterpay. I mean, to be honest, even Afterpay didn't turn out to be the next Afterpay. So if you just avoid this section of the market, you will do yourselves a great favour in terms of long term value creation in investing. So just buy companies with good balance sheets that self generate and self-fund their operations. The second rule is don't overpay. So everyone thinks about the tech wreck back in the year 2001 as tech stocks losing about 90% of their value. But it was actually more widespread than that. So on the screen, you can see Procter and Gamble, Disney, McDonald's, a lot of non-tech companies. So 60, 70, 80, 90% share price declines. And interestingly, if you'd invested at the peak in a lot of these companies, it would have taken you between 6 to 17 years to get your money back in terms of recouping that initial share price. So if we think about that initial definition of risk as permanent capital impairment, i.e. you don't get your money back, that can happen because the equity is worthless, like the painful experience I had. Or it could happen because you just never see the share price that you paid for the shares again. So this risk is really elevated at certain times in the market. And I'd argue probably a year ago this risk of overpaying across the board was quite elevated. And so, you know, these were good companies, but they were swept up in a bit of a mania. The good news is when the flipside of that is when markets are falling and everyone's really, really pessimistic, you've got a much better chance over the long term of making good money. You know, if you read the headlines, you'll convince yourself not to invest. You convince yourself that you've figured out that the global financial system is about to go down the gurgler and you're better off sitting on the sidelines. But the reality is, if you are, you know, if you're if you're planning on investing for decades, just buy the companies you like. And don't worry too much about whether or not you're going to be at the peak, the bottom. You won't be out of the bottom. I won't be out of the bottom. None of us will. But I think right now there are some good valuations available in the ASX. I think there are a lot of companies that you're going to make good money on a 3 to 5 year view, probably very good money on a ten year view because of the pessimism that's everywhere in the markets. So things could get worse in the short term, you know, as long as you don't need the money back. That's what the power of personal investing is. You don't have to pick the bottom. You can just sort of set and forget. And I think that the valuation opportunities right now, you know, across the board sort of let us avoid the risk of overpaying. The third rule is to buy quality businesses. So what do we mean by quality? For me, a quality business is one that can generate a high return on capital. So competition theory basically says that if I make a high return on capital, competitors are going to see that they're going to come into my industry and they're going to beat that return down until we're all just making average returns. So when you can see a company that's made a sustained high return on capital for a long time, it's like a big sign saying there's something special going on here because for some reason then the competitors aren't able to come in. Eat that profit pool. So that's when we sort of look at the high returns and that's when we get in there and we do the work and we try to understand what's the barrier to entry, you know, what is this company got going for that special? And then we make a judgement on how long we think that can last. So we like quality companies, but there is a bit of a tension between this rule by quality companies and the rule I just outlined of don't overpay because obviously often when a company's quality is obvious, they're the most expensive companies. And so you get through periods of time where the market really, really rewrites these high quality companies. You know, if I went back to that slide, if you correctly identified that McDonald's and Disney and Microsoft had the best prospects of the next amongst the best products of the next few decades, it still took you nearly 17 years to get your money back so you can there is a relationship between quality and valuation that you do have to pay attention to. So that's why it Ali, our way around this is to look for undervalued quality. So we're looking for quality businesses, but we're looking for situations where it's not obvious. Now, there's no one size fits all. Reason why it's not obvious. I'll give you a few examples. So there's Jewel in the Crown scenario. So this is when you've got a good business, but it's lost within a less good business. So one recently would be Wesfarmers. So Bunnings before they demerge Coles a few years ago. Bunnings is about 30% of group earnings but it is far and away the best business within Wesfarmers. It's actually one of the best businesses in Australia. So most companies make about a 10% return on capital. Bunnings makes 70%. So it's an incredible business. I mean easily got the best sausage sizzles in Australia and it's a really, really good one. But it was only 30% of the group within Wesfarmers when they were in calls. Coles was the dominant, it was about 50% of group earnings. So when they demerge Coles, if you're a shareholder in Wesfarmers, you've got your Wesfarmers shares, you've got your Coles shares. But Bunnings went from 30% of Wesfarmers to 70% of Wesfarmers earnings. So because it was such a good business, the market was suddenly like, oh, this business is worth way more because it's now the dominant driver of earnings and it rerated the company and you could see that all the performance for the company has come since that demerger. Another example where you might find undervalued qualities when you've got a good business, but it's in an unloved sector. So one company that we've owned for many years in our fund is Mineral Resources, and the heart of Fosse's business is a mining services business. Now most mining service businesses are terrible, they have really, really low returns and that's because they're tied to this chart on the left, which is mining CapEx. It's really a boom and bust. So the majors will say, we want to build a big project now, put it out to tender mining services. Companies will come in and say, oh, we can build it for $500 million. Now win the contract, they'll build it. The work will be finished, it evaporates. So when there's work, they make money, when there's work going on and they make more money the rest of the time. And a lot of these businesses end up going to the wall. Mineral Resources, Mining Services, business is linked to production. And if you look at commodities production in Western Australia, it's that chart on the right. It's been a structural growth story because of where these assets sit on the cost curve. So mineral resources does crushing for the majors. So if you go to BHP, one of their minds, for example, a chunk of their mine is run by mineral resources during the crushing portion of the mine. So if they want to, if they weren't happy with mineral resources or they thought they were paying them too much and they wanted the contract to come up for renegotiation and they wanted to bring in mineral resources, owns that part of the mine. So they'd have to pick that up, lose it, mineral resource, it would take all the kit and then they'd have to bring in someone else, bring up that part of the mine. So you'd probably lose six months of production and all the operational risk in the meantime. So it just doesn't happen. They just don't lose contracts. So they've been able to, you know, they're embedded within their customers and they've been able to make really, really good returns because of that. So this was a situation where it was priced in line with all its mining services peers on about five times earnings, even though it was a much, much better company for 20 years. It generated a return on invested capital of around 22%, whereas most, most companies in Australia generate 10 to 12% and most of these mining services companies more like four or 5%. So it's much, much better than its peers, really, really cheap because of that. So that's one way we thought it was undervalued quality. It's been a really good performer. It's up about four fold and we got lucky on the iron ore price and then the lithium price. But the core of the business is a really powerful, steady cash flow generator and the management team have been really smart about what they've invested that cash into. And now the situation where you might find on quality, it's just an under the radar business. Sorry, I don't know what the logo's dropped off here, but this business is PWI, which not many people have heard of. So it's this little Australian company based in Gold Coast and I don't know if anyone has watched Drive to Survive on Netflix or is a fan of a lot of the women. I like that a fan of Formula One. But you are really surprised to find out that this Aussie company is supplying every single Formula One team's cooling systems. So 15 years ago they started with Red Bull and then the year that they supplied Red Bull with their cooling systems, Red Bull went on to win six years in a row. Red Bull say it was Sebastian Vettel, it was a cooling systems. There may be some truth in that. Because they have then going on over the next 15 years to get every single Formula One team. So they've now just got Mercedes in the last two years and now they have the monopoly supplier of cooling systems to all of these teams. So that's half the business. That's a really good business. And that the engineering know-how and the ability to sort of invest at the leading edge of technology for these very fussy customers throws off all these other opportunities. And that's the other half of the pie. And that grain piece of the pie, emerging technologies is growing very, very fast. They are tackling electric vehicles. They're tackling aerospace, tackling defence, really, really big end markets. So that's one that we think is really exciting and it's under the radar because it's this own new managed business. And so the original founder of the business is still running it today. He was a mechanic and he and his son thought, well, we could possibly make some cooling systems. And then, you know, 40 years later, they're making the best cooling systems in the world, supplying Formula One. So it's this great Aussie success story. And it was interesting actually. So during reporting season we met with pretty much every large corporate in Australia and every single one of them was talking about how much trouble they're having right now finding good people. And we met with PWI and they were saying, oh yeah, you know, we basically just get engineering rev heads who are desperate to work for us because they love Formula One. And they had this great story in their annual report about this guy who was in his second year working at PWI, young guy. And the team had an issue in their qualifying round in Saudi Arabia and they needed a pot made. So I worked through the night, they made these pots, they gave them to this guy, flew him to Saudi Arabia, he had delivered them to the team and then they took him around that weekend to the Saudi Arabian Grand Prix. I don't know if anyone watch this drive to survive, but there probably a lot of F-bombs flying around because the team principal of Haas, he's got a real he's got a real potty mouth. But sorry. I mean, that's just so cool. If you're into cars, you just can't compete with that. So these companies, these owner managed businesses, often have these really unique cultures that can help them attract talent and help them attract loyal talent that stay with them for a long time and underpin sort of the high end engineering that's being done out of this business in Queensland. So actually that dovetails nicely into my fourth rule, which is management matters. So ideally we're really big on investing in order to manage businesses. It's not the only thing that we invest in, but when we find a really good business that's run by its original founders, we get really excited. One that we've known for many, many years is race. So race is Australia's largest plumbing wholesaler and they've been owned and run by this one family since the sixties, the Wilson family, and they owned about 60% of the shares on issue. So again, it's a bit under the radar. They're not that promotional. And if you look, 20 years ago, race was actually half the size of the dominant player in the market, which was trade linked. And over the next 20 years, race just had their head down. One management team, they invested in stores. They invested in what their customers wanted in technology and the like. And trade link went through many different corporate hands, had many, many different management teams and the results of that over 20 years, sales are up eightfold at race and profits up 22 times. And amazingly, sales are flat since 1998. A trade link. So I put that result down to the focus of the management team and it's a really good example. How so? The guy that I work with, Matt Williams, he's owned this stock in every permutation of his funds over the years. So he's enjoyed this ride in profits and it's a 50 fold increase in the share price over this time. So when you find a good management team and they're focussed on the long term because all of their family wealth and reputation is tied up on it, you know, that's really special and you can get some really good results. So we're always looking for really good owner managed businesses to put into our fund and it represents about a third of our fund at the moment. I own a managed business, so we wanted to practise this because we'd anecdotally felt as though our own businesses outperformed, so we wanted to test it. So we screened the market for businesses that had over ten years, listed history, and they were run by their original founders. And we had a look at the performance of that index, and it's up 11 fold since 2008. And if you just invested in the normal index, it's up two fold. So it dramatically outperforms. So we think when you find owner managed businesses that you like that are high quality and they have good balance sheets, that's that's you know, that's tick, tick, tick, tick, tick. So in conclusion, uncertainty creates opportunity investing. Uncertainty is your friend. You need to lean into the fear that crops up every now and then in markets because that's when you're going to make a really good return if you've got your eyes on the prize, which is the long term. But there are some things you can do to minimise risk. So if you buy businesses that have good financial strength, that make money, you don't overpay for them, you buy quality businesses and you focus on finding good management teams and you go a long way to having a really good time in investing. So I'll leave it there. Although one other thing I'd say is we've got in the car, it's got the details, but we've got a competition to win $2,000 and the Australian share market is tough. I'm not into this actually it's been a hard year. So you've got the answer. I'll leave it to you. But thank you. Thank you all for coming.