Ren’s big call, Bryce’s big move & Sam Altman’s big week

Bryce: [00:00:16] Welcome to another episode of Equity Mates or should I say? All right, folks, you're stepping into the financial ring with Equity Mates, whether you're a giambrone just starting out or you've got the people's eyebrow raised like me. We're here to lay the smack down on your financial goals. I'm here, as always, with my buddy Ren. My name is?

Alec: [00:00:36] So Bryce, you are a fighter of some description. You are Hulk Hogan.

Bryce: [00:00:42] No. 

Alec: [00:00:44] You are Floyd Mayweather. 

Bryce: [00:00:47] No. 

Alec: [00:00:47] You are Australian superstar Alex Volkanovski. 

Bryce: [00:00:52] No. I am the Rock. 

Alec: [00:00:53] Yeah, well, you know, I was in the right ballpark with wrestling.

Bryce: [00:00:55] You were. You were. Anyway, we're getting towards the end of the year and ChatGPT might take a hiatus. 

Alec: [00:01:03] I feel like we might be losing momentum on that. So I guess your summer holiday challenge is to come up with a new introduction that will get us through the year. 

Bryce: [00:01:13] Sounds great. Anyway, big episode today, Ren. We've got your session. Your final session with Andrew Page. Your mentor. You have a big call coming up. I love that. But as always, let's kick things off. There's plenty happening in news and markets. So let's start at the top. 

Alec: [00:01:34] Big week for you as well.

Bryce: [00:01:35] Yes.

Alec: [00:01:36] You got a haircut and your moving house. 

Bryce: [00:01:38] You are obsessed with the haircut. 

Alec: [00:01:38] It's different. It's like it's more maybe you washed it as well.

Bryce: [00:01:43] I think that's less shampoo.

Alec: [00:01:44] Less gel than no less.

Bryce: [00:01:46] Yeah, let's shoot it.

Alec: [00:01:48] Anyway, if that's not a sell for people to watch on YouTube to see Bryce's fancy new haircut, I don't know what is. But you also are moving house. This is the first time I've actually seen you in person this week because you settled.

Bryce: [00:02:01] Settled on Tuesday?

Alec: [00:02:03] Yep. And you were cleaning and moving and packing. All the fun stuff. 

Bryce: [00:02:08] Settled Tuesday, got the keys Tuesday afternoon, went around, started unpacking a few things. Harriet, My wife got the gurney out. She couldn't wait to start high pressure hosing things. 

Alec: [00:02:18] Nice. 

Bryce: [00:02:19] I met one of my neighbours. We've already been invited to a neighbourhood Christmas party 3pm on Sunday. 

Alec: [00:02:24] That's wholesome.

Bryce: [00:02:25] Yeah. Very awesome. And yeah, then Wednesday was spent with the removalists. And today will be spent actually unpacking and blah, blah, blah. So it's an exciting time. 

Alec: [00:02:35] Nice. Yeah. That is good.

Bryce: [00:02:36] Loving it. 

Alec: [00:02:37] So when's the first mortgage payment? 

Bryce: [00:02:39] Yeah, that's a good thing. Good question. I thought that it was at the same time that you do the settlement, like on the day the first putting out net banking, there's nothing that indicates a mortgage payments coming out. So now. Now we're just waiting to be stung. Maybe it's on the first of the month because I actually have no idea why. But we do need to follow up with our mortgage broker to find out when that would be. But I thought it was a settlement, but it wasn't.

Alec: [00:03:08] There you go. Well, let's get into the news because speaking of housing, CoreLogic have come out with their latest data for, I guess, November, even though we're in November. Yeah, well, I guess they've come out with an emergency announcement midway through November because house prices have reached record highs. So to give people some context and now this is the national average, but they reached a record high in April 2022. Then in 2022, we saw interest rates rise and the National Home value fell. Value index fell 7.5%. It bottomed out in January 2023, and since then the Home value index has risen 8.1%. And according to CoreLogic, it reached a new record high on Wednesday, the 22nd of November 2023. So your investments already paying off, Bryce?

Bryce: [00:04:05] Yeah, but it feels like it's how it feels so the rate of growth is slowing. It's definitely know it's a supply driven market at the moment. I think auction rates are starting to fall like it feels like it's getting to that point now where interest rates are at a point, I guess, where it's starting to take effect in that it's just largely unaffordable now. And so and I guess that's the whole point of rising interest rates is to have a bit of demand destruction. But it feels like from here it would be crazy if I would be blown away. If you say another year, what with just experience. It's like, what is going on? 

Alec: [00:04:48] Well, they say 12 to 18 months for the effect of interest rates to be felt across the economy. Interest rates started rising in May 2022. And we had 12 rate rises in 13 months, between May 2022 and June 2023. So that's going to start flowing through the economy. Well, it has started and yeah, as you said, it's a supply and demand time, but I feel like I'm seeing more for sale signs. 

Bryce: [00:05:14] Well, that's. Well, they think there's an increase in stressed houses going up for sale. People selling because they can't afford to pay their mortgages. But yeah, it's also quite localised like what you just went through as a national. But I'm pretty sure I read this morning that Melbourne house prices haven't actually recovered fully since, well, since the 

Alec: [00:05:36] Hobart is down 12% from its peak.

Bryce: [00:05:39] Oh, there you go.

Alec: [00:05:39] Yeah. So yeah, it's a very different market in different parts of Australia. So when we were writing about this story and prepping for this episode, the, you know, obviously it's a supply and demand challenge and it's not just house prices that are going up, rents are going up as well, which is reflective of supply and demand dynamics. And part of the supply and demand is more people coming to Australia. Part of it is also there was a big shift during Covid for people wanting an extra bedroom to set up as a study. And I think it was something like this off the top of my head. But with something like the average house went from like 2.3 people to 2.1 or something. And now, you know, they're talking about unlocking supply and all these novel ways. They're talking about incentives to build more granny flats that then can be rented out separately. They're talking about incentives to change resident, sorry, office buildings to residential to unlock more supply that way. Here's a stat that will inflame the generational divide and get people riled up. In the last census, the number of people aged 65 to 69 years old, with more than three spare bedrooms, hit almost 25%. So that's where the supply is.

Bryce: [00:06:54] Oh, my gosh. Yeah. No surprises just to close out the thought on the rent going up. We've spoken about on the show that post me moving out of my current rental, they bumped the price 200 bucks a week to $950. They couldn't find anyone at that price to actually rent it out. 

Alec: [00:07:15] Oh. Even though they were so confident.

Bryce: [00:07:18] No one came. So it's it and this is what I guess what now becomes literally unaffordable that people are just like we can't. We can't pay them. Yeah. And so they ended up renting it out at 850. So still. Yeah, still up from where they were. But it was just interesting to see that there were zero people at 950. Few interested parties at 850. Even then, the agents who like people, just can't afford this. Like if you're in a what? You're in a one bedroom. Like you're not a family that probably has more disposable income or a higher discretionary, so. Interesting to say.

Alec: [00:07:53] Now, Bryce, you have been away for this week. You've been busy moving and packing and probably haven't been paying attention to the news. 

Bryce: [00:08:00] Always paying Attention to news, Ren. 

Alec: [00:08:03] So let me ask you, have you followed the OpenAI saga. 

Bryce: [00:08:07] Sam Altman and his swings and roundabouts of being CEO Well, I've been loosely following it. Yeah, I know that he was out and now he's back. 

Alec: [00:08:15] I was going to say, if you checked out on Friday afternoon and we're just checking back in today, nothing's changed. OpenAI open my eyes. Board had a bit of a shake-up.

Bryce: [00:08:24] Okay, let's keep Moving. 

Alec: [00:08:27] OpenAI the maker of ChatGPT and Dall-E. Dall-E is less celebrated than ChatGPT. 

Bryce: [00:08:35] What I know, he lost his position as CEO. There are a few board shake ups as well. Pressure from shareholders, also Microsoft to get back in. A lot of the team who were working at OpenAI as well said that they would quit if he wasn't reinstated as CEO. I haven't gone deep enough to actually understand what he did. 

Alec: [00:08:58] Well, Sascha and I did an episode on the dive unpacking it all.

Bryce: [00:09:01] So perfect. I will make sure I listen to that. 

Alec: [00:09:03] I'm sure that's top of you listening, but no one knows. I have two theories. 

Bryce: [00:09:08] Okay? So it's not public. 

Alec: [00:09:10] No. Well, you can sort of glean some level of what happened behind the scenes, but we'll save that as a it's going listen to the dive episode if you want my two theories on what happened. 

Bryce: [00:09:21] Give me a high level. 

Alec: [00:09:22] No doubt my two theories were one, it was around the priorities and pace of development. And then secondly, it was around. 

Bryce: [00:09:31] He wanted to go faster or the other way. I'll have to listen.

Alec: [00:09:34] Yeah. And then the second was around, he was potentially working on a separate business. 

Bryce: [00:09:42] Side Hustle. 

Alec: [00:09:42] Side Hustle AI side hustles. 

Bryce: [00:09:45] That's I mean, that's a bit dumb from him to be honest. 

Alec: [00:09:49] Well I Mean, like plenty of CEOs and founders lead multiple businesses. Elon, Tesla. Space X, Jack Dorsey Twitter Block. 

Bryce: [00:09:59] But not like it. Would this have been directly competing, I guess? 

Alec: [00:10:04] No. Well, no, but you still need to be the first company to sign off on that. There's no conflicts and stuff like that. Anyway, go, go, listen to that. But the reason I want to talk about it here is because if you've been living under a rock for five days, you wake up, you open your phone, nothing's changed. And it's just such a reminder that being up to date with the news can often be a detriment to long term investing performance, because the news has a bias for sensationalism and has a bias for action because it has a bias for clicks like it. It wants you to think things are happening so you engage with it. And obviously something happened. This is, I think, the biggest business story of the year because it's the biggest company of the year and the biggest product of the year and a shake up right at the top. But, you know, all of these people on Monday and Tuesday were talking about how this is an absolute coup for Microsoft. Sidenote, Can we just say Microsoft has invested $13 billion in OpenAI, but they have so much money that people just think that that 13 billion is like a cost of doing business. It's a write off. If we can have them, they can hire them. They can rebuild it and that's right. And start 13 billion off. Yeah. I also would have loved to have seen what happened if Microsoft did poach the full OpenAI team. All 770 employees. What happens to ChatGPT and Dall-E like that has to be a fire sale then?

Bryce: [00:11:34] You would think so. 

Alec: [00:11:35] Yeah. Or you hire a whole new team to work on it. But I have no experience or knowledge anyway. But all these people who were investing in Microsoft and thinking that Microsoft were going to be the biggest winner, then a couple of days later, Sam Altman is gone and everything's back to normal. It's just a reminder that you can get swept up in that. 

Bryce: [00:11:53] So if you traded on Microsoft based on this or made assumptions, you could have come pretty unstuck. Karl Rove Fisher actually did an interesting interview with Adele 2 or 3 days ago in the midst of this. Oh, so it was good to get his view on things. 

Alec: [00:12:09] What did he say?

Bryce: [00:12:10] He was the same. He's like, nothing's really changed. 

Alec: [00:12:12] Okay. 

Bryce: [00:12:14] It's like, sure, it's annoying. And I wish he'd given a bit more transparency, but like, not implying that, like, to your point, we've got some cash. We'll just. Yeah, we'll be right. 

Alec: [00:12:29] Anyway, Bryce, let's take a quick break here. I need to take a deep breath and get revved up because after the break, we are going to introduce a new segment, Ren's Big Call. 

Bryce: [00:12:40] I've heard this segment before, so I don't know how new it is. But anyway, let's do it. Let's take a quick break. We'll be right back. All right, Ren, you've been winding up. You've been doing star jumps out the side of the studio, stretching, doing voice, voice, warm ups. We've got here at the top segment number two, Ren's Big Call. Yes, I haven't read through it.

Alec: [00:13:23] Now, this is such a big segment that I think it deserves its own sting. So let's sting it. All right, Bryce. Here we go. Ren's big call. Now, you might be thinking there's a lot of good news around inflation. The U.S.

Bryce: [00:13:49] Oh, I'll just put that out back. 

Alec: [00:13:52] Well, the U.S. reported 12 months to October, inflation at 3.2%. That's almost in the target band. That's down from 3.7% one month earlier, 12 months to September, 3.7%. One month later, 3.2%. 

Bryce: [00:14:08] Jay Powell. Good on him.

Alec: [00:14:13] Nice. The UK. in the 12 months to September, inflation was 6.7%. In the 12 months to October, inflation was down to 4.6%. Great news. While I was on my property buying journey, at least two that I can remember, probably more real estate agents and people involved in the property buying journey told me that we're going to see interest rates cut in the next few months. Great news. 

Bryce: [00:14:43] Next few months. 

Alec: [00:14:44] Yeah. Well, I am here to tell you. Here is my big call. No interest rate cuts in 2024 in Australia. It's not going to happen. It's just not. And here's what it was. So the reason for optimism is the view that a lot of inflation is being imported, that it's coming from overseas. War in Ukraine is pushing up the price of food in Ukraine. And then war in the Middle East is pushing up the price of oil. But also the Aussie dollar has been weak. So when we import goods and services from overseas, we're paying more because our dollar is worth less. So that's pushing up the price of goods and services as well. So there's been this view in the economy that we're importing inflation and that if we just get that under control, housing aside, we'll get a lot of those back under control. If inflation is coming down overseas in the US and the UK, you would think a lot of the drivers of global inflation are coming down and that we're going to see those numbers reflected in Australia as well. That's kind of the view that you're getting from a lot of people, especially a lot of real estate agents. Yeah, I'm here to tell you that inflation is more entrenched in Australia than we think and that's the reason we're not going to see interest rates fall any time soon. So The Economist publish a inflation entrenchment index where they give countries a score out of 100 on how entrenched inflation is in the economy. You want to know which country came in at number one? No prizes for guessing. Australia came in with a score of 78 out of 100. Next highest was Britain. Number two. 68 out of 100. So we are leading the pack. For context, the United States comes in at number four. 58 out of 100. And the idea that we have disinflation entrenched domestically isn't just the economist. Michelle Bullock, the new RBA governor, gave a speech last week where she said the same thing, three quotes that stood out to me that reflect this view that it's pretty entrenched domestically and we're not going to see interest rates cut anytime soon. She said the remaining inflation challenge we are dealing with is increasingly home-grown and demand driven. Secondly, she said, if we look across the CPI basket, around two thirds of items have inflation running above 3%. Indeed, often a long way above that number. And then finally, she said, hairdressers and dentists dining out, sporting and other recreational activities. The prices of all these services are rising strongly. Her thesis is that the Australian economy is actually holding up pretty well and in particular the Australian consumer is holding up pretty well and we're still spending a lot of money at um, you know, like domestic locations like hairdressers and dentist, stuff like that. But they're at capacity and so they can't add capacity, they can't add, you know, more people to deliver those services or they can't get more goods in the door. So they're raising prices. 

Bryce: [00:17:48] I can't remember what podcast it was, but it was an Australian one and they were talking about Michelle Bullock and then another woman. And I thought we should try and get on the show. The name escapes me, but she's head of like the Productivity Commission or something like that, and she did a full.

Alec: [00:18:04] Danielle Wood.

Bryce: [00:18:06] Yes, yeah. If you look at it in a breakdown of age demographics, our age, demographic and younger have really pulled back on spending not by choice I guess, but because the demand, the pressures, the interest rate rises are affecting us far more. And a lot of this spending is actually coming from the large portion of Australia who are getting less impacted by interest rates, i.e. they own their own home. They have a shitload of savings. The older generation. 

Alec: [00:18:39] yeah. Well, this is a flame. The. The fires of intergenerational fire.

Bryce: [00:18:44] And that's not it. Yeah. And that's exactly what it's doing. 

Alec: [00:18:48] Yeah. CommBank released data last week that said something very similar. What they're saying in their customer accounts is young people are getting absolutely squeezed, are cutting back on, you know, essentials like food and stuff, whereas that older cohort of customers are actually increasing their spending. 

Bryce: [00:19:07] Well, the simple maths behind that is you're a, you know, later on in life and you have a chunk of cash sitting in your bank account that's gone from 0.1% to 55%. You've got cash to spend. Yeah, yeah, yeah. 

Alec: [00:19:21] Well, so are we saying that if we see another interest rate rise, it's because of all the people. 

Bryce: [00:19:26] Yes, that's my big call. 

Alec: [00:19:30] Nice. We're both making calls. Yeah. So I think I. I hope I'm wrong. I hope I'm wrong because we're all feeling the pinch. And you know what happens if rates keep rising is it's not just people with mortgages that start feeling the pinch, but businesses will start feeling the pinch. Like you keep raising rice rates indefinitely. You hit a recession, you break the back of demand. And that is a euphemism for you price people out of the economy and businesses out of the economy. 

Bryce: [00:19:58] Well, interesting, but it looks like it's going to go that way overseas. They've managed to get it back to a decent level without hitting recession, at least in the US. 

Alec: [00:20:08] And I think for me, there's a world where we maybe see one more rate rise with maybe we don't see any more rate rises and maybe inflation comes down. But the idea of a rate cut, it's not going to happen. 

Bryce: [00:20:21] Say I go the other way. I reckon the hundred will. I reckon we will have one in February. Hands down. 

Alec: [00:20:26] A cut? 

Bryce: [00:20:26] No rise. 

Alec: [00:20:27] Okay. 

Bryce: [00:20:28] Yeah. Like with the way I read her commentary, it's like we've still got a fair bit of work to do. Yeah. And if it's driven by what we're doing here in Australia, then we either have to get governments to stop spending so much on infrastructure projects and various bits and pieces. 

Alec: [00:20:41] Which they have. I think that they pulled like $7 billion. Yeah, yeah, yeah, yeah. 

Bryce: [00:20:48] But like, that's going to take a while. That's going to take a while. Well, not a while, but like, it's not going to be an overnight like December. Inflation's going to be down.

Alec: [00:20:54] Yeah. You know what? The really politically charged conversation is going to be around next year. Start stage three tax cuts. Because both sides of politics have said they're going to support them, basically the two major parties. But, you know, if inflation remains stubbornly high, the idea of.

Bryce: [00:21:13] Yeah, giving more people just disposable income. 

Alec: [00:21:16] Yeah. And then Legislated. So unless they pull them back which is harder than. Yeah. Anyway, it's going to be a big conversation. Yeah. Yeah. But you have to get inflation under control, Definitely. I was listening to a podcast now saying to someone who earns $200,000 a year with these stage three tax cuts will get another $9,000 in their pocket. 

Bryce: [00:21:38] The stage three five for the Top end as well. 

Alec: [00:21:41] Yeah, it's basically only for the top. Yeah, it's only for like the top bracket because stage one and stage two with lower taxes. Yeah. So an extra $9,000 in their pocket on a $200,000 wage is an extra 4.5% in their pocket. But if inflation remains stubbornly high, like inflation in Australia was what it's like 5.5%, 5.4%, you can't have inflation remain this high because it erodes even the value of the extra money you're getting in your pocket. Unfortunately, we have to get inflation under control. And unfortunately, if the Government isn't going to take hate out of the economy fiscally, Michele Bullock is kind of stuck between a rock and a hard place. 

Bryce: [00:22:21] Well, to put some numbers to your prediction, Ren, so 42 economists were surveyed by the AFR. They originally suggested the median. The median response for when to expect the first rate cut is August 2024. That is, though, from the previous expectation, which was February 2024. 

Alec: [00:22:47] Crazy. Crazy. 

Bryce: [00:22:48] So obviously, economists are also pushing out their forecasts, but far out, do they ever get it right? 

Alec: [00:22:54] I mean. Do we ever get it right?

Bryce: [00:22:56] Well, I mean, it's not but that's. 

Alec: [00:22:58] That's why it's Ren's big call. It's not Ren's safe call. 

Bryce: [00:23:02] It's more just like it's. Yeah, it's not it's not our job to try and predict when rates are going to get cut. 

Alec: [00:23:07] But I just think, you know, like the Fact that. And there was obviously people who had an incentive to tell me that rates were going to get cut soon because they wanted me to buy and be happy to spend more on a place. But yeah, I just think like, let's be clear eyed and realistic and hope for better, but be realistic about where we are. 

Bryce: [00:23:29] Even if they get back to that 2 to 3% band. That doesn't mean then it's just like, all right now. Yeah, why.

Alec: [00:23:35] We are Not cutting? Yeah, it's like. Yeah. 

Bryce: [00:23:37] When you sustain at this. Yeah, yeah, yeah. Then things got. To where we need to be. Yeah, let's sizzle. And if we don't hit a recession or we don't like it, if things just keep plugging away. There's. There's no. Yeah. 

Alec: [00:23:51] and, like, you want to have some dry powder, like dry powder in terms of interest rate. It's too short. Um, so I think anyway, that's the call. Let's see where it goes. What do you reckon? Does this become a regular cycle?

Bryce: [00:24:06] Well be. It makes me excited, actually, to close out our bold predictions for 2023, which we will have coming up in a few episodes time, because I know that we both spoke about interest rates at the start of the year, so it'll be interesting to watch to see what we thought. 

Alec: [00:24:21] Well, let's save that for our Bold Predictions episode, which is right at the end of the year, mid-December is when will release start.

Bryce: [00:24:27] Coming out pretty hot.

Alec: [00:24:27] but let's take a break now because on the other side, I sat down with Andrew Page, who's been my mentor this year, who's been helping me. You know, investing is a lifelong journey and he's been helping me take steps on that journey. You've been working with your own mentor, Henry Jennings. So we'll get to that after this.

Bryce: [00:24:50] Welcome back to Equity Mates. Now, before we jump into your session with Andrew Page and your mentor to close out 2023. We do want to announce that the Equity Mates awards for 2023 are now live and we're looking for your votes. 

Alec: [00:25:04] The third annual Equity Mates Awards 

Bryce: [00:25:07] Now, we have four awards this year. We have guest of the year, platform of the year, theme of the year and Company of the Year. All information is available in the show notes as well as the page for you to vote. It's your opportunity for us to celebrate the people, the products and the platforms that contributed to your investing journey throughout 2023. We've had some incredible experts on the show. Andrew Page one of them, he's up for an award. 

Alec: [00:25:36] Up for a gong. 

Bryce: [00:25:37] Up for a gong. Yes. Henry Jennings. We've had so many, too many to name, but we would love for you to go on and share your thoughts. And and then let's say it comes out on top. 

Alec: [00:25:46] Yeah. Now, before we get stuck into my session with Andrew, I just want to shout out Crypto Curious, the crypto podcast in the Equity Mates Network. They had one of the biggest names in crypto. Michael Saylor joined their podcast. I'm about to speak to Andrew, who was once the biggest anti bitcoin person going around and that's saying there's none as zealous as the recently converted really applies to Andrew. He's now a big Bitcoin bull and we speak about it briefly in this chart. But if people are thinking more about crypto now that it seems to be rebounding a little bit despite the, you know, Sam Bankman-fried going to jail and say they are pleading guilty. Well crypto curious are all over it, so if you want to hear about the founder and CEO of Binance, the biggest crypto exchange in the world pleading guilty to multiple counts of fraud, a whole bunch of stuff going listen to crypto curious. And if you want to hear Michael Saylor get interviewed, go over to crypto curious. With that said, let's get back to stock market investing and let's pick up my conversation with Andrew Page. Andrew, you've. You've been my mentor this year helping me, I guess, take the next steps on that lifelong journey of investing. So we started, I guess, talking about your investing philosophy and then worked into how you find stocks, how you filter your universe. Then we finish by talking about some valuation stuff. So I feel like we've covered a lot. Spoken about a lot of individual companies. For people who are new to the podcast. Why don't we just quickly give them an overview of some of the things that we've spoken about this year? Maybe let's start with how you approach investing and the opportunities that you're looking for.

Andew: [00:27:38] On something that's going to be worth more in the future than it is now. I want to buy it at a one price. I want to sell it at a higher price. And I want that difference to be as great as as is possible. You've got to have an understanding of all of what is it that I'm going to buy and why can I rationally expect that to be worth more in the future? There's a whole bunch of things that I think I would like to own, but the price at which I'm prepared to own it can be very difficult. But it's those two elements that you're trying to bring together. I want to own something that's of good quality, that has durability. And importantly, I just want to pay a price that is less than what you could say it is really worth. And that's how you can get into things like discounted cash flow and the rest of it. But that, in a nutshell, is what it is. 

Alec: [00:28:26] Well, we'll get to valuation in a segue, but from that investment philosophy, you really focus on Aussie small caps and those couple of thousand stocks that don't get a lot of media or analyst attention, but you spend your days analysing. So how are you filtering that universe and identifying the opportunities that could be interesting and deserve further research? 

Andew: [00:28:49] The reason why I think small caps are more attractive is because there's less competition. I'm not up against the PhDs in Martin Place. Right. With a team of ten analysts. It's it's it's it's me and a few punters on hot copper. So you've got a greater opportunity I think to compete effectively. And also by definition the smaller companies have more growth potential. BHP was a small company at one stage. Commonwealth Bank was a small company at one stage. That's why I sort of focus there. The tricky thing, this is a generalisation, it's not always true, but as an earlier stage business, you don't necessarily have a history of really attractive fundamentals that you can point to to make the case for quality. Let's look at the classic, you know, CSL, right? Great Australian success story, brilliant business, incredible wealth creator for its investors over decades. You can look at that and go look at the margins, look at the return on equity, look at the growth in revenue and the growth in profits. You know, clearly this is an economic powerhouse. If you look at a small business, it's only been around for five years that may not have even made a profit yet. They may have only just commercialised their product or their service recently. It's more difficult to sort of rely purely on the numbers because the numbers may not be there and therefore you are reliant more on qualitative factors. You can't just scan for those easily. So the boring and frustrating answers. Your question is you have to read a lot and not just on the company that you may be scrutinising, but just in terms of how business models work. What are the characteristics of certain industries? You know, just all of this general foundational kind of stuff that give me, I guess, the mental models to know what to look for. I'm trying to patent pattern recognition here. When you look at all of the great companies, what do they look like at an earlier stage? Maybe I can look for those kinds of characteristics in other companies and find the winners of tomorrow. So that's how you do it. And then it is also something you've got to go into knowing that no matter how good you are at this, it is very much hidden. I think we chatted before of like Peter Lynch famously said, if you're good at investing, you're right. Six times out of ten, that's cool. But I mean, gosh, if you can get six out of ten. Right. And you're looking at multi-bagger type potential returns, that's that is very adequate indeed. But that's how I read a lot. 

Alec: [00:31:21] Yeah. Everyone wants the like there. There's such a view that like, there's a great resource out there that will narrow it down and filter the universe and give me what I need. But it's just you just got to put the work in, unfortunately.

Andew: [00:31:35] Think about it for a half a second. If you or I came up with this thing that we could just a bit of software or whatever, would we sell it or would we use it? Yeah.

Alec: [00:31:43] Yeah, Right. Yeah. 

Andew: [00:31:45] And even then, even just by the process of executing that strategy, we would kind of and it would, it would get rid of the opportunity, you know, if we see that. Oh, we're able to Identify value before anyone else. Very actively buying it will close that gap and sooner or later it becomes known. Other people figure it out and it gets arbitrage away. So there is no secret they can't be. And if there is one, it'll soon be arbitrage away. 

Alec: [00:32:12] Hmm. Now, the final thing we worked on this year was your back of the envelope valuation method, which I think was quite useful. It's a really common question we get from people who are trying to, I guess, invest in individual stocks. What's the best way to value a company? And I think your shorthand method is a good sort of shortcut to get an approximation. So do you want to just give a summary of it for people who may not have heard it before? 

Andew: [00:32:38] And I'll start by saying that the best you can hope for is an approximation. 

Alec: [00:32:42] The saying is what? It's better to be generally right than specifically wrong. Is that that's it?

Andew: [00:32:46] Yeah, I love that. Yeah. If I ever got a tattoo, that'd be able. To be one of the Frontrunners. Right. 

Alec: [00:32:50] Well, let's start that movement.

Andew: [00:32:54] The trouble with really smart people is they have very complex models, not recognising the fact that it's a case of garbage in, garbage out, and just the false specificity that comes with it. So you're aiming to be generally right here. And the way that I do it is just and I didn't invent this way, by the way. It's just a rearrangement of the P ratios price divided by earnings over the market cap divided by the net profit or the share price divided by the earnings per share. And it gives you some kind of sense of value. Well, you can rearrange that to sort of say, well, that means that the share price is a function of the p e times the earnings per share. Remember your basic math? I'm just rearranging the equation there, which means if I want an estimate of the price in the future, I need to have an estimate of what the earnings per share is or will be and what the PE will be. So I'm still left with having to make a guess on the future. No matter what I do. I'm making a guess here. I could call it a forecast or something more so because I'm going to guess and I like this because I only have to guess it to think again. I'm aiming for generally right here. So what's the earnings per share going to be? Well, you can sort of start. Where are we at now? Maybe. I think it can grow at 10% per year and I'll go out in five years. So that's nice and easy or whatever, whatever you think may be appropriate there. And then you can just say, well, a company that grows at about 10% per year is, as you know, in an average market. Gosh. That they're going to go for at least 15, maybe 20 times earnings. Right. That's a typical multiple. It's not an ambitious multiple that can certainly get much higher and then it can get lower than that. But I'm not. I don't want to be reliant on the market being in a great mood for this valuation to make sense. So I always am. I'm trying my best. My main focus here is what's the earnings per share going to be? And then choose a low bar, a low hurdle rate for the pay. And I multiply the numbers together. So earnings per share in five years time is a dollar. I think the PE will be 15. Ergo, the share price in five years time will be $15. In fact it is absolutely the right price to use there. Because if those two numbers, those two forecasts are accurate definitionally, that's what the share price will be. Right. And then and then the last step is, well, if I won, let's ignore dividends. Let's say I want a 10% annual return. Well, I need to divide that $15 by 10% each year or more accurately, 1.1. So 15 divided by one point. One divided by 1.1. Two five times. And if I buy shares today at that price or better, and if my forecasts are correct, I will get at least a 10% return. And it's just a nice, easy, simple way of going about it. 

Alec: [00:35:40] Yeah, And the reason that I like that is because the analytical work is if you're doing a full three stage DCF or that back of the envelope valuation, you're doing the analytical work. It's still in understanding the company, figuring out what its prospects are and trying to forecast its returns. But if the difference is you're with your back of the envelope method, you're just making an approximation of where you think the share share price will be. Whereas with the three stage DCF, once you've done the work of understanding the company, then it's all about what's an appropriate discount rate and, you know, terminal growth rate and all of that stuff. And it's just there's a lot more financial complexity that probably doesn't add a lot to the overall understanding of the company or the investment opportunity.

Andew: [00:36:26] The value of a DCF is in forcing you to think through various assumptions and understanding the mechanics of the business. Is this a retailer which generally has pretty low margins, or is this a SAS business that can have really great margins? I need to think through these things and I think that there's value in that. 

Alec: [00:36:47] You're still thinking through that in getting your earnings per share number. Oh, yes, it is. Yeah, yeah, yeah. Because I mean Revenue and margin will affect earnings per. 

Andew: [00:36:57] 100%. 100%. The other thing I would really stress and we talked about it was people feel as though they have to land on a value. Well, you don't, you can test a variety of assumptions. Here's my best guess at earnings per share. And I think the market will be in a really great mood and just combine all of these and you'll get this spread of different futures and they'll all be guesses. None of them will be exactly right. But if the current share price sits in the very lower end of that spectrum, you know, the odds are in your favour. Whereas if it's at the top, it's kind of like, well, I can still make a good return on this, but everything has to go right. And I'm going into my investment eyes wide open here like this. And as time passes, I can kind of say, you know, is the investment thesis working out as I had envisaged it? If not, it might be time to reformulate. 

Alec: [00:37:47] Yeah. So it's been a great year. And I feel like I learned a lot about the stock market and investment opportunities from you. And you've been very good at biting your tongue because I know there's another investment opportunity that you've wanted to speak about. Given this is the last time we'll be speaking for 2023, although we do have you lined up to jump on for a summer series episode in early 2024.

Andew: [00:38:14] Looking forward to.

Alec: [00:38:14] That. So if people want more of Andrew, listen to the summer series. I believe we're going to be speaking about Drop Sweet. 

Andew: [00:38:21] Yeah, very interesting company.

Alec: [00:38:22] We'll save that tease and people can listen to the episode. But given this is the last time we'll be speaking this year, I know there's an asset class that you have been talking about, but I'm sure you want to speak about. We went to the Zone Hearts and Minds Conference last week and Cathie Wood pitched and she pitched her Bitcoin base case and bull case. Right now it's 37,000 U.S. dollars a Bitcoin. She thinks by 2030 and her base case is $650,000 a Bitcoin and her bull case is $1.5 million of Bitcoin. So my question to you and her is, are you more or less bullish than Cathie Wood? 

Andew: [00:39:05] I was going to say Like, where is this question going? Because there is no way on God's green earth I am answering this. It's about Bitcoin, right? And I also want to say someone who is, you know, tries to pride themselves on being a rational conservative investor. I am hyper aware of how stupid I look by advocating magic Internet money. And and, and as I've said to you before, the very first time we ever did a podcast together, all I did was just laugh at how stupid Bitcoin was. Right? So I get it. I get it. But to answer your question without going too far down the rabbit hole, yeah, I think that's actually a very reasonable range. 

Alec: [00:39:48] It's a big range. 

Andew: [00:39:49] Here's the thing with Bitcoin valuations like, gosh, we have and could speak about valuating stocks forever, right? Money. How do you value money? I mean, gosh, that that is like next level complicated Like other than just, I guess to say that what is different with something that doesn't produce a cash flow and something whose whose utility is in a monetary good is that it has this it's almost what economists call that a Veblen good. It's an unusual characteristic where the further the price goes up, the more value it has. That's not true of shares. CSL is not worth $10 million per share. If you mean it doesn't make any sense, you get it. You get the value of a company that's worth more than the global economy. It doesn't make any sense with bitcoin at the moment. If I am China trading with the US, it's not big enough to trade. I could just it just can't carry the weight. It's like $600 billion in market cap. If you take all the 21 million coins it'll ever be produced in times by the share the unit price. You know, it's just it's not big enough, there's not enough volume or liquidity there to do that. But $1 million a coin, you can do that. So so Cathie is right in the sense that and it's going to be purely a function of adoption. So the more people that use it, there'll be a very positive feedback loops here and network effects. The more value it has, the more value it has, the more people that will be attracted to it, the more value it has, the more utility it has. And it that is the fascinating. I'll shut up after this. That is the fascinating thing about Bitcoin is because it once you look at it and once you understand it or you see a network effects and positive feedback loops everywhere, everywhere with this thing and that's why you've got something that went from literally 0 to $600 billion in value in less than 15 years. You know, we just had the Argentinean Argentineans just like to add a new president who's pro bitcoin is the 25th biggest economy in the world. And there's other nation states that have. They don't really pay attention, people. BlackRock's about to launch an ETF like this is, you know, the phrase that I like to think of, Alec, is first you ignore it, then you laugh at it, then you fight it, then you win. Just the channel God for a second. And we're kind of just sort of at the we're coming out of it, then you fight it phase. And I think Wall Street has realised like, oh, it's not going away, you can't kill it. You can actually make that statement. You can kill it once you understand how it works. It's sort of like, huh? I guess. I guess if you can't beat them, you join them. And that's what Wall Street's about. Yeah. So we've just invented digital scarcity, and you'll never get the chance again. So if you're not holding at least 1% of your capital in Bitcoin, you might regret that as an older person. Also, I've got to be really clear here and then I'll shut up. Is Bitcoin not crypto channel? Michael Saylor Hey, there's no second best right? There is. There is digital scarcity and there's Bitcoin and then there's a whole bunch of shills that are trying to scam an affinity scam essentially that that will all go to zero given enough. Well, get some bitcoin. 

Alec: [00:43:00] As someone who dollar costs average into bitcoin and Ethereum, at least I'm half right. Well, Andrew, it's been a great year. I guess one final question. If we bring it back to stocks to finish, any thoughts or advice to leave me and the Equity Mates listeners with over the holidays or any stocks that are worth keeping an eye on over the next few months as everyone hits the beach and starts thinking about getting their finances in order for 2024.

Andew: [00:43:33] Yeah, it's always fun to throw out a tip. I'll start by saying that this is a lifelong journey, right? Like, I've been doing this for, gosh, 20 something years now, and everyone is interested when the bulls are running and no one's interested when the bears are running. And you people who start in a bull market don't tend to last the next cycle because they start going, Oh, this is the easiest way in the world to make money. Look, I'm a genius. And then you lose most of it. Then you think the stock market is rigged. I'm out. And you never go back to it. Or people who start in the bear market. This is much harder and scarier than I thought. This isn't. This isn't for me. So you don't get the good times without the bad times. The people who succeed in this are those that just stick to it. You know, they learn from their mistakes and they go on and on. And it's kind of something that you can't guarantee anything in finance. But as close as I can get to using that word, I will guarantee, quote unquote, that if you stick to it and you're sensible and you learn from your mistakes and accept that you will make lots of mistakes over time, you're doing incredibly well. If you want to buy a Lambo next week, no, this is a very harsh lesson, very quickly. So I would say that and people will be listening to this now. It's their first sort of touch point on this kind of stuff. 2024 could be the worst global market we have ever seen or it could be the best. And either one is going to be really screwing with your brain. So just go into next year knowing that it's going to be going to be very tough. Have you seen Stealth Global? We talked about that lately. That's doubled since we talked.

Alec: [00:45:07] Really? I haven't been Following it, but dammit, I should have. 

Andew: [00:45:13] Pay attention. 

Alec: [00:45:14] If that's not a ringing endorsement for Straw man, then I don't know what is for people who are familiar Straw Man is Andrew's private investment community, which I'm sure Straw Stealth has got a lot of conversation on.

Andew: [00:45:26] I wasn't aware of it. We did a stock pitch tonight and one of our members pitched it to us like, Oh, that sounds really interesting. And I just discovered it from that, Geez, mate, what else could we talk? I'll tell you what, I'll give you the pitch here for a very different company. It's called Laser Bond. We spoke with one of the founding family's son. He's a fairly senior gentleman now himself. Wayne Hobart business started in 1994, does surface engineering. They basically coat shovels, big chunks of hill in the back of trucks. So they make it much stronger. So it works better and it lasts a lot longer. And it's a business that has been listed since 2000, I would say 2007. It is profitable. It pays a dividend. They have been growing incredibly well. They have a very big opportunity. They are a very defensible business and they've got a f y 25 target currently doing a 12% ad for an engineering company with reasonably big capital requirements. They think the margin will grow as well. So they put that in context. They did 38 million in f, y 23 and we had a big long chat with the CFO and the CEO yesterday exactly how they're going to do that. And I own shares. I'm biassed. It's a small cap. It'll be volatile, don't be me. If it's down 10% or 20% next week, it's, you know, okay, no responsibility, but it's something that I own and it's something that I expect in three, 4 or 5 years will be worth a lot more than it is today. 

Alec: [00:46:56] Well. I mean, like, that's a, you know, the information that you just gave us there is enough to start doing that back of the envelope calculation. 

Andew: [00:47:03] Let's do it this way. 60 million will say they get their target. They said the margin will be, as I said before, test a variety of scenarios. So this is just one that's off the top of my head. So let's go with a 13% net margin. That's $7.8 million in net profit in f y 25. Let's say that the market trades, as you say, let's just go with this PE of 20. At that point in time, that gives me a market cap of 156. Now the current market cap is 95 million. So what's that? That's a 64% gain over 18. It might be that the profit is much lower than that in the fees, in which case the math changes very rapidly. That's a nice example. 

Alec: [00:47:48] Not a stock tip, but it's an illustration of how we can do the work. 

Andew: [00:47:54] Exactly right. And you often have these conversations and someone goes, well, I don't think they're going to get this great use of what's right for you. You'll get a number and then and now. Now you've now when you look at the market and you have to ask yourself, is this good value or not, you'll have an answer because she did the work.

Alec: [00:48:10] Love it. Well, I think that's a good point to leave it. So do the work well, keep working away, keep becoming better investors. But Andrew, thanks for your time today and throughout the year.

Andew: [00:48:20] Thanks for having me. Honestly, the best way to learn is to teach. There's a better articulation of that saying somewhere which escapes me. And I really find it helpful when I'm very easy to diverge off the path. So all I'm saying is it's been my absolute pleasure and I've found it very valuable.

Alec: [00:48:37] Not so. Well, we'll have you back for the summer series to talk drops away, but until then, have a good break.

Andew: [00:48:42] Yeah happy Christmas everyone. And whatever celebration you enjoy and take some time off and here's to a great 2024. 

Bryce: [00:48:49] Well Ren, always loves hearing from Andrew. We're lucky enough to have him back for the summer series. That's coming up. Giving us another one of his small caps. It wasn't Bitcoin. We can say that as much as he wanted to talk about it. So two reminders. Firstly, plays, heads, the show notes and vote for the Equity Mates Awards for 2023 entries closed Wednesday the 6th of December, so please get your votes in for the guest of the year Platform of the year, same as the year company of the year. You don't have to do all of them, but we would really appreciate it. We've had some awesome guests. And then finally, we have our last ask and Advisor episode coming up next week. So if you would like to submit a question to our advisor, it can be anything related to money and finance. Please shoot it through to us at equitymates.com and we'll make sure that we get all of the questions around it out before the end of the year. With that said, we'll leave it there and pick it up next week. 

Alec: [00:49:40] Sounds good.