This is Motley Fool Money. Welcome to Motley Fool Money, our very, very, very, very special mailbag edition. I'm Scott Phillips with me, as always, and a great surprise this Sunday. Dr.
Nibana Hansi. Hello, Doc. Good, Captain. There's no surprise here.
It's definitely... Welcome to our very regular Sunday mailbag edition. You've got special. Very regular special Sunday regular mailbag edition.
That'll do. Let's move on. First question from Hoppy. Hoppy says, hey, Scott, thanks for answering your previous question in return for my five-star review.
It seems that people are not giving the obligatory five-star review or praise in order for their questions to be asked. Now, Hoppy, I completely agree. Hoppy says, I thought I would write that shit and snuck it on my girlfriend's phone and gave you a slender review on her behalf. That's all right.
I'll take that. Hopefully, that will get this question answered. Now, the backstory here, Doc, I said on Friday, I had to apologize. I said to Hoppy after this, yeah, yeah, we'll do it, we'll do it, we'll do it.
That was in September. And Hoppy hit me up earlier yesterday and said, hey, what about that on the listening? Where's my question? I'll take back the praise.
I couldn't have that, so Hoppy's question gets answered. He says, I gave you a slender review. Hopefully, that will get this question answered. I'm interested to know what you and Doc each perceive.
I like this question, mate, as a strong balance sheet and cash flow statements. I know Doc likes to look at free cash flow, but he's looking at free cash flow in relation to another metric. Cheers, mate. As always, the podcast is excellent, and I look forward to them each week.
Thank you, Hoppy. You're very kind. Here you go. My absolute apology.
I'm Mia Culper for not getting this done. I don't know what happened to him. We asked him a lot of questions, and I manually copied them from screenshots on Google Docs. So it's just my incompetence, frankly.
Doc is nodding for those who I can't say that, so I feel suitably changed by that. You could blame Google Docs. You don't have to blame your competencies. You could blame Google's competencies.
It's easy. You know what I do? Instagram. So Instagram, I have to over on my phone, screenshot it.
Then I open Google Docs and try to use my phone to put it in Google Docs, or in other words, it's a pain in the neck. Anyway, I love Instagram. No, I love Instagram questions because they're fun. More to the point, Hoppy's got a question, mate.
So I like this question because it's one thing to say a strong balance sheet. Another thing to say lots of free cash flow. But the right question, Hoppy asks, is relative to what? Because what is strong?
What is weak? What is a lot? What is not enough? How much cash flow is enough?
How much is too little? How much is too much? I'll ask you first because I'll ask you the hard questions, and then I can steal your answers. What is your strong balance sheet?
What is your business generating a few million dollars in revenue? Its market cap is 20, 30 million. That's 50 million. And it's got 5 million cash.
Now, relative to market cap, it might appear that 5 million cash is a lot, right, in terms of market cap. Which is fine. And you know, a couple million dollars in revenue. But here's the thing, right?
If you're burning capital, which is what would be free cash flow. So if at the end of the day, the amount of money coming in versus the amount of money going out, and that's high, then 5 million may not last you long. That's wrong. That's not true.
It's so strong if you're burning cash for long enough. Yeah, exactly. Burning cash for long enough. So relative to cash burn, you have to look at that as number one.
So basically, if your cash burn is at a certain rate, and 5 million, then it's not going to be better. The other really thing is that for any business of any magnitude, a certain amount of cash, like if you've got an ASX 100 company that doesn't have, say, $100 million of cash, it's just weak in my view. Like, it's just weak, plain weak. Because, I mean, $100 million of cash, a lot of small businesses that are not listed to have, right?
Maybe. So there's some absoluteness to it, some relativeness to it, right? I mean, you could say that, well, you've got $30 million of cash, and that's enough. But it's probably not enough because, you know, I mentioned this, for example, in a company gets a fine, right?
You may have enough cash on the balance sheet, but you don't have enough to pay the fine. It's already that cash, yeah. Right, so it's that sort of thing. So that's how I think about the balance sheet.
I think number one is relative to how much cash you're burning. So a company that wasn't burning cash. Let's say it's purely breaking up. I know there's no plans.
I'm not trying to pin it down or anything. But just to kind of help out, say, if it's not burning cash, how strong is a strong balance sheet? Or what, you know, put a strong balance sheet in some sort of context. You do like a strong balance sheet, as you said before.
Now, ASX 100 companies that have been around, Willis, or CSL, or Cochlear, they're very different businesses, and that, your point would be, if it's genuine, blue-tip, genuine, quality, you'll share more cash. Most of the companies you invest in don't have that sort of strong balance sheet, or no mind for what it's worth. So for your investments, when you say strong balance sheet, what are you looking for? Yeah, so I'm looking for plenty of cash, you know, multiples of, you know, multiple quarters, you know, preferably at least, you know, two plus years to run the business.
So if you're burning some cash, you want to at least have two plus years of cash. In general, I like to see some absolute amount of cash if I can. And then the rest of it is really relative to how much the business is burning, generating, what its costs are to run its business, right? There are some obvious costs in any business, you know, sales and marketing, general administrative costs, you know, there's, you know, potential capex costs, or, you know, capital expenditures that you need to know.
You want to look at those costs and you want to have some multiple of that, you know, because the revenue could, by definition, go to zero, right? So, you know, like, for a really small company, say, $100 million company, I'd like to say at least $10 million of cash, that's like, you know, I'd make an exception, that's an exception by rule, but, you know, $10, $20 million of cash, $20 million of cash is what I look for. So more just an amount rather than a percentage, and just as a running day fund, or was that Yeah, as a base minimum. Like, I mean, you know, I'd like to see that much, and then I want to see how much you're burning, can you sustain, say, about a quarter without having to raise capital, that's number two.
Number three is I'd like to see what your, you know, such a business costs are, so that's not really how much you're burning, right? That's basically, you know, what's your sales marketing, what's your R&D, and I understand as your revenue goes down, you'll be able to cut many things, but again, if you cut some things, you cut R&D now, you're basically losing people, you lose people, you have to find those people back again, right when you want to go back. So there's that, that, so, yeah, like, a combination of these things is what I look for, and many of my companies that I look at wouldn't have super strong balance sheets by definition, because they are just smaller, riskier companies. It's like investing in startups, right?
If investing in startups by definition, the balance sheet is not supposed to be, the balance sheet is not supposed to be like Apple's balance sheet, right, because, you know, they're startups, right? Yeah, by definition, they can't, so that's, yeah, but you want to have some assurance that they will be able to continue business as is, and that they would have access to capital markets or debt, right? And I think what happens in markets, at least in my last point, is if you have a business where it's almost imminent that cash needs to be raised, the market has a tendency to mark that down, right? And you get into this vicious spiral where, you know, the stock price is down because you need to raise cash because you need to pay your stock prices down, and then you need to raise it at a further discount, which is really diluted, right?
That's really killing this. That's really killing, yeah. Yeah, like if you had to raise something at 50% less, then by definition, you're going to have significant dilution. So I try to avoid getting into situations like that.
Do I manage? No. Again, that's part of the, you know, you've accepted that's part of what it is, which is why we say, at least for extreme opportunity service, that you want to start each position small, so that, you know, if things go wrong, then you don't feel the pain. And that's, I think, the allocation issue comes into play.
I like that, that's important. When it comes to free cash flow, do you have, you've talked about companies with high free cash flows before. Is it, so you're a blue sky investor, you're looking for big long-term returns and companies doing great things in big-term markets. Is there another free cash flow you even care about, or is it just literally at least learning something to keep its lights on and doors open?
In the early years, of course. Yeah, so this really depends on the company and B, what they're doing, and C, where they can get to, right? So I think the answer really varies from, if you look at the small end of the company, say that the extreme opportunities on the SX, then by definition, most of these don't have free cash flow. They're in that stage where they don't have free cash flow, and it'll take them some time to get to that free cash flow stage.
They don't shoot more than we talk about cash flow, because you know they don't have it. So then you can have some models, right? You know, if you look at software businesses, and you know that, well, at scale, the thing with many businesses, many good businesses, is basically the game of scale. And at scale, you can have a rough idea.
Like, payments businesses at scale can be very profitable, because, you know, a software business at scale can be very profitable. But getting to scale is really hard, and it takes time, right? So, again, there's that aspect, right? And I really talk about cash flows in the context of some of these, you know, U.S.
businesses, which are, when you talk about those, even those that are high growth, but they would be substantially larger than many of our large companies, right? So, you know, talking about $10, $20 billion company, U.S. market cap company, it might not actually be making any money right now. It would be probably break-even.
Those, I think, at scale will be generating, you know, hundreds of millions of dollars of free cash flow, right? And then the other thing I look at free cash flow is, like, you know, well-established businesses, things like Apple, or Google, or Alphabet, sorry, or Microsoft, right? Those are generating free cash flows in the order of $50 to $100 billion, right? So, Apple's free cash flow is like $80 billion.
So, there's a whole range, and for each range of free cash flow, there is a potential future, right? You know, the pedestal at which the $50 billion companies' free cash flow sit, there is no, you know, not many companies are going to get there, and once you get there, you're only going to fall out of your own miseries, not because somebody else is going to come and, you know, put you out of your porch, right? Because it is very difficult to be put out of that porch when you're generating $50, $60, $80 billion every year, right? I mean...
So, tell you something to be a big tech company. So, your business tends to be smaller, younger, faster-brand businesses. If I think about Apple, or Microsoft, or Apple, or whatever, Amazon, Amazon's probably a different example, actually, because it's not quite as stable as the other three. Do you use cash flow as a valuation tool?
Like, an Apple hasn't got the blue sky of a Tesla, for example, necessarily, maybe it doesn't make me disagree with me. But for a business, let's use Microsoft, maybe it's a little less, I'm only one. Did you use the free cash flow to kind of assess whether it's worth buying or a price it's worth paying for? Do you use that as some sort of value, or as part of your value kind of, again, you're a value guy?
Like, how much do you pay for Microsoft? Do you use free cash flow in that analysis? Yeah, so, like, I have a very, you know, this comes to, I guess, portfolio management. I have a very simple strategy, or not a strategy, but, you know, a hot-potch way of managing a portfolio.
So, I've got a bunch of these companies that are blue chips, large, high-fix cash flow generators. My intention is to actually not sell them. Okay. Right.
I have, and I look at the free cash flow largely as a way to decide if I want to buy more. Now, this might appear contradictory, because, you know, if you don't want to buy more, then why? Well, it's largely because, again, you know, I think every portfolio needs to have, like, every portfolio benefits from owning something like a Microsoft or an Apple, or it's just your portfolio stability. It's the stuff that's not going to sink.
It's the stuff that's going to generate, you know, gazillion dollars of cash. It's going to beat the market? Absolutely. It's going to trash the market?
Like, you know, is it going to 10 lakh? No. But it's that, right? So, it does, it's, I know the cash flow really is.
You know, there are points in time when Apple has appeared to me, for example, to be door chip, told many people to buy at those points. And door chip in a free cash flow? In a free cash flow sense, right? You know, like, in the normalized free cash flow and what I think this business can grow.
I mean, again, I'm saying this business can continue to grow, right? And it seems like, well, it generates so many billions of dollars, and it can absolutely generate more, because, you know, the rich gets richer over time. The best gets better over time. Because, you know, they just, it's the, you know, they have to make mistakes of their own to fall from where they are.
That's what I put it, yeah. Yeah, and then they have to beat them, unless they beat themselves. Yeah, they have to beat themselves. And then for the likes of Tesla and Amazon, I think that was interesting.
It's interesting. It doesn't tell a whole story. You can't really use it as valuation. But it's interesting, because when you have a disruptive company with huge market opportunity, the moment you've tipped into that territory where you're generating a couple of billion dollars to a few billion dollars of cash, you no longer depend on the whims of the market.
You control your destiny. You set the agenda, and others follow you, right? That's a beautiful place to be. So the moment, you know, Tesla gets there, basically says, you know what?
This is how electric vehicles are going to look. This is how autonomous is going to look. I'm going to tell the world how it is going to be. And guess what?
You have no choice, but you're going to follow me, right? And that's how it plays out. That's what Amazon has done. It doesn't mean that one of those companies is going to own 100% of the market, but they are the trailblazers, so they're going to lead the way.
And there's going to be a bunch of followers trying to follow. Some of those followers are going to stumble and die, right? That's what happens, right? So I look for those transition points.
To me, those are tipping points. So the moment that tipping point happens, it's like, okay, you have not graduated from being risky, being not that risky. Then you get to tens of billions of dollars at a point, and you're going, oh, you are definitely not that risky anymore. You're okay to hold, and you now move on to that bucket.
Okay, you're the blue ship that's going to give my portfolio. It's going to die in my portfolio from volatility, right? So I own some of those. I don't own Microsoft.
I own Tesla and Apple. I own a MasterCard. Do I think MasterCard is going to do 10x? No, right?
You know, if I had to buy a payments company, I'd buy another payments company that's going to do 10x, but I wouldn't buy Microsoft. I'm sorry, MasterCard. But do I sell it? No, because again, the amount of cash it generates is just, you know, there are some businesses I think that people think, there are some businesses that I think are great to have in a portfolio, and it's that, right?
It's like, these are companies that generate between, say, 12-15% compounded returns. I mean, what's wrong with that? I want to get more. Yes, but nothing wrong with, you know, 15% compounded returns to a company that you don't have to worry too much about, right?
Sometimes it's about, you know, I don't want to worry too much. It's there. And then I really don't like to pay taxes on stuff I sell. So I just want to let the compounding do its thing.
Very nice. There you go. Hopefully, I hope that makes up for my ability to remember to ask you a question. All right.
Next one from Jim. This kind of talks a little bit about our Friday commentator about 2G and his renewables push dog. Jim says, hi, Scott. Should investors be all in renewables before the rest of the investment committee realizes this may be the next tech boom?
And he says, thanks for the answer to you including this question, and maybe see how you can access this sector. Now, I did talk about on Friday about the, and you brought up the difference between how you wish the world would be and what you should invest in. So there are plenty of people out there who want to invest in renewables because they care about the environment. That's different if you're buying on the secondary market.
If you buy shares in renewables companies, the company doesn't get any more money at all from that. You're just paying the person who currently owns the shares. So be very careful, Jim and others, with investing because you want it to be true. That being said, Jim's question, I'm going to assume, I think it might be.
Just simply straight out, investing question, I'm going to assume, I think it might be. Is there money to be made in renewables? If there is, is now the time? And if now is the time, what should they buy?
Ultimately, what guides evolution of these things is basically economics, right? I mean, somebody has to work to bring the economics to the scale where it is better to actually, it makes economic sense to own this, and that thing wins, right? To make that happen, you have to do a lot of R&D, and that is moat, right? And that moat allows you to win over the long term, right?
Now, how many capitalists are doing that? You have to find that. But utilities, it's harder because, you know, I mean, if one utility is running a wind farm, another utility is running a wind farm, well, they're going to be all marginally on the same price point, right? And even those utilities who are doing it are largely also in other businesses.
So an HGL that has one of the facilities in South Wales, also the truckload of coal and other stuff that's also still doing. So if I had to find a unique, you know, kind of pure play, renewable utility, and as you say, if it does, it's a commodity product that's providing. Yeah, so like, I mean, maybe, you know, you want to keep an eye on what Andrew Forrest is doing, and maybe, you know, does he have a spin-off for some company that's going to do, you know, create value creation. So if you have to think about value creation, that's going to be possible.
So, you know, and then the same thing, I wouldn't put money into some sustainable something just because I think this trend is good. I need to know what the underlines are to invest in that. So it's, yeah, trend, yes, but you have to find individual companies that, you know, have the opportunity to create value. So that's, yeah.
I mean, if you want to invest in a whole bunch of things, I'd have to invest in Tesla, but that's one example. I can't give more than one example. It's hard. I can't be a doc's answer.
I think the only thing I would say is just, I know I'm a bit of a record on this, but if you'd known the growth in air travel or the growth in oil consumption over the last 1,500 years, respectively, and you'd chosen to get it before everybody else, you had made probably nothing in oil and probably lost an oil and lost money in airlines. And if you need to be a little bit careful, even if the trend is real, there may not be an investable opportunity. I happen to have that be with lithium, for example. I think we'll have a truckload more batteries, but mine's pretty good at adding to supply when needed to get the cost down.
I think that will process down. And that tends to be, I think, the likely reality. Even if the trend is real, you've got to look at someone who's actually capitalising, making money in that sector. And it's incredibly hard when your renewable energy, it will be a commodity just really over time.
It'll become the new coal, the new gas, the new oil. It's not, you know, none of those things are worth investing in long-term for their value creation. You might, I mean, it's people trade oil and go most of what and good luck to them. But yeah, it's very, very hard.
So I would speculate, if you're looking for a, the documents in Tesla, I don't know if Tesla doesn't have a positive recommendation, not the way, not the way I have it, not the way I'm sure to hate it. But as with every business that we always talk about, you want to look for something that has some sort of sustainable competitive advantage in some sense, that gives it some sort of pricing power to make money, and more money than just, you know, scraping in. So it may be the Tesla brand, it may be another battery technology that ends up with some sort of brand benefit. It may be that there's something else.
But, you know, I'm not going to pay for, you know, Doc's wind farm or Scott's wind farm and pay more because it happens to be one or the other. I'm going to say, great, there's two wind farms that are going to compete for energy. Distribution of the lowest price is going to win. That's a terrible thing.
You don't want to share something that makes money or makes revenue by being the lowest price. Lowest cost is great. Lowest price really is. All right, Doc, question from Tom.
Hey, Scott, question for the podcast. I like this one. What does a negative interest rate from the RBA actually mean? I've heard yours and Doc's views on the recent drop.
We've been a little bit forthright on that. But don't quite understand what a negative rate would mean for the average punter. Love your work. Thank you.
Well, I'll take first, Doc, then you can throw your thoughts in. In the short term, the average fund is important, right? So negative rates effectively will mean that a bank has to pay to leave its money with the RBA. to leave your money with me.
And the lower that is, the less attractive it is for the banks to do it. So if they're going to get 0.1% to leave your money with the RBA, in theory, they're incentivized to lend it to you and me instead. That's kind of the idea of lowering the cash rates, kind of what it's about. If it's negative, the banks will have to pay to leave money with the RBA.
So they put their million dollars in and they take out their $99,998, and next day they come up even less, next day they have even less. And as you might expect, that incentivizes them to leave even less money with the RBA, in other words, lending even more of it out to businesses or homeowners or something else. So that's what it's for. That's how it works.
The average punter will almost certainly never pay a negative mortgage rate. I mean, if we get to that point, we're all in trouble because the banks have to make their margin. Now, if banks are going to make a 2% each point margin, by the time we pay negative rates, the future cash rate will have to be minus 2%. So not to minus half a percent, minus one, it'll have to be super, super negative.
And that is years or some dramatic, you know, horrible, horrible, you know, dislocating event away. War, famine, God knows what, let's even try and imagine what that would be. So negative rates have no impact on you and me. It will reduce our loan rates further.
It may be a case that banks are going to make, say, a 2% margin that, you know, the future cash rate goes to minus 0.5 and we pay 1.5 on our mortgages, for example. That's the sort of way it might work. So if you just need lower mortgage rates, almost certainly, I can't imagine a scenario where we pay negative rates on our mortgages. If it gets to that point, I think we might as well give up and restart the economy from scratch in so other fashion because it will be fundamentally probably riply broken.
Do you have any more thoughts on negative rates? Oh, no, I think I agree with everything you said. I think there's a floor. I think zero is a floor.
If we get below zero, I think it signals bigger problems. Again, I'm not a proponent of lower rates. Yeah, we're desperate to avoid zero so they don't want to do it. They've got a point one rather than zero to try and have some positive number there.
Yeah. A question from Sports Girl. I'm in your comment. I think this is interesting in the context of DOMS.
Hello, Scott. The RBA rate cut didn't get passed on for my variable loan. That's why I want to talk about this one. Look at maybe refinancing a specific mortgage group for a cheap variable loan with a way in front of it.
Do you know much about them? I see their own by CBA. I see your thoughts. Thank you.
Now, Sports Girl, I don't know about specific mortgage. I have no view on that. The only reason I wanted to highlight this other than to answer your question I did respond to you directly on Twitter so I'm not giving you a short trip for anyone who's worried I'm not doing the right thing by Sports Girl on your question was I want to remind everybody that the headlines, the bait and switch headlines of, hey, we've all lowered our rates and then you'll get to find out we've lowered our fixed rates but our variable rates are still high so don't buy the hype, don't buy the headlines. If you're on a variable rate, either consider fixing as one option or at the very least make sure you shop around because some have actually dropped their variable rates but very, very few non-bank lenders.
I don't know from Adam but I see they have passed it on. You know what I'm talking about they give their current customers the same rate they give for their new customers which is pretty cool so that's part of their marketing and part of their brand promise. So please, Sports Girl on others, please stop around because your bank almost certainly hasn't passed on the RBI's reduction but others have and as I always say, don't pay too much. Anymore on that way or let me leave that rant there?
Oh, I'll let you have it. I like this question because it's a question that others might have but it also touches on everything on investing point that's not the point of the question. Samantha says, hi Scott, I've been a long-time follower of the podcast. I'm a big fan.
Thanks, Samantha. My partner and I have started dabbling and in an attempt to contribute ethically we may have made a capital letters huge mistake. We invested into Infigent Energy and looking at it today it looks like there has been an acquisition and it's been delisted. We didn't quite realise what this meant and never accepted or saw any offers.
Can we do anything now to get our investments back? She says, I'm worried we might have missed the boat in registering or accepting but it's already been delisted but we'll keep our fingers crossed. Let's talk about compulsory acquisitions. So Samantha's company has been acquired by somebody else and she's worried she's not going to get her money back.
What happens in a compulsory acquisition? Well, it's a compulsory acquisition I think 90% of the shareholders vote for the acquisition and it doesn't matter what the remaining 10% is going to say. That's right. It's democracy behind your point.
Well, it's more than democracy, right? In democracy, you're 51% vote for such a hand. That's true, so you're right. Right?
So then you get that. So it's, you know, the share market is at least a bit more. Very, very fair. In this case, I would think that you would, you know, suppose the company has been acquired by another company and either you get that company share if it was a share-related, you know, you've got X shares for whatever shares you want there or if it's like cash, you should just cash should show up in your brokerage account.
We get a check Yeah, you should get the money. And if it was like a $0 value, then you get nothing, but I don't know anything about efficiency. So what's 92 cents a share, Samantha? Yeah, you will.
So here's the thing. Make sure you keep an eye out. If you haven't looked at or seen the paperwork, either, you're not paying attention to your personal administration, that's up to you, that's not my place to comment on. So make sure you do because if I do see you're checking, you miss it, that could be expensive.
More of the point, and for everybody, this question is worthwhile, as Doc says, first point, if a buyer buys 90% of the company shares, it's allowed to automatically buy the rest and you'll get cash or shares if you don't look at the condition, as you say, Doc. So that's the first thing. Second thing is, if you didn't see the offer documents, I said, I'm not paying attention, so please do that, or it's actually possible your details are wrong with your broker or your share register. So I would actually take some action, Samantha.
Just make sure, if you're showing any paperwork, there's a decent chance to go in a different address or for some reason, your details aren't correct with your broker. So waiting for them, they may not come, you need to probably be a little bit proactive. So make sure, always make sure you are opening your mail from your investors. You do need to supply like package file numbers and stuff, so please do that.
But also, if it hasn't come, if you haven't got the offer documents, very possible, your details aren't correct in your broker system. And so if you're waiting for a check that won't arrive because you haven't got the system and the details are right, you want to go and jump on that. So do be proactive, but thank you very much. Doc, let's go to macro for a second because a couple of macro questions this week, I put a call out yesterday for some questions for the podcast and just a really good question that's really macro.
Harold asks, in quotation marks, I think he wants his question, it's asked word for word, which is fine, he wants to do this for the week, so I think, I'm not sure if he's pulling out a chain a little bit. Harold says, why hasn't quantitative easing achieved an inflationary breakout anywhere in the world? I like this question because it's supposed to. If you listen to every economist for the last 70 years, they will explain to you the story of the German Republic between the wars when massive amounts of money printing and inflation through the roof, the proverbial wheelbarrows full of cash being wheeled down the road to buy stuff.
We know elsewhere around the world, money printing, creating more cash, injecting money into the system is supposed to create inflation is why they do it. And so back as far as the GFC, there was this thing about, QE will create hyperinflation, people buying gold and bitcoin and shotguns and baked beans and it was going to destroy the economy and it didn't. And now we are post-COVID, QE is well truly back, Australia doing it for effectively the first time and still no bloody inflation. And as I said, it's supposed to happen.
The textbooks are really clear. You haven't made this if you push price up, you create inflation, job done. Harold wants to know why the textbooks are wrong. Well, why hasn't it created the very simple answer?
The textbooks are wrong and economists are wrong. Why are they wrong? Why do you say they're wrong because that's happened? Oh, they're wrong because it's not like economics is not like physics, right?
It's not like the apples are going to drop from the tree. I could do the job for a quarter of the pay. I'll do it for a quarter and taxpayers would save a lot. It's a quarter of the pay.
It's very easy to cut the rates and then expect something to happen because some book 50 years ago said so. Yes. Sorry, I'm taking a wide broad shot here. A little, a little.
Yeah, that's what I do here. I know we're going to give you that job. So that's the tangent. Well, I don't know.
A couple of things. Well, you create more money. With more money, you're supposed to buy things. Apparently, it's supposed to cost competition.
But what if we have all that we need and all the new beautiful things we want to buy basically are becoming cheaper to buy. You just keep it under the mattress. You don't want to spend it because you don't need it. So I think that's part of it.
I think technology and innovation and internet and things like that have basically made things smaller, faster, cheaper. So yes, there's only so much people can consume. I think there's that. How much more coffee can I have?
As I like to say, you can give me more money to have more coffee, but I'm not going to have more coffee because I can only have two or three coffees a day. I'm already up to the brim. How much more can I have? So I think what it's doing is asset price inflation and it's pushing the price of certain assets up whether the stock market or the housing bubble because we've got money so you've got to put it somewhere.
It's not doing anything productive in that sense because the theory doesn't work. I think that's true. I think I would largely agree with that. I'm not sure about some of it, but I think the concept is roughly right.
I don't think it's wrong either. I just don't know. I always say for it, Harold, part of it is that the money isn't got to the hands of people who have to create the inflation. It hasn't caused enough additional spending per se.
To the next point, most of the money is going to asset prices which is a different form of inflation by the way. If you've actually included asset prices in the CPI numbers and it's not exactly the same thing for different reasons but I think you'll find because of the economic seams because of the way this money printing is being done, the money has ended up in asset prices not in consumer prices but that's my take. I don't claim to be a particularly high-profile economist but that's my view. Next one from...
So that's your benefit, right? I mean, you're not a high-profile economist which means you're not wrong. So you're starting on a good wicket. It's a good batting wicket if you can make some runs there.
There we go, there we go. Yeah, all the other shows are not really working. It's mostly the old joke of the two economists walking around with a $20 note. Yeah, and they don't pick it up.
Why do they pick it up? Well, because you know you can't be pregnant and you're not going to pick it up. That's right. If the mic will fix it or someone will pick it up so I can't possibly be there.
I love that. Get more Motley Fool money advice at fool.com.au forward slash triple M. One of the cool things that's good about this is are you through actually really cool people? Steve Kors is a very well-known economist.
Speaking of economists, sorry, Steve, we're just giving you a professional a massive great whack. That was the doc mostly better than me. But it's kind of nice to interact with people on Twitter and hear different opinions and share stuff back and forth. And Steve saw my call out for a question for the podcast.
COVID-19 sorted rate hikes being priced in. Where to? For the ASX. Let's go into the thing kind of hypothetical, right?
Because those set of circumstances may or may not happen. So that's the first question is, is it a reasonable assumption? But on that hypothetical, in terms of range of potential outcomes for our market-crossed investors, it's one of the things we at least should be considering and be thoughtful about because if it does come to pass, there may well be some opportunities and frankly some risks in that sort of scenario. So doc, firstly, do you think Stephen's proposal is possible?
And secondly, if it does come to pass, if you think it's completely irresponsible and I haven't asked you this in advance or what it's going to be, what would happen if these other circumstances were going to pass? Well, I'm not an economist, right? As I like to say, the economy is not the market and I really, you know, like I mean, sure, I mean, you know, everything goes back to, you know, so we will get, here's the thing, if all those things come to pass, I'm betting that the ASX in the next 10 years is going to 7% like it's done in the previous 10 years and that's really the only thing I'm going to bet, right? Because, well, that's what the ASX does because the ASX is full of, you know, when you say the ASX, right, what we mean is, you know, as you clarify this, what we mean is is we're talking about the banks who are not going to grow, we're talking about the miners who are price takers, we're talking about a bunch of other big telcos who are, again, not going to grow because, well, that's what happens.
You can't increase, jack up the price of mobile telephony by 50% because that's not going to happen and if it does, there's going to be competition. So everything in that ASX 100, you know, bar a few, right? So we're not talking about the zeros here or the alpha pays which are, you know, trying to change the world and which are actually growing elsewhere as well. Most of the other stuff is going to do exactly what it has done in the past.
So there's no reason for me to believe that it's going to deliver more than what it has delivered in the last decade which is a pretty good decade, right? It's not going to take 7% and that's what I think it will do 6 to 7%. Like the averages, the market almost never does the average. It does more or less in a given year.
Over time, the average is the average, but I don't know. You just have to look at it. I know Morgan Housel, Eric Spolling in the US did some work. The market is almost, I think the US market has never delivered the average in any year.
So I said 10 years. I don't know what it's going to do next year. But I'm going to say that whatever it doesn't matter it's going to do that 6 to 7%. I'm not ever going to take that risk of putting my money on stuff like that, right?
Because to me that is just bizarre. Like even super funds, they should all hire me for advice. All of those people who are trying to time to get the 20% because they think that the banks are worth 20% less. I mean, why take the trouble just investing in Amazon?
I'm with it. I mean, you know, this is a very hard game to play, right? And your Westfield one is a fantastic example, right? Everybody thinks it's cheap to get that 40%.
This is from Friday, right? I mean, so like, well, I don't want to play that game. I'm happy for others. I'm happy that the super funds and everybody else is playing that game because that means that I have a chance.
If everybody started doing what I was doing, then I would not make any money and I'm happy for them to not make that much money, right? So, you know, this is for listeners, right? I mean, you can't just, you know, this, what is going to do next year? I don't know.
It makes me off. I actually don't care. Honestly, I don't care. In fact, I'm happy if it's down because, you know, most of the recommendations, like, you know, like everybody's happy when their market is up.
I'm actually very depressed when the market is up. I'm really depressed and the market is up. I'm just trying to see you right now virtually. I'm telling you what.
No, but the listeners should also not care. That's my point. Because if you're subscribing to something like Extreme Opportunity and Share Advisor, we're not recommending to you the market, right? In fact, the market is up.
Our comparison, which is what we're benchmarking against, is up. I don't like that. Who likes the benchmark to go up? I want my benchmark to go down.
I want my sales to go up. And that's what it is. I really hate those days. I feel depressed.
The market is up. Because I really don't care about the market. It's my take. So just look at it.
If you look at the fantastic companies, the companies are changing. Stuff. They're going to just be fine. Invest in those.
Ignore the rest. Move on. That's my answer. Long-winded answer.
This is another answer. So what I like about this is this is important. Because even our assets coming in the U.S. has done, I'll say, Twitter polls.
This is qualitative double-blind research. But Twitter polls asking people whether they would rather beat the market or make money. And the vast bulk of respondents, even people who follow the market, in theory are foolish investors, would much rather actually, as their primary goal, make money as opposed to beating the market. I think there's a really important point that Doc's making here, which is exactly that, right?
I think we all look at the market. I'm happy because the market's down or I'm happy because the market's up because I want to beat the market. I think that's a really important point if you're going to be an investor. Well, first of all, look, I don't think anyone should do everything just as we do it.
But it's worth just separating those two things out for a second. If you're someone who just wants to make money, just wants to make investing life easy, there's a very different way to invest. Buying an ETF, probably a fantastic way to do it. Probably some diverse way to do ETFs trying to do it.
Not to get into a single basket, but a couple of ETFs or three ETFs make a whole lot of sense. That's your thing. If you just want to make some money, compound your wealth nicely for many years, buying a market is a great way to go. And we will go back to Cook's question.
But to Doc's point, following the market because it's the market is of some sort of interest. It certainly is the benchmark you should make sure your returns are good enough. Otherwise, you shouldn't be investing. You should be either letting someone else do it with you or buying an ETF if you can't beat the market, join us, as they start.
So that's an important part of investing and understanding your own abilities to do well enough. But yeah, that's exactly the point. Worrying about what the banks are doing makes no sense unless you're investing in the banks. And so taking it from perspective is really important.
Many people don't or can't do that, and that's okay too. But knowing who you are as an investor is super, super important. I'm going to jump on Cook's question just to play the whole thing. I'm going to play the whole thing.
It's a... Look, I actually think 2020 will be okay. I think it might even be good, is my speculation. I'm probably not far off from Cook's point.
Maybe he's making it entirely ironically, in which case I fall in his trap. I'm not sure. But I think, you know, and we've talked about this before. When you come out of a recession, you grow.
That's great. The economy fell 20% and grew 3%. It's not exactly in full health. But year on year, if you're looking at those numbers, I think it's very possible that in 12 months, we actually are in that situation.
Surely another shock, hopefully 100%, but we don't know. Rate hikes being priced, I think that's the long shot. The RBA has pretty much said three years. So unless they get a really, really meaningful shock, I'd be really surprised that they would do that with the market price adding.
I do think that might be fair to say that if you look at the ASX and maybe the bad news for us to your very point about, what's the vogue you look like, what does the market look like, I wouldn't be all surprised if 2020 is a decent year for the ASX. I can see house prices going up in a surging economy, even if unreasonably. That's good for bank profits. I can see the recovery to energy prices.
We saw only this week. oil prices up 6% a day, the oil prices up 8% a day. I can absolutely see a range of scenarios where those large parts of our economy, as you say, as unappealing as they are for us as individual investments, it may be a tougher year for us to beat the market next year than maybe we might hope. And again, if you're investing in those companies, you're in a different boat than what we're going to offer.
I wouldn't be all surprised to see 2021 actually be a really good year for the ASX. Now, of course, the next six weeks we'll take that away and we'll look at individual arbitrary Jan 1 to Dec 31 numbers. The market could surge between now and December and then be flat for the next 12 months and there'll still be a great 13 and a half months. So, you know, doing individual single years is always half.
I wouldn't be all surprised, mate. Am I way off the end? No. Like, I mean, I don't know.
I don't think about it that much so I don't have a really good view. I'm not predicting. I don't know. I have half a view that we might actually have at this new ASX this year.
Yeah, like, I mean, you know, yeah, potentially. I mean, again, I'd be depressed. So, I hope you're well. Now I'm sure I want you to be depressed all next year or whether I'm going to do well and make money on that.
Well, I'm happy for the market to make, like, 5%, 6% every year. What are you going to be? Yeah, like, I don't like that. Because here's the thing with 5%, right?
The market makes 5%. Well, in a 0.8 environment, 0.1% interest rate environment, well, 5% is pretty good, right? So, it's better than nothing. Yeah, like, you know, but that's what I wish for.
I don't really know what's going on here. I'll make you back that point, right? It's an important one because I make this point about inflation and wage growth. I'm absolutely sure, even if people listen to this clever enough to realise what I'm doing and say, no, that would be me, I'm pretty sure Australians would rather a 3% pay rise and a 4% inflation environment than no pay rise and no inflation.
And if you think about that, no pay rise sucks, but no inflation means price is the same as the word last year, so you're purchasing power is the same. If you get a 3% wage rise, the price you go up 4%, you actually go back with your standard living and it actually gets worse. And yet, I'm absolutely sure people haven't had a pay rise since X, I'm not defending that, by the way, but they haven't had a pay rise since X conversations are real and I know they have a psychological impact, but, you know, we've got no inflation right now and we've lived through, as adult investors and other things, we've lived through higher inflation times where wage growth was there but still didn't keep up with that inflation. So you're kind of really careful what you wish for a little bit.
I think the truth is also true of the market. Mate, some questions from Anders on this question that I noticed. If you don't have an answer, we'll hold it over until next week, but Anders wants to know about the latest push pay earnings result. Have you actually had a look at that yet or have you got a look at that?
Yeah, like, I've just had a very high level look. It's not a high level. It looked like, you know, good growth, margin expansion. Yeah, it looks like the upper guidance.
So, like, I mean, you know, it looked good, but I haven't had a deep look yet myself. Cool. All right, so we might hold that over. Thanks for the question, Anders.
We'll have a squiz. I was a little bit mindful of their lack of growth in the small median church segment, Doc. So I'll be asking about that next week. There's a heads up.
I don't... We don't have a plan to give you much heads up. There's a week's head up. Response from Ben M.
Not much of a question, but some feedback. Ben M says, So, Doc, you've had questions around investing for kids. I suggest having a look at investment bonds. Specifically, check out generation life as an individual stock to look out all through that separately.
Strong sales growth from low base competitors have their issues, et cetera. I said, great, thanks, how are the fees? We might have asked next employees to try and find someone to give us a quick future episode on investing for kids. We don't tend to have a lot of expertise on investment structures, per se, so we'll give some feedback.
But there's Ben M's thoughts for anyone who wants to include them. Clearly not advice from him or from us. Question from Rocky. Quick, I've got a regular correspondent.
I've known for Rocky for a while, so thanks, Rocky. I'm going to ask this question, but I'm going to give Rocky the respect of asking the question. Doc, are gold mining stocks worth investing in at the moment? Well, for me, no.
What about for Rocky? Well, let me know. Gold miners are basically again, price takers, right? So, I don't know.
I mean, I really don't know. I mean, it depends on which miners, what the costs are, what the price is, what the historical price card looks like, what the cycle looks like. Too many different questions for me to answer. I really don't know.
I'm sorry. Rocky, I'm going to say I would speculate no. Sorry, look, to Doc's point. I don't own any gold mining stocks.
I've never owned any gold mining stocks. I've never recommended any gold mining stocks. We're out a long way from that. That also, by the way, means we're not exposed in the area.
So, take a look at that gold with a grain of salt. We don't do it, by the way, not because we're pedantic or philosophically opposed as a matter of faith. The problem, unfortunately, is we've gone through so much uncertainty recently the gold price has gone through the roof because everyone's gone to gold as the air quotes, safe haven asset. Now, it kind of is ironically because it is, because it is.
It's a self-haven prophecy. Everyone buys it, so the price goes up. It's a self-haven asset. The price has gone up.
And you've got a bit of a, you know, it's a bit of a self-haven prophecy because everyone buys it. That's what happens. That being said, it's also true, generally speaking, that when better times recover, people go, oh, thank goodness, I can't sell my gold stocks again. If you're buying gold right now, I think it's an aggressive, optimistic view of gold, I think owning gold is generally going to cost you over the long run relative to stocks.
Now, it might be a savings and volatility. You might go up, when others go down, you feel like you've done well, but unless you can buy at exactly the right times, chances are, like the last six months where the market's up, what, 35%, 40%? If you have missed that because you will wait without the market not coming back, that's a tough thing to do. So if you're going to buy gold, I would suggest you only should do it if you believe things get worse rather than better.
I think that's a hard thing to believe at this point, certainly in a long-term perspective. Anyone want that, mate? I have nothing to say about gold. Speaking of great questions on Twitter, Pat Garrett, who's the CEO of Six Park, they're a robo-advisor.
There was a question, I like that as well. Pat, thank you for the question. It seems that US election and success in COVID here in Australia has perhaps distracted us from the prospective impact of COVID problems in the US and Europe in terms of the toll on those important regions and globally. Do you think there's an underappreciated downside scenario?
I like this on development as Pat likely knows and our listeners know. Pat's question, I think, is fair. I think I've been guilty of not so much extrapolating the strategy to the rest of the world but certainly allowing myself to think locally maybe rather than globally and not necessarily factor in or remember that the case counts in the US are still going up that much of Europe is back in the second lockdown. I think France, Germany, UK to different degrees are back in some sort of lockdown.
I've seen and spoke a lot about the recovery here that I think I see but the rest of the world isn't going quite so well. Is there a downside here where Australia does well but only so well given the limitations of being a globalised world and a part of that globalised world meaning that we can't import the bad news because we can't get enough growth outside Australia to really help us continue to recover? So I'll repeat that. So what I've said before, I think I hold that view.
I think the problem with thinking about you think about case counts we think about lockdowns and then we think about what it does but does that stop the wheels from spinning? It does not really stop the wheels from spinning and we can talk about recovery or no recovery but I mean Apple is selling more iPhones and widgets and companies are selling more software and new stuff is being invented. I mean in some sense the challenge of COVID is an opportunity because it changes many things for the long term. It also propels many things to the forefront that otherwise have taken time and so there are all those so I think I think we can't compare in my mind it's hard it's one thing to say stuff is back to normal because people are going back to shopping but how does that help you to invest?
I don't invest in shopping so I really don't care in that sense like you know it sounds odd but you know okay well people are back to shopping and people are spending more in bunnings but they're spending more this year they will not spend more next year at the same time so it doesn't really matter right? I mean in that sense it does not matter. I think what matters is is there going to be COVID vaccine? It may as well come right?
What form that's going to take and once that is there we start off right? And you have to remember the best of the best businesses have not stopped functioning they have actually been innovating continuously and this continues right? So in fact in my mind it's a question of well you know there's immense transformation that's happening and it's not about these retail numbers and things like that those are I think those are not investment worthy or they're not investment impacting in that sense so I don't know like I mean I'm pretty optimistic that there'll be a vaccine we're releasing some positive results and you know maybe by next you know this around summertime or summer northern hemisphere or our winter next year COVID is mostly under control life is back to normal for most parts but from an investment point nothing really fundamentally changed right? And that's how you know that's how I think about it like I'm not sure how else where else can I think I mean I'm trying to separate out the individual aspects I mean the companies you own are investing or are keen in the impacts by the economic cycle I mean to some degree as you throw there's businesses that in different universes didn't go broke because the GST didn't happen and are now well-beating companies they needed funds at exactly the wrong time when VC funds had their cash flow was going out they couldn't raise money I mean we thought nine to ten months ago there'd be a whole lot more bankruptcies on the ASX than there were it turned out that the GHS came to rescue they were just capital raising after capital raising in a different university but in some version of the current circumstance there were 20, 30, 40 ASX companies of a decent size that went broke because they couldn't raise that capital other businesses you invest in you kind of think well a prolonged downturn actually could send them a little round of cash with no hope and they get sold for a song to somebody else or they can't tie up new customers because their customers aren't buying right now because of COVID no one wants to buy is there any impact on those businesses at all do you think about that?
So certain businesses are in the most challenging so the travel companies for example are in the most challenging so they have got some runway and they would probably be the ones that they're looking for let's open up the internal borders let's open up the external borders let's get tourists in let's get 9-10 million people visit Australia every year if you add 9 million people to a population of 22 million that's a humongous input the input of tourism is understated in this country in that sense then if we think about migration that's another huge you add 200,000 people come to this country they bring their money they buy more inflated assets that helps other people so there's a lot of things that happen but I think yes there's some consideration for that if there's no vaccine that's going to be there then I really believe that there's going to be a vaccine and I've already seen proof that there's vaccine in fact you'll see step change but if you take the view that we're going to address COVID whether in six months or in a year I think worrying about that's a policy question that's a political question that's a health management question you could say that you need to do this, that, x, y, z I think most of the businesses that are addressing or producing innovative technical solutions I think are going to continue to do fine so people are using and the other I think the other backstory we realize is that if this continues longer it continues I mean there's free flow of stimulus money that's coming it's not just years it's everywhere longer it continues there's more stimulus so in many ways I think the only thing to consider as investors in individual businesses is what is your bankruptcy risk in my mind that's the most important question to consider my vision is different because you're investing in different companies to you and the economic circumstances are more important than they are to you just by virtue of our different investment portfolios but ironically or maybe this is the key point it still remains the story that you look at the long-term earnings power of the business you're investing in and as long as you can avoid that bankruptcy risk and get through you know the earnings power in 2022, 2023, 2024 as far as you want to think is really the key number here rather than what happens in the next four months so if you can get through that your question is now I'm being off the price X if I go buy a new station or a cafe or something and earn it for the next 10 years that's the only thing about buying shares so if you look at a business saying you know what I can see in Doc's case this new little cool tech startup I just bought the entire business for is going to be much bigger in 10 years because it's going to X, Y, Z or if I'm going to buy I'm going to use my cafe example I'm going to buy a cafe whether there's counseling roadworks on the street for the next six months or not it's kind of irrelevant as long as I've got cash to get me through the tougher time in this case but I know I expect that in a year's time the cafe's full and I can reasonably estimate the earnings power of that business I know what the right price is to pay and I think looking at this year's profit or next year's profit aren't very useful in any of those cases including by the way some of the high growth companies where there aren't no profit this year you're literally looking at 10 years and saying this business could earn a lot at that point the earnings power of business the ability to generate profits at some future point and over the future far, far more important than what happens in the next four months Professor? Yeah, I think so and the survival of it is right so we really I mean those are the two things to think about Do you follow Alibaba on the Ant Group IPO? There's a lot going on there I have not followed it but there's only so many things we can follow but it looks like a fascinating story of there's a big IPO it was supposed to be the biggest IPO but it didn't happen and then apparently there's some investigation going on now against both Alibaba and some other companies about price fixing I think or something like that in the online markets I'm not really sure it looks very convoluted and I have just in front of it just tune things out because I'm not invested in it and I don't need to understand it Chris and Miguel also gave us some questions I think we've pretty much covered it I think we've done that in pretty good detail and I saw a couple of questions I thought I'd finish with the last one from Patrick in the last game of the State of Origin coming up in a few days time and I like this question from Patrick you can guess which state he might be from he says if State of Origin was a business and you had to choose either side to invest in why would it be Queensland and he fixes with Queenslander as an explanation mark so Patrick I love that I love that hypothetical question slash sledge slash statement mate thank you of course the reason we're investing in Queensland is because after Wednesday there'll be a losing side and there'll be cheap so if you're a value investor why Queensland if they lose the State of Origin that's probably the way I do it alright that's well and truly more than enough time we've spent on this podcast we hope you've enjoyed it we hope you've enjoyed your Sunday we as always enjoy bringing it to you speaking of which if you want to join one of our monthly full services I can highly recommend Docs it's monthly full extreme opportunities and these guys talk about the companies recommend the companies that Doc's been talking about for the last couple of podcasts he's given us a really really good summary of the way he invests what he invests in and why he invests in those businesses and probably as importantly if you want to be able to put the market noise and chatter aside and just buy those businesses that have really long potential runways a bit more risk as we said so you kind of swap market watching risk for volatility risk and to some degree there is some of them don't turn out but overall the performance has been very very good so if you like the way he talks you like the way he invests you can invest effectively alongside him by following his recommendations at monthly full extreme opportunities to do that go to fool.com.au forward slash eo podcast eo for extreme opportunities podcast because I'm anxious to use that link and then we can prove to the boss that this podcast really is generating business for the company so fool.com.au forward slash eo podcast join Doc and Kevin in their search for the big winners big ASX winners of tomorrow and more importantly the next 5 and 10 years and of course please do subscribe to the Motley Fool Triple M Money Triple M Motley Fool Money podcast and long podcast through iTunes or your favourite Android podcast app or of course podcast one if you like what you're doing please leave us a rating a review some stars and nice words would be lovely and do as Poppy did tell your friends I will try it desperately if you do tell your friends do I have your question answered sooner rather than later my apologies Poppy and of course you can get a dose of Fool straight to your inbox with some marketing so I'm not saying marketing offers to join our services for cheap prices by the way so I reckon that's a pretty good trade off all you need to do is go to fool.com.au forward slash triple M triple M that's it for this week's Motley Fool Money special mailbag we'll be back next week with another dose of Foolish Insight Fool on Fool on Foolish Insight