1 00:00:03,290 --> 00:00:05,960 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean Aylmer. 2 00:00:06,680 --> 00:00:09,559 Sean Aylmer: There's plenty of evidence to suggest that with all the 3 00:00:09,560 --> 00:00:13,250 Sean Aylmer: international and most domestic travel now off the agenda, people 4 00:00:13,250 --> 00:00:15,470 Sean Aylmer: are looking for new ways to spend their money. It's 5 00:00:15,470 --> 00:00:18,320 Sean Aylmer: resulted in a good boost for retailers like JB Hi-Fi, 6 00:00:18,320 --> 00:00:22,669 Sean Aylmer: Harvey Norman and online sellers Temple & Webster and Kogan.com. But 7 00:00:22,670 --> 00:00:26,239 Sean Aylmer: what does it mean for investors eyeing off discretionary retailers 8 00:00:26,239 --> 00:00:29,270 Sean Aylmer: on the ASX? Roger Montgomery is the founder and chief 9 00:00:29,270 --> 00:00:33,710 Sean Aylmer: investment officer of Montgomery Investment Management. Roger, welcome to Fear 10 00:00:33,710 --> 00:00:34,489 Sean Aylmer: and Greed this morning. 11 00:00:34,760 --> 00:00:35,780 Roger Montgomery: Always good to be with you. 12 00:00:36,300 --> 00:00:39,710 Sean Aylmer: So tell me exactly what is a discretionary retailer? Who 13 00:00:39,710 --> 00:00:40,470 Sean Aylmer: are we talking about? 14 00:00:40,760 --> 00:00:45,830 Roger Montgomery: So we're talking about retailers who sell things that aren't essential, 15 00:00:45,830 --> 00:00:49,250 Roger Montgomery: that aren't necessary. Really anything other than food is a 16 00:00:49,250 --> 00:00:53,390 Roger Montgomery: discretionary retailer. So you've got Woolies and Coles and then 17 00:00:53,390 --> 00:00:58,459 Roger Montgomery: everything else really does get captured by that discretionary descriptor. 18 00:00:59,120 --> 00:01:01,520 Sean Aylmer: So take me through some of the better performers of 19 00:01:01,520 --> 00:01:04,130 Sean Aylmer: the last year, or just the sector generally. It seems to 20 00:01:04,130 --> 00:01:06,450 Sean Aylmer: have had a pretty good run this year at least. 21 00:01:06,810 --> 00:01:12,800 Roger Montgomery: Yeah. So interestingly, last year, 2020, when the lockdown's first hit, 22 00:01:13,100 --> 00:01:16,090 Roger Montgomery: obviously everything in the stock market was hit pretty hard. 23 00:01:16,370 --> 00:01:19,190 Roger Montgomery: But then what we discovered is as a consequence of 24 00:01:19,190 --> 00:01:24,199 Roger Montgomery: people being locked down at home and having or continuing 25 00:01:24,200 --> 00:01:27,800 Roger Montgomery: to be paid either by their employer or by the 26 00:01:27,800 --> 00:01:32,179 Roger Montgomery: government and without their boss looking over their shoulder, they 27 00:01:32,180 --> 00:01:34,610 Roger Montgomery: were doing a lot of online shopping. And so what 28 00:01:34,610 --> 00:01:38,179 Roger Montgomery: happened is a lot of discretionary retailers reported very, very 29 00:01:38,180 --> 00:01:43,069 Roger Montgomery: strong growth from their online offerings and online retailers reported 30 00:01:43,069 --> 00:01:46,710 Roger Montgomery: extraordinary growth. And we're talking triple-digit growth year on year. 31 00:01:46,940 --> 00:01:49,340 Roger Montgomery: So it was a big deal. But what we also 32 00:01:49,340 --> 00:01:52,670 Roger Montgomery: saw was a shift or what we call in our industry, 33 00:01:52,670 --> 00:01:55,520 Roger Montgomery: a mix shift. And so what happened is the mix 34 00:01:55,520 --> 00:02:00,440 Roger Montgomery: of spending changed. So basically experiences which are supplied by 35 00:02:00,440 --> 00:02:05,720 Roger Montgomery: service providers. So the likes of movies, concerts, restaurants, those 36 00:02:05,720 --> 00:02:09,410 Roger Montgomery: sorts of things, they died completely. Nobody was allowed to 37 00:02:09,410 --> 00:02:12,350 Roger Montgomery: do any of those things. So that stopped. And with 38 00:02:12,350 --> 00:02:15,020 Roger Montgomery: the extra dollars that would normally be spent on those 39 00:02:15,020 --> 00:02:19,070 Roger Montgomery: things and also the extra $43 billion Australian dollars that 40 00:02:19,070 --> 00:02:22,940 Roger Montgomery: would normally be spent when Australians travel overseas, that was 41 00:02:22,940 --> 00:02:28,010 Roger Montgomery: all redirected to goods in Australia, supplied by, in many cases, 42 00:02:28,010 --> 00:02:33,380 Roger Montgomery: Australian retailers. And so discretionary retailers did well, services not 43 00:02:33,380 --> 00:02:37,309 Roger Montgomery: so much. The same thing is happening again now, except 44 00:02:37,310 --> 00:02:39,680 Roger Montgomery: there's a bit of a twist in that with the 45 00:02:39,680 --> 00:02:42,990 Roger Montgomery: lockdowns we're in now people have spent a lot of their money. 46 00:02:43,400 --> 00:02:45,620 Roger Montgomery: Let me rephrase that. They haven't spent a lot of their money. They've 47 00:02:45,620 --> 00:02:48,170 Roger Montgomery: still got a lot of money. They've spent on what 48 00:02:48,169 --> 00:02:50,600 Roger Montgomery: they wanted to spend last year, and so they're not 49 00:02:50,600 --> 00:02:53,840 Roger Montgomery: spending again. So hopefully that gives you a good description 50 00:02:53,840 --> 00:02:54,869 Roger Montgomery: of what has transpired. 51 00:02:55,220 --> 00:02:57,290 Sean Aylmer: Yeah, absolutely. It is interesting in that I think you've 52 00:02:57,290 --> 00:02:59,020 Sean Aylmer: called it 'economics of enough'. 53 00:02:59,030 --> 00:02:59,480 Roger Montgomery: Yes. 54 00:02:59,510 --> 00:03:02,570 Sean Aylmer: The idea that people, they purchase, you can buy a 55 00:03:02,570 --> 00:03:04,940 Sean Aylmer: new TV because you're in lockdown, but that's not a 56 00:03:04,940 --> 00:03:07,160 Sean Aylmer: purchase you make every six months or every 12 months. 57 00:03:07,160 --> 00:03:08,660 Sean Aylmer: It's probably every three or four years. 58 00:03:09,180 --> 00:03:12,920 Roger Montgomery: Yeah. You have, see, these products have a life cycle and 59 00:03:12,919 --> 00:03:17,510 Roger Montgomery: they're replaced either because they fail or technology becomes superior. 60 00:03:17,510 --> 00:03:21,660 Roger Montgomery: And so that replaces or supersedes the technology you've already got. 61 00:03:22,070 --> 00:03:24,079 Roger Montgomery: So what happens? You get a big surge of spending 62 00:03:24,080 --> 00:03:27,020 Roger Montgomery: and then people just have enough stuff. And it's really, 63 00:03:27,020 --> 00:03:29,480 Roger Montgomery: really quite simple. And I've been talking about that since 64 00:03:29,480 --> 00:03:33,500 Roger Montgomery: the 1980s. People just have bought enough for the time 65 00:03:33,500 --> 00:03:37,310 Roger Montgomery: being and they'll buy more again, but it slows down. 66 00:03:37,310 --> 00:03:40,970 Roger Montgomery: And so it means for retailers that because people have 67 00:03:40,970 --> 00:03:44,630 Roger Montgomery: got enough TVs, they've bought enough printers for the Home Office, 68 00:03:44,960 --> 00:03:48,170 Roger Montgomery: they've bought enough gym equipment for their home gym, they're 69 00:03:48,170 --> 00:03:50,720 Roger Montgomery: not buying more of it. And what it means for 70 00:03:50,720 --> 00:03:54,350 Roger Montgomery: retailers is that they have to be more competitive. They 71 00:03:54,350 --> 00:03:57,650 Roger Montgomery: tend to have more promotions, and so their margins start 72 00:03:57,650 --> 00:04:00,890 Roger Montgomery: to get compressed. And in fact, this reporting season, that's 73 00:04:00,890 --> 00:04:04,640 Roger Montgomery: exactly what we've seen. We've seen retailers report really, really 74 00:04:04,640 --> 00:04:08,030 Roger Montgomery: great results for financial year 2021 which ended on June 30. 75 00:04:08,540 --> 00:04:11,869 Roger Montgomery: But now what they're saying is that partly because of lockdown, 76 00:04:11,870 --> 00:04:14,690 Roger Montgomery: of course, but in the first month or two of 77 00:04:14,690 --> 00:04:17,900 Roger Montgomery: the new financial year, sales have dropped off. So in 78 00:04:17,900 --> 00:04:23,780 Roger Montgomery: some cases, for example, Accent Holdings, Adairs, Supercheap, JB Hi-Fi, 79 00:04:23,990 --> 00:04:28,700 Roger Montgomery: they're all reporting a lot more promotional activity. So discounting, 80 00:04:29,029 --> 00:04:32,930 Roger Montgomery: which is crimping their margins and they're also reporting very, 81 00:04:32,930 --> 00:04:37,099 Roger Montgomery: very sharp, 14, 15, up to 20 per cent declines in 82 00:04:37,100 --> 00:04:41,690 Roger Montgomery: sales compared to last year. And that really does reflect 83 00:04:41,690 --> 00:04:44,960 Roger Montgomery: not only that lockdowns, but also what I describe as 84 00:04:44,960 --> 00:04:47,479 Roger Montgomery: the economics of enough. People have just bought enough stuff 85 00:04:47,480 --> 00:04:48,220 Roger Montgomery: for the time being. 86 00:04:48,650 --> 00:04:51,350 Sean Aylmer: So it doesn't augur particularly well. And we will come 87 00:04:51,350 --> 00:04:55,549 Sean Aylmer: out of lockdowns eventually, let's say October, November. I'm just 88 00:04:55,550 --> 00:05:00,080 Sean Aylmer: thinking ahead here with discretionary retail. If the economics of 89 00:05:00,080 --> 00:05:03,050 Sean Aylmer: enough has kicked in. And I know when I'm out there, 90 00:05:03,230 --> 00:05:04,640 Sean Aylmer: I'm not going to buy a new TV, I'm going 91 00:05:04,640 --> 00:05:05,310 Sean Aylmer: to go out for dinner. 92 00:05:05,330 --> 00:05:05,909 Roger Montgomery: Exactly. 93 00:05:05,930 --> 00:05:07,370 Sean Aylmer: I'm going to do all that stuff that I haven't 94 00:05:07,370 --> 00:05:08,120 Sean Aylmer: been able to do. 95 00:05:08,150 --> 00:05:08,510 Roger Montgomery: Yes. 96 00:05:08,510 --> 00:05:10,339 Sean Aylmer: It doesn't sound great for those retailers. 97 00:05:10,820 --> 00:05:13,039 Roger Montgomery: That's exactly right. And some of them are on fairly 98 00:05:13,040 --> 00:05:18,440 Roger Montgomery: lofty price earnings multiples as well. So companies like Domino's Pizza, 99 00:05:18,440 --> 00:05:21,770 Roger Montgomery: for example, will continue to do well in lockdown. They 100 00:05:21,770 --> 00:05:25,760 Roger Montgomery: may continue to do well after lockdown. It's kind of 101 00:05:25,760 --> 00:05:29,180 Roger Montgomery: a discretionary purchase, but not really. People still have to eat. 102 00:05:29,570 --> 00:05:33,469 Roger Montgomery: But then the Kogan's of the world, the JB Hi-Fi's, Rebel Groups, 103 00:05:33,710 --> 00:05:38,270 Roger Montgomery: Harvey Norman, even Bapcor, which is a part supplier, car 104 00:05:38,270 --> 00:05:39,080 Roger Montgomery: parts supplier. 105 00:05:39,089 --> 00:05:40,610 Sean Aylmer: ARB, some of those sorts of people. 106 00:05:40,850 --> 00:05:44,360 Roger Montgomery: Yeah, Super Retail. Oh ARB is just an exceptionally good business. 107 00:05:44,370 --> 00:05:44,690 Sean Aylmer: Right. 108 00:05:44,720 --> 00:05:46,820 Roger Montgomery: Just as an aside, one of the top 10 companies 109 00:05:46,820 --> 00:05:48,510 Roger Montgomery: listed on the Australian Stock Exchange. 110 00:05:48,510 --> 00:05:51,350 Sean Aylmer: Really? So for those who don't know ARB, they basically 111 00:05:51,350 --> 00:05:53,780 Sean Aylmer: provide four-wheel drive accessories primarily. 112 00:05:53,900 --> 00:05:56,990 Roger Montgomery: Aftermarket four-wheel drive parts and accessories. That's right. But those 113 00:05:56,990 --> 00:05:58,969 Roger Montgomery: businesses that I've listed and then you can add to 114 00:05:58,970 --> 00:06:03,300 Roger Montgomery: that Baby Bunting and Adairs and Lovisa, Nick Scali, you know that 115 00:06:03,350 --> 00:06:05,719 Roger Montgomery: those sorts of businesses. I'm racking my brain to think of 116 00:06:05,720 --> 00:06:08,779 Roger Montgomery: a few more. But they're the sorts of businesses that 117 00:06:08,960 --> 00:06:13,460 Roger Montgomery: are all generally reporting tougher comps, what we call tougher comps. 118 00:06:13,470 --> 00:06:17,300 Roger Montgomery: So their comparisons. They had really good numbers last year. Their growth 119 00:06:17,300 --> 00:06:20,510 Roger Montgomery: rate might have been 50 per cent, but this year it's 120 00:06:20,510 --> 00:06:23,510 Roger Montgomery: really hard to repeat that 50 per cent. So they're going 121 00:06:23,510 --> 00:06:26,270 Roger Montgomery: to show lower rates of growth. And these lockdowns are 122 00:06:26,270 --> 00:06:29,239 Roger Montgomery: really having a detrimental impact on the operating profits of 123 00:06:29,240 --> 00:06:31,820 Roger Montgomery: many of these businesses to the tune of 20 to 124 00:06:31,820 --> 00:06:34,400 Roger Montgomery: 30 per cent in some cases. So it really is having 125 00:06:34,400 --> 00:06:37,250 Roger Montgomery: a big impact on their, on this first two months 126 00:06:37,250 --> 00:06:39,950 Roger Montgomery: of the year, the financial year compared to the first 127 00:06:39,950 --> 00:06:41,180 Roger Montgomery: two months of last financial year. 128 00:06:41,750 --> 00:06:43,599 Sean Aylmer: Stay with me, Roger. We'll be back in a minute. 129 00:06:48,540 --> 00:06:51,419 Sean Aylmer: My guest this morning is Roger Montgomery, founder and chief 130 00:06:51,420 --> 00:06:55,500 Sean Aylmer: investment officer of Montgomery Investment Management. One thing about retail 131 00:06:55,500 --> 00:06:58,320 Sean Aylmer: and I remember as a reporter when you first reported companies, 132 00:06:58,320 --> 00:07:01,880 Sean Aylmer: often you did retail because everyone can identify with it. 133 00:07:01,890 --> 00:07:02,180 Roger Montgomery: Yes. 134 00:07:02,220 --> 00:07:05,520 Sean Aylmer: From an investor viewpoint, what are the things I should be 135 00:07:05,520 --> 00:07:08,010 Sean Aylmer: looking at if I want to buy retailing and in the 136 00:07:08,160 --> 00:07:10,080 Sean Aylmer: back of my mind, I'm thinking, well, actually, if I'm 137 00:07:10,080 --> 00:07:11,700 Sean Aylmer: not going to buy a new TV, why should I 138 00:07:11,700 --> 00:07:14,150 Sean Aylmer: invest in Harvey Norman or J.B. Hi-Fi or whatever? 139 00:07:14,430 --> 00:07:16,710 Roger Montgomery: Yeah. Look, let me start with the easiest way to 140 00:07:16,710 --> 00:07:18,950 Roger Montgomery: make money in the Australian stock market and that is... 141 00:07:19,320 --> 00:07:22,420 Sean Aylmer: Ah! We've been waiting, Roger, for years for this! Off we go! 142 00:07:22,470 --> 00:07:25,260 Roger Montgomery: It's really simple. If you get a really good retail 143 00:07:25,260 --> 00:07:27,810 Roger Montgomery: concept that only has a small store footprint. 144 00:07:28,320 --> 00:07:28,590 Sean Aylmer: Yeah. 145 00:07:28,590 --> 00:07:31,920 Roger Montgomery: And it's rolling that store footprint out. One of the surest 146 00:07:31,920 --> 00:07:36,030 Roger Montgomery: ways of consistently making money in the stock market is 147 00:07:36,030 --> 00:07:39,000 Roger Montgomery: to buy that retailer when it's at 20 stores and 148 00:07:39,000 --> 00:07:43,230 Roger Montgomery: it's going to 150 or 200 stores, you will do very, 149 00:07:43,230 --> 00:07:45,870 Roger Montgomery: very well over years owning that business. 150 00:07:45,990 --> 00:07:47,340 Sean Aylmer: Domino's being an example. 151 00:07:47,880 --> 00:07:52,230 Roger Montgomery: Well, all of them. Nick Scali is another classic example. When they 152 00:07:52,230 --> 00:07:55,170 Roger Montgomery: roll out those stores and they go from, as I say, 153 00:07:55,170 --> 00:07:58,350 Roger Montgomery: 10 or 20 stores to hundreds, you're going to do very, 154 00:07:58,350 --> 00:08:01,680 Roger Montgomery: very well. And that's because often the really good retail concepts, 155 00:08:01,950 --> 00:08:04,920 Roger Montgomery: they start to pay back on the CapEx, capital expenditure 156 00:08:04,920 --> 00:08:07,370 Roger Montgomery: for the store layout, they start paying that back very quickly. 157 00:08:07,650 --> 00:08:09,630 Roger Montgomery: And so what happens is not only do you get 158 00:08:09,630 --> 00:08:13,830 Roger Montgomery: growth in earnings, but you also get analysts upgrading their 159 00:08:13,830 --> 00:08:16,620 Roger Montgomery: earnings because they're, a good store concept will do better 160 00:08:16,620 --> 00:08:19,440 Roger Montgomery: than conservative analysts are willing to estimate. And then they 161 00:08:19,440 --> 00:08:22,230 Roger Montgomery: tend to upgrade. And then that upgrade flows through to 162 00:08:22,230 --> 00:08:25,220 Roger Montgomery: a PE (Price Earnings ratio) expansion where people start projecting it out to infinity. 163 00:08:25,560 --> 00:08:28,650 Roger Montgomery: So you get growth on growth, on growth. And that's 164 00:08:28,650 --> 00:08:30,330 Roger Montgomery: really good for share prices and you make a lot 165 00:08:30,330 --> 00:08:31,080 Roger Montgomery: of money doing that. 166 00:08:31,410 --> 00:08:33,600 Sean Aylmer: Any in mind at the moment, Roger, just between you 167 00:08:33,600 --> 00:08:33,900 Sean Aylmer: and I? 168 00:08:33,990 --> 00:08:38,339 Roger Montgomery: No. Look. Well, actually, you know what? Our biggest position 169 00:08:38,550 --> 00:08:42,480 Roger Montgomery: in the Small Caps fund amongst the discretionary retailers, and 170 00:08:42,480 --> 00:08:46,530 Roger Montgomery: we've got five or six discretionary retailers, our biggest position at 171 00:08:46,620 --> 00:08:49,980 Roger Montgomery: about three per cent is City Chic, which is a plus 172 00:08:49,980 --> 00:08:54,510 Roger Montgomery: sized women's retailer. And it's made some acquisitions of what 173 00:08:54,510 --> 00:08:58,650 Roger Montgomery: a lot of market analysts think are some underperforming businesses 174 00:08:58,650 --> 00:09:02,490 Roger Montgomery: in the US and the UK. But if they can transform 175 00:09:02,490 --> 00:09:05,340 Roger Montgomery: those businesses and do what they've done with City Chic 176 00:09:05,340 --> 00:09:08,670 Roger Montgomery: in Australia, they will really roll those store concepts out 177 00:09:08,670 --> 00:09:11,130 Roger Montgomery: very successfully and make a lot of money out of that. 178 00:09:11,340 --> 00:09:15,240 Roger Montgomery: We've also got and I'll list these in order of size, but 179 00:09:15,600 --> 00:09:18,300 Roger Montgomery: the biggest is two per cent. The smallest is one per cent. 180 00:09:18,630 --> 00:09:22,410 Roger Montgomery: Lovisa is another one where, Lovisa sells what I describe 181 00:09:22,410 --> 00:09:26,939 Roger Montgomery: as costume jewellery, better, affordable, affordable jewellery. Warren Buffett owned 182 00:09:26,940 --> 00:09:28,380 Roger Montgomery: a lot of jewellery stores. You can make a lot of 183 00:09:28,380 --> 00:09:31,440 Roger Montgomery: money out of jewellery stores. GWA, which is not discretionary 184 00:09:31,440 --> 00:09:35,390 Roger Montgomery: retail but sells things like basins and sinks and toilets. Bapcor, 185 00:09:35,670 --> 00:09:38,910 Roger Montgomery: which I mentioned earlier. Adairs and Super Retail Group. So in 186 00:09:38,910 --> 00:09:41,130 Roger Montgomery: order of biggest to smallest, that's what we've got. 187 00:09:41,550 --> 00:09:44,640 Sean Aylmer: Wow. Just moving away from discretionary retailers. What about the 188 00:09:44,640 --> 00:09:47,730 Sean Aylmer: consumer staples, they're called. You mentioned Woolworths and Coles being 189 00:09:47,730 --> 00:09:50,340 Sean Aylmer: the obvious ones. How do they look as we come 190 00:09:50,340 --> 00:09:51,340 Sean Aylmer: out of lockdown? 191 00:09:51,990 --> 00:09:56,670 Roger Montgomery: Woolworths is a particularly interesting example because it's a mature business. 192 00:09:56,670 --> 00:09:59,730 Roger Montgomery: It's in a mature market. Nobody thinks of it as 193 00:09:59,730 --> 00:10:02,670 Roger Montgomery: a growth company. But what happened is in the first 194 00:10:02,670 --> 00:10:05,790 Roger Montgomery: couple of months of the first lockdown last year, 2020, 195 00:10:06,570 --> 00:10:11,250 Roger Montgomery: what happened was they signed up a million new online 196 00:10:11,250 --> 00:10:14,970 Roger Montgomery: and rewards customers. And because their ability to convert those 197 00:10:14,970 --> 00:10:19,050 Roger Montgomery: customers and upsell them and cross-sell to them, is probably two 198 00:10:19,050 --> 00:10:22,410 Roger Montgomery: years ahead of Coles, it suddenly became a growth story again. 199 00:10:22,530 --> 00:10:26,820 Roger Montgomery: And so Woolies is a particularly interesting example where they 200 00:10:26,820 --> 00:10:30,660 Roger Montgomery: could be growing at rates faster than GDP for another 201 00:10:30,660 --> 00:10:31,410 Roger Montgomery: couple of years. 202 00:10:31,980 --> 00:10:34,679 Sean Aylmer: That's really interesting. What came to mind then and I shouldn't say, 203 00:10:34,679 --> 00:10:37,020 Sean Aylmer: that Steven Cain, the head of Coles, is always pictured 204 00:10:37,170 --> 00:10:38,820 Sean Aylmer: in his Coles t-shirt. 205 00:10:38,940 --> 00:10:39,170 Roger Montgomery: Yes. 206 00:10:39,210 --> 00:10:41,340 Sean Aylmer: And I often think it actually isn't a good look for 207 00:10:41,340 --> 00:10:44,730 Sean Aylmer: the CEO of Coles, when I want to invest the money, to 208 00:10:44,730 --> 00:10:47,640 Sean Aylmer: look like a grocer. Whereas you don't ever find the 209 00:10:47,640 --> 00:10:50,940 Sean Aylmer: CEO and senior management of Woolworths doing that. Purely an 210 00:10:50,940 --> 00:10:53,340 Sean Aylmer: image thing that. But their investment in Quantium too the 211 00:10:53,340 --> 00:10:56,130 Sean Aylmer: data play. Obviously, that feeds into what you're talking about. 212 00:10:56,340 --> 00:11:01,050 Roger Montgomery: Absolutely. Absolutely. And, as I said, Woolies invested heavily in early, 213 00:11:01,170 --> 00:11:05,880 Roger Montgomery: and that's now paying dividends for shareholders. Look, really as 214 00:11:05,880 --> 00:11:08,819 Roger Montgomery: a professional investor and we own Woolies and we own 215 00:11:08,820 --> 00:11:12,929 Roger Montgomery: Coles in our large-cap or all-cap funds, but really it comes down 216 00:11:12,929 --> 00:11:16,080 Roger Montgomery: to price. We know that Woolies is growing a little 217 00:11:16,080 --> 00:11:19,530 Roger Montgomery: bit faster than Coles, but there'll be a point where 218 00:11:19,530 --> 00:11:24,030 Roger Montgomery: Coles gets marked down in price and rejected because Woolies 219 00:11:24,030 --> 00:11:27,390 Roger Montgomery: has been growing so successfully that Coles becomes the better 220 00:11:27,390 --> 00:11:32,610 Roger Montgomery: investment simply because it's cheaper. And so over time, you 221 00:11:32,610 --> 00:11:34,110 Roger Montgomery: tend to rotate between the two. 222 00:11:34,710 --> 00:11:36,330 Sean Aylmer: Just before you go, I have to ask you, why 223 00:11:36,330 --> 00:11:38,580 Sean Aylmer: do you like ARB so much? I'm really interested in 224 00:11:38,580 --> 00:11:40,800 Sean Aylmer: that company and have followed it for a while, but 225 00:11:40,800 --> 00:11:42,120 Sean Aylmer: I'm just interested in your view on it. 226 00:11:42,480 --> 00:11:46,050 Roger Montgomery: So the definition of an extraordinary business is very specific 227 00:11:46,050 --> 00:11:48,190 Roger Montgomery: and I hope you don't mind me mentioning. I have 228 00:11:48,190 --> 00:11:50,410 Roger Montgomery: a chapter on this in a book I wrote about 229 00:11:50,410 --> 00:11:53,530 Roger Montgomery: a decade ago called "Value.able", but the definition of a 230 00:11:53,530 --> 00:11:57,490 Roger Montgomery: high quality or extraordinary business is basically a business that's 231 00:11:57,490 --> 00:12:00,490 Roger Montgomery: able to take large amounts of its profit every year 232 00:12:00,760 --> 00:12:03,939 Roger Montgomery: and reinvest it at a high rate of return. So 233 00:12:03,940 --> 00:12:05,920 Roger Montgomery: you want, you want a business that can grow its 234 00:12:05,920 --> 00:12:08,680 Roger Montgomery: equity and then generate a very high rate of return 235 00:12:08,679 --> 00:12:11,110 Roger Montgomery: on that growing equity. It's a little bit like having 236 00:12:11,320 --> 00:12:13,359 Roger Montgomery: a bank account with a million dollars in it earning 237 00:12:13,360 --> 00:12:15,940 Roger Montgomery: five per cent. But I tell you that when it gets 238 00:12:15,940 --> 00:12:18,640 Roger Montgomery: to 10 million, I'll start giving you a 10 per cent return. 239 00:12:18,640 --> 00:12:19,900 Roger Montgomery: When it gets to 20 million, I'll give you a 240 00:12:19,900 --> 00:12:23,100 Roger Montgomery: 20 per cent return. When it gets to 50 million, I'll give you a 50 per cent return. 241 00:12:23,470 --> 00:12:27,790 Roger Montgomery: And that is first prize in capitalism. That's the business 242 00:12:27,790 --> 00:12:29,439 Roger Montgomery: that you want to own and you never want to 243 00:12:29,440 --> 00:12:31,449 Roger Montgomery: sell a share of it. ARB has been able to 244 00:12:31,450 --> 00:12:33,580 Roger Montgomery: do that. As its equity has grown, it's been able 245 00:12:33,580 --> 00:12:37,150 Roger Montgomery: to maintain a very high rate of return on equity, 246 00:12:37,390 --> 00:12:39,940 Roger Montgomery: on that growing equity. And it does that because it's 247 00:12:39,940 --> 00:12:44,860 Roger Montgomery: got sustainable, competitive advantages. Even in Thailand, where its products 248 00:12:44,860 --> 00:12:48,900 Roger Montgomery: are copied and people put ARB stickers on their fake 249 00:12:48,940 --> 00:12:53,830 Roger Montgomery: ARB bullbars, people still want the original ARB product because 250 00:12:53,830 --> 00:12:56,170 Roger Montgomery: they know it's safe, it's high quality, it's going to 251 00:12:56,170 --> 00:12:58,270 Roger Montgomery: last and it's going to work. And that's why, and 252 00:12:58,540 --> 00:13:02,260 Roger Montgomery: I have a four-wheel drive and I'm taking it to 253 00:13:02,260 --> 00:13:05,260 Roger Montgomery: ARB in a month to have them fit a dual 254 00:13:05,260 --> 00:13:08,290 Roger Montgomery: battery system in so that when I'm allowed to go camping again, 255 00:13:08,559 --> 00:13:10,300 Roger Montgomery: I'll be able to run a fridge and the kids 256 00:13:10,300 --> 00:13:12,910 Roger Montgomery: can charge their phones and all that sort of thing. 257 00:13:13,210 --> 00:13:16,630 Roger Montgomery: And when ARB gave me the list of everything they 258 00:13:16,630 --> 00:13:19,060 Roger Montgomery: were going to install, I went online and I found 259 00:13:19,059 --> 00:13:21,750 Roger Montgomery: every one of those products at a cheaper price than what 260 00:13:21,840 --> 00:13:24,760 Roger Montgomery: ARB were going to charge me, but I didn't care 261 00:13:24,760 --> 00:13:28,480 Roger Montgomery: because I know I will put a warranty on the 262 00:13:28,480 --> 00:13:31,690 Roger Montgomery: installation of all those things and they'll look after it. 263 00:13:31,690 --> 00:13:35,319 Roger Montgomery: And they've got really great after sales service and that's 264 00:13:35,320 --> 00:13:38,290 Roger Montgomery: what I'm paying extra for. And that's why they are 265 00:13:38,290 --> 00:13:41,229 Roger Montgomery: able to charge more for the same product and people 266 00:13:41,230 --> 00:13:44,109 Roger Montgomery: will still cross the road to buy it because they've 267 00:13:44,110 --> 00:13:47,349 Roger Montgomery: got such a great reputation. That you can't replicate, that 268 00:13:47,350 --> 00:13:50,050 Roger Montgomery: you can't copy. That is very hard to compete with. 269 00:13:50,200 --> 00:13:52,300 Roger Montgomery: And it means their return on equity or their high 270 00:13:52,300 --> 00:13:53,920 Roger Montgomery: rate of return on equity is sustainable. 271 00:13:54,700 --> 00:13:56,770 Sean Aylmer: Fantastic. Roger, thank you for talking to Fear and Greed this morning. 272 00:13:57,100 --> 00:13:57,699 Roger Montgomery: Always a pleasure. 273 00:13:58,120 --> 00:14:01,059 Sean Aylmer: That was Roger Montgomery, the founder and chief investment officer 274 00:14:01,179 --> 00:14:05,079 Sean Aylmer: of Montgomery Investment Management. This is a Fear and Greed Daily Interview. Join 275 00:14:05,080 --> 00:14:07,480 Sean Aylmer: me every morning for the full Fear and Greed podcast 276 00:14:07,660 --> 00:14:10,179 Sean Aylmer: with all the business news you need to know. I'm Sean Aylmer. 277 00:14:10,660 --> 00:14:11,440 Sean Aylmer: Enjoy your day.