Speaker 1: Hello, and welcome to The Australian's Money Puzzle podcast. I'm
Speaker 1: James Kirby, the editor at The Australian. Welcome aboard everybody.
Speaker 1: You might think in a podcast like this, I have
Speaker 1: lots of fund managers on the show, but I don't. Actually,
Speaker 1: I've had maybe three or four a year. The reason
Speaker 1: for that is, to be honest with you, a lot
Speaker 1: of them sound the same, they say the same things,
Speaker 1: and that type of manager, the traditional fund manager, is
Speaker 1: now indeed trouble because index funds basically are eating their lunch.
Speaker 1: You can see those big names that were household names, Perpetual, Platinum, Magellan,
Speaker 1: they are deeply challenged now because of index funds. And
Speaker 1: so what fund managers have to do is they have
Speaker 1: to do something entirely different reproducing the index as they
Speaker 1: call it X hugging. It's just simply no good anymore.
Speaker 1: You have to do something very different to attract the
Speaker 1: investor and to make it worthwhile. Basically to swing with
Speaker 1: someone and to have someone pickstocks for you. Today, I
Speaker 1: have someone that I know for quite a while and
Speaker 1: he's in the business largely of finding what we call
Speaker 1: small cap stocks for mid cap stocks, I can tell
Speaker 1: you it's not a game for the faint hearted because
Speaker 1: one year, basically you can shoot out the lights and
Speaker 1: the next year it can go all off the rails
Speaker 1: big time. And that's how it goes. It's volatile. You
Speaker 1: need an iron like constitution to stay at it. Dean
Speaker 1: Fergie runs the Cion Investment Fund. He's going to talk
Speaker 1: about the market, what happened this year some of the
Speaker 1: big stories in stocks? Guzmny Gomez. Is that a big story.
Speaker 1: It's a big story, that's for sure, but whether it's
Speaker 1: a big stock remains to be seen. Commonwealth Bank now
Speaker 1: there's a big stock, two hundred billion dollar stock being shorted,
Speaker 1: mind you, because many gome as it turns out, has
Speaker 1: been shorter too. Can you one week after it floated?
Speaker 1: It's been a really interesting year. How are you, Dean Fergie?
Speaker 2: Good morning, James. Thanks for having me on.
Speaker 1: Great to have you on. We had a very interesting
Speaker 1: show last week. Conceptually, it was a very interesting show
Speaker 1: because I had John Stenshold, who is the editor of
Speaker 1: The Rich two fifty and he's basically tycoon agraphy is
Speaker 1: he think he keeps in touch with all the tycoons.
Speaker 1: And we did a piece of what they've been investing
Speaker 1: in and the stocks that had been winners and losers
Speaker 1: for them. And it's interesting because they had plenty of
Speaker 1: winners and plenty of losers over the year. But just
Speaker 1: to give everyone an idea that the share market this
Speaker 1: year in the end kind of a normal year, maybe
Speaker 1: nine percent across the board for the AX and maybe
Speaker 1: another three or four percent in dividends. Is that how
Speaker 1: it's looking if it was to keep going, We're not
Speaker 1: finished yet, but that is what you call it broadly
Speaker 1: in the end, a very normal year in this scheme
Speaker 1: of things.
Speaker 2: I think at the top line, it is, you know,
Speaker 2: I think you might expect a high single or low
Speaker 2: double digit returns in any normal year in the stock market.
Speaker 2: But I've also seen, you know, there's been a real
Speaker 2: absence of activity in the IPO market, so there haven't
Speaker 2: been those free kicks for a lot of investors that
Speaker 2: play the stock market individually. And also I think it's
Speaker 2: also been kind of a bit of a tale of
Speaker 2: two tails. Like you've had a lot of the big
Speaker 2: cap stocks doing really really nicely. Small caps have performed
Speaker 2: a little bit better later on in the year, but
Speaker 2: the microcaps are still really really kind of underappreciated and
Speaker 2: still in a real slump at the moment. So we
Speaker 2: tend to operate in the smaller micro cap in and
Speaker 2: we've found that in there it's been quite a challenge
Speaker 2: just in terms of liquidity and investor interest in that space.
Speaker 1: For the listener, we have all sorts of listeners, but
Speaker 1: for the every day listener, just to find those what's
Speaker 1: a small cap, how does it? What's the tiers there?
Speaker 2: I'd probably say small, low marker caps of anything under
Speaker 2: one hundred million dollar in market cap to five hundred
Speaker 2: and two billion in small cap, and anything over a
Speaker 2: billion's probably a large captoc.
Speaker 1: And so let's just talk about some of the things
Speaker 1: that have been going on this last quarter in the market.
Speaker 1: It's been really interesting because you mentioned IPOs and when
Speaker 1: we did the show last week, Guzman Ego is the
Speaker 1: Mexican takeaway chain, had just arrived on the market and
Speaker 1: they'd literally floated an hour or two earlier, and that
Speaker 1: was the biggest float for a long time, I think
Speaker 1: three years. Instantly successful on a technical basis in that
Speaker 1: it listed and it immediately rows by thirty percent up
Speaker 1: to thirty dollars now in the week that's passed a
Speaker 1: lot of questions about this float, and you just said
Speaker 1: at the start there that we need IPOs, and we
Speaker 1: do need IPOs. Some people think this is great, it's
Speaker 1: wonderful for the market. Hey, we finally got a big
Speaker 1: IPO that took off. Some people say this is as
Speaker 1: good as it gets for those guys, believe it or not,
Speaker 1: there's already a million share is shorted in them. They
Speaker 1: haven't passed the level that they passed that for US
Speaker 1: day they were thirty dollars and they're twenty nine. Now
Speaker 1: what's your view on them, and more importantly, what is
Speaker 1: their significance as a float?
Speaker 2: Well, courst up with positives that. I think it's been
Speaker 2: a fantastic result for the market. You've had a very
Speaker 2: large float that have had both promoters and tractors involved,
Speaker 2: so it wasn't all one way traffic. In terms of
Speaker 2: the expectations. It's come on at a significant premium with
Speaker 2: quite material volume training over the first few days. So
Speaker 2: I think in terms of looking at the health of
Speaker 2: the market, I think it's been fantastic. It's a real
Speaker 2: sign that things are starting to get back to normal.
Speaker 2: For me in terms of pure evaluations. Given what else
Speaker 2: is out there, it just doesn't stack up. I'm a
Speaker 2: fundamental investor, and maybe be your fundamental investor is not
Speaker 2: as irrelevant as it has been in the past. In
Speaker 2: this market, I feel the market becomes very gets very
Speaker 2: excited about certain themes for a while, and then then
Speaker 2: forgets about them and looks at the new kind of
Speaker 2: shiny thing. This is a new shiny stock. But look
Speaker 2: at the revenues, the underlying profitability, which is close to zero.
Speaker 2: I think their MPACT for the year was about three
Speaker 2: million dollars. It's trading at a market cap of three billion,
Speaker 2: so that's a pretty steep multiple. If you ask may
Speaker 2: Well Ernie's, it's a bit irrelevant when they're so small.
Speaker 1: That's higher than Nvidian.
Speaker 2: Yeah, but again it's off a very very low base.
Speaker 2: I think the best comparison is something like Dominance, So
Speaker 2: the market cap of Domino's and gos And is broadly
Speaker 2: the same. Dominoes does four billion dollars in sales, Grismond
Speaker 2: does seven hundred and sixty, so it does six times
Speaker 2: the sales. It's got twenty times the number of stores.
Speaker 2: The profitability of Dominoes is one hundred and twenty million
Speaker 2: at the bottom line, So there's a massive gap in
Speaker 2: evaluation between two I'd say similar socks. The difference being
Speaker 2: that Gusman is new, it hasn't had a bad track record.
Speaker 2: In fact, everything isn't listened to. He has been fantastic
Speaker 2: so far, albeit over one week period. Dominos has had
Speaker 2: early massive success and recently has struggled a little bit.
Speaker 1: So so thoughd promise really isn't it it's worth three billion?
Speaker 1: Someone was saying that it's working out at about seventeen
Speaker 1: million each Gormez on your shot it's one. There are
Speaker 1: what's seventeen million eeds according to the stoff market, So
Speaker 1: people are betting that they will do a Domino's. Is
Speaker 1: that it just have this ramp up period.
Speaker 2: It has to be right that if you've got that
Speaker 2: much expect built into the current market capitalization of the stock,
Speaker 2: then it's all expectation. It's expectation they can take this
Speaker 2: success store in Australia and replicated overseas, which they may
Speaker 2: be able to do. I mean, they've got a management
Speaker 2: team that's been proven so far. But we've seen we've
Speaker 2: Dominoes that you go into new jurisdictions with all those
Speaker 2: different challenges, and it's a little bit harder than building
Speaker 2: out a franchise in a country that you're very familiar with.
Speaker 1: Yes, and you know the rules and the regulations and
Speaker 1: the logistics, etc. And you have your relationships I spols
Speaker 1: with your bank, yeah yeah.
Speaker 2: And just understanding the customers as well. People have quipped
Speaker 2: that taking Mexican food to the US isn't overly unique,
Speaker 2: and there might be some competition over there, but it'll
Speaker 2: have to be very successful to justify where it's trading now.
Speaker 2: But does that mean it won't continue to go up?
Speaker 2: I don't know. The trend is there at the moment.
Speaker 1: When you if you sell shorts a million shures it's
Speaker 1: not enormous. But have when you seen people actually taking
Speaker 1: a bet and shorting a stock for something like Guzman,
Speaker 1: which is a new stock. What does it mean to you?
Speaker 2: Yeah, Look, we don't short stocks as a business. You know.
Speaker 2: My sort of philosophy is that your losses are unlimited
Speaker 2: and your gains are kepped at one hundred percent. I
Speaker 2: think on the basis on evaluation, it is easy to
Speaker 2: justify that it is a logical short, but it also
Speaker 2: would have been in a logical short at twenty five dollars
Speaker 2: or twenty dollars, and it's trading here at thirty. So
Speaker 2: it's not something I would personally be doing. I can
Speaker 2: understand the logic behind it, but I have seen many
Speaker 2: stocks in the domestic and international markets become completely hyped
Speaker 2: and over valued and wiped out shorts very quickly. The
Speaker 2: main example of that overseas has been what's happened in
Speaker 2: Game Stop. You know that you've had a lot of
Speaker 2: investors just driving the stop us up to what would
Speaker 2: appear to be artificial has to wipe that shorts. And
Speaker 2: once you take a bit of a pain in a
Speaker 2: short position, if you can't take any more pain, you
Speaker 2: have to close up position by buying stock, which makes
Speaker 2: your short look worse. So I think it's a little
Speaker 2: bit dangerous, but I can understand why some investors have
Speaker 2: decided to do it.
Speaker 1: The irony is that they have to buy the stock
Speaker 1: to cover the short, which means they drive the stock up,
Speaker 1: which is the exact opposite of what they were trying
Speaker 1: to do. It's really interesting, it's fascinating. I mean, our
Speaker 1: listeners would know the basics they're on shorting that people
Speaker 1: borrow stock obviously and they try to profit. Then when
Speaker 1: the stock they try to drive it down basically, and
Speaker 1: in doing so they make money when they get the
Speaker 1: stock back. It's a strange game. It goes back to
Speaker 1: the nineteen twenties. We were sort of something of exemption
Speaker 1: and there wasn't much shorting here for a long life,
Speaker 1: long time quick history. Jim Chainos, the hedge fund manager,
Speaker 1: famously short at mcquarie bank back in two oh seven
Speaker 1: and it was a very successful short. McQuary went from
Speaker 1: about eighty dollars to seventeen at the time. He made
Speaker 1: huge enormous amounts of money. That meant people came into
Speaker 1: the Australian market. Various people Glaucus came in at one stage,
Speaker 1: especially on the old the old MFS plantation stock and
Speaker 1: all that. There's lots of successful ones in the early days.
Speaker 1: Now people are more sort of attuned to it. I'm
Speaker 1: using this as a preamble dean to something I suppose
Speaker 1: more important for people, which is Common Bank. So it's
Speaker 1: got eight hundred thousand shareholders. I imagine just about everyone
Speaker 1: listening to this show has direct or indirect holding a
Speaker 1: comwell bank. You couldn't avoid it, right because it's just
Speaker 1: about the biggest stock now it's been short and substantially
Speaker 1: yeah at the moment, and Phil King, there's some names
Speaker 1: in the market publicly saying they're shortening it. Of course
Speaker 1: they tell us they're shortening it because that's part of
Speaker 1: the game, isn't it that to let it be known
Speaker 1: you're shorting. But tell me when I say to you
Speaker 1: that there is now short activity and more shorts than usual.
Speaker 1: I think about three billion dollars under line betting against
Speaker 1: come Web Bank. Come We Bank's about two it's a
Speaker 1: two hundred and thirteen billion dollar stock, as I say,
Speaker 1: and it's worth maybe one hundred and thirty dollars. I
Speaker 1: think at the moment, what do you say when? How
Speaker 1: should people react when to hear that.
Speaker 2: I wouldn't think that'd be too concern. I mean unless
Speaker 2: they're short, as know something specific within the Commonwealth Bank
Speaker 2: that is likely do materially impact its business. And I
Speaker 2: think something like a data breach or you know, like
Speaker 2: a trader that has blown up some money in a
Speaker 2: foreign exchange deal or something like that. Betting against the
Speaker 2: largest most successful bank in Australia because you think it's
Speaker 2: a little bit overvalued. I just don't really so much
Speaker 2: of a potential gain in the short to medium term
Speaker 2: from doing that, that would be my perspective. We've seen
Speaker 2: that the stocks are twenty five percent this year, you know,
Speaker 2: on no real upgrade in earning, just because people walk
Speaker 2: the yields. They trust it, say to the biggest bank,
Speaker 2: it's almost the biggest stock on the Australian market. So yeah, certainly,
Speaker 2: but a small amount of CBO bony shorter. I don't
Speaker 2: think his cause for concern would be comfortable holding it
Speaker 2: because I think it's a very solid business, well run.
Speaker 1: And in your end then, and we're kind of leading
Speaker 1: into your particular sort of zone. I imagine there isn't
Speaker 1: much shorting at the small cap medium caps end of
Speaker 1: the market, and if there is, it seriously makes a
Speaker 1: difference on like a three billion worth of shorts against Combank,
Speaker 1: you know, petty cash, throw it out the window. But
Speaker 1: if someone goes in with a big short on a
Speaker 1: tiny stock, I presume it just cuts it to shreds,
Speaker 1: or could cut it to shreds.
Speaker 2: Yeah, I mean, look, there are structural issues with respect
Speaker 2: to shortening in Australia. The practical reason is you have
Speaker 2: to borrow stock from another shareholder. So if I own
Speaker 2: one hundred shares and sets are, I can lend them
Speaker 2: to you and you can sell them and at some
Speaker 2: stage in the future have to buy them back and
Speaker 2: then give them back to me. That's the way it works.
Speaker 2: If I was a big holder in a small stock
Speaker 2: and someone said I want to borrow your shares to
Speaker 2: short them, I would probably say no as such because
Speaker 2: it'd be downward pressure on the price. But you're right
Speaker 2: that those sort of mid cap stocks where there it
Speaker 2: is a free float around and companies can borrow and short,
Speaker 2: it can make a significant difference. And often those businesses
Speaker 2: if they are in a single business stream and there
Speaker 2: is something going on. We've seen a number of retailers
Speaker 2: struggling recently because of just reduction in your earnings. Then
Speaker 2: you can see some really significant falls in these businesses
Speaker 2: and good guars means to be made, and I'll look
Speaker 2: at other businesses like Blue Skylar was one of the
Speaker 2: ones a few years ago that got seriously shortened and
Speaker 2: ended up surviving, so that was a great trade. But
Speaker 2: then again we've seen big short reports on things like
Speaker 2: wise tech that have appear to have merits at the time,
Speaker 2: and wise Tech against been a fantastic performer in the market.
Speaker 1: So it's a great test at its best, like this
Speaker 1: is actually a great test of a stock if they
Speaker 1: come out the other side of a short attack. Yeah.
Speaker 2: Look absolutely, And in a way I think a number
Speaker 2: of companies will sort of complain on we shouldn't let
Speaker 2: shorters release their reports. You know, you're in a public market,
Speaker 2: you're a public company. People have opinions on what they
Speaker 2: think your business is worth and how well it's managed
Speaker 2: in it and its prospects and opportunities and its valuations.
Speaker 2: So they should be allowed to pass comments and the
Speaker 2: market will make up its mind. It won't always be right,
Speaker 2: but that's what a marketplace is.
Speaker 1: What we'll do with take short break and we'd come
Speaker 1: back and we would talk about your layer of the
Speaker 1: market and what you do. We'll be back in a moment, folks. Hello,
Speaker 1: welcome back to The Australian's Money Puzzle podcast. I'm James
Speaker 1: Kirby Well, the editor at The Australian, and this week
Speaker 1: we're talking to Dean fergie Off Cian Investment Management. He's
Speaker 1: a fund manager specializes in a special layer of the market,
Speaker 1: which is small caps and microcaps. That is a completely
Speaker 1: different area than many of us are familiar with. I
Speaker 1: mentioned at the start how I don't have many fund
Speaker 1: managers on the show because many of them are doing
Speaker 1: the same thing. Someone I deemed there's something entirely different
Speaker 1: specializes in small businesses that are listed on the market.
Speaker 1: That means he's not sitting at a screen doing his
Speaker 1: quant sort of mathematics. He's actually getting to know them.
Speaker 1: He's literally going out and sitting in front of these
Speaker 1: guys and asking them questions about their business. A lot
Speaker 1: of these businesses don't have stuff broken research notes that
Speaker 1: you or I could get, so it's like original research
Speaker 1: and just conceptually, Dean, it is a game where things
Speaker 1: go really right or really wrong right. So I think
Speaker 1: it was the year before last you had a thirty
Speaker 1: percent return in one year, and then another year you
Speaker 1: had a minus twenty five percent retime. How do you
Speaker 1: steer through that? Is that how it goes? Is that
Speaker 1: what you have to come to expect your line of work.
Speaker 2: I would say the last four or five years have
Speaker 2: been very unusual in terms of how the market's reacted.
Speaker 2: Certainly the smaller, and there's been an in incredible amount
Speaker 2: of nervousness and then high and momentum driving stocks, and
Speaker 2: so the volatility has been extreme, and it's been I think,
Speaker 2: in aspects, a really difficult time to invest, because I
Speaker 2: just don't always seem to know what's going to perapture
Speaker 2: of the market's attention on what's going to drive stocks.
Speaker 2: We looked at just how hyped up stocks went through
Speaker 2: COVID when everyone was home and everyone was investing and
Speaker 2: the stock market was going bananas. It's why is this
Speaker 2: happening on a fundamental basis? Because there was governments throwing
Speaker 2: money at people I was seeing at home trading the
Speaker 2: stock market, trading bitcoin and bond stuff online, and then
Speaker 2: that kind of all blew up, and now it's sort
Speaker 2: of startings its way back. So it is hard like
Speaker 2: I would have normally said to our clients, you know,
Speaker 2: a bad year, you might expect negative fifteen percent, of
Speaker 2: a good year, might expect plus fifteen. Now at the moment,
Speaker 2: it's sort of can be negative thirty to plus fifty,
Speaker 2: which is just we don't say to our clients whether
Speaker 2: sort of investment manage that you put twenty or thirty
Speaker 2: percent of your money with you might look at allocating
Speaker 2: five percent of your SIP towards a microcap investor, and
Speaker 2: if you have a couple good years, you can turn
Speaker 2: it five percent into ten or fifteen.
Speaker 1: And I suppose what you're doing is you're in a
Speaker 1: way you're combining rather than you the investor, putting that
Speaker 1: particular investment, which has a I don't know if you're
Speaker 1: comfortable with the world speculative, but it's riskier than buying
Speaker 1: a blue chip. Rather than narrowing your better one stock,
Speaker 1: you actually get a basket of stocks. How many stocks
Speaker 1: would you hold in the fund, the sea and fund
Speaker 1: at any given time.
Speaker 2: Typically we'd hold kind of around twenty five stocks, right,
Speaker 2: so it is very diverse. But what we have found,
Speaker 2: certainly in a couple of years prior, was that when
Speaker 2: investors decide that they don't want to be in smaller
Speaker 2: micro cap stocks, everything gets sold and liquidity make the
Speaker 2: volatility much increased. Shares go down, and then you'll have
Speaker 2: a period, particularly two years ago, where you had a
Speaker 2: number of falls posts OVID and there was a hell
Speaker 2: of a lot of tax law selling as well, which
Speaker 2: comes around in June. So it was just a bit
Speaker 2: of a vicious circle. It's going to feel that things
Speaker 2: are starting to improve at the moment.
Speaker 1: But tell me upselling you picked up when you get
Speaker 1: it right, when you get a beauty. I think you
Speaker 1: have a gaming software company that did very well for you.
Speaker 2: What's that called again, Playside Studios.
Speaker 1: Today Side Studios. How did you pick them?
Speaker 2: I'm always interested in people that like invest in businesses
Speaker 2: that are based in Taiwan, or Belgium or the US.
Speaker 2: The play Side's actually I'm based just up the road
Speaker 2: from where I lived in Port Melbourne, and over the
Speaker 2: last couple of years I've grown from about eighty staff
Speaker 2: to around three hundred and twenty, so I've kind of
Speaker 2: seen the growth in my backyard that we're doing contracts
Speaker 2: for some very big international customers. So they do programming
Speaker 2: for metsa part of Facebook and and Netflix and a
Speaker 2: gaming company called at Blizzard, so that blue chip clients.
Speaker 2: They were doing some really decent revenues that was profitable,
Speaker 2: only mildly profitable, but they've just ended up driving some
Speaker 2: really really good business decisions. They've bought a kind of
Speaker 2: a viral name or brand called Dumboes to Die, which
Speaker 2: has sort of become very successful TikTok and Instagram and
Speaker 2: with the minor games and so their revenues have almost
Speaker 2: tripled in the last couple of years, and the business
Speaker 2: is just going from strength to strength.
Speaker 1: And do you know them, like, do they know you?
Speaker 1: Can you get them on the phone? Is it that
Speaker 1: sort of relationship?
Speaker 2: Yeah? Yeah, Like I know Jerry Sakas really well actually,
Speaker 2: and Mark Alopolos is one of the board members there.
Speaker 2: So you know, we were probably a little bit fortunate
Speaker 2: or lucky to know those people personally before the stock
Speaker 2: actually listed, and we put a lot of money just
Speaker 2: pre API. So it's been a really good success story.
Speaker 2: But you know there's obviously that's out wide often against
Speaker 2: a lot of the ones that aren't great success stories.
Speaker 1: So as someone where it's it's literally you're knowing the
Speaker 1: company and that's important, and other people don't know the company.
Speaker 1: So you're on your own making these decisions. Right, It's
Speaker 1: not like you're with a herd. It's not like there's
Speaker 1: a whole pack. It's not like you're deciding today to
Speaker 1: buy Nvidia or you're deciding today to buy Guzmni Goolmez. Right,
Speaker 1: it's like you're on your own, dude, how important is
Speaker 1: the people to you and key person risk? How important
Speaker 1: is that at your level of investing.
Speaker 2: It's generally pretty important. Like if you're investing in a company.
Speaker 2: I mean people say about Guzmini Gans that Steve marxis.
Speaker 1: He's the wiz behind the whole thing.
Speaker 2: Yeah, just an absolute so energetic and what he's built.
Speaker 2: Full credit to him. He's built a great business up
Speaker 2: from scratch over ten years. So you have to invest
Speaker 2: in the people. But sometimes the risk is that you
Speaker 2: have a loyalty or an association with them that gets
Speaker 2: a little bit too close, and when you start seeing
Speaker 2: things maybe unravel or stock becoming too overvalued, you become
Speaker 2: just too wedded to the stock to make purely objective decisions.
Speaker 2: I think that's just something you can't avoid, but you've
Speaker 2: got to be aware of as much as you can.
Speaker 2: But I much prefer to be investing in someone I knew,
Speaker 2: that I trust, that I respected, rather than I mean,
Speaker 2: how many people know Gensen why at any video or
Speaker 2: have to spend much time with Mark Zuckerberg or any
Speaker 2: of those guys. They just don't, So I would rather
Speaker 2: make rejective financial decision with someone I can meet and
Speaker 2: look in the eye and speak to and get answers
Speaker 2: out of us.
Speaker 1: Yes, And what about something I've always wanted to find
Speaker 1: with fund managers is that a lot of them can
Speaker 1: be naive. I think about figures. By that, I mean
Speaker 1: they're very, very dependent on the numbers and less interested
Speaker 1: in the management. And you're talking about how in the
Speaker 1: microcraft small capital level the people really really matter. With
Speaker 1: all due respect to say, come back, Matt Common. He
Speaker 1: could go tomorrow and they'll find someone ass who's really
Speaker 1: good and it's not a crisis. But in a little
Speaker 1: company that you might be invested in, there's some wiz
Speaker 1: feed male or female, and the company is built around
Speaker 1: them and they're instrumental in this and they've got skin
Speaker 1: in the game. But you have to believe what they
Speaker 1: tell you. How do you decode between the numbers and
Speaker 1: their interpretation of the numbers, because they can say to you, hey,
Speaker 1: we're just about to turn the corner, We're just about
Speaker 1: to sign three contracts. They're not lying, right, they don't
Speaker 1: believe that, But how do you your bullshit detector?
Speaker 2: Yeah, I mean that's the case with all those I
Speaker 2: mean all these people that are running smaller businesses, are
Speaker 2: very old entrepreneur they're very aggressive, they're often very optimistic,
Speaker 2: and so sometimes you can get caught up in that
Speaker 2: and that's fine if they're right. But for me, the
Speaker 2: results have got to meet the narrative and you can
Speaker 2: only have that proven up over time. So it's about saying, Okay,
Speaker 2: James told me this back in twenty fourteen, I'll write
Speaker 2: that down, I'll keep notes, and you know, six months later,
Speaker 2: has that happened? Is the ahead of expectations? Is he
Speaker 2: behind that kind of thing? So that's what I find
Speaker 2: is just matching up the results with the previously estimated
Speaker 2: time owner. And that's what time in the market gives you,
Speaker 2: you know, coming back again to you know, like a
Speaker 2: Guzman versus a Domino's guzmins, it's all promise but no
Speaker 2: results as yet. Domino's promised a lot early on, delivered
Speaker 2: a lot, promised more, didn't deliver, and that's what's happened
Speaker 2: to the share pro So yeah, that's sort of probably
Speaker 2: my sort of that that just got to be. Don't
Speaker 2: get too excited as much as you can help, but.
Speaker 1: Don't get as excited as that as the CEO all
Speaker 1: right on the opposite end then things when things got
Speaker 1: really wrong. And I don't know whether you were in
Speaker 1: satire or not. I'm sure we have some people who
Speaker 1: are in it, but it would seem to be this
Speaker 1: year's example of a company that has absolutely whatever the
Speaker 1: opfset of shot the lights is, they've crashed basically, haven't
Speaker 1: they by fifty percent or more? In recite? And they
Speaker 1: were seen as this wonderful online jewelry company, the sticker
Speaker 1: company everyone missed. Well, what happened? Could you tell people
Speaker 1: what happened there and why? That's how a stock goes
Speaker 1: wrong sometimes like that.
Speaker 2: Look, I don't really know what's happened with said. What
Speaker 2: I can tell you is I've just never been a believer,
Speaker 2: and I've always thought there were a lot of red flags. Yes, right,
Speaker 2: it became wildly successful very quickly.
Speaker 1: Did you take a look at a Danny stage?
Speaker 2: I did, but I just never got it fundamentally. I
Speaker 2: never understood why premium you know, ultra premium brands, you know,
Speaker 2: these are companies selling up polo shits for two thousand
Speaker 2: dollars would want to be having them discounted through a
Speaker 2: third party operator of Australia I just I never got
Speaker 2: why Hermes and Priora and all those other brands would
Speaker 2: when I have a middleman doing that. I think at
Speaker 2: one stage early on, I asked them sort of how
Speaker 2: many employeers they had, and they said they had thirty,
Speaker 2: And I just thought, to myself, how is a business
Speaker 2: with thirty employees doing hundreds of millions of dollars in
Speaker 2: revenue and you know, tens of million dollars an even
Speaker 2: dar with thirty employees. I just didn't understand how they
Speaker 2: were doing it. And then the business was so secreted
Speaker 2: they wouldn't really tell you very much. They were used
Speaker 2: to answer questions all the same time, while founders were selling.
Speaker 1: Licks of shares into the market.
Speaker 2: Yeah, teens to hundreds of millions of dollars of shares.
Speaker 2: I mean, it's just red flag on red flag on
Speaker 2: red flag. But at the same time, the business was
Speaker 2: doing really well and big firms were in there driving
Speaker 2: the share price. So I think at one stage it
Speaker 2: was worth a couple of million dollars. So in the
Speaker 2: market there's always always dozens of companies you regret not buying,
Speaker 2: and you've just not got to not let it get
Speaker 2: to you. And that was when I just thought, I
Speaker 2: think at some stage there will be a judgment day
Speaker 2: on this, and it appears it's coming now. Whether I'm
Speaker 2: ultimately right or wrong, I don't know. I don't really care.
Speaker 1: It looks like it's colmed in. It's down to fifty percent.
Speaker 1: Yeah in weeks, oh look it.
Speaker 2: Yeah. And I think sometimes when you have these big
Speaker 2: hits that it's really really hard to recover from. Sign
Speaker 2: I'll do no profitability this quarter after doing ten plus
Speaker 2: million per quarter of adversary quarter. So if you extrap
Speaker 2: light that the business will never be profitable again.
Speaker 1: Yeah, on that particular layer, it's a very It really
Speaker 1: is the most tricky end of the market, small caps.
Speaker 1: And if you've done any investing at all, you would
Speaker 1: probably know that. In the mid caps, in the blue
Speaker 1: chip space, you know, you may do well or you
Speaker 1: may do badly, but it's all within a zone. But
Speaker 1: in small caps, I mean, you can literally lose ninety
Speaker 1: percent of your money, or you can have a triple
Speaker 1: four bag or five bagger. That's the business that Dean
Speaker 1: is in. It's a fascinating end of the market and
Speaker 1: sometimes I imagine it's very helpful to have someone to
Speaker 1: hold your hand. All right, Well, take short break. We'll
Speaker 1: be back with some really good questions in a moment. Hello,
Speaker 1: Welcome back to the Australian's Money Puzzle podcast. James Kirby
Speaker 1: with Dean Fergie of c An Investment Management, who was
Speaker 1: a fund manager at the spoon and microcap end of
Speaker 1: the market, which we haven't actually had a look at
Speaker 1: for quite some time. I've got two questions here. I've
Speaker 1: just narrowed it down to two, Dean, because they are
Speaker 1: probably the ones that I think we'll get the best
Speaker 1: answers from you. One one is from Luke and we've
Speaker 1: been talking about stock splits of late in the Australian market.
Speaker 1: That the famous stock splitter is CSL. Listeners are into
Speaker 1: overseas stocks and invariably they are into the same ten
Speaker 1: overseas stocks that everybody else is into, one of which
Speaker 1: is in video and they've done a split. So Luke says,
Speaker 1: what does the data say on stock splitz? Do they
Speaker 1: perform or onto performers to the market after a stock split.
Speaker 1: I'm wondering is there any behavioral psychology involved in investing
Speaker 1: post split seemingly but not actually lower price. It's a
Speaker 1: great question. Could you explain to the general listener what
Speaker 1: a stock split is if you would quickly, and then
Speaker 1: whether it makes the difference to you when this has happened. Yeah.
Speaker 2: Basically they're saying, if you have one hundred shares at
Speaker 2: one dollar, will turn that into two hundred shares at
Speaker 2: fifty cents. So the value is still one hundred dollars,
Speaker 2: but the shares in isolation look like they are half
Speaker 2: the price. The empirical evidence unequivocally is that that adds
Speaker 2: some value to the value of looseness. I think the
Speaker 2: rest it was like three to four percent.
Speaker 1: So people think it's cheaper, but it's not cheaper, right.
Speaker 2: No, it's not cheaper. There are enough people on the
Speaker 2: edge that are prepared to buy more shares a lower price.
Speaker 2: Even tho there's twice as many on issue as beforehand,
Speaker 2: and we saw that happen. Tesla did a stock split
Speaker 2: I think a couple of years ago. Main material impact.
Speaker 2: So the answer is, yes, has put my fundamental finance
Speaker 2: theory had on that shouldn't make any difference. But you
Speaker 2: can't argue with the data, and that's the data.
Speaker 1: I suppose there is a point at which it gets
Speaker 1: absurd for a stock is just bensive paras stock.
Speaker 2: Yeah. At the micro end're also having the issue when
Speaker 2: stocks get so bummed out and land up being point
Speaker 2: two of a percent point two of percent. I'll do
Speaker 2: a consolidation as well, because people think it two cent
Speaker 2: share is far too cheap. Let's make it twenty five cents.
Speaker 1: Yes, yes, that's very interesting. Yeah, the opposite. Forgotten about
Speaker 1: the stock consolidation. So look that's the opposite.
Speaker 2: Right.
Speaker 1: Let's say you have zing zing widgets and as Din says,
Speaker 1: they're treading at zer point two five cents each, and
Speaker 1: they say, this looks so bad, everybody. What they do
Speaker 1: is they said they said to the shareholders, for every
Speaker 1: ten you've got, you now have one, which is the
Speaker 1: opposite of the Nvidio thing where they say for everyone
Speaker 1: you have, you now have ten. So it's a stock
Speaker 1: can't sell.
Speaker 2: Ad Yeah, look, I don't know. I'd suggest it probably
Speaker 2: goes the other why because the reason they consolidating is
Speaker 2: the businesses are so bummed out.
Speaker 1: Yeah, times are not good as opposed to for one thing,
Speaker 1: that's for sure. With the stock splits, things have been
Speaker 1: pretty good when you get them CSL as we say,
Speaker 1: Tesla we mentioned in video that might not not always.
Speaker 1: I remember some dot coms did them. That's going back
Speaker 1: a fair bit, but there.
Speaker 2: Was mightbe sabids. Consider doing your stocks plit givns and.
Speaker 1: I knows that's right.
Speaker 2: That'll worry the shortest.
Speaker 1: I know. You don't need many cbahas to have a
Speaker 1: nice holding of them these days. Question from Rowan The
Speaker 1: as X seems like it's been pigeonholes, a backwater for
Speaker 1: legacy Australian businesses who predominantly dig up rocks lend money
Speaker 1: to buy houses or services. What needs to change to
Speaker 1: make the ASX a place worth listing on for future
Speaker 1: focused companies. You must be really interested in this. Are
Speaker 1: you that that the AX is shrinking, that there is
Speaker 1: less stocks listed than there was a year ago because
Speaker 1: you're under the market. You need lots of IPOs, don't you.
Speaker 1: I mean you need that feed if you like.
Speaker 2: No, it's actually it's a very good question. You look
Speaker 2: at the ASX composition and it is You've got your
Speaker 2: big four banks and a bunch of resources companies that
Speaker 2: dig dirt out of the ground, class a few other telcos,
Speaker 2: so it's a very a.
Speaker 1: Couple of supermarkets and they take off. What percentage of
Speaker 1: the market do they take up like half more?
Speaker 2: Yeah, I think it's more than fifty percent, and then
Speaker 2: you throw Aldi and ij in there, it's close to eighty.
Speaker 2: So everything's very, very consolidated in Australia. There's not a
Speaker 2: lot of competition, you know. I look at you know,
Speaker 2: and I think it's maybe a bit of a cultural
Speaker 2: issue in Australia, you know, the tall poppy syndrome. And
Speaker 2: I say, if you've tried to start up three businesses
Speaker 2: and failed at them in Australia, regard it as a
Speaker 2: bit of a failure, whereas if you do that in
Speaker 2: the United States, you regard it as a thriving entrepreneur. So,
Speaker 2: you know, I'd like to see Australia and there's been
Speaker 2: a lot of press this week about it is just
Speaker 2: you know, funding more startups give young entrepreneurial people to
Speaker 2: go and have access to capital so they can make
Speaker 2: it big and have that confidence that they can, you know,
Speaker 2: do something special on a global scale. You know, there's
Speaker 2: been a handful of them, obviously, the marquee ones, the
Speaker 2: things like can for an after pay that have made
Speaker 2: it globally. But I think we need more of that
Speaker 2: positive investment can do culture that you start funding some
Speaker 2: of these startups that they can progress through to being
Speaker 2: commercial businesses that list from exchange and thrive. That would
Speaker 2: be my underlying view rather than if you're not a
Speaker 2: legacy bank or a big miner, we don't really want
Speaker 2: to know about it.
Speaker 1: And the companies you do with that that end of
Speaker 1: the market, the smaller caps do they have to depend
Speaker 1: on the pulse to be vss aren't interested in the
Speaker 1: markers are listed, they're not covered by brokers. Most fund
Speaker 1: managers don't invest in them. So what do they do?
Speaker 1: Are they internally funded? Is that must be it?
Speaker 2: There are still they still do have access to capital
Speaker 2: in the markets, but it's harder than it used to be.
Speaker 2: I think what I've seen in the last couple of
Speaker 2: years is well two things happen. That the companies bunker down,
Speaker 2: can serve their cash, run the businesses efficiently and start
Speaker 2: getting growth at the bottom line, which attracts investors. Or
Speaker 2: in fact they get taken over. And that's what we're
Speaker 2: seeing a bit at the moment. A number of these
Speaker 2: small businesses are getting takeover offers from international companies. Have
Speaker 2: just seen the value in the market because everything's so
Speaker 2: bummed out. But I mean, that's not a great outcome
Speaker 2: of actual for investors. But I'd just like to see
Speaker 2: more business as listeds of are thriving in Australia rather
Speaker 2: than just trying to have a safety need of let's
Speaker 2: get taken over.
Speaker 1: Yes, okay, very good, and thanks for that. Roan is
Speaker 1: actually a real theme in the market, and more so
Speaker 1: now because of two things. One, our own market is
Speaker 1: shrinking in terms of number of listings. Very hard to do.
Speaker 1: An ipo. We've had an IPO just goes Many Gomez,
Speaker 1: which is all fine, but we all hope it goes okay,
Speaker 1: because if it doesn't and it disappoints people in the shortter,
Speaker 1: medium term, there won't be any more IPOs for a
Speaker 1: long time of any significance. Everyone gets scared again. The
Speaker 1: other thing is people used to run off and join
Speaker 1: Nastack or whatever I was reading this morning. They like
Speaker 1: about three hundred million in revenue before they let you
Speaker 1: on to the big US exchanges. Okay, hey, look, thank
Speaker 1: you very much, Dean, Thank you very much coming out
Speaker 1: the show. It's really good, really interesting to talk to you.
Speaker 1: That's Dean Fergie of CN Investment Management small cap fund manager.
Speaker 1: Keep those questions rolling. Folks love to hear your questions, opinions, comments, complaints,
Speaker 1: the money puzzle at the Australian dot com dot au
Speaker 1: Talk to you soon. The flat sad, the plant s