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Speaker 1: Hello, and welcome to the Australians Money Puzzle podcast.

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Speaker 2: I'm James Kirkby. Welcome aboard everybody.

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Speaker 1: As a private investor in shares, you're probably already realized

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Speaker 1: that you're at the back of the queue when things

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Speaker 1: go wrong, and I think we almost expect to be

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Speaker 1: dotted out of the best deals.

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Speaker 2: In some ways. It's often been like that.

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Speaker 1: It's infuriating as well to watch really good stocks being

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Speaker 1: cherry picked, you know, by overseas takeover merchants as time

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Speaker 1: goes by. But something on a whole other level has

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Speaker 1: been happening on the share market this year. It's what

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Speaker 1: I would call the plundering of the ASX by private

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Speaker 1: equity groups and it's come to a head with this week.

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Speaker 2: There was a.

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Speaker 1: Stock folks called health Scope, which was an extraordinary story,

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Speaker 1: a small company that literally became a five million dollar

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Speaker 1: company and then it was taken over by private equity

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Speaker 1: and this week it went into receivership. But thirty seven

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Speaker 1: hospitals might I add attached to that. Joining me on

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Speaker 1: the show today is Eric Johnson. He's Associate editor Business

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Speaker 1: on The Australian. He's been on the show before and

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Speaker 1: he's been following this from the very beginning.

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Speaker 3: Hawai, Eric, gooday, James, thanks for having me on.

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Speaker 2: Good to have you on.

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Speaker 1: We might briefly explain the importance of this story to

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Speaker 1: all our listeners because it's the backdrop here is about

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Speaker 1: the share market we know in which we expect to

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Speaker 1: invest getting hollowed out right, and we mentioned a few

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Speaker 1: things there. Takeovers is one and great company has been

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Speaker 1: taken over. But could you explain to everyone just briefly

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Speaker 1: about health Scope, what's happened, where are we at there?

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Speaker 3: So the name Healthscope is probably not that widely known,

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Speaker 3: but people would know the local hospitals like a Knox

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Speaker 3: private hospital. There's a Sydney clinic and people would know that.

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Speaker 3: So it's a pretty important part of the health sector

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Speaker 3: in terms of it's the second largest private hospital operator

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Speaker 3: and it also operates the Northern Beaches Hospital that's relatively

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Speaker 3: new one up in Sydney as well. And it's a

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Speaker 3: really important part because it's a lot of the well

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Speaker 3: the elective surgery, so non critical stuff but still really important.

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Speaker 3: So James, you'll get your hip operation done there or

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Speaker 3: your knee operation done there and other things that non

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Speaker 3: life you know, threatening but still pretty important for your

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Speaker 3: lifestyle now that it was listed on the AX. Previously

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Speaker 3: listed back in twenty nineteen, it was subject of a

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Speaker 3: pretty aggressive takeover battle. Initially, Australian Super was part of

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Speaker 3: a consortium looking to buy it out. So Ossie Super

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Speaker 3: wanted to buy it and park it just seeing the

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Speaker 3: long term potential of this operator. However, they were edged

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Speaker 3: out by a Canadian company and we've heard of this

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Speaker 3: company before, called Brookfield, a huge asset manager in terms

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Speaker 3: of funds under management. Yes, so yes under management. Brookfield

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Speaker 3: were the ones making the chase for Origin Energy about

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Speaker 3: two or three years ago ago to and that was

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Speaker 3: ultimately unsuccessful. Ironically, it was Ozzie Super that blocked that

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Speaker 3: deal from going out here.

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Speaker 2: They blocked them. Yeah, so they often work in tandem.

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Speaker 2: But so this company, like.

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Speaker 1: Health Scope, it was a big six billion dollar company.

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Speaker 1: It owned hospitals and obviously these guys bolted because they

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Speaker 1: thought they could make more money out of it. Listeners

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Speaker 1: would know, like listed on the stock market still something

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Speaker 1: like Ramsey Health, nothing like the company it was a

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Speaker 1: few years ago, but still a big company, multi billion

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Speaker 1: dollar company making you know, half a billion dollar profits.

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Speaker 1: Those profits are arising, it can be done. So you

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Speaker 1: were onto this fairly early, and I remember reading, I

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Speaker 1: don't know, maybe ten days ago you did a piece

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Speaker 1: and you called the Brookfield people barbarians, and then you

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Speaker 1: said there was two sort of scenarios that were possible,

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Speaker 1: and then you know one was receivership, and you said

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Speaker 1: that was the most likely, and I remember thinking.

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Speaker 2: That's a bit strong, But it's come to passer.

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Speaker 1: First of all, when you say barbarians, would you explain

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Speaker 1: for people who aren't familiar, what is the's the game

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Speaker 1: of these people in Brookfield?

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Speaker 2: What do they do?

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Speaker 1: Why do they buy the companies in the first place.

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Speaker 1: If it's ended up in receivership, something's gone terribly wrong.

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Speaker 1: What was their plan and what went wrong?

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Speaker 3: To be fair to the barbarians, they didn't plan for

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Speaker 3: it to blow up to the extent it did. But

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Speaker 3: remember these are meant to be the smartest people in

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Speaker 3: the room, and they enjoy telling everybody that they are.

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Speaker 3: They badly misread what was happening, but also they undermined

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Speaker 3: their own business models. So they came in twenty nineteen,

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Speaker 3: overpaid for it, borrowed heavily, so leveraged up the business

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Speaker 3: borrowed heavily. Initially, they broke their business, the operating business

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Speaker 3: up from all the hospitals they're actually operated, So they

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Speaker 3: sold off the physical hospitals, so the building. So what

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Speaker 3: was left was a fairly asset like business with a

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Speaker 3: lot of debt. So that sale or the hospital was

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Speaker 3: partly used to fund the acquisition, so some of that

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Speaker 3: distribution went well, that went back to shareholders that previously

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Speaker 3: owned it. However, as you know, it's always good to

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Speaker 3: have a strong balance sheet for unexpected and in health care.

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Speaker 3: Health care is a really complicated industry, and any happened

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Speaker 3: what happened a couple of months later, COVID hit and

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Speaker 3: all the private hospital sector shut down. Elective surgery effectively

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Speaker 3: stopped that starved off the funding the revenue stream, so

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Speaker 3: that was a crisis. Yet these hospitals still had to

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Speaker 3: pay rent for their overheads and so on.

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Speaker 1: Because these guys had leveraged it up right before the

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Speaker 1: sort of calamity of COVID, they had no balance sheet

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Speaker 1: strength when things went wrong.

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Speaker 3: Well, look and just to sort of finish that thought

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Speaker 3: as well, so they're also paying off debt, but then

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Speaker 3: coming out of COVID was another crist It says, we

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Speaker 3: all know for the health sectors, so staff shortages, wage inflation,

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Speaker 3: and then also input costs, so spiraling costs for that. Sorry,

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Speaker 3: you know, there were people falling out of the system,

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Speaker 3: so you know, people paying more for wages. So there

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Speaker 3: was just huge pressure on their cost side. Yet the

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Speaker 3: revenue about getting from like if surgeries just wasn't covering

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Speaker 3: this new sort of real world.

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Speaker 1: So everything went wrong and it's now in receivership. And

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Speaker 1: I suppose to the people on the street are people

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Speaker 1: who use the hospitals. It's pretty scary. So there's thirty

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Speaker 1: seven hospitals and anyone listening to the show will know

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Speaker 1: one of them for sure. When I looked at the

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Speaker 1: listener and I had been in two of them, and

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Speaker 1: they're major hospitals in the cities. But the question it begs,

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Speaker 1: I suppose, is to one extent, the wider market is

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Speaker 1: vulnerable to this sort of thing. You mentioned how Brookfields

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Speaker 1: when they came in, they geared up. They leveraged up

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Speaker 1: the balance sheet pretty fast. In some ways they used

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Speaker 1: the asset they bought to finance the purchase that they did,

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Speaker 1: and that rings a bell for me, that reminds me

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Speaker 1: of the buccaneers of yesterday, Alan Bond, Christophersquise, etc. It's

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Speaker 1: not exactly the same, but there's parallels, is there.

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Speaker 3: And we spoke about it at the top about the barbarians.

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Speaker 3: So that's not my term. It's not our term. It's

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Speaker 3: made famous by a book. A couple of former Wall

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Speaker 3: Street Journal reporters wrote the book about Barbarians of the Gate.

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Speaker 3: That was the US company KKR acquiring it's been to

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Speaker 3: acquire US food company conglomerate at a time called an

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Speaker 3: Abisco and tracking that coming in, stripping the assets, selling

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Speaker 3: it off and leaving a very capital light business.

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Speaker 2: Yeah.

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Speaker 1: So this was the benchmark if you like this, when

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Speaker 1: everyone's realized what the game was.

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Speaker 2: And KKR they're still around.

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Speaker 1: In fact, they have funds listed on our share market,

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Speaker 1: and that might be listeners on the show that even

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Speaker 1: have investments in them. So it's a two sided thing.

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Speaker 1: But I don't want to go to that just now.

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Speaker 1: I just want to capture a few other things about this.

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Speaker 1: So for most people when they look at the share market,

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Speaker 1: most of the intention and most of the action is

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Speaker 1: in a small number of companies. The top fifty and

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Speaker 1: one of the things we've seen is how private acuity

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Speaker 1: will come in. I think in our country or in

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Speaker 1: our market, the benchmark, the NJO and the.

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Speaker 2: BISCO of our area was Meyer.

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Speaker 1: Once upon a time, I think it was TPG if

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Speaker 1: I've got that right, who came in and did an

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Speaker 1: amazing deal for themselves, and there was all sorts of

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Speaker 1: controversy later as to what they did and how they

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Speaker 1: did it. More recently, had Sydney Airport a beautiful stock,

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Speaker 1: a fabulous asset that investors loved, long term infrastructure play

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Speaker 1: again that was shipped off the market and that was

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Speaker 1: big super funds playing with private equity again, correct me

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Speaker 1: if I'm wrong on this.

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Speaker 2: And then this most recent one, this.

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Speaker 1: Health scope, which is when everything went wrong, is private

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Speaker 1: equity getting it wrong themselves, But it seems to be

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Speaker 1: a process that's accelerating now. Is the ASEX particularly vulnerable

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Speaker 1: to this? And as ordinary shareholders, how do we deal

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Speaker 1: with this fact that these marauding you know, global companies

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Speaker 1: just cherry pick like this.

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Speaker 3: Well, I was just thinking, well, look there's phrase my

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Speaker 3: old economics teachers to drum into me. He said that

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Speaker 3: in order for someone to buy something. Someone has to

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Speaker 3: sell something. So if somebody is paying over the odds

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Speaker 3: for an asset, well you know that's they've got to

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Speaker 3: wear the risk. But it does come back to some

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Speaker 3: of the issues. I mean, can you know this is

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Speaker 3: a broader question. Can someone come in by a hospital

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Speaker 3: and sell off all the furniture and cut all the

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Speaker 3: stuff and then there's a lot of consequences around that too,

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Speaker 3: because that ultimately puts pressure back onto the public system.

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Speaker 3: And we don't have time to talk about all that

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Speaker 3: what's going on in there. But your earlier point about

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Speaker 3: these quality companies, I was just checking out a list,

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Speaker 3: so you're right. Sydney Airport Minerals. These are companies that

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Speaker 3: have left the AX in the last few years. City Airport,

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Speaker 3: Odds Minerals. There were Spark Infrastructure, so that was a

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Speaker 3: pretty boring company that no one had ever heard about.

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Speaker 3: Boring but nice, nice sort of yield stock. We've seen

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Speaker 3: a whole bunch of holding out of industrials and through

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Speaker 3: other companies. This is not all private equity acquisitions. Borrel

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Speaker 3: CSR James Hardy. There's a drama about it.

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Speaker 1: Relocated builders, isn't it, Eric, That's the entire building materials sector.

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Speaker 2: Yeah, and of what was the a SX, which were.

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Speaker 1: All Greek companies and popular with private investors up to

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Speaker 1: the time they were taken US.

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Speaker 3: So look, you know that happens, and as long as

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Speaker 3: there's stock markets, there's always acquisitions. Nothing wrong with acquisitions.

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Speaker 3: But what's the structural sort of issue that's been happening

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Speaker 3: is that Australia or the ASEX hasn't been able to

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Speaker 3: replenish the companies that are leaving the AX and that's

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Speaker 3: starting to become an issue. And that's why you're started

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Speaker 3: to see companies like CBA, you know, you know trading

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Speaker 3: at your that are wise sky high because it's just

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Speaker 3: not the man is just not the avenues to pack

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Speaker 3: your money.

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Speaker 1: Really interesting, Yes, that is an interesting explanation of what's

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Speaker 1: going on. Look, take a short break because I want

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Speaker 1: to come back, and what I want to do is

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Speaker 1: try and guide our listeners to how to deal with

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Speaker 1: this and particularly what's going to happen next in terms

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Speaker 1: of private equity and takeover merchants on the ASEX and

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Speaker 1: how you play this. Hello, welcome back to The Australian's

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Speaker 1: Money Puzzle podcast. I'm James Kirby talking to Eric Johnson,

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Speaker 1: my colleague on The Australian.

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Speaker 2: He's been on the show before.

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Speaker 1: He's been covering this really interesting area of large Australian,

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Speaker 1: famous Australian shares basically disappearing.

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Speaker 2: Off the market for one reason or another.

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Speaker 1: And this share markt is actually shrinking, that is, the

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Speaker 1: asex is shrinking. Now, if you are an investor to

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Speaker 1: some extent your interest here, as Eric said, do you

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Speaker 1: take the money and run? Why wouldn't you if someone

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Speaker 1: offers you, you know, forty percent more than they did

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Speaker 1: the day before for a stock and why wouldn't you

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Speaker 1: take that cash? Each deal in and of itself is

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Speaker 1: logical at the time. I just wonder, Eric, particularly about

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Speaker 1: health Scope. You wonder, without getting into social or cultural conversation,

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Speaker 1: just strictly as an investment question, whether the troubles you know,

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Speaker 1: in age care stocks which have been severe, health care

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Speaker 1: stocks which are exceptionally severe now with the receivership of

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Speaker 1: a company that was once worth six billion dollars, You wonder,

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Speaker 1: as an investor, is this area just too much trouble

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Speaker 1: as long term investment.

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Speaker 3: It's a really difficult one because one of the big

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Speaker 3: themes that you speak to the likes of, you know,

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Speaker 3: the global asset managers, you know, your black Rocks, your

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Speaker 3: black styles, saving macquaries and so on. The big several themes.

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Speaker 3: They talk about digitization, they talk about technology and AI.

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Speaker 3: Health and aging always comes up as a big theme

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Speaker 3: as an area to invest in. Yet the names that

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Speaker 3: you've sort of pointed out, and the sectors you pointed out,

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Speaker 3: they're really difficult. They're really difficult. They like it as

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Speaker 3: a theme because we're all getting older.

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Speaker 1: Yeah, it's top down, a top down thematic sounds good

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Speaker 1: right bottom.

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Speaker 3: Up, it sounds really good. But we are getting older

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Speaker 3: and we're demanding more services. However, we're not seeing private

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Speaker 3: organizations aren't seeing that. It's again, I think it's a

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Speaker 3: complicated because we're also confusing heavily regulated sector with you know,

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Speaker 3: we're coming against regulation right rightly. So there should be regulation,

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Speaker 3: there should be minimum staffing in age care, there should

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Speaker 3: be certain standards and so on. That's a given. However,

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Speaker 3: where those themes are coming in, they're not sort of

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Speaker 3: compatible with that heavy re agent. So that's where it's going.

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Speaker 3: I think health scope and this is all private hospitals too,

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Speaker 3: facing another challenge in that when even back in twenty

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Speaker 3: nineteen or twenty seventeen, or you know last decade, when

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Speaker 3: you went in for your knee repair, James, so you

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Speaker 3: could play football on the weekend, you were in usually

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Speaker 3: for about four or five days. You're in, you stayed

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Speaker 3: in and your health insurer, because you have the Gold coverage,

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Speaker 3: was paying it all. However, today you go in the

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Speaker 3: morning and you're out by three pm in the afternoon.

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Speaker 3: You're playing footy on the weekend too, And that's the

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Speaker 3: advance of changes in technology.

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Speaker 1: Right, productivity inside healthcare has had the surprise I'll come

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Speaker 1: that it's just explaining for my that's a problem financially.

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Speaker 3: Well because then me as health Scope, I own this heavy,

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Speaker 3: huge hospital that is no longer in full demand all

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Speaker 3: the time. So there's another area like also, surgeons are

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Speaker 3: not tied to specific hospitals. As you know, you went

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Speaker 3: to your surgeon to get your knee fixed, he referred

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Speaker 3: you to this day to a day care clinic down

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Speaker 3: the road, so that you're not even going to the

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Speaker 3: health hospital. So they're sitting there with empty rooms and

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Speaker 3: empty beds, still paying their debt and their bills.

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Speaker 1: That also happened, So that came on the back of

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Speaker 1: post COVID almost or at least the same time.

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Speaker 2: So you have those two things working against them.

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Speaker 1: I suppos a big question then, Eric is from again

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Speaker 1: from an investment perspective, Maybe an investor can simply choose

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Speaker 1: to play the other side. You mentioned KK or you

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Speaker 1: can now invest in they all have, all the big

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Speaker 1: players have ASX listed funds. And in recent times by

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Speaker 1: that I mean the last two years, there's been a

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Speaker 1: really big push by private equity funds to the average

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Speaker 1: retail investor, to mom and dad, and to say, look,

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Speaker 1: your super fund has always been in here, They've done

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Speaker 1: really wear private equity come and join us, and you

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Speaker 1: can just simply buy, you know whatever, a thousand dollars

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Speaker 1: both of private equity fund number one, two or three.

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Speaker 1: They're very common. They health scope crisis facing brook Field

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Speaker 1: is that What does that tell us about private equity

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Speaker 1: funds and the risks that they might put in front

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Speaker 1: of the average investor that aren't so obvious.

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Speaker 3: Yeah, Look for the average investor, the punter, the retail investor.

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Speaker 3: As you always to your listeners, you have a broad mix,

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Speaker 3: you have your low risk, you have your mid risk

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Speaker 3: and maybe just a fraction too of higher risk, and

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Speaker 3: private equity as an asset class is expensive. It's high cost,

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Speaker 3: but it promises higher return.

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Speaker 1: Yeah, right, high risk hy return or at least they're

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Speaker 1: elevated risk elevator return.

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Speaker 3: Yeah, and for every sort of health scope, which is

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Speaker 3: a spectacular disaster, and even Maya and there's a lot

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Speaker 3: of high profile Dick Smith was another that was a

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Speaker 3: disaster for private equity. There's probably about one hundred little

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Speaker 3: no name companies that are actually that are actually that

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Speaker 3: actually works, and these aren't necessarily listed companies. And private

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Speaker 3: equity it does have a role, and we can't say

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Speaker 3: as a rule private equity is all bad. It does

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Speaker 3: provide funding at funding source and alternat funding source and

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Speaker 3: potentially a pathway for a more established and sophisticated sort

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Speaker 3: of investment case. Where it does go bad is when

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Speaker 3: they come in they sell off all the furniture and

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Speaker 3: leave a very light, heavily leveraged business. And look, that's

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Speaker 3: really short term. That's a really short term model. And

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Speaker 3: if you keep doing that, you're going to run out

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Speaker 3: of run away pretty quickly.

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Speaker 2: Which seems to be exactly what happened at the school.

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Speaker 1: Tell me the big super funds, what are they good

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Speaker 1: guys or bad guys here depending on.

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Speaker 2: The day I'd see of the day.

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Speaker 3: Really so like some of that list that we spoke about,

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Speaker 3: so Spark and Sydney Airport, I mean that they were

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Speaker 3: super fun led acquisition, so they're buyouts. Their investment horizon

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Speaker 3: is different, so generally it looks to like three to

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Speaker 3: five year turnaround case. Another one with Virgin Australia at

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Speaker 3: the airline was on the cusp of listings that was

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Speaker 3: brought from administration where no one wanted to touch it by

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Speaker 3: private equity and it's held onto it for now. What

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Speaker 3: is it about five years? Bang on at times times

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Speaker 3: spot on. I don't think that the great guys they've

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Speaker 3: made it. They've made an absolute windfall on the back

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Speaker 3: of this, but they took the risk. They took the

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Speaker 3: risk when no one wanted to.

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Speaker 2: That was an example where it brooks really nicely.

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Speaker 1: I mean we get to retain a second major airline

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Speaker 1: domestically and investors took the risk, as you see, and anyone.

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Speaker 2: Who was in on that did very well well.

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Speaker 1: This is to some extent dependent on the flat what

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Speaker 1: would happen soon enough, you would expect if they got

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Speaker 1: their docks in a role there, haven't they?

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Speaker 3: Yeah? And look, you know, is to the original question

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Speaker 3: about is superis of the bad guys? So their investment

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Speaker 3: horizon that they buy and hold for the long term

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Speaker 3: ten ten to twenty years. So if Ozzie Super came in,

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Speaker 3: they did team up with a private equity fund and

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Speaker 3: in doing that there aim was to be patient capital.

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Speaker 3: We're going to buy this thing and hold on to it.

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Speaker 3: So they probably wouldn't have flogged the assets to the

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Speaker 3: extent it did.

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Speaker 1: They probably mentioned in your piece that they did intervene

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Speaker 1: one time and save what's it origin from?

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Speaker 3: Yeah, so, and that that's a really interesting sceory. And

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Speaker 3: that was a case of where investors, Australia investors, some

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Speaker 3: Australia investors. I was in Super and there was a

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Speaker 3: couple others behind it stood up and said no. Because

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Speaker 3: often when private equity comes in and offers that forty

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Speaker 3: percent premium for something, it's not doing it in our

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Speaker 3: the goodness of its heart and often jumps on companies

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Speaker 3: when they're trading at cyclical lows or you know they've

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Speaker 3: had they've made some bad calls or something. So so

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Speaker 3: there's shares a way off, so footy percent premium looks

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Speaker 3: pretty healthy to to where it is today, but it

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Speaker 3: looks pretty ordinary to where it was five years ago.

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Speaker 3: So so in that case, Brookfield did come up its

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Speaker 3: plan for Origin, big energy company. The plan was to

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Speaker 3: buy it and carve it up and flip it into

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Speaker 3: several funds. Ironically, Canadian Prime Minister Mark Corney was was

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Speaker 3: the face, the friendly face of one of these funds,

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Speaker 3: and he was he was leading the acquisition. So that

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Speaker 3: Bank of England, Bank of England, that's right, I see. However,

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Speaker 3: Australian Super stood up and said, look what you're offering

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Speaker 3: is I was it was around about nine dollars mark

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Speaker 3: what you're offering for Origin. We think over the long

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Speaker 3: term Origin is worth a lot more. It has these

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Speaker 3: key key quality assets, key quality attributes about it. I was.

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Speaker 3: He Super had it it was able to to sort

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Speaker 3: of and asked what's called a blocking the stake just

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Speaker 3: under it, and had a couple other friends. It was determined,

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Speaker 3: we're not interested in negotiating. We think this business is

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Speaker 3: great for we're buying and holding, so see you later.

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Speaker 3: And Brookfield tried everything and tried every trick in the book,

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Speaker 3: but ultimately had to take its bat and ball and

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Speaker 3: go home. It could not buy it.

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Speaker 1: Right, Interesting, So they can the big super funds can

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Speaker 1: exercise enormous power obviously in these situations and the episodes

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Speaker 1: where they were very useful to the local market.

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Speaker 3: And the postcript to that is that Ossie Super was

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Speaker 3: right that the shares ultimately increased over the offer price

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Speaker 3: over time. It didn't happen straight away, but it gradually

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Speaker 3: stopped having that direction.

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Speaker 1: That's the ultimate test, isn't it really? Very interesting? Very interesting? Okay,

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Speaker 1: So Origin is an example. Really, Origin Energy is an example.

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Speaker 1: Folks for private equity might have done awfully well and

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Speaker 1: in some extent plunder the AESX. Again, in that case,

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Speaker 1: Australia Super came in and saved the day. We now

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Speaker 1: know because of the movement and price since that time.

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Speaker 1: So interesting, two says to every story. All right, we'd

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Speaker 1: be back in a moment. We have some really good

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Speaker 1: questions from David and Neil and Trevor. Hello, welcome back

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Speaker 1: to The Australian's Money Puzzled podcast. James Kirby here talking

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Speaker 1: to Eric Johnson. We've been talking about something I think

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Speaker 1: is really was really worth looking.

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Speaker 2: At today, which is what's going on big picture.

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Speaker 1: If you like on the AX, where we depend so

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Speaker 1: much on a couple of dozen companies and they are vulnerable.

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Speaker 1: It's the very open market, and that's all fine, but

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Speaker 1: sometimes we as individual shareholders, we do lose. Right, So

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Speaker 1: Sydney Airport whipped away from under our eyes, and everyone

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Speaker 1: I think regrets that health scope of five billion dollar

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Speaker 1: company was also whipped away from under our eyes, and

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Speaker 1: we might have been better off because it turns out

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Speaker 1: that it's in receivership, so we're are that five billion

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Speaker 1: dollars go?

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Speaker 2: Well, individual shareholders didn't lose it. At least that's useful.

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Speaker 1: Okay, David asks, I was interested in your recent episode

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Speaker 1: on gold. Your guest quoted some interesting figures for returns.

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Speaker 1: Who didn't mention the digital gold bitcoin. I've owned both

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Speaker 1: for years, and bitcoin outperforms gold. And then David says,

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Speaker 1: I asked chat GPT to perform an analysis. I don't

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Speaker 1: know if I completely agree with that term, and it

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Speaker 1: said bitcoin has delivered significantly higher returns over the past

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Speaker 1: decade compared to gold. That is, but gold has been

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Speaker 1: more stable surely this would have been worth a mention,

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Speaker 1: says David, given the assertion that gold is the hot

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Speaker 1: investment product. It's just plain wrong. Okay, David, never advice

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Speaker 1: information only. They're both pretty good, first of all. And

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Speaker 1: if bitcoin at a certain point in time has delivered

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Speaker 1: more on a ten year basis than gold, I don't

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Speaker 1: deny that for a moment, So put that on the table.

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Speaker 1: It's just a question of your choice. Really, I think

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Speaker 1: the more interesting part of the question is using AI

436
00:24:00,680 --> 00:24:03,480
Speaker 1: to get some steer. Look, I don't think there's anything

437
00:24:03,520 --> 00:24:05,359
Speaker 1: wrong with it. I just I would just say to

438
00:24:05,440 --> 00:24:08,440
Speaker 1: David and all the debts out there, it's it's uninterpreted information.

439
00:24:08,920 --> 00:24:11,399
Speaker 1: It's information. It's uninterpreted. That's why we have short like this,

440
00:24:12,119 --> 00:24:14,359
Speaker 1: And I'd be careful how far you go with AI.

441
00:24:14,680 --> 00:24:17,919
Speaker 1: Aren't testing your investment hypothesis in real life?

442
00:24:18,359 --> 00:24:21,920
Speaker 3: What do you think, Eric, Yeah, I look one hundred

443
00:24:21,920 --> 00:24:26,520
Speaker 3: percent on that, and it's a it's about garbage in

444
00:24:26,640 --> 00:24:30,639
Speaker 3: and garbage out in terms of the algorithm, and sometimes

445
00:24:30,720 --> 00:24:33,200
Speaker 3: it's quality of stuff. But you just don't know what

446
00:24:33,200 --> 00:24:36,000
Speaker 3: what ingredients been put in there, So so use it

447
00:24:36,040 --> 00:24:41,800
Speaker 3: for for something, don't rely on it. Becoin. It's really interesting.

448
00:24:42,600 --> 00:24:47,159
Speaker 3: It's a it's a trying to find a correlation to bigcoin,

449
00:24:47,160 --> 00:24:49,560
Speaker 3: and that's been the big struggle. So, so is it

450
00:24:49,600 --> 00:24:52,080
Speaker 3: a global economic trend?

451
00:24:52,440 --> 00:24:54,600
Speaker 2: Just you might just explain what you mean by that.

452
00:24:55,720 --> 00:24:58,119
Speaker 3: So, so how does it move? So does it? So?

453
00:24:58,320 --> 00:25:00,800
Speaker 3: Why does it move? I think that So does it

454
00:25:00,880 --> 00:25:03,240
Speaker 3: move when the economy is booming, doesn't move when the

455
00:25:03,240 --> 00:25:06,200
Speaker 3: economy is slow. So we think about gold. So whenever

456
00:25:06,240 --> 00:25:10,359
Speaker 3: there's inflation explosion, gold goes up. Everyone rushes. Gold is

457
00:25:10,400 --> 00:25:13,600
Speaker 3: a hedge against inflation. And we've also seen that recently

458
00:25:13,640 --> 00:25:16,960
Speaker 3: with gold with uncertainty about the US US bonds and

459
00:25:17,000 --> 00:25:20,080
Speaker 3: the US treasuries as a store of As a store

460
00:25:20,119 --> 00:25:25,720
Speaker 3: of value, bitcoin struggles a bit. There is a thread

461
00:25:25,760 --> 00:25:30,040
Speaker 3: that when there's an excess of money in the financial

462
00:25:30,040 --> 00:25:32,919
Speaker 3: system that actually booms. So you know, I've got to

463
00:25:33,000 --> 00:25:36,119
Speaker 3: spare whatever I can't invest that and that then that

464
00:25:36,320 --> 00:25:40,440
Speaker 3: supports it. But again it comes back to demand now

465
00:25:40,600 --> 00:25:43,480
Speaker 3: and we're increasingly saying obviously when Trump came in, we

466
00:25:43,600 --> 00:25:46,880
Speaker 3: saw a big jump in bitcoin because Trumps saying we're

467
00:25:46,880 --> 00:25:47,520
Speaker 3: gonna We're going.

468
00:25:47,520 --> 00:25:51,879
Speaker 1: To Yeah, more than that, he's very keen, he's very

469
00:25:51,920 --> 00:25:52,520
Speaker 1: keen altogether.

470
00:25:52,640 --> 00:25:53,720
Speaker 2: Is he launching his own coins?

471
00:25:54,080 --> 00:25:57,560
Speaker 3: Yeah? Correct, So so that that's the type of thing,

472
00:25:57,600 --> 00:26:01,040
Speaker 3: so you know, whatever it is comes to Also, like gold,

473
00:26:01,160 --> 00:26:04,919
Speaker 3: bitcoin doesn't pay yield and it depends what you It

474
00:26:04,960 --> 00:26:07,720
Speaker 3: doesn't pay an income, so it's like buying them debartwork

475
00:26:07,760 --> 00:26:08,680
Speaker 3: and hanging on the wall.

476
00:26:08,840 --> 00:26:12,240
Speaker 1: So you're saying that gold as what has the history

477
00:26:12,760 --> 00:26:17,199
Speaker 1: that we know has repeatedly proven itself to be a

478
00:26:17,359 --> 00:26:21,440
Speaker 1: useful non correlated asset in that when the market's going down,

479
00:26:21,520 --> 00:26:26,200
Speaker 1: gold should go up. But bitcoin it's unclear whether it's

480
00:26:26,280 --> 00:26:27,399
Speaker 1: unclear still.

481
00:26:27,200 --> 00:26:29,640
Speaker 3: Yeah, the trend, like the history isn't there, and the

482
00:26:29,680 --> 00:26:31,800
Speaker 3: liquidity isn't there, and it will become and it will

483
00:26:31,840 --> 00:26:34,000
Speaker 3: become a lot clearer over time. And I think it

484
00:26:34,080 --> 00:26:36,760
Speaker 3: is it's a legitimate asset class today because of the

485
00:26:36,800 --> 00:26:38,040
Speaker 3: sheep value of it.

486
00:26:38,200 --> 00:26:41,160
Speaker 2: That's interesting and it's suggesting you say that. Okay, very interesting.

487
00:26:41,160 --> 00:26:43,720
Speaker 1: I hope that was useful to you, David from Neil,

488
00:26:44,480 --> 00:26:48,159
Speaker 1: which is my question could be a podcast topic. What

489
00:26:48,320 --> 00:26:52,360
Speaker 1: is productivity? How is it measured? What does the productivity

490
00:26:52,359 --> 00:26:55,320
Speaker 1: Commission do? And why does it matter to invest us?

491
00:26:55,359 --> 00:26:58,280
Speaker 1: It's a great question. Neil always comes up doesn't it,

492
00:26:58,720 --> 00:27:02,679
Speaker 1: And I think does economic explanation, which is it's not

493
00:27:02,760 --> 00:27:04,520
Speaker 1: rocket science, yes, would be boy efficiency.

494
00:27:05,040 --> 00:27:08,120
Speaker 2: But for investors, why does it matter? I think that's

495
00:27:08,119 --> 00:27:09,040
Speaker 2: the interesting one. Eric.

496
00:27:12,320 --> 00:27:15,600
Speaker 1: How would it reveal it if a company was productive?

497
00:27:16,520 --> 00:27:19,360
Speaker 1: How would it reveal itself as a listed stock? Would

498
00:27:19,359 --> 00:27:21,200
Speaker 1: there be some numbers that would be obvious?

499
00:27:21,680 --> 00:27:23,760
Speaker 2: Is it just profit? Is it simply more profitable or

500
00:27:24,880 --> 00:27:25,680
Speaker 2: what we were to play in?

501
00:27:27,480 --> 00:27:32,240
Speaker 3: Yeah, So when you know what the top of that

502
00:27:32,359 --> 00:27:34,040
Speaker 3: question about what does it look like and what does

503
00:27:34,080 --> 00:27:37,679
Speaker 3: it do? It reminds me of a very famous newspaper cartoonist,

504
00:27:37,800 --> 00:27:40,400
Speaker 3: Bruce Petty based in Melbourne, and he used to draw

505
00:27:40,520 --> 00:27:43,840
Speaker 3: these amazing images about the economy and what the economy

506
00:27:43,880 --> 00:27:47,960
Speaker 3: looked like, all these crazy machines that no one really

507
00:27:48,240 --> 00:27:49,879
Speaker 3: knew what they look like or what they were, but

508
00:27:49,960 --> 00:27:53,720
Speaker 3: they did something. That's the economy. Productivity is much like this,

509
00:27:54,880 --> 00:27:57,440
Speaker 3: much the same, but productivity, And it was talked about

510
00:27:57,920 --> 00:28:02,320
Speaker 3: why does it matter? Because it matters. Everything matters, and

511
00:28:02,400 --> 00:28:07,320
Speaker 3: it all comes back to productivity. So how what makes

512
00:28:07,320 --> 00:28:11,119
Speaker 3: a productive company? So there's a couple of measures. Obviously

513
00:28:11,200 --> 00:28:14,640
Speaker 3: you compare like for like apples for apples. So we're

514
00:28:14,720 --> 00:28:17,040
Speaker 3: very lucky in Australia that we have the big four banks,

515
00:28:17,080 --> 00:28:23,600
Speaker 3: we could relatively vanilla, relatively comparable. So cost to income

516
00:28:23,720 --> 00:28:25,320
Speaker 3: ratio would be one fact.

517
00:28:25,560 --> 00:28:28,159
Speaker 2: Yeah okay, and then the one that has the what

518
00:28:28,240 --> 00:28:30,160
Speaker 2: are you looking for, the one with the lowest.

519
00:28:30,040 --> 00:28:33,080
Speaker 3: Yeah, one lower, And this measure would generally move around

520
00:28:33,280 --> 00:28:37,200
Speaker 3: if you're so you're the amount of revenue that comes

521
00:28:38,040 --> 00:28:41,760
Speaker 3: in and compared to the amount of your cost base.

522
00:28:41,920 --> 00:28:46,320
Speaker 3: So for example, you know, West west Pac runs around

523
00:28:46,360 --> 00:28:51,280
Speaker 3: about sort of mid forties cost to income ratio, whereas

524
00:28:51,440 --> 00:28:54,080
Speaker 3: Common Bank runs is sort of like a high thirties.

525
00:28:54,360 --> 00:28:58,200
Speaker 1: So it's a much better ratio because the lower the better,

526
00:28:58,480 --> 00:29:00,920
Speaker 1: even though it's a much bigger bank where big.

527
00:29:00,800 --> 00:29:05,640
Speaker 3: Go Combank is No, but that means Combank is more efficient.

528
00:29:05,960 --> 00:29:08,240
Speaker 1: So the LA what I said, yeah, come make is

529
00:29:08,280 --> 00:29:11,400
Speaker 1: more efficient even though it's bigger. So that's your That's

530
00:29:11,440 --> 00:29:14,400
Speaker 1: how it translates to in a stock how productivity kicks

531
00:29:14,440 --> 00:29:18,880
Speaker 1: in as a useful measure for a listed.

532
00:29:18,600 --> 00:29:23,120
Speaker 3: Company, and so retailing and is another area. So you

533
00:29:23,360 --> 00:29:26,160
Speaker 3: tend to look at profit margin, your net margin or

534
00:29:26,200 --> 00:29:31,840
Speaker 3: your gross margin, and so that's the amount of profit

535
00:29:32,000 --> 00:29:34,840
Speaker 3: relative that you're making. And so we're looking at Maya

536
00:29:35,000 --> 00:29:37,880
Speaker 3: this week, and that's quite interesting. So it's it runs

537
00:29:37,920 --> 00:29:41,360
Speaker 3: a margin of about two percent, So so from everything

538
00:29:41,440 --> 00:29:45,200
Speaker 3: it's selling roughly, the profit it's making on that is

539
00:29:45,240 --> 00:29:49,479
Speaker 3: about two percent. Where whereas it, as you know, recently

540
00:29:49,520 --> 00:29:52,200
Speaker 3: bought the Solomon lose A Power Brands business and the

541
00:29:52,280 --> 00:29:56,600
Speaker 3: profit margins that's making is around nine percent. So every

542
00:29:56,640 --> 00:29:58,600
Speaker 3: pair of genes it sells and just gens is making

543
00:29:58,640 --> 00:30:01,360
Speaker 3: around nine percent. So my wants to get a bit

544
00:30:01,400 --> 00:30:04,320
Speaker 3: of that margin, and a little bit of that increase

545
00:30:04,360 --> 00:30:08,400
Speaker 3: in margin will translate to a big change in headline profit.

546
00:30:08,520 --> 00:30:11,200
Speaker 3: In fact, my was promising if you can lift its

547
00:30:11,280 --> 00:30:14,480
Speaker 3: margin by just one percent on that two percent, that

548
00:30:14,640 --> 00:30:19,600
Speaker 3: translated to a thirty three million dollar EBIT of earnings increase.

549
00:30:20,240 --> 00:30:23,840
Speaker 1: So a street mathematical. If the margin's improved, the profits improve,

550
00:30:24,280 --> 00:30:25,280
Speaker 1: the share place of improve.

551
00:30:26,080 --> 00:30:29,760
Speaker 3: Yeah, but here it goes and look in the big

552
00:30:30,360 --> 00:30:33,880
Speaker 3: structural thing that's coming around, you can't go. You can't

553
00:30:34,200 --> 00:30:37,480
Speaker 3: see any company briefing today without a CEO getting up

554
00:30:37,520 --> 00:30:40,000
Speaker 3: and talking about AI and the prospect. So look, it

555
00:30:40,120 --> 00:30:43,520
Speaker 3: is coming. It is real. It's not here in a

556
00:30:43,720 --> 00:30:45,600
Speaker 3: big way yet, but it is here a way, and

557
00:30:46,000 --> 00:30:48,240
Speaker 3: companies are just flexing it and starting to figure out.

558
00:30:48,840 --> 00:30:52,400
Speaker 3: And we heard the Teltra boss Vicky Brady this week

559
00:30:52,480 --> 00:30:55,240
Speaker 3: at a strategy briefing. She was quite open about it.

560
00:30:55,320 --> 00:30:56,960
Speaker 3: She said, look, by the end of the decade, the

561
00:30:57,080 --> 00:31:00,600
Speaker 3: way the Telterra looks, it will employ less people from

562
00:31:00,640 --> 00:31:03,240
Speaker 3: what it does today. And that was the basis that

563
00:31:03,520 --> 00:31:06,320
Speaker 3: AI will do a lot of work that is done

564
00:31:07,640 --> 00:31:12,040
Speaker 3: manually today. So that's one aspect that we will start

565
00:31:12,080 --> 00:31:13,800
Speaker 3: seeing an impact on the cost space.

566
00:31:15,080 --> 00:31:18,360
Speaker 1: So neil big issue at the moment is AI on

567
00:31:18,440 --> 00:31:21,120
Speaker 1: the basis that obviously if someone can do what they

568
00:31:21,240 --> 00:31:23,680
Speaker 1: used to do in six hours in two hours or

569
00:31:23,720 --> 00:31:26,280
Speaker 1: two minutes, depending on what the promise is for MEI

570
00:31:26,560 --> 00:31:28,440
Speaker 1: you can see how to cut straight through to profits.

571
00:31:28,480 --> 00:31:28,680
Speaker 2: Yeah.

572
00:31:29,160 --> 00:31:31,400
Speaker 3: Yeah, And I think when Neil would be really good

573
00:31:31,480 --> 00:31:33,840
Speaker 3: exercise for Neil is if he want to get ahead

574
00:31:33,840 --> 00:31:35,960
Speaker 3: of the pack on it is to have a look

575
00:31:36,000 --> 00:31:38,480
Speaker 3: at the big companies that are and how they're talking

576
00:31:38,520 --> 00:31:40,600
Speaker 3: about their use of AI and how they're applying AI

577
00:31:40,760 --> 00:31:44,040
Speaker 3: today because that may not translate to something today, but

578
00:31:44,200 --> 00:31:46,240
Speaker 3: in two or three is time, it may translate to

579
00:31:46,280 --> 00:31:48,600
Speaker 3: something pretty significant. Right.

580
00:31:49,240 --> 00:31:53,200
Speaker 1: Yes, those who master AI will master the universe. Okay, terrific.

581
00:31:53,280 --> 00:31:54,680
Speaker 1: We may we've just went out of time, so I

582
00:31:54,720 --> 00:31:57,760
Speaker 1: think we might just leave it there for today. Great

583
00:31:57,760 --> 00:31:59,880
Speaker 1: to have you on, Eric Johnson, associated is a bus

584
00:32:00,120 --> 00:32:01,000
Speaker 1: that's from the Australian.

585
00:32:01,320 --> 00:32:02,600
Speaker 3: Thanks James, nice to be here.

586
00:32:02,920 --> 00:32:05,440
Speaker 2: Thanks very much for coming on the show. And let's

587
00:32:05,480 --> 00:32:08,200
Speaker 2: have some more correspondents. And usually we'll call out this

588
00:32:08,360 --> 00:32:11,240
Speaker 2: week in that I have lots of emails flowing in,

589
00:32:11,360 --> 00:32:13,960
Speaker 2: but you know what, folks, some questions.

590
00:32:13,600 --> 00:32:16,640
Speaker 1: That aren't about the supertax would be particularly welcome because

591
00:32:16,680 --> 00:32:18,680
Speaker 1: it's a flooding the inbox.

592
00:32:18,480 --> 00:32:20,840
Speaker 2: And we will cover them. As you know, we've covered

593
00:32:20,840 --> 00:32:22,680
Speaker 2: them in special shows and there's more to come. I'm

594
00:32:22,680 --> 00:32:23,400
Speaker 2: sure on that one.

595
00:32:23,680 --> 00:32:26,560
Speaker 1: But there are other issues too, So let's hear from

596
00:32:26,640 --> 00:32:29,760
Speaker 1: you the money Puzzle at the Australian dot com dot au.

597
00:32:30,280 --> 00:32:30,880
Speaker 2: Talk to you soon,