1 00:00:10,560 --> 00:00:13,520 Speaker 1: Hello, and welcome to The Australian's Money Puzzle podcast. I'm 2 00:00:13,600 --> 00:00:16,280 Speaker 1: James Kirkby, the Wealth editor at The Australian, and welcome 3 00:00:16,280 --> 00:00:20,639 Speaker 1: aboard everybody now. Issue Issue of the Week, Issue of 4 00:00:20,960 --> 00:00:23,840 Speaker 1: certainly one of the biggest issues of the year. Hasn't 5 00:00:23,880 --> 00:00:28,560 Speaker 1: happened for a long time. Chief executives behaving badly in 6 00:00:28,840 --> 00:00:32,800 Speaker 1: many different ways. Does it matter to you as an investor? 7 00:00:32,840 --> 00:00:34,840 Speaker 1: We want to look at that today. It does matter, 8 00:00:34,880 --> 00:00:36,600 Speaker 1: by the way we can show you in many ways 9 00:00:36,640 --> 00:00:37,520 Speaker 1: how it does matter. 10 00:00:38,080 --> 00:00:39,800 Speaker 2: What if you had shares. 11 00:00:39,520 --> 00:00:42,680 Speaker 1: In Quantus, for instance, and you would have paid a 12 00:00:42,760 --> 00:00:45,400 Speaker 1: price for the reign of Alan Joyce, who was so 13 00:00:45,479 --> 00:00:47,160 Speaker 1: good for so long. But in the end, of course 14 00:00:47,240 --> 00:00:50,319 Speaker 1: it was ruling like an emperor in that airline and 15 00:00:50,640 --> 00:00:53,440 Speaker 1: he was beyond question, it seems, and it's caused all 16 00:00:53,440 --> 00:00:56,360 Speaker 1: sorts of problems, including political problems. But put that to 17 00:00:56,400 --> 00:01:01,440 Speaker 1: one side. There were issues right across quantity after the 18 00:01:01,600 --> 00:01:04,160 Speaker 1: nature if you like, and the sort of rain that 19 00:01:04,240 --> 00:01:07,600 Speaker 1: he had where he was the king and the board 20 00:01:07,680 --> 00:01:10,240 Speaker 1: really seemed to roll over for him. Chris Ellison at 21 00:01:10,360 --> 00:01:14,200 Speaker 1: Mineral Resources Big Lithium Play. Lots of our listeners would 22 00:01:14,240 --> 00:01:19,960 Speaker 1: have interest in lithium. He is under investigation for an 23 00:01:20,000 --> 00:01:23,319 Speaker 1: alleged tax fraud. This is just like an old fashioned 24 00:01:23,920 --> 00:01:28,280 Speaker 1: I would have called it a small time way of thinking, 25 00:01:29,480 --> 00:01:32,440 Speaker 1: doing little deals on the side. We haven't seen that 26 00:01:32,480 --> 00:01:35,600 Speaker 1: for a long time with in billion dollar companies, and 27 00:01:35,640 --> 00:01:37,560 Speaker 1: there it is. And then of course of the spectacular 28 00:01:37,600 --> 00:01:41,680 Speaker 1: case of Richard White of Voice Tech, where that stock 29 00:01:41,760 --> 00:01:45,280 Speaker 1: lost billions of dollars because the CEO was invested in 30 00:01:45,440 --> 00:01:48,760 Speaker 1: a sex scandal. Now these aren't typical CEOs. Keep in mind, 31 00:01:48,800 --> 00:01:53,200 Speaker 1: these are larger than live CEOs, and they often create 32 00:01:53,240 --> 00:01:56,760 Speaker 1: the company and run the company, and they completely How 33 00:01:56,840 --> 00:02:01,240 Speaker 1: they behave is integral to how the company performs. 34 00:02:01,240 --> 00:02:02,160 Speaker 2: You could eat on musk. 35 00:02:02,800 --> 00:02:05,800 Speaker 1: Can we think of Tesla without eton musk mosque at 36 00:02:05,800 --> 00:02:09,160 Speaker 1: the Trump Valleys? Do you think that matters as an investor? 37 00:02:09,200 --> 00:02:10,760 Speaker 1: Is it relevant to you? So you can see how 38 00:02:10,760 --> 00:02:14,040 Speaker 1: there's layers in this. Roger Montgomery is a regular on 39 00:02:14,120 --> 00:02:17,040 Speaker 1: the show. He's also a regular contributor to The Australian's 40 00:02:17,040 --> 00:02:20,760 Speaker 1: Wealth Section and indeed this week he has written on this. 41 00:02:20,919 --> 00:02:22,920 Speaker 1: And when I saw the piece which he sends me 42 00:02:23,000 --> 00:02:24,960 Speaker 1: earlier in the week, the minute I saw what I 43 00:02:25,040 --> 00:02:26,560 Speaker 1: rang him and I said Roger, we have to do 44 00:02:26,600 --> 00:02:29,400 Speaker 1: a podcast artist, and you are the person to do it. 45 00:02:29,480 --> 00:02:30,200 Speaker 2: Oh are you, Roger. 46 00:02:30,600 --> 00:02:32,919 Speaker 3: I'm really well, James. It's always great to be talking 47 00:02:32,960 --> 00:02:33,680 Speaker 3: to in person. 48 00:02:34,440 --> 00:02:37,400 Speaker 1: I'm trying to think of a period where we had CEOs. 49 00:02:38,360 --> 00:02:40,960 Speaker 1: I mean, do we have to go back to do 50 00:02:41,040 --> 00:02:44,120 Speaker 1: we have to go back to the nineteen eighties and 51 00:02:44,200 --> 00:02:48,040 Speaker 1: the and the bonds and the cases and all that. 52 00:02:48,200 --> 00:02:50,960 Speaker 1: And by the way, folks, their scandals were all financially 53 00:02:51,040 --> 00:02:52,720 Speaker 1: right there, they were just financially really. 54 00:02:52,919 --> 00:02:59,760 Speaker 3: We've had congo line examples of CEOs behaving unsatisfactorily or inadequately. 55 00:03:00,480 --> 00:03:02,919 Speaker 3: And as we get into the talk today, we'll probably 56 00:03:02,960 --> 00:03:06,200 Speaker 3: discover that boards have a lot of explaining to do. 57 00:03:07,040 --> 00:03:10,119 Speaker 3: You could go all the way back to Enron and Worldcolm, 58 00:03:10,160 --> 00:03:12,720 Speaker 3: as far back as you even further back to those 59 00:03:12,800 --> 00:03:16,880 Speaker 3: that you mentioned. There's been ABC Learning Centers, We've had mfs, 60 00:03:17,639 --> 00:03:19,600 Speaker 3: We've had all Co, Badcock and Brown. 61 00:03:19,880 --> 00:03:20,600 Speaker 2: Credit Corp. 62 00:03:20,680 --> 00:03:24,320 Speaker 3: I was the first fund manager in Australia to launch 63 00:03:24,320 --> 00:03:27,880 Speaker 3: a class action against a public company because of failure 64 00:03:27,919 --> 00:03:32,600 Speaker 3: to continuously disclose information that was happening in a company. 65 00:03:32,600 --> 00:03:35,640 Speaker 3: In the Credit Corp case, Timber Corp. We've had great 66 00:03:35,680 --> 00:03:40,560 Speaker 3: Southern plantations and most recently wise Teken before that quantus 67 00:03:40,880 --> 00:03:43,760 Speaker 3: And in all of those situations, or in many of 68 00:03:43,800 --> 00:03:48,760 Speaker 3: those situations, what happens is there's a personality in the business. 69 00:03:49,040 --> 00:03:52,280 Speaker 3: They might be the founder of that business. In the 70 00:03:52,320 --> 00:03:55,240 Speaker 3: cases where a founder has built a very successful business 71 00:03:55,480 --> 00:03:59,760 Speaker 3: and they've brought directors underneath them, often the directors will 72 00:03:59,760 --> 00:04:04,480 Speaker 3: fit a debt of gratitude to that founder, that chairman, 73 00:04:04,600 --> 00:04:07,240 Speaker 3: or that CEO. Then, of course you have the examples 74 00:04:07,280 --> 00:04:10,800 Speaker 3: where they've grown the business, or CEO comes in, they've 75 00:04:10,800 --> 00:04:13,000 Speaker 3: grown the business. They might not be the owner, but 76 00:04:13,040 --> 00:04:15,360 Speaker 3: they've done a phenomenal job of that business. And what 77 00:04:15,480 --> 00:04:18,920 Speaker 3: happens is the media lavishes praise on that particular person. 78 00:04:19,320 --> 00:04:22,800 Speaker 3: That particular person men starts to drink their own kool aid, 79 00:04:22,920 --> 00:04:26,080 Speaker 3: so to speak, and then they become they become bigger 80 00:04:26,080 --> 00:04:29,120 Speaker 3: than ben hers so to speak. And then the directors 81 00:04:29,160 --> 00:04:32,960 Speaker 3: again fawn over these directors, and they're scared, they're scared 82 00:04:32,960 --> 00:04:35,760 Speaker 3: to actually stand up to them. James, if you'll indulge me, 83 00:04:35,839 --> 00:04:38,800 Speaker 3: there's a terrific quote from a University of San Francisco 84 00:04:38,920 --> 00:04:41,720 Speaker 3: professor back in two thousand and one. Is named is 85 00:04:41,839 --> 00:04:45,760 Speaker 3: Richard Pantillo, and he famously mourned the loss of the 86 00:04:45,880 --> 00:04:48,679 Speaker 3: corporate moral compass. And if I can quote him, he said, 87 00:04:49,320 --> 00:04:54,800 Speaker 3: in theory, publicly traded corporations have shareholders as their kings, 88 00:04:55,680 --> 00:04:58,599 Speaker 3: boards of directors as their sword wielding knights who protect 89 00:04:58,640 --> 00:05:03,200 Speaker 3: the shareholders, and managers as the vassal who carry out orders. 90 00:05:03,600 --> 00:05:06,279 Speaker 3: In practice, in the past decade, and he wrote this, 91 00:05:06,320 --> 00:05:09,839 Speaker 3: remember in two thousand and one, managers have become kings 92 00:05:09,839 --> 00:05:13,640 Speaker 3: who lavish gold upon themselves. Boards of directors have become 93 00:05:13,760 --> 00:05:17,400 Speaker 3: fawning courtiers who take coin in return for an uncritical 94 00:05:17,480 --> 00:05:21,279 Speaker 3: yes man function, and shareholders have become peasants whose property 95 00:05:21,320 --> 00:05:25,000 Speaker 3: may be seized at at management's when. And I think 96 00:05:25,400 --> 00:05:29,359 Speaker 3: a lot of listeners today can relate to that. The 97 00:05:29,440 --> 00:05:33,240 Speaker 3: shareholders are the owners of the business. But in many cases, 98 00:05:33,400 --> 00:05:37,760 Speaker 3: when a founder decides to offer some shares to the market, 99 00:05:38,279 --> 00:05:42,160 Speaker 3: those shareholders aren't considered at the same level of ownership 100 00:05:42,480 --> 00:05:45,040 Speaker 3: as the founder of that business. And that's where the 101 00:05:45,080 --> 00:05:45,960 Speaker 3: problems begin. 102 00:05:47,120 --> 00:05:50,040 Speaker 1: Yes, and that's the problem, of course, that when these 103 00:05:50,240 --> 00:05:52,840 Speaker 1: people and they are we have some I want to 104 00:05:52,839 --> 00:05:56,040 Speaker 1: talk about some companies that are for listeners, that are 105 00:05:56,200 --> 00:05:58,520 Speaker 1: very for the present is very important and by the way, 106 00:05:58,560 --> 00:06:01,599 Speaker 1: there are no scandals that we are aware of, none, whatever. 107 00:06:02,000 --> 00:06:06,159 Speaker 1: But they're marvelous companies, but they're also terribly linked with 108 00:06:06,240 --> 00:06:06,919 Speaker 1: one person. 109 00:06:07,480 --> 00:06:08,880 Speaker 2: We think of something like. 110 00:06:09,200 --> 00:06:11,920 Speaker 1: The Goodman Group, which comes up all the time because 111 00:06:11,960 --> 00:06:14,920 Speaker 1: not only is it a top class property trust her Reef, 112 00:06:15,120 --> 00:06:18,520 Speaker 1: it's also a play on AI for many people, a 113 00:06:18,520 --> 00:06:21,760 Speaker 1: company which isn't listed like Mecca Joe Horgen, she's she's 114 00:06:21,760 --> 00:06:25,560 Speaker 1: completely personified that company's But the issue is when you 115 00:06:25,640 --> 00:06:28,640 Speaker 1: have one person that personifies the company Richard Branson at 116 00:06:28,720 --> 00:06:33,160 Speaker 1: Virgin marvelous example, Jerry Harvey at Harvey Norman, how does 117 00:06:33,200 --> 00:06:35,719 Speaker 1: the board ever get around that, especially if these people 118 00:06:35,760 --> 00:06:39,040 Speaker 1: are If these people are, they're they're charming, they're strong, 119 00:06:39,040 --> 00:06:44,000 Speaker 1: they're brilliant, sometimes they're charismatic. You've made the point that 120 00:06:44,640 --> 00:06:48,080 Speaker 1: with all these with this particular issues, the three issues 121 00:06:48,080 --> 00:06:52,640 Speaker 1: we've listed in particular Quantus Minreis mineral resources, and also 122 00:06:52,720 --> 00:06:56,279 Speaker 1: wise Tech. You mentioned the professor and he's talk about 123 00:06:56,279 --> 00:07:01,120 Speaker 1: how it seems seemingly there's this structure, but in effect 124 00:07:01,200 --> 00:07:05,120 Speaker 1: it's completely the other way around. Indeed, you mentioned in 125 00:07:05,160 --> 00:07:08,200 Speaker 1: your piece which I was talking about earlier, that there's 126 00:07:08,839 --> 00:07:11,360 Speaker 1: in recent there's this a big push for independent directors. 127 00:07:11,400 --> 00:07:13,760 Speaker 1: So the theory was, bring in people who were really smart, 128 00:07:13,800 --> 00:07:15,600 Speaker 1: really good, a really good lawyer, a really good account 129 00:07:15,640 --> 00:07:18,040 Speaker 1: and someone who's already been through the hoops in another company. 130 00:07:18,040 --> 00:07:21,160 Speaker 1: Put them around the board, and then the CEO is 131 00:07:21,200 --> 00:07:26,160 Speaker 1: answerable to these people who dominate the board. That looks 132 00:07:26,200 --> 00:07:29,120 Speaker 1: good from the outside. The problem is sometimes these people 133 00:07:29,160 --> 00:07:31,360 Speaker 1: have no clue of what's going on in the company 134 00:07:31,400 --> 00:07:34,600 Speaker 1: and their only window is the CEO who talks their 135 00:07:34,640 --> 00:07:36,120 Speaker 1: own book. How do you get around that? 136 00:07:36,880 --> 00:07:42,440 Speaker 3: Yeah, Look, most boards, despite the conger line of disasters 137 00:07:43,000 --> 00:07:47,240 Speaker 3: that we've seen, despite that, most boards actually adopt conventional 138 00:07:47,280 --> 00:07:49,560 Speaker 3: wisdom and sound practice when it comes to procedures and 139 00:07:49,560 --> 00:07:53,520 Speaker 3: structures for their operations. They meet regularly. If you look 140 00:07:53,520 --> 00:07:57,480 Speaker 3: at the best and worst companies, they or companies where 141 00:07:57,480 --> 00:08:01,160 Speaker 3: nothing's gone wrong, and companies that have imployed, they held 142 00:08:01,200 --> 00:08:04,480 Speaker 3: the same number of meetings. So it's not meetings that 143 00:08:04,720 --> 00:08:09,200 Speaker 3: changes the outcome. There's an argument that you should have 144 00:08:09,400 --> 00:08:12,360 Speaker 3: members on the board who are invested heavily in the business, 145 00:08:12,360 --> 00:08:15,680 Speaker 3: but there are very famous examples. Ge as an example 146 00:08:15,720 --> 00:08:19,280 Speaker 3: where there's been great success and the board of directors 147 00:08:19,320 --> 00:08:21,800 Speaker 3: had little or no money invested. And then on the 148 00:08:21,800 --> 00:08:26,520 Speaker 3: subject of independence, which you raised, James, the conventional wisdom 149 00:08:26,560 --> 00:08:29,200 Speaker 3: says that you need plenty of independent directors. You don't 150 00:08:29,200 --> 00:08:31,800 Speaker 3: want to have too many mates or insiders, because that 151 00:08:31,920 --> 00:08:34,720 Speaker 3: muddy is the board's operations. It can also corrupt the 152 00:08:34,760 --> 00:08:38,720 Speaker 3: decision making process. But then Warren Buffett once said, if 153 00:08:38,760 --> 00:08:41,320 Speaker 3: you have too many people who are independent and their 154 00:08:41,400 --> 00:08:45,559 Speaker 3: professional gig is being an independent director, then their bread 155 00:08:45,640 --> 00:08:48,160 Speaker 3: is buttered by the fees that they receive for being 156 00:08:48,160 --> 00:08:50,920 Speaker 3: independent directors, and so they don't want to rock the 157 00:08:50,920 --> 00:08:53,120 Speaker 3: boat because they don't want to lose their income. And 158 00:08:53,280 --> 00:08:57,160 Speaker 3: speaking of Buffett as an example today, Birkshire Hathaways eleven 159 00:08:57,200 --> 00:08:59,959 Speaker 3: board members, but once upon a time it had seven. 160 00:09:00,559 --> 00:09:02,760 Speaker 3: Three of them had the Buffet surname. Three of them 161 00:09:02,760 --> 00:09:03,840 Speaker 3: were very related. 162 00:09:04,240 --> 00:09:05,560 Speaker 2: Oh was that good or bad? 163 00:09:06,000 --> 00:09:08,800 Speaker 3: We can have some incredibly admired companies that have done 164 00:09:08,800 --> 00:09:12,400 Speaker 3: great things and there's very few independent directors. 165 00:09:12,960 --> 00:09:15,480 Speaker 1: Your point is that the insiders. 166 00:09:16,280 --> 00:09:17,840 Speaker 2: Define it. Berkshire Hathaway. 167 00:09:18,800 --> 00:09:21,760 Speaker 3: Indeed, and I think this is the really important point. 168 00:09:22,280 --> 00:09:26,840 Speaker 3: If following standard governance protocols doesn't protect investors from the 169 00:09:26,920 --> 00:09:31,000 Speaker 3: sort of things that we've seen at Quantas and Minreres 170 00:09:31,040 --> 00:09:34,240 Speaker 3: and at wise Tech. Then what is it what needs 171 00:09:34,280 --> 00:09:40,839 Speaker 3: to change because those prescriptive tools haven't prevented people from 172 00:09:40,920 --> 00:09:44,120 Speaker 3: losing a lot of money by being invested in businesses 173 00:09:44,240 --> 00:09:47,760 Speaker 3: or companies where there's been a corporate failure or a scandal. 174 00:09:48,240 --> 00:09:50,760 Speaker 3: And I think what needs to happen is you need 175 00:09:50,800 --> 00:09:53,400 Speaker 3: to acknowledge. And we talked about it right at the start, 176 00:09:53,480 --> 00:09:57,079 Speaker 3: or you mentioned it in your introduction, it's about personalities. 177 00:09:57,400 --> 00:10:01,240 Speaker 3: Boards are social systems, and in so sociology, a social 178 00:10:01,240 --> 00:10:05,160 Speaker 3: system is a group of people that combine sounds like 179 00:10:05,200 --> 00:10:09,040 Speaker 3: a board to create a functioning society with goals that 180 00:10:09,120 --> 00:10:12,280 Speaker 3: sounds very much like what a board does. So they're 181 00:10:12,280 --> 00:10:17,040 Speaker 3: not just formal structures. They're a dynamic social system exactly 182 00:10:17,080 --> 00:10:20,439 Speaker 3: the same and more mature version, but exactly the same 183 00:10:20,559 --> 00:10:23,880 Speaker 3: as a sand pit in a kindergarten. And there's going 184 00:10:23,920 --> 00:10:28,199 Speaker 3: to be interpersonal dynamics that greatly influence the effectiveness and 185 00:10:28,240 --> 00:10:32,320 Speaker 3: the outcomes of what happens in that sandpit or board meeting. 186 00:10:32,800 --> 00:10:36,920 Speaker 3: So the prescriptive stuff is vital, but really it comes 187 00:10:36,960 --> 00:10:41,480 Speaker 3: down to the personalities and a couple of key ingredients 188 00:10:41,880 --> 00:10:45,360 Speaker 3: that those personalities need to bring to those boards. 189 00:10:46,240 --> 00:10:48,840 Speaker 1: You had an idea that the boards would run better 190 00:10:48,880 --> 00:10:52,120 Speaker 1: if they all had a basically a performance review every 191 00:10:52,160 --> 00:10:53,280 Speaker 1: year of personality. 192 00:10:54,400 --> 00:10:55,560 Speaker 3: Let's talk about that for a minute. 193 00:10:55,640 --> 00:10:57,719 Speaker 1: Yeah, I want to talk about it, because here's the thing. 194 00:10:57,800 --> 00:10:59,800 Speaker 2: Who would do it? We do it. 195 00:10:59,840 --> 00:11:03,560 Speaker 3: As I was writing the article for the Australian Wealth Section, 196 00:11:04,000 --> 00:11:07,319 Speaker 3: I realized that the founders and the CEO, they should 197 00:11:07,480 --> 00:11:11,120 Speaker 3: have publicly listed companies where there are lots and lots 198 00:11:11,120 --> 00:11:15,120 Speaker 3: of investors who are depending that their superannuation is depending 199 00:11:15,280 --> 00:11:19,720 Speaker 3: on their success or otherwise should be willing to submit 200 00:11:19,760 --> 00:11:24,240 Speaker 3: to individual accountability and performance evaluations. Now, as I wrote that, 201 00:11:24,559 --> 00:11:29,120 Speaker 3: I could hear CEOs, some of whom you've mentioned, saying, yeah, 202 00:11:29,320 --> 00:11:32,440 Speaker 3: that's not going to happen. Stuff that I own them. 203 00:11:32,520 --> 00:11:35,880 Speaker 3: I own the most shares. I am the CEO. I 204 00:11:36,040 --> 00:11:39,640 Speaker 3: built this company, I listed it on the ASX, I've 205 00:11:39,640 --> 00:11:41,440 Speaker 3: made it the great success that it is, and the 206 00:11:41,480 --> 00:11:43,840 Speaker 3: rest of you can all go and get lost. There 207 00:11:43,840 --> 00:11:47,520 Speaker 3: will be people who behave that way, which is precisely 208 00:11:48,440 --> 00:11:52,320 Speaker 3: that treatment of shareholders as peasants that Richard Pontillo described earlier. 209 00:11:53,080 --> 00:11:57,680 Speaker 3: That's that's where you will see really smart directors leave 210 00:11:57,840 --> 00:12:00,920 Speaker 3: the board and arguably shareholder should probably do the same 211 00:12:00,960 --> 00:12:03,480 Speaker 3: thing because eventually it's going to come a cropper. 212 00:12:04,240 --> 00:12:08,600 Speaker 1: Yes, eventually you pay for this, don't you. Yes, that's right, okay, 213 00:12:08,640 --> 00:12:11,520 Speaker 1: And just a quick word about the how important for 214 00:12:11,679 --> 00:12:15,160 Speaker 1: you were you when you're assessing companies and you're putting money, 215 00:12:15,720 --> 00:12:17,920 Speaker 1: a large lix of money often into companies. 216 00:12:18,640 --> 00:12:20,240 Speaker 2: And obviously I know you. 217 00:12:20,240 --> 00:12:22,560 Speaker 1: For a long time and I know that your quant 218 00:12:23,240 --> 00:12:26,400 Speaker 1: quantitative analysis is always very important to you. But the 219 00:12:26,520 --> 00:12:31,240 Speaker 1: chair and the CEO, now this is a thing the 220 00:12:31,280 --> 00:12:34,440 Speaker 1: two companies come to mind. Tesla has an Australian chair, 221 00:12:34,520 --> 00:12:37,640 Speaker 1: Robin Denim, and she she's been in all sorts of 222 00:12:37,679 --> 00:12:42,160 Speaker 1: trouble for quite simply getting it on Muscowet's way. She's 223 00:12:42,200 --> 00:12:45,800 Speaker 1: also in trouble because she's chaired the Czech Tech Council, yes, 224 00:12:46,280 --> 00:12:49,080 Speaker 1: which should have been across the wise tech thing ages ago. 225 00:12:49,200 --> 00:12:52,120 Speaker 1: That's one person. The other person is Richard Goider, who 226 00:12:52,160 --> 00:12:55,440 Speaker 1: was greatly admired, had run West Farmers, was the chair 227 00:12:55,640 --> 00:13:01,200 Speaker 1: of Quantus, while Joyce was particularly in the later not 228 00:13:01,400 --> 00:13:05,320 Speaker 1: running that company in the optimum way for anybody. So 229 00:13:05,360 --> 00:13:07,520 Speaker 1: how important is that dynamic and what can be done 230 00:13:07,559 --> 00:13:11,640 Speaker 1: to improve that situation, but they they'll become chums. 231 00:13:12,200 --> 00:13:15,439 Speaker 3: You mentioned there's a quantitative or a measurable aspect to 232 00:13:16,000 --> 00:13:20,280 Speaker 3: investment analysis, and you're looking at the outputs of the 233 00:13:20,320 --> 00:13:22,440 Speaker 3: company and the inputs as well the money that's going 234 00:13:22,480 --> 00:13:25,800 Speaker 3: into that particular business to produce those outputs. But it's 235 00:13:25,880 --> 00:13:31,440 Speaker 3: much harder to analyze that qualitative aspect, particularly if a 236 00:13:31,480 --> 00:13:34,760 Speaker 3: great board has a culture of open descent and it 237 00:13:34,920 --> 00:13:38,760 Speaker 3: values diverse perspectives to help avoid groupthink and to help 238 00:13:38,800 --> 00:13:42,640 Speaker 3: enhance decision making. How do we as external shareholders actually 239 00:13:43,200 --> 00:13:46,679 Speaker 3: assess that. It's really difficult. You can ask questions, you're 240 00:13:46,679 --> 00:13:48,720 Speaker 3: probably always going to get the answer you want to hear, 241 00:13:49,400 --> 00:13:52,239 Speaker 3: but ultimately that's what it comes down to. And unfortunately, 242 00:13:52,240 --> 00:13:55,599 Speaker 3: sometimes the founder or the CEO has a personality or 243 00:13:55,679 --> 00:13:58,920 Speaker 3: a celebrity status or a weld status at billionaires, and 244 00:13:58,960 --> 00:14:02,200 Speaker 3: it makes challenging them almost impossible. But that's what you 245 00:14:02,320 --> 00:14:04,360 Speaker 3: really want to find. You want to find a culture 246 00:14:04,360 --> 00:14:07,960 Speaker 3: of open descent. Open descent, Yes, yeah, indeed, and I 247 00:14:08,000 --> 00:14:10,800 Speaker 3: think if you can have that, then we wouldn't have 248 00:14:11,320 --> 00:14:15,280 Speaker 3: the situation at Wise Tech, We wouldn't have the situation 249 00:14:16,120 --> 00:14:21,000 Speaker 3: at Quantus. Nothing would have happened that merited headlines in 250 00:14:21,080 --> 00:14:23,840 Speaker 3: newspapers that would have been nipped in the bud much 251 00:14:23,920 --> 00:14:24,400 Speaker 3: much earlier. 252 00:14:24,440 --> 00:14:26,040 Speaker 1: All Right, we'll take a short break and we'd be 253 00:14:26,040 --> 00:14:39,520 Speaker 1: back in a moment with some of our listeners' questions. Hello, 254 00:14:39,560 --> 00:14:42,280 Speaker 1: and welcome back to the Money Puzzled podcast. James Kirby 255 00:14:42,320 --> 00:14:46,920 Speaker 1: with Roger Montgomery of Montgomery Investment Management, fund manager. I'm 256 00:14:47,000 --> 00:14:49,800 Speaker 1: sure you all know him, though I should introduce him 257 00:14:49,840 --> 00:14:53,320 Speaker 1: properly to you at this stage. Okay, lots of questions, Roger, 258 00:14:53,520 --> 00:14:56,800 Speaker 1: and they're pretty interesting. I just quickly read this is 259 00:14:56,840 --> 00:14:58,880 Speaker 1: not so much a question, but it was a comment 260 00:14:58,960 --> 00:15:02,120 Speaker 1: we I had. I've been talking about a piece I 261 00:15:02,160 --> 00:15:04,480 Speaker 1: had read in the Wall Street Journal which was so good, 262 00:15:04,520 --> 00:15:08,480 Speaker 1: and it was by the chief scientist at Facebook, and he, 263 00:15:08,880 --> 00:15:14,200 Speaker 1: of all people in the world, completely downgrades the excitement 264 00:15:14,400 --> 00:15:19,520 Speaker 1: around AI and written, James, I know you have and so, 265 00:15:19,840 --> 00:15:21,800 Speaker 1: and he says that where we're at the moment, that 266 00:15:21,880 --> 00:15:25,560 Speaker 1: AI in terms of intelligence is at the same level 267 00:15:25,600 --> 00:15:29,080 Speaker 1: as a household cat. In other words, he's saying, be 268 00:15:29,280 --> 00:15:35,760 Speaker 1: very careful. It's highly developed advanced computing and retention, but 269 00:15:35,920 --> 00:15:40,760 Speaker 1: it's not thinking. So Steven's question is I was thinking 270 00:15:40,800 --> 00:15:45,200 Speaker 1: about your comment on and this was about yan Lecuon. 271 00:15:45,440 --> 00:15:47,720 Speaker 1: By the way, yan l e c u N, who 272 00:15:47,760 --> 00:15:51,320 Speaker 1: is the chief scientist that metas comparing the intelligence of 273 00:15:51,480 --> 00:15:54,280 Speaker 1: AI and the cat. I just asked chat GPT to 274 00:15:54,320 --> 00:15:58,000 Speaker 1: calculate the cash transfer value of a UK defined benefit 275 00:15:58,080 --> 00:16:03,800 Speaker 1: scheme using the variables years worked, salary, etc. It gives 276 00:16:03,800 --> 00:16:07,240 Speaker 1: me an approximate answer and second and showed the mathematical formula. 277 00:16:07,480 --> 00:16:09,960 Speaker 1: I personally don't know any cats that could do this, 278 00:16:10,720 --> 00:16:11,760 Speaker 1: said Steven. 279 00:16:11,520 --> 00:16:15,760 Speaker 3: That's true, but both are right. Both are actually right. 280 00:16:17,240 --> 00:16:20,200 Speaker 3: It's producing that answer, but it's producing it based on 281 00:16:20,360 --> 00:16:23,400 Speaker 3: a probability analysis of what the next word should be, 282 00:16:24,160 --> 00:16:28,400 Speaker 3: and it's looking at stuff that's already been written by 283 00:16:28,520 --> 00:16:31,920 Speaker 3: humans and then pulling that in and consolidating it for 284 00:16:31,960 --> 00:16:35,280 Speaker 3: the user. Look scouring the internet to find the answer, 285 00:16:35,320 --> 00:16:38,320 Speaker 3: so to speak, and where it doesn't find the answer, 286 00:16:38,360 --> 00:16:41,840 Speaker 3: where it adds libs. It's using probability to work out 287 00:16:41,880 --> 00:16:44,400 Speaker 3: what the next word is likely to be. And it's 288 00:16:44,480 --> 00:16:48,280 Speaker 3: not thinking and so it's not making a decision. It's 289 00:16:48,360 --> 00:16:51,240 Speaker 3: just following a protocol and that is quite different to 290 00:16:51,480 --> 00:16:56,280 Speaker 3: a cat. And with respect to hype around AI, look, 291 00:16:56,400 --> 00:17:00,680 Speaker 3: I think I think that artificial intelligence there's a lot 292 00:17:00,680 --> 00:17:03,440 Speaker 3: of use cases for it. I use it, most people 293 00:17:03,480 --> 00:17:06,359 Speaker 3: I know use it, but we use it in a 294 00:17:06,400 --> 00:17:09,160 Speaker 3: limited fashion. And more importantly, we don't pay a lot 295 00:17:09,160 --> 00:17:11,680 Speaker 3: of money for it. So there's a couple of issues here. 296 00:17:12,119 --> 00:17:20,960 Speaker 3: Share prices are currently reflecting the technology being transformational not 297 00:17:21,080 --> 00:17:25,600 Speaker 3: only for life on Earth, which it may be, but 298 00:17:25,720 --> 00:17:30,840 Speaker 3: transformational for all shareholders in all businesses that are related 299 00:17:30,880 --> 00:17:34,600 Speaker 3: to AI. And what we know from past experience is 300 00:17:34,640 --> 00:17:37,439 Speaker 3: that not all players are going to make money, not 301 00:17:37,480 --> 00:17:41,159 Speaker 3: all players will survive, yet they're all being priced as 302 00:17:41,240 --> 00:17:43,840 Speaker 3: if they're all going to be enormously successful. Now we've 303 00:17:43,840 --> 00:17:46,080 Speaker 3: seen this in the past. We saw this with the 304 00:17:46,160 --> 00:17:49,720 Speaker 3: advent of the motor car. If you'd been in Germany 305 00:17:49,920 --> 00:17:53,440 Speaker 3: in eighteen eighty I think it was eighty eight, if 306 00:17:53,440 --> 00:17:57,040 Speaker 3: you've been there when Carl Benz drove the first horseless 307 00:17:57,080 --> 00:18:01,399 Speaker 3: carriage I think it was called the Benz patent Malta Vagan, 308 00:18:01,600 --> 00:18:04,119 Speaker 3: and he drove that. You might have spotted that this 309 00:18:04,240 --> 00:18:07,320 Speaker 3: was going to be transformational for life on Earth. 310 00:18:07,640 --> 00:18:08,360 Speaker 2: But even if you. 311 00:18:08,400 --> 00:18:11,199 Speaker 3: Had, and by the way, not everyone did. Famously, Henry 312 00:18:11,240 --> 00:18:15,040 Speaker 3: Ford's lawyer told Henry Ford. We don't need a motor car. 313 00:18:15,080 --> 00:18:18,240 Speaker 3: What we need a faster horses and so not everyone 314 00:18:18,280 --> 00:18:20,840 Speaker 3: picked it, but let's say you did pick it. After 315 00:18:20,880 --> 00:18:24,720 Speaker 3: that event, there's been something like sixteen hundred car manufacturers 316 00:18:24,720 --> 00:18:29,680 Speaker 3: in the United States, of which four exist today, and 317 00:18:29,960 --> 00:18:33,280 Speaker 3: two of those four were bailed out during the global 318 00:18:33,280 --> 00:18:36,159 Speaker 3: financial crisis. So really there's only one or two that 319 00:18:36,480 --> 00:18:40,480 Speaker 3: are profitable that still exists, and shareholders lost a ton 320 00:18:40,520 --> 00:18:42,879 Speaker 3: of money. The same can be said for television. The 321 00:18:42,920 --> 00:18:46,240 Speaker 3: same can be said for commercial air travel. Commercial airlines 322 00:18:46,280 --> 00:18:48,920 Speaker 3: have now been running for something like eighty years, seventy 323 00:18:49,040 --> 00:18:53,880 Speaker 3: nine years, and in those seventy nine years, the total 324 00:18:53,880 --> 00:18:56,400 Speaker 3: aggregate and I did the calculation using the official data 325 00:18:56,400 --> 00:19:02,040 Speaker 3: of the IOTA data, the total aggregate profit of all 326 00:19:02,240 --> 00:19:07,199 Speaker 3: airlines that have ever operated commercially to transport people. The 327 00:19:07,280 --> 00:19:11,480 Speaker 3: total profit today is twenty billion dollars. And that seems 328 00:19:11,480 --> 00:19:14,480 Speaker 3: like a lot of money, but let's remember Microsoft does 329 00:19:14,560 --> 00:19:17,159 Speaker 3: that in three months. This is eighty years. 330 00:19:17,680 --> 00:19:19,800 Speaker 1: Their shareholders haven't made a lot of money, only a 331 00:19:19,880 --> 00:19:20,679 Speaker 1: handful of winterers. 332 00:19:20,960 --> 00:19:23,679 Speaker 3: Yeah, that's right, So it's really hard to pick the winners. 333 00:19:23,840 --> 00:19:26,080 Speaker 1: Having said that, you like next TC, don't you and 334 00:19:26,119 --> 00:19:28,320 Speaker 1: you like McQuary technology, and you're in them, aren't you. 335 00:19:28,600 --> 00:19:31,399 Speaker 3: Am I right, we're in McQuary or have been in 336 00:19:31,480 --> 00:19:34,720 Speaker 3: McQuary rather. And the reason for that is that we 337 00:19:35,359 --> 00:19:39,000 Speaker 3: think that data centers are going to capture the line's 338 00:19:39,000 --> 00:19:42,439 Speaker 3: share because they're upstream providers. So you got upstream and 339 00:19:42,440 --> 00:19:46,280 Speaker 3: you got downstream downstreamer that people who try and adopt 340 00:19:46,280 --> 00:19:49,800 Speaker 3: the technology to make products to then sell and upstream 341 00:19:50,080 --> 00:19:53,119 Speaker 3: are the supplies of the picks and shovels. And we think, 342 00:19:53,200 --> 00:19:57,080 Speaker 3: and the numbers bear this out that the upstreamers they're 343 00:19:57,119 --> 00:19:59,720 Speaker 3: making the line's share of the money. At the moment 344 00:20:00,240 --> 00:20:03,879 Speaker 3: in AI, the biggest use case, the biggest commercial use 345 00:20:03,920 --> 00:20:07,320 Speaker 3: case or the most popular commercial use case for large 346 00:20:07,400 --> 00:20:11,040 Speaker 3: language models, which is the chat GPTs and the perplexities 347 00:20:11,080 --> 00:20:15,760 Speaker 3: of the world, is chatbots or companion bots. So these 348 00:20:15,800 --> 00:20:18,480 Speaker 3: are people who might be lonely for various reasons or 349 00:20:18,520 --> 00:20:21,080 Speaker 3: don't like talking to other real people, and so they 350 00:20:21,160 --> 00:20:24,680 Speaker 3: keep they subscribe to a chatbot to keep them company. 351 00:20:24,920 --> 00:20:26,560 Speaker 3: That's the biggest use case at the moment. 352 00:20:27,520 --> 00:20:30,919 Speaker 1: At the moment, just on the investment side, then, is 353 00:20:30,960 --> 00:20:35,119 Speaker 1: there any stock stocks that you think have a potential 354 00:20:35,920 --> 00:20:37,720 Speaker 1: to be the long term winners. 355 00:20:38,080 --> 00:20:39,000 Speaker 2: Well, I think all of. 356 00:20:38,920 --> 00:20:40,760 Speaker 3: Them, at some point in the next few years are 357 00:20:40,760 --> 00:20:44,560 Speaker 3: going to are going to have a valley through the 358 00:20:44,960 --> 00:20:47,280 Speaker 3: sorry a shadow of the valley of death moment, and 359 00:20:47,320 --> 00:20:50,120 Speaker 3: I think out of that will emerge there'll be some 360 00:20:50,160 --> 00:20:53,639 Speaker 3: sort of correction. It's and I think that I'm guessing, 361 00:20:53,720 --> 00:20:57,400 Speaker 3: completely guessing. I don't know, trying to predict these things 362 00:20:57,440 --> 00:20:59,800 Speaker 3: as a fool's errand but if in the next couple 363 00:20:59,800 --> 00:21:02,080 Speaker 3: of years we have some sort of correction, then out 364 00:21:02,119 --> 00:21:05,679 Speaker 3: of that will emerge some winners, and those that are 365 00:21:05,760 --> 00:21:09,480 Speaker 3: less likely to win won't receive ongoing funding and they'll 366 00:21:09,640 --> 00:21:12,600 Speaker 3: they'll fall over and disappear. And it's then that you'll 367 00:21:12,640 --> 00:21:15,480 Speaker 3: be able to, I think, be more certain of a 368 00:21:15,520 --> 00:21:17,240 Speaker 3: great return on your money from AI. 369 00:21:17,880 --> 00:21:22,040 Speaker 1: See the big superfones are certainly stopping large words of 370 00:21:22,080 --> 00:21:23,359 Speaker 1: cash into data. 371 00:21:23,520 --> 00:21:26,159 Speaker 3: The prices data centers are fine, but it's the AI, 372 00:21:26,440 --> 00:21:30,280 Speaker 3: the LM producers perplexity. I mentioned a moment ago. It 373 00:21:30,320 --> 00:21:32,639 Speaker 3: had a valuation earlier this year of about five hundred 374 00:21:32,720 --> 00:21:36,800 Speaker 3: million US dollars. It did a funding round in March 375 00:21:36,840 --> 00:21:39,840 Speaker 3: I think it was or April, and it was valued 376 00:21:39,840 --> 00:21:42,640 Speaker 3: at four billion dollars, and it's now looking to raise 377 00:21:42,880 --> 00:21:45,840 Speaker 3: some more money at eight billion dollars. So that's a 378 00:21:45,880 --> 00:21:49,480 Speaker 3: big jump in value in less than twelve months. And 379 00:21:49,960 --> 00:21:54,720 Speaker 3: its last official run rate for revenue was ten million dollars, 380 00:21:55,000 --> 00:21:57,800 Speaker 3: So an eight billion dollar valuation for ten million dollars 381 00:21:57,800 --> 00:22:00,520 Speaker 3: of revenue. Now there are that it's increased its revenue 382 00:22:00,560 --> 00:22:04,080 Speaker 3: to fifty million, but eight billion for fifty million of revenue. 383 00:22:04,400 --> 00:22:06,479 Speaker 3: There's a lot of optimism built into that price. 384 00:22:08,160 --> 00:22:10,240 Speaker 2: There's a lot of optimism built into that price. 385 00:22:10,320 --> 00:22:13,359 Speaker 1: Okay, So listeners, I think, I mean, look across this, 386 00:22:13,880 --> 00:22:17,480 Speaker 1: it does seem well Roger's talking about the offstream and 387 00:22:17,520 --> 00:22:22,119 Speaker 1: the difference between the language modular creators, but the data 388 00:22:22,160 --> 00:22:25,160 Speaker 1: centers being something of an approximate for the pixel shows 389 00:22:25,200 --> 00:22:25,720 Speaker 1: in the boom. 390 00:22:25,840 --> 00:22:27,440 Speaker 2: Is that a fair thing to say that? 391 00:22:27,680 --> 00:22:30,040 Speaker 3: I think that's fair, And it's worth remembering that there 392 00:22:30,080 --> 00:22:33,280 Speaker 3: are people who believe that large language models are going 393 00:22:33,320 --> 00:22:37,359 Speaker 3: to lead to artificial general intelligence, or what's called AGI. 394 00:22:38,119 --> 00:22:40,120 Speaker 3: And there are other experts who say, you know what, 395 00:22:40,200 --> 00:22:44,720 Speaker 3: for llms to turn into to evolve into AGI, there 396 00:22:44,840 --> 00:22:48,240 Speaker 3: literally is not enough energy on Earth to produce the 397 00:22:48,320 --> 00:22:53,560 Speaker 3: computing power for that to happen. So that's a widely 398 00:22:53,600 --> 00:22:56,840 Speaker 3: debated point, and I think some of the optimism in 399 00:22:57,200 --> 00:23:01,360 Speaker 3: share prices at the moment are bidding on large language 400 00:23:01,359 --> 00:23:06,000 Speaker 3: models becoming AGI or becoming artificial general intelligence. 401 00:23:06,040 --> 00:23:10,160 Speaker 1: That's why Google has bought directly into nuclear power, directly 402 00:23:10,280 --> 00:23:12,639 Speaker 1: into the Three Mile Island, believe it or not, of 403 00:23:12,680 --> 00:23:14,520 Speaker 1: all the plants, of all the nuclear plants in the 404 00:23:14,520 --> 00:23:15,560 Speaker 1: world of the Harrisburg one. 405 00:23:15,760 --> 00:23:16,680 Speaker 2: Yeah. Yeah. 406 00:23:16,720 --> 00:23:19,880 Speaker 3: Google's purchase of nuclear nuclear power plant is an attempt, 407 00:23:19,920 --> 00:23:23,399 Speaker 3: I think, to capture some of the energy that's needed 408 00:23:24,040 --> 00:23:25,520 Speaker 3: to do that, and they're aware of it. 409 00:23:26,240 --> 00:23:28,639 Speaker 1: Thank you, Stephen for that marvelous question. Could have been 410 00:23:28,640 --> 00:23:30,359 Speaker 1: a whole show. We'd come back to it. We come 411 00:23:30,400 --> 00:23:32,359 Speaker 1: back to it readily. Just a quick one from Sean 412 00:23:32,680 --> 00:23:35,280 Speaker 1: on the show last week, so market the crashes and 413 00:23:35,320 --> 00:23:37,720 Speaker 1: the crash of eighty seven. I saw no real info 414 00:23:37,760 --> 00:23:40,679 Speaker 1: in this episode, just a lot of reminiscence about nineteen 415 00:23:40,720 --> 00:23:45,440 Speaker 1: eighty seven, Okay, Sean, the idea I think of that, no, 416 00:23:45,520 --> 00:23:49,439 Speaker 1: I know that. I think the show what we did, Sean, 417 00:23:49,680 --> 00:23:54,159 Speaker 1: was to try and remind people what a crash is like, 418 00:23:55,200 --> 00:23:59,280 Speaker 1: and most people have never really seen one. 419 00:23:59,640 --> 00:23:59,680 Speaker 3: That. 420 00:24:00,280 --> 00:24:02,600 Speaker 1: Of course, a ferocious downturn in COVID, but in many 421 00:24:02,640 --> 00:24:06,200 Speaker 1: ways that was entirely explained by COVID and we recovered 422 00:24:06,240 --> 00:24:08,560 Speaker 1: quite quickly. What a lot of our listeners on the 423 00:24:08,600 --> 00:24:11,800 Speaker 1: show have never experienced is twenty five percent in a 424 00:24:11,960 --> 00:24:16,240 Speaker 1: session or fifty percent Yeah, but we both have or 425 00:24:16,280 --> 00:24:18,760 Speaker 1: fifty percent over two years that we got we got 426 00:24:18,880 --> 00:24:20,840 Speaker 1: once upon a time in two oh nine, and I 427 00:24:21,000 --> 00:24:25,000 Speaker 1: just wanted to have someone on the show to articulate 428 00:24:25,080 --> 00:24:28,000 Speaker 1: what it's like, folks, because I'm just saying to you, 429 00:24:28,080 --> 00:24:31,240 Speaker 1: as a shared investor, if you are really worried and 430 00:24:31,280 --> 00:24:33,440 Speaker 1: you find it's double churning when you get up and 431 00:24:33,480 --> 00:24:36,680 Speaker 1: find the market loses three percent in a night or four, 432 00:24:36,960 --> 00:24:39,240 Speaker 1: just remember it can go ten, it can go twenty, 433 00:24:39,320 --> 00:24:42,040 Speaker 1: and you should be able to accommodate that and know 434 00:24:42,119 --> 00:24:44,320 Speaker 1: that it can happen. Okay, short break, will be back 435 00:24:44,320 --> 00:24:47,679 Speaker 1: with the last three questions, which are very interesting from Tommy, 436 00:24:47,720 --> 00:25:00,719 Speaker 1: Paul and Fred. Back at the moment. Hello, Welcome back 437 00:25:00,760 --> 00:25:04,680 Speaker 1: to the Money Pozitle podcast. I'm James Kirby with Roger Montgomery, 438 00:25:04,920 --> 00:25:09,840 Speaker 1: fund manager and author, regular guest on the show. Tommy says, 439 00:25:10,280 --> 00:25:13,480 Speaker 1: longtime listener, first time caller, thank you, Tommy, do annual 440 00:25:13,560 --> 00:25:17,520 Speaker 1: capital growth rates for Australian property accurately reflect the value 441 00:25:17,560 --> 00:25:21,440 Speaker 1: appreciation of the land underneath the underlying land, rather distorted 442 00:25:22,160 --> 00:25:25,200 Speaker 1: by the neglecting the cost of capital improvements. 443 00:25:25,400 --> 00:25:25,960 Speaker 3: Great question. 444 00:25:26,080 --> 00:25:27,160 Speaker 2: Yeah, yes, it's a. 445 00:25:27,080 --> 00:25:29,600 Speaker 1: Really good question, isn't it The land out there isn't 446 00:25:29,640 --> 00:25:31,640 Speaker 1: really going up in the same way, is it. 447 00:25:31,760 --> 00:25:32,960 Speaker 2: What do you think, Roger Well? 448 00:25:33,000 --> 00:25:37,200 Speaker 3: I think it raises an interesting and interesting discussion about 449 00:25:37,240 --> 00:25:43,960 Speaker 3: where value in property lies. And we have to go back, James, 450 00:25:44,000 --> 00:25:46,200 Speaker 3: We have to go back maybe ten or fifteen years, 451 00:25:46,840 --> 00:25:50,760 Speaker 3: and I wrote an article for you talking about property 452 00:25:50,920 --> 00:25:55,080 Speaker 3: in that light. And if you look at the very 453 00:25:55,200 --> 00:25:58,160 Speaker 3: long term returns and one hundred year returns or eighty 454 00:25:58,240 --> 00:26:03,840 Speaker 3: year returns for as CBD office tower, then you might 455 00:26:03,880 --> 00:26:06,960 Speaker 3: be surprised to hear this, but pretty much all the 456 00:26:07,080 --> 00:26:11,480 Speaker 3: rent that has ever received from owning one of those 457 00:26:11,480 --> 00:26:16,800 Speaker 3: buildings is eventually poured back into its upgrade. In CBD buildings, 458 00:26:16,880 --> 00:26:19,960 Speaker 3: we have A grade buildings, B grade, C grade, D 459 00:26:20,040 --> 00:26:23,240 Speaker 3: grade and so on. And everyone with any kind of 460 00:26:23,880 --> 00:26:26,520 Speaker 3: big brand wants to be in an A grade building, 461 00:26:26,520 --> 00:26:28,879 Speaker 3: particularly if they're employing thousands of people. They want to 462 00:26:28,920 --> 00:26:32,440 Speaker 3: be in the newest, latest, greatest building, and those buildings 463 00:26:32,440 --> 00:26:35,960 Speaker 3: don't stay A grade forever because eventually technology changes and 464 00:26:36,080 --> 00:26:40,200 Speaker 3: newer buildings that are constructed with newer technology that surpass 465 00:26:40,560 --> 00:26:43,440 Speaker 3: the A grade building of ten years ago, fifteen years ago, 466 00:26:43,520 --> 00:26:46,480 Speaker 3: or twenty years ago, and so they have a limited 467 00:26:46,760 --> 00:26:49,600 Speaker 3: life where they're A grade buildings. Then they become B 468 00:26:49,720 --> 00:26:52,000 Speaker 3: grade and then they don't earn as much, and so 469 00:26:52,240 --> 00:26:55,639 Speaker 3: eventually the owners have to pour money back in and 470 00:26:55,880 --> 00:26:59,240 Speaker 3: engage in what we call capital expenditure to upgrade the 471 00:26:59,240 --> 00:27:03,800 Speaker 3: building to make it competitive again. And so with a 472 00:27:03,800 --> 00:27:07,520 Speaker 3: CBD office Towler, you have a postage stamp of land 473 00:27:08,080 --> 00:27:13,600 Speaker 3: that appreciates and you have a very large building that depreciates, 474 00:27:14,040 --> 00:27:17,200 Speaker 3: and those economics aren't great over the very very long run. Now, 475 00:27:17,200 --> 00:27:20,240 Speaker 3: people do make money out of office buildings, but they 476 00:27:20,280 --> 00:27:24,000 Speaker 3: make it tactically rather than strategically. So they're saying, Okay, 477 00:27:24,000 --> 00:27:26,520 Speaker 3: prices are really low. Now I'm going to buy one 478 00:27:26,520 --> 00:27:28,359 Speaker 3: of these buildings. I'm going to do really well because 479 00:27:28,400 --> 00:27:30,680 Speaker 3: I think prices are going to recover, and they make 480 00:27:30,720 --> 00:27:33,760 Speaker 3: a tactical profit out of that. But if you owned 481 00:27:33,880 --> 00:27:36,560 Speaker 3: a building for as long as the bricks and the 482 00:27:36,600 --> 00:27:40,119 Speaker 3: cement lasted, you would find that over time you'd be 483 00:27:40,240 --> 00:27:43,200 Speaker 3: pouring back pretty much all of your rent into upgrading 484 00:27:43,200 --> 00:27:46,680 Speaker 3: that building. What you really want is a big piece 485 00:27:46,680 --> 00:27:49,960 Speaker 3: of land and a tin shed on it, which is 486 00:27:50,000 --> 00:27:52,880 Speaker 3: like a Bunning's building. That's what you want. You want 487 00:27:52,880 --> 00:27:56,160 Speaker 3: Industrial industrial property, I think makes a lot more sense 488 00:27:56,200 --> 00:28:01,000 Speaker 3: economically from a business economics perspective. Industrial properties make more 489 00:28:01,040 --> 00:28:04,000 Speaker 3: sense than CBD office towers because you've got a lot 490 00:28:04,000 --> 00:28:07,720 Speaker 3: of land that is appreciating and you have only a 491 00:28:07,800 --> 00:28:09,600 Speaker 3: cheap shed that is depreciating. 492 00:28:10,080 --> 00:28:13,639 Speaker 1: It's so interesting. And in residential that version, obviously is 493 00:28:13,680 --> 00:28:17,040 Speaker 1: the landlords who have a row of pretty beaten noboard 494 00:28:17,040 --> 00:28:21,119 Speaker 1: houses that never change and are rented for generations. And 495 00:28:21,160 --> 00:28:22,879 Speaker 1: it's the same sort of thing in the middle of 496 00:28:22,880 --> 00:28:23,280 Speaker 1: the city. 497 00:28:23,400 --> 00:28:23,919 Speaker 2: Very interesting. 498 00:28:24,000 --> 00:28:26,000 Speaker 1: Okay, we must get through the other questions, but thank 499 00:28:26,040 --> 00:28:29,480 Speaker 1: you for that, Tommy's Paul. Are Australian and other share 500 00:28:29,520 --> 00:28:33,360 Speaker 1: markets approach in long term pe value peaks? 501 00:28:33,600 --> 00:28:36,440 Speaker 2: Don't they correct? At this point? What does history tell us? 502 00:28:36,640 --> 00:28:37,240 Speaker 2: If only we. 503 00:28:37,200 --> 00:28:41,520 Speaker 1: Could answer that in a reliable fashion, Paul, but Roger 504 00:28:41,560 --> 00:28:42,160 Speaker 1: will have a goal. 505 00:28:42,560 --> 00:28:45,320 Speaker 3: The short answer is no, it has nothing to do 506 00:28:45,560 --> 00:28:50,240 Speaker 3: with the valuations by themselves. It will be a change 507 00:28:50,240 --> 00:28:54,920 Speaker 3: in the PE ratio, which measures the willingness of people, 508 00:28:55,360 --> 00:28:58,920 Speaker 3: the popularity or willingness of people to pay for a 509 00:28:59,000 --> 00:29:02,640 Speaker 3: dollar of earnings. The more popular or the more willing 510 00:29:02,760 --> 00:29:06,160 Speaker 3: investors are to pay for a dollar earnings, the PE expands. 511 00:29:06,520 --> 00:29:09,600 Speaker 3: There is a relationship, a correlation between interest rates and PES, 512 00:29:10,080 --> 00:29:14,960 Speaker 3: but there's also a correlation between sentiment and PES, and 513 00:29:15,200 --> 00:29:18,560 Speaker 3: sentiment all else being equals, sentiment is going to drive 514 00:29:18,640 --> 00:29:21,000 Speaker 3: what people are willing to pay for a dollar of 515 00:29:21,040 --> 00:29:25,520 Speaker 3: earnings if interest rates remain constant. When interest rates go down, 516 00:29:26,120 --> 00:29:28,360 Speaker 3: that acts like I think it was Warren Buffett who 517 00:29:28,360 --> 00:29:32,160 Speaker 3: said that that interest rates are like gravity on prices 518 00:29:32,640 --> 00:29:35,600 Speaker 3: or on pes, and so when interest rates go up, 519 00:29:35,640 --> 00:29:39,160 Speaker 3: the gravitational force is much greater and the value the 520 00:29:39,160 --> 00:29:42,240 Speaker 3: present value of future income goes down. PES go down 521 00:29:42,280 --> 00:29:44,560 Speaker 3: because people leave the stock market to put their money 522 00:29:44,880 --> 00:29:48,840 Speaker 3: into safer securities that are paying a higher interest rate, 523 00:29:49,280 --> 00:29:51,680 Speaker 3: and so or what they perceive to be safer and 524 00:29:51,680 --> 00:29:54,320 Speaker 3: paying a higher interest rate. So that process of moving 525 00:29:54,360 --> 00:29:58,240 Speaker 3: money out of the stock market into interest bearing securities 526 00:29:58,400 --> 00:30:01,560 Speaker 3: because interest rates have gone up, that reduces prices. That 527 00:30:01,640 --> 00:30:06,040 Speaker 3: selling pushes prices down, and then prices follow the intrinsic value. 528 00:30:06,400 --> 00:30:10,800 Speaker 3: The intrinsic values because the present value of future earnings 529 00:30:11,160 --> 00:30:13,200 Speaker 3: goes down as interest rates go up. 530 00:30:13,680 --> 00:30:15,240 Speaker 2: But to try and to. 531 00:30:15,240 --> 00:30:17,440 Speaker 3: Say that old peas are very high at the moment, 532 00:30:17,520 --> 00:30:19,760 Speaker 3: now there's going to be a correction, that's wrong. And 533 00:30:19,760 --> 00:30:23,280 Speaker 3: you only need to look at Robert Schiller's cape chart. 534 00:30:23,400 --> 00:30:26,840 Speaker 3: You can google that. Just type in Robert Schiller cape 535 00:30:27,040 --> 00:30:29,720 Speaker 3: chart and it'll be the first it'll be the first 536 00:30:30,000 --> 00:30:32,400 Speaker 3: entry on Google or the first listing you can pull 537 00:30:32,480 --> 00:30:34,880 Speaker 3: up that chart, and what you'll find is that there 538 00:30:34,880 --> 00:30:37,400 Speaker 3: have been lots of times in the past where the 539 00:30:37,920 --> 00:30:41,000 Speaker 3: cape ratio has been high and it's just kept going higher. 540 00:30:42,560 --> 00:30:45,840 Speaker 3: So no, you wouldn't say that just because peas are high, 541 00:30:45,920 --> 00:30:48,600 Speaker 3: that the market is going to correct. That's a mistake 542 00:30:48,680 --> 00:30:50,400 Speaker 3: that only young players keep making. 543 00:30:52,040 --> 00:30:55,040 Speaker 2: Remember your young pups. But here's the thing. 544 00:30:55,360 --> 00:30:58,320 Speaker 1: If there was a bell that rang at the top 545 00:30:58,360 --> 00:31:00,800 Speaker 1: of them, I could pull, everybody would know, and we'd 546 00:31:00,840 --> 00:31:02,800 Speaker 1: all be out, and we'd all be worthy and we'd 547 00:31:02,800 --> 00:31:03,800 Speaker 1: go back in at the bottom. 548 00:31:03,920 --> 00:31:05,280 Speaker 2: But it doesn't work like that. 549 00:31:05,480 --> 00:31:08,520 Speaker 1: And as Roger says, when you see these headlines, and 550 00:31:08,600 --> 00:31:10,200 Speaker 1: it's a great old trick, you see it in media 551 00:31:10,240 --> 00:31:14,720 Speaker 1: all the time. This ratio, some ratio is gone high. 552 00:31:14,920 --> 00:31:17,960 Speaker 1: Be careful the last time it happened to stop market crash. Yes, 553 00:31:17,960 --> 00:31:22,000 Speaker 1: but there's no evidence proof whatsoever. 554 00:31:21,520 --> 00:31:23,800 Speaker 2: It'll crash again because of one ratio or another. 555 00:31:24,160 --> 00:31:26,840 Speaker 1: I think, as Roger alluded to, it's sentiment. Really all 556 00:31:26,920 --> 00:31:29,280 Speaker 1: you can have all the ratios you like, it's sentiment 557 00:31:29,360 --> 00:31:32,200 Speaker 1: that on the day that turns a market. I think 558 00:31:32,200 --> 00:31:34,680 Speaker 1: the best one two for that is nineteen eighty seven. 559 00:31:34,720 --> 00:31:36,560 Speaker 1: So one of the reasons I used that crash because 560 00:31:36,600 --> 00:31:40,080 Speaker 1: it was the one that had no clear, outstanding explanation 561 00:31:40,480 --> 00:31:44,360 Speaker 1: except for the fact that the market had run so high. Okay, 562 00:31:44,840 --> 00:31:48,000 Speaker 1: and other crashes we knew why, COVID, GFC. 563 00:31:47,680 --> 00:31:49,280 Speaker 2: Et cetera. Yeah, we might. 564 00:31:50,080 --> 00:31:51,960 Speaker 3: I was just gonna say, James, it might be that 565 00:31:52,080 --> 00:31:54,440 Speaker 3: there's a huge amount of global debt which hasn't worried 566 00:31:54,480 --> 00:31:57,800 Speaker 3: anyone year for many years, and then suddenly everyone starts 567 00:31:57,800 --> 00:31:59,920 Speaker 3: to worry about it because there's a refinancing of it. 568 00:32:00,480 --> 00:32:04,480 Speaker 3: Or China decides to annex Taiwan, it decides to put 569 00:32:04,520 --> 00:32:06,320 Speaker 3: all of its ships and all of its planes over 570 00:32:06,360 --> 00:32:10,600 Speaker 3: the top, and suddenly sentiment changes. And that's more likely 571 00:32:10,680 --> 00:32:12,480 Speaker 3: than just the fact that peas are high. 572 00:32:12,880 --> 00:32:16,440 Speaker 1: Yes, exactly the sentiment rather than the actual numbers. Okay, 573 00:32:16,520 --> 00:32:18,560 Speaker 1: final question from Fred. We'll try and do it quickly. 574 00:32:18,640 --> 00:32:21,080 Speaker 1: It is impossible to see how my superfund is really 575 00:32:21,120 --> 00:32:25,160 Speaker 1: doing against the market because tax is a distortion. Tax 576 00:32:25,200 --> 00:32:27,840 Speaker 1: may exaggerate the returns if the tax rate is negative 577 00:32:28,680 --> 00:32:32,280 Speaker 1: due to franking credits, for example. In addition, the tax 578 00:32:32,360 --> 00:32:34,880 Speaker 1: on super can very lot, depending for example, if the 579 00:32:34,880 --> 00:32:38,320 Speaker 1: fund is in accumulation or pension. Isn't it difficult and 580 00:32:38,440 --> 00:32:45,240 Speaker 1: dangerous to discuss returns on investment without acknowledging the tax overlay? Yes, Fred, 581 00:32:45,400 --> 00:32:47,600 Speaker 1: absolutely it is. Do you think it's in particular issue 582 00:32:47,600 --> 00:32:51,160 Speaker 1: for super funds and their returns and their state? And 583 00:32:51,160 --> 00:32:55,719 Speaker 1: those advertising panels we see on the highways telling us 584 00:32:55,720 --> 00:32:58,520 Speaker 1: that such a funded nine percent for ten years in 585 00:32:58,600 --> 00:32:59,360 Speaker 1: a row or whatever? 586 00:32:59,520 --> 00:33:01,400 Speaker 2: Are they miss leading? Do you think, Roger? 587 00:33:02,360 --> 00:33:05,840 Speaker 3: Look? I think, James. The reason why it's done that 588 00:33:06,000 --> 00:33:10,640 Speaker 3: way is precisely because of the points that the question eraises, 589 00:33:10,640 --> 00:33:13,800 Speaker 3: and that is that everyone's tax is different. Imagine an 590 00:33:13,880 --> 00:33:18,080 Speaker 3: advertisement for a fund's returns that took into account everyone's 591 00:33:18,120 --> 00:33:20,840 Speaker 3: different tax rates. The numbers would be so small you 592 00:33:20,840 --> 00:33:21,760 Speaker 3: wouldn't be able to see the. 593 00:33:21,760 --> 00:33:23,520 Speaker 2: Ad yeah, or even the bands. 594 00:33:23,720 --> 00:33:26,200 Speaker 3: Yeah, absolutely, And so what we do is we take 595 00:33:26,200 --> 00:33:28,640 Speaker 3: that out of the equation and we let people make 596 00:33:28,680 --> 00:33:31,760 Speaker 3: their own assessment of what the return would be for 597 00:33:31,800 --> 00:33:34,680 Speaker 3: them given their tax rate they deal with. Everyone deals 598 00:33:34,720 --> 00:33:36,880 Speaker 3: with their own taxes, and we just present the numbers 599 00:33:36,920 --> 00:33:40,560 Speaker 3: pre tax but after these but before personal tax rates, 600 00:33:40,600 --> 00:33:41,840 Speaker 3: because we don't know people. 601 00:33:42,080 --> 00:33:42,520 Speaker 2: If you're in. 602 00:33:42,520 --> 00:33:46,680 Speaker 3: Pension phase in your superannuation fund, you're not paying any tax. 603 00:33:47,000 --> 00:33:50,240 Speaker 3: So the advertised return is your return up to one. 604 00:33:50,120 --> 00:33:50,840 Speaker 2: Point nine million. 605 00:33:50,960 --> 00:33:53,080 Speaker 1: Okay, I thank you very much, fed So I hope 606 00:33:53,120 --> 00:33:55,400 Speaker 1: that's useful to you. None of this was advice. It's 607 00:33:55,440 --> 00:33:58,280 Speaker 1: all information. And the last piece of information there was 608 00:33:58,360 --> 00:34:01,440 Speaker 1: that you want to see those returns before fees, but 609 00:34:01,640 --> 00:34:05,200 Speaker 1: actually on taxes, it's just not feasible to do it 610 00:34:05,240 --> 00:34:07,360 Speaker 1: after text because of the tax bands, because of the 611 00:34:07,440 --> 00:34:09,279 Speaker 1: tax position, because of the fact that you don't pay 612 00:34:09,280 --> 00:34:11,360 Speaker 1: TEXT when you're retired, and you pay half your income 613 00:34:11,400 --> 00:34:14,360 Speaker 1: in tax if you make a good salary before you're retired, 614 00:34:14,840 --> 00:34:18,480 Speaker 1: as all many of our listeners would be aware of. Okay, 615 00:34:18,960 --> 00:34:21,840 Speaker 1: Roger Montgomery, thank you very much. Marvelous to have you 616 00:34:21,880 --> 00:34:23,080 Speaker 1: on today or as a pleasure. 617 00:34:23,160 --> 00:34:24,520 Speaker 3: Jame's glad to be with you again in. 618 00:34:24,400 --> 00:34:26,759 Speaker 1: Person, and thank you very much for listening. Let's have 619 00:34:26,800 --> 00:34:30,440 Speaker 1: some emails the money Puzzle at the Australian dot com 620 00:34:30,480 --> 00:34:31,120 Speaker 1: dot au. 621 00:34:31,600 --> 00:34:32,239 Speaker 2: Talk to you soon.