ANDREW PAGE | from Strawman.com
ANDREW PAGE | from Strawman.com
A look at the bloodbath of the current markets, the impact it's having on portfolios and investor psychology, and the importance of a strong balance sheet when choosing companies to invest in.
“For the longest time prior to the second half of last year, we're in this growth mindset where ultra-low interest rates didn't matter if you were burning through cash. All we cared was that sales were moving in the right direction and eventually a lot of money was going to be made. And we saw all these ridiculous valuations on companies that for a lot of these kinds of companies were actually cashflow negative in a big way. So, the only reason you can survive when that is the case is because whenever you run out of cash, you pass the hat around and shareholders more than happy to tip it in because the share price is high and optimism is high. And yeah, it's all good, have some more money and do your thing, it'll all be worth it in the long run. And that changed in a very, very, very substantial way recently. And so, there are a lot of companies that will never recover to those highs and they may not even survive.”
TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE
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G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. Doom, carnage, blood bath, crunch, a sea of red, crush, kill, destroy, millions and billions and trillions of market value disappearing before our eyes. We'll all be ruined! Hello Andrew.
Hi Phil. What an intro.
Phil (1m 2s):
Well, this is the case, isn't it? That this is what we're all facing.
Andrew (1m 5s):
It feels like it, doesn't it? Yeah. It's pretty scary out there.
Phil (1m 9s):
Anyway, let me introduce you before we go on to the rest of this. And, but you've been on the podcast many times, an old friend of the podcast, Andrew Page, the founder, and managing director of strawman.com and co-host of the Baby Giants podcast. So are we all headed for ruin?
Andrew (1m 25s):
It depends on what you mean by ruin. The old economist answer of "it depends". Who was it who said "someone gave me a one-armed economist because they're always saying 'well, on one hand'". I think history, in fact, just off air, we were talking about how we love history podcasts, and I think history is really illustrative for us investors as well because history will never repeat exactly. But as, was it Mark Twain, who said, you know, history does rhyme. It doesn't repeat, but it rhymes. And I think there's a lot of truth to that. And you can look at previous bear markets and recessions and even depressions and you can sort of, it doesn't guarantee anything, but there are lessons to be drawn from it.
Andrew (2m 7s):
I think one of the lessons to be drawn from it to answer your question is, even under the worst case scenarios, at least the ones that history have served up, we have survived. We've weathered the storm and we've survived and more importantly, when we've come out the other end, we've prospered. And the other lesson is that the people who do really badly, I'm going to focus more on from the investing lens than anything else. 'Cause I guess that's what we're talking about. But the investors that, that had done really badly were the ones that were very poorly structured prior to it. So it probably took on huge amounts of debt, very speculatively structured portfolios. And not only that, but then when things got tough, they panicked and sold.
Andrew (2m 50s):
And the ones who have done the best were the ones that were able to endure because they actually had decent investments. Not that prices didn't fall and were really nasty for a long time, but they endured. And then they in fact continue to build. And as they continued to build, you know, eventually when the clouds parted and the sun shone out the other side, they were there at the beginning. No one rings a bell at the bottom, but just by enduring and continuing to dribble funds in, they were best placed to really prosper on the other side of it.
Phil (3m 21s):
It just really goes to show how much psychology and these headlines, like the ones I listed at the beginning of the podcast, really do affect people. You know, there's people, who've got investments, but when they're hearing all this news, it's just impacting them so much and all I can think of is just to sell.
Andrew (3m 37s):
Yep. And you know what, look, it's not my first rodeo. It's not yours. I'll speak for myself. I'd be lying if I said, you know, I was completely impervious to it. I mean, it sucks. There's nothing more gut-wrenching than to look at your portfolio where you've put your entire life savings and worked really hard over lots and lots and lots of years to build up. And then just to watch it sort of just evaporate. It's really tricky. When we always, and we all say this, but when you look over long periods of time and you say, well, we choose the best performing asset costs. It's shares, it's shares over any meaningful period of time. And the reason for that is it's kind of goes hand in hand with the fact that it also happens to be the most volatile and quote unquote risky asset class as well.
Andrew (4m 17s):
If it was the safest people would bid up the price to a point where you wouldn't get those returns. So it's kind of, the reason that we have great returns exactly because of periods like this. If it was easy without any risk, then, you know, almost by definition, the returns wouldn't be there. So it's not fun. But I try to look at the silver lining of it. And I'm very, very much cognisant of the fact that whenever we look forward as investors, we see the prospect of a market crash as a risk. But when we look backwards in time, we always see it as an opportunity. So when you talk to lots of investors, Phil, and when you're talking to investors and you were to ask them, what do you regret most about the GFC?
Andrew (4m 58s):
There are great isn't "Oh, I lost some money during that period." the regret is always, "I didn't take advantage of it enough." It's always the biggest regret. So I try to remind myself of that as well.
Phil (5m 9s):
It's almost counter-intuitive that, no matter how many times we talk about this and no matter how many times people are reminded, they get into these periods and then they don't take advantage of it. It's the old, you know, everyone's running out of the store when everything's on sale.
Andrew (5m 24s):
Yeah. Hundreds of thousands of years of evolution have wired us that way. You know, if you were on the Serengeti and someone in the tribe yelled out, lion, the person who's stood around and said, well, I haven't personally seen this line. I'd like some evidence for this. I'm going to take my time to think it through. I mean, that person got eaten. It just, when everyone starts running, you run as well. Right? Because that's generally a really good survival mechanism, you know, 15,000 years ago today on markets, those instincts serve you really, really poorly. So we're just not built for them. So when you look at the investing grades, they're all a little weird in the sense that they just lack that panic gene and they are more Vulcan like in there, the command of their emotions and the rest of it.
Andrew (6m 6s):
But it is, Buffet says it a lot. You don't need a really high IQ to be a successful investor. You do need a good degree of emotional fortitude though. And that is the far more important thing.
Phil (6m 16s):
Now this next question is about, and this is based on a Twitter thread where I saw you contributing. And I've sort of noticed this as well. I look at a chart of the XJO the ASX 200 and we're below the level of where we were in, what was an October, 2007. And it seems like there's been no gains made at all, but you've got an answer for this. Haven't you?
Andrew (6m 38s):
The great thing if you want to call it that Phil is, if the Sharemarket, you'll find an example to prove any point of view, because it just there's so much data out there, you know, but the points of view that that matter are the ones that are most statistically valid, I suppose I would say. So there's a couple points wrong with that. The first is that that argument is a highly selective one in terms of the start and end dates. The start date is the absolute peak of the market before one of the biggest financial disasters in history. And the end point is just after the US markets have entered into bear market territory and things are falling. So you've kind of picked the high of one cycle and you know, what is at least on, on the way to the low of the next cycle.
Andrew (7m 20s):
So just as I said to you, Hey, if you bought in may of 2009 and you sold in November of last year, your return would have been X. I mean, it's just, it's spurious, right? I'm being very selective in my data points,
Phil (7m 32s):
Arbitrary numbers aren't they
Andrew (7m 33s):
They're arbitrary ones. And they ones that I've been selected to make a point. And the point that the person was trying to make was, oh, everyone talks about long-term investing. Well, that was well, what was that? That was 15 years ago. Is that long enough? And if I bought, then I've actually made no money over that point. In fact, I've lost money on an inflation adjusted basis. So much for long-term investing, it's all rubbish. Ha you need to be a trader. You need to be a market timer. So my first point is, well, that's very selective. If, if we want to pick a combination of all, any meaningful long-term five-year periods, you will find that 95% of them and very, very favourably for you. So you can't pick the one or two examples where it didn't work.
Andrew (8m 14s):
The other point that I would make is is that, why are we only looking at half the story if you had an investment property? And I said, how have you gone over the years with that? You would include in your calculation, the rent that you received along the way, why wouldn't you it's cash. It's real cashflow, it's a real return, but on the share market, the general index that we usually quote over the all ordinaries or the ASX 200 is a price index. And that's usually a pretty good one when you're talking over relatively short periods of time. And you know, you're watching the news and they're telling you what the market did, but it ignores dividends. And in the market like Australia is where we are very focused on dividends, it skews the picture.
Andrew (8m 54s):
So SNP standard and policy create this index and not idiots. And they understand this. So they've also got, what's called an accumulation index or a total return index. So what it does is it says, look, whenever a company in this index pays out a dividend we'll re-invest, it we'll use that money to buy more units in the index.
Phil (9m 12s):
So just like a simple dividend reinvestment plan.
Andrew (9m 14s):
Yeah. Yeah. And why wouldn't you, right? Like, again, this isn't being clever. This is in fact this is more accurate than the other one, which only looks at the capital appreciation. So if you do that, you realize that an even if you want to be very selective in the dates and you want to choose the absolute height of the market before one of the biggest crashes in history, and you want to choose now, the market has doubled in that time. Absolutely doubled in that time. And not because there was incredible run of supernormal dividends that were being paid, but just, just the three to 4% average that just being paid out over a long period of time reinvested, it just means that you get a far, far, far better return. And so it's wrong.
Andrew (9m 55s):
It's wrong to say that the market is below where it was in 2007. It's right. If you want to exclude dividends, but why would you
Phil (10m 2s):
And that three to 4% that you mentioned, that's not just based on the purchase price of what you bought, because that's going to be increasing every year. Isn't it? That dividend on an inflation basis?
Andrew (10m 14s):
Yeah. Yeah, that's right. It's always dangerous dealing with averages. There'll be some companies that currently paying a 1% yield on a trailing basis and others that are 8%, but yeah, on average for the market, it tends to be about three to 4%, by the way, I've not included franking credits but you as an investor should, plus some franking credits on top of that. But this is what's deceptive about dividends is that people will say, well, why would I take a company that's giving me a 2% yield when I could get a 4% yield over here? I'm an income investor. Income is what matters to me. And I would say, well, you can't actually make that comparison unless you factor in the growth. I personally, even if I was a very focused income investor would prefer a company that's currently giving me a 2% yield, but each year they lift the dividend by 10%, as opposed to a company that's today paying me a 4% starting yield, but whose dividend does not move each year, because it's not going to take that many years before one overtakes the other and delivers a far, far superior stream of income over the fullness of time.
Andrew (11m 16s):
So yeah, you have to factor all of that kind of stuff in,
Phil (11m 19s):
And it's all about how companies deploy capital as well. I mean, you know, a company can be making lots of money and just giving it all back to shareholders, but how sustainable is that going to be in the term unless they can grow the business as well.
Andrew (11m 29s):
So, great example, there is, again, returning to Buffet, is Berkshire Hathaway. It's never paid a dividend and he could, but he chooses not to because Buffet feels probably justifiably so that he can keep that money and he can invest it on your behalf and he can get a much better return. So you could take the cash and you could put it in your pocket and do whatever you like with it. Maybe you'll reinvest it and buy it somewhere else. But here's a team of investors that is pretty much averaging about 20% per annum. I have a very, very long period of time, keep the money, Keep doing your thing. Like I don't want to interrupt you. So yeah, I've always felt that the calculus for the board when deciding whether they should pay dividends should not be based on anything other than what kind of return can we get if we keep that and how confident are we, it might be that we just we've got an opportunity to expand into a new market, or we could put it towards some R and D and build some more products.
Andrew (12m 22s):
We could invest in a bigger sales team and get more money in that way. Or we could do an acquisition or there's a million things that they could do. But the only money that you pay out is that, which you don't have a very high degree of confidence in that you could get a superior return. Otherwise give it to shareholders. A lot of companies don't operate like that. You know, something like a Woolies or a CBA, for example, know that they've got a very large component of retail investors that expect that dividend and they will continue to pay it even when sometimes they might have a better opportunity for it. So there are, there are exceptions, but if you want to be hyper-technical, that's the best lens to look through. I think
Phil (13m 4s):
Recently we managed to catch up in Melbourne at the Australian Shareholders' Association conference and listeners know I go on and on and on about the, the association, but they are a great organization. And you were the emcee for the conference. How was it for you? What were some of your impressions?
Andrew (13m 20s):
It was fantastic. It actually, for me, someone who works from home, it was actually my first sort of chance back in society after, after lockdowns and the rest of it. So I thoroughly enjoyed it. I felt that even though things were pretty scary, there was a wonderful mood in the air. I think there was a good sign of optimism. It's been a while since I've been to an ASA event, but there was a very strong emphasis on things like ESG. It was really good to see a very strong female component in terms of the guests. So we had some really awesome directors, executives, and investors there, which is, I say that because as you know, I feel it's such a male heavy industry.
Andrew (14m 1s):
So I feel as though things are shifting there for the better. And I say that not from a well, I just feel as though that's the way that we should go as a society, which I do, but also as one of the guests pointed out, is that more diversity on boards actually leads to superior investment returns. So I think I can say that I can make comments like that because it's the right comment to make, but also selfishly, because it just leads to better outcomes for shareholders. There was also a very big component on energy is very much in the news, inflation, climate. And that was a point that seemed to come up quite a bit as well. And interestingly enough, again, like the gender issue is sort of like, Hey, this isn't a cost.
Andrew (14m 41s):
This is an opportunity here. And there's some really great talks on, on all of that kind of stuff. Actually, I came away feeling pretty optimistic about Australia's situation that it's easy to sort of be cynical and go, you know, all these do gooders. We're sort of going in this direction, but come on, let's just, we're here to make money, focus on
Phil (14m 57s):
Profits. That's all we want where shareholders,
Andrew (14m 60s):
Profits, profits, profits, Hey, I'm all for profits, right. But it's kind of like, well, maybe we can do some good. In fact, here's the irony. That's I think it's finally, finally starting to dawn on people is that we should be doing a lot of this stuff again for our own selfish interests. So I've complained on the guest's name now, but he was worked for Saul Griffith for a bit. And they were basically sort of saying, look, in terms of energy, production, Australia should be the middle east of our region in terms of the abundant cheap energy that we have opportunity for. If we only make the right investment, we are one of the top sources of all the critical elements in the world, abundant sunshine, wind, geography.
Andrew (15m 41s):
We can produce steel and aluminium at a price that no one in the world can compete with. We have a comparative advantage there that cannot be beaten. We can all power ourselves for fractions of what we pay now, move ourselves around. It's a huge, it's a huge opportunity. And to hear some of the big corporate leaders and boards sort of acknowledging and talking about that was exciting.
Phil (16m 2s):
It's amazing. Isn't it? How the times have changed. And when I came into doing this podcast and I thought there'd be all this red meat, capitalism and profits profits profits, but it's not like that at all. It's like the world has gone in that direction to looking out for these kind of imperatives.
Andrew (16m 20s):
Yep. I think so. And it's becoming something that you kind of need to do really, because capital is not going into certain industries because people being rational about it, they're being rational about it. That recognizing that other people are going to see this as less appealing, it's going to impact evaluations, it's going to impact investment decision. So I actually, I'm one of these people who believe that actually we, as investors can do it. It can be a real agent for change for positive change because money talks at the end of the day. And again, I worry when I make the point, I think for the longest time, particularly on climate, that the narrative was well, look, ultimately it's going to cost us a bunch of money.
Andrew (17m 1s):
So we might as well spend some, now we'll all make less money, but overall it's the right thing to do. And you know, even in the fullness of time, it's better. But actually I think we're getting to the point now it's like, even if there was no such thing as climate change, you'd still do it and you'd still do it because the economics are more attractive and the return potentials are more attractive. So yeah, it was a really, it was a really, really great event and some really great guests there.
Phil (17m 24s):
Okay. Well, let's have a look at Strawman now. We'll move to Strawman portfolios. Well, actually just give us a little bit of an explanation because many listeners might be aware of Strawman, about what Strawman does and how the portfolios are performing at the moment.
Andrew (17m 38s):
Okay. So we're, we're not too dissimilar from the ASA, we're a private online investment club. And part of the tool set that we give our members is we give them these paper portfolios. So you'd get a thousand dollars with a play money and you can go out there and you can buy shares on the market. And that is partly because it's good practice, I suppose. But also we use it as a mechanism for members to signal to other members. What they like whenever you catch up with other investors, the question is always, what are you like, what are you buying? What are you holding? How much do you like it? This is a way to communicate that so I can dial up your profile and I can say, oh, Phil's largest position is this he's been buying and selling that recently. So it helps signal to the community.
Andrew (18m 20s):
What individual investors think is worthwhile. And it also helps build credibility within the community as well. So I can see who are the long-term successful performers and it's not because we're trying to sort of big up those that have done well and criticize those that haven't, it actually instills a great deal of collaboration, the rest of us. Cause we all, we all know that we're only, you know, a bad market session or for moving around. So it keeps everyone on the level. Yeah. And part of what we do is we then aggregate that. So we say, okay, what are the most popular stocks held across our community? And then we form an index on the top of that, which basically says based on what everyone thinks in aggregate, what's a reasonable portfolio of,
Phil (19m 0s):
I just wanted to interrupt us for a moment. That's not just collaboration, but it's about testing each other's ideas as well in investment thesis.
Andrew (19m 7s):
That's why it's called Strawman. Yeah, actually it is. So it's not about may saying I really like this and I think you should buy that. Although if you look at my portfolio and my profile, you'll see exactly what I like and why I like it. And there's a million newsletters and stuff out there. We're not that we, I genuine club where anyone can get up there and put their own ideas out and we will try and sort of in a good natured way sort of challenge each other's thinking because the best way to improve an investment idea is to challenge it. And you know, we're either right or wrong. If we're wrong, we can put our head in the sand and, you know, eventually the market will rub our faces in it we'll lose money or we can, you know, find some holes in our investment thesis and act before it's too late. Or in fact just find some other ideas that we otherwise might not have come across.
Andrew (19m 50s):
So it's just basically designed for investors to sort of come together, share ideas, okay. And our responsibility at the end of the day, everyone does what they like, but hopefully they pick up some new ideas. Hopefully they have some ideas challenged and hopefully we're, we're better investors as a consequence,
Phil (20m 3s):
Smaller end of the market is very much preferred by many of the investors. And that's the one that's been particularly hard hit at the moment. And I know we're into talking, play money here as well, but I'm sure some people would be investing in the, with the same kind of strategies as well. And what are you seeing?
Andrew (20m 22s):
We're doing it really tough. So I was never designed this way, but for whatever reason, the community has gravitated to the small cap and of the market. I think there's a couple of reasons for that. One is it's under-researched. So all of the big institutions and brokers cover all the top 200. And if you want information on a company outside of that just doesn't exist. So we've kind of built a bit of a brains trust for that undercover area of the market. It's also an area of the market where there's best return potentials. I would argue because there's less competition there. People tend to think that small caps are just super risky on balance. That's true, but there's loads of companies, even companies that are worth less than $50 million that have incredibly resilient sales and earnings and balance sheets and the rest of it, they're the exception, but they're there.
Andrew (21m 6s):
They just happen to be under the radar. So we like those and they have delivered incredible out-performance for our community. We first launched the first version of the site in 2017. And had you followed just the communities just based on what the most popular holdings are. That's a 14.3 per annum return over a five-year period versus about 5.8% for the wider market. So massive outperformance, but the cost of that outperformance is increased volatility because that's what comes with the market. So when times are good, we just, we saw ahead when times are tough, we end up perform. So I said before that lately the result has been not great. We now have an inner circle of a paid premium ship membership that we launched in August last year.
Andrew (21m 47s):
So it's about a third of that community portfolios have been lost in that time versus an 11% fall in the market. So we're under performing at this point in time. Having said that the interesting thing is that the mood on the platform is very much one of optimism and opportunity. And I think what gives us that on average, I mean, again, I don't want to speak on behalf of everyone cause we're a broad church is that although share prices have come down growth-oriented small cap stocks in particular, in terms of what the actual businesses have done, they're actually great. And most recent reporting season, for the most part, we saw improved sales where their earnings, improved earnings. The business is just getting it done.
Andrew (22m 28s):
What's happened. The market's just, I hate the term it's that risk-off attitude. Oh, recession, bear, market sell, sell, sell, sell, sell. And that's just thrown a lot of babies out with the bath water. So we've copped it, but it won't last forever. This too shall pass. And when it does, I think a lot of these companies are going to be the ones that go on to do extraordinarily well,
Phil (22m 49s):
Small companies. Do they have any particular challenges for surviving those kinds of times?
Andrew (22m 54s):
I think the biggest thing you want to look out for this is true of all companies, but it's more true of small companies is you want to have balance sheet strength for the longest time prior to sort of the second half of last year, we're in this growth mindset where ultra low interest rates didn't matter if you were burning through cash. All we cared was that sales were moving in the right direction and eventually a lot of money was going to be made. And we saw all these ridiculous valuations on companies that for a lot of these kinds of companies were actually cashflow negative in a big way. So the only reason you can survive when that is the case is because whenever you run out of cash, you pass the hat around and shareholders more than happy to tip it in because the share price is high and optimism is high.
Andrew (23m 34s):
And yeah, it's all good. Have some more money and you know, do your thing. It'll all be worth it in the long run. And that changed in a very, very, very substantial way recently. And so there are a lot of companies that will never recover to those highs and they may not even survive. So what you want, what I want, I shouldn't say you want what you want, but what I want is I want a company that is not dependent on that one, that, that, okay, our share price has dropped 60%. No one likes us anymore, but you know, we don't need you anyway. We've got more than enough cash to sustain our operations. And if we are in a situation where we have been cashflow negative, it's only been because of the growth investments that we're making. And we can pull back on that.
Andrew (24m 15s):
In other words, we can still sustain existing operations and pay for all of our staff and all of our necessary capital expenditure just by the cash flows of the business. They're the ones that will endure. Not only endure, but in the grand scheme of things, have a fun going through it, but they actually benefit. And the reason they benefit is when you have these big wash outs, you lose half of your competition. For those that haven't been structured appropriately. So times get tough for you. You don't make as many sales as you thought, you know, it gets tough. Your share price goes down cause everyone's terrified. But then you come out the other side of it and there's all this market opportunity available to you.
Phil (24m 52s):
If you survive,
Andrew (24m 53s):
You've not only survived, but as things start to take off again, there's less competitors around and you've actually strengthened your position.
Phil (25m 0s):
What are the tools that you use to work out whether there's a strong balance sheet and enough cash to cover ongoing costs?
Andrew (25m 7s):
Ah, here's the thing. I think so many people these days think that you need to have some fancy software and you don't everyone's online, right? Go to asx.com, look at the announcements. And it's a legal requirement that these businesses, at least twice a year, give you their financial statements. You can look at the balance sheet, it'll tell you cash. The very first item on the balance sheet is cash. And just go down, you know, what else have you got in accounts receivable? You know, how much money you expect is coming in from sales, you've already made, you know, what's the debt, et cetera, et cetera. And you'll see, there are some companies out there with balance sheets that are as strong as you like. And then I can look at the income statement. Well, how much cash you're bringing in? What's the cashflow statement?
Andrew (25m 47s):
Like, is this a business that is viable at this point in time? If it's not, is that only because of, of certain growth initiatives that they're undertaking or do I feel as though that's going to change, it always puts people off when you say that, because it's far more attractive for me to say, oh, just look at this ratio and do this scan. And they'll tell you, look at this chart pattern and I'll tell you everything. You need to know if it was question of that, we'd all be Warren Buffet and it's obviously not. So yeah, it takes work. It takes a bit of learning and a bit of education. It's hackneyed. It's corny. I know, but the best investment you can make is to learn a few accounting skills and you'll, you'll just get right from the horse's mouth for free on the ASX website.
Andrew (26m 28s):
This is exactly what we're doing. And honestly, it's not complicated. You know, I think a 16 year old could get their head around all of these concepts and they will be intimidating at first. I won't lie to you and they will take a while for some of the pennies to drop, but it's no one's asking you to solve, you know, quantum field theory, equations, or anything like that. The math isn't that involved and the concepts aren't, aren't out of reach from anyone of any average capacity.
Phil (26m 53s):
Yeah. This is something that's been forming in my mind about this podcast called Shares for Beginners obviously. And what I've realized now it should have maybe been called shares, buying and selling shares is not simple. I mean, it is simple to a certain extent there's that as the way that you're explaining it
Andrew (27m 8s):
Well, Buffet calls It simple, but not easy,
Phil (27m 10s):
Simple, but not easy. Yeah. Okay.
Andrew (27m 12s):
Here's why it's simple. If you want to make money as an investor in the share market, buy quality companies at a sensible price and wait, that's it? That's so super simple. It's like losing weight or being healthy, right? Like we'll watch what you eat and do a bit of exercise. Super simple. Is it easy? No 'Cause hamburgers tastes really good. 'Cause sitting on the couch is much more fun than going for a walk. It's the same with shares. I can make this statement. I mean, good quality business bought at a sensible price or wants a good quality business. How do I know that? You know, so the execution can be a lot more difficult, but the concept is super easy.
Phil (27m 50s):
Are there any other metrics that you use for valuing companies or are they the main ones?
Andrew (27m 54s):
I actually don't even get to the valuation point until I get to the point that I feel as though I understand it is that another favourite quote of mine is from Peter Lynch and other famous investor who says, know what you own and why you own it. So what is it that I own? Here's a business. Could I have a reasonably intelligent conversation with the CEO? I know what service or product that they sell. I know the market in which they operate. I know the key drivers of growth. I know the ambitions that they've got for expansion and how they're looking to do that again. It's all out there that each year they produce reams of presentations and company announcements and the rest of it. And you just read it, read it, read it, read it more often than not. You'll get two a point where like either I don't like it or I don't understand it well enough, which for me is an instant pass.
Andrew (28m 37s):
Even though it could be the best investment, but if I don't understand it, I've got no business putting my money on it. But every now and again, you get to a point where it's like, oh, it's actually a pretty cool business. I like, they seem to be making good money and have the potential to make a lot more in the future. And it's only then that you even bother looking at the share price or even bother trying to answer the question of all, okay, how much is it worth? And that next question is something we could spend hours and hours discussing. But all I'll say is I think simple is better than complicated. You know, roughly what's the per share earnings of this business in five years time, what's a reasonable assumption of the market multiple. So, you know, I think the company learned a dollar per share in 2027, probably happy to pay 15 times earning.
Andrew (29m 20s):
So it's $15 in, in five years time and I want a 10% return per year. So I just discount it back by 10% each year, it tells me the price that I should pay or that I should try and pay below. Very simple, only as good as the assumptions that I make. Obviously I think you just start with that very simple analysis. It just gives you a good footing.
Phil (29m 39s):
Okay. That is simple. But however, and this is the problem you've got to start fossicking and trying to find these companies because you know what it's like so many times you just hear the story, you know, it's lithium stock. Someone's had this headline and think, okay, well I've got to go for lithium stocks or, you know, inflationary environment, gold. We should be going for gold stocks, but it's really much more than that. Isn't it it's actually having an interest because there are so many companies doing so many interesting things that like you say, especially in the Strawman universe are flying well below the radar
Andrew (30m 11s):
And you've got to go past those first level narratives. I can't stress it enough. That's
Phil (30m 15s):
Right. The first level narratives. I love that. So it's
Andrew (30m 18s):
True. Lithium's a great one. Here is what it is at the moment. Very reasonable people are saying we are electrifying and that this is a big structural, global transition that will take decades to play out. And for us to undergo that transition, the world is going to need a hell of a lot more lithium. I can't argue with that. I think that's spot on no argument there whatsoever, but then that's where a lot of people stop and then go and run out and buy shares. Well guess what? The market is always forward. Looking by the time you've had this epiphany, chances are, most of the market have already had this, especially the people who do this full time and have been thinking about it for the last five years. So you go and buy a lithium miner, not realizing that the price has already been bid up 300%.
Andrew (30m 59s):
It's all factored in. You get to the situation where it's like, well, even if that is true, I'm still probably not going to do that. Well if I owned a cafe, that's making a hundred thousand dollars per year and it's a really well run cafe. And you can be very confident that it's going to continue to make maybe that an extra three or 5% each year, you're still not going to pay me a billion dollars for that cafe. I mean, it's going to take you forever to pay off your purchase price. The sum of all of your cash flows are never going to work out in a positive way. So price matters a lot. So firstly, you've got to say, well, is it in the price? And very often it is for these narrative stocks. The second one you've got to understand is, is what will not all companies are created equally.
Andrew (31m 40s):
You look at the lithium producers on the ASX. You've got some that are actually producing right now. Very good quality grade lithium already have end markets established. They've got the whole supply network, worked out offtake agreements, and they've already spent all the money on the capital expenditure and they're just banking it at this point. And then you've got the others, which are, we've got a tournament of land in South Australia and a few holes have been dug and it looks like there's some lithium there. We've got to spend the next five to 10 years spending tens of millions of dollars getting it to market. And by the time we do, there could be a huge supply side response in which case the price of lithium has since crashed. So you've got to think through all of it rather than just, we need more lithium, lithium good, buy lithium.
Andrew (32m 23s):
A lot of money gets blown up that way. It's a great starting point. Start with the story, but fill it out from there. And there's a lot of extra work to do.
Phil (32m 30s):
Yeah. And dig around for other companies that might be of interest, which brings me of course, to another podcast where there's a lot of discussion about some of these great companies is Baby Giants, how's it going?
Andrew (32m 40s):
Yeah, it's good actually. So I actually do another one for Triple M as well. So there's no shortage of podcasts out there at the moment, but yeah. So Matt Joass, Kevin Fung, Claude Walker, some friends of mine and there's no commercial plan to, we just get together and chat because it's so easy, right? Don't need a lot of gear or, or money. So we thought, well, let's just put it out there. It helps. I think us solidify some of our thoughts. It's a good chance to sort of talk things through with people that we trust and respect. If you want to be a fly on the wall of those conversations, hopefully it helps give you a few ideas and challenge a few perceptions as well.
Phil (33m 15s):
And Strawman, what's the next stage for Strawman?
Andrew (33m 17s):
Strawman. It took a while to realize, but you know, when you first start something off, it's going to be bigger than Ben Hur. And I sort of looked at things like hot copper and thought odds terrible, and this could be so much better. And we got some VC money and you know, the rest of it, I've just come to the conclusion that less is more. And so with Strawman, the idea is we're going to keep it pretty tight. We'll have a very limited membership, but really focused on the people who want to be there and want to make a contribution. And if it can cover its costs and if it can help me make some good returns job done. So at the moment we've got close to 700 members, really, really wonderful engaged community. I think I've said to the members, we'll probably limit it to no more than a thousand.
Andrew (34m 1s):
We only open it for new membership once or twice a year. So if you're interested, you can go to the website and put your name on a waiting list, but we need to keep it small one because I feel as though it just delivers better outcomes, there's less noise. But also for practical reasons that we touched on before we tend to gravitate towards the smaller companies. And if you've got 10,000 people chasing a $20 million market cap company, we all shoot ourselves in the foot by pushing the price around. So I want to keep it pretty tight so that we can focus on that end of the market without unfairly moving the price around just by our buying and selling.
Phil (34m 33s):
That's great. And of course, whenever we chat, we should also put a shout out to Canadian Aussie, one of your better investors. Hey Trevor.
Andrew (34m 42s):
Yeah, actually he's well, I have to say second, I'm beating him on the rankings at this point in time, but he is easily one of our best members, lots of great content, a lot of good performance. And
Phil (34m 54s):
Very generous with his learnings as well.
Andrew (34m 56s):
Yeah. And I reckon he is, but I also suggest he does it because he also personally gets great benefit from it and sharing that. It's all what we're about. You share the thinking, you share those ideas, you engage with other people. It sort of gives you a way to sort of articulate all of these things. You've learned, solidify the thinking and then hopefully augment it with other perspectives. So he's just, he's an incredible learning machine.
Phil (35m 19s):
Okay. Andrew Page. Thanks very much for coming on the podcast.
Andrew (35m 22s):
Always enjoy chatting Phil. Thanks for having me.
Shares for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Shares for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation