Transcript QAV 113

Episode name: QAV 113

Duration: 48:50

Cameron Reilly [00:04]: Welcome back to the QAV podcast. My name is Cameron Reilly. If this is your first time, welcome. This is a podcast where I talk with my friend, self-made millionaire investor, Tony Kynaston about his investment strategy that has allowed him to achieve an average of 19 and a half percent return on his portfolio over the last 20 – 25 years. Normally we’ll take a stock and break it down. Look at its financials. Apply Tony’s checklist to it. But today we have a very special episode. We have a guest on to chat with us. One of Australia’s most respected financial journalists. Certainly, a very engaging man to talk to. Mr. Alan Kohler.

Now if you don’t know who Alan is. And I’m sure a lot of you do. He’s been around forever. I think he started his journalism career as a cadet at the Australian in the late 60s. He was the editor of Financial Review from 1985-1998. He was the editor of the Age in Melbourne from 92-95. In the late 2000’s he set up his own company. Where he published the Eureka Report and the Business Spectator before selling out to News Corp 5 or 6 years later. He was the chairman of Melbourne University Press for a few years. Today he’s running his own investment newsletter again, The Constant Investor, as well as still appearing in print and on TV, and the radio.

And he was kind enough to come on and chat with us about his view of the economy, his view of equities, even his view on things like whether or not CEOs are psychopaths and habitual liars. So it’s a fascinating chat and before we get into it, I just want to point out a couple of things. One – Tony was sitting in his dining room in his Cape Schanck golfing palace. So there’s a little bit of echo on his channel. As there has been over the last couple of weeks. But he’s back in Sydney now. So that will go away next time. And as always remember nothing you hear on this show  should be taken as financial advice. We’re not financial advisors. We’re just talking about ideas and concepts that Tony, and in this case Alan, have used in their own investing. Take some ideas from it if you like. But before you do any investing go see a proper financial advisor. With that, I’ll throw to Tony. And we’ll get on with the interview.

Tony Kynaston [02:45]: Alan thank you very much for coming on to our little interview here. It’s a  great honor to have you here. I’ve been a fan for decades now. Listening to you on the ABC and reading the Eureka Report. From pretty much its inception, I think. So it’s just fantastic to actually be talking to you.

Alan Kohler [03:04]: Well it’s good to be talking to you, Tony. And thanks for your support over the years.

Tony Kynaston [03:09]: You’re welcome. I’m quite keen to get your thoughts on how things are going both on the economy and the market. And I guess we can’t do that without talking about the election. So I might just throw it to you. And it would be great to get an update on where we are in the market cycle. What you’re thoughts are on the market and the economy. And what you think might happen from here now that the election is over.

Alan Kohler [03:31]: Well I suppose if we go back a bit. We had in the final quarter of 2018 we had a very big correction. All markets around the world, sort of came down quite a lot. About 20% bottomed on Christmas Eve. And then really, almost back to where they were in October. And so there was a kind of a correction and recovery. And the recovery was basically taking it back to where things were. And where things were, was the market was a bit expensive. So I think that on the whole. If you look at the Australian market as a whole, it’s currently, this is minus the banks. So we’ll talk about the banks in a moment.

But the Australian share market minus the banks is trading at a price-earnings ratio about 20 times. And that is above average. And you wouldn’t say that it’s entirely stretched. You wouldn’t say that it’s a bubble of some sort. But it’s certainly above average, the valuation, and its price for everything to go pretty much right. What was interesting after the election was that the banks had a big strong rise. About 6 or 7% each on the day after the election. And then kept going after that. Now it’s mainly because the election resulted in no change to negative gearing. Obviously, there is also no change to the dividend franking rules. But the main reason that the banks rose was because they’ve been no change in negative gearing. Which meant that the property market wouldn’t come falling. More of a hit that it has already. S there was a bit of optimism about the banks.

But the banks are still relatively cheap. And that is to say, the bank’s shares which represent around about 25% of the market. Are still priced for things to go wrong. That is to say, there’s relative pessimism around the banks. In a way what we have are two separate sorts of markets. The mining and resources sector and the industrials going really well. They are pretty well highly valued 20 times PE. The banks, on the other hand, have done well after the election but really, they’ve had a terrible start to this year. And they look below average in terms of their valuation. And they are currently priced for things to not go that well. That is to say, the property market continues to fall. And credit growth continues to decline. And also for unpaid loans to rise. And also the other problem they’ve got, of course, is that they having to pay lots of remediation costs. Which most analysts reckon haven’t stopped yet. So that’s where I think things are in the market. That really is kind of two sets. Two different markets really in a way.

Tony Kynaston [06:08]: A couple of questions on what you said, Alan. The first one is. Given the sort of stretch nature of valuations in the non-bank sector. My feeling is that the market has basically taken an option on the future [inaudible06:21]. Not only in Australia but also in the US. What are your thoughts on that?

Alan Kohler [06:25]: Well that’s correct Tony. The thing is the reason interest rate cuts are coming. The market is now 100% convinced that there will be a rate cut next month in June. And the forecast amount from economists just to be clear about it. The forecast on interest rates is that they’ll be at least two, possibly three rate cuts. And that’s from a cash rate of 1.5%. The reason that’s happening is because the economy is getting worse and deteriorating. Now it is the case that markets tend to focus on what the Reserve Bank or the central bank is doing. Rather than the reason they’re doing it, which is the economy. And I think that that’s not appropriate and I think it’s a bit misguided, really. Because the reason that the reserve banks hitting the red cap button is because the economy’s not doing too well. So that would suggest that the domestic economy is the basis on which the Australian companies are operating. [inaudible07:29] it doesn’t look that great. But it is true that the market is kind of focus to some extent on the rate cuts.

Tony Kynaston [07:33]: We do seem to have gone down in the rabbit hole a bit on. A [inaudible07:45] chamber of the market waiting for one of the reasons to cut rates and reacting to that. Rather than to the basic p&l and earnings potential for stocks. It does seem like a strange time to be an investor. What are your thoughts on the whole point out of easing driving the market sort of scenario?

Alan Kohler [07:58]: Well the problem is the cash rate. The average cash rate is 1.5%. So, therefore, you don’t get too many rate cuts from that point before you hit zero. And that’s what happened in the US. They cut interest rates to zero in the US. Didn’t want to go any further than zero. So, therefore, they started printing money and buying bonds, and that was quantitative easing. So the Federal Reverse expanded its balance sheet by trillions of dollars buying bonds with printed money. Freshly created money and that sort of has been increasing interest rates now for a couple of years. The problem we have here in Australia. Is that the new inert rate easing cycle? It is starting with rates at 1.5%. So there is a bit of talk that they will have to do some quantitative easing here because they’ll get to what they call the zero bound.

That is to say, the zero interest rates they’ll get to that before they start needing to stimulate the economy. It is the case in some European countries, rates have been cut. And, in fact, the European Central Bank cash rate is below zero. So it isn’t necessarily the case that you have a zero bound. You can actually cut interest rates to below zero. Although it’s not very nice. And I don’t think central banks like doing that. So I suspect that this will probably engage in quantitative easing before it goes below zero. But I think you need to bear in mind Tony. That the Australian market doesn’t really respond much to Australian interest rates. It isn’t really about what the central bank here does, that turns the Australian market.

We’re more influence by the Federal Reserve, and what happens to global interest rates and global markets because the share market is pretty much a global entity these days. To be honest, I don’t think that quantitative easing here or rate cuts here are going to make that much difference. It really has to do with what’s going on in the US and the reason the market has recovered. Both in Australia and the US in the first quarter of this year. It’s because the Federal Reserve changed its tune. It is not talking about rate cuts yet in the way that the RBA is. But it stopped talking rate increases and that’s really what supported the market here and in the US.

Tony Kynaston [10:08]: Yeah, I think they are both very good points. Leaves me to reflect on whether the RBA and the US FED is a man with a hammer. Where every problem is a nail. At some stage, someone got to have a look at their mandate and say there is more to life than just inflation. And there are more tools in your toolbox than just changing interest rates. And we’ve been through a period of lower interest rates which drive property prices up very high. Reduced income for people who are trying to live off interest and retirement. Just because the economy was perhaps going through a bit of a slum. And it always seems to me like. The RBA needed more leaders or the RBA in conjunction with the government need more leaders. And I notice I think on the weekend that the RBA chief here actually asks the government to work in concept with them to try and put some infrastructure projects into the economy. To give it a boost. That will I guess at least help the economy along with interest rates? Rather than being this sort of one-trick [inaudible11:09]. What are your thoughts on that Alan?

Alan Kohler [11:12]: Well, that’s correct. That’s reserve bank really has only one tool and that is interest rates. Monetary policy. And that’s what it does. And you’re right because it’s z carpenter with a hammer. Everything looks like a nail. But the reserve bank governor did start talking the other day about the need for more fiscal policy stimulus. I interviewed the treasures Josh Frydenberg this morning and put that to him. He said, there’s plenty of stimulus coming, they’ve got rate cuts, sorry tax cuts, proposed for the coming financial year. That will be the equivalent of two interest rates he says. And he’s got more tax cuts coming down the road.

So as a favor of infrastructure spending going on. I think it is the case that there is some fiscal stimulus coming. Both in the form of tax cuts and infrastructure spending. But the problem is that up until this point, most of the fiscal policy has been quite the opposite of stimulus if I can put it that way. I mean, the coalition government has been intent on getting rid of the deficit and going into surplus as fast as possible. And that, by definition, involves fiscal consolidation and tightening of fiscal policy. And, in fact, in the speech that the RBA governor made, recently, he talked about the fact that last year, household taxes increased at three times the rate of household incomes. That is to say10%, versus 3 and a quarter percent. And he said that that was unusual. And was a bit of a problem.

Frydenberg’s response to that was, it’s partly due to increasing employment. So a reduction in unemployment leads to more taxes paid by households. That is true. But I think it’s mainly due to bracket credit. And so what we’ve seen is although the coalition government did not increase taxes over the last few years. Bracket credit has done it for them. And so what they are doing now over the next couple of years, actually, three or four years. The proposal is to hand back the bracket credit that had been previously taken in the form of tax cuts and governments always do that. So I think we’ve seen tightening fiscal policy as the coalition has attempted to move the budget back into surplus. And actually, I saw something the other day. Just on Friday. That showed that the government that the budget is now in surplus. On a 12-month rolling basis. The budget is actually in surplus. And so when they account for the current financial year. 2018, 2019 financial year comes out. Which is in September. It will show that the budget for that 12 months has been in surplus. That’s the thing by definition, that is fiscal tightening, not stimulus. And it kind of has been going against operating against the multi-policy easing. That the reserve bank has been trying to achieve.

Tony Kynaston [14:00]: Yeah, that’s a good point. So where would you say the economy is Alan? Would you say it’s reasonably healthy? Or in a problem territory? Is it something that needs resuscitating? Or you think apart from a few speed bumps it’s going down the road nicely?

Alan Kohler [14:15]: Oh no it’s definitely not going down the road nicely. It definitely is weakening. I’m not saying we’re going to be in a recession, however, the economy is not going well at all. And that’s why we’re talking about rate cuts from 1.5%, possibly to two or three interest rate cuts. Crikey, we wouldn’t be talking about that. If the economy was going well. It’s not going well. I think the main thing, the main indicator of it. Well, there is a couple really. One is wages growth is really low. Inflation is like one and a half percent. Well below the reserve bank band. But the most important indicator, in my view, is underemployment. Now unemployment is 5.2%. Most recently, and so it’s been hovering around 5% for a while. So unemployment is not that much of a problem. Obviously, you would want it to be four rather than five.

But underemployment is the problem and it’s stuck above 8%. and has been for a couple of years, at the same time as unemployment has fallen from 6 and a half% to 5%. Underemployment has stayed at above 8%. And so what’s happening is that the economy is changing character, to some extent, in particular, the nature work is changing. I mean everyone refers to as the gig economy in a way. But I think we’re in a situation now where employment is not binary. It used to be the case that you either had a job or you didn’t, you’re unemployed. But nowadays employment is not quite binary. Because everyone can get a few hours doing Uber driving or delivering pizzas.

Cameron Reilly [15:44]: Or making podcasts

Alan Kohler [15:47]: Or making coffee or something like that. There’s all sort of part-time work going. And people are doing that instead of just going on the dole. But the thing is they’re all underemployed. And that is pressing down on wages growth, it’s pressing down on incomes, people haven’t got enough income because of that. If you add together unemployment and underemployment, which I think is what, one should do. The figure is 13.5%. And that is a large number. I mean, it’s I wouldn’t equate that to unemployment. You wouldn’t say that the addition of those two numbers being 13.5%  is what we used to regard as unemployment. I would say that. But it’s something like that. And certainly, I reckon the equivalent number that we used to look at just unemployment is certainly more than 5%. Take half of the underemployment at 4%. Then I reckon unemployment is probably more like 9% than 5%. And that’s recession territory. So that’s the problem. I think we have in Australia. And I don’t think that the authorities and the reserve bank or the treasury or anywhere are paying sufficient attention to this.

Tony Kynaston [17:01]: Alan thanks that’s a great summary on that whole issue. I can’t help but think that eventually, someone’s going to look at immigration as being part of that whole discussion about underemployment. I also think if I look back 10 years ago when there was a mining boom going on. There were lots of people traveling north and west to work on the mines and the economy was checking along very nicely. And employment was very high. There’s some of that now, but it’s gone away. And the economy hasn’t really taken up the slack with jobs usually within the infrastructure. So I’m hoping as well, at some stage in the future the government ceases the need for some stimulus in that area. Do you have any thoughts on that?

Alan Kohler [17:44]: Well, mines are robotic these days. Robots run mines. The mines are not a source of employment. The Adani mine that’s probably going to go ahead in Queensland. Will have no more than 100 jobs. It’s the biggest coal mine in Australia. It’s all going to be robots. So a mining boom will no longer lead to employment, it will lead to money. Being made by mining caps who are therefore paying taxes. So the government will be rolling in money that’s fine. But in order to get the employment going, there needs to be infrastructure, more importantly, there need to be small businesses. Retail selling and health care. Health is where all the jobs are. And that’s fine. But that needs to come from government spending. And all that stuff. So I do think that there is sort of a shift in the nature of Australia. In the way the economy is structured, that means that things are different now.

Tony Kynaston [18:36]: And what about your thoughts on immigration as well Alan? I saw in one of your emails that there was a case to say that most of the growth in the economy was coming from immigration. I wonder if those people coming in are also adding to the pressure on people. To participate in the gig economy.

Alan Kohler [18:52]: Well yeah of course.  But just before the election, some data came out that showed.  I think the last, I’m pretty sure the last quarterly GDP numbers showed that we had what everyone was calling a per capital recession, which is to say, on a per capita basis, GDP was shrinking and had shrunk, for two quarters in a row. And what that tells you, and GDP itself, the overall number was positive, that tells you that the growth in the economy was entirely due to population growth. Which is to say immigration. And that’s been the case for quite a while now. I mean per capita economic growth has been hovering around zero a bit positive sometimes negative. For almost 10 years. And so I mean, it’s not going too far to say that most of the economic growth that we’ve recorded. Over the past decade has resulted from immigration, which is expanding demand, expanding production, and so on, except on a per capita basis. It has not been grown at all. And if you take away that, plus you take away in recent times, in particular, the growth in LNG exports. Because of the big burning in LNG coals and gas export from Queensland. Plus more recently the states spending money to catch up on the infrastructure needed because of immigration. There wouldn’t be any growth in the economy at all.

Tony Kynaston [20:11]: I can’t help but smile, it’s a bit of a sorry state of affairs isn’t it? When we’re relying on people tipping in at the top of the bucket to keep everyone afloat. It’s food for thought. Given your comments about the economy, and where it is. What are your comments and feelings about people paying what looks like very high prices for growth stocks at the moment? Stocks like afterpay and the various other ones in the WAAAX stable of shares?

Alan Kohler [20:37]: Well I think you need to think about what the companies are doing. So most of the technology stocks are highly valued and have high PEs global. So if you’re just looking at the Australian market these companies are too expensive. But if you look at them as global businesses. Where they’re going after global positions, global revenues, then maybe they are not overpriced. Certainly, Afterpay is, for example, Afterpay is on a high PE because of its US business, which is just taking off. And so the investors are betting that they are going to succeed in the US. I mean they may or may not. The point being that there’s really no good looking at sort of traditional PE values. If you’re looking at something that’s launching a product globally. You know the market is much bigger. All these companies are global now. A sort of a traditional PE of, say, 15 times or whatever it is. Is useful for the Australian market. But it’s not particularly useful looking at a business that’s going for something that’s global, I think.

Tony Kynaston understands what you are saying. I think for me the keyword you use was a bet. It does seem to resemble more of a casino than a sort of investment. If I was to buy a share like half to pay the only way, I could value it. Is to start working out the probabilities or the various stages of growth actually happening. Growth in the Us, growth in the UK. What are the probabilities of the competitor coming in etc.? You sort of developed a big spreadsheet of all these things happening and then discount them back. But that feels like going to Randiwck on a Saturday and betting on a short price horse. Anyway.

Alan Kohler [22:17]: But Tony another one that’s like that is Xero, the accounting software company that started in New Zealand. Came to Australia and now it’s global. It capitalized at 8 billion dollars. But it still doesn’t make any money. Is that a high-risk spectacularly gamble? I don’t think it is. I mean it’s got so many subscribers. It’s definitely winning.

Tony Kynaston [22:38]: I don’t disagree with you, Alan. I think the hard thing for me is worth and how much to pay for that. And how much to pay for it going forward.

Alan Kohler [22:45]: Its extremely difficult, very difficult, very difficult. But the trouble is you have to shift your thinking to some extent you can’t just use old metrics that apply to a mature Australian-based business.

Tony Kynaston [23:01]: I appreciate that. And I’m happy to put my hand up and say I’m an old thinker. The first thing I always look out for in this kind of market. Is people who say this time it’s different. I heard that in 1999. So it wasn’t different then and I fear it’s not different now. And this market to me does smell a bit of 1999. Do you have a take on that? Are you fairly square in the camp of this time it’s different?

Alan Kohler [23:27]: I don’t think it’s just one extreme or the other extreme. I mean, I think it’s a question of the individual business. And how it looks. I think there is a lot of interesting companies around at the moment. And I think the internet is different. It has developed quite a lot of how can I put it. There are tremendous opportunities in the market these days. Obviously, there are a lot of shafters out there too. I would say I don’t think it’s like 1999 really. I think it’s different, every time, it’s always different Tony. It’s never the same. Things are never the same. It’s always different.

Tony Kynaston [24:11]: Thanks for the comments. I do see that the market tends to rhyme even if it doesn’t repeat. But rather than belabour the point, I asked you. Given those comments does that sort of thinking drive your personal style of investment? What is your personal investment style?

Alan Kohler [24:28]: I possibly do take more risks than you do Tony. I try to find companies that I think are going to succeed in the future. I don’t always get it right. That’s for sure. So, I certainly don’t, I don’t really like investing in staid blue chips too much, you know, I’m interested in having a bit of fun with my investing. I try to have a bit of both. I try to have solid good companies like Transurban things like that. As well as try to invest in the future to some extent as well. For example, I’ve invested in a business that’s called Pushpay which is a young business where the CEO has moved to Seattle. And they have launched an app to help churches collect donations online instead of sending the plate around. And they’ve gone really well in signing up churches.  The only reason they are in the US is because they are more and larger churches there. And they seem to be going very well. I think that took kind of a business for the future, I think. So I’m trying to do a lot of that. Some of my picks have been vast flops. That’s for sure.

Cameron Reilly [25:34]: Does Pushpay have an option for five-year-old buskers, Alan? My young fellow went busking for the weekend and people walking are walking past going ‘we don’t carry cash anymore’. I was thinking somebody needs a solution for young buskers.

Alan Kohler [25:50]: Well, that’s the problem with churches. Nobody’s got any cash to put on the plate. And what the churches are finding is that their donations are increasing by 10-15%. Because people are donating using their phone app before they go. And they are giving more than they used to. Churches love it.

Cameron Reilly [26:08]: And the Lord said pulleth out thy iPhone and open up thy app. Sorry.

Tony Kynaston [26:16]: Just wanted to draw down a bit further in what you’re saying, Alan. If we can take Pushpay. It sounds like you’re I guess looking at the potential upside, you’re looking at the story, the coding, the management, etc. Is there any science around your decision to invest or not? Do you have metrics, or do you have particular things you look for? Or is it just that you think on a case-by-case basis, ‘That’s a good story’?

Alan Kohler [26:44]: That’s about it. I really focus on cash, how much they’ve got in the bank. How much cash they are earning. If they are earning cash. These companies particularly early-stage companies. It’s very much a cash story. I’ve got to get there. I’ve got to not run out of money. And then it comes down to the quality of the management. Do I like them? I don’t invest in a business I try not to invest in a business. Unless I’ve spoken to the management, and I’ve got a sense of what they’re like. And then it’s the question of the idea really. Is the idea good? is it likely to succeed? I mean, I don’t as I say, I don’t always get it right. I invest in a business called Dermacom. Which I thought, kind of still think the idea is good. I like the management. But it’s never gone anywhere really. Unfortunately. I’ve got over a dozen stocks in my portfolio. I’m more a commentator on investing than a big investor myself, I should add, Tony. I’m a student of it, as opposed to a rich person.

Tony Kynaston [27:39]: Thanks for sharing that anyway Alan. It’s always been a question in the back of my mind. Because I hear you interview lots of companies. During the week on your invest smart website. And I often wonder if that influencing your investment style? And these people that you are picking on to interview. Are they the ones that you have already taken an interest in? And want to speak to their management? Or is that just something that crossed your path some other way? I guess the interview that we hear, are the people that you have taken an interest in? Or they are people that have contacted you?

Alan Kohler [28:15]: Well it’s a bit of both. But I try not to interview CEOs of companies that are absolute dogs. Because I don’t think that will be helpful to anyone. So I do try to keep it to companies that I think are interesting. And worth looking at. Just bearing in mind that I’m not an analyst. I haven’t analyzed these businesses so therefore, the fact that I’ve interviewed them is not itself a buy recommendation. It’s simply an interview. And you know, at the end of the interview, I’ll often come to a view that sounds interesting and worth more of a look. On that basis too. I’m hoping that you would get to the end of the interview and think well that’s worth more of a look.  I wouldn’t expect anyone to into investment in a company just on the basis of the interview. But I’d hoped that it would introduce that company to you as an investor. And you might be persuaded to do a bit more work on it. On the basis of that interview.

Tony Kynaston [29:08]: Thanks for that. Certainly have done that in the past with some of the people you’ve interviewed. So it is a good source of ideas. Cameron and I have spent the last 5 or 6 years writing a book on heads of institutions and the prevalence of psychopaths, psychopaths in those jobs. Called the psychopathic economy. What are your thoughts on relying on what CEOs have to say versus fundamental analysis of the companies? Have you ever felt like you’ve been lied to by a CEO during one of these interviews?

Alan Kohler [29:39]: Well all the time? I wouldn’t say lied to straight out lie.

Cameron Reilly [29:47]: Don’t forget Alan

Alan Kohler [29:48]: What?

Cameron Reilly [29:48]: What’s the George Costanza line that you quoted today?

Alan Kohler [29:53]: It’s not a lie if you believe it.

Cameron Reilly [29:53]: That’s right

Alan Kohler [29:57]: But the thing to understand. Remember CEOs are spruikers. They are there to sell their company. And whenever I speak to them, it’s always fun and amazing. Whenever I talk to CEOs, everything’s always fantastic. Everything’s great. The feature is great. We got the right strategy. And quite often, I’ve interviewed a CEO who says everything’s great, we’ve got the right strategy at the right time, next week, he said. And the new guy comes in and has to change everything and says that it’s terrible, the place is in a mess, we have to fix it up. And that’s happened more than once. I can assure you.

Cameron Reilly [30:38]: We were laughing about that on your show a couple of weeks ago. I’ve been laughing at it. You are probably very close to this, but CEOs of newspaper companies over the last 15, 20 years say now we’ve got a strategy, now we’ve got a great strategy for getting our newspaper back on top and profitable. And then they end up sacking a lot of people. Which seems to be the strategy.

Alan Kohler [30:57]: Well the thing to bear in mind about all CEOs, including newspaper ones, is that they are in the job for 2 or 3 years. 5 years the most. Their task is to get through that period. Without losing too much of their salary. Their job is to keep getting paid that salary. For the next few years. And then getting out with their skin on. That’s all they want to do. I mean, that’s fair enough.

Cameron Reilly [31:21]: Well is that a good thing for shareholders though? Is that what the CEO’s objective is?

Alan Kohler [31:26]: Of course not, there’s a push on and support to make the CEOs get paid, mostly at least half in shares. Then divest for seven years. And that’s what I think all these short-term incentives and all that stuff is, STI & LTI’s at the moment. Rubbish. Really, I mean, I think they should just get paid a salary, plus some shares that will vest in 7 years. And that probably will focus their minds.

Cameron Reilly [32:00]: I agree

Tony Kynaston [32:00]: Thanks for coming on Alan I really appreciate it. I guess I just wanted to give you a [inaudible32:04]. You spoke about some of your issues there. That you support change for. What about some of the other things I’ve seen and heard you talk about like a conflict of interest in financial planning, and high fund fees that are getting charged. Do you have something to say about those?

Alan Kohler [32:16]: I think it is true that the fees that some managers charge, are mostly too high and it is the case that on average, most fund managers do not outperform their benchmarks or the market. And they tend to underperform by the amount of their fees. So I think, and I’ve come to see that fees are the main problem in wealth management, apart from conflict of interest, and I was very disappointed that the Hain Royal Commission did not recommend. The separation of advice and product. In that, he specifically decided not to do that. I think the key problem with financial services in this country is that banks and wealth managers such as IMP are allowed to employ advisors, or financial advisors or to hold their licenses to be affiliated with them. And so the result of that is. That there is a disconnect.

They will think they are getting financial advice. Through its independence when in fact most of the time they’re not, it’s conflicted. Now it is the case that the feature financial advice legislation, banned commissions. But that’s not the only way that there’s a conflict of interest. Someone who’s employed by a bank to provide financial advice is naturally going to try to push products, even if the product is not the banks. I mean, they are involved in selling. I think financial advice needs to be entirely separate. What I think is a proper analogy with the health system. Where the idea of a doctor giving you prescriptions for drug companies that they are employed by. Would be completely unacceptable. I mean, if a doctor that gets kickbacks, or salary from a drug company would be rubbed out, and rightly so. But in wealth management as opposed to health management, it’s okay apparently. It’s not okay.

Cameron Reilly [34:09]: Fantastic

Tony Kynaston  [34:10]: Agree. Well, one last question Alan. I do this because I read on your Wikipedia page that you are an ambassador of the Australian Indigenous Education Foundation. Would you like to tell us what that is? And how we can get involved.

Alan Kohler [34:27]: So the AIEF is founded by Andrew Penfold and what they do is. They support indigenous people, kids mainly, obviously, children too, to go to good schools. In capital cities mainly. And those kids end up with good education and quite often go back to their communities. And I think it’s really not only helps those kids, but it really has a positive impact on the whole indigenous community. Because they kind of, they go back, and they sort of, the value of education is recognized and spread through the whole community. So I just think that that’s a really terrific charity, and they’re doing great work.

Cameron Reilly [35:09]: Wonderful

Tony Kynaston [35:09]: Well, thank you, Alan. That’s my last question, I really appreciate you coming on. I’ve been a big fan for a long time. And I’m always happy to hear your voice crying out against conflicts of interest in the financial services industry in particular. So well done and again thanks.

Alan Kohler [35:28]: No worries, thank you.

Cameron Reilly [35:30]: Well there you go. You got your fanboy interview there done. Are you feeling good?

Tony Kynaston [35:36]: Yeah. I’ve been excited about it all week. I really do appreciate Alan’s help. He plugged us into his email, and he came on board for an interview. It was a highlight for me. Someone very special.

Cameron Reilly [35:48]: That’s great. I thought it was interesting that he said he’s more of an investment commentator. An investing commentator than an investor. You seemed a little bit surprised by that?

Tony Kynaston [35:59]: I was yeah. Cause he has spoken before about companies he has invested in. And sometimes it works out and sometimes it doesn’t. But I do have the impression, that’s only my impression that he was a fairly large investor, especially after selling some of these companies back to news corp. So I was a bit surprised yeah. And I think also too, interesting to interview someone like that. I felt the interview was getting into a bit of a debate between him and me, on various investment styles. So I tried to sidestep that a bit. But it was a very different viewpoint from the one that I am employing. And I’m used to. So I think it was good to have that on the show as well to give people a wider, wider insight into investment styles.

Cameron Reilly [36:45]: Basically he said you’re an old fuddy-duddy when it comes to internet stocks.

Tony Kynaston [36:53]: Yes. Well, I mean, look at it. Name successful stocks are still around since the dot-com boom. There is Google, Facebook,

Cameron Reilly [37:05]: Amazon, eBay.

Tony Kynaston [37:12]: Amazon, I’m really struggling after that. And yet in 1999 there were 100s, if not 1000s of them around.

Cameron Reilly [37:18]: I was explaining this to I think, one of my kids on the weekend. You know, I was working in an ISP in 96. I think I worked for Ozemail, and I went from that to Microsoft, where I worked at our internet service division. So I was the account manager for Wishlist and dStore and Scape, the big online venture of Village Roadshow, who threw hundreds of millions of dollars into it, it lasted about 6 months. Just fact-checking myself there. According to a computer world article from the 21st of March 2001, Scape hits the dust bin, the Ten Network and Village Roadshow spent a reported $44 million to build the website. And I was explaining to my kids, you know, the percentage of these businesses that survive are minuscule, absolutely minuscule, and some of them go on and do huge things, but most of them don’t last. Most of them don’t make it even though they make huge claims and hired by venture capitalists and the tech media at the time as being huge visionaries that it is going to take over the world. I’m not just talking about Australian businesses. I’m talking about US businesses as well. Very few of them survive to become a profitable, stable, sustainable business.

Tony Kynaston [38:51]: Well, that’s right. I mean, even if you look at Amazon now. I think it’s barely profitable, and it certainly is in their business model to pump all their profits back into expanding sales, so I don’t begrudge that. But it makes it hard to value them.

Cameron Reilly [39:04]: Amazon made 11.2 billion in profit last year, so I don’t know what you classify as barely, but

Tony Kynaston [39:11]: Thanks Mr. fact-checker. Have a look at what their return is though.

Cameron Reilly [39:14]: Maybe, by your standards, that’s barely.

Tony Kynaston [39:23]; Yeah, I’m happy to be internet fuddy-duddy.

Cameron Reilly [39:24]: Well, let’s talk about, what you talked about a little bit off the air earlier today. And we were talking about value investing. One of the questions I wanted to ask Alan, but didn’t get a chance, was why, in his experience, after writing about markets for decades, more people, more investors, and fund managers don’t follow in value investing methodology as you do. And get the sort of returns that you do. And you were saying something about it sort of comes and goes in terms of popularity.

Tony Kynaston [39:57]: Yeah, it very much does. It comes and goes in terms of the cycle. So I remember leading up to the dot come boom and bash in sort of 97, 98, 99. People like Warren Buffet were coming out saying I can’t find anything to buy in this market. Everything is overvalued. So I’m going to go to cash. And it turned out to be a very good idea because in 2001 he was able to buy a lot of things cheaply. But it can be a period of four or five years where value investing goes out of style. And I think we’re in a time like that now. If all the fund managers who post a good performance in the last 12 months. Have all had shares like half to pay in their portfolio? And I can’t help thinking that’s going to come a corporate some stage. It’s just so volatile. And if they can buy at the bottom and sell at the top, good luck to them. But I think that’s very hard to do as well. Because what’s the top for a stock like that? If you can’t value it, how do you know when it’s overvalued? The other thought that is also at the back of my mind is that for decades.

The business press here is always being littered with stories about companies who tried to expand overseas. Particularly to the US and didn’t do so well. I mean the US is a big market, but it’s a difficult market. It’s over 50 states with different legislation in each state. And the different markets in each state. And lots of entrepreneurs who are ready to copy and implement something. On a wider scale than the Australian company. Entering the market can. Now some have done it and hats off to them. But I can’t help thinking as if I was writing an app. To make donations from US churches. It wouldn’t take long for someone involved in those US churches even to have another app in their mind. With a bigger network than what I could do from New Zealand. I could be wrong. And I am an internet fuddy-duddy but. It seems to me that, the people are overrating the chance of success in the US for these stocks.

Cameron Reilly [41:58]: How did you go from running one of  Australia’s first.com retailers? To be an internet fuddy-duddy, Tony?

Tony Kynaston [42:08]: I was always an internet fuddy-duddy. I remember working at Colmar at the time. We had people coming in, including Village Roadshow. And pitching their stories to us. And I kept scratching my head, going. Let’s lift the skirts here, where is the money? Where is the profit? And there wasn’t any. It was all about, not singling out Village Roadshow here. It was all about so let’s start an internet company. Let’s list it and let’s cash in. And get out. That was never a long-term business module. And I think maybe, I probably should have asked Alan, but I didn’t. I wonder whether his career in newspapers. And even in TV is any disruption that would have gone through. Is now coloring his taste for the disruptive.

Cameron Reilly [42:51]: I don’t think that there is no doubt that there is a huge amount of opportunity in disrupting business models. But as I said before, the number of startups that get it right and survive is minuscule. It really is like you said going to Flemington on the weekend. Which is something that you are not very good at based on the results of your horses in the last couple of years.

Tony Kynaston [43:20]: That’s right. I enjoy it and it keeps me mentally sharp. But it doesn’t pay the bills. And I think one thing I want to add to that Cam. Is that value investing? Is almost called a science, there are metrics, there’s the ability to look for things above or below hurdle rates. You can create a checklist. You can test against something that’s real. I haven’t yet come across an investor in the.com space that has a checklist like that. Other than sort of soft ones like how do you like the management? Or there’s a huge addressable market. It just doesn’t seem all that scientific to me. And I like the science of investing. Not the storytelling side of things.

Cameron Reilly [43:58]: Yeah. Look, I think that’s one of the things that I find fascinating about your approach is it is very math’s-based and rational. You almost, it’s almost like a scientific method. It’s like you’ve built-in ways of trying to navigate around the subject of cognitive bias and emotion. That everyone gets caught up in when we hear a good story. Humans are storytellers. We are driven by stories, and we’re susceptible to a good story. You kind of get beyond that and just look at the hard metrics.

Tony Kynaston [44:39]: Yeah thanks. That’s what I try to achieve. From experience, I mean, as I said, we started off listening to everybody tell a story. To us and take tips and that kind of thing. And it just ends in disaster.

Cameron Reilly [44:53]: It’s boring. It’s boring, but. And listen that’s not to say. I’m sure like I heard Buffet say he missed Facebook, he missed Amazon. They were given opportunities to buy them. And Apple. Given opportunities to buy into those companies a long time ago and said no, because they didn’t understand how to value it and they missed out. But you miss some, but long term he’s done okay with doing what he does.

Tony Kynaston [45:21]: Yeah. That’s exactly right. He’s doing this to win it. And I guess I better learn not to have regret about that. I mean, I mean I could have bought Amazon at 14 bucks in 2001. But I didn’t because I couldn’t see it making any money. If I had, we’d be having this conversion in the Bahamas. On a G7 golf stream. But we’re not. You can’t have regrets about that, you’ve got to stick to what you know. Your circle of competence as Warren Buffett says, and just keep plotting along with it, it’s boring. I find it fun. But most people will find it boring. It’s far more interesting to pick up the phone and talk to CEOs. Who are always giving you positive news and view about how good their companies are going to be. And how it’s going to be the next Amazon. Far more fun to do that than to sit down and go through p&ls, balance sheets, looking for good cash flow and low debt.

Cameron Reilly [46:11]: To me, that was one of the most fascinating things about chatting with Alan. Was just his views on CEOs.  Like that sounded something as cynical as something that would come out of my mouth. In the book of psychopaths. To come out of his mouth, I find fascinating.

Tony Kynaston [46:27]: Yeah, yeah. I did too. Well, I guess you know, he’s done enough interviews. And he’s been around long enough to be cynical. Isn’t that the old [inaudible46:35] of the hard-bitten newspaper? I’ve seen them all done that.

Cameron Reilly [46:38]: So what you’re saying is if you had bought Amazon back in 2001, you would be flying me. With you to St. Andrews in July. When you’re going on your distillery and Golfing tour for a month. Unfortunately, I have to stay here and keep the fires burning.

Tony Kynaston [47:00]: Next time.

Cameron Reilly [47:02]: But I will be in Sydney with you next week. We’re going to hang out, do some video, do some podcasts together. In a room less echoey hopefully than the one you’re in now. I’m looking forward to hanging out.

Tony Kynaston [47:12]: Yeah, it will be great.

Cameron Reilly [47:22]: We’ll do some more stuff analysis shows next week, and hope you enjoyed our chat with Alan Kohler. Thanks to all our new subscribers as well. We appreciate that a lot of you have come over from Alan Kohler’s newsletter. So I hope in particular that you guys enjoy it. And we’ll be back soon. Thanks, Tony.

Tony Kynaston [47:34]: Thanks Cam, I’m out. See you.

Cameron Reilly [47:39]: And one last note from me. If you want to sign up to become a member of the QAV club where you can hear our premium episodes or you want to check in our archives. If this is the first episode you’ve listened to, you should probably go back to listen to episodes 1,2,3,4 where we talked a bit about Tony’s background, how he developed his methodology, and his checklists. How it works, etc. We analyzed Telsa [inaudible48:00] so you get a sense of how the checklist works. Go to QAV podcast.com.ou. And I also produce a whole bunch of history and politics-related podcasts. If you’re interested in that kind of stuff. Go to the podcastnetwork.com, check those out. We’re not financial advisors, make sure you get financial advice before you do any investing. And that’s us for this week. We’ll be back next week with more stock analysis. Thanks for listening.

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