Transcript QAV 336 — Michael Goldberg, Collins St Value Fund

File: QAV 336 — Michael Gold­berg, Collins St Val­ue Fund

Length: 01:29:17

Cameron Reil­ly: [06:06] Wel­come back to QAV if this is your first time lis­ten­ing to QAV, this is an invest­ment pod­cast. That usu­al­ly involves me talk­ing to my friend and invest­ing men­tor Tony Kynas­ton, and he explains his per­son­al method­ol­o­gy that we call QAV for how to pick good stock invest­ments. But today we’ve got a guest and we’re very excit­ed about this chat. We did this a cou­ple of days ago, I think 19th of August with Michael Gold­berg, Michael is one of the prin­ci­pals of the Collins Street Val­ue Fund. They’re val­ue investors with a twist; I guess when oppor­tu­ni­ties come along as Michael will explain.

But as you may know, if you’ve been lis­ten­ing to our show recent­ly, we talked about these guys a few weeks ago. They per­formed very well in the recent finan­cial year. I think they placed third in the Mer­cer sur­vey of invest­ment man­ag­er per­for­mance. So, and they’ve been per­form­ing very well for the last four or five years as you’ll hear Michael report on the show, out­per­form­ing the index very well. They’ve got a very con­cen­trat­ed port­fo­lio strat­e­gy. Any­way, ter­rif­ic chat we had, quite lengthy. So, enjoy this is Michael Gold­berg from Collins Street Val­ue Fund.

Michael Gold­berg: [01:41] So, I grew up in Mel­bourne to a fam­i­ly that was always quite entre­pre­neur­ial. My grand­par­ents came from via the Mid­dle East from Europe with noth­ing, but basi­cal­ly, the shirts on their backs and an excep­tion­al work eth­ic and they passed it on to my father and to my father’s fam­i­ly. And they also encour­aged their kids to take risks and be entre­pre­neur­ial. So, my father has always been in busi­ness, he’s always been an entre­pre­neur and that rubbed off on me, I think to some extent over the years. And I was doing entre­pre­neur­ial things before I even knew what the word entre­pre­neur­ial real­ly meant, but my dad built up a net­work of about 14 stores pre the 1990 reces­sion.

And there were lots of good learn­ing expe­ri­ences that I picked up over that peri­od. I think one of the ones that most clear­ly trans­late across to invest­ing and being a fund man­ag­er is that you dis­cov­er when you run a busi­ness that not every­body is as equal­ly informed as every­body else.

So, you can paint a pic­ture for sure if you speak to the man­agers, the store man­agers, to the sup­pli­ers or the sales­peo­ple, but no one’s ever going to know quite as much as the boss. And that always sort of sat in the back of my mind. And I’ve got a sense that, yeah, there are busi­ness­es and peo­ple can under­stand the busi­ness­es, but there are some peo­ple who under­stand them bet­ter than oth­er peo­ple.

In terms of stocks, I was first intro­duced to stocks in about 1990, 1991 when my aun­tie bought me a hun­dred dol­lars’ worth of CSR and from then on mum was only allowed to buy that sug­ar when she went shop­ping. I lat­er got intro­duced to a stock­bro­ker at JB were by one of my oth­er aun­ties. And this was before the days of dis­count broking and online broking. So, when you call up the bro­ker, you’ve got 20 min­utes chat­ting with an expert in the field. And then you walked away with mak­ing a pur­chase or mak­ing a sale, what­ev­er the case may be, and pay­ing a fee for that ben­e­fit.

And the first stock I ever bought, again, I think it was about 1991 was Nation­al Aus­tralia Bank. And I remem­ber walk­ing away think­ing, gosh, that was a real­ly good con­ver­sa­tion. I won­der if every­body else knows what this bro­ker just told me because it seems to me like if every­thing, he said is true, and then this stock is real­ly cheap. Now, again, I did­n’t quite know what to do with it at that point, but the seed was sort of plant­ed and the con­cept of being able to get an infor­ma­tion advan­tage was addi­tion­al­ly solid­i­fied in my mind, again, I did­n’t know what to do with it. I wast­ed a lot of time.

We spent a lot of time over the next few years before I got pro­fes­sion­al, look­ing for short­cuts to iden­ti­fy win­ners. And I think finan­cial cuts are won­der­ful. Short­cuts are great tools, but I think I was look­ing in all the wrong places. I start­ed by fol­low­ing chat groups. I start­ed by try­ing to under­stand momen­tum invest­ing, a bit of chart­ing, fol­low­ing good man­agers. And even when I even­tu­al­ly made it to uni­ver­si­ty, it seemed like the process of valu­ing stocks was taught more the­o­ret­i­cal­ly rather than prac­ti­cal­ly. There always seemed to be some sort of dis­con­nect between the under­ly­ing com­pa­ny and what the share price was.

And I don’t think it was real­ly until I got a job at Ley­land Pri­vate Asset Man­age­ment, which at the time was a small bou­tique wealth man­age­ment firm based out of Toorak Vil­lage that the pieces of the puz­zle sort of start­ed com­ing in to focus. And I don’t know nec­es­sar­i­ly that they added any pieces for me. I think the issue was that I’d had the whole puz­zle in front of me, but the pieces were all until then turned upside down and it was­n’t until some­one said, Hey, this is what you’ve been look­ing for. And intro­duced me to War­ren Buf­fett and val­ue invest­ing in earnest and all of a sud­den, a light was switched on.

And I real­ized, okay, this makes a lot of sense. So, Ben Gray and type invest­ing were, I think the thing that res­onat­ed with me most to start off with, the con­cept that if you can buy a stock or a busi­ness at less than the fire-sale val­ue of its assets, that you’re prob­a­bly going to do okay. I think though that the longer I’ve invest­ed, the more I’ve drift­ed towards the sort of Phil Fish­er approach or the Peter Lynch approach tak­ing the con­cept of scut­tle­butt and mak­ing it our own look­ing beyond the windup val­ue of the busi­ness and try­ing to ascribe val­ue to an actu­al under­ly­ing busi­ness, not just their assets, I think has been a big step.

And of course, I pre­sume you’ve heard some of the sto­ries that we’ve told in the past, but scut­tle­butt now plays a key role in a large num­ber of the stocks that we’ve bought. But again, it’s evolved over time like I said, the first pur­chase in 1990 my view and Vas’ view were most solid­i­fied dur­ing our time at Ley­land. But I sup­pose like pret­ty much any­one else and espe­cial­ly most val­ue investors we were just try­ing to look to buy a dol­lar for 50 cents. So, yeah, I’ll grant you that my back­ground isn’t nec­es­sar­i­ly your tra­di­tion­al fund man­ag­er back­ground.

I did­n’t go straight from high school straight to uni­ver­si­ty, straight to one of the big bro­kers, and then pig­gy­back off of oth­er peo­ple and real­ly assess things from a the­o­ret­i­cal or a quan­ti­ta­tive posi­tion. My back­ground includes things like run­ning prac­ti­cal busi­ness expe­ri­ence hav­ing a sig­nif­i­cant num­ber of years of time in sem­i­nary study­ing in the Mid­dle East, I’ve built a fam­i­ly, I’ve had jobs from house clean­er, to work­ing at Queen Vic Mar­ket, to being a finan­cial advi­sor. So, I think all of those dif­fer­ent parts of my life have all framed my approach and view on the world and cer­tain­ly has had an impact on the way we’re invest­ing.

So yes, cer­tain­ly Vas and I would both say, and Vas has a sim­i­lar back­ground to me in terms of hav­ing prac­ti­cal busi­ness expe­ri­ence, we both agree that we are, or we’d all agree that we’re, I think val­ue investors. But I think the advan­tage that we have is that we’ve received a fab­u­lous man­date from our ear­ly investors and that’s the man­date we stick with. But also, I think hav­ing run busi­ness­es and hav­ing been involved in actu­al busi­ness­es, I think per­haps we have a lit­tle bit of bet­ter insight into the busi­ness­es that we’re invest­ing in through the stock mar­ket. I think there’s always a risk that if you’re just look­ing at it from a high lev­el, just very qual­i­ta­tive, often cas­es, you can miss out on oppor­tu­ni­ties or get things wrong. And I think hav­ing had that prac­ti­cal expe­ri­ence has been a big ben­e­fit to us over the years.

Cameron Reil­ly: [08:05] Did you say sem­i­nary stud­ies in the Mid­dle East.

Michael Gold­berg: [08:07] Yes, I did.

Cameron Reil­ly: [08:09] You skipped over that real­ly quick­ly. Let’s talk more about that.

Michal Gold­berg: [08:14] Who cares about my time in sem­i­nary in Jerusalem?

Cameron Reil­ly: [08:18] I do. That sounds fas­ci­nat­ing.

Michael Gold­berg: [08:21] It was actu­al­ly an amaz­ing expe­ri­ence and it did set me up for my life going for­ward, essen­tial­ly what hap­pened was I’m an Ortho­dox Jew. I come from an Ortho­dox fam­i­ly but prac­tic­ing Judaism in Vic­to­ria and prac­tic­ing Judaism in the home of where it all start­ed in Israel are some­what dif­fer­ent expe­ri­ences, they don’t need to be, but it tends to be so after He 12, I decid­ed to go back to my roots for 12 months and learn a bit about my his­to­ry and the ethics of Judaism and some of the ancient texts and what­not. And I thought you know what? Take off 12 months, it’s a gap year.

It’s pret­ty stan­dard to do that. And so, I went off to sem­i­nary and my gap year became three gap years before I even­tu­al­ly came back to do uni­ver­si­ty here at Monash. And then after Monash, I decid­ed to pop back over there again for a refresh­er and end­ed up meet­ing my wife and start­ed to set roots in Jerusalem before we even­tu­al­ly moved back to Mel­bourne.

Cameron Reil­ly: [09:18] Wow, fas­ci­nat­ing.

Michael Gold­berg: [09:20] Yes. It’s just school. It was lots of study­ing, lots of look­ing at books, lots of qui­et time, lots of med­i­ta­tion. It was a real­ly amaz­ing expe­ri­ence. And whether you take a gap year to a sem­i­nary or whether you take a gap year, just trav­el­ing around the world, I think there are tremen­dous lessons to be learned for 18 or 19-year olds just in hav­ing some inde­pen­dence and being forced to look after them­selves.

Cameron Reil­ly: [09:49] With that kind of back­ground, I would expect you to turn into a growth stock investor because that’s all built around faith rather than sci­ence and evi­dence. Val­ue investors are more show me the data.

Michael Gold­berg: [10:06] I don’t want to get too the­o­log­i­cal for you, but Judaism is less about faith and more about belief. So, we like to have our facts in front of us.

Cameron Reil­ly: [10:12] Oh, okay. Well, that sounds like a deep top­ic for maybe anoth­er pod­cast. You said your dad was an entre­pre­neur. What did he do?

Michael Gold­berg: [10:22] He start­ed off as a tele­vi­sion tech­ni­cian. He used to repair tele­vi­sions when they used to have the tubes in them, ear­ly col­or TVs. And then he end­ed up going into retail. He start­ed off by work­ing in Queen Vic­to­ria Mar­ket, and then he start­ed open­ing up his own stores. And at one point dur­ing the late eight­ies, he and his sis­ter had opened up about 14, 15 stores trag­i­cal­ly called Trendy Girl, a very 1980s type of vein. And sad­ly, for him and the fam­i­ly, I don’t want to make it sound too trag­ic, but the reces­sion cleaned them up to a great extent. They shut down a lot of shops, which is prob­a­bly not sur­pris­ing in an envi­ron­ment where inter­est rates were 20% plus, and he was going through a growth phase for his busi­ness­es.

Cameron Reil­ly: [11:10] You’re talk­ing about the 91, The Keat­ing Reces­sion?

Michael Gold­berg: [11:13] The reces­sion, that’s it, the one that we had to have. So, we had a lot of expo­sure to like run­ning a busi­ness dad used to cart us around on Sun­days when it was­n’t soc­cer sea­son. We used to deliv­er stock. We used to go to the fac­to­ries. Lat­er on, we used to work at Queen Vic Mar­ket sell­ing Aus­traliana tee-shirts for six bucks to mas­sive, mas­sive crowds. Things have changed quite a lot in retail and at Queen Vic Mar­ket since then. We learned some good rules, so we learned some good lessons. We learned about cus­tomer ser­vice. We learned about try­ing a lit­tle bit hard­er or think­ing a lit­tle bit deep­er and get­ting big advan­tages out of doing some­thing just slight­ly dif­fer­ent from every­body else. There were some good lessons to be learned in basic busi­ness­es that can be applied to all sorts of com­plex­es.

Cameron Reil­ly: [11:55] How did you end up start­ing the fund, Michael?

Michael Gold­berg: [11:58] For sure. So, as I men­tioned, I start­ed the fund with my busi­ness part­ner and col­league Vas. We were both at Ley­land Pri­vate Asset Man­age­ment where we man­aged IMAs. Now, IMAs are a lit­tle bit dif­fer­ent from what we’re doing right now, essen­tial­ly an IMA means an indi­vid­u­al­ly man­aged account, and each client that we had had a tai­lor-made man­date to suit, what­ev­er they were try­ing to achieve. And it’s a won­der­ful prod­uct. It’s a won­der­ful prod­uct for a lot of peo­ple hav­ing direct own­er­ship of shares makes a tremen­dous amount of sense.

But Vas sat across from me on a big open office plan sort of sys­tem. And so, I’m look­ing at this guy for more hours in the day than I’m see­ing my wife and in time you build a rela­tion­ship and would occa­sion­al­ly go down for lunch. And as you do, you crack out the servi­ette and write down your last plan. And we both sort of got to the same point at the same sort of time where we felt like per­haps, we’ve hit a ceil­ing in terms of grow­ing our busi­ness. And so, we thought it makes some sense to stream­line the process. Now, obvi­ous­ly, each client has their own man­date, but amongst my clients, 80 or 90% had man­dates that were so sim­i­lar that they were almost indis­tin­guish­able and for Vas, he found sim­i­lar­ly.

So, we went to our boss at the time, Charles, and said would Ley­land con­sid­er launch­ing a fund or some­thing along those lines? And he hand­ed in hard and he was­n’t real­ly car­ry­ing it because he’d built his rep­u­ta­tion on these IMAs. And so, even­tu­al­ly, after it was clear that it was­n’t going to hap­pen there, Vas and I decid­ed that we’d go and do it our­selves. I think it was towards the end of 2014, mid­dle of 2015 we start­ed the process of speak­ing with ACIC and get­ting our licens­ing and what­not. And even­tu­al­ly the begin­ning of 2016, we opened the fund up to the pub­lic and our first mon­ey came in in Jan­u­ary.

So, the fund’s man­date is born out of a lot of the feed­back we had from our old clients and the peo­ple around us. And I think prob­a­bly the two most unique things that you’ll find about our fund is num­ber one, that we’re very con­cen­trat­ed in our view. And I think it came through in the AF arti­cle that I heard you guys talk­ing about the oth­er day. We don’t under­stand why peo­ple would invest in their 20th best idea when we feel that it is a much low­er risk of invest­ing in your favorite ideas. So, that was num­ber one, we got a man­date to invest in our favorite ideas. And num­ber two was around the face struc­ture.

We were look­ing for a way to align our inter­ests with our clients. And when­ev­er we’re look­ing at a man­age­ment team, we’re always look­ing to make sure that their inter­ests are aligned with ours. So, it makes sense that our clients should expect the same things from us. So, when we launched the fund, we decid­ed to go with the zero fixed man­age­ment fees with the only fee being a per­for­mance fee. That obvi­ous­ly has some inher­ent risks but as I said, we’ve had a bit of a track record. We’ve been run­ning mon­ey for 10-years plus at that point and we were fair­ly con­fi­dent that we could gen­er­ate pos­i­tive returns, almost irre­spec­tive of mar­kets, cer­tain­ly over the medi­um term.

And so, we’re pre­pared to back our­selves. And when peo­ple ask me, what was the basis for tak­ing that sort of view to fees? I hark back to the sto­ry of one of my old clients who I vis­it­ed pret­ty much dur­ing the depths of GFC. I think the mar­kets were down 20 or 25% or there­abouts. I turned up all excit­ed that our port­fo­lio had done excep­tion­al­ly well. I think we were down about 5%. So, we’re talk­ing about 15 to 20% out­per­for­mance. So, for a pro­fes­sion­al investor you feel pret­ty good going in say­ing, Hey, we beat the mar­ket by 15%. But of course, when I got in front of the client, he seemed less impressed than I expect­ed.

And he said, Michael, I appre­ci­ate that you’re not down 20% like the mar­ket is, but I can’t eat rel­a­tive returns. He said, I’m hap­py to pay you a fee when you do well and when I’m mak­ing mon­ey, but if I’m los­ing mon­ey, I feel like it does­n’t quite sit well with me that I’m pay­ing you a fee just to look after my mon­ey. And it res­onat­ed and we sat on that and we thought about it for a while. And when we even­tu­al­ly looked to launch the fund, we said, you know what? He’s a hun­dred per­cent cor­rect. There’s no oth­er indus­try out there where you could the­o­ret­i­cal­ly fun­da­men­tal­ly fail in your man­date and still get paid a hun­dred per­cent of your fees. Where­as in finan­cial plan­ning and broking and funds man­age­ment, whether you win or lose, most funds will get their 1 or 2% fee, no mat­ter what.

Tony Kynas­ton: [16:33] Except pol­i­tics.

Michael Gold­berg: [16:35] Yeah. But I don’t think any­one has any expec­ta­tions around pol­i­tics. So, that’s okay. My col­league Vas said lawyers, but I don’t think that’s entire­ly true.

Tony Kynas­ton: [16:47] Why lose you? Inter­est­ing, so, tell me about what sort of client would invest in your firm?

Michael Gold­berg: [16:54] I think we prob­a­bly have a cou­ple of dif­fer­ent types of, we’re a whole­sale fund. So, all of our clients seem to be sophis­ti­cat­ed. Most of our client base would be high net wealth peo­ple. So, we’re talk­ing about doc­tors and lawyers and can­dle­stick mak­ers, pro­fes­sion­als, some­times even quite young pro­fes­sion­als who just don’t have the time to man­age their own port­fo­lio. And I think even Tony you’d agree that you’ve got to find some time to, A, learn up on the indus­try and learn upon what you’re doing and then beta man­age your port­fo­lio, even if it is only an hour a day.

I think you men­tioned that you spent only a cou­ple of hours a week and that’s great, but it’s tak­en you a tremen­dous amount of time to get to this point. I don’t think most peo­ple have, or cer­tain­ly not pro­fes­sion­als have that amount of time cer­tain­ly when they’re grow­ing and get­ting start­ed.

We also have a lot of estab­lished busi­ness­peo­ple who are maybe look­ing after fam­i­ly mon­ey, who are look­ing for some hand­hold­ing in man­ag­ing their mon­ey. And of course, the largest part of our port­fo­lio would be self-man­aged super funds; I think prob­a­bly about 50, 60% of our clients are self-man­aged super funds.

We’ve also got a cou­ple of fam­i­ly offices in there and we also have a cou­ple of char­i­ta­ble trusts in there. So, if you qual­i­fy as sophis­ti­cat­ed, you’d qual­i­fy to be an investor with us sub­ject to buy­ing into our phi­los­o­phy and process. There’s been a lot of talk recent­ly about how well we’ve done, and we have done very well, but any­time I meet with a poten­tial client, the first thing I say is, I’m thrilled, first­ly, that you’re hap­py to see me. And I’m thrilled that you came to invest in us, but don’t be invest­ing in us just because we’ve done well the last four years, I want you to num­ber one, invest in us because you buy into our phi­los­o­phy and our peo­ple.

And then sec­on­dar­i­ly, because you think we’re going to keep doing what we’ve been doing. But if per­for­mance is all your back­ing, then every­one’s going to have good months and bad months, every­one’s going to have good years and bad years. There’re no promis­es that there can’t be any expec­ta­tions oth­er than we’re going to keep doing what we’ve been doing and hope­ful­ly the results will come through again.

Tony Kynas­ton: [18:48] So, just for our lis­ten­ers, what kind of returns has the fund been get­ting?

Michael Gold­berg: [18:52] Since launch, which was almost five years ago, we’re run­ning at about 16% gross. Our tar­get we’ve always said when we’ve met peo­ple face to face, and I’m a bit hes­i­tant say­ing this on a record­ed pod­cast, but we’ve often said we’re look­ing to get about 15%. We think we can do about 15 to 20% over the long-term gross before fees. And we’ve been hang­ing around about the 15% mark, pret­ty much since we start­ed.

Tony Kynas­ton: [19:21] And you said before, the fund is con­cen­trat­ed, how many posi­tions are in the fund?

Michael Gold­berg: [19:27] So, it’s a bit more com­pli­cat­ed now than it nor­mal­ly is. I would say that we’ve got about eight to ten posi­tions, but we have a few more stocks in that. And what I mean by that is ordi­nar­i­ly we’re bot­tom-up investors, we look for great com­pa­nies, and then we don’t espe­cial­ly care what indus­try, what sec­tor they’re in. We just look for great com­pa­nies that are trad­ing cheap­ly but we have tak­en the view on a cou­ple of themes at the moment. And rather than just try­ing to pick one or two stocks in that theme, we’ve built a bas­ket of stocks to give us cov­er­age to those ideas.

So, one is ura­ni­um, we iden­ti­fied in about 2018 that ura­ni­um was excep­tion­al­ly cheap based on the cost of pro­duc­tion and the upcom­ing demand and sup­ply con­straints. So, rather than try­ing to pick the best ura­ni­um stock, not being experts in geol­o­gy or ura­ni­um, what we did instead was we col­lat­ed all of the ura­ni­um com­pa­nies on this Jones Stock Mar­ket. We arranged them by bal­ance sheet strength and on that basis; we cre­at­ed essen­tial­ly our own ATS. It’s been refined since then. We’ve now paid far more atten­tion to the qual­i­ty of man­age­ment and abil­i­ty to go into pro­duc­tion quick­ly and cost of pro­duc­tion, that sort of stuff now plays a big­ger role.

And so, that ATF now looks a bit dif­fer­ent from what it did in the begin­ning, but that group of ura­ni­um stocks is about eight com­pa­nies. So, that obvi­ous­ly means we’ve got more stocks than we have posi­tions. But, I look at that bas­ket of ura­ni­um stocks as a sin­gle posi­tion, and we did a sim­i­lar thing as well around gold.

Tony Kynas­ton: [21:02] So, you’re long-only, are there any oth­er assets in the port­fo­lio besides shares?

Michael Gold­berg: [21:08] No, we’re long-only. We’ve got cash and we have an open man­date. We can hold as much cash as we want. Our view has always been, if there are good ideas, we’ll buy them. If there’s not, then we’re hap­py to hold cash. And that meant that as we approached the begin­ning of 2020 and the mar­ket’s look­ing quite expen­sive before the coro­na crash, we actu­al­ly had built up a cash reserve of about 30, 35%. Again, we weren’t genius­es. We did­n’t pick up that the coro­n­avirus was com­ing around the cor­ner. Although, I have a sto­ry on that if you’d like after­ward but at the point that we weren’t find­ing any cheap stocks of good busi­ness­es at prices that we thought were attrac­tive.

So, we were hap­py to hold cash and that meant that when the crash did come, we had a lot of cap­i­tal and dry pow­der to put to work. So, since the crash, we’ve invest­ed about two-thirds of that 35% cash. We’re now stand­ing at about 12-ish per­cent cash, which is a count­able posi­tion for us. But the mar­kets are still quite com­pli­cat­ed and still quite a bit scary, but some oppor­tu­ni­ties cropped up dur­ing Feb­ru­ary, March, and April, that we just thought were too good to let go by.

Tony Kynas­ton: [22:18] And why the focus on ura­ni­um? How did you come about to pick that area to invest in?

Michael Gold­berg: [22:24] The sto­ry actu­al­ly goes like this. We often get calls from stock­bro­kers or emails from stock­bro­kers and that’s, I sup­pose just a part of being a fund man­ag­er or an investor of any sort. And my col­league Vas was on the phone with the stock­bro­ker, I think it might’ve been Bell Pot­ter, I think. And he was spruik­ing what­ev­er the lat­est, most excit­ing stock was at the time this was back in 2018, and I could see Vas’ eyes were glaz­ing over and he was get­ting a bit frus­trat­ed because we’re not inter­est­ed in, what’s already run.

We want to know what’s unpop­u­lar and what’s got a lot of upside poten­tial, we’re look­ing for asym­met­ri­cal returns. We’re look­ing for stuff that has a lot of upsides and very lit­tle down­side. And Vas was like I said, he rolled his eyes at me and I wrote a note, I said, Vas ask him what stock he likes, but is embar­rassed to take to his cus­tomers. So, he asked the ques­tion, okay, I’m not inter­est­ed in this tech stuff that you’re talk­ing about or what­ev­er the case was. He said, but tell me some­thing about an idea that you like, but you’re uncom­fort­able tak­ing it to your clients because they’ll knock you down or it’s not pop­u­lar or what­ev­er the case may be.

And the guy says, have you had a look at ura­ni­um? And we said, no, we don’t tend to look at com­modi­ties because com­modi­tized busi­ness­es tend to only be able to com­pete on price and that’s not a great busi­ness mod­el but show us what you’ve got. So, he sent us some links to some videos and some arti­cles and some of his own research and we start­ed think­ing, Oh my good­ness, like this theme, this the­mat­ic has been in a mas­sive decline since the Fukushi­ma earth­quakes and the issues that we had with the pow­er plants in Japan. The glob­al cost of pro­duc­ing a pound of ura­ni­um is about $45 per pound and cur­rent­ly, the spot price is about $18 per pound.

And this was after the two biggest pro­duc­ers of ura­ni­um decid­ed to cut pro­duc­tion by about 20%. So, if you saw oil pro­duc­tion going down 20%, you would expect to see the price of oil, just absolute­ly sky­rock­et­ing, but noth­ing hap­pened with ura­ni­um. So, we did more research and we decid­ed you know what? This seems like a go; you’ve seen it with oil in the past. You’ve seen it with coal in the past. It’s not often that you have com­mod­i­ty trad­ing at a mate­r­i­al dis­count to the cost of pro­duc­tion and when you do, it does­n’t nor­mal­ly last, very long. So, we made the call, and we bought the bas­ket and we actu­al­ly picked the almost absolute bot­tom of the ura­ni­um mar­ket.

18 bucks is about as low as it’s got­ten, it’s cur­rent­ly sit­ting at about 32, $33 per pound. Sad­ly, for us, we did­n’t own ura­ni­um, we bought ura­ni­um com­pa­nies and they have not per­formed quite as well quite the con­trary. Vas and I were hav­ing a con­ver­sa­tion the oth­er day and he said the last time spot prices, were where they cur­rent­ly are, ura­ni­um com­pa­nies were three or four times high­er in terms of the mar­ket cap than they cur­rent­ly are. So, I think there’s a bit of a dis­con­nect I think there’s a lot of pol­i­tics in the back­ground. I think there is a lot of reg­u­la­to­ry uncer­tain­ty and all sorts of con­fu­sion around the indus­try, in gen­er­al, that’s seen it not recov­er as fast as you’d expect it to recov­er.

But I think that’s the way this indus­try is, it’s, it’s slow-mov­ing and when it does ral­ly, we think it will ral­ly very, very hard. So, we’re very, very con­fi­dent in the posi­tions we’ve got, a lot of those ura­ni­um com­pa­nies, even though they’ve all turned off pro­duc­tion for the moment, once they turn them back on the pay­back peri­od for the entire mar­ket cap is two, three years. So, it’s incred­i­bly cheap, I know you can’t quite call that a price to earn­ings ratio, but once things go to some sem­blance of nor­mal­i­ty and you get the util­i­ties in Amer­i­ca start­ing to buy again in earnest, I think you’ll see a rapid turn­around in the for­tunes of domes­tic com­pa­nies

Tony Kynas­ton: [26:14] So, some of the stocks would be what pal­la­di­um on the Aus­tralian Stock Exchange

Michael Gold­berg: [26:19] A pal­adin. Yeah, Pal­adin is the biggest one. I think prob­a­bly the best-known ones in Aus­tralia would prob­a­bly be Pal­adin and Boss, we’ve also got Penin­su­la, which has its oper­a­tions out of the States, and you’ve got VME which has its oper­a­tions in Aus­tralia as well. What else? Lotus also bought a major project of pal­adin and now runs it as an inde­pen­dent project and there isn’t a lot that is going to be in pro­duc­tion soon. And so, part of the chal­lenge is mak­ing sure that you own a broad bas­ket of them, but that you’re in the right ones.

Tony Kynas­ton: [26:53] So, that’s kind of a the­mat­ic approach to invest­ing. Is there a tim­ing risk with that, which you could be right for a long time before you actu­al­ly make any mon­ey?

Michael Gold­berg: [27:02] Yeah, I’ve heard the say­ing that if you’re right on an idea, but wrong on tim­ing, it’s as good as being wrong and I’ve cer­tain­ly seen that play out in my expe­ri­ence many, many times. One good exam­ple is sev­er­al years ago now when I was still at Ley­land, I made a big trans­fer from own­ing stock in Tel­stra, which had ral­lied to that $5.50 at the time into a New Zealand com­pa­ny called Cho­rus, which is basi­cal­ly a whole­sale tele­com com­pa­ny based out of New Zealand. So, think about Tel­stra’s pits and trench­es and access to the lines, that’s essen­tial what Cho­rus do.

So, Cho­rus was trad­ing on three, four times the earn­ings because of some reg­u­la­to­ry uncer­tain­ty, and Tel­stra at the time was trad­ing at about 12 times. And I said you know what, let’s move out of Tel­stra at 550, let’s move into Cho­rus and I think I start­ed at about $1.80, I think this makes sense. And my view was that I thought Cho­rus, once the dust had set­tled on the reg­u­la­to­ry uncer­tain­ty that they were faced with, it would be worth about $4 and that Tel­stra was prob­a­bly about right. So, I looked like an absolute dill, I thought it would take six months to play out. It took four years to play out but right after I sold my Tel­stra’s, they prompt­ly went up to 657 bucks and then Cho­rus prob­a­bly fell about a low of $1.20.

But you fast for­ward the four years that it took, for Cho­rus, to get the out­come that they were wait­ing for and they were a four-dol­lar stock. Today I think they’re $7 and change while Tel­stra $3 and change. So, there’s been a change of for­tunes there. You’re right, I was mas­sive­ly wrong on the tim­ing I thought it would take six months and it end­ed up tak­ing four years. But at the end of the day, if there’s enough mar­gin of safe­ty in terms of your poten­tial return ver­sus the down­side risk. If some­one said, are you pre­pared to pay $1.80 for some­thing today that in four years will be worth $4?

I’d prob­a­bly say yes, I’d rather be worth $4 in six months for sure but if the intrin­sic val­ue is there, I think even­tu­al­ly the mar­ket rec­og­nizes these things even­tu­al­ly. But you’re right, Tony, between mis­pric­ing and intrin­sic val­ue there are 5 mil­lion Aus­tralian investors who are mak­ing deci­sions on a day-to-day basis based on how they got out of bed. And it can be a long and some­times painful jour­ney to get from where you are to where you think you should be.

Tony Kynas­ton: [29:21] And so, that’s com­modi­ties. What about some of the oth­er stocks that you hold? What would be anoth­er exam­ple of a val­ue invest­ing pick in your port­fo­lio?

Michael Gold­berg: [29:30] Recent­ly I’ve spo­ken about a cou­ple of what I would call deep­er val­ue stocks, sort of stocks that are trad­ing at dis­counts to their NTA. One was Nation­al Tire and Wheel, and I’ve had some news recent­ly that sort of changes the sto­ry a lit­tle bit, but dur­ing the worst of the COVID crash, they got down to about 20, 22 cents. Their NTA is around about 50 cents per share. This is a busi­ness that pri­mar­i­ly sells wheels and tires and I think the mar­ket was pan­ick­ing that the busi­ness was basi­cal­ly going to be bro­ken by COVID-19. Cer­tain­ly, when I spoke to peo­ple in the indus­try, not in the tire indus­try, but in the invest­ing indus­try, they have a con­cern that sales are going to be down 60 or 80%.

So, it’s a bit of a fun­ny sto­ry, but my daugh­ter had a project on the impact of COVID-19 on local busi­ness­es, and being that I appar­ent­ly am the house expert on eco­nom­ics and math. So, she came to me to say, dad, can you help me out with this project? I said, I’ve actu­al­ly got some research I’ve got to do myself on the impact of COVID-19. Why don’t we do this togeth­er? So, we pulled up the equiv­a­lent of the yel­low pages, we Googled some local tire and wheel com­pa­nies, some in Vic­to­ria, some in East of Wales, some in Queens­land. And we called around to eight dif­fer­ent com­pa­nies and we asked them how’s it been?

What’s the impact of COVID-19 been? And across the board, they all said, Oh, this has been the most ter­ri­ble time that we’ve expe­ri­enced in my entire career, they had 5, 10, 20, 30 years, what­ev­er the case was, they all said how awful it was. And then we asked, yeah, but how, as a pro­por­tion of sales, how down are your sales dur­ing the COVID peri­od. And they all said around about 30, 20, 40%, the aver­age was around about 30%. So, we went away and we said you know what? The mar­ket thinks that this is about to get absolute­ly tow­eled up. The mar­ket thinks that Nation­al Tire and Wheel are going to come out with their announce­ment and say that sales are down 80%. That’s not what we’re see­ing by doing our scut­tle­butt.

So, we’d already owned some from before the COVID crash and we mate­ri­al­ly aver­aged down when that oppor­tu­ni­ty arose, I think we paid about 27, 28 cents for a big line of stock. And about two weeks lat­er, man­age­ment from Nation­al Tire and Wheel came out and said, it’s been a tough time. Sales were down about 30%, but we’re start­ing to see a strong recov­ery, espe­cial­ly in rur­al areas. Appar­ent­ly, there’s been some mate­r­i­al increase in sales of tires for RVs and Car­a­vans and that sort of thing. So, we bought it orig­i­nal­ly because we thought it would be counter-cycli­cal.

Peo­ple tend to buy tires instead of buy­ing new cars and since 2017; you’ve seen new car sales going down sig­nif­i­cant­ly. At first, when the idea was brought to me as being counter-cycli­cal, I did­n’t ful­ly buy into it, but even­tu­al­ly after doing the research, it res­onat­ed and it made some sense and we were buy­ing it orig­i­nal­ly at less than their NTA. And when we bought it dur­ing the COVID crash near the bot­tle­neck of the COVID crash, we were buy­ing it at almost half the NTA. So, I sup­pose that’s prob­a­bly more of a tra­di­tion­al Ben Gra­ham type val­ue invest­ing approach, where if they round up the busi­ness, the day after we bought it we would have made a prof­it and that’s great your down­side is pro­tect­ed.

If it’s the share price it can go down, at least you know that you’re not going to lose your cap­i­tal. The busi­ness is actu­al­ly quite good though. So, the busi­ness is doing quite well, they recent­ly made a pur­chase dur­ing the depths again of the COVID dra­ma. So, they bought quite well but, if you ascribed your val­ue to the ongo­ing busi­ness, we’re buy­ing it at a 30% dis­count to its fire sale-val­ue. So, we were quite com­fort­able there. Sim­i­lar­ly, I think with iSe­lect, I also men­tioned, iSe­lect recent­ly in some media they’ve got a trail­ing com­mis­sion book, which is basi­cal­ly com­mis­sions on sell­ing health insur­ance or life insur­ance or what­ev­er the case may be.

They val­ued at about 54 cents per share, they were recent­ly trad­ing as low as 20 cents. I think they’re about 25, 26 cents at the moment, and if you; account for their lia­bil­i­ties and account for the costs of wind­ing up the busi­ness, if you ascribe zero val­ue to their ongo­ing busi­ness, which I don’t, I think it’s maybe not the great­est busi­ness in the world, but cer­tain­ly a decent busi­ness. We think it’s worth 40, 45 cents and that was solid­i­fied last week when the major com­peti­tor of Com­pare the Mar­ket who was also their major share­hold­er came out and made a cheeky bid of 40 cents, which even­tu­al­ly fell over because of dif­fer­ent issues.

But, my think­ing is if you can buy these com­pa­nies at a dis­count to their windup val­ue, then the upside from the busi­ness­es is all just a bonus. So, there are few busi­ness­es like that in there that those sorts of com­pa­nies rep­re­sent and then you’ve got some com­pa­nies that have mas­sive upside poten­tial rel­a­tive to rea­son­ably low down­side poten­tial that per­haps aren’t trad­ing at a dis­count to their fire-sale val­ue, but are trad­ing very, very cheap­ly on their poten­tial. Things like Par­a­digm, which is pos­si­bly a lit­tle bit more growth-ori­en­tat­ed things like Vic­to­ry Offices. We even made some good mon­ey on TPG when the ACCC orig­i­nal­ly knocked back the merg­er with Voda­fone.

We’ve had some expe­ri­ence over time deal­ing with those sorts of sit­u­a­tions where the mar­ket pan­ics when a reg­u­la­tor says this is our ini­tial thought, but nine times out of 10, their ini­tial thoughts and the final out­come are quite dif­fer­ent. So, once you get com­fort­able we’re hap­py to invest in those sorts of things as well.

Tony Kynas­ton: [35:03] Okay So, you’re basi­cal­ly tak­ing posi­tions based on the fact that you think the mar­ket’s got the pric­ing wrong or the com­pa­ny?

Michael Gold­berg: [35:08] That is exact­ly cor­rect.

Tony Kynas­ton: [35:11] So, can you tell me an exam­ple of where that may have not worked out for you?

Michael Gold­berg: [35:17] I think we’ve invest­ed a cou­ple of times in a com­pa­ny called Cash Con­vert­ers and they faced many trau­mas over their jour­ney. But one dra­ma that we thought was being overblown was the risk of reg­u­la­to­ry inter­ven­tion in their busi­ness. There was a lot of dis­like for the pay­day lenders a few years back, and we thought that it was overblown, it turns out it was­n’t overblown. So, we did a bit of our dough over there, I think fun­da­men­tal­ly it’s a decent busi­ness, but we over­paid based on some assump­tions that turned out to be mis­placed. We made it back lat­er on when Cash Con­vert­ers was due to go to court to deal with the class action and we thought the mar­ket was over­es­ti­mat­ing the impact of that class action and we were able to buy some stock at 13 cents.

And it prob­a­bly ral­lied up to 22 cents after the class action was com­plet­ed. So, you cer­tain­ly get some wrong, the goal is always to get more right than you get wrong. And the trick, I think is just becom­ing as ful­ly informed as you pos­si­bly can. Now, obvi­ous­ly, it’s impos­si­ble to know absolute­ly every­thing about every­thing. And so, we will get it wrong from time to time, but I fig­ure the more we know the more tools we have avail­able to us to make the right sort of deci­sions.

Tony Kynas­ton: [36:45] So, you talked before about scut­tle­butt and you talked before about under­stand­ing the posi­tions. So, what kind of process do you go through to uncov­er a stock like iSe­lect or Cash Con­vert­ers?

Michael Gold­berg: [36:45] It’s a dif­fer­ent sto­ry for every sort of stock, obvi­ous­ly, because dif­fer­ent sorts of stocks are being val­ued on dif­fer­ent sort of bases. With iSe­lect specif­i­cal­ly, I recall before they were pen­ny dread­ful, they were two, three bucks a share and had fall­en down, I think this was back in I think 2019 as well, they’d fall­en to about a dol­lar. And that’s how I was sit­ting there think­ing, you know what? This is fun­da­men­tal­ly a com­pa­ny that we think we under­stand that they take a cut; they get a com­mis­sion on sell­ing insur­ance and pow­er plans and phone plans and what­not.

It seems like the sort of busi­ness that would do pret­ty well in the mod­ern world. And so, we went to meet or Vas actu­al­ly went to meet with the CEO and they had this long con­ver­sa­tion about why the stock has fall­en from 2 bucks to $1, do we have any­thing to be con­cerned about? It seems on the face of things that every­thing should be okay, but obvi­ous­ly, the share price has dropped and we’ve read a cou­ple of bro­ken notes sug­gest­ing that you guys have come to a big down­grade and the CEO at the time said, no, no, every­thing’s fine, those bro­ker notes, such is their opin­ion and I main­tain that we are on track for guid­ance.

I think that was a Wednes­day, it’s impor­tant that I men­tioned that was a Wednes­day. So, Vas came back to the office and we had a chat about it. I think it was Thurs­day that we were hav­ing the con­ver­sa­tion and I said, we would­n’t be doing our job with­out first con­firm­ing why the bro­ker, it was one bro­ker specif­i­cal­ly has such a neg­a­tive view on it. So, let’s send him an email, let’s see if he’ll have a chat with us on Mon­day and we’ll weigh what he says against what man­age­ment has said. And there’s been plen­ty of times where man­age­ment has come out with a sto­ry that makes sense and the mar­ket comes out with a sto­ry that makes sense.

And they’re both at odds with each oth­er and our job is to try and work out which one is non­sense and which one is accu­rate. So, we sent the email on Thurs­day and we wor­ried about it. I said we’ll wor­ry about this come Mon­day. So, Mon­day morn­ing comes along and I get a fran­tic phone call from Vas who was on the way to anoth­er meet­ing and he goes, Michael, it’s 33 cents. I said, Vas, what’s 33 cents. So, he says, iSe­lect just dropped from $1.05 To 33 cents, and the CEO’s retired a big down­grade, they over­spent on adver­tis­ing, and they did­n’t quite get the sales that they expect­ed, what should we do?

I said, well; let me ask you a cou­ple of basic ques­tions. I said, num­ber one, do we under­stand why the down­grade hap­pened? Yeah. Num­ber two, does man­age­ment and the new team under­stand why the down­grade hap­pened, and are they going to fix it? Yeah, great, is their NTA still about 50 cents? Yup, great. I said, mate, I’m going to hang up on you, and don’t be shy if you could buy some­thing worth 50 cents on their NTA for 33 cents then get crack­ing. So, our aver­age buy-in price orig­i­nal­ly was about 50 cents at the time that was great, It prompt­ly ran up to about 80 cents and then 90 cents, I think it might’ve even got to a dol­lar when Com­pare The Mar­ket came onto the reg­istry and we trimmed because we were cog­nizant of our weight­ings and we had made a good return.

We did­n’t sell it all, unfor­tu­nate­ly, because it start­ed to drift back­ward as it became clear that Com­pare the Mar­ket, was­n’t going to do a quick takeover. The indus­try also faced a lot of head­wind in terms of reg­u­la­to­ry change to how they dealt with health­care and how they dealt with ener­gy and all that sort of stuff. So, the busi­ness is not per­haps worth what it was, but the share price fell to 20 cents. So, at 20 cents, you’re buy­ing a busi­ness on its fire-sale val­ue even if you have to pay to sack all of the stuff and wind it up, you’re still talk­ing about 35, 40 cents after you pay for redun­dan­cy.

So, if you can buy an asset worth 40 cents with poten­tial upside from the busi­ness then that’s a pret­ty easy deci­sion to make. So, it has­n’t nec­es­sar­i­ly gone our way over the last 6 to 12 months based on our pre­vi­ous pur­chase price, but we aver­aged down when it got low and hope­ful­ly, we’ll see it much, much high­er in the not too dis­tant future. But, imag­ine Avera, if you can be sure that this busi­ness is worth 40 cents in a wind-up sce­nario, and then you can be pret­ty com­fort­able pay­ing 20 cents. Tony, I’ll accept, but that does­n’t mean that the next day the share price is going to go up and it often does­n’t go up.

Tim­ing is some­thing that plays a part and is a fac­tor but we try not to get too hung up on the mat­ter of tim­ing because it’s not impor­tant, but because I think it’s much hard­er to mea­sure we can get pret­ty com­fort­able with what a busi­ness is worth. But I can’t get that same degree of com­fort around how peo­ple are going to feel the next morn­ing and whether or not the share price is going to go up or down.

Tony Kynas­ton: [41:53] Yeah. We’re all play­ing a regres­sion to the main game. Yeah, I get that. So, I’m still kind of unsure of what your process is. Why would you pick iSe­lect out of the 2000 shares on the ASX?

Michael Gold­berg: [42:05] So, we have a watch list which cur­rent­ly makes up about 400 stocks and each report­ing sea­son, or any time there’s mate­r­i­al infor­ma­tion, we update our num­bers as to what we think those stocks might be worth and there’s a bit of automa­tion and there are a few man­u­al inputs. Report­ing sea­son is quite a busy time in the office because of all the man­u­al inputs, but essen­tial­ly any time a stock falls below what we think their intrin­sic val­ue is, we get a flag and that flag does­n’t mean buy that flag means time to get start­ed on doing some of that due dili­gence.

So, for iSe­lect specif­i­cal­ly giv­en that that’s the one that you’ve men­tioned when it fell to a dol­lar we got a flag sug­gest­ing that on the basis of its pre­vi­ous earn­ings, that it looks inter­est­ing. So, we call that man­age­ment and had a chat and we did some more research in the busi­ness and all that sort of stuff and start­ed to try and get com­fort­able with the busi­ness. But if you’re ask­ing what’s the process to get start­ed look­ing at a com­pa­ny nor­mal­ly it is some­thing off our watch list that will come up with a flag as hav­ing fall­en below what we think its intrin­sic val­ue is. So, nor­mal­ly that’s one of a cou­ple of rea­sons.

Nor­mal­ly it’s a busi­ness that’s going through a turn­around, so, it has a tough, but often you can make good mon­ey out of turn­arounds. An alter­na­tive is that the stock has gone through a one-off issue. So, often you’ll see big one-off hits that a com­pa­ny takes that aren’t going to mate­ri­al­ly impact them for the long-term but the mar­ket is very myopic and focused on what’s going on now. So, it can have a mean­ing­ful impact on the share price and the oth­er sort of busi­ness that tends to get flagged com­pa­nies that are fly­ing under the radar for a num­ber of dif­fer­ent rea­sons. So yeah, nor­mal­ly the process is we get a flag from our watch list and then we start doing prop­er due dili­gence. There are oth­er ways, but that’s nor­mal­ly how it comes about.

Tony Kynas­ton: [43:46] Inter­est­ing, you said you spoke with man­age­ment and then a cou­ple of days lat­er, the guy retired and it was a down­grade issue. So, I’d been through the process of speak­ing with man­age­ment and they’re gen­er­al­ly sales­peo­ple. So, how much stock do you put on talk­ing to man­age­ment about their book?

Michael Gold­berg: [44:03] It’s a tricky sit­u­a­tion, isn’t it? I’ve walked into meet­ings before where man­agers essen­tial­ly talk us out of buy­ing a stock. And then, of course, a bit, which was to our ben­e­fit because it turns out, there was a down­grade com­ing up. He was­n’t explic­it, but we read between the lines. And of course, there’ve been plen­ty of times where man­age­ment is spruik­ing there. It’s just because that’s, that’s their job to be pos­i­tive about the busi­ness, which turned out to be not entire­ly true. So, I was at a func­tion, not that long ago. And I think I might’ve told that exact sto­ry.

And some­one said, well, if that’s the case, how much can you trust man­age­ment? And I lift­ed my fin­gers about a cen­time­ter apart from each oth­er. And I said about that much, that’s about how much I can trust man­age­ment. So, you’ve got to take it with a grain of salt. You, you, you’ve got to try and break peo­ple as best you can. But what you real­ly want to find is what a man­ag­er is say­ing, being backed up with third par­ty con­fir­ma­tion, and what I mean by that is one of the ear­li­est stocks we looked at for the fund was Met­cash, and man­age­ment were telling a won­der­ful sto­ry and the mar­ket said, no, we don’t buy it, we don’t believe it, you can­not run super­mar­kets as a fran­chise mod­el, it does­n’t work.

So, we sat there and we called man­age­ment and he tells the sto­ry and every­thing he said made a ton of sense, but more than that, he said, it’s not that I’m telling you some­thing that’s going to hap­pen in the future. These are process­es that we have put in place that are cur­rent­ly work­ing and you will see the results of these process­es in the next six to nine months. So, I thought that was inter­est­ing they’d imple­ment­ed a num­ber of process­es like price match­ing, there’s a per­cep­tion that IGA is expen­sive, so they price match against Woolies and Coles. Anoth­er thing is that a lot of their stores are pret­ty dilap­i­dat­ed.

So, they offered to pay half of any refer bid­der than an own­er would do. And last­ly, they offered to retrain a lot of the man­age­ment of the stores. Because, you’ve got some spec­tac­u­lar IGAs and you’ve got some unspec­tac­u­lar IGAs, so they were try­ing to find best prac­tices. So, I looked at Vas and I said, our job is to find out as best as we can, what the truth is and try and get some sort of infor­ma­tion advan­tage. The only way we could think of doing it in this cir­cum­stance was by actu­al­ly vis­it­ing the stores that had been ear­ly adopters of these plans.

So, Mike had rea­son­able con­cerns and we heard what they were say­ing and man­age­ment had a rea­son­able sto­ry and we could hear what they were say­ing, but, we want­ed to back it up, what­ev­er the case may be with inde­pen­dent research. So, we vis­it­ed 15 odd stores around Vic­to­ria, and over­whelm­ing­ly the response was, price match­ing has been rev­o­lu­tion­ary for us though, it’s been a game-chang­er. Refur­bish­ing the stores has made a mas­sive dif­fer­ence and the retrain­ing has just been a won­der­ful expe­ri­ence. And we even had meet­ings with the man­agers, they took us up to their office, we spoke with man­agers, we spoke with store own­ers and we spoke with check­out peo­ple as well.

Mike was phe­nom­e­nal, just phe­nom­e­nal and we even had one guy who turned his com­put­er screen to us and showed us what the tra­jec­to­ry of his store sales had been since he imple­ment­ed price match, since they’ve done the refurb and we went away and we said you know what? I under­stand why the mar­ket is skep­ti­cal because this has been a dog of a com­pa­ny for a long time and peo­ple don’t believe any­thing men­tioned, has to stay, but we can see evi­dence that this thing is work­ing, not just that it’s work­ing, but that the entire net­work of the IGA’s nation­al­ly are going to be going up because the feed­back has been so pos­i­tive.

So, one of the chal­lenges I find with the stock mar­ket, and I think most peo­ple find is that often­times the only thing you have to judge, whether you are right or wrong on is what the share price has done. And if the share price is going back­ward, you start to sec­ond guess your­self and won­der, Oh is this a good com­pa­ny? Or is this a bad com­pa­ny? And, if you’ve got noth­ing but the share price to judge your things on, then you’re right to be con­cerned. But if you know more than the mar­kets, if you have some sort of infor­ma­tion advan­tage then you can look at IGL or Met­cash and you can see the share price, go from $1.80 to $1.20 and say, this is not scary, this is an oppor­tu­ni­ty.

So, yeah, we looked a bit dumb to our clients when we bought at $1.80 and it went to $1.60 and we looked dumb­er when it went to $1.40 and down to $1.20, but nine months lat­er when the results start­ed com­ing out, all of a sud­den we were leg­ends, well, leg­ends in our own lunch­box, at least. So yeah, every sort of com­pa­ny, we take a slight­ly dif­fer­ent approach to how we assess it and how we do our scut­tle­butt and what the case may be. And it’s cer­tain­ly uncom­fort­able some­times rock­ing up to ran­dom IGAs unin­vit­ed and try­ing to intro­duce our­selves and get the Goss on what’s going on.

But, I think if you put in a lit­tle bit more effort, or if you’re pre­pared to be a lit­tle bit more uncom­fort­able than the next guy, I think there are mas­sive advan­tages to be had if you can cap­i­tal­ize on it.

Tony Kynas­ton: [49:04] Yeah, and what you’re describ­ing is some­thing that prob­a­bly can’t be done by an indi­vid­ual investor too much any­way, which is the job of a fund man­ag­er real­ly.

Michael Gold­berg: [49:04] That may be true, but what shocked us and, this was the stuff that we were look­ing at right at the begin­ning of the fund. What shocked us is, we spoke to about 15 dif­fer­ent IGA man­agers or own­ers. And at the end we always asked them, has any­one else come to talk to you? And not one said yes, not one. So, as I said, my back­ground is a bit dif­fer­ent from your tra­di­tion­al fund man­ag­er. And so, per­haps I don’t know what I’m talk­ing about, but I would have thought that if you’re look­ing to buy a busi­ness, you’d want to under­stand the busi­ness as best you can.

And I would have thought that the sim­plest and the start­ing point would be to turn up to the store and have a look at how things are going, appar­ent­ly not. I don’t know what to tell you.

Tony Kynas­ton: [50:00] I think Cameron might want to ask about one of the stocks you own, but how would you do that for one of, I think you’ve got a bio­phar­ma­ceu­ti­cals stock in your port­fo­lio, how would you test the mar­ket, I guess, for a stock like that?

Michael Gold­berg: [50:14] And it’s a fair ques­tion. It’s dif­fer­ent and often when I talk about the Met­cash idea, I then piv­ot straight because, that was one of my ear­ly invest­ments. One of the oth­er ear­ly invest­ments we made was in ANZ and I say had I gone into the local Burke Street Branch and asked the same sort of ques­tions that I’d asked at Met­cash I prob­a­bly would have been escort­ed out of the bank under police escort. How’s busi­ness been going? How much cash have you got in the till? Those are not the sort of ques­tions you can get away with at Every kind of com­pa­ny.

With par­a­digm it was actu­al­ly an inter­est­ing one, it’s an exam­ple of an idea com­ing, not from our watch list, had you asked me 10 years ago, had you asked me six years ago? Can I imag­ine myself invest­ing in com­mod­i­ty stocks or bio­phar­ma­ceu­ti­cals I would’ve laughed at you and said, ha-ha, that’s very fun­ny? That’s not what val­ue invest­ing is, and that’s not what val­ue investors do. Par­a­digm, we actu­al­ly found through some per­son­al expe­ri­ences a mem­ber of the fam­i­ly actu­al­ly need­ed to have a knee recon­struc­tion, she had some seri­ous osteoarthri­tis and she went to the doc­tors and the tra­di­tion­al treat­ment is basi­cal­ly knee recon­struc­tion.

So, she went to the recon­struc­tion and the recov­ery process was absolute­ly awful, awful. I can’t express how awful the recov­ery process was, and as is often the case, if you’ve got osteoarthri­tis in one knee, you’re prob­a­bly going to have it in the oth­er knee or the hip as well. And she recov­ered from the orig­i­nal surgery and then recent­ly went back to get assessed for her oth­er knee and this was Vas’ fam­i­ly and they went to the doc­tor and the doc­tor said, look, you’ve got to get a recon­struc­tion again. You’ve got to go under the knife and the fam­i­ly were not sur­pris­ing­ly, not keen on that approach because of the expe­ri­ence they’d had before, and Vas my busi­ness part­ner, not being a shrink­ing vio­let kept push­ing and push­ing and push­ing and say­ing, is there noth­ing else we can do?

And even­tu­al­ly, the doc­tor said, I was hes­i­tant to men­tion this because your father is a doc­tor and I don’t want to be accused of rec­om­mend­ing unproven treat­ments. But if you’re hap­py to go on The Spe­cial Access Scheme, there is this treat­ment that’s avail­able where you can get a cou­ple of injec­tions and it seems to be hav­ing real­ly good results. So, we looked into it, we got in touch with some bro­kers, we got in touch with the man­age­ment team, Paul Ren­nie. I’ve had many con­ver­sa­tions with Paul Ren­nie. And it seemed like a real­ly, real­ly inter­est­ing sto­ry. Now the fam­i­ly mem­ber went on it and had some great results, but anec­do­tal­ly one set of results does­n’t make sta­tis­ti­cal­ly sig­nif­i­cant evi­dence.

But what we dis­cov­ered, the more we looked into it was that there have been some 500 patients treat­ed under The Spe­cial Access Scheme. We spoke to bro­kers who them­selves had par­tic­i­pat­ed in treat­ment, we spoke to patients, we spoke to doc­tors, we spoke to any­body that we could get our hands on that had any sort of con­nec­tion or rela­tion­ship with this com­pa­ny. And what we found was that the mar­ket tends not to ascribe suc­cess or val­ue to this sort of com­pa­ny, until at least the stage two clin­i­cal tri­als come out, and stage two clin­i­cal tri­als basi­cal­ly means you get a big sub­set of peo­ple, two, three four, five hun­dred to a thou­sand peo­ple.

You treat them against a place­bo and you see what the out­comes were. And nor­mal­ly you’re wait­ing for those results to come before you know whether or not this drug is work­ing. What was dif­fer­ent here was because it was a repur­posed drug and it had a great track record from a safe­ty per­spec­tive, the gov­ern­ment actu­al­ly let the com­pa­ny treat patients who were in dire need, had tried every­thing else. And this was like a mer­cy offer­ing, that they could go and they could get on this drug, even though it was­n’t offi­cial­ly approved for that par­tic­u­lar use. And there are 500 patients out there, the data from whom we have access to, the data from whom man­age­ment had been report­ing on an ongo­ing basis through their ASX announce­ments.

But, it’s not the offi­cial results, right. The offi­cial results only come out when stage two clin­i­cal tri­al results come out. So, we sat there and we said, it seems to us that it works, it’s worked for our fam­i­ly, and it’s worked for every­body that we’ve spo­ken to. The doc­tors we’ve spo­ken to have sung its prais­es. I even had a friend who was a vet and I called him up I said, I heard that this drug has been used in the vet­eri­nary space for a long, long time. Can you tell me about it? It has tend­ed to work for cats and dogs and hors­es. And he said, it’s been a mir­a­cle drug for ani­mals, but that does­n’t nec­es­sar­i­ly mean it’s going to trans­late to humans.

I said, fair enough, but thanks for the feed­back. So, we said, you know what? I under­stand why the insti­tu­tions and the big buy­ers are wait­ing for stage two clin­i­cal tri­al num­bers to come out because that’s the offi­cial num­bers, but why would the results be sig­nif­i­cant­ly dif­fer­ent in a clin­i­cal tri­al than in the real world? Because at the end of the day, the clin­i­cal tri­al is try­ing to find out what’s going to hap­pen in the real world. So, we had access to that real-world data and we said you know what? This com­pa­ny, it’s not espe­cial­ly expen­sive at the moment. I think it was maybe $200 mil­lion, maybe less than $20 mil­lion mar­ket cap at the time, and had a few projects on the boil.

The upside for this busi­ness is absolute­ly astro­nom­i­cal. The com­pa­ny lat­er came out and said that its address­able mar­ket on a per annum basis, just out of the Unit­ed States is about $9 bil­lion. That’s bil­lion with a B. And of course, it’s a long way to get from where we are to get­ting into pro­duc­tion, dis­tri­b­u­tion, and sales. But when we sat down, we said, we know this drug works, we rec­og­nize the mar­ket is not yet ascrib­ing val­ue to the fact that the drug works, we under­stand why. The down­side we think is quite lim­it­ed, espe­cial­ly rel­a­tive to the upside. So, we made the assess­ment and, on a risk, ‑adjust­ed basis, we decid­ed to take a posi­tion and we were some­what for­tu­nate that short­ly after we dis­cov­ered it, they were doing cap­i­tal rais­ing.

So, we end­ed up essen­tial­ly cor­ner ston­ing a cou­ple of rat­ings, that I think, fund­ed the com­ple­tion of their stage two clin­i­cal tri­als. So yes, Tony very dif­fer­ent from some of the stocks that sit in our port­fo­lio but, we’re look­ing to buy a dol­lar off of 50 cents some­times that’s pos­si­ble because a com­pa­ny’s fire-sale val­ue is sig­nif­i­cant­ly more than the share price. And some­times that dol­lar is in future earn­ings, whether it’s close, whether it’s this year, next year or the year after, or per­haps two or three years in the future.

Tony Kynas­ton: [56:48] And that’s a clas­sic Peter Lynch sto­ry, isn’t it? Where you come across some­thing in your every­day life and you researched it and then decid­ed to make an invest­ment in it.

Michael Gold­berg: [56:58] Cor­rect. I recall not that long ago, get­ting ques­tions about Myers when they were going through some seri­ous issues orig­i­nal­ly, and I said, we can look at the num­bers, we can make assess­ments all we like, but when push comes to shove when I asked my daugh­ter if she’s inter­est­ed in shop­ping at Myer, the answer is always no. So, some­times the aver­age con­sumer or patient or the aver­age guy on the street can have far bet­ter insight than all of the ana­lysts in the big banks. Because, as an ana­lyst and we suf­fered from it as well, you end up cre­at­ing this echo cham­ber where you sur­round your­self with peo­ple who think in the same way that you think, and you run the risk of just hear­ing what you want to hear back.

So, you’ve got to, from time to time, go out and speak to peo­ple who are dif­fer­ent from you, you’ve got to, from time to time, go and speak to peo­ple who don’t nec­es­sar­i­ly have any finan­cial acu­men. Because there’s a les­son to be learned from every­body and our job is to learn those lessons and pro­tect our clien­t’s mon­ey as best we can.

Tony Kynas­ton: [58:00] So, we’ve cov­ered a lot of indi­vid­ual stocks there. One thing that I like talk­ing about when I talked to val­ue investors is, there’s a lot of neg­a­tive press about val­ue invest­ing at the moment. How do you feel about that? I kind of con­tin­ue to find things I can buy, which are val­ue invest­ments, and do quite well with them. But I don’t know if it’s a nam­ing con­ven­tion that the mar­ket has, which is wrong, or whether val­ue investors are just shy about stand­ing up and show­ing their per­for­mance, but or whether it’s a rel­a­tive thing that the tech stocks are doing bet­ter than the tra­di­tion­al val­ue port­fo­lio, but what’s your take on this whole growth ver­sus val­ue debat­ed month?

Michael Gold­berg: [58:38] Yeah, total­ly. I think you touched on a cou­ple of points I could prob­a­bly make, but I think the three key chal­lenges, I think for me are num­ber one, there’s no set def­i­n­i­tion on what val­ue invest­ing is. Dif­fer­ent peo­ple view val­ue invest­ing in dif­fer­ent ways and so there’s no def­i­n­i­tion then any­one can be a val­ue investor. And if any­one can be a val­ue investor, then the term los­es all val­ue. Par­don the pun. I think the oth­er issue or the sec­ond issue is that, espe­cial­ly if you’re talk­ing about insti­tu­tion­al mon­ey, I think most funds, might call them­selves val­ue investors. But I think they’re prob­a­bly bench­mark funds with a bit of a val­ue twist around the edges for 10, 15, and 20% of their pub­lic author­i­ty.

Tony Kynas­ton: [59:29] They have got very big haven’t they.

Michael Gold­berg: [59:31] And the chal­lenge with that is, and it brings me to the third point, which you also men­tioned is that peo­ple like to com­pare. Peo­ple always say I want to com­pare apples with apples, oranges with oranges, apples with apples. So, it’s very hard to try and pin down what any indi­vid­ual fund man­ager’s approach might be, and com­pare it to oth­ers, like for likes, because every­body’s going to have their own twist on things. So, I think what most peo­ple do is most funds are com­pared against the bench­mark and I think that’s a mas­sive dis­ser­vice to the investor and to the fund man­ag­er.

Because it means if you’re going to be mea­sured against the bench­mark, you’re moti­vat­ed to not diverge much from the bench­mark. And so, even if you are qual­i­fied as an active fund, I think you’ll find that even active funds will have the vast major­i­ty of their port­fo­lio exposed to index-like returns. And then around the edges, there’ll be 10, 15, 20, 30, maybe even as much as 40% where they add val­ue through what­ev­er their phi­los­o­phy may be, be it growth, be it val­ue, what­ev­er the case may be. And I think that’s the prob­lem, I think a lot of funds that claim to be val­ue because of that aren’t actu­al­ly or aren’t nec­es­sar­i­ly val­ue. I think the third point which you touched on strive to set a rel­a­tive.

Tony Kynas­ton: [01:00:48] Rel­a­tive per­for­mance to growth.

Michael Gold­berg: [01:00:52] Yeah, that’s it, that’s the one. I think the third point, which you men­tioned is that, espe­cial­ly when you’re talk­ing about val­ue investors, val­ue investors aren’t look­ing to gen­er­ate mar­ket returns. You and I think we’re quite sim­i­lar, we go out there and we say, we’re hap­py to earn a 15 or 20% per annum return, no mat­ter what the mar­kets are doing. If you came to me and said Michael, would you be hap­py with a 15% return every year for the next 15-years, exclud­ing some sort of crazy hyper­in­fla­tion envi­ron­ment? I would say yes, but mar­kets don’t move like that, mar­kets move on hype.

Mar­kets are both man­ic and depres­sive. And so, what you will find I believe is that when mar­kets are being dri­ven by hype, as I think we’re see­ing right now, tech stocks and buy-now-pay-lat­er stocks and very, very high mul­ti­ples, I think you’ll find and tra­di­tion­al­ly, I think it’s true that val­ue investors are going to under­per­form because val­ue investors are find­ing good qual­i­ty com­pa­nies trad­ing for dis­count to their intrin­sic val­ue. And they’re not going to go explod­ing up by 400%, like After­pays or 500%, they’re going to go up con­sis­tent­ly on aver­age, over the medi­um term, 15, 20%. So, what you’ll find is in run­away mar­kets, like what we’re expe­ri­enc­ing at the moment, val­ue investors are going to under­per­form, but I think that’s by design.

And I think what you’ll find in flat­ten­er mar­kets or in down mar­kets, val­ue investors will out­per­form again by design because we’re just look­ing for good qual­i­ty busi­ness­es that giv­en time will gen­er­ate a suf­fi­cient return on cap­i­tal.

Tony Kynas­ton: [01:02:27] And it does strike me that we’re in a bit of a frothy time at the moment. It’s the 19th of August now and the S & P is back to its all-time high today, even though Amer­i­ca is still in the grips of the COVID pan­dem­ic and Tes­la’s just split shares and I think it was either Google or Ama­zon who were con­sid­er­ing doing it as well. And the shares are split and then they go up 20% just because they split. So, there’s not much log­ic going on in the mar­ket at the moment.

Michael Gold­berg: [01:02:59] I was hav­ing a chat with the team the oth­er day, and we were talk­ing about what’s been dri­ving the mar­ket and no one can know. And I mean, no one can actu­al­ly know, but a cou­ple of the things we’ve talked about, obvi­ous­ly low-inter­est rates have an impact. The risk of being out of the mar­ket and being a bench­mark hug­ger obvi­ous­ly plays a part as well. But one of the things that I brought up and we were sort of toy­ing with was the con­cept of share invest­ing for enter­tain­ment. I point­ed out that until recent­ly there were no sports on TV you could­n’t real­ly leave your house except to go to work if you were lucky enough to have a job that you were allowed to go to.

And so, peo­ple are find­ing them­selves, sit­ting at home, all of a sud­den with access to their Super­fund don’t for­get. So, all of a sud­den you’ve got access to an extra 20K look­ing for some­thing to do and the cash burn­ing a hole in your pock­et. And I think what you might have found, and I don’t have any real evi­dence to line this up with, but I think what you might have found, and I think you see it in some of the sto­ries you’ve heard out of like Robin­hood Investors in the States and sim­i­lar sto­ries local­ly is that a lot of mon­ey has been put into these excit­ing growth stocks. And per­haps a lot of the froth that we’re see­ing is being dri­ven from the ground lev­el by very retail mon­ey. Now, I don’t know if that’s true for sure but it’s been a very inter­est­ing time.

Tony Kynas­ton: [01:04:22] Yeah, no, I agree. I think you’re right. I’ve seen some graphs of where the insti­tu­tion­al mon­ey is and where it’s been and where retail mon­ey is and where it’s been and they’re very dif­fer­ent.

Michael Gold­berg: [01:04:33] Well, that may be true but I think what you’ll prob­a­bly find is that if retail mon­ey starts push­ing a stock, then even­tu­al­ly the insto mon­ey might actu­al­ly come in and sup­port as well.

Tony Kynas­ton: [01:04:43] Yeah, they have to, once they get into the dif­fer­ent index­es, don’t they. Yeah, that’s an issue.

Michael Kynas­ton: [01:04:47] Cor­rect. I mean the clas­sic one is After­pay. This is a com­pa­ny with a $20 bil­lion mar­ket cap with $0 of earn­ings so far and it’s down in the ASX top 20. So, maybe it belongs there maybe they’re going to replace cred­it cards, the peo­ple who are invest­ing in it are braver than I am. I wish them the best of luck; by the way, they’re braver than me.

Tony Kynas­ton: [01:05:07] I saw a great video recent­ly of Buf­fett, years and years ago, talk­ing about the auto indus­try and how with the turn of the last cen­tu­ry, there were 2000 automak­ers, but you would­n’t know which three to pick that will become Ford, GM, and Chrysler. And yet they’re the only three that sur­vived. So, his the­sis was you’re bet­ter off short­ing bug­gy whips, rather than try­ing to pick the win­ners. And I think the same thing’s going on with the cred­it card mar­ket at the moment After­pay may be the one that sur­vives for anoth­er a hun­dred years, or it might be some­thing else you just don’t know real­ly.

Michael Gold­berg: [01:05:40] You’re a hun­dred per­cent cor­rect but if I could take that one step fur­ther, even if you picked Ford, GM, and Chrysler, you still would have lost mon­ey. They still went bank­rupt dur­ing the GFC, right? So, even if cars are the way of the, even if buy-now-pay-lat­er is the way of the future. There’s no guar­an­tee that’s going to trans­late into prof­itabil­i­ty, you see it clas­si­cal­ly in the air­line indus­try. The air­line indus­try has been rev­o­lu­tion­ary has tak­en over the world has changed how we live and no one’s mak­ing a red cent out of it.

Tony Kynas­ton: [01:06:13] The same with tele­vi­sion, took over the world by storm from the fifties onwards, but they’re not mak­ing any mon­ey now. All right, Cam, I’ve exhaust­ed my list of ques­tions. Did you have any to throw in?

Cameron Reil­ly: [01:06:27] Well, I’m con­scious of time, Michael, we’ve tak­en up a lot of your time. Do you have time to answer one more ques­tion?

Michael Gold­berg: [01:06:32] I’ve sent the kids out of the house, so it’s qui­et time. They’re not com­ing back for anoth­er 40 min­utes. So, as long as we can knock off what we need before 40 min­utes, you should be able to avoid the cir­cus that is my home.

Cameron Reil­ly: [01:06:42] No, I appre­ci­ate that. Well, I saw when I was read­ing some of your past inter­views, I read some­thing, I think it was recent­ly where you said you might need to soft close the fund at some point, if it gets up around 400 mil­lion, your quote in the inter­view said, there’s no val­ue for any par­ties to sim­ply grow the fund for the sake of get­ting larg­er. If we can’t gen­er­ate the returns, we want, there’s no val­ue in rais­ing more cap­i­tal. And this ques­tion’s come up a lot on our pod­cast over the last year or so when we look at funds that don’t seem to be per­form­ing well, vis-a-vis, the index or com­pared to Tony’s per­for­mance.

And we have talked about the addi­tion­al com­plex­i­ties that must be involved when you’re trad­ing it with large sums of mon­ey. I know that even in our show, Tony will often say when we ana­lyze a stock that gets a good score, a good QAV score in our ter­mi­nol­o­gy, but Tony will say, but its trad­ing vol­umes are too small for him to invest in with the sorts of mon­ey that he’s splash­ing about. But for some of our small­er investors, it might be a good stock to look at. I imag­ine in the sort of realm that you’re play­ing in, there are addi­tion­al com­plex­i­ties. Can you talk us through how that man­i­fests the com­plex­i­ties of deal­ing with large sums of mon­ey?

Michael Gold­berg: [01:08:16] Yeah. I mean, sure. When we first start­ed with our first mil­lion dol­lars on month one, it’s much eas­i­er to allo­cate $1 mil­lion than it is ten or twen­ty or fifty or a hun­dred, no ques­tion. And as we’ve gone, we’ve seen our­selves pay­ing more and more atten­tion to liq­uid­i­ty in the mar­kets. Liq­uid­i­ty is a key con­sid­er­a­tion, but we try and make it sec­ondary to val­ue. So, if we find a stock that we think like an iSe­lect or like Nation­al Tires, it could be very hard to get set by buy­ing direct­ly in the mar­ket. But often­times you can call around to your bro­ker net­works and you can find lines of stocks to fill up what you’re after, but a hun­dred per­cent you’re right.

I think War­ren Buf­fett said recent­ly that he was cer­tain that if some­one gave him a mil­lion dol­lars today, he could, I think make a 50% return over the next few years on that mil­lion dol­lars because man­ag­ing a mil­lion dol­lars is very easy, rel­a­tive to man­ag­ing bil­lions of dol­lars. I don’t know that I can add a tremen­dous amount more to your point, except for, to say that look we went down the path of a zero fixed man­age­ment fee because we want to align our inter­est with our investors. And one of those man­i­fes­ta­tions is that we need to make sure that we keep gen­er­at­ing good returns and that means man­ag­ing our capac­i­ty.

So, we’re fair­ly con­fi­dent that we can keep doing the sorts of things that we’re doing with the man­date up to about 4 or $500 bil­lion. But from that point on, it would get quite com­pli­cat­ed and per­haps quite dif­fi­cult to the point that we can’t gen­er­ate those returns that we’re after. And if we’re not gen­er­at­ing returns, then we’re not get­ting paid and if we’re not get­ting paid, what’s the point. So, we’re look­ing after our own inter­ests, in look­ing after our investors’ inter­ests.

Cameron Reil­ly: [01:10:01] But specif­i­cal­ly to help our audi­ence under­stand what are the com­plex­i­ties when you’re deal­ing with that amount of mon­ey that make it dif­fi­cult to achieve the sorts of returns you want. Is it because that when you get involved in a stock, it’s too hard to take up a posi­tion in it with­out los­ing the mar­gin of safe­ty? What are the com­plex­i­ties specif­i­cal­ly?

Michael Gold­berg: [01:10:24] So, that’s for sure true. If I com­pared our fund port­fo­lio to what I imag­ined my port­fo­lio would look like if I still ran a pri­vate port­fo­lio, I’d be quite hap­py hav­ing all of my mon­ey in four posi­tions or there­about. With the fund it does­n’t make sense, you can’t man­age a port­fo­lio of any rea­son­able size so tight­ly, so, that’s why we’re aim­ing for about the 10, 12 sort of posi­tions over the long-term. It is a chal­lenge to not push up mar­kets and so some­times we look qui­et­ly and some­times we look slow­ly and some­times we’ll find a stock­bro­ker that can find a line for us if it’s a small­er type com­pa­ny.

But as I was say­ing cer­tain­ly as we grow we are mov­ing up the mar­ket cap lad­der. So, where­as when we start­ed, we might’ve been hap­py invest­ing in a com­pa­ny where we would require a liq­uid­i­ty event in the mar­ket to get out of. We’re hap­py to invest in twen­ty, fifty, hun­dred mil­lion dol­lar mar­ket caps. Right now, we would­n’t be because if we’re tak­ing a 5 to 10% posi­tion in any giv­en stock, well, if you buy a $5 mil­lion posi­tion in a com­pa­ny, that’s got a $20 mil­lion mar­ket cap, well then for bet­ter, or for worse, you’re stuck with that com­pa­ny until either it gets tak­en over or some­thing fun­da­men­tal hap­pens and it changes.

So cer­tain­ly, if we’re look­ing for, or if we’re look­ing at a stock that requires a mar­ket exit, we’re look­ing much high­er on the mar­ket cap lad­der. But if we imag­ine that there is a cap­i­tal event or some sort of lucra­tive event that we can cre­ate or moti­vate or push for. Then, as I said, we’ll look for a bro­ker who can buy us stock in a line and get set that way, and then moti­vate man­age­ment to real­ize val­ue. It does mean that there are a lot of stocks like Tony men­tioned where­by itself, it looks like a great idea, but we just can’t get set with­out mov­ing the mar­ket and so, we say, fine, and move on to the next idea.

And there’s always anoth­er next idea. One of the lessons of invest­ing, and I think you’ll both agree with me is the val­ue of patience. I remem­ber when I start­ed a good idea came across my desk and I thought, Oh my gosh, this is the great­est idea I’ve ever seen and it’s the great­est idea I’m ever going to see. I bet­ter chase after it and let’s best end the case there’s always anoth­er idea. If you wait, if you’re patient, if your eyes are open, you’ll always find anoth­er idea. So, we say no to a lot more ideas than we say yes to, and that’s the way it should be. But when we find an idea that fits the man­date and we’re able to get enough stock in, we buy with con­vic­tion we’ll buy a 5 or 10% posi­tion in any giv­en stock.

Tony Kynas­ton: [01:13:02] I’m inter­est­ed. You’re say­ing, if you ran the port­fo­lio your­self, you’d have maybe four shares in it and you’ve got 10 or 12 in your fund but you’ve got more ideas than that. So, why do you find that four shares are enough as opposed to invest­ing in all your ideas?

Michael Gold­berg: [01:13:20] Well, there are lots of ideas, but there are degrees of ideas, right? You’ve got your best idea. You got your sec­ond-best idea and so on and so forth. The risk of run­ning a hyper­con­cen­trat­ed port­fo­lio is that they get a lot of volatil­i­ty. Now, for me being the guy who’s done the research into the stocks, I’m com­fort­able with the volatil­i­ty because I don’t view volatil­i­ty as risk, I view risk as the absolute loss of cap­i­tal. So, for me, I’m hap­py to buy my top three ideas, you’d get a tee­ny bit of diver­si­fi­ca­tion, and don’t wor­ry about the volatil­i­ty.

 Where­as if I’m run­ning oth­er peo­ple’s mon­ey and we are a liq­uid fund, so, we’d have inflows and out­flows every sin­gle month, I can’t run a port­fo­lio, in the same way, I’d run it for myself because I need to be aware of the volatil­i­ty. I’m not scared of volatil­i­ty and I think my investors under­stand that we have prob­a­bly a lit­tle bit more volatil­i­ty than your stan­dard bench hug­ging fund might have. But I think the bal­ance of around about 10, 12 posi­tions is about right.

Tony Kynas­ton: [01:14:19] Is there any math behind that or is it just expe­ri­ence that you found, you can take cash off the table and pay up peo­ple who are redeem­ing and add to that posi­tion, easy with that kind of size?

Michael Gold­berg: [01:14:29] There is some math and I don’t have it in front of me, but I’ve read many times that if you do it right, you can have what­ev­er prop­er­ly diver­si­fied means, but you can have a prop­er­ly diver­si­fied port­fo­lio with 10 to 12 stocks. I have read that in sev­er­al places. Our view has always been, we’re not con­cerned about volatil­i­ty, we’re just con­cerned about liq­uid­i­ty from a fund per­spec­tive. And so, we’ve always sought to have 60 to 70% of our mon­ey in busi­ness­es or in cash where if we want­ed to exit, we could exit with­in a cou­ple of days with­out mean­ing­ful­ly impact­ing the stock prices.

So, we’ll have big hold­ings of cash almost all of the time rel­a­tive to I think the indus­try, I think at the moment we’ve got about 12 or 15% cash, I think the low­est we have ever got is 5 or 10%. I think it’s always a good idea to have some cap­i­tal on hand just in case, I think prob­a­bly most big funds have a cou­ple of per­cent in cash which is fine, It works for them. Our man­date is absolute returns, so, my clients don’t mind if I hold more cash as long as I’m gen­er­at­ing good returns for them, but I’m not con­cerned about volatil­i­ty. I have some con­cerns about liq­uid­i­ty. And so to that end, we try and keep the port­fo­lio 60 to 70 per­cent.

Tony Kynas­ton: [01:15:48] I find that I’m lucky, I’m not con­cerned at all about volatil­i­ty because it’s not a risk. But I do strug­gle some­times in that if I only invest­ed in my top three ideas, it was num­ber four, that turns out to be the best idea. So, I do spread between 10 and 20 for that rea­son.

Michael Gold­berg: [01:16:05] And I’ve told you that it is on you.

Tony Kynas­ton: [01:16:07] That’s right. Yeah, yeah. Hazy process.

Michael Gold­berg: [01:16:17] The great thing about invest­ing, in gen­er­al, is you don’t have to have a view on every­thing and you don’t have to invest every­where. And so, what if your fourth-best idea did­n’t pan out? It does­n’t mat­ter what you missed out on, it mat­ters what you’ve actu­al­ly invest­ed in. So yeah, you could’ve got bet­ter returns had you invest­ed in num­ber four, Tony, but part of the emo­tion­al chal­lenge of invest­ing is being hap­py and sat­is­fied and com­fort­able with what you have invest­ed in and being hap­py, com­fort­able, and sat­is­fied with the stocks that you said no on.

Tony Kynas­ton: [01:16:37] Def­i­nite­ly you’re right.

Cameron Reil­ly: [01:16:39] Oh, well, Michael, just one last thing then Tony was telling me on our show ear­li­er this week. One of our lis­ten­ers asked a ques­tion about what his worst years were and I think we went back to the GFC and he had a cou­ple of bad years there, but he said that one of the things that he learned through that process was how to put a stop-loss in place. So, part of our process now is look­ing at the three-point trend line of the stock and once it breach­es, its cell line, we will sell the stock, regard­less of whether we think it’s a good stock or a bad stock. Rather than a clas­sic val­ue invest­ing mind­set of dig­ging in and just say­ing, no, we’re going to hold it for­ev­er until it regress­es to the main, I guess. I’m inter­est­ed in if you have a sim­i­lar sort of stop-loss men­tal­i­ty or process in the fund, or do you just dig in for the long-term?

Michael Gold­berg: [01:17:48] I’m hes­i­tant to say that we dig in for the long-term because we’re not dig­ging in for the long-term. We buy a stock with a view of what we think it is worth and we buy it at a mate­r­i­al dis­count to what we think that val­u­a­tion is. And if the share price goes down, we see that as an oppor­tu­ni­ty, not a risk, I think the con­cept of stop loss­es is fine, if you haven’t got an infor­ma­tion advan­tage. If you’re not any more informed than the oth­er guy out there, then you’re a hun­dred per­cent cor­rect. And as I men­tioned before, the only thing you real­ly have to mea­sure, whether you’re right or wrong, is what the share price is doing.

So, if the share price is going down, then per­haps you made a mis­take. And I don’t want to come across as being a know-it-all because for sure, we get things wrong from time to time, more times than I care to admit, right. But at the end of the day, there are things that we have con­trol of and there are things that we’re not in con­trol of. And I think we are in con­trol of find­ing out every­thing we pos­si­bly can, that we then put to good use into com­ing up with an intrin­sic val­ue for a stock, for a com­pa­ny, for a busi­ness. And if that busi­ness is trad­ing at a dis­count, we’re hap­py to buy it.

If it goes down, we’re hap­py to buy more and that tends to be the way we go about things. My view is that on any giv­en day there’s as much chance that a share price. Well, I take that back on any giv­en day, if I’m right, there’s more chance of the share prices going up, and then it’s going down. So, just because the share price has gone down a cou­ple of days in a row, does­n’t change the odds of the next day in my view. And if the stock is cheap­er than it was yes­ter­day, then to me, that seems like an oppor­tu­ni­ty to buy my favorite apples in the store at a 50% dis­count to the pre­vi­ous day.

Stocks are just part own­er­ship in a busi­ness. It’s an actu­al thing that you can touch and feel real­ly if you want­ed to go, you could touch and feel some aspect of every busi­ness. And I think peo­ple lose sight of that, and it becomes more of a the­o­ret­i­cal blip on the screen but if I asked you, Cameron if your favorite Nashi apples nor­mal­ly cost a dol­lar, a kilo, and they went down to 90 cents the next week, would you be more or less like­ly to buy them than you were the week before?

Cameron Reil­ly: [01:19:52] No, I only eat Pink Lady apples, but yeah.

Michael Gold­berg: [01:19:57] Fine, Pink Lady apples.

Cameron Reil­ly: [01:19:58] Yeah, no.

Michael Gold­berg: [01:19:59] You’re going to buy it. So, what about 70 cents? If they go down to 70 cents a kilo will you be more or less like­ly to buy?

Cameron Reil­ly: [01:20:06] Yes, more.

Michael Gold­berg: [01:20:06] How do you know there’s not some­thing wrong with Pink Lady apples?

Cameron Reil­ly: [01:20:10] Well, yes.

Michael Gold­berg: [01:20:11] And that’s the thing, right? That’s the thing with actu­al food­stuff and wid­gets, we can touch and we can feel it. And so it becomes less the­o­ret­i­cal and becomes more prac­ti­cal. I like those pink ladies. I love them at a dol­lar. I love them even more at 50 cents, where­as with stocks it’s more the­o­ret­i­cal.

Cameron Reil­ly: [01:20:28] Well, the dif­fer­ence being is I’m going to eat the apples. I’m not going to sit on them and wait to resell them when the price gets back up above what I paid for them.

Michael Gold­berg: [01:20:38] Now we’re talk­ing about spec­u­la­tion rel­a­tive to invest­ing.

Cameron Reil­ly: [01:20:41] Well, I’ll throw Tony’s argu­ment as I under­stand it, which is obvi­ous­ly, I’m prob­a­bly only about 10% of what Tony’s under­stand­ing is about it, but the way he’s explained it to me is whilst he might believe in the inher­ent val­ue and the intrin­sic val­ue that he’s cal­cu­lat­ed for that stock. It does­n’t real­ly mat­ter if the rest of the mar­ket has decid­ed they’re going to dump it because he does­n’t know how far it’s going to drop, and he could take that cap­i­tal and put it some­where where the mar­ket sen­ti­ment is not dri­ving it down con­sis­tent­ly. And we’re not talk­ing about a cou­ple of days here or there.

I’m talk­ing about a con­cert­ed peri­od of time where the stock drops below a trend line that he can take that cap­i­tal and put it some­where where it’s going to be per­form­ing bet­ter for the next six months or the 12 months or two years rather than just be wait­ing for the mar­ket to get over its hee­bie-jee­bies on that stock. And it starts to tick back up because if it falls by 20% or 30% or 50% when it starts to tick back up again, we can get back in and buy it then and ride more of the upside rather than you’re stick­ing with it on the way down. How did I go there, Tony? Was that close?

Tony Kynas­ton: [01:22:07] It was good. Yeah. Yep. No, that’s per­fect. Exact­ly. Yeah. I’m think­ing more about GFC type events or even the COVID event, but it kind of turned out to be short-term, but the GFC, you could ride stocks down to half their val­ue or more and wait two or three years, maybe even five years for it to recov­er. So, that’s one of the things I learned was to look at the sen­ti­ment on the stock as one of my inputs as a go or no go. I take your point, Michael, about Pink Lady apples, but buy­ing the apples to eat them we’re not the gro­cery store own­er. Who’s say­ing great, Pink Lady apples are cheap­er, I’m going to buy twice as many Pink Lady apples.

Michael Gold­berg: [01:22:46] So, my view is that they’re not so dis­sim­i­lar. I eat the returns I get from the com­pa­nies that I’ve invest­ed in.

Tony Kynas­ton: [01:22:54] But, I can’t eat more Pink Lady apples just because they’re cheap.

Cameron Reil­ly: [01:22:59] I’m get­ting lost in their anal­o­gy now, but yeah. Okay, good point.

Tony Kynas­ton: [01:23:03] But, I agree with you, Michael. I’m not try­ing to debate you on that. We both have dif­fer­ent ways of doing things.

Michael Gold­berg: [01:23:08] If I could turn around tomor­row and say, I’ve become an expert per­son in time of the mar­kets, then fine. Maybe I could come on board with the phi­los­o­phy you’re sug­gest­ing here and I under­stand what you’re say­ing. I would just sug­gest that at least with my per­son­al expe­ri­ence in prac­ti­cal terms, it does­n’t always work out quite that clean­ly

Tony Kynas­ton: [01:23:31] Noth­ing is ever clean in the mar­ket. So, I under­stand what you’re say­ing. Maybe just let me refine the ques­tion a bit more. When do you get out of a posi­tion? Is it when it reach­es the IV you cal­cu­lat­ed for it or if it’s still going up do you hold on and if so when do you say [Cross-Talk­ing 01:23:45]?

Michael Gold­berg: [01:23:45] There are nor­mal­ly three rea­sons. Num­ber one, if the sto­ry changes we get out it has­n’t hap­pened often, but we have on occa­sion had to dump a stock when a sto­ry changed. Oth­er­wise, the two more com­mon sit­u­a­tions are when there’s an alter­na­tive use of that cap­i­tal that is mate­ri­al­ly bet­ter. Or when a stock gets to what we think its intrin­sic val­ue is we won’t nec­es­sar­i­ly dump it all straight away. We could chip it out or what­not. We’re hap­py if the mar­ket is excit­ed about a stock to chip it out and in a cou­ple of weeks, get out of posi­tion. But typ­i­cal­ly when it gets to what we think it is worth, we’ll exit and that’s cost us in the past, don’t get me wrong. We’ve sold ear­ly plen­ty of times.

Tony Kynas­ton: [01:24:25] That’s one of the things that I strug­gle with is like [Cross-Talk­ing 01:24:28].

Michael Gold­berg: [01:24:28] Sell­ing is much hard­er than buy­ing.

Tony Kynas­ton: [01:24:31] Yeah. The mar­ket will be like a pen­du­lum, there’s the under­val­ue swing when we buy, and then there’s def­i­nite­ly a swing to over­val­u­a­tions. Every­one jumps on board and it goes through var­i­ous index changes and things like that and uses those to jump in. So, yeah, I’ve found that in the past it can be a prob­lem get­ting out too soon, which is get­ting back to what Cameron was say­ing. I’ll wait until the sen­ti­ment changes before I get out, regard­less of it may be twice what I think it’s worth in terms of its IV.

Michael Gold­berg: [01:24:58] I remem­ber not that long ago we bought a stock that we thought was cheap, good val­ue. And about two or three days lat­er, we got a Google alert that there was poten­tial for a class action on it. And so, we got in touch with some of our legal experts and we had a chat with them and we were try­ing to find out if the case had mer­it. And we were informed that yes, this case has mer­it. So, we turned around with­in four days of buy­ing it. And we got out of the stock because it had­n’t hit the mar­ket at that point. Anoth­er exam­ple of our tim­ing being awful was three days lat­er; it got tak­en over for a mas­sive per­cent­age.

Cameron Reil­ly: [01:25:39] That’s hor­ri­ble.

Michael Gold­berg: [01: 00:25:41] So, per­haps some­times Tony and Cameron you can be over­ly informed.

Tony Kynas­ton: [01:25:48] The mar­ket can be messy.

Cameron Reil­ly: [01:25:49] Alright. Michael, well, we real­ly appre­ci­ate you com­ing on and chat­ting. That was a very refresh­ing chat. And I love your style of what you’re doing and con­grat­u­la­tions on the suc­cess, may it con­tin­ue.

Michael Gold­berg: [01:26:03] Amen. Thank you, Cameron. Appre­ci­ate your time guys.

Tony Kynas­ton: [01:26:05] Yeah. Good stuff. And where can if our lis­ten­ers want to invest with you, where do they go?

Michael Gold­berg: [01:26:09] The best way is to find us through our web­site CSVF.com.au. Just shoot us an email and we’ll come back to you with what­ev­er you’re after.

Tony Kynas­ton: [01:26:17] Good. And hope­ful­ly, when Mel­bourne gets back to the real world, we can catch up some­time for a cof­fee or a bite to eat.

Michael Gold­berg: [01:26:23] That would be a treat, although I’m feel­ing like I nev­er will be able to go out ever again. COVID is cur­rent­ly stand­ing.

Tony Kynas­ton: [01:26:30] Go and invest in anoth­er bio stock that can cre­ate a vac­cine for COVID.

Cameron Reil­ly: [01:26:37] All right. Enjoy the rest of your day. Stay safe, Michael.

Michael Gold­berg: [01:26:40] Thanks, fel­las. Thanks so much.

Cameron Reil­ly: [01:26:42] Cheers.

Tony Kynas­ton: [01:26:42] Bye.

Cameron Reil­ly: [01:26:44] Well, there you go, Michael Gold­berg, Collins Street Val­ue Fund. I hope you enjoyed that as much as Tony and I did. If you’re look­ing for a fund that has a val­ue-based phi­los­o­phy, go check it out at their web­site, CSVF.com.au, and if you’re brand new and lis­ten­ing to this for the first time, please remem­ber this is just a pod­cast. Nobody is a finan­cial advi­sor on this. So, don’t take any­thing you heard on this as finan­cial advice that is right for you. If you need finan­cial advice, please go see a finan­cial advi­sor. But if you’re look­ing for some­one to help and you’re a whole­sale lev­el investor check out CSVF.

And if you’re look­ing to learn how val­ue investors invest, so you can under­stand it bet­ter for your­self, or do it for your­self, check out our pre­mi­um pod­cast, get on the two weeks free tri­al at qavpodcast.com.au you would get to go over all of our videos and lis­ten to all of our pre­mi­um episodes where Tony explains his method­ol­o­gy in great detail. Get to look at his stock scor­ing check­list and get to read our get­ting start­ed guide on how that works and get invit­ed to our VIP events. We’ve just had some fun din­ners around the coun­try dur­ing the lock­down. Well, before lock­down, I guess in Syd­ney, and then recent­ly in Queens­land, we don’t have lock­down yay yet.

You get to ask Tony ques­tions, which we’ll answer on upcom­ing shows all this kind of good stuff. Any­way, check it out qavpodcast.com.au. Well guys, have a great week, stay safe and good luck with your invest­ing.