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.