Expert Investor, Andy Simon: Where To From Here For Growth Stocks – an Interview with Equity Mates Podcast



Bryce: [00:00:15] 

Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you’re an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce, and as always, I’m joined by my equity buddy Ren. How are you going? 

Alec: [00:00:30] 

I am very good, Bryce. Very excited for this episode. We’ve all started 2022 a little bit nervous as growth stocks have fallen and we’re all looking at our portfolios and wondering how we should think and how we should approach it. And I’m excited for this interview today because we’ve got an expert from one of our favourite investing houses to come and help us understand it all. 

Bryce: [00:00:55] 

That’s it. Ren. 12 months ago, we sat down with TDM, who published a memo on the macro environment, predicting that the mid-pandemic world of cheap money and crazy valuations would end up on the list of macro moments like the tech bubble, the global financial crisis and European debt crisis. The memo warns that you can’t just own an amazing business regardless of valuation. But now, 12 months later, TDM have published a follow up memo, and we have one of the memo’s authors, Andy Simon, joining us to discuss it today. Andy, welcome. 

Andy Simon: [00:01:28] 

Thanks, guys. I’m delighted to be here. 

Bryce: [00:01:29] 

So Andy is a member of the investment team at TDM Growth Partners. TDM is a private investment firm that was founded in 2004 and has compounded client capital at over 25 per cent per annum for 17 years. Prior to joining, Team, Andy worked for VGI Partners and Macquarie Group, so we’ve got some intro questions Ren to kick it off. [00:01:48][18.7]

Alec: [00:01:48] 

Yeah. So, Andy, before we get into the macro moment that we’re living through at the moment, we’d love to get to know you a little bit more and we always like to start at the very beginning. Can you tell us the story of your first investment? 

Andy Simon: [00:02:04] 

Sure, happy to. So it actually goes back to 2006. I just started university and I was interested in investing so. So at the time, I set up a CommSec account. That was the thing to do, and I basically got a list of the ASX 200 and started, you know, I started running down it and found the first company I’d heard of, which was BHP. So I bought BHP. Now that’s a that’s a pretty boring answer, you know, blue chip BHP. But really that that sort of purchase really sort of set off my investment journey and actually made me the investor I am today. So I might just tell a bit more about about about that story. So I was twenty six. And you know, for those who were investing at the time, I remember that, you know, the big theme of the day was the commodities boom. So you basically had like these mining producers and sort of pre-revenue mining explorers that were going public and, you know, pumping 100 per cent on day one. And, you know, basically the modern day tech company was was a mining company. And so I bought these BHP shares. I think I paid about $26 at the time and it just started going up like, you know, the day after I bought it. And I think after 12 months or so, it was in the mid 40s and I thought I was a stock market genius. And the problem with that is as the stock price went up, so did my confidence. And so what I started doing is I started dabbling in sort of the more speculative end of the of the market and investing in some, you know, early stage mining explorers and other other speculative mining companies and heading into heading into the financial crisis. In 2008, I had a portfolio of about 20 basically speculative mining companies. I think one or two biotechs thrown in for, you know, for diversification. And the problem with that is that my portfolio suffered. I think it was a 60 or 65 percent drawdown during the during the financial crisis. And that wasn’t just a that wasn’t a temporary loss of capital, that was real loss of capital because many of these businesses, you know, actually needed funding, you know, to keep doing what they were doing. And so I was staring at these massive losses. I was devastated. I was watching all my friends going on their lavish summer summer European trips and buying cars and and whatnot. And you know, I’d taken the sensible approach and decided to invest my money, and I had nothing to show for it. And if I sort of look, look back at that experience, I mean, there’s probably two things that have stuck with me from that. And the first is it’s the importance of knowing where we are in the cycle. So that’s that’s number one. And the second is just the, you know, the value of having high quality assets in your portfolio, which I didn’t have at that time. 

Bryce: [00:04:27] 

The importance of knowing where we are in the cycle, I’m sure, is going to be a theme that we chat about throughout this episode. So we’ll we’ll touch on that in a moment. But Andy, working at Macquarie VI and now TDM, have you developed a personal investing philosophy? 

Andy Simon: [00:04:43] 

Yeah. Look, so there’s there’s definitely been been an evolution in my in my style over the years, and I think I think a lot of investors go on this journey. So in the early days, you know, I was really looking for sort of deep discounts for, you know, average quality businesses. And over the years, my my tolerance to pay high prices for better quality businesses has definitely been a theme. And that’s that sort of started with that, with that financial crisis experience that I just described, but also, you know, the past I. So he is a team of really solidified that approach for me. You know, I don’t really like the terms value and growth investing. I think they’re a bit meaningless like today and we invest in high growth businesses, but we’re looking to pay good prices for those. So, you know, our growth investors, our value investors, we’re just looking to make great investments in high growth businesses. I mean, I guess the other thing I’d say a cool thing that’s sort of been with me from from the early days is the idea of margin of safety. And you know, if you go back to the to the Benjamin Grahams sort of Warren Buffett definition of margin of safety, it’s very quantitative. It’s basically, you know, you compare the price you pay to your estimate of intrinsic value. And the bigger the discount to the price you pay, the bigger your margin of safety. And I think that’s a good starting point. But I mean, what I’d add to that is some qualitative overlays. And so what I mean by that is if you take if you take two businesses, you know, business, I is a fast growing business. It’s got really strong and growing competitive advantages and it’s got an awesome management team and it’s trading at some high multiple and you’ve got business B. That’s, you know, it’s a it’s a slow growing business. It’s got sort of low, low competitive advantages and a weak management team, and it’s trading at a low headline valuation. If you compare those two businesses business, I may have a better margin to psyche than Business Bay purely because of those qualitative factors. So that’s that’s something that I’ve definitely come to appreciate more and more as time has gone on. 

Bryce: [00:06:33] 

So let’s set the scene and context for this memo. Super fascinating read. And I think firstly, I would encourage our audience to check out the original memo from 12 months ago that’s available on the TDM website on the medium. Your memo starts with the context in markets. Today, we’re seeing 40 per cent of the Nasdaq is down some sort of 50 per cent or so. Can you help us set the scene what we’re seeing in markets at the moment, what’s happening in the growth part of the market? 

Andy Simon: [00:07:04] 

Yeah, sure. So I mean, it’s fair to say it’s been it’s been pretty savage out there in the growth as part of the market, you know, for the past three or so months. I think if you if you if you call up the memo, you’ll see that the starting picture is a picture of a person sort of free falling headfirst from the sky. I think that that picture, you know, that was that was purposely chosen. It does feel a bit like that at the moment. And I think one one of the things we point out in the note that is if you look at the Nasdaq index as a whole, it’s down about 15 percent from its all time highs. But if you look beneath the surface and you look at the actual constituents of the Nasdaq, you know, many of them are down a lot more than that. And I think I think the data point we call out is that 40 percent of the Nasdaq is down by more than 50 percent. So the last time we were in the situation was March of 2020, during during the Covid crash. But as as most people can recall, the you know, the central banks and governments stepped in to backstop markets then. And so that was a pretty short lived decline. You really have to go all the way back to early 2009 to the depths of the financial crisis. For the last time, we were in a situation where so many of the Nasdaq constituents were down by that amount. So it really is quite an unusual situation that we’re in right now. 

Alec: [00:08:15] 

A common question we get here at Equity Mates and I guess that Bryce and I are pondering is, are we in 2000 again? You know, it feels like the really high growth, unprofitable stocks have obviously fallen the most this time, and that was really the story of early 2000s as well. In your memo, you go to then address that question. So I guess I’ll just ask you, are we in 2000 again? 

Andy Simon: [00:08:42] 

And we’ll say no upfront. We don’t think we’re in 2000 again. So obviously we go into a lot of data on the memo, but maybe just to call out a few points. I mean, that truly was an exceptional period. And you know, if you look if you look at the Nasdaq back in in 2000 when it peaked, it had just come off this period of pretty, pretty extreme growth. So it went up about four times in a three year period. But actually, a lot of that happened in the last six months or so in the last six months. It actually doubled to from September 1990 to March of 2000. The index doubled. And now you guys might be familiar with the term melt up. Have you heard of the term melt up? Yeah, yeah. There was definitely a melt up happening at that point in time. So it’s when there’s a frenzy, you know, buying off of shares and prices squeeze up a lot in a short period of time. And we just haven’t seen anything like that this time around. So I guess that’s the first point I’d make. You know, the second thing would call out is if you look at valuations today versus then, there are a lot more reasonable today. Back then, you had so many pre-revenue companies going public that investors started using these absurd, absurd valuation metrics like like enterprise value to to eyeballs or enterprise value to clicks as proxies just because they had nothing else to rely on. And, you know, outside of a few concept stocks today, we just aren’t seeing anything like that data. But even if you just look at the more established companies like if you look at some of the household names like Microsoft, Cisco, Intel, Adobe, all these companies were public. In 2000, I think in the memo, we actually pull out 10 companies that are pretty well-known, established tech businesses that were listed back in 2000, and those 10 businesses were trading at around 20 times forward revenue back in 2000. Whereas if you look today, the average, the average software company is trading at about eight times for revenue today, which is actually in line with its long term average. So. So we just aren’t saying that those crazy valuations like we were, you know, back in 2000. And I guess the final thing I’d say just on that and sort of related to that that point on valuations is that the business models then versus now have changed a lot as well. And this is one of the points we call out in the memo. But if you go back to 2000, most of the leading software technology businesses were generating basically one, you know, one off non-recurring revenue. So, you know, people people might remember a game going to the store and buying your windows or office, say they Roman installing in the computer and and that was a one off purchase that was one of revenue for Microsoft. They wouldn’t get that revenue again until you went back a few years later and and bought an upgrade or whatnot. Whereas if you look today, the leading SaaS businesses are all recurring. Revenue in most software businesses today are generating basically all recurring revenue. And what that means is every year they’re starting with a full book or revenue. They’re not having to having to build it up again. So it makes these businesses far more predictable. It makes the growth rates more sustainable and all else equal that that warrants a high valuation today. 

Alec: [00:11:38] 

I remember when Microsoft Office changed to a subscription and I was so angry you, but I ended up paying it and I still pay it Thursday.

Andy Simon: [00:11:48] 

It’s a much better model for the businesses, and it’s a much better model for the for the for the for the consumers as well. 

Bryce: [00:11:53] 

So in your analysis, Andy, you look at the Nasdaq Index X, the big tech companies, which which we know have been really holding the whole index up. So is there is there anything that the market cap weighting of the index is really obscuring? 

Andy Simon: [00:12:09] 

Yeah, good. Good question, Bryce. And I mean, as I said before, if you just look at the Nasdaq, it’s down 15 percent, which is a lot. But that’s that’s really masking sort of the pain being being seen below the surface. And the reason for that is because the Nasdaq is a market cap weighted index, which means each constituent in the index is weighted by its market cap. And if you if you look at it closely, you’ll see that about 10 companies account for half that market cap. And those 10 companies, you know, the well-known names like Apple, Amazon, Microsoft, Google, even Pepsi is in there. I think on, you know, depending on what day you look at it, but effectively you’ve got these 10 businesses that that account for so much of the of the Nasdaq’s market cap that really the index is just a just a just a reflection of those 10 names. And that long tail of smaller company, you know, that long tail where the pain is being felt today is really not moving the needle for the index. 

Bryce: [00:13:04] 

So we’ve set the context. And now that brings us to the big question that is on everyone’s lips and that is where to from here. Before we get to that, we will take a quick break, though, to hear from our sponsors. 

Alec: [00:13:18] 

So, Andy, before the break, Bryce asked the big question where to from here, and I guess that’s where your memo moves to, and there’s a quote that I pulled out that I think we should kick off this conversation with. In your memo, you write, there has never been more force growing at scale software businesses with amazing unit economics than they are today. And I think, you know, Bryce and I, when we talk in the office about the amount of businesses that are looking cheap, that could be, you know, this could be a great buying opportunity where really, I guess feeling that there is a big opportunity here. And you guys in the memo then look at this generation of SaaS businesses. Compare them to their historic peers to really back up that that statement. So what were your key takeaways from this analysis? Talk to us about these fast growing, amazing businesses that are available for us. 

Andy Simon: [00:14:15] 

Yeah, sure. So we certainly certainly share that sentiment. Alec and I mean, I guess, you know, one one point just to reiterate, was that point around the business model differences that I called out earlier, just that, you know that that recurring revenue versus one off revenue. So I think that that’s the important point for people to keep in mind. But I guess I guess the other key takeaway is just the expansion in the number of high quality software businesses of now versus back then. And so I think in the memo, we sort of go back in time and we say in 2006, there were two public companies and that was Adobe. And Salesforce are two to pure play SaaS companies. And actually, it’s not even really accurate to call Adobe a SaaS company back then because it hadn’t gone through its transition from from licence to cloud, but effectively, those two businesses. If you fast forward to today, there’s 94 at least 94 public SaaS businesses of scale. And so what that means is of scale. It’s, you know, it’s around 450 million of revenue on average, you know, growing it at least 30 percent per annum. And so if we look at that, we’ve never seen so many high quality, fast growing recurring revenue software businesses as as we have today and as growth investors, that that really excites us. And obviously, it helps that valuations have come down as well. 

Bryce: [00:15:29] 

And we just need more money to invest in all of this too much opportunity. 

Andy Simon: [00:15:33] 

Yeah. Yeah, you and I both are all in the same boat 

Bryce: [00:15:36] 

friends constantly complaining about his cash flow situation. I’m sure we’ll touch on on that in a moment, though, but so many of these software companies are starting to look pretty cheap. But investors and the Equity Mates community are feeling a bit of hesitancy to sort of jump in right now. Because of all these headlines we’re seeing around, you know, the fear of imminent interest rate rises and what that means on on the markets and on these growth companies. So what’s Tim’s view on interest rates?

Andy Simon: [00:16:05] 

Yeah, I thought you’d asked me that question. It’s obviously the question on everyone’s mind. And look, I’ll start by saying we don’t spend any time at all time trying to predict interest rates. It’s just not our game. We don’t have any any edge or ability to do that. But obviously interest rates do impact valuations. And as bottom up stock pickers, we need to we need to. You know that that in somehow. So we do have a mental model to deal with interest rates and the approach that we take is we use it through the cycle multiple in all our valuations. So, so through the cycle means it applies or it makes sense in sort of most reasonable and most normal market environments. And so what that means in practise is if interest rates go down a lot like they have been for the past few years, we’re not necessarily ratcheting up our valuations. And if interest rates go up a lot, we’re not necessarily ratcheting down our valuations. We actually focussed spend a lot more time trying to get the businesses themselves right. So trying to get, you know, trying to trying to forecast the growth rates, trying to understand the competitive advantages. Understand the people and culture because we think if we get that right, then we, you know, we don’t have to worry too much about where interest rates are in five years. You know, obviously there are scenarios where, you know, maybe REITs interest rates overshoot, you know, and you know, we’re in a 10 percent interest rate environment or something, which which means now we know we’d have to go back to the drawing board, probably and reassess our our framework. But I guess I’d say in that scenario, there are probably other things happening in the world as well that would cause us to go back and reassess our forecasts and our expectations of that business and that investment anyway. So, you know, as investors, we’re always absorbing and digesting new information and reflecting that in, you know, valuations and in our assessments of every business in the portfolio. And so that’s what that’s what we do in that in that environment. So I guess my advice would be anyone out there who’s worried about interest rates. I spend more time worrying about getting the businesses right rather than where interest rates are going to be. 

Alec: [00:18:00] 

I think that’s an important reminder. And maybe and if you can pass that on to some of the financial news publications, so that’s that will help kill the noise for everyone. Absolutely. But look, we I feel like we’ve covered a lot in this conversation so far. So if I can just recap. You know, we’ve seen a big falloff in growth, 40 percent of the Nasdaq index is down more than 50 percent. But you know, from what you guys at TDM have found from the work you’ve done, you know, it’s not in 2000, there’s a number of key differences. Importantly, the businesses today are a lot better than they were in 2000, and there’s more of them, which is really exciting. And a lot of this short term noise that we’re hearing at the moment around interest rates and inflation are too much of a concern for long term growth investors like yourselves at TDM. So with all that context in mind, you know, we framed this. This part of the conversation is where to from here. And I think there’s another quote that I want to pull out from your memo, which I think sums up where teams view of where we’re going from here is which is when we look at our portfolio today. Our expected returns have never been higher at approximately 35 to 40 percent per annum for the next four years. Epic. Now that’s exciting and we love to hear that. We love to read that and would love to unpack that. But it is a it is a pretty bullish call when the market is, you know, quite nervous. And many of the high growth names, some of which are in the stadium portfolio have suffered a lot of light. You know, some of the names that we talk about here at Equity Mates are down over 50 percent from their all time highs. So I guess what gives you and the TDM investment team the confidence to to make that call that over the next four years, you’re looking at 35 to 40 percent returns, are you? 

Andy Simon: [00:19:57] 

Yeah, sure. So it could just be that we’re optimistic people. I mean, I guess that’s why we invest in growth companies. 

Alec: [00:20:02] 

I think as investors, you have to be optimist. 

Bryce: [00:20:04] 

I’m expect I’m expecting 50 percent plus for mine personally. 

Andy Simon: [00:20:08]

 Yeah, yeah, no. Look, I mean, we don’t spend a lot of time worrying about share prices. I mean, we think of ourselves as business owners. So whether we own a very small stake in a business or a larger stake in a business, you know, we think of ourselves as as part owners in that business. And I think the analogy that that I love is is that of Mr. Market from the intelligent investor. And I think in that memo, we actually refer to it as Miss Market. We want it to be gender inclusive. So I’m not stick with that. And the analogy is that, you know, you’ve got this, this person miss market. And every day Miss Market comes knocking on your door offering to sell you shares or buy shares from you at some price. And you don’t know what that price is, that it’s whatever price she feels like selling it or buying it from you on that day. The problem with mis market is she has wild mood swings, and sometimes she’s a manic depressive. Other days, she’s wildly optimistic, and it’s not our job as investors to try and predict Miss Market’s mood. It’s our job to take advantage of her mood swings. So if she’s offering us really attractive prices on on on a certain day, then we’re going to take advantage of that by buying shares from her. And if she’s offering to sell shares at really high prices, then we’ll take advantage of that and we’ll sell shares to her. And so that’s sort of the relationship that we we have with share prices. And obviously right now she’s offering us really good prices and so we’re going to be buying from her. I love 

Bryce: [00:21:29] 

that. Don’t predict the moves, take advantage of the moves as they as they come that some, you know, I imagine there’s a lot of the Equity Mates community at the moment figuring out or trying to think through what’s going to be coming. But if if you just think about what’s happening right now and what’s occurring in front of you, it can take away a lot of that anxiety around it trying to be the the one investor that predicts the future correctly, for sure. So Andy A.T.M. Seventeen years. This isn’t the first correction in growth. The Emerging Cloud Index has seen up to 20 percent corrections in 2014, 16, 18, 20 and 2021, but it’s up almost 10 times in that time. So how do TDM manage their portfolio to not only weather these corrections, but also take advantage of these corrections when they occur? 

Andy Simon: [00:22:22] 

Yeah, that that’s right. I mean, in our 17 year history of investing, you know, we’ve we’ve invested through a financial crisis in 08, you know, a debt crisis in Europe in 2010 and and multiple large drawdowns over the past decade or so that we either we call out in the memo and look at the also up front. It’s it’s it’s not fun investing during a downturn. It’s it’s not fun, but there are ways there are ways or things you can do to navigate it. And you know, one of the things that we do, we are bottom up investors. So we’re looking at each individual business and making an investment decision on that business. But we do like to have an eye on where we are in the cycle. We think it’s really important to know where we are in the market cycle. So for example, a year ago when we released that first memo, when we were talking about valuations being stretched, we also talked about how we were playing defence with our portfolio. And so what that means in practise is in those situations, we’ll have a higher cash weighting than than than otherwise, and we’ll have lower. Lower sort of weightings in the investments than we would otherwise. Whereas on the flip side, if we’re in a period where we think valuations are attractive, like right now, then we’ll go on the offence and we’ll start, you know, we’ll start drawing down that cash balance and running at a lower cash balance and having higher weightings across the portfolio. And so if you look back over our history, you know, we’ve had extended periods where we’ve had more than 30 percent of the portfolio in cash and we’ve had periods where we have basically no cash, so we’re fully invested. So I think that, you know, managing that cash balance and having that playing, you know, I’m not willing to play offensive and to play defence is is really important. The second thing I’ll say is we never use financial leverage. It’s just not something that we think is, is, you know, makes sense to us. But obviously, if you all leverage that does amplify things on both the upside and the downside. And if you all leverage going into a market downturn, you know, that’s that’s when you can really, you know, get wiped out. So. So, so leverage is something that you know, just to be careful of. And I guess when it comes to specific trading tactics, what I’d say there, in particular during a downturn, we like to use what we call the chip away approach. So chip away, what we mean by that is if you know, once we decide where buying shares and we find the companies we want to stop buying, we start buying small amounts over over a long period of time. And the reason for that is we’re not trying to time the market. You know, we don’t know if the market’s at a bottom, if it’s near the bottom or if it’s, you know, a long time away from the bottom. We just know that we’re paying an attractive price today. And so we’re going to buy a little bit today. We’ll buy a bit more tomorrow and we’ll keep doing that until we no longer think it’s an attractive price. And so I think that’s that chip away approach is what served us well during during downturns and something that we, you know, we’re doing right now. And I think the final thing I’d say and this is probably most relevant to the retail, you know, to the retail investors, is this idea of emotional stability. This is such an important thing to to have while, you know, while while investing during a downturn, it’s so easy to see share prices falling every day and just to throw in the towel and hit the sell button. And that’s usually the worst time to do it. And I think, you know, if you can just maintain your emotional stability, go back to the businesses, go back to the facts and make a rational decision that that’s really important. And I think that is that is a real edge over institutional investors who often face, you know, quiet redemption pressures and monthly reporting pressures, and they’re forced to sell at the wrong time. So I think for the retail investor that can maintain their emotional stability, they can have a real edge over over the institutional investor. 

Alec: [00:25:49] 

I think Andy, one of my personality traits that serves me very well as an investor, is that I’m a very lazy person. And so I would just go long periods without checking my portfolio and just being confident in the decisions I made at the time and not watching those day to day price movements. And I can tell you in the last couple of weeks, that’s definitely saved me a lot of anxiety. And I think it’s an important reminder. I do want to pick up on the first thing you said there, because I think it’s it’s worth stressing on when we talk about portfolio construction. You mentioned having an allocation of cash on the sidelines ready to take advantage of the opportunities. You know, that’s one of the best things about being a retail investor. We don’t have a mandate from clients that say we have to be X percent invested at all times. And one of your colleagues at TDM then joined us on the podcast early last year, and he spoke about portfolio construction with the full episode on it. So I’d recommend going and listening to that if people want to, I guess, go deeper on on some of the points that Andy hit on there. 

Bryce: [00:26:58] 

Yeah, I also would suggest listening to Ed and Tom, who we spoke to over the last couple of years. 

Alec: [00:27:05] 

You might as well, you know 

Bryce: [00:27:08] 

where he spoke about that, that chip away approach. And that’s something that I after doing those episodes have actually brought into my investing during times like this. A lot of, you know, people in the community will have a chunk of money and kind of try and say or predict that, you know, is this the time to put all my all my money into intermediate? But having that chip away approach, I think, is a fantastic way of entering into positions and taking away that anxiety of it’s now or never. So, yes, some really good pieces of advice that I think are very actionable for the Equity Mates community. So thanks, Andy. Well, that does bring us to the end of the episode. We love to finish with three final questions, but before we get to that, if our community is interested in reading the memo, I would certainly suggest that they do or any of the other pieces of analysis and written content that you guys are doing over at two a.m. Where’s the best place to to find that 

Andy Simon: [00:28:05] 

this memo can be can be found across our LinkedIn page, as well as the today a medium page that if but if you go to our website, you can you can find all our all our content as well. 

Bryce: [00:28:14] 

Awesome. And we’ll we’ll put a link to the memo in. Our show notes for everyone. 

Alec: [00:28:20] 

Well, Andy, we appreciate you joining us today, as Bryce mentioned, we always like to end with the same final three questions. So we’ll get stuck into those. And the first is, do you have any books that you consider? Must read? 

Andy Simon: [00:28:34] 

Yeah, this was this was hard for me because because there’s a lot, but I’ll I’ll throw sort of three things out there that were really influential for me. So the first is probably quite well known, and that’s pure Charlie’s Almanac. So that’s the compilation of Charlie Mangas best speeches, writings, you know, philosophies, life philosophies, investing philosophies. And in my opinion, it’s the best book on self-improvement that I’ve ever read. So I guess, you know, for me, it’s a must must have in the investors library. The second is probably a bit more obscure, and it’s a book called Expectations Investing by a guy called Michael Mabasa and Rapoport. Have you guys heard of Michael Moore before? 

Alec: [00:29:14] 

Yeah, yeah. 

Andy Simon: [00:29:15] 

He’s his best described as every professional investors favourite investor. Oh wow. And so he’s probably not. He’s not a household name. You know, some some other investors are, but he’s well known in investing in the investment community. And Michael, he’s a he’s a professional investor, but he’s also a bit of a polymath and an academic as well. So what he does really well is he combines different schools of thought, you know, different disciplines and apply them to investing. And he’s written a lot of articles and a number of books and the book I’m recommending expectations investing is all about. Basically, it’s a framework for how investors should first analyse what is been priced into a stock today and then use that to form a view on whether it’s a buy or hold or sell. And it’s actually the same framework that we use in our memo. You know, when we talk about what do we need to believe to make a return from here? That’s the framework that we’re using, you know, to form that view. So it’s a really good book and it’s it’s a book that can be applied by any, any any investor. So that’s the that’s the second one. The third source that I’d give is the investment letters from from the Nomad partnership. So the Nomad partnership was a concentrated investment fund run by two guys Nick Slape and his partner, Zachariah. And they and they ran that fund, I think, from 2001 until 2014, where they compounded at about 21 percent per annum over that period. So really good returns and actually what they’re famous for is being really early on Amazon so that were invested in Amazon in the early 2000s, and they held it all the way up until I dissolved the fund in 2014. And what’s really fascinating about that story is in 2014, Amazon had grown to 70 percent of their portfolio. And those guys realised they they felt bad, charging their clients a fee to effectively manage a one stock portfolio. So what? So they they they quite literally dissolve the fund and handed the stock to their clients and said, just hold onto this stock, don’t pass any fees and we all know what happened from there. You know, Amazon’s been a bit an awesome performer, and so that was a that was a, you know, that worked. And if you read their letters, they go through. I mean, they go through a lot of things, but they they go through in detail their Amazon thesis. And it’s just great to see over the years during the ups and the downs of the Amazon share price, how their thinking evolved and sort of how they were, how they were approaching it. So just if, if, if you just look up Nick Slape investment letters in Google, you can find them all for free and it’s just an awesome ride. 

Alec: [00:31:50] 

I’m pretty envious of that. That guy’s life. If he had 70 percent in Amazon and he was so confident in the company, there’s probably a lot of time to go play golf shots and just do some other things like phase as you go. But I think three, three great recommendations there. And even next question we like to ask. Forget valuation just purely on, you know what the company is and what it does. What’s the best company you’ve ever come across? 

Andy Simon: [00:32:20] 

The best company? Well, I mean, I’m going to be a bit cheeky here and sort of give you two somewhat indirect answers. So. So the first the first thing for me, if I think about the best business, there’s there’s there’s a few criteria that come to mind. The first is an ability to earn a return on invested capital above the cost of capital for a long period of time. The second would be a permanent monopoly position. The third would be no no pricing regulations, basically free to set their own prices. And then the fourth would be constant and growing demand for that product. And I actually can’t think of of of any investable businesses that meet that criteria. The only one that comes to mind is my high school uniform shop. So if anyone knows if anyone can tell me how to invest in that, that’d be a great, great business. So that’s the first thing. I guess the second the second thing I’d say, you know, we’re trying to trying to find and find the best growth companies in the world to invest in a stadium. And we use a few different frameworks to help us, you know, help guide us through that. And so there are there are two concepts I’d like to throw out there that sort of we use when we’re assessing that, and one is this idea of vitality and the other one is this idea of A. fragility. So just to cover off on those so, so vitality is this idea that the best growth companies are constantly reinventing themselves and constantly investing in future growth growth options? And I think the most famous example of that is is Amazon with IWC. So obviously, you know, they were a retail business. They created IWC and now IWC accounts for four more of the value than the retail business. But there are lots of examples of businesses that are that are in different stages of that vitality process. And we, you know, we’ve been quite public on on Spotify as one of our, you know, one of our sort of, you know, core holdings. And if you look at Spotify, you know, we think they’re in the early stages of creating that vitality. And so what they’re doing is that they’re investing a lot in in their in their podcasting operations as well as building, building and audio advertising network. And so we, you know, we think that if that pays off, then that could be a massive, massive contributor to Spotify’s valuation over time. Mm-Hmm. So this idea of A. fragility is it’s really that the best businesses have the self-reinforcing mechanisms that allow them to thrive during difficult environments. And you know, the example I’d give for that is is because many Gomez and I know you’ve had Steven Marks, the CEO and founder on the podcast before. And you know, if you if you look at the Covid period, I mean, it was devastating for hospitality. It was devastating for most restaurants. It actually accelerated G-A-Y business. And the reason for that is because they were able to to firstly lower prices and secondly shift sales to to the delivery channel. And they could only do that because they had the margin structure to support lower prices and they had the throughput to support the delivery channel. And so their business accelerated while peers were hurting. And I think that’s a great example of A. Fragility 

Bryce: [00:35:23] 

wasn’t the chicken burrito the most ordered meal on Uber Eats during Covid? Pretty, pretty big 

Andy Simon: [00:35:29] 

was and actually we just we just learnt that it was the most ordered meal in Singapore as well on Deliveroo. So oh wow. Oh wow, 

Alec: [00:35:35] 

borders. There you go. I actually didn’t know Guzman was in Singapore. Now they ship, the 

Bryce: [00:35:39] 

burrito is across. 

Alec: [00:35:44] 

I I also think Andy, going back to your Spotify mentioned and talking about how they invest for the future. It’s a running joke here at Equity Mates that Spotify is just buying everything in the podcast space. They bought Hauschka a little earlier this year, an Australian podcast host. Then last week they announced they bought pod sites and shot ball. They are a business that sees a future in podcasting and investing heavily in it. So you’re talking about trying to find companies that are investing for the future that we are certainly seeing that in the industry over here. So, Andy, that brings us to our final question. If you think back to your younger self pulling out the ASX 200 index and looking down the list of companies landing on BHP, making that vote not

Bryce: [00:36:31] 

very far down.

Alec: [00:36:32] 

Yeah, I know you didn’t go very far. ANZ Yeah. What advice would you give your younger self?]

Andy Simon: [00:36:39] 

Yeah. Well, look, I’d like to think I’m not that old yet, but maybe that’s my own, you know, maybe I’m wrong there. But look, I I wouldn’t change a lot about about the past, but I guess I would go back to myself in 2008 when I was staring at, you know that those devastating losses in my portfolio and I would tell myself not not to worry, because those those losses, that experience will help shape, you know, shape the investor that you’re going to become. And you know, I’m a I’m a huge fan of Ray Dalio’s. You know, principle of pain plus reflection equals progress. And I think as investors, as long term investors, we’re going to experience a lot of pain. That’s just part of it. But the only way you can progress and get better is if you reflect. So having it having your reflection processes as part of your investment process is key. And I honestly think that being able to do that is the key to just constantly getting better as an investor. So I definitely go back in time and tell myself not to worry. It’s all going to be fine and just learn from this and and you’ll be better for it. 

Bryce: [00:37:41] 

Awesome. Well, Andy, every time we speak to someone from team, you know it’s so enjoyable. You guys have such a clear idea of who you are as investors in the framework to follow. And there’s so much to learn from from that as and I’m sure the Equity Mates community always take a lot of value from hearing from you guys. So we appreciate your time. And yeah, all the best. Thank you very much. 

Andy Simon: [00:38:05] 

Great. Thanks, guys. It was great to be here.’Great. Thanks, guys. It was great to be here.

Equity Mates Podcast Related

Equity Mates Podcast Related


Latest Insights

Stay informed, receive Insights first.