Podcast

Expert Investor, Ben Gisz: Building a Portfolio in Today’s Market Conditions – an Interview with Equity Mates Podcast

This interview with Ben Gisz discusses the TDM investment philosophy and its origins.

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Bryce (01:13):

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 mate. Ren, how are you

Ren (Alec) (01:27):

Going? I’m very good, Bryce, very excited for this episode. I think one of the real privileges of getting to do this show for the last few years is meeting some pretty incredible investors and some pretty incredible funds. And I think we can safely say we’ve developed a bit of a man crush on the guys at TDM Growth Partners, we’ve interviewed Ed Cowan, Tom Cowan, Hamish Collette, and now we’ve got the big four. We’ve got Ben Gizz joining us today.

Ben  (01:58):

Morning guys, thank you very much for having me. It’s great to be here. Thanks very much.

Bryce (02:02):

So Ben joined TDM Growth Partners when they had 70 million under management and along with Hamish Collette and Tom Co and has grown TDMs assets under management to over $1.5 billion. Ben is a non-executive director at Pacific Smiles, which is one of TDMs portfolio companies. But Ben, we were going to call you co-founder of TDM. And I think for the first time ever on this podcast, someone has said they don’t want that as a title. What is the story?

Ben  (02:32):

Yeah, so a lot of people do refer to me as the co-founder, but often like to use the opportunity to tell a bit of a story about the history. Founders have a very special spot in most businesses and for us the take on that was that think about a business being formed on someone’s living room floor, surrounded in annual reports, waist deep, probably reading a lot of them in either your board shorts or your undies, whatever you like. And really doing that sort of hard grunt work. In the early days, Tom and Hamish gave me a tap on the shoulder a short time later. A lot of hard work had been done by that phase. We got 70 million of funds and it’s been a massive and very enjoyable journey since,

Bryce (03:14):

I mean, still you’ve taken it from 70 to 1.5, so you’ve been part of the journey for a very long time.

Ben  (03:19):

And the power of the teams, the thing that’s always really driven our success and the combination of people and not just the three of us, but the quality of person we’ve been able to hire since and allow them to buy into the dream as well.

Ren (Alec) (03:34):

So Ben, now for the rest of this interview, I’m just going to be imagining Tom Cowan in his undies surrounded by annual reports. So thanks for that mental image. But look, we do like to start these interviews by hearing about people’s first investments. We find there’s generally a good story or some good lessons that come out of that investment. So to kick us off today, can you tell us the story of your first investment?

Ben  (03:59):

Sure, I’d love to, and it’s a bit of an odd one. I think for most people they probably talk about the first stock they bought. For me, I grew up in the country and it wasn’t a proper farm, so no offence to all the real farmers out there, but I did grow up in a small property and my first investment was a flock of merino sheep. So I’d always been interested in this price value difference and what you could buy and sell at a differential to make a return. And I looked at ostriches and I looked at alpacas and eventually my parents thought in order to get this guy to give up, we’ve just got to support him to buy a few sheep. And so that was the first investment I made. And in amongst other things, I’d look at a bunch of specky stocks and pretend I owned them and things, but the first real money I put to work was in sheep.

Bryce (04:42):

I’m pretty sure Roger Montgomery’s was a goat.

Ren (Alec) (04:46):

Weird.

Ben  (04:46):

I did want a goat. I once again, I just wasn’t allowed to get one.

Ren (Alec) (04:50):

So how did the investment turn out?

Ben  (04:52):

It went all right actually. Now I dunno whether this is one of these situations where your parents secretly underwrite an outcome to make sure you don’t lose interest in investing, but certainly from my perspective, it was a good investment and I haven’t invested in a flock of sheep since, however, recently I’ve bought 15 cows. So maybe this is the time to revisit that

Ren (Alec) (05:12):

Trend. There you go.

Bryce (05:14):

So Ben, in your time at A TDM, have you developed a personal investing philosophy?

Ben  (05:20):

Yes, I have. Rightly or wrongly. I think everyone’s personally investing philosophy some way relates to their personality traits. One of my personality traits is I’m a bargain hunter. I have been spotted from time to time rummaging around in the $2 bin at the reject shop, for example. So I love a bargain. Even back at school, I was creating a secondhand market for school uniform. So you can tell I like to hunt a bargain. I get excited by that, but over time my style’s transitioned a bit. TDM style is more great companies at a reasonable price and I think that’s the right way to invest. In terms of other factors, simplicity is something I value a lot. So this ability to take a complex investment and summarise it on a page I think is something that’s really, really important. Some people refer to that as the grandma test.

I think that’s very offensive. The grandmas, I think how I consider it is more a lay person’s test. You should be able to explain an idea on the page, not just your grandma, but anyone and really articulate it in a simple way. And if that can’t be done, I’d question whether it’s a good investment. And the final thing is just from a temperament point of view, I feel I operate better when times are tough and people are panicking and you have to make harder decisions when there’s a lot of rent on the screen. And I think that’s a temperament aspect and I feel like I like to play under that sort of situation more than a bull market.

Ren (Alec) (06:46):

So that temperament piece is a really interesting one, and I think something that a lot of our listeners probably haven’t experienced, we’ve seen a lot of listeners and more broadly in Australia, a lot of people have started investing after the Covid drop. Is that temperament something that you can build or what advice would you have for retail investors who haven’t lived through a period where there’s a lot of red on the screen?

Ben  (07:10):

I think you can build it to have the right temperament, the right time. I think you do need to have a view of what happens after whatever blip you’re going through. So if you don’t have a solid view of a company in the first place, it is easy to panic. But assuming you do have a solid view of a company, you’ve just got to take your mind out of the short term into the long term. And your view has to be, I’m down on paper 50%, which might be a lot of money to you personally, but do I have confidence this company’s going to make it through and is going to realise its value over time? And if the answer to that’s yes, then you just really focus from the short term, the long, long-term, it’s human nature to gravitate to the short term when you’re in a panic.

Bryce (07:52):

So we recently came across a blog post that TDM wrote on current market conditions, which was pretty fascinating for us because you guys aren’t really known for often commentating on market conditions. You take that very long-term approach and try and remove yourself from the noise. So when we did say it, we thought it was worth unpacking, which is what we want to start with. In fact, you’ve only commented I think four times in the last 16 years on market conditions. So what is it about the current environment that has caused you guys to give some public opinion?

Ben  (08:25):

Yeah, the way we think about it is we don’t think anyone’s an expert to say the all ordinary s and p what 200 is going to end up at X amount in a year’s time and the return will be y. We just don’t think that’s realistic. We view the world as bottom up investors, so we’re constantly looking to find stocks bottom up. Occasionally we detect that the market environment is at an extreme point in the middle of the GFC. I would say that was an extreme point and after a very, very long bull market now we feel as though it’s at quite an extreme point, but most of the time it’s in the middle. So where we have an opinion, it tends to be on either end of the spectrum when things are really dire and when things feel quite optimistic to us. So this is not some mathematical equation. This is us linking together a number of indicators if you like, financial and non-financial to get a feel for where the market is at generally.

Ren (Alec) (09:22):

So Ben, in this blog post, you spoke about how the market’s overheated. What are some of the key market indicators or just more I guess societal indicators that point to the market being overheated?

Ben  (09:35):

Yeah, that’s a great question. Something that we have thought a lot about recently. First thing I want to say is that you’ve got to think about different markets differently and a lot of our comments around the market being overheated do relate more to the growth part of the market because that’s the part that’s really been supercharged. And within that, we talked a lot about the software space, which is an area we’ve invested a lot in. Some of the indicators we referred to on a blog post include IPOs, particularly tech IPOs, doubling day one or week one. That’s a routine thing that’s happening. That’s just not normal trading volumes. Both equities and options are up 50 to a hundred percent year on year margin lending is the highest level it’s been since 2008 and equity inflows are off the charts, not at a time also when valuations are high. So they’re the metric based indicators and not just at one or two as something to worry about, but where all these things start happening. It’s kind of like the canary chirping in the coal mine. The other bit is what I call the anecdotal test, which is that if you hear every taxi driver, shopkeeper friend, whoever you speak to in the street who previously had relatively little knowledge on investing, talking about how much money they’ve made and how hard it is to lose money, then generally you’ve got a problem.

Ren (Alec) (10:57):

You never like to hear the words highest since 2008 or highest since 2000. That’s always a red flag. And yeah, we’re definitely seeing it in everything from NFTs to the amount of stupid cryptocurrencies that are being made to Pokemon cards and baseball cards trading at all time highs. There’s so much money in the system and it’s just desperate to find places to go.

Ben  (11:19):

Absolutely.

Ren (Alec) (11:20):

So markets are overvalued hot, whatever you want to say, but as you said, you are a bottom up investor. So I guess in the simplest way to ask this question is why does that matter?

Ben  (11:33):

Yeah, it’s a great question. Something that both a lot of clients ask us and we debate a lot internally as well. So you’re very right, we are bottom up investors. So what that means is that we’re looking at individual stocks and trying to form a view on whether they can deliver our returns, which we’re trying to target 20% plus per annum, 25% plus per annum. So that’s always a true north. The reason it matters for us, the market environment is that it goes to the opportunity set. So if we’re at one end of the extreme or the other, like I’ve mentioned either super optimistic or super pessimistic, you get your opportunity set change. So for example, software companies in 2010 or 11, you could have thrown a datat, a dart board, and any one of those was going to deliver your 20% return at that point in time.

Now that’s different to saying when should I have invested in the market timing and so forth. But the environment’s very target rich nowadays. I feel like we have to work a lot harder to find those gems. And so the reason it matters for us is the rate at which you need to work to find those two or three ideas to deliver our required returns. And we’re fortunate we only need to find two or three ideas a year. We only own 10 to 15 stocks and we’re not out there trying to find 50 companies that need to deliver our returns. So we’ve got an unfair advantage in that respect. Yeah,

Bryce (12:51):

Yeah. So what are some of the key, I think things that our listeners should be aware of in today’s market environment? Obviously we don’t have the research capabilities that you guys do, but just as a retail investor, how should we be thinking about it?

Ben  (13:06):

Yeah, I think it’s one of the trickiest times ever to invest, and when I say ever, I’m 43, so I don’t necessarily say ever, ever, but certainly in my investing lifetime. And the reason for that is back to this interest rate dilemma. This environment encourages people to take their money out of the bank and do other things with it. So I can understand why people say cash is trash, you earn nothing from interest in the bank. So that gives investors a real dilemma. The older you are, the bigger the dilemma it creates, because if you are in a position where you need to start harvesting cash on a two to three year view, then it’s very hard to take your money out of cash and do other things. You need to have at least a three to five year view with equities. So it’s very much a case of people aren’t earning a return in the bank, therefore they are encouraged to make an investment in the equities.

You just need to be fearful when others are greedy. So our version of that is you hold more cash than you would normally hold and you don’t get caught up in this belief that you can’t lose those two things. The second bit of it is how do you invest as a retail investor and what would your strategy be? We don’t really get too much in the business of advising people what to do there because I guess a little selfishly, we believe what we’re doing is what we need to focus on. We think it’s the right way of doing it. We don’t think everyone can do the same thing. Not everyone has access to the same people resources and dedication to 15 companies that we do. So I often struggle to give retail investors advice, but what I often say is if you really don’t really know what you’re doing, you do go wider and you do own an ETF or some sort of broader index holding because you’re less likely to trip up and fail on one company being a dud.

But if you do genuinely have an interest in business and you do genuinely think you can have a crack at understanding the fundamental value of a business, maybe it’s a business that you’re very close to, you’ve got a family interest in it, you grew up around a retail business, something like that, then I do think there’s an avenue to pick individual stocks and take a view on them. I just always caution people to say we would never buy a stock that we didn’t very clearly have a view on the fundamental value of, and that’s because our whole business is to buy at a price which is below that fundamental value and understand when it’s reached that fundamental value. And if you don’t know that equation, then I would argue it’s closer to punting.

Ren (Alec) (15:29):

So that’s the sort of context in the market we’re in and we thought this was a good, I guess context to talk about portfolio construction because when markets are hot and as you said, it’s a difficult time to invest, that’s when portfolio construction I guess is critical. Before we move there, I want to ask one more question about market conditions. You said you’re a bit of a value guy or more of a value guy than Tom and Hamish maybe, and we’ve been reading a bunch of investor letters for Q1 and there’s a lot of talk about will value finally start to outperform growth again after a long period of growth outperforming. How do you think about growth V value in their coming years?

Ben  (16:11):

Yeah, it’s a great question. It’s not something that we specifically try and forecast because we’re not trying to form a strategy around that question. Just before I go on though, I would say between Tom, Hamish and myself, we would agree on 95% of the ultimate view on price value and how we proceed. It’s normally my investment setting mentality normally informs how that debate goes. So you always need in the room someone really driving that passion for what the future could hold. And you also need a few people saying, Hey, what about this? And I think we’ve got the balance in the team between the two. It seems to work well. So on your question of value and growth, all we’re sensitive to is that in a zero interest rate environment, what do people want to own? Okay, of course you want to own structural growth businesses that are going to grow for 10 or 20 years above GDP and they’re going to take market share from the incumbents.

What a great spot to invest. I mean, that’s why software companies are highly valued. That’s why we love software companies and other structural growth businesses, but that pendulum always has an end point and whatever’s great tends to become too highly prized at some point in time. And so all we’re saying is that we’re getting towards one end of that spectrum, and therefore I would infer that at some point in time that value growth equation would swing around. We still think we can perform well in that environment. We only need to find a small handful out of 4,000 companies of high quality growth businesses. So I think naturally inevitably that equation swings around.

Bryce (17:47):

So before we jump into portfolio construction, we’ll take a quick break for our sponsors.

So Ben, before we overlay current market conditions with how you’re thinking about constructing a portfolio, let’s just talk about some of the basics of what you’re doing at TDM. Do you have any rules for which you apply to your portfolio construction?

Ben  (18:59):

Yeah, so the way we think about portfolio construction is first and foremost, we are believers in concentration. And again, this is different to a retail investor’s perspective, but our fundamental belief is there’s not that many great investments out there and our chances of delivering superior turns comes down to our ability to hold a small number of very good businesses that can deliver great returns. And it’s a constant battle to find those great businesses.

Bryce (19:27):

How many are we talking? What is concentration for you?

Ben  (19:30):

So our version of that is 10 to 15 businesses, but realistically it’s even more concentrated than that because within that mix, I can talk about the composition a bit more, but there’ll be some quite large positions and then a tale of smaller positions.

Ren (Alec) (19:43):

And then T dium invests in both private markets and public markets. Do you have any rules around that aspect for your portfolios?

Ben  (19:52):

Yeah, so I’ll give you an overview of how we think about it. So just I guess going back a step, so we’ve got about one and a half billion dollars, which we try and invest globally. We try and find the best 10 to 15 companies. We want to own businesses and help businesses that we’re proud of. That’s our mission. We are looking for businesses that have structural growth at a higher rate, outstanding people and culture and excellent sustainable competitive advantage. So those three dimensions. So we’re finding bottom up stocks that meet that criteria and that can deliver 25 ish percent per annum return. Then we say, okay, how do we factor those into the portfolio? As I said, 10 to 15 stocks. But our view of how much of those stocks you should own is roughly done like this. A small position for us might be around 3% of the portfolio.

A large position would be about 15%. So you could say, well, if you’ve got your best company, why not make 35% or 50%? You’ll get high returns if your highest returner is 50%. But however solid we think our investment record is, there’s always margin of error and you can get things wrong. And in any given year, the company that we think is going to do the best doesn’t always do the best, for example. And so there is a limit we think, from a risk point of view to how much you should have in one stock. So we have small position, large position, and then we scale everything in between depending on their risk adjusted returns and how confident we are in the future of those businesses.

Bryce (21:22):

And how do you think about cycling out businesses from that concentration? You’ve put all this work in to find 15 of the best stocks. If you then find a company that is going to be generating two or 3% extra in return, then what’s already in there? Do you rebalance cycle it through? How does that process work?

Ben  (21:38):

Yeah, we are pretty methodical about how we do that. So what we do is we’ve always got this equation, if you like, between what we think the fair value of a business is and where the business is trading. So from time to time and particularly in this environment, you can get that gap close up and when that gap close up naturally we want a smaller position. So the way we will gradually sell down or sometimes at speed sell down and increase the position depending on that differential between market price and what our impression of intrinsic value is.

Bryce (22:12):

And then in terms of portfolio, something that we are all sort of debating at the moment as well is cash and the weighting of cash. How do you think about cash weighting?

Ben  (22:22):

Yeah, I think this is quite different to many investors. So we have held about 20% of our portfolio in cash across the cycle, across our 16 years in business. And that is an unusual position when you think about it because I think most people would agree that generally speaking, you’re not in a bear market. Bear markets are occasional and so therefore shouldn’t you be mostly fully invested, particularly if you’ve got all these great ideas that you can invest in and make a 20% return. What we’ve come to realise over time and from day one actually is that the option value of having a reasonable cash holding is extremely valuable and is underestimated by most people. Again, you can fall into this trap, hang on, interest rates are zero, that’s just dead money. But we are able to and have done in the past deploy 15 to 20% of our portfolio in a matter of weeks into dirt cheap companies, which we rarely get the opportunity to buy.

And so that has allowed us, I think to improve our returns over time. I think the one shift we’ve made in the last couple of years is to recognise that as we invest in bigger and better quality businesses over time you get management teams to just continue to produce magic and the intrinsic value keeps growing faster than you think, and so therefore you may look back and regret having sold something that doesn’t meet that differential between value and price criteria on the day. So I think we’ve become a bit more relaxed about holding ultra high quality businesses, but still maintaining a discipline around adjusting position size for valuation. Some investors of course, including Buffet will say, you just hold the companies that you love and just never let go of them. And so we’ve got a different twist on that. We think valuation always plays a role.

Ren (Alec) (24:07):

That’s the incredible thing that even when we started learning about investing, everyone reads the security analysis and the buffet letters and there’s this real concept of mean reversion that comes through in there where companies go above their fair value and then they’ll come back to their fair value. But what we’ve seen with companies like Apple and Microsoft is that they just keep compounding away and that incredible rates of returns for decades.

Ben  (24:33):

Yeah, phenomenal. And they’re two great examples and our ideal investment is a type of investment that does, that continues to surprise you with magic and will can come onto people and culture in a bit, no doubt, but people and culture is typically the key ingredient make that magic happen.

Ren (Alec) (24:50):

So you’ve said there that some of these rules of portfolio construction don’t apply for retail investors, but I think the thing that really comes through is that one, you have pretty clear rules that you all understand and that you all stick to, and two, price plays an incredibly important role in how you apply those rules and how you think about it. And I guess the third one is that your companies incredibly well, and I think those three things definitely apply for any investor.

Ben  (25:17):

And I’ve got some friends, for example, who have knowledge about property and they asked me, so what shares should buy? And I agree that they should spread their wealth around a little bit, but my natural instinct is say you are all over this property game. You know it back to front, I’d be super concentrating on what you are doing and I’d keep hammering that away. You’ve got an unfair advantage. And I say flip that around. I have the same view of stocks.

Ren (Alec) (25:39):

I guess our ears picked up at the 20% cash waiting through the cycle. As you said, that’s unusual for a retail investor. Having cash on the sideline is important, but you often get an itchy finger and you’re seeing all these companies run and you’re seeing crypto run and you’re seeing buy now pay later run. And at the same time, Bryce, I think for four years when we started the show was predicting a bear market and was holding cash and it never really came. Well, it came in 2020 eventually. So I think that decision about when should you have cash, how much cash you should hold as a retail investor is difficult. Obviously it’s not a one size fits all thing, but how would you think about the cash waiting as a retail investor?

Ben  (26:24):

Yeah, I think everyone’s got to have their own version of playing a fence and defence, and that’s what we talked about in our blog post. What is your version of aggressive and conservative and match that to the environment that you’re in. So for example, our version of that being quite plain defensive, a little defensive right now in our case, 15 to 20% cash, we’ve been up as high as 50% cash before and aggressively moved our cash weight into zero when the opportunity sets massive. And so I think if I’m a retail investor, I think, well, what’s my version of that? That does come down your risk appetite and other things. But I would find it very hard to understand a retail investor at this point in the cycle, not having 10 to 20% cash somewhere ready to deploy when things are less rosy. And I particularly say that because not just equities that are enjoying significant inflation, there’s a, some could argue this is the bubble of everything that’s been going on and there’ll be opportunities in the future.

Ren (Alec) (27:25):

It is actually everything, not just traditional assets, but sneakers and everything.

Ben  (27:30):

Cows too, as it turns out, really

Ren (Alec) (27:34):

We need to get on the livestock market. True. So I think they’re sort of the rules of portfolio construction that you guys have. We’d love to now overlay current market conditions and understand how you’re thinking about portfolio construction at the moment. So yeah, I guess how are those rules holding up? Are you still finding opportunities? Do you have to reduce that 10 to 15 number because everything’s quite hot? Yeah. How are those rules holding up at the moment?

Ben  (28:06):

So we’re lucky. I think we’ve still got an unfair advantage, which I think is a point I want to keep making as we point out at the start, we can invest in public and private businesses anywhere in the world. We’ve probably got an opportunity set of 4,000 plus companies and we’re only trying to find two or three a year. And so within that we might find one private company, two public companies or the other way around. And within that we might find that we have one tens of billions market cap public company and one that’s sort of a billion in the growth phase. So we’ve got all those opportunities and I think that strategy is working really well right now because we’ve got certain companies in the portfolio that are just making massive gains in their intrinsic value. I just think about a classic Aussie success story, Guzman Gomez, it’s just shooting the lights out and is going to be if it’s not already a great Aussie success story and hopefully one day a global success story.

So that’s ticking away in the background growing intrinsic value really fast. It gives us the luxury on the public side to be really choosy about when we buy new companies. So we are able to generate those returns across the cycle by having that mix of public and private investments and not being forced to, I guess if you look at one strategy, if we’re all private equity, we need to do four deals a year and private companies or if we’re public only, we need to hold a hundred percent of our funds in public companies. We’re able to dip in and out where the best companies and teams of people reside.

Bryce (29:37):

There’s no doubt that markets can remain pretty irrational for extended periods of time and you’ve recognised that we’re a reasonably frothy overvalued point in the market, but if that were just to continue for year on year and what we’re seeing just pushes further, how do you adjust or do you adjust any of your rules? And particularly for the retail investor, if you are sitting in cash, it’s pretty hard to stay there and watch the market continue. So how do you kind of think through that?

Ben  (30:09):

Yeah, I think that’s an interesting dilemma. I mean because of this other dimension to our business and having companies that are not yet in the public domain and that are growing in the background, we do have the luxury to hold cash and bite our time. I think it’s a realistic scenario that in a market environment like this, valuations still keep going up. It just comes down to probability and timing of when a potential correction happens. So I think where we’re well positioned for that, obviously if you look back in three years time and the bull market’s extended, we would’ve been better off having that 15 20% cash in the market. And that’s something we won’t know till the time. But what we’re saying is we can generate our returns with that cash holding.

Ren (Alec) (30:49):

So there was an investor we spoke to, I can’t remember when, but there was sort of rules. He had rules around if a stock dropped 10%, he would deploy 10% of his cash into the market and he had a rules-based approach for a market downturn. Do you guys have a similar approach and maybe if we talk about a specific example, Spotify, a company that you guys have invested in for a while has come off a little bit with that. Do you have a rules-based approach where it’s like, alright, we’re going to put some more in and some more in if it keeps dropping or is it Yeah,

Ben  (31:22):

Spotify is a great example. I mean, great companies as we’ve discussed, tend to grow their intrinsic value over time. Less great companies are either flat in terms of what their fundamental intrinsic value is or down. So Spotify is a great example of a company that continues to grow its competitive advantage and its intrinsic value. So the way that translates into our decision making is we’re constantly researching the business, understanding the industry better and comparing it to other opportunities I guess, but really coming up with what our view of fundamental value is. And as that ratchets up over time, we factor that into a holding of the business and relate that back to the share price. So it may be that the share price goes up, but the intrinsic value keeps going up faster. And that’s an ideal scenario for us. So if you think about, it’s hard to draw a graph on audio, but if you think of a graph with valuation on the vertical axis and time on the horizontal axis, you think of intrinsic value being a straight line up into the right and share price a squiggly line below that. Our ideal company looks like that because you can continue to hold it for many years to come even though the share price is going up.

So obviously as the share price goes down and is no different if the share price is falling, we are in the market buying shares to recognise the growing difference between intrinsic value and where the share price sits

Bryce (32:47):

On that point, how did you guys approach the world’s fastest crash in March, 2020?

Ben  (32:55):

Yeah, interesting. So we were investing heavily in that scenario. Prior to that we were worried about valuations, so had harvested a fair bit of cash and valuations were high, they happened to be higher now. But going into that we were deploying money fast. I think what we got wrong and inverted commas is we were probably too cautious and then started to reduce some of those positions as we came out the other side because we were really worried about where the world was at. And in fact, looking back, it’s hard to fathom how well asset prices performed when the world was in a massive malaise. And I still can’t really fathom that to be honest. My only rationale is that interest rates are so low and back to this thing that all assets go up in that scenario. So we made fantastic returns the last 12 months, but they would’ve been better, even better if we’d hold on to some of those positions a bit longer because obviously the market’s been much stronger than what anyone had thought.

Bryce (33:55):

A lot of retail investors will just buy the dip because they’re told buy the dip even though and take no consideration into price. You’re saying you’re deploying cash in March 20 really quickly. Was it all driven though by the underlying stock price or were you just like, now’s an opportunity, let’s get it in there.

Ben  (34:13):

Yeah, so we have a watch list, 50 plus companies, some of those we know better than others, but the ones we know well, we will have a very specific buy price attached to it and we will adjust that buy price as new facts come to light and that buy price will be independent of what’s going on in the market around us. Now of course, it becomes tempting to change some of your assumptions when you say that all the comps to accompany are training at a certain level, but we really do try and be disciplined about looking through the cycle. So it’s quite a methodical approach when it comes to what the buy price should be.

Ren (Alec) (34:50):

I find that 2020 period interesting because on one hand you are looking at your assumptions about the intrinsic value of a company and the future prospects of a company and you’re saying, well, this is a good price that the market’s giving us. But on the other hand, there’s so much uncertainty for some of the businesses that you own about what the future actually does hold a company like Spotify all online, not as affected by covid, but another company that you own. Pacific Smiles is all physical locations, and if the economy shut down, the future becomes incredibly uncertain. So how do you build models and make assumptions about some of those companies at a time like the start of covid,

Ben  (35:29):

The key is to have a go at looking through that event, whatever it is, and try and come up with some view. So we’re always trying to look five years out. It’s not to say that Covid doesn’t have some form of disruption on that five year view, but we look five years out. So as you mentioned, I’m involved with Pacific Smiles and on the board there, if you just take that as a case study of how that played out in market prices in the middle of Covid, that stock was trading at 80 cents. Why? Because I guess people inferred dental services can’t be delivered. It’s going to be a difficult environment. Maybe you’re going to make some losses for a bit, whatever the case might be. If you take a forward look five years from that point in time, you say, okay, a dental services still going to be delivered in the way that they were pre covid. Who’s going to be delivering them? Who are the market winners and therefore, what’s the earnings power of the business at that point in time? If you ran that equation, the valuation wouldn’t change for the business. So you had a situation where the stock price was 80 cents now trading 2 75 ish, and for those willing to see red on the screen and to deal with uncertainty in the short term provided what that endpoint is or have a view on that endpoint, that’s the way you make returns.

Ren (Alec) (36:42):

Yeah, and I guess the other thing at the time was do they have the balance sheet to get through that period as well?

Ben  (36:49):

Absolutely. And we’re massive believers at TDM in balance sheet flexibility basically across our portfolio. We’re in net cash positions for all our businesses, and I’ve heard a lot of companies say, well, why don’t we just borrow more money? It’s so cheap. What happens if you can’t pay that interest bill for a month? A covenant branch, you have to do an emergency capital raise. It’s all about that optionality piece and flexibility. And you look at the companies that have done really well through covid, it’s ones that have been able to stick to their strategy or enhance it when their competitors are floundering and really double down and invest. And those are the ones with stronger balance sheets.

Bryce (37:28):

So many of the equity mates community take a dollar cost average approach. And just to close out the conversation around market conditions, how do you think about dollar cost averaging at a time like this?

Ben  (37:41):

So I don’t mind the idea of spreading a buyer decision over a period of time. I mean, we do essentially do that as well. I also think the less about a particular company or a particular situation, putting all your money into one stock on a particular day, if you dunno much about it, is probably a bad strategy. So intuitively, I don’t mind it for retail investors.

Bryce (38:02):

Yeah, nice.

Ren (Alec) (38:03):

So Ben, we want to thank you for joining us today. This has been a fascinating conversation, definitely given us and the equity mates community a lot to think about. Aside from going out and reading the TDM blog post on current market conditions, do you have any sort of final thoughts or final words for the retail investing community?

Ben  (38:23):

Sure. And I’ve really enjoyed this. I know I’ve given a bit of advice around basically if you don’t really know everything about the companies you’re investing in, take a wide strategy and be quite passive. And if you know a lot about the companies investing in be concentrate and hold onto the things. Well, the other thing I’d mention strategies like TDM strategies are hard to get involved in, hard to access, but one method of getting something similar is to invest in hearts and minds investments so that the code there is HM one that is an investment company, which is built to help community and specifically help medical research. So there’s a bunch of managers involved in picking the stocks for that company, and we’re one of them. The managers don’t make fees, but that fee is effectively paid towards those charitable endeavours in health research, health and medical research. So that would be one way of doing it.

Ren (Alec) (39:16):

We’ve had a bit of a chat about HM one on the show and interviewed some of the managers, and it’s rare that you guys at TDM, Hamish Douglas and some of the other best investors in Australia come together and it’s for a good cause. So yeah, we’re big fans of what they’re doing over there.

Ben  (39:32):

Fantastic. Thanks.

Ren (Alec) (39:33):

So Ben, we’re almost out of time. We do have a final three questions we end every interview with, but before we do, if the equity mates community want to find out more about yourself or TDM, where should they be going?

Ben  (39:46):

Well, as everyone will joke amongst my colleagues at T dmm, they’ll say Hide in the shadows. It’s very hard to find me except I respond on the occasional LinkedIn piece. But in terms of discovering more about TDM, our website’s a great resource for that. There’s, I believe heaps of good content there. If you look at when we started out, there’s no content that TDM produced and now we are really trying to change the way the investment community works for the better. And we really think it’s our duty and service to help the finance community do better than what they’ve done in the past. And we want to be driving that.

Ren (Alec) (40:21):

Well, I can say between yourself, Hamish, Tom, and Ed, you’ve definitely helped our community, so we appreciate it. And yeah, people should go and check out the TDM website now. We’ll get into the final three questions. First one, do you have any books that you consider must read?

Ben  (40:41):

Yeah, and this reflects my own personal style as well. I think one up on Wall Street by Peter Lynch is a classic and it really plays to this view. I have that if you can understand a business as a lay person, then that’s a great start. If you’re going to pick individual stocks, that’s almost a must have. So it’s just an intuitive common sense book, which I think every budding investor should read and would be a really useful resource

Ren (Alec) (41:07):

In 60 seconds or less, what’s the best company you’ve ever come across?

Ben  (41:12):

This is a super hard question because best company, we’ve never owned Apple, but I could say Apple’s one of the world’s best companies because of what they’ve achieved. And they’ve showed people who thought they were a hardware business and wouldn’t grow as fast as they had that actually they’re a must have software hardware combination that’s going to be here forever and is always going to continue to outstrip expectations. When I look at from our point of view, what is perfect, it’s a company like Mineral Resources, which we own here in Australia. And the reason I’ve picked Mineral Resources for this answer is, well, firstly, what is Mineral Resources? It’s a mining services infrastructure company, which listed 16 years ago basically when we started, we’ve owned it since that time, about a hundred million market cap at that point in time, and now it’s eight and a half billion.

Now you think of a mining company in the mining services industry and you think perhaps not as innovative, slower growth susceptible to the Vic tubes of the cycle and so forth. Mineral resource is one of the most innovative forward-thinking businesses that we’ve ever seen, and that has allowed them to continuously exceed expectations and do things that others weren’t able to do. So back to my earlier point about maintaining that gap between intrinsic value and share price and being able to own something for a long period of time, their intrinsic value has continued to grow very, very fast, and the share price has also grown, and that’s allowed us to be long-term partners with them and investors in the company.

Ren (Alec) (42:50):

Yeah, it’s a crazy company. It is the definition of bottom left to top right in terms of share price growth. So final question, if you think back to your younger self when you’re buying that first flock of shape, what advice would you give to your younger self?

Ben  (43:07):

I think a few things or don’t become susceptible to overconfidence. I think know your limitations and invest in your circle of competence. That’s number one. Number two, be around the best people that you can be around and people who are complimentary to your skillset. I think one of the key ways that TDMs become successful is the combination of people, one plus one equals five or 10 or whatever it is. And I’ve learned that on boards. I’ve learned that in the investment sphere, and I’ve learned that I guess in social communities. And that just is something that I keep coming back to. Final thing relates to, I guess people and culture is always the thing that delivers that ultimate positive surprise in the longterm. And even now, I continue to underappreciate how powerful that is. And we obviously have spreadsheets and we have research, and we have all sorts of fundamental discovery tools, but ultimately that team of people who continues to surprise and innovate and develop is what’s ultimately going to be a sustainable competitive advantage.

Bryce (44:13):

Well, Ben, it has been as always an absolute pleasure speaking with you and everyone from TDM. You always provide such a great value for our audience, and they certainly do appreciate what you guys are doing. So I would reiterate that if you are listening and want to know more, definitely head to TDM website. As Ben said, plenty of great resources there and you get a really good insight into how you guys are thinking. So very much appreciate your time and we hope to connect again at some point.

Ben  (44:41):

Thanks very much and it’s absolute pleasure to be a part of this from TDMs perspective. We love what you guys do and we’re really, really happy to support it. Thanks very much.

Bryce (44:49):

Thank you. Thank you.

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