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Expert Investor, Ed Cowan: Unconstrained Investing – an Interview with Equity Mates Podcast

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Bryce (01:14):

Hello, equity mates. This is just a quick note to say that we recorded this interview with Ed on the 18th of February, 2020. We just wanted to give you some context as to the recording date. As a lot has happened in finance and the markets around the world since then, we hope you enjoy the interview. Welcome to another episode of Equity May. It’s a podcast where we help you learn to invest in 45 minutes or less. We break down the world of investing from beginning to dividend so that you can hopefully make some returns. My name’s Bryce, and as always, I’m joined by my Eck goodie buddy Ren. How’s it going, bro?

Ren (Alec) (01:45):

I’m very good, Bryce, very excited for this episode

Bryce (01:47):

As always.

Ren (Alec) (01:49):

Yeah as always, excited

Bryce (01:49):

As always. Yeah. So am I Ren. We are continuing our theme of the Expert Investor, as we always do once a week now, and this one is expert investor, cross ex-professional athlete, which is always very exciting for us because we love delving into how that can come about. So without further ado, I’d like to introduce Ed Cowan to the show. Thank you,

Ed (02:09):

Gents. Thank you for having me. I think that there needs to be a little bit of an asterisk. Definitely not an expert, just an interested investor and lucky to be working for a great company, but this is a big moment for me because this is me ticking off the trifecta of millennial podcasts. Equity mates is the last tick on the list, obviously the grade cricketer. Shout out to my mates there and the betoota advocate. So this is it for me.

Bryce (02:36):

Well I’m glad we come in the top three Australian

Ren (Alec) (02:37):

Millennium. I’ll take that company for sure.

Ed (02:40):

Not ranking them, but

Ren (Alec) (02:43):

If you want to going to rank ’em, say we’re best

Ed (02:44):

Of last, I’ll tell you at the end, I’ll tell you at the end,

Bryce (02:46):

And obviously we will find out throughout this interview that I’m sure you are an expert in what we’re talking about for many ways, which we’ll discover. But for those that who are unsure about who Ed is, he’s a former Australian cricketer, played 13 tests for Australia, scored over a thousand runs,

Ed (03:03):

18

Ren (Alec) (03:04):

18 tests. Can’t take five

Ed (03:05):

Can’t take five away from meIt’s my claim to fame. That’s all I’m good for.

Bryce (03:12):

We’re not here talk about cricket or so Sure.

Ed (03:15):

I’m worried about your maths though.

Ren (Alec) (03:17):

We’re not experts. That’s the whole thing.

Bryce (03:19):

18 tests for Australia. Apologies Ed, you’re a non-executive director of Cricket New South Wales Co-founder of Tripod Coffee, which is Australia’s most sustainable coffee pod and has been pitched to Coles and soon to be Woolworth’s potentially

Ed (03:35):

Watch this space

Bryce (03:37):

Watch this space.

Ed (03:37):

Do you have a website on that actually? On what? On Tripod coffee

Bryce (03:40):

Do you want?

Ed (03:41):

Oh, sorry. I thought www.tripodcoffee.com.au deliciously responsible coffee capsules. There

Bryce (03:52):

You go. And more importantly though, it is part of the investment team at TDM Growth Partners, which is a phenomenal investment company, which we’re about to delve into. So very much looking forward to that. Ed,

Ren (Alec) (04:03):

Do you want to give the plug for TDM at the front as well?

Ed (04:07):

Oh, that can wait

Ren (Alec) (04:09):

Tripods where the real magic happens.

Ed (04:11):

That’s xactly right. TDM is such a great story. I think we need to dedicate a good chunk of time there.

Ren (Alec) (04:17):

Nice one. Well, before we get into the stories, and I’m sure there’ll be a lot of them, we like to start these interviews with a game, A game of overrated or underrated love games. So if you’re up for playing, we’ll get stuck into it.

Ed (04:28):

Yeah, I’m good for it. Just for clarity, is it overrated? I don’t like it or overrated. I’m a seller. What’s the underrated, undervalued. What’s the parameters here? Anyway,

Bryce (04:43):

Take it as it comes.

Ren (Alec) (04:44):

Open for interpretation, overvalued undervalued is probably where we’re going, but take it whichever way you like. This is your interview. This is your topic. I

Bryce (04:54):

Love that. Just no neutral answers.

Ed (04:56):

I’m not offended. You’ll learn quickly. I’m not a fence sitter. You don’t get on the Beda Advocate podcast guys by being a fence sitter.

Ren (Alec) (05:04):

We wouldn’t know. We haven’t been on there yet. It’s true. Okay, so overrated, underrated, overvalued, undervalued, however you want. Take it. The A SX 200. Oh,

Ed (05:14):

Good. You’ve gone straight to the big gun. It’s not overrated in a sense that it’s obviously provided some incredible returns for many, many years. But when it comes to froth and frothiness in the market, holy smokes, it’s like that poorly poured beer that you get at that dodgy pub. Valuations are at a all time high, what is it? 15 record days in 20 seller. So overvalued

Bryce (05:39):

Overvalued. Fair call fair. I’m assuming that sentiment will flow into the s and p 500.

Ed (05:45):

Ditto.

Bryce (05:46):

Yes.

Ed (05:47):

It’s a little bit different in the states I guess in that we’re seeing some crazy metrics, particularly in the technology companies. Businesses that are growing. We saw Microsoft grow at 50% off a massive number, and they’re obviously trading in a massive forward revenue multiple. But you can kind of see that playing out for a little bit longer I think. But generally the s and p 500, you’d have to put in the same bucket of let’s start collecting the cash and waiting for a downturn to allocate some capital. They call that Christmas.

Bryce (06:20):

How long would you wait though?

Ed (06:22):

As long as it takes. Who’s in a rush? You in a rush?

Ren (Alec) (06:26):

No. Bryce has been calling the crash for about three years now.

Ed (06:30):

That’s fine. You know what, I liken good investing to opening the batting. You just got to just let the balls shine the shine off the ball. Just leave a couple and then eventually the bowlers get tired and you can cash in. Nice.

Ren (Alec) (06:43):

I like it. I like it. I’m an one one. So your first career prepared you for your second career?

Ed (06:47):

Absolutely. Well and truly

Ren (Alec) (06:49):

We’ll get to that. But before we do, speaking of potential froth in a market, overrated or underrated, the Australian residential property market,

Ed (06:58):

This is a favourite topic of mine, overrated and overvalued. My commitment for the new decade was to not own any property throughout the decade. I held myself to that by selling my house in the first eight days of the new year, and I’ve never felt better. Wow, nice. Never felt better. And I don’t think I’ll ever invest in property ever again. Nine

Ren (Alec) (07:19):

And three quarter years to go.

Ed (07:21):

Indeed. Look, I’m not much on the asset class generally.

Bryce (07:26):

Never again,

Ed (07:27):

Probably never. Like I see home ownership as an emotional decision. It’s a bloody poor investment decision, but from an investing point of view, I don’t like it at all.

Bryce (07:36):

You can do better with your money elsewhere. Absolutely. I love that. I think there’s only two people on the show, you being the second Ed that have answered that question that the Australian property has overrated and followed up by saying, and I don’t own any property. The other one was Paul from Baylor Door. Paul Wilson.

Ed (07:53):

Yeah. Good person. There you go.

Ren (Alec) (07:54):

Smart bloke. Got the courage of your convictions. There we go.

Bryce (07:57):

So what? You’re just renting? Yeah,

Ed (07:59):

Loving it. Absolutely loving it. Full credit.

Ren (Alec) (08:02):

There you go.

Bryce (08:02):

Love it. So overrated or underrated, the Australian VC environment?

Ed (08:08):

No, I’m a buyer in the Australian VC environment. Look, private market valuations are toppy, there’s no doubt about that. But the joy of VCs, they’re getting first look at a thriving Australian technology scene. And these technology companies that are being built in Australia have these massive growth profiles with these huge addressable markets. And we’ve seen the case study of Atlassian and everyone loves pointing to that. There could be five or 10 more Atlassians in the next 10 years. And we’ve seen Canva on the same trajectory. And the VCs are the first to be able to invest in these business and then follow on and follow on and deploy big chunks of capital into these businesses. And they only need, let’s say five to pay off and they make a lot of money.

Bryce (08:59):

So VCs are out there with a bit of cash to burn.

Ed (09:01):

Well, I don’t like the term cash to burn. They’ve got money, they’ve got capital to allocate and money to deploy. There’s no shortage of inflow into these funds, but I don’t think there’s any shortage of great businesses to allocate the capital too. So I’m happy with the VC environment in Australia. I think we’re thriving and the Australian economy will be a net benefit of that.

Ren (Alec) (09:24):

So last question. In the game, not so much an asset class, but you were a former Australian cricketer, so overrated or underrated day night tests?

Ed (09:33):

No, I’m a buyer. I’m a huge buyer of day night test cricket. That is the future. I think the caveat being that it is a different form of the game. It’s not test cricket as we know it. And so we’ve got to be careful to provide a balance throughout the summer. But day night, cricket’s, absolutely fantastic. Imagine going to the SCG for a day night test Tottle down after work well long way from Bella Vista. You might not make it before start,

Ren (Alec) (10:02):

You just need a full night test test. That’s

Ed (10:04):

Exactly right. But no, I think it’s a great way to not only access new markets, but also a very different contest.

Ren (Alec) (10:13):

And if you were opening in the night session facing the new ball, you wouldn’t have any dramas with that.

Ed (10:18):

I’d be a seller, man. I’m finished. I’m just a mere spectator. So I’m here for the entertainment. The contest is just periphery stuff.

Ren (Alec) (10:28):

Yeah, yeah. Nice one. So before we get stuck into the journey that you’ve been on into financial markets, we always like to start with the same question. We find it normally has a good story or there’s some good lessons in it. So we’ll start with this question. Can you tell us a story of your first investment?

Ed (10:46):

Can actually, it was a while ago now, but I was lucky enough to grow up in a pretty business-minded family, and the newspaper would get delivered every day and there’d be a bit of a scramble over the sports section. And obviously on the back of the sitting morning Herald is the business section. And so we used to, I’ve got two older brothers would read the business and the sport together. And so it’s what I knew growing up, and I think it was 93 or 94 Fairfax listed on the A SX. And I was think what 12. And the offer came through. This is back in the day when you could sign your dog up literally for IPO allocations wasn’t the crosschecks that go on these days. So as a 12-year-old, I was like, I want some of this. I read the paper every day, it’s got to be, I haven’t seen any other papers in this house. Something must be going right with this business. So it was a great lesson of investing in what you knew. And so I got a little allocation with my pocket money in the Fairfax IPO in 1994 was my first investment.

Ren (Alec) (11:50):

Nice.

Bryce (11:51):

How long did you hold for? Can you remember? I

Ed (11:53):

Think there were a couple small divvy checks in there, but I think by the time I learned how to drink and I needed to access a little bit more cash for my Saturday nights, I think that was out the door pretty quickly.

Bryce (12:07):

Is there a lesson that you learned from that initial investment than it’s kind of stuck with you today?

Ed (12:11):

It’s kind of right out of the buffet book of, or even Peter Lynch, I guess investing in what you know, have a core competency and a circle of competency and sticking to it. And I guess that was a great example. It was a product I knew intimately from reading it every day and something that I enjoyed and thought other people must enjoy as well.

Ren (Alec) (12:32):

We’ve touched on it a couple of times. You started your career as a cricketer, you played for New South Wales and then Tasmania, but also played 18 tests for Australia. Don’t get that wrong again and scored over a thousand runs. So I guess you started your investing career at 12 as you’ve just told us. How was your interest in finance while you were playing cricket? Was there a lot of stock chat in the locker

Ed (12:55):

Room? Plenty of Specky stock chat in the locker room. Of course cricketers are always after a quick buck. So I did a commerce degree at Sydney Union and played cricket for university and then worked in an investment bank for a little bit and then ended up doing a master’s of finance while my cricket was going on. So in the change room, I think people saw that as a bit of a flag of if I need any kind of financial advice, I’m going to go to Ed, which usually was when they come and say, I’m thinking about buying off the plan apartment in Blacktown, what do you reckon? And I would be like, who told you that you should be doing this? Like, oh, my manager told me this because the manager’s getting a kickback here and knows that the developer there. And I’m like, this is the single worst idea you’ve ever had. See these things called ETFs, go Chuck every single dollar that you have in one of those and watch it grow over the next 10 years and don’t touch it.

Ren (Alec) (13:48):

Nice one should have offered to manage their money for them, start your own funds management.

Bryce (13:53):

So while you were still playing cricket, you co-founded the business Tripod Coffee as we mentioned at the start of the show. Can you tell us a bit about that business and also what it was like starting this entrepreneurial journey?

Ed (14:05):

Yeah. Well, as I said, business was kind of in my blood and I always had this inkling that I wanted to do something for myself. And Cricket provides you a great opportunity in many senses if you’re not playing, you train for a couple hours a day, you have a little bit of disposable income, why wouldn’t you kind of invest in yourself? And whether you’re studying or starting a business, it felt like a bit of a real life NBA to prepare me for the real world, so to speak. So I just took a bit of a punt with the guy I was opening the batting with Steve Kalina.

We both love drinking coffee. We hated the sustainability issues that Nespresso was creating at the time and we thought, bugger, let’s get into this. And it’s one of the great decisions I ever made. I’ve learned so much about the business world that one thing is learning about it at university, doing a bit of accounting here, a bit of spreadsheet work over there, but when it’s your own money and it’s your own business, you’re deep in strategy, accounting, marketing, you’re doing it all literally right through to customer service. You get a great education in the ways of the world.

Bryce (16:08):

What do you think is your weakest aspect of, you mentioned strategy, accounting, marketing, and how do you think about that?

Ed (16:16):

Yeah, so I think we’re lucky now. We’ve got a great team where everyone’s skills compliment each other and you find that you outsource a lot. So the guy that drew our packaging for instance was a designer that we found on nine nine designs who lived in Slovenia. You have a three PL that dispatches. So you just kind of call on the best of all breeds to try and piece your business together. I think we’re now in a really good place that we have some great experts around the business. And the great thing that I’ve loved about the business is how we have continually innovated to try and create a competitive advantage. And we’re in a great place at the moment. We’ve got the only certified compostable capsule in Australia. We can turn those capsules into electricity and organic fertiliser. They can go in green council bins.

The coffee’s amazing. So from where it was born from which was let’s try and get a product that is environmentally sustainable. People enjoy drinking. It’s taken kind of five, almost six years to get to this point. And it’s a great lesson that things don’t happen overnight and when you are trying to build a business, and the same principle goes for these businesses that I’m investing or helping think about it at TDM and TDM are investing in or you’re investing in the side, you got to think like that business owner and to build businesses takes a long time and that’s why you need to be investing for the long term. Now

Ren (Alec) (17:42):

You mentioned TDM and we’re keen to get into it, but we said we’d let you plug the coffee. So if people are interested in picking up some tripod coffee, where can

Ed (17:52):

They go? Well obviously you’ve probably done a deep dive in direct to consumer brands. We have a high functioning website, it’s the top of the list, tripod coffee.com au. We will ship it to you the next day and hopefully you’re happy. Don’t forget to get your reply paid label so that you can turn your capsules into fertiliser like I said. But if you live in Sydney and you have a Harris Farm nearby, you can pop into one of those Leo’s fine food in Melbourne or your Hill Street grocers in Hobart, some of the five star hotels around the country actually stockers.

Ren (Alec) (18:26):

Nice. Bryce and I are looking forward to our free samples after this interview free.

Ed (18:30):

You’ve got a lifetime supply.

Ren (Alec) (18:33):

So you touched on TDM and were saying before this podcast that TDM seems to be the classic example of all the lessons that we’ve picked up in doing this podcast. So to start the discussion of TDM, can you explain their investment philosophy?

Ed (18:49):

Yeah, sure. Let’s get into this because this is interesting stuff and I think your listeners will appreciate this. So TDM was founded on a deep belief that if you own a share in a business, whether it be one or a million or 10 million shares, you are an owner of that business. It’s not a piece of paper, it is a piece of ownership of a business and you need to think like a business owner. And so with that in mind, they set a fund up, Hamish, Tom and Ben with no restrictions. So to find the best companies around the world run by the best management teams, but most importantly with no time horizon locking them into how long you could invest for. So it’s an evergreen pool of capital that we have been allocated by 20 families. And so that pool of capital can be allocated over very long time horizons with the mentality of being a business owner, which means two things.

It means that you can ride the ups and downs, it means you can, when things go badly, you can actually allocate money into the business, which is just a great time to be buying. And also means if prices are outrageous, you can manage your portfolio as well. You’re not being marked on these quarterly mark to market that the institutional funds are. And so you can take really long-term views, you can invest in private companies, you can invest in public companies, you can transition a company from the private markets to the public markets and still hold them for a very long period of time in the public markets. And you can help create the value over that period of time. And so it’s this really beautiful model that is exactly how investing should be done. No restrictions over a very, very long period of time.

Bryce (20:39):

The story of how TDM started is an interesting one. We know I read it in a Forbes article started by your

Ed (20:46):

Brother. Yeah, it was, yeah.

Bryce (20:47):

So can you give us a bit of a background of how that happened and the growth story since then? Because you started with a million bucks and now you’ve got a billion

Ed (20:57):

Under management. It sounds ridiculous.

Bryce (21:00):

Crazy return.

Ed (21:02):

So Tom, my dear older brother who I shared a bedroom with up until I was sort of 18, he was working in Investec. The investment bank had always been a passionate investor and his best mate, Hamish, who he’d went to school with since he was four, all been a passionate investor. They’d grown up with this thirst for it and Tom actually got a chronic back issue and he had to leave work. He thought, well, he was 25 at the time. He’s like, I’ve always wanted to start my own funds management business, maybe now’s the time. So he started in a flat in Sydney. It was just him at that point in time. And Hamish came across pretty soon after, but he was lying on his back. You’d go over there were broker reports up to the roof and it was just him allocating money and there was one client and then there was two and then there was three.

And it’s really been the same clients all the way through the TDM journey. And the key to being able to allocate money over long periods of time is this evergreen pull at capital. So these families and the trust that they have put in Tom Hamish and Ben and now the greater team of 20 to do this is remarkable. And so as you say, it started with a million dollars and yeah, sure they’ve been a few inflows but not many. But it shows you the power of compounding. So the fund’s grown at 25% a year for the last 15 years, and now I think last week cracked a billion dollars

Bryce (22:32):

Phenomen. That’s crazy.

Ren (Alec) (22:33):

Yeah, good time to be speaking to you just after you cracked a billion.

Ed (22:36):

And even little things, they had a belief that the industry could do things better. Little things that there’s no management fee, it’s performance only. So a hundred percent incentives are aligned. If TDM clients don’t make money, no one in the business makes money. And so people are hustling every single day. And it’s that same mentality. Every employee is thinking like they’re an owner of TDM and conversely, every time they’re making capital allocation decisions, they’re thinking through that ownership lens as well.

Bryce (23:08):

And so what’s the process of letting, I guess these families or investors come into the business and give you capital? Is

Ed (23:15):

It? Yeah, so it’s now closed to a degree that have been what you’d call probably strategic ads in terms of the client, people that can either sit on a board on our behalf or act on our advisory committee really add value to the network. Interestingly, of the 20 clients, maybe half have built billion dollar businesses themselves. So they understand the longevity required to build great businesses and the importance of investing for the long term. It’s a very different mindset and I think they’ve probably allocated money on an intergenerational basis. There haven’t been any redemptions in 15 years during the GFC there were only inflows. So very sophisticated people that understand the value of allocating money at the right time. It’s just a very, very different model. It is unique. I

Ren (Alec) (24:05):

Think that is pretty phenomenal. And there probably wouldn’t be many funds in Australia or potentially the world that could claim that they haven’t lost an investor. It’s a testament to the performance.

Ed (24:16):

If you start underperforming, I think they start asking questions, but I think it actually runs into the trust that they have in the business and how that trust battery’s really been built out over many, many years. And also for them having most of ’em built business themselves, as I said, understand the ups and downs. And so as opposed to if you’re an institutional fund allocating money and you have a bad quarter, everyone’s pulling out everyone’s redeeming, which is probably the wrong time to redeem anyway because if the market’s down you should be putting money in. But anyway, the world’s upside down. And so without that, people are very happy to take long-term views.

Ren (Alec) (24:55):

So I guess if we get out of the abstract, because I’m sure there’s a lot of people listening, thinking you’ve hit 25% compounding growth for 15 years, that’s the best of the best level if you can keep it up. What are some of the companies and what are some of the investments that have allowed for this incredible growth story?

Ed (25:12):

Great question. So without any restrictions we invest in Australia, we can invest around the world. So I’ll start in Australia and probably with a few businesses that most of your listeners or some of your listeners would’ve heard of. Baby Bunting is a great TDM case study. I know you guys probably haven’t shopped there yet.

Ren (Alec) (25:32):

That was Bryce’s stock of the year last year. He’s been crowing about it for a while.

Ed (25:36):

Well, there you go. So we were owners of that business for just under 10 years, four years in the, I’m sure I’ll get some timings wrong here, but four years in the private markets and almost I think it was five and a half in the public markets. So it was able to, I think six stores when we invested initially went in, helped really scale that business from a process point of view and help that growth story play out. Reinvigorated the board. There’s a fantastic CEO in Matt Spencer who’s an absolute 12 out of 10. Great CFO really built that team out and helped shape that. Tom went on the board, listed the business and then held it for a long period in the public market. So I think over the course of that 10 years, I think we probably did maybe 10 times our money.

So super normal returns. So that’s provided a big chunk of our returns. Most recently, Tyro, which was the second biggest technology listing ever on the A SX, we were the second largest shareholder with Mike Cannon Brooks and Tiger Global, again invested four years ago in the private space, helped build that business, really scale the processes that business saw a few hiccups, Hamish went on the board and he and the rest of the board members and Robbie Cook, phenomenal. CEO listed the business and now it’s racing away in the public market. So that’s another great case study. So consumer business technology, FinTech software business. So again, no restrictions as to what we can invest in other businesses that we’ve been invested in for a very long period of time. Mineral resources, I think TDM bought shares in the IPO 15 years ago, 90 cents currently trading at $19.

Wow. And we think can be a much bigger business run by a super entrepreneurial high calibre executive in Chris Ellison. So the investment philosophy that comes out more than anything is we are investing in people to allocate capital on our behalf. So when you own the business, you are backing the CEO, you’re backing the board and you’re backing the senior executives to grow these businesses over long periods of time. And getting the people right is just such a key tenant of what we believe. So there are three business, Guzman and Gomez, I hope you all eat burritos. We’re the largest shareholder in that business and that’s just an absolute freight train as well. And then in the states software businesses like mindbody, Ellie Mae, which you may or may not heard of and Spotify.

Bryce (28:17):

So Ed, you said at the start of the show that understanding your circle of competence is important and one of the lessons you learned early on, if you have a philosophy of no restriction, anything you can invest in, what is the process that you guys go through to ensure that you are still investing, I guess, within your boundaries and understanding?

Ed (28:36):

Great question. So I think over the 15 years, while we have invested in a whole range of industries, software and online, probably the majority of work, probably consumer and probably healthcare if you were to silo them, we would say that we have a strong circle of competence or degree of competency in those industries. But that hasn’t stopped us investing in great businesses run by great people with great growth opportunities, with a large margin of safety, great prices that we can see can have great outcomes over a long period of time. So it’s a question of really getting to know the business and I think over the course of 15 years, we’ve probably only made 58 investment decisions. So it shows you that there aren’t many companies that TDM have invested in and when we like the look of something and it passes that initial sniff test, everyone will run at it. So you have 10 members of the team trying to get their heads across absolutely every detail of this business. So it might be outside what we would probably describe as a circle of competency, but by the time 10 people run at something for three months or four months, you can get a pretty good idea of the industry.

Bryce (29:56):

So it’s just as simple as someone in the team has come across a business that they think might be worthwhile and then you just attack it at once and see what happens.

Ed (30:04):

Absolutely.

Ren (Alec) (30:05):

Nice. Can you tell us what that looks like? What is 10 people running at an idea for three or four months look like

Bryce (30:12):

We can go out there and try it?

Ren (Alec) (30:13):

Is it eating a lot of Guzman and go there?

Ed (30:17):

I mean there’s a whole spectrum of information that gets gathered, but obviously there’s all the public market information. If it’s a listed business that is easy to gather and you build a model and the usual kind of stuff, but then you’re calling customers, you’re doing reference checks on all the executives, you are trying to meet the executives if you can. There’s a whole range of work that goes in particularly around that people and culture piece because that’s the hardest to diagnose. The rest you can kind of piece together pretty quickly, but spending time with management is a massive part of any part of our due diligence programme.

Ren (Alec) (30:52):

So I think one thing that I noticed when you were talking about those stories is that you guys take large stakes in businesses, baby bunting was over 40% percent. You are the largest shareholder in Guzman and Gomez. It seems like when you are convinced of something, you go hard at it. Is that part of the philosophy?

Ed (31:11):

It’s a high conviction game investing at any one point in time, the portfolio only has 10 to 15 businesses in it. So if you’re allocating big amount of money now in the case of trying to allocate a billion dollars, particularly in Australia, there aren’t many businesses that can absorb that. And sometimes you get yourself in a situation in a listed sense that you might own 25%. That’s quite a liquid for you. In the private sense it’s obviously very illiquid and so it doesn’t really matter how much you own because maybe at the IPO you might sell down a little bit. You might in fact like we did in Tyro add to our position. So it can get tricky when you’re dealing at scale, but you’re right, particularly in a private sense, we’re what we call chunky minority investors. We’re never control investors like a private equity fund is that you always have that lever of control to pull if something’s going wrong. We’re trying to actually work with management hand in hand without ever having that. We own 55%. So you’ll do what we tell you to do.

Bryce (32:14):

We know a company that’s looking for some cash, it’s called equity mates media. So if you’re looking to allocate that billion dollars look no further,

Ed (32:22):

We could do a little horse trading, little tripod coffee on the shelf.

Bryce (32:28):

I’m really interested in the people part because we speak to a lot of small cap fund managers as well and they heavily rely on going out and meeting executives and speaking with a team. To your point, you can understand the financials pretty well, but it’s the people part that makes a big difference. Other than being good capital allocators, what are some key characteristics that are important to you to TDM?

Ed (32:49):

Great question. Again, it depends. We invest in a lot of founder led businesses and so you’d say one of the key attributes that probably most of ’em exhibit is just this grit and this hustle to, and it’s almost innate in them to this vision to build a big business and they’ll do anything to do that and that shared value of they want to do it the right way. They’re not interested in growing too fast if it blows up the systems that they know that over the long term they need to build a really durable business with great competitive advantage and that’s going to take time. So that’s probably in the private market. In the public market, I think it’s kind of odd that you find yourself assessing people when you’re not an expert in assessing people. But basic traits like a shared belief system, empathy, modesty, a massive red flag is a CEO that uses the word and isn’t a team player or isn’t perceived to be a team player. Sometimes if we make a bad decision on a business, it’s because of the people every time and while we have compounded money at high rates, we have made mistakes, but often those mistakes are buffered out by a nice margin of safety on entry price. So it is certainly our judgement on the people in the business is probably the biggest decision that we make

Ren (Alec) (34:24):

Without throwing any company or anyone under the bus. Can you tell us the story of one of the mistakes and what you learned from it?

Ed (34:37):

I won’t get the sack,

Ren (Alec) (34:39):

But

Ed (34:40):

It’s like mentioning the word Voldemort, but there was a business that was listed in the States, a tea business. I won’t give you the name, not

Ren (Alec) (34:52):

A coffee business.

Ed (34:54):

And the guy who was running the business was a founder, really turned on the charm. An older man for all intents purposes just seemed like a fantastic person. But when push came to shove, he didn’t at all act in the best interest of shareholders. And so that business was a little bit of a basket case, but I think I could be wrong. We’ve lost money on three occasions and that was one of them.

Ren (Alec) (35:24):

That’s it. In 15 years. Yeah. Wow. That’s pretty good track record. I’ve done more than that this year.

Bryce (35:31):

Hang on, don’t say that on the show.

Ren (Alec) (35:33):

I’m interested, you said 10 to 15 stocks, 10 to 15 positions, not all stocks if they’re private. I imagine if you’re holding for the long term, you get very close to the founders, you get very close to the management and the board and it becomes a very difficult decision to then manage that portfolio and decide to sell one position and because you found a better option. What’s the process there and how do you manage that? It’s

Ed (35:58):

Probably one of the most asked questions that if we meet a CO or founder, they ask that question as well. And I guess the best way to answer it is to give the baby bunting case study. So 10 years invested in a fantastic business, still a great business still will continue to grow and eventually be a mature retailer. But I guess if you are trying to compound money at 20% and your businesses don’t have any debt, you need to be growing top line revenue at 20% or more. And so these businesses that we have been invested in for a long period of time have been on the board, maybe as you say, worked hand in hand with these CEOs. It is a very hard decision, but eventually it becomes a very easy decision because you can say, well, is this business going to keep growing at 20% or more in the foreseeable future?

And in baby buntings case, they kind of made the decision that they weren’t going to go internationally and so they were eventually going to become a mature retailer. And then it’s a question of, well, at what point in time, ideally you want to leave something on the table for the person that is buying the shares off you. When you own a large portion of the business, you don’t want to be tapping out and being known as the business that when you are selling is the time to be running. So when we sold Baby Bunting, the people that bought our shares, whether they’re mom and dad investors or institutional investors,

Ren (Alec) (37:24):

Probably Bryce, Bryce

Ed (37:26):

You still would’ve made probably was

Bryce (37:27):

That 400 million position I put on it.

Ed (37:30):

You have still done well and will continue to do well, but probably just not at the rates that we are looking to compound our money. So it’s still a fantastic business. We’re still very close to the management team and it’s a long-term relationship, but it is hard

Bryce (37:46):

With an interesting environment in the public markets at the moment, but some still, I guess great areas of opportunity. What sort of sectors at the moment are exciting for you?

Ren (Alec) (38:02):

Aside from finance, podcasting,

Ed (38:04):

If you’ve got any areas of opportunity, I’m happy to hear them because particularly in Australia it feels very full. I think the opportunity and the Asex loves probably overvaluing technology business more than any other exchange in the world, but it’s not my idea. But every business is becoming a software business and the great companies of the world are going to be technology businesses moving forward. And so if you find a great technology business at a fair price on board, but it’s very hard to find those fair prices in Australia, you look at the great technology business and they’re trading at some crazy numbers.

Ren (Alec) (38:45):

I’m interested in how you think about that because you are in this situation where it seems like everything is overvalued, public markets are overvalued, VC seems overvalued, private equity seems overvalued. You guys have built this track record of 25% year on year returns. You’ve got more money than you ever need to manage before. It’s like you’ve made this impossible bed that now you’ve got to sleep here. So how do you think

Ed (39:10):

About that? It is going to be hard to compound at scale and it’s something that we talk about, but I think there are two ways. One is to be very strategic with when you allocate capital and the joy of not having any life of fund is you can hold cash for very long periods of time. And we have in the past, and even if we’re compounding money at 20% as we have in some years, we’ve held up to 50% cash. So to be able to deploy that cash when the market is off 30% in four days in the states software at the end of 2018, every technology business was off 40% in a week. It’s like happy days. This is absolutely brilliant for us cash you’re in and you can make your returns very quickly so you can actually find opportunity if you’re patient and if you’re not always fully invested in, you’re managing your portfolio accordingly. And then the other side of the coin is investing in these private businesses where the price doesn’t move. If you can find great businesses and develop relationships at a good price, at a fair price, and you’re taking a long-term view, that price doesn’t change for four or five years notionally until it lists. And so you can make great returns that way as well. Does that make sense? Yeah,

Ren (Alec) (40:30):

Definitely. Absolutely. So you mentioned the people side of it and it seems like you’ve created something on the side that really compliments your exploration of finding good people and finding good managers, which is you’ve joined the ranks of finance podcast hosts and you’re interviewing some of Australia’s biggest CEOs with your podcast scaling up. So can you tell us about it and can you tell us some of the lessons you’ve learned from speaking to these managers?

Ed (40:57):

Yeah, great. So it’s been a fun project. So we did a first series and just about to record a second, but the idea was to interview these great CEOs or founders or executives that have in Guy Russo’s case turned around a business the size of Kmart because there’s so many nuggets of gold that people who have lived through these experiences can provide and each one has a different story. Scaling businesses is about sure scaling processes, finding a great growth opportunity in a big market. But more than anything, and this is what I think comes through is scaling the people and culture piece. Because going from five people to 500 people to 5,000 people, it sounds almost mind bogglingly impossible if you are not a great people person and a great leader of people because so much can get lost in the darkness of that exponential growth.

And so I guess the crossover of where I found was I felt like I’m almost not an expert, but I lived in high performance teams for almost 20 years in professional sport. And so there was kind of this natural crossover to entertain these conversations with these people around how they’ve built their teams and then throw into the mix TDMs deepest belief, which is at the end of the day, people and culture is probably the greatest competitive advantage you can have. It’s kind of made for a nice podcast series to really explore particularly those kind of issues and then other lessons to learn from these people. Again, I touched on it before, but the grit and the hustle required to start your own business and grow it from zero to a hundred million or zero to a billion dollars is so inspiring. And I interviewed Kate Morris who had a great story.

She’d just sold I think 60% of her business to quadrant private equity for a very big number, but for the first 10 years of her business, and it’s been going almost 20 years, adore beauty, no sales people saying, what are you doing, Kate, this is crazy. This online beauty thing isn’t a thing. And $20,000 worth of sales one year, 50, the next a hundred a hundred’s not making a living had the mortgage invested. Everything she had next minute, she was just ahead of her time. The internet blows up basically when it comes to consumer behaviour and shopping habits and next minute she’s got a hundred million dollars business. So nothing gives me more inspiration than hearing their stories.

Ren (Alec) (43:35):

You mentioned there you were in high performance teams in state and national cricket. So I guess my question is what can businesses learn from the high performing sports teams that you’ve been a part of? And similarly, what should the Australian cricket team learn from companies that you’re investing in now?

Ed (43:53):

That is a good question. I think for many, many years, business always looked to sport to see what they were doing, particularly around culture. Business culture wasn’t really a thing, but sport culture was a thing. It was team spirit or whatever. And in sport there was always this idea that the sum of the parts could be completely greater than any individual whole. And so business learned that I think, and then you’d always have the sports coaches going in and the kind of lessons that they would be expounding a pretty basic around hard work, perseverance, having a shared set of beliefs, people putting the team before the individual, which is really common, particularly in cricket, that’s very important. People doing their job, being deeply into their role. The half back, your job isn’t to pack the scrum or score on the corner, it’s to pass the ball.

Those kind of sporting analogies were thrown around the business world almost a bit too loosely. I think the tables have almost turned in that businesses have caught up in a sense that they’ve understood, particularly these businesses have grown really quickly and they’ve had to scale their teams really quickly. They’re actually now the leaders in how to do this and sports now catching up to them. And great entrepreneurs who’ve built great technology businesses are now the voice on how to build great cultures. And so look no further than the Australian cricket team and the drama they went through in South Africa and then rebuilding that culture was at the heart of everything they did, but they certainly took lessons from a whole range of people.

Bryce (45:36):

Fascinating

Ren (Alec) (45:38):

Lesson for businesses don’t use sandpaper

Ed (45:42):

Unless you work at Bunning.

Bryce (45:44):

So Ed, we’ve approached the final three questions that we always ask our guests at the end of the show to close it out, but just want to say a massive thank you for your time. It’s been a fascinating conversation. Love talking about this side of the markets. It’s not something that we often get to talk about and it is very inspiring, something that obviously Alec and I would love to get into. So if you’re looking for someone, hey,

Ren (Alec) (46:08):

Smart

Ed (46:08):

Blokes like

Ren (Alec) (46:09):

You.

Bryce (46:10):

So the first of the final three is do you have any must read books, investing or otherwise?

Ed (46:18):

That’s a deep question. I think from an investing point of view, there are a couple of must reads just from a pure building blocks foundational point of view. And that’s anything that Buffet has written, Graham pretty good starting point. Peter Lynch or these guys are what you’d call foundational books to really build your knowledge on. And once you’ve kind of got the idea, if you’re coming in completely cold, I think interesting books that I think are kind of must read from a business owner’s viewpoint. If someone like a Jim Collins, good To Great is a phenomenal book around business strategy and understanding what makes great businesses. And then when you kind of move through the pyramid, if you’re looking at it like that, if that’s kind of the middle block, then you get to the pointy end. And that’s the really kind of niche things around psychology, Danny Kahneman thinking fast and slow. And I think that Gladwell writes that might challenge your own biases and your own decision making framework and your mental models and these kind of things I think are really interesting. But if you’re a keen investor and there’s only one thing that you’d never read is probably ology.

Ren (Alec) (47:29):

Didn’t you write a couple of

Ed (47:31):

Books? I’ve written a book, yes. Surely

Ren (Alec) (47:34):

You get that plug here.

Ed (47:36):

I don’t think that book’s for everyone. That was my own personal diary of a cricket season. There’s some psychology in that. That was a dark season. I couldn’t hit the ball off the square. But I think this day and age, look, I think we live in an age where it’s never been easier to teach yourself anything with the joy of podcasting, whether it’s this one or invest like the Best, which is just a phenomenal, yeah, cracking podcast, phenomenal podcast. You can basically teach yourself about anything really quickly. Two times speed, you can get information super quick and move on. So whether that’s in an audio book or a podcast. So I think you just encourage people to open their eyes and their ears and their minds and you can, I think gain a bloody good level of knowledge pretty quickly.

Bryce (48:26):

Absolutely.

Ren (Alec) (48:27):

So the second question we like to ask is what’s your go-to source for investing information?

Ed (48:32):

That’s a good question. Again, I think go-to source has to be the earnings calls, the quarterly earnings calls or the earnings reports that companies are putting out. Because if you are having any of your judgement clouded by broker reports and analyst reports, then you’re not doing your own work. And so you need to be making up your mind not what the market’s thinking. They’re two very separate answers. And so you need to come to your own conclusions. And the best way of doing that is getting the source information yourself and working through it.

Bryce (49:06):

Yeah, separating the noise is sometimes the often very

Ed (49:09):

Difficult. That’s the game.

Bryce (49:11):

So to close it out, ed, thinking back to when you made that first investment in Fairfax,

Ed (49:18):

So did Jack Cowen, the Jack Russell, he got an IPI allocation

Ren (Alec) (49:22):

Sitting pretty, still holding,

Ed (49:25):

Still holding.

Bryce (49:27):

What advice would you give your younger self thinking back to that period of time?

Ed (49:32):

I’m a big believer in financial literacy and the power of understanding the basics, whether it is understanding how much you have to repay on your home loan on a post-tax basis. Little things like is if I was to rent, what is the post-tax return I need to achieve where I’m better off basic little maths that you can apply to your life to make sure that you are in a better financial situation. And so not when I was 12, that would’ve been a bit complex, but I would’ve probably tried to tell myself about the power of saving, the very powerful power of compounding.

Bryce (50:13):

Absolutely

Ed (50:14):

Great advice.

Bryce (50:15):

Is it the eighth greatest wonder of the world?

Ren (Alec) (50:18):

It’s the

Ed (50:19):

Eighth greatest wonder of the world.

Ren (Alec) (50:22):

So Ed, thanks for taking the time today. If people are interested in learning more about yourself or TDM or Tripod Coffee, where can they go?

Ed (50:31):

The tripod coffee website, tripod coffee.com au. You can pinging me a note on LinkedIn. You can check scaling up out on Spotify or Apple Podcast. You can leave a review there. I’m pretty good at getting back to people and TDM for people that are interested in investing. Sign up for the newsletter because it is absolutely full of phenomenal content and so I’ll definitely, definitely check out TDM growth partners.com.

Bryce (50:59):

Nice. Well, as we said, an absolutely fascinating conversation. Thank you for joining us on the show, ed. Looking forward to catching up in a while. It’s time to see when you hit the big two B, that current growth rates could be. Next week

Ed (51:15):

I’ll be buying you guys a studio. Let’s see.

Bryce (51:17):

Right.

Ed (51:21):

I won’t be on Paul,

Bryce (51:22):

But no, a massive thank you. I really appreciate your time

Ed (51:25):

Guys. Absolutely loved it. Thanks for having me.

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