Welcome back to the Rate of Change with York Wealth Management.
As advisors to some of the wealthiest families in the country, the Rate of Change is a podcast
designed to help you in the pursuit of building long-term wealth through the insights of some
of the brightest minds in asset management.
I'm your host Murdoch Gaddi and in today's broadcast we're speaking with Hugh Selby-Smith,
Co-Chief Investment Officer at Talaria Capital.
Talaria Capital is a fundamental bottom-up value manager with a unique implementation
process of fire options.
They run a single global ex-Australian investment strategy with 25 to 35 companies, max 40.
They have a hedged and an unhedged portfolio and this portfolio is executed across developed
markets.
Talaria roughly oversees $2.1 billion of funds under management since December, so that could
have changed.
For me, I enjoyed hearing Hugh break down their option strategy, which creates income from
option premiums, diversifies returns, but most interestingly was its ability to smooth
out returns in volatile markets.
Hugh's going to dig into it quite a bit and he's substantially better than myself at explaining
it, but in particular on average they capture 71% of an upside move and they target to reduce
roughly on average 34% less of a downside move.
So how does this translate into returns?
As of recording, the Talaria Unhedged Global Equity Wholesale Fund has returned on average
7.55% since inception, 10.43% over five years, 14.46% three years, 15.07% for the past 12
months and 4.54% over the past six months.
So with that being said, I hope you enjoy this conversation as much as I did.
So sit back, relax and enjoy it.
Hugh Selby-Smith, welcome to the Rate of Change with York Wealth Management.
Madhav, delighted to be here and thanks for having me on.
Yeah, really, really good to have you here.
Why don't we begin as we always do by telling us a little bit about yourself and how you
got into the wild world of financial markets.
Well, I grew up in Canberra and I had a summer job sort of in last two weeks of December
and early January where I would post through the letterbox, you know, that I would come
and cut people's lawn and do their pool and collect their mail while they're away and,
you know, all for the princely sum of, I don't know, $3 a week or something like that.
So this was in the late 70s.
And I did that for a summer.
So it saved up some money and I bought my first two shares.
And I guess that was a function of seeing my father who was interested in the stock
market and didn't really know where to put the savings.
So I could have probably got about 17% in the bank though at that time didn't really
recognize the relative value between the stock market, the bond market and cash rates in
the same way that maybe I do now.
And yeah, then I bought Repco and Mount Isa Mines and I then watched Mount Isa Mines in
the back of the paper, you know, the AFR where it was plus one minus one.
So it was sort of like the sports pages and Mount Isa Mines promptly just went nowhere
for about, you know, seven or eight years, but plus one was a really good day and down
one was a negative day.
So that was sort of the start of an interest and then, you know, I started to get subscriptions
to potential new equity raising.
So things like Highland Gold, I remember taking Woodside in the initial public offering.
And then as I sort of moved forward, I was always interested in economics.
I was always interested in decisions under uncertainty, though I probably wouldn't have
been able to phrase it in those terms at the time.
And in the 90s, I'd moved to the UK, I moved to Oxford and then I got a job in London and
I moved into financial markets.
And really, that's been my journey ever since.
Isn't it interesting how most people's journeys start with either a mail run or I remember
my old man, you know, ended up getting me a job both in the next door neighbor's lawn
and that pretty much paid my phone bill for like six years to reporting school.
Isn't it incredible how like, you know, just starts from the simplest things, then you
get a hunger for it and then off you go.
Would you say that the main interest for yourself was the entrepreneur side as in like, you
know, building the business or did you just find the markets just fast now and he's wanting
to get involved?
I think, you know, right at the start, it was probably a function of wanting to grow
my wealth, you know, I mean, I didn't call it well then I wanted a bit more money than
I had, you know, six weeks in the summer sun, dealing with pool chemicals and things like
that.
And listen, I was a really competitive person from a pretty young age.
So I liked the idea that, you know, this was a place that everybody came and was able to
put forward their ideas ultimately and, you know, as you as you develop in sophistication,
your analysis and that there was ultimately an arbiter represented by the price.
I think that was probably the first two components that got me into markets.
And clearly my journey of education and of course, you know, one of the great things
over the course of my career is and everybody I think who's taken an interest in markets
is you do recognize that you're going to be better in five years time than you are today.
And I'm better today than I was five years ago or 20 years ago.
And I think that that's a tremendous privilege if you're interested in learning, ideas,
development, because a lot of things in the world, certainly in professional world, but
also personal world, you're the best you're ever going to be at 35 or 39.
You know, my my swimming times are coming down.
They're not going up, for example, or tennis, you know, you're not as good as you used to
be might take as much pleasure from it.
And in professional sense, you know, the top chefs in the world are really the top chefs
in, you know, mid to late 30s, right?
They might be the best restaurateurs in their 50s, but they're no better chefs.
That's different to financial markets.
So I will be better in the future than I am today, because it's a constant evolution about,
you know, learning about yourself, your biases and your process.
And that's it.
That's a really exciting thing.
You know, it's a lifelong pleasure and challenge.
As they say, it's not the destination is the journey.
And that's the other thing, which I've been doing this quite a bit, like speaking to clients,
speaking to, you know, very good investors like yourself.
And the one thing that I find so fascinating is, you know, if you just looked at paper,
how someone is today, that's not how they got there.
It's this wild, crazy, go path of a track of how they got there today.
But if they didn't take that path, the lessons which they didn't learn before, they wouldn't
be able to apply today and do as good as their job.
So when you're in the UK, before, you know, Talaria became a thing, what were you actually
doing?
Is it the same role?
Were you running the same type of strategy?
And then, you know, it came across?
Or how did it work?
No, so I had, I moved into asset management at a company called TT International in London.
I'd been previously working at Goldman Sachs in London and New York, and Tim Tacky, he
had started Fidelity International, and then he'd run the European side of, or European
portion of George Soros's capital.
So he's one of the first macro hedge fund traders in Europe.
And then I'd worked in the core team of which there was about five of us running the long
only institutional side of the business.
So it was still a fundamental bottom up driven investment house from that perspective.
It had expertise in options, which I'm sure we'll get into in terms of the Talaria kind
of process, but not explicitly in terms of the portfolios that I was running in or contributing
to at TT.
I think also, listen, as we talked about, you refine and develop your own process as
you go along in a journey.
And I think, you know, TT probably had a greater emphasis on the momentum factor in terms of
earnings momentum and upgrades and so on.
And that's somewhat different to, and I'm talking about, you know, to mid 2000s here,
the process that, you know, from a bottom up part, bottom up fundamental point of view,
that has developed over the last 15 years of my career.
Yeah, let's let's definitely dig into that because there's probably a lot of listeners
and you know, clients and fund managers that, you know, definitely delve in the momentum
side and you know, investing companies, you know, bottom up.
But the one reason why I wanted to have you guys and girls on is Talaria just does things
differently.
And it's a particular, and I'll look, I'll let you explain it.
But the reason why I find this so interesting is with options, you do have the ability to
do some very interesting things, protect your downside, you know, still participate, see
you because no one knows what's happening in the next two months, right?
You think it might happen, but will it happen?
Right.
But the other thing as well is it sounds really simple, but for people that have never done
an option strategy before, it's quite complicated and difficult to use accurately and effectively
and do it without, you know, and get sleep every single month when the rollover has come
through.
So do you mind giving everyone a bit of colour around who exactly is Talaria and the investment
philosophy and what is the investment strategy, strategy which you guys and girls operate?
Sure.
There's quite a few different questions there.
So do let's break it down.
You know, what, what Talaria is a, is a global equity manager.
We're a founder led business.
Okay.
We have a perpetual mindset where we only run a single strategy and the investable universe
is everything X Australia that must have a developed market listing because of the options
implementation, which we'll unpack in a minute.
In terms of what we do then we run kind of a relatively concentrated portfolio, 25 to
25 stocks, never more than 40 by mandate.
We are all driven by the bottom up opportunity set.
And what that means Murdoch is we never sit there and say, Hey, consumer staples is a
good, good place to be in this environment.
Let's go and find a consumer staples company that conforms to our kind of our bottom up
valuation process or, you know, Switzerland's looking cheap.
Let's find a Swiss equity.
So it's really on a case by case basis.
We're relatively anti short term.
So the securities we own in the portfolio is about average tenure is about three and
a half years.
So that's sort of where to locate us in the zoo.
Okay.
And we run about 2.1, 2.2 billion dollars on behalf of our clients.
Of course, at the end of the day, we're paid a fee to work on their behalf and, and you
know, generate the consistent outcomes in which we entrust it with our clients money.
So that's sort of who we are as a firm, what we do as a strategy.
The point of unique difference is really how we enter into stocks.
So our bottom up process, you know, we're, we're a value manager and what that means
and why would we align strongly with value is there's seven of us in the investment team
over 130 years collective experience.
And like all value managers, what we're trying to do Murdoch has come up with our best estimate.
We call it the normalized cash returns, but people use different phrases, right?
The mid cycle earnings power and so on.
Okay.
Now that's all done through the annual reports and financial statements.
But the key thing that means that we align strongly with value, both from a factor perspective,
but also just philosophically is that whilst growth is an important component of valuation
as a forward factor, it's relatively weak historically looking at the data.
Okay.
So we do a normalized cash return analysis off the existing asset base.
And what that means is we won't pay for growth because that would show up in, in the asset
base, right?
Goodwill, be that tangibles or intangibles.
So that sort of is a true to label value approach.
To be honest, Murdoch, us and the other 24,000 smartest people in the room who are true to
label value are doing the same thing.
You know, the way that I talk to clients about that is, listen, if you Murdoch were looking
for a new accountant, you're going to switch from Deloitte and Ernst & Young and came in
and told you, hey, we do the accounts differently.
That should not give you any confidence.
I mean, numbers and process and numbers and process.
So what I've talked about at the moment is really anybody true to label value.
Okay.
As you said, the point of difference is really how we enter stocks and that's the option
component.
So every global equity manager who, traditional long only global equity manager, however their
process once they've decided they wish to buy the stock on behalf of their clients,
would simply go into the market and buy their first, let's call it 1% position and they'd
execute that trade in the market today.
What we do is we sell a fully cash backed and exchange traded option, which is typically
about two months in duration.
Okay.
So we're not making a decision when we sell it.
It's a promise to take possession of a stock that we want to own.
Okay.
So this isn't an overlay, an options trading strategy.
We're simply making a promise to take possession of the stock that, you know, is typically
taken five to seven weeks work and we've socialized in the team that we think we want to put into
the portfolio on behalf of our clients.
And in return for providing that promise to own an equity that we want to take possession
of, we get two things in return.
Firstly, we get a lower, we get to commit to buy it at a lower price than it's trading
at today.
In a normalized environment, that's typically three to 5% lower.
So you know, assuming a stock's trading at a hundred, we can commit to buy it at say
$96.
And secondly, we're paid a premium for providing that effective insurance.
Okay.
And we never do that at less than a 15% annualized rate of return.
So let's say in stock trading at a hundred, we commit to buy it at 96 in two months time,
we might get paid $3.
So think about it in three on 96, effectively 3%.
For two months, you know, that's about, so multiplied six times.
So that would be an 18% annualized rate of return.
And in two months time, simply only two things can happen.
Either the market's gone down or the results are perceived poorly by the market and the
stock's fallen over that two months from a hundred down to let's call it $94.
In which case, the cash that's sitting there backing the commitment to buy the share moves
across and we take possession of our first 1% of the position.
And the premium of $3 goes into the cost price.
So we're effectively bought our first 1% position in that instance at $93.
And we would then write another option at, you know, $90 until we got our target position
size in the area.
Or the market's gone up or the results are well taken, in which case the stock's traded
to 105.
In which case, we simply keep, well, firstly, we would reroll that option at 102 as long
as there was at least 20% upside from the strike price to our fundamental fair value.
But we would keep the premium, which that 3%, say on a 1% position, let's call our size
of the fund, you know, $2 billion.
So literally we're keeping $600,000 of premium.
And that's really the point of differentiation in terms of how we enter.
But as you say, it drives three key outcomes, which I'll come on to.
But you also asked, hey, why do it this way?
What's the rationale and what's the philosophical backing?
The key reason we're using the options is to reduce risk.
Okay, there's two things here.
Firstly, it really comes out of an asset and liability mindset.
So the smoothness of returns, you've got fixed kind of spending down the line, be that retirement,
be that things that you want to be able to do with the money, be that a charity foundation
or kids school fees or holiday, whatever it is.
And you've got this greater certainty of being able to match those liabilities.
It's not relying on the capital component.
And the second key reason is philosophically, listen, forget equities alone.
In any asset class, when you put money into that asset class, you're putting capital at
risk.
And the things that can drive that risk are very difficult and unknowable effectively on
an ongoing basis.
What am I talking about here?
You're talking about, well, unfortunately, geopolitics is in the top of a lot of people's
minds, but you're talking about interest rate risk, you're talking about growth risk, regulation,
taxation, cross border policy, and so on.
It's all these big macro risks.
And we want to be paid explicitly for putting our clients and our own capital at risk.
And then we want to generate an idiosyncratic return in the individual security.
And that's really the philosophical reason that we do what we do.
It's quite interesting.
And for a lot of people out there, they're not familiar with how options strategy work
or they've heard about them.
It's quite an interesting ability to take a view and then go, you know what, don't know
what's going to happen in the next two months.
Many things can happen.
Look at what's happened with COVID and black swan events everywhere.
And then also, in that interim, to go, well, we're still holding our clients' money.
We still want to be earning any income for that potential two months, if something may
occur.
So it's quite interesting.
But in saying that, the obvious question, which I always get is, Murdoch, that sounds
great.
Strategy sounds fantastic.
But how does that actually translate into performance and past performance?
What does that actually mean?
So commonly, people refer that in our world as beta.
How does that relate to how do you perform in comparison to the market underlying the
benchmark which you use?
And then more importantly, is this strategy very, very good in a bullish market?
Is it better in a bearish market?
And then what's been your average returns since inception?
And how's the past couple of years been?
Okay, great.
Quite simply, how does that translate into what's going into my pocket if I stick money
with your firm?
Yeah, absolutely.
Listen, I would obviously love to answer that.
But equally, I think there's also, let's stop.
Can I dial it back from that slightly?
Because listen, all employees at Talaria are invested in the firm.
Like I said, it's a founder-owned and led business.
So we own the firm.
We think it's the single best way to run our own money, which is why we do it.
But we recognise in the greater sense of our clients, we play a role in portfolios.
No one has a single kind of strategy or all their money in one basket, as it were.
So I think before getting into the numbers, which I'd love to answer, we have three distinct
outcomes which actually help in portfolio construction.
And a lot of clients of ours, I think, judge us on those outcomes.
Now the three things that we get from this implementation strategy, you name-check one,
we have a second lever of returns, which is about this payment in terms of the aggregation
of those premiums I was talking about.
And typically, that's been around about 600 basis points of return per random in a normalised
environment.
So in the last three years, for example, we've made a little over 600 basis points of return
for our investors from this second lever of return.
Now crucially, that lever goes up when uncertainty rises.
Because obviously, the cost of insurance is really dictated by the level of uncertainty
model.
So that happens to be the case where uncertainty rises typically in equity markets results
in capital values falling.
So we've got this offsetting return driver.
So that's a first key thing, which means in terms of our downside capture and upside capture,
over the life of the fund since the unit trust in 08, that's been about a 34% downside capture.
And the upside capture has been comfortably over 70.
So we lose less when the market goes down, and we capture the majority of the market's
gains.
The second key thing, which is in and of itself is this structurally lower downside capture
that I talked about.
And the third key thing, because you've got this contracted rate of return, you have materially
lower volatility.
Okay.
Now, I think for a lot of listeners, you know, talking about 300 basis points, lower volatility
than an index won't really resonate.
Let's take it back to real world examples here.
Most fund managers and fund management houses, they're in the business of raising assets,
right?
That's actually the incentive of the industry for fund managers.
What advisors and people who have the savings care about is not this sort of time series
return.
So here's my five year number or my 10 year number.
What they care about is how does a strategy perform when they've got their money in it?
Now, that's a small nuance, but it's crucially different.
And I think if you go back to that really famous Magellan story, so Peter Lynch, who
built Fidelity really off the Magellan fund, you know, he compounded over 20% for well
over 20 years.
And yet, when you build up the flows, the aggregate investor experience was less than
zero.
Right?
It's really hard to believe that.
If you do the same analysis of the largest four global fund managers by assets raised
in Australia over the last five years, and you look at the time series returns, but then
you look at the discrepancy between when people put their money in, they're vastly different.
And the point of that description or example is to say, if you do 10%, 10%, 10%, 10%, every
client gets 10%.
If you do up 30, down 10, up 20, etc., to get a five year annualized number of 10%,
the money in aggregate, the IRR effectively won't be 10%.
And that's the value of lower volatility in a practical sense to your listeners.
Okay, so they're the three key outcomes that we generate.
And a lot of people use this for a range of those outcomes.
So that second lever of returns, that can be actually distributed as income.
So we have a pretty high, sustainable, differentiated source of income, which is paid quarterly.
So for a lot of people who are looking to diversify away from the Australian share market,
which obviously has a relatively high dividend yield compared to the rest of the world, plus
some tax advantages, that means foregoing income potentially for capital.
Whereas actually, that's not the case for investors who are using the Talaria Global
Equity Strategy as an income engine and diversification from income, because it's not dependent on
the business cycle.
Remember, dividends are ultimately at the discretion of management, and quite often
when you need income the most, they're sensibly reducing that payout to shareholders because
of the level of uncertainty or the cash requirements in the business.
That's not the case if you're relying on income from the strategy that we employ.
Okay.
But the second key thing in that volatility and downside capture, as someone who runs
an overall portfolio or a saver who's got multiple investments, you may feel that long-term
growth equities will do much better than value.
The world's changing, AI, all the stuff that we're probably pretty familiar with at the
moment, or you may feel that small caps ultimately are much better valued and ability to generate
you much greater capital growth over the medium term.
But actually, I need to be able to hold that journey because it's a lot more volatile.
So I need to blend that with something that allows me to stick to that because of that
requirement to be able to compound and hold the position.
So we blend up pretty well with that.
And actually, we're humble enough to recognize a lot of people who've trusted us with their
money.
It's ultimately to free up some more of their risk budget because I need to blend it with
a whole range of things.
So traditionally, that's the 60-40 portfolio, right?
I'm going to have bonds so that I don't…
Well, actually, the majority of history, bonds and equities have been positively correlated.
And we've seen the havoc that that's wreaked on portfolios over the last three to four
years, right?
Whereas, hey, here's a strategy, low volatility, low drawdown, but actually allows me to stick
to the path.
So I think before the absolute returns, the vast majority of our clients, Murdoch, I think
really judge us on the combination of those outcomes.
Coming explicitly to your question, though, hey, what's…
Okay, sounds interesting, a bit different.
There's got to be an opportunity cost, right?
And that's what you talked about in terms of the beta and the upside capture.
So over the life of the fund, it's been about…
We've had about…
Per $100 of client money, we've had about 55 has been in direct stocks and shares.
So we've owned.
So we've got exercised and we own about $55 of direct equity.
We've had about $30, which is this cash backing the commitment to buy shares we want to own
at this never less than 15% contracted rate of return.
So the options implementation to reduce risk.
And we've had about 15% cash as you would understand it in any other strategy.
And that varies obviously over the cycle and at various points, but that's in aggregate
what's happened.
If you look at our rolling three-year return profile, you know, I mean, month to month
or year to year is a relatively short.
So that's our average holding period.
So we look at that over the rolling three-year period.
When markets start to be…
If the index was to give you, you know, double digit per annum returns over a rolling three-year
period, the truth mathematically is that that $30 where we get this contracted rate of return
would be better off if you had perfect foresight directly exposed to the equity market.
So the opportunity cost is higher than the benefit that we generate.
And that is ultimately the opportunity cost.
Now that means that our investors are getting the highest absolute experience, the best
absolute experience in those moments.
It's just that with perfect foresight, if you were sitting in Delphi, you know, Oracle
on the Mount, you could have done better.
And that's really the opportunity cost of the strategy.
As soon as you drop down to, you know, 8%, 9% per annum in terms of annualized returns
in equity markets over three years, that opportunity cost completely starts to drop away.
And the more negative the returns, the greater the relative contribution because of the second
labor where you're not just dependent on…
You talked about beta, as you captured the beta as an index, but also if you're in a
managed fund, you're not just relying on the alpha generation of the smartest person
in the room to be able to offset that beta component of coming down.
And I really appreciate that.
And I think it even comes back to why I call this podcast the rate of change.
The rate of change is a mathematical formula.
It just refers to the speed at which something changes from going up to down and then back
up again.
Right.
And the main reason why I do these podcasts, I just find it so interesting speaking to
people like yourself and to shine some light on different strategies is exactly what you're
talking about.
This 60-40 portfolio, which we all started, we've all told this is gospel.
This is how it is.
Well, guess what?
Coming into COVID, interest rates near zero, bonds didn't pay anything.
Then we've seen this gigantic boom of private lending.
Right.
And then there's another expression in life.
The only constant thing in life is change or one of the only constant things in life
is change.
So when we speak with investors or clients or high-end family offices, it's very interesting
the point that you're making as in some people just want stability.
They want stability, certainty, or the ability to participate in some upside whilst leasing
out the other side.
That's fantastic.
That's where the call comes into it.
Right.
But then the other thing which I've never enjoyed is when one investor or manager goes,
oh, this strategy is horrendous.
We go, hold on a second.
That particular strategy did very, very well.
Why?
Because they were printing money and assets.
It went through the roof.
But now considering that that money has been withdrawn from the market, those assets don't
do well anymore.
Right.
So I would actually, the reason we do this is I want to shine a light on there are cards
which you can play depending on the global macroeconomic and macro environment.
And people just need to know, okay, in the back of my mind, if conditions are doing this
particular way, where, as you said, who's who in the zoo, first of all, everyone needs
to understand who we can choose from and then understand when to play the cards.
So from my understanding correctly, Talaria fits in that band where essentially you can
use them continuously and which is great.
So any thoughts to that?
Well, listen, I mean, the way that I think about it is if you're doing 10.5% per annum,
you're going to double your money every seven years.
Okay.
So I think, you know, particularly in such a large savings pool in Australia in retail,
thanks to the good kind of governance of superannuation, ultimately, I think it's got to be a goals
based approach.
Right.
And I think if you can work out so how to have, I mean, I'm not saying that everyone
will be happy with doubling it only every seven years, I want to double it in five years
or you know, maybe I'll double it in nine years.
But you know, I'm 50, life expectancy, you know, whatever it is for once you get to 50
is 85.
So I've got another 35 years.
So you know, my wealth will be fivefold compound of fivefold, right?
It's not 500%.
It's double every seven years from that to when I die.
Right.
If I do 10.5%.
And if I can start with 600 basis points and where I lose less money when the market goes
down.
And let's say that I'm adept from a personality point of view from losing that it doesn't
worry me about losing money.
I understand markets go up and down.
But the key thing is I've got more money working for me in the ups.
That's why it's important.
You know, I mean, let's go back, you asked about the recent experience of the fund.
You know, 2022, a lot of the, you know, a lot of the big seven, right, that people were
talking about, you know, a stock going down, down, stock doubling sounds like a sounds
a whole lot better than a stock that halved.
But they're the same thing, right?
I mean, a lot of those stocks halved in 2022, and they doubled last year.
Where do you end up on that math, you end up at the same level that you started at?
Whereas because of some of the tailwinds of 2022, you know, this is a strategy, the Talara
Global Equity Strategy was able to generate eight and a half, eight and a half percent
absolute return.
Now last year, the market did 20.
And let's forget about leadership and why that is.
That's what it was, you know, sort of about 20.
We did about 12 and a half.
Now 12 and a half on 108.50 versus, you know, 20 on 85, if you just went in line with the
benchmark in terms of indexes down in 2022, you don't have to be genius at math to work
out that you've got a lot more money doing 12 and a half on 108.50 than you do doing
20 on 85.
So I think, you know, setting your goals, working out a portfolio.
So that's the first thing, right?
Where am I trying to get to?
And I think this strategy gives you as good a chance as any to be able to compound your
real wealth over time.
And we've run the strategy, as I said, in the unit trust since 08 and, you know, the
firm strategy in terms of using this options component started in 05.
So we've done it for quite a long time.
I think the second key thing I'd say then is, hey, you know, we touched on uncertainty.
All investors are dealing with uncertain, by definition, the future is uncertain.
So what you're trying to do then is you're trying to, where possible, and you know, this
sounds like what you're doing on behalf of your clients is you're trying to build a portfolio
that gets rid of as much diversifies away all the possible risks that it can.
Okay.
And then of course, there's a residual of risk and uncertainty that that is just what
makes being human brilliant, but makes kind of being an investor difficult.
You can't alchemy away all risk and so on, right?
We're not at a craps table where the odds mean that you could actually hedge out everything,
but you'll make nothing.
I mean, nobody's in the market for that.
So I think it's about constructing portfolios where you recognise the inherent uncertainty
of the future and use the benefits of diversification to be able to reduce relying on having some
view or other of the future because broadly, I don't think anybody's got a crystal ball
that works, right?
And I think the third key component where we sort of fit in in that is that we actually
benefit from uncertainty.
So I think intuitively, I find the strategy easier, just as just me, there's a clever
of people who are invested with us and me, is that I really think about it as an insurance
analogy, right?
And you know, we're spending all our time analysing the collateral.
So that's the company's opportunity set, right?
Before writing the insurance.
But insurance generally as a whole industry is tremendously profitable.
And in equity markets is tremendously profitable because it's a sustainable risk premium.
And the reason it's sustainable as a risk premium, and this helps you diversify, is
because it's behaviourally driven.
So investors in equity markets always have a positive skew.
It's a growth asset, right?
They're looking for the upside.
Otherwise, you wouldn't be in equities, right?
So they overpay for the downside protection.
The second key thing is we know that dealing with uncertainty is psychologically difficult.
You know, so I've travelled an awful lot over the course of my life professionally,
but also I've been lucky enough to travel a bit personally as well.
I took the kids to New Zealand last year.
So I've never claimed travel insurance.
I took the kids to New Zealand last year.
And you know, of course, I paid the 250 bucks travel insurance because the idea of watching
my daughter on the trampoline and thinking, oh my gosh, if she breaks her leg, how am
I going to get her out of here and blah, blah, blah.
It's just not worth dealing with from an uncertainty point of view, or we're going to go whitewater
rafting and she's uninsured.
I'm just not going to do that.
You know, and in the same way in equity markets that the majority of investors are very poor
at dealing with uncertainty.
So they overcompensate to take them out of that psychologically difficult place.
And then the third key thing, which you know professionally, but also your listeners know,
is losing $10 is psychologically very different from making $10.
Okay, they're not the same thing.
And therefore they overpay you for providing the perception that you insulate them from
that risk.
And that's why that risk premium is very, very, very stable in terms of that.
It's called the volatility risk premium, the difference between the implied volatility
and the realized.
And the implied volatility is all those anxieties ultimately that are driven, that mean that
the implied volatility is higher than the realized volatility.
And it's that spread that allows us to make that 600 basis point stable return that goes
up when uncertainties go up.
We get paid for doing more of the same.
We get paid more for doing the same thing.
So I think that's the third kind of way that I think about that.
It's very interesting you're making these points because we discussed the 60-40 portfolio
and then someone said to me, and it just made so much sense.
I've been doing this ever since.
So I actually refer to it now as correlated part of the bucket, which is offense.
And then the defense, which is we're trying to generate an income, which is uncorrelated
to market volatility.
And as you said, goal-based investing, well, we need to look at it backwards, as in people
have costs.
What are your bills?
What are your families?
It's not cheap.
Joey's down the road.
It's 50 grand.
When I left Joey's, it was 22,000 for year 12.
Like bills are just racking up with inflation.
So when you're looking at someone's life, having the ability to go, right, I need to
pay these bills.
What assets do I have available that have the ability, as you said, with insurance or
a level of protection where we know roughly we can generate this level of result in, depending
on their risk, what their percentage they want to take.
Someone might want to do 80% of it.
Some person might want to do 20%.
That's everyone else's prerogative.
But then let's be honest, human beings like having a view, like having a flutter.
That's Australia, which is gamblers, unfortunately.
Good or bad, the ugly love of races.
But that's the reason why as well, the offensive part of the world is important because no
one knows what's going to happen tomorrow.
And that's hope.
And that's exciting, which I've always found.
But yeah, look, back to Talaria, again, I do think what you guys are doing is very,
very interesting in the uncorrelated, as you said, you get a low beta to markets where
we can have a conversation with someone and then potentially forecast out from a goals-based
perspective what they can potentially get, which I always find quite interesting.
So in saying that, let's dig into the fun part, which is what opportunities you're seeing.
Is there anything interesting that you've been buying or anything on the horizon?
First, you just said to engage, I'll answer that, but just to engage a couple of things
you said there.
Absolutely.
When you talk about your clients and school fees, I mean, that there's these wellness
liabilities, right?
And they're all personally defined, but you went school fees or whatever.
And that's exactly what I was talking about.
And I've got a certain asset.
And you know, our biggest asset, depending on your age, is obviously your human capital.
You know, I have an income and generate kind of returns from my human capital.
I'm a really well-respected plumber or lawyer.
You know, I have a capital base in that sense.
Plus I have these savings.
But it's exactly that mindset that really was right there at the inception of the strategy.
I've got an asset and I've got a liability.
And you know, if the liability, if the asset doesn't perform at the wrong moment, then
maybe a kid can't go to accept that university place, right?
I mean, these are real things.
Or I couldn't afford to go to my brother's wedding in Brazil, right?
Whatever it is.
So I absolutely agree with what you're saying in that regard.
In terms of the opportunity set, this in the reality is it's relatively slow for us at
the moment.
And I think that that's to be expected.
So just going right back to our sort of core bottom-up process, you know, if we're talking
about a normalised level of kind of returns in individual securities, and of course, we
analyse the nearest two or three peers to get a sense of the industry, but also the
profitable dynamic of the nearest competitors.
You know, we're in a world where, you know, whole economy profits as a percentage of GDP
are pretty close to record.
Okay?
And secondly, you know, profit margins at companies are pretty close to the record.
I mean, they've come down over the last 18 months.
They're still very, very high.
And if you think about what's driven that over the last decade, it's not really been
about, well, some of it's been about growth, but some of it's really been about 100 basis
points of what's around about an 11% bottom line margin is because of falling interest
charges.
Well, you don't have to be a genius to think that that's not going to be a tailwind going
forward.
We can argue about whether it's going to be a big headwind.
That's a different thing, but it's not going to be the tailwind.
We've had about 100 basis points of falling charges from tax.
You know, that's contributed.
And then you've had falling depreciation charges because companies haven't actually been investing
in the fixed asset base, really in aggregates.
Okay?
So all of those things, when you work in a process, it's about normalised means that
if you're looking at whole economy profits at the aggregate, pretty high relative to
history, how is it then that I could come on and tell you, Merde, we're generating
hundreds of ideas?
That would be not commensurate, right?
And the reason that the corporate profits pool has been so high is really just an accounting
identity.
Just remember that corporate profits are really just a reflection of net national savings
minus investment.
That's not an interpretation.
That's an accounting identity.
That's math.
And of course, we've been running record deficits in terms of post pandemic, and we really haven't
wound any of that back.
The rate of change has gone, but of course, the absolute deficit is still going up higher.
And that's allowed the corporate profit pool to be abnormally high.
So in aggregate, no, we're not generating a lot of ideas, new ideas.
We continue, we've had about 15% of the portfolio in Japan.
That continues to be a relatively fertile ground for ideas that move through the process.
Doesn't necessarily mean that they move into the portfolio when we socialize the idea,
but we continue to see more ideas that progress further in Japan than pretty much any other
region.
So do you mind if I just ask you, you mentioned Japan, and I grew up in playing games.
It's just our generation, right?
Nintendo, Pokemon, all this type of stuff.
There's a new game launched called Power World World, which is completely ripped off Pokemon.
And there's another, the old Nintendo, which is out of Japan, like someone built one through
all the games in it.
But I was reading somewhere that in the past, when someone's ripped off a game, it's in
America and the West community, everyone gets sued $4 million.
They're completely harpooned.
Is it true that in Japan, there's something about no copyright?
Because I've heard there's companies literally in Japan ripping off, say, Nintendo or the
gaming industry, and there's just no recourse.
I don't know much about the Japanese market.
And you said you got 15% of the portfolio in the Japanese market.
I was just curious.
Is it just a whole different playing field in Japan?
Yeah, I wouldn't be comfortable actually talking about that in terms of publisher rights, Merdek.
I would like to hear more about, you sound a bit defensive about Pokemon being ripped
off though.
I'm not going to get into it.
You're almost, you know, the nerve there.
Yeah, I just did nothing.
It was just like as a kid.
Listen, I don't know in terms of publishing rights.
I mean, you know, clearly Sony's, Sony and Nintendo's big publishers, I'd be very surprised.
You know, they've got embedded kind of platforms, haven't they, from the consoles and so on.
But yeah, that I don't know.
I mean, clearly there's global patents on, you know, Takeda is a pharmaceutical company.
It's not like they're unprotected.
It's Mitsubishi Electric who does factory automation.
They would have patents.
But in terms of publishing rights, I don't know.
I have a look into that.
No, I was just curious.
Sorry.
As soon as you said 15%, my brain went Japan.
I know you're brain went.
But no, please, please continue about what you're seeing as opportunities instead of
me going on.
You know, obviously something got under my goat.
Yeah, we've, I mean, obviously last year, US utilities in particular, really, really
poor sector.
A few things have started to come through the screen that are worthwhile there.
So we've recently initiated a position in a Midwest utility.
So called WEC.
You know, they're pretty much dominant in Wisconsin.
They're a little bit in Illinois as well.
You know, that's a regulated asset base.
They're allowed to grow that around about 5% to 7% per annum.
They've got a 70% payout ratio.
You know, so you're getting, and then they're levered about three times, right, between
the debt and equity side.
So you know, you've got a dividend yield of, you know, over 4%.
They've had an excellent track record as an operator, and they're allowed to take, and
the payout ratio is about 70 cents on the dollar to underpin that 4.3% dividend yield.
And then that 30 cents in the dollar is levered about three times into the regulated asset
base where they're allowed to get about a 10.5% regulated rate of return.
And that should drive, you know, 5% to 7% growth.
So you know, that's a pretty stable good business that should be able to generate in a fair
value sense, you know, 25% upside.
And as you hold it for a period of time, you know, you're just going to be compounding
in that high single digit figure.
So this isn't something that I'm going to tell your listeners is going to double.
But that looks a pretty good investment.
It haven't come down from around about 100.
You know, we're committing to buy it in about 75.
So that's kind of the first thing.
The second thing I talked about, we've just taken a small initial position in Subaru,
which has about 40% on our forecast going forward on the cash side, or have about 40%
of the market cap in cash.
They are a relatively small producer, obviously, in total number of cars.
So they have about a 10% market share in the SUV category in North America.
That's really where they're extremely strong.
So that's a category that has been growing pretty consistently about 50% of light vehicles
and cars sold in North America in the SUV category.
So actually, they've got a really strong position in one of the better markets globally.
The company has been extremely profitable in the past and the margins have come down.
That's a function really of not they haven't lost any market share, but slightly in terms
of their product mix.
But also they've been investing, obviously, in rolling over into the electric vehicle
market that JV'd with Toyota there really on the battery side.
And one of the things that makes us much more comfortable because the issue around a lot
of traditional automakers is they're actually huge financial services companies with a manufacturing
business attached.
It's all about financing and so on and so bad loans and the leverage in that side can
be a really difficult place to analyze.
Say something like BMW is tough to analyze that and opens up our investors to greater
levels of uncertainty and risk.
Whereas they've got, Subaru has got the lowest level of customer financing of any of the
consumer brands in North America.
So clients are buying the product rather than being induced through a financial incentive
really to buy the product.
So regarding purchasing the product, COVID had very, very extensive wait times.
Have you, since you've been doing a lot of work in this, has those wait times been reduced
or is that now just a legacy problem which we have to deal with?
No, that's the supply chain issues that really dominated COVID and this is why we saw, I
drive a 1999 car.
We're going to go one in the family.
I'm just not really a car person.
And when I bought that about six years ago, so it was, I thought, do you know what?
This is only about 17 years old.
This is a bargain.
It was like about six grand.
And when I bought the car and it's tripled, you know, in terms of the COVID, but no, the
supply chain issues are starting to work through.
They're not completely done.
We had Toyota results fairly recently saying that they were coming to the end of them,
but it's really the componentry, I think that's still the issue.
And of course, you've got an overlay as well where because of what happened in COVID, if
you think about the last 20 years in business and, you know, people who do MBA, it was really
about cash management.
So it was about getting supply chains as long and as thin as singular as possible so that
your working capital management was much, much tighter.
And the reality now, of course, is they recognise if there was a company in, you know, Taiwan,
or Ukraine that just did the washer for the windscreen wiper for the car, well, if you
can't get that, then the whole car can't go out.
So it's been slightly about re-engineering the supply chain as well as access to the
product, I think, but that has pretty much worked its way through.
And we're seeing, I wouldn't want to give you the exact number of inventory days that
we're seeing in global auto, but historically I know is around about 59 to 60 was fairly
typical.
So I just want to check that.
Yeah, it's normalising.
Yeah, I mean, another stock that's relatively new in the portfolio is Medtronic, which is
a US medical devices company.
It's been a dividend aristocrat.
They had, funny enough, some supply chain issues within the company, which really impacted
both the earnings, but also the sort of cash management of the business.
And effectively, the stock's derated off the back of the supply chain issues.
They've recently hired a new manager to really run the whole logistics and supply chain and
re-engineer that and reduce down the number of sites in which they're operating.
So it's really, it's recently, kind of at the point, traded down to a five year low
PE evaluation.
There's no, they've got market leading positions, either number one or two in everything they
do.
So they're really strong in the heart, Medtronic, and clearly that's a growth area over time
and demographics.
So that's a recent addition as well, where some of the issues that we're talking about
in the auto industry have been able to afford us an opportunity in different sectors.
And we think they'll be able to take control of them from a medium term point of view,
but their market position, pricing and product portfolio is totally unimpacted.
So it's really a function that their earnings momentum in a world where you started to see
some sectors get up or individual stocks get upgrades and some get downgrades and relatively
punished or rewarded.
They've been punished, but we don't think the earnings power of the company has really
fundamentally changed.
Yeah, it's quite interesting you discussing the specifics of companies.
And I suppose the one question I really have is looking at the past five years, do you
think that CEOs are now looking at the balance sheet and going not about how much growth
can we get at any price, but not even growth at a reasonable price, but they're just trying
to get cash flow and improve the profit margins of these businesses.
So they're going to be around or when the next opportunities arise, do you think the
mentality has changed with how these CEOs are running their businesses?
Well, I should say that as part of our process, we deliberately don't meet management.
I didn't know that.
So you don't mean management at all?
No, we think that there's as many.
Why is that?
Because a lot of people say, hey, you know, we get to meet the managers and etc, etc.
Yeah, so there's a couple of reasons I could talk about.
Let's go back though to, you know, we were talking about portfolio construction, the
diversification and then this unquantifiable kind of risk component residual that you left
with.
So, you know, the traditional, there's still an awful lot of money left with active managers,
albeit, you know, the market share has been reducing with passive.
But if you're using an active manager, right, the vast majority of the pitch by the active
manager is that I'm a very clever person.
And my competitive advantage is that I have some different degree of access.
And quite often that access to knowledge, right.
And typically that access is, is couch in terms of management, you know, we do 3000
management meetings a year and so on.
If you statistically distribute who's performed how, and who how many meetings they've done,
I would challenge anybody to suggest that there's a strong pattern.
So the person who did no meeting, so let's think Renaissance Capital.
Like, you know, yeah, I only just can't believe I haven't learned about that one.
I found out about Renaissance Capital about six or seven months ago, and someone told
me that they've averaged what nearly 30% since inception for how long and they've got how
many stocks in the portfolio is 750 like 1000.
It's incredible.
But the point is even within active management.
Do you, you know, is there is there a line of best fit that's positively sloping between
most meetings and least meetings?
Okay.
So we like everybody else have 24 hours in a day Murdoch.
And it's really from our point of view, where do we get the highest return on our time in
terms of, you know, we're all we have in this in this industry and that's a lot of human
capital.
So everything's you can learn from everything and everything can be a value.
But we think that the behavioral risks around meeting management relative to how else we
can spend our time are much higher.
So what do I mean by that?
You know, you think about all the issues about meeting management.
Firstly, we know some of the worst atrocities of human history have been created because
of, you know, people's preponderance to follow and believe authority figures.
Well, you know, if I'm meeting the CFO or CEO of Microsoft, I mean, they're clear or
senior management at any of the companies that we invest in, you know, they're real
authority figures in their industry.
The second thing is, you know, studies show that it's not only that we hear confirmation
bias, so we hear what we want to hear.
It's that everything that is said merely reconfirms what we want to know.
Okay, so that's a sort of second example of a bias.
You know, third thing, listen, it's, you know, psychological studies have shown that people
are almost impossible at determining who's telling the truth and who's lying.
And so you get in the situation of saying, okay, the, you know, the capex phase or the
acquisition phase is over and we're going to start returning cash to shareholders.
And then, you know, six weeks time, they go and do a big acquisition.
You say, oh, they lied to me.
It's like, yeah, well, they did, you know.
And the fourth thing is very different from when I started in the industry.
You know, there is regulations.
I mean, travel previously, CFOs and CEOs would tell you non-public information that was market
moving, as in, oh, you talked in the last quarter about, you know, 2% volume and 1%
price.
And the CFO would say to you mid-quarter, oh, no, no, no, it's much, it's going to be
much better than that.
Because that wasn't illegal, you know, and clearly, you know, public disclosure rules
have changed over the course of my career.
So-
Newcrest Mine has changed all that.
Yeah.
So there's a whole range of issues where meeting management can be problematic.
I guess the way that I would pithily sum it up is that we're numbers over narrative.
The single best way to judge what company management and corporations do is by, you
know, forensically looking at the annual reports, financial statements, and looking, you know,
in the data of what they do rather than what they tell you what they do.
Well, on the back of the run from the Magnificent Seven, and as you said, data-driven, I would
be, it'd be terrible not to discuss the role that artificial intelligence is playing in,
you know, the investing world, the ability to get information, process information, and
analyze these things.
I would love to hear your opinion on, you know, the role that AI is playing in, say,
Tlari's business, or what you think the impact is going to have, for exactly the reasons
which you just said.
Yeah, there's a couple of things there in terms of clearly, you know, because of the
valuations and our approach, you know, we don't own stocks specifically that may come
to mind exposed to the AI theme.
But I think the framework that we kind of look at it through, because clearly we're
cognizant of it in terms of the potential positive and negative impacts on our portfolio
companies, is firstly, I think, think of an X and Y axis.
And one thing you've got rules versus discretion.
Okay, so, you know, think about an accountant, or, you know, there's a tax code that is actually,
you know, just hard rules compared to, you know, a lawyer involved in a civil case, where
that's kind of much more subjective.
And they may talk about, hey, we're going to argue it on this basis.
There's not, there's not those hard rules.
So there's a sliding scale.
And clearly the more rules based kind of component or industries are more subjected to AI compared
to those that are subjective.
And then the second thing is the customer experience, you know, how much of that is,
where on the scale is that between in person?
And where is that on the scale of kind of, you know, mass delivery?
Because, you know, so when you think about it in those terms, you know, a, you know,
a US kind of listed restaurant group, for example, you know, clearly less at risk from
AI in the sense of, you know, that their product is ultimately served in person one way or
another.
It's a, you know, customer experience.
But on the other side, in terms of all the things that go into producing food in a profitable
and efficient way, a lot of that is actually very much rules based, you know, delivery
of quantities, ordering, supply chain management, accounting, cash management, and so on.
So they can actually benefit.
So that's often how we sort of think about that matrix.
I did like the, so that that's from a portfolio and markets point of view in terms of our
companies, in terms of the business, the more philosophical question in the industry.
You know, I really liked the description recently where it says, you know, a fund manager's
job is ultimately you're sitting at a bus stop and, you know, buses meant to come every
15 minutes and, you know, no buses come for 45 minutes.
So effectively three buses haven't come.
Now, does that mean that the old adages that, you know, three buses will come along all
at once?
Or does it mean that the Flinders Street bridge has fallen down?
And of course, AI is not going to help you understand which of those two things is true.
And yet it has huge implications.
So I do think that there's a role for, you know, subjective decision making, clearly
in the investment process because of those things.
But I think the speed of the market has sped up because of AI as well.
You know, when I started the average holding period in the market was about six and a half
years and I think it's down to about, oh, it's less than six months now is the average
holding period of an equity in the US equity market.
So clearly, you know, trading on information and the speed of calculation, funny enough,
has opened up an opportunity for value managers like ourselves because value is playing a
less and less cognizant role in a lot of investment processes than when I started.
So I think there's threats and opportunities in terms of in terms of Talaria, the business
itself.
That's kind of a work in progress.
I think that we're relatively recent in terms of the investment team.
So things like meeting notes, I would write a weekly for myself, you know, the ability
to be able to analyze the common traits in what I'm writing to myself every week on,
you know, analyze what are the last year's things that you're kind of effectively able
to learn or take out from what's kind of a journaling process really.
And what can that tell you about the biases?
We can analyze, you know, with a lot more speed and accuracy, I guess, our own decision
making process of when we buy and sell things and how we scale and size things, which I
think is an important development because clearly you're trying to iterate your process.
I mean, we've always did that, but I think AI allows you to, you know, take a lot more
data and counterfactual outcomes and analyze what they may be in a less data, human capital
intensive way.
But you know, and the distribution side and client service side, you know, that's still
probably driven on that, you know, personally deliverable and mass customization.
And I think we're still probably a lot more on the on the customer focus side of that.
So I think that's a that's a work in progress.
How do you use it in your own business, Murdoch?
Oh, well, you know, it makes me look incredibly intelligent when writing articles.
Right.
But more importantly, I just like asking questions.
And then the information when you get from it, you know, how many people have said that
is potentially better than a master's degree.
So I find it incredibly interesting across the board.
Now it's thrown in the question, like, you know, we got kids, you both of us have kids,
like now they're being educated in the school systems.
Remember, we were coming up, it was like, here's a whole bunch of formats and hopefully
in life, you might need them.
But now it's actually holding the second, you know, it's more about understanding comprehension,
teamwork and how do you do this?
But unfortunately, education systems not catching up, hasn't caught up yet.
And the thing that I always think about is, you know, I've been doing a lot about speaking
to people who buy businesses and what they look for.
And one of the one person said to me very interestingly is, what's the number one thing
you look for when you buy a business?
He goes, a fax machine.
Just the entire concept of a fax machine, as in, they understand it, but the people
buying 20 yards, 30 yards, what's a fax machine?
No one's got a clue.
But if you still have a fax machine in your business, then that has the potential to be
modernized, improved, made more efficient, doing exactly the same thing, lower customer
base, improved all the way through and then potentially more profitable.
It's just something so simple, because you don't want to end up like Nokia.
And then the reason I'm asking the question now is, everyone's got chat GPT, we've got
access to it.
But unfortunately, the ones we have doesn't give you access to the internet or I can't
type in analyze, you know, the SAP 500 against Microsoft and you know, work out when to buy
and sell it hasn't got to that stage yet.
I'm assuming and I suppose in the back of my mind, I'm thinking to myself, well, maybe
do you have any mates that actually have access to that particular tool?
Like you know, maybe that's available for particular echelon that's not available for
the masses.
And the other thing in my mind is, could you imagine if an AI tool was available for the
masses about, you know, investing?
And what would that look like?
So yeah, there's a lot of philosophical questions that are in my mind.
And as you said, the one thing that's changed now is the pace at which these things are
accelerating.
I was just very interested to hear your opinion on what you're saying and you hear your thoughts.
Well, yeah, I mean, you know, I mean, I think you touched on something there that certainly
does kind of bear in my mind, but this is perhaps not as a tiller and this is just as
a citizen is, you know, clearly the pace of technological change is making it very hard
for democratic institutions to be able to move at the same pace.
I mean, there's no doubt that the studies have shown this, for example, and you've got
to believe in a degree of efficiency about capital allocation in global, you know, from
the capitalist system otherwise, and that incentives work and so on.
Otherwise, you're not going to be involved in financial markets in a professional sense
anyway.
And yet, you know, over the course of my career, it's undoubtedly a true, true statement to
say that consolidation and monopoly power has only increased.
You know, there's a whole range of reasons for that.
But you know, the ability for democratic institutions to be able to respond to that is much, much,
much slower.
You know, and on the other side of that, you know, with the rise of kind of data and our
degree in my view of technology fetishization, it means that technology can only and of itself
be a good.
I mean, you know, you look at Zuckerberg and his public statements are in many instances
fairly repulsive to the average person I would suggest.
And certainly some of them in Australia would be illegal.
And yes, he is sort of largely revered and thought of as someone who, you know, his answer
to most things is, hey, listen, you know, if I didn't do it, someone else would.
Well, that doesn't make something decent.
You know, so you talked about the pedagogy and the education system not being able to
keep up with the changing needs of our future colleagues and citizens tomorrow.
But I think that that's true in a whole range of kind of core institutions that, you know,
have been the foundation of front of democratic societies, right?
Of which education is one.
But that's true of the justice system, the legal system, the democratic system.
And I think we're seeing some of the challenges to that.
Yeah.
And well, this is what creates markets, right?
Yeah, it is.
It is.
I also think that speed doesn't necessarily mean better.
And that's where I was getting back to on investing with Sense per se is there is no
doubt that the change in the structure of the market and the speed of information has
meant that there's a tremendous amount of people in the market where valuation is a
completely secondary or irrelevant component of their investment process.
And that means that there'll be a whole range of securities that do not fulfill that criteria,
whatever that is.
We talked about not having any earnings momentum.
I mean, momentum over a long period of time has been about the fourth best, most efficient
factor over, you know, the last 30 years.
But if there's more and more capital that's moving, changing hands where valuation isn't
a component, then for people like ourselves that, you know, core competencies, really
estimating cash flows and coming up with an appropriate valuation for our clients' money,
that should provide more opportunities.
It's a fascinating world we live in.
And 2024 looks like it's going to be incredibly interesting.
So with that in mind, what's keeping you up at night and what gets you out of bed in the
morning?
What keeps you up at night, I guess, is the unsustainable level of government debt, where
we've seen, you know, the socialization of debt, really starting with the GFC and then
COVID, where it's gone from private sector and be that individuals or corporates, just
onto the public sector.
And what worries me about that is there is no maths that means it's possible that people,
as in the citizens and people in general, in many of the developed market countries,
will get what they feel they've been promised.
And I think that that keeps me up at night.
So people are sort of expecting that they're going to get a whole range of goods and services
in retirement or later in their life.
And, you know, there is just simply no money for that.
So that's probably what keeps me up at night.
And then the second key thing, what gets me up in the morning?
Oh, well, the first thing that really motivates me to get up in the morning is 25 minutes
of peace and quiet before everybody else gets up.
I mean, I'm living the best possible life.
You know, I don't have a work-life balance.
I've got 24 hours every day and I'm doing something that I absolutely love and is a
challenge and, you know, I feel privileged to be able to work on other people's behalf.
And, you know, I've got a wife who really loves me and I'm crazy about her and the kids
seem healthy and vaguely interested in both of us.
So I don't know.
Every day just feels good.
And they're vaguely interested in both of us.
I think that's the goal to achieve when the kids hit their teens.
That's fantastic.
Well, if anyone listening wants to learn more, what's the best way to get a hold of you or
find more information?
Yeah, I think the best place is to go to the Talaria Capital website.
We have a whole range of articles, insights, things that we've published out.
It gives you a bit of background to the team and the individuals in our strategy and returns
if you are interested.
So I think that's probably where I would direct most people.
And otherwise, listen, as I say, our contact details are on now.
I always tell people that we'll, you know, call me because no one ever does.
So yeah, a bit delighted to hear from anybody.
Call me because no one ever does.
I think I'll nick that one.
Well, Hugh, I really appreciate you coming on.
I found it incredibly interesting as always.
So thanks again and hope you have a great day.
Murdoch, same to you.
I felt like we were just getting going and yeah, I look forward to doing it again in
the future.
Well, the thing is, it's roughly about an hour, but you know, Joe Rogan does it for
three hours, maybe one day.
Yeah, exactly.
You'll have to buy the Cuban cigars.
Oh, apps are freaking lately.
All right.
Have a good day.
Yeah.
Thanks so much, Murdoch.
Be well.
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