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 Gaddy,
and in today's broadcast, I'm speaking with Michael
Frazes, the Managing Director and Portfolio Manager
at Frazes Capital Partners. Keen listeners will
remember Michael from a couple of podcasts. I
really enjoy getting Michael on because he specializes
in the high growth tech and biotech space, targeting
businesses that are growing fast. For the past
12 months, they're up 80%. For me, I really enjoy
getting him on. And we've had him on when the
market peaked, then it proceeded to pull back.
So it's great to hear his perspective on what's
happening at the bottom of the cycle. And right
now, as everyone's aware, a lot of these companies
have had a very, very big run. So it's great
to get an insight on what he's thinking from
macroeconomics to specific companies and what
trends and how to play it. Join us as Michael
discusses his macroeconomic views, the market
dichotomy, political impact on markets over in
Europe, interest rates cuts, and market timing.
Companies we discuss are NVIDIA, DroneShield,
Transmedics, very interesting business, Clarity
Pharmaceuticals, MercadoLibre, and NewBank. He
also discusses, as I mentioned, the fund performance,
but more importantly, as he points out, every
single time we discuss this was in a specific
company, but the focus of the conversation now
is more on portfolio management. So, you know,
there's been so many times where you find some
of these businesses can rotate up like 100, 200,
300, 400%, but then, you know, if you're not
having a very good process of when to take profit
on some of these businesses and then find, you
know, where the... like an ice skating reference,
like you want to skate to where the puck's going.
You're leaving money on the table. You're just
essentially riding the roller coaster. So Michael
spent a lot of time trying to turn this into
a bit more of a staircase. So he discusses the
how he's managing this. And lastly, we dig into
the role artificial intelligence and these language
models are having on the markets, not just from
how to invest, but, you know, how. People like
Michael are using these tools to analyze particular
companies, markets, and also just the impact
they're having on everyone's work. Balance the
ability to essentially do like a three -day task
in two hours is quite incredible. So I really
enjoyed this conversation with Michael. I always
do, and I encourage you to listen to this. a
disclaimer at the end of this broadcast and keep
your feedback coming. You can reach me at mgatty
at ywm .com .au. So with that being said, I hope
you enjoy this conversation as much as I did.
So sit back, relax, and enjoy. Michael Francis,
welcome to The Rate of Change with York Wealth
Management. Murdoch, thanks for having me back
on. It's good to have you on, Michael. What,
we catch up now every six months? Here we're
shaking in the world of growth? Yeah, it's been
an interesting period actually, always is. Just
for first listeners, who is Michael Frazes and
what do you do? We run a couple of funds, but
our main fund is global equities focused on the
fastest growing and most exciting companies.
Customer love and explosive growth, they're the
things we look at. And we also have a pretty
tight risk framework that we use to kind of enter
and exit, which has certainly tamed the volatility
this year and really helped our returns, you
know, the last 18 months. That's a good way to
be. Mate, you've been running around the countryside
having a bit of fun. You just got back from a
work trip in Boston, yeah? What's happening over
in the States? Oh, it was really interesting.
It was the Canaccord Growth Conference. So thank
you to Canaccord for hosting. It was one of the
better conferences I've been to actually in the
sense that you've got a lot of one -on -one time
with a lot of different CEOs. Look, it's just
a strange market at the moment. You know, the
average company is not doing very well and the
market's pretty difficult for most companies,
but there's some sectors that are powering on
ahead. So, you know, one meeting you're speaking
to... somebody in phase one that's like a brand
new exciting you know biotech with a new modality
you know just under a billion dollar market cap
and the next meeting you're in a company with
you know 200 million dollar market cap with 400
million dollar cash that is really struggling
to see a path out has immense spending ahead
of it so it's one of those weird You know, it's
kind of like the market in Australia and globally
as well. You know, there's some companies that
are doing extremely well, but the vast majority
is still struggling. So it's got a strange feel.
It's really different. I think returns now are
very focused on a handful of companies. So it's
really important to be in those handful that
are doing really well. So wait, so how many companies
were being presented at the Canaccord event?
Oh, there would have been a huge number of companies.
I think I did 15 meetings in two days and then
flew home. So just a bit of fun. Yeah, it was
a bit of fun. Boston's nice. I like it. So I've
been to New York, Boston, San Francisco. Boston's
lovely. You can walk on the street. There's a
lot of edge in those other cities, particularly
San Francisco. You really have to kind of keep
your wits about you when you're walking around.
Yeah, I haven't been there in a while. What's
it actually like on the ground? Is it as bad
as they say it is or is it being cleaned up?
I'd say it's significantly worse than they say.
Okay, what does that mean, significantly worse?
We're staying like say around Union Square. So
Union Square used to be the center of town. It
used to be like ultra prime real estate as well.
I think there was a footballer that got stabbed
just two days ago, got robbed in Union Square
in like the flagship central district. So we're
staying at a hotel, nice hotel around there and
then walking maybe five, ten minutes to the conference
center. And if we walked two blocks the other
way, there's literally an open -air drug market.
You know, got an Uber back that way one time
and the guy was like, see that guy? He's ring
-leaning it. And he's wearing like this big puffy
jacket. They've got the table set up. And this
is like in downtown. This is kind of like, I
don't know, if in Barangaroo there was open -air
drug markets and the business district is at
Martin Place. You know, it's really that close.
Jesus Christ. That's normally like the stuff
that you see in a back alleyway of like the old
-fashioned like Chicago or New York. But, you
know, it's so brazen. Yeah, every time you come
back to Sydney, you relax. Yeah, I was also in
London for a bit. I saw on Fleet Street, so again,
one of the major streets, heaps of people about.
I saw somebody swoop and try and grab somebody's
mobile phone. So they have all these motorcycle
gangs or scooter gangs. So there'll be a guy
driving, guy on the back, or even just the guy
driving. And then if you're holding your phone
out, they'll just like grab it. In this case,
they snatched it, dropped it. Woman started screaming.
Everybody starts looking. Yeah, this is in London.
This is the middle of London. Also saw somebody
in a motorbike with a balaclava on cruising around.
There is no good reason to wear a balaclava in
summer in London. So he was probably cruising
around looking for some mischief as well. It's
a little weird to talk about gross stocks, but
if you think about where essentially the world
was 20 years ago compared to where it is now,
I wonder if people are starting to realize this
whole global policy where everyone believes you
can live in harmony, different cultures. probably
backfiring yeah there's some really interesting
stuff on that not that we want to get too political
but you know there's there's things that like
you know they stopped um like highway deaths
started increasing dramatically in the united
states so there was all those issues around policing
and obviously George Floyd and the issues the
police had with stopping cars. So the police
actually reduced significantly the amount of
stops that they would do. And so you've got fatalities
and accidents rising again in the United States.
So it's really interesting, like the second,
third order impacts of some of these policies
and some of these political movements. And you
just kind of got to hope it doesn't come to Australia.
So I guess it has started. You know, there's
obviously a huge crime issue in the Northern
Territory at the moment in places like Cairns.
And there was a voter reaction in the sense that,
you know, a very tough on crime person just got
elected in the Northern Territory. So, you know,
Australia is very lucky, but there's no guarantee
that that doesn't come here. Let's actually just
touch on this a little bit. And it's from an,
trust me, it's from an investing point of view,
right? Because... Well, we have the elections
coming up in the States. You literally just had
RFK cross the aisle to, you know, essentially
back the Trump campaign, which is normally unheard
of. You have elections pushing in the UK to try
to... bring it back to the way it was. There's
this entire movement of the nationalistic pride.
You look at what's crazy is everyone said the
Hungarians and the Polish were mad for the policies
that they had, but they've got probably one of
the most booming GDPs in the entire European
Union. Sorry, not in the European Union, right?
So I suppose my question is thinking along the
lines of, yes, we're investing in today's climate,
but with these elections coming through, say
if... Some parties win on the nationalist side
and they kind of bring it back. What do you reckon
that's going to do for, you know, companies that
essentially have a, you know, transnational basis
or essentially enjoy the benefits of globalism?
Like is that going to constrict it or is there
still, you know, pathways of trade open for good
businesses? Like how do you reckon that's going
to impact? It's a great question. Look, it's
pretty clear that some of these policies are
certainly better for markets and business and
arguably, you know, the population. So Poland's
GDP could eventually, you know, in the near term
or midterm could overtake UK's GDP per capita.
And it wasn't that long ago around Brexit where
there was huge political arguments about Polish
plumbers. Like that was an issue. You know, all
the Polish plumbers were coming to London and
the UK and stealing the British plumbers' business.
But now, you know, many years of policy, 2016
was a long time ago, that was eight years ago.
So the better part of a decade of policy, now
you've got a situation where that's reversing.
And actually soon Poland could be wealthier per
capita than the United Kingdom, which was one
of the wealthiest places in the world. So then
you can see a direct link between, you know,
bad policy and good policy. I think the most
near -term one that we all need to worry about
or certainly consider is what happens if the
Democrats actually win in the United States.
There's some very radical policies being suggested.
Price controls on groceries probably doesn't
matter so much for investors in Australia, but
taxing unrealized capital gains. And the details
of the policy, maybe it's not as bad as it is.
Maybe it is. It's hard to tell. But if there's
unrealized capital gains, people are going to
have to sell stock. And it relates to your liquid
wealth, which probably does capture. you know,
a lot of very wealthy people. And if that's net
selling, they have to sell portions of their
significant wealth. That is going to have a pretty
big impact and probably a very dampening effect
on the United States economy. So I think markets
is very clear. You know, if Trump wins, it'll
probably be off to the races again. If Kamala
wins, you have to think, well, you've got a very,
you know, she was known as the most radical Democrat
and is certainly with the handful of policies
she's proven that that's actually what she believes
and what she'll be running and governing on,
that's probably one of the biggest risks in markets
right now. What's the globalist expression? You
will own nothing and be happy. Yeah, it's a tough
one. But the reason why I bring that up is I
always heard that essentially what they wanted
to achieve was reset. um the global financial
system right you know which the last time that
happened was after world war ii so the only way
for that really to do to work is to burn it all
down and then build again and i just when i see
the announcement what you're referring to with
paris when she says she's going to un tax unrealized
capital gains and people are like oh that's crazy
but like hold on a second even in australia australia
they tried to push that through with super right
and it got knocked back it just makes me think
that If you really want to blow someone up, you
feed them a whole bunch of debt. The debt's out
of control. Everyone's leveraged to the hill.
Everyone's got houses. Everyone's got property.
Everyone's practically up to the neck. When you
go to restaurants in Sydney these days, you chat
to the staff members, people aren't coming in
as much as they used to. I'm just starting to
wonder whether or not, talking about a bubble
bursting, if Harris gets in and a policy that
simple gets in, people... that are forced to
sell, as you mentioned, it's going to have a
domino impact. But if you look at BlackRock,
BlackRock's just bought, what are they, by 40
% of essentially residential housing last year
in the past couple of years. They're not going
to sell. So isn't there a situation where there's
a whole bunch of people or companies that can
essentially afford holding? Then the people that
can't afford it will just crack. And then if
that happens, they'll just come in and buy it
cheap. And then their ownership just increases
further. I'm not sure. I think these policies,
they come from people who've never really worked
in business, right? The wealth tax is really
interesting. So I used to read a lot of kind
of, I don't know, two, 300 -year -old English
literature. And there's always like, you know,
people losing their fortunes, you know, son would
gamble and the father would be on about to sell
his estate, you know, to settle the son's gambling
debts, all those kinds of stories. And I always
assumed that that's why so many of the landed
estates were gone. The vast majority don't exist.
The families aren't there. In many cases, the
houses have been knocked down or they've been
converted into museums or otherwise. But it turned
out actually the answer was different. It was
actually in the 60s and 70s. They brought in
these wealth taxes, similar to what's been proposed
in the United States. And so if you had a big
country manor, you then had to pay a portion
of that in tax. And obviously the only way you
can pay that is to sell it. So that's actually
where all the kind of very wealthy English aristocracy
went and why most of those... most of the families
that built those houses are no longer sitting
in them. So it's interesting to see the long
-term effects of these kinds of policies. But
we'll see. I mean, in the polls, in the betting
markets, it's pretty even. So it seems like it
could go either way. And this is one of those
moments that will be radically different if the
left or the right wins in the United States.
Yeah, it's going to be interesting. But I must
say, like, you know, I've got young kids. What's
the new one? Not MAGA. It's Make America Healthy
Again. It kind of does resonate a little bit.
Maybe I've just been listening to way too much
Joe Rogan. Hey, that's definitely true. You know,
you spend a week or even two weeks or even one
week in the United States. You come back, you
feel heavier. You are heavier. You know, there
is something. They're doing something to their
food. There's something going on there. It can't
be good. But look, anyway, that's on the politics
side. I just find it fascinating. So, okay, say
they go through. What's the play? Do you hold
what's currently in the portfolio you have now?
Are there avenues that you look at? Like what
happens essentially if the – I'll call it what
it is. Let's say the nationalistic movement across
the world gets in and then the globalist point
of view kind of backs off a little bit. What's
the play? The nationalists are generally on the
right, so their policies are generally pretty
pro -business and certainly want their own economies
to thrive. They're not winning, though, so they're
often winning the majority of votes or close
to the majority. So you saw the Reform Party
and the Conservatives combined probably did better
than Labor on a vote basis. Similarly in France,
you saw that in the first round of the elections,
the right party actually won, but then the centre
and the left colluded, pulled out some candidates,
they didn't compete, and then kind of won -ish
in the second round. It looks like now they weren't
able to actually form a coalition and Macron's
going to have to go. He's currently being impeached
now. He's just basically holding on power without
the mandate. So at the moment, the right is kind
of... He's kind of winning, often winning the
popular vote or winning a significant number
of votes, but isn't actually in power anywhere.
The closest would certainly be Trump in the United
States. I don't think the right getting in is
something to worry about for investors. I think
also generally comes with more geopolitical stability
as well. There's no doubt, you know, in these
Biden years, the world is completely in flames
and that kind of element of craziness, aggression,
but also speaking to the dictators. that trump
did actually was pretty effective and he didn't
actually start any wars um i'm one of those people
that's probably super against him at the beginning
but then like you look at things like that and
you're like wow actually that's um actually that's
pretty good i mean the last thing you want is
somebody who's not american is for america to
be out there invading a bunch of countries but
i saw some stat that like by the end of his by
the end of his tenure obama was bombing seven
countries you know from libya syria you know
iraq it was just And they're doing drone strikes
all around the world. I don't think anyone really
wants that. So it's really the hard left winning
in the United States. I think that's kind of
scary. And the issue is we don't know many of
Kamala's policies. What we do know is the ones
she suggested are very radical. They're even
being attacked by the New York Times and left
-wing publications that would have basically
been supporting her. So we don't know her full
policies. But we could presume, for example,
She would come down pretty hard on pharmaceutical
companies and maybe that actually affects the
industry quite significantly because without
this handful of drugs that actually make a lot
of money, the entire biotech industry runs at
a massive loss, right? People are spending fortunes
for a small chance of making it into that big
pharma league, into that league where you can
be acquired and have a blockbuster multibillion
-dollar drug. That pot of gold is the thing that
funds all the research and development. downstream
of that or upstream of that rather. And so if
that's cut off with radical price controls or
maybe the United States, there's policies suggested
that maybe US pricing matches international pricing.
I mean, those kinds of things would have caused
huge upheaval because the United States prices
are just so much higher than everybody else.
Those kinds of things would be pretty disastrous
for sectors like biotechnology. But again, we
don't have the policies. We don't know. Kamala's
playing everything very close to her chest, doesn't
really want to give interviews. There was one
highly edited interview that she gave to CNN.
It's been nearly two months, no press conferences,
no kind of hostile interviews, no podcasts. So
it's very hard to judge. But yeah, as I said
at the start, what we have seen is not very good.
Yeah, so again, my question is, you know, How
do you invest in that? Like, oh, look, biotech,
right, is a space you love. It's just interesting
to see. Okay, what's interesting about saying
make America healthy again, you're starting to
see, which I just can't get my head around, you
know, and I think we discussed it last time,
like drugs like Eli Lilly, Novo Nordisk coming
out were essentially. it's health beneficial
people are losing substantial amounts of weight
and then essentially you're losing money downstream
but they insurance still refuses to essentially
cover it so it's essentially it has become rich
person's drug and now there's not much supply
so i'm just starting to wonder if that's confusing
i mean the good thing about what's happening
there good thing about that i'll just give you
a few like points like the good thing about those
drugs is they will run off patent so you know
zembik will be off patent uh not within five
years But around like six, seven years, I think
they've got left. And then those drugs, the current
generation of weight loss drugs will become very
cheap. I'm not sure what the, to be honest, I'm
not sure what the policy answer is on that. Clearly,
Eli Lilly and Novo Nordisk would like insurance
companies to pay the current price. But I think
if you're in a situation where you're covering,
you know, 35, 40 million. And I think there's
like maybe 45 million people on statins. So that
would be kind of the upper end of what you could
expect one of those drugs to achieve. I think
that'd have to come down on pricing a lot. So
it wouldn't be as expensive as everybody thinks.
But I guess that's just playing out. To answer
your question, we have a pretty tight risk model.
So we'll be out of our positions if there's some
massive sell -off on the back of radical left
policy in the United States. There's some parts
of our portfolio where that's harder. So we have
some early stage companies, including Clarity
Pharmaceuticals, which is still our largest position
on account of going up something like seven times.
What is Clarity? So Clarity Pharmaceuticals is
doing a next generation of radiotherapies. So
Australia's actually got one of the leading companies,
Intilix, which is making serious money selling
radio diagnostics. They haven't had success treating
yet. Not significant success, but they are making
a fortune competing against Lantheus. Clarity
has got a drug which they've had in their early
trials has seen much better effects than basically
anything that's been seen in the treatment of
cancers, specifically for Clarity prostate cancer.
So that company is actually having a readout.
this month. They've said this quarter they'll
release results from the trial. Hasn't come out
yet. These trials aren't blinded. So you do wonder
if there's like information in the fact that
it hasn't been released, but according to the
timeline, it should be sometime this month. That's
probably what will drive value in that stock.
You know, if they can repeat what they saw in
their earlier cohorts. It's basically a dose
escalation. So they saw excellent data in the
first two cohorts. Now they're trying higher
doses. And if they see the same result or better,
that'd be a huge value unlock for that company,
even though it's appreciated so much. In terms
of the rest of the portfolio, a bad election
result would probably cause one of those broader
sell -offs, I think. You'd have to assume taxes
are going up. You'd have to assume one of these
radical policies will come in you'd have to assume
very significant government interference across
the sector in the tech space you'd have to assume
that probably m &a is a lot harder so already
it's very difficult for big tech companies to
buy smaller companies um so if that if that worsens
that also that makes it harder it's less extreme
in biotech where you know this selling to a major
pharmaceutical company is quite typical. But
even the tech sector, the fact that you had Google,
Microsoft, companies like that that were willing
to buy startups had this huge pull factor. Like
that was kind of one of the targets, you know,
get to a certain scale and then be acquired by
one of those companies. You have to assume those
kinds of deals are all off the table, which could
cast a bit of a pallor over the sector. But again,
you know, this is just... we don't we don't know
the policies so we don't know but we we can guess
that'd be pretty bad uh in that situation i imagine
would would probably end up being net sellers
i mean even even four weeks ago there was a pretty
big sell -off at the beginning of last month
i was actually just about to ask you like we
can't talk about potentially what may or may
not happen but we've just had practically a flash
crash and then a massive run so you know what's
happening there Yeah, look, we've been building
for a while. The first six months, I mean, 2023
was extremely strong for tech. The first six
months were modestly strong. Some companies did
exceptionally well. We were lucky to be in some
of those, notably semiconductors. And then really
from like June, July, they'd started to sell
off. That was kind of the peak. And then there
was that moment where you had the first polls
that showed that Kamala was ahead in a honeymoon
period. You had an assassination in Iran. uh
presumably by the israelis but uh i did write
an article about it and then was carefully corrected
by an investor who said actually israel hasn't
said that they did that and at the moment that
is still an open question um which is fair comment
uh but but that weekend we're assuming that iran
was going to do one of those missile launchers
uh like they did earlier in the year and so everybody
was on an edge because of that um And then that
Friday, there was an unemployment report where
it looked like unemployment had started rising
three months in a row. It had crossed some metric.
And in the past, when unemployment has risen
that much, that had always triggered a recession.
Or not triggered a recession, but been associated
with a recession that happened shortly after.
And the reason for that is that these things
are very cyclical. you know unemployment tends
to go in one direction and trend which is not
the case for most things in finance most things
in finance uh the trends are very hard to capture
um and very hard to pin down mathematically in
unemployment generally you can have like eight
year periods or 10 year periods where it just
basically ticks down unemployment ticks down
every month or you can have like a one year period
where it goes up every month and the reason for
that is you know people get fired, they then
spend less at the margin, somewhere in the economy,
somebody gets fired because of that, there's
less spending. Or in the flip side, you know,
a few extra people working, a few extra people
are spending, somewhere in the economy, there's
extra demand, and that results in net hiring.
And then that continues into the next month,
you know, there's another new set of people with
jobs that are spending more. And so you get these
like big trends are very slow, like unemployment
spikes, and then like slowly trends down, then
spikes, and then very slowly trends down. And
now It looks like we're just in the early stages
of one of those spikes. So the question is, you
know, most of the time when unemployment starts
rising, it continues with that kind of dynamic.
So that also happened that same weekend. That
report came out Friday. So three things that
kind of hit markets. There was also some issue
in Japan where carry trade was unwinding. They
were going to raise rates. And so people who
had... That was fascinating. Yes. All happening
at once. So much so that I'm actually off to
Japan like practically in a couple of weeks to
take advantage of that yen. But what I found
fascinating about that is when that spiked, it
was literally as soon as the central bank intervened,
it almost like just kicked off that unwinding
and essentially that flash crash. And as soon
as it just felt like as soon as when the Aussie
yen was around 92. And they stepped in again
for the last time and then it kind of stabilized.
It was almost selling is done. And then it just
started to tick along again. Yeah. Well, there
was a moment where it was down. Was it down by
maybe 18 %? I don't have any Japanese exposure,
so it's not something I track closely, but it
did look like one of those 1987 moments. And
it did look like the rest of the market might
follow it, but it didn't. Actually, that morning
was the low and then things kind of recovered.
And, you know, Iran didn't launch the missiles.
things aren't doing that badly. So one data point
doesn't suggest a recession necessarily. And
then Kamala kind of started, had that honeymoon
period and started falling again in the polls
to be more and more close to the neck and neck
with Trump. So those three things, actually four
things, if you include Japan, kind of settled.
over the weeks that followed and markets recovered.
They haven't reached the highs that they were
at. I kind of feel like whenever we talk, there's
always like a theme in the market, you know,
that everyone's doing. And I believe the theme
right now is everyone's expecting or anticipating
these interest rate cuts. So everyone's saying,
oh, rates are being cut. You need to rotate from
mega caps into small caps to essentially capture,
you know, when rates get cut, small caps does
well. Do you think that's going to be the case
here? It's certainly happening in reverse. The
issue is often the rate -cutting environments
are the worst time to own stocks, not because
of the rate -cutting, but because of the rate
-cutting. Why are people cutting rates? Usually
it happens when things are really weak. There's
basically two things that can happen, and this
is going to be like markets can go up or down,
so it's not super insightful, but I think it's
the right way to look at it anyway. Either the
markets stay kind of soft and rates cut to try
and stimulate things because real estate is falling
in major parts of the United States. There's
valid reason for inflation is down. There's valid
reason to cut cuts. Ideally, you have this kind
of weak. flatlining economy with central bankers
trying to stimulate through the very blunt policies
that they have, namely rate movements. If that
happens, you could see a lot of excess capital,
you know, flowing into the pointer into the market,
which is kind of how it works. You know, like
when money is kind of pushed into the market,
it kind of flows through and really affects kind
of the higher risky stuff. Similarly, when it's
pulled out. you know, everything's kind of fine.
The high risky stuff gets smashed the most. So
the best outcome is probably something where
we kind of muddle through. Things are not great,
but not bad. But there's a lot of financial stimulus.
That would be the best outcome for stocks. The
worst outcome for stocks is actually the unemployment
cycle is kicking off. And then you get more and
more people losing jobs. Rates are still very
high, very restrictive in the United States.
I'm not sure, not as restrictive in Australia,
but still restrictive. And, you know, a recession
happens ahead of rate cuts. And then stocks fall,
rates go down, heaps of money is pumped into
the market, and we go again. So I think that's
probably the worst case scenario because that
would involve, you know, very turbulent 6 to
12 months ahead of us. So, yeah, stocks will
go up or down. They'll fluctuate, as somebody
once said. It's going to be black or white, black
or red. It might be a white ball. See what happens.
What I do think, now more than ever, So the first,
even the first 10, maybe even 15 years of my
career, wait, is it 15 years? Yeah, actually
I'm getting old. The markets kind of really moved
in waves, you know, it was like everything up,
everything down. And the junkier... you were
the better you the more you went up particularly
if you're a high growth tech stock for example
or a biotech when markets were rallying like
it's almost the worst company is probably the
wrong way to put it but certainly the riskier
companies rallied the most and then in the sell
-offs which should happen pretty often they were
short they were sharp and the riskier stuff got
smacked a lot more that seems that hasn't really
been the case like there was a wave in the beginning
of 2023 but over the last year or so There hasn't
been that big wave of everything going up or
everything going down. In fact, it's been a very
small number of stocks, notably semiconductors
and a few independent growth stocks that have
performed exceptionally well and given the market
low to modest returns. And the vast majority
is languished. And you can measure this. So people
measure how much of the index movement is driven
by a small number of companies. And at the moment,
it's kind of one of the maximum of that. of that
measurement that we've seen. So this is a period
where you have to be in the high -performing
stocks. You need to be in companies that are
exciting the market, that are delivering exceptional
results. We focus on companies growing over 100%.
A few of our core holdings did exceptionally
well in their results, and then the stocks rallied
quite a lot. But the market itself has been pretty
lackluster. So, yeah, I really think it's a stock
selector's game at the moment. Kind of feels
that way. So speaking of stocks, let's cut through
them. Since we're discussing tech, why don't
we begin there? NVIDIA just had their results
out, which I find results so funny. It's like
people expect them. It doesn't matter what they
are. You could completely lose a huge amount
of money, but if everyone expected you to lose
more than you lost, the stock goes up. It's just
madness, right? Can you explain to people what
happened with NVIDIA? Why the sell -off and essentially,
you know, what do you think is happening in that
entire space? Because I remember you and then,
oh, yeah, NVIDIA. And then we also discussed
like CrowdStrike, you know, with Microsoft. Can
you, what's happening in that space? Yeah, I
mean, NVIDIA ran very hard, right? It had gone
up substantially, you know, over, I think it
was nine times. I don't think it quite hit 10
times. It was very close from the lows. So it
had run very hot and had basically been matched
by an increase in profits over that period. There
was some bad news. There was a delay to their
next generation, which probably doesn't affect
their long -term value at all, but certainly
had a headline. I think everybody was kind of
max long semiconductors if there's as much as
you can. I mean, every share needs to be owned
by somebody, so these things are strange. But
it did seem to become a very crowded trade. And
those things, the semiconductors are all unwound.
They're all down 30%, 40%, 50 % major companies.
So NVIDIA came out with results. It's just the
way I see it is we're in a particular regime
at the moment. The regime is markets, most companies
do average or poorly because most people, because
financial conditions are restrictive. Most people
are kind of suffering at the moment. Interest
rates are high. Rents are high. The average company
and the average person isn't doing spectacularly
well. But there's a handful of sectors, including
semis, where there is immense real demand and
investor demand. That's like our thesis for the
current regime. Regimes don't last forever, but
I think it's the right framework to think. And
at the moment, we're still in that regime. And
I think the result was evidence of that. So you
had NVIDIA posting quarterly growth of 15%. So
it's 15 % bigger than it was the quarter previously.
So it's still growing, still immense demand,
still... order book out into the future, effectively
selling what it can make. And I think it's 120
% plus over where it was a year before. So you've
still got that. Now, the flip side is everyone's
trying to think, okay, we've seen this many times
before. Even if you're young, you've probably
seen two or three semiconductor cycles. How does
this end? And are there signs of that? And there
kind of are signs. So there's been a couple of
the AI companies that were buying chips that
have folded. You know, one notably got bought
by Microsoft. But the hyperscalers are still
continuing with their massive 100 billion plus
CapEx plans, much of which will go to NVIDIA.
And so they haven't signaled any desire to pull
back. And it's also become a scientific question.
The question is, will these models continue to
improve with increasing scale? And at the moment,
they are still improving with each generation
with increasing scale, which means the investment
so far is justified. And there have been some
announcements. You know, Klarna said they got
massive cost reductions. Oracle came out and
said they had huge cost reductions. The increase
in productivity that I've seen in our work is
just incredible. You know, you can have a meeting
with somebody and, you know, it will... You know,
we've got a venture studio, so occasionally we
do meetings where we'll develop products. You
know, you can take a meeting, you can put that
recording into one of the open models, say a
chat GPT, and ask it to spit out like a spec
and a proposal, and it will just do that. You
know, and 30 seconds later, you'll have something
that could have taken hours, you know, to pull
together and probably, you know, not just hours
of one person, you will have to meet, discuss,
finesse, structure. and then right. That's all
kind of automatic now. The productivity is immense
and people are seeing it everywhere. And while
that's happening, we're still in this semiconductor
regime. There's still benefits to having more
of these. None of the hyperscalers can miss this.
They can't be left out. They need to have a play.
and they're all determined to win. And so at
the moment, NVIDIA is the only supplier of basically
the most valuable commodity in the world right
now. And I say commodity, but it's not really
a commodity because they're the only people that
can make it. It will be at some point. There
will be alternatives. And that's when the regime
will most certainly change. But as of today,
the message I got from that result was that we're
still in that regime. And the company of that
scale is still 15 % bigger than it was three
months ago. And the performance is still there
in the stock as well. It's still up quite a lot.
Unless you bought at the highs or something,
you're still probably sitting on enormous gains.
And I also had a feeling that a lot of professional
investors aren't in NVIDIA. I really get that
feeling. On the one hand, it's ripped. On the
flip side... Most investors I speak to think
it's a bubble. They don't want to buy in. They
think they've missed it. It's not one of those
situations where everybody seems to own it. That's
just my impression. Well, that's interesting.
That means a whole lot of cash is sitting on
the sidelines and we see what FOMO does to companies.
The other comment you made in the newsletter
just made me stop and think about it was I think
you're talking about the different tiers, right?
You've got Blue Chip. the mid cycle and then
you got the bootstrappers you know i mean the
ones coming up when there's money and we see
it in every single sector of the market you know
when essentially it's hammering but uranium bit
hell you know i don't know weight loss drug well
whatever it is be a tech the money just pours
in the investment gets thrown at it everyone's
just like right risk on i think you made a comment
that you know what happens if um essentially
that well of money that investment money kind
of dries up then essentially the bottom tier
like dominoes falls first in the mid -tier and
then big might be keep going but then but what
made me just think about that particular point
is you said that one of the bottom tiers fell
recently but microsoft just bought it so what's
happening here do you reckon that if a small
one stumbles just a major conglomerate is going
to swallow it and then essentially just keeps
going or what's happening? Yeah, I mean, again,
it comes to the regime. So at the moment, you
know, if a startup's bought a bunch of GPUs and
they want to sell, then there's people that will
buy them just for their GPUs, you know. The question
is, you know, I think where I was going in that
comment, I was trying to say that there's only
going to be a few of these models. There's been
a very small number of these models that end
up making money. There'll probably be many models
that, you know, are in use, but there'll be very
few that actually make significant money. But
they're all, it's taking huge investments to
stay up to date. So, you know, if you go through
them, you've got Microsoft and OpenAI, you've
got Meta's Llama, which is the open source version.
And I guess AWS doesn't really have one, but
they are developing their own chips. And then
you have Google with Gemini, who's actually got
their own chips, TPUs that they're using for
their own training. So you've got three there.
You've got Google, Microsoft OpenAI, Meta's Lama
as an open source option. Where do the others
fit below then? It's very hard to say. Now, at
the moment, a lot of people think Claude is better
for something, so Anthropic, which is one of
these startups. So maybe they find a niche. But,
you know, it's like I had a Claude switch and
I was like, wow, this is actually better. And
then OpenAI got better. And so I canceled my
clause subscription. Now temporarily, it looks
like clause better. And I was like, okay, if
that's, I'll give it another try and see if it's
better. It seems to be. But I'm not going to,
there's no way you're going to end up with like
four subscriptions to these things. And then
below anthropic, there's a whole nother tier
of people building models. There's been a similar
thing happening in imaging, in music, where the
lead's kind of changing in video. But there's
often like a new company that comes in and says,
okay, ours is temporarily better. But then the
funny thing is for those ones is often they use
each other's for training. So if somebody makes
a new advance, then people can use that model
to then improve their own models. yeah it's just
a it's just a fun you know what it's kind it
is you know like from an uh you know sorry just
an invent an inventor perspective it's just awesome
to see it's kind of like the rat race is on so
it's like a arms war or you know it's like streaming
wars like you know who's gonna put out more content
like it's just literally but it's not it's not
negative it's literally like oh my god this is
fascinating like you talk about chat jpt it's
practically my best staff member and it doesn't
talk back She's an absolute legend. Would you
say you use ChatGPT every day? Oh, yeah. Who
doesn't? It's like the efficiency is just, I'm
probably going to, in this conversation, I'm
going to take the transcript, stick it in and
go edit it. And then that there would take normally,
I don't know, four hours to do properly. It'll
spit it out in like 10 minutes. It's just remarkable.
I spent months to do that for our podcast, you
know? I think I did as well. I paid someone the
first three times, but now you just, you know.
But what's crazy is it's $30 a month. I kind
of feel like I'm cheaping out and I'm going to
have to upgrade to the full business one just
to, you know. It was a study done. I think it
was Microsoft looking at how people are using
their co -pilot. And it was something like, again,
it was like, say, $30 a month, but it was saving,
you know, a day a week. You know, it was that
level of improvement for people. So you think
of how much somebody earns in a day. That could
be, you know. I don't know, if you're 100 grand,
20 grand a year. Now, most people aren't 100
grand. Let's say you're on 50 grand, that's 10
grand a year. You know, the amount of value that
you're getting versus the amount that you're
spending, there's this huge differential. And
that's part of the bull case. That's kind of
why we're in this regime. That's why everybody's
spending. The one that blew my mind is I was
speaking to a fund manager and we were talking
about CHEPT, same conversation. He goes, yeah,
I asked her to do an analysis on BHP for me.
His next comment, this guy's pretty high up,
pretty big shop. And he's like, I fear for any
young junior that wants to be an analyst coming
through the ranks. Yeah, I mean, it's better.
One thing, so we use a lot of expert networks.
It's kind of a new development. They used to
be very hard to get. It'd be something like GLG,
the very... very annoying contracts, very poorly,
probably purposely poorly designed. So you'll
have to pay, I don't know, 20, 30 grand US and
they'll give you 25 calls. And then, you know,
some companies obviously spend, would spend millions
of dollars on these kinds of things. And then
you have to go, you do the call, you'd have to
do the work before. You'd always have this thing
where you kind of want to draw, there's kind
of like a skill to it that you'd have to draw.
You have to draw, that would have the insight
that you need, but you'd have to draw it out
of them. And like if you've got some chatty American,
often they'll just know the most important things,
but sometimes they don't. They're like subject
matter experts and you have to really try and
draw it out of them. But then there are these
new business models, well, they're a few years
old now, where people basically pay a subscription
and they'll put all the transcripts online. This
is Tegas, AlphaSense, a bunch of others, relatively
cheap to set up. There's a lot of competition.
But then every time you... Instead of paying
effectively a few thousand for a call and being
stuck in this awful bundle, you'd pay a few hundred,
which is what the actual person gets. And then
they'll put that transcript online. Well, these
companies now have hundreds of transcripts on
some of these companies, probably thousands in
the case of something like NVIDIA. And the amount
of information that's hidden in those transcripts
is immense. And you say it's bad to be a junior,
but you couldn't find a junior. You couldn't
find a junior that could read, you know, 30 transcripts
and pull out the 20 most important things or
answer a question. You know, it's actually a
pretty high level thing that you'd need. You'd
probably need a fair bit of experience and not
to mention intellect to actually do. But that's
the sort of thing that a language model can just
do almost trivially, you know, instantly. You
know, you can drop a few transcripts into a large
language model and then ask it questions, query,
draw out important points. I think you just said
it there perfectly. It's no longer a manual task.
What it is, it's now a comprehension tool and
an efficiency tool. So you still bring the juniors
on to work with you and grow, but now it just
speeds up everything. Yeah, I mean, it's a real
question in our industry or in funds management
industry of what happens. How does that, how
does it change? I mean, you know, you know, it's
completely revolutionized the way we implement
our decision making. right because we build a
risk model with the help of these models that
we wouldn't have had otherwise uh that does often
does things that we wouldn't necessarily expect
it to do um it's kind of a different style it'll
sell things that are going down because it says
based on risk uh it'll take profits often when
When a normal person, say if I have a stock that's
gone up four times, usually I'm quite excited.
It's gone up four times because you thought it
was going to double over three years and it's
doubled over eight months, you know, that kind
of thing. Well, actually, on this point, let's
talk DroneShield. Yeah, sure. Because this is
a phenomenally, you know, exact example of what
you're discussing, right? So walk us through
what happened there with DRO. Yeah, DroneShield
was basically what we look for, you know, extremely
high growth. and a really interesting sector
as well right like high level the drones are
going to the use of drones is going to dramatically
increase in the military and also obviously in
civilian use but they're very focused on the
military um the use of drone defenses is like
it's one of those rare things where you think
the market could be possibly you know 100 times
bigger in the future than it is now like the
vast majority of infantry platoons don't have
drone protection around the world the vast majority
of sites are unprotected airports are unprotected
so there's one of those areas where you know
you can you can actually see this long -term
future where there's drones kind of everywhere
and it becomes really important for security
to be able to lock them down And of all the different
ways of locking them down, DroneShield specializes
in jamming and all the AI and sensors that go
along with that, tracking, those kinds of things.
And it can work in like small sizes or large
sizes. So that's the, you know, you can put it
on a ship, you can put it on a base, or you can
have a handheld version or a car mounted version.
So the big picture is like really exciting, really
interesting. And then it helps that it was growing
well over 100 % for the last two years. The interesting
part is, you know, if this is like an extremely
red hot stock, which is kind of exciting, people
want to own it. Most of the things we invest
in have those characteristics. You know, there's
a whole like species of value investor that will
buy random companies in Europe and they just
won't go anywhere for 10 years. You know, they'll
have the thesis and maybe that's being too much.
They might go sideways for two or three years.
Nothing happens. We've never had that problem.
You know, if things are delivering, they're moving,
you know. But the problem is you do have that
hot money. And in this case, DroneShield just
flicked up a crazy amount in a very short period
of time, you know, kind of hit its three to five
year target on a stock price target, rather fundamental
target, you know, shortly after we bought it.
So we... What was your entry price? So we got
in at 80 cents. And I think overall, it was kind
of like very low 90s in terms of our average.
And then... I've done a lot of work basically
reviewing every stock we've ever looked at, certainly
ever owned and most of the ones we've looked
at. And it seems like for these kinds of companies,
not for every company, but these kinds of red
hot companies, you do actually outperform if
you have a very tight risk metric. So if they're
selling negative terms of momentum, sorry, momentum
turns negative to a certain degree, you can actually
generally outperform just by selling and missing
those crashes. And that was one of our big learnings
was in these stocks, the downside isn't 30%,
40%, 50%. It's 60%, 70%, 80%, 90%. And so if
you can cut those things off at 20 % or 30 %
and then have a very systematic way of reentering
them, you can generally outperform. Now, that
didn't happen here in DroneShield because it
just performed so well. What we also found out
was that if you take profits at certain levels,
you can also systematically outperform. Effectively,
when the red hot money comes in, the stock shoots
up. It's probably got a few short sellers. Maybe
it's relatively tightly held. The increase in
price attracts more people. Everyone starts talking
about it. You get a bunch of people jumping in.
All of a sudden, the $0 .80 stock is $2 .50.
And for us, the selling point is optimal seems
to be somewhere between two and a half to four
times. And there's only a handful of companies
that do better if you don't do that. And one
of the very few is actually NVIDIA. So that had
a couple of 10 times rallies where... where implementing
selling at 4x you actually underperform but the
vast bulk when they have these spikes and you
can take a 150 to 300 profit so two and a half
to 4x return you can outperform so at our 80
cents entry price we kind of hit that pretty
quickly and then sold you know nearly i think
it was 59 of the position obviously we're holding
some because you know midterm price target was
three to four times um But then, you know, for
whatever reason, the tide turn thing dropped.
It went sunk like a stone down almost to $1 again.
And they did a cap raising of $1 .15. And then
it got kind of interesting. I was like, whoa,
this is going to be a significant part of this
market cap is cash again. The long -term story
is exactly the same as it was. It's been on this
wild ride. We have this tiny position. Let's
load up again. So we went back in the $1 .15
cap raise. I think it's $1 .40 now. But I have
no doubt that... that will continue. And I think
this kind of stock is perfect for us because
we're, we're long -term believers. It's, it's
always nice when you put money into the company
in a cap raise, the company gets the benefit
of the capital as well. But you know, if, if,
if the animal spirits take hold again and shoot
it to the moon, we know exactly where we'll be
selling. We'll monetize it. We'll look for other
opportunities. I'll hopefully get another re
-entry point shortly after. I doubt it'll be
that fast. This was like a, I think it's nearly
back at 150 today, 146 or something. well that's
helpful you know so it's been a great it's been
the whole thing's been uh couldn't have i mean
it's been very lucky for us firstly that i did
the cap raising both cap raisings when we're
ready to put in capital secondly that we had
a model that took us out um or rather secondly
that you know the animal spirits took hold and
gave us that very near -term exit and then a
re -entry shortly after um yeah it's pretty helpful
but you know we won't we will we also have that
downside that downside strategy as well so if
this is If it turns out they've raised too much.
It's worth noting, by the way, with this raise,
they've raised a lot of money. That's a lot of
cash sitting on this company. No net debt. There's
no reason for this thing to blow up. There's
no reason to think that people are all of a sudden
not going to buy drone detection. It's also an
interesting, it's not quite as good as pharma,
but it's very hard to get into these defense
contracts. And they're selling to the CIA, to
special forces, to the United States, to the
EU now. You know, once you get those, they're
relatively high margin. It's not selling drones,
mass produced drones. You're not competing with
Chinese knockoffs. You know, these are high margin
defense contracts. And if they perform, there's
every likelihood that they'll be expanded and
increased as well as winning new ones. So it's
a different dynamic. It's not, I think the bear
case would probably hold if you could just buy
knockoffs of this stuff. um cheaply and you can
buy jamming stuff cheaply but you can't sell
it to the military cheaply uh and that is one
of the that's one of the stronger points of the
company as well so it's an interesting one it's
great great stock for us growing over 100 exactly
what we look for the fact that it's like in a
really cool area is great um the ceo copped a
lot of flack on twitter uh for selling his shares
he sold them or some of them before the massive
price increase obviously we'll get loaded up
through his compensation plan over time so he'll
be fine but my impression i did a full -length
podcast with him met him a few times my view
is he's like drink he's like very very motivated
to make drone shield a success i don't get that
impression at all that it's one of those like
enrichment schemes when you meet the ceos of
software companies like even even a couple of
ceos i met in boston with canaccord They just
couldn't care less. Like they're there because
they have to be there, but they really don't.
They could not care less about investors. You
know, you get that impression from the Roblox
CEO, got that impression from the Twilio CEO
when he gave a talk. They just don't care. They're
making tens of millions of dollars a year in
stock comp. They've got automated selling plans.
Everyone's like, oh, they're just selling because
it's automated. Well, they're still selling.
You know, they're getting their million dollars
a week or whatever it is from their automated
share sale. They just checked out. I didn't get
that impression from Oleg at all, actually the
opposite. And I thought, I'm just saying that
because I know that that's been a topical, it's
been topical on the Twittersphere and a lot of
people are talking about the share sales and
the motivations. But they're my impressions,
whatever they were. So DroneChill has been a
lot of fun. I bet it has. Mention to others,
Roblox and Twilio. So what was your impression
there? Are you currently holding those in the
portfolio or? No, but I certainly hold, I mean,
we have to run the clock back to kind of 2020,
21, that both of those companies could have gone
in different directions. So Twilio, he was just
a bit low, it was extremely low energy. He was
paying his direct reports. It did come down.
It's not as extreme as it was. He was paying
them 40, 50 million US, say 30 to 50 million
US to the five or six people that work for him,
including like, say, legal counsel. So there
was a lawyer earning over 50 million Australian
just for turning up to work a year. That's insane.
That's so disconnected from reality. It's like,
what, you couldn't find somebody smart for $5
million and save that and then multiply that
across your entire organization? Of course you
could. But this guy seems to think that people
only work for $20 million plus. And then in his
world, this is the way I see it, by the way.
I've never met him. And this isn't personal.
This is just purely on the business side. Imagine
what it's like when you're surrounded by people
that you're paying $20 million plus to. 50 million
plus too you know they're going to give you a
very different weird view and then Twilio has
really underperformed the growth hasn't been
there it's low mid single digit growth and that
stock compensation line has been insane and you
know if you strip that out maybe it's not doing
so badly but you have to include it especially
as they're selling it and it's just been a bit
of a disaster all the more so because it was
so red hot so it sucked in a lot of people And
there was also a trap which we fell into, but
then escaped from, which was trying to buy the
stuff that was most smashed. That has been disastrous
over the last few years. Those companies didn't
recover. There were a number of opportunities
to get those big returns, semiconductors, for
example, as well as other companies that we own
and we don't own, of course. But really buying
the red hot companies from the tech boom has
been a disaster strategy with Twilio, Shopify,
Roblox. uh so yeah so with the strategy that's
worked what have you bought say in the past 12
months that we haven't discussed where a couple
others you bought that's worked quite well uh
there's a few i mean obviously clarity that was
a new opportunity i'd say you know what i would
say i'd say most of the stuff that we um bought
was like 50 or 100 off the lows including something
like drone chill so again you're you're going
from a mode where you're trying to find stuff
that's down 60 70 80 percent that's cheap and
then trying to than seeing opportunities even
though the stock is up 50 % or 100%. And they're
the ones that went up three, four, five times
for us. I guess Clary is up seven now. But I
think that had not quite doubled off the lows
but close when we bought it. What else have we
discussed that's in the portfolio? Actually,
there's a couple. I just want to give my impressions
of Roblox. There's so many. And like my brain
is now going, you know, one of our beloved favorites
for the past like, you know, half a baker's dozen
is our good old friend, Mercado Libre. That had
a cracking result. Yeah, to switch to that. I
mean, that was a pretty wild result. I mean,
they were growing. What was it? It was 42 % top
line. I can't remember the numbers, but all I
saw was essentially the Aussie dollar share price
went from $1 ,600 to nearly $2 ,000 overnight.
Yeah, it was a 10 % net income margin. So a few
years ago, it wasn't profitable. Now it is. It
was like over half, $678 million. um of quarterly
cash flow adjusted to be fair you know this thing
is now spitting off cash growing top line at
40 plus um and basically has a monopoly over
what they do there's some competition obviously
um but it performed extremely well um new bank
had a blowout result that's actually up three
times so we're now selling some of it and we're
gonna we probably still got bit over half of
it left and we're going to go for the so i just
want to i just want to correct myself uh it's
now 2061 us dollars not a thousand but yeah it
went from 1600 in like a week or two weeks to
like nearly two grand so i just wanted to correct
myself yes that was helpful during the sell -off
um you know new banks growing gross profits by
88 105 million customers is one of those things
that just every quarter they seem to have you
know five million more customers And their income,
their margins are growing much faster than their
revenues. And their revenues are growing exceptionally
fast. You know, so revenues plus 65%, gross profit
plus 88%, their income plus 134%. So everything's
going up. Obviously, it's very high margin, very
high ROE credit. But you're talking about South
American credit. So it's not like, it's not,
I wouldn't say it's risk -free. But, you know,
if we've already sold... some at 3x. And if we
hit our 4x on that, that'd be a great outcome.
And then we'll just wait for the next sell -off,
which we'll no doubt. Because I always wondered,
remember, when was that the tax scandal with
their main competitor and ended up losing, what,
like 80 or 90 % of the entire business and going
under? And then I always wondered how that vacuum
of the competition just vanished and they'll
step into it but never saw the results for it.
And then all of a sudden, they just had a fantastic
result. Well, I think there has been an opportunity
to do a new bank. And it hasn't been executed
really in Australia. But I'll give you an example.
There is one in the West that's really good and
that's Revolut. So if you're traveling, try this
app Revolut. Like you can basically on the app
order a new card anywhere in the world and it
will arrive and you can basically transact in
any currency. You can top it up with a credit
card online and then convert that into a currency
and then use that by app or card. Is that like
Wise? Is Wise and Revolut similar? Oh, I don't
know enough about Wise. I don't think Wise has
banking up that good as far as I'm aware. I don't
know. That's the one I'm using to go to Japan.
I'm just saying. Maybe I should use Revolut.
I did notice there was a secondary sale offered
in Revolut through the brokers, but I just can't
do these secondaries. I'll never do another.
I'm going to avoid doing secondaries, hopefully
ever again. After the last five years, yeah,
I'm not going to be anybody else's exit liquidity.
Unfortunately, we learn our lessons the hard
way, but the thing is you learn your lesson and
that's the lesson and off we go. Yeah, exactly.
If the CEO is putting money in, then that's very
interesting. If this is a deal where the CEO
or management is taking money out, it's still
not that one. Anyway, yeah, that was pretty strong.
Transmedics had another blowout quarter. I mean,
these are stocks we've owned for a while now.
We've discussed Transmedics before, but look,
this is... This is one that I like because I
just think there's a whole lot of moral goodness
to this particular one. It solves so many problems.
What does Transmedic do for the people that are
hearing about Transmedic for the first time?
Yes, they basically offer a way to transport
organs, which in the past was done in a bucket
of ice. So the idea, much of the technology was
developed in Sydney. It's a Vincent's and then
it was taken to the US where they really ran
with it and turned it into a commercial product.
Basically, the idea is if you pump a warm solution
through the organ, keep it alive, monitor it,
you can track all the vital signs or certainly
some vital signs. You can potentially keep these
organs alive longer. There's a very limited time
span when you've got an organ. You need to get
it inside somebody. These are extremely radical,
difficult operations. Transmedics has been on
a very long journey proving that. their approach
was equivalent. And now they're showing data
that their approach is better. But basically
what they're trying to do is create a nationwide
network of organ transplants in the United States.
So if there's a car accident at 2am in one state
and somebody needs an organ in another, their
team will fly out on a transmedic zone plane,
secure the organ, take it back, monitor it, deliver
it to the surgeon, give it... the status of the
organ um keep it alive longer but that getting
some feel of how healthy the organ is turns out
to be really important because obviously these
are not really reversible procedures if anything
goes wrong it's catastrophic um and they are
the only people that do that in the united states
they've got a total monopoly uh and there's evidence
that they've actually increased the overall number
of transplants so the idea is most organs go
unused um the idea is they can By keeping them
alive longer, better monitoring technology, they
can keep these things, they can increase the
total number of successful transplants. It looks
like they've actually done that. The catch is
they charge a lot for it. So it's one of those
situations where people need to think about payments.
It's all through who bears that cost. It's obviously
much more expensive than a bucket of ice. They've
proven that there's advantages to it and that's
going to be the standard of care, I think, going
forward. There was a moment to buy the stock.
I think we bought it at $60, went to $90, we
were stoked, and then they announced they were
buying aircraft and it collapsed to like $36,
$37. It's now about $168 .06. I was just looking
at the share price now. In March, it was still
$100. In November, 12 months ago, it was $50.
Yeah, so we said we'd sell about $100, $180,
mid - $180, say. That's kind of the limit. That's
two and a half times. So we sold maybe a third
of it. We'll probably sell at least another third
of it if it goes much higher than it is today.
But again, it's one of those ones where it's
performing so well. Margins are higher than we
expected. The aircraft strategy seems to be working.
They're capturing more of the transaction. What
is the aircraft strategy? And sorry, what was
the profit margins and what's the aircraft strategy?
It's not a hyper profit. It's mid -60s gross
margin and they've had their first kind of positive
free cash flow quarter. So it's a gross stock.
You're not going to be buying this on a P, that's
for sure. I think they're up to 17 aircraft now
in the latest results. So they're adding to the
fleet and they're doing roughly 60 % of their
organ transplants on their own aircraft. So what
they're taking out is they're taking out this
process of using aircraft brokers to sort the
transportation. So let's say you want to get
an organ. In the past, what you'd do is there'd
be a team. There'd obviously be a lead surgeon
at the hospital. They would send out a junior
at 2 a .m. They'd have to charter a plane to
fly to the regional airport, pick up the organ.
harvest and pick up the organ, fly it back, and
then the lead surgeon would give a no -go, go
or no -go on whether to proceed based on their
view on the health of the organ and the likelihood
of success. That was what was happening in the
past. So by buying their own aircraft, they can
obviously equip them specially. They don't have
to pay brokers. they can manage availability
and catholic capacity utilization much better
hopefully get organs get that whole process moving
faster so you can save time and if you save time
that increases the like the geography that you
can cover um and they want to cover with time
you know the entire united states uh certainly
mainly did you say that the planes have been
well received or the people just see it as a
cost even though they know it's a good thing
I think it took everybody by surprise. I mean,
if you're in one of these medical technology
companies, you don't want to hear, or any company
really, you don't want them to just spontaneously
move into the airline industry. But there was
logic to the transaction. And the logic is you
can charge a lot for these things. So they're
capturing that margin. In the past, that margin
was going to the aircraft operators and the aircraft
brokers. Now transmedics can capture that. And
obviously it's... It's not going to be as high
margin as their other business and their gross
margin has come down a little bit, but it's an
entirely new adjacent revenue service that dramatically
improves what they can offer. Well, in short,
they're essentially a career service, but now
with this particular technology, it improves
the probability that the organ is going to be
alive and arrival. So essentially, it actually
improves the odds and improves, you know, like
doing it now, everyone may be shocked that it's
happened, but looking at it, you know, for the
longevity of your business, you could make a
point that, you know, I probably wouldn't survive
without it because at some point these airlines
or other transport entities will hold them hostage
to time schedules or costs or whatever it is,
right? Yeah, I think it was a logistical pain
in the neck to find an aircraft at certain times
at very short notice and go. And there's obviously
an industry around it, built up around it, but
much better to control that whole process. That
seems to be going well and the bulk of organs,
certainly in heart, are going unused, underutilized.
And there's huge waiting lists for donors. So
there's a massive unmet need to increase the
amount of organs that are successfully transplanted
into those that have sadly passed away. So it's
a pretty exciting one. But again, this comes
back to that risk model and that risk approach.
You get the two and a half times on something
like this. uh it pays to sell that means we've
got captured um both 100 plus organic growth
and probably about 50 multiple appreciation on
top that's enough for this round and you know
we will get there will be something else they
probably won't buy another airline but no doubt
something else will happen maybe kamala harris
wins everything sells off um we're sitting on
the cash that we sold and then as time goes by
we'll get another entry point Isn't that interesting?
That's a lesson you can only learn through experience,
right? Back when we started, it was all you fall
in love with a business. It was the old thing.
You buy it like a house. You never sell it for
30 years. But these days, it's practically a
fantasy football team. You buy your team. I think
it's more than that. It's one thing about learning
lessons, but it's also like systematizing the
process. So the reason that thinking came about,
which ended up being extremely costly for us.
um was the fact that the idea that if you sold
a stock you might kind of miss out effectively
and you know if you just held many growth stocks
that do 20 30 40 times after a big crash um after
say the dot -com bubble many tech stocks that
survived and did exceptionally But if you can
systematize a risk framework that gets you out
and gets you back in and then test that over
all those periods from the flash crashes, the
COVIDs, the dot -coms, the GFCs, and you can
prove to yourself, actually, I can be like long
NVIDIA, but I can also be out of NVIDIA at certain
times. um and out and still outperform than if
i'd held the whole way then clearly that's a
better approach and it certainly cuts i completely
agree with you but that's why i was going because
english premier league has started i'm kind of
a bit hooked on fantasy but the point i'm making
is you might be playing arsenal members and they're
going phenomenal but if they've got terrible
fixtures for the next six games you would just
be better off switching that player for even
a mid -tier player because it's just not going
to be their way for the next period of time you
can always go back the fundamentals change right
so you can be long something for a fundamental
reason the stock sells off at the margin employees
stop buying and start selling their compensation
plans ceo stops buying at the margin starts selling
when things change in the industry lots of people
know the suppliers know the customers might know
you know there's always i think i mean who knows
what how what actually it is that makes these
markets efficient but on some level the information's
getting out the stock's down 20 30 percent The
people who are, say, generalists like ourselves
and most funds and most investors see it as an
opportunity, they buy, and then actually there
was things that were going wrong and the market
collapses and then everybody has to sell and
all of a sudden all those things go into reverse.
That would be a typical kind of cycle. And then
if you have the kind of risk model we do, it's
like, well, it's down. We don't know if it's
going to bounce back tomorrow, in which case
we have to buy back, but we don't know if there's
something fundamental that happens. going on
under the surface. It's a much more humble approach
because you don't really know. You're accepting
that you don't know, but accepting that when
you're right, you're going to make a lot of money.
And I've always talked about this. When we've
had our discussions, I've always talked about
this on a stock -by -stock basis, but it's really
interesting when you run that on a portfolio
basis. We're up a bit under 80 % now, but up
nearly 80 % for the year, calendar year. Part
of it is being in the right things, but a big
part of that was not being anything that was
trending down. Because there's no way we wouldn't
have bought some of this software stuff. It wouldn't
have been Twilio, but it might have been Square.
One of these companies that really hasn't performed
well. And if you have a third of your portfolio
that's down 20%, that can obviously really impact
your overall return. Whereas we had none of that.
And because we had none of that, we had a lot
more of everything that did work. And that's
how we got that decent return. And, you know,
if we can run it. No, but I think that's quite
important. And that's what's changed a lot since,
you know, when we first, you know, met and started.
Like, you know, you ride the roller coaster,
right? But what I'm hearing now with these risk
measures, you go up and there's risk measures
to essentially get you out. So essentially you're
not giving back as much, holding on to a sizable
bit. Yeah, it might go sideways for a period
of time, but then you're making allocations,
you know, for the next cycle on the right things.
And you're targeting, what, two, two and a half
X, cycling a bunch out and then. So it's more
of a staircase instead of a roller coaster. Yeah,
and you're taking advantage of the dynamics.
It makes a lot more sense. And around our gross
stocks, you're taking advantage of those dynamics.
So if you get a drone shield situation where
money's pouring in and it goes ballistic, we're
now monetizing that. Whereas previously, like
you spoke to me like four or five years ago,
it would have been like, well, results are great,
so we're going to hold it as long as they're
performing fundamentally. That was kind of the
way we used to view it. But then you miss that
opportunity to monetize. All those factors go
into reverse. People start shorting it. The retail
money is actually selling, not buying. And all
of a sudden, it's gone from $250 to $1 in the
space of a few weeks or whatever the move was
or something like that. In this situation, you're
in at $80, then you're out at a price, and then
you're back at $150, and again, now it's at $146.
Yeah, and the beauty is you can actually – this
is what I think like AI – this is early days
for this kind of stuff, but it's going to really
change the investment industry because you can
– It's just going to improve everybody's decision
-making vastly. And the helpful thing is you
might, it feels like, I think it's going to be
a long time before everybody starts taking advantage
of this stuff because people don't change. The
money is very restricted on very specific mandates.
The vast bulk is in mutual funds or ETFs. It'll
be a mixture of passive, which doesn't trade
on this stuff at all effectively, or it'll be
mutual funds, which is run by people with very
strict processes. They're very human -driven.
It'll take a long time for these things to change.
At the moment, there's a ton of alpha in using
these crazy AI capabilities to improve your own
decision -making. It's pretty exciting. Well,
maybe that's how we should have conversations
going on. They think of it as the portfolio.
So right now, with the portfolio, what percentage
of it's in cash and what's invested? Well...
Are you fully invested or you got some cash looking
for something? I'd say we're pretty fully invested.
Another company we've invested in recently, which
is new, which I don't think we've mentioned to
anybody yet, is RxSight, which makes light adjustable
lenses. So this is just one of those ones that
kind of came up on our growth screens effectively
for growing exceptionally fast, you know, 55
% year on year, which is 82 % year on year really
for the financial year. So it popped up on our
screens there, so we thought we'd take a look.
It's kind of an interesting medical tech company.
It's light -adjusted lenses that are placed by
surgeons in people's eyes for cataracts. Now,
the reason it's interesting is, and the reason
it's got a selling point, is that it's a premium
product. It's better than the existing alternatives
in the market. I'll buy more expensive. But basically
what you can do is you implant it. Surgeons have
to make a lot of decisions about how they do
it. which give very different impacts on how
your vision looks. But this, they can use UV
light afterwards. So a few weeks afterwards,
they can come back in, they can use UV light
to change the shape of the lenses, to change
your vision and to optimize it. So effectively,
you've got, again, this is like a very kind of
special situation growth perspective. It's not
like an NVIDIA that's going to move markets.
But it is a company and their tiny market is
taking over. And that's because they've got this
second step. The surgeon implants the lens and
then they can use UV light to improve the outcome.
And I think in terms of what we're talking about
earlier, you know, the regime that we're in,
I think companies like this are going to continue
to do exceptionally well because they're just
winning in their little market. They're dominating.
They're bigger, better and stronger every quarter.
People aren't flush with cash, but there is enough
money. There's certainly enough money going around
for really good investment opportunities. And
this is just one of those special one -off. So
I think we obviously some of our trades are getting
quite mature, like Nubank, Transmedics, Clarity.
So we're still looking for the next set that
will drive us forward and give us another good
year. And I think this company certainly fits
that category of an independent growth story.
Well, Michael, it's always fun having you on,
that's for sure. And if anyone wants to learn
more about Frazzers, Capital Partners, how they
best find you? Or get in touch. Yeah, probably
just our website, www .phrasiscapitalpartners
.com or send me an email, michael at phrasiscapitalpartners
.com or Twitter, Michael Phrasis. Fantastic.
All right, Michael, thanks for coming on. Have
a great day. Thanks, Murdoch. Appreciate you
having me on. Take it easy. www .yorkwealth .com
.au