Shares Neat: Small-caps, Magellan, and males who fly

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Steve Johnson:

Hello, and welcome to episode two of Stocks Neat, a Forager Funds podcast where we talk about stock markets and review a few whiskies. I’m Steve Johnson, Chief Investment Officer here at Forager Funds. I’m joined by Gareth Brown who’s a Portfolio Manager on Forager’s International Shares Fund and also our resident geography expert. Knows every mountain, river, and capital city in the world. Welcome, Gareth.

Gareth Brown:

Hi, Steve. Hi, everyone. Happy New Year.

Steve Johnson:

You’ve just been adding a bit to your geographical knowledge of Australia with a trip down the south coast. For a bit of background for people, Gareth was originally planning a Christmas in Austria with his in-laws and had a number of changes of plans.

Gareth Brown:

Yeah. We ended up cancelling that trip and then thought about Fiji for a while. And then we thought about Queensland and we settled on Tathra on the South Coast of New South Wales, so we didn’t have to cross any borders. So we actually went into Canberra for a few days, which was lovely. Hadn’t been there in the downtown part of Canberra for years, took the kids and showed them all the sites around the capital. And then we had a week down at Tathra, which is a nice spot sort of basically an hour north of the Victorian border, lovely area, and yeah, it was a good holiday in the end.

Steve Johnson:

Very nice. Welcome back.

Gareth Brown:

It certainly sounds better than your last couple of weeks. How you doing?

Steve Johnson:

Yeah, absolutely. I’ve been struck down with the old coronavirus and had a bit of a worse bout of it than most people that are getting this latest Omicron variant. My first week of – so I tested positive on the Monday, I think I got it at the Sydney test match at the cricket on the Friday before I tested positive on the Monday. And that first week was like everyone else has been talking about: pretty mild symptoms. I didn’t really have any runny nose, slightly sore throat, bit of a cough. And by Friday night I thought I was completely better and then I woke up Saturday morning and had a really bad headache.

And I was actually, I was chatting, my mum called me last night to see how I was and she said, “when you were a child you had a lot of sinus infection issues. If there was something that was going to go wrong with you it was always going to be your sinuses.” And I think that’s what’s happened here is the virus actually got into my sinuses, a lot of pressure behind my eyes. Then the Saturday, Sunday, the Monday was probably the worst of it, so it’s sort of a full week after I first tested positive. Feeling much better now and on the straight and narrow and yeah, hopefully get a short little trip up the north coast of New South Wales myself over the next couple of weeks.

Gareth Brown:

Fingers crossed.

Steve Johnson:

We’ll come to the taste test later on, but what whisky are we trying today, Gareth?

Gareth Brown:

This was sent to us by an investor in the fund. It’s come from the Corowa Distilling Co., which is a town on the New South Wales side of the Murray a little bit downstream of Aubrey. That’s probably 100km downstream. It’s not a small distance. It’s called the Barrel House, is the type of whisky that they have. So it’s a single malt, which means it’s come from that one distillery, aged in American Oak-ex bourbon barrels. So those barrels have been used to make a bourbon in Kentucky and you’re only allowed to use a bourbon barrel once or else you’re not allowed to call it a bourbon. So they ship it off to the whisky world. So this particular barrel’s moved all the way down to Corowa and being used to distil – sorry to age this whisky. It’s 48%, so it’s a bit punchier than most commercial whiskies, which are around 40%. And I think it runs about $120 for a 500mL bottle. So it’s sort of mid-price, I’d call that.

Steve Johnson:

Yeah, there’s a burgeoning little scene here of Australian whiskies. So I’ll be looking.

Gareth Brown:

Yeah, it’s great. And on the mainland as well. Tasmania sort of developed that a while back, but it’s good to see them on the mainland as well. And if I have one complaint around the Tasmanian whiskies is they’ve just gotten so damn expensive. Most of them are sort of unaffordable. This sort of fits in – it’s not cheap, but most people can afford it if they want to give it a try.

Steve Johnson:

I’m not going to try the alcohol myself today, given the sickness of the past couple of weeks, but you can drink for both of us.

Gareth Brown:

It smells like it’s going to taste very smooth. It’s got a bit of a maybe vanilla. I poured a double ‘cause you’re not drinking. So it is after 11 here. So you can give me that.

Steve Johnson:

Fair enough. The other big event while you’re away. Well, I guess it started while you were still at work, but has accelerated over the past few weeks, is this sell-off in small-cap stocks around the world. It’s got pretty dramatic in the first couple of weeks of January.

Gareth Brown:

It’s probably not small-caps anymore either. It’s various, well, pretty widespread. So we’ve been going through our portfolio, obviously the median stocks, we own about a 40-stock portfolio that roughly 20th stock in the portfolio is down now 27%, 28%, 29% from the 52-week high. That metric is a bit distorting because stocks tend to hit their highs at different times and they’re always below their 52-week high just about. But that’s the median stock in our portfolio and we’ve got nearly 10 stocks that are down more than 50% from their 52-week high. Now those stocks are all stocks that we’ve done, we did well out of, in the sort of first half of 2021, and yeah, they’ve given back a lot of their gains in those cases.

Steve Johnson:

Yeah, when I put the quarterly report together…I think we returned 15% in the international fund, which was under the index in 2021, but perfectly acceptable return from investing in stocks over the course of the year. But that was six months of crazy positive outperformance. And then the back half of the year, I think was a negative 13% or 14%, and that was with a bit of currency tailwind as well. So the portfolio is actually off more than that in local currency and we had sold vast amounts of the things that are done very well for us. So as you touched on there, there are a lot of stocks down 50% in our portfolio and that’s pretty consistent across the market as well.

The Australian market, I don’t think was as extreme in terms of that small-cap valuation, but you look at that buy now pay later space and it’s been a complete blood bath. Cathie Wood’s ARK innovation ETFs, probably the flagship for high growth investing, the price of that ETF’s $160 down to 70-something dollars. So it’s been very, very widespread pain out there. Any lessons for you? I wrote a few things in the quarterly report that I thought I’d picked up through this, but any lessons for you first in that, and then maybe we’ll come to the coming reporting season and opportunities as well.

Gareth Brown:

There’s no doubt we’ve made a mistake here. We had a very good period, H1-21 and were aggressive. All the stocks that, almost all the stocks are up the top of that list that have performed the worst for us over the last six months, we had been aggressively selling them from April, May, June last year and often we’ve sold 60%, 70% or more of our initial holding. I think the lesson, well, sorry, with hindsight at least, we should have sold the lot or at least kept selling more aggressively, inertia is a powerful thing and sometimes you just need to, when you’re directionally, you’re doing the right thing directionally, you just need to sit down and think, should I be pushing this harder? Because ultimately it’s cost us owning any of these sort of stocks.

Steve Johnson:

Yeah. I described it as steps in the right direction, but clearly not big enough. And I think that’s true of the things that we were looking for and talking about on the other side of this as well. TESCO has done quite well for us. Lloyd’s has done very well for us as well. Those, I guess, more traditional value-type stocks have been performing quite well in this environment. And they were very, very, very cheap and we bought them. But we have 1.5%, 2.5% positions there and they’ve been the same weightings but less of them as a lot of the other stuff as well. Look, I think there’s a lot of people that were new to investing over the past 10 years, made good money out of a lot of these growth stocks and are probably sitting there feeling a bit of distress now.

I think it’s a really important time to go back to the fundamentals. You are buying a business here and just sit there and say, forget about all of these ups and downs in the share price movement. At today’s price, is this a really good business for me to own for the next 10 or 15 years? And I think it’s going to be a really interesting reporting season coming up for us on that front. Some of these businesses that we own we’ve been very, very happy with the progress with, but they are relatively young, relatively new, and 2022 is going to be a big year for them proving up our hopes for those businesses. And I think if they do from these prices, you’re right, that we’ve made mistakes, but we’re sitting there saying it is often a mistake to sell businesses where the performance of the business is going really well. A lot of them are performing better than we had initially anticipated when we bought them. So if we get delivery over the next couple of years, that their businesses that I think can generate fantastic returns for us, whether or not the share price goes up.

Gareth Brown:

I mean the first leg of this sort of, I guess, going till Christmas sort of made sense. We had a fairly stretched growth year-end of the market and some of these things needed to fall and probably won’t recover quickly, but it is getting a bit indiscriminate. So there are opportunities there that are looking particularly juicy, I think.

Steve Johnson:

Yeah. And look, that’s historically what we’ve done well, and what I want us to do well again, is when these things get silly, stop worrying about the directional movement in the share price and start worrying about just finding businesses that can get to absurdly attractive prices. So looking forward to those results coming out over the next month or so, and there’ll be lots of guidance this time around for 2022 results.

Speaking of doing it tough, 2021 was a really difficult one for the Australian funds management juggernaut Magellan. This is a funds management company here in Australia with $100 billion of funds under management and the management company itself is listed under on the stock exchange as well. It’s been an amazingly phenomenal success story over the past decade and this 2021 has been a very difficult period. Some big bets on China stocks that didn’t pay off, a significant amount of cash held through March 2020, thinking that things were going to get worse, that didn’t.

In the space of the past 12 months, Magellan’s main fund has unwound 10 years of outperformance and is now under the index over 135 and 10. And I think for a lot of people that have invested in the management company out there, they’ve seen that the share price of that management company fall some 60% over the past year. So I think an interesting business for us to take a quick look at – one, we’ve got some history with and a business that we both work in. So maybe we can provide some insight there. But maybe to kick things off Gareth, you’ve got a small personal history with some of the people here. And some of, I think, the media and the coverage of the saga over the past few months has been quite ugly and disappointing.

Gareth Brown:

Yeah. The term that comes to mind here, Steve, is “tall poppy”. I get it, it’s a national sport. But these two guys have built a very, very successful business that they started effectively from scratch 15 or 17 years ago, or whenever it was. I’ve met Chris a bunch of times over the years, Chris McKay – that was one of the founders. Hamish I’ve only met the once, but it must have been 2005 I think, if not 2007. Greg Hoffman and I recorded a podcast with both of them down on the banks of the Missouri river in Omaha. We were all over there for the Berkshire meeting. And they were obviously intelligent and they talked about what they were going to do and high-quality businesses.

And then Hamish made a comment. He said, we are going to gold plate this organisation. We are going to get the best analysts, the best back office. We are going to do this from day one to build – I don’t remember if they used the word Platinum, but that was sort of the impression I got. And Hoff and I both looked at each other and I’m sure there was some snickering there – that who’s this guy to say he’s going to build the next Platinum from scratch. And they just got there. They had their plan, they did it. And I can’t have anything but respect for what they’ve done there. So yes, the stock’s off 50%, but they’ve generated an immense amount of wealth for their shareholders and for themselves. I just don’t feel like I’m in any position to criticize. I actually think that I owned Platinum shares back then at the time, and I think I still do own them and they’ve gone backwards slightly over 15 years. And these guys have gone and built a business that’s maybe not made them billionaires, but close to. And a lot of respectful for them.

Steve Johnson:

Even ourselves, we bought Intelligent Investor… You and I were part of the group of people that bought Intelligent Investor back in 2004. And I think I calculated where roughly 5% of the farm of Magellan and they started around the same time. I think it has been an amazing-

Gareth Brown:

It’s just not what we get out of life, but they’ve set their plans and they’ve done it, and I think they’ve done it in a way that it’s generally had a lot of value to investors. So yes, we can sit here and say, they’ve done no better than the high-quality index, but those investors in 2005 in Australia weren’t going and buying an ETF of high-quality index. They went and bought this instead. And I think they’ve served their clients really quite well and they’ve made a lot of money out of it. And I just don’t feel like I’m in a position to criticise them on any particular matter.

Steve Johnson:

And I think for anyone thinking of starting today or investing in a funds management business, the economics can be amazing, which we’ll come to in a second. But I think Hamish and Chris recognized at the start here that the world was changing in terms of how you build a funds management business, that the regulations and the compliance and all of the other things that you need to raise money over and above performance were becoming increasingly important. Now, there was a day where you could start a funds management business in your bedroom. You make money for people, and then you raise lots of money. I think we live in a world now where A, you just can’t do that because you need the licensing – you need the compliance, you need the capital to get started. But B, people are much…they want to do a lot more work on your business and the depth of your team and the amount of capital that you have.

You need significant amounts of money to build a large funds management business these days and they recognize that very, very early on. Just looking at the balance sheet here, it was something like a $30 million raise at the start, which we thought was an extraordinary amount of money. It’s now a $3.6 billion company. So they have created an enormous amount of wealth, and we shouldn’t as Australians be sitting here knocking them. A lot of this funds under management is offshore, there’s tax dollars being paid in Australia. I think they’ve made international investing accessible to a large percentage of the Australian population that probably wouldn’t have done it and that global market return has been double what you would’ve got it on Australian equities over the past two months.

Gareth Brown:

Yeah, I think-

Steve Johnson:

But look, we analyse lots of businesses that we couldn’t run and I think we do have a bit of a front row seat here in terms of running a funds management business of our own. What are your thoughts in terms of, I guess, the nature of these types of businesses and now that the share price is off 60%? Would you be looking at something like this if you were working in the Aussie market?

Gareth Brown:

Yeah. I don’t work in the Aussie market and I don’t look closely at Magellan, but the answer is, yes – looking not investing. I haven’t made a call that’s, but you know.

Steve Johnson:

Just so everyone knows, Gareth does a lot of looking. His ratio of looking to investing is very, very high, which is a good thing.

Gareth Brown:

You’re welcome everyone. The thing to understand with funds management businesses is that they are high fixed costs. And I use that term in a very relative sense because we know the costs march up every year and analysts come knocking for pay rises and there’s more back office and there’s more analysts every year. So they do march up, but they are relatively fixed versus a lot of other businesses. And what that means is if you double your funds under management over a very short period of time, your costs are not doubling. And so a very high percentage of that starts dropping through to the bottom line. And so most funds management businesses, you would call them fair-to-middling sort of businesses, they’re not particularly attractive but there’s a few giants in the industry that have just been able to keep their costs down really low and generate a ton of revenue because they have a lot of funds under management or because they’re getting very good performance fees. Platinum comes to mind, even despite current woes, Magellan comes to mind – these guys can end up with sort of 80% profit margins.

Steve Johnson:

So last year, Magellan’s EBIT margin, so that’s the percentage of their revenue that’s profit before they pay taxes or interest bills, 84%. So 84 cents in every dollar of revenue is dropping through to the taxman or shareholders.

Gareth Brown:

If you pay them $1,000 in management fees and performance fees over the year, they’re paying out $160 to their staff, to their sales team, to all the other hanger-oners – Bloomberg and every other cost and they’re 80, 84, is it? 84’s drop.

Steve Johnson:

Yeah. And that’s a gold-plated funds management company. So yeah, the economics at scale can be extraordinary.

Gareth Brown:

And so what that means is you have really high drop-through rates. So when they’re growing, the profit grows immensely and goes through to the bottom line. But when those big guys start shrinking, for any reason, their revenue lines start shrinking. Then you sort of like, okay, well the economics of this change dramatically on the downside pretty quickly too. They’ll be profitable, but are they worth the same billions of dollars?

Steve Johnson:

Yeah. And that’s what I find really hard is the directional – this business is now a 10% fully franked dividend yield if they can just keep earning the profit of last year. I find it really hard to work out directionally which way that is going to go. They’ve already announced that they’ve lost their largest client, which was 20% of the fund relatively low fee, but that’s $20 billion out the door in funds under management. And my experience of these businesses has been the sentiment takes a long time to turn, and then it lasts much longer than you think it’s going to last.

Gareth Brown:

And allocators they look at what other allocators are doing as well. It’s sort of all of a sudden someone big leaves you as an allocator have to justify why you haven’t left, I guess.

Steve Johnson:

Yes.

Gareth Brown:

And I think that just getting back to the economics here, you have a cost base here that somehow looks like a toll road. So it marches up a little bit each year, but it’s fairly flat and fairly fixed. The revenue line is much more volatile than a toll road. So it can be very difficult here to work out what’s the right price. It looks like a 10% year, but if they lose 30% or 40% or 50% of funds under management, it’s sure as hell not paying a 10% yield this year.

Steve Johnson:

I think the other thing on the retail front that we’ve experienced that’s worth thinking about if you are looking at this business, is that a lot of people are still invested that are not happy at a point in time when you’ve been performing badly. And you sit there and think… And I’ve seen a lot of, there’s been media out this week. Oh, Magellan’s December performance was outperforming the market. There’s a lot of people that sit there, wait for the bounce and then sell. That they’re looking for the recovery first, but they’re still of a mind to exit. So I do think that the outflows here can last a very long time. And we’ve seen Platinum, like you said, been trading on a big dividend yield for a long time. It’s been consistent outflows there for a very long period of time.

I do think one difference here is I think Hamish is as much an entrepreneur as he is, and a business operator, as he is a fund manager. Whereas I think Care Nelson at Platinum really was fascinated by stocks and all he wanted … stocks and was quite an introvert, was my experience of him. I think with Hamish, you’ve got someone that really, really wants to and has a very successful track record of building a business. And I wouldn’t bet against them building things here that people haven’t even thought of at the moment. I think Barron Joey’s probably going to be a success itself. It’s basically trans bled and what was a very, very successful UBS business here in Australia across to a new entity, I guess is that’s going to go-

Gareth Brown:

We didn’t talk about this bit, but both Hamish and Chris were UBS alumni. So they know the business well. I’m sure they know the key people well, that’s why they’re probably being part of this Barron Joey setup.

Steve Johnson:

Correct. And I was fortunate enough to work at both UBS and Macquarie in my formative years. And I think those two organisations have a lot of the most talented people in a culture that is a very performance-driven culture. And there’s a lot of examples of successful people building things elsewhere that have come out of those two environments. So I would not bet against them building things here that make it less reliant on the funds management business. And when the market cap was $10 billion, I was sitting there saying, well, it doesn’t matter how many Barron Joey’s and Guzman & Gomez’s there are, it’s not really going to move the dial because the funds management business is so big. Today’s market cap, $3.6 billion, is one of those things can start becoming significant relative to today’s market price. So I’m a bit nervous about the core business, but I think it’s going to be a really interesting story to watch unfold there over the coming years.

Gareth Brown:

Yeah. I wish them all the best.

Steve Johnson:

My favourite part of the Christmas holidays is always catching up on reading that I haven’t got through or listening to a few podcasts that I didn’t manage to get through the year. What did you do with your free time over the break Gareth?

Gareth Brown:

Free time? You obviously don’t know what it’s like having three kids, do you mate? I didn’t get a lot of reading done. I did listen to quite a few podcasts, which was nice. The one that sort of sticks out is I’ve been listening to the Andrew Huberman podcast. It’s called Huberman Lab or Labs. So Huberman is spelled H-U-B-E-R-M-A-N. He’s a neuroscientist and a professor in the department of neurobiology at Stanford, very intelligent guy, and he has this very wonkish podcast where he digs into a topic. They tend to be two-hour monologue podcasts and he’ll do four of them on one topic. So you’re getting sort of eight hours of content. Probably not for everyone. This was about, the one that I was listening to, or the one that really sticks out was about the-

Steve Johnson:

Just quickly. I went for my first post-coronavirus walk this morning and I was listening to one of his podcasts and he was talking about concentration and what you need to do to be able to concentrate for extended periods to time. And he literally just sits there with a microphone and talks for two hours and he was absolutely testing my concentration skills. I do find I drift off when I listen to his podcast…

Gareth Brown:

Oh, I don’t have that problem with him, but I would understand it. The bit that really caught me in this brain series was talking about neuroplasticity. So what we’re talking about here is the ability for the brain to explore new topics, to integrate new skills. And I guess none of this is new to people, but children have a much higher, their neuroplasticity is a much stronger thing. For us adults, it was formally thought that were fairly fixed beyond a certain age. It turns out that we can change our brain, but it takes a lot of work. A lot of deliberate work. It’s very tiring whereas a kid – it’s almost just a throw away for them to pick up new skills. And this is my metaphor, not his, but I liken it to…the child’s brain is like the Oklahoma land rush. You are rushing out pegging virgin territory and here’s this skill that I’m wishing to acquire. I play around with it. It sits on some virgin territory.

The adult brain is more like urban infill redevelopment. You have to acquire the land, kick people off, get council approvals, rewire what’s going on there to integrate this new skill in place of something that was there beforehand. None of that should be fairly obvious to most people. What really sunk into me was he was talking about that the concept of a child’s brain – it lasts until you’re 25. So it’s quite a tight range plus or minus a year, but you’re basically, your brain is childlike until you’re 25. And that was sort of a bit of a revelation. I think it’s very, very interesting here. It ties in with some other stuff that I’ve listened to and read years ago, talking about your risk management faculties, which also don’t fully form till you about 25. So if you-

Steve Johnson:

The other thing I thought was really interesting is… I think we often think of it when people talk about it, that we building all of these neurons and connections in your brain, which to some extent is true. But you start with many, many, many more than you end your life with and your brain actually takes away the ones that it doesn’t need. So as you grow and as you evolve and as it works out what skills you need for the environment that you’re in, it will actually take away connections rather than creating them and use that capacity to strengthen other areas. And yeah, there’s some fascinating stuff in there about people that are blind from birth using that, what is for most people, the site capacity of their brain for other purposes.

Gareth Brown:

Yeah. And even things like echo location. I don’t know if you ever, the blind people that can click their tongues and that sits in the same sort out part of the brain as the visual part of it. I guess the point here that I found fascinating is that you have this childlike brain to 20, 25. And I don’t mean that in a negative context, I mean it in a very, very positive context. It explains a lot for me. So I think understanding that you are born with a Ferrari and for maybe the first 16 or 18 years, your parents, your teachers, there’s a whole bunch of other people that are in control of it. But then there’s that seven year or nine-year period, depending if you’re starting at 16 or 18, where you are in charge, you’ve got the keys, you’ve got the wheel, you’ve got the Ferrari.

And I hate to say it, but at 25 you are trading that Ferrari in for a Kia Sportage. The vehicle is not going to be as good. It’s a very unique period in your life. And being aware of that beforehand, I think is really, really important. So my point here is, what you do over those years is extremely important to who you become. And so it is a unique opportunity to sit down and work out where do I want to go over the next 50 years and what can I do over the next five to achieve that? Because beyond 25, it is going to get tougher.

Steve Johnson:

And also, just how much can you cram into that period of time where you’re wiring your brain to just explore what you are interested in, what you are good at, how you want to set yourself up, that it’s many, many, many times more powerful during that phase of your life than it-

Gareth Brown:

Width and depth, right? That’s always some combination of trying lots of new things and then going deep on a few things. Everyone I’ve ever met that’s excelled or every story I’ve ever read of anyone that’s really excelled at some area has made significant progress in that area before they’re 25. And the only exceptions I can think of is when they had great skill in some very near adjacent field, and they just happened to tie together for some reason. So you look at Einstein, you look at any of the music prodigies that, and most of them are very, very, very skilled by the time they’re 16, even. But I’m just saying that’s a unique period where you’ve got control of the car, and it’s a very, very powerful car. And you should really think about what you are doing with that time.

Steve Johnson:

The other thing it got me to thinking about for us that are already beyond that 25-year period, A, you can change things if you really want to focus and concentrate. It’s hard. It’s dramatically harder than it was when you’re young, but it’s not impossible. And he talks a lot on his podcast about things that you can do at an older age to try and rewire or rechange things. But also as an investor, I think just reflecting on those formative experiences of your life and understanding why you behave the way that you do, how you respond to certain situations is usually a function of the environment that you are in during those formative years. And yeah, for me, that growing up on a farm and my capacity to handle stress, it’s probably my number one asset as an investor, that when markets are in turmoil and everyone is panicking, I just don’t feel the same level of stress that other people feel.

And I think growing up in an environment where you regularly watched your whole family’s livelihood float down the river in a flood, it conditions you in a certain way that that brain has been wired to accept that, to move on from it and to accept that things are going to be volatile in life. It’s just the way that I grew up. And I think you can change the way that you invest, the way you put your portfolio together to compensate for some of those things. If that’s not you, you’ve probably got a lower risk of tolerance than other people. There’s nothing wrong with a really diversified portfolio. I know a lot of people that know that they’re liable to be more stressed and panicky in market downturn. So they just don’t look, and I think that’s a perfect acceptable way to deal with it as well.

Gareth Brown:

As soon as dumb money recognizes it’s dumb money it ceases to be dumb, right? You have those shortcuts. So this is a small, I presume the number of people under 25 that are listening is a fairly small subset. There is a lot of parents out here. So this is useful information maybe to give to your kids. I think the flip side of this, and again, none of this was discussed on Huberman’s podcast, but I think it’s right, is that this also applies to bad habits. So I think if you’re going to experiment with hard drugs and become addicted at 22, it’s going to be a very different path than if you do it at age 29, trying to unwire those habits that are formed in that bit where you have extreme plasticity. So I guess that applies obviously to hard drugs.

I don’t want to tell anyone not to experiment, but addictions, there’re things you need to avoid and bad habits you need to avoid. And this applies to more mundane things as well. Like people that don’t take responsibility for their decisions or their outcomes that befall them because of their decisions, if you are not doing that at 25, you’re not going to be doing it at 45. And I think understanding, trying to work on some of your bad habits, as well as your strength in that young, precious period of time, I think is really, really useful.

Steve Johnson:

I think that’s absolutely true. And it’s true, I think exercise and diet, and I think that getting into those habits and training your brain to get positive feedback from some of those activities that you know are going to be good for you long term is very, very important. Speaking of plasticity, not so much in humans this one, but in animals, one of the things I read that was just fascinating over the Christmas break – the Christmas edition of the Economist has always got… it’s half just the normal Economist and the other half is just full of interesting diverse articles about weird things. And one of them was about people that have lived their life like birds. This is going to sound really bizarre, but there’s this guy in Italy – I’m just going to dig his name up here so I get it right. His name’s Angelo d’Arrigo and he had built himself an ultra-lite contraption that let him fly around with birds for his whole life.

He recently last year crashed to his death, unfortunately, but just some really, really fascinating stories about him actually growing up with birds, teaching birds to fly. He taught, he hatched two condors from the eggs and actually taught them to fly from chicks and at the time of his death, he had almost completed teaching them how to migrate from where they need to go. He flew thousands of kilometres with birds.

Gareth Brown:

So what’s he in? An ultralight or some sort of hand powered contraption? I’m just pitching race around the world here.

Steve Johnson:

So I’ll just run you through this quickly. His very first such journey was in 2001, flying with desert hawks from Senegal to the Mediterranean. In 2003, he made a similar voyage of six endangered Western Siberian cranes. They’d been raised in captivity. He had to show them their migration route from Siberia to the Caspian Sea in Iran, some 5,500kms. It took six months and each evening he chose their resting place – through storms, through all sorts of things. And then he’d introduced these two condors to the Andies by soaring with him amongst the peaks.

Gareth Brown:

Crazy.

Steve Johnson:

So anyway, just some fascinating lives out there and apparently no interest in publicity or talking to people-

Gareth Brown:

Yeah, he just cared for the birds.

Steve Johnson:

He just loved living his life in that way. But also just the way that the bird’s brain could learn all of the things that it needed to learn from a completely foreign animal. Very, very-

Gareth Brown:

Crazy.

Steve Johnson:

I just had one more last final thing to add on this plasticity concept. I think one of the things about being an investor is, okay, you get old, changing your brain is hard. I think changing anything about your habits gets harder and harder, but it’s possible, and it can be done. One of the really difficulties in investing is just working out what you do want to change, what you need to change and what you need to keep the same. And my cover letter in our quarterly report, which is up on our website if anyone wants to read it, just talked a lot about that.

We went through a really, really difficult period with our Australian Shares Fund, what I’d call a value investing extreme bear market, where stocks that were lower quality businesses but already trading at cheap prices got to extraordinarily low prices. And we did a lot of self-reflection through that and I think a lot of our clients went through the same and drew some really important lessons about quality of business, about how hard it is to pay a low enough price for a business in decline. And then 2021 was the year where all of those businesses performed spectacularly well.

We had a great year in our fund, but we actually sold a lot of those stocks too early, we learned some really important lessons and I think we did a fantastic job to get through that very difficult period because a lot of other fund managers went out of business. A lot of funds completely changed their stripes. We’ve got a long term track record there that I’m very, very proud of, but it would’ve been so easy just to swear off those types of businesses forever. And they’re exactly the ones that you wanted to own over the past 12 months. And that’s the hard thing about investing is its long, long, long learning cycles from when you make the decision to whether you proved right or wrong, and even then it’s hard to know what’s luck and what skill.

Gareth Brown:

Wicked learning environment is what it’s referred to. You don’t get solid, useful feedback all that often.

Steve Johnson:

Exactly right. Gareth, you’ve had a chance to try the whisky. Maybe you can talk us through the taste and what’s your view of it?

Gareth Brown:

Yeah, it’s really good. It’s nice. It’s smooth. Easy to drink. Yeah, there’s no really strong flavours there – as I said, the nose is a bit vanilla, maybe a bit lemony even, easy to drink. Really nice. And when I want to buy a bottle of sort of mid-range whisky, I like the idea of supporting Australian producers, but there’s not a lot there that’s under $200 a bottle. So it’s nice to know there’s a couple out there. So thanks for the whiskies – and that’s the Corowa Distilling Company and that’s the Barrel House, is the type. So it’s a blue – is that a blue label, SJ?

Steve Johnson:

Yes, that is blue.

Gareth Brown:

Yeah. Okay. Blue label, $120 or so for 500mLs, so give it a try.

Steve Johnson:

We’ll put a link up in the show notes. Thank you for sending that in and it sounds like a very, very drinkable whisky. Thank you for tuning into episode two. Follow both of us on social media – we’re on Twitter, @ForagerSteve and @Forager_Gareth and @ForagerFunds is also active on Twitter and LinkedIn. And also, please give us any feedback. If you’ve got any questions that you’d like us to answer or topics you’d like to cover, send those through as well – either send them to us on social media or you can email [email protected] Thanks again for tuning in. Don’t forget to rate us on your favourite podcast app.

 



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