Can Afterpay Touch Take Over the US? - The Young Investors Podcast | Episode 2
Hey guys, welcome back to the Young Investors Podcast. We're doing Episode 2. We somehow managed to front up for another week of podcasting. I'm joined as always by Hey Machado.
Hey guys, it's good to be back, and yeah, we've finally got a name for the podcast which is good. Episode two, bringing out a name. Yeah, we've got a name for the podcast! So, we are the Young Investors Podcast. Yes, and we've now made it available on a number of different podcast platforms, which is good. So you don't have to just watch it on YouTube.
Yeah, true. That's true. We've got Apple Podcasts, Spotify, soon to be out on Google— is it Google Play? Google Podcasts?
Yeah, that’s called Google Podcasts.
Google Podcasts. Yeah, so hopefully that will be up. So yeah, but the main ones, yeah, obviously you can watch it just on YouTube. You can watch it on Apple Podcasts. You can watch it on Spotify as well. I’ll listen to it rather. But yeah, the Young Investors Podcast. So that's what you have to do—look us up. And if you come across this on one of the other podcasting sites, make sure you, you know, leave a review and that sort of thing if you like what we're doing. That certainly helps out, especially as we're starting out.
Yeah, and if you come across us on one of those other platforms and you like what you're hearing, go over to YouTube and find us. We've got Brandon on the Aussie Wealth Creation YouTube channel and myself on the Hamish Hatter YouTube channel. And there's a ton of content on there that's similar to what we're talking about here.
Yeah, so that's pretty exciting. We've finally got a name. There's a pretty funny story actually behind how we got our name. Essentially, I thought—I thought that I had this great idea! A great idea that we could call it the Intelligent Investing Podcast because obviously we're very much investing like, you know, Ben Graham and Warren Buffett and those guys. And of course, Ben Graham wrote The Intelligent Investor way back in the day. But we recorded the podcast and called it The Intelligent Investing Podcast, and there's already a podcast called The Intelligent Investing Podcast.
Yeah, I feel like we should have checked that.
Yeah, we should have checked. We definitely should have checked that, but we didn't know. I really liked that as well—it’s a good name!
It is! It's a good name! It works so well, especially with, you know, our style of investing, very much like Ben Graham himself.
That, yeah, absolutely. Yeah, oh well, we should have checked, but we didn't. We made an error. But now we're back—The Young Investors Podcast! It's a pretty good name. We'll go with that!
Yeah, I like it better.
Yeah, it’s better than The Intelligent Investing Podcast. Now actually, The Intelligent Investing Podcast is actually really successful. It’s probably one of the most successful investing podcasts that are going around, actually, after having looked into it.
Oh really?
Yeah, I think it’s definitely a smart idea that we did not call ourselves that.
Yeah, that would have been a bit of a clash there.
Yeah, anyway, so if anyone that's maybe just tuning in for the first time—this is our investing podcast. Essentially, our style of investing is very much the long-term value investing approach. We talked about that a lot— a lot actually in the last podcast.
So we did, but essentially how we run it is we always like to go through a little bit of stock market news first up and then we're going to do a bit of a chat about Afterpay Touch today. We've both been kind of looking into this Australian business and it’s an exciting business at the moment. It's exploding! But we're going to talk about that later. And then what we want to do is always at the end of each podcast go through some user-submitted questions. So if you want to submit a question to us, make sure you leave it in the YouTube comments there.
Yeah, the YouTube comments! And then we'll tally them up and go through them each and every podcast. But I thought that we'd probably just get started with a bit of news, so we get through the boring stuff first up, which is essentially just the market update. So ASX—what do we got?
The ASX All Ordinaries finished up actually six thousand three hundred and fifty-seven, up to six thousand four hundred and twenty-seven thousand six hundred and two hundred, finished the week up from 6247, up to six thousand three hundred and nineteen, which is interesting. Good week for the ASX!
Yeah, that's great!
Yeah. And then heading over to the US, and that's that Composite. Oh my gosh! Keeps climbing! It's up from seven thousand nine hundred and up to eight thousand one hundred and eight! And yeah, the Nasdaq as well, as you were talking about last week, the Nasdaq just keeps powering up!
Yeah, the US markets—new highs this week again!
Oh my gosh! Unreal! It just keeps drifting up further and further away from reality.
Yeah, it's gonna be interesting to see because I've been reading a bunch of articles, and it is interesting to think that when you see new highs, you think, “Oh, it’s gonna start turning around now.” But I saw an article that took screenshots of all of the times that we've said, “Oh, the Dow's hit new highs.” And obviously, it’s been hitting new highs for the past ten years.
Oh yeah, for many years! So I mean, it doesn't really indicate anything, but it is something to watch out for.
Yeah, definitely!
Yeah, it's pretty crazy how the American markets are going at the moment! But oh well, it doesn't really affect what we do. We just sit and wait for good companies to come on sale. But anyway, yeah, and then lastly we've got the Dow as well. The Dow was up from...
2000—what am I saying? Oh my gosh! Twenty-five thousand eight hundred and eighty to twenty-five thousand nine hundred and sixty-four. So that's the boring stuff. To be honest, I don't really care about that stuff whatsoever.
But anyway, going on, let's actually have a bit of a discussion about some of the news stories that have come out this week. Now, I'll tell you the first one that of course caught my attention—I'm a bit of a fanboy of this company. Elon Musk is keeping Tesla public!
Wow, yeah! I mean, after all that, I kind of saw it coming. When I saw that tweet, something just didn't seem that it was gonna... you know, he was gonna follow through with something.
Yeah, it kind of looked like he just wrote it off the top of his head without really thinking about it.
Yeah, and it seems that from the feedback, it’s not what shareholders wanted. A lot of the shareholders didn't want that.
Yeah, it’s very true. Now, well, his original thinking was just to get rid of the short sellers and to obviously let Tesla focus on the long term. They don’t really have to try and meet any short-term expectations; they can go about their business uninterrupted. Yes. Essentially, this week he's come out and said he's met with a lot of shareholders, and he's spoken to a lot of people, and he underestimated how big of a project it would be to actually get the whole company private.
So essentially, he thinks that he's got enough funding for it, but he just—he realized that if he actually wanted to do it, it would take away so much of his time. It would essentially slow Tesla down because they would have to devote so much effort into this project of getting them private.
Yeah, exactly! And I’m sure that it would cost a lot of money to make that transition, as it does cost a lot of money to make the transition from private to public.
Yeah, so also reading about what he was talking about, he actually released a full article on the Tesla website. He essentially said that given the feedback I've received, it's apparent that most Tesla's existing shareholders believe we're better off as a public company. Additionally, the number of institutional shareholders have explained that they would have internal compliance issues that limit how much they can invest in a private company. So that's kind of a—I guess just a roadblock in itself, right?
Yeah, logistics sort of thing.
Yeah, exactly! He'd probably end up losing some of his biggest shareholders. So anyway! He just finishes it off saying that he knew the process was going to be challenging, but he now knows that it's clear that it would be even more time-consuming and distracting than he initially anticipated.
So overall, I think that while it was probably it's a smart idea to take Tesla private, just so that the business can be a bit more focused on the long term and not have to worry about things—people that are trying to manipulate the stock in the short term—it's probably a smart idea for them not to chase it too much, I suppose.
Yeah, I mean, it doesn’t really matter the volatility of the stock. I mean, it might bother him, but yeah, he does get very—like what you were saying last week—he does get very agitated when people come out and, you know, say things about his company and make short-term little price movements and whatnot, or at least that's the impression he gives. And I mean, I guess by the fact that he was very serious about taking it private, he he is very agitated by it.
Yeah, yeah, yeah. Now, well, that's what's going on with Tesla. What else we got in news?
Oh, this is pretty interesting! Facebook Watch launched globally! This is crazy! So Facebook, essentially, the headline here is, “Facebook wants to eat just a little bit more of the Internet.” I love that! Like that’s a great headline!
Yeah, launching its video section Watch globally today and this is a couple of days ago, so this is interesting. It's like Facebook entering the video streaming service space, but it’s within the app. It’s within Facebook.
So it looks like, just from what I’ve looked at, it’s going to just be like another tab—like you've got your notifications tab, you've got your newsfeed, and now you're gonna have Watch as well! So, yeah, I'll be very interested to see what this actually turns into!
Yeah, yeah! I haven't read a whole lot about this! Don't explain what exactly it is!
I think that essentially, it's going to be longer form video content. So, it's gonna be, you know, people will sit down and probably end up watching shows and whatnot on Facebook. It sounds like it's going to be a little bit between kind of like a YouTube and also a streaming service. So it sounds like they are going to have some proper content on Watch as well as just people making videos for it.
But... right, it’s—it’s still just starting! Yeah, I'm not a hundred percent sure. It is obviously very new. I guess we have to watch what's happening, but at the moment it sounds like it’s just going to be the big names, the big video creators, because they’ve released that, you know, to be eligible for this sort of stuff you have to have thirty thousand one-minute views at least over the past two months.
So, where they also have to have more than ten thousand Facebook followers, they say, among other parameters. So I think really they’re just trying to keep it to the larger guys at the moment, but very interesting! And it’ll be interesting to see what happens with Facebook versus YouTube even because Facebook’s come out and said that the revenue from the ads will be 55% for creators, 45% with Facebook. So they’re giving quite a sizeable chunk to the creators!
So, that’s what you see!
Yeah, and see what sort of ad rates they charge and that sort of thing.
Yeah, and I’ve been sort of waiting for this as well, and I'm sure a lot of creators have been waiting for someone to compete with YouTube on revenue, so there's sort of a bit of competition and, you know, we can see it get some really good rates for the ads that we're running on our videos because, yeah, it's crazy that with YouTube obviously being in a monopoly—close enough to a monopoly, and in this kind of space it’s a monopoly!
Let’s be honest!
Yeah, it essentially means that they can cut us in however much they want! Like, they can give us nothing if they wanted because you can imagine like if the top creators are getting paid what—like a million dollars a year or something from their ads. And then all of a sudden they say, “Oh, by the way, we give... we’re going to give you less of a percentage now—you're only going to end up with eight hundred thousand or six hundred thousand.” Well, where are those people going to turn to?
Yes, exactly! Most of them are still gonna go with YouTube with a cut ad rate because there's no viable alternative if you've got a large following!
Yeah, for sure! And it's good because I think ads is the best way to monetize a platform like YouTube because you really want your content just to be free content that isn’t full of sponsorships and, you know, that sort of thing where you have to sell your own products in order to do it as a full-time job. It's really nice if it's just the ad at the start of the video and at the end of the video, and that's what funds the channel.
Yeah, that's the dream! Because then, obviously, people, you know, people—if they have to pay for your content, like straight up—have to pay out of their own pocket, obviously that's going to lead to drastically lower viewership and that sort of thing.
Yeah, so if they can get away with just watching— like sure, you have to watch an ad at the start of the video, but that's all you have to do, and then you've just got that content straight up there for you then...
Yeah! Yeah, definitely! Ads is the way to go! I'm hoping that Facebook is going to use this as sort of a trial basis for really big platforms and then they're gonna slowly decrease those limitations— minimum of ten thousand Facebook followers, 30,000 one-minute views—because that’s extremely high and obviously they're limiting it to the biggest creators right now.
Yeah, definitely! I think in the end, especially with Facebook being like, you know, everyone’s on Facebook, you want to—I think for the success of the program, you want to try and give as many people as possible the opportunity to create on a platform like this, but yeah, I think that’d be very beneficial for them.
Yeah, I guess we'll just see what happens, but it's very interesting! It's an interesting move, but I think it'll be a good move by Facebook to start eating into probably some of YouTube’s market share.
Yeah, definitely! It could take off! It could spread like wildfire! Because there’s a lot of people on Facebook, so even if just a small portion of them head over to Facebook Watch, it could be very successful!
But well, I guess we just have to wait and see!
Anyway, heading on to the next bit of news—this is interesting actually. This one is one of the bigger news stories of the week! TPG and Vodafone are looking to merge and become a 15 billion dollar company! How crazy is that?!
Yeah, that's huge!
That is! That's pretty impressive stuff! Actually, I actually think this is a pretty smart decision because obviously you've got Vodafone is more in the mobile space and then TPG is more in, obviously, the broadband space! Obviously, mobile and broadband are all in the telecommunications kind of space, but now they're going to join forces! So now instead of being two smaller companies that are focusing on different things, now they're one bigger company focusing on both, and it puts the pressure on bigger companies like Telstra!
Yeah, it does for sure! And it'll definitely give Telstra a run for their money, especially with the troubles that Telstra has been facing over the past few months! It's just another thing to worry about if you're a Telstra shareholder!
Yeah, and it’s done crazy—this deal has done crazy things to TPG! Their share price—since a few weeks ago, right? So the share price of TPG has jumped from about five dollars and sixty cents up to, at one stage, it was nine dollars and fifty-five cents!
Wow, how crazy was that?!
It’s settled back down at the moment, but at one stage, it had a seventy percent gain in just a few weeks!
And then interestingly, if you look at TPG’s rival, this is a bit unexpected! Telstra actually saw its share price go up as well by 2.9 percent! So that's interesting!
Yeah, I was not expecting that at all!
Yeah! But yeah, so I feel like this telecommunications space is interesting. It’s going to be a fairly interesting battle! I think it’s a race to the 5G networks! I think that’s what’s going to really drive the sector and get a bit of growth going again! But who knows? It’s an interesting sector to watch because I find it interesting because it’s been hammered so much, obviously with NBN and all this sort of stuff, but long-term, like people are using more data than ever before! They’re going to continue to use more data than ever before as, you know media—more, you know, media is consumed on the Internet! You know, with higher qualities of video, all that sort of stuff!
Yeah, definitely! And it's always a developing industry! When are we supposed to be getting 5G? When is that?
Is that in—
Good question! Is that horizon in the next couple of years or...?
I think so! I think so! I’m not entirely sure—I couldn't give an accurate answer on that one! But yeah, you'd think that they would be! We've had 4G for a fair while now and—
5G... But this is the interesting thing: 5G offers internet speeds that are far superior than even what the NBN gives you as optic fibre internet! So that’s pretty nuts! So if they can get that—if they can get a hustle on 5G, you could even see like getting better internet on a mobile network from 5G while the NBN is still being built!
Yeah, I wouldn't be surprised by that at all!
No, I think that's the direction we're probably going to go—just using unlimited mobile data instead of landline sort of data!
Yeah, I feel like that’s probably going to be the trend as well! Speaking of NBN, naturally guess what? The NBN budget has increased yet again! Surprise! Up to fifty-one billion dollars! That’s pretty crazy!
Jesus! It’s getting even more expensive and it’s taking more and more time! What a shambles!
Yeah, it's just not—the public didn’t want it! It’s come out and it’s terrible!
Yeah, it would have been—I feel like it would have been good if when it was announced, it was just—they completed it. They just did it. Because how it's—when was it announced? What government was it? Was it not Shorrod or Gillard or something? Like, I can’t even remember.
Yeah, it was a long time ago!
Yeah, it was a long time ago! If they just focused and got the thing built, we’d have a completely built up NBN right now that we’d be using and we’d be loving and we’d already be talking about the next network! But it’s just so funny when you just bounce around governments and policies and whatever, and you get to a stage where we're, what, like years and years and years down the track and still it’s unfinished! There’s still debates going on about whether we should do it or not! It’s just like, "Oh..."
Yeah, politics just gets in the way of things like this! If there's a change of government and it's not their priority, then they're not going to do much to move it forward!
Yeah, that's just crazy because it could have been done! That could have been well and truly done by now!
Yeah, dear! Anyway, that's what we get for not electing a parliament that’s going to get things done for a period of like ten years! Anyway, so I think that's all the news stories that I've got for today. We'll probably head on into the bulk of the podcast, which is a topic that a lot of people have been asking for—actually a breakdown of Afterpay Touch.
Yeah, I've been getting a lot of messages about this company, and I think—what did it IPO? Last year or a couple of years ago? So it's a very, very new—very new company! And I've been seeing it everywhere! I don't know about you, but it sort of just pulled up for me! I just started seeing it on retailers' windows everywhere!
So, yep, so for those who don't know, what Afterpay is, it’s an Australian digital payments business which works with retailers to offer customers a buy now, receive now, and pay later solution! So it’s kind of like a credit card, but it doesn't require customers to have like a credit rating or anything like that!
Yeah! And it means that you don't have to go through a traditional credit means in order to, you know, buy something now and pay for it over installments over two months! It’s a very smart business model, I think, for them to just kind of slot into other online—kind of using the other companies and just slotting in their payment method! And the business model works out for both consumers and retailers really!
Yeah, I mean, retailers love it because as soon as the transaction occurs with the customer, Afterpay pays the retailer! So the route—they—so Afterpay takes on all of the risk of the customers not paying back those payments, and the retailer gets the full amount from Afterpay immediately!
Yes! There’s really no loss to the retailer except for the retailer fees for having that system in place, but I’m sure that it would boost their sales, allowing more customers to make purchases when they don’t have the funds available!
Yeah! You just imagine people walking in and not having—like wanting to buy something from Meyer or something, not having that money, but just being able to walk home with it anyway! So it just—naturally the nature of the system that’s gonna boost up the amount of customers that these retailers will get! So it’s like a win-win really!
Yeah, and they’ve done really well over the short period that it’s been around! They've got 1.8 million customers and 14 thousand retailers—that's crazy!
That's mega! They've grown it so quickly too! That’s—I think that’s the reason that Afterpay is just getting so much hype at the moment is the rate at which they’ve been able to grow this business is just off the charts!
Yeah! I mean, some of their year-over-year growth numbers were in the four digits, like thousands of percent!
Yeah, that’s just—it's unbelievable! It's to be expected of a smallish company doing safely!
Yeah, it can only be achieved by small business!
Yeah, exactly right! And they'll start to get impaired over the next few years, I would imagine, as they start to really get bigger! Then of course, the growth rates won’t be able to be so explosive, I suppose! But you think it comes down a lot to their international expansion as well, which I find quite interesting!
Yeah, definitely! They're definitely going to be looking to expand overseas and see if they can implement this across into other nations!
I find it amazing that companies that are not profitable can have a market cap of almost five billion dollars! Just slows my mind! But then again, I guess if you think that it can do massive amounts of profit in the future, I mean it's understandable, but it is crazy though!
It is like you're literally handing your money over to a company that doesn’t make any money! So just, like, fundamentally that just doesn’t sit well with me, but yeah!
And not only are they not profitable in terms of their income statement, they're losing more and more money in terms of cash every single year, which is a concern!
And is that just to kind of fund their expansion, I suppose? You probably imagine they're just trying to pump as much money into their business because they're kind of getting these sorts of growth rates. You probably feel like they’re just trying to keep a good thing going and just like, “No matter what the cost! Let’s just keep going and get it out there!”
Yeah, especially while it's early! But even before you take into account cash investments, their cash from operations is not profitable, so they’re losing cash on it—that’s a huge concern! Because, yeah, of course, you have to make cash interest payments! And I mean you can use debt to pay off interest payments, but that’s insane!
Especially where we are in the economy right now! So, cool! The problem! Yes! Something I found interesting was that I presumed that a lot of their revenue would be from late fees from customers not paying, that they're making their payments on time, but actually 79 percent of their revenue is from the merchant fee! So from the retailers paying fees for Afterpay to operate in their retail!
Yeah, I found this really interesting actually because I, like you, when I first looked into the business, I thought that, “Oh, this is gonna be one of those companies where if you miss a payment you're going to be paying like, you know, a twenty, thirty, forty percent interest rate and they're just going to absolutely you like financially!”
Yeah, I think that’s the way that the business used to—and now they have a cap on how much you have to pay as late fees, or as before, I don’t think they had that! I think that’s a relatively recent addition!
So I think that a lot of people did get onto them and say, “Hey, this is a bit crazy if you’re not capping your late fees.” So they’ve actually decided to focus their business around earning more money from the retailers as opposed to earning their money from the customers!
Yeah, I quite like that actually because it means that customers aren’t going to be worried about that! Because I know a lot of people don't want to get a credit card because they’re worried that they'll miss a payment and yeah, then they're screwed!
Yeah, exactly! I think it also makes this company a little bit more ethical! Like I always question the ethics of companies like this! I mean technically, of course they’re within their right; if you choose to sign up for this system and you’re missing— and you’re missing payments, of course they should be able to, you know, charge you a late fee.
But with some of them, you can obviously tell that they’re super scammy and they're essentially trying to make your bad situation worse! So if you miss a payment, they're gonna hit you really hard! But I actually—I don’t mind this company because they’ve capped their late fees, and the late fees aren’t even too harsh! I think there’s something like—it's a maximum, the maximum you can pay for a late fee is like under a hundred dollars or something like that!
Oh wow, yeah, that's not very high at all compared to a credit card! If you’re paying hundreds if you miss a couple of payments and the compounding effect gets away from you!
Yeah, I’m not a hundred percent sure about the number I just chucked out! I did have a look at it in my video, but I’ve forgotten it now! But yeah, they do have the late fee cap! So they actually say, yeah, they've kind of changed their strategy! Obviously, they still need to have a late fee in there just to have it as a kind of an annoyance to people so that they actually do make their repayments!
But I like the fact that they’re focusing more on earning money from retailers rather than just taking their customers for all they’re worth!
Yeah, definitely! And there’s obviously a number of concerns with this business! I just thought I’d go through! The first is that the first is further share dilution! So basically, when a company IPOs, they issue a number of shares, obviously, to the public, and then those shares are traded between different shareholders basically on a secondary market.
But with newer companies, especially companies that aren’t profitable and that need cash in order to stay solvent—in order to not go bankrupt—they're gonna be issuing more shares and selling more shares to the market, which adds more shares and it reduces the value of your shares that you already hold! So that’s a massive concern for new businesses!
Yeah! If they—afterpay—they just have to keep raising money, then your shares just end up getting worth less and less and less and less!
Yeah! Something to watch out for, certainly! Yeah! And I mean just last week they raised another 120 million to stay solvent!
Whoa! Wow!
Which is— which is about another, uh—about another eight million shares, so yeah, even further dilution!
So that's—and you know, a company can do this whenever they need to, essentially! So as a shareholder and you see this company and they’ve raised a lot of capital in the past, there's no reason why they don’t have to raise capital in the future, so there’s something to look out for as a shareholder, I suppose!
Yeah, definitely! The second concern is that they assume a lot or all of the credit risk of these customers! So if a lot of customers don’t pay and a lot of their revenue might not actually be there because if those customers don’t make those payments, they haven’t made that money even though they've reported it as revenue already!
Yeah, it’s very true! You gotta watch—obviously it’s um, yeah, it’s always gonna be a little bit sketchy with assuming all the credit risk! But I’m not sure if there's a cap on how—how much a product— like how expensive of a product can you buy through the Afterpay system? Because that could be one way to kind of control credit risk—like how in debt do they go, kind of thing?
Yeah! I mean, I’ve seen Afterpay being used on four or five hundred dollar products, so—oh, it's not small—very, very small products! But I'm not sure how high it gets! Maybe you can't buy like a five thousand dollar product with it or something, maybe, but yeah, if there isn’t a cap, then you could end up—like for the vast majority of people, maybe buying a t-shirt at some local retail store, it probably wouldn’t matter! But if you start getting people buying—like buying cars with Afterpay Touch and then all of a sudden they’ve assumed like for one person like a twenty-five thousand dollar credit risk or something like that!
Exactly! Exactly right! I guess it would depend—they probably do have a cap! I'm not entirely sure, though!
Yeah, something to note that I did look through the annual report and the vast, vast majority of customers make the payment within the first day completely! So a lot of customers are just using it as a payment method and then sort of just paying it off like you would with a car card and then you just pay it off!
Yeah, so it must be like an easier—just an easier way to pay almost like when you’re signing into like your PayPal account online, you just hit your—just pay with PayPal!
Exactly! Instead of typing in your credit card details and all that!
Exactly right! So maybe it is just a convenient—yeah, like you're saying, a convenient payment system! And going on about that credit risk—you're taking credit from customers who weren’t credit risky enough or credit worthy enough actually to get a credit card!
Which, all right, that’s a bit of a concern! And also that it’s very popular among young people who might not understand the cost of not making payments—which is you’re risking your credit rating!
So you might get a lot of young people who buy stuff and they think, “Ah! It doesn’t matter if I don’t pay them back! Like, they’ll just eat the cost and it won’t affect me!” So just do a dodgy!
Yeah, no, that's very true! The interesting thing as well looking at this business model because there's so much hype, right? There's so much hype about their expansion into the US because essentially, people are so excited. The reason that the share price is just going up so much is not really because of what they’re doing in Australia. Sure, they’ve had great growth in Australia and all that, but people are really seeing the future in the US market!
For instance, like, there is obviously so many more people in the US market and the retail space is so much larger in the US, that people are seeing the kind of growth numbers from Australia and then they’re kind of extrapolating it to the sample size of the US, which is interesting.
But another thing that we've got written down here is to think about is that could another company come in and do what Afterpay is doing, do it even better? Or maybe they charge the lower commission, so they try and get more, or they have lower late fees, so more customers go with them? Is there any sort of—what do you think? Is there any sort of moat to Afterpay?
Yeah, especially at first glance, I struggle to see any kind of qualitative mark there! I mean, could PayPal just do this?
Yeah, I see—that's what I think! I think that they could! I think that PayPal is another one of those companies which could even see Afterpay and say, “Oh, that’s—that’s a smart idea!” And it’s all online, right? So it all it takes is programming! It takes software development programming!
And it’s not like they have to go out and, you know, Warren Buffett likes to invest in companies that have massive railroads! Obviously, it’s going to be hard for another company to come along and build a massive railroad, right?
But when it just comes down to online payment systems, which PayPal is already very much across, could they just devote a little bit of their computing power and their programming power that they have at their company and make a very similar system, and then that could spread throughout the US! And then Afterpay is kind of the little guy and getting squashed.
Do you feel like that’s a possibility? What would there be anything? Would there be anything stopping PayPal from doing something like that?
Well, I don’t think so! And especially since they’re very, very not profitable at the moment! Yeah! If they get in any kind of serious trouble, a PayPal or some other kind of business is gonna come along and buy him out!
And you might think that's a good thing if you're a shareholder, but we've got to remember they only did—or only 113 million in revenue last year, or this year actually!
Yeah! But in the grand scheme of things, obviously that’s not—the biggest amount of revenue, you better say!
No! And a company like PayPal isn’t going to pay five billion dollars for a company that’s doing that and not profitable! They’re gonna try and get it at a severe discount—maybe even less than one billion!
So that’s the risk you’re taking if you’re buying in at the current stock price!
Yeah! It’s interesting! It’s a very interesting space! But I feel like breaking into the American market, it could prove to be amazing for this business! Like it’s caught on in Australia by all means! So if it can catch on in America, then wow!
But at the same time, you've got a couple of companies which I feel like are already in that space, especially something like a PayPal that could come along and either buy him out or do it themselves!
I don't know! Would there be any—well, I wonder what the legalities are of PayPal just creating a very similar system and offering that! Whether that’d be all okay for them to do? For instance, like Facebook and Instagram now have Stories because Snapchat had Stories, so Facebook and Instagram, they just copied the entire functionality of Snapchat's system that was making Snapchat so popular!
And now they’ve crushed Snapchat! Snapchat’s not really growing as it should be, so could PayPal come along and just say, “Oh, that’s an interesting functionality of your online payment system! Can we do that? Can we crush you?”
Yeah, definitely! And I think that’s a huge possibility! I can see this business being successful in the short term or it may or may not be successful, but in the long term, I have very, very low hopes for this company in terms of just the lack of moat!
And yeah, I think— I think you're right! Like it just doesn’t have it! It's got a very smart business model—how it kind of just, it's online, so obviously it's low cost! They can just jump on into other people's client base! And then, obviously, it helps customers, helps retailers! So it’s a win-win-win essentially, but yeah, overall it’s just got no moat—it just has no moat!
Yeah! So should we just go through the summary of what we look for and just see if it takes anything?
I feel like that’s probably a good idea, just to finish it off. So I guess first thing to look at is circle of competence. Does it mean something to us? For me personally, I think that this is a business that I can understand! I’m not a huge user of those sort of systems! I do use PayPal a bit, but I don’t use credit cards or anything like that! I don’t ever use it—it’s just like get now, pay later kind of things!
So, but overall, I think that I could—if I put some really good effort into it, I think that I could understand the business! What do you reckon?
Yeah, I mean, I can definitely understand! You have a basic grasp of what that business model is! I’m not sure how deep it goes—what the complexities of a financial business like this is!
Yeah, that’s true! I’d have to learn a lot more about, you know, credit and that sort of stuff!
Yeah, definitely! Same with me! Going on to the next thing we’re looking at—the moat! So it’s a no from me! I think we've pretty much discussed that!
Yeah, we just talked about that! I don’t think there’s any sort of long-term competitive advantage there—no from you as well! And next thing—management!
Management—I haven’t actually looked into the management team too much, but even if you look at, you know, our classic number that we like to assess management teams by, the return on invested capital—well, they’re not even turning a profit yet, so the return that they’re getting out of their invested capital is still not even enough to get them any profits!
Yeah! And that’s what we’re gonna find with these newer businesses! It’s just very difficult to assess them because there’s just nothing there! You’re really just— you’ve just got an idea of where the company will be, and that’s it! You can’t really put a specific value on it!
Yeah, and that goes even for valuing the shares! A lot of people when I released my video about talking about how to kind of value shares and whatnot, a lot of people like to try it on a— like Milk, which is a very—it’s a company that is absolutely growing unbelievably well at the moment! It’s like very rapid expansion!
But people get trapped into seeing how quickly they're growing at the moment and extrapolating that growth out too far! So if we’re kind of trying to evaluate something ten years into the future—if, for example, this—like Afterpay Touch is growing at, what, a thousand percent or something this year? They’re not obviously going to grow for a thousand percent every year for the next ten years!
That would just be—it’ll be ridiculous!
Yeah! Like they did four hundred percent revenue this year—they're 900 percent or something!
Four hundred percent revenue growth! If you—they're not going to grow four hundred percent every single year for ten years!
Yeah, it’s just not gonna happen! Whereas if you look on like the—like Yahoo Finance or some of those other sites, obviously they’re still going to say the predicted growth rate is probably going to be like two hundred percent or four hundred percent or something like that!
But they're not thinking that far out into the future! So you could probably find some pretty—some pretty hated stocks, which may be actually promised a fair bit!
Yeah, definitely! So if I don’t see consistently strong numbers for at least ten years, I usually don’t even try to value the company! And if I want to invest in it because I think that it’s got a future, I’ll do a small speculative position—like I have with Facebook!
Yeah, exactly! It’s just a little speck position, and you keep those fairly—you keep those positions obviously very small in your portfolio! But yeah, so that's kind of what we think about Afterpay Touch! I think that’s probably—we’ve gone through all that we can with Afterpay! It’s a very interesting business model, and it has seen some great growth in Australia!
But overall, it just doesn’t have that competitive advantage, and we reckon that if really it comes down to it, something like a PayPal could come through and probably do what they're doing, as well, probably much better as well!
Yeah, and I think that’s a good a time as any to lead into this Q&A, this last section of the podcast!
Yeah, yeah, I reckon so! So we’ve gathered up your questions from the first podcast, and we’ve tabulated—well, we’ve gathered up most of them! There were actually a fair few, and we thought we’d just go through and talk about some of them.
Yes! So the first question you had was: what were your very, very first investments? What did you make? What did you lose? And also, this person would like to hear our thoughts on the upcoming financial crash and how we're preparing for it!
Yeah! So I think I can go first! This is funny because when I first started investing, I wasn’t that great! I tell you that! I was not that great! I was one of those people very much that thought that, “Oh yeah, someone else said that this stock might be good in the future, you know, I might just jump on that one!”
Or, you know, “I’ve heard that this company—I’ve looked into this company and sure it sounds like it’s a good idea for the future, so I’ll just buy the stocks!” I made some questionable investments first up! I think that’s how everyone starts!
Yeah, obviously you learn along the way! Some stocks go up, some stocks like go down quite considerably as was the case in my experience! And they kind of shape up that you, you know, it makes you realize that actually, you do need to actually know how to invest! So for me, my first stock that I bought was actually Tesla! And this was back when I was a bit younger because I just really liked Tesla! I just thought that it was such a good company, and I like—I followed Elon Musk! And beginner's luck! I actually wrote it up from 250 to just over $300, so I think I was up about 24% when I sold out!
And I actually did that twice because it’s fallen back down to 250, and then I wrote it back up to 300! So there you go! So I made about 24% on Tesla! Some of the first ones were—I got some advice from my uncle who invests as well! He was obviously just saying maybe if he just—he works in this kind of field! He works in setting up watching McCallum's self-managed super funds! So he very much advised me maybe if you just put some money, you know, in a listed investment company! So I’ve got Australian Foundation Investment Company, which I bought in at 570, and I still hold today!
And then my absolute shock—I got an absolute shocker! Vita Group! Vita Group—when I look at it in retrospect, such a bad investment because Vita Group essentially runs Telstra's retail stores! But in terms of like having a moat and that sort of thing, it’s just not that—not actually very dependent on Telstra posting good results for them to also have good results!
Right?
Yes, yeah! So it’s like, I think that was one where I heard some really good—or I heard some smart investors talking that it might be a really good company and that, you know, the shares have fallen too far— they’re gonna recover and something! So I ended up investing at $3, and today there are a dollar eighteen!
Yeah, so not very good to start with! Obviously way before I was using, you know, Buffett and Munger's strategy and Ben Graham's strategy! But what about you?
Yeah, I mean, same as you! Like I sort of just read some news articles and did some very, very basic research before I invested in some of these! And I actually got quite lucky when I feel my first ones, which is probably why I love betting so much!
So the very first stock that I invested in was Focus Group, which is a telecommunications business owned in Australia! And they are one of the businesses—they are in—is Dodo! So they’re one of those very small live telecommunications businesses in Australia! And like, funnily enough, I think it was about a month after I bought this stock, some overseas company made a massive bid for them!
Whoa!
Oh, doctors went up 25 percent in a day! Searching! That's crazy! And it sort of just hovered around there! And it was quite an interesting learning experience because I looked into what happens if the bid fails, what happens if the bid succeeds? Am I gonna get paid out? And that sort of thing!
And I learned a few things! And I ended up selling! Actually, the bid did go up! It went up about 40 percent, I think, after the bid! And I sold out half! And I was like, “All right, let’s see what happens!” So I’ll sell half to lock in some profits, and then we’ll see what happens! And then it dropped back down because the bid failed! And then I thought, “All right, well, still—that’s good! You covered your original investment!”
Yeah, and to make that investment, I'm pretty sure I just—it was pretty sure I just learned what the P/E ratio was!
Hey, you got a P/E of like 11! I was like, “Ah, that's good! Oh, that's great!”
I mean, yeah, there's gonna be a winner! It's all you need!
That's fantastic! And as I mentioned earlier, another early investment was Ramsey Healthcare! And I can't—I think this was just another one like Focus Group where I sort of looked at the very basics, looked at their revenue growth and was like, “Oh, that’s kind of good for the last year!” And they’ve got a low P/E!
Yeah!
I ended up selling out of that one within three months, and I made 0.5%, so I still made a profit, but—
Oh yeah, you’d make a loss on that one!
Yeah, you didn’t make a lot! I think I feel like if you're new to the stock market, if you can just not make a loss, then you're doing well!
Yeah, exactly right! Exactly right! Phil Town’s rule one—alright, don’t lose money!
Yeah, absolutely! So you followed rule one strategy! Well done!
Thank you for listening to our podcast! That’s funny! Should we move on to the next question?
Yeah, let’s do it!
All right! What platforms will this be on? This is a question that I chucked in here—we’ve already answered it! Because that's like every single comment of the first podcast on YouTube was, what platforms will it be on?
So it’s gonna be—it’s on Apple Podcasts right now! It’s on Spotify right now! It’s always going to be on YouTube as well! And we’re trying to get it onto Google as well! So that’s that one! Moving on to the next question—Mark asks, “What makes a stock appeal to you in the first place?” And for example, “Do you pick sectors that are in vogue, or do you just like what the company does or produces?”
I don't know! What do you reckon?
Yeah, so I presume he's talking about the ways we come across businesses and sort of just find them initially!
Yeah!
Yeah, basically one way is I look into areas of interest for me! So, that’s probably like technology and businesses that are really easy to understand, like RV businesses! And just really basic, like railroad businesses! Businesses that are solid and gonna be around forever, basically!
Other than that, I do use stock screeners to screen for high revenue, high and consistent revenue growth and EPS growth and all that stuff! Sort of just—to get down a few stocks that I can look deeper into!
I also like to look at news articles! And I’d like to look at bad news articles, so I like to see what stocks are hated in the market and then to see if the numbers match that! And if the numbers are really good, then I mean there’s gotta be something there! Maybe there’s a bit of a disconnect between the public opinion and how the business is actually operating!
Yeah, because, of course, naturally, business is always evening out to where they should be at some stage or another! So you could probably find some pretty hated stocks which may be actually promise a fair bit!
Yeah, definitely! What about you? You look for?
I think that I’m very much like you in that I follow businesses that, like, I use their products, or you know, I just like them! For instance, like, I’m not an investor in Tesla or anything, but I know everything about Tesla! Like, I’m a fanboy! I’ll admit that for sure! So like, I know like the Model 3 numbers and all that sort of stuff and when they’re expected to be profitable and all that sort of stuff!
So I look into companies that I really like and, you know, things that I use every day! Like Apple—looking at my iPhone right now! And all that sort of stuff! Like, for me, what’s another one? Adobe, because obviously with my YouTube, I’m using Photoshop, I’m using Premiere, I’m using After Effects—like pretty much one of them at least every single day!
So I just love their products! And you know, I just kind of go from there! And other ways that obviously I just keep up to date with kind of news and see what people are thinking!
I also like to kind of keep up to date with what like—what companies my gurus, I suppose, are talking about! Kind of like Warren Buffett and Phil Town and those kind of guys! So if I hear on the, you know, here on the podcast that Phil Town is using Chipotle Mexican Grill as an example, I’ll be like, “Okay!”
And then I naturally will just go over and have a look at what they’re all about and that sort of thing! Or if Warren Buffett's starting to invest in Apple, I’m like, “Okay! I might go in and research Apple!”
And try and decipher why he’s making that decision and see what the numbers are like and what you're doing and that sort of things! So they’re probably the main ways that I go about it!
Yeah, I think we're very similar in that area!
Yeah! The next question we've got you is, “Hamish, Brendan, what are your opinions on why exactly they don’t teach this approach at University?” And that’s referring back to our long-term value investing approach! You know, finding companies that you care about, looking for a moat, assessing the management team and making sure you only buy when there’s a decent margin of safety pricing available to you!
Yeah! Sure! Did you want to go first on this one?
Yeah, I think that—to be honest, I reckon that the reason that they don’t really delve into this at university and that sort of thing is because people that are going to university for these sort of topics are probably going to be taught by people in that industry! Working in that industry! And they’re also gonna end up working in that industry!
And the way that the kind of investment, the finance—like financials industry actually operates is way, way different to how people like Warren Buffett or Phil Town or Mohnish Pabrai actually go about their investing because in this—in this industry, people are judged quarter to quarter.
Like literally, if you want to keep your job as a top asset manager at some great mutual fund or something like that, you have to show to your investors that you aren't doing good things with their money every single quarter!
Like if you come back for a quarterly update and you say to people, “I don’t know! You tell them, oh look, I thought that the best strategy for your money was to not invest it at all,” then essentially the people that have trusted you with their money think that you’re just doing nothing! You’re just getting paid for sitting there and doing nothing with their money!
And obviously, the people that work in this industry are very short-term based! So they don’t even get taught, you know, waiting for perfect opportunities, finding companies that mean something to you, and you know, just waiting for those times where everyone else is panicking!
And then they’re just—they’re just managing so much money that they have to be doing something with it at all times to try and make a return! So they really can’t follow that long-term tried-and-true method of investing that the best use just by the nature of their industry and the way that they're judged at jobs, I suppose!
That kind of makes sense!
Yeah! Yeah! That—what you said about the cash—that's a big one! Because I think a lot of people who are giving their money to these funds to manage don’t understand that there’s times where having a lot of cash is really important! And the best investors like Buffett understand this—that you need to have lots of cash available for when the market turns down! So that you can put a lot of money into the market when prices are cheap!
And I think a lot of people don't understand this if they're not—if they don’t have a financial background! And for that reason, they expect similar to market returns or better than market returns every single quarter, which is just impossible if you’re sitting in 50% cash or 30% cash! You just couldn’t do it!
Yeah! Yeah! Your whole portfolio size—because your cash level's so high, your whole portfolio, if only a small portion of that's invested, your hopeful for it won't actually rise by that much!
Yeah, but that’s the—in most instances, that’s probably exactly the right strategy to be doing! Like at the moment, what percentage would you be sitting in cash at the moment, following our strategy?
I think—I think I’m in about forty-five percent!
Forty-five? I’m even higher! I’m actually way too high in cash! I wish that I could have some better value businesses to put some money into because I think I’m like over 60% cash, which is just ridiculous!
And last question that we’ll go through for today, guys! You seem to have a very different perspective, Hamish and Brandon; you seem to have a very different perspective on what stock exchange you use! Hamish seems to only invest in US companies, whereas I guess I talk more about Australian companies! Can you both explain your points of view on why you invest the way you do?
Yeah! So I do mostly invest in US businesses at the moment, but I want to be clear that I will invest in either the Australian or the US market if there's strong businesses there and if I can find value! But at the moment, I’m just finding it difficult to find those kind of strong businesses in Australia!
I find that you get a lot of businesses that are good over short periods of time, but you don't get any really solid businesses that have done like 20, 30 years of just insane numbers year after year after year! And part of that would be just because there's a lot more information about US stocks out there, because I'm sure that there are businesses in Australia that are doing numbers like that! But it’s just a lot easier and a lot quicker to assess a lot of US businesses because it's really easy to find the ten-year numbers for US businesses!
And I struggle to find the ten-year numbers for Australian businesses really quickly, unless you're using a paid service!
And there's so much—obviously there's so much news with US companies that it makes it much easier for us to just follow just the volume of news that comes out about these US companies! Sometimes on my channel, I go through a lot of Australian businesses, and I do like to look at Australian companies! Obviously, they’re close to home and in some aspects, you can keep track of Australian businesses more easily because obviously, you might see them on the news or you kind of understand that the market that they're working in because obviously we live in Australia!
But to be honest, I actually think that for the style of investing, our long-term value investing that we both use is that you're probably better off looking at US companies!
And I think the reason for that is that the US is not real—I should say the Australian businesses and the way our system is set up, you know, with fully frank dividends in some instances, is that a lot of companies that do end up being quite successful, they obviously—they end up just paying out a lot of their cash as fully frank dividends because that system is so good for, you know, a passive income style investor in Australia!
Whereas if you look at a business in the US, people are getting excited if they're getting like a three percent dividend, and there’s no franking over there! There’s no frank dividends over in the US!
So for us, for what we like to see in our businesses where we’re looking for these value businesses that show good growth opportunities, the US is almost set up a little bit better for those sorts of businesses, because dividends aren’t so much of a thing! You know, companies hold on to more of their profits and invest back into their own businesses and that sort of thing!
Whereas I think that almost in Australia, there’s a bit of pressure on companies to end up paying a fully frank dividend, especially if you’ve been a very successful company!
So I feel like almost the US has just set up better! So while I do like to look at Australian companies and, like Hamish, I’m happy with investing really anywhere in any market that’s, you know, that’s reputable and offers me good opportunities, I feel like overall—and also that the companies that I am interested in are usually American companies!
Like the companies that I use their products or services every day, most of them are American companies! Like Facebook or, you know, Twitter or Adobe or those ones that I’ve spoken about before—they’re pretty much all American!
Yeah! I couldn’t agree more! I think that a lot of the very, very, very successful businesses just tend to come out of the US!
Yeah, and I feel like—yeah—they’ve just got a system that allows it!
Yeah! But if you wanted to be like a passive investor, if you wanted to be someone that finds some pretty stable businesses and plunk a whole lot of money and then just live off dividends, then if you go by that style, then there’s probably no better place to invest than Australia!
Yeah, I probably agree with that, because I said—yeah, because it’s a different system! Like, it’s a different setup with the fully frank dividends, so it just depends on what style you approach! But I think because we’re very much that long-term value investing, looking for growth opportunities in businesses, then we just tend to favor the system that the US has, I suppose!
Yeah, definitely! Anyway, I think that'll do it for us for today, guys! We've been rambling on for, I think, a little bit more than an hour now, so I really enjoyed that! That was good fun!
Yeah, as always! Always good to chat about the market and wrap up the week!
Yeah, so guys, make sure if you have any other questions that you'd like us to answer, you leave them in the YouTube comments of, well, this podcast! And then we'll get to your questions a little bit—hopefully a little bit more next week!
But yeah, hopefully you’ve gotten something out of our discussion today!
Yeah! I really enjoyed talking about Afterpay! It’s good to have a bit of a yarn about that!
Yeah, it's a company that I was really interested in to learn a bit more about! It’s good!
Yeah, and I guess we’ll see you guys all next week, and we’ll have some new news stories and something else to talk about!
See you later, guys!
All right, catch you later, guys!