The 'Value Investing' Strategy Explained - The Young Investors Podcast | Episode 1

Hey guys and welcome to our investing podcast! We're doing a podcast, can you believe it? My name is Brandon, and I'm joined, gonna be joined each and every week by Hamish Hotter.

Hello, how's it going?

Oh, I'm going quite well. How are you doing?

Yeah, I'm good. Good! I'm excited to do this podcast with you, talk about everything stock market.

Yeah, I'm super pumped! It’s going to be a lot of fun! So essentially, we had an idea that we would start up an investing podcast. It’s going to be fairly light-hearted, fairly hopefully easy to listen to. It’s not going to be too dense with technical information and whatnot. But yeah, we're hopefully going to do a weekly podcast and bring you guys kind of all things stock market news from maybe around the world, as well as just Australia, because we are both Australian.

And we might chuck in, you know, some Q&A; we'll do some stock breakdowns. Obviously, this is the first podcast that we're doing, so if you do have any suggestions on what you'd like us to talk about, make sure you leave them in the YouTube comments for this podcast. But yeah, I thought that maybe we might just start out the video by just talking about kind of who we are and what we do, so that everyone's kind of on the same page and go from there.

Yeah, yeah, it’s definitely a good idea. Head off first.

Yeah, sure! So basically, if you don't know who I am, I'm Hamish Hada, and I have a YouTube channel that I started earlier this year. And funny story, actually, I used to watch Brandon's channel when he was starting out a long time ago.

And yeah, you know, you were in there early on to watch it?

Yeah, well, I think I was in the first 100 subscribers.

That’s crazy!

Yeah, it's that's crazy! And I kind of go, thank you for the support!

Welcome, man!

Yeah, and I just watched you grow over the neck of over the first year, and I saw how exponential it was, and that sort of showed me that it was possible.

Yeah, that’s the good thing about YouTube; once you can get that snowball going, it does—it starts rolling.

Yeah, yeah! I mean, I think I got—it’s a lot of fun.

Yeah!

I got like seven subs in the first month.

Seventeen?

Yes, I had, I think I had ten. I think I had ten subscribers in the first month or something—something like that. And at that tight line, I was stoked!

Yeah! Yeah, I was pumped! I was like, people actually want to listen to this! But I got the first one; I was just so like—even the every time I get a new one now, even still, I'm just like amazed that there’s another person, an actual person out there!

Yeah, that’s it!

Yeah, the first time I got one, I was just like, man, who are you?

Yeah, it's like, where the hell are you? Like, why did you press subscribe?

Hey, so you’ve been going since February.

Yeah, since February of this year.

And that’s awesome! Basically, I started investing a couple of years ago, and I was just from really, really into it. So, I decided that I'd go on and study finance at university, which is what I'm currently doing. I'm currently about 60% through my course. And the more and more that I learned about businesses and the stock market, I just got more and more passionate and started dedicating more and more of my time to researching stocks, to the point now where it's like wake up, look at the news, go to bed, look at the news, like...

Yeah, yeah! No, I feel that too. I feel that too.

Yeah, I mean, I'm just completely addicted to learning about the stock market! I just find it really fascinating!

Apparently, stock market addiction is actually like a thing.

Really?

Yeah! Apparently, it's an actual thing; like people get addicted to the stock market, and they actually like—they do look at their screens, like, the whole day from when the market opens to when it closes.

Yeah, okay, okay, maybe I shouldn't use the word addiction so openly, but, um, yeah, but political correctness—who cares?

Yeah, yeah!

And then, of course, I've watched Brandon's channel and a number of other channels, and I noticed that this YouTube thing was something that I could do in a way to express sort of my passion. So I thought I would do that, and from there, I’ve just been making a lot of individual stock analysis videos; breaking down stocks and seeing if they're a buy, seeing if they’re a great company, and also videos about just how I invest—what is the approach that I take in investing.

I think I'm fairly well—our channels are fairly similar. So I'm obviously—I run the Aussie Wealth Creation YouTube channel, which chances are you’re listening to the podcast on that channel right now.

But yeah, my name is Brandon, and I started the channel in February of 2017. So, I see you before Hamish. And unlike Hamish, I have absolutely zero qualifications or training in investing or finance or anything like that. In fact, I work in healthcare, of all things!

But just like Hamish, I just have an incredible passion for it, I suppose. And naturally, you learn about the things that you really enjoy. So, yeah, that's me.

Like Hamish, I've been investing for a couple of years. So overall, obviously, we're not super experienced investors like what you'll see on other podcasts, but that's also because—how old are you, Hamish?

I'm 20.

So 20, and I'm 23. So really, in the grand scheme of things, we couldn't have even been investing for that long!

But yeah, we both just have an incredible passion for investing, and we hope that that kind of comes across in the podcasts and the videos that we make, and you know, we just have a blast doing it!

So yeah, I feel like making this podcast is going to be one of the more enjoyable and easier things we've ever done!

Yeah, yeah! I mean, it's just rambling about stocks and that sort of thing!

And rambling about stuff you like!

Yeah! Sort of just need—it’s great to just have a really open conversation about this stuff. Because you can have the videos where they’re going to be concise and to the point, but I think you get a lot of value out of something like a podcast, where you can just listen to people expand on specific ideas, you know, over a topic for ten minutes or something like that.

Yeah, it gives you a lot more freedom to maybe go a bit more in-depth or just talk about something for a little bit longer. So yeah, I'm looking forward to it, and I reckon it'll be a lot of fun into the future, so hopefully we can keep it up, and let us know what you think in the comments section below.

But I think that maybe from here, we're always going to hopefully do a bit of a news segment at the start of each podcast, just to keep ourselves up to speed and keep you guys up to speed with a major news story and what's happening with the markets.

And then today, we're also actually going to finish off the podcast talking about what our actual individual investing strategies are, kind of to lay the groundwork before we go into future podcasts about, you know, individual companies and that sort of thing.

So I think that really, with all that said, the first thing to go through is what's happening in the world of investing news!

Yes, so I thought we'd just start off by talking about the very boring stuff—what happened during the week for the mobile of major indices. So for the ASX, the All Ordinaries was actually down this week from 64 to 5 to 6,357. And actually, on Tuesday was the worst session we’ve had in five months!

Wow!

Yeah! I think that might have had something to do with this political sort of shake-up that we read this week.

What? I go to work, and you know, I'm just doing my thing, and then I come home, and we’ve got a new prime minister!?

Yes, that’s what it’s pretty amazing that our system allows that to happen. How can this happen? This is like crazy! You can imagine just like—you go to work, and you come home, and Mark Zuckerberg is no longer the CEO of Facebook.

Yeah, it’d just be like if that happened in the stock market, that would just be ridiculous!

Ridiculous!

Yeah, anyway, it’s incredible. Anyway, so we got a new prime minister. I don't even know—I don't know much about Scott Morrison, to be honest.

No, I don't either! Do you follow much politics? Because I don't!

Not that much, I finally only like what I need to for investing, yeah, stuff. But to be honest, I follow U.S. politics more than I follow Australian politics; it’s a lot more colorful; it’s more interesting.

Just what do you think? Don’t do his thing, I’m Twitter and just watching.

That's so—he could just start his own TV show!

Yeah, it's just way more entertaining! So ASX didn’t have the best week.

Yes, in the U.S., we've got the Nasdaq, which was up—what is it? A hundred point?

Standard, standard.

Standard U.S. going up? It’s declining?

Yeah, pretty much. Oh my gosh! Yeah, I was actually—I was just looking at the Dow the other day; over like the last couple of years—oh my gosh, it’s gone up so much! So much!

Yeah? Is it not that? Dow? Maybe it was the Nasdaq. I can’t even remember. The Nasdaq is just on its own trajectory; like it’s just broken away from the S&P and any of the major markets.

What I was looking at—the SMP, yeah, that's pretty crazy!

Yeah, anyway—yeah, America! Wow! It’s pretty good over there for them!

Yeah, so yeah, that’s kind of the boring stuff. I guess we'll always give that little bit of an update, but to be honest with our investing style, that doesn't really impact us very much at all, does it?

No, it doesn't! Like it's not something I'm really watching at all now. I mean, it’s nice to know what the market's doing, but in terms of individual stock analysis and valuing stocks, it really doesn’t have any impact.

Yeah, and what I do, yeah?

Yep, I couldn't agree more!

Anyway, all right, well, let’s talk about maybe some of the major news topics of the week.

Yeah, so in Australia, we had a few stocks, a few companies that were reporting numbers. One of the bigger ones that some of you might know is Wesfarmers, who reported numbers, and their profit was down 60%.

From...?

Which at first, I saw that and I was completely blown away! But I did a little bit more digging, and most of those were from impairments. So because they’re their Bunnings in the UK, they shut out them, and it cost them $1.7 billion in the end.

Well, wait, so, did they shut it down?

Yeah, yeah! They sold it! They sold it for a dollar!

They're out!

Yeah, they are! Oh, so mostly it's seven...

$1.7 billion?

Yeah, it’s a lot of money!

That’s a lot of money, yeah! Well, dear, I do!

Yeah, so most of that profit wasn't actually losses; their profit reduced by impairments, so it’s intangible.

Yeah, it’s not really real in terms of their earnings; their earnings were up 4.5 percent, which beat estimates, actually. So that was a good positive!

Yeah, well, yeah! Wesfarmers is one of those companies—it's just crazy. Like, I can see their strategy when they wanted to start Bunnings in the UK, like yeah, enough! Let’s expand it! Like, it’s so successful in Australia.

I mean, it’s kind of ironic because Woolworths tried to challenge them with Masters, and it completely failed! And then Wesfarmers has turned around and be like, “Haha, we're taking Bunnings overseas!” And it’s just—it’s a lot, that’s a little of both!

Just like, made a huge mistake!

Yeah, lessons to be learned! Don’t start hardware stores in other countries!

Ain’t do it? If you’re thinking about starting a hardware store, think again. Start a YouTube channel or something!

Yeah, that’s enough about Wesfarmers! Erica, what else we got?

Yeah, so who else reported numbers? We’ve got Seven West Media reported numbers, and their profit was $135 million, which is a lot better than their negative $744 million last year, so nice!

Nice turnaround there!

I'm presuming that was from a number of impairments as well because their revenue was down 3.2 percent this year, so...

Yeah, right! Right?

So that doesn’t quite make sense otherwise!

Yeah!

But it’s really no surprise that these TV networks are struggling.

Yeah, I don’t—I don’t—to be honest, I’m going to go in a bit of a spill here—I don’t get how—I just don’t see a future for free-to-air TV, and I’ll tell you why. You think about—think about there’s so much media that you can buy these days.

Sure, you might watch, you know, The Bachelor or something, but then again, you’ve got like a million shows on Netflix, right? How many—there are so many people now that have Netflix; it’s just unreal!

So Netflix, of course, you have to pay to use it, whereas like free-to-air, you don’t have to pay, so Netflix is just gathering like so—and all these other streaming services—they're gathering just so much cash, right? Like ridiculous sums of cash!

And they can use that cash to make their shows like even better and even better and even better. And then you’ve got free-to-air, which over time I imagine will lose viewership because everyone will be watching the better and better and better shows which are coming out on the streaming services because they earn revenue by charging people.

And then so they’re—these free-to-air TV services, they just end up losing more and more viewers, so they make less and less money, which means they can put less and less money back into their own TV shows, so they get even worse and worse.

Do you see what I’m saying?

Yeah, I couldn’t agree more! I mean, people want to pay for the convenience of being able to watch what they want, when they want. And free-to-air is just so inconvenient!

It just infuriates me putting on TV these days because it’s even if you find something that you actually want to watch, you’re halfway through it and you’re watching an ad!

Yeah, it’s good! I see TV going as people having a number of different streaming services that they’re subscribed to, and basically that's what you're watching on the TV—none of this free-to-air sort of live TV. I just don't see a future for it!

No, I don’t see a future! And there'll always be people like my dad or something that are always like, “No, I’m only—never paying for TV! I’m gonna watch free-to-air!"

But I mean, when it does, it'll just get to a state where you're watching like 90 percent ads!

Yeah, exactly! So that—because that'll just be what they have to do!

Yeah, their earnings up!

Yeah! These networks have just got to constantly acquire new advertisers! Yes! Whereas something like Netflix—I mean, they’ve got their recurring revenue from people just subscribed, so it’s a lot easier for them to bring in consistent revenue.

Yeah, definitely! And even like—I go—even for like people that like sport, I think that that might be like the one saving grace of free-to-air is that there's so much sport on free-to-air!

Yeah, definitely! Same time, yeah—my friends down the road have Foxtel, and they get HD AFL. And I’m a huge AFL fan, and I like always go to their house now because I just love watching it in HD.

And then I come back and watch it on my, like, my TV, and it looks like I’m watching flippin’ mashed potatoes! Seriously, it looks so bad because the obviously the quality is bad, and it’s just a poor experience!

Yeah, it’s not the best! Anyway, that’s my little rant on free-to-air TV.

Habit. Anyway, we got any other news? What else is going on?

Awesome news that came out this week is that the Australian jobless numbers hit an all-time low! So the unemployment is severely down. But in what I found interesting in the report was that the actual aggregate number of employees is also down.

So, all right, if you don’t know how the unemployment number works, basically the unemployment number takes into account all the people who are looking for jobs or that are unable to work—so people who want to work but don’t have a job, basically—but it doesn’t include people who are not looking for a job.

And the number of people who have jobs is going down, so that means that there’s more people who have not only don’t have a job, they’re no longer even looking for a job.

Ah, so I mean, that’s a— that's a bit of a—yeah.

It’s interesting to see that happen because, I mean, it’s just—why is that happening?

Yeah, yeah, probably some in-depth reasoning for it.

Yeah!

And another part of the report that I've felt—but, or something that I find interesting is that because we have such high housing prices in Australia, especially around the major cities like Sydney—

Oh, that’s true!

—that very expensive, we have these such high housing prices in combination with low interest rates—that is a real concern for me because I reckon a lot of people out there have invested in these homes at these low interest rates, but because the housing prices are so high, they've probably barely been able to cover their mortgage payments as it is.

Okay! You can see where it’s going, right? You can see where it’s going...

Yeah, yeah!

And you know, inflation goes up, the Federal Reserve raises interest rates, or the Reserve Bank's just getting a bit—yeah, things start getting a bit tighter. And then if you committed yourself to so much debt, yeah... when the interest rates start going up—oh dear!

Still, I’m still—things to watch. And lower unemployment—I mean, low unemployment is obviously a great thing, but it generally indicates that we're reaching the peak of that economic cycle, where things are gonna start to turn around.

So I just—seem to watch how it unfolds over the next few years.

Definitely, definitely! That’s one thing I wish I knew a bit more about, actually, as property.

But yeah, I think learning about property as well over the next few years will be highly beneficial!

Yeah, yeah! I find it very interesting; I just don't know a whole lot about it.

Yeah, I’m doing a unit at university actually at the moment called property investment.

Oh, yeah? That’s been really helpful at expanding my knowledge in that area.

Yeah, well, I’ve talked about that sometime, because I’m a bit of a spud when it comes to property and property investing, but I like to think that I know about property, but really I’ve got no idea what.

Yeah, yeah! All right, have we got any more news stories?

Ah, nothing in terms of news, but I did want to talk about Facebook stock a little bit because it has been really popular!

Yeah, I saw your video on it too recently.

Thank you! People should go check that out!

Yeah, obviously—plug, plug, plug! It’s very interesting because if you don’t know what happened to Facebook stock, basically it was on a massive tear going up and up and up every single day—it was going nuts!

Yeah, it was going up way too quick, I mean, after that Cambridge Analytica, I think it went up 40%.

Yeah, because it spiked down, which was to be expected, but the thing I didn’t expect was how hard it recovered.

Yeah, it just went bananas!

Yeah, just flew up, and in my opinion, it went up way too high. And then their earnings came out, and the earnings weren't great.

Well, there was a number of things that were a bit of a concern—Zuckerberg speaking about revenue growth slowing by high single-digit numbers.

Yeah, and I think a lot of that just freaked people out, and people kind of realized how overpriced Facebook had begun.

Oh, yeah! But you’ve told me that you’re looking to make an investment, or you’re looking into Facebook at least?

Oh, yeah! I’m researching!

To be honest, because this all happened when I was overseas, so really, I’m just researching it now. I’m a little bit behind where everyone else is with Facebook, right?

I'm just looking at—because I’ve been reading, you know, Mark Zuckerberg saying that the growth is going to slow by high single-digit numbers, but I couldn’t—I couldn’t quite remember how long he said that’s going to happen for, so I have to go back and look at that.

I believe he’s read for the next couple of quarters.

Yeah! A couple of quarters! So I’m kind of thinking now if, you know, let’s say right now this price, let’s say I thought it might be a fair value—maybe it’s still even overpriced a little bit, who knows? But if you hold your horses a bit, is it likely to continue trending down, or has it already, you know, hitting its bonus? But then again, of course, you can’t ever tell that sort of stuff.

But yeah, stuff that I want to research a bit more into! But the thing that I actually really took out of what I've listened to so far of the earnings call was that Mark Zuckerberg is just totally honest.

Yeah, for sure! I mean, to have a conference call that is so transparent like that.

And if you've ever listened to everyone uses this example, but Warren Buffett and he's Berkshire Hathaway letters and his conference calls and annual meetings—they’re just amazing how free-flowing it is!

And it’s kind of like you're having a conversation with someone. And it’s like they’re just talking to you as if you’re the sole owner.

Yeah, I get that from Zuckerberg as well!

I get that vibe!

Yeah! You can always tell that they’re reading off a piece of paper, but there's still—the good thing about it was that he was pretty open and honest about what was happening in terms of the growth estimates and that sort of stuff.

Yeah, for sure! I mean, you eat so many times, you hear management—they always try and bounce around those sort of topics, and that's a surefire sign that the management's not really in it for the investors.

Yeah, yeah, you know it’s not a good sign when someone asks a question on the conference call, and the CEO answers it like a politician and just goes, “Yeah, well, we're focused on growing!”

Yeah, really—go where?

Where is the people like—yeah, it’s like just answer the question! You could answer the question in one sentence, and if you’re a good CEO, you will! And you won’t care if the stock price tanks because of it, because the core, you know, the core business is still really good!

Yeah, yeah, no, that’s crazy! I love that! It’s just like—so your growth is slowing by 10% per annum now—can you explain that?

So look, our employee satisfaction rates are going up a lot at the moment, which we’re really happy with!

It’s just like, notice cut! Well, looks like we just pivot the conversation!

Yeah, yeah!

But let’s talk about—we just opened a new store—we're really happy!

Yeah!

But back to Facebook though! Yeah, I think in terms of criteria, which we’ll talk about a little bit later, but I think it does fit in most of my criteria in terms of being a great business.

I’m just not sure about the price! And I have made an investment, but it is a speculative investment, which means I’m keeping it to a small proportion of my portfolio. I think it’s about 6% at the moment.

Yeah, but in terms of like circle of competence, the management team, and the moat, which we’ll talk about in a little bit—it meets all of my criteria personally at least!

Yeah, no, I’d agree with that! Definitely, it’s right up there! It’s a good company; yeah, it’s got a good, yeah, a very good return on invested capital, and it’s got a great moat, but yeah, we will talk about that.

In fact, you want to lead into that maybe now? I think that that's kind of a good flow!

Yeah, sure! We should start out our value investing styles!

Yeah, so essentially what we’re gonna aim to do—and obviously this is the first podcast—if you guys have any suggestions we would love to hear them! Leave them in the YouTube comments, definitely!

But we’re probably aiming to try and do maybe every week or every two weeks do a specific stock breakdown and talk through a different business based on our own investing strategies.

Now, with both long-term kind of value investors very much like, you know, Ben Graham, Warren Buffett, Charlie Munger—those kind of guys, that’s very much the strategy that I think we both follow.

There’s gonna be, I guess between us there’s going to be little differences, but on the whole, I think it’s fair to say that we invest fairly similarly!

Yeah, definitely! For the most part, we follow the same strategy!

Yeah, obviously, everyone deviates in terms of what their circle of competence is and what areas of the stock market or business in general they're looking at!

Yeah, of course, of course! But when it comes to actually—once we've found something—actually looking at how that company operates and, you know, what things we look for, it’s gonna be fairly similar!

So anyway, what we thought we would do for the first one is to kind of lay the groundwork, I suppose, and just go through what we actually what we actually look at when it comes to a company—how we approach our investing and talk about just essentially both of our different methods.

So there might—they’ll probably be some repetition, but I think there’s value in just each just going through separately.

So I guess I’ll start off is that the first thing that I look at when it comes to a business is something I’m trying to find businesses that I actually like—like businesses that I care about—businesses that I wouldn't hesitate to tell someone that I’m an investor in and, you know, businesses that really mean something to me—like businesses that I perhaps bump into every day just through who I am and that sort of thing.

So, yeah, I use Facebook a lot! So I would say that Facebook is probably one of those businesses that’s within what you were talking about that circle of competence.

And then from there, I guess the next thing that I would do before anything else is I would think about these different companies and think about whether they have any sort of competitive advantage or any sort of moat, same as what like Warren Buffett or Charlie Munger does.

And there are lots of different moats! Actually, I was surprised at how many—when I first started out kind of learning about this sort of stuff, I was surprised at just how many different styles of moats there are.

Yeah, there’s tons of different ways that companies can have a strong competitive advantage over the other companies in its industry!

Hmm!

I think that there obviously these moats operate differently, and some are more applicable to different areas. For example, there's one called a brand moat, which is obviously very applicable to things like fashion and clothing and that sort of thing.

And obviously that moat's just where, you know, your brand is so powerful, so strong, so well-loved that even if people had a cheaper option, you know, a cheaper alternative, they probably still end up buying your product just because they like your brand! So that’s this one that I like to look at!

There’s another one, which is like a secret moat, where somebody has—a company has a patent, and that stops other companies from pursuing their business.

You can also do like a priced moat, where that’s kind of like the Amazon or the Costco, where they can just beat everyone on price; like, you just can’t match the price!

Yeah!

So naturally they get most of the business!

Yeah, when I talk about a little bit in some of my videos is what when the brand is the industry standard in an industry!

So for example, like the industry standard for photo editing and that sort of thing is Photoshop! Adobe's!

Yeah, yeah, true!

In the same way, and I think this is why Google is such a powerful brand. And I talk about this constantly; I always use this example, but Google search engine dominant—yeah, YouTube’s dominant, Android dominant! Like they just have the industry standard in so many different industries, it’s just amazing!

And I like that! I remember listening to this in one of your videos—is that because it’s kind of the industry standard, you end up—you don’t even say, "I'll look that up on Google," you just say, "Oh, I'll just Google that!"

Yeah, it becomes a verb!

Yeah, exactly! Exactly! You just—not just like, “Oh, I'll take that photo and I'll edit it in Photoshop,” you just say, “Oh, I'll just Photoshop it!”

Yeah, it's kind of like a—yeah, it’s the verb for—it's another word for photo editing now!

In the same way, thank you, there’s another word for searching something on the internet!

Yeah, yeah, exactly right! Even YouTube, it is sort of like a thing that’s—I’ve heard—I hear that a lot as well!

Yeah, so they’re kind of some of the moats that we look at. There are some other ones here, which is like a toll moat. You can think of that like a company owning a toll road; obviously, if you have to use that road, they’re just going to keep raking in the revenue from it.

There’s a network moat, which is essentially where the network is just so strong with that company!

So think of Facebook for example—they have a network moat, which is essentially saying that the reason that Facebook is so successful is because the service that Facebook can offer you gets better with more people using it!

So the bigger the network gets, the better the product gets. So it’s kind of a network moat!

And then there’s two more—one which is very well recognized, which is a switching moat, which is kind of like what Adobe has with a lot of their products, where essentially it's the industry standard, so a lot of companies end up using a particular system so much so that it becomes quite hard for that company to switch away or it’s just not financially viable for them to switch away from that network.

Yes, and I also think Apple does this very well with their Apple ecosystem and their laptops and their iPads and their phones—and they keep you locked into their system so that it’s really annoying to want to change even if there’s a product out there from a different brand.

I think that just—sorry, just in particular with Apple, Apple was really smart because they used to have a brand moat, and they say obviously still do, right?

Yeah, but they used to just have a brand moat, and I think that they were smart enough to realize that eventually, a brand moat can be can be crossed, I suppose, or can be you know...

Exploited or whatever!

Yes! So during that time, so yeah, sure— they’re the number one smartphone or whatever. So during that time, they’re now really focusing on turning their company into having another moat, which is that switching moat!

Yeah, definitely!

And what you’ll notice is with some of the really great companies that you look into, they won’t have one moat—they’ll have a moat in many different ways.

So if you’re thinking back to say Google, they have that one—they have a networking effect in terms of their YouTube community and that sort of thing; they have their brand for their Google, and they have—well, maybe you want to call using Google as a verb their brand, but they also have their—it's the industry standard; they also have their innovation of their trade secrets because their algorithms for searches are just so powerful, and they’re so much more powerful than other searches.

And so you’ll notice—basically what I’m saying is you’ll notice that on some of the really great businesses, there won’t be one moat; there’ll be a number of different moats that make them—or even make their competitive advantage even stronger.

And if you can find those businesses, like that—that’s unreal! Like that, there—imagine a castle with two moats! It’s just like you’re invading it and then you cross one moat, and you’re like, “Crap, I’m halfway there!” Yeah, meanwhile, from the top of the castle, they’re still pelting you with rocks or whatever!

Yeah, yeah! So yeah, it really solid—just really boosts their competitive abilities, I suppose, and it protects their profits. It does all that sort of stuff.

So anyway, I guess back on the general train of thought of how I go about investing, there are kind of the moats that you’d look at! So that’s what I like to look at! I like to be able to raise through why a company has a particular competitive advantage.

And from there, I guess you have to also then check—once you've actually thought about it—you have to check that the numbers also agree with you. So the numbers that I think both of us do like to look at are things like sales growth, earnings per share growth, equity growth, cash growth, and you really like to see them growing well—really over more than ten percent each year.

And ideally, ideally, you look back through the history—look at like five years and ten years ago, and you still see that really strong growth! But you also hopefully, when you’re investing, you see that the growth rates are only improving steadily, just increasing over time, so the company is getting better and better and better each year!

So I guess that’s kind of the next step that I would go through is kind of check all of that. So if we can see that we’ve got a great company, but you know you like, and it's got a great moat, and you know that’s backed up by the numbers, it kind of shows you that you’ve got a company that’s probably got a pretty strong business model.

And then of course, I like to look at the debt levels because you can actually get very pinned down as a company by whopping great debt. So the general rule of thumb that I believe both of us follow—I’m not sure you can correct me—I don’t speak for you—is that hopefully the company can pay back its debts probably within three years of the current earnings. Is that kind of what you look at as well?

Yeah, yeah! I mean, I don’t look at that specifically, but you definitely want a company that has very confined low levels of debt that’s easily managed by their cash and short-term investments.

Yeah, so I think Facebook has total liabilities of something like $10 billion, which is unreal! Like that’s a lot of money, but at the same time, I think just in the past quarter, I can’t remember what they do—they make something like $10 or $11 billion in revenue or profit.

Yeah, yeah!

So it's a company that, obviously, it could pay back its debts very, very quickly!

So that’s just a little example! Anyway, the next thing that I guess I’d go through is research the management team. So for the management team, you want to look at like the CEO—all the guys that are running this company—guys and girls that are running the company!

And essentially, you just start out real basic: I just Google them. I just look at their history, look at what they’ve done in the past, look at whether those ventures were successful.

And then it also goes a step further—you can look into annual reports, look at their pay structure. Some CEOs just get a whopping great salary, and they don’t actually get paid in shares or share options very much, so they’re getting paid no matter what the share price does, essentially.

So you do want them to have a bit of an interest in the actual shares of the business, but again, you can look at it the other way—you don’t have them focus too much on being paid in shares because then they can just try and spike the share price with short-term news, and then they can just sell them straightaway, so there’s kind of things to think about.

But the other thing with management that I really like to look at is the return on invested capital, which I think is very similar between both of us as well.

Yeah, I definitely like to return on invested capital!

Yeah, essentially return on invested capital is just how good is the management team at taking the capital that’s at their disposal and actually getting a return from investing that capital? So obviously, if you can get like a 10 to 15 percent return on invested capital out of the management team, it shows that they've got their head screwed on. They’re allocating the capital in a way that’s, you know, benefiting the company!

Yeah, yeah! And then I guess from now, I just go straight into—after I’m kind of on my way looking at all these different things—meaning to me management, making sure it’s got a good moat—then we look at the valuation.

And essentially, I’ve done a couple of YouTube videos on this, but essentially just trying to analyze the business and figure out what the actual share value is if you're going to make a decent return on it.

So you can kind of look at—what do I want to make? Say 10 percent per year? Do I want to make maybe 15 percent per year? And you try and look at where the company is at the moment and have an educated guess as to where it’s going to get to in the future.

And then once you’ve done that, you kind of work backwards to get to what you’d be willing to pay for the shares today if you wanted a 10 percent, 15 percent return or whatever over the next however long.

And then from there, of course, we—a strategy that we both look at is to give ourselves a nice margin of safety, which just accounts for any errors that we make. So obviously, if we say we figure out some company would be—if we bought it at $50 per share to give us ten percent returns for the next ten years, well, we might have made some sort of error in our estimate.

So let’s just say instead of aiming for $50 per share, let’s even aim for $25 per share and try and buy that stock when it’s really cheap!

So that would be kind of my approach to investing overall, simplistically. That probably went for way too long than what it really needed to, but, you know.

Yeah, and mine is very very similar! And part of that is because we’re both following the investing style of these same investors as Buffett’s...

Yeah, the Mungers!

And I mean, they all do it!

Yeah! They literally all do the exact same strategy! Like they all have their little nuances and variations or whatever, but if you look at the core of what they do, it’s all the same.

Yeah! All of the most successful investors follow these principles, and I find it very ironic that, of course, they don’t teach any of this in finance at university!

They’re teaching you, you know, Modern Portfolio Theory; they’re teaching you Efficient Market Theory! It’s pretty weak!

Which is—it’s pretty funny! I mean, I just sit there and laugh because there’s no fund managers that have successfully made, you know, fifteen, twenty percent returns using the strategies that they're teaching us to do in university!

Whereas, yeah, the one—you know, the few fund managers that have been able to do it, like the Radios and the Buffetts and the Mungers—they're not using those strategies; they're using these principles that we're talking about right now!

Exactly right! Yeah, it’s crazy!

Yeah, so in terms of my... I’ll go through it briefly because some of it is a little apt, but basically, I break up my investing philosophy into two main components.

The first is you’ve got to buy great businesses—businesses that are going to be really solid as they are now and still solid in ten years' time when we’re going to be looking to sell these companies if they're at the right price.

And the other component is that you need to buy these companies at 50 percent of their fair value, which Brandon just talked about—buying them with a 50 percent margin of safety.

So when we go into the first component of buying great businesses, I basically break it down into three components. The first is that it has to have some sort of personal meaning to me.

And so it has to be a business that I'm personally interested in, an industry that I'm interested in learning about all the time, and it's got to be within my circle of competence—an area of business that I can understand.

And for a lot of beginners, people might wonder what is my circle of competence. So I haven't run a business, I haven't even, you know, worked in the workforce maybe, but basically you can just start with business models that are easy to understand.

So, my biggest investment is Thor Industries, and it's an RV company, a caravan manufacturer. And it's really simple—when the dealerships sell caravans, they order another one! It’s basically a one-to-one replacement from retail sales.

So it’s really easy to understand—you can just look at how much the retail sales are growing in the industry, look at the market share of your own of the business in that industry. It’s really easy to work out where the business is going!

So that’s the first part.

I actually think that that’s really important too, just having—this is something that I didn’t really talk about.

Yeah, having a business that’s easy to understand! It will help you make such better decisions as an investor! I mean, I feel like people sometimes—they get stuck into businesses they don’t really understand because the price might be really tempting!

Yeah, absolutely! At the end of the day, if you don’t understand the business, you’ll just be—you won’t be sleeping well!

Yeah, and one of the mistakes that I see some people making is that it’s good to follow Buffett and Munger, but to follow their exact investments can be wrong because Buffett invests a lot in fly-by—companies in banks and that sort of thing.

Yeah, but banks are really hard to understand unless you know that—you know, unless you’ve worked in finance for, you know, 40, 50 years like Buffett has!

So just investing in Goldman Sachs because Buffett is and you know you think it’s a great business, that’s not a great idea because it’s very difficult to understand how they bring money in and how money leaves.

And even as a finance student and learning about this stuff specifically—how these businesses work, it's extremely complicated, and it’s an area that I don’t want to expose myself to!

Yeah, it is! It’s hard to understand! I mean, you can—you know, you can kind of understand companies to a basic level, but when you look at like the intricacies of how a bank operates and all that sort of stuff, it’s just like—even when I watched a documentary or something on how one of the banks got exposed for doing some dodgy stuff and how some people could pick it and other people couldn’t, it’s just like, “Man, I would have no idea that that was going on,” just because I don’t know the intricacies of how banks work and operate and that sort of thing.

Yeah, and a quick way to work this out is if you just Google the company you’re interested in and you’re reading some news articles—if you come across—if you read a sentence and you have no idea what that sentence means—like, you know, they’re talking maybe—for example, semiconductors was some companies I was looking at, but I didn’t invest in them because I was reading some articles, and they’re talking about, you know, these wafer layers and you know all this stuff that I just didn’t understand!

Yeah!

And it really put me off from investing in that industry!

Yeah, no, I think that's fair! Anyway, point number two is again management. We have to have a management that has skill and integrity.

So I like to look at the ROIC because it tells us what return the management is getting on the money inside the business! And that’s really important because if you have a management team that’s not giving you—that’s not getting 15% or more returns on the money in the business, then how can you expect to make 15% or more from owning the business?

So that’s true! I like to see businesses that are doing that very well, and if they're not able to invest at a really high rate, then pay some of that out as a dividend so that we can find other businesses to invest that into!

Part of the ROIC say that I like is that it doesn’t include dividends! So if a management thinks that, “Oh, we've got a proportion of money that we can’t find investments for,” they can just pay that out, and it won’t impact their ROIC; it’ll actually make their ROIC worse if they leave it in the business!

A couple of other things I like to look at in terms of management is whether the founders are still in the management. And going back to my biggest investments—Thor Industries—the founder is still the Chairman, and the other founder—unfortunately passed away, but he was the CEO up until 2014.

So you want to know that the people who created the business, the people who came up with the idea and have the vision for the long term, are still in power in the business, and that’s really important—although it’s not vital for me! I like to see it!

And one other thing I like to look at is the shares held by the management team—like how much of their personal wealth is on the line and in the interests—how much is it correlated with the stock price?

Because if they don’t hold many shares of the business, then, I mean, their pay is mostly in terms of their salary; it's not in terms of the stock price appreciating or the business actually growing!

So I like to see—I like to see that the values are aligned!

And the third—is there so many, so many instances in the past where the management team is just paid like they're paid whopping great salaries! Like ridiculous salaries compared to like what the employees of the company are getting!

And when they’re managing the company, the stock price goes nowhere because they don’t really care what the stock price does.

Like we want the stock price to go up because we’re investors, but they just don’t care because they can show up to work every single day and do whatever they want, and they're still gonna get a massive salary at the end of it!

Yeah, and don’t think just because they’re our CEO, they’re the Chief Executive Officer—that they’re going to care how successful the business is over the long term! A lot of these CEOs are in that position because that’s what they’re good at! And that’s what their expertise is, is managing companies!

But it doesn't necessarily mean that their values are aligned with the businesses and the owners!

Yeah, yeah, definitely! You definitely want to have that management team that also has their head screwed on and recognizes what the investors also need to see out of that company!

Yeah! Yeah!

And tweets when the short sellers are gonna get squeezed!

Oh, short sellers are gonna get squeezed! I might just pop in here—obviously, we're talking about Elon Musk, but I just love—yeah, I love watching his tweets because he just moves the market!

I love that guy! I don’t know—I’m trying to actually understand more about this whole SEC investigation stuff, whether he could actually get in trouble from the SEC for what he’s been doing with potential stock manipulation!

Yeah, but I just find it so funny that he’s just like, “I hate short sellers so much, so I’m just gonna screw with you guys! I’m just going to screw you guys around!”

Yeah, yeah, it’s kind of funny because that’s one of the rules of investing is that you don’t let the market affect your emotions or the—you know, the other way around.

Yeah, and it’s kind of—it's kind of see Elon getting really affected by this—what the stocks are doing, especially because, yeah, he definitely wants to take it off the stock market because he’s so irritated by the price fluctuating!

Yeah!

And that’s—to be honest, that’s the only—that’s one of the few things, I should say, that I don’t like about Elon as the CEO if I was to be an investor in Tesla, is that he just—he just doesn’t care enough about the stock owners!

He’s like he hates thinking and talking about Tesla shares and what the shares are doing, and obviously hates the short sellers!

Of course, of course, he would!

But at the end of the day, he hates answering questions that are like, “What’s your revenues and profits and that going to be?” He’d much rather talk about engineering or design or something—or the future!

So I feel like that’s probably one of the things that I would like to see better from his leadership is him caring a little bit more about the investors in the company and what the shares are doing as well!

But yeah!

Yeah, still slightly later, couldn’t agree more! Still!

Anyway, so it’s back to—so number three: moat, which of course we just talked about. And I have two components that I look at as well as Brandon does.

The first is a qualitative moat, so I’m looking for those things like a brand and networking effect—I’m looking to see if there’s something that I can just identify as a quality of the business.

And then I want to see that backed up by those four cake growth numbers that Brandon also mentioned—being the revenue, the earnings per share, the equity, and the free cash flow.

I want to see these all growing consistently over time because that indicates that regardless of the other competition in the industry, they're still able to consistently produce more profits, more revenues, and more cash and that sort of thing, and more value for the shareholders.

And then the second part of my strategy, which is buying them at 50% of fair value, I use a similar approach to calculate the future value or the price of a company in ten years’ time!

And then we discount that back based on whatever return we want to get!

Of course, we have to pay 50% of fair value!

And that—I know that was very vague and confusing; I do have a number of videos, and Brandon has a number of videos talking about that process because it is a little bit complicated!

But once you understand...

Yeah, it’s not that—I wouldn’t even say that it's complicated; I just say that it takes a little bit of time!

Yeah, I mean it’s pretty simple!

Yeah!

Why? Is, you know, you definitely learn it!

Yeah, it’s not like we’re—we’re kind of slaving away doing mathematical calculations for ten hours a day or whatever!

Form whiteboards of just algebra!

Yeah, yeah! Just like smash in and out like you see in the movies or something!

Yeah, it’s just—it just takes a little bit more time, and you’ve got to gather some data from different areas and kind of work forwards to work backwards!

But it is—it’s not hard math! And of course, you’ve got a calculator!

So yeah!

Yeah! Check out both of our sets of videos that we do about calculating fair value and that sort of thing—that’d probably help you out a lot!

Yeah, I’m definitely going to be doing some update videos because those were some of my first videos that I uploaded, so yeah, I’m definitely gonna do some updates on those and sort of add what I’ve learned over that time and just sort of make it a bit more—give it a bit more clarity!

Yeah, so make sure you head over to the YouTube channels and subscribe and check out those videos!

Like, plug, yeah, plug, plug, plug! Shameless plug!

Yeah, I reckon we’ll start wrapping it up! We’ve been gone for a fair while now—we don’t want to make these podcasts too crazily long!

But in our podcasts from here, one thing that we really wanted to do is to give you guys the opportunity to submit questions. So if you have any sort of question that you would like us to maybe explain or go through, could be anything stock market related, company related—I mean, just ask!

And the way to do that is by dropping a comment down in the YouTube comments!

So this first episode will be on the Aussie Wealth Creation channel, so if you’re listening to it on YouTube, then head down to the comments section below—if you’d like us to answer your question for the next video, then please drop us a question down in the comments section, and we’ll total them up and go through some of the interesting ones.

And we’ll start doing that from our next podcast on, I would imagine!

Yeah, I’m really excited to do that, actually! I love doing—I haven’t really done any Q&A’s on my channel, but I love responding to guys and seeing what unique problems you’re having in investing and maybe just a broader market and that knowledge about the stock market!

Yeah, have a bit of a chat on some questions!

But yeah, I think that’ll just about do us for today—we've been talking for a fair while, rambling on!

Yes!

It’s been good! Almost an hour!

Yeah! I’ve actually really enjoyed this! It’s been...

Yeah, yeah! It’s gonna be—I love talking stock markets, so yeah! If you can get us together, we’ll just keep rambling on for hours!

Yeah, we gotta know when to stop, right?

Yeah! But not now!

Okay, we’ll sign it off! So that’ll be it for today’s podcast! I hope you guys really enjoyed the podcast!

Thanks very much for listening and showing it some support first up! Obviously, if you have any suggestions or if you have any feedback—just general feedback—we’d obviously love to hear that!

So make sure you let us know in the comments section of the video! And if you did enjoy it—if you enjoyed the video, make sure you leave it a like; it obviously really helps to show—to show us what kind of videos are working well with you guys, what kind of stuff you want to see, I suppose!

So if you did enjoy it, make sure you drop it a like! And then, yeah, any feedback, make sure you hit us up in the comments section on YouTube!

Now, I’m hoping that this podcast will also be available on iTunes! To be honest, I have no idea how to do that as of yet, but I’m gonna look into it! So hopefully fairly soon, the podcast will also be on iTunes, which would be really cool!

So yeah, you could also—probably by the time that this is going out, hopefully to be up on iTunes as well, if you want it to listen to the investing podcast on iTunes!

Is there anything else we need to say?

No, I think that’s it!

Yeah, so we’ll leave it there, guys! Thanks very much for listening! We hope you really enjoyed it!

Make sure you head over to the YouTube channels—our YouTube channels as well, because we’re obviously making videos right the way through the week as well!

So make sure you head over there and head over to Hamish's channel as well because what we’re probably going to do is we’re going to alternate uploads of the podcast!

So episode 1 will be on the Aussie Wealth Creation channel, then episode 2 will be on Hamish's channel, and we’ll probably just keep bouncing back and forth!

So make sure you head over to Hamish's channel as well so that you're all set to watch episode 2 when we bring it out, which hopefully we can do this weekly!

Yeah, I’d really like to do this weekly!

I think that, yeah, we’ll see how we go. Obviously, we've got a lot of stuff to do in our own lives as well—but we’re pretty committed! We love the stock market, so I think we’ll find a way to end up talking about it!

Yeah, I’m sure!

All right, guys, so thanks very much for listening! And as of course, leave a like if you enjoyed it and leave some comments if you have any feedback! But that’s it for now, and we’ll see you guys probably next week!

See you guys!

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