The EV revolution and the scourge of stock-based compensation

It’s time for a new episode of Stocks Neat, the podcast with nothing watered down.

In this episode, Forager FundsGareth Brown and I are talking about the electric vehicle revolution and something that’s getting under the team’s skin: the scourge of stock-based compensation. And for this month’s tasting, Gareth has brought along a single malt from The Scotch Malt Whisky Society, interestingly named A Maple Syrup Mountain Spring.

“Even if you had a strong view that stock-based compensation was going to tail off at some point in time, it makes these companies almost impossible to value because we have no idea how many shares are going to be on issue in five years’ time,” I tell Gareth.

"I touched on DocuSign in a previous podcast, but they have almost increased their shares on issue by 50% over the past three years. How you account for the cost of the share issuance is a very complicated topic, right? So you see an expense and I’m not really sure whether that’s the real economic cost or not, but you can see the share price going up. My message to Uber (which is one company getting the message) is focused on free cash flow per share.”

To hear more of our discussion, check out the video below.


Disclaimer: Just a quick reminder, this podcast may contain general advice, but it doesn’t take into account your personal circumstances, needs, or objectives. The scenarios and stocks mentioned in this podcast are for illustrative purposes only, and do not constitute a recommendation to buy, hold, or sell any financial products. Read the relevant PDFs, assess whether that information is appropriate for you, and consider speaking to a financial advisor before making investment decisions. Past performance is no indicator of future performance.

Steve: Hello, and a very warm welcome to episode six of Stocks Neat, a Forager Funds podcast where we talk the world of stock markets and whiskey. Back in the studio today with me or the Darlinghurst basement studio, as it is, is Gareth Brown fellow manager on our international fund. Gareth, Chloe filled in for you last month. I hope you are going to bring a bigger appreciation of whiskey than she did.

Gareth: I’m not likely to spit it out anyway. Hello everyone. Hi, Steve.

Steve: On today’s agenda, Gareth is going to give us a quick introduction to the whiskey he has brought along today. We’re going to talk about the coming electric vehicle wave here in Australia after a couple of trips overseas.

We’re going to have another rant on stock-based comp, which is something that we’ve already done a previous version of this podcast, but the world is changing and we’re going to have another chat about that today. And we’ll finish up with a few interesting things that I’ve been reading around the traps.

Gareth, tell us what you’ve brought along today.

Gareth: Yeah, it’s another one of my Society Whiskeys and its from the single malt whiskey society based in Scotland. It’s probably the last one of these I’ll do for a while, because I think it’s nice to try things that are available in bottle shops for everyone. But I went on a camping trip over the weekend with two of my brothers plus one of my old school mates.

And it was a beautiful spot and it got some nice photos of it. So I thought I’ll bring it in for you to try. I was sitting on top of a hill, overlooking a stream in the snowy mountains, beautiful weather. And I think my opinion of it might be a little bit distorted. I think I could have been drinking Black Douglas and it would have been fine.

So I’m interested in your opinion. This is a speyside whiskey, it’s first refill, a bourbon barrels, eight years old. So it was distilled in early 2012 and went into a bottle in 2020, I got my hands on it in the last few years. Give it a try, it’s got quite a sweet profile in my opinion.

It’s not as sweet as the grain whiskey we tried a couple of episodes ago. It doesn’t taste that fairy floss, but it’s got a maple syrup flavour to it and doesn’t burn much at all considering it’s a 60% alcohol. Yours to try.

Steve: Looking forward to it. We’ll, come back for some taste testing later in the episode. But thanks for bringing along one of your special whiskeys, there’s actually a photo up on my Twitter account @ForagerSteve of the place where Gareth was camping in the whiskey bottle in the foreground. Very beautiful part of Australia. Gareth we’ve both been overseas recently after a long stint of not going anywhere.

Something that you came back talking a lot about was also something I noticed in London. I actually almost got run over three times by taxis in London because they’re converted most of the fleet over there to electric. The sound around the streets was really, really noticeable. The buses are all electric, half the cars seem to be electric in London and the taxis, yeah they sneak up on you and you don’t even see them coming. A health warning for people that are heading there, but you had a similar experience in Europe and I guess opened your eyes a little bit to where we are in the world.

Gareth: Yeah. There’s a big change coming. And I think it’s really important from an Australian perspective.

It’s easy to miss. This is my chief point there. You and I have been going to Oslo a couple of times over the years, as long ag as 2017, I was blown away by how many Teslas there are on the streets of Oslo. So it’s not like electric vehicles are new to us, but that’s a very rich country. There was some huge incentives for people to get electric vehicles in Norway.

What was interesting about this trip having not been to Austria and central Europe for almost three years is that that revolution is really happening in central Europe, in Germany, in Austria, in the UK. My brother and sister-in-law have bought an electric vehicle. One of my wife’s best friends has bought an electric vehicle.

This is all sort of happened on the hush. We didn’t even know people were doing it. The town that my wife grew up in has a bunch of charging stations put in that, I think they’ve got more charging stations in these little town with 5,000 people than we have in the Eastern suburbs of Sydney.

It’s a really big change there. Then I went to the UK with work, and a few years ago, all the ads were around car financing. Now they’re all around vehicles and nearly always the electric vehicle option. That seems to be the banner thing that all the big automakers are advertising there.

Steve: So what percentage of new car sales over there would be electric now?

Gareth: I’ve got all the stats here, the middle of the road important European countries, so France, the United Kingdom, those big sort of central European countries, and Austria is the same. It’s around 20% now. So one in five new cars is either a battery electric vehicle or a plugin hybrid.

So that excludes hybrids that are not plugin. One car in five in sort of middle Europe now. Sweden 45% almost wanting one in two. Denmark is about a third 35% electric vehicles. So this is new cars that’s obviously it doesn’t apply to the whole car park yet. That’s going to take 10, 12 years to happen.

We’ve seen a big push on infrastructure in Europe and a big push on incentives. And it’s really, really hitting the road now over there. It’s a massive change from three years ago in my view.

Steve: So one of the things people have talked a lot about here is, you live in a city suburb like we’re in at the moment, not many people have car spaces.

Are you seeing infrastructure just on the streets, over there, all over the place that people cars plugging into?

Gareth: So my brother and sister-in-law don’t have off-street parking, very few people do in Vienna. It’s most people live in apartments. You park your car on the street. There’s a charging station around the corner from them.

There’s a few charging stations that are free most of them you pay for, but you pay a few dollars and it charges sort of overnight for most of them, Sorry a few Euros. But if you’re driving from Vienna to Salzburg and you need to charge, you need a high-speed charge. That’s going to be more expensive, but still cheaper than filling your tank of gas – petrol I should say.

Steve: We’ve just had an election here in Australia on the weekend.

And climate change was one of the factors that people were talking about a lot, particularly in wealthier electorates where they didn’t feel like the liberal party was representing their interests. I think we ended up in nine independents and the county is not finished yet going into the lower house.

And a lot of them on an agenda of a climate change policy. We’re clearly going to see something significant in this next edition of government. What do you think it means here? What needs to happen for that percentage to increase dramatically?

Gareth: I think the charging stations issue needs to happen. So that’s locally.

For people that don’t have off street parking, for example, but also as you all trying to connect cities like Sydney and Melbourne. So look something that dawned on me the other day. If you’re trying to drive from Newcastle to Canberra on the motorways, there’s a petrol station at Wyong, which is on the central coast.

And then there’s nothing until you’re on the Sydney motorways and then there’s nothing, unless you get off the Sydney motorways. And then there’s Pheasants Nest, which is almost sort of Southern Highlands. So you’ve got to get from Wyong to the Southern Highlands, through a 5 million metropolis without any chance to fill up.

Now you can’t leave like electricity infrastructure at those two points, and that’s it. You need to have a lot more infill and just to clarify here, Europe’s up in that 20% market. 20% of the market is now electric. China’s 13%, you know we’re (Australia) at 2% too, and it’s growing because it was that was 2% for 2021.

It was 0.8% the year before. So it’s growing quickly, but there’s a big job here to make the infrastructure that makes this useful. The other thing is potentially on incentives. So one of the reasons it is taking off in Austria for example, is if you get a corporate car, there’s no FPT equivalent on electric vehicles.

So you can effectively use pre-tax dollars to fund your electric vehicle and all that stuff we’ll start off big. And on those subsidies will slowly dissolve away to nothing, but it helps. You can take your lease on one of these things, then you don’t have to take the risk around the battery not working properly, which is the most expensive part to fix.

There’s a lot of things that de-risk it for the average person that sort of take a bit of government involvement. And if we’re serious about joining the rest of the world on this, I think we will need to do some of that.

Steve: I guess one benefit of us being a long way behind is that they can look at what’s working and not working overseas and cherry-pick some of those things.

I said, I think it was on a Livewire video that this route in growth stocks and the bursting of what was very clearly a bubble over the past few years, my view was it was not going to be over until Tesla was less than 200 bucks a share. That was my poster child for what was going on. It’s come halfway there, but I mean, are there things that you’re thinking about from an investment markets perspective here that capitalise on this?

Gareth: Yeah, obviously with Tesla, people have an opinion. But it’s worth noting in Europe this is being driven by the traditional OEM. So people are buying Hyundai electric vehicles and they’re buying German auto EVs. And it’s not just a Tesla story by any stretch.

Where it sort of hits the road for us, if you excuse the pun, is Linamar. We own a tier one automotive parts manufacturer. So mostly they craft product that they sell to the Fords and the GMs and the Mercedes. Five years ago you would look at this business and say, okay, the internal combustion engine will phase out over 10, 15, 20 years.

What does that cashflow look like for the Linamar? I’m not sure that it’s going to survive in a world of electric vehicles. How much cash can we get out of the traditional part of the business by last year, 20% of the new order book was electric vehicles. So, you know, almost the same level of that European market.

Does that take orders from OEMs to make stuff over the next five years for some new line, one fifth of it was electric vehicles in the first quarter of this year, that was 75% EVs. Now that’s going to be a very noisy series. The average for 2022 will be lower than that. Almost guaranteed. They are making the transition.

So the important question mark for us is, is slowly disappearing. And I think if you want to be involved in this automotive space, you have to, you absolutely have to adapt to this. It’s where it’s going. At least at least the current trajectory, there’s potentially hydrogen behind it.

There are some question marks around battery vehicles, you know, said there’s access to lithium. Can we possibly scale it so that we’re doing 50, 70 million cars a year? Can we make enough batteries and genuinely is the all-in greenness of these things as they appear to be, there’s a whole bunch of questions around that, but that is where we’re seeing that shifting real time.

Steve: Especially in a country like Australia, where we haven’t done much to transition the source of the energy away from coal, yet it is growing rapidly as well. Particularly wind in this country and my hometown of Wellington’s got an enormous, enormous solar outside town there that is generating enough electricity to power the whole of Dubbo which is a city of 50,000 people.

Now you don’t have the grid stability for it to actually power a Dubbo, but there’s enough electricity coming from that farm.

Gareth: So two things about that. Like, even if you run EVs off all energy, they don’t waste a lot of energy. So even if it’s a slightly dirtier fuel than oil, it can be greener.

The other thing here is that a big electric vehicle car park is a store of energy. So it actually helps a lot of green energy production, because you’ve got somewhere to put that energy when it comes in at an inopportune time, because people have got their cars plugged in.

Steve: The actual build of an electric vehicle though, is a very energy intensive process itself.

Gareth: And environmentally questionable still.

Steve: The carbon graphite that you need to make the batteries and things is a very, very intensive energy intensive thing as well. Hopefully that stuff comes down over time as well in measuring the total carbon footprint of what’s going on, but it is coming. I think a couple of, I guess, adjacent things to think about as well is all of this infrastructure and service stream, an ASX listed company has been talking for a few years about the rollout of these charging stations. It’s going to require a lot of maintenance. It’s not going to be a great business where I’ve got a huge competitive advantage, but they might be some nice, you know, Service Stream got a pretty nice business, just maintaining mobile phone towers.

For example, maintaining that, electricity network would be an interesting little business as well. And maybe, I hadn’t actually thought about this, when you started mentioning corporate companies, if there is some sort of tax policy to encourage the leasing over owning of these types of cars. You’ve got some very good businesses here in Australia, already in SG fleet.

A couple of other listed companies here that I think would benefit a lot from more people leasing through them and they they’re good businesses to start with.

Gareth: I wouldn’t dwell on it, but there’s also the risk that we get this wrong. I mean, we don’t make cars in this country anymore. The rest of the world is transitioning to different fuel sources for vehicles.

We sorta have to get on board. If we can be last, it’s not going to be the end of the world that they be making internal combustion engines for a long time. But as all the automakers move towards EVs and they view their old internal combustion engine drive trains as a cash cow. You know, we sort of a little bit exposed there where the only people in the world that are not transitioning.

Steve: Yeah, we’ll be digging lots of lithium out of the ground iIf nothing else, our commodities industry is likely to benefit. I’m sure people might be actually thinking about that sector as a beneficiary here. It’s got a huge amount of optimism about it at the moment, in terms of where share prices are at a lot of execution risk, I think around expanding these mines.

Gareth: One more point. The other thing is that all this was in train before Russia invaded Ukraine, right? I kind of got to make that point before, but the oil price has responded hard here and all this was already in train. It is accelerating further from here.

Steve: We’ll move on to one of our favourite topics, which is share-based compensation, where you had a rant when we’re both in Chicago a couple of months ago. A little bit of background for people that are not familiar with this concept, it’s almost uniquely US, but a lot of US companies issue enormous amounts of shares, particularly high growth and start-up companies. They’re issuing shares to their staff every year as a form of compensation.

They are reporting when they announced their results. Firstly, adjusted EBITDA as a metric, which doesn’t include that number at all. And then they’re there they’re reporting what they call adjusted earnings, which is adding back that stock based compensation to the earnings and not accounting for the enormous dilution of shares that come with it.

So we’ve had an issue with this for years. I think because the market and investors have been focusing on this adjusted EBITDA number companies have been able to get away with it. They’ve been doing more and more of it.

Gareth: I think we’ve been acutely aware of it, but it’s still falling victim to it. Twitter for me is a great example.

I really expected that to normalize and calm down and contract. Once we started owning that stock, they’ve been giving more and more of the farm more wait.

Steve: Yeah. We’ll come to this a bit later in terms of how the companies do react because what we saw in the bubble was an acceleration of it, not a decline as these companies got bigger, they started doing more and more of it. There’s a really interesting email that Dara Khosrowshahi, who’s the CEO of Uber sent to all of his employees a couple of weeks ago.

I’ll just read this out, but he said, “channelling Jerry Maguire, we need to show them”, he’s talking about investors, “we need to show them the money. We’ve made a ton of progress in terms of property profitability, setting a target for 5 billion in adjusted EBITDA in 2024, but the goalposts have changed. Now it’s about free cashflow.”

So we’ve been carrying on about adjusted EBITDA for years. At least one company in Uber is getting the message that you actually need to worry about profits here. EBITDA has a lot of things. It’s earnings before interest, tax, depreciation, amortization – earnings before a lot of things that the market does care about all of those things that come out underneath, and that they as a company need to start focusing on that as well. We’ve been hearing that a lot, a lot of companies are getting this message about, old-school concepts like profits actually matter.

And we’re seeing some shifts in behaviour, not everywhere. We’re seeing some, but not yet a lot of talk about actually, including this stock based compensation in terms of how they think about the profitability of the business. I know you, Gareth, as part of your Flutter research, looking at a company called DraftKings. I just wanted to talk about some of the extraordinary numbers first and then get onto some of the changes that we’re seeing.

Gareth: When we read that from Uber, is it you understanding of that they focus on free cash flow after stock-based comp?

Steve: I would say they’re now including capex, so we need to generate cashflow, and I’ll come back to this. I didn’t not see one mention of per share.

He needs to add two words to that sentence and I am fully supportive.

Gareth: I think they do to do some really simple accounting concepts for people or around that as well.

Steve: This will be good fun, accounting concepts on a podcast.

Gareth: You know own shares in a company called Flutter. Their most important asset is an online sports betting and gaming platform in the US called FanDuel.

And FanDuel is the number one in most states where it operates and there’s new states opening up all the time. We think it’s going to be the number one player nationwide, we can make of money out of it. So I spent a lot of time looking at its competitors. So the, the two key ones are Draft Kings, which has a very similar history to FanDuel.

Both were fantasy sports leagues. So they had a whole bunch of people that used to fantasy bet on sports. And then all of a sudden the states made it legal and they could bet real money and bang like that it was a beautiful pre-qualified list of clients. And then on the other side, you had Bet MGM, which is come more from the casino world.

So let’s ignore Bet MGM for now. Draft Kings is the chief competitor to FanDuel in online sports betting. And with that very similar history. Sort of 2021 and now in 2022, FanDuel is going to lose about 15 cents on the dollar of revenue overall from the revenue it gets from its clients.

And the reason that is, is they’re making money in some of the more established states, but there’s this huge marketing push in the new states. So just ignore that for now. This is going to be highly profitable business as time goes by, but they’re losing about 15 cents in the dollar. So they get a hundred cents of revenue. They spend 115 cents in expensives and there there’s not much stock-based comp. I think from the whole company point of view, it’s one to 2% of revenue, I don’t know if that’s actually FanDuel or other parts of the business.

Chief competitor Draft Kings, typically most states about two thirds, the size in terms of the betting handle and the revenue they are losing about 50 cents and not one, five, but five, zero, of cash on their business.

So a hundred cents of revenue from the client, they’ve got $1.50 of expenses. So they’re reporting minus 50 cents of cash.

Steve: Again saying more profitable in the more established states, you can see a path to some form of cash profitability?

Gareth: For sure. They are building a valuable business in parts.

But they are also giving away 50% of revenue as stock-based comp. So to the extent that they decided not to do that, but to pay their staff in cash instead, their margins would be minus 100%. Whereas the competitor FanDuel is minus 15%. So, you know, I’m really confident about the competitive position. Here is one of the reasons why I’m really quite excited about the stock.

I can see them building a big lead over their competitors already, but it’s a huge giveaway. This is a business that might generate 30 margins. If you get to scale and you do really, really well. You might expect to get 30% margins and I can see FanDuel getting there. I don’t really understand how DraftKings intends to get there when they’re giving away so much of the farm each year.

There’s an answer to this, which is you know the guys that run this control 90% of the vote and they’ll do whatever the hell they want, but the economics of it makes no sense to me.

Steve: Even if you had a strong view that it was going to tail off at some point in time, it just makes these companies almost impossible to value because we have no idea how many shares are going to be on issue in five years time.

And I touched on DocuSign in the previous podcast, but they have almost, they’ve increased their shares on issue by 50% over the past three years. How you account for the cost of the share issuance is a very complicated topic, right? So you see an expense and I’m not really sure whether that’s the real economic cost or not, but you can see the share price going up. And yeah, that’s my message to Uber is focused on free cash flow per share.

Gareth: So the stocks gone up 50 right, so the staff have walked away with a third of that business. For the work they’ve done in the last three years. Right?

It’s not even, it hasn’t solved the problem and now it goes away and it’s done. They own a third and you own two thirds. You are likely to cope that level of dilution ongoing. They end up with 99% of the economics relatively quick.

Steve: I think it just makes it, you have to assume that like we’re seeing, I think you are seeing a response.

This is particularly in the US that people care about the share prices over more than anywhere else in the world. You get European companies that just do whatever they want and don’t care. When you talk to us companies, they want to know why your buying or not buying the shares. And they will actually take their cue from that.

The Uber CEO actually got quite a bit of criticism for saying, we need to remember that the shareholders own the company and it’s our job to do what they want. Not do whatever we want because yeah. There’s arguments about stewardship and they should be trying to grow the value of the business independently.

But I think there’s more truth to that than most companies like to accept. And in the US they do respond more. I think we’re already seeing responses to the cash burden side of the equation, which has been rampant as well. I think in some companies we will see them recognise that they need to do something about the stock-based comp as well, or their share price is never going to go up that people can’t invest in it.

But interestingly, some of the first reactions from some companies have been in the opposite direction.

Gareth: Yeah, so we’re going to talk about Coinbase now. Coinbase is an exchange for cryptocurrencies, I think is the best way to describe it. They issued stock to their staff over the last few years.

And their stock price has been absolutely hammered a lot with, with a lot of other things in that space. And the management has just come out the other day and said to staff, we know you’ve lost a lot of your potential wealth out of this. And we are going to issue more stock-based comp to make up half the difference.

So we’ve been hammered, you’ve lost your wealth, so here’s the little something. All while shareholder, external shareholders, are getting absolutely slaughtered. Now they’re going to get diluted more aggressively for reasons that make no sense to me.

Steve: I feel like there’s still an internal, inability to in the whole sector on talking about now it – has been a bubble and there have been some extraordinary wealth transferences through that bubble from people who provided their capital to staff and people who had the ideas. And money was just being thrown around, like nothing I’ve ever seen.

You saw family offices and a lot of people get involved in the venture capital space. Every single second person in Silicon valley was running a venture capital fund. And there was just so much money going on. Lots of crazy fortunes were made. I’m not getting the sense from the outside yet that there’s been a recognition that actually this is properly over.

You can forget about the five years, there’s a lot of our way back to pre-COVID. There was a tech bubble going on pre-COVID and there’s a lot of silly money being thrown around. So yes, share prices are down a long way. I think there’s some really, really interesting opportunities out there. I still don’t feel like the people operating in the industry have had there “this is actually over” moment yet. People are saying, well, if I don’t keep paying all this stuff based comp, I’m going to lose the staff or everyone’s going through the same issue. Right. Nobody has the money to pay them what they’re paying them before.

Gareth: Sorry. I mean, Twitter is under a takeover offer, whether it’s going to get executed a little not, but, I would like to see them lose a chunk of their stuff. I don’t think that they’ve gotten value for that over the last five years. I think it is a good thing.

There’s a lot of talk about whether the market in Silicon valley is similar to 2000. Obviously there’s some parallels, I’m quite sympathetic to the idea that this is different. You know, these are real businesses now that generate a lot of money, not like back in the early days of boom. I think there’s a huge adjustment coming for the staff in Silicon valley. They’ve had it too good for too long.

I think there will ultimately be a reappraisal here, it needs to come from the shareholders. The shareholders need to sit a step up and say, this is no longer acceptable. And I think, the fact that index funds have owned a lot of these companies over the years has potentially enabled a lot of it.

Steve: And look the share prices get low enough and you start attracting a different type of investor that is coming in with a specific agenda here to change the way it’s going on it.

You could have the control or else you’re going to cop the stock-based comp, there needs to be a change there. They are in that vacuum now where they’ve fallen, but they’re not necessarily attracting that new top investor because that person’s sitting here saying, oh, I can’t work at intrinsic value, its too hard.

Steve: I think there’s some very, very valuable revenue streams things. Whoever ends up getting that revenue stream at the end of the day, it’s still a complicated question in a lot of situations.

You’ve already had your taste Gareth but we might just jump back onto the whiskey discussion and I’m going to pour a little bit of water in mine because it is quite high alcohol content. Is that all right?

Gareth: Yeah. It’s about 60% or 59%, but it’s something I think you might have overwatered that. Yeah, I’m interested in Steve’s opinion.

I said, I was sitting up on the nice hillside and it was very enjoyable, but I don’t trust my taste buds in such a situation.

Too watery? He doubled the volume. It was ridiculous.

Steve: Tell me what it says on the bottle?

Gareth: You can read it. It’s a bit dark in this room.

Steve: I went to a wine tasting thing once and they were describing all of these flavours in the wine to me. I can never taste them.

Gareth: So this was an enjoyable society whiskey. It is not like one of them are marque ones. I think it was bottom of the range sort of price there. As it speyside, eight years old, it’s not a particularly old whiskey, uh, but it was, I enjoy it.

Steve: It’s nice. So the description is a vanilla sponge cake and sultanas soaked in Brandy mix with cinnamon nutmeg, swirl of maple syrup, fresh ginger and sweet tangerines.

Gareth: Well, I like the name as well. You didn’t read that out here.

Steve: The name is a maple syrup mountain spring.

Gareth: That’s why I took it away, camping.

Steve: Very nice, very enjoyable.

If someone was buying something in a shop and they want something similar to that? Is there anything you could recommend?

Gareth: I know if I’m the person for it. I mean, as I said, these things come out, cask strength. I think that that’s part of the difference between anything you can get in a Dan Murphy’s, it’s a speyside. A lot of the speyside blends or the single malts had some similar profile, but yeah, nothing comes to mind.

Steve: We’ve talked about some of our earlier podcasts where commercial Speyside whiskeys are probably my favorite region, just for a nice, easy drinking whiskey.

We might try and do a really PT one for one of our next episodes. We’ve missed the PD category and there’s some of my favorites as well.

Gareth: I sort of gone off of them over the last 10 years.

Steve: If you want to enjoy this one, you either need to sign up, will be very nice to Gareth.

Gareth: Maybe I should introduce this section because we often finish with interesting things you’ve been reading and I’ve been reading a lot of interesting things, but they’ve just completely fallen out of my head.

Uh, and so I don’t really have a contribution here, so maybe I can ask you, what have you been reading lately? And is there anything that you think people might find interesting?

Steve: Well, fascinating little piece in the economist edition of May 14, about inflation in Zimbabwe. Very unfortunately for the Zimbabweans inflation is making a comeback.

It was absolutely horrendous over there in 2008, 2009, 2000000% per year of inflation. I’ve actually got a note somewhere that I bought in Zimbabwe that’s got more zeros on it than you can count, but he’s absolutely worthless in terms of real money. It’s a souvenir thing that gets sold over there. So anyway, they went through a whole economic review and been Zimbabwe, got inflation back down, pegged the currency of the US dollar for a while.

The recent guy running the country has gotten back to some of the ills of the old ways and decided that the only way to fund the infrastructure spend he wants to do is for the government print more money and inflation is taken off again, 160%, the more recent numbers that are in Zimbabwe and everyone who lived through that hyperinflation. Not surprising me panicking care about the value of the money.

Gareth: It’s a pretty tame next to the old numbers.

Steve: For now. There’s a really innovative business in this article. There’s a company in Harare that is offering annuities, which are retirement investment schemes for people they’re not denominated in Zimbabwean dollars for obvious reasons.

They’re not even denominated in US dollars. They denominate it in cows. That’s a very common form of wealth saving over there that the government can’t print more off. This scheme is you either give them money or you give them a cow yourself. And for the rest of your life, you get, you know, 5% of the value of a cow into perpetuity.

And your wealth is supposed to grow as the cow breeds over time. And they have to take the adjustment off where they keep the cow, but it’s actually your retirement fund is literally hitched to cow prices and how many cows are in the herd, but yeah, you’d get the compounding effect.

I assume there are fees.

Gareth: Very nice solution to an unfortunate problem. Isn’t it? I mean, when you think about the role of money, when you have a sound money, it’s this medium of exchange. So, you know, you want a computer, but the computer seller wants a new house and the house seller wants, you know, food for the table and the money just sort of flows and helps that happen.

Whereas, you know, world of unsound money, you really need to be more direct. I have a cow, you want a cow, you’d have a dress that your wife made, we can do a swap and there’s just much bigger frictional costs in that kind of world. When you have unsound money, you have a lot more frictional costs.

And this is sort of, I guess, a nice little neat way to get around it. I guess, from a risk perspective, the average person probably would rather a basket of goods than just cows.

Steve: It’s just a very traditional store of war for them as well. So I think just understanding that as a marketing thing is an interesting sales tool as well, and, you know, really brilliant, innovative product. Our own inflation problems in the Western world, at the moment.

The economist article was saying part of the problem is the government keeps spending money and getting the reserve bank to issue the currency to finance it So not too different from what the Western world have been doing over the past couple of years in particular as well and suffering some of the consequences of that at the moment.

One last little thing as well, a quick recommendation of a podcast. If you haven’t listened to it already, Liar Liar by the Sydney Morning Herald and 60 minutes is Kate McClymont. Uh, fantastic, fantastic podcasts.

Gareth: She’s someone else’s isnt’ she, just wonderful.

Steve: Uh, yeah. Interesting story of, I won’t give it all away, but you’ve probably read a bit about it in the papers, but Ponzi scheme being run out of Sydney’s Eastern suburbs. Melissa Caddick, the woman’s name who was running the Ponzi scheme, but they’ve collected a whole lot of information about her life and some prior frauds that she committed in some of the warnings people could have seen it

It’s just, it’s a really wonderful on podcast and a fascinating story. So jump onto that one. And as usual, if you’ve got any feedback or anything you’d like to see and discuss in the future, feel free to get in touch.

Thanks for tuning in.

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Steve Johnson
Founder & Chief Investment Officer

Steve began Forager Funds in 2009, and now manages approximately $350m across two funds. Offering a listed Australian Shares Fund (FOR) and an unlisted International Shares Fund, Steve focuses on long-term investing in undervalued companies.

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