Welcome to the Fear and Greed Daily Interview. I'm Sean Aylmer. We've spoken before about the influx of day traders attempting to pick stocks over the last 18 months. It's a risky business and certainly not for the fainthearted but today I wanted to focus more on long- term investing. How do you actually pick a stock that has good long term prospects and how to stay the course when markets are getting nervous about case numbers, about inflation, about geopolitical issues, all sorts of things? Forager Funds Management has around $480 million under management, running two funds on behalf of retail investors. One focusing on Australian shares and one on international shares. Steve Johnson is the Chief Investment Officer at Forager and my guest this morning, Steve, welcome to fear and greed.

Welcome to the Fear and Greed Daily Interview. I'm Sean Aylmer. We've spoken before about the influx of day traders attempting to pick stocks over the last 18 months. It's a risky business and certainly not for the fainthearted but today I wanted to focus more on long- term investing. How do you actually pick a stock that has good long term prospects and how to stay the course when markets are getting nervous about case numbers, about inflation, about geopolitical issues, all sorts of things? Forager Funds Management has around $480 million under management, running two funds on behalf of retail investors. One focusing on Australian shares and one on international shares. Steve Johnson is the Chief Investment Officer at Forager and my guest this morning, Steve, welcome to fear and greed.

Hi Sean, pleasure to be here.

Hi Sean, pleasure to be here.

When we talk about the long term, what are we thinking?

When we talk about the long term, what are we thinking?

Well forever really. I think the key to distinguishment for people is when you're thinking about investing, you're buying a share in a business and the focus is 100% on how much profit that business is going to make and how much it's going to pay you rather than trying to predict where that share price is going to go and what you might be able to sell it for in the future. So, there's nothing wrong with the latter category and plenty of people do that quite successfully but the key for a long term investor is to really recognize that simple fact that you're buying a share in a business. And if you focus on the business rather than the share price and take a long term view, you have a lot less of those gyrations around market movements and panicking just because a share price has gone down. If you're sitting there saying, well, I own a share in Woolworths and every time someone goes in there and buys some groceries, I own a tiny little bit of those profits. It's a much calmer way of thinking about things so that's the way we go about it. We buy a stock, anticipating that we're going to earn an above average return from that underlying business. More often than not someone else recognises that down the track, the share price goes up and we sell it and move on to another opportunity. Typically for us, that's a three to five year holding period for that value to be recognised but if we get it right, we'd be perfectly happy to hold the business forever if the share price didn't move.

Well forever really. I think the key to distinguishment for people is when you're thinking about investing, you're buying a share in a business and the focus is 100% on how much profit that business is going to make and how much it's going to pay you rather than trying to predict where that share price is going to go and what you might be able to sell it for in the future. So, there's nothing wrong with the latter category and plenty of people do that quite successfully but the key for a long term investor is to really recognize that simple fact that you're buying a share in a business. And if you focus on the business rather than the share price and take a long term view, you have a lot less of those gyrations around market movements and panicking just because a share price has gone down. If you're sitting there saying, well, I own a share in Woolworths and every time someone goes in there and buys some groceries, I own a tiny little bit of those profits. It's a much calmer way of thinking about things so that's the way we go about it. We buy a stock, anticipating that we're going to earn an above average return from that underlying business. More often than not someone else recognises that down the track, the share price goes up and we sell it and move on to another opportunity. Typically for us, that's a three to five year holding period for that value to be recognised but if we get it right, we'd be perfectly happy to hold the business forever if the share price didn't move.

Okay. So you mentioned Woolworths there, which is in consumer staple product. You have all sorts of mining companies and banks and technology companies. Do you think about all the different sectors in exactly the same way, it's about buying the business that you expect to outperform?

Okay. So you mentioned Woolworths there, which is in consumer staple product. You have all sorts of mining companies and banks and technology companies. Do you think about all the different sectors in exactly the same way, it's about buying the business that you expect to outperform?

100% and it's more about buying it at a price that is going to give you a return that is high.

100% and it's more about buying it at a price that is going to give you a return that is high.

Yeah.

Yeah.

It's not necessarily and I think people make this mistake a lot thinking that just because the business is going to do well, I'm going to do well buying the shares. There is a certain amount of expectation in the share price of any business, at any point in time. And what you need to do is try and buy it when those expectations are lower than reality and sell it when they're higher. So yeah, we have bought businesses, the old RAMS Home Loans, for example, it might be a brand that people are familiar with. It was listed on the stock exchange and got into a lot of trouble in the financial crisis and it actually sold the brand to another company and went into rundown. So, they never wrote another piece of business and the business shrank into oblivion and we owned that stock and did exceptionally well out of it because it traded at a price that was just absurd relative to the cash it was going to generate in that rundown. So-

It's not necessarily and I think people make this mistake a lot thinking that just because the business is going to do well, I'm going to do well buying the shares. There is a certain amount of expectation in the share price of any business, at any point in time. And what you need to do is try and buy it when those expectations are lower than reality and sell it when they're higher. So yeah, we have bought businesses, the old RAMS Home Loans, for example, it might be a brand that people are familiar with. It was listed on the stock exchange and got into a lot of trouble in the financial crisis and it actually sold the brand to another company and went into rundown. So, they never wrote another piece of business and the business shrank into oblivion and we owned that stock and did exceptionally well out of it because it traded at a price that was just absurd relative to the cash it was going to generate in that rundown. So-

Yeah.

Yeah.

Now for context, the share price got down to 5 cents and it paid a dollar 20 in fully franked dividend over the coming years and the reason is because everyone was saying, well, why would I want to own this business if it's going to shrink?

Now for context, the share price got down to 5 cents and it paid a dollar 20 in fully franked dividend over the coming years and the reason is because everyone was saying, well, why would I want to own this business if it's going to shrink?

Yeah.

Yeah.

So it all comes back to the price you pay.

So it all comes back to the price you pay.

Okay. So let's start with the local market. What do you like at the moment?

Okay. So let's start with the local market. What do you like at the moment?

This is a controversial one. I quite like Seven West Media as an old school business that I think is perceived as declining into oblivion that is not going to do so. So they own Channel 7 and WA News and a production studio that produces Home and Away and a lot of other programs that people would be familiar with. The argument here is that linear TV is going to shrink to basically nothing. This business trades at something like four times its cash flow. So it's earning 25% of the current market cap in cash flow every year. We think that can actually stabilise and the reason is that the on demand piece of linear TV is growing very quickly and the advertising tools around that are getting very sophisticated and it's actually going to be a, potentially a more powerful business model than the old business model because they can target the ads to a specific type of person at the other end.

This is a controversial one. I quite like Seven West Media as an old school business that I think is perceived as declining into oblivion that is not going to do so. So they own Channel 7 and WA News and a production studio that produces Home and Away and a lot of other programs that people would be familiar with. The argument here is that linear TV is going to shrink to basically nothing. This business trades at something like four times its cash flow. So it's earning 25% of the current market cap in cash flow every year. We think that can actually stabilise and the reason is that the on demand piece of linear TV is growing very quickly and the advertising tools around that are getting very sophisticated and it's actually going to be a, potentially a more powerful business model than the old business model because they can target the ads to a specific type of person at the other end.

So, it's almost like an old world business becoming very new world and that's where the value is.

So, it's almost like an old world business becoming very new world and that's where the value is.

We don't need it to be particularly new world, if it can just stabilise, we're going to make a lot of money. But I do think there is the potential and the optionality here that it does become something that's perceived very differently down the track.

We don't need it to be particularly new world, if it can just stabilise, we're going to make a lot of money. But I do think there is the potential and the optionality here that it does become something that's perceived very differently down the track.

Okay. What about something else from a different sector?

Okay. What about something else from a different sector?

Sure. RPMGlobal, I think is another good example at the complete opposite end of the spectrum for us. We really try and own a mix of different types of businesses. We want them all to be attractive prices when we purchase them but some growing, some shrinking, some deeply unloved, some just misunderstood. And this one is a mining software business. So being in the software space, it's not as unloved as a Seven West Media but there is the mining aspect to it, which makes a lot of people turn away. It's a really high quality growing business. The share price has done well over the past two to three years. We've already done well out of it but we think it's got a lot more upside in it. It's one of these subscription type businesses where once people sign up, they start using this company software to manage their mines, to plan where they're going to dig in future and to optimise how they run the mine. Once you put that sort of software into your business, it's very hard to get out. So nice, reliable, predictable revenues. And it's growing those predictable revenues quite quickly every year as well.

Sure. RPMGlobal, I think is another good example at the complete opposite end of the spectrum for us. We really try and own a mix of different types of businesses. We want them all to be attractive prices when we purchase them but some growing, some shrinking, some deeply unloved, some just misunderstood. And this one is a mining software business. So being in the software space, it's not as unloved as a Seven West Media but there is the mining aspect to it, which makes a lot of people turn away. It's a really high quality growing business. The share price has done well over the past two to three years. We've already done well out of it but we think it's got a lot more upside in it. It's one of these subscription type businesses where once people sign up, they start using this company software to manage their mines, to plan where they're going to dig in future and to optimise how they run the mine. Once you put that sort of software into your business, it's very hard to get out. So nice, reliable, predictable revenues. And it's growing those predictable revenues quite quickly every year as well.

Those two companies that you've mentioned are at a smaller caps or mid- caps, probably mid to smaller caps. Is it harder to find these sorts of deals in the large cap part of the market?

Those two companies that you've mentioned are at a smaller caps or mid- caps, probably mid to smaller caps. Is it harder to find these sorts of deals in the large cap part of the market?

Absolutely, it is. What I've said here today, everyone is trying to do the same thing, right?

Absolutely, it is. What I've said here today, everyone is trying to do the same thing, right?

Yeah.

Yeah.

Everyone's trying to buy businesses at cheap prices. So the idea that you're just going to look at something and say, oh, this is cheap and nobody has noticed it is arrogant and it's really important to have some humility about that. I just, I think at the smaller end of the market, where there are less people looking, there are less brokers covering it, there are less professional investors who are analysing the stock. You're far more likely to find mispricings. The price of volatility is just far more extreme as well. For our style of investing, volatility is a plus. You don't get to buy things at absurdly cheap prices unless those prices move around a lot. So yeah, we tend to focus on the smaller end of the market. It waxes and wanes though. I think there are times when there are great opportunities at the small end of the market and there are times when those opportunities are less common and we're really patient and we like to wait for those opportunities to become extreme. While we wait, there's nothing wrong with owning some larger businesses that are paying you dividends every year that can provide you with the source of portfolio capital to deploy into those small- cap opportunities in more volatile markets.

Everyone's trying to buy businesses at cheap prices. So the idea that you're just going to look at something and say, oh, this is cheap and nobody has noticed it is arrogant and it's really important to have some humility about that. I just, I think at the smaller end of the market, where there are less people looking, there are less brokers covering it, there are less professional investors who are analysing the stock. You're far more likely to find mispricings. The price of volatility is just far more extreme as well. For our style of investing, volatility is a plus. You don't get to buy things at absurdly cheap prices unless those prices move around a lot. So yeah, we tend to focus on the smaller end of the market. It waxes and wanes though. I think there are times when there are great opportunities at the small end of the market and there are times when those opportunities are less common and we're really patient and we like to wait for those opportunities to become extreme. While we wait, there's nothing wrong with owning some larger businesses that are paying you dividends every year that can provide you with the source of portfolio capital to deploy into those small- cap opportunities in more volatile markets.

Okay. Diversity at the end of the day, you need a bit of a lot, no, a lot of a bit. You know what I'm saying?

Okay. Diversity at the end of the day, you need a bit of a lot, no, a lot of a bit. You know what I'm saying?

At the right point in time. Yeah. I think there are times for being aggressively concentrated when the market gets really crazy and disjointed. And there are times for being really sensible and I think we're probably in the latter type of market environment at the moment.

At the right point in time. Yeah. I think there are times for being aggressively concentrated when the market gets really crazy and disjointed. And there are times for being really sensible and I think we're probably in the latter type of market environment at the moment.

Stay with me, Steve, we'll be back in a minute.

Stay with me, Steve, we'll be back in a minute.

I'm speaking to Steve Johnson, Chief Investment Officer at Forager. Okay. So sometimes there are things such as COVID, which hits certain stocks and recently you've spoken about the opportunities in travel exposed companies. I just want to think about that. Then the next thing I want to think about is something where there's a mega global trend. ESG is the obvious one at the moment. How you think about those sorts of companies? So just with the more discreet two, three year opportunities, so travel exposed companies, how do you think about investing in them?

I'm speaking to Steve Johnson, Chief Investment Officer at Forager. Okay. So sometimes there are things such as COVID, which hits certain stocks and recently you've spoken about the opportunities in travel exposed companies. I just want to think about that. Then the next thing I want to think about is something where there's a mega global trend. ESG is the obvious one at the moment. How you think about those sorts of companies? So just with the more discreet two, three year opportunities, so travel exposed companies, how do you think about investing in them?

Well, exactly the same way. We sit there and say, how much profit do we think this business is going to make and what price are we paying today? I would've said even just six months ago, people were massively overestimating the long term impacts on the industry. It will recover. That's been pretty obvious already and I think it would been pretty obvious to anyone that you asked about it but a lot of people don't like investing into these types of things too early. So, we've been investing in these businesses since March 2020.

Well, exactly the same way. We sit there and say, how much profit do we think this business is going to make and what price are we paying today? I would've said even just six months ago, people were massively overestimating the long term impacts on the industry. It will recover. That's been pretty obvious already and I think it would been pretty obvious to anyone that you asked about it but a lot of people don't like investing into these types of things too early. So, we've been investing in these businesses since March 2020.

Good outcomes since then.

Good outcomes since then.

Yeah, absolutely right and I think today, I think a lot of people are now saying, oh, recovery is going to come to the travel space and I'm going to go and buy some travel shares. I look at a lot of them and they're already factoring in a very, very significant recovery.

Yeah, absolutely right and I think today, I think a lot of people are now saying, oh, recovery is going to come to the travel space and I'm going to go and buy some travel shares. I look at a lot of them and they're already factoring in a very, very significant recovery.

Yeah.

Yeah.

Flight Center and Webjet, the two bigger players are actually trading at substantially higher evaluations today than they were pre- COVID.

Flight Center and Webjet, the two bigger players are actually trading at substantially higher evaluations today than they were pre- COVID.

Right.

Right.

And I think this recovery is going to take a bit of time. We had Heathrow Airport out this week saying they don't expect full recovery until 2026. I think the more you see COVID hang around, the more fear you see, there's going to be a percentage of the population that just doesn't want to travel. So, there's some great opportunities out there. There have been over the past 12 months but I think people need to be careful about just piling in because the recovery is coming when the stock market is already figured that out before you.

And I think this recovery is going to take a bit of time. We had Heathrow Airport out this week saying they don't expect full recovery until 2026. I think the more you see COVID hang around, the more fear you see, there's going to be a percentage of the population that just doesn't want to travel. So, there's some great opportunities out there. There have been over the past 12 months but I think people need to be careful about just piling in because the recovery is coming when the stock market is already figured that out before you.

Yeah. Okay. So how do you think about fossil fuel companies, coal companies, oil and gas, when there is this mega trend towards ESG and concerns about climate change? I know you're going to say, oh, we use the same process, but isn't there an issue here that the mega trend in the next 5, 10, 15 years is that there is a shift to renewable energy? And yeah, I'm just interested in how you think about it.

Yeah. Okay. So how do you think about fossil fuel companies, coal companies, oil and gas, when there is this mega trend towards ESG and concerns about climate change? I know you're going to say, oh, we use the same process, but isn't there an issue here that the mega trend in the next 5, 10, 15 years is that there is a shift to renewable energy? And yeah, I'm just interested in how you think about it.

I think the mega trend in the next five years is that there has been a massive underinvestment in the fossil fuel space because of all these ESG concerns. And also because of really poor economic returns from people that invested in US shale. For example, I heard a Podcast this morning with a Goldman Sachs resources analysts saying of every dollar that got invested in the US shale space between 2015 and 2020, they lost 20 cents, let alone making a positive return. They lost 20% of the money. So, it's been a horrible space to be invested. There's been no investment. And now you've got ESG on top of that, which is dramatically increased the cost of capital for the sector. That is why you are seeing oil prices, gas prices, coal price go up. And I think in the short term, the risk of that going substantially higher is significant because this transition is going to take a lot of time. In my view, it needs to be driven by government policy rather than investor actions. I think you're seeing in the world at the moment that just divesting these industries does not fix the problem in terms of people need electricity and demand. And I think it needs to be fixed by government policy and then investors need to work around that policy to allocate capital where it most needs to go. So look, my personal view is I look at the whole ESG space at the moment and I see people are making decisions here that are completely unrelated to the profitability and cash flow of the business and that creates the potential for opportunities. If your main concern here is whether you make money out of the shares or not, over the next five or 10 years, I actually think, thinking anti ESG is probably a more prospective strategy than investing in ESG stocks that are already quite expensive.

I think the mega trend in the next five years is that there has been a massive underinvestment in the fossil fuel space because of all these ESG concerns. And also because of really poor economic returns from people that invested in US shale. For example, I heard a Podcast this morning with a Goldman Sachs resources analysts saying of every dollar that got invested in the US shale space between 2015 and 2020, they lost 20 cents, let alone making a positive return. They lost 20% of the money. So, it's been a horrible space to be invested. There's been no investment. And now you've got ESG on top of that, which is dramatically increased the cost of capital for the sector. That is why you are seeing oil prices, gas prices, coal price go up. And I think in the short term, the risk of that going substantially higher is significant because this transition is going to take a lot of time. In my view, it needs to be driven by government policy rather than investor actions. I think you're seeing in the world at the moment that just divesting these industries does not fix the problem in terms of people need electricity and demand. And I think it needs to be fixed by government policy and then investors need to work around that policy to allocate capital where it most needs to go. So look, my personal view is I look at the whole ESG space at the moment and I see people are making decisions here that are completely unrelated to the profitability and cash flow of the business and that creates the potential for opportunities. If your main concern here is whether you make money out of the shares or not, over the next five or 10 years, I actually think, thinking anti ESG is probably a more prospective strategy than investing in ESG stocks that are already quite expensive.

Before you go just internationally, what markets and are there any, I think TESCO was one that's a supermarket chain listed in London. Janus International is another one. It's a Wall Street Group. I'm just interested in some of the international names you like at the moment.

Before you go just internationally, what markets and are there any, I think TESCO was one that's a supermarket chain listed in London. Janus International is another one. It's a Wall Street Group. I'm just interested in some of the international names you like at the moment.

Yeah. Most of what we do globally would not be familiar to people. Tesco obviously would be but we're invested mostly in companies with a market capitalisation of less than $ 5 billion and-

Yeah. Most of what we do globally would not be familiar to people. Tesco obviously would be but we're invested mostly in companies with a market capitalisation of less than $ 5 billion and-

Okay.

Okay.

Yeah. Our objective is to get out there and invest in things that people have never heard of. You can get the big, large stuff by investing in an index fund or most of Australia's international managers are doing large cap stuff. So, lots of businesses that people haven't heard of, you touched on two there that are quite defensive. So, I think there're businesses that are going to perform well, irrespective of what happens economically and our view is that this is a market that some of those businesses are being dramatically under priced and it's pretty volatile and wild out there in terms of both the economy that we're facing and the markets as well. We've got a pretty decent allocation in our portfolio. One of those businesses installs high tech, roller doors and things in storage centres. You think of the big storage centres you see around Australia, the new ones that are being constructed of which there are lots because of COVID and people moving houses. We're all now needing to store our junk in more space.

Yeah. Our objective is to get out there and invest in things that people have never heard of. You can get the big, large stuff by investing in an index fund or most of Australia's international managers are doing large cap stuff. So, lots of businesses that people haven't heard of, you touched on two there that are quite defensive. So, I think there're businesses that are going to perform well, irrespective of what happens economically and our view is that this is a market that some of those businesses are being dramatically under priced and it's pretty volatile and wild out there in terms of both the economy that we're facing and the markets as well. We've got a pretty decent allocation in our portfolio. One of those businesses installs high tech, roller doors and things in storage centres. You think of the big storage centres you see around Australia, the new ones that are being constructed of which there are lots because of COVID and people moving houses. We're all now needing to store our junk in more space.

Yeah.

Yeah.

That industry's expanding pretty consistently and this business is very dominant market share in it. And TESCO, you look at Woolies trades on 30 times earnings, you can buy TESCO on 12 times earnings in the UK. And I think it's a similar quality business but a lot of what we do globally is smaller tech companies. For example, one of our favourites is a data erasure software company that's listed in the UK called Blancco and again, another growing industry and a dramatically under priced stock. And yeah, I think it's probably a good example of the way we go about things. We love owning good growing businesses, if we can find them and the UK at the moment, everyone's super pessimistic about it. It's dramatically underperformed the rest of the world over the past 20 years.

That industry's expanding pretty consistently and this business is very dominant market share in it. And TESCO, you look at Woolies trades on 30 times earnings, you can buy TESCO on 12 times earnings in the UK. And I think it's a similar quality business but a lot of what we do globally is smaller tech companies. For example, one of our favourites is a data erasure software company that's listed in the UK called Blancco and again, another growing industry and a dramatically under priced stock. And yeah, I think it's probably a good example of the way we go about things. We love owning good growing businesses, if we can find them and the UK at the moment, everyone's super pessimistic about it. It's dramatically underperformed the rest of the world over the past 20 years.

Yeah.

Yeah.

And you're finding good businesses there at very attractive prices. You go over to the US and you look at the prices that you've got to pay for a similar type of business and it's two, three times as much.

And you're finding good businesses there at very attractive prices. You go over to the US and you look at the prices that you've got to pay for a similar type of business and it's two, three times as much.

Final question. Is it hard to sell? Is it hard to take profits or is it harder to sell than buy?

Final question. Is it hard to sell? Is it hard to take profits or is it harder to sell than buy?

I'd say, if anything, I've been guilty of selling too early.

I'd say, if anything, I've been guilty of selling too early.

Right.

Right.

So, I think when you've got something that you know is working out well and the business is going the way you anticipated it going actually hanging onto that and making the most out of it is often very important. But look, our process is to think less about an absolute buy and sell and more think, well, what is the right exposure for me in my portfolio today to this business?

So, I think when you've got something that you know is working out well and the business is going the way you anticipated it going actually hanging onto that and making the most out of it is often very important. But look, our process is to think less about an absolute buy and sell and more think, well, what is the right exposure for me in my portfolio today to this business?

Yeah.

Yeah.

And the buy or the sell is then a secondary decision. And so, okay. I think the right weighting here is five. If we have three, then we need to buy. If we have seven, we need to sell.

And the buy or the sell is then a secondary decision. And so, okay. I think the right weighting here is five. If we have three, then we need to buy. If we have seven, we need to sell.

Yeah.

Yeah.

And we take that because I think a lot of people find it really hard. They say, okay, this is still a good investment opportunity therefore, I don't want to sell it.

And we take that because I think a lot of people find it really hard. They say, okay, this is still a good investment opportunity therefore, I don't want to sell it.

Yeah.

Yeah.

Okay. It's a good investment opportunity but do you have too much exposure to it for the risk and reward that's on offer. And we think about that right down to zero. So we just keep making that decision. Okay. It's a three, it's a one at this price. It's now a zero. So it wasn't one decision to say sell it. It was a constant series of decisions to say, we want a lower weighting because the price is higher.

Okay. It's a good investment opportunity but do you have too much exposure to it for the risk and reward that's on offer. And we think about that right down to zero. So we just keep making that decision. Okay. It's a three, it's a one at this price. It's now a zero. So it wasn't one decision to say sell it. It was a constant series of decisions to say, we want a lower weighting because the price is higher.

Steve, thank you for talking to Fear and Greed.

Steve, thank you for talking to Fear and Greed.

Thanks, Sean. Good to be on.

Thanks, Sean. Good to be on.

That was Steve Johnson, Chief Investment Officer at Forager. This is a Fear and Greed Daily Interview. Join me every morning for the full Fear and Greed Podcast with all the business news you need to know. I'm Sean Aylmer. Enjoy your day.

That was Steve Johnson, Chief Investment Officer at Forager. This is a Fear and Greed Daily Interview. Join me every morning for the full Fear and Greed Podcast with all the business news you need to know. I'm Sean Aylmer. Enjoy your day.