“There’s always some key consumer decision point. We zoom in to find out who’s winning at that decision point. Things that work really well in a small group of people are very likely to work for all of us.”
Michael Frazis is a Managing Partner and Portfolio Manager at Frazis Capital Partners. Frazis Capital Partner's Frazis Fund beat both the S&P/ASX 200 and MSCI World Total Return Index by over 100% net in 2020. Over the past 12 months, the fund has generated returns of 188%.
Michael Frazis describes his investment company’s strategy that involves a 30-40 year view, not panicking and diverting the approach during dips and rallies. Evaluating growth stocks involves identifying customer love for a product or service which acts a key indicator of explosive growth potential. This approach is utilized in picking winners in industries like the ‘buy now, pay later’ space. Frazis explains how vaccine development is a long process involving extensive trials and how the emergency approval of Moderna’s vaccine allowed the company to prove the mRNA concept, providing the company a significant boost.
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SPEAKER
Michael Frazis
Portfolio Manager
Frazis Capital Partners
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
TIMESTAMPS
0:00 - Intro and background
2:39 - Founding his company at 29 and investing strategy
11:38 - Evaluating polarizing stocks like Tesla
15:08 - Investing psychology
18:45 - Processing investment information
23:17 - Investing in industry creators
25:31 - Moderna and life sciences investments
31:43 - Dogecoin case study
35:30 - Growth stocks amid inflation
TRANSCRIPT
Rachel Pether: (00:07)
Hi everyone and welcome back to Salt Talks. My name is Rachel Pether and I'm a senior advisor to SkyBridge Capital, based in Abu Dhabi, as well as being the Global MC for Salt, a thought leadership forum and networking platform at the intersection of business, technology, and public policy.
Rachel Pether: (00:26)
Salt Talks is a series of digital interviews that we launched during the work-from-home period and what we're really trying to do with this series is re-create the experience at our Salt conferences and discuss with some of the world's leading investors, creators, and thinkers.
Rachel Pether: (00:45)
Today, I'm very excited to be joined by Michael Frazis, the founder of, and managing partner at Frazis Capital, based in Sydney, Australia. Prior to founding the firm, Michael spent five years in private equity in London after completing internships at Goldman Sachs and the Boston Consulting Group. Michael read chemistry at Oxford University. He has an MSc Finance from the London School of Economics and he came first in Australia in the 2006 Chemistry Olympiad.
Rachel Pether: (01:13)
So Michael, welcome to Salt Talks.
Michael Frazis: (01:16)
Thanks so much, Rachel. I really appreciate you having me on.
Rachel Pether: (01:19)
No, I'm really excited about this one and I summarized your biography profusely. So tell me a little bit about your background. You often see people with physics degrees moving into investment management, but perhaps to pass from chemistry into finance is a little bit less trodden. So tell me a bit about your journey.
Michael Frazis: (01:40)
Yeah, sure. I mean, I was at Oxford for about four years, did a year of research. I think I was just one of those people that realized lab work probably wasn't for me and Oxford University, this was quite a while ago, 15 years. Since then, Oxford University has really taken off in terms of commercialization of business, which, as far as I was aware at the time anyway, it didn't really exist in the same way. But chemistry is a mess science, it's liquid, it's solutions. It's complicated, nothing's neat, no system is perfect. I think that actually applies pretty well to financial markets. There's so many models and ideas and frameworks you can use, but end of the day you have to accept that we're almost in the future prediction game that is messy and we're dealing with companies and people there are really complicated situations. So I think it did help me in that regard.
Rachel Pether: (02:27)
And I want to pick up on some of those models and frameworks that you use but you were just 29 when you founded the company. What drove you to sit up and go out on your own?
Michael Frazis: (02:40)
Look, I think it's just one of those kids that always knew what he wanted to do and spend most of my twenties working towards that goal. I think it was probably harder to launch the way it did. You're probably better off launching an established shop, but the good news was is starting with almost no capital and met the [inaudible 00:02:57] across every single aspect of the business. So not just the investing, but the marketing, very complicated operations, and regulatory, all the things that are involved in it. And I think that's why a lot of people find it so hard when they move either from a big fund to launch their own offer investment bank trading floor because so many things are looked after for you.
Michael Frazis: (03:15)
It's like, the analogy is, "It's easy to kick a goal in the park with your friends." It's hard if you're, I guess, playing rugby and getting beaten up for an hour and then have to do it in front of a crowd of pressure. I feel like that's a difference between trading on your own or trading within a big organization and coming out of doing it on your own.
Rachel Pether: (03:32)
Mm. You differently realize how much time you can spend on that kind of back-office and administrative side. Daniel can be quite so
Michael Frazis: (03:40)
Important. It's such a critical part of the business. You have to get it right. And it's quite complicated. So people sometimes underestimate how much is involved in that part of it.
Rachel Pether: (03:49)
Yeah, for sure. And just going back to some of the models and frameworks that you use to view the world at Frazis' Capital Partners, tell me a bit about your strategy and what, particularly types of stocks you look at?
Michael Frazis: (04:05)
Yeah, absolutely. So we invest long-only, mostly in technology and the life sciences, about 40 to 50 stocks. Look, our framework is we invest in companies with true customer love and explosive growth. It's a really simple framework, really simple idea, but the reason we chose that is it gives you the right answer to extremely difficult and extremely important questions. Do you think about all the big controversies in the investment world, whether it's Tesla, Bitcoin, early days Amazon, Australia companies like Aftepay often these were highly controversial stocks. They're generally investing heavily in growth and they are heavily shorted. These were stocks, which the smartest people in the market often bet against. Fast forward to 2021. And you know, these companies interest just do okay. In most cases are the best-performing assets in their class. So what we're trying to do is run for you.
Michael Frazis: (04:55)
How do you identify these things early? Who were there in Tesla in 2013, where then Afterpay six years ago, we were early identifying and able to identify these things early. And if you think about it, they all had like these two things in common, firstly, they had an extremely devoted customer base and secondly, they've consistently delivered outstanding results and both of those things are important, very happy to go into more detail in them. But broadly, we have a philosophy of no opinions. So if we think something's good and as true customer love, we should be able to see that in the data, we should be able to see it in the revenue growth, the user growth, the gross profit growth, their web traffic, their rankings on Amazon Alexa, the Google search trends, all of these factors should be combining to show a company that's growing extremely explosively. And that's evidence of that true love. And I can give a few examples if you think that'd be helpful.
Rachel Pether: (05:46)
Yeah, that'd be great. And just from that, there's so many things I want to pick up on and particularly dive much more deeply into that behavioral psychology side of it. But yeah, I'd love you to give me examples of those customers that have true customer love and explosive growth.
Michael Frazis: (06:01)
As an example. Well, example everyone will be familiar with is a company like Apple. So think back, I guess, 2009, 12 years ago, Apple launched the iPhone, there was intense competition. People forget now; you had Nokia, you had Microsoft, they had Blackberry just to pick three, you then had Samsung, Sony, Huawei. A host of well-funded, extremely well-funded companies that were putting out extremely high-quality phones. There was only one company that people queued outside stores for days in advance just to get the hands of be one of the first of 10,000 people with iPhone. There's only one company that people like pitch tents, literally camped, it looked foolish and silly to people. But also there was this cultural phenomenon around and so fast-forward, what happened in the next or the following, like decade or more, everybody else competed on price and features.
Michael Frazis: (06:53)
There are many years in which the smartphone industry lost money, other than Apple, which was able to charge a few hundred dollars extra for each phone and capture the entire profit margin. So as an example of that true customer love directly translating into fundamentals and creating $2 trillion worth of value. Now, to give you another example of, just step back a bit, just think about how that framework is helpful in this instance, it's extremely complicated 12 years ago to forecast which, out of all those amazing, well-resourced companies with globally significant brands, which one of those would win. And the answer was simple. It was which one did the customers love the most, which one is growing, which was delivering the best results. And that continued the whole way through another example is, and this would be very controversial or this has been a very controversial stock.
Michael Frazis: (07:43)
And that is Tesla, rewind the clock several years ago, similar to the smartphone industry, you have a number of amazing companies, top-tier engineers and globally significant brands. I'm talking about Toyota, Volkswagen, Ford. These are some of the best companies in the world, the best brands in the world. But the reality is, when it comes down to it, they're all competing on price and features. None of them really has that true customer love. Tesla obviously did. So Elon Musk love him or hate him and he's very controversial a couple of years ago, in particular, he was able to get on stage and sell hundreds of thousands of cars in a simple presentation, that's customer love.
Rachel Pether: (08:23)
Yeah.
Michael Frazis: (08:24)
And again, you fast-forward, he grew that production profile effectively from a couple of 1000 eight years ago but 25,000, 50,000, a 100,000 to 250,00, 500,000, close to a million cars a year run rate.
Michael Frazis: (08:38)
And that is the explosive growth so you have the true customer love. And then you had the explosive growth. And just to give another example from the auto industry, there are other examples of car companies that have that customer love, an example that'd be Ferrari. So an EV sales basis, Tesla is generally traded roughly around where Ferrari has, which shows there really is something going on. The companies that do have that real customer love that does transfer into their valuations. And most importantly, transfers into their fundamentals. We look back now in 2021 and the company is doing 25 times the sales it was doing several years ago when everybody was shortened. And that was the key. That was the key point. That was the clue, the true customer love, and that explosive ramp-up.
Michael Frazis: (09:23)
Basically, what we're doing in our fund is creating a portfolio of about 45 companies that display these characteristics. And one of the things we do is we push, I think, explosive growth much further than most people would. So the last time we calculated, we have to make certain adjustments, strip outgrowth from acquisitions, and so on using the latest quarterlies, maybe adjust for a couple of life sciences companies, but the average portfolio growth rate organically using latest results was over 150%. So these companies that are 150% bigger than they were last year. Last year we did over 108% net as a fund. I think this financial year we're tracking over 80% net. The reason we've been able to achieve those numbers isn't because we're smarter than anybody else or we can see the matrix better than anybody else. It's simply because we're backing companies that are systematically and structurally growing at explosive rates, and frankly taking those revenues and that success from the rest of the market.
Michael Frazis: (10:15)
I hope that gives some flavor of how we can use that really simple-sounding framework of true love and explosive growth to answer really difficult questions like was Tesla or long or short, eight years ago, or five years ago? Was Apple going to win? Who's going to win the smartphone war? I think, all the ink that was spilled, all those 100 page reports on the auto industry, all the analysts researching smartphones, assessing each model for the characteristics and the pricing and how they're compared to each other and true customer love and explosive growth got you the right answer to both those questions. And indeed we see that again and again and again and again
Rachel Pether: (10:53)
Yeah, absolutely. I mean, Apple's the only phone I've ever stood in a queue for three hours just to get it fixed. It's got that real following. And I think the Tesla example is really interesting because an Elon Musk is still a very controversial figure today, but he was one of the first, I know that recently there's been a sort of push from the retail side against stocks that are heavily shorted, but Tesla was the original heavy short, wasn't it? Just because of that polarizing following. And I guess that could really be driven by the people that did have that true customer love and the people that didn't really understand how that those dynamics were working.
Michael Frazis: (11:37)
Yeah. I think there's something really fundamental that you've touched on there, which was how heavily shorted Tesla was. There's a really good reason why these companies are both the most heavily shorted and controversial stocks and the best returning ones, it's the reason. And the reason is as simple as these are the companies that have excess consumer demand. The number one problem for every company is actually sales. How do we drive revenue? How do we grow? How do we beat our competitors? Take market share like that is the number one problem for any company. There's a very small number of companies, which are the only ones we invest in have the opposite problem. They sell out of iPhones, they still have pre-orders of cars and to meet that demand, they have to spend heavily.
Michael Frazis: (12:25)
And they're often spending in the income statement. They're not doing, they are doing CapEx, but they're also spending heavily in the income statement, on human capital, on R&D, on sales and marketing, on G&A all those things that are costs. So what's happening is people that come within traditional value lens, see those big cost items and see them as expenses and see the very mega cash flow at the bottom.
Michael Frazis: (12:47)
So software is the best example of this, a good software companies probably lose money if you consider stock-based comp probably generate cash if you take out stock-based comp, but the rational decision for them is actually to spend all their revenue, all their gross profit dollars on sales and marketing because they can get a five or 10 times return on that. And so it's really interesting to think that the framework everybody's using, this value framework, gives you the opposite answer to questions like Afterpay, Tesla, Shopify, you could go on all the best companies basically in the world. And the reason for that is they had this explosive demand. They're growing extremely fast. They're investing extremely heavily to meet that demand. So it looks like, to a traditionally investor, the cash flow negative. When, in reality, they're getting rights of return on that capital far beyond what you can get from a chemical factory or some industry that was invented 300 years ago.
Rachel Pether: (13:40)
Yeah. I love the point about capital as well and the human capital element. And I remember speaking to someone in Silicon Valley about someone, like, just to pick up on Elon Musk, the Elon Musk thing, and the quality of human capital that he attracts. So Tesla spaceX, it really is, it's the people are that employees as well, they are really committed to the business as well as the customer. So I guess that's really all tied up in the brand, isn't it in terms of true love?
Michael Frazis: (14:09)
You get the smartest people, you get to the right answer. So I'll give you another example of Tesla. The whole thing is fully integrated with computer systems. So if you could spend hundreds of thousands of dollars on a car, each component could be made by different suppliers. They will have to stitch them together. So it's really fragile, really difficult to manage that. And for Tesla, it's all ground up. And you're very right, these companies attract the best talent, as well as investors, and as well as immense demand. Yeah, it's very interesting point all around.
Rachel Pether: (14:46)
You mentioned about the composition of the balance sheet, I guess, and where the spending is happening. And you look at the last 12 months and all crises really trigger certain changes in behavior. So how do you see psychology as playing into investing, particularly on the behavioral finance side?
Michael Frazis: (15:08)
Yeah. Look, there's no doubt. There's something about the market, the way it forces everybody to panic and capitulated at lows, and then panic-buy at the highs. There's something really intrinsic going on. In those panics, like last year, we're genuinely long-term, we stayed fully invested last year. We stayed fully invested in two moments that mattered. The first one was obviously in March. So we didn't play a perfect game. We didn't foresee the crash. If anything, we thought it would be much milder than it was, but for every dollar of stock we sold, we made sure we bought a dollar of stock or something else. So it didn't change around without actual dollar exposure and that ended up we were fully ready for a two-year bear market that would have likely wiped most competitors in the industry out.
Michael Frazis: (15:55)
It brought us to the break. We're fully ready for that. As it so happened, that locked down of London, New York City. That was a lot, so, to go to your behavior psychology moment. The moment of panic turned out to be the low. So if you woke up, read the papers and like, "Whoa, they've shut down London and New York, this looks kind of dangerous." If that was your approach, I might sell my stocks. You actually caused, firstly caused that crash. The second one, that was it. And so we recovered within, not sure exactly it was probably 4, 5, 6 weeks later we're back on top. The second moment and this is probably more important and harder to do is that later in the year we're up 20% when the market was still down 20. So we're locked in is huge outperformance.
Michael Frazis: (16:36)
Now, people who know the industry, often when you get these 30, 40% outperformance, you're going to lock that in. You can ride the rest of your career on that. You can basically buy the market and your chart will always be that much bigger, better and stronger than your peers, but it's the wrong answer long-term. On a 30-to 40-year view, you have to stay invested through those rallies as well as through the dips. And so we're constantly going back to that decision making, how do we improve our decision making, our process? We don't decide what to do at any particular moment. We decide what to do in every single moment like that over the next 30 or 40 years. So sure, often sometimes the market will crash and that'll be halfway down, like something we saw in March that'll be halfway, and you can sell and do better out of it.
Michael Frazis: (17:19)
But what is the right answer? You're going to sell every crash what's that going to do to long-term returns? If you think like that, all of a sudden, it's obvious you cannot be a systematic seller in crashes. Similarly, if you think, okay, the market's up a lot, sorry, the market's down a lot, we're up a lot. Let's lock this in. If you sell the rallies, you'll also systematically underperform over 30 to 40 years, you have to sit there through both. And so I think that's allowed us to step back from that day-to-day behavioral tricks that the market plays on you and really focus on the long-term by making our decision making like that. It's a really helpful guide for us.
Rachel Pether: (17:59)
There's two really important points that you just made in there that I want to pick up on, you mentioned about not having any opinions as well. And one thing that I personally struggle with is that we've had this paradigm shift to a networked world. So we can shoot out from many media to many media very, very fast. And you almost go to infinity extremely quickly in terms of opinions being shouted at you and so many sources of information. And you mentioned that you try not to have any opinions. So how do you take all this information and particularly how do you use social media within that as well?
Michael Frazis: (18:46)
Look, we're pretty simple. We'll just look at the fundamentals and by fundamentals, I generally mean the key KPIs. So the user growth, the revenue growth, the revenue to user, gross profit margins, things like that, but no opinions. I mean, we won't walk into a room and shake a CEO's hand, and then form a view on the company based on how we think that meeting, well, like those little cute clues that we you picked up on. Similarly, you'll see a lot of people who read a lot of research, sell-side research, and also things written by other people in the buy-side. Well, let's pick, our think, I think this is going to happen next. I think this company going do better now, I think that this is happening. The market's got this wrong. I think the market hasn't understood this, what's really going to happen is this, whenever you see these phrases, which you see again and, again, that is opinion.
Michael Frazis: (19:29)
What excites us is somebody saying, "Hey, this company is going 200%" or "All the kids are obsessing about this new thing." That is what excites us. And you go, okay, let's look it up. Let's see how the website is doing. And then you see the traffic going up and then look at their results and see revenue growing explosively. And you can see that they're spending a lot of money, but also making a lot of gross profit dollars. And every time they spend a few million dollars on SGNA, they increase the total lifetime value by many times more. That's the thing that excites us. And that's what I mean by no opinions. So for us to come in and decide, I think this company has true customer love.
Michael Frazis: (20:06)
We'll then go back and look and say, okay, what's it growing at? Or maybe someone's pitching us a stock, a broker, they'd be like, "We think this is a really interesting software company and it's going to do really well in the next five years." And you look at it and it's growing at 15%. Well, if something's really 15%, it can't really be changing the world, it can't really be lighting the industry on fire. I can't really be that important, that relevant. Whereas like I said, our company is average in our portfolio averaging well over 100%, these are big companies. The medium mark-ups over 20 billion Aussies, I guess that's about 15 billion US. These are not small businesses, they're large businesses. And if they're growing at those explosive rates, they're taking money from the rest of the market because global GDP is roughly flat.
Michael Frazis: (20:50)
So we've got a portfolio of 50 stocks growing 100%-plus they're taking that revenue from somewhere else and that's somewhere else is the rest of the market. So look at how that performed. It's partly just higher returns, but it's also the fact that the market probably has done not as well as people were hoping, five years ago, it's been a very difficult. Now, there's been a bit of a rally in 2021. You could argue from 2017 to 2020, life was pretty tough for most markets and that was because a handful of companies. And one of the reasons it was a handful of companies were taking enormous amounts of revenue and market share from others. And sometimes you know it, sometimes you can see it. Sometimes you say, "Oh, Afterpay has basically killed credit cards in Australia or dramatically reduced credit cards in Australia" Afterpay has credit tens of billions of dollars of value.
Michael Frazis: (21:37)
Australian banks are down tens of billions of dollars value. Tesla has gone up like this, the rest of the industries come down, the rest of the auto industry has come down. Shopify has gone like that and Kovan has gone like that. The e-commerce providers have tripled and the physical retail are down.
Michael Frazis: (21:51)
Sometimes you can literally see where that value has gone, but sometimes it just must have come from somewhere else in the economy. It's share of mind, share of wallet. And it's so important, one of the reasons I'm bringing this up is people look at [inaudible 00:22:04] and think that's way too hard. You know what? I get it. I can't use my Warren Buffet, my Graham. I can't use my principles. I can't use my screening. I can't use fake cash flow. I can't use all these things that I'm used to using. It's in the too hard basket that you cannot outperform in today's market and then not own these companies doing this well, because if you do have that framework, you're going assist to that value, that traditional value framework, you will systematically miss every single good life sciences company, every single good software company, every good single good FinTech. And that's where the value and share of wallet share mind is going.
Rachel Pether: (22:39)
I do want to talk a bit about life sciences, but what I think is interesting is that some of the names that you keep mentioning, so affirm or sorry, Afterpay and Tesla, not only are they great companies in and of themselves, but they're also almost industry creators, right? You look at Klarna, Affirm, Afterpay, there wasn't really a buy-now, pay-later space a few years ago. And there wasn't really a electric vehicle car space a few years ago. So not only that, they have true customer love, but they're really creating new industries in and of themselves as well.
Michael Frazis: (23:18)
Absolutely. I mean, we used to focus on that as an entire way of looking at these things. And that's the category creators. It's interesting, like many years ago, and after it's like all this, we have 50 companies, these are all 2-3% positions. We just like to talk about the ones that people are most familiar with, because often they'll remember how they thought about them through their journeys: I remember Afterpay runs like PayPal will squash them, credit card companies will squash, but actually ended being the opposite. PayPal has responded to Afterpay basically by copying them, so has Shopify paying for. The visa mascot actually net beneficiaries of the buy-now, pay-later because it's splitting up one transaction into four, I guess there's another point that we often think about really carefully and it's applicable to the life science as well.
Michael Frazis: (24:00)
And any product or service, there's a decision point where you choose one product over another. It could be you sit down at this restaurant and not that restaurant, it could be you click Afterpay instead of PayPal, instead of putting in your long credit card details, it could be buy this car, not that car. There's always some key decision point consumer decision plan.
Michael Frazis: (24:21)
So one thing I should add, we're basic consumers, which I can talk about if you want, but there's always a decision point. And we always zoom in and try and figure out who's winning at that decision point because often who's winning in a small country or a small state can then roll that strategy out. Human psychology, there's certain things that seem to repeat, things that work really well in a small group of people, are very likely to work for all of us. So really focusing on that decision point is also something I think we do differently. We're not looking at historics in the same way. We're not spending as much time with management and index over weighting what they're saying, they're wink, wink, nudge, nudge is saying. We're really focusing on that decision point because that's what determines value in every industry.
Rachel Pether: (25:03)
Yeah. And so let's pick up on: you do mention life sciences, which is a nice segue. And you talk about the true customer love, and I know you're invested in Moderna. So how do you put that into the equation? Because obviously, you do have that, I guess that need at the moment, from the vaccine perspective, for customers to desire the product, but are there other aspects to Moderna that attract you to that as a stock?
Michael Frazis: (25:32)
Yeah, definitely. I mean, we're familiar with the company before Coronavirus, but the core part of our strategy in life science is ultimately simple. We want to see companies deliver, we want to see results. We don't want to guess on what's going to work and what's not going to work. mRNA vaccines got to a point where that they're basically on the cusp of working, Moderna had one for CMV. The issue with vaccines is they're really difficult to bring to market. Think about somebody who's terminally ill with cancer with a few months to live. You're very morally justified in experimental treatments to look after them. The ethics makes sense you need to try it. And you're very ethically justified in trying something that may or may not work. Think about vaccines, proper vaccine trials, you have to vaccinate huge numbers of people, the healthy people, generally there might even be people who could be pregnant, for example, or have all kinds of things.
Michael Frazis: (26:22)
The bar for safety is so exceptionally high. So it's extremely hard to commercialize these things. And Moderna was very slowly in making progress with the CMV, which stops Herpes, but the Coronavirus was just like a jolt for them, and the evidence was there quite early. So Moderna created the vaccine just from the data, just from the virus sequence. It was released on the internet. It's also one of the first times there was like a... It's really that point where medical science became a data science, this whole thing was developed and designed through data end up being incredibly meaningful. Here's the thing, the Coronavirus gave them a ton of funding, a ton of attention, a really urgent need, and that allowed them to prove the concept of mRNA vaccines and gave them huge amounts of funding.
Michael Frazis: (27:08)
So something like 20 billion of pre-orders this for company, that was only five billion very recently, or eight billion very recently. So it's a huge amount of money that is going into this company. The good news is that because they've commercialized the delivery method. They live in nanoparticle casing, which effectively goes into your bloodstream, isn't degraded. Somehow merges with cells and goes in and delivers the... All that was years and years and years of technological development to do that. And it's still very difficult to do, and we can only hit certain parts of the body and certain types of cells. But once they've proven that, now it's a simple case of just changing the data, changing the data sequence, the mRNA sequence, to cure a huge number of other diseases. So an example would be there was a Coronavirus that came out about over 100 years ago and it still circulates, it still causes a lot of deaths in elderly.
Michael Frazis: (28:00)
Moderna is very lucky to be able to put through a single-shot vaccine that can vaccinate against multiple types of influenza, all kinds of historic Coronaviruses, and obviously the more recent one, including new strands all in one because you can put multiple strands of mRNA in the one dose. To think about the commercial opportunity of that and that is just in respiratory diseases. And this, in our view, will be one of the major pharmaceutical companies. Now to bring the general point. But how does that compare to the other stuff? Well, we knew very early on that the vaccines were getting immunological responses.
Michael Frazis: (28:34)
I think there was something not quite right about the way that all the chief medical officers around the world, certainly in Australia, said, "These things take two years to develop." That's not actually true. Swine flu went from the first few cases to a vaccine in about nine months. E-bola set a precedent also for very rapid vaccine delivery, but effectively use the phase two, three trials to vaccinate frontline workers. There is historical precedent. It was one of the tests to know if the person talking new vaccines because if they said, "It always takes two to two years or more," you knew they didn't actually know the kind of history of it.
Michael Frazis: (29:10)
And it had very early, good data, so it wasn't our opinion that work. We knew that it was very likely to work and also had this ability to roll that technology out across the entire platform. So you have a number of other companies in the life sciences that we invest in. The vast majority of them have revenue or growing at triple digits plus. So they've already bought treatments to market, FDA approved and winning share of wallet from physicians. And then they're using that money to then invest in their pipeline, which uses the same platform technology. So we want a platform technology, proven technology. We have, I think we have like really good people on life sciences. World-class, these are people from the top universities in the world. I'm looking at this for us, but really the proof is in the pudding.
Michael Frazis: (29:57)
If they've got an FDA treatment that works and is generating revenues. Again, it's the way we look at the rest of the technology space that is a more important data point then even the smartest person in life sciences thinks. The data is more important than the most important person's opinion. So there's a lot of similarities in the way we do it as well. And it's really helpful about a third of our portfolios in the life sciences. It's really helpful in taming those swings across the rest of the portfolio because no way around it, we're fully invested in extremely high growth and volatile stocks.
Rachel Pether: (30:29)
Mm-mm (negative). No, and I think that's a great point you made about life sciences companies are really data companies as well. I guess in any factor of life, there's really no such thing as an overnight success, but given the precedent and the data that they've already accumulated over years of research, you're not starting from scratch, as it were. And another point; some of the things you've been saying, echoing a really great podcast I listened to the other day. It was a gentleman called Dan McMurtrie from Tyro Partners in the US and he was talking about how, when people see a situation, I think the actual example was Dogecoin. And he was saying that particularly the older generation can have this knee-jerk reaction of seeing something and screaming. It's absurd, it's absurd, it's absurd. And almost them giving that thing the attention actually is what makes it real. How do you, I guess you see that playing out and maybe a little bit about the intergenerational aspects as well?
Michael Frazis: (31:43)
Yeah, there's a couple of things there. So think about Dogecoin. It's like the perfect example almost of how user framework can make predictions. So explosive growth, obviously usage went up like that, tick. Customer love, people just obsessed about it. They loved it. They tweet about it. They're obsessed. All the cryptocurrencies they're most proud of, their Dogecoin. They'll talk about it. And like, it's got this huge amount of Mindshare, it's giving people pleasure just to put money in that. So our framework actually gets to the right answer. Our framework says that's a buy. And I wish we were thinking like this eight years ago, we could put some more money in bitcoin.
Michael Frazis: (32:17)
Another thing you touched on is the generational thing that is here to stay. That is huge. If a company has a funny name, like as my generation, we'll buy a stock if it's got a funny meme about it [inaudible 00:32:32] and we'll continue to do so in the future. And it almost makes sense. It's idea if something's good enough to make millions of people laugh and millions of people put a couple thousand bucks in, you're talking about huge numbers. It's not really that it's like, let's say there's, I don't know. I don't even know the numbers, but let's say there's... I think, I once calculated that if everybody on Wall Street bets, I think somebody else made the calculation invested a thousand dollars or something like 50 billion. And that is more than enough. There's a lot of very wealthy people on that side as well.
Michael Frazis: (33:00)
There's more than enough to push around any stock and even in any cryptocurrency. And that aspect is really interesting. And I think that's a change that will continue, especially with the pace of social media. Where a good meme can just go rip around the world and result in huge amounts of demand. I mean, we don't really participate in that. I think if you look at what's the main one, GameStop, so that was trading it way too cheap. If you think about it, it was like zero point, whatever-times sales on a company that had five billion of revenue, we lead to us. If we look at the numbers, we were actually, "It's definitely worth something," it wasn't worth the 300 million dollars. It was definitely worth something, probably in the billions. So it was way, way, way to cheap, which led to that huge ramp-up.
Michael Frazis: (33:45)
But in general, the main way that Apple flow is affected is our companies are generally shorter buy-in institutions and the other side of that is invested in by retail. And so there is a bit of a hot-element part to our portfolio, where when things moved there were really moved because the short sellers are buying back and the retail partners are buying. When they fall, they can really move as well, so that obviously gives us opportunities. We generally don't sell when things move up, for the reasons we mentioned, but often there's very good entry points. When you get these huge retail panics like we just had, we can get actually pretty aggressive and buy on the backside of that, because we do our numbers. We know our process works. We're not using opinion. We're going straight to the data, the revenue growth, the KPIs, the independence statistics that gives us the conviction to then take the other side of the hot money flows when they got out. So it's very relevant to us. And I think it's a fascinating part of the market that we all love to watch.
Rachel Pether: (34:37)
Yeah. I'm still now just a little bit depressed that I've spent so much of my life doing 40 page PowerPoint presentations, and I could have just done a funny picture or something.
Michael Frazis: (34:47)
Sadly, same way the investment management industry could have done better if we bought Bitcoins.
Rachel Pether: (34:48)
Yeah.
Michael Frazis: (34:51)
Instead of the things we are actually doing.
Rachel Pether: (34:56)
I do want to take one final point as well and bring it into the current market positioning and how inflation ties into true customer love because inflation obviously has a lot of market participants freaking out about growth stocks in particular. So I want to dive deeper into this. The stocks that you invest in growth stocks, but they have true customer love. How do you think this could make them more resilient to an inflationary scenario, what are your views on that?
Michael Frazis: (35:32)
Look, there's no doubt that a lot of our companies grew throughout, even the first part of the Coronavirus crash wasn't just a rotation into certain sectors. Look, inflation is really relevant and it's relevant in a few ways. I've actually got this weird idea that our stocks will actually benefit from that. So it affects valuations and fundamentals. Now, valuations have obviously taken a hit they already have. Most of these stocks are sideways at the last six months and they're growing at like I said, 150%-plus. So materially bigger than there were, the valuations have already materially contracted. And as inflation fears rise, rates will rise, and both, in theory, that means a higher discount rate and low valuations. In practice, it means that people just take the bigger money out of stocks and putting 2% for free with no risk.
Michael Frazis: (36:16)
That's pretty compelling to a lot of investors. There's no doubt that that relationship holds the way people expect it to. What is different is our companies should do and have been doing extremely well in inflation environments. The reason for that is firstly, inflation environments involved rising prices, e-commerce platforms, plus that straight through most of them in luxury or in those really loved parts of the market where they have exceptional pricing power and lifting prices even more. Second issue with inflation is typically high input costs. Well, most of the input for our company's is actually things like, I guess customer luck, realistically, IP, R&D, these intangible things. They're not buying, steal from a factory, and turning into widgets for another factory. That's where they get squeezed.
Michael Frazis: (37:02)
The third way it could hurt is if rising rates lead to a debt collapse if you're over-leveraged and rates go up, wiped out your cash flow, and collapse the equity value of a business. That is not relevant to our companies because they almost all hold net cash. And the payload of stock-based comp, which obviously we have to account for and account for carefully. But the reality is the high-interest rate, they actually get high cash flow from those things. Finally, in this particular inflationary environment, basically, what happened is we had a moment last year or period last year where certain parts of the economy ran red hot, places like e-commerce, in particular, comes to mind, they had their best, it's like Christmas every day for some of these online retailers. That then broadened into consumer boom and it flowed into places like auto's, where secondhand cars are being sold for more than they were bought new to real estate. It really turned into a broader consumer boom. And again, in that environment, we can expect our companies to accelerate, which is exactly what we saw in the last results.
Michael Frazis: (38:01)
Our average growth rate increased over that period. So pulling all that together, you have like, there's one of that valuation contraction, which could continue if rates continue to rise, but the fundamentals will win at any period longer than two years. The growth rates that we're investing in will very quickly dwarf any valuation change caused by inflation. So we're very comfortable with the current environment. It's really like deflationary environments that have the worst outcomes. I've got family in Greece. So look at what they experienced through deflation or the Eurozone in the 2000s in the aftermath of the last crisis, or even to a lesser extent, perhaps United Kingdom, after the 2009 crisis, deflation, it's people pulling money in, its prices is going down, it's wages just going down that's the environment that's really scary and really bad for stocks. This is not like that. So we are optimistic from here.
Rachel Pether: (38:57)
Fabulous. And on the point of the housing market, I did actually see the other day that there's now more real estate agents in the US than there are available homes on the market. So that just gives you a sense of how hot that market is right now as well.
Michael Frazis: (39:14)
Very interesting.
Rachel Pether: (39:15)
So well, thank you so much for your time, my God, it's been an absolute joy having you come on today, and I hope that we can get you back on at the end of this year to see if your performance has continued through 2021.
Michael Frazis: (39:27)
Thank you, Rachel. Really appreciate it. That was a lot of fun. So thanks for having me on.
Rachel Pether: (39:31)
Great. Thank you.
