David Paradice is one of Australia’s most respected stock pickers. His eponymous company jockeys about $18 billion through global markets. The accomplished polo player spoke to Stewart Hawkins at a sprawling, spectacular property in rural NSW about the state of the investment world, where he sees opportunities, possible dangers and how sometimes you need to park your ego if you want to win.
Q: You’ve been quoted saying you invest on fundamentals and don’t do the crazy stuff, but what are the new fundamentals? Given the state of the world how do you define the crazy stuff anyway?
David Paradice: The principles … of high return on invested capital and free cashflow and return on equity and margins … it’s still the same. When I first started, back in 2000 … it was the back end of a very speculative market. We thought [technology stocks’] valuations were very high and we didn’t move into that. We underperformed for the first three or four months. [But] … cracks started appearing in the technology side of things and in biotech and risk was on. A year later, we were up something like 35% relative, meaning we outperformed very significantly because the market got belted, but we managed to hold on. Anyway, [since then] those [technology] businesses, [have] changed industry. Business models are changing … you have to adapt on that way of analysing.
Q: So, what’s the crazy stuff?
DP: You have this massive speculative market where you’ve got a lot of technology companies which have got quite poor business models but managed to get funding because of the speculative market. When interest rates are going up, the risk has come out of the market, and a lot of the technology things have retracted. [Some of] the big [tech] ones… have got good business models, are producing cash, but there are a lot of those speculative ones that have had to rely on a very positive market to keep going. When I talk about the crazy stuff, I talk about things that are being bought on multiples of revenue with no cash flows and they need a strong equity market to continue to survive. There’s a lot of them in there that will go broke.
Q: You recently said we may be in a phase which presents a golden opportunity for stock picking. What do you mean by that and why now?
DP: A lot of the technology stocks have been belted. Now, amongst those, only a few, there’s going to be some good stocks to pick.
Q: You’ve been around long enough to see plenty of economic cycles. What are your thoughts on the current inflation situation? What opportunities does it present?
DP: It does create massive opportunities. Rates are going up. People are finding it very hard to find people to work. Commodity prices have been moving up. So they continue to jack up rates and that has an effect on economic activity. Things have been coming off a bit in the US, but the equity market does look a fair bit in advance of a recession. I think there may be some economic softeners. Some of the areas we’ve been investing in on the inflation side of things have been … in some of the commodity companies, some of the resource companies. You’re having structural changes in some of these businesses, industries like lithium. If you can find a really good technology stock which has a really good business model, and it’s been belted … it’s interesting. Airline companies … they have been belted, and there’s a lot of cooped-up demand from the pandemic.
Q: What are your thoughts on the current global economic climate?
DP: The supply chains have been an issue, which has been caused by the pandemic. China itself closed down to stop the pandemic. You have the Ukrainian-Russian war which has also created issues with supply and inflation. So you can see things like container supply and container pricing for shipping … has been coming back. You can see a number of the leading things that go into inflation just beginning to roll over a bit. If you’re a long-term investor, to chip away and to start investing money is a good idea.
Q: Do you see this as a short-term blip or is it as fundamental as the global financial crisis?
DP: No, it’s not. I don’t think the system is as broken as [during] the GFC. The low interest rate environment and free money for a number of years has led to increases in debt around the world in most economies … but the balance sheets generally of companies and individuals are … actually not too bad.
Q: In geo-politics, what do we need to look out for? What are the dangers?
DP: One of the worst-case situations, if China has a go at Taiwan … that’s a problem for supply and for inflation and for economic growth. The unrest that Europe’s seeing as a result of the Ukrainian-Russian thing and the cutting off of energy and of food to Africa … is a big issue.
Q: How do you hedge against that?
DP: You have to protect people’s money. You end up buying, say, energy businesses and companies that benefit from increasing prices. Agriculture. Australia is a massive commodity country, resources. There’s lots of companies in our index which will benefit from high prices.
Q: Do you think fears of recession are justified?
DP: I think it’ll be more like a soft landing, but it is a big consideration to companies in their earnings. Interest rates have moved up quite considerably, but they’re still a lot lower than they were in the eighties when they were 17-odd per cent … you can see, the 10-year curve, the long end is coming down a bit. It’s saying that okay, it’s going to be a bit of a softness.
Q: What are the most promising sectors, both in Australia and globally?
DP: Price is what you pay, value is what you get. If you were trying to play the inflation, then you’d be going into some of the miners, some of the energy, some of the commodity producers, some of the resource companies. On the interest rate side of things, you’d be looking at some of the companies [that have] a fair bit of cash on their balance sheet. They will be getting increased interest rates on the cash, and things like the banks, which benefit in an increasing interest rate environment.
Q: There’s a lot of talk about Web3, about the metaverse, but no one seems to know exactly what it is. Do you see value or potential in that sector, or are they selling dreams?
DP: No, I would not deal [in it] with other people’s money. Even the Bitcoin side of things is difficult to see where that ends up. Things are changing and you’ve got to adapt your way of thinking. You’ve got to entertain everything.
Q: What are your thoughts on crypto and blockchain?
DP: They’re being used in everyday business. I’m trying to work out how you can make money out of it. But if there’s something you can’t understand and it doesn’t make economic sense and it’s not rational or reasonable, then until that comes, all those things come, then there’s other things out there that you can go and buy … without taking volatility and taking a massive amount of risk on other people’s money.
Q: You work in a fast-paced, intense industry. How do you balance your life?
DP: I enjoy getting fit. I am in the fortunate position where I can try and play polo. I’m interested in investing and I’m interested in the way people think. That’s one of the other reasons I love polo … I play with people who are very good at what they do on the polo side of things. I love to look at what makes someone successful. There are so many similar traits around the world, whether you’re a sportsman, whether you’re a business guy, it’s about focus and doing things properly and making decisions that allow you to win, not for your ego.
I was playing with this guy who was ranked a very good polo player and he’s getting a bit older and they were going to drop him from the highest handicap to the next level of handicap. I said to him: “So what do you think about that?”, and he said: “It’s so good because it means we can become competitive again and we can win.” He didn’t care about whether he is No.1 in the world or not, he just wants to win.
Winning can be defined in many ways … doing right by the community … putting yourself in front of others. Ultimately, the Darwinian theory catches up with people that take shortcuts and worry about themselves as opposed to worrying about the broader community and everybody else.
*This is an edited extract of the conversation.