Elio D'Amato | What is the Stock Market?

In this episode I'm joined by Elio D'Amato from Stockopedia to unravel the mysteries of investing and ask the fundamental questions: What is a stock market? Why does it exist? And how can you, as an investor, navigate its complexities?

The stock market is not just a place where stocks are traded; it serves a crucial role in raising capital for companies. We break down the concepts of primary and secondary markets, The primary market is where companies initially raise funds. Once listed, these companies enter the secondary market, where shares are traded among investors.

Elio shares his personal journey into the world of investing, highlighting the importance of learning from mistakes. His initial investments may have led to losses, but they ignited a passion for understanding what drives business success. He emphasizes the power of quantitative analysis and the need to develop your own investment strategy. As he puts it:

The episode also delves into the role of private equity and the difference between public and private companies. While listing via an IPO can be seen as a way for founders to cash out, it also provides opportunities for restructuring and growth. Public companies, on the other hand, have to navigate the complexities of shareholder expectations and regulatory requirements.

Investing is not just about numbers It's all about understanding the story and the numbers that drive the business. Understanding what a stock market is helps us to understand the whys of investing.

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

Elio D'Amato: Chances are, uh, a good business will keep being a good business going forward. And our job as analysts, as investors, as commentators on a podcast, whatever the case may be, is to try to find those good businesses at a reasonable price that we can invest in and hopefully take part of those future earnings moving forward as they grow.

Phil: G'day and welcome back to shares for beginners. I'm Phil Muscatello. What is a stock market? What purpose do stock markets serve and why do they exist? I'm looking for the answers to some fundamental questions to try and make sense of the world of finance. The answers are simple, but ever so complex, just the way I like them. Joining me today is friend of the podcast, weekend watchlist, analyst raconteur, and roustabout of f1, Elio D'Amato. G'day, Elio.

Elio D'Amato: Yeah, g'day, Phil. I love questions like this. We do ponder the big questions on programs like this as we try to demystify, as it were, why the share market does exist, why are we here? Why do we exist? Well, there is a reason, and that's the good thing, of course, that has morphed and changed over time and evolved. But nonetheless, we'll try to take a very difficult, complex and make it quite simple to try to make some sense of this crazy, wacky world.

Phil: Yeah, I've got this italian relative who's uh, very, very quietly spoken and a very deep thinker. And m he comes up with these questions all the time for me, you know, and he says, what is the share market for? And I gotta really think, do I have the answer for it? So hopefully we can answer, Giacomo, this is for you.

Elio D'Amato: No, look, uh, obviously the problem is it can get hijacked in regards to the little tickers going up and down every day and their price movements, and often is worthwhile just to take a breath and actually sit back and why does thing actually exist in the first place? And they're what is my role in it? Because of course, that is ultimately how we make money out of anything in life, be it either making skittles or investing in the market is understanding our place and the reasons and motivations for us doing it in the first place.

Phil: So, Elio, can you remember the first time that you became conscious of the australian share market?

Elio D'Amato: I certainly can, Phil. And actually, uh, both times were quite negative. My first two share investments, both of them lot both went into voluntary administration. So for those old enough to remember, you'll recall, Australia Magnesium Corporation, which back then was flouted by Queensland premier Wayne Goss, bless his soul, who's now passed on to God, of course, followed on by young mister M. Beatty, who then took up the challenge and even forced the company to pay a dividend out to investors. But look, they had their Stanweld project and they were building out magnesium alloy, as it were, which was strengthening steel and was ultimately going to be a cornerstone of growth in the area and region and the like. But of course they took on too much risk and went broke. And then the other company I invested in was Mim holdings. Again, for those who are feeling nostalgic, where, you know, I saw where their price once was, once upon a time, where it was. At that point I said, surely it's going to get back to where it was. And ultimately I invested in that and did all my dough, as you would expect. So, uh, I think really what that did though was it created a real burning interest in the share market. I mean, he was this quite easily and relatively accessible asset class that we could invest in. Yet here I was, little old, uh, me losing money on it, and I wasn't a big fan of that. And therefore that started the journey of understanding what businesses were, what drove businesses, what drove returns ultimately, and therefore I followed that. And fortunately, I'm glad to say my performance has been a hell of a lot better since those first two initial investments. But really, if I was to go back and say what sparked the interest, it was actually losing Money. And it was my first two investments and two great lessons that I'll never forget.

Phil: So how did you feel at the time? Were you disappointed? Did it turn you into fear or did it sort of inspire something in you to, um, learn? Well, it sounds like it did inspire something to learn more. It got your back up a little bit, did it?

Elio D'Amato: Yeah, exactly. Grit the teeth, as it were. I don't want to say that my, my schooling is, uh, quantitative analytics, as it were. So I was always really interested in what made things tick. And obviously I was getting it wrong, really wrong. And I think going in there and learning a lot more about my investments was a real motivator for me. And I knew because there were people out there making a lot of money in the share market, and here I was losing on my first two bets. That is a determination that you just can't make up. And obviously, in regards to, uh, getting it right, and I wanted to get it right. I started my journey of DIY investing, and I've never looked back since.

Phil: So you were studying

00:05:00

Phil: quantitative analysis. Is that what they call someone who's a quant nowadays? You hear that term bandied about?

Elio D'Amato: Look, we're going to talk about quant analytics and especially algorithms and what's driving markets and doing all that sort of thing in a moment, Phil. But, yeah, look, I think that was really my grounding, is economics and finance, and within that, there's various streams you can go down, of course, from the various, uh, storytelling, as it were, through to a spreadsheet jockey, which I particularly was. And then from that, I then branched out more into analyzing the numbers, because, let's face it, assuming your accountant isn't too creative or italian, I should say, you would expect that the numbers that the company produces tell a story. They are really the insight into the soul of a business in regards to what it generates in terms of cash flow, profitability, et cetera, et cetera. So, with a whole list of sayings under my arm and an understanding of how numbers worked, I went about understanding what it was that drove company performance and drove their returns over the long run. And, uh, I do tend to walk to the beat of my own drum, because I was quick to learn that if you listen to others, that's the quickest way to lose money in the share market. I hate to say it, folks, if you're listening to this podcast for the first time, but I certainly hope that what it does is it feels a passion for you to go out and learn more yourself, because that is empowerment. Knowledge is power. What is it? You know, give a man a fish you're feeding for a day, teach them m how to fish, then you feed him for a lifetime. And. And that's something that I very much believe in when it comes to investing.

Phil: That's an important warning, though, because I see it all the time on social media platforms where people are authoritatively saying, this stock is going to go up, and they're not even pumping it. They're just sort of expressing their belief. But you can't have that conviction without doing your own research. It's just not possible, is it?

Elio D'Amato: No. I never say never. In the share market, I've seen some crazy things over my two and a bit plus decades in the share market. I've even seen all prices go to negative territory, if you can believe that. But anyway, there's been a whole myriad of lessons learned along the journey, and one of the prime ones is you can never be definitive about anything in regards to the share market. But many investors like the pill, Phil. You know, they, uh, either can do the work, as it were, or you can take this magic pill and it'll make your 20 kilos just wash away and you don't actually have to do anything in order to do it. Now, that may very well be good, but inevitably there'll be other lasting impacts that are not felt just yet, but you will fill them in time. And I think too many investors in the australian market in particular, are very reliant in regards to taking the pill. They want the easy way out, the silver bullet, as it were, that, you know, cures all ills, and they just follow that and they will ultimately do well. Well, I can say now that they will fail, because you got to remember, whenever you want to sell a stock, there has to be someone just as passionate as you on the other side of a computer screen somewhere else that believes is a buy. Unless you get that absolute differentiation of opinion, you are never going to have trade in the share market. And the thing is, both can be right, because we don't know what the motivations are of either party in regards to doing their transactions. So don't worry about anyone else. If you're, you know, eating from the chuff box, as it were, then you're basically just going to be having weight rather than the sweet stuff. You do have to walk to the beat of your own drum, and you do have to educate yourself, particularly when it comes to investing. And quite frankly, sticking your head out the window is actually a really good place to start.

Phil: So avoid ozempic investing then. It's not a magic pill, is it?

Elio D'Amato: That's great.

Phil: So let's get to the fundamentals. Elio, what is a share market?

Elio D'Amato: Okay, so a share market is as all good answers, star, can be broken up into two parts. The first part, and I like to think the major part of what a share market is, is the primary market. And that is where companies go to raise capital. So there's an idea, a vision, or a dream. Obviously, they don't have access to the funds themselves, so they tap the share market in that primary position in order to set up the funds they need to go out and tackle whatever it is they need to. Then after they do that is, then comes the secondary market, which is what the share market is often renowned for, where we need to remember that, you know, they're not just three letter codes floating in space, inadequately, that just go up and down on the whim, they are actually parts of a business. So one share is one percentage of a particular business that you may own. And therefore, the drivers of what it is that that business does will ultimately determine over, uh, the long run what the value is of the holding that you have. So the secondary market is where most of us have made our trade, as it were, in regards to buying and selling shares, because, of course, you know, take a CBA, a, uh, Commonwealth bank, for example. If they wanted to branch out into, I don't know, Uzbekistan, I'm just throwing out a country there, then chances are they'd probably raise money on

00:10:00

Elio D'Amato: the primary market in order to do that. However, when you and I go out there on an online broker, be it either Comsec nabtrade or the myriad of others that are out there and actually trade the stock, then we're operating in the secondary market, where we're just selling from one party to another, uh, part ownership of that business to them, and to which we then become entitled to their profits and dividends, et cetera, et cetera. Although, you know, speaking of old, uh, Italians, my father never, ever invested in my business, and that's because he never believed in the share market. I tried to convince him that you do become a part owner of a company until, uh, we walked past the bank and he said, if you own it, walk in and take some money out. To which I said, I can't. I bank somewhere else, to which I didn't really own it. But again, that is another story for another day, and I'm not going to go there. But that is how the secondary market operates versus the primary market. And the primary market is really what the share market is for, which is raising capital. And then once it does that, then it gets, you know, with the rats and mice, as it were, in the secondary market, where we trade it on a daily, if not instantaneous basis.

Phil: So it seems to be about raising capital. A share market there is for raising capital, but then it goes into this secondary market, which doesn't seem to be about capital. It's just about moving to that capital around. Is that the way it works? I mean, can you still get capital from the share market even once a company is listed?

Elio D'Amato: That's, uh, a great way to describe it. And, yes, you can get capital once it's listed. So to break down your question, you're right. The primary focus is to raise capital. Once the capital is raised, then it moves to the secondary market to then be handballed around like a football. But once you are listed you can raise more capital. So if you are looking to purchase someone overseas, as I said in my little hypothesis, hypothetical example there, or if you're looking to enter a new market or do something rather than use your own capital, as it were, you can tap shareholders and actually introduce into your business new rounds of capital to go out and spend on that new enterprise. Of course, that means by doing that, you are tapping the primary market. You're introducing new potential participants to your share price. Give a take in the secondary market once it eventually lists. But yes, you can very much tap the primary market once you are a listed entity. It's not like you just raise Money, and then that's it. In fact, you can raise Money numerous ways. One is retain profits, and that's obviously the cheapest way. The next cheapest way is via debt. But we know the risks that that compose, particularly if you borrow too much and you can't pay it back. And the most expensive and actually the, I suppose, in a way, to a degree safer than debt, is actually to raise capital, and that is to go to shareholders, cap in hand, and ask them for the funds in order to do what it is you need to do. Now, I say it's expensive because when you have shareholders on your books, you have to treat the owners of the business, so they need to be kept informed. M there's regulatory issues in and around that as well, in regards to keeping them updated so they can remain fully informed at all times. I think it was the great Bernie Brooks, ex CEO of, uh, Maya, who once famously said that dealing with shareholders is like herding cats. Yes. You might not like it, but you know what? They paid his exorbitant wage and kept employed for a very long time, as it were, by employing a board, who then re employed. But I won't get into, uh, the whole, uh, machinations of the share market. But, yes, he was effectively paid by us that did an element of complexity and expense to that overall business, but that capital was then hopefully put to good use, to which then future earnings are then generated. So, yes and yes to both those elements. But it is a question that's broken up into two parts.

Phil: So I would assume that if a company does well and is successful in generating income, income and dividends and so forth, that it becomes more valuable on the share market, in the secondary market, and therefore they have more capital at their disposal, does that work? Or the strength of their capital means that they. No. No. Okay, tell me what.

Elio D'Amato: I'm very close, though. You got to remember there's a clear differentiation between that primary market and the secondary market. So the primary market is where they raise the capital. But once it gets into the secondary market, if we have ABC Corporation, as it were, and today it generates $1 per share, for argument's sake, and then tomorrow it generates $2 per share, then the part of ownership of that business is effectively double what it's worth initially the day before, because of the fact that the earnings of it have increased, and we're entitled to that. But none of that extra money goes back to the company, as it were. It's raised its capital via the primary market. So it raised its capital at say, $1 per share, and it has done what it's done. It's, uh, built its widget or whatever it needed to do. But then ultimately what it does with generating earnings and growing that business, the beneficiary

00:15:00

Elio D'Amato: then becomes in the secondary market. And that's why we participate, because what we want to do is we want to get onto good business today, so it will look after us tomorrow and buy that share at a reasonable price, of course, and that will then ultimately determine where we end up, uh, in the long run. So the accessing of capital is only done in the one hit, but then what they do with that capital is then experienced and felt in the secondary market over the long run. And that is really important. I say that because, of course, in the short run, we tend to move from over enthusiasm to over despair. And the reality is we probably should be somewhere in between. But that's the secondary market. It's just like it's a regulated market of just buying and selling. And the only reason why we can say the share price goes up is because more people bought today than they wanted to sell. And that ultimately leaves share price going up, and vice versa if it goes the other way down.

Phil: So the share market is the secondary market, but I'm still not clear on what the primary market is. Where is it? Where does it exist? How can you see it?

Elio D'Amato: Ok, that's a good question. So you would have heard of the famous acronym IPO, initial public offering, as it were. We love our acronyms in the finance sector. Uh, so when you see an IPO, for example, that is a company that is going out to raise capital, okay? So it prints a glossy document with a whole bunch of legal jargon in it, plus what it is they want to achieve a whole stack of numbers. And they go out and they say, right, mister investor or misses investor. This is what I want to achieve in regards to this overall business to which then if the investor, male, m or female, agrees with what it is the company is trying to do and where it could possibly head, and thinks that the valuation is a fair price, then they will participate in the IPO. Now that money doesn't go into the secondary market as it were, that goes to the company in regards to doing what it is they need to. If the company is listed and they need capital in order to go out and I don't know, buy new machinery or enter a new market, they will do the same thing. They will explain to the investor uh, what it is that they want to do, what it is they want to achieve. And then they will go cup in hand looking to raise that money. Okay? And they will say okay, then once the money is raised. So once I go and get my million dollars to expand into the US, as were, that's it. I'm still my business, ABC Incorporated, I'm still doing that. But I'm um, now got an extra $1 million to go out and expand into the US. And for that I've got shareholders, or new shareholders in that company that actually have a beneficial interest in what it is that I'm able to achieve. Of course I could do it up myself on my own steam, but often the capital needed is a lot more than what is that I've actually got on the books and therefore I'll need to go to investors to do that. Alternatively I could raise debt. But geez, I want to be sure that I get it right. Otherwise you end up like australian magnesium as it were, and going broke. And that's not a position we all want to be in.

Phil: So you mentioned IPO there and some cynics would say that listing a company is often a payday for the founders.

Elio D'Amato: Yeah, it's a, it's a typical cynical view and said for good reason. There are many companies littered through history of that listed on the share market, raise their capital and effectively then in the secondary market the share price went down. So the poor investor who deposited the money in that initial IPO, as it were, ends up seeing their realized value go down. Because in the secondary market that ownership of the business, that share price has gone down as well. And that has seen the evolution of that view, uh, from a, you know, a cynical view that, you know, companies just list in order to basically raise money for the founder. And to a degree that is true. I mean I'm sure we'll get into this topic, but there's also various private equity type investments and the like where they are actually seeing a payday, as it were, where they're enlisting it on the share market because they've gone through the pains of restructuring the business, getting all the metrics looking right, making sure they don't go broke, all those sorts of things, and effectively they have an exit strategy and then it can then be passed on to investors. All of that, though, uh, excludes the future potential growth of the business. So, yes, it'd be true to hold that cynical view if you had nowhere else to grow, if you were already top of the tree and basically you had nothing to do. But if you're a company who genuinely believes that you have future growth ahead of it, that you have, you know, with whatever it is that you do, expanding into a new market, a new division in your business, whatever the case may be, and you need to tap the market for that capital, then the owners of that old businesses that were being unlisted now actually have to just let go of some of that ownership. They have to let new shareholders into the business in order to welcome that new capital into the company to go and meet their aspirations. Whilst, yes, that might be the cynics view, I also

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Elio D'Amato: think in reality, if they get it right, it's a great way for investors to participate into the future growth of a business, because generally it can only go so far as an own private entity. But it's only once it opens the store to all that external capital to welcome it into that business, to then fuel those new divisions that it can truly grow and truly expand and become one of those market darlings that we've come to know over the journey.

Phil: Okay, I'm going to channel cousin Jim again now and ask a question that might seem counterintuitive, but okay, so a company needs capital. It goes to the primary market and gets capital. What would the world look like if it didn't have the secondary market? If there was not a share market for that capital to be traded on?

Elio D'Amato: Well, it would look pretty dull. I, uh, dare suggest there wouldn't be much discussion over a dinner table or barbecue, as it were. Because of course, then if there was no secondary market, what you would do is you would have your interest in that business and then that'd be it. Its price would never move, it had never changed. You were stuck with it, basically. Unless you found someone who was willing to take it off your hands at a price that you deemed to be fair, then that may very well be okay. In my view. I'd love for the share market to be closed a lot more often than what it is. Because I think some of that daily noise contributes to the volatility that we see every day in that secondary market. Whereas often it's the company performance that drives that long term return that you are expected to obtain as a shareholder in that business, as opposed to the reality of being able to trade a stock. And in t plus two have that settled, you have the cash in your bank account and then you don't have to worry, versus something like say a property where it takes literally a month and a half to have it advertised out, then it takes a couple months to have it settled, and then eventually you get a, your money there, to which that obviously then creates a whole new range of challenges. So whilst that liquidity is a key benefit of the secondary market, being able to get in and out and access to your cash quickly, it's also a detracting factor, because, as I alluded to earlier, so much of it is driven by sentiment, in that not only have you got those people who got in there for the right reasons, let's just call it that, in order to grow the company and, and fund what it is they're wanting to achieve, but then you also have speculators who, let's face it, in a secondary market, when prices are moving up and down, you are always going to have an element of speculation in that share market, irrespective of whether it's shares or widgets or whatever the case may be. There's always going to be trade in that perspective there. So if you don't like that, then sure, you could invest in a company or find a really, really big investor. So, uh, just one guy who would never trade your stock and be willing to put their entire life savings into what it is you're wanting to achieve, which is the great outcome. But the reality is that if you're looking to raise such large amounts of coin that no one that really has that much of a mountain, unless they truly believe, chances are you're going to need a lot more than just one. And unless you have a teletex, as it were, or whatever the, you know, those dialing things are, with all these great massive investors, uh, located in there, chances are you're going to need a, um, broader market in order to access that capital. So yes, it has downsides, but it has upsides as well. That secondary market is a bit of a necessary evil, I think, that does need to be there, particularly if we want our market to operate in an orderly fashion, and to, uh, Katie, because of course, the great mushroom method of keep them in the dark and feed them on bulldust is not really ideal when it comes to an ownership in a company. Whilst we do want to see our investment grow, we do want to hear from the company as well as to how they're progressing and how they're doing. They're either kicking goals or they're failing to meet targets. And we need to make decisions based on that to which then we can decide whether we still want to maintain an interest or whether we don't. And if we don't have that secondary market, that's an option that's actually not available to us.

Phil: Which sounds like private equity, doesn't it?

Elio D'Amato: Yeah. Two is agree. Although in, you know, buy when there's blood on the streets is a famous old saying when it comes to investing, and often private equity will do that. So they'll look for companies that are quite, uh, troubled, whereby small changes to their operations could make marked changes to their financials, as it were, and say, turn them cash positive, whatever, and then they take a disaster, turn it into a darling, and then, yes, as I alluded to earlier, chances are they'll probably float it, which then becomes someone else's problem in time.

Phil: Super is one of the most important investments you'll ever make. But how do you know if you're in the best fund for your situation? Head to lifesherpe.com dot au to find out more. Life Sherpa, uh, Australia's most affordable online financial advice. So it sounds like a spreading of risk and reward. And this has been going on for a long time. Share markets are not a new invention. I mean, there's, in

00:25:00

Phil: history, I think they were, um, originally came from the Dutch East India Company and there was evidence of futures contracts in ancient Rome. And there was also that spreading of risk and reward which funded british exploration to conquer new lands. Do you have any knowledge of this history and how it came about? And it seems to come out of economics naturally, that this is what's required for finding and utilizing that capital.

Elio D'Amato: Yeah, exactly. Look, I think it's fair to suggest that the share market has the word share inserted on it, but if you remove that, it's a market. And marketplaces have had things like this since time immemorial. You mentioned the Dutch East India's company and look, I'm not going into the merits of what they did. In fact, it was really bad. But that was the first time that an investor could take a part ownership in regards to a shipment that they had, uh, and they would take on that risk because of course the shipment may not return as it should. Or there could be two that come in, one which sees the price of spice, as it were, just come down because this is too much of it on the docks, as it were. Whatever the case may be, we can even go back to, I don't know, Manisha Huma, who created candlesticks back in 18th century Japan in order to trade rice. So wherever there's a market, there will always be means of being able to hedge that risk. I mean, those ancient Romans, they were engaged in futures contracts in order to protect the price of grain that they were receiving and a whole range of other things. So these things, they'll always be someone who wants to protect their site, who wants to, you know, look after their capital. And then there'll always be someone, a speculator, as it were, that's willing to take that risk off their hands. And yes, they want to be rewarded for that risk and they will be, because that's priced in and effectively, you see that. But of course it could go bad for them as well. But they go in with eyes wide open, knowing the risks that they're taking on board. And the secondary part of the share market is very much true of that, because when it comes to the pecking order, equity holders, we last bottom of the herd, as it were, when it comes to claiming back from a company that's actually gone broke, inevitably. But credit holders and the like that get their slice of the pie first, and then if there's anything left, then it goes to shareholders. But traditionally they're very rarely, if ever, is that so? I think it's important to note though, that, yes, this has been going on for a very, very long time in terms of the underlying process. And wherever there is a market, there is always someone looking to raise capital, protect their interest, and there's always someone that's looking to benefit from that and also make m gains over the short term, uh, taking on risk, as it were. But of course, the tools we use change over time. And I think that is somewhat important because whilst the market and how that works has been pretty much standard and has been since time immemorial, how we're actually interacting with that market now. The share market in particular, I should say, has very much changed in recent times. And I think it's important that investors accept and heed that, as it were.

Phil: I think it's worth lingering for a moment on the idea of futures contracts because this is often seen to be the area of rampant speculation. But it came out of an actual need. So, uh, I believe the example, and I'm no economist here, you know more about this than I do, but I believe that, say an olive farmer was planting their crop, they wouldn't know what the market was going to be providing at the harvest time. And so someone could come in and say, well, look, I'll guarantee you I'll pay you this amount of money for your harvest when it comes in, thus speculating. But it does provide certainty for that farmer. Am I getting this correct, Ilya?

Elio D'Amato: 100% correct. That is exactly how the futures market works, whereby there will inevitably be one party that wants to ensure guaranteed income at some future date, as it were. Hence the term futures. But they don't know what that is because no one can see into the future, irrespective of what you read in those glossy magazines, Phil. So because of that, they would want to ensure that they're going to get today's price when they deliver it into the future, because then they can plan and cost against that for that potential risk, as it were, of taking that. Because it is a risk, right? Because, of course, if the oil price goes up, but you've guaranteed that it's, you know, at today's price, then obviously you end up losing out, but you receive the benefit of the certainty. But there has to be someone on the other side of the trade that's willing to take on that risk for you so that they can say, right, okay, we're going to take the risk off the hands of the olive farmer, as it were, so that, yes, oil prices could go up, down, whatever they do, and yes, they will change compared to where they are today. But you know what? I'm going to get rewarded for that risk. And there could be a whole myriad of reasons that they use to assess whether there's a relevant risk or nothing, be it either, uh, weather conditions, uh, growing conditions, whatever the case may be. And they would say, right, okay, this is worthy of me taking on the risk in order to guarantee

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Elio D'Amato: the income that you need today. And therefore it just passes on the risk to them. Of course, they don't need that. So you don't need a futures contract. You can just simply say, I'll remain unhedged, as we call it in the modern vernacular, and I will be exposed to whatever it is the price does at that particular point in time. Or you can be more risk averse and you're a bit more cautious, and you say, no, I, uh, got employees to pay and taxes to pay and all that. So therefore, I want to lock in my price today. I don't care what it is in the future. But then you pass on that risk to someone else. And risk is obviously a double edged sword. There's downside risk, but then there's also upside risk as well. And where the balance lies ultimately comes in that price that's charged for that contract.

Phil: So let's have a look at the difference between private equity and listed companies. Because we see private companies that might be private for a long time, they get listed onto the secondary market of the share market. And then we also see companies like Sydney Airport over the last couple of years that delisted and became private. What's the difference between, overall, between the running of these kind of companies?

Elio D'Amato: Look, it's a really good question, because I think that it actually creates that cynicism that you mentioned a little earlier with regards to a business being created and just a, uh, payday for investors, as it were, or for those that have founded the business. Look, when it comes to private equity generally, now, this isn't always the case, but generally, they've bought a basket case before. So it's a company that's been run incredibly poorly. Poor management, poor financial metrics, be it, whatever it may be. And they take it off the share market by paying a, uh, price at the time. And they say, right, we want total beneficial interest of this particular business. We will then restructure it, get all the financials doing what they should be doing, get the business going in the right direction, as it should be doing, and then they look to offload it in the share market as a sort of payday for them, saying that, yes, we've gone through the pain of the turnaround. We took on the risk of, you know, a company that could potentially go broke, but now, if it was going on its current trajectory, but now it's much better in position to expand. And therefore, I am going to list this on the share market versus an IPO, for example, whereby a company is a certain size and it wants to grow, it wants to expand. So there's generally a lot of blue sky in its various, ah, documentation. They're looking to convince investors that, look, we did have owners in the past, but to take this business to the next level, we need new capital inserted into the business in order to fund what it is we want to achieve. They then go about doing that, and that is then the stuff that really excites and perhaps is a little bit less of a cynical view in regards to it. And then you get the existing great business who then also taps that primary market to raise the capital to fund a new expansion. There will be some that say, well, use your own money, but sometimes you just don't have enough money to go out and do it. To pay the X amount of M dollars to acquire someone, to then incorporate their earnings into your business and make your business more valuable. So you go about raising that capital, and then obviously, as you go about that process, you have it valued. And people like me will pour over the numbers to see if it makes sense to see if what they achieve is achievable, or chances are we usually come in a little bit lower than that. That is why you will see often companies, after they list, say, we're meeting pro rata, what we say in our prospectus, our targets, that we set ourselves, because they want to convince investors in that primary market who have poured in their capital into this business, that at the very least, we are on target to meet what it is we said we would do. And therefore, that gives them comfort that, hey, you know what? Maybe it was worth putting my capital or new extra capital into this business in order to achieve what it is that it was meant to achieve. And then private equity. Well, yep. Look, at the end of the day, two ways it could have happened. The company goes broke, you lose all you dough, or you end up getting something. At least, yes, the company's taken out, and then you have to buy back in, possibly if you want to really get back into that business at a higher price. But you know what? It's squeaky clean and structured a lot better than what it was when it was taken off your hands in the first place. So, look, I'm a bit more pragmatic. Yes, you can take that view, that private equity are just in it for them. But you know what? There are, uh, thousands of different participants in the share market, and each of them with their own valid reasons. And I am absolutely in no position to stand on a pulpit and preach to anyone as to whether they're right or wrong, because it's what makes the market tick and what makes a trade every day.

Phil: And there's also the idea that there's less regulatory requirements for private equity and a privately owned company and fewer troublesome shareholders as well.

Elio D'Amato: Exactly. When I'm running my own business, I can pay the wife, the car if I like, but I don't have to actually disclose that to anyone. I can

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Elio D'Amato: treat it like my personal plaything, as opposed to when I have shareholders that are external to my family and my organization who are looking into the business, and pesky analysts like me, who are, ah, running the numbers every day. And then we can pick a part as to how the company's performing and what it's doing, its margins, et cetera, et cetera. And then we make a judgment call based on that, which is really not the ideal position to be in. I mean, you could just run it your own way. I mean, there's a famous saying from Jerry Harvey, the founder, uh, of Harvey Norman, as it were, one of the founders. And he said, if you don't like the way I run the company, then don't invest in me. Who it is a pretty old sort of way of saying that, well, if you don't like it, I'll just take it off the share market and then I'll manage it my way. They won't even worry about that. But then you have to recompensate those who are, uh, shareholders in the business, and they need to be rewarded for that. And that's what we employ a board for. And many people forget that the board is actually the representation of us as shareholders. So we generally don't have a say in regards to how the business is run. Therefore, we elect a board on our behalf in order to participate and be involved with that. So it might feel like we're just giving them money for nothing. But in reality, the idea is that they should be working for our benefit. Because ultimately, when the total pie grows, then we benefit as shareholders. And given their level of expertise and their backgrounds, as it were, they should be contributing to the company as well. And that is why they're our physical, uh, representation in regards to the business.

Phil: Well, let's finish off with a silly question. I don't think it's that silly a question, but I've had this put to me a couple of times, and the question is, when you see that headline that the market went down today by $30 billion, where does that Money go, huh?

Elio D'Amato: Into the atmosphere, actually. In fact, it's all paper profits. An old stock dog once told me, Phil, it's never a win till it's off. Your hint and hint being your part ownership in regards to that business. But again, I won't bore you to snores on that detail, but ultimately, when you hear sayings like $30 billion have been wiped from the share market, they're talking about the secondary market. So that shares traded on a daily basis. And what they're seeing is a big fall, as it were, that day. And therefore, the total value of the share market has fallen for that day in vice versa, when they say the share markets gained 50 billion, it just hasn't made Money appear out of, uh, nowhere, as it were. And the companies aren't benefiting from that. They've already done that in the primary market. That's all gone. We're now talking secondary market, and that's all the share prices going up and down. And look, I hasten to add, sorry to digress here a little, Phil, but, you know, I mean, we live in an amazing time in regards to where the share market was and where it's been now. I read on many chat forums that, you know, there's a lot of elgo trading, that there's a lot of short term speculators that are moving share price. Short sellers, call them whatever you like, and that they move share prices, as it were. But it's not. I'm old enough to remember what it was like back in the day when the only time you ever knew what your share price was, when you look at the middle pages of a finance newspaper, and you had to squint in order to find the company that you were actually interested in, and then when you wanted to trade it, you had to call, usually a gentleman with gray hair in order to trade it, and he would, uh, command a healthy clip of the ticket in order for that trade to be enacted. And then all of a sudden, that totally turned on its head. We absolutely democratized investing when the world of online trading on, I mean, yeah, we were complaining about paying $19.95, uh, a month now, or a trade now, but I mean, back in the day, that was just a godsend. And then all of a sudden, we could actually make the trade rather than rely on someone taking 1% of our transaction and making, and trying to make that work. So now we're getting computers, and they were setting up closer to the exchange, or whatever the case is, with new fiber and whatever, in order to trade more quickly. And we see sometimes, you know, non executable parcels, as it were, that are transacting, and we're going, okay, well, that's the bots, or the computers, as it were, that are actually doing that sort of thing. So we're now moving the other way. So. But I hasten to just remind everyone that once upon a time, investing in the share market was quite difficult. It's only that the online revolution has made it more democratized, as it were. Although we now seem to be going too much another way, where I. It is a little bit of, you know, the machines ruling the world as it were, but we're not quite there just yet. There is still a place for the human being, as it were. But, uh, I digress. You're right that when you see those big falls on a daily basis, it's just the secondary market. Just think about some rich guy somewhere or girl somewhere, losing a lot of money on a day and leave it at that. Because the companies are fine, the companies aren't necessarily going to be impacted. There could be an impact by the wealth effect, which is if you feel less wealthy, you will spend less. If you spend less, you will spend less in a particular business. And if you spend less in a particular business,

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Elio D'Amato: then you could see lower profits and lower levels of cash flow. Now that's a possible impact. But when you see that headline, that is the secondary market and generally is not involved with the primary market or the companies that are actually physically operating.

Phil: On a daily basis, that was a great digression. Uh, I think, because I think sometimes people focus a little bit too much on the wrong things. I mean, I was talking to an investor recently at a function and they were saying, oh, you know, around about ten to four in the afternoon, you can see all of this stuff happening in this particular company, and there's this one company that's buying and buying and buying, and they're affecting the share price. Now first of all, regulations will stop you from anyone trying to pump up, uh, prices or anything like that. And then when we sort of looked into it, we realized, well, most probably an ETF provider that's doing their daily reweighting.

Elio D'Amato: Exactly. And look, there's m many reasons why people trade on the share market every day. And look, when it comes to the share market, particularly the secondary market, you know, opinions are much like backsides, everyone's got one, right? So, you know, when it comes to why a share price moves, yes, we can see possible patterns in regards to why. And you know what? Those patterns might be real. There might be someone who's actually enacting a trade and making reweighting or whatever the case may be. So it's not for me to pooh who that, but I think we just get caught up in this idea that the secondary market is the share market and it's not. And going back to originally what we were talking about at the very start of this podcast today, that the primary reason, the primary market, to raise capital, all those sorts of things are done out of the mug punters hands. We don't actually trade it, as it were. At that stage when you're raising capital to fund expansion, to grow your business. You have your various metrics in place. You put a valuation on it, uh, that is then determined whether that's fair or unfair by people who are willing to put in capital into that business. If they think it's fair, then they'll buy up. That is the primary market. It's then when it gets into the rats and mice, the secondary market, where we trade that over ownership every single day. And it's so important to remember that whilst there is a speculation element, these are not three letter codes that are just floating in space inanimately. Ultimately, they're part ownerships of the business. And your ownership of that share actually gives you an entitlement to the returns and otherwise of the particular business that's listed. So I think if we can just break it down to its bare bones, if we look at the companies, unless you're going to think, unless you think downtown Pitt street is going to resemble Mogadishu anytime soon, chances are, uh, a good business will keep being a good business going forward. And our job as analysts, as investors, as commentators on a podcast, whatever the case may be, is to try to find those good businesses at a reasonable price that we can invest in and hopefully take part of those future earnings moving forward as they grow. Doesn't happen overnight. And in the secondary market, sometimes the future can be priced in today, and that can sometimes see those spike jumps. Well, the spike price, those jumps in prices that we see. And that is, ah, sometimes a little bit confusing, because that can muddle the story. But if we can block out the noise, look at the operations, look at what they're doing, and have a means of assessing what it is that the company is doing, and then align that to our particular personal preferences. Because, remember, I might be a quality investor, I, uh, might be a value investor, momentum, growth, I could be anything. And ultimately, then I will determine whether I'm comfortable retaining ownership of that business or whether I should pass that on to someone else based on whatever metrics it is that I've developed. And that comes to me is so important because once you know yourself, as Zheng Zhu, I think the famous chinese warlord once said, if you know yourself, then that will ultimately help you in battle a million times over. And that is what helps you win out the end of the day, rather than knowing the enemy, because, well, let's face it, that's pretty much known to everyone. But it's knowing yourself that's often a factor that many people don't follow.

Phil: Great lessons, Ilya, thank you very much for joining me today.

Elio D'Amato: Thank you, Phil.

Phil: Thanks for listening to shares for beginners. You can find more@sharesforbeginners.com if you enjoy listening, please take a moment to rate or review in your podcast player or tell a friend who might want to learn more about investing for their future.

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