Founder, Mcgrath, Claude discussed on Shares for Beginners
In their own knowledge and understanding as an investor. If you're always learning and making sure that you're careful and trying to understand things better and become a better investor. Eventually you sort of get better than enough people that he could be classified as a good investor and welcome back to shares for beginners and today. August is Claude walk. Now you may remember Claud who appeared on our common investing mistakes panel discussion at share side as a real pleasure having back on good. I quote how I am. I feel. I'm well. Thanks how you always good now. Claude is an Australian small company investor. Who looks for the best opportunities at the small end of the Essex? His the founder of ethical equities and looks for profitable ethical businesses suitable to invest in. So how did you get caught up in this investing business court? Well that's a long story. Bought essentially I was initially very interested in renewable energy and environmental law. And I had to have a low degree bought eventually. I realized that the way that I could use my skills. Best would be investing and in trying to create alternatives for people who might otherwise invest in companies that caused environmental So that was a long time ago now more than ten years ago. I decided that I'd focus on investing and ethical investing in particular. When did you start ethical? Equities I think ethical equities. I started in two thousand thirteen now. So that's just a website where I write about some of my Stocks that I like and where I make mistakes publicly but also some of my successes and I look forward to the next evolution as well because I'm constantly trying to improve it and change what it is. At the moment we have a paid newsletter paying supporters. Which is Great? That's why put most of my effort at the moment so I haven't been publishing a lot. Okay so you're covering a lot of a lot of Shay's on this at the smaller end of the Australian Stock Exchange. Let's just just give us an example of one or two of the the stocks that you've you've looked at so my longest term holding is a company called. I think kit McGraw Education Centers. That's something I bought many years ago. Now it was a little twenty to thirty cents stop at that stage it had made a bad acquisition which really caused troubles they had to do a. What do they just to start? What it's in the name. I guess they do. These little tutoring franchises so actually a lot of people might have seen them on the street or in town. They just chewed a kids. It's mostly focused on bringing kids up to scratch so if someone is in full and they're struggling with MS English a little bit behind a really good place to take them to improve. That is keep McGraw Education Center. There have been doing it for fifty years or so now. The big thing. That's being the story with them. I guess over the last few years is initially. It was running away where the franchisees paid a flat rate. Over the course of the last few years they've been transitioning more to this percentage model which has the great positive effect of allowing McGrath and now spend more marketing and they get some of that back so two lines the interests better when they get some of that back. Yeah so the Franchisee or we'll grasso previously the franchisee would just pay a flat rate to me And then it didn't really matter to keep Magara that the mother company whether they were really successful because they're getting the same amount either way Gratifications was more motivated to grow the number of Franchisees. Now that's not good for the franchisees and it's not so good for kindergarten education centers in the end by aligning the interests. Kim Gratification Centers. It made more sense to focus on increasing the revenue of existing Franchisees as well as growing the network and once they've done that the economics of the business to improve gross profit increase for quite a few years. Now and I think that's my second or third because stock to really simple in some ways boring business but it has a lot of those things I look for for example at the time I avoid it was run by the founder Kit McGraw and his son. So that's important people have always said that. Look for a company. That's run by the founder and audit of got a majority ownership. Yeah it's not failsafe. Nothing is that's definitely something that I like to see. But it's a good step in sort of understanding. What motivates people you know. Their name is on the door central. So there's I like it when I can see that somebody has a bit of personal pride in their business. They're not just there to make money. You do often see successful. Founders tried to pass on a business to their children and honestly that's not a bad thing at all has mis mixed degrees of success but in the case of education centers if anything. I think the sun storm who's now the CEO. He's done really well in improving the business economics and making it a more attractive business to own shares in so I'm happy to continue to back him and and I do definitely not a recommendation but I still in Chas and this company. I think it's a good and I think it helps people's ultimately I'm happy to see an affordable option for people to get their kids up to scratch so that's a good story where the outcome was. Good what about some of the earliest? Where where have you gone wrong? Yeah right so there's a classic one he had like so many beginning our investors. I started out by buying a company that had a great story and a lot of hype but not so much success or even that much potential for success. It was called ceramic fuel cells. That eventually went to zero effectively. And I guess I was inspired by my perhaps naive love of sustainability technology and became interested in the stock for that reason now and the end of the day. I didn't lose all my money in it but I did make an investment where. I really didn't know what I was doing awful. It was my first investment. And I think what happened was the I fell into what I call the hype trap so beginner. Investors can easily get excited by the fact that they see shares of company. I'm being very volatile. They feel I could make a load of money really quickly. And then they start to believe in the story far more than any sort of valuation. Now when I buy a company I like to be up to understand how it's actually going to earn enough money to justify the market capitalization. I'm paying for it. I see people starting out buying stocks. They don't even understand what the market capitalization is or how businesses opposed to make the money they really just focus on the share price. That's definitely not an approach that I think is accessible. I've seen more people fail with that kind of Navy than succeed on but one really good way to stop yourself. Making a beginner's mistake is by being really cautious of hype and always trying to calculate the actual free cash flow that the company is generating now many companies. That have a great story that you might find on twitter all copper or something like that. There's really more than there cash flow. They may not even have revenue if they do have revenue they may have no free cash flow so they're spending far more than they earn and they'll be putting out market-sensitive announcements that you may not really understand that will. I'll give you an example of a company owned recently. It was cold. It is cold movie to healthcare and I bought shares in about one point one cents per share. It was very very small. Mccafe's basically has exactly what I'm talking about this on commercialized technology. That may have some potential. But he's not bringing in any money that they've done this sort of desperation capital raise so the the bargain-hunting me was looking for something. Like this McGrath telling you about where something's gone wrong and there'd be a week physician and the share price is really so. I bought it for that reason to my surprise it then not long after that after they finish this capital raising started doing much more speaking at conferences on which they pay to attend and I started seeing coverage of them in some publications online where I think also you can sort of pay money to the relevant paypal and they write articles about so there's going to be companies that are actually paying for exposure fading. The machine works that definitely a their companies that many companies pay for exposure and as a result of that often the shape. I go up because excursions usually positive and also you know they may have like a good story to tell but the people that are buying because of a story haven't heard of them yet unfortunately it really does work. They pay investor relations people. They can pay to conferences. They can pay to get coverage and as a result so many people hearing about them. You get a few of the influential people talking about them and suddenly the story becomes what people are buying into and and this is something that people have really got to be aware of. Don't they because it's a trip that and they and then what happens is self reinforcing? So the share price moves from one cent to two point five cents on the basis of market sensitive announcement which really doesn't ensure any money to the company at all. I think the announcement was insurance code for out their product. Which is tally train? Which is essentially a computer program. That can help kids that have attention deficit problems. The share price moves over one hundred percents. Suddenly it's on the most talked about stocks in copper and everyone's tweeting about and stuff like this. You have people pile on and push a price up and up and up and then it does another capital raising just a couple of months later at six cents per share so for the actual company itself that needs to raise cut capital kind of makes sense for it to tell people about this story. Get the share price up on raise capital high price. But if you're the person that bought stock actually went to ten cents. Which still sense shape doesn't it? Yeah but you understand market capitalization and the mafia capitalization had moved from three or four million to thirty or forty or fifty million. Can't remember exactly what it was now. I don't want to let you get away with using some jogging. You said capital rising yet. What happens with a capital raise capital raising them? That's an important part of watching. This hype is often to do with capital raising. So that's essentially when a company like Novita healthcare has this idea and it needs money to convince doctors they should use the products and prescribe the product rather than prescribing. Adhd pills and stuff like that and in order for that to happen they need to get the relevant regulatory clearances. They need to get insurance codes. Which is one of these ounces about that but they also need to let doctors know about it and tell them hey this is an option and also convinced them in order to convinced them they need to essentially fund studies about that proves it. And there's a whole bunch of challenges when you want to.