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Dentists Who Invest

Podcast Episode

Full Transcript

Dr James: 

What is up everybody? Welcome back to the Dentist Union Fest podcast. I believe this is episode 103, and since the last time I graced these studios we have passed a century mark. Everyone, everyone else who’s present. I’m here today in some proper professional studios, which is a little bit of a different environment for me. But you know what? It’s incredible because I know that the sound quality, for once, is actually going to be decent. I am joined today by Fred. Fred is a former doctor turned hedge fund advisor, and now he works with an interesting company called 32Co, which Eagle ear listeners of the podcast will likely remember. But before we jump into that, let’s get to know Fred a little bit. Fred, how are you today, my friend? How is life? How has things? How have things been treating you since the last time we spoke?

Fred: 

Great James. Yeah, really nice to be on, be on board, happy to be part of the centenary crew.

Dr James: 

That’s an exclusive club. It’s three people are in it now. Three people, four of you include me, I suppose.

Fred: 

There we are, yeah really great to be on and we had a very serendipitous, interesting meeting last time when you were meeting Sonja. I think you were just about leaving when I bumped into you and we decided that we should probably find some time to talk, given my background in investing and your well, your passion for investing yourself and your audience as well.

Dr James: 

Serendipity is a word that I really like, and it’s really true. And you know what? We actually shot a podcast last time, or at least half of a podcast, wasn’t it? Because it was off the cuff and it was just about all the things that we’re going to talk about here today, except we’re going to flesh them out in more detail. Maybe that other podcast is going to be part of a B roll someday or some sort of exclusive material or content, who knows? But anyway, fred, I’ve given a little bit of a hint, a hint, a hint. Where did that come from? I’ve given a little bit of a hint as to who you are. Maybe it might be nice if you could tell everybody who’s listening just a little bit more detail about you, your journey and what led you to work at 32Co and your history.

Fred: 

Definitely, of course, it’s my pleasure and yeah, so my name’s Fred Clough, originally from Essex, actually from a family of seven dentists, which is, in part, how our paths have crossed. I was a medical professional before, so I was a doctor, trained at Oxford and UCL, worked in the NHS. I think my decision to become a doctor was probably, in part, some sort of teenage disruptive behaviour wanted to get away from the dental side of the family, but instead made the massive departure into being a doctor instead. But, yeah, worked in the NHS before deciding that I wanted to work in healthcare related finance and ultimately investing. So I worked at a company called Blackstone, which is a very large US institution. Most people would know it as a private equity investor, but they also had an advisory arm which advised large hedge funds large companies as well on either buying and selling of companies or the buying and selling of financial instruments. So when I was there, I did a lot of what is called a debt restructuring for large sovereign wealth funds, countries, companies basically people who are looking to intermediate and negotiate deals. So it’s kind of deal making is what I did on the investment banking side of things. A lot of that was related to healthcare and healthcare assets, and then at some point I was given an opportunity to move away from the services side of the healthcare industry into the investing side, so I made the sort of sideways step into working for a hedge fund which is called Citadel. Many of your audience have probably heard of it in the context of GameStop, but it’s a very large asset manager, I think the largest hedge fund in the world manages about, I think, 50 billions worth of assets on which it puts a lot of leverage, so it probably ends up being a lot larger. It’s also one of the largest market makers out there in its role as sort of Citadel securities, and when I was there I was doing equity investing, so stock market buying stocks, long and short investing, so buying stocks and shorting stocks as well, principally within European capital goods and lots of healthcare related names that you may think of, as sort of Siemens Health, phillips Health, buying and selling of radiology machines, mri machines, these sorts of things.

Dr James: 

In which situation I would imagine your healthcare expertise came in useful, and is that why they set out to recruit you.

Fred: 

I think so. I mean that when I worked at it’s only informed the decisions I made and probably in part informed their decisions on who to recruit. Most of the background of people there is primarily actually financial first sort of European and Americans, a few Brits and most of them have a background in equity analysis. I think for me it was a nice to have the fact that I was a doctor, that I could apply some of those learnings from being a healthcare professional to the conversations I was having on a day-to-day basis, interviewing healthcare professionals about the stocks or about the industries and the sectors in which we invested. But primarily I think a lot of what I learned in investment banking around financial modeling and analysis and valuation of companies was probably more what drove that recruitment decision.

Dr James: 

And you know what? I’m super keen to talk to you about actionable steps that people who are retail investors ie individuals, not individuals who are part of institutions, but Joe blogs such as dentists, such as professionals, such as anybody who’s not associated with any of those massive conglomerates and entities how they can begin to participate in buying individual stocks, or at least where can they look to educate themselves, because that is something that we don’t really talk about so much on dentistry and vest, given that most people can benefit. Most people are in a position where they’re so tied up in their job they need passive methods to gain exposure to the market, and hence they look for index funds, and that’s the method that I’m a massive proponent of. That is a method that I think is most readily able to utilize, especially dentists, who are very time-consuming, time per, and it will be really interesting to learn about your expertise on that matter and understand. If you think it’s a good idea that we should do that. We’ll definitely delve into that in two minutes. Just before we do that, tell me what made you take the leap from, first of all, dentistry to medicine, kind of, in a way, what made you tear away from your family so that you could be a doctor. I know that you said that you’re a little bit of a maverick, but was there a specific reason why? And then, after that, let’s talk about that transition from medicine into the financial world.

Fred: 

Yeah, sure. So look, when I say I mean actually probably 50% of one side of the family are doctors, 50% are doctors. Oh, okay, okay. So, a bit of both. I was always, you know, I was interested in the sciences at school and it felt like I did some work experience and it felt like an interesting step for me at the time. I think the later step from healthcare professional into wanting to learn about investing in finance in part comes probably from the family background. I didn’t have those influences necessarily in other spheres or other industries sort of open my eyes around what else was out there and it was. There was an element of sort of sticking to what I knew around that decision to be to become a, become a doctor or to train to become a doctor at least. But I was always interested and passionate about business and interested in investing and the stock markets and I mean actually the area where I grew up. A lot of people worked in the city of London at the time you can kind of imagine early 90s UK stock market city of London and there were always people that you sort of came across and so I always had an interest. I had friends whose parents, at least I knew of, were working in that area and it was. It was something that I found fascinating. In many ways investing is the study of history as well, and social sciences, and, you know, economic policy, politics, all of these interesting elements of society which interface in the financial markets.

Dr James: 

Cool, cool. So it was more intrigue, I suppose, to a degree. Well, you had a little bit of a background in it and then that was what propels you to find something. I suppose that unified it, which is when you were talking about working for Citadel just just a minute ago. And then when you, when you became a doctor, did you at one point realize it’s not always cracked up to be, or was it always the master plan that you wanted to leave that career and pursue something more along the lines of finance?

Fred: 

It definitely wasn’t the master plan. I don’t think I would have done the six years of study if it had always been the master plan, probably could have taken a more direct route, but I did want to experiment. In the last couple of years of clinical clinical school I did realize that I wanted to try something else. So At that point I started having conversations with people in other industries Friends of mine who had gone into into finance related jobs as well, and you know I did an internship at some point, which then transformed into a full time, and that was how I ended up getting that job at a blackstone on the investment banking M&A side of things Cool.

Dr James: 

the only reason I’m just home and writing on that is there’s a lot of dentists who want to diversify outside of dentists, either wholly or partly, and I just wanted to know how that process looked like for you, in the hopes that it would give some people listening who feel like that somewhere to look to begin. Let’s move on to the thing that I touched upon earlier, which was traditional investing techniques, how we use them as professionals around our job and how we can evolve those slightly through understanding more about investing. So tell me this would you agree or disagree with me that the majority of people out there, when they invest in their eyes, is when they invest in their sips? Those that are educated on long term investing techniques would typically Purchase funds which are diversified across the global stock market and constitute off. Constitute off either stocks or bonds, with the principal being that in the long term, the market only ever appreciates over long enough periods of time, providing you buy the right assets. Would that be your opinion? Would that be what you’ve seen? That’s out there as well, because that’s what I see on dentists who invests all the time. That’s what I advocate on dentists who invest. Given that, I think that that’s the best way for most individuals, particularly time per individuals, to gain some exposure to the market. Effectively is a better way of storing your cash, one that you don’t actually have to actively participate in, one that will passively yield your returns over long enough periods of time. This is the reason why I started dentists who invest. When you have a little bit of education, you can do that on your own. What do you think?

Fred: 

Look, I agree. I think that I think you’re primarily talking about either ETFs or, yes, diversified funds or manage funds. I think they’re great. I mean, etfs are one of the greatest financial innovations of the last last century. Clearly and I think there’s a lot, a lot of people that have done really well out of that diversified approach to things, I do think there’s a place for single stock of investing, I mean ultimately the market. If you take it to its logical conclusion, if you only have ETF funds competing against ETF funds, then it no longer makes sense. You need to have active investors in there somewhere To either get it horribly wrong or to get it right to effectively compete with a lot of the passive way of money which is out there. But no, look, I completely agree. I think it’s most important that people have a responsible approach to their portfolios which is informed by decisions they want to make in their lives, whether that’s the amount of risk they want to take or the amount of risk relative to the return. Being more precise, and I think ETFs and passive investing or diversified stock or bond funds or kind of all weather funds, which I think what you’re also probably alluding to these these are great, great vehicles for people to you know. Protect their wealth.

Dr James: 

That’s awesome. The only reason I asked that was I just wanted to make sure we were totally aligned on that perception as a springboard to deeper conversation. So here is something that a lot of people who are in the financial world, financial advisors, or certainly a lot of the financial literature, advises against for retail investors, definitely let’s. Let’s use the term retail investors today to be defined as people who are outside of institutions. So Jane, john, john Doe, the people that you see in the streets, us as dentists, who are not necessarily financial professionals, those are the people that we’re defining as retail investors. And what a lot of that material advocates is that we stay away. We avoid individual stocks like the plague, given that if, no matter how well a company is doing overnight, it can go bust and we have to go into all these different metrics about how we can calculate how much of our portfolio to allocate to it. And it just becomes way more in depth at that point where, as an ETF, effectively does the thinking for us in lots of instances. What it means is that we don’t have to diversify ourselves because somebody, somewhere, has diversified, diversified that fund correctly and through purchasing it we gain exposure to that, that level of diversification and it’s just about fund selection after that stage. Now, it’s always going to be the easiest method and having said all of that stuff, having said all of what’s just left my mouth, you still will get lots of people who are tempted to purchase individual stocks, because when I look at someone’s eyes, when people show me their eyes, they always have something in there that isn’t necessarily a fund, even though that’s the dogma and how best to grow our money long term. Certainly, if you ask the financial advisors out there, that’s one of the most proven methods. Do you think is there a possibility or is there a method, or is there a way that somebody who is as time per as a dentist, somebody who is as busy their expertise does not lie in the realm of finance. Primarily, it lies in something else. Do you think it’s advisable that we can purchase individual stocks and can people in your experience actually make a success of it who are in the position that I just described?

Fred: 

Well, I think the first thing to say is just around. You know, when you talk about the ETFs themselves, etfs are not a complete deferral of responsibility, and a managed fund is also not a deferral of responsibility, and I think that people need to be aware of that. And when you do invest in an individual stock, the first thing you probably need to check is that the fund that you’re invested in, a major constituent of it, isn’t also Apple or whatever it is that you’re buying, because you could then end up thinking you’re diversified but actually be concentrating risk in a couple of names, which is obviously the opposite of what you want to do. And I think this comes back in many ways actually to the premise of what you’re doing, which is encouraging people to be. If everyone is on their sort of personal learning journey, the first thing is that everyone be engaged with their personal financial affairs, because even by having 100% of your portfolio in cash, that is in itself an investment decision, and the minute people realize that cash is an investment decision, it helps them start to realize that the ETF has underlying constituents. Even when you buy an ETF, you’re still making a decision about country risk, about FX risk, potentially. You’re making decisions when you have a managed fund about what sits within that fund. So you really can’t get away from it, whether you like it or not, because you are always beholden either to inflation eating away the cash that sat in the bank account. So you’re always making maybe not an absolute investment decision, but you’re always making a relative investment decision between where you store your wealth. So that’s a long winded way of saying the answer is yes, there is a role for individual stocks in the individual retail investors portfolio, but there’s also an even broader role of knowing what risks you are taking at all times and planning what risks you are taking, because everyone’s investment appetite should be different depending on their age, depending on what their liabilities are, depending where they’re already invested, because they don’t want to concentrate too much risk, unknowingly or unwittingly, in one area. I mean. We actually very, very briefly before this, touched on crypto, which I know we’re not going to talk about at length, but counterparty risk is. The sad thing about everything that’s gone on with FTX is that people have potentially made great decisions around asset allocation within individual crypto, so individual coins, but it ended up taking on counterparty risk because the underlying exchange or wallet goes bust, and so the reason I use this example is just to illustrate that you’re always taking risks and the primary thing and the primary area where you focus on at least knowing those risks. And so it was Colin Powell that always talks about known risks, known knowns, known unknowns and unknown unknowns. You can’t control for the unknown unknowns, but you can think about the known unknowns and the other areas of risk, and that’s something which is directly applicable to everyone’s financial portfolio.

Dr James: 

So man, and you know what I’m so tempted to jump in right now and talk about risk, because I definitely think that we use risk as an umbrella term for actually lots of different types of there actually are lots of different types of risk and lots of different components to risk, and actually you can flip risk on its head a lot of the time and say the greatest risk is to not be invested at all and keep all of your wealth and cash, because if there’s one thing that’s true, inflation has been consistently around the level of about 3% ever since we had fiat money, which really began in earnest in about 1971, at least in this historical time period. But let’s not go on too much of a tangent today. Can you talk a little bit about how you view risk, because I’m getting a sense that you’ve got a slightly different perspective on it and probably most retail investors.

Fred: 

I mean, I don’t think I have a hugely different perspective on it for most retail investors, but I can certainly talk to because I know that’s part of the reason we’re talking today I can certainly talk to the way that a lot of financial institutions think about risk and then perhaps talk about where I apply that in my own thinking as a retail investor myself. You know, when I worked at these financial institutions, I think the end game there is, as I mentioned, to know their risks or know thyself, but to attempt to quantify risk. So the interesting thing within any portfolio is that returns and risk are two sides of the coin. You know, in financial theory at least, people talk about the reward that you should expect to be compensated for for a given level of risk and there are, you know, there are smart PhDs that have got formulae around this. And when you work in the financial industry and you work in hedge funds, you’re not compensated purely, necessarily purely on the returns that you make every year, certainly in the hedge funds, in the one where I worked, where it was what was known as a market neutral fund. So you attempt to hedge out the the market, the impacts of the broader market, and isolate the skill of individual portfolio managers. You’re compensated there on the return relative to the level of risk that you take, and that risk in that case relates to volatility. So if a particular stock or a particular strategy is particularly volatile, then, simply put, the probability of being in the green or being the red is higher because it’s volatile, whereas if there’s low volatility and you still manage to e-cout those returns, then the thinking is that you’re a better investor, you’re a smarter portfolio manager. But then there are all these other risks that are attempted to hedge out or at least be cognizant of, one of them being market risk, and the other one that people typically talk about is interest rate risk. You know the discount rate. We all, we’re acutely aware of the interest rising interest rate environment at the moment and what that means for asset valuations or the impact on earnings on multiples. But we also have elements of risk like geographic risk, like foreign exchange risk. Again, like in your individual portfolio, if, unwittingly, you were exposed to the USD this year but all of your liabilities that you need to pay the school fees you need to pay every year in GB, in you know sterling, then you’ve automatically lost 15% this year because you’ve not matched your liabilities with with the returns that you’ve accrued. So, yes, I completely agree that you should try and identify with different types of risk. But secondly, quantification of the risk is really important, and there are lots of strategies that institutional investors use that could definitely be applied to the individual investor, for example, the use of pre mortems as one example. For example, trying to identify what risks you’re exposing yourself to with an individual stock or the individual portfolio or ETF ahead of time. What do I mean by that? Very simply put, if you invest in a Argentinian ETF or an Indian ETF, you need to be aware of what country risks you’re taking. There potentially some FX risk as well, and I think your approach to risk is the right one, which is you know there are lots of different types of risk. Be aware of them and just try to think about the amount of compensation you need to have for a given level of risk.

Dr James: 

And one of the types of risk is individual risk, which is when you’re exposed to a specific company, a solitary company, individually, given that when the even if the company grows a lot, a lot, a lot, and it goes up and up and up and up and up, there’s still a chance that something could happen behind the scenes with that company all of a sudden goes bust. And the world would keep turning if that did happen, no matter how big the company is. I met someone the other day and they were talking about how their retirement portfolio is to keep buying Amazon stocks. They just buy Amazon stocks over and over again and they’re like, oh, but it’s only ever went up. And I’m like, yes, it has only ever went up. What about the day that it doesn’t? Are you with me? You know there’s a chance that Amazon could go bust. There’s a chance that any big company can go bust. There can be something that happens behind the scenes that we’re unaware of and the next thing like Lehman Brothers or something along those lines the world would keep on turning if that happened. So conventionally, one of the ways that we can minimize our exposure to that type of risk is to purchase a fund or to purchase so many companies that we’re diversified across the world’s economy, and what that would mean is that the only way your investment portfolio can be sunk is if the world’s economy goes bust, and at that point we’ve regressed to some sort of feudal society. You know, the world as we know it has ended at that stage Because there’s so many people that have a vested interest in the world’s economy. Continuing that, that would mean that they will go all out to save that, providing, providing the governments that we have across the world continue to exist in the current form, and all of that stuff. We’re basically talking about Armageddon at that stage. So, on that basis and providing what I’ve just said, you know, bearing in mind what I’ve just said, when we come to our portfolios and our Isis and our Sips and all of these things, how can dentists begin to dabble outside of buying simply just ETFs and funds? How can they begin to look at individual companies with a little bit more of a, with a little bit more of a systemized approach, so that they can begin getting exposure and hopefully boost the returns in their portfolio? Because if we use the ETF method, that’s the method that financial advisors use, that’s the method that most people use to grow their portfolios long term. The only downside to that method is, realistically, you’re going to be investing for about 20, 30 years, until the point that you have enough principle, until the point that you have enough capital that you can live off it. One of the ways that you can boost your income is by taking on these slightly more risky approaches, and if we’re going to do that, if we’re going to dabble, is there a good place that we can start to look to do that? Is there a good place that we can garner information from so that we can get more educated, or how do you think we should go about that?

Fred: 

So look, in my role as an equity investor, we and every institution will have its own sort of process that they look to follow as investors and, I think, for all of your audience. I think one thing which is important is just for them to start to develop their own personal processes, and part of that will be obviously time constrained, given they have busy jobs. A lot of them will be dentists and be doing this in their spare time. We can talk a little bit about process, but we can also talk about a little bit about edge and where dentists who are interested in investing might be able to capture some of that edge.

Dr James: 

Yeah, that sounds really good, that sounds interesting, the actionable stuff.

Fred: 

So, in terms of actionable, I think dentists are in an interesting area because there are a load of dental stocks out there. For example, I covered a lot of these stocks in informal jobs. And ultimately, what do you do as an investor? You sort of focus on these processes. We talk often about you know, about identifying and analyzing the profits, identifying and analyzing the people behind the companies and the processes in the product. But a large part of your investment process will be either doing financial analysis, modeling these numbers out, trying to see if there are insights you can get through numbers. A lot of it will be speaking to the CEOs or the CFOs of these companies, asking them questions about their businesses and where they see short term, long term trends, where there have been challenges, asking them about historic numbers. But then a lot of it will be customer insights and customer research, and so what we would typically do is either run surveys of, you know, several thousand people in the context of dental stocks often that would be dentists and we all we would speak to individual end users of products, because ultimately, the customer insight is so valuable into the fates of a company. And so, when we were looking to be long a company or, particularly importantly, when we were looking to be short a company. We have these certain frameworks and if something is a fraud, for example, it’s painfully obvious from the from in the end result. It’s not always obvious in advance, but at some point it may become obvious through the, through the financial reports. If something is a fad, again you you start to see volume dry up for a given product or company. But if something is what is called a fade, which is basically that it’s, there’s going to be a slow decline, it’s going to be out innovated, it’s going to lose market share. The key place that you need to look is speak to the customers and try and gain insight from the customers in the context of all these dental stocks. Dentists themselves have a you know, high throughput every day of patients coming in who are telling them about the economy, telling them about their in their individual investment decisions as potentially consumers or as patients. So they get an insight into what’s what’s happening on the ground and they also have their own insights into how they are using products. So the people there you are competing with when we talk about edge with individual stocks, typically going to be investors who are doing desktop research somewhere in Ivy towers, ivory towers, in an office building, somewhere sat behind a laptop and you as dentist, in those scenarios, when it comes to thinking about edge and the sources of edge, you you have a competitive advantage. You’re never going to have the analytical edge, because a lot of these people sit there 24 hours a day behind spreadsheets running the numbers. You shouldn’t have the informational edge, because that typically means you know inside a trading type things. But you can have a behavioral edge if you’re a particularly good trader or investor and you can have elements of edge related to the insights you have in that product or process. And this is what we spend a lot of time doing. For example, when we were looking at shorting companies, was was understanding like why is that? Why is the industry is changing? Why is this business losing market share? Why are the customers changing? You know and we did this with with regards to a number of the dental stocks when we were when we’re looking at them both from the long side or from the short side.

Dr James: 

Cool, man, that’s awesome. So, basically, one of the best ways a dentist can get an edge and just to be clear to anybody who’s listening and edges and advantage effectively, then we don’t need to look any further really than our own industry, because we have it. This is what we know about, this is what is primarily what we do every single day, and I know that that a lot of people thinking, listening to this, might be thinking to themselves well, okay, I could have told you that, but at the same time, it’s quite obvious. You know that is, that is the stuff, that is your bread and butter, that is the thing that you can go out and identify whether or not a product or service is going to work beyond anybody else in the whole wide world and, like I say, that could form the basis of where you get that extra bit of propellant for your investment portfolio. Cool, all right then. So, okay, put it like this, fred, so I’m a dentist. I want to jump out of the traditional index fund arena, the traditional ETF arena. I want to get a little bit more exposure to individual stocks in the hopes that I can boost my portfolio. Can you give us an idea of a helpful framework that any dentist can use to go ahead and start assessing stocks tomorrow. Would you recommend that they stick to dental stocks necessarily, or can this framework that we’ll talk about in just a moment be used on any stock?

Fred: 

So I think, yeah, I think we can definitely talk about frameworks to assess companies and I think there are some pretty simple ones which you know, which most a lens through which most people can look at companies. On the long side, there’s stuff like 3Ps, so look at the people behind the company, look at the product and processes and take a view on them, and then look at the profits. And profits means, you know, look at the margins, look at the size of the pool, the profit pool, which is basically the same as saying what’s the size of the market. And then, on the short side, we can. There are certain frameworks like the 3Fs, whether they look at the company or look, and it’s a way to generate ideas On the short side is is the company a fade, is the company a fraud or is the company a fad? And within the dental sector there’s certainly been, you know, a bit of everything. It’s been a really fascinating space to observe in the last few years. I think the ones you know I can talk to very closely. I mean I can talk to most of the dental stocks, and ad nauseam, frankly. But I’ll talk to you about a couple which have sort of informed where I’ve ended up spending my time as well. So Smiley REC Club really interesting business originally had certain high profile investors. You know Align Technology Invisalign’s parent was an investor in it. It was founded sort of 2012, 2013 time. It listed a few years back and then all very quickly it’s a stock which ended up being 95% down, 95% over time, so one of the big shorts in the space, and look what ended up basically happening there. If we use one of these frameworks you know, in this case, the three P’s you look at that product, it was a product that just didn’t work for the patient because, like ultimately what they tried originally these impression kits less than 30% of the impression kits were coming back. Of the 30% that were coming back, a tiny and minuscule percentage were actually coming back as being usable and they discovered that, who obviously do need dentists involved in the whole clear liner process and then, through the other one of the other P’s, from a profit perspective, it was incredibly costly for them to actually advertise to a market, to their patients. So it ended up it was costing them almost $1,000 just to get the individual patient to come into the clinic, to actually go, or what they then called their smile shops, and so, from that perspective, there was a load of edge that investors had just by speaking to patients, observing the numbers, a bit of sort of the analysis within Google Analytics which could be done to assess this stock, and a lot of people did really really well on shorting that one. The other really interesting one, I think, is Invisalign and AlignTech, the parent, and that’s been such a fascinating story because it was one of the most impressive compounders for a long time, and the reasons for which people like that stock as investors have become precisely the reasons people ended up hating that stock. And so there were there were three reasons, basically one, that it was a monopoly. So it held this pattern until about 2017, 2018, which meant that people couldn’t enter into the space. Secondly, it had excruciatingly high margins. You know it was a stock that had sort of 70 80% gross margin, and when people think about high quality stocks or high quality businesses, something like Apple has a 45% gross margin, and so what that means is when Apple marks up, you know what they sell, two times Align were marking up by about five times to their, to their, you know, on their lab fees and, and that was great because it meant investors had, you know, this huge profit pool and they were also known for consistently raising prices every year because they were able to do so because they had this monopoly. And then the third thing was that they position themselves as this sort of Hermes type consumer brand, and that was again something people like, because when investors analyze businesses, using things like moats or thinking about qualities of business brand is something which is difficult to replicate. But then you fast forward a couple of years and the monopoly is is off and and it’s now it’s possible for anyone to enter into the space. It turns out that the manufacturing technology is is pretty much commoditized and any sort of innovation they are do is on are doing is on really marginal edge cases, stuff like mandibular advancement, which isn’t really getting used by the majority of dentists. And secondly, you know how they try to recreate that monopoly. Well, they’ve they’ve used things like tying people in with scanners or, you know, getting people on particular sales targets, like that’s effectively a way of recreating a monopoly, because if you’re tied in then you limit choice. But that’s obviously something that when we were running interviews and customer research these across hundreds and thousands of dentists, typically in the US we heard a lot of negativity around that on the margin side of things. Well, I mean, it turns out that that was kind of price gouging and there’s a lot of unhappiness about the price that people were paying for these things, particularly when the refinement rates were so high, which you know added additional uncertainty around the quality of the offering. Again, looking at this through the sort of one of the P’s, the quality of the product and process, and sort of telling dentists that unlimited refinements was something that they should, that is a plus point is something that ended up being a negative. And then the final area is around the consumer positioning as a premium brand. I think people have really called to question the idea that this is, this is a Hermes. You know when, when you think about Hermes or you think about Chanel, you’ve got the face that you can. You can put up there the Coco Chanel, the Enzo Ferrari. There’s, there’s real provenance to these brands. Align is, you know, a technology which their position themselves as heritage technology. I mean when, when investors think of heritage technology, they think of companies like IBM. And you know how well is the mainframe computer doing now compared to the laptop, and so some of the things that we’re seeing from them are kind of reminiscent around VHS providers in the early 90s when they were telling people you had to use certain cassette brands with certain TVs. Or the game makers you know, sony PlayStation Circa 1990, locking DVDs to only be able to use with certain game station. These are all kind of tactics that you’ve see, you see time and time again across industries, across spaces, and I think ultimately that it’s, it’s understandable why, why they do these things, but it doesn’t, it doesn’t mean that the stock or the business in is in a good position, and so these are some really interesting. These have been some really interesting stories in the dental space, lots of solid stories as well. Like Henry Shine is, you know, a 90 year old, storied, storied company which has continued to attempt to deliver value to the end customer rather than, you know, immediately extracting value from the customer. That’s another thing that people often talk about, like at what point do they attempt to monetize their customers and some businesses in their very culture and DNA they want to try and extract profits from day one, and other businesses kind of ideologically want to deliver value first, and when you see them incrementally innovate, they, they buy things that make sense they have moved into kind of electronic medical records to try and ease ease the lives of their you know the dentist that they’re serving. They stuck to their knitting, they have a their defensive, they have sicker calls in terms of the consumables that they sell to dentists for their days and day in, day out, and then in the good times, they can also sell the big, the big ticket items as well. So there’s look, there’s been some really really interesting stuff in the dental space, on the short side particularly, and there’s also been some great sort of, particularly in the last year, stocks that have outperformed. But I’m obviously passionate about this space and I can and I’ve always been interested from you know both my, my family’s background and where I’ve ended up spending my time with 32 co and and also I just I think there are some really interesting business models to study which have, which have emerged as well.

Dr James: 

I love that. That’s really cool, you know. So that’s a helpful framework for any dentists who’s listening to have some participation in individual stocks world. And I like what you’re saying, that it’s helpful to stick to what you know, because what that means is you have this huge edge over everybody else, almost without even really fully appreciating it, because it’s the thing that you do every single day. You’ll have insight that no one else will ever have because of your profession, and I always did think that to myself about the model of smile direct club when they Posted out the impression kits, because I remember my first 1020, 30 impressions would definitely not as good as my 3000th one and 10,000th one. You know it’s actually. It’s actually a skill. Is taking an impression, putting a piece of plastic and someone’s mouth with some alginate and getting it to the right dimensions is a skill. But they use scanners now, more so the scan in the in the actual clinics themselves, do they?

Fred: 

I mean they’ve they’ve pivoted several times to several different models and minutes. It’s still a going concern and it’s not something a lot of people focus on. I think, just to touch on your point there about the experience that you’ve had, taking impressions, I think the interesting thing for me around that what you said there and and where I’ve ended up spending my time is you have these big picture themes in investing and we’re all aware of them as consumers. You know, we think about electric vehicles and we think about electrification of the world as many of the sort of headline themes that people are seeing, and but within health care, as investors, there have also been these big secular themes and around the sort of 2014 2018 time, when, when a lot of smart venture capitalists were making capital allocation decisions into businesses they saw being tomorrow’s future, they were thinking about how can we get closer to the consumer, how can we ease that journey for the consumer and, you know, reduce friction and in that scenario, the friction was the health care provider and you saw that a lot of this in dental, with famous, famously this example, but you saw that in all walks of health care when it came to Private out of pocket treatments, like a lot of the dermatology stuff and but also related to diabetes medicine. You saw a lot of these things, but one of the big themes that we’ve seen more recently and which is why I’ve been so interested in what’s happening what with what we’re doing now, 32 co is actually recognizing that what’s gonna get patients better outcomes in the long term eventually is actually appreciating that the friction is there, but for a very good reason that health care practitioners are the best people to deliver these things and and that the emphasis should be less on how do we get around them. How do we celebrate our own brand? How do we build businesses that go direct to consumer and more around? How do we upskill these people? How do we get more of them doing it? If that’s what the friction is, what’s the upskilling that’s required from an education, learning perspective? What’s the software and tooling they need to make their lives easier so they’re not spending Three hours after hours on electronic medical records, in putting patient notes for their next CQC investigation or whatever it is that they have to do. Technology has a phenomenally important role to play, but as does education and learning, and and I’m quite passionate about what we’re doing at 32 cope is. It combines that collaboration between health care providers, scaling of knowledge, improving technology, and it’s a really disruptive business model which ultimately solves the patients problem, which is around quality of care as well as affordability of care as well.

Dr James: 

Yeah, so you guys are mainly UK based right now, but going international it sounds like.

Fred: 

Well, it’s organically international. There’s a scalable business model which means that people from around the world can access 32 code platform and are very much trying to do so 100%, so business is going good these days.

Dr James: 

It seems to be a success. It’s going very well excellent, excellent, because I know that 32 code. The unique thing about what you guys do is that, obviously, when people want to upload their cases to the clear liners platform, there’s also a professional at the other end that can help them, which is pretty cool and pretty unique, and I always thought to myself how is it that you can be less expensive than you know? The price can be lower than in visa line. However, there also is that added elements of professional help there’s interest in. That was the thing that really caught my eye about 32 code.

Fred: 

So look from a pricing perspective, I think I mean I’m sure I know Sonya touched on this in her in her podcast. I think the interesting thing there and we touched upon this when I was talking through that work example Is that dentists have been paying excruciating high amounts for these lab fees. You know up to five times what it cost them historically for what has become more or less a commodity technology which still requires high, you know, highly repeatable, skilled manufacturing processes. But there’s nothing difficult about that side of things. The difficulty is around the planning and the expertise that goes into the plan. I mean, that’s what I think has been so for, so interesting for me, just to deviate slightly about 32 code. It sort of touches on my passions as an investor in my interest in different business models. But I ultimately was and am a healthcare sort of a trained healthcare professional. And it’s the outcomes as well. When you have different dentists, having the access to that support and the expertise and collaborating with each other ends up getting 50% better patient outcomes. They’re not getting into these endless spirals of refinement, so Ending, how you know, having dentists being put off the technology itself because they’re appropriately supported and there’s a way to do that very profitably and to offer it to patients very affordably, and you don’t need to try to charge five times for it. It’s as simple as that, and I think there’s there’s this. This is obviously something that that patients really like and then dentists really like as well.

Dr James: 

Top stuff. Fred, thanks for sharing your wisdom and knowledge on today’s podcast. Any parting pieces of information and gems that you’d like to share with the listeners before you go.

Fred: 

Yes, as I was. I was as we were talking there. I thought about a couple of books that I recommend people read, specifically around this idea of the individual investor competing. Number one it’s an 80s book. It’s a bit old school, it’s a guy into braces and pinstripe suits, but it’s by a very, very famous investicle, peter Peter Lynch, and it’s called one up on Wall Street and it talks about how individual investors can compete. Second one is a book on decision making and thinking is called thinking and bets by any Duke. And the third one is about it’s called the madness of crowds and it’s about delirium and the madness of crowds, sorry, and it’s about how Various fads and crazes have an affectations have taken the financial world and the retail investor, and it talks about some of the human behaviors behind investing, which we didn’t touch upon. But so much of investing and portfolio management is about behavioral control and knowing thyself. But this was super fun. I think this is my first podcast as well, so great to great to do it with you and thanks for having me on.

Dr James: 

Top stuff may at first and many of no doubt. Thank you so much for sharing your information and gems and pearls of wisdom with us today. We shall catch each other again very soon. We shall catch each other again very soon.