Time is the Greatest Teacher

– Melinda White, November 2025

Kenneth Fisher is credited with the saying “time in the market beats timing the market” and although it’s always felt trite to me, looking back at our first two Christmas Stocks and accounting for the milestones those businesses hit, drives home the wisdom of this phrase.

Although markets price continuously throughout the day, businesses that you buy and hold for a 20-year portfolio get on with executing on their growth plans and with the passing of time, share prices eventually reflect the value creation. Learning the patience to watch, to wait, to not trade, to control your emotions is one of the hardest things to learn in a constantly changing price environment. And I think it is best learnt by owning and aiming to own a 20-year portfolio.

Our first two 20-year stocks have done well this year. Both delivered share price increases over 30% in absolute terms and outperformed the index by approximately 10% respectively.

Over the year, Nanosonics continued to reach milestones we laid out in our original investment thesis from 2023. The base business resumed its growth trajectory with the existing Trophon business growing revenues at +17% and profit at +30%. The installed base grew 6% and showed healthy growth across all regions and the recurring revenue from consumables grew 20%. Trophon 3 and Trophon 2 plus were launched in August.

Nanosonics also received De Novo clearance from the FDA in the USA for their new CORIS system and informed the market that they would begin a staged new sales process in the first quarter of financial year 2026. The De Novo clearance covers CORIS for colonoscopes, but Nanosonics intend to obtain approval for all major categories of flexible endoscopes over time. As a reminder, the CORIS system is arguably serving a greater unmet need when it comes to disinfection of medical-grade probes. Endoscopes are more complex in their construction given they contain cameras and lights. As a result they have harder-to-get-to channels that require detailed brush cleaning if they’re being manually disinfected. The CORIS system improves on the efficacy of existing disinfection standards significantly and will free up reprocessing staff to concentrate on other parts of the disinfecting needs. There are 60 million endoscope procedures done every year in Nanosonics key markets and these procedures are growing at 6% per annum. It will take several years for us to see the full extent of the opportunity on offer for Nanosonics and its shareholders, but we believe CORIS will represent the next pillar of strong growth for the business well into the future.

This new source of revenue and profit is a good example of the type of business we see in the small cap part of the market.

Their arrival at the sweet spot of their lifecycle often happens at the point at which they’ve arrived at a novel technology platform that gives them multiple options for organic growth.

Imdex has had a similar year to Nanosonics, both in terms of absolute and relative share price performance as well as some business milestones that point to our thesis being intact.

The first half of the year demonstrated Imdex’s resilience in the face of a cyclical downturn with revenue and profit growth less negative than their end markets. It’s Devico acquisition from 2024 showed early signs of confirming the company’s thesis that they would be able to cross sell and better fulfil client demand for downhole sensors up and down the price point stack.

By the time of the full year results in August, the evidence that the 2-year decline in exploration drilling activity had bottomed and was back to growth was in and confidence in the medium-term cyclical upswing in exploration drilling started to take hold. This is likely to continue in the medium term. Exploration cycles tend to be multi-year in nature and there has been a dearth of new discoveries in commodities like copper in recent decades. The move in the gold price has driven a sharp increase in holes drilled globally this year (gold drilling often having a shorter cycle). More interesting though, is the increase in the copper price. The looming supply shortage of copper has been a feature of commodity market discussions for years, but may finally begin to drive meaningful exploration activity.

Imdex continued to grow its digital earth sciences capability by making two bolt-on acquisitions. Both have been funded by existing balance sheet capability rather than diluting shareholders.

During the year, Imdex acquired Earth Science Analytics (the developer and owner of EarthNET – a program that enables geologists to integrate datasets and apply Artificial Intelligence analytics across those datasets so that they can understand the orebodies better.

This month it also acquired Advanced Logic Technology and Mount Sopris Instruments (ALT and MSI) to extend its Earth Science Digital analytics platform. The technology these businesses bring to the Imdex technology platform is a program called wellCAD which is the industry leader in. According to Imdex the acquisition was partially customer-led and should drive further customer adoption of their software suite.

Which brings us to our next investing lesson and our Christmas Stock for 2025.

This year we are selecting Harvey Norman for our 2025 Christmas stock. Harvey’s is a non-obvious small cap stock to pick for a 20-year portfolio which is why I’m going to call out the second investing lesson up front:

Quality and Value is found in the most unusual places. Stay open minded and flexible in your thinking.

Now this is not a lesson that Barry taught me. Far from it, he and I had a raging disagreement when I was in my final year of high school over a stock that has some echoes of the objections people often raise to Harvey Norman. I wanted to buy shares in NewsCorp and for reasons left largely unsaid, Barry said I would never own Newscorp whilst ever he had anything to do with my portfolio. Whatever his reasons, Barry had a solid bias against Rupert Murdoch that would not be shifted.

There are many ways to try and force the human brain to stay open-minded and flexible in its thinking, but we’ve found over the years that the most efficient way to stay open minded is to define how the raw data of a company expresses some characteristic you’re looking for in a business and then let the data tell you (with no human interference) what companies fit the definition.

This strips all the behavioural biases away from the initial identification process of companies you might want to invest in. It also delivers discipline and repeatability into your investing process.

Many people ignore the Harvey Norman business for a range of reasons. The Australian business is a mature retailer; Gerry Harvey and other insiders own 52% of the business; there have been related party transactions in the listed business in the past that people point to as evidence of significant governance failings. However, using our dispassionate data-driven lens, Harvey Norman is a quality business, and we would argue that the large family holding aligns management to shareholders in their effort to create value in all parts of the business.

So, let’s look at Harvey Norman. This is a business that has grown from its first store in Auburn (Sydney) in 1982 to be a household name to almost every Australian today. Some of us associate Harvey Norman stores with big comfy lounges destined for middle class Australian homes, but they also own the Domayne brand and the business now thinks of itself as a “Home, Lifestyle and Tech” destination. Their business is unique in a couple of ways. Firstly, the Australian stores largely consist of sub-franchisees for each section of a Harvey Norman store. This means that when you are buying a bed in the store, you’re talking directly to either the sub-franchisee themselves, or someone who works for them. They’re empowered to give discounts to customers but also empowered in other ways: being close to the shop floor, the business and the customers mean franchisees are more connected to the evolving consumer. As a result, committees of franchise owners approve new product ranging and franchisees are responsible for deciding how much stock to hold (within a company-controlled tolerance band).

Sub-franchisees pay a franchise fee to Harvey Norman, along with rent for the floorspace they use. Harvey Norman selects and buys sites for their superstores and now own 49% of their store footprint in Australia. These store “complexes” are often large format retail shopping complexes and have third-party tenants in them as well as Harvey Norman stores. The Australian business has grown revenue at 2% and EBITDA at approximately 6% per annum over the last 10 years. Given its place in the Australian retail eco-system, despite the maturity of the business, it should continue to grow with population and income growth.

What’s underappreciated about Harvey Norman is the fact that they have spent the last 10 years building out an international store presence and now have stores serving a total population of 90 million, or 3.3x the size of the Australian population. The international footprint spans New Zealand, Singapore, Malaysia, Ireland, Croatia and Slovenia and the British Midlands. This part of the business now generates 30% of EBITDA and is growing. In the last 10 years revenue in the international divisions has grown at 6% per annum and EBITDA has grown 11% per annum. This international arm should continue to grow faster than the Australian business.

But in whispers of the past, lets return to the question of founder shareholders, non-independent boards and related party transactions (the most common objection we get to Harvey Norman). As I alluded to earlier, the benefit of having the executive team as large shareholders in any business is that they have serious skin in the game and effectively sit alongside you as an owner of the business. As a result, more often than not (and particularly when they have spent a lifetime building the successful business you are a part owner of), they tend to have the agility and alignment to consider and execute on both short term tactical and long-term strategic goals better than most. Sometimes they may go off-piste and attempt to step the business out of its core market. Some successful and still listed family run conglomerates have done this: Seven Group and Soul Pattinson come to mind. It strikes us that the market is more than willing to look through similar founder-shareholder structures when these ventures are successful but punish and remember small ventures that fail. We think Harvey Norman has learned their lesson and in a market willing to forgive convicted financial criminals (no names!) we think a A$34m loss on a dairy farm a decade ago is probably forgivable.

So why would a stock like this have a place in a 20-year portfolio? This brings us to the investing lesson this year: quality and value are found in the most unusual places. If you buy Harvey Norman stock today, you are buying a Home, Lifestyle and Tech retail business serving a population base of 90 million potential customers that should be able to continue to grow its earnings at solid rates.

It has minimal debt (13% Debt/Equity in FY25). But it also owns property in Australia in well located positions (at least in the capital cities) that are likely to create additional value over the next 20 years. Why is this the case?

Today, the property owned on the Harvey Norman balance sheet is valued at about A$3.8 billion using the valuation methodology applied to retail Real Estate landlord businesses. However, these properties are often on large land footprints with lots of above ground parking, close to transport links and population centres. Like a lot of large format retail in Australia, they are basically rentalised land banks which are likely to be converted into high density residential property at some point in the future. This is called higher and better use. Although difficult to value, we have done some work on the property portfolio that suggests that some sites could be worth significantly more as redeveloped high-density housing. Harvey Norman has confirmed that they also hold this view and intend to pursue value creation from the property portfolio over the medium to long term.

If you buy Harvey Norman today, you’re buying A$3.20 of in-use retail property and a retail business that is reasonably valued at 10.7x FY27 EV/EBIT vs its closest peers trading on an average 12.6x EV/EBIT. As with CSR and Brickworks, the unlock of value from the property portfolio won’t happen in the short term, but it provides a hidden source of balance sheet strength that will eventually be appreciated by the market over time.