Season 3, Episode 01

 Intro To QAV

As it’s been a year since we recorded our “introduction to QAV” episodes, a couple of our listeners suggested it would be a good idea to re-record them, now that we’re much smoother on the mic. So we present – QAV Reboot. We introduce ourselves and the QAV system of investing in shares.

View Transcript

S03E01 – Intro To QAV

00:00:02 – 00:00:07

This is the QAV podcast for people who want to learn how to invest like a professional.

00:00:07 – 00:00:22

Well, welcome everybody to the first episode of the QAV Reboot 301, The reboot

00:00:22 – 00:00:28

Series. My name’s Cameron Reilly with me is my partner in crime Tony

00:00:28 – 00:00:33

Kynaston. How are you Tony? I’m good, thank you, mate. We’re

00:00:33 – 00:00:40

recording this late March or March 23rd 2020. We’re both currently in lock

00:00:40 – 00:00:46

down from Coronavirus and I want to explain for new listeners and for old

00:00:46 – 00:00:51

listeners the concept of the reboot. So we’ve been doing this podcast now for

00:00:51 – 00:00:56

about a year and change. And over that period of time, as we’ve been

00:00:56 – 00:01:01

explaining Tony’s investment methodology and who Tony is, we’ll get to that

00:01:01 – 00:01:04

in a minute if you’re brand new. But Tony has an investing methodology that

00:01:04 – 00:01:09

he has been developing over 25 – 30 years and what we do in this podcast,

00:01:09 – 00:01:15

is we explain how that works. Now, when we started this podcast 13 months, 14

00:01:15 – 00:01:20

months ago, yeah, it was okay. I did my best to make it a good show. I’ve

00:01:20 – 00:01:24

been doing podcasts for 15 years. I know how to make a podcast, but I  

00:01:24 – 00:01:28

was completely out of my depth when it came to Tony’s investing stuff, to

00:01:28 – 00:01:33

financial data and terminology and the modelling and all this kind of stuff. So

00:01:33 – 00:01:36

it took me a long time to get up to speed. I reckon it took six months before I

00:01:36 – 00:01:41

felt a little bit comfortable with it. And consequently in those episodes there is a lot of

00:01:41 – 00:01:45

me dog paddling through this stuff, trying to keep my head above water. And

00:01:45 – 00:01:52

Tony wasn’t really used to speaking on a microphone and to be articulating this to

00:01:52 – 00:01:58

anybody outside of himself at three AM over a Scotch because he has just done

00:01:58 – 00:02:04

it himself for 30 years. Apart from his family, he’s never really had to explain

00:02:04 – 00:02:08

it to anyone before and as he has been explaining and on this show over the last

00:02:08 – 00:02:13

year and a bit, he’s got a lot better at it. In fact, he’s very good at it. Now is,

00:02:13 – 00:02:19

is his Warren Buffett and training with his mom, Bond Mozz. So we had a

00:02:19 – 00:02:23

dinner in Sydney last week before the lock down with some of our QAV listeners

00:02:23 – 00:02:28

in Sydney, and they suggested, Hey, why don’t you redo those episodes

00:02:28 – 00:02:32

because I think you’ll do a better job off them now, now that you’re a lot more

00:02:32 – 00:02:37

fluent in how to talk about this stuff. And we thought, What a great idea.

00:02:37 – 00:02:44

Much easier for new listeners to start with. These reboot versions. Also, the

00:02:44 – 00:02:49

checklist that we used It’s Tony’s, Tony’s IP, but I’d wanted to build my own

00:02:49 – 00:02:54

, so I got my head around it and it’s gone through lots of changes over the last

00:02:54 – 00:02:59

30 months as I’ve improved on the checklist and streamlined it, modified it.

00:02:59 – 00:03:04

So if you go, if you know you’re starting at 101 Episode one I won, you’re

00:03:04 – 00:03:08

going to have to go through all the different checklist changes in a linear

00:03:08 – 00:03:13

timeline. If you start with this one, you’ll be able to use the latest version at

00:03:13 – 00:03:17

least as of March 2020. I don’t think it’s going to change a lot from here, but

00:03:17 – 00:03:23

who knows? So anyway, Tony, that’s my preamble. Out of the way. We do

00:03:23 – 00:03:29

want to always start with this disclaimer. This podcast is a Nen formacion

00:03:29 – 00:03:36

provider. We’re giving you information about how Tony invests and we will

00:03:36 – 00:03:39

talk about stocks and we will talk about other investment vehicles, but we’re

00:03:39 – 00:03:43

not recommending that you buy anything. We’re not recommending that you

00:03:43 – 00:03:48

invest this way. We’re not financial advisors. We haven’t taken into account

00:03:48 – 00:03:52

your individual investment objectives or financial circumstances or needs.

00:03:52 – 00:03:57

Please don’t take anything you ever hear on this podcast or on our website or in

00:03:57 – 00:04:01

our emails is financial advice. If you need financial advice, go see a financial

00:04:01 – 00:04:08

advisor. What this podcast is about is explaining how one guy who’s a very

00:04:08 – 00:04:13

successful professional investor and has been doing it for decades, how he

00:04:13 – 00:04:19

thinks, how he invests and humane, and to basically teach financial literacy

00:04:19 – 00:04:25

howto how to value one way of valuing a stock and deciding what it’s worth

00:04:25 – 00:04:30

and what to pay for it. But it don’t take it it financial advice. My bottom line

00:04:30 – 00:04:34

here, I hope I’ve been very clear on that, Tony, do you want to add anything?

00:04:34 – 00:04:39

That was a good summary? Well, the way that we started the original Siri’s,

00:04:39 – 00:04:44

and I think we should start this one. A cz well is to talk a little bit about you,

00:04:44 – 00:04:49

Tony. I know it’s your least favourite subject to talk about your? Quite a quite

00:04:49 – 00:04:55

a quiet fellow, By the way, for new listeners, Tony and I go back over 12

00:04:55 – 00:04:59

years. We’ve known each other a long time. We’ve become friends. We’ve

00:04:59 – 00:05:02

worked on a number of projects together. We’ve written a book. We’ve made a

00:05:02 – 00:05:09

film, We’ve travelled the world for fun. And so we know each other very well

00:05:09 – 00:05:15

now. Dure ing that 12 years, I didn’t really know much about how Tony made

00:05:15 – 00:05:20

money. I did assume for a while that he was some kind of a hitman for the

00:05:20 – 00:05:26

mob, Probably the Irish mob, because he’s quite tall, pale and has red hair.

00:05:26 – 00:05:33

So he didn’t look Italian. And I knew video. I think I asked you early on.

00:05:33 – 00:05:37

What do you do, Tony? He said, I’m just a investor. There was like, Okay.

00:05:37 – 00:05:43

And that was that was over a first dinner, a TTE teppanyaki restaurant in

00:05:43 – 00:05:50

Fortitude Valley 12 years ago. 11 12 years ago. And and, you know, that was

00:05:50 – 00:05:54

basically it went all right. Well, obviously you don’t want to share, so Okay.

00:05:54 – 00:06:02

I’ll just do all the talking then, shall I? And then talking anyone I think that’s

00:06:02 – 00:06:09

the joke. on, then about the beginning of last year, but beginning a 2019. I

00:06:09 – 00:06:12

have twin sons who are 18. At the time they had their own podcast and they

00:06:12 – 00:06:15

said, You know, Tony’s quite a wealthy guy, right? Yeah, I think so. And

00:06:15 – 00:06:19

they said, Well, we wantto talk about money management and making money

00:06:19 – 00:06:22

for our audience. Do you think Tony would come on and be a guest? And I

00:06:22 – 00:06:27

said, I’m sure he’d be happy to and you did that. And I listen to that episode,

00:06:27 – 00:06:32

and in that episode you actually explain your infesting methodology in a very

00:06:32 – 00:06:39

high level, and I was like, What? You do what you do? You have a what? A

00:06:39 – 00:06:44

system for making money And you’ve never told it to me, you rat bastard.

00:06:44 – 00:06:51

And so Wei had any money anyway. Well, that’s true. I have no money. But

00:06:51 – 00:06:57

if I had had money, I would have been good to know howto invested and s o A

00:06:57 – 00:07:00

couple of days later, I said to Tony, what do we do? A podcast about this,

00:07:00 – 00:07:04

this method that you have and you’re like, really what? Anyone wanted to

00:07:04 – 00:07:08

listen to that and I was like, Yeah, I think some people might like to know

00:07:08 – 00:07:13

how to invest successfully, and that’s the been the show. And of course, over

00:07:13 – 00:07:18

this time, you know has been relatively successful on a lot of people have

00:07:18 – 00:07:22

expressed their appreciation to us, but to you, mostly for taking your time

00:07:22 – 00:07:28

freely, at no charge over the last year to talk about the basics of wealth

00:07:28 – 00:07:34

creation through investing and the basic fundamentals off how to be a

00:07:34 – 00:07:39

successful investor. So that’s the genesis of this shot. But, Tony, why don’t

00:07:39 – 00:07:44

we go back and you tell us before you became an investor, what was your

00:07:44 – 00:07:51

what was your career like? So I had a career in retail for 20 years, So I started

00:07:51 – 00:07:57

off after university in the department, the Shell Company of Australia, and

00:07:57 – 00:08:01

after a couple of years a 90 I felt like I wasn’t part of the action. So I moved

00:08:01 – 00:08:06

across into the retail side of Shell, which is the section that looks after service

00:08:06 – 00:08:10

stations and distributors and does the actual business of selling petroleum

00:08:10 – 00:08:14

products And what, my way out from there into general management roles. I

00:08:14 – 00:08:21

started off in the financial planning areas. I got a good overview of how shell

00:08:21 – 00:08:25

uprights in Australia. And then I went out into the field in Queensland and

00:08:25 – 00:08:29

looked after the order care franchises and all the service stations around

00:08:29 – 00:08:34

Queensland Northern Territory in the car washes and then became the central

00:08:34 – 00:08:38

Queensland territory. Managers are looked after some big fuel distributorships

00:08:38 – 00:08:42

and some service stations Well, looked after. I was basically the franchise.

00:08:42 – 00:08:48

All they were the franchisees. So lots of discussions around how to price

00:08:48 – 00:08:55

products going after winning big contracts, looking after health, safety and

00:08:55 – 00:08:59

environment. Okay, okay. Okay. We don’t need to go into that much detail.

00:08:59 – 00:09:02

Tony, you are. You’re a corporate executive. Coals and shell. That’s basically

00:09:02 – 00:09:13

all I was looking for. You ran very large companies for 28. Okay, then when

00:09:13 – 00:09:18

did your investing career start? I feel like this rebate should be called podcast.

00:09:18 – 00:09:26

Attention. I mean, lock down, having to redo my work, E wade that one

00:09:26 – 00:09:30

through last year. It’s like being in the breakfast club without Molly Ringwald

00:09:30 – 00:09:42

. Anneli Shady. Oh, my Judd Nelson or the teacher, but each Okay? Yeah.

00:09:42 – 00:09:45

Yeah. So what? What was the question? Sorry. How did your investing

00:09:45 – 00:09:50

career start? Yeah, Good question. So when I was its shell and it would have

00:09:50 – 00:09:55

bean guessing the mid 90 So towards the end of my time there they came up

00:09:55 – 00:10:02

with a way of giving us some extra enumeration by offering us alone that had

00:10:02 – 00:10:06

to be used for investment purposes. You couldn’t sort of buy house liver living

00:10:06 – 00:10:13

it with this line. It was to the amount of your annual salary. And it was offered

00:10:13 – 00:10:16

at a low interest rate, the kind of interest rate shell was getting when they

00:10:16 – 00:10:20

borrowed May, which was less than the market rate. And I thought that was a

00:10:20 – 00:10:24

great idea and a couple of friends and I got together and we said What we do,

00:10:24 – 00:10:29

how we got to invest it. Let’s take shell upon this offer. And so we did. And

00:10:29 – 00:10:33

we did a bit of investigation, and we spoke to a guy who was a property

00:10:33 – 00:10:38

developer about going in a partnership with him. We went to Cem big name

00:10:38 – 00:10:42

stockbrokers and ask their advice, and we thought both of those were a bit too

00:10:42 – 00:10:47

pedestrian because we were going ho young, you know, masters of the

00:10:47 – 00:10:49

universe. Its share Let me wanting to invest in things that were going toe

00:10:49 – 00:10:55

double our money quickly. And we started doing all the wrong things because

00:10:55 – 00:11:00

we were aggressive. So we took tips from people from stockbrokers from our

00:11:00 – 00:11:05

colleagues and the upstream side of the business who were involved in a

00:11:05 – 00:11:10

startup petroleum drilling companies and the like. And basically, after about a

00:11:10 – 00:11:16

year, I lost half my capital through mostly penny dreadful investments in the

00:11:16 – 00:11:23

mining sector. Andi? Yeah, A wake up call. I thought Shit. Not only have I

00:11:23 – 00:11:27

lost half my capital, but eventually I’ll have to pay it back. And so I’ve got to

00:11:27 – 00:11:31

find it from somewhere too. So that was like, a double whammy. And so I

00:11:31 – 00:11:36

started to subscribe it. Teo, whatever you say there, I could find on investing,

00:11:36 – 00:11:40

read any book I could find on investing. And one day I happened to be in an

00:11:40 – 00:11:44

airport bookshop, and I came across the making of an American capitalist

00:11:44 – 00:11:48

book by a guy called Roger Loans Loans. And it was a book about Warren

00:11:48 – 00:11:52

Buffett. And it really resonated with me, the whole the whole idea of value

00:11:52 – 00:11:57

investing. His storey you had a muchmore scientific feel to it than what I’ve

00:11:57 – 00:12:04

Bean used to so far it in things I’ve read or heard, And it also had a very good

00:12:04 – 00:12:10

take on how to take the emotion out of it and just just make common sense. It

00:12:10 – 00:12:17

it seems simple. And so I started applying those principles and eventually got

00:12:17 – 00:12:20

my money back and was able to pay pay shell out. It’s lying when I left and

00:12:20 – 00:12:26

moved across the Coles Myer and the investment bug bit and I went from there

00:12:26 – 00:12:29

and for people who don’t know who Warren Buffett is, although I think most

00:12:29 – 00:12:35

people probably do, we’ll talk more about him in a minute. So how long have

00:12:35 – 00:12:39

you been a full time professional investor now, Tony? Well, I retired when I

00:12:39 – 00:12:46

was 43. So about 14 years ago, right? Put that and the cabbie it is that my

00:12:46 – 00:12:50

wife has been working, so we’ve been able to live off her income and then

00:12:50 – 00:12:58

invest all of our capital time t let that you decided to be a stay at home dad and

00:12:58 – 00:13:02

just managed the investment portfolio. Yeah, Jenny and I joke about her being

00:13:02 – 00:13:08

PN Ellen may being balance sheet. She she’s cash flowing on capital, right? I

00:13:08 – 00:13:11

had the benefit of raising my daughter, which was fantastic. We have a great

00:13:11 – 00:13:16

relationship because of that, and it’s not because you’re some sort of a

00:13:16 – 00:13:20

misogynist and you sent your wife out to work. We should point out that your

00:13:20 – 00:13:25

wife, Jenny, is a very successful corporate executive and loved her work and

00:13:25 – 00:13:29

didn’t want it. Didn’t want to retire. Could have retired at the option. Chose

00:13:29 – 00:13:35

not to. Yes, until recently. I may retire, although she’s talking about going

00:13:35 – 00:13:39

back to work. You resigned from a current role recently, and that will be

00:13:39 – 00:13:42

finishing up soon, and she’s gonna take six months off and consider our

00:13:42 – 00:13:47

options. But you’ve basically been, ah, professional investor now for several

00:13:47 – 00:13:53

decades and full time for the last 14 15 years. Yeah, that’s right. Best thing

00:13:53 – 00:13:59

since about I would say, the mid nineties 25 years and the average return on

00:13:59 – 00:14:07

your portfolio over that 25 year period. Yeah, 19.5%. They’re getting full

00:14:07 – 00:14:11

disclosure. It’s probably going to drop now that the market’s tanking. But I

00:14:11 – 00:14:15

think once we come out the other side will be back up there again. Well, that

00:14:15 – 00:14:20

unless I take it, my dropped to 18% something like that. 17. But at the

00:14:20 – 00:14:25

moment, as off the end of last year, 19%. Now, to put that in perspective,

00:14:25 – 00:14:27

because when you first told me that, I mean, it sounded good, but I didn’t

00:14:27 – 00:14:33

really know how good it wass. Over the last 50 or 60 years, the Warren

00:14:33 – 00:14:39

Buffett has been investing with Berkshire Hathaway. I think he claims that his

00:14:39 – 00:14:47

average annual return is about 19.8%. Is that’s right, 90.7 or 9.8. Yeah, it’s

00:14:47 – 00:14:52

something around that definitely above 19. So that means that there are some

00:14:52 – 00:14:56

years when it’s going to be much higher than 19%. Some years when it will be

00:14:56 – 00:15:00

lower. Like this year, for example, in the market is take due to Corona virus,

00:15:00 – 00:15:07

but on average over 10 20 years and beyond, it averages out at 95%. So for

00:15:07 – 00:15:13

people who have been around investing for awhile, they will know that the A

00:15:13 – 00:15:18

Lord’s Thie Australian Stock Exchange and it is true of other stock exchanges

00:15:18 – 00:15:23

like in the US or any other country. If you look at their average growth over

00:15:23 – 00:15:31

decades, it tends to be somewhere around 9 10 11% depending on which

00:15:31 – 00:15:34

exchange you’re looking at again. Some years it’ll be hire. Some use will be

00:15:34 – 00:15:40

low, but on average it’s about 10%. Let’s say we’ll have just for a quick

00:15:40 – 00:15:44

heuristic and you’re you’re basically doubling that. Your objective is to

00:15:44 – 00:15:50

basically double the index. Correct? Yes, double the market on the premise

00:15:50 – 00:15:55

that if we can philtre out the bad stocks and the rest must do better than the

00:15:55 – 00:16:00

index. So again, not rocket science. And that might be a simple statement.

00:16:00 – 00:16:03

Well, sounds like a simple statement, but it’s hard to put into practise because

00:16:03 – 00:16:07

the philtre is the key. But if you think about it, if you take out the rotten

00:16:07 – 00:16:11

apples, the rest should be edible, and we’ll talk about how you do that as we

00:16:11 – 00:16:18

go along. My own brief bio. My name’s Cameron Reilly. I had a career in

00:16:18 – 00:16:22

sort of tech in the nineties. I worked at one of Australia’s first I S P s in the

00:16:22 – 00:16:27

mid nineties. Then I got a job at Microsoft in the late nineties was a Microsoft

00:16:27 – 00:16:33

for seven years, sort of a one of the dot com guys first, early sort of Internet

00:16:33 – 00:16:38

people that Microsoft tied travel around the country and talk to CEOs about

00:16:38 – 00:16:42

what the Internet wass and what html wass and how Microsoft was going to

00:16:42 – 00:16:49

make the Internet so much better. I left that in 2000 for and started Australia’s

00:16:49 – 00:16:54

very first ever podcast. Believe it or not, it was called Good World. And then

00:16:54 – 00:17:00

in early 2005 I started the world’s first podcast network, cunningly called the

00:17:00 – 00:17:05

Podcast Network and built that up for a few years and was making money out

00:17:05 – 00:17:09

of advertising until the GFC hit in 2008. And we lost all of our advertising

00:17:09 – 00:17:13

overnight and I wake and cried in a corner for a couple of years and did some

00:17:13 – 00:17:20

marketing jobs came back into podcasting in 2000 13 and today my leave, I

00:17:20 – 00:17:24

make my living out of producing podcast, mostly on ancient history. If you

00:17:24 – 00:17:30

wantto cheque those out, go to the podcast network dot com and despite

00:17:30 – 00:17:35

working in the stock market when I was 18 just after the 87 crash for a while

00:17:35 – 00:17:41

and working for a private investment firm a little bit. After that, I have had a

00:17:41 – 00:17:46

number of failed start ups lost. Been divorced several times. I’m the world’s

00:17:46 – 00:17:51

worst money manager completely broke, even though I’m nearly 50 lustre all

00:17:51 – 00:17:57

in divorces and start up failures. S o. The premise for the show basically is

00:17:57 – 00:18:02

Tony is very good with money is teaching may a complete idiot how to stop

00:18:02 – 00:18:07

being a complete idiot? And you, the audience get Teo. Listen, as he does

00:18:07 – 00:18:15

that now, Tony, let’s talk a little bit about value investing, your style of

00:18:15 – 00:18:19

investing. You mentioned Warren Buffett before. Can you give us a quick

00:18:19 – 00:18:26

background on value investing and why you think it is the best form of

00:18:26 – 00:18:30

investors? Yeah, sure. I mean, I think if you take it back to first principles,

00:18:30 – 00:18:35

all investing is value investing. We’re all trying to buy something now, which

00:18:35 – 00:18:40

we think is undervalue and will be worth more in the future. But there are

00:18:40 – 00:18:46

different ways of doing that. Then there’s people who focus on growth, so

00:18:46 – 00:18:48

they’re looking for companies which they think will grow quickly and they buy

00:18:48 – 00:18:55

those there are people who think that the best way to investors by quality and

00:18:55 – 00:18:58

they don’t really care about the price as long as the company is a high quality

00:18:58 – 00:19:02

company and they’ll buy those. And there are people who kind of do a bit of

00:19:02 – 00:19:06

both, and they’re called momentum investors, so they follow the trends in the

00:19:06 – 00:19:14

stock market. But a value investor is looking for things which sell for less than

00:19:14 – 00:19:18

what’s called the intrinsic value. And that’s kind of Robin. You’ve got to work

00:19:18 – 00:19:22

out what the intrinsic value is, and you’ve got to find the undiscovered

00:19:22 – 00:19:27

companies, so to speak, their trading below what they really should trade for.

00:19:27 – 00:19:31

And that’s what value investing is. So how does Warren Buffett fit into this?

00:19:31 – 00:19:35

Tony? Yeah, well, he’s probably the most famous value investor there. There

00:19:35 – 00:19:39

are others, but he’s been around for a long time. The guys, I think about 87 or

00:19:39 – 00:19:43

88 years old now, maybe even. You know, I’m not sure he has a partner

00:19:43 – 00:19:46

called Charlie Munger, who’s even over on. They’ve been doing it since the

00:19:46 – 00:19:52

fifties and sixties. Buffett learned a Columbia University of the Feet of a guy

00:19:52 – 00:20:01

called Ben Graham and Ben Graham along with his his colleague Dog Dogs

00:20:01 – 00:20:14

First Night. But anyway, write a book called Security Analysis. Yeah, yes,

00:20:14 – 00:20:19

Sorry about that. Yeah, they write a book on how to analyse securities, and

00:20:19 – 00:20:23

that led to the concept of intrinsic value and to some of the concepts that

00:20:23 – 00:20:28

Buffett has continued to teach. Like the fact that price is what you pay and

00:20:28 – 00:20:32

value is what you get. And in the short term, the market is a weighing

00:20:32 – 00:20:36

machine is a voting machine, but in the long term, it’s of weighing machine.

00:20:36 – 00:20:41

What does that mean? Can you explain that? Yes. Oh, a stock market is the

00:20:41 – 00:20:46

market. It’s people coming together to buy and sell products. In this case, the

00:20:46 – 00:20:51

product is a sharing a company and Esso. It’s subject to all the kinds of

00:20:51 – 00:20:56

psychology and whims of human nature that we encounter every day. And

00:20:56 – 00:21:00

that’s why in the short term it’s a voting machine, so shares and that prices will

00:21:00 – 00:21:06

move according to how people vote with their feet in the short term. So at the

00:21:06 – 00:21:09

moment, the shares that shares a going down quickly because people are

00:21:09 – 00:21:13

selling up and getting out of the market. So the votes at the moment are the

00:21:13 – 00:21:17

votes are in and the market’s crashing. People people are going to cash, but in

00:21:17 – 00:21:23

the long term, the share price of a company should represent what it’s value is

00:21:23 – 00:21:27

what its intrinsic value is, and there is. We’ll have to talk in detail about what

00:21:27 – 00:21:31

that means. But basically the weighing machine comes into play in the long

00:21:31 – 00:21:36

term. So if, for example, BHP is a company, even though it’s being sold off

00:21:36 – 00:21:41

now, eventually the share price will track back to work. So what should do to

00:21:41 – 00:21:47

reflect the accurate value of BHP? Right? I’ve got Ah, remember, I’ve got a

00:21:47 – 00:21:53

quote from buffet somewhere here. Let me just find it. Yeah, if a business

00:21:53 – 00:22:00

does well, the stock usually follows, so he’s tryingto basically that in my

00:22:00 – 00:22:06

understanding of value, investing at a very simple level is it’s looking for well

00:22:06 – 00:22:11

performing companies, good quality companies that ah well managed have a

00:22:11 – 00:22:16

good business, good prospects for the future. They’re making cash, and you

00:22:16 – 00:22:21

looks like they’re going to continue to perform well for the future because,

00:22:21 – 00:22:25

generally speaking, the shares of those companies will do well and then bathe.

00:22:25 – 00:22:29

Second component of it is buying stocks in those companies when you could

00:22:29 – 00:22:34

buy them at a reasonable price. You work out what you think the value of that

00:22:34 – 00:22:40

stock is on any given day, and then you try and buy it at a discount to that on

00:22:40 – 00:22:45

DH. That’s basically basically, yeah, that’s right. There’s a lot of things to

00:22:45 – 00:22:49

unpack in those simple statements, but that’s essentially What I do is try and

00:22:49 – 00:22:54

marry some kind of measurement of rating of what the quality of a company is

00:22:54 – 00:23:00

with a rating or analysis of how discounted the share prices to what I think it’s

00:23:00 – 00:23:06

worth right and just more on buffet. I mean, the guy’s been investing for a

00:23:06 – 00:23:09

long time, so he has gone through a couple of federations of that whole

00:23:09 – 00:23:14

process. Earlier in his career, he was focusing on Mohr of the value side of

00:23:14 – 00:23:18

things and pay less attention to quality. Then he teamed up with Charlie

00:23:18 – 00:23:22

Munger and Munger, convinced into pain more attention on the quality side of

00:23:22 – 00:23:27

things, a pay you went from trying to buy things, that deep discount to paying

00:23:27 – 00:23:33

a fair price for quality company, and now he’s probably more focused on the

00:23:33 – 00:23:37

quality side of things. How can I preserve my capital going forward? Because

00:23:37 – 00:23:43

now he’s, you know, spending in hundreds of billions of dollars to buy large

00:23:43 – 00:23:48

chunks or entire chunks of businesses not just trading on the market like you or

00:23:48 – 00:23:52

I would correct. And it’s a different engagements or outside. Most of his

00:23:52 – 00:23:55

investments are outside the share market now, even though it’s still a big part

00:23:55 – 00:23:59

of Berkshire Hathaway, which is his company. I think maybe about three

00:23:59 – 00:24:04

quarters is, is actually or the market capitalisation is tied up in direct

00:24:04 – 00:24:07

investments in companies on one of the things I’ve learned since we’ve been

00:24:07 – 00:24:13

doing this show is that value investing This style is buffet or Benjamin Graham

00:24:13 – 00:24:20

style of investing. It goes through cycles in terms of its popularity in the

00:24:20 – 00:24:26

market. Your last year we were at the tail end, as it turned out, off a fairly

00:24:26 – 00:24:32

long bull market boom market, and people weren’t interested in value

00:24:32 – 00:24:35

investing. Generally speaking, they thought it was boring. They thought it

00:24:35 – 00:24:40

was out of fashion. This time is different. They would say to us and they

00:24:40 – 00:24:45

know they wanted to put all their money in tech stocks, high growth stocks

00:24:45 – 00:24:51

that would never get through your checklist because quite often they’re either

00:24:51 – 00:24:58

losing money or their P E ratios are too high and variety of other things, and

00:24:58 – 00:25:02

their future is uncertain. But their share prices going up, up, up. And so

00:25:02 – 00:25:07

people jump on board, and they think value investing is boring. Of course,

00:25:07 – 00:25:14

then the market crashes. And typically, if I if I understand my history, value

00:25:14 – 00:25:20

investing will become a little bit Mohr valued by the market, as in the next

00:25:20 – 00:25:23

five years. But then the market will get back to a cycle again, where it will hit

00:25:23 – 00:25:28

another boom time of people like our value investing stupid. It’s dead. It’s

00:25:28 – 00:25:35

over. But what? But what I’ve learned from you over the last year is that,

00:25:35 – 00:25:40

yeah, look, some people make money during boom times by jumping on

00:25:40 – 00:25:45

bandwagons, But then they tend to lose money Mohr than they make money.

00:25:45 – 00:25:51

It’s very difficult to find anyone who isn’t a value investor who has produced

00:25:51 – 00:25:59

consistent, roughly 20% returns year in year out over decades. Outside of

00:25:59 – 00:26:03

value investors. Yeah, I’d agree with that. They probably are exceptions, but

00:26:03 – 00:26:09

and obviously you know, venture capitalists and in silicon value in Silicon

00:26:09 – 00:26:12

Valley may have had similar results from investing in tech stocks or better

00:26:12 – 00:26:16

result for investing in tech stocks, but but mostly the successful long term

00:26:16 – 00:26:22

investors of value investors. I’m talking about regular people investors. Yeah,

00:26:22 – 00:26:26

that’s right. Regular people, investors and just the impact that a bit. I mean,

00:26:26 – 00:26:31

we saw it happening last year. This is what happens. It’s maybe it’s an

00:26:31 – 00:26:35

indicator of the top of a bull market. If you look at when value fund start going

00:26:35 – 00:26:39

down within about two or three years, the market crashes. And what happens

00:26:39 – 00:26:45

is it’s because it’s because people, especially new to the share market and often

00:26:45 – 00:26:50

times in this case it was millennials are going out saying 20%. You know, my

00:26:50 – 00:26:56

brother made who bought into after pay att five bucks. And he’s made 250%

00:26:56 – 00:27:01

you know, year on year, going forward, blah, blah, blah and I could name

00:27:01 – 00:27:04

any of the other tech stocks in the what they call the wax in Australia or the

00:27:04 – 00:27:11

Fang companies in the US, and it’s true, but look at them now. They’re most

00:27:11 – 00:27:15

of them are crashing all that, but most of the crashing and oftentimes crashing

00:27:15 – 00:27:20

worse than the rest of the market. And we’re at the stages of a share market

00:27:20 – 00:27:24

correction at the moment, in my opinion, and they’re going to be starved for

00:27:24 – 00:27:28

capital going forward to start to eat up all the cash. And that’s that’s when you

00:27:28 – 00:27:32

hang on for the white knuckle ride and it’s the millennials, or I shouldn’t pick

00:27:32 – 00:27:36

on any particular class of people. It’s the people who have followed that trend

00:27:36 – 00:27:42

on DH thought that 20% year on year wasn’t good enough who are probably

00:27:42 – 00:27:46

locked into those stocks, and they may recover. But a lot will go broke. And

00:27:46 – 00:27:51

we should point out that the stock market, like every other market but

00:27:51 – 00:27:56

probably even more so, trades on the fact that there are whole generations of

00:27:56 – 00:28:04

new investors coming in every view years who were greedy and impatient and

00:28:04 – 00:28:10

want to make quick returns. There’s a lot of old timers out there that smell new

00:28:10 – 00:28:18

meat and take advantage of that exactly. And it’s the it’s the old dogs like you,

00:28:18 – 00:28:23

the old fuddy duddies like Alan Cola cold. You whether or not he actually deal

00:28:23 – 00:28:27

, I can’t remember. But as far as I’m concerned, he did. He least intimated it if

00:28:27 – 00:28:33

he didn’t use those words when he was on our show, just stick. Teo. Basic

00:28:33 – 00:28:40

Time Warner tested principles that have worked for Warren Buffett and Charlie

00:28:40 – 00:28:45

Munger for 60 years and they’re still around and they’re still going and they’re

00:28:45 – 00:28:50

in their eighties and nineties and they’re incredibly wealthy. Yeah, and they

00:28:50 – 00:28:55

sleep at night, will it not? I think one of the things you may have noticed

00:28:55 – 00:28:58

about me, even though there’s a lot of worry in the world at the moment, is

00:28:58 – 00:29:03

I’m not overly worried about the share market. No, because you’ve got rules

00:29:03 – 00:29:08

and principles that you follow. And it has worked for you in previous

00:29:08 – 00:29:12

recessions and downturns, and you see no reason why it won’t work this time.

00:29:12 – 00:29:18

And by the way, there also similar rules that other value investors like a

00:29:18 – 00:29:22

Warren Buffett Charlie money use. And so you’re confident that you’ve got a

00:29:22 – 00:29:26

plan and you stick to the plan on. That’s what most of us don’t have when we

00:29:26 – 00:29:30

get into investing is we don’t have a plan. We do what you did in the early

00:29:30 – 00:29:35

stages. Well, screw it up. And then after that, run around and try and read

00:29:35 – 00:29:40

staff and piece it all together. And there’s a lot of contradictory stuff out there,

00:29:40 – 00:29:46

whereas you’ve dedicated decades of your life to figuring it out and distilling it

00:29:46 – 00:29:50

down to something that dummies like me can understand. Yeah, right,

00:29:50 – 00:29:53

Exactly right. Keep it simple. That’s important, too. That was a good

00:29:53 – 00:29:56

opportunity for you to judge in there and say, You’re not a dummy, Cam.

00:29:56 – 00:30:00

Don’t put yourself down like that. But that moment’s gone now forever. I just

00:30:00 – 00:30:07

want to point that you needed the NBN. Skype Like it? You’re not gonna

00:30:07 – 00:30:12

follow the script, Tony. It says right there in the script are Karen. You’re not a

00:30:12 – 00:30:17

dummy. And you very handsome and well and down idea Just three. I got all

00:30:17 – 00:30:24

this effort. You just don’t do you job back of attention. I go E O s. So let’s talk

00:30:24 – 00:30:31

about the investment ladder. Tony, what is the investment ladder? Yes. So let

00:30:31 – 00:30:37

me step back from value investing and sigh that lot of people don’t get into

00:30:37 – 00:30:41

investing or direct investing themselves because they were busy lives and they

00:30:41 – 00:30:46

have a career. Is a doctor or a nurse or a teacher or an architect or whatever

00:30:46 – 00:30:51

and having to spend time managing their finances just really not possible

00:30:51 – 00:30:57

because they’re so busy. People may from time to time dabble it on coming on

00:30:57 – 00:31:02

out. But but sticking to it full time over a long period of time does require a bit

00:31:02 – 00:31:09

of a bit of time. And I have to say that I’d be spending maybe an hour or so a

00:31:09 – 00:31:13

day, sometimes mohr in periods like we’re in now. And there’s lots happening

00:31:13 – 00:31:18

or if companies a reporting. But it can be done for kind of an hour or two a day

00:31:18 – 00:31:23

. But most people who are raising busy raising families, they have other lives.

00:31:23 – 00:31:28

They don’t want to do that. So let me just sort of outline well what I call the

00:31:28 – 00:31:33

investment stepladder that might take you from that being busy with your own

00:31:33 – 00:31:40

career, up a few rungs to being able to be a Maurine control of your own

00:31:40 – 00:31:44

finances. And I have to say that if you stay on the bottom rung. That’s fine,

00:31:44 – 00:31:50

too. If if it works for you, that’s great. There are four wrongs to the latter.

00:31:50 – 00:31:56

The first rung is please, if you have any sort of money invested addle

00:31:56 – 00:32:03

anywhere, make sure you’re limiting your fees. I went through my father’s

00:32:03 – 00:32:06

finances when he was very late in life, and he was a very proud man who

00:32:06 – 00:32:11

didn’t like to ask for advice. And when I did, always just completely blown

00:32:11 – 00:32:16

away by how much he was paying in fees for really getting no benefit and the

00:32:16 – 00:32:20

first thing I’d say the people cheque, what you’re paying and what you’re

00:32:20 – 00:32:25

getting. And so how do you do that? Will you compare it to the lowest cost

00:32:25 – 00:32:32

operator in the market? And that is a low cost index fund in the Australian

00:32:32 – 00:32:36

market? For me, that means companies like Australian Foundation Investment

00:32:36 – 00:32:42

, so their code on the stock market is a foe. Then what? What’s called a list of

00:32:42 – 00:32:47

investment company? So it’s basically a manage fun that you can invest in

00:32:47 – 00:32:50

which is listed. So when you go to invest in that you buy shares in the

00:32:50 – 00:32:54

company rather than giving them your money and they invested on your behalf

00:32:54 – 00:32:59

. Why, though, I liked that company. Well, the the what they call the

00:32:59 – 00:33:06

management investment management expense ratio is about 0.25 of 1%. And

00:33:06 – 00:33:10

that management expense ratio is equivalent to the fees that the fund manager

00:33:10 – 00:33:16

would charge you to manage your money. So that company gets basically the

00:33:16 – 00:33:21

stock market average return because they have a big baskets of stocks. It’s

00:33:21 – 00:33:27

been around for over 100 years, and so they just continually buy and sell and

00:33:27 – 00:33:32

re balance their their holdings to resemble what the stock market looks like.

00:33:32 – 00:33:36

And so you get the average returns. And as you said before Cam, the average

00:33:36 – 00:33:41

in the stock market is about 10% year on year S O. That’s not sherry. I mean,

00:33:41 – 00:33:44

there’s not. If you think about the companies that are out there on the stock

00:33:44 – 00:33:49

market, I’d hazard a guess and say half to three quarters aren’t making that

00:33:49 – 00:33:53

kind of return in their own businesses. So to be able to go out there and get

00:33:53 – 00:34:00

10% with the cost of it being a quarter of 1% is pretty good. And so if you’re

00:34:00 – 00:34:06

not If you’re if your investments aren’t getting that, please consider seeking

00:34:06 – 00:34:11

financial advice and moving across into a least owning shares and something

00:34:11 – 00:34:16

like Australian Foundation investment. That’s what that would be mine. I

00:34:16 – 00:34:20

don’t like giving financial advice, but that’s my recommendation to investigate

00:34:20 – 00:34:24

going victory and financial advice, advice and compare it. Now I know some

00:34:24 – 00:34:31

industry super funds offered that kind of a similar kind of lo fi service, but it

00:34:31 – 00:34:35

again look, it’ll their fees. If you need to talk to him about their fees, you

00:34:35 – 00:34:40

might find you’re paying more than you think or seek financial advice. So

00:34:40 – 00:34:45

that’s that’s step number one. Please limit your fees and please, at least get the

00:34:45 – 00:34:50

average return on the share market. Step number two, though he is OK. If

00:34:50 – 00:34:53

your ex step number one and you’re feeling like you’re you’re pretty happy.

00:34:53 – 00:34:59

Stay there. But if you wantto get better it rising up the ladder, then maybe you

00:34:59 – 00:35:04

want to put together your own index fund because if you think about the way

00:35:04 – 00:35:09

the index is structured, really, the top 20 stocks by market cap is most of the

00:35:09 – 00:35:14

index. I think it’s over 70% off The value of the stock market by market

00:35:14 – 00:35:20

capitalisation is contained in the top 20 stocks on the Ex, So it’s actually not

00:35:20 – 00:35:25

hard for you yourself to go out and buy a new equivalent of your own index

00:35:25 – 00:35:31

fund. Gone buy shares in the top 20 stocks and buy them in a ratio which is

00:35:31 – 00:35:35

equivalent to their market cap. So you’re buying more of CSL and BHP and

00:35:35 – 00:35:38

maybe aggressive Woodside or war war. So he was on the bottom of that list

00:35:38 – 00:35:42

of the moment. But you can reasonably easy put together your own index fund

00:35:42 – 00:35:46

, and that’s just going to cost you the share brokerage of doing that. And that

00:35:46 – 00:35:50

will just cost you once when you when you trade. So that’s even that

00:35:50 – 00:35:55

potentially even the cheaper option for you and it maybe once every six months

00:35:55 – 00:36:01

, when the companies report their earnings or 12 months, depending on how

00:36:01 – 00:36:06

you feel, look up what the market caps are and look up who’s in that top 20

00:36:06 – 00:36:10

and maybe take out the one that’s fallen out and add one. Then that’s let’s

00:36:10 – 00:36:15

change. That’s coming to the top 20 and so you can You can quite cheaply.

00:36:15 – 00:36:19

Keep your own index fund going again, giving you the average return over the

00:36:19 – 00:36:25

years for a very low cost. So that’s Step two and step three years. You might

00:36:25 – 00:36:28

say to yourself, After you’ve done that for a while, we’ll hang on. Not always

00:36:28 – 00:36:33

. Top 20 companies are giving me the returns I want. I’m getting the average

00:36:33 – 00:36:37

return off them. So what’s what’s different here? And I certainly went through

00:36:37 – 00:36:43

that process and, well, I found wass that the best return and that top 20 stocks

00:36:43 – 00:36:46

and I now do it for the top 10 stocks because it’s a little bit easier than doing it

00:36:46 – 00:36:53

for 20 is to say, if I could work out Well, I think the each of these companies

00:36:53 – 00:36:58

will be worth next year, and I look for the biggest discount between. Well, I

00:36:58 – 00:37:03

think the value of that company is and what it’s current share prices, and I buy

00:37:03 – 00:37:08

that company then shouldn’t I? Shouldn’t I just get the return offic closing the

00:37:08 – 00:37:14

gap, which is often above 10% on the answer, is yes. More times than not,

00:37:14 – 00:37:17

you do that and you return over. Time is going to be higher than the 10%

00:37:17 – 00:37:23

average because you’re trying to pick the winner in that top 20 or top 10

00:37:23 – 00:37:28

portfolio that you’re you’re holding. And once you get good at doing that and

00:37:28 – 00:37:34

you start to understand how to value companies, then that you logically lead

00:37:34 – 00:37:39

you to the next question off. Why, just like myself, to the top 10 or 20

00:37:39 – 00:37:42

companies on the share market? Surely there are companies out there which

00:37:42 – 00:37:46

aren’t in the top 10 or 20 which are growing much faster or presenting better

00:37:46 – 00:37:51

value to us than that. Top 20 Mr Companies. And that’s the case. And that’s

00:37:51 – 00:37:59

where we are with the V investing framework Nicely done. So this’s around

00:37:59 – 00:38:04

your level off risk that you’re ready to take your level of sophistication or

00:38:04 – 00:38:10

education that you currently have, or a willing to develop in terms of

00:38:10 – 00:38:13

becoming an investor, the amount of effort that you’re able to put in or willing

00:38:13 – 00:38:20

to put in So it sze First one is the easiest lowest effort, lowest risk for the best

00:38:20 – 00:38:25

possible return and then increasingly gets a little bit more sophisticated, a little

00:38:25 – 00:38:31

bit more risk about for better returns. Correct? Yes, although a cost, we’ll

00:38:31 – 00:38:35

lower costs, right? Yes, Well, well, that’s better. Returns to write, because

00:38:35 – 00:38:41

what is your point? Cost comes off the returns. All right, Tony. Well, I guess

00:38:41 – 00:38:48

that leads us to level for then Q V, which involves the checklist on DH. So

00:38:48 – 00:38:54

maybe we start talking about the concept of the checklist. Probably don’t have

00:38:54 – 00:38:57

time in this episode to get too deep into how works and detail. We’ll leave that

00:38:57 – 00:39:02

for the next episode. But maybe we can talk about what it is and how it works

00:39:02 – 00:39:06

and why you developed it. And I just want to say to people, If you’re listening

00:39:06 – 00:39:12

to this and you’re one of our club subscribers, you can go up to our Web site

00:39:12 – 00:39:18

and download the checklist that the Excel spreadsheet, the latest version of it.

00:39:18 – 00:39:23

Just go to the pool folio and checklist tab. You’ll find links there for Q TV

00:39:23 – 00:39:27

subscribers. You’ll be able to get a copy of that for everyone else. If you’re

00:39:27 – 00:39:33

just chiming in and getting a feel for it, just we’ll try and explain it verbally.

00:39:33 – 00:39:40

Bit by bit. Yeah, yeah, So why a checklist? Well, I started using a checklist.

00:39:40 – 00:39:45

Teo, Guide my investing about seven or eight years ago, so I haven’t always

00:39:45 – 00:39:51

used it. But it came about when I read a book called The Checklist Manifesto

00:39:51 – 00:39:56

about a doctor who said, You know, I’m a surgeon and I’m in a hospital and

00:39:56 – 00:40:00

we have too many patients who die from basic mistakes or who relapse and

00:40:00 – 00:40:05

come back here with other problems because of mistakes we caused in surgery

00:40:05 – 00:40:11

. And so he cast around and said, Well, is there a better way of doing surgical

00:40:11 – 00:40:14

procedures where we make less mistakes? And he looked to the airline

00:40:14 – 00:40:21

industry, and he was amazed that airlines operate with a very, very, very low

00:40:21 – 00:40:26

crash Rocha or incident ratio compared to number of planes in the air. And he

00:40:26 – 00:40:29

said, Well, how how does that happen in the airline industry? But not in the

00:40:29 – 00:40:33

hospitals were both. Both industry is run by smart people, and what he found

00:40:33 – 00:40:39

was that pilots will go through a checklist, especially before they take off, and

00:40:39 – 00:40:44

I’ll make sure that all the functions in the plane a serviceable and working, and

00:40:44 – 00:40:48

they’ll go through the whole process line by line. They won’t skip any lines. If

00:40:48 – 00:40:51

there’s a problem, they will stop, and I’ll sort the problem out before they take

00:40:51 – 00:40:55

off. And he thought, That’s a great idea. I can apply it to a hospital

00:40:55 – 00:41:00

environment. So is the patient comes in At the start of the process, the doctors

00:41:00 – 00:41:04

and the nurses go through a whole checklist of procedures to make sure that

00:41:04 – 00:41:08

we’re doing the right surgery. That the patient is who they thought they were,

00:41:08 – 00:41:12

you know, on blah, blah, blah that everything in this in the operating room is

00:41:12 – 00:41:17

as it should be, or the instruments of sterilised, etcetera, etcetera. And he

00:41:17 – 00:41:23

found that by applying a checklist to surgery in his hospital, the relapse rates

00:41:23 – 00:41:27

and the patient care went up. And so I thought, That’s a great idea. How do I

00:41:27 – 00:41:32

apply to what I do? And so I started to Systematise. Well, I did, and up until

00:41:32 – 00:41:37

that point I had a lot of heuristics, and I would apply them at different times,

00:41:37 – 00:41:42

given the situations again, always going back Teo Buffett and Munger and

00:41:42 – 00:41:48

Graham to guide me. But over over time you kind of there’s still things that

00:41:48 – 00:41:53

you’ll look at, and I decided to put those down into a checklist, which is itself

00:41:53 – 00:41:57

has evolved over time as well, and I’ve emphasised some things and lessen the

00:41:57 – 00:42:02

emphasis on others. Out of somethings taken them out, and that’s where we

00:42:02 – 00:42:09

are. It’s a process. Which guy to me for investing, And I wantto just let

00:42:09 – 00:42:15

people know that from my perspective, the most exciting aspect ofthe the

00:42:15 – 00:42:23

checklist is it only uses numbers s o the way that the checklist allows us to

00:42:23 – 00:42:28

evaluate any particular stock and determine whether or not it deserves. By

00:42:28 – 00:42:35

rating or not, it’s all about looking at publicly available numbers. I don’t need

00:42:35 – 00:42:41

to be an expert on the travel industry or the medical goods industry or the

00:42:41 – 00:42:47

whatever industry after pay is the lay by industry, the fake lay by industry, the

00:42:47 – 00:42:51

fake credit industry. I owe the mining industry or the deal the telecoms

00:42:51 – 00:42:57

industry. I don’t need to be an expert in these things because Tony’s figured out

00:42:57 – 00:43:04

a way to get the numbers to tell that Storey and we waken get those numbers

00:43:04 – 00:43:08

from a variety of different sources. We’re talking about the data services in a

00:43:08 – 00:43:14

minute, but it enables us to use the numbers and the different scores and

00:43:14 – 00:43:19

ratings they’re rather than other services. Give that particular stock to get an

00:43:19 – 00:43:25

overview off its current financial and management health and the predicted

00:43:25 – 00:43:31

future financial and other performance aspects of the business from people who

00:43:31 – 00:43:36

are experts. Analysts who do study these industries, study these businesses

00:43:36 – 00:43:41

and hopefully have a good idea of what’s going on. Labour’s is Tio gather a

00:43:41 – 00:43:47

summary off number of different kinds of data and put it into a little framework

00:43:47 – 00:43:53

and spits out a score. A thie end it za brilliant piece of condensation. I always

00:43:53 – 00:43:57

say it’s Tony’s E equals M. C. Squared. He looked at all of this complex stuff

00:43:57 – 00:44:04

, and he condensed it down. 20 questions and ah, star at the end. So nobody

00:44:04 – 00:44:08

to blow too much smoke up your ass, Tony. But I think it’s I think you deserve

00:44:08 – 00:44:13

a Nobel Prize for it. I’m putting you for that with submit you to be the Pope

00:44:13 – 00:44:18

and to get a Nobel Prize next year for this, and the other good thing about it is

00:44:18 – 00:44:24

, you will say, Look, this is it’s a guideline. It’s not a rule or as I’ve been

00:44:24 – 00:44:30

saying it. Za tool. Not a religion. The checklist. Yeah, it’s a framework. You

00:44:30 – 00:44:36

get guides US guides us. And there are times when you are Now anyone using

00:44:36 – 00:44:39

Khun decide they’re going to make exceptions to the rule. It’s to help us invest

00:44:39 – 00:44:43

. But it’s not a religion. You’re not going to go. You’re not going to spend

00:44:43 – 00:44:48

eternity and hellfire and damnation. If you modify it, change it however you

00:44:48 – 00:44:53

want. But I would cheque with Tony before you change. It’s just up to me.

00:44:53 – 00:44:57

There may be good reasons why he’s got it the way it is. Well, I think that’s a

00:44:57 – 00:45:01

good point. But I do see the checklist is being in an evolutionary process. It’s

00:45:01 – 00:45:05

not setting cement. I’m hoping that some of our listeners might come back in

00:45:05 – 00:45:09

time and say, Look, I’ve got better returns And you I did this and that and we

00:45:09 – 00:45:13

can compare notes overall through our Westerners and come up with a better

00:45:13 – 00:45:18

checklist. I might change it going forward myself. That’s that’s how it evolved

00:45:18 – 00:45:24

to where it is now. Yeah, but yeah, you’re right. Towards the end of my

00:45:24 – 00:45:28

career, probably second half of my career. I got heavily involved in data back

00:45:28 – 00:45:32

when it was sort of very early on before big data was a thing before Moneyball

00:45:32 – 00:45:37

was written. All that kind of stuff so worked in loyalty programmes. I was a

00:45:37 – 00:45:42

database marketing expert, ran a direct marketing company, orchestrate direct

00:45:42 – 00:45:49

marketing retailer Esso. I had lot to do with data, so that kind of looking for

00:45:49 – 00:45:53

the storey and the numbers really appealed to me on when it came to investing

00:45:53 – 00:45:58

and kind of also backs up one of the things that Buffett said, he said, Hey

00:45:58 – 00:46:02

thinks it’s being the real advantage for him living in Omaha on not Wall Street,

00:46:02 – 00:46:07

because he’s not swayed by what people say. He swayed by the numbers and

00:46:07 – 00:46:12

based on discussions we’ve had recently, CEOs are often chief belief officers

00:46:12 – 00:46:16

or chief preach officers. They’re out there to convince people that their

00:46:16 – 00:46:21

companies great going to last forever and keep growing but way have to kind

00:46:21 – 00:46:25

of switch off that noise and look at the facts underneath. Well, one of the

00:46:25 – 00:46:30

difficult things, obviously, for people with investing is it sze very emotional

00:46:30 – 00:46:36

in good times and in bad times for different reasons, and human beings air

00:46:36 – 00:46:43

driven by emotions. And and it seems to me that a lot of the mistakes that

00:46:43 – 00:46:48

people make with investing Certainly this is my case in the few dabbles that

00:46:48 – 00:46:52

I’ve had over the decades before meeting you. We’re based on emotion. Well,

00:46:52 – 00:46:57

I like this guy, and this is a friend of mine’s company or I like this storey or are

00:46:57 – 00:47:01

like this product or I don’t want to miss out. Everything’s going up. I should

00:47:01 – 00:47:06

get on. I don’t want to be the one idiot who missed out on this thing or oh my

00:47:06 – 00:47:09

God, everything’s falling off a cliff. I better sell everything immediately or I’m

00:47:09 – 00:47:14

going toe. Everyone is going to get into zero. I’m going to lose everything.

00:47:14 – 00:47:20

And the thing about the checklist is it gives us relatively simple once you get

00:47:20 – 00:47:23

your head around it and there’s a learning curve there. I think it took me 6 to

00:47:23 – 00:47:30

12 months to feel comfortable ish with it, but it’s a set of guidelines, a set of

00:47:30 – 00:47:34

rules that takes the emotion out of it. The score is either positive or its negative

00:47:34 – 00:47:39

. That’s it doesn’t matter. What’s going on doesn’t matter if it’s a bull market or

00:47:39 – 00:47:43

a bear market doesn’t matter if the sky is falling or the roads are paved with

00:47:43 – 00:47:49

gold. There’s there’s a score and the score is the scores. The score doesn’t

00:47:49 – 00:47:54

matter what’s going on. All I need to do is pull the numbers, look at the score

00:47:54 – 00:47:58

and that tells me what I need to know. And it just allow enables me to go.

00:47:58 – 00:48:02

Okay, Well, as long as you believe in the checklist and you believe in the

00:48:02 – 00:48:07

framework and we believe in you and I have it on good authority from your

00:48:07 – 00:48:13

wife that you’re actually not the Messiah, you’re just a very naughty boy. But I

00:48:13 – 00:48:18

think that’s the problem for brain new people. Listening to this is you unlike

00:48:18 – 00:48:22

may. I mean, they don’t know either of us. I’ve known you for over a decade,

00:48:22 – 00:48:28

and I’ve been to several of your houses in different parts of the world in

00:48:28 – 00:48:34

different times. I know your wife very well. I know your daughter very well.

00:48:34 – 00:48:38

I think I know you pretty well. Even you’re the world’s greatest con men

00:48:38 – 00:48:46

playing a really, really long con on May or you’re the real deal. And I tend to

00:48:46 – 00:48:49

think you’re the real deal. If I was a good comment, would not try and con

00:48:49 – 00:48:53

someone with some money. Well, yeah, You’ve just been, like funding my

00:48:53 – 00:48:58

projects, getting money out of my project. So you’re exactly a long term bad

00:48:58 – 00:49:07

con man. Was s o like, maybe on a con man. Yeah, well, yeah, well, you

00:49:07 – 00:49:13

wouldn’t be the first person to say that. And so, like, for people, listen to this

00:49:13 – 00:49:16

for the first time. Look, you don’t know me. You don’t know Tony. Like,

00:49:16 – 00:49:19

why should I listen to this guy? Well, listen, we’ve got we’ve got a lot of

00:49:19 – 00:49:22

people have been listening to show now for over a year, you can listen to them

00:49:22 – 00:49:27

and read their testimonials. And some of them have been on this show. We’ve

00:49:27 – 00:49:31

had them honours guests, and they’re very 60. A lot of very successful people

00:49:31 – 00:49:34

in their own right. And they can they can back it up a cz. Well, so we

00:49:34 – 00:49:38

understand that. Why the hell should I trust you guys? But the point is, once

00:49:38 – 00:49:45

you do trust Tony and then you trust the checklist, it removes that emotion and

00:49:45 – 00:49:49

panic and fear from the scenario, but he may not be there today, but keep

00:49:49 – 00:49:53

listening. Listen to enough episodes and you get a sense for yourself, I guess

00:49:53 – 00:49:57

is to whether or not you think Tony’s full of shared or he actually knows what

00:49:57 – 00:50:01

he’s talking about. Thie. Other thing. I’m sorry. I’m going to be the anti CEO

00:50:01 – 00:50:06

here. Don’t trust us. That’s why we’re running your portfolio ourselves on the

00:50:06 – 00:50:12

on the checklist on our website when we get enough runs on the board. Look

00:50:12 – 00:50:17

at that if you want. If you want to follow us and follow along, doing on paper

00:50:17 – 00:50:22

for a while. Andi, just when you get comfortable and Khun trust us based on

00:50:22 – 00:50:27

our results, then you go for it. Yeah, if you want. If you are sceptical person,

00:50:27 – 00:50:30

that’s fine. Be sceptical as long as you want. Way went on. We’re not in any

00:50:30 – 00:50:36

hurry. You’re going to look at our portfolio right now, which we started on the

00:50:36 – 00:50:40

second of September. The public portfolio. Of course, it right now in March

00:50:40 – 00:50:46

of 2010 years way underwater like everything else is, but we’re not as far

00:50:46 – 00:50:51

underwater as Thie sexes. as the indexes. And of course, that’s our job is to

00:50:51 – 00:50:55

beat the index. So when when things are going up, we want to go up better

00:50:55 – 00:50:58

than the index. When things are going down, we want to go down less than

00:50:58 – 00:51:04

the index. And so far, that’s what we were doing a half until January or early

00:51:04 – 00:51:10

February, we were performing much better than the index going up. Now we

00:51:10 – 00:51:16

have dropped less than the index. But yes, this isn’t This isn’t magic. Thie

00:51:16 – 00:51:22

world is in a global market correction. We’re going to get swept up in that, but

00:51:22 – 00:51:27

because they were in the middle of a correction, stocks are getting very, very

00:51:27 – 00:51:32

cheap. And right now we’re planning what we’re going to be doing when the

00:51:32 – 00:51:37

inevitable turnaround comes and the market starts toe pick back up again

00:51:37 – 00:51:44

because we should talk a little bit about that. You know the advantages or why

00:51:44 – 00:51:49

a correction is actually a positive thing from an investment perspective. Yeah,

00:51:49 – 00:51:54

it is. I mean, people say, you know, bye share and hold it for life, and that

00:51:54 – 00:51:57

will definitely work for people, and I’m not going to argue against that, but I

00:51:57 – 00:52:02

can get better returns in that because our process tells us to go to cash at some

00:52:02 – 00:52:08

stages. And if we’re in cash when the market is dropping, then we’re goingto

00:52:08 – 00:52:12

outperform the market. Albeit we still might be negative. But the benefit of

00:52:12 – 00:52:16

that is when the market turns around, we have a lot to deploy, and we get a

00:52:16 – 00:52:21

bigger bang for our buck than the market. We’ll get it. Give us if we were just

00:52:21 – 00:52:25

passively invested the whole time. Warren Buffett’s gonna saying, Be fearful

00:52:25 – 00:52:29

when others are greedy and greedy when others are fearful and at times like

00:52:29 – 00:52:34

this. And while the market bottoms out, most particularly of those nube

00:52:34 – 00:52:38

investors that we talked about before who don’t have a plan done ever system

00:52:38 – 00:52:44

will be fearful still, even if the market starts to pick back up again because

00:52:44 – 00:52:49

they would be worried that it’s what’s known as a dead cat bounce. But you’ve

00:52:49 – 00:52:53

got a system for knowing when it’s relatively safe to buy back in, and so we’ll

00:52:53 – 00:52:58

get in when the market is still relatively low and ride it all the way back up

00:52:58 – 00:53:04

again. Yeah, and with a bigger, bigger ability to invest that if we head of state

00:53:04 – 00:53:08

in the market the whole time? One other thing I want to cover before we get

00:53:08 – 00:53:12

offthe e introduction to the checklist stuff is the coffee shop analogy. When

00:53:12 – 00:53:16

you started using that and made a big difference to me and help me get my

00:53:16 – 00:53:22

head around it s o. Basically, you helped me understand the buying a stock in

00:53:22 – 00:53:26

the business is exactly the same as this. I was going to buy a small business

00:53:26 – 00:53:30

like a local coffee shop. Do you want to sort of walk through the coffee shop

00:53:30 – 00:53:35

analogy a bit? Yeah, sure. So I think one of the problems with the financial

00:53:35 – 00:53:39

services industry is that if people make it Mork complex, they know they can

00:53:39 – 00:53:44

charge a bigger fees to the mystify it for you s. So I think that’s a real problem

00:53:44 – 00:53:48

with it with our industry. But the concepts overall, a fairly simple and the

00:53:48 – 00:53:53

trick is to reduce a complex set of reports down to something which we can

00:53:53 – 00:53:58

readily understand and probably the easiest business to understand. There’s a

00:53:58 – 00:54:02

simple shop down the road, so we use a as I was talking to you now I’m

00:54:02 – 00:54:05

looking out the window of the coffee shop. So you know, I used the coffee

00:54:05 – 00:54:10

shop analysis and we all know how they run is a business. I have to either buy

00:54:10 – 00:54:15

or rent some space. I have to buy a cappuccino machine. I have to fit it out

00:54:15 – 00:54:21

with furniture, tables and chairs. And I have some stock I need to buy coffee

00:54:21 – 00:54:25

beans, maybe some muffins, etcetera. And I have customers who come in and

00:54:25 – 00:54:31

by things off me. So it’s a fairly simple, transactional business, but we can

00:54:31 – 00:54:34

hopefully reduce. Even The biggest complex business is down to those same

00:54:34 – 00:54:41

sorts of for processes I’ve got. I’ve got things I sell. I’ve got cost to do that.

00:54:41 – 00:54:46

And I’ve got to decide whether I want to buy that coffee shop or that big

00:54:46 – 00:54:52

business based on the metrics that we’re the available data. Yeah, and it really

00:54:52 – 00:54:58

helps me take things that potentially fairly abstract. We talk about P ratios and

00:54:58 – 00:55:03

price to cash ratios and earnings per share and future earnings per share and all

00:55:03 – 00:55:06

these sorts of things. But when I think of them in terms of a coffee shop and I

00:55:06 – 00:55:11

guess that’s the other thing really, thing that isn’t necessarily obvious or self

00:55:11 – 00:55:17

evident to people that are new to this is that when a Warren Buffett or Charlie

00:55:17 – 00:55:21

Munger or Tony Kynaston is buying a stock in a company, you are actually

00:55:21 – 00:55:26

literally thinking of yourselves is getting into business with a visit with the

00:55:26 – 00:55:33

business. With a company, you’re looking at it not as an abstract figure on or a

00:55:33 – 00:55:39

dot on a graph you’re going. Is this business making money? How is it

00:55:39 – 00:55:42

performing? What I think that’s worth? So when we bring that back to the

00:55:42 – 00:55:48

coffee shop analogy is like saying OK, well, they’re going looking at buying

00:55:48 – 00:55:54

this coffee shop. They say it’s the price is $100,000. Well, what’s it got in

00:55:54 – 00:56:00

terms of its assets? How much money does it make? What? How long will it

00:56:00 – 00:56:07

take for the business to return enough profit to neutralise my price, my

00:56:07 – 00:56:11

purchase price of the business and what I think the chances are that it’s going to

00:56:11 – 00:56:16

continue or that its revenue is going to grow over the next few years. How

00:56:16 – 00:56:21

long, though I think the business is going to grow for if I invest $100,000 in it

00:56:21 – 00:56:26

now you know how long is not only going to take Teo, pay me back that price

00:56:26 – 00:56:30

? And what is the risk associated with the length of time that I have two waiters

00:56:30 – 00:56:35

of one years at five years is a 10 years. Obviously, the longer it takes for it to

00:56:35 – 00:56:39

return my initial purchase price, the more risk is involved because anything

00:56:39 – 00:56:45

could happen. A Corona virus could hit and everything could go to shit. How

00:56:45 – 00:56:49

long do I think it’s going to return profits over and above that and therefore

00:56:49 – 00:56:54

make me multiple times my investment thes air, Easy enough concepts for me

00:56:54 – 00:56:59

to understand when it comes to ah, little coffee shop. And so what we will do

00:56:59 – 00:57:04

is we go through explaining the checklist is try and explain each of the data

00:57:04 – 00:57:10

points and this scoring off those data points as if it was a little coffee shop on it

00:57:10 – 00:57:15

just really helped me get my head around the data points and why they’re

00:57:15 – 00:57:20

important and what they stand for. And I think that I could be wrong, but I

00:57:20 – 00:57:24

think the penny dropped with you when we started to talk about how long will

00:57:24 – 00:57:27

it take me to get my money back? If I’d buy that coffee shop of this price?

00:57:27 – 00:57:31

Yeah, absolutely. Yeah, that brought in the whole discussion about risk. The

00:57:31 – 00:57:35

longer it takes, the more risk there is. And therefore, I should try and get it

00:57:35 – 00:57:39

paid back quicker and sort of, I think, was a bit of an eye opener in terms of

00:57:39 – 00:57:43

why we’re focusing on value in our investments. Yeah, absolutely No.

00:57:43 – 00:57:48

Deserve a lightbulb went off when you first put it in that that terminology and I

00:57:48 – 00:57:53

really started to understand more about what was going on. Thinking of these

00:57:53 – 00:57:58

things Is this really a business that, like, if you look at the difference between

00:57:58 – 00:58:04

ah, no, a gold miner, let’s say in an after PE if you were Warren Buffett and

00:58:04 – 00:58:07

you had a billion dollars and they said, Hey, you want to come in and be a

00:58:07 – 00:58:11

partner in the business as it is right now, what I really want, You know what I

00:58:11 – 00:58:14

want to get in when I want to throw a billion dollars is what I really want to

00:58:14 – 00:58:20

become partners with these guys looking at the business at that level, Do I

00:58:20 – 00:58:23

really believe in the prospects of this company? And then it’s going to be

00:58:23 – 00:58:27

profitable long term, etcetera, etcetera. And as I was explaining to one of my

00:58:27 – 00:58:31

19 year old boys yesterday when he was talking about whether or not he should

00:58:31 – 00:58:34

have bought into Bitcoin last week, one of the other things you’ve helped me

00:58:34 – 00:58:38

understand is the difference between investing in gambling. Do you want to

00:58:38 – 00:58:45

explain how you would define those, too? Yeah, way are buying pieces of

00:58:45 – 00:58:49

companies so the companies can be analysed. We can work out what we want

00:58:49 – 00:58:53

to pay for those companies, what we think those companies of worth, and we

00:58:53 – 00:58:56

can go along for the ride with management if we invest in them. That’s

00:58:56 – 00:59:01

investing. If we have no way of valuing something if we have no

00:59:01 – 00:59:05

understanding of it, if we have no knowledge of the industry it operates on or

00:59:05 – 00:59:09

what drives the price up and down, then where they were gambling, that’s

00:59:09 – 00:59:15

that’s the basic difference. And generally I mean, there are. There are if you

00:59:15 – 00:59:20

look, if you look at the POW rich list or a pharmacist. Whatever it is now,

00:59:20 – 00:59:23

there aren’t any. Maybe, except for David Walsh in Tasmania. There aren’t

00:59:23 – 00:59:27

any billionaires on that list to a gamblers or have got their money through

00:59:27 – 00:59:29

gambling. There are plenty of billionaires on that list. They got it through

00:59:29 – 00:59:33

investing either directly and companies are on on the share market or in real

00:59:33 – 00:59:41

estate. So you’ve got. If you can’t, if you can’t articulate the operation or the

00:59:41 – 00:59:46

company you’re buying a piece off, and whether or not it’s a good price that

00:59:46 – 00:59:50

you’re paying for it, then it’s speculation it’s gambling. Yeah, I mean, it’s

00:59:50 – 00:59:55

lucky. If I mean, if your only rational is, I think it’s going to go up or I think

00:59:55 – 01:00:00

it’s going to go down. That’s not There’s no science behind that. There’s no

01:00:00 – 01:00:04

intelligence behind that. It’s It’s a guess, which becomes down to a lock,

01:00:04 – 01:00:08

which is which is gambling. Yeah, and sometimes you get it right. But a lot

01:00:08 – 01:00:13

of times you get it wrong. Yeah, that’s exactly what it is. It’s speculation. It’s

01:00:13 – 01:00:17

what you’re trying to do in those cases is by something and then sell it to the

01:00:17 – 01:00:22

greater fool. So part of that part of that saying is acknowledging the fact that

01:00:22 – 01:00:25

you’re a fool in the first place, and then the other one is hoping that there’s

01:00:25 – 01:00:28

going to be a greater fool down. The track will bite off you for a higher price.

01:00:28 – 01:00:32

Sometimes you’re the greater fool. And the problem with luck is we know

01:00:32 – 01:00:39

from coin toss experiments that it sze basically 50 50. So luck is not a long

01:00:39 – 01:00:42

days to say this When I was a marketing consultant writing marketing

01:00:42 – 01:00:47

strategies for clients, luck is not a long term strategy for success. Let’s put

01:00:47 – 01:00:52

some sides behind what you’re doing and why. Just throwing shit on the wall

01:00:52 – 01:00:57

and hoping some of it sticks is not a really great strategy. Buffett has a good a

01:00:57 – 01:01:01

prism for what we’re talking about, he says. If you’re going to get the poker

01:01:01 – 01:01:05

table playing poker and you look around the table and you can’t tell who the

01:01:05 – 01:01:10

patsy is, you’re the patsy on his other One is a rising tide, my carrier ships,

01:01:10 – 01:01:14

but it’s only when the tide goes out that you get to see who’s been swimming

01:01:14 – 01:01:18

naked. I like that one toe, Yeah, which were doing at the moment. The rising

01:01:18 – 01:01:23

tide stopped in about January. Yeah, right. Well, let’s leave Episode one of

01:01:23 – 01:01:27

the reboot there. I think Tony and our next episode will start to get into the

01:01:27 – 01:01:32

detail off. The checklist will explain it. Step by step will explain the different

01:01:32 – 01:01:38

places you can get data from, and we’ll take people through the checklist

01:01:38 – 01:01:43

process. And again, As I said, if you wantto download if you like, we should

01:01:43 – 01:01:46

explain this to We have free episodes each week, and we have premium

01:01:46 – 01:01:50

episodes this week. The free episodes air for people are just checking it out.

01:01:50 – 01:01:54

Or maybe I don’t want to learn a little bit more about investing, but they’re not

01:01:54 – 01:02:00

really hard core seriously, not really. Teo dedicate a serious energy to be

01:02:00 – 01:02:04

coming successful investors for the people that want to be serious investors for

01:02:04 – 01:02:08

the hardcore people. That’s what our premium Siri’s is for. If you’re a

01:02:08 – 01:02:11

premium subscriber, you get the cheque list, and there’s extra newsletters and

01:02:11 – 01:02:17

videos and episodes. Extra episodes, longer episodes s O. You get a two week

01:02:17 – 01:02:23

free trial to become a to a V club member just got to our website cov podcast

01:02:23 – 01:02:27

dot com dot au u v By the way, if you haven’t worked out yet, stands for

01:02:27 – 01:02:33

quality and value, we’re looking at both quality and value when we’re working

01:02:33 – 01:02:37

out. What, whether or not we should buy Stop. So go to Cuba podcast dot

01:02:37 – 01:02:41

com There you look for the 40 day free trial thing You Khun, download

01:02:41 – 01:02:45

everything. Listen to a ll the premium episode seal the video’s everything’s

01:02:45 – 01:02:50

there for 14 days and you can decide whether or not you want Teo keep going

01:02:50 – 01:02:54

with it or not after that. So with that, just one more reminder. Don’t take

01:02:54 – 01:02:58

anything you heard on. This is financial advice. We’re not financial advisors is

01:02:58 – 01:03:03

for educational purposes only. And good luck out there. Stay safe, Wash your

01:03:03 – 01:03:11

hands and we’ll be back next week with next part part two off the reboot Or, as

01:03:11 – 01:03:18

I call it, podcast. Attention. All right, can. That was great

 

 

PLEASE NOTE:

IF YOU WANT TO GET THE MOST OUT OF THE SHOW & LISTEN TO A MULTI-MILLIONAIRE INVESTOR TALK TO YOU ABOUT HOW HE THINKS ABOUT STOCKS FOR A FULL HOUR EVERY WEEK….

Sign Up or Login to listen to our QAV Club episodes inside the browser.

If you’d like a chance to win a prize, write a funny or insightful review on iTunes. Click here to go straight to our iTunes page.

Related

QAV #348 – John Winters, Superhero

John Winters is the CEO of Superhero, the latest digital broking app to hit the Australian market, which offers $5 flat rate trades. A few of our listeners were concerned about how Superhero “owns” the stock that you buy through their app, so we invited John on to explain how it works and why we should all relax.

QAV 347 – Screaming Buy

On today’s show: AJO quits. Unemployment in Oz at record levels. What does Tony do when he finds a “screaming buy” but can’t understand the underlying rational for the business? Calculating the SSG 3PTL sell price. Net Operating Cashflow vs Net Equity.

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *

Free Weekly Newsletter

Would you like a free copy of our weekly newsletter?