Transcript for QAV #431

QAV 431 Club

Cameron 00:12

Wel­come back to QAV, TK, Episode#431. You’re in week five of lock­down and I’m in week one of lock­down, star­ing down the bar­rel of prob­a­bly five or more weeks up here in Bris­bane.

Tony  00:28

Well it’s good, QLD is only five weeks behind now, it used to be ten years behind.

Cameron 00:35

How are you hold­ing up?

Tony  00:37

Yes, good. I mean there’s not much change to life but

Cameron 00:42

You’re wear­ing a shirt made out of croc­o­dile skin by the looks of it today– Did you catch and skin that croc your­self [unin­tel­li­gi­ble 00:51].

Tony  00:53

Well it’s not leather, it’s mate­r­i­al, it’s just a print.

Cameron 00:56

just a croc­o­dile print?

Tony  00:59

Yes.

Cameron 01:00

Good stuff. Well, we got a lot to talk about today in the mar­ket, a lot of news, a lot of things going on. I want to start with a QAV rank­ings. Thank you to every­one from QAV club that’s gone up to our QAV rank­ings spread­sheet been throw­ing up their results there. I have to update mine and the QAV ones for last month but there’s some real­ly good results trick­ling in from peo­ple that have been around for a while. 43%, 45% since incep­tion, and I want to par­tic­u­lar­ly do a give a shout out to Troy who post­ed in our Face­book group, I think last week that he’s had a 54.61% return for the last finan­cial year.

 

Tony  01:50

Fan­tas­tic.

Cameron 01:51

Sen­sa­tion­al results. So con­grat­u­la­tions, Troy. Con­grat­u­la­tions to every­one who’s post­ing their results on their like in terms of last finan­cial year Dar­ryl post­ed 51.87%…

Tony  02:08

17% for the last month as well.

Cameron 02:11

Yes, so good work, guys. Big news for After­pay. Today they’re being sold.

Tony  02:24

Is that going ahead? Have you heard of it’s been accept­ed or nor or is it just an offer at this stage?

Cameron 02:32

Accord­ing to the After­pay board of.… what­ev­er, approved it, endorsed it, accept­ed it, After­pay’s board unan­i­mous­ly endorsed the deal in the absence of a bet­ter offer say­ing, ‘an inde­pen­dent expert con­clud­ed it was in the best inter­est of share­hold­ers.’

Tony  02:52

The board of After­pay had gone.….. [laugh­ter]

Cameron 02:57

Yes

Tony  02:57

[unin­tel­li­gi­ble 03:00] just launched a com­pet­ing prod­uct. Every­one’s crowd­ing the mar­ket. Reg­u­la­tors are hav­ing a look at it. [laugh­ter]

Cameron 03:07

They’ve prob­a­bly been— They’re being acquired by square found­ed by the Twit­ter guys, Dorsey, etc. They’ve prob­a­bly been turn­ing down their offer for the last six months and telling him to go to hell and then they are like, ‘Got an offer… Still on the table’. Any­way, so I think the arti­cle says that the offer is about a 30% pre­mi­um to what the share price was trad­ing at. The square offer of $126.21 per After­pay share rep­re­sents about a 30% pre­mi­um to the stock­’s clos­ing price on Fri­day, which is great news for After­pay share­hold­ers unless they bought it. Six months ago when it was trad­ing at around $160 in which case they’re nev­er going to see that mon­ey again. So it kind of depends I guess when you bought it.

Tony  04:14

Yes, if you bought after COVID when that was 16 bucks a share or some­thing you’ve done real­ly well. Good luck to them.

Cameron 04:25

What else is going on in the news this week? I want to thank Per­sian mas­ter who­ev­er he or she may be for review of the pod­cast they put up an Apple, appre­ci­ate that. I’ve been ask­ing peo­ple late­ly to give us more Apple reviews and I appre­ci­ate Per­sian mas­ter tak­ing the time. MML Tony, what the hell hap­pened to it? What the hell MML. That’s what I want to ask. MML just sort of dive bombed on this last week. What hap­pened there? Because I read a report in the morn­ing that said, they’d issued sort of a pre­lim­i­nary results, and they were say­ing, as I read, it all sound­ed pret­ty pos­i­tive and upbeat and then the share price takes like 30%.

Tony  05:12

So MML, SLR (Sil­ver Lake Resources) and Aure­lia AMI also, all had quar­ter­ly reports com­ing out in the last week or so and they all they all pre­cip­i­tat­ed the share price decline, because of them, and for dif­fer­ent rea­sons, I guess, but it’s a com­mon­al­i­ty. The Medusa one was because their cost went up for the quar­ter. So Medusa.

So, there’s a thing called ‘All in Sus­tain­able Costs’ and it’s kind of a bench­mark way of mea­sur­ing costs if you’re a min­er, par­tic­u­lar­ly a gold min­er and basi­cal­ly, it’s like cost of goods sold, if you’re own­ing an indus­tri­al com­pa­ny or a fac­to­ry or some­thing like that. But it does add in things like explo­ration costs and it does add in things like cor­po­rate over­head. So, it’s try­ing to give you an over­all pic­ture of costs, and to have one bench­mark to com­pare minds with and it’s been a bit of a his­to­ry to get to this stage.

So way back when, like 20 years ago, min­ers were always judged by their cash cost, which was just what they spent and then peo­ple said, hang on, if you’re doing lots of explo­ration, the cash cost might be mis­lead­ing, because you’re just look­ing at the costs that are asso­ci­at­ed with min­ing, that you’re not explor­ing. If you’re look­ing at if you if you have to close the min­ers reme­di­a­tion costs, there’s a whole lot of things which are exclud­ed by just the cash costs of min­ing the oil. So the min­ing asso­ci­a­tion got togeth­er and came up with a sort of com­bined met­ric for it and that’s evolved into all in sus­tain­able cost, which is the basic mea­sure. The issue for Medusa was they came out with a quar­ter­ly report say­ing they’re all in sus­tain­able costs was I think.…

 

Cameron 07:14

It went up to US $1,594 per ounce up from $1,304 per ounce in March 2021.

Tony  07:26

Thanks for find­ing those fig­ures quick­ly and if you think about it, the gold price is about 1800 US dol­lars per ounce. So at $1600 US per ounce for the last quar­ter, they’re clos­ing in on breakeven, if not a loss sit­u­a­tion for their mind. So that was the ini­tial rea­son for the sell­off. How­ev­er, they’ve also in their call the announce­ment fore­cast their end of year results which are get­ting close to being final­ized and the on sus­tain­able costs for the year on aver­age, we’re still down around 1300, which is pret­ty stan­dard for the gold min­ing indus­try. Most min­ers are in that sort of 12 to 1400 range. Fur­ther analy­sis looks like for Medusa that they’re doing some work on the mine.

So up until recent­ly, they’ve been a– what’s called a Shaft Mine. So you know, you get out a lift, an ele­va­tor to get to the mine face.

Cameron 08:24

He’s talk­ing about shaft, shut your mouth.

Tony  08:31

And now they’re putting a ramp in. So, they’re putting out what’s called an Incline and so they can dri­ve trucks up and down to the mine phase, which is expen­sive thing to do, which is what’s push their costs up because I start­ed work on it and it’s gen­er­al­ly lumped in with explo­ration costs, because as they drill to do that, they might find some more gold.

So, there’s a rea­son behind why their costs are up. But as often hap­pens with quar­ter­ly reports, the mar­ket does­n’t stop and ask for a rea­son. It just jumps. Let’s sell the stock and that’s one of the things that you know, Buf­fet­t’s called out over the years and oth­er peo­ple are call­ing out over the years is, we should­n’t have quar­ter­ly reports, they just focus­ing every­one’s atten­tion on the short term, you should be look­ing at the long term and this is a clas­sic case.

Medusa are try­ing to improve their long term prospects, try­ing to make the mine more effi­cient, try­ing to get at a low­er ore body by get­ting trucks down into the deep­est part of the mine and not just guys in hats with jack­ham­mers going down an ele­va­tor. So this is a clas­sic case where short terms trumped long term. That’s that. There was a cou­ple of oth­er things with the oth­er min­ers. So Sil­ver Lake, and the Aure­lia both had good quar­ter­ly reports but they called out the fact that they were start­ing to see infla­tion in the min­ing indus­try.

So con­trac­tors were cost­ing more to hire, oth­er ser­vice providers who are putting their fees up, and are also find­ing it dif­fi­cult to man­age the COVID sit­u­a­tion with fly-in and fly-out work­ers, for exam­ple. So there’s there was good results, but then they kind of come with caveats and so again, peo­ple are like, in any sign of an issue jump­ing and dump­ing the stock. That leaves us with a sort of deci­sion to make, what do we do? So Medusa Min­ing was in our dum­my port­fo­lio, it came back to the price that we paid for it and I decid­ed to sell and to buy some­thing else on our check­list and that kind of caught peo­ple by sur­prise, a cou­ple of things. It’s real­ly, on a case by case deci­sion.

So, if we had bought Medusa for low­er price, it’s still way above its sell price. If you weren’t about to lose mon­ey on it, then I’d say keep it. I would wait before buy­ing it because as we’ve talked about before, I don’t like buy­ing things that are in a short term decline and that’s where it stands at the cur­rent time for Medusa, it’s the share prices retreat­ed, or I will wait to see turn the cor­ner. So we know it with what we hope with through the bot­tom. So that’s the rea­son for rotat­ing it in our dum­my port­fo­lio and that’s what we call rule one, ‘don’t lose mon­ey’ and the log­ic behind that is, if the share gets back to what I paid for it, then I pre­fer to sell it and buy some­thing else and yes, I might lose out hypo­thet­i­cal­ly, if the share price turns around from there.

But I don’t want to lose mon­ey, which I poten­tial­ly could do, or could risk if I held on to it and the share price kept going down. So there’s two risks there:

• One is that you miss out on the upside, because you sold out at breakeven.

• The oth­er one is that you save the risk of los­ing mon­ey because it keeps going down.

Essen­tial­ly as cau­tion, noth­ing for that insur­ance except for the trans­ac­tion costs, I guess, because by sell­ing at breakeven, we haven’t incurred any cap­i­tal gains tax lia­bil­i­ty and we’re still exposed to upside because we bought anoth­er stock with the pro­ceeds. So, I’d expect that stock to go up any­way, because it’s high up on our check­list.

So, I kind of see it as being almost a free insur­ance on not los­ing mon­ey. That’s why I sell and it comes back to breakeven. So for the peo­ple out there who are ques­tion­ing why we’re sell­ing Medusa, because it was at breakeven, and I did­n’t want to take the risk of los­ing mon­ey on it. Now it can go both ways, we’ve had cas­es before, like we sold Ramelius resources out of the dum­my port­fo­lio last year, when it got back to our buy price, I vot­ed rule one, and then Ramelius prompt­ly turned around and rock­et­ed up.

So it can’t go against you. But we would have bought some­thing with the pro­ceeds of sell­ing Ramelius and that would have done well too because, we had a good year last year. So, I like to pro­tect my down­side and speak­ing of Aure­lia Met­als, which is one which I have held through my breakeven point, it’s still been going down. So that was one where I thought G is the mar­ket over sell­ing this, it’s back to what I paid for it. It’s way above its sell price on our three point trend­line. I’m going to keep it and it’s just cost you cost me mon­ey since then. So I kind of keep it in the port­fo­lio now as a reminder to me to [laugh­ter] next time it occurs.

Cameron 13:07

Well, I was going to ask you with MML I bought it on the 11th of June at its all-time peak of 94 cents and then it dropped with­in like a week down to 81 cents, dropped the fur­ther way down at 80 cents and I held on to it because it was way above its 3 point trend­line then it shot back up to 93, 94 cents on the 19th of July and I was say­ing to Tay­lor, ‘See that’s why you hold’ and then I sold it a week lat­er at 81 and a half cents again, and I dropped back down– I should have— if it drops so quick­ly after we bought it we maybe should have sold it faster just gone screw the 3 point trend line just you buy it and it drops just get get out.

Tony  13:46

Yes, I think that’s a safer rule. In which case you would have tak­en a 10% loss which you can use for cap­i­tal gains in the future but you are cov­er­ing that down­side that, it’s not just a 10% loss that can keep going. You know, to be hon­est, like I just gave up bit of a thumb­nail sketch on quar­ter­ly reports for those three gold com­pa­nies, but I don’t want to get into hav­ing to know so much about gold min­ing that I need to ana­lyze their quar­ter­ly reports and make an informed deci­sion about the share price drop, is that a good or a bad thing? You know, I’m focused on our check­list met­rics, and what to do from a port­fo­lio point of view, rather than try­ing to work out whether the mar­kets right or wrong about this par­tic­u­lar gold stock.

Cameron 15:30

So, Mark, and a num­ber of peo­ple asked us, with ref­er­ence to MML, how does rule one over­ride the 3 point trend­line? If I under­stand what you’re say­ing, It’s, if you buy a stock, and then its share price takes a sig­nif­i­cant back­ward slide by 5 or 10%?

Tony  16:06

Well below what we paid for it.

Cameron 16:08

Any­thing…

Tony  16:09

Back to what we paid for it.

Cameron 16:10

Yes, if it goes down 1%?

Tony  16:15

Well, no, because often­times, we’ll buy some­thing and it might drop 1%, because our buy­ing may force the price up by 1%. So that often hap­pens as [crosstalk] [laugh­ter] Well you just may have bought on the wrong day and it can be a 1% swing.

Cameron 16:31

Well, the Cameron Curse says that, ‘When­ev­er I buy some­thing, it imme­di­ate­ly goes down’. So, I’ll be sell­ing every­thing.

Tony  16:40

Well, I feel like I’ve got a curse on me because like we did a pull up part on Medusa min­ing like a week ago or some­thing or two weeks ago.

Cameron 16:45

Yes, you were talk­ing about how great it was on Phil Mus­catel­lo’s show.

Tony  16:48

Yes, that’s right. So that hap­pens too.

Cameron 16:53

And you were doing MIL, is it was your oth­er one you were doing that had the empha­sis of mat­ter. Has­n’t been a good week. [crosstalk] If you are buy some­thing, just shows that you’re human, like all of us, Tony I like it. If you buy some­thing and it drops by x per­cent­age.

Tony  17:20

If you bought some­thing and the next day, it was 1% Low­er, I would­n’t sell because I think that’s just sort of nor­mal mar­ket volatil­i­ty. But if you bought it and it went down, say 5%, def­i­nite­ly by 10%, I’d be sell­ing out but the case I’m speak­ing of is, was Medusa min­ing where we bought it, it went up and it’s come back to the buy price, that’s much eas­i­er to put rules in place. [crosstalk] rule one.

Cameron 17:47

Yes, if you buy it and it goes up and it comes back to your buy price, sell it even if it’s above its 3 point sell line.

 

Tony  17:55

Cor­rect.

Cameron 17:57

If you buy some­thing and it imme­di­ate­ly drops by 5 to 10%, sell it?

Tony  18:03

Sell it.

Cameron 18:05

And if you buy some­thing and it’s been going up for a good peri­od of time then the 3 point sell line is our bench­mark for when we sell.

Tony  18:15

Cor­rect.

Cameron 18:18

If nei­ther of the first two con­di­tions have been met con­di­tion three holds

Tony  18:28

I’ll just spend days read­ing con­tracts that’s like close 13.1 [crosstalk] [laugh­ter]

Cameron 18:35

Yes, I heard that. Well, that helps me. I hope that helps every­one else out there and I will update the Bible to reflect that word­ing for future ref­er­ence. I want to go check WWG now that I bought today and see how much it’s dropped since I bought it because I had to sell Humm today because Humm breached sell lied on Fri­day and then jumped up today after an hour after I sold it on the news of– it’s come back.

Tony  19:17

So not only is the Cameron Curse respon­si­ble for stocks going down. It’s like they go up after you’ve sold them. [laugh­ter]

Cameron 19:26

$39 bil­lion dol­lar acqui­si­tions hap­pen when I sell some­thing.

Tony  19:34

I’ve got a stock I want you to sell.

 

Cameron 19:37

Imag­ine if I’d sold After­pay and then that acqui­si­tion news came out that would be the real thing. WWG is up, that’s good. Now you want­ed to talk about oil last week Tony, but we did­n’t get time. Do you want to talk about oil still this week? I know you touched on it briefly last week real quick.

Tony  19:53

[crosstalk] When I raised it, it was get­ting down towards the com­mod­i­ty sell price but it’s back up, I think again into the mid-70s. So the sell price was about 66. So that’s not real­ly an issue so much at the moment. It was when last week because OPEC had a bit of a falling out and there was some dis­agree­ment about what the vol­ume tar­get should be and basi­cal­ly, OPEC and Rus­sia con­trol what the oil price does by how much buy into the mar­ket. It’s a car­tel. So there was some dis­agree­ment there.

Any­way, that’s now passed, and things have been smoothed over and the oil prices back up into the mid-70s. That’s good. But there’s been a cou­ple of devel­op­ments which are of inter­est. One is BHP have decid­ed to sell off their oil busi­ness. So that was inter­est­ing, I thought, and part­ly, they’re try­ing to assuage investors who want them to get out of fos­sil fuels.

 

So they’re out of coal, and now they’re get­ting out of oil. But that means some­one’s going to buy those oil assets and prob­a­bly get a good deal, because I don’t think BHP will be an inten­tion­al sell­er, they’ll be a moti­vat­ed sell­er, so they’ll prob­a­bly not get the best price. But any­way, we’ll see what hap­pens. I did think maybe Wood­side or San­tos might pick them up. But San­tos have now gone into a tie up with Oil Search, which is a com­pa­ny that’s not only our check­list, but San­tos is also has been a Papua New Guinea oil explor­er. I think they are refin­er but they cer­tain­ly take the crude oil out and sell it. So export is what I am look­ing for. But they’ve had prob­lems for a long time, either with PNG from sov­er­eign risk point of view, or just man­ag­ing, oper­at­ing in that kind of envi­ron­ment and it’s always been a real hit and mis­sile search.

So San­tos tying up with them as seen by the mar­ket as being a way of improv­ing the oper­a­tional capa­bil­i­ties of Oil Search and Oil Search cer­tain­ly does have lots of reserves.

So I think it’ll be a good thing for San­tos, which is a share that I own it’s been a check­list for a while. The inter­est­ing thing about the San­tos approach is that it’s a merg­er of equals. So it’ll have to be approved by share­hold­ers of both com­pa­nies and it’ll mean that— I think San­tos from mem­o­ry gets the major­i­ty stake in the com­bined or San­tos share­hold­ers get the major­i­ty stake in the com­bined com­pa­ny and San­tos his board and man­age­ment will take over and run it. The rea­son for that is, San­tos does­n’t have the PE pre­mi­um to go and make a script offer for all search and that will lead me to think a lot about what’s going on in the merg­ers and acqui­si­tions mar­ket at the moment, it’s start­ing to feel a bit like 1985,86 all over again.

There’s lots of m&a activ­i­ty and the sell the sale of After­pay is a clas­sic exam­ple of that and it gets dri­ven from time to time in the mar­ket gen­er­al­ly towards the end of a cycle a boom cycle and usu­al­ly because it’s fueled by debt, or high PEs and so both of those are hap­pen­ing in the mar­ket at the moment. There are the mar­ket PE is up and that means that a com­pa­ny that’s on a high PE which I’m sure square would be, it’s a tech dar­ling from the US, I don’t know what the PE for it, it’s prob­a­bly triple dig­it. That allows them to offer a script to buy out oth­er com­pa­nies at a much more attrac­tive basis, then pay­ing cash for the shares, because their scripters is basi­cal­ly over­val­ued.

So, you see this hap­pen­ing time and time again, at this stage in the mar­ket. Com­pa­nies who’ve got high PE ratio start tak­ing over com­pa­nies that have low­er PE ratios. Even though After­pay has a high one, and lever­ag­ing that dif­fer­ence in the PE ratio, which is more attrac­tive than pay­ing cash for shares. The oth­er way that they can do it is to get lots of bit which is pos­si­ble now because inter­est rates are low and I think the clas­sic exam­ple of that at the moment is the Boral takeover by sev­en group, which has basi­cal­ly hap­pened, sev­en have had to bor­row a lot of mon­ey to have the takeover go through because they weren’t real­ly try­ing to take over the com­pa­ny, you know, just try­ing to increase their share­hold­ing and more peo­ple then they thought sold into their offer, which was­n’t that great. It was­n’t much about what the share price had been his­tor­i­cal­ly.

And now sev­en have a lot of debt, which they’ll pay down because bor­row­er sell­ing assets includ­ing a US busi­ness and then they’ll return that cap­i­tal to share­hold­ers and now sev­en being the biggest share­hold­er we’ll get the major­i­ty share of that. But I think you know, there’s still poten­tial­ly have a fair bit of debt to deal with and that’s fine when inter­est rates are low, but when inter­est rates get start to rise again, we’ll see, which should have tak­en over experts who have been over lever­aged and we’ll also see that when inter­est rates start to rise, which will affect how OIP ratio stocks and PEs will drop and that will just stop takeover activ­i­ty from them.

So it will be inter­est­ing over the next prob­a­bly 1–3 years to see how all these merg­ers and acqui­si­tions fin­ish up and they can as they did in 87, when you had all the cor­po­rate raiders like Ron Brier­ley and Ade­laide Steamships and Alan Bonds, bor­row­ing heav­i­ly to buy out oth­er com­pa­nies, and then when inter­est rates start­ed to rise, they all went bank­rupt and that sort of threw the mar­ket into chaos. That may hap­pen again, may not but it may hap­pen again. So I think we’re start­ing to see the seed sign of that kind of play out by the end of this boom cycle. Not try­ing to fore­cast but I’m say­ing I’ve seen that before.

Cameron 26:06

Did I think this time it’s dif­fer­ent, Tony?

Tony  26:09

I do not know.

Cameron 26:11

FMG

Tony  26:14

I just want­ed to make a cou­ple of points. It’ll be inter­est­ing to see what hap­pens when they report and Rio has report­ed and has now come on to the check­list. Quite high up in our top scor­ers. I still got a QAV score of 0.58. So Rio Tin­to is anoth­er iron ore mine, which is a com­peti­tor for FMG.

Cameron 26:34

Sor­ry, while you’re on that, what’s your price to cash flow for Rio because mines like over 10. I saw a lot of peo­ple on Face­book say­ing it was on the check­list but on the score­card but for me the PCF is very high.

Tony  26:51

Hang on. I’m just look­ing up for you. I’m get­ting for Rio price to cash flow. I have 1.6

Cameron 26:58

What? It was 10. When did it stop being 10? I ran up a score­card last week­end it was 10. I mean, I did [crosstalk] All right. So what changed between when I ran this Fri­day morn­ing and Fri­day after­noon?

Tony  27:35

Whole of the cash. Yeas so the last num­bers were from Decem­ber and you know that now they’ve had an iron ore price above 200 bucks for anoth­er six months. It just does won­der­ful things for these iron ore min­ers. So we’ll see the same thing with Fortes­cue Met­als Group, but they’re already on the top scor­ers list. But yes, Rio is now on. So I just want­ed to want to talk about that before we go back for the Fortes­cue Met­als.

So, it’s now in the com­pa­ny report­ing sea­son, if you go into for those peo­ple who are Stock Doc­tor sub­scrip­tions, you can look at the recent updates, which is worth doing at the moment until we start get­ting into the real bulk of the report­ing sea­son, which is next week and the week after but at the moment, you can go on the Stock Doc­tor and click on Tools and then halfway down you’ll see recent updates and if you go into that, and I select all com­pa­nies and then for the update types, I des­e­lect every­thing except for com­pa­ny finan­cials updat­ed and then click Refresh and I’ve set the date range for this past week. There’s only been 1, 2, 3, 4, 5 com­pa­nies report­ed right in the last week.

So these are the ones that are start­ing to report for the finan­cial sea­son. I think most of those list­ed invest­ment com­pa­nies which report­ed ear­ly so we’ve got stocks called White­field which is an LLC, Brick­works Invest­ment (BKI invest­ments LLC), Mag­el­lan finan­cial LLC. But we have got Rio in there and one that just came up in the last few hours called Oceana Gold, which we can look at. So rather than do a com­plete update, what I do for this is, I go back into the tools, do a stock fil­ter for today.

Down­load a new QAV down­load, but all I do is select the row with Rio in it and it just popped into my most recent down­load to the quick and dirty way of doing an update for Rio.

Cameron 29:58

Sor­ry, just walk me through that again slow­ly. So you go into stock fil­ters and then do what’s?

Tony  30:06

Select the QAV fil­ter, Run it, Save it to the CSV and then rather than go through the whole process of doing an update of my mas­ter spread­sheet which, we, as we know, can take half an hour or so. There’s only been one com­pa­ny that’s report­ed. I’ll just open that down­load. Find Rio Tin­to. Do a search and just pull out that line and just chose a new updat­ed finan­cials and paste it in here, to the lat­est down­load. You made me laugh. My tea went down the wrong way.

Cameron 31:01

I’ve set a bench­mark. I have to try and do that once a week. See if I can make Tony do a spit take with his [unin­tel­li­gi­ble 31:08]. So you grab the real line here. Copy it and paste it in

Tony  31:20

[crosstalk] QAV down­load data tab. I then go through and check the man­u­al­ly entered scores for Rio. Well, as soon as you do that, copy and paste, you’ll see the price to cash flows changed. It’s dropped back to 1.6.

Cameron 31:40

And I’ve gone up cut 7.11. Now what? Yes, we have a look. I mean, I haven’t done the man­u­al data, but that’s not going to change the price.

Tony  31:52

They’re going to change that. Okay, so I’ve got Rio Tin­to. Let me just go from left to right in the columns. I’ve got 30th of the sixth 21 is the lat­est. Yep, update. Sor­ry, let me just freeze the panes again.

Cameron

“Freeze the panes and the rest will fol­low. Freeze your pains Don’t for­get to swal­low.”

Tony 

Equi­ty 77 bil­lion. Aver­age trade. 132 mil­lion. EPS before abnor­mals is 1.5 1500 cents. EPS after­wards 1497 EPS fore­cast $2.10 a share. So 2100 cents, share price I’m using 1.3169.

Cameron 32:48

I’ve got 1.3307.

Tony  32:51

OK, I will update.

Cameron 32:52

Not going to make a huge dif­fer­ence but yes.

Tony  32:55

Price to con­sen­sus tar­get 100%, price to Lin­coln Val 102%, mar­ket cap 49 bil­lion, net oper­at­ing cash $30.5 bil­lion, free cash flow 1300 cents, bor­der­line star stock, 371 mil­lion shares out­stand­ing, 6.8% yield, etc. etc. ROE of 35%. Stock Doc­tor is giv­ing us a price to cash flow of 7.10.

Cameron 33:31

Oh, that’s what I’m look­ing at.

Tony  33:33

So we need to go across to col­umn AG.

Cameron 33:38

Oh, well I’m not using your sheet I’m using the Flit­ty sheet, let me go and have a look on the oth­er tab.

Cameron 33:51

[irrel­e­vant talk] RIO’s is not even show­ing up in this tab.

Tony  33:58

So I’m get­ting oper­at­ing cash per share of 82 bucks and the price to oper­at­ing cash flow 1.62. It is strange though nor­mal­ly Stock Doc­tor is pret­ty sim­i­lar to what I cal­cu­late it to be.

Cameron 34:13

Yes, well, I think Eddie Dona­to on Face­book when I raised this ques­tion, said some­thing about dif­fer­ent ways of look­ing at the shares.

Tony  34:26

Stock Doc­tor use– We use shares on issue and Stock Doc­tor use dilut­ed shares.  So, let me just com­pare the shares in [crosstalk] shares out­stand­ing. I’ve got 371 mil­lion. What is Stock Doc­tor say­ing?

Cameron 34:48

OK, now in the QAV analy­sis I’m get­ting priced oper­at­ing cash flow 1.62– dif­fer­ence to Stock Doc­tor 340%.

Tony  35:01

It’s worth inves­ti­gat­ing, isn’t it? Let’s have a look at that. So I call up Rio and Stock Doc­tor. That is good, that’s why we put that check in there to see if there’s a big dif­fer­ence. Now the shares on issue will be in the finan­cial state­ments sec­tion, finan­cial met­rics.

Cameron 35:28

Eddie said, ‘This is where you have to decide whether to use Stock Doc­tor dilut­ed weight­ed num­ber of ordi­nary shares of 1628 mil­lion results in price to cash flow of 7.11, and score around 0.08 with­out enter­ing man­u­al data, ver­sus ful­ly paid ordi­nary shares of 371 mil­lion results in price to cash flow of 1.62 and score around 0.454 with­out enter­ing man­u­al data.

Tony  35:58

So yes, that’s exact­ly right there. Let’s explore it. So Stock Doc­tor is say­ing dilut­ed weight­ed num­ber of ordi­nary shares is 1.6 mil­lion. We’re say shares out­stand­ing is 371. That’s a big dif­fer­ence, isn’t?

Cameron 36:20

It is.

Unknown Speak­er  36:23

Why would there be such a big dif­fer­ence in those dilut­ed weight­ed num­ber of ordi­nary shares?

Cameron 36:30

What’s 1.3 bil­lion shares between friends, Tony?

Tony  36:37

That’s a lot, isn’t it? Let’s call up the annu­al report. Even though I have to use the old one because the new one it won’t be out yet. I don’t think…

Unknown Speak­er  36:45

I, just between you and me. I’m flag­ging that we’re 37 min­utes into the show.

Tony  36:51

OK, well, you want me to take this offline and come back with a rea­son?

Cameron 36:55

No, it’s fine. I just want to let you know, because I don’t want to work you for two hours like I did last week. I felt bad. So I just want to keep us both cog­nizant of the time. That’s all.

Tony  37:08

Yes, OK.

Cameron 37:09

You know, the show is the show. So if we just do two ques­tions, and we do two ques­tions, if we don’t real­ly have time for that, I think any­one’s going to mind.

Tony  37:17

Well, I’m going to have to noo­dle around here and find out what the dif­fer­ences so let’s pop that and I’ll come back to peo­ple.

Cameron 37:22

Yes, OK. Thanks.

Tony  37:25

I’ll send you a stock jour­nal. Maybe tomor­row, and I’ll go through it and try and work it out. Good point, that should­n’t be that far apart. Because right [crosstalk 37:33] only dif­fer­ence between ful­ly issued shares and dilut­ed, it’s just things like options but they can’t be six times the num­ber of shares on issue as options there is got it. I think there’s a mis­take there some­where. I have to track it down.

Cameron 37:49

Right. Oh, good pick up. Tony and Eddie. On the Face­book page. Eagle-Eyed Eddie as I’ve often said. So “Hey, Cameron in the edit­ing room here on Tues­day, the third of August, Tony did post on Face­book about an hour ago. I think there is an error in Stock Doc­tor looks like they have only count­ed the shares list­ed in Aus­tralia. Rio has a Lon­don list­ing as well looks like all the oth­er data is for the com­bined com­pa­ny. I’ve just emailed Stock Doc­tor to con­firm. I believe the cor­rect shares on issue should be 1618.1 mil­lion. I get this from their annu­al results, which say for the pur­pose of cal­cu­lat­ing basic earn­ings per share the weight­ed aver­age num­ber of Rio Tin­to PLC, and Rio Tin­to Lim­it­ed shares out­stand­ing dur­ing the peri­od was 1618.1 mil­lion being the weight­ed aver­age num­ber of Rio Tin­to PL c shares out­stand­ing of 1246.9 mil­lion plus the weight­ed aver­age num­ber of Rio Tin­to lim­it­ed shares out­stand­ing of 371.2 mil­lion”.

Then Tony says, “Using 1618.1 mil­lion shares on issue changes the QAV score for Rio to 0.10” and then Tom Stevens, replied Tony, “Thanks very much for look­ing into it and fol­low­ing up with Stock Doc­tor, I think you’ve got the Stock Doc­tor hot­line, they’ve updat­ed it already. So that answers that issue and it drops down from 0.54 down to 0.10 on the score­card’. But, again, this strikes me as anoth­er exam­ple of what hap­pens when we have many eyes  in QAV Club, look­ing at this stuff, pick­ing up anom­alies and errors, and then we can address them”. So yes, anoth­er great exam­ple of the pow­er of the QAV com­mu­ni­ty in action.

Tony  39:49

So that was Rio, I was going to talk about Fortes­cue Met­als Group, I’ll just do it quick­ly. Real­ly just a bit of com­men­tary because I’m start­ing to see again, some sort of late stage mar­ket activ­i­ty. So the fact that there’s a high div­i­dend being paid is a way of twig­gy for us tak­ing mon­ey off the table, because he’s not going to keep it invest­ed in Fortes­cue, and try and grow the busi­ness, he’s pay­ing it out as div­i­dends, which is a way of him get­ting mon­ey out of the com­pa­ny. They’ve got a div­i­dend pay­out ratio, I think it’s now about 80%, which is quite high and then they’ve got oth­er 20%, that remains at least 10%, I think is going to their new Fortes­cue green ven­tures, busi­ness, which is try­ing to use hydro­gen to make steel, amongst oth­er things, which is a piv­ot away from min­ing iron ore.

So that’s anoth­er sort of take on the light stage check­list and then at the most, they’re going to reim­burse 10% in the busi­ness. So that’s get­ting pret­ty low for any sort of busi­ness to only need 10% cap­i­tal to either just to spend on the busi­ness, either replac­ing things or explor­ing or putting in new infra­struc­ture to ship all that kind of stuff. So I’m kind of form­ing the view that Fortes­cue is being set up to sur­vive once the iron ore price turns down. Ques­tion is, when that’s going to hap­pen? I don’t know. But sort of inter­est­ing sit­u­a­tion there. Twig­gy, for us is prob­a­bly the best entre­pre­neur I’ve seen or one of the best any­way, in Aus­trali­a’s his­to­ry.

So, you know, if he thinks that hydro­gen and the pro­duc­tion of steel using hydro­gen is the way to go, then he’s prob­a­bly right and that could eas­i­ly blow up into being a big growth area for the com­pa­ny, in which case  Fortes­cue will be OK, but let’s just see how it plays out.

Cameron 41:50

So this new green invest­ments com­pa­ny that he’s doing is a sub­sidiary of FMG. I thought it was a sep­a­rate inter­est.

Tony  41:59

No, it’s a part of FMG. So he does have lots of oth­er inter­ests, which he’s diver­si­fy­ing into as well. But I know FMG is try­ing to find a way to use hydro­gen to make steel, and there­fore I guess, sus­tain its mar­ket.

 

 

Cameron 42:18

So the 80% he’s tak­ing off the table is what he’s putting into his out­side of Fortes­cue invest­ments.  Fortes­cue itself is try­ing to piv­ot.

Tony  42:31

Yes. Any­way, that’s what we’re inter­est­ed. We’ll see what hap­pens when the results come out, we’ll get paid a big div­i­dend. The share price is going to be dri­ven by the iron ore price, which has gone on for a lot high­er and a lot longer than peo­ple thought and who knows where it’s going to go to? I’m not try­ing to fore­cast that. But yes, it’s of inter­est that Twig­gy is say­ing, ‘Hmm, this may be get­ting towards the end’.

Cameron 42:55

He just dug all the iron ore out of Aus­tralia, there’s noth­ing left to dig in.

Tony  43:00

There’s still plen­ty of iron ore in Aus­tralia. What he’s say­ing is it might be worth­less. We can’t go on for­ev­er in this pur­ple patch, which is true and he’s say­ing I need some mon­ey to shore up my posi­tion when it does turn down.

Cameron 43:16

OK, do you want to go on with these oth­er news sto­ries or do you want to jump into ques­tions?

Tony  43:21

No, let’s jump into ques­tions. That’s fine.

Cameron 43:23

Stock of the week. Cash con­vert­ers. For your pulled pork  this week. [crosstalk]

Tony  43:31

Let’s see how I go. Can I drop the share price on Cash Con­vert­ers  [laugh­ter]?

Cameron 43:36

Don’t, because I own it, so be care­ful here TK, I also owned MML, so you ruined MML for me. Don’t ruin this one.

Tony  43:46

Well, I still own MML too. So it ruined it for me as well.

Cameron 43:50

You can afford every­thing ruined every now and again. I can’t say much.

Tony  43:56

You will, one day. So, CCV (Cash Con­vert­ers) most peo­ple would­n’t know what Cash Con­vert­ers are. It’s basi­cal­ly a pawn shop fran­chise. [crosstalk]

Cameron 44:10

OK, that’s less inter­est­ing.

Tony  44:13

Yes, so it’s a place you can go and trade in sec­ond­hand goods and either get paid for them or get a loan and you can come back lat­er and buy them back. Been around for a long time, rea­son­ably check­ered career being looked at by var­i­ous gov­ern­ments to see whether they were charg­ing you seri­ous inter­est in the past, and ask­ing peo­ple to take out loans on dif­fi­cult con­di­tions. So they’ve weath­ered all those storms and are now com­ing back and doing OK.

So what­ev­er you think of Cash Con­vert­ers, from the point of view of pro­vid­ing an out­let for peo­ple to sell goods cheap­ly, through which they may have come through, come via inter­est­ing means, not nec­es­sar­i­ly pur­chas­ing them orig­i­nal­ly. I’m try­ing to tread care­ful­ly. I remem­ber when I was liv­ing in North Carl­ton when I first moved to Mel­bourne and we were robbed and lost my gui­tar and the cops just said, just walk up and down live on the street all the pawn shops. You’ll get it back. Don’t wor­ry about it.  [Laugh­ter] Sure enough there it was.

Cameron 45:23

You found it? Why did you do then just tell the cops and they went and…

Tony  45:29

No, I bought it back for 100 bucks.

Cameron 45:32

Oh, right. You still have it?

Tony  45:36

No, it was ter­ri­ble gui­tar. [laugh­ter] Very cheap strap copy any­way.

Cameron 45:42

Yes, I’ve got one of those. Any­way .…..

Tony  45:45

[crosstalk] But yes, great. So, the Cash Con­vert­er busi­ness is exact­ly though. it’s allow­ing peo­ple to get short term loans, I’ve done a lot of work mov­ing into loan­ing peo­ple mon­ey, because I now have a lot of data about who they loan to, what their repay­ment sched­ules are? And I’ve tai­lored prod­ucts around that sort of end of the mar­ket. So that’s been work­ing well for them. Any­way, I don’t want to focus on the busi­ness per se, but look at the num­bers. So they have a QAV of 0.44 at the moment. Rea­son­able size, but not over­ly big. So aver­age dai­ly trans­ac­tion of 90,000. Qual­i­ty score is pret­ty good 10 out of 13 for 77%. The yield is 3.7%, which is a good yield and they com­mence pay­ing div­i­dends last half. So that’s actu­al­ly a thing in their favor, I think to the fact that when a com­pa­ny is con­fi­dent enough, the board­’s com­pe­tent enough to pay a div­i­dend, I think is actu­al­ly a pos­i­tive. So, it might be some­thing to put in the check­list going for­ward, but I haven’t yet but any­way, it’s got a div­i­dend.

Now, it’s above the mort­gage rate. Prob­a­bly one of the biggest things about it is that, its equi­ty per share is 50 cents per share price is at 26 or so 26— 26.5 today . So it’s actu­al­ly has more equi­ty per share than you’re asked to pay. So your clas­sic case here of buy­ing a dol­lars worth of val­ue for 80 cents. So that gives us some good scores when we look at the price to book ratio.

I’ve noticed a cou­ple of times now with my analy­sis in Stock Doc­tor, when I down­load price, the con­sen­sus fore­cast is com­ing up as a one on the check­list. But if I go into the front page of Stock Doc­tor, there’s no con­sen­sus fore­cast. So not sure what’s going on there. It’s show­ing that Cash Con­vert­ers is below it’s con­sen­sus fore­casts, but it’s not telling us what that con­sen­sus fore­cast is.

So I’ve raised this with Stock Doc­tor last week, I haven’t heard back on this but a case with this com­pa­ny a cou­ple of oth­er ones. So the score may go up or down or side­ways or go down slight­ly. If we lose a point there one Stock Doc­tor get to the bot­tom of it, but we’ll see. What else the strong finan­cial health and it’s been steady for a while.

Again, price to oper­at­ing cash flow quite low of 1.74 PE of 9, return equi­ty of 5.8686 which is the low but that’s prob­a­bly because there’s lots of equi­ty. So giv­en that there’s 50 cents a share of equi­ty, you’d have to make a lot of mon­ey to give a good ROE on that stock. So that’s one of the ways that ROE can mis­lead, but put all that togeth­er  and it’s quite high on our top scor­ers list and it had a 3 point turn around in the last six months and it was off the check­list because of sen­ti­ment. but it is come back on in the last month or two.

Cameron 48:47

And the most impor­tant thing on the check­list I think with CCC is; I actu­al­ly bought it for my own port­fo­lio late last week. So the share price has obvi­ous­ly come back a bit since then. So it’s a good time for peo­ple to have a look at it.

You’re wel­come every­body.

I should sell it imme­di­ate­ly.

It will def­i­nite­ly go up if you do that.

All right. Well, let’s move on to ques­tions. Tony, we got a few this week, don’t know if we’ll get through them all. A cou­ple left­over from last week that we should start with this one’s from John, “Hi! Cam and Tony. A while ago, Tony and Dylan did some great work look­ing at which fac­tors on the check­list had the biggest impact on QAV per­for­mance the aver­age 20% per­for­mance attor­neys got over the years as a com­bi­na­tion of all the fac­tors and the sen­ti­ment from mem­o­ry Dil­lon and Tony found that the price to oper­at­ing cash flow made up about 13% of the 20% total and growth in asset val­ue was around 5%. Once Tony and Dylan have com­plet­ed their analy­sis, are there any plans to adjust the total score cal­cu­la­tion to weight each fac­tor accord­ing to the research, maybe we could run a chal­lenger port­fo­lio to test it, obvi­ous­ly because the exist­ing sys­tem works so well. There may not be any great rush to do this”. Cheers, John.

Tony  50:03

Thanks John. So you’re right, the two big heavy lifters for us a price to oper­at­ing cash flow and increas­ing net equi­ty. It’s on the list for Dylan, we’ve spent a lot of time try­ing to get 3 point trend lines work­ing and shout out to Brett for his help with that but the prob­lem is at the moment that, even though we’ve got a for­mu­la, which looks like it works, it’s just becom­ing too com­pu­ta­tion­al­ly inten­sive to go back over 10 years worth of shared data and back test things. So try­ing to find a way of achiev­ing some­thing which is robust in terms of draw­ing a line, but also com­pu­ta­tion­al­ly eas­i­er to make the back­test­ing fea­si­ble, oth­er­wise it just runs for years.

So let’s slow this down more than I would have liked and the fact that Dylan only real­ly works on things, on his hol­i­days, he does work on them when schools in, but he’s obvi­ous­ly focus­ing on school… Let’s just slow this down. So I was hop­ing to be ahead of where we are, but we’re not, but we’re get­ting close. Once we get the trend­line worked out, then we can back­test things like play­ing around with the score for things like price to oper­at­ing cash flow and net oper­at­ing equi­ty.

Inter­est­ing­ly, the price to oper­at­ing cash flow has a big impact on our check­list any­way, because we divide the qual­i­ty score by the price to oper­at­ing cash flow and as we’ve seen before, that price to oper­at­ing cash flow of less than 7 real­ly dri­ves the num­bers for QAV. So I don’t know if we’ll play around that much with that. We’ll just keep divid­ing by that to get the final QAV num­ber. But cer­tain­ly, oth­er things in the check­list will have their weight­ings change once we can do some test­ing and opti­mize it. Apolo­gies it’s tak­ing too long, but that’s just where it is.

Cameron 51:58

Yes, it’s good. But at some point, we may have a mod­i­fied check­list that has some dif­fer­ent weight­ings.

Tony  52:06

Yes, cor­rect.

Cameron 52:08

Thank you, John. Elmar says, “I’m hear­ing a lot of resource devel­op­ment in our area — gold mine by De Grey, mag­ne­sium mined by Ele­ment 25. Elmar works in the mines over in WA, and I’m want­i­ng to throw mon­ey at them in order to gain the max­i­mum pos­si­ble!!! I know it’s spec­u­la­tive (fool­ish), but I’d like to know how or where Tony would go to do a more in depth analy­sis to take out more of the spec­u­la­tion”. Cheers, Elma.

Tony  52:42

Well, easy answer the check­list by the min­ers of the scor­ing well on my check­list, I mean, to use those two exam­ples that Elmar men­tioned, ‘De Grey’s Min­ing and Ele­ment 25’. If you look at those from a check­list point of view, it’s the greys or they both had neg­a­tive oper­at­ing cash flow for I think there are, if not, then most of their entire life and the Grey list­ed in 2002, and Ele­ment list­ed in 2011. So that’s a long time to be ramp­ing up a mind and not pro­duc­ing any sales to cov­er the costs. Does­n’t mean they [unin­tel­li­gi­ble 53:22] next half, they may well turn around, but that’s when I’ll be look­ing at them. But you know, both of these are kind of typ­i­cal specky min­ers their announce­ment dri­ven. They’ll con­tin­u­al­ly try and put out a pos­i­tive spin on their lat­est quar­ter­ly report, on their lat­est ore update, on the lat­est price of what­ev­er they’re min­ing, and try and dri­ve a share price invest­ment that way. But yes, the QAV process ignores all that.

So I’ve nev­er real­ly looked hard at them and I wait until I start ship­ping and we can see some cash flow, see whether all that 10 or 11, 12 years of invest­ments been worth­while. The oth­er thing about com­pa­nies like that is; they inevitably will ask for more mon­ey from their share­hold­ers, they’ll say, well, we’re get­ting close to our first ship­ment of ore  if only we could have this rail line between our mine and the coast. We’d be able to ship and then you’re up for more mon­ey. So what­ev­er it is, rail lines

Cameron 54:20

Sound like explo­ration. They sound like doc­u­men­tary film­mak­ers, Tony.

Tony  54:24

Yes.

Cameron 54:26

We need a lit­tle bit of extra mon­ey to go and do a reshoot?

Tony  54:31

Yes, cor­rect. Sub­ti­tle it, trans­lat­ed to dif­fer­ent lan­guages. So I’m not going to touch them. I think Ele­ment 25 has recent­ly said, they’re going to ship their first door soon so we may see some pos­i­tive cash flow out of them but that’s the time to look at them. Yes, she’ll give up the first bit of specky share price gain. But on the oth­er hand, you might have invest­ed for 11 years, wait­ing for that first ship­ment before to turn the best into a prop­er busi­ness and not just the guy with a pick out in the desert some­where, build­ing stuff. But there are resources out there, peo­ple do deep analy­sis onto these com­pa­nies and can pro­vide good advice.

Tony  55:13

So, Tim Tread­gold is the resource I often go to, to look at these analy­ses on mines. I hate to say but hot­cop­per often tracks these kinds of stocks and will have opin­ions but they are opin­ions rather than being nec­es­sar­i­ly based in hard data and the same with Google News. If you see a share price, sud­den­ly go up or go down, have a look at Google News and see if we can work out what drove it but these com­pa­nies are usu­al­ly dri­ven by announce­ments. Yes, we’ve just struck a new load , our explo­ration has been good. We have more reserves under man­age­ment, all that kind of stuff. But they’re not the kinds of things that I want to look at or invest in.

Cameron 55:56

So the fact that a mine is doing a lot of devel­op­ment, it does­n’t real­ly impress you a great deal. It’s you want to see mon­ey in the bank?

Tony  56:08

Yes, it’s kind of wor­ries me in some respects, because they would have asked peo­ple to pay for that recent­ly, or they’re about to ask peo­ple to pay for it in the future. So yes, you need to wait until you get some cash flow and the pay for these kinds of things before you can real­ly assess whether it’s worth­while from an invest­ing point of view.

Cameron 56:28

OK, thanks. Thank you, Elma. John, again, or anoth­er John, who knows?

“Hi, Cam! how are you? ”

“I’m good. Thanks, John. Thanks for ask­ing.”

In the last pod­cast, you men­tioned the frus­tra­tion of cal­cu­lat­ing your annu­al return when your cap­i­tal invest­ed varies over the year, there’s a cou­ple of go, and by the way, I’ve reached out to Stock Doc­tor and asked them if they can make some­one avail­able to come on and talk about how to do that in Stock Doc­tor and they haven’t real­ly got back to me on that yet. But Fin­gers crossed. ‘This infor­ma­tion is all held by your online bro­ker’, says John and so it can be cal­cu­lat­ed by them. Where are you sev­er­al online bro­kers, unfor­tu­nate­ly– You can set the date range and then tell it to do a time weight­ed aver­age or a mon­ey weight­ed aver­age cal­cu­la­tion. The mon­ey weight­ed works well if you’ve been mov­ing cap­i­tal in and out, you can also decide on a bench­mark, and it plots a graph show­ing how the cap­i­tal is moved over time.

‘Anoth­er tip to look out for the bro­ker should be able to pro­vide a list of trans­ac­tions that you can down­load into MS Excel or Google Sheets and send to your accoun­tant. This speeds up the cap­i­tal gains tax calcs for your tax returns. Con­sid­er­ing cost per trade is only around $6 is a pret­ty good ser­vice’. I think he’s talk­ing about inter­ac­tive bro­kers there, as the bro­ker. ‘It is pret­ty good ser­vice and prob­a­bly should be part of the deci­sion as to which bro­ker to pick I imag­ine some of the more expen­sive bro­kers have this ser­vice to would be inter­est­ing to know. Look­ing for­ward to hear­ing your son break into a pod­cast with his lightsaber’. Well, he could except he and his moth­er took the lightsabers to a park to play with about a month ago and then about two weeks lat­er, Fox was like where’s my lightsabers and we real­ized they’d left him there. Left him at the park. So lightsabers gone. But thank you, John. Yes, mon­ey wait­ed, time wait­ed. I know that both [unin­tel­li­gi­ble 58:26] and share side and Stock Doc­tor all have those. But I’m still not sure how it works or how to read it. I guess I could read up and under­stand it a lit­tle bit.

Tony  58:37

Yes, appre­ci­ate that, and as we spoke about before, I think if you’ve got a small port­fo­lio, we’ve tak­en mon­ey in and out, any of those cal­cu­la­tions are going to look a bit strange. So, I thought a bit more about what we were talk­ing about. The way that I prob­a­bly approach it is to drop your trades into Excel and then trade by trade or com­pa­ny by com­pa­ny, look at how much cap­i­tal you deployed in that invest­ment and whether it made mon­ey or not and then do a weight­ed aver­age. So basi­cal­ly, for exam­ple, if you had $1,000 in MML, for three months, and it went up 100 bucks, let’s say 10% prof­it over three months, just as an exam­ple. If you had 1000 bucks in CCP called crit­i­cal and it went up, you know, if you made $300 over 2 months, or 3 months, then you’ve got a 30% return and if you add up all of those dif­fer­ent trans­ac­tions for the com­pa­nies that you’ve had, and then divide them to get an aver­age per month and then mul­ti­ply that by 12. That’s prob­a­bly the clos­est you’ll get to a weight­ed aver­age for the year. Does that make sense?

 

 

Cameron 59:47

So get the returns for each stock and then work out what the return is per month depend­ing on how long you have car­ry the invest­ment.

Tony  1:00:00

You might need to do it per week if you’ve sold them quick­ly.

Cameron 1:00:04

And then add all those final results up.

Tony  1:00:09

Yes, so you’ll need to take into account the cap­i­tal, so it’s a weight­ed aver­age. So if you had stock A with $1,000 in it for this peri­od, and you made a loss this much, that’s the first entry in your spread­sheet and then stop be do the same. So you get us, tell you up all the cap­i­tal that was invest­ed, tell you up all the mon­ey you made and get an aver­age over that time peri­od, whether it’s weeks or months, and then mul­ti­ply that out to get a year­ly val­ue. Yes, a bit of muck­ing around

Cameron 1:00:42

Dylan busy over the next week. I get… [laugh­ter] Dave from Nui pho­net­ic 01:00:49]., “Hi Cameron long­time lis­ten­er, medi­um term sub­scriber, first time ques­tion­er. First, thank you whole­heart­ed­ly to you and Tony for what you’re doing with QAV in short, this shit works”. Thanks for con­firm­ing Dave from Nui. “Per­for­mance. I start­ed allo­cat­ing share invest­ing cap­i­tal the QAV in ear­ly April and now I have 60 to 70% of my book in top score accom­pa­nies, my win­ners slash/ratio and returns are aligned with the long term QAV results. I’ve missed a cou­ple of the big win­ners now a few sol­id per­form­ers and had a dud or two I’m cau­tious of the late mar­ket stage, I lit­er­al­ly start­ed at all-time highs, so I’m using tight trail­ing sell orders set up break even once a stock has risen a bit to respect Buf­fett Rule#1 where you’re way ahead of me Dave, this has exit­ed me ear­ly pre three BTL on a few posi­tions a cou­ple of those have cost me a cou­ple saved me. I’m also doing a bit of fudg­ing e.g. I have bought from down the bot­tom of the list when I like a com­pa­ny.

I’ve scored a cou­ple of win­ners doing this that are con­tin­u­ing to per­form. Also, I’ve plucked 3 com­pa­nies off the watch list pri­or to a by 3 PTL sig­nal, on the basis they will keep going, 2 have worked, 1 is hov­er­ing where I bought it. I also had 2 I was look­ing at but did­n’t buy and went on to return pos­i­tive­ly 40% and 100%. So this is some­thing I’m grap­pling with how to iden­ti­fy the stocks that have start­ed their uptrend and will keep going and get­ting in ear­li­er than the 3 point trend line by sig­nal and there­fore expo­nen­tial­ly increas­ing gains from the win­ners and ini­tial obser­va­tion a com­mon theme in the watch list win­ners has been very low price to cash sug­gest­ing the mar­ket can’t resist them even­tu­al­ly, or very high qual­i­ty, sug­gest­ing the uptrend is based on sol­id foun­da­tions will con­tin­ue to 3 PTL breach”.

Let me stop there and pause for breath. Tony, any com­ments on that so far?

Tony  1:02:53

Sounds like Dave invests like I do. You know, look­ing at the watch lists, occa­sion­al­ly buy­ing some­thing from the bot­tom. Sign­ing up for rule one, all those things are exact­ly what I do, so good on you. In terms of get­ting things ear­li­er, it’s very tempt­ing and occa­sion­al­ly, I do but I’ve been a bit more dis­ci­plined late­ly. It can go either way.

So what he’s say­ing is that, if you think about the banks last year, gen­er­al­ly what hap­pens is we’ll get a com­pa­ny that comes out of report­ing sea­son, where the score is has gone from bad to good, the qual­i­ty score, I mean, and even the QAV score has gone from bad to good if you ignore the fact that they haven’t had reached their 3 point buy price and so you have a look at the graph and you say well, that the share price is a long way from the buy price, but this is going up and then it’s just the line­up, it’s just a cap­tain’s choice, it’s a pick as to whether you want to invest in that com­pa­ny or not, and take the risk that keeps on going.

So that’s cer­tain­ly open to peo­ple to do. I’ve done it from time to time and gen­er­al­ly it’s with a com­pa­ny I know a lot about and I guess that was the basis for fudg­ing some of those com­pa­nies as well that I was look­ing for a buy price that was low­er than it would have been draw­ing a tra­di­tion­al 3 point trend line. So I get it– Yes, it’s the age old sto­ry, there’s so many stocks on the top scor­ers list, you need to go look­ing for things ear­ly. Real­ly, that’s kind of where my think­ing is at the moment. But yes, cer­tain­ly go for it if you want to.

Cameron 1:04:37

Dave con­tin­ues, so read Roger Mont­gomery’s book valu­able. One of the key take­aways for me was to look for com­pa­nies that have an ROE of greater than 20% and then buy them when they’re cheap. So I set up a fil­ter in Stock Doc­tor. By my reck­on­ing 90 plus per­cent of com­pa­nies this fil­ter returns have appeared on QAV lists since I’ve been involved and more impor­tant­ly, most of the real big win­ner I’ve seen it there too, IIS, GRR, CAI  etc. So I’m con­sid­er­ing adding an item to the check­list is ROE greater than 20%? 1 for a ‘yes’ blank for a ‘no’. So it’s a boost­er, would appre­ci­ate Tony’s thoughts.

Tony  1:05:15

Yes, look ROE always come up a cou­ple of times from our lis­ten­ers and it’s the kind of first met­ric that investors will tell you to look at. But that’s had a cou­ple of down­sides to it over the years, the first one being that, it means that man­age­ment can gain ROE to make it look more attrac­tive for peo­ple to invest in the com­pa­ny and we already saw before with Cash Con­vert­ers, they have a rel­a­tive­ly low ROE of about 5 or 6%, which I think is a bad met­ric. In their case, they just have lots of equi­ty. So equi­ty is the divider in return on equi­ty and if you have lots of equi­ty, which was some­thing we look for, then you have to have a real­ly, real­ly big return to also have a high ROE. So that’s the first thing.

Sec­ond thing is ROE can be manip­u­lat­ed by tak­ing on debt and remem­ber that equi­ty is assets minus lia­bil­i­ties.

So I would much rather buy a com­pa­ny with low debt, and low ROE because there’s lots of equi­ty, rather than buy a com­pa­ny with high ROE. Because the equi­ty has shrunk because they take on lots of debt and the this was the case, prob­a­bly not so much these days. A lot of ana­lysts have learned their lessons but slow­ly over the last 20 years, maybe back in the 90s in par­tic­u­lar, there was this whole mantra of get­ting rid of lazy bal­ance sheets and cor­po­rate advi­sors, stock ana­lysts, invest­ment bankers were just ascend on com­pa­nies like a Cash Con­vert­ers, and say to them, you’ve got a lazy bal­ance sheet, your ROE is low. You’ve got all these assets you could be lever­ag­ing, why aren’t you out there bor­row­ing mon­ey and dou­bling in size and of course, all that did was intro­duce a whole heap of risk to these com­pa­nies, which were real­ly sol­id, real­ly well man­aged, but they were set upon by peo­ple who want­ed to get a high ROE and so you know, that’s what hap­pens in the invest­ment world

Peo­ple focus on one met­ric, and it’s a bit like your health, you can’t sort of say, you know, eat­ing fish or sup­ple­ments will lead to a longer life because you know, it’s a good antiox­i­dant. That’s just one part of a healthy diet, focus on the rest of your diet rather than just tak­ing a fish oil sup­ple­ment. It’s a bit the same with our weight. So it’s one met­ric, and it’s been done to death over the years, it’s been gained over the years.

So I’m a bit wary of it. Hav­ing said that, I went through the top scor­ers and had a look and there’s kind of a split between high ROE, as Dave said, but there’s also lots of com­pa­nies which have low ROE, and some will even have neg­a­tive ROE. So it’s actu­al­ly an inter­est­ing thing to ana­lyze. So I’m going to ask Dave to set up a cou­ple of port­fo­lios in Stock Doc­tor, or what­ev­er uses just a cou­ple of dum­my port­fo­lios, and I’ll do the same, I’ll go back through my old records and try and do it from maybe 18 months ago, and just put the top scores list into those with are we above 20%, and those below 20% and let’s just see if there’s any mean­ing­ful dif­fer­ence to those two pools of stocks, and maybe we have a third one those with neg­a­tive ROE, because that’s also on our list.

So I’m look­ing at com­pa­nies like mine, which have a neg­a­tive ROE, but they’ve done well for us. Just as well as those with a high ROE we’ve done— So let’s have a look and then come back and com­pare results and yes, maybe he’s right, maybe we should put the foot on the scales when it comes to high ROE but let’s just prove it first.

 

Cameron 1:09:01

There you go, Dave, there’s your home­work. Well, Dav­e’s got a few more ques­tions and there’s a cou­ple of oth­ers from Dun­can and Michael, but I think we’re well over time. So, let’s save those for next week time.

Tony  1:09:13

OK, sure.

Cameron 1:09:16

Quick­ly watched any­thing, read any­thing that you can rec­om­mend to us this week?

Tony  1:09:21

No, not real­ly, been watch­ing the golf at the Olympics, which has been fun. I can’t rec­om­mend any­thing else. Watched a cou­ple of crap­py movies, which I would­n’t rec­om­mend, read­ing. So you think you know what’s good for you, which is the Nor­man Swan book, which is good. That’s why I talked about sup­ple­ments, because he poopooed sup­ple­ments in it. So that’s a good read  and that’s prob­a­bly fol­low­ing on from the com­ments last week on Face­book group about being immor­tal and what the com­pound inter­est would be like if you had longer lives. It’s worth doing

Cameron 1:09:57

By the way a very old friend of mine who runs the biggest sup­ple­ments com­pa­ny in Aus­tralia told me over lunch a few years ago, ‘Yes, most sup­ple­ments are bull­shit. They do noth­ing for you. They’re all place­bo’.

Tony  1:10:10

Yes. I remem­ber read­ing the ‘Sin­gu­lar­i­ty is Near’ and then the sequel to that by Kurzweil . I think it was some­thing about live long enough to live for­ev­er and he talks about how to live longer and take sup­ple­ments and then he refers you to his web­site where he sells sup­ple­ments and I just thought it’s a bit self-serv­ing.

Cameron 1:10:31

He does­n’t make enough mon­ey at Google.

Tony  1:10:33

Yes, that’s right.

 

 

 

Cameron 1:10:36

I watched Nights of Cabiria, a Felli­ni film, 1957, Award for Best For­eign movie and I think his wife one Best Actress in a for­eign movie or some­thing for. If you like a bit of old Ital­ian clas­sics?

Tony  1:11:03

I do.

Cameron 1:11:04

Well unfor­tu­nate­ly at this junc­ture, we had tech­ni­cal prob­lems with Tony’s micro­phone and we had to just cut it. So that is the show for this week. I do want to point out that, again, I’m edit­ing this the fol­low­ing day, Tues­day, the 3rd of August,  CCV, Tony’s pulled pork of the week has now dropped more than 5% below what I paid for it last week. So I am going to have to invoke rule one, the episode did­n’t even go out and this has hap­pened. Tony just had to talk about it and I don’t know. the inter­net, the ears,  every­body’s lis­ten­ing. It’s already dropped below my buy price and now I’m going to have to sell it as soon as I fin­ish edit­ing the show.

So thanks a lot Tony. Hope you pick some­thing dif­fer­ent next week, I have to make a rule from now on when Tony picks a pulled pork he does­n’t do stuff that I own. On the flip side, glad he did­n’t talk about AIS because it’s up 14% already today and it’s only 1:30 in the after­noon. So that’s a beau­ty. But yeah, CCV dropped 5% today for some rea­son.

Any­hoo, them’s the breaks. Have a great week, folks. Talk to you soon. Ciao. Stay safe!