Transcript #435

QAV 435 Club

Tony 00:04

COG, COG, COG.

Cameron 00:06

[laugh­ing] Wel­come back to QAV Sifu Kynas­ton, Episode 435 record­ed on the 30th of August 2021. How you doing Sifu?

Tony 00:21

Seafood? I’m good.

Cameron 00:22

Sifu, S I F U. That’s what in our kung fu class­es we call our teacher, our mas­ter. You’re the Sifu of this dojo.

Tony 00:34

[laugh­ing] I don’t know about that. Jen­ny’s prob­a­bly the Sifu here.

Cameron 00:37

Well, she’s not in the dojo, you’re the Grand Mas­ter of QAV.

Tony 00:44

And you’re the grasshop­per.

Cameron 00:46

I’m the grasshop­per, yes.

Tony 00:47

Cause I feel like-

Cameron 00:49

I’m the white guy with…

Tony 00:51

Going to fill a tub with boil­ing water and put two drag­ons on the out­side of it.

Cameron 00:55

[laugh­ing] Yes. I’m the grasshop­per and I have the scars to prove it.

Tony 01:00

[laugh­ing] You’re that great Mad Mag­a­zine take off of Kung Fu. When you can steal the peb­bles in my… Oh, two out of three. [laugh­ing]

Cameron 01:15

[laugh­ing] We’re talk­ing about a TV show that no one’s ever seen and a mag­a­zine that no one’s ever seen or remem­bers.

Tony 01:21

I remem­ber them both very fond­ly.

Cameron 01:25

We’ve got some big news. Tony, do you want to start with our big excit­ing news?

Tony 01:30

Yes, so I guess by the time peo­ple hear this we’ll be licensed with an AFSL autho­rized rep agree­ment. So that’s a great relief for me. So we can talk more open­ly about stocks and not get pinged by ASIC and shut down, and it’s also means we can go back to putting a buy list out which is I think, what a lot of peo­ple have been ask­ing for and we can now deliv­er. So I’m real­ly hap­py that we can do that real­ly excit­ed by what the future holds because of it. I’m relieved, it’s all over. I had to sit a cou­ple of exams, and it required a fair bit of study.  So that’s been keep­ing me busy for the last four or five weeks. It was­n’t… the exams weren’t hard; they were mul­ti-choice open book. Who knows. But I was into the first mod­ule, which was a gen­er­al sort of intro into being a finan­cial plan­ner, and thought, I’ll just take the test and see how I go, I’ve got 70%, right. But you need 70% for a pass. So I thought I bet­ter go and study this, and then did the sec­ond one, we had to have 100%, and got there even­tu­al­ly got 92% the first time and then reset the test again the next day and pass. So all good.

Cameron 02:46

That’s good. So to be clear, you’re not a finan­cial plan­ner-

Tony 02:49

No.

Cameron 02:49

But we’re allowed to talk about gen­er­al stuff like stocks.

Tony 02:54

Yes, we were autho­rized to talk about secu­ri­ties and offer gen­er­al advice.

Cameron 03:00

Right.

Tony 03:00

Which you often hear about when peo­ple do these kinds of pod­casts. They say this is gen­er­al advice only.

Cameron 03:06

And I want to give a shout out to a num­ber of guys that helped us on this path over the last few months. Steven Mabb sent us some links. Mur­ray Bruce was help­ing us out QAV club mem­bers, and then Phil Mus­catel­lo, linked us up with the guys that we actu­al­ly got our license done with or through. So shout out to all those guys for gen­er­ous­ly help­ing out and get­ting us to this place.

Tony 03:33

Thanks very much, guys, and we went for a long time, at least six months mak­ing con­tact with peo­ple and I’d send off emails and call them up and tell the sec­re­tary Yes, we’re doing a finance invest­ing pod­cast, and we’d like to get licensed, like nev­er heard any­thing back. [laugh­ing]

Cameron 03:47

[laugh­ing] Noth­ing. No. Crick­ets.

Tony 03:53

Yes, well… We final­ly found some peo­ple. So it’s good.

Cameron 03:58

Yes, that’s good. So we’ll be able to do a lot more mov­ing for­wards, which I hope will be use­ful for peo­ple. I want­ed to say that we had a great Bris­bane din­ner last week. I want to thank all the guys that came along. There’s about a dozens of us there and had a big Chi­nese meal. Great guys great con­ver­sa­tion, as always, as always super impressed with the QAV com­mu­ni­ty and even my sons Hunter and Tay­lor came along, and Hunter, who has­n’t been very involved in QAV. He said after­wards as we’re walk­ing back to the car. Wow, con­grat­u­la­tions.  I got to say that’s an incred­i­ble group of guys. That’s real­ly impres­sive and he real­ly enjoyed sit­ting in and hear­ing the con­ver­sa­tions.

So yes, and I real­ly encour­age peo­ple who don’t have a QAV local meet­up in their area, set one up, jump on our Google Groups. If you’re a QAV club mem­ber, get a link to those through the QAV club mem­ber resources page, and set one up because I just think it’s a real­ly pow­er­ful tool, par­tic­u­lar­ly when you have the more expe­ri­enced mem­bers get­ting togeth­er with the new­er mem­bers and they can help them, and as Chrissie has always told me because she’s a teacher, the best way to learn some­thing is to teach it.

Tony 05:13

Yes.

Cameron 05:13

So, yes, I think you found that over the course of the show, right? As you’ve had to teach QAV, you’ve had to think-

Tony 05:21

Yes.

Cameron 05:22

-in a dif­fer­ent way about stuff. Yes.

Tony 05:24

And not just that, too. But I think the tools have improved, I was doing a lot more a lot more man­u­al­ly than what we do now.

Cameron 05:33

Yes.

Tony 05:34

So that’s good, and I think that’s prob­a­bly one of the key things from the meet­up groups that I’ve observed is that, some­one will say, Hey, here’s my short­cut to do that. Prob­a­bly, don’t both­er doing that do this.

Cameron 05:44

Yes.

Tony 05:44

Here’s a bit of code that will help you do this quick­er, or what­ev­er, which is real­ly great. So…

Cameron 05:48

Yes.

Tony 05:49

That’s real­ly use­ful.

Cameron 05:51

I also want to give a shout out to Chris, new QAV club mem­ber who last week picked up some errors in both the AF ver­sion of the check­list and the bible. So we sort­ed those out well done to Chris for pick­ing them up. If you haven’t seen the post that I did on our Face­book group, check that out. At the very least, down­load the lat­est ver­sion of the AF check­list if you’re using that ver­sion. 1.7.7 is the lat­est ver­sion that fix­es that, I don’t think it would have made a huge dif­fer­ence in how we’re scor­ing things. Maybe the order… I did some back test­ing on it looks to me like the the top with the new ver­sion, my top 20 is still the top 20.  But they’re ordered slight­ly dif­fer­ent­ly. The scor­ing is a lit­tle bit dif­fer­ent. But hope­ful­ly it did­n’t cause any­one too many prob­lems. The… Oh you saw a foe take of first steps last week, Tony, I think you want­ed to

Tony 06:48

I was just talk­ing about per­son­al issues that peo­ple may know that I have a horse breed­ing busi­ness and nor­mal­ly foals birth overnight. So you nev­er see it. But I was just work­ing away last week, or maybe the week before and got a Face­Time from the guy at the stud. He said quick jump on, there’s foal’s birthing, and it was like 11 o’clock in the morn­ing, which is real­ly unusu­al. So I got to see it.  Take its first steps, which I nev­er do before. Nor­mal­ly, you wake up in the morn­ing, and there’s a video and a bit of a blurb about how the birth went. But it’s amaz­ing. It real­ly is, to see a big thing come out of a big­ger thing. And-

Cameron 07:30

[laugh­ing]

Tony 07:31

And just nature. Gets up almost straight­away and tries to walk and yes. It’s tough.

Cameron 07:38

Yeah. maz­ing stuff. All right, what do you want to talk about now?

Tony 07:45

Ok, so let me go through my list. Well let me talk about mus­ing. So one of the things I’ve been think­ing about in the last lit­tle while and is about whether we should… I’m doing this tri­al on rotat­ing stocks out the low­est scor­ing stock out of my port­fo­lio and replac­ing it with the high­est on the list, and a lot of that sort of research and think­ing is lead­ing me to look at whether when some­thing gets to about a thresh­old of a QAV score of 0.05, whether it does­n’t become an auto­mat­ic sell.  And so I’m also think­ing, I’m won­der­ing whether like peo­ple have asked, why not we trade based on the IVs we set for stocks, but this might be the way to do it. Like if we’re pre­pared to buy some­thing when it’s above 0.1, and maybe if it gets to, say, a 0.05, which is prob­a­bly going to be dou­ble the val­ue of was when it was a 0.1 that might be our IV met­ric, we’re buy­ing it when it’s less than 0.1, oh sor­ry, above 0.1. So it’s maybe 0.2 maybe it’s 1.1 and then sell­ing it when it gets to be much low­er than the one and say 0.05 as well.  I’m think­ing that might be our buy­ing and sell­ing accord­ing to our IV and I did some back test­ing so I went back 12 months and now that we have least 12 months of the down­loads in the cur­rent form. I can go back 12 months and look at what the stocks were like then and then run for­ward and put the cur­rent prices into that spread­sheet and see what they’re like now-

Cameron 09:38

Yes.

Tony 09:38

And cer­tain­ly… I took all the stocks that were 0.05 or had a low­er score, and cer­tain­ly some of them per­formed well dur­ing the years since then. Stocks like Mac­quar­ie Bank or Mac­quar­ie group and NIC nick­el mines both had good years, and both were on 0.05 or they were, about a year ago, but if I took all the stocks that were a 0.05, they only returned 4% for the year against the boom year like the ASX is up 26% or some­thing in that same time peri­od.  So, over­all they’ve under­per­formed. So it’s always been my expe­ri­ence that you let them run until they turn down, and I think I need to do more research if I can iden­ti­fy the Mac­quar­ie groups and the Nick­el mines at 0.05 like maybe there’s anoth­er met­ric we need to look at, like fore­cast growth or some­thing like that. Or div­i­dend yield some­thing which makes them attrac­tive still, but cer­tain­ly as a group, those stocks are worth sell­ing, I think. So more research is need­ed. But I just thought I’d flag that maybe peo­ple give us their input.

10:47

right. So you’re not sug­gest­ing that we start exer­cis­ing that yet.

Tony 10:54

No.

Cameron 10:54

Needs more needs a lit­tle bit more research,

Tony 10:57

needs more research, but I’m just throw­ing it out there as an answer to some of the ques­tions that are being asked around, you know, how do you know when some­thing is ful­ly val­ued? Should­n’t you be sell­ing it then? I think a very, very good ques­tions, and also too, as some sort of ear­ly find­ings from my test­ing of a small part of my port­fo­lio in a chal­lenge type envi­ron­ment where I’m turn­ing stocks over month on month. Yeah, but I’ll do some more research and come back with a hard rule on that one.

Cameron 11:25

Okay, great. Well, that’s inter­est­ing. I want to thank Michael Dum­b­rell for his review on Apple pod­casts. He wrote impressed my under­stand­ing of invest­ment results have increased sub­stan­tial­ly since found­ing this pod­cast, the Face­book group is awe­some as well with every­one shar­ing their ideas. So thank you, Michael, for that it all helps. If any­one else wants to leave a review, we’d appre­ci­ate it.

Tony 11:50

Very much. So hey, I

Cameron 11:51

Hey, I had an idea ear­ly today, I hap­pened to be in a tro­phy shop, and I was think­ing we should have a tro­phy that we hand out every year at the end of the finan­cial year. For the QAV mem­bers with the best results for the year. What do you think the QAV tro­phy, good?

Tony 12:11

Yes.

Cameron 12:12

Yes. I don’t think you’re allowed to com­pete, but… [laugh­ing]

Tony 12:20

I don’t need the tro­phy. I’ll just I’ll just take the cash. Thanks.

Cameron 12:26

But, yes, so I’m going to get a tro­phy. I’m going to get it a nice classy look­ing tro­phy that look good on your man­tel­piece or on your desk. QAV club mem­ber of the Year for best results. So if you if you’re not active­ly track­ing your results in Stock Doc­tor or Navexa or Share­sight or some­thing like that, now’s the time to do it. It’ll obvi­ous­ly have to be on an hon­esty basis because we’re not get­ting we’re not going to ask you to send us your list of trades and get it audit­ed, but…

Tony 13:02

Which means it won’t be a very expen­sive tro­phy.

Cameron 13:05

[laugh­ing] But so yes, I’m going to do that. I think that’d be fun.

Tony 13:10

Yes, good idea.

Cameron 13:11

What else you want to talk about?

Tony 13:14

Just quick­ly, I spoke last week about Eme­co Hold­ings and how it remind­ed me of the past when a cou­ple of oth­er equip­ment hire com­pa­nies were tak­en out, and I was talk­ing about Sev­en Group buy­ing and I thought that was Boom Logis­tics but I looked it up after the show, it was Coates equip­ment hire-

Cameron 13:31

Right.

Tony 13:31

Which is part of part of their busi­ness now and in that same sort of space as Eme­co. So you just want to get that straight in case peo­ple before peo­ple come in with ques­tions. Why did you mean this? That’s pret­ty much it. You’ve sent out an email say­ing that. I’m meant to be the Kei­th Moon of invest­ing. We should pay homage to the great Char­lie Watts who passed away dur­ing the week as well.

Cameron 14:00

He did, like the next day, I was sort of kick­ing myself that we did­n’t men­tion Char­lie when we’re talk­ing about great drum­mers in the episode last week.

Tony 14:07

Yes. [crosstalk 14:08]

Cameron 14:12

That’s going to be the title if this weeks episode. Char­lie Watts [unin­tel­li­gi­ble 14:16] [laugh­ing]

Tony 14:17

Sit­ting in the back­ground, be amused at all the front man, and well dri­ve the machine.

Cameron 14:23

No, because you see, I think the dif­fer­ence between Kei­th and Char­lie is Kei­th was very inno­v­a­tive with his drum­ming and he brought a lot of flair a lot of flash to it. You’ve got a fair amount of inno­va­tion that you’ve done. I mean, flashy like Kei­th, you’re more chill like, Char­lie, maybe we’ll call you Char­lie moon. Or…

Tony 16:13

[crosstalk 14:45]

Cameron 16:43

yeah, I could nev­er afford it. Beta was just struck me as very unranked and roll.

Tony 16:54

Yeah, it’s even worse in Toron­to too. I mean, they have Stub­Hub and the scalpers. You know, they’ll buy tick­ets, there’s no lim­i­ta­tions on that. I’ll put them on Stub­Hub and like you can pay. If he wants to the front row seats, the Pearl Jam or some­thing? You’ll pay 1000 bucks for it for a tick­et.

Cameron 17:14

Yes, War­ren Buf­fett would say what could I turn that into over 20 years?

Tony 17:18

No.

Cameron 17:18

I could not make a thou­sand bucks.

Tony 17:22

[laugh­ing]

Cameron 17:22

That’s why you’re not War­ren Buf­fett.

Tony 17:24

True. Yeah. But now I can talk about see­ing Pearl Jam from the front row.

Cameron 17:28

Yeah, well, Chris­sy opened for Pearl Jam. Did you know that?

Tony 17:31

No, wow. Yeah. Well,

Cameron 17:34

Yes.

Tony 17:34

Wow, guess you’ve found your new hero.

Cameron 17:36

When she lived in Seat­tle, she was in a band. She played vio­lin in a band that opened for Pearl Jam once.

Tony 17:41

Oh my god. Wow.

Cameron 17:43

And she went to Mike McCready’s house after­wards, and he owns a bunch of I’m prob­a­bly gonna butch­er this but I think the sto­ry is, he owns a bunch of real­ly rare Stradi­var­ius type and equiv­a­lent vio­lin. So he gave her a tour of his very rare vio­lin col­lec­tions, like, 600 year old vio­lins and all that kind of stuff.

Tony 18:10

Is that like, come to my place and look at my etch­ings.

Cameron 18:14

[laugh­ing] Prob­a­bly. What else have we got? You want to do your pulled pork of the week­end? See what you can crash this week? Yes. [laugh­ing]

Tony 18:24

[laugh­ing] Well, some­one asked the ques­tion on Face­book group about C O G COGstate

Cameron 18:34

Yes

Tony 18:34

So that’s going to be my pulled pork, and it was up 15% on Fri­day, and I think last time I looked at, it was down about 5%. Again, so hold­ing my breath. [laugh­ing] And I I has­ten to add that when I did this, this morn­ing, we still don’t have the lat­est num­bers in Stock Doc­tor, even though the results are out, which drove the price up on Fri­day. So like, the num­bers will need to be updat­ed by peo­ple, and chances are by the time I hit this here, new num­bers will be out.  But any­way, I got the ques­tion that

was asked on Face­book, which is worth explor­ing, and so I’ll focus on that is that the com­pa­ny on a abnor­mal basis lost mon­ey on a nor­mal­ized basis it made mon­ey and yet the results were well received. So-

Cameron 19:26

Yes.

Tony 19:26

What’s with that, was the kind of the ques­tion the gist of the ques­tion on the Face­book group, and so that’s what I want­ed to focus on. So just a lit­tle bit on COG. First of all, it’s an equip­ment leas­ing firm, a bit like Forum Finance that we talked about before that was had the prob­lems with the the prin­ci­ples, defraud­ing the bank NAB bank, I think from mem­o­ry going over­seas.

Cameron 19:49

Alleged­ly.

Tony 19:49

So sim­i­lar sort of com­pa­ny in that it. It loans, big busi­ness, mon­ey to buy equip­ment usu­al­ly secured against the equip­ment and often times, from what I can tell prob­a­bly a bit rur­al based, so farm equip­ment trac­tors, things like that, but it’s at least part of the busi­ness. I’m not sure if it’s the it’s the over­all busi­ness. But what I want­ed to focus on is, it’s what’s called a roll up in the invest­ing game, and so what how it was this com­pa­ny’s pop­u­lar is because it’s going around buy­ing small leas­ing firms and then bolt­ing it on to their own busi­ness.  And roll ups have been done for a long time in the stock mar­ket.

They work best when a list­ed com­pa­ny has a PE ratio, which is high­er than the com­pa­nies that’s tak­ing over, and so the basic arith­metic is that, like if you owned a cof­fee shop, and I own a cof­fee shop, and they both trad­ed on the same price earn­ings ratio, which they prob­a­bly would if they are unlist­ed and are both sim­i­lar, I’d have to raise as much cap­i­tal as I have now to buy you out, and so one plus one equals two, right? I did­n’t have to go and bor­row mon­ey, or if.  I was list­ed, issue more shares and then buy you out. But if cof­fee shop num­ber I had a PE ratio that was twice cof­fee shop num­ber B, then it’s much eas­i­er to take over cof­fee shop num­ber B, you still have to issue shares, but only half the num­ber you’d have to issue if they were if they are both on the same P, and so hav­ing a high­er P ratio is real­ly help­ful if you’re tak­ing over a com­pa­ny, and in the equip­ment roll up space, this com­pa­ny trades on a PE of around just under 15.

So it’s about 14.9 did my num­bers, and it men­tioned some­where in the in the pre­sen­ta­tion I read today that most of the com­pa­nies in the space have their unlist­ed trade on a PE of about sev­en.  So it’s about half that.

So this is a case of one plus one giv­ing you three so they can go and take over, you know two com­pa­nies that an unlist­ed com­pa­ny could take over for the same sort of issue in cap­i­tal, and so that’s how roll ups gain momen­tum, and they’re loved in the invest­ment com­mu­ni­ty because they can just keep going until there’s no more equip­ment com­pa­nies left, and it’s kind of arbi­trage between high PE ratio and low PE ratio goes, and so it’s almost like val­ue invest­ing in reverse. They’re get­ting valu­able acqui­si­tions because it’s cost­ing them half what it would cost, unless the com­peti­tor to buy these com­pa­nies out.

So yes, it’s a good busi­ness plan. The cau­tion­ary tale comes at the end when they fin­ished all the roll-ups, and it’s a mature busi­ness, and there’s cas­es where com­pa­nies have fall­en over when they’ve reached that stage, and the clas­sic exam­ple is ABC learn­ing, which was a roll-up of child­care cen­ters, done by a Queens­lan­der by the name of Eddie Groves, who had one of the more fash­ion­able mal­lets to come out of Queens­land, and very nat­u­ral­ly, I think they were aggres­sive­ly rolling up all these child­care cen­ters, which trad­ed on very low mul­ti­ples, and because he was list­ed, he had a high­er PE ratio and could issue script eas­i­ly and take them over. When that sort of start­ed to reach matu­ri­ty, he was under all the pres­sure from the invest­ment com­mu­ni­ty to keep growth up, and so that put pres­sure on a lot of account­ing anom­alies which came out once the com­pa­ny final­ly col­lapsed. But when a roll up reach­es sort of matu­ri­ty, there’s no one left to buy, they’ve got a… it’s very hard for them to get the same sort of growth out of the exist­ing busi­ness­es that are get­ting when they are buy­ing them cheap­ly. So that’s just one thing to watch out for. I don’t know if we’ll be in COG when that hap­pens. But yes PE, that hap­pens.

There are peo­ple doing it in the mar­ket in dif­fer­ent ways. It’s a bit like Weiss tech, which is a bit of a mar­ket dar­ling, and I think its share price went up like 50%, after its results came out last week. Anoth­er sort of high priced tech com­pa­ny, it’s a freight logis­tics com­pa­ny. But it’s been going around the world buy­ing oth­er freight logis­tics soft­ware, sor­ry freight logis­tics soft­ware com­pa­ny. It’s been going around buy­ing oth­er com­pa­nies that pro­duce logis­tics soft­ware for freight com­pa­nies, and using its high PE to do that, and again, who knows what will hap­pen when they run out of com­pa­nies to buy, they’ve got to then get good growth out of their mature busi­ness, and that’s hard to do.  So, but on the way up, it’s a great ride, you get big share price appre­ci­a­tions.

So I just want to make that clear about COG. The sec­ond thing is to look at its results and they’re not in Stock Doc­tor yet, but the results that were on their web­site. First of all, they’re unau­dit­ed, which is kind of a bit of a sur­prise because most com­pa­nies are releas­ing audi­tor results now and it’ll cer­tain­ly have to be audit­ed by the time it gets into the annu­al report, which will come out in the next month or so, and the results con­tain to two issues which are worth high­light­ing.  The first one is that there was a going con­cern clause. So the direc­tors called out the fact that if you looked at the num­bers, the way they’re pre­sent­ed, then there’s a, you could draw the con­clu­sion, the com­pa­ny would­n’t be able to pay its debts going for­ward, they have a rea­son for that which I’m sat­is­fied is a rea­son­able rea­son, and it’s got to do with account­ing prin­ci­ples with these kinds of equip­ment, leas­ing com­pa­nies, and they call out the fact that debt is treat­ed as short term, because it’s issued in the year that they equip­ments leased.  And it’s amor­tized into that year, and the asset is amor­tized over its lifes­pan, which might be three or four years.

So you have this mis­match between cur­rent lia­bil­i­ties and cur­rent assets. So you have lots of long term assets and lots of short term lia­bil­i­ties. But the real­i­ty is, the lease will match the life of the equip­ment, and so it’s all tick­ety-boo. So I kind of get that argu­ment, give them an OK tick on that. But it’ll be inter­est­ing to see what the audi­tors say about that. So I flagged the fact that this could be a qual­i­fied audit, when the audit report comes out.  That’s the first thing. Sec­ond thing is that there was also a big write down of intan­gi­bles for this com­pa­ny, which is why, as some­one point­ed out on Face­book, the com­pa­ny made a loss if you look at the P&L, but it’s called an abnor­mal year, or an abnor­mal loss, and so if you look at the ongo­ing oper­a­tions, they’re quite prof­itable. The abnor­mal loss again, it looks like a bit of an arcane account­ing treat­ment.

So I’ll be inter­est­ed in what our friends the audi­tors have to say about it. But basi­cal­ly, it’s a right down to the curb because this, they’ve been cen­tral­iz­ing the new equip­ment lease busi­ness­es they’ve been buy­ing into their exist­ing one.  And the account­ing treat­ment for that is that the one that they pur­chase has to be writ­ten down, even though it’s still essen­tial­ly going oper­at­ing as it was but part of a new busi­ness, and because tech­ni­cal­ly, the old busi­ness has been closed, and it’s been wrapped up into the new one.

So there was an abnor­mal write down of amor­ti­za­tion for the good­will on those past cou­ple of pur­chas­es. Again, makes sense man­age­ment explained that that makes sense. But it’d be good to see what the order was com­ing out with. QAV num­bers are good for this one, albeit, we still have Decem­ber 20 fig­ures so they may change QAV score 0.25, qual­i­ty score 82% and some of the high­lights, I won’t go through the whole lot. Finan­cial health is strong.  The price the cash flows is only 3.3 the net equi­ty per share is $1.09. There’s no IV2 so this is not being cov­ered by any bro­kers or many bro­kers, which is some­thing I like because it allows us to form an opin­ion and get in there before the bro­ker com­mu­ni­ty have a look at it. Lit­tle yield 1.9%, but not great. But direc­tors hold 20% which I thought was good, that’s a big tick for me, and using the cur­rent PE, it’s not the high­est or the low­est, so it’ll get a score of zero, which I don’t think will change when the new fig­ures come in, and it’s been in an uptrend for a while. So it’s not a new-three point trend­line uptrend. So that’s COG, have a look at the new results and watch out for the audit report when it comes out too.

Cameron 28:17

I think the biggest thing on the score­card that you did­n’t men­tion is the fact that their CEO isn’t cur­rent­ly hid­ing in Athens. So that’s good. [laugh­ing]

Tony 28:28

[laugh­ing] Well, I would­n’t mind bet­ting that the Forum Finance cus­tomers are on top of their call list at the moment, it might be an oppor­tu­ni­ty for them, yes.

Cameron 28:36

[laugh­ing] By the way I was just hav­ing a look at the price today COG that is it’s only down two and a half per­cent. So your pulled pork’s actu­al­ly claw­ing back some of that…

Tony 28:51

[laugh­ing] I’m not sure if it’s my pulled pork or my email when I send it to you. I guess you’re in into your inbox in the morn­ing say­ing I’m going to do this stock of the week. Some­body is mon­i­tor­ing the Chi­nese hack­ers [crosstalk 29:03]

Cameron 29:06

Speak­ing of anom­alies and num­bers, though last week, we talked about ASX’s cash flow, ASX the com­pa­ny that is and I know, you then spoke to Bail­lieu and you had a bit of an update on all of that you want to quick I know it’s not in our notes, but can you just…

Tony 29:22

Yes, sure. From mem­o­ry, there’s about $5 bil­lion of oper­at­ing cash flow, which looks a bit unusu­al, and that par­tic­u­lar in the oper­at­ing cash flow jumped up from about 1 bil­lion last halves to 5 bil­lion this half and jumped on a pre­sen­ta­tion that the CEO of at the ASX did at val­ues and he said I asked the ques­tion in the chat, but it did­n’t get time to be answered.  But any­way, dur­ing the pre­sen­ta­tion he said that the ASX changed from cash account­ing to accru­al account­ing, and so that’s the first thing to note that some some­times that means that assets are treat­ed dif­fer­ent­ly and they they’re brought to book ear­li­er than they would be if it was straight cash account­ing. I think that’s part of the prob­lem or part of the issue with this one.

So that par­tic­u­lar line item and I spoke to Alex Hay lat­er on in the day about it and he said yes, what’s what hap­pens is it’s one of two things it’s either the mon­ey flow­ing through the sys­tem in the ASX, so you have T plus two set­tle­ments. So we buy a stock we have two days to pay it. So there’s always a cer­tain amount of mon­ey cir­cu­lat­ing with­in the ASX, he said, that’s either being because of accru­als count­ed all in one go. For the end of end of half num­bers, or there’s a cer­tain amount of secu­ri­ty the ASX has to hold to enable that order flow prop­er­ly.  Because you’ve got to be able to know that if I pay my stock bro­ker and stock bro­ker gives it to the ASX has kind of reached the next bro­ker and then back out to the per­son who was sell­ing the share.

So the ASX has to hold a cer­tain amount of secu­ri­ty in the sys­tem to take into account any tim­ing glitch­es or any delays, or even in the worst case, you know, stock broking going bank­rupt or some­thing like that, and so they have to hold a large amount of secu­ri­ty.  And Alex thinks that could be a com­bi­na­tion of both of those two things, or either or, and the fact they’ve gone from cash to accru­al means that those secu­ri­ties are being booked at the end of the half in one guy. So I think it will be the case that going for­ward, we’ll see it stay there. It’s finan­cials are the hard­est ones to I guess get your head around in terms of oper­at­ing cash flow, like it’s pret­ty easy. If it’s a retail­er or indus­tri­al com­pa­ny or a fac­to­ry. It’s basi­cal­ly just the sales com­ing in as the cost of goods for those sales.  But when it comes down to finan­cials, you have all these fun­ny instru­ments that are in there, the account­ing plays a big part… How they treat the assets, like we just saw with COG, if they have leas­es, how they’re treat­ed against the asset back­ing for those leas­es. So I, my rule of thumb has always been just to take oper­at­ing cash flow at face val­ue.

So some­one said, Well, it was­n’t, we nor­mal­ly would­n’t have the ASX on our buy­er list, because that $5 bil­lion dol­lars would­n’t be there, and it would have a price to cash flow much high­er than what we would nor­mal­ly look for.  But still, my rule of thumb is if it’s there, it’s there. If it goes for­ward, it’s there. It’ll stay on the buy list. I’m I cer­tain­ly don’t have the account­ing now to be able to back out things like that and know how to sep­a­rate them or treat them, and there’s also the counter argu­ment, which is what if it is the mon­ey fly­ing through the sys­tem? It is a kind of oper­at­ing cash flow, it’s cash, it’s there. It’s just not com­ing in as a receipt to the ASX. So yes. I as a sort of one hour a day investor, I’ll leave the cash flow the way it is, rather than try­ing to be a you know, nerdy accoun­tant and pull these things apart, and even if I get this wrong, it still can be trad­ed on a three point trend­line basis if I get it wrong. So time will tell.

Cameron 33:21

Right. Bot­tom line is noth­ing to be over­ly con­cerned about in ASX.

Tony 33:26

No, I don’t think so.

Cameron 33:27

So yes, Alex Hay, for new lis­ten­ers, has been your bro­ker of Bail­lieu for 100 years.

Tony 33:33

Cor­rect. He’s one of the major part­ners in the firm. So he knows what he’s talk­ing about.

Cameron 33:37

Smart dude. Yes.

Tony 33:38

Yes.

Cameron 33:39

Did you want to talk about ANP?

Tony 33:41

I just quick­ly, I men­tioned that last week that I could­n’t make a sec­ond trough to get a sell-line up to date. Which case I’d go back up the graph until I had two troughs and which means it was a sell a while ago. But it has con­tin­ued to turn up. So I’m just going to call it out. There’s some­thing to watch. Right? If we do get a sec­ond trough with AMP, and it keeps going up, it’s prob­a­bly a good time to buy.

Cameron 34:04

Right.

Tony 34:05

And the gut­si­er peo­ple who like we did with talk­ing about what the banks last year after they report­ed mid-year, I think last year, we could see in the num­bers that we’re going to do well, and I think I am he’s prob­a­bly in that space now. So it’s get­ting close to time to dip our toes in the water there. I think I just want to see some more con­fir­ma­tion. There’s anoth­er falling knife in it share price graph.

Cameron 34:27

Right.

Tony 34:29

Two more things we did­n’t talk about. Three more things.

Cameron 34:32

Oh, you Steve Jobs.

Tony 34:34

Yes, that’s right. One more thing.

Cameron 34:35

One more thing.

Tony 34:36

Yes. Three more things we haven’t talked about. The first one is and I think I don’t think we talked about this but pull me up if we have. Some­one asked the ques­tion about whether return on equi­ty should be part of that check­list, and so I did anoth­er 12-month tri­al on that. I just want to let peo­ple know what the results were. So again, I went back to a buy list from 12 months ago and I broke it up into in two, three bands, return on equi­ty that was neg­a­tive because some­times our stocks have a neg­a­tive ROE.  Because they’re in turn­around mode, I put like that was one band, the sec­ond band was stocks ahead nar­row we have between zero and 20%, and the third band was an ROE above 20%, and you know, for a long time investors get taught to look for com­pa­nies, which are always above 20%. So that’s why I broke it up that way, and then I looked at, you know, how they tracked how each of those three bands trav­eled over the last 12 months.  And the sur­pris­ing one was that it was the mid­dle band that out­per­formed so the one between zero and 20%.

So if I looked at all stocks in that peri­od, so the wire­less was about the, I think the 8th of August 2020. I did this analy­sis a cou­ple of weeks ago, over­all, for all stocks on the buy­er list that there was like 45% return over that peri­od. Across the bands, though, that the stocks have had neg­a­tive ROE, we returned 32%.  And, sor­ry, 33%, the stocks have had more than 20% ROE, we returned a 40% per­for­mance over that time, and the mid­dle band had 52%. So I have always felt that I’m agnos­tic towards ROE, and I think this kind of con­firms it, and I’ve been through the rea­sons for that, I think a lot of investors focus on ROE. So it’s become a bit of an over­bought met­ric, if you like so much investors focus on it, which dri­ves the price up for those stocks. But also to I think it’s become a gained met­ric that, if a CEO gets said gets told their bonus­es based on the RFP, they can do a cou­ple of things to improve that met­ric with­out nec­es­sar­i­ly improv­ing the busi­ness.  And so that’s anoth­er rea­son why I don’t always focus on ROE, and but this analy­sis, it’s only 12 months, it’s only one look at it. So I has­ten to add, it’s not a great sta­tis­ti­cal analy­sis. But it says to me that ROE is not some­thing we should put the check­list.

Cameron 37:03

Right. Good. Thanks.

Tony 37:05

The sec­ond thing I want to men­tion was I have been think­ing about putting into the check­list, some kind of met­ric that tracks com­pa­nies which start pay­ing a div­i­dend for the first time as as a bit of a vote of con­fi­dence by the board in the com­pa­ny going for­ward, and often­times, when I’ve noticed when I see that the share price does take a big leap up. But I haven’t been able to work out a good fil­ter for it in stock doc­tor, so I’m just try­ing a cou­ple of them. The ones I’m try­ing is I’m using a fil­ter for div­i­dends per share, greater than zero cur­rent­ly, and a two-year growth over the last lap pri­or two years of greater than 100%.  That’s not always throw­ing up com­pa­nies which go from no div­i­dend to a div­i­dend. Because some com­pa­nies do grow their div­i­dend more than 200%, like Fortes­cue Met­als Group.

So it’s not a per­fect one, and then the oth­er one I’m look­ing at is com­pa­nies which have a zero yield 0% yield this half, but their fore­cast is pos­i­tive. You will have to wait six months and see whether that is the right list or not.  But ide­al­ly, I want some­thing which peo­ple may, you know play around with and come back to us with a solu­tion for which says yeah, here’s here are the stocks which have paid a div­i­dend for the first time as half if we can sort that out. That might be it’s worth research­ing at least but it might go into the check­list.

Cameron 38:30

Well, it might be a good ques­tion for me to throw to my new friend Vic­tor de Pasquale, Lin­coln indi­ca­tors, the head of cus­tomer some­thing train­ing prod­uct, some­thing great. If you ever need to know how to do any­thing on Stock Doc­tor come to me, yes.

Tony 38:47

So there was those two things are the third one I want to talk about Shell sce­nario plan­ning. I’ll do it quick­ly. This goes way back to when I was talk­ing about the oil price and the oil indus­try, maybe a month or so ago. I just want­ed to call out it’s an eco­nom­ic frame­work, I guess.  So, you treat it with a bit of a grain of salt. But it’s real­ly inter­est­ing if peo­ple are inter­est­ed in in eco­nom­ic frame­work. So when I was work­ing at Shell, Shell has, and still has a rep­u­ta­tion for being a fan­tas­tic eco­nom­ic fore­cast­er, and I guess, busi­ness plan devel­op­er, and I start­ed off with a very broad based glob­al frame­work for what they think is going to hap­pen in the next five years, and Shell is a one of the biggest com­pa­nies in the world. It’s sell­ing a prod­uct which is used all over the world.

So it’s plugged into, seri­ous­ly plugged into most economies in the world.  And it has this rep­u­ta­tion for pro­duc­ing great eco­nom­ic frame­work sce­nar­ios, and you can go and Google it and look it up. It’s they make it read­i­ly avail­able. Back when I was work­ing at Shell back in the late 80s ear­ly 90s. To use the frame­work then, and I usu­al­ly pro­duce, I think it was four at that stage, it’s two cur­rent­ly, as code sort of com­pet­ing ideas about where the, the world might go to eco­nom­i­cal­ly in the next five years, and back then, and then I wait for one to dom­i­nate, and they sort of then align up all their busi­ness plan­ning around that sort of glob­al frame­work, and back then the frame­work that dom­i­nat­ed was called Glob­al mer­can­til­ism.

And back in the late 80s, it was pre­dict­ing that bar­ri­ers to trade would come down, we trade war with Chi­na, and Viet­nam and, and India and places like that, that infla­tion would go down because of that, and all those things that flowed from that, and that led them to invest more in any emerg­ing coun­tries like Viet­nam, Indone­sia, places like that, South Amer­i­ca, which treat­ed them, which they did very well.

So I just want­ed to call that out that the cur­rent two dom­i­nant sce­nar­ios, which are worth at least hav­ing a flick through moun­tains, and ocean, so one is moun­tains, one is oceans, the moun­tains, one says, basi­cal­ly, they say that the glob­al econ­o­my is going one of two ways in the next five years, it’s either going to retreat back into big super­pow­er economies, and there’ll be less trade going on in the world, or it’s going to be an ocean of small coun­tries still trad­ing with large ones or small­er ones, much con­tin­u­ing like it has in the last sort of 20 years, it looks to me more like it’s going to go the moun­tain route, which means that coun­tries retreat into them­selves, there’s less trade between coun­tries, there’s less out­sourc­ing of cheap labor going on. Kind of like I guess, if you look at it, in terms of coun­tries, Chi­na retreats into its shell in Amer­i­ca retreats into its shell, and we don’t have that.  So the free flow of trade that we’ve come to know, unlike in the world econ­o­my, which means that infla­tion will start to rear its head. If we can’t get t‑shirts from Bangladesh any­more, we’re going to pay more for t‑shirts, right?

So that in the longer term means infla­tion, and there’s all kinds of impli­ca­tions for infla­tion on the com­pa­nies we invest in and on us as investors, the share mar­ket usu­al­ly does­n’t like infla­tion, inter­est rates go up, and infla­tion becomes a drag on the econ­o­my.  So read it as a back­ground, I kind of like it as a frame­work, it’s not going to make any changes to how I invest because of it, but just want­ed to flag it as a real­ly inter­est­ing resource for peo­ple to have a look at.

Cameron 42:32

Ter­rif­ic. I can’t I can’t imag­ine, how we would decou­ple from Chi­na, but who knows.

Tony 42:41

Well, we already are. They’re not tak­ing our coal any­more or our wine or baby for­mu­la. Yes, they’re putting a clamp on iron ore. Are you being sar­cas­tic, are you?

Cameron 42:53

No, no, I’m not. I see those things as just, them throw­ing their weight around and remind­ing every­body who’s boss, but I can’t see it. going too much fur­ther. But who knows?

Tony 43:08

Who knows? Yes, I cer­tain­ly don’t. But yes, if peo­ple are inter­est­ed, just a real­ly inter­est­ing read.

Cameron 43:14

Oh, thank you for that. Ques­tions.

Tony 43:19

Yes.

Cameron 43:24

Hey, it’s your show, man. We’re just here going along for the ride. Brad asks, hi Cam, Is there ever a sce­nario where sen­ti­ment is dis­count­ed? To some extent? I’m think­ing tight­ly held com­pa­nies with­out much float? Some­times a few tiny trades makes it look like Armaged­don? Yes. Well, I saw that recent­ly with GLE. Yes.

Tony 43:49

Yes, right. Well, that’s what we have the three times aver­age posi­tion size has to be a third of aver­age dai­ly trade vol­ume to try and get us out when things Armaged­don hap­pens. But yes, with these kind of small­er com­pa­nies and with these larg­er com­pa­nies that have small floats, yeah, it’s going to hap­pen.  No, I would­n’t dis­count sen­ti­ment in those cas­es, it may be even more impor­tant in those com­pa­nies. But the cou­ple that I’m more famil­iar with are like some of the large mar­ket cap com­pa­nies that have two dom­i­nant share­hold­ers, and a very small float. So I’m think­ing of the likes of AGG Angl­o­Gold, and Yan­co. Why I am by both of those, I’ve invest­ed in the past and bit­ten twice by the same thing that I guess Brad’s talk­ing about. You go in there and it works both ways. So with a small float and two large share­hold­ers, if there’s a small amount of pur­chas­ing on the way up the share price can rock it up quick­ly.  But as soon as that revers­es, and you try and go out it drops like a stone so yeah, it’s that taught me to real­ly obey the aver­age salary to rule in invest­ing, and poten­tial­ly, you know, you may even need to have a big­ger mar­gin of safe­ty for these kinds of com­pa­nies. So that’s pret­ty much all I can add, I would­n’t mod­i­fy the sen­ti­ment rules. If any­thing, I would mod­i­fy hav­ing a big­ger mar­gin of safe­ty with the ADT rule.

Cameron 45:20

The guys at the Bris­bane din­ner want­ed to sug­gest that we add a new check­list item, has Cameron bought the stock recent­ly?

Tony 45:25

[laugh­ing] Well, now that we have to go no go. We have an autho­rized rep license fund, so we have to declare stocks.

Cameron 45:36

Oh, Which reminds me, I was sup­posed to add all of our stocks to the newslet­ter this week, which I did­n’t. I’ll have to set a reminder to remind myself of that next week. I’ll send…

 

Tony 45:47

Yes, I think through all our require­ments, that can be done. Going for­ward. Yes

Cameron 45:51

I’ll have a check­list that I go through. From now on, make sure that’s all includ­ed. John asks, from Tony’s expe­ri­ences, the mar­ket just hit all-time highs, where does he feel we are in the cycle?

Tony 46:06

Well, let me ask John, where he feels we’re in the cycle. I per­son­al­ly, I think we’re about 11 o’clock in the cycle, and I enun­ci­at­ed some of those thoughts over the past months about infla­tion about inter­est rates? The ques­tion is, how long does it take to get from 11 to 12? o’clock? And that’s the mil­lion-dol­lar ques­tion that no one knows, and also, how far does the mar­ket go up before it comes down between 11 o’clock and 12 o’clock, as I’ve seen before, in the GFC, in the .com boom, that last leg up can be 80 to 100% rise in the mar­ket.  And if it drops, half, you still, made a lot of gains in that last year.

So yes, I think it’s get­ting very top­py. val­u­a­tion wise, the PE ratio that if you look at the aver­age PE in the mar­ket, it’s not too bad. So one thing that might hap­pen is that there’s a cor­rec­tion rather than a route in the mar­ket, and I’ve got to say that, if that hap­pens between now and Christ­mas is usu­al­ly the hunt­ing sea­son for cor­rec­tions in the mar­ket.  There’s a lot of aca­d­e­m­ic research around the old adage sell­er may and go away, which does­n’t always hap­pen, and it’s an adage that you can’t trade by. But it reflects kind of the psy­cho­log­i­cal psy­chol­o­gy of north­ern hemi­sphere investors if you if you think about that, so they’re on their sum­mer breaks at the moment. This is like our Christ­mas hol­i­days in Aus­tralia, right? No one’s at work. In North Amer­i­ca, peo­ple are at their beach hous­es, their cot­tages by the lake. Cer­tain­ly we’re in Toron­to in Cana­da, where I had a lot of expe­ri­ence of it first­hand, and I lit­er­al­ly D camp for a month or six weeks, because they’re on school hol­i­days.

They often go back to school on Labor Day, which is com­ing up I think Labor Day is Mon­day week in the States. So it’s usu­al­ly I think the first Mon­day in Sep­tem­ber or some­thing like that. It’s the last big hol­i­day of the sum­mer, uni­ver­si­ties or start­up after that schools will go back after that. Peo­ple will reluc­tant­ly go back to the office if they can and start work­ing again after that.  So gen­er­al­ly by Octo­ber, there can be a cor­rec­tion in the mar­ket so that peo­ple get to grips again with you know, what’s been going on over the sum­mer while they haven’t been pay­ing atten­tion. That’s kind of the loose psy­chol­o­gy of it. It’s does­n’t always cor­rect in Octo­ber, but if you look back at all the major crash­es from 2009 it’s always Octo­ber.

Cameron 48:27

87?

Tony 48:28

87 was Octo­ber, the GFC. I think Lehman Broth­ers went bank­rupt in Octo­ber or there about.

Cameron 48:34

Yes.

Tony 48:36

So there’s some­thing about it. I don’t know if it’s like death three times in last 100 years. So it’s cer­tain­ly not worth­while sell­ing a mil­lion and going away, but that’s the aver­age.

Cameron 48:47

And, you’ve told us you like to be always invest­ed, and you play it by ear?

Tony 48:54

Well, yes, I mean, what’s the alter­na­tive? If you try and time the mar­ket, you can’t do that. You may miss that last leg up, which goes up for a long time, inter­est rates are still low, so you make up for years. There’s plen­ty of gov­ern­ment sup­port around when inter­est rates are low so Reno’s when that’s kind of when the Jack­son Hole con­ven­tion hap­pened on the week­end and Jerome Pow­ell came out there’s a bit of a dove in terms of inter­est rates so he’s will­ing to sup­port the econ­o­my going for­ward if there’s more COVID for exam­ple.

Cameron 49:23

By the way that’s where I’m retir­ing to.

Tony 49:25

Jack­son Hole?

Cameron 49:27

Yes, you ever been there?

Tony 49:28

No.

Cameron 49:30

Mag­i­cal lit­tle place. Real­ly great. Yes.

Tony 49:34

I thought it was a joke about Jack­son Pol­lock.

Cameron 49:38

I don’t always make jokes, Tony it’s judi­cious­ly. They’re not always good jokes. No great. Chris­sy and I did a big road trip in the US. 10 years ago, we stopped in Jack­son Hole and it’s near the Grand Tetons or the big tit­ties as I always refer. Because that’s what they’re sup­posed to be. But yeah, jack In whole, just real­ly quite lit­tle town coun­try town with coun­try bars and its great.

Tony 50:08

So hard to see why all the bankers and busi­ness leader the world would go there for a hol­i­day for con­ve­nience

Cameron 50:14

Yes, Har­ri­son Ford lives two years his range there, I did­n’t run into Har­ri­son on that trip. We just we missed each oth­er. It was a tim­ing thing. But yes.

Tony 50:22

We’ll have a con­fer­ence there some time.

Cameron 50:24

I think we should do that. When we when we’re up and run­ning in North Amer­i­ca. We’ll have our con­fer­ences there. Yes.  Well, fol­low­ing on from psy­cho ques­tions, Daniel also asks if you take any extra pre­cau­tions in these times and then he says, I guess The Ice­man just does what he does.

Tony 50:40

Cor­rect. I don’t do any­thing dif­fer­ent. You know, the, the num­bers can still be good. Lead­ing right up to the crash, there’s always a buy list. I haven’t ever haven’t been like War­ren Buf­fett who shut his invest­ment part­ner­ship in when­ev­er it was 69 or some­thing until I can’t find any­thing to buy, I’ve nev­er expe­ri­enced that at all.

So yes, I wait for the shares to start to come down and use the three point trend­line to trade our way out of it.  As we did with the COVID cough last year, try and miss out on the on much of the bot­tom and then bar­be­cue on the way um, so that that’s how I time the mar­ket, I guess, but that the mar­ket times me rather than me tim­ing the mar­ket. Because oth­er­wise you do things which I don’t think is, is a good way to invest, which is you hold cash, and which is a form of tim­ing the mar­ket and then you get you know, if you’re hold­ing 20% cash, it means your returns are 20% low­er when cash is pay­ing less than 1%.

So, you know, for me being in the mar­ket all the time get­ting an extra 20% return is is the insur­ance or is the pay­off for being ful­ly invest­ed, and if it turns down on you, well, you’ve got that buffer, obvi­ous­ly.

Cameron 51:51

Because it’s also why you always tell me in pri­vate the Buf­fet­t’s an ama­teur.

Tony 51:56

[laugh­ing] No I do dif­fer­ent with Buf­fett on hold­ing cash, but he’s hold­ing cash for dif­fer­ent rea­sons. I mean, he’s hold­ing cash. So you can be the banker of last resort when the down­turn hap­pens, which is kind of what we’re talk­ing about, he’s wait­ing for a crash with the cash. So but you know, he’s also run­ning a com­pa­ny worth $100 bil­lion, it’s dif­fer­ent way to invest in some­one who’s run­ning mil­lions or tens of mil­lions.

Cameron 52:24

How much? How much time? [laugh­ing] I did tell you the QAV din­ner, we decid­ed to start a book one day we’ll find out and we’ll see who wins. There’s anoth­er tro­phy for who get guess­es.

Tony 52:41

well, that when some­one gets hurt, the price should go to me I think for hav­ing it despised. So I was think­ing about this like, like one of the things like when I was doing my stud­ies in essen­tial­ly the to become a autho­rized to pro­vide gen­er­al finan­cial advice, you do two mod­ules in the finan­cial plan­ning syl­labus, and there’s a dozen mod­ules or some­thing to do. So it’s not just all about secu­ri­ties. But the gen­er­al one was, you know, gen­uine­ly try­ing to finan­cial plan­ning.

So I talked about insur­ance and mort­gages and pro­vid­ing advice and all that, and I was blown over by one of the state­ments of our teach­ing finan­cial plan­ners, and the state­ment was some­thing along the lines of your job isn’t to max­i­mize and investees your clients returns Your job is to min­i­mize the risk, and I thought you’ve got to be kid­ding me, and just think about that for a minute.  That’s real­ly telling the finan­cial plan­ner min­i­mize risk, so you don’t get sued. It’s pro­tects, but in min­i­miz­ing risk and low­er­ing returns, you actu­al­ly increase E, you actu­al­ly pro­vide more risk in the port­fo­lio, right? Because, you know, I’m retired if I’m retir­ing at 65, and I’ve got 15 years of you ever expect­ed life to go. My find that in my finan­cial plan­ner says look, you know, you’ve brought up this nest egg, let’s just put it in the index, you get 9% per year, you’ll get a good div­i­dend yield. Sure.

So it’s kind of dou­ble every eight years.  So you get you know, if you have 100,000 at 65 and a half 200,000 when you die, or yes, we can take a bit of a risk here. It’s going to be volatile, but you got to make 20% which means it’s going to dou­ble every three and a bit years. So it’s going to be worth 32 times that because you know 15 is three is five dou­blings of every three years it’s going to be worth $3.2 mil­lion $100,000 and okay if you die and it’s worth 3.4 it’s still bet­ter than 400,000 so you know the finan­cial plan­ning indus­try is tits up on us about it’s just ridicu­lous, and they teach that. Any­way, that’s my rant

Cameron 54:49

explains a lot. Mark any thoughts on the move­ment of M ye down the QAV lis [pho­net­ic] score down from point 232 point one two after June This trend still looks good, though. Yeah, well,

Tony 55:04

Yes, well. So for Mark’s ben­e­fit, I won’t make this the pull apart, I won’t go into a full detailed analy­sis of mas­ter­mind. [laugh­ing]

Cameron 55:12

And for my ben­e­fit too.

Tony 55:14

And for you ben­e­fit too, OK. Yes, so two things have hap­pened the share price has risen, and of course, that means the price to oper­at­ing cash flow inverts is the inverse of that. So it goes, it dri­ves the QAV score low­er, which is fine. That’s a good thing. The oth­er rea­son which may be behind the decre­ment in the QAV score is that the results for mas­ter­mind were down this year, both in terms of rev­enue was down and prof­it was down, and it was explained away for very valid rea­sons. Because of COVID. It pro­vides con­tract­ing into the min­ing sec­tor. It’s a min­ing, con­sul­tan­cy and engi­neer­ing firm, and par­tic­u­lar­ly in the coal indus­try, I think, and low­er coal mines have been hit by COVID and anti by Chi­na and have been closed down and so that the work has dried up. How­ev­er, all that was ful­ly flagged and investors seem very com­fort­able going for­ward, that mas­ter­minds are sol­id com­pa­ny and has good prospects.

Cameron 56:17

Right. Good. OK. Thanks, Mark Dun­can, would any­one care to ven­ture- this is on Face­book ‑would any­one care to ven­ture as to which sell-line is the most appro­pri­ate for CDD?

Tony 56:31

Okay, I’ll have a look. I haven’t looked at that one yet. So it’s Card­no from mem­o­ry, isn’t it? c D, D,

 

Cameron 56:37

C, D, D is Card­no, Card­no Lim­it­ed, and that’s a weird look­ing chart. Sort of bot­tomed out, ran COVID. A lit­tle bit after COVID, and then it’s had a real­ly big spike com­ing on since the begin­ning of 2021.

Tony 57:00

Yes, Hap­py Days. Hey. Yes, so I think the sell-line is going to be quite low com­pared to the share price. Yes, I’m going to look at the bot­tom, I start with the low­est point on the graph, we’ve got two which are very close. June 2020, is at 24 cents, and March 2020s, at 24. 5. So dur­ing 2020s, the low­est and then if I go to the right from there, the next one is at 29 cents, which is more than 8%. So that’s going to be L2. So L1 one is 30th of June 2020, and L2 is going to be… Well, tech­ni­cal­ly, it’s Sep­tem­ber 2020. But we’ll move it across to Octo­ber 2020. So we don’t cut the share price line there.

Cameron 57:02

Yes.  Yes.

Tony 57:49

Which means the buy price is going to be sub 50 cents when the share price is cur­rent­ly 99 cents.

Cameron 57:55

Yes.

Tony 57:55

Yes.

Cameron 57:57

Yeah. So, you know, if some­body owned CDD, and it start­ed to retreat, tech­ni­cal­ly, you know, they’d have a long fall, which I know peo­ple are always very uncom­fort­able with.

Tony 58:12

Yeah, and like it’s, it’s I for­get that, and it’s hard because if it comes off 10%, DSL is 10% just mere­ly a set­back, and it gets anoth­er leg up. So apro­pos my mus­ings before card­no is still trad­ing on a QAV score of point one, three, as of today, so it’s not like it’s point O five or low­er, and which I would con­sid­er to be quite risky. So it’s still I think it’s still it’d be a hold for me, any­way.

Cameron 58:43

And a lot of peo­ple have asked that lim­it the mon­ey for me a ques­tion com­ing up about this. But if you look at some­thing like this, its prices, more or less tripled, since the begin­ning of the year. Is it too late to buy in? It’s still got a pos­i­tive QAV score, it’s still got pos­i­tive sen­ti­ment, but it’s at least a five year high. Look­ing at my graph here. You know, I think peo­ple are often con­cerned as if we missed the boat here. Should we buy some­thing that’s had a mas­sive spike like that? Even if it’s goes well?

Tony 59:16

Yeah, just go by. It’s let’s say it’s point one, three, so it’s not going to be the first thing I buy. But yeah, I’d still buy. Absolute­ly.

Cameron 59:25

I mean, I’m wor­ried about the fact that

Tony 59:26

rule num­ber one, you’ve got rule num­ber one to look, you know, pro­tect­ing your site, scan and drop no more than 10% before you’re out. But yeah, it scores well. It’s got pos­i­tive sen­ti­ment, I’d still buy.

Cameron 59:40

Yeah, you would­n’t be scared off by the fact that it’s had a mas­sive run.

Tony 59:46

No, I would­n’t it has. Okay, so you can view this in two ways. It has had a mas­sive run off the COVID bot­tom. But like if you look back at its pri­or peak, which was Decem­ber 17. Which was a price of 93 cents. It’s not even 10% above that yet. So yeah, not that I’m say­ing you should base an invest­ment deci­sion on that. Well, I’m just try­ing to put some per­spec­tive into it. Yeah.

Cameron 1:00:12

Yes, OK.

Tony 1:00:12

Yes.

Cameron 1:00:12

Thank you, Mark Dun­can. No, that was Dun­can. Thank you, Dun­can, Mark, we’ve got like 12 ques­tions from marks today. I don’t know if they’re the same marks or dif­fer­ent marks or, you know, it’s like Mark from the Gospel of Mark. We just gave it the name mark. We don’t know who actu­al­ly wrote it. I just add names to the ques­tions that come in.

Tony 1:00:35

Even Matthew, Luke and one yeah

Cameron 1:00:37

So do you mind the old Python thing you mind if we call your Bruce. [laugh­ing]

Tony 1:00:40

[laugh­ing] Bruce.

Cameron 1:00:44

A Mark asks, hi Cam, Tony’s pre­vi­ous­ly dis­cussed how his qual­i­ty and val­ue scor­ing is not appro­pri­ate for ETFs and LIC’s, what about REIT’s?

Tony 1:00:55

Yes, so REIT’s, I still use the same scor­ing sys­tem for them. But they very rarely, I can’t think of a time when they’ve appeared on my buy list. I can think of prob­a­bly one over the last 10 years, and that was a REIT called APN Con­ve­nience Store, APN REIT, and I think it was spun out into one called APN Con­ve­nience Store, and along the way, it was a good score on our met­rics, and the rea­son for that is that it gen­er­al­ly a real estate invest­ment trust is what we’re talk­ing about when we talk about REITs, and some­times they called ARE­IT’s Aus­tralian real estate invest­ment trusts.  They’re basi­cal­ly a fund man­ag­er who goes around buy­ing prop­er­ty of dif­fer­ent class­es, and then putting them togeth­er into a fund and then trad­ing that fund on the share mar­ket.

So it’s like an LIC, but for real estate, and gen­er­al­ly, the oper­at­ing cash flow is the rent and rental yields less than 10%, they usu­al­ly between like about three and 7%, depend­ing on what stage of the cycle you’re at, and if that’s your oper­at­ing cash flow, then the price to oper­at­ing cash flows can be around 20, or more 2025 for most of the most of the life of these rates, and so they nev­er, nev­er pass that first hur­dle with us, does­n’t mean that they’re a bad invest­ment, and  I could prob­a­bly do some research and work out what the price to cash flow could be as a thresh­old, it’s more appro­pri­ate to reach but I just nev­er have.  And one rea­son why I haven’t is– it’s always in the back of my mind, what hap­pened to REIT when the GFC hit, and they all tanked real­ly, real­ly bad­ly. Because they all have all the gear­ing. REIT’s often have a lot of gear­ing in them.

Oth­er­wise, but main­ly because if you’re get­ting a… they’re a great invest­ment to gear, it’s like a fam­i­ly home or an invest­ment prop­er­ty, you’re going to get rental income, you know, it’s going to rent, it’s a qual­i­ty prop­er­ty. So you can afford to go well, in the case of invest­ment prop­er­ties that we would invest in, you can afford to go to the bank and say, I’m going to buy this prop­er­ty, lend me the mon­ey, and they say, sure you’ve got this income com­ing in to back it up. We’ve got secu­ri­ty over the prop­er­ty. So yes sure, what do you want. Same thing hap­pens on a large scale with these REIT’s, they issue bonds or what­ev­er, instead of going to the bank. So they gear up.  And the down­side of that is, of course, when there is a down­turn or a sud­den calami­ty in the finan­cial sys­tem. They get real­ly squeezed, and one of the one of the real­ly bad parts about the GFC is for a long time pri­or to the GFC. retirees were told our real estate invest­ment trusts as safe as hous­es and they pay a good yield, like you’re get­ting 7% from them, because they’ve got great prop­er­ties or they get good yields from their ten­ants, and like, you know, there was a lot of cap­i­tal loss dur­ing the GFC when they all went down sig­nif­i­cant­ly because of the gear­ing. So I haven’t ever both­ered to try and work out a way to invest in rates I’m quite hap­py play­ing in the in my cir­cle of com­pe­tence. The non-REIT uni­verse, not say­ing that REIT’s aren’t some­thing that’s good to invest in. But it just does­n’t fit my pro­file.

Cameron 1:04:11

I remem­ber in my late teens down in Mel­bourne, I worked for a year or so for like lit­tle pri­vate invest­ment firm Pama­corp, it was run by a cou­ple of guys called Mark Let­ton and Mark Stan­ley that I think both got them­selves in hot water lat­er on, as it turned out, but one of the things they were doing just after the Paul Keat­ing’s reces­sion that we had to have was when shop­ping cen­ters had col­lapsed. They were going around and just they were doing a val­ue adverse play buy­ing all of these shop­ping cen­ters when peo­ple were try­ing to offload them. [laugh­ing]

Tony 1:05:03

Yes.

Cameron 1:05:03

And I think they did very well at that.

Tony 1:05:04

Well, that’s often been the start of peo­ple’s for­tunes as hav­ing, as we talked about with Buf­fett hav­ing cash to go into the mar­ket when there’s blood in the floor.

Cameron 1:05:14

Yes.

Tony 1:05:15

Real estate def­i­nite­ly goes in cycles, and that hap­pens every 10, 15 years or so for sure.

Cameron 1:05:20

Yes.

Tony 1:05:21

Yes, and I just pulled out some num­bers to answer the ques­tion in more detail. A cou­ple of the big REIT’s that we can talk about. Good­man is trad­ing on 37 times cash flow. ALE which is the old Coles Myer liquor firms trad­ing on 29 times oper­at­ing cash flow, a REIT, which I’m not that famil­iar with called Char­ter Hall, Long Wale REIT 17 times cash flow. So basi­cal­ly, you invert that.  So if it’s trad­ing on 37 times cash flow, they’re get­ting a two and a half to 3% yield as income from the peo­ple who rent the ten­ants to the prop­er­ties.

So that’s why those num­bers are as they are. In the real estate area of things that we tend to get devel­op­ers com­ing up on our on our buy lists from time to time, which trade on lumpi­er cash flows, which is why we don’t get them there all the time. But on much bet­ter num­bers. For exam­ple, Sun­land, AV Jen­nings, Acu­men, I think ACU Acu­ment on there at the moment. They’re prop­er­ty devel­op­ers, and if they man­age their cash flow prop­er­ly, they get lots of cash in from sales, and they build the build­ing. Or they’ve sold some­thing and have that cash flow to rein­vest, and if they man­age it prop­er­ly, they become quite prof­itable.

Cameron 1:06:41

Thank you, Mark, Mark, Mark, the sec­ond or the third asks, CAA post­ed results yes­ter­day and went up. Rough­ly 10% QAV scores pret­ty good at point three, two, is it still a buy­er at these lev­els? of around $1.65? After run­ning well above its buy-line from 435. This is the ques­tion I was refer­ring to before so yes. So yes, going up.

Tony 1:07:08

Cor­rect. Yes. So I don’t have num­bers for CAA yet from Stock Doc­tor. side. Like I cer­tain­ly test it. It’s QAV score with the new num­bers. But before the new num­bers came in the QAV score was 0.34, so plen­ty of buffer there. My gut says it won’t drop off the buy­er list. So what I guess what I’m say­ing is I become wor­ried if some­thing was going up dra­mat­i­cal­ly, and it dropped back down to a point oh, five, all this. I cer­tain­ly would­n’t be buy­ing it then, and that’s not nec­es­sar­i­ly sell­ing it then. If it was still going up, but I con­sid­er sell­ing it if it start­ed to turn down at that kind of nose­bleed val­u­a­tion heights, and like I said before, I’ll do some more research on that. So I can get some rules around that one.

Cameron 1:07:57

I did sell it when it was about 735. Because I had to do rule one on CAA.  Yes

Tony 1:08:10

I thought its been going up quite sole­ly. I’ve had it for a while now. You might prob­a­bly…

Cameron 1:08:16

Yes, no, I did 11th of August I sold it bought it.

 

Tony 1:08:20

And thanks for tak­ing one for the team, and that’s it, and it’s a good return on CAA. [laugh­ing]

Cameron 1:08:32

Yeah, maybe you should. You’re wel­come. every­body. Have a 10% Stop Loss rule num­ber one for now. I do now. Yeah, yeah. Good.

Tony 1:08:44

Yes, maybe you should…

Cameron 1:08:45

You’re wel­come. every­body.

Tony 1:08:47

Have a 10% Stop Loss rule num­ber one for now.

Cameron 1:08:51

I do now.

Tony 1:08:52

Yes. Good.

Cameron 1:08:55

Last ques­tion from Mark the third. Hi, Cam some­time back TK said one of his tricks was to avoid buy­ing a stock that was in the top scor­ers list that have been going up. Do you know what that thresh­old is? For instance, if a stock has dou­bled in val­ue from cross­ing a three-point buy line is that an avoid see anoth­er ques­tion about this. Have you said that before?

Tony 1:09:17

I don’t recall say­ing that? I’m sor­ry. I’ve mis­led peo­ple if I’ve said that. I won­der if Mark’s get­ting con­fused with the fact I won’t buy it if it’s short term trend is down, and I wait for update and upturns for the month before I buy. Huh. Yes, but no, I cer­tain­ly would buy some­thing that was going up and I had a good score. Absolute­ly. Yes, Even if it was above its buy-line, and some­thing like Fortes­cue met­als group is the clas­sic exam­ple. We were buy­ing it well above its buy-line.

Cameron 1:09:48

Yes. So a lot of ques­tions about stuff going up, and the con­clu­sive answer is from the Char­lie Watts of invest­ing. No, you’re not wor­ried. It’s all good.

Tony 1:10:02

Yes, I’m not wor­ried you’ve got rule num­ber one to pro­tect you on a 10% sell side ratio but it’s going up for a rea­son peo­ple like it and the num­bers are good why would you not con­sid­er buy­ing it?

Cameron 1:10:15

Yes.

Tony 1:10:16

Yes.

Cameron 1:10:17

All right that’s a full lid this week, Tony we got in and under two hours for change, right?

Tony 1:10:24

We just had a two and a half hour meet­ing this morn­ing to make up for [laugh­ing].

Cameron 1:10:30

Well this gives us time for you to talk about TV and music. What are your TV book and music rec­om­men­da­tions? And what are you cook­ing tonight? We all want to know that.

Cook­ing just a chick­en and veg­gie pas­ta chick­en and veg­gie bake…

Tony 1:10:45

We had some bad eat­ing habits last week we had our first deliv­ery in lock­down so nine weeks but I think I must have seen a piz­za com­mer­cial at some stage when I was watch­ing some­thing and we cel­e­brat­ed with a cheese piz­za.

Cameron 1:11:01

Oh from Piz­za Hut?

Tony 1:11:02

Yes, it was how we cel­e­brat­ed, you lashed out. [laugh­ing] So I’ll declare that it’s back to healthy eat­ing this week. I’ll do a chick­en and pas­ta bake, a chick­en and sor­ry, veg­gie bake.

Cameron 1:11:17

Tray back.

 

Tony 1:11:19

Yes, just put it in the tray.

Cameron 1:11:20

Love it. One of our go to’s chick­en and veg­gie tray back. Fan­tas­tic bit of olive oil. You know some rose­mary whack it in FANTASTIC.

Tony 1:11:30

My secret is to get a toma­to and cut it up and put it on top. Oh, juices.

Cameron 1:11:35

Yes.

Tony 1:11:36

Oh, and we also when I serve it I put some beet­root and avo­ca­do on top that’s just real­ly sort of just add a bit of spice to the real fla­vor to it. Yeah, it can be a bit bland some­times but any­way, the cheese on top when it melts through it’s good too.

Cameron 1:11:53

OK, mak­ing me hun­gry. Tony, what have you watched, any­thing good?

Tony 1:11:58

I’ve gone back to watch­ing Shet­land. You watch that? It’s a Scot­tish detec­tive dra­ma, real­ly good.

Cameron 1:12:07

Chris­sy watched it.

Tony 1:12:08

Yes, I watched it when it was on the ABC cou­ple of years ago and it popped up on my Net­flix list recent­ly. Right? It’s real­ly good. You got to watch it with the cap­tions on though because they…

Cameron 1:12:19

Yes.

Tony 1:12:19

Some­times lapse in the Gael­ic and they talk about Scot­tish. Yes, but the land­scapes bril­liant. That’s prob­a­bly the best thing about it.

Cameron 1:12:27

Yes.  Yes. No, I remem­ber Chris­sy watch­ing it when I was work­ing at nights cou­ple years ago, and she’d have the cap­tions on.

Tony 1:12:28

Yes.  Yes.  And it has good guests now. So one of the I’ve gone back to the start, because I have seen some of it before, and Bri­an Cox was in one of the ear­ly episodes and he did a great job.

Cameron 1:12:44

Have you watched Suc­ces­sion yet?

Tony 1:12:46

I’ve watched the first series. Yes, had­n’t haven’t gone past that.

Cameron 1:12:49

Yes, it was the sec­ond series. Yes.

Tony 1:12:52

Yes. Third series has just dropped off.

Cameron 1:12:54

It’s dropped?  Yes, Oh, God. We’ve been hang­ing out for that. We love that show, and it’s for me, it’s all about the McCulkin kid. what­ev­er his name is Rory McCulken I think it’s the McCulken kid in it.

Tony 1:13:07

The Hone Alone guy.

Cameron 1:13:09

No, his younger broth­er his…

Tony 1:13:11

Oh yes. he’s in it. Yes.

Cameron 1:13:12

Yes. He’s the younger broth­er in it. Who’s a bit of a douchebag. But yes, he just he’s just so good plays so well. But Bri­an Cox. So good. The whole cast is great. It’s just a great, great show. Sup­pos­ed­ly over­tak­en them? Yes. I haven’t. Yeah, I watched the first episode of that. I could­n’t get into it. It is going to give it anoth­er shot, though. I love Gia­mat­ti.

Tony 1:13:13

Yes. So that drops? I think they had to stop halfway through a sea­son because of COVID. I think the sec­ond half play next week.

Cameron 1:13:38

Yes, good stuff.

Tony 1:13:47

How about You?

Cameron 1:13:50

I haven’t watched any­thing in the last week. Noth­ing. Too busy.

Tony 1:13:52

I have been read­ing that book that Steve Mabb put us on To Rich­er, Hap­pi­er, Rich­er, Hap­pi­er, Wis­er.

Cameron 1:13:59

Yes, very good. Yes. Which one of those are you aim­ing for?

Tony 1:14:07

Rich­er, Hap­pi­er, Wis­er, hope­ful­ly lighter as well? No, it’s good. Its this guy’s investable, the top finan­cial gurus in the last 20 years, and it’s chap­ters on dif­fer­ent per­son. It’s actu­al­ly real­ly good. Yes, I start­ed read­ing, like… I should just put out quotes fresh, because I’m real­ly going. Yes, that’s what I said. That’s what I said. [laugh­ing]

Cameron 1:14:27

[laugh­ing] Well, I’ll get that QAV book fin­ished one of these days, and we’ll have our own account there.

Tony 1:14:36

Yes.

Cameron 1:14:40

All right. Well, thank you very much, Tony. Thank you to every­body for the ques­tions, and for all of the great con­tri­bu­tions to the Face­book group in the last week. Keep it up.

 

Tony 1:14:51

Yes.

Cameron 1:14:51

And we’ll be back next week with the ful­ly licensed ver­sion of QAV.

Tony 1:14:57

Cor­rect, and the buy list. Yes.

Cameron 1:15:04

Excit­ing stuff.

Tony 1:15:05

I just have to teach Alex how to do QAV so she can.

Cameron 1:15:10

Well, that’s the oth­er news, and your new intern, your daugh­ter, Alex.

Tony 1:15:13

Yes, that’s right. Yes. I talked to her a cou­ple of weeks ago about need­ing some­one to put out reg­u­lar buy-list for me, because I think I’d get dis­tract­ed and would­n’t have the time to do it. She said, I’ll do that. Because I was think­ing about using her boyfriend, Shawn.  And I was about to call Shawn when she called me and inter­cept­ed the call. No, no. I’ll do it. I’ll do it. So yes, I will over­see it and make sure it’s OK, and I’ll teach you how to do it. But yes, she’ll do it even­tu­al­ly.

Cameron 1:15:41

Right.

Tony 1:15:43

You know, it’s the old sto­ry of least cost job gets done by the least cost oper­a­tor. I don’t want to be spend­ing my life on buy lists. Yeah, I’d rather be research­ing whether we sell things at QAV 0.05. Thanks, mate. Have a good week. Bye.  All right. You too.