QAV 415 Club

 

Duration: 58:09

Cameron Reilly: [00:04] Welcome back to QAV Episode 415, TK. We’re both back in our homes.

Tony Kynaston: [00:13] Yeah, we are. It’s good, good to be back. How was Bundaberg?

Cameron Reilly: [00:17] Bundaberg was alright. Like it was a bit hot yesterday but today like it was 26, blue skies, just beautiful. We’ve decided we’re never going back to Bundy in summer ever again. It’s just March and April, September. Perfect, beautiful beaches, beautiful weather, everything. Hey, did you get my gift? Where is it? You’re not wearing it.

Tony Kynaston: [00:41] Oh, shit I was going to wear it, I know. I’ll go and get it.

Cameron Reilly: [00:48] Get in close. Give us a close-up. Give us a close-up, Berkshire Hathaway on May 1, 1999. Warren The Whip Buffett, there you go I expect you to wear that when you play golf from now. That’s your new golf hat.

Tony Kynaston: [01:05] Thank you. It’s lovely.

Cameron Reilly: [01:06] It’s the only thing I could find that was from Omaha, Nebraska.

Tony Kynaston: [01:14] It’s an old one, was it on some kind of antique site or eBay or what?

Cameron Reilly: [01:19] eBay, fierce bidding auction. I had to get in there. Not really.

Tony Kynaston: [01:28] So it’s good. No, it’s good. Thank you. And also, the whiskey that the Melbourne guy sent me was Bakery Hill

Cameron Reilly: [01:35] Righ,t lovely, Bakery Hill Pocket Guide. Hey, I went to a distillery in Bundaberg yesterday, I went to Kalki moon as you know I picked up a couple of bottles, and then yesterday I went to Waterview it’s a little distillery just near the Bundy Rum distillery. And a little bit of wide range of rum and gin and vodka, whiskey. Rum and gin and vodka they produce. So, I picked up a thing called BOB Honey. Which is like honey made with macadamia flower honey rum. The honey is from a macadamia flower bee or something. Really nice. Yeah. Nice. Little tipple kind of thing. Yeah, yeah, anyway, so everyone there likes their rums so check out the water view distillery in Bundaberg. You can order online I believe they’ll send it to you. I bought three bottles of booze when I was in Bundaberg, which is more bottles of booze than I’ve bought in the last three years. But I figured got to support the little small businesses in my hometown.

Tony Kynaston: [02:43] Yeah, good for you. So, the trip was good. Otherwise, yeah. Apart from the boozing and like eating and all that?

Cameron Reilly: [02:51] Yeah but was good. Went to see a band The other night. Some of my old schoolmates had their band, happened to be doing only their second gig this year. So that was good. They did a lot of the old 80s, 70s and 80s classics. Yeah.

Tony Kynaston: [03:09] Excellent. Excellent. Excellent. Well, this weekend was the masters, so I was up at five o’clock this morning watching a Japanese golfer win his first major.

Cameron Reilly: [03:19] People who are not watching the video stream Tony, held up a masters Coffee mug there, tea mug.

Tony Kynaston: [03:26] Correct? Yeah.

Cameron Reilly: [03:26] What was his name? The guy who won.

Tony Kynaston: [03:27] Hideki Matsuyama.

Cameron Reilly: [03:29] He’s Japanese?

Tony Kynaston: [03:29] He’s Japanese.

Cameron Reilly: [03:31] Is he the first Japanese man to win a Master’s?

Tony Kynaston: [03:33] He’s the first Japanese player to win any major.

Cameron Reilly: [03:39] Wow. Whoa, yeah. Domo arigato, Mr. Matsuyama.

Tony Kynaston: [03:45] Matsuyama, yeah. The sound like, occasionally would cut to the Tokyo TV commentary just for a bit. It’s like those old comedies, YouTube videos, where they have the Spanish soccer.

Cameron Reilly: [04:06] Oh, yeah. Did you ever watch the original Iron Chef on SBS 30 years ago? All right. Well, let’s get into stocks. I want to promote your ASA webinar or our ASA webinar. Apparently, I’m on the thing. I don’t know what I’m doing. I’m not doing anything but…

Tony Kynaston: [04:26] you’re meant to deliver half the presentation.

Cameron Reilly: [04:28] Am I? But you wrote the deck. You rewrote, I wrote the first one then you rewrote the deck. And you said we’re going to do it by yourself.

Tony Kynaston: [04:37] No, I didn’t. I said you had a written as if you were doing it by yourself.

Cameron Reilly: [04:41] I was going to do it. And then I was going to introduce you. Originally, I went, and now ladies and gentlemen. So that’s April 15th. I think at 1 pm.

Tony Kynaston: [04:59] It’s 12 pm.

Cameron Reilly: [05:02] Yes, scratch that. 12 pm. Thursday, the 15th. That’s this Thursday. And you can find out more on our Facebook page. You get the link or the ASA website. And yeah, but it’s not going to be anything new for our subscribers. Really. We’re just going to be telling your story and talking about QAV, right?

Tony Kynaston: [05:19] Yeah, exactly.

Cameron Reilly: [05:21] It’ll be fun. Yep, yeah. Our portfolio I just pulled up Sharesite hasn’t changed much since last week by the looks of it. For this financial year our portfolio’s up 31% versus the SPDR ASX 200 Fund, which is up 21.8%. So, 22. So we’re about 9, 10 points, ahead of the ASX. So that’s good. It’s not double, but it’s good. And you know, comes and goes, goes up, goes down, but we’re still outperforming it nicely.

Tony Kynaston: [06:02] Yeah, correct. I’ve got a couple of things to go through. If you’ve got time. Yeah. Yeah. So got the first bit of work back from Dylan the intern, which was really good.

Cameron Reilly: [06:11] What is that first bit of work?

Tony Kynaston: [06:16] Yeah, so we’ve been, we’ve been trying to set up regression testing, as you know, we don’t have a data source now. And Dylan’s written the code for it. But we spent a lot of time trying to get the three-point trendline algorithm to be automated. So, it’s kind of there. It’s working in most cases, but not all cases. So now we decided to pocket it for a while and just look at some of the questions we could answer, perhaps without the three-point trend line being all around. And the first question was, which was the heavy lifter of our KPIs? So, Dylan went back 10 years, and pulled out, like ran and rerun and rerun the models, taking samples of hundreds of stocks and creating buy lists, what he decided to do was to rebalance. So, he would sell and buy according to when stocks, he would try and hold the top 10 stocks in the buyer list every half. So, he was selling and buying to do that, as opposed to three-point trend line buying and selling, which is a bit different from what we do.

But in terms of the process of what we’re trying to do, which is to just look at the relative performance of each item on the checklist. It will work fine. So, the average of all his runs, he did 50 tests. And he averaged 19%, over 10 years per annum, which is pretty close to what I was getting anyway. And that was just with a simple rebalancing method. So, I’m hoping it’ll be different, we actually get the three-point trend line up and running.

Cameron Reilly: [07:50] Different in terms of better.

Tony Kynaston: [07:50] Yeah, I would think so.

Cameron Reilly: [07:51] Sorry. Can you explain what the rebalance, how the rebalancing works?

Tony Kynaston: [07:55] Yeah. So, he would generate a buy list when there were new figures every half and then rebalance the portfolio. So, if something wasn’t in the top 10, I think he used 10 stocks. I don’t have the details, that kind of detail in front of me, I think he used 10 stocks, in each portfolios, so he bought the top 10 on the QAV list every half and sold out and re-bought to achieve that.

Cameron Reilly: [08:21] Right. So, he would rebuild the buy list for every new results season. Take out anything that wasn’t in the top 10. He would remove it and replace it, like an ETF basically.

Tony Kynaston: [08:35] Yeah, right. Yeah.

Cameron Reilly: [08:35] And it achieved 19%. Wow.

Tony Kynaston: [08:38] Correct. Yeah. So, the big, heavy hitters in that list, I guess, maybe no surprise, but the two biggest ones were the price to operating cash flow and the increasing equity. Right? Yeah. And then after that was the using our IV2 figure, so in other words, if we didn’t use the IV2 score on the checklist, the performance dropped off to 14.9%. If we didn’t use price to book being greater than 30%, or 30% or less above the book price, we drop back to 14 and a half percent. If we didn’t use operating cash flow per share though, we dropped back to 9.6%. Which is pretty much market, I would think, over that time. And if we didn’t use increasing equity, we dropped back to 13.8%. And all of the variables that Dylan pulled out or had some contribution to play.

So, some of them are only making like a 1% difference, but some of them, as I said, were only  making sort of a 7% difference, which is a lot. Yeah, so that’s the start. That’s the first run through, so he did a lot of testing on that. But I’m going to go back now and look at what a portfolio will look like if we just use the big heavy hitters, just operating cash flow, price to operating cash flow, and then increasing equity, and I want to test what the correct weightings are, should we be sort of giving like pric to operating cash flow a score of one if it’s less than six? Or six or less? Should we be giving it like a score of five, if it’s that important now. So yeah, that’s the kind of work we plan to do in the future based on that, but interesting first cut, and he’s got the model set up now. Which is good.

Cameron Reilly: [10:23] This is really exciting. Hooray for Dylan the intern. When do we lose Dylan? Isn’t he back at UNI now?

Tony Kynaston: [10:29] Yeah, he’s back at UNI. So, he slowed down a bit. But he’s I think he’s really enjoying this. So, he’s giving it a fair bit of time, which is great.

Cameron Reilly: [10:37] Oh, that’s great. Yeah, good stuff.

Tony Kynaston: [10:39] Well, yeah. So hopefully we’ll add some of the other questions that we’ve been asking about, like increasing gross profit, which I think was one that Steve Mabb suggested. We’ll put that one in and see what makes a difference. And, yeah, so he worked our way through our backlog of items to check to regression test. Yeah, so that’s good. The other interesting thing I read on the weekend was a paper that Jamie sent through to us. I don’t know, if you had a chance to read it, I’ll just get the title up, so I don’t mess it up, because it’s quite techie. The paper was called “A Quantitative Approach To Tactical Asset Allocation” from the Journal of Wealth Management. And it was, I think, originally published in 2007. But it’s been updated recently. So well, long story short, it was buying an index fund, and then swapping out between an index fund of shares and an index funds of bonds, when a moving average line, that was a 10-month average, was crossed by the share price. So, it’s kind of like an alternative to our three-point trendline.

I know we’ve looked at it in the past, where we looked at a long-term moving average being crossed by a short-term moving average. But this was even simpler it was just overlaying a 10-month moving average over the share price. And when the share price went below the average, the person running the regression test would sell out of the index fund and buy into bonds. And then would reverse it when the moving average was a buy signal when the share price went above the moving average, 10 months moving average. And in Stock Doctor, If you go into the advanced graphing guide, graphing section, yeah, charting and then going to studies, there’s a simple moving average line now, which you can overlay to have a look at it.

I did some quick checks. And in some cases, it lines up with three-point trend lines, but in other cases, it’s a bit choppier, so more volatile. But anyway, the point that this guy makes is that, by getting out of the market, when the downtrend has commenced, is he got outsized performance, which is the kind of sort of result that we’re getting as well. So, if people are interested, they can go and have a look at the paper. And it goes, it lists various different tests, all kinds of tests, and the benefit of using this kind of approach, but it was really worthwhile. And the reason for it being worthwhile is that you’re just out of the market when the markets going through its corrections. So, you’re in there for the good times, and you’re getting out when times turn bad

Cameron Reilly: [13:22] For people who want to look it up themselves. It’s called “A Quantitative Approach To Tactical Asset Allocation.”

Tony Kynaston: [13:29] It’s a bit technical, so I guess skim through it until it gets to the meat of the article, which is basically looking at the effect of having a 10-month moving average on your performance. Yeah.

Cameron Reilly: [13:42] By the way, I keep losing concentration because I’m looking at your background or you know, your background your room. It just looks like a da Vinci painting. I’m looking at the perspective of those squares on your ceiling. Your room is so long and deep. It looks fake. It looks like you’ve got a green screen background with a da Vinci

Painting.

Cameron Reilly: [14:04] Well, I know it’s not fake. I’ve been there two weeks ago. Yeah, but yeah, it’s just it looks stunning from this perspective. So many like perspective angles coming in. Dramatic. Yeah, good. Well, thanks, Jamie. What else you got, boss?

Tony Kynaston: [14:24] I didn’t haven’t done a download, but I thought we’d just talk quickly about the stock of the week, which is the number one thing on the last download I did on the buy list, which was Maxitrans-=, MXI. Manufacturer of trailers, like truck trailers.

Cameron Reilly: [14:44] Right. And why are they your stock of the week?

Tony Kynaston: Because they are number on on the buy list and I thought we should, I haven’t done a download for a while. So, I thought we should look at number one on the buy list. Yeah. So only small. It’s only a small cap though. And its average daily trading is about $30,000 from memory. So, it won’t suit everyone. It’s $29,165. With a $64 million market cap.

Cameron Reilly: [15:08] That’s not MFD?

Tony Kynaston: [15:11] No its MXI.

Cameron Reilly: [15:16] Just bring up the chart.

Tony Kynaston: [15:19] Last time  I did a download which was about a week ago they were scoring 0.67/

Cameron Reilly: [15:31] So why are they scoring so well and why are they, you know what’s going on with them?

Tony Kynaston: [15:36] Yeah, so I’m just going to look at their operating cash flow. It’s probably the highest it’s been in the last five years, maybe even forever. And I just had a, since about, no it’s actually I can’t see a higher cash flow year than what they’re doing at the moment. And I don’t normally do this but in trying to work out why that was the case. I went to their  announcements and in the AGM, they spoke about the fact that they were so uncertain during COVID that they were going to survive, but they did everything they could to maximize cash flow, operating cash flow, so they paid down debt, they took costs out of the manufacturing process. Blah, blah, blah, they did whatever they could to focus on cash flow. It’s just, it’s at a record high now. So, I think that’s why it’s scoring so well for us.

Cameron Reilly: [16:32] Right, well, good for them. I’m just looking at a chart though. Okay, yeah, they’re above the sell line. If I do the second peak from sort of January 21. The second trough I mean, as the second low point, I was using the second one like the, well it’s a bit late for COVID really. Like their low point was June 2020, for some reason. I was using the July one, and that would have put the sell line right about where they are now. But if I use that second trough, late January, early February, whenever that one is there, January, it gets above that nicely by 10%. Higher than that. A bit less actually. But it’s sort of got a nice upward trend since June. It does, yes. And wood across the buy line. Only like a month ago, really? February, March maybe? February.

Tony Kynaston: [17:41] Yeah. If you use that second point. Second, the second peak. Sorry. Back in November last year. Yeah. Yeah, I think you might be inclined to use one earlier. First point, December, second point February 18. Which would bring you back into a buy around about October 2020.

Cameron Oh, okay. Yeah, right.

Tony: May have had a sell though, after that. Because as you say that two low points would have been a sell.. Maybe just after that. So, you’re probably right to use the peak you suggested in November 2020.

Cameron Reilly: [18:21] Good. Maxitrans? That’s a pretty good score.

Tony Kynaston: [18:26] It’s a very good score, isn’t it?

Cameron: Yeah.

Tony: And shows you the power of focusing on operating cash flow?

Cameron: Yeah.

Tony: I mean, I guess they were taking lots of short-term decisions because they were worried about what the effect of COVID would be on the business. But you know, sort of reading between the lines, I think they’re selling okay at the moment.

Cameron Reilly: [18:46] Right.

Tony: Yeah.

Cameron: Anything else in the news?

Tony Kynaston: [18:50] No, I don’t think so. I think that’s enough.

Cameron Reilly: [18:53] Okay. Well, we’ve got a few questions. Thanks to everybody. We only had one question as of yesterday, and I jumped onto the club page and said any questions and a bunch of them poured in via email and Facebook. So, thank you to everyone for giving something giving us something to talk about. This first one is from Paul. Hi, Cam, I’d be interested to hear Tony’s thoughts on the performance of the NASDAQ 100 over the past 10 years, a 23 and a half percent per annum average return. Hey, I’m going to pause for a second that reminds me. Sorry, getting back to Dylan’s regression testing that 19% – does that include after you’ve netted out brokerage, capital gains tax, and all that kind of stuff?

Tony Kynaston: [19:40] No that will be gross.

Cameron Reilly: [19:42] That would be gross right. So, you’re 19 and a half percent is net. His 19% is gross. And probably doing a little bit more trading as well.

Tony Kynaston: [19:53] Well, I don’t know but possibly ,like he’s probably trading every six months, at least.

Cameron Reilly: [19:59] Yeah. And I know you do too you said you dump a couple on average.

Tony Kynaston[20:01] But I just haven’t gone through the detail with Dylan yet about it. So, I don’t know.

Cameron Reilly: [20:07] And so that’s gross. So, if we had to net out CGT, and brokerage and the other fees, etc. associated with it, what do you think that would drop the 19 down by, any rough guess? Half a point?

Tony Kynaston: [20:24] Hard to say, I don’t. Okay. So, I don’t think brokerage would have a big impact on things. Maybe half a point at the most. Tax might, just depends on whether there were losses to go against the capital gains, and I don’t know. Sorry.

Cameron Reilly: [20:43] Yeah, that’s a figure we’d need to try and get at some point. That’s the real figure, right?

Tony: Yeah.

Cameron: Okay. Sorry, back to Paul’s question  – This is the NASDAQ 100 over the last 10 years – a 23 and a half percent per annum average return for a decade would appear to be a very consistent stellar return for very little effort. Would Tony argue that the decade was a one-off past performance, and not an indicator of future returns, etc. Or might there be value in having tech ETF exposure in a portfolio given the nature of the fastest-growing businesses and the times in which we live? I appreciate that they are difficult to value. But it is hard to argue with numbers like these and it would appear that a basket of the leading 100 stocks more than averages out the winners and losers. Kind regards Paul. Fair question, I thought.

Tony Kynaston: [21:33] Yeah, and you know, if Paul wants to go ahead and do it and feel free or do a champion challenger portfolio with it? I wouldn’t, myself personally, this is not by any means financial advice. As you know, as Buffett would say it’s outside his circle of competence to invest in tech stocks, and it’s outside of mine. I’m competent to know these businesses are sometimes good businesses, but I don’t think that they’re always good investments. And you know, Paul says in his question, he appreciates they are difficult to value. But it’s hard to argue with numbers like these. So, it’s basically a momentum trade I would think, to do this.

Cameron Reilly: [22:17] But isn’t the same as any ETF buy, you’re just looking at the ETF returns.

Tony Kynaston: [22:27] Yeah, so I think just a couple of things about the numbers. I think they require a bit more investigation because I pulled up… so this is a new ETF from what I can see or it’s at least  a recently listed ETF

Cameron Reilly: [22:37] There is a betashares one on the ASX – NDQ.

Tony Kynaston: [22:43] Correct. And I couldn’t find my own numbers to do a calculation on the NASDAQ 100. There’s the NASDAQ Composite Index, which is everything in the NASDAQ. And it certainly hasn’t been getting 23 and a half percent. Over the last 10 years. I pulled the numbers off Google Finance myself Recently, today,  and I make it that the NASDAQ composite had 17.5% over the last 10 years. And if you go back 20 years, it’s 9.9% and 11.6% for 30 years. So, you could argue that NASDAQ 30 years ago looked different to NASDAQ today, so happy to take the 17.5%. But that’s half of what this ETF provider is … it’s less than what the ETF provider is claiming, they’re claiming 23.5, and I’m getting 17.5 for the whole NASDAQ.

When I went to find a US ETF for the NASDAQ 100, the one I pulled up, again, was not performing at that kind of rate. So obviously, betashares would have had the numbers to back up what they’re saying. But I’d be interested, if maybe Paul wants to do his own investigations, and convince himself or satisfy himself that that’s actually what the returns are. But taking that aside, my problem with the NASDAQ isn’t so much that it’s an index of stocks I can’t value, which is part of the problem. It’s more than history has shown us that the things that go up high come down with a thud and having been through the Dot Com boom and bubble, and burst. And the NASDAQ drop 75% it’s and it’s looking at during other downturns, they tend to magnify the upside and the downside.

And in a rising interest rate environment, which we’re going into, might not be next year, but it’s or even this year, but certainly in the future. I think there’ll be you know, some downward pressure on the high-flying growth stocks. So, if Paul wanted to buy into this ETF, I’d definitely do it only if I had a three-point trend line strategy or a 10-month moving average strategy so I could get out at the first sign of trouble because yeah, what goes up quickly comes down even quicker. So that’s, that’s my concern. It’s not a sleep-at-night portfolio for me. Because I know that at some stage, I’m going to wake up and wish I’d sold out the day before because overnight in the US something terrible has happened and the stocks have all dropped 30% in one night, so that happens on the NASDAQ.

Cameron Reilly: [25:28] Right. So, you know, it wouldn’t be the situation like any other stock in our portfolio where you’re just looking at a three-point trend line sell line, because you think it could collapse more quickly.

Tony Kynaston: [25:46] No, I’m saying at least use a three-point trendline. But yeah, it could actually drop through the three-point trendline at a very fast rate, which they’ve done before. Yeah. But you know, the other general point to make is that, from time to time, people can always cherry-pick a good 10-year period of investing. And the point, again, that Paul makes, is that future, past results don’t always predict future returns, is valid. The NASDAQ 100 could continue to do 23.5% per annum, I wouldn’t know. But, you know, other people, like the best investment in vehicles got to be a TARDIS, so you can fly back in time and buy bitcoin and buy Amazon at the IPO and buy Apple when Steve Jobs was running it, all those kinds of things, they’re always going to be an example out there over the last 10 years, which beats your return, you just got to be comfortable that your return is good for all seasons, good for all weather and that you’re comfortable, you can sleep at night, you have a process for dealing with the ups and the downs.

And you understand what you’re investing in, your basing it on the figures. And I think with a lot of these things that are saying look how good it’s been for the last 10 years, they’re basing it on the past figures and not necessarily the future figures.

Cameron: Right.

Tony: Same with Bitcoin. Why doesn’t Paul go and buy bitcoin? It’s outperformed in the last year. The same thing, we can’t value it. If we don’t know, we don’t have a checklist for buying it. All we can do is put a three-point trendline over it in terms of trading. And that’s a valid strategy. As long as you’re diligent and you don’t get, you know, you don’t get stuck with something which falls so quickly, you can’t get out.

Cameron Reilly: [27:28] Well, how do you, remind me again, how you value LICs like Wilson  asset management?

Tony Kynaston: [27:36] Well, that’s different, I mean, the ETF could be very the same way I suppose. Wilson asset management, for example, or any of the LIC’s will have to have to publish their net tangible asset backing, which is the mark to market value of all the stocks they hold, it’s usually done on a monthly basis, as of month-end. And then you can compare that to the share price of the week, which holds all those assets. And so sometimes you can buy $1 for 80 cents, which is a great time to buy a LIC. You probably could do this, if they published what the underlying… no you can’t it’s an ETF. ETFs don’t trade it at discounts or buy overages to their net tangible assets because there’s a company or a person in the background called the market maker who’s always trading the other way. So, the ETF is meant to equal the index all the time.

Cameron: Right.

Tony: Yeah.

Cameron Reilly: [28:32] Right. But you have said in our investing ladder, an ETF is a good starting point for people on their investing journey.

Tony Kynaston: [28:44] Well, I probably said LIC’s – ETFs Yes, but LIC I prefer.

Cameron: right

Tony: You could use it, yes, you can use an ETF if you’re buying the index. I prefer to use a LIC, so I can trade that over or underage,  compared to the index.

Cameron Reilly: [29:00] Right. But that, again, that takes work then, though.

Tony: It does. Yeah.

Cameron: I mean, in our investment ladder, if we’re talking about the good starting point for people on their investing journey, who don’t have the time or the inclination to do a QAV type analysis on anything, they just want a good return with low fees, I think we have said ETF and a LIC is a good place to go.

Tony Kynaston: [29:25] We have, index funds generally. Absolutely. I’m not sure I’d be, I wouldn’t advise anyone to go and buy a NASDAQ index fund with all their money. Sure, as I said, do it as a test or do it with some of the money. And, you know, ideally, do it through a downward cycle so you can see what the downside is going to be and how you cope with it.

Cameron Reilly: [29:50] Come back in 30 years and tell us how it went.

Tony Kynaston: [29:54] Well, yeah, it’s been hard, isn’t it? Well go back and have a look. I mean, you can pull up at least a 30-year graph of the NASDAQ. And you can see that, you know,

Cameron Reilly: [30:03] Or you can regression test. Right? You could regression test what the top 100 stocks in the NASDAQ were over 20 years and you know how it would have performed. Surely somebody has done that.

Tony Kynaston: [30:17] Well, I did some research today, but I couldn’t come across that, I just came across the NASDAQ composite.

Cameron Reilly: [30:21] Well thanks Paul, good one. Next question. Arash. Hi, Cameron. I know you’ve spoken about AGD, but would be interested to know if Tony thinks we should keep our AGD shares and stick to the sell line or cut our losses in light of the announcement discussed in last week’s podcast

Tony Kynaston: [30:41] I’m assuming that what Arash is talking about there are my musings on whether I would take a shorter period for gold stocks based on the commodity price and when it started to kick up, but I’m not sure exactly what he’s referring to there.

Cameron Reilly: [30:56] Me either. I thought I hoped you’d know.

Tony Kynaston: [30:58] Yeah, I think that’s what he’s talking about. Because I had mentioned that a couple of times over the last few weeks. Commodities. And AGD these are gold miners. I guess that’s what he’s talking about. Yeah. Sorry, Arash I’ve been away playing golf. So, I haven’t, haven’t landed on an answer yet. Or a solution to my commodity trendline trading strategy. So, we’ll get back to you on that one.

Cameron Reilly: [31:26] But if I look at AGD, they sort of the price peaked in August last year at 28.67. Currently down at 17 and a half. So, seems to be sliding. The three-point sell line for though is pretty low. It’s like you know, 10 cents.

Tony Kynaston: [31:44] Yeah. And so, what Arash is asking the really relevant question is, has the gold price peaked? And as I’ve said before, it’s only come off from 20 or from $2,000 US to 1700 US, which is not a whole lot. The gold trend line is still in an upswing. So, I’m not really understanding why the gold miners are selling off so dramatically. But at the moment, they’re still about their three-point sell line. So, and in fact, this one’s kind of almost getting back to a buy again, AGD. If that the last sort of month which is going sideways, if that keeps up, I think that will almost breach the buy line, wouldn’t it?

Cameron Reilly: [32:35] Just running a digital ruler over it.

Tony Kynaston: [32:40] So I’ve got a high point in August 2020. February 21 is my second point.

Cameron Reilly: [32:49] Yeah, well, it’s kind of crossed that. It’s above that.

Tony Kynaston[33:00] It’s just kind of touching it now. I think. So, it’d be up to where it goes to the next month or so as to whether it’s a buy again, but well it’s still a buy but it might be a more recent buy, it might be an uptick. Yeah, so Arash sorry I don’t have a definitive answer about commodity stocks yet I’m still doing some testing on that and some thinking about it.

Cameron Reilly: [33:21] Just trying to get to stock doctors’ commodity page so I can have a look at what’s been happening with the gold price recently. CMD – commodities – la de dah – gold… Well, it’s spiking up today.

Tony Kynaston: [33:47] You kind of expect it, because you know, vaccines aren’t working and you know, are being slower to roll out than they should be and all that kind of stuff. So, the world’s not through this COVID situation. I expect gold to not drop too much further from where it is, given the kind of background.

Cameron Reilly: [34:04] Yeah. So, it’s sort of a wait-and-see with gold.

Tony Kynaston: [34:09] Yeah, it is. Yeah.

Cameron Reilly: [34:09] All right. Hope that helps Arash. Murray. Why did Tony skip past MYR on the buy list for his recent buys, would have bought it would have the liquidity and size for him.

Tony Kynaston: [34:26] Nope. No, too small. Sorry, Murray. Myer – in my most recent download, has an average daily trading amount of $879,000.

Cameron Reilly: [34:38] That’s basically your lunch budget. It’s your booze budget for the month.

Tony Kynaston: [34:46] Yeah, my rule of thumb is to try and buy things that are three times higher than my holding in them, which doesn’t apply in this case.

Cameron Reilly: [34:54] Three times higher.

Tony Kynaston: [34:54] Yeah, so a third, so the average daily trade, so my portfolio holding is a third of the average daily trade. And sometimes I fudge that and go up to 50%. But I try and keep it below 50%.

Cameron Reilly: [35:07] Right. So, in this case, the daily trade would need to be like 100 million.

Tony Kynaston: [35:11] I’m not going to tell you. But Myer is too small. So now I have a whole barrage of question, so what about the one that trades with $100 million. Okay.

Cameron Reilly: [35:26] We just keep edging our way up. Phil Muscatello sent us an email during the week that one of the top searches that bring people to his website is what is Tony Kynaston’s net worth? And I said, Yeah, that was all me. I was hoping he’d told you when you had a few drinks. Because he hasn’t told me. Not that I’ve ever asked but I’m assuming if I asked you would never tell me.

Tony Kynaston: [35:45] That’s like a joke I had recently. Larry Emdur passed away. Like, you know how old he was?

Cameron Reilly: [35:53] No. How old?

Tony Kynaston: [35:53] How old do you think?

Cameron Reilly: [35:57] Larry Emdur? 50?

Tony Kynaston: [36:00] Higher.

Cameron Reilly: [36:00] 60.

Tony Kynaston: [36:03] Higher.

Cameron Reilly: [36:05] I don’t even know who Larry Emdur is. He did a game show, right? I don’t watch TV, what Game Show did he do?

Tony Kynaston: [36:12] The Price Is Right.

Cameron Reilly: [36:17] Okay. Yeah, well, did he really pass away?

Tony: No.

Cameron: Good joke though, nice one. Nice try Murray. Keep it up. You know, I’ve been telling everyone to keep asking these questions. So, we can figure out how much Tony’s portfolio is worth, people keep asking me and I go, I have no idea. I don’t know. I don’t ask.

Tony Kynaston: [36:41] You do ask. I just don’t tell.

Cameron Reilly: [36:41] I don’t ask. When have I ever asked you?

Tony Kynaston: [36:45] You asked your boys to ask me.

Cameron Reilly: [36:48] Did not ask No, I didn’t. I didn’t ask. I didn’t ask my boys to ask you. They said to me, what do you think Tony’s worth? And I’m like, I got no idea. But whatever it is, it’s probably three times more than it was… It’s probably twice as much as it was three years ago.

Tony: Yeah. That’s probably right.

Cameron: That’s the rule of 70. Right. So, if you’re getting 20% a year it doubles every roughly three years.

Tony Kynaston: [37:14] Yeah. A bit more than that.

Cameron: Three and a half.. Something like that.

Tony: Yeah.

Cameron Reilly: [37:21] Whereas I’m worth less than I was three years ago. I’ve done something wrong. Justin asks, I have a company that has recently completed a capital raise only for institutional investors. They didn’t notify the retail investors until the capital raise was completed and shares were issued. Is this process normal? Or would this come under the umbrella of the reduced disclosure rules?

Tony Kynaston: [37:46] Yes, that’s an interesting one. I’m not I’m not across the rules. I thought that they had to make an equal offer or at least give the retail investors a chance via a share purchase plan. So, I sort of was trying to go through my memory banks and think of a case where this has happened to me, but I couldn’t. So, I went to the ASX website and.. I kind of homed in on the answer. So, it’s this is in a section called understanding capital raisings on the ASX website and it was from last year when they relaxed the laws on capital raisings. It talks about the fact that if a company has to do a placement, it used to be that they couldn’t do more than 15% of the cap, the market cap, as an offer, and it got raised to 25% during COVID which was an emergency measure. And it goes on to say that’s currently conditional on ASX listed entities either doing a follow on accelerated pro-rata entitlement offer or a placement followed by share purchase plan at the same or a lower price than the placement.

This is so retail shareholders get to participate in the overall capital raising at a price at least as favorable as the placement. So, certainly, if you’re, if a company is doing an emergency capital raising up to 25% of their market cap, they have to issue a share purchase plan for retail investors, but it generally is the practice, so, unfortunately Justin hasn’t told me who the company is. If he wants to contact us privately, I can look at an individual case, but I think that they’re meant to, I think, the rules are that the company should also be having a share purchase plan for retail investors following the insto placement.

Cameron Reilly: [39:53] Right, right. Sorry, we can’t help more on that Justin but yeah, shoot us an email and let us know who it was if you want. Glen. Hi, Cam I’ve noticed a couple of companies having their AGMs in the coming months. How do AGMs fit into Tony’s investment strategy and his thoughts around what to be vigilant about in these meetings, there is a reference in the QAV Bible that Tony will generally sell if a) a company issues new results which change its valuation. I assume at the AGM companies aren’t issuing new results but may change guidance. So, post AGM this could affect the stock’s sentiment or forecast future earnings. If the AGM does point to new guidance how soon would the future earnings per share be changed in stock doctor post the AGM.

Tony Kynaston: [40:39] Yes, so Glen is spot on there, the AGM season is really all about guidance, because generally the AGM is happening a couple of months into the new calendar year or financial year depending on whether, well if it’s an AGM it should be half-yearly so it should be coming into the new financial year, but for the companies who report calendar year, they’ll be doing their AGMs around now and they’ve already had, January, February, March, figures to know how this year’s going so far so that generally gives them at least a bit of a bedrock to forecast what they’re going to look like for the half, and for the year. So, it’s all about guidance. Generally, it doesn’t change much. I don’t. In my experience, we’re not going to trade very much during the guidance period, or the AGM season.

Occasionally, something will come out, that will be an aberration and then we might, it’s probably going to be reflected in the share price sooner than it gets reflected in the checklist because we’re only going to probably change future EPS, and that should come through in stock doctor, I would think within about a week, so it shouldn’t take too long to get into stock doctor and get into our checklist but like, I would think it’s more it’s more going to be about the three-point trendline being breached because of poor guidance, and in a few examples I can think of that’s what happens, the share price drops quickly after the AGM.

Cameron Reilly: [42:06] And you have an alert set up in Stock Doctor for something like that.

Tony Kynaston: [42:09] No, just have the normal three-point trend line alerts.

Cameron Reilly: [42:13] What’s your three-point trend line alert though, isn’t it, you have an alert set up for when it gets close to its sell line.

Tony Kynaston: [42:18] Yeah, generally I only do it for the stocks which are getting close anyway so if I do like a periodic review of the portfolio, usually most of the stocks are selling way above their sell line but if we get one that gets close to the sell line, then I’ll raise an alert in  Stock Doctor before. Yeah, so it, I’d say in 90, plus percent of the cases, it doesn’t worry me this period. The other interesting thing about AGMs is that if you’re unhappy with a company well, you should sell the shares if you’re unhappy with the company, but it is possible these days to vote against the Rem report, and if they get above a certain amount of, I think it’s 25% voting against it, then if that happens two AGMs in a row the board gets spilled so they generally pay attention to issues that shareholders raise in that situation after a first strike.

Cameron Reilly: [43:10] What’s a Rem report?

Tony Kynaston: [43:14] Remuneration report so usually the AGM is only about things like, in general, voting directors to the board and approving the CEO’s pay and director salaries. And so, it’s now, I guess a weapon to use against the underperforming board to vote against the Rem report.

Cameron Reilly: [43:34] Right. How much attention do you pay to AGMs?

Tony Kynaston: [43:36] Hardly any

Cameron Reilly: [43:39] Yeah, that’s what I figured.

Tony Kynaston: [43:41] Yeah, yeah, it’s a, it’s a box-ticking exercise really. If I don’t like the company I would sell it rather than go and complain to management. It’d be different if I, you know, wanted to be an active investor and take a board seat or whatever but yeah, I don’t want to do that.

Cameron Reilly: [43:54] You’re not you know the Stephen Mayne.

Tony Kynaston: [43:58] No, not even a Warren Buffett, he would be happy taking positions and then try to turn the company around.

Cameron Reilly: [44:05] Yeah, be far more active. Yeah, for you that just cuts into golf. Thanks, Glen. Who is this one … Dan: hi Cam hope you’re well mate, I am. Thank you Dan. I’m very well, very relaxed. Despite the fact that I literally got out of a car after a six-hour drive and sat down at the mic but I’m good. I’ve noticed a couple of questions, a few ideas, questions for one of the next shows if you think they make sense. Is there some sort of checklist we can use during reporting season that can help with the decision if we will hold on to a share in your portfolio or need to sell one of them. Is there a systematic approach we can use to help with that decision? For example, what if revenue is down 15% or debt levels have increased significantly? Well I would assume that just the usual three rules right? The usual, three-point trendline, basically, or really bad news.

Tony Kynaston: [45:08] Yeah, so there’s no checklist, other than the QAV checklist so if the numbers go through the checklist in those kinds of circumstances it’s quite possible that company would fall off the checklist as a buy. But it may not necessarily be a sell because its three point   trend line hasn’t been breached yet. So that’s, that’s how I do it. There’s a lot of things I’m looking for that make a big difference. Asset write downs, so you know, think of the Foslock example that we talked about a week or two ago that there was fraud in the accounting in China, and it was only disclosed at results times when the auditors, or the auditor first of all signed off on the accounts and then went back and had to recant. So, it’s that kind of thing, there’s been other cases where, for example, an acquisition, a big acquisition hasn’t worked out and they may not disclose it until the annual numbers are released, for example. So yeah, it’s got to be a really big thing to make me want to sell just based on one event. And that’s usually a bit of prediction on my part that the share price will drop through the 3-point sell line pretty quickly.

Cameron Reilly: [46:23] Yeah. The second part of Dan’s question is, can you draw any useful conclusions by looking at the depth of a share chart , and in brackets, the amount of buyers or sellers at a given price. Does it tell us something about sentiment or less risk, as you know a lot of buyers are lined up at a certain price.

Tony Kynaston: [46:42] Never done any analysis on it. Sorry Dan. It’s not something that has interested me. If it’s good to have depth, I love depth in the share price buying and selling because that gives us the chance to get in and out without dramatically affecting the share price but yeah, I don’t look at it myself so I can’t answer that one sorry.

Cameron Reilly: [47:03] Aren’t the three-point trendlines sort of a reflection of that, anyway? They kind of tell us where the support lines are and the, you know, maybe not the lines where people are getting out but the buy and sell lines tell us something about the amount of buyers and sellers at a given price.

Tony Kynaston: [47:19] Not so much that it’s more about the was partly about the average daily trade so that’s a measure of market depth but I think what Dan’s getting to was say for example if BHP was trading at $40, and there was, you know $10,000 worth of buy and sell orders at $40 but there was $10 million worth at 41, or 39, that might give an indication as to where the price would go to. And Dan’s correct, but I don’t know how we would feed that into our decisions to buy or sell a stock. So, throw that one out to the listeners, and let’s see if someone uses it, we can come back and talk to us about it.

Cameron Reilly: [48:08] Yeah. And the last part of Dan’s question – can it be smart to postpone a decision to buy a share by a day or two based on the AFR headlines about the expectations. If the ASX is bound to rise or drop the next trading day. For example, when you read on a Sunday night that the ASX is expected to drop because of something that happened in the States.

Tony Kynaston: [48:32] I kind of do that so rather than looking at what the forecast is I prefer to buy on up days rather than down days, only because if you have a down day and you have another down day and you bought the first one you’ve lost money, but if you buy on the up day … you could still have those two down days following it, I guess. But, so, there’s probably not much science on that but I like to buy on an up day. I wait for the market to open.

Cameron Reilly: [49:03] And how long do you wait before you determine whether or not it’s an up day or a down day?

Tony Kynaston: [49:06] Yeah, a couple of hours.

Cameron Reilly: [49:08] And if things are going up, then that’s an up day.

Tony Kynaston: [49:08] I’m happy to buy, yeah. Yeah, it’s not like science and this, that’s, that’s just something, just a bit of experience over the years and if it’s going down, I wait for it to go up again before I buy it. And, you know, I know the question will be how do you know it won’t go down following that and you don’t.

Cameron Reilly: [49:30] Thanks, Dan. Last question from Brent coming to us from Blackwater. Blackwater, weren’t they the mercenary, American mercenaries in Iraq,. Wow, be careful there Brent.

Tony Kynaston: [49:46] Also a coal mining district four hours inland from Mackay.

Cameron Reilly: [49:48] I think Blackwater’s had to change their name about three times because they keep ending up in hot water, hot Blackwater over civilians they assassinated, and then they have to change the name.

Tony Kynaston: [50:03] Have you seen Buy Shit, the movie.

Cameron Reilly: [50:05] No, no, that’s the Dick Cheney one?

Tony Kynaston: [50:10] Yeah. Yeah, he’s, he was CEO of an incarnation of Blackwater. I don’t think it’s called Blackwater when he was running it, but yeah, right. Then he became the vice president after W ceded all military oversight to him.

Cameron Reilly: [50:29] Yeah, Brent says hi Cameron and Iceman, this question was asked on a zoom call some quarters ago but thought it might be timely to ask again following the earning season. I was wondering how the current buy list compares to other periods say two to five years ago. Was there as many companies on the list, were the QAV scores as high, were there as many high market cap businesses on the buy list. And then he finishes with the thought What I enjoy most about QAV club is the coaching and linking with other similar-minded investors to get more from the network, I was thinking we could start a QAV book club. Maybe we could have a book of the month, create a feed on the website where we could share our insights, what do you think? I think that’s a great idea, Brent.

I think the first book should be The Psychopath Epidemic. Everyone buy a copy of The Psychopath Epidemic and read it and tell your friends to buy a copy or go to my mom’s house, and she strategically placed Psychopath Epidemic on the bookshelf in her living room and I said oh you read my book, have you? Actually, not yet. You know I’m still trying to finish this other one that my friend wrote, and I said you told me that a year ago that you were going to read my book when you finish yeah well, she goes. There are too many good shows on Netflix, I haven’t, I said great, I said look I just want one person in my family to have read my book. Is that too much to ask, one person. Well, I tell you what though, but sorry Brent I’ll get to your question in a second, ran into this old mate of mine he was playing in the band that I went to see on Saturday night turns out he’s now working as like the tech guy at one of the old theaters in the main street abandon the Moncrieff theater.

I said that they still this is where I saw Star Wars in 1978 and 77 and all these things. I said that they still show movies, because I know it’s mostly like live entertainment shows dude stuff, they like theater. He said yeah of special occasions they do I said we should get a screening of my film. In my hometown then he goes, I know just the guy to talk to, I’ll set it up so that would be cool, you’ll have to come to Bundy, if we do a screening in Bundy, you’ll have to come up with our golf club and that’s where the band was playing actually the Bundy golf club, and unless you play some golf, you can, you know, I’ll let you beat me. A game of golf and be good. Anyway, good, that sounds great idea about the book club Brent, but I’m deadly serious. Let’s talk about the epidemic What do you think about these questions? How does the list compare to the list a few years ago?

Tony Kynaston: [53:27] I think there were fewer items on the list a few years ago, But I’m just going back on memory here I think that may have been because on the current buyer list I include every stock regardless of whether it’s a micro-cap or not. And I think I might have a filter in the past just for stocks that interested me. Yeah, but that aside, I think, in the last 12 months in particular we’ve seen an uptick in the buy list because of COVID. And companies are doing well. They’ve seemed to have come through COVID, almost unscathed and perhaps even in better shape than they were prior to COVID. And certainly, people aren’t traveling overseas, there is a lot of money in their pocket. So, there is a bit of money in the economy that wasn’t there a year or two ago. Yeah, I think the list is bigger at the moment, for various reasons,

Cameron Reilly: [54:14] Yeah. I mean, sorry, sorry, I remember when we started as the first six or 12 months of doing the show. I know we weren’t really doing a buy list. Back then we were doing stocks one at a time, but we were on the show we were really struggling for a while it was just why Apollo tourism kept coming up. We were really struggling for a while to find stuff and it took us like we started the show I think in February or March of 2019, and we didn’t find 20 stocks to add to the buy list until September, took us that long to find 20 stocks, and we were doing them slowly one at a time. But if we did that today I think we would find them pretty quickly.

Tony Kynaston: [55:00] Yeah, I agree. And that’s, that’s an interesting point you make by two because that was potentially mentioned the light means the market was at a high back then was at the end.

Cameron Reilly: [55:05] Well it was the end of the five-year bull market. Right, yeah, yeah.

Tony Kynaston: [55:11] So, it’s from, maybe that means we’re heading into the start of a five-year bull market run which would be lovely.

Cameron Reilly: [55:15] Yeah, well, that’s the way that you normally goes. Doesn’t it? Yeah, crash as you go into seven years.

Tony Kynaston: [55:25] Yeah. So yes, definitely more or less now with the QAV scores higher in the past now I think probably about the same. Again, just going on memory, were there any high market cap businesses on the buy list yes definitely we’ve always had high cap, high market cap businesses. I mean we’ve got Fortescue in the banks at the moment, to name a few. Plus, some of the retailers in the past, we’ve had the likes of Qantas on the buy list Fortescue Metals have been on that for a while. Some of the big gold mines from the buy list just a few years ago so yeah there are always big caps to buy on the buyer list.

Cameron Reilly: [55:59] All right, well, that’s a wrap. How did a princess raffle go I forgot to check?

Tony Kynaston: [56:05] Ran fourth but ran really well, rental home from last night only miss winning by half a length so that was a really good run and fill in the containership race on Saturday in Melbourne, so be prepared for that.

Tony Kynaston: [56:23] Are you going down for it?

Tony Kynaston: [56:26] No I’ll be staying up here but the friends who aren’t she’s ideal racing in the Sydney cup right in on Saturday, which is a big event up here, so I’ll be going there.

Cameron Reilly: [56:34] Any other recommendations for us this week Tony good movies, books, TV shows.

Tony Kynaston: [56:40] No. I haven’t really been keeping up I’ve been away, and I am playing golf, can recommend the Whiskey Bar or the hotel and barrel that’s lots of fun. There are AWS, friends will love it. Yeah, okay. Yeah, great, it was really good.

Cameron Reilly: [56:57] All righty then. Well, thanks again to everyone for the questions. Thank you for the answers Tony hope everyone has a great week. Don’t forget to check out the ASA webinar if you want to see us do a dog and pony show. And we’ll be back next time. Thank you, everyone.

Tony Kynaston: [57:14] Thanks, Cam.