Transcript #439

QAV 439 Club

Cameron  00:10

QAV 439, Tony. Mon­day, the 27th of Sep­tem­ber, 2021. What’s going on in your world bud­dy?

Tony  00:19

Well, I have to stop and think because there’s not much going on in lock­down. That’s for sure. Oh God, no.

Cameron  00:26

Come on you’re almost out of lock down now. You can do stuff. You can go out. The num­bers are down. Gladys is cel­e­brat­ing.

Tony  00:37

Yes, it’s look­ing bet­ter but we’re not going to be out until Novem­ber. I don’t think.

Cameron  00:40

Is she doing press con­fer­ences this week or she giv­en up like she said she was going to?

Tony  00:45

I don’t know. She said she was going to give up and not actu­al­ly fund­ed a press con­fer­ence every day since. Maybe she’s tak­ing a break. I don’t know.

Cameron  00:53

Well, lots of talk about today com­ing up a lit­tle bit lat­er on. We’ve got to Brett Fish­er, the inven­tor of the Bret­ta­la­tor who’s com­ing on to talk us through the Bret­ta­la­tor. The hard to write Bret­ta­la­tor. I like the name that it’s a lit­tle bit clum­sy to type it. I might have to change his name to some­thing else. This is a shame because I like Bret­ta­la­tor. Peo­ple have been enjoy­ing that this week. I’ve been get­ting lots of good feed­back. Every­one real­ly loves it. There’s a tool so that’s great. Well done to you and Brett for putting that togeth­er.

Tony  01:24

Oh, it’s all Brett.

Cameron  01:25

Well, you helped with some of the things.

Tony  01:27

No, it’s all Brett.

Cameron  01:28

He did the code thing. Before I for­get, this is par­tic­u­lar­ly to our QAV club mem­bers. Every now and again, if you want to do us a favor, share the lat­est episode on Face­book. Let peo­ple know, not that I want to tell you what to do or what to say but if you just want to go hey, this is real­ly great invest­ing pod­cast that I like and Cameron’s very hand­some and Tony’s very smart and the com­bi­na­tion of the two works real­ly well. You could write that but I don’t want to leave the wit­ness­es but some­thing like that’d help. Let peo­ple know about us. Do us a favor. Get the– Get help spread the word. That’s all I’m say­ing.

Tony  02:05

Yes, I agree. Yes, I think it’s a– I think most of our new mem­bers come from word of mouth. It’d be good if peo­ple could do that.

Cameron  02:13

Yes, for sure. All right. Well, let’s get stuck into the stock picks of the week. Tony, some­thing a lit­tle bit dif­fer­ent. When I talk about your small cap stock of the week, what do you like this week?

Tony  02:26

I like the retail­ers this week­end. Michael Hill jew­el­ers (MHJ) and Myer (MYR) are my two picks of the week and I thought I’d do a pulled pork on Myer so get ready if you own it. You may need to sell giv­en the curse that’s been hap­pen­ing.

Cameron  02:40

Oh, well, I do own it. Let’s not do that.

Tony  02:43

You do?

Cameron  02:43

Yes, let’s not do that. It’s been good. It’s up like 90% since I bought into Myer.

Tony  02:48

Oh, good.

Cameron  02:49

Don’t jinx it on me. TK.

Tony  02:50

Well, I pre­pared Myer so I’m going to go ahead with it. Sor­ry.

Cameron  02:53

I think I also Michael Hill jew­el­er. I don’t have. Any­way, to turn this week. All right. Which one you want to talk about first? Myer?

Tony  03:01

Yes, I’m going to do a stock of the week on Myer. That’s what I got prepped for.

Cameron  03:04

Yes.

Tony  03:05

Yes, OK, go. Stock of the week, Myer. Most peo­ple will be famil­iar with it, espe­cial­ly Aus­tralians. First thing I want­ed to call out was that Myer has a Jan­u­ary to July report­ing peri­od. Just be aware of that and the fig­ures have just come into Stock Doc­tor in the last week and the rea­son for that is that retail­ers don’t like hav­ing to rule off their finan­cial years at Christ­mas time. That just puts too much bur­den on the busi­ness so they leave it till Jan­u­ary to get through Christ­mas and then get all the num­bers togeth­er. A bit unusu­al but that’s what they are.

The share price that I’m using is 63.5 cents which was the share price yes­ter­day being Sun­day, 26th of Sep­tem­ber and that’s the basis for all the num­bers I’m talk­ing about here. The health of the com­pa­ny is quite good, strong and steady, strong finan­cial health in Stock Doc­tor and it’s been strong for a while which I find quite inter­est­ing because Myer is a bit of a turn­around sto­ry. It flat line– There was a falling knife for a long time and it flat lined and now it’s on its way back under new man­age­ment. It’s sur­pris­ing that it’s got strong finan­cial health but guess that shows the strength of the under­ly­ing busi­ness.

ROE is high for this kind of busi­ness again, 25%. Not that that feeds into our cal­cu­la­tions but I know some peo­ple mon­i­tor it but the big dri­ver for us is this is a val­ue play. It’s price to oper­at­ing cash flow is 1.9 times which is very low and its PE is 10 times which is fun­ni­ly enough not a record low PE score so it does­n’t get a score for that in our man­u­al­ly entered data but it’s still a pret­ty good price to be pay­ing for a busi­ness with was about 500 mil­lion mar­ket cap and a well-known brand and quite a high turnover. $1.6 mil­lion trad­ed on aver­age each day which makes it a fair­ly decent size for peo­ple who want to invest.

The oth­er thing I noticed when I was going through this was the prices has increased over the last six months by 76%. It’s real­ly turned itself around. I think this is the first half where it’s been prof­itable for a while but it does have a call out some of the neg­a­tives. It does have neg­a­tive net tan­gi­ble assets. We tend to focus on net equi­ty per share and call that book val­ue which is only slight­ly above zero. Slight­ly pos­i­tive.

I think I haven’t drilled down into that any big detail but I think it’s prob­a­bly due to the fact that Myer have sold off all the prop­er­ty. I did use the owner’s big flag­ship stores in Syd­ney and Mel­bourne. Poten­tial­ly in Bris­bane and over the years, it’s been sell­ing those off when­ev­er it’s need­ed cash, its net assets is obvi­ous­ly declined quite a bit.

What else can I say about it? It’s rather than it’s the share price is cur­rent­ly greater than IV1, Intrin­sic Val­ue Num­ber One, which is 32 cents per share but less than IV2 which is 97 cents per share but it’s not high­er than two times IV2. We don’t get a score for that. It’s also greater than its book val­ue plus 30%. No score for that and its fore­cast earn­ings per share is to decrease by 5%. It does­n’t get a growth score for us as well.

This is cer­tain­ly not a qual­i­ty type com­pa­ny, it’s got chance– The chance of being it again and it has been in the past but not at the moment.

The next thing I want to talk about with Myer is direc­tor’s hold­ing. The cur­rent board hold around 2% of shares. It does­n’t have a founder hold­er which is not sur­pris­ing giv­en that Myer has been around for such a long time and Sid­ney Myer was the founder hold­er who passed away quite a while ago.

The inter­est­ing thing now is that Solomon Lew who was a retail heavy­weight pre­mier invest­ment amongst oth­er com­pa­nies. He has a 10% stake or 10% plus stake in Myer now and I guess the ques­tion that begs the ques­tion, what will hap­pen with that? Will there be a takeover? My thought is, I don’t see one com­ing near term any­way and that’s a pre­dic­tion. I could be proved wrong tomor­row but if he was going to take over the com­pa­ny, why would­n’t he buy that 30 cents a share and not its cur­rent share price which is more twice what it was in the past. I think he’ll be patient. He has a his­to­ry of sit­ting on boards and agi­tat­ing for change– Or sor­ry, sit­ting on com­pa­ny hold­ings and agi­tat­ing for change. He does­n’t have a board seat yet. One of the things he’s been agi­tat­ing for which is being resist­ed by the cur­rent board.

I think we’re going through a phase where Mr. Lewis tried to take over the com­pa­ny by stealth, by crit­i­ciz­ing man­age­ment until he gets some seats on the board. I think that might pos­si­bly be com­ing to a close giv­en that the cur­rent man­age­ment has kicked some goals now and the share price is re-rat­ing but who knows, he may want to be forced to launch a takeover quick­ly or he may sit there for years as he did with his share­hold­ing in coun­try road which he held for 10 to 15 years and then made all his mon­ey back when the takeover offer came from a South African retail­er who bought that coun­try road from mem­o­ry and they actu­al­ly, I think took it over up to some­thing like the high 80s in terms of the per­cent­age they took over but Solomon loose stuck, sat on his shares and blocked the com­plete takeover and even­tu­al­ly the South Africans got or had enough of that and want­ed to con­sol­i­date the PnL onto their own bal­ance sheet and they bought him out at a very high price.

He may also be play­ing that game. I don’t know but it was worth explor­ing a lit­tle bit. All up the qual­i­ty score for Myer is 36%, the QAV score is 0.19 which is not over­ly high but for this kind of larg­er cap, it’s high up on the buy list and it’s def­i­nite­ly more of a val­ue sit­u­a­tion than a qual­i­ty stock and that’s mile.

Cameron  08:38

Yes, well, thank God for Sol­ly Lew. That’s all I can say. He’s helped those of us that have owned Myer out in the last few months. It’s been great. What’s– Was he– Did he ever run Myer? What was his back­ground? He had his own com­pa­ny and bought in or some­thing?

Tony  08:54

Yes.

Cameron  08:54

What’s his­to­ry with Myer?

Tony  08:56

He took it over. He was a rag trad­er in Mel­bourne.

Cameron  09:00

Yes.

Tony  09:01

And then even­tu­al­ly took over Myer and then even­tu­al­ly engi­neered the merg­er with Coles to become Coles Myer.

Cameron  09:07

Right.

Tony  09:07

And then for a while he was the chair­man of Coles Myer and then there were ruc­tions about relat­ed par­ty trans­ac­tions and cor­po­rate gov­er­nance around being a big sup­pli­er to Myer and then but also being chair­man of Myer and whether it was in the best inter­est of share­hold­ers etc.

Cameron  09:23

Right.

Tony  09:23

He stay on the board of Coles Myer and stepped down as chair and yes, he basi­cal­ly engi­neered the takeover of Coles Myer by, first of all, KKR, the big Amer­i­can takeover firm and even­tu­al­ly Wes­farm­ers. It was a big bid­ding war which kicked off my share port­fo­lio big time because I had options that tripled in val­ue dur­ing the last cou­ple of weeks in the takeover.

Cameron  09:46

Yes, very nice. Yes. Well, that’s the large cap and the small cap stock this week was Michael Hill jew­el­ers. It’s MHJ.

Tony  09:53

Yes. I have anoth­er [Crosstalk 00:09:56] to pulled pork on them. It’s enough.

Cameron  09:57

Yes. Anoth­er well-known retail­er though.

Tony  10:00

Yes, Michael Hill Jew­els. Peo­ple will know of them. New Zealand based orig­i­nal­ly and then own­er founder is obvi­ous­ly there with them because Michael Hill was still involved on the board and as far as I know, still holds a chunk of the com­pa­ny but he has hand­ed over the reins to to an inde­pen­dent CEO. I want to say inde­pen­dent new CEO who has expand­ed the com­pa­ny. Michael Hill him­self expand­ed into Aus­tralia.

In fact, I used to live near him. He was back when I was work­ing for Shell and liv­ing in Bris­bane. I was liv­ing in some apart­ments in dock­side and he was he was a cou­ple of apart­ments over from me. I used to see him about the place and he was quite well known because he front­ed all the adver­tis­ing for Michael Hill jew­el­ers or TV com­mer­cials.

Cameron  10:41

Right. Cov­ered in bling.

Tony  10:44

No, he was­n’t.

Cameron  10:48

It just sells a bling. Does­n’t win.

Tony  10:50

Sells a bling. That’s right. Yes.

Cameron  10:52

All right. Well, peo­ple might want to check out those two stocks this week. MHJ, which I think had a QAV score of 0.35 this week and Myer with a QAV score of 0.19. All right, well, let’s move on with the notes, Tony. Live Cat­tle futures. What do you want to tell us about that?

Tony  11:13

Yes, there’s a com­pa­ny on our buy list called Wellard. It’s WLD for mem­o­ry is the code and they got into a lot of trou­ble because they’re essen­tial­ly a Live Cat­tle export­ed from Aus­tralia over­seas. They’ve got into a lot of trou­ble. We’re now export­ing cat­tle to the Mid­dle East and it was shut down, I think by the Gillard gov­ern­ment but maybe more recent­ly than that as well. Maybe it was only recent­ly lift­ed after being shut down by the Gillard gov­ern­ment who protests about the unsa­vory con­di­tions that the cat­tles were being shipped in.

Wellard has since, I think piv­ot­ed to being still involved in that indus­try but I think they don’t own the ships any­more, they lease them. Could have that wrong but that was my take on it but what I found when I was going through the com­modi­ties avail­able for us to graph that there is one on Live Cat­tle and it’s just become a three-point trend line buy. I sus­pect that might bode well for Wellard which is back when they’re biased.

They had a qual­i­fied audit last year and we had a good QAV score but was­n’t on the buy list but it came on just recent­ly.

Cameron  12:18

God, I remem­ber talk­ing to some farm­ers a cou­ple of years ago about that whole Live Cat­tle export­ing thing and a lot of anger, a lot of con­spir­a­cy the­o­ries in the farm­ing com­mu­ni­ty over that.

Tony  12:30

Yes.

Cameron  12:31

Try­ing to tell me it was a big con­spir­a­cy between the pre-pack­aged meat indus­try and the live beef export indus­try and the Gillard gov­ern­ment was all in on it because there RE a bunch of labor rat­bags and they shut it all down. It was– It’s real­ly fas­ci­nat­ing.

Tony  12:50

Yes, well, it could be. Who knows? But yes, it was cer­tain­ly a very polar­iz­ing time.

Cameron  12:56

Alright, let’s talk about our old friends, FMG.

Tony  13:03

Yes. Some­one asked the ques­tion, I think it was last week or recent­ly any­way about, am I still doing my top 20 stocks down­load and then look­ing at the cur­rent share price and the biggest dif­fer­ence to the future IV? And I did one last week. I’d like to do them when report­ing sea­sons come to an end and fun­ni­ly enough, the biggest gap was now FMG which it has been for the last year or so, I think and Rio, I think was the stock before that. Iron’s always play­ing a big part in that. Even though I think peo­ple are gen­er­al­ly now down­grad­ing their fore­casts for earn­ings per share for Fortes­cue Met­als. It’s still com­ing up as the biggest gap to IV2 at the moment.

Cameron  13:44

Right. That would be your– One of your chal­lenges strate­gies.

Tony  13:49

Yes, that’s right. That was the step on the invest­ment lad­der. It’s a good mid­way point between becom­ing an index investor and mov­ing on to being your own investor. If you can start to have rea­sons to favor or val­ue one stock over anoth­er. That’s an impor­tant step to make.

Cameron  14:06

And if new lis­ten­ers want to know more about the think­ing behind that you can go to the Bible if you’re a QAV club mem­ber and read up on it in the invest­ment lad­der sec­tion in the Bible and there’s some oth­er pod­casts we’ve done in the past where you’ll be able to lis­ten to Tony talk more about that.

Tony  14:21

Yes.

Cameron  14:22

Ter­re­mo­to, Tony. Ter­re­mo­to.

Tony  14:26

Earth­quake. Like the 1980s film that brought sense around in the cin­e­mas. Shook the seats. Yes, there was­n’t that peo­ple would know there was an earth­quake in Mans­field last week but we felt it up here in the sky palace.

Cameron  14:43

Real­ly? Syd­ney? Wow.

Tony  14:45

Yes. I think about 9 — 9:30 in the morn­ing, we were– Judy and I both sit­ting work­ing and then she jumped up and said, did you feel that? And I said, yes, and we shook side to side a few cen­time­ters for about 30 sec­onds but it was quite notice­able and then about a sec­ond lat­er we got a text from Alex, dad there’s been an earth­quake in Mel­bourne. I was like, yes, in Syd­ney too.

Cameron  15:11

I was talk­ing to our Ital­ian coach on Fri­day after­noon who’s down in Mel­bourne. An Ital­ian guy and we were talk­ing about the earth­quake. That’s why I know it’s Ter­re­mo­to. Earth motion in Ital­ian, Ter­re­mo­to and he was like, yes, you Aus­tralians, it was noth­ing we get like in Italy. You just– You wake up and there’s an earth­quake and there’s sev­en points and you go, what­ev­er, go back to sleep. He said that his flat mates were all scared. He was like, yes, it’s noth­ing.

Tony  15:41

Yes.

Cameron  15:42

Very blas­phe­mous.

Tony  15:43

[Inaudi­ble 00:15:43] was bounced around in the bed­room. It must have been some­thing.

Cameron  15:46

Wow. Yes, I saw some of the footage down there. There’s quite a lit­tle bit of dam­age to some build­ings.

Tony  15:54

Yes. Not used to speak­ing of earth­quakes in Italy. Have you caught up with that series? Right around the world yet?

Cameron  16:00

No.

Tony  16:00

With Richard E. Grant. Excel­lent. Yes, so good but he did a– It’s a series where he goes to parts of Europe. Richard E. Grant, the actor takes a whole heap of books with him. Not trav­el books but books that were writ­ten and set in that area and then finds local peo­ple who can– Who know about the book and can take him through the local area with ref­er­ence to scenes from the book or impor­tant places the author vis­it­ed and I think Episode Two maybe was on Pom­peii and

Cameron  16:32

Real­ly?

Tony  16:33

Richard Har­ris spoke about Pom­peii.

Cameron  16:35

Oh, right . Not talk­ing about Pliny the Elder’s death. They come up?

Tony  16:39

They did. They did­n’t. I think they touched on that but it was main­ly about Richard Har­ris. Yes. Any­way, great series if any­one is look­ing for some­thing to watch.

Cameron  16:47

I think I inter­viewed Richard Har­ris. I real­ly with him on the Cae­sar show.

Tony  16:51

You did.

Cameron  16:52

Yes

Tony  16:53

That’s right. Yes.

Cameron  16:54

Nice guy. Let’s talk about Excel’s CAGR for­mu­la.

Tony  16:59

Yes, we’ve been talk­ing about valu­ing port­fo­lios and I hap­pen to come across the for­mu­la in Excel which does the com­pound growth for­mu­la in a very sim­ple way and it’s called RRI. Romeo, Romeo India, and you just plug in the peri­od you want to val­ue and the start­ing val­ue of the port­fo­lio and the end val­ue and it works out the com­pound growth rate for you very quick­ly.

Cameron  17:26

We can do that as an alter­na­tive to this thing that the Navexa guys are doing. The AYI.

Tony  17:32

Cor­rect. Yes.

Cameron  17:34

1. I’ll do that at the end of the month and just see how it com­pares.

Tony  17:37

Yes, good.

Cameron  17:38

You’ve been doing some cool stuff in Excel with this stock his­to­ry func­tion that it has. You want to tell peo­ple a lit­tle bit about that?

Tony  17:46

Yes. I guess I’ve been moti­vat­ed by Bret­t’s good work and Bret­ta­la­tor spread­sheet and in his spread­sheet, he has col­or cod­ed the stock price if it’s low­er than the clos­ing price for the pri­or month which tells us it’s a Juli­et at least for the cur­rent month.

Cameron  18:02

Josep– Josephine.

Tony  18:03

Josephine. Sor­ry Juli­et. Josephine. Thank you.

Cameron  18:09

Now I’m going to have to find some­thing to call it Juli­et. Yes, the chal­lenge has been laid down. Yes.

Tony  18:15

This is like learn­ing a new lan­guage. Isn’t it? We have to pub­lish a trans­la­tion guide.

Cameron  18:20

We do. It’s called the Bible.

Tony  18:22

Right. What I did was in Excel– Bret­t’s Spread­sheet is writ­ten in Google Finance but in Excel there’s a sim­i­lar for­mu­la called stock his­to­ry and it gives you the cur­rent price and you can also code in for oth­er things like the clos­ing price from the pri­or month. Yes, I put that into Excel onto the buy list sheet and it’s a bit– I’m not that famil­iar with the for­mu­la but the way I had to do it was just copy the codes from col­umn A into a sep­a­rate col­umn and then change their data for­mat to be stock his­to­ry and they’re all stocks, I think, and then use the stock his­to­ry for­mu­la on those codes and you get– You can cal­cu­late for the whole bal­ance quick­ly what were the Josephine’s are based on the cur­rent share price and the clos­ing share price from last month?

Cameron  19:11

I tried to imple­ment it in the Flit­man mod­el this morn­ing and I got stuck and I was spend­ing too much time on it. I gave up but I’m going to beg Andrew to have a look at it. An Excel guru, like Andrew will prob­a­bly know a way to stream­line that whole exer­cise.

Tony  19:28

Yes.

Cameron  19:29

Yes. It’s a great one.

Tony  19:29

I’m sure. Yes. That’s good and yes, I mean, I think, well, I start­ed to try and also then do a five-year graph based on that because you can get five years’ worth of month­ly clos­ing in prices from that stock his­to­ry func­tion but like you I ran out of time. Again, some­one might lis­ten to this and know exact­ly how to do it but I’ll fid­dle around with it and see if we can do it based on Bret­t’s for­mu­las and the stock his­to­ry data.

Cameron  19:55

Yes, one of our very smart club mem­bers who are Excel gurus will how to do this.

Tony  20:01

Yes.

Cameron  20:01

Let’s talk about ATL.

Tony  20:05

Oh, I just threw this in here because we often have bad news about ATL but the curse might be bro­ken because the share price went up quite a bit last week. It’s not brought up since we buy it’ll go down.

Cameron  20:15

Yes.

Tony  20:15

Any­way, I still think it’s an aggres­sive buy at the moment giv­en up it’s based on the premise of every­thing reopen­ing for COVID but we’ll see.

Cameron  20:24

You just put it in there to upset me. I know.

Tony  20:26

No.

Cameron  20:27

Speak­ing of things that are back up, I noticed MWI was in the score­card this morn­ing. We took them off the list. We’re good to go because you said the Lum­ber com­mod­i­ty price bro­ken through its sell line but it’s back up. Why is Lum­ber back up?

Tony  20:42

No, I haven’t seen it. The Lum­ber under­ly­ing is or mid­way?

Cameron  20:47

Well, both. Mid­way we had is a com­mod­i­ty sells a week or two ago. We talked about it then it was back on your list today. I thought you must have gone into [Crossover 00:20:57].

Tony  20:57

No, com­mod­i­ty [Inaudi­ble 00:20:58] I think.

Cameron  20:58

Well, I went and checked the com­mod­i­ty price and it has gone back up.

Tony  21:01

Real­ly?

Cameron  21:02

Yes.

Tony  21:02

Has it gone up to the buy?

Cameron  21:03

Well, it’s– Yes, I think so it’s got above its sell line. I think so it’s picked back up. Yes. I thought you might be able to tell me why Lum­ber’s back up all of a sud­den.

Tony  21:12

I don’t know but it’s been jump­ing around a lot late­ly. Got real­ly expen­sive in post COVID main­ly because of prob­lems in get­ting Lum­ber from over­seas.

Cameron  21:23

Right.

Tony  21:23

And res­i­den­tial prop­er­ty prices are just going through the roof. Peo­ple are ren­o­vat­ing places a lot more. That could be the rea­son but yes, it did drop off again. Just recent­ly,

Cameron  21:35

While I was look­ing at Lum­ber Futures, LB#, tak­ing March 2020 as the low point and then, I guess tak­ing August 21 as the– As L2.

Tony  21:49

I’ve got Octo­ber 2020 as L2. Oh, you’re going– OK, got you. Sor­ry. Yes.

Cameron  21:55

Well, it’s got a new trough now to the right.

Tony  21:58

Yes, but I think using Octo­ber is the last time it gives me it was a sell before the cur­rent buy.

Cameron  22:05

Right, but then it will have a new buy, right? Well, I was going to say so if you use L2– If you use Octo­ber 2020 is L2, that would give you a sell around about June 21.

Tony  22:23

Yes.

Cameron  22:25

And then how would you draw the– Draw a new buy line with an h2 com­ing after that?

Tony  22:30

Yes, I’m using the h1 as the high­est point of April.

Cameron  22:33

Yes.

Tony  22:34

Cameron  22:35

Yes.

Tony  22:35

And then h2 was May 2021.

Cameron  22:38

Right and it’s has­n’t quite crossed that. You don’t think?

Tony  22:43

No, and it’s a bit hard to tell on Stock Doc­tor. It looks like that is going across around 700, maybe 720 but it’s the cur­rent price is 643.

Cameron  22:53

Right.

Tony  22:54

And what I would nor­mal­ly do is you could cer­tain­ly use the L1, L2 as the low­est and next low­est which is fair and it’s above the sell line but it has­n’t crossed the buy line yet. What Brett and I have been cod­ing into the Bret­ta­la­tor. What Bret­t’s been cod­ing but I’ve been– We’ve been debat­ing is if you use buy line fol­lows the sell line iter­a­tion and you go back to L2 as Octo­ber 2020, L2 only moves then down to August 2021. After the buy line cross­es all the share graph, the share graph cross­es the buy line. That’s how it will unfold. It won’t make much dif­fer­ence in this case because it’s a sell. It’s been a sell. It’s not a buy until it’s a buy again, if that makes sense.

Cameron  23:40

Yes, until it cross­es over. OK.

Tony  23:42

Yes.

Cameron  23:43

I prob­a­bly should­n’t have been on the list this morn­ing then.

Tony  23:46

Yes, I’m just look­ing at it now. It’s still maybe $60 I think below its buy.

Cameron  23:53

Right. It will be by the time the show goes out it’ll be up I’m sure. We’ll be good. We’ll be safe.

 

Speak­ing of things at an all-time high. We sold off the banks last week includ­ing Com­mon­wealth Bank that was at an all-time high. That was tough.

Tony  24:09

Oh, yes, it was tough. Rules are rules we went through and had a look at the share price deduct­ed the div­i­dend adding back the frank­ing cred­it and it was a sell. By the way, it’s back in– Back to being a buy today. This after­noon.

Cameron  24:23

Yes, I was speak­ing to one of our club mem­bers last week– Late last week and he was like, yes, I’m not sell­ing. I’m hold­ing on those. That’s bull­shit. I’m just going to hold on cause it’s com­ing back I’m pret­ty sure.

Tony  24:38

Well, look, I think that’s wise I mean, I think this is one of those exam­ples again of the rel­a­tive­ly steep upturn in price but also a steep sell line and it’s been– All the way up it’s been cross­ing over and com­ing back into from buy to sell by cross­ing the sell line. It’s prob­a­bly not a bad thing to do that and also too, I think div­i­dend sea­son has dropped it back below the sell line. That’s now com­ing back above the buy line as the div­i­dend flows through the sys­tem.

Cameron  25:04

Well I gath­ered my super port­fo­lio last week sell­ing the banks because the banks were about half of my super port­fo­lio and I’ve been strug­gling to replace them too.

Tony  25:14

Well, now you can sell– You can buy back Com­mon­wealth Bank.

Cameron  25:17

There’s $100 in bro­ker­age that I did­n’t need. OK, that was fun. Oh, speak­ing of.

Tony  25:25

Look, I mean, I don’t want to make a lot. It’s– I don’t want make too much either but it’s an issue with the three-point trend line like–

Cameron  25:30

Yes,

Tony  25:30

I think you need to be flex­i­ble dur­ing div­i­dend sea­son but I think we– I sold mine com­ing off the 2% drop in the share mar­ket last Mon­day when the Com­mon­wealth Bank price went way below its sell line which could be a case of sell­ing low but I still made a prof­it. If I need to, I can buy back in. Yes, apart from the fact I paid a bit of com­mis­sion, I pay a bit of CGT going for­ward. Yes, it’s– I can buy back in there which is still good.

Tony  25:30

Rules are rules. I mean, that’s anoth­er good point, Cam. You remind­ed me of some of the oth­er stocks that have gone this way and I’m think­ing of Supercheap Auto and it also has a steep buy line for being close­ly tracked by steep sell line but when it did cross back, it kept on going and I’ll just call up. SUA is the code for Supercheap Auto was the one that got away there for a while but if you look at it now, it’s come back off its peak and it’s def­i­nite­ly a sell and that’s the way that CBA was head­ing last week. It’s turned around again though which is good, peo­ple held it.

Cameron  25:58

But rules are rules.

Tony  26:04

The oth­er one that also fol­lows this pat­tern is Nick Scali, NCK was only on the buy list for about a minute dur­ing the year, was­n’t on for very long. One of those ones that comes on as 0.1 and then dis­ap­pears again quick­ly as a share price keeps going up and again, that traced up it sell line, traced up the share price graph and then crossed and recrossed and became a sell and a buy and a sell and a buy but the last one, it crossed and it just kept going down. Even though CBA has gone back up, that’s one out of three for these three which are for that same pic­ture.

Cameron  27:09

Yes. That’s the way I fig­ure it. It’s like you’re going to win some, going to lose some with these calls but hope­ful­ly over the long haul, we get more right than we get wrong when we obey the rules.

Tony  27:21

Cor­rect. Yes and that sell line’s there to stop us from tak­ing heavy loss­es.

Cameron  27:25

Yes, that’s right. You got to keep your QAV moist by fol­low­ing the recipe and if you don’t and it ends up crunchy. Well, that’s on you.

Tony  27:37

Yes, speak­ing of every­thing’s on you. Do your own research.

Cameron  27:41

Exact­ly.

Tony  27:42

Keep your own mind up.

Cameron  27:42

Yes. Speak­ing of do your own research and us screw­ing up KRM last week was a Josephine as a whole bunch of peo­ple picked up very quick­ly on Face­book when I said it was the stock of the week.

Tony  27:54

Yes, thanks. Thank you for that. I don’t know what hap­pened. Now, all I can say is that I think it may have been– I did the analy­sis on the week­end. That may have been a flat com­pared to the week before. Sor­ry, clos­ing month before but yes, def­i­nite­ly Josephine’s a could pick up.

Cameron  28:09

The thing that amused me about it is we spent a good cou­ple of hours that morn­ing debat­ing all the Josephine’s in the buy list. The one we missed was the stock of the week. The– Yes.

Tony  28:21

Yes.

Cameron  28:22

Well, now it is time for a chat with a very spe­cial guest and a QAV club mem­ber, the inven­tor of the Bret­ta­la­tor him­self, Brett Fish­er. Wel­come to the QAV show. I think this is your first time on the show. Am I right Brett?

Brett Fish­er  28:41

It is, Cameron. Apart from when we had the din­ner and you pass the micro­phone around the table. Yes. First offi­cial expe­ri­ence on the show. Thank you for hav­ing me.

Cameron  28:51

I for­got I did that. Yes, that’s right. Well, before we get into talk­ing about the Bret­ta­la­tor, why don’t you tell us a lit­tle bit about your­self, Brett?

Brett  29:00

Sure. Thanks, Cameron and Tony. I am based in Mel­bourne. Part of Mel­bourne crew. I live just out­side of Mel­bourne in a town called Kinglake or just out­side of. Sim­i­lar to your­self, Cam, about the same age, same col­or here. I think I’m about a year younger than you and yes, I’ve been doing QAV now for– I actu­al­ly went and looked it up in prepa­ra­tion for this inter­view and I joined at the end of August last year. I missed my one-year anniver­sary. I did­n’t real­ize it that I made my first pur­chase at the towards the end of Octo­ber. I still got that one lined up as my anniver­sary. That’s the one I’ll stick to I think.

It’s been– I real­ly appre­ci­ate what God has done for us. I heard about you on a dif­fer­ent pod­cast and you’re actu­al­ly spruik­ing mar­ket­ing the Mes­si­ah. That’s how I actu­al­ly got in con­tact with or found out about QAV and fol­lowed some.

Cameron  29:49

Oh, yes, right.

Brett  29:51

Yes, and found out that– Yes, I enjoyed that and I got on to QAV. I was lis­ten­ing to these pod­casts. It was a US pod­cast think­ing I would love an Aus­tralian type pod­cast. I liked it. I lis­tened to it, did­n’t real­ly apply to Aus­tralia and I was­n’t ful­ly on board but I’ve always had an inter­est in finance. It dou­bled in things here and there but noth­ing too seri­ous, prob­a­bly more spec­u­lat­ing than any­thing and then QAV come on board and I start­ed lis­ten­ing and it real­ly struck a chord with me. I real­ly, I guess, when we get into the spread­sheet but I’m a bit of a process maths type per­son. The QAV process real­ly hit a chord with me and yes, I real­ly enjoy it. Yes, I’d like to say it’s life chang­ing. Prob­a­bly 11 months in. Prob­a­bly a bit too ear­ly but I’m hope­ful. It’s look­ing good.

Cameron  30:35

And tell us about your day job, Brett.

Brett  30:37

Yes, right. I work for a com­pa­ny, a glob­al com­pa­ny based out of Mel­bourne called Ori­ca. It’s an explo­sives com­pa­ny. It’s in the min­ing indus­try. I mean, in IT. I work in IT depart­ment. Yes, I’ll be mov­ing on from there soon but that’s what I’ve been work­ing for quite a while now. IT infra­struc­ture is my back­ground. Been play­ing with spread­sheets for as long as I can remem­ber, prob­a­bly since– Well, since ear­ly 20s, I guess for at least 20–30 years. Since your lat­est 1, 2, 3 days, I guess before– Maybe before Excel was even a thing and now I’m into Google Sheets and play around with that a bit too.

Cameron  31:11

And what inspired the cre­ation of the Bret­ta­la­tor?

Brett  31:15

Yes, that’s a good ques­tion. I was try­ing to remem­ber, I think it’s a prob­lem I always had float­ing around in my head to start a QAV of just ideas of how I would do it in a spread­sheet and it was just some­thing I was churn­ing away in the head for a while and one of the things that was hold­ing me up is I’ve been using the Google Finance and it does­n’t give month­ly data and it only gives dai­ly or week­ly. I was let­ting that hold me up because we need a month­ly data and then I think one day, it was a mis­er­able day in win­ter on a week­end and we’re in lock­down and noth­ing to do but look­ing for some­thing to do and I thought, oh, I had this brain­wave, I can make my own month­ly data by the dai­ly data. It was­n’t real­ly a road block­er. I was just let­ting it be a road block­er.

I just got stuck into it. No. I devel­oped the sheet on a Sat­ur­day and did bug check­ing, fix­ing it up on a Sun­day and it was done in two days, real­ly. Apart from fix­ing up issues and then with­out a great Mel­bourne crew I was test­ing it out with them for a bit. Fix­ing up bugs here and there and then share it with Tony and then Tony picked up a few things that I’ve mis­in­ter­pret­ed, how we do the flat top ver­sion, the flat bot­tom fudge, and I guess in devel­op­ing the chart you make– Real­ly make sure you know every­thing real­ly well. You can’t teach it unless you know it and I guess that’s where maybe you and Tony are going through is teach­ing peo­ple that it forces you to make sure you’ve got every­thing spot on and say­ing we’re try­ing to pro­gram it you think you know some­thing and then when you try and pro­gram it if you don’t have it spot on you miss out.

Try­ing to get all those nuances cor­rect with par­tic­u­lar­ly the fudg­ing was the key. Ini­tial­ly, I was only fudg­ing that the very top and the very bot­tom but Tony point­ed out the flood would apply to each each of the steps as we go, buy line fol­lows the sell line. That took a– I think I took a bit of time off that three or four weeks before I fixed that up. Got that fixed up and I’m pret­ty hap­py with it now. I’m hap­py with the sheet now. Just the data I guess is the– My con­cern is it does rely on Google data and we’ve come up– I think prob­a­bly now most of the issues Tony rais­es to do with the data which we don’t have con­trol of.

In this case, you prob­a­bly do get what you pay for. The Google finance is a free ser­vice but we found they don’t. One of the issues is they don’t unless I go through them now if you like. The issue we’ve found with the data is Google does­n’t go past the sec­ond dec­i­mal point, cents. If we have the num­ber of cents in $1. I think the stan­dard for the ASX is up to 10 cents. I think they’ll take it in 0.1 cent incre­ments, add up to $2, they’ll go half cents, where­as Google has done every­thing in cents. You look at some­thing like oh, yes, or I was even track­ing BCN which was around three cents, I think. It’s track­ing in 0.1 of a cent and when Google rounds it off to the near­est cent, it’s vir­tu­al­ly use­less but once you get above $2, it works quite well.

I’ve also noticed it does­n’t fix his­tor­i­cal data, I don’t believe. Where you might have a con­sol­i­da­tion, it does­n’t go back and fix the his­tor­i­cal dates. I guess the les­son is there. Yes, it’s real­ly good if you want to change your heap of charts quick­ly but peo­ple are going to be mak­ing a deci­sion. Make sure you dou­ble check your prof­it chart before you start mak­ing any deci­sions based on it because it’s not 100% reli­able and maybe peo­ple– We can’t– I can’t adapt it to use dif­fer­ent data feeds. I haven’t found one yet. I’ve looked what we need is a data feed where we can scrape off a web­site either month­ly or dai­ly data and the ones that I found.

Tony  34:27

The stock his­to­ry in Excel works. Have you tried that?

Brett  34:29

Yes. I haven’t tried it yet. I haven’t export­ed it into Excel and I think I could get that to work. My issue with that is that’s also a paid ser­vice. What I was try­ing to do is keep it avail­able to every­one. The stock his­to­ry in Excel is only avail­able to Office 365 sub­scribers.

For the aver­age per­son who– I’m not sure what’s aver­age to be hon­est but for the per­son who’s just using Excel, it’s not avail­able to them. I think it’s some­thing we’ll prob­a­bly do, maybe it’s when the to do list is to con­vert it to Excel. Plan­ning on doing that once, we’ve got it real­ly, I guess ironed out. We don’t keep hav­ing to recon­vert it every time we make updates but we prob­a­bly will do an Excel ver­sion but it will still be only in reach of peo­ple who are sub­scribed to Office 365.

I was try­ing to find a ser­vice and Yahoo Finance is maybe an exam­ple where they do have that infor­ma­tion on their web­site but they block you from scrap­ing it. I can’t. I haven’t yet found a reli­able data source it’s free to use. Yes.

Tony  35:22

Yes, I used to use that data scrap­ing on Yahoo Finance for many years and they blocked it.

Brett  35:27

Yes, I guess their idea is they want you to go to their web­site. Don’t they?

Tony  35:31

They do. Yes. There are– Yes, those data issues. There’s prob­a­bly some oth­er ones we haven’t talked about now that may come up. Peo­ple should watch out for par­tic­u­lar­ly graphs that look square. They don’t have peaks nec­es­sar­i­ly or curves. They have very square look­ing saw tooth pat­terns. That’s often a sign that there’s a data issue that I found any­way but yes, you’re right. Def­i­nite­ly feed them back but they’re prob­a­bly issues with Google and its data but you’re def­i­nite­ly check it in yahoo finance or Stock Doc­tor before you make any pur­chas­ing deci­sions or sell deci­sions.

Brett  35:58

Yes, cor­rect.

Tony  36:08

Cam, just on that, where should peo­ple feed­back, any sug­ges­tions for enhance­ments or poten­tial errors or any oth­er feed­back? Through you?

Cameron  36:18

I’ve told them all to knock on your front door, Tony and just–

Tony  36:21

Yes, good.

Cameron  36:22

Not leave until you give them an audi­ence.

Tony  36:26

Nice.

Cameron  36:27

Send me an email. Yes, send me an email [Crossover 00:36:30]. Yes, col­late them and send them through to Brett but I have to say, so far Brett, the feed­back, it’s only been– We only soft launched it in beta or a week ago but the feed­back has been tremen­dous. Peo­ple are very excit­ed, lov­ing it, and very appre­cia­tive for all the work that you’ve done.

Tony  36:46

Yes, it’s real­ly made my life eas­i­er too to use it. I have it open all the time. It’s great.

Brett  36:52

Well, that’s great, Tony. It wants you to think you’re using some­thing that I’ve devel­oped.

Tony  36:59

Oh, it’s fan­tas­tic. I mean, I– Just again, high­lights how great the hive mind is with the QAV. There’s just so much tal­ent out there, Flit­man mod­el and this is fan­tas­tic.

Brett  37:08

Yes, I think if we can do with it is to play around. We can enter dif­fer­ent fudge fac­tors because some­times you look at it, might say, it looks like it should fudge fur­ther. It might be all 5%, it might be nine or 10%, and then work out where it is for that par­tic­u­lar chart then you can make an informed deci­sion, do I want to push the bound­ary a bit to make it look like it fits bet­ter?

Some oth­er ones I’ve played with is a date. I don’t know if peo­ple have played with a date but there’s a few ways you can enter a date. You can either put a past date, if you want to look at what did the chart look like when I bought it six months ago. You can put the date of six months ago and it will will draw the chart for you then or future date. You could put a future date to see, obvi­ous­ly, hope­ful­ly, the next ver­sion will actu­al­ly pre­dict where the charts going to go. That would be real­ly good but right now, it just draws it flat. It’ll assume that these price stays cur­rent but you can see when will it hit the sell line, for exam­ple, if the price stay cur­rent, it might be one month or it could be five years depend­ing how steep the line is. I found those are few handy things to play with also.

Tony  38:09

Yes, that’s great. Now, is it the thought that I had play­ing around with it today is, is it pos­si­ble some­how to code this in the mas­ter spread­sheet or the fit­ting mod­el so we can do a down­load and then get all the buy sig­nals or sell sig­nals straight­away?

Brett  38:24

Good ques­tion. I was going to answer your ques­tion but my per­son­al copy of the port­fo­lio that we share with our Mel­bourne group which is fan­tas­tic. We keep a data­base in there of all the high points and low points. When­ev­er we do a fresh down­load, it tells us whether it’s in a buy or sell posi­tion and it tells us when those buy points or sell points expire. If they go past 60 months, for exam­ple. I have that whether we can have it in there, too. You’re say­ing if we auto­mat­i­cal­ly do a down­load, it will [Crossover 00:38:54].

Tony  38:53

Well, what I did today, when I start­ed doing work on was, it’s n Excel. Stock his­to­ry is the func­tion in Excel but I’ve cod­ed it so you can get five years’ worth of month­ly clos­es in a col­umn and then I just won­dered whether you could take your algo­rithm against that data set and come up with a rec­om­men­da­tion.

Brett  39:11

Oh, yes. If you can get the list of data into a col­umn, either month­ly or dai­ly data, we could eas­i­ly– We could adapt it for that. Yes. I think con­vert­ing this to Excel would just be a mat­ter of export into Excel and chang­ing all the Google. Well, it’s only one rule apart where the Google finances to get the data that then feeds into the rest of the cal­cu­la­tor. I can talk to you about.

Tony  39:34

Yes, that’d be excel­lent. I guess the one issue might be tim­ing because it can take a while to refresh but yes, stock his­to­ry is prob­a­bly the same refresh speed as Google Finance but we can check that out.

Brett  39:47

Yes, I haven’t actu­al­ly Stock Doc­tor– I’ve only used that when you high­light­ed to me that it exist­ed. I got in and had a quick look. I think it looks a lot more accu­rate. I think it goes to four dec­i­mal places, not two. That’s a bonus but I haven’t played around with it much to see whether it’s reli­able or not. It’s a paid ser­vice, hope­ful­ly it is.

Tony  40:06

Well, it has all usu­al dis­claimers that rely on the data. Maybe, yes.

Brett  40:10

Yes.

Tony  40:11

Yes. Good stuff. I think it’s a great step for­ward for us. Real­ly good. It’s always the area that we prob­a­bly get the most ques­tions on. Isn’t it, Cam? How do we draw the lines?

Cameron  40:19

Yes, it always has been and it’s real­ly great to have a tool that can help us. Even if it’s not 100% accu­rate right now, it gives us an indi­ca­tion of where things are at. I love it. Well done, mate.

Brett  40:33

Wel­come. [Crossover 00:40:36]. The algo­rithm behind it, I think ear­ly on are the days when I first start­ed with QAV, I think I men­tioned to you before, I always used to lis­ten to it with a com­put­er in front of me, with the charts in front of me and as you were describ­ing them, I’d go through them and run through them on the screen at the same time. I felt I got a good han­dle on them ini­tial­ly and I think you must have described it ear­ly on in the piece Tony where not so much the sec­ond-high point was more you drop a ruler on the first point and then for a buy line, for exam­ple, you let it just low­er until it touched the next point which might not be the next high­est point which is the next one it touch­es.

When I was devel­op­ing it, I did it more on the angle. I pic­tured myself sit­ting on that peak and then look­ing down– You’re on Mount Ever­est, you’re look­ing down and what’s the next line of sight, the going down moun­tain you can see, that’s just how I cod­ed it. It’s not try­ing to find the height of the next high point. It’s more of an angle to the next high point where it how we cal­cu­late it.

Tony  41:29

Yes, I think that was the bril­liant insight that was a real­ly, that was the break­through for cod­ing. I think.

Brett  41:34

I got that from you.

Tony  41:35

Dylan and I went through for months try­ing to work out how to code it with the peak find­ers and trough find­ers and apply­ing the rules on what to do next and was doing it.

Cameron  41:48

I remem­ber when Brett sent me the first ver­sion of it and I sent it to Tony and I was like, holy shit. Look at this. You’ve been– You and Dylan had been work­ing on it for months and all out of nowhere. We did­n’t even know Brett was [Crossover 00:42:02]. He just goes, oh look. Here it is. It’s already done. We’re like, oh shit, look at that. That’s bril­liant. Yes, it’s great.

Brett  42:08

Prob­a­bly the dif­fer­ence with what you’re doing with Dylan, if– I mean if Dylan’s cod­ing it into a pro­gram, it’s prob­a­bly much eas­i­er to use that as like a back test robot. This–

Tony  42:17

Right.

Brett  42:17

You have to go through one by one man­u­al­ly. It’s not like a stan­dard pro­gram where you could. Prob­a­bly not good for back test­ing. You could use it for back test­ing but it’s still a one by one, case by case basis.

Tony  42:29

Cor­rect. Yes, that’s what we found is it’s quite slow to doing, espe­cial­ly over 10 years of data, it’s [Inaudi­ble 00:42:34].

Brett  42:34

Very much.

Tony  42:35

We haven’t yet cracked it by get­ting some­where that uses your code and works fast but we’ll get there.

Brett  42:42

Oh, yes, maybe we can work on that.

Cameron  42:46

Brett, just final­ly after 12 months almost doing QAV, any tips or insights you want to share with the lis­ten­ers that are new on their QAV jour­ney, any­thing that you’ve– Any wis­dom that you’ve gath­ered in the last year?

Brett  43:04

Oh, look, one tip I have with the spread­sheet is just per­son­al­ly use a big­ger mon­i­tor, always use an exter­nal mon­i­tor, get a big one. I find it’s real­ly help­ful par­tic­u­lar­ly when we’re doing all these buy list and sell list. I see peo­ple try­ing to do on a lap­top and I strug­gle with that but in gen­er­al with QAV, like I said, I’ve got some my port­fo­lio up here. My first pur­chase was ECX on 20th of Octo­ber and I made a few pur­chas­es in Octo­ber and by the end of Octo­ber, I was down 3.4% so it was with­in 10 days I crashed, to speak but since then it’s just looked up fan­tas­tic. I mean the last two months has­n’t been flash but still.

Yes, I’m not a year into it yet and I’m still sit­ting at about 40% up.

Tony  43:49

Wow.

Brett  43:50

Yes, it’s not dou­ble the mar­ket but it’s maybe 50% above the mar­ket and it’s 40% high­er than what I was get­ting before I start­ed QAV. Yes, I’m not even con­cerned with against the mar­ket. It’s great to dou­ble a mar­ket but com­pared to where I was, I knew that yes, I’m mid­dle aged, most my house paid off mon­ey sit­ting there basi­cal­ly. Yes, such low inter­est rates doing noth­ing, it was real­ly eat­ing away at me that I knew I should be doing some­thing. I just did­n’t know what it was and QAV gave me that answer. Yes, it’s been fan­tas­tic.

I think stick with it, stick with the process. I find it inter­est­ing. We’ve got our Mel­bourne group that is some guys they’re just real­ly good at get­ting into doing the research. Every­one’s test­ing and try­ing dif­fer­ent things. I’ve even, I guess seen Tony over the last year. I guess we’re think­ing how some things he does and look­ing to improve also. I think it’s great to–

Tony  44:47

Def­i­nite­ly.

Brett  44:48

Not just this is it guys and that we’re– They’re always look­ing to improve and eat out a few per­cent which is great but yes, I like it. It seems my some­how just the process and the math­e­mat­i­cal nature of it. Some of our groups are real­ly inter­est­ed get­ting in and study­ing the com­pa­nies per­son­al­ly that does­n’t– I find it inter­est­ing but it’s not prob­a­bly sep­a­rate to my invest­ing. I like the invest­ing to be more cut and dry.

I went through– I’ve gone through dif­fer­ent phas­es of how I sell using stop loss­es and then not using stop loss­es and now back to using stop loss­es but maybe with a bit of breath­ing space. I’ve had some that would hit the stop loss and then that could bounce back and you’re buy­ing straight back in but I think that’s been resolved a bit by a more recent­ly– Ton’s prob­a­bly been doing this the whole time but I’ve only picked up recent­ly about mak­ing sure you– Josephine con­cept, mak­ing sure it’s got a recent uptrend. I think that elim­i­nates the sell­ing and buy­ing straight back in again because if you sell then you’re pick­ing some­thing else on the list, not the same thing you just sold.

Also, when I look at my port­fo­lio, there’s prob­a­bly a few that dom­i­nate the pos­i­tive per­for­mances and I guess, Tony over his­to­ry just as you say it, in any peri­od of time you might have every­thing’s tak­en along nice­ly but you big gain one par­tic­u­lar stock this month and next month, it’s a dif­fer­ent stock. Like Myer has killed it for me late­ly. I got into Myer quite ear­ly. I remem­ber email­ing Cameron when it was real­ly close to it sell line. Cameron and because you said you would­n’t touch it with a barge pole and I was argu­ing well, that’s the best time to get in because there’s no– You got noth­ing to lose, right? And I did get in and it’s done real­ly well.

JR– GRR did real­ly well. My fault I guess on that is I was­n’t as quick to jump off with the iron prices so I lost some of my sav­ings here. I was– I want­ed to hold on to it. I haven’t been in it for a year, I want some of mine to get to the one-year-old that cap­i­tal gains but I guess I’ve real­ized that–

Tony  46:40

Yes, right [Crossover 00:46:41].

Brett  46:41

Isn’t worth los­ing mon­ey over. You bet­ter off tak­ing the price where it’s that if you get the cap­i­tal gains, that’s a bonus. Yes, I find AIS has done real­ly well. In some months, it’s dropped back a lit­tle recent­ly but that’s still done well but I found each month or each peri­od of a cou­ple months, there’s been a high fly­er that’s it’s dri­ving the per­for­mance. Not that the oth­ers are doing bad­ly. They might be doing as the mar­ket but the above mar­ket comes from those gems I guess with­in it. There always seems to be a gem here. Is that how you’ve seen it, Tony?

Tony  47:10

Yes, absolute­ly. Yes, I know def­i­nite­ly. That’s exact­ly how it works and that’s– The les­son I think there is to always be ful­ly invest­ed because you don’t know which part of the port­fo­lio is going to shoot the lights out next. If you start to try and pick win­ners invari­ably you’ll miss them and if you aren’t ful­ly invest­ed, then you’re not going to again be exposed to the one that goes up.

Brett  47:33

Yes, I have– I’ve got right now. I think I’m 95%. I’ve got one, prob­a­bly one open­ing there. I’ve got to jump in on but been a bit busy.

Tony  47:42

Yes, that’s great. Tell me more about this famous Mel­bourne group. Seems to have tak­en off down there and the way it has­n’t nec­es­sar­i­ly tak­en off in some oth­er areas. What are the learn­ings there?

Brett  47:51

Yes, it’s fan­tas­tic. We got togeth­er in Jan­u­ary when we had the– You were there Tony when we had the first Mel­bourne–

Tony  47:57

Yes.

Brett  47:57

Din­ner. Unfor­tu­nate­ly, Cameron could­n’t make it and we hit it off. I guess we had some pre din­ner drinks and I went to din­ner and we kept in con­tact. Since then, we have a What­sApp group where we keep in con­tact and it’s real­ly good because every­one has dif­fer­ent skills, we com­ple­ment each oth­er. I do a lot of the spread­sheet work about the spread­sheets but like I men­tioned before, I’m not as into doing the deep dives. We’ve got some guys who are fan­tas­tic at doing a deep dive into the dif­fer­ent com­pa­nies or even the indus­tries.

Yes, we’ve got a few entre­pre­neurs on the group, We’ve got our audi­tor, our famous James in the group. I think the strength of the group is the cross skill under the dif­fer­ent per­son­al­i­ties of the peo­ple and we just sup­port and help each oth­er.

Yes, it’s– That’s how it gels I think. Just the dif­fer­ent peo­ple and every­one brings what they can to the group and every­one else can then then feed off it– Feed off what your weak­ness­es are.

Tony  48:46

Is it like the Face­book group or do you actu­al­ly for­mal­ly sit down every week and dis­cuss what you’re think­ing of buy­ing and sell­ing?

Brett  48:51

No, it’s con­tin­u­ous, to be hon­est. It’s a What­sApp group that’s going off every hour of the day. It’s real­ly quite social now. It’s not for– We have had catch ups, we’ve had a sec­ond din­ner with when Cameron was able to make it down and we’ve had a cou­ple online catch ups but most­ly it’s just, we’re always online with the group chat togeth­er. I feel sor­ry for the peo­ple who aren’t as active on it because I’d be going off and dri­ving them nuts. That’s often I’ve got to and I’ve got 30 or 40 unread mes­sages, just fly through them and some of them, they’ll be shar­ing doc­u­ments or shar­ing news arti­cles or it could just be sup­port, I just saw this, share, hit the stop line or often it might be it’s want­i­ng each oth­er is get­ting some­thing near a sell line or it’s get­ting near my per­son­al rule one line where it might not be near the sell line and give each oth­er sup­port but yes, we’ve come quite a close group. It’s great.

Tony  49:41

No, it’s good. Fan­tas­tic.

Cameron  49:43

It’s real­ly great. All right mate. Well, thanks again for all the work that you’ve done on behalf of Tony and myself and the rest of the QAV com­mu­ni­ty. Top marks mate. We real­ly appre­ci­ate it.

Brett  49:54

Thanks Cameron. Thanks Tony. Yes, and any feed­back through you’d be great to hear. If there’s any prob­lems with it, we want to iron them out and if any­one has an idea for a bet­ter data feed, you pass them on and I’ll see if I can get it to work.

Cameron  50:06

Good stuff. Thanks mate. Take care.

Tony  50:08

Excel­lent.

Cameron  50:08

Thanks, guys.

Tony  50:09

Thanks, Brett.

Brett  50:10

See you lat­er.

Cameron  50:10

OK, well, John has been doing some inter­est­ing think­ing prompt­ed in part by Bret­t’s great work. He post­ed some stuff in the Face­book group. He said once a QAV scores are cal­cu­lat­ed, check­ing sen­ti­ment can be time con­sum­ing. I find Bret­t’s spark lines are a way of speed­ing this up. They show the shape of the chart against the shared tick­er code in Google Sheets. This is actioned by copy­ing and past­ing your tick­ers and scores onto sheets, then past­ing the Sparkline chart for­mu­la in the next col­umn and he put an exam­ple there in Face­book, this is very use­ful once you’re famil­iar with the three-point trend lines and see a trend on a chart with­out the lines. The lines are only used as a means of spot­ting a trend. Have you played around with the Sparkline stuff at all, Tony?

Tony  50:58

Just today after you sent me this ques­tion and I saw it on Face­book last week. I agree whole­heart­ed­ly with John’s com­ments. It’s for peo­ple who don’t know it’s a mini graph you can put into a cell in Excel. John’s described how you do it in Google Finance and again, peo­ple with Excel can do it using the data his­to­ry for­mu­la and pulling out the live use of month­ly clos­ing prices and then doing a spark graph based on those. Keep play­ing around with it. If we can get to a stage where we can release it either as part of Bret­t’s or as part of the spread­sheets we put out. It’ll be use­ful.

Yes, but it’s good and it’s a good point John makes as I’ve said before on the show, gen­er­al­ly if I just have a grain to the graph, I can tell whether it’s a buy or sell. Most of them get eye­balled that way. I mean, some of the tricky so you’ve got to draw lines but John’s right, if you look at it, even a very small sparkline graph, you can often pret­ty much tell whether it’s going up or going down.

Cameron  51:49

And is that show­ing you five year month­ly points just in the very small zone?

Tony  51:55

Cor­rect. It’s a very small chart. Yes, in Google finan­cial down­load using the data feed there and just put it into a stock his­to­ry. I put it into a col­umn and then there was Sparkline over that five years’ worth of data.

Cameron  52:07

Well, it sounds real­ly cool. Just run your eyes down the list and see. John also said, I’m at the stage where sen­ti­ment QAV score audit aver­age dai­ly trade are all checked from my lat­est down­load but I have one fur­ther check in I want to share with fel­low QAVias, the check is to judge if oper­at­ing cash flow in the QAV score is a one-off event or recur­ring. With prac­tice it takes about 15 min­utes to do. If there are two shares with sim­i­lar QAV scores and sen­ti­ment, I always pick the one where oper­at­ing cash flow is like­ly to increase or be main­tained in 2022 against the one with a one-off high. Tony deter­mine that oper­at­ing cash flow is the met­ric that has the biggest impact on invest­ment suc­cess in his work with Dylan.

KPT, Kan­ga­roo Island Plan­ta­tion Tim­ber shows two years of oper­at­ing cash flow in his cash flow state­ment on the finan­cial report. Look­ing at the fig­ures, insur­ance recov­er­ies jumps out is an insur­ance claim and nor­mal oper­at­ing cash flow item.

Anoth­er find which is insur­ance recov­er­ies yields more with­out much effort. A fire destroyed more than 80% of the mature wood assets of the busi­ness and most of the insur­ance claim has already passed through the bank is cash flow. The replace­ment trees are going to have to grow pret­ty quick­ly to cre­ate anoth­er mature tim­ber to gen­er­ate the same cash flow in 2022. My KPT shares were sold. There’s been plen­ty of oth­er one-off increas­es recent­ly, espe­cial­ly from job keep­er grants, some of which have been dis­cussed on the pod­cast. In con­trast, the fig­ures from GR engi­neer­ing, GNG, give me more con­fi­dence of recur­ring cash flow at least over the next 12 months. The stock is a poten­tial buy for me next week. No rec­om­men­da­tions or advice for me though.

There are no one-off phonies in the cash flow state­ment. Sells are increas­ing as shown in the sec­ond snip­pet gen­er­at­ing more cus­tomer seats and pay­ments to sup­pli­ers. His­toric year on year cash flow has increased from 11 mil­lion to 2020 to 49 mil­lion in 2021. The FY 22 out­look state­ment shows expect­ed sales rev­enues are bet­ter than FY 21. This is like­ly to lead to bet­ter cash flow unless the direc­tors are plan­ning on leav­ing before the 22 results are announced. The sales tar­gets in the out­look state­ment will be achiev­able because this is what makes direc­tors look good. This is backed up by the for­ward order book which is build­ing up nice­ly as the busi­ness is involved in min­ing oil, gas, and gold. It is less affect­ed by the com­modi­ties route. What do you think of all that, Tony?

Tony  54:28

It’s great. I think John’s for­got our request to have short ques­tions though for the pod­cast.

Cameron  54:39

Well, to be fair, it was­n’t a ques­tion. He just threw it into Face­book. I stole it and throw it in. It’s on me.

Tony  54:44

Yes. What’s the break­down there? Well, the first ques­tion I have for John is, his, I guess state­ment that he’s look­ing for one-off high cash flows, is this based on evi­dence or is it the hypoth­e­sis on? Guess­ing it’s a hypoth­e­sis, if John has evi­dence for these one-off cash flows not per­form­ing, it’d be great to see it.

Cameron  55:02

You mean evi­dence that one-off events are a bad thing for the share price?

Tony  55:09

Yes, or not nec­es­sar­i­ly a bad thing but under­per­form the oth­er. There’s two parts of the data. One is one-off high cash flows and one is reg­u­lar cash flows and the ques­tion I guess John’s pos­ing is there’s one out­per­forms the oth­er. I mean, I guess regres­sion test­ing would help us there. It might be hard. We cer­tain­ly could­n’t trawl through the text and look for insur­ance claims and job keep­er and stuff like that in the annu­al reports to see what was caus­ing that one-off.

It’s prob­a­bly pos­si­ble to do some regres­sion tests based on a one-off real­ly high num­ber appear­ing in the oper­at­ing cash flow and then dis­ap­pear­ing again the fol­low­ing six months. That might be pos­si­ble but cer­tain­ly, if John does this going for­ward, I’d love to hear what his results are because if he’s onto some­thing here, it’d be great to feed it back into the check­list.

The ques­tion in my mind is, there’s some­thing here and the rea­son why it’s a ques­tion in my mind is that often­times, what I found in the share mar­ket and some­thing that Char­lie Munger high­lights a lot is it’s easy to see the issues but it’s not easy to see the sec­ondary effects and the ter­tiary effects and the qua­ter­nary effects on these issues. As soon as I read this, the ques­tion in my mind was, OK, if you look at Mil­len­ni­um ser­vices (MIL) which we spoke about a few weeks ago, it received a lot of job keep­er, it had a one-off high oper­at­ing cash flow and it got that com­ing in but it was able to pay down debt and restruc­ture the busi­ness. It’s not so much that the cash flow in my mind is a high one-off event. It’s how it’s being deployed. That’s the sec­ondary effect of it. How good is man­age­ment at mak­ing, how while the sun shines, I guess and Mil­len­ni­um ser­vices from mem­o­ry, I think he’s back on our buy list again, this half, even though the job keep­er pay­ments were made last half.

Per­haps they have been able to restruc­ture the busi­ness and done a good thing with that. Obvi­ous­ly, some­times man­age­ment are up to it and the mon­ey flows in and it flows out again.

Yes, I’d like to see John’s results going for­ward. Just one thing on Kan­ga­roo Island, plan­ta­tion tim­bers, it was a tim­ber com­pa­ny, the plan­ta­tion was burnt down in the bush­fires at the start of 2020 but they have called out that they’re not going back into the tim­ber busi­ness, they’re not going to wait decades for a new plan­ta­tion to occur. They’re piv­ot­ing and going back into nor­mal agri­cul­tur­al type busi­ness­es which did­n’t real­ly spell out but I think is farm­ing. Whether it’s dairy or crop, I’m not sure. They had a dock that burnt down and I think they apply to have it rebuilt and they’ve got knocked back. There’s a few things going on with KPT but I sus­pect they’re going to take the insur­ance mon­ey and posi­tion them­selves into a dif­fer­ent indus­try which looks like it’s going to be an agri­cul­tur­al indus­try of some kind but not plan­ta­tion tim­ber.

Again, if they’ve used the mon­ey wise­ly and they can set them­selves up as a farm based type busi­ness, they may well do well going for­ward. We need to get data to back these hypothe­ses up.

Cameron  57:49

It’s a bit like a lot­to win.

Tony  57:50

Yes.

Cameron  57:51

You can take a lot­to in and piss it all away on coke and hook­ers and you’ll have a good year or you could take it invest­ed in QAV port­fo­lio and you’ll have many good years. It depends on what you do with that one-off bump to the p&l.

Tony  58:08

Yes, exact­ly. It’s not always a bad thing that you’re the one-off bump and maybe life­sav­ing in the case of some of the shop­keep­er recip­i­ents and if they can con­tin­ue, you might be onwards and upwards but the ques­tion I don’t know is, how does those one-off recip­i­ents of cash com­pared to the likes of GNG. I think was John’s exam­ple of how– It’s got increas­ing cash flow but maybe slow­ly, steadi­ly increas­ing cash flow and maybe I could eas­i­ly see a case where that under­per­forms a com­pa­ny which has had the cash rid­ing on it for a year and they’ve been able to restruc­ture and keep a few goals.

Cameron  58:36

Yes.

Tony  58:37

Real­ly good points he’s made. I love the analy­sis, but we’d love to see some data to back it up.

Cameron  58:42

Good stuff. Yes. Well, thanks for shar­ing all that, John and if you have some more thoughts on it, share them with us.

Before we get into ques­tions, I just want­ed to talk about our new book club that I inau­gu­rat­ed late last week. I was going over the tran­script of an episode we did a while back where it was Brent Sweeney sug­gest­ed we should have a book club and we both said it was a good idea and then I nev­er did any­thing about it. I plugged it on the Face­book group. A lot of peo­ple sug­gest­ed a lot of great books. Brent, though sug­gest­ed what works on Wall Street by James P. O. Shaugh­nessy and I thought, A) Brent should get two picks as it was his idea and B) That’s a good Irish name and I like the sound of that.

By the way, I did look him up O’Shaugh­nessy and he was only Born in 1960. If he’s still around, runs a firm. I think it looks like one of his sons is the CEO of the firm– A fund that they run. I am going to try and get him on the show. I bought the book as an EBook and I bought it on Audi­ble as well so I could lis­ten to it on the dri­ve up to Bund­aberg which is where I am today and I was lis­ten­ing to it in the car on the way up here and I had to turn it off after 10 min­utes because it was so good. It was dri­ving me nuts that I could­n’t write down all the quotes. The first chance I got when I got to my mom’s house in Bon­di is I pulled out the EBook ver­sion and start­ed to grab these quotes that I heard. It was like lis­ten­ing to your brain, Tony and I was sure that you had read this book and you just ripped it off and you told me ear­li­er today that you’d nev­er heard of it before.

Tony  1:00:12

No.

Cameron  1:00:13

Here are some of the quotes. This is from the pref­ace of the book, “Investors can do much bet­ter than the mar­ket if they con­sis­tent­ly use time test­ed strate­gies that are based on sen­si­ble, ratio­nal meth­ods for select­ing stocks.” I thought, oh well, that sounds famil­iar. He starts off in the pref­ace by say­ing, he’s gone back, I think the first edi­tion of this which came out in like 96 or 97, he went back over 52 years of S&P data and look­ing at funds and stocks and all this stuff, deep dive data analy­sis on it and he said, what we have talked about before but it’s always good to be remind­ed that 80% of active­ly man­aged funds under­per­form the index over long peri­ods of time and he says, why is that so? These peo­ple are high­ly paid pro­fes­sion­als that are very smart, they can’t even beat the index con­sis­tent­ly. Why is that? And he said, it comes down to two things.

Num­ber one is, they either have the wrong strat­e­gy or they chop and change strate­gies all the time. He said, in fact, even after the first edi­tion of the book came out where he talked about what the cor­rect strat­e­gy was based on data to beat the index long term, he got a lot of feed­back from the fund man­agers say­ing, well, I tried that and it worked well for a while but then it stopped work­ing. I dumped it and I changed to a dif­fer­ent strat­e­gy and he makes the point, no strat­e­gy works con­sis­tent­ly all of the time. All strate­gies are going to under­per­form the mar­ket at dif­fer­ent points in time but over the long haul, they will out­per­form if you just stick with them. He goes on to say that out of all of the data he’d ana­lyzed, price to sales ratio is the best val­ue ratio to use for buy­ing mar­ket beat­ing stocks. This is in the pref­ace of the book.

Now, cor­rect me if I’m wrong, but isn’t that the same thing as say­ing price to oper­at­ing cash flow?

Tony  1:02:10

It’s close. It’s not exact­ly the same. There’s no costs involved. You could be buy­ing a after­pay which has good price to sales maybe but isn’t mak­ing mon­ey but yes, the point’s valid.

I remem­ber the quote that some­one gave us that, “Sales have a van­i­ty and prof­it is for san­i­ty but cash is king.”

Cameron  1:02:29

Right. OK, sales is just what’s com­ing in does­n’t take into account what’s going out

Tony  1:02:34

The cost of get­ting them to come in here, right. I expect there to be a rea­son­able cor­re­la­tion between price to up cash flow and price to sales.

Cameron  1:02:41

I think we’ve talked about it on the show before price to sales. Have you ever done any com­par­i­son like regres­sion analy­sis on that ver­sus off cash flow?

Tony  1:02:49

No, sor­ry, I haven’t. I worked the oth­er way. I worked from P back­wards up to cash flow which is how I came about cash flow.

Cameron  1:02:56

Right.

Tony  1:02:56

Try­ing to take out the things that had dis­cre­tion in them before they’re allo­cat­ed. Yes.

Cameron  1:03:00

Well, based on what he says we should maybe have a look at that. See what the cor­re­la­tion is and just one more quote from this book that this is on page five of the eBook ver­sion, “Find­ing exploitable invest­ment oppor­tu­ni­ties does not mean it’s easy to make mon­ey. How­ev­er, to do so requires an abil­i­ty to con­sis­tent­ly, patient­ly, and slav­ish­ly stick with a strat­e­gy, even when it’s per­form­ing poor­ly rel­a­tive to oth­er meth­ods. Few are capa­ble of such action. Suc­cess­ful investors do not com­ply with nature, they defy it. In the next chap­ter, I argue that the rea­son tra­di­tion­al man­age­ment does­n’t work well, is that human deci­sion mak­ing is sys­tem­at­i­cal­ly flawed and unre­li­able. The door is open to those who use a ratio­nal, dis­ci­plined method to buy and sell stocks on the basis of time test­ed meth­ods. Wow, that’s just an ad for QAV right there.

Tony  1:03:55

[Inaudi­ble 01:03:55].

Cameron  1:03:55

He goes on the third or fourth edi­tion of the book which is what I was lis­ten­ing to in the audi­ble ver­sion. He said, since the first ver­sion of this came out, this whole field of behav­ioral eco­nom­ics has come out, basi­cal­ly rein­forced what he wrote in the first edi­tion which is that humans don’t make log­i­cal deci­sions all the time. They are emo­tion­al. All of the the­o­ries on the stock mar­ket which had assumed that the mar­ket was ratio­nal and made ratio­nal deci­sions was just non­sense.

Tony  1:04:24

Of course, it is. If the mar­ket was com­plete­ly ratio­nal, who makes mon­ey?

Cameron  1:04:28

That’s right. Yes. Any­way, for the book club– Like you asked me this morn­ing, how does this real­ly work? And I don’t real­ly know, but I’m guess­ing that it’s just– We all read the same book for a month and talk about it. Share what we learned, talk about on Face­book, and I’ll throw some quotes on the pod­cast but if any­one’s got any oth­er ideas for how we use a book club, let me know but good one, Brett haven’t got any fur­ther into it but already, I love it. It’s good stuff.

All right. Let’s get into the ques­tions. Here’s one from MANTLS STEVE / LEIGH: Giv­en the newest process of sell­ing min­ers on the three-point sell breach of their main com­mod­i­ty, what will be the process of for get­ting back in take iron ore as the exam­ple? Are we look­ing at a one or two-month upturn in the com­mod­i­ty price again? And then a min­er still scor­ing well at that point or is it a three-point trend line? By on the com­mod­i­ty price? Good ques­tion.

Tony  1:05:22

Yes, great ques­tion. The way I nor­mal­ly do it is wait for a three-point trend line buy on either the min­er itself or the com­mod­i­ty price. I sus­pect the three-point trend line buy will come on the min­er itself because the mar­ket is a bit for­ward look­ing and if it sees the com­mod­i­ty price start­ing to trend up for a month or two, then it’ll send the stock prices up for the min­ers and I’ll come back into a buy ter­ri­to­ry for us.

I guess the exam­ple which dis­proves that was San­tos which I bought last week and declared and that was before it’s three-point buy. I think the three-point price is around $6 at which San­tos is get­ting close to now. I bought it at around $6.20 but I was strug­gling to find large cap stocks to buy when I was sell­ing my bank­ing stocks. I did go a bit ear­ly on can­tos but yes, the rule is to wait for the buy sig­nal from you to the min­ing stock or the com­mod­i­ty.

Cameron  1:06:11

But either one would be fine. Yes, no, exact­ly. Good stuff. It’s like we were talk­ing about Lum­ber. We’re talk­ing about mid­way and Lum­ber. Well, half of the MANTLS duo Leigh has anoth­er ques­tion. How does Tony think about find­ing qual­i­ty and val­ue in indus­tries dom­i­nat­ed by busi­ness­es with most­ly intan­gi­ble assets? He does­n’t, would have to be my answer to that ques­tion. Move on next.

Yes, same way.

Tony  1:06:35

Same way.

Cameron  1:06:37

Yes, look at the same things.

Tony  1:06:38

It may not pass the book plus 30 above book val­ue but that’s OK.

Cameron  1:06:43

The rest of Leigh’s ques­tion is, whilst we are not growth investors, “if done cor­rect­ly,” in invert­ed com­mas, all invest­ing is val­ue invest­ing accord­ing to the Ora­cle. At some point, as sec­u­lar trends con­tin­ue to shift busi­ness­es towards dig­i­tal online cloud, etc. There sure­ly must be oppor­tu­ni­ties to find val­ue the way we do. Not all tech busi­ness­es are debt laden and unprof­itable spec­u­la­tive bets. For exam­ple, Face­book is an estab­lished busi­ness and a cash flow machine. Are there ways to score these busi­ness­es who do not make QAV cents on a price to book ratio basis?

Tony  1:07:19

If there are, I haven’t found it and I’ve been try­ing because I’d love to buy some of these busi­ness­es. I think the issue in most cas­es is not that they’re debt laden or unprof­itable spec­u­la­tive bets. It’s just expen­sive by any val­ue met­ric and Face­book fits that cat­e­go­ry.

The only thing I’ve come clos­est to scor­ing for this com­pa­nies came out of the book rich­er, wis­er hap­pi­er, which I think Leigh or Steve rec­om­mend­ed on the Face­book group. I just want­ed to do a quote from page 156 of rich­er, wis­er, hap­pi­er. I guess, a round­about way of answer­ing the ques­tion comes from a sec­tion on a guy called, I think it’s Nick sleep. This book, rich­er, wis­er hap­pi­er is chap­ter by chap­ter inter­views with famous investors. I had­n’t heard of Nick before read­ing it. It’s a great book. It’s a good chap­ter.

What they came up with Nick and his part­ners, Zack was a term called scale economies shared and that was their way of look­ing at these busi­ness­es that look like they’re expen­sive on a val­u­a­tion met­ric until you look into the long term and can see how they’re going to grow and then dis­count that those future cash flows back but just the read from the book, the com­pa­ny have intro­duced Nick to this mod­el was Cost­co Whole­sale, an Amer­i­can dis­count retail­er that embod­ied every­thing they sought in the busi­ness.

“When they first invest­ed in Cost­co in 2002. Its stock had tum­bled from $55 to $30 amid con­cerns about the com­pa­ny’s low prof­it mar­gins but sleep and Zachari­ah as his part­ner, sur­ren­der appre­ci­at­ed strength in Cost­co’s fanat­i­cal focus on deliv­er­ing val­ue to shop­pers at a time as cus­tomers pay the $45 annu­al mem­ber­ship fee which gave them access to ware­hous­es filled with depend­able prod­ucts sold at the low­est pos­si­ble prices. Cost­co marked up its goods by no more than 15% above cost. While a typ­i­cal super­mar­ket mar­ket prices by 30%. Mem­bers had no need to for­age else­where for bar­gains because Cost­co treat­ed them so fair­ly. The com­pa­ny could have jacked up its prices and boost­ed mar­gins but that would have jeop­ar­dized its mem­bers trust to the skep­tics on Wall Street. This gen­eros­i­ty seems soft and uncom­pet­i­tive, the cor­po­rate equiv­a­lent of col­lec­tivism but Sleep and Zacharias or the long term log­ic of Cost­co’s largest sat­is­fied cus­tomers kept return­ing and spend­ing more mon­ey at stores, there­by gen­er­at­ing enor­mous rev­enues.

As the com­pa­ny grew and nego­ti­at­ed bet­ter deals with sup­pli­ers and kept dri­ving down its famous­ly low costs. Cost­co then share these economies of scale with con­sumers by low­er­ing its price even fur­ther. Sleep and Zachari­ah esti­mat­ed that its mem­bers saved $5 for every $1 that Cost­co kept for itself. The effect of this pol­i­cy of self-restraint was a vir­tu­ous cycle that Sleep sums up like this. increased rev­enues begets scale sav­ings begets low­er costs begets low­er prices begets increased rev­enues.

Most big suc­cess­ful cor­po­ra­tions even­tu­al­ly lapse into medi­oc­rity but Cost­co’s readi­ness to share the ben­e­fits of at scale with cus­tomers meant that size became an advan­tage not a bur­den, enabling the com­pa­ny to extend its age over rivals that boost­ed high­er mar­gins. Cost­co which was found­ed 93 kept grow­ing by giv­ing back instead of grab­bing all the spoils for itself, it’s low mar­gins reflect­ed patients not weak­ness. Writ­ing to nomads, which is the fund that Sleep found­ed.

Writ­ing to nomads’ investors, Sleep explained, the firm has dif­fer­ing prof­its today in order to extend the life of the fran­chise. Of course, Wall Street would love prof­its today but that’s just Wall Street’s obses­sion with short term out­comes. Sleep and Zachari­ah kept adding to their invest­ment as their rev­er­ence for Cost­co grew. By 2005, it account­ed for 1/6 of nomads’ assets. Today, it remains one of the lynch­pins in their per­son­al port­fo­lios.

Dur­ing the 18 years, they’ve owned the stock, it’s risen from about from $30 to about $390, while also pay­ing rich div­i­dends. Still, they have no inten­tion of sell­ing any­time soon, giv­en the like­li­hood that Cost­co will con­tin­ue to advance towards a desir­able des­ti­na­tion.

I guess the ques­tion I’ve asked for a cou­ple of years now at least is how do we find a way of quan­ti­fy­ing that long term invest­ment in a grow­ing com­pa­ny? And I think the answer is in that chap­ter of the book some­how and in fact, to fol­low on from that Munger has declared he owns four stocks. One of them is Cost­co, one is Berk­shire Hath­away’s, and this Cost­co mod­el, I think, was also used by Ama­zon, famous­ly and it’s the whole idea of, we don’t want to make prof­its, we want to give the prof­its back in the way of low­er prices and in r&d and when you do that, you don’t pay tax on the prof­its but we con­tin­ue to grow the com­pa­ny.

If you look at these com­pa­nies, any nor­mal val­ue investor met­rics, they’re hell­ish­ly expen­sive, right? Because they’re not mak­ing a prof­it and peo­ple are over­pay­ing them because of the future growth poten­tial but I think there’s some­thing in that and I guess the ques­tion for the brains trust out there is, what’s the Aus­tralian ver­sion of Cost­co or Ama­zon? There might be one out there that if we can break it down into met­rics which allows to quan­ti­fy that maybe we cracked the nut on how to val­ue these com­pa­nies.

I haven’t come across any­one who’s fanat­i­cal as giv­ing mon­ey back to cus­tomers as Cost­co or Ama­zon, per­haps Bun­nings Ware­house which is part of Wes­farm­ers might be that one but I’ll throw it out there as a thought puz­zle for peo­ple, what’s the Aus­tralian ver­sion of Cost­co that we can break down into some met­rics and then put togeth­er a check­list for these kinds of cross stocks that are still going to be valu­able and val­ue invest­ing but just on a longer time hori­zon?

Cameron  1:12:53

Yes, we had Steven Mab on talk­ing to us a while back about analy­sis. That he and one of his folks at the HSA had done. The chal­lenge for us apart from how to val­ue them is, how do you know which you’re going to be suc­cess­ful at of the growth stocks and which aren’t? Have you thought more about the work that he did back then and whether or not we can apply that?

Tony  1:13:17

Yes, I have and I’ve set up a cou­ple of port­fo­lios to track it. Again, I haven’t regres­sion tests but I’m look­ing at going for­ward. I can report back after we get enough data. It’ll take a while a year or so to get some data to look at it, while I’m track­ing us is if I intro­duce these met­ric into the QAV check­list. There was a bit of an over­lap between some of our QAV buy list stocks and the stocks that were appear­ing on Steve’s analy­sis, which was around the future growth and growth in sales, I think was his met­ric from mem­o­ry.

Cameron  1:13:46

Was­n’t the dif­fer­en­tial between sales growth and price growth look­ing for the stocks with the biggest dif­fer­en­tial between the two?

Tony  1:13:54

Yes, it was some­thing like that. I can’t recall exact­ly what it was and I’ve set up a port­fo­lio to watch that going for­ward but yes, I’ll report back if we have any mean­ing­ful dif­fer­ences from the QAV num­bers.

Cameron  1:14:04

When you say that these stocks real­ly expen­sive, you’re talk­ing about in terms of a nor­mal val­ue based analy­sis, right? When you’re look­ing at things like price top cash flow.

Tony  1:14:16

If you look the met­rics on one year or one six-month peri­od for these stocks, yes, you come up with a ridicu­lous­ly high num­ber in terms of price to oper­at­ing cash flow in par­tic­u­lar and I’m not that famil­iar with Cost­co. I don’t mean with Ama­zon, it’s a very high num­ber. If you do it for Ama­zon., I sus­pect Cost­co will be the same. The point that these peo­ple make is that these are com­pa­nies which are going to win over the longer term by play­ing their prof­its back into dis­counts for cus­tomers and there­fore, you need to look at the met­rics of their worth over a long peri­od of time, 5, 10 years, 15 years going for­ward. Tell us what peri­od they use. They just say long term.

If some­one has a the­o­ry like that, you should be able to reduce it to num­bers and then apply it to the oth­er stocks in the mar­ket. That’s the trick that we have to do and the check­list I think for stocks like that will be some­thing like, what’s his prof­it mar­gins? How much is going back into price? What’s his price com­pet­i­tive­ness is like? And then the qual­i­ty met­rics. Both Ama­zon and Cost­co will prob­a­bly have some own­er founder, cer­tain­ly with Ama­zon there is, again, I’m not famil­iar with Cost­co.

These things have been called out by Munger in par­tic­u­lar and they’ve not giv­en as much promi­nence as the tra­di­tion­al crime and dot val­ue invest­ing stick because there’s a lot more writ­ten about those but cer­tain­ly Munger in par­tic­u­lar is spo­ken about tak­ing a longer term view and then dis­count­ing it back and find­ing good busi­ness mod­els which work by giv­ing back to their cus­tomers in cre­at­ing that vir­tu­ous cycle. He’s been on tour for quite a while and so it’s next slide. We just need to put some check­lists in place that we can find the next one.

Cameron  1:15:42

Have you ever been to a Cost­co?

Tony  1:15:43

No, I haven’t. I’ve been to a Wal­mart Sam’s Club in the States but not at Cost­co.

Cameron  1:15:47

We’re mem­bers of Cost­co in Bris­bane. Chris, he goes there. Once a month. I go there as rarely as pos­si­ble because it’s like going to IKEA it’s a day long thing. You come out of it. You feel like you’ve been in the trench­es and World War One man, you’ve got I’ve got gan­grene. I got PTSD. When­ev­er I come out of there. It’s just hor­ri­ble.

Tony  1:16:09

How does Chris­sy feel about it because most Amer­i­cans I speak to, Cost­co is just part of their life.

Cameron  1:16:13

She loves it. She was so excit­ed when they opened their Cost­co in Bris­bane. It’s like her lit­tle slice of Amer­i­ca. She goes there, it’s just– Oh, she knows all the prod­ucts. I think their head­quar­ters is in Kirk­land in Wash­ing­ton. It’s a Seat­tle based com­pa­ny and she lived in Seat­tle for 10 years. It’s like, oh, I know this and I know that I’ve missed this and all that stuff which is great for her. It’s excit­ing lit­tle taste to home. For me, it’s hor­ri­fy­ing.

Tony  1:16:41

But it has become very cul­tur­al, a big thing in Amer­i­can cul­ture you like talk about what they bought from Cost­co and what the price was and all that and Kirk­land is a brand. It’s even got­ten into golf. I don’t know if Aus­tralians will be famil­iar with it and cer­tain­ly Amer­i­cans buy the golf balls from Cost­co, the Kirk­land golf balls which are cheap but still good qual­i­ty.

Cameron  1:16:57

Yes, but the thing with Cost­co is you buy stuff in bulk so we always leave there with like an entire boot full of three months’ sup­ply of hand tow­els and stuff like that.

Tony  1:17:07

Yes.

Cameron  1:17:07

Michael: Tony has occa­sion­al­ly com­ment­ed on the lat­est fig­ures for a stock being out but not yet in Stock Doc­tor. How do you quick­ly tell if Stock Doc­tor reflects the lat­est fig­ures? Good ques­tion, Michael.

Tony  1:17:19

Yes, if you’re doing a down­load that one of the first columns is the last peri­od ana­lyzed and if that’s not the cur­rent peri­od and you know it has­n’t been updat­ed. If it is recent, it’s been updat­ed. You can also look at it in Stock Doc­tor across the top of the screen, it has usu­al­ly about five or six columns of fig­ures. If the last one isn’t a recent one, it has­n’t been down­loaded into Stock Doc­tor and also too if you want to check for it, you can set up a stock alert for lat­est finan­cials loaded that’s avail­able in Stock Doc­tor in the tool sec­tion and also to in the tool sec­tion is a click through you can use to look at the lat­est updates and if you go into that and select com­pa­ny finan­cials, you’ll get all the ones updat­ed today or the ones updat­ed in the last week etc. and you can search for your com­pa­ny there and see if it’s been updat­ed recent­ly.

Cameron  1:18:05

How do you know if it’s one of these com­pa­nies with a weird report­ing peri­od though?

Tony  1:18:08

Yes, what I tend to do is I mean. I guess I knows I’m sure expe­ri­ence but I’ll set up stock alerts for them to say when the last com­pa­ny’s finan­cials are updat­ed, send them through. Stocks like Myer, stocks like Kat­man­du are on that Jan­u­ary, July report­ing peri­od but also stocks com­ing out on March, Decem­ber so the banks and stocks like Eclipse which are impor­tant to me as a share­hold­er. Obvi­ous­ly, just set up stock alerts for them to let me know when they’ve been updat­ed but also to real­ly any­thing review they’ll have an arti­cle about the lat­est results and usu­al­ly that’s a day or two before the num­ber six Stock Doc­tor.

Cameron  1:18:41

Right. Trent. I think this may have been men­tioned a lit­tle bit with the QAV process which I am tran­si­tion­ing to slow­ly. Con­grat­u­la­tions on your tran­si­tion, Trent. I’m doing a lot more trades than pre­vi­ous­ly, was a bit more cum­ber­some tax wise than usu­al which is not a big issue. Just thought a bit of a chat about the most effec­tive ways to man­age this may be use­ful. Does Tony’s full ser­vice bro­ker help­ing with that. I guess I’m just weigh­ing up man­u­al ver­sus a paid ser­vice if there’s some­thing suit­able.

I was sur­prised when we got this ques­tion because I think of QAV as being a very low trad­ing strat­e­gy but of course, ear­ly on with rule one sells that cre­ates a lot of trad­ing I found. What are your thoughts on Tren­t’s ques­tion?

Tony  1:19:27

I think we turn the port­fo­lio over or near­ly all of it once a year so it’s not like an ETF where you might buy and hold for many years. Cer­tain­ly my stock bro­ker Bail­lieu’s helps me with this. I can down­load from their web­site I think quite quick­ly up to three years’ worth of stock trades and with just a bit of fid­dling around and get longer than that when I put the dates in. That’s use­ful at tax time but also I use Xero which is linked to Share­sight and I can mark rod my accoun­tant pulls reports out of Share­sight and cer­tain­ly Xero which are almost pre-pack­age tax return items, at least as far as div­i­dends and cap­i­tal gains tax goes.

Cameron  1:20:05

Maybe check out Xero.

Tony  1:20:06

Check out Share­sight and Xero is asso­ci­at­ed with it. Full ser­vice bro­ker like val­ues but they all come at a cost.

Cameron  1:20:12

And give Mark Rudd a call. Send Mark more busi­ness.

Tony  1:20:15

He loves some more work at the moment bud­dy.

Cameron  1:20:17

Well, if you need I’m just kid­ding. He’s very busy.

Last ques­tion from James, can you ask TK if he was mea­sur­ing him­self by after tax returns, would he do any­thing dif­fer­ent­ly? Some man­agers pro­vide after tax report­ing, for exam­ple, War­rakiri. If he was mea­sur­ing him­self by after tax returns? But you did mea­sure your­self by after tax return.

Tony  1:20:42

I do. The answer is no. I don’t do any­thing dif­fer­ent­ly.

Cameron  1:20:45

Because that’s what you do. Right?

Tony  1:20:47

Yes.

Cameron  1:20:47

The 19 and a half per­cent is after tax and fees. We’ve said that before.

Tony  1:20:51

Cor­rect. It’s also after only the last cou­ple of years has to be liv­ing expens­es but it’s also the ins and outs in terms of stamp duty on house pur­chas­es, pay­ing debt on mort­gages, all that stuff. Yes, it’s after tax.

Cameron  1:21:03

Well, that was an easy one. Thanks, James.

OK, I guess the flip it invert, always invert. If you were mea­sur­ing your­self by pre tax returns, would you do any­thing dif­fer­ent­ly?

Tony  1:21:15

No. It’s the same thing. Prob­a­bly a bit sim­pler and prob­a­bly the returns would be high­er, but yes, no, I do after tax return.

Cameron  1:21:23

Yes. Well, that’s a wrap of that.

Now, we’re into after hours. I start­ed watch­ing hap­pen Leonard. Last week I re-watched the first episode which I’d seen before and your rec­om­men­da­tion is good. I enjoyed it, par­tic­u­lar­ly with the now con­firmed over­dose death of Michael K. Williams, hero­in and coke and fen­tanyl in his sys­tem but they’ve ruled as an acci­den­tal OD but yes, no, I enjoyed it.

Tony  1:21:49

He tripped over and his nose fell on a pile of cocaine.

Cameron  1:21:51

Yes.  That’s how it always works.

Tony  1:21:55

You’re on there.

Cameron  1:21:56

Yes. What else? What have you been watch­ing, read­ing, lis­ten­ing to, Tony?

Tony  1:22:00

Well, it’s been there’s Roy and HG, the Fes­ti­val of the boot this last week­end with the grand final for the AFL and pre­lim­i­nary finals for the NRL. Lots of foot­ball. Lots of the Ryder Cup was on this week­end. Unfor­tu­nate­ly, one of the very few times the US has tranced Europe but they did.

Cameron  1:22:17

What sport is that, the Ryder Cup?

Tony  1:22:19

Golf. Every two years Europe place the US in golf. Usu­al­ly, it’s a case of prov­ing the max­i­mum that a team of cham­pi­ons could los­es to a cham­pi­on team because gen­er­al­ly the US play­ers are high­er rat­ed than the Euro­peans but the Euro­peans tend to win, usu­al­ly through cama­raderie and hav­ing the crowd sup­port and all that stuff but this time with COVID they was almost entire­ly us crowd. The US won, the team of cham­pi­ons won.

Cameron  1:22:25

How does cama­raderie mat­ter in golf? Like they’re pass­ing the ball to each oth­er?

Tony  1:22:27

But they seem to real­ly rise to the occa­sion and get geared up by the crowd sup­port and its usu­al­ly real­ly fun­ny crowd sup­port. I mean, it’s usu­al­ly guys dressed in cos­tumes and singing fun­ny songs and it’s quite a lot of fun to watch.

Cameron  1:23:04

OK, what else? Any­thing else?

Tony  1:23:07

Bil­lions and bil­lions sec­ond half of series five is now being released and it’s a lot of fun to.

Cameron  1:23:12

That’s about Buf­fett and Munger?

Tony  1:23:14

No, it’s about Wall Street and Paul Gia­mat­ta plays the New York Attor­ney Gen­er­al keeps try­ing to catch ex cap­i­tal out as twists and turns and sub­verts the finan­cial sys­tem. It’s lots of fun.

Cameron  1:23:28

Any invest­ing wis­dom? Did– You learn­ing any new tricks out of it?

Tony  1:23:32

It prob­a­bly isn’t far from real­i­ty but it’s all about how they try and catch each oth­er route and rip each oth­er off basi­cal­ly but yes, good fun.

Cameron  1:23:39

Good stuff. I watched some­thing that hunter rec­om­mend­ed to me, the light­house this week. Have you heard of that?

Tony  1:23:45

No.

Cameron  1:23:46

Came out a year or so ago. Got a lot of crit­i­cal acclaim its stars Willem Defoe and Robert Pat­tin­son, black and white, shot in four three ratio and it’s on Net­flix. It’s about just set in the ear­ly 20th cen­tu­ry. Two guys strand­ed in a light­house on a lit­tle island off Nova Sco­tia or some­thing like that and it a psy­cho­log­i­cal thriller thing. Very lynchy Orson Welle‑y thing. Real­ly well done. I mean I’m a huge Willem Dafoe fan. It’s like Nico­las Cage for me like he makes every­thing bet­ter. In this he’s got this big beard and he talks in a sea cap­tain thing and with this old timey yee [Inaudi­ble 01:24:37], these nuts and it’s real­ly.

Tony  1:24:39

Yes, real­ly like a Nova Sco­tia accent.

Cameron  1:24:42

It’s real­ly good. I thought a lit­tle bit sur­re­al a lit­tle bit creepy. Yes, I thor­ough­ly enjoyed it.

Tony  1:24:50

But first time I went to Nova Sco­tia, we got a bit lost try­ing to find the golf course and my Cana­di­an mate says, go over and ask that guy where the golf course is? I did. He was piss­ing him­self. I came back and I said, I could­n’t under­stand what he was say­ing and he said, he could­n’t under­stand what you were say­ing though with the Aus­tralian accent.

Cameron  1:25:06

Good stuff. Well, that’s the show for this week. Thanks, every­body. Thanks, Tony. Good luck. Talk to you next week.

Tony  1:25:13

Cameron  1:25:28

The QAV Pod­cast is a pro­duc­tion of space craft pub­lish­ing pro­pri­ety lim­it­ed autho­rized rep­re­sen­ta­tive of AFSL 520442 HFS rep­re­sen­ta­tive num­ber 001292718. Please don’t make any invest­ment deci­sions based sole­ly on lis­ten­ing to this pod­cast. This is pre­sent­ed as gen­er­al advice only, not per­son­al finan­cial advice. We don’t know your per­son­al finan­cial cir­cum­stances. Please see a finan­cial plan­ner before mak­ing any invest­ing deci­sions.