Welcome back to QAV, TK.
Let me start with that.
Yeah, Magic Millions. It’s been a big week.
What’s better, like, a horse winning a race or selling a horse?
Oh, good question. Probably a horse winning a race, but it’s still good to have some cash flow to fund it. So, Magic Millions was busy last week. Big sale on the Gold Coast for horse people. We had a colt out of a mare called Caesura and it went to sale late Friday afternoon, and before the sale we thought we’d be lucky to get $200,000 for it, we thought about 150, which was still a good result because it was, we bought it in foal to a horse called Harry Angel, a sire. And the sire doesn’t charge very much in this case. Sometimes they charge 150 grand, this one charges 16 grand for a service. So, it wasn’t an expensive buy for us. During the week, the new records were set with the horses that were selling so we could sort of ride on the back of that. We own half – I touched base with the other owner who was up there and said, you know, “what do you think we should do for a reserve?” He said, “well, I think it’s going to go for 200.” And I said “you want to make that the reserve?” And he said that “I don’t think we should make a reserve at all, it could go north of that.” So, he said “okay, we’ll put it on reserve.” He’d done a good job – he’s in the industry – he’d done a good job of lining up some trainers to make sure we had some bidders, some price action. I’d spoken to a couple of trainers I knew that we’re going to have a look. One of them was going to bid, asked us to retain a share in the horse, we said we would as long as it’s sold for more than 200, otherwise we’d take the cash. So, a lot of toing and froing going on behind the scenes. Anyways, long story short, went to auction, blew past 200, blew past 250, blew past 300, and sold for 400 grand.
Wow. That’s great.
Yeah, really exciting.
And yet you’re sober enough to do the show today okay.
Well, I was home here by myself. I took Jenny up to the airport on Friday just before the sale. So, no one to celebrate with except virtually.
Oh, well. That’s a shame. Congratulations.
It’s nice to have a win.
Yeah, it was. Really good. So, that’s, that’s good cash flow for our business going forward for a while.
Nice to have a win as opposed to those of us that own Myer – finally had to sell Myer today. Thanks for nothing, Jeff Wilson.
I don’t think it’s Jeff Wilson, I think it’s Dominic Perrottet and the other state premiers. I mean, there’s a lot of information out there saying that retail’s had a dip because of Omicron. No one’s prepared to go out. Still lots of online sales, but who wants to go and stand in a Myer store when there’s a virulent flu going around?
Pretty much everyone from what I can gather, because, you know, when the government, I don’t know about down there, but up here the government’s stopped reporting contact sites.
They just gave up on contact tracing. Like “uh, why the hell did we bother?” Or, “why are we bothering to check in?” But there’s a couple of Facebook groups that set up where people are doing their own contact tracing, which I’m part of, and I was looking at, you know, people if they get a positive test, they post their own contact tracing history. And every one of them seems to have been everywhere. Like they’ve just been going to a million places, and constantly, I’m like, “well, no wonder you got it. What, what did you think was going to happen?”
Anyway, so I just assume that I’m the only one who’s staying home and playing it safe. Everyone else is just going about life like it’s normal.
I’m the same, and I even had a couple of friends who were going to come down and visit on the weekend, and then last minute they said they both had family members with COVID. And I said “well, maybe not a good idea to come down.” I was talking with Jenny today, so she’s back up in Sydney at the apartment settled in because she had some work commitments, and I said, “how is it?” and she said, “well, you know,” like, went out, she went out today. No one’s wearing a mask. Well, lots of people aren’t wearing masks. There’s seven apartments with COVID in our apartment building. So, it’s just you know, it’s everywhere.
You know, I got my booster on Friday afternoon and the first jab didn’t, had no side effects. Second jab, no side effects. I thought this one, this will be fine. Chrissy got hers the day before and she was quite sick on Friday. She got hers Thursday, was quite sick on Friday. I got mine on Friday, and I thought it’ll be fine. Friday night, I’m fine. Saturday morning, I woke up I was fine. And then all of a sudden, I was like, oh shit, I don’t feel well and then I got really – I still cleaned the garage because I bought my Wing Chung wooden dummy that week and I had to clear space in the garage to set it up and I wasn’t going to let a little bit of COVID Booster symptoms stop me. But I’d like, I’d get up for a minute and move some stuff and then I’d have to sit down for like five minutes and rest and get up. And by the end of the day it was fevers, chills, pains in my kidneys, rough night. Woke up Sunday morning, fine. Then started getting weird headaches Sunday night again, but by Monday, I was fine. But just that one day of those symptoms, I was like, “holy crap, I wouldn’t want this for a week or to be any worse than this,” you know, it was terrible.
Yeah. Well that’s your immune system fighting it, so it’s not even COVID. It’s your immune systems’ response to it. So, yeah, I had a similar sort of thing, the first shot I had of AZ. So, it must just be that your body when it gets an overload and generates lots of immune response once one of the jabs goes through that process, yeah.
Anyway, enough of my travails. Howard Marks’ latest memo, Tony, did you have a read?
I did. I read it this morning. Thanks for sending it through, and with the notes. What a load of horseshit. Biggest wank on paper I’ve read for all week, it’s just ridiculous.
Yeah, well, look, there was some of it, I thought, was on message for us. Like, you know, he starts off; “the basic idea everyone is familiar with the old school that’s supposed to capture investing’s basic proposition, buy low, sell high. It’s a hackneyed caricature of the way most people view investing. But few things that are important can be distilled into just four words. Thus, buy low sell high, is nothing but a starting point for discussion of a very complex process.” And he goes on to say what I’ve heard you say a lot of times, you don’t sell high, you ride it out. Like, he talks about Amazon, “everyone wishes they bought Amazon at $5 on the first day of 1998, since it’s now up 660 times at $3,304, but who would have continued to hold when the stock hit $85 in 1999? Up 17 times in less than two years, who among those who held on would have been able to avoid panicking in 2001, as the price fell 93% to $6? And who wouldn’t have sold by late 2015, when it hits $600, up 100 times from the 2001 low? Yet anyone who sold at $600 captured only the first 18% of the overall rise from the low.” And I thought okay, well, that’s exactly what Tony would say; you don’t sell, you ride your winners. And you know, then it went downhill from there.
No, he makes a good point. And I suspect if I did own Amazon, I probably would have sold it along the way, because I’m sure it’s had its ups and downs and three-point trendline sells and rebuys and all the rest of it if it had ever come on the QAV buylist. Which it never did, because you know, it took a long time for it to make money. And it’s not on the buylist now, or even if we’re doing overseas stocks it wouldn’t be on the buy lists now, because it’s got a high PE ratio. So, or ratio of Pr/OpCaf. So, the reason why I think Howard Marks was jerking us all off is because he went through a lot of the old saws and a lot of the things that we’ve talked about in the market – adages like buy low, sell high – and he talked about “so when do you sell?” And he said, “well, here are all the things you shouldn’t do, you shouldn’t sell just because you’ve made a profit. You shouldn’t sell just because the stock went down,” etc., etc. All those sorts of obvious things. But he never told you when you do sell. He basically said it’s a judgement call. Well, fuck that. It’s either you’re the Eye of Sauron who can make perfect judgement every time. He didn’t tell you how he makes judgement, he didn’t say “here are the rules I live by when I have to make a judgement on a sell.” He just said it’s a judgement call. Shove that.
You need to sell horses more often. A whole other side of your personalities coming out today.
Well, I just thought it would have been a more useful article if he said, “here’s how I sell” and there was some rules around it or a framework around it, other than “I make a judgement call”. “I stick a finger in the air, a wet finger in the air and see which way the wind blows.”
“When should investors sell” on page four, and he recounts his fictional conversation with his son that we talked about a while back. Then he goes into aphorisms like “no one ever went broke taking a profit maybe relevant to people who invest part time for themselves, but they should have no place in professional investing.” And I think you’d agree with that, you know, and we have plenty of new, or sometimes quite experienced, QAV subscribers who say “come on, it’s up 50%,” “it’s up 100% Surely we should sell.” Taylor and I have this conversation all the time. He’s like furious now that he didn’t sell Myer when it was up 70% four months ago. We did sell, and I think we made 20% on it in six months. I’m not complaining I’m making a 20% profit on six months. But if we’d sold it four months ago, we would have made 70% on it.
You can’t think that way, that’s, that’s hindsight bias, right? You can’t pick the top.
If we couldn’t pick the top, that’d be a rule. But it’s not, because you can’t do it.
He said there certainly, this is back to Howard, “there certainly are good reasons for selling but they have nothing to do with the fear of making mistakes, experiencing regret and looking bad. Rather, these reasons should be based on the outlook for the investment, not the psyche of the investor, and they have to be identified through hard-headed financial analysis, rigour and discipline.” I was like, “Oh, good. Let’s get to that bit.” It didn’t really get to that bit.
He didn’t did he, didn’t tell us what these rules were? Yeah.
Well, maybe he’s not giving away the secret, the magic like you do.
If you just take that statement, even if you don’t know what his rules are, there’s been plenty of times when the numbers tell us one thing – like the hard facts tell us one thing – but the share price is still going south because the information isn’t out in the market yet. There’s a select group of people who know that the MD’s about to retire or resign, or a competitor is about to take one of their key customers or whatever, and so the price starts going south. That’s why we use sentiment as our framework, one of the reasons why we sell, probably the prime reason why we sell. And you can see that from the buy list; our watch list is twice as big as our buy list because there are just as many companies who have good figures who, but the share price is going south that we don’t want to buy. So, it’s the same sort of thing. So, Howard’s fine to say “do some hard-headed financial analysis,” if he doesn’t tell us how, then it’s not the full picture.
He’s also coming from the view, I think reading through it, that he’s a long-term investor. So, like your classic value investor, he, if he believes in the business, he’s willing to ride through the ups and downs. He says, “as mentioned earlier, investors often engage in selling because they believe a decline is imminent, and they have the ability to avoid it. The truth, however, is that buying or holding, even at elevated prices, and experiencing that decline is in itself far from fatal. Usually every market high is followed by a higher one, and after all, only the long-term return matters. Reducing market exposure through ill-conceived selling, and thus failing to participate fully in the market positive long-term trend, is a cardinal sin in investing. That’s even more true of selling without reason things that have fallen, turning negative fluctuations into permanent losses, and missing out on the miracle of long-term compounding.” But of course, just because you sell it doesn’t mean it’s permanent loss, because you can buy it again when it comes back up, right?
Or you can buy the next thing on the buy list, which might be going up much stronger. So, again, I don’t disagree with what he’s saying, he just doesn’t tell us what he does and what his rules are.
Well, I think he’s saying that, you know, if he likes a business, he’ll hold it until he doesn’t like the business anymore. Whereas, the magic, I’ve come to believe that part of the magic of QAV is how you’ve moderated that hardcore value investing view, which is buy and hold forever, to well, look even if you think it’s really good, if everyone else doesn’t, the price is gonna go down and could go down further and could stay down. So, get your ego out of the equation and just go okay,
Just bow out for a little bit and see what happens. Buy something else.
Well put, Cam, that’s exactly right. And the other dimension to that is that the way that I invest is not to get that immersed in trying to understand the company I’m investing in. I do a cursory analysis of it, but someone like Howard Marks, I imagine, would have a hotline to the chairman or the CEO and would be able to ring them up and say, “hey, what’s happening?” You know, “how you’re feeling today? What’s going on?” etc., etc. We don’t have a hope in hell of investing that way. And so, he’s saying that he’ll invest until he doesn’t like something in the company,
Yeah, that’s right. Yeah. He’ll keep investing until he doesn’t like something in the company. He’s probably more informed than what, than what we could be as retail investors.
Okay, good to get your feedback on that. I thought, I thought that would be fun. Want to give a shout out to Jeremy and Brett, who published some of the returns they’re getting on their QAV portfolios on Facebook in the last week or so. Getting incredible returns, well done.
Well done, guys.
Well done to everyone out there who is using QAV and getting better returns than I do. Congratulations. And I’m not complaining about mine, but you know, some people have just… timing thing when you buy and all that kind of stuff. But they’re doing very, very well. Well done, guys.
And thanks for sharing too.
Yeah, it’s always good for me to hear those stories, to know that people out there actually putting it into practice and doing very well. That’s great. I want to point out to people, I did post this on Facebook today, but there’s a new version of the AF sheet I put up today. Thank you, as always to Andrew Flitman for doing the work on that. As you know, when we compare our checklists every week, I’ve noticed that the scoring has been a little bit out; you’ll get a 0.9 for something and I’ll get a 0.1 and I was never quite sure why. I’ve worked it out, there was a formula – I don’t remember when we did this, but in the Bible it says if the, when we’re doing yield minus PE in the Bible, it says, if the PE is blank, the score should be blank, which is what your sheet was doing. The AF sheet wasn’t doing that, I don’t know if we changed that at some point and I didn’t tell Andrew or we missed it in the first model. I don’t think it would be that because Andrew is very, very good, but, at translating your model over but anyway, so that’s changed now. So, it should fix the scoring. I don’t think it’s, it’s not going to be a big deal for anybody, but it just changed the final score by 0.03 or something in some cases. But, if that’s enough with the rounding to get something that’s point… you had 0.093 and rounded it down 0.09, mine was getting 0.096 and rounding it up to 0.10, you know. It was just annoying me and taking a lot of my time to work it out. VUK, Tony, you said VUK is getting close to it’s buy price.
VUK, Virgin UK it’s been on the buy list in the past. We sold it about 12 months ago, I think from memory, and it’s now getting close so I put an alert into Stock Doctor. But, if it keeps going in the next week or so it’ll probably come back on the buy list. It’s a large ADT stock. If people need that, keep an eye out for VUK.
Very good. Well, the stocks of the week this week were MFD, good old MFD. They come and they go on a regular basis, Mayfield Childcare. And I did post on my blog post about it, they’re our small-cap stock of the week. The last time they were a stock of the week was February 2020, like a week before the COVID crash. But, they’re well above where they were price wise when we had them as our stock of the week, so if they, if anyone did a Howard Marks and bought and held they’ve done quite well out of it. But yeah, it’s obviously not Mayfield’s fault that the market crashed and they crashed along with it. But they’re back on and our large cap stock of the week this week was Beach energy, BPT, another one that we’ve seen come and go on a regular basis.
So, I’m going to make that my pulled pork, if I can do that now. So, as you alluded to, it’s been on the buy list in the past, and it’s back on now. The couple of things, I guess, as background for it. The oil price has been increasing recently, and that’s not unusual this time of year because it’s the northern winter, so they’re kind of a flip side of what we are in summer. So, in summer, our power stations work around the clock because everyone’s turning on their aircon units, but in winter, we don’t need much heating. But in Europe, it’s the reverse. So, in winter, the power stations crank up because everyone’s trying to heat their homes, and getting less and less these days but certainly over the last couple of decades, a lot of the homes were being heated by burning fuel oil, a type of oil, like a low-grade oil. And so, the oil prices in the northern winter generally go up. So, it could be short term, but it’s also being supported by another thing that’s going on, a macro trend, which is the fact that because oil is on the nose in terms of the ESG investors, and even to the point where they pressure the banks these days not to lend to oil companies to try and reduce the carbon footprint of the world – and I’m not saying it’s a good thing or a bad thing – but there’s been less much less exploration in new oil discoveries in the last couple of years than is normal. And so, it’s one of the reasons why the oil price is going up because the existing producers have less competition. A couple of other factors too, like in the northern hemisphere winter, because oil is, when it’s being drilled, it often goes through reserves of water and pulls out water as well, it freezes, and the water if it freezes on the drilling rigs it can shut them down for long periods of time. And so that’s happening. There was apparently some kind of cold spell in Texas, which is unusual, but the oil rigs froze there, so they’ve been out of the market for a while. So, lots of things are going on to sort of keep the oil price elevated, which all plays into a good story for stocks like Beach Energy. They’re also a natural gas explorer and producer. Natural gas is a funny one because it’s actually better to power a power plant using natural gas than it is to use coal but the ESG people still say they’re both bad. But there has been a, there still is an ongoing conversion of coal power plants to natural gas, so that’s also supporting the price and, and oftentimes contracts for a gas are tied to the oil price, so they tend to go in lockstep. But both of those commodity graphs are going up. So, that’s the background to Beach. A couple of things about Beach Energy. One of the reasons why it came off the buy list last time was because they had a surprise downgrade, they eventually got around to telling the market that they didn’t have as much oil reserves under the ground and they’re oil fields as they’d stated in the past, so that caused the price to crash. I guess that’s now baked into the share price, so the fact that it’s turning up again is taking that into account. A couple of other things, though. The MD resigned unexpectedly at the end of last year, so we need to be cognisant of that. I don’t think they’ve appointed anyone yet as an acting CFO, as an acting MD. So, that’s another risk, I guess, to the stock. The last sort of background story to the stock is that the Stokes family through their Seven Group company own about 30% of the stock. That can be a good thing and a bad thing. If you look at what they did with Boral, I guess in the short term, it’s good. I don’t know how it’ll play out in the long term, but what they have a track record of doing with other companies as well is buying a stake that gets them a seat on the board, and then using what’s called the Creek Provision to be able to buy more stock without launching a takeover – a formal takeover. So, one of the problems with a company like Beach, if it has a large shareholder on the base is that it makes it less attractive for someone to launch a takeover bid. So, even though the price crashed and the fundamentals were still strong, and the oil price is rising, and there has been merger and acquisition activity going on in the Australian oil and gas scene, it makes it hard for someone to launch a takeover bid for something like Beach Energy. So, that takes that kind of upswing in the share price potential out of the stock. So, that’s an issue. And then if, if the Seven Group keeps creeping up on the register without launching a takeover then they’ll get to a stage where they’ll effectively control the company. That can be good and bad. There’s a case in the past where it’s been bad, where the Seven Group then use their control to buy other assets they owned at prices that were probably unrealistic compared to what you get in the market and so the, the company became stuffed with assets, and eventually, I think it eventually went broke. I won’t talk about which company that was because I don’t want to be litigated against, but that’s essentially what happened. And, but in the other case of Boral, it seems to have worked out for shareholders because they did exert enough pressure to turn around the company, and so that’s working out there. So, it can be good or bad. So, I know I’m sitting on the fence with the Stokes owning 30% of Beach Energy, but it is something to watch and just be, be aware that it can have positive and negative implications for the company. That all aside, I guess we just go straight to numbers, that’s pretty much it, I was going to talk about the oil price a bit further and say that as the oil price rises, there’s been some stories in the press saying that, some analysts are saying or can reach $200 a barrel, it’s now sitting around 80 odd, in the 80s a barrel. So, along with a lot of upside. And they’re basing that analysis around the fact that, like I said before, less exploration going on, ESG squeezing on producers being able to explore and therefore the existing people should be able to command a bigger margin for what’s left. And that’s, there’s some certain truth about that. However, in the last decade or so, both Russia and the US have acted as kind of valves against the oil price going too high, because there are shale oil producers in the US who lie dormant until the oil price gets up around $100 a barrel, and then they come back on because they can make money at $100 a barrel. And so, they almost become like a pressure valve for the oil price getting too high. And Russia is a bit the same. So, they’ve done a deal now with OPEC to throw in with the cartel in terms of trying to regulate the price and keep the margin up, but they also have a history of going rogue and when they need to selling lots of oil, which brings money to them but drops the price in the market. So, they’re the two, I guess, issues around the oil price. To me, all that summed up says that I think $100 is about the natural limit in this market to the oil price, but it’s a prediction that could be wrong. Anyway, QAV by the numbers are quite good for this company. I’m using a share price of $1.40, which is less than the consensus target for Beach Energy, so that’s a score of 1 for us. It is a low yield company, and I guess I question why even has a yield – I think it’s about 1.5%. I expect the answer is so that they can release some of the franking credits on the balance sheet. They’ve been paying tax on their earnings and like they can release some of that back as a credit to their shareholders. They don’t want to pay a whole heaping yield because they do want to put money back into exploring for oil and developing their own oil and gas fields. So, that’s probably why it’s about 1.5%. Financial health is strong and steady, Pr/OpCaf on this one currently is 4.2 times, so makes a good value stock for us. The price is slightly higher than IV1, less than IV2 and less than two times IV2, so it gets a couple of points on the checklist for those things. Net equity per share is around $1.35, and as I said before the share price is $1.40, so it’s trading around its book price and certainly less than book plus 30%, which is a good test for us in terms of value, so it gets a point for that. The interesting thing is that the analysts are forecasting earnings per share growth of 60% on this company, so they’re certainly seeing, I guess the analysts are bullish on the oil price and they’re certainly probably also bullish on Beach Energy getting it’s shit together. So, that’s probably why it’s forecast growth’s so high. But it means it’s got the growth over PE metric that we look at, is quite strong, it’s greater than five times, which is very strong. Stock Doctor is stating that directors’ holdings are only 1.79%, which is a bit misleading because the Stokes family have, as I said before, 30% via their Seven Group company. And the Seven Group company has at least one director on the board and maybe even two. So, that’s a bit misleading. But if I override the spreadsheet and give that 1 it doesn’t change the QAV score very much. So, I haven’t, I’ve left it, left it down. But people may want to do that. It gets a zero for the lowest PE of the last six halves. It’s, it’s almost that but it’s not. Gets a 1 for a new upturn, because as I said before, it was crashing last year, it’s just been turning around since its last results were out. Gets a 1 for consistently increasing equity. So total score is 12 out of 14 for quality, which is 86%, which is good. And if you add the Stokes shareholding back, it’s 13 out of 14, which is even better. QAV score of 0.2, and 0.22 if you add the Stokes’ score back in. So yeah, for a large cap stock it’s certainly scoring well for us.
Very good. Thank you for that. Let me ask you a question though while we’re talking about OPEC, why doesn’t the World Trade Organisation slap them around for collusion?
Well, I don’t know if they can. It’s a good question. I’m not sure of the history of it. But how would you do that? There’s no sort of… someone couldn’t take them to court, I guess. But again, the WTO rules on disputes, I don’t know if it actually has the legal ability to break up a cartel in Saudi Arabia and its friends,
Could just, the rest of the world could just say, “well, we’re not buying your oil anymore unless you cut it out.”
Well, that’s what kind of happened when, I mean, OPEC came under a lot of pressure in the Obama years when shale oil became big in the US. This is an interesting thing about the US economy, is that, like when I was visiting there from Canada, you can buy fuel for equivalent I’d say about 25 cents a litre. I mean, they sold it in dollars per gallon and you had to convert it and all the rest of it, but it was very, very cheap. That’s now changed.
25 cents Aussie?
Oh, I think so, something like that, yeah.
A litre? Wow.
I think I did the calculation once and it was very cheap. So yeah, much, much cheaper than what we pay for it. That’s now risen, so that’s a drag on the US economy, because the shale oil, a lot of the shale oil providers as I said before can’t make money when the oil price is low – and it got down to, I think it was about $35 a barrel during the COVID cough. That put all of the shale operators into care and maintenance mode. They’ll come, come back. And so, it is a drag on the US economy the oil prices rising, but I don’t think it’ll go too high, because as I said before the shale oil companies will open up again, price will go down. But that shale oil buffer, I guess, for world oil production put OPEC under all the pressure. Then Russia came in and said “well stuff you guys, we’re gonna go our own way because you guys are under pressure because of the shale oil in the US.” And they had to do a lot of singing and dancing to get the cartel to hold together in the last 10 years or so. It’s now back on track. Russia has joined up with them again and the shale oil producers in the US have been mothballed for a while, but that might just be a holding pattern.
Plus, the Saudis know they could do anything they want and get away with it. They, they funded 9/11 attacks, got away with it. Killed Khashoggi, chopped him up in a bathtub with an axe, got away with it. They can do whatever they want. They basically can get away with anything. Allegedly. No, there’s no allegedly. It’s not allegedly.
I’m not saying anything, because I think you’re right. They can do whatever they want. I don’t need to be on the wrong end of that statement.
Hey, I love the Saudis. But they can get away with whatever they want. Well, let’s, let’s… anything else? Shall we get into Q&A?
Let’s go into Q&A, thanks.
Mark. This question is also about oil and it’s a couple of weeks old, so I apologise, Mark, for missing this the first time. He reminded me that we didn’t get to it. “West Texas Intermediate crude is a three-point trendline sell,” he said, “but Brent crude is well above its sell line.” I think they’re both above their lines now, he emailed me this morning. “Which one does Tony use to gauge if a stock is an underlying commodity sell and why?”
Yeah, so I’m using Brent, and Brent is pretty much the global benchmark now. For a long time they were neck and neck and, well, going back ten-twenty years West Texas Intermediate was the global benchmark. Brent became the global benchmark. Basically, West Texas Intermediate is US oil producers, Brent traditionally has been a northern, the North Sea, UK oil producers, and I guess, North Sea would include Norway and Denmark and places like that, too. So, a pretty big market. And then, when Africa became an oil force and Asia started to do more as well, they fell into line with Brent, partly because they were using that market as opposed to the US market. It’s got a lot to do with the various levels of “sweetness” as they call it, and specific gravity or crudeness of the oil. And so American oil is, I think from memory, is the lighter one and Brent is the heavier one, and that Brent’s more like most of the oil or more oil in the world than the American one is. So, oil can be priced specifically based on the characteristics of the crude coming out of that particular area. There had to be a global benchmark, and it has defaulted to Brent in the last sort of five, maybe ten years, and it’s the one that the Australian producers will often use as well. So, Brent’s the one I pay attention to, less so West Texas Intermediate.
And Brent is the one that we’d find in the commodity section of Stock Doctor? In advanced charting?
That’s right, yeah.
Brent Crude North America.
Yeah, that’s the one I’m using. It’s funny that Stock Doctor only gives us North America. But that’s the one that we use, it’s the only option we’ve got in Stock Doctor. There is probably some Brent global ones if we go to some of the other providers, but it’s BTR-N in Stock Doctor.
Sorry, BRT-N. Yep.
Well, it looks like it’s doing quite well.
Yeah, strong buy. $86 a barrel.
Which is a five-year high, at least five years.
So, according to this, at the bottom of the COVID cough it got below $30 a barrel. Looks like it’s about actually $22.71 in March. That’s very low.
It peaked in, on the 30th of June 2008 at $138. Wow. Just before the GFC when it came down to $36.16 by the end of 2008.
It does move around a lot, doesn’t it? I mean there’s people who trade oil futures all the time, and it’s a big liquid market. So, they’ll be looking at things like is Omicron gonna shut down the world economy? What’s happening in China? All those things also play into the, the oil price mix as well as who’s producing what and what deals are they doing?
Well, good luck to them. Thanks for that question, Mark. Ali asks, she says, “I’m torn. Should I buy indiscriminately from the top of the list down putting, aside that I may favour or need high capital top 300 stocks, or should I overlay Martin Roth’s current top stock selection, and choose stocks that also appear in his latest edition. For example, CCP has just made it on the QAV list, but a fair way down. However, it is included in Roth’s latest list.” I personally align the QAV stocks with David Lee Roth’s list, which usually just includes jumping and Panama, things like that. Never heard of Martin Roth before, but I did look into him when she posted this on Facebook. I gather he’s a finance journalist who’s, writes books on top stocks. Are you familiar with Martin Roth?
I’m not. I have a vague memory of looking at his book a long time ago, and because I’m not using it now, I guess I’ll probably put it aside. But I wasn’t familiar with it. I did, when I saw your, the question from Ali, I did go and do some research and it’s very interesting. So, I actually went and bought the eBook for last year, because I thought I’m going to do some analysis onto this and see how it compares to the market and compares to us. So, I bought his 2021 edition, and looks like what he does is he’s a value investor and he has a set of figures around debt and debt to equity and size of the company and has to have been making a profit for the last five years and paying a dividend etc., etc. He comes up with a list of ninety stocks, he publishes it at the start of the year and he suggests you buy and hold them for 12 months. So, until the next list comes out, and then adjust your list when his next book comes out. So, not a bad system. I don’t really have any quarrels with it. I thought I’d see then whether it worked better than QAV or not. So, it was too difficult for me, too time consuming to go and do all ninety stocks and put their price in from the first, well I actually used the 15th of January last year, which is 12 months before my analysis this time. And I took all the stocks that started with “a” which is an old data analyst hack, but it’s a good way of getting a random sample. You just pick a letter and take all the things, all the names that start with that letter, and that was fourteen stocks. So, it was like a portfolio size, so I thought it was a good sample to take. And they did well, so those fourteen stocks – so the stocks that began with the letter “a” from his 2021 book from the same time last year ’til now – were up 29%. So, happy days. Better than the market, and it was a set and forget, buy and hold like a Howard Marks type strategy. So, I then went back to the buy list at the same time, 15th of January 2021 for QAV, took the top fourteen stocks – and full disclosure, I think there were three, a couple of ETFs and an LIC, so I binned those because, partly because we don’t use those anymore, but also, he doesn’t use them as well in his stock selection process, pretty much for the same reasons we don’t. And there was one company in that top 14 list that was sold, was taken over soon after, so I binned that one too, because it was basically in the last week that some takeover play. Took the top fourteen stocks otherwise, though, and they were up 36% for the same period. So, that’s as far as I’ve gone in analysing it, but then I’ve sort of, that’s opened up a whole can of worms: are we better off using the buy list once a year and, and buying and holding and taking 36% – which was better than I gotten in the market last calendar yea -, or not? So, I need to do further research on that and proper analysis would be to see whether fourteen stocks versus twenty stocks, how that performs, whether it’s you know, a smaller portfolio, does that perform better? And we basically have to, you know, go along the axis on each, along with dimensions on each variable there. Is, is the first or the start of January and holding for a calendar year important or do we, you know, does March work better than January? Do we hold it for three months or twelve months? Or two years or six months? What’s the timeline that’s best optimised? All those things have to be looked at. Is it small-caps versus large stocks? So, I’m going to flick that one to a data analyst like Dylan to do some research for me, but certainly a good thought starter for the process. But in answering, to answer Ali’s question, even though it was a small self-analysis, it did sort of suggest to me that QAV still performed better than a more traditional value approach to investing, like top stocks use.
And you said he puts out, was it ninety stocks?
Yeah. So, he puts out all the stocks that meet his criteria and from what I read recently, in last year’s book, he said ninety stocks was down on some of his past years because… and there was also a whole heap of stocks which continued to be on his list. So, I think he said there was something like fifteen new stocks, fifteen had dropped-thirty had dropped off so his list was smaller than last year. So, it sounds like, he said that banks have always been on his lists, so they’ve been there forever, and so it sounds like so had a lot of the other stocks on the list. He’s more a buy and hold, he’s not turning over a whole heap. From what I’ve read so far, he doesn’t tell you when to sell, he doesn’t tell you whether you should have all 90 stocks in the portfolio, whether you should have a smaller portfolio. All those kinds of questions from what I’ve read so far haven’t been answered. But, interesting concept.
We should get him on the show.
Yeah, that’d be good.
I was wondering like if he’s recommending you buy all ninety, and if you bought, like if you threw all ninety in and see how that did, if they would sort of get closer to market sized returns. You’ve always told me that the bigger the portfolio is, the more chance you’ve got of getting closer to the ASX 100 or the 200 or the index or whatever, you know.
Interesting well good, good stuff. Thank you, Ali. Thank you for throwing that our way. Let Tony think about that. Gerry asks, “currently, we keep an eye out for announcements from companies in our portfolios, especially around confession season. But what about companies on the buy list that we don’t own yet? We’re at a point in the cycle where most of the QAV scores are off data that was released five months ago, we’re a month away from half year results. A profit downgrade or other negative announcement could be a signal and many of the metrics used to calculate the QAV score are going to fall in the next results release. So, my question is, should we be checking price sensitive announcements since the last results announcement for red flags before buying? Thanks, Gerry.”
Good question. Broad answer is yes. So, we are in confession season, and in fact I meant to mention before that EFG in our Navexa portfolio confessed, or they came out with their unaudited results and told the market that they thought they’d make I think it was $44 million profit. And the share price has dropped about 8-10% since that came out. So, that’s our first casualty from the confession season. It’s still well and truly a buy for us, but it has come down in the last week. To answer Gerry’s questions, yes, you should be checking announcements before you buy anything, certainly during confession season. So, you don’t need to watch announcements for all stocks on the buy list because you’re not bothered by the ones you don’t own. But, if you’re about to buy a new one, then yes, I always would check the announcements and make sure that there’s something in there which I’m comfortable with – there’s nothing in there I’m not comfortable with I guess I should say. Having said that, as soon as the announcement is made, the share price will adjust to the news. So, as long as it obeys our other rules – it’s a good QAV score, the sentiments still okay, it’s still a buy, it’s not a Josephine – then I’d still buy. Which is pretty much the case with Beach Energy. I mean, I outlined all the risks around Beach Energy at the moment, but it’s going up, and it has a great QAV score, so that’s enough to, I guess, balance the risks that are there with a stock like that. So yes, I think at this stage, and we are waiting for new results… but I’m still buying things you know, I sold Challenger and bought ANZ recently, which I flagged in the Facebook group, so I’m still buying things. ANZ’s a bit different because I think its results are in March rather than coming up, but anyway, Challenger may come out with good results soon and come back onto the buy list. But anyway, it’s important before you buy to really check the sentiment and really check for Josephine’s at this time, because as you saw with Myer, what can happen, what often happens is that the last thing you want to do is to buy a retail stock coming into a reporting season when the share price is going down. I mean, they generally put out lots of sales announcements along the way, and it’s enough to tell the analysts that it’s not going to be a good announcement, and you can see that in the sentiment of the company.
Yeah, I said to Jerry, I replied to his email and said, “look, my guess is that any announcement that didn’t sound good, the share price would be down and it would be a Josephine if I went to buy it, and general rule is we don’t buy Josephine’s.” That’d be the first indicator that something’s going on, I would suspect. And if there was an announcement and the share price hasn’t gone down enough to make it a Josephine, then it’s probably not that bad of a price announcement.
But good one, Jerry, thanks for thinking about that, and thanks for reminding me that it’s that time of the year. Sue asks, “hi, Cam, Happy New Year to both of you.” Thank you, back to you, Sue. “A question for you guys. With the likelihood of interest rates rising with some predictions of seven rises over the next two years in the US, what impact is this likely to have on the economy, the share market and QAV stocks in particular and in a broad sense? I know Tony can’t predict the future,” as evidenced by how much he thought his horse was going to sell for, “but what has Tony’s experience been when interest rates are rising? What impact or pattern has occurred on QAV portfolios so we can be somewhat prepared to look for?”
Sue, this is probably the question most vexing people’s minds in the market at the moment; what’s going to happen with interest rates rising. In terms of my experience of it, which is, I guess at the heart of your questions, interest rates risings generally hurt the market and hurt businesses for a couple of reasons. They, it particularly hurts growth stocks, the high PE stocks like your Afterpay ‘s of the world and the tech stocks, because it makes the discounted cash flow model that the analysts use to base their price valuations a little bit harder to stack up, because the interest rate is a part of the calculation for the hurdle rate. And the hurdle rate if interest rates go up goes down, which means that the multiples for those tech stocks go down. So, expect to see tech stocks retreat during a rising interest rate market. But, it also hurts your general businesses because the borrowing costs go up for their debt. And that’s going to affect highly indebted companies more than it’s going to affect the companies in the QAV portfolio, because one of our tests is for rising equity, which is generally – and financial health – which, all things being considered generally points to low debt and low indebted companies rather than high ones. So, those two things alone will probably put a bit of a handbrake on the market. However, the market will eventually settle, and, you know, for most of my investing life this, this, the last sort of four or five years has been the anomaly rather than the norm. Interest rates, like our mortgage rates for the last twenty or so years have averaged much higher than what they are now. And I generally think of about 7% as the average mortgage rate that I would have paid over the last twenty-twenty-five years. But the markets were still going up when interest rates were that high, and that’s more than double what they are now. So, I’m not worried that the rising interest rates is going to close the share market or be an insurmountable obstacle for it. But there will be a period of adjustments, there will be a period of different sectors doing poorly or doing well while that sort of settling happens. I guess what else happens, they’ll hurt things like collectibles, which is not part of what we invest in, although it’ll hurt racehorses I think eventually as well because they’re kind of thrown in with collectibles, anything where people are buying things because the cost of debt is virtually zero will get hurt. So, art, wine, cars, race horses, all those kinds of things which have been fun to buy when it’s not costing you much each month to pay the debt will suddenly become much harder to buy when the debt becomes serious. So, there’s that. It could have an impact on the housing market, probably will have an impact on the housing market, although with the recent price rises you’ve got to think that people have lots of equity as a buffer at the moment so who knows. But, certainly you probably won’t get the growth in the housing market from here if interest rates are rising, and that’s one of the backbones of the economy. So, that’s going to be an issue. One of the things which I, which I probably weight even more highly than interest rates rising is what does that mean to inflation? And so, we’re seeing high inflation in the US, they haven’t had inflation this high, which I think is running about 6% for the last quarter, in a long time. And that becomes a vicious cycle, because if the price of food goes up, if the price of fuel goes up, if interest rates, your mortgage price goes up, suddenly you have less spending to put into discretionary things or to upgrade your house or your car, and that is a real handbrake on the economy. So, it tends to be inflation and wage rises, and wage rises become the double whammy for business because they’re paying more for their debt and they’re paying more for their wages, they’re kind of like two of the biggest costs for a business. So, that’s what really slows down the economy. So, it really comes down to what the central bank does to try and nip inflation in the bud. So, it’s entirely possible that we don’t see interest rates rising too much higher than where they are now, if inflation gets out of control, because the only lever that central banks have to deal with inflation is to lower interest rates to try and take some steam out of the economy which is what they kind of doing now in the US in particular. So, if they can’t balance that tightrope walk, and there’s been a history of, of them getting it right for a while and then getting it wrong, the economies crash into recession. And that’s what really hurts the stock market. So, you’ve always got to factor into account that there’s going to be another GFC, there’s going to be another recession that we had to have all, those kinds of things that have happened in the past will happen again in the future. And my experience is a system like QAV is the best way to deal with those. We’re investing in quality stocks, we’re investing in stocks we’re not paying high prices for, they don’t carry much debt. So yes, they will go down and we may have to sell them and go to cash and then wait for them to turn up again, but they’re probably the best way of investing given the risks in the economy.
And QAV tells us when to get in and when to get out.
Minimise our risk and maximise our upside. So, what you’re saying, Tony, is all of this has happened before and all of this will happen again.
Correct. All Things must pass.
“Dun, dun, dun, dun, dun, dun dun…” Did you watch Battlestar Galactica?
Which version? i used to watch the Lorne Green one.
No the reboot, the 2005 reboot or whatever it was. That was their sort of mantra: “all of this has happened before, and all of this will happen again.”
It’s a good mantra.
Basically, humans build robots to go to war with the humans. And then, the robots sort of become the humans, and then they build new robots to replace the robots, you know, well, they end up becoming indistinguishable from humans, because they get more and more advanced, then they get lazy. And so they build robots to do all the manual labour and then the robots become sentient and wipe them out, and the cycle just keeps repeating.
Oh, cool. I have to have looked at it.
It was good.
I remember those terrible red-eyed Cylon things in the original and the terrible acting.
Well, I mean, yeah, this one has got Edward James Olmos at the head of it, man. And he’s, he’s great as the commander of the fleet, this gravelly voice, and he’s like “grr”. Anyway, later, all right, well, that’s that. After hours. What have you been entertaining yourself with outside of selling horses?
Yeah, watching, watching a lot down here. Nothing much else to do except play golf and go for walks. So, a new season of Afterlife dropped on Netflix, have you been watching that? Season Three?
No, I haven’t started the new season yet. I’ve been meaning to get around to it. Love that show. Really great.
Yeah, enjoying it. Watched a cop movie? I don’t know if you’re into detective-serial killer movies, called The Little Things which was really good. Denzel Washington and Rami Malik both did really well.
Haven’t seen Rami Malik do anything good since Mr. Robot, like he had the Queen thing I didn’t like, the James Bond thins – you saw No Time to Die.
It was terrible. What a hot mess.
What, like, after his start with Casino Royale, which I still think is one of the best if not the best Bond movie they ever did, to start like that and end with… I thought, like the last few have been very average, I thought, but they’ll, they’ll do it right on the way out. No, just shoddy.
And, I mean I don’t want to give away spoilers, but haven’t they killed off the franchise?
And it made no sense. I’m going to skip spoilers, if people haven’t watched No Time to Die, turn off the episode now, you have been warned. But they’re like, he’s, he’s in the bunker, and they’ve gone “oh James, we’ve set off the missiles, the missiles are going, go back inside the bunker James.” You just said the bunker had, he had to open the missile doors so they could be destroyed, just close the missile doors again and then go “alright, well listen, I’ll just close the doors and then after these missiles have gone I’ll open them again in 15 minutes, and then you can send another bunch of missiles to destroy the secret Toxin Lab.” Like, what, like, why did the just, like what? That made no sense.
The whole movie made no sense. They killed off Felix, they killed everyone in Spectre, they killed off Blofeld, and they killed off Bond. What’s the next one gonna be? What’s the next instalment gonna be?
They regrow Bond from DNA of a martini glass that they found.
Who’s gonna say Bond, James Bond in the next day instalment.
Well, Idris Elba.
If there is one.
Oh, there will be. Bond will outlive, outlive the human race – they’ll be making Bond movies when the Cylons takeover.
Jenny and I both thought the, there was a girl he meets when he goes to the Spectre party and she said “I’ve only been training for two weeks.” And she, she does really well. We both thought “that’s the next James Bond.”
Well, she’s the Cuban chick?
So she was in Knives Out with Daniel Craig, and – did you see that?
It was good, right, Knives Out? It was, I thought it was good. Good sort of Agatha Christie type thing. And then she was all – I just rewatched when I was sick, I rewatched Blade Runner 2049 because I hated it when I first saw it, and a lot of people told me to give it another shot, so I finally did. And she’s Ryan Gosling’s virtual girlfriend in that and she’s gorgeous. She does a good job in that. And I still, like, it’s a, it’s a beautiful film, like in terms of the, the sets and the cinematography and the soundtrack and it’s an interesting enough story. I still think it misses – like I’m a big fan of Philip K Dick’s short stories and his novels, always have been. And the whole thing behind Philip K Dick’s writing is usually this question about what does it mean to be sentient? What does it mean to be conscious? What kind of automatic rights do you get if you can demonstrate sentience or consciousness in various forms? And, you know, why does a robot not have the same rights as a human if it is sentient, and these really deep moral, philosophical questions, and the Denis Villeneuve film just didn’t really go there. It was just an action film. And I was like, “you’re missing the whole point of Blade Runner for my money.” Anyway.
I agree. I didn’t like it either. I didn’t like bonds, that’s for sure.
Such a disappointment.
And just the, the sight of, Daniel Craig must be pushing sixty now, like hooking up with a thirty-year-old, and it was urgh.
If I looked like that, I could hook up with a 30-year-old too, I mean, he’s a good looking dude.
Well, do you notice he didn’t take his shirt off the whole time? Jenny and I were looking at it like, she’s going, “oh, there’s crepe skin.”
And then she goes, “look, he’s, he’s in bed. He’s got no clothes on, but the girls lying on him so you can’t see his chest.” Anyway, we were being harsh. We got to the stage where we were sort of like commenting on the movie rather than getting into it and being taken away by it.
Yeah. Early on when the cars chasing him over some stone bridge in Italy somewhere, and he hides behind some big stupid rock that’s just sitting in the middle of the bridge. Like why is that rock not been removed for the last 500 years? It’s obviously not a good place to have a rock on a bridge. It’s going to be causing all sorts of problems.
Yeah. It didn’t have the action of the other ones too, even if like the last couple have been weak, but they’ve had great action set pieces. The, was it last time the plane lost its wings when it crashed landed but kept going on relentlessly and all that. I mean, there’s great action scenes and all that but this time it was just Bond doing donuts in his Aston Martin shooting up the bad guys. Or they were firing paintballs at the bulletproof glass. It was just, it was weak as.
I want to give a plug for a book that Steven Mabb recommended to me that you would like if you haven’t read it already: Lifespan by David Sinclair.
Doesn’t ring a bell, no. Okay, I’ll look at it.
Sinclair is an Aussie, but he’s a professor of genetics or something at Harvard, and his whole, you know, he’s got a team here and a team over there, and he’s dedicated decades to defeating ageing so we can live much longer, healthier lives. Bit like, you know, the old interviews I did with Aubrey de Grey back in the G’Day World days, or Ray Kurtzweil. Sort of an update on that from, Aubrey de Grey was at Cambridge, I think, at the time I interviewed him, but this guy is at Harvard, very credible, and has written a whole book on the fact that yeah, like those guys always said back in those old episodes, ageing is a disease. It’s the biggest killer and we should think of it as a disease and we can cure it like a disease. And he said, we actually understand the basic cause of ageing now, and we can fix it and we’re going to fix it. And he said, people don’t believe it, that we’re going to fix it, but, what’s the analogy that he uses in one of the early chapters? I don’t know, something like people didn’t believe that we could fix, you know, viruses a hundred years ago until we did and then we just took care of it and saved billions of people’s lives. He also talks about cancer, and all the progress that’s been made on cancer since 2016. Obama made big investments in cancer research and they figured out some stuff and he said there’s like seventeen million people alive in the US today that wouldn’t have been alive as a result of these new approaches to curing cancer. Anyway, it’s a good book.
Okay, I’ll check it out. Telomeres by Elizabeth Blackburn, I think, the other Australian researcher, is very good in that sort of vein as well. Came out about four or five years ago
Blackburn’s the woman I interviewed about consciousness.
Oh, okay. I’m pretty sure she got a, she may have even got a Nobel Prize, but got some, some big award for the research into telomeres, those caps at the end of the shoelaces of the DNA.
Oh, not, I don’t think that’s Blackburn, but I know who you’re talking about. Yeah.
Okay. I could have that wrong.
I’ve read that book as well, about telomerase and that kind of stuff.
Is that how you pronounce it? Telomerase.
No, no, the telomeres are the things at the end of the DNA, but the solution that they can put in to stop them from deteriorating is called telomerase, the protein or whatever that goes into it.
I actually started writing again, when I was sick in bed, I started writing a, either a TV series, a script for a TV series or a comic book, I’m not sure what it is. It’s called The Tellows. It’s about people that are born with a mutation where their telomeres don’t shorten and they effectively stay young. It kicks in epigenetics when they’re in their early 20s, they basically don’t age. They can still die if they get murdered or have an accident or catch a disease, but they just basically stay young. And you know, how they experience, a bit, a little bit like Highlander, but, you know, with an actual scientific basis for it like a mutation that causes their telomeres to… anyway.
After reading this book I got thinking about that when I had a fever dream. I was just gonna finish with something not to watch, is Guy Ritchie’s last film with Jason Statham Wrath of Man. You think the Bond movie was bad? It makes Wrath of Man, it’s a masterpiece compared to Wrath of Man, man. What a piece of shit.
Oh, after The Gentlemen, which was great, he’s just, he must be married to Madonna again, because it was just horrible. Shocken’.
Did you ever see that Jason Statham movie, Jolt?
I think there’s two of them. Great B-movie where something happens to his heart and he has to keep electrocuting himself every hour or something to keep the heart going. It’s fantastic. It’s a real B-movie, so don’t think much of it, but it’s just a great premise and a great fast pace movie. Another B-movie I watched recently, which you might want to check out, Boss Zone. Have you seen that?
On Netflix, Mel Gibson plays the baddy, Naomi Watts plays the goodie. There’s a guy whose face I recognise but he’s been around lots of B-movies. Great B-movie. It’s a, it’s a riff on that same Groundhog Day premise where Naomi Watts, believe it or not, plays a quantum physicist to invents a machine that can, like, keep reversing time. So, every time her ex-husband, who just happens to be a Navy SEAL, dies he can wake up again and relive the day.
Oh, I saw the trailer for that. I think the twins watched it and said it was horrible.
Oh, I liked it. Again, classic B-movie, right? You know, full of sword fights, gunfights. It’s really good. I enjoyed it.
Mel Gibson playing a bad guy’s not that much of a stretch for him really these days, is it?
No, he’s the quintessential Hollywood bad guy these days, isn’t he?
He’s the quintessential human bad guy, just lost his, lost his… I saw a YouTube that he did for some American Bishops Conference recently where he was just like, a couple of months ago, where he was talking about how “they’re out to get us, the Catholics” you know “everyone’s out to get the Catholics,” and you know the pre-Vatican two Catholics and “we’re the only ones that really know what’s going on” and “gotta fight the good fight because the Lord’s expecting us to do it.” And he’s “grr” and I was like, “oh my god.”
Mel, Mel, Mel.
But he goes home to his young supermodel after he ditched his wife and kids and all the rest of it. Yeah, great Catholic values.
And he says “you want to get out of here, you talk to me.” Anyway, that’s it for the show. Thank you, Tony. Enjoy your week, and good luck everyone. Stay safe, wear a mask, don’t be silly.
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