QAV 503 Club

Cameron  00:06

Welcome back to QAV 503, TK. This is the, what day is it today? Tuesday the 25th of January, 2022. And the market is melting down. It’s like the Wicked Witch of the West. It’s “I’m melting! I’m melting!”

Tony  00:29

Yeah, and I’ll tell you what, I wish you’d done that intro for me this morning because January the 25th is a special day for us. It’s my wedding anniversary, and I forgot completely about it.

Cameron  00:40

Are you melting? Did Jenny throw a bucket of water over you?

Tony  00:46

Well Jenny’s in Sydney and I’m still at Cape Schanck. She rang me at 9:30 and I thought “oh, something’s wrong” because we normally talk in the evenings after our day’s finished and we’ve got stuff to talk about. And she’s normally working. Anyway, she rang up to wish me a happy anniversary.

Cameron  01:01

Wow.

Tony  01:02

Yeah. After 24 years.

Tony  01:05

I’ll have to in the future. I don’t even have it in my diary. I was so good, this is the first time I’ve ever forgotten. I was so good at remembering that I didn’t even bother about it. But, yeah, I’ll have to change my tune. But, in my defence, like it’s hard to even keep track of days down here let alone dates. It’s just wonderful.

Cameron  01:05

Dude, don’t you have staff to, you know, organise anniversary presents for your wife? I thought that’s what rich people always did. They have people that take care of this stuff.

Cameron  01:32

Well, the markets melting down, she can’t expect you to remember trivial things like your wedding anniversary when people on our Facebook group are having a conniption. Nah, they’re not actually, I’m quite surprised and pleased.

Tony  01:45

They’re not, which is good.

Cameron  01:46

Yeah. Everyone’s just sort of laughing it off and going “you know, she’s good.” Taylor, not so much. Well, I know why the markets melting down, it’s because Meatloaf died. I mean, I took it hard and I think the rest of the world is taking it hard as well. I mean, true. He hadn’t really done much of consequence since 1978. But, you know, that was enough to change the world forever. I’m guessing though you’re probably not a big Meatloaf fan.

Tony  02:18

No, I’m a big fan of his acting. I really liked his Fight Club character, but not the music side, no. I mean, I think when did Bat out of Hell come out? ’77?

Cameron  02:29

’77/’78, yeah.

Tony  02:31

I was well and truly into punk rock by then, and he was just part of the old group that had to move on. That whole Rocky Horror stuff was just urgh, devils, like a, you had to throw some holy water at it and make the sign of the cross and move them on. And melt them down, just like the market.

Cameron  02:48

Well, I made some Meatloaf jokes in one of our posts and James Simpson said “much like QAV stock pick strike rate, two out of three ain’t bad.” Now, i laughed at that and I said to James I’m gonna steal that, but I think I did use that on an early episode of QAV. I think if we go back through the archives, I’ve made that Meatloaf reference before talking about our 60% strike rate. But I had forgotten and James pulled it out, so shout out to James. So, back to the market. It’s at its lowest point since May of ’21, and I remember having a joke in the newsletter a few weeks ago when it was at its all-time high. Three weeks ago, the AOrd was at its all-time high. I remember writing in the newsletter “don’t let the fact that supply chains around the world have ground to a halt and this is going on and that is going on and COVID and blah, blah. No, the markets going, everything’s great. It’s at an all-time high.” And now we’ve just wiped out. In one week, the markets wiped out eight months’ worth of gains. But I thought the market was rational, Tony, and that all of these things are built in and it’s all factored in and everyone knows what’s going on, and it’s a perfect storm of really intelligent highly paid professionals.

Tony  04:09

The efficient market theory, hey. Complete bunk. I mean, the market hates uncertainty and there’s certainly plenty of uncertainty. Most analysts are attributing it towards, around interest rates, which has certainly caused the high growth stocks to pull back. But clearly there’s one thing the Australian market hates even more than uncertainty, it’s the certainty of seeing the American market go down. So, we typically fall in lockstep. People get up in the morning, see what the US market’s done overnight, and then trade accordingly. So, I think there’s all of that going on at the moment. Our market is overvalued, but not to the extent that the US market is and especially not to the extent that the NASDAQ market is. So, there’s more than one thing happening, as there always is. And it’s not just interest rates, it’s the Ukraine and what Russia will do there, and, you know, then people start extrapolating if Russia goes into Ukraine, will China use that as a distraction and go into Taiwan? People’s minds spin out of control when there’s a tiny bit of uncertainty going on. And in fact, it’s not even really that uncertain; interest rates are gonna go up. So, that’s pretty certain. They may not go up as quickly now that the markets coming off, but they’re gonna go up. They have to, I mean, if they go down that’s probably even a worse outcome for the market then if they go up. So, yeah, there’s always a lot of overreaction going on.

Cameron  05:29

But all of this uncertainty was there three weeks ago, when the market was at an all-time high and everyone was buoyant.

Tony  05:35

Yeah.

Cameron  05:35

At the time I was like, “what’s going on? Everyone – like the markets booming and yet, you know, there’s chaos happening everywhere.” I don’t see what’s changed in the last three weeks that’s taken us from being at peak market to crashing and burning and everyone running for the hills.

Tony  05:54

Well, I’m sure if we divine the tea leaves we’ll find out that Jerome Powell said something about interest rates in the last three weeks which has spooked the market, especially the high growth side of the market. It’s also, don’t forget, it’s also, we’re coming into reporting season in Australia, but it is quarterly reporting season in the US and stocks like Netflix and Peloton which are high growth stocks were smashed last week because of their quarterly numbers not being up to what the analysts thought. So, there’s a bit of that going on, too.

Cameron  06:19

As for Russia and the Ukraine, I think the US government and Western media have been predicting the US is going to invade Ukraine every year since 2014. So, it’s nothing new.

Tony  06:33

The US or, the US or Russia?

Cameron  06:36

US has been predicting that Russia is going to invade Ukraine every year for the last eight years. Maybe they will, maybe they won’t, but just seems like that’s a bit of a rinse and repeat story.

Tony  06:48

Well, there is, isn’t there 100,000 troops lined up on the border now, I think that’s different.

Cameron  06:52

It’s their border. It’s their country. They’re putting troops on their border. It’s not like… Anyway, don’t get me started. Oh, I could go on for hours on that.

Tony  07:03

No, I know. It’s theatre, it’s theatre for different reasons, isn’t it? For different consumption?

Cameron  07:09

Yeah, well, who knows what’s driving it? I’ll pick it apart on a Bullshit Filter episode next week, I think. But, Taylor called me earlier, he and his buddy Chris finally nutted up earlier this week, did a checklist, and decided to go and invest a big chunk of their money. They’ve been dabbling in QAV for the last six or eight months, you know, I think they bought like five stocks each six or eight months ago. And a couple of those went up, remember? I think three of them went up like 60% and Taylor was like, “Tony, Tony doesn’t know what he’s doing.” And they’ve all come back since then. And his others, you know, went backwards. He was like, “uh, this QAV thing. It’s not working.” I was like, “well, you only bought five stocks champ, you gotta, you gotta follow the rules.” Anyway, he was saying, “look, Chris bought a bunch of stocks Monday, and now they’re all down, everything’s down. Surely we should be going to cash and not investing in the market.” And I was trying to talk you through, we’ve touched on this before, but I figured we got a lot of new people listening and they may not have heard us talk about this before. I’m sure there’s a lot of people out there thinking is this the time when you just go to cash, you get out of the market? Can you use a three-point trendline to determine when the market is going to turn around versus being fully invested? Do you want to just walk us quickly through your thinking around that kind of stuff?

Tony  08:33

Yeah, and I actually have revisited that thinking in the last few days, because it’d be great if we could time the market. I mean, we’ve been talking about this now for probably three months, maybe even six months, about signs that the market’s becoming quite toppy. And people have been talking with us since the start of QAV three years ago about the cap Shiller ratio being at its all-time high in the US for stocks. And then I was talking about recently the second, world’s second tallest building being built, which was always a sign that the market is flush with lots of cheap capital and people start to build glorious edifices to themselves. And not just that, I remember there was a listener last year who wrote in and said, you know, the ASX has just become a three-point trend line sell, is that a sign to go to cash? And I remember us talking about that and saying that no, because some QAV stocks will do well even when the market’s down. And also, too, I did go back and check that analysis on the market going back over a number of years, and even though it may have correlated this time, and we’re kind of six months since that question was raised – or three to six months since that question was raised – it doesn’t always correlate and going to cash at the wrong time is a, it’s a death-trap if you’re an investor. And you can just ask Hamish Douglas about that. He’s been in cash or had a large cash holding with the Magellan Fund since the COVID cough and his share price’s now less than a quarter of what it was at its high point. So, there’s always other signals that the market is getting into overvalued territory. We could sell out at those points when they start to appear, but I’ve also been in markets where the market goes up another 40%/50% in that last sort of Bull run and that can be a really magnificent time to make money. The only tried and true way of being able to tell when to go to cash is to use the three-point trendlines and rule 1. And I’ve sold, I sold ANZ recently, because it went down. I’ll probably have to sell some other things. But I’m not sitting on cash, I’m going to rein- I have reinvested the ANZ money into Champion Iron, which we spoke about a week or two ago. So, there are still things to buy, we’re gonna do a pulled pork later on a stock that is still going up. So, the market turmoil may mean the index is down, it may mean the blue chips are down, it may mean the high-flying stocks are down but doesn’t mean we’re down and out. And there are stocks still on our buy list that you can buy. But applying our rules will tell us when to go to cash. I haven’t gone to cash yet. I wouldn’t be surprised if we wake up tomorrow and there’s been a market rally in the States, because that’s the way it works; is like a pendulum, it swings too far one way sometimes. I wouldn’t also be surprised if the markets down again tomorrow. That’s just how it works. And this is like an argument, right? It’s a, it’s an argument between people like Jeremy Grantham who are saying “I told you so, the markets overvalued, we’re all doomed” – and he’s said that every second year for the last twenty years – and the bulls. The, I’ve forgotten the lady’s name now who runs Ark Investments, that “we’re still on the dawn of a bright future for green stocks and ESG stocks and Tesla and stocks like that, and we should still invest.” So, it’s an argument, it goes on every day, and eventually there’ll be some more certainty that comes back to the market. But volatility is our friend. Don’t forget that. We’re not anywhere near like we were going into the COVID cough in March 2020 when we did go to cash. And if you recall, it was only a month after that, that we made some of our best returns for a long time. So, that’s just the way the market works.

Cameron  11:59

Cathie Wood would be the Ark innovations lady.

Tony  12:03

Thank you. Yeah, Cathie Wood.

Cameron  12:05

Yeah, I was explaining to Taylor that, yeah, the whole market can be down but our job is to try and find the winners inside of that. We’re looking for the stocks that are counter cyclical, that are doing well while the rest of the market is plummeting, if we can find them. And you know, like you I had to sell ECX, had to rule 1 some of my ECX holdings the other day, and I replaced them with EHL. And then I had to get rid of BlueScope today, rule 1 again, and replace them with CIA. Like you I picked up some CIA, which is still doing well, not a Josephine. There are stocks out there, there’s a lot of Josephine’s out there, but there are some that aren’t, and it’s our job to find those and buy them. Not all of our picks will work out, obviously, but hopefully we can find enough to keep growing while the rest of the markets tanking.

Tony  12:59

Correct. It is some short term, you know, don’t want to de-emphasise that. I mean, we’re, we’re back, the Navexa portfolio was down 4.5% for the week – that’s our dummy portfolio. So, yeah, it’s, it’s not nice to see your, your positions go backwards. But this is what happens; it’s always two steps forward, one step back and that’s how it’s going to be for the rest of time in terms of the share market. I mean, there are pragmatic things you can do. I did spend a bit of time on the weekend going through my portfolio and our dummy portfolio and updating my alerts, both for rule 1s and first sell prices. So, that’s something that people can be doing. So, I did get an alert on ANZ, I got an alert on a stock, I don’t own, which was on our buy list called Nufarm. I’ve been following it because it was a large cap and it was on our buy list and potentially therefore was a buy opportunity for me going forward, but it won’t be now. So yeah, it’s a good time to make sure you’re on top of your alerts and know what your three-point trend prices are, and your rule 1s.

Cameron  13:57

Yeah. Moving along, you sent me something about an article in the Financial Review about the perils of high-flying tech stocks mentioning-talking about Cathie Wood and Ark Innovations.

Tony  14:08

Yeah, so this, I mean, this is the quote that gets trotted out all the time. Once, or, I shouldn’t say all the time, every time there’s a market downturn – so, probably once every five-seven years – the famous Buffett quote that when the tide goes out we’ll see who’s been swimming without shorts, or something like that.

Cameron  14:26

Swimming naked.

Tony  14:27

Swimming naked, yeah. And this is one of those times. He’s always warned that buying high valuation, sorry, high growth stocks with high prices and ridiculous valuations is always in the short term gonna make you money, but in the long term gonna really hurt you. And it’s this kind of time when you can see how it gets hurt. So, the FAANG, if you look at the FAANG stocks, the F-A-A-N-G stocks on the US market, which is your alphabets and your Apples, and your Netflix’s and your Googles and what was Facebook when it was called *that*, it’s now called Meta. So, it’s the demand stocks or the main stocks now, I guess. But if you take those five stocks out of the NASDAQ, the NASDAQ is down more than 40% from its twelve months high. And even some of those stocks, like I said, Netflix is down 20% after its results came out last week. So, those high growth stocks are dropping quickly and that’s always been the problem. And if you look at Block, which was the old Afterpay, which listed on the ASX last week, it’s now down 50% from its high as well. And if you look at Bitcoin, it’s almost down 50% from its high. Last time I had a look it was $35,000 US a coin, and it’s high was 67,000. And the, I guess the core of the AFR article I posted was that the performance of Berkshire Hathaway now is catching up to Cathie Woods Ark Fund. They’re almost neck and neck. I don’t think it’s for the calendar year, but it might be for the financial year. So, it’s just the old Buffett saying about tides, these things come in cycles and you can put your money in these high growth stocks for a while and make money but don’t leave it there because they, when the market turns, these are the ones that always get dumped, they get smashed.

Cameron  16:04

Which you’ve been telling me for three years, and Afterpay had a dip during the COVID cough, but then it came rocketing back, and then it, then it stopped.

Tony  16:17

Now it’s halved again.

Cameron  16:19

Yeah, the people that bought it a few years ago and held on to it and sold it at the peak probably did well, would have done very well out of it. But as we kept saying, well, how do you know when the right time is to buy, and how do you know when the right time is to sell for something like this? How do you decide when it’s undervalued? It’s really difficult to apply any sort of science and methodology to it. Although I know Steve Mabb and Lee were working on something based I think on the work that Steve did at the ASA. They’re trying to work out some algorithms for these high growth stocks. So, I’m sure they’ll come up with something really interesting. But it’s, whatever it is, you need to have some sort of science and logic behind it. There may be some people out there that are super, super smart that have worked this out, but I suspect that the vast majority of people investing in these things are just doing it by FOMO. There’s no science behind it.

Tony  17:09

Well, exactly. And that’s, good luck to Steve, I hope he does come up with something and hope he shares it with us, too, if it works. That’d be great to be able to profit out of these cycles. And they are cyclical. I mean, the thing that worries me about, sometimes the way I look at it is these stocks are almost like pump and dumps. Yeah, sure, Buffett’s out there saying, “oh, value investing is great.” But he’s not out there saying, you know, hyping Walmart, or hyping Berkshire Hathaway railroads, you’re not telling people to buy shares in those things, the same way that Cathie Wood’s out there hyping every day in the press, buy Tesla, buy Tesla, it’s a great investment. And I’m not by any means trying to impugn Cathie’s motives or, or her abilities or anything like that, but the whole high growth stock thing does have the flavour of pump and dump. It’s people who, for whatever reason, they buy these stocks cheaply – maybe they buy a hundred – and then when, when one or two do well, they get behind them and they push them and push them and push them. And that helps the price to go up, and as you say it becomes FOMO and then people jump in. And then yeah, it all ends in tears when the Punchbowl gets taken away as Ben Bernanke used to say, or Greenspan think it was used to say.

Cameron  18:20

Yeah, and there is a, there’s a cosy relationship – I talked about this in the Psychopath Epidemic – there’s this cosy, cosy relationship often between venture capital money and big investing funds and the, you know, in the tech industry, I saw this when I was in the tech industry, there’s a tight relationship between the venture capital industry in Silicon Valley, and the tech media out of Silicon Valley. And so, what would often happen is you’d have whatever the hot start-up of the period was, and sadly, it was never really podcasting, but other things at the time that would come along, you know, there was always the flavour of the month thing. And, you’d see these venture capital firms sinking tonnes of money into these start-ups, then their friends in the tech media would be pumping these things, “this is going to be the next big thing,” “this is going to take over the world,” “this is going to be huge.” Then that would start to float, the original VCs obviously had a good exit with the float some of their equity and then they would hold on to some and then have their friends in the media pump it up and pump it up and pump it up, then they’d eventually exit just as all these wannabe copycat companies would launch an IPO and all the punters who missed out on the first round would try and get in the second round. And then these things would all crash and burn; maybe one would survive, quite often none of them would survive or they’d pivot into something else, or whatever. And then you just see the cycle rinse and repeat every few years, then it’s the VCs are on the new thing and the cycle starts all over again. It always struck me as this cosy little pump and dump. And no one ever went “hey,” to the tech journalists “hold on, the thing you were pumping three years ago just fell over and burned. Well, why are we listening to you now?” No one remembers, just time moves on and they just pump a new thing coming along. And a lot of this, a lot of the Bitcoin stuff and the high tech stuff just does remind me a lot of that cycle, the cosy relationship between the big investing funds and the finance media in the space.

Tony  20:19

Your problem was when you started podcasting, you didn’t get Henry Blodget to take 10% of your company, and then go and sprout it to the, to the .com world for you and make money that way.

Cameron  20:31

That’s what I should have done. Speaking of crypto, I saw of good article in the Fin this morning by Kevin Davis who’s a professor of finance at the University of Melbourne. Article titled “Why crypto is gambling and not investing.” And I thought, hello, he’s been listening to our podcast. Welcome. Shout out to, shout out to Kevin, if you’re listening in, because we’ve been saying that on this show for three years.

Tony  20:58

And I guess that’s good, it’s good that that article balanced the other ones that have been in the AFR in the last week or two that rich people are thinking about getting into bitcoin now it’s come off its highs. That’s almost irresponsible journalism, I think.

Cameron  21:09

Yeah. Is there such a thing as responsible journalism these days? Not a lot of it out there, I’ve gotta be honest.

Tony  21:16

Yeah, it’s rotting in Bellmore prison.

Cameron  21:18

Yeah, that’s true. Belmarsh, Belmarsh.

Tony  21:21

Oh, Belmarsh is it? Sorry. Hey, do you think when Assange goes to the trial, they’ll put him in a box and then like wheel him out from his sell down like a trolley car.

Cameron  21:33

Really slowly, really, really slowl.

Tony  21:36

With mood lighting.

Cameron  21:38

Making a reference obviously to Blofeld in the most recent James Bond film who was also in, also in Belmarsh Prison. See, they threw Blofeld in with Julian Assange.

Tony  21:51

When  Jenny and I were watching, I’m going “hang on, Belmore Prison must be like a hundred years old, if not double that.” Like there’s no way there’s a railway to bring prisoners out of their cells.

Cameron  22:02

What the movie should have been is Blofeld in Belmarsh with Julian and the two of them cooking up something together to take down MI5 and Bond and the whole thing. That would have been worth watching.

Tony  22:16

Or, maybe Julian Assange is an ex-007.

Cameron  22:19

Well, I’ve been working on a comic book script, I don’t know if I’ve ever told you about this, I’ve been working on and off for years. And it, back before Julian was in prison, in fact, but it starts off with Superman flying into the Batcave and saying to Batman, “hey, have you seen all this stuff that WikiLeaks have been publishing about how the US is sponsoring terrorists all around the world? Why are we mucking around with the Joker and the Riddler? We should be taking down the military contractors and the lobbyists, They’re the real evil.” And Batman just turns to him and goes “who do you think’s been funding WikiLeaks for the last ten years, you dipshit, it’s the Wayne Foundation that’s been funding it all. About time you woke up? Let’s go. Strap on.” Anyway. That’s my fantasy superhero world.

Tony  23:04

Well, that’s how the Wayne foundation makes it’s money, isn’t it? Selling high tech to the military?

Cameron  23:08

Yeah, well, in in the recent Christopher Nolan versions of the story, yeah, like a Stark. Tony Stark. Alright, well, you want to get into your deep dive, your pulled pork?

Tony  23:22

Oh yeah, just a couple of other things to talk about, sorry, before we do. A couple of stocks in the news. So, confession season has claimed a couple of stocks on the buy list. Adairs, ADH, has been on the buy list for a while. It’s been a Josephine for a long time, so I don’t know if anyone would be owning it. But they came out and fessed up to the fact that their sales aren’t, haven’t been great during Omicron. So, their stock dropped like a stone in the last couple of days. One I own, South 32, they actually published some good sales numbers in that they’re a miner which has spun out of BHP that mines all of the things that BHP didn’t want back then but are now all of the vogue stocks now they’re doing well, like your coppers and your zincs and your nickels and aluminium and things like that. And they’ve been doing really well over the last twelve months. But they’re down, I think 3 or 4% last time I looked anyway, because they said their costs had been increased because of Omicron. So, sales are up, margins were good, but costs were up so spooked the market a little bit. And the last one happened in the last, well happened overnight. So, I own shares in West African Resources, WAF, and that’s been smashed today because there’s been a military coup in Burkina Faso. So, if you do have a hotline to Superman, can you tell him to go in and fix the West African military for me, please, because West African Resources has dropped a lot – like 15-20% in the last, well today. It’s getting down close to a rule 1 for me. It’s way above its three-point trend sell line, because it’s a gold stock and it’s been doing well, but it’s retraced a lot of its gains for the last twelve months and I just highlight it so if people haven’t come across that in the news they can check their alerts are set for West African Resources as well.

Cameron  25:05

So, you want me to get Superman to be your private merc and go and you know, rough people up for the sake of your portfolio. Does this meet your ESG framework, Tony?

Tony  25:17

I’ll give him 10% of the portfolio , he can make sure it always goes up for me.

Cameron  25:25

I had to rule 1 West African Resources quite a while ago, I think. I think it’s been a little bit rocky for a while, hasn’t it?

Tony  25:33

Yeah, it’s been up and down because there’s been military coups in the neighbouring countries and it got put in that whole general area when some of the other ones came off, and then it went up again, and now it’s come back again. I don’t know what the result will be with the coup, it’s a breaking situation, and obviously I’m not an expert. So, we’ll have to let sentiment guide us on this one.

Cameron  25:53

Yeah, I think when we talked about it a while back you did highlight the fact that stocks like that were subject to some form of sovereign risk or foreign stuff going on.

Tony  26:06

Correct. This is exactly an example of sovereign risk that things come out of the blue like this in countries that aren’t near us, and we don’t know much about. So, yep, sovereign risk is very much alive and well with this one, and that’s one of the reasons why it was so cheap. I mean, it was, it’s a very profitable company in a gold mine when gold’s gone up a lot, even though it’s been level for a while, but it’s been cheap because of sovereign risk and looks like that may cause us to sell it but we’ll see what happens.

Cameron  26:33

Okay, what else you got?

Tony  26:35

No, that’s it. Pulled pork now, thanks.

Cameron  26:37

All right. So, stocks of the week this week, which I chose yesterday morning, Monday morning, where RVR and RIO, two miners. Both looked okay at the time, but lots happened in the last 24 hours. Of course, as I tell, I tell people every week when I put out the stocks of the week, check them for a Josephine before you do anything because a lot can change, particularly in a turbulent market like this. And you emailed me this morning and said that RVR has in fact become a Josephine since then.

Tony  27:08

Yeah, it was down like 15% today last time I had a look, so something’s gone on there.

Cameron  27:12

Yikes.

Tony  27:14

Yeah. Small-cap miners. I don’t know much about it, so I’m going to focus on Rio for the pulled pork. Rio Tinto.

Cameron  27:20

Never heard of them. What do they do, Tony?

Tony  27:24

Well, it’s kind of surprising because they’ve shot themselves in the foot a lot in the last twelve months. They’ve been in the news which is not what you, not for all good reasons. But anyway, Rio, Rio Tinto, big miner, one of the big-cap stocks on the ASX. Largely iron ore, iron ore makes up 76% of its revenues, but it also has some copper, bauxite, aluminium or aluminia – alumina, sorry, get the pronunciation right – diamonds and titanium oxide. So, it has diversified a bit and has had some good news in the papers recently, in the last day or so. So, they’ve been trying for a long time to sort out a copper mine called Oyu Tolgoi, and I hope I pronounced that right because I’ve never heard it mentioned, I’ve only read it, in Mongolia. And just in the last day or so it looks like they may have sorted out their problems with the Mongolian government and the old Oyu Tolgoi copper mine will go ahead, which is a big deal for Rio and, and will boost the amount of copper that they have in their mix. That may change things for us. I mean, the mine won’t happen, won’t get started for a while and won’t happen for a while, so not a short-term issue. But that’s another thing if copper does become a big part of Rio, we’ll have to reassess whether we treat it as an iron ore stock or a copper stock or both. So, at the moment, it’s predominantly iron ore. Last year it mired itself in controversy, it blew up an Aboriginal or a First Nations sacred site in a place called Juukan Gorge, which was a terrible thing to take place and seemed like management were at sixes and sevens in dealing with it and eventually it claimed the scalp of the old CEO. And the CFO has been promoted now to running the company. So, a lot of things going on with Rio Tinto, more than you’d want to see in a big blue-chip miner. But, things might be turning around, it came back onto our buy list recently so it scores a point for that. It’s a recent three-point upturn after going off when iron ore stocks dropped, but also it was also a three-point trend sell – probably because of the Juukan Gorge controversy. Today, the share price is $1.69, so almost $1.70, so 25th of January, and it is just slightly under the consensus target, so it scores a point for that for share price. It’s a star income stock and it scores half a point for that with Stock Doctor, and the reason why it’s a star income stocks because, well, one of the reasons is because it has a yield of nearly 8.5%, so that’s very high and certainly above the bank rate so it scores a 1 for that. Financial health is strong and steady, as you’d expect from a really big large-cap company like this, so it scores for those. For people who are interested, the ROE is 35%, and the Pr/OpCaf –  the price to operating cash flow – was 5.6 times. So, that’s, it’s getting up there but it’s still, you know, when you consider it to be a large-cap stock on the ASX, it’s still very cheap. PE is 7, which is not a record low for the last six halves, so it doesn’t score for that, but still a low PE. And the interesting thing with this company is that the PE is less than the yield, so that’s always been a low value indicator to me, or a great value by indicator to me. Never heard anyone else talk about it, but certainly something I’ve observed over my years in the stock market. So, it gets a point for that on our QAV score list. It’s less than its IV 2, it’s just above its IV 1, and it’s less than two times it’s IV 2, so it scores 1 point for each of those. It’s got a high growth profile, so growth over PE is three times which is twice what we want to see to get onto our checklist and it’s scored a 2 for growth. As I said before, it’s a new three-point upturn, even though it’s been a buy for a long time it did come off the list at the end of last year. Equity has been bouncing around a bit so it doesn’t get a, a score for that. So, overall, the quality side of things’ 83% and the QAV total, and we take into account the Pr/OpCaf is 0.15, given its got an average daily trade of $117 million it’s certainly one that would fit every investor’s criteria.

Cameron  31:34

Very good. Thank you, TK. Rio. Do you know how it ended up in Australia?

Tony  31:42

Yeah, I think it’s a British miner, it may even be dual listed and people might be aware of that because they’ve seen BHP repatriated back to Australia which has been in the headlines, or the financial headlines, recently. I think it was because of CRA, a company it bought in WA which was a big miner over here of iron ore and, and that was kind of a turning point for Rio back probably about twenty or thirty years ago from memory.

Cameron  32:05

Yeah, Conzinc Rio Tinto of Australia. I did a sort of a history on it when I was picking it as the stock of the week yesterday. It’s named after the river in Spain, which has been mined for minerals for five thousand years, the Rio Tinto, and when the Spanish monarchy sold the rights to mine on the Rio River in 1873 the rights were purchased by a consortium led by the Scottish industrialist Hugh Matheson, famous for Jardine Matheson, and the company soon I think by the end of the 1880s was in the hands of the Rothschild family. And then there was a series of acquisitions and mergers over the next century, and then in 1962 Rio Tinto company merged with Consolidated Zinc, which was an Australian firm, to form the Rio Tinto Zinc corporation, RTZ, and its main subsidiary was Conzinc Rio Tinto of Australia, CRA. And then in 1995 the company’s merged into a dual listed company run by single management. So, there you go. That’s my short history of Rio Tinto. I’ve always wondered with a name like that, how did end up listed in Australia, so did some background.

Tony  33:22

And I wonder, like, the Tinto River, that sounds to me like it may have been coloured by the copper maybe, had a coloration to it or a tint.

Cameron  33:28

Hm. Tinto, Rio. Yeah. Good thinking.

Tony  33:32

Potentially. I’m not sure.

Cameron  33:33

We’ll get one of our interns to look into that. Are you ready to get into the Q&A for this week, Tony?

Tony  33:42

Yeah, sure. Absolutely.

Cameron  33:44

All right. Well, the first question this week comes from Jeff. He says he found a question from an article in the AFR relating to Westpac. There was a line included in the article – this is from the 18th of January – the title of the article was “Westpac follows CBA deal with five-year Aussie debt deal”. There was, he says, there was a line in the article “CBA launched its deal at a proposed spread of 75 basis points above swaps and ended up winding it back to 70 basis points.” And he asks, “what the hell does that mean?”

Tony  34:21

Yeah, we’re getting into the area of bonds, which is not something I’m strong on, but I do know what this means. So we know what a bond is, its a way for a company to raise debt. It issues a coupon, if you like, to companies or to individuals potentially as well who buy the bond, and it will have certain characteristics. I think in this case, it was a five-year bond maybe. Anyway, you will have a term, the way the bond will work is at the end of that term the company has to buy it back off you at face value or convert it into debt or roll it over into another bond. So, I think that’s probably the three main things that happen in the life of a bond. And, along the way they agree to pay you the coupon, the interest, I guess the dividend you receive, although it’s not a dividend in the way that we think of dividends and there’s no franking credits, it’s just the amount of money that there’s a percentage of what the face value of the bond was when it was issued. So, it’s basically like you issuing a mortgage to the bank, except the other way around. So, instead of you taking out a mortgage for a period of time and agreeing to pay them an interest rate, you give them your money and they give you a piece of paper which says that they’ll pay you back in full over after a time period and they’ll give you a coupon each year for that period of the of the bond. So, if it’s a fixed income bond then the amount is known up front, so it might be like 1% or 2% given interest rates are very low at the moment, it’s usually between 2 and 3%. This particular issuance was part fixed and part floating, and floating interest rate bonds now are of more interest to the market than fixed because interest rates are going up. So, if you, if you take a bond, give your money to the bank, and they have a fixed income bond with you for five years and it’s at 1%, at the end of five years if the interest rates are now at 5%, you effectively, you’ve missed out on the opportunity of taking money off the table, and your bond is worth a lot less. The bonds are often tradable on the secondary market, and if the interest rates go up then the bond value goes down. So, just to explain; that if I gave Westpac a million dollars, bought this bond off them and it was a 1% coupon, but then interest rates rose to 2%, the value of the bond, say it was issued at $100 per bond, would go down to accommodate the fact that the person buying it from you wanted the market interest rate of 2%. So, the face value of the bond goes down when interest rates go up. So, what people are after these days are floating rate bonds, so that if interest rates go up then the amount that they receive on their, on their bond purchase also goes up because you can hold the bond until its term finishes and get your money back from Westpac or get rolled over into another bond or whatever the deal is, but if you do have to trade the bond in between and interest rates are higher than what the coupon was set at, then you’re going to lose money. You won’t get your million dollars back if you have to sell it, you might get $900,000 or something so that the new buyer gets a higher, still gets the 1% of the original value from Westpac but because they paid $900,000 for it, that’s now worth more to them and more in line with what the market is getting as a yield. So, anyway, long story short, the way that the floating rates are often quoted is a certain percentage above the swap rate. And again, this is very technical. Swap rate, though it’s sometimes called a BBSW, it’s the bank bill swap rate that banks use as a benchmark to be able to trade with themselves or between themselves. That itself is sometimes set through trading and sometimes it can be tied – I shouldn’t say sometimes, I think it might be tied to the RBA’s short-term rate. So, the RBA will publish a long-term rate, which we tend to think about but there can also be a short-term rate published. Anyway, the banks need a benchmark so that when they’re, they’re trading with each other all the time, and sometimes they have a short term need for cash to settle a deal or whatever or to, sometimes to repatriate bonds, and they’ll go and borrow it from a different bank. And they have a bank bill swap rate, which is generally what people think of as the short-term money market. So, if you’ve ever heard people say, “I sold my house and I rolled the money in the short-term money market until I bought something else,” they’re getting something like the bank bill swap rate. So, it’s a fairly low rate. So, what Westpac is offering with this particular deal, and what CBA offered with their deal, is to always pay you a certain percentage above the bank bill swap rate – in other words, the short term. And that is the floating component of the bond, and it means that as interest rates rise, the bank bill swap rate will go up as well and so you as the coupon holder get more from the bank. And that’s, that’s to protect your capital in case, in the event, and it’s likely, that interest rates will rise. Now, the other point that is part of the question was that when this deal, the original deal was going out, the proposed spread was 75 basis points above the bank bill swap rate and they ended up wanting to get back to 70 basis points. So, what that means is that there was a lot of demand for this kind of bond and the bank issued, like, met that demand with the initial offering at 75 basis points and then probably went out into the market and offered more at 70 basis points to soak up some of that demand, which was a better deal for the bank. So, long story short, this was just saying that the investment community is looking for bonds that have a floating component so they can protect themselves from rising interest rates, and there’s so much demand out there that the banks can lower the spread that they offer on this kind of product.

Cameron  39:56

So, it’s a protection mechanism for them to make sure they don’t get caught out if interest rates go up.

Tony  40:04

Yeah. And in fact, I know it’s very popular in the US, and I think – I don’t know what the offerings are here because I don’t follow the bond market – but Inflation Protected bonds are the other big thing at the moment. So, they also float as inflation goes up. So, they’re pegged to some kind of CPI mechanism which means that if inflation rises you, you are protected with your initial capital.

Cameron  40:25

Okay, the bank bill swap rate, or BBSW. I thought that was a, thought that was a porn subcategory, but just be careful if you Google that. Never know what you’re gonna come up with.

Tony  40:40

There probably is banker porn, right? They probably all watch BBSW like hawks. “Hey, did you see the BBSW went up today. Woohoo.”

Cameron  40:52

Both hands above the table, please, Jeff, both hands above the table. All right. Thank you, Jeff, for that question. Michael says he was listening to SO2EO5. Oh, God, I wonder when we recorded that? Would have been just before the COVID cough, I think. He says – in early 2020, I’m guessing – “Tony was musing that someone starting their portfolio then might want to wait until the end of reporting season. Would he still be thinking this way today given how close we are to reporting season?

Tony  41:27

Yeah, good question. I’m not hesitating to buy things. Like I said, I’ve sold out at ANZ, bought into Champion Iron even though we’re close to reporting season. I could get caught out if Champion Iron has a poor report, but the surprises are less and less in the market these days with confession season coming first and the quarterly reports, especially for the miners which have to divulge what their sales are at least among other things. So, it’s a reasonably informed market. And generally, if you see a stock going into reporting season, it’s a good sign as well. If you see stocks going down, like we saw with Myer a week or two ago, it’s not a good sign. So, I’m still reasonably comfortable. If you want to be super cautious than yeah, hold off and buy in February. And look, there’s no doubt that we’re coming into the busiest time of the year for us when company reporting season happens, and its gonna happen with the backdrop of the market correcting. So, yeah, I mean, golf games might get thin on the ground for a while. But, we’ll require focus and downloads and things like that. Like I said, I’m comfortable going in, I’d be going in probably a little bit slower than normal. But having said that, I don’t think there’s going to be a whole heap of stocks on the buy list anyway that aren’t Josephine’s at the moment. So, you can be cautious anyway just naturally. Still follow the rules. Someone made an interesting comment on the Facebook group which I read recently when they said that they had gone into the market and bought some stocks, but only the ones that were on a different reporting cycle – so the ones that reported March or September – which I thought was an interesting way to do it as well. So, Michael might want to consider that. But yeah, Michael, I’m, if I were starting out today, I’d still be following the rules and buying, but just bear in mind that you might have some selling and rebuying to do during the company reporting season.

Cameron  43:14

And that leads me to think like, there’s probably some people out there that have just started their portfolio or are in the process of building it up, and of course everything’s tanking and they’re looking at, you know, I think I’ve seen a few people say in the Facebook group, “oh, I’ve had to sell 40%/50% of my portfolio in the last week because of rule 1 sells,” which, you know, if you just bought recently that could easily happen to you as everything is falling around you. But, what would you say to those people? I know we’ve been through periods like this in the past, but for new folks that have just kicked off and now they’re losing 10-20% of their portfolio, they’ve paid brokerage, everything’s, they’re having to R1 everything, what suggestions would you have?

Tony  43:57

Yeah, I say hold the line. I mean, it’s probably unfortunate that you started the but and enter the market when it’s been in this situation, but that can’t be helped. And all I can say is you’ll make it back in the long term, that’s certainly been my experience. Continue to follow the process. But look, I, first of all I do empathise and sympathise with them, it’s certainly not easy for me at the moment losing large sums of money when you look at stocks. So, I do, I do sympathise with you. But really it’s, this is part of investing, and all I can say is that if you keep following the process it will come good for you.

Cameron  44:30

Taylor said to me today like “oh, I just can’t you know, it’s just really hard to see all this money.” I go “if you can’t, if you can’t handle seeing your portfolio go down then maybe you shouldn’t be investing. Take up knitting or something like that. You don’t have the, you don’t have the constitution for it, don’t do it. Like go do something else, put your money in an ETF and close your eyes and don’t worry about it. That’s okay.” I’m not being disparaging, but that is part of, that’s one thing I’ve learned from you over the last couple of years is this is just part of it. The market goes up, the market, I, you know… it’s as John Denver said, “some days are diamonds and some days are coa, and you just have to just ignore it.” Like you just follow the rules. Yeah, there’s red on the screen for days or weeks or months at a time, it’s just a colour on the screen. Don’t worry about it, don’t think of it. Just, I mean, it’s easy for me to say this because I’ve been listening to you every week for three years. But, I’m absolutely convinced having watched the last three years and talk to you about it that it’s cyclical, these things go down then they go up, as you said; two steps forward, one, step back, one, two. And it sucks if you got, if you start in the one step backward part of the phase.

Tony  45:44

Yeah.

Cameron  45:45

But if you’ve been listening to the show for a while, and you trust that Tony knows what he’s talking about, then this is just, this is just part of it. It just happens. It goes down, then it goes back up, then it goes down, then it goes back up, then it goes down. And, no you can’t really time it, you can’t figure out when’s the right time to… it’s like playing Frogger, you can’t figure out the right time jumping, you just jump and then you follow with the car – did you ever play Frogger, Tony, does anyone remember Frogger? Am I the only person who played Frogger?

Tony  46:18

Yeah, I did.

Cameron  46:19

Frogger you just jump in, right, and then as the cars come at you, you jump out of the way and then when you see an opportunity you jump up a level, then you go sideways a little bit and then you jump up. You don’t, you can ever wait until all the cars are perfectly lined up and you go straight across the five lanes of traffic, you just have to jump in and get going and keep moving.

Tony  46:39

No, that’s right. And also, too, I’m reminded of Charlie Munger who said if you can’t stomach a 50% drop in your share portfolio, then don’t do it. You are going to learn a lot about your own personality doing this, as well.

Cameron  46:51

Yeah, yeah. And I think you said really early on in the show quoting maybe Buffett or Ben Graham or Munger or one of these guys, that I think there’s, it’s a Buffett saying, something about, it doesn’t take a high degree of intelligence to be an investor, but it does take a certain kind of personality. You’ve just got to be able to follow a system, ignore the noise, ignore what the markets doing, just be disciplined and follow your thing and have a little bit of ice in your veins and just have that level of confidence that the system – whatever system it is that you’re applying, not necessarily, doesn’t have to be QAV, can be any system – but that the system that you’re applying works long term, and therefore you should just ignore short term fluctuations. Volatility.

Tony  47:40

Yeah, that’s exactly right. You gamify it, right? It’s like, okay, you might have started playing Monopoly and landed on go to jail on your first turn, do you pack up and go home? You keep going, you’ve got to gamify it. And, and that’s, this is how the markets gonna be. I mean, the flip side is that I don’t know how long it will be, I don’t know if it’ll be tomorrow or next week or next year, we’ll turn around and we’ll go “Mr Markets been really pessimistic for a long time. Now, he’s just presented me with the best deal I’ve seen for years, I’m gonna buy.” So, and we have a system to be able to take the stress out of that, even if we sit on cash for the next twelve months or two years. We’ll still come out ahead.

Cameron  48:20

Yeah, it’s that, that ability just to trust the system and ignore the backdrop and the noise and ignore the numbers, like your own numbers. Just go yeah, as you said, gamify it. Just realise that it’s just, it’s short term noise is the way I think of it really now. Yeah, I’ve got to sell some stuff, I’ve got to replace some stuff.

Tony  48:41

Exactly.

Cameron  48:42

Doesn’t matter. You just do it. It’s like going for a run when you don’t feel like it because you know that the long-term benefits are there. It’s just, that you just put the shoes on. Or whatever, you go to the gym, right? You don’t think about it. You just do it. You don’t think about it, “Just Do It”.

Tony  49:00

Yeah, put your Nikes on.

Cameron  49:01

Yeah, no, like seriously, like it took me a while to get there and, but once I got there it made life a lot easier. Like, Taylor still rings me like every day, “did you see what happened today? This went up. This went down.” Like, Dude, seriously, you’re gonna kill yourself. Like, stop worrying about it. Like, it’s… Moving right along. Ange: “hi, Cam after two plus years, I really thought I understood the three-point trendlines but when you and Tony had that conversation late in the last series about going back to an old buy line, I thought there would be a lot of discussion as it was the opposite of the buy line follows the sell line. You brought it up again at the start of the series, but you agreed with Tony to sort it out off air so I’m still confused. If the buy line follows the sell, then the chart would look like my attached sample, buy follows sell, which is what you responded back to Alison on Facebook this evening regarding ANZ and is how I’d always thought it would be drawn. From the recent podcast, I thought Tony was saying that once a sell line changes, you go back to where the sell line starts and you forget about all the buys and sells along the way and plot the buy line so the buy’s third point is after the start of the sell line again. So, ignoring buy follows recent sell rule. I thought your confusion was valid,” thank you, Ange, “so we must think the same way. Did you sort it out? If so, can you share your findings?” And I said, “No, waiting for Tony to get back to me on that.”

Tony  50:32

Well, first of all, Ange, I apologise. I probably miss-well, just confused people, as you said, and Cameron and other listeners. The first thing I want to say is the Brettelator has the correct version of the three-point trend line code drawing algorithm in it. So, if I’ve said things to confuse people, or I’ve confused myself – which I am listening to Ange’s question – I apologise. Really, really it is go back to the Brettelator and use that and see if it matches up to what you think. And if you still have, have issues, then then get back to us. But yeah, this has been obviously confusing, and I apologise if I’ve led people down the garden path, it wasn’t my intention.

Cameron  51:16

Well, I don’t think any of us thought it was your intention, but let’s talk about what the rule is right now in your head. So, well, I think we’re back. The last time we talked about this a couple of weeks ago, I think we got back to the buy line follows the sell line, right? Is that where we’re at today, right?

Tony  51:33

Yes, that’s right.

Cameron  51:34

So, if there’s a new sell line, meaning we’ve got a new L2 somewhere on a chart, and it’s the sell line has fallen, we still have to go back and plot out the historical buy and sell lines to see when the last buy line would have been. We don’t just go back to whatever bu line makes sense, based on the current sell line, we have to go back and do the historical lines.

Tony  52:04

I think so. It’s confusing me now talking about it. But yeah, so the change that we made last year, which maybe threw people was that, and this was in response to some companies like Super Cheap Auto, I think Nick Scali at the time anyway, that were going up after the COVID cough, but they were going up in a jagged sort of way. So, they were continuously crossing their sell line as a sell and then going up above it and becoming a buy again. And so, the change that we made to the Brettelator was to say if there’s a sell line and there’s an L2 trough below that sell line, we use that as the new L2. So, the sell line keeps, I guess, getting lower, if you like. So, it’s always, it doesn’t have a trough to the right of it, which was the, which was the important point. But all the other rules stayed the same. So, yes, the buy line should still follow the sell line, but we, we do draw a new sell line when we see a trough outside of the current one, or to the right of the current one.

Cameron  53:02

Right. But when we’re trying to work out what buy line we’re using, we have to step backwards. We have to roll the tape backwards.

Tony  53:13

So, you’re still looking for a buy line following the sell line, if that’s what you mean. Yeah.

Cameron  53:17

Yes. So, we have to figure out, okay, so we know what today’s sell line is, we have to go back and draw the previous sell line and then draw a buy line where H2 falls after the most recent sell event.

Tony  53:34

Look, I’m gonna hesitate to agree with that, because I’m just struggling to get the wording right on this. It’s the buy line follows the sell line. I think one of the outstanding issues is whether it’s H2 that you need to worry about being after the sell line, or whether it’s just the buy line. I think the last sort of round of conversations Brett and I have had about the Brettelator was whether we use the H2 following the sell line, or whether it’s just the buy line has a buy price which is above the current sell line. I don’t want to get tied up into wording around H2, I think this is where the problem is. The basic concept is if we draw a new sell line and the new buy line should be drawn such that the buy line crosses the graph, the share price graph, after that last sell line. Does that make sense? H2 may come before or during that sell period.

Cameron  54:25

Okay, but the line crosses it after the sell. The third point, if you like.

Tony  54:32

The line… I’m getting… let’s work through an example. This is, it’s hard for me to think about these things universally without talking through an example.

Cameron  54:39

I’ll tell you the one, the one where this rose late last year was, we were talking about CBA.

Tony  54:45

CBA. Okay.

Cameron  54:46

Do you have it open in front of you?

Tony  54:48

I do. Yes. And CBA was definitely one of these examples I was talking about coming out of the COVID cough. There was a higher sell line then there is today and then it went backwards below that sell line, so we said let’s draw the new trough as a new L2.

Cameron  55:02

So, the current sell line, God, CBA’s gone below its sell line too, shit. CBA’s a sell.

Tony  55:03

Oh no.

Cameron  55:12

I own that. Gotta dump that today, too. So, the way that I draw the sell line today is I’ve got, we’ve got a bit of a flat bottom down there from March 2020 through to September 2020. So, we’re using September 2020 as L1 and November 2021 as L2. Agree?

Tony  55:34

Yep, I do.

Cameron  55:35

Okay. The previous sell line would have gone through again, September 2020, and through February 2021.

Tony  55:44

Correct.

Cameron  55:45

So, when that sell line was active, the relevant sell line, it would have crossed over, would’ve become a sell using that sell line I’d say somewhere around July ’21.

Tony  56:02

Yep. Sounds right.

Cameron  56:04

Okay. So, when we were talking about it, like, yeah, I think in December, I was saying, “so how do we, how do we draw a buy line for this, now? Because it was very hard at the time to get a buy line that followed that sell event in July ’21 and you said something about, “well, it’s got a new sell line, now, because we had the L2 in November, and so we could go back to using the buy line that started in January 2020 with H1 and went through January ’21 as H2.”

Tony  56:41

Yeah, that looks about right to me. So, you go back looking for a buy line. We don’t have a buy line that comes after the sell line, so we go back to the last buy line. Which means it’s not a buy, its a sell.

Cameron  56:52

But that’s the problem.

Tony  56:53

Why’s that the problem?

Cameron  56:55

Oh, well. Well, because at the time, the price was above that buy line.

Tony  57:02

Oh.

Cameron  57:03

And above the sell line.

Tony  57:04

Price was above…?

Cameron  57:05

So, you were saying well, we just… yeah, if you go to December ’21. So, you were saying it’s a buy because it’s above that buy line. But that buy line doesn’t come after the previous sell line. Previous sell line we just said would have made it a sell in July. That buy line comes before that.

Tony  57:24

Right. Okay. I can see what you’re saying.

Cameron  57:27

And at the time you said, I said “well hold on. The buy line doesn’t follow the sell line.” You said “doesn’t matter. There’s a new sell line. So you just get back to the old buy line.” I was like, “but I thought the buy line had to follow the sell line,” and you said “no.” And so that’s the confusion.

Tony  57:42

Okay, so you can’t draw a buy line after the sell line. So, you go back to the old buy line.

Cameron  57:47

But it doesn’t come after the sell line. So, is it a valid buy line or not?

Tony  57:51

Well, I’ve always assumed it was, yeah. If you can’t draw a current buy line, you’ve got to go back to the last buy line. We had this problem with Rio last year, as well. It was going up all the time, and we couldn’t draw a buy line because there was never a H2. It was always H1, H1, H1 going higher and higher and higher. So, like to draw a buy line for Rio, we had to go right back past five years to get a H1 with a H2.

Cameron  58:12

Which I think was also FMG last year too, which made sense because we didn’t have a sell anywhere in that period, either. If there hasn’t been a sell event for several years, going back to a buy line thats several years old is fine. But what confused me then and still confuses me now with this one is we have this rule that the buy line has to follow the sell line, but in this case, we’re saying well, no, because we can’t draw a new buy line. We’re just using an old buy line and that seems to break the rule. Even though, on paper, looking at the chart, it’s obviously a buy really, I mean, not today, but it would have been in December because it had been shot up from like $80 to $105 or something. So, it looks like a buy, so it makes sense that we would use that buy line, but but it breaks the buy line follows the sell on rule. So, therein lies the confusion.

Tony  59:08

Sorry, you’re saying it was in July that is crossed over as a sell on your chart? That must have been after that. L2 was July, wasn’t it?

Cameron  59:15

No L2 is, was, February ’21.

Tony  59:20

Yes. Okay. And it crosses the line therefore crosses in July, or a bit later than that?

Cameron  59:25

July, according to Stock Doctor.

Tony  59:28

Yeah. Okay, July. All right. So, then if I put into the Brettelator first of August, and it’s calling it a buy. It’s doing exactly what I said, it went back to the last buy line even though it doesn’t, there’s no buy line after the current sell. And that’s the way the code, Brettelator code works. If it can’t get a buy line thats more, more recent than a prior one it goes back to the last buy line you can draw, basically. And it says if the price is above that, tick, and if the price is above the sell line, tick. So, CBA would have been a buy on the first of August, 2021.

Cameron  1:00:00

Okay. Which means, though, that the buy line follows the sell line isn’t necessarily always true.

Tony  1:00:06

No, I guess that’s true. So, first of September it’s a sell again in the Brettelator. So, even though it’s above the buy price, it’s, the graph crossed the sell line. So, it’s below it’s sell price and there’s no buy line after that. So, we can’t buy it. And that was, that was a thing we were working with, was how do we handle these graphs which we can see are going up, but they’re going up in a zigzag fashion and keep crossing and then recrossing their sell lines. And so, that’s the code we came up with, is what’s in the Brettelator now. But yeah, there’s no buy line coming after the sell line for CBA. Or for any stock-or there is now.

Cameron  1:00:42

Yeah, so how do we, how do we phrase this for the folks at home trying to figure out their own buy and sell lines? Buy line follows the sell line, unless you can’t draw a new buy line in which case the last buy line is active?

Tony  1:01:01

I think I can see where the confusion is, I hope. Kinda like it’s all making sense to me, but it’s getting the wording right I think, as you’re saying. So, the last sell line, as you said, was crossing in July and there was a buy line before that which was crossing much earlier in the same year. It was clearly a sell at that stage, we couldn’t draw a buy line after the sell. So, yeah, so the first of September is a sell because that sell line you were talking about is still in force. The share price is crossing…

Cameron  1:01:32

First of September ’21?

Tony  1:01:35

Yeah, 2021. If I put that into the Brettelator we can see what you’re talking about. So, the sell, the second to last sell line to the cut was the last sell line before the current sell line was in force, and the sell price is $103.22, according to the red line, and the share price was $101 on the first of September. So, its a sell, and we haven’t been able to buy after that, so that buy line is coming, yeah, its coming before the current sell. So, you’re right. So, we can’t draw a buy line after the sell line. The code says we go back to the buy line before that. We check to see if the price is above that. Yes. Is it above the sell price? No. So, it’s a sell.

Cameron  1:02:12

Right, and then we get to December ’21. We’ve got a new L2 at the end of November, so we have a new sell line, but we still can’t draw a new buy line that comes after with an H2 or any point that comes after the last sell.

Tony  1:02:30

Yeah. So, it’s still a sell though, right? Because the price first of December was $93.88 and the sell price is $110, so it’s below that. So, yeah, we haven’t been able to draw a new buy line so its still a sell.

Cameron  1:02:43

But it’s got a new sell line.

Tony  1:02:46

Yeah, because there was a trough that came out after that. So, again, there was a trough that happened after the prior sell line, which caused us to redraw the sell line. We can’t redraw the buy line, but it’s below the sell line.

Cameron  1:02:58

Well, it’s not below the new sell line. In December there’s a new sell line with L2 at the end of November. And in December, the price was going up. So, it was above that new sell line.

Tony  1:03:12

Not according to the Brettelator, I’ve got first, I’m using first of December. Are you using 31st of December, are you?

Cameron  1:03:17

Yeah, I guess I’m just looking at the five-year monthly in Stock Doctor.

Tony  1:03:22

Yeah, so that gives us a new sell line. So, that’s actually two sell lines after the first of September date. And it’s now a buy because the old buy line is still in place and it’s above its new sell line.

Cameron  1:03:37

Right, but that all buy line, again, doesn’t come after the old sell line. Yeah.

Tony  1:03:45

Yeah, no, you’re right. So, there’s, so we need new wording. It’s certainly how the Brettelator works.

Cameron  1:03:52

But does that mean the Brettelator’s right though?

Tony  1:03:54

I think it is, yeah.

Cameron  1:03:56

Brettelator only works based on what you told it. But yeah. Makes sense if I look at it on a graph, if instinctively I go “well, yeah, would have been a buy then.” But, I don’t know when to break the buy line follows the sell line rule.

Tony  1:04:09

Yeah. So, it’s got to be if you can’t draw a new buy line you go back to the old buy line.

Cameron  1:04:14

If you can’t draw a new buy line, you go back to the old buy line.

Tony  1:04:19

Yeah, so we have I guess a couple of intersecting rules here in the code. So, the the code for the Brettelator says if I can’t draw, go back to when I can draw the most recent buy line. Forget about with it comes after a sell line. And that’s what it’s doing. And that gives us a buy line on, well, as at 31st of December it gives us a buy price of $83.77, which was way back in February ’21. So, it’s been in force for a long time. What’s been stopping us from buying it is that it’s been below its sell line as well, which has been much steeper. And then, because we can draw that new low point in November 21, the sell line drops to that and it becomes a buy again.

Cameron  1:04:57

So, for the folks listening at home, our draft wording is “if you can’t draw a new buy line, use the old buy line even if it doesn’t come after the last sell event.”

Tony  1:05:08

Yeah. You’re a better word smith than me. I’d say use the Brettelator.

Cameron  1:05:13

Well, yeah, but it doesn’t, we know the Brettelator doesn’t work for 50% of the stocks that we’re looking at from Google Finance limitations under 50 cents, etc., etc. So, at least half the time we have to draw our own lines.

Tony  1:05:26

Yeah, okay, fair enough. But that’s what’s happening, so it’s always trying to draw a new, the latest sell line and the latest buy line, and then looking for the price being above both of those two things. I’m just trying to think where we got to with the buy price following the sell price. I can’t remember what the reasoning for that was. But as you say, it’s not, it’s not applying in this case.

Cameron  1:05:47

Okay. Well, that’ll do for now. Ange, I hope that helps a little bit. I guess we’ll, if we come up with examples over the next coming months where these things continue to not work, we can sort of adjust the wording as we go.

Tony  1:06:04

Yeah, look, I appreciate that. Like I said, I’m sorry if it’s confusing. It’s obviously, getting the wording rights important, but I haven’t really focused on it, I’ve just focused on getting the coding right in the Brettelator.

Cameron  1:06:13

And well, as I pointed out to people in a recent episode, last time we touched on this, like in the three years that we’ve been doing the show, I don’t think, I mean, this has never come up before. So, there are always new things that come up, and it’s not like you had a set of rules that were given to you on Mount Olympus by the gods. You’re kind of trying to work this out as you go and put wording around stuff that you’ve been doing instinctively for 30 years, so.

Tony  1:06:39

Correct. And that’s the hard thing, yeah, it’s instinctive to me but trying to codify it is the hard thing. And I think the, like I said, it was this change has come about because of the COVID cough. What happened to share prices after the COVID cough is pretty rare, I haven’t seen such a steep rise across the board so quickly. And that was, when we had the old rules in place, that was playing havoc with the lines. We were, you know, sort of missing out on stocks that were going up just because they happened to zigzag from month to month. So, we made a new rule change to it.

Cameron  1:07:10

And it’s, yeah, so rare, rare circumstances, but bear with us. We’ll try and work it out as we go.

Tony  1:07:18

We’ll get the wording right, sorry Ange.

Cameron  1:07:19

Max says “hi Tony, KR M is up 90% since I got on,”

Tony  1:07:24

Yay.

Cameron  1:07:25

I wonder if it still is.

Tony  1:07:26

He owes us a beer.

Cameron  1:07:27

I don’t think so, I saw KRMs share price today, it’s plummeted. Well, it’s still up a big way since when we put it on our stock tip of the week. “KRM is up 90% since I got on but there doesn’t appear to be any justification for such a big jump. They’ve since come out saying they found a new gold tenement just before reporting season which is an old trick used when earnings don’t match the price. We use 3PTL as our sell, but if their earnings are that poor it may drop more than 20% on release, which would be good to avoid. Do you have any other tips regarding selling in this scenario? The company has been great, it’s just the timing of the release that has me concerned. Also, MQG has dropped significantly in recent days due to upcoming interest rate rises and lower than expected earnings so insiders are jumping off.” Let’s start with KRM, got any tips on how to avoid bad news?

Tony  1:08:22

No, I don’t sorry, I haven’t come across miners releasing new tenements to hide poor results, but I’ll take Max’s word for it. It sounds like it might be a way of drumming up some good publicity before bad results, so no I don’t. KRM is still above its sell line, so I’d be holding it for that or rule 1ing it if Max needs to. But, well, a couple of other points. Yes, it’s never great seeing stocks turn down into reporting season, but again, I haven’t got rules around that. Like, I’ve, in the past I’ve done things like if a stock is going down into reporting season, sell it, but then the markets got it wrong and it comes out with a good result and you miss out on that retracement. So, yeah, I don’t have any rules for this. I think if Max is feeling uncomfortable, then certainly sell it, don’t hold it, don’t lose sleep over it, you had a good run. Take some profits. But then don’t get upset if it turns around and puts in a good result and you miss out on the upside. But I certainly don’t have any rules around what to do in this situation except focus on how good it’s been.

Cameron  1:09:23

Never look back, you taught me that.

Tony  1:09:26

Yeah, that’s right.

Cameron  1:09:27

I never look back, I never check stocks after I sell them. Their dead to me until the next time they turn up on my list.

Tony  1:09:35

As for MQG, MQG is, is certainly a stock that will have problems with interest rates rising, not because of valuation issues, but because it now has a very large infrastructure business. So, Macquarie Bank and then Macquarie group has evolved over the years and it used to be a bit of a investment bank and a retail bank, I guess, for a while. A stock brokerage way back in the, in the 80s. And it just finds new businesses to invest in and gives them the capital to grow, and now is probably one of the biggest infrastructure managers in the world. So, why is that interest rate sensitive? Because they borrow lots to fund toll roads, bridges with tolls on them, any other sort of infrastructure. I think maybe airports, maybe docks, not too sure about those. But certainly, things like toll roads and bridges require lots of debt funding, and so as interest rates rise, unless they can back to back that rise in what they charge their consumers, which is always hard but it can be done, they’ll suffer. So, that’s probably the reason why I think Macquarie group has gone down recently. Could also just be part of the selloff of the market. But I think that would be the reason.

Cameron  1:10:43

I’m just trying to get the Brettelator to work so I can see whether or not MQG is a sell. Looking at it on Stock Doctor, it’s very close. It’s like, right on it.

Tony  1:10:55

It’s getting close. It’s getting close, yeah.

Cameron  1:10:59

That’s a shame.

Tony  1:11:00

It’s three cents off a sell on the Brettelator. Its sell price is $182 and the current price is $185 in change. So, it’s getting close. Yeah.

Cameron  1:11:10

Oh, that’s another one I’m gonna have to get rid of.

Tony  1:11:14

Quite possibly.

Cameron  1:11:16

It was doing well there too, recently. It was up, like, 5-10% in the last couple of weeks.

Tony  1:11:23

Yeah, it was. Yeah. So, hopefully, we don’t have to sell it but we’ll see.

Cameron  1:11:26

Alright, listen, I’ve got one more late question. I know we’re going long though. It’s a quick one. Do you want to have a crack at it, or? It’s just about market value.

Tony  1:11:35

Sure.

Cameron  1:11:36

Just came in late from Ben. He says “hi Cam and Tony, love the show. A few times I’ve seen a certain share price and then when I’ve bought it it’s risen a few cents in my invoice in comparison to the share price at the time. This isn’t including brokerage fee. Tony has touched on this issue to be careful when buying shares at market value. I’ve tried buying shares at a certain value, but I haven’t been successful. The offers have sat there in my CommSec account, and I see the price is going up. So, to avoid missing out, I’ve just deleted the offer and returned to buying at market value. Would Tony mind suggesting the best way to buy shares alternative to buying at market, in particular for a stock where the price is on the move? Thanks, gents. Take care during this rocky period as well as silly season upon us. Cheers, Ben.”

Tony  1:12:19

Okay, Ben, well, I buy everything at market and that’s largely because it’s much easier for me to deal with my stock broker with the amounts I’m using to do it at market. I have the same issue you do. I’ll factor into my calculation of how much to buy a certain price and invariably the price comes back a few cents more than that, often not, not a whole lot more. That’s just really the, if you think about it, what happens when you meet the market. So, if you have, let’s, let’s pick Macquarie group. So, at the moment, the last shares traded at $182. So, there are going to be people who want to buy at $181 and people who want to sell it at $183. And when someone goes at market, those two things meet. So, it’ll probably be somewhere in the middle of those two bids and sells. And so that’s why it’s a usually a couple of cents higher or a couple cents lower if you’re selling than what you’re seeing on the screen, because of that, you know, settling in the middle that occurs within that market trade. Occasionally, very occasionally in the past, I’ve used the price limit. But, like you, that can take days and weeks to execute a trade and lots of toing and froing on changing prices and the rest of it. So, yeah, all my trades are at market. I can’t really help you, sorry, Ben.

Cameron  1:13:34

Yeah, somebody posted in the forum a while back something that helped me. Just looking at the spread, realising that the price that you see when you’re looking at the price is really just the closing price, or the…

Tony  1:13:48

Or the last trade.

Cameron  1:13:49

The last trade, yeah. But when you look at the spread of what people are willing to buy and sell at, there’s always a big range. When you go in at market, the trench of shares that were available at that price may have been gone by the time you get in there and you’re getting the next best deal. Yeah, I stopped worrying about it.

Tony  1:14:08

Yeah, very much so, I agree. Especially for liquid stocks. It might be a bit different if it’s a really small cap illiquid stock, you can move the market around, but for big liquid stocks just execute, I execute at market.

Cameron  1:14:19

And if it’s a stock, I mean, that where a couple of cents is going to matter/make a big difference between whether or not you buy it or don’t buy it, maybe don’t buy that stock. Like if a couple of cents movements going to make a big difference to you then buy something else, maybe.

Tony  1:14:35

Good point, Cam. If you like Macquarie group, if it keeps dropping and it’s only a few cents above its sell price and you put that market order in, you don’t want to buy it and then have to sell it straight away. So, just be careful of that.

Cameron  1:14:46

After hours. I’ve been reading Three Crooked Kings by Matthew Condon. You ever read that?

Tony  1:14:53

I haven’t, no. Matthew Condon the journalist?

Cameron  1:14:57

Yes, it’s the story of Terry Lewis and the corrupt Queensland Police Force and politicians in the good old days. It came out in 2013, so it’s not new, but I was having a conversation with somebody recently about this and realised I didn’t really know a lot about that story. So, I’ve been drilling into that. The corrupt cops of Queensland, fascinating stuff.

Tony  1:15:23

Yeah, lived through it all. It was a crazy time. I love Terry Lewis’s classic line when he’s in the doc and said, he was asked “how did he make so much money?” He said, “I’m a very good punter.”

Cameron  1:15:36

For people outside of Queensland, it’s you know, there was this whole, I think it started with the death of a madam, the whole thing that fell apart. Yeah, Shirley Brifman. The blurb for the book says “the shocking True Story of Queensland and how society was shaped by almost a half a century of corruption at its core as Terence Murray Lewis deposed and jailed former police commissioner. From his entry into the force in 1949, Lewis rose through the ranks becoming part of the so called Rat Pack with detectives Glendon Patrick Callahan and Tony Murphy, under the guiding influence of Commissioner Frank Bischof. The next four decades make for a searing tale of cops and killings, bag men and blackmail, and sin and sleaze that exposes a police underworld, which operated from Queensland and into New South Wales. This gripping book exposes the final pieces of the puzzle, unearths new evidence on cold cases and explores the pivotal role that whistle-blower Shirley Brifman, prostitute and brothel owner, played until her sudden death.” So, good stuff.

Tony  1:16:43

Wow. Yeah, it was a tumultuous time, all right. There were illegal casinos where everyone knew where they were. You had the whole Bjelke-Peterson dimension to it and Russ Hinze and all of that, too. So interesting. Have you ever seen that-it’s not Queensland related, it’s New South Wales related, but similar sort of thing? Have you seen Blue Murder, the series that Richard Roxburgh sort of made him a bit of a name?

Cameron  1:17:09

Ah, loved it. I’ve watched it twice over the years. When it first came out, whenever that was. It was fairly early days. And I recall like, like we’re used to that kind of gritty, violent television now, but it was very early on they did that. I remember it just being brutal compared to most stuff on TV back in the day.

Tony  1:17:29

Yeah, similar sort of story, yeah. Corrupt cops. Who’da thought?

Cameron  1:17:34

What have you been doing for entertainment by yourself down there without your family?

Tony  1:17:40

Yeah, just, well playing a lot of golf which has been great. So, Billions has started up again. The latest series they’re releasing episodes by week. So, that’s worth watching, I enjoy Billions. Although, like a lot of these things, it’s, it’s a soap opera set in the world of high finance in New York, but it’s been lots of fun along the way. And I’ve gone back to House of Cards, so, I decided I was going to clear out my Netflix list that I’ve had sitting there for years and hadn’t gotten around to watching and been going back to season three of House of Cards, which is, it’s amazing how much content they produced. Its taking me ages to go through the seasons. And I’ve still got a couple to go.

Cameron  1:18:19

This is the US version, not the UK version?

Tony  1:18:22

Yes. I remember seeing the UK version when I was a kid, but the US version definitely, the Kevin Spacey cancel culture event in the end…

Cameron  1:18:33

Yeah, the series kind of, just kind of evaporated into nothing after they had to get rid of him. But I tell you what, I rewatched the UK version after the first US season, I think, and I got a tell you, I think the British season, British version, is better. Stands up, is really great. Very, very obviously Shakespearean and yeah, really well done.

Tony  1:19:00

Francis Urquhart with his “f you” cufflinks.

Cameron  1:19:04

Yeah.

Tony  1:19:05

Yeah, it was good. And Stings wife I think was in it. Or not Stings wife, who’s the, Knopfler’s wife was in it.

Cameron  1:19:11

Oh, okay. And you’ve had Wordle down on your after-hours list for the last couple of weeks. What? What’s up with Wordle?

Tony  1:19:19

Do you know what it is?

Cameron  1:19:20

I read an article about it, how it’s taking the world by storm after I saw you put it on there. And I was like, what is it? Like a, like a Scrabble thing? What is it?

Tony  1:19:29

Like yeah, sort of. I get up every morning and do it, Jenny put me onto it. So, it’s an interesting website. Like there’s no ads, there’s no subscription, you just click on it. And then every day you get a new puzzle to solve. And it’s five letters, you have to enter five letters, and then it will tell you which letters occur in the word it’s thinking of and you have to guess what it is by putting in another word, and it will tell you which letters of those in that word are in the one it’s thinking of and you’ve got to try and do it in at least, with the least number of goes. And then it just locks you out for 24 hours and you get another go the next day. So, its, yeah, you get up, I get up every day and do it. It’s a lot of fun.

Cameron  1:20:06

I read that some guy developed it for his girlfriend or his partner or his friend or something just as a, some sort of COVID distraction for them, and it sort of blew up and it’s become this global phenomenon.

Tony  1:20:19

Yeah, it’s, it’s nice to wake up to in the mornings, to the new Wordle that comes onto your phone.

Cameron  1:20:24

Alrighty, then. Well, that’s the show for this week. Thank you, Tony. When do you head back to Sydney? Do you know yet?

Tony  1:20:32

Oh, another week at least. I’m just waiting to hear about some renovations that are happening up there. They were supposed to have started by now, but there’s been some hold ups. So, they’re meant to finish at the end of next week, they’re not big ones, but after that. So, probably another two weeks, maybe.

Cameron  1:20:46

Right. Okay, good stuff.

Tony  1:20:48

Jenny and I were talking today and she said don’t come back. There’s COVID in the apartment block, there’s people, young people in groups walking around without marks on. It’s just, yeah, very distracting. And down here’s paradise. I went and played golf yesterday – so The National has a fourth golf course closer to Melbourne, its about an hour’s drive from here back up in north Frankston which is a very different course. These courses down here are buffeted by winds and there a couple of links courses and a hills course. And then the Long Island course in Frankston is more of a sand belt type of course. I went and played it yesterday and I had the whole course to myself, it was really great. It was a beautifully kept course, I hadn’t played it in about five years. And then I got off the course and one of the staff members came out of the pro shop to have a chat, and we’re both sitting there with our masks, and he said “how was it?” And I said “oh, just fantastic” and he said, “I’m really surprised you got round,” and I said “why’s that?” He said “look, it’s 35 degrees” so it was just really hot. I was wilting on the last couple of holes, but gee it was nice. It was just so, so good to go for a long walk on a beautiful golf course. It was lovely.

Cameron  1:21:51

No one to see you when you pick your ball up out of the rough and throw it back on the green and tap it in the hole.

Tony  1:21:58

True. Well that’s the beauty about golf, you have to self-report. Again, it’s, it’s a revealer of your personality, your character. I play with some CEOs who can’t add up, that’s for sure. All right,

Cameron  1:22:13

Thank you mate. Have a good week.

Tony  1:22:15

Thanks Cam. Okay, you too. Bye.

Cameron  1:22:20

The QAV Podcast is a production of space craft publishing Proprietary Limited authorised representative of AFSL 520442 AFS 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.