QAV 511 Club

Cameron  00:03

Welcome back to QAV, TK. This is episode 511. We’re recording this on the 22nd of whatever month it is, March 2022. How are you?

Tony  00:18

Yeah, good.

Cameron  00:18

Hurt your back playing golf-you hurt your back somehow?

Tony  00:21

I did.

Cameron  00:22

Told you. Golf’s not good for you, man. It’s bad for your health.

Tony  00:26

You know what, I played yesterday because like, yesterday and today and Sunday are the only three days in about the last month it hasn’t rained or is going to rain in Sydney. So, had a back massage on Friday because I hadn’t had one because I was away for a long time and I thought I should get one. And sometimes they can trigger some problems. So, it was a bit sore on the weekend, bit sore yesterday before I went, decided to go, was motivated to go because I know if I don’t play yesterday I know I’m not gonna play for another week, at least. I came home with a sore back. Played with a nice Irish guy, got to the pro shop, all the way and I’m going “I don’t know if I can play today, I’m a bit sore.” Got to the pro shop, thought I’ll just, maybe I’ll play nine holes and see how I go. And they go “oh, we’ve got this guy visiting all the way from Ireland. Would you mind pairing with the him?” No, it’s okay. So, played the before 18. Which was great, he was a really nice guy.

Cameron  01:18

Oh, good.

Tony  01:19

Good guy. We became best friends. He was bitching and moaning that he it cost him 65 bucks to catch a taxi from his hotel in Darling Harbour to the golf course. I said “its okay, I’ll give you a lift home.” “Oh, that’s just really wonderful of you mate, I’ll buy a beer afterwards.” So, we had a few beers afterwards.

Cameron  01:35

Oh nice. That’s great. Look at you. You should be paid by the Australian Tourism Bureau. Did you slip him a QAV business card, Tony, and say, if you know, get into this, you won’t worry about the $60 Uber fare.

Tony  01:51

I didn’t, no.

Cameron  01:52

Okay. Well take care of yourself, because we had a wonderful dinner in Brisbane last week. Thank you to everybody who came along. It was a great night. But one of the topics of discussion was your health, Tony. And I think it was Ed Nixon who said, you know, he wants to learn everything that you know and be as good as you are before, you know, something tragic happens to you.

Tony  02:18

Was it a wake, or was it a dinner?

Cameron  02:21

I may be putting words in his mouth there. He did say, no, we were talking about, yeah, look, I said that’s my objective too. I, you know, “Tony could get hit by a bus tomorrow, or catch COVID, or whatever, we need to learn everything that he knows” before you pass off the mortal coil. You know, we need to do the transfer of the Dharma.

Tony  02:41

Yeah, well, right. But, there’s three years of it transcribed, so I’m not sure what more I can do.

Cameron  02:47

Ah, there’s always something new and you change the rules all the time.

Tony  02:51

Yeah, true.

Cameron  02:52

No, it’s good. So, thank you to everyone who came. All right, into the news. Hamish Douglas resigns from the Magellan board this week, Tony. Is that a big deal? I’ve read various-some new sources are going, “this is the end of an era.” Some are saying, “ah, no big deal. He’ll be back. He’s just taking some time off.” I don’t know. Resigning from a board of the company that you’ve been running for twenty-odd years sounds like a bit of a major step to me.

Tony  03:17

Yeah. I mean, I’m not sure. I think he’ll be back myself. He’s been under a lot of stress, been through a divorce. Maybe in six months or twelve months, I think he’ll come back. But yeah, I mean, just the whole Magellan story shows you, well, just what we’ve been talking about: if one person gets sick or gets stressed, then the whole thing falls in the hole. It’s key man risk, right.

Tony  03:38


Tony  03:38

And that book I finished reading recently about the UK, “Built on a Lie”, which was really good. And it’s the same sort of story, key man risk. He was really good for twenty-thirty years of investing, only buying blue chip companies, avoided the GFC, avoided the dot com bubble, all this kind of stuff. And then hubris got to him and he thought he could invest in biotech start-ups. And then that turned to liquid. And that was one thing he needed, was liquidity, and he didn’t have it because he couldn’t sell them. So, he got squashed. So, similar sort of story. It’s a shame it’s happening, but it does happen. Well, it’ll be like Warren Buffett when he passes away, and when Charlie passes away, what’s going to happen with Berkshire then? I mean, he’s doing everything he can to hand it over to some of his staff, but are people really going to treat your staff the same way they’ve been treating him? I think there’ll be an exit when it happens.

Cameron  04:33

I saw this. I lived through this, in part, at Microsoft when Bill Gates stepped away from the company after the government went after them — the antitrust stuff. And Bill initially stepped down as CEO and stepped down as president and then eventually left the board as well. But you know, it was it was very hard. Bill Gates had a certain aura about him, and people listened to Bill in a different way than they listened to Steve Ballmer, even. And it’s taken them a while, but I think they’re back on track now. I think the new guy has got a lot of respect and seems to be doing well. But yeah, it’s, the transition of founder like that is difficult. When Steve Jobs died, it must have been very difficult at Apple, but Tim’s obviously done a tremendous job in most respects.

Tony  05:20

Yeah. And I think both those people recognise the fact that the company had to be set up to survive after them. So, they do go through a period of decline, but they do, if their companies are good enough, they will bounce back and do even better.

Cameron  05:33

But, that aura of the Buffet, or the Gates, or the Jobs, Rupert Murdoch, you know, these guys, you know, they carry… It’s like Goodwill. We were talking about this last week.

Tony  05:43

Yeah, right.

Cameron  05:44

Not-tangible, intangible, intangible assets.

Tony  05:47

Intangible, yeah. Well, it’s exactly right. Because, there’s a trust in those people that because they’ve done so much, seen so much, that no matter what gets thrown at them, the company will come through, and they’ll come through. Takes a long time to build that up, that trust up.

Cameron  06:01


Tony  06:02

So, Hamish Douglas going is a big deal. Interestingly enough, it was kind of, a company called St. James’ Place which had a large stake in the Magellan funds, when it was pulled that was probably the end. It was also in the same position with this book I was reading in the UK, “Built on Lies,” same thing. They had a big stake in the fund there, and when things started to turn to shit, they pulled their money out which was the, you know, the death knell for the fund.

Cameron  06:31

It was Saint James’ Place, it was the same mob?

Tony  06:33

Same one, yeah.

Cameron  06:34

They’re not shorting these organisations, are they?

Tony  06:40

Yeah, well, possibly. I doubt it, betting against themselves.

Cameron  06:43

Sound like an old Kerry Packer play.

Tony  06:46

I don’t know about Kerry Packer. But yeah, I mean, it’s an interesting scenario, isn’t it? They could be, you know, slipping photos to Hamish Douglass’s wife, starting the divorce because they shorted the stock. But no, that’s not going on.

Cameron  06:59

Allegedly. You posted a link to our Facebook group the other day about Russia spiralling towards a $210 billion default nightmare. That was the topic of big conversation at the Brisbane dinner last week. Talk us through how you understand this.

Tony  07:17

Yeah. So, Russia, like almost every other country in the world, has has debt flows. And, they’re in a bit of a jam at the moment because the debt that they’ve taken out, which is mainly to investment bankers in the US — and perhaps even the government in the US, I’m not familiar with the exact bonds that they’ve been holding. But, as a rule, or an obligation associated with those bonds, they have to pay the debt when it’s due in US dollars. And of course, now with the sanctions are placed on Russia, they can’t do that. So, they said “we’ll pay it in Rubles.” But that’s a breach of the bond, so they have thirty days to come up with US Dollars or they default. And, you know, a $210 billion default is quite large even for Wall Street. Yeah, so I’m following the money here. I’m guessing that the big banks on Wall Street aren’t going to like that and they’re going to be putting some pressure to play somewhere, perhaps on the US government, to try and get things tied up with a neat bow by the middle of April, so they can get their money back. So, that’s one dimension of it. And that’s me drawing a long bow and I don’t like predicting things, but there’s certainly some pressure of money behind what is going on there. But the other side that that really, I think, was probably the lesson for QAV listeners was that the rating agencies had raided these bonds highly, you know, double A, double A plus, or even higher, all the way through, you know, safe. Bet your houses, low money to Russia, no problems, they’ll pay it back guaranteed, right? And, you know, 140,000 troops mass on the border with Ukraine. “No, no, they’re still rated solid gold, not going to be a problem.” And now they’re worth, well when this article was published, they were worth 20 cents on the dollar. I understand that no one can foresee what has happened with any degree of certainty, but these guys should have been taking risks into account with their ratings, right? They should have been saying “okay, it was triple A, but now there’s something funny going on with the Ukraine. Let’s downgrade them a bit.” But they never did, right up until the first shots they were still saying that these were solid gold rated debt instruments and they weren’t. And it was the same thing during the GFC. The ratings agencies, soon as one of them listed. So, they were all unlisted companies in the past and they were known for being independent, objective — which they had to be because they’re rating debt securities, right? So, they had to be independent and objective. As soon as they listed, and as soon as one of them listed, I think was Moody’s went first, but who knows? The other ones had to list as well. And then they became beholdent to the people that they were rating. You’re, I don’t know I’ll just pick one, Citibank, and you’re putting out a bond issue and you bring up Moody’s and you say, “hey, we’re putting out this bond. What are you going to give us? A triple plus? Yeah, we’ll go across the road, see what Standard and Poors will give us. And by the way, we own 5% of you guys so let’s get a better deal.” So, it became heavily corrupted. And I even remember, after the GFC, they did a big investigation into the causes and they named the rating agencies as that the problem. And I remember one of their ex-employees giving testimony to say, “yeah, before we listed we used to, you know, someone would come up with a big debt issuance. We’d get a pizza, we’d stand around the boardroom for half an hour, like, reading through all the small print, understanding, and we’d rate it. Now, someone’s putting out a debt instrument because we’re listed and we have relationships with them, I get a phone call from the sales clerk saying it needs to be a triple plus.” You know, it’s like, the salespeople were driving the company because they had to keep the revenue top line growing, which was good for their shareholders, and it became a big convoluted snake eating its tail type scenario. So, no, I don’t have much respect for the ratings agencies, and to be honest I don’t think people out there should. They’re conflicted.

Cameron  11:09

And what did you call them in the Facebook post?

Tony  11:11

Oh, they’re flogs. Absolute flogs.

Cameron  11:14

And that is the title of this week’s episode: “Flogs, they’re a Bunch of Flogs.” Well, that leads me directly into the next story I wanted to talk about, which was Cory Doctorow’s article about asset manager capitalism. Did you have a read of that?

Tony  11:32

I did. Yeah. I was surprised. I mean, Cory Doctorow, well, my knowledge of Cory Doctorow is that he’s a science fiction writer.

Cameron  11:38

He is, but he’s a lot more than that, yeah. I mean, he’s been one of the leading technology activists for decades around fighting against DRM and fighting against Facebook, and technology standards. He’s a nonfiction writer as much as he is a fiction writer.

Tony  11:58


Cameron  11:59

But I’ve read, I mean, I’ve read a number of his fiction books which I really enjoyed. So, you read this article on — I subscribe to him on Medium, read this story the other day — we’re living in an era of extremely weird capitalism. “American capitalism is usually described as a system in which top managers are rewarded with stock options, which incentivizes them to maximise returns to shareholders who are so dispersed that they struggle to control companies by voting their stock.” But then he talks about how we’re now in the era of asset manager capitalism as a corporate governance regime, which was a paper that came out from Max Planck Institute, author by the name of Benjamin Braun. “What’s asset manager capitalism? It’s a market dominated by the asset managers from three giant index funds, BlackRock, Vanguard and State Street, along with a few other giant funds that roll up pension funds and other funds, vast family fortunes, managed funds, etc. These funds are giant. Between them, they own an average of 22% of every S&P 500 company,” every S&P 500 company!

Tony  13:04


Cameron  13:05

“They don’t just own a big stake in the whole sector, like Warren Buffett buying a big chunk of all four airlines, they own significant stakes in every industry; not just airlines, but hotels, resorts, rental car agencies, etc. But even though they have a lot of power, for many companies an index manager is their largest shareholder, they are weak in one critical respect: an index fund can’t walk away from their investment. If you’re tracking the S&P 500, you’ve got to own the piece of nearly every S&P 500 company. This is super extra weird.” So, he goes on to talk about, for listeners, you know, in theory, these big stakeholders can use their shareholding and their seat on the board to threaten the company to do this or that, or change their practices or whatever. These guys can’t sell because they’re obliged to own these massive stakes in these companies.

Tony  13:07

Yeah, because their index managed funds.

Cameron  14:06

Right. And also, they own a massive stake in everything. So, like the entire economy is sitting with these guys who can’t really be activists, they just hold it. And so, he talks about some of the issues with that, which I found really enlightening and interesting. I know you’ve talked about some of these issues in the past too, about these index funds and holding large stakes of all these businesses and some of the implications of that from an investing perspective. What did you take away from Cory’s article?

Tony  14:36

Yeah, it’s very interesting. I mean, again, this is like a two-phase piece because the leaders of those three companies, BlackRock, etc., have come out and said they’re going to start applying pressure from an ESG perspective on companies — but they don’t. I mean, Rear Window in the Fin Review every now and then has a go at them because they still vote with the companies on when there’s, like, a shareholder activist’s vote about climate change, for example. They’ll say that they’re pro for it, but when the vote comes down they just vote with management. And because they’re index funds, they own shares in gas and coal and oil and all those things. And tobacco — well, there’s no tobacco in Australia, but there is in other parts of the world — liquor, gambling, all those kinds of things, armaments manufacturers. So, I mean, they’re just basically passive capital for companies. And it’s interesting, that number you said, 22%, last I saw it’s about 13% in Australia, and I’m not sure if that’s just the index portion of ETFs but it’s probably the whole market, so some active people in there as well. But yeah, I mean, there’s a whole heap of issues here on the investing side; there’s what happens when somebody who owns 13-20% of the market sells, there’s going to be a big step down in the share price. Now, if it’s an index fund, it’s only going to happen if it moves from the ASX 200 downwards, for example, but that’s a big issue. But as you’re saying, from the corporate governance side, these people are passive, they vote with management. It’s basically giving top companies a free kick, isn’t it, to enact whatever policies they want to. Because if you want to vote against management, you’ve got to not only have a majority, but the majority has just been increased by 20%, you’ve got to basically get a majority. If they’re 20% is voting with management, you’ve got to get a lot of votes to overturn something that management wants to do if you disagree with it.

Cameron  16:23

And according to Cory, looking at these companies in the US, as you said, they’re very passive. He says, “between 2008 to 2017, four thousand shareholder proposals were tracked by the Russell 3000 Index. None of them came from a big-three asset manager.”

Tony  16:42


Cameron  16:42

So, they’re not trying to change these companies at all.

Tony  16:46

And they would argue they work behind the scenes. So, they pick up the phone and say, “listen, I own 20% of you, you’re doing this.” There’s probably a lot of that going on, too. So, I think it’s a two-way street in this circumstance. But I haven’t heard much evidence of that going on. I haven’t heard of any evidence of Black Rock, etc., influencing a company’s strategy to suit Black Rocks needs at all. Heaven help us if it ever does come to transpire that a government wants to turn against those big institutions. I mean, it’s going to be a, they’re going to be fighting a lot of muscle when they’re that big, and have that much influence. I mean, every company CEO is going to be opposed to it, to whatever change the government… I think if a government comes in and says, “well, we’re now going to bring in a 20% carbon tax.” And Blackrock says, “oh, no, you’re not.” You’ve basically got every corporation in Australia, in the US and UK, probably, in Europe, fighting against that.

Cameron  17:42

Which they probably would be, anyway. But, still, unless they’re a green energy company or somebody who stands to benefit.

Tony  17:49

Yeah, but this wasn’t, I mean, the point I’ve made in the past is this wasn’t there when I first started investing, right? Sure, there were managed funds; the people who came before Magellan, you know, you’re Platinum’s, those kinds of people — Bankers Trust — they had large funds, but they were nowhere near as large as what they currently are. And with the rise of index funds, they didn’t have the same rules. So, if Bankers Trust didn’t like what the company was doing, they’d sell the shares. Now, Blackrock can’t do that if it’s marketing itself as an index fund to its customers, they’ve got to hold the shares. So, it’s a very different game. Apart from the fact it promotes the status quo, so it’s going to be hard to see change from an ESG side of things, corporate governance side of things, I think it’s going to also play out in any sort of market route where you see companies start to drop out of the index. They’re going to fall even heavier because of that.

Cameron  18:40

Because all these big asset managers are going to have to sell their steaks, and it’s just going to be a dump.

Tony  18:45


Cameron  18:46

All right. Well, anyway, I found that interesting when it crossed my path this week. Copper is a buy again, Tony, it was a sell for about five minutes.

Tony  18:55

Yeah, it wasn’t long was it?

Cameron  18:57

And it stuck its nose up again.

Tony  18:59

It is skirting it’s sell line. But yeah, it is still going up, and it’s turned up again this week.

Cameron  19:03

So, to everybody who sold their copper stocks last week when we said copper was a sell…

Tony  19:09

You can buy them back.

Cameron  19:11

Yeah, you can buy them back.

Tony  19:12

And look, this has been an unusual market, not just for copper. But you know, I’m going to do a pulled pork on Macquarie group soon, and that was a stock I held and sold. It’s now back on the buy list about a month later. So, it’s a bit of an unusual market at the moment. It’s been dipping, it’s been coming back, it’s been going sideways. There’s a lot going on outside of the market which is affecting it, and I think, you know, when things start to clear up a bit the market will start to get a bit firmer. But at the moment it’s shifting sand.

Cameron  19:43

You think things are going to return to normal, Tony?

Tony  19:47

Well, who knows? I hope so. And normal for the market isn’t so much that there’s a lot going on in the world, it’s how predictable is what’s going on. And so, the markets getting comfortable with the fact that powers in the US are saying that interest rates will rise and there’ll be five or six rate rises this year, the market in Australia is kind of predicting there’ll be rate rises here. So, it’s not so much that the interest rates are rising, it’s the market getting to grips with being able to predict what’s going to happen. Eventually, something will clarify in Europe and the war in Ukraine will end or ramp up or whatever, and the market will get comfortable with that. And with COVID, and all those kinds of things — probably already is comfortable with COVID, I think that’s probably a mistake. But anyway, it’s the fact that there’s a lot going on and it’s difficult to predict that’s the problem with the market. There’re always things going on. I mean, the stock market went through the Cold War, went through all of the Vietnam War, Korean War, blah, blah, blah. They continued to trade, it’s just how predictable can they be in putting their money into the market and getting it back with interest in the future.

Cameron  20:47

So it’s predictability that matters?

Tony  20:49

Yeah, certainty. But yeah, I was just thinking — Jenny and I were talking about this last night; it’s just, we’re handing over a crap world to our kids. I mean, with COVID, and with difficulties in buying houses and interest rates rising, and whatever’s going to happen in Europe or China, all those kinds of things. I mean, we grew up with those kinds of backdrops, but they were different, you know. The Cold War was different and the Vietnam War was different. But yeah, it’s just, we had a good run there I feel for at least a decade if not more, where there was a lot going on, but doesn’t seem to almost as big as existential as it is now.

Cameron  21:26

Yeah, I’ll talk about it in after hours, but I, last week, I’ve been reading John Mearsheimer’s book, The Tragedy of Great Power Politics that he wrote in 2001, before 9/11, before the Iraq invasion, the Afghanistan invasion, that kind of stuff, but ten years after the end of the Soviet Union. And, you know, this is the book where he expounded upon the theory of offensive realism, as he calls it. You know, he starts the book by saying, “you know, there’s a lot of people saying this is a new era, the End of History as Fukuyama says, the end of the Cold War and the Soviet Union and Bill Clinton had been saying it’s going to be this nice future where everyone gets along and cooperates and rainbows and flowers and Kumbaya and unicorns, and all this kind of stuff.” And he was saying, “yeah, I don’t buy it.” This is why it’s a realist view of how the great powers operate. And the offensive part is because offence is the best form of defence. So, he said, like, bottom line is the states and the great powers don’t trust each other. And for good reason, they’re always lying to each other and their view of the world is only the strongest survive. And so they will always be trying to take from each other and trying to get on top. He quotes Immanuel Kant, basically saying the best form of achieving perpetual peace in the eyes of most kings or nations is complete hegemony. That’s the only way you can have perpetual peace, is if you control everything. And he’s saying, yeah, that’s basically how these guys, how, you know, states think. They have to, because if you close your eyes, you’re worried that the other guy’s gonna sneak up behind you and hit you over the head with a mallet.

Tony  23:14

That’s certainly the autocratic view isn’t it, Putin controlling the media and Xi Jinping controlling the media and all that, it’s hegemony.

Cameron  23:22

But it’s the same here. I mean, the blanket, one-sided narrative that we’re getting in the West is really no different in for as far as I can tell. It’s the same blanket narrative

Tony  23:35

Yeah, we’re the good guys, they’re the bad guys, yeah.  And we’ve talked about it before, it’s that red/blue thing in your brain that’s been there since this start of evolution: our tribe good, tribe over there bad.

Cameron  23:46

And people like us are going “well, you know what, we’ve done some bad shit and those other guys, they have their good points.” We’d be pushed into the lava pit, you know, very quickly.

Tony  24:01

“A little to the left,” yeah.

Cameron  24:04

But I have a podcast!

Tony  24:08

Probably the only bit of insightful journalism I read this week, I forget where I read it, but someone pointed out that Angela Merkel is gone, and Russia, the relationship with Russia changed almost immediately after she left — or the relationship between the West and Russia changed. And, you know, the new guy who’s in Germany has started building up his military again, he’s on the offensive with Putin, whereas Merkel just kept managing Putin. She’d throw him a bit of trade, then she’d put some sanctions on him when he invaded Crimea, then she’d trade with him. So, she was, you know, dancing with him, which seemed to work because she was open, you know, open to discussion and transacting. Whereas, the new guys just “nup, walls are up. I’m going to start building my military again. I don’t care what Putin thinks.”

Cameron  24:54

More of a hardliner. Anyway, back to investing. GRR, Tony, now a star stock.

Tony  24:59

Yeah, just again, this is one of the things I’ve spoken about which I enjoy, is when we find something on our buy list and then Stock Doctor a bit later gives it a top ranking, a star stock ranking, and GRR was one of those this week. So, that’s good. It means that its score goes up in our buy list as well.

Cameron  25:16

MQG is back on the buy list, as you mentioned, and BSL and COG.

Tony  25:23

BlueScope Steel. Yeah, I mean, I think things are settling down after the reporting season now. We’re starting to get a lot of the figures are in Stock Doctor now, there’s still a couple missing, but a lot are in. And this is an example of what I was saying before, Macquarie, BlueScope and COG have all been on the buy list in the past, even in the recent past. They’ve gone off, they’ve dipped down in the first quarter of this year, because everything that’s going on in the world, and now they’re starting to come back up. Which is, you know, it happens. It’s kind of a sign of a volatile market. But yeah, I mean, I sold out of Macquarie group a little while ago, and now it’s back on the buy list and it’s a big stock, I’ll probably buy back into it at some stage going forward.

Tony  25:59

Yeah, I had it and sold it too. You’ve got some interesting thoughts about petrol and EVs, Tony.

Tony  26:05

Yeah. So, what struck me was, I mean, there’s been a lot of articles comparing our current economic environment back to the 70s when there was a last big petrol shock and the price of gasoline went up a lot because of OPEC. I was in my early teens, then. And I remember at the time that suddenly there was this this whole flood of new Japanese cars in the neighbourhood. We went from people driving me Monaros and Valiant Charges, which were big V8 gas guzzling cars, to bats and 180Bs and 120Ys, and well, my first car was a Ford Escort, a little four-cylinder thing. So, the fact that petrol went from being reasonably freely available and reasonably cheap to being expensive, meant the whole car market shifted to meet that change. And I think it’s probably, again, not wanting to predict anything, but I think with oil being priced so highly –which I think is probably going to be a longer-term thing more so than what people think, I know people are saying it’s because of Ukraine and the sanctions on Russia, and that’s taken 6 or 7% out of the market, and those things are all true. But there’s also a fair bit of analysis around there now saying that because of pressure on banks not to loan to oil companies, because of oil companies themselves not getting access to capital, there’s a lot less exploration going on in the oil industry. So, typically, what happens with any of these resources is as soon as the price rises, the market gets saturated with new entrants and they soak up that price rise. And it’s happening a little bit, happens with the oil shale producers in the US in particular, but you know, there’s a fair bit of analysis saying the price is going to stay high going forward, because people are viewing it as an area they don’t want to invest in which constrains your ability to find new fields. So, anyway, so I think this is probably around the time when electric vehicles might get a big push into the market from the big car manufacturers, and probably gain a fair bit more traction than they have, because petrol is expensive.

Cameron  28:09

So buy Tesla, is that what you’re saying, Tony?

Tony  28:12

I would never recommend Tesla. They’re great cars, but remember that there’s a difference between the product and the company, or the product and the investment. No, my personal view for what it’s worth, and it’s not worth much when it comes to the car industry, is that just like now the, you know, the Fords, the VWs, the Volvo’s, the Nissans, the Toyota’s of the world are still going to dominate the EV market. Tesla will have a place probably at the premium end, it will probably compete against the BMW and Mercedes Benz’s as I would expect, rather than the mass market.

Tony  28:44

So, from an investing perspective, how does this come into play?

Tony  28:48

Well, it doesn’t from an investing perspective. We don’t have any car manufacturers in Australia, so we can’t really invest. Overseas, I mean, who knows? I don’t like investing in thematics, I just think it’s going to be a change we’ll see in society.

Cameron  29:01

We do have some guys here that make chargers for electric cars, though, there’s a mob out of Brisbane that’s been getting some media play recently. Can’t remember their name.

Tony  29:10


Cameron  29:10

Tritium. Yeah, that’s it.

Tony  29:12

Well, again, potentially, but they wouldn’t be a QAV stock. I mean, they’re a startup. They won’t be producing any sort of positive cash flow anytime soon, I don’t think.

Cameron  29:19

So, no real implications for us but just interesting by the by.

Tony  29:24


Cameron  29:24

Tony’s prediction corner.

Tony  29:28

Asterix, not a prediction.

Cameron  29:31

“We don’t predict,” yeah. Talk to me about KRM.

Tony  29:34

I promised to do a pulled pork on KRM last week, couldn’t do it. This week, can’t do it still. The figures still aren’t in Stock Doctor for its latest results. So, I’ll try again next week. I will do it, I know someone’s requested it so I’m not trying to duck it. You might actually contact Stock Doctor and see if we can get the figures loaded. Happy to do a pulled pork on the current figures, but they’ll probably be out of date as soon as we do something, right. I’m inclined to wait a bit.

Cameron  29:58

So, you’re going to do Macquarie instead.

Tony  30:00

Yeah, so if I can do that now. Macquarie, people will be familiar with it. It’s a large-cap, I’ll call it a bank stock. It’s far bigger than a bank stock. It started out as a bank, though, originally was called Macquarie Bank when it first started which is how I remember it. Got into stock broking, and I remember at the time that I was first getting into investing, the retail brokerage reports for a Macquarie were probably the best in the market, they were always really good. And it became more of an investment bank over time, grew with that. And now, it’s probably more of an infrastructure type fund. So, it has four businesses within its group. The Macquarie asset management, which I think would be about the biggest now, it probably is, is largely an infrastructure investor. And, so, that means that they’re big in toll roads, especially overseas; agriculture, so farms; what’s known in the industry as alternative assets, so, things you can’t buy generally listed on the market, like, I don’t know, wind farms or private equity buyout firms, that kind of thing; issuing debt, private debt issuance to fund company expansion or whatever. That’s probably the biggest part of Macquarie Bank now, and it reminds me a little bit more of Berkshire Hathaway than it does of a normal bank. So, if you forget the listed investment side of Berkshire Hathaway, Warren’s been trying for a long time to buy into infrastructure like assets that have high barriers to entry and predictable cash flows, and oftentimes government regulated cash flow. So, a big part of Berkshire Hathaway now is their rail business, Burlington National Rail, and companies like it, and also their power business. So, they’re two big parts of Berkshire Hathaway, and I think Buffett’s attracted to those because they require lots of capital, so he can invest the money that he has, the cash that he has, but they’re also in it for the long term. You can predict out and say that, “I expect that the railways will generate five or 6% growth year on year, will always be profitable, will always operate even in times of downturn because they move freight around internally in America,” all those kinds of things. Same with the power company. They’re largely blue-chip long-term investments. And I think Macquarie’s sort of getting into that market now, it likes to invest in infrastructure assets, often, or probably always, unlisted. It likes to throw capital at it, because it has lots of capital, it likes the fact that they’re almost like an annuity type of investment. So, when they buy a toll road, they know that they’re going to get tolls for the next twenty years. They know that they’re going to be tied to inflation, all those kinds of things. So, that’s now a large part of what Macquarie group is, probably the predominant part. But it also has some other side, it has the banking and financial services side. So, it does operate a retail bank, does hold a banking licence in Australia, it does provide-lends money to people and to companies just like a normal bank does. It also has Macquarie commodities and global markets, which is another division which provides people with the ability to invest overseas, transact overseas and trade in commodities, so it operates a commodities exchange. And then Mac Capital, which was, I guess, the traditional investment banking side of things. So, if you wanted to IPO stock, it would help you do that, for example, that kind of stuff. So, that’s pretty much what Macquarie group is. The reason for going through that in a detailed way is just to point out to people that Macquarie is much more like a large super fund or Berkshire Hathaway then perhaps the sort of view that people have in their mind, and the other side of the Macquarie which is investment banking and retail banking. They’re still there, but not as dominant. Anyway, to go through the numbers, it’s a large, very large-cap stock, its ADT is $155 million. So it’s, it’s huge. It’s, I’m doing this analysis based on a share price of $195. That’s rebounded over the last couple of months, it got down to being a sell somewhere around in the sort of 188 type region, I think from memory, but it’s rebounded from there. Even at this current price, it’s 87% of the consensus target, so it’s still seen by the market as having some upside from here. It gets a point on our buy list for that. Stock Doctor rate it as both a star growth stock and an income stock, so we’d give it one and a half points for that. But I just also want to highlight one more thing, I did notice when I was doing some research that Macquarie Group have downgraded their dividend guidance going forward. So, I think from memory they were telling people that they would pay out between 60 and 80% of their profits as dividends, and they’ve dropped that now to between 50 and 70%. So, it doesn’t seem like a lot, but what that tells me is they’re going to focus on investing for growth rather than paying out dividends. Whether or not that means it still retains it star income stock, it’s up for Stock Doctor I guess. But, the yields currently just over 3%, 3.12%, so we don’t score it on the QAV buy list as suiting our dividend needs. But it’s not a bad yield, but it’s below our expected return. The financial health is strong and steady as you’d expect for a Star growth stock. It’s Pr/OpCaf is low, which is why it appears on our buy list. It’s just over 2.8 times, 2.85 times, operating cash flow to price, but it has a PE of 20. So, again, it’s one of these stocks that throws off a lot of cash, but then the cash gets used up by the time it hits the bottom line. Its price is greater than our IV1 and IV2, so it doesn’t score for those. And similarly, the price is above, well above book value and book value plus 30%, so it doesn’t score for those. It does have forecast growth of 18%, though, which is good, in earnings per share, that’s from the analysts. But because the PE was 20, growth over PE doesn’t hit our hurdle of 1.5. It’s 0.88 instead, so we don’t score it for that. Even though management do have a reasonable shareholding, I mean, it’s such a big stock the we don’t score it for the board holding enough stock. And it certainly no longer has a founder-director. This is one of the companies that did have a founder-director back in its heyday, but those people have retired and left the company now. In terms of the manually entered data, it doesn’t have a record low PE for the last three years. It does have a new three-point upturn even though it was on the buy list and went off, it’s now come back so it scores for that. It doesn’t have consistently increasing equity, so it doesn’t score for that. So overall, the quality scores kind of on the low side, it’s 54%, but the QAV score is 0.19, so definitely be driven by that high operating cash flow that’s coming in.

Cameron  36:31

0.19, that’s pretty good for a massive cap like this. So, good opportunity for people to take a look at that if they’re looking for large-cap stocks. Alright, time for Q&A?

Tony  36:46

We missed one thing.

Cameron  36:47


Tony  36:48

Our Navexa portfolio. I’ll just briefly give an update on that. So, our portfolio is up for the week, 1.2%. Year today, it’s up 5.29 versus the market that we track, STW, it’s only at 1.3%. So, big out-performance this year. And all time, it’s been a good week for us, up 28% now versus the market, which is up 11%. So, we’re outperforming that quite well.

Cameron  37:15

Yeah, but that’s their per annum calculation thing. I looked at it this morning, and it said our total capital is like over 30,000. We started with 20,000, so we’re actually up 50%. But the way that they report it is some sort of weird per annum calculation.

Tony  37:33

Yeah, look, and I agree. So, looking forward to when they have the simple CAGR calculation in. I call out those numbers with that caveat, I don’t think they’re the right numbers, but the relativities I think are going to be the right ones because both the market and us are being calculated in the same way. No, we’ve grown our portfolio in a little over, or getting up to three years. I think it’s about two- and three-quarter years now, is up 50%. So, in fact, it’s less than that, because we didn’t start until September. So, it’s two and a half years roughly, which is going to be around about 21-22% in terms of how we do a CAGR calculation per annum., yeah.

Cameron  38:09

Doing good.

Tony  38:10

Yeah, but still outperforming the market by a wide margin.

Cameron  38:15

All right. Trent asks, “I’ve built a position of eight or nine QAV shares fairly slowly over the past year or so. I am now in a position financially to fill up to the QAV recommended amount of shares; 15 to 20 companies. Do I do that tomorrow with the highest on the list or do I take my time?”

Tony  38:36

Well, Trent, there’s a lot of questions I want to ask you about this, but I’m going to assume them. So, if it was me, so I’m assuming that you’ve got eight or nine QAV shares and you have some cash. So, my advice is, yeah, just go ahead and buy with the cash. And this is not, I’ve got to be careful here. I’m not giving specific advice to Trent. If I was in a situation where I was starting a new portfolio, I already had eight or nine stocks and I had the rest in cash, then I wouldn’t, I wouldn’t hesitate to go out and buy the other seven to ten stocks as soon as possible. I don’t like sitting in cash. If you sit in cash for too long and the market has a big jump, you’ve missed out on it. But I don’t know Trent’s circumstances. He may, what he might be saying as well is that he has other stocks, should he sell those and buy the QAV ones? And again, I tend not to. I would three-point trend line sell the other ones when they fall due, or rule 1 them, and then buy QAV stocks as replacements. Simply because if they’re going up, why sell them?

Cameron  39:35

So, according to QAV theory you would, you know, if you had cash, you would invest that cash. So, we don’t know Trent’s circumstances, see a financial planner before you make any investing decisions Trent, but according to the Bible you want to be fully invested at all times.

Tony  39:53


Cameron  39:54

Thank you, Tony. Thank you, Trent. Allison asks, “hi Cam. When Tony gets a sell signal, presuming he gets intraday notifications, does he generally act on it immediately or watch it until the next day? And an adjunct question, has Tony found that there’s a better time of day to buy or sell?” For the first question I said to Allison, I think Tony’s playing golf in the middle of the day, so he’s not getting intraday notifications. He’s only going to see it when he sobers up at nine o’clock at night, after the 19th hole, few Negronis.

Tony  40:30

Hang on, you don’t sober up at nine o’clock at night.

Cameron  40:32

Nine o’clock in the morning? Yeah, the next morning when he sobers up and reads his emails, he goes, “oh, I guess I should sell.”

Tony  40:41

Well, funny story, even funnier than that. Stock Doctor sent me an email a couple of years ago and said “can you shut down some of these alerts, you’ve got too many. It’s actually slowing down our computers.”

Cameron  40:53

For real?

Tony  40:53

Yeah, well, I did have a long list because I wasn’t deleting them after I was interested in something. But also too, they were all set to intraday which means that Stock Doctor was always crunching in the background testing at, like, whatever time, like every five minutes or every minute even, as it crossed, and it was it was running up CPU time for them. So, I actually, just to be nice, I only get my emails now on a daily basis. I haven’t clicked the intraday notifications just to appease them.

Cameron  41:20

You crashed Stock Doctor, that’s great.

Tony  41:26

So, no, I just get an email at the end of the day which means I do have to wait until the next day to decide what to do. You know, the rule is if it crosses sell it. There have been occasions where I might wait a little bit, like if it’s just crossed the buy line but it’s been sort of going up and just touching it a number of times. So, I might just see whether it reverts quickly. But generally, I’ll sell it straightaway. In terms of the second question, when do I, is there a good time of day to buy or sell? Interesting question. I’ve been told that the pros trade in the first fifteen minutes and in the last fifteen minutes of a day. And by pros, I don’t know if that means day traders or investment funds or whatever. I don’t do that. I typically wait at least an hour from when the market opens so I can see what direction it’s going in. Because you know, if I did get a notice that Sandfire Resources was a sell, but it just crossed, I’d probably wait for the first hour to see if it came back or whether it continued down a bit. Generally, you won’t get a big fluctuation in that first hour but you’ll get a real clue for where the markets going for that day. So, I typically trade sort of mid-morning, but that’s not a hard and fast rule, it’s more just me waiting to see which way the markets gone after the first hour and whether that’s changed my intention. But otherwise, I will trade anytime during the day at all. I don’t find a good time or a bad time to trade after that.

Cameron  42:46

Alright, thank you. Max asks, “hi Tony. I like the idea of 3PTL commodity sells, but I think it’s crazy to be selling copper and gold stocks at the moment. Copper is a sell with gold super close, yet both are at near all-time highs. Even with a further 10% reduction in the current commodity price, the miners will still be making some serious profits. Am I missing something? Do you take high inflation into account? I suppose my point is if commodities trade sideways whilst at seriously high levels, I don’t think we should sell them when they eventually cross the sell line. They will still be super profitable at these levels.”

Tony  43:28

Yeah, look I can’t fault Max on his logic. However, I do know that the three-point trendline is a good judge of sentiment. I tend to agree with Max, I sometimes try and make a case for keeping something for as long as possible like gold stocks because there is so much going on in the world, and gold is a safe haven. But no, I will trade based on the three-point trendlines. If the gold price is high, just picking on gold here, and it’s going sideways, then I don’t know if it’s going to go up or go down. So, perhaps it is a good time to sell. You’ve sold at a high if it’s trending sideways for a bit and it’s crossed our sell line. So, that’s the first point I’ll make. So, we take a profit at the right time. Some of the other questions that Max has asked, do I take inflation into account? No, I don’t. I do take the exchange rate into account, so we talked about that on a prior show that I think gold breached the US dollar sell line and I went looking for the Australian dollar sell line because the Australian dollar was dropping, and the gold price in Australian dollars was still fine so I did hold because of that. Which is, you know, possibly me being in the Max camp and trying to hold gold for as long as possible, but also there’s a fair bit of logic behind looking at the effect of exchange rates on the gold price. And then the last question he asked is, even though gold’s trading sideways, aren’t the miners super profitable? Well, they are, but if the underlying commodity’s trading sideways they’re not getting growth and their share price is probably just as much driven by profit as it is by growth. So, and we’ve seen that with some of the gold stocks, they’ve been going sideways as well, and they often, well, they do track the gold price even if it’s not in lockstep. But broadly speaking, they do track the commodity prices. So no, I will use the commodity three-point trend line sells religiously with these things.

Cameron  45:13

Yeah, I mean, I get Max’s logic and it makes sense. But we have the sentiment checks there to, sort of, override our ability to logic ourselves into a corner, right?

Tony  45:26

Yeah. And to predict which way a commodity is going to go. I mean, I don’t know Max’s background, but I, you know, I’ve been doing this for thirty years and I can usually make a case for a commodity going up or down on the same day at the same time. So, I’d rather let the market tell me what’s going to happen with gold rather than me try and guess it or predict it.

Cameron  45:44

Like a good economist, you can make a case for anything.

Tony  45:46

That’s right. I should put out a shingle and sell both sides of the argument to the government.

Cameron  45:54

What’s that old story, I think it was, there was a Roosevelt or a Truman story. Asked some economist, Keynes or somebody, what was going to happen. And he said, “well, on one hand, Mr President, it could go up. On the other hand, Mr President, it could go down” and he said, “what we need is a good one handed economist.”

Tony  46:16

Oh, that’s good.

Cameron  46:17

Yeah. But getting back to Max’s question, like my understanding of sentiment in general, not just with the commodities, but when we’re looking at a stock, is a stock can be at the top of our buy list, check all the boxes, have a great QAV score, a great quality score, really great numbers. But if the sentiments going backwards, you’re like, “I’m out.” Like, “I’m not going to fight the sentiment. I’m not going to fight public opinion on this” right?

Tony  46:47

Yeah, I mean, like, this is not about me being right or anyone using the buy list being right. It’s about what the market thinks is right. It’s that old-again, harking back to an old story, I’m not trying to rate the beauty of the girls in the pageant. I’m trying to guess what the judges are gonna rate as beautiful of the beauty girls in the pageant.

Cameron  47:05

I thought you were just going to sleep with them all. That wasn’t the punchline to that story? No. Okay.

Tony  47:11

No. So, it’s the same sort of thing. Here’s our list of candidates, but if the market doesn’t like it, then what’s the point? We’re trying to make money, not be right.

Cameron  47:21

Yeah. And obviously, we don’t listen to the market most of the time. We don’t care what’s being hyped up, we don’t care what mood the markets in. We’re making our own decisions based on fundamentals. But that’s one of the things I have always liked and admired about QAV. You’re like, “well, yes, I’m trying to be smarter than the market. But, I’m not going to try and walk upstream in a blazing tsunami pushing me downstream,” right? There’s a certain point where you just go, okay, well, the markets obviously wrong, but it’s still the market.

Tony  47:53

Yeah. I mean, that’s one of the fundamental tenets of our investing and being contrarian is we know the market gets it wrong. Otherwise, they would all be buying the stocks we do. But, and that’s the nice side of it, we get to make profit out of that. But where we have a different point of view on when the markets going down, then you can’t fight it. There’s no point finding it.

Cameron  48:12

If there’s a crowd of a million people running towards you because they think the world’s ending and you know it’s not ending, you can try and push your way through the crowd of a million people but you’re probably going to end up being trampled to death. You’ll be right, but you’ll be dead.

Tony  48:26

No, exactly. So, what you do is you stand off to the side and you buy something else. And when they come running back and want to but it off you, you say “oh, yeah, thanks. Great.”

Cameron  48:35

You buy bottles of water for 10 cents and sell them for five bucks when they’re tired and hot running back the other way.

Tony  48:41


Cameron  48:43

Dave from Newy: “hi Cam. Hope you’re well,” thank you, Dave. Yes, I am. “Questions if I may.” You may. “Number one re: IMA, Image Resources. I know this was probably a three-point sell at some point, but for those that held on, is Tony able to comment on the current corporate action underway? My question is, if Tony was a holder, would he consider this a bad news sell? My summary of the situation: the Chinese minority shareholder, Murray Zircon, is looking to replace the majority of the board with their own representatives. Shareholders have been asked to vote on this at an extraordinary general meeting. IMA, some media reports and other sources, e.g. Hotcopper, are saying that this is a takeover by stealth. Once MZ take control of the board they may not act in the best interests of shareholders. Volumes are through the roof in the last week or so and the share price is butting up against five-year highs. Presumably, somebody is buying votes. I know it is counterintuitive to suggest a takeover is bad news, but given the method MZ is employing, would Tony consider the downside risk too high and take advantage of the bid on offer? There is another upcoming two cent — fully-franked this time — dividend in the mix to consider, too.”

Tony  49:59

Yeah, good question. It’s a good outline of the situation. IMA, first of all, congratulations Dave. The stock has just rocketed in the last little while, it’s doing very well. But IMA reminds me of a situation that’s occurred at Myer and occurred at Boral, the two sort of high profile cases I can think of, where someone’s come in, they’ve bought a reasonable stake, I think in all cases it’s around sort of 20%ish. And then they try and agitate for board change as a way of controlling the company, and then bending the company’s policies to suit them without ever having to launch a takeover or pay a premium. So, it’s a kind of tried and true way of taking over a company, as Dave says, by stealth, or to avoid paying a hefty premium to buy the shares on market. So, no, I don’t see it as bad news. I mean, it can have distracting consequences for management, which may affect the company’s performance and share price, but it is kind of a normal argy bargy of listed corporate life. So, I’m not going to call it bad news and sell it. One thing I will say to Dave, I think the Special General Meeting which has been called about these board positions that Murray Zircon want to replace, is happening 24th, so Thursday, so, if you hear this in time, you might want to vote. Or, if you haven’t voted already, get on quickly and vote the way that you think is appropriate. And there’s been plenty of publications from the company about the way that they think is appropriate. But no, I wouldn’t sell on bad news, I’d still apply all the similar ways of trading we’ve spoken about. It’ll become a three-point sell eventually. And good luck to you. It’s taken off recently.

Cameron  51:39

Okay, second question from Dave. “I loved Tony’s deep dive into the balance sheet last week, intangibles, goodwill, etc., which got me thinking. Similar to the weekly pulled pork, could Tony pull apart an item on the financial statements of the listeners choosing each week? I’d be keen to understand ‘right of use assets’ in non-current assets, for example. Stock Doctor seems to roll it into property, plant and equipment, I can and do Google stuff,” congratulations, Dave, “and read books, etc., but it’s good to hear Tony talk through it in layman’s terms. Don’t mean for him to take time to research it. If he knows about it, talk about it. Otherwise, feel free to tell me to do my own work. Thanks, and keep keeping up the good stuff. Dave from Newy.”

Tony  52:23

Thanks, Dave. Yeah, I’m happy to do it if you want to send in questions. I’m not an accountant, though, so I’m sure one of our accountant listeners will point out where I’m wrong. But happy for that to happen as well. In terms of right of use assets, in a nutshell. This goes back to how you treat property and plant and equipment and fit outs and things like that on the balance sheet. And probably goes back-I mean, when I was working, there was a big move to, like, for example, when I was working at Shell, there was a big move to sell property assets. Analysts would say “that was a lazy balance sheet” if you have lots of property just sitting there, because you were getting returns, but they were property returns. So, there weren’t going to be market beating returns on the assets. And so the idea was you sold those assets, you took the money in and you reinvested it somewhere else in the company to get a better return. And it also helped return on equity, which was the metric that they were all focusing on at the time because you had less assets, your equity was lower, and so even if you’re just getting the same return, the same profit, ROE we went up. So, it’s always been a bit of a balance sheet manipulation exercise between how much assets you hold that you’ve paid for versus how much you lease. And this right of use seems to have come in, in my opinion, to help clarify how leases are to be treated on the balance sheet, probably because of this move to sell and leaseback, and then I guess some of the analysts were crying foul and saying, “well hang on, all you’ve done is transfer a property portfolio into a lease portfolio, and isn’t that the same company?” So, accountants have tried to, I guess, take into account the different ways that leases can be accounted for in the balance sheet. Now, my simple layman’s terms, it doesn’t belong on the balance sheet. It’s a lease, it’s a rent. It’s like any other obligation or expense the company has like payroll or capital purchases. It’s a cost of doing business and it should be in the P&L, which it is, but for some reason people want it on the balance sheet. So, in a nutshell, what it is, is that from an asset point of view, let’s take a simple example: you’re a coffee shop, you’ve leased the coffee shop from someone but you’ve done the fit out and so you put your own machines in and you put your own tables in, cash register systems, etc. Those things are your assets and they go onto the balance sheet as assets. If you had any sort of good deal on the lease, like maybe you didn’t have to pay for the first six months, you can actually put that on the balance sheet as a discount, monetize that discount, put it on the balance sheet as an asset, I think. And, on the flip side, you run a discounted cash flow for the life of the lease, work out what the obligation is from a discount point of view and that goes on as a liability. Personally, I don’t buy it. I think it’s accounting hokum, but that’s what happens. And it, I guess, on the plus side, it does allow you to take into account, you know, write-downs or impairments. So, if you break the lease and get out of it, you’ll have an extra cost and they’ll put that as a liability on the balance sheet. And, you know, there’s some sense to that, but again, it’s an expense, it should just go through the P&L. So, that’s my understanding of right of use assets, Dave, I’m not a fan of them, but they do exist and I probably got all the rules wrong. But, that’s probably because it’s a fairly arcane piece of accounting that says that these things are assets and liabilities when they’re not, their an expense, for God’s sake. Well, maybe the fit out isn’t. That’s the thing, I mean, some of these things make sense. The fit out goes on as an asset, I don’t see that as being the double entry bookkeeping, quid pro quo for having a discounted cash flow of the lease on the balance sheet. That doesn’t make sense. But from time to time, it does make sense to put impairments or write downs or your own plant and equipment onto a balance sheet. I just don’t think it makes sense to have a discounted cash flow for the lease there as well.

Cameron  56:11

I just want to know what the hell Dave’s doing reading down that far in the profit and loss on the balance sheet statement. Dave, come on, man. Like, I know, Newcastle is not the most exciting place in the world, but come on. Surely there’s something better to be doing then getting down into the weeds of these things. Thank you, Dave. Thank you, Tony. Andrew asks, “to what extent should we take industry sector into account? My QAV portfolio currently is 54% materials, 19% energy, with the other 27% split across five industry sectors. Last week was a tough one for materials which was reflected in the week’s performance. When buying, rather than simply taking the next share on the buy list, should I take the next one that provides a reasonable balance across industries? Also, would TK recommend that I actively rebalance my portfolio, selling the material stocks I have with the lowest current QAV score and replace them with balancing stocks from other industry sectors? Or should I sector rebalance only when they become QAV rule sales? Or should industry not be a consideration and I should go back to sleep? Cheers, AF.” I was gonna say this Andrew must be new, but it’s Andrew Flitman, so he’s not new.

Tony  57:26

Andrew Flitman. Nah, good question, Andrew. Thank you. And thank you for all your work in supporting our, our spreadsheets. But yeah, I kind of zoned out there. The last sentence was the important one, just don’t consider it and go back to sleep. This kind of plays into that chestnut of the diversification, or as I call it, de-worse-ification. I don’t see any point in having a balanced portfolio by industry sector. I get that, as Andrew said, there’s times when if we’re overweight in a sector and it goes down it hurts our portfolio. But that can happen. But we’re in that sector for a reason, it’s because it just happened to be over-represented on our buy list, and so I’ve got no problems with that. And it’s been the case, I often find that the buy list is skewed towards a sector. In the past it’s been the airline sector when I owned Qantas and Air New Zealand, even some of the airports. It’s been the gold sector. We generally only find out in hindsight that we’re overweight in the sector, but it just creeps up on us. I still go around buying and selling the same way I normally do, and then, you know, after six months ago, I go “oh, that’s a lot of gold stocks, I’ve got.” I didn’t intend it to happen that way, I didn’t set out to buy gold, but it’s served me well. We’re in a sector which is undervalued and every dog has its day and that will right itself, and we’ll get regression to the mean. And we’ll do well. If that’s your strategy, why would you want to say “let’s limit our strategy to only getting a quarter of our portfolio at the max exposed to the sector that we think is going to take off.” I just find that counterintuitive. And the more times we do that, the more like the index we get because we’re balancing our portfolio to look more like the market more broadly. And again, that’s not how I think we should invest.

Cameron  59:04

But wouldn’t the counter argument, Tony, to that be that all of the stocks on our buy list we’ve deemed to be undervalued, that’s why they’re on the buy list. So, regardless of where in the buy list you’re buying, you’re buying undervalued companies. And I know that you did do an experiment a little while ago where you were rebalancing to buy stuff at the bottom and etc., etc.

Tony  59:29

Sell at the bottom.

Cameron  59:30

Oh, sell at the bottom. Yeah.

Tony  59:31

I did a rebalancing exercise where I sold when the QAV score got to 0.05.

Cameron  59:36

But, so, if Andrew did what he’s talking about and still bought companies from up and down the buy list, but just tried to get a balance of industry sectors, he’s still buying undervalued companies but your expectation would be that it wouldn’t perform as well if you bought from the top of the list, because the scores with the highest QAV scores in theory should do better.

Tony  1:00:02

Yeah, that’s pretty much my argument. And I see what you’re saying, if there’s a hundred companies on the buy list you should be able to buy from the buy list and balance that by sector. I mean, if Andrew wants to trial that and let us know how it goes, great. But yeah, I think buying from the from the top should give you the best upside.

Cameron  1:00:19

And yes, when that industry turns south you’re going to take a bit of a hit. But, the theory being when it’s going up you’re gonna get your gains. You’ll lose a bit when it comes down, but you’ll get all the gains.

Tony  1:00:31

Yeah, so I really don’t think of things in the sector it comes from, I think of things in terms of the stocks. So, it’s no surprise to me that from time to time we’ll see lots of stocks from a particular sector on the buy list and near the top, that sector is out of favour, so why shouldn’t we buy it? Why should we try and limit ourselves to that opportunity, just so we can balance our portfolio by sector?

Cameron  1:00:53

As I said on Facebook, rebalancing is for amateurs. If you don’t know what you’re doing, sure, rebalancing makes sense, I guess. But if you have a strategy that is telling you which stocks represent the best opportunity because they’re the most undervalued and also the highest quality and are performing well, generating cash, then you do what the strategy tells you, which is buy those companies, you don’t try and second guess what the strategy is telling you.

Tony  1:01:24

I don’t mind if Andrew wants to trial the equally balanced by sector portfolio from the buy list, I understand that’s a valid question. But my gut feel says you’re better off buying from the top down, regardless of sector.

Cameron  1:01:36

Yeah. We know that you don’t care what people do, Tony, you tell us that every week: “yeah, go off and experiment. Good luck.”

Tony  1:01:44

I wish they would, because we’ve been doing this for two and a half years, now, and no one’s come back and said “Eureka!”

Cameron  1:01:49

“I found it. I figured it out.” Yeah. Usually they come back and go, “I tried that, didn’t work out so well.” No, but you know, we do hope that somebody goes and experiments and has a huge success and comes back and tells us about it. It’s like Burke and Will’s; “listen, you go off in that direction. Good luck. Hope you come back and tell us you discovered a pot of gold under the rainbow. That’d be great.”

Tony  1:02:15

Yeah. Well, maybe they have discovered it and they just keep it quiet. “We’re not gonna share it.”

Cameron  1:02:20

Yeah, maybe. “We’re gonna sit here in our air conditioning, but you go off and walk across this country. Rally, we want you to do that.” Drinking Negronis. Thank you, Andrew Flitman. Last question, Chris: “hi Cam. Had a question, if not too late.” No, it’s not, Chris. “I bought MAD at IPO. It has performed very well, but I have no idea what the sell line should be and was hoping for some insights.

Tony  1:02:47

No, so MADs doing really well. I think what’s behind Chris’s question is it’s done really well since it IPO’d, and, you know, I think the current price is $3 something, $3.04. But, the sell lines at 95 cents using the Brettelator. So, I think what Chris is saying, as a lot of people have said before, Chris, when we have a big gap between the current price and the sell line, what do we do? We just sit back and enjoy it, really. I understand that Chris is worried that the shares might retrace, and they might. So, in that case, look, there’s only a year or so of listed life for this company. I mean, I wouldn’t be averse to using a twelve-month graph if that gives Chris some comfort, and it certainly would raise the sell line higher up. It’s still not near the sell line at the moment, but it would make the sell line closer to the share price. So, Chris might want to do that. I can see the sense in that, it’s only been listed for a year but we’re using a five-year graph. But yeah, that’s, I would typically use the five-year graph. I think give it some time and see if it starts to come down again, and if it does, maybe you want to look at a one-year graph and use that just to protect your upside. But yeah, that’s a great problem to have, Chris, well done.

Cameron  1:04:01

So, the sell line using a five-year graph just eyeballing it here would come in at around about a buck.

Tony  1:04:07

I had 95 cents from the Brettelator.

Cameron  1:04:09

And he said it’s up around three bucks. Down a bit today, $2.92. But still, if he got in at the float which is around about $1, I think, he’s had a nice win. Congratulations. Part two of Chris’s question: “also in last week’s podcast, there was a comment on how much a listed company can raise without shareholder approval. A company can raise up to 15%, however small-cap companies market capped at less than 300 mil and not in the S&P ASX 300 can seek shareholder approval at their AGM to get an additional 10% capacity.”

Tony  1:04:41

Thanks, Chris. That sounds like the rules. Yeah, I knew that they had the ability to, I didn’t know what the numbers were. But yeah, I guess it’s to give them flexibility, especially the small-caps to raise money quickly. But it does, well, in the case that we discussed last week there was a company that looks like it’s raised money, but only from Instow shareholders and hasn’t given the retail shareholders a fair go. These rules look like they can be rorted at the expense of retail shareholders.

Cameron  1:05:07

All right. Well, that’s the show.

Cameron  1:15:12

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