QAV 512 Club

Cameron  00:00

Hey folks, Cameron here. Before we get into Episode 512, we have an update from Denis, our editor based in Ukraine. I’m sure you all heard his update a couple of weeks ago, we asked him to give us another one and let us know how he’s tracking, and so he did. Here’s Denis.

Dennis  00:20

Hello, everyone. Hi, Cam. Hi, TK. This is Denis, recording from Khmelnitsky, Ukraine. I just thought I’d record a small update on how we’re doing and about the situation here. Things have slowed down for us here. I don’t think I can tell you anything that you haven’t heard about already in your news, but I’m not really sure what’s been highlighted in your media. So, about the situation on the front line, the Mariupol is still the worst one, the city is being completely destroyed. There’s heavy fighting there. In Kiev and Kharkiv things have been stalled and our army is pushing Russians back to the border, they’re liberating lots of small towns and villages. Russians are not even trying to face our army, they’re still striking from afar. They’re trying to terrorise the civilians. So yeah, they’re avoiding any close fights. Near Kherson, there is a small town called Chornobaivka. This is probably something that you didn’t hear in your media. This is a place that became basically a meme right now for Ukrainians because the Russians have tried to position their troops there for, I don’t know, more than twelve times now, and every time they’re being completely destroyed by Ukrainian army there. And we’re all just laughing at them at this point. What about us? Here in Khmelnitsky its pretty quiet. This is one of the cities that has not experienced any heavy shelling so far. But even here, right now it’s 11pm, and the sirens are going on outside. So yeah, it’s dangerous even here. And I evacuated my cat from Kharkiv, so he’s here with us. He was in Kharkiv close to my house under heavy shelling for a month. So yeah, I’m very happy I managed to get him out of there. So, the war has been going on for over a month right now, and even we over here are getting used to it. But it is still important, still very important to talk about it, to tell people that this is not a conflict; this is not a special military operation, this is war. This is an invasion, and Ukrainians are dying, still dying every day here because Russians are shooting at residential areas. So, your support is crucial right now. We need each and every one of you to stand with Ukraine. Thank you. Just as I was recording this message to you talking about how we are getting used to war and how Khmelnitsky is a safe and quiet town there was two or three loud explosions over here. I think this is the first time. This is the loudest ones here. So, you might probably hear about this in the news today. So, once again, Ukraine still needs support. The Ukraine is a huge country and as you can see, there is no safe place right now here. 

Cameron  04:21

Welcome back to QAV. This is episode 512 being recorded Tuesday 29th of March 2022. How are you TK?

Tony  04:37

Very well, thank you Cam. How are you?

Cameron  04:39

Good. How’s the back?

Tony  04:41

Yeah, not so great, but it’s getting better.

Cameron  04:44

You been playing golf since last week?

Tony  04:47

In flippers. It’s been raining cats and dogs.

Tony  04:50

I had the impression that nothing stops you. “Neither rail…” you’re like the American postal worker, “neither rail nor sleet nor rain will stop you from hitting a little white ball.”

Tony  05:04

Yeah, except for a bad back. So yeah, it’s been hurting, dragging on a bit longer than normal but I think I wasn’t doing it any help. I kept doing my normal exercises last week, so I stopped them this week and it’s improving. I do all these things to, like, strengthen the core and the glutes and all those kinds of areas which are meant to take pressure off the back, but this time I think they’re the areas that are hurting. So, I’m just going to give it some rest.

Tony  05:31

Get up and show me your exercises, your core exercises. Show me how you strengthen your glutes, Tony. No? Okay.

Tony  05:39

After the recording.

Cameron  05:41

Okay. After hours.

Tony  05:43

Yeah. QAV after dark. 

Cameron  05:47

Well, where are we?

Tony  05:50

Where are we? It’s the usual shitstorm going on in the world. That’s where we were. Well, it’s budget night tonight, so we’ll get to see the cash flash before the election coming up. Joe Biden says that Putin should be removed.

Tony  06:07

That was when he’s, he’s inside voice came out in a long time, wasn’t it? I was like, “did I? Did I say that out loud? I’m only supposed to say that in certain rooms to certain people. Not supposed to say those things in public.”

Tony  06:22

Yeah.

Cameron  06:22

I was just waiting for, with the budget tonight, I’m waiting to see Albanese stand up and give an ol’ Will Smith to… 

Tony  06:32

Chris Rock?

Cameron  06:32

Yeah, like treat Frydenberg like he’s Chris Rock.

Tony  06:35

Also, I think the Oscar ratings were up 53% or something last night, so be prepared for the rematch next year. The cage fight.

Cameron  06:44

Exactly. I’d pay to see that. 

Tony  06:46

Now they know how they get the ratings up. Might be-2024 might be a catfight.

Tony  06:52

They’ll have to hire Roy and HG to commentate the whole thing. A little bit of biffo. 

Tony  06:58

The cauldron, “live from the cauldron.”

Cameron  07:01

“Where too much biffo is never enough. Want to see some blood. Wanna see some blood on the stage, Roy.”

Tony  07:08

“Well yes Roy, that’s right. I think Chris Rock is now officially Will’s bitch.”

Cameron  07:16

Anyway, back to investing. AMI, Tony, Aurelia Metals. They had an announcement last week, something about a lower grade of mineralisation than previously forecast at the Dargues mine. People on Facebook wanted to know is that a bad news sell? Market didn’t react very positively to it, that’s for sure.

Tony  07:39

Yeah, so I own AMI, so I’ll just declare that up front. And I haven’t sold it. I want to just clarify the bad news sell; I mean, the markets always our guide whether we think it’s bad news or good news or whatever, it’s what the market thinks that’s the important thing. So, all of our normal rule 1 rules, three-point trendline sell rules are all still in place and that’s why I still hold AMI. The bad news sell is what I’ve seen over the years for things that are a red flag but haven’t been picked up by the market yet, and that’s typically things like an independent director resigns, or the CFO resigns, or the CEO resigns unexpectedly. They’re probably the most common type 1s. Like, the CEO resigning can trigger market sentiment but oftentimes the CFO resigning unexpectedly doesn’t, or, in particular, an independent director resigning. And that generally is code for the independent director just can’t stand the board anymore. They can’t get their way, they can’t persuade them, they can’t see sense and so they’re out. They’re not going to have their name tarnished by the rest of the board and what they’re doing. So, that’s what I treat is bad new sells, the rest I really just get guided by the market. I mean, AMI in particular, so what’s happened there is that they’ve announced a downgrade in mineralisation, which means that there’ll be a non-cash provision taken in the next profit report, and so the profit will be less than what it is this year. But it’s a non-cash item, and the market didn’t like it, the shares are down 10-12%, something like that. So, it’s not the end of the world and they’re still up for the year. So, it’s not enough for me to sell, Cam. 

Cameron  09:19

Okay, so let’s just recap. Bad news is something that the market hasn’t reacted to yet, but we see as potentially damaging. 

Tony  09:29

Correct, a red flag, yeah. Otherwise, I let the market guide. 

Cameron  09:33

So, something like this, the share price drops, but if it’s still above — assuming you’ve owned it for a while so it didn’t become a rule 1 — it’s still above the three-point trendline sell line. It’s just business as usual.

Tony  09:47

Yeah, I mean, it is a little bit of that. And we’ve seen this before with other companies; I remember Beach Petroleum, or Beach Energies it’s now called, did a similar thing last year or the year before. They said we don’t have the same level of oil reserves we thought we had, so we’re taking a write down. Because, all these things, whether it’s the mineralization that AMI is talking about is, I guess, an assessment of assets in the ground. And that sits on their balance sheet as an asset, and having to write it down because — take a non-cash impairment — because they’ve done further work, or some some new thrilling results have come to light, and it’s not worth what they said it was worth on their books. Same thing happened with Beach Energy a year or two ago, they thought they had more oil reserves then they did, they confessed up and then they coughed up a write down and their shares went down. But they, they’ve come back in the last oil surge. So, I’m hesitating to say it’s business as usual, but it is a recognition of the fact that exploration companies do have assets which can be written up or can be written down depending on more recent drilling and exploration results. So, it is business as usual, but not necessarily something that happens every day.

Tony  10:59

So, I also own AMI, and you know, it looked like from a market reaction perspective, it looked like bad news. Share price dropped by 10% immediately. But because this is market as usual activity, reporting on results or findings or the operations, normal operations of their business, not bad news, just business as usual, normal rules apply.

Tony  11:26

It is bad news. Unquestionably, it’s bad news. They have less assets today than they thought they had yesterday. But it’s not a bad news sell from my point of view. So, I just want to I want to clarify that. 

Tony  11:37

Okay. Maybe we should have “bad news” and “calamity” or something like that.

Tony  11:41

Well, I think we have our main ways of selling, the three-point trend line and rule 1, and that’s it except for if we see one of these red flags like an unexpected resignation, and we go “hang on what’s going on there.” So, it’s oftentimes something that I’ve seen as a red flag that the market doesn’t pick up that I would sell for. But things like if a profit downgrade comes out, if a bad result happens for a company, the shares may well drop but I’d still hold them if I was still above rule 1 or three-point sell. 

Tony  12:09

It does invoke a little bit of forecasting, doesn’t it, your red flag thing. You’re like, “ooh, independent directors quit, CFOs quit, that’s portending bad news to come down the track, I’m getting out now.” But we don’t usually approve of forecasting. That’s a little bit of forecast.

Tony  12:27

Yeah, it is a little bit of forecasting, but it’s really based on experience. I’ve seen it happen before. I think probably the best example I can think of goes back a long way. There was an independent director, I think her name was Catherine Greiner from memory, and she sat on the AMP board, and she left. It was just reported by the press, you know, “Catherine Greiner moves on,” nothing to see here, and then AMP went through one of the calamitous downgrades it’s been going through since it listed. So, that was a red flag for me, and I’ve seen that a couple of other times. It doesn’t always portend bad news. I mean, if a CFO resigns it might just be part of normal career management on their part, but there have been other cases where CFOs get replaced because they won’t sign off on the results or whatever, and you never hear that. You just hear that the CFO’s gone, and then a few months later you get a big downgrade. So, yes, it’s prediction but it’s based heavily on experience.

Cameron  13:21

Okay, thank you for clarifying that. Let’s talk about Navexa and CAGR. Navexa have finally implemented CAGR, but I don’t know if it’s working.

Tony  13:32

No, I agree. 

Tony  13:34

Our QAV portfolio when I reported in last week’s newsletter and I looked at Navexa — this is pre CAGR — from memory we were up about 15% for the financial year and the ASX 200 was up about 6% for the financial year. Moved over to CAGR, I looked at the report today, it says the ASX 200 is up 7% for the financial year and we’re up 5%. We dropped 10% in the last week, and we’ve had nothing go down significantly in the last week. So, I don’t know what’s going on.

Tony  14:09

I have to unpick it and look at it. That sounds like it’s that cash component again, maybe the cash account isn’t being taken into account properly. When I had a look at the change over to CAGR, I think our performance since inception, which is about two and a half years, went down. Well, we were doing 29% on the old calculation methodology, and then we dropped to 25% on the new calculation, on the new CAGR calculation methodology. But none of those make sense because the portfolio has gone from around $20,000 in change up to around $30,000 in change over two and a half years. If you just plug it into Excel, it’s about 20% CAGR. So, I don’t know what’s going on there.

Cameron  14:50

They must hate us, the Navexa guys. 

Tony  14:53

We might just have to drop it out and do it in Excel again on our own.

Tony  14:56

That’s why we invoke the dark powers of Steven Mabb and say, “Mr President of the Australian Shareholders Association, could you have a look at their CAGR reporting and get back to them?” Because, you know, I think his emails carry a lot more weight than ours do, even though I had to get them to pay attention to his emails originally. He was emailing them and I don’t think they were replying, and I had to go ” hey Diego, hey guys, this guy is the president of the ASA, you should…” And they were like, “oh! Okay.” Gave him a lot of love. Moving right along, new groups and Slack channels. So, this is for QAV club members. As you may or may not have seen in the Facebook group, I’ve been trying to move away from Facebook and on to our own social media platform on our own site because I don’t trust Facebook, and don’t like Facebook, don’t like to have to have it open during the day to see all your comments because it’s noisy and people are always trying to get into fights with me over politics. And I don’t have time. So, I’m trying to internalise it. And also, we’ve set up a Slack channel because I know some of you are already big into using Slack. So, check those out. If you haven’t already, go to qavpodcast.com.au/groups and get out your slack channel off of somewhere. I don’t know how you find us on Slack, I’m not sure how it works really. But, ask me and I’ll show you how to get onto our Slack channel if you… I did link to it in Facebook, I’ll keep linking to it. I’ll put it up on the Club Resources page so you can figure out how to get on to Slack. And just the good thing about that is if people have questions, particularly new people during the day, they can ping me and I’ll get an alert on Slack and I can give you my attention. Better than email probably, better than Facebook if you need to get in touch with me because I try and avoid looking at my emails and looking at Facebook as much as possible. What else. Oh, Andy Cody suggested I remind people to leave us an iTunes review or a Spotify review, something that I don’t say every show and I should. So, if you have a minute and you haven’t, please leave us a review on one of those places. You can find a link on our homepage to those I think or you can just go to the Apple podcast app, go search for QAV, click on the show not the episode, scroll down to ratings and reviews and write a review. It’s a little bit hard to figure out and I’m not sure how it works on Spotify, but you’re all smart people, you can work it out. But yeah, reviews are good. That’s, you know, when other people stumble across the show on one of those platforms the first thing I’m sure everybody does to see whether or not they should bother listening is they look at the reviews and the more reviews, the better etc. Only good reviews, though, if you don’t like the show, don’t bother. And, also while I’m thinking of new people, we had a really good success as I mentioned last time with the first sort of Q&A Zoom call, just with me and a bunch of new people. The “helping you get up and started” Zoom calls. So, I’m gonna start doing them on a Wednesday night, seven o’clock Brisbane time Wednesday night starting this week. Advertise it so new people can just jump on and you know, get straight into asking questions in their first week if they’re comfortable. Or, just sitting and watching and listening to other people ask questions and get a sense for how it goes. So, if you want to jump on one of those, it’s gonna be fairly freeform for now, just Q&A. You ask questions and I’ll answer them, and anything I can’t answer I’ll ask Tony and we can talk about it on the show. Stocks of the week this week: not even the small-cap, our micro-cap stock of the week — couldn’t find any small cap stocks of the week this week — micro was TBR, Tribune Resources, and the large-cap was Bendigo and Adelaide Bank, BEN. So, if you’re looking for stocks this week to give some attention to if you’ve been too busy to do your own checklist this week and you’re looking for a micro-cap, I think its average daily trade for TBR is about 15 or 16,000. So, it’s small, but big enough that, you know, if you’re putting 1000 in or a couple of 1000 you can probably get in there. And Ben’s average daily trade’s like, I don’t know, 21 million or something, so it’s huge.

Tony  19:13

But do your own research, people, they’re not recommendations.

Tony  19:17

A good place to start doing your own research. Okay, Tony, Santos. Talk to me about Santos. 

Tony  19:24

Yeah, Santos I’m finding more and more interesting. So, the news item I just wanted to highlight was they had a big discovery of a new oil field off the coast of WA, and it’s apparently the second largest in the last five years so it’s a significant one. Their share price has been going well because of the oil price rising, but I think it’s also a longer-term good investment from the point of view of it is still investing in developing its oil reserves. It’s merged with Oil Search, that’s gone through. So, it’s much bigger than what it was in the recent past. And, because of ESG concerns, Santos and a lot of the other big oil majors are not really developing or expanding their oil reserves because they’re not getting access to capital. So, Santos is getting some access to capital, is still expanding, and I think that bodes well because I can’t see the oil price dropping dramatically even when the Ukraine conflict is over. It’ll definitely drop, but by how much, who knows? But, there is this, sort of, general thematic going on about the lack of investment in oil reserves will keep the oil price high. I did read today in the Fin Review that there’s another, I guess, thematic starting with Santos which is that it’s being seen by some analysts as being a transitional stock. So, even though it’s an oil and gas explorer, it is seen as as helping the decarbonisation, I guess, future of the planet because it is investing in other fuel type. So, you know, that may or may not play out, I don’t like investing in thematics. I just, I really raised the story about the large discovery in WA which will bode well for Santos going forward.

Cameron  21:05

Very good. Good luck to Santos. I own Santos for the record. Max Walsh passed along. 

Tony  21:12

Yeah. I don’t know if it’s just us getting older, but I seem to be noticing more people pass on. Max Walsh, for people who don’t know, was a past AFR editor back in probably the 80s or 90s and famous for that, and also a show called the Carwash report with Richard Carlton which was on the ABC and was pretty groundbreaking. At least as my young self could see, in that it really did do deep dives into politics and the economy and business which was usually on the back or middle pages of newspapers and hardly ever spoken about on TV. So, he was a pioneer, and valet to Max Walsh.

Tony  21:54

And he was also the Editor in Chief at the Bulletin Magazine when I was on their front cover in 2006, so thank you for that. And then they promptly went out of business. So my apologies, Max, for that. Ah, yes, he was around a long time. He was sort of a mainstay of financial political journalism in this country, wasn’t. 

Tony  22:19

Yeah, he was. Yeah. 

Cameron  22:21

What’s going on with Twiggy Forrest, Tony?

Tony  22:23

Yeah, just an interesting article I read recently about his idea for a perpetual train. So, the idea is that they have these long trains of some three hundred carriages carrying iron ore from their mines down to the coast so it can be loaded onto ships. And Twiggy’s hired an engineering firm in the UK to build him a net-zero self-powering train, net-zero in terms of using energy. And the idea is that because it’s downhill from the mind to the coast, and the train is full of iron ore, they can hook up some batteries on carriages behind it. As the train slows down the brakes charge the batteries, they unload the iron or, the trains a lot lighter than it was on the way down and the batteries power it back up the hill to the mind. And apparently this has got some kind of in principle support from the engineering company, and they’re going to develop a concept for it. I thought it was intriguing. Very clever.

Tony  23:19

Yeah. Good for Twiggy. BNPL bloodbath.

Tony  23:25

Yeah, I mean, we’ve spoken about the buy now, pay later stocks over the last couple of years we’ve been doing this podcast, and something caught my eye during the week which said that if you take into account Afterpay and the way it was converted into block, even though block is now up around the highest price Afterpay ever got to — the conversion wasn’t one to one — Afterpay is down 50% for people who held on to it after it converted to block. But the eye catching one was Zip, one of Afterpays Australian competitors. Hit a high price of $12.40 a year or so ago and is now $1.47 today. So, some heavy losses being sustained in the buy now, pay later space. Well, I don’t hate to say I told you so. I did tell people that, I think we were saying all the way along these things are being held up by hot air and they were. 

Cameron  24:14

Wow. So, gee. Where are all the people that were talking about the huge futures for these and they’re great, you know, this time it’s different. 

Tony  24:29

This time it’s different, yeah. 

Cameron  24:30

Where are their stories? What are they saying now? Where are they all? 

Tony  24:35

They’re quiet, they’re licking their wounds. Well, they’re probably moving on to green hydrogen or something. The next play, the next pump and dump that doesn’t have a profit and never makes any money.

Tony  24:45

But like, this is, like, without any sense of Schadenfreude, but you were telling us this story for the last few years. You kept saying, “yeah, I’ve seen it all before. These things rise up and then interest rates start to rise or something else happens or big competition moves in…”  

Tony  25:04

More regulation, 

Cameron  25:05

More regulation, and they just evaporate overnight. Not go down by 10% or go down by 20% and then come back up, but evaporate, and somebody is left holding the cup. Somebody bought in when Afterpay was at $200. Somebody bought in when Zip was at $12. Somebody who was told by somebody else, “oh, man, this thing’s going all the way to the moon.” You know, “it’s a brave new world, rules don’t matter anymore. It’s all about market share and eyeballs and ear lobes.” 

Tony  25:39

Yeah, as Ben Graham said a hundred years ago: “the market in the short term is a voting machine, and in the long term it’s a weighing machine.” And these companies have been put on the scales and there’s nothing there. They’re pretty light when it comes to financials, so they’ve been voted off the island.

Tony  25:54

But there were analysts after analysts, after journalists after journalists saying these things are going to be the future, and is written in stone.

Tony  26:06

And “its a great new business model,” and “it’s going to take over the world,” and “we did it first,” “first mover advantage,” all those kinds of stories which we’ve all heard before.

Cameron  26:18

And the people, like, the analysts, I’m talking about the professionals, not the punters, but the professionals who no doubt when Afterpay was at $7 were saying it was undervalued at $7. And we’re saying it was undervalued at $10, and $11. Why aren’t they buying it and keeping the price up at $7 or $8 or $10 if it was undervalued.

Tony  26:41

That’s the FOMO. There were plenty of stories around, particularly after the COVID cough when Afterpay went down to I think it was like less than $20, and people piled in and they made a lot of money out of it. So, hopefully they sold out and kept the money. But that’s what gets reported. What doesn’t get reported is the fact that, lucky for Afterpay, block took it over. But on the conversion, it’s still worth half of what it was when block took it over and let alone what’s to happen to the other players in the space. No one’s reporting on that, but that’s the flip side to all these booms, they always go bust.

Cameron  27:13

But, to play devil’s advocate, let’s say you had bought Zip in January 21 at $5 and it went up to $12 in a month because it doubles in a month, because that’s realistic. And then you three-point sold it on its way down — I wonder what the three-point trendline would have looked like, you know, what kind of stop loss would you have in place for these things? 

Tony  27:41

We can have a look. I imagine with that kind of steep rise the sell point would be very low. So, you probably would have given up most of the upside coming back.

Tony  27:49

If you’re going to play that game you would need a different kind of sell trigger, stop loss sell trigger.

Tony  27:54

Yeah, I mean, I looked at Bitcoin and tried to apply a three-point trendline to that, but you can’t do it either because over five years it’s gone from nothing to, well, it’s gone from thousands to tens of thousands and so the sell line’s really low. And Bitcoin might continue to hold up and then the five year graph rolls around and you get a sell out of it, so it might still work. But, that’s all you can do with these stocks, Cam, is trade them. Trade them based on, you know, some kind of technical analysis not fundamental, it’s got to be on the graph. And that’s a valid strategy. So, you know, my point is if you do have a system which says “if I bought Zip at 5 and its gone up by more than double, so I’m selling it,” great. And then what do you do? Move into Bitcoin and do the same there, etc., etc. Eventually you’ll get caught out because something will drop dramatically and quickly, and you’ll get caught. But it’s a strategy. It’s a momentum strategy, and there are plenty of momentum traders out there.

Tony  28:44

Yeah. If I go back, say, a year and I was drawing a three-point trendline for it then, it looks like the low point would have been around early 2016. Anyway, there would have been a very low sell line. Yeah, I think your sell line would have come in around about $1.60 which is kind of where the share price is now. So, you could be getting out now. But yeah.

Tony  29:08

Yeah. Anyway, my point was that I prefer to be a fundamental investor and let the numbers stack up, and you avoid all this kind of having to watch the share price every day and decide in a binary sense do I stay or do I go? Do I buy more or do I sell? If you can rely on the numbers.

Cameron  29:26

Yeah. Somebody go back and find all of the hype articles around Zip for us from eighteen months ago. We can have a read, have a laugh. What do you want to talk about? The new master spreadsheet?

Tony  29:40

Yeah, so I’ve finally caught up to the AF model. The new spreadsheet which I sent through now calculates the number of days since the consensus target was last updated, and people can put in their own date range. I’ve been using182.5 days, which is six months, to test to see if the consensus target is still up to date. So, in other words has it been updated since the last results were released? So, that’s now live. I had some problems with it, I couldn’t work out why that date calculation wasn’t working and then I jumped on a call with Brett from Brettelator fame last week and we sorted it out. Well, he sorted it out. The system clock on my computer was still working on a North American date format, so month — what is it over there? It’s month, day, year, and it was messing up with the calculation. So, that’s an issue. If anyone has problems with that date calculation in our spreadsheets, just check your system date format and make sure it’s set to Australian.

Tony  30:42

You have a version number or something for this, the right one? Is this the one you sent me late last week?

Tony  30:49

It is, yeah, I sent it to you on Thursday, I think. 

Cameron  30:52

Okay. 

Tony  30:53

And that’s the one, too, if people are using my spreadsheet then you’ll need to add the extra field onto the Stock Doctor filter at the end, which is the consensus target date.

Tony  31:04

Yes. Same if you’re using the AF one.

Tony  31:06

Yeah. But I think we told people a couple of weeks ago not to do that until we released this new version of mine. 

Tony  31:12

Yep. Okay. BHP and RIO have just become borderline star growth stocks.

Tony  31:20

Yeah. So, once again, following the results they’ve been promoted up the star stock chain, but they’ve been on our buy list now for a while. So, it’s, as I said I think last week, it’s always good that we find something and then they get a little bump in the star stock universe as well.

Tony  31:37

Yeah. Navexa’s top movers, or our portfolio top movers according to Navexa last week, Tony?

Tony  31:44

Yeah, so Capral Aluminium up nearly 14%, and Eclipse Group up nearly 14% as well. Two big moves.

Tony  31:52

And yet our portfolio went down by 10% performance per annum according to Navexa.

Tony  31:58

On the weekly basis it was good. We were getting close to double market, I think, on the weekly.

Cameron  32:03

Very good. Okay, you want to do your pulled pork for today?

Tony  32:07

I do, yes. And so, getting back to a question that was asked a couple of weeks ago, can I do a pulled pork on Kingrose Mining, KRM? And the answer is no, I can’t. So, the new figures were released by Stock Doctor last week and there was apparently some delay in Kingrose’s figures being released by the company. So, they should have been out by the end of February but they were delayed until mid-March. They’ve now hit Stock Doctor, but the problem is the new figures have a negative operating cash flow and so they’re not part of our download so I can’t do a pulled pork on them. It’s happened before to me, where a company goes negative on its cash flow, and that doesn’t necessarily mean I’ll sell it but it is something I’ll watch and use the three-point trend lines and rule 1s to trade out of eventually. So, if it’s going up, fine, if it comes back down again, we’ll sell it. But yeah, I can’t do a pulled pork on it. I did want to just, maybe, do a quick deep dive into operating cash flow as it appears in Stock Doctor, so I’m going to call it up. So, the thing to note, I just want to highlight this: in both our filters and in Stock Doctor when you have a look at it, the financial statements screen, if you go to the statement of cash flows you can see that the operating cash flow for the June period, June 21, was positive 9.9 million but for the December 21st interim results is -429. So, it’s gone negative which means we can’t score it because it’s not making any, not having any cash come in. Just above those numbers though, on that screen in Stock Doctor, there’s a little box which is currently set to annuals and interims. If you click it you can select either annuals by itself and annuals and interims. We always leave it set to annuals and interims, but if we set it to annuals the interims go away and we can see that June 21, as I said, had a positive cash flow. If we go back to annuals and interims it adds the interims back, and what it does is it gives us a rolling twelve months. So, it adds the six months from the second part of that June 21 annual statement to the six months between June and December, and that gives us a negative number. And that’s the preferred way of doing it, because that gives us a rolling twelve months which is the more recent of the results. So, we can either wait until we get another annual result or we can do rolling twelve months. So, that must mean that there was probably a… there could have been in June, sorry, the second half, so January-June negative and then June-December negative, or it could just have been negative in June-December. Either way, it’s currently negative on a rolling twelve-month basis so we can’t score it. So, let me do a pulled pork for this week. I’m going to do it on ABA, and the reason for that is it’s hit our buy list this week and it’s pretty high up. This is a company called Auswide Bank. People may know it under its old name of Wide Bay. So, Wide Bay Building Society originally, and it did, I think, merge with some of the other building societies in Queensland. So, it’s a regional bank now, it was a regional building society in Queensland.

Cameron  35:13

Bundaberg, headquartered in Bundaberg. 

Tony  35:16

Is it? Okay. Bundaberg.

Cameron  35:17

Yeah, Bundaberg. 

Tony  35:18

It’s new to our buy list. It has an ADT of 108,000, so it’s a reasonable size for people. I don’t own this one, by the way. It’s a small bank and I think that there are both some positives and negatives to the small bank space. On the negative side, they have been asked to hold more capital ratio, as it’s called, by APRA to provide liquidity in case there’s a run on the funds and they hold more than the big banks do, which they’ve always cried foul on. So, that’s a negative because it does tie up more of their capital. But, on the positive side of things, if they execute properly, these banks have an advantage. And this was pioneered way back in the 80s and 90s by some of the first of these small building societies to list, and what they would do is they would continue to operate their building societies or bank services in their local areas but then they would go down into Brisbane, Sydney, Melbourne, and open an office and use a broker network to sell mortgages. And the advantage they had in doing that was they didn’t have to have a branch network to service their customers, and so their costs were kept down because of that. It seems like that’s the strategy which ABA is using, and it seems to be using it effectively. So, ABA has some seventeen branches, mainly in its Queensland area, but they do have offices in Sydney and Melbourne. And something like, I think, two thirds of their lending, their mortgages, come through the broker network. So, that’s going to be a low cost way of servicing their customers. So, it’s a good strategy, and it seems to be working for them. To go through the numbers, I’m using a price of 696 from the weekend, and that’s 95% of the consensus target. However, the consensus target is now more than six months old so I’m not going to score it for that. The market cap is 300 million, so it’s small compared to the big players which are way up in the nearly 100 billion space of CommBank, so it’s a minnow compared to the big ones. However, it does score well. It’s providing a yield of 6%, which goes to show that the old adage holds for a lot of banks where you put your money in the bank’s shares, not deposits. If you did that, you’d have an interest, a dividend payment of 6% versus less than 1% for a bank deposit. The financial health in Stock Doctor is strong and steady for this one. The Pr/OpCaf is very low, it’s 1.84 and a PE of 11.3 which is reasonable as well, below the average in the market, but probably in the ballpark a lot of the bank shares which are around that sort of PE of 10 to 14. The price is greater than IV 1 which is $3.16 and we don’t have any consensus forecasts for this company to use, so no IV 2 or earnings per share forecast. Net equity per share is 623, so the share price of 696 is above that but less than book plus 30%, which is $8.10. So, it gets a point for that. Directors are only holding 1%, so there’s no score there. It does have a record low PE for the last six halves, so it scores a 2 there. And the equity is consistently increasing so it scores a 1 — we don’t see that too often these days, but that’s been happening with this bank so good on them. All those things add up to give a quality score of 92% which is quite high, and a QAV have a score of 0.5. I just thought I’d run through a quick comparison to some of the other banks on our list. So, ANZ, which is getting close to being a buy again but isn’t at the moment, ANZ has a quality score of 50% and a QAV score of 0.28. CBA as well is down our list with a QAV score of 0.06 but it’s often the most expensive bank, and Westpac is again almost a buy on our buy list for using the three-point trendline sentiment checker. Its quality score is only 41% and QAV score of 0.24. So, this ABA is a little bank that could, and it’s come on to the buy list this week and worth a look for people. 

Tony  39:13

And you get a free bottle of Bundy rum with every share of ABA.

Tony  39:19

Do your own research on that one.

Cameron  39:21

And if you are going to go to Bundaberg, don’t go to the Bundy rum distillery. Go to Kalki Moon, get some gins and vodka from the Kalki Moon distillery. Much better. All righty TK, thank you for that. Q&A time?

Tony  39:34

I had a couple of other ones to go through quickly, sorry. Few more news items that came in today as I was prepping. People may be reading about the yield curve inversion again. So, we last heard about this a couple of years ago, which is happening again in the US. This is where short-term bonds have a higher yield to long term bonds, which is usually the reverse, and it often is a pre-stage for a downturn in the economy and downturn in the market. Happened before COVID, although I think that was probably a coincidence, no one could have predicted COVID. But it is happening again in the US and probably being driven by inflation and the Fed starting to raise interest rates over there, but hasn’t happened here yet. Our yield curves haven’t inverted, and it hasn’t happened across the board. So, it’s only happening for five-year bonds and ten-year bonds, and five years and thirties. So, the last time the US five year and thirty year inverted, though, was in 2006. So, it can be an indicator of things to come.  You know, I’d watch the space, I’d be careful about taking out any further debt in this kind of time. And because I think interest rates are going up anyway. So, if you do, factor into account the cost that’s not going to be much higher than what it is now for repayments. And just be a little careful with debt at the moment, because yield curve inversion may come to nothing, but it may also lead to or be an early warning signal for things that we’ve been talking about; inflation in particular.

Cameron  40:59

Before you go on, I wanted to ask you to explain that to me again, because I know we talked about this a few years ago but I forgot. So, you said yield curve inversion is when short term bond rates are higher than long term bond rates. 

Tony  41:15

Yes, the yields. 

Cameron  41:16

The yields, yeah. What they’re willing to pay to keep your money for the short term, rather than keep your money for ten years.

Tony  41:23

Yeah, they’ve gotta buy, have got to pay you more in the short term than they pay you in the long term. So, that suggests that the people who are borrowing, who are buying those bonds, think the short term is going to be economically worse off than the long term. So, it’s less risky to take out a ten-year bond rate than a five-year bond at the moment.

Tony  41:42

It’s less risky to take out a ten-year bond than a five-year bond.

Tony  41:48

So, that could also be that they think that short term bonds might get sold off more, which would make sense if interest rates are rising in the short term because new bonds will come onto the market with a high yield. And then the existing bonds have to get sold down to match that until their yield matches the new bond yield. So, that’s usually a sign that inflation is going up, which has negative consequences on the economy.

Cameron  42:11

I’m still not following why the yields on the short-term bonds suddenly become higher. So, people say, “okay,” if somebody is issuing a bond, company’s issuing a bond, company X is issuing a bond, and the market is saying, “well, you only want my money…” So, you say five years is short term.

Tony  42:28

In this case, it is. I mean, there’s all sorts of ratios that get used, six months versus five years, but in this particular case, it’s the five year versus ten year and five year versus thirty year which have inverted.

Cameron  42:40

So, people are saying, “I will give you my money for five years, but I want a higher return on that per annum than I would if I gave you my money for ten years.”

Tony  42:55

Correct. Because they see the short term as being a rockier investment than the longer term. So, in other words, they’re predicting that the short term is going to have economic problems, but they’ll right themselves in the long term.

Cameron  43:07

So, how does that rockiness impact on my decision to want higher rates? I’m like, “okay, well, because I might need that money in this five years. So, to give it to you, I want to get paid back a higher return or… I’m worried that if I give it to you, you might go out of business,” no, you wouldn’t do that.

Tony  43:29

In simple mechanical terms, the interest rates are rising. So, if I buy a five-year bond yield now that’s paying 2.5% I expect if I wait a period of time, say six months, I can borrow five year money at 3% and get a better deal. So, I’m hanging off and I’m expecting that the next round of bonds that get issued will be more attractive to me because interest rates are rising. That’s the mechanics of it.

Cameron  43:55

Right. So, then the bond issuer needs to increase the interest rates just to attract the money. So, it’s really just mentality on behalf of the investors, the bond buyers, to say, “I think I can squeeze as much money out of the market as possible, because inflation is going up, therefore, interest rates will rise. And yeah, I should, I can use that to just squeeze higher rates out of the market today.”

Tony  44:24

Yeah, and it’s probably even more. That’s part of it, definitely. It’s also mechanical in that as the Fed puts up interest rates, then the companies that are issuing bonds have to put up their short-term interest rates as well to attract people away from government bonds. And so, the people who are buying those bonds are saying “do I keep my hands in my pocket now, because if I buy a bond now at 2.5%…” So, say I spent a million dollars buying a bond at 2.5% and in six months’ time the next round of issuances are at 3%. My bond gets sold down until the yield matches the current market, so my million dollars is now worth less. If I sold that bond on the market in six months’ time, I might get $900,000 for it, because that’s the only way the yield can go up on that bond, is if someone who buys it off you pays less, because the company that issued the bond is always paying 2.5%. But if I buy the bond off you at a cheaper rate than face value, then I’m going to get my 3% which is the current market rate. So, its that secondary trading the current buyers of bonds are saying, “I think it’s risky to my capital to buy a short-term bond at the moment because interest rates are going up. I’m better off waiting, preserving my capital and buying them in the future and getting a higher interest rate.”

Tony  45:37

And in order to attract those investors, the bond issuer needs to increase the interest rates to make it worth their while. 

Tony  45:43

Correct. 

Cameron  45:44

Okay. I think I understand that. I’ll forget it in five minutes, but right now… And the government is putting up the interest rate on the government bonds because they’re trying to slow down the amount of capital going into the markets, because banks will buy those bonds and then they borrow money at those rates, and then they need to put a margin on it. So, whatever percent they’re going to tack on puts the market rates up for businesses and the general public and that’s designed to make-it’s a disincentive to borrowing money.

Tony  46:20

Yes, it slows the economy, which is, you know, the Fed in the States are trying to put a lid on inflation at the moment. And so, that’s why the ten-year bond rates aren’t going through that kind of ratcheting up as well, because their inflation is seen as being a short-term thing at the moment in the US. But, this kind of short-term inversion, so the short-term bonds are going up, long term bonds are relatively stable, is often a sign of, you know, some kind of problem in the economy around the corner. We all know it’s probably coming because of inflation, but this is just one indicator of it. And I think the other thing to point out too, which is interesting given that we’ve just done a pulled pork on a bank, is that banks are the classic “borrow long and sell short.” So, the banks are in the market-as, for the last forty years, as interest rates on bonds have been coming down, they can go and get a ten-year bond that’s paying a low yield, sorry, a higher yield than the short term bond. So, they can borrow at, say, 3% and then put it in the market as a mortgage at 2.5, then they’re making half a percent. Because of a yield curve inversion, they can’t do that. They can’t borrow anymore. They’re going to borrow a thirty-year US bond, for example, at two point whatever it is, 2.5%, but in the short term money market the short term bond rate is 2.6%. So, they’re going to lose on issuing mortgages if they borrow to do that, so they become more reliant on deposits, which will probably mean that we’ll start to see interest rates on deposits go up because they need to attract that money back into their coffers.

Cameron  47:52

What was the thing you said before when you were doing the ABA pulled pork? You said the old adage, “better to put your money in bank shares than in a bank deposit?”

Tony  48:02

Yeah, correct. That’s always been the case.

Tony  48:05

No one’s ever told me that, I’m fifty-one years old, Tony. No one’s ever told me that before. When when did that become an old adage?

Tony  48:12

It was old when I started investing, and it’s been good. I mean, you know, probably over the last five years the Australian banks have gone down, so it doesn’t always work. But, over the long term bank stocks have always done reasonably well and paid a high dividend yield — much higher than the bank deposit rate. 

Tony  48:29

All right. Good stuff. You got any more news items?

Tony  48:33

I do. I was reading about Larry Fink and Howard Marks, two pundits that people have talked about in the past. But, what caught my eye was an article recently saying that they are calling an end to globalisation, largely because of the Ukrainian invasion, and, you know, sanctions being imposed on Russia. They’re calling that as being the beginning of the end for the US Dollar as being a global currency, and when the world starts to split up, which its kind of doing now with China setting up more contracts in their currency rather than US dollars, the world starts to splinter back to being regionals rather than a globalised economy. And so, both Fink and Marks are saying that we’re moving from globalisation to near-local sourcing, they’re calling it. So, in order for supply chains to work going forward, when we can’t trust dealing with other global partners, we’ve got to do more manufacturing either locally or in countries that we can trust nearby. And that’s another source of inflation, is what that means. Prices go up.

Tony  49:34

Because wages are going to be higher, infrastructure costs are going to be higher, running costs…

Tony  49:40

Exactly. And then lastly, my last little bit of news was that if anyone followed our discussion last week on the oil price going up and that to me it was like the 1970s when we moved from V8s to four cylinders, if I had of bought Tesla stocks last week, they’re up 17% this week. Largely because they’re talking about doing a share split, but it was, it was a coincidence. So, hopefully someone benefitted. I didn’t, was hoping someone did out there.

Tony  50:08

If people are listening to you and then going and buying Tesla they’re not really listening to anything that you’ve said.

Tony  50:16

True. Oh, that reminds me too speaking of financials, I should declare that, I think for the first-time last month and maybe the month before, I did pull a dollar out of QAV. Which is a first for me. I know I’ve been talking for years about doing it for free, but I just wanted to declare that I made a little bit of money.

Tony  50:36

Well, technically, you didn’t though, right? It just covers your costs. 

Tony  50:40

It’s not even covering my costs. 

Cameron  50:41

Okay. You’re not getting any profit out of it, I just covered some of your costs for the month.

Tony  50:49

Yeah. For people who don’t know the arrangement Cameron and I have is that he’s been taking the $100 a month that you pay, and using that to run the ship, pay for the IT and the marketing, editing and emails and all the rest of it, and taking a little bit of a wage for himself. And, we had a deal where once it reached a certain level that we’d start to profit share. But as you say, I’ve got some money which is covering my costs. Because I’ve outsourced some of the stuff that we do as well, to my daughter and to Dylan and all the other things. So, anyway, it’s nice, it’s nice to see us growing. Well done, Cam. I just want to call out the fact that you do work hard on this and you deserve the income.

Cameron  51:29

All I heard was you complaining that it’s not covering your costs. That’s all I heard. 

Tony  51:33

I did not complain. It was a good news story, I got some income.

Cameron  51:39

Alrighty, let’s move on. Anymore before we get into Q&A? 

Tony  51:43

No, That’s all. Thank you.

Cameron  51:45

Petra. She says, “my portfolio is slipping. I forgot to sell out and also decided to hang on to a few when I shouldn’t have. They’re travelling up again, slowly. I’ve been struggling with the blunt rule 1 and a breach of the sell line when the stock is volatile, or the market is generally volatile. Earlier in Facebook, someone posted ‘to sell or not to sell?’ This is what I’ve been struggling with too. I feel that sometimes we sell out of positions and buy into another to make up a loss, lots of work to maintain the status quo, when perhaps we could have written out the downward sentiment and stayed in the same stock and got the same results. Maybe you could do an episode with a deeper dive on the psychology of investing.”

Tony  52:26

Psychology of investing, sure. And also, the three-point trendline rules and the rule 1 rules. I can start there. I mean, first of all, sorry, Petra, that you haven’t been doing as well as perhaps some of our other listeners are. And I should comment that we’ve had this question before about what happens if a stock blasts through its sell line or its rule 1 line and we haven’t sold yet. I think you should sell and move on for the same reasons I think you should have sold when it hit those trend line alerts. And the reason for that is three-point trend line rules and rule 1 rules are insurance, and that’s all they are. So, you’re right, maybe some of those stocks that you’re holding will eventually come back, especially when the markets in a volatile situation. But maybe they’ll go the other way and keep going down. So, I’m perfectly happy to apply the rules, sell out of something and find out that it’s turned around and come back, because I would have bought something else which should go up based on buying something higher on the buy list.  And the concept of insurance is always a hard one. So, you know, I buy insurance on my house and my car etc., never expecting to claim, never hoping to claim, but I still take out the insurance because if I do have to claim it’s going to be some kind of Lollapalooza event which are, you know, I need financial help to weather. And it’s the same way with these rules. And Petra, you probably weren’t around when we went through the COVID cough in 2019, but for those listeners who were, they learnt really quickly how these rules work. And, coming into March 2019 as the virus was starting to hit the news headlines and the markets were tanking, we got out of a lot, if not most of our stocks. And for the only time in a long while I went to 50 or 60% cash in our dummy portfolio — I did, too — and then a month or so later, we started buying again because they were the rules. And no one could have predicted that in either event and it was that kind of insurance which got us out of the market safely and got us back into the market safely. And now, I admit the price, the premium we pay is that sometimes there’s not the calamitous event going on like a COVID cough, and we sell out of something and it rebounds. But that’s the price of insurance. And I would have bought something else and with the expectation that that would go up, so I’m not worried about the fact that the stock I sold may rebound. And if I remember at that COVID cough time, Cam, like in March of 2019 everyone was asking “what’s happening? Tell us about the GFC. How long was the share market in the doldrums in 2007 and 2008? What kinds of signs can we look for?” And, you know, we started to talk about those and then about three weeks later the market was taking off again and we used our three-point trendlines to buy in without really knowing why. There was heaps of bad news in the market, I couldn’t really tell why the market was taking off. But it did, and again, it was that the principles of those rules got us back into the market at the right time and we did well. So, I mean, Petra, you might want to go back and listen to the sort of shows around March 2019. That might help. But that’s really the reasons for those particular rules. The second point I wanted to make was on the psychology of investing again, we did do a show with, I’ve forgotten the lady’s name, Cam, I’m sorry. But anyway, a couple of things she spoke about, and you can read about, is one concept is called anchoring and the other one’s called the sunk-cost fallacy. And this is behavioural psychology, if you want to read more about it go and look at things that Daniel Kahneman has written. Thinking Fast and Slow is a really good book. And Michael Lewis wrote about Kahneman in a book called The Undoing Project, another really good book. But basically, it’s an investigation into the mindset of what happens when we hold on to a losing investment. And the anchoring principle says, “well, I bought into this stock,” or I bought into anything, a house, a car, or whatever, “and it must have been a good decision, because I did my due diligence on it. So what’s changed? Well, I can’t see what’s changed, but it’s going down, I better hold on.” And you can trade that sucker all the way, you can hold onto that sucker all the way down to zero, as people with Zip can tell you about, right? And I’m sure that people with Zip, who bought Zip at $12 haven’t had any change to their theory as to why they were buying it, it’s just that the markets tanked. So, our three-point trend lines are there to protect us against that kind of thing. It’s called anchoring, or the sunk-cost fallacy which is a similar sort of thing; “I put money into this, I should be doubling down now that the price has dropped.” And again, that can be a really bad thing to do as well. If it’s in sell territory as far as our trend lines, I wouldn’t be doing that. And it’s really, there’s no logic to it. How do you know whether you should be doubling down if the thing goes down 10%, 20%, or 50%, or more? That’s just basically guessing. So, the rules are the rules and they’re there for insurance reasons. And they’re there to protect us from the sort of wiring that our brains have, that if we don’t have a system can take over and dominate our thinking. And so, that’s the reason why we have the rules, Petra.

Cameron  57:20

That was Louise Bedford who came on to talk about the psychology of investing. Episode 443 if people haven’t heard that, it was a good show. The Candlestick Queen is the name of the episode. I just opened a couple of Zip articles from 2020, just for fun, when you mentioned… Financial Review: “Zip shares jump 25% to a record after announcing a move into business lending on the back of a partnership with eBay Australia,” August 26, 2020. “A day before announcing its full year results, Zip on Wednesday launched the Zip business, distinguishing itself from main rival Afterpay and rival buy now, pay later providers whose sole focus is consumer lending. This partnership with eBay will allow Zip to offer working capital to forty thousand small businesses using eBay platform,” blardy blardy blar. “Zip shares have climbed 50% in August.” In one month, they went up 50%.

Tony  58:19

So, yeah, it’s worth the AFR covering a share that’s gone up 50%. But there’s two things there, which I think are worthy of note. One is they made an announcement about a new deal the day before the results came out. So, you know, in other words, “look at this shiny object. We’re going to release some bad numbers tomorrow.” And of course, and I’m not picking on Zip, but with these kinds of companies are always bad numbers, right? Because there’s no profit. And the second thing is, I can bet that the AFR never went back in the intervening two years since then and said to Zip, “hey, how’s your partnership with eBay going and your business lending programme going?” So, there’s no follow up.

Cameron  58:58

Hope that helps, Petra. Yeah, I know the whole selling thing and hanging on thing. It is hard at the beginning. But you know, I was out to dinner with the boys the other night and Chrissy and Fox, and Taylor said “I saw somebody on the Facebook page,” the QAV Facebook page, “they said something about this and that, ‘what should I do?’ And they’re getting down in the weeds, and I thought to myself, ‘why are you bothering with the weeds, just follow the rules.'” And I was like, “ah, you’ve levelled up, cockroach-grasshopper, you’ve levelled up.” He’s hit the point where he’s like “yeah, I don’t even think about what to do with all that kind of stuff now, I’m just like, do the bare minimum, follow the rules. Ignore everything else.”

Tony  59:49

Play golf. 

Cameron  59:50

Well, not sure he’s doing that so much. I haven’t spoken to him, haven’t asked you about it — he came and had a game with you, didn’t he, a few weeks ago. How’d he go? 

Tony  59:59

He was good as a beginner, good beginner. But he should go, though, he’s a young and fit guy, so, he should go and take some lessons for sure.

Tony  1:00:06

There you go, Tay. Go take some lessons. I’ll come, we’ll do it together, it’ll be fun. Next question, this one comes from Neil: ” I held ECX for a few months after buying it at about $2.50 and not selling despite breaching rule 1. Eventually I quit and took a greater than 10% loss. Apparently, a car leasing company with good fundamentals and a share buyback instead of a dividend. Connecting the dots, I was wondering why it took off this week. Then I recalled two things; Tony talking about petrol prices and the impact on electric vehicle outlook. ECX had a strong ESG philosophy and benefited from the move to fleet sales of electric vehicles. I wish I’d connected the dots before the shares took off. Apparently, it was obvious to those who were buying. I guess it speaks to understanding business drivers of our investments. I wonder if Tony connected the dots or any of the listeners after last week’s podcast? I wonder if there is more upside?”

Tony  1:00:59

Well, Neil, I don’t think the dots were connected by the people who were buying ECX. I doubt if the connection between the oil price and electric vehicles was driving up the ECX share price. It could be, it’s unusual that would happen in the space of a week. I mean, who knows, because ECX is notoriously bad at communications. They hardly ever make announcements outside of the ones that they’re required to make, like, you know, someone buying and selling that has a large stake. So, I don’t know why it’s up. I did do a bit of some analysis on why it might be up. So, could be possibly on Neil’s theory, could also be possibly on the fact that with COVID shutting down supply chains and people having to wait longer for new cars that they’re extending their leases on current cars. So, that might help Eclipse. Certainly the used car market, the prices there have been going up, and part of Eclipse’s revenue comes from when a car comes to the end of its lease, the owner has the right to buy it at a fair market rate. So, that could help them as well. But again, there’s no information coming out of Eclipse on that. Could be interest rates, I mean, Eclipse is a car leasing business, so they’re going to be borrowing money and then buying vehicles and then leasing them to customers. So, potentially if interest rates rise they can charge more for the leases, maybe that expands their margin. Not sure. I did have a look in Stock Doctor, there’s been no director buying since July 21. However, what I did notice in looking at Stock Doctor is Eclipse is one of those companies that have an end of March reporting date. So, they are days away — or weeks away, perhaps — from reporting their financial results, and their share price is going up. So, I personally think the ASX should issue a speeding ticket and ask them why the share price is going up, and are there any material reasons for that? And should they be making a confession during confession season for them? Because they haven’t, but I suspect that the results have leaked, or the analysts who know a lot about Eclipse have put two and two together and have come up with a good result in advance of the announcement.

Tony  1:03:04

Isn’t that insider trading. Do people get nods and winks, and you know, that kind of stuff in your experience?

Tony  1:03:13

Well, I think yes. I think that in some ways the share market is rigged, and all I’ve ever said is that if it is I want to get in. I don’t think there’s any particular insider trading going on here, if someone’s been assiduously following this company and has numbers at their fingertips to do the analysis on what the increase in used car prices mean, and what interest rates mean to this company and all that kind of stuff, they may well have put two and two together. But there’s not much in the way of market release on data for this company. So, if someone does have a deeper analysis of the company, they’re probably talking to management. So, that could be skating on the edges of insider trading. Cam, but maybe the MD just booked an overseas trip to Aspen skiing and the Secretary thought “hang on, things are looking up.” Who knows. Who knows what the reason is.

Cameron  1:04:05

Not talking about ECX, Eclipse Group Limited at all. No, no, no insinuation of anything here. But generally speaking, as somebody who’s been around, you’ve held executive positions, your wife holds executive positions, you know lots of executives. Like people, people go out to lunch, right? And they’re like, “don’t tell me if the results are good, but if they’re good, just eat that cracker with your left hand,” or something like that.

Tony  1:04:41

As long as that’s worked out well in advance then yeah, that’s a potential code. Well, I mean, there used to be a guy when I worked at Shell, right? I’m not talking over school here, this is going back twenty years. The petrol industry was heavily regulated to protect the dealers. They were always seen as being the small guy. Oil companies where the big nasty oil companies. And the government used to hold inquiries from time to time and come out with rules saying, as a rep, which I was, an area manager, I couldn’t go to a service station operator — now a franchisee — and say, “hey, put your price up.” I couldn’t have a conversation with them about moving their price, right? The franchisee had to come to that conclusion all on their own. What evolved over time was a system whereby the oil companies would offer rebates to dealers if the price got too low to prop their businesses up. So, that became a codes way of telling a dealer what they could make if the price was a certain amount, because I could say, “I’m offering a rebate of 2 cents a litre this week, or 1 cent a litre this week.” And so, that would be like a hidden signal of where I thought the market was going and what they could expect. And that was legitimate. But there was this one guy, an area manager, who used to have an answering machine back in the day. And he used to regularly just change his message to say things like, “I’m going fishing, who’s with me?” And the dealers would ring up and they’d hear that message and they’d go, “oh, that’s the code to move the price up or down or whatever.” So, there were all sorts of codes like that. Additionally, I would say that least two, no three cases in my investing career where I have been offered insider information and I’ve deliberately chosen not to take it up because it’s illegal. But, in all three cases I could have made a lot of money. And in all three cases, I went back to the person and I said “look, you can’t. Don’t tell me this in the future, because if I’m going in, I’m putting millions of dollars on it, right? And it’s going to hit some kind of ASX report and you’re going to get found out and I’m going to get found out, so just, I don’t know who else you’ve told about this, but please don’t tell me anymore.”

Tony  1:06:41

You know that snitches get stitches, Tony. If you get called in, you’ve got to take your years like a gangster.

Tony  1:06:49

I never did anything wrong. In fact, I help ASIC regulate the market. I told the people not to tell me.

Tony  1:06:55

No, that’s now what I’m saying. If you put in the millions and you got caught, you just have to go down. Quietly do your time, they’d look after you when you came out, I’m quite sure.

Tony  1:07:04

Correct. And in fact, I know someone who went to jail for insider trading.

Cameron  1:07:07

Really? 

Tony  1:07:08

And they were looked after. 

Cameron  1:07:09

Wow. Because they didn’t snitch?

Tony  1:07:11

Because they didn’t snitch, they did their time. Anyway, this is for the after-hours Podcast. I’m not saying anything more.

Cameron  1:07:19

Like, I just assume that there are coded signals between old friends in the market. 

Tony  1:07:27

If you’re out playing golf, there’s not many microphones around, is there? 

Cameron  1:07:30

Well yeah. Not unless you’re being tracked by ASIC. Do they have drones? ASIC drones flying over golf courses? Thank you, Neil. Alice: “could you please check in the checklists, is share price less than consensus IV, is it simply asking is the share price less than the consensus price?” The example that she gave is URW, share price is $4.66, consensus price is $5.15. “Would it be easier to replace price to consensus target percentage with consensus price target dollar in the filter and then it would make the formula easier to understand?” And I went back and said I don’t understand. What’s the point of this, Alice? I think she said it just makes it easier for the formula.

Tony  1:08:17

Right? Okay, so it’s an alternate and I think Alice is right, you can either take the share price from the consensus price target and work out one side on the other, or you can just take the one field from Stock Doctor which is the percentage of the consensus price target and use that. So, it’s six of one, half a dozen of the other. The fact that Alice thinks that one’s better than the other, some people don’t work well with percentages. So, perhaps that’s the case with Alice, I won’t…

Cameron  1:08:40

I’m one of those people, I confess right now.

Tony  1:08:43

Yeah. And you know what’s interesting, and I don’t want to highlight the point with Alice. Back when I was working at Cole’s Myer and we did some research into — I was in the research department — and we did some research into, you know, whether telling people a 10% discount was better than, you know, a certain dollar off the price. So, what was going to go on the signs in Coles that week. And I was shocked that there is a significant amount of the population who don’t know what a percentage is, who can’t calculate the math for a percentage. So, that’s why you often see Coles bananas are 99 cents a kilo cheaper this week and not 20% cheaper, or whatever the numbers are. 

Cameron  1:09:20

Wow. 

Tony  1:09:20

Yeah, I was shocked. It was something like 15% of people in the population cannot calculate percentages. So, I’m sympathetic to you, Alice, but I think it’s not gonna make much difference really.

Cameron  1:09:29

It’s interesting. I was watching a Wing Chun documentary over the weekend out of Hong Kong, and the guy, one of the guys on video started training in the 40s or the 50s with Yip man, sort of the most famous Wing Chun Teacher — Teacher of Bruce Lee and William Chung, and those guys. And this guy was saying, you know, you go into a Wing Chun school today and they say you got to have your arm at a 135 degree angle for maximum tension, and you got to turn your body you know, 33 degrees to the opponent for their centre line, and blah blah. He said “we never learned it that way,” like, no one knew what a percentage was. Like, in most of its history, Wing Chun was being taught to illiterate, uneducated Chinese men and women. 

Tony  1:10:11

And it’s not now?

Cameron  1:10:14

They’re all better educated than us now. They’ve got great educations.

Tony  1:10:17

Okay.

Cameron  1:10:18

No, just uneducated Australians who don’t know what a percentage is. But you know, he was saying it gets taught differently in Western countries to how it was taught traditionally, because all these things no one understood. He said, “our teacher would just go, ‘you look like this'” and that was it, you know, and talked a lot about yin yang and all that kind of stuff. I don’t know where I’m going with that… But I agree with, well, you that I’m not good at percentages. But what I didn’t understand about Alice’s thing is like, why it matters? Like, it just pumps out a number. But I think she’s trying to understand the formula, take it apart, which is fine.

Tony  1:10:52

Yeah, she’s saying is it better off to know that the consensus price is, in the case of her example, was it 49 cents-59 cents cheaper? Or is it better off to know that it’s a certain percentage cheaper?

Cameron  1:11:05

She’s probably an engineer, or a mathematician.

Tony  1:11:08

She’s probably way smarter than I am, but I don’t think it matters whether we’re looking at the percentage discount or the dollar discount to the consensus price target.

Cameron  1:11:16

Thank you, Alice. Glen asks, “how does Tony manage the QA…” Oh, this is the big question for the week: “How does Tony manage the QAV process when he’s on holidays? The background behind this question is that when going on holidays, it’s not as easy to be able to jump on to place, buy or sell orders or run a new QAV spreadsheet. Computer access at times is limited. I would just like to find out some details of how Tony enjoys a holiday but still ensures the portfolio is managed successfully?” My question is, how do you tell when Tony’s on holiday? What’s the difference between Tony being on holiday and Tony not being on holiday?

Cameron  1:11:17

Because all I care about is does it spit out a result? Does it spit out a number, a score? Anyway. So, basically, you’re saying to Alice “Yeah. Well, if that works for you do it that way.” 

Tony  1:11:23

Correct. 

Tony  1:11:23

You haven’t really seen the second one, have you?

Cameron  1:12:15

Well, no. I mean, when you say “I’m going on holidays,” I’m like, “and how’s that different from your normal life?”

Tony  1:12:25

Yeah, just the WiFi gets worse at Cape Schanck, that’s about it.

Tony  1:12:28

That’s about it, yeah. Your life doesn’t seem to change a great deal. When you stay home, its play golf and eat out at restaurants. At Cape Schanck its play golf — or, you have to cook for yourself, that’s what holidays mean to you, you have to cook for yourself. 

Tony  1:12:41

Maybe Cape Schanck is work and up here is holidays? Yeah, look, I’ve been doing this for a long time and been on lots of holidays around the world. And, I guess I don’t go on holidays to the Serengeti or the Andean mountains or whatever. So, I’m always going to somewhere that has WIFI or at least telephone reception. That’s all I need. I do what I do now. So, I set my alerts. If I need to trade, I send an email to Baillieu’s to trade for me. I’ll keep a copy of the contract note in my email folder and then print it off when I get home. I’ve got my spreadsheets with me, I’ve got my laptop with me. So, yeah, I’d say its business as usual. I do minimal work, which I do now. Half an hour, an hour a day. I still read the AFR online when I want to. A couple of things, I do a backup of my spreadsheets and spreadsheet history to a thumb drive before I go anywhere. I do backup to iCloud all the time too, but it’s like belts and braces; I’ve got a backup on a backup that way. And yeah, that’s it. Business as usual, doesn’t change at all. 

Cameron  1:13:45

When we were travelling around Europe for a few weeks a few years ago I don’t remember you going, “I have to go back to the hotel room to do a checklist.”

Tony  1:13:55

I was doing it. 

Cameron  1:13:56

Yeah, but just in between the museum tours and the drinking.

Tony  1:14:00

Yeah, exactly. After the museum, before the happy hour.

Cameron  1:14:04

Yeah, those happy hours were happy. Bottom line is, I mean, if you were going to go to the Serengeti, if you were going to be offline for a couple of weeks, what would happen? 

Tony  1:14:15

I don’t know, I’d probably have to park all the money somewhere. Sell out and park it, maybe. 

Cameron  1:14:19

Really?

Tony  1:14:20

Put it in an ETF. I don’t know, I mean, it’s never been an issue for me so I haven’t thought it through. I mean, it could be an issue if I ever got, you know, bad COVID and put on a respirator or something. But Jen knows she rings up Alex Hay and puts everything into an index fund — a LIC, the largest LIC. 

Cameron  1:14:35

That’s the emergency protocol? 

Tony  1:14:37

It is, yeah. 

Cameron  1:16:31

Just put it into a LIC.

Tony  1:16:34

Yeah, so Australian Foundation Investment, or whatever the largest LIC is at the time. 

Cameron  1:18:33

Do you have a codename for that operation?

Tony  1:18:39

Jenny probably calls it Codename Breakout or Codename Escape or Codename Yippee!

Cameron  1:23:08

Does she have a, I don’t know if has like a secret wall panel that she activates and it torches your building, destroys all the paperwork. You know, deletes all the hard drives.

Tony  1:24:06

No, it’s pretty loose.

Cameron  1:24:35

I’ve been reading too much of The Ipcress File, as I segue into after-hours…

Cameron  1:26:32

The QAV podcast is a production of Spacecraft Publishing Propriety Limited, authorised representative of AFSL 520442 , AFS representative number 001292718. Please don’t make any investment decisions based solely on listening to this podcast 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