Cameron  00:14

Welcome back to QAV. This is episode 513. We’re recording this on the fifth of April — Tuesday, the fifth of April 2022. It’s 3:25pm now in Brisbane and also 3:25pm in Sydney, where the birthday boy lives. Happy birthday for yesterday, TK.

Tony  00:34

Thanks Cam. I celebrated with Jen, we watched the sunset, we had some antipasto and drank my birthday present, which was an old bottle of great red wine.

Cameron  00:44

And you were telling me before that you reckon that a good bottle of wine like that, an old bottle of wine is at least twice as good as a regular bottle of wine?

Tony  00:54

Oh, definitely, yeah. I decanted it for about six hours, so that really helped. But yeah, no, very, very, very, very good.

Cameron  01:01

And is the difference in the complexity of the flavours or does it get you drunk quicker?

Tony  01:09

Doesn’t get you drunk quicker, no. It’s just well-rounded flavours, nice soft flavours, even flavours, smooth. Yeah, it was lovely.

Cameron  01:18

That’s good. Very nice. Well, on behalf of everyone at QAV who hasn’t already wished you a happy birthday via the various social media things, happy birthday from all of us.

Tony  01:31

Yeah, thank you. And thanks for all the shout outs on Facebook, etc. That was much appreciated. Lovely. Thank you.

Cameron  01:37

Alright, let’s get into investing stuff, Tony. Let’s talk about financial health rating versus financial health trend in the checklist. One of our eagle-eyed watchers on Slack last week, I think it was, picked up the fact that you were scoring in the latest version of the checklist, you’re scoring for both financial health rating and financial health trend and that this wasn’t mentioned in the Bible that we’re recording, scoring for both. And I checked with you and you said, “yeah, I think I’ve always done that.” So, the new version of the TK master sheet now is recording for both. I don’t think we’ve, I haven’t told Andrew Flitman yet, or asked Andrew Flitman, told him that we’ve made this change. Is there anything you want to say about the rating versus trend situation?

Tony  02:35

No, so it’s probably my error, I thought the spreadsheet was checking for both. So, the health rating should be strong or satisfactory, that scores a one, everything else is zero. And then the trend scores a one if it’s steady and a two if it’s increasing, and a minus one if it’s decreasing.

Cameron  02:54

The fact that we haven’t been checking for both or scoring for both. The data has been in the checklist forever, but I don’t think we were taking a score for both. Is it going to make a big difference in scoring, do you think? Final scores?

Tony  03:07

No, it won’t make a big difference. It might change the QAV score by one or two points. So, it might change the ranking slightly, but no, it won’t make a difference.

Cameron  03:15

If a company scores well for trend which is I think the one that we’ve been scoring on up until now, would it normally also score well on rating do you think? Or are they separate?

Tony  03:27

I would think usually. I’m not quite sure, I haven’t looked into that. But potentially you could have something which is an early warning for a number of months, sorry, a number of halves, and therefore it’ll be a steady. So, it’s possibly different.

Cameron  03:40

So, Tony, I saw some news in the financial review this week about Perpetuals $2.4 billion bid for an outfit called Pendal. I’d never heard of it before, but I gather its some sort of funds management merger situation going on here. But the interesting part of the article that I wanted to talk to you about, it says, “and it’s worth noting that Perpetual shares have held up quite well compared to others in the funds management sector. Where Pendal is down 46% over the past six months, Magellan is down 52% and Pinnacle investment management is down 30%, Perpetual shares have fallen by just 8.5%.” So, that’s apparently doing pretty well and the funds management industry in Australia in the last six months is to only be down 8.5%.

Tony  04:37

Yeah, I can’t really comment. It’s not really a stock I follow. Perpetual is a value manager, so it’s quite possible they’ve been down for a long time and they’re just going back up or just… Yeah, I don’t know, sorry, I can’t comment. Well, actually I’m looking at Perpetual now over the long term. So, it’s been on, it’s been a falling knife for over the last five years and probably the last year as well. So, maybe that’s why it hasn’t dropped as dramatically as the other ones.

Cameron  05:03

Right? Well, you know, I was thinking about it in terms of our QAV dummy portfolio, which when we rejigged it on Navexa last week, you know, it showed that we’re only, we’re neck and neck as of today with the ASX 200 for the financial year. Since inception were doing three times the ASX 200 better. I was comparing it to this and going, well, at least we’re not down 52%. I mean, we’re doing pretty well if we’re neck and neck.

Tony  05:36

Perpetual is a value manager. So, this is one of the classic stories you see. In fact, it’s almost like a signal that you’re in a growth stock boom, is when a company like Perpetual goes down, because they just stick to their traditional value type investing and haven’t been providing the returns that the growth stocks have been providing, and they generally turn around now that the growth stocks have come off.

Cameron  06:01

Yeah, we’re value investors, too.

Tony  06:08

No, that’s right. So, it’s pretty hard to explain, isn’t it? And they’re getting paid to do it. Isn’t that nice as an investor?

Cameron  06:13

Yeah, it would be interesting to know, like, why they’re going down so much. Do they not use stop losses? You know, they just can’t get out? They’re entrenched? I don’t know what it is. I thought it was interesting though.

Tony  06:31

Yeah, I don’t know either. It is, yeah. I think the bigger sort of story between Pendal and Perpetual is that there’s so much money going into passive investing — ETFS and index funds — that companies like Perpetual and Pendal who are both actively managing their funds are having to merge or take one another over to get economies of scale to keep the business going, really.

Cameron  06:58

Another article that I thought was interesting, Tony. This is again from the Financial Review in the last couple of days: “Spoils of War: commodity earnings to rise above $400 billion.” There was a section in that that said “Russia’s invasion of the Ukraine is expected to send Australia’s annual mining and energy export earnings above $400 billion for the first time, delivering a $46 billion increase and driving profits even higher in exporters, including BHP, Rio Tinto, Woodside and Santos.” I think all of those have been on our buy list recently. Rio, maybe Rio, I can’t remember.

Tony  07:41

Rio’s on their now, I own Rio, and Santos is on there now. I think BHP may have come and gone.

Cameron  07:48

I bought Woodside last week.

Tony  07:49

Yeah. It’s just come on.

Cameron  07:51

A long with a couple of others, yeah.

Tony  07:52

It’s a shame about the war and that it has this kind of problem. But, this is exactly what happens and many stocks were on our buy list before the war. Maybe not Woodside, but the others were for sure. And you can’t predict what events are going to cause them to regress towards the mean and make some money for us, but this is the event.

Cameron  08:10

So, these sorts of things that you can’t predict, but we’re invested in unpopular stocks and sounds like they should be going through another sort of boom period or growth period anyway. A $46 billion increase on 400 billion, that’s a lot a lot of new cash, I guess.

Tony  08:30

And I don’t think Rio or BHP are necessarily doing well because of the Ukraine invasion. I mean, they’re iron ore exporters, I think it’s got more to do with the iron ore price which is being driven around by China and what it’s doing with COVID and locking down and then people looking through that and seeing what’s coming out the other side, etc., etc. So, but certainly the gas — Woodside and Santos — the oil and gas companies, yeah, they’re definitely being affected by the Ukrainian situation because the Russian oil tap has been turned off.

Cameron  09:02

Well, yes and no. I mean, there are still lots of people buying Russian oil and gas in Europe and paying for in rubles, and you know, a lot of talk about them trying to get out. I read that the new Chancellor of Germany has said they have come up with a great plan to get off, wean themselves off of Russian gas. It’s only going to take them three to five years, and… They’ll be weaned off. Obviously, I mean, you know, whilst everyone I’m sure can, I’m sure they all would like to just stop buying it, but it’s not that easy, right? Their entire economy requires gas and oil, it’s gotta come from somewhere.

Tony  09:47

Yeah, and if it comes from Australia it’s going to carry all the transport costs to get it there as opposed to just coming out of a pipe from Russia. So, even if Germany does switch across tomorrow, the economy is going take a hit because the oil and gas prices are going up.

Cameron  10:03

Yeah, well, it’s already going up as I understand it, taking a hit. I had an email from a listener from one of my other shows who’s in Poland the other day, she was talking about how much her energy prices have gone up in the last year but particularly recently, they just keep going up and up and up. It must be hard to keep track of it if you live over there.

Tony  10:24

Well, it’s hard to keep track of it here. I mean, the pump price goes up every day.

Cameron  10:27

The pump price does, yeah.

Tony  10:29

So, yeah, must be must be worse over there though, I agree.

Cameron  10:31

Anyway, so those of us that had investments in the energy sector may benefit from the tragedy that is the war in Ukraine at the moment, and shout out and our best wishes to Dennis and his family and anyone else over there who’s… I guess everyone over there really. Best wishes to everyone. It’s a terrible situation. Dennis did give us an update on the show last week, which was nice. Glad to hear that he got his cat out of Kharkiv and to Khmelnystkyi but, yeah, just, the stories that are coming out of there every day are just tragic, obviously.

Tony  11:06

They are. And I think the other point that’s worth noting, if just for historical purposes, is the Russian army is not covering itself in any sort of glory at the moment. It sounds like the truth isn’t getting through to Putin because the general who delivers the truth gets taken out and shot, probably. But, I read somewhere there was a military historian, I think, delivered a speech where he said of the eighteen generals who went into Ukraine, I think half of them are dead including one who committed suicide and one who was fragged by his own tank commanders, so, it’s not going well for them over there.

Cameron  11:39

Yeah, but honestly, man, I don’t know what to believe. There’s so much fog of war and Western propaganda, too, that comes out in these things. It’s really hard, really hard to really know what’s really going on; who’s committing which atrocities, how many atrocities are real. I mean, I remember, I’m old enough to remember when, during the first Gulf War, ’91, the American media was full of stories of Saddam Hussein’s soldiers throwing babies out of windows in hospitals so they could keep the humidy cribs and all of this. They even had a girl stand up in the United Nations — or no, US Congress I think, one of the two — and gave a big speech about, you know, what she had seen with her own eyes and she got a standing ovation and all this. Then it came out years later that she was the daughter of the Kuwaiti ambassador and it was all a PR stunt that was paid for, organised by their PR agency that the Kuwaiti government had spent millions of — American PR agency — that they’d spent millions of dollars engaging. There was no truth to it, it was all fake. It was all designed to outrage the American people so they could pass more war funding. Now, I’m not saying that that’s what’s happening with anything that’s happening in Ukraine, but we know this stuff happens. Those of us that study history know that in these times there is propaganda on all sides, and it’s really hard to know from the outside what to believe, what not to believe. So, I don’t know. We’ll find out maybe one day.

Tony  13:17

I agree with you. And, you know, getting it back to investments again, I guess the overall point is it’s an event that came out of left field that was hard to predict and it’s had an impact on our portfolios, but it’s not the reason we bought those stocks in our portfolios. They already existed in our portfolios first.

Cameron  13:37

Yeah. And if anyone wants to know more about that Iraqi story, either read my book Psychopath Epidemic because I talk about it, or Google the Nayirah testimony, I think Nayirah, the Nayirah Testimony. Read up on it, fascinating. All right, what’s next on the list? Jeremy: a couple of weeks ago, Jeremy asked a question about CAA and aluminium prices and all that kind of stuff, and whether or not the rising price of aluminium would affect CAA’s business. We’ve talked about this I think on a number of occasions over the last year. Jeremy, to his credit, reached out to Investor Relations at CAA and — this is Capral Aluminium for new folks — and asked them “how do you go about hedging the aluminium price?” They did come back, sent him a reply which he forwarded on to us, as he says, “no meaty detail.” But, they said “Capral has various pricing mechanisms, most of which contain a pass through of aluminium price fluctuations.” Do you understand what that means, Tony? What does a pass through of price fluctuations mean?

Tony  14:46

Well, I think it means good news for Capral, because the way I read that was that they’re passing through the aluminium price whether it goes up or down to their customers. So, they have contracts with their customers that mean that the aluminium price as far as Capral goes is neutral, but the price increases are borne by the customers. So, that’s good news for Carpal if that’s the case.

Cameron  15:07

So, the aluminium price goes up, Capral make aluminium products — finished aluminium products, I think — so their prices go up to their customers, so their profit margins stay the same.

Tony  15:18

Yeah. And potentially if their costs don’t go up and I exclude the aluminium price because it’s been passed through, they make more money because if they, you know, if it’s a 10% margin normally and the aluminium prices double, the same 10% delivers a lot bigger dollar profit to the company.

Cameron  15:36

Good stuff. Well, thanks for following that up, Jeremy. Well done. And as he noted in his post, too, the aluminium price — the CAA price, sorry — has gone back up since he first asked the question. So, whatever caused the dip in their price was quite temporary. Let’s talk about RBA and rates rises, Tony.

Tony  15:58

Yeah, I should have checked. I think the RBA might even be meeting today. Anyway. I think they meet on the first Thursday of every month. The only thing I wanted to just highlight was my observation that ever since 2007 when the RBA raised interest rates during the federal election cycle then — which was seen as being a negative for the Howard government, which then lost power — the RBA has been fairly studious in avoiding putting interest rates when an election is called. So, if they haven’t done it today, and they probably haven’t, then I suspect we won’t see a rate rise until after the federal election in May. People have asked lots of questions about interest rates and inflation and all the rest, but I think calling a federal election usually puts it on ice in recent years anyway.

Cameron  16:47

And so, what are we doing with the rates in the checklist?

Tony  16:50

Yeah, I need to change them. So, I read an article last week about there being a price war in mortgages between the big banks, and so I went back and checked the mortgage rate that I was using to set the mortgage rate test against the yield of the stock in our check, and I want to lower down to 3.22%. It’s cell AW32, and we need to lower it down to 3.22%. And I also used CANSTAR, which gave me the average for the variable home rate mortgage rate in the market, whereas I’ve been using the ANZ price because that’s who I have my mortgage with. So, another reason for a slight change in the rate.

Cameron  17:37

So, 3.22%. Set your watches people, adjust your…

Tony  17:42

it’s kind of funny. Interest rates are going up, but capitalism is alive and well. Apparently, all the housing market price increases are driving people to get into the market and that means the banks are being swamped with mortgage applications, and they’re trying to steal share from each other by lowering price.

Cameron  18:01

You’ve been doing some work with Dylan.

Tony  18:04

Yeah, so Dylan gave me a couple of things to look at based on his analysis using refinitive data for the last ten years, and I wanted to just pull together all the buy lists that we’ve produced over the last two and a half-odd years and put them into a usable form so I can, sort of, replicate that analysis — at least in the short term — and see if it’s gonna result in some changes. But I’m still working on it, and there’s a few things like that, I keep starting them and they just become so… either time sinks or just technically difficult, but I’m almost at the stage of thinking that I should go and hire someone full time just to help me with all this stuff. So, if anyone out there knows a grad, or anyone really who’s got good Excel skills and can use refinitiv which I guess is some kind of SQL, give me a shout out. I need some help.

Cameron  18:56

I think he just has an API that goes into Excel, isn’t that what he’s been doing.

Tony  19:01

No, well, it is an API, yeah, but it’s — I forget now, it’s some kind of, what do they call it? Not Java. I’ve forgotten the language. Anyway, it’s a query language.

Cameron  19:10

All right. You want me to talk about Slack?

Tony  19:13

Yeah. I followed your link, went to the website and then it prompted me to download Slack and I got all tied up in that and I just stopped. So, are there two groups or is there one, and do we need to download the Slack app to use it? Talk me through it.

Cameron  19:29

Yeah, so as club members know this is for club members. I’m shutting down the Facebook group for club members and moving to a, just a Facebook clone I guess on our website. And then somebody, I think Barry, one of our subscribers, suggested Slack. All the cool kids today use Slack for this kind of stuff. So, they’re separate. The club chat forum and Slack are separate. I’m cross posting our communication stuff between both and on the Facebook group for the moment ’til I shut that down. But moving forwards, I’ll be doing it on both. My thinking is that people can use whichever one — if they want to get in touch with me they can use either one, they’ll get to me. They can use whichever one to talk to each other that they’re most comfortable with. And over time, we might just see if one is far more popular than the other, we’ll shut down the unpopular one and leave the popular one.

Tony  20:25

So, should I just hang back and join one when it becomes the winner?

Cameron  20:28

Yeah, what you should do is build a checklist, Tony, and figure out how to score all of the interactions on the different things and tell me. Do some regression analysis on it.

Tony  20:41

If cool kids are using Slack, let’s use the other one.

Cameron  20:44

The reason I would prefer to use the other one is the same reason I want to get off Facebook, because I don’t trust Facebook. Slack, you know, I don’t know. They could go out of business next month, they could get acquired by Facebook or Microsoft. I don’t know who owns them now, maybe one of them does own it. Who knows? I’m always reluctant to throw stuff off to third parties, but I guess for a thing that’s just for chatting and messaging, it’s not that big a deal if it goes bye bye. But if, you know, if we have it on our own website then we kind of own it and we can manage it and maintain an archive of the conversations going back years. I’m not sure how much value there is in that, I don’t ever go back on our Facebook group looking for what somebody said to us a year ago. So, it’s more just to give people convenient ways to talk to each other in the QAV club community and to ask me questions and ask you if you’re listening, but I assume… I think most people assume you’re not listening a great deal of the time because you’re too busy playing golf or drinking expensive bottles of wine. So, you know, its how they get in touch with me.

Tony  21:48

Well, I’ll join. Just when you sort it out, let me know what to do.

Cameron  21:52

Don’t do anything, this isn’t for you. This is for us. This is for the, you know, the pleb level of QAV club. You sit up there in your sky palace, and we’ll talk amongst ourselves. Oh, speaking of which, I just wanted to thank everybody that came to the Zoom Q&A that I did last Wednesday night. I think we had about a dozen people on it, went for about ninety minutes. It was great fun, and everyone seemed to really enjoy and appreciate, I think, the opportunity to ask live questions again. And so, we’ll probably keep doing it, see how it goes. I’m going to do another one this Wednesday night. Even though I’m in Bundaberg on vacation, I will turn on my laptop in my bedroom at my mother’s house and chat to people there.

Tony  22:39

In your old bedroom?

Cameron  22:41

No fox is in my old bedroom. I’m in another one, yeah.

Tony  22:47

I was gonna ask what posters are on the wall?

Cameron  22:50

Lots of people have lived in that bedroom since I was in that bedroom, Tony. I had two sisters who grew up after me. Yes, all of the Playboy posters that I had surreptitiously hidden behind Van Halen posters have long gone since I left there in 1987, sadly, because they’d probably be worth money now — be classics, collector’s editions. The Playboy posters that is, not the Van Halen posters, or maybe, who knows? So, yeah, you can find a link to that on the club member resources page, go to our Zoom calls, I think you’ll find that. If not, it’s in the newsletter, it’s on all the chat things, but email me if you don’t already have it. It’s a good opportunity for new and old people to ask questions. But I think particularly for the new people, it’s designed for people that are just getting started in QAV: go, “show me how to do a chart. Show me why does this happen in the spreadsheet?” And all that kind of stuff. Basic questions. All right, moving right along. You want to do your pulled pork?

Tony  23:49

Yeah. So, we had a listener request for MAM, Micro Equities Management group.

Cameron  23:55

That was from Phil on Slack. You’re not even on Slack. See how it works? It’s great.

Tony  24:03

I’ll get Alex to sign up to Slack and ask her to just monitor what people are saying about me, on Slack.

Cameron  24:10

You could do that, but that’s what I’m here for. I’m doing the job for you. If you don’t trust me to protect your reputation and monitor it for you, yeah, have to get Alex to see what I’m saying about you on Slack.

Tony  24:19

Anyway, Micro Equities Management Group. So, had a good run recently but it is a bit of a Josephine at the moment. So, the recent downtrend is down, but I’ll go through it anyway. Interesting company. It’s a fund manager. So, we’ve talked in the past about whether ETFs and LICs should be on our watch list and I took them off. However, this is a fund manager, so it’s business is managing the fund. We’re not talking about the fund, we’re talking about the manager. A bit equivalent to Magellan that we spoke about earlier. And the thing about fund managers is their operating cash flow is basically fee income, so if the funds are performing that they’re managing then they get more operating cash flow. So, they can be incredibly profitable, which this company is and I’ll get to that, but they can also be incredibly volatile. So, if they have a bad half, next half, then the share price can reflect that pretty savagely. They can be good investments, but just watch… If people have a, I guess a threshold on volatility, just be careful that some of these can go up and down quickly. But that aside, they’ve had some good results, and I guess the rule of thumb that’s been around for a long time in the stock market is you’re better off investing in the fund manager than the fund. And the reason for that is that if you think about it, the fund manager receives a commission for the fund’s performance. And so, say for example, I don’t know what the Micro Equities Management group fee structure is, but just say for example, a generic fund manager charges a 10% performance fee. So, even if the fund gives its investors an index performance of 10%, the fund manager is taking out 1% of their fees for basically giving you no special type return and that 1% is you straight profit to them. If the fund does twice market, then they’re making even more money. And because there’s no extra costs in the fund manager, their profit can go up quite dramatically. That’s something to know. So, if you’re in the fund you might just be getting 10%. But if you’re in the fund manager, you could be getting a very high ROE and a very strongly profitable business because it’ll have low costs. And we’ll see that when we go through this. So, I guess a bit of an outline: there focusing on micro equities, as their name suggests. There’s, I think, five or six funds that they manage, and they like to take a long-term holding so that they’re, I guess, in some cases significant shareholders in these small cap funds. And then they’re along for the ride and potentially be sometimes actively involved in those companies. And they promote themselves as being a value manager, so it might even be worthwhile getting them on the show at some stage, Cam, to have a chat to. Anyway, they’ve recently opened a new fund which is a private equity fund, so it’s giving their clients access to unlisted assets. But I think all their other funds are listed micro-cap stocks. I looked up their website, they claim 18.9% per annum across their funds since 2009, so that’s pretty good return. I didn’t dig deep enough to find out whether that was before fees or after fees, I suspect that’s before fees which is how that kind of performance is normally quoted. So, it’s good. Again, I haven’t dug in detail, I don’t know if they listed in 2009, but using 2009 raises a bit of a flag for me because it’s the year that we came out of the GFC and things started to kick goals in. So, if they had been going before the GFC it’d be good to know what their longer-term returns were. Anyway, I won’t dwell on that. QAV by the numbers. It’s a small-cap stock, so their market cap is only $103 million and ADT of 35,000. So, not a big-cap stock and won’t suit all people, but an interesting company to go through. I’m doing the analysis based on the price of 80 cents, and because it’s a small cap stock there’s no consensus forecasts or targets for them so I can’t score them based on that. They have a 13.75% yield, so that’s huge, and we we’re just talking about the mortgage rate before so they obviously score on the yield being higher than the mortgage rate. And, this is one of the interesting stocks where the yield is higher than the PE and we haven’t seen that for a long time, but that has been an indicator of good value in my experience in the past. So, it scores on that one too. Financial health in Stock Doctor is strong and steady, so it gets a point each for that. The Pr/OpCaf for this one is 4.56 and the PE is only 4.62, so, like I said before, that’s almost all the revenue flowing straight through to profit with very little cost in the business driven by fund performance. Net equity per share for this one is only 21 cents and the share price is 80. So, it’s not going to score well on book value or book plus 30. The directors in this company, however, hold — according to Stock Doctor — 74% of the company, so huge shareholding and so not much available float which is why the ADT is down but scores for us on the founder-operator metric. It has a record low PE and consistently increasing equity, so the manually entered data is strong for this one. All up, the quality score is 117%, and we get that because some of the things got 2s, which gives us more than 100. But that’s a very good score on quality and a QAV score of 0.6. So it’s, it’s up there on the buy list. So, thanks very much for holding that on for us to go through. I wasn’t really aware of it. But you know, a great business model.

Cameron  30:11

Getting back to what you said before about you’re better off investing in the fund manager than in the fund. 18 point, what is it? 19%? I think you said 18.9%, is good, but yeah, if I look at their shares two years ago, their shares were trading at 22 cents. They did go as high as 97 late last year, they’re down to about 80 cents now. So, that’s a lot better than 18.9% a year return for the last couple of years if you bought their shares instead. Going back to 2018 they were at 71 cents, and then, you know, they crashed during the COVID cough.

Tony  30:48

Probably very volatile, I’ll just point that one out, because they’re gonna be driven by the funds performance.

Cameron  30:54

So, if you bought them back in 2018 at 76.5 cents, it hasn’t done very well if you held it the whole time. But yeah, that’s interesting. So, last week I think you said you’re better off buying the bank than putting your money in the bank, and this week you’re saying you better off buying a fund manager than investing in the fund.

Tony  31:12

Correct. And that goes not just for fund managers, but it also goes for any type of manager. Like, I remember the classic was when Westfield was still listed in Australia. You were better off buying Westfield, which was the listed management company, than the Westfield trust which were the actual shopping malls that were listed. For the same reason; the manager gets a performance fee and their only cost is staff and the leveraged upside can be huge.

Cameron  31:40

Good. Well, thank you for that, the MAM story. Let’s talk about our top performers in Navexa this week.

Tony  31:48

Yes, so, some big ones. GRR, Grange Resources is up 15.35% and Champion Iron is up 7.72%, so some quite large up turns. Grange had an update on, I think it’s called, Savage River and the resources which they forecast to come out of it. So, this is kind of the reverse of our discussion last week on Aurelia Metals; where that one went down because they decreased their mineralization assets, this one’s gone up. And then Champion Iron has just leveraged to the iron ore price, which has taken another leg up in the last seven days.

Cameron  32:23

Wow. And you’re coming to Brisbane, maybe?

Tony  32:26

I am, no, definitely. Definitely. So, I’m up there, I think its the last week in May, the 24th or 25th. But yeah, I’ll be on the Gold Coast anyway, sorry. I’ve got a friend who’s selling a horse in the broodmare sales on the Gold Coast, Magic Millions broodmare sales that week. So, Ruddy and I and Jeff are doing a road trip, and we’ll stay at the Gold Coast and come up to Brisbane — Ruddy and I’ll come up to the Brisbane for the weekend and we’ll do a dinner. 27th or 28th once we work it out.

Cameron  32:53

Great. Well, everyone up here will be very happy to see you. It’s been a while. When was the last time you were at a Brisbane dinner do you think? A year ago?

Tony  33:01

At least, yeah. Yeah, it was, it was a year ago.

Cameron  33:06

Jolly good. Well, anything else before we get into Q&A?

Tony  33:11

Nope. Let’s go.

Cameron  33:12

Ali asks, “can we go over this in a podcast again, even though Tony has already touched on it previously?” Yes, we can, Ali. “Buying QAV shares in a superfund, especially through Australian Super members direct option top 300 limitations, I get all that. It’s a clear winner to salary sacrifice in the super for some great tax savings to begin with, 32.3% minus 15% equals 17.5% tax in super even before adding QAV returns on shares on top, 19%+. I don’t plan to work after sixty,” I’m in a co-working space in Bundaberg. There’s going to be noises in the background, people, I apologise for that. “I don’t play to work after sixty so can get to it then, therefore can go hard with the salary sacrificing and investing now in super. What I don’t get is how to manage it now that I already have a share portfolio outside of my super as well. Tony has previously suggested holding different shares in each portfolio and treating shares inside and outside of super as the one portfolio. Would there be a downside to running two portfolios of fifteen, for example? Some of the same shares might be held in each portfolio, but many might not. Do I risk being too diluted with fifteen plus fifteen equals thirty shares? Perhaps it’s better to hold twelve plus twelve? My super shares balance will be double that of my shares held outside super as well.” What do you think, TK?

Tony  34:45

A lot to unpack there, so let me just start with the last bit first. So, yes, if you have a larger portfolio you’ll get more like index returns. So, I would advocate holding fifteen-twenty shares across both. So, across what Ali has in the Super and what she has outside. Bearing in mind, this is not financial advice, I’m talking in general about what I would do. And the other point to make is she sounds like she has a bigger portion of her investments in super, so I would have fifteen-twenty stocks starting out at equal weighting. That means that she’ll have more stocks inside her super and less stocks outside her super, and the ones outside her super might be larger in terms of their holdings and what they are now. So, for example, if Ali has $100,000, or if I have $100,000 to invest, and I want to buy twenty stocks at $5,000 each, and 70,000 is in super and 30,000 is outside of super, I would still have the fourteen stocks in super and six stocks outside of super. And if the six stocks outside of super have to be larger than what the holdings have been to date, then I’d just migrate to that over time. I mean, the general point is if you think about the size of the portfolio and the returns on the portfolio as an x and y graph, and if you start with like a one stock portfolio at the left hand side on the x axis, and then you have maybe a two hundred stock portfolio on the right hand side of the x axis, the returns on the two hundred stock portfolio are going to correlate exactly the same as the ASX 200. Not taking into account you might have different weightings because you bought them at different times and things like that, but it’s gonna correlate pretty closely. So, you want to be further up towards the left-hand side of that graph we you’re getting uncorrelated returns, or less uncorrelated returns. Well, potentially you might want to be right down at the left-hand side where you have a one stock portfolio, or a two or three or four stock portfolio which Charlie Munger advocates for. But you’ve just got to be able to handle the volatility. So, one of the things that I, when I was talking before about implementing stuff that Dylan’s research has thrown up and I’m testing, is potentially holding a greater weighting for me in my portfolio of the largest — of the stock that’s highest up on the buy list because I did do some research which showed a one stock portfolio for the stock that was highest on the buy list, and in swapping it out when it fell down the buy list and another stock came on top of the buy list produced outsized returns. However, during some periods, it went negative dramatically as well, right? So, you’ve got to be able to stand the volatility. So, the kind of happy medium on the curve as I was talking about before of that portfolio size versus return tends to be around that fifteen to twenty. If you double that, I think your returns are going to start to dilute and go down. Not a bad thing, you’ll still get closer to index. So, you’ll still be in front, but you won’t be getting double market type returns. That’s the first thing to talk about in terms of Ali’s question. The second thing is, I just wanted to go through superannuation, and I guess my experiences and opinions on superannuation. It sounds like Ali is aggressively salary sacrificing, which is fine. And for people who aren’t aware of that, I mean, talk to your financial advisor, obviously, but basically what salary sacrificing means is that, again, a simple analogy, if I’m earning $100,000 a year, I’m allowed to salary sacrifice up to a limit every year into my superannuation account as a way of encouraging savings for retirement. I think that amount is about $30,000. It was 25 last time I looked, but I think it’s gone up recently. So, it’s $25-$30,000. Say it’s 30. That means that as far as the Tax Office goes, if I salary sacrifice I’ve only earnt $70,000 income for the year, and I pay tax based on that and the other 30 has gone into my superannuation account. So, that’s a legitimate way of reducing my tax and saving for the future. That’s a good thing to do. However, one of the observations I’ll make about superannuation, and I did make an extra contribution once before I went overseas to Canada, but I’ve never salary sacrificed and I’m not necessarily in favour of doing it, only because superannuation is locked up until you’re retired, right? So, you can’t take money out to take a holiday, can’t take money out to buy a house, you can’t take money out to buy more shares or anything like that, or to use as collateral — well, you can in some cases, but it’s a non-recourse loan and I won’t go down that track right now. But it’s locked up until you retire. And secondly, it’s at the whim of the government as to whether the rules change or don’t change. And so, they haven’t changed a whole lot but they do change from time to time, and I didn’t want to be snookered by the government to finally get to –it’s like a Twilight Zone episode, right? You get to the end of your life, about to drawdown your super and the rules change and you can’t get it or it’s not worthwhile anymore. And of course, being as one of the baby boomers and going through, at some stage a government’s going to look at all that money sitting in the superannuation system for us and go, “mm, just imagine if we increase the tax on that 5%, we’d be back in the black” or something like that. So, I’ve always been sceptical about super. I do have a fair bit in there because I’ve rolled over superannuation from when I was working and Jenny’s done the same, so we have that which we’ve been managing all the way through. But I’m not necessarily advocating putting more money into super. And as far as a tax goes, you know, I’ve been now able to manage capital gains tax — not always, I don’t have a problem paying capital gains tax along the way because I’ve made a profit, but I do try and back to back it with some shares that run at a loss for me. And then on the income side I get dividends but they have franking credits, so there’s some tax benefits there, too. I’m always a bit leery of doing something just for the tax benefits, which salary sacrifice is for. I’m not saying for Ali’s situation it’s not the best thing since sliced bread, but just be aware of the fact that superannuation can be a black box which you may find is a bit different when you come to open it when you’re sixty-five. And that was the other thing, I think Ali said she was able to get her super after sixty. I’d just ask her to check that. I think it’s sixty-five. I think you can access it at sixty under certain circumstances, but my understanding is that that comes with increased taxation. There’s a quid pro quo there about getting it early. I think if you wait until you’re sixty five you get it tax free, or get access to it tax free. But again, these are questions for Ali’s financial planner and tax advisor.

Cameron  41:41

And it doesn’t matter if you go, “look, I don’t need to work anymore. I’m fifty-five, I’m retired now?”

Tony  41:44

Yeah, your money’s all locked up in super, you can’t do much can you? You’ve got to keep working.

Cameron  41:47

Yeah, but I’m retired.

Tony  41:48

Yeah, again, this is where a tax advisor or superannuation advisor is required. You can I think, once you reach a certain age — I think for me it was fifty-seven, maybe its sixty for Ali — you can write to the ATO and say “I’m never going to work again,” and you can get access to superannuation. But if you do work again, and of course if you work again you pay tax, and the ATO finds out there can be consequences. So, that corridor is open to you, but again, it comes with consequences.

Cameron  42:17

So, does doing the QAV podcast classify as work for you, Tony?

Tony  42:23

Well, if I ever get paid… Well, I’ve never written to the ATO and said I’ve stopped working, because I own shares in so many companies which I think fails the work test.

Cameron  42:34

I was worried there for you for a second there.

Tony  42:37

Well, don’t worry for me. I’d just encourage Ali to go and get proper financial advice on this before she makes plans.

Cameron  42:43

All right. Hope that helps, Ali. Kazi asks, or says, no, asks, “there was an update on GOR regarding quality of mining. Is that news to sell off?” I think he’s asking is that like a bad news sell regarding the quality of mining? And I think after he asked that question, he heard last week’s episode, and I think he got back to me at some point and said, “yeah, you don’t need to ask that anymore because I heard Tony say last week that probably not.”

Tony  43:12

Yeah, that’s right. It’s the same as Aurelia Metals and kind of the reverse of Grange Resources. So, these kinds of changes in mineralisation assets happen all the time, although I think — and I did have a quick look at GOR today — and I think it was because of their financial results that the price has gone down. And I just made a note from Stock Doctor, from the summary of the results where they say, their commentary was: “the revenue decreased by 7% in latest results, and that was because of a slight decrease in sales and a slight decrease in the price of gold that they were getting for those sales,” which I think had to do with the quality of the gold that we’re producing. But they then said “however, you should note mill issues affected the last quarter.” I haven’t drilled down into what that means, but potentially, you know, if there was some maintenance in the mill or a COVID interruption in the mill, that might be a short-term blip in Gold Resources. So, again, I’ll be guided by what the market does.

Cameron  44:09

“Trouble at the mill.”

Tony  44:15

“Trouble at the mill. Nobody expects the Spanish Inquisition.”

Cameron  44:25

I’m looking at GORs share price. It’s been going down for a while, since last month or so. Been going backwards, don’t know if that’s got anything to do with their “trouble at the mill.”

Tony  44:41

Well it would be, well not so much trouble at the mill, but its their latest results weren’t that well received. The question is, is that long term or short term? And I think if you look at the share graphs on a short-term basis it’s come off, but if you look at it over five years it’s in a general uptrend which I guess tracks the gold price. And so, it’s the age old — well, it’s not the age-old story — someone raised this point before, should we be selling gold miners when the gold price is high? And so, I’d be giving this one the benefit of the doubt and see how it turns out.

Cameron  45:09

All right, thanks, Tony. Hope that helps., Kazi. Dan asks, “should we be considering large anomalies between our OpCaf versus the Stock Doctor OpCaf, say greater than 30% plus, to stop any dilution in shares we may purchase? I was reading the Intelligent Investor not so long ago, and it was something Ben Graham called out that you should be wary of. I know you check for this, Tony, so I just wondered if you ever put a margin on how much dilution potentially you may be comfortable with, or whether if there are big discrepancies you’ll just skip it and move on to the next one. Cheers, Dan.”

Tony  45:47

Yeah, thanks, Dan. It’s not something I’ve been troubled with for a long time. I do put it in the checklist, the difference between Stock Doctor’s PropCaf and the one I calculate, and that comes down to the method. So, Stock Doctor uses fully diluted shares and I use the number of issued shares. And so, Stock Doctor is taking into account anything that hasn’t been issued yet but is coming down the pipe, like management options, for example. And I don’t count those, because it’s never a sure thing that things which are counted as options or of the like may actually get issued, and they may get issued in a couple of years’ time. So, there are a few elements there which I don’t like taking into account, I prefer to use the shares that are actually on issue to do my calculations. That aside — and this is kind of like a six of one, half a dozen of the other situation — that aside, I do track the difference. And there’s only a few stocks on our buy list now which have, I’ll call it a large discrepancy. It depends on the size of the company, I guess. Like Challenger, which I own, I think has about a 30% difference in the PropCaf between Stock Doctor and the one that I calculate manually. But, that difference isn’t making a whole heap of difference to the PropCaf anyway. So, I’ll just call up Challenger, for example. And that’s because Challenger is a large company, so I can have a percentage discrepancy like this but it may not make a big difference to our score. So, Stock Doctor have the price to operating cash flow for Challenger Limited at 1.9 times, and then I have it at 1.46. So, even though that’s a 30% difference between those two numbers, it’s not going to change the ranking of Challenger dramatically in our buy list. So, there’s a big difference there in terms of the percentage difference, but is it going to make a big difference to the buy list? It doesn’t. it’s a different story for some of the smaller companies, and the one I had looked at today was Horizon, Horizon Oil. So, for example, Stock Doctor have the PropCaf for Horizon Oil at 4.93, and when I do the calculation based on the number of issued shares I have 3.63. There’s a 36% difference there, but they’re both still less than our target of seven times. So, it would change the ranking a little bit more dramatically for Horizon then for Challenger, but they’re based on the buy list. So, that’s how I tend to look at it, Dan. Most companies the difference is 1 or 2%, so it’s not material. There’s a few where it can be up to 30 or 40%, but I think in most cases the difference still keeps it on the buy list and for the bigger companies doesn’t change its ranking that much, so I’m not too worried about it.

Cameron  48:44

Okay, thanks for the question, Dan. Last question. This is from Jeff down in Melbourne. “Can I ask for a PP,” love the fact that we’re know abbreviating pulled pork. “Can I ask for a PP or even just a discussion on FFX? Fire Finch was on the buy list for maybe thirty seconds and then took off. I clung on tenaciously to the falling knife, and before you know it, it was a way again.” He clung on to the falling knife, what? It’s had a Corker run.

Tony  49:20

Yeah.

Cameron  49:21

Coming from the COVID cough when it was trading at about five cents, it’s now at $1.25. So, it’s the opposite of a falling knife. I don’t know when it was a falling knife for you, Jeff.

Tony  49:28

I think it might have been a falling knife maybe back in December. You can see it came off it high, what was that? 86 cents down to a low of 69. So, that could have been when Jeff bought it, I’m not sure.

Cameron  49:46

Yeah. Could have been. Oh, okay. Yeah, maybe bought it, went down, then it went back up. “This is my first stock that has gone 100% and now beyond. Lots of sovereign risk with mines in Mali and of late I’ve received a number of FFX notifications, pretty much every day. While Stock Doctor gives this a star stock Antichrist early warning with poor financial performance, as you can see pretty much all recent announcements have been seen favourably by the market, particularly Gulamein funding received. Whilst I’ll assume that TK will give FFX a sovereign risk wide berth, I’d be very interested to know how he sees it. Great for my ongoing QAV learning as well. Thank you, mate, and on behalf of QAV Melbourne, ready for the next dinner.” Me too, Jeff, can’t wait to get down to Melbourne for another dinner with the crew down there.

Tony  50:43

I agree. I love our Melbourne crew. Its good. Oh, yeah, well, so many issues here. I can’t do a pull pork, Jeff, because there are no December results yet in Stock Doctor. I had a quick look at FFX today, I don’t think they’ve reported their December results. So, that’s a bit of a flag for me. They should have reported by now, so I guess we’ll wait and see. So, the figures you’re talking about are still June 21, so I’d just be a little wary of that given that we’re now into April and it should have reported by the end of February. I know that companies have a leave pass and their auditors have a leave pass because of COVID, but if it keeps going for much longer that excuse will wear thin. That aside, this is a lithium mine, it’s pretty much in development stage from what I can see. They must be getting some sales somewhere because their operating cash turned positive in the December half, I think. Certainly, in the June half on a rolling twelve-month basis, which is what we look at. So, you know, happy days for you mate, that’s great. It’s a lithium miner, it’s based overseas in Africa. So, I’m not at all averse to owning stocks that have mines overseas, and we’ve spoken about sovereign risk on the show before. It can be an issue, and I remember… so, I own shares in West African Resources, which is over in that neck of the woods as well. And there was a coup, I think in Burkina Faso, and the share price dropped, and now it’s back up to where it was. So, these stocks do suffer from sovereign risk and can be volatile, however I’m happy to invest in them. And that’s one of the reasons why I do, because they are value stocks because of the fact there is sovereign risk, right? We’re being contrarian investors when we invest in them. If they were based in Western Australia, they wouldn’t, you know, the price would be much higher. We wouldn’t have the deep discounts that we have now, I don’t think anyway. So, I’m not averse to sovereign risk. Having said that, I wouldn’t hold an entire portfolio of African miners or Indonesian miners or any other sort of overseas miner or based company, because that would be a large exposure to sovereign risk. But I’m happy to have a portion of my portfolio holding these stocks. So that’s, I guess, how I deal with sovereign risk. And then the other point I wanted to make was that I don’t have a problem buying a company that has a Stock Doctor health rating of early warning, either, because it could be that the company’s investing in its future, which it seems like to be the case for this company. And, I’ve seen plenty of companies that have gone from early warning back into satisfactory and strong financial health. So, that element is only one part of our checklist and I’m happy to still buy a stock if it doesn’t score on that metric for us.

Cameron  53:31

Well, congratulations as Tony said, Jeff, that sounds like a good win.

Tony  53:36

Yeah, I never saw it on the buy list, but I should be claiming it, shouldn’t I? It was on the buy list and its up 100%.

Cameron  53:42

Yeah. Yeah, I don’t remember seeing it before either. Apparently, it wasn’t on there very long, he says, Well, that’s the questions for this week, folks. Before we get into after hours I will ask you to leave us a review if you have a minute on Apple podcasts or Spotify. Probably the two most important ones. That’d be nice, it always helps. And what else? That’s it. Okay. Let’s get into after hours.

Cameron  1:04:24

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